The Daily Reckoning

Data released this week may show new signs of a global slowdown, leading one analyst to think his darkest predictions may have been right all along. In a May 2012 file photo, a sign offering help in foreclosure cases stands by a street in Pembroke Pines, Fla. (J Pat Carter/AP)

New signs of global slowdown darken analyst's economic outlook

By Bill Bonner, Guest blogger / 05.30.12

Monday was Memorial Day. We said a prayer for all the brave men and women who died in war…after all, we have a heart!

But the brain never quite gets in sync. When it looks at what those soldiers were doing, it wishes they had never left home. America’s wars were almost all ‘wars of choice,’ says a friend. “They were fought to expand the power of the empire. The Mexican-American war was a bald-faced grab for Mexican land. The ‘Civil War’ was a battle to bring the South into submission. The US took Puerto Rico and the Philippines in the Spanish American war. President Wilson took the US into WWI simply to throw our weight around in Europe; we had no dog in that fight. He botched up the peace so badly that the Europeans went to war again 20 years later to sort it out. That was a war — WWII in Europe — that the US didn’t have to get involved in either.

“And then there was Korea, Vietnam, Iraq, Afghanistan…and hundreds of sleazy assassinations, tawdry meddles and rank ops. They all increased the reach and power of the military-led empire…but the price was paid by the Old Republic, which is now almost extinct.”

Mr. Obama can start a war with whomever he pleases…no vote of the people’s elected representatives needed (as if that would make any difference).

Frankly, we never much cared for the empire. We liked the Old Republic, as it was meant to be. So, we didn’t festoon our house with red, white and blue, celebrating the success of the US empire, this Memorial Day. Instead, we hung black crepe…and mourned the loss of America.

And what’s this…? A headline that caught our eye:

100 Million Americans Without Jobs…

Business Insider reports:

The national unemployment rate gets lots of attention, and lately more attention has been paid to the workforce participation rate since more Americans have given up looking for a job, but we can also see that an astounding 100 million Americans don’t have jobs… According to the April jobs report, the number of jobless American stood at 100.9 million.

Let’s see…that’s about one in three Americans actually working. And how many of them have productive jobs? It depends on what you mean.

Do you mean jobs that actually increase the supply of goods and services that make up our real wealth? If so, you have to take out all the people who are doing zombie jobs…

You may be thinking of people working for the government…paper pushers whose contribution to national prosperity is marginal, or even negative. What about all the TSA agents who are feeling up nuns and radiating grandmothers? And what about people who work for the zombie industries — like “Government Motors”…funded by the feds…or Solyndra, which got a $535 million loan, guaranteed by the feds…or the Bank of America, kept in business by Fed bailouts…or any one of dozens of companies whose revenues come almost entirely from the feds? Do any of them add to the nation’s wealth? Net? Probably not.

So, out of a population of 311,000,000 how many are carrying the load?

Maybe 50 million. One in 6. The rest are zombies. Or retired. In school. Disabled. Or just goofing off.

Land of the free? RIP.

Darn! Day after day, the Dow is headed down.

Finally, on Thursday of last week, stocks caught a break. The end of a long losing streak. But then…on Friday…down again, with a 74 point loss for the Dow.

Gold lost money too. Oil closed right on the $90 mark.

What’s going on? The Wall Street Journal reports:

New signs of a global slowdown are darkening the economic outlook.

On Thursday, the US reported that businesses were slowing their orders of computers, aircraft, machinery and other long-lasting goods. Measures of business sentiment in Europe slipped, and reports from purchasing managers at manufacturers around the globe turned down. Among them, China, the world’s second-largest economy, registered its seventh straight drop in an important manufacturing index.

A slew of data this week suggests that the global economy is slowing down.

With the latest reports, a new economic threat is emerging: That activity is slowing in sync around the globe and not just in a few markets with their own isolated problems. Europe, struggling with the risk of a Greek pullout from the euro area and broader fiscal problems, is the epicenter of global economic concerns right now. But reports of economic trouble are turning up in China, India, South Africa, Brazil and elsewhere.

When the global economy is performing well, synchronized growth reinforces itself and spreads prosperity wide and far. But slowdowns can become interconnected and self-reinforcing, and the global economy has been plagued by them since the financial crisis of 2008.

A synchronized worldwide slowdown? Bummer!

But hey, dear reader, would you reach out and pat us on the back?

In 1999, we said the tech bubble was going to pop. We made fun of the techies.

And guess what? We were right. Tech blew up…and never came back.

Okay…okay…we were wrong about some things. We called Amazon the “River of No Returns.” Well…Amazon has done quite well. But where’s Global Crossing? And Pets.com? Boo.com? GeoCities? All dead and gone.

We urged dear readers to buy gold, not stocks. If they had done that they would be way ahead. Stocks went nowhere for the next 10 years. Gold went up 5 times.

Dear readers who got all golded up would have dodged the housing bubble, too. Sell your expensive house, we urged dear readers in 2005 and 2006…and rent! That turned out to be good advice, as the bubble blew up in 2007 and has been in tatters ever since.

When the recession of ’09 hit, economists and pundits wondered what shape the recovery would be. V? or W? We said it would be an L. Down…then dragging across the floor for a very long time.

A real recovery was “impossible,” we said, choosing our words recklessly…but correctly. It was impossible for a debt-soaked economy to recover until the debt had been squeezed out, we said.

Well, here we are, 5 years after the crisis hit, and we’re still at the bottom of the L. Debt is still being wrung out of the private sector…while the feds pour it on the public sector as fast as they can.

Right again! The economy bumps along the bottom…with persistent high unemployment, record low bond yields, and “growth” that is more a product of government gas than real, honest GDP building.

So, what are we going to be wrong about?

Here’s our hunch: that the bottom of this L stretches out for a long, long time. Maybe 10 more years. Maybe 20. Maybe 100.

We’ve got a whole theory to back this up. But since we’re just back from a long weekend we’ll save it for tomorrow!

