According to Inflation Data.com, inflation is non-existent right now.  They currently post inflation at -1.29%. Deflation has reigned for the last three quarters. Although they see the trend heading in the other direction right now, I wouldn’t be surprised if we see another quarter of deflationary activity. Bear in mind, the “official” Consumer Price Index differ from  non-official tallies, but any way you look at it, inflation is weak.

That’s one reason to consider cash investments.  Inflation won’t eat away at the purchasing power of cash you store in the bank. Smart Money recently discovered some high-yield accounts available at community banks and credit unions.

These “rewards-checking” programs offer depositors much higher yield than other traditional checking or savings accounts – some as high as 6%. Granted, they want to see some activity because they receive interchange revenue when you use your debit card. This helps the bank recover the expense of the high rates.

It makes sense for these institutions to offer attractive rates.  They’re up against behemoths like Wells Fargo and Chase, which can offer lower rates because people place a value on their convenience and too-big-to-fail stability.

Shop around for high-yield checking accounts in your area at community banks and credit unions.

Brandon Clay  
Invest With An Edge

I’ve talked a lot about soaring costs for many of our biggest needs and wants — energy, health care, food, and more.

But if you have kids or grandkids, you’re probably aware of another major expenditure that keeps going up no matter how weak the broad economy is: The price of a college education.

The College Board’s latest survey came out a couple weeks ago, showing that tuition and fees at private 4-year schools rose 4.4 percent in the current school year to $26,273.

Meanwhile, the price of a 4-year public university education spiked more than 6 percent for both in-state and out-of-state students ($7,020 and $18,548, respectively).

Lest you think this is a short-term trend, I’ve got some more numbers to share from The National Association of Independent Colleges and Universities, which surveys 350 private, nonprofit colleges and universities:

The group says the average increase in tuition was 4.3 percent in 2009, and it notes that this is the smallest increase since the 1972-1973 school year.

Even worse, the NAICU notes that the average annual increase in tuition and fees has been 6 percent over the last ten years!

As I said on my blog, I really question whether many of our country’s students are even getting value for their money anymore.

Heck, would you rather go into business for yourself with a head start of anywhere from $30,000 to $100,000 or come out with a four-year degree and then dig your way out of a major financial hole?

That question gets harder and harder to answer.

Regardless, a lot of parents and grandparents — myself included — still want to provide the choice.

And given soaring costs, I think the best way to save for college is clearly the ubiquitous 529 Plan.

529 Plans Not Only Help College Savers
They Can Also Help You Avoid Taxes!

A Cap and gown is the least of your college expense worries these days!

A 529 plan is a tax-advantaged savings plan designed to help you save for a child’s future college costs. They are issued by individual states, either directly or through brokers. And since they were added to the Internal Revenue Code in 1996 they’ve become an extremely popular choice.

Essentially, there are two types of 529 plans — prepaid tuition plans and college savings plans.

As their names suggest, prepaid plans lock in today’s tuition prices at eligible public and private colleges and universities. Many of these plans are guaranteed or backed by the issuing state, and the owner or beneficiary typically has to reside in the state.

The way I see it, prepaid plans are great if you’re fairly certain that a beneficiary is going to attend a particular school (or if you’re going to choose for them!). They might also be good for “belts and suspenders” types who want a rock solid guarantee.

In contrast, regular 529 college savings plans are more like tax-deferred retirement accounts. They don’t lock-in college costs, but they allow you to sock away large amounts of money (some allow hundreds of thousands in contributions). Typically, you are then able to choose from a set menu of investments such as broad-based mutual funds.

Unlike a corporate retirement account, however, you can choose what plan you want to join.

Here Are Your Three Biggest Considerations
When Selecting a 529 Plan …

#1. Fees — It’s true of nearly any investment account: The fees you pay are going to greatly affect your portfolio’s performance. And despite recent crackdowns on egregious fees at some 529 plans, you can still find better and worse deals. A general rule to follow is that you will likely pay more in fees and charges when you purchase through most brokerages than you would with a similar plan purchased directly.

#2. Investment Options — As you probably know, the quality of mutual funds varies greatly. Not just because of the fees they charge, but also because of their management and focuses. In general, I favor low-cost index funds, especially in long-term accounts such as a 529. Please note that — based on recent tuition growth — you’ll need an annual return of AT LEAST 6 percent just to keep pace … and a few percentage points more if you want to gain any ground. That argues for a more aggressive asset allocation.

#3. Tax Treatment — All 529 plans are treated the same way for Federal tax purposes — no upfront deduction, but your investment earnings grow tax-deferred and withdrawals for qualified education expenses are tax-free.

However, each state has individual rules about how it treats your contributions. Many allow upfront deductions with generous limits, but you will often need to choose your home state’s plan. A few states allow deductions no matter what plan you contribute to. And some states don’t offer a tax break at all!

Take a look at your home state’s tax treatment of 529 plans before you do anything else!

If you’re getting the idea that choosing the right 529 plan is a highly individual choice, you’re right.

But I suggest you get started by investigating your home state’s treatment of contributions and the plans it offers. Then, if you’re not going to get a tax break, look at other low-cost plans next.

Bottom Line: 529 Plans Give You
Powerful Savings and Flexibility

In the end, there’s very little we can do about soaring college costs other than:

1. Using the best saving vehicles available to us and …

2. Having a real heart-to-heart with our children and grandchildren about how the money is best spent.

And between A. and B., you’ll rest easier knowing that the money in the 529 plan always remains the property of the account owner and NOT the account beneficiary.

That means YOU remain in control of whether or not to release the funds for the intended recipient, regardless of age, college acceptance, etc.

Most plans will let you easily transfer the plan to cover another recipient (practically any family member).

Alternatively, you can withdraw the funds and use them for something else. You’d just need to pay income tax and a 10 percent penalty on any earnings that have accumulated.

So, in the end, if there’s even a small chance that someone in your family will attend college — and you want to pitch in some money — a 529 plan is a great way to get started.

Best wishes,

Nilus Mattive
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales. This week we look at how taxes are doing in a period of economic recovery. Then we turn our eyes to a very interesting (and sobering) analysis of possible future unemployment rates. This is an anecdote to the happy-face analysis of employment numbers you get from establishment economists. There will be a lot of charts and tables, so this letter may print a little longer, but I think you will find it very interesting.

If This is Recovery, Where Are the Taxes?

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let’s look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we’re in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called "Beyond California" (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover mid-sized and up retailers, leaving out smaller businesses. Further, if you are a retail chain that has closed 10% of its stores, the remaining stores should in theory benefit from getting your loyal customers into them.

Last Business Standing

Yesterday I was with an associate, and I hesitated in asking them how their business was doing, because I knew things had been tough at the beginning of the year. But I did ask, and they said sales were up over the last months and business was looking better. Surprised, I asked them what made the difference. "Ah," they said, "less competition. Our competitors have gone out of business."

Best Buy and other electronic retailers had to benefit from Circuit City disappearing. That is Schumpeter’s creative destruction at work. Not very good for total employment, but it does help the profitability of the survivors.

So, if things are so bad, how did we have 3.5% growth in the third quarter? First off, things are not as bad as they were in the past year. We are in fact getting close to an economic bottom, at least for now. Second, the 3.5% number is a preliminary estimate. A study by Goldman Sachs suggests that the number will be revised down by at least 0.5% and maybe as much as 1%.

Why? The estimate does not really take into account how poorly small businesses are performing. If you look at small-business indexes and compare them to historical GDP numbers, you get the smaller number mentioned above. And since at least 2% of the GDP was from the stimulus package (Cash for Clunkers, houses, tax cuts), the economy on its own was flat. That begs the question, what happens when the stimulus runs out?

And the answer is that we won’t know for some time, as the stimulus is just getting ramped up. "According to CBO estimates, only 21% of [the stimulus] spending will occur in 2009; another 38% will come in 2010, and 22% in 2011. After that, its effect will dissipate quickly." (The Liscio Report)

But David Rosenberg notes that what the federal government is giving, the states are taking away. The Pew Study shows that at least nine other states are in appalling shape, so it is no wonder that David writes:

Stimulus, What Stimulus?

"Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?

"The states are filling around 40% of their fiscal gaps with the federal stimulus (so much for spending on "shovel ready" infrastructure projects). Even after the fiscal help from Washington, the state governments will still face a projected deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the restraint in the state and local government sector is estimated to drain a full percentage point from U.S. GDP growth in 2010 and more than fully offset the stimulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market."

The Reality of Unemployment

All this is, of course, going to put continued pressure on employment. As I noted last week, the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey, not the 190,000 you read about in the mainstream media. Unemployment is sadly continuing to rise by significant amounts.

In August, I did an interview with CNBC from Leen’s Fishing Lodge in Maine. The unemployment numbers had just come out. I did a back-of-the-napkin estimate that we would need about 15 million new jobs over the next five years just to get back to where we were when the recession started.

That works out to a need for about 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we’ve lost. That is a daunting number. It amounts to 250,000 new jobs a month every month for five years. And we are still losing more than that number a month, let alone adding the needed 250,000.

Look at the chart below. It shows the establishment survey employment figures for the last ten years. Only once, in 1999, did we actually add over 250,000 jobs a month for a whole year. And that was during the internet boom.

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

I love it when someone does the really heavy lifting for me, and my friend Mike Shedlock of Sitka Pacific Capital Management has done a wonderful job of taking that speculation of mine and putting it into a spreadsheet that helps us get a real handle on what unemployment is likely to look like for the next ten years. I am going to make use of his basic analysis and then modify some of his assumptions in the spreadsheet he provided me, in order to think about different scenarios.

All three scenarios are based on assumptions, so let’s see what Mish started with. There is a wealth of data available from the Bureau of Labor Statistics and the Census Bureau. According to the Census Bureau Population Estimates we are going to add about 2.5 million working-age (16 years old and up) citizens a year, from now until 2020. The numbers varies slightly year to year. Mish used an estimate of the average, summing up the buckets from 16 to 100+ for the years in question and rounding the result.

You can go to the BLS site and look at Table A-1, which shows the civilian noninstitutional population (those over 16 not in prisons), the participation rate (those who are working and/or want to work), the unemployment rate, the number employed, those not in the labor force, and those who want a job. Those are starting numbers for the charts below.

For those interested, you can read Mish’s very full (and quite detailed) analysis at his blog site http://globaleconomicanalysis.blogspot.com/2009/11/mish-unemployment-projections-through.html). But let’s look at his assumptions:

• Job losses are likely to continue for a minimum of another year.
• When job gains start, they will be very slow at first, then pick up.
• An extremely generous monthly job gain stat over the course of the year would be 150,000 jobs.
• A falling participation rate (boomers retiring) will continue to mask reported unemployment.
• Starting in 2013 the labor pool will start decreasing because of Boomer demographics.
• The noninstitutional population will rise by 2.5 million workers a year.

The spreadsheet below needs a little explanation. Let’s start with the assumptions. Mike starts with current working-age population and adds 2.5 million people a year. He assumes that Boomers will retire at 65 (something which all the surveys say is not going to happen). And his last estimate is what the unemployment numbers will be. Everything else is based on those assumptions, which leads to the first column, or the expected unemployment number.

By the way, we know that everyone will want to make different assumptions. I am going to create three scenarios, but you can go to Mike’s blog and at the bottom of the post is a link to the actual spreadsheet. Have fun. Let’s look at scenario 1.

This assumes there is no double-dip recession, and jobs roughly rise along the same lines as the last recovery. Actually, Mish is far more optimistic, as in the very first chart you will notice that job losses were negative in the first year after the end of the recession and flat the second year. Mish has jobs rising by 120,000 next year and 600,000 the second year (2011), and then a fairly robust recovery. Below is the graph of the unemployment numbers under such a scenario.

Notice that unemployment stays at or above 11% for three years. Pessimistic? Mainstream and usually very optimistic Mark Zandi of www.economy.com predicted this week that unemployment would rise to 11% by the middle of next year, right in line with this scenario. Also note that total jobs rise by 14 million over ten years. Hardly doom and gloom. Again, Boomers all retire on time and there is no double-dip recession.

Let the Good Times Roll

What would it take to get back to 5% unemployment? I played with the spreadsheet and came up with the following numbers, which get us below 5% by 2020. I assume no recessions for the next ten years, and 2 million new jobs a year after 2011, which I start off with almost 1.5 million jobs. Of course, we have never done that, but let’s be optimistic.

And the graph below shows the unemployment numbers for the Good Times Scenario.

Want to get to 5% within five years? Add 3 million jobs a year starting now. With no housing recovery, a smaller auto industry, and financial firms getting leaner.

The Quick Double-Dip Scenario

When I called the last two recessions about a year before they happened, it was not all that hard. We had inverted yield curves, falling leading indicators, and a lot of other data that pretty much pointed to a recession. Believing that we had a housing bubble and a looming credit crisis also helped my conviction in calling the last recession.

I think we are in for a double-dip recession in 2011, yet I readily admit there will be little if any statistical evidence in advance this time. This is more of an instinct call. I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

Taxing small businesses, and that is what the tax increase amounts to, is a very bad idea in a weak economy. Small businesses are where the job growth comes from. Taking money from productive businesses and giving it to government is a fundamentally flawed concept.

Now, if they decide to postpone the tax increase, or phase it in slowly, then maybe we avoid the double dip. But right now it doesn’t look like that will be the case. So, let’s quickly see what a double-dip scenario might look like. Let’s be optimistic and assume we only lose another 1.2 million jobs in the next recession, since we have already lost so many in this one (8 million and counting). And then the economy comes roaring back in 2012 with 1.5 million jobs and continues to grow rather smartly for the rest of the decade. No further recession. We absorb the tax increases and move on with our economic lives.

Unemployment under such a scenario would rise to just under 13% and stay above 10% for 8 years. Take a look at the chart and graph.

Think 13% is too dire? This week David Rosenberg said unemployment would rise to between 12-13%. The former Merrill Lynch economist was one of the few mainstream economists who called the recession and the credit crisis. The so-called "Blue Chip" economists told us at the beginning of 2008 that unemployment would peak out at 6%. While Rosie is not optimistic of late, he has a rather solid record of being right.

We are at 10.2% unemployment today. The economy lost jobs for 21 months after the end of the last recession. That would easily take us into 2011. Another million lost jobs will take us well over 11% and close to 12% (remember, you have to add in the increasing population), even without my double-dip scenario.

The letter is getting long and it’s getting late, so let me close with a few thoughts.

First, 12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.

Second, Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5-trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small business can thrive. As I’ve noted for the last several weeks in this letter, government spending does not increase GDP over time. It is a temporary nonproductive stimulus. It takes private investment to create jobs and increase productivity. Over the next few months, I will write more about how to do that.

Phoenix, New York, and Thoughts on the Internet

Next week I take a quick one-day trip to Phoenix, then back to do a satellite-remote speech to a South African hedge fund conference. I will be in New York the first weekend of December (the 4th) for Festivus, a great fundraiser for kids sponsored by Todd Harrison and the team at Minyanville (http://www.rpfoundation.org). Interestingly, they hold it every year at a "Texas" barbecue joint. Look me up if you are there.

The 7 kids, spouses, and grandkids are starting to gather. We will all have brunch Sunday and then a shower for Tiffani. She has another 6 weeks before she is due, and she is really uncomfortable. Walking is literally a pain.

Permit me to reminisce. A little over 9 years ago I started this letter on the internet with about 2,000 email addresses. It was a new version of what had been a print letter, as that was the business I knew. The internet was still a new thing to me, but it seemed like a good idea at the time. Little did I know.

I am still amazed at the growth and the direction my business and life have taken. My letters are sent out by various publishers and affiliates to over 1.5 million readers and posted on dozens of web sites, and the numbers have been growing rapidly of late. I am grateful. But I wonder what would happen if I started it today. Ten years ago there was little in the way of free economic letters. Not a lot of competition.

Today, there is so much free information that it’s staggering. There have to be thousands of blogs and hundreds of free letters, some with very large circulations. It seems a new star is born every few months. While much of it does not add to the level of conversation, some of it is quite excellent. I think I am lucky to have started when I did.

And I am grateful for the kind attention you give me. As I turn 60, I note that this has been a rather overwhelming last ten years. A lot of changes for me, and almost all of them very good. But there are more to come. The last two flights I was on I was connected to the internet at 35,000 feet. I sense a lot more changes coming. I am thinking a lot about how to keep up and not get left behind, how to make sure that you, gentle reader, continue to get my best. That is what, at the end of the day, drives me.

Have a great week. I know I shall. Dad loves it when his kids (from 15 to 32) and spouses and grandkids are all under one roof.

Your amazed at it all analyst,

John Mauldin
Outside the Box & Thoughts From the Frontline
johnmauldin@investorsinsight.com

John Mauldin, best-selling author and recognized financial expert, is also editor of the free Thoughts from the Frontline and Outside the Box e-letters that go to over 1 million readers each week. For more information on John or his FREE weekly economics letters, go to: http://www.frontlinethoughts.com/learnmore

She cited personal examples of people who have been coming into the credit union where she works, telling tales of new fees, lower limits, and interest rates doubling overnight for no good reason.

And make no mistake — I totally agree that credit card companies are doing these things today. Moreover, I consider the actions both reprehensible AND counter-productive to the financial companies’ long-term goals.

Yet being the devil’s advocate that I am, I also felt compelled to point out to my mother — and now again here in these very public pages — that I think borrowers are just as culpable as the credit card companies.

Sure, the companies are motivated by self-interested greed. But isn’t that the same motivation that led to all of our country’s irresponsible borrowing, too?

Newsflash: Credit Card Companies Have Never Been Our Friends
And Their Products Shouldn’t Be Used as Long-Term Loans!

Collectively, U.S. consumers have had charge cards for about 90 years now. Since the end of World War II, buying on credit has become absolutely commonplace across the land.

And while card companies have certainly become more and more aggressive with their marketing tactics, the general idea of “paying with plastic” has never really changed — even back when the Diners Club card was still made out of cardboard.

Even before they were made of plastic, credit cards were meant to be simple, convenient cash replacements not long-term loans.

Basically, they’re a convenient way for people to pay for items without having to carry cash.

In the ’20s and ’30s they allowed rural customers to get gas when far away from home …

In the 50s, New Yorkers were able to dine at their favorite restaurants with that little cardboard card …

And today, just one swipe of a card will buy you virtually anything … most places in the world … with currencies automatically exchanged.

