Regardless of any formal announcement of whether or not the United States drops into an actual recession, the ongoing credit crisis guarantees a contraction of the American economy by virtually every measure we know. That period of darkness will be marked by a dramatic slowdown in economic activity, as well as by rising unemployment, additional declines in U.S. stock prices, and constant volatility. And it could last as long as 12-18 months.

But when the dawn does come, it will be one to remember. If U.S. President-elect Barack Obama gets it right – and I have every reason to believe that he will – then investors will be presented with the greatest investment opportunity of our generation. At that point, shares of American companies will be at such low levels that wholesale buying by individuals, mutual funds, pension funds, institutional money managers, and foreign-controlled sovereign wealth funds, will generate gains that will not only make us whole, they will make us rich once again.

A Market Mandela

Creating an analysis of the U.S. economy’s outlook for the New Year is akin to creating a mandala, a geometric work of art whose pattern, symbolically or metaphysically, represents a microcosm of the universe from the human perspective. In some Buddhist temples, mandalas are made of tiny colored beads, painstakingly created by several monks as a form of meditation. In celebration of the ever-changing nature of the universe, the mandala is then joyously shaken by its creators, until it is once again nothing more than chaos embodied in a box of colored beads.

Regardless of the big picture, analysis of a mandala – or the economy – always starts at the center and emanates outward. With the U.S. economy, that centerpiece is credit. The credit crisis has shaken the complex mandala that is our economy and transformed the United States economy into chaos. It’s complex because this economic-forecast mandala derived its form from thousands of individual pieces – in the case of the economy, from scores of data points, many of which are currently dark and foreboding.

The credit crisis we are experiencing results from the contraction – or worse, the cessation – of lending. Under normal circumstances, institutions and markets freely facilitate capital movement between lenders and borrowers. But that’s not happening, now.

Because of a lack of transparency into the balance sheets of borrowers holding such complex and illiquid securities as collateralized debt obligations, credit-default swaps, and non-performing loans, and because of increasing recessionary fears affecting businesses and households, lenders don’t want to increase their loan exposure. Banks are holding onto the cash and liquid securities they control, using them as a cushion against their own potential losses. The U.S. Treasury Department’s direct-to-bank capital injections do not alter these banking realities. In fact, as a Money Morning investigative story recently demonstrated, instead of using these taxpayer-provided infusions to increase their lending, these banks are using the money to finance takeover deals.

The Recipe for a Recession

The National Bureau of Economic Research (NBER) will ultimately determine whether or not the United States is technically in a recession. The business-cycle dating committee of this privately run, nonprofit economic research group is right now studying five factors in an attempt to determine if the United States has entered a recession and, if so, when that downturn started, MarketWatch.com reported. Those five factors are:

• Gross Domestic Product (GDP).
• Industrial production.
• Employment
• Income.
• Retail sales

Regardless of any formal announcement by the NBER of whether we’re in a recession, the credit crisis guarantees a general contraction of economic activity, by every measure.

“Any doubt that we’re officially in a recession can be put aside,” Anthony Karydakis, former chief U.S. economist for JPMorgan Asset Management – and now a professor at New York University’s Stern School of Business – recently wrote in Fortune magazine. “The rapid deterioration of labor markets points to a sharp decline in hours worked and output in the fourth quarter. This is likely to lead to a decline in personal consumption to the tune of 5.0% or so for that period. Since [consumer spending] makes up about 70% of the economy, the stage has already been set for real GDP to shrink at a more than 4.0% rate in the fourth quarter.”

Confirmation of that belief is evident by looking at each of the NBER’s five key indicators.

• Gross Domestic Product (GDP): The U.S. Commerce Department estimated that the U.S. economy, as measured by GDP, rose 0.9% in the first quarter. In the second quarter, GDP advanced an estimated 2.8%. For the third quarter, GDP declined an estimated 0.3%. My own econometric models suggest that GDP actually contracted at a 1.5% pace in the third quarter and will decline another 2.75% in the fourth quarter. For the year, that would mean the U.S. economy actually fell 0.55%. The U.S. economy last posted a full year’s negative GDP in 1991, when it declined 0.2%. Verdict: Recession.

• Industrial Production: This measure of output by the nation’s factories and mines dropped 2.8% in September, and a very steep 6.0% in the third quarter. Verdict: Recession.

• Employment: The U.S. Bureau of Labor Statistics announced Friday that October’s unemployment rate was 6.5%, a jump of 0.4%, which was double what most economists expected, and also its highest level in 14 years. The economy has now lost a total of 1.2 million jobs since the beginning of the year, with nearly half of those losses occurring in the last three months alone, pointing to an acceleration in the pace of erosion in labor markets. Karydakis, the Stern School professor, wrote in Fortune: “By way of comparison, during the 2001 recession and in the sluggish growth that followed in 2002-03, the unemployment rate reached a peak of only 6.3%, in June 2003. We’ve already exceeded that mark and, given that we are still in the early phase of the current recession, the unemployment rate should be expected to push toward the 7.5% range – and possibly higher – during the next three months to six months.” Verdict: Recession.

• Income: Personal income increased $24.5 billion, or 0.2%, and disposable personal income (DPI) increased $25.7 billion, or 0.2%, in September. Personal consumption expenditures (PCE) decreased $33.6 billion, or 0.3%. Excluding the rebate payments made to U.S. taxpayers under the Economic Stimulus Act of 2008, DPI increased $30.3 billion, or 0.3%, in September, and increased $44.0 billion, or 0.4%, in August. Verdict: Too close to call.

• Retail Sales: October retail sales are coming in well below already-diminished expectations, and some reports have been downright depressing – including The Neiman Marcus Group Inc. -26.8%; The Gap Inc. -16%; The Nordstrom Group -15.7%; J.C. Penny Co. Inc. -13%; Kohl’s Corp. -9%;  Ltd. Brands Inc. -9%; Target Corp. Inc. -4.8%; and Wal-Mart Stores Inc. +2.4%. In a report last week, Moody’s Investors Service projected that the retail sector’s woes will continue into 2009 as consumers cut back on buying apparel, footwear and accessories “in order to save money for essentials.” The credit rating firm said in a separate report that holiday spending “will prove even weaker than expected,” amid October’s financial-market swoon. Verdict: Recession.

If U.S. exports are taken out of the GDP calculations going back to January, it’s apparent that there has been very little domestic growth in the economy. And when revisions are finalized in the next few months, we’ll be looking back at the recession that we’re all but certain is upon us right now. Until the credit markets are freed up and borrowers are extended credit at reasonable rates, it’s unlikely that credit, the centerpiece of the economy, will be anything other than a major cog in the wheel.

