 | | The Daily Reckoning | Wednesday, January 4, 2012 |
- Reality unravels: are individuals questioning authority onto something?
- Death squads, Cold Warriors and the best beer you’ve never tasted,
- Plus, Bill Bonner on when stocks will be cheap again and plenty more...
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|  | | | | As the Thread Unravels | | Why the Spirit of Protest Seemed to Travel at the Speed of Light in 2011 | | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
No discernible New Year’s Eve hangover for the markets yesterday, Fellow Reckoner. The Dow, like those insufferable individuals seen jogging early on Sunday morning, put in a chipper performance, racking up roughly 2% gains for the session. The same could not be said of your managing editor, however, who allowed himself to be talked into more celebrations than were probably necessary over the long weekend.
Perhaps it was a subconscious effort on our part to avoid the great disappointment in the life of one John Maynard Keynes. It is said that the (in)famous economist and investor remarked on his deathbed, “my only regret in life is that I didn’t drink enough Champagne.” An admirable lament, to be sure...and a clear lesson for the rest of us. Let us therefore resolve not to repeat the mistakes of Mr. Keynes, neither by the over consumption of his economic theories nor through the negligent under consumption of bubbly libations.
New Year’s resolutions now out of the way, we are left wondering what to make of this coming stretch in front of us. It’s the beginning of a new chapter in our Gregorian calendar...and, we’ve heard, the beginning of the last chapter of the Mayan calendar. What will the year bring us? To another New Year’s Eve party...or to the destruction of heaven and earth and everything in it? And how best are we to make use of the intervening time?
Instead of losing ourselves in the increasingly granular interplay between the world’s governments and the markets they affect to save and to serve, we are going to take a step back today, to start from the beginning. Forests are so often lost in trees, after all, the majesty and grandeur of the universe ignored for a single star.
On many of life’s big questions, we remain firmly, surely, absolutely and positively in the agnostic camp. Only the degree of agnosticism varies. With such a long and celebrated list of mistakes behind us, how can we be totally sure of anything? An example: The world was considered flat for a very long time before it was “discovered” to be round. And even then people weren’t sufficiently sure — or able — to put their sailing vessels where their brave hypotheses dared to venture. Hellenistic astronomy established the spherical shape of the earth as a physical given around the 3rd century BC. Not for another 1800 years, give or take, did Juan Sebastian Elcano’s circumnavigation (1519-1521) “prove” it beyond reasonable doubt. We expect that the flat earthers were pretty sure of their position. Maybe as sure as we all are about the “sphereness” of the earth today.
Moreover, agnosticism needn’t confine itself to earthly matters alone. We have the heavens to wonder about too, and the complex arrangement of the many workings therein.
Recently, as in this past September recently, the central tenet of modern physics itself was called into question. Until a bunch of skeptics got together to reckon on the nature of things and how they work, it was thought that nothing in our known universe could travel faster than the speed of light, 299,792 km/s (186,282 miles per second), not even — as the term implies — light itself. That barrier was thought to be a kind of celestial speed limit, the “c” constant in Einstein’s E = mc2.
An article in Universe Today reported the story back on September 22, the day the speed limit was said to have been bettered:
An international team of scientists at the Gran Sasso research facility outside of Rome announced today that they have clocked neutrinos traveling fasterthan the speed of light. The neutrinos, subatomic particles with very little mass, were contained within beams emitted from CERN 730 km (500 miles) away in Switzerland. Over a period of three years, 15,000 neutrino beams were fired from CERN at special detectors located deep underground at Gran Sasso. Where light would have made the trip in 2.4 thousandths of a second, the neutrinos made it there 60 nanoseconds faster — that’s 60billionths of a second — a tiny difference to us but a huge difference to particle physicists! You see what happens when you begin pulling on a thread, Fellow Reckoner? Yank it for long enough and, before you know it, the fabric of the entire “known” universe unravels like a scarf knitted from spaghetti.
You remember what happened when people began pulling on similar threads last year, don’t you? Individuals began to question the nature of the world around them, particularly their political world. It began, as you’ll recall, in the tiny North African nation of Tunisia...
