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Tuesday, January 12, 2010 China overtakes the US as the world's largest auto market: Now what? In a decade of bamboozles and boondoggles, this one takes the cake, Plus, Bill Bonner on life back in the States and the possibility of rigged markets... Joel Bowman, with a few words from Hong Kong Island... China as the biggest exporter in the world? Aw c'mon...that's, like, so yesterday's news. Today's buzz is that the Middle Kingdom has convincingly usurped the US as the world's largest auto market; something that would surely have ol' Henry Ford turning in his grave. Vehicle sales in China jumped 46% for 2009, compared to a 21% slump in the American market. Sales of passenger cars, buses and trucks rose to a whopping 13.6 million. The US managed to move only 10.1 million vehicles during that same time. Figures in the now-number-two market haven't been that lean in almost three decades. And, thanks to C.E.Obama's "Cash for Clunkers" meddling, the US has already spent a good portion of tomorrow's demand, too. Our own Reckoner-in-Chief, Bill Bonner, explained as much in yesterday's issue. "The fellow with an old pick-up truck may have judged his truck good for another six months of service. But with the lure of a federal bribe before him, he junked the truck six months early. Any sensible person can see that this is a waste. A valuable asset has been lost - six months of truck service. "But the elite economist thinks he has saved the auto industry," continued Bill. "Because the 'demand for trucks has been stimulated.' Jobs have been saved. Detroit has been given a boost. "What kind of nonsense is this? Not only have useful resources been sent to the scrap heap prematurely, but the auto industry has been given a bum steer, too." Of course, China is not without its own government meddling. Feds are feds are feds, no matter where in the world you go. Eventually they all become aware that their position would be better left vacant. Upon realizing this they all seek to protect their jobs with make-work programs for others funded by the spending of everyone else's money. An article in this morning's South China Morning Post warns that the Chinese economy may soon reach a "superheated 16%" growth rate if the country's loose monetary policy is not reigned in. The report, prepared by a government agency, no less, comes just two weeks after Premier Wen Jiabao promised a year of "moderately loose" policy. An "appropriate" rate of growth, according to the authors of the report, would be exactly 11.6%. How do they know this, we wonder? Why not 11.2%...or 12.4%? Either way, history cares not for economists' or politicians' definition of "appropriate." It will decide that in due course...with or without the meddlers approvals and warnings. In today's Daily Reckoning, guest columnist Jeff Clark furthers the case against market meddlers and asks why anybody bothers listening to them in the first place. Enjoy... The Daily Reckoning PRESENTS: With so much finger-pointing going on in the crumbling western economies, it's a wonder nobody has lost an eye. The blunders of the past ten years are plenty, but according to Casey Research's Jeff Clark, one bamboozle stands out among all others as... The Biggest Financial Deception of the Decade By Jeff Clark Stowe, Vermont Enron? Bear Stearns? Bernie Madoff? They're all big stories about big losses and have hurt a lot of employees and investors. But none come close to getting my vote for the decade's most dastardly deception... First came Enron, with $65.5 billion in assets, going belly-up and becoming the largest bankruptcy in US history at that time. The stock went from a high of $84.63 in December 2000 to a whopping 26¢ one year later. And what had we been told by the media? Fortune magazine dubbed Enron "America's Most Innovative Company" for six consecutive years. Next came WorldCom filing for bankruptcy in 2002, their assets of $103.9 billion dwarfing Enron's. Tyco, Adelphia, Peregrine Systems...also made headlines for their acts of fraud and mismanagement. A few years later, Bear Stearns set us all up for the Big Meltdown of 2008. It was B.S. (no, I mean Bear Stearns) that pioneered the asset- backed securities markets, and we all know how that turned out. Later we learned that as losses mounted in 2006 and 2007, the company was actually adding to its exposure of mortgage-backed assets. With net equity of $11.1 billion supporting $395 billion in assets, Bear leveraged itself up to an astonishing 35-to-1. And during it all, Bear Stearns was recognized as the "Most Admired" securities firm in a survey by Fortune magazine (there's that Lower Manhattan tabloid darling again). Frequent sightings of company executives on country club fairways assured the public that all was well. And CEO Alan Schwartz told us there was "no liquidity crisis