 | | The Daily Reckoning | Wednesday, September 7, 2011 |
- Markets catch a cold — One leading indicator to keep your eye on,
- Courage under fire: Chris Mayer’s stock “watchlist” begins to blossom,
- Plus, Bill Bonner with thoughts on “President Zero” and plenty more...
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|  | | | Dr. Bernanke's Ineffective Elixir | | Why There's No Employment Growth in America's Profit Centers | |  | | Eric Fry |
Reporting from Laguna Beach, California...
The financial markets seem to have caught a runny nose. But at this point, it’s hard to say if it’s the runny nose that follows a mild allergic reaction or the one that precedes a life-threatening pneumonia.
Despite a chronic case of the sniffles, the stock and bond markets of the world have performed reasonably well for most of the last of the two years. Even though the financial markets are acutely allergic to most strains of credit distress, Dr. Bernanke’s “Liquidity Elixir” has provided an effective antidote so far.
Even so, we suspect the elixir is treating symptoms, rather than the disease itself. Debt liquidation — either by repayment or default — continues to hobble economic growth worldwide, and also to terrify stock market investors.
Economies usually thrive when private-sector credit is expanding, and struggle when private-sector credit is contracting. The latter circumstance is the one that pertains today. To make matters worse, public-sector credit is expanding.
In effect, the US Postal Service and the IRS are increasing their indebtedness, while Apple Computer and ExxonMobil are reducing theirs. Unfortunately, “cost centers” like the IRS do not create employment growth; “profit centers” like Apple Computer do.
Therefore, when a country’s profit centers are retrenching, its job- creating engines will also be retrenching. And when a country’s job- creating engines are retrenching, nothing good can happen. Employment growth stagnates and credit distress accelerates throughout most parts of the economy.
Welcome to America, 2011.
Despite trillions of dollars of federal stimuli, the US economy can’t seem to shake off its hangover. Businesses are slow to invest and slow to hire. As a result, household finances continue to deteriorate...and defaults continue to mount.
Not surprisingly, many of the world’s largest financial institutions are just as sick as they were three years ago. And many of the world’s largest governments are even sicker. Dr. Bernanke’s elixir may be able to work wonders, but it can’t work miracles.
Bad loans go bad...eventually.
Bad loans go bad, no matter whether the borrower is a mortgage- holder who “bought” more house than he could afford or a government that promised more benefits than it could afford.
The only time a bad loan “goes good” is when a central bank or a national treasury or some other “angel investor” intercedes to rescue the lender from his own incompetence.
The problem with this selective intercession is that it alters the course of history for selected institutions or individuals, but not for the economy at large. Selective intercession is a sand castle. It might divert a wave or two. But after three waves, you would never know the thing was ever there.
Three years after the bailouts of 2008, the sand castles of government intervention are gone. Only the pounding surf of debt liquidation remains...and the surf is pounding away, both at European governments and at American households. As such, the signs of credit distress are increasing.
These signs take various forms. But one of the most telling forms is the direction of LIBOR interest rates. LIBOR stands for “London Interbank Offered Rate.” It is the rate at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank lending market).
In most circumstances, LIBOR rates track short-term Treasury rates. But in the midst of crisis conditions, LIBOR rates tend to spike, while Treasury rates fall. That’s exactly what happened during the credit crisis of 2008, as the chart below illustrates.
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In the depths of the crisis, LIBOR rates soared, reflecting the reluctance of banks to lend money to other banks. The more worrisome the crisis seemed to be, the higher LIBOR rates climbed. As such, the LIBOR rate functioned as a kind of “fear gauge.”
And so it remains...
During the last few weeks, LIBOR rates have been on the rise once again. They have not risen high enough to sound a distress signal, but they have risen high enough to raise an eyebrow.
Let’s call it an early warning sign.
So whatever else you may be watching to guide your investment decisions, don’t forget to watch LIBOR.
| | | | URGENT Crisis Alert: Where’s the Bottom of this Market Correction? |
Trillions in wealth has vanished from the stock market in the past month. Europe’s on the brink of economic collapse. China’s growth is slowing down.
Making matters worse, banks around the world scramble to avoid complete failure (again!) And the US public has finally stood up to years of reckless federal spending...
