 | | The Daily Reckoning | Saturday, September 1, 2012 |
- Honest money...honest stewardship...and the Federal Reserve,
- Readers weigh-in on the state of US real estate,
- Plus, all this week’s reckonings archived for your non-rigged reading...
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|  | | | | | | | The Sun Also Sets | |  | | Joel Bowman | Checking in today from Seville, Spain...
“The meals were simple and excellent and the dining room and the wood-planked public bar were well heated and friendly. The valley was wide and open so there was good sun. The pension was about two dollars a day for the three of us, and as the Austrian schilling went down with inflation, our room and food were less all the time. There was no desperate inflation and poverty as there had been in Germany. The schilling went up and down; but its course was down.” — Ernest Hemingway from, A Moveable Feast
The sun also sets...as it did each afternoon behind the east-facing cliffs of Praia do Camilo, one of the many beaches dotted along the Costa Algarve in southern Portugal. The grotto below was wide and the sand was coarse underfoot. And yellow, almost a royal yellow, like the cliffs above. The water was near transparent, which made for excellent snorkeling and even spearfishing. But mostly, beachgoers would just lie on the sand, reading novels without meaning and thinking about nothing at all except the sun high overhead and the crash of waves on the shore.
During the summer months, tourists from Spain and Italy and Germany and Holland and from all over Europe would arrive on the coast. They would descend the wooden stairway, down the cliffs, past the little shack that served ice-cold Super Bok cervejas and sorbets for the children, to scout for a place on the sand. The Germans typically arrived very early in the morning. The rest ambled down later in the day, after a long lunch, when the sun was not too severe and the tide had receded.
Portugal was still mired in financial crisis. Much of Europe, too, was experiencing a deep and desperate recession. Many were unemployed, but nobody was unhappy. Not in Lagos. Not on the Praia do Camilo.
Each day, the papers ran stories about the state of the economy. More and more often, the news was bad. Even the Prime Minister, when he was asked about the youth unemployment issue, told the graduating generation to seek opportunities elsewhere. Go abroad, he said, to countries where there are jobs...and a future. Many young people left. They went to Brazil and to Angola. They went to England, where they could still find jobs, some that paid well. Some even went to the United States, for this was before the war and during a time when the United States still welcomed foreigners. The world was very different. Maybe not better or worse. Just, different.
Those who stayed in Lagos worked the beach shacks and at the restaurants in the main town. Some busked outside, in front of tables that lined the streets. Others brought in fresh seafood from the trawlers after long days fishing.
The two of us could get by comfortably on €50 per day, after board. As the euro went down with inflation, our room and food were less all the time. It went up and down; but its course was down. We ate bacalhau à brás and oysters from the Ria de Alvor for dinner with torta de amenoda and tarté banoffee for dessert. We drank well too. Portugal was famous for its good, inexpensive wines, and there were many wonderful varieties to be had, but the vinho verde was the best for seafood. A young harvest wine from the Minho province, in the far north of the country, it didn’t overpower the taste of the oysters, which were fresh and milky. For dessert, we drank sweet, red vinho do Porto. We always drank vinho do Porto, even when it wasn’t dessert.
Sometimes, down on the Praia do Camilo, in the late afternoon, a gentle breeze would blow in off the Atlantic. The shadows from the cliffs overhead would grow long and the tourists would inch their towels down closer to the tideline, eking out every last drop of sunshine. It was best to leave just before the shadows hit the water, when the sunbathers would all rise together and begin the long march up the wooden stairs to the top of the cliffs and the little restaurant that overlooked the coast. Typically, the Germans would leave first, sensing the impending shortage of tables above. Next, the Dutch would pack up their books and towels and fall in line. Finally, the Spaniards and the Italians, having squeezed every last ray from the setting sun, would begin the climb up the top. Usually, by the time they arrived, the seats were all gone.
They were the first to complain...but not the last.
[Ed. Note: The following essay, this week’s feature piece, has nothing to do with Hemingway, or inflation, or the Iberian Peninsula. It was first published in these pages on Monday, August 27, 2012]
| | | | | The Daily Reckoning Presents | | Champions of Dishonesty | | How the Fed is Bastardizing the World’s “Best Policy” | | |  | | Eric Fry | “Achievements on the golf course are not what matters, decency and honesty are what matter.”
— Tiger Woods
“Honesty is for the most part less profitable than dishonesty.”
— Plato
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Honest money requires honest stewardship. If, therefore, the dollar is to be an honest, trustworthy currency, the Chairman of the Federal Reserve and the Secretary of the Treasury must also be honest and trustworthy.
Anything less is a threat to the dollar’s value, which is a threat to the very foundation of the US economy.
