Britannia Radio

Today's Daily Reckoning:

Hoorah For Capitalism! San Jose de los Perros, Nicaragua Friday, 27 February 2009 --------------------- *** The government grants you a European vacation!...Sounds like someone's calling the pigs to the trough... *** Every cloud is half full of lemons...Americans are not quite in Depression Mode... *** We're only at the beginning of the middle...the ox-cart industry in Granada is booming...and more! Come and get it! The slop is in the trough...and the pigs are coming at a run. An advertisement on the Internet tells the tale. The Obama Stimulus Program is giving away "$10 billion a month in grants." These grants "never have to be repaid." "Finally, a taxpayer bailout!" it continues...explaining "how to get your government grant." Then, there is a photo of the purveyor of this scheme - standing in front of the Eiffel Tower in Paris. In other words, these government grants make anything possible - even a European vacation! Then, there are a series of testimonials... "I got enough to buy a new car..." "I didn't think it was true...but I got my check today..." "These government grants are great...just what I needed..." Soooo...eeee...! We never heard that cry personally...but that's how farmers used to call their hogs when it was time to feed them. Just in the last few days, the Obama government has announced another $750 billion for bank bailouts...and a $634 billion. Where's all that money going to come from? Only a few months ago, the official budget deficit was projected to come to $800 billion...then $900 billion...then $1.2 trillion...and now, get this, it's gone to $1.75 trillion. The pols are taking advantage of the situation. Capitalism has fallen down and can't seem to get up. So, the politicians get to march ahead and take charge. General Motors just reported a loss for the fourth quarter of nearly $10 billion. You can see what good it does to bail out failing companies...the money just goes down the drain. The government gave GM more than $13 billion - there goes the bulk of it. And AIG is said to be nearing collapse - despite the government bailout of this past fall. You'll remember that the Goldman boys got together with the government and decided to rescue AIG, but not competitor Lehman Bros. AIG was reported to have owed $25 billion to Goldman. We hope the firm stays alive long enough for Goldman to get its money... Sooo...eee! The Dow fell another 88 points yesterday. Oil rose to $45. And gold fell 23 bucks. Sales of previously owned houses fell 5.3% in January from December. There are now fewer sales than at any time in 10 years. The median price of a used house is 26% below its peak, we are told. But despite the bad news, Americans are not quite in Depression Mode. We have been trying to gauge popular sentiment. Are investors throwing in the towel? Are consumers giving up? Is this the bottom of the downturn? Not likely... "Stocks face long road back after crash," is a headline in the Wall Street Journal. "Bernanke says slump may end in '09," is how one paper reports on the Fed chairman's congressional testimony. "Seven signs of an economic bottom," is a piece at Seeking Alpha. And Jeremy Siegel, author of Stocks for the Long Run, says he has never seen such great bargains. What this tells us is that people are still optimistic. Still hoping. Still thinking positive. Like us here at The Daily Reckoning, they make lemonade out of every cloud...see a silver lining in every glass...and every cloud is half full of lemons, rather than half empty. Something like that. "Yes, the markets have been hit hard," they tell themselves. "But they'll recover." Unfortunately, this is not depression thinking. This is the kind of thinking that happens at the beginning of a depression. Even after recent losses, most stocks are still selling for 15 times earnings - or more. When you get to the bottom, that multiple goes down to 5-8. And while stocks have lost 50% of their value...we remind readers that at the bottom in '32...and Japan's bottom now...stocks were down 90%. And when you get to a real bottom, you don't hear people talking about 'the long road back'...or what bargains you can get...or signs of a bottom. Instead, they're convinced that there is no going back...that stocks are expensive at any price...and that the slump will never end. *** No, dear reader, we're not at the end of the slump...we're not at the beginning of the end...or even the end of the middle... ..we're only at the beginning of the middle. We have our 'Crash Alert' flag flying because we believe there is another 50% drop coming. But it may not come right away. It wouldn't be at all surprising to see a major rally, such as happened following the crash of '29 and the crash in Japan. Stocks could rally to more than 9,000 on the Dow. Mr. Market is a perverse old coot. If he is going down...he wants to take as many investors with him as possible. So he fakes them out...moving sharply to the upside in order to make them think the bear market is