Saturday, August 1, 2009

Why Minimum Wage Means Maximum Slavery

While we were in Vancouver last week, the dipsticks in Washington, District of Criminals did it again. They increased the Minimum Wage from $6.55 to $7.25 per hour.

I don't mean to preach to the choir, but there goes the remnant of what might otherwise have been the start of a jobs recovery.

Wage and Price Controls don't work. You and I can see it in everyday real life. Richard Nixon tried it and failed. The Pols that run the country can't seem to see beyond the end of their noses. Actually, they know exactly what will happen but they're so hell-bent to reward unions, they don't care.

Why unions? Simple. If the minimum wage is increased, naturally the union wage must also be increased. Increasing the union wage rate keeps the membership in line and fattens the pockets of the union officials. In turn, it helps get the Pols re-elected. Talk about being hypocritical. The very Pols that caused the dollar to lose purchasing power due to government deficit spending now pretend to be so munificent as to help the poor earn a "living wage."

This is no different than rent controls or price controls. Anytime artificial numbers are substituted for what an otherwise free market would be willing to pay, somebody gets hurt. In the case of minimum wages, it's the very low-level worker that gets hurt. If the objective is to provide employment for entry level workers, minimum wage isn't the answer.

Would you like a job paying $6.55 per hour or would you prefer no-job paying $7.25 per hour?

It really is that simple. If you're a marginal worker, you're expendable. The business for which you work can perhaps justify paying you $6.55 per hour to sweep or wash dishes. When then forced to pay $7.25 per hour for the same services, the business just decides they can no longer afford to hire the sweeper or dishwasher. They make other arrangements to get the jobs done. Meanwhile, the former dishwasher is now out of a job thanks to the Federal Government raising the minimum wage.

During WWII, we had all sorts of wage, rent and price controls. Perhaps because we were involved in a major war, folks simply made-do without and devoted their efforts to helping the United States win the war. Once the war was over, most of the wage and price controls were removed. The economy then took-off like a scalded dog.

There were a few pockets of resistance however. One was Santa Monica, CA. They decided rent controls were necessary because "greedy" landlords were taking advantage of the "poor" tenants. Ditto NYC, by the way. The result was fewer units available because the very folks that risk their own money and expended their own energies to provide living accommodations weren't willing to do so for a less-than-profitable return. Existing units were not well maintained because the owner was seldom allowed to increase rents to cover expenses. New units were exempt. Those new units were rentable at whatever the market would pay. As a result, all varieties of high-priced new units came on the market while the more-affordable units vanished. Once again, the very folks who were supposed to be helped by rent controls now found thems elves with no choices, thanks to government interference.

As mentioned above, during WWII, we had price controls on almost everything. We also had coupon books that limited the quantity of almost every good we could purchase. My mom traded coupons with other moms so everyone had a chance to get what they really needed. Shortages, however, were the norm. It made almost no difference whether you had an "A," "B," or "C" gasoline sticker for your car because you couldn't buy tires. When prices and/or quantities are artificially limited, scarcity is the result.

Have you heard the opposition to Obama's National Health Care complain about rationing? This is exactly the "why" of that complaint. Some bureaucrat will decide who gets what medical treatment. The excuse is that medical costs are too high. It's another form of wage and price controls. In this case, the result will be otherwise-avoidable deaths simply due to the rationing of medical services. And as you've read many times, if you think health care is expensive now, wait until you see what it costs when it's free.

So what's the solution? What about "all those poor people?" What's a heartless capitalist to do?

Recall Mama Obama ranting during the campaign that "some folks are going to have to give-up some of their pie so that others can have some?" Neither she nor the multitudes like her understand the basics of Economics 101. Our economy is not a zero-sum game.

For most of my life, I raced cars and one of my favorite races was the 2000 mile La Carrera Panamericana from Guatemala to the USA through central Mexico. Let's admit that Mexico is a poor country. That is, many of the folks are considered to be poor. Yet as I traveled throughout Mexico, I saw color TVs in cardboard shacks. I must have been really "poor" when I was a kid because we didn't even have a black and white TV. No one did. We were one of the first families in the neighborhood to get a TV and that wasn't until 1948. Today, even a poor Mexican can have a color TV. Why? Because contrary to Mama Obama, the world's pie continues getting bigger. That means even the poorest among us can enjoy a living standard that wasn't even available when I was young.

We have a bunch of politicians who continuously deficit-spend thus reducing the purchasing power of the dollar. Then they graciously increase the mandatory minimum wage in order to off-set the loss of purchasing power they, themselves, created. Do you suppose there is a moral hazard hiding somewhere in this fraud?


Today you do the heavy lifting, Shooters. Here are just a few of the letters I received about yesterday's Whiskey

Today you said:
I'm all for murderers and rapists being removed from society permanently…but an awful lot of people are guests of the states because of insanely immoral prohibition laws. Yes, I speak of drug offenses.

And plenty of the murderers in prison are such because they are the de facto warriors and enforcers in a black market economy created by prohibition.

End prohibition and an awful lot of prison space becomes redundant.

I concur with this exactly. Too bad we don't we don't hear more about this. Keep up the irreverence!

Consider the irreverence kept up!

Bravo!!! I completely agree with you!

Drug prohibition has been one of the greatest tactical errors and manifest failures of the powers that be.

It has handed a very lucrative and powerful market and placed in the hands of the organized crime, making them very wealthy, powerful, and un-stoppable.

The only way we can defeat the drug traffickers is to take away their product:  Legalize it! Regulate it! Tax it!

The War on Drugs has been a failure.  The victims are our families and our tax dollars spent on housing masses of people in prison and the funding this ineffectual war.

