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The Daily Reckoning Thursday, November 19, 2009 Markets muted as investors digest housing figures, Chanos is bearish...Rogers is bullish...so where to for China? Plus, God oversees Goldman's charity and plenty more... --------------------------------------------------------------- Bill Bonner, with a few thoughts from London, England... The Lloyd's Prayer Our Chairman, who art at Goldman Blanfein be thy name The rally's come God's work be done On earth as there's no fear of correction Give us our daily gains... Poor Goldman Sachs. Everyone is on its case. Criticizing. Carping. Jealous. Envious. So, today we rise in defense of the Wall Street giant. Yes, the Goldmen may be shysters. But they are honest shysters... Besides, it was another slow day on Wall Street. Investors are still mulling the news. As we all know, the recession is over. But... What kind of strange recovery is this? A survey showed that only 1 in 10 workers say his income is going up. This is the lowest reading since 1946. Meanwhile, the news two days ago was that homebuilding took a dive in October. Work began on 11% fewer houses than the month before. On multi-family dwellings, the figures were worse - down 35%. Why would homebuilding go down when the economy is supposedly gathering strength? Well, builders were wondering what would happen when they finished the houses. The new house tax credit was due to expire; they weren't sure the politicians would be witless enough to renew it. They need not have worried. Give the politicos a chance to do something stupid and they will come through every time. Since the end of October, Congress passed and President Obama signed an extension of the housing credit. Until next April, at least, first time buyers will get an $8,000 credit. You'd think that would have revived animal spirits a bit in the residential construction industry. But today's news tells us that mortgage applications are falling - even with lower interest rates. How come interest rates are falling? Well, here again, we see the heavy hand of the feds. The "quantitative easing" has come to a halt...that is, the Fed is no longer buying US Treasury debt (it doesn't need to). But its buying of mortgage backed securities continues. That program will last until March of next year. Still...housing is not cooperating. This news hasn't had much impact on Wall Street. All that can be said is that investors have seemed to hesitate for the last couple of days. Stocks fell softly yesterday, with the Dow down only 11 points. Oil stayed at $79. Gold rose to $1,141. And the euro remained at $1.49. Investors must still believe in what The Washington Post calls a "lukewarm recovery." It is like finding a body on the street. You feel for a pulse and discover that it has not quite reached room temperature. It is tepid... Not quite alive. Not quite dead. Too close to the quick to bury...too close to the grave to boogaloo. --- Major News Outlet Calls This the "Next Crisis"... --- How These Crooks Just Gained Access to Your Bank Account America on the mend? HORSE HOCKEY! Here's what's real: Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history, engineered by none other than Wall Street and Washington, DC. How does their scam work? It's a crafty "triple-swindle" just clever enough that most Americans won't even see it happen... until it's too late. The short of it is, every three days, these flim-flam artists use this strategy to secretly suck wealth out of your savings account. Nobody's immune. ------------------------------------------------------- And now, back to our defense of Goldman... We pick up sword and shield, ready to fight for Goldman, after reading The Financial Times. The FT has devoted a whole page to Goldman bashing. It's time someone stood up to say a kind word for the firm. Besides, Lloyd Blankfein said he was sorry. That's right. He announced that the firm regretted its role in the world financial crisis. And if that weren't enough, he pledged half a billion dollars to helping small business through tough times. In his apology, Blankfein mentioned that he thought Goldman was doing "God's work." That is what prompted humorists to make up the "Lloyd's Prayer," we have republished above. On the surface of it, it does seem absurd. If any group of people ever worshipped Mammon, it is the bunch that works at Goldman. Money is what makes that mare run; no one doubts it. In 2008, the average compensation of the average Goldman employee averaged $364,000 - or more than 6 times the earnings of the average American who was not employed by Goldman. Naturally, the widespread publication of this fact caused a surge of envy. Now comes news that the average Goldman man expects to make about twice as much this year - or about $765,000. As you can imagine, this did nothing to soothe the jealous spirits. Instead, it inflamed them. And now, everyone has Goldman in his sights. Newspaper editorials kvetch and moan. Union-organized yahoos demonstrate in front of Goldman's offices. Cartoons make fun of Blankfein. Commentators say the Goldman crew is greedy. The Rolling Stone magazine described Goldman as a "vampire squid." Saturday Night Live mocked the company. Stand up comics stock up on Goldman jokes. Even priests criticize the firm's claim to be