 | | The Daily Reckoning | Tuesday, January 31, 2012 |
- The Goldman Indicator: When this bank says “buy,” you say...
- Capitalism explained and remodeled by people who don’t understand it,
- Plus, Bill Bonner on the average American...the average Roman...and the average response to influence...
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|  | | | What We Know and What We Don’t | | Persistent Questions About the Future of the US Economy | |  | | Bill Bonner |
Reckoning today from Baltimore, Maryland...
We’ve covered a lot of ground over the past few months. Not much action in the markets yesterday, so let’s stop here and take stock.
What we know so far...
First, it was clear from the get-go that there was a bubble in finance and housing. The only people who couldn’t see it were the people in finance and housing...and the feds. It reached its peak in ’05-’07...then, exploded.
Second, it was obvious that the US economy entered a period of debt destruction — a Great Correction, we called it. There was never really any hope of ‘recovery.’ Once it blows up, you can’t put the pieces of a bubble back together.
Third, the question then was how long the Great Correction would last...which depended on what it was correcting. No one knows. We’re still correcting the debt bubble, which could take another 10 years or so. But this correction could be tough; there are other things going on. Which led us to start asking questions about what we don’t know:
Can any government in the developed world survive? Will there be enough growth to keep them from going broke? Was the growth of the post-war period a fluke? Was the Industrial Era driven entirely by cheap energy...a ‘growth spurt’ that is now played out? Are the developed economies so burdened by zombie institutions that they can never hope to compete with the emerging markets? How do governments shuck off the zombies?
Those questions gave us something to think about.
We saw, for example, that the theories of government were mostly wishful thinking, apologia, and claptrap. Government is raw force...used to transfer wealth and status to the insiders who control it. The reason for the triumph of democratic government is that it gives more people the illusion of power...and welcomes more people as insiders (however modest their participation). As time goes by, more and more groups get special privileges, contracts, jobs, tax breaks, bailouts, protections and redistributions. Eventually, there are more insiders collecting wealth than there are outsiders producing it. Then, reform is practically impossible. The political system is entirely under the control of the zombies. The only resolution of this is catastrophe — either in the form of bankruptcy, hyperinflation, war, revolution, or some combination.
Zombies are expensive parasites. The more political power they gain, the less flexible and adaptable the economy and the society become. Capitalism is corrupted. The ‘system’ cannot correct itself. Politicians may talk about cutting spending, balancing the budget, and protecting the nation’s finances. But they can’t do it. The leeches want more and more blood. Sooner or later, the host goes broke.
But bankruptcy is not the biggest menace — not for the US. An empire risks losing its soul as well as its money. That is the drama we are watching in the Republican presidential race. The devil has already laid his trap — the Pentagon budget, Homeland Security, Patriot Act, the Defense Authorization Bill, sidelining Congress, torture, the use of drones at home and abroad, the pre-meditated murder of Osama bin Laden. It is probably just a matter of time until it springs shut.
“Wait, Bill,” writes a reader. “You keep going on and on about the Pentagon. But the military is going to take the budget bullet, if you know what I mean. That’s where the automatic cuts are focused.”
Oh yeah? More below...
Of course, we don’t know what will happen. We’re just watching, wondering...guessing...like everyone else. We’re also probably a bit more ‘pessimistic’ than most observers. Because we have a lower opinion of our fellow man than most people do. Not that he is bad. But he is subject to influence. And sometimes the influences upon him are rotten. The average person we meet is a decent enough character; we almost always like him. But the average Roman in Caligula’s reign was probably a decent fellow too. Sometimes people get trapped...where the worst take over...and decent people can’t stop them.
More, after the news...
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This CEO Accidentally Reveals a Big Secret
Experts say North Dakota’s Bakken Oil Pool may hold 4-6 billion barrels of sweet, light crude.
But the CEO of the biggest Bakken oil company just let it slip that there’s as much as 24 billion barrels.
The thing is, there’s very little land left for drilling leases...
And that means Bakken oil companies may be worth 300%-400% more than most investors now believe.
You can watch this CEO’s incredible video footage here.
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| | The Daily Reckoning Presents | | Goldman Sachs is Probably Not a “Buy” | |  | | Eric Fry |
“I don’t know much about the stock market,” says Matt Taibbi, the witty critic of Goldman Sachs and other financial atrocities, “but when the O’Neills of the world start telling me what a great investment opportunity the American stock market is, I start getting the urge to buy canned food.”
The specific O’Neill that Taibbi mocks is Jim O’Neill, head of Goldman’s Asset Management department. “It seems,” Taibbi observes, “that O’Neill is predicting that the United States stock market may go up ‘15 to 20 percent [in 2012].’”
On its face, this prediction seems pretty tame...and harmless. But Taibbi — like many other cynical financial market observers — has learned to regard every pronouncement from Goldman Sachs with suspicion. Recent experience has demonstrated that “tame” and “harmless” are attributes that rarely operate within the Goldman Sachs business model. “Conniving” and “conspiratorial” seem much closer to the mark.
According to Goldman’s critics, the investment bank’s “recommendations” often advance a self-serving agenda. A “strong buy” recommendation from Goldman, for example, could mean the Goldman trading desk already owns the recommended security and is looking to unload its position into a rising market.
“The folks at Zero Hedge long ago caught on to Goldman’s pump-and-dump vibe,” Taibbi reports. “Here’s what they said when Goldman upgraded European bank stocks a few weeks ago:
Goldman has just started selling European bank stocks to its clients, whom it is telling to buy European bank stocks...Translation: run from European bank exposure. Sure enough, Euro bank stocks plummeted a few days after that Zero Hedge post.
