As Peter Schiff and I have long warned, America's reliance on borrowing and consumption to fuel economic activity would result in the wholesale destruction of national wealth. Until recently, the dissipation was largely invisible to most consumers. However, the ongoing plunge in real estate and equity prices and newly released statistics concerning retail sales, consumer confidence and employment have now made it plain to most Americans that their own wealth has been seriously, and perhaps permanently, degraded. In response, they are now hoarding cash and reevaluating their spending habits.

The immediate result is that the large retailers, such as Circuit City, Best Buy and Mervyn's, have gone under completely or have closed a significant percentage of their locations. Indeed, on November 17th, Moody's warned of an epidemic of corporate bankruptcies. America is facing a severe recession that, if wrongly handled, will likely lead to a depression as bad, if not worse than those of the South Sea Bubble (1720) or the Great Depression of the early 1930's.

Citigroup (C) announced Monday that it would be laying off 53,000 workers. The company has already laid off 23,000 employees earlier this year. Citi has lost 20 billion dollars over the past year and has had four straight quarterly earning losses. The company is on its third CEO in the last year, and has watched its stock price decline to $8.00 per share and its market cap shrink to 43 billion. Citigroup is also facing mounting losses from its mortgage, credit card portfolio and will likely need to raise additional capital. The firm is trying to return to profitability by selling off assets and implementing a number of cost cutting initiatives. This strategy will help it in the near term, but it does not solve the long term issues that plagued the company.

Beginning with the ill fated acquisition of the Travelers Group, Citigroup has struggled since the late 90's to find its niche in the banking industry. The bank grew to prominence by making large acquisitions and through aggressive cost cutting. These tactics allowed Citigroup to flourish in the 90's. The problem with relying on these methods to fuel growth is that eventually you run out of major acquisitions to make and costs can only be reduced for so long.

I understand the Federal Reserve Chairman Ben Bernanke is considered something of a sacred cow, our one point of light in an uncertain world. An academic who cannot be questioned by other academics. A smart person who has mastered the Great Depression and therefore “knows” what to do, and is providing the leadership to do it.

I am beginning to question all of these assumptions.

The yin to the yang going on at Yahoo (YHOO) has serious implications for media and Internet companies that believe a merger or alliance can solve, rather than compound, their problems. There is something to be said for resorting to leadership and innovation instead.

That is the crossroads at which Yahoo has arrived: It lost the original $47 billion, $33-a-share takeover offer from Microsoft in May that Yahoo CEO Jerry Yang and his board flatly nixed. Instead, Yahoo has been paralyzed by bad press, debilitating morale and dogged uncertainty. Yang, his management and board should have been strengthening Yahoo's dominant display advertising position, building search and ad-serving, gaining more of a social networking and e-commerce foothold. If there is any doubt about the lucrative difference that CEO leadership can make, look at Apple's Steve Jobs, Cisco's John Chambers and Walt Disney's Bob Iger.

If you’ve tried buying physical silver recently, then you are undoubtedly aware of the incredibly high premiums charged above market value. I wrote previously about the premiums for 100 ounce silver bars, which are traditionally a low premium method for acquiring silver. At the time of investigation, premiums were running from 40% to 50%  above the market price of silver.

Premiums for virtually all other methods of acquiring physical silver are also stubbornly high. American Silver Eagles, Canadian Silver Maple Leafs, and other government issued bullion coins carry premiums often well in excess of 50%. The same high premiums persist for generic silver rounds, small size bars, and bags of 90% junk silver. Even 1,000 ounce silver bars are now carrying premiums of 25% to 30%. Many people have been actively looking for the method which will provide the absolute lowest premiums.

Wednesday, the Philadelphia Semiconductor Index, aka the SOX, took out its 1998 low of 182, closing at 177 Wednesday afternoon. 

click to enlarge

On Tuesday, November 18, I testified before the Senate Banking Committee on the proposed bailout for the domestic auto industry. The other panelists were Senator Debbie Stabenow, the CEOs of GM (GM), Ford (F) and Chrysler, Rick Wagoner, Alan Mulally, and Robert Nardelli, and UAW President Ron Gettelfinger. Here is the C-Span link.

Here is my written statement to the committee:

For all its shortcomings, the G20 summit that was held in Washington on November 15 is already a historical event. Indeed, as the Financial Times writes in its November 16 editorial, this summit marks a shift of economic power and a recognition that the emerging economies will play a key role in reforming the global financial system that was shattered down by the worst financial crisis since the Great Depression.

"We are talking about the G20 because the G8 doesn't have any more reason to exist," said Luiz Inácio Lula da Silva, Brazil's president.

Yahoo! (YHOO) Finance's front page has yet another article that has me infuriated. First it was the 29 year old housewife who is the paragon of a saver and early retiree. Now this.

