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Wednesday, May 6, 2009 Can the feds now fix the trouble they never saw coming? Mr. Market may taketh away, but Mr. Federal Official putteth back... The next phase could be worse than the '30s... Gerald Celente describes 'The Greatest Depression'...and more! Bernanke's Crystal Ball by Bill Bonner London, England "Jeepers, creepers...where'd you get those peepers... "Jeepers, creepers...where'd you get those eyes..." Thank god for laser eye surgery! Now, the people who were blind to the biggest financial crisis in the history of the world can see clearly again. And what do they see? A recovery! "Bernanke strikes note of hope on economy," says the headline in today's International Herald Tribune. "The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday that the US economy appeared to be stabilizing on many fronts and that a recovery was likely to begin this year." Is this good news? Or what? 'Or what' is our bet. Yesterday, the markets seemed to take a breather. Stocks fell slightly. Oil slipped a bit too. The dollar remained where it was...but still on a downward trend. And gold held steady...at $902 an ounce. Can the feds now fix the trouble they never saw coming? Can the people who ran banks into the ground now run the banks that will help finance the recovery? Can the investors who bought trashy investments with borrowed money now recognize the good investments that are put in front of them? Neither Ben Bernanke, Tim Geithner, Hank Paulson nor Alan Greenspan could see it - but there was something clearly wrong with the Bubble Economy of 2001-2007. We said so many times. 'Good riddance,' we celebrated, when it keeled over But now they struggle to revive it. Like a brain-dead codger on life support, they are bankrupting the next generation trying to keep it alive. "We expect that the recovery will only gradually gain momentum," Ben Bernanke forecast, trying to manage expectations, "and that the economic slack will diminish slowly." Really? Oh, the wonders of modern medicine. Now, with 20/20 vision, the Fed chief can look ahead and tell us what will happen next. If only he'd gone to the doctor two years ago! Stocks are rallying all over the world. Economists are putting on their spectacles and looking to the future. Bankers are cashing their checks and laughing all the way home from work. "That sense of unremitting free fall we had a month or two ago is not present today," says White House economic advisor Larry Summers. Barron's Big Money Poll shows professional portfolio managers are bullish again. They're looking for the Dow to gain 7% this year...and 17% by the middle of next year. (This is good news for us. We were beginning to look around and notice that that too many stupid people agreed with us. But now that we see the pros are in the opposite camp...we can sleep more soundly.) The proximate cause of all this optimism is the vigor with which the people who didn't see the problem coming have gone about fighting it. Mr. Market may taketh away...but Mr. Federal Official putteth back. At least, that's the logic of it. So far, in the U.S.A. alone, they've earmarked a sum nearly three times the cost of fighting World War II. Not all of that are direct cash outlays. Much of it is in the form of financial 'guarantees' and 'investments' (such as buying up Wall Street's smelly derivatives). Still, it's a lot of money. Normally, in a correction, the supply of money - M1 - falls. Asset values are destroyed...borrowers default...money disappears into vaults and mattresses. But this time, so vigorous has been the authorities' response that M-1 is actually increasing at about a 14% annual rate. The money's got to go somewhere... Here in London, the government has taken a similarly energetic line. The Bank of England has fallen in line with the government and boosted its balance sheet by more than two times in the last 12 months. Banks have been shored up with easy cash. Rates have been cut. Stimulus budgets have been passed. And yesterday, the government bailed out LDV, a maker of industrial vans. Naturally, the bailout comes with some strings attached. The government stressed that this was just a 'short term' solution, pending a rescue by a Malaysian group. And hey...wait a minute...the company also had to promise not to move its production out of the United Kingdom. Who needs Smoot and Hawley when you can protect your markets using central bank cash? So we see, the feds are on the case. Investors are coming back into the market. The banks have money again. What could go wrong? Why...everything...of course! Luckily, when it does, our dear readers will be ready. The Richebächer Letter's Rob Parenteau has picked up where the Good Doctor left off - showing readers how to protect themselves from an even deeper downturn. The clock is ticking much faster than most believe...read Rob's full report here. Now, we turn to Addison for the latest on the sucker's rally: "Markets make opinions... even of Federal Reserve Chairmen," writes Addison in today's issue of The 5 Min. Forecast. "I think we are in much better shape than we were in September and October," Mr. Bernanke testified yesterday, often speaking in a manner that, gulp, even a Congressman could understand. That the S&P 500 had just inched positive for the year provided ample cover for the chairman's tepid confidence. "The Dow, responding in kind, opened up 1% this morning. Following minor losses yesterday, the market turned positive after the ADP jobs report hit the wire this morning. "Let us remind you, history shows this rally still has room to run: "The current rally is smaller - in order of magnitude and duration - than the average Great Depression rebound. Should history rhyme, we still have another 5% to the upside and more than 20 days to go. "Here's the 'money' lesson: Despite 5 rallies from 1929-1932 that exceeded 15% - including the doozy that soared almost 48% - the Dow fell from 300 to 60 over the same period. That's an 80% crash. Caveat emptor. "'875 is the number to watch on the S&P 500,' notes John Wayne Burritt, architect of Easy Money Options. 