A 21st Century Depression by Bill Bonner London, England
The inflation/deflation debate is hot... It crackles and pops like a pine fire. But it gives off little helpful light. Abe Lincoln may have read by the light of an open fire. But when tried it, we singed our eyebrows. It made us suspicious of Old Abe; maybe he wasn't quite as truthful as he pretended to be. Later, we realized he was a mountebank. But that's another story...
Today, we light a candle and try to interpret the shadows on the wall...
Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.
Will the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency in a time of deflationary trouble?
According to the papers, the feds have already done it. "Fed says recovery underway," says a headline from yesterday's press.
Another headline tells us that the feds are considering how and when to ease themselves out of their interventions. But what would the economy look like after they stopped meddling? Just look at auto sales. People bought cars when the feds bribed them to do so. When the bribes stopped, so did car sales. Now, the clunker program has ended and spiders are busy building their webs in showrooms again. Sales fell 38% from August to September...to a 28-year low.
House sales too have been goosed up by the feds' tax credits. According to an estimate we reported yesterday, 350,000 new house sales since January were assisted by federal intervention - about 80% of the total. What will happen when this program ends in November? Hey...let's guess...uh...housing sales will fall, right?
And speculators are worried about what will happen when the feds stop their intervention in the financial industry, scheduled for December. Thanks to taxpayer money, the bankers were spared the consequences of their own stupidity. Instead, taxpayers will pay for their mistakes. No one is particularly upset about it. The taxpayers don't know what is going on. And bankers are happy to continue living in the style to which they have become accustomed. Reuters reports:
"You wouldn't know it by his pay stubs, but Jiang Jianqing heads the world's largest bank.
"Jiang, chairman of Industrial and Commercial Bank of China, made just $234,700 in 2008. That's less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world's fourth-largest bank, JPMorgan Chase & Co.
"The contrast illustrates the massive differences in pay among the CEOs of the world's top banks. The compensation of the CEOs of the largest US banks towers above what's paid to banking chiefs in other parts of the world, according to a Reuters analysis of pay at the 18 biggest banks by market value.
"The United States is home to four of the nine largest banks in the world - JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs.
"China, for example, boasts three of the world's four biggest banks, yet the leaders of those banks - Industrial and Commercial Bank of China, China Construction Bank Corp and Bank of China - are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per year."
If America's make-believe capitalists want to pay their CEOs exorbitant wages, that's their business. A pox on all of them. But in come the feds...and now we're all paying the price. And if the program ends in December, as scheduled, we'll get to see how far the economy without taxpayers' money in the gas tank. Let's see...it comes to a complete stop?
But no matter how malign and imbecilic the feds are, the public is rooting for them. People think Bernanke has avoided a 'Second Great Depression,' and that the government has rescued the economy. Now they see nothing but clear highway ahead...perhaps with a little bump from time to time.
What's ahead? We don't know. Neither does anyone else. There is no precedent. Never before has a major central bank reacted so recklessly to a market correction. Never before has the monetary based exploded so violently. Never before have so many people with so many bills to pay had to face such a downturn.
But amid all the confusion, uncertainty and noise...your editor is calmly, cheerfully and confidently awaiting a depression. Yes, dear reader, we don't know what markets will do. We don't know how much gold will sell for next year...or what the actual GDP will be. But when we look at the shadows...we have a strong hunch that we are entering a depression...and that we won't get out of it soon.
That said, we caution readers not to expect soup lines or people selling apples on the street corners. This is a depression a la 21st century. A depression with iPhones and Twitter. This is NOT your grandfather's depression. Keep reading...
[Unfortunately, this 'recovery' is just a figment of the feds' imagination. And unfortunately for you, this means that you are losing money hand over fist - and you may not even know it yet. It's time to implement your financial defense strategy, which you can find here - for free.]
More news from The 5 Min. Forecast:
"As we forecast, the Fed took control of the market yesterday," writes Ian Mathias in today's issue of The 5 Min. Forecast. Roll the videotape:
"So what got traders in such a tiff? Heh, we could think of a couple different things. First, here's the quick and dirty version of the Fed's announcement:
'Economic activity has picked up following its severe downturn,' but 'economic activity is likely to remain weak for a time.'
The Fed will continue it's plan to buy $1.5 trillion in mortgage backed securities. They're now looking to end this program in the first quarter of 2010, later than originally planned.
