Britannia Radio

Wednesday, April 29, 2009 The markets on the other side of the pond seem to be winding down... Economic growth spurred by spending, not saving, is black magic... The way both bears and bulls will be killed in this market... Byron King on the direction of energy policy...and more! Voodoo Economics by Bill Bonner London, England Finally...we're back in London. We left at the beginning of April...went to San Diego and Los Angeles...then to Buenos Aires and Salta...then to Paris for a few days.. and now we're back. London is cold and rainy...just like we left it. Not exactly home...but it will do. But what's this? The City seems to be winding down. All those hot shots in the financial sector aren't so hot any more. In the space of just ten years, the percentage of GDP generated by the financial sector almost doubled - from 5.5% in 1996 to 10.8% a decade later. But now the whole sector is shrinking...along with bonuses...payrolls...and expense accounts. And since Britain counted so heavily on the financial high fliers and their money...the whole country seems to have gone into a funk. Tax revenues are collapsing. Deficits are soaring. The U.K.'s national budget deficit is already at 12%...about even with the United States. But if current trends continue, she'll soon have the largest deficit in the developed world. But here comes the bad news. Your editor didn't mind when investor and speculators lost trillions. He barely noticed when the U.S. government practically nationalized the largest banks, insurance and automobile companies. He hardly blinked when $13 trillion of the nation's treasure was committed to a foolhardy effort to combat capitalism. But now they are going too far. In an effort to raise money, the British government is raising your editor's taxes! Yes...your poor editor pays taxes in several countries. And now the Brits are raising their rates to levels that rival those of the highest tax jurisdictions in the world - Sweden, Norway and the Netherlands. The trouble with this strategy is that your editor just bought a pair of Argentine boots. And these boots are made for walking. If these news taxes pinch too hard he - and thousands of other people working, vaguely, in the financial sector - is likely to walk right out of here. But to where? Ah...there's the rub. All over the world, governments are desperate to get out of the mess they've gotten themselves in. Argentina and Ireland just got handouts from the IMF. Other countries are getting in line. Having spent far too much in the past, they now spend more - hoping that spending will miraculously bring about economic growth. We say "miraculously" because there is no other way to explain it. When economic growth results from saving, investing and hard work you can describe it in terms of 'cause and effect.' But if you ever get economic growth simply by spending money, you can only refer to it as an act of God...or the devil. Black magic, maybe. Voodoo economics. Hardly a day goes by without some abracadabra or hocus pocus announcement. The feds bail out the banks on Monday. On Tuesday, they take over the auto industry. By Wednesday, they're passing out money on Wall Street. If any of these tactics result in greater wealth or more output - it will be a miracle. One question that has so far been avoided by practically all the commentators and well-wishers is this: where's the money come from? In the popular mind, if you can call it that, the government's pockets are infinitely deep. Reach down far enough and you will pull up whatever resources you need. But the fact of the matter is a bit different. In time of war, a government can marshal the resources of an entire nation. People believe they must buy war bonds, collect old metal, use rationing coupons, forego salary increases, pay higher taxes, and sign up for the Home Guard. Every back bends to the job; better that than bending to the lash, people say to themselves. But the war against capitalism is not getting the same level of popular support. People are not buying "war bonds" so the feds can bail out Wall Street or the City. They're not likely to eat margarine so the bankers can slather real butter on both sides of their bread. And they're not willing to spend less just so the government can spend more. So instead of asking the whole population to suffer, the feds - both in Britain and back at home in America - have chosen an easy target...the rich! In the public mind, 'rich' and 'banker' are inseparable. Like 'corrupt' and 'politician.' What's more, the rich were at the scene of the crime when the financial crisis began. The rich were caught red-handed. It doesn't matter if the 'rich' man earned his money from doing heart operations or selling vegetables. Every rich person is presumed guilty of the crime of the century. "Tax them!" screams the mob. Tax them! Tax them! Eat them. And so, it will come to pass that 'the rich' are taxed. The money will be taken from them and given to...well...the rich. But these will be different rich people - bondholders...bankers...insiders...hustlers and anglers. This is why we've been urging you, dear reader, to build your own 'personal bailout' - it's doable. All the resources you need to get started are here. Now, we turn to Addison, who is busy deciphering the GDP numbers: "Well, 'less awful' it is: The Commerce Department says first-quarter GDP dropped an annualized 6.1%," writes Addison in today's issue of The 5 Min. Forecast. "That's a tough number. Wonks, quants and analysts on Wall Street expected an annualized 4.6% decline. But the 'official' number is still a minuscule improvement over the 6.3% rate for the fourth quarter of last year. "But lest you should strive to breathe easy, put the two quarters together and you have the weakest six months in the U.S economy since 1957-58. One more quarter of contraction