Friday, September 4, 2009

The Capitalists Have No Capital; Bill Bonner on the Fixers Who Fix Fixes With Other Phony Fixes

Celebrating A Decade of Reckoning
US Edition Home Contributors Media & Testimonials archives DR's 10th Anniversary DR's 10th Anniversary
The Daily Reckoning
Friday, September 4, 2009

  • Gold is up $40 - close to $1,000 an ounce...
  • Some of the occurrences we expect in this downturn...
  • What was distracting the SEC from the Madoff case?
  • Bill Bonner on the fixers who fix fixes with other phony fixes...

  • --------------------- Special Offer ---------------------------

    Harness the Power of Options for Your Portfolio

    Since November 2006, not one of our picks has lost value! It's no wonder our readers could have turned $5,000 into $1 million in just over five years!

    Learn more about this elite advisory here...


    The Capitalists Have No Capital
    by Bill Bonner
    Baltimore, Maryland

    What was the SEC was doing...?

    But first, what the stock market and the economy are doing...

    In the past two days, the price of gold has shot up more than $40. It's now near $1,000 an ounce.

    Why? We don't know. Rumors, talk, noise...there's plenty of that. But as for why investors are suddenly putting so much money into gold, we'll have to wait to find out.

    But should you buy gold now? The answer is simple: yes and no.

    The Trade of the Decade is still buy gold/sell stocks. And the decade isn't over. If you have US stocks, this is a good time to sell. The Dow went up 63 points yesterday - a weak bounce after several days of losses.

    This is no time to hold stocks - for the reasons we outlined yesterday.

    But gold? Should you buy gold and hope to get rich when gold shoots up to $3,000 an ounce? A bad idea, in our opinion. You should buy gold to protect your assets. The risk is in the paper money...because they can create as much of it as they please. And they're under pressure now to create a lot. You buy gold as insurance against inflation, a dollar bust, a bear market in stocks and bonds, or a financial crisis. Gold is nature's money. It is better than manmade money. Because, with gold, what you have it what you've got. They can't artificially depreciate it or easily increase the quantity of it. That's why the feds don't like it. It won't support their cause du jour - whether it is a war, a bailout, stimulus, health care, or whatever. Gold doesn't cooperate with the financial engineers. That's why it's a good thing to hold when you think the financial engineers are making a mistake.

    But our view at The Daily Reckoning headquarters is that while the engineers are making a mistake, they not very good at it even when they're making a mistake they're good at. Typically, they're pretty good at causing inflation. But now the credit bubble is deflating, not inflating. It will take them a few years before they become reckless enough to move prices up again. And then, they'll probably overshoot their objectives considerably.

    In the meantime, there's no inflation to speak dollar bond bust. So we wouldn't expect the price of gold to soar...not just yet. That's the big surprise - that this period of deflation will last longer than expected. Then, when it begins to seem permanent, inflation will suddenly come roaring back.

    By then, most investors will have given up on gold...especially those who were speculating on it going to $3,000. It will go to $3,000, but only after speculators have dropped their positions.

    [That's why you should get yours now - before the price jumps $2,000. In fact, right now, you can pad your portfolio with the precious metal, for just a penny per ounce. No joke. See how here.]

    So far, everything is happening just as we expected. After more than half a century of boom, we are now in a bust. People need to downsize...cut back...and live a little less large than they had in the boom years. That means...well...just what you'd expect.

    Wasn't it just yesterday that we reported that Florida was losing population? People just aren't retiring like used to. Here's comes the evidence:

    From The New York Times comes this headline: "Older US Workers Put Retirement on Hold."

    The Times tells us that older people are continuing to work because they don't have a choice. They can't afford to retire. So they hold onto jobs, which is another reason it's so hard for the unemployed to find a job. Those who have them aren't giving them up. A Bloomberg report today, for example, tells us that more people are applying for job benefits than expected. Another tells us that millions of people are running out of benefits before they find a job.

    Just what you'd expect, in other words. Here are some of the other things we expected:

    1. Unemployment is still rising.

    "Investors discouraged by US jobs report," says a headline at the International Herald Tribune. To make a long story short, August was a disappointment. More jobs were lost than expected.

    We don't know how many jobs we should expect to lose. But we're in the downhill part of the credit cycle; we're bound to lose a lot of them.

