Forecasts & Trends : Profutures

Why This Real Estate Bust is Different

Gary D. Halbert — Tue, 17 Nov 2009 21:54:00 GMT

IN THIS ISSUE:

The Commercial Real Estate Bust 2.0
Why This Real Estate Bust Is Different
Who Will Refinance $3.5 Trillion in CRE?
REITs & ETFs to the Rescue?
Conclusions: Look Before You Leap

Introduction

In my September 29 E-Letter, I wrote extensively about the looming crisis in the commercial real estate sector. Things have not improved since my late September letter, and in fact have gotten even worse, despite the pick-up in the economy in the 3Q. Commercial real estate prices have continued to fall, and foreclosures continue to rise.

This week, we will revisit the commercial real estate ("CRE") bust. When I wrote about it in September, we had questions from readers as to how the CRE crisis came to be and why this current slump seems to be worse than other real estate slumps in the past. I have friends and business associates that ask the same thing.

I recently ran across a very good article in BusinessWeek that explains why this commercial real estate bust is unlike any in the past. It is written in an easy-to-understand style with lots of examples. So, for those of you with questions about the CRE bust and the implications for the financial markets, I have reprinted excerpts from the article below. I think you'll find it informative.

The core problem with the commercial real estate market is the $3.5 trillion in outstanding mortgage debt. Of that amount, an estimated $1.3-$1.5 trillion of outstanding loans will have to be refinanced in the next 3-4 years alone. In the past, banks were generally willing to extend these loans, for years in many cases, until the economy and the CRE markets recovered. But they may not be so obliging this time around.

Complicating matters in the current slump is the fact that millions of investors have become CRE lenders over the last decade in the form of Collateralized Mortgage Backed Securities ("CMBS"). Most of these investors just want out; they have no desire to extend these loans. This is another reason the current CRE slump is like no other.

So, it is a real possibility that we will have yet another credit crisis on our hands over the next few years, which supports my view that this could well be a double-dip recession, with the second downturn sparked by widespread defaults and foreclosures in commercial real estate. It's a lot to cover in one letter, so let's get going.

The Commercial Real Estate Bust 2.0

Cyclical swings in the commercial real estate market are hardly new. In the good times, developers overbuild, leaving themselves open to losses whenever the economy slows down. In the past, it was usually banks that ended up with foreclosed properties. In today's mess, in addition to the banks, there are millions of investors who bought collateralized debt securities on commercial real estate who are left holding the bag. And it's a very big bag.

The entire US commercial real estate market is valued at apprx. $6.4 trillion. Of that, apprx. $3.5 trillion of properties have outstanding mortgages. Nationwide, commercial real estate prices have already plunged 39% on average from the peak in late 2007, according to the MIT Real Estate Center. Estimates vary but it is widely believed that nearly half of all commercial real estate mortgage loans in the US - $1.3 to $1.5 trillion - will come due in the next 3-4 years alone.

MIT also reports that most commercial properties bought or refinanced in the last five years are now upside down on their loans, with current property values having fallen below the finance or purchase price. Real Capital Analytics reports that owners have lost their entire down payments on about $1.3 trillion worth of property. Deutsche Bank recently estimated that 65% or more of these loans will fail to qualify for refinancing when they come due.

The Fed's latest "Beige Book" analysis on the economy on October 21 underscores the fact that the commercial real estate market is still worsening:

Commercial real estate was reported to be one of the weakest sectors… Commercial real estate continued to weaken across the 12 Districts… Each District indicated that demand for private commercial real estate was weak, with New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco all characterizing activity as declining further since the last report. An inability to obtain credit was often cited as a problem for businesses that wanted to purchase or build space. High vacancy rates were noted as a key concern especially for landlords who were not offering concessions.

Each year, PricewaterhouseCoopers and the Urban Land Institute issue a detailed report entitled "Emerging Trends in Real Estate." This annual report, in its 31st year, is based on interviews with about 1,000 developers, investors, real estate service firms, banks and others.

The latest report for 2010 predicts that commercial real estate prices will continue to decline well into 2010, falling 40%-50% from the peak in 2007. According to the report, this will be the worst commercial real estate decline since the Great Depression, eclipsing the 1990s savings-and-loan crisis. It goes on to say:

"Not surprisingly, the overwhelming sentiment of interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging. Hardest-hit will be retail and office properties, reflecting a weak job market and cautious consumers."

With the above as a general backdrop to the current commercial real estate dilemma, let's now turn to excerpts from the November 16 BusinessWeek article that I mentioned in the Introduction. Hopefully, this will answer questions about how we got in this mess. Following that, I will further explain how this CRE slump is like no other.

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.

QUOTE:

Why This Real Estate Bust Is Different

Unrealistic assumptions, layers of investors, sky-high prices, and possible fraud will make it hard to clean up the mess in commercial real estate

By Mara Der Hovanesian and Dean Foust

When Goldman Sachs sold complex bonds backed by the Arizona Grand Resort and other commercial properties in 2006, it suggested the returns would be strong. The 164-acre luxury Arizona Grand, set against the Sonoran Desert in Phoenix, boasted an award-winning golf course, deluxe spa, and several swank restaurants. The on-site water park was named one of the best in the country by the Travel Channel. With the resort's new owners planning to refurbish hotel rooms and common areas, Goldman told investors that the renovations would help boost cash flow.

As was so often the case during the real estate boom, the lofty projections didn't pan out. When the economy softened and business travel slumped, Arizona Grand's bookings slipped to 67%, from 80%. The resort defaulted on the $190 million underlying loan in 2009—a hit that alone could largely wipe out investors who bought the riskier pieces of the Goldman mortgage-backed securities deal.

"It's one of the largest losses we have forecasted for an individual loan," says Steve Kuritz, a senior vice-president at Realpoint, an independent credit-rating agency. The property, once valued at $246 million, is now worth just $93 million. A spokesman for Goldman says the pricing on the bonds was in line with market levels at the time and not above what investors could get on similar securities. Grossman Co. Properties, which owns Arizona Grand, didn't return calls for comment.

It would be easy to write off this blowup as just another casualty in the regular boom-and-bust cycle of the $6.4 trillion commercial real estate market. But the Goldman deal, with its unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones—and will turn out to be far costlier. Already, prices have plunged 41% from the peak in 2007, according to Moody's/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. "We've never seen this extreme a correction as far back as the data go, which is the late 1960s," says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: "Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices."

To appreciate why this bust is like no other, first consider the typical commercial real estate downturns that used to crop up every 5 or 10 years. The pattern was predictable: When prices for apartment complexes, office buildings, shopping malls, and other properties began to rise, developers sped up their projects to cash in on the bull market. Eventually, some of those developers, unable to fill all the new space, began to default on their loans, and lenders were stuck with the buildings they'd financed. The slump lasted no longer than the time it took for the property glut to be worked down.

TURNING A BLIND EYE

But overbuilding isn't the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge. [Emphasis added]

It turns out the same excesses that drove the housing market's crazy rise and fall were present in commercial real estate, too—but they have largely gone unnoticed until now. Bankers, in their haste to make more and bigger loans, blindly accepted borrowers' wildest growth assumptions and readily overlooked other shortcomings on loan applications. They did so in part because they could easily sell their dubious loans to investors in the form of commercial mortgage-backed securities [CMBS]. As the market overheated, it became a breeding ground for fraud: A flurry of new court cases reveals the disturbing extent to which commercial mortgage borrowers may have doctored loan documents. [Emphasis added]

While the housing crisis seems to be easing, the commercial storm is still gathering strength. Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners. Analysts at Deutsche Bank estimate that borrowers will have trouble rolling over as many as three-quarters of the loans they took out in 2007, the most toxic vintage. [Emphasis added.]

For the banks and investors whose money fuels the economy, this presents major problems. Their losses will likely cast a shadow over lending—and, by extension, the overall economy—for years. The market won't fully recover until 2020, says Kenneth P. Riggs Jr., CEO of Real Estate Research, and in cases where "values were over the top...maybe never."

In the short term, toxic securities are creating a new problem weighing on the market: a tangle of interconnected investors fighting over the remains of the properties they own. In the past the damage was limited to a handful of lenders who invested directly in any given project. Now there can be dozens of groups of investors, each with its own agenda. The April bankruptcy of shopping mall owner General Growth, one of the largest real-estate-related bankruptcies ever, affected hundreds of parties—an unprecedented slicing and dicing of assets. These investors won't soon forget the bust and aren't likely to dive back into the market as aggressively as they once did. [Emphasis added]

And yet the securities are only a secondary problem. The main driver of the commercial real estate bust is the underlying loans. How frothy did the market get? In one notable example, New York investment fund Sterling American Property and real estate company Hines paid $281 million in 2007 for the 42-floor office building at 333 Bush St. in San Francisco. That worked out to $518 a square foot, far higher than today's price, according to Real Capital Analytics, a research firm. Less than two years later, the building's primary tenant, law firm Heller Ehrman, filed for bankruptcy and stopped making rent payments. According to Real Capital Analytics, the building's owners did not make a recent loan payment, and the lender is expected to begin foreclosure proceedings…

What's striking is how quickly some big commercial deals have gone south. In April 2007, Charney FPG, a New York real estate partnership, paid about $180 million to buy a 22-story office building in Manhattan's Times Square district. It borrowed $202 million to pay for the purchase, renovations, and incidentals—111% financing. Because the rental income didn't cover the debt payments, Comfort's lenders, Wachovia and RBS Greenwich Capital, required the firm to set aside $10 million in reserves to keep the project afloat until it got more paying tenants. Those occupants never materialized, and by July the owners had exhausted 95% of their reserves. The building is now in jeopardy of being seized by the bankers, says Real Capital Analytics' head of research, Dan Fasulo. "Everyone knows Judgment Day is coming." Says a Charney spokesman: "The owners are in the midst of restructuring the debt." Wachovia and RBS declined to comment.

Commercial lending mirrored mortgage lending in another way: Loans were made based on an unshakable belief that the market would never go down. An analysis by research firm REIS of mortgage securities created between 2005 and 2008 found that income projections for properties exceeded their historical performances by an average of 15%. "It was all based on assumption of cash flow," says Howard S. Landsberg of New York-based consultant Weiser Realty Advisors. "If you couldn't afford to pay the bank back now, in three years you could count on another $20 a square foot" in rent. When the numbers didn't add up, some lenders got imaginative. Says a banker at a large Wall Street firm: "If the cash flow wasn't there, you had to ignore it or find ways to create it."

Some lenders may have drummed up business for themselves, enticing borrowers with more money than they needed. Consider Credit Suisse's $375 million loan to the Yellowstone Club in Big Sky, Mont., one of the starkest examples of poor underwriting in recent memory. Opened in 1999 by Timothy L. Blixseth, a welfare kid turned timber magnate, the private ski and golf club catered to the ultra-wealthy crowd. Microsoft founder Bill Gates and Tour de France champion Greg LeMond built multimillion-dollar vacation homes there.

In 2005 a Credit Suisse banker approached Blixseth about a loan, which the banker compared to "a home equity loan," according to bankruptcy court documents. Blixseth initially turned down the offer. But after several calls and a personal visit to Blixseth's home near Palm Springs, Calif., the banker persuaded Blixseth to borrow $375 million in the name of the club. According to court papers, the two decided the transaction fee by coin flip; Blixseth won, agreeing to pay 2%.

"WILD, OUT-OF-CONTROL SPENDING"

But not all of the funds were earmarked for the club. The deal allowed Blixseth to use up to $209 million of the proceeds "for his own personal benefit," according to the bankruptcy court papers. In a civil lawsuit filed by Yellowstone investors and homeowners, the plaintiffs say Blixseth used some of that money to fund a lavish lifestyle, including the purchases of a 20-seat Gulfstream corporate jet, two Rolls-Royce Phantoms, and three Land Rovers.

While Blixseth was busy spending the money, Yellowstone was struggling under the weight of its debt. Vendors often went unpaid for three months or longer, according to bankruptcy court testimony. In November 2008, Yellowstone filed for bankruptcy protection. "The only plausible explanation for Credit Suisse's action is that it was simply driven by the fees it was extracting from the loans it was selling and letting the chips fall where they may," said Ralph B. Kirscher, a federal bankruptcy judge in Helena, in a May court decision.

RED FLAGS GALORE

The banks were hardly the only freewheeling players during the credit boom. The fast-and-easy lending environment was fertile territory for alleged fraudsters. In 2007 Prudential Financial lent $13.9 million to Namir A. Faidi, a Houston developer who planned to use the money to pay off construction loans on Piazza Blanca, a Mediterranean-themed shopping complex in Galveston, Tex. Faidi dipped into the project's reserve fund to make the first loan payment but failed to make any more. After that, Prudential concluded that some of the leases he'd submitted weren't legitimate. According to a civil suit filed in federal court by Prudential, Faidi's loan papers included a signed lease from time-share giant Bluegreen, a purported tenant that would occupy 26% of the space. But when Prudential contacted Bluegreen after the default, it learned it had backed out of talks and never signed a rental agreement…

END QUOTE

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.

Who Will Refinance $3.5 Trillion in CRE?

As noted earlier, it is widely agreed that there is apprx. $3.5 trillion in outstanding commercial real estate debt. It is also widely agreed that some $1.3 to $1.5 trillion of that debt will have to be refinanced over the next 3-4 years. The question is, who will step up to the plate? The chart below illustrates who the main players are.

Looking at the left panel above, we see that banks and S&Ls hold 51% of outstanding CRE debt. Investors in Collateralized Mortgage Backed Securities (CMBS) own apprx. 21%. Together, these represent 72% of outstanding CRE debt. The slice noted as "Other 15%" is mainly made up of REITs. Much of the financing since 2002 has been in the CMBS (individual investors for the most part).

Virtually all of the players have seen the values of their CRE investments plunge since the peak in 2007. As noted earlier, CRE values are down 39%-41% on average depending on which estimate you believe, and they are still falling for the most part.

The National Association of Realtors projects that retail vacancy rates will increase from 11.7% in the 2Q of 2009 to at least 12.9% in the same period of 2010, the highest vacancy rates since 1991. Likewise, NAR projects that office building vacancy rates will rise from 15.5% to at least 18.8% by this time next year.

While the economy seemed to turn around in the 3Q, most forecasters agree that the unemployment rate will remain near 10% for all of 2010. Given that, it is likely that CRE vacancy rates will remain high. For all these reasons, Deutsche Bank predicts that over 65% of the loans coming due in the next few years will fail to qualify for refinancing.

So, we are back to the question of how does this $1.3 to $1.5 trillion in CRE get refinanced over the next several years? The answer is, much of it won't. Defaults will continue to rise. This will put banks increasingly in the sublease business, assuming that willing tenants can be found. Unfortunately, sublease rental rates typically are only 60%-80% of the original rates.

Commercial real estate loans are not just concentrated among the nation's largest banks; these loans are widely made by regional banks and even smaller banks. These banks are even more at risk because they will likely have a harder time accessing the crucial capital to offset rising defaults on commercial real estate loans. The FDIC reports that 120 small and regional banks have failed so far this year (as of Nov. 6), compared to only 24 failures in all of 2008.

Obviously, banks will not be refinancing much of the $1.3-$1.5 trillion that comes due over the next 3-4 years. Banks are still trying to reduce their exposure and deleverage. Likewise, the CMBS market has practically dried up. So who is left to refinance these maturing CRE loans?

As we might expect, there are those in the CRE industry that are calling for a government bailout – what else is new? You may recall that about this time last year, the Fed created what is called the "Troubled Asset Loan Facility" (TALF) which is scheduled to end soon. Now there are calls from the CRE industry to extend that facility.

Others are calling for changes such as:

Stop forcing banks to reclassify loans that have had minor modifications to assist borrowers (and continue the so-called "pretend and extend" practice);
Reject any new taxes on real estate such as capital-gains-tax hikes; changes to IRS Section 1031, which allows tax deferral; and
Amend the IRS Tax Reform Act of 1986 to allow modification of loans within Real Estate Mortgage Investment Conduits (REMICSs). Some 25% of US commercial real estate is financed with these securities.

It remains to be seen if the Obama administration will entertain any of these requests. If I were a real estate developer, I wouldn't count on it.

REITs & ETFs to the Rescue?

REIT is the acronym for Real Estate Investment Trust. REITs are similar to mutual funds except that their shares trade as stocks on the major exchanges. ETF is the acronym for Exchange Traded Funds, which also trade as stocks throughout the day. REITs generally only invest in real estate.

Like real estate, REITS were hammered by the recession, on average losing 70% from the peak in 2007 to the bottom in March. Since then, average REIT prices have rebounded strongly, up apprx. 80%, but are still far below the highs in 2008. Dozens of new IPOs in the form of REITs have been launched since March, reportedly raising over $20 billion in new assets, by fund managers who seek to acquire bargain basement commercial real estate properties. I'm told there have also been dozens of new ETFs that have been formed this year for the very same purpose.

Most estimates suggest that there will be around $500 billion in commercial real estate loans that will need to be refinanced in 2010 alone. So while REITs and ETFs will help, they are not the magic bullet.

Conclusions – Look Before You Leap

There is currently $3.5 trillion in outstanding commercial real estate debt, with much of it related to properties purchased at exorbitant prices during the real estate boom that ended in 2007. Many private equity players and hedge funds used heavy leverage, borrowing up to 80% of the purchase price, to acquire the properties that are now struggling to generate the cash-flow needed to service the debt and meet debt calls.

An estimated $1.3- $1.5 trillion in commercial real estate debt will need to be refinanced over the next 3-4 years, with apprx. $500 billion of that coming due in 2010. The question is, who will be there to refinance these CRE loans? Banks are trying to reduce their exposure to CRE. REITs and ETFs will take on some of these properties, but certainly not all or even most. Is there another massive government bailout on the horizon? Don't rule it out.

It is not unusual for the real estate market to worsen even after the economy comes out of recession. In the 1991 recession, it took the industry 14 months to rebound after the recession's end; in the 2001 downturn, it took 29 months for the sector to fully recover. Even if the current recession ended in the summer as many seem to believe, it could easily take a couple of years for commercial real estate to bounce back, and that assumes we are not looking at a double-dip recession which I believe is entirely possible.

Put differently, the commercial real estate dilemma is likely to get worse before it gets better. As discussed above, vacancy rates continue to rise; loan default rates continue to rise; foreclosures continue to rise; and all of this will continue to worsen as long as unemployment remains above 10%.

As discussed above, a lot of money is being raised publicly and privately with the goal of cashing in on the commercial real estate debacle. Promoters are touting "once in a lifetime" profit potential as they look to scoop up distressed properties for pennies on the dollar.

Yet the amount of money being raised is only a fraction of the size of the $1.3+ trillion in commercial real estate debt that needs refinancing over the next 3-4 years. So the CRE market could be far from a bottom. As the old saying goes, look before you leap.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Facing the next real estate collapse
http://www.nypost.com/p/news/opinion/opedcolumnists/facing_the_next_real_estate_collapse_5NbxrlBoP3xbtOHa9TGmTO/0

REITs and Commercial Real Estate's Victims
http://www.time.com/time/business/article/0,8599,1932749,00.html

Dismantling America - Thomas Sowell (excellent read)
http://www.realclearpolitics.com/articles/2009/11/16/pushing_health_reform_when_job_losses_are_rising__99152.html

Wrong time to be pushing massive health reform
http://www.realclearpolitics.com/articles/2009/11/16/pushing_health_reform_when_job_losses_are_rising__99152.html

Are We Sure the Recession is Really Over?

Gary D. Halbert — Tue, 10 Nov 2009 21:46:00 GMT

IN THIS ISSUE:

3Q GDP Report - Was It Really Better Than Expected?
What Else Was Missing in the 3Q GDP Report?
Worker Productivity Surges to Six-Year High
Latest Unemployment Numbers Not Encouraging
Roubini - Too Many People Are "Short" the Dollar

Introduction

When the government announced on October 29 that 3Q Gross Domestic Product surged 3.5% (annual rate), there was a collective sigh of relief around the world that the US economy had finally emerged from the most serious recession since the Great Depression. After all, the 3.5% number outpaced the pre-report consensus of around 3%.

On closer inspection, however, the latest GDP report was not nearly as rosy as the headline number of 3.5% seems to suggest. For example, if you consider all of the government's incentives for consumers to spend (think "cash-for-clunkers" which ended in August, the $8,000 first-time homebuyer tax credit, and huge stimulus spending), GDP growth in the 3Q would have been significantly lower.

These and other caveats from the latest GDP report suggest that while we have turned the corner on the recession - barring any big negative surprises - economic growth over at least the next several quarters is likely to be disappointing. For example, most estimates I see for 4Q GDP growth are in the 1-2% range.

Last Thursday, the Labor Department reported that US worker productivity soared to a six-year high in the 3Q, well above expectations. Rising productivity is a good thing, right? Not necessarily, especially when it means that companies are laying off their best and brightest, such as scientists and engineers, that are focused on new product development (R&D).

On Friday, the Labor Department reported that the unemployment rate surged from 9.8% to 10.2% in October, well above the pre-report consensus of 9.9%. 10.2% is the highest unemployment rate since 1983. 15.7 million Americans are officially out of work, and that does not include those who are working part-time by necessity and those who have given up looking for work.

This week, we will examine the latest 3Q GDP report in detail and what that means for the future of the economy. We'll also take a look at some subsequent economic reports which seem to suggest that 4Q growth will be tepid. Next, we'll delve into the latest worker productivity report and what that may mean for the economy and the markets. Also, we will dissect the latest unemployment figures.

Finally, I will bring you the latest dire warning from noted forecaster Nouriel Roubini. You may recall that he predicted the housing/credit crisis back in 2005. Now he warns that too many people around the world are "short" the US dollar, and this could spark a second credit crisis.

3Q GDP Report - Was It Really Better Than Expected?

As noted above, the Commerce Department reported on October 29 that US GDP grew at an annual rate of 3.5% in the 3Q. Pre-report estimates varied widely with a consensus of 3%, so the actual report was better than expected. Stocks rallied sharply and closed 200 points higher following the report's release. In the Commerce Department's report, it stated: "The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment." The 3Q boost in the economy followed four consecutive losing quarters, including the 2Q that saw a drop of 0.7%. The 3Q GDP report, the so-called "advance" report, will be revised two more times before it goes "final", and the next revision will be released on November 24.

While stocks rallied strongly just after the report, it did not take long for analysts to see that the number was artificially pumped up. For example, if you take out surging auto sales ("cash-for-clunkers" which ended in August), GDP rose only apprx. 1.5% in the 3Q. Take away the government's $8,000 tax credit for first-time homebuyers, which is scheduled to end on December 1, and economic growth was even weaker.

Consider also the fact that GDP was boosted by the federal "stimulus package" spending, which unlike cash-for-clunkers and home tax credits, is not going away anytime soon. But the point is, the GDP number would have been much lower without these artificial incentives. Actually, the White House admitted as much just after the report. Christina Romer, chairwoman of the White House Council of Economic Advisors, acknowledged that without all these government incentives, "real GDP would have risen little, if at all, this past quarter."

Looked at differently, the 3.5% GDP report noted that the overall economy rose to a seasonally adjusted $13.014 trillion (annual) in the 3Q, up from $12.901 trillion in the 2Q. In other words, the economy added apprx. $112 billion dollars in output quarter-over-quarter. Yet we have spent an estimated $173 billion worth of the $787 billion stimulus plan so far. This shows how heavily dependent the economy is on government spending.

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.

What Else Was Missing in the 3Q GDP Report?

There are a number of factors and trends that the government's GDP reports do not consider. For example, the official GDP statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, worker training, etc. There's plenty of evidence which indicates that companies are slashing this kind of spending, which is essential for innovation, in an effort to cut costs.

Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy over the long-run. Yet we don't see that plunge reflected in the GDP numbers which are still too focused on more traditional sectors, such as motor vehicles, construction, housing, etc.

There are more signs that companies are robbing the future to cut costs and improve profits. For example, over the past year, US employment of scientists and engineers has fallen by 6.3% according to BusinessWeek. For the most part, these are the people who create the next generation of products and make the US more competitive over the long-term. Again, this trend is not considered in the GDP reports.

Another clear-cut sign that GDP growth is being overestimated is the sharp drop in venture capital investment, which goes directly to new businesses. Venture capital firms invested about $12 billion in the first three quarters of 2009, barely half the $22 billion invested during the first three quarters of 2008. Some of this shortfall would have been spent on computers and other physical equipment, which would have been picked up in GDP. But most of the drop in VC money would have gone to pay for scientists, engineers, and new product development - all valuable intangible investments that don't show up in the GDP reports.

Similarly, many companies have slashed their reported R&D spending, which also doesn't show up in GDP. Just to cite a couple of examples, Alcoa announced recently that it cut its 3Q R&D spending by 36% from the year before. Johnson & Johnson has reduced its R&D by 13% over the past year. Such cuts are going on across industry sectors, with few exceptions. Again, these significant cutbacks are not reflected in the GDP data.

Another big problem not reflected in the GDP statistics is that many companies are retreating from development of new products, especially in stressed industries. In many sectors of the economy, companies have not only cut back on new products, but in many cases are reducing the number of models or options they currently offer.

Likewise, US companies are significantly cutting their spending on worker training. The drop started in 2008, when employers reduced their per-worker "learning expenditures" by 3.8% on average, according to the American Society for Training & Development. No data are available for 2009, but "from anecdotal evidence, obviously there's a lot of cutback," says Pat Galagan, executive editor of publications.

Ideally, a big burst of training would occur during a severe recession such as this so that people can acquire the skills needed for the jobs of the future. The problem is how to pay for that training, since unemployed people rarely spend money on long-term training when they're worried about short-term survival.

Worker Productivity Surges to Six-Year High

Last Thursday, the Labor Department announced that worker productivity surged to the highest level in six years in the 3Q. Productivity nationally rose 9.5% on average, well above the pre-report consensus of 6.5%. Non-farm productivity and costs provide measures of the productivity of workers and the costs associated with producing a unit of output.

The report also noted that overall output rose 4.0% in the 3Q, while hours worked fell 5.0%. Non-farm businesses continued to get lean and mean, finding ways to squeeze more output out of fewer workers (more on this below). Unit labor costs also fell 5.2%, which will help keep inflation contained.

Productivity growth has risen at an 8.2% average annualized pace during the last two quarters, the fastest two-quarter surge off a recession trough since 1961. Unit labor costs, typically the flip side of the productivity numbers, collapsed at nearly a 6% annualized rate during the last two quarters - the largest two-quarter decline off a recession trough on record. Since corporate profits are directly related to productivity growth and inversely related to unit cost growth, this data is good news for earnings.

Normally, it is considered a good thing for productivity to go up but the question is, why so much? With the unemployment rate continuing to go up every month, we know that companies continue to terminate and/or lay off workers. In doing so, they are demanding more productivity from those employees that remain on the job.

Actually, it is not unusual for productivity to rise in the early stages of a recovery as businesses continue to aggressively cut costs even as output begins to rebound. Companies are reluctant to hire near the end of recessions and even in the early stages of a recovery, as they are not sure the economy has really turned the corner, especially with the unemployment rate rising month after month.

On a related note, the Labor Department also published monthly data on the "average work week." The average work week shrank to a new all-time low of 33 hours in June, and it remained the same in October, as reported in last Friday's unemployment data (more on that report below). While the manufacturing sectors are averaging well above 33 work hours per week, the much larger service/retail sectors are averaging less than 33 work hours per week.

Many economists believe, however, that the recent productivity gains and the shrinking of the average work week are not sustainable. At some point, hours worked and payrolls will have to rise in order to meet stepped-up production schedules. As this occurs, income growth should recover, allowing households to spend more even if they are setting aside a larger fraction of their income in savings. Of course, the question is, when?

Latest Unemployment Numbers Not Encouraging

On Friday, the Labor Department reported that the US unemployment rate rose from 9.8% to 10.2% in October, the highest level since April 1983. The report noted that in October, the number of unemployed persons increased by 558,000 to 15.7 million, a record high. The largest job losses over the month were in construction, manufacturing, and retail trade.

Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. Keep in mind that the official unemployment rate does not include those who are working part-time out of necessity, and does not include those who have given up on looking for a job.

The number of long-term unemployed, jobless for 27 weeks or more, and assumed to have given up on looking for work, was 5.6 million in October according to the latest report. The Labor Department estimates that 35.6% of unemployed persons were jobless for 27 weeks or more. Yet these people are not counted in the official unemployment rate.

The number of persons working part-time for economic reasons (sometimes referred to as "involuntary part-time workers") was 9.3 million. These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job. Here too, these people are not counted in the official unemployment rate.

If we include discouraged workers and those forced to work part-time, the unemployment rate surged to 17.5%, the highest on record.

The latest unemployment rate was considerably worse than expected. The pre-report consensus was for a rise from 9.8% in September to 9.9% in October. While many in the media have led us to believe in recent weeks that job losses were falling, the latest report clearly muzzles such optimism.

Most economists believe that the unemployment rate will continue to rise for at least a few more months. A Bloomberg survey of leading economists concludes that the unemployment rate will remain high for at least another year. The average forecast among the dozens of economists surveyed indicates that unemployment will average 9.7% for all of 2010.

