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The Daily Reckoning | Friday, August 12, 2011 Wall Street's "fear gauge" goes wild and markets buck and bounce, Unlocking the true wealth-building potential of your IRA, Plus, Bill Bonner on the Zombie Wars, paper wealth and market mayhem galore... ................................................................................................. Who Gives A Damn About America's Credit Rating? I'm SICK of hearing about Keynesian vs. Austrian, fiat currency vs. Gold, U.S. credit ratings and other BORING economic theories you have ZERO control over... "WHO CARES!?" Truth is, if you want to make money in the markets, none of that stuff even matters! Let me prove it to you by showing you... Ivy League Idiocy Why private mistakes are preferable to public disasters Joel Bowman Joel Bowman, reporting from Barcelona, Spain... What a ride! Yesterday's market action makes four consecutive 400+ point daily swings for the Dow, the first time in history the index has registered such extreme behavior. The VIX Index -- sometimes referred to as Wall Street's "Fear Gauge" -- has more than doubled in the past month, from a reading of less than 20 to over 40 this week. That's a lot of fear, a lot of uncertainty and a lot of upset stomachs…all things not usually associated with "recoveries." Of course, Fellow Reckoners have rightly come to scoff at the mere mention of the word "recovery." They know it's a joke, a farce. They know it isn't real, that it is a rhetorical conjuring trick cooked up by self-serving clerks inside the beltway to bolster consumer confidence and paper over cracks in the economy. And so, they buy gold because they expect the opposite of a recovery. They anticipate a long and bumpy road ahead. They figure the worst is not behind them, but yet to come. So they prepare accordingly. They buy gold and they are happy. Good for them. Your editor arrived in Spain a few days ago after a couple of weeks in the U.K. We were in Ireland for one wedding, then Scotland for another. And we stopped by London too…just before looters and hoodlums took to the streets there, wrecking everything in sight and feeling proud of themselves for having done so. Our little trip, a "partial PIIGS tour," if you will, has given us a glimpse into a kind of dystopian future, a look at what may be on the cards for the rest of the west. Take Limerick, Ireland, for example, a sleepy little town of about 100,000 souls. The economy there has ground, almost completely, to a halt. It seems there are more stores with "for sale" signs on them than not. We're probably exaggerating there, but it's pretty grim just the same. Construction sites sit abandoned, scaffolding and tarpaulins hang off half-completed buildings like saggy-bottomed swimming trunks on a skinny old man. And it rains all day. Miserable. "They started building an opera center down town," one man told us. "Like we needed a bleedin' opera center, here in Limerick! Then the money dried up during the crisis. Work stopped. Well, now it's just a huge hole in the ground. You can see it right as you drive into town. It's a bleedin' embarrassment is what it is." The pubs, perhaps not surprisingly, are still full. After all, people need a place to drown their sorrows…and nobody drowns their sorrows better than the Irish. Some folks go to church. Most go to their local. We saw a menu in one joint with a page dedicated to "recession-busting cocktail specials." We tried a few to see whether they worked. Nope. Still raining outside. Still no work on the opera site. Strangely enough, however, prices in Ireland are still relatively high. We don't know how the gainfully employed can afford to live there…never mind the perennially unemployed. A taxi to the airport -- about 25 minutes out of town -- cost us almost 35 euros. A quick calculation…that's about two bucks a minute! In some parts of the world you can get a decent hotel room and a good hangover for half that amount. What are these people still doing here in Limerick, we wondered? Not riding in taxis, most likely. Ireland, like her Club Med cousins down in the Mediterranean, is doing it tough. Her banks spent the early 2000's lending money to people who couldn't afford to repay it. That's no way to run a bank. Eventually, those who couldn't make their payments didn't. Debts hung around banks' throats like iron neckties. Then, rather than letting the profligate go bust, making way for fresh and enterprising businesses to take their place, the government stepped in to save the day. As usual, they ruined it. Now the whole country is broke. Likewise, the economic landscapes in Spain and Italy inspire little confidence for investors. And, just as the Irish government sacrificed the many (taxpayers) to save the few (banks…which effectively went bust anyway), the ECB and the IMF are putting the whole European union in front of the firing squad in order to direct bailout funds towards countries that demonstrably cannot balance a budget. The result, we predict, will be the same as in the Emerald Isle. Why, good folk wonder, would supposedly smart people do such obviously dumb things? It's a fair enough question, and one we hear a lot. Some contend that politicians are ruining their economies on purpose, a conniving way to further impoverish and enslave the masses. Sounds a bit conspiratorial…though we wouldn't put it past them. More likely, those we think of as smart may not really be so…or at least not in the way -- nor in the specific fields -- in which they claim to be. Isaac Newton was a brilliant astronomer, for example…but he was also an avid believer in alchemy. We don't doubt gravity because lead doesn't turn to gold…but