The Masquerade is Over
Buenos Aires, Argentina
Tuesday, October 28, 2008
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*** The masks are coming off, and what is underneath is not pretty...investors have lost $10 trillion worldwide in just this month...
*** People are losing faith in housing and stocks, but they still believe in progress...consumer confidence hits an all-time low in October...
*** Why not blame capitalism?...will Argentina go belly-up this year?...and more thoughts, advice and insights!
The masks are coming off. It’s the end of the party, now we get to see what people really look like.
And it’s not a pretty sight.
You’ll recall that one of the fairest of the Bubble Era’s revelers was the idea that, over the long run, you would make money in stocks. All you had to do was ‘buy and hold.’ Who didn’t like her? She seemed so easy...so willing...so fetching and attractive.
Yesterday, the Dow lost another 203 points. Investors are down 44% so far this year. Worldwide, they’ve lost $10 trillion this month – far worse than the crash of ’29.
The most successful economy of the 20th century was the United States of America. The second was probably Japan. It rose from the bombed-out ruins of WWII to become a worldwide export powerhouse, dominating the auto and electronic equipment industries.
But yesterday, stock prices in Japan fell to more than a quarter-century low. Investors in Japanese stocks – including your editor (who is better at giving advice than taking it) – have made nothing in 26 years.
Here’s the press report:
“Tokyo’s Nikkei 225 index closed down 6.4 percent to 7,162.90 – the lowest since October 1982 – with exporters like Toyota Motor Corp. and Sony Corp hit hard. The losses came despite a report that the government was considering massive capital injection into struggling banks in a bid to calm jittery financial markets.”
“Decades of pain and still no relief,” adds the Financial Times , noting that investors in Japan have been waiting for a recovery for the last 18 years.
With the mask off, stocks in Japan are giving investors a Halloween fright.
But what other masks are coming off?
How about the sweet mask worn by housing? ‘Housing always goes up.’ And, ‘you can’t lose money in property.’ Remember those beauties? Those masks hit the floor a year ago. Since then, the whole world has looked at the property market and gasped in horror. How could houses be so ugly, homeowners have wondered; they look like they just woke up.
Oh and there’s oil...down to $63 yesterday. Oil was supposed to go up forever. At least, that was one of the favorite masks of the late Bubble Era.
But there are still a few Bubble Era masks that have not yet come off. In fact, the belle of the ball is the mask on ‘progress.’ People still believe that the world grows and improves – if not steadily, at least episodically. It’s certainly true that long periods of history show what appears to be economic progress. Things get better. But occasionally, something terrible happens – plagues, wars, revolutions, Great Depressions and Dark Ages. Then, the world turns backward. The bull market in progress turns into a bear market of progress turns into a bear market of backsliding.
Today, people are losing faith in stocks and housing...but they still have faith in progress. Just a few months ago, they thought capitalism would make them rich. But wicked capitalism has disappointed them badly; it didn’t guarantee rising asset prices after all. So, now they turn their sad eyes to the feds. ‘Oh ye all-knowing, all-seeing, all-powerful ones...hear us. Save us – from capitalism!
They figure the feds will do the trick... And sure enough, all over the world the federales are playing along. The G7, the IMF, the central banks, the finance ministers and Treasury Secretaries – all have put on their own masks...strutting around, pretending to know what they are talking about. Curiously, France’s president Nicholas Sarkozy is a leading strutter. He’s trying to organize a New World Financial Order...based on something other than the dollar.
These poseurs don’t look too bad – as long as they leave the masks on. Take them off, of course, and you will see the same silly clowns who CAUSED the crisis in the first place.
That is what is so amusing about this stage in the collapse of Western Civilization. You see, most of the world’s financial press has come around; they see things much the way we do. They see, for example, that the U.S. Fed erred – big time – by fixing the price of credit too low for far too long.
