-- Posted Thursday, 4 October 2007 | Digg This Article
Buenos Aires, Argentina
Thursday, October 4, 2007
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*** The idiotic insights of Irving Fisher…how do you say "Déjà vu" in Mandarin?…fiscal Chickenhawks pass the buck…
*** Next generation to pay for government sandwiches…the Argentine 'Theater of the Absurd'…two steaks for the price of a Happy Meal…
*** Baltimore is not immune to flippers…warnings that fell on deaf ears…one solid investment strategy…and more!
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Professor Irving Fisher set the pace on October 16, 1929. The Harvard man was the most renowned economist of his day. But people should have known he was an idiot.
In WWI, he forecast that the war would be very bad for the United States. The Europeans would withdraw their money from Wall Street, he predicted, because they would need it to finance the war. America would be cut off from trade with Europe, stocks would fall, and the economy would go into a slump.
Of course, what happened was the exact opposite. Europeans bought huge quantities of goods from the U.S. and paid for them with their gold. America enjoyed a great boom.
And then, he was a champion of prohibition. He thought that outlawing booze would increase the nation's efficiency and boost demand for alternative amusements, such as "automobiles…travel…and education."
(As to whether prohibition makes a society more prosperous, we are indifferent; even if it were true, it still wouldn't be worth it, in our opinion.)
So when he announced, just days before the big crash, "stock prices have reached what looks like a permanently high plateau," shrewd investors should have taken it as a sell signal.
The man was the worst sort to have in public life - a world improver through and through. Not only did he believe that man could be improved by forbidding him from having a drink now and then, he believed the U.S. economy had actually been improved by the establishment of the Federal Reserve in 1913. The problems of bubbles and panics had been solved, he said.
What's more, he maintained that U.S. industry had come under the spell of "scientific management" in which modern, educated leaders, "specially fitted at once to forecast and to mould the future," were in charge.
There were many more reasons to think that a new era really had come. There was new technology - lots of it. There were new investment trusts, an early version of today's mutual funds, which were a big hit with investors in 1929. America was also the world's fastest growing major economy…with the strongest currency; overseas investors couldn't get enough.
Then, in October, the stock market began to shake. There was a sharp drop in the second week of the month - right after Fisher's famous remark. But he brushed off the decline. It was just "shaking out the lunatic fringe," he said.
As it turned out, it shook out everyone.
But everyone still loves a new era!
Only two years ago, many thought residential real estate had entered a new era.
"South Florida," said a realtor quoted in the New York Times, "is working off of a totally new economic model than any of us have ever experienced in the past."
The dimensions may have been a bit stretched, but the model was the same boom-bust model Florida had followed in the 1920s. And now, the fabric is snapping back to its normal size. Just two weeks ago, an auction of Miami condos shrank prices down to half their level of 2005.
In the late '90s was another new era - one based on communications technology and centered on dotcom start-ups. The technology proved remarkably resilient and productive. Even Alan Greenspan said he thought we were onto something new. But the bubble in tech stocks blew up anyway - as they always do.
One bubble bursts only to puff up another.
Now, the bubble du jour is in China.
In Shanghai, cab drivers offer stock tips. People stand in line in brokerage offices to open accounts. China's largest brokerage, CITIC, is bigger than Bear Stearns (NYSE:BSC) and Lehman Bros. (NYSE:LEH) combined. And stocks are soaring… Now they're trading at an average of about 50 times earnings. Pretty rich.
"Déjà vu" is a French expression, well known to investors in the West. We wonder if there is an equivalent in Mandarin.
Iran now sells 85% of its oil in currencies other than the dollar, with 65% sold for euros (EUR) and the other 20% for yen (JPY). Iraq threatened to sell its oil for euros; the Bush administration invaded soon after. In his book, The Age of Turbulence, Alan Greenspan reportedly claims that the oil issue was an important reason for the invasion.
We recall estimates that after the United States took control of Iraq, so much oil would be pumped that the price would fall back to $10. It didn't work out that way; nothing about the Iraq adventure worked out the way backers hoped. Except for one thing: now the U.S. has a big, expensive base in the heart of the Middle East.
It costs about half a billion dollars per day to keep the operation up, or about $180 billion per year. And recently, our elected representatives gave a thought to how the bill could be paid. Well, they thought about it for four hours. Then they decided to do what they always do…pass the buck.
