| December 03, 2013 | | | | |  | | | From Venezuela Without Lights… or Toilet Paper… or Sugar, Coffee, Refrigerators, Etc. | | | - Venezuela goes dark: The lights won't stay on... but who cares? Socialism still beats working...
- Then, Venezuelan President Nicolas Maduro finds out that price controls still don't work… but probably only because they haven't been tried enough times yet...
- Plus, Marc Faber on how the market reacts when bailouts and price signals are distorted… (hint: very badly)... and our surprising forecast for the next decade...
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| | | | | | | Good News About Retirement Finally, some good news about retirement... Turns out there ARE still places where you can afford to kick back in your "golden years"… where you don't have to be wealthy to live the good life. | | | | | | | | Peter Coyne, trying to find Venezuela's secret to success…
 Last night, the lights went out all across Caracas. At the time, Venezuelan President, Nicolas Maduro was making a passionate televised speech, no doubt about building the South American nation with revolutionary efficiency. All of a sudden, boob tubes across the country flickered off. Streetlights, metro rails and traffic lights suddenly stopped working. Here are two pictures of the city:
 ♪When the lights go down in the city...♪
Curious about why such a thing would happen, we decided to dig around for the root cause of the blackout. Here's what we learned:
This was Venezuela's second major power outage. The last one occurred in September. Smaller power outages outside of Caracas are even more frequent. To be clear, however, our research showed that the recurring problem had absolutely nothing to do… whatsoever… by any stretch of the facts or imagination... with the sudden nationalization of the power company Corpoelec in 2007. That's right.
In fact, our completely unbiased and primary source, President Maduro's own Twitter account, explains that the outages are the result of political sabotage by his political enemies.
If you're still doubtful, there's good reason that political opponents would've cut the power during el presidente's speech. Maduro was outlining his bold, newish plan to jump-start the Venezuelan economy -- price controls -- when the lights went out.
Such controls are sorely needed too. After all, until now, the only solutions the Venezuelan government have offered are price controls. Clearly, they weren't enough. They haven't alleviated the country's inflation problem. Currently prices are rising more than 54% per month.
What's more, Venezuela has prices controlled the prices of many things, like toilet paper and paper for writing… which are facing severe shortages. Washing machines and flour are among some of the other products that are hard to come by.
Oh, coffee is facing shortages too. And refrigerators. And televisions…
… sewing machines too… and, um, chicken… cooking oil… milk… rice… corn… and microwaves.
| Either way, more, not fewer, price controls is unmistakably the correct way forward. | But those shortages are probably because some jerk is hoarding the items as a sick joke… or because he hates his fellow man. There's probably a bunch of those strange pack rats that buy up way more than they need too. That's nothing Maduro can do anything about.
What's 100% crystal clear and undeniable, however, is that the shortages were definitely not due to price controls. If anything, they're because price controls weren't tight enough. It could've also been that the price controls just didn't cover enough products. Either way, more, not fewer, price controls is unmistakably the correct way forward. And now Maduro has taken a courageous step in the right direction.
By decree, from yesterday on, el presidente will set the maximum price that can be charged for new and used cars. No longer will Venezuelans have to worry about being gouged for the price of an automobile. And if Maduro's really effective, Venezuelans won't have to worry about driving altogether, as there will be no cars.
Go ahead… poke fun, but next time you're stuck in traffic, don't write to us (peter@dailyreckoning.com) whining about how you wished you lived in Caracas.
Bueno, we hear you thinking to yourself. Tell me, then, how other nations, like the U.S., enjoy plentiful abundance without such price controls?"
Sheer luck, we answer. And it's not to be confused with the merits of government policies. Clearly, Venezuela demonstrates that you can have the best policies in the world yet still hit a patch of rough luck that can consistently set you back for decades upon decades.
