The Daily Reckoning

An Argentine economist holds up a $100 bill together with a 100 Argentine peso bill in this file photo. Bonner argues that financially, Argentina is the pacesetter for the rest of the developed world. (Ricky Rogers/Reuters/File)

How to ruin your economy, like Argentina

By Bill Bonner, Guest blogger / 02.14.12

We can learn a lot from the Argentines. When it comes to messing up an economy, they’re Numero Uno. They’re Olympians of financial legerdemain and masters of the old false shuffle.

In 2001, the country was deeply in debt. The government was out of money. And the currency was losing value fast. What did the Argentines do?

First, they broke their promise to investors and savers, cutting the peso loose from the dollar. Then, they seized control of banks and bank accounts. People had been saving money in US dollar accounts in order to avoid problems with the peso. But the Argentine feds forcibly converted their accounts to pesos, just as the peso was losing 2/3rds of its value.

The next thing was to take the reserves in the central bank and use them to pay current expenses — which caused the head of the bank to resign in protest.

And finally, a few years later, they took over private pension funds — to protect them for the pensioners, of course. What are they used for? To fund the country’s deficits!

But the Argentine feds are not just scalawags, they’re the pacesetters for the rest of the developed world.

Here’s The Financial Times with a warning:

Watch out as sovereigns eye company cash piles
 By David Bowers

Much has been written about how the developed world must tackle its structural budget deficits. But the link that remains to be properly recognised is that the counterparts to those ‘unsustainable’ public-sector budget deficits are equally ‘unsustainable’ corporate-sector surpluses.

The conventional wisdom believes that the current sovereign debt crisis is the result of governments having been too profligate. But it is not that governments have been spending ‘too much’ that is the problem; it is that corporates have been spending ‘too little’. Moreover, because this corporate saving is the main counterpart to the government’s borrowing, until companies start to spend again, the burden of fiscal adjustment will have to fall on cutbacks in public services and higher personal taxation. It is time to shift the debate away from talking about the fiscal position, and focus instead on whether it is a shift in corporate behaviour that is responsible for the fiscal mess in the developed world.

It is very unusual for the corporate sectors to run sustained financial surpluses. Look back at the UK and the US for more than half a century and the corporate sector has tended to be a net borrower, not a net saver.

What has prompted the recent move into financial surplus has been the decision by companies to step away from investment. Investment-to-gross domestic product ratios in the developed world are now close to the lowest levels seen in 60 years. Corporates appear to have decided to run themselves for cash, and not for growth. It is this profound shift in corporate behaviour that policymakers and politicians have been slow to spot. Until this behaviour changes — or is changed — it will be very hard to improve the fiscal arithmetic.

In the Reagan-Thatcher era, politicians cut taxes so that companies would come to their country, invest, create jobs…so that those politicians could, in turn, be re-elected. It does not work like that anymore; globalisation has seen to that. The reality is that public services used by the ‘99 per cent’ are taking the strain, while attractive corporate tax regimes are protected. Just as the trade-union barons of the ’70s failed to see the writing on the wall, so the global captains of industry may suffer a similar fate unless they put their cash to work in the countries in which they are domiciled.

The Argentines are the pacesetters for all modern governments. And The Financial Times is their newspaper of reference. It’s what the policy makers read. And the bankers.

Here, The Financial Times makes it clear what the policy makers should think: that corporations are to blame for current financial problems. They haven’t invested their money the way they should. If they’d invested more, instead of paying dividends and bonuses to rich people, we’d have more jobs…more spending and more growth.

Surely the feds can help them find ways to “invest” their money…

“I love the US…but it does seem to be going in a bad direction,” said a friend in Miami.

“You look around here and everything looks good. The grass and trees are all manicured. People are prosperous. But you go inland and it’s a different story. A lot of people in Florida don’t have two dimes. That’s why you see so many old people working. They’re taking tickets at the amusement parks. They’re working the cruise ships. They’re parking cars. They don’t have any money. They have to work to make ends meet.

“And the real estate market here is a disaster. People tell you it’s bottoming out. I don’t see it. What I see are few transactions…the market is very soft. People keep thinking they’re going to buy at the bottom. They buy…and then the bottom sinks some more.

“This is a consumer society down here. People live in suburbs…almost the whole state is suburb. They go to work. They come home. They go out to eat. They go out to shop.

“At any hour of the day, you’ll see work vans in about half the driveways. Someone’s cutting a lawn or fixing a cable TV. Nobody does these things for himself. That’s the way people live down here. They call someone. It’s money in and money out…all the time. Nobody’s got any savings…or any time. It’s go…go…go…You go to work. Then you go shopping.

“And it can’t stop. If it just slows down a little, the state goes into a slump. Everybody is checking his cellphone or iPhone or email all the time. He can’t stop either. It’s go, go, go….

“Nobody can take the time to think or even to wonder. That’s why a real depression now would be much worse than the Great Depression of the ’30s. Nobody can sit still. They can’t wait for it to pass. They can’t stop to breathe…or think…or wait for all the problems to clear up. They can’t relax and wait for an uneconomic upturn. They have to work.

“They’ve got to have money coming in…and money going out.

“You know, I’ve been reading your Daily Reckoning for years. And the one lesson I take from it is that you have to have some savings…so you’re not forced to run on the treadmill all the time. You need some money and some time. Otherwise, you’re never going to figure out what is going on. And you’re not going to have a clue of how to make any money. You just go from day to day…from job to job…from one shop to the next mall…from bill to bill…

“Scientists have done some studies on how the brain works. They found that most of what we do is reactive… Like someone throws a ball at you…you reach out and catch it. Quick response.

