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Tuesday, June 16, 2009 Apparently, the economic crisis is all in our heads... Why the Fed is talking about "keeping a lid on bond buys"... A Delray Beach man living in his closet is suddenly a trendsetter... Alan Knuckman on the bubble of all bubbles...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 $34,680 in just the last 30 days... You have only 3 more days... Get behind the Mr. X mystery here! --------------------------------------------------------------- The Mental Nature of the Credit Crisis by Bill Bonner London, England Yesterday, the Dow fell 187 points. Oil slipped to $70. The dollar rose to $1.37. And gold lost another $12 - to $928. The rally may run through the summer; it may not. Asked about the rally on Wall Street, Barron's latest Roundtable panel had various views about how far and how fast it would take us. But all were sure of one thing: the worst is over. We will not go below the lows set this past March. This recovery is for real, they believe...and so is the bull market on Wall Street. Investors believe it too. Analysts believe it. Economists believe it. And why not? The 'Committee to Save the World,' part II, is on the job. And here are two of the three committee members writing in the Washington Post. "We have nothing to fear but fear itself," they would have written. But that line had already been taken: Like all financial crises, the current crisis is a crisis of confidence and trust. Reassuring the American people that our financial system will be better controlled is critical to our economic recovery. By restoring the public's trust in our financial system, the administration's reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses. Get it, dear reader? The slump has nothing to do with bad investments and bad businesses...or with too much debt...or with too many producers making too much stuff for too many people who can't pay for it. Instead, it's all in our heads! And if we can make some 'reforms' that cause the public to think everything is all right, well...heck...everything WILL be all right. Except that it's not all right. You can pull as much wool over the public's eyes as you want, GM still won't be a going concern. Nor will any of the other problems go away. And until those problems are worked out, there won't be enough earnings and savings to push the economy forward. Of course, even in a stagnant economy, there are always investments that forge ahead...and for once we're not talking about gold. In fact, this one is even better than gold... Click here to see what we mean. As for the feds' confidence tricks, they only make the situation worse. If the public spends more money...it just goes even deeper in debt! Our old friend Rick Ackerman has no more faith in this recovery than we do. It's "just like the recovery of '31," he says. Of course, as regular DR sufferers know, there was no recovery in '31. Instead, it was a head-fake upwards, followed by a major drive to the bottom in '32. The '29 crash was just the beginning. The Dow reached its peak of 381 in September '29. It crashed in October...but then bounced back for the following five months. By April 17th the bounce was exhausted at Dow 294. Then, too, people thought the 'worst was over' and that the initiatives of the Hoover administration had put the economy back on track for growth and prosperity. But then stocks headed down again and the economy sank. On July 8th, 1932, the Dow hit 41 - its low for the Great Depression. Why won't history repeat itself? The run-up in debt in the '90-'07 period exceeded even the debt build-up of the '20s. Many other features are similar too - a huge expansion of global trade...new inventions...suburbs...financial innovation. Why would it be different this time? "Because the government has taken aggressive action to correct the problem!" That's what most people think. But here's what Rick has to say about the feds' rescue: Bailing out the economy and the banking system has been such a brazenly corrupt, mendacious and, ultimately, doomed enterprise that one could almost forget for a moment how very clever the perpetrators are. If we needed proof that these guys are the slickest behind-the-scenes spin- doctors around, consider the following two headlines that ran on successive days atop the Wall Street Journal's front page. "Rate Rise Clouds Recovery" was the grim news that greeted us last Thursday, on day one. The article described how, despite the Federal Reserve's explicit strategy of buying as much Treasury paper as it takes to hold market rates down, particularly in the mortgage sector, rates are rising anyway, and steeply. In fact, 30-year fixeds climbed to 5.79% from 5.00% just two weeks earlier, suggesting that market demand for mortgage paper is drying up despite the Fed's strategy of direct monetization of Treasury debt (a.k.a. "quantitative easing"). But get this: On day two, as if to reassure