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Friday, June 12, 2009 Households expand and contract with the credit cycle... More evidence that the recession isn't ending soon... The US government targets the middle class to repay its debts... Bill Bonner on the life of the late Mr. Oscar Bongo...and more! ----------------------- Special Offer ------------------------- Meet Mr. X... He Could Make You an Extra $1,156 Per Day We were intimidated by his bold trades... Then we realized he could have made you $34,685 in just the last 30 days... Get behind the mystery of Mr. X here! --------------------------------------------------------------- The Curious Case of the "Normal Recession" by Bill Bonner London, England Nothing much happened in the markets yesterday. Stocks up. Gold up. Oil up. Bonds up. Dollar down. But listen up...an important announcement: The bear market/credit crisis/depression is over! How do we know? Abby Cohen says so. We read this in Bloomberg the other day: "U.S. financial markets have been moving 'back towards normal' since March, said Abby Joseph Cohen, Goldman Sachs Group Inc.'s senior investment strategist, in an interview. "'Much of what we can recognize as happening now is really a restoration of where we should be,' Cohen said 'This situation is much closer to normal than any place we have been over the last 18 months.'" Bloomberg does not mention it, but soldiers had more of a fighting chance under George Armstrong Custer than investors following Abbey Joseph Cohen. In August of 2007, she told CNBC that the S&P 500 would rally to 1,600 by December. Then, in December, she predicted the S&P 500 index would reach 1,675 in 2008. In fact, the S&P 500 traded as low as 741.02 by November 2008. We wonder what they put in the water where Abby Cohen lives. The woman always thinks stocks are going up, of course...but there is nothing odd about that; she's paid to think stocks are going up. Of course, we know better. We wouldn't touch stocks with a ten-foot pole. But why does she think the situation is close to normal? What's normal in her world? Deficits at 13% of GDP? GM goings bust? US presidents running auto companies and banks? Bailouts...boondoggles...and baloney equal to the entire nation's output? If this is 'normal'...what's not? We went to dinner with a group of Americans last night - at one of London's oldest gentleman's clubs. Women are not allowed at the bar or in many other parts of the club, but they may come for dinner in the main dining room. Included was a young woman: "I have a lot of friends who are just getting out of college. None of them has gotten a good job. Instead, they're all moving back in with mom and dad. And some of them are in their mid-'20s... It's very depressing." It's a phenomenon known as household compression. Households expand and contract with the credit cycle. The '80s, '90s and early '00s were a time of household expansion. Families broke up. Men and women separated, setting up house in different places. The average house size went up...but the average number of people per household size went down! Now, those trends are reversing. Children are moving in with parents...spouses are moving back in with each other...old folks are staying put. Multi-generational families are becoming more common. We don't have any statistical proof of this. But it makes sense. And it's not a bad thing. We've had a multi-generational household for many years. Grandmother, parents and children all in one house. Everyone seemed to benefit from it. From around the world comes more evidence that the recession isn't ending soon. Bloomberg reports: "German exports in April were 4.8 per cent lower than in March, and 28.7 per cent down on a year earlier, official figures show - the steepest annual fall since records began in 1950, although officials said that April 2008 had been exceptionally buoyant." Meanwhile, from China, comes news that the world's most dynamic economy has lost some of its old vim and vigor. Chinese exports are down too - 26%: "China's exports fall by record after global demand dries up," reports Bloomberg. But what's this? The New York Times says China is on a "commodity buying spree." How could China import so much copper and iron ore when it's not exporting finished products? Iron ore imports into China, for example, are running 27% ahead of 2008. What are they doing with the raw materials? This story from Maritime Global News helps explain it. "...could be the fact that domestically produced iron ore in China is of a rather poor quality and quite expensive when compared to spot imported prices. Another explanation could be that of speculators getting into the import market to try and get hold of 'cheap' iron [ore] that would possibly be required under the Chinese government's US$586bn stimulus plan. And a third could be the impending conclusion of the iron ore contract price negotiations." Whatever the explanation... China may be importing raw materials, but it is not selling them. Neither is Germany. And neither is Japan, whose