Of course, there’s nothing in the Manual of Capitalism that allows the feds to fix the price of credit or support the housing market. This was the government at work, not the market. With the misleading signal coming from the credit markets, the capitalists just did what they always do – they overdid it.
Still, the world’s press, pundits and politicians have convinced themselves that the fault lies not in themselves...but in capitalism. And now, they expect the feds to do something about it.
But that’s just the way it works...one hallucination gives way to another. One delusion on the way up; another on the way down.
*** Even star mutual fund managers are getting walloped by this market. Chris Mayer offers us a few examples:
“Managers with great track records are faring poorly, and it may help you feel better about how you are doing. Jean-Marie Eveillard, for example, has been running money for 50 years. He’s beaten the market handily for a long time. He is a cautious type. He likes gold stocks. He likes Japan. He’s down 27% this year. Robert Rodriguez, another cautious money manager who holds a lot of cash and runs FPA Capital, is down 29%. These are among the best of the best, as the market is down more than 40% this year. William Fries at Thornburg is down 43%. David Winters at Wintergreen is down 37%. Wally Weitz at Weitz Value is down 39%. The list goes on and on...
“So you see, nothing is really working well in this market right now – at least not for investors in stocks. However, there are a lot of cheap stocks out there, bargains I haven’t seen in a long time. Unless the world comes to an end, which it has a habit of not doing, future investors will be a happy lot. Count me a cautious buyer of stocks.”
Caution is the name of the game here...and if you’d like to see what Chris has been thoughtfully recommending to his Capital & Crisis subscribers, see here .
And the bargain hunters were abound this morning, setting up a rally worldwide in the markets.
Also boosting the markets is the anticipation of the Fed’s two-day meeting, that begins today. It is widely believed that the Fed will cut rates...but it remains to be seen what, if any, lasting effect it will have on the markets.
Lurking behind this rally is this unsurprising tidbit: consumer confidence in the United States hit an all-time low in October. The Conference Board reported that expectations have turned “significantly pessimistic with the percentage of consumers expecting business condition to worsen over the next 6 months rising to 36.6% from 21% and those expecting fewer jobs rising to 41.5% from 26.9%”
*** Perhaps the biggest delusion of the financial world now is that the dollar...and dollar-based Treasury obligations...are a safe refuge. In a sense, of course, they are. The U.S. government is in no danger of defaulting on its loans. In an emergency, it can always just print up the money. But that’s the problem. An emergency is coming. More on this when we get a chance to think about it...
*** “I’ll be all right down here,” said our old friend Doug Casey. Doug has bought a place in Cafayate, a town that reminds us of Santa Fe or Aspen, before they were ruined by rich people. He’s building a world-class resort – complete with golf course, riding trails, tennis, health spa, library...everything he wants.
Cafayate also has several things going for it that Aspen and Santa Fe did not. First, it is prettier and the weather is better. It is always sunny, with pleasant temperatures. Wherever you look, you see beautiful mountains. What’s more, it produces some of the world’s best wine.
Doug’s place is right in the middle of a vineyard. In fact, he’s got it set up so that revenue from the vines pays much of the operating costs of running a golf course and so forth.
“Another big plus,” says Doug, “is that this place isn’t going to suffer too much from the credit crisis. Nobody down here had any credit.”
*** Doug is not completely right about Argentina’s credit situation. Believe it or not, there were lenders – mostly big banks – who were foolish enough to extend the nation credit. Naturally, the Argentine government treats these angels like taxi drivers in Buenos Aires treat other foreigners.
Almost every time we go to the airport, the taxi driver tries to pull a fast one. “My meter is broken,” said one, “the standard fare is 200 pesos.” (It is really about 70 pesos.) “We crossed into another zone,” said another, “so I have to add another 50 pesos.” “It’s night time,” came another invention, “after dark you have to pay a surcharge.”
It’s all good fun. The taxi drivers are merely establishing the going rate. The price for a run to the airport is much higher for naïve foreigners, but why shouldn’t it be?