How do you beat it all? Watch this right now for the answer. Hurry — time is short.
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| | The Daily Reckoning Presents | | Fear and Loathing on Wall Street | |  | | Chris Mayer |
Ah, I love the smell of fear in the morning! Stocks around the globe are getting hammered. So the only thing selling faster than stocks these days is replacement underwear.
The usual suspects are at work again. Greece is about done. The yield on 1-year Greek bonds rose to 82%. Think about that. That’s the market saying a Greek default is inevitable. But the problems, of course, don’t stop with Greece, or this wouldn’t be worth reporting. All of Europe is under a cloud. The banking system is on the verge of collapse.
Europe has the same problem the US did in ’08, except that in the US, banks held mortgage debt that was going up in flames and opening up huge craters in bank balance sheets. In Europe, it’s sovereign debt. In other words, European banks hold Greek government paper, and Italian government paper and Spanish paper and the rest.
Josef Ackermann, the CEO of Deutsche Bank, summed it up: “It is obvious, not to say a truism, that many European banks would not cope with writing down the government bonds held in the banking book to market value.”
As the value of those bonds collapses, European banks become insolvent. Those bonds are earning assets for the banks. Against those assets, banks have large liabilities to depositors. So if the bonds go poof, the bank is left with liabilities it can’t meet.
This is why the European Central Bank (ECB) has been buying bonds from the banks. This way, the bank gets a clean asset (cash) and transfers the junk on the ECB.
Recently, global bank regulators unveiled something called a “liquidity coverage ratio.” The regulators wanted banks to hold enough easy-to-sell assets to withstand a 30-day run on the bank’s funding (or deposits). An inability to do this is what doomed Lehman Brothers in 2008.
JP Morgan found that only seven of the largest 28 European banks met this test. By their measure, European banks fall short by 493 billion euros (almost $700 billion).
This is the doom we are under. And the list doesn’t end there. The US still has hideous fiscal problems and a weak economy. Plus, the big emerging markets are slowing down too.
What’s going up? Gold rising to $1,900 and $2,000 seems a cinch.
I was at a party on Saturday night. A friend of mine, knowing of my enthusiasm for the yellow metal, told me that he heard “gold is in a bubble.” I don’t think so. Not with all this stuff going on.
Besides, the Chinese are buying gold hand-over-fist. In 2010, they imported five times as much gold as they did in 2009. In 2011, they will top those figures. In China, the government actively encourages its people to own gold as part of their personal savings plans. And I will never forget visiting the Cai Bai gold market in Beijing. That place was hopping, just packed with people buying gold: gold figures, gold bars, gold coins, gold jewelry.
Gold stocks still lag the metal and remain a compelling buy. Jim Slater, the old corporate raider and now private investor, wrote a column in The Financial Times making a case for gold stocks. Slater compared gold stocks to companies dependent on consumer spending.
“Gold mining companies are benefiting from the tail wind of the gold price that is massively increasing their revenue and future cash flow,” he writes. “In contrast, companies that rely on consumer spending are likely to run into a very strong head wind. I know where I would rather have my money.”
To be clear, I don’t have an apocalyptic view of the world. Yes, US stocks just finished the worst August in a decade. And yes, we’re off to the worst September ever. But the underlying values of good assets and businesses fluctuate much less than the stock market. So during times like this, you are more likely to find wide divergences between stock prices and real-world values.
I’ll tell you this: My watch list is starting to make me salivate. It’s times like this that make me wish I had more money.
I’ve been buying into this decline personally. I’ve been trying to pace myself and go slow because I know that I am usually early. In 2008, I bought stocks and had most of my chips in by December. Of course, a nasty drop remained before we finally hit bottom in March 2009.
But the timing didn’t really matter so much. In the end, stocks I bought in late 2008 repaid me with at least a double in 18 months. It can seem like an eternity when you are going through it. Day after mind-numbing day of watching stuff drop. It’s especially painful when you look at something you picked up only a few months ago fall by a third.
Still, you’ve got to have resolve and confidence in the value of what you own or markets like these will just chew down your net worth as you bail out. You’ll miss, too, the inevitable rebound.
I remember putting money in an oil & gas stock (ATP Oil & Gas) in November 2008 only to watch it get cut in half by March 2009. But by September of 2009, that stock had tripled from where I bought it, and I booked a huge gain.
