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Monday, August 31, 2009

End the Fed!

Sunday, August 30, 2009

Is China really growing?

China is booming…isn’t it?’

Well, here’s a question for you: if China were really growing at 8% per year, how come its electricity consumption is going down?

Answer: Because the Chinese bureaucrats can jiggle and jive the numbers for employment, GDP, and inflation. But the number of kilowatt-hours consumed in China is just a number. It is not computed. It is not seasonally adjusted. It is not tortured by statisticians nor tormented by economists. It is just a number. And that number is a smaller number than it used to be.

Oh, and here’s another number. China’s exports for July were down 22% from the year before. Here’s another question: how can an export led economy grow when its exports are collapsing?

Again, we have an answer: when it is not really growing.

According to the meddlers, China is growing because meddling works. China is spending $586 billion (proportionally nearly 3 times as much as the US) to keep its economy booming. The program must be working, say the economists, because China’s economy is still growing.

But is it? Most of the money is spent on infrastructure. The Chinese are doing what the Japanese did before them. Japan bailed out its banks and spent trillions on infrastructure. There were years when little Japan was pouring much more cement than the entire USA. – channeling rivers, building bridges to nowhere, and creating highways for no one. What did they get for their money? Well, you could say they got a lot of infrastructure…and the most cemented–up country on the planet. Is that a good thing? We don’t know. But one thing they didn’t get was durable economic growth.

Why not? The easy answer is because an economic system is too sophisticated to yield to these ham fisted interveners. Another way to look at it is because the economy had already spent too much…creating too much capacity. Adding infrastructure that could handle more capacity was not a solution.

“Keep in mind,” says The Richebächer Letter’s Rob Parenteau, “China needs at least 9% growth to soak up the 24 million new Chinese workers who come of age each year – something even the Chinese Premier doesn’t like to mention.”

But heck…it’s summer. And in the sum…sum…summertime, we’re not going to criticize our fellow man. Instead, we’re just going to laugh at him.

In China, for example, the government’s stimulatory programs are having the same flaccid results they got in Japan. Prices are going down. The Chinese feds are trying to get people to spend more money – just as they did in Japan. But people do not spend more when prices are falling. They wait for a better deal. And as they wait, consumer demand falls…forcing prices down further. Japan has gone through almost two decades of on-again, off-again consumer price deflation. Now it’s China’s turn. Consumer prices in China have been going down for the last six months…and are now reported falling at a 1.8% annual rate.

How could prices be going down in a booming economy? Well, because the economy isn’t booming. Instead, it’s burdened with overcapacity – just like Japan’s. And like Japan’s it is probably doomed to go through a long period of re-adjustment…before a durable recovery can begin.

-- from "What Chinese Depression?" by Bill Bonner

The meddlers always make things worse

Consuming wealth is not the way to get rich. It’s the way to get poor. But it would take someone without a PhD in economics to see such a simple and obvious truth. Given a fellow a computer and an advanced degree in economics and he’s ready to believe anything…

Yes, dear reader, in His majestic wisdom, God – or whatever wiseacre created this system – set up something so subtle and complex that it is beyond the reach of human tinkering. That’s why the meddlers always make things worse. That’s how they put the ‘great’ into the depression of the ’30s – by interfering with the markets’ natural corrective mechanisms. And now these simpletons think they can stop the correction underway since ’07 – with stimulus, bailouts, and boondoggles. Yes, they admit, it was excess credit that put American consumers into such a jamb. But, heck, now we’ll let the government do the borrowing. The government will make up for the demand that has been removed from the private sector. The private sector is paying down debt at roughly $1 trillion per year. And now the public sector is adding debt at roughly $1 trillion per year. That ought to do it, right?

Ha…ha…yes…why not? And while we’re at it, let’s round off pi to a whole number so it will be easier for school kids to remember.
-- from "What Chinese Depression?" by Bill Bonner

Thursday, August 27, 2009

The oil/gas price ratio gone wild!

Aug. 25 (Bloomberg) -- Crude oil has become so expensive compared with natural gas that the record price ratio between them probably won’t last, analysts say.

The CHART OF THE DAY shows the prices of these commodities since 1990, when natural-gas futures started trading on the New York Mercantile Exchange, in the top panel. The ratio between them, which closed at a record 26.4-to-1 last week, appears in the bottom panel.

