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Pie in the Sky – John Browne Commentary January 27, 2011

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Pie in the Sky

By John Browne

Following the huge gains made by Republicans in the midterm elections, it was widely expected that President Obama would use the State of the Union address to signal a major policy shift toward the center of the political spectrum. On the surface, at least, he appeared to do just that, hinting that he took budget management very seriously and that Americans should be prepared for shared sacrifice. However, as the final applause still echoed in the House chamber, many astute pundits were left trying to make sense of the many contradictory policy prescriptions the President proffered.

Classical political maneuvering dictates that when clouds are grey, politicians must offer good news, tell jokes, and remind us warmly of our childhood (or in Obama’s version, America’s triumph over Russia in the Space Race). Disclosure of specific measures should be avoided at all costs. President Obama followed these tactics closely.

While he did address plans to cut non-defence, discretionary federal spending – a small fraction of the overall budget – the President also announced his intention to increase spending on several existing and new initiatives. The scope of the new initiatives will surely eclipse the modest cuts pledged.

The President was careful to refer to all his spending plans as “investments.” The word is used in order to illicit a pleasant feeling among voters who instinctively favor capitalism over socialism, not because any thinking person expects these resources to be better allocated than they would have been by the market. Governments don’t make investments because they aren’t subject to profit-and-loss feedback. Governments provide public goods for which no profit can be measured or expected – or else we would just have the private sector take care of it. This disingenuous use of the word investment disguises the fact that the President simply intends to borrow even more money to spend on public-sector jobs.

The essential point is that while jobs in the private sector create wealth, public sector jobs actually consume wealth. When I was a Member of the British Parliament, I represented a county that spent the least amount per pupil on education of anywhere in the entire country. Yet, the achievement level of the students was by far the highest. It was vivid proof that it is not the amount of money that is crucial to success, but the quality of the spending. If the President were to lower taxation, cut the number of government regulations, and replace a political atmosphere of uncertainty with one of certainty, he might stand a chance of reviving wealth creation.

More seriously, the President made no mention of the massive debt problems facing US state governments, such as California and Illinois. The potential eruption of these debt and currency problems could well dominate investment strategies for 2011.

Yesterday, the Congressional Budget Office issued a highly embarrassing assessment that the federal deficit for 2011 would rise from the previously projected $1.1 trillion to $1.48 trillion. At a stroke, this nullified the President’s debt reduction plans. The CBO also pointed out that Social Security posted a $45 billion deficit in 2010 and will bleed more than $600 billion over the next ten years. I assume these estimates to be conservative. It is clear that the President, and the rest of Congress for that matter (with the possible exception of Congressman Paul Ryan whose austere recommendations have been ignored by most of his fellow Republicans), are dancing around the bonfire of our sovereign credit and hoping that their twirls will distract us from the conflagration.

Also yesterday, the Federal Reserve’s policy statement claimed that its massive stimulus plans are working, and that it will maintain both QE II and near-zero rates well into 2011. If the economy were indeed improving, as Messrs. Bernanke and Obama claim, why would the Fed and the Treasury need to keep administering life support? Clearly the White House and the Fed have little confidence in their own assertions; so, how should average investors react to more promises which are highly unlikely to be kept?

Rather than buying into Washington’s scripted recovery propaganda, investors should focus on the bottom line. Low interest rates are distorting the value of money and the key investment relationship between risk and reward. One side effect is that investors are being incentivized to favor equities over fixed income. A lack of viable alternatives has likely played an unsung role in supporting the current stock market rally.

Investors would be well-advised to retain a jaundiced view of all political statements, especially those of central bankers and politicians positioning themselves for the next election. In 2011, investors should focus their eyes not on the sky, but at the brick wall our Union is fast approaching.

John Browne is a Senior Market Strategist at Euro-Pacific Capital. He’s been a member of English Parliament, an advisor to Prime Minister Margaret Thatcher, and currently serves as Lead Panelist for The Mangru Report. You can view all of his commentaries by CLICKING HERE NOW.

Dr. Larry Kotlikoff Interview with Dan Mangru – The Mangru Report on Fox Business October 9, 2010

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As the debate goes on as to whether the U.S. banking system is stable and secure, Boston University Professor of Economics Dr. Larry Kotiikoff is proposing new solutions to change the way that we bank in his new book, “Jimmy Stewart is Dead”.  Watch Kotlikoff and Dan Mangru discuss limited purpose banking, how it can be implemented in our current system, how the government is exacerbating the problem, and how much money we really owe in debt and obligations.