You just count your blessings there aren't shortages here in the U.S. It's nothing but a God-given miracle that Americans aren't bitter from rotten food... nauseous from foul-smelling clothing… constantly groggy from lack of caffeine… and sorely rashed with discomfort from using leaves to clean themselves in the dark without having a pen and paper to write a complaint to their government on. You bourgeois pig…
If you don't believe us, then read on as Dr. Marc Faber explains historical examples in which short-term causes, policies and long-term trends don't jibe…
(Side Note: If you haven't seen our economic forecast for the next decade and beyond, we'd like to share it with you, right here. Please check it out, and then read Dr. Faber's essay below… we hope you enjoy it.)
| | | | | | | | | Ex-Secret Service Agent: 'It's worse than people know...' One of Obama's former Secret Service agents recently smelled a rat. What he discovered inside our Government was so devastating he only saw one option… he quit.
What's worse – he fears what he found could affect your job… your neighborhood… and, most importantly, your family. Very soon.
"It's worse than people know," he said in a recent interview, "and I'm not trying to scare you, either."
We share his concerns. This is why we've devoted the better part of three years collecting solutions for nearly all problems created by intrusive governments. And we've succeeded.
| | | | | | | | The Daily Reckoning Presents
| | | | Long-Term Trends and Short-Term Causes | | | | by Marc Faber | | | As a distant but interested observer of history and investment markets I am fascinated how major events that arose from longer-term trends are often explained by short-term causes. The First World War is explained as a consequence of the assassination of Archduke Franz Ferdinand, heir to the Austrian-Hungarian throne; the Depression in the 1930s as a result of the tight monetary policies of the Fed; the Second World War as having been caused by Hitler; and the Vietnam War as a result of the communist threat.
Similarly, the disinflation that followed after 1980 is attributed to Paul Volcker's tight monetary policies. The 1987 stock market crash is blamed on portfolio insurance. And the Asian Crisis and the stock market crash of 1997 are attributed to foreigners attacking the Thai Baht (Thailand's currency). A closer analysis of all these events, however, shows that their causes were far more complex and that there was always some "inevitability" at play.
Take the 1987 stock market crash. By the summer of 1987, the stock market had become extremely overbought and a correction was due regardless of how bright the future looked. Between the August 1987 high and the October 1987 low, the Dow Jones declined by 41%. As we all know, the Dow rose for another 20 years, to reach a high of 14,198 in October of 2007.
These swings remind us that we can have huge corrections within longer term trends. The Asian Crisis of 1997-98 is also interesting because it occurred long after Asian macroeconomic fundamentals had begun to deteriorate. Not surprisingly, the eternally optimistic Asian analysts, fund managers , and strategists remained positive about the Asian markets right up until disaster struck in 1997.
| A financial crisis doesn't happen accidentally, but follows after a prolonged period of excesses... | But even to the most casual observer it should have been obvious that something wasn't quite right. The Nikkei Index and the Taiwan stock market had peaked out in 1990 and thereafter trended down or sidewards, while most other stock markets in Asia topped out in 1994. In fact, the Thailand SET Index was already down by 60% from its 1994 high when the Asian financial crisis sent the Thai Baht tumbling by 50% within a few months. That waked the perpetually over-confident bullish analyst and media crowd from their slumber of complacency.
I agree with the late Charles Kindleberger, who commented that "financial crises are associated with the peaks of business cycles" and that financial crisis "is the culmination of a period of expansion and leads to downturn". However, I also side with J.R. Hicks, who maintained that "really catastrophic depression" is likely to occur "when there is profound monetary instability — when the rot in the monetary system goes very deep".
Simply put, a financial crisis doesn't happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/ or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis. Usually, as was the case in Asia in the 1990s, macroeconomic conditions deteriorate long before the onset of the crisis. However, expansionary monetary policies and excessive debt growth can extend the life of the business expansion for a very long time.
In the case of Asia, macroeconomic conditions began to deteriorate in 1988 when Asian countries' trade and current account surpluses turned down. They then went negative in 1990. The economic expansion, however, continued — financed largely by excessive foreign borrowings. As a result, by the late 1990s, dead ahead of the 1997-98 crisis, the Asian bears were being totally discredited by the bullish crowd and their views were largely ignored.
