Why the Meltdown Should Have Surprised No One | Peter Schiff

Here is the link to the Peter Schiff video mentioned at the end of the previous post.

 

 

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Be Very Afraid: The 'Experts' Are Running the Economy

Be Very Afraid: The 'Experts' Are Running the Economy
by Thomas E. Woods, Jr.

Recently by Thomas E. Woods, Jr.: Some Americans Distrust Authority

When Young Americans for Liberty at Indiana University first invited me to speak last year, the group ran into resistance from the university administration. Having consulted the economics department, the relevant university office declared that I was "uncredentialed," and that perhaps a professor from IU’s economics faculty could give a nice lecture instead. I was uncredentialed, presumably, because my education at Harvard and Columbia was in history, not economics.

The student group refused to take this lying down, and made such a stink in the local media, pointing to my bio and the reception of my book Meltdown – including the friendly coverage it received from mainstream outlets like Barron’s, CBS.com, and UPI – that the university not only reversed its stance but even partially funded my appearance, which took place on September 21 of this year.

 
The Indiana Daily Student (circulation 15,500) offered me a 600-word guest column in the wake of my appearance. Here’s what I wrote, which they published verbatim (complete with a comments section). ~ Tom Woods

 
The free market did not cause the financial crisis, and the Elmer’s glue and Scotch tape our wise leaders have applied to the economy are only prolonging the agony. That’s the thesis of my 2009 New York Times bestseller, Meltdown.

That’s not a popular thing to say in Bloomington, I learned several months ago.

When Young Americans for Liberty at IU hit a bureaucratic stone wall in trying to invite me to campus – a problem I can’t say I’ve run into at any other university – the local media took notice. But it was the comment sections that were a particular hoot. It was as though I had insulted Stalin in the old Soviet Union. Who does this idiot think he is? How dare he speak of our wise overlords that way! Why, they’re just looking out for the good of the people! And so on, as if I’d stumbled into some kind of cliché competition.

Then, when the university reversed itself and even helped fund my appearance, the comments switched to, "If I had time, I’d go over there and set this guy straight!" Uh-huh. The large crowd that came to hear me a couple weeks ago couldn’t have been friendlier.

What I explained at IU was that asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.

 
But thanks to the Federal Reserve System (or simply the "Fed"), which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?

 
It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)

None of this has anything to do with the free market.

Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?

The point of being in college is to learn how to think beyond clichés. Forget the quacks who told us, cluelessly, that everything was fine with the economy in 2007. Look instead to modern spokesmen of the Austrian School like Peter Schiff, Ron Paul, and Jim Grant. You know, the people who, unlike your professors (who, by the way, tried to keep a dissident voice from speaking on campus), predicted the recent crash to a T.

Want to know what really happened to the economy, and why your job prospects are so bleak? Watch Peter Schiff’s YouTube "Why the Meltdown Should Have Surprised No One." That’s the first step toward becoming the independent thinker that four years at IU are supposed to make of you.

 

September 30, 2010

Thomas E. Woods, Jr. holds a bachelor's degree in history from Harvard and his master's, M.Phil., and Ph.D. from Columbia University. He is the author of ten books, including the just-released Nullification: How to Resist Federal Tyranny in the 21st Century, and the New York Times bestsellers Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, and The Politically Incorrect Guide to American History. Visit his website and blog, follow him on Twitter and Facebook, and subscribe to his YouTube Channel.

Copyright © 2010 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

AGNC Commences Public Offering of Common Stock

AGNC's stock price dropped 4.61% this afternoon on the news that it is offering 10 million shares of additional common stock.  This shouldn't be a big surprise to anyone who has examined AGNC's quarterly 10-K filings.  They routinely issue stock to attain paid-in capital to buy more "agency securities".  The company had 33.6 million shares as of June 2010.  It will likely have 43.6 million shares after the new shares are sold.

What is interesting is that AGNC paid $1.30 per share dividend last quarter (2Q 2010).  The dividend cost AGNC $47.1 million dollars.  That dividend payment exceeded it quarterly earnings of $36.8 million dollars.  Then just a few weeks ago it declared that it will pay $1.30 for the third quarter of 2010, but now it will have 43.6 million shares at $1.30/share for a total dividend payment of $56.7 million dollars.