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A Candid Appraisal of the Recovery – John Browne Commentary October 1, 2010

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A Candid Appraisal of the Recovery

By John Browne

Over the last two weeks, seemingly good economic news offered some shreds of optimism to a stock market that was desperate for a pick-me-up.

The week before last, the National Bureau of Economic Research declared that the US recession had ended back in June 2009. At the beginning of last week, news came in that month-on-month retail sales had risen by 0.4 percent. Combined with successful government debt auctions in the eurozone, increasing expectations that Republicans will take back the House (thereby blunting the leftward drift of Washington), and hopes that a new round of quantitative easing will pump up growth, mainstream analysts are developing a feeling of near-euphoria.

Although it hard to begrudge the punch drunk for grasping at a little hope, investing is a dispassionate endeavor that calls for close and realistic analysis. In that spirit, let’s dig deeper into the recent ‘good news.’

First, the single month’s rise in retail sales was a blip on what has been a long-term downtrend. Furthermore, retail sales in August typically get a large boost from seasonal ‘back to school’ spending. This year, retail sales were boosted further by temporary tax incentives and vendor discounts.

Second, the successful auction of debt from worrisome eurozone countries, like Ireland, only served to further camouflage the ongoing risk of sovereign default by these states. None of them have committed to a comprehensive program of austerity and market liberalization – Ireland maintains a ‘too big to fail’ doctrine while Greece is on the verge of riots from its so-far modest efforts at privatization. None of the PIIGS would have had successful bond sales if Germany hadn’t been pressured into becoming a ‘sovereign of last resort’ for the whole currency area.

Apart from health of the weakest nations, a more important issue is understanding how sovereign debt is analyzed by investors in the first place. Those who consider buying government debt have for many years relied on backward-looking measurements such as debt-to-GDP to analyze the investment quality.

But that’s only half the picture, and oftentimes it’s even less than that. It does not include off-balance sheet items such as unfunded pensions, social security payments, or health obligations. For the US, I estimate this total debt amounts to some $134 trillion – nearly ten times the ‘official’ figure.

On a deeper level, using the public debt-to-GDP ratio to assess sovereign solvency implies that governments have access to the entire annual production of their economies. In reality, they have access only to that portion which is taxable. As taxes increase, there are natural limits imposed by increasing inefficiency and avoidance behaviors. Therefore, ‘net GDP,’ the portion available to the government for debt service, is significantly smaller than the gross GDP of the nation.

With real government debts, including off-balance sheet items, far larger than officially recognized and net GDPs far smaller that top-line GDP, the solvency of many sovereigns should be considered dubious at best.

For example, the debt-to-GDP ratio of the United States is currently 65 percent, which puts the country towards the solvent end of the debt spectrum among developed Western nations. However, the real debt-to-net GDP ratio is a staggering 358 percent, making the US the most insolvent nation in the group, behind even Greece!

In the interest of brevity, I will only touch on the fact that the above number is actually still an underestimate. It does not account for the portion of gross GDP claimed by state and municipal governments to service their debts. After all, all levels of government tax the same base. So, the effective portion of GDP available to the US federal government is even smaller still.

The third problem with the late round of ‘good news’ is that while a GOP sweep of House races looks likely, it is unlikely to make a large impact on policy. It is doubtful that the small number of freshman GOP Representatives will be able to win over their more mature, big government-minded colleagues. Any pending GOP ‘small government’ revolution will be heavy on talk and short on accomplishments.

It should come as no surprise that the Republicans’ “Pledge to America” lacked specific commitments for cost-cutting. Republicans are terrified of becoming the party of austerity, and the next Republican President will want to avoid being seen as ‘Hoover 2.0’. Therefore, any structural changes will come slowly – and perhaps too late.

Finally, whatever actions the Fed takes in the name of further stimulus will have the same unintended consequences as all previous stimulus efforts. Long-term sustainability will be sacrificed in favor of a short-term boom. Since World War II, the underlying strength of the US economy has allowed the central bank to get away with this strategy, as the economy simply outgrew the inefficiencies caused by monetary manipulation. But what happens when we are in a period of secular decline?

So we see that Wall Street is again playing the part of Pangloss. Unfortunately, their purported inklings of a renewed rally in the US markets do not stand up to candid appraisal.