As a result of Goldman’s alleged — albeit unproven — “pump-and-dump vibe,” its recommendations often seem very poorly timed (from the standpoint of its clients), which, of course, would make them very well-timed from the perspective of Goldman’s trading desk.
“Goldman is building an impressive résumé of sweepingly bullish predictions that later on, in retrospect, look more like signals to investors that they should have run screaming in the opposite direction,” Taibbi remarks. “A good example might be May of 2008, when Goldman boldly predicted that oil would go to $200 a barrel; oil would go on to peak at $147 less than two months later and crash to the floor soon after... Anyway, every time I read one of these rah-rah predictions, I get this feeling that I’ve seen this movie before.”
Concerning Goldman’s bullish outlook on US stocks, Taibbi remarks, “O’Neill apparently believes Ben Bernanke and the Federal Reserve will resort to another round of money-printing, and finally green- light the long-awaited ‘QE3,’ or third round of ‘Quantitative Easing.’
“The QE programs,” Taibbi continues, “involve the Fed printing hundreds of billions of dollars and pumping them into the marketplace, where they ostensibly stimulate the economy (although recent experience tells us that the money mostly ends up being swallowed by the financial services industry — but that’s another subject for another time). Anyway, Bernanke declined to go ahead with a third QE program in late 2011, but O’Neill apparently thinks we’ll get it in 2012.”
O’Neill is hardly the only Wall Street bigwig to predict rising share prices in 2012. And a 15% to 20% gain for the S&P 500 is hardly an outrageous forecast. So why does Taibbi make a big deal out of it?
Probably because of that old expression, “Fool me once, shame on you. Fool me twice, shame on me.” Goldman’s high-stakes hijinks are infamous. Remember, this was the firm that continuously packaged and sold mortgage-backed securities (MBS) to its clients, while simultaneously building a meaningful short position in the identical (or very similar) mortgage-backed securities. This practice was perfectly legal, but it was also perfectly scummy.
It was a little like selling tickets for an ocean cruise, then buying a disaster insurance on that particular cruise because you had some knowledge that the ship was barely seaworthy. Hey, you didn’t force anyone to buy a ticket for the cruise; you simply designed the cruise, then marketed it and sold tickets.
So if Goldman devoted itself to a series of perfectly legal — but morally bankrupt — business practices during the go-go years of 2005 to 2008, would it not be tempted to do even more of the same during the grim conditions of 2011-12?
Likely...which is just one reason why Goldman Sachs is probably not a “Buy.” Tomorrow we’ll share one reason why it probably is a “Sell.”
Regards,
Eric J. Fry
for The Daily Reckoning
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| | | | And now back to Bill with more thoughts... | | | | | Bill Bonner |
Remember the meeting at Davos with the “remodeling capitalism” theme? We were suspicious and dismissive. After all, no one ever modeled capitalism in the first place. It seemed vain to talk about remodeling it.
Besides, we’ve seen these architects and decorators at work before. We wouldn’t want to live in a house they designed.
Stephen Roach, an economist with Morgan Stanley and Yale, took part in the discussion. His account of the conference confirms our guess: this was the most prestigious meeting of dumbbells on the planet.
One speaker urged a repudiation of materialistic values. Another wanted to confront human rights abuses. Another wanted to make some point about the Arab Spring.
Two thirds of the participants, writes Roach in The Financial Times, “felt capitalism was not working.” But none seemed to have any idea of what capitalism really is...or what might be wrong with it.
A group of Occupy agitators broke into a chant: “No speeches. No stage. Join us!”
Join us? Why?
*** “We simply cannot continue to cut our defense budget if we are to remain the hope of the Earth,” says Mitt Romney.
Where do candidates get this sort of stuff? Who writes lines like that? Who takes them seriously?
According to Romney, the Earth itself longs for more US military spending.
His adversary, Newt Gingrich, says he thinks that Obama’s Pentagon cuts will make the US as vulnerable to attack as it was before World War II.
But the Pentagon won’t really have less money to spend. They’re not really talking about cutting defense spending; they’re talking about cutting projected military spending increases. Even after the ‘cuts,’ the US military will still be spending more than the next 10 biggest spenders put together.
While Republican candidates try to out-Rambo each other, the president himself sends teams of Navy Seals to rescue American hostages...and never fails to remind Americans that he was the one who ordered the killing of Osama bin Laden.
All the candidates think the American people want war. Or...what?
Actually, Americans don’t want war. The latest Pew Research polls show them more opposed to foreign military adventures than at any time in the last 15 years. They’re more interested in getting a job...and protecting their retirements. Given the choice, they would probably want to see military spending cut back and the money put into their own pockets.
But they won’t be given the choice. The system is rigged. Between them and the outcomes are 10,000 lobbyists and millions of zombies. This is why representative democracy doesn’t work.
Decent people will generally have decent responses to decent questions. Put to a ballot, how would American’s vote?
1. Should the US balance its budget...or continue to spend $1.50 for every dollar in revenue?
2. If you have to give up something, which would you rather do without: foreign wars...or domestic health and retirement benefits?
3. Should Congressmen be forced to leave Washington after a maximum of 2 terms?
4. Should members of Congress be forced to live by the same laws as the voters?
5. What do you say to a flat 10% tax rate, on all income...across the board...? Yes or no?
6. Should the President be allowed to kill or imprison anyone he wants, without due process of law? Our guess is that the voters would do the right thing.
But they’ll never get the chance. The system is in the hands of the zombies now. Lobbyists, lawyers, connivers, chiselers, contractors, layabouts and scalawags and world-improvers — each one takes a little piece of the old republic...until there’s nothing left.
Tomorrow: how the zombies work...
Regards,
Bill Bonner,
for The Daily Reckoning
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