Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Monday, April 25, 2011 Fine art, skyscrapers and other bubblicious indicators, Gold rockets on as Fed fiddlers continue muddying the waters, Plus, Bill Bonner on good ol' capitalism, just doing its job... ------------------------------------------------------- Have We Really Reached "PEAK GOLD"? Global gold production has been declining for the last 10 years and is now on a permanent downward slope. It's becoming extremely difficult to find the yellow metal. And one tiny penny stock has secured rights to what could be one of the world's last remaining big finds... The news could send it soaring from $1.73... Tales from an Emerging Art Market What China’s Foray into Fine Art Means for the World Economy Eric Fry Reporting from Laguna Beach, California... As we go to the presses this afternoon, gold is rallying (again), silver is rocketing (again), wheat is soaring (again) and just about every other asset on the planet that isn't a US dollar is moving up in price (again). The beleaguered greenback keeps trying to find a place to stand, but only seems to find places to fall. Already this year, the dollar index has dropped 6.3% - wiping out all of the S&P 500's gains for the year to date. Another 6% drop would take the dollar index to an all-time low. Little wonder that investors are flocking to gold, silver and every other asset that seems a plausible alternative to dollars. Even fine art is catching a bid...but maybe too much of a bid. Derek Thompson, writing for The Atlantic, suggests that record-setting auction prices for fine art may be "a leading indicator of economic collapse." In his column, entitled, "The Art of Bubbles: How Sotheby's Predicts the World Economy," Thompson highlights China's conspicuously large role in the red-hot market for fine art. "[China's] blaze of auction records," he explains, "is looking eerily reminiscent of 1987 Japan and 2007 America... In four years, China has zoomed past [the US] from the world's fourth-biggest fine art scene to the world's largest auction market for art. "In May 2010, an anonymous bidder believed to be Chinese forked over $106 million for 'Nude, Green Leaves, and Bust', the most ever paid for a Picasso," Thompson notes. "Five months later, three bottles of Chateau Lafite 1869 sold at Sotheby's for 30-times their pre-auction estimate, at $230,000 per bottle to Chinese bidders. In November, an 18th century vase sold for $70 million. Eight figures for a vase... Then, just last week, Chinese buyers helped Sotheby's and Christie's set (yet another) record by bidding up the price of a Chinese vase estimated to fetch $800 all the way to $18 million - a 22,000% mark up! "That's the kind of fever pitch The Economist captured when it reported 'astonishing bidding' by wealthy Chinese across the globe as 'record after record has fallen away as newly wealthy collectors from mainland China have piled into salerooms in London, New York and Hong Kong.'" China's record-setting presence in the fine art market is not necessarily a bad thing, but if the recent past is anything close to prologue, the Chinese economy is heading for a hard landing. "China's meteoric rise in the global auction world might be a sign of well-earned wealth," Thompson explains. "But periods of record bidding are scarily accurate bubble predictors, according to Vikram Mansharamani, author of Boombustology. They're a 'symptom of overconfidence and hubris' as a newly rich society spends its easy money with exponential flamboyance. "China's appetite for fine art isn't a stray indicator, Mansharamani says. It's a telltale clue from a disaster movie we've seen play out at least three times before," Thompson continues. "In the last 20 years, Sotheby's stock has experienced four sharp peaks. In the late 1980s, Japan had been 'the center of gravity' in the international art market. But its economy imploded, sending Sotheby's stock reeling. Ten years later, the Internet bubble drove another auction boom among Silicon Valley newbies, and the bubble burst again. Ten years later, we watched the same film play out. This year could be deja vu, all over again...all over again. "Mansharamani makes an eerie supporting argument for a bubble in China: skyscrapers," Thompson concludes. "In 1929, the world's three tallest buildings were in New York. In 1997, before the Asian financial crisis, the Petronas Towers took the title from Sears Tower. Thirteen years later, the record-setting Burj Dubai was erected just as the latest financial crisis hit Dubai. It turns out that the world's ten tallest new buildings are like a worldwide pulse of bubblicious economic activity. In 2015, he notes, Chinese skyscrapers will occupy spots #2, 3, 5, 9 and 10." A final corroborating data point may be the Chinese stock market itself. Despite still-titanic credit growth in China - and despite unrelenting headlines of booming economic growth - the Shanghai Composite Index has failed to make any net progress during the last six months. As such, Chinese stocks are diverging noticeably from Sotheby's - a stock the index has tracked very closely for most of the last two decades. While Sotheby's stock is busy challenging its all-time high, the Shanghai Composite remains 50% below its all-time high of October 2007. Maybe it's still too early to panic about these various signs of cultural excess and stock market distress. But it's not too early to worry. 