My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

Don't Buy a House in 2011 Before You Read These 20 Wacky Statistics About the U.S. Real Estate Crisis

There will be more distressed home sales in the next few years that a smart investor can turn into a positive cash flow from rental real estate.  Houses with positive cash flow can be like high dividend stocks.  You get a steady stream of income from the rental of your property and you will own the home after the mortgage is paid off by the renters. 
 
This article below from the Economic Collapse blog reprinted at LewRockwell.com highlights 20 facts why there will be bargin houses to buy at low prices.
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.  Go to www.johnschaub.com to learn how to buy houses at low prices from distressed sellers to make money to fund your retirement.
 
Be seeing you!
 

Don’t Buy a House in 2011 Before You Read These 20 Wacky Statistics About The U.S. Real Estate Crisis

Economic Collapse Blog

 

   

Unless you have been asleep or hiding under a rock for the past five years, you already know that we are experiencing the worst real estate crisis that the U.S. has ever seen. Home prices in the United States have fallen 33 percent from the peak of the housing bubble, which is more than they fell during the Great Depression. Those that decided to buy a house in 2005 or 2006 are really hurting right now. Just think about it. Could you imagine paying off a $400,000 mortgage on a home that is now only worth $250,000? Millions of Americans are now living through that kind of financial hell. Sadly, most analysts expect U.S. home prices to go down even further. Despite the "best efforts" of those running our economy, unemployment is still rampant. The number of middle class jobs continues to decline year after year, but it takes at least a middle class income to buy a decent home. In addition, financial institutions have really tightened up lending standards and have made it much more difficult to get home loans. Back during the wild days of the housing bubble, the family cat could get a zero-down mortgage, but today the pendulum has swung very far in the other direction and now it is really, really tough to get a home loan. Meanwhile, the number of foreclosures and distressed properties continues to soar. So with a ton of homes on the market and not a lot of buyers the power is firmly in the hands of those looking to buy a house.

So will home prices continue to go down? Possibly. But they won't go down forever. At some point the inflation that is already affecting many other segments of the economy will affect home prices as well. That doesn't mean that it will be middle class American families that will be buying up all the homes. An increasing percentage of homes are being purchased by investors or by foreigners. There are a lot of really beautiful homes in the United States, and wealthy people from all over the globe love to buy a house in America.

But because of the factors mentioned above, it is quite possible that U.S. home prices could go down another 10 or 20 percent, especially if the economy gets worse.

So what is the right time to buy a house?

Nobody really knows for sure.

Mortgage rates are near record lows right now and there are some great deals to be had in many areas of the country. But that does not mean that you won't be able to get the same home for even less 6 months or a year from now.

In any event, this truly has been a really trying time for the U.S. housing market. Hordes of builders, construction workers, contractors, real estate agents and mortgage professionals have been put out of work by this downturn. The housing industry is one of the core pillars of the economy, and so a recovery in home sales is desperately needed.

The following are 20 really wacky statistics about the U.S. real estate crisis....

#1 According to Zillow, 28.4 percent of all single-family homes with a mortgage in the United States are now underwater.

#2 Zillow has also announced that the average price of a home in the U.S. is about 8 percent lower than it was a year ago and that it continues to fall about 1 percent a month.

#3 U.S. home prices have now fallen a whopping 33% from where they were at during the peak of the housing bubble.

#4 During the first quarter of 2011, home values declined at the fastest rate since late 2008.

#5 According to Zillow, more than 55 percent of all single-family homes with a mortgage in Atlanta have negative equity and more than 68 percent of all single-family homes with a mortgage in Phoenix have negative equity.

#6 U.S. home values have fallen an astounding 6.3 trillion dollars since the housing crisis first began.

#7 In February, U.S. housing starts experienced their largest decline in 27 years.

#8 New home sales in the United States are now down 80% from the peak in July 2005.

#9 Historically, the percentage of residential mortgages in foreclosure in the United States has tended to hover between 1 and 1.5 percent. Today, it is up around 4.5 percent.

#10 According to RealtyTrac, foreclosure filings in the United States are projected to increase by another 20 percent in 2011.

#11 It is estimated that 25% of all mortgages in Miami-Dade County are "in serious distress and headed for either foreclosure or short sale".

#12 Two years ago, the average U.S. homeowner that was being foreclosed upon had not made a mortgage payment in 11 months. Today, the average U.S. homeowner that is being foreclosed upon has not made a mortgage payment in 17 months.

#13 Sales of foreclosed homes now represent an all-time record 23.7% of the market.

#14 4.5 million home loans are now either in some stage of foreclosure or are at least 90 days delinquent.

#15 According to the Mortgage Bankers Association, at least 8 million Americans are currently at least one month behind on their mortgage payments.

#16 In September 2008, 33 percent of Americans knew someone who had been foreclosed upon or who was facing the threat of foreclosure. Today that number has risen to 48 percent.

#17 During the first quarter of 2011, less new homes were sold in the U.S. than in any three month period ever recorded.

#18 According to a recent census report, 13% of all homes in the United States are currently sitting empty.

#19 In 1996, 89 percent of Americans believed that it was better to own a home than to rent one. Today that number has fallen to 63 percent.

#20 According to Zillow, the United States has been in a "housing recession" for 57 straight months without an end in sight.

So should we be confident that the folks in charge are doing everything that they can to turn all of this around?

Sadly, the truth is that our "authorities" really do not know what they are doing. The following is what Fed Chairman Ben Bernanke had to say about the housing market back in 2006....

"Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise."

Since that time U.S. housing prices have experienced their biggest decline ever.

At some point widespread inflation is going to reverse the trend we are experiencing right now, but that doesn't mean that most American families will be able to afford to buy homes when that happens.

As I have written about previously, the middle class in America is shrinking. The number of Americans on food stamps has increased by 18 million over the past four years and today 47 million Americans (a new all-time record) are living in poverty.

Millions of our jobs are being shipped overseas, the cost of living keeps going up and an increasing percentage of American families are losing faith in the economy.

More Americans than ever are talking about "the coming economic collapse" as if it is a foregone conclusion. Our federal government is swamped with debt, our state and local governments are swamped with debt and our economic infrastructure is being ripped to shreds by globalization.

So sadly, no, there are not a whole lot of reasons to be optimistic at this point about a major economic turnaround.

The U.S. economy is going down the toilet and the coming collapse is going to be incredibly painful for all of us.

Hopefully when that collapse comes you will have somewhere warm and safe to call home. If not, hopefully someone will have compassion on you. In any event, we all need to buckle up because it is going to be a wild ride.

Reprinted with permission from the Economic Collapse Blog.

May 14, 2011

Human Freedom Rests on Gold Redeemable Money by Warren Buffett's Father

Human Freedom Rests on Gold Redeemable Money

by Hon. Howard Buffett
U.S. Congressman from Nebraska
The Commercial and Financial Chronicle 5/6/48

 

   

Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere.

But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty.

Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom.

In that case then certainly you and I as Americans should know the connection. We must find it even if money is a difficult and tricky subject. I suppose that if most people were asked for their views on money the almost universal answer would be that they didn't have enough of it.

In a free country the monetary unit rests upon a fixed foundation of gold or gold and silver independent of the ruling politicians. Our dollar was that kind of money before 1933. Under that system paper currency is redeemable for a certain weight of gold, at the free option and choice of the holder of paper money.

Redemption Right Insures Stability

That redemption right gives money a large degree of stability. The owner of such gold redeemable currency has economic independence. He can move around either within or without his country because his money holdings have accepted value anywhere.

For example, I hold here what is called a $20 gold piece. Before 1933, if you possessed paper money you could exchange it at your option for gold coin. This gold coin had a recognizable and definite value all over the world. It does so today. In most countries of the world this gold piece, if you have enough of them, will give you much independence. But today the ownership of such gold pieces as money in this country, Russia, and all divers other places is outlawed.

The subject of a Hitler or a Stalin is a serf by the mere fact that his money can be called in and depreciated at the whim of his rulers. That actually happened in Russia a few months ago, when the Russian people, holding cash, had to turn it in – 10 old rubles and receive back one new ruble.

