Half of U.S. Marines to leave Okinawa

[This would probably not have happened without the work of Chalmers Johnson, whose biting critique of U.S. imperialism in Asia has drawn national attention to the American “empire of bases.” But the palm leaves this victory go to the people of Okinawa, whose degrading vassalage can’t go on forever. Congratulations. –JAH]

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

WASHINGTON (CNN) -- The Pentagon has yielded to demands from residents on the Japanese island of Okinawa and committed to cut the number of U.S. Marines in the country by nearly half.

The announcement from the Pentagon came Saturday and stated that the United States and Japan had agreed to shift 7,000 Marines from Okinawa to Guam during the next six years. There are 14,460 U.S. Marines in Japan, and almost all of them are stationed in Okinawa.

About 47,000 troops from all U.S. military branches are in Japan, and most of those also are in Okinawa.

Earlier in the week, Japan and the United States agreed to close the Marine Corps Air Station Futenma in the crowded southern part of Okinawa and move its functions to Camp Schwab in the north, according to The Associated Press.

Local residents have held widespread protests periodically during the past decade in response to U.S. military personnel committing crimes.

Protests boiled over in 1995 after three American servicemen were found guilty of raping an Okinawan schoolgirl.

Since 1995, U.S. service members have been convicted at least five times on sexual assault charges. An airman was convicted of rape in 2002.

In July, Okinawa police in July charged another U.S. airman following the molestation of a 10-year-old girl in a parking lot. Sgt. Armando Valdez, 27, later pleaded guilty, Japan's Kyodo News Agency reported.

Saturday's announcement followed talks among U.S. Defense Secretary Donald Rumsfeld, U.S. Secretary of State Condoleezza Rice, Japanese Defense Minister Yoshinori Ono and Japanese Foreign Minister Nobutaka Machimura.

Rumsfeld told a news conference Saturday that the United States and Japan "agreed to findings and recommendations to strengthen the alliance and reduce the impact of U.S. military on local communities."

Ono said the agreement represented a "transformation of the alliance" between the two countries that will provide it with "a fresh start and new energy."

Both sides affirmed plans for closer military cooperation, sharing intelligence, and expanding training opportunities in deterring and defending against ballistic missile attacks. They also pledged to dissuade other nations from development and proliferation of ballistic missiles.

[What Kunstler calls “the building and servicing of suburban sprawl” is both the motor of the U.S. economy and the sole condition under which the real estate market can inflate. In a sense, the bursting of the real estate bubble will represent its collision with energy scarcity. But the bursting of the derivatives bubble will represent energy scarcity’s collision with the entire economy. –JAH]

The total value of residential property in developed countries rose by more than $30 trillion over the past five years to more than $70 trillion, according to The Economist. That increase is equivalent to 100% of those countries' combined gross domestic products (GDPs). Ponder the magnitude of that statement.

To be fair, it's difficult to grasp exactly how amazing that is without historical context. Those numbers dwarf any previous housing boom, the global stock market bubble of the late 1990s (a GDP increase of 80% over five years), and America's stock market bubble of the late 1920s (55% of GDP). We're looking straight into the eyes of the biggest bubble in history.

Compensation. Robert Toll, CEO of Toll Brothers (NYSE: TOL) is No. 13 on the Forbes list of most highly compensated CEOs. His total compensation for 2005 is estimated to be more than $50 million, including a $30 million bonus.

Media. "Flipping" properties has become so popular that there's even a new television show called Flip This House. It's nearly impossible to pick up a newspaper or magazine without reading about the riches to be made in real estate.

Cocktail-party barometer. Remember a few years back, when the only thing people wanted to talk about was their latest IPO highflier? Well, listen closely at your next party and see how many of your friends are talking about how much they've made in real estate.

New risky mortgages. The Washington Post recently reported that Fed Chairman Alan Greenspan warned that "home prices seem to have risen to unsustainable levels" in certain local markets. An Economist article stated that "42% of all first-time buyers and 25% of all buyers made no down payment on their home purchase last year."