for the firm" and insisted he "had the numbers to back it up." His company was sold four days later to JPMorgan Chase at $10 per share, a 92% loss from its $133.20 high. Lehman Brothers, the 158-year-old investment bank, was next and still today holds the title as the largest bankruptcy in US history. L.B. succumbed to 2007's Word of the Year, "subprime," and its $600 billion in assets all went poof! In just the first half of 2008, before the meltdown, Lehman's stock slid 73%. And what did CEO Dick Fuld tell us in April of that year? "I will hurt the shorts, and that is my goal." He must have been referring to the attire of his tennis club buddies, because the ones who actually got hurt were numerous other banks, money market funds, institutions, hedge funds, REITs, brokers, private and public trusts, foundations, government agencies, foreign governments, employees, and investors. Moving on to the largest US government bailout recipient by far, AIG's troubles spawned my favorite placard of the decade: seen outside their Manhattan offices stood a sign that simply read, "Jump!" Maybe its creator heard what I did from AIG's financial products head Joseph Cassano: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions." Oops! Topping off our list of the infamous debacles of the decade is Bernie Made-off (er, Madoff), who scammed $65 billion over 20 years from unsuspecting institutions and wealthy investors... By now you are probably wondering... What's bigger than all these debacles? He's covered the major frauds and scams of the past decade - what could possibly be left? To quote my favorite sleuth, Hercule Poirot, "When all the facts are laid before me, the solution becomes inevitable." Here are a few clues... Federal Reserve Chairman Ben Bernanke said on July 16, 2008, that Fannie Mae and Freddie Mac are "adequately capitalized" and "in no danger of failing." Then-Secretary Treasurer Henry Paulson declared on August 10, 2008, "We have no plans to insert money into either of those two institutions." - Both Fannie and Freddie were nationalized 28 days later, on September 8, 2008. Ben Bernanke claimed on February 28, 2008, "Among the largest banks, the capital ratios remain good and I don't expect any serious problems of that sort among the large, internationally active banks..." Henry Paulson added on July 20, 2008, that "It's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation." - Since the recession started in December, 2008, 144 banks have failed. Paulson informed us on April 20, 2007, that "All the signs I look at show the housing market is at or near the bottom." - The number of foreclosures skyrocketed shortly thereafter and will now any day surpass those during the Great Depression. Ben Bernanke announced on June 20, 2007, that "[The sub prime fallout] will not affect the economy overall." - Less than one year later, the stock market crashed, losing 53% of its value, and is still down 25% despite one of the biggest bounces in history. Those in charge of our country's finances not only failed to see the crises developing and then bungled the handling of the recovery, they've deliberately misled us about what they're doing to our currency. In spite of emphatic promises, flowery speeches, pat-on-the- back assurances, and continual reassurances, here's what they've actually done to the dollar: Since September 1, 2008, the monetary base has ballooned from $908 billion to $2.0 trillion. The current monetary base is now equal to bailing out General Motors 23 times. Bailout funds in 2008 and 2009 total $8.1 trillion. That's almost 78 WorldComs. It's over 123 Enrons. US debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today. That's over $39,000 per citizen. David Walker, the comptroller general of the Government Accountability Office from 1998-2008, warned that the US is on the hook for $60 trillion in unfunded liabilities. Independent analysts peg the figure at near twice that. Whatever the number, it is incomprehensibly large. The only way we will meet these liabilities is to print the money and inflate them away. We're bailing out corporations that should fail, making financial promises we can't keep, and adding layers of debt we can't possibly repay. And the real killer is, if we don't have the cash, we just print it. It is, by any reasonable account, the "blunder that will plunder" the next several generations. It is changing America permanently, and the problems will persist long after you and I are laid to rest. Bottom line: after all the bailout programs, housing initiatives, rescue efforts, stimulus schemes, bank takeovers, wars, unemployment benefit extensions, and numerous other promises, the biggest financial deception of the decade is what the US government is doing to the dollar. Nothing else even comes close. This reckless activity has spooked our foreign creditors, weakened our