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. The Daily Reckoning Presents Go Long Material, Go Short Certified Idiots Frederick Sheehan Some relationships: The last time the US dollar exceeded 120 on the dollar index (DXY) was in January 2002. Today it's trading at 74.04, a 38% decline. Since January, 2002, gold has risen from $282 to $1,509 an ounce. Silver has risen from $4.30 to $47.36 an ounce. A barrel of crude oil (WTI) has risen from $20 to $112. A rising oil price increases the costs and prices of wheat, corn, gold, silver, shipping, and Internet searches. Some other relationships: Federal Reserve Chairman, Ben Bernanke, knows that his stock-market support operations are coming to an end, or a pause - time will tell. Propping up the stock market was an explicit objective of QE2. Quantitative Easing 2 (QE2), a process by which the New York Federal Reserve is buying $600 billion of US Treasury securities, is due to end in June. Classified as Permanent Open Market Operations (POMOs), the New York Fed dispatches about $6.5 to $8.5 billion into the banking system every day, as payment for 5- to 7-year Treasury notes. Chairman Bernanke wants the POMOs to continue, forever. A few Federal Reserve Bank presidents have recently stated their reservations, in public. They warn that it is time to stop POMO-ing, QE-ing, or otherwise bankrupting America. ("Bankrupting" was not their description.) But Christina Romer, former chairperson of the "Council of Economic Advisors," is "all in." During a recent interview on Yahoo's Daily Ticker, Romer gushed, "I think the evidence is that QE2 was very effective and certainly QE1 was very effective. I don't understand why we'd be dialing back that tool." Central to her argument is that a lower dollar helps Americans. Since she worked so hard to emphasize this view on the Daily Ticker, we can be sure that: (1) Ben Bernanke is doing all that he can to lower the value of the dollar against other currencies, (2) jobs, wages, working hours, and production industries will continue to shrivel, and (3) tried-and-true asset relationships of the past decade (i.e. gold up, dollar down) will accelerate. The Bureau of Labor Statistics (BLS) calculated the civilian population available to work was 216 million in January 2002. It was 239 million in December 2010, an increase of 23 million. Within this group, the BLS calculated 132 million were working in January 2002. In December 2010: 138 million, an increase of 6 million. Thus, the percentage of those with jobs among those who can work has dropped significantly. Those who do have jobs are worse off, in general, than they were in 2002. The BLS calculated the weekly earnings of the average worker at $341 in January 2002. In December 2010, it was $342. This calculation is adjusted for inflation - but given the corruption of government inflation numbers, the latter figure ($342) should be reduced by at least 20%. However, despite the overwhelming evidence that QE I and II have been dismal failures, Romer continues to applaud them as successes, just like Chairman Bernanke. The striking similarity between Romer's perspective and Bernanke's seems odd...until you examine their resumes. We have, first, Christiana Romer, Class of 1957, Garff B. Wilson Professor of Economics at the University of California, Berkeley, former Chair of the President's Council of Economic Advisers, former economics professor at Princeton University, current co-director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER),former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received her Ph.D in economics from the Massachusetts Institute of Technology in 1985. We have, second, Ben S. Bernanke, current chairman of the Federal Reserve Board, former Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, former chair of the President's Council of Economics Advisers, former Director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER), former member of the NBER's Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received his Ph.D in economics from the Massachusetts Institute of Technology in 1979. Perhaps there's a bit too much "in-breeding" in the gene pool of professional economists. Now some "highlights" from the Romer interview: The Daily Ticker's, Aaron Task: A lot of people say the Fed's been very successful helping financial markets and helping people at the upper end of the income scale. There hasn't been a translation into wage growth for the average worker or substantial hiring, so [how] would the Fed be doing more to help [if it continued to QE]? ROMER: Noooooooo! If you look in fact at what quantitative easing does, it tends to lower the price of the dollar, both of those things that are good for ordinary families and lower long-term interest rates means firms can do investment. It means it's easier for consumers to afford borrowing, so that