There are some signs of a thaw, but not anytime soon. The U.S. Federal Reserve’s lowering of the Fed Funds target rate to 1.0%, and coordinated rate reductions by the Bank of England and the European Central Bank, as well as other major worldwide central banks, may start to ease the stranglehold gripping the worldwide credit markets.

The prospect of President-elect Obama’s choosing a different means of attacking the credit crisis will be closely watched and, by itself, may create an air of confidence that perceptions will change. But changed perceptions will not be enough.

The truth about our economic outlook is that it is predicated on demonstrably better transparency. If U.S. banks follow the lead of their European counterparts, which have recently been freed from fair-value, mark-to-market accounting, and which may retroactively mark assets to “internal models” back to July, then balance-sheet clarity will continue to be cloaked in darkness. Lack of confidence in the banking system will persist, especially among the banks themselves. The first order of attack needs to be the creation of a fundamental leadership position that leads to an open, transparent and accountable measure of balance sheet assets and liabilities. As long as failing banks are being propped up, this cycle of credit contraction will persist.

The outlook for the economy is inextricably tied to the price of oil. The run-up of benchmark crude this summer to the record $145 a barrel level, and its subsequent fall to half that level, has wreaked havoc throughout the economy. Similarly, the run-up in commodity prices, and their subsequent fall, also has caused a lot of damage. Together, the dramatic rise and fall in the price of oil and other commodities is a harbinger of greater volatility in the future.

Follow the Money

Follow the money. Capital rapidly inflated the tech-stock bubble. When that bubble burst, capital flowed into and flooded the hard-asset world of real estate. When that bubble burst fast, speculative money dove into oil and commodities. When the U.S. and world economies looked weak, those bubbles burst. The looming threat of inflation this past summer instantly gave way after the drop of oil, gold, metals and agricultural commodities. And now, deflation is seen as the looming threat on the horizon.

Which threat should we worry about?

The answer is – both. The prospect for near-term deflation seems all too real. As raw material prices fall and finished good prices fall due to a lack of purchasing power resulting from lack of credit and world-wide recessionary fears, the U.S. consumer has fundamentally changed his or her collective psychology. Is U.S. consumerism, which is responsible for 70% of GDP, in full retreat? If it is, as all measures project, then it’s likely that government stimulus efforts will overshoot their intended mark.

Just look at what the United States has done already as it battles this financial crisis. It has:

• Handed out more than $150 billion in stimulus rebate checks.
• Floated a $700 billion financial bailout rescue plan – almost $160 billion of which has already been placed.
• Bailed out American International Group Inc., to the tune of $125 billion.
• Covered JP Morgan Chase & Co.’s bet on taking over
  The Bear Stearns Cos. – to the tune of $29 billion.
• Looked to lend struggling automakers $25 billion.
• Agreed to guarantee depositors at all banks.
• Stepped in to buy commercial paper that no one else will buy.
• Guaranteed money-market-fund investors.
• And backstopped the Federal Deposit Insurance Corp. (FDIC), Fannie Mae and Freddie Mac.

And now we’re getting wind of another stimulus package and more help for everyone.

If, in six months to a year, the credit markets are facilitating borrowers again, the massive buildup of U.S. debt will result in a falling dollar and higher interest rates.

That spells inflation.

A massive re-inflation of the economy portends another flood of speculative money into oil and commodities. The cycles are increasingly condensed, more volatile and will be increasingly more disruptive.

Welcome to the brave new world of global finance and speculation.

The Federal Reserve’s balance sheet has ballooned from $900 billion to more than $1.8 trillion. That’s 13% of GDP. The Treasury Department has telegraphed its intention to float $550 billion of debt in the fourth quarter and estimates it will have to float another $368 billion in the first quarter of 2009. Our national debt will then be close to 49% of GDP.

If there is an easing of credit in the economy, and borrowers come to market with the pent-up demand that has not been met for the past year, the competition for funds will raise interest rates. Higher interest rates will counter any stimulus effect from government programs.

Who will buy U.S. Treasury debt if the world is less apprehensive about credit quality? Lenders will once again seek higher returns, potentially forcing the Treasury Department to increase its rates. The potential of this event may sink the dollar if investors perceive that the U.S. economy is stagnant and the world is awash in dollars. The yield curve – the spread between the Treasury’s two-year and the 10-year paper – has been steepening. A steepening yield curve, where short-term borrowing costs are low and long-term rates considerably higher, is good for banks that borrow short and lend long.

But if the perception of risk diminishes, and the perception of future inflation increases, the yield curve will invert and the threat of rising rates will cause a sell-off in the short end of the curve and a rush into longer-dated maturities. Any increase in short-term interest rates would be painful for struggling banks. An inverted yield curve would be devastating, and inevitably would lead to more bank failures.

Home on the Range …

At the core of the U.S. economy sits a desperately ailing piece of the mandala – the U.S. housing market. The once bright prospect of home ownership, which historically formed a beautiful economic picture, right now doesn’t exist. For most Americans, the family home constituted the bulk of their wealth. Or at least it did. And this family financial portrait will get worse before it gets better, since the real estate collapse is far from over. Goldman Sachs Group Inc., for instance, projects another 15% drop in housing prices.

I think that’s conservative. Mortgage rates are actually rising as Fannie and Freddie have to pay higher interest on their short-term notes and bonds. Thirty-year fixed-rate mortgage paper averaged 6.47% last week, up from its 52-week low of 5.36%. The 15-year fixed paper was trading at 6.18%, up from its 52-week low of 4.91% (based on Bankrate.com rate surveys). This trend is definitely not our friend. As housing prices continue to fall, and inventories stagnate and grow in many areas, homeowners are increasingly underwater and are increasingly entertaining foreclosure as a viable economic alternative to indentured servitude.

The Hope for Homeowners Plan, which looks to lower interest rates and reduce principal on mortgages, and which makes homeowners pay a share of the appreciation on their home to their lender when they sell it, was initiated in October and was expected to garner some 400,000 takers. As of last week, according to The Wall Street Journal, there had been only 42 takers. That’s not a misprint – 42 – I even checked with The Journal.

In the real estate realm, the proverbial “other shoe” hasn’t dropped yet, but certainly is dangling – and that’s commercial real estate. As homeowners writhe in agony and stop spending, retailers will go out of business, businesses of all stripes will suffer and commercial real estate will implode. The leverage left over from just the private equity foray into commercial real estate in the acquisitive 2006-2007 period is staggering. Refinancing will be impossible. Banks are stuck with hundreds of billions of dollars of leveraged loans that they took on as bridge and mezzanine financing from the private-equity shops alone, at the time believing they would  be able to securitize those loans and sell them off to investors.