I hate drugs, want to have nothing to do with them.  But I am a pragmatist and the War on Drugs is a wasteful joke. 

It's time to declare victory and make the stuff as legal as whiskey and put the cartels out of business!

Danke. Beware when you hear anyone say "there oughta be a law." Just because you don't approve of a behavior doesn't mean there ought to be legislation against it.

When the citizenry really gets fed up the easiest thing to do is build a big concrete wall around Washington, call it a jail, and start over.  And definitely do away with prohibition - what a stupid concept.  Let people do what they want as long as they are harming no one but themselves (or aiding themselves).  This police state has to stop, and the politicians don't get it at all.  Besides the billions of dollars wasted on enforcing drug laws, and the billions missed in taxing substances, you have billions spent on keeping so-called criminals incarcerated.  Don't they have calculators?  I know they can't add up things in their heads, but calculators have been around for years.  I know some of them don't get computers yet, but calculators?  Add up the costs, dear government, this drug war thing is throwing money out the window.

Waitaminut…government throwing money out the window whilst simultaneously meddling with individual behavior it has no natural right to control? Doesn't seem possible.

Hooray, someone else with common sense. Case in point, a local man was sentenced to 42 years in prison for having 1 marijuana smoke in his possession. He did have a number of convictions for the same thing, but no convictions for any other type of crime. The judge handing out such a sentence is up for reelection soon. Some common sense must return to our laws on soft drug usage and possession in small quantities. We have prisons full of people who cost the entire country indirectly through lost productivity as well as the direct cost of housing them.

Thanks, but it shouldn't matter how "hard" or "soft" the drug usage is. We don't arrest people based on how hard they hit the bottle. Why should it be different for any other drug?

The violence issue often comes up, but plenty of people smoke crack and manage not to assault and rob others.

And if there were no government-spawned black market, the cost of crack and drugs like it would come down so far that those who currently rob strangers or sell them sexual favors for rock or smack most likely wouldn't have to. The habit would become as cheap as compulsive gum-chewing. Hard drug-users could kill themselves in peace without the government incentives to mug or whore.

RE: drugs: I wish I could howl, but I am moving toward the same position. If people want to screw up their lives, let them buy drugs from a drug store, let Midwest farmers grow pot and poppies, and tax it like any other sinful substance.

BUT: You can not do that if health care is considered a right rather than a privilege in this society. If it is a right, then hospitals and ER docs are required to work without compensation. Right now, if a hospital bills Medicare / Medicaid, they must treat anyone who shows up at the ER, whether they'll get paid or not.  Isn't that slavery? Do you have any position on slavery?

So before you take drugs off the streets and legitimize an outlet for them, a repeal of the slavery - I mean, compassion laws is necessary. If people show up to an ER, they should have to show ability to pay, or they don't get care. Harsh? I suppose, but I bet it would be a nice incentive to buy health insurance.

And you certainly cannot legalize drugs and have Obamacare. Government run health care will not work. Government already heavily controls our health care system, which IMHO is exactly why costs are out of control. Any time you subsidize something with government thievery, the costs will go up. 

No alcohol, please, I'm from Utah, but I will squeeze off a round or two in a show of solidarity.

Oy. You really, really don't want me to get started on government healthcare, Good Shooter…but it's too late.

This whole government healthcare racket itself smacks of slavery: foisting care upon people then telling them what they can and can't do since any harm that comes to their bodies would be a burden on the national system.

I'd like to opt out of the collective, thank you very much. Let me abuse myself as I wish and pay for care as I see fit.

I await the indignant responses from the nannies and meddlers who insist on taking care of me and on telling me what's on their approved list of what goes on with my person.

This ought to be good.

Friday, July 31, 2009

Requiem for Ben Bernanke, and His "Second Great Depression"

"I was not going to be the Federal Reserve chairman who presided over the second Great Depression," declared Federal Reserve Chairman Ben Bernanke this past Sunday. Well, he sure had me fooled.

My gut reaction to Mr. Bernanke's statement was to recall the famous words of former President Nixon, who said of the Vietnam conflict, "I'm not going to be the first American president to lose a war." And we know how that turned out.

Poor Mr. Bernanke. Does he really not understand his fate? I'll grant that he was dealt a bad hand - a draw of pure, malevolent evil - by his incompetent predecessor at the Fed, Alan Greenspan. But when you volunteer to run the nation's central bank, you're asking for a seat at the table of history. When history deals, you play the cards that you're dealt. And sometimes history holds all the trumps, if not a few aces up its sleeve.

This past weekend Mr. Bernanke "appeared stoic at times," according to The Wall Street Journal, as he met with 190 people in a town hall-style forum at the Federal Reserve Bank of Kansas City. Over the course of an hour, at an event moderated by PBS correspondent Jim Lehrer, the Fed chairman answered 20 questions from attendees.

The unusual setting allowed the former Princeton professor to speak outside of his usual comfort zone. The give-and-take in Missouri - aka "flyover country" to many Washingtonians - was far removed from Fed chief's normal, well-scripted congressional testimony, or his occasional academic presentations to roomfuls of big shot bankers and professional economists.

Continuing the Nixonian theme, the Kansas City forum was an opportunity to find out what Mr. Bernanke knew, and when did he know it.

Mr. Bernanke defended himself and the Fed against suggestions that he was too eager to aid large financial institutions last fall and winter, while sacrificing the interests of small businesses and everyday American citizens. "It wasn't to help the big firms that we intervened," argued Mr. Bernanke as he discussed intervening to help the big firms - y'know, the financial firms that are supposedly too big to fail.

