

-- Posted Thursday, 3 April 2008 | Digg This Article | Source: GoldSeek.com



London, England

Thursday, April 3, 2008 --------------------- *** Want a sure bet? Bet on deleveraging�the only place where deflation and inflation make common cause� *** So many foreclosures, so little time�apartment sales in Manhattan are at an 18-year low - but prices are still higher than ever! *** Argentina may face worst unrest since the 1970's�a neighbor you would definitely want to lend you some sugar�and more! --------------------- It is a "leveraged planet," says the New York Times. It explains that an ounce of leverage in Manhattan is likely to turn into a pound of credit in Dubai�which could quite possibly fall as a ton of debt on someone's head in Norway. Norwegian fishermen were surprised when they discovered that they were taking losses from US subprime mortgage debt. So were German dentists. But that's just the way globalization works. We have nothing against it, but neither would we mind if there were less of it. Which raises the big question: is the leveraged planet becoming even more leveraged�or less so? Ah, dear reader�this is where inflation and deflation make common cause. They both de-leverage the world�reducing the value of debt - either by defaults or by lowering the real value of the debt itself. That is the real story in the financial markets�and in the housing market: leverage is being marked down. A residential mortgage worth $200,000 two years ago may be worth only $150,000 now, for example. Bear Stearns - worth billions a few months ago - is now worth peanuts. Inflation takes leverage down too. All those U.S. dollars held abroad (and at home, for that matter)�all those dollar-denominated Treasury bonds�all those dollar denominated I.O.Us - they all lose value as inflation increases. Just take those 2 trillion odd dollars outside America. Every one of them is a claim against U.S. assets - land, houses, tractors, food, stocks, buildings, you name it. And as inflation takes prices upwards, each of those dollars falls to the ground�it will buy less of what the United States has to offer. We have been talking about the battle raging between inflation and deflation. But this is one way to win, no matter which side comes out ahead. Want a sure bet? Bet on deleveraging. How do you do that? There are many ways. Sell the industry that provides leverage, for example - the financial sector. Sell Wall Street on rallies, in other words. Yesterday was a good day to sell. After having gone up more in a single day than the entire value of the Dow in '29, it was time to take profits. And that's what investors did. The Dow sold off a little. Gold, meanwhile, gave investors a buying opportunity. At $887, we're not saying that that is the best price this correction will offer�but it wasn't bad. And many buyers decided to take advantage of it. Gold rose back to $900. Now let's look at the U.S. economy itself. Ah�so many foreclosures�so little time. Food up 9%. Houses down 11%. What's an upside-down homeowner to do but walk away? According to yesterday's USA Today, so many are walking away in Denver that it is producing an 'Exodus' of Biblical proportions. Some neighbors have one out of 8 houses in foreclosure. Citywide, the total last year was one out of 32. Where do these people go? They rent, naturally. Rental vacancy rates have fallen from 10% two years ago to 5% today Meanwhile, from Manhattan come two bits of conflicting news: apartment sales are down to an 18-year low�but prices are at an all-time high. Buyers are holding back, in other words�but sellers hold out too - for more money. Across the nation, repossession filings are up 93% from last year. And as we saw yesterday, food stamps are up big time. But there really aren't any "stamps" any more. Now, the food comes via plastic, a type of credit card that can be used - theoretically - only for buying food. In practice, nice shopkeepers in bad neighborhoods take the card and give back cash at steep discount. Say a $10 charge for 7 bucks worth of cash to buy life's real necessities - liquor, cigarettes and gas. It's all going according to plan, as we see it. The empire is rolling over. Now, in its advanced, decadent phase, the imperial government must provide bread - in the form of plastic food stamps�and circuses - in the form of national party conventions, elections and foreign wars. The combination settles the public�and distracts them. They become docile, subservient, willing to stand in line to protect themselves from make-believe threats �and ready to put up with any nonsense, no matter how grotesque, absurd or faithless. In the latest financial news comes word of new proposals to "regulate" Wall Street�and new initiatives to "save" homeowners. The free market is out. 