Investors must be pondering the future.

What will the future look like? No one knows. But investors thought they saw things they liked.

For one thing, there was the Federal Reserve governor from New York, who told the world that there was no risk of a rate hike anytime soon. Bill Dudley knows which way the wind is blowing. He said the Fed would hold money policy loose “indefinitely.”

Indefinitely is otherwise known as “as long as it takes.”

But as long as it takes for what? Ah…as long as it takes until the economy appears strong again.

How long will that be? Ah…maybe longer than anyone realizes.

Yesterday, we were calculating how long it would take to get the jobless number back down to ’90s levels…that is, around 5%. There are now about 131 million jobs in the United States…and about 15 million people who would like a job but can’t find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction – backwards. It’s losing jobs…maybe 3 million this year…and maybe another 2 million or so before it finally stabilizes (who knows?)…for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.

Let’s suppose, by some miracle, the economy turns around…and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half – 1.5 million – gradually reduce unemployment. Now, let’s get out the calculator…20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!

But what if the economy doesn’t grow at 3% per year? Ooooh…that’s the problem, isn’t it? All the feds – and practically all other economists too – are projecting a return to normal. They expect a ‘recovery.’ But what if there never is a recovery?

Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.

“Canberra says risk of serious retraction over,” The Financial Times reports.

But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.

Or maybe they failed to notice that China’s biggest customer is broke.

Right under The Financial Times’ article about Australia is the following headline:

“No sign of credit revival for US households.”

“The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July – the fastest rate since the crisis began two years ago.”

Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.

Another headline in The Financial Times tells us, “Holiday sales [are] set to fall.”

Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?

Perhaps China is focusing more sales on the domestic market; we don’t doubt it. But you don’t refocus the world’s second or third largest economy in 12 months. It takes years. And you don’t get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls – it makes one helluva mess.

Meanwhile, President Obama is adding more gin to the party punch. He says he’s considering ways to create more jobs without a new stimulus program. Among the schemes under consideration is a $3,000 new job tax credit.

Hey, why not! They had such great success with the Clunker tax credit…and with the first time house buyer tax credit. Of course, when you pay people to do things, you can’t be too surprised that they do them. And then, you can’t be too surprised when they stop doing them after you stop paying them. Thus, when the Clunkers program conked out in August car buyers stopped buying. And when the new house purchase tax credit expires in November, don’t be surprised if house sales collapse too. So, if the feds are going to pay people to hire other people, they better be prepared to do it for a long time.

Which brings us back to our calculations. How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP…or more than $20 trillion worth. How do you eliminate debt? Well, some of it simply disappears…through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That’s savings and capital formation of all types – corporate as well as individual. It ignores government, which is going in the other direction. At 15% of GDP per year, paying America’s private debt down to under 2 times annual output is still about a 7-year project.

So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.

And in the worst of cases? Oh, well…that’s a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.

As the private sector eliminates debt, for example, the feds add it. The deficits are scheduled – by the Congressional Budget Office – to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs – it adds up. But the CBO projections are based on very optimistic assumptions, in which the economy ‘recovers’ quickly and grows strongly. They do not take into account the real nature of the slump. It is not a pause…it is a permanent change. The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.

Until tomorrow,

Bill Bonner

Source: The Eternal Depression

Oil didn’t move yesterday. Neither did gold.

The Wall Street Journal reported that markets were reacting to “mixed data”.

That is to say, some reports were encouraging. Others were not. It was as if one weather forecaster called for a blizzard. The other for sunny skies and warm temperatures. Investors didn’t know how to dress.

Among the dark clouds was an item on the falloff in tax revenues. States are having a hard time balancing their books, because their tax receipts are declining. The WSJ reports that they are running 17% below last year.

Since states cannot print money, they’re forced to make cutbacks – typically reducing hours worked per employee as well as the total number of employees. This is a bad thing, says the report, because it increases unemployment and lowers the wage base. This leads to less consumer spending.

Another little cloud appeared yesterday (in addition to the consumer confidence numbers): the vacation timeshare market is collapsing at a record pace.

Well, don’t worry about it. We met a guy who explained the timeshare business to us.

“What you’re selling is a dream. You bring them to the property. You make sure they have a good time. And then you do to the numbers with them. You show them how much they save by coming to your property rather than on a typical vacation. And then you show them the other properties that they can exchange for. They think they can buy a cheap property and then exchange with an expensive timeshare. But it doesn’t work that way. They get stuck in the cheap unit and the dream gets a little faded… And then, they stop coming… and then they try to sell the timeshare. Timeshares are rarely a good investment.”

Besides, timeshares are a small, quirky part of the housing picture anyway. The real story is in the regular housing market. There, if you believe the forecasters, it’s sunny skies.

House prices seem to be stabilising. In some areas, they are going up. Of course, in some places you can get a house at half the price it sold for two years ago. That lures buyers back into the market. If we wanted a house to live in, we might be tempted too. That’s why we like falling housing prices: we get more for our money. But most people want a rising housing market. They think it makes them richer.

They’re likely to be disappointed. They show up at the beach with their umbrellas and sun-tan lotion… just as a winter storm hits the coast.

Forbes lists eight reasons to “remain worried about housing”.

• The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000 more expensive for first-time buyers.

• The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-backed derivatives. What will happen when it stops?

• Mortgage lending standards are tightening up generally.

• Houses are still not cheap. Forbes cites Shiller’s numbers, putting the average house price 41% higher than it was in 2000. Incomes did not increase during that period; ergo, houses are still too expensive.

• Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market.

• The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, during the school break. Then, sales fall with the autumn leaves.

• There are still huge numbers of houses that will be repossessed. Forbes says only 12% of option ARMs have been reset. More repossessions will increase the supply of desperate sellers and decrease prices.

• There’s a ‘shadow inventory’ hanging over the housing market. It could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilise. As they put their houses up for sale, that too will hold prices down.

Some wiseacre economist has probably already come up with eight reasons why housing prices will go up. But the key thing to recall is that this is a depression. It’s a major restructuring of the economy, not a standard post-war recession. After 64 years, the consumer has finally rung a bell. He has reached his limit. He cannot borrow more. He cannot spend more. He is finally cutting back. That fact will echo through the entire world economy – and through the US housing market – for many years.

Houses, like stocks and corpses, may bounce. But they will not begin a real bull market again for a long, long time.

***Our old friend Marc Faber is “highly confident” that things will turn out badly.

“The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society,” he writes.

“We have a money-printer at the Fed,” he continues, which guarantees runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well.

Meanwhile, Paul Volcker says that China’s rise merely “highlights the relative decline of the US.”

So there you have it: China on the way up, America on the way down .

That’s the drama that we’re watching every day here at the Daily Reckoning. In our view, the peak of US wealth and power probably came during the period between the fall of the Berlin Wall and the fall of Lehman Brothers. But there are probably a lot more shoes to drop before people are fully aware of what is going on.

The way we see it, almost the entire 20th century was a mistake, a dead end. Europeans were clearly on top of the world when the century began. Then, after WWI the Europeans in America took the lead role. But WWI shook their faith in their evolving political order.

