And now, it’s broke. And even politicians think they know how to run an auto company. Just read the papers. “Obama insists on changes,” says one headline.

Normally, the politicos should hold their tongues…and let an industry’s owners run their businesses. Alas, as of a few days ago, the politicians ARE the owners.

Here’s a question:

When the government takes a majority stake in the auto business you know you are:

A) In a bad dream
B) In a bad way
C) In a bad country
D) In France

Correct answer: well, we we’re not in France. But as for the rest, it could be any of them…or all of the above.

Here’s an easier question. Who will the U.S. government put on the board of directors of General Motors?

A) A political hack
B) An industry hack
C) A far-sighted maverick who will shake up the business and put it on the road to growth and prosperity

If you answered “C” – you are from another planet. There is a reason neither governments, nor workers should own businesses. In the following, roundabout way, we explain why…

But first, a bit of news. As far as we can tell, the bear market rally is still on. The Dow rose 44 points on Friday. Oil closed at $53. The dollar is still sinking. And gold lost $3 to end the day’s trading at $888.

Thirty-two banks have shut down so far this year in the United States. Little, mismanaged banks go broke. But big, mismanaged banks get federal money. With these subsidies and bailouts, the big banks get larger…and live to foul-up another day.

Poor Warren Buffett seemed a little discouraged at his annual shareholders’ fest in Omaha. He must be nearing the end of his career. And consumers just aren’t buying as much furniture, cola, and candy as they used to, he told the faithful. (NYSE:BRK.A/BRK.B) Berkshire Hathaway’s profits were 10% below those of last year.

Swine flu seems to be disappearing from the front pages. Has it gone the way of Y2K and terrorism? Has another great disaster been averted? Might be too early to tell…

Oh you doomers and gloomers, cheer up! There’s always some other disaster waiting for a headline. How about this? The Seattle Times looks at Las Vegas and sees what it calls “the next global crisis.” After 10 years of drought, Las Vegas is running out of water.

The city fathers are thinking of all sorts of solutions – except, of course, for the obvious and effective one. They’re planning on huge pipelines…hundreds of miles long…and sucking water out of aquifers millions of years old. But, according to the paper, Las Vegas charges only about a tenth as much for its water as Atlanta does. The simple solution is to let free enterprise provide water…so that it could be priced correctly.

Colleague Chris Mayer has been following the water crisis story since the introduction of his newsletter, Mayer’s Special Situations, in 2006.

“Water is not just a problem in Las Vegas. The lack of sources for fresh water is a problem facing much of the American West, though the problem is particularly acute there and in the state of Nevada generally. Nevada is the most arid state in the union,” says Chris.

“The tight water supply has implications all over the West. In Arizona, you can’t build a residential development unless you find a ‘designated assured water supply’ that can sustain that development for 100 years. I could go on and on about this kind of thing. Suffice it to say, the American West faces a water crisis.”

Maybe the increase in water prices would discourage people from planting Georgia-style grass lawns in the Nevada desert. Or maybe it would discourage people from moving to Las Vegas in the first place. But that’s the thing with capitalism; it doesn’t take people where they want to go…it takes them where they ought to be. That’s also why people hate free enterprise so much. Where they ought to be is, often, where they least want to go. In the present example, people think they have a right to water – practically for free. They think there’s a ‘water clause’ in the Constitution that says government is supposed to provide them as much water as they want at a price they can afford.

Most things work better when they are run by private enterprises. Too bad. Free enterprise is out of style. The days of privatizing are over. Now, everyone wants the government to take charge.

What a turnaround from a few years ago – when people thought they could solve practically every problem by privatizing it. And then, the voters would buy shares in the newly privatized companies…and we’d all get rich!

“For water, the really bad stuff hasn’t happened – yet,” says Chris. “As investors, it’s a good place to be for a long time.”

Now, over to Addison for a look at this year’s federal deficit:

“Panic over the financial system is no longer crowding out discussion of the federal deficit here in I.O.U.S.A.,” writes Addison in today’s issue of The 5 Min. Forecast.

“Even the New York Times is noticing the deficit as a percentage of GDP will likely shoot above 10% this year – a post-WWII high.

“Bond investors caught onto this even sooner than the Times. They’ve driven yields on the 10-year Treasury note to their highest since last November – above 3%.

“Ben Bernanke and Co. can keep short-term rates as low as they like, but the bond market clearly sees signs of trouble on the longer end of the yield curve.”

“‘The reality remains that the United States is struggling through the most severe post-World War II recession with a rather compromised credit system,” writes The Richebächer Letter’s Rob Parenteau, “and the only sure area of rising final demand over the next year will be coming from fiscal deficit spending.’”

And back to Bill, with more thoughts:

The proletariat began buying stocks in the ’80s. The ‘shareholder nation’ was a dream of Maggie Thatcher and Ronald Reagan: Everyman a Capitalist.

Of course, these new capitalists were not real capitalists. Instead, the little guys were mostly pigeons for Wall Street. Instead of really understanding and CONTROLLING the companies they owed, they bought shares in mutual funds…or owned their shares through insurance or pension funds. These collective investments left the little guys dependent on Wall Street managers – who paid themselves enormous fees and bonuses.

Of course, as long as stocks went up, the new capitalists didn’t mind or notice that the financial industry took advantage of them. They completely misunderstood what they had gotten into. In their minds, capitalists made people rich…and Wall Street helped them get in on the deal.

When Francois Mitterand, socialist president of France during the ’80s, realized how it worked, he was outraged; ‘they make money in their sleep,’ he remarked of capitalists. But that was just what most people wanted to do. So, they began to imitate the capitalists. “Buy stocks,” thundered Wall Street.

And so…the little guys piled in….and stocks soared.

“Buy and Hold,” the pros told them. “Stocks for the Long Run,” wrote professors of finance.

Of course, some people wanted to make money faster. So ‘day trading’ became popular in the late ’90s. The newspapers were full of stories of people who quit their jobs in order to trade stocks.

In the ’80s and ’90s, too, people began to believe that you could motivate workers by giving them “a piece of the upside.” And the workers, too, believed they might get rich if they had a stake in their employer’s company. Especially in the financial sector, ‘results-based compensation’ caught on. Soon, almost everyone had a piece of the upside.

The trouble was, especially in the financial sector, the upside was remarkably short-sighted. In the near-term, business managers had a huge incentive to push the upside up farther than it ought to go. Take risks? Why not! If they could increase the quarterly results they would get a bigger bonus. If, over the long term, the business were weakened…well, that would be the owners problem, wouldn’t it? Managers sometimes had such a big piece of the upside there was scarcely anything left for the owners.

Everybody wanted a piece of the upside. Owners – including the new capitalists – wanted the business to prosper so their stocks would go up in price. Managers wanted high quarterly profits – so they could exercise their stock options and pay themselves big bonuses. They were all ‘capitalists’ – but ersatz capitalists. None had much of an interest in the long-term health of the capitalist institution itself.