    2. Sales are falling.

    That's another thing we would expect. People have to cut back. So...they do cut back. Sales go down. That means fewer sales and fewer jobs. No point in making things, shipping them and retailing them if no one is buying them, right?

    3. What else would you expect? Lower house prices? Check. Higher savings rates? Check. More bankruptcies? Check. Falling prices? Check.

    Isn't it nice when things work out "as they should?' Check.

    [While most are scrambling as the downturn deepens, you could be sitting pretty...due to a 'loophole' in the bailout. This loophole allows you to get 'bailout income checks' this year - and every year - until the US economy recovers. You could make up to $17,500 in this year alone. Act now...]

    And more news from The 5 Min. Forecast:

    "Silver has been perking our interest lately," writes Ian Mathias in today's issue of The 5. "With gold near $1,000 and the precious metals buzz revived, we dug up some silver charts this morning...and liked what we saw. Check it out:


    "So if you believe silver to be a store of value as legitimate as gold, it looks like there's more potential short term upside for 'poor man's gold.' While gold is just a breath from all-time highs, an ounce of silver goes for $16 today, about 23% below its 2008 high of $21. Sellers will say this is because of silver's industrial capacity - which has been beaten bloody by the credit crunch. Buyers, like Byron and most of us, say we're heading into an inflationary period so great that this will be rendered somewhat irrelevant.

    "What's more, the gold/silver ratio is both in a state of decline while still higher than typical...another bullish argument for silver:


    "The gold-to-silver ratio has spent most of 2009 in a downtrend, meaning the price of silver has been rising faster this year than the price of gold. Just this morning it hit 59, a 2009 low. During the high inflation of the '70s, the ratio stayed below 50. Back in gold standard days, it was hardly 15.

    "So silver is undervalued compared to gold, and it has some momentum on its side? We've heard worse odds.

    "'Long term, gold and silver prices are going higher,' Byron King summarizes. 'Really, where else can they go? Lower? With the current monetary madness that's infecting the world's central bankers?

    "'Precious metals prices won't fall very far unless governments worldwide stop spending funds they don't have. (OK, China is spending money it DOES have. Everybody else? No way.) Will governments stop spending? Doubtful. So with excess spending, we'll see the accompanying monetary expansion from the central banks. That'll give us more inflation. And the only effective defense against inflation is gold and silver.'"

    In a good year for gold, silver will actually do even better. To learn how to take advantage of the momentum that 'poor man's gold' is building, see Byron's latest report.
    And back to Bill, with more thoughts:

    Now, back to the regulators. Here is Britain's main man, Adair Turner of the Financial Services Authority, in The Wall Street Journal:

    "Cash is for buffers, not for wallets," says the headline. Mr. Turner is making the point we have made many times. The US system of capitalism has become a system where the capitalists have no capital. The big banks have too little in savings...not enough 'buffers' to protect them from unexpected crises. They made a fortune during the boom years - loading consumers up with debt. But instead of holding onto the money to protect themselves against emergencies, they paid it out in bonuses and salaries. Then, when the crisis came - one they caused - they were without sufficient funds.

    What do you do when you're a major bank and you are insolvent? Hey, you already know the answer. You turn to the government! Which is why Mr. Turner's comment is both very smart and very dumb at the same time. He's right; the banks should hold more capital. But the reason they don't is obvious: they know the government will bail them out. They figure they don't need much capital; the feds have plenty.

    This is the problem economists call "moral hazard." If you protect people from their own excesses they will become even more excessive. On the other hand, if they have to pay for their errors, they'll be quicker to correct them.

    Okay...well...maybe the banks still wouldn't save enough. But that would take care of itself. If the feds didn't intervene, the insolvent banks would go under; those left would - by definition or accident - be better run.

    [Unfortunately for you, you are not a big if you become insolvent, the government will not bail you out. That's why we encourage you to set up your own 'personal bailout'... All the resources you need to get started can be found here.]

    But let us turn to America's equivalent of the FSA - the SEC.

    Front page in The Washington Post: "The Madoff Files...A Chronicle of SEC Failure..."

    According to the Post, Madoff was "astonished" that the SEC didn't bother to verify whether he was actually doing the billions of dollars worth of trades he claimed to be doing.

    In response, the SEC says it "doesn't have the resources" necessary to keep an eye on "the exploding number of financial firms."