tends to encourage spending and when people spend that puts the people back to work. A lower price of the dollar helps to make goods more competitive in foreign markets. If we're exporting more, we need more workers to produce it. TASK: Isn't it true that long-term rates have risen since the Fed announced QE2 in August? And also, a lot of people think a "weaker dollar" means the dollar doesn't go as far, when I go to the grocery store and when I put gas in my tank, or things of that nature. So, I think a lot of people think the weaker dollar is hurting them, not helping them ROMER: So, you need to be very careful. It's hard to evaluate what QE has done to long-term interest rates, because there were a lot of announcement effects. What I can tell you is that the academic studies that have looked at this absolutely say that QE does what we thought it was going to do. And, of course, on the price of the dollar we're not talking about what's happening to your purchasing power here; we're talking about what the price of the dollar is in the foreign exchange markets. I think that everyone agrees that a lower price of the dollar tends to make us export more, which ultimately causes unemployment to come down... There's no evidence that what's holding back business spending or consumer economy is government activism. [Editor's note: In 2010, David Farr, President, Chairman and CEO of Emerson Electric Corporation, in Chicago, told investors: "Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game."] Many brand-name professors and economists from the Romer/Bernanke gene pool also continue to cheer the "successes" of quantitative easing. Average Americans, not so much... "Comments" by Yahoo! viewers responding to the Romer interview, featured widespread contempt for QE, and therefore for Romer's perspective. Comment #1 was from "Ross," who asked, "Is this chick retarded or what?" Of viewers who expressed an opinion about Ross' analysis, 227 liked his comment; 16 disliked it. Comment #2 was from "Brian," who queried: "Who knew it was so easy? Someone should go tell those poor nations in Africa that we've learned the secret: just produce more of your currency." (Score: 182 to 11.) Comment #3 was from "Kimmie Taylor" who observed: "QE1 has failed on jobs. QE2 has failed on jobs. The only success with these QEs are increased bank profits." (253-18) Comment #4 was from "Jack," who stated one obvious problem and a fair conclusion: "The woman has never held a real job and knows nothing about the real world. She is a complete failure." There was not a single Romer defender as far as the eye could see. (The eye saw the first 20 reviews.) We will finish with "PhilippeB" (#6), a fast learner: "No idea who she is, but it is now official: Christina Romer is a certified idiot." (62- 3) What to do about it? Please refer to the very top: "Some relationships." Regards, Frederick J. Sheehan, for The Daily Reckoning Joel's Note: Frederick Sheehan is author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession and co-author ofGreenspan's Bubbles: The Age of Ignorance at the Federal Reserve. Sheehan was a director at John Hancock Financial Services where he wrote the Market Outlook and Market Review. He contributes to The Gloom, Boom & Doom Report, Whiskey & Gunpowder, and the Prudent Bear, among others. He also advises an investment firm and a non-profit foundation. Sheehan is a CFA and graduate of Columbia Business School. Uncovered: A Way to Tap into an "Other" Pool of Government-Backed Income Potential... ..that only a handful of Americans know about. And with Social Security becoming less and less of a guarantee, now is the time to act. Click here now and discover a way to protect your retirement from the uncertainties surrounding Social Security. Bill Bonner What’s Wrong With a Little Monetary Inflation? Bill Bonner Reckoning from Baltimore, Maryland... Colleague Porter Stansberry sent us this note: The Justice Department is assembling a team to "root out any cases of fraud or manipulation" in oil markets that might be contributing to $4 a gallon-plus gasoline prices. Says OBAMA!: "We are going to make sure that no one is taking advantage of the American people for their own short-term gain." My bet is the "task force" won't question Bernanke... No, they won't question Ben. That's not their job. Their job is to find some poor schmuck and make him do the perp walk before the cameras. Maybe some guy who is speculating on oil futures. Or maybe a fellow who is running an oil company. But let's look at how this works. The feds openly and explicitly try to cause inflation. No kidding. Ben Bernanke made it very clear. He was worried about falling prices...about deflation. He practically made his career as a deflation expert...claiming to be able to prevent it by dropping "money from helicopters," if necessary. He's fought deflation in a number of ways. By buying bonds with made-up money. By lending money at zero interest rates. And by helping the US Treasury spend money it didn't have and couldn't raise by honest taxation or bond sales. A little bit of monetary inflation is thought to be a good thing - especially when