Consumer debt levels. Consumer spending accounts for approximately 70% of our GDP. That's well above the 75-year average of 65.5% (covering the period 1929 to 2004) as described in a report (link opens a PDF file) provided by famed value investor Arnold Van Den Berg of Century Management. This spending level is not sustainable, especially now that consumer debt is approximately $10 trillion, or almost 80% of total GDP ($12.3 trillion). The bulk of that consumer debt? Yep, you guessed it: Approximately $8 trillion is mortgage debt.

Don't know much about history
Leverage -- particularly buying stocks on margin (with little or no money down) -- played a big part in the Great Depression. We're doing much the same thing today with interest-only or negative amortization loans.

Remember Black Monday in October 1987? How about the savings and loan failures that followed? From the late 1980s to the late 1990s, real estate was not a particularly great investment. My wife and I bought a home here in Virginia in 1998 for the same price the previous owners had paid way back in 1989. That's nine years and zero appreciation.

But wait, there's more. One of Warren Buffett's early partner letters (with updated numbers) provides a great example of the irrational returns of today's real estate market. Back in 1636, the Dutch purchased Manhattan Island for $24 worth of glass beads. In 2004, the assessed value of all the properties on Manhattan was $186 billion. What a steal, right?

Well, hang on a minute. Do you have any idea what kind of annualized return you'd need if you wanted to turn that measly $24 into $186 billion? Just 6.37%. Real estate, or any other investment for that matter, will not increase at 20% per year for very long. Eventually, reversion to the mean kicks in.

Did you know the housing market in Hong Kong saw a "real decrease" in housing prices of 57% from 1997 to 2002?

It's safe to say that people's expectations are out of whack and that real estate investments won't increase at the same rate they have in the past five years. As a matter of fact, in some markets, I don't think it's out of the question for some properties to lose 20% to 30% of their value in a given year or to see no increases for a decade or more.

Bringing it home: The 150 to 200 rule
If a home is selling for 150 times the monthly rent (or less), it's generally a good deal. If it's selling for more than 200 times the monthly rent of a comparable property, you're better off renting. I ran this little test for a house near Fool HQ in Alexandria, Va. House A has five bedrooms and 4.5 baths, and it sits on one pristine acre. You can rent House A for $3,900 per month. Based on comparable sales, this home would sell for approximately $2 million. Therefore, it's selling for 512 times the monthly rent! Put another way, if you mortgaged the whole $2 million at 5.42% over 30 years, your monthly payment would be more than $11,000.

Who will get hurt?
Bill Gross, famed PIMCO fund manager, believes that holders of real estate, equities, and high-yield debt will get hurt. I agree. Among those likely to be burned are:

Big banks -- in the fourth quarter of 2004, derivatives held by commercial banks totaled $96.2 trillion. If you own shares of a bank (or any other company with a significant amount of derivatives exposure), ask yourself whether you understand the potential risks. Holdings of derivatives are concentrated in the largest banks, with five commercial banks accounting for 96% of the total notional amount of derivatives in the commercial banking system, according to Kathryn Dick, deputy comptroller for Risk Evaluation at the Office of the Comptroller of the Currency.

First-time homebuyers who are stretching into their homes using adjustable-rate mortgages, interest-only loans, and "pay as much as you like" loans.

Holders of homebuilder stocks like Toll Brothers, Pulte (NYSE: PHM), and D.R. Horton (NYSE: DHI). These stocks seem extremely cheap right now, with price-to-earnings ratios (P/Es) in the single digits. However, this is a cyclical industry, and the best time to buy into cyclicals is when they look expensive.

Exuberant buyers of mortgage-backed securities (MBS). As you'll read below, stretching for returns can lead many investors into mortgage-backed securities.

Why will the end be so bad?
Robert Brokamp, editor of the Motley Fool Rule Your Retirement newsletter service and the Fool's resident retirement guru, talks to his members a lot about asset allocation and the importance of negatively correlated assets. If one asset is going up, the other will likely be going down. It worked pretty well during the bursting of the tech bubble, when many people's real estate gains more than made up for their market losses. More than ever, I believe the economy is being driven by real estate. When that asset class turns, it will be like a bunch of dominos, and the stock market will follow. Here's why.

