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What’s China’s Gameplan?

Bill Bonner — Fri, 24 Apr 2009 14:00:40 +0000

Buenos Aires, Argentina Is the rally still on? We’re not sure. Wednesday, the Dow fell 83 points…after a weak bounce on Tuesday. We expected the rally to last until June and to take the Dow back to the 10,000 range. But anything could happen.
And if you depend on 91-day T-bills for your spending money, you’re in a world of hurt. The yield is only 0.13%.

But maybe things are better on the other side of the planet. How’s China doing? Analysts are “cautiously optimistic,” says a New York Times report.

Retail spending in China is said to be up 15%.

Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt.

Hmmm… Why would China be doing that? The official response to that question is that U.S. Treasury debt is not only the most abundant credit in the world; it is also the most reliable.

As to the first point, no one would quibble. As to the second, only a fool wouldn’t.

The price tag for the crisis-related bailouts, guarantees and boondoggles is nearly $13 billion. The United States is setting records, of course. The biggest budgets ever. The biggest budget deficits ever. The biggest bailouts.

The U.S. budget deficit is about 13%. It was a budget deficit of not even half that amount that pushed Argentina over the brink in 2001. What are we supposed to believe…that there is no brink waiting for the United States?

Even more curious…what do the Chinese believe?

“It’s all very strange,” said a new friend who came into our Buenos Aires office today. “Americans are clearly cutting back. Their credit cards are maxed out. Their houses are going down in price…”

On this last point, we provide a quick update. Bloomberg reports that the average house price actually went up by 0.7% from January to February. But before you begin to think that the housing slump is over, another Bloomberg report tells us that house prices resumed their slide in February – down 6.5%.

Charles Hugh Smith argues that not only are house prices still going down – they’ll never recover. He gives five reasons, which we’ve paraphrased below:

1. Bubbles never re-inflate; instead, they go to a new sector
2. Even if nominal prices go up, they will be undercut by inflation
3. More likely, deflation will continue to drive down prices for a long time (Consumer price inflation just came in at a negative number for the first time since the ’50s.)
4. The low-interest rate, low-inflation world that permitted high property prices is finished
5. There is no demographic pressure on housing prices; the current stock is sufficient for years.

Low housing prices force Americans to cut their spending.

“But if Americans don’t buy, China will no longer have so much money to recycle into U.S. Treasury bonds. So who will buy all those Treasury bonds?”

Bond issuance is running as high and as fast as a 100-year flood. In Britain, recently, a bond auction found itself with more bonds than buyers. Could the same thing happen for the United States?

“Well,” our friend continued, “I have a darker scenario in mind. What if China had a different game plan? What if she intends to continue buying U.S. bonds as long as she can…leaving the United States completely dependent on Chinese lending? And what if she then suddenly dumps all her bonds and U.S. dollar assets? She would lose a lot of money. But the U.S. economy would suffer far more. The dollar would collapse…so would the US economy…completely. “

Now, we turn to Addison, who points out some telling trends now underway:

“The credit crisis has stymied a unique feature of American society,” writes Addison in today’s issue of The 5 Min. Forecast.

“According to the Census bureau, 35.2 million people changed their residence from March 2008 to March 2009 – the lowest number since 1962. And back then, there were 120 million fewer Americans.”

“The New York Times does a rather unremarkable job analyzing the trend underway, but they do point to a couple of interesting changes in American society since the 1960s: Home ownership rates have risen and owners are typically less likely to move than renters. The median age of the country has edged up…old people move less often than the young do.

But probably the most telling trend underway: two-income families have become more common and increasingly necessary to maintain a middleclass lifestyle. “Finding employment for both spouses in a new location can be challenging,” says the NY Times.

“And in this environment, it’s getting more challenging all the time. The line of American’s seeking jobless benefits grew even longer last week, the Labor Department says today. Their gauge of continuing claims – that’s people seeking unemployment benefits for more than a week – rose to a new record 6.13 million. New claims inched up 27,000 to 640,000 last week – not a record, but close.

“While these numbers look awful – and they are – they’ll be a non-event in trading today… this latest report was right in line with Wall Street expectations.”

Each weekday, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And back to Bill, with more thoughts:

We’re continuing our report on our trip to the ranch. This has no particular financial implication; we just want to tell you what happened.

