Bill Bonner (The Daily Reckoning, UK):

Are we in a depression yet? The number of Americans living on food stamps has risen to 37 million. The ‘30s had soup lines. The ‘00s have food stamps.

And what else was big in the ‘30s? Escapist movies. Here’s a headline for you:

“Box office takings set to smash records,” says the Financial Times. What kind of movies? End of the world catastrophes… vampires… strange non-humans doing strange things.

For example, there are ads for Avatar all over Europe. The film seems to concern Spock-like creatures who use bows and arrows. Pure escapism, in other words.

Stocks went down a bit in America yesterday. The commentariat blamed it on higher producer prices, thought to be harbingers of consumer price inflation.

Of course, consumer price inflation is what everyone is counting on.

The debts of the past need to be reckoned with. Borrowers are doing the best they can. They pay when they’ve got the money. They default when they don’t. Since ’07, mortgage debt is down about 2% –to about $10 trillion. Most of that decline comes as a result of defaults and repossessions.

Let’s see, 2% over two years ain’t very much. At that rate, it will take half a century to bring mortgage debt down to the comfortable levels of the ‘80s.

What’s more, it will be hard to do at all. Incomes are stagnant… or actually falling. As people cut back on their spending in order to pay down debt, it reduces income to employers, as a consequence of which the economy is weaker… with fewer jobs and less income to the folks who are trying to pay off debt.

What a drag! People ran up huge debts believing that they would never actually have to pay them. They figured they would refinance, and pocket the built-up ‘equity’.

But, according to a report in this week’s press, though mortgage rates are at a multi-generational low, finding a banker willing to lend is as hard as finding a liquor store that makes home delivery on Sunday.

That’s largely because the equity most homeowners have is negative. Houses are down about 30% since ’07. Any buyer who bought or refinanced a house in the last four or five years is likely to be under water.

Even in normal circumstances paying off debt is a long, hard process. Mortgage debt is long-term. Paying it off is long-term too. Many people see years of painful scrimping and saving ahead of them.

What they would all appreciate is a little help from inflation. Inflation lightens the load. It increases nominal incomes while holding mortgage payments steady. It increases nominal ‘equity’ too.

House prices tracked inflation for a hundred years. It was only in the last ten years or so . . .

Click here for the rest of Mr. Bonner’s commentary on The Daily Reckoning, UK Edition.

Bill Bonner (The Daily Reckoning, UK):

The ‘recession’ did more damage than they think

Claptrap! Nonsense! Balderdash!

Everywhere we look, someone is saying something ridiculous.

Which is good news to us. This Daily Reckoning was getting to be serious work…what with the world facing a total financial meltdown and all.

So, we’re pleased to be able to lighten up by, once again, telling you what an idiot Tom Friedman is. You already knew that? Well, it doesn’t hurt to repeat it…

We hadn’t seen much of the old Tom recently. His recent editorials in the New York Times were no smarter than before, but a bit subdued…as if some chemical trace of good sense had slipped into his system, perhaps from a paper cut. But now, he’s back, big as life and twice as stupid.

We’ll come back to Tom in a moment, but since this is a financial service, we should probably begin with the financial news.

The Financial Times is looking over its shoulder. The recession is over, it says; time to take stock of the damage.

“Beyond the Crisis… With most of the world’s economies officially out of recession, the FT launches a series examining the legacy of worst global economic crisis since the 1930s,” says the FT. But according to the figures below the headline, the crisis wasn’t so bad. The US economy walked backward only 3.5%. Now, it’s making progress again.

The FT editors should keep their eyes on the road. The ‘recession’ did more damage than they think. And it isn’t over… There’s more trouble ahead.

The ‘recession’ in the US has wiped out…

…ten years of stock market progress. Actually, stock prices are no higher than they were in 1998…

…ten years of employment progress. You have to go back to the ’90s to find a time when so few people were working in America…

…ten years of income gains. The typical household had less real, disposable income than it had 10 years ago.

In other words, a whole decade has been lost. Baby boomers are now ten years older, and less prepared for retirement than any previous generation in US history.

In Florida, joblessness has reached 11.2%. The jobless picture gets even grimmer when you consider the effect of long-term unemployment on the unemployed.

“It’s a killer disease,” says Thomas Cottle of Boston University. “People are going to be damaged and may not recover in their lifetimes.”