us that [the] Treasury's borrowing is well under control despite the fact that the opposite is true, the spinmeisters co-opted the Journal's front page with this well-timed policy leak: "Fed to Keep Lid on Bond Buys." Are we actually being asked to believe that, absent the acceleration of direct purchases of Treasury paper by the central bank, demand from other sources will suffice to keep rates from rising further? Yesterday, we saw a chart that showed the effectiveness of the Fed's efforts. When the Fed intervenes to buy Treasuries, yields tend to go down - that's the whole idea. Low yields help people borrow...and pay their debts. But the chart clearly shows that each subsequent intervention has less effect. This is very bad news...though just what you'd expect. It's why a little bit of monetary inflation has a tendency to become a lot of consumer price inflation. On a more philosophical note, it is how people get trapped into doing things they really don't want to do - because the alternative is even worse. Here's the dilemma. The feds buy US bonds to keep interest rates down. If they don't buy them, the government's huge demand for credit drives up yields: greater supply of bonds leads to lower prices (higher yields). But if they do buy them, investors begin to fear inflation. Then, they sell bonds...driving up yields: less demand leads to lower prices (higher yields). That's why the Fed is talking about "keeping a lid on bond buys." It's expected to reassure investors. So far, everyone seems to be playing the part he has been given. In today's news is word that the Japanese and Russians are one hundred percent behind the dollar and US bonds. The Japanese even say their faith is "unshakeable." These comments helped send bonds back up...after yields on the 10-year note had reached 4% last week. But do you believe them? C'mon, dear reader, you know better than that. The Japanese and Russians have two of the biggest piles of US bonds in the world. Only China has more. What would you say if you owned $800 billion worth of bonds? Wouldn't you tell the world what a great investment they were...and then sell them quietly, when no one was looking? Most likely, the feds will be forced to do what they don't want to do. They'll have to buy bonds to keep rates down. Then, they'll have to buy more...because others will be selling them. Finally, they'll have to monetize a huge percentage of them...ultimately causing inflation rates to soar. When and how that will happen is the financial drama that will occupy these Daily Reckonings for many months to come. Now over to Addison, in Baltimore, for some more news... "We note a couple of peculiar celebrations in the world of economic data today," writes Addison Wiggin in today's 5 Minute Forecast. "First, much to Wall Street's delight, housing starts jumped 17.2% from April to May. The Commerce Department blew expectations out of the water on this one, as the Street was hoping for a 7% climb. Permits to build new property rose as well, up 4% and also nearly double trader expectations. "'Wow' we heard a CNBC talking face beam. 'Another good sign,' said The Washington Post. Maybe we're just too thickheaded...but with a 10.1- month supply of homes already on the market, how does building more make us all better off? "Second, producer prices posted a 5% annual decline in May, its biggest yearly fall since 1949. The PPI actually inched up 0.2% from April to May, but still far less than the Street's 0.6% estimate. Thus, as CNN declared, inflation remains 'in check.' We certainly won't argue that idea in the near term, but as you may have gathered from yesterday's 5, we don't have the stomach to bet against a trend like this one: Each day, Addison writes for The 5 Min Forecast, a daily executive series e-letter that provides a quick and dirty analysis of economic and financial developments - in five minutes or less. It's a free service available only to subscribers to Agora Financial's paid publications. One such newsletter, Wayne Burritt's Easy Money Options, offers a "bread and butter" technique for discovering the most lucrative gains around...like 150% plus in as little as two weeks. Click here to learn more. And more thoughts on a thing or two from Bill, back in London... "Man lives in closet in Delray Beach," was a headline that caught our eye. We wondered what sort of man would live in a closet. But there was the photo... He looked like a very ordinary man. Indeed, he seemed proud of what he had achieved. Downsizing is in style; he is a trendsetter. Beneath the big financial headlines, there's a huge aesthetic change taking place in America. Small is becoming fashionable. Less is becoming more. Ostentation...big spending...and luxury are out. Charm...making do...and innovation are in. Pick up a copy of Cottage Living magazine and you'll see what we mean. A couple of years ago it was the "wow factor" that sold houses. Clients were meant to drive up to a