Britannia Radio

Thursday, March 26, 2009 Is the president of the EU a Daily Reckoning reader? A bailout in sheep's clothing...don't mistake a rebound for a bull market... Imminent inflation headed our way?...the reason commodity prices are going up... Puru Saxena on the Fed's all-out inflationary war...and more! A Bailout in Disguise by Bill Bonner London, England Three cheers for Topolanek! Never heard of him? Neither had we until this morning. But on the front page of today's Financial Times, we discover two extraordinary things. Topolanek is the Prime Minister of the Czech Republic (and coincidentally, president of the European Union). And, he has a very accurate road map. "The US is repeating mistakes from the 1930s," he says, "such as wide- ranging stimuluses, protectionist tendencies and appeals, the Buy American campaign and so on. All these steps, their combination and their permanency, are the road to hell." We've said so ourselves. Many times. But we are surprised to find the president of the world's biggest and richest economy - Europe - say so. It made us feel funny...odd...as if we weren't alone in the world after all...as if we had a friend. And a friend in a high place. At least, he was in a high place this week. He lost a non-confidence vote in his the Czech parliament on Tuesday...causing a stir in Brussels. No one knows how the European central government functions - certainly not the Europeans. But as near as we can tell, it's a healthier system than the United States. The presidency rotates...with each member nation getting a turn. So, when the president of the EU says something, you can ignore him; he'll be gone before the milk goes bad. Meanwhile, Europe's central bank seems to be of the same mind as its president. While other central banks print up extra currency to help bailout their economies, the European Central Bank hardly seems to notice. Unlike the central banks of Britain, Japan and the United States, it hasn't cut rates to zero...and it isn't printing money. The economy will get itself out of the slump faster if the bank remains steadfast in its long term objectives of sound money and stable interest rates, says Trichet. Well, as we Irish would say, "Tree cheers for Trichet, too!" In America, the scammy bailouts come faster than European presidents. But each one gets a little cleverer at disguising what is really going on. The idea behind all the bailout programs is always the same - to stick the losses onto someone who doesn't deserve them. Of course, the stickers tell us not to ask questions; it's a national emergency! But when the stickees - the taxpayers - see what actually is done with the bailout money, they get a little huffy. So, now the stickers have a new plan: a public/private partnership, which makes it sound like Wall Street is helping to bail itself out. Finally, the feds are going to harness the private sector...and get the people who caused the crisis to help get us out if it. Now, investors and government will be working together, as equals, to solve this problem. But if you believe that...well...you are Tom Friedman. Which is to say, you are a moron. Inviting investors into the game looks good on paper, but what's really going on? The losses are the losses. Why would investors want a part of them? Of course, they wouldn't...unless they were paid to play along. The public is fed up with bailouts. So, the feds have disguised this new one as an investment scheme. The lumpen yahoos are invited to imagine that "capitalists are now going to help solve the problem they caused" as it was described in the French press. They delude themselves into believing investors are willingly going to buy into losing positions...and somehow make them winning ones. "Win...win...win..." is what they'd like to believe. But the game is poker. And for every winner, there's a loser. And the big fellow who has just entered the game is every poker player's dream. He is almost infinitely rich and infinitely stupid. Before the night is over, investors are going to clean him out. And the American taxpayer is getting fed up...knowing full well that none of this bailout money will ever make an appearance in his personal account. We've warned our dear readers before: you can't expect the government to bail you out...you're going to have to take care of that for yourself. That's why we've put together our special "Emergency 'Personal Bailout' Plan. Get yours here. The Dow rose 89 points yesterday. As near as we can tell, the rebound is still going on. For stocks globally, March has been the best month, so far, since 1989. But don't mistake a rebound for a real bull market. House prices in California were down 41% last month, over prices from a year ago. Airlines are expected to lose $5 billion this year. IBM announced a further 5,000 job cuts. German business sentiment is at a 26-year low... In short, this correction has a long way to go before it is over. By that time, most people will have stopped caring. And now, we turn to Ian in Baltimore for more news: "The U.S. Treasury auctioned off $34 billion in five-year notes yesterday - barely," writes Ian in today's issue of The 5 Min. Forecast. "Demand for government debt was so low the Treasury had to adjust the bond yields mid auction, from 1.8% to 1.85%. Five basis points might not seem like a big deal, but it certainly turned heads at the Big Board: "Even more notable," continues Ian, "this bond fallout happened on the same day the Federal Reserve announced its first series of Treasury bond purchases. Bernanke and company snatched up $7.5 billion of their $300 billion U.S. Treasury purchase program... and investors didn't seem to care. So much for the trader idiom, 'don't fight the Fed'." Each day, Ian and Addison bring readers the The 5 Min Forecast, is 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 the Hulbert #1 Performing Investment Letter, Outstanding Investments. Back