Not long after, German hyperinflation and the Great Depression shook their faith in their economic and financial order. This left a huge vacuum, which was soon filled by ruthless adventurers and ideological schemers. Much of the rest of the century – from 1939 to 1989 – was spent in hot wars and cold wars against these Bolsheviks, Fascists, Stalinists and Maoists.

In the end, the more reasonable and consensual societies of the West won the battle. But they, too, were transformed by 50 years of war and nearly a century of bad ideas .

“Whoever fights monsters should see to it that in the process he does not become a monster. When you look into the abyss, the abyss also looks into you,” Nietzsche warned.

Looking into the abyss created by Mussolini, Hitler, Tojo, Pol Pot and the rest, Western societies decided both to fight them and to join them. Tax rates soared. Regulations multiplied. University professors taught socialism, Freudianism, modernism, cubism, feminism, racism… and every other ‘ism’ they could think of. Parents spent good money to send their children to universities that turned them into mush-heads.

And – perhaps most ominous – in the United States of America, the military grew into a greedy, grasping goliath… the very thing Eisenhower had warned against.

Then, there were counter-trends in the 1980s… led by Margaret Thatcher in England and Ronald Reagan in the US. But these were mostly frauds . Top marginal tax rates were rolled back. And there were some cuts in regulatory procedures. But government spending tended to go up anyway. Worse, Ronald Reagan mistook the Soviet Union for a genuine threat and increased military spending even further to combat it.

And now, the US staggers under the weight of its eternal wars… its imperial illusions … and its everlasting efforts to provide bread and circuses. If it kept its books like a private enterprise, it would be broke. If it were a public corporation, it would be de-listed.

Still, it spends and spends… and there is no stopping the spending. Trillions are spent on wars in Iraq and Afghanistan, for no apparent reason. But who complains? Too much money is at stake. There are too many lobbyists for too many industries and too many special interests involved. Military spending – even in a time when America faces no substantial challengers – cannot be rolled back. Neither can social spending.

Marc Faber is right. There too, there are too many people with too many dogs in this fight. Both military and social spending will continue to expand until the empire is ruined.

Until tomorrow,

Bill Bonner

Source: A Century of Bad Ideas

Probably most incredible is that the dollar has NOT collapsed. It has lost ground, and was trading at $1.43 per euro on Friday, but no one laughs at you when go to exchange dollars…or offer to pay in dollars rather than the local currency.

For the last 10 years, the money supply in the United States has expanded at roughly twice the rate of GDP growth. And the Fed doubled its balance sheet in just the last 18 months. This last bit of information is stunning. It took the central bank nearly 100 years to build a balance sheet of $1 trillion. Then, under the leadership of Ben Bernanke, it added another $1 trillion in just a few months.

What does that mean, exactly? It means they bought a lot of debt from US agencies and the financial sector. It means also that they “monetized” this debt…transforming it into cash by paying for it with money especially created for that purpose. It also means that the whole financial sector has a bigger financial base against which to lend. The Fed lends against its balance sheet to member banks. These banks then lend to other banks who lend to business and consumers. So the amount of potential credit – as well as the amount of actual cash – has gone up.

There is an iron law in economics. Quality and quantity vary inversely…which is another way of saying that when you add more of something…each unit is worth less than the unit that preceded it (assuming everything else remained unchanged.) Certainly, this is true of money. The more money in a financial system, the less each unit of it is worth. Add enough new money – as Zimbabwe proved recently – and each unit becomes worthless.

But so far, the dollar has not collapsed. It has fallen, but gently…

Meanwhile, the inflation rate has NOT gone up. Instead, it’s gone down. Go figure. You add that much monetary inflation and you’d expect to get a boost in the CPI. Nope. Not yet.

On the other hand, we’re already a year-and-a-half into a major recession/depression. You’d think you’d get deflation. That hasn’t happened either. Prices are down. But not as much as you’d expect, given the scale of the downturn.

Related to both the dollar and inflation is the bond market. Even more surprising is that the bond market has NOT fallen apart. Let’s see, a huge input of monetary inflation; that ought to kill the bond market. Then too, the biggest sales of Treasury bonds in history – needed to cover a $1.7 trillion deficit this year. That ought to kill the bond market too. And on top of it all is a projection from the White House telling us that the feds will add $9 trillion to US debt over the next 10 years. And that assumes a full recovery in the economy! Now, that ought to kill the bond market for sure.

Not at all! Bond yields have risen…but the 10-year T-note still only gives you 3.4%.

Of course, you say, it’s a depression. Bond yields always go down in a depression.

But if it’s a depression, how come commodities are up? And stocks are up? Above all, how come Chinese stocks are up? Everybody knows China earns its money selling products to Americans and other non-Chinese. If the rest of the world is in a depression, who is China going to sell to? How come China isn’t in a depression already? But there you are – there’s another thing that hasn’t happened. Chinese stocks haven’t collapsed.

And getting back to commodities, they’re all up. Commodity prices don’t go up in a depression; everybody knows that. They go down. But commodities are NOT in a bear market. Go figure.

And, of course, there’s gold. The metal gave up a dollar on Friday, but it’s still just $4 short of the $1,000 mark…and just a shadow below its all-time high. Gold is a commodity…but it’s also money in its purest, more reliable form. Commodities go down in a depression. Money goes up. But since gold is an alternative to paper money, it tends to go up only when paper money goes down. As explained above, the dollar has NOT collapsed. So why is gold going up? It should be going down, reflecting the effect of a recession…

There are two possible answers.

First, maybe the iron laws of economics have been repealed.

Or, second…maybe the iron laws just haven’t caught up to the market – yet.

Unemployment is at 9.7%. It will probably rise above 10% this month. The economy is supposed to be recovering. Now, The New York Times is talking about a “jobless recovery.”

You’ll remember the phrase. It came out in 2003. Then, the economy was allegedly recovering from a micro-recession. Economists were surprised that there were so few new jobs created.

What was really happening was that there was no genuine recovery. Consumers just decided to go deeper and deeper into debt – egged on by the feds. A regional governor of the Fed actually urged consumers to “go out and buy an SUV.” So Americans bought more products from the Chinese…on credit…and the Chinese enjoyed a boom.

And now the boom is over. Americans are paying down their debt. And unemployment is getting worse. This time the feds are pumping trillions into the system. This time, it’s not the consumer who is willing to go further into debt; it’s the government. And once again, few new jobs are being created.

Without jobs, the recovery is an impostor…a phony…a fraud. Without jobs, people have no extra spending power. So they can’t buy – except by going deeper into debt. They were willing to go further into debt in ’03-’07. But not this time. They’ve reached their limit on debt. Besides, with house prices falling, who would lend to them?

No new jobs = no new income. No new income = no new sales. No new sales = no new profits = no new jobs.

But what about the government? The feds are still willing to borrow. How come federal borrowing can’t create a new boom – even if it is a phony one – like the one in 2003-2007?

