This Recovery is an Imposter; The Mogambo on Being Evicted From Your New Clunker
The Daily Reckoning Monday, September 7, 2009 - Labor Day
The dollar has not collapsed. It has fallen, gently... If it's a depression, why are commodities and stocks up? As promised on Friday, the answer to: "What was the SEC doing?" The Mogambo on being evicted from your new clunker...and more!
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This Recovery is an Imposter by Bill Bonner London, England
It is amazing how many things have NOT happened.
Probably most incredible is that the dollar has NOT collapsed. It has lost ground, and was trading at $1.43 per euro on Friday, but no one laughs at you when go to exchange dollars...or offer to pay in dollars rather than the local currency.
For the last 10 years, the money supply in the United States has expanded at roughly twice the rate of GDP growth. And the Fed doubled its balance sheet in just the last 18 months. This last bit of information is stunning. It took the central bank nearly 100 years to build a balance sheet of $1 trillion. Then, under the leadership of Ben Bernanke, it added another $1 trillion in just a few months.
What does that mean, exactly? It means they bought a lot of debt from US agencies and the financial sector. It means also that they "monetized" this debt...transforming it into cash by paying for it with money especially created for that purpose. It also means that the whole financial sector has a bigger financial base against which to lend. The Fed lends against its balance sheet to member banks. These banks then lend to other banks who lend to business and consumers. So the amount of potential credit – as well as the amount of actual cash – has gone up.
There is an iron law in economics. Quality and quantity vary inversely...which is another way of saying that when you add more of something...each unit is worth less than the unit that preceded it (assuming everything else remained unchanged.) Certainly, this is true of money. The more money in a financial system, the less each unit of it is worth. Add enough new money – as Zimbabwe proved recently – and each unit becomes worthless.
But so far, the dollar has not collapsed. It has fallen, but gently...
Meanwhile, the inflation rate has NOT gone up. Instead, it's gone down. Go figure. You add that much monetary inflation and you'd expect to get a boost in the CPI. Nope. Not yet.
On the other hand, we're already a year-and-a-half into a major recession/depression. You'd think you'd get deflation. That hasn't happened either. Prices are down. But not as much as you'd expect, given the scale of the downturn.
Related to both the dollar and inflation is the bond market. Even more surprising is that the bond market has NOT fallen apart. Let's see, a huge input of monetary inflation; that ought to kill the bond market. Then too, the biggest sales of Treasury bonds in history – needed to cover a $1.7 trillion deficit this year. That ought to kill the bond market too. And on top of it all is a projection from the White House telling us that the feds will add $9 trillion to US debt over the next 10 years. And that assumes a full recovery in the economy! Now, that ought to kill the bond market for sure.
Not at all! Bond yields have risen...but the 10-year T-note still only gives you 3.4%.
Of course, you say, it's a depression. Bond yields always go down in a depression.
But if it's a depression, how come commodities are up? And stocks are up? Above all, how come Chinese stocks are up? Everybody knows China earns its money selling products to Americans and other non-Chinese. If the rest of the world is in a depression, who is China going to sell to? How come China isn't in a depression already? But there you are – there's another thing that hasn't happened. Chinese stocks haven't collapsed.
And getting back to commodities, they're all up. Commodity prices don't go up in a depression; everybody knows that. They go down. But commodities are NOT in a bear market. Go figure.
And, of course, there's gold. The metal gave up a dollar on Friday, but it's still just $4 short of the $1,000 mark...and just a shadow below its all-time high. Gold is a commodity...but it's also money in its purest, more reliable form. Commodities go down in a depression. Money goes up. But since gold is an alternative to paper money, it tends to go up only when paper money goes down. As explained above, the dollar has NOT collapsed. So why is gold going up? It should be going down, reflecting the effect of a recession...
There are two possible answers.
First, maybe the iron laws of economics have been repealed.
Or, second...maybe the iron laws just haven't caught up to the market – yet.
[It's going to take longer than most realize for the market to recover...and who knows how many more billions in bailouts will be spent. However, due to a legal 'loophole' in the bailouts, you can collect 'bailout income' checks this year – and every year – until the US economy recovers. Your next check could be in the mail soon. Get the details here.]
Unemployment is at 9.7%. It will probably rise above 10% this month. The economy is supposed to be recovering. Now, The New York Times is talking about a "jobless recovery."
You'll remember the phrase. It came out in 2003. Then, the economy was allegedly recovering from a micro-recession. Economists were surprised that there were so few new jobs created.
What was really happening was that there was no genuine recovery. Consumers just decided to go deeper and deeper into debt – egged on by the feds. A regional governor of the Fed actually urged consumers to "go out and buy an SUV." So Americans bought more products from the Chinese...on credit...and the Chinese enjoyed a boom.
