 | | The Daily Reckoning | Monday, November 14, 2011 |
- The looming, trillion-dollar bubble nobody seems to be talking about,
- An investor’s eternal search for “truth with legs,”
- Plus, Bill Bonner on spending a little, drinking a lot and plenty more...
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Special Daily Reckoning Holiday Gift Set: One Ounce of Gold, Ten Ounces of Silver
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|  | | | | A Truth that Won’t Go Away | | Evidence of a Downtrend in the US Stock Market | | |  | | Bill Bonner |
Reckoning today from Paris, France...
What happened on Friday? A “moment of truth” arrived for Europe. But what is the truth? We’ll have to wait to find out.
The Dow rose 259 points. Gold was up $28.
But who cares? Up, down...up, down... Every day brings more ‘truth.’ But what we want is a truth with legs. We’re not day traders. Not week traders. Not even year traders. We want a long, sure...mega trend. We want the Dow at 900 in 1983. Or gold at 260 in 1998.
What is there today that is equivalent? How about 10-year US bonds at 2.20% yield? For upside, we can’t think of a single other thing. US bonds have been in a long, long uptrend — basically — since they’ve existed. From 1791 to the present, they’ve gone up. Of course, there have been some major problems along the way, notably in the ’70s when it looked like the Fed had lost control of inflation. Otherwise, bond yields have gone down as prices have gone up.
Is it time for a turnaround? Maybe not just yet. We’re still in a Great Correction. Bonds should continue to go up — for a while. But just wait...this is a truth that won’t go away: US debt is expanding...as its ability to pay declines.
Meanwhile, the big trend for the US stock market is probably down too. Just a guess, mind you. Why? We’ve given you the reasons...but since you seem to have forgotten, we’ll give them to you again:
..After 60 years of credit expansion, credit is contracting. That means less household spending, which means lower sales and fewer profits
..A bear market began in January 2000. It never reached its rendezvous with a real bottom. Ergo, the ultimate bottom still lies ahead...
..Stocks rose since 1982...since 2000, they’ve been going nowhere. Now, it’s time for them to go down.
..Most of the ‘growth’ in the last 20 years has come from more and more debt at the household level. Now that debt is shrinking...growth should shrink too...
..There are 70 million baby boomers who desperately need to save money for their retirements. They used to borrow and spend...now, they will have to pay back and save.
..As credit grew, it took more and more credit to produce an extra unit of output. Adding more credit now will not help the real economy expand...
..The feds can’t engineer a recovery, because unlike a recession, the problem is not that debt is too expensive, but that they have too much of it already...
..As the economy softens, the feds take more and more of it into custody. The feds invest badly, leading to less real output...which must supports more and more zombies...
..The European economy is sliding towards another recession; this will hurt the US economy too...
..The whole world economy is weakening; it could drop into a worldwide depression...
..Higher, persistent unemployment undermines consumer spending...
..House prices are still falling, which will further reduce household net worth and reduce both spending and risk-taking...
..Energy use in the US is falling...more inputs of energy do not produce enough extra output to pay for themselves...
..But energy use in the emerging markets is increasing, supporting energy prices and putting more pressure on US household budgets...
..What else? Want more reasons? Stay tuned...
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Oil’s Set to Double (With Hardly Any Notice)
For 23 months now, Dr. Kent Moors has been showing Money Morning readers how the oil market really works. After 31 years advising the Big Boys, he would know. And now he’s taking things a big (and bold) step further. This is the oil story no one is telling right now. Of course, hardly anyone is connected enough to do so, not like Kent. That’s why the profit potential is so unusually big.
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| | The Daily Reckoning Presents | | Penn State Pricks the Student Loan Bubble | | |  | | Byron King |
A month ago, at an investment conference in Baltimore, my colleague Eric Fry asked if I think there’s another “bubble” out there that’s going to pop. My reply was that I believe the “education” bubble is destined for doom. It’ll be just one more thing to smack down the US economy, and makes for another reason — as if we need more — to hold precious metals as portfolio protection.
In the US, there’s over $1 trillion of “student loan” debt on the books. This is money that people borrowed from banks and government agencies (Sallie Mae comes to mind). The funds flowed through the “education” landscape and cash flow mills, paying for faculty, administrators, buildings, overhead and much else.
This gusher of student loan money over the past two generations (!) has been a key factor — THE key factor — in the super-inflation of the cost of education. That is, the more money that goes for loans and grants, the more leeway and incentive the schools have to raise tuition and let internal costs soar.
At the student level, some people borrowed to pay the tuition at impressive universities, where they received things like medical degrees and Ph.D.s in physics. Good for them.
But at other times and places, students borrowed funds to attend school and major in things for which there’s not much of a demand in the true, competitive economic marketplace. You know what I mean, right? Courses with the word “studies” appended to the end come to mind.
How bad is the student loan situation? Currently, around 9% of student loans are “slow pay,” if not in technical default. That’s after two years of alleged economic recovery from the crash of 2008- 09. To make matters worse, it’s next to impossible to discharge student debt, even in bankruptcy.
