 | | The Daily Reckoning | Friday, March 25, 2011 |
- The most "elegant scamster" of them all...right here in the US of A,
- A Columbian story, from cocaine kingpins to investment hotspot,
- Plus, Bill Bonner on gold's new records, 'kooky' Fed math and the Chinese taking over Paris...
|  | | When the Fix is In
| Government Profits from the “Never Go Bust” Guarantee
| |  | | Bill Bonner |
Reckoning this Friday from Agora's H.Q. in Baltimore, Maryland...
Gold is hitting new records. It's telling us that there is something very wrong with the world's dollar-based money system.
But most investors don't notice. Gold is still a "kooky" thing to buy.
And the feds have no idea what is going on.
You gotta hand it to the feds. They're cool. They're incompetent. They could pass a lie detector test no matter what they did.
Over at the US Treasury, they've been crowing about how much profit they've made. They rushed to save AIG and Citi by buying their toxic bonds. Then, they flew to the side of Fannie and Freddie when they were in trouble.
As a result of these selfless rescue efforts, they came to hold a huge portfolio of securities; the Fannie and Freddie portion alone is worth $142 billion, say the papers. The Treasury has already sold its AIG and Citi paper - at a profit. And now, it is getting set to unload its hoard of Freddie and Fannie paper.
Can you believe it; its eggs haven't been sold yet, but it's already counting on profits between $15 and $20 billion. Are they investment geniuses at the Treasury, or what?
Well, in a way, they're a lot smarter than we are. We could have bought those notes and bonds too. We should have had more faith in the feds. We could have looked ahead and seen that they would get away - for a while, at least - with one of the biggest financial scams in history. We could have made a profit on it too!
Let's look at how it works. The borrowers - AIG, Citi, Freddie, Fannie - make bad bets. By all rights, they should go broke and their bondholders should lose money. But as Mr. Market is doing his work - marking down junk debt of all kind in anticipation of a clean up - in come the feds. No need to sell that stuff, they say. We're behind it 100%. Thus did they pledge the full faith and credit of the United States of America to guarantee that bondholders wouldn't pay for their own dumb mistakes.
We should have bought then; the fix was in. But we had doubts about the credit of the US. Still do. We worried that the fix may not stay fixed long enough to make money.
We were wrong. As to their ability to refloat the financial sector, we should never have doubted the feds. The Fed went out and bought every stray dog and cat of a mortgaged-backed security it could find - $1.4 trillion worth of them. It also lent money to the financial industry at 0.5%. That's about 8.5% below the real rate of consumer price inflation - according to John William's "Shadow Stats" estimate. And if that weren't enough, the banks were guaranteed profits - by allowing them to borrow from the Fed at 0.5%, use the money to buy US Treasury bonds, yielding between 3% and 4%...and sell them back the Fed. Not taking any chances, the Fed is also printing up an extra $4 billion per day, money coming out of nowhere, to buy Treasury bonds. Not only is it financing more than America's entire monthly deficit...it leaves the financial industry free to use its own (borrowed) money to speculate on other things.
Naturally, when you have this kind of racket going, you're not going to bother making risky loans to the private sector. Instead, you're going to go where the fix is in...you're going to gamble on debt - buying more "junk" bonds...and pushing up bond prices!
Oh, Dear Reader, we hate a scam, but we admire an elegant scamster. In other words, the feds gave the financial sector the money to bid up its own paper...the very paper that the feds themselves held in great quantity.
And now they claim to have made a profit from this operation.
How about this? We'll start a phony baloney business. We'll sell shares all over town. When people realize that the business is a loser, the shares will fall and our business will be in danger of collapse. Then, the feds can come to our aid too. They can buy up our shares, guarantee that we'll never go bust, and give us money so we can buy shares too. The price of the shares will go back up...and the feds can sell their shares, quietly. Hey, this will be profitable for the feds too - if they ignore all that money they gave us to make the flimflam work.
But here's a question: why couldn't they make this sort of razzmatazz work in Europe? Didn't the Irish have a boatload of bad mortgage debt? Didn't the government step in to guarantee the lot of it? And now look. Not only is the original mortgage debt getting marked down...so is the Irish government's debt.
Why can't the Irish get the hang of this?