'Because the market reversed course to the downside February 9th at that level (875), and that peak is called - in technical parlance - a 'resistance' level. "'The market also failed to penetrate this resistance level just a few trading days earlier, on Jan. 28. All told, that means 875 is a pretty tough point for the market to get above. That's why the market's most recent action is more significant than most investors and traders are thinking: It smashed above key resistance at 875 like a walk in the park. No doubt about it, that shows uncommon technical upside strength. "'Here's the best part: When the market breaks through resistance - especially after failing to do so in previous attempts - that resistance level has an excellent chance of becoming a stopping point when the market decides to turn down again. "'In other words, strong resistance - once defeated - becomes solid support for future price action. So when the market pulls back - and it surely will - it's very likely to not fall too much below 875.' "And if the S&P 500 fails to find support at 875? All bets are off. If you're looking to trade the swings, be sure to check out Wayne's recommendations here. And back to Bill, with more thoughts: In the first place, the rally in stocks is likely to be a bear market trap. A real boom would require a real increase in profits. That is not likely to happen. Housing prices may be nearing a bottom - or not - but they're not likely to begin another huge rise again in our lifetimes. Once a bubble pops...it's usually over for that sector at least until another generation comes along. It will be a long time before homeowners forget what happened to their house prices. And it will be a long time before investors are willing to make big gambles on housing debt. It will also be a long time before Americans return to free-spending ways. Not only do they no longer have the collateral to back up more debt, they are also growing older and wiser. Consumer spending rose 2.2% in the last quarter. But that is probably a fluke. Americans can't spend what they don't have. And they must save for long retirements...knowing that their houses and stocks could lose value at any time. Many Americans are coming to the realization that the traditional way of planning for retirement - 401(k) plans, for instance - is just not going to cut it anymore. We have come across a great strategy (with a proven track record over time) that can easily outclass classic fixed- benefit pensions on reliability, and can nearly double your market performance. Learn more about it here: "Plan B Pensions." The last report we saw showed the saving rate was back towards 5% - a big jump up from zero a year ago. There is no way savings AND spending can go up at the same time. What's more, their incomes are falling. Wages and salaries are down 1.2% over the last year. As this depression sinks in...Americans will lose more income. USA Today opens with a cover story on "the new homeless." There's a photo of a 53-year-old man sitting in his tent. It's a "temporary situation," he says. But the tent city in Pinellas County, Florida, may be home for longer than he expects. "Tent cities filling up with casualties of the economy,' says the headline. "Some middle-class workers with college degrees find themselves displaced by layoffs, foreclosures." "Economy contracts 'faster than in the 1930s,'" says a headline in today's Financial Times. A research outfit is forecasting a drop in British national income of 4.3% - substantially worse than the government's guess. The reason for this new outlook is that "world trade has collapsed by more than forecast," explained an economist on the case. The report went on to forecast UK public debt at 100% of GDP. The story is not much different in the United States. GDP is falling at a 6% annual rate. If this continues for a few years, it will make this depression worse than the Great Depression of the '30s - which hit America much harder than it did Britain (probably thanks to the forceful response of the Hoover and Roosevelt administrations). Equity losses last year were worse than those of '29. It stands to reason that the next phase - the economic decline - will also be worse than the '30s. By our calculation, the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage. Getting rid of that debt either involves a long, hard period of work and sacrifice - as debts are paid down. Or, it involves something much worse. Our guess is that the feds - who still have no idea what is going on - will choose the second solution...something much worse. But what, exactly? We have some ideas...some guesses...stay tuned. Until tomorrow, Bill Bonner The Daily Reckoning P.S. While we wait this out, we will continue to hold gold, which has continued to sit around the $900 range. Before this show ends, we think it will go much higher - but you can still get it for just a penny per ounce. No joke. See how here. --------------------- 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 you've been warned you... Only 1 in 100 people can probably handle this. Are you one of them? Only you can decide... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Trend forecaster Gerald Celente describes the history of the future, envisioning how "The Greatest Depression" will look from the perspective of someone in 2012. Read on, and see how he recommends you prepare for the worst... Looking Back on The Greatest Depression by Gerald Celente Kingston, New York On average, world trade fell 31 percent in January 2009. To varying degrees, recession and depression gripped globally. "The outlook for global consumption remains bleak. Exports are likely to remain lackluster until global consumers regain their appetite for consumption," wrote Jing Ulrich, managing director at JPMorgan in Hong Kong, in response to the dire data. To track and make practical use of trends requires critical analysis of not only the data but also of the interpretations arising from the data. This becomes particularly essential when interpretations express a virtual media consensus. "Whenever you find that you are on the side of the majority, it is time to pause and reflect," advised Mark Twain. A case in point: On the surface, Ms. Ulrich's assessment above does not seem unreasonable. It is a theme expressed, with minor variations, by a majority of economic analysts reported by the media. But that assessment rests upon a set of false or questionable assumptions. The first assumption was that all consumers need to do is "regain their appetites" for exports. But it has nothing to do with "appetites." Consumers were broke. They were no less hungry for products - they just didn't have the money to buy them. The second assumption was that once consumers started consuming again exports would regain luster. Implicit in this statement was that as exports grew, economies would rebound and everything would go back to normal. This "normal" refrain was endlessly repeated, not only by economic analysts, but by politicians and business leaders. Unquestioned was not only the inevitability, but also the virtue and desirability of a return to "normal." What was normal? Normal, prior to "The Greatest Depression," meant unchecked over consumption and over development made possible by the availability of cheap money and easy credit. On the consumer end, "normal" was a death wish, "shop 'til you drop" - an obsessive compulsion by the profligate many to spend money they didn't have but had to borrow. The spending spree extended to buying expensive new cars rather than affordable used ones. It had people building extensions and making home improvements when neither were necessary. It meant buying a McMansion when a Cape Cod would do. Splurging on expensive vacations, elaborate weddings and extravagant bar-mitzvahs to impress family and friends. Borrowed money financed a major lifestyle upgrade that otherwise could not have ever been imagined, but that corresponded to what most people considered the "American Dream." Borrow to the limit now, and pay sooner or later was "normal." On the commercial/financial end, "normal" was also the obsessive compulsion to endlessly acquire, not merely upgrade. Borrowed billions, lots of leverage and little collateral provided financiers and developers with the power to acquire ever more money, assets and prestige - through mergers and acquisitions, building developments, equity market speculation and predatory business practices that gobbled up or drove out the competition. Give or take a bit of regulation and self-restraint, this was the "normal" the popular new President promised to return to. Which brings us to the third assumption, and arguably the most important which was that the crisis - inability of banks to lend and businesses to borrow - was mainly responsible for the economic disaster. As President Obama put it, "Our goal is to quicken the day when we restart lending to the American people and American business, and end this crisis once and for all." "To promote policies encouraging people to take out more loans and sink still deeper into debt was abnormal, not 'normal.' The abnormal had been renamed the normal." He said, "You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll." Sounds positive, doesn't it? Ease the "flow of credit." Make it easier "to get a loan." But what the President meant and did not say was ... take on more debt, borrow more money. Sound familiar? Turn back the clock. Remember the advertisements at the start of the decade encouraging Americans to take out home equity loans, to buy new cars, to move up from a starter home into the dream house? With interest rates at 46 year lows and credit flowing, the public were suckered into betting on their futures with borrowed money they could only pay back as long as they had jobs, could make payments and the economy didn't collapse. But when they lost their jobs, they couldn't make payments and the economy began to collapse. Total unemployment (including discouraged workers and those with part time jobs looking for full time) was nearing 15 percent. In the fourth quarter of 2008, the net worth of American households fell by the largest amount in more than a