"Loose lending standards are probably the single biggest thing fueling the speculative fever we have today" in housing, says economist Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California -- Berkeley. There are loose standards because of strong demand for mortgage-backed securities. In this low-interest-rate environment, an MBS guaranteed by Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE) is too profitable for investors to pass up. In a time when 10-year Treasuries are yielding 4.2%, you can get an MBS earning 5.5% and a subprime security with no guarantee that can yield as much as 15%. Who is holding these mortgage-backed securities? Asian investors now account for roughly 10% to 20% of mortgage securities, but hedge funds, pensions, and insurance companies are big players in this market.

If we see a sharp drop in housing prices, I expect financial institutions to take a hit, consumer spending to dry up, default rates to rise significantly, and a long-overdue crackdown to come on loose underwriting standards. According to The Economist, over the past four years, consumer spending and residential construction have accounted for 90% of the total GDP growth. Additionally, more than 40% of all private-sector jobs created since 2001 have been real-estate-related sectors. In short, it's going to have a serious impact on our entire economy.

What should you do?
Really, there are a few ways to hedge against the bubble:

If you're a first-time homebuyer, do not purchase a home that costs more than three times your gross household income, and do not pay more than 200 times what a comparable property is renting for.

Focus on top-tier companies that trade at reasonable valuations with pristine balance sheets. There are some large-cap blue chips that qualify right now. Wal-Mart leads that list.

If you're not a real estate expert, now is not the time to start speculating.

Don't be afraid to hold cash. Some of the best money mangers around are holding 10% to 45% of their portfolios in cash. With rising interest rates, bubbly real estate prices, and government, consumer, and corporate debt at all-time highs, you'll no doubt find more attractive prices in the years ahead.

If you have investments that are influenced by the real estate market -- like Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) -- you must understand how a downturn will affect their businesses.

It's important to have exposure to economies outside the United States. In his recent book, Wharton Business School professor Jeremy Siegel recommends that investors have 40% of their holdings in international companies.

In short, don't panic. And don't try to time the market. The first step toward becoming a master investor is becoming a compulsive saver. Prudent investors who are not overburdened with debt will be fine. So take stock of your personal situation in the next week or two. And if you'd like some help, consider a 30-day free trial of Motley Fool Rule Your Retirement, where Robert can help you learn more about asset allocation and planning for a financially secure future.

Buck Hartzell believes that capital preservation is crucial to long-term investing success. He owns a home but none of the companies mentioned in this article. Fannie Mae and Home Depot are Motley Fool Inside Value recommendations. The Fool is investors writing for investors.

The rise of fuel prices over the last year seems to have had little effect on how much we pay for food. That pint of raspberries imported on a gas-guzzling jet from Argentina? Still five bucks. Nevertheless, the high cost of petroleum has rattled the people in the business of putting food on the nation's table. With prices at the grocery store and in restaurants holding steady, producers and middlemen have been forced to absorb the increase.

In Poolesville, Md., Eric Spates grows No. 2 yellow corn on nearly 300 acres. His tractor and combine burn about 4,000 gallons of diesel fuel every season, which cost him $1 each last year. This year, it's $2.50 a gallon. "That's a $6,000 hit in my checkbook," Spates notes. Add to that the cost of ammonium nitrate, a fertilizer made using natural gas, which went from $85 a ton last year to $200 this year.

And, unfortunately, the price Spates will get for his corn won't rise accordingly. In fact, it is quite low now, hovering around $2 a bushel. (He starts to make money only when it rises above $2.40.) So Spates, 36, is holding on to most of his crop until January, banking on nationwide supplies running low and the price going up. And if it doesn't?

"I try to be a low-cost producer," he says. "I don't spend a lot on machinery, and I try to do all the repairs myself."

It's a refrain familiar to any small-boat fisherman, whose fuel represents a little more than 50 percent of maintainance, according to Bob Campbell, the manager of the Yankee Fisherman's Cooperative in Seabrook, N.H. Campbell has been selling diesel for $2.45 a gallon in the middle of October to dispense to the co-op's 52 members, many of whom are resorting to extreme cost-cutting measures. "A lot of these guys are fishing solo now, which is a dangerous thing to do," Campbell says. "If the price of gas doubles again, you're not going to see the price of fish go the same way - there's no correlation between them, similar to the farm business. It's just a crazy thing."