There’s no chance of that, now.

One deal in particular illustrates this entire mess.  Private equity behemoth The Blackstone Group LP took Hilton Hotels Corp. private for $26 billion. Blackstone put up $6 billion of its own money as equity and borrowed the other $20 billion from Bear Stearns, Bank of America Corp., Deutsche Bank AG, Goldman Sachs, Morgan Stanley, Merrill Lynch & Co. Inc. and Lehman Brothers Holdings Inc.

Based on a current analysis of the deal at the multiple of seven times projected cash flow that the market currently puts on Starwood Hotels & Resorts Worldwide Inc. - Hilton’s nearest rival – if Blackstone values its property comparably, it will have to mark its Hilton holdings down 50%, because it paid 13 times projected cash flow. That wipes out all of Blackstone’s equity in the deal. What’s more, the $4 billion portion of the loan that Bear Stearns took on, courtesy of JP Morgan Chase casting off Bear’s orphaned liabilities, now sits on the Fed’s balance sheet – and isn’t likely to go anywhere anytime soon.

Until the real estate cycle completes its implosion and begins to stabilize, there’s nothing that will fundamentally alter the outlook for the economy. This is Ground Zero. President-elect Obama must resist creating only a political solution to the overwhelming economic problem of declining house prices and declining real estate prices in general. Any attempt to put a Band-Aid on this economic plague will only delay the day of reckoning. I regret deeply the conclusion that the lake must be drained before we can realistically climb out of it. But there just aren’t enough ferrymen to get us all to shore.

Always a Silver Lining – My Forecast

The outlook for the economy is not rosy – and that’s an understatement. But there is a silver lining. Even in the near term, the stock market will present innumerable wealth-creation opportunities.

• First, there are plenty of shorting opportunities out there now, and more will present themselves in the future.
• Second, in due course – in perhaps 12-18 months – we will be presented with the investment opportunity of our generation. If President-elect Obama gets it right, and I believe he’s got the potential to bring us all together and get the country through this (and if you’re reading this Mr. President-elect, I’d like to put in my vote for [New York Fed President] Timothy Geithner as next U.S. treasury secretary), American companies will be able to be purchased so cheaply that fortunes will be made. The recovery will not only make us whole, it will make our people and our nation rich again.

I have absolutely no doubt that the United States will lead the world back into balance. The sea change that has arrived is the result of the conservative experiment having lost its true moorings, pushing the economy into disaster. Not that a wholesale swinging of the pendulum to the other side would be good. In fact, it would be disastrous. We have the potential to end up with a new, fair, transparent and judiciously regulated environment where capital formation can again spread its wings and the U.S. economy can fly.

There are new hands reaching into the colorful box of beads that comprise the American landscape and economy. From any human perspective, the United States is more than a microcosm of the universe; it is the center of the world as we know it. It will take time to construct the new mandala. We all need to meditate on the process to ensure that the design we embrace will ultimately be inclusive, forward-looking and – like all great art – an inspiration to all who view it.

Source: U.S. Economic Outlook for 2009

“The businesses we are acquiring are hugely successful with excellent management and staff. This is a once-in-a-generation opportunity,” said Nomura Chief Executive Kenichi Watanabe of the deal, MarketWatch reported.

“Our ability to capitalize on this opportunity in spite of such volatile markets reflects our financial strength and demonstrates how well we have managed the credit crisis. This deal is validation for our strategy,” Watanabe said.

PricewaterhouseCoopers LLP is leading the search for buyers of Lehman’s European assets. Unnamed sources close to the deal named Nomura as the final suitor for the European units. Barclays PLC (ADR: BCS), which earlier acquired Lehman’s North American operations for the bargain basement price of $1.75 million, had only been interested in the equities division.

“We are now focusing on one party as they are interested in acquiring a wider team, which should result in a better deal for staff and creditors,” PwC partner Dan Schwarzmann said, but declined to identify the sole bidder by name. “Given the complexity of Lehman Brothers, these negotiations are difficult, but I’m hoping to give certainty to all involved in the short term.”

Many felt the purchase of Lehman’s Asia and European units was a good fit for the expansion-hungry Nomura.

“Nomura’s global hub for this business is London, rather than New York, so bidding for Lehman’s European operation makes sense,” Wataru Kasatani, senior financial analyst at Meiji Dresdner Asset Management, told Reuters. “Lehman’s Asia operation will also add value to what Nomura has been doing in Asia.”

Source: Japan’s Nomura Broadens Horizons With Purchase of Bankrupt Lehman Assets

• The Reserve’s Primary Fund (RFIXX), one of the largest and oldest U.S. money market funds was forced to place a 7-day freeze on redemptions when its net asset value (NAV) fell below $1. The fund’s shares dropped to 97 cents as its $785 million holding of Lehman Brothers Holdings Inc. (LEH) debt has been valued at zero, The Reserve said, MarketWatch reported.

• SanDisk Corp. (SNDK) stock surged almost 40% after Samsung Electronics Co. Ltd. made a $5.85 billion hostile takeover offer for the memory-device maker. SanDisk shares surged $5.88 to close at $20.92 yesterday (Wednesday).

• The price of gold skyrocketed yesterday (Wednesday) posting its biggest one-day gain ever in dollar terms. Gold for December delivery rose as much as $90.40, or 11.6%, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session, The Associated Press reported.

• Oil ended its slump yesterday (Wednesday) shooting up $6 a barrel after a week and a half of substantial declines. Light, sweet crude for October delivery rose $6.01, or 6.59 percent, to settle at $97.16 a barrel on the New York Mercantile Exchange. Prices slid more than $5 to close at $91.15 on Tuesday.

• Construction of new homes grew at the weakest pace in 17 years in August, dropping 6.2% the Commerce Department reported. Building permits, an indicator of future activity, dropped 8.9% for the month to an annual rate of 854,000 units.

• Barclays PLC (ADR: BCS) said yesterday (Wednesday) that it could acquire more Lehman Brothers Holdings Inc. (LEH) assets to expand its presence in Europe and Asia. “We wouldn’t want to miss the opportunity to add some of the talent from the U.K. and Europe to the team,” Barclays President Robert D. Diamond Jr. said in a conference call with analysts, The Associated Press reported. “It would most typically be where Lehman has a strong position and BarCap (Barclays Capital) a weak position.”