So I don’t have a warm feeling about this student debt bottomless pit.
Let’s think it through. We have a generation of young people, many of whom with sizeable student debts, along with their underwater basket weaving degrees and such. They are unable to obtain the jobs they believed their degrees would accord them.
So there’s a lot of resentment and bitterness, which I witnessed firsthand during a recent walk through the “Occupy Pittsburgh” crowd downtown. I saw a lot of protest signs concerning student debt. It’s a very raw nerve.
The bottom line is that a lot of US young people will never find suitable employment that aligns with their education. Consequently, they’ll never earn enough to repay their student loans. Yet due to the banking lobby, and how that particular cabal has gamed the legal system, the indebted young basket weavers of the nation can’t get a classic “fresh start” in bankruptcy.
Something has got to give, and I believe we’ll see some sort of crash in the student loan markets. The student debt sector has failure built into it, down to the debt-DNA.
Also along the lines of the education bubble popping, I’ve been pondering where and when the first pin would penetrate the latex. Just this week, I believe we may have seen it: The Penn State scandal.
I’ve always had a high regard for Penn State, which is one of America’s great public universities. But if you’re following the news, you’ve likely seen where Penn State President Graham Spanier and iconic football coach Joe Paterno were just fired.
Neither Messrs. Spanier nor Paterno personally committed any indecent act. But they, apparently, knew that a subordinate within the university hierarchy — within the nationally ranked football program — was totally out of line (and I’ll spare you the disgusting details on that).
In a manner reminiscent of how certain churches cover up bad acts — “for the greater benefit of the institution,” goes the excuse — Penn State never properly handled its issues. After a period of time, however, the pot boiled over. A grand jury convened, and people testified.
This week, several Penn State officials and a former high-level Penn State coach were arrested. The Pennsylvania attorney general announced a major prosecution. All around, it’s a bad time for the Nittany Lions.
Yes, this may just be an “isolated” incident of one bad guy doing something bad, and several other people sweeping the issues under the proverbial rug. But the larger story here tells another tale of how some things in the university sector have gotten just too darn big — as in “too big to fail” — until they fail.
With Penn State, we’re seeing Big Football fail, and take down Big Coaching — as in Joe Paterno. This failure is taking down Big University Management too — as in, the president of the institution.
University managements — and, I hope, their boards of trustees — across the country had better be watching the Penn State scandal and looking hard in the mirror. They had better be asking themselves the hardest questions and looking under those lumpy rugs.
This Penn State scandal is not just some issue of having an academically ineligible kid playing linebacker for a few minutes in the fourth quarter. Or even that the star quarterback “borrowed” a Corvette automobile from some car dealer who’s a major football booster.
No, when people start to dissect this Penn State thing, they’ll have to follow the money. At Penn State, Big Football meant Big Money, and it spawned an entire culture that affected everything — permeating the overall university culture.
And while people are dissecting the Big Football money, they had better check out the Big Student Loan money, too — courtesy of government grants and loan guarantees. What ELSE is going on in the dim shadows of the locker rooms and shower stalls, what with all that money at stake? What’s going on with the fundamental mission of the education institutions of this nation?
The Big Money, provided so liberally by the student lending institutions, created lots of excesses and corruptions — great and small — that are just beginning to unwind.
Big Money means that people wind up doing whatever it takes to keep the cash flowing. It means that people will find some way to justify cutting corners, even ethical, moral and criminal corners. Until it all blows up.
Don’t sell your gold.
Regards,
Byron King,
for The Daily Reckoning
Joel’s Note: Speaking of gold, did see our gold coin special? Last week we made available a handful of 100% American 24-Karat Gold Buffalo Coins, exclusively for Agora Financial readers. We started with 99...but only have about 35 left. If you want to grab one, see here.
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| | | | | And back to Bill Bonner...with the rest of today’s reckoning... | | | | | Bill Bonner |
“I don’t have to spend money.”
Damien, our gardener, invited us for dinner on Saturday. We drove over, under a full moon. The little village only has about a dozen houses, all built of stone. It once was the site of a relay station, where travelers could stop, get fresh horses, or spend the night. Now, there are only houses, gardens, and a little stream.
Damien’s house was warm...a pleasure to come in from the cold night air. The fire in the fireplace, contained in a steel firebox, heats the entire house.
We were admiring the fire.
“I don’t spend any money because I heat with wood, which I cut myself. There’s nothing better than wood heat. And I eat things that I grow in my garden...and meat that I get by trading with local farmers. Tomorrow, I’m going to slaughter a pig. I cut up a side of beef a few days ago.”
“Do you have room in your freezer for all that meat?”
“Oh yes...no problem. I’ve got two of them, anyway. All I spend money on is my truck...and electricity. But even on them, I don’t spend very much. You really don’t have to spend a lot of money, if you don’t want to.”
Damien did not mention the alcohol. He also has a vineyard. He uses it to make wine and alcohol...which he concocts into local aperitifs, “Puces d’epines” and “Pineau.” Both begin as grape juice, reinforced with alcohol — typically, from distilled grape juice — with local flavoring added, such as the early flowers of the hawthorne bushes that grow alongside the roads and fields.