global standing, diluted our currency, is punishing savers and retirees, and ultimately sets us up for a level of inflation this country has never seen before. Yet, what is the guardian of our economy and money telling us now? "Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road? The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here." (Ben Bernanke, December 7, 2009). This is pure rubbish. If inflation could be controlled by just thinking stable inflation thoughts, then Ben should be able to grow a full head of hair by just thinking scalp follicle thoughts. This is so ridiculous, it's insulting. Government actions make a mockery of their words; what they say and what they do are diametrically opposed. It's clear that inflation is not a question of "if," but "when." Any level-headed individual has to conclude that there will be a steady - and likely accelerating - decline in the dollar's purchasing power. It's inevitable. The great masses don't quite understand it yet, but they will. There will be no escape from the cold, hard slap in the face citizens will receive when a high level of inflation arrives. And when it does, it will make a mockery of any opposing viewpoint. So the question before you is simple: Will you be a prepared survivor for what lies ahead, despite what our government leaders tell us, or will you be a complacent victim of the biggest financial deception of the decade? For me, there's only one solution. Don't kid yourself into thinking a man-made asset will protect your purchasing power. This is the time to be overweight gold and silver. I advise letting them serve their purpose for you. Regards, Jeff Clark for The Daily Reckoning Joel's note: To learn more about specific ways to profit from the next wave of the bull market in precious metals, click here. --------------------------------------------------------------- And now over to Bill Bonner, who has today's reckoning from Bethesda, Maryland... Poor Obama. The man is in way over his head. And what can he do? Few people understand what is going on in the economy...and none of them work for the Obama administration, as near as we can tell. The only one who seemed to be on the ball was his advisor, Paul Volcker. But Volcker got edged out by Larry Summers, a man with a long history of bad ideas on economic matters. Summers is a stalwart member of that very special club - modern economists. Never has an unarmed professional group done more damage to a society than Summers and his colleagues. "We cannot and will not accept any speed limit on American growth," said Summers in a 1995 speech, rejecting the idea of higher interest rates to cool speculation. By 2000, the economy with no speed limit had smashed into an abutment. But Summers never figured out what the problem was. He was too busy wrecking a great university. He went on to apply the same 'no speed limit' philosophy to Harvard, where his building program was so costly the university years will probably never recover from it. Ben Bernanke gives no hint that he has any idea of what is going on either. He maintains that modern central banking can't see when economies are getting into trouble. But when they do...he knows just what to do to fix it. What kind of strange GPS system is this, dear reader? It failed to tell us where we were before we ran off the cliff... But now, we're going to use it to find our way home. Good luck! But who worries now? We're rolling along...convinced that trouble is behind us. Recovery is on the way; that's what the signs say. But wait... Joblessness at a 26-year high, and rising.... Consumer credit just took the biggest monthly drop ever...it's fallen 10 months in a row. Nearly half of Florida's mortgages are underwater... Hey...what a recovery! But the stock market doesn't seem to care. Or notice. The Dow rose 45 points yesterday. Investors seem to think that businesses are going to make a lot of money in the years ahead. How? How much stuff can you sell to unemployed people? But why else would investors pay 100 times earnings for a share? The current price/earnings ratio is a subject of much discussion. Earnings collapsed in the depression. Prices did not. So if you look just at current earnings you come to a P/E ratio in the 100+ range. That means investors pay $100 for every dollar's worth of earnings. If they intend to earn their money back - and nothing changes - they'll wait a century to break even. But earnings are expected to go up. So Robert Shiller used a 10-year moving average to compute earnings...smoothing them out to a "normal" level. Still, he says, the S&P 500 is overvalued by about 27%. The point is, stocks are expensive. So, you have to wonder: what is going on? Are stock market investors really such optimists? Or, is the federal government manipulating stock prices? It is spending trillions of dollars to give people the impression