So is the price for lending to the Argentine government.
This from MoneyWeek :
“In December 2001 [Argentina] reneged on its $95bn of sovereign debt.
“At the time, that was the biggest default in world history, though these days such a number looks like chicken feed compared with what the world’s bankers have recently managed to mislay. Only in 2005 did Argentina sort the final details, with a ‘take-it-or-leave-it’ 70% ‘haircut’ on face value, again the largest sovereign debt markdown ever.
“Three years later, it’s back to square one. Inflation is rocketing (some estimates put it at 20% annualized) and the government is once again running out of cash. Argentina’s borrowing needs will swell to as much as $14bn next year from $7bn in 2008, says RBC Capital Markets. And any confidence that the country will be able to repay what it owes is fast flying out of the window.
“Argentina’s 8.28% government bonds are due to be redeemed in 2033. Fat chance of that, the way things are looking right now. Now priced at 22 cents on the dollar, they currently yield 31%, as against ‘just’ 12% a month ago. And still no one wants them.
“What’s more, the price of credit default swaps – market insurance that investors can buy to protect themselves against default (Read: All you need to know about credit default swaps for more) – covering the country’s sovereign debt has more than quadrupled over the past month. These CDS now stand at more than three times the Icelandic level, and suggest there’s almost a 2:1 chance that Argentina will go bust this year.”
Does this worry your editor – who has substantial (for him) investments in Argentina? Not at all. As a dear reader pointed out, the average Buenos Aires taxi driver knows more about financial crises than Bernanke, Paulson and Greenspan put together. The Argentines know how to get through a crisis, in other words, and still put steak on the table and wine in their glasses.
We’re going to learn from them.
*** Finally, another dear reader sends a news item explaining why there was a bagpiper in front of our neighborhood church last Sunday.
It was the “kirking of the tartans,” said the headline. Turns out, the local Scottish Argentine society does this every year...a kind of blessing of the clans, performed by the local priest. “Kirk” in Scottish means church.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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The Daily Reckoning PRESENTS: The presidential candidates have been lamenting about everything under the sun on the campaign trail and in debates, but there is one major issue they have overlooked: the electricity crisis. Many people think that since we haven’t had a major blackout since 2003 that the problem is solved. Byron King tells us that is just not so, and the outlook for the future of power is this country is far gloomier than most realize. Read on...
THE COMING ELECTRICITY CRISIS
by Byron W. King
OK, so I don’t have a copy of the Sunday business section from next March. But I think I know what at least one major issue will be within the next 24 months. The headlines will scream, “Power Failures, Price Spikes Plague Northeast U.S.” And the same thing will also hit the Western U.S. And the Southeastern U.S. And parts of the Midwest.
They sure did not talk about power failures in the presidential debates, did they? I don’t know why not. All the insiders know about it. Indeed, power failures and price spikes are baked into the national economic cake. People who follow these things are quite sure of it. It’s just a question of when, exactly, the lights will start to flicker.
We already had one experience with a regional blackout. Do you remember the power failure of Aug. 14, 2003? Almost the entire Northeast U.S. went dark, except it occurred in the middle of the day. The effects were immediate on over 50 million people in the U.S. and Canada.
Skyscrapers just stopped working – no elevators, no lights, no water, no nothing. Hospital operating rooms went dark. Traffic signals stopped functioning and people were in the midst of instant gridlock. If you ran out of gas, there was no power for the pumps at the gas station. Refrigerators stopped humming and large amounts of food spoiled. Rail systems stopped running – from streetcars in Toronto to subways in New York and Amtrak and freight trains in the middle of nowhere. FAA flight controllers had to communicate with airborne pilots via battery-powered walkie-talkies. Sewage systems shut down, and a lot of you-know-what backed up in many low-lying areas.
The 2003 power failure was bad news, although short in duration. And then it was back to business for the U.S. Things became (if you will excuse the expression) “normal” again. Just like in Amity.
