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: How's your investing going?

Uncle Bill
07-14-2009, 04:17 PM
Hope you are making as much as you you'll be able to weather the storm later. And for those that believe the storm is over, my condolences.


Looking Out for Number One
by Bill Bonner
Waterford, Ireland

Ireland is nearly broke. Its debt was downgraded a couple weeks ago.
Unemployment is near 14%. Deflation is at 5.4% -- the highest since the Great
Depression of the '30s. And it's not over. It's "too early" to talk about recovery,
says Finance Minister Brian Lenihan.

It's too early in England too. Financial Advisor Peter Hargreaves says that talk
of 'green shoots' gives rise to illusions. People think they see the light of dawn
when the sun is still going down. And forget about a V–shaped recovery.
There won't be any simple bounce-back. Nor even a W-shaped double
decline. "There could be a quadruple dip in my opinion," he said.

And what about California? This week's Economist magazine gives us a new
measure for California' budget deficit -- $26 billion, up from the $24 billion
last reported in this space. A widely published photo shows Arnold
Schwarzenegger smoking a cigar...apparently confident that the state's
problems will work themselves out somehow.

Of course they will. They always do. But not necessarily the way people hope.

California is the world's 8th largest economy. It can print IOUs when it runs
out of money. But there's no law that says banks have to take them. They
stopped taking them last week...which leaves the Golden State in a jam.

What is ailing California is ailing the entire United States of America –
and much of the rest of the world, especially that part of the world that
speaks English. Politicians have promised too much...without being willing to
raise the money to pay for it all. Solution: spend less. Or tax more. Or a little of

Hey, Arnold should have asked us. It's so simple.

But wait. California is a democracy. And the democracy is a flim-flam. As
we've explained in these reckonings: there are two parts to it. One part is like
professional wrestling – full of bullying, humbug and hollow gestures. One
group wants to stop its neighbors from smoking. Another wants a flag with
yellow trim. Still another wants revenge on a neighbor because it feels
disrespected. There is no accounting...or predicting...what direction the mob
will take.

The other part of democracy is more rational. The citizen wants to know not
what he can do for his government, but what he can get out of it.

This second part is a time bomb. Once citizens realize that they have the
power to vote themselves the contents of someone else's pocket, the system
is doomed. They don't let up until they've bankrupted it.

A man may vote for a candidate who promises a yellow flag. No harm done.
But when he votes for the candidate who promises more "benefits" at someone
else's expense, he is on the road to Hell.

"Democrats in the House propose setting a 1% extra tax on couples earning
more than $350,000," reports the Financial Times this morning. The money is
to be used to pay for other peoples' health benefits.

If you earn less than $350,000, you feel that you are getting something for
nothing. But that money – had it not been confiscated – wouldn't have
disappeared. It would have been put to work in one way or another – added to
the nation's capital formation, lent to the government, used to buy a new car or
take a vacation. Instead, it is to be sucked out of the benefits of the willing
economy and used to give people something they couldn't afford or didn't
want to pay for themselves.

In order to get elected, politicians have to promise more and more of these
'benefits.' There is no backing turning around. Even when the
government is clearly headed to bankruptcy. If a politician hesitates, some
other clown will just take his place. He may even be overcome – in a weak
moment – with a desire to level with the voters. He may imagine himself going
on TV and putting it to them straight:

"Look, we'd like to continue these programs; but we don't have the money."

Then, he comes to his senses: 'I might as well say I've fallen in love with a
woman from Argentina...or a man in a public bathroom; either way, I'm dead,

Now, Dear Reader, you may object. 'The American political system draws
forth the best and the brightest from the entire nation of 300 million," you may
say. "Surely these people are capable of doing the right thing for the good of
future generations."

They are surely capable of making rational decisions. But what is rational for
them – ducking serious issues...nourishing the illusion that voters can get
something for nothing -- is fatal to the republic.

Of course, the same thing could be said for a well as a country.
Why did GM go broke? It was the largest company in the world. It could pick
and choose the very best managers ...the smartest businessmen...the greatest
investors...the most far-sighted engineers... the most wonderful of the
wonderful. Surely, these fellows could add and subtract, right? Surely one of
them noticed:

"Hey...if we keep adding costs, we're not going to be competitive any more.
And if we're not competitive, we're not going to be able to sell cars at a profit.
And then, we're going to lose money and go broke.'

How come the best talent money could buy couldn't change course at
GM? How come all those smart people in the California legislature can't
balance the budget? Well, that's just the way it is. An institution matures...and
the parasites take it over.

Retirees, executives with their golden parachutes, the halt, the lame,
employees, managers, hangers on, lawyers, accountants, businessmen...
everyone has an interest in keeping the hustle going. The executive wants his
bonus...the retiree wants his pension...the lawyer wants his retainer... All can
see that the old place ain't what it used to be. They all know that the gravy
train won't go on forever...but that just makes them more eager to get it while
the getting's good. So they jiggle the numbers so each quarter doesn't look so
bad...jive the news so it sounds almost as if the institution had a future...and
they juke up the whole system so that no one even mentions that they're going

GM "sets out on a fresh start," says the Financial Times. "From this point on,"
says its top man, "our efforts are dedicated to customers, cars..." and repaying
the feds.

What were they dedicated to before they had to turn to the feds for money?
Answer: to looking out for number one.

What are they dedicated to now: refer to the question above.