economy is shrinking at a 14% rate. So here's a question for Abby: How can you have a global rebound when the world's three biggest exporters aren't exporting? They're not selling because the usual buyers aren't buying. Consider this: "Hiring Plans Stick at Record Low," begins a MarketWatch story. Employers' plans to add jobs were at an all-time low in the second quarter. Now, according to Manpower's latest survey, they're still at a record low. And today comes word that foreclosures topped 300,000 last month - for the third month in a row. At this rate, three and a half million houses will be foreclosed this year. No jobs, no income. No income, no buying. No buying, no real boom. No real boom, stocks head down. Why complicate it? Now over to Ian Mathias at The 5 Minute Forecast, with some more news: "Just when you thought 'too big to fail' was going out of style: Ohh...and they've already got a great, devious name! "BlackRock announced a $13.5 billion merger with Barclays Global Investors today, making the former company the biggest money manager in the world. BlackRock will soon oversee $2.7 trillion in assets, making it roughly twice the size of State Street or Fidelity, its closest competitors. That's $2.7 trillion under management...with a market cap of just $34 billion. "If that marriage of assets to equity wasn't unnerving enough, BlackRock will also pick up iShares in the deal. That makes the new world's biggest asset manager also the world's biggest wielder of exchange-traded funds (ETFs) - the rabidly popular, complex derivatives (many of which track other complicated derivatives) that millions own, but very few truly understand. Hmmm..." 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 Capital & Crisis. And in the latest report of C&C, you'll discover a little-known way to receive up to three extra paychecks a month...without lifting a finger. It's the perfect way to ensure a constant influx of money, whenever you may need it. Click here for all the info. And back to Bill, in London, with a few more thoughts: Gradually, Americans are waking up. They are rubbing the sleep from their eyes and wondering what they were thinking when they gave the Bush and Obama administrations their credit cards. "This isn't a temporary stimulus but a ramp-up in debt followed by a greater explosion in spending and debt," said Congressman Paul Ryan to Fortune magazine. "The bond markets will come after us with a vengeance. We're playing with fire." Playing with fire? Yes...in a refinery! Fortune says that over the next 10 years federal deficits will add $90,000 in debt to the average tax-paying household's burdens, bringing the total to about $155,000 per household. Fortune is underestimating. It's likely to be much, much more. We hope you're prepared, dear reader. Our friend and colleague, Rob Parenteau, at the revamped Richebächer Letter says there's a "triple time bomb" yet to hit the market that will make recovery nearly impossible. Click here to find out what it is. Obama may talk about taxing the rich. In fact, there aren't enough rich people to pay the tab for US spending; the middle class will have to put on the yoke. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy, says Fortune: "a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals." But wait, there's more... The American middle class can't really pay these debts. They were living hand to mouth even in the Bubble Epoch. Now, jobs are disappearing and incomes are going down. How would they possibly keep up with the interest, let alone pay down the principal, on an additional $90,000? We quoted estimates that taxes would have to go up by 60% to balance the budget by 2019. As we said then; that ain't gonna happen. Instead, the US is headed for bankruptcy. And that begins with higher interest rates, as lenders try to protect themselves from the risks of default and/or inflation. Fortune: "The risk that the U.S. will follow Britain, which was warned recently that it could lose its triple-A bond rating, has risen from virtually nil to a real possibility, judging by the sevenfold jump in the cost of insuring Treasury debt in the past year. The big borrowing is already spooking the bond markets. This year rates on 10-year Treasuries have jumped from 2.2% to 3.7%. A further increase in rates would aggravate the situation, raising the interest costs on the debt and increasing its size even more." Allan Meltzer, the distinguished monetarist at Carnegie Mellon: "I predict far higher rates over the next few years." Fortune continues: "Under George W. Bush, the U.S. experienced a prelude to the crisis before us: Spending rose rapidly, while revenues remained reasonably flat. Bush created an expensive new entitlement, the Medicare drug benefit (cost this year: $63 billion), and let spending on domestic programs from education to veterans' benefits run wild. Over seven years the wars in Afghanistan and Iraq added a total of some $900 billion to the budget. All told, Bush raised spending from 18.5% to 21% of GDP, setting in motion