• General Electric Co. (GE) and Google Inc. (GOOG) announced (Wednesday) they would jointly lobby for alternative energy. GE’s Jeffrey Immelt and Google’s Eric Schmidt said at a public event that the companies would team up on a “policy partnership” in Washington intended to promote “tomorrow’s power generation, transmission and distribution,” MarketWatch reported.

• Wachovia Corp. (WB) is considering a possible merger with Morgan Stanley (MS), one of the last two big independent brokerage firms. Morgan Stanley chief executive, John J. Mack, received a telephone call yesterday (Wednesday) from Wachovia expressing interest in the Wall Street investment bank, The New York Times reported. Wachovia declined to comment.

Source: Global Investing Roundups Thursday, September 18th, 2008

They’re like plate tectonics in the field of geology. An earthquake can often be quite a serious event. But one earthquake is just an indication of the presence of a fault, if not a complex fault system. And that fault system may be part of a vastly larger structural zone at the edge of a shifting continent.

When it comes to major changes, you have to keep something clear. Earthquakes don’t move continents. In the big scheme of things, moving continents cause earthquakes. Something similar occurs with economic events.

The Great Depresion, Hooverism and the New Deal

For example, the Great Depression in the U.S. is associated with the administration of President Herbert Hoover. The term “Hooverism” is commonly used to describe government mismanagement of the economy while things slide from bad to worse.

But the truth is that the market excesses that led to the stock market crash in October 1929 (only seven months after Hoover took office) occurred in the mid- to late 1920s, with Calvin Coolidge in the White House. And many of the monetary excesses of the 1920s had their roots in excess U.S. spending by the Wilson administration during the “Great War,” as World War I was called before there was a second.

And looking back at the 1930s, the growth of big government in the U.S. is associated with the presidency of Franklin Rosevelt.

True enough, the New Deal was a Roosevelt campaign slogan.

But Roosevelt’s plan to close the banks after his inauguration was drawn up during the last six months of the Hoover administration. And many of the great public works projects of Roosevelt, such as the Tennessee Valley Authority or construction of dams on Western rivers like the Colorado or Columbia, were drawn up under the Hoover administration. (Why do you think that they eventually renamed Boulder Dam after Herbert Hoover?)

Reaganism and Thatcherism

Much later, the seeds of Reaganism were planted during the preceding administration of President Jimmy Carter, who appointed Paul Volker to run the Federal Reserve. Indeed, it was Volker’s sharp increases in interest rates that broke the backs of the Vietnam-era inflation and the stagflation of the 1970s.

Volker’s policies allowed the Reagan-era tax cuts and supply-side policies to gain traction. Without Carter’s appointment of Volker, we would probably never have heard the term “Reaganism” or “Reaganomics.” The economic boom of the 1980s might never have occurred.

And let’s take a look at Britain’s “Thatcherism.” This concept has become almost synonymous with strong growth monetarism in the U.K. Looking back, Margaret Thatcher is often credited with defeating British inflation and ending an era of heavy-handed government spending and control.

Of course, there is no denying the important and bold policies that Margaret Thatcher pursued. Or Thatcher’s good fortune to be prime minister during the early and successful exploitation of the oil resources of the North Sea.

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But monetarism in the U.K. dates from 1976, three years before Thatcher came into office as prime minister. That was when a Labor government accepted a loan from the International Monetary Fund, paving the way for Britain to prosper under Thatcher.

Deep Roots, Visible in Hindsight

The point to keep in mind is that major economic trends do not just appear and disappear with the coming and going of politicians in office. (We should be so lucky!) The roots of things are usually quite deep, perhaps apparent only in hindsight.

Thus, you want to be careful of assuming that the upcoming U.S. presidential election will usher in some new era of economic policy. Epic changes in economic trends do not simply appear when voters dismiss one bunch of politicians and ask a new bunch to do things differently. In many respects, the dice are already loaded for whichever of the two candidates prevails on Election Day.

It is not overstating the case to say that large-scale change tends to happen abruptly — and not uncommonly — when the previous policies collapse under their own weight. As history shows, it is often the politicians on their way out (for example, Hoover or Carter) who are forced to change things once it becomes clear they have failed.

Monetary Excess, Tectonic Policy Shifts

The excess credit creation by the U.S. over the past 10 years has been a policy failure of historic proportions. We witnessed serial bubbles in technology, dot-coms, housing and now energy and commodities. These bubbles were related to horrible distortions within the larger financial system.

Thus, within the past year, the lame-duck Bush administration has presided over a huge expansion of the government’s role in finance. The Bear Stearns (NYSE:BSC) bailout brought about a sea of change in policy. Now investment banks, not just commercial banks, may borrow directly from the Federal Reserve.

More recently, the Fed announced that it would lend to Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). These two nominally independent firms guarantee or own half the mortgages in the U.S. And not to be outdone, the U.S. Treasury also stated that it would intervene to buy the agencies’ stocks if they stayed under pressure from short sellers.

Perhaps this is not quite the scope of FDR’s New Deal. Then again, the New Deal was about building roads, bridges and dams, not bailing out failed banks.

But the new government intervention to bail out large financial players signals a remarkable change in national economic policy. And it has not come about at the behest of the voters.

This new set of government guarantees to investment banks and Fannie and Freddie will be difficult — perhaps impossible — to reverse. Thus, the new situation will simply be “the way things are” when either President McCain or President Obama takes office.

What will this mean to the future of the U.S. dollar? Among other things, it means that the federal government will be spending tens or hundreds of billions of dollars to bail out bad investments by investment banks and Fannie and Freddie. And in turn, the government will not be spending dollars to fix national infrastructure like roads, bridges or water or energy systems.

And long term, it is probably bad for the value of the dollar. Which is why you should be sure to preserve some of your savings and purchasing power in precious metals like gold and silver.

Until we meet again…
Byron W. King

Source: Economic Tectonics

Gold held above $800 (barely) and silver bounced at $14 (barely). As I said in my commentary on Monday night, I was going to be somewhat reluctant to turn on my computer on Tuesday morning. Fortunately, the worst had passed (for the time being?) as both metals rallied from the Hong Kong bear raid…right up until the London p.m. fix. That was the top in prices for both metals…and it was all downhill from there.

Open interest for gold on Monday’s shellacking showed a drop of 9,912 contracts on huge volume. This is not a lot for such a huge price decline. There was probably fresh shorting by the tech funds and more long buying by the bullion banks that blunted this number somewhat. As for silver…for the sixth day in a row, open interest rose…this time by 778 contracts. The boyz are doing an excellent job of keeping the real magnitude of the selloff from prying eyes. Hopefully, all this will be in the COT on Friday, but I’ll bet a ten spot that it isn’t.