Compuel is what we’d call the ‘back 40’ in America. Except it’s about 10,000 acres…and it’s a 4-hour trip on horseback. Still, the cattle have to be rounded up from Compuel annually. Then, they are driven down to the main part of the ranch …where they are vaccinated against brucellosis and other diseases and parasites…culled…castrated…and generally treated roughly. It takes about 7 hours to drive the herd up over the pass and down to the corrals near the ranch house.

The following day, we got up before dawn…by the time we got to the corral, the sky in the East was pink. It was still cold, but warming up fast.

Jorge gave the orders.

“Javier…you and Cosimir separate out the ‘terneros’ (young animals)… Pedro and Gustavo, get on the sluices… Senior Bonner, would you like to operate the gate?”

Javier is a young man who looks a little like Robert Mitchum, if you can imagine Robert Mitchum as an Incan with a huge wad of coca leaves in his jaw. Javier wore leather chaps and a flat, broad-brimmed Peruvian cowboy hat. He and Cosimir worked fast. They yelled. They whipped. A huge cloud of dust swirled up as they got the whole herd moving in a circle…and then forced the young animals into a second pen…generally by waving their hats at them. Occasionally, the cattle would panic and the two would run for cover. And occasionally, a cow…or a bull…would get annoyed and charge. Javier, particularly, was amazingly fast on his feet. He jumped onto the stone walls of the corral a couple of times.

The last calves were lassoed…and dragged them away from their mothers, into the holding pen. Then, they were pushed through a maze of stone walls, where the passage became narrower and narrower, until they finally came to the wooden sluice. It is tight turnstile with a gate on one end and a “sepa” on the other (we couldn’t find the word in the dictionary). This sepa is rather ingenious. It is two large pieces of solid wood that open up into a V-shaped passage and then come together – suddenly – like the jaws of a clamp. The cows come through the sluice one at a time. As they come through, the rear gate closes behind them. Then, the sepa at the other end begins to close. As it closes, the cow makes a dash for freedom. But Pedro was working the sepa lever and he rarely missed. As the cow started through the sepa opening, he leaned down hard on the lever and grabbed it by the neck.

Then, the hatches on each side of the sluice opened…and the needles came toward the struggling beast.

“Mr. Bonner…you’re going to have to operate that gate a little faster,” said Jorge. “We only want one cow at a time.”

More tomorrow…we’re out of time for today.

Source: What’s China’s Gameplan?

Toll Brothers Banks Lower Loss, CEO Gives Congress Some Market Recovery Advice

Mike Caggeso — Tue, 03 Jun 2008 19:35:26 +0000

A surprise to few, luxury homebuilder Toll Brothers Inc. (TOL) posted its second consecutive quarterly net loss today (Tuesday), though the results were better than Wall Street expected.

As a result, Toll Brothers’ stock gained a handy 3.44% by mid-afternoon in Tuesday trading as investors viewed it as a signal that the U.S. housing slump has more yesterdays than tomorrows.

The largest U.S. luxury homebuilder posted a net loss of $93.7 million, or 59 cents a share, in the quarter ended April 30 with a $36.7 million, or 22 cents a share, profit a year earlier.

This quarter’s loss is technically related to write-downs and land value of a joint venture, but overall blame goes to the stagnant U.S. housing market.

“In this difficult market, we continue to develop incentive strategies, when appropriate, on a community-by-community basis, which has enabled us to continue to generate pre-write-off profits,” Robert I. Toll, chief executive officer, said in a statement. “Although this strategy has resulted in slower sales, we believe it has helped sustain the reputation of our communities and value for our home buyers.”

Toll didn’t stop there. He bluntly went on to suggest ways the U.S. Government can quicken the housing market’s recovery – the key of which is removing the danger from existing homeowners who worry about selling their homes, and in turn, wait to buy a new one.

“We believe Congress should jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices. As we have said before, we favor a tax incentive for all those who buy homes within nine months of the Bill’s passage; this would create a sense of urgency. Interest rates are low, supply is abundant and a buyer’s market prevails. With a little motivation, the new home market could turn around, which would have a very positive impact on banks, bond prices and many other areas of the economy. Once home prices stabilize, Congress could then more successfully address mortgage issues; however, without stabilization of home prices, trying to address mortgage issues may be difficult at best,” Toll said.

Fittingly, “new homes” are exactly what Toll Brothers make and sell, but he makes a point.

For the first quarter, Toll Brothers posted its first loss in 21 years.

Toll Brothers made significant steps forward by reducing its risk at the source – shedding its land holdings from 91,200 in the second quarter of 2006 to its current number of 51,800.

The company also cut its net-debt-to-capital ratio from 31.8% a year ago to 22.7%.

“This liquidity will allow the company to take advantage of opportunities that arise from less financially flexible peers as we move through the downturn,” UBS AG (UBS) analyst David Goldberg told Reuters, calling Toll Brothers a “buy.”

Source: Toll Brothers Banks Lower Loss, CEO Gives Congress Some Market Recovery Advice

Manufacturer Data Better than Expected

Contrarian Profits — Mon, 02 Jun 2008 20:05:13 +0000

A severe US recession is less likely following better-than-forecast May data from US manufacturers. This from Bloomberg:

Demand from overseas for U.S.-made products is helping to keep factories running even as spending by American consumers and businesses slows. The improvement signals the U.S. may be able to avoid a deep and protracted economic slowdown as the housing slump worsens and food and fuel prices soar.

“Worries over a US recession are turning into fears of inflation,” says William Patalon III in Money Morning.

“And suddenly those increased water cooler discussions about the dreaded “I” word are starting to move from speculation to reality. Dow Chemical announced a 20% across the board price increase to “mitigate the effects of raw material costs.” German-based DHL soon will be “outsourcing” its North American delivery biz to competitor UPS as its seeks to reduce costs. Discounter airline JetBlue will not be adding to its fleet as expected because it too suffered the ill-effects of rising fuel prices that have prompted major changes throughout its industry (can you say consolidation?). Likewise, automakers continued to struggle from consumer activity (rather inactivity) as both Ford Motor Co. (F) and General Motors announced major reductions to their respective workforces.”

“My friends and I have been debating the ‘recession’ topic for a while now”, says Wayne Mulligan in The Penny Sleuth. “Are we currently in one? Will we run into one this year or next? What will the effects be?

“But when I read that Warren Buffett thinks the US is already in a recession and it will be ‘longer’ and ‘deeper’ than any we’ve seen for quite some time, I definitely began to think less about ‘what if we go into a recession’ and more along the lines of ‘What should I do with my money now?’”

Click here to find out which recession-proof discount retailers Wayne reckons are worth digging into.

Housing Crisis: Case-Shiller Index Reveals 13% Price Drop

Contrarian Profits — Tue, 27 May 2008 19:37:52 +0000

The US housing crisis looks sets to deepen after S&P’s/Case-Shiller Home Price index showed that home prices in 20 US cities fell almost 13% in February from a year earlier. This from AP:

“Month-to-month, it gets consistently worse,” said David Blitzer, chairman of the index committee at S&P, noting that February also marked the sixth straight month that all 20 cities experienced declines. “The slope is one direction. There is no sign of a bottom.”

“If you expect a ‘muddle through’ economic recovery to persist over the next 12 months – and I do – then the Fed will have to stay on guard as housing attempts to establish a bottom,” says Eric Roseman in The Offshore A-Letter.

“This doesn’t imply the dollar must fall further. But it does suggest commodities and gold will continue to rally because most central banks will continue to print credit while they try to look concerned about inflation.”

Bill Bonner in The Daily Reckoning says, “The last two big bubbles – in residential housing and the financial industry – are deflating. Prices are going down for both assets. But inflation-sensitive commodities, most notably oil and gold, have soared. And now prices seem be working their up all along the chain… from the oil wells, to the shipping containers, to the Chinese sweatshops, to the shelves of Wal-Mart.

“What this means to central bankers is that they have to watch it. They can’t cut rates so freely… not while consumer prices are rising. Instead, the pressure will be on the other side – to raise rates.

“To the man on the street it means that he has to prepare to pay higher prices for everything.”

Cashing in on Commodities: Lumber & Paper Mills Struggle as Timber Stands Tall

Don Miller — Tue, 27 May 2008 12:41:18 +0000

This is the third installment of a new Money Morning series highlighting investment opportunities created by the global bull market in commodities. There’s a classic squeeze going on in the timber markets right now.

As you might expect, the U.S housing slump is reducing demand for finished lumber. Meanwhile, timber, pulpwood, and paper prices are rising worldwide – but curiously, profit margins are eroding.

What’s up with that?

The global commodity boom has created a supply/demand price imbalance between the four distinct industry sectors that rely on timber as a raw material. In fact, that imbalance is a huge mismatch. And savvy investors may be able to wring substantial returns from the winner.

You see, timber companies have shrewdly maintained monopoly-like control of raw materials to hold the line on prices, despite the economic downturn. They are doling out enough – and only enough – supply to maintain sufficient revenue streams to pay the bills. Meanwhile, their downstream relatives are suffering.

