Monday, July 27, 2009

Rude Awakening - Hammer Time in New York City

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Rude Awakening

The Rude Awakening

Manhattan, New York

Monday, July 26, 2009


* Bank loans shrink as confidence in rally wanes,

* Insider selling tops $3.9 billion since May,

* "Hammer Time" hits New York City and plenty more...


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Joel Bowman, reporting from the scene of the crime...

Only the tourists look twice in New York City. The locals have seen it all.

Yesterday, while enjoying a leisurely brunch at a little café down in the Soho district, your editor noticed a group of strangely dressed twenty-somethings strutting along the sidewalk. A few New Yorkers even did double takes as they passed by. One member of the group, possibly their spiritual leader, sported a large "afro-style" hairdo. Nothing strange about that...except that it was only half a hairdo; he had decided to shave the other half off. The remaining "do" was, of course, bleached blonde. The rest of the posse had some variation of the same style with "flat-tops" and assorted right angles protruding from every head.

One member carried a retro-style "ghetto-blaster" and they all wore baggy pants with colorful graffiti markings. They looked like the cast of a mediocre Spike Lee movie.

"It's the next look," our fashion-astute friend remarked. "People are starting to re-embrace the whole 'M.C. Hammer' thing."

M.C. Hammer, for those who missed his brief act, was a late-80s- early-90s rap star most famous for squandering a huge fortune. "Hammer" had amassed a booty of some $33 million at peak popularity thanks to a few hit songs and some catchy dance moves. With or without the advice of his manager, the rap star dumped $12 of that million into a Californian mega-mansion, complete with two gold- plated "Hammer Time" gates at the entrance to the property and a 17- car garage, which he filled with luxury vehicles. Not one to shy away from his own reflection, Hammer had $75,000 worth of mirrors installed throughout the house. A couple of helicopters were on standby out back in case Hammer needed to be anywhere faster than his Lamborghinis could take him.

Alas, as we all know, "Hammer Time" can't last forever. And, after his entourage of 300 helped the poor rapper blow his loot, Hammer filed for bankruptcy and spent the final years of the millennium as a comical footnote in the book of one-hit wonders.

It was therefore interesting to learn that Hammer Time is back in New York, especially as the city's chart –topping singles (remember the Mortgage Backed Security remix featuring Biggie Bear Stearns and L.L. Lehman Bros.?) are, like, so five minutes ago.

Posse leader (and Federal Reserve chairman), Ben Bernanke, appeared in Kansas over the weekend to defend his group's flailing reputation.

"I was not going to be the Federal Reserve chairman who presided over the second Great Depression."

Bernanke hit back at allegations from the crowd that he had acted irresponsibly by spending billions of taxpayer dollars to prop up Wall Street "beheamoths" instead of allowing them to fail and "making room for the small business."

"It wasn't to help the big firms that we intervened," M.C. Bernanke pleaded. Small business must have wondered why the Fed didn't NOT help them by funneling hundreds of billions of dollars their way.

It would seem too that Wall Street insiders, those with the word on the next big thing, are rapidly losing confidence in the Bernanke economy's ability to churn out another chart-topping single.

Since the start of May, there's been "massive selling" by insiders, to the tune of $3.9 billion vs. just $350 million of insider buying.

Banks too are lacking for confidence. The front page of this morning's Wall Street journal reports that "The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter," What's more, over half of the loan volume in April came from "refinancing mortgages and renewing credit to businesses," not new loans.

Whether it is in the hip-hopping world of entertainment or the entertaining world of global finance, crowd approval can be equally as fleeting. One need only write a few poorly received songs or send an entire economy into the depths of depression and, "bang" just like that you're yesterday's news.

In the column below, Bill Bonner follows the money through what he calls the "greatest stimulus story ever." Bill offered many of these thoughts in his closing address at last week's Agora Financial Investment Symposium in Vancouver, Canada. We hope you enjoy the column as much as we did his presentation...

