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Thursday, June 18, 2009 Three days until summer - and it's not looking good... Obama wants to give the Federal Reserve more power... Can a consumer economy boom if consumers have less money? Alexander Green says you're rich - and don't know it...and more! --------------------- Special Offer --------------------------- The Anti-Stock Market was up 71% in 2008...were you? It's averaged 56.3% gains every year since 2002... And, just cashed in another 100% winner! Sign up by midnight tonight and These Gains Are Yours - GUARANTEED. --------------------------------------------------------------- Cruel Summer by Bill Bonner London, England Summer begins in 3 days. We can hardly wait. We predict it will be a killer. Several interesting things are likely to happen this summer. 1) Unemployment rates will go up. 2) Rising joblessness will increase rates of defaults, foreclosures, and bankruptcies. Not just at the consumer level - but throughout the system...including banks, states, businesses, as well as households 3) The stock market will take a dive as earnings fall and investors realize that there will be no quick recovery Oh...and one more thing: U.S. bonds could collapse. But watch out...here's where it gets tricky. Another swoon in the stock market could send investors running for the smelling salts in the bond market. A collapse of bond prices, on the other hand, could send them helter skelter into stocks. Yesterday, the Dow rose 7 points. Oil held at $71. The dollar lost a little ground - to $1.39 per euro. And gold added 3 bucks. It is impossible to predict what will happen - or when - in the markets. So let us turn our attention to the real economy. Here, we see the picture more clearly: We're in a depression. We write depression with a small 'd.' We're saving the big one for later. Few economists or analysts will tell you we're in a depression. They're looking at "green shoots" and rising trendlines. They'd do better to read a little history. Such as the history of the Great Depression. Martin Wolf in the Financial Times (reporting the results of a study by two American professors): First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan's industrial collapse has been far worse than in the 1930s, despite a very recent recovery. Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures. Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression. The two authors sum up starkly: "Globally we are tracking or doing even worse than the Great Depression... This is a Depression-sized event." Yesterday, we proposed two sine qua non for a new boom. Either the feds revive the old economy - by getting people to borrow and spend more money. Or, the mistakes of the past must be corrected...whereupon new investment and growth can take place. While the free market is busy working on the latter, central banks and national governments all over the world are trying to stop it. They've got the voters and campaign contributors to answer to, none of whom wants to get what he deserves. Instead, they're hoping to revive the Bubble Epoque. Citizens are already up to their necks in debt; but the feds raise the water level! This flood of fed liquidity seems to be raising boats and animal spirits among speculators. But it is doing nothing to revive the real economy. "Consumer Costs Fall Most in Six Decades," reports Bloomberg. Europe is already in deflation. America is not far behind. We had a hard time following the Bloomberg report. It said consumer prices were 1.3% below those of 12 months ago. We don't believe that's true. What we think Bloomberg meant to say was that prices are increasing at the slowest pace in 6 decades...but, for the moment, inflation is still (barely) positive. With prices falling, the last thing the feds are worrying about is inflation. Except that there isn't any. And they're going to worry a lot more over the summer, when the hot sun beats down on a lifeless economy and it becomes obvious that their revival efforts have failed. More news from Ian at The 5 Min. Forecast: "Are we reading this right? The new president wants to give the Federal Reserve... more power?" writes Ian Mathias in today's issue of The 5 Min. Forecast. "The very body who's easy credit policies over the past 15 years helped fulminate the largest speculative bubble in history... could soon oversee nearly every major company in the U.S? "In a surprisingly brief (for Washington standards) 88 page plan released yesterday, President Obama revealed the first steps toward the biggest financial overhaul since post Depression reform. We could fill the next five minutes with juicy bits from the plan, but here are just the ones that made us choke on our morning brew: "The Fed - already the controller of money supply and interest rates - will be given 'authority and accountability for consolidated supervision and regulation of Tier 1 FHCs.' And what the hell is a Tier 1 FHC? Glad you asked...it's ANY company 'whose failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness.' In simple terms, the Fed will become the master of all things 'too big to fail.' "We're with you Ben... scares us too "The FDIC (and maybe the