The Fix is In at AIG by Bill Bonner Paris, France "Stone him to death!" No kidding. Dilapidation may be coming back into style. That's what one of Madoff's victims proposed in front of the courthouse. We're in the "anger" stage, writes John Authers in the Financial Times. No more denial...now, people want blood. After the South Sea Bubble blew up, in the 18th century, the Walpole government was faced with similar anger. It seized the property of the company's directors and used it to pay off the victims. Then, a resolution was proposed in Parliament by which the bankers involved in the scandal would be tied up in sacks filled with snakes and tipped into the Thames River. So far, Congress has not proposed stoning Fannie Mae or sending AIG directors to the bottom of the Potomac. But it must be warming to the idea. "Congress is looking for heads to cut off," says the French press. One member of Congress - Senator Grassley - retreated from his call for AIG executives to commit suicide. It would be all right with him if they just showed a little contrition, he says now. But all over the world - and especially in Washington DC - the mobs are out in the streets with liquor on their breath and ropes in their hands. The proximate cause of this anger is the bonuses paid out by AIG - after the company got a taxpayer bailout of $170 billion. According to the New York Attorney General, 73 AIG execs got $1 million + bonus checks. "Livid Democrats demand AIG return bailout bonuses," says a headline in today's financial press. We hope you realize, dear reader, that all of this, of course, is just a cynical sideshow. It's a distraction...a self-indulgent tantrum; the real story lies elsewhere...which we'll come to in a minute. First, the rally is still going on. Stocks have recovered about 10% of their losses so far. And yesterday, the Dow rose another 178 points. Don't forget, this is not a new bull market. It is a bear trap...a rebound in an on-going bear market. After this phase of anger passes...people will probably feel that the worst is behind us. They'll squint and see a "light at the end of the tunnel." Later on, they'll realize that the light is an on-coming freight train! Yesterday's up-move was traced to a surprising report from the housing industry. "Housing starts unexpectedly increase on condos," explains a Bloomberg headline. And today, the Fed meets. Analysts are betting that the Fed will begin more "massive buying" of assets - especially U.S. Treasury bonds - in order to get more money into the system. All the news is not favorable, of course. Auto loan delinquency rates are running 9% ahead of last year. Thornburg Mortgage is apparently headed towards Chapter 11. Caterpillar says it will lay off more than 2,000 workers; less construction means less need for heavy equipment. And AMEX says even its best customers are falling behind on their bills. But let's go back to into the theatre and take our seats: The politicians give money to their pet projects...and then pretend to be outraged when the companies use it to pay their bills. Among their bills were billions in payments to other companies -notably Goldman Sachs, former employer and major source of wealth for the man who designed the bailout, Hank Paulson - and thousands of employment contracts with AIG's salarymen. What did the feds think when they gave AIG the money? That they were donating to charity? No, dear reader...the fix was in. And it's still in. And while the press and politicians huff about a few million in bonuses to AIG's hacks, billions more is being paid out to AIG's counterparties. It's not only a waste of money, says our old friend Jim Rogers, the bailouts actually retard a recovery. How so? In the obvious way. Like any kind of subsidy or welfare payment, they invite people to keep doing what they've been doing - no matter how unproductive it is. Instead of letting AIG and its bosses and counterparties go broke, the feds give the whole brain-dead system a transfusion of taxpayers' money. So the executives don't have to go out and find other work. And AIG can continue peddling its mortgage insurance. And its counterparties, too, are