 | | The Daily Reckoning | Tuesday, December 20, 2011 |
- How long can the central bank cavalry continue to lead the charge?
- Investing in Nicaragua and the importance of “ground truth”...
- Plus, Bill Bonner on the corrupting influence of power, and plenty more...
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|  | | | | Backdoor Quantitative Easing | | How Central Banks Attempt to Prop Up the Economy | | |  | | Eric Fry | Reporting from Laguna Beach, California...
The Dow Jones Industrial Average tumbled about 100 points yesterday — probably not because anyone really wanted to sell stocks, but because no one could think of any really good reason to buy them. This morning, the Dow is soaring more than 300 points — probably not because anyone really wants to buy stocks, but because no one can think of any really good reason to sell them again.
In short, the financial markets are reflecting what our friend, John Mauldin, calls a “muddle through” economy.
Notwithstanding this morning’s buoyant stock market action, the euro zone is still in crisis, the finances of most governments in the Western world are still in shambles... and Bank of America’s share price is still hovering around five dollars — just like it was in March of 2009, when then-Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke were busy patting each other on the back for “saving” the financial system.
Toward the end of yesterday’s trading session, Bank of America’s share price actually slipped below five dollars per share for the first time since mid-March 2009. That event may or may not be significant, depending upon which rumors one chooses to believe.
One of the juiciest rumors of the moment is that the Federal Reserve is desperately trying to prop up Bank of America, under the guise of helping to “save the euro.”
For example, the last time Bank of America’s share price flirted with five dollars was November 29. The stock hit $5.03 during that trading session before closing at $5.08. The following morning, at the crack of dawn, the Federal Reserve announced its latest “coordinated intervention” with the European Central Bank and a bevy of other central banks. Stock markets around the world skyrocketed on the news. Distressed financial stocks like Bank of America’s skyrocketed most of all.
Therefore, as we noted in the December 5th edition of The Daily Reckoning, “[The King Report] speculates that problems here at home may have also spurred the cavalry into action. ‘Fed concern about Bank of America was probably a prime factor in implementing the latest scheme,’ says King. ‘If BAC had fallen below $5, there could have been an avalanche of selling because some institutions cannot buy or hold a stock that is less than $5 per share. A cascading BAC could have generated an “Emperor has no clothes” moment for BAC. (Buffett would have been chagrined). So it was imperative that someone closed BAC above $5 on Tuesday and that some scheme had to be implemented to drive the price higher on Wednesday.’
“So just as expected/hoped,” the December 5th Daily Reckoning continued, “the markets rallied sharply on Wednesday, enabling BAC and a few other troubled financial institutions to live to fight another day. But the fight is far from over...and the troubled financial institutions are unlikely to emerge victorious, no matter how many times the central bank cavalry storms into battle.”
As predicted, the central bank intervention announcement on November 30 produced a very sharp, dramatic rally. Bank of America’s shares rallied as much as 16%, while the shares of many other banks and finance companies rallied even more. Nevertheless, by the end of yesterday’s trading session, those fleeting gains had more than disappeared... and there sat a forlorn Bank of America, priced at $4.98 a share
Then the cavalry charged in once again!
Is it not somewhat curious, that today’s 320 rally seemed to come out of nowhere, on no major news whatsoever? Is it not also somewhat curious that the stock market happened to the soar the very next morning after Bank of America fell below $5?
These kinds of coincidences are almost enough to make me believe crazy rumors.
Oh, wait a minute, there was some bullish news out of Europe this morning. The Spanish government managed to sell a few bonds to “the public.” This announcement sparked a rally in Europe that continued into the New York trading session. But once again, if you believe some of the crazy rumors going around, the “successful” Spanish bond auction had the Fed’s fingerprints all over it.
According to the scuttlebutt, European banks snapped up the Spanish debt — these very same European banks that are already choking on life-threatening quantities of Spanish, Italian, Portuguese and Greek debt. So why would they buy even more of this stuff?