Federal borrowing, spending, bailouts and monetary inflation are not helping the real economy. But they are making a lot of money available for speculation. That’s why so many things are NOT happening. Investors are speculating on commodities, gold and Chinese stocks – for example. And US bonds.

But this is not a durable, reliable trend. And it’s not laying the foundation for a genuine recovery. Borrowing by the feds is different from borrowing by individuals. Private households can go broke. But they can’t take the dollar down with them. When the feds borrow, they pledge the full faith and credit of the United States – and its currency – as security. So, as they borrow more…the value of the US currency comes into doubt…then, into play…and then into jeopardy.

Investors eventually sell off dollars and US bonds…then, what should happen finally does.

Caution: what has to happen does eventually happen. But it doesn’t have to happen when you think it should. The big surprise might be how long it takes before these things happen. If we were Mr. Market, for example, we probably would not take gold much higher – not just yet. We’d let deflation take gold down for a while – long enough to separate the speculators from their money. Then, we’d let investors get used to falling prices – before bringing inflation back.

And, as promised on Friday, the answer to ‘What was the SEC doing?’

Harassing us!

Recall that last week, we reported the latest news on the SEC. Investigators wondered why the agency had let Madoff run billions in suspicious trades without ever checking them out. The SEC responded by saying it lacked sufficient resources. Then, New York Senator Schumer said he would propose a measure to increase the agency’s spending power by 75% – by allowing it to shake down the financial industry directly, rather than going to Congress for a budget allocation.

Which still leaves open the question of what the SEC was doing when it should have been making Madoff do the perp walk. We have the answer: the SEC was harassing us.

Yes, hard to believe that they would target your poor, innocent editor. And they didn’t, not directly anyway. Instead, they targeted one of our colleagues. This was a couple of years ago…when Bernie Madoff was at the top of his game.

We haven’t mentioned it in this space…on the advice of our lawyer. Judges don’t like it when you “try a case in public.” And the case still isn’t settled.

But we won’t discuss the merits of the case…only the circumstances around it.

This will help us understand what the SEC is really up to…and why the hope of regulating fraud out of existence is as vain and futile as trying to clear out a bar by using foul language.

Here’s what happened. One of our researchers discovered what he thought was a great investment opportunity. He called the target company and spoke to a VP in charge of public relations. What he heard convinced him that he was on to something, so he published a recommendation, sending a copy of it immediately to the company.

He got no response from the company. But a few months later, the SEC knocked on our door. What was their beef? That we had misled investors. How so? In our report, we told readers what the VP had told us. We carefully called it “insider” information…putting the word in quotes to let readers know it wasn’t the same as the forbidden ‘inside information.’ Anyone could have found out the same thing if he had just called the company, read the published reports, and put two and two together.

Our caution was lost on the SEC. They didn’t see the difference between “insider” information and inside information. What’s more, the fellow at the target company denied he had said what he had said. Curiously, he made no objection when the report was published; the objection came after the SEC started snooping around.

The SEC wanted blood. They thought they could get an easy win against a little guy in Baltimore. They wanted us to turn on our own associate…to stop defending him and cop a plea. Obviously, we couldn’t do that. We stood behind our man.

Then came a quirky turn of events. Both the researcher and your editor’s company were charged with what was effectively a new crime – a federal case, no less. The SEC, remember, is supposed to be protecting investors from stock fraud, manipulation, and ‘insider trading.’ But there was never any allegation of manipulating a stock or insider trading. Instead, the agency charged us with NOT having inside information. We never traded in the stock at all…or manipulated it in any way. So the feds alleged that we did not have any inside information to trade on…and that therefore our representation – of having “insider” information (in quotes!) – was a kind of fraud.

And the whole case turned on a telephone conversation between a stock market analyst and a public relations guy in a company. One said one thing; the other said another thing. Reporters make mistakes all the time; so do their sources. But this was the first time the government made a federal case out of it.

We believe our analyst. The SEC believed the other guy and spent millions trying to prove that our fellow lied. No one who bought the research report on the stock complained, let alone threatened a lawsuit. Prior to any SEC probe, refunds were issued to anyone who asked (most did not). Yet the SEC, protector of the public interest, spent years…and millions…on the case – while Bernie Madoff was stealing billions from his clients.

Case against your editor’s company: judges ruled that we were innocent.

Case against our colleague: still undecided at the appeals court.

Case against SEC: guilty of negligence, dereliction and humbug.

Until tomorrow,

Bill Bonner

Source: This Recovery is an Imposter

Then, he followed his own theory… coolly… confidently… cutting Fed rates down to nearly zero, pushing Congress to pass a huge ‘stimulus’ bill, and even forcing Bank of America (NYSE:BAC) to take over Merrill Lynch. In this last event, he is accused of deliberately hiding Merrill’s enormous losses and then threatening the BofA board with dismissal if they refused.

Because of Bernanke’s swift and assertive action, the nation’s banking system held together during those critical weeks of late-2008. And because of his monetary (and fiscal) policies, all the worlds’ economies are now in some stage of recovery. Stocks are rising. House sales are increasing. All the indicators point to a better world.

In recognition of the fact that he saved the world, Ben Bernanke was given the nation’s highest honour; Obama picked him to continue as head of America’s central bank, the Federal Reserve… even though he was appointed by his predecessor, a Republican.

Everyone needs a story. It’s the way we understand things. Data is just data. Numbers are just numbers. Facts are just facts. Without the framework of a good tale to hold them together, they are worthless.

That’s why, here at the Daily Reckoning, we are suspicious of facts, data and numbers. As for the numbers, they are wrong before they get to us… often intentionally. Then, when they are later straightened out, they sometimes tell a completely different story. Even the ‘facts’ often turn out to be not facts at all… but distorted data, information has been twisted to fit into a storyline.

The more precise the data, meanwhile, the more they lie. Give us a CPI rate of 6.24% and we will give you back two numbers that are total fictions… and another one that turns out to be wrong later. As for the GDP growth rate… don’t even bother to give us a number at all. Whatever the digits say, it’s a lie.

This week came news that the GDP is falling at a 1% rate. This number surprised economists. They thought it was falling at a 1.5% rate. This better-than-expected number encouraged investors to buy stocks; the Dow rose 37 points yesterday. Oil and gold remained more or less where they were.

Economists are frequently surprised. In a study of GDP forecasts, a researcher found that economists did nothing more than extrapolate current trends into the future. If the GDP was growing at 2%… they projected that it would grow at 2.3% the following year. Or maybe 1.9%. These projections were mostly correct. Generally, one year is a lot like the year before. But whenever the direction changed dramatically, economists missed it completely. In other words, they’re not really capable of telling us what the economy will do – unless it does nothing different.

We’ve discussed the emptiness of the GDP figures many times. Just because the GDP is growing doesn’t mean people are really any better off. In fact, GDP growth during the Bubble Epoque was really a measure of how fast people were ruining themselves. Seventy percent of the GDP was consumer spending; as consumer spending went up so did debt. The result was a paradox and a shame – at the end of one of the longest periods of uninterrupted GDP growth in history, the typical householder was poorer than he was than when it began.