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AGNC Commences Public Offering of Common Stock

BETHESDA, Md., Sept 27, 2010 /PRNewswire via COMTEX/ -- American Capital Agency Corp.(AGNC 26.70, -1.29, -4.61%) ("AGNC" or the "Company") announced today that it intends to offer, subject to market and other conditions, 10,000,000 shares of its common stock in an underwritten public offering. In connection with the offering, the Company intends to grant the underwriters an option for 30 days to purchase up to an additional 1,500,000 shares of common stock to cover overallotments, if any.

AGNC expects to use the net proceeds from this offering to acquire additional agency securities as market conditions warrant and for general corporate purposes.

BofA Merrill Lynch, Citi, Deutsche Bank Securities and UBS Investment Bank are joint book-running managers for the offering.

The offering will be made pursuant to AGNC's existing shelf registration statement, previously filed with and declared effective by the Securities and Exchange Commission. The offering of these securities will be made only by means of a prospectus and a related prospectus supplement. When available, copies of the prospectus and prospectus supplement may be obtained from BofA Merrill Lynch, Attn: Prospectus Department, 4 World Financial Center, New York, New York 10080; Citi, Brooklyn Army Terminal, 140 58th Street, 8th Floor, Brooklyn, New York 11220; telephone: (800) 831-9146; Deutsche Bank Securities, Prospectus Department, Harborside Financial Center, 100 Plaza One, Jersey City, New Jersey 07311-3988; telephone: (800) 503-4611 or UBS Investment Bank, Attn: Prospectus Department, 299 Park Avenue, New York, New York 10171; telephone: (888) 827-7275.

This press release does not constitute an offer to sell or the solicitation of an offer to buy shares of common stock, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

ABOUT AGNC

AGNC is a REIT that invests in agency pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity. The Company is externally managed and advised by American Capital Agency Management, LLC, an affiliate of American Capital, Ltd. ("American Capital"). For further information, please refer to www.AGNC.com.

Here is the link to the rest of the legalese: http://www.marketwatch.com/story/agnc-commences-public-offering-of-common-stock-2010-09-27?reflink=MW_news_stmp 

Obama's budget cuts visualized

Elmo isn't laughing at the American national debt

Like the Mogambo Guru says, "We're freakin' doomed!!"  Read the other pages on this blog for some tips on how to survive the coming financial calamity.

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Test audio

via AudioBoo

AGNC analysis of the income account> balance sheet and income tax check upon the published earnings statements

American Capital Agency Corp. (AGNC) qualifies as a real estate investment trust (REIT).  They elected to be taxed as a REIT under the unconstitutional Internal Revenue Code of 1986.  In order to avoid U.S. federal or state corporate taxes, AGNC is required by the men with guns (government) to distrubute annually 90% of their taxable income.   Therefore, we don’t need to check its income tax filings to double-check the honesty of their earnings statements.

 

Note: I wish that we could live in a voluntary society where each business could decide on its own how much of its earnings to distribute to its owners.  No businesses should be taxed.  In a truly free market some businesses would choose to distribute 90% and some would decide to distribute 30%.  Some would decide to distrubute none.  No businesses should be taxed.  Taxes take money away from the employees and owners in the form of taxes.  Individuals shouldn't be taxed either.  However, we are not free so I digress.

 

Please read the excerpt from Securities Analysis below to get an idea how to apply this action step to your own securities holdings.

 

 

Balance-sheet and Income-tax Checks upon the Published Earnings Statements. The Park and Tilford case illustrates the necessity of relating an analysis of income accounts to an examination of the appurtenant balance sheets. This is a point that cannot be stressed too strongly, in view of Wall Street’s naïve acceptance of reported income and reported earnings per share. Our example suggests also a further check upon the reliability of the published earnings statements, viz., by the amount of the federal income tax accrued. The taxable profit can be calculated fairly readily from the income-tax accrual, and this profit compared in turn with the earnings reported to stockholders. The two figures should not necessarily be the same, since the intricacies of the tax laws may give rise to a number of divergences.2 We do not suggest that any effort be made to reconcile the amounts absolutely but only that very wide differences be noted and made the subject of further inquiry.

The Park and Tilford figures analyzed from this viewpoint supply the suggestive results as shown in the table on page 436.

 

The close correspondence of the tax accrual with the reported income during the earlier period makes the later discrepancy appear the more striking. These figures eloquently cast suspicion upon the truthfulness of the reports made to the stockholders during 1927–1929, at which time considerable manipulation was apparently going on in the shares.