façade that looked vaguely impressive...like a bank with a bad architect. They walked into an entry way and saw a huge hall with a chandelier hanging on a chain. The more expensive McMansions had sweeping marble staircases. "Wow," prospective buyers were supposed to say...reaching for their checkbooks. Now, the McMansions are hard to sell. Cottages are more popular. They tend to be plain and uninteresting when they are purchased. But now people are taking pride in making them nice places to live - with shutters...larger windows...fireplaces...reading nooks, and so forth. They're using imagination and elbow grease instead of credit cards. People are downsizing - slimming away the unwanted, trimming off the unnecessary, and skimming off the best of what remains. They are making - or trying to make - their lives more manageable, more affordable, and more secure. In a way, this is 'back to the '70s,' when wood stoves became popular ways to heat a house. Wood stoves practically disappeared in the '90s. But they're back. And so are back-yard gardens...bicycles...chickens...canning...saving and many other things our grandparents took for granted. Until tomorrow Bill Bonner The Daily Reckoning P.S. With this emergence of 'thrift' and 'simple living' comes also a strong need for security. After all, what good is saving if it doesn't grow? We suggest you take decisive action immediately... And bail yourself out. Read this report to find out how. ----------------------- Special Offer ------------------------- Only 63 People Know Why These Six Tiny Companies Will Change the World... You're #64 - and you're about to become Ultra-Wealthy. This will go down in history as the "story of our era..." - and you'll be rich because you took decisive action in 2009. See the full report right here. --------------------------------------------------------------- The Daily Reckoning PRESENTS: If it's not something you've yet thought about, today hard commodities expert Alan Knuckman is considering the bubble of all bubbles...in Treasuries, and how you can profit from it. It's a critical and timely lesson to take to heart...so read on below. The Bubble of all Bubbles by Alan Knuckman Chicago, Illinois When the government intervenes into the financial system, it disrupts the supply-and-demand balance, but eventually, true market forces can win out. Months ago, a plan to use $300 billion to buy long-term bonds shocked the market like a cattle prod...sorry, I'm always a commodities guy. Remember back in March when the Federal Open Market Committee made a surprise announcement that it would spend Treasury funds to support long-term government bonds? This announcement rocked the world. The 30-year Treasury bond futures jumped almost 8 full basis points ($8,000 per contract), sending rates crashing lower with the yield on the widely followed 10-year note down to 2.5%, from over 3% in one day. As a direct result, the dollar was smacked down nearly 500 pips ($5,000 per contract), versus the euro currency. This last-gasp financial plan to purchase and support the Treasury market was and is, at best, a short-term fix to prevent the bubble of all bubbles from bursting. If we flash back to last fall, the stock market panic was driving some investors to guarantee a negative return on their money for the safety of the full faith and credit of the Federal Reserve. That same money that ran to bonds in order to escape equities is in danger of unwinding and going on the move again - after all, money goes where it is treated best. Don't believe me? Just ask Warren Buffett. In his 2008 letter to shareholders Warren Buffet described the situation this way, "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the US Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary." The Fed's action follows similar tactics used by the Bank of England, which pledged up to 150 billion pounds toward buying its government bonds. This quantitative easing of buying debt with newly printed money expands the deficit and, most importantly, is the match lighting for inflation. According to Edward Chancellor's skeptical commentary in the Financial Times: There is no question that a determined central bank can get rid of deflation. It is simply a question of printing enough money. Economists have another term to describe the monetization of government debt. The history of "seigniorage" goes back to the debasement of the coinage under the Roman emperors. Seigniorage is really a tax on holders of money and government debt which is paid via inflation. When carried to excess, it leads to hyperinflation. This leads to the eventual sale of accumulated bondholding by the government and the impending pop of the bubble, leaving greater financial issues in the long run. Unnatural forces at work in the market can only serve to exacerbate the problem. As witnessed by the market action in May, restless investors are searching for higher returns on their money than the