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Today's Daily Reckoning: Give Liquidation a Chance! San Jose de los Perros, Nicaragua Wednesday, 25 February 2009 --------------------- *** U.S. stockholders got a bit of break yesterday...consumer confidence is at a record low... *** The whole world is slipping into a depression...the only way to get the rottenness out of the banking system... *** Is your brand-new car tax deductible...has Obama been reading The Daily Reckoning?...and more! A plea to lawmakers...give liquidation a chance! U.S. stockowners got a break yesterday...the Dow rose 236 points. News reports tell us that investors were listening to Ben Bernanke. He's speaking to Congress...intending to boost investor confidence. But we can't find anything in Bernanke's remarks that would give us much confidence. In fact, consumer confidence is at a record low. And investors couldn't have taken much comfort from the Fed chief. Bernanke said the economy would start to grow again in 2010...and then, only if the banking system is stabilized. Of course, Bernanke is talking nonsense. He doesn't know when the economy will begin to grow in earnest again, and if it does begin to grow it won't be because the banking system is stabilized. You can stabilize a comatose person. You can stabilize a battlefield. You can stabilize a ladder. But stabilizing a crummy bank won't help the economy grow. For that you need a healthy bank. And the only way a bank can be a healthy bank is if it holds healthy assets and can earn decent money when it makes a loan. Banks aren't making loans now because they don't know who will be able to pay them back...and don't know what the collateral is worth. They'll have to wait until this period of price discovery settles down. And that won't happen until deflation has done its work...until prices have been knocked down to their lowest level. That could happen quickly...or it could take years. AIG now says it is facing a $60 billion loss. How much is its stock worth? Citigroup is nearing bankruptcy, with the U.S. government getting ready to up its stake to 40%. What will the shares be worth when the operation is over? GE finance says it will get by - maybe. Micro Tech is laying off 2,000 more people in Idaho. And Italy is officially in recession. One by one, company by company, country by country...the whole world slips into depression. Oil traded at $39 yesterday. And gold lost $25. What's ahead? We'll give it to you straight - darned if we know. Stocks could rally from here...or collapse. We have our 'Crash Alert' flag up...just in case. The Dow will probably get down to the 3,000 - 5,000 range before this crisis is over. If we're right, it's got to lose another 2,000 plus points. You don't want to be holding stocks when that happens. Might as well get rid of them now - even at the risk of losing out on a rally. As for gold... Chris Wood says it will reach $3,500 by next year. Chris is more right than most analysts. In his newsletter, Greed and Fear, he warned that the bubble in sub-prime lending was going to blow up... The Wall Street Journal says he's the "man who saw it coming." Why will gold soar? "It's the only form of money or credit not contaminated by the credit system," says Chris. Which explains why it has risen - even while inflation expectations are so low. Investors are not buying gold as a protection against inflation; they're buying it to protect themselves from deflation. Yesterday, as deflation expectations subsided, so did the price of gold. Wood is primarily an Asian analyst. Which is to say, he spends most of his time trying to figure out what it going on in the Far East. He's watched Japan for decades. And now he sees the threat of the entire world entering a Japan-like slump. How to avoid it? Nationalize the banks, says Wood. And create a 'bad bank' where you can dump all the toxic assets. That's what is already underway...more or less. Wood believes nationalization is the only way to get the rottenness out of the banking system - quickly. He's not the only one. Nouriel Roubini is for it. So is Nobel Prize winner Paul Krugman. They believe, as we do, that the banking system is still resting on the sand of trillions in bad loans and radioactive investments. Taken as a whole, the entire banking industry in America is insolvent. That's another reason banks aren't making loans - they don't have any money. And deflation continues to wash out the loose sand and expose the weak foundations of the banks' assets. It will also undermine their collateral. Until this process is over...the system cannot begin to put itself right. The banks mustn't be stabilized as they are, in other words. They need to be cleaned out first. We don't disagree. But if it were up to us, we'd give nature a chance. The market seems to be doing a decent job, as near as we can tell. The value of everything on earth put together is about $100 trillion. In the space of less than two years it has wiped out about a third of the entire capital value of the planet. If our hotline rings and Mr. Obama is on the phone, we know what advice we will give: Let the banks fail. Let them go broke. Let them be liquidated. Then, the surviving banks could buy up the decent assets and