If true, this is very bad news for the Obama administration and for Democrats who will be seeking re-election in 2010.

Is the World Too Bearish on the US Dollar?

There is now near-universal agreement that the US dollar will continue to fall for the foreseeable future. While not admitting to it, the Obama administration favors a weaker dollar as it is good for exports, just as the Bush administration did. The Fed is encouraging a weaker dollar by keeping short-term interest rates near zero for "an extended period."

As the dollar has fallen sharply since March, investors around the world have taken to "shorting" the dollar in various ways. Yet the US dollar is a commodity, after all, and commodities of all stripes have a way of not doing what the crowd expects. There is no way to know when the dollar will reverse higher, but when it does, it could well be explosive at least for a time.

Nouriel Roubini is a well-known professor of economics at the Stern School of Business at New York University and is chairman of RGE Monitor, an economic consulting firm. Roubini is best known for his public warnings in 2005 that we were in a housing bubble that was about to burst, and that it would lead to a financial crisis. At the time, he was called "Doctor Doom."

Last week, Roubini issued a serious warning that too many people around the world are "short" the US dollar, especially via so-called "carry trades" where investors borrow cheap dollars and then invest in other "risk assets" (stocks, etc.) that earn higher returns. Roubini believes that, at some point, the short dollar carry trade is going to blow up.

I have taken the liberty of reprinting his latest warning in the Financial Times (of London).

QUOTE:

Mother of all carry trades faces an inevitable bust

By Nouriel Roubini
November 1 2009

Since March there has been a massive rally in all sorts of risky assets - equities, oil, energy and commodity prices - a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

The dollar and the sterling have weakened against a host of other currencies since the summer, promoting speculation that they could become the next carry trade currencies and supplant the yen as the ‘funding currency' of choice.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualised - as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius - even if they are just riding a huge bubble financed by a large negative cost of borrowing - as the total returns have been in the 50-70 per cent range since March.

People's sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade - you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed's policy of buying everything in sight - witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets - the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe - for now - for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest coordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate - as was seen in previous reversals, such as the yen-funded carry trade - the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a coordinated collapse of all those risky assets - equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever - its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
END QUOTE

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

Conclusions

I titled this E-Letter "Are We Sure the Recession is Really Over" because I think this concern is still heavy on the minds of most Americans. Certainly, the latest 3Q GDP report is a welcome sign that we have turned a corner, at least for now. But as I have also pointed out above, the reported gain of 3.5% in the 3Q leaves many questions we should be concerned about.

There are still many weak spots in our economy. Most notable, the unemployment rate weakened even more than almost anyone expected in October, reaching the highest level in a quarter century, and is very likely headed even higher for a few more months at least. It will almost certainly remain high throughout 2010.

The worst of the housing and credit crisis appears to be behind us, but bank lending remains substantially below pre-crisis levels, even as short-term interest rates are at historical lows. The Fed continues to buy up toxic assets at unprecedented levels. At some point, this will have to stop and reverse itself, just as interest rates will have to be increased at some point.

The point is, while we may have emerged from the recession, there are many risks that could throw us right back into a further economic contraction in the next year or two. Nouriel Roubini's analysis just above regarding the US dollar is just one of several scenarios that could result in a "double-dip" recession in the next year or two.

As I discussed at length in my September 29 E-Letter, we are in the early stages of a commercial real estate bust that could very well be the next shoe to drop in the credit crisis. I will have a lot more to say about that next week, unless something more pressing comes about. In any event, we will be hearing a lot more about the commercial real estate problems in the weeks and months ahead.

While we all welcomed the latest GDP report, conflicted as it was, there are few indications that economic growth will continue at that rate going forward. As mentioned earlier, most estimates I am seeing on 4Q GDP growth are in the 1-2% range. Forecasts for 2010 are only marginally better.

Finally, the stock market overshoot since early March has surprised even the most optimistic forecasters. All of my most trusted sources believe that the equity markets are overbought and very susceptible to a downside correction, or worse anytime now. If Roubini's concerns about the dollar are realized, it could be much worse than a garden variety correction.

Everything I have discussed this week argues for having actively managed strategies in your investment portfolio, strategies that have the ability to move out of the markets, or hedge long positions, in case any one of the negative scenarios arises. If you agree, give us a call at 800-348-3601, or e-mail us at info@halbertwealth.com.

** If you are wondering just how bad the House healthcare reform bill that passed last Saturday is, be sure to read the link in SPECIAL ARTICLES below. It's awful!

Finally, our thoughts and prayers go out to all of the families of the innocent soldiers who were killed and injured in the tragedy at FortHood that occurred on November 5.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

What the Pelosi Health-Care Bill Really Says
http://online.wsj.com/article/SB10001424052748704795604574519671055918380.html

Economic Recovery vs. Rising Unemployment

Gary D. Halbert — Tue, 27 Oct 2009 21:28:00 GMT

IN THIS ISSUE:

Overview of Recent US Economic Trends
Snapshot of the Latest Economic Data
Fed's "Beige Book" Sees Modest Improvement
Unemployment: The 800-Pound Gorilla in the Room
Conclusions - Storm Clouds on the Horizon

Eyes around the world are intently focused on this Thursday's advance estimate of 3Q GDP in the US. Everyone is anxiously awaiting the report which will signal whether or not the US economy moved into positive territory in the July-September quarter. Pre-report GDP estimates are all over the board, ranging from -1% to +3% or more. I can't recall another quarterly GDP report that was this uncertain in terms of pre-report estimates than this one.

As I have reported over the last couple of months, most economic reports of late have suggested that the US economy is coming out of the recession a little sooner than many of us expected earlier this year. In the pages that follow, we will review the latest economic reports in the hopes of giving us a little more insight as to what we may learn on Thursday with the release of the 3Q "advance" GDP estimate.

While the GDP report on Thursday is generally expected to be positive, we all know that the unemployment rate continues to rise, now at 9.8%, and likely headed even higher just ahead.

While most economists concur that the jobless rate will move even higher for at least several more months, recent data paint a grim picture for the likelihood of the unemployment rate falling significantly anytime soon.

And the truth is, the real unemployment rate in the US is now at 17%, if the government reported all of the people who are out of work and those who are having to work part-time because they can't find a full-time job. This week, I will give you all of the unemployment numbers, not just the official unemployment rate which now stands at 9.8% and rising.

Finally, most forecasters believe the economy will rebound, at least modestly in 2010, and I don't disagree. Yet few are offering forecasts beyond 2010 because no one knows what will happen if President Obama doubles the national debt in the next 5+ years. All I can say is that I don't believe this liberal experiment will end pretty, and I will have more to say about it in the weeks and months ahead.

Overview of US Economic Trends

Global attention will be intently focused on Thursday's 3Q GDP report as it is widely expected to show that the US economy emerged from the worst recession since the Great Depression. As noted above, not all pre-report GDP estimates are positive, but most are as I will discuss below.

But before we get to the latest estimates for Thursday's GDP report, let's quickly review the quarterly GDP data for 2008 and the first half of 2009. Here are the official annualized numbers:

1Q 08	2Q 08	3Q 08	4Q 08	1Q 09	2Q 09
-0.7%	+1.5%	-2.7%	-5.4%	-6.4%	-0.7%

On September 30, the Commerce Department released its third and final GDP report for the 2Q, showing the economy contracted at an annual rate of -0.7%, as compared to its prior estimate of -1.0%

As you can see, the worst of the recent economic slump occurred in the last half of 2008 and the first quarter of this year as the housing/credit crisis played out. But it should also be pointed out that the US economy was already slowing down its growth rate even before the latest recession. GDP growth was only 2.7% in 2006 and 2.1% in 2007 (annual rates).

Most economists agree that apprx. 3% annualized growth in GDP represents the average rate of growth in the US economy in the post-WWII era. Periods of growth below 3% represent "below-trend" time windows, while periods above 3% indicate "above-trend" examples. Clearly, the US economy has been growing at below-trend rates for the last several years.

With that perspective, let's look at the latest economic reports.

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.

Snapshot of the Latest Economic Data

The consensus view based on recent economic and financial data is that the US economy is coming out of the credit crisis and recession. The National Association for Business Economics (NABE) recently surveyed leading economists, and over 80% believe the recession is over and an expansion has begun, but they expect the economic recovery will be slow as worries over unemployment and high federal debt persist.

"The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines," said NABE President-elect Lynn Reaser, chief economist at Point Loma Nazarene University.

Most of the forecasters surveyed had upgraded their economic outlook for the next several quarters, but cautioned that unemployment rates and the federal deficit are expected to remain high through the next year. On balance, the economists now expect the economy, as measured by GDP, to advance at a 2.9% pace in the second half of 2009, after falling for four straight quarters for the first time in more than 50 years. On average, they expect GDP to gain 3% in 2010. I wish I were so optimistic.

The best news in recent months has been in the Index of Leading Economic Indicators (LEI), which has long been one of my favorite economic benchmarks. The LEI has risen for six consecutive months, with a strong increase of 1.0% in September, following +0.6% in August.

The LEI rise over the last six consecutive months, alone, would suggest - with the benefit of hindsight - that the recession was coming to an end. The six-month rise in the LEI gives credence to positive forecasts for the 3Q GDP number and perhaps the 4Q as well. Beyond that, it is anyone's guess.

For the benefit of our many newer readers, the Index of Leading Economic Indicators is, for the most part, a compendium of economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. The LEI is maintained and reported by the Conference Board (www.conference-board.org).

Consumer confidence is arguably the next major indicator of the direction of the economy, since consumer spending accounts for roughly 70% of GDP. Since rising sharply in April-May-June, the Consumer Confidence Index has gone basically sideways since then.

The other widely followed measure of consumer confidence is the University of Michigan Consumer Sentiment Index. After reaching a new recent high of 73.5 in September, the UM Consumer Sentiment Index fell to 69.4 earlier this month as announced on October 16.

Consumer spending is generally gauged by two economic reports, both of which are generated by the Commerce Department. One is the monthly retail sales report which dipped slightly in September. However, if we revise this retail sales report to exclude auto sales (which plunged last month due to the end of the "cash-for-clunkers" rebate program in August), retail sales actually increased marginally (+0.5%) in September, following a 2.2% gain in August.

The other widely followed indicator of consumer spending is the Commerce Department's "personal consumption expenditures" (PCE) measure, which is a part of the quarterly GDP reports. Americans increased PCE by 0.6% in the 1Q, only to see it decline by 0.9% in the 2Q. We will get our first look at 3Q PCE on Thursday with the latest GDP report.

Regardless of which report we use to gauge retail sales, the results are not eye-popping. Yes, consumer spending is finally on the rise in the wake of the recession, but we are far from out of the woods.

On the manufacturing front, things continue to improve at least modestly. The ISM Index basically was flat in September at 52.6. Industrial production rose 0.7% in September. The factory operating rate rose to 70.5% in September from 69.9% in August. Construction spending rose 0.8% in August (latest data available). The ISM Services Index rose to 50.9 in September, another indication that the recession may be ending.

And finally, on the housing front, there was more encouraging news last Friday. The National Association of Realtors reported that sales of existing homes rose 9.4% in September. The inventory of existing homes on the market declined slightly last month, and the decrease in home sale prices was somewhat less than was expected.

Fed's "Beige Book" Sees Modest Improvement

The Federal Reserve publishes an economic report eight times per year (roughly every six weeks) that is based on surveys conducted by the Fed's 12 regional banks that continually collect economic data within their respective regions. This periodic economic report is called the Fed's "Beige Book," and the latest report was released last Wednesday.

Basically, the latest Beige Book indicated that the US economy is continuing to improve, albeit very modestly, in most (but not all) regions of the country. The survey indicates that the economy, while gaining momentum, has yet to overcome weaknesses in bank lending and employment. According to the report, unemployment continued to rise last month in 23 US states, giving the Fed additional reasons to hold the main interest rate at a record low to stoke a recovery.

In particular, Federal Reserve district banks identified commercial real estate as the weakest part of the economy, while most saw "stabilization or modest improvements" in areas including housing and manufacturing. All 12 district banks reported a weak or declining commercial real estate market. You may recall that I wrote about the problems in commercial real estate in great detail in my September 29 E-Letter, so my readers should not be surprised.

While the latest Beige Book tried to present a guardedly optimistic outlook for continued economic recovery, it included several prominent caveats, such as: "Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered." The report also demonstrated how heavily many businesses are relying on government spending in the face of huge contractions in the private sector.

Unemployment: The 800-Pound Gorilla in the Room

It is widely estimated that over 7 million jobs have been lost since the recession began in late 2007. The unemployment rate rose to 9.8% in September, with the "official" number of job losses at 263,000 last month. That is the highest unemployment rate since June 1983.

Most forecasters expect the US unemployment rate to continue to climb until sometime in mid-2010 when the rate is expected to peak somewhere north of 10%.

As many of you know, the official Labor Department unemployment rate is quite misleading in several ways. While it is useful as an indication of the trend in the unemployment rate, it actually understates the real percentage of Americans who are out of work.

The official unemployment rate that is announced every month does not include: 1) workers who have had to settle for part-time jobs because they can't find full-time jobs; and 2) Americans who have given up looking for a job.

If laid-off workers who have settled for part-time work or have given up looking for new jobs are included, the true unemployment rate rose to 17% in September. Here is the actual data from the Labor Department:

Table A-12.

Alternative measures of labor underutilization
Seasonally adjusted rates as of September 2009:

U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force	5.4%
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force	6.8%
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)	9.8%
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers	10.2%
U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers	11.1%
U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers	17.0%
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. For more information, see "BLS introduces new range of alternative unemployment measures," in the October 1995 issue of the Monthly Labor Review. Updated population controls are introduced annually with the release of January data. (Source: Bureau of Labor Statistics Economic News Release - October 2, 2009)

All told, 15.1 million Americans (17%) are now out of work, the Department said. And an estimated 7.2 million jobs have been eliminated since the recession began in December 2007.

The Labor Department said 571,000 of the unemployed dropped out of the work force last month, presumably out of frustration over the lack of jobs. That sent the so-called "participation rate," or the percentage of the population either not working or looking for work, to a 23-year low. The unemployment rate would have topped 10% if the labor force hadn't shrunk again in September.

Older, laid-off workers are dropping out and requesting Social Security at a faster-than-expected pace, according to government officials. The Social Security Administration reported earlier this month that applications for retirement benefits are 23% higher than last year, while disability claims have risen by about 20%.

Meanwhile, the number of people out of work for six months or longer jumped to a record 5.4 million in September, and they now make up almost 36% of the unemployed, also a record. Making matters worse, weekly wages fell $1.54 to $616.11 in September, according to the Labor Department. Also, the average hourly work week fell back to a record low of 33 hours in September.

Unemployment to Remain High for Years to Come,
Even if the Economic Recovery Gets Stronger

With the unemployment rate so much higher than most expected, and headed higher still, more and more analysts are trying to determine how much job creation will be required to bring us down to 5% unemployment. Many economists and analysts consider that 5% unemployment is the equivalent of "full employment," since there will always be some percentage of the working population that is unemployed at any given time.

The job creation numbers required to get us from the current 9.8% unemployment to 5% unemployment, at this point, are simply staggering. And they are likely to get even worse, since we are likely headed for at least 10% unemployment in the months ahead.

As noted above, well over seven million jobs have been eliminated since late 2007. Most economists agree that most of these jobs have been eliminated permanently. Also as noted above, there are now 15.1 million Americans (17%) who were out of work, or forced to work part-time, as of the end of September.

In addition to the 15.1 million Americans who are out of work, most economists agree that apprx. 1 million new people enter the US job market every year (high school and college grads, legal immigrants, etc.). So not only does the economy need to grow by enough to re-employ 15 million unemployed, it also must create another 1 million jobs each year to provide for new entrants to the labor force.

With 15 million out of work already, and with the labor force expanding by more than 1 million new workers annually, economists Joseph Seneca and James Hughes of Rutgers estimate that even the robust job growth of the 1990s (2.4 million new jobs a year) wouldn't reduce today's 9.8% unemployment to 5% until 2017.

We increasingly hear about the so-called "jobless recovery" that we are likely facing. With the economy still losing over 250,000 jobs per month, it is a real stretch to assume that we will get anywhere near the 1990s pace of adding an average of 200,000 jobs per month (2.4 million annually). For example, the Business Roundtable, a group of CEOs from large corporations, said earlier this month that only 13% of its members expect to increase hiring over the next six months.

As these numbers continue to sink in, we are hearing new calls for more federal aid to state governments, a further extension of unemployment insurance (now up to 79 weeks) and a tax credit for companies that create new jobs. One such proposal would give employers a $7,000 tax credit for each additional worker hired (over some base period).

The W.E. Upjohn Institute for Employment Research thinks such a credit might create two million jobs. Sounds good on paper, perhaps, but the budgetary cost to the government would likely be $40 billion annually or higher.

As you will likely recall, President Obama rammed through his massive $787 billion "stimulus package" back in February, largely on the promise that it would create jobs. What he didn't tell us was that most of the money would not be spent this year, and that much of the money would go for pork-barrel spending programs over the next few years that won't create large numbers of jobs in the first place.

Supporters of the stimulus argue that without it, unemployment would be even worse than it is now and suggest that the stimulus spending in 2010 and 2011 will boost the economic recovery significantly. That remains to be seen, of course. I tend to doubt it.

Conclusions - Storm Clouds on the Horizon

Economic and financial reports continue to support the idea that we have seen the worst of the economic recession and the credit crisis, as I have suggested in recent weeks. Most estimates suggest that the economy, as measured by GDP, will show a positive number for the first time in over a year with this Thursday's advance 3Q GDP report.

Pre-report estimates are all over the board, and some analysts believe the report could show 3Q growth of 3% or more. Of course, we must all keep in mind that year-over-year comparisons of 3Q 2009 to last year's 3Q should make this year look pretty darned good in any event.

But the bigger problem is that unemployment continues to rise and is likely to do so until at least sometime in the first half of 2010, reaching well over 10% in the official number. As I have explained in detail above, the official unemployment rate significantly understates the real unemployment rate, which is now at 17%, as admitted by the Labor Department.

Despite the continuing unemployment trend, most forecasters believe that the US economy came out of the recession in the 3Q. Likewise, most mainstream forecasters believe that 2010 will be a year with at least modestly higher growth rates. Most estimates I read suggest the US economy will grow by 1.5%-3% in GDP next year. That remains to be seen, however.

Yet the most interesting thing for me is that we are seeing very few forecasts for 2011 and beyond. Usually, forecasters are more than happy to provide multi-year economic projections, so why not now? The reason is, in my opinion, that no one has a clue what the long-term effects will be as a result of President Obama's plans to run trillion-dollar deficits for the next several years at least and double the national debt in possibly the next five years.

The US dollar continues to fall as I discussed in detail last week. While I don't believe the dollar will be replaced as the world's "reserve currency" in the near-term, the long-term prospects for the dollar are questionable at best, especially if Obama doubles the national debt over the next 5-plus years. At some point, foreigners who buy our massive debt may decide to stop buying dollars, or worst case, begin to unload dollars.

If that were to happen, the implications for the US financial markets would be enormous. That could cause a financial crisis that dwarfs the one we've just been through. Maybe we do see an economic recovery in 2010 as most economists predict. But I want to go on record in predicting a "double-dip recession" in 2011 and perhaps beyond, especially if the dollar accelerates its decline. Space does not allow me to go into my reasons for this prediction this week, but I will be writing more about it in the weeks and months ahead.

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

Stocks Up 60% - Now What?

If the current troubling economic forecast doesn't call for a defensive investment approach, I don't know what does. Stocks have exploded since the March lows, with the S&P 500 Index up almost 60%. Now, more than ever, you may want to consider active management strategies that can move to cash or hedge long positions should stocks switch direction just ahead.

We recently sponsored live webinars featuring two of our recommended Investment Advisors. The overwhelming response we received shows us that investors are beginning to realize that the market can't continue to go up forever, and that market euphoria will run into economic reality at some point.

Increasingly, sophisticated investors are increasingly turning to professional money managers that can take advantage of whatever remains of the stock market upside, but that also have the ability to move to cash, or hedge long positions, when the current bull market rally plays out.

Fortunately, we recorded both of these webinars and have placed them on our website. I urge you to check out both the Potomac Fund Management and Niemann Capital Management webinars. Both of these Advisors have actual track records going back well over a decade, so they are not recent entrants in the field of active money management. Click on the following links to learn more about how these professional money managers add value to their clients' investments.

Potomac Fund Management Webinar

Niemann Capital Management Webinar

If you would like to discuss either of these managers, or learn more about our other actively managed investment programs, feel free to call one of our Investment Consultants at 800-348-3601 or send an e-mail to info@halbertwealth.com. We look forward to hearing from you!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Why Government Health Care Keeps Falling in the Polls
http://online.wsj.com/article/SB10001424052748704335904574495131591949574.html

Is the healthcare "public option" really back?
http://www.realclearpolitics.com/articles/2009/10/27/if_public_option_is_really_back_why_such_a_heavy_lift_98890.html

The Dethroning of King Dollar (an interesting read)
http://www.weeklystandard.com/Content/Public/Articles/000/000/017/124jwyuq.asp?pg=1

Will the US Dollar Lose "Reserve Currency" Status?

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

IN THIS ISSUE:

Most Americans Are Dollar Indifferent/Oblivious
How the Dollar Became the Reserve Currency
Long-term Swings in the US Dollar's Value
Global Calls for Reserve Currency Replacement
Editorial: The "Dump-the-Dollar" Conspiracy
Conclusions – No Change Likely Anytime Soon

Introduction

The US dollar became the global "reserve currency" in 1944 near the end of World War II and continues as such. There have been numerous reserve currencies over the centuries, but none more widely accepted than the US dollar since 1944. While the US dollar has fluctuated widely in value over the 65 years since its designation as the reserve currency, its credibility has come under the most intense scrutiny ever in the last few years.

The US dollar peaked in value in 2000-2001 and has been in a significant decline ever since. There was a relatively brief period in 2008 when the dollar rebounded quite sharply due to the worldwide financial crisis and economic meltdown, when there was a global rush to the safety of US Treasury securities. But since then, the dollar has resumed its long-term downtrend.

With President Obama's most unprecedented spending plans in history, with trillion-dollar budget deficits as far as the eye can see, and the potential to more than double the US national debt in the next 5-10 years, there is now widespread speculation that the dollar is headed for new all-time lows and a possible collapse.

As a result, we are seeing and hearing calls around the world to end the dollar's status as the world's reserve currency and replace it with something else. The question is, replace it with what? The US dollar is by far the largest currency in the world; many commodities around the world are priced in dollars; and most international transactions are settled in dollars.

This week, we will look at the debate regarding what to do about the US dollar as the world's reserve currency. I will start by explaining how the US dollar became the global reserve currency. Next, we will look at some of the difficulties the global community will face if the dollar is to be replaced as the reserve currency. And finally, we will explore what may happen if the US doubles the national debt over the next 5-10 years. It should make for an interesting letter.

Most Americans Are Dollar Indifferent/Oblivious

The financial media keeps us constantly aware of what's happening with the US dollar, as it should. But let's face it, most Americans pay little attention to the financial media, much less the value of the US dollar. And why should they? The dollar goes up in value and goes down in value, most often with few obvious effects on the lives of everyday Americans.

In extreme cases, a sharply falling dollar can result in significantly higher inflation and higher prices for the goods and services we consume. The late 1970s, when we had what some called 'hyperinflation,' is one such example. But Americans have come to accept that inflation rises every year, and few correlate rising consumer prices to fluctuations in the US dollar.

Likewise, a falling dollar can make US exports more competitively priced in foreign countries, and this can be a positive factor for the economy and job creation here at home. Yet a falling dollar can also make foreign imports more expensive to US consumers. But the point is, when it comes to a rising or falling dollar, most Americans are indifferent if not oblivious.

Most Americans, as far as I can tell, are likewise indifferent or oblivious as to the significance of the US dollar being the world's reserve currency. I would similarly suggest that most Americans don't even know what it means to be the world's reserve currency. Yet that may be about to change in a big way, what with increasing calls for the replacement of the US dollar as the world's reserve currency.

Sophisticated investors need to understand the importance of these issues as the future of the US dollar can significantly affect the value of our investments, as well as the prices we pay for the goods and services we all consume. In that regard, let's start with a brief discussion of how the US dollar came to be the world's reserve currency and what that means.

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.

How the Dollar Became the Reserve Currency

In July 1944, with World War II still raging and the international economic and financial systems in near shambles, delegates from all 44 Allied nations gathered in Bretton Woods, New Hampshire for the 'United Nations Monetary and Financial Conference.' The goal was to set up a system of rules, procedures and institutions to regulate the international monetary system. After three weeks of deliberating, the delegates agreed upon and signed the Bretton Woods Agreements.

The planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the Bretton Woods Agreements.

One of the chief features of the Bretton Woods system was an obligation for each country to adopt monetary policies that maintained the exchange rate of its currency within a fixed value (plus or minus 1%). The US dollar was established as the world's "reserve currency," which is typically defined as theforeign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, and/or to influence their domestic currency exchange rates.

At the same time, the US agreed separately to link the dollar to gold at the price of $35 per ounce, with the added promise that Allied nations could convert their dollar holdings to gold if they so preferred. This was collectively known as the new "gold standard."

Ultimately, the other Allied nations agreed to "peg" their currencies to the US dollar, and agreed to buy and sell dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the US dollar took over the role that gold had played in the previous international financial system. As the world's reserve currency, most international transactions came to be denominated in US dollars. The US dollar was the currency with the most purchasing power, partly because it was the only currency that was backed by gold. This led to the phrase that "the US dollar is as good as gold."

The gold standard for the US dollar, as the global reserve currency, continued until August 15, 1971 when President Richard Nixon unilaterally closed the so-called "gold window" and ended the option of converting US dollars into gold. Despite that, the US dollar has continued to be the global reserve currency to this day. But that may be changing… or maybe not.

Long-term Swings in US Dollar Value

The decoupling of the US dollar from gold in 1971 meant that the greenback became a "fiat" currency that was supported by nothing more than the full faith and credit of the US government, and thus subject to the whims of the market. The US Dollar Index (as measured in relation to six major foreign currencies) actually fell for several years after Nixon closed the gold window.

Then from 1980 to 1985, the US dollar skyrocketed on the upside, nearly doubling in value by 1985. But then in late 1985, the dollar began a virtual collapse which saw its value cut almost in half by late 1987. From late 1987 to 1995, the dollar moved in a broad sideways trading range.

From 1996 to 2001, the dollar staged another strong rally which moved the Index up to 120 as you can see in the chart below. From 2001 to the present, the Dollar Index fell sharply, reaching a new low in early 2008. Yet as the recession and the credit crisis unfolded in earnest in 2008, the dollar saw a fairly significant bounce, which was driven almost entirely by the global rush to safety in US Treasuries.

As you can clearly see, the credit crisis rally in the dollar ended early this year, and the long-term downtrend has resumed. The question now is whether or not the US dollar is headed for new all-time lows. With Obama's plans to run trillion-dollar annual budget deficits as far as the eye can see, and double the national debt in the next 5-10 years, it would seem almost certain that the dollar is headed for new lows.

This is precisely why we are hearing calls from around the world to replace the US dollar as the global reserve currency. But again, the question is with what?

Global Calls for Reserve Currency Replacement

As the US dollar has resumed its long-term downtrend this year, a growing international chorus is suggesting that the dollar be replaced as the world's reserve currency, a move that could theoretically end the greenback's six decades of global dominance.

China was the first major power to call in March for the dollar to be replaced as the world's reserve currency. China holds more US debt than any other country - about $800 billion - and the further the dollar drops, the less the value of the US debt owed to China. Never mind that China has been roundly criticized for its handling of its own currency, the yuan, which I might add is pegged to the US dollar.

Reportedly, there were informal talks on the dollar continuing as the reserve currency at the G-20 summit in London in early April. Since then other nations such as Russia, France and Brazil have suggested that the US dollar should be "supplemented" by other major currencies as a shared reserve currency.

The US was again criticized at the latest G-20 summit in Pittsburgh at the end of September, to the point that Treasury Secretary Geithner felt obligated to say the following at the opening of the conference: "A strong dollar is very important to the United States." Given the massive spending by the Obama administration, and plans to double the national debt in 5-10 years, it is no wonder that no one believed Geithner's remarks.

Regardless of whether the dollar would be replaced or supplemented, it would be a very complicated matter. The technical and political hurdles are enormous. For one thing, central banks around the world hold far more US dollars and dollar-denominated securities than they do assets denominated in any other individual foreign currency. Such reserves are frequently used to stabilize the value of the central banks' domestic currencies.

Most finance ministers around the world, including China's, know this and their comments in regard to replacing or supplementing the dollar as the world's reserve currency are just so much lip-service, which is really aimed at threatening the Obama administration over its out-of-control spending.