    And according to today's International Herald Tribune, Senator Schumer has suggested a way for the SEC to increase its budget by 75%. The idea is to turn it into a kind of tax farmer...with the right to earn money directly from the industry it is supposed to regulate. There's an idea for you - a very bad one. It would give the SEC more money to waste...allowing it to hire more people to meddle in the investors more illusions that they are playing 'on a level playing field'...and ultimately corrupting the financial sector even more than it already is.

    Which brings us back to our original question: what was the SEC doing?

    The Madoff group was very suspiciously doing billions in trades with remarkable profitability and consistency. Every trader in New York knew something was up. What was so intriguing to SEC eyes...when they weren't keeping their eyes on Madoff?

    We can tell you. Us! Your editor and his colleagues. No kidding. We'll give you the full story on Monday. Promise.

    Keep reading for today's essay, below...

    --------------------- Special Offer ---------------------------

    Quadruple Your Money with a 231 Year-Old Discovery

    Every country in the developing world needs this 231-year-old discovery, but...

  • Only 10 companies in the world have it...
  • Only 3 of them are pure plays...
  • Only ONE can actually deliver...
  • Turning every one of your dollars into four by this time next year! Keep reading for the story...


    The Daily Reckoning PRESENTS: Will smartness make the world a better place? Well, when surveying the damage that's occurred at the mercy of the brains, Bill Bonner thinks not. But that won't stop them from trying. Read on...

    Fixers Aim to Fix Fixes With Another Phony Fix
    by Bill Bonner
    Baltimore, Maryland

    From California comes word that the summer program of Singularity University came to an end this week. The idea of SU is simple enough. Put smart people together with the latest technology; let them figure out solutions to the world's problems.

    'The Singularity' is an idea from Ray Kurzweil. The gist of it is that computers will soon be smarter than humans; by the middle of this century they'll be smart enough to figure out how to get smarter and smarter, faster and faster.

    No doubt, many of them will go into finance. And no doubt, many will make a fast buck. But will more smartness really make the world a better place? According to the singularists, increased brainpower will be able to solve all sorts of problems - from global climate change to market crises.

    But the brain is a big disappointment. No mechanical engineer has ever improved the old-fashioned kiss. Nor has any brain ever straightened out the business cycle. Dumb as a slide rule, the brain does what it is told to do; it doesn't ask questions. Tell it to build a bridge and it is on the case. Put it to work packaging tranches of toxic assets or selling aluminum is just as happy with one task as with the next. And the more a man's brain bends to a challenge, the more it elbows out of the way his finer senses...and the dumber the man becomes. He turns his back on his own intuition as well as the accumulated wisdom from previous bust-ups and bruises. Like a man who has gone crazy, as G.K. Chesterton put it, all he has left is his sense of reason. Then, with nothing more to work with, he comes down on his work like a blacksmith's hammer on a fine Swiss watch.

    During the bubble period, the big banks were the biggest employers of top graduates from the world's top schools. Oxford, Cambridge, Harvard, Yale...the financial sector drew them in like flies to an open latrine. The financial industry made so much money it had a hard time explaining it. The smart dudes did not toil in the fields, neither did they spin. Then, what did they do? They earned millions, bought BMWs and got dates with actresses. They claimed they were doing a fine job of allocating the world's wealth and making everyone better off.
    "Smart people were also to blame for the biggest single error of the last century: central planning. The central planners thought they could fix the supposed evils of the natural economy with logic and reason. The idea was so alluring half the world fell for it."

    But when the bubble blew up, it was apparent that the financial world they created was fragile and perverse. Not a single one of the largest Wall Street banks survived without government handouts. And a news report from this week tells us that Americans were so damaged by the Bubble Epoque that their discretionary spending has now been cut to levels not seen in 50 years. The geniuses wiped out a half-century of economic progress in the richest, most successful economy the world has ever seen.

    Smart people were also to blame for the biggest single error of the last century: central planning. The central planners thought they could fix the supposed evils of the natural economy with logic and reason. The idea was so alluring half the world fell for it. If the Nobel Committee had been on the ball they would have given Karl Marx a prize.

    If the bug had come from stupid people might have avoided it. They might have come through the period without permanent scaring. But the wheezy intellectuals behind it were too clever for their own good. They soon infected the top universities...and the government. They convinced almost everyone that central planning was the wave of the future and that anyone who stood against it was a bumpkin, a parasite or a fool. Then, in the name of human progress, they took control in two of the world's largest countries and turned them into prison camps.

