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The Daily Reckoning Friday, November 20, 2009 Housing and unemployment figures drag on the markets, Too few and far too many: China as an economy of extremes, Plus, what will the next generation think?! And plenty more... --- Bulletin Board Elite: Positions Now Open --- Bill Bonner, speaking his mind from London, England... Okay! We'll say what we've been thinking... ..that our children are going to spit on our graves! First, Americans made a colossal mistake in the '90s and the '00s. They partied...they spent...they borrowed...running up huge debts in the private sector. Most kids could forget about inheriting anything from their parents; the geezers spent it years ago. The boomer generation also made a mess of the biggest success story in world history - the United States of America. In the '60s and '70s - when boomers matured and began to take over - the US was still on top of the world. It had a positive trade balance...huge savings...massive investments abroad...and the strongest companies in the world. They ruined it. The financial industry took over...replacing manufacturing. Instead of making things we could sell at a profit, Wall Street sold debt - mostly to us! In government, imperial ambitions pushed aside the restraints and good sense of the old republic. Overseas, military bases were set up in 120 countries. We now have unwinnable, trillion-dollar wars that could go on forever. At home, the sheep look to the government to solve every problem. Thirty-five million Americans - almost as many as the entire population of Spain - depend on the feds' food stamp program for their daily bread. At least, most Americans are making amends in their private lives. The old days, when the US was "the world's mouth," are over. We can no longer be counted on to buy up every gadget and gizmo produced in the world. We're rediscovering the old virtues of thrift and savings. Frugality is back in style. If this continues, the Baby Boom generation may not leave the next generation with much net wealth, but at least it will not leave behind huge net debts. But over in the public sector, the debt toll mounts up. The boomers want the government - which means, the next generation - to pay for their health care...their unemployment insurance...their bailouts and their handouts. The deficit for this year is expected to be about $1.5 trillion. Next year, it will be about the same. The feds say it is too early to pull back on their stimulus efforts. Housing credits and unemployment benefits have just been extended. A trillion-dollar overhaul of the healthcare system is in the works. Even assuming a real recovery - don't hold your breath - the deficits are supposed to run $1 trillion per year for the next 10 years. More likely, as we reported in this space a few weeks ago, the deficits will be $2 trillion per year. By the time today's 30-year-old gets a family...a house...and a mortgage, he will also have his share of a $20 trillion dollar deficit - not to mention the "off budget" obligations of the US government, a total of more than $100 trillion! But wait...aren't these spending efforts paying off? Isn't the stimulus helping the US economy get back to into the pink? Don't all these federal spending programs create a safer, more prosperous world? Ah...tell that to the kids! "We were just trying to get the economy back on its feet...so you could find a job in a thriving economy," we might say. Take any two young people, 16-24 years old. Odds are, one of them will be unemployed. Joblessness among the young has hit 53% - a post WWII high. Seven million jobs have been lost in the last 24 months. Employers are still cutting payrolls. And when business picks up...what kind of jobs are they going to offer? Will the next generation compete with the Chinese for low-cost production? Are they going to compete with the Europeans for high-cost/high quality production? Are they going to develop more mortgaged-backed securities? Or are they going to put on waiters' aprons and take orders from clients who no longer dine out? Good jobs will be hard to come by. Because the 'growth' of the bubble period - 2001-2007 - was a fraud. Instead of building up capital assets and creating more jobs, people borrowed money ...and then squandered it. And now, the recovery is a fraud too. Now, the government pumps up the economy with cheap credit...borrows trillions...and wastes the money on pointless 'stimulus' programs. And day after day, the debt builds up. Soon, it will be too big to handle. And then, these same young people - who can't get a foot onto the lowest rung of the employment ladder - will be asked to shoulder this huge burden of debt left to them by their parents. You can imagine their reaction... ..they will spit on our graves! And more thoughts... What happened yesterday? The Dow sold off 93 points. Investors