The FT elaborates: “The longer people are out of work the more their skills decline and the less appealing they become to employers.”

That puts the boomers in a bad spot. If they lose their jobs now they may never work again. Which means, they will face retirement with very little money…and a keen interest in making sure the feds keep the money flowing their way. They may not recover in their lifetimes…

Housing starts are at a 10-month low. Mortgage applications are at a 12-year low. As far as we can tell, both housing and employment figures are getting worse.

In short, the ‘recession’ is far from over, even if the feds are able to jive up the GDP figures from time to time.

Click here for the rest of Mr. Bonner’s insightful analysis at The Daily Reckoning, UK edition.

Bill Bonner (The Daily Reckoning, UK):

Poor Goldman Sachs. Everyone is on its case. Criticizing. Carping. Jealous. Envious.

So, today we rise in defense of the Wall Street giant. Yes, the Goldmen may be shysters. But they are honest shysters…

Besides, it was another slow day on Wall Street. Investors are still mulling the news. As we all know, the recession is over. But… what kind of strange recovery is this?

A survey showed that only 1 in 10 workers says his income is going up. This is the lowest reading since 1946.

Meanwhile, the news two days ago was that homebuilding took a dive in October. Work began on 11% fewer houses than the month before. On multi-family dwellings, the figures were worse – down 35%.

Why would homebuilding go down when the economy is supposedly gathering strength? Well, builders were wondering what would happen when they finished the houses. The new house tax credit was due to expire; they weren’t sure the politicians would be witless enough to renew it.

They need not have worried. Give the politicos a chance to do something stupid and they will come through every time. Since the end of October, Congress passed and President Obama signed an extension of the housing credit. Until next April, at least, first time buyers will get an $8,000 credit.

You’d think that would have revived animal spirits a bit in the residential construction industry. But today’s news tells us that mortgage applications are falling – even with lower interest rates.

How come interest rates are falling? Well, here again, we see the heavy hand of the feds. The “quantitative easing” has come to a halt… that is, the Fed is no longer buying US Treasury debt (it doesn’t need to). But its buying of mortgage backed securities continues. That program will last until March of next year.

Still… housing is not cooperating.

This news hasn’t had much impact on Wall Street. All that can be said is that investors have seemed to hesitate for the last couple of days.

Stocks fell softly yesterday, with the Dow down only 11 points. Oil stayed at $79. Gold rose to $1,141. And the euro remained at $1.49.

Investors must still believe in what the Washington Post calls a “lukewarm recovery.” It is like finding a body on the street. You feel for a pulse and discover that it has not quite reached room temperature. It is tepid… Not quite alive. Not quite dead.

Too close to the quick to bury… too close to the grave to boogaloo.

Click here to read the rest of Mr. Bonner’s commentary at The Daily Reckoning, UK edition.

Martin Wolf, speaking, gravely, for the world’s intelligentsia in The Financial Times last week, proclaimed that: “the only thing worse than rescuing the system would have been not rescuing it.” But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds’ part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely –but not completely – the result of government initiative. Artificially low interest rates – intended to counter the modest downturn of 2001 – sent the wrong message. Consumers – notably those in Britain and America – bought things they couldn’t afford. Producers – notably those in Asia – made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic “growth” of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of “counterfeit GDP” at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode.

Finish reading the complete article at The Daily Reckoning.

Porter Stansberry explains the forces behind the current rally The Daily Crux

America is running out of rope The Market Ticker

The world financial system’s Achilles’ heel The Daily Reckoning

Roubini on a U shaped recovery Naked Capitalism

Larry Flynt calls for a national strike The Huffington Post

Look for an X shaped recovery Real Clear Markets

The risk of double dip recession rising Financial Times

What the stress tests didn’t predict NYT

Hedge funds declined by an average 0.7 percent in June, bringing the year-to-date loss to 0.75 percent, data compiled by Hedge Fund Research Inc. show. It’s the worst start to a year since the Chicago-based firm began tracking returns in 1990. The $1.9 trillion industry has posted one losing year, in 2002, when funds fell 1.45 percent amid the 23 percent decline by the Standard & Poor’s 500 Index.

With hedge funds producing such losses, investors forked over half as much to fund managers in the first quarter ‘08, $16.5 billion, as they did in the last quarter of ‘07, just over $30 billion.

