 | | The Daily Reckoning | Friday, March 11, 2011 | - The newly-renamed Daily Reckoning Dodo Derby...
- Inflationary expectations drive the economy...for now...
- Plus, Bill Bonner on taking the junkies' juice away...
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|  | | | From Tsunami Police to the Dodo Derby | | Two Important Announcements to Kick Off Today’s Daily Reckoning | |  | | Eric Fry |
From the eye of the California tsunami...
We'll begin today's issue of The Daily Reckoning with a couple of important announcements. First, a massive tsunami unfurled along the California coast this morning...and your editor observed it firsthand.
At 8:25 A.M., on the button, sirens blared and a tidal wave descended upon Main Beach here in Laguna. There weren't any giant waves, of course, nor even the slightest visible ripple along the surf. But there was a massive tsunami of police cars and emergency vehicles crowding the beachfront to protect the public from the "emergency that wasn't."
The photo below, snapped moments after the tsunami's predicted arrival, shows very clearly that the only thing that swept across Laguna Beach this morning was a hodgepodge of uniforms and badges swirling about as purposelessly as driftwood.
California's treasury may be running on empty, but somehow, we still manage to find the money to send police down to the beach to watch the waves roll in.
Please understand, we have no quarrel with this state of affairs; we'd much rather see a cop car on the beach, for example, than in our rear- view mirror.
We just don't understand the math that makes this system work. (More on this below.)
Next item on today's agenda:
It seems we have once again annoyed the folks over at the Darwin Awards. We are sorry to have done so and wish to issue a public apology. To view some of the real work these fine,actual Darwin Award folk do, we present this link directly to their website. Feel free to visit it or not, as you wish.
Further, in consideration of our respect for the folks at the Darwin Awards - and in recognition of their trademark - we will heretofore refrain from utilizing any portion of the term "Darwin Awards" in our little spectacle here at The Daily Reckoning.
It's difficult to find a new name for our contest on such short notice. But fear not, after putting our heads together here at Daily Reckoning headquarters, we came up with the following: "The-name-of-the-guy-who- came-up-with-the-idea-of-evolution-but-who's-name-we-cannot-use-due-to- trademark-infringement-constraints-Award."
For short, we have renamed our event the "Dodo Derby." Below, Joel Bowman provides some details on the Dodo Derby's first runner up...a state flush with movie star governors, gaping budget deficits and tsunami-gazing police forces. Read on...
| | Tales From the Most Over-Governed State in the Union | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Population: 37.5 million.
Unemployed: 2.2 million.
Food stamp recipients: 3.7 million.
Total debt: $367 billion.
Debt/GDP ratio: 18.80%...
And, finally...
Total state debt per man, woman and child - working or not: $9,835!
Ladies and gentleman, Fellow Reckoners, people who enjoy overly dramatic, entirely non-scientific countdowns...
The First Runner-Up in this year's newly-renamed Daily Reckoning Dodo Derby is...
The Golden State of California. Congratulations!
Now, before we get all carried away with the celebrations, a couple of quick words...
Your editor happens to enjoy a few drinks with a couple of California locals when he visits that paradisiacal stretch of coastline from time to time. One such local happens to be his senior editor, Eric Fry, who resides in Laguna Beach, home of the ever-vigilant Tsunami watchmen. As such, we feel it would be somewhat unbecoming of us to launch into a crassly gratuitous, politico-bashing tirade about a state in which our good friend happens to reside - and in which we do not.
So, we're going to let our Fellow Reckoners do it for us; Fellow Reckoners who, mind you, alsohappen to live in California and, therefore, should know better than us about the goings on there.
First up, from Reckoner Dimitri:
"The LA Times ran an investigative series last week showing how billions were mismanaged and squandered in an inept and failed attempt to upgrade the Los Angeles Community College campus. Why the perpetrators of this disaster haven't been fired is beyond me - it unfortunately highlights the entrenched and increasingly incompetent infrastructure we are hopelessly saddled with. Yes, hopelessly - the chances of removing the incompetents is slim and none, but worse, I don't see a cadre of competents around to take their places."