Regards,

Bill Bonner,
 for The Daily Reckoning

The sun rises behind the entrance sign to Facebook headquarters in Menlo Park before the company's IPO launch, in this May 18 file photo. Bonner suggests that the Facebook flop might signal the end of the economic recovery. (Beck Diefenbach/Reuters/File)

Facebook IPO: The end of an era

By Bill Bonner, Guest blogger / 05.25.12

At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860s and ’70s than in the 1900s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.

— Reminiscences of a Stock Operator, circa 1923

Poor Zuckerberg. He’s got all those Facebook shares. And they’re dropping in price. The stock closed a bit over $31Tuesday…and then kept sinking… It was down to $30 in afterhours trading.

What did you expect? The company has sales of $4 billion. IF…IF…it were able to claw out a 10% profit margin…and IF a fair multiple for its earnings were, say, 10…the company would be worth $4 billion. Not $100 billion. Four billion dollars. And instead of having shares valued at $15 billion, Mr. Zuckerberg would have shares worth about $800 million.

The Dow itself was flat Tuesday. Not a very good showing after so many down days. We’ll keep our ‘Crash Alert’ flag up. The bottom could drop out at any time.

The Facebook IPO looks more and more like the end of an era. The end of the pie-in-the-sky social network era. The end of the post-crisis recovery rally. The end of the public’s residual confidence in Wall Street. The end of America’s youthful energy…its era of growth, innocence and hope for the future.

Now, growth rates are low; they’ve been falling for the last 30 years. The baby boomers are neither booming nor babies. Stocks are passé…people want bonds now. And 63% of voters think their children will be worse off than they are.

At least Zuckerberg has it made. He’s got about 500 million shares and options. But every two dollars they fall costs him about $1 billion. So, he’s lost $5 billion since the company went public on Friday.

Still, we’re not going to feel sorry for him. He’s still got $15 billion or so.

Not that we care how much money he’s got. He could have twice as much; he’d still be a putz. We saw the movie!

Seriously, Americans care far too much about money. That’s what people who don’t have it say. They say that too much money is a sign of greed. And that people with too much money can’t relate to everyone else. We lose our sense of community…our public space. People with money live separately from the rest of us. They buy elections and use too much energy…and leave small tips. They’ve got too much power, too much influence, and too much of the pie.

Paul Krugman, Thomas Friedman and Barack Obama want to solve this problem by taking money away from the people who have it. And making it harder for them to earn more.

The guys at J.P. Morgan lost a few billion. You’d think the anti-money crowd would be happy about that. Instead, they want to make a federal case out of it. Practically every pundit is calling for more regulation. “If even good bankers can lose so much,” they say, “we’ve got to get control of them!”

The whole idea that they can regulate risk out of the system is loony. It doesn’t work that way. The more they regulate, the more they distort the market, and the more mistakes investors make.

Investors are buying US treasury bonds, for example, by the boatload. Why? Because the regulators at the Fed have taken the risk out of buying bonds. If interest rates rise, the Fed will buy bonds itself.

Dear Readers and connoisseurs of regulatory FUBARity will appreciate the flexibility of America’s central bank. Its aim is to drive investors into risky assets…by suppressing yields on “safe” treasuries. The unintended consequence is to create depression-like yields…and capital gains for bond buyers. Investors flee stocks…and go into the Treasury bonds the Fed was trying to get them out of. Thus does the Fed manage to bend its right leg far enough to kick its own derriere.

People who don’t like the rich should spend a little time thinking about how the rich got that way. Were they smarter than others? Greedier? Or just luckier?

In our humble observation, we’d say they were a little of all those things. But most of the big increase in wealth the rich enjoyed has come thanks to those same regulators whom the feds want to sic on them.

Yes, dear reader, the rich got richer because of the fixers…not because of the rich themselves. In 1971, Richard Nixon changed America’s money. The old money — backed by gold — flowed to the hardworking producers. It was saved, invested, and put to work. This new money had different ideas. It ran around in different circles. It preferred a different class of friends — bankers, money managers, investors, speculators, venture capitalists, derivative mongers, private equity operators…

You can see this shift illustrated in the difference between Mitt Romney and his father. The ol’ man ran an auto company. He made cars. That’s where the money was back then. He made the Rambler. Remember that? We had one. It was cheap. It was ugly. It ran. What more could you ask for?

But the son never made anything…but money itself. He didn’t run productive companies. Instead, at Bain Capital he was a leading member of the new class of people who fiddled with them.

By 2007, this class had gotten far too big for its britches. The whole capital structure began to wobble. Left alone, it would have crashed to the ground…bringing rich people down to earth with it.

Left to its own devices — without the generous support of the feds — the Dow might have fallen to 6,000 in 2008…and kept falling. And it probably would have brought down J.P. Morgan…and Goldman Sachs…the Bank of America and most of the rest of Wall Street. Even GM, which by then had become a finance company, would have gone out of business.

And today…there wouldn’t be nearly as many rich people to complain about. Problem solved.

Instead, the fixers fixed it so the fixees stayed fixed.

Hey…here’s another bubble…getting ready to blow up. Bubble bubble student trouble:

Student Loans With Over $1 Trillion are Likely One of the Next Hindenburg Zeppelin Financial Infernos

Barry James Dyke, author of The Pirates of Manhattan II: Highway to Serfdom predicts that student loans, in excess of $1 trillion, will likely be one of the country’s next financial infernos.

Federal student loans interest rates will rise to 6.8% on July 1st 2012 from their current 3.4% base if Congress does not act. Banking lobbies oppose any reduction in interest rates. If Congress does nothing, the average student’s $23 thousand subsidized loan costs will increase an additional $5,000 over a ten year period.

The author states, “Student loans are a form of indentured servitude as student loans cannot be discharged in bankruptcy. Student loans do not die with death. Collection agencies can call day and night to collect student loan debts. Garnishment to pay student loan debt is common. Students are not getting enough well-paying jobs to pay back these enormous loans, yet The Department of Education through the Department of Treasury can attach tax refunds to pay off student loans. What is more, our Congress drove the getaway car for academia and the banks in 2005 with the Bankruptcy Abuse and Consumer Protection Act of 2005 — which turned student loans into non-dischargeable debt.”

