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Friday, May 1, 2009 Things seem to be coming back to 'normal'...for now... What's more important: Fighting swine flu or fighting capitalism? In the future, all the automobiles will be gray... Bill Bonner on an even greater depression...and more! 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. --------------------------------------------------------------- Back to Normal? by Bill Bonner London, England Today is a holiday in much of the world. But not in London. For some reason, the English are celebrating May 1st on May 4th. Go figure. Here at the Daily Reckoning headquarters, however, we keep our eyes open 24/7 - well, unless we are on vacation...or sleeping...or having dinner...or have something better to do. What we've been watching is a bear market rally. Stocks have bounced...and with them good news is beginning to appear. Commentators keep saying that "maybe the worst is behind us." Analysts keep claiming they see "signs of a recovery." Economists think the results are "better than expected." All over the world, people are breathing a sigh of relief. The end of the world did not come. Asian economies are still growing. Even with GDP falling at a 6% annual rate in the U.S.A., unemployment seems to be moderating...and house prices are falling not quite as fast as they were a few months ago. Yesterday, the Dow fell 17 points. Oil traded at $51. The dollar dipped a bit - to trade at $1.32 per euro. And gold gave up $9 - ending the day at $891. Hallelujah! Things seem to be coming back to 'normal.' No more 500- point drops in the Dow. No more oil at $149. No more nerve-shattering bankruptcies. We will consider whether it is time to stand down or not in future Daily Reckonings. Today, we pause briefly to consider what it cost. In the news this week, the headlines were dominated by the swine flu. Each day, the death count mounted. Each day, new cases were reported in new places. And each day, the world seemed to come closer to a pandemic that would take millions of walking, talking Homo sapiens and lay them silently under the ground. Almost every day, we were reminded of how much damage the last big pandemic - 1918-1921 - did. Thirty to fifty million was its toll, we were told...along with the additional warning that "major epidemics seem to strike every hundred years or so." Even math-challenged Americans could figure out that their time might have come... Included in the panicky chatter were announcements, warnings, and provocations from the various health authorities. The 'alert level' was raised to 5 (on a six-point scale)...travelers' advisories were posted...the World Health Organization pestered member states to beef up their stocks of vaccines and to put in place preventive measures. "Wash your hands," said one doctor. "Cover your nose and mouth with a mask," said another. "Run for the hills," said a joker. The actual price in lives has been very, very modest. Thousands of people die from flu and colds every year. Still, people go about their business. They sneeze on the subway...they accept change from vendors in bare hands...they sit next to coughing passengers on airplanes. Life goes on. But this new strain of flu spooked them badly. They feared it might be like the plague...a curse from the gods that could exterminate millions for their wicked ways. Humanity itself seemed at risk. Yet, in response to the threat of extermination, the Obama government has proposed to spend $1.5 billion. By our calculations, that is approximately 0.0001% of the amount the feds are spending to fight capitalism's correction. Why is the threat of death less disagreeable than the threat of letting capitalism do her work? We don't know. The feds may be reluctant to spend on the swine flu because they are unsure about how bad it will be...and unsure how much they can do to prevent it. But couldn't the same thing be said of the swinish financial correction? Of course it could. The feds have no idea what they are doing. All they have is a crackpot theory...and some guesses. And yet...on the basis of these fantasies...they are spending an amount equal to the nation's entire annual output. And you, dear reader, will be the one paying the price. See the full report here. More below... But first...we turn to Addison for a look at the Dow-Gold ratio: "We don't take note of the Dow-Gold ratio on a daily basis, but for the record, it stands today at roughly 9:1," writes Addison in today's issue of The 5 Min. Forecast. "We mention this because Byron King sent along this chart going all the way back to the year Charles Dow created his famous index of blue chips. "For the uninitiated, let's back up. The chart measures the number of ounces of gold it would take to buy all 30 Dow stocks. So in 1980 for example, when the Dow sat around 800 and gold was $800 an ounce, the ratio was 1:1. At the height of the tech bubble in 1999, it was 44:1. "Notice where we are now... and where in all likelihood we're going based on what's happened before. 