 | | The Daily Reckoning | Friday, September 30, 2011 |
- Sticking to the script: The EU produces an all-too-familiar movie,
- The disaster of "kickstarting growth" the Ben & Friends way,
- Plus, Bill Bonner on 5% China and King Cash...with a revolution to come...
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The Mother of All Financial Bubbles is Just Now Starting to Pop...
The wild ups and downs in stocks and gold aren't due to any single factor.
Everything's shooting up and falling down because we're witnessing a bubble start to pop that's been expanding for decades. It's time you learned the truth about what's happening. Click here.
|  | | | | Oedipal Economics | | How the EU Has Secured the Greek Default it Sought to Avoid | | |  | | Eric Fry | Reporting from Amsterdam, Holland...
“Germany Backs Rescue Fund,” the front page of today’s Financial Times declares. “Victory for Merkel on Euro Zone Aid,” adds the front page of today’s International Herald Tribune.
Good times, apparently, are here again...if the stories that followed these headlines are to be believed.
“The German parliament voted by an overwhelming majority in favor of measures to bolster the $597 billion eurozone rescue fund,” The Financial Times’ story began, “giving [the fund] new powers to buy bonds and recapitalize weak banks, in a move that lifted financial markets and boosted the euro.”
The Dow Jones Industrial Average celebrated the German vote with a 145-point rally. Today, the Dow is “uncelebrating” yesterday’s vote by falling — at this moment — exactly 145 points.
We’ve seen this movie once, if not a dozen times before. The plot goes something like this:
- Investors worry about Greece going bankrupt.
- Investors subsequently worry that a Greece bankruptcy would trigger a contagion that would doom other European nations, as well as several large European banks.
- Markets fall worldwide.
- Some hodgepodge of EU officials announces, approves or revises a bailout plan.
- Markets rally worldwide.
- Within a day or two, investors re-think their initial exuberance. Their optimism yields to doubt.
- Markets resume falling worldwide.
The German Bundestag’s approval of an enlarged bailout fund — as well as the preceding and ensuing stock market volatility — follow the script above, scene-for-scene, line-for-line.
But the real story for investors is no the movie we’ve already watched a dozen times, it is the live drama that’s now unfolding. The movie is merely a distraction from the drama — creating lots of volatility, but very little substance.
The unfolding drama is “Oedipus Rex,” with a financial twist.
Oedipus, as you may recall, was that unfortunate lad who, according to the Oracle at Delphi, would marry his mother and kill his father. Oedipus fled his homeland immediately. But in trying to escape his fate, he sealed it.
Angela Merkel, you are Oedipus...sort of.
If the Oracle at Delphi were still in the predictions business, she might prophesy that Greece will default and the euro will fail. And if so, Greece and the EU would immediately attempt to flee their fate. But like Oedipus, in fleeing their fate, they would seal it.
Greece might, for example, beg its rich neighbors in the north for a “short-term” loan. It might also enact austerity measures in exchange for even larger handouts.
The EU, in an effort to avoid its fate, might agree to ship billions of euros down to Greece to try to contain the threat of contagion. Further, the EU might agree to continue sending billions until there was no more money to send...or until Greece defaulted anyway.
The bailout funds — no matter how large they grow — will merely slow the march toward inevitability. The destination is certain; the timetable is variable.
Here in Europe, your editor has been conducting a week-long “Farewell Euro Tour.” From Amsterdam to Geneva to Venice and back to Amsterdam, your editor has been asking men and women on the streets what they think about the euro and about its chances for survival.
Generally speaking, support for “saving Greece” is tepid at best. While most folks voiced some version of, “Well, we should try to do something to save,” they also voiced some version of, “We liked our old currency better.”
We’ll detail our encounters next week, while also providing a few of the highlights we captured on video. For now, let it suffice to say that popular support for rescuing Greece appears to be waning, no matter how the Bundestag votes.
| | | | | When Will Obama Confess to the Secret “Timebomb” Event Ahead? |
Obama and Congress won’t even talk about it...but we’ve got a much bigger problem ahead than anybody cares to admit...and it could hit harder than the 2008 banking collapse.
