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Posts Tagged ‘faith’

50 Shocking Questions That You Should Ask To Anyone That Is Not A Prepper Yet

January 17th, 2013

are you readyMichael Snyder: Share this list of shocking questions with everyone you know that needs to wake up.  Sometimes asking good questions is the best way to get someone that you care about to understand something.  When I attended law school, I became very familiar with something called “the Socratic method”.  Read more…

Economy, Government, World News

Election Fraud: Accounts Of Voting Machines Turning Mitt Romney Votes Into Barack Obama Votes

November 17th, 2012

Michael Snyder: Why is the mainstream media saying nothing about election fraud even though there are eyewitness reports from all over the country of voting machines turning Romney Read more…

Economy, Government

22 Signs That Voter Fraud Is Wildly Out Of Control And The Election Was A Sham

November 13th, 2012

Michael Snyder: After what we have seen this November, how is any American ever supposed to trust the integrity of our elections ever again?  There were over 70,000 reports of voting Read more…

Economy, Government, Markets

Don’t touch these stocks with a ten-foot pole!

June 13th, 2011

Martin D. Weiss, Ph.D.Major stock sectors are now in a race for the bottom.

These are stocks on a rendezvous with their lowest lows reached in the debt crisis of 2008-2009 … sinking back into the danger zone that came with red ink, bankruptcy, and financial ruin for millions of investors.

Hard to believe that could already be happening so soon after the market peaked?

Then consider the 25 stocks I’m going to list for you in a moment, starting with PMI Group, one of the nation’s leading mortgage insurers.

Two and a half years ago, at the height of the financial crisis, this leading mortgage insurer plummeted to a low of a meager 32 cents per share.

But in the weeks and months that followed, Washington worked overtime to inject trillions of dollars into the housing market and convince the world that the Great American Nightmare — the worst real estate crash of all time — was over.

Many Americans, blinded by their faith in “almighty government,” actually fell for it: The housing market stabilized temporarily. The economy recovered a bit. Stocks rallied sharply. And PMI surged, reaching a peak of $7.10 per share last year.

But that was just the prelude to disaster …

Chart

In the ensuing months, all of the government’s housing support programs and all the government’s mortgage subsidy initiatives failed.

Nothing the government did could stop wave after wave of mortgage defaults and foreclosures.

And even the government’s massive injections of money into the mortgage market were unable to prevent PMI from crashing again, closing at a mere $1.12 per share in late trading hours this past Friday.

That’s down a sickening 84% from last year’s high!

If you had invested $10,000 in this dog at that time, you’d now have only $1,577 in your account right now.

An Unimportant Company? No!

PMI has historically been a huge player with a pivotal function in the housing finance industry — insuring mortgages against default. But now …

If big mortgage insurers like PMI go out of business or refuse to write new policies, most lenders will refuse to extend mortgage loans to anyone except those who are rich enough to buy a home for cash and don’t need a mortgage to begin with.

Moreover, PMI is on the frontline of the losing battle against a flood of bad mortgages in virtually every region of the United States.

So if this company is drowning and its stock is sinking to zero, you can be quite certain that many other companies downstream — lenders and banks, builders and realtors, REITs and other financials — are likely to face a similar fate.

As I illustrated here last week, nearly all bank and financial stocks are now in a race for the bottom — the only difference being, PMI is “winning” that race.

Just a Technical Correction?

If the housing and mortgage markets were holding up nicely, perhaps you could make that argument stick. But the fact is, all three key facets of this giant sector are coming unglued at the seams —

  1. The finances of homeowners who borrowed the money
  2. The finances of bankers who loaned them the money
  3. And the value of the home itself, the underlying collateral that’s supposed to be tapped when folks run out of money.

This is no small technicality. It’s a fundamental deterioration in the underpinnings of the entire sector.

“Why Can’t the Government Come
To The Rescue Again?” You Ask

For the simple reason that the government itself is ALSO running out of money.

But for argument’s sake, let’s say the government does somehow come up with more funds to pump into housing and mortgages.

OK. So what? What difference is that going to make?

Based on the recent history, the answer should be obvious: Not much!

Chart

Remember: No amount of government intervention has been able to prevent home prices from plunging to new lows — even lower than the bottom of March 2009, when homes were selling at deeply distressed prices. (See chart to left.)

Similarly, no amount of government intervention can prevent nearly every sector that touches housing and mortgages from suffering a similar fate.

“Martin’s Too Pessimistic.
Don’t Listen to Him!” Say My Critics

Harry Truman once said. “I never give them hell. I just tell the truth and they think it’s hell.”

That’s what my team and I do.

If anything, we’re optimists. We find the few companies that do have the wherewithal to survive and even benefit. And we see silver linings in this crisis that I’ll be glad to tell you more about in future issues.

Moreover, this is isn’t the first time we have given advance warnings about companies like PMI.

In our Safe Money Report of April 2005, well before the housing bubble peaked, we told our subscribers not to touch PMI Group and 24 other stocks with a ten-foot pole. Here they are:

Aames Investment, Accredited Home Lenders, Beazer Homes, Countrywide Financial, DR Horton, Fannie Mae, Freddie Mac, Fidelity National Financial, Fremont General, General Motors, Golden West Financial, H&R Block, KB Homes, MDC Holdings, MGIC Investment, New Century Financial, Novastar Financial, PHH Group, PMI Group, Pulte Homes, Radian Group, Toll Brothers, Washington Mutual, and Wells Fargo & Company.

(Want proof? Click here for the SMR issue of April 2005 and scroll down to page 10.)

Subsequently, 11 of these 25 companies filed for bankruptcy, were bailed out or bought out.

ALL 25 stocks plummeted, with an AVERAGE loss of 81.3%.

And even after more than two years of stock market rally, investors who bought and held these stocks are deep in the red.

(But whether they rallied or not, our advice to anyone who owns the surviving companies today is the same: Don’t touch them with a ten-foot pole!)

Later, in the financial crisis of 2008, we were the only ones who issued negative ratings and warned well ahead of time of nearly every major firm that subsequently collapsed. We warned about …

* Bear Stearns 102 days before it failed (click here for the proof)

* Lehman Brothers 182 days before (proof)

* Citigroup 110 days before (proof)

* Washington Mutual 51 days before (proof), and

* Fannie Mae 4 years before (proof).

That’s history. What counts most now is that …

It’s “Game Over” for the U.S. “Recovery”

Look. From the outset, we knew the U.S. economic recovery was rigged — bought and paid for by the greatest monetary and fiscal extravaganzas of all time.

We knew that no government, no matter how rich, can create corporate immortality: In the real world, companies are born and companies must die. I’m sure you understood that as well.

We knew that no government, no matter how autocratic, can repeal the law of gravity: When sellers are anxious to sell and buyers are reluctant to buy, prices fall. A no-brainer!

We also knew that no government, no matter how powerful, can stop the march of time: With every second that ticks by, more debts come due, more mortgages go into default, more homes are foreclosed.