that things are getting back to normal. Why not spend a few billion more to manipulate stock prices? We don't know. The feds have shown themselves willing to do any fool thing...but rigging the stock market? Who knows? We've got to reckon with what we've got. And what we've got is a stock market that is either manipulated...or delusional. Stocks could only be worth current prices if this were a normal recession. But if this were a normal recession, it would be over by now. Stocks would be moving up in anticipation of the next boom phase. But this is not a normal recession. And it hasn't come to an end. New jobs aren't being created. Consumer credit is not expanding. And the only prices that are going up are the prices subject to speculation. The real reason stocks are so expensive (assuming the market isn't rigged) is that this is the beginning of a depression, not the end of one. At the beginning, people don't quite believe it. "We're climbing out of a nasty recession," said a financial expert interviewed on the radio this morning. "And we're all happy to put this thing behind us as soon as possible." Stocks are high because people think they can 'put this thing behind them.' They can't imagine that the depression will last for 5...10...maybe 15 more years. Nor do they realize that the US economy is permanently impaired...that the companies traded on Wall Street will have a very hard time earning profits in the years ahead...nor that the average American family may have reached the height of its wealth in 1973! The disappointment will come...then the disillusionment...then the disgust...then the despair. It will be like walking down a staircase...each step heavier...deeper...and more depressing the last. And with each step, stocks will fall. Investors will begin to see things in a new way. And at the bottom, a whole new outlook will be common: "America is finished as an economic power," people will say. "Incomes are going down - forever; we can't compete with the Chinese. Stocks were dreadfully overpriced; now they are cheap...but who would want to buy them?" It may not happen like that. But somehow, some day...stocks will once again trade at low P/E ratios... Below 10...maybe down to 5. Then, they will be bargains. How will you know when it is time to buy again? When you no longer want to. --- The Richebächer Society Announces... --- Secretive Society of economists, market players, and world-class researchers and analysts reveal... The TRIPLE TIMEBOMB That Makes Market Recovery Almost IMPOSSIBLE in 2009 or 2010...but that could still make a few people very rich! Elite alliance of experts warns: Don't hold your breath waiting for a recovery in 2010. The three toxic timebombs they name here make a quick rebound next to impossible. Yet, they also name seven "Super Shields" you can use to safeguard against further losses...plus at least five surprising "long" plays you can still use - even now - to get very rich. --------------------------------------------------------------- And more thoughts... Our old friend, Mark Skousen, has won the Choice Book Award for Outstanding Academic Title for 2009, for his book The Making of Modern Economics. The award is important because Mark is a fairly sensible guy. So many academic awards go to morons, we thought it was a requirement. Most prizes are won by socialists, Keynesians, or Marxists. Mark is a free- market economist in an un-free world. He explains why Karl Marx's theories of capitalism, labor, imperialism and exploitation are claptrap, and why most of his predictions have utterly failed. We ordered a copy. You might want to do so, too. You have to like driving. Otherwise, the suburbs are not the place to live. We came to that conclusion after a week of our new life. Edward's school is only a couple miles away. But at rush hour, it can take 20 minutes to get there...and another 20 minutes to get back. And that's by taking a short cut...avoiding the beltway, where traffic can get backed up for hours. Every time you want to get something to eat...or just buy a pack of cigarettes and a bottle of whisky, you have to get in your car. Heck, the traffic can be so thick, half the bottle of whisky can be gone by the time you get home. The newspapers tell us that a rising price of fuel is threatening the recovery. "Gasoline approaching $3 a gallon," says a headline. But $3 gas is cheap by Euro standards. Yesterday, we filled up our new gas-guzzling truck. It cost $68. That seems like peanuts, only half what it cost to fill our Nissan Patrol in France or Britain. Another report tells us that China has stepped up lending. Watch out, dear reader. China needs more lending like America needs more granite countertops. Regards, Bill Bonner, for The Daily Reckoning --------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at 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.