nor do we study alchemy at school just because an apple falls from a tree. Likewise, few would doubt that Ben Bernanke, a Princeton PhD., is an intelligent guy. But that doesn't mean he's not also a moron. Maybe it just depends on the subject. Listen to him talk, for instance, about the state of the economy… Here he is in May of 2007, precious months before the nationwide collapse of the subprime mortgage market across the US. "…given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system." His words. No kidding. Throughout 2008, Bernanke remained adamant that the American economy was robust enough to stave off a recession. On January 10 of that year he declared, "The Federal Reserve is not currently forecasting a recession." A week later, "[The U.S. economy] has a strong labor force, excellent productivity and technology, and a deep and liquid financial market that is in the process of repairing itself." And then again, on June 9, "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." Of course, as all non-economists knew too well, the pains of severe economic downturn had already begun to set in. Real gross domestic product (spurious a measure as it is) began contracting in the third quarter of 2008. By early 2009 it was falling at an annualized pace not seen since the 1950s. The rest of the story you know. Just to be clear, the goal here is not to make a fool of Mr. Bernanke. The man is clearly capable of doing that all by himself. The point, rather, is that smart people sometimes do and say stupid things. That goes for Ivy League grads as well as Irish politicians and Italian bankers. Being no stranger to mistakes himself, your editor has no problem with acts of private idiocy...and the valuable lessons they yield. They are tolerable to the extent they are inevitable. But public idiocy, idiocy that impacts the fate of entire nations, idiocy that, not being subject to market forces tends to yield no lesson whatsoever…well, that's just politics. For reasons that ought to be obvious, it pays to have more of your money within your own control…and away from that of do-gooder politicians. In today's guest essay, Terry Coxon investigates a few ways to do just that, starting with your own IRA. Please enjoy… The book the US Congress never wanted you to see... Ron Paul's "Lost" Gold Bible Buried away in secret since late in the last century, this 200-page guide shows you: * Why $15,000 gold is likely inevitable, BUT why that's not a GOOD thing for investors... * The only REAL way out of our monetary crisis... * And a glimpse into the future...when everything BUT the dollar could be used as money... We're spreading the word... Click here to find out more. The Daily Reckoning Presents Amazing Power Terry Coxon Imagine discovering that your dog can fly. As soon as you'd gotten over the surprise, you'd start wondering why you hadn't noticed years before. Then you'd start thinking about the money you could make with such a talented canine. That's the experience I had with IRAs. IRAs seemed so plain and ordinary. Good to have, comforting at times, but dull, like chicken noodle soup. Nothing special and nothing to get excited about. IRAs ran on AAA batteries and had about as much power... or so I thought. Then what a surprise! I learned how an IRA can be a powerhouse for accumulating tax-free wealth. I don't mind admitting I'd been blind to the potential that was right in front of me for so long -- I had so much company in not noticing. Even today 67 million Americans have an IRA, but not one in a thousand understands all the good things he can do with it or how powerful it can be for building and protecting wealth. Here's a sample of what the rules allow you to do with your IRA (and that most investors haven't a clue is possible). Gold. Buy gold coins for your IRA and store them privately at home. You can even hide the coins in a jar of canned peaches and keep them in your refrigerator if you think that's the safest way to handle them. It's all within the rules. Rentals. Your IRA can own an apartment house and be a landlord. And you can be the rent-collector and pick up those checks every month -- tax-deferred income for your IRA. Bigger rentals. Want a bigger apartment house? If you decide the terms are right, your IRA can use mortgage financing for a rental property. Operating business. Follow the rules carefully and you can run a motel, restaurant, bio-science lab, specialty store or any other business and let your IRA pick up most of the earnings. Running a business is demanding, but the work is a lot more enjoyable when a big chunk of the income is tax deferred -- or even tax free. Foreign real estate. Your IRA can buy an apartment in Buenos Aires or farmland in New Zealand. It'll be waiting for you if you ever need to go there. Equipment leasing. Do you have experience selling or servicing heavy equipment, trucks, airplanes, medical equipment or anything else that users often want to lease? Your IRA can be the lessor while you put your knowledge to work helping your IRA earn the lease payments -- income for your IRA to add to its growing pile of tax-deferred cash. Private lending. Your IRA can earn high returns lending money on well-secured first and second mortgages. That's what the smart banks do, and they collect far more than the sad returns they pay to IRA investors who buy their CDs. Rehabilitate property. You can buy and manage the rehabilitation of a run-down dwelling, apartment house or office building and let your IRA reap the financial benefit. Seize bargains. You can show up at foreclosure sales (there are plenty of them these days) and buy property for your IRA at distress prices. You might do the same thing on your own, but