But people shouldn’t confuse convenience with necessity.

I can’t tell you how many verified stories I’ve heard about credit card balances north of $20,000 … $50,000 … even $125,000. Yes, seriously. In some cases, the folks didn’t even know the totals they owed because they had so many cards!

Now, some of those very same people are complaining about their skyrocketing interest rates.

Didn’t they read the fine print? You know, the contract that basically says “By the way, dear consumer, we can jack your rates up at will.”

More to the point: Did they even need to read the fine print? Isn’t it common knowledge at this point that financial companies will try to wring every last penny out of us through usurious fees and interest rates?

Heck, from the first time I got a credit card at age 16 with my dad’s help — to begin building my credit score — I knew it was the financial equivalent of a razor-sharp chef’s knife. A useful tool that could do a lot of damage without the proper training and caution. And to keep the metaphor going, not something you need twenty of, either!

It’s much like all the exotic mortgages that recently came back to bite our economy. When used correctly, these financial instruments have legitimate and helpful purposes. When used by irresponsible, greedy, or outright ignorant people, they end up hurting us all.

If you’re one of the rare people carrying a large balance because of extenuating circumstances (medical bills, a job loss, etc.), I feel for you. I really do. Especially if you’ve been paying on time and your lender is just sticking it to you because they can.

However, for the vast majority of the people complaining — the ones who have balances that can’t easily be paid off because they bought too many flat panel TVs — well, I hate to say it, but you got what was coming to you. You borrow from a loan shark, and you risk a visit from a thug wielding a baseball bat.

No Matter What, There Are
Always Options Available to Us!

Look, I think the credit card issue is pretty simple:

1. Have one or two no-annual-fee rewards credit cards.

2. Don’t borrow what you can’t pay back, especially if it’s for a luxury item (and most are).

3. Pay off your balances on time and in full every month.

4. Wash, rinse, repeat.

If your lender raises your interest rate? It won’t matter as long as you follow Step #3.

If you have a current balance that can’t be immediately paid off? Call and negotiate a better rate or move the balance to a friendlier lender with a better interest rate. Just watch out for balance transfer fees, teaser rates, and the like. And please focus all your effort on paying down that balance as quickly as possible, once and for all!

If your lender starts charging you fees or reduces the availability of rewards? Again, try negotiating or just cancel and go somewhere else. (Hint: Regional banks, credit unions and other slightly more customer-centric financial institutions are good places to look.)

Yes, there’s a chance that doing so will temporarily impact your credit score (and that’s a whole other rant that I delivered here back in June). But if you aren’t going to be shopping for a car or home anytime soon, your credit score is not the immediate concern.

If things get really bad in the credit card industry, I have a much simpler solution than new legislation!

And if every card issuer starts nickeling and diming us? Let’s just go back to cash and other stone-age methods. Yes, Virginia, there was life before automatic bill pay!

The bottom line: I am hardly supportive of the dirty tactics being used by the credit card companies today. But I’m also sick of whiny, spoiled-rotten borrowers that didn’t understand what they were getting themselves into.

I’m a big believer in both freedom and personal responsibility. So the companies can exercise their right to try and rip us off within the letter of the law. And we can exercise our right to pay off our balances and walk away permanently when they tick us off.

Rather than have the government help consumers stay in arrangements they don’t belong in or understand, I’d rather see the usurious practices bring this topic to the fore and spur Americans back to at time of greater fiscal responsibility for us all.

Hey, at least I’m free to dream!

Best wishes,

Nilus Mattive
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

• You may be buying, selling, or holding a primary residence or vacation home.

• You probably have a mortgage, and maybe a home equity loan.

• And you’re probably concerned about the broader economy, which the housing and mortgage markets significantly impact.

So where do we stand now?

Well, the stabilization and very mild recovery I first told you was coming back in the spring, continues apace. Sales have generally been picking up. The supply of homes for sale has generally been falling. And prices, while still weak and falling, are not falling as quickly.

The real question is: What happens when the mammoth support that the government is throwing at the market ends?

Used Home Market
Finding Its Footing

In September, existing homes sales hit a level not seen in over two years.

I’ll start with the existing home figures, since that’s the most important part of the market. Most of us own “used” homes and sales of such homes account for around 75 percent to 85 percent of overall transactions in any given month. The latest:

* Sales surged 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from 5.09 million in August. That was twice the gain that was expected, and it left sales running at the highest level since July 2007.

* Single-family sales gained 9.4 percent, while condo and cooperative sales rose 9.7 percent. By region, sales climbed across the board, with the Northeast bringing up the rear at +4.4 percent and the West leading at +13 percent.

* Better yet, the raw number of homes for sale dropped 7.5 percent to 3.63 million units from 3.92 million in August. Supply was down 15 percent from a year earlier. That helped push the “month’s supply at current sales pace” indicator of inventory down to 7.8 from 9.3. That’s still higher than the 5-6 month range that’s considered “normal.” But it’s a significant improvement from the double-digit readings we were seeing.

* Pricing is still weak, with the median price of an existing home down 8.5 percent year-over-year to $174,900. But as any good housing analyst will tell you: Pricing lags sales and supply.

Indeed, if you recall what I said in my May 8, Money and Markets column:  

“I still believe home prices have further downside. That’s because we remain oversupplied, with approximately 1 million excess housing units for sale in this country. More foreclosure inventory will likely hit the markets in the coming months, too. Reason: Many of the filing moratoriums put in place at the state and industry levels have expired.

“But the sharpest declines in residential real estate are, for now, mostly behind us. I expect to see sales volumes gradually stabilize on a nationwide basis over the coming year, with total inventory for sale (new plus used) gradually coming down. By mid-to-late 2010, we should see pricing stabilize and gradually turn higher, with the improvement coming in stages depending on location.”

Buying New?
Not Lately …

So what about the new home market? It’s taking a bit of a breather. An index put out by the National Association of Home Builders dropped to 18 in October from 19 in September. Builders said present sales, expectations about future sales, and prospective buyer traffic have all declined.

The new home market has slowed down a bit.

Meanwhile, actual sales have missed expectations for two months in a row. They dropped 3.6 percent in September to a seasonally adjusted annual rate of 402,000. Economists were expecting an increase to 440,000 units. Pricing remains weak, with the median price of a new home off more than 9 percent from a year ago to $204,800.

But here’s the thing: The supply picture in the new housing market has dramatically improved!

At the peak of the bubble, builders had 572,000 homes up for sale. That was the highest in U.S. history.

The dramatic cutback in production, combined with a general uptick in sales, has driven that number all the way down to 251,000. We haven’t had this few homes on the market since November 1982, almost 27 years ago.

Surprise, Surprise:
Government Policy Is
Distorting the Market …

Why are we seeing a divergence between the new and existing markets? Like it is in so many other parts of the economy, government policy is distorting things.

You see, the $8,000 first-time home buyer tax credit is set to expire on November 30. It applies to all transactions CLOSED by that date. The typical closing of an existing home takes about 30-60 days. So contracts signed as late as, say, July, August and even early September, are probably okay.

But when you sign a contract to buy a NEW home, unless it’s a “spec” property, you’re buying a plot of land. This means you’re looking at several months to build the house and close. So we got the tax-credit-fueled surge in the new home market EARLIER than the existing home market (June sales rose 7.6 percent, while May sales climbed 7.5 percent).

Since then, some buyers have gotten more reluctant to jump in because they fear they won’t be able to close in time to get their government handout … er … credit.

An extension in the tax credit should keep the housing recovery on track.

But — and this is important — Congress is now talking about extending the credit into 2010. The latest scuttlebutt is that the credit would now apply to all contracts signed through April 30 of next year, with an additional 60 days granted to close the transaction.

Not only that, but it may be expanded so that richer buyers could qualify! If that happens, couples making up to $225,000 would qualify, compared with $150,000 now. Plus it would no longer apply to only first-time buyers. If you’ve lived in your current home for at least five years, you would qualify for a credit of up to $6,500.

Bottom line is that the government’s massive housing and mortgage market support measures show no sign of letting up. In fact,

• The Federal Reserve is still buying $1.25 trillion of mortgage securities to keep rates low.

• The FHA is now backing the same kinds of high-risk loans that blew up private, high-risk lenders, allowing it to capture the largest share of the mortgage market in years.

• The “temporary” increases in the size of mortgages that FHA, Fannie Mae, and Freddie Mac can insure have essentially become permanent.

• And now, just as I forecast, the tax credit/handout is almost sure to be extended well into the future.

You don’t have to like it. Frankly, I don’t. But you do have to appreciate the reality of the situation and understand that it likely will keep the housing recovery on track.

It won’t be a linear process, though. Instead, I foresee more of a “three steps forward, two steps back” scenario.

Until next time,

Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

An insight on this question came from an unexpected quarter.

A gentleman by the name of Fernando Aguirre, who posts on Internet forums and his blog as FerFAL, has written voluminously about his experiences as an Argentine citizen during and after the economic cataclysm that wracked his country in 2001. I first found a long forum post, and then a Google search of “FerFAL” revealed a larger web presence, including a recently published book.

Mr. Aguierre shares his thoughts on all sorts of related subjects, from food storage to guns to politics (he appears to really like Rep. Ron Paul). I personally found a great deal of value among what I’ve seen so far.

One brief passage struck me, however, because it related to the mechanism by which middle-class people become poor during an economic meltdown. The mechanism may be obvious, but it is important to see how theory actually worked in the real world.

Mr. Aguierre shares (in “Part IV”) how, while studying architecture following the 2001 crisis, a social studies teacher illustrated Argentina’s middle class’ slide into poverty. Quoting the teacher from memory, Mr. Aguierre writes,

“[Those in the] middle class suddenly discover that they are overqualified for the jobs they can find and have to settle for anything they can obtain, therefore unemployment sky rockets: too much to offer, too little demand. You see they prepare, study for a job they are not going to get. You kids, you are studying Architecture because you simply wish to do so. Only 3 or 4 percent of you will actually find a job related to architecture.”

We all sat there, letting it all sink in. After a few months, it all proved to be true. Even the amount of students that dropped out of college increased to at least 50%. They either [saw] no point in studying something that would not make much of a difference in their future salaries, had no money to keep themselves in college, or simply had to drop college to work and support their families.

This reads like a premonition.

The USA’s middle-class includes lots of people whose careers rest on higher education and specialized certification. While plumbers, electricians, factory employees and truck drivers typically are among the middle-class, most of those populating suburbia are accountants, middle managers, sales people, financial consultants, teachers, nurses, writers, etc. In other words, as manufacturing and now building activity contract, more of the middle class is made up of the college-educated in white-collar careers.

Factor in our current economic pickle and it’s easy to see the most likely path ahead.
With the economic expansion built on mass optimism and debt rolling over, conditions are now fertile for questioning the college degree system as jobs for the college-educated evaporate en masse. The ability of technology to replace white-collar jobs is widespread, and an increasing need to cut costs is finally driving its use, just as changing economic (and regulatory) conditions also drive the replacement of manpower with robotics in the factory.

Across the economy, the need to cut employment costs (not just payroll, but payroll taxes and benefits) is resulting in mass layoffs of sales people and white-collar office staff. When one considers how much work can be replaced now by accounting software, electronic sales presentations, flatter organizational structures, and “news persons” filing reports for free on the Internet via blogs, it is obvious that vast numbers of middle-class Americans teeter on the precipice of unemployability, not just unemployment.

When the “unique” skill sets that commanded $50,000 to $100,000 (or more) annual salaries turn out to be in vast oversupply, the only course left is to compete with those with neither a college degree nor technical education for jobs that can’t support a middle-class lifestyle.
Hands-on service occupations like nursing and medicine are also far from safe. At the end of the day, it is productivity that pays for such work to be done, and when vast numbers of people cannot find economically productive work, economic reality will land on these occupations, too.
When the economic tide goes out, all boats sink into the mud.

Too many people were goaded into illusory occupations by tax subsidies for higher education, government (rather than market) demand, and other distortions like the credit-without-prior-production of the central bank. Political pandering and central planning replaced the natural balance of an economy growing organically through the honest signals of the price system.
As long as there was enough optimism and ignorance to sustain the illusion, the distortions only grew larger.

Though the ignorance largely remains, there’s no more blind denial left to sustain the burden of all that wasted effort. If your job disappears, it may not come back.

This time it really is different. The final stages of that blind denial included fiscal imprudence that bordered on insanity. The mirage economy can’t return until after the pendulum has swung its full travel to the other side of the arc. That path leads through the valley of a crushing economic depression, one that will radically and permanently alter the lives of middle-class Americans who are almost universally unaccustomed to hardship.

My comments: This is an excellent article as it restates my view that unless you have some type of unique skill or a pool of capital available to you that you can invest and grow you are really screwed as far as standard of living goes. For example I was watching a commerical on CNBC that was extolling the virtues of investing in Macedonia. Low taxes, low regulation, educated workforce, average salary for college educated worker 460 Euros per month. Granted I am sure there would be some infrastructure issues and some additional monies having to spent on training but there are advantages. They have a small government that does not have the resources or interest in sticking its nose in my business. Labor regulation, diversity set asides, lawsuits for all kinds of employee nonsense that goes on here in this country would make it at least attractive to consider. How many college graduates would enthusiastically work for $350-400 per month here in the US? That is the reality of what is happening around the world and why I spend hours corresponding, emailing, studying, and researching opportunities around the world. The whole paradigm of going to college and getting a generic degree for entry into corporate dronedom is over. Yet people continue to go tens of thousands in debt so they can go to school for fours years for a Business Administration degree and end up waiting tables or working as a cashier. The college and university bubble is another bubble that was encouraged and financed by the government and it will have to deflate like all the other bubbles. By the way that Ferfal guy has an excellent blog about surviving a crash as he went through it in Argentina.

John Polomny
The Real Deal

The U.S. is the most prosperous nation because it has embraced risk taking. Silicon Valley has created some of the greatest innovation because it has been a magnet for entrepreneurs. When we evaluate our love-hate relationship with investment banks, let’s not forget that as one of their key roles, they facilitate the aggregation and deployment of risk takers’ capital. When policy makers interfere with crucial elements of the American growth engine, we all deserve a broad debate on the subject.

The reason why most of us invest is because we are concerned about the purchasing power of our savings. Sure it’s great to achieve returns in excess of what it takes to preserve purchasing power, but inflation and taxes are bound to destroy savings over time if we don’t take risks in an effort to achieve higher returns.

There are very few families in the world that have managed to retain great wealth over generations. There are two main reasons for this: those who rely on their savings to support their lifestyle are bound to lose them over time; and those who do take risks may or may not make the right decisions. But those who do not take risks are certain to lose. Those who do take risks have a chance of staying ahead of the game. A society thrives when creative destruction is endorsed: rewarding successful risk takers makes a society prosper as a whole, as successful companies and industries will grow, whereas weaker ones are allowed to fail.

The U.S. is not the only country that thrives by endorsing creative destruction. China has allowed the low-end toy industry to fail, accelerating a shift towards goods and services that cater to, as we call it, the higher end of the value chain. The country is positioning itself where it can compete. China knows it can’t keep its currency peg forever; it knows that allowing the currency to rise is the most effective way to tame domestic inflationary pressures.

And the U.S.? We try to destroy the financial services sector on top of manufacturing. Jimmy Rogers, the former hedge fund manager known for his love for commodities in particular (he says Wall Street traders should learn how to drive a tractor to cater to the boom in soft commodities), has just been appointed to the board of a commodities exchange in China; China is ready if we want to give up the quasi-monopoly the U.S. has enjoyed in trading commodities. Singapore, too, is waiting with its doors wide open: Singapore may be the winner of those alienated by policies coming out of New York and London. In the U.S., in contrast, policies all decade long have fostered an acceleration of outsourcing in an ill-guided pursuit of consumption at any cost. I would like to say that it ended in the credit bust, but unfortunately, there’s no end in sight to the policies that got us into trouble in the first place.

Don’t take me wrong: a lot of bad has come from Wall Street and the anger in the public is real and justified. But we need to keep a cool head and not throw out the baby with the bathwater when meddling with the core values of what made the U.S. successful over time. Risk itself is not bad. What is bad is that we say we need to set up bureaucracies to manage systemically critical institutions without even defining what “systemically critical” actually means. What is bad is to think a super-regulator will somehow prevent the next crisis rather than merely increasing the barrier to entry further. What is bad is to reward bad decisions and reward good ones in the banking sector by draining money from taxpayers to support failed banks. What is bad is to put in place wage controls without a public debate on whether that’s indeed a prudent course of action; traditionally, wage controls have never worked – the most recent time, when Congress decided to no longer allow tax deductibility of salaries in excess of $1 million in the ‘90s, it gave rise to an explosion in stock options being awarded and the focus shift to micro-manage quarterly earnings, inadvertently contributing to the present mess we find ourselves in.

Greed is part of human nature. The challenge for policy makers is to put the right incentives in place to increase the odds that – for society as a whole – more good, than bad, results from greed. I emphasize incentives because incentives typically work better than regulation. The Chinese have long tried to manage economic growth with regulation – giving mandates to banks about how many loans may be issued; the Chinese may soon come to the realization that it is far more efficient to allow market forces to dictate growth, and that using levers such as interest rates and a freely floating exchange rate will be more effective.

Regulation breeds corruption, loopholes, lobbying, etc., and, by implication, inefficiencies. The more general the levers of policy makers, the more effective they are. For a central bank to engage in private sector asset purchases is extremely inefficient. The Fed has been substituting rather than encouraging private sector activity. The Fed’s actions to buy mortgage-backed securities have cemented the government’s ownership of the mortgage market. A free society with a government owned mortgage market? Please don’t tell Adam Smith, who would turn in his grave. The government hasn’t stopped there, but there’s no need to expand for the purpose of this argument.

Risk taking is good. What is not good is to have gains privatized, yet losses socialized. It is good that someone is willing to risk their savings to put their money where their mouth is. It’s not good that someone puts someone else’s money where his or her mouth is, then collects the gain, but is not responsible for the losses. How do you fix this? With salary caps? With a systemic risk regulator? In our humble opinion, no, that’s he wrong approach, as it paralyzes financial institutions. We may hate them now, but without them, we would be worse off. We need to turn our anger into constructive suggestions, not destroy a backbone of economic growth.

