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Thursday, July 9, 2009 We are aggrieved by the plight of the rich… A depression remains until this pile of debt has been paid down… Where is Paul Volcker when you need him? Barry Ritholtz on where blame for the crisis should fall…and more! --------------------- 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 reading here.   ---------------------------------------------------------------   No Recovery in Sight by Bill Bonner London, England     We have spent the last few days holding back tears...   Michael Jackson! Robert MacNamara!   And now our heart goes out to Nantucket Island. Word came this morning that the rich are not living it up like they used to. The New York Times reports that it's the slowest summer on Nantucket locals have ever seen. There are over 600 properties for sale – and none of them are selling. Even at discounts of up to a third off! Restaurants and bars are offering discounts too – anything to lure in the customers.   Here at The Daily Reckoning, we champion lost causes. We join the diehards. And we take up the banner of despised, persecuted minorities everywhere. So we are aggrieved by the plight of the rich. They've lost $10 trillion in the downturn, according to our estimates. They're being blamed for every sin and crime, from teen-pregnancy to shopping on Sunday. Fashion has given them its fickle finger – their big houses, big cars, and big carbon footprints are as out- of-style as spats. And just yesterday, a press report told us that Congress was considering a surtax on the rich – to be slipped into the latest health care bonanza. No wonder they're having such a bummer of a summer. Sniff...sniff...   Our oldest son, Will, proposes to open up our private family office as a kind of support group for the rich. His father cleverly off-loaded the burden of managing the family money (such as it is) onto his strong, young back. Will figures there must be thousands and thousands of readers facing the same challenges he is...more on this in future issues.   Yesterday, the Dow rose 14 points. Oil fell to $60. Gold lost $19.   According to the headline in the Financial Times, the International Monetary Fund says the recession is ending. Digging deeper into the story, we find that the IMF thinks the recovery may be "weak" and may require more stimulus to get consumers spending again.   As usual, the bank is wrong about everything. There is no recession; it's a depression.   And it's not ending; there is no recovery in sight. And more stimulus won't cause consumers to spend more money.   "It's really not very complicated," we told our audience of publishers in London yesterday. "We're in a depression. Not a recession."   Sometimes when you are giving a speech, words come out more self-assured than you expected. The occasion calls for confidence...oratorical certainty, not doubts and nuances. Out come fully formed sentences – often elegant or powerful in themselves – that you barely recognize as your own. You listen...surprised at how clever the speaker is.   "It's a depression. And it will remain a depression until this huge pile of debt accumulated over the last quarter century has been paid down. Until businesses and banks that are no longer viable have gone broke and been restructured. Until consumers have real money to spend – not just more credit. Until those things happen, there is no way for a genuine recovery to take place.   "For more than half a century, the driving force of the world economy has been the willingness of English-speaking consumers to go further and further into debt. That permitted businesses to expand sales and profits.   "Now, that trend – that lasted longer than the lifetimes of most of the people in this room – is finished. Consumers aren't going further into debt. Bankers aren't lending them more money. Their houses aren't going up in price...so they have nothing to borrow against. It's over. And now, after working your whole careers in a growing economy...you have to figure out how to survive in a declining one. "   We could have gone further. But our listeners were already looking a little blue.   We might have told them about the latest report from Bloomberg. PMI, a large mortgage insurer predicts that housing prices will fall for almost two more years. Prices will be driven down by unemployment and foreclosures, says the insurer. We could have told them about the "triple time bomb" that The Richebacher Letter's Rob Parenteau has been warning readers about. Doesn't sound too farfetched to us. (Read Rob's full report here.)   Or we might have provided evidence that consumer credit is contracting...not expanding. The feds have put trillions into the financial system. And that's where it stays. The banks don't lend because consumers can't borrow. Their houses – the major source of collateral for the middle class – are going down in price. The Financial Times is on the case; it reports that consumer credit fell again in May, for the 4th month in a row. "Delinquencies at record high," says another FT headline.   We might have explained that not only is the shift from credit expansion to credit contraction the biggest thing to come along since WWII...there's also a major shift of wealth and power taking place. The Anglo-Saxon commercial (and military) empire has peaked out. The wealth and power of English speakers has been expanding, relative to the rest of the world, for the past three centuries. That trend, too, seems to have come to an end.   More on this below, but first, we'll turn to The 5 Min. Forecast for more news:   "Americans are taking on less debt and saving more… really?" wonders Ian in today's issue of The 5. Now anything's possible!   "U.S. consumer credit fell for the fourth straight month in May, the Federal Reserve reported late yesterday. Credit inched down at an annual rate of 1.5% during the month – a $3.2 billion drop to a total consumer debt load of $2.52 trillion. Coupled with the previous three months, we're now experiencing the biggest and longest consumer deleveraging since 1991. We even have a somewhat respectable savings rate – 6.9%, the highest since 1993.   "While we welcome this deleveraging, it still doesn't seem legit. With unemployment at a 26-year high and the sudden disappearance of easy-money credit, we wonder if this balance sheet restoration is a matter of choice… or if the lowly American consumer is just playing the hand he's been dealt.   "Then there's this chart:     "'The U.S. household sector is currently saving more and deleveraging,' adds Rob Parenteau, 'while lenders both here and abroad remain wary of lending, except, apparently, in the case of bank loan officers for high rollers in China.   "'To be clear, the household and business sector debt reduction is still in its early stages and has been dwarfed by the massive deleveraging of the financial sector itself as the so-called 'shadow banking system' has either collapsed or moved onto the Fed's balance sheet.'"   Ian writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments-in five minutes or less. It's a free service available only to subscribers of Agora Financial's paid publications, such as the Hulbert #1 Performing Investment Letter, Outstanding Investments.   And back to Bill, with more thoughts:   Lord Rees-Mogg invited us for lunch at his favorite gentlemen's club – the Garrick. It is our favorite too. A club originally founded for actors and writers, it was the club in which Dickens and Thackeray had a legendary feud. More recently, Prince Charles dined in a private room with intimate friends. And now your editor goes there for lunch from time to time.   It is a grand old building...with ornate trimmings...hung with paintings of great actors and theatre scenes. The place seems perfect for a conversation about monetary policy. It is as old as the South Sea Bubble...and a monument to an industry of make-believe.   William made an interesting point.   "The Obama team doesn't seem to know what it is doing on economic matters, does it? They had a good man on the team – Paul Volker. He was the only one who really knew what he was doing. And they seem to have edged him out.   "This is a very bad sign. It was Volker who saved the day the last time the US dollar seemed to be headed for the scrap heap. This time, it looks as though they have no intention of saving it."   The dollar hardly looks like it needs saving now. It rose slightly yesterday. Generally, throughout the crisis of the last six months, the dollar has been favored as a safe haven.Yesterday too, prices of gold and commodities fell – in dollars. The greenback rose against cotton, coffee, silver – just about everything.   Why is the dollar so (seemingly) strong right now? Master FX Options' Bill Jenkins believes it is because the United States isn't facing the same sort of 'social upheaval' that the Eurozone has.   "Across the Eurozone riots and outbreaks of violence have been touched off by escalating economic problems and disagreements between members and neighbors. People involved in civil unrest are a multifold problem. First, they have too much time on their hands because they are not working. Jobless citizens, especially in a heavily socialist culture, are a continual drag on the system. Second, it costs money to keep repressing social upheaval -- presenting another drag on the system. Additionally, the passions and fears of men being what they are, such activities tend to draw in more normally productive folks as the snowball gains speed and volume.   "Here in the United States, we are not facing such difficulties (yet). This means a more reasonable system of work and distribution of goods and labor. All in all, this is good for a culture, the body politic and the economy. As a result, it also breeds greater confidence in the currency. And when all is said and done, investment money will go where there is a reasonable likelihood of return, even if the return may be lower.   "This is what has been good up to this point in the recession/depression for the US dollar. And if this continues to unfold over the next year or two in similar fashion, this would still produce US dollar strength compared to the euro simply by the 'fear factor.'   "Additionally, as I have tried to show, the situation in Europe is actually more severe than in the United States. I believe in the end that will make them copy, at least percentage wise, the same devaluing practices that have happened here. Should that occur, it would once again be advantage-USD.   "However, when I look at the dollar, I wonder if what we have done may be past the point of no return, the point of repair or recovery. The next generation may well find that the US dollar has gone the way of all fiat currencies before her. What will replace it? I can't say. But in the present environment, more shocks to the system will ultimately favor the dollar... at least for the time being, because it is supported by stability. And in unstable times -- stability draws the highest premium."   For more from Bill Jenkins, see his latest report here.   Though the dollar doesn't look like it needs saving right now, there are two things going on...two things that appear contradictory...and which lead investors to make big mistakes. On the one hand, the world economy is contracting – which is naturally deflationary. Demand goes down...prices go down...the currency in which prices are quoted goes up. On the other hand, the people who control the currency are doing all they can to cause it to go down. The Congressional Budget Office tells us that the US national debt is rising by about $1 trillion per year. It will hit $12 trillion this fall. By next fall, it will be at $13. The interest alone this year is $565 billion – about 4% of the nation's total output.   The last time the United States overspent on anything approaching this scale was during the 'guns and butter' years – the 1960s. Lyndon Johnson wanted a war in Vietnam and a Great Society at home. He got both. He also got inflation. Inflation rates hit double digits in the late '70s. The dollar seemed to be going the way of all paper money – to nothing.   