Tuesday, August 25, 2009

The Rich are Taking a Wailing; Rob Parenteau Looks to the Beach for a Sign of the Times

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The Daily Reckoning
Tuesday, August 25, 2009

  • The rich are getting beaten up...
  • Now the homeowners' backs are up against to the garden wall...
  • It's the way of the world: losers become winners and vice versa...
  • Rob Parenteau looks to the beach for a sign of the times...and more!

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    The Rich are Taking a Wailing
    by Bill Bonner
    Ouzilly, France

    Pity the poor rich! Pity the poor! Pity us all!

    Here at The Daily Reckoning, we always take the part of the humble...the despised...the oppressed...and the misbegotten.

    Today, that means the rich...

    Yes, dear reader, the rich are getting beaten up. Maligned. Mistreated.

    Their governments all have in it for them...taxes on 'the rich' are rising. The Democrats are talking about financing the entire nation's health care system on the backs of the super-rich.

    And prosecutors and politicians are targeting their salaries. No more million-dollar paydays...not with the feds looking over their shoulders. Oh...and their investment earnings are down too. The dividend yield on the stock market is scarcely 3% - try living on that, you rentiers! As for the 10-year T-note, the yield is only 3.5%.

    And capital gains? Fugetaboutit. Stocks have been rallying (bouncing) since March 9th. The bounce has helped investors recover about 45% of what they lost. But, overall, there have been no gains in the stock market for more than 10 years. None. Factor in the effect of inflation and the story is worse; investors have lost about 25% to 30% of their money.

    But everyone is pointing a finger at the rich - as if they were to blame for the financial debacle of the last few years. Some economists even blame the "growing inequality of incomes" as a cause of the crisis.

    This is completely unfair. The rich didn't cause the problem - they merely took advantage of it as best they could. It was a time when 'financialization' was on the rise...when money made money, at least in theory. Speculation and lending paid off. Obviously, you have to have money if you're going to lend or speculate. Some of 'the rich' - those in the financial industry - cleaned up.

    But come the revolution of '07-'08 and the rich lost their heads. Who lost $50 trillion in stock and real estate? It wasn't the poor. Whose derivative positions went belly up? Whose stocks went down? Whose mega McMansions got re-priced as cracker shacks?

    On this last point, we have new information. The housing crisis may have begun in the subprime trailer part of town. But now it's in the older suburbs - it's the prime and super-prime homeowner whose back is to the garden wall. A third of foreclosures in the 2nd quarter were of houses financed by prime, fixed-rate mortgages. Of prime borrowers, 41% are expected to be underwater by 2011, says a forecast from Deutsche Bank - nearly three times as many as at the beginning of 2009.

    And now nearly half of all jumbo mortgages are underwater. Yikes, the rich...and bourgeois classes...are up to their necks.

    [If you thought the subprime fallout was bad, just wait. It's only going to get worse in the coming year, as the risky 'option ARM' or 'Alt-A' mortgage loans begin to reset. But there are some 'downside' plays you can make, that could easily protect you from an even deeper downturn...and allow you to see gains - while everyone else is losing their shirts. See how here.]

    And now this sad report from The New York Times:

    "Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

    "Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price . In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage."

    (More on this in today's guest essay, below...)

    And so, we pause to wonder. What does it mean? Where does it lead? Who gives a flying fig?

    More...after the news:

    "Here's an interesting credit crisis byproduct," writes Ian Mathias in today's issue of The 5 Min. Forecast. "The 50 million current social security recipients probably won't see any extra SS income until 2012. In fact, millions on the government dime might see their monthly checks shrink.

    "It all boils down to COLA - the government's cost of living adjustment. Since consumer prices are - in theory at least - deflating, the Social Security administration announced this weekend that they do not plan on a COLA for the next two years. Should that forecast come true, it'll be the first time that's happened since at least 1975, when automatic increases were first implemented.

    Social Security and Cost of Living Adjustments

    "That will probably equate to a net monthly loss for millions of beneficiaries. Medicare prescription drug premiums are on track to bump up a few bucks next year - a major cost for most retirees. And until the Obama Administration jams through their healthcare reform, medical expenses will continue to rise as well. Who knows... they might go even higher after Obamacare. Either way, tens of millions of seniors are about to face stagnant income and rising monthly costs...could get politically interesting."

