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The Daily Reckoning | Thursday, September 8, 2011 Markets “mix, fall and wobble” ahead of Obama’s jobs speech, The Keynesian mindset: Laying the groundwork for QE3, Plus, Bill Bonner on stocks, housing and the frightening pastime of making heroes of killers... ------------------------------------------------------- Why I’ll Help Fly You to an Elite Meeting... There are only 300 spaces, total, for this elite meeting. That means only 300 people get access to the strategies a world-class group of experts are ready to reveal. Why would I help fly you to this meeting — while also helping to cover your other expenses? Get all the details — right here. But Hurry — this offer closes at midnight tonight. President Zero on Job Destruction What to Make of Obama’s Jobs Speech...Before it Even Happens Joel Bowman Reporting from Buenos Aires, Argentina... Attention comrades, workers and tax slaves! Tonight is the night! Get your tickets! Turn your televisions up and sit your buts down! From the people who harass your small business...from the folks who regulate your entrepreneurial spirit into submission...from the clerks who mandate outsourcing, expropriate your profits and who cannot “create” one job without first destroying two, comes... The Presidential Speech on Job Creation! The papers were abuzz with excitement this morning. Journalists rushed to put ink to paper, careful to do so before they had time to think. “Wall Street Mixed Ahead of Obama Speech,” announced one headline. “Wall Street Falls Ahead of Obama Speech,” countered another. “DJIA Wobbles Ahead of Obama’s Jobs Speech,” opined a third. What are we to make of all this, Fellow Reckoner? Is it a wobbly, mixed fall we have on our hands...or a falling, mixed wobbly? And how are we to respond to these vacuous oddities, equal parts curious and meaningless? No matter. President Zero — so dubbed because of the precise number of jobs “created” last month — will surely fill us all in this evening. He’ll tell us how the world works, how the foreigner’s loans should be spent and how the savings of future generations should be allocated today, before they are even earned. Commenting under a wire story on rising jobless claims ahead of Obama’s speech, one perceptive gentleman gives us a taste of what’s to come: “Tonight’s focus group buzzwords for the ‘jobs speech’: Bi-partisan, Compromise, Sacrifice, Rich folks, Those of us, I, Me, My...” The list goes on. You can probably think of a few more heartstring, bumper-sticker catchphrases too. Hey, maybe we can make a game out of this. One shot of tequila for every mention of the word “compromise.” A swig of whiskey for every “sacrifice.” A chug of beer for every “ordinary Americans,” “party politics” and “in the nation’s best interests.” Of course, you’d be on the floor within the first two minutes...but at least you wouldn’t have to listen to the rest of the speech. Unfortunately, however, that won’t be the end of it. Not by a long shot. When the applause is over and the citizenry is back to the grindstone (provided they can find a stone on which to grind), the opposition will give us their version of the way the world works. “Too much money spent here...not enough funding over there,” one will contend. “Less on infrastructure, more on schools,” another will counter. “What about my [insert special interest of choice here] group?” begs another. The politicos will fight over that which isn’t theirs like a feral mob looting a sacked city. Lone will be the voice who calls for no spending, no demonstrably impotent “job programs,” no meddlesome intervention. The opposition’s rebuttal will be, in other words, many different versions of the same wretched thing. What all world improvers fail to recognize is that the state, by its very nature, cannot simply “create” jobs. One needn’t look past the government’s own statistics to see that. We noted the zero jobs added last month above. Applications for unemployment benefits rose to 414,000 last week — outpacing experts’ expectations (again) — from an upwardly revised 412,000 the previous week. But for one week in early August, claims have remained above 400,000 since early April. And it’s not just a “rough spot,” a problem that spans a few weeks or even months. It’s the story of the decade, as Bill noted in yesterday’s issue: 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. But even if the government could create jobs, how would it know what jobs to create? At what price? In which sector of the economy...and at the expense of which other? In a free market, it is consumers who ultimately decide what jobs, what goods and what services are needed when and where. Demand provides price signals, helping businesses to direct their resources and capital for maximum impact. As a “para- market” entity, the government is privy to no such signals, save for a dog and pony popularity contest held once an Olympiad, designed to fool voters into thinking they have the “power of choice.” That not all jobs are created equal is obvious. President George W. Bush, for example, was very good at putting people to work dropping bombs on people’s heads in faraway lands. But bombs are expensive...to say nothing of other people’s heads. One number we saw recently put the costs associated with the