'Public responsibility' is in. Treasury Secretary Paulson: "I think you will continue to see flexibility as we learn and go forward,'' changing his tune from last month when he said proposals to use government funds were a "non- starter." Why are they a starter now? People come to believe what they must believe when they must believe it, is our observation. Both private citizens and the government too have taken on obligations that they can't possibly fulfill. Since it cannot be paid, the debt must be made to disappear. The world - or at least most of the Anglo-Saxon part of it, must be de-leveraged. So, people must believe in a fantasy about how the government will "bail out" the homeowners�and how the Fed will "rescue" Wall Street. How could they perform such miracles? When a man cannot pay for his house, can the feds make the mortgage disappear? When Wall Street has blundered -forgetting to sell its cheesy debt before it started to stink - what can the feds do about it? All they can do is to spray some deodorizer around the room Still, the voters have been conditioned by television, public education, and maybe something in the water; people will believe anything. And what they need to believe now is that the feds can somehow ease their hurt. This will make it possible to shift the debts that cannot be paid onto the government, where they will not be paid. Among all the great debtors in the U.S.A., circa 2008, only one has the power to pay its debts - no matter how large they are. Only one has printing presses that turn out pieces of paper with pictures of dead presidents on them. And only one can trade bad debt for political favor. That one is, of course, the U.S. federal government�lender of first, last, and holiday resort. Already, the Fed has taken onto its balance sheet some $30 billion in smelly collateral from Bear Stearns�and billions more from other financial institutions. That is just the beginning. Somehow, the whole shebang of mistakes, misjudgments, greed-stoked miscalculations will end on the shoulders of the U.S. Treasury�on the backs of U.S. citizens�and dollar holders all over the world. *** Uh oh, what's this? "Argentina may face worst unrest since the '70s," says a headline in the TIMES of London. Hmmm�we're on a way to Argentina on Friday�to see our new grandson. The last thing we want is trouble. But apparently, "a farmers strike has emptied the shelves of meat, cereals and milk." More than 400 roads are blocked. Much of the discontent followed a disastrous speech by the president of the country, Cristina Fernandez de Kirchner, which is said to have alienated the farmers even further. At the heart of the matter is a new tax - up to 49% - on soy exports. Argentina is a farming nation. And soy prices are so high, the farmers planted every available acre, hoping to score big on international grain markets. And now the government has stepped in to take half their money; no wonder they have their bombachos in a twist. This just goes to illustrate our point: no situation is ever so beneficent that politicians won't find a way to make a hash of it. The oil exporters are getting a once-in-a-lifetime windfall from high energy prices. What are they doing? Building empty skyscrapers and adding social welfare promises faster than the pumps can put out oil. They've managed to squander most of their profit margins and then some. Just look at Hugo Chavez. He had so much oil he was able to throw his weight around all over Latin America. But the dumbell has so mismanaged his own economy that the place is said to be falling apart. And look to at the US of A. What a bonanza it was to have the world's biggest military�its richest economy�and its only reserve currency. The rest of the world seemed to want to give Americans valuable goods and services, expecting nothing in return but pieces of green paper. It was like manna falling from heaven. How did Americans manage to turn that into the biggest financial trap in history - actually growing poorer during the greatest boom the world had ever seen? And now Argentina�with the world's richest farmland�the world's flattest, best