a chronic budget gap by piling on new spending without paying for it. "Under Obama the Bush trend keeps going, but this time on steroids..." Trying to be a responsible pater familias, and having passed the age of 60, we took the rather reasonable decision to put our affairs in order for the benefit of the next generation. The effort quickly became an expensive nightmare of lawyers on three continents. For your amusement we enclose an actual email message we just received. It is a conversation between five lawyers...each billing at top rates. This is a very private communication, but what difference does it make? As near as we can make out, it is written in code so that neither the client nor the general public can understand it: "The concept you outline below is workable from US Estate Planning Perspective, and makes sense as the way to meld the various goals, both tax oriented and non tax oriented, together. If Bill confirms that this concept is worth developing further, then I understand that Penny and you will produce a first draft.... Some brief further details: "(1) The QTIP Marital Trust for Elizabeth MUST distribute all income to her during her lifetime after the demise of Bill, and must have within the text [as you probably know] other tax oriented provisions. The professional trustee having discretion with regard to distribution of income to Elizabeth will not work, but having discretion with regard to capital distributions is ok. Sarah can send sample language for a 'standard' QTIP, if you want. Please advise. "(2) The marital deduction trust in Elizabeth's Revocable Trust is a QDOT, not a QTIP... It is not a model to be used in Bill's Trust to provide for Elizabeth if Bill attains his reward...and is survived by Elizabeth. "(3) Sarah is producing a Summary of US estate, gift and GST tax attributes with regard to Bill. We hope to send that in the next day or so, to serve as a general orientation, and to make sure that we are all reading from the same page. "(4) It appears, however, as if the 'applicable exclusion amount' [the exemption from US federal estate tax] for a person like Bill may be very small...while the exemption from GST tax might be the 'normal' $3.5 M. If we confirm this, then the structure that needs to be used [we believe; subject to confirmation] is a QTIP Marital Trust A and a QTIP Marital Trust B. BOTH qualify for the marital deduction; both function to postpone the federal estate tax on Bill's demise until the assumed subsequent demise of Elizabeth. But 'A' captures the amount of the GST exemption in excess of the 'applicable exclusion amount', and 'B' is funded with all property in excess of (i) the [small] amount of the applicable exclusion [which we agree remains throughout in the main trust; see the fourth sentence of your paragraph 4 immediately below] and (ii) the amount that funds 'A'. Then upon Elizabeth subsequent demise, ALL US federal estate tax is paid ONLY out of 'B' [this is permitted if the document stipulates to this effect], allowing 'A' to pass back to the [now irrevocable] main trust [see the third sentence of your paragraph 4 immediately below] wholly protected from all future GST tax. "(5) The 'A' vs. 'B' structure preserves the full amount of the GST exemption, and to that extent 'solves' the GST issue which you refer to in your paragraph 8 immediately below, and which was identified in jjr email in paragraph 6 and 7 from June 5 at 1:27 pm further below. "(6) If we confirm (4), then Sarah will send sample language regarding the A vs. B QTIP structure...etc." With all this hassle, it is hardly worth dying. Keep reading for today's essay... ----------------------- Special Offer ------------------------- With Gold, Who's Laughing Now? With all the flak you've taken for singing gold's praises, wouldn't it be nice to laugh back? Well, today's your lucky day...an opportunity to make up to 20X your money. We have a VERY limited number of spots, so get in now! --------------------------------------------------------------- The Daily Reckoning PRESENTS: Today, Bill examines the life of the late Mr. Omar Bongo - one of the world's richest heads of state - and discovers that the type of larceny and bribery that made Bongo so successful, is alive and well in many developed democracies. Read on... Kleptocracy in America by Bill Bonner London, England Reading the obituaries is such a delight. First, it is a relief when you find your name not mentioned. Then, it is a joy when you find those that are. Not that we wish to see any man's name on the roll of the dead; still, the final audits are always the most revealing. Here on the back page, we admire honest scalawags...and learn from them. Thus was our attention drawn to Mr. Omar Bongo's exit from the mortal stage on June 8th. Popular government has two major parts. One part is fraud. The other is larceny. As to the first, it is like a professional wrestling match - full of lurid threats, spilled beer, sacred cows, gaudy uniforms and self-delusions; the fans feel their private parts shrink when