Saturday, August 13, 2011
If you want a sure sign Europe is bound to collapse, here's one...
France, Belgium, Italy, and Spain banned short selling certain financial stocks.
We tried that in the U.S. when the market was falling. Remember how it saved the country?
Of course, the short ban didn't do anything good. During the U.S. Securities and Exchange Commission's (SEC) ban on shorting financial stocks from September 2008 to March 2009, financials fell 70%. The ban had no effect whatsoever, beyond a one-day 11% rally in financials.
Blaming short sellers is the typical political move of people intent on sloughing off onto others the responsibility for the mess they created. And that's the world we live in, isn't it? If you watch too much TV, our world seems totally devoid of adults. Nobody takes responsibility for his actions anymore. Everybody blames everyone but himself.
The blame game is at work on the streets of London, too... The rioters in London are saying rich people caused the violence. The rioters aren't to blame for their vandalism and theft. Rich people pushed them to it.
Who'd have thought European regulatory authorities and London rioters would be birds of a feather? Our glorious Komrade Obama is one of them, too...
Looking for someone to blame for the U.S.'s woes, El Presidente recently chose (who else?) the rich. He said we need to tax corporate jets and other luxury goods immediately to rectify the injustice.
Obama is economically and historically illiterate. He forgets what happened the last time we tried to tax the rich by taxing their jets and jewelry.
In 1990, we passed a 10% tax on yachts, luxury airplanes, jewelry, furs, and expensive cars. It was touted as a fair, easy way to soak the rich without harming the working man.
Within eight months, the largest U.S. yacht company, Viking Yachts, closed one of its two plants and laid off more than 1,100 of its 1,400-member workforce. Within 12 months, one-third of all yacht builders in the U.S. ceased production. The industry lost 7,600 jobs in the first year. Before the tax was finally repealed, 25,000 workers lost their jobs.
The U.S. went from exporting yachts to importing them. Viking Yachts shrank to just 68 employees. Congress estimated the tax would generate $5 million in revenue the first year. Reality didn't read the estimate... The Treasury lost $24 million in tax revenue because all the yacht makers either closed up or left the U.S. Congress repealed the tax in 1993.
If you think that was an isolated example, you'll learn otherwise when our glorious Komrade starts raising taxes. When FDR raised taxes in the Great Depression, the Depression deepened, and more people found themselves out of work.
The lesson is clear. Eat the rich only if you're certain it's your last meal.
As you've surely heard, Standard & Poor's downgraded the U.S. credit rating one notch to "double-A-plus." It's the first time in history the U.S. has not been granted the highest ("triple-A") rating.
The downgrade wasn't a surprise to readers of our research... We've been warning of a U.S. downgrade for years. But just for fun, we'll revisit an April 2011 interview Geithner did with Peter Barnes from Fox News. (Thanks to Zero Hedge for the reminder.)
Peter Barnes: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?"
Tim Geithner: "No risk of that."
Barnes: "No risk?"
Geithner: "No risk."
Despite the downgrade, Treasurys are still viewed as the safest asset in the world. Prices have risen and yields have fallen on the 10-year bond.
The S&P downgrade is really a warning for the government to get its finances in order. The real chaos will come when the market "downgrades" Treasurys... When sovereign buyers suddenly don't bid at a Treasury auction and demand higher interest rates. That time will come. In fact, we made a video of the speech Obama will give on that day, and how your life will change when the world no longer wants Treasurys. You can watch it here...
When you're financially scared out of your wits, what do you do? Most folks hoard cash. That's exactly what corporate America is doing...
In the third quarter of 2008, nonfinancial companies in the S&P 500 were holding a little more than $700 billion in cash. Today, they've got $1.12 trillion, 59% more cash than just three years ago.
If you want them to spend their cash and invest in their businesses, you've got to give them a reason to believe their investments won't be eaten up by taxes and regulatory burdens. Or maybe you'll have to let them know their investments will be returned in a currency that's worth something.
If you were holding lots of big, blue-chip, dividend-growing stocks recently, you did much better than the overall market. The S&P 500 fell about 17% from late July through Monday. During that time, stocks like Coca-Cola (-6.6%), Altria Group (-6.9%), and Pepsi (-4.2%) fell much less than the overall market.
We've covered both Altria Group and Coca-Cola in The 12% Letter. If you want access to The 12% Letter's list of stocks that pay growing dividends, click here.
Date Range:8/4/2011 to 8/11/2011
Date Range:8/4/2011 to 8/11/2011