The ratio has more than tripled this year amid a 67 percent increase in crude prices, bolstered by speculation that Chinese demand will climb. Gas prices have fallen 48 percent on reduced demand from industrial companies and the start of production at new U.S. fields.

“History clearly suggests that the price gap will eventually narrow, through some combination of oil prices falling and natural-gas prices rising,” Donald Marron, a former member of the Council of Economic Advisers, wrote in an Aug. 21 posting on his blog.

The timing of any return to historical norms, also known as mean reversion, is questionable. Marron didn’t speculate in his posting about when that might take place.

“Who knows when we’ll see some reversion to the mean,” analysts at Bespoke Investment Group wrote yesterday in a comment highlighting the oil-gas ratio.
--from "Record Oil-Gas Price Ratio May Be Set to Narrow: Chart of Day " by David Wilson

The chart referred to in the above is here (click on the "GRAPHIC" tab).

P/Es gone wild!

Universal healthcare

Should include putting an end to the maiming and murdering of the Iraqis, Afghanis, and Pakistanis. After all, aren't they part of the universe, too?

Wednesday, August 26, 2009

Another view of Peak Oil

See "‘Peak Oil’ Is a Waste of Energy " by Michael Lynch.

I've been reading Lynch off and on over the past few years and I think his point of view is definitely worth considering.

Single-payer cell phones

Here's what cell phones would look like today had the U. S. instituted single-payer cell phones in 1987:



Mike Douglas as Gordon Gekko in "Wall Street", 1987 (photo credit here).

These phones had:
no email,
no texting,
no web browser,
no media player,
no digital camera,
no digital video camera,
no calendar,
etc.
(And they really didn't fit in one's hip pocket!)

I wonder: what would healthcare technology look like today had the U. S. instituted single-payer healthcare in 1987?

Antiwar.com on Cindy Sheehan

And a request for donations!
Remember Cindy Sheehan? She's the antiwar activist who lost her son in the Iraq war and turned her grief into a national crusade, getting in Bush's face by camping outside the presidential compound in Crawford, Texas. The mainstream media loved it and covered her on a daily basis – but now that another commander in chief occupies the White House, where is the media coverage of Cindy's ongoing antiwar protest?

In a recent interview on Chicago's WLS radio, ABC News anchor Charles Gibson was asked about antiwar protester Cindy Sheehan's plans to travel to Martha's Vineyard, where she is protesting the Iraq and Afghanistan wars while President Obama is vacationing there. Gibson, whose newscast and network covered Sheehan in 2005 outside Bush's ranch, answered, "Enough already."

Enough focus on America's wars – now that Obama's in charge, we don't have to talk or even know about it. When the Republicans go to war, it's a crime; when the Democrats escalate what the GOP started, it barely gets reported.

Well, we here at Antiwar.com aren't ignoring it. Cindy Sheehan's sincerity and consistency is a rebuke to those "progressives" who – like ABC's Gibson – say "enough already" to the antiwar movement. We've had enough already of their hypocrisy and crude partisan bias. We don't care what party the warmongers are in, we're going after them tooth and nail.

We pay the price for this. Fair-weather friends are no longer giving, because we won't bow down to their hero as he unleashes a reign of terror on the peoples of "Af-Pak" and threatens Iran.

But we have never depended on the kindness of hypocrites, and we don't intend to start now.

We've always told it like it is. But in order to keep doing that we need your support, and we need it now. We're in our third week of fundraising, and we're just over half of where we need to be in order to survive. Yes, our principle stance is hurting us financially, but we won't let the Democrats off the hook.

We need your help to keep up the fight. Don't give Obama a pass – kick the warmongers in the a**!

-- from Antiwar.com

Arlo Guthrie joins Ron Paul in singing, "End the Fed!"

"Rarely has a single book not only challenged, but decisively changed my mind."

