Britannia Radio

Friday, April 24, 2009 The feds are trying the old 'hair of the dog' technique... Trillions spent to stop speculators from getting what they deserve... The feds have so many pockets to pick - and so little time... Bill Bonner on the adulterated mess that is Argentina...and more! Rabid with Debt by Bill Bonner Buenos Aires, Argentina "How do you feel now?" asked a reporter for a local investment magazine. "I mean, you're a contrarian...and you were right about so much?" "Not exactly," we explained. "Yes, we saw the problem coming. And we expected the government would do all the wrong things - which it has. But we never imagined that they'd do so many stupid things all at once." There are only two examples from modern history of depressions such as this - the '30s in America and the '90s in Japan. Both times, the governments did stupid things. But this time, the U.S. government has outdone them all. They've committed $13 trillion to programs that make no sense theoretically...and have never worked when they've been tried. If you'll recall, the dog that bit the world economy was rabid with debt. The feds are trying the old 'hair of the dog' technique. But they've rounded up every mangy cur and stray bitch in the country. And now they're adding debt to the world economy at a much faster rate than ever in history. Of course, as feral economists, we love it. We never thought we'd see such a thing. Gone are the mealy-mouthed reservations of cautious economists. Gone are the hesitant...hedged...halfway measures. They're pulling out on the stops. It's the pedal to the metal...it's hell for leather... What a bold experiment! What a brave undertaking! What a crackpot thing to do! They must think the planet is under attack from aliens. It's as if the survival of the human race were at stake. Nearly the entire output of the largest economy on the planet for an entire year - debt, not savings - is being spent to...to...to...well...to do what? To try to stop the speculators from getting what they deserve! But wait...it gets even madder. Of course, if you put food out in the alley, it's bound to attract rats. Not surprising then, that the government's bailout cash is giving rise to an astonishing number of new fraud and money laundering accusations. The complex nature of the bailout program makes it "inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering," says an internal government report. "You don't need an entirely corrupt institution to pull one of these schemes off," said an expert. "You only need a few corrupt managers whose compensation may be tied to the performance of these assets in order to effectively pull off a collusion or a kickback scheme." But don't worry. The feds are on the case. They're said to be investigating. Just the way they did with Bernie Madoff. And who knows? Maybe the crooks will tell their families...and maybe the sons and daughters will turn them in, just like they did with Bernie. There are always a few rotten apples in every barrel. But from here at The Daily Reckoning's South American headquarters in Buenos Aires they all look brown to us. Even Business Week magazine opines that the whole bailout program is nothing more than a scheme to pick the pockets of the nation's retirees in order to give the money to rich bankers. "Monday afternoon, Goldman Sachs (GS) reported much larger than expected first-quarter profits on the heels of the strong earnings Wells Fargo (WFC) reported last week. "No one should be surprised. "The Fed has permitted the banks and financial houses to park vast sums of unmarketable paper on its books - securities made nearly worthless by the misjudgment and avarice of bankers. In return, the Fed has provided these paragons of finance with fresh, cheap funds to lend at healthy rates on credit cards, auto loans, and even mortgages. "While the Fed cuts the banks slack, the bankers are busy turning the screws on their debtors by raising credit card rates and fees, and harassing distressed borrowers with all the zeal the Roman army displayed sacking Palestine. "It takes good banking skills to borrow at 3%, lend at 5%, and make a profit. It takes much less business acumen to borrow at 2%, lend at 5%, and make a profit - which is exactly what has happened. The extra fees are just gravy. "This all comes at a cost to someone - America's elderly. "Many retirees depend on interest from certificates of deposit. Those rates are down dramatically and as CDs expire, retirees are compelled to reinvest their savings at lower rates and live on less income. They can take comfort that their sacrifices are helping pay off Wall Street's losses from the lavish bonuses that were paid bankers - for example, the $70.3 million Goldman doled out to CEO Lloyd Blankfein