And I think you knew, too. But still you ask:

“How Could This Recovery End So
Abruptly and Crumble So Dramatically?”

Answer: As we’ve been telling you all along, it was never a true recovery to begin with:

Bill Gates Just Poured ANOTHER $54 Million Into This Stock

February 14th, 2011

Bill Gates Just Poured ANOTHER $54 Million Into This Stock

Conviction. It's a concept that is rarely heard in investment circles these days, but is still one of the key traits of top investors. When they have conviction, they stick with an investment idea for the long haul, undeterred by any near-term concerns that may shake their faith. Indeed, many investors will book profits if a stock has had a strong run. It's human nature — for most of us. Microsoft (Nasdaq: MSFT) co-founder Bill Gates does the opposite. He continues to buy into his favorite ideas even after they've been powering higher.

Case in point: AutoNation (NYSE: AN).

I told you about his interest in the company three months ago when shares traded for about $26. His bullishness came at a time when many analysts thought that shares were fully-valued on the basis of near-term operating metrics.

With shares up about 42% to almost $34 since then, you'd think Gates might be content to book his profit.

Uncategorized

Bill Gates Just Poured ANOTHER $54 Million Into This Stock

February 14th, 2011

Bill Gates Just Poured ANOTHER $54 Million Into This Stock

Conviction. It's a concept that is rarely heard in investment circles these days, but is still one of the key traits of top investors. When they have conviction, they stick with an investment idea for the long haul, undeterred by any near-term concerns that may shake their faith. Indeed, many investors will book profits if a stock has had a strong run. It's human nature — for most of us. Microsoft (Nasdaq: MSFT) co-founder Bill Gates does the opposite. He continues to buy into his favorite ideas even after they've been powering higher.

Case in point: AutoNation (NYSE: AN).

I told you about his interest in the company three months ago when shares traded for about $26. His bullishness came at a time when many analysts thought that shares were fully-valued on the basis of near-term operating metrics.

With shares up about 42% to almost $34 since then, you'd think Gates might be content to book his profit.

Uncategorized

Losing Faith in Paper Money

February 11th, 2011

I was planning to go into a bizarre and irrational rant against JP Morgan for its obvious scam of manipulating the silver market by massive naked-short positions, and including in my Loud Mogambo Diatribe (LMD) the scumbag government and “regulators” who are supposed to keep this kind of fraud out of the commodities markets.

Preparing myself by taking a long pull on a bottle of tequila, rehearsing every curse word I could remember and loosening up the vocal cords (“Mi mi miiiiii! Get out of my yard, you stupid kids! Yo, Adrian!”), I was almost ready when I got a copy of an email from David Bond, in his role as First Lord of the Treasury for the Island Kingdom of Colemania, who reports the news that JP Morgan has announced that they will accept gold as collateral for margin loans.

The part that saved me from denouncing JP Morgan is when he went on that “Whilst JP Morgan is pleased to now to accept physical gold as collateral for credit, it will NOT ACCEPT equivalent value (or any value) of shares in its own gold ETF in lieu thereof.”

Even I, jaded and cynical after a lifetime of watching one thieving bastard after another foist a screw-job on me, and watching one incompetent, corrupt government moron after another let them, I think that it is all encapsulated in his sentence that the lesson is that “Ergo (or is it ipso facto?) JP Morgan has great faith in physical gold, but concurrently has no faith in its own gold-backed paper.”

Its own ETF! JP Morgan runs an Exchange Traded Fund for gold, giving it complete control over the gold deposited there, and yet doesn’t trust its own fund? Has JP Morgan actually sold the gold that the ETF buyers were told was in there? Hmmm! That would make ME lose faith in it paper, too!

And as far as depositing gold with JP Morgan, Chris Powell of the Gold Anti-Trust Action Committee seems as cynical as I when he says, “Good luck getting it back.”

But suddenly everybody wants gold, especially as the Federal Reserve created more credit (which turns into money when somebody borrows it) last week, and Total Fed Credit went up last week by $19 billion. As to how much actual money this turned into is anybody’s guess since the fractional-reserve multiplier used by banks ranges from here to, literally, infinity.

But $18.4 billion of it turned into cash! I know this because the Fed used $18.4 billion of it to buy government securities to fund the loathsome Obama administration’s deficit-spending insanity!

And, in December, more money was created when revolving debt climbed by $3.5 billion.

And more money was created to allow total personal debt to shoot up $6.1 billion in December, too.

All in all, seemingly impossible amounts of money are being created, which means seemingly impossible amounts of inflation, which means seemingly impossible amounts of capital gains from buying gold and silver rising in price, which seemingly explains why I am seemingly always saying, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Losing Faith in Paper Money originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Read more here:
Losing Faith in Paper Money




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, ETF, OPTIONS, Uncategorized

The Effects of Central Banking on Gold and Paper Currencies

December 17th, 2010

“When will the gold bubble burst?” CNBC’s Larry Kudlow wondered aloud this morning.

A question to which your California editor would reply, “We know what gold is and we know what a financial bubble is, but we don’t see any gold bubbles.”

Perhaps Kudlow is referring to the fact that the gold price is rising…in response to the Central Banking Bubble. On its face, the idea is ludicrous that one man can steer an entire economy, simply by adjusting one little interest rate. The idea is a doubly ludicrous that one institution can nurture economic growth, simply by printing money. And yet, a nation of investors places its faith in the Cult of Central Banking, as folks like Larry Kudlow pay homage to Ben Bernanke every business day.

So far, the true believers have profited from their faith. It has paid well to embrace this cult and to trust the Delphic utterances of its high priests like Alan Greenspan and Ben Bernanke. But this whole central bank thing is getting a little out of hand.

The early central bankers admitted their fallibility. They would adjust interest rates up or down, depending on the prevailing economic circumstances, then hope for the best. But the more that the central bankers’ tinkering and meddling appeared to succeed, the more they tinkered and meddled, and the more they believed in the power of their tinkering and meddling.

Eventually, the central bankers not only believed in the power of their intrusions and manipulations, but also in the wisdom of them. Before long, the central bankers considered their activities to be not merely a responsibility, but an imperative, a social duty; perhaps even a “calling” – a kind of Divine Right of Central Banking.

Armed with these potent delusions, central bankers around the world continue to meddle, day by day, month by month. And the investor-flock continues to trust in their mystical powers. This nearly universal faith in a priesthood of monetary medicine men is an extreme idea…taken to an extreme. It is a bubble – the effects of which are as varied as they are non-quantifiable. But one effect is very clear: currency values are perpetually in decline.

The more the medicine men prescribe their remedies and elixirs, the faster the purchasing power of their paper currencies erodes. Observing this trend, rational, forward-looking investors scout around for assets the central bankers are not trying to protect – assets that require no protection whatsoever. Gold is an obvious choice. It is the timeless choice of all investors who reject the Cult of Central Banking and who, therefore, distrust paper currencies as a store of value.

