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The Daily Reckoning Monday, December 14, 2009 The taxman squeezes...and "Goldman's God" comes out, Half the world is booming! But it's likely not the half you live in, Plus, Fed-sponsored "morbid feedback loops," and plenty more... Bill Bonner with today's entry from London, England... It's open season on bankers. But the hunters are shooting blanks! First, Britain said it would impose a 50% super-tax on their bonuses. Then, Sarkozy said he would do the same thing. Angela Merkel merely said that she found the idea 'charming.' As for the US, the argument goes on. Goldman has tried to head it off with various gestures. Its top man said the firm wasn't just trying to make money; it was doing "God's work." No kidding. We couldn't make this stuff up. How Mr. Blankfein knows what God wants him to do, we can't tell you. But it was certainly a bold public relations move to suggest it. More recently, top executives agreed not to take cash bonuses. The Financial Times calls it a "war on greed." But it's a bogus war. What is really going on is that both sides are conspiring to share money that doesn't belong to them. The Wall Street Journal, for example, revealed more of the real dealings between AIG and Goldman. AIG had guaranteed billions worth of Goldman's dodgy mortgage deals. If AIG went down, Goldman would lose a lot of money. So, when the feds stepped in to "save western civilization as we know it," they were really saving Goldman. Western civilization would have been better off if they had all taken their losses and gone to wherever willing investors and lenders sent them. Instead, the feds put up the taxpayers' money...and the bankers got their bonuses. The show must go on. And now, the government pretends to punish the bankers, the bankers pretend to suffer. In the first place, a 50% tax is not that extraordinary. The top marginal rate is nearly 50% in many places already - including the US. Add the local tax to the federal levy and you barely have half left. In the second place, if the bankers don't take big cash bonuses they'll take their compensation in some other manner. According to The Financial Times, rough handling by English tax collectors is causing many bankers to leave the country. But there's more to it than just the taxes. Bankers are leaving the UK because the opportunities for them are better elsewhere. Here we come to one of the world's big trends - one that will have profound consequences for the entire world. There may be a depression in the US and Britain...but it hasn't slowed the movement of money and power from the mature, developed economies - notably the aforementioned Britain and America - in the direction of the emerging markets. The emerging markets are growing faster; everybody knows that. According to a Goldman study, nearly half the world's economic growth is now occurring in just four countries. And neither the US nor Britain is on the list. Nor is any other developed country. The four are the BRICs...Brazil, Russia, India and China. They were given a big boost by the Fed...which has kept the price of credit in the US artificially low for almost an entire generation. This increased consumer demand in the US for foreign products, indirectly transferring a substantial part of the US GDP to the emerging market exporters. This year, nearly twice as many IPOs were completed in Hong Kong as in either New York or London. Why? Because there is more new economic activity in Asia than in the mature Anglo-Saxon markets. And because there is more money available in those emerging markets than there is in the West. This trend could come to an end at any time. But it is unlikely. The industrial revolution favored the West. The next phase of global development seems to favor the new, emerging markets. They don't have the legacy costs and corruptions of mature industrial societies. No giant military establishments. Minimal social security and public health care systems. Smaller welfare, education and health bureaucracies. Fewer lobbyists and entrenched special interests. Fewer retirees. In short, fewer parasites. Emerging markets are now playing catch up. Sometime in the future, some of them may take the lead - surpassing the US and Europe in military power, national income, growth, even quality of life and income per capita. Then, they too can begin ruining themselves. But that is still far, far in the future. We'll have many a laugh between now and then... More from Bill below... But first, let's get into today's essay... The Daily Reckoning PRESENTS: You've heard of what happens when a butterfly flaps its wings on one side of the Pacific, right? Now, let us consider what might happen when a Helicopter Fed Chairman churns his blades around the world's most influential reserve bank. Tidal waves are only the beginning... In today's column, resident value investor and part-time financial historian, Chris Mayer, talks us through some uncommon investor wisdom and offers a few recommendations from his own bookshelf... The Yellowstone Syndrome By Chris Mayer Gaithersburg, Maryland Most people in finance operate under a giant self-deception: they think future economic trends are much more knowable than they actually are. The economy is like a complex ecosystem. You cannot alter one piece of it without causing effects elsewhere in the system. Investors who understand this reality can also understand (and avoid) the hazards of over-confident investing. Our discussion begins in Yellowstone National Park. In the late 1800s, Yellowstone's game population - its elk, bison, antelope and deer - began to disappear. So in 1886, the