Well, a couple of reasons.
First, the Irish have much more debt to deal with; they've already given their banks an amount equal to 1/4 of the nation's entire GDP. That would be like reflating the US financial sector with $3.5 trillion.
Wait a minute. You say the US financial sector has gotten nearly that much? Hold on...maybe you're right...
The money printing from the Fed is the aforementioned $1.4 billion, right? Okay... Another $200 billion or so in asset purchases from the Treasury. And surely handling all those US Treasury bonds didn't hurt - what's that, about $3 trillion there, but you can't really count that as a bank bailout.
But the big difference is that the US can print money; Ireland can't. Ireland has to borrow the money with which to bail out its banks. And the more it borrows, the more investors worry that it won't be able to pay it back.
And they're right. At current yields, the Irish can't borrow at all - not on the open market. Two-year bonds issued by Ireland now yield more than 10%. So, the Irish have to beg loans from the euro-feds. And even they are charging them 6%. Even at that subsidized rate, Ireland can't go on much longer.
Ireland is more like California or Illinois. It doesn't print its own money. And it doesn't have a central bank that will lend at zero percent...
In the long run, this is a good thing. They can't destroy their entire economies with make-believe money, while claiming to make taxpayers' a profit.
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| | The Daily Reckoning Presents | | Best Economy in Latin America? | |  | | Chris Mayer |
I grew up in the 1980s, and in some ways I never left it. I still wear Ray-Ban Wayfarer sunglasses. I still enjoy those big hair bands like Guns N' Roses and the bluesy rock of Stevie Ray Vaughan. And I still get a kick out of watching re-reruns of 1980s TV shows (Miami Vice holds up well) and movies. Say Conan to me and I think of a buff Arnold Schwarzenegger, not a late night host.
The 1980s also left its indelible mark on certain places. Say "Nicaragua" and it likely conjures up images of guerilla fighting between Sandinistas and Contras. Or say "Colombia" and you likely think of the drug trade. Cigarette boats. Violence. Drug mafias. Rich cocaine kingpins. Back in the day, as the saying went, Colombians didn't rob banks. They bought them.
Both countries have changed dramatically, though. What follows is a little peek at my recent field trips to Nicaragua and Colombia.
I recently visited an old college friend of mine who lives in Leon, Nicaragua. His family is from there, and they left in 1983 as Nicaragua's civil war raged on. He can still remember playing in the streets, hearing machine gun fire and then sprinting home. He can remember how his family slept in the center of the house where there were more walls between them and what might happen outside. He remembers people knocking on the door begging for food or a place to hide. Only 11 at the time, he had nightmares for years afterward.
Walking around in Leon, you can still see the effects of the war. Lots where buildings once stood are empty. Some buildings are still unoccupied and unclaimed, essentially in ruins. My friend's father told me, "This was a really nice town once. We had everything." He told me how there were once nine movie theaters in Leon. Now there is only one. There was once a nice park with tennis courts right around the corner. Now it's weedy and unkempt. And on and on it goes...
I always enjoy visiting, and I learn all kinds of things I'd never learn otherwise. Some of them are little things, like the way banks in Nicaragua hold checks for three weeks. (That's a three-week float!) Or how the water pressure is so weak in the mornings that the water dribbles out of the showerheads.
On my trip, I read a book titled My Car in Managua by Forrest Colburn, who made many trips to Nicaragua in 1980s and lived there for a year in 1985. (His take on Leon was not charitable: "Unless you have family in Leon, there is nothing in the city of interest.") His book talks about life in post-revolutionary Nicaragua in the 1980s. It's a lighthearted look and an easy read of only 130 pages, but the stories will stick with you. I highly recommend it if you want to know something of that period in Nicaraguan history.
Nicaragua has changed a lot since the 1980s, of course. After all, my friend and his family moved back. And I was down in Nicaragua with a group of readers exploring property in Rancho Santana. I also poked around other developments nearby. The country is enjoying a revival of investor interest.
As for Colombia... Well, I recently read a very entertaining book entitled, The Fruit Palace: An Odyssey Through Colombia's Cocaine Underworld, by Charles Nicholl. Published in 1985, the author sets off, Hunter S. Thompson-style, in search of the Great Cocaine Story, "a one- eyed glimpse up the skirts of South America." The book takes its name from a little whitewashed café in the seaport of Santa Marta, where the author had his first encounter with drug trafficking.
