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Friday, May 29, 2009 Law grads specializing in bankruptcy should move to Detroit... The war against capitalism seems to be going pretty well... The feds may be winning a battle but losing the war on inflation... Bill Bonner on the unfortunate class of '09...and more! ----------------------- Special Announcement ------------------ Who's Laughing Now? With all the flack you've taken over the years for singing gold's praises, wouldn't it be nice to laugh right back. Well, today is your lucky day. Starting this month, you can be one gold bull who doesn't have to take it lying down anymore... With opportunities to make up to 20 times your money. But hurry, this 10-minute step is only available until 5 PM today. Read more here. --------------------------------------------------------------- Tales from a Bankrupt Economy by Bill Bonner London, England "Pssst...hey kid... You, in the red robe... "You're just graduating from college, right? "You wanna make some real money? "Then, rush to Detroit. Set up a law firm specializing in bankruptcy." More advice to college graduates follows...(below)... Two auto-parts suppliers have already filed under Chapter 11. GM is expected to do so momentarily. Too bad about GM. It was set up in 1916. If it had been able to hold together for another 7 years, it would have gone 100 years without having to declare bankruptcy. All people die. All companies die, too. That's why 'buy and hold' is wishful thinking. Buy and hold long enough and you are sure to go broke. And die. Eventually the undertakers and bankruptcy lawyers get you. And today...business is good in Detroit. What cleared the way for the GM bankruptcy was a deal with the bondholders...in which they take equity in exchange for their debt and agree not to contest the bankruptcy filing. Still, the deal - and other deals relating to it...including the presence of one very big and very odd shareholder, the government of the United States of America - is so complicated, it's bound to give bankruptcy lawyers plenty of work for many years. But business seems to be picking up everywhere...at least, that's the impression you get from reading the paper. The war against capitalism seems to be going pretty well, in other words. Yesterday, the rally continued on Wall Street, with the Dow up 103 points. Oil rose too. It is trading at $65 a barrel this morning. And look at gold - the old yellow metal is at $963 and still going up. We wouldn't be surprised if this trend continued. Does this mean the feds are winning the war? "Signs of life return to California market," says the Financial Times. Houses in many areas are selling for 60% less than they did two years ago. Two years ago, the average family couldn't come close to buying the average house. In didn't take a genius to figure out that that couldn't last. Who were they going to sell the average house to if not to the average family? Well, now the $600,000 dump from '07 has been foreclosed and is now on sale for $200,000. That means that the average family that still has a job can buy it. And it doesn't hurt that the feds make it easier - distorting the market with an $8,000 tax credit and EZ financing from the FHA. Wait a minute! Wasn't it easy financing that got us into this mess? Of course it was. But that little insight doesn't stop the feds. They're convinced that if they can just put out enough new credit, it will somehow make the problems caused by having too much credit before go away. So here's the deal. You can get the FHA to finance a house, long-term, at just 4.9%. That's just 0.3% higher than the long-term Treasury yield. Even without opening the closet door, we smell a rat. How can lenders expect to make any money - after delinquencies, defaults, foreclosures, resales...to say nothing of legal and administrative work - on a 0.3% margin? And that's assuming their cost of money is the same as the feds' cost - the long term T-bond rate. Maybe they should read the paper. John Authers, writing in the Financial Times: "The latest US mortgage delinquency figures are horrendous, with more than 6% of prime mortgages in arrears - more than double the long-term norm. A quarter of sub-prime loans are delinquent." And although one in 6 homeowners is underwater... "The peak of foreclosures has yet to come,' Harvard historian Niall Ferguson adds. 'They will go from 40 percent of all home sales to literally 100 percent by the end of the year.'" Well, the bankers - as everyone knows - are a lot smarter than we are. They're probably up to the old trick: borrowing short, lending long. The spread between the long rate and the short rate has never been great. We explained why yesterday. The Chinese don't trust Tim Geithner to keep his word. For that matter, neither do we. They've switched from buying long bonds to buying short bills. So, the bankers - including those working for the FHA - can borrow very cheaply in the short-term market. And they can make cheap mortgage loans, long-term. And then, when the short rates go up...and they need to roll over their short- term loans...they can get in line at the courthouse, behind GM and the parts manufacturers... ..and pick out a gaudy casket too. Now over to Ian with some more news from today's 5 Minute Forecast: "As we prepare to wrap up the month of May, one thing's clear: Commodities are back, baby. "That's a 12.3% monthly move for the CRB, an index that tracks most of the world's heavily traded commodities. The stars have aligned in the favor of hard assets this month: Global investors are collectively more optimistic. There's a strong reboom vibe emanating from BRIC nations (see below). And perhaps above all, there's this: "After falling