“But there are some things where the brain needs time. Some kinds of deep thought require, well, reflection. And nobody has time for reflection when they are on the computer or the iPhone…or rushing to get something done…

“And nobody can stop to think when they are having trouble paying their bills. That’s why you need savings. That’s why you need to have a garden, too. Nobody’s got a garden down here in South Florida. We have to go to the supermarket to buy our food.

“Of course, that’s part of the problem. If you have to work to prepare your food, you get better food…and you don’t get fat. But now you have to work to not get fat. Otherwise, food is just another distraction…like the iPhone or the Internet. You eat because it’s easier than thinking. It saves you from having to figure things out.

“You work. You drive. You shop. You check email. You call people. You eat. Money in. Money out. There’s no stopping it. No hesitating. No time to think. No time just to let things be.”

Regards,

Bill Bonner
 for The Daily Reckoning

A man walks through the snow in Denver. Bonner argues that the jobs report automatically adjusts upward for bad winter weather. (Helene H. Richardson/The Denver Post/AP/File)

Why US job creation heats up in the winter

By Bill Bonner, Guest blogger / 02.12.12

We used to like traveling. Now, it’s a drag.

“No, we don’t want to go through your new x-ray machine,” we told the TSA guard.

“Whassa matter? It’s safe…” she replied.

“How do you know that?”

“The government said it was safe.”

“Do you believe everything the government tells you?”

“Heh…heh… Okay…” then, turning to no one in particular… “REFUSAL on 11. Male.”

We were out quickly…but the poor old woman behind us had to get up out of her wheelchair…hobble through the x-ray machine…and then they still wanted to feel her up on the other side.

You can’t be too safe, right?

This has been going on for 10 years. But it is still shocking. No one seriously believes that 85-year-old crippled Lutherans are going to cause mayhem on commercial airliners. But no one seems willing to say so.

You can’t even ask the question. Because it leads to other questions. Who, actually, is a threat? Probably no one. So, why are we herded…inspected…and pawed…as if the survival of the nation depended on it?

For the money and aggravation, all this security has probably done little to make air-travel any safer. But it’s done wonders at turning the American population into whipped dogs. They bark on command. When they begin the round-ups, interrogations and deportations…Americans will be ready to get in line…

You’ll see part of the reason why, below…

Recent news brought reports of more new jobs. We suspect that most of the good news was merely misinterpretation of the data. Many people have been looking for work for so long, the feds have stopped counting them. Besides, they routinely adjust jobs upward in winter, to make up for bad weather. So when there isn’t any bad weather in January, the job numbers go up automatically.

But there’s another problem.

“Most of the new jobs being created,” complains Robert Reich, “are in the lower-wage sectors of the economy — hospital orderlies and nursing aides, secretaries and temporary workers, retail and restaurant. Meanwhile, millions of Americans remain working only because they’ve agreed to cuts in wages and benefits. Others are settling for jobs that pay less than the jobs they’ve lost. Entry-level manufacturing jobs are paying half what entry-level manufacturing jobs paid six years ago.”

He continues, in the Christian Science Monitor:

Other people are falling out of the middle class because they’ve lost their jobs, and many have also lost their homes. Almost one in three families with a mortgage is now underwater, holding their breath against imminent foreclosure.

The percent of Americans in poverty is its highest in two decades, and more of us are impoverished than at any time in the last fifty years. A recent analysis of federal data by the New York Times showed the number of children receiving subsidized lunches rose to 21 million in the last school year, up from 18 million in 2006-2007. Nearly a dozen states experienced increases of 25 percent or more. Under federal rules, children from families with incomes up to 130 percent of the poverty line, $29,055 for a family of four, are eligible.

Too bad; Reich misunderstands everything. He thinks Republicans are to blame for wanting to reduce government handouts. Reich believes he can replace real middle-class earnings with a cushier safety net…as if there was no difference between a person who earns a living…and one who begs one….

…and as if the middle class wouldn’t have to pay for it.

On the subject of handouts, the Republicans are on slightly more solid ground than Reich and the democrats. They say they will cut them back. At least, those that don’t go to the voters.

For example, Mitt Romney says he doesn’t care about the poor; he cares about the middle class. Why? The middle class votes; the poor don’t.

Trouble is, there are more and more people who are slipping from the middle class…to the poor side of town.

Investment Business Daily is on the story:

The American public’s dependence on the federal government shot up 23% in just two years under President Obama, with 67 million now relying on some federal program, according to a newly released study by the Heritage Foundation.

The conservative think tank’s annual Index of Dependence on Government tracks money spent on housing, health, welfare, education subsidies and other federal programs that were “traditionally provided to needy people by local organizations and families.”

The two-year increase under Obama is the biggest two-year jump since Jimmy Carter was president, the data show.

The rise was driven mainly by increases in housing subsidies, an expansion in Medicaid and changes to the welfare system, along with a sharp rise in food stamps, the study found.

“You can’t get around the fact that policy decisions made over the past two years, on top of those made over the past several decades, are having a large effect on the pace of growth of the index,” said William Beach, who authored the Heritage study.

Government dependence has climbed steadily since 1962, when the index stood at 19. By 1980, the index had risen to 100. It stood at 294 in 2010, the last year for which the data are available. D.C.-based Heritage has produced the index for nine years.

