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The Daily Reckoning Wednesday, November 25, 2009 The AIG investigation is in...and you're on the hook for billions, Gold continues to crash through barriers in early trading, Plus, there's still work to do, even in a depression, and more... --- The Agora Financial Reserve is Officially Open --- We'll Pay You $5,909 to Cancel Your Agora Financial Subscription Right Now We know it sounds preposterous, but it's true. Not only that... If you act now* you'll receive every one of our elite publications... And that's in addition to the nearly $6 grand we just mentioned. Just give us 10 short minutes out of your day, and we'll explain everything. *The doors to the Agora Financial Reserve are only open a few short weeks out of the year. We suggest you take advantage while you can. --------------------------------------------------------------- Joel Bowman, with today's briefing from Taipei, Taiwan... Readers, investors and taxicab drivers of the world want to know: how far can gold go? But they are all asking the wrong question. They should be more concerned with how far it will go...and, more importantly, when? "When Midas fever hits," writes visiting columnist, Jeff Clark, in today's essay, "prices will explode to the upside." Mr. Clark has a couple of nifty charts to help put the size of that explosion into perspective for us... Of course, no price in the world moves in a straight line, especially when that is what is most expected of it. Is the sizzling gold market due for a short-term correction? "Watch out!" warns Bill Bonner... You'll find all that, and plenty more, in today's edition of The Daily Reckoning... First up, here is Bill Bonner, with some thoughts from London, England... One turkey turns to the other... "Things were pretty rough there for a while...what with the recession and all. But now there's a recovery. Business is picking up." "Yeah, this is great...no more hanging around this place waiting...finally, the boss says we're all shipping out today..." "I wonder what we're going to be doing..." "I don't know...I'm going to some place called 'Butterball Birds'..." "Hey, sounds like it might be fun...maybe it's some kind of theme park. I'm going to work for a fellow named Frank Perdue..." As our friend Nassim Taleb says, a turkey's life is very agreeable...until the very last day. Until then, his whole life is a bull market. Everything looks good. Good food. A roof over his head. Plenty of company. Even free health care. The MPT guys would look at his history. They'd see no volatility. Every day, the turkey gains weight. Every day things get better. They'd see all reward and no risk. They'd say 'every investor should have turkeys in his portfolio.' The chartists, too. They'd look at the turkey's life and see a line moving steadily up. 'Is this a winner or what," they'd say to each other. And what about the economists? Well, the old-timers would be suspicious. 'There's no such thing as all upside...there's no boom without a bust,' they'd grumble. But the young fellows wouldn't listen. They'd plump for the turkeys without hesitation, confident that if anything were to go wrong, Ben Bernanke and Tim Geithner would set it right lickety-split. And now, they think the Bernanke-Geithner team has just pulled off a save. Thanks to them, the turkeys who ran Wall Street - and invested in it - have been spared. America is getting back to work. But what kind of work? Alas, it's the work of a DEPRESSION - de-leveraging, busting up, working out loans, defaulting on debt...going chapters 11 and 7. Yes, dear reader, the recession is over. Welcome back to the Depression. The number crunchers reported a positive GDP growth figure for the last quarter of 3.5%. Everyone cheered. Now, the crunchers admit that they were a little too optimistic. The real number is only 2.8%. But it's still positive. So the recovery is still on... Sort of. If you deconstruct the numbers, and pull out all the feds' hot money effects, you'll probably find that the economy is not growing at all. How could it be? It's a consumer economy. Consumers aren't consuming... The Wall Street Journal reports that "One in four borrowers underwater." Mortgage delinquencies at a record high, adds The New York Times. Real joblessness is at 17.5%, reports CNBC. Insiders are selling 17 of their own shares for every one that they buy. "Consumers lose appetite for dining out," says The Los Angeles Times. The National Retail Federation thinks holiday sales will be 1% lower than last year. And last year they were depressed. But The New York Times is worried about us over here in England. "Lost decade feared for British economy," says a headline. As we pointed out yesterday, the US economy has already suffered a lost decade. No employment growth in the last ten years. No gains in the stock market. No household income growth. As near as we can tell, the whole nation is just another decade older and deeper in debt. But that's the way it works, isn't it? A bull market on Wall Street...or a boom in the economy...they're just like a turkey's life. It's all fine...until it ain't fine any more. And now, we're going to let you in on the secret. You can pass this on to the White House and the Fed if you like. How can you really get an economy out of a depression? Well, you have to get into a depression first. Then, you can get out. The cure for a depression, in other words, is a depression. Nothing else will do. Mistakes need to be addressed and corrected. Losses need to be recognized and written off. Bad decisions need to be put right. So, bring on the depression! Get it on. Get it over with. Too bad the feds don't get it at all. --- Outstanding Investments Silver Report --- Introducing the one metal investment touted as... Better Thank Gold! One investment should rocket even faster than gold over the next 12-24 months... yielding at least 3-to-1 gains on every dollar invested... GUARANTEED. In fact, I'm so sure of this, I won't charge you a penny to show you how... If soaring gold feels good... when this "other" metals investment makes its next big move, it's going to feel even better. With much greater potential for high