in 2007." We don't envy the feds. So many pockets to pick...so little time. Make sure you aren't among those who find themselves bled dry by the government's bailouts. You don't have to be a victim of government shenanigans - learn how to build your own 'personal bailout'. We have all the resources you need to get started. See the free report here. Now, we turn to Addison with a look at China's recent gold accumulation: "As we've been suspecting, the Chinese have been accumulating gold, slowly but surely." Writes Addison in today's 5 Minute Forecast. "They made the announcement this morning. Really, what would you do if you were sitting on $1.9 trillion in foreign reserves - more than half of it minted in U.S. dollars? "The State Administration of Foreign Exchange says China's reserves now total 1054 metric tons - up from 600 in 2003. If you're keeping score at home, that's a 76% increase in 5 years. "These new numbers place China fifth among nations that disclose their gold holdings - just ahead of Switzerland. "Given pronouncements made by premier Wen leading up to the G20 meeting last month, you can count on them to pick up a fair share of the $12 billion the International Monetary Fund (IMF) plans to sell this year." Each weekday, Addison brings readers 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. The 5 is free to subscribers of our paid publications, including the newly revamped Richebächer Letter. We know many of our dear readers heeded the Good Doctor's invaluable insights and warnings throughout the years - and your portfolios were certainly the better for it. This is why, in his honor, we've formed a brand new 'wealth protection' society: The Richebächer Society. This alliance is for the individually ambitious and financially responsible, the informed and the disciplined, those who know what it is to make one's own opportunity. If you would like to join this elite group of investors, please click here. And back to Bill for more memories of his Argentine adventure: "Macho..." Jorge shouted. "Alto!" "Macho" was not the right thing to be during the roundup season. It was like being long banks in September of 2008; you were going to get killed. "If ever you are in the sluices," we warned Elizabeth, "and they say 'Alto!' you should make a run for it." "Macho" means male. And on a cattle ranch, male animals are few. The ratio is one bull per 20 cows. The finest of the young males are spared...and destined to a life of procreation. The rest get sent "alto" - to the upper field...and then to the slaughterhouse (usually after being fattened up a bit before they get there). We brought about 400 cattle over the pass from Compuel. As far as we know, only three died. One calf made it all the way to the corral down at the ranch and then fell down. We left it alone on the ground...hoping it would get back on its feet. It never did. "There was something wrong with it before we left," Jorge warned. The vaqueros would normally cut up a fallen calf and have it for dinner. This one, they didn't dare eat. The other two dead cows died of wounds inflected by the vaqueros themselves. One - a fat young black steer - was singled out of early retirement...it was the quest of honor at a barbecue at the ranch house. The other was cut up by the vaqueros and portioned out between them. We saw it when we headed back up the hill to the house at lunchtime. It was on its back and on the ground... Three vaqueros were working on it. Its hide had already been cut off. Even from the head. Otherwise, the animal was still intact. Pedro was beginning to cut the head off with a saw as we passed. Later in the day, the skinned head, with horns, sat on the wall like a devil's head. The vaqueros made the sign of the crucifix when they walked in front of it. Every once in a while, the bulls would begin pushing against each other. Once they got into such a squabble they broke through the main gate. Another time, a huge bull charged where we were working. All of us jumped the fence or climbed the sluice to get away. Then, we got back to work... "Macho...alto!" "Hembra...bajo." (Female...to the lower paddock.) Jorge judged every animal. As each animal got stuck in the jaws of the sepa, a whole team got to work. One of the vaqueros injected it against brucellosis. Another gave it an anti-parasite medicine. Cosimir, a young man wearing a red trucker's cap, put a pair of tongs in its nose and gave a tug...forcing open its mouth so we could look at the teeth. We watched Cosimir's face...intent on his work; each time he pulled on the tongs, his own mouth opened...his tongue went out to the side. "Sin dientes...alto." (No teeth...upper paddock.) "Llena boca...bajo." (All her teeth...lower paddock.) Each cow was also treated to an ear tag