A real capitalist is eager to cut his labor costs. If hourly wages rose too high…he’d want to move to a lower-cost production center. And if the managers asked for too much – he’d fire them and get new ones.

But neither the working stiffs nor the suits shared the owners’ interest in cutting labor costs and preparing for the future. While European automakers shifted much of their production to lower-cost countries…GM continued to make cars in the United States of America. Its unionized, stock-owning, voting employees wouldn’t allow it to move. And when it needed to invest in new tools and equipment in order to make autos for the 21st century – suppressing earnings in the short term in order to make the company stronger later on – its bonus-seeking, option-driven managers wouldn’t permit it.

Lesson: Let the managers manage. Let the workers work. Let the capitalists grub for money. And let the politicians lie and steal. Each to his own métier.

If you’re wondering what that means in today’s world, you’re not alone. We’re wondering too.

Until tomorrow,

Bill Bonner

Source: How Unions and Governments Destroy Businesses

Poor Warren. He’s down to his last $25 billion. And Bill Gates can barely hold his head up; his pile has shrunk to barely $18 billion.

And do a Google search of “AIG outrage” and you will get 621,000 hits.

Alas, being rich isn’t as easy or as much fun as it used to be.

The rally paused yesterday. The Dow lost 7 points. It could be over. More likely, it will run for a few months. Gradually, people will come to think that this is the real thing. They’ll begin to imagine that it is 2003 all over again. Of course, it’s not…this market has nothing in common with the Great Rebound of 2003-2007. (More below…)

Oil traded at $47 yesterday; it is slipping toward the $50 level. And the dollar is slipping around too – it is losing ground against the euro, now trading at $1.29/$. But it is mostly steady against gold, which seems to like the $900-$950 range…for now.

AIG is today’s main story. Everyone is appalled, outraged…or apoplectic about it. First, we under-reported the amount in bonuses paid out. The real amount is $450 million, says the Wall Street Journal…and one member of Congress charges that many bonuses were disguised as other things…and that the real total is more like $1 billion.

The average lumpenvoter has no idea how bailouts work. He was willing to believe that giving Wall Street hundreds of billions in taxpayer money would somehow make his house go up in price, but now that he sees how it really operates, he is ticked off about it. He may not understand macroeconomics, but he knows chicanery when he sees it.

Under pressure, AIG revealed what it did with the bailout money. It came as no shock to us to discover Goldman Sachs at the top of the list of recipients. Goldman’s main man was in the room with the feds – the only representative of Wall Street – when the decision was made to rescue AIG. What’s more, the feds’ main man at the time – Hank Paulson – also used to be the top honcho at Goldman (NYSE:GS). So the fix was in. The government gave money to AIG and AIG gave it to a long list of speculators – including Goldman.

This seems perfectly natural to us. If we’d been in on the fix we would have steered some of the loot our way. But the politicians are feigning shock and horror. Senator Grassley even said AIG management should “resign or commit suicide.” He later calmed down and said he didn’t mean it.

But we would have simply edited his remarks, giving the schmucks at AIG a last chance to exit with honor: “Resign AND commit suicide, in that order.”

Barney Frank added that “maybe it’s time to fire some people.” Why not? The feds own 80% of the insurance giant now. Go ahead; fire all the people you want. That’s about the only pleasure a real capitalist has left to him. Reach out…and fire someone today!

Elsewhere in the news, the economy continues to deteriorate. Industrial production fell 1.4% in February. And credit card defaults are at a 20-year high.

Misters Smoot and Hawley seem to still be on the federal payroll. The news this morning is that they began a trade war with Mexico and the Mexicans have already retaliated. That’s all we know about it…

But back to the tribulations of the rich…

First, Mr. Market is downsizing fortunes – fast. In the last 12 months, the average rich person has probably lost half his wealth. Not only did he own millions worth of stocks and real estate…he was also among the privileged few to get into good deals on derivatives, SIVs, hedge funds and private equity. Many of those complicated and conflicted assets have been wiped out completely. Or, maybe he was unlucky enough to count Bernie Madoff as a friend.

Second, what Mr. Market doesn’t take, Mr. Politician is looking at. All over the world, plans are afoot to increase his taxes…and close down his tax havens. President Obama has already revealed his plans to soak the rich. Every other group will come out even…or better…from Obama’s tax proposals. But the rich are going to be saturated…marinated…soaked to the bone.

And third, the poor rich guy has become a pariah. He doesn’t get invited to charity events anymore – or even to join the guys after work for a beer. Europeans have always distrusted rich people. But in America, a rich man used to be respected – just because he was rich. People asked his opinion on politics…on fashion…on art. He was presumed to be an authority on all things and was generally treated with respect…even deference.

But now rich are seen as chumps, losers, incompetents and malefactors. Even Americans look at rich people and think they must be either stupid or corrupt.

“Le secret des grandes fortunes sans cause apparente est un crime oubli , parce qu’ il a t proprement fait.” said Balzac. Which has been paraphrased to “Behind every great fortune lies a great crime.” Of course, he was referring to France, where it is has probably always been true. Money is dirty in France. But in America, money was supposed to be clean…innocent…honest and forthright. The richest man in town always sat in the front pew in church and stood for election to local office.

But come the depression and even the rich suffer. And unlike the starving urchins, unlucky widows and innocent orphans, no one cries a tear for the rich. Here at The Daily Reckoning we always take the side of the underdog…and always support the lost cause. So when we think of the rich…those darling people with their Italian suits…German cars…and Swiss bank accounts…our cheek gets a little moist. For we – and we alone – still admire and respect the rich. Of course, the rich are human beings too – just like the rest of us. And yes, dear reader…we still despise them as much as anyone else. When it comes to intelligence or moral rectitude, they are probably no better than the lower classes, though probably no worse. But we still admire and respect their money. Their money is no better either – but they have more of it.

Now over to Baltimore, where Addison at The 5 Min. Forecast gives a St. Patty’s Day look at the Emerald Isle:

“What’s the difference between Iceland and Ireland? ‘one letter and six months,’ or so goes a joke making its way around the Internet,” writes Addison.

“Aye, on this St. Patty’s day the Emerald Isle is suffering the mother of all hangovers; the embodiment of a boom gone bust.

“With official unemployment now over 10%, GDP shrinking at a 6.5% clip, a proper housing crash and a 10% federal budget shortfall, Ireland has seen it’s glory days crumble into one of the Eurozone’s most beaten down economies.

“Ratings agencies are on the verge of downgrading Ireland’s sovereign debt, which will assuredly make the whole matter even grimmer.

“The opening joke is so pointed,” Addison continues, “Irish Finance Minister Brian Lenihan is now on a global PR tour to help rekindle the world’s love of shamrocks and Guinness. Despite Lenihan’s denials, many expect the IMF to swoop in and become Ireland’s banker of last resort.”