Two reasons: 1) The banks have a large, vested interest in preventing the prices of the sovereign bonds they already hold from falling even more and; 2) Thanks to the Federal Reserve, these banks now have access to extremely cheap, unlimited funding through the swap lines the Fed announced on November 30th. (The banks also have access to very cheap 3-year credit lines from the ECB).
Let’s call this whole shebang, “Backdoor Quantitative Easing.”
Even if the details of this Backdoor QE theory are somewhat off base, the substance of the theory is certainly dead on. Somehow or other, you can be sure that the Fed and the ECB are busy “fixing things”...and utilizing clandestine tactics to do so.
But so far, the troubled banks of America and Europe are still as troubled today as they were three weeks ago, and many of them are more troubled than they were three years ago, when the Fed moved full-time into the bank-rescue business.
Of course, the Fed and the ECB have financial problems of their own.
“No matter how you slice it,” observes our friend Dan Denning, editor of the Australian Daily Reckoning, “many of the world’s governments need money. If the private markets don’t give it to them, their central banks will have to do the job. This will lead inevitably to money printing and currency devaluation. The amount of money these governments require is staggering.
“Industrialized Welfare State governments will have to borrow some $10.4 trillion next year, according to the Paris-based Organisation for Economic Cooperation and Development (OECD),” Dan continue. “That’s a lot of money. The countries doing the bulk of the borrowing are in Europe. Don’t forget America. The chart below shows that nearly 60% of total US Treasury debt outstanding — or $5.6 trillion — must be refinanced in the next four years.”
Where is that money going to come from?
It’s hard to say where the money will come from, but it’s easy to say where it will not come from. It will not come from private citizens who are looking to park their cash in safe and secure investments. There aren’t enough folks with actual money to invest who are willing to lend that money to a bankrupt government. So in order to fill this $10 trillion funding gap, we should expect a few more quantitative easing programs and other forms of money-printing.
Meanwhile, we should also expect a lot more attempts by government powers to repel the forces of economic nature: More “coordinated central bank intervention,” more “emergency landing facilities,” and more ad-hoc, too-big-to-fail remedies.
So at least we’ve got that going for us — a lot more of the stuff that hasn’t worked... and never will.
Buy gold...some more.
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| | The Daily Reckoning Presents | | “Power Corrupts...” | | |  | | Bill Bonner | This is the last in a series. We began by wondering how come some people get to boss other people around...
We’re not talking about wives and husbands or employees and their employers. In those cases, the bossing is legit. Husbands ask for it. And employees can walk off the job anytime they like.
We’re talking about people who have the right — by law — to tell other people what to do. The TSA agent...the policeman...the building inspector...the customs agent...the IRS clerk...the FDA...the CIA...the FBI...
It is a remarkable thing, don’t you think, dear reader? It says right there in the Declaration of Independence that ‘all men are created equal.’ Equality under the law is supposed to be the law of the land. And yet, some people are clearly above the law...some give orders to complete strangers...and some people even claim the right to make laws any way they want.
There are laws that tell you not to murder...and not to steal. In the 10 Commandments given to Moses, God named 10 laws that he considered important. But the folks walking the floors of Congress, the EPA, the SEC, the IRS and a plethora of other government agencies have added 10,000 more commandments. ‘Thou shalt’ this... ‘thou shalt not’ that. You can barely go to the bathroom or drill an oil well, without asking permission from a dozen different bureaucracies. ‘Ignorance of the law,’ is said to be an ineffective defense. But it’s a very effective explanation. There are so many laws, rules, regulations, edicts, commandments, prohibitions, interdictions, injunctions, requirements and obligations that you are bound to miss one or two of them.
The latest Defense Authorization Bill just passed by Congress shows how far the law-makers and law-enforcers will go. The doctrine of habeas corpus goes back to before the signing of the Magna Carta in 1215. It was an ancient Anglo-Saxon limitation on the power of government. If the feds held a prisoner, a writ of habeas corpus required them to “produce the body.” The government had to either release the person or charge him with a crime. For more than 800 years, this gave people some protection against government.