According to the Department of Education, two thirds of students who earn a bachelor degree use some type of loan to finance their education with an average loan of roughly $23 thousand. The New York Times recently reported that as much as 94% of students borrow to get a college degree.

The taxpayer underwrites roughly $105 billion a year in Title IV student loans a year, with $24 billion going to for profit schools owned by Wall Street asset managers. Student loans guaranteed by the taxpayer are a major source of revenue for the US higher educational system and if default rates accelerate, it could bring about a Greece like debt problem to the nation’s colleges.

“Excessive borrowing for an education will be a dark cloud hanging over this generation for decades,” claims Dyke. ”Default rates on student loans for traditional undergraduate and graduate rates are currently as high as 15.8%, and as high as 48% for for-profit colleges. The New York Fed reports that nearly one in four student loan holders are falling behind on their student loan payments.

Regards,

Bill Bonner
 for The Daily Reckoning

Sen. Charles Schumer, left, accompanied by Sen. Bob Casey, arrives for a news conference on Capitol Hill in Washington, Thursday to unveil a comprehensive plan to respond to Facebook co-founder Eduardo Saverin's scheme to renounce his U.S. citizenship in order to dodge taxes on profits he is expected to collect when the social-networking company goes public. Bonner argues that Saverin shouldn't be punished for his actions. (Susan Walsh/AP/File)

Leave Facebook's Eduardo Saverin alone

By Bill Bonner, Guest blogger / 05.22.12

The Maryland House of Delegates just voted to raise taxes. Should we move to Florida…or Delaware?

If we move to Palm Beach, will we ever be able to visit our beloved Maryland homeland again?

The Financial Times reports that thousands of wealthy French people are now moving to London. Their motive? They want to escape the taxes proposed by France’s new president, Francois Hollande.

Should the French impose an exit tax on these “ex-patriots”? Should it then bar them from visiting France?

Of course not.

In England in 1215, the right to travel was enshrined in Article 42 of the Magna Carta:

It shall be lawful to any person, for the future, to go out of our kingdom, and to return, safely and securely, by land or by water, saving his allegiance to us, unless it be in time of war, for some short space, for the common good of the kingdom: excepting prisoners and outlaws, according to the laws of the land, and of the people of the nation at war against us, and Merchants who shall be treated as it is said above.

Here’s the United Nations Universal Declaration of Human Rights. Article 13:

(1) Everyone has the right to freedom of movement and residence within the borders of each State.
 (2) Everyone has the right to leave any country, including his own, and to return to his country.

Article 12 of the International Covenant on Civil and Political Rights incorporates this right into treaty law:

(1) Everyone lawfully within the territory of a State shall, within that territory, have the right to liberty of movement and freedom to choose his residence.
 (2) Everyone shall be free to leave any country, including his own.
 (3) The above-mentioned rights shall not be subject to any restrictions except those provided by law, are necessary to protect national security, public order (ordre public), public health or morals or the rights and freedoms of others, and are consistent with the other rights recognized in the present Covenant.

People should be able to move where they want, no? They should be able to look for lower tax places to live, shouldn’t they? After all, we’re Americans, aren’t we? Aren’t we all descendants of people who tried to improve their lives by moving to a new place?

Apparently, a lot of Americans don’t think so. Facebook is going public. And one of Facebook’s founders has moved to Singapore. He will save, by one estimate, $67 million in taxes by giving up his US citizenship. He says that’s not the reason he gave it up. But you can believe what you want.

And now the politicos are up in arms. Mr. Saverin has helped to give them an asset worth about $100 billion. Are they grateful? Do they bend down and kiss his derriere?

No! They want to tax him even more heavily…and prevent him from ever setting foot in the US again.

Yes, dear reader, there is no thought so dumb…so short-sighted…so low…that it won’t become the law of the land. Bloomberg reports:

Chuck Schumer, D-N.Y., has a status update for Facebook co-founder Eduardo Saverin: Stop attempting to dodge your taxes by renouncing your US citizenship or never come to back to the US again.

In September 2011, Saverin relinquished his US citizenship before the company announced its planned initial public offering of stock, which will debut this week. The move was likely a financial one, as he owns an estimated 4 percent of Facebook and stands to make $4 billion when the company goes public. Saverin would reap the benefit of tax savings by becoming a permanent resident of Singapore, which levies no capital gains taxes.

At a news conference this morning, Sens. Schumer and Bob Casey, D-Pa., will unveil the “Ex-PATRIOT” — “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” — Act to respond directly to Saverin’s move, which they dub a “scheme” that would “help him duck up to $67 million in taxes.”

The senators will call Saverin’s move an “outrage” and will outline their plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their proposal would also impose a mandatory 30 percent tax on the capital gains of anybody who renounces their US citizenship.

The plan would bar individuals like Saverin from ever reentering the United States again.

If Chuck Schumer has his way, entrepreneurs like Eduardo Saverin will think twice before setting up shop in America!

[Editor’s Note: After yesterday’s column, Run, Saverin! Run!r, we were delighted to discover that a brave Fellow Reckoner had actually linked to The Daily Reckoning...on Chuck Schumer’s Facebook page. Ha! Feel free to “like” our bitty missive and to “share” it on Facebook. Call it non-violent protest. And of course, you can always “be our friend”.]

Down, down, down…day after day… Stocks down. Yields down.

But what’s this? Gold rose nearly $40 Friday

Our “Alert Flag” went up yesterday morning. The Dow fell 156 points during the day. Not that there’s any connection. Most likely, after so many down days, stocks will bounce. But watch out…

We have a hunch.

Facebook is the biggest deal in the stock market…perhaps ever. It’s a company that didn’t even exist 10 years ago. We know all about the company’s founding; we saw the movie. Twice. Because our daughter has a role in the movie. She’s the waitress in the scene where Zuckerberg means Sean Parker.

