Thursday, August 6, 2009

A Financial World Gone Mad; Bill Jenkins on the Abundance of Illogical Optimism

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The Daily Reckoning
Thursday, August 6, 2009

  • The financial world is still suffering from a Bubble Era hangover...
  • Maybe this is the Chinese Century - but maybe not...
  • The dollar is low and America's cheap...but for how long?
  • Bill Jenkins on the abundance of illogical optimism...and more!

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    A Financial World Gone Mad
    by Bill Bonner
    Ouzilly, France

    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.

    Or, perhaps we should say...a financial world that has still not recovered from the Bubble Madness of 2002-2007.

    One bubble begat another. We have previously reported that the Bubble Era was over. Because the machinery that made it possible - the bubblelized financial industry - was broken. Well, we were only half right. The finance sector has exploded. Bear Stearns was sold for peanuts. Lehman Bros. went broke. Merrill was forced into a shotgun wedding with the Bank of America; with Hank Paulson holding the firearm. JPMorgan is still in business. So is Goldman. But now we know that even Goldman might have gone under if Paulson - ex-Goldman man - had not engineered a stealth bailout. He brought the feds in to save AIG, and in the process he saved his old alma mater too...AIG's biggest trading partner, Goldman Sachs.

    And now Goldman is in the news almost every day. It reported spectacular trading results for the quarter, lifting the entire world stock market. What's good for Goldman must be good for the whole world economy, investors reasoned.

    Then it was reported that Goldman made its money in a variety of ways - none of which had anything to do with providing genuine service to the economy. Goldman made a fortune on the feds' own money raising, it came out. And then it came out ...Goldman was making billions by trading at lightning speed - clipping investors for fractions of pennies each time a transaction passed through the markets.

    Goldman... Goldman... Goldman... The Italians think Goldman runs their country. They've got the top three posts in Rome...Premier Romano Prodi is an ex-Goldman guy. So is the headman at the Treasury. And the chief of the central bank, too.

    They think Goldman is like a cult...a semi-secret society of insiders with the power to rule the country - surreptitiously. Like the free masons...the Jesuits...or the Illuminati.

    Goldman has its boys in important posts in the United States too - but not at the same level as in Italy. Tim Geithner is not a Goldman graduate. Neither is Ben Bernanke. But both have plenty of input from ex-Goldman associates, colleagues and handlers.

    We confess an interest - we have relatives working at Goldman. But we doubt that Goldman rules the world. Just look what they said and did over the last couple of years; they had no more idea of what was going on than anyone else. No, they don't rule the world...but they do manage to persuade it in their direction from time to time...

    During the bubble years, they urged consumers, bankers, and investors to speculate...and to ruin themselves. Naturally, Goldman made out a bandit.

    And now Goldman guys urge the government to ruin itself too. Yes, dear reader, the Bubble Era is not quite over. Now, there's a bubble in government debt. Here as well, Goldman makes a bandit. The more the feds borrow...the more debt there is to buy and sell. And the more the feds stimulate...the more acts of reckless speculation there are to finance.

    And the more money Goldman makes...the more politicians the firm is able to buy. Of course, they welcome campaign contributions.

    And of course, Wall Street is spending record amounts in lobbying. But the real appeal is the lure of being able to join Goldman itself...of being able to spend some time in Washington...pushing business Goldman's way...and then cash in big by joining the firm and getting a piece of the action...

    [Still waiting patiently for your 'piece of the action'? Looks like the wait is over - due to a legal 'loophole' you could be getting your slice of the stimulus pie in the mail as soon as August 19. Don't delay...learn how you can get your first 'bailout' income check by clicking here.]

    More on bubbles, below. But first, we turn to The 5 Min. Forecast:

    "Looking for a raise this year? Better work for the government," writes Ian Mathias in today's issue of The 5.

    "In another sad sign of the times, Washington DC is now the number one metro area in America for those seeking a salary bump, says a study from WorldatWork, a group of HR companies. 77% of companies operating in the District plan on giving raises this year, says the group, second only to the Tampa area. Of those receiving a raise in DC, it'll average 2.3%, the highest in the country.

    "We can't say exactly what our forefathers had in mind when they spawned this union, but we really doubt it was a table like this:


    Ian writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments-in five minutes or less. It's a free service available only to subscribers of Agora Financial's paid publications, such as the Hulbert #1 Performing Investment Letter, Outstanding Investments.
    And back to Bill, with more bubbles:

    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 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.

    [In other words, if you're placing any faith in a whole new Asian miracle, you may want to reconsider. Especially if your wealth depends on it, as it might - in more ways than you might imagine. Learn about what simple 'super shield' moves you can make to protect yourself and your money by clicking here.]

    Barron's says that "The Greenback is Broken." True, the dollar has been losing ground as the stock market gains it. Yesterday, it took $1.44 to buy a euro.

    "I was amazed at how expensive everything is in Paris," said son Will. "You go into a shop to buy a few groceries... You expect to pay about $12. Instead, the bill comes to $40. Or, you stop to have a cup of coffee and a croissant. It costs you $10. I don't know how you can afford to live in Paris."

    Will lives in Buenos Aires...with frequent visits to in-laws in Florida...

    "You know, it used to be so much cheaper to live in Buenos Aires than just about anywhere. But now, I think the prices are about the same as in Florida. Everything seems so cheap in Florida. And you can make some very good deals on property...

    "Remember that house that I bought in 2006? You warned me not to do it. But right after I bought it people were coming to my door asking if they could buy it. One guy offered to write a check for $600,000. Then another guy offered $675,000. I began to think I really had something hot.

    "Of course, then the market crashed. Now, I'm thinking of selling it for $300,000 - if I could find a buyer.