John Browne is the Senior Market Strategist for Euro-Pacific Capital and a featured panelist on The Mangru Report on Fox Business.  To view his previous commentaries please click here.

Bert Dohmen Freedom Fest 2010 Interview – The Mangru Report on Fox Business September 22, 2010

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After a long wait, it’s finally here online, Bert Dohmen’s exclusive interview with Dan Mangru from Freedom Fest 2010 in Las Vegas.  In this interview, Dohmen discusses the prospects of a V-shaped recovery or whether the United States is headed for what George Soros calls “Act II of the Crisis”.  He also shares his views on the financial reform bill, a Chinese bubble, and whether the U.S. can save China if it goes under.  Bert Dohmen is the founder of the Dohmen Capital Research Institute and the author of the award winning Wellington Letter.

Even The French Get It – Dan Mangru & Jim Rogers in French Moneyweek Magazine July 12, 2010

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While mainstream media continues to ignore the municipal debt problem here in America, the world is slowly realizing the silent killer that is brewing.

In the latest issue of the popular French magazine MoneyWeek, Dan Mangru and Jim Rogers are mentioned in a scathing article regarding Los Angeles’ municipal debt problem.

In Dan Mangru’s most recent interview with Jim Rogers, they discussed the impending municipal debt crisis and how a municipal default could trigger another massive bailout or worldwide economic depression.  To watch the most recent interview between Dan Mangru and Jim Rogers please see below.

It’s No Big Deal, You Only Owe $123,636 – Dan Mangru WND (WorldNetDaily) Commentary June 15, 2010

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It’s no big deal, you only owe $123,636

by Dan Mangru

On a warm D.C. Friday evening, our pals over at the U.S. Treasury, led by our revered Treasury Secretary Tim Geithner, put out a little report that they didn’t want you to see. After all, who’s looking for news on a Friday night?

In that little report, they just happened to mention that U.S. debt will rise to at most $13.6 trillion (as if the government has never underestimated a time or two).

For all of you 110 million taxpaying Americans, that’s $123,636 each, and that’s probably just the low estimate.

But it gets even better. By 2015, based on our current path of spending, out debt will be a paltry $19.6 trillion.

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For those keeping score, that’s $178,181 for each taxpaying American, assuming that there are 110 million taxpaying Americans by 2015.

You see, our buddies in Washington, D.C., named Obama, Biden and Geithner want as few Americans as possible paying taxes.

Currently 47 percent of taxpayer-eligible Americans do not pay income taxes and that number is rising steadily.

So, let’s say if that number creeps up and only 100 million Americans are paying taxes, then each taxpayer will have a bill of $196,000 even. Considering this is the federal government we are talking about let’s just round it up to an even $200k.

For most taxpaying Americans, this means that you will owe more than what you take in during any given year, which sounds about right considering that by 2015 our debt will be 102 percent of our GDP, meaning that we will owe more than what we collect.

(Editor’s Note: To read the entire article please CLICK HERE NOW.)

Martin Weiss To Appear on The Mangru Report this Saturday and Sunday May 28, 2010

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Be sure to catch contrarian investing guru and the Founder of Weiss Ratings, Dr. Martin Weiss, in his exclusive in-studio one-on-one with Dan Mangru of The Mangru Report.  During the interview, Dr. Weiss, who also chairs the Sound Dollar Committee, shares insights that you won’t find anywhere else on television.  Dr. Weiss goes beyond the rhetoric to explain why the U.S. should have its credit rating reevaluated, why the major rating agencies (Moody’s, Fitch, and S&P) have failed all investors, the dangers of being involved in a bank failure, and how sovereign nations can get their fiscal house in order.

This is definitely an interview you don’t want to miss.  You can watch it this Saturday May 29 and Sunday May 30 at 5:30 p.m. on Fox Business Network.  Also appearing on the show will be Ambrose Evans-Pritchard, International Business Editor of The London Daily Telegraph.

Also as a special feature, the entire unedited version of Dan Mangru’s interview with Martin Weiss will be made available at www.weissratings.com .

Taxation By Representation – The Mangru Report – Episode 4 May 28, 2010

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In this segment of The Mangru Report, Dan Mangru along with the Mangru Panel of Experts (Al Zucaro, Anthony Pulieri, and Nicholas Brack) discuss the recent Senate Banking committee vote to raise capital gains and dividend taxes, the laffer curve, inflation, Ronald Reagan, and Barack Obama, as well as hedge fund and Wall St. taxes.