Posted on 09/04/2009 1:27:03 PM PDT by dennisw
What was the SEC was doing...?
But first, what the stock market and the economy are doing...
In the past two days, the price of gold has shot up more than $40. It's now near $1,000 an ounce.
Why? We don't know. Rumors, talk, noise...there's plenty of that. But as for why investors are suddenly putting so much money into gold, we'll have to wait to find out.
But should you buy gold now? The answer is simple: yes and no.
The Trade of the Decade is still buy gold/sell stocks. And the decade isn't over. If you have US stocks, this is a good time to sell. The Dow went up 63 points yesterday - a weak bounce after several days of losses.
This is no time to hold stocks - for the reasons we outlined yesterday.
But gold? Should you buy gold and hope to get rich when gold shoots up to $3,000 an ounce? A bad idea, in our opinion. You should buy gold to protect your assets. The risk is in the paper money...because they can create as much of it as they please. And they're under pressure now to create a lot. You buy gold as insurance against inflation, a dollar bust, a bear market in stocks and bonds, or a financial crisis. Gold is nature's money. It is better than manmade money. Because, with gold, what you have it what you've got. They can't artificially depreciate it or easily increase the quantity of it. That's why the feds don't like it. It won't support their cause du jour - whether it is a war, a bailout, stimulus, health care, or whatever. Gold doesn't cooperate with the financial engineers. That's why it's a good thing to hold when you think the financial engineers are making a mistake.
But our view at The Daily Reckoning headquarters is that while the engineers are making a mistake, they not very good at it even when they're making a mistake they're good at. Typically, they're pretty good at causing inflation. But now the credit bubble is deflating, not inflating. It will take them a few years before they become reckless enough to move prices up again. And then, they'll probably overshoot their objectives considerably.
In the meantime, there's no inflation to speak of...no dollar crisis...no bond bust. So we wouldn't expect the price of gold to soar...not just yet. That's the big surprise - that this period of deflation will last longer than expected. Then, when it begins to seem permanent, inflation will suddenly come roaring back.
By then, most investors will have given up on gold...especially those who were speculating on it going to $3,000. It will go to $3,000, but only after speculators have dropped their positions.
[That's why you should get yours now - before the price jumps $2,000. In fact, right now, you can pad your portfolio with the precious metal, for just a penny per ounce. No joke. See how here.]
So far, everything is happening just as we expected. After more than half a century of boom, we are now in a bust. People need to downsize...cut back...and live a little less large than they had in the boom years. That means...well...just what you'd expect.
Wasn't it just yesterday that we reported that Florida was losing population? People just aren't retiring like used to. Here's comes the evidence:
From The New York Times comes this headline: "Older US Workers Put Retirement on Hold."
The Times tells us that older people are continuing to work because they don't have a choice. They can't afford to retire. So they hold onto jobs, which is another reason it's so hard for the unemployed to find a job. Those who have them aren't giving them up. A Bloomberg report today, for example, tells us that more people are applying for job benefits than expected. Another tells us that millions of people are running out of benefits before they find a job.
Just what you'd expect, in other words. Here are some of the other things we expected:
1. Unemployment is still rising.
"Investors discouraged by US jobs report," says a headline at the International Herald Tribune. To make a long story short, August was a disappointment. More jobs were lost than expected.
We don't know how many jobs we should expect to lose. But we're in the downhill part of the credit cycle; we're bound to lose a lot of them.
2. Sales are falling.
That's another thing we would expect. People have to cut back. So...they do cut back. Sales go down. That means fewer sales and fewer jobs. No point in making things, shipping them and retailing them if no one is buying them, right?
3. What else would you expect? Lower house prices? Check. Higher savings rates? Check. More bankruptcies? Check. Falling prices? Check.
Isn't it nice when things work out "as they should?' Check.
Now, back to the regulators. Here is Britain's main man, Adair Turner of the Financial Services Authority, in The Wall Street Journal:
"Cash is for buffers, not for wallets," says the headline. Mr. Turner is making the point we have made many times. The US system of capitalism has become a system where the capitalists have no capital. The big banks have too little in savings...not enough 'buffers' to protect them from unexpected crises. They made a fortune during the boom years - loading consumers up with debt. But instead of holding onto the money to protect themselves against emergencies, they paid it out in bonuses and salaries. Then, when the crisis came - one they caused - they were without sufficient funds.
