Happy BFF - Bakersfield Edition

I was really starting to worry that things were askew at the FDIC. They didn’t shut anyone down last week and as of 6PM PST they hadn’t shut anyone down this week. I thought that one of the following must have happened:

1. All banks became solvent, the crisis is over, there’s nothing to look at here, move along folks.
2. The FDIC finally ran out of money. SAY WHAT?!?
3. Sheila and Suze were on a 2 week, instead of 1 week, retreat to solve their recent bout of lesbian bed death.

But as I log in at close to 10 PM on a Friday evening, I see that Sheila was back in action, at least bank-wise. She took down the San Joaquin Bank in Bakersfield, California signaling to the world that everything is normal once again.

Barney Frank, Predatory Lender

Yes, that headline sounds like a lot of headlines on the W.C. Varones Blog.

But that's not my headline; it's from the Wall Street Journal:

Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.

The Wall Street Journal agrees: FHA is the new subprime. Click on over and read the whole thing.

Hyperinflation tipping point

Following up yesterday's post on inflation-defense investments, Paul Hsieh and Amit Ghate cite John Mauldin's weekly newsletter, which notes that the hyperinflation "tipping point" generally occurs when governments have to borrow 40% of what they are spending, which, coincidentally, is exactly where Barack Obama and his printmeister Ben Bernanke have the United States at the moment:

"There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures.

"According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed.

But hey, what's the worst that could happen? Recent hyperinflations have only brought about little things like civil war and genocide. A small price to pay to give Wall Street, the autoworkers, and Realtors another well-deserved bailout!

Shall we play a game?

"How about Global Thermonuclear Depression?"

"Wouldn't you prefer a good game of chess?"

"Later. Right now let's play Global Thermonuclear Depression."

"Fine."


HT: Instapundit.

CalPERS: not just bad investors, but crooked too! Pay-to-play

We've been documenting the CalPERS debacle here for more than a year:

CalPERS' magical performance numbers -- 7/19/2008
CalPERS implodes just as predicted --12/18/2008
CalPERS fraud countdown -- 6/21/09
CalPERS fraud watch -- 7/21/09
CalPERS tragic in its hilarity -- 7/27/2009

Today the Wall Street Journal exposes CalPERS board members taking bribes to put CALPERS money into losing investments.

America's largest public-pension fund, Calpers, revealed that a former board member had reaped more than $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses.

The disclosure deepens concerns that alleged conflicts of interest are undermining state retirement funds.

The California Public Employees' Retirement System said it is launching a "special review" into payments by money managers -- including billionaire Leon Black's Apollo Management LP -- to firms including Arvco Financial Ventures LLC. Arvco is headed by Al Villalobos, who served on Calpers's board from 1993 to 1995.

End the Fed rallies November 22

Mark your calendar for an End the Fed rally on Sunday, November 22. They'll be happening nationwide at Federal Reserve Bank branches. I'll be at the San Francisco Fed yellin' at Yellen.

Here is Jr. Deputy Accountant's recap, with pics, from last year.

More info at End the Fed.

Advice to a young man on supporting a mistress

Instapundit links to this Virginian post on protection against hyperinflation. I agree with his conclusion of real estate, gold, and stocks.

Coincidentally, I had just written an e-mail last night to a young professional who was looking into investment ideas to protect against dollar collapse. Here are my thoughts:

My overall philosophy is that individual investors should manage their own investments via very low-cost mutual funds and ETFs -- the money they save by not paying advisors really adds up.

A few of my favored low-cost vehicles are:

Foreign stocks:
VWO, VEA -- Vanguard emerging markets and EAFE index ETFs
SWISX -- Schwab international index fund
EWA -- Australia stock ETF
EWC -- Canada stock ETF

Foreign currencies:
FXA -- Australia currency ETF
FXC -- Canada currency ETF
Everbank.com -- savings accounts and CDs denominated in many different currencies

Foreign bonds:
PFUIX -- Pimco Foreign Bond (unhedged)

Commodities:
GSG -- Goldman Sachs Commodity Index ETF (yes, they are evil, but their index is OK)
GLD, SLV -- gold and silver ETFs
GDX -- gold miner index ETF
gold coins -- pick them up at your local dealer for $50 -$70 per ounce above the spot price of gold

For most investors with a long time horizon, I'd recommend a very diversified portfolio with most or all of the above in addition to significant chunk of US stocks (VTI -- Vanguard total index is the only thing you need to hold there) and a good chunk of cash/short-term CDs.

There are other great advantages to managing your own money -- like managing your own tax liability. Professionally managed funds generally generate capital gains, but if you manage your own you only take gains when it makes sense for you. And you can actually manage tax losses to offset 3k per year of ordinary income.

Of course, I left out real estate. Real estate is a brilliant inflation hedge because it's typically highly leveraged. Buy a home with an FHA loan and a phony 3.5% down payment, and you're essentially getting it for free as inflation erodes the value of your debt and future payments to nearly zero. The downside of that leverage is that if we're wrong and we get recession rather than hyperinflation, you're way underwater on an overpriced house. But that's OK with an FHA loan, as you can just walk away and hand the house back to the government.

Also left out were TIPS. TIPS are a fine choice for the most conservative savers, but the real return is near-zero. You may protect your purchasing power, but your money is not going to grow. And TIPS are based on government CPI, which may or may not reflect the true cost of living. The government has an incentive to understate inflation in the CPI as this reduces payments like SSI and keeps taxpayers in higher CPI-adjusted tax brackets.