Given this inescapable truth, what are we to make of the revelation that the Chairman of the Federal Reserve and the Secretary of the Treasury allowed the multi-trillion-dollar Libor fraud to operate for more than four years?
“LIBOR, which stands for London Interbank Offered Rate, may seem like a meaningless financial obscurity to most folks,” we explained in the July 19th edition of The Daily Reckoning, “But this particular obscurity happens to determine the pricing of trillions of dollars’ worth of credit lines and credit derivatives.
“Therefore, rigging Libor is a little like rigging magnetic north...or its modern-day equivalent, the Global Positioning System (GPS). Every compass in the world would point to a deception. More importantly, your Paris-bound jet might touch down in Tripoli. And even if your Paris-bound jet touched down in nearby Lyon, you’d still be a little annoyed...
“According to press reports,” we continued, “only three of the 16 banks that establish the Libor rate have admitted — or sort of admitted — to posting fraudulent LIBOR rates... But very few filthy kitchens contain just three cockroaches.”
Just a few days later, the world learned that the Federal Reserve and US Treasury were scuttling around with the roaches. Chairman Bernanke and Secretary Geithner knowingly allowed the Libor fraud to operate for four years! Incredibly, this outrageous revelation produced very little outrage. But the public non-reaction does not make the behavior of Bernanke and Geithner any less outrageous.
If the stewards of the world’s reserve currency are able to tolerate four years of cheating in the Libor market, what other frauds do they consider insignificant? Or worse, what other frauds might they be directly aiding and abetting?
This fraud was not victimless, Dear Reader, quite the contrary. Day after day, week after week, unwitting investors lost money they did not deserve to lose...as the Libor-riggers made money they did not deserve to make. The cumulative losses would be incalculable.
But that’s not all... The biggest victim of this crime may be the US economy, itself.
Dishonest financial markets paralyze capital. Generally speaking, investors refuse to invest in markets they perceive to be rigged or highly manipulated. And paralyzed markets tend to paralyze economic activity.
What’s more, the Libor scandal is not the first instance of large- scale, clandestine market-rigging that has occurred with the full knowledge — if not full cooperation — of the Federal Reserve and/or US Treasury. Remember all those secret, not-so-little loans the Fed doled out in 2009 to various financial firms? These were loans the Fed never disclosed at the time and never expected to disclose...ever. They were secret.
“Recent disclosures from the Federal Reserve reveal that honesty was one of the earliest casualties of the 2008 financial crisis,” we observed in the December 15, 2010 edition of The Daily Reckoning. “These disclosures contain a number of juicy tidbits, like the fact that Goldman Sachs received tens of billions of dollars in direct and indirect succor from the Fed...
“Thanks to the Fed’s massive, undisclosed assistance, Goldman Sachs managed to project an image of financial well-being, even while accessing tens of billions of dollars of direct assistance from the Federal Reserve...
“On June 17, 2009, thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. Just six days before this announcement, Goldman sold $11 billion of MBS to the Fed. In other words, Goldman ‘repaid’ the Treasury by secretly selling illiquid assets to the Fed...
“During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment.
“Did private investors not have the right to know that the Federal Reserve was secretly recapitalizing Goldman’s balance sheet during this period? Did they not deserve to know that the Fed’s MBS buying was producing Goldman’s ‘perfect’ trading record during this timeframe?
“Yes, would seem to be the obvious answer.”
But instead, private investors were forced to match their wits against massive, secret manipulation by the Federal Reserve. This secret manipulation would not become public until 18 months after the fact — long after unwitting investors had lost (or won) the capital the Fed’s dishonesty caused them to lose (or win).
Clearly, secret market-rigging is the Fed’s lifestyle, not an occasional lark. So the investment capital that is now huddled on the sidelines is unlikely to be thinking, “I’m sure glad the Libor scandal is over and done with. Now I can invest with confidence.” Instead, it is likely to be thinking, “Wow! What’s next? If the Fed allowed Libor-rigging, what other frauds is it allowing...or directly conducting?”
By his own admission, as early as 2008, Bernanke knew large banks were posting fraudulent LIBOR postings. Geithner has also admitted to knowing about it in 2008. But when the Congressional Financial Services Committee asked the Chairman last month why he never put a stop to the fraud, he replied, “[The Libor rate] is constructed by a private organization in the UK, and so our direct ability to influence that is limited.” Geithner provided a similarly feeble defense.
Seriously?
Both men possessed the power to halt a crime spree. Neither did. Instead, they simply winked and nodded at the criminals. Bernanke and Geithner have been doing so much nodding and winking during the last few years that they are starting to resemble narcoleptics with turrets syndrome.