had been hesitating. There's supposed to be a recovery going on. But the latest news is unsettling. Housing and employment numbers are weak. What's going on? Maybe this recovery is not a sure thing after all. "Record numbers late on US loans," says a headline in The Financial Times. The story is easy to understand. People without jobs can't make mortgage payments. So, payments are late on 1 of every 6 FHA mortgages. Mortgage defaults are at a 3-decade high. Of all mortgages, nearly one homeowner in 10 is running late in his payments. As predicted in this space, problems in the housing finance sector are now shifting from sub-prime to prime mortgages. The subprime borrower had few resources. He washed up as soon as the crisis began. But now the prime borrower, who lost his job and is running out of options, is sinking too. What's the smart money doing? The Dow is now up more than 50% from its March low...and has regained more than 50% of what it lost. Are the insiders taking advantage of this dip to get bigger stakes in their own companies? No... They're selling 18 times as many shares as they're buying. Go figure. The insiders know that their businesses are not really in good shape. They've been able to maintain profit margins by cutting staff. But sales are down. And they don't see where additional sales will come from. Meanwhile, investors have been hallucinating about a real recovery. They've bid up the price of shares as though they expected a stunning period of growth. Generally, earnings have held steady...but stock prices have gone up. This has brought a 10-point increase in the P/E ratio, to greater than 27. What would justify such an ambitious P/E? Only growth. Where might growth come from? We don't know. David Rosenberg says stocks are priced as if investors expected profits to double next year. But it usually takes profits 5 years to double. And then, only when they have a reason to double - such as higher sales and lower costs. Don't count on it, dear reader. More thoughts below, but first, here's today's essay... --- Five More Ways to Ride Gold to New Record Highs --- From Hulbert's No 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet... GOLD $2,000 "I'm so sure gold will soar higher I'll even make you a guarantee... plus, I'll give you five entirely new ways to play the trend..." "Including one hidden way to snap up gold... for less than one penny per ounce..." --------------------------------------------------------------- The Daily Reckoning PRESENTS: Too many and too few people...too much and too little money...a history so rich many would rather forget it and a future so uncertain everyone is willing to gamble on it. The subject, of course, is China. This week we brought you a couple of essays on The Middle Kingdom, both of them bullish. In today's installment of our little China Series, Bill Bonner offers a seasoned contrarian's perspective. Please enjoy... Bare Branches By Bill Bonner London, England Last month, a Hong Kong apartment set a record. It sold for $56.6 million, which works out to $11,350 per square foot - the highest price ever paid for a pad in China. The buyer may have just needed a roof over his head. More likely, he is bullish on China. We are too, in the sense that we expect the Middle Kingdom to mature in wealth and power in the 21st century. But here's a better bet: that China will blow up before it grows up. China is a country of hyperbole. There's scarcely anything you can say about it that doesn't end with 'est.' In some ways, it is the world's oldest society. In other ways, it is its newest. It is the world's richest - with more than $2 trillion in reserves. It is also the world's poorest, with some 200 million people who get by on less than $5 per day. It faces the world's biggest problems too. Even in its calamities, China is second to none. People inside the Great Wall were about as rich as people outside it, man for man, until the 19th century. Then, China missed the industrial revolution. Nearby Japan missed it too, but quickly corrected its mistake. It kept the barbarians at arms length, but still managed to pick their pockets. The Chinese, on the other hand, played it cool. The barbarians had nothing to offer, they believed. They still think so. Said Xue Chen of the Shanghai Institute of International Studies, just last week: "The US has a lot to ask from China. On the other hand, the US has little to offer China." In the early 19th century, traders from Britain and America bought porcelain (china), silk and tea. Trouble was, they could find nothing to sell in exchange. The trade balance with China went negative, with China building up substantial monetary reserves (in silver). In 1830, a Chinese merchant, Hao Gua, who enjoyed a near monopoly on trade with the gweilos [foreign devils], was said to be one of the richest men in the world. Then, the English found something the Chinese would buy - opium. The fruit of the poppy was popular in many countries but, as usual, the Chinese over-did it. First, it was a favorite of the leisure classes. Then, it trickled down to ordinary workmen. Soon the coolies were neglecting their labors and China was in crisis. When the authorities tried to stop the drug trade, the English opened fire, humiliating the government and almost bankrupting it. People lost confidence in Manchu rule. By mid-century, nearly half the country was in open revolt. A Christian revolutionary had set up the "Heavenly Kingdom" in Nanjing. He raised armies and challenged the Qing Dynasty to battle. For a time, it looked like he might win. In the north, meanwhile, infanticide of female babies had become common in Nien territory - a reaction to famine and scarcity. By mid-century, one out of four young men in the region couldn't find a bride; "bare branches," they were called. By 1855, these bare branches were ready to break. They armed themselves and organized. They drove out government forces and controlled a large part of the country before they were finally put down. Between natural calamities and war, some experts put the 19-century death toll at an unimaginable 200 million. And then came the 20th century! The Middle Kingdom staggered forward, from error to accident to catastrophe! From the Taiping insurrection to Mao Tsetung. Then, 30 years ago, Deng Tsaoping announced the new line: "To get rich is glorious," he said. Suddenly, the Chinese began saving every penny. Building factories. Cutting prices. And beating the barbarians at their own game. Again, they exaggerated. While Americans built too many shopping malls, the Chinese built too many factories. Then, in 2008-2009 came the "greatest collapse in world trade in history," says Nobel-winning economist Paul Krugman. Americans - their biggest customers - rediscovered thrift. You might think China would realize it had too much capacity and back off. Instead, it rolled more steel. It built more factories and offices...entire cities. If stimulus spending is a measure of stupidity, the Chinese are three times as dumb as Americans. Both governments respond to correction by doing more wrong than they did before. Loans in China are rising by about 40% of GDP annually. The money supply is soaring at nearly 30% a year. "We estimate that [fixed capital formation] accounted for 70% of China's growth in 2008 and close to 90% of China's first half of 2009 growth," says a report from Pivot Capital. It is just a matter of time until this capital spending bubble blows up. But China is full of bubbles. In another example of its central planning, it made the ancient practice of infanticide state policy. One couple/one child was the rule. Missing girls was the result. Then, when the boys grew up, they discovered that their brides were missing too. The working age population of China is collapsing. There were 7 workers to every old person in 1990. Now, there are barely 4. By 2035, there will be only 2. What happened to the workers? They are the missing children of the missing girls who then became missing mothers. And by 2040, 397 billion old people - more than the total populations of France, Germany, Italy, Japan and the UK combined - will be missing the support of those missing workers. Where this leads, we don't pretend to know. But bare branches bend...and then they break. Regards, Bill Bonner, for The Daily Reckoning P.S. Long suffering readers are reminded that we'll be presenting an exclusive interview with dear friend and colleague, Dr. Marc Faber, in this space next Tuesday, November 24th at 2 PM. His views on China are creating quite the stir... You probably already know Dr. Faber as editor of The Gloom, Boom and Doom Report. Put simply, he's one of the finest contrarian economists working today. Below is a preview of the interview and instructions on how to make sure you can access it for free next Tuesday. --------------------------------------------------------------- And finally today, a few conversations with cabbies... We spent much of the week in taxicabs, going from one meeting to another in London. For some reason, the taxi drivers were unusually talkative this week. For example, a traditional black cab stopped for us on the ramp to Blackfriar's bridge. The driver was not at all the typical English cab driver. Instead, there was a woman behind the wheel - an attractive woman of about 30, with long dark hair and a black dress. "Where do you come from," she asked. "Originally, from the US," we replied. "Yes, you have a bit of a southern accent. I just melt when I hear a southern accent." "Well young lady," we shifted our accent quickly...from the tidewater of Maryland...across the Potomac...and down along the Virginia piedmont. By the time we got to the other side of the bridge we were moving across Georgia faster than William Tecumseh