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The Daily Reckoning | Friday, February 25, 2011 Middle East turmoil and the curious calm in US markets, China's net silver imports quadruple as worldwide demand surges, Plus, Bill Bonner on Geithner's antics and why you need a refuge now more than ever... ------------------------------------------------------- WARNING: This is Controversial. It Offends "Gloom and Doomers" Here's why it's NOT the end of America... Shocking new presentation reveals epic opportunities - viewer discretion advised for thin-skinned fear mongers. Watch the presentation right here. A Momentary Fear of Middle East Turmoil Why Investors Continue to Find Comfort in the Stock Market Eric Fry Reporting from Miami Beach, Florida... The Dow dropped another 122 points yesterday, while crude oil jumped 5.4% to $103.41 a barrel and gold surged to a fresh two-month high. But that was before lunchtime in New York, when traders got the chance to talk things over and decide that widespread Middle East turmoil, bloodshed and coup d'états aren't as bad as they sound. Shortly after lunch, the mood on Wall Street reversed. Stocks rebounded. "Enough of this sturm und drang," investors seemed to say to themselves. "By golly, we still love US stocks and we're going to buy them no matter how many Middle East tyrants flee their countries!" The Dow closed out the New York session with only a modest 37-point drop. The S&P 500 ended the day nearly unchanged and the NASDAQ Composite advanced about three quarters of a percent. By contrast, crude oil's early morning gains evaporated throughout the day. By the end of the New York trading session, the price of crude was down 82 cents to $97.28 a barrel - snapping a nine-day winning streak. The morning gains of gold and silver also evaporated, as gold slipped nearly one percent and silver tumbled nearly 5%. "The worst is over," Mr. Market seemed to say. He's the expert, but we still don't trust his judgment. Earlier this week, the lovers of US stocks began noticing the serial "Facebook Revolutions" unfolding in the Middle East. These investors seemed to decide that the violent images on their TV screens that started pre-empting Jim Cramer's "Mad Money" might mean something...perhaps something bad. So they decided to take a break from their habitual, manic stock-buying. The Dow dropped almost 200 points on Tuesday - its worst one-day decline since last summer. And the Blue Chips dropped another 100 points the next day. The "Risk Off" trade was on!...at least momentarily. Evidencing this momentary relapse into caution, the VIX Index stirred from its slumbers. This Index, known as the "Fear Gauge," bounced a bit during the last few days. But at its highest point yesterday, the VIX had merely regained its average level of the last 12 months. And already, the index has slipped back below that average level. Net-net, US investors continue to exhibit very little anxiety about stock price trends. They continue to cling to US stocks like a baby clinging to a "blankey." Presumably, these investors consider the recent events in the Middle East to be of transitory and/or minor significance. By extension, the resulting spike in oil prices must be nothing more than a pothole on the superhighway to robust stock market profits. Your California editor is not so certain that the "somethings" that are occurring in the Middle East mean next to nothing. Neither is he certain that the contagious revolutionary virus spreading throughout the region is bullish for anything other than the oil price...and Anderson Cooper. Interestingly, some of the investors who are closest to the action seem to share your editor's malaise. The cost of insuring 5-year government bonds issued by the State of Israel has jumped 50% during the last few days - the highest level in almost two years. By contrast, the VIX Index here in the US, barely reached its highest level of the last two months. Perhaps these conflicting impressions of investor anxiety mean nothing at all. On the other hand, we would not derive any comfort whatsoever from the fact that investors over herescarcely acknowledge the risks that terrify investors over there. Just sayin'... Microcap "Stealing" Oil from Iran Could Return 4,599%! One tiny company has found a way to legally "steal" oil from Iran's largest oil field... Which means it's now sitting on oil reserves that could be worth over fifty times its total market-cap, setting the stage for an astronomical run-up of 4,599%! Resource expert Chris Mayer shares everything you need to know about this urgent opportunity in his brand new presentation... Click here to watch it right now. The Daily Reckoning Presents How Much More Demand Can Silver Handle? Jeff Clark The numbers for silver demand are starting to make some market-watchers nervous. The US Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin's introduction in 1986. China's net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can't meet worldwide demand; the only way demand gets fulfilled is from scrap supply. That is some very hungry demand. Which raises the question, how long can this pace continue? This question is important for various reasons, starting with how demand contributes to price. If demand falls off, silver investments would obviously suffer. While I've discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let's focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records? There are a number of ways to measure this - the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. - but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle. So how do the world's largest silver ETF and one of the biggest silver producers compare to the more fashionable equities? The largest silver ETF, iShares Silver Trust, has net assets of $9.6 billion (as of February 4). This pales in comparison to the more popular stocks trading in the US. In fact, SLV has roughly 3% the market cap of Apple. It would have to grow over 43 times to match Exxon Mobil. Pan American Silver, the largest pure silver producer trading on a major US exchange, has a market cap of $3.72 billion. This