I remember seeing lots of stocks hit big air pockets in 2008, only to bounce back strongly. Not everything bounces back, of course. Inevitably, some stocks will break. But by and large, I expect the companies I have recommended to my subscribers to hold together.
Typically, the companies I recommend have good balance sheets with excess capital and/or generate strong cash flow.
And even the speculative companies I recommend have enough cash to advance their corporate development to the next level or are already at self-sustaining levels. The upside is tremendous on many of these. That’s why falling prices are often terrific buying opportunities. Successful investors are usually owners, not traders.
I have along list of prospective buys now. A lot of the market is still a “sell,” even after this summer’s selloff. But if you can sit still and wait a year or two (or dip in and buy), I think you will be repaid for your courage and cool-headedness amid the fear and loathing on Wall Street.
Regards,
Chris Mayer,
for The Daily Reckoning
P.S. I’ll be delving into a few of the companies on my watch list as they move into the buy zone over the coming weeks and months. Every week I sent a quick update email to my Capital & Crisis readership, alerting them to these opportunities as they present themselves. As I said, there are going to be plenty of rewards for those with the courage to run against the heard here. If you’d like to begin receiving these weekly, stock-specific updates, feel free to join us here. My next alert is due out this Friday.
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Judgment, pestilence and bloodshed — are they headed for the USA?
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| | | | Bill Bonner | | Counting the Zeros in the US Economy | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Poor Mr. Obama. They’re calling him “President Zero.” Why? Because August produced zero new jobs.
But we Daily Reckoners were way ahead of the story. Almost everywhere we look we see a circle with a hole in it.
How many new jobs have been created in the last 10 years? Zero.
There were about 130 million jobs in America in the year 2000. There are about 130 million today.
How much more does the average wage-earner make? Zero. Adjusted for inflation, he made about $16 an hour in 2001. He still makes about $16 an hour.
How much more are stocks worth? Zero.
How much more does a house sell for? Zero.
By all the important measures, Americans are Zero better off than they were a decade ago.
But wait. They’re much worse off. They have much more debt. Here are some numbers that aren’t zero. In round numbers, total debt to GDP increased from around 200% to over 350%. Federal debt alone went from 57% of GDP to nearly 100% today.
And now the markets are beginning to realize what happens to prices when there’s too much debt in the system.
The Dow was down 100 yesterday. No relief from the bear market.
Gold down $3.
At least, gold is moving in the direction we think it OUGHT to move. Not that we’ve got anything against it. But gold is up a whopping 33% this year. That ain’t natural. It ain’t normal. And it probably ain’t gonna continue.
Don’t get us wrong. We’re gold bugs. We believe the feds are the problem and gold is the solution. But we weren’t born yesterday. And we don’t think the time has come for gold to make its final, blow- off climax.
No, dear...dear reader. We’re still in the foreplay stage. The hot action will come later. Probably much later.
In the meantime, we are in a Great Correction...and now, at last, almost everyone knows it. There was no normal recession. And now there’s no normal recovery.
The latest proof came from the employment numbers. The New York Times was on the story:
The government report on hiring, released on Friday, prompted another round in a relentless diminution of economic expectations. The unemployment rate, at 9.1 percent, did not change last month, and the White House said it was expected to stay that high through at least 2012.
The optics of a giant zero in the jobs column — more symbolically powerful, perhaps, than even a small decrease might have been — increase the pressure on President Obama as he prepares to deliver a major address on job creation next week, on Republicans who have a starkly different approach to economic revival and on the Federal Reserve, whose policy makers have been divided over the wisdom of using its limited arsenal of tools to get the economy moving again.
The White House immediately seized on the report to bolster the president’s impending call to action. Republicans countered that the numbers were further proof that the stimulus policies of Mr. Obama, whom they quickly dubbed “President Zero,” were not working.
This is not the first time that job growth, the most important measure of the economy for many Americans, has ground to a halt since the recovery. It dropped into negative territory in the middle of last year after three months of strong showings. This time, the slowdown comes after the earthquake in Japan, a spike in oil prices and the European debt crisis, in addition to political gridlock in America. No, the quack remedies aren’t working. But that doesn’t mean they aren’t popular. In fact, we’ll make a prediction. The less they work, the more popular they’ll become.