And now the boom is over. Americans are paying down their debt. And unemployment is getting worse. This time the feds are pumping trillions into the system. This time, it's not the consumer who is willing to go further into debt; it's the government. And once again, few new jobs are being created.
Without jobs, the recovery is an impostor...a phony...a fraud. Without jobs, people have no extra spending power. So they can't buy – except by going deeper into debt. They were willing to go further into debt in '03-'07. But not this time. They've reached their limit on debt. Besides, with house prices falling, who would lend to them?
No new jobs = no new income. No new income = no new sales. No new sales = no new profits = no new jobs.
But what about the government? The feds are still willing to borrow. How come federal borrowing can't create a new boom – even if it is a phony one – like the one in 2003-2007?
Federal borrowing, spending, bailouts and monetary inflation are not helping the real economy. But they are making a lot of money available for speculation. That's why so many things are NOT happening. Investors are speculating on commodities, gold and Chinese stocks – for example. And US bonds.
But this is not a durable, reliable trend. And it's not laying the foundation for a genuine recovery. Borrowing by the feds is different from borrowing by individuals. Private households can go broke. But they can't take the dollar down with them. When the feds borrow, they pledge the full faith and credit of the United States – and its currency – as security. So, as they borrow more...the value of the US currency comes into doubt...then, into play...and then into jeopardy.
Investors eventually sell off dollars and US bonds...then, what should happen finally does.
Caution: what has to happen does eventually happen. But it doesn't have to happen when you think it should. The big surprise might be how long it takes before these things happen. If we were Mr. Market, for example, we probably would not take gold much higher – not just yet. We'd let deflation take gold down for a while – long enough to separate the speculators from their money. Then, we'd let investors get used to falling prices – before bringing inflation back.
[While you await the inevitable correction, make sure you are prepared. You can set up your own 'personal bailout'. All the resources you need to get started can be found here.]
And, as promised on Friday, the answer to 'What was the SEC doing?'
Recall that last week, we reported the latest news on the SEC. Investigators wondered why the agency had let Madoff run billions in suspicious trades without ever checking them out. The SEC responded by saying it lacked sufficient resources. Then, New York Senator Schumer said he would propose a measure to increase the agency's spending power by 75% – by allowing it to shake down the financial industry directly, rather than going to Congress for a budget allocation.
Which still leaves open the question of what the SEC was doing when it should have been making Madoff do the perp walk. We have the answer: the SEC was harassing us.
Yes, hard to believe that they would target your poor, innocent editor. And they didn't, not directly anyway. Instead, they targeted one of our colleagues. This was a couple of years ago...when Bernie Madoff was at the top of his game.
We haven't mentioned it in this space...on the advice of our lawyer. Judges don't like it when you "try a case in public." And the case still isn't settled.
But we won't discuss the merits of the case...only the circumstances around it.
This will help us understand what the SEC is really up to...and why the hope of regulating fraud out of existence is as vain and futile as trying to clear out a bar by using foul language.
Here's what happened. One of our researchers discovered what he thought was a great investment opportunity. He called the target company and spoke to a VP in charge of public relations. What he heard convinced him that he was on to something, so he published a recommendation, sending a copy of it immediately to the company.
He got no response from the company. But a few months later, the SEC knocked on our door. What was their beef? That we had misled investors. How so? In our report, we told readers what the VP had told us. We carefully called it "insider" information...putting the word in quotes to let readers know it wasn't the same as the forbidden 'inside information.' Anyone could have found out the same thing if he had just called the company, read the published reports, and put two and two together.
Our caution was lost on the SEC. They didn't see the difference between "insider" information and inside information. What's more, the fellow at the target company denied he had said what he had said. Curiously, he made no objection when the report was published; the objection came after the SEC started snooping around.
The SEC wanted blood. They thought they could get an easy win against a little guy in Baltimore. They wanted us to turn on our own associate...to stop defending him and cop a plea. Obviously, we couldn't do that. We stood behind our man.
Then came a quirky turn of events. Both the researcher and your editor's company were charged with what was effectively a new crime – a federal case, no less. The SEC, remember, is supposed to be protecting investors from stock fraud, manipulation, and 'insider trading.' But there was never any allegation of manipulating a stock or insider trading. Instead, the agency charged us with NOT having inside information. We never traded in the stock at all...or manipulated it in any way. So the feds alleged that we did not have any inside information to trade on...and that therefore our representation – of having "insider" information (in quotes!) – was a kind of fraud.
And the whole case turned on a telephone conversation between a stock market analyst and a public relations guy in a company. One said one thing; the other said another thing. Reporters make mistakes all the time; so do their sources. But this was the first time the government made a federal case out of it.
We believe our analyst. The SEC believed the other guy and spent millions trying to prove that our fellow lied. No one who bought the research report on the stock complained, let alone threatened a lawsuit. Prior to any SEC probe, refunds were issued to anyone who asked (most did not). Yet the SEC, protector of the public interest, spent years...and millions...on the case – while Bernie Madoff was stealing billions from his clients.