Using a Discovery Channel analogy, Mr. Bernanke said, "When the elephant falls down, all the grass gets crushed as well." Thus did he justify unprecedented levels of federal aid to the very Wall Street banking houses that contributed so mightily to the bubble economy of recent years. In essence, the Fed had to feed the beast and save the big guys to protect the little guys. But have the little guys really benefited?

Mr. Bernanke claimed that he was "disgusted" by circumstances under which the Fed rode to the rescue of several large financial firms. "Nothing made me more frustrated," he said, "more angry, than having to intervene" when big banks were "taking wild bets that had forced these companies close to bankruptcy."

Then Mr. Bernanke argued - strangely - in favor of new laws to let financial firms other than banks fail WITHOUT going into bankruptcy. Huh? What's wrong with bankruptcy? It's been around since the days of the Roman Empire.

I practiced bankruptcy law in my pre-Agora career as an attorney. (I'm a recovering attorney now.) I don't understand Mr. Bernanke's viewpoint at all. Why shouldn't big financial firms go bankrupt when they deserve it? OK, there's the usual canard: because it would be difficult or impossible for a bankruptcy court to "unwind" all the open trades in the sweatshops and boiler rooms of big outfits like AIG. I disagree.

Mr. Bernanke's comment makes me wonder how well he understands the intent (let alone the history and legal process) of bankruptcy. Or does the Fed boss just always default to handing out special deals to the big-money guys?

Still, I have to give Mr. Bernanke credit for showing up to speak with a couple hundred informed citizens. The Fed certainly deserves the exposure.

According to a recent Gallup poll, a mere 30% of Americans believe that the Fed is doing a "good" or "excellent" job (down from 53% as recently as 2003). About 57% of Americans believe the Fed is doing a "fair" or "poor" job.

Indeed, according to Gallup, the Fed is the least-trusted of nine government agencies. The Fed lags far behind on a list that includes agencies such as NASA and the FBI, as well as traditional bĂȘte noires such as the Central Intelligence Agency, the Internal Revenue Agency and the Food and Drug Administration.

Mr. Bernanke's tenure at the US central bank faces intense scrutiny, and not just from the serial bashing that he receives from the writers at Agora Financial. He has only six months left in his term as Fed chairman. Mr. Bernanke will soon learn whether President Obama will reappoint him to another four-year term or replace him with another Fed chairman wannabe.

Does Mr. Bernanke really want to continue at the Fed? Why? If Mr. Bernanke doesn't want to preside "over the second Great Depression," as he claims, then he should get the hell out now and try to salvage some measure of his professional reputation - if not his old job and paycheck at Princeton. Or does Mr. Bernanke want to continue on the pathway of becoming the central bank equivalent of Gen. William Westmoreland?

The questioners in Kansas City were on the right track. They certainly raised better issues than we see in the softball questions Mr. Bernanke routinely receives from members of Congress and senators.

Here's the key point. Mr. Bernanke and the Fed had a clear policy choice last fall. They could do a big bailout or not. The Fed chose to open Door No. 1 and bail out Wall Street. This was at the expense of Main Street, let alone the national balance sheet.

But the "Second Great Depression" was not going to be stopped so easily. You don't just throw money at a Great Depression, especially money that you don't have. Mr. Bernanke ought to know this, based on his studies of the first Great Depression.

Instead of the bailout last fall, Mr. Bernanke and the Fed should've let the big guys fail. The Fed should've upset the whole stinking mess on the card table and reset the US monetary system. The Fed had the chance to make a statement and choose a new path, and to cast the money-changers out of the temple, so to speak.

Mr. Bernanke and the Fed should've allowed the failed banks to go down. The Fed should've sent the bubble perps down the street to the US Bankruptcy Court in lower Manhattan, along with all their fraudulent paper such as MBSs, CDOs, SIVs, etc.

Would large-scale bankruptcies have been a shock to the US and world financial system? Of course. That's the idea. It would have been very ugly. But it would've helped to clean up the US economy for a couple of generations.

Would Mr. Bernanke be despised by many people? Yep. Burned in effigy, a la Paul Volker? Yes, and it comes with the job. The Fed chairman should not try to be Mr. Popularity.

By now, almost a year later, we'd have some semblance of financial finality. That's because bankruptcy courts have the legal power to void bad contracts and discharge unpayable debt. Instead, we still have the problem of bailed-out zombie banks with massive levels of unmarketable paper and unpayable debt on their books. Right now, the "dead banks walking" are doing little but sucking capital out of the system while the Fed tries to reinflate more bubbles.

Would finance and commerce have proceeded during a banking bankruptcy? Yes, because there's an entire economy out there, with hundreds of millions of people expressing needs and wants in the marketplace. If you believe in the basic idea of Capitalism, then you have to believe that we would have adapted, and learned new ways to meet the needs and wants absent the big, failed banks.

And it's worth pointing out that plenty of people and companies do business while they're in bankruptcy court. There's nothing quite like the stroke of the pen of a federal judge to cut through the crap.

When Ben Bernanke says that he doesn't want to preside over the second Great Depression, he's missed a critical point. He's already there.

Whether it was Pres. Nixon and his policies, mired in the rice paddies in Southeast Asia many decades past, or the current fever-swamps of the Potomac River, there are some bullets that have your name on them. You can't duck and dodge.

Right now, many years of monetary malpractice are roiling the American economy. To quote a famous Chicago preacher, "The chickens have come home to roost." The second Great Depression is happening, and it's happening on Mr. Bernanke's watch. Did he really expect to skate through a couple of terms as post-Greenspan Fed chairman and not get blown up?

Sad to say, Mr. Bernanke bailed out the big banks. Now the damage is done. We're still in for that "Second Great Depression." And Mr. Bernanke will forever be associated with it.