    "But that's in South Florida...only about an hour up the coast from Miami. There are places in the US where things are really, really cheap. In Iowa, maybe, or Arkansas...or Michigan. You can get a nice house for less than you'd pay for a garage in Paris. From that standpoint...the US seems like the place to be. You can live so cheaply. And fairly well, but quality of life is another thing..."

    The dollar is low...America is cheap. Barron's is probably wrong about the buck. It's not broken - not yet. Our guess is that it will rise when stocks crash this fall.

    We've thought a lot about quality of life. It is not a constant, fixed thing we conclude....

    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.

    Living in rural Iowa probably wouldn't suit us. We don't have the stomach for it. We couldn't draw enough nourishment out of such lean meat. We need more stimulation.

    We like Paris for the street scenes. Everywhere we look, we see something we like to look at - people, buildings, shop windows, streets, bridges, and river boats. Same thing out here at our summer place. We work in an octagonal office that sits in the park. No matter what window we look out of, we see something that pleases us. A stone barn with a red barrel tile roof. Those big limousine cattle grazing in the field. And there's the house itself...a conglomeration of a fortified farm house from the middle ages with a Renaissance-style faux-chateau cobbled onto it in the 19th century. And there is our grandson...16 months old...playing in the gravel...

    Wait - what's he doing? Uh-oh...he's eating the gravel.

    Gotta run...

    Until tomorrow,

    Bill Bonner
    The Daily Reckoning

    P.S. Calling all bloggers...we'd like to offer you a free copy of the newly updated Financial Reckoning Day Fallout to review for your blog or website. All you have to do is shoot us an email at with your blog URL and physical address.

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    The Daily Reckoning PRESENTS: As we watch the recovery trade unfold, we know it has been largely supported by the rise in equities - especially the ones here in the United States. But Bill Jenkins believes there are a number of pronounced reasons why this rally will fail. Read on...

    Illogical Optimism
    by Bill Jenkins
    Pylesville, Maryland

    First, a historical note...

    US equities have just come off their best July since 1989. Overall, the market is up over 8% for the year.

    But if we look backward (after all, hindsight is 20/20), March 1989 also saw a huge run up. It was followed by an even stronger rally in July, during which volume dried up. It appears the same is happening now. What came next in 1989 was a big sell-off in September, followed by an even greater one in October.

    Don't look now, but history tends to repeat itself.

    Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP? No.

    We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans do not return to work, THERE IS NO RECOVERY. Memorize this line. Post it on your refrigerator, your mirror, your dashboard - wherever!

    So maybe now you're asking yourself, "Aren't the unemployment numbers getting better?"

    Well, let's see...

    Verizon - 8,000 jobs cut
    Motorola - 7,000
    Microsoft - 5,000
    Untied Technologies - 8,000
    HSBC - 6,100
    Anglo American - 19,000
    Avon - 2,500
    Goodyear Tire - 5,000
    GM - 10,000
    Nissan Motors - 20,000
    Panasonic - 15,000
    PNC Bank - 5,800

    Many of these will be released in the third and fourth quarters. No doubt there are plenty more we haven't heard from yet. Frankly, I couldn't list the thousands of companies and millions of jobs lost in this write-up. That's just a sampling. But let's get to some hard and fast figures.

    According to Seeking Alpha, 13 million Americans will lose their benefits by years' end. So if unemployment claims are falling, people must be getting back to work. Right?


    They are exhausting their benefits. There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Is there any wonder why the Administration is NOW saying they will have to raise taxes on the middle class to fund their programs?

    Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

    Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

    And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

    As I have said before, unemployed people don't spend money. They don't buy technologies, or durables, or even pay their mortgage. Bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

    So who is going to pay for anything when they are struggling to buy groceries?

    If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

    And we have seen this corollary frequently in recent months. When stocks and risk assets fall, so do the currencies, and the dollar rises. We are a long way from being out of the woods on this retracement.
    "When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet."

    So why do I cite all this doom and gloom about the United States? Believe me, there's plenty more to go around. Because the fact of the matter is this: When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet.

    While some are talking of a recovery, others are talking about a possible double-dip recession - and I'm reasonably sure we are in for a "multi-dip." It is hard to be bullish on the dollar for any reason, but if the market drops again, which I believe it will, funds will rush right back to the dollar (and the yen).

    So far, we have seen range-bound trading in the recent months as currencies search for direction. This week the big news was the US GDP. Risk currencies rallied on the back of it, but for 24 hours they have remained flat as there were no buyers to move it higher.

    Also, the market got awfully jittery on the release of the consumer spending news yesterday. The manufacturing euphoria expended itself, and now we find out that personal income has dropped 1.4%, the biggest fall in four years. Inflation-adjusted spending fell 0.1%. The real dark spots in the economy have started showing back up. The stimulus has worked its way and done its best, but its effects are now negligible. Even though there are signs of a "recovery," it isn't going to be one without the consumer. If he's exhausted his means of spending, or is just afraid to put out any money, the recovery trade will be doomed. And that means dollar strength once again.

    But for now, we will have to trade with what we have. It is hard to argue with the markets, even with the most compelling of reasons. A person may as well try to stop an ocean wave from breaking onshore.

    And as we look ahead, we must always be mindful of what may be. As numerous talking heads were saying on Tuesday of this week, "We have turned the corner... things are going to get better - if they don't get worse!"


    Bill Jenkins
    for The Daily Reckoning

    Editor's Note: Bill Jenkins, founder and managing editor of Master FX Options Trader, knows the Forex currency markets inside and out. After 20 years and a string of losses following other people's crack advice, Bill created his own system for cashing in on tiny currency fluctuations between the British pound and the US dollar.

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