In a sense, timber owners are weathering the storm. And when the storm is over, their profits should explode.

It’s a complicated scenario being driven by a number of economic factors including the declining U.S. dollar, classic market demand/supply ratios, emerging markets growth, and even export quotas and tariffs.

Investors who tune in may catch lightning in a bottle. The end game could send timber company profits – and your portfolio – soaring in the next 12 months to two years.

Let’s take a look.

Housing Slump Wreaks Havoc on Lumber Mills

As lumber prices have swooned to a five-year low, wood has been piling up at lumber mills. Sawmills throughout the United States and Canada have been reeling since the second quarter of 2007, when lumber prices collapsed to below the cost of production.

Here’s what’s happening now:

* In the United States, single-family-housing starts dropped 1.7% in April to a seasonally adjusted annual rate of 692,000 units, the lowest monthly production rate since January 1991, and a jaw-dropping 42% below 2007.
* U.S lumber consumption is expected to drop, from 64 billion board feet to 43 billion board feet from 2006 to 2008. A drop of 21 billion board feet in the span of three years is simply staggering, equal to the total production of the Top 20 softwood lumber producers in the U.S. market for all of 2007.
* North American lumber at the Chicago Mercantile Exchange has fallen as low as $209 per thousand board feet, down a whopping 56% from its peak of $473 in 2004 – at the apex of the housing boom.
* Lumber companies in the Billion Board Foot Club, a measurement of the largest lumber companies in the world, was reduced from 22 to 15 in 2007. Six of the victims to be cut were in North America.

Particularly hard-hit are the big lumber mills in Canada, which ship much of their production to the United States. The key factor was the unprecedented run-up in the Canadian dollar. With sales denominated in U.S. dollars and costs accrued in Canadian dollars, a wide range of Canadian producers were running in the red and simply ran out of money.

In addition, Canada mills must pay a 15% duty to ship lumber into the United States. That puts the price at those mills at about $175 per thousand board feet, said Gerry Van Leeuwen, vice president at International Wood Markets Group, a Vancouver-based lumber consulting firm. “There is just no way anyone is making any money,” he added.

In the past, sawmills only needed to wait for interest rates to decline before ramping up production. Now, however, they will have to wait until the housing glut is over before lumber demand gets back to normal.

And that’s not likely until mid-2009 at the earliest. Our advice is not to bet the farm on lumber companies right now.
Global Growth Buoys Pulpwood and Paper Mills

Meanwhile, pulpwood and paper has been in a strong bull market for almost two years. Demand for paper and pulp remains strong – from overseas markets, in particular. And that demand doesn’t appear likely to ebb anytime, soon.’

Overall, world paper demand is moving ahead, buoyed by accelerating growth in Asia. The surge in paper demand in Asia is driving a huge appetite for both virgin pulp and recycled fiber. In 2006, alone, China’s imports of wood pulp jumped 150% to 7.5 million tons.

Increased exports have also helped pulpwood prices. The weak U.S. dollar makes it cheap enough for pulp and paper companies to purchase products in the United States and ship them overseas.

On top of that, demand from European utility companies for wood pellets should keep pulpwood prices elevated. Believe it or not, European utilities have turned to wood chips to produce power in order to lower their greenhouse gas emissions in accordance with the Kyoto protocol.

So you would think paper and pulpwood mills would be humming along, bringing in record profits.

Don’t make that bet.

The Big Squeeze

There is a huge fly in the ointment for pulpwood-and-paper mills.

Paper mills, of course, rely on pulpwood as raw material. Pulp mills, in turn, operate on small logs and wood chips – a byproduct of lumber production. And, as you might expect, the weak market has lumber mills cutting back on production. This is forcing pulpwood mills to rely on buying more logs or raw timber, says Daniel Stuber, of Forest2Market.com,. The lack of available chips has produced a big demand for small, lower quality logs.

The fact is, pulp mills are using twice as many logs as they normally would to satisfy production levels. And they’re getting hit right in the wallet.

“One of the bright spots for timberland owners is the demand from the pulp-and-paper industry,” Stuber said. “Land owners have been withholding stands with larger trees until saw-timber prices rebound, but they have been able to generate revenue through thinning practices and harvesting younger stands.”

Housing Crisis: 243,000 US Homes in Foreclosure and Counting

Contrarian Profits — Wed, 14 May 2008 20:54:13 +0000

US foreclosure filings climbed 65% and bank seizures more than doubled in April from a year earlier as mortgage industry efforts to modify loans fell short, reports Bloomberg.

