Britannia Radio

Today's Daily Reckoning: Living in the Post-Bubble World San Jose de los Perros, Nicaragua Tuesday, February 17, 2009 --------------------- *** The property market in Dubai ceases to exist...the S&P is registering its first quarter ever of negative earnings... *** The search for the bottom continues in Japan...while the West was over-consuming, the Far East was overproducing... *** Trying to inflate away America’s debt...a chance encounter with a dear reader...and more! --- Special Offer --- Legally “Hack” Into Wall Street’s Best-Kept Secret Millionaires have their private jet planes...private clubs...why wouldn’t they have their own, exclusive market? Turns out, they do. And membership costs a pretty penny. Lucky for you, we have a way you can legally ‘hack’ into the “Millionaire’s Market”...and reap the benefits of the ultra-rich...at a steep discount. See here for all the details...but hurry – at midnight on Thursday, February 19, your chance to get in at a discount will come to an end. Act now! --------------------- The markets of 2009: plenty of offers; few bids. From Dubai comes word that the property market has not just fallen...it has ceased to exist. This from Justice Litle: “You can’t put a percentage figure on the market drop. In fact, there isn’t a market at all.” “The scary thing is, they’re nowhere close to facing reality... the official listings have only reduced prices by 10-20%, even with no buyers in sight, and builders are hoping to build more...” Meanwhile, in the United States, the S&P has completed 6 quarters of negative growth and is now registering it first quarter ever of negative earnings. That’s right, dear reader, put all the S&P companies together. Add up their earnings. Subtract their losses. Result: net losses. MarketWatch reports: “A sixth quarter of negative growth ties the prior record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952. “‘Next quarter, we’re expecting a new record of seven quarters of negative growth,’ said an analyst. “As of the close of business Thursday, [he] calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share.” We are in a period of price discovery. Many shares, businesses, and credits are on offer. Typically, people are reluctant to make bids until they have a clearer idea of what these things are worth. What are they worth now that we’re in a post-Bubble world? No one knows. And no one seems in a hurry to find out. Even in Japan, the search for the bottom continues. It hardly seems possible. The Japanese economy was already in a deep hole after 19 years of recession/depression. Now, it’s digging deeper. The latest figures show the Japanese economy falling at a 12% annual rate – faster than ever. Well, faster than at any time during its 19-year slump. The last time the economy in Japan slumped this hard was 35 years ago. What to make of it? Well, the simple answer is this: while Americans consumed too much, the Japanese produced too much. The United States had far too many retail shops and service industries. The Japanese built far too many factories to stock their shelves. And now, well...you know the story now. No shoppers. No merchandise needed. No orders for Japan. So how much are the shops worth? How about the factories? What about houses? We’d all like to know what they’re worth so we could get on with business. But Mr. Market is playing it cool. We’ll just have to wait until the bids come in. *** Strategic Short Report ’s Dan Amoss offers his two cents on Geithner’s Financial Stability Plan, or ‘TARP 2.0’: “Part of the new Financial Stability Plan involves an unspecified ‘public/private’ partnership to buy up toxic assets. Apparently, the idea for a public/private partnership was a last-minute development leading up to Tuesday’s announcement. Word is that several prominent hedge fund managers met privately with Larry Summers, one of the administration’s top economic advisers, just days before Tuesday’s announcement. “Here’s my guess at how this arrangement might develop in the coming weeks: Long-term financing from the Treasury to distressed debt hedge funds is a very creative way to hide a government subsidy. The potential cash-on-cash return for hedge funds interested in cheap toxic assets is probably not enticing enough for them to pay what the banks are asking. But if the Treasury acts as a prime broker by providing, say, 10-year financing at 4%, so hedge funds can lever up their equity by five times, maybe the funds will be willing to pay a bit above the banks’ asking price and still earn a decent five- or 10-year return. This is a backdoor way to recapitalize stressed banks and get toxic assets into stronger hands without exposing taxpayers to too much credit risk. Combined with a major new mortgage refinancing initiative, this might have a shot at success. “One thing is clear: The authorities are not going to just sit by and do nothing. I’ll be looking closely at the details of the Financial Stability Plan as they are revealed in the coming weeks.” For more from Dan, see the latest issue of Strategic Short Report . *** At least the Japanese have an orderly society with plenty of savings to lather over their hurts. The Land of the Rising Sun is also the land of an aging, shrinking population. These old people can just wait out the slump...knowing that it might last longer than they do. Cross the straits into China. There, same story. Different ending. China has too many factories too – at least, too many set up to produce too much stuff for too many people who can’t pay for them. China has a huge, growing population. The