China says, for example, that it would prefer to hold its apprx. $2 trillion in reserves in something other than US dollars, but the fact is that Beijing has few alternatives. With more US dollars continuing to pour into China from trade and investment, Beijing has no realistic option other than storing them in US debt.

Some Argue "SDRs" are the Solution

So-called "Special Drawing Rights" (SDRs) are a synthetic currency created by the International Monetary Fund (IMF) in 1969 in an effort to stabilize the international foreign exchange system. The IMF defines SDRs as follows: The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies..."

Basically, SDRs are a combination of four currencies - US dollar, the Euro, the Yen and the British Pound. The US dollar alone makes up almost half of the value of a SDR. The amounts of each currency making up SDRs are determined by the IMF Executive Board in accordance with the relative importance of the currency in international trade and finance every five years.

SDRs were originally created to replace gold and silver in large international transactions. Since the quantity of gold and silver worldwide is finite, and the economies of all participating IMF members as an aggregate are growing, a purported need arose to increase the supply of international reserves. Thus, SDRs (also called "paper gold") are credits that nations with balance of trade surpluses can 'draw' upon from nations with balance of trade deficits.

In short, SDRs are little more than an accounting transaction within a ledger of accounts, which eliminates the logistical and security problems of shipping gold back and forth across borders to settle national accounts.

When SDRs were created, the IMF also suggested that member nations could convert their US dollar holdings into SDRs to diversify away from the dollar without driving the value of the dollar down. However, since US dollars account for almost half the value of SDRs, this diversification argument never made very much sense.

Despite the IMF's initial desires, SDRs never became the currency of choice for any countries. Even today, SDRs are primarily used only to settle accounts between the IMF and its members' treasury departments/foreign exchange ministries. Frankly, this is a good thing, in my opinion.

Still, there are continued calls for the SDR to replace the US dollar as the world's reserve currency. There are even a few voices out there that seem to believe we should adopt the SDR as a single global currency. In either case, the logic is flawed because of the limited size of the SDR market. Plus, if SDRs were instated as the global currency, every country with its own currency would lose a significant measure of national sovereignty.

Other arguments against making SDRs the world's reserve currency include the fact that the US dollar, the Euro and the Pound – which make up the large majority of SDRs – have all lost value since late 2007 when the recession began. Why replace a falling dollar by an index which so heavily includes the dollar? Also, SDRs do not contain the Chinese Yuan, Indian Rupee, Australian Dollar or Canadian Dollar, all of which are important benchmark or secondary global reserve currencies.

These are just some of the reasons that the SDR is not likely to become the global reserve currency.

EDITORIAL REPRINT

What follows is one of the more interesting analyses on the US dollar that I have read in some time about the so-called "Dump the Dollar" conspiracy. The piece is written by Dean Baker, a senior correspondent for Foreign Policy magazine (www.foreignpolicy.com), a leading non-partisan foreign policy think-tank in Washington.

QUOTE:

Debunking the "Dumping-the-Dollar" Conspiracy

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday [October 6], as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.

With the United States' ascendancy as the pre-eminent economic power after World War II, the dollar became the world's reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.

Any market -- a stock market, a wheat market, or the oil market -- requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It's simply an accounting issue.

Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would [be] 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.

It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer -- whether a member of OPEC or not -- from signing contracts selling their oil for whatever currency is convenient for them to acquire.

Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

This raises a more serious issue affecting the demand for dollars, which is the dollar's status as an international reserve currency. Currently the dollar is by far the preferred currency, but others, notably the euro, are gaining ground. A switch away from the dollar will lower its value, but this is hardly anything to fear: In actuality, it was and is an official policy goal of both the George W. Bush and Barack Obama administrations [to have a weaker dollar].

Both administrations are on record complaining about China's 'manipulation' of its currency. China does this by buying up vast amounts of dollars to hold as foreign reserves, suppressing the value of the yuan against the dollar. This, in turn, makes Chinese goods cheaper in the United States and bolsters China's exports.

If China stopped buying up huge amounts of dollars, as the United States wishes, then the dollar would fall in value against the yuan, thereby making Chinese imports more expensive. The result would be that the United States would buy fewer imports from China, improving its trade balance. Not too many people would be frightened by this prospect.

To summarize, the dollars needed to finance the international oil trade are trivial compared with other sources of demand for dollars. The currency chosen for foreign reserve holdings can have an impact on demand for dollars, but this has nothing to do with the currency chosen to conduct the oil trade. If Saudi Arabia wanted to hold euros rather than dollars, it could almost instantly offload as many dollars as it desired. Plus, the White House wants the dollar to decline anyway because it would improve the United States' trade balance.

Thus, the conspiracy theory Fisk resurrected might have spooked the markets, but the reality is that there is nothing to fear. The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.
END QUOTE

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

Conclusions

The US dollar is not likely to lose it reserve currency status anytime soon, unless it were to collapse for some unexpected reason. As illustrated in the chart above, the dollar has been losing value for almost a decade, yet no major countries have switched to some other currency to settle international transactions. As discussed earlier, there is no other currency that is large enough to replace the dollar as the world currency.

Longer-term, however, the prospects don't look very bright. With President Obama's plans to run trillion-dollar annual budget deficits for at least the next five years (and possibly longer) and double the national debt in 5-10 years, the dollar could find itself in real trouble as the reserve currency. The dollar could fall so low that foreign nations decide to dump their dollars in favor of euros, yen or whatever. If that day comes, I (and many others) believe we will see an even greater financial crisis and another depression.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Why the euro is not the next global currency
http://www.ft.com/cms/s/0/1e661b42-bcdb-11de-a7ec-00144feab49a.html?nclick_check=1

Deficit Dilemma: How to Dig Out
http://online.wsj.com/article/SB125554787267585505.html

Excuses wearing thin for Obama
http://www.suntimes.com/news/huntley/1834209,CST-EDT-HUNT20.article

The Stock Market Conundrum

Gary D. Halbert — Tue, 06 Oct 2009 19:14:00 GMT

IN THIS ISSUE:

Ball of Confusion
The Gloom-and-Doom Argument
Damn the Torpedoes, Full Speed Ahead!
Is the Market Defying Gravity?
What You Should be Doing

Introduction

The cover of the October 5, 2009 issue of Business Week magazine summed up the current dilemma for stock market investors perfectly. It had a staircase running diagonally across the page, with one figure climbing up the stairs, and the other going down the stairs. The "upstairs" view had the caption, "Why the Market Will Keep Going Up," while the downstairs view was labeled, "Why the Market is Going Nowhere."

The fact that both cases can be made in a single magazine article shows that there are good reasons for the market to go up, and equally good reasons for it to go sideways, or even down. The fact that the S&P 500 Index has risen over 50% since the March lows has both bulls and bears scratching their heads. And nobody knows what lies ahead.

There's little wonder why $3-$4 trillion of investor assets are reportedly still sitting on the sidelines in cash, even though the market's rally since the March 9th lows has been nothing short of spectacular. You would think that even hesitant investors would now be piling into the market. Some have, but much of this sideline money is staying put where it won't be subject to another round of losses, should the market rally suddenly reverse.

This week, I'm going to discuss both the upside and downside potential in the stock markets. In doing so, I'm going to lean upon the opinions of various market forecasters as well as my best economic resources. I warn you, however, that there is no single oracle of truth and light that has all the answers. George Bernard Shaw reportedly said if all the economists were laid end to end, they'd never reach a conclusion, and I'm beginning to get the same feeling about today's stock market analysts.

Ball of Confusion

The term "uncharted waters" as it relates to the stock and bond markets has probably never been as apt as in today's environment. Unprecedented federal government intervention in the markets has created a playing field that is, at best, significantly different than past market environments. The Fed and Treasury have primed the pump, and we seem to be coming out of the worst recession since the Great Depression. But no one knows whether the economy will continue on a path of sustained growth once these trillions of dollars are no longer flowing.

As we all know, however, the stock market and the economy are two different things and they sometimes move independently. As a result, some feel that the stock market is giving the "all clear" signal for investors with its 50%+ run-up since the March lows. Others, however, point to the fact that stocks haven't risen this far this fast since 1933, and we all know what happened after that. Plus, while this rally is impressive, it's important to realize that the S&P 500 Index is still over 32% below its October 2007 peak value as of the end of September, so many buy-and-hold investors are still under water.

Some analysts point to the fact that the market hasn't experienced even a 10% downward correction since March as a reason for caution, thinking that such a correction could be in the cards in the near future. Others, however, actually think that the market's lack of a significant correction is a sign of the superior strength of this run-up in prices.

There is also a wide range of interpretations of the stock market's current pricing. Some say that the market is pricing in continued economic growth and, if such growth doesn't happen, the market will fall again, possibly even re-testing the March lows. Others, however, claim that the stock market is priced fairly at this point in time and investors need not be concerned.

A number of analysts pin responsibility for the market rally on corporate profits, especially as they continue to beat expectations. Others, however, claim that expectations were so low that they were almost impossible not to beat. Since we don't track or recommend individual stocks, I can't offer an opinion on this earnings discussion. However, I do know that if you lower your expectations enough, earnings are bound to beat them sooner or later.

The end result is that investors are now justifiably confused and there is no single authoritative source for market action going forward. For every positive argument, there's a negative opinion. For every cheerleader, there's a gloom-and-doomer and most are backed up with sophisticated statistical analyses supporting their predictions. As always, the future is unknowable, but in this case it doesn't even seem to be giving us the slightest hint of what might happen.

The Gloom-and-Doom Argument

I am always a little hard on the gloom-and-doom crowd, possibly because I have been exposed to them for so long that I know how wrong they have been over the years. Many in this negative camp missed out on the greatest bull market in history in the 1980s and ‘90s because of their deep-seated fears that the sky was always falling. At best, the old adage about even a stopped clock being right twice a day seems to be appropriate for this group.

However, it's not just the usual suspects who are sounding warnings about the current state of the stock market. Bill Gross and Mohamed A. El-Erian, both with the PIMCO family of mutual funds, are touting a "new normal" where stock market returns will be less than the long-term averages as economic growth is likely to be below-trend (3% or less in GDP) for at least the next couple of years. El-Erian expresses his skepticism of the stock market's recent rally, saying "Interest rates are at zero, there's $2 trillion plus on the Federal Reserve's balance sheet, and yet the economy is still losing jobs. What exactly is the stock market romancing?"

Of course, El-Erian and Bill Gross are well-known bond guys, so it is not unusual for them to be a bit biased against stocks. However, many of my best sources over the years share the view that stocks are likely to under-perform their historical averages over the next several years.

Ned Davis Research recently issued a report noting that all previous rallies of the magnitude we've seen over the past six months or so took place in the 1930s and the 1970s. Davis notes that none of those rallies were sustained over the long haul. In essence, Davis points out that anyone who missed out on the first six months of such powerful rallies, and then jumped back in the market, would have been subjected to losses as the bull market ran out of steam and started falling. This data suggests that the current rally will run out of steam later on this year, but that remains to be seen.

A recent Wall Street Journal article noted that Tim Hayes, chief strategist for Ned Davis Research, believes that there is a good chance that the stock market could have another big decline in 2010. Mr. Hayes is known for having forecast the current market rally, so his opinion does carry some weight. Likewise, Jordan Kotick with Barclays Capital in New York expects a repeat of the 1970s, where the rally fizzles and we end up with an extended range-bound market.

A separate article in the October 5 Business Week noted that high unemployment and low inflation might lead to a decline in pay, which could slow consumer spending in the next year and, in turn, the economic recovery. Mainstream economists downplay the probability of this happening, but it is a possibility, and stock prices could suffer if it comes to pass.

As for consumer spending, a recent Careerbuilder.com survey indicated that 61% of Americans say they are living paycheck to paycheck, up from 49% a year ago. Even among those making over $100,000 per year, 30% say they are just scraping by, compared to 21% a year ago. With a growing number of families strapped for cash and unemployment expected to peak at over 10%, please tell me how consumer spending is going to rebound sharply.

A final cautionary word comes from those analysts who are tracking the massive spending by the federal government. As I have mentioned a number of times, this short-term spending could lead to long-term catastrophe, especially if the Treasury has to raise interest rates paid on its debt to attract foreign buyers. Higher interest rates could stifle an economic recovery already facing headwinds from curtailed consumer spending and high unemployment.

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.

Damn the Torpedoes, Full Speed Ahead!

While there are many reasons to be cautious about the market's recent strong rally, the number of analysts and professional money managers who are cheerleaders for the new bull market is growing. A recent Financial Advisor Magazine article noted that such luminaries as Byron Wien (Chief Investment Strategist for Pequot Capital Management), Barton Biggs (Manager of the Traxis Partners hedge fund), Steve Leuthold (Leuthold mutual funds manager) and Michael Price (billionaire value investor and fund manager) are all now firmly in the bull market camp. Despite the 50+% spike since March, these well-known stock market mavens believe the bull market should continue.

The primary supporters of a continued market rally are those who believe that the market will revert back to its previous long-term mean return. These analysts admit that the last 10 years have been anything but normal, but they believe that long-term stock market fundamentals should regain control as the economy continues to get better.

Of course, when these "normalists" speak of a return to the mean, they are talking about a 12.9% annualized gain like the stock market produced from 1900 to 1999. But some ask how we can return to "normal" when consumer spending is expected to remain suppressed as the rate of savings continues to increase.

Liz Ann Sonders, chief market strategist for Charles Schwab, says that many investors have underestimated the "bounce-back effect," referring to the tendency of the market to rebound from artificially low points such as the March 2009 lows, which were spawned by panic about the ongoing credit crisis. She also predicts that US exports will rise sharply over the next year, which in her view will help to offset slower consumer spending. She, too, is bullish.

Likewise, Neil Hennessy, chief investment officer of Hennessey Funds, not only thinks that the current market rally will continue, but also believes that we are at the start of a 10-year bull market that will see the Dow Jones Industrial Average doubling by the time it's done. He cites low interest rates that make stocks far more attractive than government bonds, and large amounts of cash waiting on the sidelines as the main reasons for his optimism.

Trillions of Dollars Sitting in Cash

The amount of money on the sidelines in cash and money market accounts is a recurring theme when researching stock market analysts with bullish views. As noted earlier, there is reportedly anywhere from $3-$4 trillion sitting on the sidelines, much of it waiting for a signal to jump back into the market. Like Hennessy, many analysts believe that investors will tire of earning little or no return on this money, and then move back into the market, thus leading to higher stock prices.

I have to agree that so much money on the sidelines is a potentially good bullish argument. In fact, some of this money is already flowing back into mutual funds, but industry data show that most is flowing into bond mutual funds, not stock funds. Therefore, it may be a little early to pin too much hope on the herd instinct driving the market up.

Plus, much of this money belongs to Baby Boomers whose retirement funds have already endured two major bear markets in the span of a decade. Many of these individuals may feel that the bulk of the bull market has passed them by, and fear that getting back into the market may expose them to even further losses.

As for government spending and deficits, there is no doubt that much of the economy's growth since the 9-11 terrorist attacks has been fueled by government spending of one kind or another, aided along the way by the housing bubble. As the Fed continues to hold interest rates to near-zero, it is essentially making cash and money market funds unattractive to investors in hopes of driving them to other investments. The question then becomes what happens after the government stops priming the pump?

Fed chairman Bernanke has indicated that interest rates will stay low for a long time. In the past, this liquidity has gone to fuel bubbles – first the tech bubble and then the housing bubble. This time, the bulls believe it will take the form of a stock market bubble, which could send the market much higher in the weeks and months to come. That remains to be seen.

Looking at the Big Picture

As discussed above, there are compelling arguments for both the bullish and bearish cases at this time. However, there is little disagreement that the major stock market averages are "overbought" at this time. As noted earlier, there has not been even a 10% downward correction since the March lows.

The Dow Jones Industrial Average peaked in October 2007 at just over 14,000. It then experienced the largest numerical decline in history over the next 18 months to the low on March 9, 2009. The percentage decline from peak-to-valley was apprx. 54%. From the March low, the Dow spiked up to above 9,800 briefly in late September, marking a recovery of just over 50% without so much as a 10% downward correction along the way.

This is why most market forecasters agree that the stock markets are overbought. From the highs in late September, the Dow retreated to just under 9,500 in early October, but is again rallying so far this week.

One point is clear from the chart, however. Buy-and-hold investors who rode the market all the way down have not recovered even half of their investment losses, despite the latest 50% rebound. And there is no guarantee that the market will continue higher.

Investors that bailed out of the market late last year or early this year, and have not gotten back in, are between a rock and a hard place, as the saying goes. They are understandably reluctant to jump back in the market after a 50% spike up. Yet they are earning next to nothing in cash. I've had plenty of people voice this concern to me: Well, if I get back in now, that means the market is sure to go down again. Those on the sidelines are in a really tough spot right now.

Is the Market Defying Gravity?

As I have mentioned many times, my firm recommends a number of actively managed investment programs that have the flexibility to move to cash or hedge long positions. To provide the most value for our clients, we are also constantly tracking other active money managers to see if their strategies might have a place in our AdvisorLink® Program.

This tracking of current and prospective investment programs allows us to see a lot of daily trading activity generated by a wide variety of systematic approaches, which I believe supports the idea that there are a lot of contradictory signals being given by the market. From our experience, it's not uncommon for the various systems to disagree about the market's direction. After all, they use a variety of technical and statistical data to generate their trading signals, but not all systems use the same data.

However, when we see most of the various programs we track line up on the same side of the market, it usually means there is a good chance the market will move in that direction. Yet as noted above, the current market has been giving numerous contradictory signals, and thus some of the managers we track (and even some we recommend) have been on both sides of the market recently.

This makes it even more difficult to have a strong view of the market's overall direction going forward, other than the consensus that it is currently overbought and overdue for a downward correction. Whether or not we are in such a correction as this is written is uncertain.

The last time something like this happened was back in the late 1990s when the tech bubble was being inflated. Most everyone agreed that the markets were overbought, but stocks, especially tech stocks, continued to soar. New-age market gurus claimed that we were in a "new paradigm" and that the old rules no longer applied. Eventually, the market did collapse under its own weight, but only after an extended period of impressive gains.

We may, again, be dealing with an irrational market that neglects proven technical indicators and, instead, believes that we have entered a new era of government funded gains in the stocks of companies deemed "too big to fail." However, I think there is still a lot of risk for those considering traditional buy-and-hold investment strategies.

It may be that the recent uptrend in stocks continues for a while as it does appear that we are coming out of the recession, and corporate earnings have been surprising on the upside, generally speaking. Consensus opinion has turned significantly higher and, as noted above, there are trillions of dollars looking to get back in that could limit downturns and drive prices even higher.

But with the Obama administration on track to double the national debt in the next 10 years, I don't see things ending pretty at some point, probably soon after all those sidelined trillions jump back in the market.

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

Conclusions

As I researched material for this article, I found it interesting that the current opinions about the strength of the current market rally somewhat parallel what was going on back in the late 1990s. Back then, all of the fundamental analysis was showing that the market shouldn't be going up like it was, while the "new paradigm" crowd was saying it's different this time.

Now, we have many of the same arguments. The fundamental analysis camp is saying that the market is fairly priced and should continue to go up based on profit expectations. All the while, those promoting the "new normal" are claiming that even if the market continues higher, it will struggle and will under-perform its historical averages. It seems that the more things change, the more they stay the same.

Of course, there is a third possibility that could prove both camps wrong. There is a distinct possibility that the stock market could get caught up in a broad trading range in which it moves generally sideways for an extended period of time. Maybe we're already in it: the Dow's close at 9,487.67 on Friday, October 2nd was actually lower than the index's closing value of 9,505.96 back on August 21st.

Such a market environment does not mean that stock prices do not change, but rather that short-term upward trends could be followed by similar periods of downward price movement, and vice versa. Over the long haul, the market could grind slowly higher or lower, but any such move could be gradual, at best.

Of course, these arguments don't help investors who are trying to figure out what to do with their money. Have they missed out on most of the market's gain, or is there plenty more to go around? Unfortunately, no one knows for sure, and anyone who tells you they do is either dishonest or delusional or both.

As always, I suggest that you have most of your stock and bond portfolio professionally managed by Advisors that have a proven system, complete with the ability to move to cash or hedge long positions during major market downturns and bear markets. More sophisticated investors may also want to consider a small allocation to investment programs that can go "short" if market conditions warrant.

Two of the programs I have mentioned most often are Niemann Equity Plus and Potomac Guardian. These are managed accounts that invest in a wide variety of mutual funds in up markets, but also have the ability to move to cash or hedge positions during major corrections or bear markets. We recently presented a webinar on the Potomac Guardian Program that featured a member of its Investment Committee explaining their approach to the market. If you would like to learn more about this program, I would strongly suggest that you listen to the recorded version of this seminar at the Potomac Webinar link.

For anyone interested in the Niemann Equity Plus Program, we're having a live webinar tomorrow, October 7th, at 12:00 PM Central Time. In this webinar, Travis Silberman, one of Niemann's co-founders, will discuss the strategy Niemann employs in managing money. If you would like to sit in on this webinar, click on the following link to access the Niemann Webinar Invitation.

And don't forget about the Columbus High-Yield Bond Program that I wrote about in my September 15 E-Letter. This actively managed high-yield bond fund strategy offers a fixed income exposure for your portfolio along with the ability to move to cash in down markets. For a more aggressive fixed income program, you may want to check out the Hg Capital Long/Short Government Bond Program that trades the 30-year Treasury bond both long and short.

These are in addition to our other AdvisorLink® recommended programs like Third Day Advisors and Scotia Partners that I have also written about in the past. If you'd like to find out how these programs could bring additional diversification to your portfolio, check out our website at www.halbertwealth.com. Better yet, give one of our Investment Consultants a call at 800-348-3601 and let them explain our various investment options and how they might fit within a diversified portfolio.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

The New Economic Landscape Will be Grim Unless Policymakers Act to Foster Growth
http://www.economist.com/opinion/displayStory.cfm?story_id=14548881&source=hptextfeature

Democrats Brace for the Hardest Part of Health-Care Reform
http://www.time.com/time/politics/article/0,8599,1927787,00.html

Obama Caves on Iran
http://online.wsj.com/article/SB10001424052748703628304574452933624279114.html

The Economy & the Commercial Real Estate Bust

Gary D. Halbert — Wed, 30 Sep 2009 00:43:00 GMT

In This Issue:

The Economy Continues to Improve Slowly
Plunge in Commercial Real Estate Values
More Trouble Ahead for the Banks
Glut of Commercial Mortgage-Backed Securities
Personal: Thinking Wrong, But Getting It Right

Introduction

There is broad agreement that we have seen the worst of the recession, and that GDP will show a positive gain for the 3Q when we get the first government estimate in late October. Most pre-report GDP estimates I have seen are in the +2 to +3% range for the 3Q. The actual number remains to be seen, of course.

There is also a growing agreement that we have seen the worst of the housing bust, as sales of new and existing homes rose briskly for the four months ended in July; however sales of existing homes unexpectedly fell slightly in August as reported last week.

Yet while the economy appears to be on the mend, at least for a while, and the housing market seems to be recovering, there is another serious threat to the economy and the credit markets just ahead - the continuing commercial real estate bust which is still getting worse.

This week, we will take a brief look at the latest economic reports, most of which are encouraging, and then I will summarize the very troubling situation in US commercial real estate. This problem has led numerous analysts to predict that the commercial real estate may well be the next shoe to drop in the credit crunch.

The Economy Continues to Improve Slowly

As noted above, most forecasters believe the US economy has expanded at healthy rate in the 3Q which officially ends tomorrow. If so, that will be a welcome relief following GDP declines of -6.4% in the 1Q and -1.0% (annual rates) in the 2Q.

The Index of Leading Economic Indicators (LEI) rose 0.6% in August, marketing the sixth consecutive monthly increase. This is perhaps our best indication that growth in the 3Q and the 4Q will be positive and could surprise on the upside, which is not surprising following the worst recession since the Great Depression.

Most analysts that I follow closely believe, however, that the economic recovery in 2010 will be rather anemic with GDP growth at or below 3% on average. Such estimates could prove too rosy, depending on what happens in the huge commercial real estate sector (details to follow).

Consumer confidence improved significantly in August after falling slightly in June and July. The Consumer Confidence Index rose to its highest level (54.1) since the recession began. The improvement continued into September with the University of Michigan Consumer Sentiment Index climbing to a new recent high of 70.2.

Higher confidence resulted in a nice rise in retail sales in August, up 2.7%. Unfortunately, durable goods orders, which were expected to have risen in August, fell 2.7% last month, following the big increase of 4.8% in July.

On the manufacturing front, the ISM Index rose to 54.1 in August, up from a revised 47.4 in July. Industrial production rose 0.8% in August, following a 1.3% gain in July. Factory orders were up 1.3% in July (latest data available). The factory operating rate rose to 69.6% in August.

As noted above, existing home sales dipped slightly in August following four consecutive monthly increases. New home sales in August were up fractionally (0.7%), well below expectations, following the 9.6% jump in July, the highest in almost a year.

Of course, any analysis of the overall economy would be remiss not to point out that, while things are improving on most fronts, the unemployment rate continues to rise - up to 9.7% in August from 9.4% in July - and will almost certainly continue higher for several more months at least.

Overall, it appears clear that the recession will end this year, and it is quite possible that we will see positive growth in GDP in the 3Q and 4Q. Most of the estimates I read for the 2Q are in the +2-3% range; most of the guesses I read for the 4Q are in the +3-4% range, which remains to be seen, especially in light of the potentially dangerous situation in the commercial real estate markets.

Plunge in Commercial Real Estate Values

US commercial real estate, valued at some $3.5 trillion, has experienced a 39% decline in prices on average from the peak in late 2007, according to the MITCenter for Real Estate.

This current drop is considerably worse than the 27% commercial real estate decline associated with the savings and loan crisis of the late '80s and early '90s. You will recall that the S&L crisis precipitated the government-run Resolution Trust Corporation and the resulting seizures and auctions of hundreds S&Ls around the country.

The same conditions that caused the residential housing bubble, including the Fed's easy credit, lax lending standards and booming mortgage-backed securities underwriting on Wall Street, also drove commercial real estate overvaluation.

Recently, MIT reported that commercial real estate prices plunged 18% in the second quarter, which was the largest quarterly drop in the 25 years since MIT first published its Commercial Real Estate Price Index. MIT also reports that most commercial properties bought or refinanced in the last five years are now upside down on their loans, with current property prices having fallen below the finance or purchase price. Real Capital Analytics reports that owners have lost their entire down payments on about $1.3 trillion worth of property.

According to several sources, nearly half of all the commercial real estate mortgage loans in the US are coming due within the next five years. Deutsche Bank, for example, believes that 65% or more of these loans will fail to qualify for refinancing. Existing high vacancy rates will continue or worsen as long as the unemployment rate continues to rise.

We are hearing more and more talk about the plunge in commercial real estate values these days because commercial real estate value trends tend to lag the overall economy. There are many reasons for this - too many in fact that it is impossible to cover them in this short space.

Susan Smith, who is the director of PricewaterhouseCoopers' real estate advisory practice notes: "The biggest problem is that commercial real estate lags what happens in the economy. Companies are looking for ways to cut costs, many are continuing to reduce workers and are continuing to reduce their space needs." As a result, commercial rental rates have taken a nosedive in most markets.

Ms. Smith and her team at PricewaterhouseCoopers conduct surveys each year of the commercial real estate market, and their latest survey concludes that the rise in vacancy rates and the plunge in rental rate are far from over and may well extend into 2011. Office rents in New York and San Francisco may drop 20% in 2010 alone, the survey found.

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.

More Trouble Ahead for the Banks

All of the above suggests the following: many of the banks that made commercial real estate have only realized a fraction of their losses. And as those losses continue to mount, we're likely to see more and more bank failures. Commercial real estate loans are not just concentrated among the nations largest banks; these loans are widely made by regional banks and even smaller banks.

Of the largest banks, San Francisco-based Wells Fargo has the largest share of the apprx. $3.5 trillion commercial debt securities, reportedly with 16.5% of its $821 billion loan portfolio invested. JPMorgan Chase is reportedly a distant second with 5.4% of its portfolio invested in commercial loans, followed by Citigroup with 3.4%.

However, smaller banks - 92 of which have already folded this year as of mid-September, according to the FDIC, compared to 25 last year - are even more at risk because they will likely have a harder time accessing the crucial capital to offset rising defaults on commercial real estate loans, according to the TARP-inspired Congressional Oversight Panel's August Oversight Report. The Oversight Panel noted:

"Unlike large banks that can sustain a certain number of defaults, even of large commercial loans, smaller banks may have far more difficulty in absorbing more than a few large loan losses. The FDIC's statement that ‘banks have been able to raise capital without having to sell bad assets through the LLP' may not reflect the reality for these banks."

Indeed, the number of smaller banks expected to be seized by the FDIC is forecast to accelerate later this year and next year. The FDIC's "problem list," of banks that run a higher risk of failure, grew to 416 in the 2Q, up from 305 in the 1Q. That's the highest number since the 2Q of 1994, following the S&L crisis, when there were 434 banks on the list.