More than 243,300 properties were in some stage of foreclosure, the highest monthly total since RealtyTrac Inc., a seller of default data, began in January 2005. One in every 519 households received a filing and Nevada, California and Florida had the highest rates. Filings rose 4 percent from March.

Noisy Markets

Bill Bonner — Thu, 24 Apr 2008 18:57:45 +0000

The great overreach continues…there’s so much noise in the financial markets, one can barely think straight. Housing slump may exceed the Great Depression…the profit parade in commodities marches on. We pity the next president…the subprime debacle has produced a tsunami of lawsuits…and more!

“The baths, the wine, and Venus corrupt our bodies,
But the baths, the wine and Venus are our life…”

-Inscription found on a Roman tomb

Yes, dear reader…we are here in Rome. We have enjoyed the wine. We have
had a bath or two – in our own private bathroom. And Venus? Well…this is
a family publication…

This afternoon, we are going to visit the baths of Caracalla, built at the
beginning of the 3rd century by Caracalla’s father Septimius Severus and
inaugurated by the son after Severus’s death.

‘Overreach’ is not a Latin word. But it was practically invented to
describe what the Romans did to themselves…to their empire…and to
their money. About which, more below…and more about our own overreach,
circa 2008, too.

But first the bare facts, yesterday’s financial news in a nutshell:

The Dow rose slightly. Oil held steady at an all-time high of $118. Gold
dropped another $16 to close at $909.

There is so much ‘noise’ in the financial system, it is hard to think. The
papers are full of distractions and absurdities. You can find almost any
point-of-view you want. Some argue that central banks are winning…that
the stock market hasn’t gone down because it is getting ready to go
up…and soon, the housing market will bottom out too.

“Fears of bank failures recede,” says a headline in the Financial Times
today.

Others argue that the worst is still ahead…that the stock market will
melt down…that housing prices will fall another 20%…and that the whole
world will go into a monumental downturn.

“Housing slump may exceed Depression,” says a San Diego paper.

We take a middle view – that financial assets (including paper money), the
financial industry, the credit cycle, the dollar-standard monetary system
and the U.S.A. itself are in an historic decline…while emerging markets,
gold and commodities are in a once-in-a-lifetime upswing.

We’ve heard about the panic that the doubling of wheat and rice prices is
causing in China, India and other Asian countries. But now, reports the
Washington Times, this panic is beginning to spill over to Americans. The
article goes on to point out that bulk grocery stores, such as Costco, are
having to put a limit on how much rice customers in certain states can
buy. Americans have gotten a whiff of the high prices and fear that the
shortages will spread from overseas, and have begun hoarding necessities
such as oil, rice and flour.

“Commodity prices across the board are at levels not experienced in many
of our lifetimes,” said CFTC Chairman Walter Lukken. “These price levels,
along with record energy costs, have put a strain on consumers as well as
many producers and commercial participants that utilize the futures
markets to manage risks.”

Resource Trader Alert’s Kevin Kerr assets that “this profit parade [in
commodities] isn’t going to end anytime soon.” He’s so certain, in fact,
that he’s offering three month’s of Resource Trader Alert – completely
free of charge. Find out how you can profit from this epic boom in
commodities here.

http://www1.youreletters.com/t/1472707/30712165/846957/0/

But let’s take a look at the headlines and then we’ll come back to our
analysis.

Is the housing market getting worse? Well, you already heard the report
from San Diego; it could be worse than the Great Depression, it says. Up
the coast, the news from the LA Times is that California is suffering a
record level of foreclosures. And in Nevada, the local press tells us that
many erstwhile homeowners are not being very considerate to the new
owners. They’re wrecking the houses before they leave, says the paper,
even putting cement down the plumbing. Of course, they’re upset, continues
the report, because they feel they’ve been roughly handled by the mortgage
industry.

Meanwhile, in Chicago, Jesse Jackson is in the news; he thinks borrowers
have been roughly handled by the mortgage industry too. He’s called for a
moratorium on foreclosures.

And over the on East Coast, the Washington Post says lenders are “being
swamped” by delinquent loans.

Partly because of the risk of bad payers, mortgage approvals have fallen
to a 10-year low. But not all the delinquents are homeowners. Many former
students, who took out loans to get through college, are finding it hard
to pay the money back. Lenders are tightening up on the scholars too. And
the Bush Administration is so alarmed at the thought of all the college
keg parties that might be canceled; it has proposed to buy student loans
from the lenders.