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    And back to Bill, with more about that flying fig:

    At a certain level, all of this concern about who earns what...and who has what...is just so much envious claptrap. For most of us - who have enough to eat and a roof over our heads - money is just sport. We aim to win, just as we would try to win a croquet match. But what difference does it make?

    We don't know. So we turn back to the game. How can we get more wealth than our neighbors?

    And here...a bit of perspective...

    When the Great Khans road across the heartland of Eurasia in the 13th and 14th centuries, nothing could stop them...or so it seemed. Their soldiers were practically born in the saddle. From childhood they learned how to ride, and fight...and little else. Europe's population, meanwhile, was more settled...and more soft.

    But Europe was hardly the brightest bauble on the tree. The Mongols had their pick. West - to conquer Europe. South - to conquer India. Or East - to conquer China.

    They attacked Europe, but only half-heartedly. Instead, they devoted most of their efforts to India and China. Why? India and China were richer! There was more stuff to steal.

    It's hard to make comparisons. But, at the time, the East was at least as rich as the West. But then, along came the Industrial Revolution and the East was left behind. People in the West learned to save...and to invest their savings in capital improvements - machines, factories, canals, railroads, mines, ships and all the other things that allow people to be more productive. This extra production made them rich. Not to put too fine a point on it, but they could make more stuff!

    Then, with the ability to produce more and better stuff came the ability to produce the kind of stuff that you can kill people with. So, pretty soon, they were making machine guns. And pretty soon, the horse- mounted warrior of the steppes was as archaic and irrelevant as the Roman legions. He could still charge with great élan. He could still raise his saber and his bow...providing a rich subject for artists and poets. And he could die so well! All you had to do was to open up with your new, factory-made 50-caliber machine gun and down he went.

    But what goes around comes around. Who's saving now? The Chinese save 25% of their earnings. In America, the rate is rising...from zero to five percent!

    Who's building factories? Who's harnessing the industrial revolution? Who's getting rich? Who's innovating? Who's building cities?

    Who's the world's biggest creditor? Who's got the biggest pile of money?

    Oh, dear reader...you already know the answer...

    "West will languish; Asia will lead..." says a headline in Barron's this week.

    And what's this?

    "China commercial property sales higher than US," says a headline at Bloomberg.

    Yes, dear reader...it is the way of the world... Losers become winners. Winners become losers. Day yields to night; summer gives way to winter. Life goes on...always as it always was...but never the same.

    And we leave you with that philosophical reflection...and go back to the financial world...

    [Speaking of winners...our commodities man, Alan Knuckman, recently led a select group of readers to a 72% gain on coffee call options, an 80% gain on silver call options, and a 67% gain on Canadian dollar call options - in just one week! See his track record for yourself, by clicking here.]

    The nights have turned cooler. And the hot social season is giving off heat...like a pond in the autumn. Last night we went to a dinner under the stars. Without mentioning names, the crowd with mixed...and interesting: the widow of one of the greatest admen of all time...a descendant of Jacques de Liniers, who sank the English fleet at the battle of La Plata, thus protecting the Spanish possessions in Argentina, and a few members of the world's most celebrated banking family. What were they doing in the middle of nowhere in France?

    "There's no explanation for it...I was surprised as you," explained one of our companions. "You don't expect it. The whole area is as dead as a doornail 10 months of the year. Then, in the summer it really comes alive. I've been to several cocktails...and several dinners...and concerts. Last night, there was an English choir - a big choir of more than 30 people - performing at the church in Montmorillon. There's something going on almost all the time...

    "Maybe it's because the countryside is so quiet. And there aren't many restaurants. Not much to do. So when you come here for the summer you just have to organize something yourself.

    "The nice thing about it is that we all have friends here that we see nowhere else...and only once a year. So, we catch up.

    "And I hear your children are making friends," she said with a wink.

    Word gets around.

    "Yes, it has been a summer of awakening, I think."

    Our sons have discovered that the little girls across the street have grown up. And the little girls across the street have discovered that they can charm young men. They hardly knew each other until this summer - though we've all been practically next to each other for nearly 15 years. But we were only here in the summer. And they were only there in the summer. And until this summer they never took much interest in one another.

    This summer, they're going back and forth from one house to another. They swim in our neighbor's pool. They ride horses at our house. They play tennis. And it goes on all-day and late into the night.

