Britannia Radio

Friday, April 10, 2009 Enjoy the rally while it lasts... What happens when people can't pay their loans? How to play the bear market...beware the 'multibubble' explosion... What you can learn from Argentina... Bill Bonner on California's 'Extreme Bubble Culture'...and more! --------------------- Special Offer --------------------------- Don't Miss Out on Your Chance to be a Part of History Early this month, science once again became a national priority...and this is just the tip of the iceberg. If you play this change right, you could quickly accumulate three generations of wealth. Real wealth. Wealth the markets can't touch. What you are about to read is so lucrative, we could only offer it to a limited amount of people. There are only 100 spots left...and we fully expect to sell out by Monday. Don't let this once-in-a-lifetime opportunity pass you by. Read the full report here. --------------------------------------------------------------- A 'Rebubble' Attempt by Bill Bonner Buenos Aires, Argentina The rally is on! The Dow rose another 246 points yesterday. Enjoy it while it lasts...but keep those trailing stops tight. The "End of the Rally is Nigh," says Barron's. Our old friend, Marc Faber, says he expects a 10% drop in the stock market before the rally resumes. Maybe. This rally is going to end sometime. But it probably has a ways to go. There are still a lot of suckers who haven't been drawn in. Another old friend, Rick Ackerman, thinks the problem with this rally is capitulation...or rather, the lack of it. There's been no capitulation, says he. And you can't have a real bottom without it. No capitulation, no bottom. The news from the economy is bad and getting worse. Credit card debt has just taken its biggest plunge in 32 years...maybe ever. Credit card balances fell 9.7% in February. And the number of open credit card accounts is going down too. What happens when people can't pay down their loans? "Mortgage delinquencies soar in the US," says a Reuters article. Remember, delinquencies are the beginning of the process. Then come foreclosures and auctions - all eventually driving housing prices down further. And when property prices fall, so does the collateral behind the banks' and other financial institutions' assets. So, their troubles aren't over. The worst is still ahead of us, not behind us. But despite the bad economic outlook, investors think the worst is past for the stock market. Markets look ahead, they say, beyond the immediate economic forecast. True, but they have an adorable habit of seeing only what they want to see. "In January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse," explains Rick Ackerman, "domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline." Investors didn't give up on stocks - despite the huge decline in stock market prices. What that means is that there's still a lot of selling to be done. "This bear market will end," he continues, "like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison." That's why you use trailing stops. You want to be sure that when the selling begins your stocks get sold first - long before most investors finally capitulate. More news on how to play this bear market from Addison and The 5: "If you're shorting stocks, this might be of use," writes Addison Wiggin. "Now that the easy targets are long gone (big banks, homebuilders, AIG) and the bear market rally is in full swing, short sellers are setting their sites on some more diverse organizations." "Hmmm... pretty all over the board, eh?" Addison notes. "There's a mobile tech biz, several real estate players, home healthcare, a bank and a popular chain of sandwich shops. What's the connection?" "Most of the stocks on this list," answers our resident short seller Dan Amoss, "are characterized by at least one of these three facets: Shorting the stock is a current fad, the company is using 'creative" accounting methods that traders think is fraudulent, or the company is a high risk for insolvency. "Regardless, bulls beware... when you see short interest that high (as a % of outstanding shares), you rarely see sustainable short squeezes." That's good news for Dan's Strategic Short Report readers. Late last month they amassed a new short position in one of the stocks listed above... one that already paid them out 57% in 2008. Given the latest market rally, this short is all the more attractive today. To find out which of these stocks Dan recommends you bet against, along with the rest of his stellar short side advice, check out Strategic Short Report, here. And back to Bill with more thoughts: It's amazing how much credibility some people have. Seems almost infinite. No matter how bad their advice...or how little they understand...people still ask their opinions. Or, to put it another way...it's amazing what most people will believe. You'd think - after $50 trillion in losses - that people would be careful whom they listened to. Who would take Alan Greenspan's thoughts seriously, for example? Yet, the newspapers still report his remarks with a straight face. And what about all the economists who claimed that since