Where will it get the money, you ask? From taxpayers, of course. Who are
the taxpayers? The parents of the students, obviously. Then, why not let
the parents keep their money and pay for their own children’s education?
Oh, stop being a silly old fuddy duddy…

*** First, we turn to Project Overreach: America’s Imperial Budget, 2008.
George W. Bush et al. have been stretching in all directions. And now
comes his party’s chosen successor, John McCain, with even longer arms.

McCain wants to lock in place Bush’s $350 billion of tax cuts…and then
cut another $300 billion more. Here at The Daily Reckoning headquarters
we’ve never met a tax cut we didn’t like. But it’s the other side of the
ledger than concerns us. If revenues go down, how would McCain pay for all
those spiffy projects – mortgage rescues, student loan bail-outs, the
never-ending war in Iraq, bombing Iran…not to mention all the regular
giveaways to America’s seniors, poor, cripples, veterans, bankers, and
feeble-minded citizens?

The idea, put forward by Arthur Laffer and the Reagan crew, was that lower
tax rates would stimulate economic activity and, ergo, more tax revenue to
the government. But now, McCain’s top economist – Douglas Holtz-Eakin –
says the estimates of increased tax revenue as a result of lower rates
were “overblown.” As director of the Congressional Budget Office, he
admitted to Congress that a “dynamic analysis” of tax cuts (taking into
account the likely positive effect of cuts on economic activity) made
essentially no difference to the outcome. Conclusion: if you cut
taxes…you also must cut spending…or you’ll find yourself in the hole.

The Bush Administration has worked the United States into the biggest hole
ever. Like Diocletian, Septimius Severus and Caracalla, the next president
will face the consequences of overreach…inflation, budget deficits, and
rapidly expanding debt.

*** But mommas still want their babies to grow up to be president…or
even better, to land a job on Wall Street. And to break into finance or
politics, it helps to have a degree from a prestigious university. It is
proof to your employers that you have been indoctrinated with the latest
Efficient Market claptrap…that you believe the hocus pocus of modern
macroeconomics…and that you can do the miracle math required to turn
trashy credits into triple A-rated investments.

But for all those mommas hoping to get their babies a place at Goldman or
Blackrock, we have a suggestion: aim for the legal department. Yesterday
brought word from the Financial Times that “sub-prime produces a tsunami
of lawsuits.” Our guess is that the financial industry has seen its best
days. The wheels are falling off the deal machine. Bonuses are coming
down. Employees are being laid off, cast off, spun off, and blown off in
every department – save where the legal team does its work. The next few
years are likely to produce further trimming in the financial industry
ranks. But the in-house lawyers…and lawyers who work face them from
outside firms…are bound to enjoy a boom. They’ve got to work out,
renegotiate, defend, and deny thousands of claims. Their jobs are safe for
years to come.

*** Poor Caracalla. The man spent his whole life pushing the barbarians
back…or being pushed back by them. And for his thanks…one of his own
men stabbed him to death.

But he had it coming.

He was a good child, say the historians: “sed haec puer.” But he went bad
fairly early. After his father died, he ruled as co-emperor with his
brother, Geta. Then, he murdered Geta in 212 A.D. and fled to the army for
support. After he had solidified his position, he began purging his
brother’s old friends and supporters. More than a 1,000 were killed.

He seemed to want to imitate Alexander the Great…and even began walking
with his head tilted to the right, as he had seen in a depiction of
Alexander. He set out to make his military glory with a series of
campaigns against the Gauls, the Chatti, the Alemanni, and the Getae. He
pillaged Alexandria, after hearing that the citizens spoke of him with
contempt. And he was preparing a war against the Parthians when he was
killed.

His greatest achievement was the “Constitutio Antoniniana,” which made all
inhabitants of the empire equal citizens. He is also remembered for a new
coin – the Antoninianus – which replaced the denarius. It was a way of
dealing with the inflation that was troubling the empire. Wars were
expensive then, as they are now. But back then, were sometimes profitable
enterprises, as a victorious army usually captured enough booty to pay its
way – and then some. But the larger the empire became, the more neighbors
it had, the longer its borders grew, and the more garrisons it needed to
protect them. The people at home needed bread and circuses too – or they
would go turn on an emperor…and shift power to a rival.

Pretty soon, Rome ran out of money, which was then calibrated in gold
and/or silver. The Antoninianus was a way to depreciate the currency. It
had a face value of 3 times the denarius, but with the same silver
content.