Back to Bill in Paris…

It’s NOT 2003. Just in case you had any doubts.

You remember 2003? After a phony recession in ’01-’02 came a phony boom in ’03-’07. Stocks had driven into a ditch following the crash of the NASDAQ. The Dow had fallen down to about 7500. And then, when it looked like they were going nowhere for a long time…along came Alan Greenspan’s friendly towing service. In a jiffy, he winched the economy back onto the road…and it was soon flying along at the fastest speeds every recorded. The Dow went all the way to 14,000 and beyond…before crashing into a stone wall.

And now the financial media is on “bottom watch.” No, we’re not talking about the kind of bottom watching you do on a Brazilian beach…we’re talking about looking for the end of this bear market.

“Are stocks and oil bottoming,” asks a headline at Seeking Alpha.

“How will we know…” when we hit the bottom? Asks the New York Times.

The answer: we will know when we no longer want to know.

For the moment, we believe we are beginning a classic rebound. The news seems to have turned positive…along with the weather. It’s sunny and warm in Europe this morning. And investors are focusing on the positive.

“IMF poised to print billions in global quantitative easing,” says a headline in London’s Telegraph.

All over the world, the feds are working the pumps. And investors are watching their little boats begin to rock. If history is any guide, this rebound will recover 20% to 50% of what was lost. Then, the bottom – so recently spotted and revered – will fall out.

This is not 2003. In 2003, there was no collapse of the financial sector…banks didn’t fail…major companies didn’t face bankruptcy…consumer spending didn’t fall…house prices didn’t collapse…savings rates didn’t go up…capitalism wasn’t called into question…there were no tax rebates…there were no bailouts…not even a stimulus plan (though the feds did spend much more money…and the Fed did cut rates to 1%).

This time it’s different. This is not a recession. Not even a phony recession. It’s a very real Depression with a capital D…and all that goes with it – including whole industries that go broke, a credit crunch, a big drop in consumer spending, a huge political shift toward socialism, interest rates at zero, falling prices, and widespread bankruptcies – both of households and companies.

In 2003, a quick cut in interest rates – along with a boost in federal spending – produced a fast turnaround. Within months, prices were rising again. Consumers didn’t even pause…they kept spending and borrowing all the time. This time, the world has never seen stimulus efforts of such huge magnitude – and still no real uptick. This time, consumers are running scared…they’re losing their jobs and closing their wallets. This is the real thing. It won’t end quickly…or easily.

Here’s a calculation for you. The amount of excess debt in the United States is about $20 trillion. That’s the difference between the usual level debt – about 150% of GDP – and today’s level – about 350%. That $20 trillion in surplus debt probably has to disappear before a true growth cycle can begin again. The best way is simply to let nature take her course. Much of it would be written off in a few months. But the feds won’t let that happen. They’re doing all they can to prevent assets from getting marked down…and to prevent debt from getting written off. So far, they’ve committed $11.7 trillion to the fight against debt deflation.

So instead of writing it off, it will have to paid off…or ultimately, inflated off.

Currently savings rates have risen from zero to about 3% of GDP. That’s about $420 billion per year put to paying down the debt. Let’s see, at that rate, how long will it take to erase the $20 trillion in excess debt? Hmm….about 47 years!

Until tomorrow,

Bill Bonner
The Daily Reckoning

Source: Where the Bailout Money is Really Going

This from Money Morning:

Although ABB Ltd. (ADR:ABB) has been around for 120 years, it’s one of those rare companies that’s kept current with the times. It continues to do so and those efforts are generating tangible results.

Indeed, as Money Morning noted in its July 7 overview of ABB, the Zurich-based industrial giant is a virtual lock to benefit from the many billions in stimulus money governments around the globe will be directing into such infrastructure-related areas as highway, construction and power-generation.

These promising opportunities remain.  In fact – with the $586 billion stimulus China unveiled in early November, and the $825 billion stimulus plan that President-elect Barack Obama is kicking around, ABB’s growth opportunities have probably actually been enhanced, because infrastructure projects and job-creation are at the core of both packages.

In late October, ABB reported strong earnings for its third quarter, beating analysts’ estimates, while reaffirming its strong growth guidance for the firm’s still-to-be-reported fourth-quarter results.

In its third-quarter report, for instance, ABB reported strong (23%) year-over-year revenue growth, as well as a hefty increase in operating-profit margins (as measured by EBIT, or earnings before interest and taxes) to a healthy 14.5%.

So why are we revisiting our earlier report? What’s changed since we last looked at ABB? No surprise here: It’s the increasing uncertainty over the timing of these opportunities, given the ongoing – and, at times, escalating – global financial crisis. ABB took special note of this in the management report that accompanied its third-quarter financial statement.

“It’s too early to say how the recent financial-market turmoil will impact our markets in the short term, but our operational strength and flexibility, leading technology, competitive cost base and solid balance sheet put us in a good position to meet a tougher market. We are on target to deliver on our 2008 growth guidance,” ABB said in a statement that day.

After I published my cautious “Buy” recommendation, ABB shares rallied about 4%, a move that peaked near the end of July – which is right about the time that the Lehman Brothers Holdings Inc. (LEHMQ) saga began exerting pressure on the stock market. That saga – which culminated with the brokerage firm’s Sept. 15 bankruptcy filing – precipitated an entire chain of events, which included the rescue of insurer American International Group Inc. (AIG), and widespread de-leveraging in the hedge-fund sector, all of which we’ve covered closely here in Money Morning.

By October, this financial collapse had evolved into a credit squeeze that paralyzed the world’s key economies – including the United States – in October. As the U.S. financial system ground to a halt, and as the effects reverberated across the world, growth projections for almost every country were revised downward and international-bank financing all but disappeared.  Financing is a key issue in long-term infrastructure projects, since many of those big-ticket jobs could get delayed if financing is not readily available.

Thus, the financial crisis, has affected ABB’s stock price, both because of the forced de-leveraging and because of the downward revisions to estimated earnings per share. The stock came down from about $27 to a double-bottom low of $10 in October and November, and then rallied 50% to close the year at $15.01.

So what’s next for ABB’s shares?

For starters, the company is seeing a slowdown in large contracts: “Large project orders declined significantly, reflecting in part a comparison with a very strong quarter a year ago,” ABB stated when it reported its third-quarter results. “In addition, customers’ decisions on a number of industrial and infrastructure investments have been delayed as a result of the recent market uncertainty.”

ABB will be reporting its fourth quarter results on Feb. 12.  In late December, when it set the date for that report, ABB announced it would be taking a fourth-quarter provision of $850 million for anti-competitive price-fixing, for a legal provision for suspicious payments in the United States, as well as for a tax dispute, restructuring charges and asset impairment.  At the same time, however, the company announced it has found more than $1 billion in cost savings. That latter revelation is consistent with expected continued margin improvements, a conclusion reached in our earlier “Buy, Sell or Hold” column.