is 4.7% the size of McDonald's. The market cap would have to increase more than 53 times to match Wal-Mart. It is over 62 times smaller than Microsoft. This isn't to suggest SLV and PAAS will match the market cap of these other companies, but clearly the masses are still demanding much more of them than the biggest of silver's investment vehicles. So how much more demand can silver handle? As much as it takes to make it the household name I'm convinced it will be before this is all over. When SLV is a favorite of fund managers. When Silver Wheaton is a market darling of the masses. When Pan American is Wall Street's top pick for the year. Imagine what those bars on the right will look like when most everyone you know is talking about poor man's gold. The rise could be breathtaking. Remember that silver rose over 3,646% from trough to peak in the last precious metals bull market; it's up about 630% in our current run. A return matching the 1970s advance would push the price to $152. This price level is further supported by the fact that this is about where it would be when inflation-adjusted for its 1980 peak. When you look at the potential growth in market cap of the world's biggest silver investments, it becomes easy to view any downdraft in price as nothing but a buying opportunity. I know I do. Regards, Jeff Clark, for The Daily Reckoning Joel's Note: The current edition of BIG GOLD includes naming the cheapest one-ounce bullion coin on the market right now, plus a new gold stock pick that has incredible growth potential. Get all this and more for only $79 per year, including a 3-month trial with full money- back guarantee. Details here. From Hulbert Financial Digest's Best-Performing Newsletter Advisory of the last 10 years...Comes... The New OIL WAR and Why Iran Threatens Your Money... According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year. Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue. Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead... Click here to watch Byron's value-packed presentation now. Bill Bonner Buying Bad Debt to Return Bank Solvency Bill Bonner Reckoning from Paris, France... Let's begin with a hearty laugh...a big guffaw... We don't hear much from Tom Friedman anymore. But we still have Paul Krugman, Ben Bernanke and Tim Geithner. It was the latter who had us in stitches yesterday. Here's the report fromBloomberg: The US financial system is in better shape than it was before the recession and is well placed to provide the funding needed for the economic expansion, Treasury Secretary Timothy F. Geithner said. "The core of the American financial system is in a much stronger position than it was before the crisis," Geithner said today during a Bloomberg Breakfast with reporters in Washington. US banks had net income of $87.5 billion in 2010, the highest since 2007, the Federal Deposit Insurance Corp. said today. The Standard & Poor's 500 index has jumped 64 percent since March 2009, and corporate bond spreads have narrowed. "We can say with much more confidence now that the US banking system and the US capital market are much more likely to be in a position to finance the capital needs that come with a recovery," Geithner said. Oh stop it, Tim. How much more can we take? Hold on... Let's take a few deep breaths. Now, how did that work again? The banks were shown to be insolvent during the crisis of '07-'09. They had too much bad debt and not enough capital. And now they're healthy, right? Well, what happened to the bad debt? Most of it was backed by real estate. Did real estate go up? It didn't? Then, what happened to make the bankers rich again? The Fed bought their bad debt - about $1.25 trillion worth. But not only did it relieve the banks of their mistakes, it also connived with the US Treasury, now run by the aforementioned Geithner, to make sure the bankers made a lot of money. The Fed lent to them at next to zero interest rate. Then, the US Treasury borrowed the money back at 4%. Even a banker could make money with that deal. But wait, there's more... Government deficits and money printing may mean eventual ruin to a nation's finances, but they do wonders for the financial sector. Free money is great for the people who get it first, in other words. It's like milk. Wholesome and fresh initially, it soon begins to turn. You can pass it along for months. You can pretend it is still good. But don't open the carton! The banks were able to use this free money from the feds to rebuild their balance sheets. Tim Geithner now pronounces them "solid" and "healthy." But wait... This is the same man who watched over them, from his post at the New York Fed, before the crisis of '07-'09 too. He thought they were solid and healthy back then too. They weren't. It's true they are in better shape now. But only because the sour milk is now in the Fed's refrigerator... Yes, dear reader. The trick of modern financial management is merely to turn little problems into bigger ones...passing along the bad stuff to larger and larger groups. Individual banks were broke. Now, the Fed is broke. And the US government too. Individual banks were going broke...so they put the credit of the US central bank at risk to save them. And who stands behind the Fed? The US government. When the crisis hit, the bankers looked at each other. They sized each other up. Who's broke? Who's solvent? They quickly decided not to accept Bear Stearns' credits or to deal with Lehman Bros. as a counterparty. Then, the feds stepped in...refloating the whole sector on a sea of dollars, US government bonds and the full faith and credit of the US government. Now, the whole system is in jeopardy. And more thoughts... By the way, Tim. You want to know how an economy really works? You want to know why you can't engineer a real recovery by adding more debt to a debt-drenched system? You don't? Well, we're going to tell you any way. Here's Ludwig von Mises, writing in the 1930s: Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand. Yes, and the "recovery" engineered by Bernanke and Geithner is built on quicksand. In a real recovery, people have jobs. In a phony