rate of population growth is not at high as it used to be, but the raw numbers of getting larger all the time. If you have a population of 100 million and you grow at 6% per year, you add 6 million new people to the world’s population each year. If you have a population of a billion people, and you grow at half that rate – just 3% per year – you add 30 billion new people each year. China’s economy needs to grow at nearly 10% per year just to provide jobs for these people, say the experts. Doesn’t seem very likely – not in today’s incredible shrinking world economy. The New York Times : “From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe. “Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs. “High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France. “Last month, the government of Iceland, whose economy is expected to contract 10 percent this year, collapsed and the prime minister moved up national elections after weeks of protests by Icelanders angered by soaring unemployment and rising prices. “Just last week, the new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.” “Millions of migrant workers in mainland China are searching for jobs but finding that factories are shutting down. Though not as large as the disturbances in Greece or the Baltics, there have been dozens of protests at individual factories in China and Indonesia where workers were laid off with little or no notice.” The Chinese have built their factories to sell things to foreigners – notably, the most feckless consumers on the planet, Americans. It will take time to re-jig factories and marketing channels to the needs of its own market. Remember, this is a depression. A depression requires structural changes to an economy. Those take time. The Japanese can wait. But on both ends of the U.S.-China shipping lanes there are big, big problems. *** On the U.S. end, the pols can’t leave bad enough alone. The voters won’t stand for it. They’re going to ‘do something’ – if it kills us all. What they are trying to do is obvious – inflate away America’s debts. So far, the market has been ahead of them – wiping out more money than the feds can replace. Sooner or later, they’re bound to turn the situation around. And Obama heads to Denver, Colorado to sign the $787 billion stimulus package. (More on that tomorrow). Our guess is that the next time we come to Nicaragua our dollars will no longer get the admiring glances they bring now. “You can pay me in dollars,” said the woman from whom we bought a watermelon yesterday. Next time, she’s likely to want cordobas... *** On the other end of the trade lines, China could blow up. *** “Dad, this is the best house we’ve ever had...why would you want to sell it?” (About which, more tomorrow...) We were sitting on the verandah last night, having dinner. Beneath us, the waves slapped against the rocks. In front of us, a long, wide beach curved around toward green hills. There are a few lights from the condominia in the distance. Above them, the stars began to sparkle in the sky and the moon lit up the ocean. Wait...across the river, the condominium owners have put up a tower. It must be for radio or TV signals... Progress! It reminds us of the forest of communication towers in Annapolis. This is a place where people come to realize their dreams. One of the houses is even named “Our Dreams.” Another looks like the Dali Lama’s Mongolian Palace... Across the river, they must have dreamed of cable TV. Yesterday, a man got drunk at the bar. “Missshter Bonner. I alllways wanted to meet you,” he began. “But I’ve got a bone to pick with you. It’s because of you that I came down here. I read about it in your daily email...you know that thing you send out... “...and I wanna thank you for that. Because of that I bought some gold about 5 years ago. It’s the only thing I have that hasn’t gone down in price. Just about everything else has gone down the round hole. That Daily Reckoning thing is okay...but to tell you the truth...I don’t read it every day. It’s too damned long. And besides, do you know that you repeat yourself?’ “Yes...I’d like to say something original, but the world doesn’t change much.” “I’m not complaining about that though. You work hard...even if you do same the same thing over and over. And, as I said, at least I got into gold fairly early. “No, what I’m complaining about is that because of you I came down here.” “Hey wait...I tried to discourage you from coming down. I always wrote about how nothing goes right down here.” “Well, maybe you did. But it sounded pretty good anyway. So I bought a lot.” “What...you don’t like it?” “No, I like it all right. It’s just that the fellow up the hill built a monstrosity...and now I have to look at it. The place that looks like the Dali Lama’s Tibetan Palace.” “Oh, that place.” “Yes, THAT place.” “Well, people come down here to realize their dreams. I guess that was his dream.” “It might have been his dream, but MY dream was not to have to look at things like that. If I wanted to look at places like that I could have stayed in Florida.” Until tomorrow, Bill Bonner The Daily Reckoning P.S. At least the gentleman was pleased on one piece of advice we’ve offered over the years: buy gold. And we stand by this advice still...gold hasn’t finished its epic run. In fact, we believe its price still has a ways to go. Don’t miss out – buy some of the precious metal while the price is still relatively low. Find out how by clicking here . --- Special Offer --- Options Made Easy We know – many investors shy away from playing options because they are notoriously tricky. But the