Britannia Radio

The Daily Reckoning Monday, December 28, 2009 Stock markets up, economic fundamentals down: 2009 in review, Why central banks all over the world are turning Japanese, Plus, Bill Bonner with his very own "Man of the Year," and more... Bill Bonner, with thoughts on all things Christmas, from Ouzilly, France... Dear Friends,  Well, another year has gone by. And here is another Christmas Letter for our Daily Reckoning family.  Let's try to remember what happened.  Most of us would have to say that it was a pretty nasty year, at least from a Christmas Letter point of view. None of our children got into Harvard. No one's team won the regional soccer championship. Nobody went to New Guinea to help the hill tribes reduce their rate of infant mortality.  And even after the success of our Trade of the Decade, we did not win a Nobel Prize in economics. We didn't even get a polite note of congratulations. Instead, zilch. Nada. No word. Probably got lost in the mail.  But let's back up and see where 2009 went bad.  You'll recall the year got off to a rough start. At least, that's what we'd call it. Wall Street collapsed. Stock prices were cut in half. And the biggest, most successful firms on Wall Street went broke, got a handout from the feds, or were merged in with other banking groups, sometimes under shotgun wedding conditions. Not one of them - not even Goldman Sachs - was left standing in its original shape. Goldman pretended to be a survivor, but we don't know what would have happened if the feds - led by former Goldman CEO Hank Paulson - had not bailed out AIG. The insurance giant was one of Goldman's main counterparties.  World trade fell along with Wall Street. Instead of backing up outside Long Beach container ports, waiting to unload, ships began sitting in harbors idle, waiting for someone to want to send something somewhere. Few people did. Why bother? When it got where it was going there would be no one to buy it.  The US consumer - the world's buyer of first and last resort - was out of action. He couldn't spend because he didn't have any money. He couldn't earn it and he couldn't borrow it. He couldn't earn more money because he lost his job. He couldn't borrow more because his house was falling in price.  This left the whole world economy in a tight spot. For at least 50 years, the US consumer had been the little engine that could. The US economy grew because he chugged along, buying evermore stuff. The world economy grew because the foreigners were able to export huge quantities of stuff to the US market.  At first, the US consumer bought with real cash. Then, when salaries stopped rising in the '70s, he switched to credit. By the '00s, he was depending on credit just to get him through to the end of the month.  But the whole consumer credit bubble finally blew up in '07-'08...and in '09 people were in a panic about it. This gave the feds cover. Under the threat of an emergency, they were able to transfer hundreds of billions' worth of Wall Street's bad debts onto the taxpayers...and add to his burdens with billions more worth of boondoggle spending projects.  Of course, Dear Readers know that this just makes the situation worse. In order to spend, the feds had to borrow. Not only did this take money out of the real economy - money needed to retool - it also retarded the necessary changes themselves. Instead of permitting brain dead companies to go broke, they were kept alive - with taxpayer subsidies - so new companies couldn't take their place.  From the bankers' standpoint, the federal bailout was a big success. They were able to get money from the feds at near-zero cost, offload their bad investments, pay big bonuses all around (you wouldn't want to lose talent like that!) and go back to doing what they had been doing so fatally before. Sure enough, with so much hot air from the feds blowing into their sails, the banks made money. They were then able to pay back the government. Investors who bought the banks' shares also profited.  After the first quarter was over, 2009 was a good year for just about all investors. You could throw dollar bills in any direction; chances were very good that you'd make money. Dollars went down. Everything else went up.  This was almost great for our Daily Reckoning readers. We had warned readers to stay away from dollars. But we also warned readers to stay away from stocks.  Yes, dear reader, we expected the bounce. We even guessed that it would take stocks back to the 10,300 level on the Dow, recovering about half of what they had lost. But we didn't think the bounce would last this long. And the longer it goes on, the more people come to think that it is not a bounce at all...but a genuine new bull market.  Anything is possible. But we'll stick with our Bounce Theory a while longer. Even at the March 9 low, stocks never got down to levels typical of a major bear market bottom. By our reading of things, the stock market works in broad patterns of boom and bust. We've had the boom, no question about it. What we've missed is a real bust. Stocks never became cheap.  But that brings us back to our 'Trade of the Decade.' For not only are we arriving at the end of a year. We're also coming to the end of the '00s.  Turns out, our 'Trade of the Decade' was a big winner. Remember, the trade was simple - sell stocks on rallies; buy gold on dips. Well, over the last 10 years, no major asset class outperformed gold. No major asset class underperformed stocks. Such a big winner was our 'Trade of the Decade' that Merryn Somerset Webb wrote about it in The Financial Times:  "It turned out to be a good plan. In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you $1,125. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst. "He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. "So it made sense to him to hold the only non-paper currency there is - gold. Bonner had a good decade, making returns of 400 per cent plus."  