As noted above, the S&L crisis resulted in a 27% decline in commercial real estate around the country. This time around the losses are even greater (39% so far) because the apprx. $3.5 trillion is over three times what it was during the early 1990s - meaning the potential for losses is steeper than ever before.

Glut of Commercial Mortgage-Backed Securities

Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering another knockout punch to the US economy just as it struggles to get up off the mat. Yet their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. These loans are known as Commercial Mortgage-Backed Securities (CMBS).

As discussed above, many US banks have high exposure to commercial real estate debt that they initiated through their own internal loans. In addition, many banks also bought CMBS and now have additional default risks that I will discuss in more detail as we go along.

Similar mortgage-backed securities (Sub-prime, Alt A, etc.) created out of home loans played a huge role in undoing that sector and triggering the global economic recession and credit crisis. Most sources estimate that there is around $700-$900 billion of CMBS outstanding at this time. These complicated products are being tested for the first time by the massive downturn real estate values discussed above, and so far the outcome so far hasn't been pretty.

A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, which is usually a large financial institution like Wells Fargo or JPMorgan Chase, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities.

The CMBS sector is suffering from two major problems, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is major problem is that many of these mortgages were simply poorly underwritten. In the era of looser credit in recent years, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.

The other major problem is the growing inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Unfortunately, other sources estimate that twice that many CMBS loans will come due between now and 2012; and double the amount that will be difficult or impossible to refinance.

Even though the cash flows of many of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS - including hedge funds, pension funds, mutual funds and other financial institutions - thus exacerbating the economic downturn.

Many banks that hold traditional commercial real estate loans have chosen to extend the maturities and/or renegotiate the terms (this is one reason we haven't heard too much about it until recently). Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.

Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Unfortunately, CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do.

Mounting foreclosures in the CMBS sector will likely depress values even further as property is dumped on the market. And this, in turn, will likely put pressure on banks to write down the myriad of commercial loans on their books, thereby exacerbating the problem.

The $64 Question: Why Are Bank Stocks Soaring?

At this point, the logical question to ask is, how is it that we have this enormous commercial debt problem, yet bank stocks have been on a tear for the last couple of months? Frankly, I think most bank shares are wildly overbought at this point, but then I'm not a stock picker.

Some of the largest US-based multinational banks saw their share prices plunge to the level of "penny stocks" over the last year. CitiGroup at one point fell to below $1 per share (97¢) on March 5. Yet shares of these mega-banks have rebounded significantly in recent months, albeit from the lowest levels ever recorded for many of the largest banks. In other words, they were due for a significant rebound.

Another reason the large money center banks have seen their shares soar is the widespread belief that President Obama will not allow any of the major financial institutions fail on his watch. The turmoil that erupted after the Lehman failure will not be allowed to happen again, so investors have more confidence in the large bank stocks. The recent spike in bank stocks has also helped the regional bank stocks which, in most cases have seen their share prices rise as well.

None of this, however, makes the commercial real estate debt problem go away, and it will get worse before it gets better. There is virtually no market for CMBS. Potentially hundreds of billions in commercial mortgage loans will not be able to be refinanced over the next couple of years. I fully expect this to weigh heavily on the banks - small and large - in the weeks and months ahead.

If I had very large profits in banks stocks over the last 2-3 months, I would be taking money off the table. But again, I'm not a stock picker.

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.

Thinking Wrong, But Getting It Right

If you have been reading this E-Letter all year, you know that my calls on the economy and the stock market have been off the mark for the most part. Earlier this year, I expected the economy would remain in negative GDP territory all year and not recover until sometime next year. I expected consumer confidence to stay in the dumps pretty much all year.

Despite my forecast, the economy did begin to rebound during the summer, and it now looks reasonable to expect positive growth in the 3Q and 4Q, assuming there are no more big negative surprises. Just how negative the commercial real estate debt problem will be remains to be seen.

In a similar vein, I did not see the recent surge in the stock markets coming. Of course, I don't know anyone else who predicted stocks would spike 50% higher back in March either. Back in early March when the Dow had literally collapsed to 6500, I did feel that the panic was probably over. Yet I never would have imagined that the Dow and other major market indexes would soar over 50% in relatively short order. But they have.

I openly admit to those misgivings to make the following point. I don't manage any of my own money that is in the stock market or in bonds. I haven't made a personal trade in years. I figured out a long time ago that I am too emotional to do it myself.

If I had been managing my own money in stocks or mutual funds, I would probably have bailed out sometime late last year or early this year, as millions of investors did. Given my views of the economy and the stock markets earlier this year, I can all but assure you I would not have jumped back in when the markets turned up in late March and April.

I would still be on the sidelines like millions of other investors, and I would have missed out on the huge gains that followed. By the way, estimates are that there is still $3-$4 trillion in money that bailed out that is still sitting on the sidelines in money market funds, T-bills, etc.

But since almost all of the money I have in the stock markets is managed by professionals, I have been able to participate in this recovery.

If you have read these letters for long, you know that my firm is in the business of finding successful professional money managers to recommend to our clients. As a long-time critic of Wall Street's "buy-and-hold" mantra, I have always preferred "active" or "tactical" money management strategies that have the ability to move to cash (money market) or "hedge" long positions during down periods.

The reality is that my equity managers lost far less than the market during the bear market that began in late 2007, and they have been able to participate in the bull market that began earlier this year. (As always, past performance is no guarantee of future returns.)

My goal has always been to avoid the 40-50% losses that often occur during bear markets. Remember, if you lose 50%, you must make 100% just to get back to breakeven.

If avoiding big losses is a big concern to you, then maybe it's time to checkout some of the active managers I recommend. Hopefully, you read my E-Letter two weeks ago on the Columbus High-Yield Bond Program.

Please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about our actively managed investment strategies.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Healthcare: Doubling Down on a Flawed Model (read this)
http://online.wsj.com/article/SB10001424052970204488304574426872264215790.html

Healthcare Reform or Government Takeover?

Gary D. Halbert — Tue, 22 Sep 2009 20:54:00 GMT

In This Issue:

Reactions to the President's Healthcare Speech
Omissions & Falsehoods In President Obama's Healthcare Speech
A Re-Run of Clinton Nationalized Healthcare?
Conclusions - So What Should We Think Now?

Introduction

President Obama addressed a rare joint session of Congress on September 9 when he spoke at length about his desire to substantially reform America's healthcare system. Whether you are among the apprx. 56% of Americans who now oppose the healthcare reform bill in the House, or you are among the apprx. 43% who support it (latest Rasmussen poll), it is important to know the facts - a number of which the president failed to address or misrepresented in his speech.

With opposition to the House healthcare reform bill rising almost daily over the last month or so, there was great anticipation ahead of the president's speech. Many in the media commented that Mr. Obama needed to "hit it out of the park," and that the speech needed to be a "game-changer." Politicos on both sides of the aisle agreed afterward that the speech was delivered extremely well. Unfortunately, it raised more questions than answers.

Many thought the president would soften his recent healthcare rhetoric and reach out to Republicans and Independents. He didn't. He chose instead to shore up his base. Many thought he would compromise on the so-called "public option." He didn't, exactly. And while President Obama's approval ratings rose a few points just after the speech, opposition to the Democrats' healthcare reform bill has soared to new highs since then.

While I have refrained from writing at length on the healthcare reform debate, I feel the issue is just too important, and too politically charged, not to speak out. In the pages that follow, we will delve into some of the biggest problems and challenges with the House healthcare bill, H.R. 3200 - America's Affordable Health Choices Act of 2009. Given that there is so much misinformation on healthcare reform out there, on both sides, maybe this will help.

Reactions to the President's Speech

As noted above, the immediate reactions to the president's healthcare speech on September 9 were almost unanimously favorable. There is no question that Mr. Obama is a great orator. But the real question is whether the president changed enough minds to breathe new life into the struggling healthcare reform bill stuck in Congress To my surprise, George Stephanopoulos of ABC news (and a former Clinton aide) wrote a column entitled "Obama Speech No Game-Changer" soon after the speech.

Whether you liked or disliked the president's speech, it did change some minds favorably, but for only a few days. A Rasmussen poll released a few days after the speech showed that, for the first time, a slim majority - 51% - of Americans favored the Democrats' healthcare plan, while 46% opposed it. But those approval numbers began to fall significantly last week. This from Rasmussen on September 16, one week after the speech:

One week after President Obama's speech to Congress, opposition to his health care reform plan has reached a new high of 55%. The latest Rasmussen Reports daily tracking poll shows that just 42% now support the plan, matching the low first reached in August. [As noted above, the latest numbers this week are 56% opposed and 43% in favor.]

Just a few days earlier, Rasmussen's poll showed that those who "strongly favor" the plan were at 28%, while those who "strongly oppose" were at 38%. Now, two weeks after President Obama's speech, the latest numbers are only 23% strongly favor the plan and 44% strongly oppose it. This is very bad news for Team Obama.

Conclusion: President Obama gave a great speech, as he is known to do, and it helped the healthcare ratings for a week or so. But the reality is that a majority of Americans do not want this government healthcare plan, and that number is likely to rise even more as people learn more about the Democrats' plan.

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.

Misrepresentations, Omissions & Falsehoods
in President Obama's Healthcare Speech

The number one problem with the Democrats' massive healthcare reform proposal is a simple matter of supply/demand. There is no way to provide healthcare insurance and coverage to 46 million people who do not currently have coverage, with the same number of doctors, nurses and hospitals/clinics, without rationing healthcare. Even if the number is half that, some 23 million people (or even just 15-20 million as some argue), the problem is still the same.

The law of supply and demand also dictates that if we substantially increase the number of Americans covered (demand) with the same number of doctors, nurses and hospitals/clinics (supply), the cost of healthcare will increase, perhaps significantly, unless there is rationing. We must look no further than Canada or Great Britain to see how this will happen.

The question at the end of the day is, why can't the president and the Democrats just admit that there will be rationing and just be straight with the American people? In all of his healthcare speeches, President Obama totally avoids this simple supply/demand fact. The president wants us to believe that we can insure and provide healthcare to at least 15-20 million more Americans and actually spend less. No wonder that millions of Americans are up in arms over this!

Some observers have called this a "convenient fantasy" on the part of President Obama and the Democrats. How are we are going to save money by spending a lot more money - $1 to $2 trillion over the next ten years? How are we are going to solve our exploding fiscal problems with a massive new federal bureaucracy that will control at least one-sixth of the national economy going forward?

President Obama claims that the new government-run healthcare system "won't add one dime to the deficit." Unfortunately, presidential administrations and Congress are notoriously bad at forecasting the costs of their pet projects, especially entitlement programs that are intended to be permanent.

President Bush's Medicare Prescription Drug program is a perfect example. When it was passed in 2003, the White House and the Congressional Budget Office forecast that it would cost apprx. $400 billion over 10 years. Guess what - the CBO now projects it to cost $1.2 trillion over 10 years. Do we really think Congress and Obama's cost forecasts are any better? I doubt it!

Obama says the government will guarantee that you can keep your current insurance, even though his healthcare plan would encourage your employer to stop offering it; and when they do, you will have no option except the government-run plan. The same is true should you get fired or decide to change jobs - the government-run option is the only option in H.R. 3200.

In addition, he says we aren't going to insure any illegal aliens; however, in H.R. 3200 passed by the House Committee on Education and Labor, there were no citizenship verification provisions to assure that illegals can't apply and get benefits. Yet President Obama promises that the new healthcare plan will only cover American citizens. (Maybe he plans to make them all citizens - amnesty - before the new system goes in place - think about it.)

At one point during his healthcare speech to a joint session of Congress, President Obama drew cackles for remarking that "there remain some significant details to be ironed out." No kidding! Here again, Obama delivered a message that was strikingly similar to the one that has failed to resonate with the American people thus far. The reason is that while Obama can paper over political and policy realities by speaking in broad strokes, it's always the specifics that have caused him problems. Healthcare is too big not to nail down the specifics!

As he has done before, Obama pledged to veto any bill that added to the federal deficit. But despite that commitment, the Congressional Budget Office projected that the House Democrats' healthcare reform plan would cost over $1 trillion over the next decade and add a minimum of $239 billion to the deficit.

Obama again touted the cost-saving potential of "preventive care." Here, too, the independent Congressional Budget Office has determined that preventive measures would actually increase health care costs, and that a so-called Medicare Commission that Mr. Obama has suggested would have a negligible impact on curbing government healthcare spending. Why are the president and the Congress ignoring these warnings from the independent CBO?

Back in May, President Obama went before the American Medical Association and declared, "No matter how we reform health care, we will keep this promise to the American people: If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you'll be able to keep your health care plan, period. No one will take it away, no matter what." He has made this exact claim in numerous other healthcare speeches.

In his latest speech before Congress on September 9, Obama offered a more nuanced pledge that "nothing in this plan will require you or your employer to change the coverage or the doctor you have." As noted above, this is simply not true if you lose your current coverage for any reason under H.R. 3200.

Regardless of whether or not the proposed healthcare legislation specifically requires that Americans give up their private coverage, there are still many changes to the system that could cause many people to lose it anyway. For instance, one provision Obama backed in his latest speech - to tax expensive health plans - is explicitly aimed at encouraging employers to drop benefit-rich policies in hopes that it would help rein-in medical spending (ie - rationing).

At another point in his recent healthcare speech, Obama said that, "The middle-class will realize greater security, not higher taxes." How does this jibe with the preceding sentence in the paragraph just above? Then, at another point in his latest speech Obama gave an unwavering endorsement of a requirement that individuals either purchase health insurance, or pay a tax.

Under the Senate version of healthcare reform/mandate proposed by Senate Finance Committee Chairman Max Baucus (D-MT), individuals would face a tax of at least $750 annually if they do not purchase health coverage. How is this "greater security, not higher taxes"?

And while the Baucus healthcare proposal would provide subsidies to lower-income Americans, those subsidies would stop at 300% of the federal poverty level. What that means is that a family of four with a household income above $66,150 would face a tax of $3,800 if they do not obtain health insurance, while individuals with income above $32,490 would face a tax of $950. Yet Obama argues that this is not a "tax," if it's something that is good for you. Yeah, right!

This is a problem that Obama himself noted when he was campaigning against Hillary Clinton back when he said he opposed such mandates. In a February 2008 debate referring to healthcare reform, he said, "In some cases, there are people who are paying fines and still can't afford it, so now they're worse off than they were. They don't have health insurance and they're paying a fine." He was referring to conditions under a similar healthcare mandate in Massachusetts.

During his speech two weeks ago, Obama advocated the creation of a plan to be offered on a government-run insurance exchange that would be "administered by the government just like Medicaid or Medicare." He said that the reason we need such an option is that, "by avoiding some of the overhead that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers."

Yet later in the same speech, he argued that he could pay for most of his proposal with cuts to Medicare that would not have any impact on benefits to seniors. Say what? The reason, he explained, is that we could save money by reducing "the hundreds of billions of dollars in waste and fraud…" in Medicare - the very government-run program he touts as a model for the creation of a new government-run healthcare program. Do they really think we are that stupid?

While acknowledging that the new plan would be run by the government, Obama tried to argue that it wouldn't be subsidized by taxpayers, but only funded by the premiums it collects. Sorry, but I must point out that any new government plan would require taxpayer money to fund huge start-up costs - at the least, and should it run into financial trouble, it's hard to believe that lawmakers would allow it to fail without pumping taxpayer money into it, just as they did in the cases of Fannie Mae and Freddie Mac (and those were allegedly private companies).

President Obama speaks in such broad circles and contradictions. You can keep your current plan and doctors, but not really; your taxes will not go up, but they probably will have to; we won't cover illegals, but there's no way not to; etc., etc. No wonder the number of Americans who oppose government-run healthcare is now at a record high - 56%!

A Re-Run of Clinton Nationalized Healthcare?

A recent article on Forbes.com, just after the president's latest speech before Congress, caught my attention and further explained the current healthcare debate as follows:

Before a tense and packed House, the President told Congress:

‘Millions of Americans are just a pink slip away from losing their health insurance, and one serious illness away from losing all their savings... And in spite of all this, our medical bills are growing at over twice the rate of inflation...'

That's President Clinton, sixteen years ago almost to the day, in a speech about a complex health-care plan built on government expansion, with billions in hidden costs. Last night, a President--who was only 32 then--is now in the White House, out to prove that nothing has changed in the minds of the Democratic leadership since the Clinton debacle.

President Clinton's health-care legislation didn't fail in 1994 because people didn't want better health care. The White House plan failed because it was too bureaucratic, too complicated, and too expensive.

Last night, President Obama's response to sixteen years (and one angry August recess) worth of bi-partisan doubt was to double down and bet even more political capital on the same approach. It's as if he expected Americans to tune in, and suddenly realize their mistake.

This was supposed to be the Administration of the post-partisan rational center. Arguments were supposed to work with this White House. While many critics of President Obama's health-care plan have been too extreme, some rational criticism should have broken through. The speech was brilliant--unless you've actually read the [healthcare] legislation behind it, which contradicts many of the President's restated "commitments."

Last night, the President said that, "Nothing in this plan will require you or your employer to change the coverage or the doctor you have." Countless observers have already shown that this is not true, as proposed new regulations mandating a whole range of benefits, setting community rating schemes, and banning individual incentives will radically change many existing plans.

Last night, the President said his reforms would fight rising costs, not add to the deficit, and reduce government waste. Countless observers have already shown that the President is wrong, among them the Congressional Budget Office, which calculates that the plan will increase costs and explode the deficit. And, as I observed in the Washington Examiner, government waste will grow under ObamaCare, since the House bill creates a sea of new Washington-based programs, offices, and bureaucracies (53, by one count) to micro-manage your health insurance, your hospital, and even your family doctor.

Last night, the President said competition from a government-run insurance plan was needed to "give Americans a choice." And the President has been shown to be wrong there, too. Federal employees have over 230 private alternatives to choose from in their existing health exchange…; a public plan would just add one new option (a government financed and price controlled one, at that). [Emphasis added, GDH.]

It's not that President Obama wants to turn the health-care policy clock backwards sixteen years. It's worse than that. It's as though the last sixteen years never even happened. It's like a health-care Groundhog Day where Americans wake up to the same tired arguments for government-run care every morning, simply because Democratic Presidents can't resist testing the same pick-up lines on an unwilling America.

And the lines are wearing thin. The President (yes, Obama this time) told Congress that "our collective failure to meet this challenge--year after year, decade after decade--has led us to a breaking point." Has it really? When President Clinton conjured similar fears about pink slips and millions losing coverage to Congress in 1993, 15.3% of Americans were uninsured. In 2007, the percentage of Americans without insurance was...15.3%. A solution to this problem is needed, but the fact that it hasn't grown worse is a sign that Congress has time to think, and little reason to panic.

Since President Clinton spoke of health inflation in 1993, health costs continued to rise faster than wages, but President Obama refuses to acknowledge years later that the U.S. health inflation rate is almost identical to rates in government-run systems [in other countries]. Rising costs must be attacked, yes, but if rationed health management can't stop health inflation in Britain or Ireland, will a rush to President Obama's version of HillaryCare do any better?

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

Conclusions - So What Should We Think Now?

Some surveys indicate that a majority of Americans think we need reform of our healthcare system. This explains, in part, why President Obama and the Democrats are so hell-bent on passing a massive overhaul of our healthcare system this year. Yet plenty of other surveys show that appx. 80% of Americans are happy with the healthcare insurance and care they have now. So what gives?

What gives is that liberal presidents dating back to Theodore Roosevelt have tried to nationalize healthcare, and every attempt has failed. The simple fact is that virtually all Americans would favor healthcare that costs less - what else is new? Likewise, a majority of Americans would like to see healthcare insurance available to everyone - somehow.

But as has been consistent for over 100 years, a majority of Americans do not want to see the federal government take over healthcare - doctors, nurses, hospitals, etc. - and be in a position to mandate what care we can and cannot receive.

The problem is, the current president and the Democrats in the majority in Washington feel otherwise. They see government-run healthcare as a giant power grab, as I have discussed previously. They believe that the government is a better arbiter of our healthcare needs than we are. And they see Obama's presidency as the best opportunity they have had in years to ram it down our throats, even if it means by a simple Democrat majority "reconciliation" (51%), which they just might be arrogant enough to pull off. Nancy Pelosi and Harry Reid have all but promised to do this if necessary to pass their healthcare plan.

On most political issues, I would argue that the party in power should go ahead and try to ram it down our throats, and suffer the political backlash in the next election, in this case the 2010 mid-terms and the 2012 general elections. But when it comes to healthcare reform, if it passes, there is almost no chance to roll it back once it is in place. This is precisely why the Democrats don't want their takeover of healthcare to be implemented until 2013!

President Obama and the Democrats in Washington know this. They thought they had it during President Clinton's administration, but the American people fought back and stopped it. Now they see their odds even better with President Obama in office, although public opposition is now growing daily, 56% oppose/43% approve as this is written. So, it remains to be seen what will happen this year.

As it stands now, most of the political observers I read believe that some form of government-run healthcare will pass this year or next under President Obama. Even some moderate to conservative analysts I read have concluded that the time has come to provide some form of health insurance to all Americans. But the question is, as always, how to pay for it?

Sadly, I have not seen a single comprehensive healthcare reform proposal from the Republicans or other non-Democratic groups, and that disappoints me greatly. Streamlining the complex insurance licensing process so that insurance companies can offer policies across all state lines is not being discussed, in what would seem to be a slam-dunk starter for reforming healthcare.

Likewise, letting small businesses band together to buy insurance to cut costs is not on the table. Serious medical malpractice (tort) reform is also AWOL. Providing tax credits/subsidies for low-income Americans to purchase health insurance is not on the table either.

Plus, if we can reform Medicare and trim hundreds of billions in waste, as President Obama suggests, why not do that now and use those savings to subsidize health insurance for low income Americans?

I am also puzzled as to the rush to pass healthcare reform at any cost. We're talking about reforming an industry that makes up 16-17% of the world's largest economy. Doesn't that merit taking the time necessary to do it right? Evidently not, if you're a Democrat.

At the end of the day, I just don't get it. Have we reached the point where there is no alternative to a massive government-run healthcare system? I don't think so. But it remains to be seen if we can derail the Democrats' plans for nationalized healthcare.

Finally, I recognize that this has been a polarizing editorial on my part. I will get roundly criticized for it by my moderate/liberal readers, and those who favor government-run healthcare, which I can handle as always. But the issue of nationalized healthcare is just too important for all of us - and for the economy - for me to remain silent.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Has Obama misread the tea leaves? (excellent read!)
http://www.realclearpolitics.com/articles/2009/09/10/the_goldilocks_principle_in_american_politics_98233.html

Does Obama lie?
http://www.realclearpolitics.com/articles/2009/09/18/does_he_lie_98363.html

Obama omits crucial details on healthcare
http://article.nationalreview.com/?q=ZTI2YmFlYmVkYjgwZmQ0NTk2MjUzNzZhYTgyOTVmMTY=

Federalization of college loans teaches health care lesson
http://washingtontimes.com/news/2009/sep/18/back-door-to-a-public-option/

The Case for High-Yield Bonds

Gary D. Halbert — Tue, 15 Sep 2009 21:34:00 GMT

IN THIS ISSUE:

"Junk Bond" Basics
High-Yield Bond Whitepaper
by Steven D. Landis, CFP
Is the Party Over for 2009?
Introducing the Columbus High-Yield Bond Program
Performance Evaluation
Conclusions

Introduction

High-yield bonds, or "junk bonds" as they are widely known, have become the subject of quite a bit of attention in recent months. That's because, as of August 31st, the Barclays and Merrill Lynch high-yield bond indexes have jumped over 40% in value so far in 2009. This makes the S&P 500 Index's year-to-date return of only 14.97% as of August 31st paltry in comparison.

Returns of that magnitude have not escaped the notice of investors. Inflows into high-yield bond mutual funds have been at or near record levels since March, based on information from AMG Data Services, a mutual fund tracking firm. However, the question is whether the good times in high-yield bonds will last.

I certainly don't pretend to be an expert on high-yield bonds, but I have found that the cyclical trends in the high-yield market often do lend themselves to being traded by an active money manager. Though "junk bonds" carry with them the reputation for being risky (and they are), we have found a professional money manager who has produced an enviable track record with low historical drawdowns.

This week, I'm going to feature Sojourn Financial Strategies, LLC and its co-founder, Steven D. Landis, CFP. I'll begin by reprinting excerpts from a whitepaper on high-yield bonds that Steve has authored. This paper does an excellent job of explaining the opportunities available in high-yield bonds, and whether or not it's too late to participate in the junk bond rally that began earlier this year.

I'll then finish up by presenting Steve's Columbus High-Yield Bond (CHYB) Program. Just to whet your appetite, this actively managed strategy has produced an annualized return of over 10% since its inception in 2002, with a maximum drawdown of only -6.14%. Year-to-date, the CHYB Program is up over 24% as of the end of August. Past performance, however, is not necessarily indicative of future results.

Junk Bonds 101

Most of us realize that high-yield bonds are called "junk bonds" because they carry a much higher risk of default than government or high-grade corporate bonds. As a result, these bonds tend to carry a higher rate of interest in order to compensate investors for taking on a greater risk of default. Like all bonds, high-yield issues tend to be affected by the interest rate climate. However, what you may not know is that the value of a high-yield bond can also be affected by the health of the economy and stock market.

It just makes sense that a better economic environment sometimes reduces a junk bond's default risk, since the issuing corporation may be less likely to default in a good economy. As a result, the spread between the effective junk bond yield and a risk-free (Treasury) rate closes, and the underlying bond becomes more valuable.

Of course, the skill in managing high-yield bonds or junk bond mutual funds comes in knowing when to be in the market and when to move to cash. Since 2002, Steve has shown us that he has the methodology in place to make these decisions with a high degree of accuracy. However, before getting into the details of his program, I want to reprint excerpts from his recent whitepaper on high-yield bond investing.

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.

QUOTE:

Investors Ready for a New Way to Invest in High Yield Bonds
By Steven D. Landis, CFP®

High yield bonds have been around for longer than most of us can remember. Anybody who was born earlier than 1960 can recall the days of Ivan Boesky and Michael Milken, the highly creative and somewhat dubious creators of "junk bonds" (the more-to-the-point term for high yield bonds). Eventually, their actions, not the junk bonds, landed the boys in jail for a short time. It should be noted that never was there (then or now) anything illegal about the use of the junk bonds, but their criminal activity, in part, contributed to the bad reputation sometimes attributed to high yield bonds.

In this paper, the terms high yield bonds, junk bonds, and "junks" will be used interchangeably and will have the same meaning and reference. These terms apply to loans that are made to higher risk, corporate borrowers of money. High yield bonds had been in existence long before Boesky's and Milken's involvement in the early 1980s. During the early part of the 20th century General Motors, U.S. Steel, and other well-known corporations borrowed money that, at that time, was considered higher-risk debt. If that debt were issued today, it would be considered to be a junk bond.

Fast forward to today and we find that more than $500 billion (a half-trillion dollars) defines the magnitude of the high yield bond market. Its explosive growth is the result of two factors: 1) more companies needing capital; and 2) the availability of investors who are willing to take more risk in return for a higher yield on their investment.

Bond Ratings

Bonds are rated based on the probability of the borrower defaulting on the bond, that is eventually failing to meet the terms of the bond covenant. The highest quality bonds, those with the greatest probability of paying back the loan principle and interest, are rated AAA. As the chances of a bond default increases, the lower the rating on the bond, as illustrated in Table 1 below.

Table 1.
Bond Rating vs. Default Risk

Standard & Poor's Rating	Grade	Default Risk
AAA	Investment	Lowest Risk
AA	Investment	Low Risk
A	Investment	Low Risk
BBB	Investment	Medium Risk
BB, B	Junk	High Risk
CCC, CC, C	Junk	Highest Risk
D	Junk	In Default

So we can see that the two terms used to describe these bonds, high-yield and junk, come from two features of the bonds: 1) High-yield refers to the increased interest rate that accompanies the bonds; and 2) Junk refers to the low quality of the bond.

Risks of investing in high yield bonds

In 2007, investors and the public became intimately familiar with the sub-prime consumer mortgages and their risk to lenders (and ultimately the economy, in general). The results of consumers overextending themselves by borrowing more debt than they could repay, under terms that were unfavorable, eventually resulted in a near-collapse of the consumer mortgage market. Investors in those sub-prime mortgages soon found their investments suffering tremendous losses. Meanwhile, the ability to sell out of those investments became more and more difficult due to a lack of buyers. A similar scenario also played out in the high yield bond market in which holders of low-quality debt saw their investments lose a substantial percentage of its original value.

A fact of life is that consumers with low credit scores must pay high interest rates when they borrow money. This higher interest rate compensates the lender for the increased chance of the borrower defaulting on the loan. Likewise, corporate borrowers with a lower credit rating have an increased probability of defaulting on their loans and pay lenders accordingly. Those who loan money to these corporate borrowers demand to be compensated for the extra risk they take in making these loans. Should a default occur, the bondholders stand in line with all the other creditors of the company, hoping to get back some portion of their money. The lower the quality the bond, the less chance there will be assets that can be used to pay back creditors. The increased interest rate compensates the lender, at least in part, for this additional risk.