Treasury) could have a third option for failing companies. Not content with just the 'big bailout' or 'let 'em fail' options, the plan proposes to allow federal regulators to overtake failed companies and sell their assets to investors, much like the FDIC already does with dead banks. "The private sector gets the regulations you'd expect... higher capital requirements at banks, tighter borrowing standards at mortgage lenders, lots of restrictions on complex derivatives and so on...typical reactionary reform. But one notably absent smackdown: rating agencies will be untouched. "The Office of Thrift Supervision is the fall guy. The OTS will be abolished under the plan, thus taking the blame for nefarious companies it oversaw like AIG and WaMu. Years of free money interest rates from the Fed, all the blundering bailouts at the Treasury and the total inadequacy of the SEC will go unnoted. In fact, all three of those agencies are getting more money and responsibility. Par for the course in 2009...the bigger your failure, the greater your reward. "And just one more...we can't resist. A whole new bureaucratic arm will be created: The Consumer Financial Protection Agency. You see, it's not our own fault that millions of American's signed up for liar loans, high interest credit cards and no-money down adjustable rate mortgages. It's those damn predatory lenders! Thus this new office will be tasked with saving us from ourselves. Best of luck. "Of course, we're premature in passing judgment on this reform. After all, it's yet to pass through the slimy halls of Congress. When Hank Paulson proposed the 3 page, carte blanche TARP, it came out of the Senate 448 pages heavier, with such memorable additions as the "exemption from excise tax for certain wooden arrows designed for use by children." We'll let you know how they manage to 'improve' this proposal. 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 Resource Trader Alert. And until midnight tonight, you can get Resource Trader Alert at half the regular subscription price. Don't miss out - see here. And back to Bill, with more thoughts for the summer ahead: Global commerce has fallen in line with the Great Depression. That means producers don't need to produce so much...and don't need so many people to produce it. Jobs are lost. And then the people who lose their jobs don't go out to restaurants and malls so much...so more jobs are lost. These job losses take time to show up. And then they take time to "ripen." People tend to have a little something set aside for a rainy day - or at least, unemployment compensation. But after a few weeks of stormy weather, the reserves are exhausted. Then...they have to cut back much more. USA Today asked people: "If you lost your job, how long could you afford to pay for your own health insurance?" More than 65% of respondents said they could only manage for 6 months or less. In America "there hasn't been a shock like this since the de- mobilization of millions of soldiers following WWII: something like 3 million unemployed people are going to fall out of the safety net in the third quarter. With their families, that's about 10 million people who will sink suddenly into deep poverty," says GEAB a private research service headquartered in Paris. The group anticipates a "Very Great Depression" coming to the United States. More than three million jobs have been lost in the United States during the last five months. As these out-of-work cases ripen, there will be some rotten fruit falling to ground. There are also the millions who are working fewer hours and earning less money. In fact, the number of hours worked per week has fallen to a record low. Where do people without jobs, without incomes, without savings - and without benefits - shop? What money do they spend? How does a consumer economy launch a boom when consumers have less money to spend? These questions have obvious answers and obvious implications: there ain't going to be any consumer spending boom in the U.S.A....not this summer...and probably not for many summers to come. Martin Wolf explains why: "Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process." If we assume that debt levels need to go back to where they were before the Bubble Epoque...well, let's say to 200% of GDP just to make the math easy...that means 170% of GDP worth of debt needs to be paid off. That's $20 trillion, in round numbers - or about 40% of the total. At 6% per year, even if households kept paying off debt at the current rate it would still take nearly 7 years to get household debt down to pre-bubble levels. Then, of course, there is the government debt - now expanding faster than ever. The United States has the biggest deficit - even as a percentage of GDP - of any serious country in the world. The U.S. deficit is 12% or 13% of GDP. Compare that to Russia at 2.6%...Spain at 6%...France at 5%...Brazil at 1.3%.... Even Argentina has a much smaller deficit than the US - only 3.6% of GDP. (More on the pampas tomorrow....) But don't worry about it. The 'Committee to Save the World, Part II' is on the case. Geithner, Bernanke and Summers are staying in the office throughout the hot months. They kept us out of trouble so far, didn't