    We left the party at about 1AM. When we got home, we spotted a campfire beside the pond.

    "Let's go see who's still up," said Elizabeth.

    "Do we dare? I don't think they want us intruding..."

    "Let's do it anyway..."

    Next to the gypsy wagon, there was a group of about 10 teenagers. There were some we didn't recognize. There were our three sons...and a couple of their friends. And there were the girls from across the road, with their friends. And one of their brothers, too. One of our sons was sitting very close to one of the girls from across the road - a charming 17 year-old. In the light of the campfire, he looked very pleased with himself.

    "Don't you girls have to go home?" we asked.

    "At 1:30 AM..." they replied.

    It was 1:25. Why waste a minute...when you are 17...and the summer is coming to an end?

    Until tomorrow,

    Bill Bonner
    The Daily Reckoning

    P.S. We recently had an open call for bloggers who want to review the newly updated editions of Empire of Debt and Financial Reckoning Day (both co-authored with Addison Wiggin). The first of these reviews was posted today...here's a snippet:

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    The Daily Reckoning PRESENTS: Signs of the times are popping up everywhere - you just have to keep your eyes open. And on a recent trip to a Maine beach town, Rob Parenteau kept his eyes peeled...and made some interesting discoveries. Read on...

    Analysis by Anecdote
    by Rob Parenteau
    San Francisco, California

    Years ago, a colleague of ours who covered Asian economies suggested no matter how closely he analyzed the data flow and queried the key policymakers, he never felt like he had a good read on the situation until he walked around the foreign cities he was visiting with his eyes wide open.

    Analysis by anecdote has its dangers. One instance may not be representative, for example, of what is going on in the larger picture. However, we do recall back in the '80s, there was one brokerage firm in the South that kept a running count of the number of dead chickens on the road to use as a proxy for GDP. The idea was the stronger the economy, the more trucks stacked with crates of chickens would be heading to the slaughterhouse, and hence the more crates would be falling off the back of trucks. Estimating GDP by road kill volumes struck us as a bit of a reach, but if memory serves us correctly, this anecdotal measure did a lot better than some of the Wall Street economists we followed at the time.

    The risk of analysis by anecdote is that by nature, our minds tend to gravitate toward confirming our existing opinions and perspectives. "Confirmation bias" is the label the behavioral finance types have applied to this recurring tendency in our thinking. Once our minds make sense of a confusing jumble of facts, we inadvertently tend to pay attention to the information that corroborates the initial story. As any marketing professional will attest, we also tend to be persuaded more easily by compelling images or entertaining stories than by facts and figures. For investors, these built-in perceptual biases can lead to building too large a position in one investment theme or hanging onto one position for far too long.

    We have been detailing growing evidence of a turn in the US economy in recent months. The bounce in existing homes sales reported last week is yet one more sign that even in the most bombed-out part of the economy, there is some activity stirring. The median home price, which has fallen 28% from the July 2006 peak, remains above its April 2009 lows. And in the Northeast, the National Association of Realtors reports existing single-family home sales have risen 44% from their January lows.

    US Home Sales

    Judging by the strong gains in US equity indexes on this release, this is precisely the type of confirmation many equity investors have been seeking regarding the prospects of a V-shaped recovery. So while on vacation at a spot on the ocean south of Portland, Maine, that we have visited for better part of four decades, we decided to walk around with eyes wide open.

    Our destination was an old mill town that thins out down the river- wooded areas that lead to some sweeping beaches. The beachfront is laced with light gray beach sand the consistency of powdered sugar that fills in between bold, seaweed-strewn granite outcroppings. Lobster traps bob just off the coast, and at daybreak, the lobstermen are out pulling their traps. A few miles south, the Bush family compound lies behind a gated fence, and weathered, cedar-shingled vacation homes along the picturesque seacoast stand in stark contrast to the nitty- gritty core of the town upstream. Such are the intriguing contrasts of New England: historical legacy abides by natural beauty.

    Walking around, eyes wide open, we noticed more of the vacation homes had for sale signs on their front lawns than last year. Last summer, the signs were standing mostly on the lawns of the inland locals who had no doubt been taunted by the siren song of liar loans in order to make the leap from renting to owning - probably sometime right around 2006, at the peak of the market. Now the gentry, who often try to pass down their seaside vacation homes through the generations, appeared to be distressed sellers as well.