The result is that those entities that lend money to higher risk borrowers, via junk bond offerings, receive a higher interest rate than if they had been lending money to higher quality (lower risk) borrowers. To illustrate this difference, consider that over the past twenty or so years, high yield bonds have paid an interest rate of 3-9% (with an average of 6%) per year more than that of U.S. Treasury bonds. This difference is known as the "spread." In early 2008 the average default rate on junk bonds was about 1.1%. However, as the economy continued to sour the default was expected to increase to around 5.2%. Compare this with an average, long-term default rate of about 4.9% (according to John Lonski, chief economist of Moody's.)

An additional risk of junk bonds is their lack of liquidity. Liquidity refers to the ease of trading the instrument in the marketplace. The author of this paper also refers to liquidity as "how quickly one can sell an investment and convert it to cash". Junk bonds are not traded as freely as, say, government bonds. Thus, the liquidity of high yields is significantly lower than that of high quality debt, which leads to higher costs of trading and selling at one's desired price. All of these factors combined result in the higher interest rate that is attached to junks.

Why Invest in High-Yield Bonds?

Unlike normal bonds, that are greatly influenced by fluctuations in interest rates, junk bonds are less affected by interest rate movement. This is because junks generally have higher interest rates and have, generally, shorter maturities. In fact, junk bonds are affected more by overall economic changes (expansion or contraction) than changes (increase or decrease) in prevailing interest rates. This is because the quality of a junk bond is most affected by the strength of the company issuing the bond.

If the company's profitability increases (since the issuance date of the bond), the quality of their bonds increases. For an investor in a junk bond, this is an almost-perfect scenario: One in which a junk bond with a high interest rate becomes a quality bond with a high interest rate (this being the result of the formerly high risk borrower becoming a low risk borrower).

For example, ABC Corp. had a debt rating of "B" and issued a bond at 12%. Meanwhile, AAA-rated debt was paying 4%. Sometime following issuance of this debt, ABC Corp. enjoys a return to profitability and its debt rating is upgraded to "A". The result is that holders of those old ABC Corp. bonds now hold A-rated debt that is paying 12%! This, in turn, makes the underlying bond more valuable since investors are willing to accept a lower rate of interest on debt issued by a stable company.

How to Invest in High-Yields

In my opinion, investing directly in individual junk bonds should be left to the wealthy and institutional investors. In fact, the majority of investors in junk debt are institutional…mutual funds, pension funds, hedge funds, and others. This, however, does not suggest that investing in junks is only for the wealthy. Most all investors can get involved with junk bond investing by investing in mutual funds that specialize in them.

By investing in a mutual fund that specializes in junk bonds, an investor can take advantage of a professional fund manager. Additionally, the investor will be able to reduce risk via the diversification that mutual funds offer. (A typical mutual fund will hold as many as 200-400 bonds, all of which are owned, on a pro rata basis, by investors in the fund.)

Keep in mind, though, that investing in a mutual fund does not mean that the investor has no risk. Like the bonds held by the fund, a mutual fund can gain or lose value. Plus, in the event of a slowing economy, high yield bond mutual funds can lose significant value. So, for anybody considering an investment in high yield bond funds (or for that matter, any mutual fund) consider your tolerance for and ability to withstand potential losses.

An Improvement on Buy-and-Hold Bond Investing

As much as we really like investing in high-yield bond funds, they have one major flaw. That flaw is that there are times in which high yield bonds (and mutual funds investing in them) will get absolutely annihilated in a bear market. The years 2007 and 2008 are the most recent examples of this. In 2008, the majority of high yield bond mutual funds lost more than 20% of their value. Worse still were those funds that lost more than 50% of their value!

Risk-averse investors may find themselves asking: "Is there a way to invest in high yield bond funds without the risk of losing money in a down market?" Fortunately, the answer is, "Yes, there is." There are any number of advisers whose role is to actively manage money for their clients. (The author of this paper is among those who manage money for investors who want to invest in high yield bond funds.) The goal for most of these advisers/managers is to be invested in a security/market when it's gaining in price and to sell that security/market before its price goes down too much.

If the adviser is able to do this buying and selling successfully (and we emphasize "IF"), then that adviser's clients/investors would be able to make more profit while taking less risk. By reducing the losses during time periods in which high yield bonds are losing money (1998-2002 and 2007-2008) one can dramatically improve the potential for long-term profits.

Is the Party Over for 2009?

At this point, readers of this paper are either eager to invest in high-yield bond funds or skeptical and not interested in the increased risk. For those who are tempted to invest in the high-yield bond market, a question arises: "How much profit is left after the big run junks have had this year?"

It goes without saying that we have no idea how much more high yields can offer. But we can offer a look at three possible scenarios:

Scenario 1. The Economy Improves. If the economy continues to improve, profits of most corporations will rise. At the same time, we would expect profits of many issuers of high yield debt to improve. If this scenario does, in fact, occur then we would expect high yield bonds to continue increasing in price. (Additionally, bondholders would continue to receive interest payments from those bonds.)

Scenario 2. The Economy Sours. If the economy begins to worsen, then corporate profits will likely be depressed. At the same time, profits of issuers of high yield debt would probably suffer. In this scenario, the prices of high-yield debt would probably begin to fall. The buy-and-hold investor would suffer losses to his/her investment. Investors who use skilled, successful active managers have a great probability that their adviser/manager would sell their junk bond fund and invest their money in the safety of a money market fund. This move to safety would preserve the value of investors money.

Scenario 3. The Economy Muddles Along. If the economy becomes listless and neither grows nor contracts, there is the possibility that high-yield bond prices could stagnate. That is, prices would neither rise nor fall. It would be extremely rare for this to continue for an extended period of time, but let's assume it does. In such a situation, the investor neither gains nor loses money on his/her investment principle. However, he/she could continue to reap profits in the form of high interest income being generated by the bonds.

So, looking at the three possible scenarios, the only one that we would expect to pose a threat of significant loss is Scenario #2, specifically for the buy-and-hold investor. The investor who uses a skilled, active adviser/manager has a significantly greater chance of avoiding losses during a "down market". [There are no guarantees, of course. GDH]

In summary, we contend that high yield bond mutual funds can be an extremely attractive way to invest, though subject to substantial losses during falling markets. Furthermore, we believe that investing in high yield bond mutual funds can be an even more attractive method of investing, if managed under the guidance, direction, and oversight of an experienced and skilled adviser.

Steven D. Landis, CFP®
Sojourn Financial Strategies, LLC

References:

Glenn Yago. "Junk Bonds." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 20, 2008 from the World Wide Web: http://www.econlib.org/Library/Enc/JunkBonds.html
John Waggoner. USA Today. February 7, 2008.
"Junk Bonds: Everything You Need to Know". Investopedia®

END QUOTE

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.

The Columbus High-Yield Bond Program (CHYB)

As Steve made clear in his whitepaper, active management of high-yield bond mutual funds can potentially allow investors to participate in both capital gains and coupon returns, while also moving to the sidelines during times of downward price pressure. This ability to move to cash in downward trending markets is very important, especially considering the aggressive nature of high-yield bond investments.

It might come as a disappointment that the CHYB Program is up "only" 25.01% so far in 2009 as of August 31, considering that the Barclay's High-Yield Credit Bond Index is up over 40% over the same period of time. However, this analysis is very short-sighted given that historical drawdowns in the Barclay's Index have exceeded -33%, while the CHYB's worst-ever drawdown has been limited to just over -6%.

The value of minimizing losses becomes even more apparent when looking at the rolling 5-year returns as of August 31. The CHYB Program has a 5-year annualized return of 8.94% while the unmanaged Barclays Index has managed an annualized return of only 5.27%. Again, the ability to move to cash in downward trending markets can make a significant difference in long-term returns, though there are no guarantees. And remember that the CHYB returns are net of all fees and expenses.

The Columbus High-Yield Bond Trading Strategy

Steve's proprietary trading model uses technical indicators to determine the high-yield bond market's potential future movements. However, Steve goes one step further by analyzing the technical indicators unique to each of the high-yield bond mutual funds he uses. Like many other active money managers, Steve will sometimes use specialized high-yield bond index funds. However, he also uses traditional high-yield bond funds when his system tells him they have the best potential for future gain.

Doing this allows him to combine his market timing expertise with the bond selection expertise of the mutual fund manager. Plus, traditional high-yield bond funds typically pay a higher "coupon" rate of return than specialized index funds.

As a general rule, the CHYB Program invests in only one mutual fund at a time, though future growth may require him to use two or more funds. Client accounts will either be 100% in a high-yield mutual fund or 100% in cash (money market); there are no graded investments or partial positions taken.

The CHYB trading model does not use leveraged funds nor does it use specialized inverse funds that provide a net "short" exposure to the high-yield bond market. However, Steve may use such inverse funds as a hedge under certain conditions. Best of all, Steve's strategy employs the use of trailing stop orders that close out trades should losses exceed a pre-determined percentage. In winning trades, these stop-loss orders ratchet up with gains, providing the potential to lock in any positive returns over and above the stop-loss trigger percentage.

If I had to describe our observations of Steve's trading model, I'd have to use the term "patience." Steve does not employ any discretion in his trading, so he will allow the system to stay in cash as long as necessary until the high-yield bond market environment improves. For example, the CHYB Program was in cash for much of 2008, which is why it ended the year with only a 2.9% loss rather than a drop of over 26% as was the case in the Barclays High-Yield Credit Bond Index.

Performance Evaluation

The goal of the CHYB Program is not necessarily to "beat the market" over the short run, but rather to participate in market gains while also managing risks. From the historical performance statistics provided below, it is evident that Steve has attained this goal in the past, though past performance cannot guarantee favorable future results:

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
(Please see Important Disclosures below.)

The CHYB Program is available through the Purcell Advisory Services platform. Accounts are held at Trust Company of America (TCA), an independent trust company located in Denver, Colorado. Clients have online access to their accounts via the TCA website. Both TCA and Purcell issue quarterly statements and TCA produces year-end tax reports. TCA charges a custodial fee of 1/10th of one percent (ten basis points) of the account balance.

The minimum account size for the CHYB Program is $50,000 per account. Management fees are billed quarterly in advance based on the following annual percentages for various sized accounts:

First $500,000	2.50%
$500,000 to $1 million	2.25% (entire account)
$Over $1 million	2.00% (entire account)

It is important to remember that all performance information provided above is net of both the management fee and custodial fee charged on the accounts.

Conclusions

We have been offering the Columbus High-Yield Bond Program for over three years now, and I continue to be impressed with the way it can participate in market gains and then move to the safety of the money market fund when the risk of loss becomes too great. I also like the fact that it is a non-discretionary system, which is an important factor when the model has been in cash for an extended period of time.

Over the years, I have seen money managers disregard their trading systems when they signal to be in cash for weeks or months. Overriding a trading system can also result from clients calling to ask why they are paying a fee to sit in a money market fund. Steve stuck to his guns during the extended cash position in 2008, and we haven't heard many clients complaining about having lost only 2.9% for the year when the stock and high-yield bond markets were in free-fall.

While you may have missed much of the move in high-yield bonds so far in 2009, I think Steve makes a good case for investing in this program now. Since we recommend this program for investors with at least a three-to-five-year time horizon, we feel that the CHYB Program's combination of market participation and risk management is a fit for the less aggressive portion of your portfolio. As always, be sure to read all offering materials and Important Disclosures before making a decision to invest.

If you would like to learn more about the Columbus High-Yield Bond Program or any of our other risk-managed AdvisorLink® investment programs, please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about this and our other actively managed investment strategies.

Special Reminder about the "All They'll Need to Know" Booklets

As I mentioned a couple of weeks ago, we have now exhausted our supply of the end-of-life planning resource entitled "All They'll Need to Know." You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

I am making this valuable resource available as a service to my readers and I do not share in any part of the purchase price of either version of the booklet. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible.

Wishing you profits,

Gary D. Halbert

IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM), Sojourn Financial Strategies, LLC (Sojourn), and Purcell Advisory Services, LLC (Purcell) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from the Advisors in exchange for introducing client accounts. For more information on HWM or any other Advisor mentioned, please consult their respective Form ADV 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.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index and the Barclays High Yield Credit Bond Index (which both include dividends) were used. Both represent unmanaged, passive buy-and-hold approaches, and are designed to represent their specific market. The volatility and investment characteristics of these indexes may differ materially (more or less) from that of this program, and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index and the Barclays High Yield Credit Bond Index is not meant to imply that investors should consider an investment in the Columbus High-Yield trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index or the high yield investments that comprise the Barclays High Yield Credit Bond Index. Historical performance data from inception through December 2005 represents a tracking account managed by Steven D. Landis and audited by MoniResearch, an independent corporation, Steve Shellans, President. Performance from January 2006 forward is from an actual account in Purcell Advisory Services Columbus High-Yield Bond Program. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Columbus High-Yield Bond Program.

Purcell utilizes research signals purchased from Sojourn, an unaffiliated investment advisor. The signals are generated by the use of a proprietary model developed by Sojourn, with the objective of providing superior risk-adjusted returns using high-yield bond investments. Assets in the program are allocated 100% to the appropriate high-yield mutual funds or 100% to the money market according to the purchased research signals. 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.

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 Columbus High-Yield trading program.

In addition, you should be aware that (i) the Columbus High-Yield trading program is speculative and involves risk; (ii) the Columbus High-Yield trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell 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 Columbus High-Yield trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Any investment in a mutual fund or money market fund carries the risk of loss. Mutual funds and money market funds have 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. Returns illustrated are net of the maximum annual management fee of 2.5%, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Dividends and capital gains have been reinvested. Management Fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. Individual account results may vary based on each investor's unique situation. No adjustment has been made for income tax liability. Performance for individual accounts may differ materially (more or less) from the results illustrated. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

On the Economy & Obama's Trillions

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

IN THIS ISSUE:

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

Introduction

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

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

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

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

The Economy - More Signs of Recovery

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

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

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

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

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

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

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

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

Is the Recession & Credit Crisis Over?

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

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

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

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

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

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

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

Obama Adds $2 Trillion to Debt Forecast

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

TOTAL $11.11 Trillion

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

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

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

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

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

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

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

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

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

"What's $2 Trillion Among Friends?

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

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

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

Economic Assumptions Still Too Optimistic

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

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

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

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

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

What in the World Are They Thinking?

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

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

"How big is $9 trillion?

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

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

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

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

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

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

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

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

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

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

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

Do They Want Control Even If It Ruins The Economy?

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

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

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

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

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

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

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

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

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

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

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

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

A Case of Mistaken Identity - The "Other" Gary Halbert

Gary D. Halbert — Tue, 01 Sep 2009 19:59:00 GMT

IN THIS ISSUE:

An Alter-Ego on the Internet
The Late Gary C. Halbert
My Background and Qualifications
Halbert Wealth Management, Inc.
The Forecasts & Trends E-Letter
Conclusions - Don't Forget the "D"

Introduction

Since hundreds of thousands of new subscribers come onboard my Forecasts & Trends E-Letter each year, it is important to advise readers from time to time that there is another Gary Halbert that is prominent on the Internet. His name is Gary C. Halbert. I am Gary D. Halbert. We are not related, and I have never even met Gary C. Halbert.

In fact, Gary C. Halbert is now deceased, but he continues to have a huge presence on the Internet even after his death. If you do a Google search for "Gary Halbert" without my middle initial, you do not find a direct link to me until somewhere around the second page of links. The entire first page of links, including the sponsored links, refer to the deceased Gary C. Halbert, not me - even though he passed away in April of 2007.

Perhaps it wouldn't be so bad if it were just a case of mistaken identity. However, the checkered past of Gary C. Halbert makes many of the subject lines of the search results appear to be very negative, especially to someone like me in the Investment Advisory business. Here's an example of what you might see when you Google "Gary Halbert" without my middle initial:

Gary Halbert has passed away (never good for business);
Gary Halbert Reviews - Is Gary Halbert a Scam?
Gary Halbert - Even though he apparently did something very wrong, he's still one heck of a good writer!
Gary Halbert shut down? He's not who you might think. Read the summary of facts we turned up.

If you happened to have done an online search for my name and came upon these links, let me assure you that they are NOT talking about me, but rather Gary C. Halbert (deceased).

Today, it has become second nature to go on the Internet and Google someone's name after hearing about them or seeing an advertisement. Thus, there's no telling how many people have received my E-Letter and then unsubscribed after doing a quick Internet search for my name and reading one of the horrible links above (or others) about the other Gary Halbert. While I do not want to speak ill of the dead, I do hope you can understand my desire to distance myself from Gary C. Halbert, even though he is no longer with us.

This week, I'm going to help clear up any confusion that my readers may have regarding the two Gary Halberts on the Internet. I'll spend a little time relating what I know of Gary C. Halbert, but most of the time discussing my background so that you will be more comfortable that I'm neither shut down nor dead, nor have I ever been imprisoned for fraud.

Gary C. Halbert

As I noted above, I have never met Gary C. Halbert and have never talked to him on the phone. The closest we came to communicating happened when he wrote me a terse e-mail as a result of a previous e-letter discussing how he and I were not the same person.

I do not know for sure exactly what Gary C. Halbert did, other than what is available on the Internet. While he wrote a newsletter and had a website (which is still operating - why, I don't know), his main claim to fame seemed to be as a marketing/direct-mail consultant. In fact, some of the links generated by Internet search engines are offering his old copywriting materials. Sometimes, you can even find his marketing materials on E-bay.

If that were the entire story, it might not be so bad since being confused with a formerly well-known direct-mail copywriter is not the worst thing in the world. However, Gary C. Halbert evidently had a few skeletons in his closet. According to information on www.gary-halbert.net, Gary C. Halbert spent "…several years in the Boron Federal Prison Camp for fraud in the 1980s." That's certainly not something I'd want my readers to think happened to me.

Then, back in 2003, the Securities & Exchange Commission initiated litigation against Gary C. Halbert and his son, Bond Halbert, for "possible violations of the federal securities laws" related to a stock trading system they had been promoting. According to the SEC press release, Halbert was being investigated for "…possible material false statements concerning a stock trading system made by or on behalf of Gary C. Halbert…"

I'm not sure how this SEC investigation came out in the end, but the important thing to know is that I was not the target of it. I have always tried to keep my 30-year regulatory record clean, which is no small feat when you consider that my various companies are regulated by the SEC, Financial Regulatory Authority (FINRA), Commodities Futures Trading Association (CFTC), National Futures Association (NFA) and even the Texas Department of Insurance.

Thus, you can see how someone doing an Internet search on my first and last name might give up before learning that there are actually two Gary Halberts on the Internet. Given the recent Madoff, Stanford and other investment frauds uncovered by the recent bear market, even a whiff of impropriety is enough to send investors elsewhere. Thus, having someone with the same name apparently being imprisoned for fraud and formerly under SEC investigation has likely sent more than a few of my readers to the unsubscribe link.

Again, I hold no animosity for Gary C. Halbert, and I find it sad that he passed away at the relatively young age of 68. The above discussion is simply a presentation of the facts and they are what they are. The important thing is, when you read any of these Internet postings about Gary C. Halbert, that you realize it's not me, Gary D. Halbert.

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.

And Now for My Story

Friends, family and co-workers will tell you that self-promotion is not one of my strong suits. In that way, I guess I'm the polar opposite of the other Gary Halbert whose self-promotion has taken on a life of its own on the Internet. Thus, discussing my background in the financial services business does not come natural to me, but at times I feel it's important so that you can feel that you know the person who writes to you each week. So here goes…

After obtaining my MBA in International Management, I began my career with a nationwide commodities brokerage firm in 1976. I specialized as a "hedging" broker and worked with agri-businesses and large farmers who wanted to use the futures markets to hedge the price of physical commodities that they dealt in or produced. In 1982, I moved to another nationwide brokerage firm that catered more to investors who wanted to trade commodities futures on a speculative basis.

It was during this time that I noticed how many brokers and brokerage firms were more interested in generating fees and commissions for themselves than providing good advice to their clients. After hearing an industry big-wig claim that over 90% of individual commodities account holders lost money, I realized that investors needed someone on their side of the table to help them evaluate the many investment opportunities available.

In 1984, I decided to leave the ranks of the big brokerage firms and, along with my wife Debi, founded ProFutures, Inc. While I knew that many investors needed professional help, I also found that the large minimum investments required by many successful money managers were a barrier to entry for most people. So, in 1987, we organized the ProFutures Diversified Fund, a managed futures fund featuring multiple Advisors, deeply discounted fees and commissions and a minimum investment of only $10,000.

In the years that followed, ProFutures expanded its services within its original mission of matching client needs with suitable professional money managers. In addition to other futures funds, ProFutures organized a series of private equity hedge funds and an offshore currency fund.

Halbert Wealth Management, Inc.

In 1994, my clients began asking for help with their more traditional investments, including mutual funds. Realizing that the principles that apply to selecting traditional money managers are similar to those required when selecting a commodities trader, we formed ProFutures Capital Management, Inc., later to become Halbert Wealth Management, Inc. (HWM). HWM's flagship service is ADVISORLINK®, an innovative program offering HWM's clients access to active management strategies from third-party money managers with the goal of participating in market gains with an eye on limiting investment losses.

Over the years, we have developed other programs to meet investors' needs, but they all have the common denominator of using professionals to manage money in an effort to produce better results than you can get on your own. While the initial selection of programs to be recommended to our clients is important, I think one of the greatest values we provide is the ongoing monitoring of our money managers.

As I have noted many times, I invest in every program we recommend alongside my clients. Not only does this mean that my money is at risk along with yours, but also that my accounts are available to us for monitoring purposes. Each day, my staff reviews the performance and trading of each investment program we recommend and sends a summary around to everyone in our office. This way, we not only know where each program is in terms of performance, but we are also able to spot any deviations from expected trading patterns.

If we see something unusual, we can determine if a mistake was made or if a money manager has significantly modified their trading model. Either way, we're on the phone or sending an e-mail immediately to determine what's going on. Several of our money managers have commented over the years about how quickly my staff can spot a small trading deviation and be on the phone asking for an explanation.

While it's something we don't like to think about, there are also times that it becomes necessary to fire a money manager. It's just a fact of life that sometimes a money manager ceases to perform according to expectations and has to be replaced. However, in all of my experience, I have never had a money manager tell me that I needed to fire him or her, and I'll bet you've never had it happen to you, either. Money managers always have a new "fix" to try or other excuse, but the sad truth is that sometimes they need to be fired.

Since my company sits on your side of the table, we are concerned about doing what's in your best interest, not ours or the best interests of a money manager. Thus, we become your advocate when it comes time to let a money manager go and search for new strategies for your investment dollars. Equally important, we constantly search the universe of US money managers to find new talent to recommend to our clients. We attend conferences where money managers gather, and we have several databases that track professional money managers.

The Forecasts & Trends Weekly E-Letter

Since most of you know me through my Forecasts & Trends weekly e-letter, it might be a good idea to revisit how this Internet publication came to be. I have been writing my paper F&Ts for over 30 years. In the weeks just after the September 11, 2001 terrorist disaster, I started writing more frequent updates in the form of expanded e-mails. Eventually, the Forecasts & Trends E-Letter became a weekly publication.

In 2002, I was approached by the owner and president of InvestorsInsights.com, an Internet- based investment publishing company with over 1 million potential readers all across the nation. They asked permission to re-publish my weekly Forecasts & Trends E-Letters, and as you might expect, I immediately accepted.

Generally speaking, I write about the economy, the markets, investments, financial matters, what's happening in the world, geopolitics, etc. But I also write about political issues from time to time because they can and do often affect the economy, the markets and even our investments. If you have read me for long, you know that I am a political conservative on most issues, and my views often don't sit well with our more liberal readers; nonetheless, I tell it like I see it.

Fixing the "Gary Halbert" Problem

Call me naïve, but I thought that the untimely death of Gary C. Halbert might actually result in lower Internet visibility on his part, but such has not been the case. Aside from the many links to notices about the other Gary Halbert's death, there are now a flood of websites offering his direct-marketing and copywriting materials for sale. As I noted above, you can sometimes even find them on the E-bay online auction website.

The result is that Gary C. Halbert is at least as visible on the Internet after his death as he was before, and possibly more so. Perhaps this is a testament to the quality of his marketing and copywriting materials. Otherwise, he would have evaporated into oblivion following his death. However, because many of the links have very negative subject lines, I am now going on the offense to try to even the odds of my name appearing at the top of the search engine lists.

We are in the process of spending a considerable amount of time and money in an effort to place sponsored ads that will at least tell the story of there being two Gary Halberts on the Internet. Hopefully, this will help to avoid any confusion on the part of investors and potential E-Letter subscribers.

Writing To Strangers, Sort Of

Some of you may be wondering why having a namesake on the Internet is such a big deal, especially since he is deceased. The reason is that, especially in today's post-Madoff investment environment, reputation is everything. It's very frustrating to spend over 30 years building a business known for honesty and integrity, only to be confused with another Gary Halbert whose reputation on the Internet is questionable, to say the least.

I have over a thousand investment clients who live all across America. I have never met most of them. Most have come to me by way of third-party referrals, as noted above. I also don't know very many of you who are among InvestorsInsight's 1+ million E-Letter recipients. It's an interesting challenge to write to over a million people you don't know, but it's vitally important that I be able to earn my readers' trust.

I have a lot of questions I wish I knew the answers to. Like, most of all, I wish I could know exactly what most of you are looking for in terms of information and advice. We assume that we have readers from all financial strata - from the very wealthy to middle class folks, from those who are very sophisticated investors to those who are just starting out, from those who are retired to those who are just starting to save for their retirement, etc., etc.

My goal is to provide a variety of topics, most of which are at least somewhat investment related, that will hopefully be helpful to a majority of this broad cross-section of readers, but also knowing that not everything I write will be useful to all of you week in and week out.

We Are Avid Readers

My editorial staff and I are avid readers. We have to be. We subscribe to dozens of financial periodicals (including some very expensive ones) and investment-related magazines and newsletters. In addition, we are voracious surfers of the Internet.

Each morning, for example, one person on my editorial staff spends over an hour cruising our list of Internet sites, looking for interesting news and information that may not have been covered (or was mis-reported) by the mainstream media. By mid-morning each day, he sends me an e-mail with a list of links to the stories he thinks I will want to read. Some of those stories end-up in my SPECIAL ARTICLES section below.

On Monday of each week, or even earlier, we sit down and think about all the topics and reports we've read and decide what will be the focus of the weekly E-Letter. Some weeks, there's just so much to write about, I don't know where to start. On other weeks, the topic seems obvious. And then on some weeks, I'm still scratching my head on Monday.

The Common Thread - Spotting Mis-Information

There is a ton of mis-information out there. If you have been reading me very long, you know that I believe the mainstream media is very slanted. For years now, I have directed you to a great website for tracking the bias in the mainstream media - the Media Research Center CyberAlert at www.mediaresearch.org. If you haven't done so, check it out.

I also believe that many in the financial media are also very slanted, in one way or the other. Some analysts and publications spin the news and reports so as to only reflect their views on the markets and investing. This includes the "perma bulls" on Wall Street.

And then there is the "gloom-and-doom" crowd for which the sky is always falling. I call them "perma-bears" since they always expect the worst. They missed the greatest bull market in stocks in history during the 1980s and ‘90s. For them, the next depression is always right around the corner.

The common thread in my writing is that I try to bring you the real story, whatever that may be, whether it's about the economy, the investment markets, world events or politics. This is not to suggest that I am right all the time. I'm not. What I do is read a variety of respected publications and writers, in addition to the mainstream media, and I try to maintain a flexible attitude. I try to give you my very best thinking every week. And I don't mind admitting when I'm wrong.

Along this same line, I very much appreciate your comments and suggestions for topics that I can write about. Remember, this E-Letter is for you, and I will try to address your comments and suggestions - if you send them to me.

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

Conclusions - Don't Forget the "D"

To recap, if you do an Internet search for "Gary Halbert," you will see a LOT of links about the "other" Gary C. Halbert, and nothing about me, Gary D. Halbert until you get a couple of pages deep in most search engines. Just keep that in mind.

However, if you search for "Gary D. Halbert" on Google, you will find me at the top followed by pages and pages of links to things I have written in the past. Thus, it is always important that you add the "D" to your search, if you are looking for a past article that I have written.

As should be obvious, I do not endorse or recommend any of the products or services offered by those who continue to promote the late Gary C. Halbert. I could not in any event because I don't know what those products or services are.

I could not even begin to speculate how many prospective clients we have lost over the last 10 to 15 years of the Internet explosion because of the confusion that Gary C. Halbert has generated with me. Obviously, there is no way to know, and unfortunately that is water under the bridge.

We have known about this problem for over a decade. But as noted above, we plan to take some bold new steps to get my name above his on most Internet search engines. Time (and money) will determine how successful our upcoming efforts will be. I will keep you posted.

Finally, I would like to ask a favor of you. For many years, the majority of new clients that come to us do so because one of our existing clients referred them to us. I am extremely grateful for that! So, if you should tell someone that they might want to check out our services, please emphasize that they use "Gary D. Halbert" should they do a search on the Internet.