“[Bernanke] is insulting his audience to say there was nothing he could do,” gripes Dean Baker, co-director of the Center for Economic and Policy Research, “That is complete nonsense. If he had called up [the head of the Bank of England, Mervyn] King and said that King has to fix the Libor [fraud], and if he doesn’t this all goes public, then King would have had no choice... Bernanke allowed this fraud to continue, violating his responsibilities as Fed chair.”
The United States deserves better.
The financial markets deserve better. The US dollar deserves better. And yet, the most scandalous aspect of the LIBOR scandal is that it has produced almost no scandal whatsoever. The Chairman is still the Chairman, doing the same stuff he’s been doing for the last six years, whatever that stuff might be. (Don’t worry, we’ll probably learn all about the stuff he’s been doing, eventually...maybe).
The Chairman of the Federal Reserve doesn’t have to be particularly brilliant, or stylish, or entertaining, but he ought to be particularly honest...or at least not particularly dishonest. That’s just no way to run a money-printing business.
“The Libor scandal is clarifying, if not shocking,” remarks James Grant, editor of Grant’s Interest Rate Observer, “On both sides of the Atlantic, investigations into the alleged manipulation are shifting from the bankers who supposedly did the fudging to the regulators who permitted it...”
Even in the best of circumstances, the Federal Reserve Chairman is a professional price-fixer and market-rigger. “The private sector manipulated prices opportunistically. The public sector rigs them on principal,” Grant quips, “In the United States, the Federal Open Market Committee fixes, or ‘sets,’ the funds rate... It manipulates the yield curve via Operation Twist. It manipulates the mortgage market, along with every other department of the credit markets, via so-called quantitative easing. It attempts to manipulate the stock market (and expectations concerning the stock market)...”
Although these manipulations are usually inimical to free market dynamics, they are, at least, disclosed publicly. Therefore, because they usually unfold in plain view, they do not usually repel or inhibit investment to any great degree. But when the world’s leading price-fixer starts conducting and/or ignoring secret market manipulations, that’s very bad news.
As one professional investor put it recently, “The Fed is manipulating so many markets at once that it has become tougher to identify a genuine free-market price in the financial markets than to identify a genuine female in a Bangkok bar... I don’t want to play in markets like this.”
And neither do many other investors or entrepreneurs. Increasingly, the folks with the capital to risk are refusing to risk it on anything. They are simply refusing to play the game...any game.
The 2012 Survey of Affluence and Wealth in America, from American Express Publishing and Harrison Group, finds that the wealthiest Americans are hoarding three times as much cash as they were two years ago. Their savings rate soared to 34 percent in the second quarter of 2012, up from 12 percent in 2007.
This skyrocketing savings rate is the flip side of lost confidence. A whopping 82 percent of the wealthy respondents said they would increase their spending and investing if they had more confidence in the future.
“[The wealthy are] basically stuffing money under the mattress,” says Jim Taylor, vice chairman of Harrison Group. “This has resulted in people managing their risk to a ‘no loss’ position rather than a ‘real gains’ position,” Taylor said. “That’s not the great tradition of American investing.”
Clearly, deception and dishonesty are no way to restore or inspire confidence in the financial markets...or to revive America’s legendary entrepreneurial dynamism.
The economy doesn’t need low rates; it needs honest rates. It needs to know that the free market is setting prices in the financial markets; not the Federal Reserve....or fraudulent banks with the blessing of the Federal Reserve.
Perhaps the Fed Chairman should add “honesty” to his short list of “policy tools.”
Regards,
Eric Fry
for The Daily Reckoning
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| | | | | ALSO THIS WEEK in The Daily Reckoning...
|  The Mongolia of America
By Chris Mayer
Question: How is North Dakota like Mongolia? Answer below...but first a little background. As I made very clear at this year’s Agora Financial Investment Symposium in Vancouver, I am very bullish about Mongolia. This is one emerging market that is likely to continue emerging very rapidly.
 Fifty Shades of Government
By Jeffrey Tucker
On a flight the other day, I noticed that a third of the passengers were reading a certain best-selling book. It got me thinking. Every politically active group wants something from government, and government is happy to oblige. It’s even more obvious in the election season, and it’s only going to get worse as we approach November.
 US Housing — Surprising Numbers
By Chris Mayer
Just how cheap is US housing? Consider Minneapolis, Minn. You could’ve bought, out of foreclosure, a three-bedroom, two-bath house of 1,356 square feet on a quarter acre lot for about $29,000. It needed a lot of work, but houses in the neighborhood recently sold for $75,000.