Hmmm…

Until tomorrow,

Bill Bonner
The Daily Reckoning

Miscellaneous Notes From a Faltering Economy

Dave Gonigam — Thu, 24 Apr 2008 18:32:44 +0000

Time was, “As General Motors goes, so goes the nation.” What would be the suitable substitute for GM in post-industrial, post-modern, post-Bretton Woods America? Wal-Mart? Or maybe Starbucks?

Starbucks, the coffee house chain, on Wednesday blamed a “sharp weakening” in the consumer economy for an unexpected decline in its US sales, sending its shares plunging more than 10 per cent in after-hours trading.

Howard Schultz, who returned to the role of chief executive in January, said “the current economic environment is the weakest in our company’s history”, citing the housing slump and rising energy and food costs.

The company’s history goes back to 1971, the year Bretton Woods fell apart and Nixon closed the gold window. So for Schultz, things are worse now than the double-dip recession in the early 80s, the worst of the postwar era. Grim stuff indeed for a company whose entire business model is built on an “affordable luxury.”On the subject of historical comparisons, Robert Shiller — he of the Case/Shiller home price index — is going all the way back to the Great Depression, when housing prices dropped 30%. He says an even bigger drop is possible now (with prices having already fallen 15% in his estimation).

Home prices rose about 85% from 1997 to 2006 adjusted for inflation, the biggest national housing boom in U.S. history, Mr. Shiller said. “Basically we’re in uncharted territory,” he said. “It seems we have developed a speculative culture about housing that never existed on a national basis before.” Many people became convinced that housing prices would increase 10% annually, a notion Mr. Shiller called crazy.

And there’s another property time-bomb looming. In fact, it’s one of five “super shocks” about to hit the U.S. economy and stock market in the very near future. For a seven-part defense strategy, check out this special report.

Why Falling House Prices Could Actually Be A Good Thing

Ben Traynor — Tue, 15 Apr 2008 18:50:34 +0000

More ‘bad’ news for the housing market yesterday. Surveyors are writing smaller numbers on the top of their housing valuation reports.

The Royal Institute of Chartered Surveyors (RICS) reports that the number of surveyors reporting lower valuations exceeded those reporting gains by 78.5 percentage points in March. This was up from a 65.7 percentage point gap in February.

Of course, we don’t know by how much prices are falling. But this is yet more evidence of housing market weakness. Pain in store for homeowners, then. But let’s not get too maudlin here.

Yes, some people may soon find themselves with negative equity. But for most, if they’ve borrowed sensibly, can manage their repayments and stay living in their house for a few years, they should find this is a temporary phenomenon.

But what of the wider economy? Does this news herald the Great Housing Crash that will plunge us into recession? It’s easy to see why people think that — and why they’re worried. The RICS survey began in 1978, and its findings last month were the worst since it started. Small wonder, then, that this morning’s headlines proclaimed the biggest housing slump for 30 years.

But the news can be viewed in a positive light. Or, to be more accurate, in a lesser-of-two-evils light (it’s still evil… no happy ending here, I’m afraid).

British houses are really expensive. So the question we need to ask is, do we want them to stay that expensive (and unaffordable), or do we want the market to do its job and bring prices down?

Of course, if you’re selling a house you pick the first option; if you’re buying – the second. But let’s take a step back and look beyond mere self-interest. Everyone’s worried about a housing crash, so let’s examine option number two first. What might happen?

Well, house prices fall. People whose wealth is tied up in their house are poorer… they feel poorer… and they spend less. Businesses make less money… they invest less… the economy slows down. Maybe even shrinks a little. Not a rosy outcome.

So what if (as many would love) we managed, somehow, to keep house prices where they are. Forget for a second that any effort to do so would be, in all likelihood, futile (the cat’s out of the bag on this one — buyers know sellers are scared, and prices only go one way in a buyers’ market).

To keep prices high would require diverting resources from elsewhere in the economy. It would require more new buyers to borrow up to the hilt. In other words, they’d have to hand over larger shares of their future incomes to existing homeowners, imposing a significant constraint on their future spending.

So, in the coming years, they’ll spend less than they otherwise would have had their house been cheaper when they bought it. And businesses will make less money… they’ll invest less… sound familiar?

The housing market needs to correct. Trying to cheat the system will impact our long-term growth negatively.

So neither scenario is rosy. I’d love to wrap up with something that is, but the best I can do is to tell you inflation hasn’t gone up. In February, Consumer Price Index (CPI) inflation was 2.5%. It was 2.5% again in March.