– Arlo Guthrie

Ron Paul's new book, due out September 16, is "End the Fed".
Ever since it was schemed by the Rockefeller, Morgan, and Kuhn-Loeb banking families in 1913, and signed into law by the inflationist-warmonger Woodrow Wilson, the Fed has been instrumental in more than 100 wars . . . .
--from "The Book Bomb to End the Fed

A National Day of Protest of Obama’s Wars

[L]ibertarian activist and attorney James Ostrowski has already begun organizing a "National Day of Protest of Obama’s Democrat Wars” for September 5 at noon in Buffalo, New York. In an interview with THE NEW AMERICAN, Ostrowski explained "the tea party movement has been very successful in thwarting Obama's domestic agenda and I feel that now is the appropriate time to go after his foreign policy agenda. It's the right time since almost all the liberals and the leftists have given Obama a pass on all his war mongering. Big government and war are genetically linked and historically linked. This can be a great teaching moment to the tea party activists and perhaps they will open their eyes to the link between big government and war." Could a new antiwar movement rise up and derail Obama's presidency?
--from "Obama's Wars Trigger New Activists" by Patrick Krey

Obama's healthcare plan for Iraq, Afghanistan, and Pakistan

More murder, maiming, and mayhem.

The economists' new clothes

At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don’t deserve the beating they’re getting in the press – with snide remarks and sarcastic comments; they deserve better. A beating with sticks!

Even Alan Greenspan admitted he had “found a flaw” in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. If was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn’t seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you’d hope he’d be a gentleman about it and hang himself.

Meanwhile, the queen of England visited the London School of Economics and had a question: why weren’t economists on top of this thing?

They replied to this question last month. In a three-page letter, they avoided the simple truth – that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a “psychology of denial” prevented government and financial eyes from seeing the catastrophe in front of them. It was “a failure of the collective imagination of many bright people”, they said.

In fact, it was the exact opposite – imagination run wild. Economists imagined a world without yesterday or tomorrow…a world in which you could run up debts forever and never have to pay them back.

Last week, Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America’s biggest creditor that the public sector wouldn’t continue to run huge deficits – practically an outright lie.
--from "Stitch in Time" by Bill Bonner

The future has arrived (and it wants its money from the past!)

In the past, the consumer reached into the future. In many cases, he reached beyond the future, and into Never Never Land. Consumers spent money they hadn’t earned yet…thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy – from America alone – over the course of the great credit expansion, 1945-2007. That’s why we have a depression now – because consumers already spent what they would normally be spending now.

Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006…the house bought in 2005…the vacation taken in 1999 – the ghosts of yesteryear spending reach for Americans’ paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back – ever. They reached so far the poor ghosts are disappointed. Lenders realized that they’d never get their money back, which is what led to the credit crunch and the collapse of Wall Street.
--from "Stitch in Time" by Bill Bonner

Stealing from the future to spend in the present

Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside ‘quantitative easing’…or Zimbabwe-style stimulus…an even bigger fraud.)

The purest illustration of how this works is in the popular ‘cash for clunkers’ programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn’t expect 2010 to ever arrive…as if they thought they could stop the sun and the seasons…and the Chinese…forever. Like moths in amber, their wings will never tatter…nor will their faith flag. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive.

But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011…and then 2012…all the way to the end of time.
--from "Stitch in Time" by Bill Bonner

A financial world gone mad

The Dow slipped a bit yesterday – only 39 points. Everyone is watching. They want to see how far this rally carries on. Many think it is more than a bear market bounce; they think it is for real.

The prevailing opinion is that quick action by the feds avoided a more serious meltdown. Ben Bernanke says he was working to prevent a “second Great Depression.”

And now that the crisis is past, the economy is slowly climbing out of its hole. The second quarter showed GDP falling at 1% per year in the United States…rather than the 6.4% rate recorded earlier in the year. Housing sales have perked up. Oil is trading above $71 – a sign of renewed economic activity. And gold seems to be getting ready for another assault on the $1,000 mark – a sign of growing inflation pressures.

At least…that’s the way the world sees it.

Here at The Daily Reckoning, we look…we squint…we wipe the fog off our glasses and try to tear the scales off our eyes. What do we see? We see a financial world gone mad.

-- from "A Financial World Gone Mad" by Bill Bonner

Is China the next big bubble?

There are two big bubbles now. There is the familiar one in federal government debt. The other is the Peoples’ Republic of China.