I hold here a small packet of this second kind of money – printing press paper money – technically known as fiat money because its value is arbitrarily fixed by rulers or statute. The amount of this money in numerals is very large. This little packet amounts to CNC $680,000. It cost me $5 at regular exchange rates. I understand I got clipped on the deal. I could have gotten $2½ million if I had purchased in the black market. But you can readily see that this Chinese money, which is a fine grade of paper money, gives the individual who owns it no independence, because it has no redemptive value.

Under such conditions the individual citizen is deprived of freedom of movement. He is prevented from laying away purchasing power for the future. He becomes dependent upon the goodwill of the politicians for his daily bread. Unless he lives on land that will sustain him, freedom for him does not exist.

You have heard a lot of oratory on inflation from politicians in both parties. Actually that oratory and the inflation maneuvering around here are mostly sly efforts designed to lay the blame on the other party's doorstep. All our politicians regularly announce their intention to stop inflation. I believe I can show that until they move to restore your right to own gold that talk is hogwash.

Paper Systems End in Collapse

But first let me clear away a bit of underbrush. I will not take time to review the history of paper money experiments. So far as I can discover, paper money systems have always wound up with collapse and economic chaos.

Here somebody might like to interrupt and ask if we are not now on the gold standard. That is true, internationally, but not domestically. Even though there is a lot of gold buried down at Fort Knox, that gold is not subject to demand by American citizens. It could all be shipped out of this country without the people having any chance to prevent it. That is not probable in the near future, for a small trickle of gold is still coming in. But it can happen in the future. This gold is temporarily and theoretically partial security for our paper currency. But in reality it is not.

Also, currently, we are enjoying a large surplus in tax revenues, but this happy condition is only a phenomenon of postwar inflation and our global WPA. It cannot be relied upon as an accurate gauge of our financial condition. So we should disregard the current flush treasury in considering this problem.

From 1930-1946 your government went into the red every year and the debt steadily mounted. Various plans have been proposed to reverse this spiral of debt. One is that a fixed amount of tax revenue each year would go for debt reduction. Another is that Congress be prohibited by statute from appropriating more than anticipated revenues in peacetime. Still another is that 10% of the taxes be set aside each year for debt reduction.

All of these proposals look good. But they are unrealistic under our paper money system. They will not stand against postwar spending pressures. The accuracy of this conclusion has already been demonstrated.

The Budget and Paper Money

Under the streamlining Act passed by Congress in 1946, the Senate and the House were required to fix a maximum budget each year. In 1947 the Senate and the House could not reach an agreement on this maximum budget so that the law was ignored.

On March 4 this year the House and Senate agreed on a budget of $37½ billion. Appropriations already passed or on the docket will most certainly take expenditures past the $40 billion mark. The statute providing for a maximum budget has fallen by the wayside even in the first two years it has been operating and in a period of prosperity.

There is only one way that these spending pressures can be halted, and that is to restore the final decision on public spending to the producers of the nation. The producers of wealth – taxpayers – must regain their right to obtain gold in exchange for the fruits of their labor. This restoration would give the people the final say-so on governmental spending, and would enable wealth producers to control the issuance of paper money and bonds.

I do not ask you to accept this contention outright. But if you look at the political facts of life, I think you will agree that this action is the only genuine cure.

There is a parallel between business and politics which quickly illustrates the weakness in political control of money.

Each of you is in business to make profits. If your firm does not make profits, it goes out of business. If I were to bring a product to you and say, this item is splendid for your customers, but you would have to sell it without profit, or even at a loss that would put you out of business. – well, I would get thrown out of your office, perhaps politely, but certainly quickly. Your business must have profits.

In politics votes have a similar vital importance to an elected official. That situation is not ideal, but it exists, probably because generally no one gives up power willingly.

Perhaps you are right now saying to yourself: "That's just What I have always thought. The politicians are thinking of votes when they ought to think about the future of the country. What we need is a Congress with some 'guts.' If we elected a Congress with intestinal fortitude, it would stop the spending all right!"

I went to Washington with exactly that hope and belief. But I have had to discard it as unrealistic. Why?

Because an economy Congressman under our printingpress money system is in the position of a fireman running into a burning building with a hose that is not connected with the water plug. His courage may be commendable, but he is not hooked up right at the other end of the line. So it is now with a Congressman working for economy. There is no sustained hookup with the taxpayers to give him strength.

When the people's right to restrain public spending by demanding gold coin was taken from them, the automatic flow of strength from the grass-roots to enforce economy in Washington was disconnected. I'll come back to this later.

In January you heard the President's message to Congress. or at least you heard about it. It made Harry Hopkins, in memory, look like Old Scrooge himself. Truman's State of the Union message was "pie-in-thesky" for everybody except business. These promises were to be expected under our paper currency system. Why? Because his continuance in office depends upon pleasing a majority of the pressure groups.

Before you judge him too harshly for that performance, let us speculate on his thinking. Certainly he can persuade himself that the Republicans would do the same thing if they were In power. Already he has characterized our talk of economy as "just conversation." To date we have been proving him right. Neither the President nor the Republican Congress is under real compulsion to cut Federal spending. And so neither one does so, and the people are largely helpless.

But it was not always this way.

Before 1933 the people themselves had an effective way to demand economy. Before 1933, whenever the people became disturbed over Federal spending, they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington.

Raids on Treasury

That happened on various occasions and conditions sometimes became strained, but nothing occurred like the ultimate consequences of paper money inflation. Today Congress is constantly besieged by minority groups seeking benefits from the public treasury. Often these groups. control enough votes in many Congressional districts to change the outcome of elections. And so Congressmen find it difficult to persuade themselves not to give in to pressure groups. With no bad immediate consequence it becomes expedient to accede to a spending demand. The Treasury is seemingly inexhaustible. Besides the unorganized taxpayers back home may not notice this particular expenditure – and so it goes.

Let's take a quick look at just the payroll pressure elements. On June 30, 1932, there were 2,196,151 people receiving regular monthly checks from the Federal Treasury. On June 30, 1947, this number had risen to the fantastic total of 14,416,393 persons. This 14½ million figure does not include about 2 million receiving either unemployment benefits of soil conservation checks. However, It includes about 2 million GI's getting schooling or on-the-job-training. Excluding them, the total is about l2½ million or 500% more than in 1932. If each beneficiary accounted for four votes (and only half exhibited this payroll allegiance response) this group would account for 25 million votes, almost by itself enough votes to win any national election.

Besides these direct payroll voters, there are a large number of State, county and local employees whose compensation in part comes from Federal subsidies and grants-in-aid.

Then there are many other kinds of pressure groups. There are businesses that are being enriched by national defense spending and foreign handouts. These firms, because of the money they can spend on propaganda, may be the most dangerous of all.

If the Marshall Plan meant $100 million worth of profitable business for your firm, wouldn't you Invest a few thousands or so to successfully propagandize for the Marshall Plan? And if you were a foreign government, getting billions, perhaps you could persuade your prospective suppliers here to lend a hand in putting that deal through Congress.

Taxpayer the Forgotten Man

Far away from Congress is the real forgotten man, the taxpayer who foots the bill. He is in a different spot from the tax-eater or the business that makes millions from spending schemes. He cannot afford to spend his time trying to oppose Federal expenditures. He has to earn his own living and carry the burden of taxes as well.

But for most beneficiaries a Federal paycheck soon becomes vital in his life. He usually will spend his full energies if necessary to hang onto this income. The taxpayer is completely outmatched in such an unequal contest. Always heretofore he possessed an equalizer. If government finances weren't run according to his idea of soundness he had an individual right to protect himself by obtaining gold.

With a restoration of the gold standard, Congress would have to again resist handouts. That would work this way. If Congress seemed receptive to reckless spending schemes, depositors' demands over the country for gold would soon become serious. That alarm in turn would quickly be reflected in the halls of Congress. The legislators would learn from the banks back home and from the Treasury officials that confidence in the Treasury was endangered.

Congress would be forced to confront spending demands with firmness. The gold standard acted as a silent watchdog to prevent unlimited public spending. I have only briefly outlined the inability of Congress to resist spending pressures during periods of prosperity. What Congress would do when a depression comes is a question I leave to your imagination.

I have not time to portray the end of the road of all paper money experiments.