to Bill in London with more thoughts: If you had stocks in 2000 and held them until now...guess how much you would have lost? 60% - in real terms. If you went all the way back to 1966...how much would have made if you held stocks all the time until today? Zero! How about stocks for the long run? Well, maybe...but actual performance depends on WHEN you buy and WHEN you sell. If you're lucky, you'll get out when the getting's good...and back in when it pays. And right now? "Everybody I know is getting back in...cautiously," says a rich friend here in London. "But I'm not so sure...I don't think there's any hurry." Nope. No hurry. There's a storm passing over the world's financial markets. We'd let it blow itself out before we made any major investments. "But what do you do in the meantime? I'm in cash...and I guess I'll stay in cash after reading your report yesterday. Inflation seemed like a sure thing. But as you say, maybe it's not as sure as we think." Yesterday, the Fed made history. It made a little step for man, and a big step for mankind, down the road to Hell. The monetary base of the U.S.A. is to be increased 500% over the next few months. More than a trillion dollars' worth of debt is to be monetized. Doesn't this guarantee imminent inflation at much higher levels? Yes...in theory. But there's a many a slip twixt the cup of theory and the lip of actual financial experience. As our friend James Ferguson pointed out, the Japanese had their cup running over for 10 years. Still, no consumer price inflation arrived to quench their recession- parched lips. What we take from this experience is that inflation is like a temperamental mistress. Sometimes she will be smooth and serviceable...and at other times, she will be as cold and stiff as brass. If the world is in the grip of a major correction - which it certainly is - commodity prices should be going down. Instead, they're going up. Copper is up 40% since it hit bottom in December of last year. Oil has gained more than 50%. In dollar terms, the commodity index, the CRB, has increased 14% from its bottom a few weeks ago. Are these dead cats just bouncing? Or, is this inflation? And take a look at what has happened in England. Even in the midst of the biggest deflationary meltdown in asset prices in all of history, consumer prices still rose. Bread is up 11.2%. Meat is 15% more expensive than it was 12 months ago. Fruit is 13% higher. Natural gas up 33% and electricity is at plus 18% Britain is a special case. Much of the price increases come a result of the falling pound - which makes everything that has to be imported more expensive. But everything is a special case, isn't it? Japan was a special case. And now...the whole dollar-based world is a very special case. And when the Fed monetizes debt, it's not as if it buys it directly from mom and pop. Who owns the debt? Well, the biggest holder is China. When the Fed buys U.S. Treasury debt from China, the cash doesn't automatically fall into the U.S. consumer slipstream. The Chinese could horde the money. Or they could use it to buy U.S. businesses - big business, such as GM and Caterpillar. In effect, what the Fed is really doing is facilitating a massive transfer of real wealth - from America to foreigners. By holding up the price of U.S. Treasuries (by buying them itself) the Fed is funneling cash to the foreign owners. The foreigners then redeem the cash for major U.S. assets (at low prices). Maybe that was the deal the feds worked out with the Chinese. Or maybe these are just the collateral and unforeseen consequences of a foolish plan. We don't know. But it doesn't necessarily put a lot of extra cash on the street. And then, even if it were on the street, it may not stay there for long. The feds can put in a lot more money. It doesn't mean it necessarily chases consumer products and drives prices higher. In fact, in a real depression, people tend to hoard money. They save. The more fearful they are, the more they squeeze their coins and clutch their bills. Instead of circulating freely, money disappears into drawers, bank vaults, and billfolds. Let's say the feds add a colossal sum - $10 trillion - to the dollar money supply. Even that could quickly be stashed away...in pockets...bank vaults...business holdings. Remember, most of it is in electronic form. What difference would it make to consumer prices if every account holder added a zero or two? Our old friend John Mauldin sends this comment: "On the Fed printing money: there is one small thing to watch. What if they print it, put it in the banks and then the banks instead of lending it to each other at 1.25% in LIBOR decide to deposit it at the Fed for .25% because they are worried about security and counter-party risk, which is a lot of the reason Fed reserves have exploded. They could print $5 trillion and if it all goes back to the Fed then where is the inflation? We need to pay close attention to where the money goes." Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: The cat is out of the bag. The Federal Reserve is waging an all-out inflationary war on the economic contraction. Below, Puru Saxena asserts that you don't have to be an economist to realize that monetary inflation will be with us for many, many years to come. Read on... Monetary Inflation is Our Future by Puru Saxena Hong Kong, China Last week, Mr. Bernanke announced that the Federal Reserve would buy $300 billion worth of U.S. Treasuries and another $700 billion worth of government-agency mortgage debt. In order to finance these purchases, the Federal Reserve would simply create this money out of thin air. It is worth noting, that the Federal Reserve has already dropped the Fed funds rate to a historically low range of 0-0.25% and now it is desperately trying to use other unconventional methods (quantitative easing) to stimulate the economy. In my view, this latest development of the Federal Reserve monetizing