the "U.S. has the world's most flexible, dynamic economy" you couldn't go wrong buying U.S. stocks? And what about the market timers who urged investors to buy "bargains" when the Dow was only 10% below its peak? And how about the regulators - such as Tim Geithner - who completely missed the biggest Ponzi scheme of all time, taking place right under their noses? And the economists who thought derivative debt made the financial world safer by "distributing risk more widely?" And those, such as Hank Paulson, who thought the sub-prime crisis was "contained" at $100 billion in losses? (Current cost of the bailouts - $12.8 TRILLION!) As our friend Nicholas Taleb says, it's as if these guys had wrecked a school bus - while they were driving drunk. But instead of putting them in jail - they're given a new school bus to drive! Kevin Phillips, author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism warned of a the pending explosion of a 25-year "multibubble." The bubbles began in the 1980s, he says, when the financial sector accounted for 10 percent to 12 percent of the U.S. economy had grew to an "arguably crippling" 20 percent to 21 percent of GDP by the middle of this decade. Who's to blame? Henry Paulson, he says...and Ben Bernanke...and Alan Greenspan. The Reuters report: "Phillips calls Paulson a Wall Street insider who was looking out for his own, and Bernanke an academic misguidedly trying to refight the 1930s Great Depression. Together they formed the wrong team at the wrong time whose ad hoc approach threw away hundreds of billions of dollars and more than doubled the Fed's balance sheet, he says. "What you're seeing Bernanke do is he's trying to create a bailout reflationary bubble, which he can't describe as a bubble, just as Greenspan couldn't describe the housing mortgage bubble as a bubble. What we're seeing by Bernanke is a covert attempt to rebubble," Phillips told Reuters. Meanwhile, Nouriel Roubini - who's been mostly right about the crisis - says that [Jim] "Cramer is a buffoon." "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame...He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong." Roubini warned two years ago that the United States faced its worse recession in four decades. He points out that the current rally on Wall Street merely follows the pattern of other major downturns. "Once people get the reality check than it's going to get ugly again," he says. Finally, as promised in yesterday's issue: What can we learn from Argentina? In the '30s, Argentina suffered along with the rest of the world. Until then, it was roughly as rich as Europe and rivaled America in some ways. "As rich as an Argentine," was an expression in England. Marrying one's daughter to an Argentine planter was the dream of many down-at-the- heels English aristocrat. But something went very wrong on the pampas. Instead of Franklin Roosevelt's New Deal, the Argentine's got a raw deal from Juan Peron. Both programs were frauds. Both made things worse. But Peron's program stuck. Americans soon came to their senses and forgot Roosevelt. Between Franklin Roosevelt and Barack Obama were Eisenhower Republicans and Carter Democrats. But Peronist politicians have dominated the Argentine political landscape since the '40s. Every problem demands a government solution. And every Peronist solution makes things worse. Keep reading for today's essay...but in the meantime, we'd like to bring to your attention some good news. We know our dear readers were saddened by the loss of one of the great economic minds of our time: Dr. Kurt Richebächer. Many of you heeded his warnings and insightful forecasts about the coming housing bubble burst and subsequent credit crisis, and your portfolios were the better for it. Well, we would like to give you another chance to use the Good Doctor's warnings to avert or even recover from the later stages of financial catastrophe. We've just formed a brand new "wealth-protection" society, and named it in honor of Dr. Richebächer. For a limited time, we will waive your membership to the Richebächer Society for a full year...a total of $9,955 of benefits - free of charge. But you must act by Tuesday, April 21 at 5 PM. Click here for all the details. The Daily Reckoning PRESENTS: America may lead the world. But the Golden State leads America. The state is a hothouse of invention...always innovating...always evolving...at such a fast pace the rest of the world gets dizzy trying to keep up. Bill Bonner explores... California Dreamin' by Bill Bonner Buenos Aires, Argentina The pall of insolvency hangs over Los Angeles like the smoke from a brush fire. Fire is such a hazard in California that inspectors roam the hills around the city looking for dead wood. Residents are fined if it is found on their lots. But no such penalty awaits those whose financial tinder poses a risk. We have come to California to look into the future. America may lead the world. But the Golden State leads America. The state is a hothouse of invention...always innovating...always evolving...at such a fast pace the rest of the world gets dizzy trying to keep up. Detroit may have given the nation the cheap automobile...but L.A. knew what to do with it. It built suburbs all up and down the coast...and then connected them with a network of freeways. Gasoline was cheap. Houses were cheap. And the roads were open. California is a land of dreamers. Bubbles, like tropical plants, grow big and fast here...creating vast canopies of delusions and conceit. Then, the hot sun beats down and the dried-out dreams fall to the ground as kindling...waiting for a spark. In the late '90s, the Silicon Valley was the source of a great reverie - that computer technology would transform the world. It has. But not exactly as the hopers hoped. Their dotcom bubble went up in smoke at the end of the decade. Then, came a group of new bubbles - also largely based in California. The feds panicked in the recession of '01-'02. Their artificially low interest rates - combined with the globalized economy - caused the final mutation that produced the Extreme Bubble Culture circa, 2002- 2007. Housing prices rose, giving consumers the collateral they needed to dream big. Soon they were borrowing money so they could buy German cars, fill their tanks with Saudi oil, and drive to malls to buy Chinese gadgets. Everyone speculated on housing prices - homeowners, lenders, investors, builders, and Arnold Schwarzenegger's state government itself. But now that housing prices have come down...the whole Bubble Culture may be threatened with extinction. We drove into the heart of L.A. looking for evidence. Our first challenge was to find the heart of the city. The place stretches for many miles in many directions. It has a head...a mayor and a city council, easy to locate in a stately old building. It has long arms too - reaching out to grab parking offenders and collect property taxes. And its legs are in constant motion; the city is always on the move. What it seems to lack is a heart. The downtown area is just a collection of office buildings. In the morning, people drive in, park in garages, and go directly to their offices. In the late afternoon, the legs turn and move in the opposite direction. By nighttime, the place is as dull and empty as a state senator's head. The brain is missing too. When ordinary citizens dreamed of riches, so did the state government. Now, the weightlifter faces bankruptcy for the 2nd time since he's been governor. When he was sworn in, the state was threatened with default on $13 billion worth of loans from the previous administration. This time the stakes are higher. California led the nation on the way up; it's leading on the way down too. When the value of the collateral broke down in 2007, Bubble Culture turned brown. Homeowners went broke. Their lenders went broke. And pretty soon, the whole world was beginning to go broke. In the last two years, house prices in California have fallen 40%...50% in some areas. "For months, the government has warned that it was running out of money. In this too, California leads the nation. Not only are its people going broke – so is its government. When this year began, the government faced a $42 billion deficit and was forced to pay its employees in IOUs." Driving through the city, most of the older neighborhoods show few signs of trouble. There are few "For Sale" signs up. Life goes on in the same way it has since this culture began early in the 20th century. It's in the open areas outside the city, where the dreams got most sun, that the trouble begins. Just drive down Lincoln Street from Santa Monica to the airport. When you come to Marina del Mar you will soon notice huge housing developments on both sides of the road. "Now Leasing" says one. "Luxury Units for Sale" says the other. No lines were seen outside the sales offices. Throughout Southern California there are thousands of these new houses...mostly at the fringe of stretched-out suburbs and outlying towns...many of them practically deserted. It was the rare developer who imagined that prices would be cut in half. Naturally, when the bubble blew up...so did California's state budget. Suddenly, tax revenues collapsed...while expenses rose. This was completely foreseeable to a person off normal intelligence; it nevertheless seemed to come as a complete surprise to the legislature. For months, the government has warned that it was running out of money. In this too, California leads the nation. Not only are its people going broke - so is its government. When this year began, the government faced a $42 billion deficit and was forced to pay its employees in IOUs. Unlike the federal government, California can't print money. But between issuing IOUs to employees and issuing dollar bills to foreign lenders there is not a lot of difference. Whether they have the emblem of the Great State of California or that of the United States of America, both pieces of paper will come to be worth what people will give you for them...and not a penny more. Bubble Culture now seems tawdry, out-of-fashion and broke. But Californians are still dreaming. When the underbrush finally is burned away, perhaps they'll dream up something new. Enjoy your weekend, Bill Bonner The Daily Reckoning