It is worse than just the high prices that you have heard about. Monetary chaos was followed in Germany by a Hitler; in Russia by all-out Bolshevism; and in other nations by more or less tyranny. It can take a nation to communism without external influences. Suppose the frugal savings of the humble people of America continue to deteriorate in the next 10 years as they have in the past 10 years? Some day the people will almost certainly flock to "a man on horseback" who says he will stop inflation by price-fixing, wage-fixing, and rationing. When currency loses its exchange value the processes of production and distribution are demoralized.

For example, we still have rent-fixing and rental housing remains a desperate situation.

For a long time shrewd people have been quietly hoarding tangibles in one way or another. Eventually, this individual movement into tangibles will become a general stampede unless corrective action comes soon.

Is Time Propitious

Most opponents of free coinage of gold admit that that restoration is essential, but claim the time is not propitious. Some argue that there would be a scramble for gold and our enormous gold reserves would soon be exhausted.

Actually this argument simply points up the case. If there is so little confidence in our currency that restoration of gold coin would cause our gold stocks to disappear, then we must act promptly.

The danger was recently highlighted by Mr. Allan Sproul, President of the Federal Reserve Bank of New York, who said:

"Without our support (the Federal Reserve System), under present conditions, almost any sale of government bonds, undertaken for whatever purpose, laudable or otherwise, would be likely to find an almost bottomless market on the first day support was withdrawn."

Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion. The paper money disease has been a pleasant habit thus far and will not he dropped voluntarily any more than a dope user will without a struggle give up narcotics. But in each case the end of the road is not a desirable prospect.

I can find no evidence to support a hope that our fiat paper money venture will fare better ultimately than such experiments in other lands. Because of our economic strength the paper money disease here may take many years to run its course.

But we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife. That was the way out for the paper-money economy of Hitler and others. In these remarks I have only touched the high points of this problem. I hope that I have given you enough information to challenge you to make a serious study of it.

I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it. Als o those elements here and abroad who are getting rich from the continued American inflation will oppose a return to sound money. You must be prepared to meet their opposition intelligently and vigorously. They have had 15 years of unbroken victory.

But, unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.

There is no more important challenge facing us than this issue – the restoration of your freedom to secure gold in exchange for the fruits of your labors.

Thanks to David Stockman for pointing this out to me. Ed.

May 14, 2011

Howard Buffett was an Old Right libertarian congressman and businessman from Omaha, Nebraska. One of his aides was Murray Rothbard. His son is the oligarch Warren.

Copyright © 1948 The Commercial and Financial Chronicle

 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

TIP OF THE WEEK - Why the dividend/earning yield ratio is better than the dividend payout ratio

Why the dividend/earning yield ratio is better than the dividend payout ratio

Jason Brizic

May 13, 2011

Rock solid high dividend stocks earn more than they payout in dividends year after year.  This ratio between earnings per share and dividends per share is commonly known as the dividend payout ratio.  A dividend payout ratio above 100% signals a possible dividend cut (especially the longer it stays above 100%).

The dividend payout ratio is nice but it only shows you the difference between the two numbers being compared.  There is another number that called the earnings yield that can be compared to the dividend yield.  Let’s compare three companies with some similar ratios.  Proctor & Gamble (dividend aristocrat) and Safe Bulkers have similar dividend payout ratios and div yield/earnings yield ratios, but much different dividend yields.  Safe Bulkers and WWE have high dividend yields, but very different ratios.

Proctor & Gamble (PG)

Safe Bulkers (SB)

World Wrestling Ent.(WWE)

Dividend/share

$2.10

$0.60

$1.44

Earnings/share

$4.32

$1.73

$0.72

Dividend Payout Ratio

48.6%

34.7%

200%

Dividend yield

3.0%

7.3%

13.9%

Earnings yield

5.7%

19.2%

4.8%

Div yld./Earning yld.

52.6%

38.0%

289%

It should be no surprise that WWE cut its dividend recently and now its dividend yield is in the 4-5% range.

You can use Morningstar.com to quickly find these yields.  Go to www.morningstar.com.  Type your stock ticker into the box at the top.  Then click on the Valuations tab.  Scroll down to the bottom of the page’s contents and you will see the dividend and earnings yields.  It looks like this:

Image002

I like to see double digit earnings yields with a slightly smaller dividend yield.  Safe Bulkers (SB) is a beautiful thing.  Click here to be taken right to the page:

http://financials.morningstar.com/valuation/price-ratio.html?t=SB

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

What to do when a high dividend stock attempts a significant acquistion of another company.

Keep away from high dividend stocks that you don't understand.  I started analysis on Exelon (EXC) before several merger and acquistion proposals were reported in the financial press.  Now I know that I'm not going to be able to understand the dividend record, earning power, or strength of balance sheet of the combined companies.
 
I thought that Exelon Corp was shaping up to be an excellent high dividend stock when I discovered it a few weeks ago, but then they decided to buy Constellation Energy Group (CEG).  I know little to nothing about CEG, so now I'm a bit hesitant to spend much time analyzing Exelon.  This is unfortunate because I wanted to analyze Exelon so my readers would have some good analysis of a high dividend utility stock.
 
What really irks me is that they need the permission of third-party bureaucrats to acquire another company.  If the CEG merger wasn't enough - now they are attempting another acquisition only this time much smaller.  Again, they need bureaucratic permission.    EXC doesn't expect to be granted approval until the third quarter of 2011.  This is more proof that I don't live in a free, capitalist country.
 
The company that Exelon seeks to merge with is doing its own acquisitions.  All of this makes analysis of Exelon not worth the effort.
 
I'm taking Exelon off my watch list until all this merger and acquisition occurs.  I will reevaluate the new company once they start paying dividends.  Stay away from high dividend stocks that are attempting to acquire one or more companies if you don't clearly understand how the new company will make profits and their capitalization structure.  You might have to sell one of your high dividend stock favorites when they decide to propose an acquistion.  There have been many colossal acquisition blunders (e.g. Time Warner buying AOL).  Don't let a high dividend blind you to a horrible acquistion that will lose the company money.
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!
 
* * * * * * *
 
By Tess Stynes and Naureen S. Malik
   Of DOW JONES NEWSWIRES

Exelon Corp. (EXC) said Thursday it has agreed to purchase a north Texas natural-gas fired plant from Sequent Wolf Hollow LLC in a $305 million deal.

The move follows Exelon's planned $7.8 billion acquisition of Constellation Energy Group Inc. (CEG) that was unveiled last month. That deal puts Exelon--the largest operator of nuclear plants in the U.S.--in position to resuscitate some nuclear developments abandoned by Constellation because they were too costly.

When the deal between the two power companies was announced, executives said that matching Exelon's large merchant business, which sells electricity on the wholesale market, with Constellation's retail business, which markets directly to consumers, was a key driver for the deal.

Separately, Constellation on Thursday agreed to acquire MXenergy, a Connecticut supplier of natural gas and electricity, for $175 million. MXenergy has more than a half million customers in 15 states and two Canadian provinces. Constellation expects the move to supplement its growing retail business, especially in the residential market. MXenergy shareholders Denham Capital Management, Charterhouse Group LLC and Sempra Energy Trading LLC support the deal.

Exelon said the acquisition of the Texas plant will expand its clean-energy portfolio in anticipation of coming clean-air regulations. "This is not a needle mover," William Von Hoene, executive vice president of finance and legal at Exelon, said during the Deutsche Bank Securities alternative energy, utilities and power conference Thursday afternoon.

The Wolf Hollow acquisition is expected to close in the third quarter upon regulatory approval.

It also expands the company's presence in Texas, where Exelon already owns and operates three gas-fired plants and where Constellation also has generation assets. Hoene said Wolf Hollow "will be modestly accretive to cash flows in 2012 and neutral to earnings near-term."

Exelon last month reported first-quarter earnings fell 11% amid hedging losses and other charges, though revenue was up due to higher prices and unusually cold weather in Texas.

Shares of Exelon closed 1.1% higher at $42, while Constellation also advanced 1.1% to $37.07.

-By Naureen S. Malik and Tess Stynes, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

 

How the Irish pension raid will affect you retirement and your high dividend stock portfolio.