Andy Xie says China is a ‘giant Ponzi scheme’ fed by new investors hoping to get rich. Of course, the China story is an attractive one. China’s growth rate is spectacular. Even in a worldwide financial meltdown…and the biggest depression since the ’30s…China is still growing at greater than 8% per year – or so the figures tell us. New cities are still being built…at a breathtaking pace. Stocks on the Shanghai exchange are up 80% so far this year. China has the biggest pile of cash on the planet – $2 trillion worth. And it has more bright, well-educated engineers, accountants and economists than anywhere else… In fact, it has so many economists trained at Western universities, it is almost sure to blow itself up…

Maybe this is the Chinese Century. Maybe it is not. Either way, it seems inevitable to us that the Chinese bubble economy is going to pop. Banks are lending three times as much as they lent last year. You can’t increase lending at that rate and still maintain credit quality – if there was any in the first place. A lot of buildings are going up that won’t find tenants. A lot of factories are expanding that won’t find customers. A lot of speculations are going on that investors will later regret. That’s just how a bubble works!

Mr. Xie says, for example, that the cost of property in China is about the same as in the United States. But wait, the average income in China is only 1/7th what it is in the USA. How can the Chinese afford American prices? Well, they can’t. They’re all betting on the ‘greater fool theory’ – that they can pay any price, because some greater fool will come along and pay more. Trouble with that is that the Greatest Fool of All finally shows up…and then the whole structure collapses.
-- from "A Financial World Gone Mad" by Bill Bonner

Making the three main decisions in life on emotion, not logic

There are only three main decisions you make in life – what you do; who you do it with; and where you do it. Typically, these decisions are made without much real thinking – which is probably the best way. They are not things that lend themselves to thought…but to feeling. Pity the more man who marries a woman after a prolonged and logical thought process. The poor sap is doomed. His head may be in the game, but his heart will drop the ball. The next thing you know, he will be in divorce court or therapy. Likewise, the decision about where you live is not one that is readily subject to logical analysis. You like a place because you like it… And you may like it for a variety of reasons that defy analysis. There’s no accounting for taste, as they say.
-- from "A Financial World Gone Mad" by Bill Bonner

What to do when the bounce stops bouncing

Sell oil and buy the dollar!
No one knows how long this rally will last – certainly no one here at The Daily Reckoning vacation headquarters. It will continue until it runs out of gas. That could be tomorrow. It could be months from now.

It will run out of gas sooner or later, and probably this fall. A real, durable bull market would require an economic boom – a genuine recovery. We don’t see that happening…

But people must think it is happening…

“There are signs of a recovery in the US…” was a popular line at last night’s cocktail party. Several friends mentioned it. Each time, we had the same reply – we wouldn’t bet on it.

Yesterday, the price of oil rose; it ended the day at $71. And the dollar stayed where it was – at $1.44 per euro. Investors are betting on recovery – despite our advice.

And when the recovery turns out to be a clunker, they’ll probably put these trades into reverse. Oil will go down; the dollar will go up.

You want to speculate, dear reader? Sell oil…buy the dollar. Wait for another crash this autumn.
-- from "Don’t Put Your Money on a US Recovery" by Bill Bonner

What's so special about clunkers?

‘Cash for Clunkers’ is a hare-brained scheme…but that doesn’t make it unpopular. The idea is to stimulate demand by, well, giving people money. But instead of just giving them money and letting them choose what to do with it, the feds decide they need a new car. In order to the get the money, people have to buy one.

According to the press reports, the program has been a great success wherever it has been put in place – in France and Germany, as well as in the United States.

If so, why not apply the concept elsewhere? How about cash for houses? Cash for liquor? Cash for newspapers? Cash for trips to Europe?

What’s so special about autos, in other words? And why is it a good thing for people to buy cars?

Oh c’mon, dear reader…don’t pretend you don’t know. The auto industry is huge…with many lobbyists and many organized groups interested in its wellbeing. It is an old and well-established industry with plenty of political clout.

Tomorrow’s industries, by contrast, have no lobbyists…no organized labor…no pet congressmen…no political action committees. So who gets the money?
-- from "Don’t Put Your Money on a US Recovery" by Bill Bonner

Stealing from the future

[T]he goal of the ‘Cash for Clunkers’ scheme is not to increase the size of the US auto fleet, it’s to make it newer. People don’t need more cars. They only need to replace cars that get worn out. If they bought a car five years ago, they may be ready to buy another one. Or, they could probably wait until next year. Along come the feds with cash…and the buyer decides to replace his car this year rather than next.

This is heralded as a success. The feds have stimulated demand. But what about next year?