Mohamed Bouaziz probably wasn’t looking for his government to honor him with a postage stamp when he self-immolated in December of 2010, an act that would eventually end his life, the final stretch of which he spent in a coma, in the early days of January, 2011. The 26-year old street vendor was protesting the harassment and humiliation inflicted on him by local municipal officials and their confiscation of his wares. Leave it to the government to hijack a tragedy prompted by their own insidious meddling for the purpose of aggrandizing the state.
This lamentable irony notwithstanding, Mr. Bouaziz’s act set the stage for perhaps the most widespread social upheaval in the region in modern times. Beginning in Bouaziz’s home country of Tunisia, revolutions — largely of the open source variety — spread south and east through Libya and Egypt, where, with the overthrows of Muammar Gaddafi and Hosni Mubarak, a combined half century of brutal, US- backed, dictatorship was ended.
The revolutions in Tunisia and Egypt and the civil war in Libya were followed by civil uprisings in Bahrain, Syria, and Yemen, the latter resulting in the resignation of the Yemeni prime minister, major protests in Algeria, Iraq, Jordan, Kuwait, Morocco, and Oman. There were also minor protests in Lebanon, Mauritania, Sudan, and Western Sahara. And, not insignificantly for that portion of the world heavily dependent on the use of relatively cheap, easily accessed, high quality crude oil, the House of Saud also learned of a seething, if only nascent, revolutionary spirit resting just below the surface.
Freedom is a catchy tune, we observed during the midst of the spreading unrest. Once you get it into your head, it’s hard to get rid of...not that you’d want to. From the aforementioned (and ongoing) Arab Spring through to the swiftly quelled Jasmine Revolution in China, 2011 began to take shape as the “Year of the Revolution.”
The sentiment traveled at the speed of light — whatever relevance that now has — to Europe, where unemployable graduates, jilted retirees and everyone besides gathered in capitals across the continent to protest backdoor bank bailouts, austerity programs and the general looting of the masses by the political class, many of whom they themselves elect. Not to say there wasn’t also plenty of looting perpetrated by the masses themselves. From Syntagma Square in Athens to Tottenham Square in London, rioters tested their strength of numbers against police forces demonstrably unable to keep pace with the new reality of “flash riots” and the advanced, open-source techniques they utilized to assemble and disperse before Ol’ Bill could get a grip on the unfamiliar situation.
The world marched forward, literally, to October’s “Global Day of Rage,” where the cheated and the scammed coalesced from Tokyo to Zurich and in cities across more than 80 countries around the world to vent their anger and the world as they know it. But that world might just be coming to an end anyway, a global morphing of the kind even the Mayans couldn’t imagine. More (much more) on this to come...
In today’s guest essay, publisher and executive editor of Laissez-Faire Books, Jeffrey Tucker, takes us back to another time in another place...a place from which the world of today was almost certainly unimaginable. Please enjoy...
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| | The Daily Reckoning Presents | | Nicaragua and the Cold War Political Theater | | |  | | Jeffrey Tucker |
Some friends and co-workers spent their holidays at Rancho Santana in Nicaragua, where you can live like a king on a pauper’s salary. The beaches are among the best in the world, and the people are nuts for Americans. There is every amenity and consumer product, even better stuff than you can get at Wal-Mart. Local food is outrageously good. There are even local beers that best most on the market in the US. In general, it’s the real deal, the closet thing to a paradise this world has to offer.
How do I know these things? Larry Reed, now president of the Foundation for Economic Education, and I visited this country for a full week during that volatile year of 1985. In those days, the superpowers had somehow decided to choose this little country as its theater for one of the last showdowns of the Cold War.
The US said that the communists had taken over at the behest of the Soviets and they were exporting their revolution around the region. The Soviets said that the US was trying to topple a democratically elected government by funding death squads. Remember Oliver North and all that? The drama was intense.
We went there to see what was going on. From the American press reports, we had every expectation of finding a civil war and communists battling it out with freedom-loving rebels. What we found was very different, indeed. We ended up meeting with leaders on both sides of the great issue of the day, but they weren’t dressed in battle gear. It was more like a political squabble of the kind that you find on Capitol Hill every day. We met with high-ranking officials in the current regime, as well as opposition leaders like Violeta Chamorro, who was later elected as president.