That’s why we are skeptical of numbers… especially precise numbers. They lie through their decimals.

What matters is the story… and our story now centers on the role of one man: Ben Bernanke. But the story that most people hear… and believe… is false. It is like GDP growth in the Bubble years… it may sound right on the surface, but the real story is opposite to what is commonly believed.

Bernanke ‘wrote the book’ on avoiding deflation, ‘tis true. But he doesn’t really have a clue what he is doing. He didn’t really avoid a Second Great Depression. There isn’t really a genuine recovery underway. And the world is not becoming a better place as a result of Ben Bernanke’s exertions.

Au contraire… he’s making a natural mess into an unnatural one. He’s turning a depression into a Great Depression… He’s making a bad situation worse.

At least, that is OUR plotline. But we’ll let the story tell itself… day by day… and see where it leads us. If we are wrong about the plot… we’ll find out…

*** What a summer.

Last night we invited our neighbours over for a barbecue. Damien, our gardener, manned the fire. Jules took care of drinks.

Along with the farmers, their wives and their children, came the girls from across the road. You’ll recall THAT storyline, dear reader. This has been a summer of awakening for the teenagers. For the first time since we’ve been here – 14 years – our boys have noticed our neighbours’ girls. Every summer before, we would only see them in church, lined up in pretty dresses… quiet… polite… We exchanged kisses, in the French manner, after the mass, but that was it. Otherwise, we never saw them.

“This is a summer the boys aren’t likely to forget,” began their older brother at breakfast this morning. “They all went down to the pond after dinner last night. I went down to say hello, but after a few minutes, I felt out of place. It was pretty hot down there.”

Yes, the girls have grown up. And so have the boys. Back and forth, all the month of August. Playing tennis and swimming in the daytime. Having dinner and hanging out at the pond at night.

“It’s a lot of fun,” our youngest boy, 15, reported earlier in the week. “But it’s complicated. We all seem to like someone else… but not the one who likes us. Eloise likes Henry, but Henry likes Claire. Claire likes me, I think, but I like Sylvie. I don’t know who Jules likes, but I think all the girls like him.”

Last night, however, it looked as though the iron filings were finally lining up. Your editor went down to the pond at 2AM; it was time to take the girls home, he told them.

“I don’t care if the girls want to stay or not… Take them home,” he told them.

The boys obeyed. But it was obvious that none of them wanted to leave. Edward had one of the girls by the arm. Henry and another were deep in conversation on the other side of the fire. Jules was nowhere to be seen.

It was the last time they would see each other until next summer. The girls would go back to their lives in Paris or elsewhere. Our boys would go back to school or on to their careers. Tonight was their last night together. The goodbyes were long… and, probably, tender.

“C’mon… get going,” said Father, heartlessly. “Wrap it up…”

Source: Making a Bad Situation Worse

It all started back in 1991, when J. Aron & Co., Goldman’s commodities-trading division, recommended that a large institutional client invest about $100 million in commodities.  The vehicle “du-jour” was Goldman’s own investment vehicle, the Goldman Sachs Commodity Index (now the S&P GSCI Commodity Index).

The GSCI is a 24-commodity dollar-weighted index, comprised of 70% energy (oil and natural gas), 8% industrial metals (aluminum, copper, lead, nickel and zinc), 3% precious metals (gold and silver), 14% agriculture (wheat, corn, soybeans, cotton, sugar, coffee and cocoa) and 4% livestock (cattle and hogs).

Goldman was to take the other side of the bet, meaning that should the index rise, Goldman would have to pay equivalent returns to the investor.  In order to hedge, J. Aron needed to institute similar positions in the futures markets for those commodities.

But the plan had one wrinkle in it.  At the time, the U.S. Commodity Futures Trading Commission (CFTC) – the agency that regulated the commodities sector – placed position limits on certain agricultural commodities, like wheat, corn and soybeans.  Other commodities weren’t subject to these same limits.  Yet it was necessary to hedge all the commodities concerned in order for this investment arrangement to work.

So with a large chunk of new business at stake, J. Aron asked the CFTC to grant it an exemption.  Goldman contended that it was not a speculator, but was instead a true “hedger.”

The upshot: In October 1991, J. Aron was granted the sought-after exemption.

Inspired by J. Aron’s success, other members of the commodities-trading oligopoly followed suit, and soon had similar exemptions in hand.

The Global Commodities Boom

In the 18 years that followed the exemption grants, the commodities sector was all in all a pretty orderly place. Between 1990 and 2002, in fact, commodities prices essentially traded sideways.

Unfortunately, that stability wasn’t to last. Like a greyhound that sets out after the hare after having been penned up for too long a stretch, commodity prices started to surge – and ended up doubling over the next six years, albeit in a relatively orderly fashion.

Finally, last year, a market that had been simmering for far too long finally came to a full-fledge boil – and last summer boiled over. Food prices soared, intensifying inflationary fears here in the United States while prompting the leader of the United Nation’s World Food Programme to warn that a “silent tsunami” of hunger was threatening to span the globe.

It seems, though, that the actual boiling point was reached last summer when oil went into a near-vertical climb, surging 63% in just five months, and hitting an all-time high of $147 a barrel last July. Given that oil is in many ways the most relevant commodity to the general public (think fuel for transportation and heating), the new record price touched off a media feeding and prompted projections that crude oil could be headed for $500 a barrel.

As commodity prices were shooting skyward, however, U.S. stock prices saw their already-steep descent turn into a nearly vertical plunge – thank to a worsening of the deepest financial crisis since the Great Depression.

As a result of that crisis, the world’s largest banks, insurance firms and brokerages have been forced to take nearly $1.5 trillion in writedowns, Bloomberg News reported. Because of that and some other related problems, U.S. Treasury Secretary Timothy F. Geithner is pressing Congress to somehow restrain the $600 trillion worldwide derivatives market.

And that has set the stage for a showdown that pits the regulators against the speculators.

What Gensler Wants …

As the spotlight has increasingly been focused on Goldman in the last couple of years for its trading prowess, it’s been suggested on many occasions that the investment bank must be benefiting from some sort of a “special” relationship with the federal government.

The suggestion is understandable on several levels.

Only a month ago, for instance, when Goldman reported its financial results for the second quarter, the investment bank’s trading results helped it record all-time-record profits of $3.44 billion – a good 50% above what experts had been forecasting for what had been expected to be a “blowout” quarter for Goldman.

The stunning profit results once again reminded observers that Goldman Sachs alumnae seem to have a “knack” for landing in positions of high influence.
Former U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., who held that position under former U.S. President George W. Bush – where he was widely viewed as the mastermind behind many of the bank bailout programs conceived last fall – was once the chairman and CEO of Goldman Sachs.

While he was serving as Treasury secretary, Paulson’s office calendar says he called Goldman Sachs Chairman Lloyd C. Blankfein roughly 24 times the week that the federal government opted to bailout out busted insurance giant American International Group Inc. (NYSE: AIG). Remember, had AIG been allowed to collapse, Goldman would have been left holding the biggest of all bags, because of the oversized bets they’d made on AIG’s financial insurance.  Paulson, it seems, would have none of that.