The people calling themselves the Irish government announced yesterday that they will be raiding private pensions to fund their failing government.  This will happen all over the western world (including the US) because they are all bankrupt.  The Irish government is not unique.

http://read.bi/IrishPensionRaid

You should view this as a real threat to your retirement money held in government sanctioned tax-deferred accounts such as the IRAs and 401(k) in the US.  Trillions of dollars in retirement accounts are sitting right in front of money starved politicians.  At first they will tax some more of it, then they will confiscate it and give you a promise of a government annuity.  These plans are already being discussed in the US government.

http://bit.ly/RetirementTrap

You should have 20-30% of you non-home net worth in precious metals.  The other 70-80% should be diversified away from the US dollar and US government sanctioned retirement accounts.

I’m trying to get my vested money out of my 401(k) plan.  Fidelity told me I couldn’t get the money unless I was fired or I quit my job according to my company’s plan rules.  I reiterated to the Fidelity representative that I was willing to pay the penalties and taxes to get access now.  They said I couldn’t.  At that moment I learned that the money I was saving in my 401(k) really isn’t mine.  There is the illusion of control, but I have no access and the government can change the rules in the future to keep me from getting access to it.

The numbers point the inevitable bankruptcy of the US government due to Social Security and Medicare unfunded liabilities.  European governments are going bust first for the same reasons.  This is your wake up call.

I’m looking into converting it to some other type of account like an IRA rollover to get it out of the clutches of Fidelity.  Then I could pay the penalties and taxes to get it in my possession.  The remainder after taxes and penalties can be used for my high dividend stock portfolio.

You should consider stopping your contributions to so-called tax sheltered retirement accounts and save that capital in some other way.  If you do this, you must still save your capital and invest it in high dividend stocks, rental real estate, precious metals, and/or consumer goods that you will consume in the future.  Don’t blow it.  Save for the days ahead when the government welfare ponzi schemes come unraveled.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

A candid interview with Safe Bulkers (SB) CEO. Good news for dividend investors. ((best dividend stocks, SB, Safe Bulkers, high dividend stocks))

Image003

I recently found a recent interview of Polys Hadjioannou, the CEO of Safe Bulkers (SB), in which he provided some interesting insight into the inner workings of the company’s strategy to navigate the depressed dry-bulk shipping market.  Safe Bulkers has a very safe quarterly dividend of $0.15/share, a five year average earning power of $1.50/share @ 71.63 million shares, and a strong balance sheet with increasing equity.

Here is the link to the original article: http://www.sys-con.com/node/1826678

* * * * * * *

My comments on the interview will appear in like this.

Company Interview

Polys Hadjioannou, CEO of Safe Bulkers

discusses the dry bulk sector and Safe Bulkers

Interview with Barry Parker

It is very helpful to dividend investors to know that over 50% of Safe Bulkers future revenues are locked into existing charters.  This chartered revenue will produce enough profits to pay the existing quarterly dividend of $0.15/share for the next three years without any revenues from the ships operating in the spot market.  He says that the company will not lock in charters at today’s low rates.

Q) Barry Parker (BP): Recently you announced your earnings and there is a lot of good news. Let me start with a question  about the chartering strategy. I believe for 2011 you have 75% of the fleet ownership days covered on charters, 59% for 2012 and 52% for 2013. Could you elaborate on the chartering strategy and how you make the decisions on whether you will choose a period charter or keep the ships spot?

A) Polys Hadjioannou (PH): Right now the period market is not at levels we consider profitable in the long-run for the company. So what we are doing at the moment is, as some ships open up, we try to employ them in the spot market for one or two months or in the short period market, which is something like three to five months.  Our expectation is that when they will reopen we will have the opportunity to fix something better. So this is the current strategy of the company.

He reiterates that he won’t lock in charters at mid-teens rates for the long term health of the company.

Q) BP: On your fleet list, you have a few ships that are coming off period charters within the next few months. Will you evaluate the spot versus the period market when making those decisions?

A) PH: Yes, actually the ships that are coming off charters now are ships that were on 1-year charters. One was at US$27,250 and the other at US$22,750, so these ships were not in long-term charters before. We now have the option either to consider again possibly a 1-year charter, which is in the mid-teens at the moment, which I don’t think is so attractive, or we better target for them the shorter period charter, something around US$16,000 for three to five months. Thereafter we will wait for Q4 2011 when we will possibly have a better opportunity to fix at that time maybe under 1-year or 2-years charters.

Safe Bulkers unique selling proposition is its modern fleet of dry-bulk ships.  I presume that their high spec ships load faster, cruise faster, carry more dry-bulk, and/or are more fuel efficient and less costly to maintain than their competition’s older fleets.

Q) BP: Within the past couple of months you increased your new-building vessels from 9 to 11, having a preference for modern tonnage. This combined with the charter cover, lets you raise money very effectively and you have a tremendous amount of cash flow. There are still potentially distressed assets available in the market, have you been approached by shipyards or possibly from a bank to purchase any distressed assets?

A) PH: Yes. By definition a distressed ship usually is a low-spec vessel that doesn’t fit with the rest of the fleet. We don’t really like concentrating on deals like these because they have to come either from a bank or a shipyard position, delivering as such a ship that is of inferior specification or something that was not properly attended during construction. That is not the type of investment we are looking at for our company.

There are currently plenty of opportunities and yards where we can order our own specifications that are compatible with the rest of our fleet and they offer the efficiencies and economies of scale that we enjoy with our current fleet. So we will go for fleet styles that are compatible with the ones that we currently own.

Our charterers have been enjoying our company’s service mostly because we offer them the latest designs with high specs. We are concentrating to continue ordering the latest technology and more fuel efficient vessels. We are much focused all these years to be ahead of the average ship that is constructed.

He reiterates their commitment to their unique selling proposition.

Q) BP: You announced about a month ago that you are making an order with a Japanese yard of two Panamax vessels. So the idea is that these will be very high spec vessels?

A) PH: Yes that is exactly the idea; they will be high spec vessels.

Easy money policies of central banks around the world lured entrepreneurs to make malinvestments in all sorts of industries including dry bulk shipping.  Too many ships were ordered during the false global economic boom of 2003-2008.  Many dry bulk shippers have cancelled some of the ships prior to construction, but many ships will still be built and add to the global dry bulk tonnage capacity.  More ships means lower dry bulk shipping rates in the short term.

Q) BP: One of the questions that the analysts and investors ask is about when the orderbook gets delivered, there is always worry about oversupply but on the other hand in 2009 and 2010 there was significant slippage, around 40%. What are your expectations for 2011 and beyond? Considering slippage

and cancellations, what do you see happening on the supply side?

A) PH: We all know that the orderbook is a big question mark and a big problem for the freight market at least for the next 12-18 months. I think the slippage ratio will be equally high for 2011, mainly because many of the ships that are in the orderbook are cancelled but still quoted, while some have been pushed back to further delivery dates. So we don’t really know in detail as they are not properly recorded or reported either by shipyards or owners when these agreements or cancellations are reached.

We definitely expect at least a similar sort of slippage for 2011. Of course the orderbook for this year is the heaviest, even heavier than the two previous years, and that is causing the current depression of freight rates because this year we are at the peak of dry bulk deliveries. Once we get over with 2011 things will start getting better.

Also we have the other positive factor, that the new orders of 2011 are at a much slower pace than 2010, so we are building in some healthy conditions for the following years, 2013 and 2014, and I am optimistic that in those years we will see again freight rates at levels near to the historical average.

The demand is doing OK at the moment so when we sort out the supply issue in 2012 or 2013 things will improve, I believe.

The company has strong cash flow and balance sheet.  The cash flow is sufficient to pay the existing quarterly dividend and to continue paying for the ships under construction.  This is a very important point – the Hadjioannou family is the majority shareholders of the company.  They benefit from a conservatively run company and their generous dividend is making their family richer.  The company is mostly their property and they want to take care of it.  You can benefit from this.

Q) BP: Could you talk about the sustainability of the dividend?  Also how do you balance that against the fact that you need cash for your capital expenditures as well?