Gold is rising because Central Banking is in a bubble. But the gold bubble, itself, will not arrive until the Central Banking Bubble bursts – the moment when investors universally spurn the cult of Central banking as heresy, and rebuke central bankers, themselves, as agents of wealth destruction. At that moment, when gold is trading north of $10,000 an ounce…or $20,000…or $100,000, the gold bubble will have arrived. And when it does, we will be there to issue a “sell” recommendation.

Speaking of “sell” recommendations, Jay Shartsis, a seasoned options pro at R.F. Lafferty in Lower Manhattan, warned his clients on Wednesday, “A big stock market decline is coming.”

To support his bearish call, Shartsis has highlighted a variety of market signals and sentiment indicators. Late last week, for example, Shartsis noted that the “CBOE equity put/call ratio hit .27 – the lowest in my memory. And now 8 days in a row, this ratio has been sitting below .60 – that’s a sell signal.”

Then earlier this week, Shartsis observed, “With the stock market near the highs for this move, there are only 127 new highs on the NYSE and 88 new lows. The new lows number is way above where it would be if this market was in good underlying shape. Yesterday saw 3% of all NYSE stocks at new lows – a condition that has happened only 36 times in the past. Two months afterwards, the S&P 500 was lower on 32 of those 36 instances.”

Options Speculation Index
Chart Source: SentimenTrader

Lastly, Shartsis called attention to the nearby chart, as he remarked, “The chart displays the Options Speculation Index. It is a measure of total call buys plus put sales (those are bullish transactions), divided by total put buys plus call sales (bearish transactions). So this is a very comprehensive gauge and it now reflects the most bullish option trader sentiment probably ever recorded. No fear at all. Note that the index is considerably higher than it was before the flash crash last May. A big market decline is coming!”

Shartsis has been wrong before, of course. But he has also been right. We predict he will be one of the two this time around.

Eric Fry
for The Daily Reckoning

The Effects of Central Banking on Gold and Paper Currencies originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Effects of Central Banking on Gold and Paper Currencies




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

OPTIONS, Uncategorized

Wall Street Cover-Ups, Deceptions and Lies

November 21st, 2010

Martin D. Weiss, Ph.D.

Let’s say you put a big chunk of your nest egg in a life insurance policy with an A+ company.

You invest another sizable amount in a portfolio of high-rated corporate bonds and tax-free municipal bonds.

Then, feeling safe and secure with most of your funds, you take a flyer on a few stocks that a dozen separate research analysts have unanimously rated as a “buy” or at least a “hold.”

You assume you’ve made informed decisions based on the best research the world has to offer.

The reality: Even in the absence of bubbles, busts, recessions or dollar collapses, you could suffer wipeout losses.

Hard to believe this could actually happen? Actually, it already has happened; and I want to make absolutely certain you don’t get caught in Wall Street deceptions like these in the future. So this morning, let me tell you what they are.

Their primary source: Legalized payola and massive conflicts of interest.

The primary result: Distorted research and inflated ratings on hundreds of thousands of companies, bonds, stocks, and investments of all kinds.

The threat to you: Far bigger losses in your investments than you would have anticipated otherwise.

Today, I’ll tell you about deceptions in the insurance industry. Next time, we can talk about equally egregious deceptions in other financial sectors.

“Weiss Had Better Shut the
@!%# Up or Get a Bodyguard.”

The year was 1988, and I had been rating the financial strength of the nation’s banks and S&Ls for over a decade.

My father, J. Irving Weiss, already an octogenarian, was helping me with the analysis. And one afternoon I told him that my ratings firm, Weiss Ratings was going to start rating insurance companies.

I can never forget his first words: “Check out First Executive [the parent of Executive Life Insurance],” he said. “Fred Carr’s running it. He’s trouble, and he’s knee deep in junk bonds. Follow the junk and you will find your answers.”

I did, and I found quite a few life insurance companies that were loaded with junk bonds, one of which was First Capital Life, to which we gave a financial strength rating of D-.

I was generous. The company should have gotten an F.

But within days of my widely-publicized warnings on First Capital Life, a gaggle of the company’s lawyers and top executives flew down to our office. They ranted. They raved. They swore they’d slap me with a massive lawsuit and put me out of business if I didn’t give them a better rating. “All the Wall Street ratings agencies give us high grades,” they said. “Who the hell do you think you are?”

I politely explained that we never let personal threats affect our ratings. And unlike other rating agencies, Weiss Ratings never accepts a dime from the companies we rate. “We work for individuals,” I said, “not big corporations. Besides,” I continued, opening up the company’s most recent quarterly report, “your own financial statements prove your company is in trouble.”

That’s when one of them delivered the ultimate threat: “Weiss better shut the @!%# up,” he whispered to my associate, “or get a bodyguard.”

We did neither. To the contrary, we intensified our warnings. And within weeks, the company went belly-up, just as Weiss Ratings had warned — still boasting high ratings from major Wall Street firms on the very day they failed.

In fact, the leading insurance rating agency, A.M. Best, didn’t downgrade First Capital Life to a warning level until five days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company’s stock crashed 99 percent, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the Earth. Three of the company’s closest competitors also bit the dust. Unwitting investors — who did not have access to my ratings — lost $4 billion, $4.5 billion, and $13 billion, respectively.

Fortunately, those who had seen our ratings were ready. Weiss Ratings warned them long before these companies went bust. Nobody who heeded our warning lost a cent.

In fact, the contrast between anyone who relied on Weiss Ratings and anyone who didn’t was so stark, even the U.S. Congress couldn’t help but notice.

Congress asked: How was it possible for Weiss — a small firm in Florida — to identify companies that were about to fail, when Wall Street told us they were still “superior” or “excellent” right up to the day they failed?

To find an answer, Congress called all the rating agencies — Standard & Poor’s (S&P), Moody’s, A.M. Best, Duff & Phelps, and Weiss — to testify. But we were the only ones among them who showed up.

So Congress asked its auditing arm, the U.S. Government Accountability Office (GAO), to conduct a detailed study on the Weiss ratings in comparison to the ratings of the other major rating agencies.

Three years later, after extensive research and review, the GAO published its conclusion: Weiss beat its leading competitor, A.M. Best, by a factor of three to one in forecasting future financial troubles. The three other Wall Street firms weren’t even competition.

But the GAO never answered the original question — why?

I can assure you it wasn’t because of better access to information than our competitors. Nor were we smarter than they were. The real answer was contained in one four-letter word: Bias.

To this day, the other rating agencies are paid huge fees by the issuers of bonds, insurance policies and other investments that you buy. In other words, their ratings are literally bought and paid for by the same companies they rate.

These conflicts and bias in the ratings business are no trivial matter.

How Deceptive Ratings Entrapped
Nearly Two Million Americans in Failed
Insurance — and Why It Could
Happen to You!

