 | | The Daily Reckoning | Wednesday, May 16, 2012 |
- Opportunities in Brazil...and the generation set to follow them,
- “Corzine Capitalism” giving the markets and justice a bad name,
- Plus, Bill Bonner on why the best move might just be to “liquidate everything”...and plenty more...
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|  | | | | The New Land of Opportunity? | | Why the World's Unemployed Youth are Flocking to Brazil | | |  | | Joel Bowman | Reckoning today from Rio de Janeiro, Brazil...
Man wasn’t supposed to labor like this. Not under these conditions...with a clear view of a clearer sea...a white sandy beach below his room...the sound of the crashing waves gently carrying through his window...
..and his head stuck firmly in his computer screen.
But we will soldier on, Fellow Reckoner. We will ignore the blissful and beckoning distractions of one of the world’s most famous esplanades just across the way. We will pretend the little cabanas down by Ipanema’s Post 10 have exhausted their supplies of frosted, cachaça-based refreshments and that the hot bods tanning on the sand and frolicking in the water are really just figments of our imagination. We will turn away from this little heaven on earth and cast our gaze, instead, upon its equal and opposing force...
..but not just yet.
We’re here in South America’s largest economy to scope out opportunities in the local business scene. The country is booming, as you’ve no doubt heard. And as far as the BRIC countries go, Brazil might just be our favorite. Well, at least it’s our favorite to visit. Unlike China, Brazil’s demographics are favorable. Unlike India, its social mobility is flexible. And Unlike Russia, the weather is agreeable. Also, the South American nation didn’t just “re-elect” Vladimir Putin. Then again, many would argue, neither did Russia.
All of which is not to say the place is without its “fair share” of problems. It has many. Official growth here has slowed. Considerably. The parasite class — politicians in Brasília — had forecast a growth rate of 4.5% for the year 2012. Now they figure it will be closer to 2.7%. Policy makers are “under pressure,” say the papers, to “do something.”
A standard quote from The Financial Times:
With the world economy slowing, many argue Brazil needs a fresh spark to keep it growing. Policy makers are under pressure to consider a second generation of reforms in areas such as taxation, infrastructure and education to make the country globally competitive. | Hmm... Maybe policy makers do have a role to play. But we’d bet that role is best served by getting out of the way and allowing the magic of the market to work its wonders.
Fortunately, there is a growing contingent of young entrepreneurs who are advocating just that. Your editor was delighted to meet a handful of them at the III Conferência de Escola Austríaca hosted by the Instituto Ludwig von Mises Brazil, this past weekend. A crowd of young and excited attendees sat glued to their seats while absorbing presentations from a host of Austrian School superstars, including Laissez Faire Book’s own Jeffrey Tucker...the only man to inspire a standing ovation after his spectacular speech on Intellectual Property in the Digital Age.
[Ed. Note: Jeffrey will be among a world class lineup presenting at Agora Financial’s own annual Investment Symposium in Vancouver in a couple of months. If you haven’t already secured your seat, you’d do well to book sooner rather than later. Last year’s conference sold out in record time...and we’re expecting nothing less this time ’round. Get all the details — including speaker list — here.]
Imagining what a country like Brazil could do if the ideas of liberty and freedom were to take hold here is, in itself, an inspiring thought experiment. And the blossoming trend of independent young thinkers and innovative entrepreneurs is one we hope to be a part of in the very near future. As, it seems, do many others.
Tellingly, attendees at the conference hailed not only from around Brazil, but also from Europe and the US, both struggling markets that promise little or no future for the generation currently graduating from universities there. And these fugitive career seekers are not alone.
Portugal’s official unemployment rate — not atypical for the PIIGS economies — stands above 14%. The reality on the ground, however, is likely much worse than that. Among youths, the figure is closer to 40% and, as one Reuters journalist writing from Lisbon put it recently, the former colonial power offers “little hope for a sharp, job-generating recovery any time soon.”
Conversely, Brazil’s official unemployment rate hovers around multi- decade lows (between 5-6%). Given the common language, it’s hardly surprising therefore to find youth flocking to the opportunity rich South American powerhouse. Continued the Reuters piece:
Emigrating is fast becoming a preferred option for many seeking a decent living as their bailed-out economy suffers under debt, low growth and poor competitiveness. Portugal’s booming ex-colonies in Africa and Brazil are a natural choice. | Similarly, the employment situation in the US is inspiring many fresh-faced college grads...inspiring them to learn a new language and to seek jobs abroad, in healthier, more promising markets. And why not?