Not a bad flick. But from an investment standpoint, Facebook is probably one of the worst moves you can make. Most likely, it will be gone 10 years from now. $100 billion of market capitalization will disappear. Poof! It’s just a website, after all. We looked at a Facebook page, once… We couldn’t figure out why anyone would waste his time.

The trouble with new technology is that in a few years it’s old technology.

Here’s our hunch: The Facebook IPO may mark a major peak…and the beginning of a major bear market on Wall Street.

It happens every time. There’s a big, big deal. And then, it’s over. We’d give you some examples, if we could think of them. But we can’t. You’ll just have to trust us on this.

We don’t really have any evidence or logic to back this up. It’s just a hunch.

But our intuition tells us that when investors finally get the full Facebook treatment, they are going to be turned off by the stock market and Wall Street. Not only will the company turn out to be not worth a fraction of the IPO price…investors will also get a clearer picture of how Wall Street really works.

About that IPO… The idea is to generate a lot of excitement…a frenzy…so that people are eager to get the shares. And with all these Facebook users, who like…like…Facebook…and think they can tell a good investment when they see one…it ought to be easy to create a buying frenzy. Besides, everyone knows shares are intentionally priced below what their backers believe they can get for them. This causes the share-price to “pop” right after the IPO.

Of course, the distribution is tightly controlled. You have to be an insider to get IPO shares. Say…you’ll get them at about $40…and then, you expect them to go to $50 on the “pop.” If it works out as planned, you make $10 per share. This is a lot of money. Easy money. So, the insiders all want a piece of the action.

How do you get to be an “insider”? You have to be a friend of Morgan Stanley. Which is to say, you help Morgan Stanley make money. How? For example, if you are a pension fund or hedge fund you put through a lot of trades. Morgan Stanley makes money on the churn. You make money on the churn, too. Customers don’t make any money on the churn. They pay for every transaction. But who cares about them?

Everyone is convinced that buying…selling…and trading investments makes money. As long as the illusion lasts, Wall Street is happy. The customers are happy too…more or less. They’re participating in the Great Illusion — all trying to make money without actually doing anything.

So everyone churns. And the more you churn with Morgan Stanley the more likely you are to get an allocation of IPO stock. There could be about 50 million shares handed to insiders in this manner. Let’s say they go up $10 in the “pop.” That’s half a billion in gains …in only a few hours.

Dan Ariely explains:

Morgan Stanley and the rest of the investment banks involved will … make sure that their favorite fund manager client “friends” are given lots of free money. Assuming that these “friends” are given 75% of the total number of IPO shares, or a total of 291 million shares, and assuming that the stock does rise from $40 to $50, then these fund managers will collectively, in one day, make $2.9 billion dollars in realized or unrealized profits. That’s right, 2.9 BILLION DOLLARS.

…where and out of whose pocket does this money come from?

Well, just think of it this way… Let’s assume you own a very expensive piece of waterfront real estate, and you hire a broker to sell it for you. After exploring the market and after getting indications of interest, your broker advises you that $10 million would be a great price for your home. You meet with the potential buyers and decide to sell it for $10 million. After the $1 million commission you have to pay your broker, your net proceeds are $9 million. An hour later, you drive by the house and see your broker in the driveway shaking hands with some different people. You pull over to see what’s going on, and you find that the people you just sold the house to for $10 million are very close friends of your broker. To your dismay, you also find out that those friends just sold your (former) house to somebody else for $15 million.

The same exact game is going on here… By the time you drive around the block, these folks will have sold their shares at $50 per share.

I am not sure about you, but I find all of this very depressing.

Regards,

Bill Bonner,
 for The Daily Reckoning

The bull and bear bronze statue stands outside the stock market in Frankfurt, Germany in this December 2011 file photo. Bonner argues that the financial industry was supposed to help bring growth and prosperity to the US, but it did just the opposite. (Michael Probst/AP/File )

The financial industry's growth is stunting everything else

By Bill Bonner, Guest blogger / 05.15.12

Societies become more complex as they age. Each challenge…or opportunity…is met with a new rig of some sort. A tax. A regulation. An organizational fix.

As time goes by, these fixes act like friction…they slow the machine. They make it hard to move…inflexible and unresponsive. And over time, more people gain access to a fix — each lobbying group and special interest, each with his own bailout or subsidy…and each desperate to hold onto it.

Output is thus shifted to unproductive activities. The real producers are punished — with taxes and regulations — while unproductive activities are rewarded, with bailouts, handouts and sweetheart deals.

The financial industry was 2.5% of the economy when WWII ended. Now, it is 8.5%. How did it get so big? What does it do for all the money?

The answer to the first question is that it grew as the economy became ‘financialized.’ More and more laws were passed granting more and more special favors and protections to the financial industry. Just read the tax code. Go ahead, we dare you! You will find special allowances and deals for the insurance industry on almost every page. And there are rules and regulations for pension funds. And pensions themselves. ERISA. 401k. 501C3. SEC. FDIC. Dodd-Frank. CFPB. Everything is regulated…controlled…protected…

And all of this happened on the back of the biggest expansion of financial instruments in world history. The feds transformed the economy from one that made things…at a profit…to one that just made money. The money supply in the US increased by 1,300% in the 40 years after Richard Nixon ‘shut the gold window’ at the Treasury. That ‘wealth’ did not take the form of new factories in New England or new tractors in the Old South. It went mostly into money instruments…funneled through the financial industry to the rich people who owned financial assets.

Every potential new competitor had to comply with such a mountain of rules and regulations that he quickly gave up. Even if approved, he could not hope to provide a new product. Instead, he could only provide the same approved services and products that the big, entrenched players already had in stock.

John Kay, writing in The Financial Times, explains what would have happened had the computer industry been tied in the same knots.

“If you needed a licence to enter the US computer business, you can imagine the Computer Regulation Agency interviewing Bill Gates and Steve Jobs in the 1970s. What dutiful regulator would allow someone who had not even completed his Harvard degree to sell software to the public?”

Protected. Coddled. The financial industry went rogue. It was supposed to match investors with worthy investments, helping to bring genuine growth and prosperity to the US. Instead, it matched up most of the new money with itself.