Planned purchases of Treasuries will be completed by October, at a cost of $300 billion
Rates stay at near-zero and will stay 'exceptionally low' for 'an extended period'
'Inflation will remain subdued for some time'
"The mere thought of the Fed leaving the mortgage backed security market likely caused much of the stock sell-off. Bernanke and his brood have been relentless consumers of the housing backed garbage this year:
"Of the $8.9 trillion mortgage backed securities market, the Fed will own almost 17% of 'em when it's all said and done. Of MBS issued since the recession began, The New York Times says the Fed owns up to 80%.
"So now the Fed says it wants out by March of 2010 - right at the time, we hasten to add, that the infamous second wave of ARM resets is supposed to crash ashore. When they abandon this binge, who will belly up to the bar and take their place? Will the Fed then become a net seller, or will it just let these toxic assets rot on their balance sheet? How could mortgage rates possibly stay so low? Maybe we'll have to choose between another MBS crisis or selling the US housing market to China...assuming they even want to buy it."
You can get The 5 in your inbox 5 days a week, free of charge. It's one of the many perks that come along with being a subscriber to Agora Financial's paid publications, such as Options Hotline. This publication has been on an epic winning streak: no losing picks in 2009...2008...or 2007! Learn how you can multiply your options trading portfolio at least TEN times this year - guaranteed, or your money back.Get all the info here.
And more thoughts on the depression:
It's not your grandfather's depression, but it has many elements that your grandfather would recognize. This from David Rosenberg:
"Frugality theme is secular, not just cyclical."
With so much noise...and so many distortions...it's hard to tell what is really going on...and impossible to know how the markets will react. Still, there are some patterns that make sense. After a long period of credit growth, credit is now shrinking. At least in the private sector. And that is not likely to change. Well, it's not likely to change unless the Fed goes nuclear. If they push the hyperinflation button, the whole picture changes radically and immediately. But that's not likely to happen any time soon...so let's ignore it for the present.
What we have before us now is a consumer economy where the consumer is cutting back. Despite the odd shadow shapes on the wall, that means a slowdown in hiring, business revenues and real prices...and tax revenues.
New York says its budget deficit will grow to $3 billion. And over on the sunny West Coast, California is selling $8.8 billion in notes to try to close its deficit.
Apartment rents in New York City are falling. Credit card defaults hit a new record. And The Wall Street Journal says that holiday jobs in the retail sector are likely to be scarce.
Not to mention the wave of mortgage loan defaults that is headed our way - and is already in progress.
[All of those things are about what you'd expect...and things that could batter your already existing wealth - if you let it. This wave of defaults is going to have an impact on your assets no matter what you do...unless you set up a 'super shield' that will protect you - and build up your portfolio. See here.]
Another thing you'd expect is a decline in America's relative economic power and political influence. Richard Duncan, along with your editor, has been following the story. Bloomberg reports:
"US budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of The Dollar Crisis.
"The US has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.
"In The Dollar Crisis, first published in 2003, Duncan argued that persistent current account deficits by the US were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.
"'The bad news is at the end of a 10-year period we're still not going to have fixed the problem,' Duncan said in an interview in Hong Kong yesterday. 'Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of 'Fall of Rome' scenario.'"
Fall of Rome? Hey, Addison Wiggin and your editor wrote the book on the fall of Rome idea. Empire of Debt, we called it. It was such a hit that the publisher asked us for a new edition...which was released this summer. You can get your copy here.
Richard Duncan, with Bloomberg on lead guitar, was singing our song:
"The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.
"The US has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of US debt has propped up the dollar and allowed a credit-fueled spending boom by the nation's consumers, according to Duncan.
"US workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation's jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.
"As unemployment remains above 10 percent well into the foreseeable future, it won't be long before Americans start voting for protectionism," Duncan said. "That's going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity."
Once the US debt burden becomes too large and the government can no longer sell debt to the public the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he concluded.
Bill Bonner The Daily Reckoning
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The Daily Reckoning PRESENTS: Have you heard? Michael Moore is back with a new documentary film called Capitalism: A Love Story. While you can bet it won't be an unbiased look at capitalism, you can be sure that it will be entertaining. Mike Covel recently went to a private screening of the film...and here's his report, below...
Michael Moore Kills Capitalism with Kool-Aid by Michael Covel San Diego, California
A friend recently invited me to a private screening of Michael Moore's new film Capitalism: A Love Story. The September 16th invite not surprisingly leaned a certain direction:
"[Michael] Moore takes us into the homes of ordinary people whose lives have been turned upside down; and he goes looking for explanations in Washington, DC and elsewhere. What he finds are the all-too-familiar symptoms of a love affair gone astray: lies, abuse, betrayal and 14,000 jobs being lost every day.Capitalism: A Love Story...is Michael Moore's ultimate quest to answer the question he's posed throughout his illustrious filmmaking career: Who are we and why do we behave the way that we do?"