Then there's this, from another Golden State Reckoner, one who wishes to remain anonymous...
"There are over 600,000 California state workers getting fat pensions and health care and other retirement benefits. With benefits like [theirs] there is no hope of ever balancing the budget. We already have the highest State Income Tax, Gasoline Tax, Sales Tax and property tax. The only hope is to declare bankruptcy and let all benefits be scaled down by the legal system."
And this, from Reckoner Peterson...
"California has a gigantic hole in this year's budget [$24.5 billion; the largest state budget shortfall for 2012 in the entire country]. This is illegal, as the California Constitution insists the budget be balanced. Governor Schwarzenegger recalled the legislature to a special session to deal with the crisis last Fall, just before he left office.
"However, he could not get the legislature together. Many of the legislators were in Maui. As in, Hawaii. They were there to discuss green energy and who knows what else. The trip was paid for by California interest groups including the California Prison Guards union. What does the California prison guards union care about green energy, you ask? Absolutely nothing, of course. But, they care a great deal, and are willing to pay handsomely for, legislators' votes on their pay and benefits.
"Thus, when new (old) Governor Jerry Brown took office, he was forced to propose a draconian budget that cuts all kinds of state services, including funding for education, medical care for children, and assistance to local governments. There were however no proposed cuts to the pay or benefits of the public service unions, including the California Prison Guards Union."
Chimed Reckoner Edwardo...
"Greetings from California, the most over-governed state in the USA. A crazy place where prison guards earn 3x the rate for starting schoolteachers, and enjoy fabulous retirement benefits. The whole public sector is out-of-control, bleeding the private sector dry. Prison overcrowding has put the State under severe federal pressure.
"We have a whole government agency trying to collect sales taxes on out-of state purchases by Californians - which I would guess has a negative financial benefit to the state when all salaries, benefits, occupancy and other expenses are computed. The lunatics are running the asylum."
And finally, we couldn't resist printing this last email, in full. It's a bit longer but, after having read through the entire mailbag from peeved California residents, we think it deserves a run...
"What is generally not covered in most any press is the government tyranny at the local level.
"5.3 (five point 3) YEARS ago I started the process to build a new home on a 50-acre parcel in Santa Clara County. Still no permit. The tyranny of 'Planning' is documented in a CATO report, showing how it created a CA real estate bubble.
"Besides being incompetent and lazy, the planners outright lie to the citizens. Not once in the 5 years did they meet the 30-day CA STATE LAW response time for filings. The top elected officials (Board of Supervisors) admit they are unable to fix the indolence, incompetency, and aggressive adversarial positions taken against the citizens.
"Since they have unchecked and unaccountable monopoly power, Planning has done what any good monopoly does when demand goes down - they have exorbitantly raised prices! Now, nearly triple the permits vs. 5 years ago are needed for - you name it!
"No matter how surly, insulting, or capricious a county employee may be, one must remember to always Kiss Their A** or they will get even. Don't even think of escalating to a supervisor.
"At one time in the past, taxes paid for government and citizens had some control. Now, the bureaucracies do as they wish, and fee us to death, and we have no recourse.
"TO THE BARRICADES, I say!
"A. Reckoner and former CA resident
"P.S. Although I'm liquidating all CA real estate, please don't use my name or there will be retribution by County employees."
Tomorrow: The Daily Reckoning Dody Derby winner. Stay tuned...
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| | The Daily Reckoning Presents | | Inflation 1; Economy 0 | |  | | Dan Amoss |
America's recent economic "recovery" is just a dismal version of "Mother May I." Almost every "one step forward" will succumb to "two steps backward."
To switch metaphors, the so-called recovery is not the fruit of sustainable underlying demand; it is merely the weed of rising inflation expectations. Let me explain...
Much of the recent improvement in economic statistics can be chalked up to inflationary expectations. Business operators believe that future prices for many goods and services will be higher next month than they are today. As a result, many companies - and some households - are asking themselves: "Why don't we buy the supplies we'll need in the future today?" Those with savings and capital can afford to do so.