A) PH: Yes, the company is in a very healthy balance sheet condition and a healthy financial position. We did a recent offering and raised around US$40m so the CAPEX requirement for the remaining 11 ships is somewhere around US$310m dollars, which is well taken care from the cash and cash flow of the company of the next two years. There is good possibility that the company could take over these 11 ships utilising cash and cash flow from operations, after payment of dividends, and still keep them in a debt free condition.

We discuss the dividend every quarter. We are more focused on our dividend to be sustainable for the long-term rather than increasing it prematurely. So, if we see the freight market improving and with the new ships coming into our fleet we see that we have better earnings than forecasted at the moment, we could well consider increasing the dividend in the future quarters. But first we want to see better signs from the freight market. If we don’t see the improvement we will continue with the same dividend which we feel is sustainable in the long-run.

We don’t want to surprise our shareholders. You have to remember also that we, as a family, are the major shareholders of this company and we are working our best both for our family and for all

other shareholders as well.

Safe Bulker’s stock dropped about 10% on the news of the 5 million new shares to be issued.  This drove the yield up and attracted new shareholders to the company.  The company was a great value at the $9.00 price.  It is a better value at the lower price in the markets.

Q) BP: The power of the dividend is enhanced by the fact that you were able to successfully raise the money about a month ago, when it is not an easy time for a shipping company to raise money?

A) PH: That was the right move at that time. The company is very enthusiastic about the support we received from our existing investors, with some of them participating actively in this follow on offering, but also from new ones who joined the company’s shareholding base for the first time.

The Chinese government believes in Keynesian mercantilism.  They are printing money to match the Federal Reserve’s money printing.  This keeps the yuan depressed versus the US dollar.  That subsidizes Chinese exports and hurts Chinese consumers.  Chinese consumers pay more for goods in China than they would without the yuan printing.  US consumers benefit.  This will end when rising prices in China cause social unrest.  The Chinese government will face a revolt if they don’t put on the monetary brakes.  China will experience a great depression of their own.  Demand for dry bulk commodities will at the prices of the boom will drop.  Dry bulk commodity prices will drop like the crash of 2008.  Safe Bulkers will be okay because of their locked in charters.  But times will be tougher than they are right now.  I expect Safe Bulkers stock price to drop to around $3.00 per share.  It will be a repeat of 2008 only worse.  There will be colossal bargains for those who are patient.

Q) BP: Let’s talk about the demand, the cargo side in the dry bulk space. One of the concerns is that China has been the engine of growth for the last five or six years but if the banks tighten up and their economy doesn’t grow fast it might have an impact on the demand side. Could you comment on the demand side?

A) PH: The Chinese economy is becoming bigger and bigger every year and of course it cannot keep growing at paces of 9.5%-10% year in year out, because every year we are talking about a much bigger economy than the previous years. Even if the Chinese economy grows at a rate of 8-8.5% this is very good news for shipping, because we are talking about a huge economy, even bigger that the Japanese one.

We believe it is a good thing that the government is putting inflation under control because nobody wants an overshooting of enthusiasm and trade and then a sudden collapse of everything. We want this to be like the dividend of our company, to be a sustainable growth for China for decades to come and not for just one year. The signs are long-term positive. Indeed in the short-term, there may need to make some adjustments but overall the demand from China will be very positive.

He is saying that Safe Bulkers will stick to its area of expertise.  This is smart.  Times will be tough in the dry bulk shipping market when China implodes due to their Keynesian mercantilism.  They will be busy making spot and charter deals when shipping rates decline again.  Their current charters will get them through the crisis.

Q) BP: Through the relationships you have with the S&P brokers and maybe the banks, possibly you are seeing deals that are completely outside of your existing business. In your case do you see deals outside of the dry bulk space and consider of setting a separate company and possibly spin it off later on?

A) PH: We see some deals that have been offered to us in other sectors, like containers, but we prefer to leave these sectors and markets to the experts. As a new-comer company with no experience in other sectors is not right to concentrate on them, and there too many experts in these sectors. Also most of them are listed companies with about 30-40 years of experience in the container business. So why should we compete with them?

I prefer for our company to concentrate on what we know best, for the last 50 years we have expertise in the Panamax and Post-Panamax dry bulk markets, and try to make the company as profitable as possible for all of our shareholders. And we leave the Costamare and Danaos of this world to do their container business, which they do better than anybody else.

Q) BP: So we will not see a Safebulkers container division?

A) PH: No this is not in the plans.

Contributed by Barry Parker

Barry Parker is a financial writer and analyst. His articles appear in a number of prominent maritime periodicals including Lloyds List, Fairplay, Seatrade, and Maritime Executive and Capital Link Shipping.

About Safe Bulkers, Inc.

The Company is an international provider of marine dry bulk transportation services, transporting bulk cargoes, particularly coal, grain and iron ore, along worldwide shipping routes for some of the world’s largest users of marine drybulk transportation services. The Company’s common stock is listed on the NYSE, where it trades under the symbol “SB”. The Company’s current fleet consists of 16 drybulk vessels, all built post-2003, and the Company has contracted to acquire 11 additional dry bulk newbuild vessels to be delivered at various times through 2014. www.safebulkers.com

* * * * * * *

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

You enjoy movies at Regal's theaters, but should you buy this high dividend stock?

 
I recently read an article that listed Regal Entertainment Group (RGC) as a high dividend stock targeted by short sellers.  I hadn't seen Regal on my previous high dividend stock screens, so I was curious to put this stock with my Benjamin Graham inspired mechanical tests.  The bottom line is that the short sellers are probably right.  RGC is not a movie you want in your portfolio at $13.96 per share.  However, what price might Regal become a value basis for investment?
 
Regal Entertainment group (RGC)
Market price: $13.96
Shares: 154.56 M
 
Dividend record: quarterly dividend of $0.18 since Q1 2009, dividend was $0.30 per quarter for years before that.
Dividend yield: 6.02%
Quarterly dividend: $0.21
Dividend payout ratio: 168% (BAD $0.84/$0.50)
 
Earning power:  5 yr. average earning power is $0.95/share; 10 yr. average earning power is $0.76 per share
(earnings adjusted for changes in capitalization)
                EPS          Net inc.         Adj. EPS
2006    $0.56     $86.3 M        $0.56
2007    $2.28     $363.0 M     $2.35
2008    $0.72     $112.2 M      $0.73
2009    $0.62     $95.5 M        $0.62
2010    $0.50     $77.6 M       $0.50
 
I suggest that you try to buy value stocks at below 12 times average earnings.  Regal would have to fall below $11.40 to qualify as a value stock based on its five year average earnings of $0.95/share.  It would become speculative above 20 times average earnings at $19.00.  It still qualifies as an investment basis since it is in between those two extremes.
 
If you take the 10 year view of Regal's earning power, then you get the same result but with a lower average earning power.  The company averaged $118.1 M net income over 10 years.  Divide that average by 154.56 M shares and you get a 10 year average earning power of $0.76/share.  The share price would have to drop to $9.17 to qualify as a value basis (12 times 10 yr. average earnings/share).  It would become speculative at 20 times average earnings/share at $15.20.  I usually like to use the 10 year average earnings when possible to buy low in the value territory.
 
Balance sheet:  This company has a troubling balance sheet.  No wonder short sellers are betting against the company.
Book value per share: -$3.17  (BAD)
Price to book value: -4.4 (BAD)
Current ratio: 0.74 (less than 2.0 is BAD)
Quick ratio: 0.64 (less than 1.0 is BAD)
Shareholder equity: is negative and keeps getting worse.  This is reflected in the negative book value per share.
 
I give Regal Entertainment Group two thumbs down at $13.96 per share.  A dividend cut is likely.  The company has a 10 year average earning power of $0.76 per share.  And its balance sheet is scarier than most horror films that it plays in its theaters.  The short sellers are justified to bet against Regal.  I would put Regal on your watch list at $9.17, but even then its negative book value and current/quick ratios should give you pause.
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

Large bank debt is frequently a sign of weakness. Safe Bulkers (SB) vs. AGNC.

Large bank debt due shortly is frequently a sign of weakness.  I’m comparing two of the stocks that I’ve been analyzing the most: Safe Bulkers (SB) and American Capital Agency Corp. (AGNC).  Both are high dividend stocks.  SB yields about 7.4% and AGNC yields a whopping 19%.  See how each of them deals with their short term debts.

Safe Bulkers (SB) looks like it is financially sound.  Safe Bulkers (SB) has $28.6 million in short term debt as of Q1 2011.  Short term debts were $8.2 million in 2006.  It has $53.2 million in total current liabilities.    Total current liabilities were $172 million in 2006.  Short term debt is on a slight uptrend, but total current liabilities are in a five year downtrend.  Safe Bulkers has an annual net income of about $109 million.  It can pay down the debts it owns with the money the business earns and continue to pay its high dividend (even in the beaten down dry-bulk shipping market; shipping rates have plummeted since 2008).  The same can’t be said of AGNC.

American Capital Agency Corp. (AGNC) is not financially sound because it is leveraged 7-9 times and like a bank it is borrowed short (through repurchase agreements due in 30-180 days) and lent long (agency securities).  AGNC has $21.9 billion in short term debt according to the company’s latest quarterly report.  The company’s total current liabilities is virtually the same as its short term debts.  AGNC has an annual net income of about $288 million.

You can see the huge difference between AGNC’s short term debt and net income due to their leverage.  I expect the company’s net income to decrease in the next year or so due to rising short term interest rates.

The point is that AGNC does not payback its short term debts with the money it earns.  Its dividend payment is also in jeopardy.  It issues more stock to raise capital and it rolls over its debts.  The music stops when the financial institutions refuse to rollover its short term debts (credit crisis) or they charge higher rates for short term borrowings (rising interest rates).

I will not invest in banks, mortgage REITs, and insurance companies for this reason.  They are too opaque and difficult to understand their asset values.  The details of the business operations are also difficult to understand.  Don’t be charmed by their siren’s song of a whopping dividend yield or you may find a portion of your dividend portfolio smashed upon the rocks when the interest rate yield curve inverts.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

* * * * * * *

Large Bank Debt Frequently a Sign of Weakness. Financial difficulties are almost always heralded by the presence of bank loans or of other debt due in a short time. In other words, it is rare for a weak financial position to be created solely by ordinary trade accounts payable. This does not mean that bank debt is a bad sign in itself; the use of a reasonable amount of bank credit —particularly for seasonal needs—is not only legitimate but even desirable. But, whenever the statement shows Notes or Bills Payable, the analyst will subject the financial picture to a somewhat closer scrutiny than in cases where there is a “clean” balance sheet.

The postwar boom in 1919 was marked by an enormous expansion of industrial inventories carried at high prices and financed largely by bank loans. The 1920–1921 collapse of commodity prices made these industrial bank loans a major problem. But the depression of the 1930’s had different characteristics. Industrial borrowings in 1929 had been remarkably small, due first to the absence of commodity or inventory speculation and secondly to the huge sales of stock to provide additional working capital. (Naturally there were exceptions, such as, notably, Anaconda Copper Mining Company which owed $35,000,000 to banks at the end of 1929, increased to $70,500,000 three years later.) The large bank borrowings were shown more frequently by the railroads and public utilities. These were contracted to pay for property additions or to meet maturing debt or—in the case of some railways—to carry unearned fixed charges. The expectation in all these cases was that the bank loans would be refunded by permanent financing; but in many instances such refinancing proved impossible, and receivership resulted. The collapse of the Insull system of public-utility holding companies was precipitated in this way.

Nixonomics at the New York Times

The sinking New York Times is running cover for the Federal Reserve.  Read this article to see him strip away the emperor's clothes.  I especially like the sections on Nixonomics.
 
The article appeared on LewRockwell.com: http://www.lewrockwell.com/north/north979.html
 

Nixonomics at the New York Times

by Gary North

Recently by Gary North: The Foundational Economic Myth of Our Era: 'Government Cured the Great Depression'

 

   

On August 15, 1971, a Sunday, President Nixon unilaterally suspended the last traces of the gold standard. He "closed the gold window" on his own authority. From that time on, no government or central bank has been able to exchange dollars for Treasury gold at a fixed price. Nixon broke the Bretton Woods agreement of 1944. He broke the nation's word. He cheated. That was his way. Ever since that day, American monetary policy has been Nixonomics.

Eight months earlier, he had announced his conversion to Keynesianism. This passage is from the amazingly good documentary on PBS, "Commanding Heights."

For one thing, whatever the effects of the Vietnam War on the national consensus in the 1960s, confidence had risen in the ability of government to manage the economy and to reach out to solve big social problems through such programs as the War on Poverty. Nixon shared in these beliefs, at least in part. "Now I am a Keynesian," he declared in January 1971 – leaving his aides to draft replies to the angry letters that flowed into the White House from conservative supporters. He introduced a Keynesian "full employment" budget, which provided for deficit spending to reduce unemployment.

If you think I am trying to tar and feather critics of the gold standard and defenders of Keynesian economics by connecting their ideas to a pragmatic, lying politician, then you're brighter than your brother-in-law thinks.

THE NEW YORK TIMES

It should come as no surprise that the premier mouthpiece of American Establishment official opinion, The New York Times, is hostile to the traditional gold coin standard or any state-guaranteed version of the gold standard.

The New York Times used to be called "the gold standard of journalism." But it was always a fiat standard. And like the fiat United States dollar, its value keeps sinking.

The gold coin standard places limits on a central bank's ability to create money out of nothing, meaning counterfeiting. This is why its critics hate it.

At the center of almost every national economy today is a central bank that has been granted the government-sanctioned authority to intervene in the financial sector on behalf of large multinational banks. In the city of over-leveraged multinational banks, the New York Times wants no limits placed on the ability of the Federal Reserve System to bail out over-leveraged multinational banks.

The Times is well aware of the fact that Ron Paul is most famous for his position, which is also his book's title, to end the FED. This position was considered crackpot, even within conservative political circles, prior to Paul's run for the Republican Party's nomination for President in late 2007. His was a well-timed candidacy. The economy went into a recession in December of 2007.

His stand against the FED spread rapidly in late 2008, after the FED and the U.S. government bailed out the biggest banks. The anti-FED genie is out of the bottle. Never before in America's post-1913 history has there been this much public opposition to the FED.

The Times can do nothing about this, other than to publish an occasional obligatory article that announces: "You know where we stand." Of course we know. We also know that the fiscally besieged Times is going bankrupt.

We know that its influence is fading, along with all print media. We know that there will not be enough paying online subscribers to offset the declining revenues from advertising, which the Times cannot command these days in the face of its declining readership.

So, for old Times sake, I offer my critique of its recent piece, "Be Careful Wishing for the Fed's End." That warning makes about as much sense to me as this one: "Be Careful Wishing for the Times' End." The author is the company's in-house financial columnist, Roger Lowenstein.

A CRISIS OF CONFIDENCE IN THE FED

Lowenstein leads off with one of the most heart-warming paragraphs of my intellectual life.

Ben S. Bernanke, the Federal Reserve chairman, faces a crisis of confidence. He is excoriated on the right for debasing the currency, and blasted on the left for failing to stimulate more than he has. It has gotten so bad that last week Mr. Bernanke, who prefers to discuss monetary policy with erudite professors like himself, submitted to the indignity of a news conference. Among the uninvited was Representative Ron Paul, who is flirting with a presidential run, and who, if he took office in 2013, would like nothing more than to celebrate the Fed's centennial by ... abolishing it.

Think about this paragraph. Never before in the FED's history has any chairman faced this kind of opposition.

And that got me to thinking: What if there were no Fed? Don't laugh; it has happened before. The United States had a primitive central bank, conceived by Alexander Hamilton, but President James Madison let its charter lapse in 1811.

Madison did nothing of the kind. By the terms of its incorporation, it automatically lapsed, and no President had any authority to keep it from lapsing.

Lowenstein does not mention that, during the long fight over the re-chartering of the Bank, Albert Gallatin, the Secretary of the Treasury, had favored the Bank's re-chartering from 1809 to 1811. At no time did Madison fire him or suggest that he did not speak for Madison on this issue. Madison had two years to do so; Gallatin repeatedly lobbied Congress for the renewed charter. In 1811, the vote to re-charter failed by one vote in the House. In the Senate, the vote was tied; Vice President Clinton voted against it. Therefore, Madison did not let the First Bank's charter lapse. Congress did, just barely. If Madison had publicly opposed the re-chartering, the votes would not have been close. But he kept silent. He let Gallatin speak for him. In 1816, Madison favored the creation of the Second Bank of the U.S. He signed it into law.