Case against your editor's company: judges ruled that we were innocent.
Case against our colleague: still undecided at the appeals court.
Case against SEC: guilty of negligence, dereliction and humbug.
Bill Bonner The Daily Reckoning
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The Daily Reckoning PRESENTS: The government induced a whole new level of "buyers remorse" this year, with the creation of the "Cash for Clunkers" program. This week, the Mogambo takes a look at how this program will end up hurting those who can't even pay their mortgages, let alone their new car payments. Read on...
Evicted from Your Brand New Clunker by The Mogambo Guru Tampa Bay, Florida
Roger Wiegand of Trader Tracks Newsletter finally says what I always figured: "Cash for Clunkers was a real clunker. One out of four auto buyers using this program is having buyer's remorse as they just signed-up for so many new payments they cannot afford."
Thanks, Roger! I always had a hard time believing in the unbelievable "Cash for Clunkers" program, where the government astonishingly gives up to $4,500 to people who buy a new car!
This is a subject which is very interesting to me because I happen to be a guy who owned a whole series of clunker cars and trucks over the years because I couldn't justify the expense of a new vehicle/a good vehicle/a better vehicle/a vehicle that wasn't rusted/a vehicle where parts and pieces didn't fall off/a vehicle that usually started because they were completely paid for, thus costing me exactly nothing per month in principal and interest payments, and which needed only the legally-required minimum of liability insurance.
In short, the cost of driving those old cars and trucks was almost zilch, which fitted my budget perfectly, as I thought I would need the extra money for dating, but which turned out not to be the case. In fact, I found that women usually disdained both me and my cars, and they would say hurtful things like, "Hey! It stinks in here! Or is that you?" and, "At least clean out the old, moldy pizza boxes and chicken bones so I won't be more disgusted than I am just sitting next to you!" and yammer yammer yammer.
That is, however, when I learned one of the Immortal Lessons Of The Mogambo (ILOTM), which is that as long as you had a good set of brakes on your ratty old car, a case of cheap oil in the trunk, a long siphon hose and a girlfriend who had a nice car in which to ride around, you could get along pretty good!
Not "getting along" as good as the federal government, however, which can (and did) just decide on a plan to sell a couple of trillions of dollars in new debt, whereupon the Federal Reserve will create the money, like when the Fed bought $30 billion of US government securities, directly increasing the money supply by the amount of the new debt! Now THAT'S what I call "getting along pretty good!" Hahaha!
"...since people can stop paying on their house but still live in it because the bank doesn't want to evict them, people will start living in their cars and stop paying on them, too!"
Now, suddenly, sad sack people like me, whose incomes are so low that we have to drive rusted-out, beat-up old clunkers that cost almost nothing to own or operate, that nobody would steal, which were completely paid for, for which you only needed the minimum of liability insurance, would suddenly decide to buy a very expensive, shiny new car and begin paying upwards of $400-$500 a month for the new car and the big new premiums for the required higher insurance coverage? Hmmmm!
Perhaps this is why Bloomberg reports that "Consumer spending in the US rose in July as Americans jammed auto showrooms to take advantage of the 'cash for clunkers' program while avoiding other purchases"! Yikes! Avoiding other purchases! This is NOT the kind of thing from which economic recoveries are made!
And to suddenly start paying all of that money, every month for the next seven years or so, is not to even mention the effort of always having to wash and wax the new car, which is hard, disagreeable work that you don't get paid for, which is like being punished for having a new car!
So, the only explanation that makes sense is that since people can stop paying on their house but still live in it because the bank doesn't want to evict them, people will start living in their cars and stop paying on them, too! What are the car companies going to do? Evict a family onto the street by repossessing the snazzy new car in which they are living? Hahahaha!
I say this because I read in The Financial Times that in the UK, "The number of people of working age living in a household where none of the adults work rose by 500,000 to 4.8m for the period April to June", which is a huge number of people which is now "close to one in five households", which I assume is a rough estimate of what is happening in the USA.
Instead of laughing in my usual mocking style to indicate the bizarre absurdity of an economic system where the unemployed are given financial incentives to buy new cars, let me instead merely urge you to buy gold, silver and oil with your every waking moment and your every last dime, whichever comes first, which says the same thing but with the "secret bonus feature" of letting you make a Whole Lot Of Money (WLOM) when their prices rise, rise, rise, which is good because you are going to need a WLOM when inflation in consumer prices catches up with the inflation in the money supply that will accommodate the inflation in government spending, thanks to the loathsome Federal Reserve allowing and abetting the inflations by merely creating more money, which makes buying gold, silver and oil such an obvious choice that you say, "Whee! This investing stuff is easy!"
Until next time,
The Mogambo Guru for The Daily Reckoning
Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.
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.
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