over. And then he takes them all down... ..if we're right, this bear market won't end until the Dow trades under 5,000...and possibly under 2,000. And it won't end until the price of gold and the Dow are about the same number. And when that happens, you'll wish you would have bought gold earlier - when it was a whole lot cheaper. *** Today, a friend sent us a picture that was simply astounding. We're not sure how to describe it. It's best you see it for yourself. And feel free to comment on it. *** Today, we left the ocean and drove to Granada. We're on our way back to Europe. Elizabeth had this to say: "This is a wonderful country. It is so interesting...and so pretty in many ways...and so ugly in others. There is trash all over the place. And the kind of houses most people put up are unsightly hovels. But I suppose we should thank the Sandinistas for making the place so picturesque. "Remember when we were here 10 years ago? I told the children to look careful at the ox-carts...because I didn't think they'd ever seen them again. They've disappeared almost everywhere in the world. They were only here because the communists had been in power for so long. They retarded the growth of the country so much that people were still using carts, pulled by oxen, when we came at the end of the '90s. "Of course, I thought it was quaint...and charming. I never imagined that I'd see the same ox-carts 10 years later. But I think I've seen more on this trip than I'd seen 10 years ago. They're everywhere. And I guess we can thank the Sandinistas again. Danny Ortega came back to power...what...about three years ago, before the ox-carts were replaced with trucks. And now there's a worldwide financial meltdown. The ox- carts could be with us for years... "I went riding this morning. You know Lencho, who runs the stable? He's only about 40 years old...very distinguished looking...with his rough face and his cowboy hat. He's got 9 children, he told me. We had a conversation about economics while we were riding. He's never been to school...probably not a day in his life. But he had a remarkably clear view of what is going on...I'll tell you what he told me... "He said that before the Sandinistas came to power the country was poor...but it was growing. And it seemed to be getting richer all the time. People planted a lot of cotton back then...and apparently made a lot of money at it. Then, the communists came...took away their land...and no one wanted to invest. Nobody wanted to plant cotton, for example, or build a herd of cattle...because it took so long to get your money back...and they figured that if they made any money, the Sandinistas would take it away from them. So even the areas that had been productive farms grew up in weeds. And the factories rusted. Even after the Sandinistas left, and the land went back to the original owners, they didn't want to invest as they had before. They figured they couldn't trust the government. Or maybe it just wasn't as profitable as it used to be...and they'd lost their key people... "He said that he thought the secret to development was to let people keep their money. Then they'd invest to make more money. And people would have jobs. And then they'd spend money. "He seemed to have the whole thing figured out. And he's right, of course. There's no secret to macro-economics. I know you think about it all the time, but there's really nothing to think about...in a way, of course. If you let people keep what they earn...and make sure they know you won't take away their property...they'll do their best. You can't do better than that." More below... --- Special Offer --- Our readers could have turned $5000 into $1 million in just over five years... 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Guest Essay:

The Daily Reckoning PRESENTS: Capitalism has always had its naysayers. In Communist countries, the rich hate it because it threatens to take away their money, and the poor hate it because they think it keeps them from getting any money in the first place. Have these people learned nothing? Bill Bonner explores... HOORAH FOR CAPITALISM! by Bill Bonner Everyone hates capitalism, so it can't be all bad. "Poor of the World, Unite against Capitalism!" says a huge poster in Managua...featuring the largest picture of an accused rapist we've ever seen. No kidding. Daniel Ortega's stepdaughter said he had raped and abused her since she was 10 years old. What is wrong with these people? Do they never learn anything? 'Capitalism has failed,' they say. 