We’ll have more to say about this on Friday…but the auto example helps us see what a scam these stimulus schemes really are. They claim to boost demand. But they can’t really increase demand. All they can do is roll next year’s buying into the present year.

Sound familiar? That’s the very thing that has been happening for the last two generations. Consumers didn’t want to wait until they’d made the money to take their vacations or buy their houses. They turned to credit. They borrowed against future earnings. They spent money they hadn’t earned yet…thus bringing forward purchases that should have been made in the future. That’s why we have a depression; now, we’re in the future!

It had to come sooner or later. After drawing consumption forward for decades, Americans had to stop. Time had to catch-up. Homeowners had to pay down debt. Ken Rogoff, Harvard professor of economics, believes it will take them 6-8 years to do so.
-- from "Don’t Put Your Money on a US Recovery" by Bill Bonner

What will happen when the bounce ends?

I expect this rebound to end…and for stocks to go down, possibly down a lot. The dollar is what people want when they are frightened. The dollar is going down now because they think there’s no longer anything to be frightened about. But when this recovery disappoints them, investors are going to be more frightened than ever. Because they’ll realize that we’re faced with a depression…and that the feds can’t do anything about it. They’re going to rush to the safety of dollars…at least for a while. Probably long enough to shake out a lot of gold buyers.
-- from "Don’t Put Your Money on a US Recovery" by Bill Bonner

Tuesday, August 25, 2009

Cash for Clunkers: is the U. S. government nuts?

Can it really help the economy to destroy perfectly good assets? Are the people running the government the most economically illiterate bunch since FDR ruled the roost? Or are they dumber?
-- from "Watch Perfectly Good Assets Being Destroyed" by M. J. Perry

Saturday, August 08, 2009

Seinfeldonomics

As congress and the president consider the best policies to right our economic ship, it is my hope that they will pursue a strategy first developed by Seinfeld character George Costanza. After wisely recognizing that every instinct he had up unto that point had ended in failure, George decided that to be successful, he had to do the exact opposite of whatever his instincts told him. I suggest our policymakers give this approach a try.
-- from "'Experts' Never Learn" by Peter Schiff

Wednesday, August 05, 2009

Is natural gas under-priced?

A neglected sector that has gotten my attention is natural gas. The last few months have shown resurgence in crude with the global economy stabilizing and demand picking up. Overall crude itself has more than doubled from the lows with nat. gas lagging far behind.

For me the risk on nat gas is on the upside…in other words, I don’t want to risk missing a big upturn. Prices have already fallen from $12 down to under $4 – which is a $40,000 move per futures contract. For my taste the upside potential far outweighs the chance of the downtrend continuing much lower. Gas cannot go to zero, it will always have some value, and many fundamentals can change the present landscape of low, low prices.
-- from "How to Become a Better Investor" by Alan Knuckman

From "cash for clunkers" to "money for McMansions"?

“The economic idiocy behind destroying the engines of the ‘cash for clunkers’ vehicles is almost unfathomable,” writes a reader. “What next -- a ‘money for McMansions’ program in which homes are burned in order to stimulate new home sales and prop up the price of existing houses? Bastiat must be spinning in his grave as we break windows on the most massive scale in history.”
-- from "The Worst is Over? College Costs, CRB Bull Market v2.0, Bank Warning and More!" by Addison Wiggin and Ian Mathias

The era of forced speculation

"The wretched performance of the U.S. dollar and dollar-denominated bonds leaves investors with a simple choice: Speculate on other, riskier assets or watch the value of your dollar-based savings erode.

“So we have the era of forced speculation. It's a kind of dollar exodus. And anything that is not the dollar is a potential promised land. The upside -- if you own oil, base metal and commodity shares -- is that there's a strong tail wind behind your investments.

“The downside is that the speculation may not be based on real sustainable growth. It's just another lending bubble in China piled on the rubble of the real estate lending bubble in America. Bubbles built on rubble aren't stable. That means you may be better off trading the shares, rather than buying and holding and getting whipsawed by volatility. It's worth thinking about.”
-- Dan Denning, quoted by Addison Wiggin and Ian Mathias in "The Worst is Over? College Costs, CRB Bull Market v2.0, Bank Warning and More!"

Look out below!

Bill Bonner has four reasons why housing prices will continue on their downward slide:

"First . . . . This is a depression. Depressions drag down asset prices. Typically, prices become much more reasonable. And then they reach UNREASONABLE levels. House prices have become reasonable. Now they will become unreasonably cheap…"

"Second, waves of resets and foreclosures are still washing over the housing market."