and we'll officially have the longest recession since the Great Depression. "One caveat: Commerce issues three estimates of quarterly GDP growth, and this is just the first. Expect revisions. "The GDP numbers form an interesting backdrop for today's meeting of the Federal Reserve's Open Market Committee. The Fed's "deflation boogeyman" is retreating, for one. Personal consumption grew 2.2% in the first quarter... much better than the 4.9% decline in the previous quarter. "So what will the Fed do? Predictions in mainstream financial media run all over the map. One says the Fed will hold off on any more purchases of Treasuries and mortgage securities as long as 'green shoots' (like the housing and consumer confidence numbers yesterday) keep showing up in the economic data. "Another speculates some sort of loose-money measures are in the offing to fight the economic effects of the swine flu outbreak. "We're not going to venture a guess. We'll only remind you that in the Fed's fantasy world, interest rates right now would be at minus 5%. And go from there." 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. Dr. Kurt Richebächer could often be found in the pages of the DR, or his newsletter, The Richebächer Letter, calling for the demise of the dollar...along with the collapse of the housing market and the end of the over-extended American consumer, as far back as 2000. Many of you felt the void left by Dr. Kurt Richebächer when he passed away in 2007, so in his honor we've formed a brand new 'wealth protection' society. Join this elite group of investors by clicking here. And back to Bill with more thoughts: The Dow fell 8 points yesterday. Oil slipped below $50. Gold slipped too - below $900. What gives? As far as we can tell, the rally that began in March continues. While it might peter out any day, we continue to believe that this market intends bloody mayhem...and that it won't stop until it has killed both the bulls and the bears. The bulls will be killed in the classic way. A strong rally on Wall Street...or a series of minor ones... will lead them to believe that "the worst is over." They'll get back into stocks after a 20% or 30% advance - hoping to recover what they lost last year. Then, the stock market will make a new dramatic move to the downside. This will probably happen several times...each time leaving bullish investors with more losses. Finally, the bulls will give up. They will sell stocks...driving prices down and dividend yields up. By the time the bottom is reached, former investors will neither know nor care. P/Es will be scarcely more than 5. Dividend yields will rise above 5%. The Dow will sink to 3,000 - 5,000. Then, it will be the bears' turn. When stock prices go down, they'll sit smugly with their cash, Treasuries and gold. But gold will not resist the deflationary whirlpool. It could get sucked down violently...or might just float down gently, remaining low for a long time. Either way, the gold bulls will give up. Only the gold bugs will hold on. Cash and Treasuries, meanwhile, will look smart - for a while. Then, suddenly, they will look like the stupidest investment on the planet. In a matter of days...maybe weeks...the dollar could lose half or more of its value. Savers will suffer staggering losses. No, dear reader, the months ahead will be a challenge. The world economy is telling a story no one has ever read before. Every day we turn the page just to see what happens. We have no idea how the story might develop. It's all guesswork. Still, when the final chapter is read out...the moral of the story will probably be familiar to us. It always is. China has increased their gold holdings 75% in the last six years. They recently announced that the gold holdings have been transferred from the State Administration of Foreign Exchange (SAFE) books to the People's Bank of China. PBOC. Our intrepid correspondent, Byron King explains what this really means: "China is monetizing its gold! "This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But in keeping with a nation where youngsters get their Sun Tzu with their mother's milk, the Chinese went through an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not "monetary," then it was just another nonmonetary investment commodity like iron ore or copper or petroleum. "But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves. "This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset. Gold has not been a factor in global trade and currency exchange since the late 1960s. But there's a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It's because the U.S. dollar has been so badly mismanaged over the decades. No, you won't read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It's happening. "So now the Chinese are primed to begin using gold as a monetary asset. What's the practical impact? I expect to see central banks worldwide start to add gold to their monetary reserves. The floodgates are opening. The PBOC and other central banks from here to Timbuktu are going to become net purchasers of gold in the years ahead. In the future, only central bank suckers and losers will be net sellers of gold. (Take note, IMF.) "And people who own physical gold, as well as shares in well-managed mining companies, will benefit greatly. Need I say more?" For ideas of how to integrate gold with your portfolio, see here. We'll have more from Byron in today's guest essay, below. The plane coming back from Buenos Aires wasn't full. Air traffic is down 11% from a year earlier. And this was before people began worrying about swine flu. Today, commentators are fretting about how a serious epidemic would affect the "recovery." They needn't worry. First, because there is no genuine recovery to worry about. Second, because if a serious epidemic were to hit the world, economic growth would be the least of our problems. Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- Here's How YOU Could Make Easy Forex Profits... On Monday, Oct. 27, 2008 - at 1:17 P.M., I sent a short email to my select group of testers. In this e-mail, I recommended one simple FX trade... By noon that Wednesday, I told my readers to sell half their position for a 100% gain... You need to give this a try...get my next alert here... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Byron King recently attended a lunch where the topic of conversation was where energy policy is going - and what that means for geothermal. Read his conclusions, below... The Direction of Energy Policy, and What it Means for Geothermal Power by Byron W. King Pittsburgh, Pennsylvania The other day I had lunch with a "brain trust," of sorts. Participants included a retired executive from an aerospace company. This guy helped design and build many of the reconnaissance satellites that the U.S. has launched. There was a senior executive from a large steel company. There was a venture capitalist who made his first $500 million in the software industry, and who now has much of that wealth spread around in biotech and nanotech startups. There was a former senior political appointee who worked in the Treasury Department. And then there was me. If you're into lunches where you'd rather listen than eat, then this was the lunch for you. According to the satellite builder, the dominant elements of the political and media culture are "completely in the tank" when it comes to believing in the dangers of "climate change." It's not as if climate change is demonstrably true, he pointed out. There are valid scientific data from both sides of the climate change issue, and many valid data points in between. But according to the aerospace executive - some of whose satellites were built to track climate change - "For at least ten years, if you have not been promoting the dangers of climate change then you have not been receiving government grants. So the research community is following the money." Thus the research literature is coming out strongly in favor of "doing something" about climate change. And policy-makers are using this research literature to justify doing what they've wanted all along, which is change the world as we know it. As a class, the activists want to change the world into something else. According to the steel executive, the climate change issue has spurred what amounts to "a pathological hatred" of carbon-based energy systems. "It doesn't have to make practical sense," says this source. "It doesn't even have to work with economics. It just has to support a policy to utterly transform the nation's energy system. The people making policy now have a crusader's mentality. 'The past is trash,' is how many of the new policy makers view our world. So the new policy makers want to promote radical change in energy policy. They're going to jam it down the throat of the economy." According to the steel executive, the steel industry expects to see inflation-adjusted, baseline energy prices triple or quadruple within ten years. "Whether the government taxes carbon-based energy at the source, or whether they pass 'cap-and-trade' legislation, it's going to cost us. So we'll pay. Of course, we'll pass along the new costs to the steel buyers. If demand goes down, we'll close facilities. Then the TV cameras will show up at the plant gates to watch us shut the doors and click the padlocks. And we'll get called bad names by the people who never much liked us in the first place." The former Treasury official added that a new "policy paradigm" has yet to form in Washington DC. "It's like during the Cold War, there was a bi-partisan consensus to confront and contain the Soviet Union. It was expensive, but we agreed to do it. We made the national sacrifice. Well, that foreign policy consensus ended when the Berlin Wall fell and the USSR came down." The groupthink in the early 1990s was that another kind of broad consensus had to take the place of the confrontation with the Soviets. And by its very nature, that consensus was fragile. "Let me back up," said the former Treasury official. "Confronting the Soviet Union gave the U.S. an excuse to continue with Franklin Roosevelt's Depression Era, New Deal, big government for 45 years after World War II. But after the USSR fell? Why did we still need big government? To run a modern welfare state? That was the justification. Remember the talk about that 'Peace Dividend?' People were drooling over the idea of cutting the military budget and paying for more and better social welfare through more big government." "...for all the anti-carbon sentiment out there, the most under-appreciated, 'clean and green' energy source is geothermal. There appears to be strong support for geothermal development via tax incentives and other, policy-based standards." "So what happened?" asked the Treasury guy. "Some people thought they were going to run a big government welfare state using modern monetary theory. They convinced themselves that we could do that. They didn't understand the long term problem." What was the long-term problem? "The welfare state was never going to last. Especially because the nation collectively wanted it to support a rank, consumerist culture that could not earn its keep within the world economy. We imported, imported, imported. And we paid for it with cheap dollars. After the U.S. left the gold standard in 1971, the fundamentals of the American productive economy could never support what the nation was trying to do. We'll look back eventually and realize it was delusional policy-making. All we did was run down the economy for a couple of generations. It finally collapsed in 2008." Whatever "post-USSR consensus" existed in the U.S. in the 1990s shattered during the 2000s. "People went nuts because of the Bush Administration," said