This buying activity, which is driven by expectations of higher prices in the future, results in a transfer of future economic activity into the present. It's the type of activity that Keynesian central bankers like Ben Bernanke want to encourage. But the transfer of future economic activity into the present carries with it the same problems we saw during the housing and credit bubbles: when the "borrowed-against" future finally arrives, we see a collapse in demand for the pre-bought items.
An example of this phenomenon was the spike and crash in the construction of new homes in the US. During the peak years, several years' worth of future demand was pulled into the present.
Bernanke's goal of inducing a benign rise in expectations for future inflation will backfire. Pushing consumers and businesses to "buy now" with the expectation of higher prices in the future is hardly different from subsidizing the reckless growth in debt-driven economic activity in 2004-07. As a result of Bernanke's QE experiments, we'll see sugar rushes in economic activity, followed by hangovers. The result will be stagflation.
While some industries and companies enjoy pricing power, most do not. Those without pricing power will see weaker profit margins as higher raw material prices flow through the chain of production.
I continue to be amazed by the market's complacency in the face of obvious deterioration in the economic picture. There's no denying the recessionary impact of gasoline spiking to $4-plus per gallon - and staying there for some time. The International Energy Agency estimated this week that the turmoil in Libya has shut in between 850,000-one million barrels of oil per day. Governments and investors around the world are more interested in securing their oil and food imports than they are in holding US dollars paying negative real interest rates.
Central banks and governments remain blind to the inflationary consequences of their policies. Based on his public comments, Ben Bernanke seems to view rising food and energy prices as adeflationary shock to the US economy - which would, in his mind, necessitate even more money printing. He sees no connection between the expansion of the Fed's balance sheet and rising prices for necessities. He blames the weather and growth in emerging markets. How convenient!
One would hope that Bernanke understands the dilemmas that faced one Rudolf von Havenstein, president of the German central bank during its hyperinflation of 1921-23. In a research piece posted on Zero Hedge, SocGen strategist Dylan Grice offers an interesting perspective of von Havenstein's experience. Here is a snippet:
[Let's] not ignore the parallels [between Weimar Germany and today's monetary environment]: as is the case for today's central bankers, Von Havenstein was faced with horrible fiscal problems; as is the case for today's central bankers, the distinction between fiscal and monetary policy had blurred; as is the case for today's central bankers, the political difficulty of deflating was daunting; and as is the case for today's QE-enthralled central bankers, apparently respectable economic theory reassured him that he was doing the right thing. Grice's piece is over a year old, published at a time when the consensus view was expecting a "self-sustaining recovery" and an "exit strategy" from QE1. Instead, after a few short months of economic deterioration in mid-2010, Bernanke came out blazing with his QE2 guns. So the question must be asked: how are endless QE programs not considered an effort to monetize the US federal deficit? Everyone has their own answer, but it's hard to imagine that more investors won't start worrying about a dramatic collapse in confidence in the US dollar.
The proposed budget cuts from the Obama administration and Congress are jokes. They are woefully inadequate. And polls this week revealed that even many self-identified Tea Party members have no desire to cut Social Security and Medicare benefits. The weaker the political will to enact painful budget reforms, the faster the federal debt will grow. The faster the debt grows, the more the Fed will be pressured to monetize, which boosts the money supply. The further the money supply grows, the more urgency investors around the globe will feel to buy gold, silver, and other hard assets.
Demand for gold should keep growing in the coming months, as Bernanke and other central bankers willfully ignore the inflationary consequences of their actions. It's hard to imagine a reversal of this trend until we see much more political support in Congress for handcuffing the Fed or changing its so-called "mandate." As Rep. Ron Paul noted in his questioning of Bernanke recently, the Fed's quantitative easing enables reckless federal spending like an accommodating bartender enables an alcoholic.
Investors looking to protect their portfolios from the ravages of deficit spending and money printing will look to buy gold.