A report from TheHill.com:
"All told, the Democratic proposal for an 'Iraq tax' lasted about four hours. That's roughly the amount of time from when House Appropriations Committee Chairman David Obey (D-Wis.) gave life to the idea with his endorsement, to when House Speaker Nancy Pelosi (D-Calif.) strangled it.
"'Just as I have opposed the war from the outset, I am opposed to a draft and I am opposed to a war surtax,' Pelosi said in a statement issued this afternoon."
Byron King comments:
"The U.S. Constitution gives Congress the power to raise an Army and a Navy, and to declare War. The power of the purse is basic to the existence of national military power, and hence a controlling element of national strategy. Power of the purse is also the ultimate control of the Legislative branch over the Executive's otherwise plenary role as 'Commander in Chief of the Army and the Navy' (a quaint role, designed in 1787 specifically with George Washington in mind, as opposed to any other George W.). Use it or lose it.
"Under the Republican political control of 2001 - 2006, and at the behest of a Republican president, Congress was OK with fighting the war in Iraq but not paying for it with increased taxes. Not even, say $0.50 per gallon tax on gasoline. (It might interfere with peoples' trips to Disney World.) And certainly no 2% surtax on the hedge fund managers of Greenwich (who know quite a bit about 2% fees). Better to borrow the funds, was the apparent philosophy, and lay the cost off on future generations…
"Now under new management, Congress daily reminds us that it is not OK with fighting the continuing war in Iraq, but still refuses to pay for la guerre with increased taxes. Better to borrow more funds, apparently goes the thought process, and lay off even more of the cost on future generations.
"Fiscal Chickenhawks, all of 'em."
When it comes to oil, gas, energy, war and politics, Byron is our go-to man - and with good reason. His hands-on experience in all of these topics has been very useful to him as editor of the Hulbert's #1 ranked performing investment letter of the last five years.
So when Byron says he has brilliant alternative energy plays that will soar as a new wave of violence overcomes the Middle East… safeguard strategies, like a new and still undiscovered way to own "zero-downside" gold… we listen. And so should you…find out more here:
Crude-Awakening Crisis & Profit Library
Too bad about that next generation. They are going to have to pay for every ham sandwich eaten by government employees from the beginning of the 21st century to the end of time. And every drug handed out by Medicaid. And every retired civil servant's pension…and every presidential tour…and every cartridge spent shooting at 'insurgents' in every godforsaken hellhole in the whole damned world.
"Argentina is being modified artificially, like middle-aged women in magazines…vastly improved, thanks to 'Photoshop,'" says our new Argentine Daily Reckoning correspondent, Paola Pecora. "Then, when you actually see these women on the streets, the whole world falls apart… 'Must be her sister… No! Her mother!' you say to yourself."
"That is the kind of disparity that is taking place today in Argentina…
"Since 2003, we Argentines have lived in a fantasy world… President Kirchner's administration performs daily plays of the so-called 'Theatre of the Absurd,' a theatrical trend created between 1940-1960 in which actual on-stage events contradict the play script recited by the performers (the government). Crises are systematically denied (inflation, energy, tax collection, corruption…) but always right in front of us.
"One of the most classic plays 'Waiting for Godot' is about an eternal wait for someone who never arrives and we don't know if he exists or ever existed. Our government is a mess, but the whole country waits…and waits for a political opposition that never shows up. Does it even exist? We don't know…
"In the meantime, the Photoshop Policy works overtime. One government agency tells us what problems we face. Another one tells us how the government is solving the problems. And then, there are national statistics from INDEC - all doctored up by Photoshop to look better than they actually are. Argentines all have dormant inflationary genes (bred into them by many years of sad evolution). According to INDEC the inflation rate in the country is less than 10%. According to unofficial INDEC figures, inflation is already over 20%."
Why the disparity? Because an election is coming in just a few weeks. Nobody tells the truth before an election…at least not in Argentina…
Dear readers who read Spanish might want to sign up for Paola's regular commentary on Argentina… and the investment world. Read more here.
Yesterday, we went out to lunch to one of the nicest restaurants in the area - a steak house right across the road from the Four Seasons hotel. Curiously, the place - though huge - was empty. We were the only diners.
The steaks were very thick and delicious; the two of us had salads…we had coffee…and two glasses of wine. The bill came to 150 pesos, delivered with a plate of tiny desserts. Or, about $45. Or, about 23 pounds sterling. Or about 32 euros. In London or Paris, we would have thought we had come across an extraordinary deal, though here in Buenos Aires, it was probably one of the most expensive lunches available.
"But you don't have to pay that amount," volunteered the waiter, for no particular reason that we could see.
"We will give you a discount."
And with that, he took off 54 pesos. We paid only 96 pesos…
"You can barely get a Happy Meal for that kind of money…" our son concluded.
Argentine politics are a mystery to us.
"Are you kidding? They're a mystery to us too," said a local.
Along the Avenida 9 de Julio, campaign posters urge the voters to the polls. Near our apartment, a wall of plywood surrounds a construction site. There, hundreds of billboards have been plastered. At first, we thought it was a "WANTED" poster put up by the police. The large face is surrounded by long, uncombed hair…and the face itself is unshaven, with a two-day stubble sprouting out. The fellow may be a criminal - but he is also a candidate in the up-coming elections!
Until tomorrow,
Bill Bonner
The Daily Reckoning
P.S. You can go see Argentina in action for yourself…join our friends at Agora Travel on a not-to-be missed tour. On November 3-16, 2007 they head to Argentina with an extension to Uruguay through November 20, 2007. Join them and you'll explore some of the best opportunities in existence today for collecting real assets - in the company of the executives in charge of these high income-earning operations.
But it's not all business. We'll have plenty of old-fashioned fun, too…but act fast - the private charter plane only seats 16…
A Truly Exclusive Journey Open to Diversifying Investors
Now we turn to our guest essay for more insights…
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The Daily Reckoning PRESENTS:
The End of Las Vegas
by Kevin Capp
"The room beamed with good intentions and positive thinking. So many ideas and innovations. You just had to believe.
"On Aug. 27, inside the Dialogue Center at the Las Vegas Springs Preserve, the much-hyped $250 million beacon of alternative energy possibility, U.S. Sen. Harry Reid told the small group of concerned citizens and green business people in attendance that the time had come for Nevada to go renewable and lead the nation toward a clean energy future.
"'What we need to do is stop using fossil fuel,' Reid told the audience. 'But people need to be incentivized to do this.'"
Keep reading today's guest essay here:
The End of Las Vegas
And some more news from Short Fuse in Baltimore…
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Views from the Fuse:
"Well, that will never happen here."
That was the battle cry of Baltimore realtors, homebuyers, house flippers, contractors and the like, when anyone so much as mentioned a housing bubble (and the effects of the subsequent and inevitable bust.)
And there was reason to believe that that was true - at least for a while.
Baltimore has changed, grown and cleaned itself up immensely in the last 15 years. The harbor has become a hub for shops, hotels, and restaurants; and more young professionals than ever before are living downtown.
According to a New York Times article, the number of downtown housing units has doubled in less than a decade.
But even in the city that swore it would not be affected by a housing downturn, the cracks are beginning to show.
First, like the rest of the country, foreclosures are beginning to pose a problem. Foreclosures have doubled for the second half of the year, with 25% in the city itself. The NYT reports that the blue collar workers that occupy many of the homes on the outskirts of the city, where foreclosures are on the rise, got in trouble by refinancing at variable rates.
"They were offered loans that in some cases did not require them to escrow for taxes and insurance, and they took them," Mr. Sissman, president of Healthy Neighborhoods said, "and then they woke up with a six-month tax bill, and if they can no longer refinance, they are in trouble."
The neighborhoods that were in the process of being "revitalized" are also in trouble. One of the big problems in Baltimore, and many other American cities that began to flourish during the housing frenzy, are home flippers. They zero in on one neighborhood, often times in an unsavory part of town (and there are plenty in Baltimore), fixing up homes and hoping make a nice profit. Except, of course, the flippers never actually live in the homes, so the neighborhood stays shady and the homes sit empty.
That's not to say, however, that Charm City isn't thriving in other ways…but the housing slowdown is starting to become more noticeable. And two years ago, we tried to warn a couple of colleagues about Baltimore's housing market…but our words of caution fell on deaf years. Read it here:
A Failed Intervention: A Morality Play
And if that play can't keep you from submitting to the temptation of the housing market, or if the damage has already been done, why not hedge your bets by investing in something that doesn't fall victim to flippers, or a credit crunch…or a fumbling Federal Reserve: gold. Get yours here:
Government Guaranteed Gold
-- Posted Thursday, 4 October 2007 | Digg This Article