The report also found that spending on “dependence programs” accounts for more than 70% of the federal budget. That, too, is up dramatically. In 1990, for example, the figure stood at 48.5%, and in 1962 just over a quarter of federal spending went to dependence programs.

At the same time, fewer Americans pay income taxes, the report notes. Almost half (49.5%) didn’t pay income taxes in 2009, the latest year for which the researchers have data. Back in the late 1960s, only 12% of Americans escaped the income tax burden.

Other findings:

The number of people dependent on the federal government shot up 7.5% in the past two years.

In 2010, for the first time ever, average spending on dependence programs per recipient exceeded the country’s per-capita disposable income.

Our quick-witted Dear Readers are probably already gasping for air. The zombies now are getting more money than wage earners. And millions of those wage earners are zombies themselves, on the government payroll…or the payroll of some industry — health, education, military — that depends on federal spending.

That leaves honest working people in a minority. And everybody gets a vote.

How do you think the zombies will vote? To cut back on spending on education? On healthcare? On foreign wars or new weapons? On welfare? On food stamps? On unemployment comp?

No, dear reader, there are some ailments that can’t be cured…and some problems democracy cannot solve.

Regards,

Bill Bonner
 for The Daily Reckoning

A man places Japanese Yen on a counter to exchange for U.S. dollar at an exchange booth in Tokyo in this file photo. Bonner argues that like Japan, the US will not be able to trick its way out of paying its debts. (Kim Kyung-Hoon/Reuters/File)

Debt outpacing growth and the case of Japan

By Bill Bonner, Guest blogger / 02.10.12

Get out your chopsticks! Brush up on your sushi! Learn to read backwards and upside down!

Yes…we’re going to Japan!

The gist of the Japanese situation is this:

The bubble burst in 1990. But rather than let their big businesses go belly up, the Japanese used every trick in the book. Counter-cyclical deficits up the Shinanho. ZIRP (zero interest rate policy). And QE too.

The economy didn’t grow. It didn’t collapse. It just got stuck…like a moth in amber. No new jobs. No new output. And get this, Japan is expected to lose 40% of its working age population by 2050.

But Japan is a leader, not a follower. Over the next 40 years, Germany will lose more than 30% of its working age population too. Russia and Poland will lose even more.

Growth is expected to be negligible over the next 40 years in Japan. But it will be almost nothing in many other countries too, according to an HSBC report. It estimates that the US will grow at around 1.5% annually. France 1.1%. Denmark, Norway, Sweden — barely anything at all.

What does this sound like to you, dear reader? It sounds like the whole developed world going Japan’s way — with low growth and high debts from here to eternity.

As in Japan, so in Europe and America. The European Central Bank is lending the banks as much as they want — at low rates. The Fed has its own ZIRP…which it says it will keep in place until 2014.

Growth is stalled…debts are mounting up. Hello Tokyo!

But wait…here’s the Congressional Budget Office telling us that Congress will have those deficits under control in no time.

“Deficits to fall sharply, US forecast says,” reports the International Herald Tribune.

What a relief that is! The CBO has crunched the numbers. It has beaten up the 2s. It has punched out the 5s. It has pounded the 6s. And now, finally, like prisoners at Guantanamo, the numbers tell us what we want to hear.

US debt is going down!

Wait a minute…are these the same number crunchers who, at the beginning of the 21st century, forecast federal surpluses as far as the eye could see?

Yes, it is!

But, okay, that didn’t work out exactly as planned. They crunched the numbers but then the numbers got un-crunched on their own. Damned numbers! You just can’t trust them.

So, how can we trust these numbers?

That’s just it, dear reader, we can’t. In order to work out as planned, they require:

1. Congress has to let the Bush tax cuts expire on schedule. Hmmm… Will that happen? Beats us. It probably depends on who wins the elections in November…which probably depends on what the economy does between now and then…which probably depends on more things than we can begin to estimate and compute.

But the central idea of it — that Congress will act responsibly — seems like something you can’t say with a straight face. Will pandas stop eating bamboo? Will teenagers stop slouching? Will liquor stores make free home deliveries? Nope. Everything has a nature of its own. And the nature of Congress is to spend money it doesn’t have on things it doesn’t need. And then to push the bill onto the next Congress…the next administration and the next generation.

2. Not only do taxes have to go up, so does economic growth. There’s a problem right there. According to prevailing theories, if you increase taxes during a de-leveraging spell, you don’t get faster rates of GDP growth. You get slower growth.

The CBO acknowledges this problem, to a degree. It allows as how unemployment may go up, thanks to the tax increases. In fact, they say it will go to 9% in 2013.

How will the President, Congress and the Fed react to rising unemployment? Mightn’t it tempt them to engage in a little more counter-cyclical stimulus…at the expense of the tax cuts?

And what happens to growth rates? The CBO figures that growth can outstrip deficits. Maybe. Maybe not. Now, it’s not even close. There’s a $1.1 trillion deficit this year. Growth? Maybe a fifth of that. In other words, debt is growing 5 times faster than the economy.

During Mr. Obama’s first (and maybe last) term, US debt will grow by more than $5 trillion. Another term like that and we’ll be over $20 trillion.

And already the weight of debt is pressing down growth rates…and it’s getting worse.

And if HSBC is right, US growth will be very slow. Will deficits also be very low? Below 1.5% of GDP? Down from over $1 for the last 4 years to under $225 billion for the next 40?