returns. --------------------------------------------------------------- And more thoughts... Yesterday was a typical day on Wall Street. The Dow fell a little. Oil slipped a little. The dollar held steady at $1.49 per euro, about where it has been for months. And the price of gold went up. No matter what else happens, gold seems to go up. Watch out, though. This gold market is ready for a correction. As we said yesterday, a little bit of governance goes a long way. You'd think the feds might have learned their lesson. Their low rates...and subsidized mortgage loans...led to the biggest bubble in housing in US history. But no...they continue to cause trouble: This from the Independent Institute: "FHA Encourages More Bad Mortgage Loans "An astounding 20 percent of the Federal Housing Administration's $725 billion portfolio of mortgage loans will go into default as the result of the agency's recent campaign to subsidize first-time homebuyers with little cash and weak credit. That prediction comes from an industry insider who has seen it all happen before: former chief credit officer of Fannie Mae, Edward Pinto, who recently testified before a House committee on the gathering storm of FHA mortgage defaults. It's déjà vu all over again. But why did federal policymakers allow history to repeat itself? "To listen to our glorious leaders discuss such matters is to realize that they have no real understanding of what they are dealing with," writes Independent Institute Senior Fellow Robert Higgs in a new post on The Beacon. "They see the collapse of an artificially stimulated house-construction industry, and they conclude: the government must subsidize more house construction. They see the collapse of real estate prices, and they conclude: the government must stimulate demand for real estate in order to raise its price." Had policymakers grasped the causes of the housing boom and subsequent bust, they would have stopped subsidizing unqualified borrowers, stopped trying to raise the prices of houses, and let the economic process work itself out through market processes. Continues Higgs: "Simply piling on more and more of the same distortive policies that generated the crisis in the first place can, at best, only delay the day of reckoning while magnifying the adjustments that ultimately will have to occur." "Government Responds to Economic Woes by Making More Bad Mortgages Loans", by Robert Higgs (The Beacon, 11/22/09) Housing America: Building Out of a Crisis, edited by Randall G. Holcombe and Benjamin Powell "Anatomy of a Train Wreck: Causes of the Mortgage Meltdown", by Stan Liebowitz (10/3/08) In other news, Eliot Spitzer is trying for rehabilitation. He seems to be attempting a comeback as the champion of the little guy. So, in Slate Magazine, he attacks Tim Geithner's deal to save AIG. It was a sellout of the American taxpayer, he says. "Geither's Disgrace," he entitles it. But wasn't that the whole idea? To bail out Wall Street with the taxpayers' money? AIG was saved...thereby saving a lot of bankers' bacon all up and down Wall Street. But what about the firms that weren't saved? The New York Times reports that their bacon was fine too: "At Lehman, the top five executives received cash bonuses and proceeds from stock sales totaling $1 billion between 2000 and 2008, and at Bear, the top five received more than $1.4 billion, according to the study, which was released on Sunday night on the Web site of the Program on Corporate Governance at Harvard Law School. "The payouts came in the form of cash bonuses as well as thousands of shares of stock that the executives sold as the share prices of their companies soared. Most of the executives sold far more shares during that period than the number they held when their companies hit bottom. "'There's no question they would have done massively better had their firms not collapsed,' said Lucian Bebchuk, one of the study's authors. 'But the wealth of those top executives was hardly wiped out. The idea that they were devastated financially has kind of colored the picture people have about what payoffs they were facing.'" --- Introducing The Lifetime Income Report --- Enroll today and immediately start collecting "pension paychecks" every 15 days, for the rest of your life... Retirement, Plan B: Without doing a single moment's work, now you can legally sneak onto the "payroll" of nearly 1,000 of America's best companies... And collect a regular "Plan B Pension" check as often as every 15 days... At any age and for as long as you like, even after you've already retired... With nonstop annual incomes running as high as $120,000 or more... Get the Full, Step-by-Step Guide Here. --------------------------------------------------------------- Ian Mathias, editor of The 5-Minute Forecast, has a few more details on the AIG debacle from the Agora Financial HQ in Baltimore... Brace yourselves for a shocking report from the US government: After months of research and we don't even want to know how much money, an independent investigator has concluded that the government wasted a ton of money bailing out AIG. You don't say! Special Inspector General Neil Barofsky, the man tasked with policing the TARP, released a report last week that focused on the transactions between the New York Fed, led by Tim Geithner, and AIG's counterparties. As was evident to, ummm... everyone, Barofsky concluded that the Fed blew it by not demanding any concessions from the major holders of AIG credit default swaps - like Hank Paulson's alma mater, Goldman Sachs. The NY Fed paid out these contracts in full even though they would have been worth far less had Mr. Geithner not stepped in and bailed out AIG. That cost the American taxpayer "tens of billions of dollars," the report finds. "Geithner's already tattered reputation took a major blow with his investigation," Dan Amoss notes. "He does not come out looking so good. I wouldn't be surprised if President Obama replaced Geithner in 2010, given the mounting evidence that he was handing out taxpayer money and guarantees willy-nilly during the 2008 AIG panic. "With more information about the performance of loans and mortgages in the coming months, the market's attention could easily shift back to the capital