The “Six Degrees of Goldman Sachs” doesn’t end there, either, as the many connections show. Geithner, the current Treasury secretary, was mentored by Goldman alumnus John Thain [the last chairman and CEO of Merrill Lynch before it merged with Bank of America Corp. (NYSE: BAC)].  Plus, Geithner just chose Mark Patterson, formerly a lobbyist for Goldman, as his top aide.

And don’t forget about Gary Gensler, the newly installed head of the CFTC whose resume includes a 20-year stint at Goldman Sachs. But interestingly – perhaps even ironically – Gensler’s new job pits him directly against Goldman, as the CFTC looks to rein in what some consider to excessive speculation.

During hearings held in July and August, attended by representatives from both Goldman Sachs and JPMorgan Chase & Co. (NYSE: JPM), Gensler commented that the CFTC “must seriously consider setting strict position limits in the energy market.” He also indicated that his staff had been instructed to determine “every authority available to the agency” to guard the interests of the public as well as the markets.

What Goldman Should Get

In its defense, Goldman has argued that setting position limits on trading commodities is likely to prove harmful, as restricting access could affect liquidity.  (Highly liquid markets, or “deep” markets with large volume, are considered to be more fairly priced).

Steven Strongin, a managing director at Goldman, recently told a Senate hearing committee that “attempts to regulate volatility have rarely – if ever – succeeded.  Yet they often have unintended and significant consequences.”

Although commodities trading accounts for a considerable part of Goldman’s revenue – some estimates place it at about 8% to 9% – making it a target for would-be reformers, Strongin’s cautionary words should serve as a warning to back off for one simple reason.

He’s right.

Because of the exemption granted to the trading houses, institutional investors have been better able to provide commodity diversification to their portfolios, thereby minimizing some asset and inflation risks.
United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) – two ETFs that are among the largest such products in the world.

Though very popular, such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) could also be affected.  They currently boast large volumes in the 12 million and 40 million units traded/day, respectively. That means that a limitation on futures positions – let alone an outright prohibition – would work against the best interests of individual investors.

Even producers and refiners of petroleum products could end up being squeezed, as well. These oil-sector players sometimes hedge risks by calling on the large commodities traders who can provide them with custom trades on demand.  The dealer then turns around and wisely hedges its own risk.  Now, doubt is being cast on the ability to perform these transactions.
So we know that Goldman, along with JPMorgan Chase) and others – as the largest owners of derivatives – have a lot to defend.
But there’s actually an even-bigger-picture view that argues against regulation – of any kind.

Who Needs Rules?

Government oversight, intervention, and insurance schemes usually lead to problems – often really big problems.

A simple example should be enough to make my point.

Just think back to what happened last year to mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).  It doesn’t take an accounting degree to figure out that, by having their loans government guaranteed, management had no incentive to follow cautious lending practices.

After all, why should they?  When a base salary is certain, a bonus is tied to sales or growth, and there are no consequences for bad results, why not take on more risk and just shoot for the moon?  If you hit it out of the park, your bonus swells.  If you strike out – even so badly that you even make “Mighty Casey” look like Henry Aaron – and you lose really badly and your company loses big, even to the point of bankruptcy or outright collapse, you still get your base salary.

Where’s the incentive to manage your risks?

In the case of a bank, there’s no incentive to be careful with depositor assets when the Federal Deposit Insurance Corp. (FDIC) is your bottomless backstop.

Clearly, the government does not always know better.

And that brings us back to Goldman Sachs.

Goldman Sachs: Unplugged, Unfettered, Unregulated

In the debate about regulating the commodities markets, I come down on the side of Goldman, reasoning that a free market – left unfettered – knows best, since the forces of supply and demand will ultimately price things fairly.

Inside an economic system as highly developed as that of the United States, everything operates at a level of complexity that no single person – let alone a government bureaucracy – can operate, or even fine tune. And as soon as anyone begins to tinker with it, there are always going to be unintended consequences.  Which leads us back to the question of regulation.

According to Prof. Kent Moors, a noted global oil consultant, only a small portion of a commodity’s price, at any given point in time, can be attributed to speculators.  He believes that speculators they are necessary to provide liquidity and that, in the end, the benefits speculators provide cancel out any of the negatives often ascribed to their marketplace activities.

If regulations with real “teeth” – in this case, position limits on energy futures – are actually put in place, U.S. financial leaders will end up playing the economic equivalent of Whac-A-Mole – an unwinnable game, and a dangerous one, at that.

While the final result is difficult – if not impossible – to picture, here’s my best guess: The financially lucrative, economically prestigious and strategically important commodities-trading business won’t fold up and disappear – it will just move to another country, where it’s better treated, and even nurtured.
Perhaps it will end up in Asia, as has been the case with so many other important businesses during the past couple of decades.  And that, once again, will end up costing America jobs – these jobs high-paying and prestigious – at the worst possible juncture.

According to commodities guru Jim Rogers – who is frequently quoted here in Money Morning – “the three commodity exchanges in China are booming.  Dalian trades more soybean contracts than Chicago does already, and that’s with a blocked currency [and] a closed market.  Can you imagine what’s going to happen if and when they open that market up to foreigners?  It’s going to explode.”

So as you think about “big bad trading firms” such as Goldman Sachs, and commodities speculators, remember the necessary role they play.  And realize that restrictive regulations will end up being bad for consumers, investors, and the same free markets we should be defending.

Source: How Over-Regulating Goldman Sachs Will Lead to Higher Oil and Commodity Prices

Good day… And happy Friday! The data released yesterday morning was a mixed bag, as the leading indicators climbed for a fourth straight month and the Philadelphia fed reported a big jump in their gauge of activity, but the initial jobless claims unexpectedly rose. Unemployment in the US will continue to be a drag on the economy, slowing any recovery and possibly pushing the US back into recession (or as some predict a depression). Today we will get some news on the housing market, and while the media will pump up the fact that month on month sales continue to rise, another report released yesterday showed mortgage delinquencies hit a record high in July. The proportion of homeowners delinquent on their mortgage or in foreclosure rose to its highest levels in four decades. An ominous sign for the US economy is that the problem loans have shifted away from the subprime borrowers to those driven into delinquency by unemployment. More than half the mortgages in the foreclosure process during the second quarter were prime loans. So while this morning’s data may show a bump up in monthly home sales, the US is still far from being out of the housing problems.

The European markets took the Euro higher against the dollar after reports showed German services and French manufacturing unexpectedly expanded in August. Another report showed an index of German services industry grew for the first time in more than a year. This data confirms that the largest nation in the EU is pulling itself out of recession. The German services index rose to 54.1 from 48.1 and the French manufacturing index increased to 50.2 from July’s figure of 48.1. So both indices moved over the 50 mark which is an indication of expansion. And the composite index of both services and manufacturing for the 16 nations sharing the euro moved to 50 from 47, another strong indication that Europe is starting to grow again.