Considering Moore was going to be there for a Q&A after (moderated by Arianna Huffington), I quickly signed on. Now before painting a picture of Moore's new film let me be honest: my belief set is essentially libertarian ('Government out of my bedroom and my pocketbook'). Not only do government solutions not excite me, they scare the living blank out of me. Remember when George Bush declared, "I've abandoned free- market principles to save the free-market system...to make sure the economy doesn't collapse"? He might as well of said, "Hide your money, kids - 'cause I'm coming to take it!"
Oh sure, in theory I would like to see everyone with their own homestead, money in their pocket for regular shopping frenzies and no health worries despite eating at Burger King 24/7, but arriving at those goals is not exactly doable unless government robs Peter to pay Paul and or starts up the printing press.
And that view of course puts me in opposition to Moore since he has no problem with government as his and our father figure. That is his utopia. He truly believes warehouses of Washington, DC-based federal workers remotely running our lives is the optimal plan. He is an unapologetic socialist who really doesn't care why the poor are poor or the rich are rich, he just wants it fixed. So not surprisingly, and with some generalization as I proffer this, Democrats like Moore and Republicans don't.
However, I was excited to see a 'mainstream' film that was backed by big Hollywood bucks conclude capitalism as 'evil.' Arguably the most successful documentarian ever, a man who has made untold millions of dollars, was going to legitimately make the case that there was an alternative to capitalism. I sat down in a packed Mann's Bruin Theater in Westwood, CA eager to see how his vision could possibly flesh out.
Moore is a rather simple guy. He is likable. He sees the world as good guys (people with no money) and bad guys (people with money). His Flint, Michigan union worker upbringing is his worldview. If you did not have that upbringing or if your life started less severe than his you are an evil capitalist. If on the other hand you were a laid off factory worker with a sixth grade education you are the true hero. I don't care one way or the other that he has that view and I am not knocking union workers, but Moore sees the world through a class warfare lens resulting in a certain agenda: force wealth to be spread amongst everyone regardless of effort. Within minutes it was clear where Capitalism: A Love Story was headed. The 'highlights' included:
We listen to heartbreaking stories of foreclosed families across America, but we don't learn why the foreclosures happened. Did these people treat their homes as piggy banks? Were there refis on top of refis just to keep buying mall trinkets and other goodies with no respect to risk or logic? We don't find out.
We meet one family who was just foreclosed on so desperate for money that they were willing to accept $1,000 for cleaning out the house that they were just evicted from. Was it sad? Yes. But, should we end capitalism due to this one family in Peoria, IL?
We are introduced to a guy whose company is called 'Condo Vultures' buying and selling foreclosed properties. Since he acted like a used car salesman, the implication was that he was an evil capitalist. However, Moore doesn't tell us if his buyers were 'working class' people making smart buying decisions after prices had dropped.
We listen to Catholic priests who denounce capitalism as an evil to be eradicated. What they would put in its place and how would the new system work? The priests don't tell us.
We learn that Wal-Mart bought life insurance policies on many workers. We are then told to feel outrage when Wal-Mart receives a large payout from an employee death while the families still struggle with bills. I saw where Moore was heading here, but this was a reason to end capitalism?
We hear a story from a commercial pilot so low on money that he has to use food stamps. Moore points out that many pilots are making less than Taco Bell managers and then attributes a recent plane crash in Buffalo to underpaid pilots. This one crash is extrapolated out as yet another reason to end capitalism.
I was pleasantly surprised at Moore's attempt at balance. For example, he included:
A carpenter, while ply-wooding up a foreclosed home, says, "If people pay their bills, they don't get thrown out."
A dressing down of Senator Chris Dodd (D) by name. Moore calling out a top Democrat? He sure did. He nailed him.
A lengthy dissertation on the evils of Goldman Sachs. He rips Robert Rubin and Hank Paulson big time and I agree with him. In fact, I said to myself, "Moore you should have done your whole film on Goldman Sachs!"
Throughout the various stories and interviews he also weaves a conspiracy (all Moore films do this). The plot goes something like this: America won World War II and quickly dominated due to no competition (Germany and Japan were destroyed). We had great post-war success where everyone lived in union-like equality. Jobs were plentiful and families were happy. However, things start to go bad in the 1970s, and Moore uses a snippet of President Carter preaching about greed. This clip was predictably building to Moore's big reason for all problems today: the Reagan revolution.