protected from their mistakes. Of course, the government doesn't want to raise taxes in order to keep these incompetents in business, so it bleeds the money from the next generation of taxpayers - who aren't around to protest. Instead of letting the debt be reduced by the natural process of deflationary default, in other words, the government adds more debt. (As an aside, it wouldn't hurt for you to be protected against these government shenanigans - why not set up your own personal bailout? Learn how here.) Already, as we pointed out yesterday, there's about $20 trillion worth of debt debris that must be brushed aside before the economy can begin rebuilding on a solid foundation. At the present rate of savings, it will take about 45 years to do the job. Which suggests to us that it ain't gonna happen. We don't think the feds can sit still that long. And they're not sitting still now. In fact, they're adding to the public debt faster than the private debt is getting paid down. By our calculations, the private economy is paying off about $420 billion - net - per year. (Just based on higher rates of saving...not counting write-downs, and defaults.) But the federal deficit is expected to run to $2 trillion! In other words, the feds are adding debt 4 times faster than the private sector is paying it down. This is not a formula for putting this problem behind us. Instead, it just pushes it ahead. Now, we turn to Baltimore, to see what Addison has for us... "'We do want foreign capital to come in here and we want private capital,' our favorite stammering Rep, Barney Frank said yesterday. "After emerging from a House Financial Services Committee meeting," writes Addison in today's issue of The 5 Min. Forecast, "Frank found a few mics to spit into... and the off the cuff pontifications proffered fourth. This was our favorite: "'We just had the Chinese raising the specter of not buying our Treasuries. Well, that would be troubling. I think they're bluffing, personally.' "Ha! "Bluffing? We thought bluffing meant you were acting strong despite a lousy hand... like this:
"This game is played with the cards up...and China's holding all aces." Addison writes every day for 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 Penny Stock Fortunes, whose CXS Money-Multiplier Strategy could turn $200 into $1 million - no joke. Learn how you can try this service out for six months by clicking here. Back to Bill, in the land of wine and cheese... Newsweek magazine offers bad advice: "Stop Saving Now!" We didn't read the magazine's account; giving the editors the benefit of the doubt, we will guess they were being ironic. All over the nation - and perhaps the world - people are cutting back, making do, and doing without. "Frugal families doing own chores," says one headline. "Beat the recession by growing your own vegetables," says another. And a popular new website, called Mint.com, is a runaway success; it helps people plan their budgets and find ways to spend less money. All of this financial rectitude is having a deleterious effect on the economy. The old economists called it the 'paradox of thrift.' The man who plants his own vegetables spends less with the green grocer. Then, the grocer spends less with his suppliers. Then the suppliers spend less with their suppliers. And so forth. Soon, everyone is spending less money...and you have a depression. So, a civic-minded reader might think he should step up his shopping - if he were an idiot. He might think we'd all be better off if he spent more money...and everyone else did the same. But that's not how it works. We're not all better off when we all do something stupid. We're only better off when we all do something smart. And when people have spent too much money - and gone too far into debt - the smart thing to do is to spend less, not more. *** Income-on-Demand's Wayne Burritt on last week's market bounce: "As you can see from this chart of the S&P 500 - a good gauge of the broader U.S. stock market - last week's bounce has ignited a mini-rally that is just plain joy to see. In fact, from a low last Monday, the S&P 500 has surged a mind-blowing 15%. Wow!"