thing is – they are also notoriously lucrative, routinely beating regular stocks. Well, in this report, we lay it all out for you. It’s quite plainly, the easiest way to play options...ever. And the gains are just as big. Keep reading here . Guest Essay: The Daily Reckoning PRESENTS: Often overlooked, or disregarded as too ‘volatile’, commodities are making a comeback – in a big way. Resource Trader Alert’s Alan Knuckman explores... COMMODITIES DRIVE THE MARKETS by Alan Knuckman Commodities are now beginning to be appreciated and understood by investors. After all, they are the key to the financial world. Friends and family tell me that they don’t follow commodities but always want to discuss investing. After a few minutes of conversation they make the connection to oil, interest rates, gold and the value of the dollar – and as this year is proving once again everything hinges on commodities. One of the main reasons the stock market was at record highs in 2007 was the steadily increasing price of oil. Two of the Dow 30 stocks of Exxon and Chevron had increased dramatically in price because of huge profit margins with record energy prices. With their high share price there contribution to the index kept the Dow strong. Which just goes to show that commodities drive our markets. At any given time the biggest financial stories are related to commodity prices. Exxon accounts for about 5.4 percent of the Standard & Poor’s 500 Index’s value, according to data compiled by Bloomberg. The world’s largest oil company carries the most weight of any company since 1985, when International Business Machines Corp. was 6.37 percent, year-end figure. But even though Exxon’s profits are up, expectations are still lower and the stock is well off its highs of 2007 and 2008 – and year to date the stock is down around 4%. Accordingly the S&P 500 fell 8.6 percent this month, eclipsing the 7.6 percent drop at the start of 1970 for the steepest January decline in the gauge’s 81-year history. The slide in the S&P 500 this month suggests the so-called January barometer will signal a loss for 2009. The indicator was developed by Yale Hirsch, chairman and founder of the Stock Traders’ Almanac, and built on the theory that the S&P 500’s first-month performance sets its course for the year. Since 1950, the barometer has been at least 80 percent accurate. One of the exceptions occurred in 1978, when the index rebounded from a January drop of 6.2 percent to close 1.1 percent higher. Let me share just one more thought about the commodities and futures world in Chicago as the dynamics continue to evolve. The future generations of traders are losing the connection to the risk-takers that walked the exchange floors before them. Let’s remember at one time this was the largest concentration of millionaires per square foot of anywhere in the world. The grand old lady that is the Chicago Board of Trade Building rarely gets to feel the spirit of trading from the past 100+ years gone by. Yelling, screaming and vigorous hand signals has since moved onto computer screens – setting up the move throughout the world and away from a center of financial activity at the end of the Chicago LaSalle street corridor. Even though investing has advanced with technology the anticipation from Friday’s unemployment numbers brought recollections from the days of old. Back then before the unemployment number was announced the halls and elevators were filled with energy. It has been nearly 20 years since my first day at the exchange but I still get excited as the day approaches for the unemployment data – let’s not forget that many use this number to gauge the nation’s economic strength or weakness. It is true that some stubborn souls still linger on the exchange floor but with the exception of futures options almost all transactions are now just mouse clicks. So nowadays financial athletes put on their best game faces and get ready to put their skills to work trader versus trader – all on the computer screen. It just reminds me that the lessons learned on the trading floor were truly some of the finest forms of education that money can buy. The job loss totals were staggering but as a forward-looking vehicle the market had discounted the bad news. There was a sense of relief that things weren’t worse than expected and the revisions from previous months were reasonable. Stocks rallied nearly 3% across the board and sit at the upper end of the wide sideways range from the past ten weeks. Almost as interesting is the downward reaction by bonds and rise in interest rates in this WEAK environment. A normal reaction to continuing unemployment escalation would be seen in a treasury rally...BUT... the market is so concerned by the amount of debt necessary to be sold for the stimulus that prices have dropped almost inexplicably. How this affects commodities is all we care about but some telltale signs reinforce our previous theory that INFLATION, yes I said it again, is a concern. Barring the renewed flight to safety interest rates have reversed on the longer end for treasuries. What this means is that Bond and Note yields have climbed nearly 1% – a big deal from recent lows of near 2%. And as you may already know, the cost of the stimulus is financed by selling, selling and more selling of paper to the Japanese and Chinese to help America recover. This is proof positive that inflation can be the problem issue in the futures versus deflationary concerns. It isn’t important what any analyst or economic expert thinks – it’s more important what the markets are telling us. Regards, Alan Knuckman