Here’s what the usual NY gold commentator had to say yesterday…”Today’s ECB statement of condition reported a drop of €14 million (0.74 tonnes), attributed to sales by one captive CB (central bank). Last week’s quantum was 2.47 tonnes. Clearly the ECB does not want to appear involved in gold at present – one wonders why it was worth bothering with such a small sale. Perhaps it was option related.

“Yesterday’s (Monday) $36.50 (4.2%) loss on Comex saw open interest slip 9,912 lots (2.5%). One might have expected a large drop: probably there was some fresh shorting.

“Today (Tuesday) world gold dropped over $20 on the TOCOM open, despite there having been no recovery since the NY close. This is very unusual. Both TOCOM and Shanghai locked limit down, and a recovery attempt was blocked at the close. The performance reeked of tape painting, especially as local physical demand was reported.

“Last night, MarketVane’s Bullish Consensus dropped to 65%, the lowest in a couple of years.

“A rally on Comex was neatly eradicated going into the close. Volume was again massive: estimated at 206,604, with a switch effect of only 10,000 lots.

“Gold appears firmly clasped by the bears at present. At least the Indians are happy.”

That’s for sure! With gold (and silver) prices this low, the physical off-take is going to be tremendous from everywhere in the world…and I’m sure the bullion banks know that. My coin guy here in Edmonton has been doing great business all month…especially yesterday. Investors have finally smartened up, as more and more are buying the dips, rather than buying when prices are screaming to the up-side. If you check Tulving (and others) these days, you’ll note that they’re sold out of just about all their bread and butter items. The retail market is in a deficit situation in both silver and gold. No one knows what retail demand is right now, because there just isn’t enough supply to fill it. Ted Butler could be right…they’re cannibalizing investment demand to ensure that the industrial users are well fed.

A story that had sort of fallen off the front page of the papers yesterday is the conflict in Georgia, where Russia has invaded to protect its citizens in South Ossetia. Medvedev and Putin are no fools…attacking when the US can’t help its puppet government in Tbilisi. Putin sent one of his economic advisors to GATA’s gold conference in Dawson City, Yukon a couple of years back. Then a few months after that, he was photographed holding a bar of gold in his hands. It’s a pretty good bet that Putin now knows that the western world’s bullion banks have a ‘golden’ problem…but will he exploit it if/when push become shove? However, the picture is worth a thousand words.

The story (with a Western slant) about the current flare-up in the Caucasus is from The Times out of London and is entitled “Analysis: Why the Russia-Georgia conflict matters to the West”. The link is here.

Today’s second story is one that’s been up at Bloomberg for the last couple of days, but I wanted to make sure that you didn’t miss it. It’s another story about the mysterious demise of Bear Stearns (NYSE:BSC). This time it has to do with put options that were placed against the company…a lot of them. One of the commentators in the story said that a way to determine a link to whether the BS failure was premeditated or not, was to “Follow the puts.” My only comment is this: If they “follow the puts” in the Bear Stearns case like they “followed the puts” placed on American Airlines in the week before 9/11, then the BS investigation will peter out, too. The rather longish story is entitled “Bringing Down Bear Began as $1.7 Million of Options”…and the link is here.

Last year, at a meeting of the Committee for Monetary Research and Education, I said that if a world-wide nuclear war broke out and only one financial market in the world was still functioning in a city that had escaped destruction, what remained of the U.S. Federal Reserve and Treasury Department would find that market and sell promises of gold, and gold would go down, at least for the day, lest any financial market people who had survived the war think that anything was wrong. – Chris Powell, Secretary Treasurer, GATA

So…are we done? Is this the bottom? I’m too gunshy to say yes. Let’s see how the next 24 hours go…and then we can talk about it.

I hope your Wednesday goes well, and all of us at Casey’s Daily Resource Plus look forward to seeing you on Thursday morning.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Wednesday, August 13th,2008

But by keeping interest rates below the rate of inflation for three straight years starting in 2002, the Fed created a bubble in the housing market. That bubble has now popped, leaving in its wake a severe liquidity crisis.

Now big banks won’t lend without the backing of government bonds, and the Fed continues to inflate money supply. All good news for gold, says Adrian…

So Alan Greenspan – former chairman of the Federal Reserve – thinks this equals the Great Crash, if not out-bads it.

“It’s getting increasingly evident that this is a once-in-a-century type of phenomenon,” he told the ever-fragrant Maria Bartiromo in an interview with CNBC this week, “not the standard type of liquidity crisis that we have seen in the past.

“It’s verging on the issue of solvency.”

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To gauge the true scale of this crisis, Greenspan went on, just consider the fact that it took sovereign credit to stabilize first the U.K. and then U.S. financial systems. When Northern Rock went belly-up last Sept. and then Bear Stearns (NYSE:BSC) blew up this spring, Treasury bonds had to be lent out like adjustable-rate home loans circa 2006, covering short- term black holes with government debt.

Without these loans of government bonds, the banks simply wouldn’t lend to each other. They needed securitized tax payments to gain the credibility needed for raising new funds in the market. Short of offering government debt to put up as collateral, they found the cost of borrowing money – when they found any money to borrow – simply too high to bear.

“It’s still very evident from [inter-bank lending] spreads that we have not gotten closure yet,” Dr. Greenspan continued, pointing to the ongoing premium charged for loans backed by anything other than sovereign credit. So to fix the problem – or at least tease it out for months if not years – clearly the world needs more government bonds for the big banks to borrow and put up against cash loans in the market.

“It’s essentially, fundamentally the price of homes in the United States which are determining… the ultimate collateral of mortgage-backed bonds, pretty much around the world.”

Looking ahead, he concluded that “we’re still nowhere near the bottom of the home-price thing” – the word “thing” standing in for “crash…collapse…crisis…deflation” and all the other phenomena Greenspan must still believe can never apply to real-estate prices.

As key contractor, if not the architect, of today’s pan-global banking crisis, he chose to keep U.S. interest rates way below the rate of inflation – making debt pay and savings a suck of real value – for three years straight starting in August 2002:

That period marked the first run of sub-zero returns paid-to-cash since the inflationary ‘70s, back when loose money worldwide led to a bubble in prices that needed 20% interest rates to revive the world’s faith in the dollar.

The start of this decade also saw the gold price – dormant-to-dead ever since the U.S. took that strong medicine at the start of the ‘80s – double inside five years.

“First warning,” as Marc Faber wrote in his Gloom, Boom & Doom Report of Sept. ‘07, of trouble ahead.