adequacy of the US banking system. And with waning political support for government subsidies, bank executives may have to start taking their lumps the old-fashioned way: raise as much dilutive equity capital as necessary to absorb credit losses. Bank shareholders and bondholders - not taxpayers - should be responsible for their own lending follies. "Bank stocks are among the riskiest stocks to own." And now to today's guest essay, below... --------------------------------------------------------------- The Daily Reckoning PRESENTS: It seems that hardly a day goes by without news that gold has reached some new and lofty high. (Just this moment, as we sit down to pen this very note, we see our favorite metal has eclipsed the $1,180 per ounce mark.) The size and pace of such a movement has led some in the mainstream media to question just how much room is left on the upside for our favorite metal. In today's essay, guest columnist Jeff Clark lends some perspective on exactly that question. A quick note before we start: this essay works best if you read it while seated. Details below... How to Invest in Gold Mania By Jeff Clark Stowe, Vermont "There's no doubt in my mind that we'll have a mania in gold. And because the gold and especially silver markets are so tiny, the rush into them will be like trying to push the contents of Hoover Dam through a garden hose. Our positions will go absolutely ballistic." - Doug Casey, September 2009 There's certain to be a rush into gold and silver, and buying before Main Street catches gold fever is the only way to play this trend. Because when Midas fever hits, prices will explode to the upside, for both the metals and the stocks. How do we know that? First, let's look at gold. If we added up all the gold ever mined on the planet, its total value would equal no more than $5 trillion at today's prices. Yet, look at how this compares to the debt and bailouts and other monetary mischief of current governments... Let's make this chart very clear. Of the $5 trillion in gold ever mined... The US government has thrown over twice as much at the economy in the past 12 months. The US debt is more than double this amount so far this year. Total global government bailouts are almost four times larger (and this is a conservative figure; one estimate puts it at $24 trillion). I intended to include annual gold production as one of the comparisons, but the chart isn't big enough and neither is your monitor: 2008's global gold production equaled about $73 billion, and to make that figure discernable on the chart would require the Global Bailouts bar to hit the ceiling above your head. That's how small the gold market is. The implications are undeniable: when the greater public rushes into gold - whether in response to inflation, dollar woes, war, whatever - the price will be forced up by an order of magnitude. While physical gold will protect our wealth, it's the gold stocks that can potentially make us wealthy. Once again, to get a sense of the Lilliputian size of the gold industry, I compared it to several other leading industries and stocks. The value, as measured by market capitalization, of all gold producers around the world is less than Wal-Mart's. Every gold stock would need to nearly double just for the industry to match ExxonMobil. The oil and gas industry is about 12 times bigger. When your neighbors and relatives and co-workers and friends all start clamoring to buy gold stocks, the pressure on prices will be enormous, rocketing our positions upwards. Meanwhile - and admitting we're first and foremost gold bugs - the picture for silver is even more dramatic. The potential for silver stocks is jaw dropping. If the gold industry is tiny, then silver's $9 billion market cap makes it a nano industry. The entire silver industry is over 21 times smaller than gold's! If gold explodes, silver will go supernova. Consider these macro-facts about a micro-market and what they reveal about silver's enormous potential: There are over 200 companies in the S&P 500 with a market cap larger than the entire market of silver producers. There are five times more gold stocks than silver. Total silver production in 2008 was valued around $10.3 billion (at today's prices). That represents just 1.5% of the $700 billion bailout last year, and 0.006% of the current US monetary base. Of the 20 largest silver producers, only five actually call themselves a "silver" company, due to the fact that about 73% of all silver mined is a byproduct of other metals mining. Any flood into the silver market would overwhelm it. In other words, the rise will be stunning. While it's not going to happen tomorrow, I strongly suggest you get on board before that rocket ship takes off. Just putting these charts together stirred my feelings of restlessness, making me anxious for the mania in precious metals to arrive. But the timing is not up to us. Be patient, because if you're invested in gold and silver and the respective, high-quality stocks, you're on the right side of this trend. Regards, Jeff Clark Senior Editor, Casey's Gold & Resource Report for The Daily Reckoning P.S. Had you bought gold, say, four years ago, when it was around $450/oz, you'd be sitting on a nearly 130% gain. But you could have made up to three times as much with even the most conservative precious metals investments - large- and medium-cap gold and silver producers. It's not too late to jump on the bandwagon. Click here to find out more. ---------------------------------------------------------- Daily Endnote: "So, what is the standard working timetable for Thanksgiving over there in America?" your managing editor inquired during a teleconference with some of his stateside workmates yesterday. "Everyone gets the day off," replied our senior editor, Eric Fry, "except, obviously, for Australians living in Taipei. They still have to work, right Joe?" "Yeah, sorry Joel," confirmed our publisher, Joe Schriefer. "Not much I can do there. I think you'll find that's pretty much standard procedure." Hmmn...we'll just see about that... Happy Thanksgiving, Joel Bowman Managing Editor, The Daily Reckoning joel@dailyreckoning.com   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.