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The Daily Reckoning | Tuesday, November 16, 2010 Equities in freefall - has Mr. Market lost his pizzazz? Sledging Social Security reform: the ultimate bipartisan achievement, Plus Bill Bonner on state-sponsored investments vs. greedy capitalists... ------------------------------------------------------- Options Hotline Offer Closes at Midnight Thursday, November 21... Makes as much as $536 per Day This little-known and underappreciated stock market strategy could have already made you a maximum of $1.9 million over the last 10 years...that's as much as $536 per day! Sounds too good to be true? Click here to see how for yourself (plus check out the outrageous guarantee). Avoid the Overbought Markets Knowing where to be bullish and where to be bearish Eric Fry Reporting from Laguna Beach, California... The US stock market bounced a little yesterday...very little. And most commodity markets bounced even less, if at all. The Dow Jones Industrial Average jumped 89 points shortly after the opening bell. But as the trading session advanced, enthusiasm for stocks waned. By the time the closing bell sounded, the Dow had gained a meager 9 points. Very meager. Over in the commodity pits, the trading action was even more dismal. Early gains yielded to late-day losses. Gold and silver started higher, only to end lower. Most other commodities followed suit. Mr. Market seems to have lost his pizzazz. He'll get it back someday, but probably not immediately. Here's why: Great big rallies tend to produce large corrections...or at least sudden, frightening corrections. Let's roll the videotape... During the last two years, short-term interest rates have collapsed from a meaningful number to an invisible one. Therefore, investors dumped fixed income and bought something else...anything else. They re- directed their capital toward more promising asset classes like equities and commodities. But the pendulum has swung too far...at least for the moment. Many equity and commodity markets are "overbought" and deserve a rest. At least that's the informed opinion of David Rosenberg, The Daily Reckoning's favorite economist. In a recent missive, Rosenberg warns, "It may be time to avoid the areas of the market where net speculative long positions exist and are in the process of unwinding." In other words, it may be time to avoid the areas of the market that have become too popular - the "crowded trades." Rosenberg highlights the following crowded trades: Equities: There are currently 5,780 net long contracts on the Chicago Mercantile Exchange (CME). Oil: There are a near-record 208,226 net long contract on the NY Mercantile Exchange. Gold: There are a near-record 253,528 net long contract on the COMEX. Copper: There are a near-record 25,139 net long contracts on the COMEX. Silver: Not a record but a still significant 42,556 net long contracts on the COMEX. Euro: Huge net speculative long position of 35,879 contracts on the CME. At the other end of the spectrum, Rosenberg notes, volatility is cheap. "With the risk-on trade in full force for the last two months, the VIX futures have a net speculative short position of 13,345 contracts, which is at the high end of the historic range." [The VIX is an index of implied option volatility. The higher the index, the greater the level of investor fear; the lower the index, the greater the level of investor complacency. Shorting the VIX Index is, therefore, a bet against fear - a bet that rising stock prices will remain the status quo.] In other words, investors are very complacent, which is usually the condition that precedes market selloffs. Curiously, investor sentiment has reached bullish extremes for stocks and commodities at the same time. Traditionally, these asset classes are non-correlated. But this time around, the two have been very highly correlated. If, therefore, these two asset classes are able to rally at the same time, they are also able to correct at the same time. Net-net, if you're bearish on stocks or commodities, this is your moment. If you're bullish, take your time establishing new positions. Why Some People DIDN'T Go Broke In The Bust From 2008 until now, some people watched their gains go UP...as high as 448%, 556%, and even 579%. On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it - and so could you. Click here to watch the free new video that shows you how. The Daily Reckoning Presents Fixing Social Security... Some Other Day Ian Mathias How exactly does one unwind a Ponzi Scheme? People like Bernie Madoff have done a fine job showing investors, and eventually the American public, how to build one up. Essentially, you use the contributions from incoming investors to pay "profits" out to departing investors. And you repeat this process for as long as the incoming checks are larger than the outgoing checks. When the inevitable tipping point finally arrives - and there isn't enough new money to pay off all the old money - you skip the border and leave your clients waiting for their next share of the profits...and waiting...and waiting. To describe American Social Security as such a scheme wouldn't be much of a stretch. For a system with so many complicated facets, advanced accounting and half-truths, there is one absolute fact: Social Security is not taking in enough money to write all the retirement checks it is obligated to write over the next couple of decades. So last week, President Obama's Bipartisan Deficit Commission set out to begin unwinding the scheme. Their proposal, like most things from Washington, was ambiguous at times and difficult to