This from our old friend, Adrian Day:

"I've been called a cynic—and worse—but, as Winston Churchill told us, if
you don't know the future, look to the past. So if we want an idea how long the
government might be subsidizing GM and Chrysler, let's look to the
experience with railroads. In 1970, Penn Central, America's largest rail
company, filed for bankruptcy, and Congress created Amtrak. The government
passenger rail monopoly was confidently expected to be paying its own way by
1974. Well, 38 years and $33 billion later, it has still to turn a profit. So this
year, congress has voted another $14 billion for the next five years."

From our perspective – because we hate taxes and we like trains – it would
have been better if the railroads had gone broke...and been bought up by
whomever could make a go of them.

And from our perspective – because we hate taxes and we like cars – it would
be better if GM had been allowed a death with dignity. Then, other
automakers could have salvaged the wreck for spare parts.

Of course, this formula applies to all the crippled banks, bankrupt households,
reckless insurance companies, greedy Wall Street...and all the rest of the
flotsam and jetsam of the Bubble Epoque.

As Yu Faz, who anticipated the 'laissez-faire' economists by 500 years, said:
"A man lives under the roof of his own making. If it falls on his head, so be


Uncle Bill
07-14-2009, 04:21 PM
Bonner, Cont'd...

"The mainstream is aghast at Goldman Sachs," writes Ian Mathias in today's
issue of The 5 Min.

"The investment bank is expected to announce a $2 billion profit in its second
quarter earnings announcement tomorrow. The New York Times is wondering
how Goldman 'could have rebounded so drastically only months after the
nation's financial industry was shaken to its foundations.'

"We're wondering… just $2 billion?

"GS is an 'investment bank,' after all, and we hope it did a little investing
during the biggest snap-back rallies of our lifetime. During the second quarter,
the S&P 500 rose 15%. 433 of its components registered a gain, including
Goldman, which shot up 33%. From a January bottom, GS stock has more than

"Goldman is one of the world's biggest underwriters too… a fortunate place to
be in the second quarter, one of the grandest periods of dilutive stock offerings
in history. On top of that, it got a $10 billion taxpayer lifeline, and a market
value of $74 billion, and recently issued $28 billion in ultra-cheap FDIC-
backed debt.

"So only $2 billion? Yawn… for the most politically connected bank in the
world during the most rabid rebound rally since the Great Depression, we're
not surprised. We suspect the second half of 2009 will be much more

Our friends at The 5 aren't the only ones who think the second half of 2009 –
and 2010 – will be a very interesting (and turbulent) time for investors. Rob
Parenteau at The Richebacher Letter has some note-worthy forecasts on what is
coming around the corner over the next year or so…and you'll want to start
getting prepared now.

The Financial Times interviewed our friend Hugh Hendry, of Eclectica Asset
Management. Excerpts:

"I've never known a moment where a trade has become so crowded. And that
trade would be this absolute certainty that the future is going to result in
inflation. And not just any old inflation. People are using quite severe
language. And there are notable contrarians and commentators who are
comparing America's monetary policy with Zimbabwe. And they're not just
saying inflation, they're saying hyperinflation.

"Prices today...are falling, in America and in the British economy, and indeed
across Europe. That never happened in the 1960s, 1970s, 1980s. 1990s. That's
a new phenomena. It's almost as if we have this flood and yet people are
buying fire insurance, and that's quite – you couldn't make this stuff up.

"When Japan hit the turbulence which we're experiencing now – when they hit
it twenty years ago, their public finances were very similar to the public
finances we had in the UK going back a year or so, and the US, where gross
public debt was no more than 40% of GDP. Now over the last 20 years, the
Japanese have fought crisis after crisis by expanding the public sector debt.
They've issued trillions, literally trillions of yen, and debt is now approaching
two hundred percent of GDP. What's happened to government bond yields?
They've gone down.

"Here we are with the most profound collapse in industrial production, world
trade, since the 1930s. That is not an exaggeration, that is reality. Okay? And
yet today ...they only proposed to grow the money supply at the rate at which
it's expanding just now – it's expanding at like nine percent just now...history
will determine that their steps were modest, and they were massively
overwhelmed by this hysteria, which raised interest rates."

We can't find the passage...but one thing in what Hugh said stuck in our brain.
He said the inflation narrative was "too easy to articulate" and too

That's what's been bothering us too. It's too obvious. The feds print money.
Prices go up.

Well, the fed is printing money, but as Hugh points out...probably not enough
to offset the economic collapse. Are prices going up? No, they're going down.

Should you be long or short bonds? The dollar?

We suspect Hugh is right. In the short run, you should probably be long
both. The correction has been underestimated. It will be worse than most
people realize. Since a correction is fundamentally deflationary, the dollar
should rise.

But here at the Daily Reckoning, we're not smart enough to invest in the short-
run. We never know how short short is. And we fear having our short positions
when the long run finally arrives. So, we'd prefer to take the long-run position
from the get-go. In the long run, we have faith in the feds. They may not be
very good at causing inflation. They may have underestimated the downward
tug of the correction. But give them time. They'll keep emitting their
I.O.Us...and keep propping up their dead institutions with make-believe
money...and keep handing out their bonuses and benefits...

...until the country goes broke.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Gerry Clinchy
07-14-2009, 08:42 PM
I've heard that Milton Friedman's book Money Mischief might be worth reading right about now.