you'll enjoy the profits more if they're protected from tax by your IRA. And those are just examples. Whatever investment you'd like to make and whatever business opportunity you'd like to pursue, there is a proper way for your IRA to collect most of the benefit. That means more of your earnings are tax-deferred -- and with a Roth IRA the earnings can be tax-free. Unnoticed Maybe you're wondering how a secret that big could be a secret at all. The answer is pretty simple. As a matter of law, an IRA must have a custodian. It's the custodian that holds legal title to whatever is in your IRA. But the custodian doesn't have to accept any investment it doesn't like. It can just say "No." Most custodians are attached to a bank, stockbroker, mutual fund complex or insurance company. Not surprisingly, those captive custodians are ready to let your IRA buy whatever the bank, stockbroker, mutual fund complex or insurance company is selling -- and nothing else. That's what keeps the handcuffs on most IRA investors and why most financial institutions like to tell just part of the IRA story. (The rest of the story is in this Report.) Better Than "Self-Directed" A sizeable minority of investors have slipped out of the ordinary-IRA handcuffs and moved to a so-called self-directed IRA. They've placed their IRA with a custodian that doesn't sell investments and that will consider accepting any investment. That's better than what most IRA investors have, but not nearly as good what you could have. The key word is consider. With a self-directed IRA, the investor must get the custodian's approval at each step of every transaction. That means extra work and trouble for the investor. It means delay, which means the risk of missing an opportunity. It also means uncertainty, since the custodian can always say "No, we don't do that." And when the custodian of a self-directed IRA finally does sign off on an investment, the starting bell rings for heavy fees that will keep draining the IRA's value. The arrangement just isn't as self-directed as it looks. It would be more accurate to call it a May-I-Please IRA. Or a May-I-Please-Pay-More-Fees IRA. That's why I created a report called How to Rescue Your Retirement from Three Dangerous Threats. In it, I reveal a little known IRS loophole that can help you triple the returns in your IRA. No your dog can't fly. But your IRA can learn to. Good luck out there. Regards, Terry Coxon, for The Daily Reckoning P.S. If you'd like to take your wealth into your own hands, I invite you to click here. After the jump, you'll learn... • A simple secret that can multiply your IRA's returns up to tenfold in today's bull market... • How a Special IRA makes more money than a regular IRA that is limited to modest returns from passive investments... • How to turn your IRA into a powerhouse for accumulating tax-free wealth... And much, much more...Find Out More Here. Chris Mayer's Capital & Crisis Presents: The Biggest Retirement Scam In American History! Mad men drunk on power and driven by greed are robbing YOUR retirement! Most sickening of all, Washington fully endorses this bold-faced assault on your wealth. But Chris Mayer is exposing this scam in his brand new video presentation. PLUS, he'll show you how you could protect and even grow your wealth in spite of this scam, virtually spitting in the face of these elitist thieves. Don't be a helpless victim... Click here to act right now. And now over to Bill Bonner with the rest of today's Reckoning from Poitou, France... Mr. Market's Next Attack Think $3 trillio in paper losses is bad...wait 'till you see this Bill Bonner Whew! What a week. Traders must be reeling. The rest of us are staggering. And nobody knows anything. Is this market going up or down? We don't know. But wherever it is going, it seems to be in a hurry to get there. It collapsed on Monday, soared on Tuesday, collapsed again on Wednesday and soared again on Thursday. The Netscape News report: The Dow Jones industrial average soared 423 points. It had already fallen 634 points Monday, risen 429 Tuesday and fallen 519 Wednesday. Never before has the Dow had four 400-point swings in a row. The pieces of news that sent Wall Street rocketing higher were not exactly blockbusters: Cisco Systems said its profit was better than expected, the job market got a little better, and France tried to raise confidence in its shaken banking system. But this is a week in which any move by the market — higher or lower — seems to touch off an investor stampede. So it was on Thursday, when stocks shot higher at the opening bell and never turned around. So, nobody knows why the stock market went up yesterday. Of course, they don't know why it went down the day before either. That's why a lot of old market hands get tired of wondering about it. "Just show me the chart," they say. They don't believe it's worth trying to figure out the why...they just look at the pattern. But when we've looked at the charts we still don't know anything. Maybe the seasoned pros can see things we don't. To us, they're just as confusing as everything else. Mr. Market is a cagey fellow, no doubt about it. And if he has a story to tell, he keeps it to himself. That said, he's only natural. And there are certain natural laws that even he has to obey. For example, he can't allow debt to build up forever. There always comes a moment of awful recognition, when lenders realize they've been idiots...when they see that they won't get their money back. Savvy speculators try to sell the debt short before lenders catch on. Nor can asset prices run too far ahead of real values for too long. Sooner or later comes a moment of reckoning, when asset values and asset prices