pittance they chose to accept last fall for safety. "The unprecedented movement of funds into Treasuries was and is a concern – but it’s also a huge opportunity when that money comes back into the market." At that time, the dollar and Treasuries sold down to lows not previously seen in the last six months. More selling is in the cards as an appetitive need for risk increases with general global market confidence. Human nature will lead some to move money out of safety and chase higher returns in the fear of missing out on a stock market turnaround. Emotion can be a great detrimental force and can disrupt a sound disciplined investment plan. Don't miss this flow of funds! How? By positioning yourselves in hard assets. The unprecedented movement of funds into Treasuries was and is a concern - but it's also a huge opportunity when that money comes back into the market. The numbers will be staggering. The gold market moved over 40% with just the spillover money seeking safety in the financial chaos. When even a small portion of that moves into hard assets, the commodities bulls will be on the stampede again...for oil, gold, soybeans, silver, wheat, coffee, and more. People will continue to drive, heat, eat, produce goods and services, and put the "consume" in "consumer." Conspicuous consumption may be out, but pent-up demand for goods we need has only been delayed, occasionally to extreme consequences. Consider this example from the Associated Press: Store Owner Gives Would-be Robber Bread and $40 SHIRLEY, N.Y. (AP) - A Long Island convenience store owner who was confronted by a bat-wielding would-be robber has shown mercy on the man by giving him a loaf of bread and $40. Convenience store owner Mohammad Sohail pulled a rifle to defend himself against the would-be thief, who then dropped to his knees and begged for forgiveness. The man explained that he was battling economic hardship and was just trying to feed his family. Sohail put down the rifle and gave the man $40 and a loaf of bread. Another sign of economic transition was the jump in short-term rates a week ago, pricing in a quarter-point rate hike down the road. In Agora Financial's Resource Trader Alert we've been concentrating on the bond sell-off described above, and have been doing quite well with the Treasury unwinding. However, the market is now acknowledging that rising rates are also something worth watching closely. Keep an eye on movements in the dollar. The dollar index weakness down to the December lows at 78 was not calmed by a rise in long-term yields. The inevitability of the Fed eventually raising rates to address inflation fears strengthened the greenback back above 81. Stocks continued to extend their upward run 11 out of the last 13 weeks. The major indices have been in the positive for 2009. Some consolidation and profit taking will likely take place after these new relative highs. This next step forward will include some global demand rebound as life continues on for the billions around the world who are not money managers, bankers, or insurance executives mired by overleveraged portfolios and bad bets. Commodities and things of real value should do very well. This new upward phase in the asset market is taking place after a bottoming from the recent and unnatural price depression of vital resources that are consumed every day. It all comes back to commodities. Regards, Alan Knuckman for The Daily Reckoning P.S. As I mentioned above, the movement of funds into Treasuries is providing an immense opportunity...that money will pour back into commodities. Position yourself to capture those gains by subscribing to Resource Trader Alert, which is a now available for half the normal price until midnight on this Thursday, June 18th. Read the details on how to profit from the anti-stock market here. Editor's Note: Commodity expert Alan Knuckman hails from the home of commodity trading in Chicago, where he began as a clerk on the floor of the Chicago Board of Trade (CBOT). Alan's worked in the commodity markets for 18 years - and is devoted to raking in profits for his readers. Visit here to learn about how we began our successful relationship with him. Also, be sure to join Alan and all your favorite Agora Financial experts at this year's Investment Symposium in Vancouver, British Columbia. From July 21st through the 24th, Alan will be among the many guides dedicated to helping you discover the most profitable investment opportunities of the coming ten years. This event, honoring 10 years of The Daily Reckoning and celebrating an entire Decade of Reckoning, is certain to sell out...so secure your tickets now. Call Opportunity Travel at (800) 926-6575 or visit here for more information. ----------------------- 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... So will it happen to you? Read on here to find out.   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... Click to Learn More About Mobs, Messiahs and Markets.