Heck, we’re as soft-headed as anyone. We’d like to see the whole problem go away too. And maybe it will…

But we wouldn’t bet on it…

Bill Bonner
 for The Daily Reckoning

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In this file picture, students attend graduation ceremonies at the University of Alabama in Tuscaloosa, Ala. Bonner argues that contemporary education is not worth the money put in. (Butch Dill/AP/File)

Is education really a worthy investment?

By Bill Bonner, Guest blogger / 02.07.12

Several of the ‘Capitalism in Crisis’ thinkers — even those who should have known better — thought the government needed to invest more money in education.

Kenneth Rogoff, for example, concludes that “improved education alone will not resolve the flaws inherent in today’s capitalism, but it [is an] essential first step down any path to a solution.”

Oh? We never quite figured out the connection. The problem in a nutshell is that developed countries have too much debt and not enough growth. And their debt is growing faster than their output. How then does spending more on non-productive behavior increase GDP output or decrease debt?

Contemporary education is a dead end. The industry has been taken over by zombies. Huge amounts of money — public, private, charitable, debt, savings, earnings — are invested. The output is small, dubious and perhaps even negative.

We know that in some fields, such as economics, the more instruction a person has, the less he knows. Economics — as taught in many universities — is a value-subtracting discipline. As to other fields — politics, sociology, literature, gender studies — we are suspicious.

We have also noted that despite huge increases in per capita, inflation adjusted spending over the last 40 years, test scores have not increased. This suggests that the money was wasted.

But our suspicions run deeper. We suspect that — outside science and engineering — most education, from the first grade to a PhD, is at best a costly luxury…at worst, a big waste of time and money.

Here is evidence, a letter from a former slave to his former master, written only a few years after the War Between the States came to an end. We don’t know, but it is unlikely the former slave had any formal education. But you will notice that today’s typical university graduate could not match his clear thinking or his polite, funny, sarcastic style:

Dayton, Ohio,
 August 7, 1865

To My Old Master, Colonel P.H. Anderson, Big Spring, Tennessee

Sir: I got your letter, and was glad to find that you had not forgotten Jourdon, and that you wanted me to come back and live with you again, promising to do better for me than anybody else can. I have often felt uneasy about you. I thought the Yankees would have hung you long before this, for harboring Rebs they found at your house. I suppose they never heard about your going to Colonel Martin’s to kill the Union soldier that was left by his company in their stable. Although you shot at me twice before I left you, I did not want to hear of your being hurt, and am glad you are still living. It would do me good to go back to the dear old home again, and see Miss Mary and Miss Martha and Allen, Esther, Green, and Lee. Give my love to them all, and tell them I hope we will meet in the better world, if not in this. I would have gone back to see you all when I was working in the Nashville Hospital, but one of the neighbors told me that Henry intended to shoot me if he ever got a chance.

I want to know particularly what the good chance is you propose to give me. I am doing tolerably well here. I get twenty-five dollars a month, with victuals and clothing; have a comfortable home for Mandy — the folks call her Mrs. Anderson — and the children — Milly, Jane, and Grundy — go to school and are learning well. The teacher says Grundy has a head for a preacher. They go to Sunday school, and Mandy and me attend church regularly. We are kindly treated. Sometimes we overhear others saying, “Them colored people were slaves” down in Tennessee. The children feel hurt when they hear such remarks; but I tell them it was no disgrace in Tennessee to belong to Colonel Anderson. Many darkeys would have been proud, as I used to be, to call you master. Now if you will write and say what wages you will give me, I will be better able to decide whether it would be to my advantage to move back again.

As to my freedom, which you say I can have, there is nothing to be gained on that score, as I got my free papers in 1864 from the Provost-Marshal-General of the Department of Nashville. Mandy says she would be afraid to go back without some proof that you were disposed to treat us justly and kindly; and we have concluded to test your sincerity by asking you to send us our wages for the time we served you. This will make us forget and forgive old scores, and rely on your justice and friendship in the future. I served you faithfully for thirty-two years, and Mandy twenty years. At twenty-five dollars a month for me, and two dollars a week for Mandy, our earnings would amount to eleven thousand six hundred and eighty dollars. Add to this the interest for the time our wages have been kept back, and deduct what you paid for our clothing, and three doctor’s visits to me, and pulling a tooth for Mandy, and the balance will show what we are in justice entitled to. Please send the money by Adams’s Express, in care of V. Winters, Esq., Dayton, Ohio. If you fail to pay us for faithful labors in the past, we can have little faith in your promises in the future. We trust the good Maker has opened your eyes to the wrongs which you and your fathers have done to me and my fathers, in making us toil for you for generations without recompense. Here I draw my wages every Saturday night; but in Tennessee there was never any pay-day for the negroes any more than for the horses and cows. Surely there will be a day of reckoning for those who defraud the laborer of his hire.

In answering this letter, please state if there would be any safety for my Milly and Jane, who are now grown up, and both good-looking girls. You know how it was with poor Matilda and Catherine. I would rather stay here and starve — and die, if it come to that — than have my girls brought to shame by the violence and wickedness of their young masters. You will also please state if there has been any schools opened for the colored children in your neighborhood. The great desire of my life now is to give my children an education, and have them form virtuous habits.

Say howdy to George Carter, and thank him for taking the pistol from you when you were shooting at me.