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“Ultra-expansionary U.S. monetary policies with artificially low interest rates led to bubbles all over the world and in every imaginable asset class. The price of gold more than doubled in nominal terms and against the Dow Jones Industrial Average.”

So why didn’t gold take a dive when Greenspan’s successor – Ben Bernanke – tip-toed his way back to 4% real rates of interest in late 2006…? Because early gold buyers never believed the Fed would succeed in keeping rates there. With housing now a political issue – and home ownership a god-given right for even the flakiest debtors – the first sign of trouble would cause a collapse in real rates, destroying the value of money in the hope of achieving “Reflation Part II.”

Hey, it worked after the Tech Stock bubble blew up. Why not again? And faced with a much greater crisis, or so Ben Bernanke believes, he’s managed to out-Greenspan the Maestro… pushing real U.S. interest rates way down to minus 3% and worse.

Take gold as a marker of stress, and the true extent of today’s crisis becomes clearer still. Bear Stearns’ firesale to J.P.Morgan (NYSE:JPM) in mid-March – which required an open-ended loan of $29 billion from the Federal Reserve – saw gold jump to $1,032 per ounce. We think it’s a signal that Alan Greenspan ignores it.

“Central banks, of necessity, determine what the money supply is,” as he told Congress in a 1999 hearing. “If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.

“The reason there is [now] very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.”

Today, almost a decade later, the Federal Reserve and its peers across the world are trying to prevent the money supply from shrinking again. That was the fear amid the “Deflation Scare” of 2002, which caused the Fed to ordain sub-zero rates, creating not only the bubble in housing but also the collapse of true money values against oil, food and pretty much all raw materials.

The world’s nostalgia for gold, in response, has seen it treble in price vs. the dollar and more than double against the Euro, Yen and British Pound. But the cheerleader for cheap money when running the Fed, Alan Greenspan, points instead to government bonds when gauging the size of today’s crisis. A true policy wonk, Greenspan thinks only of political bailouts to protect the system, rather than considering how private investors might choose to protect themselves and their wealth.

Heaven knows they won’t get any help from Bernanke’s repeat of the Maestro’s “reflationary” error.

Source: Sorcerer’s Apprentice

But over the same period the most important credit indices have posted declines while others have logged marginal gains. Overall, the broad trend in credit has not been bullish since mid-July. This tells me that stocks are luring more investors into another bear market trap.

Since the onset of the credit squeeze last August, stocks have staged two bear market rallies – the first last September and another one in late March. Both rallies ended badly for investors.

The last bear market rally following the Bear Stearns Cos. (NYSE:BSC) bailout was actually supported by a broad-based decline in riskier credits. But that 10% gain for stocks from late March through late May also proved dangerous. In June, the S&P 500 Index plunged more than 8%. In fact, that was the worst June for the S&P 500 since 1930.

Nevertheless, it’s important to gauge what credit indicators are telling us now so we can at least feel more confident dipping our toes back into the stock market.

Lending rates, as defined by LIBOR, which sets the standard for over US$1.5 trillion worth of global funding remains elevated. It’s still 80 basis points above the Federal Funds target rate.

The same is true in Europe where EURIBOR sits at 4.96%. That’s significantly above the European Central Bank’s (ECB’s) base rate of 4.25%.

These lending rates have not eased since June and continue to paint a bad picture for global cross-border lending or the lack of inter-bank liquidity. Central banks, despite pumping the credit markets with hundreds of billions of dollars or euro since last summer, still can’t ease LIBOR or EURIBOR.

LIBOR remains my greatest concern followed by mortgage rates.

Tune in tomorrow and I’ll show you exactly how the credit markets reacted to this past week’s stock market rally.

ERIC ROSEMAN, Investment Director

Source: Credit Market Says: Don’t Buy Stocks Yet!, Part I

So far this year, eight banks have collapsed. At first blush, eight banks failing doesn’t sound quite as bad if you consider 834 banks went under during the S&L crisis from 1990 to 1992.

But if you want to know the real extent of this crisis, you need to look at the bottom line. Worldwide, the credit crisis has already cost US$476 billion in losses, write-downs, etc.

Seventeen years ago, the Savings and Loan Crisis cost the global economy US$190 billion (or US$350 billion in inflation-adjusted dollars).

The Federal government already bailed out Bear Stearns Cos (NYSE:BSC), Fannie Mae (NYSE:FNM), and Freddie Mac (NYSE:FRE) this year to stop a systemic risk, but at a massive cost to taxpayers.

On top of that, the government’s actions did nothing to fix the credit crisis, which is still the big looming threat to all the other smaller banks and mortgage lenders that aren’t getting bailed out.

The Federal Reserve won’t dirty its hands or spend the money to bailout smaller lenders.

That means it’s going to be a long, painful recovery for the banks going forward. And a few banks won’t make it.

Take IndyMac (OTC:IDMC) for example…

When IndyMac’s clients got word that the bank was in trouble in early July, thousands of concerned depositors pulled their cash out of the bank to salvage as much as they could.

All totaled, depositors walked away with US$1.3 billion in 11 days.

That’s when the FDIC stepped in and shut IndyMac’s doors for good.

And the remaining IndyMac clients had to depend on the FDIC to recover their deposits – assuming their accounts were fully insured.

What Good Is FDIC Insurance in the 21st Century?

As I said, when a bank fails, the FDIC accountants swoop in to tally the books.

The FDIC agents officially close the bank. They freeze the accounts at the bank. Then they begin the long painful process to determine exactly which funds are insured or not.

In the meantime, if the FDIC is dismantling your bank, you’re stuck waiting to recoup what you lost. You can’t write checks. You can’t pay bills. You can’t use your debit card. You can’t even go to the grocery store to buy food unless you have cash lying around.

Technically the FDIC insures every account up to US$100,000, and every retirement account up to US$250,000. But the devil is in the details. It’s generally US$100,000 per holder of account.

So for example, if you and your spouse have a joint savings account, you could hold up to US$200,000 in a single account. Then in theory, if your bank failed, you would recoup your entire account.

But these limits get dicey when you’re talking about trusts, annuities and other accounts – depending on how the account is titled. (Get the full rules here.)

In IndyMac’s case, a whopping US$1 billion of the US$19 billion deposits was uninsured. According to FDIC, US$2.6 TRILLION is currently uninsured in the United States.

So the question is: What do you do if your accounts are simply too big for the FDIC to insure?

A Masterful Solution to This FDIC Insurance Problem

For years, we’ve recommended you seek refuge from possible bank failures by diversifying your holdings.

For example, you can hold up to US$100,000 at several U.S. banks, or invest your long-term safe funds in a bank account overseas where liquidity is much higher. And in our recommended jurisdictions, there hasn’t been a bank failure in over 125 years.