Although some issues of concern have arisen, there are a number of mitigating factors. These positive factors might even turn the story completely around in short order and will definitely be a huge plus in years to come.

As the company stated above, ABB has a number of very strong positives working in its favor. Sales in emerging economies outpaced sales in advanced economies for the first time in the company’s history in 2008. The afore-mentioned $586 billion China stimulus is heavily focused on infrastructure projects, as well as consumer spending (For an excellent overview of the overall investment opportunities China presents, take a look at my colleague Don Miller’s recent “Money Morning Outlook 2009 Series” installment on China. To read that report, which is free of charge, please click here).

But this infrastructure theme is not limited only to China. It’s a common threat that runs through virtually all the stimulus plans announced by countries all around the world in recent months. Even President-elect Barack Obama, in unveiling his own stimulus plan, made it clear that infrastructure will be a central component of his job-creating stimulus plan. One key goal: The modernization of the aging-and-inefficient U.S. energy grid.

Europe’s infrastructure is likewise old and in dire need of a major makeover. And emerging economies such as India, Brazil and Chile will continue to use their new-found wealth to stimulate their economies by staying on course with their ambitious infrastructure plans.

There’s an important point to understand here. Anytime major infrastructure investments are planned, investors can be assured that major investments in power-generation and power-transmission will be a central element of the billions in economic infusions. It has to be that way. You see, investments in power generation (and transmission) have a direct correlation with gross domestic product (GDP) growth. What’s more, as much as 90% of the world’s growth this year will come from emerging economies around the world – markets that are already driving sales for ABB.

For example, Chile’s stabilization fund has reached some $24 billion dollars, or 14% of GDP.  This type of savings by countries that pursued sound economic policies during healthy periods is now enabling those same countries to mitigate the effects of the worldwide financial crisis, even as they continue to grow.

There are relatively few emerging markets to totally steer clear of, although Argentina is certainly one to be avoided.

In sum, while the financial disruptions have slowed down the pace of infrastructure spending, stimulus packages are keeping those projects from disappearing completely – and are perhaps even serving to stretch them out.

ABB may be one of the few companies positioned to benefit from all these trends. The company has a bullet-proof balance sheet, strong margins and solid cash flow. These strengths will mitigate the fallout from the financial crisis and over the long haul will keep propelling this giant to higher profits.  The market has already discounted the slowdown, but has not discounted the cost-cutting efforts, whose details have been sketchy so far.  We continue to be very upbeat about ABB’s prospects and will look at any market weakness in the year’s first half as a buying opportunity.

Action to take:  Buy shares of ABB Ltd. (ADR: ABB). The stock has been buoyed in anticipation of the so-called “January Effect,” although the U.S. stock market has badly misbehaved since then.

Given the uncertainty, if you haven’t already established a position in ABB shares – as I urged in my prior column – then I would split my purchases so that they are made before and after the mid-February earnings report. But I would not “chase” it, and I would save some cash in order to possibly add the last 20% towards the end of the first quarter, as visibility about the U.S. and Chinese infrastructure plans improves, and as the company’s legal hassles become more clear.

Source: Buy, Sell or Hold: A New Look at ABB Spotlights a Company That’s Poised to Benefit From Global Bailout Plans

If in fact this scenario plays out, emerging markets in Asia could prove to be the superior play in the coming decades as they surpass America’s R&D investments.

R&D is the cornerstone of sustained growth. For example, China recognizes this by launching a branding campaign that turns the pejorative “made in China” to a higher value added “created in China.”

While some of the R&D numbers coming out of Asia today still may pale compared to the U.S., the important criteria is the percentage of GDP and overall growth that these emerging markets are investing in innovation.

For example, South Korea said last week it will allocate $8.3 billion on R&D in 2009. While that’s a drop in the bucket when measured against Washington’s $99 billion budget, the bottom line is that South Korea’s budget is an increase of 11% while the American budget is a decline of 0.34%.

A recent article in The Economist said that approximately $1 trillion is spent on R&D every year in computing, telecommunications and electronics of which the U.S. accounts for over 30%. But while corporate R&D in America and Europe grew by 1-2% between 2001 and 2006, in China’s R&D soared 23%, The Economist reported.  And as a percentage of GDP, China’s corporate R&D spending is almost on a par with the European Union’s (around 1%).

The Economist said that in 2007, South Korea’s Samsung spent more on R&D than IBM. The company has jumped to second place in the number of patents granted by America’s patent office (just behind IBM).

The trend could become irreversible if Washington favors bailouts over innovation.

The Georgia Institute of Technology’s bi-annual “High-Tech Indicators” study concluded that China improved its “technological standing” by 9 points over the period of 2005 to 2007, with the U.S. declining to of 6.8. In Georgia Tech’s scale of one to 100, China’s technological standing is pegged at 82.8, versus the U.S. at 76.1. The U.S. peaked at 95.4 in 1999. China has increased from 22.5 in 1996 to 82.8 in 2007.

Innovation is the fuel for growth and generates profits for investors. That could make Asia a better long-term play than the U.S. for investors.

So my holiday message to President-Elect Obama and his new Treasury Secretary – Timothy Geithner is this…

Don’t ask banks to be your kid’s wimpy version of Santa Claus – giving out gifts to all those who ask nicely … or scream the loudest (autos, anybody?).

Banks can make your dreams come true. Or they can destroy them.

In either case, I’d like them to lend responsibly.

I’ve seen both sides of what banks can do. And I’m sure you have too.

I remember getting a bank loan for my first home. I needed to prove that payments would take up no more than 20 percent of my disposable income. I needed to prove I had a job. I had to show a good credit rating.

Jumping through all these hoops wasn’t optional. No exceptions allowed.

When I got the loan, my wife Cec and I went out to celebrate. It was a big deal.

Then there’s the other side…

My Cousin Harvey had built his door and window business from scratch. They had so much business he applied for a loan to build a bigger facility. The company’s bank gladly gave it to them. After all, the company was flying high on the mini-real estate boom that visited the greater Boston area in the mid-1980s.

Five years later it reversed direction. Housing prices plunged. And housing construction shrank to almost nothing.

Even after downsizing, the company could barely pay its bills. It dipped into its revolving loan more and more. Until one day the bank took it away.

The company lasted a month more before shutting its doors.

I’ve seen the same thing happen to publicly listed companies like the small Texas-based oil company that seemingly was sitting on top of the world.

I was on the phone with the CEO and he was sounding his normal confident self.

The drilling was going great, he said. Every well tested so far found oil. They were ahead of schedule. Their big investment in a potentially huge oil basin off the coast of Nicaragua was also making better-than-expected progress.

Then he dropped the bomb.