 

This and other examples discussed herein point strongly to the need for independent audits of corporate statements by certified public accountants. It may be suggested also that annual reports should include a detailed reconcilement of the net earnings reported to the shareholders with the 2 See Appendix Note 51, p. 787, for a brief résumé of these divergences. net income upon which the federal tax is paid. In our opinion a good deal of the information relative to minor matters that appears in registration statements and prospectuses might be dispensed with to general advantage; but if, in lieu thereof, the S.E.C. were to require such a reconcilement, the cause of security analysis would be greatly advanced.

 

 

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AGNC analysis of the income account> earnings of subsidiaries

We need to examine American Capital Agency Corp’s (AGNC) earnings statements and balance sheets to make sure there are no misleading artifices in their income account.  Today we will check to make sure they didn’t manipulate their earnings by padding their income account with some subsidiary sleight-of-hand.  This is easy since AGNC has no subsidiaries.  No adjustments are necessary.

 

Please read this excerpt from Securities Analysis on the topic and apply it to stock you own or are considering to purchase with subsidiaries.

 

 

On comparatively rare occasions, managements resort to padding their income account by including items in earnings that have no real existence.  One flagrant corporation did the following during the Great Depression:

 

“An examination of the balance sheets discloses that during these two years the item of Good-will and Trade-marks was written up successively from $1,000,000 to $1,600,000 and then to $2,000,000, and these increases deducted from the expenses for the period.

 

These figures show a reduction of $1,600,000 in net current assets in 15 months, or $1,000,000 more than the cash dividends paid. This shrinkage was concealed by a $1,000,000 write-up of Good-will and Trademarks.  No statement relating to these amazing entries was vouchsafed to the stockholders in the annual reports or to the New York Stock Exchange in subsequent listing applications. In answer to an individual inquiry, however, the company stated that these additions to Good-will and Trade-marks represented expenditures for advertising and other sales efforts to develop the business of Tintex Company, Inc., a subsidiary.

 

The charging of current advertising expense to the good-will account is inadmissible under all canons of sound accounting. To do so without any disclosure to the stockholders is still more discreditable. It is difficult to believe, moreover, that the sum of $600,000 could have been expended for this purpose by Park and Tilford in the three months between September 30 and December 31, 1929. The entry appears therefore to have included a recrediting to current income of expenditures made in a previous period, and to that extent the results for the fourth quarter of 1929 may have been flagrantly distorted. Needless to say, no accountants’ certificate accompanied the annual statements of this enterprise.”

 

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A small increase to interest rates will burst the bond bubble

Bonds are definately in a bubble.  This is a good article that explains how a small uptick in several interest rates will pop the bond bubble.  It is going to be so sad to see more people's retirement dreams destroyed by the Federal Reserve's manipulation of interest rates.  The market (people's time preference for money) should determine interest rates.

 

http://read.bi/bqGvo1

Fractional Reserve Banking by Murray N. Rothbard

via lewrockwell.com

Murray Rothbard explains the fraud known as fraction-reserve banking.

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Greenspan's Dark Cloud by Gary North

Check out this website I found at lewrockwell.com

When even the evil Alan Greenspan says we're screwed, then you know it is bad.

AGNC Declares $1.40 Third Quarter Dividend

AGNC will maintain its $1.40 dividend.  I wonder if the dividend will exceed the earnings per share for a second straight quarter.  AGNC earned $1.23 per share back in June 2010 and paid a dividend of $1.40.  That equated to a 113% payout ratio.  If the EPS comes in below $1.40 again, then the stock should move lower because the dividend will not be sustainable for very long.  AGNC had $25,359,000 of retained earnings as of the end of June 2010 in which to draw upon to make up the difference between earnings and the dividend payment.  If they continued to earn $1.23/share, then they could pay the $1.40 dividend for another five or so quarters.

AGNC Declares $1.40 Third Quarter Dividend

BETHESDA, Md., Sept 14, 2010 /PRNewswire via COMTEX/ -- American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that its Board of Directors has declared a cash dividend of $1.40 per share for the third quarter 2010. The dividend is payable on October 27, 2010 to common shareholders of record as of September 28, 2010, with an ex-dividend date of September 24, 2010.

Here is the link to the press release:

http://ir.agnc.com/phoenix.zhtml?c=219916&p=irol-newsArticle&ID=1471118&highlight=

AGNC analysis of the income account> extraordinary losses> amortization of bond discount

American Capital Agency Corp. (AGNC) has not floated any bonds since it began operating in May 2008.  Therefore, no adjustments to its income account are necessary for amortization of bond discount.  You can see from their most recent quarterly 10-K filing that they have no bond liabilities.  Their biggest liabilities are repurchase agreements (6.6 billion dollars).  Repurchase agreements are not bonds.

 

The bottom line is that companies can manipulate their future earnings by charging amortization of bond discounts to their surplus instead of their income statements.

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Here is the relevant section from Securities Analysis:

 

Amortization of Bond Discount. Bonds are usually floated by corporations at a price to net the treasury less than par. The discount suffered is part of the cost of borrowing the money, i.e., part of the interest burden, and it should be amortized over the life of the bond issue by an annual charge against earnings, included with the statement of interest paid. It was formerly considered “conservative” to write off such bond discounts by a single charge against surplus, in order not to show so intangible an item among the assets on the balance sheet. More recently these write-offs against surplus have become popular for the opposite reason, viz., to eliminate future annual deductions from earnings and in that way to make the shares more “valuable.”

 

Example: Associated Gas and Electric Company charged against surplus in 1932 the sum of $5,892,000 for “debt discount and expense” written off.

 

This practice has aroused considerable criticism in recent years both from the New York Stock Exchange and from the S.E.C. As a result of these objections a number of companies have reversed their previous charge to surplus and are again charging amortization of bond discounts annually against earnings.

Why It's Time To Dump Most US Stocks by Peter Schiff

Check out this website I found at lewrockwell.com

Peter Schiff believes in Austrian economics, so do I. He advises to own some foreign high dividend stocks to avoid US dollar risk. Commodity prices will rise when the commercial bankers start lending their 1.1 trillion dollars in excess reserves.

P.S. click on the words lewrockwell.com (that's the hyperlink to the article)

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High dividend stocks – AGNC analysis of the income account> extraordinary losses> idle-plant expense

American Capital Agency Corp. (AGNC) does not own any plant equipment; therefore, they have no idle-plant expenses.  No adjustment to the income account is necessary for this category of analysis.  Learn more about how idle-plant expense accounting can effect earnings by reading the section below.

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The cost of carrying non-operating properties should almost always be charged against income account.  Idle-plant expenses are of a different nature than ordinary charges against income.  The idle-plant expenses should be of a temporary and therefore non-recurring type.  The company’s management can terminate the losses at any time by disposing of or abandoning the property.  If, for the time being, the company elects to spend money to carry these assets along in the expectation that future value will justify the outlay, it does not seem logical to consider these assets as equivalent to a permanent liability, i.e., as a permanent drag upon the company’s earning power, which makes the stock worth considerably less than it would be if these “assets” did not exist.

Some companies in the past had charged their idle-plant expenses to their surplus.  That relieved their reported earnings of expenditures that most companies charge against income.  They should have charged to their income account.

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High dividend stocks – AGNC analysis of the income account> extraordinary losses> other elements in inventory accounting ((tags: high dividend stocks, AGNC, analysis of the income account, extraordinary losses, other elements in inventory accounting)

Different methods of inventory accounting can skew earnings reports.  However, the subject of this article is not applicable to AGNC.  I searched for the words “inventory”, “inventories”, “last-in”, “first-out”, and “costs of goods sold” in AGNC's 2009 annual report and most recent quarterly 10-K filing.  Those words do not appear in their SEC filings.

I decided to reprint the relevant section of Securities Analysis 2^nd edition since the subject of inventory accounting is not applicable to AGNC:

Other Elements in Inventory Accounting. The student of corporate reports must familiarize himself with two permissible variations from the usual accounting practice in handling inventories. As is well known, the standard procedure consists of taking inventory at the close of the year at the lower of cost or market. The “cost of goods sold” is then found by adding purchases to the opening inventory and subtracting the closing inventory, valued as described.

Last-In, First-Out. The first variation from this method consists of taking as the cost of goods sold the actual amount paid for the most recently acquired lots. The theory behind this method is that a merchant’s selling price is related mainly to the current replacement price or the recent cost of the article sold. The point is of importance only when there are substantial changes in unit values from year to year; it cannot affect the aggregate reported profits over a long period but only the division of results from one year to another; it may be useful in reducing income tax by avoiding alternations of loss and profit due to inventory fluctuations.  