From your old servant,

Jourdon Anderson

Regards,

Bill Bonner
 for The Daily Reckoning

The Nasdaq Composite stock market index is seen inside their studios at Times Square in New York in this file photo. Bonner argues that Without growth, the average stock will go nowhere, making investing in a stagnant economy unwise. (Shannon Stapleton/Reuters/File)

Should you invest in a no-growth economy?

By Bill Bonner, Guest blogger / 02.04.12

Baltimore…best bet for investors?

We drove back into town on Sunday night. People moped around in front of bars. Groups walked uptown from the stadium, their shoulders down, the chins dragging. The city was dark…and unhappy.

There was no joy in Baltimore on Sunday night. Baltimore is a sports town. The Ravens — the only team we know named after a poem — had lost. They would not be going to the Super Bowl.

Baltimore is a funny place. We were happy to leave it for 15 years when we lived in Europe. And we are happy to be back. Living in Europe was hard. Here it is easy. Living in Europe was chic and fashionable. Here, moving to a trailer park would be moving up in the world. Living in Europe was expensive. Baltimore, meanwhile, is one of the cheapest cities in the world.

But we’ll come back to Baltimore in a minute…

What’s in the news today? The Dow rose 83 points yesterday. The 30-year, ‘long’ bond yield dropped below 3%. The price of gold rose to $1,749.

Bond yields signal a recession. Stocks hint at a recovery… Gold? The correction in the gold market didn’t go nearly as far as we expected. And now it’s over. What to make of it? Do people expect inflation? Why are they buying gold?

We know why the Syrians are buying gold. There’s a war on. Gold has always been the thing to own in a war zone. But here, people think the economy is recovering.

The public and the investoriat seem to think all is well. We’ve just had one of our best months in stock market history. Many investors are convinced that it is the beginning of something big.

Our old friend Mark Hulbert, for example, tells us that some of the oldest and wisest of the newsletter gurus are now bullish on stocks.

We don’t have any opinion about stocks. We just don’t like them. And we figure that if they were as valuable as people think, the owners wouldn’t be in such a hurry to unload them. At least, not to us. Instead, they’d hold on.

But some people are always selling. Others always seem to be buying. Prices go up…and down…the world goes ’round and ’round…

…and who are we to argue with it?

The trouble is, the economy is not nearly as strong as most people think. There is no growth to speak of. And without growth, it doesn’t make sense to pay so much for stocks. Forbes:

The Q4 2011 GDP reading of +2.8% produced what may appear to be a respectable headline number, a full percentage point above Q3 GDP growth of 1.8%. On the surface, the Q4 report also compared favorably to an increase in real GDP of 1.7% for all of 2011. But 2.8%, even at first look, is still softer than the 3.0% gain in real GDP logged for 2010, repeating a pattern that we’ve seen over the past few years: GDP rises, only to drop off again.

Although it may be tempting to look at the economy as a glass that’s half full, I’m afraid it’s far emptier than it looks. Diving into the Q4 GDP report, we see that two-thirds of the amount of growth reported (1.9%) was due to private inventory build-up. (According to standard accounting practice, growth in inventory increases GDP, while sales of inventory reduces it.) Drilling further, the stat that is most meaningful is the real final sales of domestic product — GDP minus the change in private inventories. This data point eked out only a 0.8% increase in Q4 2011, compared with an increase of 3.2% in Q3 2011. That is very telling.

Another weakness in consumer spending was reported by the Commerce Department: Personal income grew by 0.5% in December, up from a 0.1% rise in November. Spending was flat, however. The personal saving rate, meanwhile, was 4.0% in December, compared to 3.5% in November. Saving instead of spending may be good for consumers’ personal balances sheets, but it doesn’t do much good for an economy that needs to gain traction. Additionally, sales increases still appear to be driven by increases in debt which is not sustainable.

Without growth, the average stock will go nowhere. How could it? There’s nowhere to go. No growth means that the economy is no larger at the end of the year than it was at the beginning. So, for any company to grow, it would have to take sales and profits from some other company. For one to grow another must shrink. Overall, there would be no growth, and no capital gains for investors.

Trouble is the dividend yield of the stock market is only around 2%. That’s not enough. Take inflation and taxes into account, says our Family Office strategist, Rob Marstrand, and you need more than an 8% return just to break even.

So, if you’re buying stocks in a no-growth market…with a 2% dividend yield…you’re losing 6% on your money.

Heck, you’re much better off buying gold…or property in Baltimore.

Gold has been up every year for the last 11. Even last year, when it supposedly suffered a big correction, it still ended the year up about $300 — which is what you would have paid for a whole ounce of gold in 1999.

As for Baltimore real estate…

We’ve been looking at apartment buildings in B’more. This city is unusual, so you probably shouldn’t generalize. But we’re seeing buildings with “cap rates” of 10% and more…and return on cash as high as 20%. Interest rates are so low you can finance much of the purchase price at low cost…and leverage your investment to get a higher return.

How does that work? Well, the building we just looked at had 5 units. The sales agent explained it to us.

“You get gross rents of about $100,000 and you can buy the building for $800,000. You put down $100,000 and borrow the other $700,000. Then, you pay off your mortgage, pay the upkeep, property taxes, utilities and so forth… You also have to pay management…leave an allowance for vacancies and major repairs…and you end up with about $20,000.

“That’s your return on cash. Not bad, huh?”

Well, it’s about 10 times what you can expect from the stock market.