they? So enjoy the beach! The United States has entered the Third Stage of a great nation. The Political Stage. In the late 20th century, power and money moved from the banks of the Monongahela to the banks of the Hudson. Now they're moving again - to the banks of the Potomac. Washington calls the shots. "Obama Blueprints Deepen Federal Role in Markets," says a headline in yesterday's Washington Post. Of course, this change didn't happen overnight. George W. Bush was a trailblazer - turning 'conservatives!' into big spending activists. And the business community - particularly the banks - saw it coming and got ready. In 2001 the banking industry spent $5 million on lobbying in Washington. The total went up every year. By 2008, they were spending $20 million. Campaign contributions from bankers increased too...from only $4 million from the bankers' political action committees in 2000 to $8 million last year. Judging from the bailouts given to Wall Street last year, this investment paid off handsomely. Until tomorrow, Bill Bonner The Daily Reckoning P.S. Today is your last chance to get in on the 'anti-stock market.' Until midnight tonight, you can get in at half the regular price...so don't delay. The clock is ticking. See here for all the details... --------------------- Special Offer --------------------------- A Single Ignored Stock Made 279% This Year! And that's on top of 61%, 47%, and 33% gains readers already booked in 2009 thanks to the scientific CXS Money Multiplier system. Click here to learn more! --------------------------------------------------------------- The Daily Reckoning PRESENTS: Despite all the negative news out there, Alexander Green asserts that things in the United States are getting better, not worse...relatively speaking. Read on and see if you agree... You're Rich and Don't Know It by Alexander Green Charlottesville, Virginia Today you are richer than 99% of the people who ever walked the earth. That's true even if you're out of work, flat broke, your credit cards are maxed out, your car's been repossessed and a sheriff's deputy has already served your eviction notice. I'm about to explain why - and share the best three words of advice you'll ever get ... According to a recent CBS News/New York Times poll, Americans' views on the general state of the country have hit an all-time low, with 81% saying the nation is on the "wrong track" - the worst-ever number for this barometer. Some will say this simply reflects The Great Recession and the inevitable pain and suffering it has wrought. But that's not the whole story. Increasing numbers have been saying this - not just for years but for decades, with large majorities claiming that the country is going downhill, life is getting tougher, our children face a declining future and the world in general is going to hell in a hand basket. Exactly why is pretty obvious ... We face the twin specters of terrorism and nuclear proliferation. American troops are bogged down in Iraq and Afghanistan. TV programming is trash. Taxes are high. The federal deficit is ballooning, home prices are falling, the currency is weak, food and fuel prices have jumped, credit is tight, and the stock market just experienced its worst year since 1931. Of course, the national media delivers the world through a highly distorted lens. It does this to attract attention. It takes viewers to sell advertising. And you don't draw a crowd talking about buildings that don't burn, planes that don't crash, or companies that are hiring instead of laying off. Yet despite all the negative news, our general lot is getting better, not worse. As Greg Easterbrook of the Brookings Institution recently wrote in The Wall Street Journal, "Living standards are the highest they have ever been, including the living standards for the middle class and the poor. All forms of pollution other than greenhouse gases are in decline; cancer, heart disease and stroke incidence are declining; crime is in a long-term cycle of significant decline, education levels are at all-time highs." Our ancestors just a few generations removed would marvel at life today. In the first half of the 20th century, for instance, most people earned a subsistence living through long hours of backbreaking work in forestry, mining, farms or factories. Today we work roughly half as many hours, physical toil has ended for most wage earners, and we have more purchasing power with far more leisure. In the first half of our nation's history, most Americans lived and died within a few miles of where they were born. Nothing - neither people nor news - traveled faster than a horse. And, as far as we knew, nothing ever would. Today we have instantaneous global communication, 24-hour broadband Internet access and same-day travel to distant cities. Formal discrimination against women and minorities has ended. There is mass home ownership, with central heat and air-conditioning - and endless labor-saving devices: stoves, ovens, refrigerators, dishwashers, microwaves, cell phones and computers. Medicine was almost non-existent 80 years ago. In 1927, for example, President Calvin Coolidge's sixteen-year old son Calvin Jr. developed a blister playing tennis without