While Asians were not quite so gullible as to believe that "the overall level of debt makes no difference … one person's liability is another person's asset" (as Paul Krugman has said), they advanced numerous other arguments in favour of Asia's continuous economic expansion and to explain why Asia would never experience the kind of "tequila crisis" Mexico had encountered at the end of 1994, when the Mexican Peso collapsed by more than 50% within a few months. | | | | | | |
| Investors: Could there really be a brand-new "Gilded Age" ahead? Nearly 140 years ago... in the middle of seedy bank scandals, financial panic and filthy national politics... a handful of Americans still managed to build staggering wealth. Could the same force that created these titans... unleash a whole new wave of wealth creation, yet again? This shocking new presentation says yes, thanks to seven unexpected and "exponential" wealth events ahead. Click here for full details... | | | | | | | | In 1994, the Fed increased the Fed Fund Rate from 3% to nearly 6%. This led to a rout in the bond market. Ten-Year Treasury Note yields rose from less than 5.5% at the end of 1993 to over 8% in November 1994. In turn, the emerging market bond and stock markets collapsed. In 1994, it became obvious that the emerging economies were cooling down and that the world was headed towards a major economic slowdown, or even a recession.
But when President Clinton decided to bail out Mexico, over Congress's opposition but with the support of Republican leaders Newt Gingrich and Bob Dole, and tapped an obscure Treasury fund to lend Mexico more than $20 billion, the markets stabilized. Loans made by the US Treasury, the International Monetary Fund and the Bank for International Settlements totalled almost $50 billion.
However, the bailout attracted criticism. Former co-chairman of Goldman Sachs, US Treasury Secretary Robert Rubin used funds to bail out Mexican bonds of which Goldman Sachs was an underwriter and in which it owned positions valued at about $5 billion.
At this point I am not interested in discussing the merits or failures of the Mexican bailout of 1994. (Regular readers will know my critical stance on any form of bailout.) However, the consequences of the bailout were that bonds and equities soared. In particular, after 1994, emerging market bonds and loans performed superbly — that is, until the Asian Crisis in 1997. Clearly, the cost to the global economy was in the form of moral hazard because investors were emboldened by the bailout and piled into emerging market credits of even lower quality.
Above, I mentioned that, by 1994, it had become obvious that the emerging economies were cooling down and that the world was headed towards a meaningful economic slowdown or even a recession. But the bailout of Mexico prolonged the economic expansion in emerging economies by making available foreign capital with which to finance their trade and current account deficits. At the same time, it led to a far more serious crisis in Asia in 1997 and in Russia and the U.S. (LTCM) in 1998.
| Clearly, the cost to the global economy was in the form of moral hazard... | So, the lesson I learned from the Asian Crisis was that it was devastating because, given the natural business cycle, Asia should already have turned down in 1994. But because of the bailout of Mexico, Asia's expansion was prolonged through the availability of foreign credits.
This debt financing in foreign currencies created a colossal mismatch of assets and liabilities. Assets that served as collateral for loans were in local currencies, whereas liabilities were denominated in foreign currencies. This mismatch exacerbated the Asian Crisis when the currencies began to weaken, because it induced local businesses to convert local currencies into dollars as fast as they could for the purpose of hedging their foreign exchange risks.
In turn, the weakening of the Asian currencies reduced the value of the collateral, because local assets fall in value not only in local currency terms but even more so in US dollar terms. This led locals and foreigners to liquidate their foreign loans, bonds and local equities. So, whereas the Indonesian stock market declined by "only" 65% between its 1997 high and 1998 low, it fell by 92% in US dollar terms because of the collapse of their currency, the Rupiah.
As an aside, the US enjoys a huge advantage by having the ability to borrow in US dollars against US dollar assets, which doesn't lead to a mismatch of assets and liabilities. So, maybe Krugman's economic painkillers, which provided only temporary relief of the symptoms of economic illness, worked for a while in the case of Mexico, but they created a huge problem for Asia in 1997.
Similarly, the housing bubble that Krugman advocated in 2001 relieved temporarily some of the symptoms of the economic malaise but then led to the vicious 2008 crisis. Therefore, it would appear that, more often than not, bailouts create larger problems down the road, and that the authorities should use them only very rarely and with great caution.
Regards,
Marc Faber
for The Daily Reckoning
[Ed. Note: Just like in 1994, 1998 and 2008 , stimulus, money printing and low interest rates are relieving short-term economic pain… at a great long-term cost. Still, we bet that you'll be very surprised at what we're forecasting over the next decade. We've posted it here for easy access.]
| | | | | | |  Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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