[P.S. Today is the final day you can grab the entire conference on audio recording for a specially discounted price. You'll find each and every presentation from the main podium on there, including words of wisdom and warning from Doug Casey, Eric Fry, Addison Wiggan and Mr. Bonner himself. But, once the clock strikes 12:01 tonight, the price jumps $100. More Info Here.]

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Romulus, Remus, Stimulus: A Brief History of Monetary Madness
By Bill Bonner

Those whom the gods would destroy are first granted stimulus. When a man wins the lottery, for example, it has a stimulating effect on everyone around him. He usually spends the money quickly - often even before he gets it. But no matter how much he wins, he is usually broke within a few years...often, even broker than he was before he bought the winning ticket.

A recent example from the British press: One of the first lottery millionaires punched a plumber and ended up in court, says The Telegraph. Michael Antonucci won 2.8 million pounds in 1995. But he "blew his entire fortune," reported the paper last month. Now he's reduced to stiffing tradesmen. The amount in dispute was just 400 pounds, what he was billed for a "gigantic ceiling mirror fitted above a whirlpool Jacuzzi." He had the mirror installed when he was still flush. Now that he's broke, he can't pay...hence the altercation.

The phenomenon is little different when it happens on a national or even imperial scale. Any money that you don't earn is stimulus. Without the sweat of honest toil on it, money seems to play a pernicious role in history. There are no examples - none - where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford...and getting into trouble.

The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more, silver, land and slaves. And each led to more conquests, which brought forth more booty. But the stimulus of this booty stimulated only the need for more stimulus. It did not stimulate real prosperity. Instead, it undermined it. First, slaves bought by rich landowners destroyed the free labor market and ruined small farmers. And then, imported wheat from the provinces - paid as tribute - put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food.

In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, made up of displaced small landowners and out-of-work laborers, needed bread and circuses which drained the Treasury.

The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it...with more stimulus. Neither paper money nor the printing press had yet been invented. So, Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock! This extra money did not bring prosperity; it caused price inflation. In a period of about three decades, Rome's consumer price index almost doubled. Then, when output from the mines could be increased no further, Augustus's great nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Of course, Rome itself was played out too.

Another early and dramatic example of stimulus-in-action came in Spain in the 16th century. The conquistadors increased their supply of money in the time-honored fashion - by stealing it. Galleons brought treasure from the Americas; increasing the Spanish money supply substantially and fatally. The Spaniards had so much stimulus that they laid down their tools. Why should they work? They could buy things.

The discovery of a whole mountain of silver - Potosi - in the middle of the 16th century insured a supply of stimulus that would last for nearly a century. Results? Predictable. Inflation. In the "price revolution" from 1540 to 1640 the cost of living went up throughout Europe. In England, for which we have the most reliable data, prices went up 700%. And Spain, though it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next 10 decades. Spain, like Rome, welcomed stimulus; it never recovered from it.

Now we turn to the biggest misadventure in stimulus ever - the period after the United States 'closed the gold window' in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. After 1971, on the other hand, the sky was the limit - especially in the United States of America. The US could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. The Fed's adjusted monetary base grew 900% since 1985, and more than doubled this year alone. Total US debt tripled - as percent of GDP.

As it did with Rome and Spain, more and more stimulus stimulated spending and speculation, but not real output. During the 2001-2007 period, for example, credit in the United States increased by $22 trillion. The nation's GDP increased only by $4 trillion. For every extra dollar of output, Americans took on $5.50 of debt.

But now the bubble has blown up; the feds are on the case. What do they offer? More stimulus! Cometh a report this week that $23 trillion has already been put at risk in the various bailouts and credit guarantees. As for the US public debt, it is expected to increase until the country goes broke.

Future economic historians will look at these staggering efforts with awe and wonder; they will wonder what the Hell we were thinking.

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[Rude Endnote: After traveling 15 time zones east over the past 10 days, your editor is almost halfway back on publishing schedule. With an early night tonight and some peace and quiet here in the city, we'll be back to our usual, early morning delivery tomorrow. (Thanks for your patience!)

In the meantime, if you would like to have a word or send us a comment, please do so to the address below. Otherwise, we'll catch you tomorrow.

Until then...


Joel Bowman

The Rude Awakening

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