That’s kind of good news… isn’t it? I would go out and celebrate, but have you seen how much a pint costs these days?

A bunch of bankers… and Gordon Brown

The chief executives of Britain’s biggest banks are meeting Gordon Brown today to drink tea, sample the delights of the Downing Street kitchen… oh, and see if they can’t do something about this here credit crisis.

The King of Barclays, the Earl of HBOS, Lord Royal Bank of Scotland and Mr HSBC-man will all take turns bending the prime minister’s ear.

“They have a lot in common,” says Fleet Street Letter editor Brian Durrant. “Both the banks and the PM overplayed their hands in the good times. The banks now have no confidence in each other and the people have lost confidence in Mr Brown.”

Brian tells me that in a speech in east London yesterday, the prime minister said the economy remains his sole focus.

“No wonder people are worried,” he quips.

Tesco profits jump 12%

First quarter earnings season rumbles on. Tesco’s results have caused a storm in a teacup. Tesco decided not to separately publish the results of its new US subsidiary Fresh & Easy. Analysts kicked off about it, taking it as clear evidence that Fresh & Easy was struggling.

“This overlooked the fact that Fresh & Easy accounts for a marginal amount of Tesco’s net income,” says Theo Casey, our master of the level-headed analysis.

The supermarket’s pre-tax profits rose 12%. Happily the market has ignored the analysts’ wailing — at the time of writing Tesco shares are up 22p.

It’s April Bio-fools day

“It’s madness, utter, utter madness!”

Today is not a great day for Manchester’s most vocal biofuels opponent. Commodities maestro Garry White has long argued that they are a con, but it seems only the Germans are listening.

Germany has decided to ignore an EU target that would require 5% of all fuel to come from biofuels by 2010. Sadly, Britain hasn’t. The Renewable Transport Fuel Obligation becomes law today. It requires 2.5% of fuels to come from biofuels as of today — rising to 5% by 2010.

“And guess where we’re getting it from,” says Garry. “Importing it from America. In ships. I bet they don’t run on biofuel!”

Stupid though this policy may be, it’s thrown up an intriguing investment opportunity, and Garry’s going to tell you all about it.

“Let’s get ready to rumble!”

In the blue corner we have the undisputed heavyweight champion, the United States of America. Big, powerful… it has the experience… but maybe it’s a bit too long in the tooth, maybe it’s taken a few to many to the jaw in its time….

In the red corner we have the challenger, China. Lean, hungry… and with quick feet. But China’s moved up a division. Does it have enough to get the better of its opponent?

There’s a lot riding on this bout. The purse is one quarter of all US oil imports by 2015. The venue, the Gulf of Guinea.

“Let’s get ready to rumble!”, booms an excited Manraaj Singh.

China and America are squaring up to each other in the battle for Africa’s oil reserves. Who will win?

So far China’s looked impressive, but America’s just landed a big right hander — it’s sent in the troops. Manraaj has the latest from ringside, including why this new “Cold War” will actually be a good thing for Africa (and why investors would be mad to miss it).

Until tomorrow,

Ben Traynor

Fed Members See ‘Deep Recession’

Contrarian Profits — Wed, 09 Apr 2008 14:31:20 +0000

According to AP, fears of a deep recession “drove Federal Reserve policymakers to slash a key interest rate last month, meeting minutes show.”

Even as the Fed battled in almost unprecedented fashion to stem a widening credit and housing slump, some members fretted over the possibility of a “prolonged and severe” economic downturn. It was in that environment that they voted — with two dissents — to cut its most important interest rate by three-quarters of a percentage point to 2.25 percent. That action capped the most aggressive Fed intervention in a quarter-century.

Meanwhile, former Fed chief Alan Greenspan has been busy defending his part in the housing bubble.

“I find it interesting that Big Al is getting testy about all the fingers being pointed at him for this mess,” says Dan Denning in The Daily Reckoning Australia.

“I believe I may have been one of the first to point a finger at him when the housing bubble was getting bigger and bigger, and no one would admit we had a bubble.

“But just for the record… Here’s the blame I believe he should bear… First, I believe the Fed was too lax during the stock market bubble. Raising Fed requirements on margin, in my opinion would have gone a long way toward slowing that bubble, and maybe preventing trillions of dollars in losses.

“Second, I believe he fueled the housing bubble and then all the awful stuff that happened as a result of the housing bubble, by cutting rates too low back in 2001 and then keeping them too low for too long (through 2003).”