Before leaving on the trip, I had read a wonderful book by New York Times reporter Shirley Christian. It was called Nicaragua: Revolution in the Family. Her detailed report documented how what appears to be a revolutionary environment on the outside is actually a fairly normal tug-of-war between two ruling factions. Ideology plays very little role in reality beyond serving as a pretext of sorts. When one side gets control, it does things to hurt the other side, and so on. In other words, politics as usual.
I was amazed to hear this. This was a far cry from the language you were hearing from Washington at the time about how this was the battleground of the great Manichean struggle of our epoch. But it wasn’t just budding Cold Warriors like me who got taken in. There were first-world political pilgrims from the left who got sucked up into the theater and came to Nicaragua to experience the new egalitarian utopia as well. These people provided the main amusements for the week.
And so everywhere we went, we bumped into literature majors from the United States, seminarians from West Germany, women’s rights advocates from the UK and assorted Hollywood gadabouts who came to mix their labors with the liberators now in control. We all lived together in downtown Managua in a hotel that catered to our every need. So much for the workers and peasants. We truly lived like kings for a week.
Breakfast was amazing, with juices from all over the region. I’ve never seen anything like it since. The coffee was beyond-belief great, so strong that it had to be cut with hot fresh milk. You could eat a gigantic lunch and pay only a buck or two. Dinner always seemed to feature entertainment of some sort and the local liquor, which, I learned from experience, is rather dangerous for inexperienced drinkers.
My favorite bar was not far from the capitol building. I don’t recall the name, but at the time, I just called it the “communist bar.” That was because that’s where all the communists hung out to drink nearly every evening. Again, they were all from the United States and Western Europe, and they would sit around talking about the great utopia being built before their eyes. There were pictures of Che, Castro and Lenin on the walls. The reading material was Soviet Life magazine, and I would swear that some of the issues dated from the 1950s. Larry and I would flip through them and laugh uproariously at the pictures and propaganda. I don’t know whether this junk was brought in by the students or shipped directly by Moscow, but as I think about it, the former scenario is more likely.
One night we went to a movie. I was a smoker at the time, so I experienced that singular pleasure of blowing smoke up in the air during the movie and watching it mix with the light of the projector and create a beautiful film noir ambiance. I recall thinking that this was a pleasure that I could never experience in the United States. Maybe there is something to this communist idea after all! (Kidding.) I’ve since learned that smoking has been banned in theaters, and tragically so.
We hopped into a cab after the movie. Larry and I were in the back seat and two jaded-looking women were in the front seat. I tried to make small talk about how good the movie was. One of the women shot back at me: It was a terrible movie, but exactly what you would expect given how American imperialists send their cast-off flops down here to exploit the workers by extracting their money. Silence followed this stern lecture. I piped up again, innocently saying that, even so, I thought the movie was pretty good. She grunted extreme disapproval of my opinion, and we rode in silence until we got back to the hotel.
The next morning at breakfast, I met Gary Merrill, the former husband of Bette Davis who had starred in many films at his height, including Davis’ smash hit All About Eve. He was wearing a dress. I asked why. He said that he could do this in Nicaragua because it was a free country where the human spirit was liberated thanks to socialist control. I asked if he considered himself a communist. “All I know is that this works,” came the reply.
We had a charming meeting overall, but he said that he had to go because he was meeting with some government officials. That meant that he needed to change out of the dress and into a suit. I asked him why he must give up his freedom when meeting with government officials. He responded that it was just an intuition he had that he would make a better impression in a suit. Good intuition! We met with Gary several more times on that trip, and I can’t but have the fondest memories of his good cheer.
Later that day, we decided to do some sightseeing of government buildings. We were taking pictures like crazy at the ministry of defense building, asking all the soldiers and guards to pose. Some thug came up to us and told us to stop. We resisted a bit and suddenly found ourselves under arrest. They took Larry’s camera and planned to ruin all the pictures. But they never figured out how to open it. They gave us our equipment and let us go. The benefit from our point of view: We had a cool story to tell!