The typical American was impoverished. Forty years after America’s money went rogue, he has not a dime’s more earning power per hour. And 4.5 times more debt, adjusted for inflation.

Regards,

Bill Bonner,
 for The Daily Reckoning

Members of Occupy Cincinnati march through the Price Hill neighborhood to protest against the banking industry over the home foreclosure throughout Cincinnati, and the rest of the country during an Occupy Cincinnati rally in this March 2012 photo. Bonner argues that the rich aren't really to blame for the sour economy. (John Sommers/Reuters/File)

Will taxing the rich really fix the economy?

By Bill Bonner, Guest blogger / 05.11.12

Gold down below $1,600! Is the bull market in gold finally over?

Nah…let’s change the subject.

Today, our hearts go out to the poor 1%…

Yes, dear reader, they’re blamed for the crisis…

They’re reviled, calumnied, and criticized…

They’re hunted by the taxmen…

And now they are being shunned by the very institutions they most wanted to get to know. Bloomberg:

US Millionaires Told Go Away as Tax Evasion Rule Looms

That’s what some of the world’s largest wealth-management firms are saying ahead of Washington’s implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business.

Renato de Guzman, chief executive officer of Bank of Singapore Ltd., said in industry meetings of private bankers he attends in Singapore, not accepting US clients is “quite a prevailing sentiment”.

“I don’t open US accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward US clients as “Draconian.”

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the US to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all US citizens living abroad, which could affect their ability to generate returns.

Most offshore hedge funds will no longer take US clients. Overseas banks don’t want their money either.

Why? Because there are over 400 pages of new regulations in the FATCA legislation. Way too much for a sane person.

Everybody wants to tax the rich, investigate them, crucify them…

But what did they do wrong?

In 1970, the top 10% of California’s taxpayers paid 28.2% of all the personal income tax in the state. Who complained? They were pulling their weight. Paying their fair share.

Now, 78% of all California’s personal income tax comes from these “rich” people.

But what, exactly, happened between 1970 and 2010 that shifted so much wealth and so much tax burden to the top earners? As you can see, it wasn’t just cutting their taxes — they’re paying more now than ever.

So what happened?

The whole system changed. Richard Nixon cut the dollar loose from gold. He may not have upset the world, but he changed the US economy. Instead of being an economy based on real money where real savings and real production increased real wages and profits, it became a smoke and mirrors economy…with money that you couldn’t trust…GDP growth that was largely phony…and zero real growth in wages.

From the ’70s to 2012, US stocks — measured by the Dow — rose more than 13 times. From under 1,000 to over 13,000. Here’s a question: how could America’s companies be so much more valuable…when their customers hadn’t gotten a penny richer?

Follow the money. From 1970 to 2008, the US money supply (M-2) grew from $624 billion to $8.2 trillion. Guess how much that is. It’s 1,314% — almost the same as the Dow.

“The only real force that ultimately makes the stock market or any market rise (and to a large extent, fall) over the longer term,” writes analyst Kel Kelly, “is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets).”

You’ll recall, Dear Reader, that we are getting suspicious of GDP. As we said yesterday, it measures how fast the wheels are spinning; it doesn’t tell you if you are getting anywhere.

What happened over the last 30 years in the US? Money…funny money from the feds…was causing the wheels to spin faster and faster. But the economy got nowhere…

…except deeper in debt.

Yes, the phony money caused people (many of them in Japan and China) to produce more stuff.

And, oh yes, it shifted money from the middle classes to the rich, by increasing the relative value of their investments 13 times…while simultaneously holding real wages flat.

Ken Gerbino explains it in another way:

It is the paper money created out of thin air that creates the unfair distribution of wealth that is making the middle class fall more behind and the poor more poor. Newly created money and credit in a paper money system benefits those that can access the money first and buy capital goods and real property…before the new money circulates and makes all prices go up. Wages also do not keep up with the inflation and that creates another squeeze on the middle class…the bottom 90% of our citizens went from owning a big piece of the income gains (65%) in the 1960s to being squashed in the 2002-2007 period to 11%.

Now, the feds have the voters where they want them. Forty-six million on food stamps. And millions more dependent on federal handouts… Most people can’t afford to oppose the government. They need it to eat. The Week reports:

“Over the last three decades, annual spending on the top federal programs for the poor and near-poor — such as Medicaid, food stamps and Pell grants — soared from $126 billion (in inflation adjusted 2011 dollars) to $625 billion. Today, the average poor person receives $13,000 in federal aid, up from $4,300 in 1980. Programs that transfer wealth to the middle classes are even more massive, with Social Security consuming $725 billion last year and Medicare $560 billion. All told, the US spends nearly $2.1 trillion on social programs, 60% of all federal spending.”

The feds have the rich where they want them too. They’re now pariahs…all over the world. Nobody wants them. Nobody likes them. Banks won’t touch their money.

Now, the feds can squeeze them for campaign contributions and tax money as hard as they want.

Regards,

Bill Bonner
 for The Daily Reckoning

Newspapers are displayed next to traders from Interactive Investor in their office in Glasgow, Scotland May 8, 2012. Bonner argues that austerity measures being debated throughout Europe. (David Moir/Reuters/File)

Will austerity come to the US?

By Bill Bonner, Guest blogger / 05.08.12

The financial news yesterday was dominated by alarming reports from Europe.

“Backlash,” said The Financial Times…referring to an “anti-austerity wave” that washed over Europe in weekend voting.

If the FT doesn’t mind mixing metaphors, we don’t either. But our metaphors are a bit different. What has happened is not a backlash but a wake-up call. It comes as voters realize that the placebo medicine — phony, half-hearted austerity measures peddled by the Euro elite — don’t work. They want an elixir with more of a kick to it. That’s why the leftists are gaining so much ground.

In Greece, support for leftwing parties has trebled since the last elections. But what do you expect? The typical family has lost almost a third of its real income since the recession (which continues) began. Youth unemployment is at 50%. Young Greeks fear being a ‘lost generation’ that must emigrate in order to find jobs.