The company’s bank was withdrawing their loan.

The CEO tried to cover his tracks. “As far as I’m concerned,” he said, “This gives us an opportunity to find a better bank … a bank that really believes in us.”

But without access to bank credit, they couldn’t pay their bills. Their credit rating plunged. Other banks wouldn’t touch them.

They were forced to sell their promising parcel off the coast of Nicaragua. It bought more time for them. But that parcel was a big part of what made the company so attractive. More shareholders sold off. Their stock price plummeted.

Ten months later, they were de-listed from the New York Stock Exchange. Fifteen months later they declared bankruptcy.

It happened a couple of years ago. But I believe it gives you a sneak preview into 2009 … except for one thing. Next year these won’t be isolated incidents. The market will be littered with dead corpses whose money lifeline was cut off.

Banks matter.

They matter a great deal.

Banks will give loans to companies with cash or with a high credit rating. Other companies will see the back of their hand.

Same thing with individuals. Banks will lend to those who need the money the least: the careful savers … the homeowners who didn’t cash out their home equity … the very well-off.

It’s the nature of the banking business that when you need them the most, that’s when they fade from view.

That doesn’t make them evil. But it doesn’t endear them to the rejected – whether they’re companies or individuals.

And now, with the economy swooning, the government wants banks to act like a three-year old’s version of Santa.

Isn’t that how we got into this mess in the first place?

They don’t want banks to become responsible careful lenders. It would make a sick economy even sicker.

The lesson is clear. If you’ve got cash, nourish it. Hoard it. Save it. Because if you run out, your bank won’t have your back.

Cash is king.

Remember that when you’re looking to invest in 2009. Companies out of cash could also be out of luck.

Source:  A Preview of 2009?

With that in mind, I have decided to give you a feel for what some of the best people I know in the money business are thinking. Not saying, thinking.

I’m not a mind reader, although many of my former clients expected me to be, but I do have a source for great financial information that is virtually untapped.

My home is in a little area of Baltimore near the harbor that is within walking distance of most of the big brokerage and banking businesses in downtown.  As you might expect, we have more than our share of bankers, analysts, brokers and every kind of financial type living in our neighborhood.

Right in the center of our neighborhood is a bistro called Regi’s.  It’s not only the preferred watering hole; it’s a great restaurant, too.

Any night of the week, this place is packed with some of the best minds in the money business. The real deal. Men and women who actually work in the business of packaging mortgages, putting together bond deals and doing equity offerings. They don’t write about it and no one is asking their opinion about what is going on, they are the people who are actually doing it.

Here’s what they’re saying about 2009. While the ideas aren’t specific, they are from folks who know the biz from the real inside and confirm much of what I have been thinking for sometime.

One guy creates mortgage products. He’s the only person I know who really knows what a Tranche is. Tranche is a word that has been thrown around by mortgage financial types for about 20 years, but this guy can actually explain how it affects my money. Let’s call him Ted.

Ted was the first guy who spelled out for me why congress is really responsible for this credit/mortgage/banking crisis. He was the first, and to date the only person, who nailed down the fact that congress mandated that banks, and Fannie and Freddie, accept mortgages from people who could normally never qualify for one. All of this was in the name of the “American Dream,” that quickly became the world’s nightmare.

Ted is cautiously buying equities with the expectation that we will have a lot of ups and downs before we turn the corner, but we will turn the corner in 2009. Ted is also very confident that the mortgage crisis is moving along nicely.

Sally is in the tax-free bond business. She sets up and runs deals to finance public service projects. She, like a lot of other people, knows we will survive this current garbage market. She also agrees with the majority of the pros I talk to that this is the best buying opportunity in her lifetime. She is cautious and feels we need to tread lightly, but is buying now.

Dave is in business insurance. He sets up insurance programs for small and large business. He spends most of his day talking directly to the top players in a number of industries. He thinks we are in deep trouble. He sees a complete lack of leadership in Washington, at all levels, in both parties. The result of this vacuum is that we are at best trading water and most likely sinking slowly into an extended recession with deflation most likely.

His greatest fear is not the bailouts or the amount of money the Fed has to print, or even the endless debt. His fear is that when all the loans from the bailouts are repaid, congress will just spend that, too.

On the topic of real estate, almost to the person, the response is, “what did they expect.” You give mortgages to people who cannot afford them and they default? You then sell these worthless mortgages to banks all over the world and the banks go broke because of it. You’re surprised?

Still, there is optimism about real estate. It’s a waiting game. Prices have begun to bottom in our market, the really over leveraged markets, (Nevada, Florida, California), still have a way to go. They are sitting tight and waiting out the defaults.

Overall, everyone thinks we are in the best buying market of their adult lives. No one is calling a bottom and no one is calling for a short- term top. Everyone is a cautious buyer. Everyone expects to have many ups and downs before we level off late next year.

Some are throwing around numbers in the 7000’s as a low for 2009.

The areas they like best are anywhere business spending isn’t required, necessary consumables, drugs, personal items, infrastructure construction and telecom.

Their biggest concern, how will we ever absorb all of the money being printed, and what kind of inflation risk do we run after all this new money hits the system. Even my giant-brain friends don’t have the answers to these issues.

The good news, no one is running scared, everyone is buying on the dips, everyone is confident we are doing the right things to get the economy moving again, most feel Obama was the right choice for the times. There’s a lot of money to be made but you have to get in before it gets too expensive.

That’s it. If you’ve been selling and running scared you might want to consider what the real pros are doing with their money.

Keep your eye on the horizon and your powder dry.

Source: What The Insiders See In 2009

This from Money Morning:

The plethora of bank and corporate bailouts, stimulus plans and interest-rate cuts that the U.S. government has produced over the last three months can only lead to one outcome: The U.S. dollar has to decline.

During the crisis so far, the dollar in general, and U.S. Treasury bonds in particular, have been regarded as a “safe haven,” making the dollar strong and pushing long-term U.S. Treasury rates downward. In the New Year, however, this is likely to change – the weight of the added supply of dollars in circulation will be too great for the greenback to shrug off.

Back in November 2007, when I wrote about the U.S. dollar becoming the “Bernanke peso,” I suggested that the dollar – then trading at $1.50 to the euro – would get weaker. Alas, I was wrong: It is currently trading at $1.29 to the euro, although it did reach $1.60 in May. However, I recommended buying not euros, but yen. The chaos of 2008 has reversed the decline in the dollar against the euro, but not against the yen, which has reached Yen 92.8 = $1 compared to a rate of Yen 114.8 = $1 when I wrote the piece. A gain of 24% against the dollar is not bad, and indeed I defy you to find a stock market that has done as well over that period.