Every major bust in history was the result of excessive credit expansion. Some have argued that one needs to actively restrict credit expansion. The argument against this debate – a debate worth having – is that it would put regulators in the game of managing asset prices. As we are in a world where central banks set interest rates and control money supply, I do think they should be vigilant that excessive money supply does not push up all asset classes without a comparable pickup in real economic activity – the clearest bubble indicator, in our view.

If risk is good, what is bad? What is bad is that someone’s risk appetite can bring down someone else. And that this threat provides a guarantee that the risk the speculator takes is asymmetrical: Heads, I win; Tails, you lose. Well, fix that. How about: Heads, I win; Tails, I lose. It’s really that simple. I don’t have a problem with anyone speculating, as long as his or her risk does not impose on my wellbeing. Indeed, speculators are a crucial part to our economic system; without speculators, we would have frequent shortages in commodities: producers, be they in oil or agriculture, would not be able to hedge their production and thus produce less as they face uncertain revenue, but certain production costs. In many areas, speculators are crucial to the real economy.

There has been much debate about certain transactions that, in some people’s eyes, serve no common good. Should parties A and B be allowed to engage in a contract that party C goes out of business, even if parties A and B have no stake in C’s success or failure otherwise? But let me turn the question around: what is our business to regulate such transactions? Regulators start meddling with such transactions if such decisions become “systemically important” – presumably this means when such transactions can rock the financial system as a whole because of the leverage typically inherent to them.

There’s a cure for this: force anyone engaging in a leveraged transaction to post collateral and to mark such transactions to market every single day. On regulated exchanges, this happens all the time. Take as an example, when oil traded at $100 a barrel in 2008, a speculator placed a leveraged bet it would fall down to $50. As oil soared to over $140 a barrel, the speculator would have been asked by the exchange to post additional collateral along the way. If the speculator is unable post the collateral, the exchange will close out the position, even if the speculator may ultimately be right (as oil did make it down to $50 later in the year). The point of this mechanism is that the failure of any one player does not jeopardize the system. Further, because the rules were clear from the outset, the speculator better think twice before putting up so much leverage.

Banks are fighting tooth and nail about applying the same rules to credit derivatives and other transactions. They argue it is not necessary because their positions will ultimately be profitable, that the crisis valued their securities inappropriately. Of course they would say this: anyone holding an asset is inherently biased to the upside. In any event, that’s besides the point. It’s the risk to the system that must be averted. And the way it is averted is by providing a market-based mechanism to wind down leverage before it causes a problem. A regulated exchange is ideal in such situations, but similar mechanisms can be implemented when a regulated exchange is not practical.

One can require financial institutions to have a greater capital cushion. Trouble here is that most proposals are not working with market forces and, as a result, will be diluted through lobbying once the memory of the latest crisis fades. It’s beyond the scope of this newsletter to go into details of possible avenues here, but there are market based approached to make banks more resilient, e.g. by making them more dependent on long-term debt and less on the overnight funding markets – the lack of access to capital in the overnight funding markets brought both Bear Stearns and Lehman to their knees.

One can also work with tax incentives – for example, apply them to leverage in general, such as eliminating the possibility for corporations to deduct interest expenses (one needs to offset this with a reduction or elimination in corporate income tax).

Aside from risk, the place regulators should tighten the reigns in boardrooms. Executives foremost report to the board of directors, and that’s where the oversight must be rooted. Boards must have in have oversight of policies that reflect their fiduciary duty when it comes to how much risk executives may take. Such policies must be clearly communicated to stakeholders. The point is not to unnecessarily restrict risk taking, but to inform everyone that deals with the firm what their risk profile is. It’s then up to others to choose to conduct business with or invest with the firm.

Important is that the public has a healthy debate on what is to be done; we are rather concerned that policy makers impose restrictions in the heat of the moment that will cause more harm than good. The peak of the crisis has abated – in some ways, the perceived stabilization has reduced the sense of urgency. But, ultimately, the reforms being negotiated will not only affect your ability to achieve and sustain wealth, but that of the U.S. as a whole. Tell your elected officials they have a job to get done.

Your savings are at risk if you don’t engage in this fight. This fight is rather unpopular right now as we see how executives of companies on government support are fast rebuilding the system that proved unsustainable the first time around; while receiving top dollars in compensation. But that’s precisely because too few are involved in the real issues that foster bad decision making. As the financial crisis has shown, there is a real impact on your wealth when bad incentives lead to a financial meltdown; but there is also a real impact on your wealth when America’s growth engine gets crippled. If we don’t initiate a broader debate, we may get the worst of both worlds.

Axel Merk
President and Chief Investment Officer, Merk Investments

The news wasn’t entirely a surprise. And, sure, President Obama has asked Congress to send out another one-time payment of $250 to more than 50 million seniors as a little relief (emphasis on “little”).

But whatever way you slice it, this Social Security snafu highlights two simple facts that we all need to recognize, no matter what stage of life we’re in …

First, the Social Security system is flawed on MANY levels.

Second, we should only depend on our private investments to truly sustain us in our golden years.

I’ll talk more about two steps you can take for higher income in a moment. First, let’s start with my initial assertion …

Four Reasons Social Security Is Completely Flawed

Reason #1: A pay-as-you-go structure. I’ve talked about it before, but it’s worth repeating … Social Security’s pay-as-you-go structure is essentially a giant ponzi scheme.

Ostensibly, we’re all paying into our “own” retirement futures every time money gets siphoned out of our paychecks and into the government kitty.

But realistically, our future payments depend on future workers. And that means something has to expand indefinitely — either the workforce or the tax rate. Otherwise, future benefits are going to have to shrink in some way, shape, or form.

Reason #2: Rising life expectancies. Don’t get me wrong … I’m glad we all stand a good chance of living longer, healthier, more productive lives than the generations of yore. But the side effect for Social Security is additional strain.

Remember, Social Security was designed in the 1930s, when people lived to an average age of 60. Today, the average American is hitting 76!

The end result is another strike against the system’s ability to pay out promised benefits to millions of Americans based on current inflows.

Reason #3: A markedly expanded coverage universe. When Social Security started, it covered about half of the U.S. population. Entire swaths of workers were not promised benefits.

But today, nearly all workers are covered by the program. In the event of injury, they usually qualify for disability. In the event of their death, their spouses — and possibly their children — receive benefits.

Plus, as one reader pointed out on my blog a few months ago:

“Please go to the federal budget for 2008, look at the social security section, and see for yourself that SS going broke has less to do with seniors collecting benefits, and more to do with people UNDER retirement benefit age collecting money each month.

“Examples of programs include; payments to unwed mothers, WIC program, disability benefits to anyone at any age for most any injury, funding for drug treatment centers, tuition dollars for re-training workers, the list goes on and on. Don’t misunderstand, these are great programs, but they don’t belong under SS.”

His point is well taken. There’s no question that many of Social Security’s expanded responsibilities help Americans who are down on their luck. But this broader coverage also comes with a huge price tag and adds to an already struggling system.

Retirees are rightfully angry about Social Security’s inability to hand them realistic cost-of-living increases.

Reason #4: Skewed cost-of-living adjustments. Since 1950, Social Security has adjusted recipients’ checks for inflation. The current method, adopted in 1972, uses the change in Consumer Price Index (CPI) from July through September vs. the same period a year earlier.

Let’s ignore the fact that it doesn’t compare a complete year, which is a flaw in and of itself as far as I’m concerned.

Instead, let’s focus on the fact that the CPI itself is an imperfect indicator of the inflation that you and I feel in our daily lives.

I covered this topic in depth back in June of 2008, so I think a few simple questions will make my point today …

Has your food gotten any cheaper in the last year? How about your healthcare costs? And sure, gas dipped temporarily, but what are you paying now? Is it significantly less than you were paying over the last couple years?

Heck, consider this: Social Security’s biggest COLA since 1982 came last year, with a 5.8 percent boost. The few preceding years saw adjustments of 2.3 percent (2008), 3.3 percent (2007), and 4.1 percent (2006).

Meanwhile, the Kaiser Foundation says health insurance premiums for families have risen 131 percent since 1999 more than FOUR TIMES the general rate of inflation over the same period (28 percent).

So the fact that retirees aren’t getting any raise this year is just a more extreme example of the less-than-accurate adjustments they’ve been getting every year.

I could go on and on about Social Security’s shortcomings. But let’s just get to the main point, one that is stated quite plainly on the official Social Security website …

“Social Security Was Never Meant to Be
The Sole Source of Income in Retirement.”
In Other Words: You Must Rely on Your Own Investments!

We’re on our own when it comes to building and maintaining a solid retirement nest egg … one that can hand us steady income through thick and thin … and continue to grow your cash flow faster than the true rate of your own costs.

So how can you do that?

Certainly not with CDs or money market funds, given the pitifully low interest rates right now.

Instead, I have a couple suggestions:

First, stick with solid dividend stocks that have a long history of rising payments. It’s no secret that I favor these kinds of investments in my Dividend Superstars newsletter.

These companies tend to hold up very well during market downdrafts, post solid capital gains over time, and can continue to provide you with greater income year in and year out.

Second, also consider balancing your income-producing stocks with a solid mix of bonds. Not only will you get much needed diversification, but by selecting carefully, you can also get very solid yields with relatively moderate risk.

And don’t just stick to bonds here in the U.S., either! Remember that there are plenty of foreign companies and governments that are also competing for investment dollars by offering very attractive interest rates right now.

That’s one of the big points made in a free webinar called “Earning Higher Income in a Low Yield Market,” which was recently put together by Weiss Capital Management, a separately-managed affiliate of Weiss Research.

If you’re an income investor, consider taking a few moments to watch this very insightful video now. After all, Washington clearly isn’t worrying much about our income needs!

Best wishes,

Nilus Mattive
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Despite signs that the economy has resumed growing, unemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse.

Job seekers now outnumber openings by six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, while 14.5 million people were officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.

"There’s too much uncertainty out there," said Thomas A. Kochan, a labor economist at MIT’s Sloan School of Management. "There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing."

My comment: First of all the recession/depression is not over and unemployment is going a lot higher before this over. The misinformation that the mainstream media puts out is mind boggling.

John Polomny
The Real Deal

Back in April, I told you a bit about the Pension Benefit Guaranty Corporation and its decade of running in the red.

But just to recap: The PBGC is there for workers when their companies break retirement promises, and yet ironically, the PBGC itself has been underfunded every year since 2002!

To its credit, the organization was doing a decent job of getting back toward the black lately. It cut its deficit slightly in 2005, then made major strides in 2006 … 2007 … and 2008.

Now that streak looks ready to end — in a BIG way — when the PBGC reports its full-year financial results at the end of this month.

I’m basing that on what the group’s acting director Vince Snowbarger told a Senate Special Committee on Aging back in May. At that point, he said the PBGC was running a $33.5 billion deficit in 2009.

That’s THREE TIMES the size of the group’s deficit last year, and the largest shortfall in its 35-year operating history!

As Snowbarger stated in his written testimony:

“The increase in the PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses. The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.”

PBGC Acting Director Vince Snowbarger and former director, Charles Millard, testify before the Senate.

I’m willing to bet that the PBGC’s official release at the end of this month is going to show a rather dire situation, possibly worse than the mid-year deficit.

And the most important part of Snowbarger’s statement is that this deficit WILL need to be addressed.

That raises a few important questions …

First, Where Does the PBGC Get Its Funding?

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. That basically means it’s a quasi-governmental agency, much like Fannie Mae and Freddie Mac were. (Yes, feel free to either shudder or snicker at this point.)

Essentially, the PBGC builds up a kitty by collecting premiums from working pension plans, and then uses that money to dole out benefits when companies go bankrupt or otherwise abandon their plans.

The PBGC currently guarantees basic pension benefits for about 44 million U.S. workers and retirees taking part in nearly 30,000 defined benefit pension plans.

Before I go any further, here’s a quick refresher on defined benefit pension plans: They’re the dying breed of retirement plans that guarantee participants a set amount of money — paid monthly for life — generally based on the number of years of service performed at a company.

To operate these plans, companies have to sock away money for each covered worker. More importantly, they have to hope their investment assumptions work out well enough to produce enough in future returns to cover promised payouts.

When their investment portfolios don’t perform as planned — and that has been happening across the board lately given a rather tumultuous decade for stocks — companies must either dig deep into their corporate coffers or discontinue their plans.

You can see why very few old-line companies are offering defined benefit pension plans to their new crop of workers. And why they’re having a hard time keeping their existing plans solvent.

More importantly, we should all remember that the PBGC basically faces the same challenges … plus a couple of additional hurdles.

Like private companies, it has a set amount of money in its kitty. And like private companies, it has to hope future investment returns allow that money to grow fast enough to cover future outlays.

But it CANNOT borrow from its regular operations to cover its deficit. After all, it doesn’t have a regular business to fall back on …

It CANNOT discontinue its operations, obviously …

And given the fact that fewer companies are choosing to continue offering defined benefit plans, it has fewer and fewer healthy plans to collect premiums from!

So Where Will the PBGC Get the Money
to Correct Its Massive Deficit?

Here’s the thing … the PBGC does have a lot of money in its plan. And it’s unlikely that anyone currently receiving benefits is going to suffer in the short-term.

As Snowbarger noted in his testimony, because benefits are paid out monthly, the PBGC has some leeway. Plus, a greater number of failed plans means more immediate funding for PBGC because most companies leave behind some money when they close shop.

However, none of that makes the long-term health of the PBGC any better. It really only has a few ways to solve its systemic underfunding.

Obviously, if its investment portfolio has a rip-roaring rally, everything will be just peachy. But the idea of investment gains making up much ground is a long shot. Especially once you realize that the PBGC’s portfolio is about 30 percent in stocks and 70 percent in bonds!

That kind of an asset allocation certainly helped the PBGC avoid an even bigger catastrophe during the recent meltdown. However, based on historical returns, we should hardly expect it to post massive gains going forward.

The second option is for the PBGC to cut the amount of benefits it pays out to current recipients or to reduce the amount it offers to future workers covered in the event of plan failures. Remember that the PBGC already imposes a cap on how much it pays out workers — currently $54,000 a year to anyone 65 years or older.

Still, I don’t see it being able to reduce payments to anyone already covered. Only the idea of a smaller guarantee to future recipients is a possibility. They could simply maintain current payout levels and let long-term inflation work its magic.

But really … the PBGC simply needs to get more money into its coffers.

A lot of experts are calling for higher premiums being charged to member pension plans. And that may certainly happen. Yet there are two big drawbacks to this approach, as I see it:

First, as previously noted, there are already fewer and fewer companies offering defined benefit pension plans.

Second, charging the good plans higher premiums will only give companies one more reason to STOP providing defined benefit pension plans, which would exacerbate the existing problem.

That leaves just one place for the PBGC to get its money … you and me!

The PBGC’s Ongoing Deficit Will Likely Be
One More Bailout for Uncle Sam to Deal With

The story is just like all the others — whether it’s Fannie, Freddie, Social Security, the FDIC, or some other program.

They start with great intentions. They run fine when things are going well. But when things go bad, they become taxpayer money pits. They’re beasts that need constant feeding, growing hungrier and hungrier with time.

In the case of the PBGC, things have been running surprisingly well up until this point. And the organization has never taken a dime of taxpayer money yet.

I should also note that interest rate changes greatly affect the organization’s balance sheet … with higher rates making future obligations less of a problem.

Still, what are the odds that we’ll see a couple more major plan failures before the economy finds its footing? And what are the odds that taxpayers will ultimately be on the hook for at least some money five or ten years from now?

You know which way I’d be betting.

Best wishes,

Nilus Mattive
Money and Markets

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We are now the laughing stock of Asia. Our dollars are no longer respected; our ambitions, no longer mimicked.

Our way of life, often based on consuming far beyond our means, is being flat-out rejected.

I can’t even exchange a $100 bill on the street here anymore: Most of the street money changers will take euros, Singapore dollars, even Chinese yuan. But fearful of losing their shirt with sinking exchange rates, they don’t want U.S. dollars.

Not long ago, I never traveled without my American Express card. Now, it sits in my office safe. Many in Asia no longer accept the card anymore. MasterCard and Visa are still OK, but they’re also losing market share to locally grown cards like Aeon.

The running joke in Singapore, Hong Kong, Bangkok, and Kuala Lumpur is that the U.S. is the place where even your pet could get a credit card or a home mortgage.

So to Asians, the crisis we’re going through is our own fault. And although it was also caused by blunders in Western Europe and other regions, truth be told, they are mostly right.

The message is clear: We need to immediately stop living beyond our means. But can we?

Consider the facts:

• Through August, the federal deficit has already hit $1.38 trillion, or TRIPLE last year’s all-time record deficit of $454.8 billion. And in September alone, the administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.

• The U.S. government’s official debt is now at an all-time high of $11.8 trillion. That’s over $100,000 for each and every household in America.

• Both the administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, bringing the burden per household up to $177,000.

• The Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.

• Perhaps worst of all, the unfunded government IOUs that are now starting to come due on Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.

Grand total: Each and every household in America is indirectly responsible for a debt burden of over 1 MILLION DOLLARS!

Bottom line:

Even assuming they can save 5 percent of their income year after year … and even assuming every single penny of their savings is thrown into the pot … in order to pay off the U.S. government’s debts and obligations, each American family — and descendents — would have to toil for the next 429 years.

Problem is, we haven’t borrowed all that money from ourselves. We’ve borrowed more than half of the outstanding national debt from overseas investors, who now fund fully 50 percent of our debt addiction.

But now …

America’s foreign creditors are haunted by the spectacle of Washington’s spending binge and are starting to recoil in horror.

That’s why in April, U.S. bond purchases by foreign central banks plunged 41 percent from the month before, while purchases by foreign private investors dropped 7 percent. All in a single month!

Yet even as investors flee in increasing numbers, our government continues to ramp up spending — trying to hawk even more U.S. debt to foreign lenders.

The Obama administration largely ignores the fact that overseas investors are getting tired of footing the bill for our borrow-and-spend addiction … and are also becoming increasingly skeptical of our ability to pay our debts.

The result: More foreign central banks, overseas fund managers, and investors flee, leaving the U.S. government with no choice but to pump out more and more unbacked paper dollars and dump them into the economy — further eroding their value.

Central banks over the last year have been actively replacing portions of their dollar reserves with the euro, the Canadian and Australian dollars … and gold. China alone recently announced it has quietly increased its gold reserves by more than 75 percent over the last seven years.