If you have insurance, don’t blindly assume it’s safe. In a moment, I’ll show you how two million others once made that mistake and lived to regret it. And to help you avoid repeating their error, it’s vital that you understand their story from start to finish.

The problems began in the early 1980s when insurance companies had guaranteed to pay high yields to investors of 10 percent or more, but the best they could earn on safe bonds was 8, 7, or 6 percent. They had to do something to bridge that gap — and quickly.

So how do you deliver high guaranteed yields when interest rates are going down? Their solution: Buy the bonds of financially weaker companies.

Consider, for a moment, what bonds are and you’ll understand the situation. When you buy a bond, all you’re doing, in essence, is making a loan. If you make the loan to a strong, secure borrower, like the U.S. government or a financially robust corporation, you won’t be able to collect a very high rate of interest.

If you want a truly high interest rate, you need to take the risk of lending your money to a less secure borrower — maybe a start-up company or perhaps a company that’s had some ups and downs in recent years. And you can earn even more interest from companies that have been having “a bit of trouble” paying their bills lately. (Whether you’ll actually be able to collect that interest or get back your principal is another matter entirely.)

What’s secure and what’s risky? In the corporate bond world, everyone agreed to use the standard rating scales originally established by the two leading bond rating agencies — Moody’s and S&P. The two agencies use slightly different letters, but their scale is basically the same: Triple-A, double-A, single-A; triple-B, double-B, single-B; and so on.

If a bond is triple-B or better, it’s investment grade. That’s considered relatively secure. If the bond is double-B or lower, it’s speculative grade, or simply “junk.” It’s not garbage you’d necessarily throw into the trashcan, but in the parlance of Wall Street, it’s officially known as junk.

And that’s what insurance companies started to buy: Junk. They bought double-B bonds. They bought single-B bonds. They even bought unrated bonds that, if rated, would have been classified as junk.

The key to their success was to keep the junk bond aspect hush-hush, while exploiting the faith people still had in the inherent safety of insurance. To make the scheme work, they needed two more elements: The blessing of the Wall Street ratings agencies and the cooperation of the state insurance commissioners, many of whom had worked for — or would later join — those same insurance companies.

The blessing of the rating agencies was relatively easy. Indeed, for years, the standard operating procedure of the leading insurance company rating agency, A.M. Best & Co., was to “work closely” with the insurers.

If you ran an insurance company and wanted a rating, the deal that Best offered you was very favorable indeed. Best said, in effect: “We give you a rating. If you don’t like it, we won’t publish it. If you like it, you pay us to print up thousands of rating cards and reports that your salespeople can use to sell insurance. It’s a win-win.”

The ratings process was stacked in favor of the companies from start to finish. They were empowered to decide when and if they wanted to be rated. They got a “sneak preview” of their rating before it was revealed to the public. They could appeal the rating if they didn’t like it. And if they still didn’t get a rating they agreed with, they could take it out of circulation by suppressing its publication.

Three newer entrants to the business of rating insurance companies — Moody’s, S&P, and Duff & Phelps (now Fitch) — offered essentially the same deal.

But instead of earning their money from reprints of ratings reports, they simply charged the insurance companies a fat flat fee for each rating — anywhere from $10,000 to $50,000 per insurance company subsidiary, per year. Later, Best decided to change its price structure to match the other three, charging the rated companies similar up-front fees.

Not surprisingly, the rating agencies gave out good grades like candy. At A.M. Best, the grade inflation got so far out of hand that no industry insider would be caught alive buying insurance from a company rated “good” by Best. Nearly everyone (except the customers) knew that Best’s “good” was actually bad.

Getting the insurance regulators to cooperate was not quite as easy. In fact, the state insurance commissioners around the country were getting so concerned about the industry’s bulging investments in junk and unrated bonds, they decided to set up a special office in New York — the Securities Valuation Office — to monitor the situation.

What’s a junk bond? The answer, as I’ve explained, was undisputed: any bond with a rating from S&P or Moody’s of double-B or lower. But the insurance companies didn’t like that definition. “You can’t do that to us,” they told the insurance commissioners. “If you use that definition, everybody will see how much junk we have.” The commissioners struggled with this request, but amazingly, they obliged. It was like rewriting history to suit the new king.

This went on for several years. Finally, however, after a few of us screamed and hollered about this sham, the insurance commissioners finally realized they simply could not be a party to the junk bond cover-up any longer. They decided to bite the bullet. They adopted the standard double-B definition, and reclassified over $30 billion in “secure” bonds as junk bonds. It was the beginning of the final act for the giant junk bond insurance companies.

The New York Times was one of the first to pick up the story. Newspapers all over the country soon followed. That’s when the large life and health insurance companies began to fall like dominoes — Executive Life of California, Executive Life of New York, Fidelity Bankers Life, First Capital Life — each and every one dragged down by large junk bond holdings.

And this was just the prelude to the biggest failure of all — Mutual Benefit Life of New Jersey, which fell under the weight of losses in speculative real estate.

How many people were affected? I checked the records of each failed company:

In total, they had exactly 5,950,422 policyholders.

And among these, 1.9 million were fixed annuities and other policies with cash value. If you were one of the 1.9 million, your money was frozen. The authorities wouldn’t let you cash out your policy. They wouldn’t even let you borrow on your policy.

What about the legal mandate for the guarantee funds to reimburse policyholders in failed companies? The authorities put their heads together and came up with a “creative” solution:

To avoid invoking the guarantee system, they simply decided to change the definition of when a failed company fails. Instead of declaring that the bankrupt companies were bankrupt, they decided to call them “financially impaired,” or “in rehabilitation.”

Then, after many months, the authorities created new companies with new, reformed annuities yielding far less than the original policies. They gave policyholders two choices. Either:

  • “Opt in” to the new company and accept a loss of yield for years to come, or …
  • “Opt out” and accept their share of whatever cash was available, often as little as 50 cents on the dollar.

It was the greatest disaster in the history of insurance!

So You’d Think That the Insurance
Industry Would Have Learned Its Lessons.

Not So!

Like the failed insurers of the 1990s, several large U.S. insurance companies, on the prowl for high yields, invested again in high-risk instruments. Junk bonds were still stigmatized, but a handy substitute for junk was readily available: Subprime mortgages.

And to make things even more exciting, some insurers added a whole new layer of risk: A special kind of bet known as a credit default swap (CDS) — a bet placed on the probability of another company’s failure.

Remember, in the prior episode, the rating agencies collected large fees from the companies for each grade. That, in turn, introduced serious conflicts of interest into the process and often biased the ratings in favor of the companies.

This time around, they did precisely the same thing: They collected the same kind of big fees. They gave out the same kind of top-notch ratings. And they covered up the same kind of massive risks.

In addition, S&P, Moody’s, and Fitch created a whole new layer of conflicts and bias: They hired themselves out as consultants to help create newfangled debt-backed securities, giving them a true lock on the industry: They created the securities.

They rated the securities. And then they rated the companies that bought the securities, collecting fat fees at each stage of the process.