emerge stronger than ever. *** With tax season upon us, everyone is scrambling to figure out what they can and can't count as deductions. Turns out, with some clever accounting, cat food and even swimming pools can be added as deductions on your federal income taxes. But what about a brand-new car? Gunner and Jim at Penny Stock Fortunes have the answer, below... "The folks in Washington are ready to make that happen now with plans to make the total cost of auto loans tax deductible - along with other rebate and incentive programs - to try to persuade those with older vehicles to trade in their junkers for new rides. "The Senate's tax deduction bill is pretty straightforward. Those with a new auto loan would earn an above-the-line deduction for loans up to $49,500. The second proposal supposedly has environmental benefits. Those who sell an older vehicle for scrap would receive a voucher to aid in the purchase of a newer, more-efficient vehicle. "It's difficult to say if either of these proposals will actually help revive auto sales. Some industry experts believe that a more effective fix would need to include measures to make it easier for buyers to secure auto loans in the first place. "Of course, these are mere proposals - not new laws. And it is unclear at the moment whether any of the measures will become official, or for how long. But the fact that legislators are discussing the problems of the auto industry is a crucial step. Auto stocks will begin to turn around once investor confidence turns. Legislation - whether it will be effective or not - could very well spark a rally in this sector." As for right now, the data look bad at best. According to estimates from the National Automobile Dealers Association, 900 dealers closed their doors in 2008. That's bad for them, but potentially good for one of the companies in the Penny Stock Fortunes portfolio...which is up to the double digits in just a couple weeks. To check it out, and to find out how you could double your money in just six months with their special system, see here. *** A 'Slumdog Millionaire' DR reader writes: "Thank you for making me feel like the biblical Noah. I am Dinakarananda from India and I am grateful to the entire DR team. I have been an avid reader of DR for the past two years. I am very happy that I stumbled on DR soon after I landed in Melbourne and looking for some Australian business news website that was sensible and truthful. I have been an avid investor in India since 1993 and in the US since 1999. "I cashed out almost all my investments in equities and bought 130Kg of gold back in October-November of 2007. DR was one of the major factors that influenced my decision and I am happy every minute of my life now to have found DR. "Thanks a lot to Dan Denning, Bill Bonner, Mogambo guru and all of you in the DR team for guiding my ark and investments. One of those slumdog to millionaire stories inspired by DR I presume. I would be happy if my email finds its way to the reader email that is occasionally published and if it helps a few more slumdogs around the world." *** Is the new U.S. president a Daily Reckoning reader? In his first address to a joint session of Congress last night, President Obama said, "That day of reckoning has arrived, and the time to take charge of our future is here." Hmmmmn...if you missed it, you can catch the video here on our site. And let us know what you think - is Obama going to be able to make good with all of his promises, or is he just blowing smoke up the country's collective you-know-what? You can leave your comments in the space provided underneath the post... Until tomorrow, Bill Bonner The Daily Reckoning --- Special Offer --- You've Got Your Work Cut Out for You, Mr. President... Bailouts...wars...a global depression - Obama's certainly got his plate full. So don't expect him - or anyone else in Washington - to bailout you out...you're going to have to do that on your own. Find out how you can rescue your retirement - and receive copies of I.O.U.S.A., the companion book and DVD - here. Guest Essay: The Daily Reckoning PRESENTS: Various central banks continue to steer this economy like drunken sailors and they are injecting TRILLIONS of dollars into the system. Puru Saxena takes a look at what this means for the well-being of these currencies - specifically, the U.S. dollar. Read on... BUNCH OF TURKEYS By Puru Saxena Vicious selling continues on Wall Street and the pathetic action of the financials is dragging down the entire market. So far, the banking index has declined by roughly 83% from its highs. As I have said for years, banking is the only industry which is always in a state of permanent bankruptcy and people have finally realized that the emperor has no clothes. We can thank the fractional reserve banking system for this mess; a totally fraudulent system which allows banks to create multiples of credit compared to bank deposits. This is the reason why I urged you repeatedly to stay well clear of financial shares and I hope that you followed my advice. Today, investors in financials have lost nearly everything and before this is over, I suspect the majority of banks in the West will be nationalized. This would mean a total catastrophe for those who invested in bank stocks or corporate bonds. So, no matter how strongly your private banker pushes you to load up on "cheap" financial stocks, please DO NOT go "bottom fishing" in this bankrupt industry. Banking is no longer a growth industry and financials will disappoint investors for many years. Furthermore, if you have any exposure to hedge funds, structured products, accumulators or derivatives of any kind, I sincerely urge you to get rid of all this highly toxic garbage. Such Ponzi schemes were very good for the private bankers (due to the huge amounts of commissions involved) but they are a disaster waiting to happen. Today, our planet has roughly US$600 trillion worth of derivatives and this is roughly 10 times the size of the global economy! So, please get rid of your derivatives based "investments" immediately. Even though the financials are getting killed, our fundamentally sound stocks in solid sectors continue to report good operating results and their stock prices are much higher than the lows recorded last fall. So, this is a positive divergence and shows that the market's internal breadth is improving with fewer stocks breaking down to new lows. Another positive sign is that the Asian markets are faring much better and are nowhere near the lows recorded last fall. During such turbulent times, it is worth remembering that your stocks represent partial ownership in underlying businesses with real assets (plants, reserves, land, machinery, technology, cash and human resources). And even though the stock market's current appraisal is not favorable, it has no connection with the intrinsic value of your holdings. Various central banks continue to steer this economy like drunken sailors and they are injecting TRILLIONS of dollars into the system. I would argue that many nations in the West are already bankrupt (US, Britain, Germany, Spain, Iceland and Ireland come to mind) and the ONLY thing they can do now is to print even more money. For example, America's total debt is worth US$54 trillion and there is no way the US can ever hope of repaying its debt in today's money. In other words, either the US will default (highly unlikely in my view) or it will print and inflate so that this huge mountain of debt feels much smaller in the future due to the loss of its purchasing power. Remember, the best way to make debt more manageable is by inflating the supply of money in the system. And this is precisely what the various central banks are doing. It is worth noting that nations like Germany and the United States have already started using the printing press and more nations will soon follow. When the entire planet is covered with oceans of paper "money", its purchasing power will sink and hard assets will sky-rocket. At least this is what has happened throughout history. So, please don't be fooled by this temporary contraction in hard assets and hold on to your positions. If anything, take advantage of the ongoing fire-sale and if your financial situation permits, convert more cash to quality assets in the resources sector. A bunch of turkeys have hijacked our monetary system and all they know is how to print money. Rather than let the market clear itself out, central banks continue to use taxpayers' money to bail out insolvent institutions. This brilliant strategy has NEVER worked in the past and it will not work this time around. Instead of robbing innocent people of their savings, the establishment must allow the weak banks to go bust. For example, if Citibank is on the verge of collapse, then the US Treasury must let it go bust! All Mr. Geithner needs to do is to protect the customers of Citibank, allow Citibank's investors (shareholders and bondholders) to suffer and sell the bank's book to another institution. This is all that needs to happen. This way, depositors will not lose anything and only investors in Citibank will suffer - and they should! Why should the public share the losses with these investors? When Citibank did well in the past, did its shareholders and bondholders distribute the profits to the public? Of course not! So, why should the reverse occur now?! Personally, I find these bailouts absurd, unethical and a total waste of valuable resources! Who gave these politicians the authority to act like investment bankers? Mr. Geithner is not a qualified 'merger & acquisition' expert, so how does he have the audacity to use other people's money to take over insolvent banks? Likewise, Mr. Bernanke is now using American taxpayers' money and buying distressed debt! I find this outrageous! Is he going to act like a debt collector when people default on their loans? Mark my words - the establishment is only making matters worse and prolonging the pain. Moreover, by printing insane amounts of paper, the politicians are setting everyone up for an inflationary nightmare! One thing is for sure - before this drama ends, the viability of the U.S. dollar as the world's reserve currency will come under question. When the U.S. dollar starts to implode, hard assets will go through the roof. Remember, commodity prices went ballistic in the late 1930s as well as during the 1970s. We should expect similar action in the years ahead. Regards, Puru Saxena for The Daily Reckoning