-- Posted Monday, 14 May 2007 | Digg This Article
Chateau de Courtomer, Normandy, France
Monday, May 14, 2007
---------------------
*** Just when we thought the party was over…a truck-load of cash and credit…
*** The markets remain optimistic…for richer or for poorer…a rebuttal from one of our biggest critics…
*** An I.O.U. with varying potential…a nightmare getting bad tenants out…an historic house for less than you'd think…and more!
--- Special Announcement ---
It's Your Last chance…
Help us celebrate Options Hotline's 18th Anniversary
Get the second oldest, most prestigious options trading service - for half the regular price!
But hurry - this offer is only available until midnight tonight…
http://www.isecureonline.com/Reports/OHL/EOHLH5CA/
---------------------
We keep warning investors. But nothing bad happens.
Atop our worldwide headquarters, the Crash Alert flag…with its handsome skull and cross-bones design…keeps flapping in the wind. But no one pays the least attention. We might as well be a schoolteacher.
Why continue with this (now hoarse) voice of concern…when everything is clearly going so well? Isn't it time to admit that we are wrong? Isn't it time to look out the window…see the sun shining…and stop fretting about a downpour?
Well, of course, dear reader, we wish to confess to a little faiblesse. We don't know what is going on - except for the obvious thing. Obviously, the credit cycle is still in an expansion phase. We thought it came to an end in 2000…and then again last year. So far, we've been wrong - just when we think the party is over, someone rushes in with another armful of bottles. And, wheeee!
After the tech stocks began to crash and burn in January 2000, the whole globe held its breath. And then, in September of 2001, it shuddered. By then, the U.S. economy was already in recession - induced by the stock market correction and its knock-on effects.
Then, of course, George W. Bush and Alan Greenspan were taking no chances. They backed up the liquor truck and unloaded the biggest delivery of cash and credit ever delivered. The federal budget went from a phony surplus to a real deficit - a total swing of about $700 billion. And the Fed's key lending rate went from 8% down to 1%; we'd never seen anything like it.
We doubted that even this would be enough to stop the credit contraction. Wages were not rising. So, consumers could only spend more money by borrowing it. Since they already owed a record amount, we doubted that they would be fool enough to go deeper into debt.
But they were. A boom in the property market suckered them into it. It gave them not only the will…but the way. Thanks to the innovations of the mortgage credit industry, they could 'take out' equity faster and easier than they could order a pizza. Party on!
By 2006, though, the revelers were getting a little tired. Lenders had lent too much money to too many people who couldn't pay it back. And now the bad credits were beginning to make the headlines. All of a sudden, subprime lenders were missing their earnings targets. Then, a few of the big subprime mortgage companies actually went broke. And now, people with bad credit and no money are finding it hard to buy a house. Imagine that! Which means, the pressure from the bottom, pushing people into bigger and better houses…and higher and higher house prices…has eased off. Housing prices are no longer going up. They're going down.
With no more equity to 'take out,' where will consumers get more money to spend? How will the economy continue to expand?
We don't know. But it looks to us like the real economy is now not growing at all - but shrinking (that is to say, the sum of actual, productive labor is falling). The average worker is not really getting richer - but poorer.
Still, there's no talk of recession - yet. Indeed, from the looks of the markets, things have never been jollier. The Dow is near an all-time record. There are so many mergers and acquisitions that the business journals can barely keep up with them. And other markets - notably China - are flying off the charts.
We see hyper financial activity…with desperate speculation all over the place. In fact, it looks to us like the final phase of a credit expansion…the final, loopy phase when investors lose their heads…and wallets…completely.
Could we be wrong? Yes, we could. But remember - the importance of any event is equal to the likelihood TIMES the consequences. There may not be a crash…but the effects of a crash could be so devastating…readers are urged to take precautions. Think about the risk factors in your portfolio and see what you can do to minimize that risk.
We are lucky to have one of the best risk management experts in the country on our staff: Steve Sarnoff, who runs the second oldest and most prestigious options services in the United States, Options Hotline. Steve sees options as a way to hedge your portfolio and minimize risk - no matter which way the market is headed.
His simple strategy has been proven profitable since 1989 - and in today's volatile market climate, it doesn't hurt to give options a try…especially since we are offering his service for half off the regular price!
But this is your final chance to get in at $495 off - at the stroke of midnight tonight, the price goes back to normal. Click here for all the info
Half-Off Options Hotline Until Midnight Tonight!
More news:
--------------
Addison Wiggin, reporting from Baltimore…
"Cerberus Capital is buying Chrysler back from the German's for $7.4 billion.
"After spending $37 billion to buy the American carmaker, then billions more trying to keep it afloat, Daimler gets to keep all of Chrysler's debts. (At least, they get to write them off against activities at Mercedes and other going business concerns.) The big she-daddy problem that is Chrysler's billion dollar pension nightmare will be spun off into a separate holding company, called Chrysler Holding.
"And Cerberus - the three headed dog who guards the gates of Hades - gets to keep the car company. Cerberus now owns the Chrysler, Dodge and Jeep makes, and Chrysler Finanancial. They just bought GMAC financing, the only part of GMC worth a spit. And they're looking at the 2005 bankruptcy-Oscar winner, Delphi.
"Look for Cerberus to come out strong next year with a new and improved debt-free global automaker for sale…and a fistful of performance fees stuffed into its own pockets."
For more on this…Peak Milk…the battle for 'commanding heights' of the U.S. economy - and more, see today's issue of
The 5 Min. Forecast
--------------
And more views:
*** We've heard of outsourcing IT…accounting…call centers and the like to India - but local news reporting? Isn't half the point of reporting on local news being 'on the scene'?
Apparently not. The LA Times reports this morning that a Pasadena, California news site has hired two Indian reporters to cover their local news from Mumbai and Bangalore, respectively.
"'A lot of the routine stuff we do can be done by really talented people in another time zone at much lower wages,' said James Macpherson, editor and publisher of the Pasadena Now website, who used to run a clothing business with manufacturing help from Vietnam and India.
"So, on the Indian version of Craigslist, he posted an ad that said in part, 'We do not believe that geographic distance between California and India will present unsurmountable problems, and that working together with you will result in your development of a keen working knowledge of this city's affairs.'"
Interesting…we can understand wanting to stretch a shoestring budget - but this may be pushing it.
We've been saying for a couple of years now that overvalued Indian outsourcing plays won't make you a dime. But the Far East does hold a multitude of good plays - it's just a matter of where to look. Find out for yourself at this year's Agora Financial Investment Symposium, where the theme is "Rim of Fire: Crisis and Opportunity in the New Asian Era." As always, we'll have all of your favorite DR editors, as well as a few special guests.
Don't miss out - the Symposium is taking place July 24-27 at the beautiful Fairmont Hotel in Vancouver, British Columbia. This event is sure to sell out, so secure your spot now:
Agora Financial Investment Symposium - July 24-27
*** "You are always telling readers to avoid getting into housing, stocks and hedge funds," began our harshest critic yesterday. "But what are they supposed to do? It seems to me people who buy things - whether it be works of art (which you seem to like to make fun of too) or shares in companies, or real estate - are really doing the right thing," Elizabeth continued.
"Otherwise, what do they do? Hold money? What is money? That's the thing…it's nothing. I don't want to hold it. What I want is what money can buy…not money itself. And we all know that money buys less and less all the time. It's losing its value every year. Stocks and real estate aren't losing value; they're going up in value. So, the people who are making mistakes are the people who are holding cash - because the government is creating more and more cash…it's not creating more and more land, for example. So, I'd rather own land.
"You don't have to be an economist to figure out that the value of the currency has got to go down. Then, all the people who were holding money in money market accounts are going to wish they had bought stocks and real estate…because those things at least have a chance of preserving your wealth."
Elizabeth's point is that since today's funny money itself is a poor store of value, a person is better off buying something else. She is certainly right.
But imagine that instead of trying to increase the size of your wad over the next 18 months you're trying to figure out how to leave something of value to your grandchildren, say, 25 years from now. Hmmm…what do you leave them? Shares in General Motors (NYSE:GM)? Shares in Microsoft (NASDAQ:MSFT)? U.S. Treasury Bonds?
Looking ahead a quarter of a century, none of these investments seem very sure. GM will probably be out of business. Microsoft is almost sure to be knocked off by newer, faster, better technology. And U.S. bonds? Well, the dollar is now losing purchasing power at a rate of about 3% - compounded annually.
Since Alan Greenspan first took the post of Fed chairman (he only stepped down last year), the dollar has lost about half its value. And during that time the total of financial obligations of the institution that controls the dollar's value - the U.S. government - has soared by, who knows, probably at least 25 trillion. The dollar has become like an IOU from a man who owes far more than he can pay…and who can decide how much his IOU is worth anytime he wants. Who would take that kind of paper? Who but a cynical crank would want to leave it to his grandchildren?
Land, you say? Real estate? Well, at least land won't go away. But the trouble with real estate is that it requires attention. And often, its' costly to own. There are taxes, maintenance, insurance…plus the regular expenses of owning a place…utilities, furnishings, this and that.
(Interested in ensuring your children's future's - and pad your own - during the lean years ahead. Find out how here:
The Special Report No Retiring Parent Should Miss
Property is especially appealing to Europeans. They're not as trusting as Americans. They've seen more disruption and change - both politically and financially. The French, for example, devalued their franc in the '60s. Out went 100 old francs for every single new one. Then, a generation later came an entirely new currency -the euro (EUR) - and a new system run by the European Central Bank. So, the French often leave property to their children and grandchildren rather than government bonds.
But it isn't easy. We have a friend who rents out an apartment. He hasn't gotten a dime in rent in the last six months. But getting out bad tenants is a nightmare, even for a lawyer.
Other friends had a house in the country that they were keeping for the next generation. But thieves kept breaking in. Finally, they gave up and sold it.
And even if you put aside all the practical problems of owning real estate, you still have the risk that - as a financial asset - your property may go down in price. Over the 100 years, from 1896 to 1996, the average property in America only kept up with inflation. Fine enough. But that means that about half of them didn't do even that well. And some of them went down substantially.
Our offices are in downtown Baltimore. The city was once one of the richest and most thriving metropolises on the planet. Immigrants streamed in from the Old World with money and energy. Trains and canals connected the city with the interior. Huge factories lined the harbor, where huge ships unloaded their cargo…and little bay skiffs unloaded oysters, crabs, fish…as well as farm produce from the Eastern Shore. Skyscrapers rose downtown. Row houses spread out in every direction. Theaters, restaurants, clubs and bars served up meals, drinks and entertainment. H.L. Mencken loved the place; he couldn't imagine living anywhere else. And there were probably plenty of people who couldn't imagine a safer, surer way to leave wealth to their grandchildren than to pass along property in the center of town.
One of those properties was a beautiful mansion once owned by Theodore Marburg, America's ambassador to Belgium in World War I. Marburg was a friend of Woodrow Wilson. The two of them were said to have drafted the original League of Nations charter while sitting in the library, a room with leaded-crystal bookcases and cherubs painted on the ceiling.
In today's money, the house would have been worth about $2 to $3 million, back when Wilson was elected. But by the time we bought it, in the mid-'90s, the price had sunk to $500,000 - and there were no other bidders in sight.
---------------------
The Daily Reckoning PRESENTS: With only 88,000 jobs created in April, things are already looking pretty grim for the average American worker. But as the Mogambo explains, things could get much worse, as the government tries to trick us by adding 'hamburger flipping' to the list of manufacturing jobs. Read on…
MANUFACTURING JOB CREATION
by The Mogambo Guru
And now, back to the constant litany of gloom with the Bloomberg.com report that "Employers in the U.S. last month added the fewest jobs in more than two years." And things are not looking like they are going to get any better, as the latest report from Challenger & Gray reveals that April's layoff announcements rose 18.4% over this time last year.
Anyway, the big news is that the Labor Department reported (believe it or not) an increase in employment of 88,000 jobs. The funny past was that any increase in jobs was entirely a result of plugging in the results of the "Birth-Death model". This handy and easy computational device is merely an educated guess of how many jobs were created (but not counted) by new businesses and how many were lost by businesses folding. The result was that this "Birth-Death model" added 317,000 jobs! Hahaha!
Even worse news is found, says George Ure of UrbanSurvival.com, in Table A-12 of the report, where we find the statistic known as U-6 (Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers), which he calls the "Engineers flipping Burgers index", and that this U-6 unemployment rate "is stuck at 7.9% - the same as a year ago."
Tony Cherniawski of thepracticalinvestor.com reflects, "To make matters worse, the report shows that the Civilian Labor force declined by 468,000. Really? Where did they go? Forgive my conclusion, but it looks like we may have lost as many as 697,000 jobs last month."
But, surprisingly, manufacturing is reportedly up! But even this is no real surprise, as Mr. Cherniawski reports, "Our government now wants to classify hamburger flipping as a manufacturing job."
Actually, I have to admit that it makes sense, as it is unassailably true that it IS manufacturing, because making a hamburger is just another case of a laborer, in a building, taking raw materials and using capital equipment to create a finished product. But it leaves a bad taste in your mouth, if you'll forgive the pun.
And why is the government doing this redefinition of terms? His analysis is that "manufacturing jobs as a percentage of the total labor force have fallen to an all-time low. Could it be that Washington wants to hide this embarrassment by lumping fast food with manufacturing in order that it won't look so bad?" I jump to my feet and exclaim, "You bet they do!"
Chuck Butler at Everbank.com explodes, "What a crock! How can they get away with lies like that? When the Bureau of Labor Statistics (BLS) doesn't count people who have had their unemployment benefits expire… When the BLS doesn't count people in jail as unemployed, as if they even have a chance to get a job! Oh, and the list goes on and on." He figures, "Unemployment, in my opinion, is probably more in the neighborhood of 12%."
To make matters worse, the average workweek declined to 33.8 hours.
Perhaps this nightmare of "lower hours worked plus price inflation that comes from monetary inflation" is why Bloomberg.com reports that, in March, "Consumer credit, or non-mortgage loans to individuals, increased $13.5 billion, or 6.7 percent at an annual rate, to $2.425 trillion."
Yikes! People are not only buying less, but having to go into debt just to pay current expenses! I surmise this from John Mauldin, of Frontlinethoughts.com, who reports, "The Liscio Report, among other things, tracks sales tax receipts from the various states. They report a serious deterioration in sales tax receipts in March."
In fact, Liscio reports that "In March only 18% of the states in our survey hit or exceeded their estimated sales tax collections, and levels in just over 30% of the states were lower than they were in March 2006, some quite steeply so."
Good ol' Phil S. sent an excerpt from something called, "Transcript: April 13, 2007 - Weekly Institutional Client Conference Call" by Donald G. M. Coxe, who is the Global Portfolio Strategist for BMO Financial Group, where we read that the, "dollar index (the DX) is now heading down to touch what is the very long term low for this index, which is the 79.5 - 80 range. And just to put it into perspective for those of you who don't follow it, that index was as high as 120 back in '01. So, we've already given up one-third of the value."
A hand goes up in the back of the class with the question, "So what? Who cares? And why doesn't the Stupid Mogambo Loudmouth (SML) just shut the hell up about it for a change?"
Naturally, I am frozen in place, paralyzed by my outrage at the insult. Intuitively sensing that diversionary action was needed to prevent the violence that was sure to soon erupt, Mr. Coxe jumps in and changes the subject by surprisingly saying, "The great bull market began on Friday the 13th of August 1982."
Hands fly up around the room, and I assume that everyone else wants to know (as I want to know!) how the hell he knows so precisely. He effortlessly answers that it is simplicity itself, as "Paul Volcker signaled an announcement to the first cut in interest rates on Friday the 13th of August."
More hands fly up, including my own, and we were all thinking, "So what? Get to the point! I am starting to sober up here, and I don't like it one damned bit!"
Showing a rare gift of being able to read the minds of the audience, he answers the question without actually being asked, and explains that the significance is that now "we come out and announce that after all these years of telling you that the primary challenge to the price system is deflation, we say that story which has been true for 25 years, is over."
25 years! Wow! What a bull run! And so, "What is the NEW 'primary challenge to the price system'?" we innocently ask.
Apparently already primed to answer such a question, he says that now "the primary challenge to the price system is inflation." The smart people in the audience immediately get up and rush out of the door muttering "Inflation! Gotta get more gold! Inflation! Gotta get more gold!", leaving the rest of us stupid people sitting here, all alone, thinking to ourselves "What in the hell does that mean, and where is everybody going?" Again our hands fly up.
With another superb demonstration of uncanny ability to anticipate our stupid questions, he says, "so naturally we've chosen for the Conference Call theme - gold."
Until next week,
The Mogambo Guru
for The Daily Reckoning
**** Mogambo sez: Addison Wiggin of DailyReckoning.com says, "At least writing about this stuff these days is like shooting fish in a barrel." Hahaha! It's easy, alright, but it is not very pleasant for the fish!
Since I am always loudly screeching for people to buy gold, silver and oil, and making very rude and crude remarks when they don't, the task is made much harder when you are not shooting at the fish in the barrel, but yelling at them, "The Federal Reserve and all the world's central banks are shooting like crazy at you! So buy gold, silver and oil, you stupid fish, and buy yourself some protection! And make a hell of a lot of money, too!"
But they won't listen. Nobody ever does. That's why gold, silver and are oil are so cheap right now. And if you don't buy cheap, you can't sell when they are expensive!
Editor's Note: This year, the Mighty Mogambo is actually going to bravely exit his Big Mogambo Bunker (BMB) in order to speak at the Agora Financial Investment Symposium in Vancouver, British Columbia. Don't miss this opportunity to hear his rants live, on why "We are all Freaking Doomed!"
Agora Financial Investment Symposium - July 24-27
Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. If you're inclined to read more, you'll find the whole Mogambo here:
Elements of the Dollar's Death Knell
-- Posted Monday, 14 May 2007 | Digg This Article