But now, we’ve discovered another unique solution.

Our friends at EverBank have devised a new “Insured Advantage Certificate of Deposit,” that protects your capital up to US$50 MILLION. You can literally park your funds in this CD and the FDIC will insure you up to US$50 million no matter what happens.

You can open this CD for yourself, your business, your non-for-profit organization, etc.

Also, you don’t have to hold this CD for years (unless you want to) for it to mature. You can hold this CD for as little as three months.

Plus, your funds receive high yields at the same time. EverBank is able to do this by spreading the risk out among many banks, to ensure your money is fully protected.

Please take a moment to review the balances and the title on your U.S. bank accounts. Make sure that you don’t exceed the FDIC limits in a climate like this. And, if you discover you do, find the time to find the right solution for you and your family.

The best time to do it is now before the next bank goes bust and takes your savings along with it.

Source: How to Protect Your Life Savings When You’re Over the $100,000 FDIC Limit

Yes, the rescue of Bear Stearns (NYSE:BSC) in March, and Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) in July, averted a major short-term crisis. But the long-term costs of inflation and a worthless dollar will be more painful.

Eric says the value of paper currency will be worth nothing when the inflationary storm hits…

Inflate or die. That’s the Federal Reserve’s mantra since the sub-prime credit crisis first hit the investment scene last August.

Since then, this crisis has taken a destructive path and pummeled global equity and bond markets along the way. Global banks have also lost a combined US$1.6 trillion worth of stock market capitalization since last August. That makes this past year the worst year-over-year loss in history.

Before it’s all over, Americans, Sovereign Wealth Funds (SWFs) and other investors will pay an astronomical price to rescue the battered U.S. financial system.

The Death of a 24-Year-Old Bull Market

The bull market for financial services stocks first began in 1982. And this bull market hit a crushing dead-end in August 2007. It will be years before this sector fully recovers.

Let’s start with banks. Right now, large and small banks are desperate to recapitalize their smashed-out balance sheets. They continue to dilute shareholder equity through massive rights offerings and new issues. Dividends have been sliced and diced.

Since last August, banks have written off or lost a cumulative US$476 billion during the worst credit crisis in a generation.

We’re Postponing, NOT Avoiding Systemic Risk

Over the last 12 months, the Federal Reserve and the U.S. Treasury have dreamed up and orchestrated spectacular bailouts to preserve the financial system and avoid systemic risk.

But what are they really achieving? Long-term the consequences of the Fed’s actions will be horrendous. In the not-too-distant future, you’ll see existing and future generations of Americans paying dearly for our leaders rescuing one financial institution after another.

There is no “avoiding” systemic risk. The final consequence of Morale Hazard is a larger, more threatening financial panic down the road.

When the government bails out institutions and nationalizes failed enterprises, they only increase long-term inflation. For starters, they have to pay for those bailouts. So the government ultimately turns to taxpayers to fund the expansion of credit. By interfering with capitalism’s natural progression, the government delays its own financial reckoning.

In my opinion, an insolvent institution must be allowed to fail.

Morale hazard has played a major role on Wall Street and at the Bernanke Fed since March. Investors and analysts have seriously questioned the Fed’s unorthodox role as lender of last resort.

What business does the central bank have to collateralize a failed institution’s almost worthless debt with Treasury securities? That’s what the Fed did with Bear Stearns Cos. (NYSE:BSC) in March. The Fed did the same thing for other troubled but unnamed investment banks and banks over the same period.

Is Morale Hazard Justified?

Is a bailout justified if that institution mismanaged its business model? More importantly, should the government rescue a financial firm in the interest of deterring systemic risk?

It’s true that the Bear Stearns bailout deflected a major financial panic. But what really happened there? Contrary to most financial news reports in March, several large hedge funds were in the process of liquidating their accounts at Bear Stearns (Bear Stearns was a leading prime broker for hedge funds).

One of the largest hedge funds in the world actually sparked a run by other hedge funds to get out of Bear Stearns. The entire gamut of players scrambled to get their assets out before it was too late. There’s no doubt a major global financial panic would have ensued on March 17 without some sort of rescue.

In July, the government officially assured investors that Uncle Sam would guarantee GSEs or Government Sponsored Enterprises, Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). Prior to Secretary Treasury Paulson’s assurances in mid-July, markets were reeling at the prospects of a Fannie and Freddie collapse.

Again, a failure of both mortgage giants would have caused sheer panic in global markets because of the significant role they play in mortgage financing, debt issuance, and liquidity to banks. So some will argue it was a good short-term solution…but at what cost?

The Piper Will Come Calling – Eventually

Bailouts and Morale Hazard have been highly subjective topics among investors and policymakers since March.

In the end, the United States will have to finance these and future financial bailouts with enormous amounts of credit, mostly from taxpayers. It’s inevitable that all this credit will eventually drain on the economy, American capital markets, and ultimately the dollar.

The United States is already losing its financial supremacy to London, Frankfurt, Hong Kong, Singapore, and Dubai this decade.

Capital flows to safe, tax-efficient shores. We’re likely to see new regulations in the U.S. as a consequence of the sub-prime mortgage debacle and other banking oversights. As a result, the United States will increasingly lose more market share to other international financial capitals.

Eventually, other financial systems will also feel strained by America’s slow but progressive financial dilution.

The United States still plays a vital role in global finance. So it would be naïve to think Dubai or Singapore won’t be affected by another major U.S. financial crisis in the future. That’s why I continue to buy gold. All governments are tied in one form or another to each other as global trade and capital flows have grown increasingly inter-connected. There’s no safe-haven overseas ahead of the next major crisis.

The dollar and other mismanaged currencies are just a bunch of drinks shaken and stirred by a warped bartender. Fiat paper is a poor store of absolute value compared to gold and other tangible assets like oil and gas.

Hedge your future with gold and other hard assets – paper money won’t protect your purchasing power from the upcoming inflationary storm in the United States and eventually, everywhere else.

Source: Costs, Repercussions and the End of U.S. Financial Domination

The next big trend, dear reader…

It’s coming. Consumers – especially the baby boomers – are about to change their way of looking at things. And when Bernanke & Co. realize what is happening, they will greet the new trend like the citizens of Atlanta welcomed Sherman.

“War is hell,” said the yankee general, before burning the city down. So is a correction.

Yesterday’s news brought more details. The Dow rose 40 points. Oil remained where it was. Gold lost $3. And the dollar seems to be strengthening a little against the euro. You can now buy a euro for only $1.56.