Regards,
Dan Amoss,
for The Daily Reckoning
Joel's Note: In addition to gold, you could prepare for the coming inflationary cycle by investing in a diversified basket of commodities...the kind of commodities that fiat currencies tend to lose value against when overzealous central bankers take to the presses.
Our friends at EverBank offer just such a basket though their MarketSafe Diversified Commodities CD. As usual, this CD is insured by the FDIC (in amounts up to $250,000) and it is guaranteed against any loss of principal. In other words, there's lots of potential upside; zero potential downside.
EverBank's Diversified Commodities CD is comprised of 10 equally weighted commodities: WTI Crude Oil, Gold, Silver, Platinum, Soybeans, Corn, Sugar, Copper, Nickel and Lean Hogs. If you are seeking exposure to these commodities but don't know how to best go about it, you could do much worse than taking a look at the EverBank CD. Check it out, here.
By way of full disclosure: We maintain a business relationship with EverBank because the folks there have a worldview similar to our own. And, they don't seem to mind our anti-central banker rants, God bless 'em.
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| | | | Bill Bonner | | More Stimulus for the Debt Junkies | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
And the latest installment...
The Dow dropped 228 points yesterday. Everybody blamed a different part of the world. Some blamed a developing civil war in Libya. Some blamed China's big trade deficit (China imports beaucoup energy and raw materials). And some blamed rising interest rates in Europe.
"Borrowing costs soar on Eurozone periphery," says a headline in The Financial Times.
Remember, Japan, Europe and America all depend on low interest rates. They're all addicted to cheap money. Take away the stimulants and their economies slump.
Ten year yields on Greek debt rose to over 12%. The Portuguese government paid 6% for its latest 2-year funding. A Portuguese debt trader:
"We are not at bailout levels yet, but we are moving in that direction."
Why not just let rates rise to market levels...and force everyone to kick the debt habit?
No...no...no... You don't understand, dear reader. Since a slump is just the thing the financial stimulants were designed to avoid, governments are very reluctant to give them up. Instead, they bailout, prop up, and tide over every bank and sovereign debtor who threatens to go into rehab.
But as we've seen on the mean streets of Baltimore, it takes bigger and bigger doses to keep the junkies happy. You cover one bad debt by adding another. And then you have two bad debts to worry about. In Europe, Japan and America, bad debt held by the banks has effectively taken over the public sector. Now, government debt is going bad too.
Meanwhile, on the streets of Japan, we see what the government's 2- decade-long methadone finance program has wrought.
Bloomberg reports:
Japan's economy contracted more than the government initially estimated in the fourth quarter because of a downward revision to capital investment and consumer spending.
Gross domestic product shrank at an annualized 1.3 percent rate in the three months ended Dec. 31, more than the 1.1 percent contraction reported last month, the Cabinet Office said today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 1.2 percent contraction.
Private consumption fell 0.8 percent drove GDP lower in the fourth quarter after the government ended a subsidy program to buy fuel- efficient cars in September and reduced incentives to purchase electronic home appliances in December, a program that will end in March. Capital spending rose 0.5 percent, compared with the initial estimate of a 0.9 percent increase. Take away the juice; the juice junkies slow down.
Back in the US, the Republicans proposed to take away a little bit of the deficit. The Democrats proposed to take away less. The Senate rejected both proposals.
The Fed has no intention of taking away anything. There is some talk of "exiting" the zero interest rate/QE programs. But it is an empty bluff, in our opinion. They won't give up their fix until they have to.
The economy is too weak. Households are too fragile. And the recovery is a sham.
In the news yesterday was a discussion of how much the hike in oil prices will cost the typical family. Gasoline prices have gained about 30% in the last year. April crude traded yesterday at over $100, for the first time in 2 years. This will cost the typical family about $700 per year. That money will have to come from somewhere. Taking it away is sure to cause pain somewhere else. Bloomberg continues:
Nouriel Roubini, the New York University economist who became known for his pessimistic forecasts before the financial crisis, told reporters in Dubai on Tuesday that an increase in oil prices to $140 a barrel could even cause some advanced economies to dip back into recession.
