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Thursday, May 14, 2009 Americans no longer buying with money they don't have... If Alan Greenspan sees "seeds of a bottoming" we're in trouble... It's probably time to sell the rally... John Pugsley on the greatest swindle ever sold...and more! Do Seeds Grow Downward? by Bill Bonner London, England Have you checked your stops, dear reader? Remember back in November, we waited for the Obama Bounce? It was the one of the most reliable phenomena in the world of investing, we said. Then, we began to wonder. Month after month...no bounce. It took a long time coming...then, finally, in March prices headed up. Since the 9th of March world stock markets are up 37% - about average for a post-crash bounce. Now, it looks as though the bear market rally might have run its course. And yesterday, the Dow was down 184 points. We don't know if that marks the end of it or not. But count us out. At this point, it is far too dangerous to be heavily invested in stocks. Why? Because the Bubble Epoque is over. The bubble in the financial sector blew up last year. That marked the end of a half-century of building up debt. Most likely, now debt is going to be thrown off, shucked, dumped, paid down, worked out and defaulted on. Without the financial sector puffing up assets, prices will tend to go down, not up. And without the financial sector adding debt...and giving American consumers the wherewithal to dig themselves deeper holes...the whole world economy needs to be restructured. Manufacturers in China can't depend on the consumers of first and last resort in America anymore. People in the US are no longer buying what they don't need with money they don't have. Because no one will lend them money. And so, global commerce slumps. Ships wait at loading docks; where are the containers? Factories wait for orders and stores wait for customers; but where are the customers? The customers aren't going to show up. Because if there is one thing Americans have learned from this crisis it's that they must stop spending so much money. They're facing what the Washington Post calls the "Baby Boomers' Retirement Bummer." They have no choice; they have to pay off debt, not add more of it. We're hearing that China is recovering. We don't believe it. Who's buying? They say the US economy is close to a bottom, too. We don't believe that either. Wait...let's ask Alan Greenspan. Here's the Bloomberg report: Former Federal Reserve Chairman Alan Greenspan said on Tuesday that "the seeds of a bottoming" in plunging U.S. home markets were becoming visible. Speaking to a National Association of Realtors summit, Greenspan said there were reasons to believe that bulging inventories of unsold homes were dwindling and that should bring some stability to prices. "It looks to me, judging from the balancing of household formation on one hand, conversions, mergers, demolitions...that we're at the edge of a major liquidation in that excess of inventories which I suspect and I hope will be of such a pace that it will stabilize prices," the former Fed chief said. "So as I look at the housing market...we are finally beginning to see the seeds of a bottoming," he added. We can imagine seeds of a recovery. We can imagine signs of a bottoming. But we don't know what the hell "seeds of a bottoming" is supposed to mean. Do the seeds grow downward? And turn into a bottom? Then what happens? But that confirms it for us. If the former Fed chief thinks he sees the "seeds of a bottoming," a bottom must be nowhere in sight. And how could it be? You can't hope to erase the errors of a 50-year debt build up in a single year. Just look at the auto industry. How long will it take to turn GM around...or to break it up...sell off the assets...and put the good pieces back to work? Many years. How long will it take to work off the housing inventory? Years. How long will it take China to retool her economy for domestic consumption? Years. It makes sense to guard yourself because the inevitable downturn coming our way...sooner than you may think. Read carefully about how you could protect yourself with the seven "super shields" explained in this special report. And how long will it take the American consumer to pay down his debt to a level where he is comfortable again? Well...forever... Just do the math. The savings rate has gone up to 5% of GDP. That's $700 billion per year. Yet, the excess debt alone is estimated (by us) to be between $20 and $30 TRILLION. At that rate, it could take 40 years, or more, to pay it down. But wait again...while consumers are paying down debt, the feds are borrowing more than ever. While consumers may pay off $700 billion of debt, the US government is borrowing $1.84 trillion - at this rate, Americans will never get out of the hole. Now over to Ian Mathias in the heart of Baltimore for the news... In today's issue of The 5 Min. Forecast Ian Mathias asks, "After yesterday's major Social Security and Medicare announcement, today we have to ask (again): Can the U.S. hold onto its AAA credit rating? "'The US government has had a triple-A credit rating since 1917," answers former US comptroller general and I.O.U.S.A. protagonist David Walker, "but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating. "'First, while comprehensive healthcare reform is needed, it must not further harm our nation's financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country's future. "'Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.' "Of course, we must note that the whole credit rating biz is... well... corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch and Moody's) are the same ones that left us all out to dry in 2007. (Of course, mortgage-backed securities get a AAA... housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can too. "But even Moody's is starting to hedge its bets. It recently created three subdivisions within its