wars in Afghanistan, Iraq and Pakistan at nearly $4 trillion dollars, an amount equal to between one-quarter and one-third of the entire national debt. Seeing how costly, how unsuccessful these foreign misadventures were, President Obama, a Nobel Peace Prize recipient, couldn’t help but to expand the bombing to Libya too. The feds have spent trillions of dollars at home too — through various bailouts, shovel-ready programs and other stimulus gimmickry — trying to get people back to work. Unsurprisingly, their programs are not working. Folks are not going back. And in many cases, they never will. Of course that won’t stop the feds, with their committed aversion to learning from mistakes, from spending trillions more dollars retesting their failed theories. In the end, job creation is not a “rabbit out of a hat” equation. The rabbit must first come from somewhere, just like the money for so-called “jobs programs.” “The role of a good economist,” wrote Chris Mayer recently, referring to a key insight championed by the likes of Frederic Bastiat and Henry Hazlitt, “is not merely to show that which is seen, but to reveal that which is unseen.” Readers can judge for themselves the “seen” consequences of state intervention in the job market. The unseen will be the burden carried by future generations, born into a nation that has already squandered everything they are yet to earn, abused its currency to death and sunk the economy beneath unserviceable debt. “These Keynesian ‘cures’ of endless inflation and debt to fix our economic malaise are offered,” wrote Michael Pento, newest addition to the Agora Financial team, in today’s edition of The 5-Minute Forecast, “because there is a profound lack of understanding of what causes a depression in the first place.” And, as the saying goes, those who don’t learn from history are doomed to repeat it. Dan Amoss, Agora Financial’s resident short seller, explains in more detail some of the fundamental flaws of the Keynesian mindset in today’s column, below. [Ed. Note: Mr. Pento, by the way, will be just one of a select group of editors speaking at our Safety and Survival Summit in Baltimore next month. The Summit is a chance for Agora Financial Reserve members to hear first-hand up-to-date strategies on how to avoid the fallout of growing state intervention into things like the job market, the stock market...and, ultimately, your back pocket. We’re keeping a strict cap on the number of people who can attend, to keep the event as personal and intimate as possible...but we still have room before we close the doors tonight at midnight. Details here.] P.S. For a full rundown of what you get with a Reserve membership, including exclusive access to our Safety and Survival Summit, feel free to review this invitation. And don’t forget, almost no one pays full price for admission. It works like this: If you already subscribe to one or more of our high-end services, you’re eligible for a substantial discount from the one-time fee. We’ll credit your account based on the remaining time of your existing subscriptions. How much can you save? The answer is different for everyone...but my friend John Wilkinson is standing by, ready to give you a personal answer. He’s manning the phones late tonight, working till 7 p.m. EDT. Give him a call at (866) 361-7662. The Secret Financial “Timebomb” Nobody’s Talking About Forget the DC debt circus... this secret Saudi event could double your cost of living, in more ways than one, starting as early as the end of this year. Nobody wants to talk about it... and not Obama or Congress have any idea what to do, once this event starts to unfold. Once it does, get ready to kiss your savings goodbye. Hear our shocking new warning in this special report... The Daily Reckoning Presents Stay Short! Dan Amoss The global economic backdrop continues to provide many reasons to sell stocks, but very few reasons to buy them — gold stocks being one of the few exceptions. The weight of US economic data points to a recessionary environment over the next few quarters. Analysts have not cut their 2011 and 2012 earnings estimates far enough to reflect the recent dramatic deterioration in economic conditions. The stock market may seem somewhat cheap, based upon overall valuation numbers. But that’s not necessarily encouraging. The stock market typically looks cheap on a trailing earnings basis ahead of a recession. So I would expect the stock market to remain week for several months, but probably not collapse. That’s because the very low yields available on bonds are unlikely to attract capital away from the stock market. On the other hand, low rates can’t really send stocks surging, either. In the coming months, I expect most stocks to slowly grind lower, interrupted by bursts of central bank- fueled rallies. The euro crisis may come to a head in the next few weeks. Germany may need to suffer a 2008-style market sell-off before the public is scared enough to support the “Eurobond” concept. This fear catalyst alone could pull down the rest of the global stock market, given the size of the problem — at least until we see a fiscal transfer union and/or a much more aggressive European Central Bank. And the Federal Reserve looks like it’s laying the groundwork for QE3. We have seen trial balloons floated in the press — most recently