Having misled his readers regarding the First Bank of the United States, Lowenstein goes on to mislead them about the second Bank, i.e., Madison's Bank.

A second such bank became the target of President Andrew Jackson, who viewed it as a "hydra" and a "curse" upon the nation. Jackson sought to decertify the bank and, in 1836, succeeded. Never mind that the following year, the United States was plunged into a serious financial panic. The curse had been lifted, not to reappear for nearly a century.

Never mind? Here is what he wants his readers not to mind. The president of the Bank, Nicholas Biddle, filed for re-chartering in 1831, five years early. The election of 1832 was fought mainly over the re-chartering of the Bank. Jackson vetoed the bill to re-charter. Congress failed to override the veto. Jackson's Party had a smashing victory in November. The government ceased depositing funds in the Second Bank. Biddle's bank began calling in loans, to pressure Jackson to comply. This action failed. The panic of 1837 was the result of an expansion of fractional reserve banking at the state level, 1833-36, over which the U.S. government had no constitutional control.

If the U.S. government had simply refused to deposit tax receipts in the banks, calling in specie and holding it as "excess reserves," to use the nomenclature of today's Federal Reserve System, there would have been no boom or bust, 1833-37. This idea was well known. It was called the independent Treasury system.

There was an inflow of silver, 1833-37, because of the inflationary policies of Santa Anna's government. It was the result of Gresham's law: a fixed exchange rate on silver. This inflow had nothing to do with Jackson or the Second Bank. The monetary base grew. Reserve requirements were not raised by state banks, including the Bank of the United States, still run by Biddle. The problem was fractional reserve commercial banking, as always: the state-granted license to counterfeit money.

IF THERE WERE NO FEDERAL RESERVE

The Establishment can no more conceive of money without a central bank than it could conceive of television programming standards without the Federal Communications Commission in 1970 or airline ticket pricing without the Civil Aeronautics Board in 1977.

Established in 1913, the Fed was to be a banker to the nation's banks, controlling the money supply and, thus, the value of the currency. Without a Fed, someone else would have to handle these (and other) tasks of central banking.

Under the FED, there was monetary inflation in the World War I era, then the recession of 1920-21, and then the monetary inflation and bust of 1926-30, followed by the Great Depression. Stability? There was none.

"Money," observes the Fed historian Allan H. Meltzer, "does not take care of itself." But who else could regulate the value of money? And regulate its value in relation to what?

Why doesn't money "take care of itself"? Because governments want to control it. Contract law serves the other markets. Why not money? Why should money be under the control of a system of 12 privately owned banks that are under a government board?

In its founding days, the United States defined the dollar by an explicit weight of gold or silver.

No, it didn't. The dollar was always a silver standard. Then a price control with gold was set by the government, which led to Gresham's law. Sometimes gold would be in short supply, sometimes silver. That is what price controls produce: gluts and shortages.

During the first half of the 19th century, state-chartered banks issued notes, preferably backed by metal, that circulated much as dollar bills do today. But since these banks were private, and differed widely in their standards, their notes were accorded different values. In effect, the country had lots of "monies."

Exchange rates set the value of these notes, just as the free market does in the currency markets today. With computerization in our day, this is no problem. The government can set what currency it requires for tax payments. Gold would be a good choice. The government does not need to set currency ratios. It does not need to monopolize money. But politicians want to.

The United States moved to normalize the situation during the Civil War. It restricted the issuance of notes to more uniform, federally chartered banks, which were required to hold Treasury bonds (as well as gold) in reserve.

The government did this to gain more control over the money supply. It had suspended payment in gold in late 1861 – a violation of contract. Then it created "greenbacks" – unbacked paper money – in a wave of price inflation. The South did the same, only much worse. It was theft: first the suspension of specie payments, then from the people through inflation.

Should the Fed be interred, this abbreviated history provides some clues about alternatives. One solution would be for private banks to issue money – perhaps bearing the likeness of Jamie Dimon and the seal of his bank, JPMorgan Chase. Alternatively, the Treasury could do it.

Private agencies of all kinds could issue money. The market would decide which to use. Money tied to gold or silver would enjoy a great advantage. Banks do this now, but without being tied to gold. Their digits are money.

If the government ever does this, then hyperinflation is a sure thing. This would be greenback economics, which is always political and inflationary in modern times. On greenback economics, click here.

A GOLD STANDARD

As long as contracts are not violated, private money would work far better than the Federal Reserve's legalized counterfeiting does. Any firm could issue an IOU for gold or silver or platinum coins of a specific weight and fineness. Just be sure it has the metals in reserve.

But what will the money represent? Gold is the first obvious answer. James Grant, the newsletter writer, author and gold bug par excellence, asserts that gold money is superior to the "fiat" money of the Fed. By fiat, he means that it has value only because the Fed says it does. (Representative Paul, less diplomatically, refers to Federal Reserve notes as "counterfeits" and to the Fed as a price fixer.)

Grant is correct. Paul is correct. Fiat money is counterfeit money. Let the banks issue warehouse receipts 100% backed by gold. Contract law will take over. There will be a market for gold coins.

Let us interject that in any monetary system, some authority must fix either the price of money or the supply. McDonald's can either set the price of a hamburger and let the market consume the quantity it will – or, it can insist on selling a specified quantity, in which case consumer demand will determine the price.

I will not let "us" interject anything of the kind. There is no logic to it. Gold, silver, and platinum are limited by mining costs, but there is no fixed money supply. There never has been in man's history. The statement is conceptually ludicrous and historically ludicrous. No authority need fix either the supply or the price of anything.

The Fed has a similar choice with money. The Bernanke Fed, which is trying to stimulate the economy, regulates the price of money – the interest rate – presently 0.0 percent. Paul Volcker, who assumed command of the Fed in 1979, when inflation was rampant, chose the opposite tactic. Mr. Volcker provided a specific (and, dare I say, miserly) quantity of liquidity, letting interest rates go where the market directed – ultimately 20 percent. There is an element of arbitrary choice either way.

The element of arbitrary choice is the heart of the problem: it will eventually be misused. Central banking's cheerleaders want us to believe that wise, salaried bureaucrats should control the monetary base. There is a problem here: these bureaucrats then must let commercial bankers, speculators, and governments decide what the money is worth. They cannot determine this on their own authority.

The gold standard, in effect, replaces the Fed chief with the collective wisdom (or luck) of the mining industry. Rather than entrust the money supply to a guru or a professor, money is limited by the quantity of bullion.

He's got it! The private property rights system restricts the money supply, so that neither politicians nor central bank committees are in charge of our money. We can trust mining costs with greater confidence than politicians with badges and guns and a printing press.

The law in the early 20th century stipulated that dollars be backed 40 percent in gold. This fixed the dollar in relation to metal but not in relation to things, like shoes or yarn, that dollars could buy. This was because the quantity of bullion that banks had in reserve, relative to the size of the economy, fluctuated. As a historian noted, it was as if "the yardstick of value was 36 inches long in 1879 ... 46 inches in 1896, 13 and a half inches in 1920."

Whoever that unnamed historian was, he was an economic ignoramus. Money is not a measure. It is a social institution based on contract. The government wants to get control over it, so that it can create fiat money and thereby impose an inflation tax rather than tax voters directly.

The gold standard – which John Maynard Keynes termed a "barbarous relic" – led to ruinous deflations.

There have never been any ruinous deflations based on a contracting supply of gold. Gold's supply constantly increases, though slowly. There were many deflations based on fractional reserve banking – fiat money allowed to commercial bankers by the state – when the over-leveraged (over-counterfeited) banks got hit by bank runs.

When gold reserves contracted, so did the money supply. David Moss, a Harvard Business School professor, asserts that the United States experienced more banking panics in the years without a central bank than any other industrial nation, often when people feared for the quality of paper; specifically, it experienced them in 1837, 1839, 1857, 1873 and 1907.

States authorize commercial bank counterfeiting. The Constitution does not authorize the U.S. government to intervene to stop this practice. That is what federalism is all about. That is what the Tenth Amendment used to be about, before it was gutted by the Supreme Court.