US Cavalry took over management of the park. And its first order of business was to help bring back the game population. After a few years of protection and special feeding, the game population started to come back strong. But what the government didn't understand was that it was dealing with a complex ecosystem. You can't just change one thing and think that it won't also lead to cascading changes elsewhere. The surging elk and deer populations ate a lot more. This caused the plant life to diminish. Aspen trees, for instance, started to disappear, eaten by the numerous elks. This hurt the beaver population, which depended on the aspen tree. The beavers built fewer dams. The beaver dams were important in helping prevent soil erosion by slowing the flow of water from the spring melt. Now the trout population took a hit, because it didn't spawn in the increasingly silted water. And so on and so on... The entire ecosystem started to break down because of man's desire to boost the elk population. It got worse. In the winter of 1919-1920, more than half of the elk population died - with most of them starving to death. But the National Park Service chalked it up to predators. So it began killing wolves, mountain lions and coyotes - all of which only made the problems worse. This anecdote from Yellowstone's past comes from Michael Mauboussin's book, Think Twice. He writes: "The population of the game animals began to experience erratic booms and busts. This only encouraged the managers to redouble their efforts, triggering morbid feedback loops." By the mid-1900s, the Park Service managed to kill off nearly all of the predators. In 1926, it shot the last wolf. This experience in Yellowstone sounds a lot like what's happening in our economy today. Congress and the Federal Reserve are so busy "rescuing" specific pieces of the economy that they fail to realize how these efforts are threatening other pieces of the economy. Our government has propped up the auto manufacturers. It's propped up numerous banks, mortgage lenders and the world's biggest insurer, AIG. But the rest of the economy is still swooning. In fact, portions of the government's rescue efforts are contributing to the economy's difficulties. Because the Fed is supplying so much credit at such low rates of interest to the big finance companies, these finance companies can make a lot of money by simply buying Treasuries, rather then lending to businesses. The result is that most small and mid-sized companies cannot get loans. If the Fed's did not supply credit so inexpensively, the banks would be forced to loan to businesses. Unintended effects like this one produce unintended effects elsewhere, and before you know it, cause and effect are hard to discern...or to explain accurately. "Yet our minds are not beyond making up a cause to relieve the itch of an unexplained effect," Mauboussin writes. "When a mind seeking links between cause and effect meets a system that conceals them, accidents will happen." That's why so many so-called experts are so often dead wrong. They think that know what's causing what. But they don't. For instance, there is no shortage of financial experts who will tell their clients to put 15% of their portfolio here and 10% there or whatever. And these experts will have definite opinions on each of their recommended mutual funds. This one is better than that one. They'll give numbers. It will seem very concrete and real and "expert." But guess what? Almost all the experts produced an identical 35% loss for their clients in 2008. If an investor hopes to minimize or avoid losses of this magnitude, they must understand that economies are complex adaptive systems - replete with feedback loops and black swans and power laws. Investors must approach the future with humility. And that means fearing risk more than craving reward. A humble investor will also insist on a margin of safety in each investment. I don't write about this philosophy very much, because it is kind of wonky. But these ideas inform how I look at markets, and are one reason why I try to stay rooted in boots-on-the-ground-type thinking and present-day facts. I've been influenced by a number of thinkers about the unpredictability of economies and markets. A couple of my favorites would be Nassim Taleb, author of Fooled by Randomness, and Benoit Mandelbrot, author of The (Mis)behavior of Markets. Another useful book on these ideas is Mauboussin's More Than You Know. Mandelbrot writes a lot of highbrow stuff, but in this book he teamed up with Richard Hudson, a former Wall Street Journal editor, to reach a broader audience. Mandelbrot is a critically important thinker in finance. But he is not revered by academics. As Paul Cootner, an MIT economist, put it: "If [Mandelbrot] is right, almost all of our statistical tools are obsolete. Almost without exception, past econometric work is meaningless." So there you go. Academics ignore him because if he's right, academia is pretty much a farce. Academics won't embrace Mandelbrot's ideas because their salaries depend on them not embracing those ideas. So if you think that academia might be promoting a farce - for the first time ever, of course - you might want to examine Mandelbrot's ideas in more detail. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: If you currently subscribe to either of Chris' superb investment letters, or, indeed, any of Agora Financial's research services, you might like to consider consolidating your memberships into a single package deal. For most readers, this will mean a considerable savings and, in some cases (depending on how many subscriptions you receive) even a refund. Savings will vary from individual account to account, of course, but it's probably worth checking it out just the same. You can do so here. P.S. It is unlikely that this package offer will continue into the new year, so if you want in, act fast. --------------------------------------------------------------- And more thoughts from Mr. Bill Bonner... Growth requires finance. Capital needs to be raised and allocated. Then, earnings must be distributed and invested. And, of course, consumers want credit too. One sector that is growing particularly fast in the emerging markets is...you guessed it...finance. You could say that the thing that emerging markets most lack is a sophisticated financial industry. Until they get that, they'll have to continue to earn their livings with honest work. When people in Argentina buy houses, for example, they typically have to come up with a lot of cash...sometimes 100% cash. This means that they tend to have a lot in savings. It also means that there is a huge business waiting to be developed - helping the consumer get deeper into debt. Stocks in the US went up 65 points on the Dow on Friday. Gold continued its correction, down $6. We got a big dose of American culture this weekend. We went Christmas shopping in the Annapolis Mall. It is the first time we've been in a mall for at least 15 years. We've never seen so much junk in one place! Geegaws...gadgets...shoes...clothes... It is amazing what people will buy. Anyhow, while we were strolling through the mall, looking for presents for Elizabeth and the children, an idea occurred to us...about what this mall represented. Was it not a consequence of a 50-year trend towards consumerism? Was it not aided and abetted by artificial policies of the Fed and Keynesian economic delusions? Is it not unsustainable economically...financially...and physically? Could the Chinese, the Indians, the Russians, the Brazilians and the Indonesians...or all 9 billion people expected on the planet in 2050...ever hope to consume resources in such a manner? Americans can only do so because of the willingness of the foreigners to ship their resources...and their finished products...to the US in return for pieces of paper with the dollar signs on them. What will happen when the foreigners want to consume their own output? Will there be enough? Or will a new idea emerge with the new economies...a new idea about how to live...and what it means to be wealthy? Maybe the ancients were right about it. A man's wealth can be measured by what he has; but it can also be measured by what he doesn't have and doesn't want. When he wants little, he is a rich man. But in the Annapolis Mall we saw no sign of Marcus Aurelius. This was a temple of the hedonists, not the ascetics. People were there to buy things...things they didn't need and would be better off without, in our opinion. But were they buying with money they didn't have? Maybe not. Consumer debt is going down. That must mean they are borrowing less than they are paying back. Well, not exactly. Debt is going down largely because households are defaulting. Floyd Norris reports in The New York Times: "Figures released this week by the Federal Reserve showed that Americans owed $10.8 trillion on home mortgages at the end of the third quarter, down 2.2 percent from a year earlier and the lowest level since mid-2007. "Similarly, the Fed said that outstanding credit card bills in October totaled $888 billion, down 8.5 percent from a year earlier. That number was the lowest since March 2007. "Those trends do not, however, necessarily indicate that Americans have paid down their debts and are starting to lead the more frugal lives that some financial planners have been recommending for years. There has undoubtedly been some of that, but the declines also indicate that banks have been forced to write off a lot of bad debts and have grown more stingy in granting credit. "...banks' credit card write-offs have soared, to an annual rate of 10.2 percent in the third quarter of this year. "And the Mortgage Bankers Association reported that at the end of the third quarter, 4.5 percent of all mortgages were in foreclosure - one in 22 mortgages. It said another 6.1 percent - one in 16 - were at least two months overdue. Those figures are for all mortgages, not just subprime ones. "The extent to which Americans are really cutting back may become clearer this holiday shopping season, when they decide how much money to spend. If what they tell pollsters can be trusted, they are going to cut back. "A poll of 7,500 Americans in November, conducted for Alix Partners, a business consulting firm, found that people expected to save 15 percent of their income when the recession ended. That is about three times the current savings rate, as reflected in government figures. Asked what their largest personal financial concern was, 18 percent cited lowering their debt, more than any other choice." We sat in the business class lounge at Dulles Airport longer than we wanted to. The TV in the corner seemed to be tuned into a talk show. As near as we could figure, people yelled at each other about things that didn't concern any of them. Two subjects of conversation were addressed. The first was the case of a teenage girl who had murdered a child. The second was Tiger Woods' private life. More interesting were the advertisements. There must have been four different advertisers offering to help people get out of debt. In the past, the ads would have been for weight-loss programs. Now, they are debt-loss programs. Until tomorrow, Bill Bonner The Daily Reckoning   The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.