The article in question asks whether Warren Buffett has lost his touch. It recounts what it calls three of Buffett's mistakes.

In the latest 7-Year Asset Class Forecast from Jeremy Grantham and GMO (published October 31 - before the latest leg down in the market), the firm anticipates a 12.2% annual return from U.S. 'high quality' equities with active management, and approximately 11% from international developed markets. Click to enlarge:

Tax policy is going to be a hot debate in Congress once President-elect Obama's term begins in January. Although Obama won the tax debate with McCain in the voters' eyes (polls show voters preferred Obama's plan, despite McCain's continuous attacks on it), his administration will still have to work across party lines to pass tax reform next year.

Two areas getting a lot of attention are capital gains taxes and corporate income taxes. The argument for the former is that lower tax rates induce more investment capital into the system. For the latter it is that companies with extra cash flow will hire workers and buy new equipment. I actually don't think either one of those arguments is true to any significant degree.

Those of you who have seen the chart below on my blog over the last year-and-a-half might have already guessed what it looks like after yesterday's dramatic plunge in the consumer price index - it's now screaming DEFLATION.
Not that there's anyreal significance to the fact that it's screaming deflation.

As noted here, in a world full of fiat money, "deflation" is nothing more than an amusing side-show to the much more important financial troika of global deleveraging - collapsing asset bubble - global reflation, a sequence that has now been set in motion.

About a year ago, I commented on an article that appeared in Barron's which argued that Warren Buffett's Berkshire Hathaway (BRK.A) was overvalued. In my post, entitled Barron's Pans Buffett's Berkshire, I agreed with the article that Berkshire Hathaway stock looked overvalued. A lot has changed since then. Berkshire shares have fallen 45% from their high and hit a fresh yearly low on Wednesday at $84,000 per share. At that price, the stock looks cheap.

As I discussed in my 2007 post, the best way to value Berkshire Hathaway looks to be on a price-to-book basis. Berkshire's core business is insurance (which is valued with price-to-book) and the company's assets are largely in publicly traded securities, whether it be common stocks or various types of debt instruments. Going a bit further, I would use tangible book value, rather than total shareholders' equity, because Berkshire has more than $30 billion of goodwill on its books.

Lately there have been quite a few days when it looks as if the market is wearing ‘concrete shoes’ and will never be able to keep its head above water. Time and time again the financials look like those concrete shoes: financials plunge; the market follows.

In fact, the performance of financials relative to the broader market has been weakening steadily since early October 2006, when the ratio of financials (XLF) to the S&P 500 index (SPX) peaked. The chart below (click to enlarge) tracks this ratio since the beginning of 2006 and shows how financials have pulled the broader market down. Additionally, the chart reveals that almost every temporary improvement in the ratio has been an excellent shorting opportunity.

Dress Barn Inc. (DBRN)

F1Q09 Earnings Call

Semtech Corporation (SMTC)

F3Q09 Earnings Call

Wednesday was a rotten market day, in a rotten market month, in a rotten market year, in a troubled economy.  Otherwise, things are OK.

The Good News:

For those of you who have been following this blog, you know where I stand on the proposed aid package for US automakers (see Preventing Moral Hazard in the Auto Industry for background). I am not opposed to aid for General Motors (GM) and Ford (F), provided that aid come with strict terms:

1. A moratorium on acquisitions (whether with Chrysler, or otherwise)
2. A rationalization of operations - a reduction in the number of brands/models coupled with plant closures
3. A renegotiation of employment terms with the UAW to make the US automakers more competitive with global competitors
4. Strong incentives to build more fuel-efficient automobiles

Although I support some form of aid for GM and Ford, I have been staunchly opposed to providing any aid to Chrysler given its current ownership structure (see A Benevolent Cerberus or Is the End Nigh for Chrysler).

The Fed on Wednesday released ‘Minutes‘ of the Committee meeting held late October 2008, raising the specter of more economic and financial weakness. The projections ahead suggest a prolonged and severe economic downturn with increased worries of a deep recession.

Fed officials noted in their analysis that a number of adverse financial developments continue to negatively influence economic and financial market conditions. The conclusion was based on the evidence that the financial turmoil has increasingly become an international phenomenon, leading to a noticeable deterioration in global growth prospects.

One rule that's held consistently in the recent market is that reaching for yield has cost investors in performance. I took a look at the FINRA data and the numbers were eye-opening. Here are the advance/decline numbers this past week for bonds in their investment grade index and bonds in their high-yield index (in parentheses):

As we can see, advancing bonds and decliners have been pretty even for the last five trading days among the investment grade issues. Decliners have been ahead of advancers by about 2:1 among the high-yield bonds, however.