In France, Francois Hollande promises to be reasonable. But he won the election by attacking Sarkozy’s austerity moves. He won’t make Sarkozy’s mistake. Instead, he’ll go after the rich with a top marginal tax rate of 75%…and promise ‘growth,’ not ‘austerity.’

The trouble with the austerity proponents is that they didn’t go far enough. Budgets were cut. But not enough. The average deficit is still about 5% — well above the Maastricht 3% limit. This left the deficit nations in tough spots. They cut spending, which angered the leftists and the layabouts. But they still were beholden to lenders to cover their deficits. And whenever their unemployment rates rose…or the GDP growth rate fell…they had to pay more for their borrowed money.

Real austerity — with deep cuts and balanced budgets — could work. But it contradicts the whole idea of government, which is to transfer as much wealth from the outsiders to the insiders as possible. Besides, such deep cutbacks would probably trigger a zombie revolution.

And by the way, ‘austerity’ is coming to the US too — if Congress doesn’t stop it. Economists are calling it the “fiscal cliff.” The nation is scheduled to run off the edge on Dec. 31st… Mohammed El-Erian explains:

Economists are rightly starting to warn that the United States faces a worrisome “fiscal cliff” at year’s end. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling — and the failure of the “supercommittee” that followed — along with across-the-board tax increases would derail the US recovery and undermine the well-being of the global economy. We should be avoiding the edge of this cliff — and politicians should not believe that they have until the end of this year to act.

The sequestration mandated by the Budget Control Act of 2011 and the reversal of the Bush-era and payroll tax cuts would essentially mean withdrawing from the economy some 4 percent of the national income in one blunt go — and this doesn’t factor in possible knock-on effects. The importance of this issue cannot be overstated. A fiscal contraction of this magnitude and composition would stop dead in its tracks the economy’s nascent healing and job creation. Consumption and investment would be harmed. Foreigners would become more cautious about buying our ever-increasing debt issuance. And with our internal growth momentum weakened, the headwinds from the European debt crisis could prove overwhelming.

The austerity show has been playing in Europe for the last two years. That’s why half of Europe is in recession…with the other half not far behind. Europeans are tired of it.

So, now the Europeans seem to be giving up on phony austerity and turning to phony growth. They are going to spend more borrowed and printed money. This will look vaguely like “growth.” There will be more jobs and more incomes. But there will be precious little real prosperity going on.

Of course, going for growth is precisely what got the developed world into such a jam in the first place. Too many people spent too much money they didn’t have on too many things they didn’t need.

In America, the Fed encouraged it with low rates…then after the private sector debt bubble blew up, the feds made up for the missing spending by spending more themselves.

In Europe, the euro-feds made a debt bubble possible by establishing a single currency bloc…with harmonized interest rates. All of a sudden Greece and Ireland could borrow as easily and cheaply as France and Germany. And so they did; they borrowed their way to the brink of bankruptcy.

Now, Francois Hollande has a plan. He wants to make Europe more like America…with a central bank that lends to government directly and “mutualization” of credit risk. In other words, he wants to do what Alexander Hamilton did to the US in 1791: make the states collectively responsible for each other’s debt. And then he’ll let the ECB print the money to buy sovereign bonds directly.

Yes, dear reader, the trend towards centralization continues…with central financial planning…central bank counterfeiting…and everybody going broke together.

In Europe, as in America, it’s one for all…and all for one…

…and every man for himself.

Bill Bonner
 for The Daily Reckoning

A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this 2010 file photo. Bonner argues that the Fed has been devaluing the US dollar for a century. (Issei Kato/Reuters/File)

The dollar is in decline. So how to invest it?

By Bill Bonner, Guest blogger / 05.03.12

Yesterday, we got a glimpse.

Yes, dear reader, we were on our way to Sea Island. We looked across the bridge at another island — Jekyll Island. You know Jekyll Island, don’t you? It’s where the monster was created…

A group of the nation’s richest, biggest, and most powerful bankers got together there — in secret — in November, 1910. They figured it was time to put in place a system that would make it a little easier for them to make money. Instead of competing head to head, without any backstop to protect them when things got rough, they decided to set up a central bank.

The meeting was so cloaked in secrecy few believed it ever took place. Implausibly, it was first reported by the poet Ezra Pound. How Pound learned of it…and why he reported it…we don’t know. But that’s the word on the street.

B. C. Forbes reported in 1916:

Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written… The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York’s ubiquitous reporters had been foiled… Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry… Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.

And now it’s official. Ben Bernanke went there to give a speech in 2010, marking the 100th year of the meeting.

The role of the Fed…apart from greasing the skids for rich bankers…was supposed to be to protect the value of the dollar. Why the dollar needed protection was never explained. For the previous 100 years, it had been solid enough — except for during the War Between the States, when Lincoln printed up far too many of them in order to pay for his attack on the South. But Lincoln’s paper dollars came and went. And on the day the Fed was officially set up, in 1913, the dollar was still worth about as much as it had been when Napoleon Bonaparte set off for Russia.

Whatever the Fed was supposed do to, what it did not do was protect the greenback. Instead, the dollar slipped and slid throughout the 20th century and is now worth only about 3 cents.

Which is why we return to yesterday’s theme. There’s no guarantee. But we have a feeling that the dollar will continue to lose ground. Maybe not right away. But sooner or later.

And if someone will lend you money at the lowest mortgage rates in history…in advance of what could be the greatest inflation in US history…perhaps you should take it.

We’re down here at a financial conference. Among the attendees is colleague Steve Sjuggerud, who believes US real estate may be the best investment of all time. Adjusted for inflation, housing prices are back to 1979 levels, he says. But they’re much better deals now. Because mortgage rates in ’79 were 3 times higher.

“If you took out a mortgage in 1979,” says Steve, “you’d be paying 15% to 20% interest. So, over the life of a $200,000 mortgage, you’d pay as much as $700,000, including interest.