debt is inflationary and confirmation that the Federal Reserve wants to debase the U.S. dollar. It is worth noting that the total debt in the United States now exceeds $60 trillion, and its economy is around $14 trillion. So, the United States is already bankrupt, and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement. Allow me to explain: Suppose your grandparents borrowed $100,000 from their friends roughly 50 years ago. Back then, $100,000 was a lot of money, and the chances of your grandparents ever repaying this loan were slim at best. However, thanks to monetary inflation and the debasement of the U.S. dollar, today, $100,000 isn't a very large sum of money. Therefore, your grandparents would find it much easier to repay their debt. Turning to the present situation, the United States owes its creditors a gigantic amount of money and a debt so large that it can never hope of repaying it in today's dollars. So, the United States has two options: a. Default or bankruptcy b. Monetary inflation Given the fact that the United States is still the world's largest economy, owns the world's reserve currency and has a democratically elected government, I think we can pretty much rule out the possibility of sovereign default. Therefore, you can bet your bottom dollar that the United States will try its best to inflate its way out of trouble. Remember, politicians borrow money when it buys them a loaf of bread and they repay it when the same money is worth only a slice of bread! It is my firm belief that over the years ahead, the United States, and all other debt-laden nations in the West, will engage in massive money- creation in order to debase their currencies and dilute the purchasing power of paper money. Remember, monetary inflation is a debtor's best friend, as it makes the debt easier to service and repay. On the other hand, monetary inflation goes against the interests of savers and creditors. Given the fact that most of the 'developed' nations are up to their eyeballs in debt, you don't have to be a genius to figure out that monetary inflation is our future. At present, the global economy is dealing with deflationary forces due to credit contraction in the private-sector. However, even now, total credit in the United States is expanding due to rampant borrowing by the U.S. government. So, I don't expect deflation to take hold; rather, I anticipate accelerating inflation, which has always led to rising asset and consumer prices. "...over the years ahead, the United States, and all other debt-laden nations in the West, will engage in massive money-creation in order to debase their currencies and dilute the purchasing power of paper money." It is worth noting that apart from the Federal Reserve, other nations have also started monetizing their debt. Recently, the Bank of England announced that it plans to buy GBP150 billion worth of its government debt by creating money out of thin air. Needless to say, such a move is inflationary and terrible for the health of the British currency. Now that we have established that monetary inflation is our future, let us examine which currencies and assets will maintain their purchasing power. If history is any guide, nations that engage in monetary inflation always diminish the purchasing power of their currency. So, in the years ahead, we can expect currencies in the West to depreciate in terms of purchasing power, but the trouble is that none of the fundamentally sound nations want a strong currency either! As the world engages in competitive currency devaluations, I expect all the currencies in the world to lose significant purchasing power against hard assets. Therefore, in the years ahead, precious metals and other commodities with intrinsic value should appreciate considerably. Even the values of fundamentally sound businesses with clean balance sheets should skyrocket as a result of inflation. Last week, in the aftermath of the latest announcement by the Federal Reserve, we have seen significant strength in precious metals, crude oil and grains. Conversely, we have seen a huge decline in the U.S. dollar. If the Federal Reserve continues on this inflationary path, we can expect a resumption of the commodities bull-market and renewed weakness in the U.S. dollar. Contrary to popular opinion, I am of the view that most commodities and stock markets have seen the lows for the entire bear market and we may be in the early stages of a new cyclical bull market that could last for a few years. Now, I am aware that my bullish stance may lead to ridicule from some of my readers, but I would like to point out that new bull markets are always born during abject pessimism and skepticism. Even if some asset prices break to fresh lows in the near- term, I suspect such a move will prove to be a 'head fake' and prices will soon rebound. So if you have a 4-5 year investment horizon, now may be a good time to convert some of your temporarily powerful cash into hard assets (precious metals, energy and industrial metals), related producing-companies and sound businesses in the fast-growing Asian economies. At the current levels, the energy complex looks extremely attractive and should prove to be a fantastic long-term investment. After years of extensive research, I am convinced that the world's oil production is peaking and we are likely to see much higher energy prices in the future. So, investors may want to add to their positions in upstream oil/gas companies and the energy service stocks. Finally, it looks as though the precious metals complex is becoming over-heated and long- term investors may want to wait for the usual summer correction before adding to their positions in physical gold and silver. Regards, Puru Saxena for The Daily Reckoning Editor's Note: Puru Saxena is the founder of Puru Saxena Wealth Management - his Hong Kong-based firm that manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here.