So it should come as no surprise that the widely watched U.S. Dollar Index, a measure of the dollar’s performance against a basket of six of the world’s major currencies, has plunged 15.1 percent since its high of March 4.

As you can see from the accompanying chart, that now puts the greenback in free-fall territory.

It’s plunging against the euro, the Japanese yen, the British pound, the Swiss franc, the Canadian dollar.

It’s even sliding against the currencies of lesser-developed economies like the Thai baht, the Philippine peso, the Indian rupee, the Malaysian ringgit, the Indonesian rupiah, and the Vietnamese dong.

And it leaves …

The U.S. and All Americans
Between a Rock and a Hard Place

Either …

• U.S. consumers and the U.S. government must slash spending drastically, accepting a deeper economic decline or …

• They will perpetuate the borrow-and-spend cycle, destroying the U.S. dollar and, ultimately, our standard of living.

I’d like to hear your thoughts on how we might get out from under this mess we find ourselves in — and, more importantly, what YOU are doing to protect yourself, your family, and your retirement from the dollar’s demise.

Just jump over to my personal blog to weigh in on this issue by clicking here.

Best wishes,

Larry Edelson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

The Great Depression taught Americans about thrift, a virtue largely absent from society in recent years.  Now thrift is mainstream once again. Opulence is out and living frugally in. The New York Times points out these new realities…

“Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the wherewithal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and real estate prices.

Some suggest the recession has endured so long and spread pain so broadly that it has seeped into the culture, downgrading expectations, clouding assumptions about the future and eroding the impulse to buy.”

In addition to curbing their purchase decisions, consumers are saving more. According to the Bureau of Economic Analysis, Americans saved 2% of their income in 2007. The savings rate has improved to over 4% in recent months – a 100% improvement motivated by economic uncertainty.  We’re living in an age of scarcity now – or so thinks the culture.

Why this change? The US economy has lost 6.7 million jobs since the onset of the recession in December 2007. Everyone knows someone who has lost a job, making the income problem palpable. Many have lost income due to the downturn, making the problem real. Some could lose our jobs in the next round of cuts, making the problem scary. No wonder consumers are thrifty these days.

With consumers accounting for around 70% of the US economy, investors should take note of the renewed sense of value. Companies known to provide products and services at a better price will do better than those perceived as more costly. Whether or not the short-term rally continues, look to the new value culture for new opportunities.

Brandon Clay
Invest With An Edge

Clearly, you wouldn’t get far.

Yet it’s not uncommon to run into investors who are knee deep in option trading, currencies, short selling, or sophisticated arbitrage strategies without mastering – or even understanding – basic investment principles.

Even seasoned hands can benefit from a refresher course from time to time.

So today we’re going to revisit Investing 101 and talk about the six factors that will determine the future value of your investment portfolio, whether it’s worth $10,000 or $10 million.

Six Factors That Determine Your Portfolio’s Future Value

Those six factors are:

• The amount of money you save. To put it bluntly you have to start by maximizing your income, minimizing your outgoing and paying yourself first. Why? Because expenses always rise to meet the income available. As soon as you get a raise or a higher paying job, you’ll find that you need a new car, a bigger house, better furniture and a new set of Callaway irons. But you have to draw the line somewhere. You can’t save a pittance and expect your portfolio to perform miracles each year.

• The length of time your money compounds. The sooner you start investing the better. And the longer you leave it alone the better. If you start too late – or raid your portfolio to redo the kitchen or take the kids to Disney – you’re going to have a lot of catching up to do down the road. The old chestnut is true: Don’t touch your capital. It’s like eating your seed corn.

• Your asset allocation. Studies consistently show that how you divide your portfolio among non-correlated assets – stocks, bonds, real estate investment trusts, precious metals, etc. – determines 90% of your portfolio’s long-term return. (The rest is due to security selection.) If you’re too conservative – or too aggressive to stick with your program – you simply won’t meet your goals.

• Your assets’ annual return. This, of course, is the great unknown. Not even Warren Buffett or Ben Bernanke can say what their portfolio will return each year. But the better your security selection and asset allocation decisions, the higher your annual compounded returns.

• What you pay in expenses. Don’t be oblivious to what all those financial intermediaries are charging you. You can sacrifice far too much in commissions, bid/ask spreads, wrap fees, management expenses and other costs. All things being equal, the lower your expenses the higher your net returns.

• How much you pay in taxes. Too many investors are oblivious to the tax ramifications of their investment moves. When possible, put your high-yielding investments in your tax-deferred accounts and your tax-efficient funds and individual stocks in your non-retirement accounts. (I call this your asset location strategy.) Hold positions 12 months or more to qualify for the lower long-term capital gains tax rate. Offset your capital gains with capital losses if possible.

Only one of these six factors is beyond your control: your assets’ annual compounded return. That means it only makes sense to focus on the other five.

Investing 101: Don’t Worry About The Markets…

So instead of worrying about what the market will do between now and year end – something you can’t possibly know and has nothing to do with what your portfolio will be worth five or 10 years from now – focus on:

• Saving more,
• Leaving it alone longer,
• Getting your asset allocation right,
• Lowering your expenses
• And keeping a close eye on taxes.

Get these big questions right and you’ll find the details will take care of themselves.

Better still, in your golden years, your portfolio will take care of you.

Good investing,

Alexander Green
Investment U

What’s more …

 The euro just hit its highest level against the dollar since December.

 The New Zealand dollar hit its highest level since October.

 The Australian dollar hit its highest level since September.

 And the star performer — the Brazilian real — surged to its highest level against the greenback in 11 months.

Good news, no doubt, if you’re a U.S.-based investor in foreign equities. You can benefit from rising foreign stock prices … and benefit again from the falling dollar, which increases your dollar-based returns. But throwing the dollar overboard, as Washington appears wont to do, is a dangerous game.

Why you ask? Because …

We’re in Debt to the World to
The Tune of Trillions of Dollars!

When you’re a creditor, you control the purse strings. If your borrower’s credit quality deteriorates … if your borrower takes on too much debt … if your borrower loses his job … or if your borrower keeps trying to find squirrely ways to avoid paying you the full amount he owes you, you can cut him off.

As Washington piles on more debt, you and I will pay more to get mortgages … and companies looking to expand will have to shell out more in interest.

Unfortunately, in today’s global economy, America is the biggest borrower on the block. Our country’s debt load at the end of July totaled $11,669,251,349,504.65. That’s $11.7 trillion, or roughly $38,000 for every man, woman, and child in the country.

If our political leaders were attempting to get our borrowing binge under control, maybe I could be more optimistic about America’s financial future. But they’re not! In fact, the Congressional Budget Office recently warned of “an explosive fiscal situation.” It projected that the U.S. debt load could hit 100 percent of GDP by 2023 and a whopping 200 percent of GDP by the mid-2030s!

We’re counting on foreign creditors to finance that debt explosion. But those creditors ALREADY own about 53 percent of our marketable debt, the highest percentage share in history. And they’re starting to rebel.

Case in point: Both Russia and China have made noises about wanting to diversify the allocation of their reserves. They’re talking about buying fewer dollar assets, and more assets denominated in other currencies.

These guys aren’t small beer, either … Russia’s reserves are a staggering $402 billion, the third-biggest in the world behind Japan. China is at the top of the reserve heap — with a mindboggling cash hoard of $2.13 trillion!

Why would these guys want to move their money out of dollars? Simple.

As the dollar loses value on the global currency market, our foreign creditors lose money. That’s because every dollar worth of bonds they own translates into fewer pounds, euros, yen, and so on when those dollars are exchanged into the owners’ home currencies.

We’ve already seen the dollar’s share of global reserves shrink to 64 percent at year-end 2008 from 73 percent in 2001, according to the International Monetary Fund. If that figure continues to decline, U.S. interest rates will simply have to rise.

That means Uncle Sam will pay more to sell Treasuries … you and I will pay more to get mortgages … and companies looking to expand will have to shell out more in interest.

How to Protect Yourself …

You can protect your wealth with contra-dollar investments that are meant to go up in value when the dollar goes down.

Look, you and I can’t control what Washington does. But we can control our own portfolios. We can buy protective investments that are designed to RISE in value as bond prices FALL. And we can buy contra-dollar investments that are meant to go UP in value when the dollar goes DOWN.

In short, we don’t have to just grin and bear it. We can build a moat of protection around ourselves — and go on the offense with investments that can build wealth in this environment. And that’s exactly what I’m doing in my services, including Safe Money. If you’d like to join, we’d love to have you — and it’ll cost you less than a buck a day.

Not ready yet? Then just remember my more generalized advice: Consider locking in long-term borrowing rates now, before they go up. Stay away from long-term bonds. And definitely build up your savings by pinching as many pennies as you can.

Until next time,

Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

You’ve just beaten the toughest part of the entire job search process.

Getting the call means that you crafted a resume that grabbed their attention, and also made a solid first impression – mostly likely via a “pre-interview” telephone call with your prospective new boss. With unemployment at its highest level in 26 years – and countless numbers of hungry unemployed workers swarming every promising job opening – that was no small achievement. Make sure to give yourself some credit – and maybe even celebrate a bit.

At the same time, don’t lose focus – the “brass ring” is now in sight. All that’s keeping you from landing this job (and putting an end to the need to regularly take cash advances against your credit card, if you’ve been out of work awhile), are the three, four or five other job candidates who’ve also been called in for interviews.

Working against you is the fact that each of them is at least as desperate as you are to get a job – especially now, in the toughest job market any of us has ever seen. One of your rivals may even be the so-called “internal” candidate that we all dread competing against.

But here’s the good news.  You’re about to learn the one real secret of the interview process that’s going to give you a huge advantage over your competition.  It’s the key to focusing everything you do before, during and after the interview – and that will make you the clear-cut, No. 1 best choice for this job.

It’s not enough to demonstrate that you’re a perfect candidate for the open job. You need to show that you’ll be a perfect fit in the organization’s corporate/company culture.

The Toughest Competition You’ll Ever See

With entire industries gone belly up, and supposedly rock-solid icons of American business bankrupt, the competition for available jobs is more vicious now than ever before. By the time a company has narrowed down its list of job applicants to the handful that warrant an actual interview, all of them are going to be very, very qualified – so qualified, in fact, that the chance of one person having significantly more experience or skill or knowledge than the others is remote, indeed.

Most folks go after a job interview like a hammer goes after a nail: They hammer away at the interviewer, doing the whole “hard-sell” drill, going on about their achievements, their education, their work ethic, their qualifications and their skills. They talk about why they’re better than anyone else who could walk through the door.

The upshot is that all the candidates sound the same, and in the end do little to distinguish themselves.

As demoralizing as it initially sounds, that’s not enough.

You see, with so many potential candidates out in the job market, it’s really a “buyer’s market,” meaning the company clearly has the upper hand. It can wait to pick and choose the very best person available. And that’s what it’s going to do.

That’s why you need to go about this whole interview routine in a very different way than normal.

Because of your preparation, you’re able to demonstrate precisely how you’re the best fit for the position, the company and the corporate culture. In short, you’re showing the interviewer that he or she has a problem (a job that needs to be filled) – and that you are the solution.

That gives you a huge competitive advantage.

Hit the mark here and what you pursued as only a new job could well burgeon into a new career.

Connecting With Your Prospective New Boss

Initially, you might think this approach is too touchy-feely for today’s jagged-edge recession. But here’s something to consider: Not only is this the right strategy, it could well be the simplest.

While the other job candidates spin their wheels hard-selling the information that’s already spelled out on their resumes, you have a much-easier task: From now until you receive an actual salary offer from the company, you’re going to need demonstrate your ability to fit in with the culture. But don’t have to worry about embracing 1,500 people, or convincing all of them at once that you’re the best fit for the job. You’ve only got to connect with the person in front of you – the interviewer. Make that connection and you’ll be miles ahead of your competition.

Two strategies will get you to that point:

• Turn your interview into a “Highlight Reel” – thanks to intense preparation.
• And close the deal with impressive follow-up questions.

Let’s look closely at each of these strategies.

How to Turn Your Interview Into a Job-Candidate Highlight Reel

As unfair as it might seem, the reality is that your interviewer will form a strong opinion about your potential to do the job – or your ability to fit into the corporate culture – within the first minute or so of your initial meeting. And as the old adage says: “You never get a second chance to make a first impression.”

Your appearance will play a dominant role in that first impression. So, it’s up to you to make sure that you’re communicating exactly what you should be with the way you look.  Here’s how: 

• Do the Research (I): To make this strategy work, you have to know your subject. Do all the research you can on the company, its products or services, its markets, its current finances, and it’s corporate (if it’s a big firm) or company (if it’s smaller) culture. Especially if it’s a big company, make sure to check out stories in Fortune, BusinessWeek, Bloomberg News, Reuters, The Associated Press, The Wall Street Journal, USA Today and MarketWatch.com. That’ll get you all the “official” news. Make sure to read the comments below the stories; many times, there will be some left by employees. Check out some of the investor chat rooms for big companies, too: You’ll often find that employees have (anonymously) left comments. Here’s something else, too: Many big companies have Web sites (both official and unofficial) in which workers congregate and talk about their employer. These sites aren’t always open to outsiders. But these sites, as well as the afore-mentioned “chat rooms” are the source of some great “dish” on your prospective employer’s true company culture.

• Do the Research (II): It will be hugely beneficial do devote some of your ever-increasing research prowess on the person you expect to be interviewing with. Do a general Web search (especially if they’re a higher-level exec with a public company, he or she could well be quoted in some news stories about the firm). Don’t forget to see if he or she has a site on Facebook, or Linked In (which is the more-business-oriented of the so-called “social-networking” sites). Finding out what they are interested in will help you “connect” – especially if you find out you share some common interests.

• Dress for Success, But Consider the Context:  Make sure you’re not under or over-dressed, and make sure to keep in mind the job and the company that you’re applying for. If it’s an hourly position in a production environment, for instance, consider a sport coat, tie and nice slacks, instead of a full-on suit. But an opportunity in the uber-professional financial ranks might require you to break out the diamond-studded cufflinks.

• Don’t Get Derailed by Details:  Pay attention to the basics, for you never know what your interviewer will value. For instance, if you plan to wear a suit, make sure it’s been cleaned and pressed. Take along an extra shirt or blouse “just in case.” When it comes to accessories, don’t overdo the bling – it can be distracting, and you want the interviewer to remember you, not the dangly bracelet that hypnotizes him. Good grooming – hair, nails, polished shoes – is worth the time.

• Be Punctual: It goes without saying that you don’t want to be late. On the other hand, you don’t want to be too early; we’ve heard horror stories of late about a number long-out-of-work job-seekers whose desperation became apparent when they showed up for their interviews several hours before the appointed time – and just kicked around the office lobby until it was time for their appointment. Sorry, but that comes across as weird.

• Practice Makes Perfect:  Come up with a list of questions and have a friend or family member run through them – a number of times. Lists of interview questions are easy to find on the Internet. Make sure to include some tough ones. And, if possible, have your “helper” come up with some tough ones that you aren’t expecting – it’ll be good practice. Though you’ll clearly face some new questions in the actual interview, just going through this routine will help you feel more at ease. It’s worth the time invested.

• Make Sure to “Ask” for the Job: In the business classic, “Liar’s Poker,” author Michael Lewis recounted his experience during his interview for an entry-level job and Wall Street bond-market heavyweight Salomon Brothers. The interview just seemed to go on and on. Then he remembered the counsel of a friend who said that the interviewer wanted to hear the candidate “take the job.” Once he had that epiphany, Lewis turned to his interviewer and said: “I accept the job.” His interviewer smiled, shook Lewis’ hand, and welcomed him aboard. That’s a bit of an extreme example. But you will score points by telling the interviewer that you’re “excited about,” or “jazzed about,” and “really want” this job. Don’t be afraid to say that you see it as “a great opportunity.” That said, don’t go on and on about the bills that are piling up, and how badly you “need this job.” In fact, that leads us to our next – and final – interview tip.

• Always be Positive:  As obvious as this sounds, it’s the tip job-seekers forget the most. And, unfortunately, it’s the one misstep that can negate all your good, hard work, and that can make your prospects disappear like they were part of a David Copperfield trick. In fact, it’s so important that you have to adhere to it from the outset – from the very first call you get from the company until after you sign and deliver your acceptance letter. Avoid being negative. For instance, if you were laid off you’re your previous job – as so many people have been as a result of this recession – don’t “bad-mouth” your former employer. Even seemingly innocent comments – “yeah, I think they’re really headed downhill,” or “they need to value their people better” – can make you appear petty, mean, or even a bit unstable, emotionally. Just keep your comments positive (but realistic). If they ask about the layoff, for instance, tell your interviewer that you “prefer to look forward, not back.” If the interviewer presses you, consider such replies as “I can’t tell you how much I learned while working there,” or “I worked with some incredibly talented people.”

All this preparation will get you the interview, and will make a memorable first impression in the first 60 seconds of your first meeting with your prospective new employer. After that, it’s all about closing the deal. In Part II of this story, we’re going to detail just how to do that – how to conduct the “perfect” interview (as the “interviewee”) and then how to seal that deal with a virtuoso follow-up performance.

After your interview’s passed that initial 60 second mark, your interviewer will have already formed his first impressions of you.  As critical as they are for helping you send the right message to the interviewer about your ability to fit into the culture of the company, they’re really just setting the stage for to shine.

During the rest of the interview, whether that’s 59 minutes, an hour and 59 minutes or longer, you’ll be closing the deal.  That is, you’ll be solidifying your claim to the position by asking the right follow up questions.

By Wayne Ellis
Money Morning

P.S. “First Ounce Bounce” Set to Pay 1,100%

Government filing NI 43-101 is mandatory in Canada. It shows the proven reserves of any company intending to mine gold. The latest filing from a small renegade company we’ve just uncovered lists their reserves at an astounding 10.1 million ounces. It’s the biggest gold strike in Canadian history – and one of the biggest in the world. Yet few investors have seen or heard of NI 43-101 yet. Getting in before the “first ounce bounce” – when the first ounce comes out of the ground – is likely to yield an initial return of 1,100%.

Go here for the full report.

But here’s the stark reality: The money Uncle Sam gets from personal taxes, payroll deductions, corporate taxes and various other duties is a little more than half of the money it’s spending. The difference (deficit) has to be made up either by reducing spending, increasing taxes, or both.

It’s an unpleasant reality, but that doesn’t mean we’re helpless against these changes.