'That last drop of gold, from 9 ounces to the 1-2 ounce range,' says Byron, 'can bring a lot of hurt to the stock market along the way.' "'One way or another, we'll see, say, $5,000... either $5,000 gold or $5,000 DOW. Even if the DOW stays at the current 8,000, that implies, say, $4,000 gold at a 2-to-1 ratio.'" Byron believes gold still has a ways to go in its epic run...and knows of the easiest, and most effective way to pad your portfolio with this precious metal. Read his full report here. And back to Bill, with more thoughts: Chrysler has gone broke. Meanwhile, over at GM, the new owners - the feds and the unions - are already working hard to bring the automaker into line with the new patrons' program. In a special press conference yesterday, UAW bosses joined hands with federal bureaucrats, and announced a "Five Year Plan", which they predicted would be a "great leap forward" for the automotive industry and for Detroit. "The first thing we have to do," we imagine the declaration to say, "is to redesign the automobiles so they will be more easily turned out...and will be more in keeping with their new mission. We will dispense with the many different colors GM has used in recent years. In our view, they only encourage bourgeois egoism. In the future, all the automobiles will be gray. And there will be two models - one for the workers...and another, a luxury model, which will be reserved for politicians, apparatchiks and union bosses. "Our objective is to produce solid, safe automobiles...while also providing employment for the workers. We will make some improvements on the assembly-line techniques. Each automobile will be assigned to a team of nurturing workers who will put the parts together between union meetings and lobbying activities. Consumers will be given a number. They will be notified when their automobile is ready. "Marketing costs will be reduced by requiring customers to stand in line for a very long time, before they are allowed to pay - in cash - and take a number. Then, they will wait a very long time for delivery of their automobile. "Congress, meanwhile, has agreed to pass legislation limiting the number of autos that may be imported from abroad to two vehicles per year - one for the UAW president...the other for Michelle Obama." "That idea of 'decoupling' was not all wrong," explained French MoneyWeek editor Simone Wapler a few days ago. "You remember...the emerging markets were thought to be immune from the excesses of the developed countries. Even if there was a major correction in the United States, Britain, and France, for example, investors thought China would be untouched. "Well, it turned out to be nonsense. Stock markets in the emerging markets actually got hit harder than those in the developed countries. So there was no decoupling in a financial sense; they all went down together. Investors lost money...they panicked...and they pulled their money out of all risky investments. The only safe place to have your money during the panic was in the U.S. dollar. "But now, more than 6 months has gone by. And it appears that the 'decoupling' idea does work at an economic level. The United States and Germany are both in recession - with GDP retreating at 6% per year. Japan is imploding...with a negative trade balance for the first time in more than a quarter of a century. But India, China and other emerging markets are still growing. Consumer spending is up in China - at a 15% rate. And this year, more autos will be sold in China than in the United States - for the first time ever. And just look where those autos are made - in China, of course. So, they seem to be doing just what we predicted they would do - shifting their industries from export to domestic sales...and counting on rising consumer spending in their own countries to make up for lost sales overseas." "Is it time to get back into emerging markets?" we asked. "Yes...maybe... But you've got to have a long-term outlook. Three...five...ten years. Companies are growing fast. Sooner or later, those sales...and the growth...are bound to be reflected in rising stock prices." Our old friend, Marc Faber - recently back from Beijing - added this: "I can assure my readers that social, political and economic conditions in China have improved enormously in the last 20 years or so, and that, aside from the current temporary economic setbacks, the country's progress and development is almost unstoppable (as was the case in the U.S. in the 19th and the first part of the 20th centuries.)" Marc will be one of the many speakers we have lined up for our annual Agora Financial Investment Symposium in Vancouver. You don't want to miss any of the special events we have lined up for this year's conference, themed 'A Decade of Reckoning.' And if you secure your spot now, you can still get the 'early-bird' special: $300 off regular admission. But you must act now, today is the last day we are offering admission at this discounted price. Secure your spot now: The Agora Financial Investment Symposium: July 21-24 --------------------- Special Offer --------------------------- Here's How YOU Could Make Easy Forex Profits... On Monday, March 16, 2009 - at 4:05 P.M., I sent a short email to my select group of readers. In this e-mail, I recommended one simple FX trade... By 10 a.m. that Thursday, I told my readers to sell half their position for a 99% gain... You need to give this a try...get my next alert here... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Like a simple village priest in St. Peter's...or a drunk at the Guinness gate. We are amazed, dumbfounded, in shock and awe at the woeful majesty of it. Flies wander in and out of our gaping mouths. We can neither close our jaws nor still our pounding hearts. Read on... An Even Greater Depression by Bill Bonner London, England Not infrequently, governments 'shoot themselves in the foot.' But in the current event, they have brought out the biggest cannon in history. We look on with amusement as they blow their fool heads off. Readers are reminded of our Daily Reckoning Law: 'The force of a correction is equal and opposite to the deception that preceded it.' Today, we offer a corollary: 'The greatness of a depression is commensurate to the government's efforts to prevent it.' Since these iron laws seem to contradict almost everything one hears on the subject, the burden of proof is on us. So, to the witness stand, we call our first expert, Angela Merkel. Alone among the world leaders, she seems to have kept her head: "The crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable," explains Germany's chancellor. She went on to suggest that maybe we shouldn't repeat the errors of the past. As a proxy for 'deception' in our handy dictum, substitute 'money.' And now consider it in its two misleading forms - credit and deficit spending. "Credit not backed by real savings is a fraud," the great economist, Kurt Richebächer, used to say. It is a fraud when it comes not from willing lenders, but from central banks, artificially reducing lending rates in order to spur the economy. Deficit spending by government is a flimflam too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid. During the entire last half a century leading Western economists imagined a world that couldn't exist for one minute - where consuming wealth makes people wealthier...and where simply making more credit available can stimulate consumption. Each time the economy slowed down, the authorities induced people to buy more of what they didn't need with more money they didn't have. This produced 'growth.' But it was an ersatz growth. Every dollar of borrowed money would one day have to be paid back. Every step forward would have to be followed, eventually, by another one to the rear. "Deficit spending by government is a flimflam too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid." In the first four U.S. recessions after the Great Depression, from the mid-'30s through the mid-'50s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds - witless, as usual - often increased them or left them alone. But deficit spending went up an average of 2.2% of GDP each time. Later, the feds began to get the hang of it; every recession after 1958 was met with both more credit and more spending. As the feds put in more money and credit, they found that more money and credit was needed. At the beginning of the period an extra $2 of credit would result in $1 of extra GDP. By the time the lights went out in 2007, it took about $6 of additional credit to produce a single extra dollar of output. Each new dollar of credit had to support not only the new 'growth' the feds were after, but all the accumulated debt and mistakes from previous stimulus programs. In the recession of 1973, Brookings Institution economist George Perry told Congress that "we should be pulling out all the stops" to fix it. The resulting fiscal and monetary stimulus program cost the U.S. 4% of GDP, according to an estimate by Jim Grant. Future generations of Fed governors and Treasury secretaries found more stops...and of course, pulled them out too. In the micro recession of 2001, for example, the combined fiscal and monetary boost amounted to 7.2% of GDP, according to Grant. The deceptions of the Bubble Epoque, 2001-2007, were enormous. The correction has been enormous too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion - at least, here at The Daily Reckoning. The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going. Just looking at the numbers, the toll will be monstrous. All over the world, interest rates have been cut and budgets padded. France's deficit is running at 8% of GDP. England is running a deficit of more than 12% of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13 trillion has been pledged...an amount equivalent to a full year's annual output of the United States of America. This response is 3 times more (adjusted to today's dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression. It is, we will guess, what makes a great depression even greater. 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 by today, 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: 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. Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: Mobs, Messiahs and Markets --------------------- Special Offer --------------------------- Your "30-Day Retirement Plan" One month and three "Flash Action" market moves could be... Your Chance to Turn $500 into $14 Million. It's happened before. It could happen again - starting as early as next week... So will it happen to you? Read on here to find out.   The Daily Reckoning - Special Reports: US Recession: By far the Weakest Recovery A Golden Answer: Protection Against Untrustworthy Paper Currencies Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...