Looking back on the event, I’m realizing that the fastest way to get arrested in Washington, DC, would be to try to get as close as possible to the Pentagon with a camera and take pictures of all the guards. You would probably be held for slightly more than a few hours!
On this trip, I also learned something about currency exchange. The government in those days tried to keep tight control on the rates. There was a government rate that you got at the hotel and the airport. And then there was the market rate that you could get on the streets.
You didn’t have to look far to find a currency exchange dealer. There were kids that seemed as young as 7 and 8 years old, budding young entrepreneurs. They were everywhere outside the hotel, and no one bothered them. Their math skills were absolutely amazing. They could figure the exchange rates on any amount in a matter of seconds.
How did they know the market rate? It is a bit mysterious to me, but they must have run back and forth to each other in some kind of cooperative/competitive arrangement, perhaps arbitraging with the dealers around the block or the other side of town. It was hard to say, but there was no question that they were the masters of the craft.
I think about this when I hear people object to the idea of competitive currencies in the United States. People say, oh, it would be so confusing and no one could figure it out! Perhaps there would be a learning curve, but surely over time, the math skills of the typical American could rise to the level of a peasant Nicaraguan child. It’s a tall order to be sure, but it is possible.
Much to my disappointment, we saw no bloodshed, death squads, gulags or secret missile stashes. All the communists I met I could have also met by visiting the local university. And the government officials were pretty much like those you would meet anywhere: greedy, lazy, puffed up and useless. Everyone knew this. I assume the same is true today.
A few years later, the “dictator” of Nicaragua submitted to a democratic election and was tossed out. Later on, long after the Cold War ended and everyone stopped caring about this country, he was re-elected. Nothing much changed either way.
“Most Americans,” writes investment guru Chris Mayer, “would be surprised to learn Nicaragua is the second-safest country in Central America, behind only Costa Rica. The World Bank ranks it as the easiest country in Central America, Panama excepted, in which to start a new business. Or that in ‘ease of doing business,’ Nicaragua ranks well ahead of such perennial darlings as Brazil or India — or even neighboring Costa Rica. A recent IMF report said that Nicaragua was the Central American country that best protected investors’ rights.”
I can believe that. It is certainly among the most beautiful places I’ve ever visited, and I would take a week here over any visit to the Old World on the Continent. The food is better and cheaper, and the people seem far more insistent on and appreciative of their core freedoms. People say that going there now reminds one of how few freedoms we have remaining in the US.
How history turned on a dime: Our country is looking more and more like the nightmare that the US said it was stopping from taking over Central America. Today, Central America is the beneficiary of a glorious benign neglect, whereas the “freedom fighters” finally got their way in the United States and brought us a tyranny that Daniel Ortega would never have dared impose even at the height of his power.
Regards,
Jeffrey Tucker,
for The Daily Reckoning
Joel’s Note: We’re pulling the details together on a conference to be held in Rancho Santana this coming March. We’ve learned a lot from the past few visits there and, with those lessons in mind, this coming event will aim to tackle some of the issues our readers voiced considerable interest in.
We’ll look, for example, at renewable energies and natural resources... off-the-grid (resilient) living... Nicaragua itself as a proxy for emerging market investing... and the best, tax-effective ways to get involved. Stay tuned for more information as the event draws nearer...
| | | | | The Secret Financial “Timebomb” Nobody’s Talking About |
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| | | | | And now over to Bill Bonner with the rest of today’s reckoning from Baltimore, Maryland... | | When the Public Sector Debt Bubble Blows Up | | |  | | Bill Bonner |
What’s ahead for 2012?
We gave you a hunch yesterday. The price of gold will probably go nowhere this year.
We have a feeling that 2012 is not going to be a great year for money you get from the ground. Oddly, it will probably be a better year for the money you get from trees.
How is that possible? We all know paper money is going to be worthless. Yes...dear reader...but not necessarily in 2012. It’s just part of the curious way Mr. Market does business...and a feature of his nasty habit of ruining as many investors as possible.