So, the investment vehicle of the rich is also getting pinched in this global downturn. Though funds that invest based on views of the global economic outlook were able to hit double-digit returns this year. This from the Financial Times:

These so-called macro hedge funds, which attempt to identify extreme valuations in stock markets, interest rates, foreign exchange rates and commodities, have shown returns of more than 12 per cent this year, outperforming the S&P 500 index by about 17 per cen.

To identify extreme price valuations, macro hedge fund managers generally employ a global approach that concentrates on forecasting how global macroeconomic and political events affect the valuations of financial instruments.

Worries about the state of the US and world economy show few signs of easing. A recent survey of more than 70 US hedge fund managers and their advisers has found that most have a broadly pessimistic view on the prospects in 2008 for the country’s economy, which 80 per cent expect to be flat or in recession by the end of the year. Many expect the Federal Reserve to raise interest rates rather than lower them further.

Bill Bonner elaborates on the definition of a recession:

The old timer’s definition of a recession was ‘when your neighbor loses his job.’ When you lose your own job, it’s a depression. How many people have lost their jobs in this downturn? Well, for the answer to that question we look to the same people who give us the official inflation numbers – the apparatchiks at the U.S. Labor Department. Therein, of course, hangs a tale…and we will let Dana Samuelson of Danagold tell it:

” The average person judges a recession mainly on employment. If jobs are available, then the economy is holding up. If jobs are scarce, the economy is poor. By that standard, the economy is really struggling, with payrolls down in each of the first four months of the year. But the headline figures, again, don’t reflect the lived reality of Americans. At 5.0% in April, down from 5.1% in March, the current BLS unemployment rate is relatively low by historical standards. Yet the number of jobless Americans of prime working age, that is, men aged 24 to 54, is historically high at 13.1%. Most of these people don’t qualify as unemployed but they are nonetheless out of work.

“Why don’t these would-be workers show up in the headline statistics? Mainly because the government’s definition of the unemployed includes only people who do not have a job, have actively looked for work in the four weeks preceding the survey, and are currently available for work. But it excludes the self-employed, 1099 workers who can’t get enough contracts, those working part-time or on commission only, and the under-employed (like real estate agents waiting tables or mortgage brokers bagging groceries). It also doesn’t count those who’ve given up looking for work altogether—a category known as “discouraged workers,” defined as persons not currently looking for work specifically because they believe there aren’t any jobs available for them. Some analysts say this particular group of jobless Americans—who believe their prospects for finding a job are getting ever dimmer, yet who don’t figure in the computation of the unemployment rate—represent the nation’s dire job situation. According to John Williams’ Shadow Government Statistics , the primary source for unbiased economic data, if adjusted for “discouraged workers,” the actual unemployment figure for April rose to 13.1%, up from 13.0% in March. Now that’s recessionary!”

Real inflation at 10%? Real unemployment at 13%? Maybe. But we have not quite seen the fall off in consumer spending that these numbers suggest…

For more information about the definition of a recession and how to profit, also read our Recession Guide: Recession Proof Investing: The Best Investment Strategies to Use During Recession

On the edge of this fertile farmland, and in the middle of one of the biggest booms in farm prices in history, the politicians in Buenos Aires have achieved what might have seemed nearly impossible – they have created a crisis in the agricultural sector. “Day 20. The strike continues: farmers reject government’s nine new initiatives,” says the headline on La Nación.

But farm problems are not limited to the pampas. Thanks to globalisation, they’re sprouting everywhere. “Fears grow over rice crisis,” is the front page story at the Financial Times. “Silent famine sweeps the globe,” reports WorldNet Daily. Thirty-three nations face “unrest” because of food shortages, says the IMF.

All over the world, food fights are breaking out. Not because there is too much food or too little, but because it has gone way up in price. Of course, you could put that another way: the paper money in which food is priced is going down faster than usual. There’s no less food than there was five years ago. But there is a lot more paper money. Modern central banking was invented so that we should have paper money – and have it in abundance. Now, we have so much that it is causing food prices to soar.

But food is hardly in a class by itself. When one bubble pops, the authorities immediately begin pumping up another one. After the dotcom bubble deflated in 2000-2001, up came even bigger bubbles in residential housing and the financial industry. Now, both housing and finance are losing air. But the central banks are still pumping hard. Where’s the air going? Apparently, into commodities. In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might put it, not an agricultural one.