“Damien...what did the doctor say?”
“He said it wasn’t cancer. That was the good news. They’re going to do an operation in February. They say I eat too much rich food and drink too much.”
“You probably do.”
“Well, maybe...but in my family, the men always die young. It’s hereditary. Nothing I can do about it.”
“Maybe the men in your family always eat and drink too much.”
“No...I don’t eat and drink any more than everyone else...”
A knock at the door. Mickey...pronounced Mee Kay...came in, wearing a jacket with Mickey Mouse on it. Mickey, a slight man of 58 with a very narrow jawbone, explained why France is in financial trouble.
“I’m the reason France is going broke. I worked for the Post Office. I’ve been retired for 3 years. It doesn’t really make any sense. I earn almost as much as I did when I was working. Statistically, I’ll live for another 25 or 30 years. They’re going to pay me all that time for doing nothing. At least, that’s the idea. But they’ll go broke long before that.
“These retirement systems were set up a long time ago. The unions fought for more and more benefits — earlier retirement was a main one. They won. They wanted better and better retirements. And now the people coming along after me will be lucky if they get any retirement at all.
“You know why Bismarck invented the public pension system? He needed to get elected. And he wanted to take votes away from the Socialist candidate. So, he came up with the pension system. You call it ‘Social Security’ in your country.
“But he set the retirement age at 77, I think. And then, the average worker only lived to be about 65. So, you understand...it was designed only to support the very few old people who lived long enough to get it. But, of course, the politicians found they could get votes by making it better and better. And now it’s so good they can’t afford it. They’ve already begun to change the terms in France. I probably got out just at the right time. I could retire at 55...and live for another 30 years at public expense. What a deal!”
Mickey doesn’t look French. We asked him where his people came from.
“Oh...you’re right. My mother is French. She’s still alive. But my father was a refugee during the war. He came from the Ukraine. My family name is Zacycincaz. Nobody knows how to pronounce it. Or, when I’m on the phone, I always have to spell it out. I like spelling it out. It makes me feel different.
“My father died a year after I was born. I don’t know anything about his family. I probably have relatives in the Ukraine. But I don’t know how to find them.”
“Just go on the Internet,” said Damien. “You can find anything on the Internet.’
“I’m not going on the Internet. I’m an ex-post office guy. A letter carrier. I’m not going on the Internet. It would be disloyal.”
“Then, you’re not going to find your family.”
“I don’t know if I want to find them anyway... Hear that? ”
“It’s Ludovic!”
Damien opened the door.
“Ludovic...come in!” he yelled. “I’ve got Mickey and Mr. Bonner here. Come in and play for us.”
“A boy of about 15 came in. He looked at Mickey. He smiled. He shook our hands...but didn’t look directly at your editor. His mother and father came in after him. Sturdy people. The father had a stiff brush of black hair, with tips of gray...and a large mustache. He was short and jolly. The mother had a finer face...a little on the plump side. Attractive. Friendly. Both were dressed simply. Without pretension. They could have been farmers. Truck drivers. Or, perhaps, school teachers.
“Play something for us...”
The boy began to play. It was the music of rural France — La Musette. Gay. Charming. His first song sounded almost Irish.
He concentrated. His fingers worked the keys on one said...and the buttons on the other. He sang happily. He was a musician at heart...connected with the music in some deep way. He did not have to think about it... He just kept himself in that unique space that all good musicians inhabit, where some inner spirit guides the fingers and the voice.
We clapped and cheered when he finished.
Then, he began a series of songs. One was a lament...like a sad waltz; but it was the waltz of short, country people in farm outfits, not the waltz of tall Viennese noblesse. Lugubrious. Almost whining. And then, perhaps to please us, he played “When the Saints Go Marching In” and “She’ll Be Comin’ Round the Mountain.”
He seemed to have a large stock of songs. We all listened with pleasure and watched in admiration.
Finally, he stopped, bowed to us all as we applauded...and began to take his leave.
“He’s a gifted musician,” we said to his mother.
“Yes...but I don’t want him to go into music professionally. It’s too hard to earn your living as a musician. I told him to train as a pastry cook...or a farmer...and play music for fun. That’s what everybody does around here.”
When the musician had left, we returned to our meal...
..terrine of deer meat...with two glasses of Pineau... to start...
..then, a fish dish (we didn’t understand what it was) with a white sauce...with a bottle of white wine.
..then, rabbit in a mustard sauce and string beans in olive oil...for the main course, with two bottles of red wine.
..then, came the cheese...local....undefinable...with more red wine....
..salad...
..a dessert of clafouti...made of prunes in a custard, on a light, flakey crust...with a sweet wine the color of amber...
..and finally, coffee.
When we had finished we had pushed our chairs away from the table and were leaning back, not sure if we could get up.
“How about a drink...eau de vie or whiskey... as a digestif,” asked Damien?
Regards,
Bill Bonner
for The Daily Reckoning
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