AAA rating: resistant, resilient and vulnerable... a corporate way of saying the good, the bad and the ugly. While the U.S. isn't in the worst of the bunch, it's certainly not the best." You can now learn more about the award-winning documentary film I.O.U.S.A. - and get a free subscription to The 5 Min. Forecast in the process - by clicking here. And back to Bill, reporting from the largest city in the European Union... "The market seems to be looking as if this is going to be an average recession, but it's not," said Paul Krugman, Princeton University's Nobel Prize-winning economist. Nouriel Roubini also thinks the forecasts of a recovery are "too optimistic." They're almost certainly right. Krugman goes on to warn that the run-up in stocks can't be justified by the fundamentals: "It looks to me now as if the markets are now pricing in a rapid recovery, that they're pricing in a V-shaped recession, which I consider extremely unlikely." Let's review: stocks get expensive...then they become cheap. That's just the way it works. Prices go up and down in long cycles. At the top of the cycle, they're very expensive - over 20 times earnings. At the bottom, they're very cheap, under 5 times earnings. At the top of the cycle you might need as many as 43 ounces of gold to buy the Dow stocks. At the bottom, one or two ounces will do the job. At present, stocks are not cheap. In nominal terms, the Dow is 8 times higher than it was when the bull market began in August 1982. In terms of gold, it takes about 9 ounces today to buy the Dow. That's a lot less than it took in 1998, when the Dow was 43 times the price of an ounce of gold. But it's a lot more than you find at real bottoms. At the bottom of the cycle in 1982, you could buy the entire Dow for just one ounce of gold. And in terms of P/E ratios, you can buy a few stocks at very low price-to-earnings ratios today, but the majority are still above 15. When they get down to 5, we'll talk. There being no sign of a bottom in the stock market yet, nor even the seeds of a bottom, we'll adjourn today's session...and guess that the real bottom is still far ahead. Time to sell the rally. Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- Only 63 people know why 6 companies will change the world... You're #64 - and years from now you'll remember when your Ultra-Wealth took flight. A chance like this pops up once every few lifetimes. Your chance ends at Midnight, Friday, May 15 due to the shocking announcement I'll reveal...here. --------------------------------------------------------------- The Daily Reckoning PRESENTS: If you've considered the Bernie Madoff scandal a travesty, there's a much bigger and far worse scam still taking place today. A ponzi scheme that would leave even Charles Ponzi himself in awe. If you're prepared to know the dark details and the unpleasant truth behind our current economic crisis, read on... The Greatest Swindle Ever Sold by John Pugsley Carlsbad, California Since the Madoff scandal broke last year, the press has been filled with names and pictures of his victims. The front page of The San Diego Union Tribune on March 13 showed a large photo of a woman joyfully cheering. The caption read: "Miriam Siegman of New York, who said she lost her retirement money with Bernard Madoff, celebrated yesterday upon leaving a Manhattan courthouse, where Madoff was ordered jailed." We celebrate with the victims when a swindler like Madoff is brought to justice. Yet there is a vastly larger fraud being perpetrated on all Americans, and it's unlikely that any of the perpetrators will ever be jailed for their crime. Bernard Madoff defrauded a few hundred clients of some $65 billion. Yet his scam pales next to the swindle being perpetrated at this moment on hundreds of millions of Americans who have been told they have accumulated more than $40 trillion in future retirement benefits. This scam is the Social Security system. Those who conceived the Social Security swindle promised that it would end the plight of the aged and disabled by guaranteeing them "security" - a steady income in disability and old age. It was promoted as a life raft that would carry everyone safely through to the end of his or her days. Today, 74 years later, Americans continue to be told that regardless of what happens to the economy, the government will never renege on this promise. As the population has aged, Social Security beneficiaries have become the biggest political lobby in America. To get elected, any political candidate must participate in the swindle. Both as a candidate and now as President, Barack Obama has consistently maintained that the Social Security program's financing is basically sound, and can be assured far into the future. He's lying. I became aware of the technique of the fraud in 1975 when Arthur Andersen & Company published a lengthy report titled "Sound Financial Reporting in the Public Sector." It disclosed both the magnitude of the crime, and the simple accounting subterfuge used to disguise the fraud. The report pointed out that the government keeps its books using the "cash basis" method of accounting rather than the "accrual basis." The cash basis is what you use to balance your checkbook. If you deposit $50,000 in your account for the year and write $49,000 in checks to cover your expenses, your checkbook will show a $1,000 surplus for the year. However, this does not tell the true story. If you took a vacation in December and ran up $5,000 on your credit card, but the payment didn't come due until the following year, your true expenses for the year were $55,000. You actually ran a $4,000 deficit which didn't show up in your checkbook. Every rational business owner knows that to track the true condition of the business he must add in the cost of purchases he made but must pay for in future years. Sound businesses always use the accrual method of accounting. In its 1975 report, Arthur