Trouble is…trouble. Being a landlord in an inner city is trouble. You get trouble from the tenants. Trouble from the city. Trouble from the pipes, the roof, the wires…lead…asbestos — everything. Buy city apartment buildings and you are asking for trouble.

But if you can handle the trouble, hey…see you in Charm City.

Bill Bonner
 for The Daily Reckoning

This undated file photo shows gold nuggets and bars. Gold prices are heading upward yet again. (Newmont Mining/AP/File)

Gold prices up in uncertain times

By Bill Bonner, Guest blogger / 02.03.12

Dow down slightly yesterday. Oil falling further below $100. And gold still going up.

What is most interesting is the movement in the price of gold. It seems to be heading up again — almost no matter what else is happening.

So, let’s look at what might be going on…

If investors sensed a recovery…they would expect banks to lend more freely…people to shop more freely…and prices to rise.

This would raise consumer prices; the price of gold should go up.

But if the market sees growth and inflation ahead, why is oil slipping? And why is the Baltic Dry Index — which measures shipping prices — at a 25-year low? And how come last month’s employment figures were disappointing? And why aren’t stock market prices going up?

Most important, if the economy is really recovering, why is the 10-year note yielding only 1.82%? And what about the long bond? Shouldn’t it be trading at a yield higher than 3%?

And how come house prices fell over the last year…and the last month?

And how come incomes are falling?

Or, to look at it from the opposite point of view, how is it possible for a real recovery to take root in the hard, barren soil of falling house prices and slipping consumer earnings?

But if the economy is not improving…then there should be no increase in inflation…and no pressure on the price of gold, right?

Maybe investors don’t anticipate a recovery at all. Maybe they’re buying gold because they see the economy getting worse, not better. We associate a rise in the price of gold with inflation. But gold is much more versatile than we think. It protects your wealth when paper money loses its value. It also protects your wealth when paper money gains in value. It protects you when you are right…and when you are wrong.

How so?

During the Great Depression, for example, the price of gold rose…against dollars…even though the prices of food, clothing and other consumer items…as well as the prices of investment assets…were falling in dollar terms. Why? Because money gains value — relative to things — in a depression. Gold is money. It is the best money. It is the only money that has stood the test of time.

Besides, there is more going on. In a financial crisis…or a depression…investors begin to doubt that their counterparties will make good. Banks fail. Investors go broke. You own a mortgage, and then you discover that the homeowner has left town…and the house has lost half its value. You own a note, and then you discover than the payer is bankrupt; your note is worthless. You own shares in a company; and then the company goes out of business.

When you are in a de-leveraging phase, you discover that many of the assets of the previous credit bubble are not assets at all. And while you’re waiting to find out, the best thing to have in your safe is gold.

As uncertainty rises; so does the price of gold.

The price of gold also rises when the return on other assets declines. At 1.82%, the real return on a 10-year T-note is negative. Consumer prices are rising faster. So, the reward for lending to the government is less than zero.

Normally, holding gold costs you money. You give up the return you could get from ‘risk free’ investments (Treasury debt). Now, you give up the risk from reward-free investments.

Gold goes nowhere. It produces no yield. It pays no dividends. It makes no profits. You can’t live in it. You can’t drive it. You can’t hang it on your wall and admire it.

But when the return on Treasury debt is negative, what do you give up by owning gold? You give up a loss!

You also give up the risk of a much bigger loss. The Fed is bound and determined to bring up the inflation rate. Ben Bernanke has suggested that he might set the inflation target higher than 2%. He has announced that he will keep the Fed’s key lending rate near zero for the next 3 years. He has hinted that he is ready to print more money — QEIII — if conditions warrant.

Holding gold protects you from Bernanke’s success. For if he succeeds in raising the rate of inflation, gold will surely soar. And there is substantial risk — bordering on certainty — that he will be no better at creating moderately more inflation than he has been at creating moderately more GDP growth.

It is quite possible that he will overshoot.

Normally, inflation is a feature of the banking system. The system takes the Fed’s monetary grubstake and parleys it into the nation’s money supply. Banks magnify the money supply by lending…and thereby create more demand, which raises prices. They do this by making loans…to people who then spend the money.

This sort of inflation is controllable, by raising interest rates and tightening banking credit rules. But there’s another form of inflation. The kind that starts with an “h.”

Hyperinflation happens when the banking system breaks down. People lose faith in the money itself…and the people who control it. Foreign dollar holders may worry that the Fed is printing too much money. It may even be good economic news that causes them distress; they may anticipate higher inflation rates, and a sell-off of the dollar, which would lower the value of their dollar reserves. They may figure that they are better off diversifying into yuan…or gold.

Then, when other investors and householders see the dollar falling…they get panicky too. Pretty soon, people are digging around in drawers, bank accounts and mattresses…looking for dollars — just so they can get rid of them.

That is when dollars hit the hyperinflationary fan. Our old friend Michael Checkan tells what it was like in Argentina in the late ’80s:

“Imagine a $2.00 gallon of milk spiking to $775.40 within a year — like in Argentina, 1988.”

Bill Bonner
 for The Daily Reckoning

The Euro sculpture is pictured in front of the headquarters of the European Central Bank in Frankfurt. Bonner argues that the world's largest banks are trying to get out of debt by creating even more debt. (Lmar Niazman/Reuters/File)

Creating more debt won't solve the economic crisis

By Bill Bonner, Guest blogger / 02.01.12

Readers who expect an early end to this Great Correction are going to be disappointed. There is no sign of it reaching its conclusion anytime soon. Just the contrary…there’s no end in sight.

