Britannia Radio

Tuesday, April 28, 2009 GM is being taken over by the government; we bid adieu to Pontiac... Major epidemics come along as often as new imperial currencies... Need money? Just take it from accounts in the country's banks... Dan Denning on what we'll do when the money runs out...and more! Shifting Toward an Un-free Market by Bill Bonner Paris, France Little GTO, you're really lookin' fine Three deuces and a four-speed and a 389 Listen to her tachin' up now, listen to her why-ee-eye-ine C'mon and turn it on, wind it up, blow it out GTO Wa-wa, (mixed with "Yeah, yeah, little GTO") wa, wa, wa, wa, wa, wa (mixed with "Yeah, yeah, little GTO") Wa-wa, (mixed with "Yeah, yeah, little GTO") wa, wa, wa, wa, wa, wa (mixed with "Yeah, yeah, little GTO") Wa-wa (mixed with "Ahhh, little GTO") wa, wa, wa, wa, wa, wa You oughta see her on a road course or a quarter mile This little modified Pon-Pon has got plenty of style She beats the gassers and the rail jobs, really drives 'em why-eye-ild C'mon and turn it on, wind it up, blow it out GTO - Ronnie and the Daytonas Pontiac is going out of business after 82 years. And General Motors is being taken over by the government. Here at The Daily Reckoning's office in Paris, we are delighted. It's like being alive when extra-terrestrials finally come calling. Or when the Pope becomes a Mormon. We're getting to see things we never thought we'd see...amazing things. It must have been about 1960. Our father traded in the old Chevy for a Pontiac. It was an old one - maybe it was a '54 or a '56. But it was heavier, more solidly built, and quieter than the Chevrolet. A few years later, boys from better families bought muscled-up Pontiac GTOs and Grand Prix. We remember, when we graduated from high school, a friend bought a GTO. What a thrill it was just to go for a ride...and turn up the radio! And then, it must have been in the early '70s, our old friend Doug Casey drove up in a shiny Pontiac Firebird. We still remember the sound of it...deep, resonant...a baritone of an automobile; it probably sucked an entire oil well dry each time it drove up to the pump. Global warming on wheels. But now... Adieu, Pontiac... And we can probably say goodbye to GM too. "US to take majority GM stake in revamp," says the headline in today's Financial Times. How about that? America's largest car company is going to be state- owned...nationalized...presided over by the federal bureaucrats. It's just a part of the shift away from the free market and towards an un-free market. Free market capitalism has failed, say the pundits. Let's give the feds a chance. Even Henry Kaufman, writing in today's Financial Times, says that the Fed's "libertarian dogma" prevented it from controlling the banks properly. But the Fed is hardly a libertarian organization. It's a banking cartel. As a cartel, it looks out for its member banks - and doesn't hesitate to use state power to do so. There is nothing libertarian about it...and no dogma associated with it - except as Greenspan's eyewash - that is even vaguely libertarian. The Fed colluded with member banks to fix interest rates. In so doing, it helped create the biggest bubble in credit the world had ever seen. It was a terrible thing for the average fellow - who was lured deep into debt by rising house prices and cheap credit. But it was a great thing for the members of the Federal Reserve cartel. Profits in the financial sector - notably, the big Wall Street investment banks - soared. But bankers are vulnerable to too much of a good thing - just like everyone else. Soon, they made the classic Wall Street mistake - they came to believe their own hype. Not only did they gin up trillions of dollars' worth of preposterous financial instruments...they actually bought these debt bombs from each other. This posed a grave danger to the nation's economy...and to the banking system. Henry Kaufman claims the regulators dropped the ball because believed they put too much faith in the free market. But the regulators were little more than front men for the banks themselves. After Alan Greenspan came Henry Paulson as Secretary of the Treasury. He was probably still replying to messages at his old address - HPaulson@goldman.com - when the crisis began. And the head of the New York Fed - now, U.S. Treasury Secretary Tim Geithner - was elected to his post by the very institutions he was supposed to be overseeing. Neither of them was about to stop the party; they and their friends were having too much fun. And now, the feds are taking over control of America's largest auto business... "Consider the risk of General Motors" on the economy, says Strategic Short Report's Dan Amoss. "If it goes into Chapter 11 bankruptcy, it has the potential to be very disruptive to the economy, despite administration plans for a 'surgical' bankruptcy. Bankruptcies are about as predictable as the weather on the Gulf of Mexico during hurricane season, especially in this type of economy." As Dan points out below, the rally is "getting tired"...but that doesn't mean there aren't opportunities to make money. When stocks go down in a bear market, far too many people don't realize that there can be plenty of investing upsides as well. Be sure to read Dan's special report, which will show you how to make some major gains - even after the stock market crashes. Read it