Not only did that pad the bottom line of the rating agencies, it also gave them stronger reasons to inflate the ratings, ignore warning signs, postpone downgrades, and avoid anything that might bring down the debt pyramid they had helped to create.

The repercussions of this disaster were at the heart of the debt crisis, and as a part of the Regulatory Reform Act of 2010, Congress sought to address them. But …

The Fundamental Business
Model of the Big Four Rating
Agencies Has Not Changed.

To this day, the insurance companies are still rated by the same rating agencies, in the same way with the same conflicts of interest.

This is also how the Wall Street rating agencies rate every issuer of corporate bonds, municipal bonds, mortgage-backed securities, and more.

ALL of the Big Four rating agencies — Moody’s, Standard & Poor’s, Fitch, and A.M. Best — continue to collect large fees from the companies they rate.

And the obvious conflict of interest that naturally flows from that financial relationship persists, leaving the danger of more ratings fiascos to come.

Next month, I will provide a solution to help you make sure your money is safe and STAYS safe. Stand by.

Good luck and God bless!

Martin

Read more here:
Wall Street Cover-Ups, Deceptions and Lies

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

How to Make Sure All Your Investments Are Secure

November 21st, 2010

Martin D. Weiss, Ph.D.

In it, I give you a very simple method to help greatly improve the probability that ALL the specific investments that you own — or are about to buy — are among the safest choices you can make.

I want you to make safer profits in stocks, mutual funds or ETFs … find the safest banks for your CDs, money markets and checking accounts … and buy strictly the safest life insurance, annuities and health insurance. Plus I want to help you …

Avoid the Deceptions, Cover-Ups and
Lies Still Common on Wall Street

Let’s say you put a big chunk of your nest egg in a life insurance policy with an A+ company.

You invest another sizable amount in a portfolio of high-rated corporate bonds and tax-free municipal bonds.

Then, feeling safe and secure with most of your funds, you take a flyer on a few stocks that a dozen separate research analysts have unanimously rated as a “buy” or at least a “hold.”

You assume you’ve made informed decisions based on the best research the world has to offer.

The reality: Even in the absence of bubbles, busts, recessions or dollar collapses, you could suffer wipeout losses.

Hard to believe this could actually happen? Actually, it already has happened; and I want to make absolutely certain you don’t get caught in Wall Street deceptions like these in the future. So this morning, let me tell you what they are.

Their primary source: Legalized payola and massive conflicts of interest.

The primary result: Distorted research and inflated ratings on hundreds of thousands of companies, bonds, stocks, and investments of all kinds.

The threat to you: Far bigger losses in your investments than you would have anticipated otherwise.

Today, I’ll tell you about deceptions in the insurance industry. Next time, we can talk about equally egregious deceptions in other financial sectors.

“Weiss Had Better Shut the
@!%# Up or Get a Bodyguard.”

The year was 1988, and I had been rating the financial strength of the nation’s banks and S&Ls for over a decade.

My father, J. Irving Weiss, already an octogenarian, was helping me with the analysis. And one afternoon I told him that my ratings firm, Weiss Ratings was going to start rating insurance companies.

I can never forget his first words: “Check out First Executive [the parent of Executive Life Insurance],” he said. “Fred Carr’s running it. He’s trouble, and he’s knee deep in junk bonds. Follow the junk and you will find your answers.”

I did, and I found quite a few life insurance companies that were loaded with junk bonds, one of which was First Capital Life, to which we gave a financial strength rating of D-.

I was generous. The company should have gotten an F.

But within days of my widely-publicized warnings on First Capital Life, a gaggle of the company’s lawyers and top executives flew down to our office. They ranted. They raved. They swore they’d slap me with a massive lawsuit and put me out of business if I didn’t give them a better rating. “All the Wall Street ratings agencies give us high grades,” they said. “Who the hell do you think you are?”

I politely explained that we never let personal threats affect our ratings. And unlike other rating agencies, Weiss Ratings never accepts a dime from the companies we rate. “We work for individuals,” I said, “not big corporations. Besides,” I continued, opening up the company’s most recent quarterly report, “your own financial statements prove your company is in trouble.”

That’s when one of them delivered the ultimate threat: “Weiss better shut the @!%# up,” he whispered to my associate, “or get a bodyguard.”

We did neither. To the contrary, we intensified our warnings. And within weeks, the company went belly-up, just as Weiss Ratings had warned — still boasting high ratings from major Wall Street firms on the very day they failed.

In fact, the leading insurance rating agency, A.M. Best, didn’t downgrade First Capital Life to a warning level until five days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company’s stock crashed 99 percent, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the Earth. Three of the company’s closest competitors also bit the dust. Unwitting investors — who did not have access to my ratings — lost $4 billion, $4.5 billion, and $13 billion, respectively.

Fortunately, those who had seen our ratings were ready. Weiss Ratings warned them long before these companies went bust. Nobody who heeded our warning lost a cent.

In fact, the contrast between anyone who relied on Weiss Ratings and anyone who didn’t was so stark, even the U.S. Congress couldn’t help but notice.

Congress asked: How was it possible for Weiss — a small firm in Florida — to identify companies that were about to fail, when Wall Street told us they were still “superior” or “excellent” right up to the day they failed?

To find an answer, Congress called all the rating agencies — Standard & Poor’s (S&P), Moody’s, A.M. Best, Duff & Phelps, and Weiss — to testify. But we were the only ones among them who showed up.

So Congress asked its auditing arm, the U.S. Government Accountability Office (GAO), to conduct a detailed study on the Weiss ratings in comparison to the ratings of the other major rating agencies.

Three years later, after extensive research and review, the GAO published its conclusion: Weiss beat its leading competitor, A.M. Best, by a factor of three to one in forecasting future financial troubles. The three other Wall Street firms weren’t even competition.

But the GAO never answered the original question — why?

I can assure you it wasn’t because of better access to information than our competitors. Nor were we smarter than they were. The real answer was contained in one four-letter word: Bias.

To this day, the other rating agencies are paid huge fees by the issuers of bonds, insurance policies and other investments that you buy. In other words, their ratings are literally bought and paid for by the same companies they rate.

These conflicts and bias in the ratings business are no trivial matter.

How Deceptive Ratings Entrapped
Nearly Two Million Americans in Failed
Insurance — and Why It Could
Happen to You!

If you have insurance, don’t blindly assume it’s safe. In a moment, I’ll show you how two million others once made that mistake and lived to regret it. And to help you avoid repeating their error, it’s vital that you understand their story from start to finish.

The problems began in the early 1980s when insurance companies had guaranteed to pay high yields to investors of 10 percent or more, but the best they could earn on safe bonds was 8, 7, or 6 percent. They had to do something to bridge that gap — and quickly.

So how do you deliver high guaranteed yields when interest rates are going down? Their solution: Buy the bonds of financially weaker companies.