    But by the last decades of the 20th century it was obvious even to central planners themselves that it wouldn't work; in both Russia and China, the planners simply gave up.

    Central planning didn't work because people had plans of their own. They resisted. Then, the planners brought down their hammers. "If you're going to make an omelet, you have to break some eggs," said chef Vladimir Lenin. The "Black Book of Communism" puts the death toll as high as 100 million.

    Then too, central planning didn't work for less obvious reasons. Planning requires information. The planners had plenty of it. But private individuals had far more - local, current, more accurate information from first-hand observation and experience. With better information, they could make better plans. Most important, individuals didn't limit themselves to only the fresh fruit of their rational brains. They put their hearts in it...and drew on instinct and tradition - the distilled spirits of previous generations - giving them a huge advantage over the apparatchiks.

    But the brains kept at it. When the forensic experts sifted through the debris from the 2007-2008 financial blow-up they found fingerprints from a whole list of Nobel winners. It was they who had developed the formulae and the theories that deceived investors, and themselves. They believed they could tame calculation! They figured out the odds and worked out prices - to as many decimals as needed to put investors to sleep. And then along came a risk they had not foreseen - the risk that their own formulae were claptrap and that they were idiots.

    Meanwhile, the brains were at work in the public sector too. There, they were still pushing central planning...albeit on a much less ambitious scale than in the last century. In Western countries, government economists fixed lending rates and credit policies in order to encourage over-consumption. In the East, they fixed exchange rates and recycled credit back to their customers in the West in order to encourage over-production. And what ho! Wouldn't you know it; now the world has too much debt and too much capacity.

    And so the brains are back on the job. In China, the government boosts production. In America, the central planners are trying to boost consumption. In short, the fixers are still fixing. And soon, the world will be in an even worse fix than it is now.

    Enjoy your weekend,

    Bill Bonner
    The Daily Reckoning

    P.S. Where the rubber meets the road. Daily Reckoning readers meet us at conferences. Often, they have questions:

    "Mr. Bonner...what do you do with your own money?"

    We explain that we don't really have any secrets. We tell readers what we think everyday; we don't hold anything back. That said, there's a big gap between what we think about investing and how we actually go about it. When we're talking ideas, it's WHAT you know that counts... But when we're implementing investment ideas, often it's WHO you know that is more important...

    Oldest son, Will, has begun a project designed to make the critical contacts more least to a small group of partners. Find out more tomorrow in an unusual letter that will be sent to our most loyal readers...

    Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis. He is also the author of, along with Lila Rajiva, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics.

    Bill's latest book, an update of Financial Reckoning Day, co-authored with Addison Wiggin, is now available for purchase by clicking here:

    Financial Reckoning Day Fallout: Surviving Todays Global Depression

    --------------------- Special Offer ---------------------------

    Breaking News, Full Report - For Your Eyes Only...

    Only 63 People Know Exactly Why These 6 Tiny Companies Will Change the World... You're #64 - And You're About to Become Ultra-Wealthy

    This will go down in history as the "story of our era..."

    By then, you could be among the ultra-wealthy...All because you took decisive action in early 2009. A chance like this pops up once every few lifetimes.

    YOUR chance could end at any moment due to a shocking announcement that will be revealed today...
    The Daily Reckoning - Special Reports:

    History of Financial Disasters: Will you be Wiped Out?

    US Recession: By far the Weakest Recovery

    Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...

    AGORA Financial Resources: The Daily Reckoning Is:

    Economics & Politics
    Crisis & Opportunity
    Gold, Oil & Energy
    Growth, Tech & Medical
    Options Investing

    Founder: Bill Bonner
    Editorial Director:
    Addison Wiggin
    Publisher: Rocky Vega
    Managing Editor: Kate Incontrera
    Web Editor: Greg Kadajski
    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.

    For additional articles and commentary follow The Daily Reckoning on Twitter and Facebook.

    Agora Financial

    To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription .

    If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning.

    © 2009 Agora Financial, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the World Wide Web), in whole or in part, is strictly prohibited without the express written permission of Agora Financial, LLC. 808 Saint Paul Street, Baltimore MD 21202. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice.We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

    No comments:

    Post a Comment

    Note: Only a member of this blog may post a comment.