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Monday, July 6, 2009 Getting rich is not as easy as it used to be... The capitalists' capital is capitulating... How do you get the masses to vote for you? The Mogambo on how to avoid a money tsunami...and more! --------------------- Special Offer --------------------------- Only 63 People Know Why These Six Tiny Companies Will Change the World... You're #64 - and about to become ultra-wealthy. This will go down in history as the "story of our era..." Most importantly, you'll be rich because you took decisive action in 2009. See the full report here. --------------------------------------------------------------- Pity the Poor Rich by Bill Bonner London, England There is little financial news today; markets in America were closed for the 4th of July weekend. So, we begin our week with a quote from our favorite philosopher: Yu Faz. "The rich man's heart breaks...just like the poor man's. For all his money, he cannot buy another one." Yu should know. He was exiled after he had a liaison amoureuse with one of Genghis' concubines. Pity poor Yu! Pity the poor rich...! Here at The Daily Reckoning, as long-term DR sufferers know, we always take the part of the underdog. We almost never saw a lost cause that we didn't want to join. We admire die-hards...and we like the company of scalawags. So, today, we take up the banner of one group that is all these things...a group that is widely despised and routinely persecuted...the 'untouchables' at the top of the economic pyramid: the rich. "Switzerland at war with the rest of the world," begins an update from colleague, Cecile Chevre, in Paris. The Swiss usually manage to stay out of wars. They do it by being heavily armed. Even the yodelers have softened up lately, but until recently every able-bodied man was required to serve in the Swiss Army. He had to keep his rifle at home...and each year he had to prove that he knew how to use it. During WWII, the Germans considered invading Switzerland. According to legend, a top German general met with Switzerland's top military man on the border. "We have twice as many men on the border as you do," said the German. "What would you do if we launched an attack?" "The answer is very obvious," replied the Swiss general. "I would tell each of my men to shoot twice." But now Switzerland is up against even worse odds. Switzerland has long been a haven for people with money. And life is getting tougher for the rich...as well as for those who defend them. In the first place, getting rich is not as easy as it used to be. Gone are the days when you could just put your money "in the market" and come back 10 years later with 10 times as much. If you had invested $70,000 in Dow stocks in '82 and let it grow, you'd have been a millionaire by 2007... Even after inflation, investors came out way ahead. Gone too are the glory days in real estate, too. How many fortunes in America were built on dirt? Thousands of them...maybe millions. Especially, in places such as California, Florida and Las Vegas...a steady immigration over decades produced a bonanza for property owners. A fellow of modest means was able to mortgage his house and buy more properties. He might begin with the house across the street...and then buy four condo units down the road...and then move on to major apartment buildings and commercial property too. After a couple of decades, he could easily have parlayed a few thousand of original equity into millions worth of property assets. But how do you do that when prices are falling? And when lenders no longer want to give you credit? We received a letter recently, from a fellow with a string of properties in Las Vegas. He had bought wisely and now enjoyed positive cash flow - after all costs, including financing. Still, he couldn't find a lender willing to roll over his debt. The last couple of years have been a bad time to be rich. The capitalists' capital is capitulating. It's giving up and dying. Meanwhile, governments are looking to "the rich" to finance their bailout programs, their wars, their pension programs and giveaways. Where else can they look? They need money. Like Willie Sutton, they know where the money is. A few years ago too, the rabble-rousers made the news by pointing to the "uneven distribution of wealth" in America. Eighty-five percent of the wealth in the country was owned by only 20% of the people What got people chafed was that the rich were getting richer. The percentage of total wealth owned by the rich had gone up from 81% in 1983. What happened in the years '83 to 2004 to make the rich so much richer? Financial assets rose in value. And then what happened? Financial assets fell in value in '07-'09. The total amount lost, according to the latest number we saw, is about $13 trillion. Roughly, both houses and stocks are down about a third. Who took those losses? The poor? Ha ha. The nice thing about being poor is that you don't have to worry about losing money in a downturn. No, dear reader, the poor are scarcely poorer because of the slump. They had nothing when it began; they still have nothing. The rich, on the other hand, were big-time losers. They must have borne 85% of the losses - or a total of about $10 trillion. If that's correct, the rich must now own a smaller piece of the pie than anytime in the last 25 years. We feel a tear forming in our right eye. There...it wells up...and rolls down over our trembling cheek. The poor rich! And everyone, not just the rich, is likely going to take a hit when the second wave of homeowner defaults hits the United States' shores...and it's going to happen sooner than you think. Get the full report here - and learn how you cannot only protect your assets from the next downturn, but build up your portfolio at the same time. Keep reading here. Now, we turn to The 5 Min. Forecast for more news: "We're scanning markets of the world today and scratching our heads... haven't we heard this before?" writes Ian Mathias in today's issue of The 5. "There was a scare at the start of the year - banks were in trouble, the housing market was crashing and unemployment was rising. The S&P fell at a rate unseen in a long, long time. But then, a sucker's rally! The worst was likely over, they said...stocks were oversold. The US consumer, China and oil companies promised to lead us out of this mess. And of course, the current administration's new multi-billion stimulus plan will kick in any second. "After bottoming in early March, stocks soared well off their lows. With the S&P 500 at breakeven for the year, stocks now face an inflection point. "Wait a second... what year is it? "We need not remind you of what happened in the second half of 2008. But it's not worth worrying about... it'll be different this time! "But just as in 2008, the smart money says there is more pain ahead: "'You may have green shoots, whatever you want to call them,' said market sage and author of The Black Swan Nassim Taleb. 