Consider, for a moment, what bonds are and you’ll understand the situation. When you buy a bond, all you’re doing, in essence, is making a loan. If you make the loan to a strong, secure borrower, like the U.S. government or a financially robust corporation, you won’t be able to collect a very high rate of interest.

If you want a truly high interest rate, you need to take the risk of lending your money to a less secure borrower — maybe a start-up company or perhaps a company that’s had some ups and downs in recent years. And you can earn even more interest from companies that have been having “a bit of trouble” paying their bills lately. (Whether you’ll actually be able to collect that interest or get back your principal is another matter entirely.)

What’s secure and what’s risky? In the corporate bond world, everyone agreed to use the standard rating scales originally established by the two leading bond rating agencies — Moody’s and S&P. The two agencies use slightly different letters, but their scale is basically the same: Triple-A, double-A, single-A; triple-B, double-B, single-B; and so on.

If a bond is triple-B or better, it’s investment grade. That’s considered relatively secure. If the bond is double-B or lower, it’s speculative grade, or simply “junk.” It’s not garbage you’d necessarily throw into the trashcan, but in the parlance of Wall Street, it’s officially known as junk.

And that’s what insurance companies started to buy: Junk. They bought double-B bonds. They bought single-B bonds. They even bought unrated bonds that, if rated, would have been classified as junk.

The key to their success was to keep the junk bond aspect hush-hush, while exploiting the faith people still had in the inherent safety of insurance. To make the scheme work, they needed two more elements: The blessing of the Wall Street ratings agencies and the cooperation of the state insurance commissioners, many of whom had worked for — or would later join — those same insurance companies.

The blessing of the rating agencies was relatively easy. Indeed, for years, the standard operating procedure of the leading insurance company rating agency, A.M. Best & Co., was to “work closely” with the insurers.

If you ran an insurance company and wanted a rating, the deal that Best offered you was very favorable indeed. Best said, in effect: “We give you a rating. If you don’t like it, we won’t publish it. If you like it, you pay us to print up thousands of rating cards and reports that your salespeople can use to sell insurance. It’s a win-win.”

The ratings process was stacked in favor of the companies from start to finish. They were empowered to decide when and if they wanted to be rated. They got a “sneak preview” of their rating before it was revealed to the public. They could appeal the rating if they didn’t like it. And if they still didn’t get a rating they agreed with, they could take it out of circulation by suppressing its publication.

Three newer entrants to the business of rating insurance companies — Moody’s, S&P, and Duff & Phelps (now Fitch) — offered essentially the same deal.

But instead of earning their money from reprints of ratings reports, they simply charged the insurance companies a fat flat fee for each rating — anywhere from $10,000 to $50,000 per insurance company subsidiary, per year. Later, Best decided to change its price structure to match the other three, charging the rated companies similar up-front fees.

Not surprisingly, the rating agencies gave out good grades like candy. At A.M. Best, the grade inflation got so far out of hand that no industry insider would be caught alive buying insurance from a company rated “good” by Best. Nearly everyone (except the customers) knew that Best’s “good” was actually bad.

Getting the insurance regulators to cooperate was not quite as easy. In fact, the state insurance commissioners around the country were getting so concerned about the industry’s bulging investments in junk and unrated bonds, they decided to set up a special office in New York — the Securities Valuation Office — to monitor the situation.

What’s a junk bond? The answer, as I’ve explained, was undisputed: any bond with a rating from S&P or Moody’s of double-B or lower. But the insurance companies didn’t like that definition. “You can’t do that to us,” they told the insurance commissioners. “If you use that definition, everybody will see how much junk we have.” The commissioners struggled with this request, but amazingly, they obliged. It was like rewriting history to suit the new king.

This went on for several years. Finally, however, after a few of us screamed and hollered about this sham, the insurance commissioners finally realized they simply could not be a party to the junk bond cover-up any longer. They decided to bite the bullet. They adopted the standard double-B definition, and reclassified over $30 billion in “secure” bonds as junk bonds. It was the beginning of the final act for the giant junk bond insurance companies.

The New York Times was one of the first to pick up the story. Newspapers all over the country soon followed. That’s when the large life and health insurance companies began to fall like dominoes — Executive Life of California, Executive Life of New York, Fidelity Bankers Life, First Capital Life — each and every one dragged down by large junk bond holdings.

And this was just the prelude to the biggest failure of all — Mutual Benefit Life of New Jersey, which fell under the weight of losses in speculative real estate.

How many people were affected? I checked the records of each failed company:

In total, they had exactly 5,950,422 policyholders.

And among these, 1.9 million were fixed annuities and other policies with cash value. If you were one of the 1.9 million, your money was frozen. The authorities wouldn’t let you cash out your policy. They wouldn’t even let you borrow on your policy.

What about the legal mandate for the guarantee funds to reimburse policyholders in failed companies? The authorities put their heads together and came up with a “creative” solution:

To avoid invoking the guarantee system, they simply decided to change the definition of when a failed company fails. Instead of declaring that the bankrupt companies were bankrupt, they decided to call them “financially impaired,” or “in rehabilitation.”

Then, after many months, the authorities created new companies with new, reformed annuities yielding far less than the original policies. They gave policyholders two choices. Either:

  • “Opt in” to the new company and accept a loss of yield for years to come, or …
  • “Opt out” and accept their share of whatever cash was available, often as little as 50 cents on the dollar.

It was the greatest disaster in the history of insurance!

So You’d Think That the Insurance
Industry Would Have Learned Its Lessons.

Not So!

Like the failed insurers of the 1990s, several large U.S. insurance companies, on the prowl for high yields, invested again in high-risk instruments. Junk bonds were still stigmatized, but a handy substitute for junk was readily available: Subprime mortgages.

And to make things even more exciting, some insurers added a whole new layer of risk: A special kind of bet known as a credit default swap (CDS) — a bet placed on the probability of another company’s failure.

Remember, in the prior episode, the rating agencies collected large fees from the companies for each grade. That, in turn, introduced serious conflicts of interest into the process and often biased the ratings in favor of the companies.

This time around, they did precisely the same thing: They collected the same kind of big fees. They gave out the same kind of top-notch ratings. And they covered up the same kind of massive risks.

In addition, S&P, Moody’s, and Fitch created a whole new layer of conflicts and bias: They hired themselves out as consultants to help create newfangled debt-backed securities, giving them a true lock on the industry: They created the securities.

They rated the securities. And then they rated the companies that bought the securities, collecting fat fees at each stage of the process.

Not only did that pad the bottom line of the rating agencies, it also gave them stronger reasons to inflate the ratings, ignore warning signs, postpone downgrades, and avoid anything that might bring down the debt pyramid they had helped to create.

The repercussions of this disaster were at the heart of the debt crisis, and as a part of the Regulatory Reform Act of 2010, Congress sought to address them. But …

The Fundamental Business
Model of the Big Four Rating
Agencies Has Not Changed.

To this day, the insurance companies are still rated by the same rating agencies, in the same way with the same conflicts of interest.