'We need government to fix the problems...' The rich hate capitalism because it threatens to take away their money. The poor hate it because they think it keeps them from getting any money in the first place. And everywhere you look, the chiselers are offering bailouts, boondoggles and bamboozles. With so many people trying to improve on capitalism, it's a wonder they've never come up with something better. Danny Ortega makes it sound like capitalism is a system invented by rich people to keep poor people down. Instead, it's what happens when you leave people alone: some people watch TV...some blabber about politics...and some build wealth. The rules are simple: Thou shalt not steal, it saith in the Bible. Do unto others as you would have them do unto you, Jesus added. Everything else - from hedge funds to derivatives - is merely an elaboration. People make deals with their neighbors in order to get what they want. One plants the wheat; the other bakes the bread. As long as they respect each other's deals and each other's property, everything goes tolerably well. But the urge to larceny and slavery is as strong as rum punch. One man gets a bottle of Flor de Cana rum; another wants to punch him and take it away. And if he gets away with it, we're all in trouble. In the second half of the 20th century, approximately 2 billion people participated in a bold experiment. The idea was to prove - or disprove - that central planning would do a better job of providing goods and services than people left to their own devices. After Mao came to power, for example, China turned its back on capitalism for an entire generation. Millions starved or were killed outright in various hokums such as the Great Leap Forward and the Cultural Revolution. Then, Deng Xiaoping announced a change. "To get rich is glorious," he proclaimed. Since then, the comrade capitalists have been creating wealth at the fastest rate in history. Too bad the Chinese weren't running things in Africa. But then, Africa had a big disadvantage, says Damisa Moyo; the rest of the world was 'helping' it. Rather than allowing nature to take her course, Africa has gotten one bailout after another. Thanks to so many bailouts, it is now more busted and more desperate than ever. "Think about it this way," says Ms. Moyo, "China has 1.3 billion people, only 300 million of whom live like us, if you will, with Western living standards. There are a billion Chinese who are living in substandard conditions. Do you know anybody who feels sorry for China? Nobody. Forty years ago, China was poorer than many African countries. Yes, they have money today, but where did that money come from?" It didn't come from bailouts, she points out. And it didn't come from anti-capitalist claptrap-babbling demagogues. Russia, too, prospered only after it sent the Bolsheviks packing. Gorbachev introduced his perestroika program in June '87. In the control group, meanwhile, Americans made their own anti- capitalist mistakes. The central bank lent money at artificially low rates - distorting the value of all capital assets. Tax policies, government-backed lenders, and government's banking regulations stimulated the housing bubble. And the use of the dollar as an international reserve currency created what was effectively an all- night party with an open bar. Instead of having to settle up in gold, as they did up until 1971, the U.S. could pay its bills by emitting more pieces of green paper. Then, local economies had to put out great quantities of their own paper money just to keep up. This liquidity created a series of bubbles...leading up to the great bubble in finance and housing that blew up '07-'08... Late at night, after the party has been going strong, all credits are almost equally fetching. An Argentine bond? A house in Pomona? A share of Renault? All went up in value. But come the morning light, and investors begin to make distinctions: then, they want only the best credits. A business that is losing money is like the Soviet Union - it is a wealth destroyer, not a wealth-builder. It produces things that are worth less than the resources that went into them. Eventually, it needs a perestroika; propping it up with bailouts and boondoggles only deepens the losses. In the soviet economy, businesses were taking valuable raw materials and working them up into shoddy finished products that no one wanted. In the capitalist blow-out, valuable products and services were produced by the boatload, for people who couldn't really afford them. Naturally, the producers are worth a lot less than people thought. So are the houses their over-indebted customers live in. And so are all the debt-based instruments that their spending was meant to support. The wealth of the entire world is estimated to have a value of around $100 trillion. Capitalistic markets, in their wisdom, have judged about a third of that wealth no longer viable. "Today, it's America that must have a perestroika," says ex-Soviet boss Michail Gorbachev. "You don't have to be a Nobel Prize-winning economist to understand that it's not normal that the country with 20% of the world's GDP consumes 40% of the world's resources." Yes, Gorbachev is right about a number of things. The western, capitalist economies are in the midst of their own perestroika. They are being restructured. But not by the world-improvers. Instead, they are being restructured by capitalism itself... Leave capitalism alone and it will do the job far faster and far better than the meddlers could ever do.