Many don’t know why or how much our Gross Domestic Product (GDP) relates to the taxes we all pay. So let’s take a look at how it’s determined and why it’s important. And best of all, how we can even profit from these charges – I mean changes – and make money in the process.

GDP: What is it and Why Should I Care?

Gross Domestic Product – or GDP as it’s most often referred to – is the basic measure of a country’s economic performance.

It’s calculated in a number of ways. One of the most common is the total money spent to purchase the final goods, end products and services produced in one year.

It’s a very big number: In 2008, the International Monetary Fund estimated that the GDP for the entire world was $68.9 trillion. Not too surprisingly, the United States’ share is by far the largest: $14.2 trillion, or about 20.6% of the total.

• It stands to reason that if GDP is rising, economic growth is increasing, unemployment is falling and tax revenue is increasing.
• In the United States, the consumer has historically been responsible for 70% of the nation’s GDP, and that’s what’s sustained our long run of economic growth.
• But now, the consumer’s ATM is tapped out… kaput. He’s now too busy saving and paying down debt (a good thing) to be able to spend money at historical levels.

As a result, GDP – and by extension economic growth – is falling, and unemployment is rising. As a result, federal and state tax revenues are dropping.

So who or what is going to make up the GDP difference? Of course, there’s always the hue and cry of cutting government spending. When was the last time – under any administration – that you actually saw government shrink?

It’s been awhile, but I can assure you that at least at the state and local levels, government is laying off workers and tightening its purse strings. But that won’t be enough: taxes will have to rise to make up the difference.

Our Rising Tax Predicament Was Foreseen in the 19th Century

It’s interesting to note that this scenario was foreseen hundreds of years ago. You see, way back in the 19th century, German economist Adolf Wagner predicted that as societies grew more affluent, taxes would inevitably have to rise. This became known in economic circles as Wagner’s Law.

The reason is simple: A nation’s citizenry ultimately wants more of the things that only its government can easily provide. All those good schools, public order and safety, a strong military, and various public welfare services and Social Security benefits all cost money.

While I’m not a fan of big government, most of these are things the average citizen would have difficulty providing on their own.

Arguments are made all the time that as more social services are provided, there is less incentive for people to work. The reality though, is quite different.

Even when taxes rose sharply – as they did in the early part of the 20th century – from only a couple of percentage points of GDP to the current level (18%), the country still prospered.

Now they will have to rise again, to make up the gap in social service spending. Although there is much ballyhooing about it, the country will still prosper, as most people are quite comfortable from a material standpoint.

So what’s the best way to “play” the inevitable tax increase?

Three Ways To Play The Coming Tax Increase

My answer might surprise you, but I believe there are three sectors that will fill the consumer spending “deficit” and fund an economic recovery: energy, infrastructure and health care.

Both energy and infrastructure will benefit for the next several years from the billions being thrown at the sectors via the stimulus package as well as coming tax increases. We’re just starting to see the first of what will be many large highway, bridge and other infrastructure projects, as well as energy infrastructure undertakings associated with the smart grid.

Regular readers know I follow the first two very closely. Marc Lichtenfeld – an Investment U contributor you’ll be hearing a lot more from in the coming weeks – is an expert on the third. Read about Marc’s ideas on partial profit taking.

• Right now, analysts and most investors are shunning the energy ETFs, many of which are off 25% or more from their highs of last November. Of course, that’s the very reason you should consider taking a position in one.
• Specifically, take iShares Dow Jones U.S. Energy (NYSE: IYE), a fund that seeks to replicate the performance of the Dow Jones Oil and Gas Index. It includes companies in all facets of oil and gas: producers, equipment and distribution.

No one likes higher taxes, but in the coming weeks and months, these three sectors stand to benefit from the coming increase in government spending. We’ll be bringing you more on all three over next few weeks and months.

And remember, there’s always a way to make a profit.

Good investing,

David Fessler
Investment U

We’re here to tell you that this bit of wisdom is true.

It even includes jobs.

But as is the case with pretty much everything else on the Net, you have to know where to look.

With U.S. unemployment at a 30-year high of 9.5% – and expected to go higher – the search for a new job is certain to become a tougher challenge. In 15 states, in fact, the jobless rate already exceeds 10%, including Michigan, where it’s 15% (22.5% if you include laid-off workers who have given up looking for jobs, or who have settled for part-time work).

Job-hunters are battling back by increasingly turning to the Web. In fact, about 40% of the Americans who use the Internet regularly use it to search for jobs and hiring information, concluded a mid-July study from the Pew Research Center. People are also looking at company Web sites for jobs and to research firms they want to work for; they’re also seeking more general information about the economy and just how bad it is.

That’s because one major function of the Web has been to replace the old classified section of the daily newspaper with online job boards and job portals. Such job-listing sites have been a major contribution of the Internet – and are shaping up as a major contributing cause-of-death for newspapers. Unlike the newspaper, though, the online job postings are not always local and are not always current.

Nevertheless, the Internet has changed the job-hunting game forever, raising the stakes while quickening the pace, one expert says.

“The Internet has made life faster for both candidate and employer,” Daryl A. Hulme, vice president of human resources for Yahoo Inc.’s HotJobs.com (Nasdaq: YHOO), an Internet job board, told Reader’s Digest in an interview. “Resumes once submitted through the mail are now submitted with a click. Candidates still relying on the mail stand a good chance of being beaten to the punch by candidates sending their resumes through cyberspace.”

Internet Job Search Dos and Don’ts

Most sites allow job-seekers to post a resume, but here a word of caution is in order: Read the confidentiality notice of each job board closely, especially if you’re still employed and don’t want your current boss to see that you’re looking for a job.

You may also want to consider this: Many job-posters now have computer programs that electronically “pre-screen” candidates by scanning resumes, looking for specific keywords to create a short-list of the candidates who presumably have the best qualifications. You have to know the keywords from their ad or their posting before you submit your resume.

You can, of course, update your resume on most of these sites, and some experts advise doing so every few days.

By the way, if anyone asks you to pay to post your resume, click away from their page, and do so quickly.

Compared to the old newspaper classified section, using Internet job boards is in fact a challenging proposition. A closer look at a few of the top sites illustrates the pitfalls.

Places to Pan for Internet Gold – a New Job

Let’s first consider the most accessible Web site of all: craigslist.  With individual sites for each major city/metropolitan area, craigslist is definitely local; it’s well-categorized, and it attracts a pretty wide range of employers because it ischeap to post jobs, and free to post “gigs” or small contract or one-time jobs.

Those are the good points. But here’s the downside: Because it’s so cheap and so accessible, craigslist is also a magnet for the slightly – and even outright – sleazy. You’ll sometimes find downright deceptive ads that, when you respond, send you an e-mail trying to set up a traditional scam – such as asking you to send money as a sign of good faith.

You’ll even find the old “work-at-home!” and multi-level-marketing scams disguised as legitimate job opportunities.

But craigslist is worth the effort if you’re looking for a job with a small local firm, a startup or a family-run venture. Just read each post carefully.

You can also post a resume on craisgslist, though here considerable caution is in order: Relatively few recruiters are actually going to look at resumes, and you’ll have to protect your privacy by editing out some of your personal details.

Two more sites –  Indeed  (”In one search. All jobs”) and SimplyHired (”Job Search Made Simple”) – offer searching by job type and by zip code. They are very similar. Indeed.com is an aggregator: It culls listings from various job-listing sites. So Indeed casts a wide net, but it also can run behind the deadlines various job postings have set.

Indeed can be searched by zip code, and lists jobs with a little ‘New’ logo, but closer examination reveals that applications are due on the next day or that the deadline has passed. Still, its very wide reach gives Indeed a strong advantage.

SimplyHired.com is very similar to Indeed.com, also culling from a variety of other Web sites. SimplyHired presents itself as a slightly hipper, younger destination than Indeed.com.

Three oldies but goodies – Monster , Careerbuilder and Hot Jobs – are among the oldest job-hunting sites in cyberspace, and are definitely worth the look. All three tend to gather openings from large companies, rather than from entrepreneurial hirers, and all three will try to sell you such “extras” as resume-writing services. But Monster sometimes suffers from geographic confusion, sending notices of openings in Texas and Oregon to job-seekers in Virginia.

The Ladders is a niche job site aimed at job-seekers in loftier salary ranges – chiefly $100k+ positions in sales, and in the executive suite. Its basic level is free but it charges on a graduated scale for longer periods of access. It specializes in human relations and marketing positions.

Snag A Job calls itself "the #1 job site for hourly employment and entry level opportunities," but it frequently lists jobs that are not actually available at the time. For instance, Snag A Job lists openings at Pizza Hut locations – where you’d think they’re hiring, but where in fact they do not currently need people.

Jobfox.com is more like a wolf in a fox’s clothing: This site seems largely to exist to try to sell people resume-writing services.

These are only a few of the bigger sites; you may also want to look at the national trade association for job sites for some smaller and niche sites. For high-tech jobs, two sites present a few strengths: Dice.com and noodleplace.com. Dice has a very broad sweep, covering everything from data-entry to programming to managerial positions, while Noodleplace offers a much-more-sophisticated approach and a more selective array of jobs. An online newsletter, Weddle’s, also provides specialized job hunting sites, as well as pointers for recruiters.

Social Networking and the Job-Seeker

Bear in mind that most job boards are like the old newspaper employment/classified ads section in still another way: They share its weaknesses, including the fact that they go in one direction at a time, from one point (the job seeker) to another (the hirer). That’s where social networking sites – sites that offer access to many points and many users – come into play. Kevin Wheeler, a human resources and hiring vet, tells the recruiting Web site Electronic Recruiting Exchange that social media, with its referral and recommendation abilities, will be the wave of the future and the "primary sourcing tool" for new hires.

Surprisingly, MySpace, Facebook Inc. and even Twitter Inc. play a role for job-seekers, especially younger ones, but the one site that a job-hunter is most likely to find of use is Linked In. Linked In is the nation’s largest business-networking site with 17 million active users, more than the population of The Netherlands. It has some four million visitors each month and adds 35,000 new members daily. Its average user is approximately 39 years old, and about 12% are in senior-management roles. About half of its users are interested in learning about new career opportunities.

Linked In’s basic model is a “by-invitation” model; you can get on without knowing someone that’s already linked up, but it helps to know someone who’s on the list. It has a jobs section and a jobs blog, and most of these jobs demand very specifically qualified people.

You’ll find, for instance, a marketing post deep within The Procter & Gamble Co. (NYSE: PG) or a similar opportunity tucked inside General Electric Co. (NYSE: GE) that demand such specific skill sets that the job descriptions seem to have been written with someone specific in mind.

And that’s often the case. But here’s the important thing about Linked In: This very specific job may already have been filled by someone who knew someone who’s on Linked In, or who was recommended by someone on Linked In.

Its recommendations are a unique feature of the site, and carry the credibility that only a known factor – such as a known member – can provide. Job openings that Linked In members post contain a mention of the poster, and you can certainly apply blind, but if you can connect with the person who posted, you certainly have a leg up.

(There is a catch, of course: On Linked In, you can only connect with someone if both parties agree, and no one can see your personal profile or your network of connections unless they’re connected to someone who is connected to you. Thus, it’s who you know that counts.)

With Linked In, once you have a connection, you’re on your way to getting linked in. Remember that Linked In’s membership includes many executives with hiring responsibilities, as well as many other decision-makers; if you can approach one of them with a recommendation, you’re way ahead.

As for the other sites – Facebook, MySpace and Twitter – they’re potentially useful for twentysomethings who grew up (or didn’t) with social media, but they also contain pitfalls.

If you’re a twentysomething, you’ve probably done some twentysomething things involving ‘partying.’ This means excess, and the universal advice from recruiters is this: Don’t post pictures or descriptions of yourself doing things like parading around with a lampshade on your head, a bottle in your hand and nothing else on. Increasingly, employers are taking the time to check out the postings of people they’re considering hiring. Unless you’re applying for the position of frat house loudmouth, post with caution.

By David Field
Money Morning

We focus too much on the short-term trends and lose sight of the big picture. And we don’t think about what’s likely to happen over the next five or ten years because we’re just trying to make it through the next five or ten DAYS.

So in this Money and Markets column, I want to do something different. Rather than talk about what the S&P 500 or 10-year Treasury Notes did this week, I’m going to tell you about a major, LONG-TERM economic trend that you should be aware of. I believe it’s one that should frame your investing decisions for years, rather than days, weeks, or even months.

I’m talking about …

America’s Newfound
Embrace of Thrift

I know what you’re thinking: Using the word “thrifty” in the same sentence as “American” seems like a crazy thing to do. If there’s anything we’re good at as a country, it’s spending like mad — and running up the credit card (or mortgage) to do it!

According to the National Retail Federation, retailers should brace for a 7.7 percent drop in back-to-school shopping this year.

But that’s changing. Really changing. And I think that the shift toward thrift is going to last for a long time. The evidence is everywhere:

• In a Wednesday story called “Restaurants Burned By Deep Discounts,” The Wall Street Journal noted that several fast-food and casual dining chains are slashing prices and offering all kinds of come-ons. Yet consumers aren’t biting. They’re spending less time and money eating out regardless of the deals. In the Journal’s words:

  “Despite heavy discounts across the retail industry — prices have been slashed on everything from food to clothing — consumers have been stubbornly reluctant to open their wallets.”

• The same thing is happening at the nation’s shopping malls. While overall retail spending rose 0.6 percent in June, the gains were largely driven by higher fuel prices. Core sales in discretionary categories like furniture (down 0.2 percent), general merchandise (down 0.4 percent), and clothing (unchanged) were weak. The National Retail Federation just forecast a 7.7 percent drop in back-to-school shopping this year ― something we haven’t seen in years.

• This newfound culture of thrift cuts across socioeconomic lines, too. Every year, American Express Publishing and the Harrison Group publish their “Survey of Affluence and Wealth in America.” The responses on the economy, on savings, and on spending come in from more than 1,500 people who make anywhere from $100,000 to $5 million a year.

  This year, the survey showed that wealthy Americans are saving a whopping 16 percent more of their income. They’re raising their retirement plan contributions by 6 percent, and most (77 percent) are purchasing fewer big-ticket items.

• Nationwide, the personal savings rate soared to 6.9 percent in May. That’s the highest level going all the way back to 1993.

Bottom line: We’re spending less and saving more, from one end of the country to the other. Just about the only group of Americans that haven’t gotten the message are our elected officials in Washington. They’re blowing every last penny of taxpayer resources, then borrowing trillions more and blowing that money, too!

What the New World of Less Spending,
More Saving, Will Look Like …

“It’s time to return from Oz to Kansas, to become fully reality-based again.” — March 26, TIME Magazine

So what will it mean for America going forward? TIME Magazine took a crack at envisioning it in its March 26 cover story called “The End of Excess. Why this crisis is good for America.” The author said:

“It’s time to ratchet back our wild and crazy grasshopper side and get in touch with our inner ant, to be more artisan-enterpriser and less prospector-speculator, more heroic Greatest Generation and less self-indulgent baby boomer, to return from Oz to Kansas, to become fully reality-based again.”

Bill Gross, managing director at the giant bond investment firm Pimco, used his own colorful language to describe the recent past — and provide a vision of the future:

“U.S. and many global consumers gorged themselves on Big Macs of all varieties: burgers to be sure, but also McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitizing them could never go down. What a colossal McStake that turned out to be …

The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Global estimates are less reliable, but certainly in multiples of that figure. And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%.”

Me? I think this is a healthy development that’s been a long time coming …

The “borrow and spend, then borrow and spend some more” approach has done nothing but hollow out our economy. We borrowed trillions of dollars to chase asset values ever higher. Now we’re left holding a steaming pile of deflating assets (commercial real estate, housing, etc.) — and a gigantic mountain of debt that we’ll be paying off for years and years.

We NEED to get back to an economy built on a healthy foundation. We NEED to save more and spend less. And if the government doesn’t get in the way of this healthy, corrective process, we’ll find ourselves in a much better place for the long run.

Until next time,

Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Oops.

We’ve already established how those guys were dead wrong about home loans. Indeed, the delinquency rate on U.S. mortgages surged to a record 9.12 percent in the first quarter of this year. Late payments rose in ALL categories, including prime fixed-rate loans, the absolute “cream of the crop” in the mortgage world.

Now, it’s clear they were dead wrong about the entire credit market! Credit losses and delinquencies are rising anywhere and everywhere, and I’ve got the numbers to prove it.

In the first quarter of this year, the credit card delinquency rate shot up to 6.6 percent … a record high.

RVs … HELOCs … Personal Loans —
Borrowers Can’t Pay Back Anything!

Get a load of these hot-off-the-press figures from the American Bankers Association (ABA). In the first quarter of 2009 …

• Home equity loan delinquencies increased from 3.03 percent in the fourth quarter of 2008 to 3.52 percent.
• Home equity line of credit delinquencies rose from 1.46 percent to 1.89 percent.
• Credit card delinquencies rose from 5.52 percent to 6.6 percent (measured on a “percentage of dollars outstanding” basis).
• Direct auto loan delinquencies increased from 2.03 percent to 3.01 percent.
• RV loan delinquencies increased from 1.38 percent to 1.52 percent.
• Mobile home loan delinquencies increased from 2.96 percent to 3.70 percent.
• Personal loan delinquencies increased from 2.88 percent to 3.47 percent.

The home equity loan delinquency rate is a record high. The home equity line of credit rate is a record high. The credit card delinquency rate is a record high. And so is the level of the aggregate consumer credit delinquency index that the ABA has been putting together since 1974!

Source: American Bankers Association

What about CORPORATE credit quality? Any “green shoots” there? Nope:

The default rate on junk bonds has almost quadrupled to 9.5 percent from 2.4 percent a year earlier, according to Fitch Ratings.

A University of California economist just predicted that a whopping 20 percent of hotel development loans made in the U.S. may default over the next year and a half.

Standard & Poor’s just said it’s planning to slash ratings on more than $235 billion worth of commercial mortgage-backed-securities. Loose underwriting, falling asset prices, slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector.

What’s the Problem? We Had the Biggest
Credit Bubble of All Time, That’s What!

Slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector.

Americans simply borrowed and spent way too much during the halcyon days of the early-to-mid 2000s. They were counting on ever-rising home values to bail them out from high-risk loans.