What problem?
Nothing less than a secret new meltdown for world oil supplies — with gas potentially doubling in price and oil potentially about to hit $300 — and it could hit as early as the end of this year.
Find out how in this urgent new report...
| | |
| | The Daily Reckoning Presents | | An Absolute Zero | | |  | | Frederick J. Sheehan | The Federal Reserve Open Market Committee (FOMC) concluded a two-day meeting last week by initiating “Operation Twist.” The FOMC’s press release explained: “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”
This announcement initiated sell programs in almost every financial market. There are many reasons for this reaction, one of which was the recognition that the Federal Reserve is 0-for-whatever-it-has tried. All the Fed’s initiatives have failed, and now, all that Bernanke can think to do is drive down yields that are already below 2.00%!
The Fed’s efforts to revive the economy are failing because of the four topics that never enter the mind of Federal Reserve Chairman Ben S. Bernanke: money, credit, leverage, and capital.
The productivity of capital is an important consideration, one which most people understand, in their own words. A bank does not lend money to a business that cannot earn its way to paying back the loan. A potential borrower understands the banker’s hurdle. Similarly, an investor buys shares of common stock in a company that will produce the most from the least. The higher the profits produced per share, the more the shares should be worth.
In other words, most folks understand the classic connection between risk and reward. And most folks also understand that merely borrowing more money, without putting that money to productive use, will never solve anything.
Ben & friends do not think this way. They believe that funneling more credit into the economy is a surefire means of “kickstarting growth.” But the facts say otherwise.
During the quantitative easing programs, the Fed’s credit-from-the- heavens produced zero growth.
During the 1980s, the change (rise) in non-financial domestic debt divided by the change (rise) in nominal Gross Domestic Product was 2.2. That is, for every $2.20 borrowed, the United States produced $1.00 of additional goods and services (nominal). In the 1990s, debt was less efficient. The US borrowed $2.70 for every $1.00 of growth. More recently, between 2001 and 2008, this ratio soared all the way to $4.20 for every $1.00 of growth.
In other words, every incremental unit of credit has been less and less productive. But that’s the only tool Bernanke has in his toolbox, so he just keeps using it. Since the Fed rolled out its various quantitative initiatives in early 2009, the ratio of debt- to-production has been 3.7:1 (through June, 2011). But, the increase in transfer payments (1-in-7 Americans now receive food stamps, Cash for Clunkers, shovel-ready bank bailouts) exceeds the rise in nominal GDP by a wide margin. Thus, as a measure of financial efficiency, the ratio is now meaningless.
The additional debt being manufactured is not producing any additional goods and services. The more Bernanke applies his senior thesis to the real economy, the less the economy is able to pay down old debt, much less manufacture additional goods and services to pay down the new debt.
The Fed has pegged short-term interest rates at zero; Operation Twist is an attempt to drive long-term rates to zero (or, close to it); the rise of incomes in the United States since 2008 has been zero; “real” GDP growth since QE1 has been less than zero; the FOMC is an absolute zero.
Physical elements tend to behave very strangely as they approach absolute zero (-273 Celsius).
Economic elements, as it turns out, are not so different. The move toward “absolute zero” along the yield curve is producing some very strange behavior — in both the financial markets and the economy at large.
The Authorities have lost control of the markets they have been manipulating. Desperate tactics, with untold unintended consequences, such as the Swiss National Bank doubling its monetary base last month, ensure more fanatical outbursts from the Fed, the ECB, and the Bank of Japan.
In this setting, gold fell more than $150 last week. Strange, isn’t it? Other than remote islands, gold is the best bargain around.
Regards,
Frederick J. Sheehan,
for The Daily Reckoning
Joel’s Note: For reasons oft-cited in these pages, by Mr. Sheehan and others, the gold story — sometimes known as the “anti-dollar” story — is becoming an increasingly important one for individuals who wish to distance themselves from the Fed’s unscrupulous, dollar- debasing clutches. In fact, the story is so important, Addison has made it a mission to get a copy of Ron Paul’s “Lost Gold Bible” into as many hands as possible. Be sure to grab your copy — and a few issues of Addison’s Apogee Advisory — right here.
Mr. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and The Coming Collapse of the Municipal Bond Market (Aucontrarian.com, 2009)
| | | | | | | Bill Bonner | | Bernanke’s Plot to Overthrow the US Dollar | | |  | | Bill Bonner | Reckoning from Paris, France...
Where’s the Bastille...?
The Dow got a boost yesterday — up 143 points.
Gold remained where it was — about $1,617.
Dear Readers know what we think.
The Great Correction has a lot of work to do — there are so many things that need correction. And it will take time to do it. Meanwhile, your goal as an investor is to lose less money than everyone else. He who loses least wins!
Stocks should go down. Real estate should go down. Even gold should go down...as the dollar goes up!
Cash will be king...
..until the revolution.
What kind of revolution? When?
Ah...dear reader...you’re asking a lot from a free service!
But what the heck... We’re happy to tell you what we think. We just hope it’s worth at least what you paid for it.
Here’s the way we see it. Cash is king in a de-leveraging, dis- inflationary, depressing slump. The king should reign for a long time...because it will take a long time to squeeze the excess debt out of the US economy.
But as you know, there’s a lot more going on. While the private sector reduces its debt the public sector adds debt. And the people who run the public sector are activists...determined to de-throne the king. They are plotting treacherous acts of insurrection... They are looking for the Bastille!
Here’s Ben Bernanke, stirring up the mob. Bloomberg reports:
Federal Reserve Chairman Ben S. Bernanke said the US is facing a crisis with a jobless rate at or above 9 percent since April 2009, and that fiscal discipline would help spur the economic recovery.
“This unemployment situation we have, the jobs situation, is really a national crisis,” Bernanke said in response to questions after a speech yesterday in Cleveland. “We’ve had close to 10 percent unemployment now for a number of years and, of the people who are unemployed, about 45 percent have been unemployed for six months or more. This is unheard of.” Mr. Bernanke is preparing the crowd. He wants to take action to topple his royal highness, king dollar. He wants to bring cash down... And he figures that the way to do it is to drop him out of a helicopter.
When people see so much cash fluttering in the air they’ll want to get it...and get rid of it...as soon as possible. That will get the economy rolling again and convince people that he, Ben Bernanke, actually knows what he’s talking about...and that he, Ben Shalom Bernanke, should be in charge. He should be the real monarch...
But Mr. Bernanke’s hour has not come round yet. He is faced with opposition in Congress...and in his own central bank. He will have to wait before it is time to slouch to Bethlehem...he’ll have to wait for things to get worse...then, he’ll be able to start up the helicopters.
What might make things worse? When? Keep reading...
And more thoughts...
Here’s more bad news for the world economy. Again, Bloomberg is on the case:
China Growth Seen Less Than 5% by 2016: Poll
Most global investors predict Chinese growth will slow to less than half the pace sustained since the government began dismantling Mao Zedong’s communist economy three decades ago, a Bloomberg poll indicated.
Fifty-nine percent of respondents said China’s gross domestic product, which rose 9.5 percent last quarter, will gain less than 5 percent annually by 2016. Twelve percent see such a slowdown within a year, and 47 percent said it will occur in two to five years, the quarterly Bloomberg Global Poll of investors, analysts and traders who are Bloomberg subscribers showed.
China, which saw its exports tumble the most since at least 1979 amid the 2008-09 global crisis, may not be able to rely on trade in any prolonged demand slump in Europe and the US, now battling to avoid returning to a recession. Managing the economic downshift would fall to the Communist Party’s next leaders, as President Hu Jintao and Premier Wen Jiabao begin their transition from power late next year.