Looking back, the utility companies got the power back up and running, right? And the experts investigated the origins of the problem, right? The people who know all about power grids fixed the problem, right? It could not happen again, right? The U.S. power grid has ample electricity-generating capacity, right? And there’s plenty of transmission to move power from one region to another, right?
Well, no.
Earlier this week, I attended a privately sponsored presentation on U.S. energy policy. The main speaker was a senior faculty member from Carnegie Mellon University. This guy has been “doing electricity” for about 40 years or so. He has written reports for the National Academy of Sciences. When the people at the U.S. Department of Energy have a question about electricity, they call this CMU professor.
The news is not good. In 2007, there were about 144 new coal-fired power plants on the drawing boards of the U.S. energy utilities. But, said the professor, “We will probably build none of them.” Indeed, “The electric industry in the U.S. is in terrible shape,” said the CMU man. So we should expect local and regional brownouts and blackouts to become common occurrences “within five years.” But the first isolated instances of brownout and blackout will hit us much sooner than that.
Why is there such a gloomy forecast? Because essentially, the deregulation of the 1990s was botched. According to the CMU electricity expert, botched deregulation “slowed investment, raised prices and led to more and more uncertainty.” So now few utilities or their executives want to take political, regulatory, technical or financial risks. Hence, the entire long-range planning cycle has broken down.
It’s almost impossible to decide what to build, and at what scale. Costs are exploding, particularly for new construction. It’s safe to say that most power plant construction cost projections have doubled within the past 18 months. The prospect of fast-changing environmental regulations also adds to the uncertainty. No one wants to build a power plant and learn in five or 10 years or so that environmental regulations are going to shut it down.
Even the alternative energy industry – with wind, solar and geothermal as the poster children – has formidable challenges. The biggest issue is cost competitiveness. That’s because alternative systems provide power at costs that range from slightly higher to much higher than traditional power from, say, coal plants. Then there are issues of reliability, due to the intermittent nature of wind and solar, and the still-novel nature of geothermal power. And other issues include the lack of transmission from the usually remote sites of wind and solar facilities.
Overall, U.S. power producers face the prospect of many different forms of investment uncertainty. What will be the availability of different fuel mixes? Will coal still be useable? Or will natural gas be available at a cost they can afford? Can power producers invest in nuclear systems when there is still no definite program for disposing of the waste stream over the next 50 years? Or should the utility companies go all out for alternative systems?
But the next question is how much can consumers afford to pay? And what rates will the regulators allow? If utilities invest in alternative power systems (like wind or solar) that produce electricity at, say, 20-30 cents per kilowatt hour (kwh), will the regulators set those relatively high costs as the level of reimbursement? And for how long? What if the regulators permit the higher costs for only a few years and then penalize the utilities because some “better” technology comes along? At the end of the day, the base line cost of electricity is set against the cost to produce comparable coal or natural gas-based electricity. And this cost setting occurs even though there is a growing bias against burning carbon in the U.S. political and regulatory culture. One attendee at the discussion commented, “When you’re in a ‘no-win’ situation, guess what? You can’t win.”
The CMU professor has looked at historical trends for power in the U.S. His best estimate is that over the next decade or so, the price for electricity will about double on average throughout the nation. “This would put the cost of electricity about on par, as a percentage, with where it was back in the 1950s.” But that is only if people keep making investments in new power systems and the nation adopts conservation and efficiency measures on a large scale. Absent that? It’s lights out.
So you might not see it in your daily life – not yet, anyhow – but the power industry is currently paralyzed by the uncertainty of lopsided risks. And as old power plants age and go off stream, there will be less and less reserve power. Costs are going to rise. And reliability will fall. It’s inevitable.
So one investment sector that ought to do well over the next five years is power and backup power systems. And particularly, the companies that should do well are involved in power systems that are off the drawing boards and in some phase of construction, or near completion.
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