converge. Savvy speculators bet on convergence. They buy when a stock is far below its real value...and sell when it is far above. But Mr. Market is a fooler. He doesn't make it easy. All over the world stocks are down about 20% from their recent peaks and about 5% to 10% for the year. But they're far from cheap. Shiller's normalized earnings put the P/E on US stocks today at about 20. Major bear market bottoms come with the P/E down at 6 to 8. The typical bottom, according to Shiller, comes at about 13. So, if this were a bear market (we don't know)...and if it were a typical bear market (we don't know that either)...it would bottom out at about 8,000 on the Dow (now, 11,143). If this were a major bear market, we'd look for a bottom in the 4,000 to 6,000 range. We don't know what game Mr. Market has in mind. But we know he can play a cruel hand. It's not that he has no sense of pity. He just wants to teach a lesson that investors won't soon forget. Here's what we think he's up to: First, he will dally around a bit. Let investors recover their breath and their nerve. Then, he'll move prices back up....this would draw more money into the stock market. When most of the seats in the theater are full look for a furry creature sneaking around with a can of gasoline in one hand and a pack of matches in the other. He'll set fire to it. Stocks will go down...stabilize...then go down again. Then, Warren Buffett will announce that he is buying. The Fed will announce another QE program...perhaps with a different twist. What ho! Stocks will soar...and then fall again. Down, down, down...they'll drop to their level of March '09...and keep falling until they have finally found their bottom -- maybe 3...maybe 5...maybe 10 years from now. The bear in the stock market will send investors fleeing to the shelter of the bond market. In a stagnant, Japan-like economy, even with trillion-dollar deficits, bond yields will stay low. Investors will get 2% on 10 year T-notes. "Better than losing money in the stock market," they'll say. Households will put their savings into US Treasury debt -- something they can count on. Businesses will store their cash in US Treasury debt, after all...no point in investing in new plant and equipment. Financial institutions, too, will seek out US Treasury bonds as the only place where they can still place money safely. Ben Bernanke has pledged to keep the key lending rate near zero. Bankers now know they will be given free money for the next two years. All they have to do is take it...and lend it back to the US government! And then, when the bond market is fat and happy...and the nation's savings have been transferred to the government and consumed by it, Mr. Market will creep up again -- like a thief in the night -- and give it a wallop. Just in the last few weeks, stock market investors lost about $3 trillion of wealth -- on paper. How they will look back on these days with pleasant nostalgia! Mr. Market's next attack on stocks will wipe out $10 trillion. And when he whacks the bond market, he'll take out another $10 trillion. And this time, it won't be just ‘paper' wealth. It will be real wealth...the savings built up over millions of lifetimes of hard work. And more thoughts... Have the riots reached New York or Boston yet? As Dear Readers know, we have wondered what this Great Correction really intends to correct. At a minimum, it seems destined to correct the 50+ year build-up of debt. But maybe it will destroy modern social-welfare governments too. The model is simple enough: citizens give up a portion of their freedom and a portion of their money. In return they get safety...protection...and something for nothing. The typical voter believes he will get more than he paid for...he counts on his government to rob those richer than he is and transfer the loot to him. The system works -- for a while. But as these governments mature they become more expensive, rigid, and zombified. More and more people find ways to get something for nothing. More and more join the underclass, because it is easier to live at someone else's expense, even if you can't live very well. Pretty soon, there are zombies all over the place. The Cameron government in the UK -- like almost all social welfare governments -- spends more than it can afford. It realized it had to stop feeding the zombies so much. It announced cut backs. This week, the zombies counterattacked. ‘They don't treat me right,' said one zombie quoted in the International Herald Tribune. ‘They just give me enough money to eat and watch TV.' When they are not eating at taxpayer expense...or watching TV at taxpayer expense...in an apartment paid for at taxpayer expense...wearing clothes furnished at taxpayer expense, they are likely communicating by cellphone or Blackberry or I-phone, also provided at taxpayer expense. This week, the zombies got in touch with one another and decided to upgrade their lifestyles by breaking into shops and stealing things. That too, was at taxpayer expense. But it wasn't an expense authorized by the peoples' representatives in Parliament. The zombies had declared war. The British feds were outraged. They had spent so much money on these people. Why were they biting the hands that fed them? Ah...you know the answer, Dear Reader. Because the system had turned almost a whole generation of people into zombies. Zombies are used to getting something for nothing. If they get it from the feds ...or take it directly, what is the difference? And what else do they have to do? Watching TV all day is boring. For a brief time this week, zombies were on the march. It probably won't be the last time. The Zombie Wars have begun. Regards, Bill Bonner, for The Daily Reckoning