“And you got a lot less house for your money in 1979,” he continues. “The typical house sold in ’79 had only 1,600 square feet of living space. Today, the average is about 2,200 sq. ft. It’s a much bigger house.

“So, in terms of dollars per square foot, you’re paying about $75 now compared to about $100 back then.

In terms of affordability, and value per dollar, the US house is a better deal now than it has ever been, Steve concludes. It would have to increase in value by $100,000 just to get to normal affordability levels.

“There are unbelievable bargains around,” Steve goes on. He found a farm in Florida that had been appraised at more than $10 million in 2006. Now, the owner is bankrupt and the bank is desperate to get rid of it.

What bid will it take to buy it?

“Maybe less than $1 million,” says Steve.

There’s a time to be a borrower and a time to be a lender. As long as the Great Correction continues (and we think it will continue for a few more years…perhaps 10) it will be a good time to be a lender. Interest rates will tend to go down, not up. That is the lesson of Japan, where bonds have been the only decent investment for the last 22 years.

But thanks to that clandestine meeting on Jekyll Island 102 years ago, we probably won’t stay in a Japan-like rut forever. Ben Bernanke promises. He has ‘a little technology’ called a printing press. And he knows how to use it!

Your editor is not a good example. He bought a house and paid more than he needed to pay. But he was buying a house, not an investment. At least that’s what he told himself.

Still, he figures that he will mortgage the place and let Ben Bernanke help make it a better deal. It may be a good time to be a lender now, but we will borrow anyway. The borrowers’ time must be coming.

What are the odds that a dollar’s worth of debt…at 4% interest…will still be worth a dollar 10 years…20 years…30 years from now? The odds can’t be very high.

The headline story over the weekend was that GDP growth in America, in the last quarter, was “disappointing.” Which just goes to show how little people understand what is going on.

The Great Correction began 5 years ago. The feds have been fighting it ever since — with trillions of dollars’ worth of fiscal and monetary stimulus. You can see what good this does. Just look at the Dow. After Lehman went broke the index dropped to the 6,000 level. Then, the feds began dumping in money. Remember TARP? And tax cut extensions. And ‘cash for clunkers’? And ZIRP? And QEI, QEII, and now…the Twist?

Naturally, the markets…and the economy…react. GDP growth resumed in 2009. But most of the growth depends on further spending and money-creation by the feds. We don’t know how much of it…maybe all of it.

There is no ‘recovery.’ Instead, the private sector is correcting…or trying to…and the economy is merely returning to its trend. GDP growth rates have been going down for 40 years. Growth rates averaged about 4% in the ’70s…3% in the ’80s and ’90s…and then about 2% in the ’00s. On a 10-year trailing average basis, they are down to about 1.6% now. And they still seem to be headed lower.

What caused this drop off in growth is a matter of debate. (We have our ideas!) But the decline in the last quarter was right in line with what has been going on for more than a generation.

As long as growth is disappointing, the feds will fight it…and they’ll fight the Great Correction too. The US government borrows a trillion dollars a year…with no end in sight.

And last year, 61% of that money came from…Ben Bernanke’s printing press.

Keep up the fight, Ben! And our long-term fixed-rate mortgage will eventually be worthless.

Regards,

Bill Bonner
 for The Daily Reckoning

A trader reacts as he looks at screens during trading at the Madrid bourse in this April 19, 2012 file photo. France and Spain sold all the bonds they wanted at auction on Thursday, though for Spain the cost was rising yields, indicating growing concerns the government will not be able to tame its deficit. (Susana Vera/Reuters/File)

European debt: the more things change, the more they stay the same

By Bill Bonner, Guest blogger / 04.23.12

The more things don’t change…the more they remain the same. You can quote us on that.

On the surface, very little changed in the 2 months we were away.

The Dow was about 13,000 in mid-Feb. It’s still about 13,000.

The yield on the 10 year US note was about 2%. No change there either.

The euro was about $1.30. It’s $1.30 today.

Gold is a little lower. Big deal.

But down deeper….did anything more substantial change…evolve…develop?

Apparently not. Back in the winter, the Europeans were pretending to fix Greece. Now they’re pretending to fix Spain.

But wait…here’s something that might be changing…now nobody believes the fixes will stay fixed.

“Europe’s Rescue Plan Falters,” says the front page of The Wall Street Journal.

Yesterday, widely reported was the fact that Spanish banks held more delinquent loans than at any time since 1995. The world seemed to be waking up too to the realization that when you pour bad money after good money you end up with no money.

The ECB’s $1.3 trillion worth of loans to banks was supposed to put a stop to liquidity problems. After all, investors know that borrowers can get more money. The ECB lends to the banks. The banks lend to the governments. You can’t go broke that way. Not as long as the money keeps flowing.

But wait again… “After months of using that cash to buy their government’s debt,” reports the WSJ, “banks in Spain and Italy have little left.”

Let’s look at this more closely.

The banks have a lot of bad debt, left over from the go-go lending mania in the bubble years.

Led by Ireland, the governments bailed them out. But that put the governments themselves in jeopardy. They didn’t have any real money to lend the banks. They had to borrow. They just gave the banks money that they had borrowed themselves. So then investors began to wonder about Ireland, Greece, Portugal, Spain and Italy. And guess what? They found that they were going broke too.

That’s when the central bank came to the rescue. The idea was to bail out the banks and the governments at the same time. The ECB’s LTRO program looked like a winner, for a while. The plan was simple enough: lend the money to the banks; make sure the banks lend to the governments.

You see the problem, don’t you? It was just a variation on the US model of trying to fix a debt problem with more debt. In the US version, the Fed buys US government debt, effectively financing the government with printing press cash. In Europe’s version, the ECB lends to banks…who then lend to, say, Greece. Now, they all have more debt than they can pay.

So now, bond yields are rising again…with Spanish debt back over 6%. And Spanish banks are in worse shape than ever.

Meanwhile, the Italians are staggering under the same kind of weight. In order to get financing last year, they promised to balance the budget next year. But now next year is getting close and a balanced budget is still far away. Says Mario Monti…well, maybe the year after!