This is also how the Wall Street rating agencies rate every issuer of corporate bonds, municipal bonds, mortgage-backed securities, and more.

ALL of the Big Four rating agencies — Moody’s, Standard & Poor’s, Fitch, and A.M. Best — continue to collect large fees from the companies they rate.

And the obvious conflict of interest that naturally flows from that financial relationship persists, leaving the danger of more ratings fiascos to come.

Good luck and God bless!

Martin

Read more here:
How to Make Sure All Your Investments Are Secure

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

All Eyes On the Fed: Awaiting Bernanke’s Decision

October 30th, 2010

The world waits…

Stocks barely budged this week. Gold bobbed around like an anchorless sailboat, adrift in a vast ocean of guesses, speculation and rumor. All eyes, meanwhile, are on US Fed Chairman Ben Bernanke, who is widely expected to announce his next round of systematic dollar debasement a few days from now – a strategy otherwise known as “quantitative easing,” or “QE” for short. Trepid investors, unsure of what the value of the world’s reserve currency will be a week from now, sit on the sidelines, awaiting their cue from the man with the magic chopper.

Fellow Reckoners will recall Bernanke’s statement that, should it become “necessary,” he could cure what ails the financial world by dropping money from helicopters. He’s not quite there yet. Readers are invited to have a little patience…

Of course, the battle between central bank-created fiat money and its arch nemesis, gold, is not a new tale. Money meddlers have been tussling with the precious metal since the coin clipping days of the Romans. You’d think the bozos would have learned their lesson by now. But, as Bill likes to say, what one generation learns, the next is quick to forget.

“Gold vs. the Fed: the Record is Clear,” reads a headline from The Wall Street Journal this week. The article goes on to highlight a few of the dollar’s lowlights during its ongoing battle with the Midas Metal.

“From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility,” the story begins, “unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable – the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.

“What’s happened since 1971,” the article wonders aloud, “when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience.”

And that’s not all.

“For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.”

And to think the Journal is referring only to official statistics! The real story, when adjusting for the number torture going on in the government’s chamber of statistics – what Orwell might call the Ministry for Truth – is far, far worse. But readers get the point. The evidence is in. The facts have been observed. The arguments made. The case against a fiat money system would seem as open and shut as they come.

So why continue down the path leading to the very same cliff every other fiat money leapt from? Ahh… As every liar worth his salt well knows, a mistruth must beget a fraud, which, in turn, must give rise to another lie.

The world is brimming with stories of people who blindly cling to crackpot ideas in the face of any and all rational argument to the contrary. In fact, research shows that, far from inspiring a level-headed change of opinion, a well constructed argument dismantling this or that hocus pocus theory often has the opposite effect, emboldening the purveyors of such falsehoods. Leon Festinger introduced the theory, known as “cognitive dissonance” in his well-known book When Prophecy Fails, co-written with Henry Riecken, and Stanley Schachter.

In it, Festinger and his colleagues infiltrate a cult whose leader, Dorothy Martin, convinces a bunch of fellow village idiots that an apocalyptic flood is going to ravage the earth and that their only hope rests with a group of strangely benevolent aliens who would swoop down at the hour of reckoning to save the believing souls form certain death. One might reasonably expect that, when the fated day came and went without a drop of rain (or alien appearance), the group, no doubt embarrassed but otherwise none the worse for wear, would simply disband and go home. Not so.

Ed Yong, an award-winning British science writer who addressed the subject in a recent article for Discover magazine, describes what happened next. “In a reversal of their earlier distaste for publicity, [the group] started to actively proselytize for their beliefs. Far from shattering their faith, the absent UFOs had turned them into zealous evangelists.”

What corners we humans allow our theories to paint us into!

Perhaps it is the same psychological disposition, a cerebral partitioning of sorts, giving rise to the popular belief that a man can grow prosperous by spending more than he earns. Or that problems caused by too much debt can be cured…with more debt. Or that leaving a central banker in charge of the value of money can end in anything other than currency destruction and eventual financial ruin.

So, what does a central banker do when one round of money printing doesn’t bring about the desired effect? Does he revisit first principles and reexamine the evidence? Or does he double down on his bets, defending his actions with increasingly zealous evangelism? Bernanke gives the world his answer on Wednesday.

Joel Bowman
for The Daily Reckoning

All Eyes On the Fed: Awaiting Bernanke’s Decision originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
All Eyes On the Fed: Awaiting Bernanke’s Decision




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Opt Out of Social Security

September 27th, 2010

“The Social Security Trust Fund is misnamed. It cannot be trusted, and it is not funded.”

–Former US Comptroller General David Walker, July 2010.

If David Walker – who was essentially the US government’s accountant from 1998-2008 – can make jokes like that about Social Security, we’re in trouble. Indeed, as we noted in our essay “The End of Social Security as We Know It”, the Social Security Trust recently began paying out more than it is taking in. Over the next 75 years, the Fund will require an additional $5.4 trillion to pay for scheduled benefits.

Given the deplorable fiscal condition of the Social Security Trust Fund, some forward-looking Americans are asking, “Why can’t I just opt out?” Even middle-aged members of the Baby Boom generation are wondering if there will be any Social Security left for them when the time comes…and if they wouldn’t be better off abandoning the government’s mandatory retirement plan.

So can you opt out? In a word, yes.

How Do You Feel About a Horse and Buggy?

It’s true; you can opt out of Social Security…if you belong to a fiercely independent religious culture like the Amish.

Back in 1954, when the Social Security Administration first began taxing and covering “agricultural workers,” the Amish took issue with Social Security’s forced participation. The program, also known as Federal Old Age, Disability and Survivors Insurance, is a pretty brash affront to the Amish credo. Not only are the Amish famous for “taking care of their own,” but the whole concept of insurance goes against their faith. As people extremely serious about God’s plan, they don’t take kindly to a government-mandated hedge against His prerogative.

So in the late ’50s, the Amish started their resistance to Social Security. Naturally, they were quiet and reasonable about it. Some put money into a bank account and insisted the government place a lien on it. At least that way, some Amish thought, they weren’t voluntarily paying into the program. Others signed a petition and sent it to Capitol Hill. But, naturally, the IRS paid no attention. The IRS kept insisting that FICA taxes be remunerated…until eventually many Amish just stopped paying.

The whole conflict came to its climax in 1961 when the IRS went after one of these “delinquents,” Valentine Byler. Long story short, he owed over $300 in back Social Security taxes, so the IRS repo’ed three of his six horses. No kidding. (At one point in this fiasco, Reader’s Digest reported a judge berating the government’s representatives, “Don’t you have anything better to do than to take a peaceful man off his farm and drag him into court?” Apparently not.)

To the Amish’s credit, they kept resisting the FICA tax, insisting that it violated their 1st Amendment right to practice religion free of government interference. Byler’s story, as you can imagine, was a real hit with the media and within a few years the IRS caved under public pressure. In 1965, the government passed a law that allowed US citizens to opt out of Social Security.