But now, in the Year of Our Lord 2011, the Congress of the United States of America, with the complicity of POTUS, himself, has seen fit to deny the right of habeas corpus to American citizens. Henceforth, the feds can capture you, put you in prison and waterboard you every day for the rest of your life. They don’t have to charge you with murder or jay-walking or any crime at all. They don’t have to let you talk to a lawyer. Or to your spouse. Or to your Congressman... They don’t have to read you your rights or provide any evidence against you. Like the Argentines in the ’80s, they just ‘disappear’ you. And you’re gone forever.
The Guardian reports:
Human rights groups accused the president of deserting his principles and disregarding the long-established principle that the military is not used in domestic policing. The legislation has also been strongly criticised by libertarians on the right angered at the stripping of individual rights for the duration of “a war that appears to have no end”.
The law, contained in the defence authorisation bill that funds the US military, effectively extends the battlefield in the “war on terror” to the US and applies the established principle that combatants in any war are subject to military detention.
“It’s something so radical that it would have been considered crazy had it been pushed by the Bush administration,” said Tom Malinowski of Human Rights Watch. “It establishes precisely the kind of system that the United States has consistently urged other countries not to adopt. At a time when the United States is urging Egypt, for example, to scrap its emergency law and military courts, this is not consistent.”
Rand Paul, a strong libertarian, has said “detaining citizens without a court trial is not American” and that if the law passes “the terrorists have won”.
“We’re talking about American citizens who can be taken from the United States and sent to a camp at Guantánamo Bay and held indefinitely. It puts every single citizen American at risk,” he said. “Really, what security does this indefinite detention of Americans give us? The first and flawed premise, both here and in the badly named Patriot Act, is that our pre-9/11 police powers were insufficient to stop terrorism. This is simply not borne out by the facts.” So now the feds, whose salaries we pay, can spy on us with drones we paid for too. They can send a swat team to disappear us...and keep us in prison.
Our question is: ‘what gives them the right?’ What bread to these people eat? What air do they breathe?
We’ve seen the theories. We’ve seen them in practice too. The ‘divine right of kings.’ The ‘social contract.’ ‘From each according to his abilities...’ ‘The greatest good for the greatest number.’
What they all have in common is that they are not theories, but apologia. One claims to know God’s own plan. Another imagines that the powerless masses agreed to be pushed around. Still another pretends that it’s for their own good.
Some of the excuses are implausible or unbelievable. Others are absurd. The ‘theories’ make no sense. But the facts are undeniable. And the fact is that there are always some people who are willing, ready and able to boss others around. Some rulers — the ‘insiders’ — are smarter than others. Some are nicer. Over time, you see all sorts. Their goal is always the same — to take power and wealth away from the outsiders. How much? As much as they can get away with.
You may wonder, for example, how come the governments of the developed countries all seem to be in the same deep hole of debt. If you listened to the politicians, for example, you might conclude that France and America were an ocean apart. Actually, overall tax, spending, and debt levels are similar in all OECD nations. And tax levels, generally, are about 10 times higher than they were in the last century. And their forms of government are about the same too — even though the insiders claim to have very different ideas about how to govern.
What happened?
The genius of modern democracy is that it makes the citizen a party to his own enslavement. Rather than give up 10% of his output to his feudal lord and master, he gives up 30% to 50% to his democratically-elected bosses. They tell him what to do. And he believes he is giving the orders!
And then, he believes he has discovered the best form of government in the world. It is so good he can’t wait to force others to be democrats too.
Regards,
Bill Bonner
for The Daily Reckoning
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| | | | | | Bill Bonner | | The Importance of “Ground Truth” | | |  | | Chris Mayer | GlobalPost is an online news organization dedicated to the idea of “ground truth.” It’s a simple concept. Say you have a satellite image. And then you send a person there to verify it. The latter is ground truth. It is a person on the ground, making a firsthand observation. GlobalPost has adopted this concept as its mission.
GlobalPost expects its correspondents to live in the countries they write about. Co-founder Charles Sennott put together a correspondent’s field guide with key points he expects his writers to live by. No. 1 on the list is simple: “Be there.”
I love this idea. I am also mindful of its wisdom in my own investing adventures. (This is why I rack up a lot of frequent-flier miles.) There is no substitute for being there.