people don't know what is going on. Add more money and it makes people feel wealthier. This leads them to spend more...sell more...produce more...and hire more. But what happens when they see that it's only a cheap trick? What happens when they see the helicopter overhead and realize that there is something very funny about money you give away for free? Well, what would you do if you were a commodity producer? Say, you had oil in the ground or wheat in the field? Would you exchange it for dollars? Or would you wait...holding back a little bit...either because you thought the price was going up...or because you were afraid that the funny money might lose its value? The trouble with a little inflation is that it has a way of becoming a lot of inflation - all of a sudden. In a sense, inflation is always a monetary phenomenon. But it's also a psychological phenomenon...and an economic phenomenon too. In a Great Correction, the authorities can add to the Fed's balance sheet holdings. But, if the member banks don't borrow and lend...you don't get much of an increase in consumer prices. And if you do get an increase - such as we are seeing in the price of gasoline - it tends to work against a general increase in the price level. In fact, it tends to correct the inflationary cycle. That is, consumers pay more for gas and have less left over for other things. That's why a sharp rise in oil prices doesn't cause an inflationary boom. Instead, it always causes an economic slowdown. And recession tends to lower prices, not increase them. Since prices remain stagnant or even go down, the authorities think they can get away with more of their inflationary policies. In fact, they believe they have no choice. They have to fight recession! Inflation is the last of their worries. They "print" money. And they continue printing it. Because, as the recession continues, tax revenues fall. Then, the government comes to rely on the central bank to finance its deficits. Inflationary policies become not just "counter-cyclical" measures; they are an essential part of the feds' budget. And then, the psychological component comes into play. Investors begin to worry. They begin to buy gold - it will be their own financial reserves. They begin to expect higher prices - much higher prices. And producers begin holding back supplies. This produces scarcity...which causes prices to soar, convincing producers to hold back even more. And soon, ordinary households are buying gold too. The feds look for scapegoats. They collar a speculator or two. They accuse producers of "hoarding." They insist that there is no problem with central government finances or the central banks policies. The problem is "greedy" capitalists. Or the weather. Or whatever... Remember, people starved in Germany in the winter of the Great Inflation of the early twenties - even though farmers had a record harvest. Why? Because farmers didn't want to sell. They kept their produce in barns and silos...waiting until the money problems resolved themselves. Naturally, the authorities tried to shift the blame. Some blamed speculators. Some blamed France and Britain. Some blamed bankers...especially if they were Jewish. And more thoughts... Oh my...oh my... A Nobel Prize winning economist has come out with yet another analysis, showing that capitalism isn't working. It is failing the middle class, says Michael Spence. The rich are getting richer. The poor are as poor as ever. And the middle classes are losing ground. That's what he says. And he's a moron. Here's the Reuters blog... Capitalism is failing the middle class Global capitalism isn't working for the American middle class. That isn't a headline from the left-leaning Huffington Post, or a comment on Glenn Beck's right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the US establishment: the paper's lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations. - Reuters Blog, Chrystia Freeland Actually, the poor are making huge gains - in India, China, and Southeast Asia particularly. The rich are making huge gains too - all over the world. And the middle classes? The poor middles classes in the developed world can't seem to catch a break. They've been treading water for the last quarter century. But rather than accept the status quo, they managed to improve their living standards by working more hours and going further into debt. Alas, with the labor markets full of millions of unemployed workers...they can no longer add to their incomes by working longer. And with household debt near record levels, they can't get more stuff that way either. What are the poor devils to do? They need to cut back...downsize...learn to live better on less income. Does that mean capitalism has failed? Not at all. Capitalism is just doing its job... ..separating fools from their money... ..and giving people, not what they expect or what they hope for, but what they deserve. Of course, there's more to the story. The feds are the real culprits. Their central planning is largely responsible for the strange pattern of income distribution. But that's a long story...for another day. Regards, Bill Bonner for The Daily Reckoning