here. Over to Addison, for news from the housing market: "Only in America, only in 2009, can an annual 18.6% decline in home prices signal 'stabilization' in the housing market," writes Addison in today's issue of The 5 Min. Forecast. "Just out this morning is the latest Case-Shiller index of housing prices in major U.S. metro areas. The annual 18.6% plunge in February is a teensy improvement from a record 19.0% drop the month before. It's the first time since the index started falling in early 2007 that it did not set a record year-over-year decline." "The numbers are in line with economists' expectations. All 20 metro areas measured by the index fell during the last year. In the case of Phoenix, Las Vegas, and San Francisco, those drops were more than 30%. "Overall, home prices, on average, are now back to where they were in 2003." The news from the housing market may be seen as 'stable' right now...but wait until the second wave of loan resets happens in 2011. If you thought the first wave of subprime defaults was bad - just wait. Millions of consumers will watch their finances go over a cliff...and more bank losses will drag down the entire economy. But you don't have to be among the millions of Americans that are affected by the coming downturn...there is still time to protect yourself and your assets. The newly revamped Richebächer Letter's latest special report shows you how to shield yourself from the coming meltdown - while managing to turn a profit at the same time. See it here. 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. And back to Bill, with more thoughts: Swine flu is in the headlines. They say 149 people have died of it in Mexico. Hardly a world-changing event so far, but epidemics have to begin somewhere. Governments are swinging into action. They're checking their stocks of vaccinations...and threatening to 'shut down' Mexico City. Major epidemics come along about as often as new imperial currencies. The French currency - the gold Louis - was the money of choice in the 18th century. In the 19th, it was the pound sterling. The U.S. dollar dominated the 20th century, it took over at about the same time as the Spanish Flu ran wild. The epidemic of 1918-1921 killed 30 million to 100 million people. It was the worst ever. But this flu seems to move too slowly to be a major threat. People are able to see it coming, and take precautions. The next major epidemic will probably move much faster. When you will see the TV news reporter drop dead in front of your eyes, you will know trouble is coming. Yesterday, the Dow fell 51 points. Oil stayed at $50. Gold lost $5 to close at $908. The mood of the market is fairly positive, at least as we hear it. The last few weeks have produced an upward trend on Wall Street. The press is reporting "early signs of a recovery." Of course, the crisis has to end sometime. But it seems much too early to us. Remember, this is a depression, not a recession. It is not a pause in an otherwise-healthy economic model. This time, the model itself is insolvent. Americans cannot continue going further and further into debt in order to provide huge bonuses for Wall Street and employment for China. It's over. Fini. Caput. It will take time to destroy the industries, investments and lifestyles that depended on the old model. And it will take even more time to find new ones. Corporate earnings this year are expected to come in 35% below last year. The insiders seem to realize that the game is over. They're selling into this rally - the highest level of insider selling in two years. As Strategic Short Report's Dan Amoss put it "the rally is getting tired." Zimbabwe, as long-suffering Dear Readers know, is a monetary pacesetter. It led the world in inflation - with a CPI estimated at 230 million percent. And then, it suddenly took the zeros off its currency - leading the world in deflation. The latest report from that benighted land tells us that the chief of the Zimbabwe central bank, Gideon Gono, has found even more novel ways to get his economy rolling. Ben Bernanke, are you paying attention? "Zimbabwe's central bank head admits robbing private bank accounts," says a headline. Need money? Just take it directly from accounts in the country's banks. Of course, thanks to Mr. Gono and his friends there isn't a lot of money in Zimbabwe's banks. Who would keep money in Zimbabwe's banks, unless they had to? Still, a few international aid agencies had significant accounts - which Mr. Gono cleaned out. He said he only did it because he had to, in order to keep the economy functioning. Besides, he's going to put the money back just as soon as Zimbabwe gets back on its feet. Finally, we cast a nostalgic look backwards at Argentina, where we spent our recent vacation. Newsweek reports that Buenos Aires seems untouched by the global financial meltdown: "Take the city of Buenos Aires, capital of an economy built on the export of food and leather, and acutely sensitive to downdrafts in global trade. The sprawling old neighborhood of Palermo and its subsections "Palermo Soho" and "Palermo Hollywood" see new clubs, bars and restaurants opening weekly. Hip spaces are filled nightly with the young and sleek, including young American and European expats with funds to spare." Until tomorrow, Bill Bonner The Daily Reckoning ---------------------- Special Offer ---------------------- The $2.5 Trillion Gorilla in the Room This is vital. Because, you see, a lot of Americans - and a lot of people in the rest of the world - are counting on credit-card carrying American shoppers to jumpstart the global economic engine all over again. But it isn't going to happen. And you don't want to bank your investments on the idea that it will. Or you'll risk even bigger losses than many Americans have suffered already. Here's how you can save yourself and boost your profits during the coming time bomb... -------------------------------------------------------- The Daily Reckoning PRESENTS: People are desperate to see signs that the economy is on the road to recovery - and on the surface, things are looking up. But, as Dan Denning points out, below, the real action is happening behind the scenes...and eventually, the stock market is going to realize what is really occurring. Read on... What Happens When the Money Runs Out? by Dan Denning Melbourne, Australia In the markets, all the really interesting action is happening behind the scenes. On the surface, things appeared to get better on Friday. In the U.S., Ford told investors that it lost $1.4 billion in the first quarter. Apparently this was less than analysts expected. The Dow closed up 1.48% and climbed back over 8,000. What a battler that Dow is. It's got nothing on the S&P 500 though. The S&P is up 28% in the last thirty-three trading days. It hasn't done anything like that since the 1930s. However the index did close down for the week. That broke a six-week run of gains. One more note about that. Four-week winning streaks of ten percent are more are generally followed by much smaller gains or losses over the next four weeks, according to the analysts at Bespoke Investment Group. Their research shows that in the four weeks following a four-week rally of 10% or more on the S&P, the index followed up with average gains of 1.87%. How about one more note about that. There were two four-week rallies of more than twenty percent, according to the same research. The S&P 500 surged 54.2% in just four weeks by early August of 1932. Over the next four weeks in went up another 30%. Then, in April of 1933, the index provided an encore to one four-week surge of 33.8% with another surge of 19.2%. So there you go. What we do we make of all that? Well, it shows you that even in the middle of the Great Depression, the market was capable of staging mammoth rallies that would tempt investors back in. No doubt those were extremely tradable rallies. But they were followed by lower lows once the forces of economic and earnings reality reasserted themselves on the collective mind of the market. This time will be different because it's always different. But if you're wondering if the stock market is flashing a recovery sign for the economy, you might want to take a look at insider selling. The insiders are selling this rally, according to Data by Maryland-based Washington Service. That outfit says the during the S&P's 28% climb from twelve-year lows on March 9th, CEOs, directors, and senior officers of U.S. corporations sold 8.3 times more stock than they bought. Not that there won't be others. But behind the scenes, other things are happening which are going to drag on stocks. One of those things is that many of the world's sovereign governments are in the process of going broke. Spain, Ireland, Greece, and Portugal have all had their sovereign credit ratings downgraded by the ratings agencies. These countries face different challenges like burst property bubbles, declining government tax revenues, and banking sectors hobbled by massive bad loans. But what they have in common is that their respective governments have responded to the crisis by ramping up borrowing to credit-rating ruinous levels. The scale of global borrowing plans is pretty breathtaking. And what you begin to wonder is a simple question: where is all the money going to come from? Or, to quote David Gray in "Nightblindness", "What we gonna do when the money runs out?" "The insiders are probably not paying attention to the first quarter earnings reports that are responsible for the current rally. They're looking at the rest of 2009 and probably planning for more layoffs. If they think the rally is over, it probably is." For example, the UK's Debt Management office, which issues bonds on behalf of the British government, says that British bond sales between now and 2013 will exceed £696 billion. The Guardian reports that it will be more like £815 billion, according to figures from Deutsche Bank. Do you think private investors are super excited to loan the British government money when the British economy is expected to contract by 3.5% this year? Under the budget revealed last week by Chancellor of the Exchequer Alistair Darling, the UK will borrow £175 billion this year alone, or about 12.5% of British GDP. Over the next five years, public sector debt would rise to 76% of British GDP from its current level of 46%. Gee. That is a lot of borrowing. Britain is a country drowning in debt. Adding more millstones around its neck would not seem to improve its chances of paying that debt down. You could pay it down by, say, generating national income from exports. S&P's ratings agency keeps track of the sovereign debt to income ratio. If a country exports a lot of finished