Saturday, November 28, 2009

A Faith-Based Recovery

Celebrating A Decade of Reckoning
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The Daily Reckoning Weekend Edition
Saturday, November 28, 2009
Taipei, Taiwan

  • And where gold stops, nobody knows (well, maybe these guys do),
  • Six reasons not to believe in the frantic recovery hype,
  • Plus Bill Bonner on the sovereign debt mega-bubble and much more...
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Joel Bowman, with some cheery holiday words from Taipei, Taiwan...

Today we have something extraordinary for you to ponder. We call it, in the prescribed, politico-doublespeak of the times, a "recovery." Allow us to elaborate for just a moment...

A "recovery," as defined by the same economic talent that led us into mass speculative temptation in the first place, is a magical reversal of fortunes for the global economy.

What is this recovery based on? Glad you asked, because here comes the extraordinary is underpinned by the hysterical, back-slapping delusion that comes from accepting that there is, in fact, a recovery. It is real, in other words, because we are told it is real.

Convinced yet?

As the late astronomer, Carl Sagan, was fond of saying, "Extraordinary claims require extraordinary evidence." In the absence of such evidence, let us examine the faith-based foundation on which the stability of the world's largest economy now rests.

Below are a few tenets all sworn Recoverites must accept, any and all evidence to the contrary be damned:

1. That a consumer economy can continue to grow exponentially, even as the consumers themselves are forced to economize...

Where once manufacturing, innovation and a solid savings base held sturdy the US economy, there is now consumption, a waning service industry and a fiscally constipating accumulation of debt.

With household liabilities as a percentage of disposable income running at almost 130% for the average American family, and official unemployment bubbling over a 26-year peak of 10.2%, it's tough going at the mall...even for the mighty US consumer...and even after the government has bribed him to go out and spend!

Already GDP estimates for the September quarter were revised downward - from 3.5% to 2.8% - after it became clear that the effects of the Cash for Clunkers program - the governmental equivalent of economic Viagra - had worn off sooner than expected. Barely had the poor consumer got his pants off and his wallet out when his many embarrassing deficits became all too apparent.

2. That the notices of liability printed by the Feds - commonly referred to as "greenbacks" - will enjoy the infinite confidence and unyielding patience of the nation's foreign creditors...

For the past year we have heard rumblings from the BRIC nations, in particular China, over the government-sponsored debasement of the greenback. Most recently, Liu Mingkang, the Middle Kingdom's chief banking regulator, argued that the combination of a weak dollar with persistently low interest rates had encouraged a "huge carry trade" that was having a "massive impact on global asset prices."

It is no secret that "dollar alternatives" are openly discussed among large holders of US paper. So shaky is the dollar, in fact, that even a (briskly discredited) rumor in an English paper about OPEC nations ditching the buck sent the world's "reserve" currency into a tailspin, tipping off gold's current trailblazing rise - itself another indicator of fear and loathing of the once almighty buck.

(As we were jotting these few words, midweek, the greenback had just fallen below one Swiss franc for only the second time ever, reaching a 15-month low on the dollar index and approaching a 14-year low against the yen.)

3. That those creditors will continue to reinvest said monies back into the increasingly regulated and overtaxed US securities exchanges...

And that's to say nothing of the growing minority of American citizens and companies already, wisely, looking for ways to flee their own shores with the hope of doing business in more accommodating, less intrusive arenas.

4. That extorting money from current and future workers in order to allocate it to the nation's least efficient industries is a positive long-term strategy...

Over the past year, the government of the United States of America has pumped more money into its flailing economy than the total value of all the gold ever mined in world history...doubled.

Before we go on, let us remember that each and every one of those dollars - and the trillions more splashed around by the do-gooder interventionalists of the world - are dollars that are NOT now available to private citizens or the thousands of small businesses that might have benefited from a little extra cash during this whole crisis.

The true opportunity cost of this gross misallocation of vital resources will, of course, never be known. What is known, however, is that said bailouts helped the federal budget deficit along to a post WWII record of more than $1.4 trillion in fiscal 2009. Treasury officials warn the national debt limit of $12.1 trillion may be reached and breached by as early as December.

5. That those still purchasing stocks are better informed than the industries' insiders...

Insider selling increased during the latest week from $960 million in sales to over $1.39 billion. That compares with "buys" totaling just $160 million. The ratio of selling to buying has, at times during this stock market rally, stretched to as much as 31:1.

Is there something outsiders know that insiders don't? Unlikely.

6. And, that the geniuses who missed the warning signs of the biggest bust up in modern financial history are the most qualified to guide us out of it...

Even up until the very eve of the crisis, elected and unelected politicians assured those who knew better that the vast and plentiful risks to the financial industry were contained. Clearly, they were not. At every juncture since then, those leaders and others have sought to impose the very measures - currency debasement, deficit spending, increased state intervention, bailouts, nationalizations etc. - that history tells us lead to outright ruin.

Sir Isaac Newton - himself a man of faith...and a devout student of alchemy - once wrote, "If I have seen further it is only by standing on the shoulders of giants."

What is perhaps the most galling of this entire financial debacle is that, with the abundance of insightful economists history has granted us, today's leaders should appear proud to be seen standing on the shoulders of earthworms.

That, in itself, is something even the most delusional among us ought to have serious trouble believing in.

More below...

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But even better, I've just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call "penny-per-ounce" gold.


ALSO THIS WEEK in The Daily Reckoning...

Golden Years
By Bill Bonner
London, England

Everyone knows what when wrong with sub-prime. When you lend money to people who can't pay it back, you're asking for trouble. So, if you're out of a job and looking for a sub-prime loan to buy a double-wide trailer you're out of luck. Bankers won't give you a dime. But now, the world's lenders are doing something just as dumb. They're lending to governments. Imagine you were a banker. And the US government comes to you for a loan.

Unscramble These Letters: MOLYBDENUM
By Chris Mayer
Gaithersburg, Maryland

The mere whiff of an economic recovery has sent the prices of many industrial metals soaring. A genuine recovery and/or inflationary trend will cause prices to soar even more. Heck, we may not even need much of a rebound. Current extraction rates of certain metal minerals imply we're going to see some big price moves

How to Invest in Gold Mania
By Jeff Clark
Stowe, Vermont

There's certain to be a rush into gold and silver, and buying before Main Street catches gold fever is the only way to play this trend. Because when Midas fever hits, prices will explode to the upside, for both the metals and the stocks.

Freak Show
By Bill Bonner
London, England

There are so many breathtaking things going on around us we practically suffocate. Last week, three-month US Treasury-bills yielded all of 0.015% interest. Some yields were below zero. In effect, investors gave the government money. The government thanked them and promised to give them back less money three months later. How do you explain this strange transaction? Was there a full moon?

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The Weekly Endnote: It would be criminal to keep you any longer on a holiday weekend. So we won't.

If you do wish to send us a comment on any of this week's issues, simply drop us a line at the address below. Aside from that...

Enjoy the holiday!


Joel Bowman
Managing Editor, The Daily Reckoning
The Daily Reckoning - Special Reports:

Gold: The Truth About Gold

Fiat Currency: Using the Past to See into the Future

"THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.

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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.

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