We Daily Reckoners were also right about the economy. While Ben Bernanke saw a "Great Moderation," (more below...) we saw a Big Bubble. And while Ben Bernanke saw skillful economists maintaining an era of growth and stability, we saw a bunch of clowns cruisin' for a bruisin'.  So where's our picture on the cover of TIME? Not there. Instead, there is the hirsute mug of Ben Bernanke. And where's our Nobel in economics? Instead, that went to Paul Krugman. At least Krugman saw trouble coming. Too bad his solution to it was even worse than Bernanke's. The Fed chairman increased the nation's monetary base by $1.2 trillion - more than all the previous Fed chairmen put together. When this didn't do any good (except for protecting bankers' bonuses), Krugman suggested that the Fed add $2 trillion more.  But don't worry, we're not going to use our Christmas Letter to rag on Ben Bernanke and Paul Krugman. After all, Christmas is time for generosity of spirit...for happiness and celebration...for Peace on Earth and warm feelings towards our fellow man. That's what the priest told us last night. Mass was held at 7PM in the little hamlet of Bourg Archambault.  "I don't know what's wrong with people today," the jolly priest began. "When I was young...well, yes...80 years ago...we would walk 3 kilometers to go to the mass on Christmas Eve. Often, through the snow. We were so happy...it was the happiest night of the year.  "Of course, Christmas is not the most important day on the calendar. That day is Easter. But that is a much different kind of celebration. On Easter Sunday, we give thanks to God for sending His son to us...but it is a weightier more solemn occasion too, because Jesus suffered and died for us.  "Christmas is pure joy. And it was a pleasure to go out in the cold to an unheated church...at midnight.  "Now, we heat the churches...and we have the mass at 7PM because they tell me the old people can't stay out late and the roads are slippery and dangerous. What a load of rubbish!"  The old priest has what the locals call a "character." He has strong opinions and doesn't mind expressing them.  "I'm too old to care what anyone thinks of me..." he says. "But it is a waste of time to be thinking about yourself...or what others think of you, anyway. What you should really care about is what God thinks of you. And that is a very different thing. What does God want you to do? What does God care about?  "Of course, we don't know the mind of God...but we have the word of God... and it is pretty clear. It tells us to 'love thy neighbor.' And that's why we are here tonight. And that's why this is such a joyful occasion. God sent His son into a world of sin and sorrow with a message for us. It wasn't a message of approval. He was telling us to shape up."  We went to the mass with the whole family...  Coming back in the car, Edward seemed to have missed the point...  "I hate going to that mass. It's so long. And everybody sings off key."  Jules may have missed it too. He began singing...  "Get down off that cross...we need the wood..."  "What the heck is that you're singing?" we asked.  "Oh...that's a Tom Waites' song..."  "Oh..." Back at the house, we looked at our Christmas tree and sighed. Damien had dragged it up to the house behind the tractor.  "One of the trees by the pond fell over. I cut the top out. It will make a good Christmas tree, don't you think?"  Looking at it set up, we didn't think. It was bent. And it was naked at the top.  "Don't worry, when we get the decorations on, it will be okay," said father, trying to keep spirits high.  So, we brought out the CD player...put on Bing Crosby's Christmas songs...lit a big fire in the fireplace and set to work. Elizabeth brought out foie gras on toast and an oyster stew. Henry opened a bottle of champagne.  After a few glasses of champagne, the tree, now decked out with flashing lights and golden balls, didn't look so bad.  All of a sudden, the spirit of Christmas seemed to enter the room. We realized that we shouldn't feel bad about not getting the Nobel in economics or TIME's 'Man of the Year' distinction. Nor should we think bad thoughts about Bernanke or Krugman. True, they had no idea what was going on...and still don't. But while they are fools, they are God's fools.  We thought of the priest's sermon...and how we should remember the baby Jesus...and how he was sent down to earth to preach the gospel of love and forgiveness.  Yes, we were turfed out of a Nobel Prize and the "Man of the Year" award...but it is Christmas... "Love thy neighbor" is the order of the day.  So, we will hide our hurt pride and love both Bernanke and Krugman...  ..the bastards.  Merry Christmas to all Dear Readers...and best wishes for 2010,  Bill --- Critical Agora Financial Account Information* --- Attn: Agora Financial Reader - A Quick Word From our Publisher: Do any of the following apply to you? You subscribe to one or more Agora Financial research service You have NOT yet claimed your free gold collectors coins You are an Agora member but unfamiliar with The Reserve You are NOT receiving our highest-priced trading service for one complimentary year If any of these scenarios do apply to you, the following message directly affects your account with Agora Financial. Please take a few moments to review this important message to ensure you are getting all the benefits included in your AF membership.  *In some cases, existing members may be entitled to a partial refund and/or additional services at no extra charge. Cont'd Here. --------------------------------------------------------------- The Daily Reckoning PRESENTS: TIME Magazine's "Man of the Year" goes to someone who has provoked the public discourse in one way or another, someone who has impacted the world, for better or, as is often the case, for worse. The Daily Reckoning's Christopher Columbus prize is somewhat different, as Bill explains... Our 2009 Christopher Columbus Prize... By Bill Bonner  Ouzilly, France Beginning a new tradition, we give an award to the person who has done the dumbest thing in the financial world during the preceding 12 months. We call it the "Christopher Columbus Prize," named after the mariner who didn't know where he was going, didn't know where he was when he got there, and as Churchill pointed out, did it all at government expense.  Anyone can make a mistake. But to make a truly colossal blunder you need the support of the taxpayer. That's why TIME magazine named Ben Bernanke its "Man of the Year." Yes, you guessed it, he is our man too.  A decent economist is rarely offered the job of Fed chairman. The public wants miracles. A real economist knows he can't deliver them, so he takes himself out of the running before embarrassing anyone. A scoundrel like Alan Greenspan, on the other hand, squeezes his role like a ham actor, even though he knows the juice is bogus.  But in order to understand the grandeur of Bernanke's error in 2009 we have to go back to the Greenspan era...and his illusions of 2004. He had no idea of where he was then, as evidenced by a famous speech made to the Eastern Economics Association, entitled "the Great Moderation." The Fed's future chairman described recent history, in which nothing much went wrong. He attributed this remarkable stretch of growth and stability to "improved policymaking," noting that the stability should continue indefinitely, "assuming of course that policymakers do not forget the lessons of history."  But the professor from Princeton never learned the lessons of history in the first place - not even the recent history of Japan. The real cause of the "moderation" was a huge flood of credit in the '90s and '00s. No one disputes it. That's why everybody looked so smart. Even a captain who wanted to run his bark aground would have had a hard time finding rocks; they were submerged under EZ money - much of it from the Fed. Investors thought they were geniuses because their assets rose in price. Businessmen were heroes because sales increased. And the Fed chairman took excess credit for what excess credit itself had wrought. But that was just like Ben Bernanke, he mistook a dangerous nuisance for a great success.  Then, in 2009, having misunderstood where he came from and how he got there, it was not surprising that he had no idea where he was. As Bernanke saw it, credit was what made the world spin. Now, with gears stiffening, it needed more grease. But where would the money come from? The US government already had a net worth of minus $68 trillion; it could only spend by borrowing more. Any moron could see the problem right there. In order to put a dollar in the economy, the feds first had to take it out, which further damaged the credit of the world's biggest debtor.  Team Bernanke was counting on "the multiplier effect," in which spending by the government is supposedly magnified by the private economy. But if he had learned anything from history, it should have been that the magnifier doesn't work when an economy is de-leveraging. David Ricardo explained why more than 100 years ago: as the government borrows more and more, people begin to suspect a crisis is coming. Rather than spend or invest, they hunker down and wait. Instead of multiplying the government's inputs, the private sector gives them a haircut.  The amounts are staggering. In 2010, the US federal government will have to roll over 2.5 trillion in debt and finance an additional deficit that will probably reach up to another trillion. Where will it get that kind of money?  Don't look at us, said Bank of China honcho Zhu Min last week: "The United States cannot force foreign governments to increase their holdings of Treasuries... The world does not have so much money to buy more US Treasuries."  Where he was maladroit with fiscal policy, he stumbled badly on monetary policy too. Intending to re-liquefy the economy, Ben Bernanke turned on a fire-hose. But the banks hunkered down, just like consumers. Measures of the real money supply turned negative. The Fed stopped reporting M3 - the traditional money supply measure - in March 2006. But it has been contracting month after month since July. We don't have December numbers yet, but it appears likely to drop below the zero line...meaning not just a decline in the rate of an increase, but an actual decrease in the available money supply. As the supply of money falls, the value of each dollar goes up. People owe more...and spend less. That is what a depression is all about.  Economist Richard Koo:  "Now the same Mr. Bernanke is finding himself, in the United States, that even with all the actions of the Federal Reserve, nothing is happening. So he is in the same position the Bank of Japan was in 15 years ago."  Now we see where the mariner has washed up - just where he didn't want to go. In Japan. --- Outstanding Investments Metals Report --- Introducing the one 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. Download this Free Report. --------------------------------------------------------------- And now Bill has today's (Monday's) reckoning from Ouzilly, France... We're coming to the end of the year...  What have we learned? Here's how we would put it, a four-word lesson that applies to almost everything:  "It's Not That Simple."  We were on pretty solid ground - at least as far as understanding what was going on in the markets and the economy - up until the middle of 2009. The Bubble Epoque led to the Bust Epoque...just as we thought it would.  But our view was too simplistic. We expected the feds to react...and stocks to bounce. Both of those things happened. But then, the bounce should have ended...and the feds' massive inputs of cash and credit should have led to inflation...or at least a major sell-off of bonds and the dollar in anticipation of inflation.  