I have read a number of articles and research report which throw darts at the European Central bank for not being more aggressive with ‘quantitative easing’ and stimulus efforts. These latest reports indicate to me that the ECB may have played it ‘just right’. I know it won’t be clear sailing from here, and that the European recovery will still have some bumps, but the ECB left some powder dry and will be able to step in again if needed. And if the recovery sticks in Europe, the ECB won’t have near as much manufactured liquidity to pull in from the markets.

And I’m sure some readers will question how I can trumpet the recovery in Europe while at the same time believing the recovery here in the US won’t have legs. The main difference is what is fueling these recoveries. While many, including your current Pfennig writer, are in the opinion that the nascent recovery here in the US has mainly been driven by government stimulus; you can’t say the recovery in Germany and France is being driven by government intervention. Digging into the recent positive data here in the US shows the government is responsible for most of the spending; the private sector has largely stayed on the sidelines. The recovery in Europe, on the other hand, is being fueled by increased consumer confidence and internal private sector demand. In fact, many of the dollar bulls have continually chastised the European governments for not taking a more aggressive role in providing stimulus to their economies.

England and the US have yet to feel the inflationary impact of their budget busting ‘quantitative easing’ programs; but believe me, inflation is lurking just around the corner. While the US’s Bernanke and UK’s Darling have chosen to ignore the future consequences of these programs, Trichet and the ECB always kept a hawkish eye looking toward the future.

Currency traders got excited about these European data releases and took the Euro back above 1.43. As Chuck would say, the big dog started to move and the rest of the pack followed suit. The leaders vs. the US$ were the Nordic currencies of Sweden, Norway, and Denmark which were 1,2, and 3 overnight vs. the US$. Even the Swiss Franc showed some strength, matching the move up by the Euro.

The Norwegian currency probably benefitted a bit from an article which ran in the Economist magazine. The article was entitled “Which central bank will raise interest rates first?” and pointed out the most likely candidates were Australia and Norway. I believe the Pfenning pointed this out a few weeks ago, but for now the Economist magazine has a bit more readers than the Pfennig, so the article probably had a bit more of an impact on the markets. The article points to the brightening economic picture for both of these countries and the fact that “Because both countries primarily export staples like raw materials and food, their sales abroad have held up relatively well. Australia in particular benefits from Asian customers whose economies have remained pretty robust.” The magazine predicts that Norway will likely be the first to raise rates.

Long time readers of the Pfennig will recall that the direction of interest rates was at one time the largest determinant of currency movements. Those countries with central banks which were looking to raise rates were the favorite of investors. Nations with central banks who were ‘in front’ of the inflation curve and raising rates to combat future inflation were the best places to invest during this time period. Lately the currency markets have been trading on risk aversion, with bad economic news pushing investors toward the dollar, and positive news moving them back into higher yielding assets. As the global recession eases, I would look for the currency markets to return to past trends, and reward those currencies who have rising interest rates. Australia seems poised to benefit under either scenario, as they are already in the ‘higher yields” camp and are also predicted to move these rates even higher.

No big news out of the boondoggle in Jackson Hole, not that I expect any! There was one story which caught my eye yesterday regarding the meeting. Mohamed El-Erian, who is the CEO of bond giant PIMCO was on the news wires with suggestions for the central bankers meeting in Jackson Hole. He apparently is worried about the disjointed approach these central bankers have taken in their intervention with the markets and believes the approach will lead to volatile markets and slower global growth. He also believes we are in for a drop in the value of the US$. “The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian. “The real risk is that you will get a disorderly decline.” According to El-Erian, the euro will rise to $1.60 by the end of 2010 and the Canadian dollar will appreciated to 1.01.

And finally, the Mexican central bank will probably keep their interest rates unchanged at their meeting today. Inflation which has been running above their target level will prevent policy makers from cutting the benchmark rates to stimulate their economy. The Mexican pesos has turned in a good month, even outperforming the popular Brazilian real and Australian dollar. But don’t get too excited, Mexico is still very dependent on a strong US market, and at least some of this appreciation has been due to rising oil prices.

Speaking of oil, crude ran through another milestone yesterday hitting the high for the year. Oil exporters such as Norway, Brazil, Mexico, and Australia should continue to benefit from these higher prices. But the other commodities we track, gold and silver, seem to be stuck in a range. Silver seems especially cheap compared to gold right now, and both are good hedges against future inflation. I have to believe both are set for a breakout on the upside at some time down the road.

Currencies today 8/21/09: A$ .8331, kiwi .6789, C$ .9229, euro 1.4329, sterling 1.6574, Swiss .9448, rand 7.8576, krone 5.9725, SEK 7.0928, forint 187.70, zloty 2.8667, koruna 17.7965, yen 93.88, sing 1.4378, HKD 7.7511, INR 48.595, China 6.8313, pesos 12.846, BRL 1.8442, dollar index 78.06, Oil $73.59, 10-year 3.46%, Silver $14.01, and Gold… $944.40

That’s it for today…Hope everyone has a Fantastic Friday and a Wonderful Weekend!!

Chris Gaffney

Source: Mortgage Delinquencies Move Higher…

Here is Warren Buffett’s view:

“Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

“They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

“The United States economy is now out of the emergency room and appears to be on a slow path to recovery.”

This is probably the view shared by most economists and most investors. It is not our view. From where we sit there is no recovery underway…and there never will be one. You can recover from a hangover. You can recover from a nasty divorce. You can even recover from an earthquake. But once a depression begins, you can only endure it. Get on with it. Get it over. And then, you can begin rebuilding again. You will never recover the economy you had before the crisis. You must find a new economic model.

A headline from yesterday: “Reluctant shoppers hold back recovery.”

That’s one way to put it. Shoppers don’t have any money. They need to cut back. Most likely, they will cut back until their savings rates reach 10% of disposable income. That will take $1 trillion out of consumer spending. The economy cannot possibly recover under those conditions; it can’t return to its same old, consumer-led, credit-fuelled self. Instead, it must go through a period of transition – in which output is depressed – until it finds a new personality, better suited to the new economic circumstances.

But Buffett is not worried about the depression. He’s worried about how the recovery is financed:

“.. enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”

Buffett does the maths. This year, the US deficit will total $1.8 trillion. Since 1920, the largest peacetime deficit was 6% of GDP. This is 13% of GDP. The magnitude of it alone should be cause for alarm. But there’s more. Where does this money come from? Even if you could direct 100% of the net US trade deficit (about $400 billion, the money that ends up in foreigners’ hands as a result of American spending) and 100% of American’s savings (estimated to be about $500 billion), you’d still be $900 billion short.

Desperate borrowers should expect to pay high rates of interest. A borrower who doesn’t need the money can shop for the best rates and hold out for a good deal. But when a person needs to borrow, he takes what the market gives him.

Yet, one of the most curious things about the financial world circa 2009 is the yield on the 10-year Treasury note. It has fallen to under 3.5%. Despite record borrowing by the feds, lenders content themselves with the lowest yields in nearly half a century. Go figure.

The market seems to be anticipating a depression. Why else would bond yields be so low? If the economy sours…and the stock market sinks…the safe yields on Treasury bonds will seem like a good alternative. But Buffett believes the Treasury yields are not as safe as they appear. That other $900 billion has to come from somewhere. And the feds can’t allow interest rates to rise significantly; that would undermine all their stimulus efforts. High real interest rates depress economic activity. So, what can the feds do?

“ Washington’s printing presses will need to work overtime,” says Buffett prophetically.

Of the two ways of financing the deficit, one is a flimflam; the other is robbery. In the great credit expansion consumers borrowed so they could buy things such as automobiles. Now, the feds borrow and bribe the voters with money to buy automobiles. No matter who does it, borrowing for consumption is merely taking from the future. Then, when the future comes…the account has to be settled. Result: no net gain. What was consumed in one year is not consumed in the next.

Of course, the feds don’t spend money the same way consumers did. Consumers wasted their money on frou-frou and watchamacallits of their own choosing. The government wastes money on different things – like turtle crossings and billion-dollar bailouts.

Not that we’re complaining about government spending. We’re just pointing out that it’s not the same as private spending. What makes goods good is that people choose them and buy them with their own money. They get what they’ve got coming. But the feds are spending other peoples’ money. If they get any goods at all it is practically an accident.

But what we’re talking about this morning is the dollar. According to Buffett, the dollar is in danger. He’s worried about the larceny, not the flim-flam. Printing up additional dollars robs savers. Each new dollar created to buy US debt makes each one already in existence – say, in a vault in the Bank of China – worth less than it was before. If that isn’t true, the whole body of economic thinking from Adam Smith to Irving Fisher is nothing but a fantasy. And the only way to protect the value of the dollars held by savers, theoretically, is to withdraw the stimulus money before inflation sends prices soaring.

Buffett is an optimistic fellow. He believes that responsible authorities will turn off their dollar-printing machines in order to protect the greenback. Here at the Daily Reckoning, we’re not so sure.

First, the depression is likely to be worse than people think. This will mask the effects of dollar printing. Plus, it will make the need for more dollars – more federal spending, more US debt – seem more urgent than ever. Instead of pulling the plug, they’ll turn up the speed.

Second, the feds are not really interested in the health of the real economy anyway. This is an insight which is obvious, but one that only came to us recently. When the feds put in place absurd policies to delay and restrain the inevitable correction, they are making things worse, generally, for everyone. But the politicians are responding to their constituents’ demands. One campaign donor wants to keep his business alive. Another wants to keep his job. Still another promises the feds high paying jobs on Wall Street, after their term in Washington is over. Millions of others — more than enough to turn an election – want free pills and mortgage subsidies and so forth. When the feds try to bailout the economy, they are only doing their jobs! They’re not going to stop doing their jobs – especially in a depression – just to protect foreign dollar-holders.

Source: Flim-Flam, Robbery and the Economics of Depression

Behold the “Plenty” an alternative currency printed and exchanged exclusively in Pittsboro, N.C., population 2,500. A couple dozen Pittsboro stores accept it as a dollar alternative, like the local feed store and a produce co-op.

The idea is nothing new… we’ve chronicled scrips like the Ithaca HOUR and Western Mass’ BerkShare for some time. Both have millions worth in ciculation.

But according to the LA Times, scrips haven’t been this popular since the Great Depression. They’ve gained significant traction in New York, North Carolina, Michigan, Colorado, Arizona and Massachusetts, with many more communities beginning to experiment.

And we’re noticing a decidedly less hippie, more snarky feel: “The Plenty is not going to get siphoned off to Wall Street,” says B.J. Lawson, president of The Plenty co-op board, “or Washington, or make a stop in Bentonville on its way to China.” In Mesa, Ariz., locals are using Mesa Bucks to essentially stick it to the man… bring a sales receipt from inside city limits to the local arts center and they’ll give you a percentage of your sales tax back in Mesa Bucks.

So much for “E Pluribus Unum”

Source: Sick of the Dollar? Print Your Own Money

Good day… And a Tub Thumpin’ Thursday to you! Once again yesterday, we traded all day in a very tight range with the currencies. The ADP/Challenger data didn’t give anyone a warm and fuzzy about the labor picture, and tax receipts are in the news… So, let’s go to the tape!

OK, front and center this morning, I have to talk about this deal with tax receipts in this country. So, I’ve chronicled the April and June debacles for tax receipts, but just in case someone is new to class, and missed that, let’s review… The U.S. used to count on the months of April and June for HUGE cash receipts from tax returns, but this year, both April and June’s tax receipts were so bad, the expenditures were greater than the receipts! I highlight these two months because, they should have been positive months for the budget balance… If we can’t post a positive balance in April and June, what’s the rest of the year going to look like?

Well… Just for starters, tax receipts in the U.S. are the worst since the Great Depression, and if they continue on this path, could pass that awful period of time for the top spot! My friend, the Mogambo Guru, had this to say, in that “special” Mogambo way of describing something… Let’s listen in…

“In fact, speaking of taxes, it makes your hat fly up comically off your head in astonishment when you realize that total income and corporate taxes are less than this year’s federal budget deficit alone! And then you really start screaming your guts out in anger when you then realize that the total federal budget is 400% of total federal revenues! They are spending four times as much as they take in! Four times as much!”

You can read the Mogambo Guru on the Daily Reckoning… www.dailyreckoning.com

OK… Now that I’ve sufficiently raised my blood pressure talking about the fact that in a time when tax receipts are down because of the depression, the Gov’t is spending more and more and more and more. I’ll stop there, even though the Gov’t isn’t stopping their spending! And just like I used to bang on consumers for spending more than they made… The U.S. Gov’t continues to do so… Consumers have gone to saving (YAY!), but the Gov’t has not! As we all found out, you can’t continue to spend more than you make forever… I wonder when the Gov’t will figure this out… (probably when foreigners say “no mas” on financing the deficit spending!)

Well… The currencies, like I said at the top, remain in a very tight trading range… Three currencies stick out above the others though in the overnight trading…
1. Mexican pesos… Moodys affirmed Mexico’s credit rating, which was thought might be revised lower, and the peso rallied on the news…
2. Canadian dollars/ loonies… After a day of consolidation trades due to the Central Bank Gov. once again threatening the markets if they take the loonie higher, the loonie went higher! Look for the Bank of Canada (BOC) to come out and make a statement, something to the tune of they are going to extend their interest rate pledge for a longer period. They will do this to once again attempt to keep a lid on the loonie…
3. Brazilian real… Oh brother! Somebody put a leash on this puppy! The real continues to edge higher and higher, and now is close to move past the 1.80 level.. The real has posted a better than 27% gain VS the dollar this year, with most of that move coming in the past 3 months!

Yesterday, there was a story in China Daily, that China was going to switch from Australian Iron Ore to Brazilian Iron Ore… Now… On the outside this looks bad for A$’s and good fro reals, right? Well… As I told the boys and girls on the trading desk yesterday, I think this is more posturing by China, after some of their businessmen were arrested in Australia and charged with espionage. We’ll have to keep an eye on this, to see if there’s more to this than posturing…

The news didn’t hurt the A$ yesterday… In fact the A$ is trading near a 10-month high this morning, after posting a surprising jobs report for July last night… Australian employers added jobs in July. Once again, the jobs markets sparks the A$ higher, just like in the go-go days before the deleveraging meltdown last year.