The lending industry actively egged them on, as did policymakers at the Fed, who kept interest rates too low for too long. The insanity spread to commercial real estate … to corporate buyout loans … to virtually every corner of the credit market!

Now, we’re all dealing with the hugely negative consequences of this massive credit bubble. What a shame! I can only hope that borrowers, lenders, policymakers, and regulators behave more responsibly in the future.

In the meantime, I continue to suggest the following: Stay away from sectors vulnerable to deteriorating credit quality, tighter lending standards, falling home values, and falling commercial property prices. That includes banks, insurers, home builders, and REITs.

And what about all the talk out of Washington on how these companies are just fine, how the economy is recovering strongly, and how happy times are here again?

Plug your ears and lash yourself to the mast! These guys didn’t get the mortgage crisis right. They didn’t get the credit crisis right! And they sure as blazes aren’t getting the economy right, either!

Consider: Just a few weeks ago, politicians on Capitol Hill and policymakers at the Federal Reserve were tripping all over themselves to discuss the “green shoots” in the economy. Now, they’re openly admitting they screwed it up.

Joe Biden spilled the beans when he announced that the administration had “misread the economy.”

Vice President Joe Biden said last weekend that the administration “misread the economy.” Their hopelessly optimistic projection that unemployment would peak at 8 percent — which Martin and I told you was fantasyland forecasting — has been thrown in the trash. The unemployment rate has instead climbed to 9.5 percent … and double-digit levels are right around the corner.

Heck, you now have key officials, like Obama adviser Laura Tyson and House Democratic leader Steny Hoyer, talking about the possibility of a SECOND economic stimulus package. That’s a tacit admission that the $787-billion package enacted in February is failing to get the job done.

Again, this should come as no surprise to you. Unlike the ivory tower economists in Washington, we live in the real world. We know how bad things are, and how serious the risk is that they’ll get worse — MUCH worse. So we’ve been warning you constantly to avoid risk, and batten down the hatches for a worsening economic storm. We suggest you do NOT stray from that path!

Until next time,

Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.

Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits). So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers’ dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.

Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.

There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.

As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won’t be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.

The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.

So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become – had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping – and learning from – the mechanics.

Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher-paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.

The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower-wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?

The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That’s the exact burden the minimum wage places on our poor and low-skilled workers and, ultimately, on every American consumer.

Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?

By Peter D. Schiff
Guest Columnist, Money Morning

Will our nation’s largest debtors meet their massive financial obligations? Or will many ultimately default?

In California, the answer given by the state Treasurer’s office was a commitment never to default, seeking to directly refute my forecast issued here 13 days ago under the headline “California Collapsing.”

According to the BusinessJournal:

“The California’s state Treasurer’s office on Monday refuted an analyst’s recommendation last week that investors dump California municipal bonds and that the state is likely to default.

“Analyst Martin Weiss of Weiss Research said in a June 22 report that California’s financial woes create ‘a very high probability’ that California will eventually miss debt service payments.

“Mr. Weiss’ analysis and recommendation, to put it kindly, is misinformed,” responded Tom Dresslar, a spokesman for state Treasurer Bill Lockyer. “Even the credit rating agencies said, in announcing possible downgrades, that the likelihood of default is low.”

Ironically, just two days later …

California Defaulted on Its
Short-Term Debt Obligations

In lieu of cash, California issued i.o.u.’s to meet obligations to vendors and citizens, postponing payments on its current liabilities.

But current liabilities are short-term debts. Ergo, based on this standard definition, California is already defaulting.

It’s not the same as defaulting on its bonds. But for reasons I’ll explain in a moment, I’m now more convinced than ever that a bond default is also coming.

Consider the importance of this week’s events …

If California’s creditors had a say in the issuance of i.o.u.’s, Sacramento officials might be able to deny they’re in default by implying mutual consent. But that’s far from the facts. The creditors had nothing to do with this decision. It was unilateral, a telltale aspect of debt defaults.

If the i.o.u.’s were as good as cash, Sacramento might also deny the D-word. But the sad reality is that, if you’re among those stuck with California i.o.u.’s, you have only two choices: You have to either hold them while you sweat and cross your fingers or you have to sell them at a steep discount — exactly the same choices facing bond investors after a default.

If all major financial institutions accepted California i.o.u.’s, that might also help Sacramento justify a continued denial of default. But the reality is that most banks are not accepting the i.o.u.’s, and no one could argue their reasoning is financially unsound.

Why accept a piece of paper at face value when it’s worth significantly less than face value on the open market? The nation’s largest banks already have enough troubles with toxic mortgages, toxic credit cards and toxic loans on commercial real estate. They’re not exactly anxious to pile on toxic California paper.

If, as in past episodes, California’s budget mess were mostly due to a political snafu, it could be argued that the i.o.u.’s are merely a temporary stop-gap. But that’s clearly not the case either.

To the contrary, California’s budget crisis is rooted in an unprecedented economic depression with 11.5 percent unemployment and the greatest concentration of mortgage delinquencies in the nation. Even if the i.o.u.’s are ultimately paid in full, California’s debt troubles are not going away.

Why I Expect a Default on California’s Bonds

Short of an 11th-hour rescue from Washington — where political resistance to bailouts has grown dramatically in the wake of recent federal rescues — it will be extremely difficult for California to avoid a default on its bonds.

The fundamental reason: A vicious cycle of budget tightening and falling state revenues.

The state cannot balance its books without inadvertently making the California economy — and its deficit — even worse.

When it cuts spending, it merely creates more unemployment and forces consumers to slash their own spending or default on their own obligations, driving the economy into a still deeper depression. And when it raises taxes, it has a similar impact.

Either way, the end result is lower revenues flowing into the state’s coffers.

But now California has over $28 billion in bonds coming due between now and October. How will it come up with the cash is a great mystery to me. Bond holders are certainly not going to be among those accepting i.o.u.’s.

Wall Street Rating
Agencies Also in Denial

The business model of Moody’s, S&P and Fitch is to sell their ratings to bond issuers; the ratings are bought and paid for by the very institutions being rated, including the state of California.

After multiple investigations of the Wall Street ratings agencies, Congress and the Obama Administration are proposing radical changes. But right now, it’s business as usual, and the egregiously conflicted business model of the Wall Street rating agencies still stands.

I believe that’s a key reason the rating agencies have not yet fully recognized the obviously dire state of California’s finances. And that’s why California’s state Treasurer can still claim Wall Street “doesn’t agree” with more realistic analysis like ours.

In effect, the state virtually pays them to hold their punches.

But despite these blatant conflicts of interest, the truth cannot be bottled up forever. Here’s what I see coming next:

1. Downgrade massacre: A series of multi-notch downgrades by Fitch, Moody’s and S&P, making it extremely difficult — if not impossible — for California to roll over maturing debts at any cost.

2. Worsening deficit: Surging interest costs and greater than expected declines in cash inflows, bloating California’s deficit even further.

3. Washington snub: A last-ditch effort to persuade Treasury Secretary Geithner and President Obama to reverse their earlier decision not to bail out California.

But Washington’s arguments against a California bailout are relatively firm: They’re already giving California billions through the stimulus package. If they bail out California, what will they say to the dozens of other states that line up on the White House lawn asking for theirs?

In contrast, arguments supporting a federal bailout of California sound like a hollow rerun of last year’s “bailout-or-meltdown” ultimatum by former Treasury Secretary Paulson to Congress. It’s a long-ago discredited approach to financial emergencies.

4. Default on California bonds: Despite Sacramento’s official mantra that a default is impossible and unthinkable, it happens.

5. Cascade of defaults: If giant California can default, the new assumption is bound to be that almost any issuer of tax-exempt securities can do the same. A cascade of downgrades and defaults by other states and municipalities ensues.

What to Do …

If you’re a U.S. citizen or resident — whether in California or not — don’t count on borrowing money. Prepare yourself for a return of last fall’s environment in which consumer credit was either too expensive or unavailable.

Pinch pennies. Sell off unneeded assets and possessions. And raise as much cash as you can — for emergencies and for your family’s future.

If you’re a bond investor, better to be safe than sorry. Unload your tax-exempt bonds and tax-exempt mutual funds. With few exceptions, the benefits do not justify the rapidly growing risk.

And if you’re a more aggressive investor, seriously consider transforming the inevitable market volatility of this crisis into a series of substantial profit opportunities.

The key: Timing the market!

Good luck and God bless!

by Martin D. Weiss, Ph.D.
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Morale and productivity have plummeted. Your mandate: Fix it.

It’s one of those assignments that can either be a career-maker – or a career-ender. You want to make sure it’s the former, not the latter, and need to make all the right moves.

What do you do?

In an economy in which the unemployment rate just hit a 25-year high of 9.4% – and is expected to go higher – and that’s seen 6 million workers lose their jobs since the U.S. recession started in December 2007, this situation is becoming more the norm than the exception. And with 14.5 million workers currently unemployed – and a “jobless recovery” in the offing – the population of U.S. managers who are asking the “what to do” question is going to spiral higher.

The report on the U.S. unemployment rate for June will be reported early today (Thursday).

No More “Business As Usual”

After a layoff, managers cannot go back to “business as usual” if they hope to have any control over workplace morale and productivity. In fact, managing for the survivors of layoffs should become a top priority for managers, personnel experts say.

Increasingly, “layoff-survivor syndrome” is becoming a common phrase, one that conveys the unpleasant reality that not being laid off is in some ways as tough as getting that pink slip, and that underscores that the people who remain on the job will have plenty of emotional challenges, much as do disaster survivors (”why him and not me?”).

First, there’s the guilt. As might be expected, a majority of workers said they had feelings of guilt, anger, and anxiety, according to a survey by Leadership IQ, a Washington-, D.C.-based research-and-training company.

But the guilt, anger and anxiety have a real effect on the company: Three-quarters of layoff survivors say their productivity has declined, while customer service has worsened, the survey found. It also found that 69% of the remaining workers believe the quality of their company’s products or services has declined since the layoffs. According to the survey, 64% of surviving workers say the productivity of their colleagues has also declined and 81% of surviving workers say there’s been a decline in the service the company’s customers are receiving.

“There is a great myth that, following a layoff, the surviving employees will be so grateful that they still have a job that they’ll work harder and be more productive,” says Mark Murphy, chairman of Leadership IQ. “But as this study shows, the opposite is usually true.”

Part of the problem is that – after the job cuts – employees face an implied “do-more-with-less” work edict. In other words, the survivors are being forced to be more productive as they find themselves having to do new tasks and duties. In a survey by CareerBuilder.com, 47% of workers reported they have taken on more responsibility because of a layoff within their organization, while 37% said they are handling the work of two people. What’s more, 30% are feeling burned out.

“Employees are feeling added pressure as they shoulder heavier workloads and strive to maintain productivity levels,” says Rosemary Haefner, vice president of human resources at CareerBuilder LLC.

Robert Hosking, executive director of Menlo Park, Calif.-based staffing firm OfficeTeam, a unit of Robert Half International Inc. (NYSE: RHI), says that the period following a major work-force reduction is a good time to make sure that employee workloads reflect company priorities.

Key Moves to Make

Constant communication is the first big step. Make sure to speak with those who remain, underscoring their value to the company, while also being candid about just what’s to come.

For instance, don’t tell people ‘no further layoffs are expected’ unless you’re sure that no one else will be laid off. Managers need to be in constant view of their front-line employees, and must be approachable. Employees need to be able to express their feelings – their concerns about the people who have been laid off, their concerns about their jobs and their concerns about the company’s future.

“The number one way to prevent guilt is [through solid] communication,” Jason P. Zickerman, president of The Alternative Board, a Denver-based executive-consulting firm, told BusinessWeek.

Leadership IQ’s Murphy counsels managers that how a layoff is conducted is important, but the aftermath needs even-more-careful management.

“Managers need to be highly visible to their staff, approachable even when they don’t have anything new to say, and candid about the state of things in order to build their trust and credibility,” he says. “If your company has to conduct a layoff, it is imperative that you train your managers how to both manage that process and deal with the highly debilitating aftermath. Otherwise, you will waste any potential cost savings from the layoff on lost productivity, quality problems, and service breakdowns.”

The discussion of the state of the business should include context about how that company’s overall industry or sector is doing, says Janet C. Barnard, a management consultant and former associate professor of management at the Rochester Institute of Technology College of Business.

Going forward, part of that communication has to include detailed discussion of goals and expectations – for the individual workers, for the entire department and for the company, Barnard says.

“Goals are very important, particularly in a period of uncertainty,” like the one U.S. workers face right now, Barnard says.

Goals give workers more of a feeling of control, allowing them to feel as if they have a role or say in their own destiny. That’s crucial, because as the feeling of control increases, it reduces the feelings of powerlessness, fear and uncertainty, Barnard says.

Goals should be specific, measurable and attainable. And there should be periodic reviews, with feedback, so that the workers understand how they are doing, she says. Those reviews should be “information rich,” meaning there should be context about how the company is doing overall – particularly if these efforts are propelling the department, or even the entire company, forward.

“If you give employees a feeling of some power [over their future], they feel less fearful,” which makes them much more productive, Barnard says.

When facing a jobless recovery, these can add up to a winning formula for you as a manager, and for your company.

By Dave Field
Money Morning

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1. Go for the Goal: Managers know how important it is to have clear, measurable and attainable goals for their organization – but they sometimes forget to do the same for themselves. Establish personal goals that will feed into your objectives for the organization. Make sure to write them down (some experts say goals don’t be come “real” until they are “written”). Prioritize your goals. Mark them off as you attain them – and allow yourself to experience a deserved feeling of accomplishment or achievement. And make sure to create new goals as you cross off the old ones – or as new problems or objectives come to light.

2. Communicate, Communicate, Communicate: More communication is better than less, especially during a period of intense uncertainty. Make sure you let your direct reports know what’s expected of them. And take the time to keep your supervisors or bosses informed. They’ll appreciate it and will begin to look at you as an integral part of the organization.

3. Treat Your Time Like the Scarce Resource That it Actually is: Spend time on the tasks that matter, and avoid getting bogged down on those that don’t. Keep the “80/20 Rule” (also known as the “Pareto Principle“), which in its simplest form says that only about 20% of your work is related to essential or vital parts of the business, meaning that 80% of your tasks are trivial. Focus on the “essential few” and your odds of success will skyrocket.

4. Don’t Be Afraid to Delegate: People want to be helpful. That’s a surprising realization for many managers, but it’s also a powerful epiphany to have. Ask the right way, make it clear it’s an offer to be included, and you’ll be both surprised and thrilled at the effort your request to “help out” will generate. That’s especially true during periods of uncertainty – instead of sitting around and worrying, most employees would much rather be busy, productive and contributing to the turnaround effort.

5. Handle Paperwork Only Once: Whenever possible, follow this rule and you’ll eliminate clutter, will become more organized, and will end procrastination as a problem. MeadWestvaco Corp. (NYSE: MWV), maker of the popular personal planners, recommends having an assistant in charge of screening your mail. Whatever does hit your desk should then be acted upon immediately, kept in a reference file on your desk if it’s related to a crucial project, or filed away – but with a “discard date” that tells you when it can be tossed, thereby trimming desktop and file-cabinet clutter.

6. Minimize Interruptions/Maximize Productivity: It’s almost a subset of Lesson No. 3, but interruptions are all too often related more to the “80%” than they are the “20%.” The average employee is interrupted an average of 48 times a day – or about once every nine minutes. It’s worse for managers. If the interruption is related to the “vital few,” whenever possible, handle it immediately, and be done with it (this also tends to contain the damage from a problem if its resolved quickly). If it’s unnecessary, delay, stop or avoid it entirely. If it’s somewhat important, but is inconvenient or untimely, schedule it for later or delegate it to someone who’s more directly involved.

7. Take Care of Yourself: No one can do this but you. To make the best decisions, to operate at peak efficiency, and to be the best resource for the organization that you can be, you need to be healthy. Make sure to eat well, get rest, and exercise. Take the time to go for a walk at least once a day – even if it’s only around the building – so long as it gets you out from behind your desk. Use the time to think, or to walk around and be seen as the “leader” (not just the manager) that you’re striving to be in this turnaround situation.

Money Morning

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And I think this information is so critical to your financial life that I want to go over some of the details again here in Money and Markets today. Plus, I want to tell you why I think the system as it stands today is treating many responsible savers and borrowers unfairly in these credit-crunched times. That’s something I didn’t have room for in the latest Dividend Superstars newsletter.

So let’s get into it …

The Basics of Credit Scores

If you’ve been reading my columns and issues, you know I firmly believe you should pull your credit reports from the three major reporting agencies — Equifax, Experian, and Transunion — once a year. Doing so is now completely free because of the Fair Credit Reporting Act.

You can choose to pull all three reports at one time, or space them out throughout the year so you get a frequent look into your records.

Whatever way you choose to do it, look for errors, incorrect addresses, or any suspicious activity. If you have questions or corrections, don’t hesitate to contact the agency. After all, your credit score affects the interest rates you pay on all kinds of loans.

To get those reports, visit www.annualcreditreport.com or call 1-877-322-8228. You can also request them by mail at: Annual Credit Report Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Of course, when you pull those reports you WILL NOT see your actual credit score, which is derived from your reports.

The most commonly cited credit score number is known as your “FICO score,” named after the firm that created it, Fair Isaac Co. The three-digit number falls between 300 and 850, with most people falling into the 600s or 700s.

Landlords and employers use credit scores as a way to get a sense of who you are, and as I noted, a FICO score greatly affects your borrowing ability. Fair Isaac says a borrower with a 580 might pay three percentage points more for a loan than someone with a 720!

The importance of your FICO is only getting more dramatic with the ongoing credit crunch. Some mortgage lenders have even been creating additional tiers above the 740-750 level, which has typically represented the general cutoff point for their “best” customers.

How a FICO Score Is Calculated,
Along With Recent Important Changes …

Fair Isaac’s website gives the following general guidelines:

• Your payment history counts for 35%. Being late on credit card balances, declaring bankruptcy, and other factors fall into this category.
• Your debt counts for another 30%. This includes your overall debt vs. credit available, the balances on individual cards, and similar factors.
• The length of credit history makes up 15%. In simple terms, the longer your credit history, the better your score will be.
• Applications for new credit contribute 10%. Whenever you go shopping for a mortgage or open a new credit card, your score can potentially suffer.

The rest of your score comes from a mix of other factors. And note that the exact algorithm behind the FICO score is a closely guarded secret that is continually being tweaked.