through its 200-day moving average earlier this month, the dollar index has been in steady decay. The index crashed through another important level this morning -- the 80 score, a long-standing point of support. Will the greenback fall further still? Barring a stock market reversal and flight to safety in the dollar, or some kind of wild government intervention (both totally possible), we don't see what's keeping the dollar from testing 2008 lows." Every business day Ian Mathias writes for The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of economic and financial developments - in five minutes or less. It's a service available free only to Agora Financial's paid publication subscribers. And in the next few hours, one of these publications, Energy & Scarcity Investor, is set to release an exclusive report that could make you gains upwards of 15,000% in less than 2 years. Now, that might sound crazy, but isn't worth 10 minutes to judge for yourself? Click here for all the information. But act now. This report expires at 5 PM today! And now back to Bill with some more thoughts: Jobless claims eased for the second week in a row. Hallelujah. The economy is still unloading jobs, but at least its not dumping them like it was earlier in the year. Which leads a number of economists to the old refrain: 'the worst is behind us.' Meanwhile, from Japan comes encouraging news. The Nippon economy is increasing its industrial output at the fastest pace in 56 years. And oil is signaling a global rebound, isn't it? "I don't think so," says MoneyWeek's editor in Paris. "There is no increase in oil consumption. Instead, consumption is still going down. What we're seeing is speculation. The central banks are adding to the funds available for speculation. So far, that money isn't reaching the consumer economy...it's mostly in the natural resources market betting on inflation." Everywhere you look, dear reader, is a war zone. Nothing is safe. The feds' war against deflation does collateral damage to almost everyone and everything. But you have to give the feds credit. Raw materials...gold...oil...emerging markets - all have seen big increases. Major stock markets too are showing big gains. But the feds' plan is not to reflate the asset bubble, but to reflate the economy. For that, they need rising consumer prices. Consumers need to borrow...and spend. They'll do so, say economists, when prices rise and their dollars lose value. So far, milk and potatoes aren't cooperating. The price of milk fell so low that farmers slaughtered their herds. As for potatoes...we don't know. In Europe, inflation has disappeared. This is the first time the euro zone has ever had flat and falling prices. In America, too, consumer price inflation is ebbing away. In other words, the feds may be winning a battle but losing the war! As usual, there's a lot of smoke and fog on this battlefield. Consumer confidence is rising...but so is unemployment. The New York Times says US joblessness may soon pass Europe's habitually-high rates. The Chinese are still buying America's debt - but only the short-term stuff. America's biggest industrial company goes broke...the government takes a key role in key industries...but investors buy more stocks! If you look through your binoculars you will have a hard time figuring out who's really winning. In the confusion of the battlefield, even a hardened veteran often fails to tell which way the fight is going. In fact, you might see rising stock prices and get the wrong idea...like watching the Yankees get chased back to Washington after the first battle of Bull Run; you might have thought that that was all there was to it. The war was over and the South had won. Not quite. Keep reading for today's essay... ----------------------- Special Offer ------------------------- You could have turned $5000 into $1 million in just over five years... Each week, readers to make just one investment buy. And since November 2006, not one pick has lost value! It's no wonder readers of this newsletter could have turned $5,000 into $1 million in just over five years! Now, they're quickly closing in on $2 million! Join them... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Even though he's never been asked to make a commencement address, that does not stop Bill Bonner from offering up a few words of wisdom to the world's new graduates. It may not be what they want to hear, but his advice is something they should all heed. Read on... Class of '09: You're Screwed! by Bill Bonner London, England Last weekend, we journeyed to Boston to attend a college graduation. Thousands of callow scholars were on display. Each was handed his papers...and then marched out of the hockey stadium. To the tune of 'Pomp & Circumstance,' wearing a long, red robe, he entered the outside world solemnly...like a patsy joining a poker game. So far, not a single major university has asked us to make the commencement address. Nor a minor college. Not even a school of cosmetology or taxidermy. But here at the Daily Reckoning headquarters in London, protected by a broad ocean and a narrow reading of the First Amendment, we will give them - and UK graduates too - advice no one asked for. "Plastics," was the advice given to college graduates in Mike Nichols' '67 film. But that was when there was still hope for America's manufacturing sector. Even then, it was too late. The percentage of GDP from the manufacturing sector fell for the next four decades, from over 20% in the last '60s to barely 12% last year. Better advice would have been 'derivatives.' They stank just as bad, but they were much more profitable. While only 8% of GDP, finance accounted for 40% of corporate profits in 2007. And derivatives grew from