understand. Some suggestions included "creating a new bendpoint," "reducing replacement factors," and "phasing into a higher taxable maximum." But stripped down to the essentials, the plan has some merit. Here are the basics: The retirement age will go up to 68 by 2050 and 69 by 2075 The government will make "hardship exemptions" for people 62 or over who are physically unable to work There will also be a minimum SS benefit for those making very little income The rich will likely be eligible for fewer benefits while having to contribute slightly higher FICA taxes. Cost of living adjustments will be gradually reduced by using a different measure of inflation (Chained CPI) How does a government back its way out of an accidental Ponzi? Well, something like this proposal. In abstract terms, the Social Security system either has to pay out less, take in more, or both. That means lower benefit payments and/or higher taxes. And to the credit of the Commission, this proposal would work just fine. Everything about it is built to please both Democrats and Republicans - or rather, to displease both Democrats and Republicans. For starters, the commission is co-chaired by a member of each party, lest the whole thing be billed as a scheme to usurp power by the "liberal elite," the "radical right" or some other political affiliation that actually makes most people nauseous. Then there's the mechanics of the proposal. To appeal to the left, there are several provisions aimed at the underprivileged and disadvantaged. In essence, no one who REALLY needs a retirement insurance plan will be hung out to dry. Those dastardly "top earners," on the other hand, will have to pay more. And the left's precious "middle class America" will be just Goldilocks...tucked in that warm sweetspot of relatively few benefit cuts and minimal tax increases. For the right, the whole plan should appeal to the true blue Republicans (are there any?) that value fiscal responsibility above all. Allegedly, for every $1 of higher taxes in this plan, there's $3 in spending cuts. Of course, hiking taxes sounds like nails on a chalkboard to that crowd, especially during a recession. But the plan also proposes to cut individual tax rates to a maximum 23%, which would counteract the higher FICA taxes that would help pull Social Security out of the red. So, what we've got here is a fair, bipartisan proposal. It's flawed, of course, like any other first attempt. But is it that insufferable? Apparently so: "This proposal is simply unacceptable," lame duck Speaker Nancy Pelosi said flatly, and in the same breath insisted we "do what is right for our children and grandchildren's economic security." "We're not talking about cuts in Social Security," blackballed Jim DeMint, supposedly one of the biggest Republican debt and deficit hawks. He promised to somehow fix this mess "without cutting any benefits to seniors or veterans." "Especially in these tough economic times, it is unconscionable to be proposing cuts to the critical economic lifelines for working people, Social Security and Medicare," said AFL-CIO President Richard Trumka. "The very people who want to slash Social Security and Medicare spent this week clamoring for more unpaid Bush tax cuts for millionaires." "Deficit Reduction Plan Draws Scorn From Left and Right" headlines the liberal New York Times, noting that "Republicans face intense pressure from their conservative base and the Tea Party movement to reject any deal that includes tax increases." "Commission Offers Controversial Solutions to Axe Deficit" reports conservatives at FOXNews Even the Independents hate it! The Commission's proposal is "extremely disappointing and something that should be vigorously opposed by the American people," said Vermont's Bernie Sanders, the House's only official Independent. Dear reader, bad-mouthing the Commission's proposal on fixing Social Security might be the most bipartisan effort in the history of Washington DC. Alan Simpson, the Republican Co-Chair of the Commission, half joked on Thursday, "We're entering the witness protection program." Simpson and his Commission colleagues forgot they were in the business of politics. And politics, of course, is the business of being re- elected. It doesn't matter if none of the changes proposed would be felt for years, and that not a single current Social Security beneficiary would be affected. What does matter is that Nancy Pelosi, Jim DeMint, Bernie Sanders and all their brood can hear the 2012 campaign ads already... "Pelosi voted to CUT your Social Security benefits"... "Jim DeMint abandoned his Republican roots and voted to RAISE your Social Security taxes," and on and on. By even hinting at messing with Social Security, no matter Republican or Democrat, any politician is ruffling the feathers of the greatest golden goose of them all: seniors. Is there any demographic as coveted and important to election results as the grey hairs? No, there isn't. Seniors, much thanks to the entitlement programs their generation built, have plenty of time and wherewithal to shuffle over to the polls and vote down any candidate with the political fortitude to cut benefits...whether the threat to their actual retirement is real or just perceived. Thus, the Deficit Commission's proposal is dead on arrival, shot down by the most bipartisan hunting party assembled in years - all of whom are acting on behalf of a constituency that claims it cares for future generations, but has historically voted to save its own skin. Entitlement reform? It'll have to wait. "Democrat or Republican, Elephant or Donkey, nothing much ever seems to