"...it was clear to me at that moment capitalism was on shaky ground. Starting with Bush 'abandoning' capitalism to bailouts for everyone to Obama gifting away the future – we seriously might be past the point of no return toward a socialization of America."
Moore sees Reagan entering the scene as a shill for corporate banking interests. However, everyone is happy as the good times roll all the way through into Clinton times. Moore does take subtle shots at President Clinton, but nails his right hand economic man Larry Summers directly as a primary reason for the banking collapse. So, while Moore sees Japan and Germany today as socialistic winners where corporations benefit workers more than shareholders, he sees America sinking fast.
So is that it? That was the proof that capitalism is an evil to eliminate? Essentially, yes, that's Moore's proof. What is his solution? Tugging on your idealistic heartstrings of course! Moore ends his film with recently uncovered video of FDR talking to America on January 11, 1944. Looking into the camera a weary FDR proposed what he called a second Bill of Rights - an economic Bill of Rights for all regardless of station, race, or creed that included:
The right to a useful and remunerative job in the industries or shops or farms or mines of the nation.
The right to earn enough to provide adequate food and clothing and recreation.
The right of every farmer to raise and sell his products at a return which will give him and his family a decent living.
The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.
The right of every family to a decent home.
The right to adequate medical care and the opportunity to achieve and enjoy good health.
The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment.
The right to a good education.
As FDR concluded and the film ended, I was shocked at the reaction. The theater of 400+ stood and cheered wildly at FDR's 1944 proposal. The questions running through my head were immediate: How does one legislate words like "useful", "enough", "recreation", "adequate", "decent", and "good"? Who decides all of this and to what degree? At past points in history to voice an opposition opinion in the middle of such a single-minded herd would have certainly been my physical demise! Interestingly, during the Q&A Huffington and Moore discussed bank failure fears during the fall of 2008. They asked for a show of hands of how many people moved money around or attempted to protect against a bank failure. I had the only hand that went up.
FDR's plan hauled out by Moore six decades after it was forgotten reminded me of another interchange - this one from the 1970s. Then talk show master, the Oprah of his day, Phil Donahue was interviewing free market economist Milton Friedman and wanted to know if Friedman had ever had a moment of doubt about "capitalism and whether greed's a good idea to run on?"
Friedman was quick in response, "...is there some society you know that doesn't run on greed? You think Russia doesn't run on greed? You think China doesn't run on greed? The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn't construct his theory under order from a bureaucrat. Henry Ford didn't revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you're talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it's exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system."
Donahue (and the video of this on YouTube is classic) then countered saying that capitalism rewards the ability to manipulate the system and not virtue. Friedman was having none of it, "And what does reward virtue? You think the communist commissar rewards virtue? ...Do you think American presidents reward virtue? Do they choose their appointees on the basis of the virtue of the people appointed or on the basis of their political clout? Is it really true that political self- interest is nobler somehow than economic self-interest? ...Just tell me where in the world you find these angels who are going to organize society for us?"
Friedman's logic was what I was remembering as a theater full of people cheered wildly for a second Bill of Rights. How did this film crowd actually think FDR's 1944 vision could be executed? Frankly, it was clear to me at that moment capitalism was on shaky ground. Starting with Bush 'abandoning' capitalism to bailouts for everyone to Obama gifting away the future - we seriously might be past the point of no return toward a socialization of America.
Figuring someone else must see the problems with this film, I started poking around the net for other views. One critic declared that the value of Capitalism: A Love Story was not in the moviemaking, but in its message that hits you in the gut and makes you angry. This film did not make me angry, but it did punch me in the gut. The people in that theater with me were not bad people, including Moore. They just seem to all have consumed a lethal dose of Kool-Aid! And at the end of his Q&A Moore pushed the audience to understand that while they don't have the money, they do have the vote. He implored them to use their vote to take money from one group to give it another group. Did he really say that openly with no ambiguity? Yes, sadly.
Mike Covel for The Daily Reckoning
Editor's Note:Michael Covel is an author, director, and founder of TurtleTrader.com. Covel's books include the best selling Trend Following: Learn to Make Millions in Up or Down Markets, which has sold over 100,000 copies, and The Complete TurtleTrader: The Legend, the Lessons, the Results. Covel also wrote, directed, and produced the documentary film, Broke: The New American Dream. Covel has been interviewed by Bloomberg Radio, Technical Analysis Magazine, Barron's, and others.
Get your copy of his latest book, Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets(FT Press; 2009) here.
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About The Daily Reckoning: Now in its 10th anniversary year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists.