The Biggest Bust Will Follow the Biggest Bubble by Bill Bonner London, England
Our 'Crash Alert' flag goes back up the pole...
October is almost half over. Will we get through the month without a major sell-off?
Dear reader, if you think we know the answer to that you've got us mixed up with someone else. Someone who is crazy.
No one with his wits about him thinks he knows what the stock market is going to do.
Still, here at The Daily Reckoning, we have our hunches. We think it's time for a major pull back. Frankly, we'll be disappointed if we don't get one soon. Because, once again stocks are too expensive.
Too expensive for what? Too expensive for the circumstances.
The Dow rose another 20 points yesterday to a new bounce record. Oil rose to over $73. Gold didn't budge.
Of course, everyone now knows that the recession is over. NABE interviewed 44 economic forecasters. Four-fifths of them said the recession was over.
But we don't care what they said. These are the same seers who missed the biggest single event in financial history. There are many banking crises, recessions, panics and defaults in the record books. But none were as great as the one that hit September a year ago. Most economists didn't see it coming; why should we trust them to tell us when it is going?
Besides they've got the whole thing wrong. It isn't a recession; it's a depression. There is no recovery from a depression; instead, the economy has to re-invent itself in another form. Things aren't going 'back to normal,' in other words. Because the period leading up to the crisis was not 'normal;' it was a bubble. After a bubble explodes, you have a lot of debris to clean up. The bigger the bubble, the more damage it does when it blows up.
"The force of a correction is equal and opposite to the deception that preceded it."
You've heard our dictum before. In fact, you've heard our explanations for all these points before.
We just lived through the biggest bubble in history. Get ready for the biggest bust. Not just two years of falling stock prices and news- making bailouts. Not just 10% unemployment. Not just 100 bank failures and 30% off housing prices.
Noooo... We're talking about a worthy correction...a real correction...a noble and distinguished correction...a correction that can hold its head up in public.
This is a correction that will take many years...one that will knock housing prices down for at least five years...and stock prices down to the point where people no longer want to buy them. It's a correction that goes deep enough and continues long enough to do its work - wiping out the bad investments and mistakes of the Bubble Era, while allowing the survivors to pay down their debts and build up their savings.
Now, here's a confusing little item. Yesterday's news tells us that consumer spending as a percentage of the entire economy has edged up to 71%. Now wait just one cotton-pickin' minute. How could consumer spending be going up?
Hold on, cupcake. It's not going up. It's going down. It's just that the other components of the economy are going down even more.
In the second quarter consumers spent $195 billion less than they did the year before - a 1.9% drop. In the 20 years before that, consumer spending increased at an average rate of 3.3%. So, you do the math... that's an about-face of more than 5% of GDP - a loss to the economy of about $700 billion!
Consumer credit is going down (we reported the figures earlier in the week)...unemployment is going up...consumer spending is going down...
..those are not the circumstances in which stocks sell for 27 times earnings...and move higher. Those are the circumstances in which stocks crash.
"By some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.
"On an operating ('scrubbed') basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is... While we will not belabor the point, when all the write-downs are included, the trailing P/E on 'reported' earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble."
So, here goes...yes...today, we are officially running our "Crash Alert" flag up the pole here at the London headquarters of The Daily Reckoning. Cross Blackfriars Bridge and you might see if flapping in the wind, between the two huge gold balls on the roof.
Our Crash Alert flag is out because stocks have become too expensive...and because this bounce should be reaching its apogee by now. Already, central banks are talking about cutting back on their efforts to sustain the bounce with easy credit. Australia led the way last week with a rate hike.
It is also becoming clearer and clearer that the feds' efforts aren't really working. They can give money to their friends in the banking industry. They can give money to speculators who then make bets on the stock market, among other things. They can bailout major companies. But they can't really get much money into the real economy.
Au contraire; they take money OUT of the real economy. The feds will absorb $700 billion of private savings this year alone...to finance their deficit. They expect $1 trillion deficits at least for another 10 years. That won't leave much money for the private sector.
Naturally, Washington, DC, is doing well. While unemployment is near 10% in the rest of the nation, it's only about 6% in the Washington area.
But let's face it... What's good for Washington is bad for the rest of the nation. The feds have used this correction to increase their power...and add to their wealth. The average federal employee now earns twice as much as his counterpart in the private sector - if the fellow in the private sector has a job at all.
A news item tells us that TARP recipients spent $114 million lobbying for their bailout money - most of it going into Washington, of course.
And the feds now own major stakes in what used to be the private sector - insurance, automobiles, and banking industries.
This has been a great period for government. Money, power...it is all floating down the Potomac like raw sewage...and coming to rest in the capitol city.
Our advice to the feds: enjoy it while you can. When stocks fall again...and people figure out what a mess you've made of the economy...you'll be lucky if you aren't tarred, feathered and run out of town on a rail.
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More news, from The 5 Min. Forecast:
"Man, the dollar just can't catch a break!" writes Ian Mathias in today's issue of The 5.
"Just a few days after the story/rumor that a consortium of nations wanted to remove the dollar from the oil trade, we hear this: Global central banks are ditching the dollar at a historic rate.
"Central banks increased foreign exchange holdings by $413 billion in the second quarter (the most since 2003), says Bloomberg data. But of those new holdings, only 37% were greenbacks. Over the last ten years, the average dollar share of new reserves has been 63%. Has the credit crisis christened a new era for FX reserves?
"Interestingly, global central banks chose the euro and yen to replace the dollar in the second quarter. The two monies accounted for all but a smidge of the remaining 63% share of new FX reserves. The euro garnered 50% of new reserves, the first time it's ever achieved such investment.
"We could think of more attractive monies... Perhaps ones that aren't part of a bitterly divided union of nations or an export country that's been in recession for most of this decade. But hey, with performances versus the dollar like this over the last six months, can you blame them?"
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 one of our most profitable research services, Options Hotline. Right now, this service is offering 24 recommendations completely free of charge to new readers...but not for long. Act now...
And back to Bill, with more thoughts:
Barack Obama has won the Nobel Peace Prize. Everyone is talking about it. They want to know what they put in the water in Stockholm. Why would the Nobel committee give the prize to someone who hadn't really done much for world peace? Of course, the committee spokesmen had their lame answers. Now, they're just hoping Obama doesn't make fools of them.
It is as if the Pulitzer committee had given the prize to someone whose book had just one chapter; "We hope this will encourage him to finish it well," says the committee.
But the Nobel committee might have done worse. Barack Obama is not the first American president to win the award. Woodrow Wilson got it before him. Obama seems ready to continue unnecessary wars. But at least he didn't start them. Wilson sent American troops into the Europea in 1917. He transformed the European war into a World War and drew it out for another 2 years...at a cost of millions of lives, not to mention trillions in expenses.
Wilson was a fool and a humbug, no more deserving of the Nobel Peace Prize than Kaiser Wilhelm. As for Obama, we haven't quite gotten his measure yet. Fool? Fraud? It's still too early to say.
But if he had been smart, he would have followed the example of another US president - Millard Fillmore. Go to Washington. You will find no monuments to Fillmore. 'Tis a pity. Fillmore actually kept the peace. Not only that, he made improvements; he installed running water in the White House. Then, when Oxford University offered him an honorary degree, he turned it down. The degree was written in Latin. Fillmore said he didn't want a degree he couldn't understand.
Chris Mayer, currently in Dubai with Addison Wiggin, sends us this note:
"The real boom in Dubai really only kicked off recently. After spending some time here and chatting with those who live here, I would boil down the more important ingredients to these:
Low regulations, low tax. This has probably been a Dubai advantage for a hundred years, but people here told us repeatedly how easy it is to set up shop in Dubai and how your privacy is protected. There are also no income, property or corporate taxes. Zero.
(The city funds itself with taxes on hotel occupancy, liquor sales and restaurant meals, as well as permits for roads and such. Part of the budget also comes from the Sheikh's business interests - such as Emirates Airlines and the aluminum smelters.)
The introduction of freeholds. In 2002, Dubai allowed foreigners to own property in so-called freeholds. That was a big milestone that kicked off a wave of immigration. So now there are these freeholds where the Penthouse Gypsies live in high style and in very nice communities.
The backlash of 9/11. Before 9/11, Middle-Eastern exporting countries re-invested $25 billion a year in the US. After 9/11, that slowed to about $1.2 billion a year. Arabs no longer felt welcome and feared what might happen to their wealth. So guess where the money went?
Arab wealth started flowing back to their own countries. The economies of the eight states of the Gulf Coast grew 60% between 2001-08, compared to 18% for the US. 'Cash poured into Dubai,' Krane writes. And Dubai's growth rate topped China's, averaging 13% per year.
Essentially, the repatriation of Arab wealth in the US was a big driver and still continues to today. As the Middle East region gets wealthier, a good chunk of that wealth will flow through Dubai.
Finally, the UAE fixes the value of its currency to the dollar - at least for now. What this means is that as the US printed dollars the effects were exported to Dubai, too. That is where Dubai got into trouble. Lots of speculative capital flowed to building islands in the shape of date palms or creating residential communities with robotic dinosaurs from Japan. Now Dubai is suffering through a massive real estate bust as a result.
"Still, Dubai's important position in world trade is many layered, like a wedding cake."
[Addison and Chris are heading to India, and promise to send back their observations throughout the week. Addison sent us an essay on Dubai today, which can be found below. In the meantime, check out his latest report, which allows you to secure your charter membership for our newest research and investment service. Find it here.]
"What happened to global warming?" asks a headline at the BBC.
Folks in the Rockies are shivering. "Western Montana breaks records," says a report. Missoula reported a low of 8 degrees yesterday...14 degrees lower than the previous record for this early in the season.
Nearby Idaho had heavy snow last week too. Same thing in New Zealand, where roads were blocked by heavy snow.
In New Zealand, two major North Island highways remain closed after unseasonal heavy snow days stranded motorists for two nights. "Even if this was the middle of winter this is extreme," said an analyst.
And right now, it's spring in NZ. They had a spring snowstorm that put their winter snowstorms to shame.
"Forget global warming," says old friend Jim Davidson. "Get ready for another ice age." Buy Brazil, he advises; the cold will drive down farm output in North America and Europe.
As the BBC reports, worldwide temperatures are not increasing; they've been falling for the last 10 years. No one knows why. Global warming enthusiasts say the trend is still towards higher temperatures. Their opponents say the world is actually beginning a major period of cooling - driven by solar activity, not by man-made carbon emissions.
Who's right? We get out our mittens and wait to find out.
Bill Bonner The Daily Reckoning
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The Daily Reckoning PRESENTS: Dubai and Abu Dhabi, the two leading Emirates of the UAE are relatively new to global finance and trade... But they want you to know they have arrived in high style. Addison Wiggin explores, below...
Arabian Money: Gold, Sex, Oil and War by Addison Wiggin Dubai, UAE
"The future is what we will make of it." - Seen on a t-shirt of a young UAE national in the Souk Al Babar
The 4-lane Sheik Zayed road stretching between Dubai and Abu Dhabi is, at best, a competition for speed; at worst it's a death trap. Among the UAE's claim to world's largest shopping mall, world's tallest building and world's longest metro built in "one go", is this highways claim: to one of the world's biggest automobile pile-ups.
On March 12, 2008, 25 cars traveling along the route burst into flames after piling into one another as a band of fog rolled in from the Gulf. Nearly 60 cars were in the accident altogether... 347 people were injured in the crash, 6 lost their lives.
"The crash happened because everyone was speeding despite the severe weather conditions," an Abu Dhabi traffic police officer said at the crash site, as reported by the Gulf News. "Drivers weren't leaving a safe distance between cars and this resulted in everyone hitting each other after the first crash."
A documentary short posted on YouTube capturing the 911 calls placed from motorists describes 'Foggy Tuesday' as a morning devoid of "human caution." The film also heralds the obvious bravery of the men who arrived from the Abu Dhabi fire, police and rescue crews to save those who'd become entangled in the brouhaha.
We will not hold you in suspense any longer...the metaphor suggested by this fantastic auto accident is a perfect fit for those studying the Dubai property bust. And like the writer of a Hollywood script, we cannot help by bring it to your attention.