doing 'God's work.' The regulators cannot be far behind. It is illegal to trade on "inside information." So, when a company targets the shares of a rival, and passes its buy orders through a Wall Street firm, the traders are forbidden from trading the shares on their own account. They cannot profit from 'front running' shares, based information not yet available to the public. Goldman clearly profits from front running. But it does it by aggregating information from clients rather than using the inside information from a single client. This gives them a "market color," rather than precise trading targets. In other words, if you have a client who sets out to acquire Acme Cement Company, you can't buy up the shares yourself in anticipation of the rise in the share prices. That information is "protected, inside information." But suppose you have two clients, each of whom targets a cement firm? You quickly get a "market color," don't you? You put two and two together. If they're both after cement makers, probably, the whole cement sector will go up. You buy cement makers, though not those that your clients are buying. This aggregated inside information gives Goldman a big advantage. So do its close contacts with the feds. Goldman has its former operatives in key posts throughout the government. It knows what the government is doing; it has a fair idea of what the government will do next. In trading US government securities, the biggest business in the financial world, this "insider" knowledge is no doubt a handy thing to have. It doesn't hurt either that the Fed is making money available to Goldman at practically no cost. Nor, that the Fed is buying its mortgage backed securities - perhaps even ones that would be hard to unload on the private market. These contacts and sources of 'insider' information are what George Soros has called the "hidden gifts" that Goldman enjoys...and that contribute mightily to its success. But so what? As far as we know, Goldman holds no gun to any counterparty's head. Nor does it lie...unless you call saying things that aren't true "lying." Goldman merely says the same falsehoods as the rest of the financial industry...the things people want to hear...which almost everyone believes anyway. And is there anything wrong with taking money from the US government? Doesn't every retiree do so? Doesn't every larcenous Congressman and every conniving contractor and every shiftless welfare addict aim to do the same thing? Isn't the whole idea of government to take from someone and give to someone else? Then, why not to those who are most able to claim it? The swift...the strong...the smart...the Goldmans! No, dear reader, we cannot criticize Goldman. Instead, we admire it. Goldman took advantage of the financial boom by selling debt and derivatives all over the world. Now, it takes advantage of the 'recovery,' by trading on its client information. And who can blame it for wanting to do business with the richest and dumbest client of all, the US government? In God's plan, at least as we see it, the lowly are raised up. The rich...the proud...and the foolish are brought down. God deals with the meek on his own. Goldman helps him bring the boom down on the others. Until tomorrow, Bill Bonner The Daily Reckoning --- Finally Published: The Options Hotline Track Record --- Tired of trading "gurus" giving you lousy recommendations that lose money? How's This for a WINNING STREAK! Last year, I recommended 37 trades to my readers, every one a winner! With a total gain of 4,647% you could have claimed $232,381 in Profit! Don't believe me? Check out my certified track record for proof... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Jim Chanos is bearish on China...as in "China is Dubai times 1,000, if not a million," bearish. Jim Rogers is bullish, as in, "China is going to be the most important country of the 21st century," bullish. Who will be proven right? Time will tell, of course...but in the meantime, we've got a few essays covering both sides of the argument that you might be interested in. In today's column, Co-manager of the China Region Fund, Romeo Dator, argues the Rogers case. His thoughts below... Five Reasons China Is Not a Bubble By Romeo Dator, Co-manager, China Region Fund (USCOX) San Antonio, Texas A year ago, nobody thought China could manage 8 percent GDP growth in 2009. With year-to-date growth coming in at 7.7 percent through the first three quarters and getting stronger, China is poised to break that 8 percent mark rather easily. The success of the Chinese government's stimulus efforts, evidenced by the lofty economic numbers China has managed to produce amidst a global crisis, has led many to claim China is the next great bubble. We see five reasons China is not a bubble and believe that its prospects remain strong the next decade or two. 1) Consumption Continues to be Strong China is transitioning to a consumption-based workforce. Retail sales rose 16.2 percent in nominal terms during October and have been accelerating. The retail sales figure isn't a perfect proxy, but it is the best available indicator of overall consumption because it includes sales to consumers and not just purchases made by the government. We also saw strong growth in industrial production (IP) and power generation - both were up more than 16 percent on a year-over-year basis in October. Housing starts were up more than 50 percent (yoy) for the second straight month. 