Sherman. "Well...aaah aam veairy paleeezed to make yawr chawmen acquaintance," we told her. Our accent was so thick with pecan pie and grits it was amazing she could understand a word. But we were determined; by the time we got to Charlotte Street she was going to be a puddle. Instead, she did the talking... "I lived in America for about 5 years," she continued. "I had such a good time. I loved it. Let's see, I visited New York, of course...but also down in Virginia...and even Florida. Then, I went out to the West Coast. That was fun too. It's such a big, beautiful country. "It's a pity about the people, though. I probably shouldn't say this to you. Because I can see you are a gentleman. A real Southern Gentleman, of course. But not all Americans are very well mannered. They're all very nice. Well, they're mostly very nice. But that's different. They're just not always very polite. In New York, they act like they don't have time to be polite. I mean, I can tell New Yorkers when they are visiting London and they get in the cab. They don't say, 'Thank you,' when I pick them up. They don't bother with 'good morning' or 'good afternoon.' No, they say: 'I wanna go to Buckingham Palace.' I mean, I guess it saves time. But it's not very nice. "The southerners are more polite. But even there, you get some parts of the population that don't seem to be very well brought up. You go into a fast food store and they don't look you in the eye...or say anything. It's strange. And then when they do talk you can't understand what they're saying... "The West Coast is a little different. But sometimes I got the impression that they thought being polite wasn't very cool. It was as if they were imitating New Yorkers. I don't know. I probably don't have a very good grasp of American customs, but that was just something I noticed." We continued a lively conversation. "You're probably wondering how I came to be driving a cab. Well, I tried a number of things. But I like driving a cab. My father is a cab driver. So is my sister. It's a little game with us...trying to remember all the little streets in London and how to get from one place to another without getting stuck in traffic. That's what we talk about when we get together. And it's not a bad way to earn a living anyway. Because you can work as much or as little as you want. "As long as people have the money for the fares, it's not bad. For a while there earlier this year, it was pretty grim. But now, people seem to have money to spend again. They're going out...they're taking taxis. It's like old times." Another taxi driver misunderstood the American financial system: "One of my sons works in New York. I don't know how he does it. They don't get any vacations. I couldn't live like that. But he says he likes it. Says it's stimulating. And he's with a bank. He works 12 hours a day, as near as I can make out. "But what I don't get is how come you have one fellow working 12 hours a day and others not working at all? It doesn't make sense. Why not split the work up...spread it around? Let others have a shot at it. Wouldn't everyone be better off? "The whole US financial system makes no sense to me. I don't know why working people put up with it. They get no vacations to speak of. And they don't have a system of health care. If you get sick, you have to pay for your care yourself. But if you're really sick, you can't work. And if you can't work, how can you pay for your treatment. The whole thing seems balmy to me. "But what do I know, I'm just a cab driver..." Still another had more personal matters on his mind: "I'm just here a few days a week. My wife and I live in Shropshire. Way up north. That's where her family is from. Our children are all grown up. They've moved away from London. And my family has passed away. We just have her family, and they're up north. So, she wanted to leave London and move up where her family is. "I can't stand it, to tell you the truth. It's beautiful. And you go into a shop and the shopkeeper knows your name. It's charming; you know what I mean? But I'm used to London. Up there you can't go get a cup of tea after 5pm. Everything is closed. So, I get bored. That's why I drive this cab. I should have retired years ago. But I can't bear sitting around. I'd rather drive the cab...get out...meet people. It's just much more interesting. And I can do it when I want. Nobody tells me what to do. If I get tired, I just stop. "I come down here and spend a few days driving the cab, then I'm ready to go back to my wife. That's a nice thing about it too. She gets tired of me after a few days. I probably get on her nerves. And she probably gets on my nerves. So I come down here and work...and then when I go back, she's happy to see me again. It works out real well for everybody.' Enjoy your weekend, Bill Bonner The Daily Reckoning   The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.