watered fields, and some of its best weather�has found a way to turn the highest grain prices in history into a financial crisis. Bravo! Bravo to us all! *** One of the world's most fascinating people is surely the first lady of France, Carla Bruni. She dined with Queen Elizabeth II last week. Amid all the glamorous guests, glitzy table setting and diamonds, it was she who sparkled most. What follows has no apparent connection to our beat - money. Nor does it have any particular connection with anything. Still, women represent half the human population. As poets, we are fascinated by them. As philosophers we are intrigued. And as economists, we cannot ignore them. Mr. Sarkozy's wife is a woman, but not just any woman; she seems to us to be a kind of �berfemale. Almost unnaturally gifted, talented, beautiful and corrupt. The trouble with economics - one of them - is that economists are almost all male. And thus they are completely incapable of understanding the motives or methods of half the population they are meant to be studying. That is why we turn our attention to Carla. She is such an extreme example of womanhood, perhaps we can learn something. For readers who have not followed the French press, Ms. Bruni is an extraordinary subject. The French say she is a "croqueuse d'hommes" - which is to say, a man-eater. It was she, according to the press, who had such an affair with Mick Jagger that it destroyed his long marriage to that tough, smart and talented Texan, Jerry Hall. And it was she, too, who is said to have had affairs with Eric Clapton and Donald Trump. Then, she lived with a French philosopher, Jean-Paul Enthoven, until she took a fancy to his son, Raphael, with whom she had a son, Aurelien. Nor was she particularly demeure about the whole thing; she wrote a song called "Raphael" describing how she had fallen madly in love and had great sex with him. She is so "properly, old-fashionedly beautiful," writes India Knight in the TIMES of London, "with non-inbred aristocratic features and good bones; so beautiful that she makes everyone else look like pudding." Not only that, she speaks three or four languages�comes from a fabulously rich family�and can sing. At the Queen's state dinner, practically every one of the hundreds of guests had seen her naked photo in the tabloids the day before. Yet, she was reportedly the most composed, most confident person there. According to reports, she is irresistible at every level - intellectually, emotionally, sexually and artistically. What's more she lives around the corner from your editor's Paris apartment. "I saw her go by last night," said a neighbor on Saturday. "She had a whole squad of police with her." "Why doesn't she move into the Elysee Palace with her husband?" we wanted to know. "Apparently, she likes to keep her independence." Madame Sarkozy is like no first lady France has ever seen. Nor is she like any first lady any country has ever seen. She says she finds monogamy "boring." She further observed that "love lasts a long time, but burning desire - two to three weeks." Here is the world's most desirable woman - married to a cad. But she is the perfect political prop�a woman who plays her role superbly - according to the local gossip, both in public and in private - and who otherwise goes on her way and amuses herself. What do other women think of her? Around the corner, from what we hear, they barely let their husbands out of sight. Your editor is an old-fashioned fuddy duddy; he admits it. He turns his tired eyes to politics, economics and finance - and sees only frauds and mountebanks. But when he comes home at night, he is charmed. In the newspapers, he regards the chatter on the editorial pages as all lies and claptrap; but at home he believes every fairy tale. When his broker proposes a hedge fund with a leveraged portfolio of private equity deals, he practically laughs in his face. But when his priest promises him everlasting life, what reason has he to doubt? And when his daughter says, "Oh Daddy�I just dropped by the office to say hello," he's delighted, scarcely noticing that she leaves with $50 to buy a new pair of blue jeans. There is a place for cynicism, he says to himself, and a place to believe. Poor Carla doesn't seem to know the difference. Still, she lives so close by. Better to keep an open mind. Besides, says your editor remembers that he has a couple weeks of vacation coming up� Until tomorrow, Bill Bonner

