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Thursday, May 21, 2009 The bailout program: a scam on top of a scam... All the Feds do is make a bad situation worse... The "fake out" trend that is just the beginning of a new bubble... Alexander Green on how to "get wise" with your money...and more! ----------------------- Special Offer ------------------------- Ready to Recoup Your Recession Losses by 9/30/09? I don't know about you, but I'd barely trust Wall Street and the Big Banks with the 63 dollars in my wallet right now, never mind my IRA, 401(k), and life savings! That's why thousands of smart Americans are now taking matters into their own hands and quietly moving their savings and portfolio "off" Wall Street... to a far safer and more profitable place I call "Liberty Street." Read on to discover how this "Off-Wall Street Cash Recovery Plan" could recoup 100% of your recession losses by September 30, 2009. --------------------------------------------------------------- Bailouts the Plaque of Economic Hygiene by Bill Bonner Baltimore, Maryland Is it on...or off? The bear market rally, that is? The Dow was down again yesterday...but just a little...52 points. The short-covering rally is finished, says David Rosenberg, formerly one of Merrill's top analysts. "Everyone I know is laying people off...cutting back...and generally struggling to survive," said a colleague from Florida. "I don't believe this recovery story. The stock market might be up, but the real economy is still sinking." Yesterday, we went to get our teeth checked out. "Hey...I'm a Daily Reckoning reader," said our dentist. "So, I knew you were in town." Asked about the state of the economy, he had this comment: "Our business is a little counter-cyclical. People get laid off from work, but they still have their health benefits - at least for a while. They want to make use of them while they can. And they've got the time to do it. So, our business actually goes up. "But then, when the recovery comes they go back to work...they're busy...and they've already had their teeth fixed. We're not seeing that yet." House prices are still falling. The average house in Southern California has fallen to $247,000 - a big drop from the top set two years ago. Toll Bros., one of the country's biggest builders, reports revenues down 51%. If the US economy is really following Japan, things are going to get a lot worse. Japan's output is collapsing - at a 15% annual rate last quarter. The Land of the Rising Sun is a major exporter. For the first time ever, exports are falling...taking the Japanese economy down with it. Internally, the Japanese are still not big spenders. The population is not only aging...it's shrinking. That's not happening in the United States. Thanks largely to its immigrants and Hispanics, the US population is expanding. But this new population is not the same as the old one. At the top of the socio-economic pyramid in the United States is a huge group of aging, mostly white baby boomers. Naturally, the geezers vote. And naturally, they vote themselves more benefits at the expense of the next generation. In fact, you can look at the entire bailout/stimulus program...and the $1.8 trillion US budget deficit for 2009...as a huge transfer of wealth. Benefits are provided to the present generation at the expense of the next generation. The white boomers borrow - through their elected federal representatives. The next generation - much more Hispanic and much more immigrant - is stuck with the bill. But it's not that simple. The bailout/stimulus program is a scam on top of a scam. One generation may be trying to get something at the expense of the next - but they're both losing. On the surface, the next generation gets stuck with the cost of bailing out the present generation. But underneath, the bailout is a sham; it doesn't really work. It doesn't revive the economy. All it does is move money from sensible households and good businesses to reckless spenders, mis-managed firms, and foolish projects. The losers are the winners. What it doesn't do is bring about a general recovery in the economy. It can't - for all the many reasons we've described in these Daily Reckonings. All it does is leave it up to you to bail yourself out. The feds can spend money. But they can't turn bad investments into good ones...nor turn hopeless, brain-dead companies into successful ones...nor erase $20 trillion of excess debt. All the feds can do, in other words, is make a bad situation worse. First, they mislead investors into believing the fix is in. With all that money coming into the market, people think the problems are going away. "Everything is under control," they say to themselves. Then, they put their money into stocks, deluding themselves that a new boom is underway. Later, when it becomes clear that the boom is a long way off, they are deeply disappointed. Stocks fall...and the economy enters a long, dark period of workouts, defaults, bankruptcies, disgrace and suicides. Then, as we have explained many times, the feds' money actually delays the process of creative destruction. Instead of burning off the dead wood and making room for new growth, the smoke jumpers at the Fed parachute out of airplanes to smother the flames. Instead of a hot fire that burns itself out in 24 months...the economy suffers a slow burn for 10 years. Another way they make the situation worse is by undermining the rule of law and the predictability of economic