The fundamentals tending to weaken the dollar remain. The U.S. trade deficit was $57.2 billion in October, which annualizes to $700.3 billion – down but a little from the 2006 peak of $758 billion. Although the recession and recent sharp decline in the value of U.S. oil imports will reduce the U.S. trade deficit further – perhaps to $500 billion annually – there is still no reason why foreigners should continue to so highly rate the currency of a country that is running a $500 billion balance-of-payments deficit, and a $1 trillion budget deficit.

After a pause during the summer, the U.S. money supply has begun rising again rapidly. The excess money has flowed into Treasury bonds, sending the yield on the 10-year bond down to a recent 2.71%. The distortion in the market can be shown by the yield on the 10-year Treasury Inflated Protected Securities (TIPS), which was 2.44%; that combination of prices said that investors expect U.S. inflation to average a mere 0.27% annually over the next 10 years.

Clearly that’s nonsense; the explanation is that yields on long-term Treasury bonds have been driven far below their economically appropriate level. In other words, U.S. Treasury bonds are currently benefiting from a bubble, and like the bubbles that we’ve seen in Japanese stocks, real estate, U.S. tech stocks, the American housing market and global commodities, this bubble, too, will ultimately burst.

The budget deficit in the 12 months through to September was $455 billion, but that’s expected to expand to close to $1 trillion in the year to September 2009 – and that’s even before President-elect Barack Obama’s stimulus plan, which is expected to cost at least $500 billion, and could possibly cost that much a year over several years.

If that’s surprising, consider this: The U.S. budget deficit was $237.2 billion in October 2008, a record monthly figure. That puts a huge strain on the U.S. Treasury Department’s financing capacity, and will probably result in the U.S. Federal Reserve printing yet more money, since the alternative would be for the huge amounts going into Treasuries to choke off demand for private investment – not the desired objective. With more money being printed, inflation is likely to soar and the dollar to weaken.

Net foreign purchases of long-term U.S. securities declined to $793 billion in the 12 months to September 2008, from $1.03 trillion in the previous year. Of those purchases, Treasury bonds and notes represented $385 billion, up from $192 billion in the previous year, while purchased corporate bonds shrank from $447 billion to $168 billion.  Thus, the “flight to quality” has so far been enormously helpful in enabling the U.S. Treasury to finance its growing budget deficit; in October and November it will doubtless have been even more so.

Once the inflow into U.S. Treasuries slows, or the huge volume of Treasuries issued simply overwhelms it, the dollar will weaken and Treasury yields will rise. At that point, there is likely to be a stampede for the exits from the Treasury bond market, which will be self-reinforcing. As a wise investor, you could prepare for this stampede in four ways:

• First, you could have a modest holding of the Rydex Juno Fund (MUTF:RYJCX), the price of which is inversely linked to T-bond prices (the fund shorts Treasury bond futures.). The fund has had a poor record since its inception in 2001, and it probably makes little sense to put too much money in it. However, given the scenario we’ve sketched out here, the fund will do a lot better in 2009.

• Second, you should have bond, cash and stock holdings in foreign currencies, particularly the euro and the yen (but not British pounds sterling; with a housing bubble and a bloated financial sector, Britain has many of the same problems as the United States). Aside from foreign-currency-denominated stocks and bonds, you may want to consider a foreign-currency-deposit account through EverBank, which offers foreign-currency certificates of deposit (CDs), albeit at low interest rates, at present – only 1% on a 12-month Euro CD for example. [Editor’s Note: EverBank also offers a product called the EverBank Asian Currency Portfolio. Readers can find out about all the bank’s products by contacting the folks at EverBank’s World Currency desk at (800) 926-4922. Be sure to mention product ID #12534. We should also mention that Money Morning has a marketing relationship with Everbank, but that’s only because we believe in its products.]

• Third, you should hold some gold, which is likely to profit from a dollar collapse – for example through the SPDR Gold Trust fund ETF (NYSE:GLD), which has ample liquidity, with $17.6 billion outstanding, and which tracks the gold price directly.

• Fourth, you may make a modest (no more than 1% to 2% of your portfolio) speculation in currency options, which are traded on the Philadelphia Stock Exchange. Since the yen has already enjoyed a considerable run against the dollar, the best speculation might be to purchase out-of-the-money euro call options, which will rise in price once the dollar starts falling against the euro. Personally, I prefer to buy the longest possible options available, to give the market time to move in my direction. So, I would go for the September 140s (PHLX: XDEIH), giving nine months to maturity at a strike price about 8% out of the money (the euro being currently at $1.29). Currently these are trading at $4.55 offered, so you would have to pay $455 for each 10,000 euros on which you purchased an option.  Your break-even would thus be $1.4450. If the euro is trading above that level next September, you would gain, so if it matched its May peak of $1.60, you would make $2,000 per contract. If it was below $1.40, you would lose your investment of $455 per contract.

Source: With Billions in Bailout Funds Flowing, the “Peso-fication” of the Dollar Continues

And Japanese yen is “getting bought!” Yen is trading in the 93 range this morning… Strong, very strong!

When this all began, I truly believed that it would last through the elections and on to the end of the year… Then the magnitude of the problems were revealed, and I changed that to lasting probably through to spring. The longer it takes the “boys” Paulson and Bernanke, to get this credit market crisis unlocked, the longer it will take before we return to the fundamentals that continue to get worse by the day.

On Friday, Chris printed some thoughts I had left him regarding the data that printed on Wednesday, wasn’t that just downright scary? I know that a ton of you all had the day off on Friday, and didn’t see the Pfennig that day, so for those of you that missed class on Friday, here’s what I had to say about the data prints from Wednesday…

New-Home Sales Sink 5.3% to Lowest Level in 17 Years U. Mich. Confidence – new low since ‘80
Chicago PMI collapses Consumer Spending Fell to 7-Year Low in October (manufacturing for that region)
Americans’ Food Stamp Use Nears All-Time High

And can’t imagine what in the world the people that make the official call on a recession the NBER (National Bureau of Economic Research) are thinking… I called this a recession back in January, and they have yet to make the call… Amazing!

Of all that bad data, the only one that will have a good outcome in the end, is the Consumer Spending falling to a 7-year low. We’ve gone on with this spending more than we make, for far too long! Now, if we could just get the Gov’t to do the same!

Now onto this week… So, as I said above, the risk aversion theme is back… There will be a ton o’ data print this week with it all culminating on Friday with the Jobs Jamboree… Just peeking ahead at Friday, the “experts” believe the job losses for November will be 320K, with the unemployment rate moving to 6.8% from 6.5%. That’s downright ugly folks.

Speaking of ugly… Today, we’ll see the color of the Nov. ISM (manufacturing) Index, which collapsed to 37 last month, and is expected to have fallen to 32 in Nov. All this “bad data” does is put the Trading Theme front and center even more…

OK, The Chinese renminbi has fallen .73% overnight, which is the largest drop for the currency since dropping the peg to the dollar in July 2005. I find it interesting that the banking officials allowed the renminbi to drop by that large of an amount right before, U.S. Treasury Sec. Paulson is about to visit… Can’t you just hear the Chinese saying something like this to Paulson… “See, Mr. Treasury Sec. we can play games with our currency too, and so now if you’ll just get yourself back on that plane, and leave us alone, we’ll see where the currency goes next.”