Andersen reviewed the U.S. federal budgets for fiscal years ending 1973 and 1974, and came up with shocking figures. Using the cash basis of accounting, the government had reported federal deficits of $14.3 billion for 1973 and $3.5 billion for 1974. “Decade after decade the total of the swindle has been inexorably rising, until today the estimated shortfall owed Americans is an incredible $40 trillion.” Recalculated according to the accrual method and including future Social Security payments and government pensions, the true 1973 deficit jumped from $14.3 billion to a staggering $86.6 billion. The 1974 budget was even worse, jumping from $3.5 billion to just over $95 billion. The government underreported its deficits by more than $160 billion in a two-year period. Peter G. Petersen, former Chairman of the Federal Reserve Bank of New York, began sounding the alarm on this looming financial catastrophe more than a decade ago. In his 1996 book, Gray Dawn: How the Coming Age Wave Will Transform America and the World, he pointed out that if federal law required Congress to fund Social Security the way private pensions must be funded, the annual federal deficit in 1996 would have instantly risen by some $675 billion. Add in lavish and unfunded federal-employee pensions and the deficit would have risen by $800 billion. Add in Medicare and it would have risen by more than $1 trillion. The cash and accrual deficits that Arthur Anderson discussed in his 1975 report seem trivial compared to last year's federal deficit of $454 billion, and especially compared to this year's projected deficit of $1.8 trillion. Decade after decade the total of the swindle has been inexorably rising, until today the estimated shortfall owed Americans is an incredible $40 trillion. Nor has it stopped. The total continues to rise at a rate of $2 to $3 trillion per year. Bernie Madoff was able to get away with his fraud by using the same technique as Charles Ponzi did in the 1920s. He sold fictitious securities, promised a high return, and paid off old investors out of monies taken in from new investors. It collapsed when new victims could no longer be found to support withdrawals from old victims. The Social Security swindle has worked exactly the same way. It receives "contributions" in the form of FICA taxes, pretends to place those funds in trust, and pays benefits to current retirees out of taxes collected from current workers. Just as in the case of Madoff, there is no trust, there is no income to the non-existent trust, and the payments are simply made from current collections. Madoff's scheme lasted 20 years before collapsing. The Social Security swindle is now in its 74th year...the end is near. It's clear that Social Security cannot fulfill its promises to future retirees, but the casualties will not be limited to those victims, like Miriam Siegman, who find there is no life raft to carry them safely through retirement. In order to continue the fraud, politicians have no alternative except to issue more promises. Retirement checks will come, but they will be financed by more federal borrowing. Cash basis deficits will rise. Treasury IOUs will be converted by the Federal Reserve into dollars. As the monetary inflation morphs into price inflation, the victim list will swell to include everyone who doesn't see it coming. Last year, former Comptroller of the Currency, David Walker, teamed up with Addison Wiggin of Agora Financial to produce an eye-opening movie, I.O.U.S.A., which documented the stunning financial swindle being perpetrated on the nation. This compelling addition to Petersen's disclosure of the government's financial fraud is being widely shown, and has just become available on DVD. Unfortunately, we will never enjoy the sight of the politicians responsible for the Social Security swindle being sent to jail, but we can protect ourselves from their fraud. It's time to don your lifejacket. Best regards, John Pugsley for The Daily Reckoning P.S. What's the smartest way to prepare for retirement? If you've been pondering offshore banks or investments, consider moving forward now. If you've been considering dual citizenship, now's the time to learn the process. If you want to protect yourself from the collapse of the dollar, listen to the currency experts and special recommendations we've put together in a new report available here, which details how to protect your wealth and grow your portfolio. Editor's Note: John Pugsley is the author of many books, including the 1980 classic and New York Times bestseller, The Alpha Strategy, which made numerous correct predictions about the large deficits the United States would soon experience. John is also part of our all-star speaker line-up for this year's Agora Financial Investment Symposium in Vancouver, Canada. The conference is rapidly approaching, and...believe it or not...this year marks the 10- year anniversary of The Daily Reckoning! So, be there this July as we gather to celebrate a "Decade of Reckoning." Join all your favorite writers and speakers for four days that will fully prepare you for the profit opportunities of the next, coming decade. This event is sure to sell-out...so secure your spot now. Call Opportunity Travel at (800) 926-6575 to make your arrangements or click here for all the info... The Agora Financial Investment Symposium: July 21-24 --------------------- Special Offer --------------------------- Only 63 people know how 6 tiny companies will change the world... Become the 64th and get your chance to join the ultra-wealthy. This "story of our era" only happens once in a lifetime... and the upcoming, shocking announcement could be your best shot ever at a different life. YOUR chance ends at midnight on Friday, May 15th, read on...   The Daily Reckoning - Special Reports: US Recession: By far the Weakest Recovery Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run Out of Money