by Chicago Fed president Charles Evans. In an interview with The Wall Street Journal, Evans said, “We need to do much more to increase the level of [monetary] accommodation.” In a CNBC interview, Mr. Evans expressed his opinion that demand from emerging markets — not QE2 — drove the 2010-11 rally in commodities. Therefore, using Evans’ logic, another round of QE “accommodation” would not lead to another surge in commodities. Apparently, the academic ivory tower blinds one from the obvious: QE2 exported US dollar inflation to China and other export-oriented economies. They have been returning the favor in the form of higher prices for products exported to the US. QE3 would accelerate this trend, possibly even sparking a panic out of US paper. This is a longer-run prospect if the Fed doesn’t start acknowledging the connection between the size of its balance sheet and commodity prices. In the shorter run — as in the next several weeks — the stock market would likely have to sell off sharply from here before support for more QE reaches a critical mass. Then, once QE3 is implemented, after a short “sugar high,” the stock market would look ahead and start discounting the impact of higher raw materials prices on future cash flows. Companies without pricing power are at risk of a margin squeeze. In particular, several of the companies that I have recommended selling short in my investment service,Strategic Short Report, are facing this exact risk. It’s obvious that the appetite for more “fiscal stimulus” is not great. Tonight, we’ll hear President Obama’s latest job creation proposal. There will be the typical Keynesian “get cash into consumers’ hands” proposals — stimulus that won’t work...again. But there’s a chance the Obama administration might try to implement a backdoor, off-balance sheet, stimulus plan. Several newspaper articles have hinted that we could see a proposal to streamline mortgage refinancing through Fannie Mae and Freddie Mac. This could happen regardless of Republican opposition. These two housing-bubble-inflating institutions have been out of focus since entering conservatorship three years ago. They guarantee hundreds of billions worth of mortgage-backed securities that pay yields in the range of 5-7%. The homeowners paying these rates haven’t been able to refinance, mostly due to a lack of home equity. Loosening the loan-to-value requirements could result in a surge in refinancing at rates closer to 4% for 30-year mortgages, which would result in a wealth transfer from creditors to borrowers. While putting extra monthly cash into many household budgets, this policy would be the latest in a long line of policies we’ve seen over the past three years to transfer wealth from savers to borrowers. This idea looks like it has Ben Bernanke’s fingerprints all over it, because he seems frustrated that his rate cuts haven’t translated into cheaper borrowing costs for many households. Also, if many GSE- guaranteed mortgages currently yielding 5-7% were to prepay after refinancing, Bernanke could reinvest the proceeds of the Fed’s mortgage-backed security holdings into more Treasury purchases...a “mini QE” operation. Such a plan, if it unfolded, would add to the inflation problem in the US. As long as the Fed and other central banks maintain super-easy policies, we will see a steady erosion of corporate profit margins. Directly: The cost structure of operating business will make “higher highs,” in technical parlance. Indirectly: Corporate pricing power will remain weak as commodity inflation is working its way through the pipeline, squeezing household budgets. But none of this is obvious to Fed economists, because their Keynesian models don’t say that the world works this way. In the wake of last week’s depressing payroll report, it looks like we’re back into another leg of the “risk off” trade. Plus, the European banking system remains stressed. Hold your short positions! Regards, Dan Amoss, for The Daily Reckoning Joel’s Note: Dan’s Strategic Short Report is another tool in the suite of vital research services on tap for Reserve members. We mentioned a few of the benefits regarding Reserve membership above — including invitation to our Safety and Survival Summit in Baltimore a few weeks from now — but for a full rundown, please view this invitation. The reserve offer closes tonight at midnight. No exceptions. Bill Bonner A Zombie Economy Following Unfaithful Shepherds Bill Bonner Reckoning from Baltimore, Maryland... For the shepherds have become stupid and have not sought the LORD; therefore they have not prospered, and all their flock is scattered (Jer 10:21). The unfaithful shepherds...and the jackasses... A big day up yesterday. The Dow rose 275 points. Gold dropped $55. What’s the matter with investors? They should be selling gold AND stocks. Why? Because we’re in a Great Correction. Not a boom. Not a recovery. Not anything except a Great Correction. What does that mean? It means Mr. Market is correcting the errors of the past. We don’t know exactly which errors — it depends on how rambunctious he gets — but we know we won’t ever go back to where we were in 2007. We have to go on. Forward. Adelante, to give it a certain Latin sashay. But where to? C’mon...you don’t seriously think we know, do you? Of course, we don’t...nobody knows the future. But