half- century of record keeping. By February 2009, the foreclosure rate was up 30 percent from February 2008. What Mr. Obama promised as the solution was, and had been, the problem. The country was already overwhelmed with debt ... debt that it couldn't pay back. In what way could incurring more debt "end this crisis once and for all"? It was a plain fact; the flow of easy credit produced a torrent of debt. In 2009, private sector credit market debt was 174 percent of GDP. Household debt-service ratio was at an all-time high. US households had 39 percent more debt than income. (In 1962, consumers had 37 percent less debt than income. To promote policies encouraging people to take out more loans and sink still deeper into debt was abnormal, not "normal." The abnormal had been renamed the normal. Instead of encouraging people to live within their means, cut back, save money, and distinguish between "wants" and real needs, the official policy was to turn on the credit tap and flood the world with more debt. The sanity of the policy was never in question. Arguments raged only over the quickest and most effective way to turn on the money spigot. Everyone was looking for someone, somewhere, for rescue, and most eyes were turned to the United States. Even though the US was blamed for the flagrant economic abuses that brought on the crisis, given its economic clout and Superpower status, America was still looked to for the leadership needed to pave the way to recovery. With its globally popular new president, hopes ran high that American know-how would know how to fix the problem ... as though it were an intellectual exercise that could be solved by applying the correct economic formula. No such formula existed. Yet so desperate was the world that it placed its hopes on the very people responsible for the deregulation of the financial industry largely blamed for the crisis. The deregulators now occupied key positions within the cabinet of that globally popular new President. Billionaire investor Warren Buffett added a military dimension, dubbing the meltdown an "economic Pearl Harbor." Buffett called on Congress to unite behind President Barack Obama, comparing the economic crisis to a military conflict that needed a commander-in-chief. "Patriotic Americans will realize this is a war," he said. If it was an economic Pearl Harbor, the enemies were Fannie Mae, Freddie Mac, A.I.G., Countrywide, Bank of America, Merrill Lynch, Citigroup, Bear Stearns, and all the other banks, brokerages, speculators, insurance companies, hedge funds and leverage buyout specialists that had launched the sneak attack on the American economy. It had nothing to do with patriotism, unless being a "Patriotic American" meant appeasing and rewarding the enemy with trillions of dollars of taxpayer money and not being allowed to know where the money went. Fed Refuses to Release Bank Data, Insists on Secrecy March 5, 2009 (Bloomberg) - The Federal Reserve Board of Governors receives daily reports on bailout loans to financial institutions and won't make the information public, the central bank said in a reply in a Bloomberg News lawsuit. The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast "a stigma on recipients of more than $1.9 trillion of emergency credit from US taxpayers and the assets the central bank is accepting as collateral. The public had been cozened into believing: That disclosing the identities of the recipients would poorly reflect upon their public image and therefore their ability to function. Secrecy, on the other hand, allowed them to continue making disastrous decisions, while bamboozling clients who would not know they were dealing with incompetents - who stayed in business only because of huge taxpayer-financed infusions of corporate welfare. The "too big to fail" had to be bailed out by taxpayers in order to keep "the credit markets from seizing up." But the consequences of seized up credit were rarely if ever spelled out. Many financial analysts no less "expert" than those pushing through the bailouts were convinced that allowing the credit markets to seize up would, in the long run, prove far less costly than endlessly printing money and pouring it down a plush-lined sink hole. Buffett was wrong. It wasn't a "war" at all. It was a criminal case, or should have been, but the accused took a financial Fifth Amendment - the right to remain silent, since any statement made could be used as evidence against them - and got away with it. When, at a hearing before the Senate Budget Committee, Fed Chairman Ben Bernanke was asked, "Will you tell the American people to whom you lent $2.2 trillion of their dollars?" He answered, "No." Regards, Gerald Celente for The Daily Reckoning Editor's Note: The above is excerpted from The Trends Journal, which is published by Gerald Celente. The Trends Journal distills the ongoing research of The Trends Research Institute into a concise, readily accessible form. To learn more about The Trends Journal, click here. Gerald Celente is also founder and director of The Trends Research Institute, as well as the author of Trends 2000 and Trend Tracking. Celente has made many media appearances including Oprah, CNN, The Today Show, CNBC, Good Morning America, NBC Nightly News, and has been cited in publications such as the Economist, Chicago Tribune, LA Times, Entrepreneur, and USA Today. --------------------- 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...