Yesterday, on the recommendation of our new friend Moe, we traveled the same stretch of Sheik Zayed highway where the accident had taken place. Mohammad "Moe" Fathi Al Abrozani a Bahrainian-Qtari whose mother was an Iranian-American. Moe was born in Abu Dhabi, educated in California, lived briefly in New York and Chicago, then spent seven years in Germany. (His German is so fluent our German friends, Andre and Vereena, here in Dubai did not expect him to be Arabic when they first met him in person.)
Moe had returned to the Middle East to take part in the expansive boom attracting so much attention around the globe. He's now an executive with TwoFour54 Media, a firm set up by the government in Abu Dhabi to woo Western firms into establishing their Middle East operations in the new Media City in the UAE's capitol city. The rulers of Abu Dhabi had witnessed the efforts, successes and failures of their fellow emirate, Dubai, and have since vowed to create a modern media communications hub greater than anything now in existence.
"Why mess with visas, permits and expatriate contracts down in Dubai?" Moe asked us at dinner the other night, "when you can come to Abu Dhabi and get them all from the government free...?" One foggy morning in the year 2008, the reckless speculation that spurned much of the outrageous development projects in Dubai began to pile up on each other. Now the motionless construction sites lay in wait for assistance. In a scene familiar across the West, Abu Dhabi, the company line suggests, has "come to the rescue" of Dubai; with low cost loans; paper money and the sincerity of an assassin.
When we met up with Moe and Andre at Shakespeare's a brand-new bar in the all-new Souk Al Bahar, they were quietly puffing from sisha - the traditional water pipes bubbling with aromatic smoke. Our mission in the region was and is simple. We want to establish a presence on the ground from which we can monitor the developments and assess investment opportunities in Dubai, the UAE and across the Middle East unfiltered by the mainstream press. But here we were being asked to consider moving the infrastructure of our publishing business, our families, our lives, half way around the world to the desert.Bloomberg, CNN, Forbes are all moving and or expanding their operations in either Dubai or Abu Dhabi.
Why shouldn't we? Our friends in Abu Dhabi are apparently ready and willing to help.
"We suspect this fantastic wreck in the desert is only one scene in a long, exhilarating drama. We're not 'long' Dubai in any real investment sense. Not now anyway."
Dubai and Abu Dhabi, the two leading Emirates of the UAE are relatively new to the global finance and trade... but they want you to know they have arrived in high style. This weekend, Formula One racing makes its debut in Abu Dhabi. The government had to pull workers from several of its five star seaside resort project to complete the track and facilities on time. Ferrari World, a massive theme park dedicated to the sport sits nearby. Yesterday, the Emirates Palace Hotel - the world's first seven-star hotel - Demi Moore, Hilary Swank, and last year's Oscar winner, Freida Pinto (Slumdog Millionaire) graced the opening ceremonies of the Middle East Film Festival. The Abu Dhabi sovereign wealth fund has famously leveraged their way into both of the leading football franchises in the world - FCBarcelona and Manchester United.
Still, our friend Peter Cooper recalls a time in his own family history when Dubai was nothing but a backwater of the British Empire, a port full of smugglers, nomads and thieves. His great uncle had been stationed here during World War II. At the time, the strife caused by the war left the ragtag bunch group of 7,000 residents on the edge of starvation.
Sheik Rashid, the father of modern Dubai, dredged the Creek in the 1950s establishing Dubai as a free trade port. At the time, too, the Creek dredging project was roundly criticized, as it should have been. The project cost nearly 3 times Dubai's annual GDP. But it also established Dubai as the trading center for goods coming into the Middle East. If you go down by the creek today there are Iranian Dhows - the Middle East's answer to the Chinese Junk - bringing rice, rugs and refrigerators back and forth across the Persian Gulf. Iran's ports are about a two-day drift away for these wooden ships. Kuwait and Iraq a day or two more. Bahrain, Qtar, Oman closer still. Without the fantastic success of that initial dredging project, we wouldn't be writing to you from the desert today.
"Dubai the hot spot..." has been a center of trade, smuggling and the rougher trades ever since. As the back jacket copy on a 1970s novel about gold smugglers in Dubai written by the French Connection author Robin Moore indicates: "Dubai, where adventurers play the world's most dangerous games...gold, sex, oil and war. Cold- blooded adventurers in a blistering Mideast empire where life is cheap and no price too high for pleasure." The novel is still banned here because the sheiks don't like the image it portrays.
The promise of riches, however, is part of the region's allure and what has attracted those expatriates who chosen to ride out the bust and continue to live here to this day.
The most recent gold rush, the boom in Dubai property, came on the heels of the terrorist attacks on September 11, 2001 and the same policy response that spawned a housing and consumption bubble across the United States, London and much of the West. Arabs flush with energy and trading capital brought much of that money home to the Middle East fearing a Western clamp down. At the same time, investors in dirham backed assets - the local currency which has enjoyed a US-dollar peg since November 1997 - benefited from the same era of low interest rates that soccer moms in Montgomery County, Maryland or gamblers in Las Vegas, Nevada did.
And like all booms, the property in Dubai witnessed its excess and its pathos. An article in this week's Asian edition of Time Magazine laments the manmade island project meant to mimic all the countries on the planet. "The World is one of many architectural fantasies in Dubai that now appear to be shimmering mirages. The emirate boasts the 818m Burj Dubai, the world's tallest skyscraper; a manmade island shaped like a giant palm; a ski slope in a shopping mall; an 18-hole golf course in the middle of the desert that will slurp down 3.8 million liters of water a day. But the dozens of giant cranes that once littered the skyline are beginning to migrate elsewhere. Dubai today has the feel of a futuristic, five star ghost town blasted by sandstorms."
"The fools!" we can hear readers of Time Asia chuckle with superiority. Everyone likes to kick a gambler when he's down.
But the story remains. On our way to Abu Dhabi yesterday we passed by the free zone surrounding the new deepwater global trading port at Jebel Ali. Business Bay near Jebel Ali is the home to many of the Bubble Era development projects, 30-story towers standing side-by-side, dark windowed and tenantless.
We suspect many of these nutty projects - like the City of Arabia, which had boasted an amusement park full of life size animatronic dinosaurs as its calling card during the boom - will never find the funding to finish. More sober projects that are or are nearing completion will likely take years to find tenants. And those "investors" who bet big and large on Dubai property in 2003-08 are no doubt already wishing they never had.
But the free zone near Jebel Ali also the site of Dubai's real potential; banking and trade. Corporate tax rates in are effectively zero. You name a multinational and Moe can point to their local subsidiary. The Dubai Mall, for example, is reported to need 10,000 shoppers a day to break even but now only sports around 7,000. Why do the world's most famous brand names all have shops open and spiffy already, we couldn't help but wonder. It has to be for those fine tax rates, we couldn't help but conclude.
Among other racy themes we heard this week, Dubai is supposed to now be the world capitol of the flesh trade. And the gold price hit an all- time high early in the week after we arrived sparked by rumors the GCC would back a unified currency with gold and provide oil traders an alternative pricing unit than the US dollar...
We suspect this fantastic wreck in the desert is only one scene in a long, exhilarating drama. We're not "long" Dubai in any real investment sense. Not now anyway. But, like most onlookers to the spectacle, we struggle to avert our eyes. The story promises more exciting car chases, more steamy sex scenes and political intrigue to come...and we'd be lying if we didn't admit we're suckers for a good story. And, who knows, we may open an office of our own there.
Addison Wiggin for The Daily Reckoning
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Editor's Note: Addison Wiggin is the editorial director of The Daily Reckoning, and executive publisher of Agora Financial, a multi-million dollar financial research firm and publishing group based in Baltimore, Maryland. His second edition of The Demise of the Dollar...and Why it's Even Better for Your Investments was just fully revised and updated. He is also the executive producer of and a writer of I.O.U.S.A. a feature length documentary film nominated for the Grand Jury prize at the 2008 Sundance Film Festival. The film is inspired by the international bestsellers Financial Reckoning Day and Empire of Debt, which he coauthored with Bill Bonner.
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