Next week, we return to economic, financial, market and investment topics as the summer is winding down, kids are off to school, and we return our focus to how to make some money in this very challenging market environment.

And be sure to send me your comments and suggestions for making this weekly E-Letter better for you. What you like; what you don't like; and ideas for making it better. Thanks in advance!

I hope you had a great 2009 summer - I sure did, despite the Texas drought.

Very best regards,

Gary D. Halbert

P.S. - Last week, I mentioned that we had come across an important resource for end-of-life planning entitled "All They'll Need to Know." This booklet helps you think through a multitude of issues that arise after an untimely death, but are often overlooked by other estate planning materials.

In my E-letter, I offered readers a discount on the price of the electronic version of this booklet, or a free paper copy of the booklet as long as our existing supply held out. After receiving an overwhelming response, our existing supply of booklets is now depleted and we are unable to honor any more requests for a free booklet.

You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. To help defray the cost, I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible. Just click on the following link to access the Emerson Publications website:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

This booklet is an important resource for loved ones in case of an untimely death, so I urge you to order either a printed or electronic version while the special discounted price is still available.

GDH

SPECIAL ARTICLES:

Witch Hunt at the CIA Hurts America
http://www.nypost.com/seven/09012009/postopinion/opedcolumnists/punishing_patriots_187490.htm

The Obama Slide
http://www.nytimes.com/2009/09/01/opinion/01brooks.html?_r=2&ref=opinion

Democrats' Strange Bedfellows on Health Care Reform
http://www.forbes.com/2009/08/31/health-care-reform-lobbying-biologics-opinions-contributors-phrma.html

Is The Recession Over? Don't Bet On It

Gary D. Halbert — Tue, 18 Aug 2009 22:12:00 GMT

IN THIS ISSUE:

Economic Signs of Improvement
Fed Vows to Keep Rates Low
Market Comments from John P. Hussman, Ph.D.
Conclusions

Introduction

We have seen some encouraging economic news in recent weeks, and President Obama and his cronies in the mainstream media have declared that the worst recession in post-war history is all but over. The advance estimate of 2Q GDP was down considerably less than expected (-1.0%); the unemployment rate actually fell slightly in July to 9.4%; and the ISM manufacturing index posted a nice improvement last month.

While these reports were better than expected, and continue to suggest that the worst of the recession is behind us (as I have suggested often in recent weeks), this economy is far from out of the woods yet. Growth prospects continue to look muted, although a growing number of forecasters are suggesting that GDP will register a positive number in the 3Q due largely to the rebuilding of inventories, as I discussed in my August 4 E-Letter.

This week, we will look at the latest economic reports, as well as the Federal Reserve's latest decision on interest rates and purchases of Treasury securities. Also, the Fed says it will end its record large purchases of government agency debt in October. If indeed this happens, it will be the first step in ending the Fed's massive stimulus spending.

Next, so that we don't all get caught up in the latest hype that the recession is over, I will reprint excerpts from a recent Weekly Market Comment written by John P. Hussman, Ph.D. Dr. Hussman is best known as the president of Hussman Investment Trust, and he manages the Hussman Strategic Growth and Hussman Strategic Total Return Funds, which are actively managed and can go to cash in bear markets.

Dr. Hussman's latest analysis is consistent with the view many of us have that the recession, while improving in some areas, is not over yet, and that the ensuing economic recovery over the next year or longer will be disappointing -- even if there is a bump up in the 3Q. All of this should make for interesting reading, so let's get started.

Economic Signs of Improvement

Over the last several weeks, we've seen some encouraging economic reports. In some cases, "encouraging" simply means that the reports weren't as negative as expected. That was certainly the case with the advance 2Q GDP estimate at the end of June, which showed a decline of only 1% (annual rate) versus pre-report estimates which were considerably worse. Some analysts expect that number to be revised downward somewhat when the second estimate is released later this month.

On the manufacturing front, the ISM Index rose more than expected in July to 48.9, up from 44.8 a month earlier. Industrial production rose 0.5% in July, and construction spending and the factory operating rate both rose modestly last month as well. These are all signs that the recession may be leveling out.

On Thursday of this week, we get the latest Index of Leading Economic Indicators (LEI) for July, and the pre-report consensus is for a rise of 0.6%, following +0.7% in June. If the LEI is up for July, that will mean the fourth consecutive monthly increase. That would be very encouraging and a sign that we will likely be out of this recession by the end of the year.

The US unemployment rate unexpectedly dropped from 9.5% in June to 9.4% in July, as employers slashed 247,000 jobs, the slowest rate of decline in nearly a year. This news temporarily sent stocks to their highest level of the year since the pre-report consensus was for a rise to 9.6%

However, the July decline in the jobless rate came about not because more people had jobs, but because almost 800,000 "discouraged workers" - people who have essentially given up on looking for a job - were not counted as unemployed, thereby allowing the official unemployment rate to fall modestly in the latest jobs report. The number of long-term unemployed people - those who have been out of a job but looking for more than 26 weeks - rose by another 584,000. Thus, it appears we are still headed for 10% employment before this cycle reverses.

Despite the still troubled employment situation, investors welcomed the reports above, and more and more forecasters have apparently decided that the recession is over. I continue to believe that we are still at least a few months from concluding that the recession has ended. The Consumer Confidence Index fell for the second month in a row in July, and retails sales were down slightly last month. Therefore, it is premature to declare that the recession is over.

Fed Vows to Keep Rates Low

To no one's surprise, the Federal Open Market Committee (FOMC) announced last Wednesday that it will continue its policy of keeping interest rates at their historically low levels. The FOMC also maintained its position that interest rates could remain historically low for an "extended period of time." In other words, the floodgates of liquidity are still wide open.

About the only new revelation was that the Fed announced that it will stop buying long-term Treasuries in October of this year. This could be the ultimate case of good news/bad news, in that it's good that the Fed may no longer be printing money to buy Treasuries, but bad in that these securities will soon have to compete in the open market, and this could lead to higher interest rates. Remember that this is why the Fed committed to start buying Treasuries in the first place.

However, the Fed's printing press will not be idle as it said it will continue to purchase up to $1.25 trillion in agency mortgage-backed securities and other agency debt from Fannie Mae and Freddie Mac. The Fed's hope here is to keep a lid on mortgage rates in an effort to stimulate the housing market.

From an economic standpoint, the latest FOMC statement notes that US economic activity is "leveling out," meaning that the rate of descent has slowed. However, this simply means that the recession may not get deeper. The Fed's prospects for recovery, however, were modest, at best. The Fed expects economic activity to remain weak "for a time" (whatever that means) and a return to sustainable economic growth is likely to be gradual.

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.

Market Comments from John P. Hussman, Ph.D.

Dr. John Hussmanis best known as the president of Hussman Investment Trust (a mutual fund family), and he manages the Hussman Strategic Growth and Hussman Strategic Total Return Funds. Dr. Hussman is also the chairman, president and controlling shareholder of Hussman Econometrics Advisors, Inc. which has published his Weekly Market Comment letters for years, and they always have some interesting points about the economy, the markets, etc.

As a mutual fund manager, Dr. Hussman is somewhat unique in that he not only actively seeks the best opportunities in the stock market, but will also move to neutral positions in his funds during market downturns. In other words, the investment strategies he employs are similar to those used by the active money managers my firm recommends.

The following excerpts are from Dr. Hussman's August 10, 2009 Weekly Market Comment. [Note that we have removed discussions about specific funds where possible.] Pay particular attention to Dr. Hussman's outlook for the economy.

QUOTE:

The U.S. economy lost a quarter of a million jobs in July. Meanwhile, over 400,000 workers abandoned the labor force (and are therefore no longer counted among the unemployed), which prompted a slight decline in the unemployment rate despite the job losses. In the context of an economy still strained by high levels of consumer debt and still record delinquency and foreclosure rates, labor market conditions are still troublesome. Still, the pace of job losses and new unemployment claims has clearly softened from the pace we observed early in the year.

If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn. As for market action, the major indices have generally been strong, as has breadth (as measured by advances versus declines), but the "investor sponsorship" evident from trading volume has been uncharacteristically dismal compared with initial advances of past bull markets. So here too, we have very strong concerns that the recent advance may not be as durable as investors appear to believe.

All of that said, we aren't inclined to fight even what we view as errant analysis, and the Strategic Growth Fund has about 1% of assets allocated to near-the-money index call options -- about enough to gradually close down about 40% of our hedge in the event that the market advances markedly higher from here, but without putting us at risk of much loss in the event of failure. With investors now anticipating and pricing in a sustained economic recovery, as well as a spectacular earnings rebound, a lot of things will have to go right from here in order to sustain higher prices than we currently observe.

Frankly, our call option allocation here is something of a paean to a notion -- a sustained economic recovery and new bull market -- that I have no belief in whatsoever. But at this point, the broad strength in the major indices, even lacking volume sponsorship or favorable valuation, requires that we allow for the possibility of additional investor speculation. Even if we do observe such an outcome, it's difficult to envision that the S&P 500 will clear the 1000 level for all time, without revisiting it again in the months (not to mention years) ahead. To the extent that we don't clear 1000 permanently, establishing investment exposure here with anything but call options amounts to a game of trying to "ride" the market higher and to get out before it returns to or below current levels. With the market strenuously overbought already, that game strikes me as exquisitely difficult to get right. Hence the use of a modest allocation to call options only, without closing our downside hedges.

Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.

Moreover, it might be enticing to look at a chart of the S&P 500 and envision a quick return to 2007 highs and beyond, but it is important to recognize that those highs were based on profit margins about 50% above historical norms, combined with an elevated P/E multiple of about 19 against those earnings. Even if the economy is poised for a sustained recovery here, the belief that those joint outliers will be quickly re-established goes against historical precedent.

In any event, we've got some call option coverage to gradually allow participation if this run continues.

Post-Crash Dynamics

When markets crashes are coupled with changes in the fundamentals that supported the preceding bubble -- as we observed in the post-1929 market, the gold market of the 1980's, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble -- they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years.

The chart below updates the position of the S&P 500 (red line) in the context of other post-crash bubbles. The horizontal axis is measured in months. Note that very strong and extended interim advances have been part and parcel of similar experiences.

The intent here is not to argue that the U.S. stock market must by necessity follow the same extended adjustment that followed prior burst bubbles. Rather, the intent is to underscore that it is dangerous to infer that structural difficulties have vanished simply because a market enjoys a strong post-crash advance.

My friend James Montier at SocGen draws a similar pattern from a larger historical collection of post-crash bubbles - including the above instances, as well as others such as the South Sea Bubble and the Railroad Bubble of the 1840's. The underlying theme is that the adjustment period following the bursting of a bubble tends to be very extended.

I understand the eagerness of investors to put the entire credit crisis behind them and look ahead to a recovery of the prior highs, but these hopes are based on the assumption that a positive boost to GDP, once achieved, will propagate into a full-fledged recovery. Again, however, no economic improvement is evident in the behavior of consumer demand and capital spending, once you adjust for the impact of government spending (particularly transfer payments).

Yes, we have observed a massive reallocation of global resources from savers (who have bought newly issued Treasury debt) toward mismanaged financial institutions that made bad loans. Yes, there are certainly favorable short-run economic numbers that can be achieved by running a year-to-date federal deficit equal to seven percent of the U.S. economy. The problem is that this money does not come from nowhere. We have effectively sold an identical ownership claim on our future production to those individuals and foreign governments who bought the Treasuries. Government "stimulus" is not free money. The continued attempt to bail out bad loans with good resources (largely foreign savings) will end up costing our nation some of our most productive assets, which will be acquired by foreign countries and investors for years to come.

From my perspective, investors have gotten entirely too far ahead of themselves with the assumption of a sustained recovery. Nevertheless, we again have about 1% of assets in index call options to allow for further market strength if it emerges. I expect that if they move "in the money," we will leave their strike prices unchanged unless market internals deteriorate measurably. Leaving our call option strikes fixed would open us up to losing on any subsequent downturn whatever we make on a further advance, but again, our opening exposure is fairly limited. We'll let the market put us into a more constructive position if investors are inclined to continue their exuberance here. [Emphasis added, GDH.]

Market Climate

As of last week, the Market Climate for stocks was characterized by unfavorable valuation and mixed market action, but enough evidence of speculation (reasonable or not) to own about 1% of assets in index call options. We are otherwise hedged.

During earnings season, there are often days where most of the performance of the Fund is driven by significant movement in a small handful of Fund holdings. These movements can be positive or negative, and may cause the Fund to move differently than one would expect that the Fund "should" move based on our investment position, and on what the market did on a particular day. As I've frequently noted, short-term movements, particularly day-to-day, are not effective indicators of the Fund's investment position, or predictors of Fund performance. Performance is always best measured from the peak of one market cycle to the peak of the next, or over an extended period of years representing neither a peak-to-trough nor trough-to-peak movement in the market.

Based on our standard methodology, which considers normalized earnings (not the far more depressed level of current earnings) the S&P 500 is now priced to deliver 10-year total returns in the area of 6.9% annually. This is a figure that has historically been associated with bull market peaks, including 1969 and 1987. In most instances, such valuations turned out badly in reasonably short order. It is, however, true that prospective returns were even worse prior to the 1929 crash, and during the bulk of the period since 1996, so there have been some historical periods where speculators have driven valuations to higher levels, and during these times, it has not been particularly effective to stand in front of speculators saying ‘no, stop, don't.' [Emphasis added, GDH.]

Ultimately, all of those periods where valuations were driven to higher levels were followed by poor long-term returns, with stocks generally trading at lower levels at some point one or more years later. So we can say with a reasonable degree of confidence that even if the present advance continues, investors will most likely observe current levels again either within the current market cycle or (worse) several years out. Overvalued markets simply do not "run away" for good. Still, it can be painful or at least unenjoyable to remain defensive during a speculative advance.

In bonds, the Market Climate last week was characterized by relatively neutral yield levels and moderately unfavorable yield pressures. As usual, we will tend to increase our bond durations on spikes in yield (weakness in bond prices), and these are becoming more interesting -- though not strongly attractive. Our most recent extension of durations was in the 3.9%-4% area for 10-year Treasuries, and a push materially above that level would represent enough of a yield pickup to move a modest amount of short-maturity Treasury allocations into mid-maturities. As I've noted in recent weeks, we don't anticipate much in the way of extended directional movement in the bond market, so most of our portfolio activity will probably tend to be modest reallocations in response to yield fluctuations. At the point where we observe either fresh inflation pressure or general declines in Treasury yields (i.e. general downward pressure on real interest rates), I expect that we'll observe fresh pressure on the U.S. dollar and upward pressure on precious metals shares. For now, those markets are likely to be somewhat range-bound as well.

We've got an extended economic adjustment ahead. Most probably far longer than most investors presently expect. As always, we'll take our opportunities as the evidence emerges, with the objective of outperforming our respective benchmarks over the complete market cycle, and an additional emphasis on defending capital over the course of that cycle. [Emphasis added, GDH.]

END QUOTE

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

Conclusions

While we have seen some encouraging economic reports over the last few weeks, it is premature to declare that the recession has ended. As discussed above, the unemployment rate is very likely to rise even higher before this cycle is over. Remember that consumer spending is still the main driver of this economy, and retail sales fell slightly in July well below the pre-report consensus. The Consumer Confidence Index fell a second month in a row in July.

On the positive side, the Fed remains committed to keeping interest rates very low for an extended period, and liquidity is plentiful for now. If this Thursday's Leading Economic Indicators report is positive, that will market the fourth consecutive monthly increase, which will be a very good sign that the recession will end by the end of the year.

I agree with Dr. Hussman that stocks are overbought at this point, as many investors who bailed out in February and March are now jumping back in. The stock market has felt like a mini-bubble since the March lows and especially in July. Thus, I would not be surprised to see the downward correction that began last week to continue in the weeks ahead.

Finally, I recently told you about our online webinar featuring the Potomac Guardian Program on August 6th. We had hundreds of investors register for the webinar and it was well-received. If you were unable to attend this webinar but would still like to learn more about the Potomac Guardian Program and its investment strategy, you can now find a recorded version on our Internet website at www.halbertwealth.com.

Wishing you profits in a difficult market,

Gary D. Halbert

SPECIAL ARTICLES

Stocks: Five Key Signals for Investors
http://www.businessweek.com/investor/content/aug2009/pi20090817_099111_page_2.htm

Why Obama's Ratings Are Sinking
http://online.wsj.com/article/SB10001424052970204683204574354383543314054.html

Public Spending's Day Of Reckoning
http://www.forbes.com/2009/08/12/public-spending-finances-economy-debt-opinions-contributors-desmond-lachman.html

Retirement Focus: Target-Date Funds in the Crosshairs

Gary D. Halbert — Tue, 11 Aug 2009 19:25:00 GMT

By Mike Posey

IN THIS ISSUE:

Target-Date Funds 101
Advantages of Target-Date Funds
Criticisms of Target-Date Funds
The Feds Come Down on Target-Date Funds
Buy-and-Hold on a Stick

Introduction

Target-date mutual funds are a fairly recent entry into the mutual fund field, having been first introduced in the early 1990s. Since then, they have become very popular - especially after the passage of the Pension Protection Act in 2006. For those of you who may not be familiar with this type of investment, target-date funds are specialized mutual funds that offer an investor the option of buying a single fund that invests its assets based on an assumed date of retirement. As retirement nears, the fund's allocation is usually changed to become more conservative.

These funds have become hugely popular with investors because they represent a one-stop shopping opportunity for a diversified portfolio. Thus, they appeal to individual investors and 401(k) participants who are not comfortable making their own portfolio decisions. Just pick your date of retirement and your investment decision is made.

Usually structured as a mutual fund that invests in other mutual funds (a "fund-of-funds"), target-date products automatically allocate an investor's assets among a variety of asset classes, generally based on traditional asset allocation techniques.

Due to the simplicity of this approach, target-date funds have become standard features in scores of 401(k) plans where participants must direct the investment of their accounts. The premise is easy - just put your money in the fund that corresponds with your normal retirement date, sit back and let the fund take care of the details. At least that's the theory.

Too bad things have not gone as well in actual practice. Federal regulators including the Department of Labor and the SEC have been looking into the performance of these funds during the recent bear market. In addition, regulators are investigating the "need for additional guidance given the importance of these investments to the retirement savings of investors."

In this week's Retirement Focus E-Letter, I'm going to discuss the development of target-date funds, how they work and their advantages to investors. I'll also discuss the shortcomings of target-date funds, which became painfully evident over the course of this bear market. What we'll find is that, like many one-size-fits-all approaches, target-date funds can have some serious drawbacks.

The Basics of Target Date Funds

As I noted above, target-date funds are a one-size-fits-all investment solution usually structured as a mutual fund that invests its assets exclusively in other mutual funds. In most cases, the mutual fund family that sponsors the target-date funds directs its assets into other funds within the same fund family. Since most fund families sponsor a wide variety of mutual funds, it's usually not hard to achieve the fund's directive for diversification through an asset allocation strategy.

Target-date funds are also sometimes called "lifecycle funds," because they seek to provide an automatic approach to investing over time. As such, they are typically sold to investors as a sole investment. Otherwise, holdings outside of these funds could throw the asset allocation out of whack. For example, if a younger client put half of his or her 401(k) account in a target-date fund that had 80% invested in equities, yet held the other 50% of the account in cash, this would greatly reduce the overall equity exposure. Thus, target-date fund proponents suggest that participants should invest all of their contributions in this type of fund to get the best results.

Over time, target-date funds slowly shift their assets to more conservative funds as the assumed retirement date nears. In the industry, this is known as the fund's "glide path." As a general rule, the longer the fund has until the target retirement date, the higher the percentage invested in stocks. As the retirement date nears, more of the portfolio is shifted to bonds and other fixed-rate investments.

While allocations within target-date funds are generally based on asset allocation and Modern Portfolio Theory, it would be a mistake to assume that all funds have similar stock/bond allocation ratios. There is a wide variation in the amount of assets invested in equities and bonds, even among target-date funds with the same assumed retirement date (more about this later on).

Since all funds are not created equal in regard to the allocation to stocks and bonds and the glide path used, it is up to participants to determine whether the specific allocation method of any given target-date fund is appropriate for their investment goals and risk tolerance.

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.

Advantages of Target-Date Funds

While many investors are not interested in a fund that makes all of the investment decisions for them, the creation of target-date funds did serve a real need. In the past, I have written about how some 401(k) participants will not make a decision as to how to invest their contributions. As a result, these contributions sit in low-earning cash or guaranteed-return funds, offering little hope of meeting the participants' retirement goals.

Target-date funds attempted to fix that by allowing a participant to make a single decision based on their assumed year of retirement. In theory, nothing could be easier. The participant was invested in a fund with the potential for growth and the employer was able to escape possible fiduciary liability for allowing an employee to remain in low-yielding investments.

However, even with this simplification, there were still 401(k) participants that would not even elect to invest in a target-date fund based on their retirement date. To remedy this situation, the Pension Protection Act of 2006 allowed employers to select "default" investments for participants who would not or could not make their own elections.

This law also strengthened automatic enrollment policies, so that now an employee can be enrolled into a 401(k) and have his or her money invested in a target-date fund without taking any action or making any investment decisions. Obviously, this is not a wise course of action on the part of the employee, but it can serve as a fail-safe for those who simply won't take action to secure a retirement nest egg.

Other advantages of target-date funds include the following:

Ideally, a target-date fund not only allows a participant to make a single investment decision upon participation, but also handles future rebalancing and allocation adjustments necessary to reduce portfolio risk as participants get older. In other words, it's billed as being a "set it and forget it" investment;
Likewise, in an ideal world, the target-date fund would not only provide for growth prior to retirement, but also provide a way to help retirees not outlive their money. The rationale here is that, absent target-date plans, many retirees move all of their money to "safe," fixed-rate investments upon retirement to avoid losses. By doing so, however, they might subject themselves to returns so low that they end up outliving their money. Many target-date funds maintain some level of equity investment even into retirement, which provides the potential for additional growth. Of course, it also provides for the potential for losses;
Gary has written many times about how studies conducted by the Dalbar organization show that investors who frequently change funds forfeit much of the long-term return. Target-date funds can help curb the desire to chase the latest hot performance among optional 401(k) investments by removing the need to make subsequent investment decisions after the initial purchase;
Many target-date funds have low minimum investments, making them available for even relatively small 401(k) contributions;
Asset allocations are managed by professionals within the mutual fund family sponsoring the target-date fund. Thus, participants have the potential benefit of professional management, but they are usually limited to an asset allocation strategy, which is a form of buy-and-hold investing that I do not recommend;
Some target-date funds offer the use of traditional mutual funds while others select among only passive index funds. The presence of a fund manager who tries to add value over and above the performance of an index can be an advantage, but there are no guarantees that they can always do so; and
Target-date funds can be an excellent way to take advantage of a strategy known as "dollar-cost averaging." This strategy is based on making investment purchases at regular intervals (usually monthly). Over time, contributions buy more shares when prices are lower and fewer shares when prices are high. The ultimate goal is to lower the total average cost per share purchased over a participant's working lifetime.

Disadvantages and Criticisms of Target-Date Funds

Almost since they were first introduced, target-date funds have met with criticism. Primarily, critics focus on the idea that a one-size-fits-all solution is rarely, if ever, appropriate for everyone who owns the fund. We know this to be true as the risk tolerance, return expectations and a host of other variables often determine an investor's comfort with a particular portfolio allocation.

Some dismiss this criticism by noting that 401(k) participants generally have the choice of whether or not to select their own mix of funds from those offered in the plan, so if a target-date fund is selected they should be satisfied with the result. This may be true, but it doesn't help participants who might get out of target-date funds because they are too aggressive for their risk tolerance.

Target-date funds have been the subject of a number of other criticisms, including the following:

Many target-date funds are sponsored by mutual fund families that allocate its assets only among mutual funds sponsored by the same organization. While this is not a guarantee of poor performance, a single mutual fund family usually does not have superior funds representing all asset classes;
Target-date funds are also sometimes criticized for adding a layer of fees on top of those charged by the underlying mutual funds in which they invest. In fact, some fund companies "double dip" by charging fees on the underlying funds as well as on the target-date fund. Others, however, do not charge additional management fees for their professional management services. Thus, it's important to check on what fees will be charged before making a decision to invest;
One of the biggest disadvantages of target-date funds is that it's sometimes hard to tell exactly how it will be managed over time. As I noted above, asset allocation strategies can vary widely among fund families, and can even be modified within a fund as time goes by. For instance, I read several articles back in the summer of 2008 that discussed how target-date funds were increasing their allocations to stocks. Guess how those funds did over the last half of 2008!

The lack of easily understood labeling on target-date funds can actually help to defeat the simplicity they try to provide. Participants who do not want to make their own asset allocation decisions are not likely to want to dig through a prospectus to see how their target-date fund will be managed. Plus, according to a 2008 study by the Financial Research Corp., it was even hard for professionals to discern specific investment strategies, making it very difficult to compare one target-date fund to another.
On a related note, recent research has found that the amount of a target-date fund's allocation to equities can vary widely among fund sponsors, even when the funds are close to their target retirement date. While many experts agree that some exposure to equities is necessary in retirement to provide a potential for growth, most agree that this allocation should be rather small.

A good example comes from a 2008 Investment News article that noted the Oppenheimer Transition 2010 Fund (designed for someone retiring in the year 2010) had 75% of its assets invested in stocks. Not surprisingly, it lost over 41% of its value in 2008, a loss even greater than that of the S&P 500 Index's drop of 37%. Now, just think of retirees in this fund that have just two years or less before retirement. It's unlikely that they'll make back much, if any, of this loss prior to their target retirement date;
Another possible disadvantage brought about by all the variation in target-date funds is that employers who use these funds as default options may find themselves having liability for selecting the wrong default fund;
While most fund companies and employers have done a good job communicating about how target-date funds work, a recent study by Janus Funds found that 60% of target-date fund holders incorrectly believe that these funds provide some pension-like guarantees. They do not offer any guarantees and are subject to market losses, as most participants found out in 2008;
As both employers and plan participants seek to evaluate and compare various target-date funds that may be available to them, they often find that the target-date funds have a very limited actual track record. The number of target-date funds has exploded in the last few years, so many have little to show as far as a track record. You can try to get a better picture by analyzing the track records of the underlying funds used, but this can be a rather complex task.

Even worse, a participant must not only decide if the current allocation is appropriate for his or her investment profile, but must also see if the glide path will result in an appropriate allocation in all future years. In other words, a target-date fund investor must decide up-front if all future allocation adjustments will be appropriate for his or her financial situation at that time, something that is impossible to know.

Again, I doubt that participants who already don't feel comfortable making their own investment decisions will go to this trouble. If not, they'll either stay invested in low-yielding investments, or pick the first target-date fund that sounds good without determining whether it is the most suitable option for them. Either way, their retirement security may be at risk;
As I noted above, target-date funds are designed to be a sole investment rather than part of an allocation of various funds. As such, however, a target-date fund may conflict with other investments a participant may hold outside of the 401(k) plan; and
While target-date funds may be useful for young participants who can benefit from dollar-cost-averaging, it may not be the most suitable investment for large accumulated balances. I'll discuss this in more detail later on, but target-date funds are nothing but buy-and-hold strategies on autopilot, which could subject large nest eggs to potentially significant losses.

As I have previously noted, any one-size-fits-all solution is bound to have negative implications for some who invest in these programs. However, target-date funds seem to have more than their fair share of disadvantages that can moderate, or even eliminate the advantages of these funds, depending upon the participant's personal situation.

The Feds to the Rescue

To say that many target-date funds did not fare well in the bear market of 2008 would be a vast understatement. In fact, we can say that most target-date funds didn't do very well. According to a recent speech by SEC Chairman Mary Schapiro, funds with target retirement dates of 2010 had returns in 2008 that varied from minus 3.6% to minus 41%. This is a huge disparity for a group of funds that are supposed to be designed for 401(k) participants retiring next year.

As you might suspect, the primary culprit causing this spread in returns was the wide variation in the stock allocations within the various target-date funds. Those with larger allocations to equities had the greatest losses, while those with lower equity allocations had smaller losses. However, large losses for employees who are close to retirement age were seen as especially disturbing to the SEC and Department of Labor (DOL), not to mention the unfortunate 401(k) participants who invested in these funds.

Plus, some funds actually increased their allocation to stocks last year, just before the market meltdown, in what can only be described as an attempt to chase returns. Supposedly, investors are paying their professional managers to apply a disciplined approach to investing, but chasing returns is what the Dalbar organization has identified as the reason average investors often earn poor returns. In my opinion, this is simply inexcusable for a professional money manager.

As a result of the shortcomings of target-date funds, the SEC and DOL held a joint hearing on these investments on June 18th. The purpose of this hearing was to have an "in-depth discussion" about the role of target-date funds in retirement planning as well as the need to improve regulation of these funds and better protect retail investors. In her opening statement, SEC Chairman Schapiro said:

Target date funds have become an increasingly popular investment option for Americans investing for retirement and educational needs. These funds and other similar investment options are financial products that allocate their investments among various asset classes. These funds automatically shift that allocation to more conservative investments as a "target" date approaches…

The "set it and forget it" approach of target date funds can be very appealing to investors. Target date funds were expected to make investing easier for the typical American and avoid the need for investors to constantly monitor market movements and realign personal investment allocations.