What do you do when you're a major bank and you are insolvent? Hey, you already know the answer. You turn to the government! Which is why Mr. Turner's comment is both very smart and very dumb at the same time. He's right; the banks should hold more capital. But the reason they don't is obvious: they know the government will bail them out. They figure they don't need much capital; the feds have plenty.
This is the problem economists call "moral hazard." If you protect people from their own excesses they will become even more excessive. On the other hand, if they have to pay for their errors, they'll be quicker to correct them.
Okay...well...maybe the banks still wouldn't save enough. But that would take care of itself. If the feds didn't intervene, the insolvent banks would go under; those left would - by definition or accident - be better run.
[Unfortunately for you, you are not a big bank...so if you become insolvent, the government will not bail you out. That's why we encourage you to set up your own 'personal bailout'... All the resources you need to get started can be found here.]
But let us turn to America's equivalent of the FSA - the SEC.
Front page in The Washington Post: "The Madoff Files...A Chronicle of SEC Failure..."
According to the Post, Madoff was "astonished" that the SEC didn't bother to verify whether he was actually doing the billions of dollars worth of trades he claimed to be doing.
In response, the SEC says it "doesn't have the resources" necessary to keep an eye on "the exploding number of financial firms."
And according to today's International Herald Tribune, Senator Schumer has suggested a way for the SEC to increase its budget by 75%. The idea is to turn it into a kind of tax farmer...with the right to earn money directly from the industry it is supposed to regulate. There's an idea for you - a very bad one. It would give the SEC more money to waste...allowing it to hire more people to meddle in the marketplace...giving investors more illusions that they are playing 'on a level playing field'...and ultimately corrupting the financial sector even more than it already is.
Which brings us back to our original question: what was the SEC doing?
The Madoff group was very suspiciously doing billions in trades with remarkable profitability and consistency. Every trader in New York knew something was up. What was so intriguing to SEC eyes...when they weren't keeping their eyes on Madoff?
We can tell you. Us! Your editor and his colleagues. No kidding. We'll give you the full story on Monday. Promise.
Keep reading for today's essay, below...
Fixers Aim to Fix Fixes With Another Phony Fix
by Bill Bonner
Baltimore, Maryland
From California comes word that the summer program of Singularity University came to an end this week. The idea of SU is simple enough. Put smart people together with the latest technology; let them figure out solutions to the world's problems.
'The Singularity' is an idea from Ray Kurzweil. The gist of it is that computers will soon be smarter than humans; by the middle of this century they'll be smart enough to figure out how to get smarter and smarter, faster and faster.
No doubt, many of them will go into finance. And no doubt, many will make a fast buck. But will more smartness really make the world a better place? According to the singularists, increased brainpower will be able to solve all sorts of problems - from global climate change to market crises.
But the brain is a big disappointment. No mechanical engineer has ever improved the old-fashioned kiss. Nor has any brain ever straightened out the business cycle. Dumb as a slide rule, the brain does what it is told to do; it doesn't ask questions. Tell it to build a bridge and it is on the case. Put it to work packaging tranches of toxic assets or selling aluminum siding...it is just as happy with one task as with the next. And the more a man's brain bends to a challenge, the more it elbows out of the way his finer senses...and the dumber the man becomes. He turns his back on his own intuition as well as the accumulated wisdom from previous bust-ups and bruises. Like a man who has gone crazy, as G.K. Chesterton put it, all he has left is his sense of reason. Then, with nothing more to work with, he comes down on his work like a blacksmith's hammer on a fine Swiss watch.
During the bubble period, the big banks were the biggest employers of top graduates from the world's top schools. Oxford, Cambridge, Harvard, Yale...the financial sector drew them in like flies to an open latrine. The financial industry made so much money it had a hard time explaining it. The smart dudes did not toil in the fields, neither did they spin. Then, what did they do? They earned millions, bought BMWs and got dates with actresses. They claimed they were doing a fine job of allocating the world's wealth and making everyone better off.
But when the bubble blew up, it was apparent that the financial world they created was fragile and perverse. Not a single one of the largest Wall Street banks survived without government handouts. And a news report from this week tells us that Americans were so damaged by the Bubble Epoque that their discretionary spending has now been cut to levels not seen in 50 years. The geniuses wiped out a half-century of economic progress in the richest, most successful economy the world has ever seen.