one, they don't. Since last June, reports Mort Zuckerman in The Financial Times, employers added a paltry 284,000 jobs, net. Not enough to keep even with population growth. In January of this year there were actually half a million fewer people working than there were in June of 2009. "The decline in unemployment to 9% is illusory, because half a million discouraged workers stopped looking for jobs." And now... "Oil price surge puts fragile US recovery at risk," reports the FT. Of course, you read it here first. Ben Bernanke forced up oil and food prices. This thighbone was connected to the knee bone of uprisings in the desert...which led to the leg bone of even higher oil prices. And now, the "recovery" that Ben Bernanke wanted so badly is threatened by his own reckless and futile policies. *** We never completed our reflections on why you need a refuge...a place to retreat...a family stronghold. As society becomes more complex, each man depends more or his neighbors...and on people he has never met on the other side of the world. The Arab demonstrators in Tripoli, for example, have to eat. Their bread may have been baked by a local bakery, but the wheat may have come from Australia, France or Canada. And the oven in which it was baked may have been assembled in Germany or Ireland...with parts imported from China or India. As each person becomes more specialized, the efficiency of the system increases. A man who focuses on a single thing is more likely to do it better than one who does several things. He is able to develop tools and tricks that help him be more productive, thereby defeating the generalist in market competition. Everyone gets a little richer. But specialization makes the world more vulnerable to systemic risk. Small problems become much bigger ones. Local famines, for example, have the potential to become global famines. Famines in Western Europe disappeared with the fall of Napoleon Bonaparte and the rise of better transportation systems. European wars closed borders and choked trade. Peace opened them up again. Then, canals and trains made it possible to move grain from one area to the next. The last major famine in Western Europe was in the 18th century. Since then, famines in Europe have been the result of politics. The great famine in Ireland, for example, was triggered by a blight on potato crops. But had their land not been taken from them, and had they been allowed to buy and sell freely, rather than only with Britain on terms it set, the Irish would have fared much better. Thanks to the curious set of political circumstances in the mid-19th century, Ireland remained a food exporter, even while a million Irish peasants died of hunger. Likewise, in WWII, the Netherlands suffered 30,000 deaths in the "Hongerwinter" because of punishing restrictions imposed by the occupying German troops. Since the beginning of the 20th century, many people have gone to bed hungry. Tens of millions died of starvation. But almost all the deaths can be traced to the murderous intentions or incompetent administration of governments. In this regard, as in many others, the Soviet Union and China were world leaders. Goofy theories and bad policies reduced the amount of food available. Then, communist governments used food shortages as a weapon against their internal enemies. Obviously, the first protection against famine is wealth. There is almost always food available - at some price. Generally, but not always, it goes to the highest bidder. So, having some money is in itself a measure of safety. Always has been. But people with wealth can also be popular scapegoats when times get tough. The easy money policies of the Fed during the last two decades have made America's rich richer than ever, while the incomes and wealth of 95% of the population has barely risen at all. If food supplies were short, it wouldn't be at all surprising if the mobs turned against "the rich," intentionally withholding food from them. Hunger was largely responsible for the French Revolution. Mobs gathered in front the Tuileries Palace, protesting the high cost of food. Inflation and bad weather had driven up the price of a loaf of bread to almost an entire day's wages by an ordinary laborer. Marie Antoinette, wife of Louis 16th, is said to have asked: "What are they complaining about?" "They have no bread," came the answer. "Well, let them eat cake," was her witty, but ultimately fatal, reply. She lost her head in the Revolution. So did thousands of others. Mobs need scapegoats. And hungry mobs are not particularly careful about whom they choose. More to come... 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 atjoel@dailyreckoning.com Betting Against the Fed: A Guaranteed Investment Strategy Ben Bernanke has never given the slightest indication, hint or wink to suggest that he has any idea of what is really going on or that he understands how an economy really works. At every point over the last 5 years, his analysis has been incorrect. His predictions have been wrong. And his policies have made things worse. How the Rising Oil Price Might Affect the US Economy The Role of US Debt in the Current Revolution Food Price Inflation Calculator Mark Thornton of the Mises Institute writes, “The price of everything seems to have skyrocketed. Only housing, the dollar and inflation-adjusted income are negative.” I immediately interrupt to wittily say, “Well, housing is going down because nobody wants to buy a still-over-priced-yet-even-lower-quality house that now needs painting, a new water heater, some leaky things fixed and a new roof... Protecting Yourself from Bernanke’s Money Printing Sustainable Shortfalls on Unsustainable Debt After Predicting Global Anti-Gov’t Protests: What’s Next? It is a matter of record! The spate of seething, youth-inspired Middle East uprisings that are toppling governments, reshaping the geopolitical landscape and roiling world markets blindsided the world’s intelligence community. Not the CIA, Joint Chiefs of Staff or National Security Council saw it coming... Euro Rally Continues On Increased Rhetoric from ECB Members Food Price Inflation Calculator