You'll recall, that even we thought this view was too simplistic. The story was too easy to tell and too easy to understand. And so many people were jumping on, we thought the bandwagon would break an axel.  But we just didn't have a good alternative.  As usual, Mr. Market is being cagey. He's playing his cards very close to his vest...not giving away too much information.  He's extended the bounce for so long that most people now think we're in a new bull market. Just read the views of Barron's roundtable. Almost all of them expect higher stock prices in 2010. Or, ask the man in the street. He's convinced that the crisis of '07-'09 is over...and that the recovery, while it may be fragile, is a sure thing.  Is it a bounce or a bull market? We'll stick with the bounce hypothesis a while longer; until we're proven right...or people start laughing at us, whichever comes first.  Meanwhile, the man on the street is not taking chances. While he probably believes the claptrap from Washington and Wall Street, he also knows that his house has lost 30% of its value and that if he loses his job he'll have a hard time finding another one. So, he's cutting back - just like he should.  According to the early figures, holiday sales are coming in sub-par, as expected. The New York Times reports that retailers are offering large discounts to attract customers. Saks gave shoppers up to 70% off. Brooks Bros. cut prices up to 50%.  Sales declines are not just the fault of the weather. Consumers have less money to consume with. This is the fundamental change that makes 'recovery' impossible. The economy can't go back to the Bubble Epoque. That period was irreproducible. Consumers were able to live beyond their means by borrowing against their houses (or, 'taking out equity,' as they liked to say.) Those days are gone forever.  And now, stock market investors judge America's businesses to be worth about 2/3rds as much as they were in the Bubble Epoque. Is that too high? Or too low? Or just right?  It's probably too high. The outlook for American business is not good, for all the many reasons we've outlined in these Daily Reckonings. Our guess is that investors are going to turn gloomy when they realize that there will be no recovery...not now...not ever...and that the businesses they own are not really worth as much as they thought.  If no recovery, then what? Well, then we have a depression.  "Hey wait a minute...this ain't no depression..." you're probably thinking.  Well, it doesn't look like a depression. But we blame that on color photography. Since the '30s, we now have color photographs...so nothing looks like it did in the '30s.  Besides, it didn't feel much like a depression back then either...at first. And it didn't feel much like a depression after Japan cracked in 1990 either.  Depressions take time to express themselves. Remember, they are not pauses in the life of an otherwise healthy trend. They are what happens after the trend drops dead. Then, the economy needs to reinvent itself. At first, people don't want to believe it. They try to revive the old business model. They bet that the old companies will quickly return to robust health; they buy their stocks. They demand that the government do something to save the poor, ailing economy.  But it's not that simple... You can't revive a dead economy. And when you realize the old economic model is, in fact, a corpse...it's depressing.  The US economy (and much of the rest of the world economy) can no longer depend on increasing consumer debt. We need a new model...a new business plan... The sooner we find one, the better off we all will be.  And more thoughts... No, dear reader...it's not that simple. It never is.  That's true of almost everything....  The bond market has begun to sell off. The big question is: what does it mean?  Is it A sell-off? Or THE sell-off?  We've done well with our simple trade for the last ten years. We bought gold. We sold stocks. But what's ahead?  Will that be the best trade for the NEXT 10 years too? Or is it time to sell bonds, rather than stocks?  Hmmm....  Stocks have lost value over the last ten years. US stocks were about the worst thing you could own over that period. But what are the odds that they'll be the worst thing you can own over the NEXT decade too?  Who knows... Historically, it would be unprecedented for stocks to have negative returns over a second 10-year term. That doesn't mean it won't happen. But is it a bet worthy of the Trade of the Decade?  Don't know.  What we're looking for are the extremes. We want to buy things that have been so beaten down for such a long time that they almost have to go up. And we want to sell things that have been going up for so long that people are sure they're going up forever.  In 1999, gold was perfect for the buy side. It had been going down for 20 years...while other asset classes and money substitutes soared. On the sell side, stocks were perfect. The Dow had been going up since 1982...and prices had reached levels that could only be sustained by delusions and hallucinations.  But what now?  We have a couple more days to think about it... Stay tuned.  What else? "New Home Sales Drop 11.3% As Impact of Stimulus Fades," says the WSJ.  Ah ha! Just as we've been saying. The 'recovery' is a fraud...it's just hot money from the feds bubbling up the figures. Take away the hot money and the market goes cold.  In short, there is no 'multiplier'...no magnifier...and no tooth fairy. Santa Claus? Well...we don't know about that one. Santa brought us a nice cashmere scarf on Friday. He must be real. As for the rest of them, they are phonies... Regards, Bill Bonner,  for 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.