"Even better: The market's latest action snapped a series of down days that had just about everyone running ragged, me included. "The market also bounced on higher volume, another big plus for a straightforward reason: When up-market moves are accompanied by higher- than-average volume, it's a clear sign that bullish investors are attracted by the positive market action and are willing to buy shares to prove it. "But that's not all. Last week's bounce was not just a big volume day: It was the highest-volume day out of the previous seven trading days. I have to go all the way back to the bounce of late November to find a similar surge in buying volume. "Significant? You bet. When the market bounced late last November, it immediately began a run that didn't end until the S&P 500 hit 944 on Jan. 6 of this year. From the November low of 741, that run marked a massive 203-point surge. "Translation: A bounce similar to last week's ushered in a whopping 27% upside bullish run on the S&P 500 just a few months ago. Given that we've moved 15% in just a matter of days, this run could best last November's by a long shot. "Now, I'm not about to say that it's time to pop open the champagne. But facts are facts, and current market action is certainly a step in the right direction." For more from Wayne on how to play this bounce, see the latest issue of Income-on-Demand. That's going to do it for us today. Keep reading for today's guest essay from Bill Jenkins who will explain how he sees signs of socialism more and more in today's headlines. Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- March 9, 2009: A Day That Will Go Down in History Last week, science once again became a national priority...and this is just the tip of the iceberg. If you play this change right, you could quickly accumulate three generations of wealth. Real wealth. Wealth the markets can't touch. What you are about to read is so lucrative, we can only offer it to the first 558 people who respond...and we've already filled most of these spots! Don't let this once-in-a-lifetime opportunity pass you by. Read the full report here. --------------------------------------------------------------- | |||
| The Daily Reckoning Presents: Bill Jenkins has been scoping out the headlines lately...and noticingthe tendrils of socialism grasping more firmly around our society. Below, he looks at why this widespread push to socialism hasn't yet worked. Read on... The Problem with Socialism by Bill Jenkins Havre de Grace, Maryland As I read the headlines, I can't help but see the tendrils of socialism grasping more and more very day. And it always brings to mind my uncle, Wm. R. Duvall. When I was a boy, my uncle was the richest man I knew. He was fond of saying, ""There are three things you need to get rich: time, leverage and other people's money." I didn't know what it meant at the time, but when I got older, I wanted to hear how he made it big "I always knew I would be rich," he said. "Even when I didn't have two nickels to rub together." He started out as a barber, renting a chair in another man's shop for $20 a week. "10 heads," he said, "that's all I needed. After that, every dollar was mine." "At that point," he remarked, "all I had was time. I was making money, but I wasn't getting rich." It finally occurred to him that a real way to get ahead in barbering was to have his own shop and rent out his own chairs to other guys who were getting started in the barbering business. So he looked high and low until he found a dumpy old place where he could afford the rent, then spent his nights and weekends fixing it up. In a couple months, he had it ready and went to work. He rented out the five chairs in the shop while he still worked at the same chair he had rented for several years. "It seemed like a risky idea to leave the spot where my customers were used to coming," he told me. Unfortunately, after a year, his landlord realized how good the business was and forced my uncle out. "What a setback," he said. "All these customers and nowhere to go." His first thought was to look for a new place to rent. But then he was hit with a stroke of genius: "Own my own place, and I can't get kicked out again!" It only took him a handful of days to locate what would become his goldmine: 3 acres of land with a corner shop and two houses. He set out his shingle in the shop, bought a trailer for $150 and moved it onto the back of the property, then rented the two little houses. He had talked the owners into selling him the whole ball of wax with 100% financing over 10 years. After he got his extra chairs rented out and moved another trailer onto the property, he was flush with cash. In the end, the property was paid off in eight years. But in the meantime he dabbled in other real estate, left the country and bought a house in Cancun where he lived as a tour guide. Years later he came back and bought a beachfront house on a local river, where he lived until just recently. "Everybody gets the same amount of time, Billy," he would often say. "But that's not enough to get you to the top of the heap." His experience with collecting the rent from four other barbers showed him the power of leverage. His no-money-down real estate deal taught him about other people's money. And I imagine he probably watched a boatload of late-night infomercials that helped formulate his "Wealth Outline." I have come to find that what he said (even though it was completely borrowed and not original) held a great deal of truth. But up to this point, you're probably wondering what in the world this has to do with socialism. Seems like a pretty entrepreneurial story. Right? You are correct. Seeing the proper working of a man and his wealth, well, that makes a counterfeit all the more easily spotted. But we could add to that story our own little adventure in currency options. The same three principles are at work. Time, leverage and other peoples' money. But