The Normal-stock or Basic-stock Inventory Method. A more radical method of minimizing fluctuations due to inventory values has been followed by a considerable number of companies for some years past. This method is based on the theory that the company must regularly carry a certain physical stock of materials and that there is no more reason to vary the value of this “normal stock” from year to year—because of market changes—than there would be to vary the value of the manufacturing plant as the price index rises or falls and to reflect this change in the year’s operations. In order to permit the base inventory to be carried at an unchanging figure, the practice is to mark it down to a very low unit price level—so low that it should never be necessary to reduce it further to get it down to current market.

High dividend stocks – AGNC analysis of the income account> extraordinary losses> reserves for inventory losses

Definition for inventory: (accounting) the value of a firm's current assets including raw materials and work in progress and finished goods. Source “define: inventory” on Google.

AGNC’s current assets are mostly comprised of agency securities (over $6 billion in a $7.1 billion investment portfolio). These agency securities are toxic assets in my opinion. They will be viewed as toxic assets by AGNC’s shareholders the moment that Fannie Mae and Freddie Mac stop guaranteeing the pass-through principal and interest payments of the securitized mortgages that these agency securities are comprised of. You know they are toxic because the Federal Reserve bought over 1 trillion dollars of them from Fannie and Freddie over the course of a year ending in March 2010. The Fed buys toxic assets to bailout the largest banks.

I scanned through the most recent 10-K filing and the 2009 annual report to find out if AGNC’s management set up a reserve fund for future losses on their inventory/assets.  It turns out they haven’t set up such a reserve.  They do acknowledge the risks to their asset values under the banner of “spread risk” in the most recent 10-K filing.

Spread Risk

Our available−for−sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in OCI pursuant to ASC 320. As of June 30, 2010, the fair value of these securities was $7.1 billion. When the spread between the yield on our agency securities and U.S. Treasuries or swap rates widens, this could cause the value of our agency securities to decline, creating what we refer to as spread risk. The spread risk associated with our agency securities and the resulting fluctuations in fair value of these securities can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets such as liquidity or changes in required rates of return on different assets.

The whole ‘fair value’ accounting smells like government authorized fraud.

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High dividend stocks – AGNC analysis of the income account> extraordinary losses> manufactured earnings

Today’s goal is to determine whether or not American Capital Agency Corp. (AGNC) wrote down any inventories or receivables as a charge to their surplus account since 2008.   Many companies did this during the Great Depression in order to make the next year’s income numbers look better than they really were.

“If the receivables and inventories were written down to an unduly low figure on December 31, 1932, this artificially low “cost price” would give rise to a correspondingly inflated profit in the following years.” – Securities Analysis chapter 32 section on manufactured earnings examples.

It appears to me that AGNC did not write down any inventories or receivables as a charge to surplus from 2008 to 2010.  Gains and losses in the values of its agency securities portfolio, hedges, and other assets appear on the current income statement for Q2 2010.  Therefore, I don’t think that AGNC is charging extraordinary losses to its surplus account in order to inflate its profit in the following year.  No adjustments to the income account are necessary for this category of analysis.

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How the Bankers Have Trapped Bernanke by Gary North

Check out this website I found at lewrockwell.com

In his speech, he opened with praise for what a great job the world's central bankers and politicians did to save the economy in 2008.

"On the whole, when the eruption of the Panic of 2008 threatened the very foundations of the global economy, the world rose to the challenge, with a remarkable degree of international cooperation, despite very difficult conditions and compressed time frames."

We can take this about as seriously as we would take similar self-praise by the head of FEMA after Katrina. Yet even that's not close enough. It's more like self-praise from the Army Corps of Engineers describing the levies. Maybe we should think of Greenspan as the Army Corps of Engineers and Bernanke as FEMA.

Click the link to read the rest of the post.

Rounding Up the Culprits of Rising Prices by Richard Daughty (the Mogambo Guru)

Check out this website I found at lewrockwell.com

I love the Mogambo Guru's sense of humor. Check out this article to understand why 2-3% dividend yields don't cut it.

High dividend stocks – AGNC analysis of the income account> non-recurrent earnings> other non-recurrent items

The remaining group of non-recurrent profit items is not important enough to merit detailed discussion.  In most cases it is of minor consequence whether they appear as part of the year’s earnings or are credited to surplus where they properly belong.

AGNC did not have any non-recurrent profit items (2008-2010), so this is not applicable to AGNC.