"Third, incomes are falling."

"Fourth, there are too many houses that are too big…and in the wrong places."

Tuesday, August 04, 2009

Ce qu'on voit et ce qu'on ne voit pas.voit et ce qu'on ne voit pas.

Under the government's program, my tax dollars are being diverted to people with cheap cars so they can buy expensive ones. That's just really inefficient wealth distribution, not wealth creation. But government can see it, and that's all that counts.
-- from "How much is that clunker in the window?" by Jonah Goldberg

Monday, August 03, 2009

What's next, a "cash for broken windows" program?

Just one more thing about cash for clunkers… have you heard what the dealers do with the “clunkers”? By government decree, every traded-in clunker has to have sodium-silicate poured in its engine and run until rendered completely and eternally useless. Doesn’t matter if the engine’s brand-new -- less than 18 mpg and it’s destroyed. No resale, no charity, no exports to foreign nations… not even a moment’s consideration to whether the drivetrain could be used by anyone, for anything, anywhere.

All clunkers are then towed to the scrap yard, where some parts are stripped and the rest is smashed and shredded. (And you know that metal scrap will get shipped straight to China… at least someone will use it.)
-- from "A New Employment Crisis, Cash for Clunkers, Buy This Commodity and More!" by Addison Wiggin and Ian Mathias

Shifting auto sales from the future to the present

“The “cash for clunkers” program provides a microcosm of the unimaginable macrocosm,” writes our macro-economic adviser, Rob Parenteau. “Funding for this trade-in program was originally expected to last until October, but the response has been so overwhelming that it’s already running out of money and Congress is rushing to add more cash.

“So here we have it. The government dangles a subsidy worth over $4,000 before the eyes of otherwise tapped-out households. The auto dealers tirelessly hype the offer. Pavlov’s dog hears the bell and starts drooling all over himself. Auto sales are shifted from future sales periods into the present, and voila, the can is kicked one more block down the road while the fiscal deficit winds higher. If we had to capture the policy steroid game in a nutshell, that pretty much sums it up. But it does work in the near term.”
-- from "A New Employment Crisis, Cash for Clunkers, Buy This Commodity and More!" by Addison Wiggin and Ian Mathias

Government stimulus: take from the future and give to the present

You can’t take things from the future without putting them back eventually. The future won’t stand for it. But the feds, in their benighted confusion, fight the problem like a farmer who plows backwards to fool the crows. They think the problem is too little demand. So, they try to add demand…with tax cuts…spending programs…low rates…easy credit…cash for clunkers and other fixes. What do these policies achieve? Do they really increase demand? No, they can’t do that…that would require a richer population with more money to spend. What they try to do is to move demand forward.

The problem, of course, is that too much demand has already been moved forward. But they’re nevertheless trying to steal even more of it…taking away demand that would normally show up two, three, four…ten years from now. That car that you might buy next year, for example. With the ‘cash for clunkers’ program, you might make the purchase now instead of waiting until you actually have the money. Or, that new parking lot behind the town hall. We won’t really need it for a few years, but heck, if they’re giving away money now… Or how about that trip to Europe? With a big tax rebate check, you might decide to take it on your 20th wedding anniversary, rather than wait ’til your 25th.

Real demand increases only when real wages increase. Then, people have more purchasing power. Trying to increase demand by borrowing – or stealing – from the future is a scam at best. Even if it works now, it fails later.
-- from "Sticking With the Basics" by Bill Bonner

This is not the worst recession since the Great Depression

Stock market cycles tend to coincide, more or less, with broad trends in the credit cycle. When people borrow and spend it causes business profits to grow. The businesses then expand; they hire more people; they build more capacity.

Then, when the credit cycle turns, everything goes in the other direction. People stop borrowing and begin paying back. Sales decline. Unemployment grows. Profits fall. Credit contracts.

We are now in the early stages of a major credit contraction. This is not a pause in a credit expansion; it is a change of direction, a credit contraction with all that goes along with it – joblessness, bankruptcies, foreclosures, and so forth.

Bloomberg tells us that the numbers have already been revised – downward. “Worst recession since the Great Depression,” says its headline.