To show you the scope of the phenomenon, we pull out a copy of The New York Times from 19 October, 1896. There, it is recorded in black and white that the average wheat price was about $1 a bushel – in gold – during the previous 20 years. An ounce of gold would buy you 20 bushels of wheat. Today, you can buy a bushel of wheat for about $12, which means an ounce of gold will buy about 75 bushels of wheat. In terms of real money – gold – the price of wheat has gone down for more than 100 years. In other words, however fast farmers have added to the world’s wheat output, central banks have outdone them, planting far more acreage in paper money.

And now that governments have caused a crisis, they are hard at work making it worse. In Argentina, the farmers are few; city dwellers are many. Argentina’s Peronistas can do the maths. They make out the farmers – historically patrician landowners with large holdings – to be greedy and insensitive. The politicians imposed a 49% windfall tax on foreign sales. The measure should lower prices for Argentine consumers and raise money for the government, they reasoned. It seemed like a no-brainer. That is, until the Gauchos blocked the roads into Buenos Aires and threatened to starve the city.

In America, the maths is different, but the result is equally imbecilic. There aren’t many farmers out on the prairie, but in Washington there are more farm-state US senators than pigs. They push and shove up to the taxpayers’ trough to get huge subsidies for their hometown campaign donors – lately, in the form of bio-fuels. Corn-fed ethanol may make no sense in environmental or energy terms, but it lubricates the big wheels of national politics. In the event, it takes a third of the US corn crop out of the food chain and puts it to use in the drive train – further driving up grain prices. With bread prices on the rise, politicians feel compelled to intervene. And every intervention falls upon the crops like a cloud of locusts.

Last Friday’s 10% spike in rice prices came as governments moved to corner the market. Three billion people, many of them with very marginal incomes, eat rice every day. The price of rice rose 50% in the past two weeks, causing Thai farmers to sleep in their fields to protect their harvests, while the Philippines posts armed guards at its granaries. Vietnam, India, Kazakhstan and China have all restricted foreign sales. The exporters are coming under pressure to export less – in order to lower prices at home. The importers, meanwhile, have no choice but to try to get as much of it as possible, as soon as possible, in order to head off shortages. Result: a run on rice.

India’s trade minister warned hoarders: “We will not hesitate to take strong measures…” Of course, hoarding is exactly what a smart family should do. Most likely, there will be runs on other commodities, too – and then a run on gold itself. People will want something real… something sure… something with which they can buy rice, without having to worry about it doubling in price two weeks later. That something, traditionally, is gold.

Hoard it now, while you still can.

The renminbi has broken through the psychological barrier of seven yuan to the dollar, the first time the Chinese currency has done so in 14 years.

The Financial Times reports that the Chinese currency is up more than 4% against the greenback so far this year.

China’s communist leadership is under pressure from the US to allow the renminbi to climb. However, the pressure on the currency to rise might be abating, according to the FT. Today, China recorded the first drop in its quarterly trade surplus in three years.

“China’s growing middle classes is where the money is to be made in China,” says Greg Guenthner.

“As China’s working and middle classes grow, so too does the country’s purchasing power. Naturally, retail sales have experienced a dramatic surge. Domestic retail sales skyrocketed 20.2% for the first two months of 2008, to more than 1.74 trillion yuan, or about $248.1 billion. That’s more than 5% higher than last year.

“One of the true hallmarks of middle-class growth is the sale of these non-essential and luxury items. Even the poorest working members of a society will spend money on food staples. However, the working poor, especially in nations with less-developed economies, won’t be dropping big chunks of their paychecks at the Gap.”

“U.S. loses jobs at the fastest rate in five years,” says a headline in the weekend’s Financial Times .

Economists had been expecting a drop of about 50,000 jobs last month. Instead, the non-farm total came to about 80,000 – the highest total since March 2003.

As the FT points out, this number will keep the pressure on the Bernanke team to cut rates. It didn’t mention that it will also keep pressure on the dollar – as speculators will expect the dollar to fall as a result. That’s the trouble with this battle between inflation and deflation – many of the soldiers don’t seem to know what side they’re on! When speculators unload dollars, it doesn’t have the effect on U.S. lending rates that Bernanke intends. In fact, it has the opposite effect. Pushing down on the short end of the yield curve (the Fed sets the rate at which member banks borrow from it, short-term), Bernanke hopes to drag longer-term rates along. Easier said than done. If speculators fear inflation, they sell the dollar, lower prices on U.S. credits and raise yields. All else remaining the same, prices on T-bonds go down, while yields go up.

But in this post-1971 world of ours – nothing stands still. You can no longer save a farthing a week…watching your little pile grow up…and looking forward to the day you can use it as you wish. Now, when that day comes, you’ll find your farthings aren’t worth what you thought. The ground has shifted under your feet…and your loyal soldiers have gone over to the other side.

The Bernanke team had a good week. By the middle of the week, everything seemed to be slipping and sliding his way. That is, stock prices were up and gold was falling. But by week’s end, whoever is on the other side in this tug-of-war had dug in its heels, refusing to budge. Gold was back up over $900…the Dow was off…and Bernanke was back in the news, saying that a “recession is possible”.

There is a big question that we’ve been unable to answer: Which way will this tug-of-war go? But we realize that this is the wrong question. Of course, it will go both ways. We will neither have our cake nor eat it. Instead, we will have both inflation and deflation…losses from consumer price increases, and losses from defaults. Between the two, the value of both our credits and our debts will go down.

In addition to the bad unemployment news, the weekend brought word that bankruptcies had risen 30% in market. Strip malls’ vacancy rates are the highest in 12 years (there is far too much retail space in the United States…it will take years to work it off). Gasoline hit a new record in Texas. Even the American Mortgage Bankers Association can’t pay its rent. And when pollsters put the question to them, 81% of Americans thought the country was going to Hell in a handcart.

Yet, in spite of all this disturbing news, stock markets seem to want to go up – or at least not go down. The short sellers are in trouble; there are far too many of them and every small increase forces them to cover their positions, buying back in and sending prices higher.

Still, we do not want to hold U.S. stocks – other than the special situations we find from time to time. If our analysis is correct, the inflation that is holding up stock prices will be felt even more in other places – namely, in commodities, gold and consumer prices. When one bubble pops, the next one always appears somewhere else. So don’t even think about buying back into the finance sector. That trend is over. George Soros says it’s the end of the road for cheap and easy borrowing. That is to say, it’s the end of a trend that has been going for the last 28 years. We may not see another boom in the financial industry during our lifetimes.

We remind readers, too, that while stocks are no lower today than they were 10 years ago, stock market investors have lost about a quarter to a third of their money to inflation. The next ten years could bring another, similar loss, even without a crash or bear market on Wall Street.

Meanwhile, in what could be the NEW bubble area – gold was back over $910 on Friday, corn hit $6 a bushel…rice is disappearing from the market…and the developing world, according to the Washington Post , is in a panic.

*** All over the world, food is causing trouble. Why? Not because there is too much of it or too little, but because it has gone way up in price.

Why has it gone up? Well, for one reason, Ben Bernanke and other monetary authorities are pushing more money into the world financial system. The cash has to go somewhere. Much of it seems to be finding its way into the commodities markets – including soft commodities, notably food. In other words, worldwide inflation of food prices is a monetary phenomenon, as Milton Friedman might have put it, not a feature of the weather. But rather than attack the cause of inflation, the authorities are aiming squarely at its consequences.

Of course, there are other reasons for food price increases. There are a lot more people in the world than there used to be. And the new people have to eat too. Since many of these new people are entering the ‘middle class’ they have more money to spend on food, so they can bid up prices. And, typically, they want more meat. It takes more land to produce meat than it does to produce grains – putting further pressure prices all up and down the food chain.

Another reason food is in the news is governments’ own food policies. This is on our mind, because when we went to lunch today we discovered that our favorite meat – churasquito – was unavailable.

“Because of the blockade, you know…” the waiter explained.

Here in Argentina, politicians can do the math. There are more urban voters than rural ones. And as elsewhere, government is in the business of providing bread and circuses. Bread is getting expensive; the urban mobs are beginning to grumble. So the government of Senora Fernandez de Kirchner effectively forbade the farmers from selling their grain on the world market, imposing a 49% tax on foreign sales. It seemed like a no-brainer, until the farmers blocked the roads into Buenos Aires.

“They’re trying to starve us into submission,” explained a cab driver.

Word on the street is that both sides have agreed to a ‘cooling off’ period.