The rising price of gas - which averaged $3.57 a gallon nationwide on Monday, according to the government - is already prompting some people to change their habits. And more thoughts...
"The columnists and the media have greatly misunderestimated the pain in the lower and middle classes," said a friend at lunch.
"I was talking to my aunt yesterday. She lives in Pennsylvania, out by Pittsburgh. Of course, that's not the most dynamic part of the country. But people there have to eat too. These are working class people, you know. She said that both her sons-in-law had lost their jobs and hadn't been able to find work for more than a year. And her son lost his business and his house.
"What I think is happening is that the big money in the richest part of the economy is distorting the whole picture. If you look at the averages, they don't look that bad. Because there are a lot of million- dollar paydays at the top. But at the bottom, wages aren't going up - if you can find a job at all. And the cost of living is rising. I bought gasoline yesterday. I paid more than $3.50 a gallon. I filled up the tank. It cost me $85. Okay, not a big deal. But there are a lot of people in this country who don't have that kind of money.
"That's why so many people are on food stamps. There's a whole big segment of the population that is struggling. We don't see them. They don't live where we live. They don't shop where we shop. They don't work where we work. They don't eat in the same restaurants. But they're out there."
*** What's going on down on the pampas?
"Most of South America - including Argentina - is in the midst of an economic boom," writes our old friend Doug Casey.
Argentina has a financial crisis about once every 10 years. The last one was in 2002. Another one should be coming up.
But it may not be so bad. What makes financial troubles painful is debt. If you have a house that is worth $200,000 one year...and $100,000 the next, so what? It is the same house. Its roof and walls give the same service.
But if you owe $150,000 on your house, you wince at the thought of a 50% drop in house prices. If you have to refinance, you will have to come up with at least $50,000 to swing the deal.
Argentina - thanks to its own incompetence and instability - has little debt. Fewer than 6% of houses in the country are financed, says Family Office colleague, Robert Marstrand, who lives in Buenos Aires. Who would lend to an Argentine?
So, now the country is practically debt-free. Its assets can go up and down. Crises can come and go. It's like a roller coaster. Whee!
But how are things out at the farm? We put the question to our farm manager, expecting to hear that another drought had dried up the pastures and forced the sale of our remaining cattle. But no! Instead, it is raining in the Andes. In fact, it is raining so much that roads have been washed out. Our farm manager has not been able to get up there to visit. But he sends this update:
Bill, it has been raining hard. The grass is growing again. The roads are impassable. That's the good news.
The bad news is that old Don Jose Gutierrez died. He was 91 years old. He lived up in the mountains. I never saw him. But Jorge said he was a "good peone." They had to carry his body down from the mountains on a horse. It must have been sad. He's been up there for so long. Long time Daily Reckoning sufferers will recall that we "bought the farm" in Argentina about 5 years ago. Since then, one calamity after another has beset us. It is as if we were in the Old Testament - with a plague of bees one year...ants the next. Meanwhile, rainfall fell from 300 millimeters the first year...down to 60 last year. The place was drying up and threatening to blow away like tumbleweed.
It is a cattle ranch. But, as a visitor from Buenos Aires asked recently, "What do the cattle eat?"
We wondered the same thing. There is nothing there but rocks, cacti, and desert sand. It was then that we realized that we must have bred a new race of lean, low-cholesterol animals, which we call "sand fed beef."
When we began there were more than 1,000 head on the property. Now, we're down to less than 500. Too bad. Cattle prices have been going down in real terms since 1974. During that time the US cattle herd has declined by about a third. We don't have numbers for the decline in Argentina, but it has probably been even greater, as farmers switched to growing soy and other grains.
This fall in production has finally led to an up-tick in prices. And now, the monsoons have arrived. We've gotten 240 millimeters, says the farm report.
Rain, higher prices...hey, the cattle business is looking up.
"Señor Bonner," our farm manager wrote with cheerful news, "this year we won't lose so much money."
Regards,
Bill Bonner,
for The Daily Reckoning |
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