It is the worst recession since the Great Depression because it’s not a recession at all; it’s a depression. And the government is doing its level best to make it a great one.
-- from "Sticking With the Basics" by Bill Bonner

Stocks are cheap at 5 to 8 times earnings

Or on August 15, 2018--whichever comes first!
[S]tocks, bonds and commodities move in broad patterns that last for many years. Not to put too fine a point on it, but they go up and then they go down. Or vice versa. Just looking at the last 50 years, stocks were very expensive in 1966. Then, they dilly dallied around for a couple of years…and headed down. This bear market continued until August 1982. That was when BusinessWeek magazine declared that stocks were not merely ailing, they were dead: “The Death of Equities” was the cover story that month. Naturally, equities got up from their deathbed the very next month and entered the marathon. They ran for the next 18 years.

Well, you know the rest of the story as well as we do. It’s not complicated. The problem is that it takes patience to see it…to understand it…and to take advantage of it. The way to make money in stocks is to buy them when they are very cheap. But you may have to wait for 15-20 years. They’re not cheap towards the end of the bull cycle. Since you never know exactly when it’s going to end you don’t want to buy anywhere near the top. So you wait…and then stocks keep getting more and more expensive. Finally, the top arrives…and then you have to wait another decade or more until they reach bottom.

“Well, why don’t your write The Daily Reckoning once every 20 years?” mother wanted to know. “Just tell them when to buy…wait 20 years…and then tell them when to sell.”

But we’re going to ignore our dear, sweet momma this morning. She just doesn’t understand the complexity of the financial world!

For the last nine years, stocks have been going down (albeit with a major countertrend to the upside). We’ll probably have to wait another few years before they are cheap enough to buy. And when the end comes, stocks will be very cheap – between 5 to 8 times earnings.

When will that day come? Probably around August 15, 2018. Don’t forget to read The Daily Reckoning that day!
-- from "Sticking With the Basics" by Bill Bonner

Buy low, sell high

Richard Russell has given a Dow Theory bull market signal. When you get a signal, he says, you don’t argue with it; you go with it. Stock prices are going up.

We don’t doubt it. The Dow would have to clime to about 10,300 just to give us a classic 50% bounce.

But we are in a depression. We don’t gamble on stocks in a depression. It’s too risky. Instead, we go with the flow. And the flow over the next 10 years or so is probably going to be down.

By our reckoning the Dow hit its high in January of 2000. Adjusted for inflation it’s been running downhill ever since. Investors have made nothing for their trouble. And if we’re right, they won’t make anything in the years ahead either. Instead, they’ll have to wait until stocks are cheap again.

You know, dear reader…investing is really very simple. Buy low. Sell high.
-- from "Sticking With the Basics" by Bill Bonner

A clunker of a government program

Remind me why we should hand over our healthcare to the same gang that brought us "cash for clunkers"!
“The central planners have established a program in which significant wealth (the cars and trucks, most of which are fully functioning) of a society is junked to stimulate demand for products from a government-owned business. This is reminiscent of some of the silliness that issued from the Cultural Revolution. Oh, did I mention we are borrowing the money to pay for it?”
-- from "Grantham Says Sell, Trade of the Next Decade, The Plight of Old White Men and More!" by Addison Wiggin and Ian Mathias

Doug Casey: Go short on bonds, long on precious metals

And don't for get to fear your own government!
It seems to me that the sure bet is to be short bonds,” says Doug Casey. “Interest rates are going way up. Why? There will be tremendous demand for capital, of which there’s a limited supply. Interest rates are the price of capital. So they’re going up for that reason -- and because of the trillions of paper dollars the government is creating, inflation is going to skyrocket. High inflation will itself guarantee high interest rates.

“So the trade of the decade is going to be to short long-term bonds and to go long precious metals (which are the only financial assets that are not also simultaneously someone else’s liability). These are two excellent investment plays, but there are many others…

“However, just as important is political diversification. The main risk you have is your own government. You have to diversify your assets out of the control of your government. This is even more important than picking the right investment today.”
-- from "Grantham Says Sell, Trade of the Next Decade, The Plight of Old White Men and More!" by Addison Wiggin and Ian Mathias

What's the cure for too much credit? More credit?