The Daily Reckoning --------------------- The Daily Reckoning PRESENTS: Working to better the U.S.'s energy policy is obviously one of the biggest challenges facing our nation. And one of the biggest hurdles to the U.S. getting energy right is that the mainstream media infotainment circus has not prepared people to connect the dots of what they already know. Byron King explains� ENERGY POLICY: GET IT RIGHT�OR ELSE!

by Byron King Energy policy - and getting it right - is a long-running theme for both Kevin Kerr and me in Outstanding Investments. And if the U.S. does not get energy right, nothing else really matters all that much. Bad U.S. energy policy will take down everything. You name it. Pick your favorite issue: the economy, health care, Social Security, education, immigration, the environment� Without assured supplies of good-quality energy - which will not come cheap or fast - all of these problems will just get much worse. If the U.S. could get energy right, the impact would improve a lot of those other problems. So we as a nation had better get it right. And while I am talking about Kevin behind his back, I want to say that I truly enjoy working with him. I tend to take a long view of the investment world, and Kevin offers the shorter-term vision. We think that this helps you, the subscriber, obtain a larger perspective. And it's kind of amusing, because in real life, my eyes are nearsighted and Kevin's are farsighted. Go figure. Still - and with our eyeglasses firmly planted on our respective noses - every day, Kevin and I hawk the screens to keep up with critical prices and other indicators. We watch prices for gold, silver, oil and natural gas. We also watch prices for many other commodities, from copper to platinum, and lumber to cotton. And we look at many different stocks, way more than are in the OI portfolio. We are always trying to make sense of it all. For Kevin and me, it is not just, "What is the story?" It is, "What is driving the story?" We want to be a few steps ahead of everyone else so we can offer the best advice to you, the reader. So what have we been seeing lately? Well, the screens have been hopping. Prices for just about every commodity have been gyrating. And I don't need to comment too much on the general stock market. Days of deep losses are followed by some days of spectacular gains. Every day, I open the newspapers or fire up the screen and wonder what new monetary disaster is going to surface. Will the Fed lower rates some more? Yes, indeed. That's what this world needs - more cheap money (just kidding). Or perhaps another silly piece of "feel good" legislation is working its way through Congress. Did you see that the Senate just voted to extend the ban on drilling offshore the U.S. East and West coasts? Whew! We dodged that bullet, huh? Thanks, guys. I guess the politicians are waiting for physical oil shortages in the world. And don't think that the rest of the world is not watching us. People in world capitals are asking, "Is the U.S. serious about its energy issues? Or is the U.S. just wasting time? Are its people just collectively flattering themselves with their sense of exceptionalism?" The U.S. is a world-class laughing stock when it comes to its national energy policy. Maybe when oil prices get to $250 per barrel, Congress will finally allow those evil oil companies to park some rigs offshore and drill that oil. But don't hold your breath. If the U.S. started an offshore leasing and drilling program tomorrow morning, it might take 10 years for the first barrel of oil to make landfall. That would be� um� Easter 2018. I know I can't wait. When I am not worrying about U.S. energy policy, I look to see which major bank will announce more bad news. Or what big brokerage house is on the verge of failing. (Maybe they shouldn't have paid out all those big bonuses last December.) Or what part of the world's energy supply chain got blown up overnight. You get the picture. What can you do at a time like this? Well, you can always just sell everything. Liquidate and take the money and stuff it into your mattress. But even going "long cash and mattress" is an investment decision. And eventually, you will probably regret the decision. You will wake up one day and find out that your mattress stash has lost a lot of its purchasing power to inflation. (Thanks, Fed.) Should you sell just some of your stocks? Or should you buy some shares, even now? And if so, which ones should you sell or buy? Well, no one can predict the future with absolute certainty. But we might be in for a modest correction in some of the run-up we have seen in the prices for gold, silver and oil. So let me offer some last words of advice. Kevin and I work hard to give you the best ideas we can find. But we cannot control the larger investment climate or the bad energy policy of the U.S. We can just try to make good investments "around" that difficult climate and bad policy. One of the biggest hurdles to the U.S. getting energy right is that the mainstream media infotainment circus has not prepared people to connect the dots of what they already know. Think about your own daily observations. People "see" information that tells them how much oil, for example, is in the hands of the national oil companies of many foreign nations. But the mainstream media (MSM) - and a lot of U.S. politicians - corporately hate Big Oil so much that they won't inform viewers and readers how little control the name-brand players have anymore. Really, in a lot of respects, Exxon Mobil, Shell and Chevron are now bit players in oil. The MSM are stuck in the 1970s, in the thought processes of the disco era. Really, the MSM need to lose the polyester leisure suits. The MSM could help the situation if they emphasized that we live in an era of less oil, higher prices and a lot more competition for the same old stuff. They could point out to viewers and readers that the developing world is� um�. developing. And we in the U.S. are not. We are just living off the past, drinking from wells we did not dig and running down the energy inheritance. The world is changing so quickly that a lot of what the media know is quickly becoming obsolescent - if not already obsolete. The MSM have just plain missed the energy and resource story. I guess it is over their heads. Zoom. Until next we meet, Byron King

for The Daily Reckoning P.S. I have a great new investment recommendation for you in this next issue. It is a great, old American company that is transforming itself into a world-class player in its niche. And Kevin has some comments on alternative fuels that will surely make you think. In a nutshell, Kevin is discussing the need for the U.S. to "get energy right" - which is not happening just now. The U.S. is getting energy "wrong," for a variety of reasons. Kevin will dissect one of those reasons down to the gristly bone. Kevin Kerr and I spent much of the past week putting together the next monthly issue of Outstanding Investments. Not a subscriber? You are missing out! Click here to sign up: Outstanding Investments Editor's Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments, and editor of Energy & Scarcity Investor.

-- Posted Thursday, 3 April 2008 | Digg This Article | Source: GoldSeek.com

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