That’s the formula for success in a city like Baltimore. You fail. They give you money.
It will become the feds’ favorite formula too. Their recovery claptrap won’t work. The economy will drag its butt down Tokyo lane...and people will clamor for more bailouts. President Zero will have to ‘do something.’
We expect he’ll come up with some Rooseveltian jobs program. How many real jobs will it add? A big, fat zero.
Stay tuned.
And more thoughts...
Home again, home again...back to B-more...
Baltimore is, of course, a dump. But it’s our dump. We like it. Drenched in rain, the city glistens. It has been hosed down by a hurricane and now looks almost clean.
Compared to the gritty streets of the Bowery and the Lower East Side, the Mount Vernon area of Baltimore is pristine.
This weekend, we drove up to New York. Elizabeth’s car wouldn’t start after sitting for two months, so we took the pickup. The truck — a Ford F-150 — is very comfortable. But it has a badly-dented tailgate, a victim of your editor’s rush to put away things just before leaving for Europe. He had backed up a little too fast and ran into a tree. So, we had to tie a piece of rope onto the bumper in order to steady the tailgate on the back of the truck.
We listened to Paul Johnson’s “History of the Jews” as we made our way up the New Jersey turnpike to New York.
“We’re going to meet a lot of Jews in New York,” Elizabeth explained. “We should learn something about their history.”
The history of the Jews was fascinating, largely because there was so much of it. We had barely arrived at the time of David when we drove into lower Manhattan and found our rather chic hotel. We drove up to the front entrance. The valet parking attendant looked a little puzzled.
It was then that we realized that we looked like hicks. We were driving up to one of the city’s most fashionable and hippest hotels in a beaten up pickup truck.
“This is embarrassing,” said Elizabeth.
“No, it’s a mark of distinction,” we replied.
“Deliveries in the back,” said the attendant.
*** What is most interesting about the history of the Jews is that there is so much of it. The Jews had history when your editor’s Irish ancestors still walked on four legs and barked at the moon. And what a tale it tells!
Was there any tribe in the Middle East with whom the Jews didn’t go to war? Was there any error, sin or misfortune that the Jews had not committed or suffered? Is there any glory they have not enjoyed?
History is largely a record of war, disaster and misgovernment. And the Jews have more history than anybody. They kept records. They remembered. They taught and reminded.
Menachem Begin and the other terrorists who founded the modern state of Israel in the early 20th century surely studied how their ancestor Joshua had conquered Canaan three thousands earlier. Moshe Dayan must have felt the blood of David in his veins as he slew the Arabs and Syrians. Today’s president of Israel, Benjamin Netanyahu, must also learn from King Herod’s example from two thousand years ago.
But there has always been an uncomfortable tension between the Jewish culture and religion on the one hand and Jewish government on the other. The Israelites developed the world’s most advanced and sophisticated literature. In commerce they were unsurpassed. Their religion was perhaps the most humane ever. Asked by a cynic if the Torah could be understood by a man standing on one leg, the rabbi Hillel, about the time of Christ, responded:
“That which is hateful to thyself do not do it to another. That is the whole law. The rest is just commentary.”
But when it came to government the Jews made as big a mess of it as everyone else. David may have been a freedom fighter, but Solomon was a despot. Judah Maccabee may have been a reformer and a purist, but Alexander Jannaeus was a monster. He was the first to adopt the Roman practice of crucifixion, which he took up with some relish. In one orgy of meanness, he had 800 of his enemies crucified...and while they were still living, he had their wives and children brought out and their throats cut before their eyes. King Herod was little better.
Political power corrupts. Many Jews thought they were better off without it. They figured they couldn’t serve two masters. Either they were true to their religion. Or they bent to political necessities, which they saw as evil.
Like the rest of us, Jews seem to do best when they stay out of politics. They flourished under the Persians, the Seleucids, even the Babylonians. The Egyptian captivity, for that matter, was probably not so bad either, at least in the beginning. But in the 2nd century AD Roman Emperor Julius Severus, putting down the Bar Kokhba Revolt, practically wiped out the Jews in Judea.
That’s as far as we’ve gotten.
Regards,
Bill Bonner,
for The Daily Reckoning |
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