“Retail sales stall,” is the word on the street, coming from Bloomberg. Of course, we already knew it. Restaurants are serving fewer meals. Malls are losing tenants. U.S. automakers are desperate to move their vehicles off the lots.

“Big three face bankruptcy fears,” is the headline from CNN/Money.

There are two ways to play a correction, as we mentioned yesterday. (Or forgot to mention?) You can look for bargains as investors sell off their losing positions. Or, you can take a vacation. Read War and Peace…in Russian.

Here at The Daily Reckoning, we’ll take Option #2. We like doing nothing. It gives us time to think.

Many investors, on the other hand, are sure they are looking at the Opportunities of a Lifetime. They see Fannie (NYSE:FNM) and Freddie (NYSE:FRE), for example, and remember when the stocks were trading over $60. “What a bargain they are now!” they say to themselves. Or look at Wall Street. J P Morgan (NYSE:JPM), Lehman Brothers (NYSE:LEH), Bear Stearns (NYSE:BSC)…they’re all selling at big discounts.

And don’t forget the nail bangers. The housebuilders were the first to get nailed. Their stocks got sold off; investors lost billions in just a few months. But take a look at the builders now – hey, maybe they’re coming back! ‘No guts, no glory!’ ‘Go for it!’

Yesterday, one of the biggest builders, DR Horton, reported a $400 million loss for the third quarter. While it is possible that we’ve seen the worst in the housing sector, it is also possible that the sector will never bounce back – at least, not in our lifetimes. Nor will Wall Street. The bargains, in other words, could turn out to be traps for the unwary.

How could that be? We’ll explain.

Over most of the last century, housing prices followed GDP growth and inflation. Nothing more. And it makes sense that they would. Housing is the number one consumer item. Consumers buy as much housing as they can afford – but not more. What happened in the 10 years – 1997-2007 – was an aberration, an unnatural freak caused by a rare conjunction of various absurdities. The dollar-based financial system…the collapse of the dotcoms…9/11…Asian export-mad economies…Alan Greenspan – all conspired to bring about a huge run-up in housing prices and consumer debt.

The two circumstances – like Butch Cassidy and the Sundance Kid – worked together. One kept his firearm on the bank manager, while the other cleaned out the vault. Consumers were able to borrow vast amounts, because their major collateral – their houses – was rising in value. And with the extra credit, they were able to buy more houses!

But the two desperadoes met their end, it is said, like Che Guevara, gunned down by the federales of Bolivia. And once they were dead, they were dead forever.

So too, our guess is that the bubble in housing and lending is over. If not forever, at least for a long time. Credit or interest rate cycles tend to last a long time – about as long as an investor’s career. High-grade yields reached a peak in 1920 and then retreated until after WWII. Then, they rose again…for the next 35 years. Since 1981, they’ve gone down…at least for 22 years…maybe longer. One generation is convinced that interest rates always go up. The next is sure they always go down. One thinks credit gets easier and easier. The next knows it will never be able to borrow another dime – and doesn’t want to. One generation forgets what the generation before it just learned. That’s the credit cycle.

But what did U.S. consumers learn during the last great credit cycle? What are they learning now?

One of the surest ways to make money in the last 10 years was to buy a house. The baby-boomers, especially, saw home ownership as equivalent to saving for retirement. Houses always went up in price; everyone knew that. If you had enough houses you didn’t need any money in the bank. A popular retirement planning technique was to buy a second house at the beach in your ’40s or ’50s. And then, when you were ready to retire, you could sell the main house.

But this is where the Next Big Trend comes in. The baby boomers are suddenly realizing that houses are not the same as savings. And they’re suddenly facing up to the idea of financing their retirements in a world of declining house prices…and rising costs.

“Home energy prices are expected to soar,” reports the New York Times.

What will they do? First, they will be forced to go back to saving. They won’t like it. But they will have no choice. They need money for their retirements. And the only way they can get it is by reducing their spending and saving more.

We know what you’re thinking, dear reader. You’re thinking – “it’s about time!” We’re thinking the same thing. Americans desperately need savings…capital…resources.

But we’re thinking something else too – that the U.S. economy of the last 20 years was built on excess consumer spending. Savings rates went from around 9% of GDP down to zero. Now, if they go in the opposite direction – and they must, in our opinion – the drop in consumer spending will cause the worst recession since the ’30s. We’re not just saying that to be provocative. We can add two and two. Subtract 9% from an economy that is growing at, maybe, 2%. Do that over a period of 10 years (the boomers don’t have to save just one year…they have to save every year). Of course, it isn’t quite that simple. When money is saved it doesn’t disappear. Some of it is re-invested in the real economy, leading to more jobs…more output…and growth. But it takes time to convert a consumer economy into a more balanced economy. And it takes time to pay off debts…and write-off mistakes. In the meantime, you have an economy walking backwards for a long time. And probably tripping over something along the way.

But wait. Will the Bernanke Fed allow it? Will the Obama administration permit a serious, multi-year recession? How will they try to prevent it? What will happen when they do?

Ah…we’re glad we don’t have time to answer those questions today. Stay tuned for tomorrow…

*** Japan says it is in recession. China says it is trying to avoid a slowdown, by loosening credit restrictions. The United States is probably already in a recession; its central bank is giving away money to try to get out of it. So is the U.S. government. Britain is falling into recession too; the IMF warned Britain not to cut rates to try to save itself. Europe must not be far behind…with the lowest consumer confidence numbers in memory.

The whole world is slowing down.

But commodity prices, while retreating, are still up for the year. Copper is 14% ahead of last year. Gold is up 5%. Aluminum is 23% more expensive.

Tanker rates are falling; tanker captains have been told to go more slowly to save fuel. And the oil producers are selling oil forward in order to lock in today’s prices. The industry seems to have little faith in today’s prices – even though oil has come down about 15% from the peak.

*** Another farcical chapter in the history of the War on Terror seemed to come to a close this week. It turned out that the ‘terrorist’ responsible for practically shutting down the U.S. postal system – closing mail rooms across the nation, and frightening old ladies to the point that they were afraid to open letters from their grandchildren – was most likely working for the U.S. government. Bruce Ivins cost the nation millions, maybe billions of dollars, when he sent the anthrax spores through the U.S. mail. But at least he had the good grace to save the country the few bucks it would have spent putting him on trial. After threatening to kill his co-workers and adversaries, he decided it was time to exit the stage.

*** Tomorrow too – more on the Zimbabwe with Oil, Venezuela…

Until tomorrow,

Bill Bonner
The Daily Reckoning

Source: The Absent-Minded Credit Cycle