THE CREATURE FROM JEKYLL ISLAND

The Establishment occasionally admits that the November 1910 meeting on Jekyll Island was a quiet gathering. But it was not a conspiracy. Not at all. The difference is this. . . There must be a difference. . . Anyway, it was all for the public's good.

The Fed was conceived to alleviate such crises; that is, to be "the lender of last resort." This function was fulfilled, ad hoc, by the financier J. P. Morgan in the panic of 1907. But Morgan was old, destined to die the year the Fed was created; some institution was needed. Hostility toward central banks, an American tradition, was such that in 1910, lawmakers and bankers convened at Jekyll Island, Ga. – under the ruse of going duck hunting – to sketch a blueprint.

The FED was conceived to bail out the big New York banks. It was justified as a tool to alleviate crises. And, yes, it was a conspiracy consummated on Jekyll Island by a group of bankers and Senator Nelson Aldrich, John D. Rockefeller, Jr.'s father-in-law.

Part of the aim of the new central bank was a more flexible money supply – for instance, to lend to farmers in the winter. Another was to lend into the teeth of a panic – though only to solvent institutions and on sound collateral. The insurance giant American International Group – a controversial bailout recipient in 2008 – would not have qualified.

AIG surely qualified in 2008. That is what "flexibility" is for: to bail out insiders.

Farmers in the winter. Right! As if the FED cared a whit about farmers, back then or now. Did the FED save farms in the 1920s? No. Did it save farm area banks, 1930-33? No. In any case, prices for grain adjust in winter. That is what pricing is for. That is also why interest rates change. Conditions change. You don't need counterfeiting to smooth out supply and demand based on seasons.

In its early days, the Fed maintained the gold standard – forcing it to maintain tight money even in 1931, in the midst of the Great Depression. Economists today regard this as a mistake.

This is Milton Friedman's misleading intellectual legacy. The FED did not tighten money, 1930-31. See the chart provided by a vice president of the St. Louis Federal Reserve Bank. The monetary base was flat.

Money shrank because 9,000 banks went under. That ceased in 1934, when the FDIC was set up. The FED had no authority or ability to save 9,000 banks.

The circumstances are relevant to those who envision a Fed-less future. England had departed from the gold standard; worried that the United States would follow suit, people demanded to trade dollars for gold. Professor Meltzer deduces that the gold standard doesn't work for one country alone; the bad paper money corrupts the good.

This is the ill-informed person's view of Gresham's law: that the free market rewards bad money. It doesn't. When there are government-imposed fixed exchange rates – price controls on money – the artificially overvalued money drives out the artificially undervalued money. In other words, price controls create gluts and shortages. Every economist knows this. Any economist who promotes Gresham's law without explaining this price control factor is trying to put the shuck on the rubes. Lowenstein is one of the rubes who got shucked.

AN ALTERNATIVE TO GOLD

Here is where Lowenstein lets his imagination soar.

An alternative to gold, and to the Fed, was suggested by Mr. Bernanke's hero, Milton Friedman: let a computer govern the money supply. John Taylor, a former Treasury official, has derived a formula, the Taylor Rule, which Fed policy often agrees with. Adopting the formula in a mechanical way would trim the deficit a bit, since the Fed could dismiss every one of its 200 economists. The problem with a formula (also its virtue) is its lack of flexibility. Alan S. Blinder, a former Fed vice chairman, notes that strict adherence to the Taylor Rule during the recent crisis would have mandated an interest rate of negative 5 percent. (That is, the economy was so weak, and people so unwilling to borrow money, the computer would have paid people 5 percent a year to accept it.) This being impractical, Mr. Bernanke was moved to improvise a remedy other than negative rates.

This is academic self-puffery. There is no Taylor rule at the FED. That is my point and Ron Paul's point. There are no rules. You know: "flexibility," as Lowenstein calls it. There is only ad-hockery, such as: (1) double the monetary base, (2) swap T-bills at face value for toxic assets held by large New York banks, and (3) lend billions to large foreign banks.

If the computer is out and the Fed shuttered, Professor Meltzer suggests that the dollar be backed by euros, pounds and yen (and, eventually, the renminbi). This new money would require that each of the financial powers commits to a targeted rate of inflation – say, 2 percent a year. People who didn't trust the dollar to maintain its value could trade them for euros. Now there's an idea that would delight the Tea Party – American money backed by France.

Professor Meltzer can say anything he wants. Nobody has to believe him. I surely don't.

The dollar is not backed by anything, and has not been ever since August 15, 1971, when Nixon without authorization suspended payments in gold to foreign central banks. Nixon was a petty tyrant, but here the Congress and business cheered. He imposed price and wage controls. More cheering. Ben Bernanke presides over Nixonomics, as have all subsequent chairmen of the Board of Governors of the FED. But no one in the Establishment wants to call the system what it really is: Nixonomics.

Actually, this system is not terribly different from today's. We have, indeed, fiat money, convertible into foreign exchange and regulated, not always successfully, with the intent of maintaining (or not too quickly depreciating) the dollar's purchasing power. And if money is a unit of value, it is hard to conceive of a yardstick better than purchasing power.

I see. A yardstick. This "yardstick" has shrunk by over 95% since 1914, the year the FED opened for business. You can check this with the inflation calculator of the Bureau of Labor Statistics.

But the Fed, thanks to an act of Congress in 1978, and perhaps to America's suspicious anti-central banking culture, has a dual mission – protecting the value of the dollar and promoting long-term growth and employment. In this, it differs (at least in degree) from Europe's and other central banks. In many ways, this mission creep – the Fed's expanded power and role in the economy – lies at the root of the animus that Americans feel for it.

This is not a dual mission. It is a dual public relations statement. Congress did not specify any numbers. The FED gets to make them up as it goes along . . . and does.

Banking purists would like, if not to abolish the institution, to return it to the job envisaged on Jekyll Island. They are, in a sense, the financial equivalent to strict constitutionalists. Nostalgia has its place, but so does pragmatism. Mr. Bernanke and his colleagues may be flawed, but democracy trusts in the power to elect, appoint and, if need be, remove. It is fine to lament their alleged excesses – for instance, the Fed's swollen balance sheet in the name of stimulation, or "quantitative easing." It is another to imagine that regulating the money could be as simple as it was in 1913, or that a formula, or a barbarous relic, could do the job.

CONCLUSION

In his view, defenders of the gold coin standard are quaint relics of the past, just as gold is. He writes: "They are, in a sense, the financial equivalent to strict constitutionalists. Nostalgia has its place, but so does pragmatism." So, adhering to the Constitution is nostalgia. So is the idea of a world without the creature from Jekyll Island.

What Lowenstein wants is pragmatism. You know: flexibility.

This is what every central banker always wants. Also, every dictator.

Richard Nixon surely wanted it.

It is what Ron Paul does not want. Neither do I.

End the FED.

May 7, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

TIP OF THE WEEK - Opportunities to buy precious metals for procrastinators.

Opportunities to buy precious metals for procrastinators.

Jason Brizic

May 6, 2011

You should have 20-30% of your non-house net worth in precious metals.  They are a hedge against massive price increases and hyperinflation.  I consider price increases of 10-20% per annum to be massive.  I consider hyperinflation price increases above 20% per annum.  Entrepreneurs can't calculate in an environment where prices increase above 20% per year.  The division of labor begins breaking down in the 20-30% range.


The precious metals (gold and silver) are a hedge against massive price increases.  They are not a hedge against low inflation.  Just look at precious metal prices from 1980 - 2000 for confirmation.  Silver took a beating this week.  It was down 29%.  Gold lost 6%.  Silver is more volitile than gold.


I think you should use 80% of your precious metals money to buy gold coins from your country's mint.  Buy 1 ounce and tenth ounce coins.  Buy 20% silver coins.  Buy 1 ounce silver coins and junk silver coins.


I think gold under $1,400 per oz. and silver under $30 per oz. will be good buys.  Don't buy gold and silver ETFs like GLD and SLV if you don't own any physical coins.


Buy from where ever you are comfortable: local coin dealers, EBay, Amazon.com, or my favorite www.apex.com .

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week