But "Tall Paul" Volker was called to the Fed. He said he was going to snuff inflation...and he meant it. Against widespread criticism – his effigy was burnt on the steps of the Capitol – he took the yield on 10-year T-notes all the way to 15%. The economy entered its worst recession since the Great Depression. Politicians howled. The press roared. Everyone seemed to want Paul Volker's head. But Reagan backed him up. And he beat inflation and saved the dollar.   But that was then. This is now. Now, the country is far deeper in debt...with a much weaker economy...and much stronger rivals. Not even Paul Volker could play Paul Volker's role this time.   Until tomorrow,   Bill Bonner The Daily Reckoning   --------------------- 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.   ---------------------------------------------------------------   The Daily Reckoning PRESENTS: In the excerpt of his book, Bailout Nation, below, Barry Ritholz breaks down the major players in economic crisis our country is now facing. Read on…   Casting Blame, Part I by Barry Ritholtz New York, NY   There are so many players responsible for the housing boom and bust, the credit crisis, and the financial collapse that it is difficult to blame any one person--it is a broadly shared culpability.   There are many who were rooting for the blame to be assessed to a given political party, a particular player, or a specific act of malfeasance. In reality, the situation is far more complex. The responsibility is widespread, and there is plenty of shared blame. Joseph Stiglitz, the Nobel Prize–winning professor of economics at Columbia University, called it a "system failure"—not merely one bad decision, but a cascade of many decisions that produced tragic results.   The recklessness and incompetence seemed to be a team effort. With no single villain and so much blame to go around, I fear missing some person or event that significantly contributed to the mess now enveloping the global economy.   That does not mean we cannot attempt to highlight those whose contributions have disproportionately led to the final catastrophe. After exhaustively reviewing this debacle, I assess responsibility in order of culpability as follows:   Many of the monetary and regulatory errors that directly led to the present crisis are attributable to the man they once called the Maestro. Under the guidance of Alan Greenspan, the Federal Reserve abused monetary policy, ignored critical lending issues, and failed to regulate new and irresponsible banking products.   Several of Greenspan's policies proved to be wildly misguided: the regular interventions to protect asset prices and bail out investors, the irresponsibly low rates after the post-2000 crash, and his nonfeasance in supervising lending. Most of all, it was his deeply held philosophical conviction that all regulations are bad, and are to be avoided at all cost. We now know what that cost is, and it's astronomical.   Alan Greenspan had spent his years at the Fed operating under an enormous philosophical misconception, as the former Fed chairman admitted in testimony before Congress on October 22, 2008: "I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such as that they were capable of protecting their own shareholders."   Based on Greenspan's worldview, the events of the present crisis and many others that occurred over the past decade were impossible, given that the so- called wisdom of the free markets would prevent them. Only they did occur. Greenspan's faith was wildly misplaced, and the taxpayers are that much poorer for it. If we have to put our finger on the single intellectual flaw that underlies the housing collapse, the credit crisis, the economic recession, and the problems with toxic paper, it would be a misplaced belief that markets could self-regulate. One is reminded of the Benjamin Disraeli quote: "He was distinguished for ignorance; for he had only one idea, and that was wrong."   Given how enamored Greenspan was of free markets, it is increasingly difficult to reconcile many of the actions he undertook. The very concept of the champion of free markets repeatedly intervening in their inner workings is a contradiction of enormous proportions. It is a catch-22 worthy of Joseph Heller.   It is beyond my capacity to decipher how Greenspan justified his internal conflicts, but at least he later admitted that his primary philosophy "had a flaw." Unfortunately, his flawed economic belief system colored nearly every policy he enacted as Federal Reserve chairman. Most of today's crises trace their roots in part to his policies.   In 1836, Mayer Rothschild wrote, "Give me control of a nation's money, and I care not who makes the laws." If only that prescient warning had been heeded by the Federal Reserve. It might also serve as an admonition for Ben Bernanke, the current Fed chief.   The Greenspan era lasted 20 years (1987 to 2006). The Federal Open Market Committee (FOMC) must take responsibility for following him so obsequiously, especially in the latter years of his reign. Exceptions include Edward Gramlich, whose timely warnings about subprime and early concern with predatory lending were on target and ignored. So, too, William Poole deserves credit for his many cautionary warnings about the government- sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. To our chagrin, neither man was paid much heed by Greenspan or the FOMC.   The single biggest fault found within the Fed is its inability to fulfill its responsibilities as bank regulator. The Fed not only failed to supervise lending institutions, but it also ignored the most significant shift in lending standards in the history of human finance. The results were disastrous.   The Fed, as an institution, failed the nation. It directly encouraged mass speculation. It failed to supervise innovative new forms of lending. The inflationary spiral that sent oil soaring from $16 in 2001 to $147 per barrel seven years later, along with other commodity and food prices, is attributable to its radical rate-cutting regime.   The current chairman, Ben Bernanke, deserves partial blame for the Fed's slumber during this inflationary spike. A renowned student of the Great Depression, it was then Fed Governor Bernanke who raised warning flags about deflation after the tech bubble burst. He provided the framework and intellectual cover for Greenspan's ultra-easy money circa 2001 to 2003.   As Fed chair, Bernanke was terribly slow to realize the subprime mortgage crisis was anything but "contained." By the time he did awaken to the crisis in August 2007, he responded with a series of programs that pushed the envelope of legality, dramatically expanded the Fed's balance sheet, and put the central bank's credibility at risk.   Of all the institutions that played a part in the current crisis, none had a more prominent role than the Federal Reserve. "The Fed not only failed to supervise lending institutions, but it also ignored the most significant shift in lending standards in the history of human finance. The results were disastrous." The first telegraph message ever sent, "What hath God wrought," reflected Samuel Morse's deep concern for the repercussions of his own actions. If only Phil Gramm were so similarly introspective.   While Congress deserves much blame for the crisis, no one elected official looms larger in our drama than Gramm. He was the senator behind the Commodity Futures Modernization Act of 2000 (CFMA), and spearheaded the repeal of Glass-Steagall. The legislation that overturned it bears his name (Gramm-Leach-Bliley Act). Both legislative acts were WMDs—weapons of monetary destruction. These time bombs eventually led to mass financial destruction.   Barbara Roper, director of investor protection for the Consumer Federation of America, said: "Since the financial meltdown, people have been asking, 'Where was Congress? Why didn't they see this coming? Why didn't they provide better oversight?'" We now know the answer is that members of Congress were too busy pursuing a radical deregulatory agenda. Instead of protecting investors and defending the overall economic system, their misplaced concern was how to make life easier for Wall Street.   During the late-1990s era of deregulatory dogma, the GOP controlled the House and Senate, and Gramm was the point man on issues of deregulation. The Texas Republican was aided in his deregulatory quest in part by Senator Chuck Schumer, a New York Democrat. Perhaps Schumer represented the interests of New York's Wall Street too well.   To this day, Gramm still claims deregulation had no impact on the housing collapse or the credit crisis. The exempting of derivatives from all regulation—including state insurance supervision, reserve requirements, or clearing information—was not at all related to the eventual problems, according to Gramm. He remains unrepentant as to his impact. Placing any blame on deregulation was simply "an emerging myth," the retired Texas senator has said. Deregulation "played virtually no role" in the economic turmoil engulfing the globe, Gramm claimed in November 2008.   What shameless nonsense. You will not come across a greater example of cognitive dissonance in your lifetime. Gramm's inability to recognize the results of his legislative handiwork is a function of a flawed mind protecting itself from the harsh reality. The inconsistency of his deeply held philosophy and the results thereof are logically incomprehensible to Gramm's conflicted brain. If he were ever to admit the truth, he would likely go stark, raving mad.   I'll give Alan Greenspan this much credit: At least he has come clean about the "flaw" in his philosophy. Gramm, by contrast, remains committed to his tainted brand of unregulated, free-market absolutism. Of all the players in the tragic drama that has unfolded, he alone remains unrepentant. Gramm is Bailout Nation's most intellectually bankrupt citizen. Like Greenspan, Gramm had only one idea; unlike Greenspan, he had no comprehension it was wrong.   Regards,   Barry Ritholtz for The Daily Reckoning   Editor's Note: The piece above is an excerpt from Barry's book, Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. To get your copy, click here.   Barry Ritholtz is CEO of FusionIQ, a research firm that provides web-based services to individual investors and traders.   Barry knows the world's biggest firms have teams of professional investors that are faster, better prepared, and have a lot more money at stake than you or I. The odds are really stacked in their favor and against the little guy.   The big firms work around the clock with the best mathematicians and researchers around. So, everyone's looking for an edge. Fortunately, Barry offers a unique advantage that's available at a very special discount to Daily Reckoning readers.   Barron's said his service helps, "determine the strength of some 8,000 publicly traded equities… the most tradable issues and sectors with the lowest component of risk."   In 2008, the service helped Barry avoid a lot of trouble. He recommended selling or shorting Bear Stearns when it was over $100, and very publicly said the same about AIG. He told his readers to sell Fannie Mae over $40 and Lehman Brothers at over $30.   While Barry's contrarian calls caught a lot of grief from fans of those firms, in the end his clients have strongly thanked him. He made all those calls using his unique system called FusionIQ. If you would like to learn more about FusionIQ, he has a very special offer for Daily Reckoning readers…click here.   You can catch Barry (along with 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! See here:   Agora Financial Investment Symposium, July 21-24   --------------------- 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 - 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...