change," famous bond investor Bill Gross wrote in his monthly letter to investors earlier this month. "Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it, or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn't a choice between chocolate and vanilla folks, it's all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath." With that in mind, nuts to you Republicrats, and you too, Bernie Sanders... and to anyone else who wants to reduce the deficit without making a single sacrifice. Interestingly, one of the only Washingtonians making sense last week was President Obama. "If we are concerned about debt and deficits," he said, "then we're going to have to take actions that are difficult and we're going to have to tell the truth to the American people.'' Well, you know the truth. Ready to take action? Good luck, Ian Mathias for The Daily Reckoning P.S. So what does taking action mean? In part, I think it means building a retirement fund of your own that won't rely on entitlement programs. For the best advice for doing just that, check out our all-out effort to bolster your nest egg - Lifetime Income Report. Outstanding Investments Precious Metals Report Introducing the one investment experts have dubbed... BETTER THAN 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. Click Here Now For Details. Bill Bonner Why US Retail Sales Are Up Even as Consumers Deleverage Bill Bonner Reckoning from Baltimore, Maryland... We were curious about what would happen yesterday. The market sold off on Friday. The question was: are investors rejecting Ben Bernanke and his printing press money? Another big drop in stocks yesterday would have confirmed the rejection hypothesis. A big increase in stock prices would have suggested that investors were on board with QE. So what happened? Nothing. The Dow was either up 9 or down 9, we can't remember which. Gold was up $3. Nothing significant, in other words, in either direction. So, Mr. Market is going to keep us wondering...guessing...cogitating... ..what's going on? And here's something that has us wondering about. Retail sales are up. Here's the Bloomberg report: Sales at US retailers climbed in October by the most in seven months, brightening the outlook for holiday shopping even as unemployment holds near 10 percent. Purchases rose 1.2 percent, exceeding the highest forecast among economists surveyed by Bloomberg News, according to data from the Commerce Department issued today in Washington. Another report showed manufacturing in the New York region unexpectedly shrank in November as orders dropped. "We expect the holiday shopping season to really ramp up in November," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who forecast a 1.1 percent gain in sales. "The breadth of discounting" and steady income gains are "providing some support," he said. The improvement in spending comes as other parts of the economy show signs of cooling. Wait a minute. Isn't the consumer de-leveraging? Isn't he paying down debt and defaulting on his mortgage? How can he be increasing spending? Well, maybe with all this talk of quantitative easing has unsettled him. Maybe he thinks the world as we have known it is ending...maybe he's decided to enjoy it. Or maybe the consumer believes that the Fed will really succeed in stirring up the economy. So, maybe he's feeling more confident. Or maybe he thinks the Fed will destroy the value of the dollar, so he's getting ready for inflation - spending his money as fast as possible. Or, most likely...this is just a little, insignificant blip of information...meaningless noise, in other words. Households are not likely to really increase spending. They don't have more income. Their houses are worth only about 70% of what they were three years ago, and still going down. Their credit ratings are impaired. Lenders are more cautious. And so are consumers themselves. So, we're not going to take this news very seriously. We just didn't want you to think that we were hiding developments that don't seem to fit our Great Correction hypothesis. We're not hiding them; we're just ignoring them. And more thoughts... Elizabeth went to church on Sunday. "The sermon was about the need for charity," she reported. "The minister said she was shocked when she went to the local food bank...you know, where people contribute food for the poor. She said there was very little food there, because people have not made many contributions... "She said we should look around at our neighbors...realize that people are going hungry...and reach out and help them. "But I thought about our neighbors. And I couldn't think of any one of them who was hungry. It seemed to me that they mostly needed to lose weight, not gain it. "So it made me suspicious of this whole line of argument. I mean, you get the feeling that people are just saying these things mechanically...or because they think they should say them. They don't really seem to be thinking very much about whether there really are people who need food...or why...or whether you do more harm or good by giving them food. "That's the trouble with organized charity... It's like foreign aid or like welfare...