their man loses. If he wins, they feel they are winners too. But it is the other part, the more rational part - a balance of larceny and bribery - that interests us today. Serge Dassault miscalculated. One of the richest men in France, he was stripped of his position as mayor of a Paris suburb this week. A court found he had made cash payments to voters in Corbeil-Essones, east of Paris, which could have influenced the outcome of a mayoral election. We stand dumbfounded...mouths wide open...our fondest hopes for the progress of humanity dashed to pieces. How could an experienced, well- informed man of mature age and sound finances, have made such an amateur's error? He bribed the voters unfairly - that is, with his own money - but apparently not enough of them! Mr. Serge Dassault, meet the late Mr. Bongo. France included in its 'mission civilisatrice' the cultivation of various public officials throughout Africa. Bongo was one of them. The moment when destiny stuck her nose into Mr. Bongo's affairs was probably in 1964, when Mr. Bongo had gotten himself into the post of Minister of Tourism in the government of President Mba. That year was the one chosen by Jean-Hilaire Aubame to launch a coup against Mba's regime, which saw both Mba and Bongo confined together until French troops came and bailed them out. Being locked up with the president of a country can be good for your career; at least it was for Bongo. His ties to Mba were strengthened by the ordeal, says the TIMES, and he was subsequently made Vice-President, succeeding to the top post itself when Mba's last cartridge had been spent. The TIMES described Bongo as "one of the world's richest heads of state." The Financial Times provided details: "An indictment...listed 39 properties, mostly in the chic 16th arrondissement of Paris, nine cars worth nearly $2 million, and 70 bank accounts." And so the familiar question: "how is this possible?" Mr. Bongo's percentage of Gabon's output must have been substantial. He took over the government of Gabon in 1967 at the age of 31, making him the world's youngest head of state. "For the next two decades," continues the obituary, "Bongo was able to rule Gabon almost as a personal fiefdom. With a relatively small population and benefiting from abundant natural resources - principally oil, but also uranium, manganese and timber...." "But politicians in modern, developed democracies are now bribing voters on a breathtaking scale – protecting their bank accounts, shoring up their houses, giving them jobs and health care." The man mastered both carrot and stick. With revenue from Gabon's natural resources flowing into his coffers, he was able to hand out lavish favors. "He placated students in 2000 by providing hundreds of thousand of pounds for the purchase of the computers and books they were demanding," says the TIMES. He could spend his own money when it suited him too - for he had so much of it. And when the working classes took the streets in 1990, he had plenty of goons in uniform to beat them with sticks. Bongo did not suffer from the typical financing problem of modern democracy. When you rob Peter to pay Paul, Peter gets cheesed off about it. The next thing you know he's voting against you or plotting a coup. That is why it is better to bribe Paul with money Peter never earned. And do it on a large scale. That is how Bongo won an election as recently as 2005 with nearly 80% of the vote. Not even Obama can match that. But politicians in modern, developed democracies are now bribing voters on a breathtaking scale - protecting their bank accounts, shoring up their houses, giving them jobs and health care. In the US alone total US government debts, obligations and commitments now come to $112 trillion. Congressmen risk neither jail nor insurrection. Cometh the old question; how do they get away with it? Currently, 50% of every dollar spent comes from borrowing. This week brought news that the developing countries - led by China - are still adding to their positions in US Treasury bonds. The funds are spent immediately. The payer and the payee - neither of whom vote in current US elections - can worry about settling the debt later. What a marvelous invention is inter-generational government debt, funded by foreigners! Even Mr. Bongo, RIP, must have been impressed. Enjoy your weekend, Bill Bonner The Daily Reckoning P.S. Our annual Agora Financial Investment Symposium in Vancouver is rapidly approaching...and 2009 marks the 10-year anniversary of The Daily Reckoning. Come celebrate with us! Dear reader, in honor of your DR the theme is a Decade of Reckoning... four days of unparalleled insight into the most profitable opportunities of this coming decade. This event is certain to sell-out...so immediately secure your spot here. Editor's Note: Bill Bonner is founder and editor of The Daily Reckoning, and will be speaking at the Symposium, so make sure you register today! Along with Addison Wiggin, he's also author of 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 now by clicking here: