| Today's Daily Reckoning: |
| The Downfall of the American Consumer London, England Wednesday, March 4, 2009 --------------------- *** Easy credit killed the American consumer...Europe has not avoided the plague of debt... *** Obama - the world is awaiting the bounce with baited breath...a $3.6 trillion budget - and everything that goes along with it... *** The deficit is going to equal more than 12% of U.S. GDP...the age of big government is back...and more! Angela Merkel to Eastern Europe: Drop Dead! You remember that famous cover story of the New York Daily News? New York was nearly bankrupt in 1975. The city asked the feds for a bailout. To his everlasting credit, Gerald Ford had the backbone to just say 'no.' Had he given the city a bailout, Ford might have won his race against Carter. He believes that that headline cost him the New York vote...and the election. Then again, had he given New York a bailout...the city might be more like Detroit. The kindness of strangers is one of life's delights, but once you begin to count on getting something for nothing you are on the road to Hell. At least, that is our view here at The Daily Reckoning. Welfare ruined the lives of millions of people. (More on that...below...) Easy credit - coming largely from the Fed and the kindness of strangers in Asia - ruined the American consumer. Bailouts, handouts, bribes and giveaways threaten to sink whole industries. And now the whole world economy will be ruined by printing press currency - something-for-nothing money coming from the central banks. But that will take time...maybe years. For the moment, we are enjoying the show... Europe is plagued by debt too - just like the United States. Individual households are generally in better shape than those in America, but governments tend to have more debt than the United States. And in the fringe countries of Europe - Ireland, Spain, Greece, Italy, Poland, and the Ukraine - consumers borrowed far too much money to buy houses. Unemployment is soaring to 15% of the workforce in Spain. Irish banks are going under. And in Eastern Europe, the problems are worse. Typically, a man who wanted to buy a house found that he got a better interest rate if he took out a mortgage in euros than in his home currency. In Poland, for example, many homeowners must now make their mortgage payments in euros, while they earn their money in zlotys. As the financial crisis developed, the zloty fell against the stronger euro, by half. This leaves the Polish householder paying twice as much on his mortgage. Not surprisingly, consumers are in trouble...so are the banks than lent them money...and so are the countries where they live. Nine of these nations - an Eastern European bloc - got together and asked the European governing council for help. They said they needed $380 billion to get through this crisis. Angela Merkel, speaking for the French and Germans, said no. She might have mentioned, too, that they had already spent $380 billion recapitalizing Europe's banks. In America, the government is more accommodating. It is spending trillions to try to bailout the entire global economy. And by the look of things...it is failing. O! Bama! Where is thy bounce? The whole world needs it. The Dow did not bounce much yesterday. It was up only 31 points. A disappointing showing. Usually, you can count on a healthy bounce after a big drop, such as stocks got on Monday. But this market has been short on bounces. After Obama got elected, we expected a big bounce. Instead, there was a feeble ricochet of about 15%...and then, stocks headed down again. In the United States, they've lost 20% so far this year. And the more the government tries to pump up the ball, the flatter it seems to get. HSBC said it was cutting 6,100 jobs...closing offices all over America...and trying to earn back the $10 billion it lost in the US consumer finance business. AIG is getting another $30+ billion - after burning through the last $133 billion. 'Can't let this insurance giant go under,' say the pundits, "or the whole insurance business will go down.' AIG was "irresponsible," said Ben Bernanke in his little chat with Congress yesterday. He said they made speculative bets that they shouldn't have made. But what did he expect? The Fed - under the leadership of Alan Greenspan - threw the biggest financial party in world history. What did they expect the pros to do...stay home and watch TV? And now the IMF says the global banking system needs another $500 billion. The real figure is probably two to three times that amount. But who knows? We're still in a period of aggressive price discovery. Until we find out what's in their vaults...and what it is worth...we won't know how much it will cost to save them. Ford and GM sales have been cut in half - sales fell to a 27-year low in February. Blockbuster is eyeing Chapter 11. And skilled immigrants are leaving the