For example, in February of 2009 Fair Isaac made a number of important changes to the formula:

1. Only spouses and children are able to piggyback onto your cards to boost their scores.
2. Debts of less than $100 that go into collections do less damage to your score.
3. Having less available credit hurts a score more.
4. A healthy smattering of loans (i.e. student, mortgage, credit card, etc.) helps a score.
5. Closing accounts hurts a score.
6. Single negative events may have less of an effect.

So How Can You Help Your Score
(Or At Least Not Hurt It)?

Here are some of the basic steps you can take:

First, you should keep a few credit cards open for as long as possible, and with high available lines of credit even if you aren’t really using them all that often.

It can make sense to close a couple newer cards, especially if they levy annual fees, but be careful that you’ll still have a healthy amount of available credit and a long continuous history.

Cancelling credit cards might actually hurt your credit score!

And don’t let your few cards sit completely idle because lenders may unexpectedly close them, reduce your available credit, or stop reporting the activity to the credit agencies.

Second, you should not go around opening new cards just to get those initial 10 percent-off discounts or shopping for a home equity loan just to see what rate you can get. FICO tries to account for similar credit inquiry activity all falling within a small window (roughly 45 days) such as when you go mortgage shopping, but it still makes sense to limit your activity in this area.

Third, high balances are to be avoided. And if possible, you should spread out your activity among a few cards.

Fourth, don’t forget about the simple steps like consistently paying bills on time and correcting errors on your credit reports, either.

Yet All This Begs One Last Question:
Is the FICO System Even Fair in Today’s Environment?

Think about some of the steps I just outlined: Keep cards open that you aren’t really using … have a “healthy mix of debt” … and don’t shop around for loans very often.

Do those make sense to you? Do those sound like steps a conservative consumer should take?

No way!

And yet these are apparently some of the best ways to get — and keep — a top credit score.

Consider this case: A hypothetical borrower has paid cash for his house and cars. He uses just one rewards card for all his purchases and pays off the balance in full every month, though he sometimes changes what card he uses based on the best rewards program at the time. And he frequently rolls his savings into CDs with whatever bank pays the highest rates.

Now, that sounds like someone I would loan money to! I mean, the guy has no debt and makes sound financial decisions.

Yet, as far as the FICO system is concerned, he doesn’t have much of a credit history nor a smattering of loans. And all that credit card and CD shopping will also cause a lot of credit report pulls.

Oh, and get this: From what I’ve heard, the FICO system doesn’t recognize patterns like regularly paying off large credit card balances. So in our hypothetical example, Mr. Conservative would also show a high debt-to-available credit balance.

Now, I’m sure this guy would still have a very decent score. And if he’s cash rich and debt free, he probably wouldn’t give a darn what Fair Isaac’s system thought of him, either.

But what if he did decide to go shopping for a second home mortgage? Would the system — or the lenders who blindly rely on it — actually see him for the low-risk borrower he is?

My general impression is that FICO is best applied to the masses — people who live with all kinds of loans and spend the rest of their days faithfully paying off little bits here and there. And I guess that’s exactly who lenders want to court, too.

Still, anyone who is responsible and doesn’t fit “the mold” might be left calling FICO’s creator “Unfair Isaac” when it’s time to shop for a loan.

Best wishes,

Nilus Mattive
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Indeed, some regions – and some sectors – that are proving quite resilient.
       
So, if you’re in the market for a job, it might be a good idea to target those areas and sectors that have demonstrated flexibility over several decades and are best able adapt to 21st century trends.

For job-seekers, it all comes down to this: You have to know what’s hot – and what’s not.

The three graphs below – based on data from the Federal Reserve Bank of St. Louis – show the number of people working in the 12 different sectors of the U.S. economy since 1939. The shaded areas represent periods of recession.

Virtually all of the sectors have grown consistently over the past 70 years. The one noticeable exception is manufacturing, which peaked in the late 1970s and has been in decline ever since.

Government jobs and jobs in education and healthcare – referred to as “Eds & Meds” in economic parlance – have provided the most consistent growth, even in the current recession, which has also been the most severe in the time period studied. However, the biggest supplier of jobs continues to be the trade, transportation and utilities sector.

In the current recession – which began in December 2007 – job losses were severe in the commercial and resident real estate business, but more recently have shown signs of stabilizing. Employment in construction decreased by 59,000 in May, compared with an average monthly job loss of 117,000 in the industry for the previous six months, according to the U.S. Labor Department.

Job losses in professional and business services also moderated in May. The industry shed 51,000 jobs, compared with an average loss of 136,000 jobs per month in the prior six months.

Employment in the leisure-and-hospitality and government sectors was about flat, but the manufacturing sector continued to deteriorate— with employment falling by 156,000 for the month.

But the healthcare sector continued to display resilience, increasing by 24,000 jobs. That makes sense: Long term, as the U.S. population continues to “gray,” the healthcare sector figures to keep adding workers in order to keep pace.

Job Growth in the ‘Clean Energy Economy’

While healthcare and education, along with the government, continue to be the most consistent employers of the American public, increased environmental awareness and more government incentives have made the clean energy sector a viable option for steady employment.

In fact, from 1998 to 2007, the number of jobs in the “clean energy economy,” grew nearly two and a half times faster than the overall job market, according to a recent study by the Pew Center on the States.

Jobs in the clean energy economy grew at a rate of 9.1% during that time, compared to a rate of 3.7% for traditional jobs. By 2007, more than 68,200 clean energy businesses across the United States accounted for about 770,000 jobs.

The clean energy economy includes jobs in clean energy, energy efficiency, environmentally friendly production, conservation and pollution mitigation, and training and support.

The report found that 65% of jobs in the clean energy economy are in the category of conservation and pollution mitigation. However, jobs in the categories of clean energy, energy efficiency, and environmentally friendly production are growing at the fastest rate.

California has more jobs in the clean-energy economy – more than 125,000 – than any other state, and that number has grown at an average annual rate of 0.9% between 1998 and 2007. Other states in the Pacific Northwest – Oregon and Washington – also have large and growing clean energy industries. Florida, Texas, Tennessee, and Colorado are also notable for their large and growing clean energy industries.

The St. Louis Fed report notes that venture capital was a driving force behind clean energy before the global financial crisis struck. In 2008, investors directed $5.9 billion, or 15% of all global venture capital investments, into the clean energy economy, a 48% increase over 2007. Between 1998 and the end of 2008, a total of about $12.6 billion in venture capital money had been directed into the clean-energy economy.
Of course, venture capital investment has declined considerably since the collapse of the global economy. The Pew Center study found that during the first three months of 2009, investment in clean energy was down 48% compared to a year earlier. However, the report also found that investment in clean energy still outpaced such investment elsewhere. During the same time period, total venture capital investment decreased by 61%, and that trend is expected to continue.

“Analysts suspect that the green industry will weather the downturn better than other market segments, both because of stimulus and because the drivers for growth are still there,” Kil Huh, Project Director for the Pew Center on the States and a principal author of the study, told Social Funds.com. “Consumers continue to call for a viable alternative to traditional energy sources.”

Furthermore, increased government investment should help compensate for the dearth of venture capital. The American Recovery and Reinvestment Act of 2009 (ARRA) provides $85 billion in spending for energy and transportation, and includes $21 billion in tax incentives for renewable energy, as well as more than $30 billion for spending on a variety of clean energy programs. 

Additionally, 29 states and the District of Columbia have established renewable portfolio standards, Social Funds reported. And 19 states have established Energy Efficiency Resource Standards that encourage a continual increase in energy savings on the part of utilities.

While venture capital was abundant in the years leading up to the financial crisis, government funding was absent. Huh believes this new wave of political support will continue to carry the industry until private sector investment rebounds.

“The growth happened with a lack of sustained government support, and we suspect that recent government actions will help job growth in the green economy significantly,” Huh said. “Federal proposals for a market-based system for climate control will help shape consumer demand. The legislation would move the entire industry in that direction of clean energy. The green energy economy seems poised for continued growth.”

Location, Location, Location

Just as some sectors have fared better than others, the financial crisis has had an unequal impact on various metro areas across the country. Parts of the country that had overly inflated property markets suffered greatly from the collapse of the housing market. Similarly, local economies in the Midwest were devastated by bankruptcies in the American auto industry.

On the other hand, metro areas with high concentrations of government jobs or jobs in health and education have been much better off.

The Brookings Institution’s MetroMonitor examined such economic indicators as employment, unemployment, wages, output, home prices and foreclosures throughout the first quarter of 2009.

“Economic pain is widespread in Midwestern metro areas that depend heavily on the auto industry and its supply chain,” the report said. “Most metro areas in Michigan and Ohio have experienced employment and output declines exceeding national averages. Several, including Dayton, Detroit, and Youngstown, began losing jobs two to three years earlier than the U.S. economy as a whole.”

These areas are likely to continue to struggle as both General Motors Corp. (OTC: GMGMQ) and Chrysler LLC engage in lengthy restructuring processes.

Additionally, large portions of the South and West – including such states as Florida, Arizona, Nevada and California – continue to suffer the fallout from the housing collapse.

However, the effects of the financial crisis have been far more muted in other parts of the country.

“Job losses have been more modest, and housing prices have risen slightly, in many Northeastern metro areas that have less auto-oriented manufacturing sectors (e.g., aerospace in Hartford [Connecticut], photonics in Rochester [Upstate New York], plastics in Scranton [Eastern Pennsylvania]),” according to the MetroMonitor. “Parts of the Southwest and Deep South—including metro areas in New Mexico, Texas, Oklahoma, Arkansas, and Louisiana—have performed relatively well, experiencing less severe job losses, relatively large wage gains, and modest home price increases.”

The report attributes buoyancy in the Southwest – particularly Texas – to a strong specialization in energy. It also points out that large amounts of hurricane recovery funding for the Gulf Coast and smaller increases in housing prices in the earlier part of the decade could also be factors in that region’s resilience.

Predictably, city centers with large educational and medical labor forces performed better than the broader job market. Metro areas with specializations in education and healthcare saw employment drop by an average of 2% from the fourth quarter of 2007 through the first quarter of 2009. That compares to a national employment decline of 3.7% over that same period.

Metro areas with a specialization in government/military employment – such as Washington D.C., El Paso, Texas, and Honolulu Hawaii – saw average job losses of 1.3%.

Some of the areas that were most susceptible to the housing collapse were also hit by a decline in tourism, as metro areas specializing in entertainment and recreation – such as Orlando, FL and Las Vegas, NV – experienced a 4% average drop in employment.

By Jason Simpkins
Money Morning

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While I’ve always doubted that the "money on the sidelines" argument is really all it’s cracked up to be, one can hardly argue with a recently released report from Harris Private Bank of Chicago [part of the U.S. arm of the Bank of Montreal (NYSE: BMO) that notes that stocks have rallied for the next two years whenever money market assets have exceeded 25% of the capitalization of the Standard & Poor’s 500 Index. According to the Los Angeles Times, that figure is now 43%, down from 58% after having peaked in December – and that’s even after the 30%-plus run-up in the S&P 500 since March.

What’s interesting is that many investors holding large cash positions view their money as an asset, when, ironically, it’s really more of a liability at this stage of the game.
Some might take issue with that statement. After all, even we at Money Morning have counseled readers that cash – correctly deployed – can allow an investor to sidestep the worst stretches of a financial crisis, like the one from which we’re currently attempting to extricate ourselves.

But when the markets are as beat up as they as they have been, history suggests there’s probably more upside than downside – even if we haven’t bottomed out yet.
And there’s a broad body of research to support that contention – including our own newly created "LSV (LIBOR/Sentiment/Value) Index" (published as a part of The Money Map Report, the monthly investment newsletter that’s affiliated with Money Morning).

There’s also data sets widely published by others, such as Yale Economics Professor Robert J. Shiller. Shiller has found that when you look at 10-year periods of Price/Earnings (P/E) data dating all the way back to 1871, the markets tend to rise when the average P/E is low, as it is right now. Conversely, when the average Price/Earnings values are high – as they were in late 1999, and again in 2007 – a decline in stock prices is much more likely.

There are obviously no guarantees that history will repeat itself. But if it does, the same data implies we could see real returns of 10% a year or more "for years to come," as Shiller noted in a recent interview with Kiplinger’s Personal Finance.

My own research seconds the general-market-increase theory, but I’m much more conservative in my expectations of returns and think that returns of 7% are more likely.

Perhaps what’s more important right now is that inflation typically accompanies growth – and with a vengeance. And that means that investors who are sitting on cash "until the time is right" may have their hearts in the right place but are relying on the wrong protection strategy.

My recommendation is a four-part plan that can help lock in the expected returns you want, while also protecting your cash from the ravages of inflation. Let’s take a close look at each of the four elements of this strategy:

• First, protect your cash with Treasury Inflation Protected Securities (TIPs). Even though the trillions of dollars the Fed has injected into the system seem to be having some effect on the critically ill patient the U.S. central bank is trying to fix, we’re likely to pay a terrible price in the future. Forget the hyperinflation scenario so many people are hyping at the moment. While that’s certainly possible, it’s not probable. However, what is likely is a dramatic realignment of the dollar and a general increase in worldwide living expenses.

If you’re based in the United States and have mostly U.S. assets, you may want to consider something as simple as the iShares Barclays TIPS Bond Fund (NYSE: TIP) to offset this risk. The TIP portfolio is chocked full of inflation-indexed securities, but it also offers a healthy 7.46% yield. If you’ve got international exposure, you may also want to consider the SPDR DB International Government Inflation Protected Bond ETF (NYSE: WIP). It’s a collection of internationally diversified government inflation indexed bonds that provides similar protection. Make sure you talk with your tax advisor about both, though. Depending on your tax situation, you may find that because of the tax liability on inflation-related accretion, these are generally best held in tax-exempt accounts.

• Own some gold but don’t go crazy. Despite widespread belief to the contrary, gold has never been statistically proven as an inflation hedge. But the yellow metal has proven to be a great crisis hedge because of the 10:1 relationship between gold prices and bond coupon rates – which obviously are directly related to inflation. Over time, the two move in such a way that having $1 for every $9 in bond principal can help immunize the value of your bond portfolio.

So to the extent that you own gold, do so not because you expect it to rise sharply, but because it will offset the inflationary damage to your bonds. A good place to start is the SPDR Gold Trust (NYSE: GLD) because it’s tied directly to the underlying asset without the hassles or risks of direct personal storage associated with bullion.

• Consider commodities. It’s too early to tell if the so-called "green shoots" that everybody is so excited about are little more than weeds. Therefore, it makes sense to concentrate on picking up resource-based investments. History shows that these things are less susceptible to downturns, but more importantly, rise at rates that far exceed inflation when a recovery begins in earnest.

I prefer companies like Kinder Morgan Energy Partners LP (NYSE: KMP) that are less dependent on the underlying cost of energy than they are on actual growth in demand. That way, if energy prices don’t take off immediately for reasons related to deflation or stagflation, those still will benefit from demand growth. It’s a fine point, but one that merits attention for serious investors. KMP, incidentally, yields an appealing 8.68% at the moment. 

• Short the dollar to hedge your bets still further. Not only is the government going to borrow nearly four times more than it did last year, but when you add the complete federal fiscal obligations into the picture, our government owes nearly $14 trillion. This makes the dollar, as legendary investor Jim Rogers put it, "a terribly flawed currency" that could fail at any time.

To ensure you’re at least partially protected, consider the PowerShares DB U.S. Dollar Index Bearish Fund (NYSE: UDN), which will rise as the dollar falls. It’s essentially one big dollar short against the European euro, the Japanese yen, the British pound sterling and the Norwegian kroner, among other currencies.
In closing, there is one additional point to consider. You rarely get a second chance to do anything, especially when it comes to investing. So act now before the markets make it cost-prohibitive to protect yourself. When the economic recovery gets here, you’ll be glad you did.

Keith Fitz-Gerald
Money Morning

14 Picks. 14 Wins. Zero Losses.

• The U.S. unemployment rate just spiked to 9.4% for May, up from 8.6% in April, meaning the nation’s jobless rate is now at its highest level in more than 25 years.
• Throw in the fact that the current jobless rate does not include people who have taken part-time jobs below their skill levels to make ends meet (a little-referred-to situation called underemployment), and the “real” unemployment rate soars to a staggering 16.4%.
• More than 6 million workers have lost their jobs since the recession started in December 2007, meaning one in 20 jobs has disappeared – many of them forever.
• A total of 14.5 million Americans are now unemployed. The number of long-term unemployed (those without jobs for 27 weeks or more) recently increased by 268,000 to 3.9 million and has tripled since the start of the recession.

But that’s not the worst of it. Experts are projecting an economic rebound that will take hold late this year – early next year at the latest. At the same time, however, economists are starting to whisper about a “jobless recovery,” an upturn in which the economy and corporate profits advance, but virtually no new jobs are created to overcome the years of layoffs that preceded the rebound. In fact, the U.S. Federal Reserve said the U.S. economy might not return to its “normalized” unemployment rate of roughly 5% until 2013, Argus Research Chief Economist Richard Yamarone wrote in a recent report.

So while there appears to be some light at the end of the tunnel for the economy in general, the outlook is somewhat more challenging for those who are unemployed, underemployed, or who are currently working but who still harbor dreams of “career advancement.” As bleak as this all may sound, jobseekers (both employed and unemployed) shouldn’t be deterred: With a sound strategy, and four simple secrets, it’s still possible to survive – and even thrive – in a jobless recovery. We’ve labeled them as the “Four P’s” – Plan, Pinpoint, Pounce and Persevere.

Planning to Win

It’s a well-worn adage, but it’s also a truism: Those who fail to plan are essentially just planning to fail. Have a plan to keep your life on track while you see that new career opportunity.

When “joblessness” strikes, it usually does so in one of two ways.  It either catches you completely off guard – often with a hastily called series of employee meetings, or that Friday afternoon summons to the boss’ office – or you’ve seen the handwriting on the wall (or in your company’s financial statements), and so you knew it was only a matter of time. Either way, if you let the search for a new job consume 100% of your life, you may end up losing more than just a regular paycheck.

By far, the largest consequence when you lose a job is the loss of regular income. Having a plan to deal with this change is just as important as getting a new job. 

To create this plan, start by asking this question:  Do you have enough cash on hand, or can you access the needed funds, to pay all your bills, while you’re looking for a job?

