The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery
The Daily Reckoning
Friday, December 11, 2009Gold: The best long-term bet against Bernanke & Co., Paul Volcker to the world's leading bankers: "Wake up!" The real story behind Anthropogenic Market Warming and more...
Bill Bonner, reporting from Dakar, Senegal...
We're not really in Dakar. We left there after a couple of hours on the runway. But we thought it would fun to file a Daily Reckoning from such an exotic place.
Now, we're back in good ol' Bawlamer, Maryland. No matter where you go in the world, you won't find anything like Baltimore. It's probably best that way.
This week, we've had our eye on gold...and the dollar. As the dollar rises, gold goes down. This is not the way we thought it would happen. We expected a crack in the stock market first.
But you never know. And we'll take what we can get. Gold is correcting; that's what we were waiting for.
Well, we don't really know what is happening. Stocks rose yesterday - with the Dow up 68 points. So far, no sign of the rout we're expecting. We'll leave our tattered Crash Alert Flag flying anyway...just in case.
Gold rose $5 yesterday. Was that all there was to it? Was that the dip you're supposed to buy?
We wish we could tell you. As far as we call tell, this is the part of the market that is "noise" and not much more. Gold is a very good bet for the long term. Because it is a bet against Bernanke & Co. Look at it this way, where would your rather put your money...on the brains and integrity of America's central bankers...or on a dumb metal? We'll take the metal!
Just look at what the Bernanke team does. Listen to what they say. They have no idea what they are doing...yet, they are doing a lot of it. They more than doubled the US monetary base in less than 18 months. They've bought hundreds of billions worth of the banks' dodgy loans. They've threatened to drop money from helicopters rather than permit the economy to correct its mistakes.
We'll take gold, thank you very much...and wait to see what happens next.
Markets are closer to living things than to inanimate objects. They have hearts, souls, and a sense of humor. They don't merely react to circumstances. They create circumstances. And then they react to them. And then they give a good laugh. That's why Modern Portfolio Theory and the Efficient Market Hypothesis are such folderol. They expect markets to act like rubber balls or iron filings. They expect them to behave like objects, rather than like human beings.
Anthropogenic Global Warming is probably a hollow conceit. Anthropogenic Market Warming, on the other hand, is a certainty. Put out enough hot money...mix with boundless delusions...and that is what you get.
Anthropogenic Global Warming, or AGW, is what climate scientists call the hypothesis that human behavior is causing the world to heat up. Anthropogenic means 'caused by humans.' Supposedly, humans release carbon dioxide that creates a greenhouse effect, raising temperatures. That's what the scientists claim.
The trouble is there aren't really any climate scientists and nobody really knows what is going on. Real science requires an ability to reproduce results and disprove an assertion. If there's no way to prove that a hypothesis isn't so, it's not really science. It's just guesswork. Nobody can prove much of anything related to the earth's climate. You can't do a controlled experiment. All you have is cogitation and conjecture.
Markets are the same way. Nobody knows for sure why anything happens. But we do know that humans play a central role in market behavior and that what they think matters. That's why you can't measure risk by looking back on past behavior. Investors didn't think the same things then.
In the '90s, investors began to believe that stocks always outperformed bonds and that the US stock market was the safest, surest bet on the planet. This gave them an almost unlimited faith in Wall Street, in equities and in the future. Stocks soared. Then, what happened? In the next decade, US stocks underperformed bonds and were the world's worst- performing major equity market.
Now that's a sense of humor!
And now what do investors believe? They think we are in a recovery. They don't expect it to be very robust. They may be mad at the authorities for giving so much money to the bankers, but they have confidence that the situation is under control. US bonds are still the world's best credits, in their eyes. And stocks are still almost as good as money in the bank. Sure, they may take a hit...but they always bounce back.
The bear has his work cut out for him. He must demolish these confident, inherently bullish, attitudes. He gave investors a fright in '08-'09. As near as we can tell, he succeeded in chasing consumers out of the park. With no source of finance or increased income, consumers have been forced to cut back. They have no choice. Fashion often follows necessity; conspicuous consumption is giving way to frugality.
But investors - particularly speculators - are still believers. The feds couldn't juice up consumer spending...but they wasted no time putting the asset markets into the blender. Speculators enjoy real short-term lending rates below zero...and the fruit of TARP. And now comes word that the feds are going to extend TARP until October 2010...and use unspent funds in other stimulating ways.
No wonder the markets are so frothy! Just watch. Mr. Bear is going to blow the froth off. That's his job.
And more thoughts...
The poor bankers. Now Paul Volcker is giving them hell.
Volcker was the last central banker in America to have any real integrity. He saw what needed to be done and he did it. He hiked up rates and brought consumer price inflation under control. Thus began the bull market in bonds that continues to this day...29 years later.
Volcker saved the dollar...and saved the US economy from a worse bout of stagflation.
Circumstances are very different today. Now, our central bankers are trying to weaken the dollar. They see it as a way to escape debt and get out of a depression. This is, by the way, the depression caused by their own loose-money credit policies. Under the influence of artificially low interest rates, people borrowed too much. Then, they had to cut back...creating today's depression.
Bernanke and company think they can hold off a correction forever - by increasing the amount of cash and credit available.
How does that work, again? People have too much debt...so you give them more, right? Investors and businessmen made too many mistakes...so you enable them to keep making them, right? The bankers lent too much money to too many people who couldn't pay it back, so you insist that they offer more credit, right?
Everyone is mad at bankers. Not us, of course. We pet underdogs. We champion lost causes. We stand by diehards.
As far as we're concerned, the bankers stole their money fair and square.
But the poor English bankers aren't getting away with it. The sourpuss government of Gordon Brown just hit them with a 50% super-tax on their bonuses. Boo hoo.
And here's Paul Volcker, as reported in the London Telegraph, telling them to wise up:
The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful". Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr. Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralized debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products. When one stunned audience member suggested that Mr. Volcker did not really mean bond markets and securitizations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk." He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong."
And with Mr. Volcker's words in mind, let's move right along to today's essay...
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---------------------------------------------------------------The Daily Reckoning PRESENTS: When tallying up the true cost of the government's various bailouts, blunders and boondoggles, many people forget to include one very important - and ultimately unknowable - cost: opportunity cost. Sure, we can represent the actual cost of the stimulus efforts in dollar terms (though not without bringing on a serious head and heartache), but what about the cost of all that was forsaken in order to pay for it? What might future generations have produced had they NOT been saddled with the additional debt? What prudent businesses might have found strength by feeding on the carcasses of the profligate? How streamlined might the self-corrected economy be that emerged from its natural, rejuvenating process? Alas, we will never know...
In today's reckoning, Bill has some thoughts on Fed-sponsored blindness and the inevitable cliff they can't see coming...
The Retarded Recovery
By Bill Bonner
Dakar, Senegal
Nothing is quite as disagreeable as a neighbor who has made a lot of money by not following your advice. After 9 months of 'recovery' they are all around us. They think they have perfected the art of bubble riding.
Here on the back page, we alert investors. We wag our fingers and shake our heads. Little good it does. We might as well warn surfers about an approaching storm. They don't head for cover; they rush to the beach, hoping it's not too late to catch a big one.
As of this week, investors are still making money. Almost everything has outperformed cash over the last 9 months. Stocks, commodities, gold - you name it. This wouldn't be happening were it not for the government. The feds are making waves from Malibu to Manila. 'Don't worry about the depression,' they tell us; 'we're on the case.' That, of course, is what we're worried about.
Instead of allowing things to settle down, the feds are doing all they can to keep them stirred up. Amid the foam and splash, nobody knows what is really going on. For example, they've driven the yield on cash down to near zero. What's a borrower to think? Why are interest rates so low? Are there so many trillions in idle savings that he can have them for nothing?
Investors don't know whether they are coming or going either. They're buying S&P stocks at more than 80 times earnings, while people who know what they are doing - the insiders - dump 82 shares for every one they purchase.
And in the economy, last Friday, came a puzzling report from America. According to the feds, unemployment dropped by 0.2% last month. That leaves only 15 million without work. Another report tells us that each job created by US government stimulus costs $246,000. What were they hiring, bankers?
While the feds muddy the waters, the de-leveraging of the American consumer continues. Consumer credit fell in the US in October, for the 9th month in a row. As long as consumers are cutting back there is no way a real recovery can begin.
What to make of it all? We turn to a ghost for an explanation. Friedrich Hayek described a similar situation 76 years ago:
"There can...be little doubt that ...a deflation process is going on...Central Banks, particularly in the United States, have been making earlier and are more far-reaching efforts than have ever been undertaken before to combat the depression by a policy of credit expansion - with the result that the depression has lasted longer and has become more severe than any preceding one.
"...all conceivable means have been used to prevent the readjustment from taking place; and one of those means , which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about..."
He could have been describing Japan's 20-year depression, too. So far, we have no evidence that the authorities can improve a depression. All we know is that they can stretch it out.
A real recovery is a process of discovery: it begins in misery and ends in prosperity. Investors figure out what their boom-era investments are really worth. Businessmen figure out how to turn a profit in a new environment. Households learn how to match their incomes against their expenses in a world where credit is less forthcoming and jobs are harder to find. Needless to say, the faster these discoveries are made, the better.
But the first thing people realize is that they have been idiots. Then, they call for the government to prove it isn't so. In Britain, the government has spent about $8,000 per family to bail out the banking sector. As a result, we don't get to discover what the bankers would do if they were forced to seek honest employment. Nor do we discover what the poor taxpayers would have done with that $8,000 if it hadn't been forcibly transferred to the City.
Likewise, what we want to know about an insurance company is how well it holds up under pressure. But when the feds rushed in to save AIG they corrupted the facts. Then, in the US alone, there were Bear Stearns, Citigroup, Washington Mutual, General Motors, Chrysler, Fannie Mae and Freddie Mac, not to mention the small fry. Our curiosity remains unsatisfied; what kind of world would it be if they had gotten what they deserved?
Alas, the feds have created a world of darkness and depression. No one knows anything. And what they think they see clearly is often a mirage. Employers don't know whether to hire or fire. Consumers are blind too; they don't know whether things are getting better or worse. Finally, government even pokes its own eyes out. Relying on 'funny money' to cover its deficits, it has no idea how far it can go before it falls off a cliff.
Regards,
Bill Bonner,
for The Daily Reckoning
Joel's Note: Want a free hardcover copy of Bill and Addison's bestselling book,Financial Reckoning Day: Fallout, sent right to your front door? Well, it just so happens that Addison is giving 500 books away to dedicated readers as part of his latest project.He's got all the details for you here. The Daily Reckoning - Special Reports:
Friday, 11 December 2009
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