the path to wealth through socialism is not so clearly seen. As a matter of fact, it is more like a path to nowhere. Because socialism denies the capitalistic importance of these four pillars: wealth, time, leverage and other people's money. Instead, they corrupt them to their own destructive ends. Any socialist will tell you wealth is important. As a matter of fact, that is the big carrot held out to entice people to follow such a muddleheaded plan. They will also tell you that time is important. Not because you need it to build wealth, but because you need it to spend wealth. In other words, the here-and-now is what is of the utmost importance. And you must be rich now, in order to enjoy what time you have here! Leverage is also important to the socialist. As poor men manage their wealth very poorly (but seem to know instinctively how to manage their ballot), it is imperative to leverage out the efforts of the poor man into large voting blocks. One poor man cannot get a candidate into office. But 100,000 of them, that's a horse of a different color. Finally, we have the socialist's take on other people's money. They love it. They covet it. And they'll do anything to get it. Obviously it is impossible to enrich the poor men who voted for them with the candidate's own money. This is why other people's money is so critically important. Unfortunately for them, they have forgotten the words of U.K. Prime Minister Margaret Thatcher, who said, "The problem with socialism is that you eventually run out of other people's money." Whether she actually believed that or not is a question for another day. But it still has the ring of an eternal truth. My uncle's understanding of other people's money was that it could be used to make money for himself. And he was right. But here is a key difference. The "other people" in my uncle's life lent him that money VOLUNTARILY, not because they were coerced. And they expected a real cash return on their funds, not just the "warm feeling" that comes from being forced to help an indolent person by way of government-run charity! Because socialists reward those who treat money poorly and penalize those who treat money well, the system will never work. True, advocates of wealth redistribution can point to circumstances where it did "work," and where it does "work" from time to time (if only for a limited time). But I can also point to circumstances where the laws of gravity are temporarily suspended, such as when I get on a plane. But even God will not help me if I just assume because I can fly for a few hours from here to there that I can fly forever. At some point my plane has to come back to the ground. At some point the laws of gravity will resume their authority, and I will realize that my flight and my violation of gravity's laws are coming to an end.
Capitalism is a law established by God, just like gravity. Its foundation is in the 9th Commandment, "Thou shalt not covet." I am never free to desire to take what is my neighbor's. Not his wife. Not his house. Not his lands. Not his possessions. I can trade him for them if I have something he wants more than what he has. (Except his wife, of course...) I can buy them from him if my offer is right. But I cannot steal (or vote) away his property into my account. That is not wealth creation; it is merely re-distribution. God condemns it, and He will not be mocked by those who think that they can make socialism "fly" forever. Eventually, they will run out of other people's money. And when they do, their plane will come crashing to the ground. One more thing. All around us, we see the widespread push toward more socialism, even when it hasn't yet worked. How could that be? To explain what we are seeing currently, we must acknowledge that if the socialists manage to escape complete annihilation in the plane that they wreck, they will begin a campaign of propaganda, reminding the people that if only the free market force of gravity hadn't gotten involved, they would have been successful. And that all they need is more fuel (other people's money) to get the thing going again. And, of course, the people will see the wisdom of their case, and will vote for more fuel or parts or anything, just so long as we don't let those stupid Gravitarians have control of the cockpit. More groundbreaking efforts will be tried, such as debasing the fuel, so that we have more of it. Sure, if you add five gallons of water to five gallons of gasoline you get 10 gallons... Certainly we can go further on twice as much fuel, right? Yeah, Right. Whatever you say, Comrade. Meanwhile, anybody who knows better had better be preparing a parachute. As the major nations of the world move deeper and deeper into the "Pit of Despair" (to borrow a good term from The Princess Bride), their solutions will work less and less. Each effort will become more and more futile. Perhaps then we will learn our lessons. If not we will be doomed to repeat them. All that being said, we did have a big news item from last week. Chinese Premier Wen Jiabao fired a shot across the bow of the Good Ship USS Treasury. It was not just a request, and it was not couched in the tactfulness of political diplomats. China warned the United States to "Keep its word." Seems that the Moral Empire of America has a hard time with the bad habits of lying and stealing. And now the rest of the world knows it. And now we know that the Chinese know it. And we know that we need their lending to keep up our little charade. And they know we need their lending. Now they are telling us, do not fool with our investments. China has options of where to put their money. What options do we have? How many nations can lend us the amounts we are consuming? China has options. We don't. "The borrower is servant to the lender." The world is changing... and we will keep looking for opportunities to profit from it. |
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