Britannia Radio

Monday, May 11, 2009 Bank of England aims to put some brighter colors into the economy... We continue our "World According to The Daily Reckoning"... How government efforts impact the severity of a depression... The Mogambo Guru on the decline of naked short-selling...and more! Capitalism at Work by Bill Bonner London, England We made a brief trip back to France for a board meeting. Returning to London, people all seemed to be in mourning. Black is the color in London. Everyone wears black. Black pants, black skirts, black coats... ..the cabs are black...and so is the mood. Last week, the Bank of England and European Central Bank announced new initiatives aimed at putting some brighter colors in the economy. Both banks are going to take up forms of QE - quantitative easing. Whoa...don't touch that dial! (A reminder for younger readers: TVs and radios used to have dials, which you turned to change the channel. Announcers would begin with 'Don't touch that dial' when they had something important to say.) We're not going to discuss QE - promise! On Friday, for the benefit of new readers, we were trying to explain The World According to The Daily Reckoning. Today, we continue our explanation - partly to bring new Dear Readers into the picture...and partly to remind ourselves what the hell we're talking about. On Friday, the Dow rose 164 points. The rally is still going on. Markets make opinions, say the old timers on Wall Street. After nine weeks of rising prices, people are beginning to see the world differently. To simplify: it doesn't seem nearly as bad a place as it was a few months ago. Oil has risen to $58 a barrel. The dollar has fallen to $1.35 per euro. And gold is at $914. Even house prices - while not actually rising - are not falling as fast as they were before. And while people are still losing their jobs, not as many of them are losing their jobs each month as did earlier in the year. This has led many commentators to believe that government's expensive bailout/stimulus efforts are finally working. Toward the end of last year, the days were getting shorter and shorter. Darkness covered the land - especially in Iceland where, even in the best of times, late December offers barely enough daylight to smoke a cigarette. And then, the authorities got up to their usual antics. They bailed out some companies...lowered interest rates to zero...and shored up the financial sector - which just happened to have very good representation in the government and its central bank - and saved the bondholders from getting what they had coming. Meanwhile, the feds made sacrifices to the market gods too. Unable to find any virgins in the financial sector, they threw the taxpayers down the well. And then they went after the savers (admittedly, there weren't many of them) and the next generation too. At first, it seemed as if the feds had failed. Then, gradually, the light increased...the days grew longer. And now, the mob screams: "The worst is over!" "We've seen the bottom." "Hoorah for the feds!" But it is not likely to be so... Here we give you the first of four Daily Reckoning dicta: People do not get what they want or what they expect from the markets; they get what they deserve. Of course, people would like the downturn to be over. Many are counting on it. But Mr. Market doesn't give a hoot. He's got a "Capitalism at Work" t-shirt on and a sledgehammer in his hand. What's he up to? He's demolishing a quarter century's worth of mistakes. There are always mistakes made. Investments go bad. Businesses go under. People go broke. When many mistakes are corrected at once, it's called a 'recession.' And when an entire economic model goes bad, it's called a 'depression.' The economic model of the last quarter century caused more mistakes than usual. It encouraged people to spend, borrow, and speculate. And each time Mr. Market tried to make some corrections, the authorities came along with more money and easier credit. Businesses that should have gone under years ago kept digging themselves in deeper. Homeowners kept running up more debt. Speculators kept taking bigger and bigger gambles. Altogether, total debt - a measure of the bubble in the credit markets and all things associated with it - rose from only about 150% of GDP when the Pontiac GTO came out, to 370% during the Hummer and Prius years. Fish gotta swim, birds gotta fly, and bubbles gotta blow. The bubble in the financial sector - including subprime debt, housing prices, bonuses on Wall Street and derivatives - hit the fan in 2007. And what a mess! And why shouldn't it be? Which brings us to the second of our dicta: The force of a correction is equal and opposite to the deception that preceded it. The delusions and absurdities of the Bubble Epoque were monstrous. Naturally, the correction must be huge too. World stock markets were nearly cut in half. Property prices too have been knocked down almost everywhere. The total loss of nominal wealth has been estimated as high as $50 trillion. In today's paper, we find that Buffett's company, Berkshire Hathaway, made its first loss since 2001. Thirty-three banks have been shut down this year. America's leading banks say they need another $75 billion to keep their doors open. And Fannie Mae said it lost $23 billion; it will need $19 billion more to continue jiving the housing market. Could these losses have been prevented? Ah...certainly many of them could. If the U.S. Congress had never created Fannie Mae, for example, it never would have distorted the mortgage market as much as it did. And if the feds hadn't created the Federal Reserve Bank, it couldn't have provided so much ready money for so many speculators and borrowers. And if the Fed under Alan Greenspan had done what it was supposed to do - that is, to "take away the punch bowl" before the party got out of control - the bubble in the financial sector probably would have been much more modest. Of course, people drew all the wrong conclusions. They thought "capitalism failed." They saw the car drive off the cliff...but didn't notice how government had twisted the road signs. Instead of warning investors of the dangerous curve ahead, the Fed's low lending rates said: 'Step on the gas!' We all know the story from there...and Rob Parenteau has reason to believe that a replay of these events could be coming our way - and sooner than you think. Learn how to protect yourself from the second wave of the housing tsunami by clicking here. We'll continue this, below. But first, let's turn to Addison: "China has overtaken the U.S. in yet another category of global influence this morning," writes Addison in today's issue of The 5 Min. Forecast. "This time it's Brazil. China is now Brazil's No. 1 trading partner, snapping a nearly 80-year tradition of Brazil depending primarily on exports to America. "Brazil announced over the weekend it had conducted $3.2 billion in business with China during April - a 12-fold increase in Sino-Brazilian trade from 2001. April also marks the second consecutive month that the U.S. has ranked No. 2. "What's the trade? Iron ore. Brazilian officials say the Chinese have been buying the stuff hand over fist since the start of 2009. "As one consequence, Brazil's stock market, the Bovespa Index, is outpacing the American equity rebound. Brazil's version of the Dow has recouped the majority of its crisis losses. Check it out: "Brazil and China are just two areas of rich investment opportunity we'll be focusing on with the new BRIC report we conceived with our Indian partners last week in London. Specific details on the report are forthcoming." Wanna make sure you get The 5 - in its entirety - sent to your inbox, every Monday through Friday? You can...by becoming a subscriber to one of Agora Financial's paid publications, such as Penny Stock Fortunes. Their latest special report details the easiest way to make money in this market - by focusing on stocks most investors overlook. Read all about it here. Back to Bill, with more thoughts: Dictum number 3: Capitalism doesn't always take an economy where it wants to go; but it always takes an economy where it ought to be. Whoever was responsible for the mistakes, capitalism went about correcting them with its customary élan. It hit imprudent investors with trillions in losses. It knocked down mismanaged corporations. It whacked homeowners...and pounded housing-based derivatives to dust. Capitalism operates by a process that the great economist Joseph Schumpeter called "creative destruction." It destroys mistakes to make room for new innovations and new businesses. Unfortunately, this puts it at odds with government...and what most people want. When people make mistakes, they maintain that they are blameless ("who could have seen this crisis coming?") and that someone else should pay for the loss. So today, the feds, who mismanaged their regulatory responsibilities during the Bubble Epoque, are bailing out mismanaged corporations in order to protect lenders who mismanaged their money. They are determined to prevent capitalism from making major changes - in the worst possible way. What's the worst possible way? Simple. Leave the mismanagers in place. Keep the brain-dead companies alive - along with the zombie banks. Let the government take ownership of major sectors of the economy. And stick a debt-ridden society with even more debt! The feds are expected to borrow $2 trillion this year alone. From whom? And who will repay it? We think you have a pretty good idea of who is going to end up footing the bill, dear reader. And we don't think you should take it sitting down. That's why we've gathered all the resources you need to build your own personal bailout - and put them here to be easily accessible for you. And the fourth dicta: The severity of a depression is inversely correlated with government's efforts to stop it. The more the feds try to delay and distract the process of creative destruction, the longer it takes to get the job done. And the higher the eventual bill. There are only two fairly clear examples in modern history. After the crash of '29, the Hoover and Roosevelt administrations tried desperately to stop the correction. They could not make bad debts disappear, nor turn bad decisions into good ones. All they could do was to retard the necessary corrections - and cause new mistakes! It wasn't until after WWII, 15 years later, when the New Deal was largely forgotten, that the United States got back to work. Similarly, when Japan was confronted with a major correction in 1990, its politicians followed the Hoover/Roosevelt model. Over the years, an amount equivalent to almost an entire year's output was applied to recovery efforts. But all they did was to prevent and forestall the needed changes. Now, 19 years later, the Japanese economy is still in corrective mode. Tomorrow...beware the suckers' rally... Uh oh...we might be next. The U.K. government has published a list of people it won't allow in the country. The list includes some terrorists...but also conservative U.S. talk show host Michael Savage. The idea, as near as we can make it out, is that Britain feels it can exclude people who nurture hatred. So, let us make it perfectly clear: Here at The Daily Reckoning we do not hate bankers, politicians, lawyers, bureaucrats, tax collectors, gypsies, slow drivers, rich people, snitches, women, dwarfs, English twits or anyone else. Nor do we advocate the use of violence in any form - unless it is necessary...and unless it is against small, defenseless little nations that can't fight back. Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: This week, the Mighty Mogambo addresses the dwindling practice of naked short-selling, and how it might just have been able to save his Mogambo Enterprises from Complete And Utter Bankruptcy (CAUB). Too little, too late, as they say. Read on... Selling Shorts Out Naked in the Cold by The Mogambo Guru Tampa Bay, Florida In a bit of good news, NyTimes.com had the headline "Goodbye to Naked Shorting" by Floyd Norris. He reports that it looks like "naked shorting - the practice of selling shares short without borrowing them - is almost gone." Thank goodness! As a greedy optimist, one can certainly understand the attraction of naked short-selling because (for one thing), "Naked short-selling can save a trader the costs of borrowing shares." Instantly, I thought of myself and my job in the context of my employer trying to cut expenses, since everybody is seemingly losing sales, losing jobs, and the old "pre-Clinton" way of measurement of the unemployment rate is now running at 12% or more! Some estimate up to 18% unemployment!! Yikes! Double exclamation points! "...my new plan is to simply negate contracts with customers, keep the money the suckers already paid us, sue them for more money, and then reluctantly settle at the last minute by paying the whining and litigious customers back with shares of stock, which I don’t have, either! I love this naked-short thing!" From the depths of my sudden despair, I realize that I could use this to my advantage! On the wall of my office I wrote, "Since a reason for allowing naked short-selling is because it saves a greedy trader a necessary expense (the cost of borrowing shares), then it must be similarly okay for me to lie to customers about the ownership of assets in order for customers to give me money!" I love it! I love the simplicity of it! No accomplices to pay off, no bribes to pay, no more spending night after night in some desperate blackmail scheme, watching somebody's house until you catch them doing something bad, and then, when you finally face them in your moment of ultimate triumph and hit them with the sordid evidence, they turn around and whip out those old photos of you with that Swedish ballerina in the storage locker, and they laugh at you when you try to explain, for the thousandth time, "You should have seen her right BEFORE this photo was taken! It was her idea! She was lovin' it, I'm telling ya!" Since my career as a competent employee long ago turned into a farce and my backup plan as extortionist extraordinaire now lay in flames, too, my new plan is to simply negate contracts with customers, keep the money the suckers already paid us, sue them for more money, and then reluctantly settle at the last minute by paying the whining and litigious customers back with shares of stock, which I don't have, either! I love this naked-short thing! Hahahaha! Additionally, the article notes that naked short-selling "can make it possible to short a stock where borrowing is very difficult because so many others want to sell it short," which is a weird situation, and, I admit, the whole reason that I formed Mogambo Enterprises, a company long reviled by Wall Street and small-minded people who wouldn't know quality pornography if it came over there and squatted down on their faces. But the idea is that Mogambo Enterprises would be a small outfit with an incompetent, corrupt management, zero capital or assets, mysterious liabilities, a total capitalization of 100 shares of almost worthless value and zero float (since nobody in their right mind would buy any shares), but which could (and this where it suddenly gets interesting!) suddenly have thousands of its shares sold short if there were a rumor that the price of the shares would plummet from almost-zero to absolute zero. Tens of thousands of shares could be sold short! Millions of shares! By this time I am screaming in glee "Billions of shares of Mogambo Enterprises could 'exist' by virtue of being sold naked-short!" There is, obviously, no upper limit on the number of shares that can exist if you allow unlimited naked short-selling, which is Very, Very Interesting (VVI) since there would theoretically be a Huge Freaking Squeeze (HFS) on short-sellers, driving the price of the entire Mogambo Enterprises shares to astronomical levels, if Mogambo Enterprises suddenly declared a dividend of $5 per share! Instantly, the stock would rise in price from almost zero to at least $5 per share! The stock would go to the moon if there were only 100 real shares to satisfy a billion short positions that need to be filled! The moon, I tells ya! Hahaha! Not surprisingly, since one of the Laws Of The Jungle (LOTJ) is that the majority of investors must lose money or purchasing power, or both, "the primary evidence of naked short-selling is a large number of trades where shares were not delivered on time, causing a 'fail' in Wall Street jargon." We all admit that "A large number of fails does not prove naked short- selling, since there are other reasons for trades to fail" but even the NY Times admits, "such a number does indicate it is likely." Then Mr. Norris says, "Critics of naked short-selling often say it produces 'counterfeit shares,' but that term is misleading." I naturally leap to my feet and shout, like a whiny little kid, "No it is not! It's a blatant, state-sanctified fraud against the guy who contracted in good faith to buy a share of stock, but received only a promise of a share of stock! Ain't the same thing!" It's the same thing with the blatant naked-shorting of gold on the Comex, but that is a whole other story, when we should be paying attention to gold, which is apparently a favorite of Mother Economic Nature in that, historically, gold has won every time against everything else over the long-term. Whee! This investing stuff is easy! Until next time, The Mogambo Guru for The Daily Reckoning Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page. --------------------- Special Offer --------------------------- On Monday, March 16th, 2009, with just one simple FX trade... You could have made a 99% gain... You need to learn how to do this! Get the next VERY profitable alert here...   The Daily Reckoning - Special Reports: Investing in Gold: The 5 Best Ways to Invest in Gold US Recession: By far the Weakest Recovery