To Ephraim Leibtag, a food-price specialist with the Economic Research Service of the U.S.D.A., it's simple competitive-market economics. "Increased costs at early levels of production do not necessarily translate fully through the production chain," he says. "People at the lower end of the supply chain will have less market power when there are other options for buyers." Dealing in perishables is a zero-sum game, and the seller starts with a disadvantage. "If the buyer knows the goods are going to spoil," Leibtag says, "it gives them more market power."

But Leibtag notes that there might be hope for producers. Consumer prices rose 1.2 percent in September, a sign that energy costs were working through the system. "At the pump, we see prices rise immediately," he says. "But a grocery store might have contracted for goods months in advance." Price increases won't show up until the next contract cycle.

Fish is clearly being marked up somewhere along the supply chain. Cyril Renaud, the chef and owner of Fleur de Sel, a small Manhattan restaurant, has watched the price of scallops inch forward over the last two years to $10.75 a pound. "A year ago, I was getting them for $8.25," he says. To save money, Renaud prowls the Fulton Fish Market himself instead of paying a purveyor a premium and a fuel surcharge for delivery. "I can't keep raising prices," he says. "I'm going to hang on as much as I can for as long as I can."

He's not the only one. A recent Zagat survey shows that the average cost of a restaurant meal in New York rose only 0.4 percent in the last year. The notion that prices must be held isn't rooted in solidarity with the consumer but in reality: price your entree too high, and you risk that no one will buy it. Those bills piling up in the back office are a powerful motivator to keep pricing aggressively.

Stephen Katzman, the president of S. Katzman Produce at the Hunt's Point Produce Market in the Bronx, is in an even graver pinch. Not only does he operate under the threat of being left with rotting cabbages in a competitive marketplace, but if he can't pay the farmer enough to cover his costs, the farmer won't ship the crop at all. His diesel-fuel expense for the refrigerated trailers that the company uses as overflow storage space gobbled $68,545 in the first eight months of 2004; the same period this year cost $199,605 (though a slice of that was due to increased usage, he says). One cost-cutting tactic he's using is to maximize his delivery fleet: he's pressuring his clients to order enough to fill a truck, so a purveyor that took in five partial loads a week might now receive three.

Some restaurants are taking these pressures in stride. Joel Patraker, the purchasing manager for the Four Seasons Restaurant, surveys his bills for the day's deliveries. He adds up the various fuel surcharges that his suppliers have tacked on: $16. "It's imperceptible, really," he says. "If everyone started putting on $3.95, that would be a consideration." He's been forced to play the purchasing game with greater acuity. When the price per pound of Canadian bison tenderloin went from $19 to $21, in a blink, no note," he looked at bison from the Dakotas being offered for $19.25 per pound, which turned out to be superior in quality as well.

At Joseph Yavarkovsky Inc., which sells paper goods and packaging to Manhattan delis and restaurants, there is greater alarm. Each delivery from the paper plants in the South brings with it a new fuel surcharge of about $75. And the goods themselves are skyrocketing because of the fuel-intensive nature of their manufacture. "Anything made of plastic, a petroleum product, is up by 50 to 70 percent," says Ira Yavarkovsky, the firm's owner.

These days, the only ones not feeling the gas crunch are the restaurateurs who take a literal approach to "fresh, local food." Parker Bosley, the executive chef of Parker's American Bistro in Cleveland, orders exclusively from small farmers, most of whom don't use big diesel-chugging tractors. And their fields are within a two-hour drive of the restaurant's back door - in many cases, far less. Not a single food purveyor of Bosley's has levied a fuel surcharge or raised prices in the last year.

"I'm more than proud of what I do," Bosley says. "I'm chauvinistic and smug. To chefs who learned how to source exotic ingredients instead of learning how to cook well, I say, 'Tough beans, guys."'