“If we’re not buying things, they’re not making them,” said Charles Doraine, Chief Executive Officer of Doraine Wealth Management in Corpus Christi, Texas, and a respondent in the poll of 1,031 investors, analysts and traders taken Sept. 26. If Americans don’t buy, Chinese don’t make. That leaves both of them feeling a little poorer.
*** And here’s what happens when people get poor.
PHILADELPHIA (CBS) — Thousands of Philadelphia residents gathered in long lines, citywide, waiting hours outside of 12 County Assistance Offices, hoping to apply for relief following Hurricane Irene.
The residents, many confused and lacking official information, hoped to receive a month of food stamps for food ruined by floods and power problems caused by the hurricane.
The program, called Disaster SNAP (Supplemental Nutrition Assistance Program), was created by the federal government and is administered by the State Department of Public Welfare.
Because of unexpectedly large turnouts, the application process was moved from Disaster Recovery Centers in Philadelphia to the 12 state offices in neighborhoods citywide.
Residents, based on income, household size and proof of flood-damage can receive up to a month’s worth of food stamps.
Those already receiving food stamps are eligible for partial relief, to the extent that their prior month’s food supply was damaged.
Throughout the day Monday, and beginning early Tuesday morning, many state offices had lines stretching for blocks with confused residents, many alerted by other neighbors that relief was available.
Little if any guidance was available at offices in the early going, although later in the day, officials did permit applicants to fill out forms outside the building instead of waiting for hours in line. *** A thought keeps coming to mind. This correction is bigger, meaner and longer lasting than even we imagined. It’s not just taking us through a normal recession cycle...and not even through a normal credit contraction.
Actually, we have so little experience with credit contractions that we don’t know what normal is. Like the US in the ’30s? Like Japan in the ’90s?
At least we know how, in theory, credit contractions work. People cut back spending until they have rebuilt their balance sheets. That’s why they are also called “balance sheet recessions.” We can also make some estimates about how long they will last, based on how long it should take to pay down debt. When the correction began we calculated that it would last 7 to 10 years. That’s how long it would take to pay down debt to ’80s levels, assuming savings rates went back to where they had been at the beginning of the ’80s.
Now, it looks like it will take longer. Maybe forever. At least, it will seem like forever.
This is partly because the feds interfered. They panicked when it looked like the process of de-leveraging was out of control. People were going broke — even people who made large campaign contributions! Even people who were members of that privileged fraternity — bankers! So, they came in...and locked up the economy in its depressed state, keeping zombie institutions alive indefinitely.
But that’s not all. It will also take longer because it is a more serious correction. It has a lot of work to do. What exactly?
Well, we don’t know exactly. But many of the governments of the developed countries are not likely to survive.
‘Wow, Bill, have you lost your mind?’
We don’t take anything for granted. And we know that we are sometimes right and sometimes wrong. And always in doubt. Still, the social welfare governments of the modern world are not equipped to deal with this challenge. They were designed for growing economies, not stagnant ones. They were all created in a period of growth — made possible by the widespread introduction of cheap fossil fuels. That period is over. Temporarily or permanently. And the dinosaurs of the growth era are unable to adapt to the colder climate of the new age of austerity.
Here in France, for example, they’ve already taxed the rich about as much as the rich can stand. And they’ve robbed future generations as much as they could get away with. What else can they do?
In the US, they can probably tax the rich harder...but it will yield peanuts, perhaps even reducing the feds’ take. America’s providential state is less generous and less ambitious socially than the French model. On the other hand, the US is far more ambitious militarily. For every layabout chiseler the French supports, the US supports two soldiers and one Pentagon contractor. The cost is staggering ...and probably even more irreducible than Europe’s social costs...
Neither the Europeans’ social welfare states...nor the Americans’ welfare/warfare state...are likely to survive in their present forms.
Regards,
Bill Bonner,
for The Daily Reckoning
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