Look, it’s pretty simple. The private sector debt bubble blew up in 2008. The public sector debt bubble will blow up too. Maybe in 2012. Most likely not for a while longer. But when US debt begins to blow up, the feds will come in with everything they’ve got trying to stop it.
And all they’ve got is a printing press. Ben Bernanke:
...the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Positive inflation is the feds’ answer to a debt blow-up. They have no other answer... When bond buyers refuse to roll over US debt at reasonable rates, the Fed will use its printing press. The resulting “positive” inflation will blow up the world’s monetary system as well as government debt. Gold will be the about the only money left.
So, we should just buy gold...and avoid US dollar-denominated debt, right?
Hold on. Mr. Market doesn’t make it that easy. Our guess is that he’s going to lure trillions more dollars into the US debt market...and then blow the whole thing sky high.
Just look what happened last year. Bloomberg tells us that stocks worldwide lost 12% of their value. But bonds actually went up...about 6%. And there’s a good chance that the same thing could happen in 2012. Stocks down. Bonds up.
Stocks won’t be cheap until they are about half today’s prices. So they have a long way to go.
When stocks go down, investors will go into the US bond market looking for shelter. This will drive down yields and drive up prices. And bonds — judging from Japan’s example — can keep edging upward for a long time. Especially now that everyone thinks US debt is 100% safe.
And the worse things get, the more people want the safety of US Treasury debt. That was the lesson of 2011.
Like people buying houses in 2005...investors will buy bonds and think they are geniuses — for a while.
And more thoughts...
The feds are already running into the limits of their ability to borrow. Here’s theBloomberg story:
Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.
Led by Japan’s $3 trillion and the US’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.
Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the US struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.
The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the US’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.
Borrowing costs for G-7 nations will rise as much as 39 percent from 2011, based on forecasts of 10-year government bond yields by economists and strategists surveyed by Bloomberg in separate surveys. China’s 10-year yields may remain little changed, while India’s are projected to fall to 8.02 percent from 8.36 percent. The survey doesn’t include estimates for Russia and Brazil. The world’s economic knees are beginning to buckle. Higher borrowing costs reduce the fiscal support governments can give to their economies. “Austerity” becomes less of a choice and more of a necessity. Europe is already in recession. America is probably not far behind.
The feds may have to turn to the printing press sooner than we thought.
***Who’s number one?
Depends on what you mean.
Who’s number one in steel production? China.
Who’s number one in mobile phones? Well...China again.
Who’s number one in manufacturing output? That would be China too.
How about car sales? China!
How about exports? China.
Patents granted? China.
Energy consumption? China
Fixed investment? China
The Economist:
The country that invented the compass, gunpowder and printing is also challenging America in the innovation stakes. We estimate that in 2011 more patents were granted to residents in China than in America. The quality of some Chinese patents may be dubious but they will surely improve. The World Economic Forum’s “World Competitiveness Report” ranks China 31st out of 142 countries on the quality of its maths and science education, well ahead of America’s 51st place. China’s external financial clout also beats America’s hands down. It has total net foreign assets of $2 trillion; America has net debts of $2.5 trillion. Wait a minute, the US must be number one in something.
Yes, dear reader, we can hold our heads up high. We are still number one in zombies. When it comes to consuming, rather than producing...we’re in the lead. Out in front. We buy more and import more than anyone.
And we’re way ahead on the most zombie industry of all — the military. Heck, China won’t catch up with us on military spending until 2025, estimates The Economist.
Then what? What will happen when China spends more on its military than the US? Hmmm....
We’re not going to think about it. Too far in the future. Here at The Daily Reckoning we take it one day at a time. Day after day...we follow the news. Day after day, we try to make sense of it...we squint and try to see what is going on. And day by day, we think we see it more clearly. It is like the early morning. In the half light we can barely make out the shapes. A house in the distance could be a small hillock. A tree could be a cloud on the horizon. And what is that moving...?
Then, the light comes and the figures become more distinct...2012 comes into focus...
..and then it grows dark again.
Regards,
Bill Bonner
for The Daily Reckoning
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