The Great Correction seems to be going along just as you’d expect. Or, just as we’d expect.

Here’s the latest from Reuters:

Home prices fell more steeply than expected in November, and consumers turned less optimistic in January, highlighting the hurdles still facing the bumpy economic recovery.

The S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas, released on Tuesday, declined 0.7 percent on a seasonally adjusted basis, a bigger drop than the 0.5 percent economists expected.

Separately, an index of consumer attitudes fell to 61.1 in January from 64.8 the month before, as Americans turned gloomy about the job market and income prospects, said the Conference Board, representing private companies.

Some improving housing data in late 2011 had raised hopes the recovery was finding its footing. But weaker numbers this month have underscored how lengthy the healing process will be.

US housing prices have plunged by about a third from their peak before the financial crisis, and a combination of high unemployment, tight mortgage lending conditions and more foreclosures in the pipeline are holding back a recovery.

A report released on Monday showed spending was flat in December as Americans focused more on saving.

Once a key pillar of the US economy, Americans have taken a more frugal tack as many struggle with hefty debt burdens.

And guess what? The Great Correction is having the same effect in Europe. Here’s The Wall Street Journal:

LONDON — UK households made a record repayment of personal loans and credit card bills in December, Bank of England data showed Tuesday, underscoring households’ limited appetite for spending and heightening fears the UK may slip back into recession.

BOE figures showed UK consumers made a net repayment on unsecured loans of £377 million ($592.3 million) in December, the highest figure since records began in 1993. It was also the first time since last January that repayments exceeded new borrowings…

In some ways the situation in Europe is worse than in the US, depending on where you are. Youth unemployment is up as high as 50% in some areas. Even in supposedly strong economies it is around 20%.

And, oh yes, you want yield? How about a 10-year note from Portugal? It comes with a yield of 17%.

Portugal’s economy is shrinking at a 5% annual rate. Italy, Spain, Greece and Ireland are not in much better shape.

So what do the euro-crats do? Same thing as the US-crats. They give the banks money, hoping the nice bankers will spread it around.

Last month, the European Central Bank provided 489 billion euros in 3-year loans. “Super Mario” Draghi — formerly head of the bank of Italy, now head of the ECB — keeps the banks from going bust…and begs them to keep the governments from going bust.

The banks needed about 230 billion to refinance loans coming due in the first quarter of this year. They got the money from the ECB.

What a show! Draghi, Monti, Papademos and all the other ‘technocrats’ now managing the crisis are the very same guys who created the crisis. They worked for Goldman, ran central banks, and helped organizations such as the IMF and the World Bank make a mess of the world’s financial system.

Now, they’re solving the crisis the same way they caused it — by creating more debt. The banks can’t pay their bills so the central bank lends them money. Governments can’t pay their bills either, so the central bank lends them money so they can lend it to the government.

The ECB says it will give away more money on February 28th. Goldman Sachs is advising other banks to take the loot. As much as $1 trillion could be given out.

Let’s see, how does this work? You are deeply in debt. So, the bankers lend you money so you can continue making payments. You go even deeper in debt…and the bankers lend you more money so you can keep making payments…

…and so on…

Where does this end? We don’t know.

Whee!

Bill Bonner
 for The Daily Reckoning

This file photo shows a view of the Melbourne skyline and the Yarra River in Australia. According to Bonner, Melbourne is prohibitively expensive, but the region is booming. (Melanie Stetson Freeman/The Christian Science Monitor/File)

Economic tales from the Southern Hemisphere

By Bill Bonner, Guest blogger / 01.28.12

The Southern Hemisphere is not a bad place to be in the wintertime. That is, when it is wintertime in the Northern Hemisphere. By the time the chilly winds from Baltimore reach the southern tip of Africa they have been warmed by the South Atlantic. Flowers bloom. The sun shines. Gentle breezes glide over the fields and parking lots.

As near as we can tell, South Africa is booming. Driving along the freeways, you’d scarcely know you weren’t in Southern California…or Texas. Except that it seems newer and more modern in Johannesburg than it does in LA. Most of the roads…shops…and offices you see in Jo’burg were put up only in the last couple of years. Those in LA date back decades.

But there are a lot of poor people in Africa, more than in California. And some of them are not very good neighbors. At intersections that are particularly favored by hijackers, for example, signs warn motorists to watch out. Razor wire, stretched generously and lazily on the top of walls, reminds the visitor that this is no paradise.

Melbourne, Australia, is equally sun-washed this time of year. But it seems cleaner, safer, and more urban. People ride bicycles up and down the Yarro River. Couples stroll hand in hand in front of the old train station or through the narrow alleys, now filled with tables and outdoor dining.

Jo’burg is much cheaper than Melbourne. We paid $44 for a buffet breakfast at the Crowne Plaza hotel. Then again, Melbourne has become one of the world’s most expensive and desirable cities. Each year, it and Vancouver vie for the top position in The Economist’s list of the world’s most livable cities.

To summarize Australia’s economic situation: the Aussies sell dirt to the Chinese. Since the Chinese have such a strong appetite for antipodal dirt, the Aussies are making money. Prices are rising. Investors are confident. The boom goes on.