Today, I’m in Nicaragua. It’s morning here as I write you from a palm-fringed house perched on a bluff overlooking a gorgeous stretch of beach at Rancho Santana. Before I visited Nicaragua for the first time, it was simply a place on a map. It was an abstraction. If anything, it was a set of received ideas — bits gleaned from other people, reflecting all the biases you’d expect.
Now Nicaragua means something very specific. It is a house with a pool surrounded by coconut trees. It’s green mountains and white surf and ocean breezes. It’s a warm pile of rice and beans and fried plantains. It’s friendly people and good times.
I was here with a group of readers over the weekend. They were looking at possibly buying real estate here. That is an idea that many people back home in the US would think a bit nutty. Back home, Nicaragua often means something that has little to do with the substance of what it actually is. Nicaragua means Sandinistas. It means Ortega. It conveys a vague sense of menace. To invest here would seem insane.
But the ground truth is different.
On Saturday, Joel Bowman and I delivered the first presentations ever made at the brand-new clubhouse in Rancho Santana. It was a very low-key affair. (I gave my talk in bare feet.) My task was to provide some macro context for Nicaragua. Some of the ideas I included in my talk are below, based on my own ground truth.
The big thing everyone thinks of first is el presidente, Daniel Ortega. Business people and investors in Nicaragua have no particular love for Ortega as far as I can tell. But they also believe he has been good for investors. He has provided tax breaks, carved out free-trade zones and boosted infrastructure investment.
It’s not an ideal free market, of course, but it’s now functionally superior as such to many other markets investors might rank offhand as better. The proof is in the pudding. Hear it from Carlos Pellas Chamorro, the richest man in Nicaragua. He is the controlling shareholder of Grupo Pellas, which has an oar in seemingly every boat: sugar, rum, banking, media, insurance and more.
A reporter once asked him if open and free markets really work in Nicaragua. He said:
“Open and free markets work everywhere when you let them. Of course, there are many obstacles in Nicaragua, as in all emerging nations... Many sophisticated foreign investors like Citibank, GE, Grupo Roble, Cemex, America Movil, Telefonica, PriceSmart, Wal-Mart, Cargill and many others have invested large sums of money in Nicaragua, obtaining very attractive returns.”
Those of us who have been down here have known these things for years. Only recently, though, has the ground truth started to seep into the mainstream press.
Still, most Americans would be surprised to learn Nicaragua is the second safest country in Central America, behind only Costa Rica. Or that the World Bank ranks it as the easiest country in Central America, Panama excepted, in which to start a new business. Or that in “ease of doing business,” Nicaragua ranks well ahead of such perennial darlings as Brazil or India — or even neighboring Costa Rica. A recent IMF report said that Nicaragua was the Central American country that best protected investors’ rights.
There are always uncertainties. But sometimes I think people almost reflexively assume that a foreign place has greater risks than back home simply because they overlook — or have grown complacent — about the risks they’ve lived with for so long.
Realities, too, can change. Places can go bad, like overripe fruit. But they can also re-emerge. In this way, the investor’s chore (or pleasure) is clear: to stay informed, to always seek out and gather fresh insights, to revise opinions accordingly so they do not grow stale and cost you a lot of money.
Great opportunities in markets often emerge simply because investors are relying on old assumptions or on ideas posed by people who have never checked things out up close. There is then an opportunity to get in at good prices and wait for the rest of the world to catch on.
This is always important, but the idea of ground truth seems it will be more important in 2012, as a number of big questions linger unanswered in 2011: What is the fate of the EU? Who will be the US president after the 2012 elections? Will gold get back to $2,000 an ounce? Will the US Treasury bond bubble pop? Will the BRIC countries slow further in 2012 or reverse course? Can commodities rally in the face of tepid economic growth?
It feels like 2012 will be an important year, maybe even a pivotal one, in the changes it could bring. Those who rely on ground truth have a better shot of ferreting out opportunities as the world changes than those who don’t.
So here’s to finding more ground truth in 2012!
Regards,
Chris Mayer
for The Daily Reckoning
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