Of course, only a small minority of Americans can legally stop paying Social Security taxes and strike their beneficiary status. In order to qualify for the IRS’s exemption, you must:

  • Convince them you are part of a religion that is “conscientiously opposed to accepting benefits of any private or public insurance that makes payments in the event of death, disability, old age or retirement.”
  • Have a ranking official of this religion authorize that you are a true believer
  • Prove that your religion has been established – and continually opposing insurance – since at least 1950.

So unless you are Amish, Mennonite, Anabaptist or part of another very small religious sect, odds are you’re stuck paying (and receiving) Social Security for the foreseeable future. Still, we won’t fault you for trying: Look around for Form 4029…you’ll have to file with the IRS if you seek Social Security exemption. Be careful what you wish for…exemption might be the swan song for your life, auto and health insurance, too.

Learn from the Amish

Even though your opt-out chances are slim to none, there’s plenty to learn from the Amish battle against Social Security.

1) This story should serve as a reminder of what the whole program really is: insurance. When FDR first introduced Social Security in 1935, he said it would “give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” It was never intended to be a program in which nearly everyone paid in and nearly everyone expected to be fully paid out…even though that is what it has become today.

We suspect that kind of insurance language will return. The rich – who are so exceptionally unpopular these days – might soon be reminded they are not “average” and that Social Security was not designed to supplement their fat 401(k)s. (Whether that is in any way ethical, or even what qualifies you as “rich” in America, is a debate for another Daily Reckoning.) At the least, expect this cash-strapped government to raise the wage base for the Social Security tax or institute a benefits means test in the near future.

2) The framework of Social Security is flexible. There are plenty of people alive in America today who were around before this program even existed. Those same people saw it amended and reformed many times in the ’30s, ’40s and ’50s. Exceptions have been made along the way. And in 1983, under the Greenspan Commission, the government gave Social Security yet another dramatic reform.

Thus, there is no reason to think Social Security can’t be amended again, for better or for worse. Maybe the government, like it did in the ’80s, will change the rules and hike taxes, raise the retirement age and reduce benefits. Or if you are as persistent as the Amish, perhaps you can influence legislation in your favor. (Your odds increase dramatically if you own or control a large multinational corporation.)

3) Most importantly, like the Amish, expect a self-sufficient retirement. “The best revenge is living well,” the saying goes. Thus the best way to survive the plight of the Social Security Trust Fund is to not need it in the first place. Take a page from the Amish playbook and minimize your taxes…contribute the most you can to your company’s tax-deferred 401(k) plan. Better still, enroll in a self-directed 401(k), where you can invest in stable, dividend-yielding companies that might compound your returns. A few of those companies might even have a dividend reinvestment plan (DRIP) where you can use those quarterly payments to reinvest in the underlying stock… That’s a double serving of perfectly legal tax evasion.

There’s something to be said for the Amish way of taking care of your own, too. Their lifelong financial planning doesn’t just revolve around their individual net worth, and neither should yours. If there’s money to spare, set up some tax-deferred accounts for family members. Not only could it empower them, but depending on your situation, you might be able to alleviate your own tax burden at the same time. They’ll thank you 10-20 years from now, when David Walker’s joke isn’t quite so funny.

Regards,

Ian Mathias
for The Daily Reckoning

Opt Out of Social Security originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Opt Out of Social Security




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Major Moves Aug: New Listings Fly High, Others Stagnate, Filings Slow

September 1st, 2010

August, a typically slow month for North American markets marking the end of the summer, ended with the general equity markets working up losses over the period. The S&P500 lost about 4.7% over August as the market bounce that we saw in July fizzled out. No doubt that poor housing and employment numbers in the US had lots to do with this as investors have been forced to re-test their faith in the recovery time and again.

The Active ETF space in the US over the past month ramped up and garnered a significant amount of assets, but again the growth was driven primarily by just a few names. August also saw the number of new filings for actively-managed ETFs slow down, with fewer new players announcing plans. However, considering that there are currently 25 different issuers with plans for actively-managed ETFs which are backlogged with the SEC, one would have to say that the bottleneck definitely lies at the SEC. This was confirmed in an interview with Patrick Daugherty, who spoke of “Paralysis at the SEC”. We did see more conversion plans announced though, this time with Claymore announcing plans to convert two passively-managed bond ETFs into actively-managed ETFs. We also started to address the basics with regards to actively-managed ETFs to help new investors with our Active ETF Basics series. August also marked the closure of two Active ETFs from Grail Advisors and RiverPark, which are the first actively-managed ETFs to shut down since Bear Stearns’ very first Active ETF went down with the company in 2008.

Fund Flows:

(Click table to enlarge)

The US Active ETF space saw its assets grow by more than $400 million, but the growth was concentrated in a few names and majority of the funds in the space continued to be overlooked by investors. All in all, the total asset base reached $2.2 billion at the end of August, still below the May high. As has become the norm, PIMCO’s Enhance Short Maturity Fund (MINT: 100.74 0.00%) served as a barometer for market sentiment, being directly related to investor fears. As the market fell back in August, investors looked to take risk off the table and go into cash. And in doing so, they helped MINT bolster its asset base up to $517 million, still nowhere close to the $770 million high from May, but an significant rise from the $333 million the fund had at the end of July.

However, the biggest magnet for assets in the Active ETF space, was WisdomTree’s just launched actively-managed ETF – the WisdomTree Emerging Markets Local Debt Fund (ELD: 50.43 0.00%). In the span of 3 weeks, the fund was able to attract close to $200 million in assets, remarkable considering how most other funds performed over the period. Clearly, WisdomTree has been able to gain quite a lot of interest and traction from investors for to its emerging markets fixed-income strategy. Whether that’s a result of superior marketing capabilities or a simple case of finding the right investor need and catering to it, is anyone’s guess. But most other Active ETF issuers could take a lesson or two from WisdomTree as another fund, the Dreyfus Brazilian Real Fund (BZF: 27.69 0.00%) was also able to increase its asset base $62 million to $220 million. WisdomTree’s largest fund remains the Chinese Yuan Fund (CYB: 24.81 0.00%), which stood at $585 million and in fact lost some money in August.

(Click table to enlarge)

In Canada, the Active ETF scene remained largely stagnant, with the exception of AlphaPro’s latest new launch – the Horizons AlphaPro Corporate Bond Fund (HAB) – which built on its successful launch by gathering $10 million more in assets. That brought the total assets within actively-managed ETFs in Canada to $340 million.

Head to our Active ETFs Database for a more dynamic listing of all Active ETFs.

New Entrants, Filings and Closures:

1. Huntington files for strategy using options – direct link

2. Claymore files to convert 2 passive ETFs into Active ETFs – direct link

3. U.S. One expands its exemptive relief and plans new Active ETF – direct link

4. Grail Advisors shuts down two of its funds – direct link

5. Van Eck removes derivatives from Active ETF plans – direct link

ETF, OPTIONS

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