2) Structural Changes to Domestic Economy We're seeing a transition to a service-related economy. The service industry is the fastest-growing sector (roughly 20 percent faster than construction) and now accounts for one-third of China's workforce. In general, the size of the service sector is directly correlated to the amount of goods and services an economy consumes. This is why the government has spent such a large amount of the stimulus on areas that benefit the domestic market - that's where it thinks the economy is headed. 3) Stimulus Exit Strategy in Place China's stimulus exit strategy is simple - create a strong economic base that the private sector can launch from. After private investment surpassed that of state-owned enterprises in September, the two flip- flopped during October. Given the environment, month-to-month fluctuations like this are to be expected since private investment is dependent on how willing Chinese citizens are to put their own money at risk. Even though Beijing is determined to wean China's economy off of government stimulus, the government will not hesitate to ramp up activity should the private investors become risk-averse. 4) Government Controls on Flow of Money After lending more money over the first five months of 2009 than all of 2008, we've seen loan numbers come down. There's a longstanding pattern of new loans slowing down during the second part of the year, as banks have historically rushed to meet government-mandated loan quotas. The magnitude this year's slowdown - trillions of yuan - is evidence of Beijing's dedication to prevent a bubble from forming. Once the figures grew too large, the government moved quickly to hit the brakes. While US regulators have many holes to plug in order to keep the economy afloat, the limited number of investment options available to Chinese citizens - basically stocks, bank savings and property - makes it easier for the government to institute controls. This is what happened in 2007 when the government forced a slowdown in the housing market before it overheated. After its economy grew 12.6 percent in the second quarter of 2007, China took more aggressive actions to cool its economic growth. The government raised lending rates and also raised reserve requirements to shrink the pool of money available for lending. 5) China's Long-Term Goals Match Up With Short-Term Goals In the US, the Federal Reserve and policymakers are faced with conflicting goals. They need people to spend in order to get the economy rolling again, but their end game is to have the American people spend less and save more. It's the opposite for China. The problem in China is excess savings and not enough spending. The short-term and long-term challenges are the same - to get people to spend more. Recent signals that China will begin letting the yuan appreciate against the US dollar are not new. For several years, Beijing has stated a gradual appreciation of the yuan will benefit the economy, and CLSA expects Beijing to resume a 5 to 7 percent annualized appreciation process about midway through 2010. Rapid economic growth may be common in emerging economies, but there's only one China. Already the world's third-largest economy on a nominal GDP basis and second-largest based on purchasing power parity, the Chinese aren't making a break from the back of the pack - they're leading it. Domestic consumption, the rise of the service sector and increased private investment won't make China immune to economic bubbles, but these strengths will provide some protection from external forces. Regards, Romeo Dator, for The Daily Reckoning Disclaimer: Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1- 800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by US Global Brokerage, Inc. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund's returns and share price may be more volatile than those of a less concentrated portfolio. --- Forget Goldman...Invest in REAL Gold! --- Even if Gold hits $2,000 by the end of this year... here's a hidden way you can get in for less than one cent per ounce. Over the next two years, you'll witness the greatest surge in gold prices in market history - at least 119% above where gold sits today, as I write this. But even better, I've just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call "penny-per- ounce" gold. That is, doing this is a "backdoor" way to own as much of a position in gold as you like... for the equivalent of paying a single cent per ounce. --------------------------------------------------------------- Now over to Addison Wiggin with today's Daily Endnote... Long-time DR sufferers are already familiar with our friend and colleague Dr. Marc Faber - author of The Gloom, Boom and Doom Report, and one of the foremost contrarian economists working today. Well, we've secured an exclusive interview with Dr. Faber - hosted by our own Dan Mangru - which will premier on Tuesday, November 24th at 2 PM...and it's already creating quite a bit of buzz. Be sure to check out the trailer below, and click here to sign up for your access to this free event. Cheers, Addison Wiggin The Daily Reckoning   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.