[or even like bank bailouts, we wanted to add]. It makes the giver feel better about himself, but it may do real harm to the recipient. "Real charity is hard work. You'd have to go out and meet the people who are supposed to be hungry. And you'd have to find out why they are hungry. If they're hungry because they're too lazy to work...or because they're taking drugs all day...you're probably not doing them much real good by giving them food. All you're doing is making it easier for them to be lazy or addicted." We thought about it for a moment. Then at a funeral on Monday, we heard about the charitable contributions of the deceased. "My mother did more than just give money to charity. She actually helped people," said her daughter. "There was a family that lived down the road from us when I was little. This was a family that had been on welfare for three generations. Well, my mother decided to help them. She was always so positive. So chipper. So ready to help. "But she didn't just give them money or clothes or food. She gave them all those things. But she went a big step further. She brought them into our house. There was a separate mother-in-law's apartment in the house. She brought them in and worked with them. "And guess what? She broke the cycle. Those kids are grown up now. And I don't think any of them are on welfare." "All institutions tend to go in the same direction," we began, professorially, speaking to Elizabeth. "They start out with good intentions. They do good work. They satisfy the need they were set up to satisfy. "And then they become corrupt and degenerate. I don't mean that they steal. I just mean that they become self-serving. Like the US government. It was set up to protect the liberty of Americans. The Constitution and the Bill of Rights very carefully limited the power of the government. But now the government mostly tries to protect the pensions and health care programs of the people who control it. "No one cares about liberty...or at least, no one working for the US government. The feds can get away with almost anything. You can't smoke a cigarette in your own restaurant. Jules was kicked out of a bar last weekend because he gave a drink to his brother on his birthday. Now we're going to have to buy health insurance - whether we want it or not. There are probably a few things the federal government still cannot do...but there aren't many of them. And government employees are paid twice as much as the people who pay their salaries. "It probably works the same way at charities. As they mature, they become more interested in looking out for themselves than they are in looking out for the people they're meant to be helping. They still go through the motions of helping people. But they don't seem to care if it does any genuine good." *** Most of the work of activist governments is hopelessly ineffective and unproductive. But that doesn't stop them. When their programs don't work, the feds rarely wonder why. Instead, they force the issue...with more regulation, penalties and coercion. Look at Hugo Chavez in Venezuela. Here's the latest from Bloomberg: [Venezuela] will offer local investors high yields to stimulate saving and allow nationalized companies to seek financing. The Public Bond Market, which will begin operations in December, will allow state-run companies to sell debt to finance operations and individuals to seek investment opportunities, Chavez said. Chavez tightened his grip on the financial industry this year by closing more than a dozen banks and 40 brokerages that he said committed "fraud" and set artificial exchange rates. He said investors will have their investments guaranteed by the state. "The banking and brokerage crisis has allowed us to draft this law," Chavez said yesterday on state television during his Alo Presidente program. "Don't spend all your year-end bonuses, invest in the bourse, and the state will guarantee your money with good yields." Hey...there's a deal! The feds will guarantee your investments..."with good yields." Leave it to the government to come up with a can't-lose investment program. What do you think, dear reader? Will investors come out ahead? Can an investment program run by the Venezuelan feds, investing in businesses owned by the government, give better returns than a program that invests in money-grubbing enterprises run by greedy capitalists? You decide. 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 How the Market Really Feels About Bernanke’s Money Printing Mr. Bernanke is trying to give “risk on” investors a put – protecting them from the downside by adding more and more money. No, investors are not sure this plan is really going to do them any good. The stock market went up only very briefly on the day following Mr. Bernanke’s announcement. Then, there was no follow-through. Junk Science The Real Effects of Printing Money and Creating Debt Gold Investing: A Bet Against the Idiocy of Money Creation I was delighted by the humor of Su Wei, a Chinese climate-change negotiator at the international climate change conference, calling the United States “a pig preening before a mirror.” Hahaha! It’s funny because it’s true! Hahaha! Of course, he meant in the context of carbon emissions and all of that “green” stuff, but it perfectly describes the fiscal policies of the Obama administration, too, but not our monetary policies. Sterilizing Money at the QE Corral Why Some Think a Gold Standard Wouldn’t Work 23 Financial Minds Join Forces to Publicly Rebuke QE2 Today, an open letter to Fed Chair Ben Bernanke appeared via the Wall Street Journal questioning the wisdom of the Fed’s round two of quantitative easing. It’s signed by 23 economists, financial writers, fund managers and others, including, to name just a few... * Richard X. Bove of Rochdale Securities * Jim Chanos of Kynikos * Niall Ferguson of Harvard University * James Grant of Grant’s Interest Rate Observer... Anticipating Volatility and the Rise of Emerging Markets The Tale of André Prenner, a Parable for our Times (Part Two of Two) The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor