Britannia Radio

Friday, March 27, 2009 An amusing spectacle turns ugly...shanty-towns popping up in the U.S.... Something's gone very wrong with our 'just in time' system... Bond market braces for Great Depression...Alan Greenspan defends himself... Bill Bonner with a breakdown of the bailouts...and more! Still Searching for a Recovery by Bill Bonner Paris, France The mobs are forming... Give the sans-culottes a chance...and they'll turn violent. So far, two bosses have been held hostage in France. Employees wanted something the bosses either couldn't or wouldn't give. In England, the yahoos attacked poor Sir Fred Goodwin's house. Fred ran the Royal Bank of Scotland into the ground; you'd think the rabble would be delighted. In America, meanwhile, they organize bus tours to gawk at AIG executives' houses...and howl for blood. Apologize, resign...or commit suicide, suggested Senator Grassley. "The corporate security business is booming," says the International Herald Tribune. Until now, the whole bonus/executive pay/bailout spectacle was just an amusing diversion - diverting the public's attention with a trifling few million dollars, while the feds picked their pickets for trillions. But now, it's turning ugly. Our guess is that the blood will flow...but later. It's still fairly early in the correction. Investors have lost money - lots of it. Homeowners have lost their homes. Working stiffs and Wall Street sharpies have both lost their jobs. But the violence-prone yahoos still expect something for nothing. The bailout plans will work, they believe. The government will step in and save them. They haven't figured out that the government's bailouts are just making their situation worse. Today's International Herald Tribune tells that "shanty-towns" are beginning to appear throughout the United States. People are setting up tent communities...shacks...and Rio-style favelas - in America. The paper shows a photo of a group of tents under a California freeway. It's not hard to understand why. Many families live paycheck to paycheck...just one week ahead of the rent payments. If the paychecks stop - even for a short time - they're in trouble. When credit is expanding, jobs are plentiful and credit is willing. Lose a job and you can always get another. And you can fill in the gap in your budget with credit cards. But that was then...this is now. Advertise a job opening now and you're likely to get hundreds of applicants. And not only is it harder to get a job...it's harder to get a line of credit too. And even people who still have credit are more reluctant to use it. They know where that leads; many would prefer to live under a highway than to run up more debt. A big change in attitude has taken place. People used to think that whatever they needed, they could get it 'just in time.' That's why we have 24-7 liquor stores, all-night convenience shops and cash machines on every street corner. But something has gone wrong with the 'just in time' system. The cash machines aren't as yielding as they used to be. Neither is the housing market. Or the job market. Sometimes, they just say no. Now, people want a little cash in their pocket...just in case. But what do we know? We missed the whole credit cycle. When we were young and in need of credit, the banks were still smart enough not to lend to us. When we got older, we were smart enough not to borrow. But pity people about 20 years younger than we are. They were just starting out...having children...buying houses...at a time when the banks had lost their minds. Credit was as easy to get as a social disease. Now, the debt is even harder to get rid of. Old people...and young people...tend to have little debt. It's the people in between who are hurting. But enough rambling... Everyone's looking for the recovery. The commentators think they see signs of it everywhere. Commodities are rising. Stocks are going up. Even houses are said to be selling better than they were a few weeks ago. "Risk appetite grows on hope US is near bottom," says the FT today. The Dow rose 174 points yesterday. Oil, the dollar, and gold moved little. Maybe you should stop reading here...before we get to the 'rest of the story'... But first, we turn to Ian in Baltimore for more news: "On the housing front, we see a ray of hope," writes Ian in today's issue of The 5 Min. Forecast. "According to this chart, the precipitous fall in home prices might start to ease up soon: "The current crisis has finally wiped out the bubble in home prices," continues Ian. "Adjusted for inflation, the price of median single family home has plunged 33% from its 2005 high. Now at pre-mania levels, an average of $165,000, home prices have a reason to at least slow down their rapid decay. "Ouch...sorry if you bought your home during the height of the housing boom in the 1979. The median, inflation adjusted return over the last 30 years is negative 1.6%." Each weekday, Ian and Addison bring readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free service available only to subscribers of Agora Financial's paid publications, such as Breakthrough Technology Alert. This publication's subscribers have had an interesting couple of weeks, as Obama's pledge to put science on the top of his administration's agenda had them poised to make some pretty major profits. Keep reading to learn all about it - but act now... Only a limited number of spots are available... And now, as Paul Harvey used to say, the rest of the story: GM says 7,500 hourly workers have left the company. Jobless claims sent another record - the 9th one in a row. There are now more people getting benefits than any time since 1967. And what's going on in the bond market? "Weak demand at Treasury auction gives Wall Street pause," says an article at the New York Times. And in England, an auction of government bonds "failed" - buyers didn't show up. If the government can't finance its debt, how will it pay for its bailouts? Oh, never mind...we forgot; the Fed will lend the government the money. Where will the Fed get the money? Oh, never mind... Meanwhile, the corporate bond market is still expecting a Great Depression... "Investment grade corporate bond indices are [still] priced for default rates of 38% in Europe; 40% in the US; and 51% in the UK - all worse than the Depression," writes John Authers in today's Financial Times. Bank lending is the target of all these recent operations, he points out. Stocks are going up. But corporate debt is still priced "on the assumption of absolute disaster," says Authers. Someone's got to be wrong: either stock market investors...or the bond market. "Either the credit market is so illiquid that these numbers bear no relation to the outcomes that investors expect; or we are in for a re-run of the Depression." Naturally, we don't know which it is. We are incurable optimists here at The Daily Reckoning. Let the markets work...they'll straighten things out. In the meantime, we keep our Crash Alert flags unfurled...just in case. As an aside, our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching...and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a "Decade of Reckoning"...four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade. If you secure your spot now, you can save $300 off of the regular price. Click here for all the info: The Agora Financial Investment Symposium: July 21-24 And finally, Alan Greenspan is in the news today. He has a major work of obfuscation in today's Financial Times, the gist of which is the same as his previous pieces. "It's not my fault," is the message. In a sense, he is right. The free markets are full of boom and bust, sturm and drang, yin and yang. Free markets also create prosperity, he points out. And if bubbles are the price we pay, well...it's worth it. "I do not recall bubbles emerging in the former Soviet Union," he says. Yes, bubbles will always be with us, dear reader. But that is no excuse for a Federal Reserve chairman who pumped extra air into the already bubbling economy. Poor Dr. Greenspan. The more he tries to defend himself...the more guilty he appears. And now he must shuffle out the end of his days...an empty coat upon a stick...with the curse of the biggest financial crisis in history upon his wrinkly, old head. The Daily Reckoning PRESENTS: Politicians and investors have much in common. Both can be bought. And now both connive to shift the burden of losses from those who were born biddable to those who haven't been born at all. Read on... Born Biddable by Bill Bonner Paris, France Mr. Timothy Geithner was the man who was on watch when the ship ran aground. His job, as head of the Federal Reserve Bank of New York, was to keep an eye on Wall Street. Now, he's come forward with a new $1 trillion plan to get the boat back on the water. He should have left it to the ship-breakers. We almost feel sorry for him; Sisyphus had it easier. But Sisyphus was doing honest work. Besides, when Geithner's tour of duty is finished, the public will pay for his jackass bamboozles for decades, while he moves on to a cushy job at Goldman Sachs...or maybe AIG itself, if it is still in business. Of course, we are out of harmony with mainstream opinion; but we are always out of harmony. When the USS Bubble was steaming along we fretted and warned: it was too heavily laden with debt; it was off course; the captain and his mates were all morons. Then, when it washed up, we switched to a more cheerful song, with the sound of blowtorches cutting her up...and the furnaces melting her down...as background music. Finally, capitalism was doing its job and happily whistling our tune. But now that we are jolly, the rest of the world is full of doom and gloom. Thomas L. Friedman, writing in the New York Times, tells us that we have a "once in a century financial crisis on our hands..." We can't let capitalism do her work, he says; we have to get this wreck out of the mud and back on the cruise circuit! So far, America's efforts to borrow its way out of debt have not gone well. The scum gets dredged up from the bottom on Wall Street. But when it is dumped onto the ship, the whole thing just sinks lower. Henry Paulson began the digging with his TARP program in September of last year. Then came TALF. Not to mention various trillion-dollar salvage operations from the Fed. How much do all these rescue efforts cost? The last number we saw - in Barron's - was $14 trillion. Last week, Mr. Ben Bernanke announced to the whole world that he was doing the sort of thing that people used to be ashamed of. Instead of dredging out the mud, he was going to blow hot air into the rusty hull. And on Wednesday, he began following in the footsteps of pioneers at the Bank of England, the Bank of Japan, and most importantly, the Bank of Zimbabwe. Buying U.S. Treasury debt directly, he will add trillions to the U.S. money supply. Last year, before Lehman Brothers dove in the water and never came up; the entire monetary base of the United States of America measured $850 billion. With so much gas being pumped, it will soon rise to 5 times that amount - or more than $4 trillion. "So far, America’s efforts to borrow its way out of debt have not gone well. The scum gets dredged up from the bottom on Wall Street. But when it is dumped onto the ship, the whole thing just sinks lower." Daily Reckoning readers may be having as hard a time keeping up with the bailouts as we are. Here, we attempt a simplification: America still sinks under the weight of more than twice as much debt as usual. The collateral behind that debt has lost about 20% of its value - or about $10 trillion. Normally, those losses should be born by the capitalists - the reckless lenders and investors who extended loans to people who couldn't pay them back. But all of the bailouts have one thing in common: they aim to shift the losses from the people who deserve them to the people who don't...from the culpable to the gullible. Which is why they are so popular. After such a remarkable excursion, many are those who deserve to lose money - from those who bought doublewide trailers they couldn't afford...to those who lent them the money...to those who securitized the debt and passed it out all over town. That's why the biggest problem confronting the salvage workers has been to find some other group of innocents dumb enough and rich enough to pay the bills. Mr. Bernanke's focused on shifting the burden onto dollar holders worldwide - notably the Chinese - by inflating the currency. But the Bank of China is also America's biggest creditor and has threatened to get upset if the dollar loses too much value. Besides, inflation is no sure thing. As James Ferguson points out, Japan has been trying to incite inflation for many years - with no success. Until now, Geithner and his boss targeted the taxpayers. Private losses became public losses...as toxic assets were bought up, or backed up, by the government. But when the public got a look at what the bailouts actually paid for - million dollar bonuses, for example - it was outraged. The mob called for Geithner's head; the stingers themselves got stung. This latest plan has a fairer sound to it, but it is a bigger fraud. "The solution depends on getting private money funds to team up with the government to buy up toxic assets" wrote Mr. Friedman, anticipating the Geithner plan by only a few hours and the truth by an eternity. "The president's comprehensive plan to remove the toxic assets from our ailing banks...is the key to our economic recovery..." he continued. Geithner has invited investors up to the trough. His plan leaves the government with 90% of the risk; investors will quickly figure out how to get 100% of the profits. The latest estimate tells us that all this salvage work will add $9.5 trillion to the U.S. national debt over the next 10 years. At the current rate, it would still take 20 years to pay it off, even if every dime of savings of every American were applied to the task. Necessarily, the debt sludge will be dumped on the next generation - who don't vote...and won't notice the smell for years. Enjoy your weekend, Bill Bonner The Daily Reckoning Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis. Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: