Britannia Radio

Friday, July 17, 2009 JPMorgan and China are doing well – the crisis is over, right? Trading is not only a zero-sum game, it's a game of chance… The world is in a slump – yet China is booming? Bill Bonner on a new crop of bubble deniers…and more!   The Zero-Sum Game of Speculation by Bill Bonner Madrid, Spain     Two important headlines this morning, both of them fraudulent:   "Chinese economy bounces back," says one headline in the International Herald Tribune.   "JPMorgan profit soars despite downturn," says another.   The average reader or TV viewer will go no further. "Ah," he says to himself, "good news; the worst is over. China is a green shoot as big as the Amazon. And JPMorgan is a leader in the financial sector. If the financial sector is doing well, the whole world economy must be doing well."   But here at The Daily Reckoning, we can't help ourselves. If we see a silver lining, we look for the cloud. We see garbage...we look for the rat...   We begin with the JPMorgan profit announcement, because it is the most intriguing. Let us set the stage:   In the last half century, credit has expanded faster even than dress sizes. Naturally, this has made the business of hawking credit extremely profitable. Profits in the financial sector soared to 40% of the U.S. total. And every momma wanted her baby to grow up to be an investment banker.   But then, in 2007 & 2008, the bubble in the financial sector popped. Many banks and financial institutions went broke...or had to be bailed out by the government. Instead of being the world's highest-flying industry...finance became the scene of its biggest crash.   And now, from all we've been able to detect, a fundamental shift has occurred. People are no longer eager to go deeper and deeper into debt. Instead, they are eager to pay off debt...that is, to rid themselves of finance...and to get as far away from the financial sector as possible. Savings rates, for example, have gone from zero to 7% in just the last 12 months.   But in the midst of this remarkable and historic change, we get news that at least a couple of the biggest firms in the financial sector – JPMorgan and Goldman Sachs – are making billions in profits:   "Even as it weathers the worst economic downturn in decades, JPMorgan Chase said Thursday that it had made a $2.7 billion second-quarter profit as a result of stellar trading and investment banking results."   This was essentially the same story we got from Goldman. Neither bank made its money the old fashioned way -- by lending to worthy projects; they made their dough by "trading" and "investment banking." In other words, they made billions from speculation.   Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: whom were they trading against?   Speculating is a zero-sum game. No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?   There is also something fishy about the whole thing. Trading is not only a zero-sum game, it's a game of chance. Traders lose money about as often as they make it. Of course, normally, the traders at the big banks have an advantage; they are not idiots. They make money by taking it away from the amateur traders, who are idiots. But what amateur traders put up $6 billion?   Our guess: the fix is in. They are taking advantage of the feds' stimulus programs...and trading against the biggest patsy in the world, the U.S. taxpayer. How? We'll find out how, later...   [In the meantime, you'll want to protect yourself…by setting up your own 'emergency bailout'. We've provided you with all the resources you need to get started…get them here.]   But first, more news, from The 5 Min. Forecast:   "Here comes another financial systemic risk crisis," writes Ian Mathias in today's issue of The 5.   "The drama du jour is at CIT Group, a commercial lender not to be confused with Citigroup.   "CIT is a small to midsize business lender that actually has a lot more in common with Lehman Bros. Like Lehman, the company's business model is dependant on debt and easy credit – CIT relies on money borrowed from capital markets to finance its loans. And also like Lehman, CIT is saddled with debt of its own – about $35 billion worth.   "Having already bailed out CIT with 2.3 billion in TARP bucks, the Obama Administration gave the company the cold shoulder (thank heavens) when CIT came knocking for more earlier this week. Evidently, their moronic board was counting on renewed government aid. Now the company has just a matter of days to raise as much as $3 billion. Fat chance, says the market:     "This time last week we compared some eerie similarities between 2008 and 2009… investor attitudes, market behavior and economic indicators are lining up a bit too close for comfort. And now this – what will likely be the biggest banking failure since Lehman. Oy, could get interesting. Most media outlets are downplaying CIT's peril, but we're not so quick to brush it off. Their bankruptcy won't likely produce a Lehman style meltdown, but on Monday tens of thousands of businesses might not have a primary source of financing. In this credit environment, do you think it'll be easy for them to get fast loans from someone else?"   Catch up with all of Agora Financial's best and brightest at this year's Agora Financial Investment Symposium in Vancouver, B.C. The symposium promises to be the event of the year – so don't miss out! Secure your ticket now – before the event sells out! The clock is ticking…see here: Agora Financial Investment Symposium, July 21-24   And back to Bill, reporting from Spain:   Meanwhile, there is the news that China is back in business.   "Government spending pushes GDP growth to 7.9% for 2nd quarter," reports the IHT, "...fueled by a large economic stimulus package and aggressive bank lending...a surprisingly strong showing during the global economic downturn...   "...while most other major economies are contracting and suffering from the worst economic crisis in decades, China appears to have turned a corner...   "Growth in the second quarter was driven by strong auto and property sales, a rebound in manufacturing and huge infrastructure spending, which was propping up global commodity prices."   Further investigation reveals that bank lending and property speculation have gone wild. (More on this in today's essay, below...) And stocks in Shanghai are up 75% so far this year.   Now, let's try to get this straight. The world is in a slump. China sells stuff to the world. And yet, China is booming.   How could it be? Again, there's something fishy about it...as if the government were jiving the figures...as if the speculators had taken leave of their senses...and as if the whole thing were just the result of the same kind of misguided 'stimulus' that got us into trouble in the first place...   The Richebacher Letter's Rob Parenteau agrees that something isn't quite right. "Ask anyone who's done business there. Keeping a double set of books in China isn't just common, it's considered 'good strategy.' You've also got under- regulated Chinese banks hiding as much as $500 billion in bad debts — China's own version of 'subprime' loans to small businesses and Asian property speculators.   "On top of that, you've got a $40 billion tab left over from the Beijing Olympics... and a $140 billion tab for rebuilding Sichuan after their 2008 earthquake." Boom...boom...ka-booooom!   [While Shanghai stocks haven't yet collapsed anything close to what we're seeing on this side of the ocean... it won't be long before they catch up. Learn Rob's simple 'super shield' strategy to protect yourself from the Asian meltdown… read it here.]   Keep reading for today's essay, below…   --------------------- Special Offer ---------------------------   Options Made Simple   Let's face it - playing options can be tricky. But they can also be incredibly lucrative.   Well, in this report, we lay it all out for you. It's quite plainly, the easiest way to play options...ever. And the gains are just as big: Keep r The Daily Reckoning PRESENTS: All over the world, the feds deal with the problems they caused by causing more of them. Yet, they will deny forever that there was a bubble to start with – and that they caused it. Now, these 'bubble deniers', as Bill Bonner calls them, are cropping up in a new location: China. Read on…     Bubble Deniers, Part II by Bill Bonner Madrid, Spain     If you ask a serious economist, "What was the lesson of the Soviet economic experience?" he would have a ready answer:   "It was that distributed information is more reliable than the centralized variety." In the non-communist world, if a man had money and no bread, he exchanged the former for the latter...and sat down to dinner. As if guided by an 'invisible hand,' millions of people did the same thing. Everyone tried to get a bit more grease on his plate, by making his own decisions based on the facts before him. The result: standards of living rose for practically everyone.   In the centrally planned economies, on the other hand, neither the householder nor the baker had a choice. Their tasks were set by apparatchiks who presumed to know exactly how much of society's resources should be devoted to making bread...and exactly how much each person should eat. But by the '80s, it was obvious that central planning had failed. And by 1990, both the Soviets and their neighbors, the Chinese, had abandoned the experiment. Mankind breathed a sigh of relief. It seemed to have made a genuine great leap forward. Finally, it was generally accepted that people should be able to offer up their money as they did their prayers – to whatever god they chose.   The planners had made millions of people miserable over the course of seven decades; remarkably, none were hung from lampposts. Instead, they retreated to the universities, central banks and finance ministries. From these defensive redoubts, they continued their meddling. Soon, they were in the drivers' seats...and headed for another wall. The crash of '08 cut world asset values by as much as $50 trillion. But did the planners learn anything?   "This is where I have the greatest problem with US economic policy makers," writes Marc Faber. "I don't think they have ever recognized that the excessive, credit-driven expansion of the US economy was unsustainable in the long run and that, sooner or later, the current crisis was inevitable."   The bubble deniers deny there was a bubble and deny that their own stimulus caused it. They see nothing wrong with what they were doing and no reason to stop doing it. Instead, they add more stimuli...and create new bubbles. “The bubble deniers deny there was a bubble and deny that their own stimulus caused it. They see nothing wrong with what they were doing and no reason to stop doing it. Instead, they add more stimuli...and create new bubbles.” In the gallery of Hell bent deniers, China is a special case. "To get rich is glorious," announced Deng Xiaoping after coming to power in 1978. The state pulled back its long arm. People were free to run businesses, to pay wages, to keep bank accounts. Today, in many ways, the average Chinese entrepreneur is freer than, say, his counterpart in France or America. He faces fewer obstacles. Factories go up overnight...and he is in business.   So dynamic was the Chinese economy that it responded to America's centralized monetary policies in record time. Spooked by the recession of 2001-2002, the Americans cut rates and boosted public spending. This brought a bubble in the housing sector...which gave English speaking consumers an appetite. Soon they were gobbling up boatloads of goods made by people who spoke Chinese.   Now, it is indigestion to which the central planners respond. An IMF report gives us a measure of the response. Add up all the loan guarantees, toxic asset purchases and other forms of bicarbonate administered by the G20 nations and they come to about a third of their combined GDPs. Those are just the monetary stimulus programs. The fiscal programs add another 5.5% of GDP.   America's central bank adds reserves so fast it must be running out of storage space. As for its fiscal policy, this week it has passed the $1 trillion deficit milestone – with almost half the year still ahead.   For their part, the Chinese planners enjoy the liberty of the damned. With no creditor looking over their shoulder, they are free to fight the downturn even more recklessly. "China is back in bubble land," says the Financial Times. In the first six months of this year, Chinese banks lent more than $1 trillion – or about four times the rate of 2007. They have more money to lend because reserves of foreign currencies are still increasing...and recently passed the $2 trillion mark. The money is coming in from speculators, who have taken stock market trading volumes to three times last year's levels.   Chinese planners thought they were pretty smart. During the boom years, they fixed the yuan to the dollar and refused to let it rise. This spurred rapid growth in China's export sector. But like all central economic planning, it backfired. China's entrepreneurs were misled. They didn't know their biggest customers were going broke. Now, they have too many factories producing too much stuff for too many people who cannot afford it.   But that is the beauty of being a central planner; you never have to say you're sorry.   Instead, you double up. The Chinese economy is expanding at nearly 8% this year, according to official estimates. It is expected to generate 74% of the worldwide GDP growth in the 2007-2010 period. As for commodities, were it not for Chinese buying, prices would collapse. Of course, that could be said for a lot of things. Were it not for the Chinese stimulus, the whole world economy would probably be backing up. We'll find out for sure...when this next bubble blows up.   Enjoy your weekend,   Bill Bonner The Daily Reckoning   P.S. Our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching…and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a "Decade of Reckoning"…four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade.   This event is already 70% sold out…secure your spot now. Click here for all the info: The Agora Financial Investment Symposium: July 21-24   P.P.S. For those of you who can't join us at this year's Symposium, all is not lost. We're going to be updating you live from the symposium using the DR Twitter feed. If you haven't already, you can sign up for a free account and follow us here. http://twitter.com/DailyReckoning   Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the 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: Mobs, Messiahs and Markets   --------------------- 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 - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run