nothing to a face value of 16 times the GDP of the entire planet. But your elders are always giving you bum advice. "You cannot decline the burdens of empire and still expect to share its honors," said Pericles to the class of 430BC. He lived during a time not unlike your parents' era in the USA - when Athens was on top of the world. But vanity got the better of him. He launched an attack on Sparta that backfired badly. He soon died of plague and Athens was not only ruined, but enslaved. Athens' 'golden age' turned to lead. Young Athenians should have shrugged off the burden rather than accept it. You should do the same. "...as much as $77 trillion of post-’09 earnings must be stolen from the future in order to pay for the liquor your parents drank..." When you were born 20-some years ago, the nation's total debt per person was less than $90,000 - adjusted to '09 dollars, of course. While that was a lot of money, it was nothing compared to what was coming. Now it's $186,717 per person - more than twice as much, in real terms. Fortunately, private debt is not inheritable. But it comes to you as a lien against property. Instead of paying off their mortgages and leaving you a house, free and clear, the baby boomer generation spent the 'equity' in their houses even faster than they got it. House prices rose. But mortgage debt rose faster. While your grandparents owned 80% of their houses, by 2007, the typical homeowner only really owned 4 rooms of an 8-room house. And then, when house prices fell, so did his remaining equity...to the point where one out of six homeowners in America is now underwater. You could still eventually inherit a house, but you may have to scrape the barnacles off the front porch. But that's not even the half of it. While your parents had control of the US government they allowed themselves a little larceny. Add the unfunded retirement and healthcare benefits they voted for themselves to the official national debt, and together they are scheduled to cost your generation 4 times the total annual output of the US. This is over and above the private debt they accumulated. Some of this debt can be carried. Some will have to paid down. But as it stands, as much as $77 trillion of post-'09 earnings must be stolen from the future in order to pay for the liquor your parents drank...the bombs they dropped on god-forsaken foreigners...and the interest on their debts. So, forget about saving for a European vacation or a house of your own. Even if every penny of your savings - and every other American's savings - are put to the task you will still be paying for your parents' expenses all your life. But wait, there's more! The burden is getting heavier. Federal budget projections show an additional $7 trillion in deficits over the next 10 years. Described as the cost of fighting recession, the present generation buries its own mistakes under cash that the next generation hasn't even earned yet. Today's bankers, businessmen and speculators are being bankrolled by you - tomorrow's bankers, businessmen and speculators. Today's homeowners get a helping hand...from whom? Tomorrow's homeowners - you. Today's employees get a boost too. Same story. Where do you think the money came from to pay Wall Street bonuses this year? How do you think GM stays in business...and Fannie Mae...and AIG... Who pays those salaries? Who pays to keep troops all over the world and keep old people supplied with new drugs? Who pays for hundreds of billions' worth of 'shovel ready' boondoggles? You will. At least, that's the plan. The luck of one generation is the curse of the next. Like Pericles, your parents inherited a dollar; they leave you a peso. They took over the strongest, richest, most competitive nation in the world. And like Pericles they minded everyone's business but their own. Now, not only does the US owe money all over town, its government puts out trillions more in IOUs every year - each one with your name on it. You're not even out in the real world yet, and you're getting the bill for 50 cents of every dollar the feds spend - almost none of it earmarked for you. But that is the thing about the real world your teachers probably forgot to tell you about. It is more unreal and fantastical than anything you studied. Here's what's real: You've been dealt a bad hand. From the bottom of the deck...your parents have slipped you some nasty cards. Our advice? Fold 'em. Get up from the table before they clean you out. Enjoy your weekend, Bill Bonner The Daily Reckoning Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning...and this year marks our 10th anniversary! Come celebrate with us at the Agora Financial Investment Symposium taking place this July in Vancouver, Canada. In honor of the DR, the theme is a "Decade of Reckoning," and throughout the four-day event you'll receive tremendous insight into the most profitable opportunities that will shape the next decade. Bill will be one of the many top-flight speakers presenting, so secure your spot today! Call Opportunity Travel at (800) 926-6575 or click here for more information... The Agora Financial Investment Symposium: July 21-24 In addition to founding the DR, Bill is 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 here: Mobs, Messiahs and Markets --------------------- Special Offer --------------------------- All Those People Laughed at You When You Bought Gold... Wouldn't you love to throw it back in their face? Drive past their house in your Lamborghini on the way to your private jet? So you can fly to your private island? Now's your chance. One simple move that can turn $10,000 into $1,509,000. But I warn you... Only one in 100 people can probably handle this. Are you one of them? Only you can decide...