While student loan debt in the US recently surpassed outstanding credit card debt, unemployment data for the youth demographic suggests the cost of education might not have been worth it. Data from 2011 reveal that more than half of all US graduates with a bachelor’s degree were either unemployed or underemployed at the end of last year. What does underemployed mean? From a recent CNBC article:
In the last year, [students with bachelor’s degrees] were more likely to be employed as waiters, waitresses, bartenders and food- service helpers than as engineers, physicists, chemists and mathematicians combined (100,000 versus 90,000). There were more working in office-related jobs such as receptionist or payroll clerk than in all computer professional jobs (163,000 versus 100,000). More also were employed as cashiers, retail clerks and customer representatives than engineers (125,000 versus 80,000). | Why flip burgers in Alabama, Kentucky, Mississippi or Tennessee (states with the highest rates of youth unemployment, along with the Mountain West region) when you could move to Rio de Janeiro and start an online business of your own? Why hang around waiting for government handouts on the streets of Lisbon when you could be flashing your skills in São Paulo’s bustling professional scene?
For many, the “service and protection” of the US government is no longer an adequate response...in fact, it’s becoming the very reason to leave. More on that, tomorrow...
In today’s column, guest essayist, Sydney Williams, muses on exactly the kind of corrupted system that is driving entrepreneurial productivity offshore while rewarding criminal incompetence at home. Please enjoy...
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| | The Daily Reckoning Presents | | "Jon Corzine — What's Going On?" | | |  | | Sydney Williams | It pays to be rich, powerful and a Democrat with friends in Washington. While Anna Gristina, a Connecticut mother accused of being a New York “madam” sits in a cell on Riker’s Island, Jon Corzine, the former CEO of MF Global sits at home in his New Jersey mansion. MF Global had been a publically traded securities firm with $40 billion in assets, but with liabilities even larger, filed for bankruptcy late last year, after being accused of co-mingling customer funds with its own, a flagrant violation of securities law.
As we all know, prostitution is illegal. Ms. Gristina has been charged with providing attractive young women to testosteronic men for money — a crime, but largely victim-less. Nevertheless, she has already spent two months on Riker’s Island, awaiting a June 21st hearing. Bail for her was set at $2 million in a bond, or $1 million in cash. Despite the misappropriation of an estimated $1.6 billion, Mr. Corzine has yet to be charged. Yet 36,000 clients had their money appropriated under his watch. It is hard not to believe that his status as a former Senator from and Governor of New Jersey, and major bundler for President Obama’s campaign has not provided him special privileges. Is not justice supposed to be blind?
It is hard to imagine that Ms. Gristina, whose business was to introduce consenting adults, could be an enormous risk to society. On the other hand, a wealthy and powerful man who appears to have cheated his clients is a fraud and a menace. MF Global was a public company, until it became the nation’s 8th largest bankruptcy when it filed last October. Thus, not only are customers, for whose funds Mr. Corzine had a fiduciary responsibility, out their money, but shareholders of MF Global lost their investment as well. Of course, it is perfectly possible that the morally challenged Mr. Corzine was unaware that embezzling is a crime. However, as CEO he is responsible for financial transgressions within his firm. It is unfortunate that he is not man enough to admit it.
Mr. Corzine testified before Congress, and claimed not to have been aware that anything amiss was going on. “I simply do not know where the money is.” What a whopper! Keep in mind this is a man who had been senior partner of Goldman Sachs, so not a naïf when it came to financial matters. Until the bankruptcy, Mr. Corzine was on President Obama’s short-list to replace Timothy Geithner as Secretary of Treasury. He was not only the CEO of MF Global, Mr. Corzine, according to some reports, was chiefly responsible for the bets on European bonds that got them into trouble in the first place. An e-mail from MF Global’s assistant treasurer appeared to implicate Mr. Corzine in the wrongful transfer of $200 million to JP Morgan, a transfer which included customer funds. But when Ms. O’Brien was asked questions at a Congressional hearing she pleaded the fifth. Why? Was she afraid of Mr. Corzine? Did she feel threatened by the prosecutors? Surely she did not transfer funds of that amount without some higher-ups’ approval. A lot of us would like the answer to a question recently asked by a reporter for The Financial Times: why wasn’t she granted immunity from prosecution, in exchange for her testimony? Are the prosecutors concerned as to where the answers might lead?
This is not the first time that rich, powerful and politically connected Wall Street types have walked away from prosecution. Prosecutors also took passes on Angelo Mozilo, former chairman and CEO of Countrywide and Richard Fuld, former CEO of Lehman Brothers. Both men disgraced their companies and their industries, while losing millions of dollars for investors who had entrusted their savings with them. Crony capitalism does not only lead to criminal behavior, it reflects a moral decay that threatens our capitalist system and the democracy that underlies it. When the defense uses what Matt Taibbi of Rolling Stone calls a “Wizard of Oz” defense — that the stealing was not deliberate; the misplacement of client funds was due to the chaos that attended the firm’s last few days — it’s obvious the perpetrators, with help from their attorneys, are obfuscating the truth.