US. *** Obama has, of course, announced his $3.6 trillion budget...and all that goes with it. Including a $1.7 trillion deficit. But his estimates were based on a recovery in the last part of this year. That seems increasingly unlikely. Our guess: the deficit will go over $2 trillion. Congress has hunched over the numbers. The solemn chicanery of federal budgeting is underway, in other words, as politicians pretend to weigh the merits of the spending plan... Of course, they are spending other peoples' money...and none forgets it. The idea is not to reduce spending, and certainly not to return it to its rightful owners, but to make sure it goes to the groups most important for re-election. Besides so much of this money is borrowed from future generations...and foreigners...and who-knows-whom...it is like money from Heaven. As any system of government matures, more and more people are able to get a purchase on it. It could be a tax break...a licensing requirement that keeps out competitors...a tariff...a subsidy...a job...free food or a welfare check. And as more and more people get something from the government, more and more have a stake in making sure the government stays in business. This phenomenon contributes to the stability of the institution in the short run...in the long run, it guarantees its failure. For each little hustle is a cost...like a leech on the back of a water buffalo. The animal may be strong and fit; but put enough leeches on him and he'll wither like a dried up grape. Of course, after a while, the beast begins to stagger and people notice something is wrong. Then, the reformers come out...promising change. But change is just what people don't want and just what the system won't permit. There are too many leeches - and the leeches vote. Obama's new budget is the biggest bag of leeches to come along since the Roosevelt Administration. We have not seen it in detail. But from what we've gathered from the press reports, it has something in it for almost every bloodsucker. The raw numbers are breathtaking. Whereas the feds have taken about 21% of the nation's income in recent years, now they're going to take 28%. The deficit alone will equal more than 12% of total GDP. Put the feds together with state and local hacks, altogether they will consume 40% of the nation's total output. Whoa...that's put it close to the levels of such free-market bastions as Zimbabwe and Algeria, both with 43% of spending done by government...and Hugo Chavez's Venezuela, where the government spends 41% of GDP. By contrast, in France, that socialistic, bureaucrat-saturated country with the croissants, 53% of GDP is spent by the government. But wait...in France healthcare is a government industry and so is the passenger train system. In America, 17% of GDP is spent on healthcare. As for the passenger trains...forget it...in America, we scarcely have any. So, if you add the 17% spent on private healthcare to the 40% you actually get a total higher than that of France. Ooh la la...the age of big government is back! Who pays? Ah...that's an interesting subject in itself. Obama says he's going to soak the rich. But the rich are already pretty well marinated. Reagan's tax cuts freed them to earn more money - and pay more taxes. Now, the top 5% pays 60% of the costs of government. The bottom 40% pay no taxes at all. They get all government 'services'...which is to say their boondoggles...for free. Until tomorrow, Bill Bonner The Daily Reckoning P.S. Obviously, the cost of the bailouts is going to be passed on to the taxpayers - lucky you. What you need is your own personal bailout strategy...which you can obtain by clicking here. --- Special Offer --- Imagine Getting Rich No matter what the markets do - it is possible to pull in some major profits right now...and it's easier than you think. In fact, you could turn $200 into $1.2 million - and you don't even have to do any of the work of deciding when to buy or sell. You can start making enormous gains right now - click here for the full story. |
| Guest Essay: |
| The Daily Reckoning PRESENTS: The dollar and yen have had a long and checkered (not to mention a bit confusing) relationship. Bill Jenkins takes a look at what makes currencies rise and fall - and how you can use this information to your advantage. Read on... TROUBLE IN TOKYO by Bill Jenkins Tokyo reported terrible GDP numbers a few weeks back. The U.S. dollar was spurred by this report, moving 5 whole cents, from 93 and 1/2 to 98 and 3/4. But believe it or not, the news is still working magic in the market. In short, it initiated a new change in currency relationships. Up until this point in the last several months, any time the U.S. dollar weakened against the pound or euro, it strengthened against the yen, and vice versa. Now the U.S. dollar is taking on all challengers. All three of the other majors weakened together, while the U.S. dollar went on to make new credit crisis highs. However, on Friday of last week, it appeared that the old correlations may have been coming back. The end of the week brought U.S. dollar weakness against the yen, but strength against the euro and pound. So let's look at the skinny on this dollar/yen relationship a bit more. It wasn't just last week that brought about a revival in the yen's weakness. Since Jan. 21, the yen has lost 12% against the greenback. That's in only five weeks... a pretty substantial move. On the technical side we saw it put in the infamous double bottom formation. It has moved steadily in favor of the dollar ever since. The question in my mind is this: While Japan's GDP number was deplorable, it wasn't entirely unexpected, was it? It came at the end of a long line of bad news. Consider that industrial output fell 8.5% in November, 9.8% in December and then 10% in January. Exports dropped a whopping 45% in the last year. Many pundits bemoan the U.S. plight of being a non-manufacturing economy, but Japan's numbers show that manufacturing economies are faring no better than service economies. But in spite of all this bad news, how has Japan's currency continued its stellar rise, and why now does it appear to be reversing? Have the fundamentals become just too bad to ignore? Or is something else afoot? Currencies do not rise and fall on the sheer strength or weakness inherent in them or in their economies. They rise and fall because of the factors of supply and demand. The yen was not appreciating because it was the strongest or the surest or the safest. It was driven to these levels simply because the money flows from the long-held carry trade absolutely overwhelmed the market's ability to distribute them quickly enough. In other words, for years, a popular trade was to borrow yen and use them to buy just about any other currency. Since the yen had an official interest rate of zero, traders could borrow them practically for free. Then they'd use the yen to buy a currency producing a higher rate of interest. The profit came from the appreciation of other currencies against the yen, as well as in the form of the interest rate differential. This is what is commonly called the yen carry, or the carry trade. Its simplicity made it exceptionally valuable. How could you go wrong? If you can get something for free, and then sell it at any price, you will always make a profit. But when the housing crisis began to unfold, followed by the credit crunch, traders began to worry that their high-paying interest rate differentials might be in serious trouble. What if the high-paying currency they were holding defaulted? What if the banks started cutting interest rates and they could no longer get that primo return? What if pigs started flying? What if? What if? What if? And so, the panic began. and traders began "unwinding" (getting out of) their carry positions. What did this do to the yen? As you know, all currencies are traded in pairs. That is, you sell one currency then buy another. For the years of the successful carry trade, traders sold the yen to buy other money. In doing so, the yen became less and less valuable the more it was sold. Japan, as an exporting manufacturing economy, was perfectly content for it to be so, as it made their goods cheaper for the rest of the world to buy. But when panic and fear gripped the market, and traders started to get out of their carry positions, it meant that they were selling everything else and buying back the yen. More buyers meant fewer yen. More demand on less yen meant higher prices. So the yen began appreciating like a rocket, especially against the dollar. Was it fundamentally more sound? Was it an interest rate acceleration that propelled it? Not at all. Just as there was no real reason for the U.S. dollar to be at 123.50 during the middle of 2007, there was also no economic rationale for the yen to be at 88.00 either. As the world was flooded with euros, pounds, Aussies and kiwis, the yen was forced higher and higher. The money flows were essentially a one- way street, and the yen could only go in a single direction: up. But now that the vast majority of these trades are unwound, and the money flows are subsiding in this trade, the fundamentals are again reasserting themselves. Japan's economic condition is considerably weaker than that of the United States, and it appears that there is little the country can do about it. Printing money has not worked in the past, and it is not likely to start working now. Perhaps world demand for their goods will increase. It is doubtful, but even so, there is nothing that they can do to alter that factor either. Finally, in a world where no one is buying, trying to change from a manufacturing/exporting economy to an economy that favors domestic consumption does not happen overnight. Regards, |
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