Stimulus will not produce genuine prosperity. You can’t cure a credit-caused crisis by offering more credit; it just won’t work. But rather than let the system correct itself, the feds are determined to ‘do something!’ What can they do? They can only destroy the dollar – or try to – thereby destroying the value of China’s $1.5 trillion treasure.
>-- from "Showdown With the Bond Vigilantes" by Bill Bonner

How stimulus really works

The whole idea of Keynesian stimulus,[French economist Jacques Rueff] explained, was to cause inflation…which would reduce the real price of labor. In a modern democracy, politics prevents wages from falling. But in a correction, if wages don’t fall people don’t get jobs. Keynes’ didn’t mention it, but the only reason his stimulus works is because it pulls the wool over the eyes of the working classes – reducing their wages by inflation so employers can afford to hire them again. Ergo, no inflation…no recovery in the job market. No recovery in the job market…no recovery in the economy.

But inflation will cost the Chinese plenty. And they’ve let it be known they won’t sit still for it.
>-- from "Showdown With the Bond Vigilantes" by Bill Bonner

Dow 5,000?

As a rough rule of thumb, a bounce can be expected to recover half of the losses from the crash. The Dow went down 7600 points below its pre-crash high. So, we can expect a rebound of about 3800 points – which would put the index back around 10,300. By that measure, this rally could still have a lot of life in it – enough to convince practically everyone that the depression will soon be over. Don’t believe it. This depression is going to last at least a few years…and the bear market isn’t over. The Dow will eventually close below 5,000. At least…that’s our story and we’re sticking with it.
-- from "
Showdown With the Bond Vigilantes"
by Bill Bonner

Sunday, August 02, 2009

Heads up: inflation's a-coming!

The hastily approved macroeconomic schemes of the Bush and Obama administrations will not succeed in promoting lasting recovery because they ignore the microeconomic fundamentals. The direction of spending and hence resource allocation they generate are fragile—they are not consistent with the preferences of consumers, savers, and investors. Therefore, once the putatively temporary stimulus is complete, the corrective forces that are now trying to undo previous resource misallocations will reassert themselves.

In the longer term, the threat of significant inflation looms large. After the U.S. Treasury has incurred the additional trillions of dollars in national debt (at least one trillion in George W. Bush’s response to the crisis and a minimum of one more in Obama’s response) and the Federal Reserve has completed expanding its balance sheet (thus creating new money) by some trillion or more, what will happen? Will the federal government abolish the stimulus programs, raise taxes to pay off the increases in the national debt (or even to service the debt), and cut entitlement programs? The constituencies that will be formed by the stimulus spending will resist. Will the Fed begin a contractionary monetary policy to absorb all the excess money it created in the name of the emergency? That would raise interest rates and the cost of servicing the huge national debt. What is probable is that we will see an effective repudiation of part of the national debt through inflation. The temptation will be all but irresistible to inflate ourselves out of this mess. The economic consequences of the “cure” will be worse than the disease.
-- from "A Microeconomist’s Protest" by Mario Rizzo

Saturday, August 01, 2009

Save during the fat years!

Pharaoh had a dream. He dreamt he saw seven fat cows devoured by seven scrawny, misbegotten cows. He didn’t know what the dream meant, so he called for a young Hebrew man who had interpreted dreams for his master. Joseph told Pharaoh that Egypt was to enjoy seven years of abundance followed by seven years of famine. He told him what he should do about it too. He should store all the grain he could from the fat years…so he could pass it out when the going got tough.

This is a story we all know. It is easy to tell and easy to understand. But modern economists twisted it as though it were an inflation statistic. They maintain that when the business cycle turns down, it’s just like a drought. And they can counteract the effect of the drought by giving the economy stimulus – liquidity – from the public sector.

Trouble is, they missed the point completely. Do you recall any public official urging the public to stop spending so much in the bubble years? Do you remember any Treasury Secretary or Fed Chairman suggesting that the U.S. government run real budget surpluses in the fat years? Does any headline from any paper in the nation mention a storeroom in which grain or treasure was stored for the lean years? Not at all! Instead, the feds encouraged people to eat their grain! Governments ran deficits even during the bubble years, with the biggest deficit in history in 2008, just as the lean years began. Now they have no real grain to offer. So they turn to a reckless, disaster-defying stunt – passing out phony money, like sawdust muffins…

Future generations will watch the video and laugh until their stomachs hurt.
-- from "We Are All Jackasses Now" by Bill Bonner