Regulatory bodies spend millions of our tax dollars every year supposedly supervising those they are charged with overseeing. The events that led to the financial crisis did not happen because of a lack of regulation; it was a lack of enforcement of existing rules. The response in Washington was, of course, to create new rules, not to punish regulators who did not regulate. The Obama Administration is not afraid of lawsuits and charges. Look at the legal problems his Environmental Protection Agency (EPA) is causing the energy industry. But it is telling that this administration, theoretically so friendly to the poor and defenseless, has not sent one person to jail for the near collapse of the financial system four years ago. They could start by looking at Congress. When it comes to investigating the true causes of the near-financial collapse, this administration is the antithesis of Teddy Roosevelt — talk loudly and carry a wiffle bat.
As insulting, has been the response of the Trustee, James W. Giddings. The role of a Trustee is political in the sense that they are awarded by the courts. And they are meaningful in terms of compensation. For example, Irving Picard, Trustee of what is left of the Madoff Ponzi scheme, through last October had billed $225 million. Mr. Giddings’ firm, Hughes Hubbard, has billed $168.7 million thus far for the Lehman bankruptcy. With that sort of money on the table there is plenty of room and opportunity for shenanigans. Mr. Giddings acknowledged that $1.2 billion has gone missing and that a commingling of customer accounts and corporate funds did take place. But it was, in his opinion, at least in part, due to “sloppy” bookkeeping, and computers and employees who could not keep up. That sounds to me like a “Wizard of Oz” defense. Sloppy bookkeeping! Give me a break! This was stealing.
Incredibly, no one has been arrested. Republican Congressman Michael Grimm from New York City has asked for an independent counsel to take over the federal criminal probe being conducted by the Department of Justice (DOJ.) James Koultas, the leader of the Commodity Customer Coalition, an advocacy group for former MF Global clients recently noted the obvious: “I don’t think the DOJ is going to go up against one of the President’s biggest bundlers without an independent counsel being appointed.”
The near-collapse of the financial system four years ago spooked investors. Taxpayers are already rightfully concerned about the cost to them caused by a few rogue traders, who saw millions in personal profits, and lawmakers whose concern about re-election overcame any worries about the consequences of their legislation. When the guilty go unpunished, crime only increases. Joe Nocera, writing a couple of weeks ago in The New York Times, put it this way: “Giving the big guys a pass isn’t good for the financial markets. And it isn’t good for democracy either.” It is the inverse of James Q. Wilson’s “broken windows” theory that says if broken windows are repaired immediately the incidence of crime will decline. When criminal activities such as these go unpunished, the crime rate goes up.
Everyday small time criminals get busted — drug pushers, hookers, purse snatchers and small-time robbers — but wear a white shirt, steal a few million dollars and have friends in high places, and you can stay at home. It is crony capitalism at its worst. Court appointed lawyers get rich; politicians, who have become wealthy, pay back their friends and remain in office. Very few bad guys go to prison. It is a terrible message, if we want to restore faith and confidence in our markets. Democracy is based on property rights and the rule of law. When property is not protected, the law is meaningless. What really is going on with Mr. Corzine?
Regards,
Sydney Williams,
for The Daily Reckoning
Ed. Note: Sydney Williams graduated from the University of New Hampshire in 1965, and for the last forty-five years he’s worked on Wall Street as an institutional salesman. He has been writing about the financial industry for over a decade, and in the last four years began compiling his thoughts in his daily blog “Thought of the Day: Financial markets, political events and life’s experiences.”
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| | | | | | And now over to Bill Bonner who has the rest of today’s reckoning from Baltimore, Maryland... | | Correction Fighting: How the Feds Prolong Economic Depressions | | |  | | Bill Bonner | “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
— Andrew Mellon
Down, down, down...
Oil is at a 5-month low. Russian stocks are 20% below their high. Commodities are back to 2010 levels.
Everything is going down. Even gold.
Wait a minute. Since we know from Einstein that all motion is relative, everything CAN’T be going down. If everything were going down, everything would be standing still. Something must be going up as a point of reference.
So what’s going up?
Cash!
Cash is going up against oil, houses, stocks, copper, commodities of all sorts...and just about everything else.
Cash is king.
Why? Because we are in a Great Correction. And in a great correction, prices are corrected. In a bubble, prices tend to go up. This tends to push up animal spirits...encouraging investors and business people to do things that they will later regret. They build houses no one can afford...and shopping centers no one really needs. Then, these things — and the loans against them — appear as “assets” on the books of banks, pension funds, hedge funds, private equity outfits...you name it.