just wait until Mr. Obama gets on the TV screen. He’ll tell us where he wants us to go. We’d like to tell him where to go too... But, heck, he’s the POTUS. We’re just a lowly scribe...a miserable molder of mediocre memes. A financial Jeremiah...always warning...worrying...predicting doom and gloom. But wait. Didn’t we tell you the bubble would pop in 2007? Didn’t we tell you that real estate would go down 30% or more? Didn’t we warn you to get out of stocks and into gold 10 years ago? Sometimes right. Sometimes wrong. Always in doubt. But what we see now is an unfaithful shepherd... A central bank that has turned its back on the currency it is meant to protect... A government that has betrayed the principles it was set up to defend... And an economy that has turned into a zombie. It’s somewhere between alive and dead... Pretending to be a capitalist system...but a capitalist looking for a handout. Consumer confidence numbers continue to sink... Housing prices continue to fall...while housing starts bump along at depression levels... More and more people are moving into long-stay motels...more and more are on food stamps. An ABC poll tells us that Obama’s DIS-approval rating has increased to 60%...with most Americans convinced that his jobs proposal (to be announced today) will not work. The output gap — roughly the difference between what the economy should produce and what it actually does produce — is at 7%. It’s never been this high at this stage of the business cycle. Had enough? Well, it gets worse. Because the effect of the unfaithful shepherds’ bailouts has been to shift more and more wealth to the people who were wealthiest already. Business profits — especially in the financial sector — soared. Wages fell. And now, even old people can’t pay their mortgages...so they’re stuck in jobs, leaving the young with nothing to do. The youth unemployment rate is one in four; it’s a wonder they are aren’t burning cars and rampaging through cities. But they live in the suburbs and probably can’t afford the bus fare to get into town. This is becoming a dangerous situation. Former Labor Secretary Robert Reich explains: The 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics. During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns. Starting in the late 1970s, the middle class began to weaken... The middle class nonetheless continued to spend, at first enabled by the flow of women into the work force. (In the 1960s only 12 percent of married women with young children were working for pay; by the late 1990s, 55 percent were.) When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise it seemed a painless way to get additional money. Eventually, of course, the bubble burst. That ended the middle class’s remarkable ability to keep spending in the face of near stagnant wages. The puzzle is why so little has been done in the last 40 years to help deal with the subversion of the economic power of the middle class. With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators — through early childhood education, better public schools, expanded access to higher education and more efficient public transportation. Of course, Reich goes on to misunderstand everything. He thinks the rich got richer because government was not ambitious enough. The real problem was that the rich were able to use ambitious, activist government to their own ends. The unfaithful shepherds rigged the game in their favor. And more thoughts... Last night we watched TV. There was a show called “Killing Bin Laden.” We do not normally react to political commentary, except to laugh. But the “Killing Bin Laden” show gave us the creeps. We laughed. But it was a bitter, worried laugh. The show describes, with evident pride, how a group of American soldiers trained carefully...and used the latest gee-whiz military hardware to murder unarmed, apparently completely innocent people. Encountering bin Laden’s wife, for example, the soldiers made no attempt to protect her...or to rescue her. They just gunned her down. As appalling as this was, what happened next almost took our breath away. An “expert” appeared on screen. In a single sentence, this jackass excused the killing by saying “it was permissible” or some other claptrap. What exactly was his rationale, we don’t know. He didn’t say. Even in times of war, soldiers are not supposed to kill civilians. Heck, these soldiers probably shot his dog too. You may be allowed to kill enemy combatants (which is a huge stretch for Bin Laden)...but what kind of army kills their wives and children too? If this ‘expert’ doesn’t go to Hell we’ll be disappointed in the whole structure of Heaven. Our “History of the Jews” book has made us think. It has a lot of instances of mass murder masquerading as military action. And then, when the Jews had been massacred, their cities destroyed, and their wives and children sold into slavery, they asked why their God had forsaken them. The prophets answered: ‘because we forsook Him.’ It was a good answer. They argued that the Jews had been corrupted by politics...and then they became its victims. Those who lived by the sword, perished by it. Rough justice, administered by God himself. So, what’s in store for a nation that makes heroes of killers? We don’t like to think... Regards, Bill Bonner, for The Daily Reckoning