'You may have temporary relief, but you are still in a world that's breaking. We're in the middle of a crash. So if I'm going to forecast something, it is that it's going to get worse, not better.' "And the root of all our woes, Mr. Taleb? 'The monkey on our back is debt.'" Amen. This should be deja vu to our most dedicated readers...Nassim shared a similar sentiment at the 2007 Agora Financial Investment Symposium. We expect equally prophetic forecasts from our speakers this year. If you haven't signed up to join us, better get on it right now...the show starts in two weeks. And back to Bill, with more thoughts: The rich in America may have lost $10 trillion so far...but their losses are just beginning. Who's going to pay the expenses of bailing out the banks...the economy...the states...Detroit...? You do the math yourself. The United States functions as a popular democracy. Politicians get elected by winning votes. The idea is to get as many votes as possible. Do you get the most votes by appealing to the few people with money - the 20% "rich"? Or do you appeal to the masses - the 80% of the population who don't have much wealth? Well, you can do the math later. How do you get the masses to vote for you? You offer them something. What? Well...Medicare...pensions...bridges...tax credits...wars - whatever they seem to want at the moment. And how do you pay for it? Okay...now we're putting 2 and 2 together: you have to take the money from the 'rich.' Of course, it's not that simple. Because you also need money from the rich to "get the word out" about what a great guy you are. And if you lose the race for the House of Representatives, you want to make sure you have a cushy chair somewhere to rest your fat behind. No point in going to the masses for those things. You need friends among the rich. So, you favor some of the rich - with special subsidies and credits - while making the rest of them pay. And since you're competing with other politicians who have gotten their support from other groups of rich people...at the end of the day, by the time the votes are counted, it's hard to know exactly who the real winners and losers are. One rich family gets millions in subsidies. Another has his business protected from competition. Another benefits from an obscure amendment to an almost unknown little section of the IRS code. Rivals get wind of these boondoggles and make a stink about it in the press. Pretty soon, the masses think the 'rich' are ripping them off...not realizing that, as a group, the rich pay for 80% of the costs of government. And now, as the official federal debt goes to $12 trillion, who's really going to pay it? Just apply the 80/20 rule... the 'rich' will have to pay 80% of it - at least. That's $9.6 trillion that will be borne by 60 million citizens. No, wait...of those 60 million...you have to take out those who are too young...or too old. Each household may only have one person earning a living...say, only about 20 million real taxpayers. Now, divide $9.6 trillion by 20 million - you get a debt burden of $480,000 for each one. But that's just the "official" national debt, which is bad enough. But what about Social Security and healthcare obligations...and obligations to soldiers who've lost their legs in Iraq? Are you going to forget about these people? Who's going to support them? According to the Petersen Foundation, there's a "financing gap" of about $47 trillion between what the government is obliged to pay out and what it expects to get in tax revenues. Now, let's put that burden too onto the only place it might be shouldered - the same 20% of the population who have the money - the "rich people." That's another $2.35 million per taxpayer! And now you see why Switzerland is "at war" with the world. Almost all the world's governments are running large deficits; all are squeezing the rich. Switzerland is the place 'rich' people turn to when they want to protect their money from greedy politicians. It got its start in the 17th century, back when Louis XIV revoked the Edict of Nantes. Suddenly Protestants weren't allowed to live in peace in France. Many fled to England, America and the Low countries. Others sent their money "offshore" to Switzerland, where it would be safe from confiscation. Thus did Switzerland develop its banking industry - to help protect people from their own governments. And thus do people turn to the Swiss once again, as they see their own governments sharpening their knives and tightening their borders. In order to preserve its role as a protector of foreigners' money, Switzerland has been forced to resist these measures. Major Swiss banks, for example, announced that they would no longer be available to American clients. Too much paperwork; too much disclosure. And since Swiss law prevents bankers from divulging details of their clients' accounts, the Swiss are in a jam. If they failed to report to the United States, they'd be breaking US law. If they did report to the US, they'd be breaking Swiss law. Swiss bankers just sent a letter to their French clients...asking for permission to pass along information about their accounts to the French government. "What sort of Frenchman would give his okay?" asks Cecile. "'Sure, denounce me to the French taxmen...rat me out, go ahead.' But the banks were forced to send out the letter in order to comply with French demands." Until tomorrow, Bill Bonner The Daily Reckoning P.S. It's true, it's becoming harder and harder to get rich - and to stay rich. But, our intrepid correspondent Byron King has a way to do just that...with gold. If this sounds like something you'd be interested in, please visit here. --------------------- Special Offer --------------------------- The $2.5 Trillion Gorilla in the Room This is vital. Because, you see, a lot of Americans - and a lot of people in the rest of the world - are counting on credit-card carrying American shoppers to jumpstart the global economic engine all over again. But it isn't going to happen. And you don't want to bank your investments on the idea that it will. Or you'll risk even bigger losses than many Americans have suffered already. Here's how you can save yourself and boost your profits during the coming time bomb... --------------------------------------------------------------- The Daily Reckoning PRESENTS: When the huge tsunamis of money that exist around the world start running amuck and soaking every economy's patio furniture, we turn to one man to tell us what to do. But since Superman is on vacation, we'll ask The Mighty Mogambo. Read on... Money Tsunami Capsizes the Global Economy by The Mogambo Guru Tampa Bay, Florida I was surprised that Barron's reported that the banks show their Total Reserves fell from $896 billion to $848 billion, which is a simple math problem that seems custom-made for my abilities in that regard. And to prove it, I deftly subtract one from the other and get - voila! - $48 billion, which is not only factually correct, but more than enough to quiet any naysayer saying, "Nay, I say!" as regards my computational skills. Then, to add that essential touch of surreal whimsy that seems to permeate all things fiscal and monetary these days, I additionally note that not only did Total Reserves go down in the banks by $48 billion to $848 billion, but I will note that Total Reserves one year ago were a miniscule $41 billion! Hahahaha! They fell last week by more than they totaled one year ago! Hahaha! "...precision economic forecasting is a ridiculous exercise everywhere you go, especially since economics is, just as the Austrian school of economics always said it was, human behavior with a huge random element..." In fact, Required Reserves are only now starting to rise from "nearly zero" to "slightly more than zero," and banks are now "required" to have a miniscule $56 billion in reserves against their zillions of dollars in assets and liabilities, while meanwhile, a mere couple of lines up on the same Barron's page, the Federal Reserve reports that "Reserves F. R. banks" went down by an astonishing $125 billion last week to $692.6 billion! Wow! Big move! These huge tsunamis of money, joining all the other tsunamis of money sloshing back and forth around the banks and the world, around and around, getting everything all wet, are not only ruining the patio furniture and making a mess of everything, but are such that even the World Bank has revised its estimates, and now says the global economy will contract by 2.9% this year instead of their previous forecast of 1.7%, which is an error of 41%. Well, when I show up at an executive board meeting sporting a 41% error on a forecast I made just a few months ago, all I hear is people all demanding that I be fired or killed for bringing the company to the edge of bankruptcy and ruination, which of course I seize upon to show that precision economic forecasting is a ridiculous exercise everywhere you go, especially since economics is, just as the Austrian school of economics always said it was, human behavior with a huge random element, which is not even to mention Taleb's Black Swan Hypothesis of unforeseen catastrophic events making a complete mockery of using bell- curve probabilities to forecast long-term expected results. It's like expecting, but not getting, what you would expect from the statement from the Federal Open Market Committee after their recent meeting, which apparently showed that they are incredulous of the generally low level of intelligence of Americans, which they demonstrated when they said, "As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year," which I figure would be $238 billion a month for the remaining six months of the year, which would normally make my heart start fibrillating with fear at the inflationary implications of such irresponsible monetary policy. My snotty interpretation is that by saying "as previously announced" they mean, "we say again so that you can't say we didn't tell you that you morons are sitting there while we at the Federal Reserve are going to buy up the losses of our friends at a rate of $12,500.00 for every one of the 100 million non-government workers in the USA, which is admittedly a lot of money at $12,500.00 each, but which is almost certainly grossly understated so that we are going to keep coming back for more and more and more! Hahaha! Suckers!!" Whether or not they meant that, it turns out that I was right, and this is all part of some nefarious plan, as they later slipped in, almost as an afterthought, that "In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn," which made my eyes pop out painfully when I realized that this means that we are suddenly talking about buying up almost $350 billion a month in worthless assets and handing over the cash to the lucky current holders (who are making out like bandits!) of those toxic assets, which means that these guys will suddenly have a lot of cash in their pockets looking for a home, and the prices of something, or some things, are going to go up as this $350 billion of new cash Per Freaking Month (PFM) gets plowed into "investing" in some asset or another. Until next time, The Mogambo Guru for The Daily Reckoning P.S. This is where some people think it gets tricky, but it is not. This is, in fact, the easy part, as all you have to do is buy gold, silver and oil when your government is acting so impossibly stupid. At least, that is the lesson of the last 4,500 years of history! And like the saying goes, "The race is not always won by the swiftest, nor the battle by the strongest, but that is the way to bet!" which is just another way of saying, "Whee! This investing stuff is easy!" Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page. --------------------- Special Offer --------------------------- The Fear Factor Strategy: For every $1 these stocks tank, you could pocket $3 to $7 It's proven to turn $1,000 into $2,619... $3,383... even $5,718. It could happen in the next 24 hours. Get in on the next play. Act now.   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 Out of Money...