goods or raw materials, the government benefits from tax and royalty revenues. These monies are used to service the sovereign debt. But if you're not generating large export revenues, then you find a big gaping hole in your budget where royalty and tax revenue should be. Maybe that's one reason Britain's new budget raises tax rates on high- income earnings from 40-50%. What you gonna do when the money runs out? If Britain's government thinks it can make up for disastrous public finances by raising taxes, it's probably making another in a long line of stupid mistakes. The high-income earners who would face the big tax increase are exactly the same people getting fired from their jobs in the City. This shows, once again, that building an entire national economy around high finance puts you in all sorts of trouble. But wait. Maybe the high-saving nations of the world will bridge the gap between British expectations and financial reality. We wouldn't count on it though. Remember the big hoopla from the G20 meeting in London when it was announced that the International Monetary Fund's funding would be tripled to $750 billion? That funding is desperately needed. The IMF itself reckons it will have to dole out some $187 billion in new loans to national governments just to ride the current phase of the global financial crisis. But a key piece of information was left missing in London. How would the IMF be funded? The G20 finance ministers met in Washington to sort that out. And the early indications are that the IMF will be funded by issuing bonds sold to high-saving nations. If this is true, it's a victory for the developing world and a defeat for the U.S. and Europe. The U.S. and Europe were both pushing for a direct cash injection funding method. In other words, they wanted China, Russia, Brazil, and India to use their foreign currency reserves to fund the IMF. But the BRICs batted that proposal away. So now the IMF plans to sell around $500 billion in bonds. They will be denominated in the quasi- currency the fund uses internally (the special drawing rights, or SDR that both Russia and China have floated as a possible new global reserve currency). How the bonds actually work still has to be sorted out. But the internal logic of the whole arrangement is now clear: creditors hold the whip hand. Debtors are going to get whipped. The balance of power in the global economy is clearly shifting from the borrowers and spenders towards the savers and producers. Advantage BRICs. Disadvantage Gordon Brown and Barack Obama and probably Kevin Rudd too. With the existing debt-to-GDP ratios in Britain and the U.K., we reckon it is going to be impossible to fund further expansions of financial bailout programs and welfare state programs without much higher interest rates (borrowing costs). You can avoid the borrowing problem for a while by soaking the rich with higher taxes. You might also use climate change hysteria to tax carbon (really an indirect tax on consumers). If both happen this year and the result will be even more rapid economic contraction. They will be this Depression's equivalent of Smoot-Hawley: exactly the wrong thing to do, done at the worst possible time. Of course the easy out, we feel obliged to point out, is not to borrow the money at all or tax it from your citizens. You could just print it instead. But this tends to unleash hyperinflationary pressures which also tend to destabilize civil society. It's better to avoid this if you can. Either way, there is no avoiding the reckoning. Right now, you could make a compelling argument that the value of credit-backed assets is falling so fast that government steps to prop them up simply won't (or can't) work. Credit deflation rules the day. The formidable fiscal and monetary stimulus measures are disappearing in the maw of asset deflation while the world goes broke trying to prevent it. If this is right, and it's something investors take the time to notice, stocks are going to make lower lows again. A lot lower. Regards, Dan Denning for The Daily Reckoning P.S. Dan will speaking at this year's Agora Financial Investment Symposium in Vancouver. In addition to Dan, all of your favorite DR editors will be there - and a few special guests, to boot! This year's event marks the 10th anniversary of your favorite free online newsletter, The Daily Reckoning, so 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 by this Friday, May 1, 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: Dan Denning is the author of 2005's best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia. --------------------- Special Offer ---------------------------- The Second Wave of the Housing Tsunami You already know by now, I'm sure, that it was the first wave of defaults in "subprime" mortgages that sparked today's economic meltdown... What you might NOT know is that there's a whole second wave of just as toxic mortgages in the pipeline...in a glut just as large...and potentially just as far reaching. But there is still time to prepare yourself from the flood of defaults that will rock the already teetering banking industry. Learn about the seven simple "super shield" moves you can make that could easily protect you from an even deeper downturn. Click here for the full report...   The Daily Reckoning - Special Reports: Invest in Gold: A Brief History