You go, Mario…keep spending…keep borrowing…and tell your friends at the ECB to keep printing…

So what’s changed?

Nothing. And it’s going to keep not changing until it can’t go on any longer.

You see, dear reader, change is a natural thing. So is the desire to prevent it. And what we’re seeing now is a natural struggle between the Great Correction — which wants to eliminate debt…and the Great Blundering Reflation — in which the feds desperately try to add to the world’s debt supply.

Why are the feds so keen to add debt? They’re not really. What they want to do to is to prevent change. And the only things they’ve got to work with are brute force…counterfeit money…and debt.

But even the USA is scheduled to enter a phase of European-style austerity. Beginning next on Jan. 1st, a combination of tax hikes and spending cuts should grip America and force it into something the newspapers are calling “Taxmaggedon.”

In Greece, …debtors kill themselves…children go hungry…the unemployed threaten insurrection.

In Spain, mobs attack banks…half of all youths are unemployed…and the banks face huge losses from bad debt.

So far, America has avoided those scenes of desperation. But unless Congress takes action to deny what it has promised, like Mario Monti did yesterday, the Great Correction is about to get even greater. Tax rates are scheduled to go up. Automatic spending cuts are scheduled to take deficits down. These are the cans that Congress kicked down the road last year. The Bush/Obama tax cuts will expire in 2013. And — because Congress was unable to come up with a sensible budget — the axe will fall on government spending too.

What will happen if “taxmaggedon” comes as scheduled? Experts say GDP will fall by 3%. Hey, that would put it in negative territory.

And the recovery? Over. Finito. Kaput. And unemployment? Up. House prices? Down.

But wait…will the feds allow such a thing?

No, probably not. They will try to block it. Congress will kick the can again. Tax rates will rise…but not as much as they are supposed to rise. Spending will be trimmed…around the edges…but not seriously.

And then — when the economy and stock market take another dive, as they did in August of 2010 and again in September of 2011 — the Fed will announce another program of QE.

If there is any real change — a real Great Correction, in other words — it will be over their dead bodies.

A pair of bulls is displayed in front of the New York Stock Exchange, Thursday, Jan. 5, 2012 to promote the Professional Bull Riders annual event at Madison Square Garden. Is the bull market back? Bonner doesn't think so. (Mark Lennihan/AP/File)

The return of the bull market?

By Bill Bonner, Guest blogger / 03.02.12

Did you miss us, Dear Reader?

You won’t believe this…we hardly believe it ourselves…but after months of planning and preparation for our expedition to the high, dry mountains of Argentina, we’re still here in the city of Salta… Our project has been delayed…by floods.

As you may recall, it is so dry up at the ranch that visitors wonder what the cows eat. We tell them we have developed a new race of low-fat, low cholesterol cattle we call “sand fed beef.”

But what ho! Now we are still in Salta, a city about a 5-hour drive from the ranch, and we are stuck.

“Well…” says our foreman “…the road to Angastaco is blocked by the river. The road to Molinos is blocked by mud. But you don’t have to worry about that. You can’t get anywhere near there, because the road to Cafayate is impassable because of rockslides…and the road over the mountain pass has been washed out completely.”

Yes, dear reader, we have been hit by a low, unexpected blow…from water! The ranch got only 120 mm, or about 5 inches, of rain last year. The year before it was only about 4 inches. It looked to us as though the whole place was going to dry up and blow away.

But so far this year, the gods have poured 15 inches of water on that parched ground…and it keeps raining. Fifteen inches is not a lot. Not for Maryland. But up in the barren mountains, the water rolls of the rocks…down through the gullies…and fills the rivers. Soon, it is over its banks, floating automobiles and rolling boulders.

“They’re clearing the main road now,” says our friend. It should be passable tomorrow…if it doesn’t rain tonight. But getting from Cafayate up to your ranch is another matter. Nobody knows what has happened up there. They’ve been cut off for weeks.”

Hmmm…

And so, we cool our heels…we rest our heads…we pace the room and watch the skies…eager to see a ray of sunlight…and some hope of proceeding to our objective.

And so…we have time to reckon after all.

And we reckon that investors are in ‘hope mode.’ How else to explain the recent bullishness? Albert Edwards elaborates:

One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion. It is when “buyers-on-dips” become “sellers-on-rallies”. It is when volume dries up to almost nothing. It is the loss of hope. In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.

The market is once again in a hope phase — hoping that the US is now in a self-sustaining recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the ECB liquidity polices have settled things down in the eurozone. These bursts of hope are essential in long bear markets. Essential in the sense that hope must be crushed. It will be crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope and consume it in front of investors’ eyes. Only then can the bull market begin.

In our view, the real turning point came in the year 2000. That’s when America’s decline began to speed up. It’s when the credit-driven economy could no longer produce real jobs…or real GDP…or real wealth.

Stocks rose. But they were rising on a bubble of debt. Then, it was mostly private debt. Now, they rise again…this time on public debt.

Either way, it can’t last. Eventually, the bear market will resume…taking down the prices of assets until they are cheap again. At 16 times earnings, stocks are higher than usual…and earnings are at near record levels. We expect earnings to fall…and stocks to fall too… Then, they will keep falling…until they finally reach the bottom. Edwards:

A flattening of the profits cycle is exactly what you might expect as the easy, early cycle productivity gains come to an end. It is worth noting that the last time this occurred was just ahead of the start of the recession which the NBER date as having started in December 2007. Back then too, both markets and policymakers all felt the economy was still quite healthy. Indeed neither non-farm payrolls nor the headline ISM signaled the economy had already entered recession at the end of 2007 — indeed like now, payrolls actually accelerated in the second half of 2007, just as profits began to slip!

But we can’t reach the bottom of this cycle unless and until investors give up hope. As long as they have hope they will buy the dips, hoping to catch the next up-move. Only when they become convinced that there will be no move to the upside, will they stop buying the dips and prices can finally fall to their ultimate low.

Hope must be destroyed. Then, a real bull market can begin.

Bill Bonner
 for The Daily Reckoning