socks. It became infected. Five days later, he died. Before the advent of antibiotics, tragedies like this were routine. Advances in drugs and technology have eliminated most of history's plagues. There has been a stunning reduction in infectious diseases. "True, the federal government is a sprawling, metastasizing leviathan that needs to be beat back with a stick. But compare it to most governments in most countries down through the ages." We complain about the rising cost of health care. But that's only because we live long enough to need more of it. The average American lifespan has almost doubled over the past century. We have low-cost access to information, art and literature. We have almost every imaginable political and economic freedom. True, the federal government is a sprawling, metastasizing leviathan that needs to be beat back with a stick. But compare it to most governments in most countries down through the ages. In short, we enjoy economic and political freedoms that millions throughout history have risked theirs lives for. We live a long time, in comfortable circumstances, and enjoy goods and services in almost limitless supply. By almost any measure, we are living better than 99% of the people who have come before us. Yet Americans routinely tell pollsters that life is hard and things are getting worse. In short, we risk becoming the moping caricature that comedian Steve Martin creates when he grumbles, "the only joy I know is a dishwashing liquid." Seldom do we take a moment to appreciate our incredible good fortune being alive. As Oxford biologist Richard Dawkins writes: We are going to die, and that makes us the lucky ones. Most people are never going to die because they are never going to be born. The potential people who could have been here in my place but who will in fact never see the light of day outnumber the sand grains of Sahara. Certainly those unborn ghosts include greater poets than Keats, scientists greater than Newton. We know this because the set of possible people allowed by our DNA so massively outnumbers the set of actual people. In the teeth of these stupefying odds it is you and I, in our ordinariness, that are here... And none of us knows how long he's going to be here. Take Eugene O'Kelly, former Chairman and CEO of accounting giant KPMG, for example. Four years ago, he was diagnosed with inoperable, late-stage brain cancer. He was told he had three to six months to live. He was 53. Suddenly, the life of this rich, powerful and privileged man, whose days were filled with executive meetings and business appointments, became something very different. He was left with less than 100 days to live. "No more living in the future," he wrote in his memoir. "(Or the past, for that matter - a problem for many people, although a lesser one for me.) I needed to stop living two months, a week, even a few hours ahead. Even a few minutes ahead. Sixty seconds from now is, in its way, as elusive as sixty years from now, and always will be. It is - was - exhausting to live in a world that never exists. Also kind of silly, since we happen to be blessed with such a fascinating one right here, right now. I felt that if I could learn to stay in the present moment, to be fully conscious of my surroundings, I would buy myself lots of time that had never been available to me, not in all the years I was healthy..." With the clock counting down, O'Kelly made a list of his closest friends and colleagues and planned a final encounter with each one: "I stopped at each name and made myself recall, in the closest detail possible, all the moments the two of us had enjoyed together. How we met. What made us become friends in the first place. The qualities in them I particularly appreciated. The lessons I learned by knowing them. The ways in which having met him or her had made me a better person." His friends were touched - usually overwhelmed - to know how much they had meant to him. "Enjoy every sandwich," he writes. Most of us promise ourselves that one day - not too long from now - we'll slow down. We'll spend more time with our family. Enjoy a lazy day out with friends. Or just take a walk alone in the woods or on the seashore. Some day... If - like me - you're one of the millions who has often deluded himself this way, O'Kelly has three words of advice: "Move it up." Eugene O'Kelly died on September 10th, 2005. Regards, Alexander Green for The Daily Reckoning Editor's Note: Alexander Green is Investment Director of The Oxford Club. He also writes Spiritual Wealth, an e-letter about the pursuit of the good life and what it means to be truly wealthy. Just this week, Wiley & Sons published a new collection of his essays, The Secret of Shelter Island: Money and What Matters. --------------------- 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 $34,680 in just the last 30 days... Your only chance ENDS TONIGHT at midnight... Get behind the mystery here!   The Daily Reckoning - Special Reports: A Golden Answer: Protection Against Untrustworthy Paper Currencies US Recession: By far the Weakest Recovery Introducing the Single Best Way to Make Sure You'll Never Run Out of Money... Click to Learn More About Mobs, Messiahs and Markets.