Ben Bernanke could have been a heroic figure. He could have refused the bailout and repudiated several generations of bad monetary ideas. He could have launched a new movement - something like monetary perestroika in the US - and moved the country ahead into a future of increased productivity and financial solvency. Instead, Mr. Bernanke is just a bit actor in a historical tragedy.

There's no armor against the arrows of fate. Mr. Bernanke has lost his chance. Perhaps he can take solace in the words of Robert Louis Stevenson from his classic "Requiem": "Home is the sailor, home from the sea."

Thursday, July 30, 2009

What's Good for Goldman is Bad for the Nation

We're attending a financial conference here in Vancouver. Yesterday was actually the tenth anniversary of The Daily Reckoning. A group of readers took your editor to dinner and roasted him.

He was flattered...and grateful for the attention.

But we're not kidding ourselves. Readers come up to us at conferences and tell how much they enjoy reading the DR. We wait for questions about Quantitative Easing, the Trade of the Decade, Empire of Debt or any of our other important themes. Instead, what they want to know about is:

"How's your gardener doing? What's Maria doing in Los Angeles? Did you ever figure out what happened to your missing cows...?"

Readers know what's important. They want to know more about what really matters.

Still, we are foot soldiers in the lonely battle against economic claptrap; we must march on!

Yesterday, came more evidence that the depression is over. The Dow shot up 188 points. From a technical point of view, if you believe that kind of thing, it looks as though the rally has farther to go. We recall setting a target of Dow 10,000. Perhaps we will get there.

Oil traded at $67 yesterday. Gold rose to $954 and bond yields on the 10-year T-note rose to 3.7%.

All of this sounds vaguely inflationary...and vaguely bullish. Besides, Goldman stock is rising. And as we all know, what's good for Goldman is good for the country.

Wait...we're kidding...right?

Yes, we are kidding. What's good for Goldman is generally bad for the country. Goldman makes money by separating investors from their money. Nothing wrong with that; someone has to do it. But the big banks are most profitable when speculation is rampant and debt is growing. That is, when people are going further and further into debt...and speculating on rising asset prices. We know you don't really prosper by borrowing and gambling. But that doesn't make casinos unpopular, or lenders unlawful. Bankers, like undertakers, benefit from human frailty. At least, they benefit as long as the government bails them out. Otherwise, they fall victim to their own human frailty.

But this is a minority opinion. Most economists disagree with us. And there are so many of them...if all the economists who disagreed with us were laid would be a good thing. They believe that the economy is stabilizing...and on its way back to normal. Trouble is, 'normal' ain't what it used to be.

[Indeed, 'normal' is hard to come by these days, as The Rude Awakening's Eric Fry pointed out in his speech at the AF Symposium on Wednesday. If you couldn't join us in Vancouver this year, don't worry - we've been recording all the main session presentations for you, so you don't have to miss a single insight or forecast. Get your AF Symposium audio recordings here.]

Wall Street banks are making money, 'tis true. But they're not financing new businesses...or factories. They're not aiding the process of capital formation nor allocating capital in ways that will result in new jobs and new industries. Instead, they are refinancing old debts...and speculating on zombie assets. This will not increase the real wealth of the planet. Instead, money just changes pockets. Which, of course, raises an interesting question; where did all this money come from?

If Goldman's pockets are fatter, whose are thinner? If the four biggest banks earned a combined $11 billion in the last quarter...who did they take the money from? Who's got that kind of money?

Meanwhile, we found out this week that the feds have wagered an amount equal to 170% of GDP in their attempt to bailout the world (more below). Part of that money was used to buy Wall Street out of the investments that they didn't want. Which ones were those?

Well, the ones that didn't work out.

No wonder the banks are making money.

But while the banks are making billions, cometh another report from another sector - manufacturing. Caterpillar announced its results for the second quarter too. Profits were down 66%. In other words, while the banks were making money speculating with taxpayer's money, Caterpillar was trying to make things and selling them to customers. Caterpillar not only makes things; it makes things that help other companies make things. Things with motors...big things...things that make noise and give off exhaust...things you use to dig holes and move dirt...things you need if you're going to have a real economic recovery. Unfortunately for CAT, these things aren't selling.

So what does this tell us? suggests that there is no real economic recovery at all. The real economy is suffering...sinking...and shutting down.

More news from the Agora Financial Investment Symposium:

"The conference certainly did not disappoint yesterday, with presentations from Alan Knuckman and Doug Casey - just to name a couple," says Kate Incontrera, reporting from the Fairmont Hotel in Vancouver.

"'Commodities are not a dirty word,' Resource Trader Alert's Alan Knuckman told the crowd at the conference yesterday.

"The average investor is notoriously wary of investing in commodities, because the volatility in the natural resource market makes it seem like you are gambling. However, Alan pointed out if you go into the natural resources market armed with exit rules, discipline, and a methodical implementation of trading plan, you will be all set to flourish in this market.

"'As a trader,' Alan said, 'you are always trading for tomorrow. If one trade goes bad, so what? There's always tomorrow, there's always a new opportunity.'

[You can hear Alan's full speech - along with all the other main session presentations - from the comfort of your own home. Get the full audio recordings from this year's AF Symposium by clicking here.]

"Then, there was the always-entertaining and 'pot-stirring' Doug Casey. Not everyone in the crowd always agrees with what Doug has to say, but yesterday, the audience was glued to their chairs when he took the stage.


"The only thing that will solve the economic situation, according to Doug, is the total deregulation of government, the elimination of all taxes, the abolishment of the Federal Reserve, the collapse of overstuffed, corrupt financial institutions and a default on the national debt. But since none of that is likely to happen in our lifetimes, Doug offered what he believed will ultimately solve what he calls, 'The Greater Depression.'

"'Forget about the government,' he told his audience, 'it serves no purpose, and encourages the worst habits. Individual people saving will make a difference. Savings will directly impact growth in technology, which is also very important to helping the economy.'

"And what should you be doing with your money right now? According to Doug, you should buy precious metals and put them aside. Short interest rates because he believes that they will inevitably go higher. Buy real estate in a foreign country - but choose these countries wisely.

"'The situation is hopeless - but it's not serious,' Doug concluded.

"We could go on and on about the other all-star presentations we saw yesterday, but time is running short - and our own Bill Bonner is about to take the stage. Look for the full report in the weekend edition of the DR, which will be in your inbox tomorrow."

[If you weren't able to join us in Vancouver for the Symposium (we know it's a hike), don't worry - we are recording all of the main session presentations and putting them in both CD and MP3 format. And until Monday, July 27th at midnight, you can get these audio recordings at a significant discount...get yours now.]
And back to Bill, with more thoughts:

The banks are not earning their money helping Caterpillar expand. They're making their money not because of a recovery, but because there isn't one. In other words, they're profiting from the financial stress of the early stages of a depression. There's a post-crash bounce...and the government is sending a lot of money their way.

As for a real recovery - forget it. There's no evidence of it. Unemployment is getting worse. Housing is still going down. Profits are going down. Those aren't the things that presage a recovery...they herald a deeper, darker depression.

The depression darkens because people are not just being laid off - their jobs are disappearing. They do not get called back to work. Instead, they stay unemployed until they run out of unemployment benefits...and then the statisticians in Washington drop them off the unemployment rolls. Currently, the first batch of those people to reach the end of their benefits came this week. Last we looked, the Pennsylvania legislature was passing a law so they could continue drawing benefits for a few weeks more.

We've mentioned John Williams and his excellent service called Shadow Government Statistics. He looks at the numbers and figures out how they are twisted and tortured...and then figures out what they would be if they were treated properly. Currently, the unemployment rate nationwide officially is almost 10%. But if you computed the unemployment numbers the way they did back in the Great Depression, Williams says one in five people are out of work. In some places the figure is as high as one in four.

In other words, the unemployment numbers are already beginning to look like those of the Great Depression. But that's true of almost all the numbers. They've all got a '30s era look to them. And if you stopped water boarding them, they'd tell a similar story. Almost all the indicators are worse than any we've seen since WWII.

Unemployment, trade, defaults, foreclosures, bankruptcies, prices, name it and you have to go back to the end of WWII to find similar numbers. Of course, at the end of the war, the wartime economy shut down. Millions of people who have been in uniform...or making tanks and airplanes...were suddenly out of work. Economists thought the economy would go right back into the Great Depression. Instead, it boomed.

Those soldiers and their families had savings. They had pent up demand - they hadn't bought a new car in 10 years...they were young...they got married...they had children...they needed baby cribs and houses. We remember going to look at one of the first major suburban developments as a child - Harundale - in Maryland, built by the Levitt Company.

It was a horrible place, but you could buy a house for peanuts...on credit. And it set the pace for the suburban consumer credit expansion of the next half a century.

But what was normal for so many years is not normal any more. Now, consumers are paying off debt faster than any time since 1952. The government, however, is making up for them. Goldman may no longer be able to push more credit onto the public; but it can push one heckuva lot of debt onto the public sector. Wall Street firms helped households ruin themselves in the Bubble of 2003-2007. Now they're doing the same for the government, helping the feds raise money on a scale never seen before in human history.

As we wonder they're making money. Too bad.

Reflections from Vancouver

Just getting to Vancouver was a revealing trek. Despite the ongoing Great Recession, it never ceases to amaze me how busy are the major airports. My trip took me through Atlanta and Seattle, and both airports were wall-to-wall travelers. The waiting areas were full, the planes were packed and the baggage areas were filled. Even the rental car counters had lines out the door.

Busy airports may or may not be a sign of life in the larger economy. Even unemployed people can buy a ticket and fly somewhere. All you need is a credit card, if you can still get credit. Meanwhile, airline profit margins are tight. Fuel prices are creeping upwards. The airlines are still nicking you for things like $15 baggage fees. And as I flew over the heartland of the nation, I looked down and pondered our collective fate.

Last week, for example, the Federal Reserve predicted that the U.S. unemployment rate would surpass 10% in the coming months.

That's no big surprise. The true U.S. unemployment rate as at least 15% already when you factor in the long-term unemployed who are not carried on the "official" books.

Then the Fed made a shocking prediction. It forecasted that the U.S. economy would add NO NET NEW JOBS over the next five years! Whoa!

No net new jobs? That ought to scare you. The Census Bureau predicts that the U.S population will grow over five years. But the numbers of new jobs will remain static. That is, for every job gain there will be a loss.

This job-stagnation is a recipe for all sorts of bad things at the local, state and national levels. Government budgets won't balance, so I guess we can plan on more "cost saving" measures such as releasing prisoners early and closing schools. Yep, that's how to build a great nation... More criminals and fewer well-educated citizens.

The Fed announcement is basically an admission of monetary and policy malpractice at the highest levels of the U.S. political class. I witnessed it first-hand a couple weeks ago when I was in Washington, DC. I met with some Congressional staffers who were just clueless. But they sure were full of themselves. They had all the answers, too.

As my Delta flight flew over eastern Washington the other day, I looked down and saw a familiar sight. It was a long, narrow body of water, with a stark, linear feature at the end of it. It was Lake Roosevelt, impounded by the Grand Coulee Dam, of which I wrote last year.

From 36,000 feet, Grand Coulee Dam sure looked small. But it's the largest manmade structure in North America. It's three times the height of Niagara Falls. It's larger than the Great Pyramid of Cheops, times a factor of three. It has enough steel in it (9 million tons) to build about 225 World War II-era battleships, at 40,000 tons each. Today it's rated at about 6.8 gigawatts of electrical power, or the equivalent of about seven large nuclear power plants.

Grand Coulee was built in the 1930s as a government "stimulus" project. This was back in the good old days when the government knew how to "do stimulus." Y'know, build big dams. Kick-start the steel and cement industry. Employ tens of thousands of skilled workers. Do some heroic engineering and create an energy project that will benefit the nation for decades into the future.

No, Grand Coulee by itself didn't solve the issues of the Great Depression. But it sure did come in handy when it started spinning power in 1942, just as the U.S. entered into fighting World War II. One lesson is that if you dream big dreams, you never know what will come out on the other side.

And today? Congress's idea of "stimulus" is to pass a $787 billion pork-bill. But most of the money won't get spent until 2010 and 2011. Oh well, we're going to have to borrow it all anyhow.

I drove across part of southeast Washington and northwest Oregon during my journey to Vancouver. I haven't been up in these parts in many years, so this was my chance.

As I motored around the two and three lane back roads, I sure saw a lot of stuff for sale. It seemed that many households wanted to sell one item or another, often parked prominently along the highway.

I saw cars for sale - old, not-so-old, and nearly new. There were vans, SUVs, trucks, campers and trailers. There was farm and construction equipment. There were boats and ATVs. Then there were dozens of homes and lots with "for sale" signs. Plus many yard sales, with all sorts of household, workplace and institutional goods waiting for buyers.

It was entirely clear that many people are trying to raise cash. So everything's for sale.

Remember that old expression, "Shop 'Till You Drop?" Well, people are dropping. Where's that Grand Coulee Dam project when you need it, right?

I drove along the Columbia River for quite a ways, following the trail of Lewis & Clark, from their expedition in 1805-1806. Today the Columbia is a well-regulated, controlled body of water crossed with dams and dredged as necessary. Large ocean-going ships float serenely in the water next to downtown Portland.

In their journals, Lewis & Clark described a wild Columbia River of raging rapids, filled with gigantic log snags. Some of the logs floating down the Columbia of old were up to 7-feet in diameter and 200-feet long. Big trees, huh? It was a different world back then. Speaking of a different world, I was impressed by the old U.S. Customs House in Portland. Now THAT building also represents a different world, one where the federal government raised its revenues from duties and imposts.

In the olden days a ship captain would dock at Portland, or another locale on the Columbia. Then he'd walk over to the U.S. Customs office to declare the cargo and pay the taxes due. This was how the federal government funded its operations. And when the funds were spent, the government had to observe its own fiscal limits.

In other words, the original U.S. government had to take an interest in growing and maintaining the economy. Today, with the fiat dollar, the feds think that they can do anything. Until, of course, the nation spends itself into national penury.

Monday, July 27, 2009

Top Stocks To Buy 2010: A Brief History of Monetary Madness

Those whom the gods would destroy are first granted stimulus. When a man wins the lottery, for example, it has a stimulating effect on everyone around him. He usually spends the money quickly ― often even before he gets it. But no matter how much he wins, he is usually broke within a few years...often, even broker than he was before he bought the winning ticket.

A recent example from the British press: One of the first lottery millionaires punched a plumber and ended up in court, says The Telegraph. Michael Antonucci won 2.8 million pounds in 1995. But he "blew his entire fortune," reported the paper last month. Now he's reduced to stiffing tradesmen. The amount in dispute was just 400 pounds, what he was billed for a "gigantic ceiling mirror fitted above a whirlpool Jacuzzi." He had the mirror installed when he was still flush. Now that he's broke, he can't pay...hence the altercation.

The phenomenon is little different when it happens on a national or even imperial scale. Any money that you don't earn is stimulus. Without the sweat of honest toil on it, money seems to play a pernicious role in history. There are no examples ― none ― where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford...and getting into trouble.

The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more, silver, land and slaves. And each led to more conquests, which brought forth more booty. But the stimulus of this booty stimulated only the need for more stimulus. It did not stimulate real prosperity. Instead, it undermined it. First, slaves bought by rich landowners destroyed the free labor market and ruined small farmers. And then, imported wheat from the provinces ― paid as tribute ― put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food.

In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, made up of displaced small landowners and out-of-work laborers, needed bread and circuses which drained the Treasury.

The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it...with more stimulus. Neither paper money nor the printing press had yet been invented. So, Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock! This extra money did not bring prosperity; it caused price inflation. In a period of about three decades, Rome's consumer price index almost doubled. Then, when output from the mines could be increased no further, Augustus's great nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Of course, Rome itself was played out too.

Another early and dramatic example of stimulus-in-action came in Spain in the 16th century. The conquistadors increased their supply of money in the time-honored fashion ― by stealing it. Galleons brought treasure from the Americas; increasing the Spanish money supply substantially and fatally. The Spaniards had so much stimulus that they laid down their tools. Why should they work? They could buy things.

The discovery of a whole mountain of silver ― Potosi ― in the middle of the 16th century insured a supply of stimulus that would last for nearly a century. Results? Predictable. Inflation. In the "price revolution" from 1540 to 1640 the cost of living went up throughout Europe. In England, for which we have the most reliable data, prices went up 700%. And Spain, though it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next 10 decades. Spain, like Rome, welcomed stimulus; it never recovered from it.

Now we turn to the biggest misadventure in stimulus ever ― the period after the United States 'closed the gold window' in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. After 1971, on the other hand, the sky was the limit ― especially in the United States of America. The US could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. The Fed's adjusted monetary base grew 900% since 1985, and more than doubled this year alone. Total US debt tripled ― as percent of GDP.

As it did with Rome and Spain, more and more stimulus stimulated spending and speculation, but not real output. During the 2001-2007 period, for example, credit in the United States increased by $22 trillion. The nation's GDP increased only by $4 trillion. For every extra dollar of output, Americans took on $5.50 of debt.

But now the bubble has blown up; the feds are on the case. What do they offer? More stimulus! Cometh a report this week that $23 trillion has already been put at risk in the various bailouts and credit guarantees. As for the US public debt, it is expected to increase until the country goes broke.

Future economic historians will look at these staggering efforts with awe and wonder; they will wonder what the Hell we were thinking.

Be Ready When the Market Tops

The S&P 500 jumped another 4.13% last week ― can this rally continue? It's time to gauge where we stand today, and what to look for this week in the markets.

From where I'm standing, the market looks very overbought right now. That means that after the last three consecutive weeks of rallies that we've just experienced, the market is currently at risk of topping off and heading back down. But technical analysis is more than just speculation, so it's time we look at a chart…

While we usually use the Dow, OTC Composite and S&P 500 charts to get a glimpse at what's going on with the market at large, today we'll be looking at the Wilshire 5000 and the S&P 500 for a view from the top.

It doesn't take a rocket scientist to see that major indexes have come a long way, and are now sporting major bearish technical indicators. But you sure wouldn't know it by watching TV.

Traditional Wall Street "buy and holders" would do themselves well by taking note of this…

When the markets see bad times on the horizon (forward thinking) they run the markets higher. Why would they do that you ask? So the big, smart money that is never on CNBC can get out. Said another way: You have to sell peanuts when the circus is in town ― and one look at the last 10 days suggests that the market is the high wire act currently on stage.

Looking at the daily charts of the indexes, as well as a number of Investor's Business Daily leaders, all we see are peaks and stocks in overbought territory.

While we aren't seeing anything but a peak on the daily charts, we sure are seeing topping/bearish structure in the shorter-term frequencies ― not just on the indexes but also in leading stocks.
So, what's the bottom line right now?

In the short term as well as the long term all the ingredients are there for a pullback to initial breakouts (green lines).

The real test will be what happens after a pullback to initial breakout levels. Will we see a bounce? That bounce is what you really want to watch for, as more often than not the markets have a way of testing and returning to the scene of the crime.

If we are going to top in the next week or two, then a pullback of the recent breakouts are in order with another move up to put in a top.

A Decade of Pain; The Mogambo on the Impact of Modern Economic Theory

Heathrow Airport is a nightmare in many ways. It is so large it can take hours to get from one terminal to the next. Yet, when we came back from Vancouver on Saturday, we landed at 10:30AM. By 11AM we were in central London.

We flew through the the express train. The whole thing took only a fraction of the time it takes us when we fly into Dulles at Washington.

But London was in a sour mood when we returned.

"Decade of pain predicted for public services," was the headline on Friday's Guardian from London. The reason for the decade of pain is the obvious one. Tax receipts are down - because of the depression. Governments are caught in a bind. Their revenues go down just as their costs - offering bailouts, counter-cyclical stimulus, and handouts to the unemployed - go up.

Ireland and California have been in the news on this subject. But they're hardly alone. It's a problem for almost all governments in the English-speaking world. As for the rest of the world, we don't know.

Ireland is facing its own decade of pain. So is California. This morning, California is in the news. Apparently, a deal has been worked out. The state will stay in business...and even pay off its IOUs. But it will mean cuts of 'services.' Here at The Daily Reckoning, whenever we modify the word 'services' with the word 'government' we feel we should warn readers that we don't really mean it. Most government services are a a government-subsidized business they are a fraud on the economy, absorbing valuable resources in order to provide a 'service' that is worth less than the inputs that were required to provide it. The service is a disservice to the broader economy.

And today too we find that England is sinking deeper into depression; it too will have to endure a decade of painful honesty.

"UK Slump Identical to that of 1930s," says Saturday's headline in the TIMES.

A chart traces the minus 5.6% GDP growth over the past 12 months...paralleling the decline following the crash of '29.

"The collapse is Britain's economy now rivals the worst days of the Great Depression..." continues the report.

If it continues following along on the 1930s track, the UK economy will continue to decline...and bottom out at 7% or 8% below pre-crisis output. Then, it will bottom out over a period of a couple years before beginning a recovery, back to pre-crisis GDP levels.

If that's correct, we're only about 2/3rds through the depression in terms of output...and only about 1/3 in terms of time. Remember, the first leg of the Great Depression lasted 43 months. So far, this one is only 19 months old. It probably has a ways to go.

The stock market has a ways to go too. The Dow was up 23 points on Friday, bringing it to 9093. Like the economy, the stock market runs in long cycles - from bull to bear and back to bull again. The first post- war bull cycle took the Dow from under 100 to nearly 1,000 in 1966. Then, the index shilly-shallied around for the next 16 years. Adjusting for inflation, investors lost more than half their money during that period. Then began the big bull market that dominated our financial lives until 2007. But this bull market actually topped out in January 2000 - in real terms. Adjust for inflation and investors made nothing during the 2000-2007 period. So, the current bear market has been going on for nine years already. But if it lasts as long as the typical major bear market of the 20th century, about 18 years, that means it is only about half over. Look for it to end sometime between 2015 and 2020.

Where will the Dow be then? We can make a guess. If the economy were to lose, say, 10% of GDP...the loss in incremental sales would probably erase about 50% of corporate profits. And the financial industry, which had been responsible for 40% of corporate profits at its peak, will probably go back to a more reasonable figure of 10% of corporate profits - so that's a loss of 30%. Of course, there's some overlap on these figures - and a huge dose of Daily Dead reckoning - but maybe the loss of corporate earnings averages about 60%. So, if 2007 were a base of $100 in corporate earnings, we can expect only $40 sometime in the future.

The most important thing that happens in a bear market is that the multiples go down. Investors, who were prepared to pay $25 for a dollar's worth of earnings at the peak of the bull market begin to think they've been too optimistic. As the depression deepens they begin to see things differently. They see earnings continue to fall and feel they should be more cautious. So they take down p/e ratios...from 25 down to as low as 5. But let us say the p/e ratio goes to 8...on Dow earnings that are only 40% of what they were in 2007. Where would that put the bottom? Dow 1600. Allow for a little inflation...maybe 2,500.

Watch out...

[Where we are in the current depression - and what you can do to survive it - was touched on by just about every speaker at this year's Agora Financial Investment Symposium. If you weren't able to join us last week in Vancouver, don't worry - you don't have to miss out on any of the insights or advice offered at this year's event. We recorded each main session presentation in MP3 and CD form...and if you get yours before midnight tonight, you can get the recordings at 40% off! See here.]

More news:

"We have just returned from this year's Agora Financial Investment Symposium - and my head is still spinning," reported Kate Incontrera this morning.

"When sifting through our pages and pages of notes, I noticed a theme that kept cropping up throughout all of the speeches: innovation. With the current economic environment, it's clear that the old way of doing things is not going to cut it - you need to step out of your comfort zone and go along with the change, instead of fighting it.

"One clear example came from Resource Trader Alert's Alan Knuckman. Though many investors shy away from commodities and natural resource investing because of the volatility in the markets, Alan believes that's exactly the reason you should be getting involved in commodities. Step up to the plate and use the volatility to your advantage."

[You can hear Alan's full speech on your commute to work. You can purchase the full main session presentations from last week's Symposium in CD or MP3 format. But hurry - at 12:01 AM tonight, the price jumps $100! Get the recordings now.]

"Of course, much of the innovation in today's markets is coming from new technology.

"'Continued growth in technology,' Doug Casey told us, 'will be one of the things that will solve the depression.'

"Our intrepid correspondent, Byron King, also had an interesting example of innovations in technology shaping the world - specifically, the oil world. His presentation looked at what he is calling 'the perfect storm for Brazil and investors.'

"We won't try to get into the technicalities of this investment story, but in a nutshell, Brazil's offshore oil resources may rival those of the total for Saudi Arabia.

"'It takes companies with phenomenal technical and managerial skills, plus deep pockets, to play in this great game,' Byron told the crowd. 'The bottom line is that with the right companies working at it, there's enough oil down there to make it economic to invest and recover.'

[Hear the whole story in Byron's presentation.]

"Byron and Alan are just two examples of new opportunities for investors to take in this wobbly economy. It's clear that if you want to flourish right now, you will have to think outside the box.

"'This is not a recovery. This is a depression,' our own Bill Bonner reminded us in his closing speech. 'You take the serious numbers that measure the health of the real economy and you'll see that things are not getting better - they are getting worse.'


"All in all," concludes Kate, "this year's AF Symposium exceeded expectations. I've been attending this event for five years now, and each year the speakers and the presentations get better and better. I'm already looking forward to next year's event."

[If making the trek to Vancouver was just not in the cards for you this year, don't worry. We recorded all the main session presentations, so you don't have to miss out on anything. And if you secure your audio recordings before midnight tonight, you will save $100! Get yours now.]

And back to Bill, with more thoughts:

The Small Business Administration reports that losses are rising. Last year, the SBA had to take back $2.1 billion in loans that it had guaranteed. This year, it looks like the total will be higher.

Normally, small businesses lead the economy out of recession. But this is no normal recession. This is a depression. And small businesses are getting crushed. An AP report says small businesses are not bouncing back as hoped.

Part of the phenomenon can be explained merely by the severity of the downturn. If this were a recession it would be a bad one - worse than any since the Great Depression. Consumers have rediscovered thrift. Households are cutting back. They do this by eliminating things that aren't necessary. Small enterprises often provide things that people don't really need to have.

Another explanation involves the feds' response to the slump. Never before have they fought so hard to avoid a capitalist correction. But in their efforts to bailout Wall Street they not only ignore the side streets and back alleys where small businesses operate, they actually take away money from what might be called the small business economy in order to pay off their friends on Wall Street.

This is how you put the 'great' into a Great Depression - by depriving the small business sector of the capital and freedom it needs to innovate and grow.

"What kind of cattle do you raise in the ranch?" asked a friend in Vancouver.

"Well, there are three types of cattle," we explained. "There are feed lot cattle...which are fattened up on grain. And there are grass fed cattle - which Argentina is famous for. But I've got sand-fed beef."

"Sand fed?"

"Yeah, it's pretty dry up there. Every time I go up I wonder what they eat. It hasn't really rained in two years. I see almost no grass. I figure they must eat sand. We've got a lot of that..."

"What do they look like?"

"They're brown and very skinny."

"They don't sound very appetizing..."

"They're not...almost too tough to eat. But they have one big advantage.

"What's that?"

"Very low cholesterol.

"Yes, it's a selling point. Sand-fed beef is very low in cholesterol. And fat. And everything else. Calories too. It's low-cal beef. We were thinking of calling it 'zero beef.' But we decided on 'sand-fed' instead. "

"Is it good...? Do people come back for more?"

"Not very often. They can usually only eat one steak. It wears their teeth down so much."