If your answer is “yes,” congratulations.  You’re much better off than the majority of people losing jobs right now.  For the purposes of this article, go ahead and skip to the second “P” – Pinpoint. 

But if you’re like most unemployed Americans, you depend on a regular paycheck to meet your financial needs.  Once that income stops, you’re going to have to make some difficult choices based on your financial situation.  Waste no time in taking the steps to address these issues head-on by:{##34##}

• Contact your creditors:  With such liabilities as a credit card, credit line, or outstanding medical bills, if the creditor in question doesn’t have a program in place to suspend your account for a couple of months while you track down that new job, then they likely have a program to reduce the interest rate and modify your payments.  Believe it or not, they’ll work with you, especially right now.  The last thing they want is for you to default on the loan.  The earlier you contact them, the better off you’ll be – especially in the long run.

• Micro-budget yourself:  Figure out what you can and cannot do without.  The longer your job search lasts, the easier it becomes to do without cable television, dry-cleaned clothes, making that weekly sojourn to your local restaurant, or stopping every day for that morning muffin and coffee. Scrutinize your bank statement. Consumers are often surprised how often they’ve accumulated automated payments or account debits – which they’ve forgotten about. Look closely: If you’re still making regular payments to magazines, dating services, TV-based services, or even mutual funds, look at those you can stop.  You’ll be surprised at what you can eliminate from your monthly expenses once you know what’s actually being paid for. 

• Seek Alternative Income: Do this immediately. Access other income sources as soon as you can.  If you’re eligible, apply for Unemployment Compensation; sometimes it can take weeks for this to kick in, so the sooner you apply, the sooner you can begin to collect an income.  If needed, find another source of income – you’ll be surprised how many opportunities are out there for people who are willing to take on shifts outside of the 9 to 5 norm.

As you work through these necessary tasks, make time to jumpstart your job-hunt, as well. Unless you’re forced to take the first real offer that comes your way, don’t be afraid to make the most out of this situation by including your dream job in process. The worst that can happen is that you don’t land that particular job.

But you just might do it.

Just as with the “Plan” phase of your job search, you’ll create the best chance for success in the job-hunting phase if you “Pinpoint” exactly what you’re looking for.

Pinpointing Success

By pinpointing your objectives, you have to understand just where you want to be. But you also need to pinpoint just how you intend to get there, and to be realistic about what you’re up against. It’s the last of those three that’s often the toughest to see and understand. So let’s take a closer look.

Understanding the Challenges: As we noted just moments ago, it’s not too difficult these days to get a pretty good idea of the overall unemployment scene: The official unemployment rate was last this high in 1983, and it’s going to get higher before it hits its apex and heads lower. But you also need to understand just what the hiring situation is in the specific industry you wish to work in – as well as the specific geographic market where you hope to work.

On an industry-wide level, The U.S. Bureau of Labor Statistics Web Site (www.bls.gov) is a good place to start.  By checking out their monthly Economic Statistics reports, you can get a clear picture of industry-specific performance in the U.S. 

For example, in the Employment Situation Summary for May 2009, we can see that both the education/health services and leisure/hospitality subsets of the service-providing industry added jobs last month: 44,000 and 3,000 jobs, respectively. 

Whereas, the goods-producing, manufacturing, and service- providing sectors were down 225,000, 156,000 and 120,000 jobs for the month, respectively.
By combining industry-wide knowledge with more specific resources available for your cities and states on Web sites provided by local newspapers (in my local area, that would be The Baltimore Sun or The Washington Post, for example), social media networks (like Craig’s List or Facebook) and jobs sites (such as Monster.com or Careerbuilder.com), you’ll gain a much better idea of the job market available to you right now.

Define Your Goal: This is the point most people start at when job hunting because they think it’s the easiest to knock out.  Well, in part, they’re right.  There’s no better authority than you when it comes to knowing what you can do or want to do. 

But there’s a mistake most jobseekers make – a mistake you need to avoid at all costs: Don’t sell yourself short, and don’t “pigeon-hole” yourself by thinking that your skills will only allow you to do a very narrowly defined job. Granted, for certain specific trades – such as HVAC installation and service, plumbing, or auto repair – you may be looking for highly specialized work.

In Corporate America, however, people who’ve worked in the divisions or departments essential to business – such as marketing, sales, human resources, logistics, or operations – jobseekers often don’t see those additional possibilities. If someone has spent the last 11 years working in HR for an accounting firm, they may not realize that they have the skills or experience needed to do a similar job within a school system, a hospital or health-care center, or a startup technology firm. And they could end up missing out on some good-paying and career-rejuvenating opportunities in the process.

That’s when the marriage between knowing what you’re up against and know what you want to do becomes critical.  Once you’ve identified which industries are the go-to segments for employment, you just have to look for the companies within that industry that offer positions in which you’ve had all of that experience.  Sometimes, though, you may need to persuade the decision-maker for the position in question that your experience in one industry lends itself to the other.

And finally, understanding of the challenges you face may also give you an entrée into the industry that houses your dream job.

Of course, you need to be somewhat realistic, even as you act with enthusiasm and aggressiveness. For example, if you always wanted to be a major league relief pitcher, but are now 34 years old with eight years of accounting experience to your credit, the chances are pretty good that the New York Yankees aren’t going to be phoning you to offer a mound tryout. However, the Bronx Bombers – like any other business – do have an accounting division, and your experience may be a perfect fit for what they’re looking for.

Remember that your sudden joblessness may give you the opportunity to get into an industry that you’ve always wanted to be in.  Now, though, you have the requisite experience within one of the departments common to every company, that makes you a much more attractive candidate for that position. 

Now, you just have to be able to seize an opportunity, once you’ve identified it.  And that brings us to the third “P” – Pounce.

Pounce on That Possibility

Too many job seekers begin their search in an all-out desperation mode – thinking they have to find a job as soon as possible.  Even if that’s true in your case, if you’re not prepared to make the most out of every job-seeking situation you enter, you may end up blowing the best chance – at the best job – that you’ll ever see. 

So, take a page from the Boy Scouts: Be prepared – to pounce.  That is, prepare for the best possible scenario, as if you’re going to hit the job-seeking jackpot.  For example, what happens if the first company you contact asks you to send your resume and references right away, so the chief executive and the head of HR can look them over this morning and then have you in that afternoon? If you aren’t prepared, you can’t pounce on the prospects that may come your way.

Well, if your answer to that request is “I can e-mail whatever you’d like right now.  What time this afternoon would you like to meet?” you’re on your way.  But if the last time you looked at your resume was six years ago, during your last job search, or you last spoke to your best prospective reference three years ago (and don’t even know where they’re working today), chances are you’ll still be job hunting long after someone else is happily seated (and working) behind the desk that should have been yours.

So even before making that first call or typing in that first word for an online search, make sure that you have the following information updated, available, and ready to be sent at the drop of a hat:

1. Resume:  More than just having it updated, make sure that you know it backwards and forewords.  Be able to explain gaps in your employment history, or why you’ve recently jumped from job to job.  The best plan: Have a general template that you can individualize or customize in order to pounce on a specific job opening.  
2. Cover Letter:  In many cases, the cover letter is just as important as your resume.  It should be your Sports Center highlight reel, but it should also be concise. Like you have with your resume, prepare a cover letter template, so that you can customize information for different openings, catering your comments to specific requirements or requests.
3. References:  At a minimum, you should have the names and contact information (phone and e-mail) for three business and personal references.  For businesspeople, include their titles and company names. 
4. Samples of work:  For positions in such “creative” fields as copywriting, graphic arts, architecture, or industrial design, to name a few, you’ll be asked to submit samples of your work.  Make hardcopies and electronic files of whatever you can, so that you can submit them in multiple formats.  Never give away originals, thinking that they’ll be returned – chances are, you’ll never see them again.

In addition to having the documents and materials above ready to go with a moment’s notice, you should also have the following information and materials readily available:

1. Your schedule for the week:  If you’re asked when you’re free later in the week, you need to be able to answer that question immediately.  The worst thing you can do tell someone that you’re meeting with at that moment, or that you’re talking with on the phone, that you’ll get back to them with that information.  You may not be able to connect later, for a variety of reasons.  Then when you do re-connect, you window of opportunity may have closed. 
2. Clothes for an interview:  Some laugh at this suggestion as oh-so-obvious, but you’d be surprised how many times people will tell us that they were called in for an interview – only to realize that their best suit was still rumpled from their last interview, three weeks ago. You don’t have to go out and purchase a new suit for every interview opportunity, but if you’re asked to come in to talk that day, and you don’t have time to wash, iron or otherwise clean appropriate clothing, you run the risk of making a bad impression – and losing the job.

Don’t Give Up

It goes without saying that this is one of the toughest and most-challenging periods U.S. job seekers have faced. But it also goes without saying that you can’t give up. That’s why the fourth of our four insights – the “Four P’s” is perseverance. Hope for the best, but don’t be discouraged if no job offer is immediately forthcoming. Prepare for the long haul by following the game plan we’ve identified, and use that as a survival kit that will get you through to the long run, where those who persevere usually win.

By Wayne Eillis
Money Morning

Today I want to follow that same approach with a slightly different spin. We’re going to put faces on some of the seemingly abstract numbers that are floating around out there. In doing so, we’ll get a telling look into what regular ol’ U.S. citizens are experiencing right now. Let’s call them “Mr. and Mrs. Median.”

What I think will become painfully obvious is that housing remains largely overpriced … people remain tremendously unprepared for personal hardships … and the road to substantial economic recovery will likely be long and arduous.

More on that — and what to do about it — in a moment. First, let’s start with a simple baseline …

How Much Do Mr. And Mrs. Median Earn?

If we want to get a sense of where people stand in their personal finances, I think a good place to start is with their cash flows.

And here’s what the 2007 U.S. Census Consumer Income report, issued in August 2008, says:

• Real median household income in the U.S. is $50,233. In other words, half of the households in this country make more and half make less.

• Households headed by married couples have a median income of $72,785.

• And the top 20% of households in the U.S. earn more than $100,000, with the top 5% of households earning more than $177,000.

Remember, these numbers are for households, not individuals. The numbers for individuals would be much lower.

Still, on the surface, it doesn’t seem too bad, right? Mr. and Mrs. Median — an ordinary, upwardly mobile, middle class couple — are bringing in about $72,000 a year.

Well once you start looking at their day-to-day lives and expenses, you’ll get a completely different picture. Let’s start with Mr. and Mrs. Median’s biggest expense, and the most notable one in today’s environment …

How Much Would Mr. and Mrs. Median Pay for Housing Today?

According to that same Census report, about 80% of higher-earning households own their house … though the term “rent from the bank” is probably more accurate in most cases.

And this is where we run into our first head-scratcher …

According to the National Association of Realtors, the median price of a single-family home in the U.S. fell 14% to $169,000 in the first quarter of 2009.

If we take that number and divide it by the median household income of $50,233 we get a ratio of 3.36.

In other words, it would take the middle-of-the-pay scale American household nearly 3.5 times their annual income to buy the middle-priced house.

From a historical perspective, that’s getting back to normal — in the 1990s, the ratio hovered right in that general area.

However, we have not factored in things that have happened since that 2007 Census report, including mounting job losses, evaporating 401(k)s, and the tightening of credit.

In other words, we are using top-of-the-cycle incomes and on-the-decline housing prices with more than a year’s difference in the data points.

More importantly, the bigger problem is this …

A Regular Family’s Actual Monthly Budget Makes
Housing Affordability Much More Complicated!

Simple ratios don’t give us an accurate depiction of housing affordability for Mr. and Mrs. Median.

Since our hypothetical couple does far better than the straight median household income — $72,000 vs. $50,233 — today’s median-priced home should be all that much more affordable for them then, right?

If you look at the price-to-income ratio, yes. It’s a reasonable 2.35.

However, once you start tracking our couple’s actual monthly expenditures (something that practically nobody does anymore!), you’ll see just how unaffordable even today’s moderately-priced house is for an upwardly mobile family.

We’ll start with another generous assumption: Mr. and Mrs. Median are actually going to put down 20% on this new house. Crazy talk, I know.

With today’s 5.75% 30-year fixed mortgage, their $135,200 loan is going to cost them about $788.99 a month.

Hey, with $6,000 a month coming in, that should be no problem, right?

Wrong.

First off, there’s that little thing called taxes. Let’s assume their employers cover half of their Social Security and Medicare taxes. That means they lose 7.65% of the $72,000, or $5,508.

Then, Uncle Sam will want his “regular” cut. For a couple making $72,000 that would come out to about 20% according to the IRS. Say goodbye to another $14,400!

State taxes are anybody’s guess … they could be zero in Florida or 5.3% in Massachusetts. We’ll split the difference and say they pay 3%, including state and local. That’s $2,160 out the window.

Already, our favorite imaginary couple is now clearing just $49,932, or $4,161 a month.

Of course, they probably have health insurance, which costs something like $500 a month through their employers …

Their cars and associated insurance bills suck out another $500 or $1,000 (the average car payment in the U.S. is about $380) …

Gas could be $100, $200 or more …

Groceries — not of the organic variety — might run a cost-conscious family of three or four about $600 a month …

And cell phone, cable, and Internet would be $150. (Boy, am I being nice there!)

As you can see, their monthly bills are already running into the $2,000 range, which means they’re now left with $2,161 a month.

Deduct that mortgage payment of $788.99 and they’ll have about $1,372 a month left in their bank account each month.

Still doable, right?

Well, we didn’t mention the costs directly related to their new house yet. Even if we assume a relatively low property tax rate of 1%, they’re shelling out $1,690. Insurance would tack on another $1,000. And utilities might average $300 a month throughout the year. The grand total for these costs is easily $500 a month.

End result: Mr. and Mrs. Median are left with $872 a month in so-called disposable income.

That money will have to be used to pay for every other single thing they buy throughout the year — including vacations, clothes, regular maintenance of the house and cars, unexpected emergencies, etc.

If they have kids — and I think it’s safe to assume that this imaginary couple does or soon will — they could also be shelling out a boatload for child care, toys, etc.

Sure, they’ll probably scrape by.

But ask yourself this: Given all those other expenses that we have not yet accounted for, is there any way that this couple can possibly be saving and investing for their retirement or their kids’ educations?

No way!

They certainly wouldn’t be able to contribute the $5,000 maximum to even one Roth IRA. And even with the tax savings afforded 401(k) plans, they’d be lucky to put away a couple grand a year each.

In fact, that jibes completely with the actual statistics — according to the Employee Benefit Research Institute, the average worker contributes about 7.5 percent to their company retirement plan. That means Mr. and Mrs. Median are saving $5,400 a year toward their combined retirement.

Other real-world numbers back this up. At the end of last year, the median balance of a 401(k) plan was $18,942.

The average balance was a significantly higher $65,454. But that’s because a minority of people (19 percent) have built up 401(k) balances worth $100,000 or more. A full 39 percent had less than $10,000 socked away.

If Regular U.S. Citizens Want Real Prosperity,
Something Has to Give Here …

Look, I realize I’m just tossing around numbers. And you might think my assumptions are crazy — on either side of the spectrum. By all means, I’d love to hear your feedback on my blog!

But from my personal conversations with friends, family, and readers all across the country, this little exercise is grossly underestimating the situation for many Americans.

Heck, how many upwardly mobile middle class couples do you know who recently paid $169,000 for their homes in major metropolitan areas? Not many I suspect.

And for those who bought in the last few years, not only does everything I just said hold true, but they are also underwater … they could have mortgage resets ahead … and on and on.

The only way many people are holding their finances together is with the glue of credit. Because based on the incomes in this country, there’s no way so many people can be driving $40,000 cars and living in $400,000 houses.

Or more accurately, there’s no way that these higher-priced cars and houses can sell at current prices going forward. The math just doesn’t add up, and the credit is long gone.

Think about it. For a household to afford one of the many $500,000 homes I see for sale everywhere I look, they’d need to pull in $142,000 a year. And that’s at the 3.5 ratio, which as I’ve shown you is far too optimistic once you look at actual family budgets.

According to the Census, only 7% or 8% of households make more than $142,000 a year to begin with. How much of the housing inventory in your area is at the higher end of the market?

Bottom line …

The Great Unwinding of Credit Will Continue,
So Make Absolutely Sure You’re Prepared!

I hate to be a downer here. It’d certainly be nice if everyone could just go on with their happy lives, expensive cars and houses, and endless credit-fueled buying binges.

But it ain’t gonna happen.

In the very best case, with a solid economic recovery, I expect housing prices to stagnate for many years. If mortgage rates continue to jump or the recession lingers, look out below.

Meanwhile, the days of conspicuous consumption will quietly fade. You can already see this happening with the recent uptick in the U.S. saving rate.

Is it a doomsday scenario? Not in my opinion. The overall quality of life in this country can keep improving. But it feels like a cultural shift is starting to take place, that it simply must take place.

That means slower growth for some time to come.

Plenty of U.S. citizens are simply going to scrape by, barely making ends meet because of the unwise decisions they made in the last decade. They’re going to have to re-evaluate their household budgets just to survive. They’re going to realize that the lifestyle they’ve become accustomed to is no longer attainable.

They are absolutely not going to accumulate wealth at a rapid clip.

Fortunately, since you read Money & Markets, I’m sure you find yourself in better financial shape than Mr. and Mrs. Median. Yet I don’t want you to rest on your laurels.

And even if you find yourself crunched in this tough environment, I want you to know that there are still plenty of steps you can take now to become better prepared for the future …

First, continue living well within your means and saving religiously. There is no free lunch, and the only way to build wealth is by spending less than you earn.

Second, make sure your portfolio is prepared for a long economic slog. I favor economically-insensitive dividend stocks, carefully-selected bonds, and other conservative income investments. But I also recognize the importance of inflation and dollar hedges, inverse ETFs, and a healthy dose of cash. Diversification remains a valid concept, in my opinion. Our team of experts here at Money & Markets is giving you all the tools you need to put together a portfolio that’s right for you.

Third, ignore the hype about a quick recovery, massive gains just waiting around the corner, and all the other feel-good talk that’s out there. Sure, you can continue raking in solid returns every year if you make the right moves. But the idea that this 10- or 20-year credit party is going to get worked off in a year doesn’t pass a “common sense test” and it certainly isn’t supported by the numbers. We all have to adjust our expectations accordingly.

Best wishes,

by Nilus Mattive
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.