the Treasury official. "The white-bread explanation - call it 'Decline and Fall for Dummies' - was that it was all about the evil George Bush and his wars in Afghanistan and Iraq. Well, Bush and the wars were visible, so that's what people blamed. The real problem for the U.S. was that the whole foundation for post-war American society, economy and governance was caving in under our feet. The timbers were rotten." According to the Treasury man, the U.S. economy is now confronted by "block obsolescence" of many of the economic and political assumptions with which we've lived for decades, since World War II. "Chrysler isn't the only big institution that's bankrupt. We ought to burn down a few universities, while we're at it," he added. And he noted that Republicans and Democrats both fed at the trough while the going was good. "But while the politicians had their heads buried in the trough for all those years," he said, "they didn't notice that the barn was burning down around them." The Treasury-man continued: "Look at the destruction of former industrial titans like General Motors, and with GM the annihilation of much of the rest of the automobile industry. Who's going to invent whatever will take its place? We used to say that 40% of the U.S. economy was based on the auto industry, directly or indirectly. Are we ever going to see 40% of the U.S. economy based on putting solar panels on roofs, or tuning the gearboxes of windmills?" The former Treasury official looked at the ongoing economic crash. He placed it within the context of the long-term decline in U.S. manufacturing. "As a society," he said, "we've made a lot of very bad choices of both moral philosophy and economic policy. Those bad choices have brought us to the edge of the end. We've spent, borrowed and 'free-traded' ourselves to the poorhouse. Now the Chinese own us." The venture capitalist chimed in with some thoughts. "If the feds are going to spend billions on stimulus, then they ought to direct some of that money to help fund promising research. How about some money to pay for every fossil-fuel power plant in the country to siphon off some of its CO2? Then run the CO2 through a facility to grow algae to make biofuels." "We'd be killing about four birds with one stone," explained the venture capitalist. "We'd be taking down CO2 emissions. Not much, maybe, but some. We'd be helping an embryonic industry that can be competitive in coming years. Heck, turning algae into fuel is easy. The basic part is just high school chemistry. So we'd be creating a new supply source for the liquid fuels industry. And we'd be able to point to at least one success story where people can agree that we all did something right." Then the venture capitalist added that one of his startups is "working on coal-eating bugs." He explained, "There's a lot of coal buried so deep, or under other conditions that we can't mine it. That coal will never get out. So why not put bugs down in the deep seams, and let them eat the coal? Then we can harvest the gases that come out the back end of the bugs, and use that as feedstock for other things." At one point, one of the lunch participants turned to the silent person at the table, who was busy taking it all in and making a few discrete notes. Then came the dreaded question, "Well Byron, what do YOU think?" I focused my comments on geothermal development. I pointed out that for all the anti-carbon sentiment out there, the most under-appreciated, "clean and green" energy source is geothermal. There appears to be strong support for geothermal development via tax incentives and other, policy-based standards. Combine this with the growing social focus on clean, renewable energy sources. Right now, 24 states have renewable portfolio standards (RPS) for electricity production. And Congress is leaning towards setting a national standard of 20% to 25% RPS power production by 2025. We're at the point where a utility like California's Pacific Gas and Electric is so desperate for "clean" energy that they're contracting with a privately-owned company to build a satellite to harvest solar energy from space, and "beam" it back to earth. The companies that are out there now are in relatively advanced stages of developments. The big problem is that the follow-on pipeline is almost empty. The problem has been lack of access to capital for the past year or so. In other words, lack of capital is the strongest headwind to progress. If the funding delays can break down, then we'll see decreased complexity for funding, and project schedules moving ahead. Until next we meet, Byron W. King for The Daily Reckoning P.S. We have five geothermal companies in the Energy & Scarcity Investor portfolio. I like all of them. They are all finding steam. They have power purchase agreements. And they are all about to become players within the "clean green" energy space. See the full list here. Editor's Note: Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor. --------------------- Special Offer --------------------------- The Good Doctor Lives On... We lost an economic heavy weight in 2007: Dr. Kurt Richebächer. Many of you heeded his warnings and insightful forecasts about the coming housing bubble burst and subsequent credit crisis, and your portfolios were the better for it. Well, we would like to give you another chance to use the Good Doctor's warnings to avert or even recover from the later stages of financial catastrophe. We've just formed a brand new "wealth- protection" society, and named it in honor of Dr. Richebächer. Learn how to join this elite society here.   The Daily Reckoning - Special Reports: Investing in Green Energy Fed in the Land of Access: Will we be provided with cushions? Introducing the Single Best Way to Make Sure You'll Never Run Out of Money... Click to Learn More About Mobs, Messiahs and Markets.