Australian property prices seem way out of line, at least compared to Baltimore. An office building that might sell for $1 or $2 million in the heart of Baltimore is on offer in the St. Kilda area of Melbourne for $7 million. Then again, St. Kilda is lively, hip, and attractive, with an exciting nightlife and a beach next door. Baltimore, on the other hand…oh, never mind.

Regards,

Bill Bonner
 for The Daily Reckoning

In this file photo, people carry shopping bags on Oxford Street in London. Bonner argues that the panic over lowered consumer demand is unfounded. (Finbarr O'Reilly/Reuters/File)

Is lower consumer demand actually a problem?

By Bill Bonner, Guest blogger / 01.26.12

Yesterday, Europe was back in the news. Whenever Europe is in the headlines, the headlines are bad. And the ideas behind the headlines are absurd. In fact, it is amazing how many crackpot ideas the press can throw at you in a single day.

The immediate problems in Europe were two:

First, it looked like Portugal was going the way of Greece. It would soon need another bailout, said the papers.

Second, the Greeks themselves, were still having trouble settling up with their creditors — despite years of negotiation, bailouts, rescue plans, and mouth-to-mouth resuscitation.

Bloomberg was on the story yesterday afternoon:

…a stalemate between European policy makers and Greek bondholders over debt relief increased concern that the European credit crisis will spread.

…finance ministers balked at putting up more public money for Greece, calling on holders of its debt to provide more relief. The International Monetary Fund cut its global economic forecast as Europe slips into recession and growth cools in China and India.

“The Greek debt impasse is weighing on the market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The IMF warning this morning dampened any economic optimism.”

At the heart of the market’s nervousness was what Bloomberg calls “demand fears.” As near as we can figure, ‘demand fear’ is the worry that there aren’t enough people who want things and have the money to pay for them.

Why not be satisfied with the demand as it is? Why not accept the decisions of willing and able consumers as to how much stuff they need and how much they can afford to buy? Why is it important that they buy more than they need with more than they have?

Because it could lead to another Great Depression, says Christine Lagarde.

No kidding. That’s what the head of the IMF told Germany’s Council on Foreign Relations. The Washington Post:

International Monetary Fund Managing Director Christine Lagarde warned of a “1930s moment” for the world economy if Europe does not solve its financial problems and said Germany must contribute more money to rescue efforts if a disaster is to be avoided.

Without such funds, Lagarde said, “we could easily slide into a 1930s moment. A moment, ultimately, leading to a downward spiral that could engulf the entire world.”

She said the 17 euro-zone countries also must move quickly to integrate their economies as deeply as they integrated their monetary systems with the creation of the common currency. Failure to act, she said, could precipitate a crisis comparable to the Great Depression.

And here’s one of our favorite economists, Larry Summers, writing in The Financial Times. Mr. Summers is concerned by a lack of confidence…and “uncertainty about future growth prospects,” which he thinks are the causes of the demand shortage.

What? You can see the problem with Summers’ pensee right here. If “uncertainty about growth prospects” is a problem, it is equivalent to uncertainty about how long our liquor supply will last in a snow storm. It’s an uncertainty we have to live with. The future is unknowable. We’re always uncertain about growth prospects — particularly now, when the developed economies are doing so little growing.

Europe is expected to contract by 0.5% this year. The US is expected to grow, but only at a 1.8% rate. Japan…the other major developed economy…hasn’t grown in 21 years and most likely won’t growth this year either.

So, you can forget your “uncertainties about growth?” The entire developing world, as a whole, is not growing. Get over it…

Instead, Summers thinks these uncertainties should be addressed…yes, by government! Of course, government is the sector that never produces any real growth. It’s a consumer, not a producer. And it can only consume what it extracts from the real economy. It diverts resources from real, growth-creating activities into zombie redistribution, make-work, and work-squelching regulations.

(An aside… A friend of ours just started up a new bio-tech company. He moved out of Georgia to Toronto, Canada, to start the business. Why? “Too much regulation and red tape in the US,” he says. “You’d have to be crazy to start a business in the US.”)

Still, Summers believes that government has no higher purpose than to get people to shop.

“Government has no higher responsibility than insuring economies have an adequate level of demand,” he says.

What? Luring people to the mall is more important that protecting them from annihilation? Is it more important that people buy more toaster ovens and more super-size bottles of cherry cola than they are able to live in peace in a just and honest society?

Apparently.

But how can government increase demand? How can it make people richer and more confident? Of course, it can’t. Government is not a producer. So, it can’t make people wealthier.

All it can do is to bamboozle them. Summers quotes the Great Bamboozler himself, John Maynard Keynes:

“[The] public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”

Let’s see. The feds borrow $5 from Peter to give it to Paul. How is demand increased?

“Peter was a rich guy,” you say. “He wasn’t going to spend it. Better to give it to Paul.”

Well, we don’t know what Peter was going to do with his money. He might have invested it to create more jobs and output. Or he might have spent it himself. Either way, we’d be better off than if he lent it to the feds. We know what they do with it. Maybe it ends up in the pockets of a rich lobbyist in Washington. Maybe it is used to build a drone that crashes in the desert. Nothing good comes from it.

The other demand-increasing choice is to print the money. Hey…what kind of money is this that you can just create on a printing press?

We’re not going to dignify that question with an answer, dear reader. We all know what kind of money it is. It’s make-believe, counterfeit money…the kind of money that you’d go to jail for creating on your own.

And you’d deserve to go to jail. So do the feds who gin it up.

Regards,

Bill Bonner
 for The Daily Reckoning