and an earmark. Each yellow plastic tag has a number, so the animal can be identified and recorded. The tags are punctured through the ears like rings. Then, a v-shaped cut is made in the ear too - further identifying the cow as one of ours. The cows kicked and bawled. But your editor had already closed the gate behind them. And Pedro had closed the sepa on their necks. They were stuck until we were finished with them. Young macho calves were singled out for special torture. Once the injections had been made, ears cut and pierced, a rawhide rope was put around their necks. They were dragged into a small paddock next to the sepa. Then, they were held down by two vaqueros while the third cut off their testicles. The first day, Edward, 15, wearing boots and a cowboy hat, learned to lasso the young calves. He was soon put to work helping Omar castrate the machos: "I just held them down. Omar asked if I wanted to cut off their...well...you-know- what...but I didn't want to do it. He was using a Swiss Army knife. I thought they used rubber bands. That's what they use in France. But Omar says the rubber bands are not always successful. Sometimes they fall off. This way, there's no doubt about it." Over the three days, Edward helped castrate dozens of young calves. We finished with the cows from Compuel on the first day. By late afternoon, we were checking the horizon for signs of the second group. For while we were working on the thin cows from the high country, other vaqueros were on out the range rounding up hundreds more of them. Towards the north, we saw a cloud of dust. "There they are. They'll be here in about an hour," Jorge calculated. It was already nearly 6:30 pm. The sun was going down. Soon, it would be dark. "We'll get them into the big paddock...and work on them tomorrow," said Jorge. The roundup lasted three long days. From sun-up to sunset, the dust rose up from the corral, along with the yells of the cowhands - including your editor's. Without a break...the cowboys drove the cows into the sluices...the bright sun beat down...the injections...the frightened cows...the fighting bulls... By the time the sun set behind the mountain in the West, your editor was worn out. He could barely drag himself back up the hill to the 'sala' - the main ranch house. But as he was going up the hill, he noticed, and not for the first time, what a beautiful place it was. It's autumn in the Southern Hemisphere; the alamo trees have turned golden. Water is running in the streams. The grass is green. The sky is blue. "I think what makes this place so stunning are the vivid colors," said Elizabeth. "That...and the majesty of the setting." One on side, in the distance, is the snow-covered Nevada de Cachi. At the other, snow tops the Lomo de Negra too. Between them is a broad valley with cattle, vineyards, pimento, llama, barren desert, stones, cactus, and dry moonscape rock formations as well as dense, bottomland vegetation. More memories on Monday... Keep reading for today's essay, below. --------------------- Special Offer --------------------------- Use This 2,309-Year-Old Edge To Build a Fast Fortune 150% gains in just 14 days, plus 168.75% gains in only 7 days are common for this ancient strategy that still works like gangbusters even in today's market... Better yet, it doesn't require any special knowledge or skills on your part. In fact, you can get started with Edge gains in as few as 3 minutes... To learn all the details, and to start building your own fortune, read on... --------------------------------------------------------------- The Daily Reckoning PRESENTS: When Argentina cut the peso loose from the dollar, foreign investors fled and the economy collapsed upon itself. Below, Bill Bonner explores the thinking behind this decision. Read on... Cry All You Want by Bill Bonner Buenos Aires, Argentina We recall a meeting, back in the '90s, with Mr. Carlos Menem. "Can investors rely on Argentina's commitment to keep the dollar and the peso linked together?" we asked. "Absolutely," replied Argentina's president. "We would never give up the peso-dollar link. It is too important to our economy. Without it foreign investors would leave and the economy would collapse." Five years later, Argentina cut the peso loose from the dollar. Foreign investors fled and the economy collapsed. What lesson can you draw from this narrow set of facts? If you say, 'politicians can't be trusted,' you are merely stating an obvious, universal truth, like 'public toilets stink.' But do they stink more on the pampas than, say, in London or New York? That is the question before us. We begin by posing other leading questions: can investors depend on the money custodians north of the Rio Grande more than they could depend on those south of the Rio Plata? Why do people do things they oughtn't do - because they are stupid or because they are just bad? Today, Argentina is a mess. But it is an adulterated mess. The restaurants in Buenos Aires are still full. The beef is tasty. The women are pretty. The weather is nice. But so distrustful of Argentina's public finances are investors that you could earn as much as 70% yield on a peso bond - the implied yield at today's heavily discounted prices. If everything goes according to plan, you will get your money. But the 70% yield is a measure of how often things don't go according to the plan. Investors here are used it. It is as if they got on a flight to Sao Paulo and ended up in Cordova or Brisbane. Or they turned on the hot water and got molasses. "When a big guy in a dark alley says, 'I don’t want to hurt you...' it is time to run. But the Argentine parliament offered a similar assurance to citizens in 2001..." It is these adulterations that make an investor's lot so treacherous. Argentina's main source of revenue is agriculture. Farmers are blessed by nature and cursed by politics. Nature gives them the richest, flattest, best-watered dirt in the world. With these advantages under their feet, a fair sun overhead, and a hugely expanding population around the world, agriculture on the pampas should be as easy as rolling tourists in Buenos Aires or selling stolen autos in the ghetto. Instead, the farmers go broke. Why? Math...and popular democracy. For every lonely hick on the pampas, there are 10 voters in the big city eager for other peoples' money. That's why farmers pay 40% export tax on their products to the feds in Buenos Aires and as much as 30% more to their local governments. By the time the tax collectors are finished with them, they are out of business. But even at this level of public larceny, the feds are still faced with a crisis. The country doesn't have the problems of North America or England. It was spared the credit crunch by its own incompetence and the collective misjudgment of lenders all over the world. Instead of giving credit to people with little of it, they lent to people with too much. The problem here is not the credit crunch, it is a cash crunch. Local economists say the trouble will begin in late June when the government won't be able to pay salaries. Then, the country may enter another crisis - similar to what it went through in the period of 1999 through 2002. In anticipation, the ruling husband and wife team, the Kirchners, have pushed the elections forward 4 months, hoping to be re- elected before the voters catch on. When a big guy in a dark alley says, "I don't want to hurt you..." it is time to run. But the Argentine parliament offered a similar assurance to citizens in 2001. A law was passed guaranteeing that bank deposits would be protected. A few days later, the bankers revealed that they lacked the funds necessary to keep up with depositors' withdrawals. Meanwhile, the government needed to refinance its debt...but investors, growing wary, demanded higher and higher rates. In the end, depositors and lenders were hurt after all. The government froze bank accounts and defaulted on its foreign debt. By the time the accounts thawed out, the peso had been cut loose from the dollar and both lenders and savers had lost about two-thirds of their money. There are times, we conclude, when despite the best of intentions, people do naughty things. Carlos Menem and Ferdnando De la Rua are probably no dumber or badder than Barack Obama and Gordon Brown. Both might have preferred not to freeze accounts or to devalue the peso. Likewise, Barack Obama and Gordon Brown might rather keep their currencies strong...reduce their fiscal deficits, honor their nations' commitments at home and abroad, and join the community of saints. Maybe they will succeed in these things. But what trapped Menem and De La Rua was the relentless logic of debt and popular democracy. Mr. Menem fixed the peso by gluing it to the dollar. But there were other things that needed glue too. The urban voters, for example. They still needed their fixes of bread and circuses. And those cost money. Mr. De la Rua's deficits ran to 5% of GDP. The weight of them finally came down on the gauchos' necks like a guillotine. But 5% seems like a problem from another era. In France, the fiscal deficit for 2009 is expected to be over 8%. In Britain, it is nearly 10%. And in America, the feds' excess spending will equal 13% of GDP. As far as we know, Mr. Obama speaks no Spanish. Whatever mischief is forced upon him, it will have to be declared in English. Enjoy your weekend, Bill Bonner The Daily Reckoning P.S. 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 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.