I’ll tell you what this report does do more than anything… It gives the markets the idea that the Reserve Bank of Australia (RBA) is definitely on track to raise interest rates next year… And some traders are now thinking that the RBA moves rates higher before we turn the calendar page on 2009! WOW! Now that’s aggressive thinking! So, you can see why the A$ took the news in China Daily, and let it roll off its back like water on a duck’s back!

In the U.S. yesterday… The ISM Index for Services (non-manufacturing) printed, and fell unexpectedly in July… The ISM Services Index printed at 46.4 following the prior month’s 47.0 reading. The weakening was broad-based amongst the sub-indices. New orders declined to 48.1 from 48.6, business activity fell to 46.1 from 49.8 and employment softened to 41.5 from 43.4.

But… To offset the ISM we saw Factory Orders rise, but that data was for June… I really don’t understand why it takes two months to get data like this to the markets!

Today, we’ll see the Weekly Initial Jobless Claims, which have fallen below 600,000 each week, but remain very high at 580,000, so nothing to get the “recovery is here campers” all excited… Today’s report is just an appetizer for tomorrow’s Big Jobs Jamboree…

Economists are expected a HUGE drop in the jobs lost figure for July, dropping to 327,000 from June’s 467,000 (after BLS adjustments, of course!) I really don’t know where they think the jobs came from, but if they’re right, then good for the U.S. worker! And, that kind of number, although it will seem strange to say this, and for you to hear it when you read it, but… A good Jobs Jamboree number will be negative for the dollar…

Why? Because… As I’ve been telling you over and over again, like a broken record, or for you youngsters, a scratched CD… The dollar was a safe haven last fall and winter with U.S. Treasury purchases… As the losses mount on those “safe haven” purchases of Treasuries, and things begin to look brighter those “safe haven” trades are reversed, and than means the dollar gets sold…

You know for some time now I’ve written about the Treasury Bubble popping… And those darn Fed Reserve purchases of Treasuries kept a lid on the losses mounting… But, it appears that the cartel, I mean Fed Reserve has backed off their purchases… And Treasury yields are once again on the rise… And for those of you new to bonds, they work like this… As a bond’s yield goes up, the price goes down, and vice versa… So… In January this year, the 10-yr Treasury yield was 2%… In June it reached 3.80%, then the cartel, I mean Fed Reserve bought Treasuries, and the yield on the 10-yr fell to 3.12%… But in the past three weeks, those yields have risen once again to 3.73%… Looks like the Bubble popping is once again on the table, eh?

You’ve got the U.S. issuing more and more Treasuries to finance their deficit spending, and on the other side you’ve got Treasury holders unloading them on the markets… That looks like a perfect storm brewing, folks…

The Bank of England (BOE) and The European Central Bank (ECB) are meeting as I write… Don’t expect anything earth shattering from either meeting… There is hope that the BOE will announce an end to their Quantitative Easing (QE), which I talked about yesterday. Now that would be earth shattering, but… There’s no guarantee that the BOE sees things the way the markets want them to be seen!

Gold backed off yesterday as it saw profit taking. The shiny metal had traded over $670 yesterday before seeing the profit taking. I would think that the inflation hedging buying of Gold would really be strong for the remainder of this year, as my inflation fears really begin to grow stronger every day, you know I’m alright now… HA!

Currencies today 8/6/09: A$ .8410, kiwi .6705, C$ .9320, euro 1.4390, sterling 1.6975, Swiss .94, rand 8.05, krone 6.02, SEK 7.1350, forint 187, zloty 2.8825, koruna 18.04, yen 95.50, sing 1.4350, HKD 7.75, INR 47.73, China 6.8312, pesos 13.04, BRL 1.8130, dollar index 77.79, Oil $71.56, 10-year 3.73%, Silver $14.69, and Gold… $961.05

Chuck Butler

Source: Spending More than We (the U.S.) Make…

Since March 9, the S&P 500 is up 48%. The small-cap index, the Russell 2000, is up 65%. The EAFE international index is up 67%. And the MSCI Emerging Markets index is up 79%.

Yet five months ago, investor sentiment was black as Halloween night and equity mutual funds were experiencing massive outflows.

How did millions of investors get it so wrong?

The short answer is they didn’t know what they didn’t know. They didn’t know that the economy can’t be reliably forecast and the stock market can’t be consistently timed. They didn’t know that abject pessimism is the long-term investor’s best friend.

Why We Were Never Heading Into Another Great Depression

And, perhaps most importantly, they didn’t know that it was never likely that we were heading into another Great Depression.

Read your history. The Depression was caused by policy errors: tight money, higher taxes and protectionist legislation.

The Federal government has done a lot of things wrong since this economic crisis began. But it hasn’t been so foolish as to make the same mistakes it did almost 80 years ago.

• The Fed has taken short-term rates to zero, a powerful tonic.
• Bernanke is flooding the system with money.
• Plus, Uncle Sam is spending money like there’s no tomorrow. (Too much, in fact.)
• And there have been no trade wars with foreign nations.

Bear in mind, economic knowledge in the 1930s was like medical knowledge in the Victorian era. We’ve come a long ways since then. No one is going to bleed the economy with leeches.

The Gloom-&-Doomers See Clouds in Every Silver Lining…

Yet the gloom-and-doomers, the folks who see the cloud in every silver lining, have never understood this.

Not only have they completely missed out on the stock market’s big gains, but the highest-yielding money market in the nation yields less than 1%. Gold is stuck in neutral. And many with the strength of their convictions are holding double-short funds that have lost most – or nearly all – of their value.

These investors never seem to realize that the media delivers the world through a highly distorted lens.

When you hear five times a day that…

• The economy is in contraction
• Unemployment claims are increasing by more than 400,000 a month
• The U.S. housing market is spiraling down
• Consumer spending is anemic
• Business investment is down and credit is tight

…It’s tough to muster much confidence to buy stocks.

The Greatest Buying Opportunities of Our Lifetimes

But as I wrote in this space just one week before the market bottomed:

“Irrational exuberance is as dead as Che Guevara. And while true contrarianism is by definition a lonely business, 10 years from now this market is likely to be viewed as one of the great buying opportunities of our lifetimes. Many investors will disagree, of course. And that’s fine. As George Santayana famously said, ‘Those who cannot learn from history are condemned to repeat it.’”

It hasn’t take 10 years, of course. Or even 10 months. (Although it’s unlikely that we’ll see this bull market reach much higher levels without a few interruptions.)

Two of our core principles are:

• Number one, owning a diversified portfolio of profitable businesses is the best way to protect and enhance long-term wealth.
• And number two, the best time to buy will always be when the majority of investors are despondently selling.

Yes, these principles have served us in good stead.

That’s why we call them principles.

Good investing,

Alex

Source: How Did Millions of Investors Get It So Wrong?