But, the reality of target date funds was quite surprising to many investors last year. It has been reported that the average loss in 2008 among 31 funds with a 2010 target date was almost 25 percent…

These varying results should cause all of us to pause and consider whether regulatory changes, industry reforms or other revisions are needed with respect to target date funds. And this is what I hope today's joint hearing will help us assess.

I researched our Morningstar Principia Pro software to find the 2010 target-date funds and did a bit of additional analysis. As usual, I searched only the "distinct portfolios" so that I wouldn't get multiple share classes of the same fund. The result was a group of 50 mutual funds falling within the "Target Date 2000 - 2010" Morningstar Category.

Sure enough, these funds had a wide variety of equity exposure, ranging from a low of around 10% to a high of over 65%. It is also important to note that this equity exposure was not just in relation to domestic stocks, but some funds had over 20% allocated to non-US stocks, which are usually deemed to be more aggressive than domestic stocks due to the currency risk involved.

In light of these statistics, it does appear that something probably needs to be done to standardize target-date funds, or at least provide for more disclosure. As I have said above, my concern is that investors may blindly buy a fund with the right target retirement date not knowing that the underlying investments may be far too risky. Of course, this can be avoided by carefully researching the prospectus, but the more research and due diligence is required of the participants, the less these funds are likely to be used. After all, the idea is to provide a solution to those who either can't or won't make their own asset allocation decision.

Plus, the skeptic in me wonders how effective the DOL and SEC will be in regulating these funds. After all, the DOL is the agency that approved these funds as a default investment just a couple of years ago, when all of the shortcomings of these funds were already well known.

Industry Not Waiting For Regulation

As you might imagine, the mutual fund industry is vowing to fight government regulations that dictate allocation percentages within target-date funds. The fund industry is also developing the next generation of target-date funds in an effort to correct the problems found in current products. One new innovation is to remove the requirement that all asset classes are managed by the same fund family. This "open architecture" could diversify the management of these funds, but might do little to affect the wide variation found in equity allocations.

Yet, I have to wonder whether the fund industry really understands the situation they have put target-date fund investors in, especially those who are close to retirement. A benefit plans consultant is quoted as saying the following in response to the industry's attempts to fix the inherent problems found in target-date funds: "It usually takes two or three tries to get the products right. The next generation products will correct deficiencies that the current crisis revealed."

And what about the retirees and near-retirees whose account balances are at risk while the fund industry makes these attempts to get its act together? If it's going to take two or three tries for the industry to get it right, you have to wonder what additional problems lie in these funds just waiting to spring upon unsuspecting investors.

Perhaps the most important news is coming from large corporate employers who are creating their own custom target-date portfolios using investments selected from among the various options available in their plans. These large employers can even customize their portfolios based on workplace demographics and the presence of other retirement plans. Unfortunately, this does little to help the millions of participants who work at smaller employers.

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.

Conclusion: Buy-and-Hold on a Stick

While I do agree that target-date funds serve a purpose in that they offer a simple way for a 401(k) participant to invest when they might otherwise leave their contributions in cash, the variations in allocation methods and lack of transparency make it questionable as to whether these funds are better than the alternative. After all, the guys who left all of their contributions in cash or "safe" investments are looking like geniuses right now.

I am also concerned that many employers may have adopted target-date funds without appropriate analysis, and may now have subjected themselves to liability. One study suggested that 80% of large employers now offer target-date funds. These funds could be ticking time bombs if they have questionable allocations or an inappropriate glide path. Thus, employers could find themselves facing the very liability they sought to escape by using the target-date funds in the first place.

In the end, the real shortcoming of target-date funds is that they are simply buy-and-hold strategies on autopilot. As such, they have all of the shortcomings of buy-and-hold that Gary has written about many times in this E-Letter. Even if the DOL and SEC are successful in standardizing target-date fund allocations, it will be within the context of a buy-and-hold asset allocation portfolio.

As a practical matter, many employers who sponsor 401(k) plans opt for buy-and-hold mutual fund solutions at the direction of brokers or financial advisors who know of no other way to invest. It's too bad that they ignore active management strategies that might be attractive to participants who see the value of moving to cash to manage market risks.

The only thing clear at this point in time is that target-date funds will soon be changing. Let's hope it's for the better. In the meantime, if you are invested in a target-date fund, I suggest that you request a prospectus on your fund and read it carefully. See how your money is allocated now, and also how this allocation will change as you proceed down the glide path.

Hoping you retire in style,

Mike Posey

SPECIAL ARTICLES

Unemployment - A Scary Reality
http://www.nytimes.com/2009/08/11/opinion/11herbert.html?_r=2&ref=opinion

Pelosi's 'Un-American' attacks can't derail health care debate or silence opponents
http://blogs.usatoday.com/oped/2009/08/unamerican-attacks-cant-derail-health-care-debate-.html

Boehner calls Pelosi & Hoyer op-ed 'reprehensible'
http://thehill.com/leading-the-news/boehner-calls-pelosi--hoyer-op-ed-reprehensible-2009-08-10.html

Institutionalized Deception

Gary D. Halbert — Tue, 28 Jul 2009 22:05:00 GMT

IN THIS ISSUE:

Figures Don't Lie but...
The Recovery Fallacy
Limiting Losses is the Key
The Potomac Guardian Example
Conclusions

Introduction

Some of you may remember the radio spots some years ago by Eddie Chiles, CEO of the Western Company. His brief commercials would often contain a phrase borrowed from the 1976 movie Network: "I'm mad as hell and I'm not going to take it any more." Right now, I feel somewhat the same way. While I'm not quite as angry as Mr. Chiles, I am concerned that investors continue to be subjected to misleading arguments that favor "buy-and-hold" investments over "actively managed" strategies, even though we've had two major bear markets in this decade alone.

This is especially true now that the market is again moving upward. Wall Street is making a big deal of the fact that the stock market has rebounded from its March low. What they don't tell you is that most of this rebound was needed to just erase the losses incurred in the early months of the year, not to mention losses incurred in 2008.

Even worse is that these misrepresentations continue to be made by many of the big brokerage and mutual fund firms that are intent only on keeping investors' money tied up in their products. Likewise, many in the financial press have also continued to pass on these faulty arguments in the name of prudent advice. It's time to realize that Wall Street's conventional wisdom is designed to have you do what's best for them, and not necessarily what's best for you!

What irritates me even more is that these same buy-and-hold outfits continually preach that it is "impossible to time the stock market." I beg to differ! In the pages that follow, I'm going to show you a professional money manager that has successfully timed the stock market for over a decade, with an average annualized return of 9.13% versus the S&P 500 return of 4.26% over the same period. So don't tell me it's impossible to time the stock market! As always, I must add that past performance is no guarantee of future results.

This week, I'm going to challenge one of the most prevalent buy-and-hold arguments that I consider to be most misleading. I have written about this in the past, but I think it is important to keep spreading the word about buy-and-hold studies and marketing materials that are repeatedly designed to tell only half of the story. The half they tell you is how it hurts you to be out of the market on the good days. The half they don't tell you is how difficult it is to recover from large bear market losses. What else is new?

Figures Don't Lie but...

Proponents of buy-and-hold present a variety of very misleading arguments when attempting to counter the advantages of active investment management strategies. While the statistics that they provide are usually accurate in and of themselves, they are spun together into a web of deception in an attempt to keep unwitting investors in the promoters' funds and/or brokerage accounts.

For example, those who offer buy-and-hold strategies have recently started referring to them as "diversification" rather than Modern Portfolio Theory, asset allocation, etc., etc. The obvious implication is that if you're not using one of these buy-and-hold methods, your portfolio is not diversified. Hogwash!

By adding active management strategies, you can actually increase diversification by adding different investment strategies and not just a variety of investment asset classes. Plus, if you look at the history of bear markets, it's in the buy-and-hold programs where diversification often breaks down as previously uncorrelated investments all start going down together in a declining market. I'll bet you haven't seen this disclosed in any traditional mutual fund advertising.

Another example of this type of deception goes something like this excerpt from an article I found on a prominent brokerage firm's website:

"...Bull market returns tend to be front-loaded, with the bulk of returns accruing to the earliest months of the rally. Being late to the party can mean the birthday cake is half eaten by the time you arrive. For example...The first 12 months of the average bull market has provided more than 40% of an entire bull market's price appreciation, yielding on average 45% for investors..."

While the statistical return figures quoted in this excerpt appear to be true, I have a number of problems with the implications of this statement. The first problem is that it doesn't explain that the 45% average gain after the end of a typical bear market may not even get you back to break-even after the bear market losses you've just incurred. Unfortunately, many investors mistakenly believe that a 45% gain will erase a 45% loss, but it won't.

For example, the 45% average gain mentioned above will cover a portfolio loss of only about 31%. In other words, if your investment portfolio lost 31% of its value, it would take a gain of 45% just to get you back to break-even. So what would it take to get back to break-even if you had a loss of 45%? Doing the math, we find that $10,000 incurring a 45% loss drops to $5,500. To gain the $4,500 back, the investor would need to earn a return of over 80%!! This is another tidbit of information you're not likely to find in Wall Street's glossy marketing materials.

Here is a table showing various levels of loss and the gain it would take just to get the portfolio back to where it started:

Amount of Loss Incurred	Return Required To Break Even

10%	11.1%
15%	17.7%
20%	25.0%
25%	33.3%
30%	42.9%
35%	53.9%
40%	66.7%
45%	81.8%
50%	100.0%

The moral of this story is that avoiding large losses can be just as important (actually more so, as I will discuss below) than holding investments so that you don't miss out on subsequent gains.

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.

The Recovery Fallacy

There's a flip side of this buy-and-hold fairy tale that I also need to address. As noted above, buy-and-hold adherents use the statistics showing that much of a bull market's gain is concentrated in the first 12 months to convince investors to stay invested at all times. Going to cash, they say, will prevent you from taking advantage of the outsized returns that often occur during the early months of a new bull market.

However, this argument is bogus unless you decided to move to cash at or near the very bottom of the market. Had you chosen to move to cash sometime before the bottom, you could actually miss some of the early bull market gains and still be better off than had you stayed in the market.

You see, to get the maximum benefit of the average 45% gain in the first year of a new bull market, you must be invested at the very bottom of the market. About the only way to do this is to have followed the buy-and-hold advice of staying invested at all times. So, to get the full value of the 45% average upside, you would likely have had to endure the pain of the entire bear market's downward ride. OUCH!!!

Common sense, however, tells you that if you exited the market sometime before the actual market bottom, you could afford to miss out on some of a new bull market's early gain and not be any worse off.

To provide an example, I documented six times when market analysts, journalists, talking heads, etc. incorrectly predicted an end to the current bear market over the past year or so. By comparing where the markets were when these "false bottom" calls were made to the actual lows at the market close set in March of 2009, we can see that timing the market isn't necessarily a bad thing if it allows you to avoid losses.

The most recent dip in the S&P 500 Index took it down to 676 at the close on March 9th and the Dow Jones Industrial Average (Dow) closed at 6,547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

In January of 2008 with the Dow at 13,265, well-known perma-bull Abby Joseph Cohen predicted a reversal in the Dow and that it would be at 14,750 by the end of the year.
On March 17, 2008 with the Dow at 11,972, some analysts declared a "Bear Stearns Bottom." CNBC guru Jim Cramer declared that the bear market had been tamed.
On July 31, 2008, Jim Cramer again predicted that the Dow's July 15, 2008 low of 10,962 would be the market bottom. As Cramer put it, "Bye, bye bear market."
On October 9, 2008 with the Dow at 8,579, professional stock trader Tony Oz declared that the market was near a significant bottom.
On November 20, 2008, the Dow posted a new low of 7,552, which prompted some analysts and investors to again declare that the bear market was dead. However, the Dow eventually broke through the 7,552 low on February 27, 2009.
Finally, many investors thought that the New Year (accompanied by a new president) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8,776, yet it continued to fall even further until closing at 6,547 on March 9th, its lowest level yet during the current bear market.

If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottoms. However, it's likely that any of these market gurus would have told you that getting out of the market on these dates would be the worst time to do so, since they expected the market to reverse course and go higher.

Limiting Losses is the Key

My purpose in noting these predictions of "false bottoms" is to illustrate what would happen should an investor ignore buy-and-hold advice and get out at exactly where Wall Street might consider it to be the worst possible time – when the "experts" were saying a market bottom was in. You may think I'm being a contrarian, but this analysis will show you why Wall Street never mentions how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out.

Take the first bottom call from the list when Ms. Cohen predicted a market bottom in January of 2008. The Dow ended up falling an additional 6,718 points after this inaccurate prediction. This drop represents a 50.6% reduction in the value of the Index and, using the mathematics of gains and losses discussed above, will require a gain of over 102% just to get back to break-even.

In other words, investors who moved to cash in January of 2008, despite an expert opinion that the market had hit bottom, could stand to miss out on the first 102% of a new bull market's gains before they would be worse off financially than had they not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager as I will discuss later on.

The table below shows a similar analysis for all of the "false bottom" dates from the above list. The results reflect how much further the market fell after the experts' calls, and how much return you could have missed in the early stages of a market rally and still not have been harmed:

Date	Dow Position	Additional Loss to March '09 Low	Gain Required to Break Even
January 1, 2008	13,265	6,718 (50.6%)	102.6%
March 17, 2008	11,972	5,425 (45.3%)	82.9%
July 15, 2008	10,962	4,415 (40.3%)	67.4%
October 9, 2008	8,579	2,032 (23.7%)	31.0%
November 20, 2008	7,552	1,005 (13.3%)	15.4%
January 1, 2009	8,776	2,229 (25.4%)	34.0%

The most obvious lesson to be learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the far from accurate buy-and-hold crowd promises. As the above table represents, the potential to lose more money before an actual market bottom effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. Obviously, this doesn't work if you actually do get out at the actual bottom of the market, but that's a hard call to make.

The next most obvious realization is that it might be possible to maximize returns and minimize losses if you could move out of the market early in the bear market, and then move back into the market fairly soon after the bull market begins. That way, you'd not only benefit from avoiding losses, but also from participating in the outsized gains early in the bull market. Actually, this concept is the driving force behind the active management strategy known as "market timing."

However, attempting to time the market on your own can be dangerous, since making the wrong move at the wrong time could actually expose you to more losses than a buy-and-hold strategy. That's why we recommend that you depend upon professional money managers with time-tested systems with the potential to get out of bear markets as early as possible and avoid big losses, and then get back in when conditions suggest a renewed uptrend. These strategies can help you to control the emotions associated with investing on your own.

The Potomac Guardian Example

The best way for me to illustrate the value of professional active management is by way of example using one of our recommended actively managed investment programs. My company has been offering the Potomac Guardian managed account program since 1996, and it has shown to be a consistent performer over that time. While past performance can't guarantee future results, this investment has provided a much smoother growth line than the benchmark S&P 500 Index.

Potomac's Guardian Program essentially ignores Wall Street's admonitions to refrain from timing the market. Potomac has developed a proprietary strategy that moves gradually to cash or a hedged position when their system detects a greater level of market risk. This gradual pace helps Potomac keep from being "whipsawed" by quick up and down spikes in the market, while also maintaining a market exposure should a downward trend prove to be temporary.

Since Potomac's Guardian Program defies Wall Street's conventional wisdom, let's compare its performance to that of the unmanaged S&P 500 Index during the 2000 – 2002 bear market. We'll assume an investment of $1,000 at the beginning of the bear market and actual month-end performance data from April of 2000 through September of 2002. Note that our analysis is for comparison purposes only since you can't invest directly in the S&P 500 Index.

Over this time period, the amount of money deemed to have been invested in the S&P 500 Index dropped from $1,000 to $562.54, a loss of 43.75%. Over the same time period, the Potomac Guardian program grew from $1,000 to $1,004.80. Potomac actually made a modest profit in the 2000-2002 bear market when an S&P 500 buy-and-hold strategy incurred a devastating loss of almost 44%. You can clearly see from this analysis why I recommend proven active management strategies over Wall Street's buy-and-hold mantra.

However, Wall Street's argument isn't that large losses won't happen from time to time; rather that you need to stay in the market to participate in the gains that come about during the early months of a new bull market. Therefore, let's see how the S&P 500 Index performed as compared to the Potomac Guardian program in the 12 months following the market bottom in early October 2002.

From October 2002 through September 2003, the S&P 500 Index gained a whopping 24.4%. Since the Guardian Program moved back into the market gradually, it produced a gain of only 9.33% over the same 12 months. So, buy-and-hold wins, right?

Not so fast! As I mentioned above, we have to factor in the mathematics of gains and losses. To get a true comparison, we need to see what happened to the hypothetical values of our sample accounts in the 12 months following the bear market of 2000 – 2002.

As noted, the value of $1,000 invested in the S&P 500 Index in April 2000 would have shriveled down to only $562.54 by September 2002. However, this investment benefited from the 24.4% accumulated gain over the 12 months following the bear market. Doing the math, we see that the S&P 500 Index account grew from $562.54 to $699.80 over that one-year period. Not bad, but still far short of the original $1,000 investment.

The Potomac Guardian account, however, didn't lose money during the bear market, retaining a value of $1,004.80 and underscoring the importance of avoiding losses. During the subsequent 12 months, the Guardian account gained 9.33%, growing our example account balance to $1,098.55 at the end of September, 2003. Remember, the Potomac numbers are based on actual performance net of fees and expenses, while the S&P 500 Index numbers do not include any management fees.

Thus, the S&P 500 Index investment had a greater percentage gain after the end of the bear market, but Potomac retained a higher dollar value. Since most grocery stores don't accept percentages as payment, what really matters is your MIP (money in pocket) at the end of the day. So here's a tough question: Which account would you rather have?

Wait a minute! I can already hear the buy-and-hold devotees becoming defensive, saying that I am misrepresenting the case for active management by cherry picking a time period. I'm not sure how they could say that, since I used the 12-month example from a buy-and-hold article, but let's humor the buy-and-hold advocates for a while longer. After all, they've had a hard decade considering we've had two major bear markets in less than ten years.

The buy-and-hold groupies might protest that I didn't show what happened after September 2003. Since the S&P 500 Index produced a gain of two-and-a-half times that of the Guardian Program in the 12 months following the bottom of the 2000 – 2002 bear market, they might reason that future years would allow the S&P 500 Index to catch up to Guardian. That's a logical conclusion. Logical but wrong.

Below, I have listed the actual performance numbers for both the S&P 500 Index and the Potomac Guardian program picking up at October 2003 and going through September 2007, which marks the month-end closest to the market peak reached in early October 2007:

	S&P 500 Return	S&P 500 Accum Value	Guardian Return	Guardian Accum Return
Value at Sept 2003		$699.80		$1,098.55
Oct - Dec 2003 Return	12.18%	$785.04	12.39%	$1,234.66
2004 Annual Return	10.88%	$870.45	10.21%	$1,360.72
2005 Annual Return	4.91%	$913.19	5.27%	$1,432.43
2006 Annual Return	15.79%	$1,057.38	16.13%	$1,663.48
Jan - Sept 2007	9.13%	$1,153.92	4.76%	1,742.66

So, while the S&P 500 Index spent most of its time getting back to break-even, the Potomac Guardian Program was busy building wealth on a risk-managed basis. This also illustrates that, while Potomac moves back into the market gradually, once it is fully invested it can match or even beat market index returns. Obviously, there's no guarantee that they can always do so.

And just in case you're curious, the Potomac Guardian Program has significantly limited losses in the most recent bear market cycle. From the market peak in October of 2007 through June of 2009, Guardian had annualized return of -5.27% versus the S&P 500 Index's -23.32%. This again shows the value of having a program that can play defense as well as offense.

From its inception in June of 1996, Guardian has produced an annualized return of 9.13% through June of 2009, net of fees and expenses. Over the same period of time, the S&P 500 Index has an annualized gain (including dividends) of only 4.26%. If you accumulate these returns over the entire period, you will find that the S&P 500 Index would have grown a one-time investment of $100,000 into $172,558. Meanwhile, the Potomac Guardian Program would have produced a nest egg of $313,748 over that same period of time. That's a difference of $141,190 in favor of Potomac. Such is the value of successful active management strategies. Again, which account would you rather have? (Past results are not necessarily indicative of future results.)

As a moderate-risk investment, the Potomac Guardian program may be suitable to a wide variety of investors who seek asset growth with an eye on capital preservation. At my company, we consider Guardian to be a "core" holding, meaning one that may be suitable for a wide range of investment goals and risk tolerances.

It is also important to note that the results above are net of Potomac's 2.5% annual management fee and any expense loadings in the mutual funds they use. Yes, in my example an early Guardian investor would have paid higher fees with Potomac than in a low-cost index fund, but that investor would have had over $140,000 more MIP at the end of the day. Yet again, which would you prefer?

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

Conclusions

Are you mad yet? Well you should be! Major financial services firms have fed you a steady stream of misinformation about the benefits of active management as opposed to buy-and-hold strategies. And now that two consecutive bear markets have decimated investors' portfolios, Wall Street is still singing the same buy-and-hold song. Hopefully, this time it's a funeral dirge.

It seems clear to me that if buy-and-hold was actually superior to market timing or other active management strategies, Wall Street could make the case without using deceptive or misleading studies and analyses. But they don't – primarily because more and more studies are showing that successful active management strategies such as market timing CAN beat buy-and-hold portfolios.

At the end of the day, what really matters to most investors is the value of their accounts when they need their money. A double-digit historical return over a 75-year time horizon doesn't do you much good if the value of your investment dives 50% just at the time you need your money for retirement, a college education, etc. The siren song of buy-and-hold strategies is that you'll be OK if you just hold on. Many Baby Boomers who took that advice are now facing retirement with a smaller nest egg and not much time for buy-and-hold's empty promises to catch up.

If you would like to check out an actively managed program that can move in and out of the market, I suggest you take a look at the Potomac Guardian Program. While future performance can't be guaranteed, Guardian's actual results spanning the bursting of two asset bubbles and subsequent bear markets not only speaks well for that program, but also helps to disprove Wall Street's buy-and-hold mythology.

To get more information about the Guardian Program, including detailed performance information and a description of Potomac's trading methodology, give one of our Investment Consultants a call at 800-348-3601 to discuss this investment in more detail and ask any questions you may have. You can also click on the following link to access our online request form. This will allow you to request a packet of information to be sent to you via first-class mail. Or, visit our website at http://www.halbertwealth.com/advisorlink/potomac.php to access this information. Also be sure to read the Important Notes following my signature below before deciding to invest.

And remember, Potomac is only one of the actively managed investment strategies we recommend. We have several other professionally managed investment programs that also have very positive risk-adjusted returns as compared to Wall Street's buy-and-hold mantra. Maybe it's time you take a look and consider adding some of these programs to your portfolio.

Finally, we are sponsoring an online webinar featuring the Potomac Guardian Program on August 6th at 1:00 PM Eastern Time. You can learn more about this webinar and register to attend at the following Potomac Webinar Link. In this webinar, you'll hear directly from a member of Potomac's Investment Committee and be able to ask any questions you may have about Potomac's proprietary investment strategy.

We've had an incredible attendance rate at our first two online webinars. Maybe you should register and see why.

Wishing you profits in a difficult market,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Potomac Fund Management (PFM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. HWM receives compensation from PFM in exchange for introducing client accounts. For more information on HWM or PFM, please consult the appropriate Form ADV Part II, or the PFM Annual GIPS Disclosure Presentation 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As a benchmark for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) represents an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500 may differ materially (more or less) from that of the Advisor, and this Index cannot be invested in directly. The performance of the S&P 500 Stock Index is not meant to imply that investors should consider an investment in the Potomac Guardian trading program as comparable to an investment in the "blue chip" stocks that comprise the S&P 500 Stock Index. Potomac's performance results are based on the Model Portfolio. The Model Portfolio is an actual account that is considered representative of the majority of client accounts with similar investment objectives. Returns for the Model Portfolio are time-weighted, total returns that reflect the reinvestment of dividends and capital gain distributions. The Guardian strategy is actively allocated across many sectors and/or asset classes, overweighting those exhibiting the best risk-to-reward ratio. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) the Potomac Guardian's trading program is speculative and involves a moderate degree of risk; (ii) the Potomac Guardian's trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) PFM 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 Potomac Guardian's 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, 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. The results shown are for limited time periods and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Second Stimulus - Good Money After Bad

Gary D. Halbert — Tue, 21 Jul 2009 21:20:00 GMT

IN THIS ISSUE:

The Latest Assessment of the US Economy
The Real Unemployment Rate is 16.5%, Not 9.5%
Nine Reasons the Economy is Not Getting Better
Where I Disagree With Mr. Zuckerman
Conclusions -- "The New Normal"

Introduction

Over the last few weeks, most polls have shifted to indicate that a majority of Americans now believe President Obama's massive $787 billion stimulus package that he signed into law on February 17 has been a failure in terms of restarting the economy. I could not agree more. Rather than making the money available to immediate job-creating projects and programs, Obama and the Democrats in Congress loaded the stimulus up with pork-barrel projects that will take years to come about, and the recession will likely be over well before that.

I warned about this repeatedly in my February 10, 17 and 24 E-Letters. I was not a fan of the massive $787 billion stimulus package, but most of my best sources agreed that the government needed to step in with some kind of stimulus to at least partially fill the gap left by the marked slowdown in consumer spending. But the $787 billion spending package, which was spread out over 3-4 years, was not what we needed to jump-start the economy. It is now estimated that only about 10% of the stimulus money has been spent at this point. No wonder unemployment is 9.5% and rising fast.

Now we have widespread talk in Washington and elsewhere of a second huge stimulus package. Oh, but this time the politicos in Washington claim that they've learned their lesson, and a second stimulus will be focused only on "shovel-ready" programs that will create new jobs right away. To that I say (as my kids often do): yeah, right! I have a different suggestion: forget a second stimulus and redirect the remaining 90% of the $787 billion first stimulus to projects that will create jobs now. And include a payroll tax holiday for six months or so to boot.

In addition to the second stimulus issue, we will touch several other bases in this week's E-Letter. We will begin with the latest economic reports which remain mixed to negative. The theme of "green shoots" and an economic recovery that became popular in April and May has since turned more negative in June and so far in July. Consumer confidence is falling once again as it increasingly becomes clear that this recession will not be over anytime soon, and that the recovery will almost certainly be tepid over the next couple of years.

Following that discussion, we will look at a recent article which details why the real unemployment rate in the US is much, much worse than the monthly Labor Department reports depict. Most of you, I suspect, are aware of this, but the report I will share with you below puts the situation in much clearer terms, and explains why the economic recovery is likely doomed to be lackluster over the next couple of years or longer.

While this definitely won't be one of my more upbeat E-Letters, the circumstances are what they are and you need to know about it, especially as you try to manage your money and plan for retirement in this very challenging environment. Let's get started.

The Latest Assessment of the US Economy

On June 25, the Commerce Department released its final report on 1Q GDP at -5.5% (annual rate). That was slightly less negative than the prior estimate of -5.7%. The 1Q decline followed the 6.3% decline in the 4Q of 2008. Most analysts now expect that GDP will be negative for the 2Q as well, but not nearly as bad as the 1Q. A good number of analysts and economists continue to believe GDP will return to mildly positive territory by the 3Q, but that remains to be seen.

The Index of Leading Economic Indicators (LEI) rose for the third month in a row in June, up 0.7% following the rise of 1.2% in May. This is encouraging and seems to confirm that we have seen the worst of the recession and the credit crisis, but it does not suggest that this deep recession is over yet. Retail sales also increased modestly in June, up 0.6% following a gain of 0.5% in May, a sign that things are improving but we are not nearly out of the woods yet.

Unfortunately, the Consumer Confidence Index fell from 54.8 in May to 49.3 in June. The index had risen for three months in a row until the June decline. The University of Michigan Consumer Sentiment Index fell from 70.8 in June to 64.6 so far in July. I believe it is clear that consumers are coming to realize that this recession, while we've likely seen the worst of it, is not going away anytime soon.

As we will discuss in detail below, the unemployment rate surged to 9.5% in June, above expectations. Most analysts, including President Obama, now predict that the unemployment rate will go above 10% in the months ahead and will not likely peak until sometime in the second half of 2010. As we will explore later on, the "headline" unemployment rate published by the Labor Department significantly understates the true level of unemployment.

Factory orders and durable goods orders both rose for the second month in a row in May (latest data available). The ISM Manufacturing Index rose modestly in June to 44.8, up from 42.8 in May. Remember, any ISM number below 50 indicates recession. Industrial production fell by 0.4% in June, and the factory operating rate (capacity utilization) continued to fall in June to only 68.3%, down 13.6% over the last 12 months.

Sales of new and existing homes appear to be bottoming out with a very modest rise in May/June. Housing starts actually rose slightly in May/June as well. Unfortunately, the home foreclosure rate continues to soar, rising 4.6% in June and 33% over the last 12 months. The housing crisis is still far from over.