    More striking, in the urban core of the town, several miles upriver from the coast, we had never seen so many for rent signs. The last of the mill jobs had just been eliminated, and much of the mill complex at the center of town had been turned into condos or stripped down to the brick walls (in a somewhat haunting see-through condition) in preparation for a risk-hungry developer to create condos out the remaining shell. Either a glut of rental properties has developed in the core of the town or families are doubling up as the unemployment rate has climbed.

    We noticed the weakness in the last housing starts report did come from the multifamily or rental side, and rents as recorded in the CPI did fall in July relative to June, so this may all be symptomatic of the next stage of the real estate workout. In the college town we have lived in for nearly two decades on the West Coast, which should be brimming with student renters, we have also noticed a blossoming of for rent signs. We previously wrote that off as the inevitable result of state budget cuts leading to dramatic cuts in fall enrollment, but perhaps this initial conclusion was too sanguine.
    "Most striking was the absence of people on the beach during the weekdays. Even in the depths of the 1973-5 recession, we cannot recall the beach seeming so sparsely populated."

    The shack near the beach where we remember our father sneaking off to indulge in the guilty pleasures of a chocolate shake and fried clams had closed after decades of operation, as had the fish purveyors' shop in the village near the mouth of harbor. Oddly enough, a real estate office has taken the place of the fishmonger. Off on the water, lobstermen were reportedly cutting each other's trap lines, sinking each other's boats and occasionally pulling guns on each other. Fuel prices were up, but the wholesalers that purchase the lobsters were offering rock-bottom prices for the catch, leaving the lobstermen in fairly desperate straits.

    On the main beach itself, which curves up in a two mile long crescent before grass-covered dunes, French was spoken under every other collection of beach umbrellas. The strong Canadian dollar is getting more mileage stateside - apparently enough that the humble bungalow our family vacationed in back in the '70s had been bulldozed by a Quebec- based steel magnate and replaced with a barn-sized trophy house, which only paled in comparison with the trophy mansion next to it, built a year or two prior, by a US pharmaceutical company CEO.

    Most striking was the absence of people on the beach during the weekdays. Even in the depths of the 1973-5 recession, we cannot recall the beach seeming so sparsely populated. Maybe the soggy weather had encouraged more people to cancel their vacation plans earlier in the summer, or maybe "staycations" have come to dominate as households try to save money and find diversions closer to home.

    What are we to conclude from walking around with our eyes wide open? The recent upturn in the economic data can (and we suspect will) be used to confirm the V-shaped aspirations of professional equity investors in the months ahead. Without it, driving US equity indexes higher, after a 50% move off the bottom, would surely prove problematic. It will also be used by policymakers to claim victory with their extraordinary and unconventional policy measures. Chairman Ben Bernanke needs to be able to declare some sort of victory if he wishes to be reappointed in January of next year. With the health care proposals literally on the ropes in many town meetings, the president will need to claim victory elsewhere to regain traction in the polls going into 2010, which will host midterm elections.

    But if this one New England town is any indication, beyond the V-shaped impression that "Cash for Clunkers" pump priming and other influences will leave over the next couple of quarters, there is plenty of economic restructuring to be accomplished beyond the V impression. The legacy of the housing bust will linger long over this area. More lobsters might get ordered in Manhattan, but living large will remain out of reach for many households that cannot access credit anywhere near the fashion they once grew accustomed to, but now regret. Reinventing growth without reliance on private credit bubbles is undoubtedly the task ahead, and we suspect this will become increasingly apparent once the sugar high of policy stimulus wears off.

    Best regards,

    Rob Parenteau
    for The Daily Reckoning

    Editor's Note: Rob Parenteau edits The Richebächer Letter, founded by the late Dr. Kurt Richebächer. Each issue provides an examination of the world's currency and credit markets. Previously, he spent 24 years as Chief US Economist and Investment Strategist for RCM Capital Management, an asset management firm. Rob holds a CFA and was appointed a Research Associate at The Levy Economics Institute in 2006. His papers have been presented at the Political Economy Research Institute, the Seventh and Eighth Annual Post Keynesian International Workshop, and the Eastern Economic Association.

    Get Rob's latest report here.

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