rules. When a corporation goes broke BOTH the bondholders and the stockholders should suffer. But in bumbles the Federal government with bailout money. The share price plummets as investors anticipate a clumsy takeover - wiping out the shareholders. But the bonds could even go up - as the firm is given easy credit, allowing it to stay out of bankruptcy and continue paying off the bondholders. Worse, as in the case of the Chrysler bailout, the feds jumped in and upset everybody. Instead of letting the markets sort out the stockholders and bondholders, they forced a political settlement that rewarded one class and punished another. Bondholders got less than they should have...and the autoworkers union got more. What is this? A free-market country with the rule of law? Or a third- world basket case in which the politicians decide who gets what? And now some more news from The 5 Minute Forecast: "You've heard the old axiom, 'Do as I say, not as I do'?" writes Ian in today's issue of The 5. "Today, the Federal Reserve's done one better: 'Do as we say, not as we forecast.' "Despite all the mentions of 'green shoots' of recovery sprouting about - the 'tentative signs' that the recession is easing - the fine details of Federal Open Market Committee minutes released yesterday painted a clear picture: The worst is yet to come. "Funny how that works, eh? If Mr. Bernanke were to sit before Congress and say, 'I expect unemployment, inflation and our economy at large to all deteriorate for the rest of the year; it's even worse than we predicted back in January,' that would cause quite a commotion. "But that's the beauty of fine print. These forecasts can be found at the end of the FOMC's 20-page release, in a hard-to-interpret table. Only someone who's being paid to do so would have the patience (or stupidity) to sift through the 6,800-plus words preceding it." Ian writes every day for 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. It's a free service available only to subscribers of Agora Financial's paid publications, such as Resource Trader Alert, whose latest report details an exclusive way to legally "hack" into one of the world's most elite and secretive markets. It's a market usually reserved for investors who've already made their first million. But you can get in for only a fraction of what they paid. Read all about it here. Now back to Bill, still in the land of orioles and blue crabs: *** Are you watching the dollar? Maybe the unwinding of the dollar- based paper money system is coming sooner than we expected. Yesterday, the dollar fell again - now it costs $1.37 to buy a euro. And if you want an ounce of gold, it will cost you $937. It looks to us as though gold is headed to $1,000 again...maybe higher. This is not what we expected... Not yet anyway. What we still expect is a broad, long rally in stock prices. We think the Dow might go back to 10,000 before it is over. This is the rebound we were waiting for. It should boost asset prices generally - including gold, commodities and oil - as well as stocks. Oil, by the way, rose $2 yesterday too. It's back to $62. But this trend is probably a fake out. Underlying the positive market news is an economy that continues to decay, degrade and deflate. Remember, this is a depression, not a recession. The bubble era is over. Because the transmission is broken. The financial industry has blown up. It won't be repaired. Instead, it will be bailed out...nursed along...and mollycoddled. Once a bubble blows up, it is never repaired and reflated. Instead, if new money is added to the system, it goes into a new bubble. Right now, the new bubble is in the US Treasury market. How long that will last, we don't know. But currently, if you put your money into Treasury bills - short-term US paper - your yield will be negative. This does not happen very often. If it ever happens in our lifetimes again, it will be when the moon turns blue. And anyone betting on an indefinite continuation of this bubble is probably a lunatic. But when it blows...we wish we could tell you. *** "Can I get a bottom of wine..." A drunk had wandered into the dentist office in downtown Baltimore while we were waiting to have our teeth cleaned. "I'm sorry, sir. You're going to have to leave," said the blond woman at the desk. "This is a dentist office. You come here to get your teeth worked on. This isn't a liquor store." "Wha...? I'm s'posed to be here... I think...my mother sent me down here..." "What?" "My mother..." "Wait a minute," said an older woman behind the desk. "That's Henry. That's Ms. Rogers son." The man was very drunk. His eyes were out of focus. He was about 40 years old...wearing what looked like a hunting jacket. Wobbling as he stood before the desk. "Okay..." continued the blond woman. "Henry...we're not going to work on your teeth if you're drunk. You come back straight...and we'll take you. "Besides, your appointment is for tomorrow at 9:30...not today. You run along...and come back tomorrow at 9:30...and come back sober...okay?" "Henry," the older woman took up the conversation. "Do you have bus fare? How you gonna get home?" "Bus fare...why? I'm not going anywhere..." "Yes you are..." said the blond woman...and she escorted him to the door and pushed him outside. Until tomorrow, Bill Bonner The Daily Reckoning ----------------------- Special Offer ------------------------- Can You Handle This Much Wealth? I've seen this one simple move can turn $10,000 into $1,509,000. Thing is, not everybody has the courage to make it happen. Not everyone thinks they deserve this kind of wealth. Maybe just 1 in 100. Can you prove to me you're one of them? --------------------------------------------------------------- The Daily Reckoning PRESENTS: One thing we can all take from the recent government shenanigans is this: No one (certainly not the fools on the Hill) cares more about your hard-earned money than you do. Chairman of Investment U, Alexander Green, has recently released a book, The Gone Fishin' Portfolio, and in it he details where you should put your money - and how to manage it. Keep reading for an excerpt from Gone Fishin' below... Get Wise by Alexander Green Charlottesville, Virginia As an investment analyst, I speak frequently at investment conferences across the United States and around the world. The attendees come for a number of different reasons. Some want to gain some insights on interest rates, the dollar, or the stock market. Others are seeking a new investment strategy. Still others are looking for good investment ideas or, as one gentleman insisted, "just one great stock." But before you can put your money to work effectively, you need something even more fundamental to your success: a philosophy of investing. In her book Philosophy: Who Needs It, Ayn Rand argues that all of us have a philosophy of life, whether we know it or not. "Your only choice," she writes, "is whether you define your philosophy by a conscious, rational, disciplined process of thought...or let your subconscious accumulate a junk heap of unwarranted conclusions..." What's true of life is also true of investing. Over the past two decades, I've dealt with thousands of individual investors, some highly astute, some rank novices. Many had only the foggiest notion of what they were trying to achieve - or how. In some ways this is understandable. World financial markets are complex and the investment process can be daunting. Beginners often don't understand the fundamentals of saving and investing. And even more experienced investors are often stymied by the complexities and technical jargon surrounding the investment process. Many try (and inevitably fail) to outguess the markets - or simply wave the white flag and turn their portfolio over to "that nice young man down at Merrill Lynch." Big mistake. No one cares more about your money than you do. With a basic understanding of the investment process and a bit of discipline, you're perfectly capable of managing your own money, even your "serious money." Especially your serious money. By managing your own money, you'll be able to earn higher returns and save many thousands of dollars in investment costs over your lifetime. The Gone Fishin' Portfolio rests on a powerful philosophy of investing. It's battle-tested. It's built on the most advanced - and realistic - theories of money management. And it works. Moreover, The Gone Fishin' Portfolio does something that virtually no other investment guide does. I'm going to show you - very specifically - where you should put your money. And then I'm going to show you how to manage it year after year. Once you've set up your portfolio, the whole process will take less than 20 minutes a year to implement. This may sound like an audacious claim. But, as you'll soon see, the strategy itself is steeped in humility. It is based on the only realistic premise for an investment philosophy - that, to a great extent, the future is unknowable. So don't expect me to draw on my gift of prophecy and tell you what's going to happen to the economy, interest rates, the dollar, or world stock markets. (No one is more surprised than me how the market action unfolds each year.) Nor will we ignore uncertainty or pretend we have a system that has eliminated it. Instead, we're going to use uncertainty and make it our friend. In short, we're going to capitalize on it. Investing is serious business. Getting it right is the difference between a retirement spent in comfort (or luxury) and spending your golden years counting nickels, worrying whether you'll have enough. The difference could hardly be starker. “Investing is serious business. Getting it right is the difference between a retirement spent in comfort (or luxury) and spending your golden years counting nickels, worrying whether you’ll have enough. The difference could hardly be starker.” Up until now, you may have been tempted to turn your investment portfolio over to someone else to manage. After all, your financial security is paramount. You may not think you can take the risk - or handle the responsibility - of running your money yourself. I fully intend to disabuse you of that notion. I also want to point out that there are serious risks to turning your money over to someone else. That person may manage it poorly. Or be terribly expensive. Or both. If you're skeptical on this point, it may be that you've bought the story that Wall Street is selling: Investing is so complicated - or your personal circumstances so exceptional - that you should not be trusted to run your own money. I'll concede that if you don't know what the heck you're doing, this is absolutely true. But one solution is learning what to do, rather than turning your financial welfare over to someone else. When it comes to managing your money, there are plenty of potential pitfalls out there. However, those investors who wind up in retirement with less money than they need have generally fallen prey to one of four basic mistakes: 1. They were too conservative, so their portfolio didn't grow enough to begin generating the income required to meet their spending requirements. 2. They were too aggressive, so a significant percentage of their portfolio went up in flames along the way. 3. They tried - and failed - to time the market. Confident that they would be in for market rallies and out for market corrections, they ended up doing just the opposite much of the time. 4. They delegated unwisely. They turned their financial affairs over to a broker, insurance agent, or financial planner who - over time - converted a substantial amount of their assets into his assets. In addition, the advisor may have been too conservative, too aggressive, or tried and failed to time the market. If your nest egg is lying in pieces late in life, you generally don't have the opportunity - or the time - to build another one. The consequences, both personal and financial, can be devastating. Planning your financial future is a momentous responsibility. Although The Gone Fishin' Portfolio has a lighthearted name, it enables you to handle your serious money - the money you need to live on in retirement - in a serious way. There are few guarantees in the world of investing. In fact, once you get beyond the risk-free world of Treasuries and certificates of deposit, there are virtually none. However, The Gone Fishin' Portfolio eliminates six major investment risks: 1. It keeps you from being so conservative that your long-term purchasing power fails to keep up with inflation. 2. It prevents you from handling your money recklessly. 3. It does not require you to own any individual stocks or bonds. So a single security - think Worldcom or Enron - cannot cause your portfolio to crater. 4. It does not require a broker, financial consultant, or anyone else to attach himself to your portfolio like a barnacle, siphoning off fees every year. 5. It doesn't require you - or any investment "expert" - to forecast the economy, predict the market, or analyze competing economic theories about the future. 6. Perhaps most importantly, it guarantees that your time will be your own. Rather than spending countless hours evaluating stocks, market trends, or fund managers, you'll spend your time as you please. While others struggle to manage their money effectively, you'll have "gone fishin'." This last point means that instead of spending countless hours fretting over your investment portfolio, you'll be able to relax...play golf...travel the world...spend more time with your kids or grandkids...or just swing on a hammock in the shade with a glass of ice-cold lemonade. Because your investments will be on autopilot. This is not just a strategy for today's markets, incidentally. The Gone Fishin' Portfolio is designed to prosper - and generate peace of mind - through all market environments. And I invite you to be skeptical. In fact, let me begin by asking you a question: If I could show you a way to manage your money yourself, using a strategy that is as powerful and effective as any used by the nation's top institutions, that will allow you to outperform the vast majority of investment professionals, pay nothing in sales charges, brokerage fees, or commissions, that will take less than 20 minutes a year to implement, and is based on an investment strategy so sophisticated it won the Nobel Prize in economics, would you be interested? I hope so. That, in a nutshell, is The Gone Fishin' Portfolio. It's about handling the money you intend to retire on simply, effectively and cost-efficiently, with the absolute minimum of time and attention. If you're like most people I know, you have better things to do than watch your stocks bounce up and down all day. Don't get me wrong. I'm not averse to trading stocks, myself. (Long- term investing and short-term trading are not mutually exclusive.) But short-term trading strategies are beyond the scope of this book. Instead of focusing on trading or speculating, we're going to focus here on the money you intend to retire on - and perhaps ultimately leave to your kids, your grandkids, or your favorite charity. This is money that shouldn't be treated like chips in a poker game. Reaching financial independence is a serious goal, one that should be pursued in a disciplined, rigorous way. That's why I recommend that you make The Gone Fishin' Portfolio the core of your long-term investment program. The philosophy behind it is based on the best investment thinking available. It has been tested in various economic conditions. It increases your returns while reducing your risk. And it minimizes your investment costs and annual capital gains taxes. Best of all, it works. Investors who have put their money to work this way have enjoyed years of market-beating returns while taking less risk than being fully invested in stocks. Now it's your turn. Regards, Alexander Green for The Daily Reckoning Editor's Note: Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager. He is also Chairman of Investment U, an Internet-based research and education service with over 300,000 readers. He currently writes and directs the twice-weekly Oxford Portfolio Update e-letter and three short-term trading services: The Momentum Alert, The Insider Alert and The New Frontier Trader. Mr. Green is also the author of The New York Times bestseller The Gone Fishin' Portfolio: Get Wise, Get Wealthy...and Get On with Your Life.