Colombia is ideal for growing coca, which thrives in the lush, hot, semitropical slopes of its mountains, which run north-south up the country like primeval spines. Nicholls writes, "Fiercely hot, plentifully watered, full of hidden cul-de-sac valleys and mostly impassable to any vehicle larger than a mule... They call this the continent of fugitives, where a man can lose his own shadow."
This is the South America of imagination, shrouded in greenery, fringed with mist and full of steamy valleys and half-hidden villages and lost shrines. Slow-moving rivers, rice paddies, cane fields, coffee plantations...
Today, though, Colombia may be the best economic story in Latin America. The drug violence has been mostly rooted out. Bogotá, the capital, is now safer than Miami, Washington or Atlanta. The economy is growing 5% per year and has a large middle class. In just the last six years, foreign investment in Colombia has gone up fourfold, and exports tripled.
The famous IMD survey recently ranked Colombia second best in Latin America in protecting private property, behind only Chile. And the World Bank rated Colombia third in Latin America in the "business friendly" category, behind only Mexico and Peru.
The Colombian stock market has been on a tear since the '08 financial crisis. But valuations remain reasonable given the high growth rate.
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As a resource story, Colombia has huge potential for oil production. There have been a number of success stories already. The stock price in the largest independent oil producer in Colombia, Pacific Rubiales, for instance, is up 10-fold in the last two years! But there are several other ways to "play Colombia."
I recently returned from a visit to this bustling South American nation to see what values I might uncover. I will file a couple of reports about my discoveries in next week's editions ofThe Daily Reckoning.
Regards,
Chris Mayer,
for The Daily Reckoning
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| | | | Bill Bonner | | Qualms With Chinese Parisians | | | | Bill Bonner |
What's the matter with the Chinese, we asked?
We weren't talking about the Chinese in China. It was the Chinese in Paris that had our friends upset.
"They ruin whatever neighborhood they move into," began the explanation. "They are really amazing. They take over all the shops. Even the local bars...where people from the neighborhood have been gathering for generations. All of a sudden, there's someone at the counter who doesn't speak a word of French and doesn't know how to make a cafe creme.
"But that's only part of it. They are secretive. They keep to themselves. Reporters have tried to do stories. They go into these neighborhoods and try to get people to talk. But they won't say a word. When they can speak French, they will pretend they don't. No one knows what is really going on. But the shops all change. One will sell very cheap clothes. Another will sell Chinese food. Then, they'll have a bar and a couple restaurants. Over in Belleville, [near our office]...it's a horror. I went to a sushi shop...expecting to get some real Japanese sushi. Instead, it was run by a Chinese guy. God knows what was in that sushi. And if the sushi shop doesn't work, he'll turn it into an Italian restaurant or a shoe repair store - the same guy. "And now, in Belleville, you can barely walk down the streets at noon. They're full of Chinese prostitutes. These aren't like the French and North African prostitutes. They don't wear those revealing clothes. They don't have such big breasts. They just stand around in groups...dressed like normal people...almost like a group of housewives or office workers.
"Where do they come from? Nobody seems to know...but between them, the fellows who sell out-of-date yoghurt...and the men who make their wives walk around in those head-to-toe black bags...the neighborhood is going downhill fast."
We can imagine why the Chinese are having such success; they probably ignore French employment law. Labor rules in France make it extremely costly to hire people. Not that workers are overpaid. It's just that there are so many rules on how you hire, how you fire and who has to do what, you'll spend a lot of time and money just trying to keep up with them all. And don't even think about asking anyone to work overtime.
These rules make it hard for small shops to stay in business. They need cheap clerks and stock movers. And there is little room in France's high-cost market for this kind of low-cost labor.
The Chinese probably put their families to work...or other members of the Chinese immigrant community. And French labor inspectors probably get little cooperation from any of them.
Like America's legal and illegal immigrants from Latin America, the Chinese are building a new economy in Paris. They're undercutting native French shopkeepers and helping to make the city a livelier place. It just won't be Paris any more.
Regards,
Bill Bonner
for The Daily Reckoning |
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