The Chinese have their own problems right now, and making sure their currency continues to strengthen isn’t one of them! China has shifted from “inflation fighting” which requires a strong currency, to “promoting growth” which doesn’t! And with exports set to collapse next year, given the U.S. recession, a currency strengthening just isn’t on their agenda any longer.

There will be a truck load of Central Bank rate meetings this week, beginning with the Reserve Bank of Australia (RBA) tonight. The Reserve Bank of New Zealand (RBNZ), Bank of England (BOE) and European Central Bank (ECB) are all expected to cut rates this week, and then next week, we’ll see rate cuts from the Bank of Canada (BOC) and the Fed Reserve…

Global rates are going lower and lower folks, we had all better be prepared for this, as it is going to happen, no doubts. For instance, I fully expect the RBA to announce a 75 BPS rate cut tonight or tomorrow, whenever they do it…

Now… Enough rate talk… How about we visit the goings on with the bailouts? Oh, goodness gracious, no! I don’t want to go there! My blood pressure is doing just fine today! Oh? I have to? The little guy on my right shoulder is telling me to not go there, and the little guy on my left shoulder is telling me to do it, NOW! Hmmm… Ok, I won’t do it, but what I will do is give you a thought from a reader, who is an investment advisor regarding all of this and the Gov’t taking ownership of banks… Let’s listen in…

“Does anybody out there have any memory of the reason given for the establishment of the DEPARTMENT OF ENERGY during the Carter Administration? Anybody? Anything? No? Didn’t think so. Bottom line .. . we’ve spent several hundred billion dollars in support of an agency the reason for which not one person who reads this can remember. Ready? It was very simple, and at the time everybody thought it very appropriate. The Department of Energy was instituted 8-04-1977 TO LESSEN OUR DEPENDENCE ON FOREIGN OIL. HEY, PRETTY EFFICIENT, HUH? AND NOW IT’S 2008, 31 YEARS LATER, AND THE BUDGET FOR THIS NECESSARY DEPARTMENT IS AT $24.2 BILLION A YEAR, THEY HAVE 16,000 FEDERAL EMPLOYEES, AND APPROXIMATELY 100,000 CONTRACT EMPLOYEES AND LOOK AT THE JOB THEY HAVE DONE! THIS IS WHERE YOU SLAP YOUR FOREHEAD AND SAY ‘WHAT WAS I THINKING?’ Ah yes, good ole bureaucracy. And now we are going to turn the Banking system over to them?”

Now, that’s one of those things you say, Whoa There Partner! I’ve warned about this Gov’t sticking their hands into banks and acting like owners before… But that’s exactly what’s happening folks…

OK, enough… Let’s talk Gold a bit… Mark O’Byrne, executive director at Gold & Silver Investments, has his attention on the open interest numbers.

Comex gold futures open interest—the number of outstanding contracts—declined sharply this month, falling to 289,700 contracts in the week ended November 18, according to the Commodity Futures Trading Commission. That’s down 9.3% from a month ago.

What the low open interest means is “that nearly all the speculative froth has been liquidated and remaining longs are ‘strong hands’,” O’Byrne says. “This will encourage more long interest to enter the market and should contribute to markedly higher prices in the coming weeks.”

OK… But… We need to see the markets return their focus on the fundamentals to weaken the dollar before we get any “real traction” in Gold… At least that’s my opinion, although Gold did have its best month in 9 years in November, gaining 11%…

Well, the good news from the weekend was that the Black Friday retail Sales were stronger than expected… But what’s going to happen when, as I said above, job losses post a 320K figure at the end of the week? I think it takes the wind out of those sails in a heartbeat!

I’ve gone on a bit this morning, but there’s lot to talk about, and that means an Iceland update! Reuters reported on Friday that… REYKJAVIK, Nov 28 (Reuters) – Iceland’s parliament passed legislation on Friday to curb currency outflows and the central bank vowed to restrict credit as authorities moved to restart trade in the collapsed Icelandic crown.

“The bank will maintain tight control over the access of banks to central bank credit until exchange market stability has been achieved,” Sedlabanki said on its Web site.

It said temporary currency restrictions, which had been necessary for Iceland to function at a basic level, would be lifted in stages.

“A considerable proportion of crown-denominated securities are owned by foreign investors. Lifting restrictions by stages will make it possible to unwind their crown-denominated positions in a systematic way, as the external balance permits, without undue impact on the exchange rate.”

There have been quite a few individuals that have ripped us for our handling of the Iceland meltdown, but as you can read above, there WERE CURRENCY CONTROLS in place…

One industry that’s not experiencing slowing sales… Guns… Barack Obama apparently is the best salesman the gun industry has had in years! With many buyers worrying about higher taxes or limits put on guns and ammo, sales are quite brisk since the election… I sure wish I was talking about home sales being brisk, or computers, or something like that…

Currencies today 12/1/08: A$ .6425, kiwi .5355, C$ .8045, euro 1.2675, sterling 1.5040, Swiss .8285, ISK 230, rand 10.25, krone 7.0280, SEK 8.1825, forint 207.35, zloty 3.0425, koruna 20.2330, yen 93.90, baht 35.75, sing 1.5285, HKD 7.7518, INR 50.29, China 6.8842, pesos 10.25, BRL 2.3735, dollar index 86.71, Oil $52.07, Silver $9.94, and Gold… $794.00

Source: Back to Risk Aversion

If America were to put in place a stimulus plan that represented the same proportionate outlay that Beijing’s will for China, we’d be talking about an infusion of nearly $1.83 trillion, or 10.89 times more than the positively puny $168 billion stimulus that went into the hands of U.S. taxpayers last year. And it would probably dwarf anything that President-elect Barack Obama is contemplating right now.

Think of the pile-driver-like effect a stimulus of that size would have on U.S. consumer spending – which, after all, accounts for 70% of what the American economy does. Billions of dollars in loans could be paid off and consumer debt retired. In that sense, such a massive capital infusion could do what U.S. Federal Reserve Chairman Ben S. Bernanke and his Bailout Boys can’t achieve. The Beijing-like infusion would provide a needed recapitalization of the financial markets – without rewarding those who got us into this mess in the first place. Most important of all, it would help the folks who are caught in the middle – us consumers.
What makes this particularly ironic is that the nature and composition of China’s stimulus program suggests that Beijing’s communist government understands consumer psychology and capitalist financial markets better than Western governments do right now – particularly the psychology.