Later, as the correction continues, markets discover that these ‘assets’ are not worth quite as much as they thought. Prices go down. Some ‘assets’ become liabilities. They are underwater, with more debt than equity.
Labor rates fall too. There are fewer projects that “make sense”...and they need fewer workers. Business falls off. Unemployment goes up. Salaries go down.
As prices fall, they must fall against something. So they fall against cash. Cash becomes more valuable. You can buy more real assets with every unit. People who hold their cash through a correction usually do well. They are able to buy quality assets, at the bottom, at large discounts to their previous prices.
That’s why so many people are willing to lend money to the feds for such low interest rates. They figure it’s as good as cash.
All this is obvious and hardly worth mentioning. In a better world, we’d all know what was going on...and we could all predict what would happen next: the mistakes would be written off, defaulted on, foreclosed, and marked down...
..and then, the economy could get up, dust itself off, and get back to work.
That’s what used to happen. The first American depression came in 1819. Cotton prices collapsed. Farms were foreclosed. Banks failed. It was over by 1821 — 2 years later.
Then, there was the Panic of 1837. New York brokerage houses failed. Farm prices collapsed. A bank president committed suicide. But it was over by 1843 — 6 years later.
The Panic of 1857 was triggered by the bankruptcy of Ohio Life Insurance and Trust Company. Railroad speculators were ruined. Stocks plunged. Nearly a thousand companies went broke. The resulting depression was hard...but short. Recovery began two years later.
The Panic of 1873 led to a 5-year depression. And the Panic of 1893 hit even harder — with a crash on Wall Street, 16,000 business failures and a 15% unemployment rate. Four years later, the economy was running hot again.
The aftermath of WWI brought the Depression of 1921. By many measures it was as bad as the Great Depression. But it was quick — two years later it was over.
And then, came the Great Depression itself. What made it so great? The feds! Until the 1930s, the feds let the economy take care of itself. Interest rates? They were set by willing buyers and sellers, not by economists working for the government. Monetary policy? Fiscal policy? There were none.
When it was time for a correction, Mr. Market took out a wrecking ball and knocked down the mistakes of the previous boom. The debris was quickly swept away...and it was off to the races again.
Even as late as the 1930s, Andrew Mellon, then Secretary of the US Treasury, advised president Hoover to “liquidate” everything. His idea was to give the correction a helping hand... Rather than wait for the correction to do its work, he’d swing the wrecking ball himself.
That is just what he did in the 1920s. He was Treasury Secretary in 1921 too. And instead of trying to fight the slump of ’21-’23, he helped it on its way. Instead of “countercyclical stimulus” measures, he gave the nation “pro-cyclical” measures. That is, he didn’t increase government spending in order to provide the economy with fiscal stimulus. He cut government spending in order to leave more money in the hands of consumers, investors, and business people.
And it worked. Scarcely 24 months after the beginning of the depression it was over...with unemployment back to 5%.
But the world changed between ’21 and ’31. By the ’30s, the feds had the bit between their teeth. In Germany, the Nazis were already consolidating power and gathering tinder for the Reichstag. In Italy, Mussolini and his gang were wearing funny outfits and plotting out an empire. Stalin was reorganizing Soviet agriculture — which would result in millions of deaths by starvation. And in the western democracies, the meddlers were taking over too.
Instead of thanking Mellon for his input, the feds tried to impeach him! In a few months, Mellon was gone. And then US economic policy was firmly in the hands of people who thought they could do better.
The gist of the new policy was that corrections must be stopped — at all cost. Depressions must be fought. Bankruptcies must be prevented... Markets must be controlled! By bureaucrats!
This new policy was what made the Great Depression great. Mr. Market may have wanted to correct his mistakes; but the feds wouldn’t let him. The depression continued, off and on, throughout the ’30s...and the ’40s too. It didn’t really end until the 1950s. You might expect the feds would have learned from that experience. Compared to the laissez faire policies of Andrew Mellon their activism was a complete, miserable failure.
Learn? Are you kidding? We’re now in year the 6th year of the crisis that began with the collapse of subprime in April ’07. Does it show any sign of letting up? Any sign of coming to an end?
Nope?
The feds have fought the correction every step of the way...with everything they’ve got. They’ve tried monetary stimulus — taking rates down to zero. They’ve tried fiscal stimulus — with $1 trillion budget deficits for the last 4 years...and no end in sight. They’ve tried “unconventional” measures too — such as QEI, QEII and The Twist. Last year, the Fed funded more than 60% of the US deficit with printed money. And the Fed has increased its holdings of US debt some 3.5 times since 2008, from $479 billion in September, 2008 to $1.66 trillion in March, 2012.
So, put on your seat belts. Sit back. Relax.
Eventually, the correction will do its work. But it could take a long, long time.
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
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