While it is encouraging that we have had some positive economic reports over the last several weeks, most economists continue to lower their forecasts for the last half of the year. I continue to believe that this recession will last longer than the current consensus predicts.

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.

The Real Unemployment Rate is 16.5%, Not 9.5%

I have known for more than two decades that the official Labor Department "unemployment rate" significantly understates the number of Americans who are out of work each month. Most likely, many of you are also aware of this longstanding disparity. A number of other official government reports contain similar disparities. But since the markets react to these government reports as if they are accurate, I report them in these pages accordingly.

With that in mind, I was pleasantly surprised to read an article last week by the Editor-in-Chief of U.S. News & World Report, Mort Zuckerman, that very accurately described the fallacies in the Labor Department's monthly unemployment report. I don't think I have ever seen these fallacies reported so accurately and concisely in one place. Mr. Zuckerman also reveals what he sees for the future of the US economy and the jobs market in the years to come.

So, I will reprint it for you below. While I don't agree with Mr. Zuckerman's conclusions as to what should be done now, I trust you will find the following of great interest.

QUOTE:

Nine Reasons the Economy is Not Getting Better
Jobs data paint a discouraging picture of more pain to come
By Mortimer Zuckerman
Posted July 13, 2009

We are now looking at unemployment numbers that undermine any confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. A better image is to look at the true total of jobless people as a prudent navigator looks at an iceberg.

What we see on the surface is disconcerting enough. The estimate from the Bureau of Labor Statistics of job losses for June is 467,000. That increases by 7.2 million the number of unemployed since the start of the recession. The cumulative job losses over the past six months have been greater than for any other half-year period since World War II, including demobilization. What's more, the job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all employment growth from the previous business cycle.

That's bad enough. But here are nine reasons we are in even more trouble than the 9.5 percent unemployment rate indicates.

One. June's total included 185,000 people who were assumed to be at work, many of whom probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation: finance, for example. When the official numbers are adjusted over the next several months, look to some of the 185,000 boosting the unemployment totals.

Two. More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.

Three. No fewer than 1.4 million people wanted or were available for work in the past 12 months. They were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey. The assumption is that they had found work or don't want it, but there are other explanations: school attendance, family responsibilities, sheer exhaustion.

Four. The number of workers taking part-time jobs because of the slack economy, a kind of stealth underemployment, has doubled in this recession to about 9 million, or 5.8 percent of the workforce. Add those whose hours have been cut to those who cannot find a full-time job, and the total of unemployed and underemployed rises to 16.5 percent, putting the number of involuntarily idle workers in the range of an overwhelming 25 million. [Emphasis added, GDH.]

Five. The inside numbers are just as bad. The average workweek for production and nonsupervisory private-sector employees, around 80 percent of the workforce, dropped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level of activity since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water and factories operate at only 65 percent of capacity. If American workers were still putting in those extra 48 minutes a week now, 3.3 million fewer employees could perform the same aggregate amount of work. With a longer workweek, the unemployment rate would reach 11.7 percent, not the official 9.5 percent (which in turn dramatically exceeds the 8 percent rate projected by the Obama administration).

Six. The average length of official unemployment increased to 24.5 weeks. This is the longest term since the government started to track these data in 1948. The number of long-term unemployed (those out of a job for 27 weeks or more) has now jumped to 4.4 million, an all-time high.

Seven. The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.

Eight. The jobs report is even uglier when you consider that the sector producing goods is losing the most jobs—223,000 in the last report alone.

Nine.The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers to full-time status.

Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because more layoffs in this recession have been permanent and not temporary. Instead of shrinking operations, companies have closed whole business units or made sweeping structural changes in the way they conduct their business.

For example, General Motors and Chrysler shut down hundreds of dealerships and reduced brands; Citigroup and Bank of America cut tens of thousands of jobs and exited many parts of the world of finance. In other words, we could face a very low upswing in terms of the creation of new jobs, and we may be facing a much higher level of joblessness on an ongoing basis. Job losses may last well into 2010 to hit an unemployment peak close to 11 percent. And then joblessness may be sustained for an extended period.

Can we find comfort in knowing that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power because employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled from 4.8 to 9.5 percent in just 16 months, a record rate so fast it may influence future economic behaviors and outlooks.

Bear in mind that the lackluster increase in inventories suggests that there's little prospect in the pipeline of real growth in consumption, investment, and exports. So the terrible state of the labor market is likely to be a strong head wind against consumer spending for a long time as wages and overall income growth are decelerating and households, within a fairly short period, will have received their full portion of the [$787 billion] stimulus package.

How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments—Medicaid, jobless benefits, and the like - that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10 percent of the stimulus package today.

Second, the stimulus package may have been well intentioned, but it was [arguably!] too small and [definitely!] too badly constructed to get money into the economy fast enough to replace lost consumer and business spending and to slow unemployment. Workers' pessimism is justified: About 40 percent believe the recession will continue for another full year. As paychecks shrink and disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough.

It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden told it as it is when he said the administration misread how bad the economy was. The administration inherited the problem, but then it failed to understand how ineffective its solution would be. The program was supposed to be about jobs, jobs, and jobs. It wasn't. The recovery act may have been a single piece of legislation, but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency. [Emphasis added, GDH.]

An additional $150 billion, which was allocated to state coffers so as to continue existing programs like Medicaid, did not add new jobs. Hundreds of billions of dollars were set aside for tax cuts and for new benefits for the poor and the unemployed, and that did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb.

Next year, state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending or raise taxes, or both. The complete state and local government sector, which makes up about 15 percent of the economy, is beginning the worst contraction in postwar history in the face of a [combined state] deficit gap of $166 billion for fiscal year 2010, according to the Center on Budget and Policy Priorities, and a cumulative gap of $350 billion in fiscal year 2011.

Similarly, households overburdened with historic levels of debt will be saving more. The savings rate has already jumped from zero in 2007 to almost 7 percent of after-tax income now, and it is still rising. Every dollar of saving comes out of consumption. Because consumer spending is the economy's main driver, we are going to have a [continued] weak consumer sector, and many businesses simply won't have the means or the need to hire employees.

In the aftermath of the 1990-1991 recession, Americans bought houses, cars, and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so.

In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated: borrowing against the once rising price of their homes and tapping plentiful credit cards. No longer. The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs. This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of the excessive debt has been completed. Until then, the private economy will be deprived of adequate profits and cash flow, and businesses will not start to hire. Nor will they race to make capital expenditures when they have vast idle capacity.

In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround. Consumer spending and residential investment could be even weaker than most estimates, and, as the level of fiscal stimulus begins its decline in the second half of 2010, we may be facing an even more difficult future. [Emphasis added, GDH.]

No wonder poll after poll shows a steady erosion of confidence in the stimulus measures. One survey even showed 45 percent believe the limited [stimulus] results suggest they should simply be abandoned midway. The disappointment is understandable - but that would only make things worse. So what kind of second-act stimulus program should we look for? This time, it should not be an excuse to pass a lot of programs like those in the first stimulus package that do not really have the kind of multiplier effect on job creation and on economic growth that was intended.

In any event, given the trends, it is absolutely critical that the Obama administration not play politics with the issue but really begin to prepare a second stimulus program, so that if the economy does take a major downturn, it will be possible this time to provide much more rapid government support to infrastructure spending that will maximize the creation of jobs. The time to get ready is now.
END QUOTE

Where I Disagree With Mr. Zuckerman

It is now clear that President Obama's initial $787 billion stimulus package was badly misguided. We can agree or disagree on whether it should have been passed in the first place. But what is not in question any longer is that the bulk of the near-$1 trillion spending package was made up of pork-barrel spending that will be years in creating any meaningful jobs.

Now, Mr. Zuckerman and others are calling for another large stimulus package. Who knows how large the next one will be, but I would guess that it will be at least another $500 billion to $1 trillion. The new stimulus we're hearing about will, they say, somehow be successful in creating large numbers of jobs in the near-term. But why in the world should we believe that? I certainly do not.

My suggestion is as follows. As reported widely, only apprx. 10% ($60-$70 billion) of the $787 billion stimulus package has actually been spent thus far. How about we reallocate the remaining $700+ billion from long-term liberal spending programs to job-creating programs in the short-term, and forget about a second stimulus program?

Of course, this is just wishful thinking on my part -- it will probably never happen, unfortunately. If the economy continues to languish, as I expect it will for another year or two, there will very likely be another stimulus package that will likely add another trillion or so to our already bulging national debt.

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

Conclusions -- "The New Normal"

It is becoming increasingly clear to economists, market analysts and investors that the US economy is not going to come roaring back from this severe recession and credit crisis anytime soon. In light of the sharp increase in the personal saving rate, consumer spending no longer accounts for 70-72% of GDP and is not likely to do so for the foreseeable future as Americans are increasingly paying down debt (deleveraging) and hoping they can hang onto their jobs.

We are not going back anytime soon to the go-go days of the late 1990s when tech stocks exploded and we saw the greatest stock bull market in history when equity gains fueled record large consumer spending. Likewise, we are not going back to the real estate/refinance boom of the 2000s when home prices exploded and consumer spending hit even new record highs anytime soon.

I agree with Mr. Zuckerman that the most likely scenario when we finally come out of this recession is a "range-bound" economy that fluctuates back and forth from slightly negative growth to slightly positive growth for the next several years. Analysts are increasingly referring to this scenario as "The New Normal."

Meanwhile, President Obama is spending trillions after trillions that we do not have on big government programs that may or may not work, but will certainly increase government control in our lives and our pocketbooks (ie- higher taxes). Another huge new stimulus package may be just around the corner, along with nationalized healthcare at an estimated cost of $1.5 trillion (and we all know how good the government is at estimating costs). Never mind that we have a massive Social Security and Medicare crisis facing us in the next 5-10 years.

I don't pretend to know exactly where all of this is headed, but I cannot see it ending pretty on any front. The stock markets have rallied a fair amount since the March lows, which is not surprising given how hard they plunged since this recession began in late 2007. Maybe the March lows were the bottom, maybe not.

It has long been argued that stocks tend to lead the end of major recessions by 6-9 months. In the past, this has been true on numerous occasions. But as Mr. Zuckerman opined above, things are very different this time around. The "New Normal" is definitely new and is anything but normal.

If we are destined for an extended period of "range-bound" economic growth as I believe, that very likely means an extended broad trading rage in stocks, and probably bonds as well. All of this suggests, more than ever, that you need some alternative investment strategies that can move among different market sectors and can move to the safety of cash (or hedge long positions) when market conditions turn ugly.

If you agree, you know where to find us: 800-348-3601 or www.halbertwealth.com.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

The Squandered Stimulus
http://www.realclearpolitics.com/articles/2009/07/20/the_squandered_stimulus.html

Obama's Summer of Discontent
http://www.commentarymagazine.com/viewarticle.cfm/obama-s-summer-of-discontent-15208

Why Toxic Assets Are So Hard to Clean Up
http://online.wsj.com/article/SB124804469056163533.html

Cap-and-Trade: Bad For The Economy & Us

Gary D. Halbert — Tue, 14 Jul 2009 19:47:07 GMT

IN THIS ISSUE:

The House of Representatives Cap & Trade Bill
EPA Suppresses Contradictory Global Warming Study
Senate Delays Deliberation On Cap-and-Trade
Conclusions - Why Is Obama Doing This?

Introduction

On June 26, the Democrat-controlled House narrowly passed sweeping legislation that calls for the government's first limits and taxes on carbon emissions, the so-called "Cap-and-Trade" bill that President Obama has insisted on. Experts on both sides of the issue, including President Obama, agree that Cap-and-Trade will result in higher energy prices, and that means higher prices for fuel, home heating and cooling and many other things we buy from food to cars to movie tickets, etc., etc.

The Cap-and-Trade bill passed by the House (219-212), while bad enough on its own, unfortunately contained a very onerous last-minute provision that calls for a tariff on imported goods from other countries that do not adopt similar cap-and-trade policies of their own. Even Obama opposed this tariff provision, but the Democrats (and eight Republicans) passed it anyway.

China, India and other large trading partners have no interest in adopting cap-and-trade. Therefore, the US Cap & Trade bill, if passed with the foreign tariff provision by the Senate, will almost certainly result in a global trade war. Some have called it the Smoot-Hawley bill of the 21st century if the tariff provision stays in. It remains to be seen if the Senate will also pass the bill over the next few weeks, which as of this writing seems doubtful, but who knows as Obama fights hard to see it become a reality.

The reason I chose to write about Cap-and-Trade again is the fact that news has escaped in the last two weeks that a recent Environmental Protection Agency (EPA) study found that global warming may NOT be happening at all, and that global temperatures have in fact been falling slightly over the last 11 years. Most importantly, this major study was buried by the EPA until its primary author went public with the information in late June.

While this aspect of the Cap-and-Trade bill may or may not get a lot of attention in the media just ahead, it is important for my readers to understand what is really going on in this sweeping legislation. The bottom line is, it is all about intrusive government control of our lives, from what cars we can drive to how much energy we can use in our homes and businesses. It is not about carbon emissions or global warming (if it exists). It's about expanding government and indirectly raising our taxes.

I'm quite sure that our more liberal readers and Obama supporters are ready to hit the "delete" button about now, if they haven't already. But I encourage everyone to read on, even if you think cap-and-trade is a good idea. If it is such a good idea, then why did the EPA bury a major study which concludes that global warming may not be happening, and that regulating carbon emissions is not needed? I'm certainly curious, and maybe you should be too.

The House of Representatives Cap & Trade Bill

On June 26, the House of Representatives narrowly passed H.R. 2998, the American Clean Energy and Security Act of 2009, by a vote of 219 to 212 with eight Republicans voting for it and 44 Democrats voting against it. The complex, 1,000+ page bill mandates a 17% cut in greenhouse gas emissions by 2020 and an 83% cut by 2050, reductions that will be accomplished by putting a price on carbon dioxide through a cap-and-trade system. It mandates that at least 20% of electricity comes from renewable sources and increased energy efficiency by 2020.

Basically, cap-and-trade works as follows. The government sets a limit or a "cap" on the amount of carbon dioxide (CO2) and other so-called "greenhouse gases" that can be emitted nationally. Companies and other groups that emit such gases are issued emission permits set by the government and are required to hold an equivalent number of "allowances" (or credits) which represent the right to emit a specific amount. Most importantly, those that emit these gases will have to pay for these allowances every year.

The total amount of allowances issued cannot exceed the government-determined cap, limiting total emissions to that level. Companies that need to increase their emission allowance must buy credits from those who pollute less. The sale and transfer of allowances is referred to as "trade." The theory is that those who emit less than their cap will be rewarded by selling their excess allowances to those who emit more, who will in turn have a monetary incentive to emit less over time. They will have to in any event, because the national "cap" goes down over time.

The foundational premise of cap-and-trade is that energy prices will rise, most likely significantly, as companies are forced to buy permits while at the same time they will be spending large amounts of money to substantially upgrade their systems to emit less greenhouse gases.

These added costs will no doubt be passed on to consumers. Since just about everything we use has some energy component to it, we will very likely see the prices of just about everything go up if cap-and-trade is also passed by the Senate.

Peter Orszag, now Mr. Obama's budget director, told Congress last year that "Those [energy] price increases are essential to the success of a cap-and-trade program." Earlier this year President Obama confirmed this when he said that under his cap-and-trade plan, "electricity rates would necessarily skyrocket." They're admitting it!

While proponents of the Cap-and-Trade bill argue that the costs of such a system would be negligible, nothing could be further from the truth. In fact, by raising the cost of energy significantly, the bill indirectly leads to a massive and highly regressive tax on US consumers. Putting a price on carbon emissions is regressive by definition because poor and middle-income households spend more of their paychecks on things like gasoline to drive to work, groceries and home heating/cooling.

Proponents of cap-and-trade, including President Obama, also argue that it will result in millions of new "green" jobs for Americans. Yet if the price of energy goes up by 15-20% (or potentially much more) permanently, that will mean a serious drag on the economy and could potentially cause extensive business failures and higher unemployment than we have even now.

To understand this, let's look at the numbers the government has admitted to. According to a report issued by the Environmental Protection Agency in April, by 2015 the price of carbon emission allowances required by the bill for industries to operate could be expected to run between $13 and $17 per ton of CO2 emitted annually. [I should note that the EPA is pushing hard for cap-and-trade (more on this later), so these estimates could be considerably low.]

Even the usually moderate Roll Call (Mort Kondracke's publication) is firmly opposed to cap-and-trade, and on June 25 posted the following very good analysis of the EPA's April assessment of cap-and-trade.

"The United States emits about 9 billion tons of CO2 per year. Therefore, at a rate of $15/ton fee for emission indulgences, the bill would impose a tax of $135 billion per year on the nation. Divided by the U.S. population of 300 million, that works out to a cost of $450 per year levied on every American man, woman or child, or $1,800 [per year] for a family of four. While for wealthy individuals like Al Gore such an impost [tax] might represent a mere pittance; for working families struggling hard to make ends meet it would be a very significant burden. [Emphasis added, GDH.]

But that is not even the worst part of it. As a result of the markup of carbon costs, a lot of those working families will be out of work and unable to pay their existing bills, let alone new ones. Consider: Burning one ton of coal produces about three tons of CO2. So a tax of $15 per ton of CO2 emitted is equivalent to a tax of $45/ton on coal… Coal provides half of America's electricity, so such extraordinary imposts [taxes] could easily double the electric bills paid by consumers and businesses across half the nation. In addition, many businesses, such as the metals and chemical industries, use a great deal of coal directly. By doubling or potentially even quadrupling the cost of their most basic feedstock, the cap-and-trade system's indulgence fees could make many such businesses uncompetitive and ultimately throw millions of working men and women onto the unemployment lines. [Emphasis added, GDH.]

A gallon of petroleum-derived liquid fuel produces about 20 pounds, or 1 percent of a ton, of CO2 when burned. But it takes about 1.5 gallons of oil to produce one gallon of refined liquid fuel. So a $15/ton tax on CO2 emissions will also cause an increase in the price of gasoline, diesel and jet fuel on the order of $0.22/gallon [others put the added cost at 77 cents per gallon]. This will not only hit consumers' pockets, but increase transport costs throughout the economy, thereby disabling businesses and increasing unemployment levels still more. While harming the economy, such a gas tax will do nothing material toward the truly essential goal of decreasing America's dependence on foreign oil.

Indeed, the bill's dramatic hikes in electricity costs will have the opposite effect, since only 3 percent of America's electricity is derived from oil, and by forcefully increasing electric power costs, the bill will actually discourage adoption of electric means of transport, including mass-transit systems today and potentially plug-in hybrid cars in the future…

But all these bad aspects of the Waxman-Markey [cap-and-trade] bill pale before its potential impact on the world's food supply. America's agricultural sector is one of the greatest success stories in human history. In 1930, hunger still stalked the entire globe. Not just in Africa, India and China, but even in Europe and America, the struggle to simply get enough food to live on still preoccupied billions of people. Since 1930, the world population has tripled. But instead of going hungrier, people nearly everywhere are now eating much better.

This miracle is the work of American farmers, who have not only produced huge surpluses to feed the world, but used the income gained from such good work to pioneer ever more advanced techniques that have enabled farmers everywhere to grow more. This progress is still continuing… But this miracle depends upon the availability of cheap fertilizer and pesticides, which in turn require carbon-based process energy to produce. If you tax carbon, you tax fertilizer and pesticides.

If you tax these things, you tax food, and by no small amount. A $15/ton CO2 tax would increase fertilizer production costs directly by about $60/ton, with the cap-and-trade bill's increased transport costs inflating the burden still more. That's enough to make many farmers use less fertilizer, and less fertilizer means less food [and much higher prices]. But to impose such costs for basic groceries on everyone else, and particularly the poor, as part of a largely symbolic effort to try to change the weather, is self-indulgent in the extreme.

In the 220 years of our republic, there may have been worse pieces of legislation enacted by Congress than the Waxman-Markey bill, but none readily comes to mind. The Senate needs to take a stand and stop this disastrous act from passing into law."

As you can easily see, cap-and-trade has enormous US and global implications, yet most Americans have little or no idea how disastrous cap-and-trade will be. It doesn't take an economist to see that placing a significant cost on US companies that emit greenhouse gases, while most of the rest of the world has no such tax, will be very bad for the economy.

The House Democrats' idea to impose an import tariff on foreign countries that do not enact similar measures to control their own greenhouse gas emissions is ludicrous in the first place and would lead to a potentially serious trade war in the years ahead. Hopefully, the Senate will remove that provision as President Obama has wisely requested. Better yet, the Senate does not pass Cap-and-Trade at all (more on this later).

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.

EPA Suppresses Contradictory Global Warming Study

In the last full week of June, the Environmental Protection Agency was accused of suppressing an internal report that was skeptical of claims about global warming, including whether carbon dioxide should be strictly regulated by the federal government, according to a series of newly disclosed EPA e-mail messages.

In mid-March, less than two weeks before the agency formally submitted its pro-regulation [cap-and-trade] recommendation to the White House, an EPA center director quashed a 98-page report that warned against making hasty "decisions based on a scientific hypothesis [global warming] that does not appear to explain most of the available data." A copy of this report was subsequently obtained by the Competitive Enterprise Institute and was posted on its website on June 25.

In a nutshell, the 98-page report questioned the long-held EPA theory that man-made greenhouse gases are a cause of global warming, and further suggested that global warming may not be happening at all. The 38-year veteran EPA researcher, Alan Carlin, pointed out in his report that global temperatures peaked in 1998 and have been falling modestly ever since. The report also suggested that cap-and-trade regulation was not needed, and probably would have little overall effect on global temperatures.

The EPA center director, Al McGartland, said in an e-mail message to Carlin on March 17: "The [EPA] administrator and the [Obama] administration has decided to move forward...and your comments do not help the legal or policy case for this decision."

Alan Carlin, the primary author of the 98-page EPA report, said in a telephone interview with CBS News.com on June 26 that his boss, McGartland, was being pressured himself. "It was his view that he either lost his job or he got me working on something else," Carlin said. "That was obviously coming from higher levels."

E-mail messages released in late June show that McGartland ordered Carlin not to "have any direct communication" with anyone outside his small group at EPA on the topic of climate change, and was informed that his report would not be shared with the agency group working on the topic of global warming.

"I was told for probably the first time in I don't know how many years exactly what I was to work on," Carlin told CBSNews.com. "And it was not to work on climate change." One e-mail orders him to update a grants database instead.

After reviewing the scientific literature that the EPA is relying on, Carlin said, he concluded that it was at least three years out of date and did not reflect the latest research. "My personal view is that there is not currently any reason to regulate [carbon dioxide]," he said. "There may be in the future, but global temperatures are roughly where they were in the mid-20th century. They're not going up, and if anything they're going down."

Carlin's report listed a number of recent developments he said the EPA did not consider, including: that global temperatures have declined for 11 years; that new research predicts Atlantic hurricanes will be unaffected; that there's "little evidence" that Greenland is shedding ice at increasing levels; and that solar radiation has the largest single effect on the earth's temperature.

If there is a need for the government to lower planetary temperatures, Carlin believes, other mechanisms would be cheaper and more effective than regulation of carbon dioxide. One paper he wrote says managing sea level rise or reducing solar radiation reaching the earth would be more cost-effective alternatives.

To their credit, the editors at CBSNews.com published the results of their interview with Alan Carlin on their website on June 26 at 11:09 PM, not exactly prime-time, but at least they published it. And the editors went so far as to conclude: "The EPA's possible suppression of Carlin's report, which lists the EPA's John Davidson as a co-author, could endanger any carbon dioxide regulations if they are eventually challenged in court."

Wow! Unfortunately, few others in the mainstream media have touched this story.

There is a lot of other juicy info on this EPA suppression matter in the CBS story, but space does not permit me to elaborate. I have a link to the full CBSNews.com story in SPECIAL ARTICLES below. Be sure to read it.

Senate Delays Deliberation On Cap-and-Trade

As discussed above, the Cap-and Trade bill barely passed in the House of Representatives with a narrow margin (219-212) made possible only because eight Republicans joined in voting yes (44 Democrats voted no). Thus, politicos on both sides know that the measure will be even harder to pass in the Senate. In fact, given the political makeup of the Senate, Cap-and-Trade definitely faces an uphill battle, especially in light of the suppressed EPA report noted just above.

Knowing that he did not assuredly have the votes to pass Cap-and-Trade, Senate Majority Leader Harry Reid acknowledged last Thursday that the Senate would delay any further work on the sweeping energy legislation until after the August recess. Senate Environment and Public Works Committee Chairwoman Barbara Boxer (D-CA) announced that she was pushing back her self-imposed deadline to pass cap-and-trade legislation that squeaked through the House in late June. Boxer said senators would take up the legislation "as soon as we get back" from the August recess.

It will be interesting to see if that actually happens given the public backlash to Cap-and-Trade that is growing in the wake of the EPA cover-up story noted above. While Senator Boxer noted that the delay was no indication that the climate bill faces troubles in the Senate, it is clear that the Democrats do not have the votes to pass the increasingly controversial Cap-and-Trade bill at this time.

The Obama administration obviously recognized this as well in light of the very narrow passage of Cap-and-Trade in the House in the last week of June and the repercussions from the EPA story. As a result, the president abruptly shifted his number one priority from Cap-and-Trade to his healthcare reform agenda.

Senator Boxer admitted late last week that the latest intense focus on healthcare by Obama has detracted from her ability to craft a climate change bill to complement the House bill. She said, "A lot of our colleagues are on the health committee. It's been difficult." Thank goodness! Let's hope and pray that the Senate does not pass Obama's onerous Cap-and-Trade bill.

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

Conclusions - Why Is Obama Doing This?

The more we learn about President Obama's Cap-and-Trade program, the more there is not to like about it. Several facts are now very clear:

1. If Cap-and-Trade is passed, the government will set a national "cap" on so-called "greenhouse gas" emissions, and that cap will be reduced every year thereafter. This will be a serious drag on the economy, no doubt about it.

2. A massive new government bureaucracy will have to be instituted to formulate, regulate and oversee this latest pervasive intrusion into the private sector. Bureaucrats will be the ones dictating how businesses that emit greenhouse gases run their operations.

3. All companies and groups that emit greenhouse gasses will also have a "cap" set by the government on their greenhouse gas emissions, and will be taxed annually on every ton of such gases they emit at a rate of $13-$17 as suggested by the EPA (but almost certainly will be significantly higher).

4. President Obama, his budget director and others in his administration have stated publicly that Cap-and-Trade will result in significantly higher energy prices, but maintain that we have to do it in the name of climate change, even though the result on global temperatures will be negligible (if any) unless countries like China, India and others also sign on - which they won't.

5. Almost everything we consume has an energy component to it - not just fuel for our cars, trucks, buses, trains and airplanes - but also the food we eat, and virtually everything we buy, directly or indirectly. Prices for virtually everything we buy will go up with Cap-and-Trade.

6. President Obama promises that Cap-and-Trade will mean millions of new "green" jobs in new energy efficient industries. Maybe so, maybe not. But one thing is for sure - taxing carbon emissions on tens of millions of US businesses will reduce their competitiveness with foreign companies that face no such carbon taxes. Millions more US jobs are likely to be lost.

At the end of the day, we are left with the same old question I have asked often over the last six months: "Why is he doing this?" No one doubts that President Obama is a very smart man and has a lot of supposedly smart people surrounding him. They are clearly aware of all the facts I have noted above regarding Cap-and-Trade.

As I noted in the Introduction, this is all about intrusive government control of our lives, from what cars we can drive to how much energy we can use in our homes and businesses and much, much more. It is not really about carbon emissions or global warming (if it exists). It's about expanding government and indirectly raising taxes for everyone, not just the "rich."

As for raising taxes on the rich, the Obama administration has figured out that they can't just raise taxes on the rich to pay for his trillions in lavish government spending. That is precisely why you're hearing increasing talk of a Value-Added Tax that will further hike the prices of everything we buy, in addition to Cap-and-Trade. But that is a story for another E-Letter.

Finally, a note to those that always criticize me for occasionally devoting these pages to political issues. If you don't think such political issues such as Cap-and-Trade relate to markets and investing, consider the following. If Obama is successful in getting his onerous Cap-and-Trade bill passed, it will be very good for the commodity funds I manage, since commodity prices will see another big bull market as prices across-the-board will rise substantially in the years to come.

Yet these same price increases will be bearish long-term for the economy, and for stock and bond prices, that presumably most of my readers are counting on for their retirement. Think about it. As always, I appreciate your comments (pro or con) and suggestions.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

CBSNews.com: EPA May Have Suppressed Report Skeptical Of Global Warming
http://www.cbsnews.com/blogs/2009/06/26/politics/politicalhotsheet/entry5117890.shtml

Warming Hysteria [is] Road to Economic Ruin (excellent article)
http://www.telegraph.co.uk/comment/columnists/christopherbooker/5804831/Climate-change-The-sun-and-the-oceans-do-not-lie.html

Obama Rewrites the Cold War (in Moscow)
http://online.wsj.com/article/SB124744075427029805.html