 The Hurricane Whisperer
By Joel Bowman
The Feds use a number of complicated instruments to determine which way the economic breeze is blowing, almost all of them baloney. Then they imagine that, after holding their windsocks out in the hurricane, they can command the gales to blow in any direction they so desire. And what’s more, people actually believe them!
 Too Much of a Good Thing, Part III
By Bill Bonner
The phenomenon known as “declining marginal utility” is well known. Economists cite it from time to time. Even butchers refer to the ‘point of diminishing returns.’ And poets warble about fading light and failing love.
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| | | | The Weekly Endnote...
| | | And now, it’s over to a few readers for some thoughts, ideas and rumors...
First up, here’s a Reckoner writing from Florida in response to Chris Mayer’s column on a US housing rebound...
Here in the Palm Beach county area [Florida] we have a massive amount of properties for sale. I bought [April 2004] a 2 bedroom, Den, 2 1/2 bath, living room, dining room, kitchen and laundry room. The 5th floor Condo [2335 sq. ft.] with a million dollar water view of the harbor and ocean. Also has a 484 sq. ft. L shaped balcony. I paid $525,000.00 for it and then put in all hardwood floors.
At the peak of the market in 2007, the asking price for the same apartment on another floor was up to $775,000.00. I put it on the market in March 2010 for $525,000.00 expecting of course to get a bit less. Kept on dropping the price for the next 2 years, some people looked but no bids. My last asking price was $365,000.00. I finally had an offer of $325,000.00, an insulting price considering the Condo was in excellent condition. BUT I took the offer and ran with the money [considering yearly Condo fees and property taxes of $ 25,000.00].
In April of 2010, I bought a larger 3000 sq. ft. Condo on the 18th floor in the same building. I can’t complain because I also “stole” it for $600,000.00...mint condition. There are over 10,000 homes/Condo’s for sale in Palm Beach county alone.
If I were younger, I would jump back into the rental real estate market once again. Bargains are to be had although there is no doubt that after the November election [spring 2013] the stock market/economy will crash once again and prices will even drop lower.
Next up, a “Reckoner for years and forever” comments thus on the same piece...
Hold on. What about hyperinflation? In the Weimar incident it became the average that only 2% of people’s income was used for living quarters. Need food more. Let’s see, 2% would be $1,000 per year from someone whom today makes $50,000. That would be financially anemic. Plus the added negative benefit of being vilified as a ‘landlord’ by regulators probably.
To counteract this problem, you might want to install large scale gardening beds at your properties. If interested, let me know.
And finally, Reckoner Bruno wonders...
Lately the DR has got me a little confused.
On the one hand, its editors rightly point a finger at the threatening police state which is rapidly expanding over the US, and advise readers to be ready to move abroad, if and when things turn really bad.
These editors also regularly mention the ever present threat of financial collapse, resulting from this country’s irresponsible policies.
Yet, on the other hand, editors such as Chris Mayer advise readers to buy real estate in the US, mainly because the prices are good.
But, is the cost of housing in the US the issue one should focus on?
What’s the point of owning a $10,000 nice home in a place constantly observed by drones from above and by IRS and NSA agents from below, where the value of the currency is sinking fast, and where one has no idea what to expect from a totally dysfunctional and corrupt government?
A house is not an investment like shares, or bonds, or precious metals.
A house requires costly maintenance and, more importantly, one can’t get rid of it by simply giving a phone call.
All told, a house, and the mortgage generally going with it, are like a chain keeping the owner on a tight leash, thus strongly restricting its freedom of movement.
DR: All excellent points, Bruno. Indeed, the Police State grows more and more vicious by the day. (Did you see this story? Disgusting!) This trend, we reckon, will only worsen when the Mother of All Bubbles that Addison and Bill are talking about (see here) finally bursts.
That said, not everybody is in a position to just up and move...to Get Outta Dodge, as we keep saying. As such, we try to write both for those who are looking abroad...and for those who don’t see expatriation, for whatever reason, as a viable option.
Ideally, the world would consist not of a couple hundred oppressive states, but of seven billion individuals freely roaming the planet, setting down roots wherever it so pleases them and contracting only with those in whom they find valuable ideas and wealth building opportunities. Until that day comes, however, we’ll have to play the hand we’re dealt. Hope that helps...
---
A question, Fellow Reckoners: Have you noticed a revival in your local real estate market? Do bargains abound...or are prices still dropping? Do you foresee an uptick in building activity? Or is the ugly bottom still ahead?
We’d like to hear your local, boots-on-the-ground observations. Please email any thoughts you have on the matter to the address below and...
..enjoy your weekend.
Cheers,
Joel Bowman
Managing Editor
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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