For example, because of the credit crisis and relentless coverage of the flagging economy, consumers are scared stiff at the moment. And understandably so. They see factory orders declining and jobless claims spiking to their highest levels in 25 years. They read the news that retail stalwart Wal-Mart Stores Inc. (NYSE:WMT) – is lowering expectations. So consumers opt to hoard money out of fear, rather than spend it, and that’s what really kicks a recession into gear.

So what will China’s stimulus package do that ours won’t?

For starters, Beijing’s stimulus is designed to encourage spending, rather than reward malfeasance, as our bailout plan is doing. Further, there’s no buying up of bad debt. Instead, there’s an implied recapitalization that will take place through growth. But most importantly, Beijing is sending an ultra-clear message to its people – we will be here for you and we will help you directly – and that’s stoked the confidence in every Chinese contact I’ve talked to since the plan was announced.

And that uptick in confidence is warranted, given all that China is planning, including:

• Improved environmental-protection projects, including new sewage and waste treatment projects.
• More low-rent and affordable-housing projects.
• Distributed healthcare projects, including hospitals, clinics and medical equipment, particularly in the historically ignored rural regions.
• New highways that will more than double China’s navigable area and that will account for nearly 40 million new jobs in the next 24 months.
• New railways and railway-related projects, which will create 6 million jobs during 2009 alone and more after that.

Beijing’s stimulus is geared toward creating 3.0% to 5.0% gross domestic product (GDP) growth to augment the 3.0% domestic-consumption activity, for a total 2009 target growth rate of at least 7.0%.

While China’s stimulus is designed to create valuable growth, the U.S. package is simply concerned with plugging leaks. China’s package is forward-looking, while ours is not.

Clearly though, the effects won’t be immediate and Beijing knows that. And that’s why, based on historical trends, we expect it to be about six months before the money really begins to work its way through the system. Look for an uptick in Chinese demand in late 2009, and acceleration in 2010.

Look, also, for the worldwide ripple effects, particularly for commodities producers and exporters that do business with China, and the infrastructure providers. This package will stop many of these sector skids, and we can look to see them rebound in earnest once demand kicks in and the Renminbi (yuan) start to flow.

Let’s hope that the rest of the world gets the message. Washington’s current bailout plan isn’t large enough to restart the global markets and it sure as heck isn’t large enough to recharge investor psychology.

But China’s plan is. And that’s what Washington should be looking at.

Source: The One Global Market Where There are Gains Behind the Gloom

- Of course a depression is what they used to call a recession. Then came the Great Depression. After that, economists and politicians stopped using the word for fear of jinxing the economy. Now, a depression means a severe and protracted recession.

- Bush may be right about the chances of the US slumping into a depression. Part of the problem is that it’s not only the US that’s suffering a bout of economic woes. Japan’s economy, the world’s second largest, has just officially entered its first recession since 2001. Third-quarter growth fell 0.1% after a second-quarter drop of 0.9%. The euro area is also in recession. A 0.2% drop in growth there in the third-quarter followed a similar second-quarter fall.

- Lucky the leaders of the G20 nations are on the case. The pols from the  world’s 20 largest economies have promised to work together to achieve “needed reforms” in the world’s financial systems. US stock futures reacted poorly to the G20 pledge. Economists at UBS probably summed it up best, calling the G20 statement “a bland recitation of past policy initiatives, coupled with comments that were blindingly obvious.”

- We wish the G20 good luck in their endeavors. Unfortunately, however, we don’t hold much hope that their efforts will avert further pain. The G20, just like the Bush administration, is focused on reinflation measures, without addressing the underlying cancer eating away at the global economy: 40 years of monetary policy indulgence. As Doug Noland writes at PrudentBear.com,

There is little prospect that the direction of global policymaking will engender the return of stability anytime soon.  As [Judy] Shelton adeptly notes [in an op-ed piece in the WSJ], “In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits.” …

The global abandonment of any semblance of monetary or fiscal discipline is a hallmark of this extraordinary period of bursting Bubbles.  Stable “money” may be the key – but it’s also nowhere to be seen.

- Meanwhile, bankruptcies continue to rise back in good ol’ US of A. The NYT reports that the number of personal bankruptcy filings “jumped nearly 8% in October from September, after marching steadily upward for the last two years … Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005.” This means an average of 4,936 Americans filed for bankruptcy each business day last month.”

- And it’s not just America’s citizens who are facing bankruptcy; whole states are facing going under. The NYT also has a report on the massive deficits eating away at some of the country’s biggest state governments.

Two short months ago lawmakers in California struggled to close a $15 billion hole in the state budget. It was among the biggest deficits in state history. Now the state faces an additional $11 billion shortfall and may be unable to pay its bills this spring.

The astonishing decline in revenues is without modern precedent here, but California is hardly alone. A majority of states — many with budgets already full of deep cuts and dependent on raiding rainy-day funds or tax increases — are scrambling to find ways to get through the rest of the year without hacking apart vital services or raising taxes …

In Michigan, to reduce overtime costs, fewer streets will be salted this winter. In Ohio, where the unemployment rate is above 7 percent, the state may need a federal loan for the first time in 26 years to cover unemployment costs. In Nevada, which is almost totally dependent on sales taxes and gambling revenues, a health administrator said the state may be unable to pay claims in a few months.

- Such problems are just the tip of the iceberg, according to perma-bear NYU economics professor NourielRoubini . There are at least 20 reasons why Bush may actually be talking sense when he says the US faces a depression greater than the Great Depression. Here’s a quick rundown, courtesy of NakedCapitalism.com:

· The US consumer is shopped-out having spent for the last few years well above its means.

· The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.

· The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

· Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.

· The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%….

· Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 billion in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.

· The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.

· The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.

· Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.

· Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.

· The Fed is reaching the zero-bound on interest rates as the economy gets close to deflation given the slack in goods, labor and commodity markets. Deflation means that consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of the households nominal debts

· Employment has been falling for 10 months in a row and the rate of job losses is now accelerating… In this cycle job losses have been so far “only” slightly over 1 million while labor market conditions are severely worsening based on all forward looking indicators…Massive job losses and concerns about job losses will further dampen current and expected income and further contract consumption.

· Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the tax rebate was spent as US consumers are worried about jobs and need to use funds to pay their credit card and mortgage….another general tax rebate would be as ineffective as the first one in boosting consumption.

· The 1990-91 and 2001 recessions were not global; this time around the IMF is forecasting a global recession for 2009.

· The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion) but the losses of real disposable income and thus falling consumption from other sources (wealth, income, debt servicing ratios) are much larger and more significant.

· The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US and reduced further real disposable income and the purchasing power of US consumers over foreign goods.

· With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth…

· Monetary easing will not stimulate durable consumption and demand for residential housing as demand for such capital goods becomes interest rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps. In spite of that capex spending of the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut…

· While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling…. together with less availability of credit are severely dampening the ability of households to borrow and spend.

· To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58). One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.