Smart people were also to blame for the biggest single error of the last century: central planning. The central planners thought they could fix the supposed evils of the natural economy with logic and reason. The idea was so alluring half the world fell for it. If the Nobel Committee had been on the ball they would have given Karl Marx a prize.
If the bug had come from stupid people...smart people might have avoided it. They might have come through the period without permanent scaring. But the wheezy intellectuals behind it were too clever for their own good. They soon infected the top universities...and the government. They convinced almost everyone that central planning was the wave of the future and that anyone who stood against it was a bumpkin, a parasite or a fool. Then, in the name of human progress, they took control in two of the world's largest countries and turned them into prison camps.
But by the last decades of the 20th century it was obvious even to central planners themselves that it wouldn't work; in both Russia and China, the planners simply gave up.
Central planning didn't work because people had plans of their own. They resisted. Then, the planners brought down their hammers. "If you're going to make an omelet, you have to break some eggs," said chef Vladimir Lenin. The "Black Book of Communism" puts the death toll as high as 100 million.
Then too, central planning didn't work for less obvious reasons. Planning requires information. The planners had plenty of it. But private individuals had far more - local, current, more accurate information from first-hand observation and experience. With better information, they could make better plans. Most important, individuals didn't limit themselves to only the fresh fruit of their rational brains. They put their hearts in it...and drew on instinct and tradition - the distilled spirits of previous generations - giving them a huge advantage over the apparatchiks.
But the brains kept at it. When the forensic experts sifted through the debris from the 2007-2008 financial blow-up they found fingerprints from a whole list of Nobel winners. It was they who had developed the formulae and the theories that deceived investors, and themselves. They believed they could tame risk...by calculation! They figured out the odds and worked out prices - to as many decimals as needed to put investors to sleep. And then along came a risk they had not foreseen - the risk that their own formulae were claptrap and that they were idiots.
Meanwhile, the brains were at work in the public sector too. There, they were still pushing central planning...albeit on a much less ambitious scale than in the last century. In Western countries, government economists fixed lending rates and credit policies in order to encourage over-consumption. In the East, they fixed exchange rates and recycled credit back to their customers in the West in order to encourage over-production. And what ho! Wouldn't you know it; now the world has too much debt and too much capacity.
And so the brains are back on the job. In China, the government boosts production. In America, the central planners are trying to boost consumption. In short, the fixers are still fixing. And soon, the world will be in an even worse fix than it is now.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
P.S. Where the rubber meets the road. Daily Reckoning readers meet us at conferences. Often, they have questions:
"Mr. Bonner...what do you do with your own money?"
We explain that we don't really have any secrets. We tell readers what we think everyday; we don't hold anything back. That said, there's a big gap between what we think about investing and how we actually go about it. When we're talking ideas, it's WHAT you know that counts... But when we're implementing investment ideas, often it's WHO you know that is more important...
Oldest son, Will, has begun a project designed to make the critical contacts more accessible...at least to a small group of partners. Find out more tomorrow in an unusual letter that will be sent to our most loyal readers...
"The US system of capitalism has become a system where the capitalists have no capital. The big banks have too little in savings"
But banks are not capitalists. The author is simply a moron.
F Wall Street... and the BRIC countries agree. They are tired of being suckered by the “derivative makers” and “credit default swap maestros”. China is threatening to default on Wall Street’s crappy products (petro derivatives) and I hope they do
"They are tired of being suckered by the “derivative makers” and “credit default swap maestros”.
Are you just airing grievances, no matter how unrelated they are to the article or my post? What do you want me to say, then?
What a nice model of the world! Reminds me of what anti-Semites constantly said about the Jews: the devilish but sneaky Jews sucker good but naive Christians into all sorts of calamities.
In your world, too, whole counties are suckered by Wall Street into "derivatives" and CDOs. And those good but naive country are led by shepherds and fishermen? What a nice model of the world.
But forget me....The BRIC countries are proving it by action
I’m just airing grievances and Wall Street has lots of Jews but all are well represented except for blacks and Hispanic. Jamie Diamon is Greek and so was the guy name starting with Th running Merrill Lynch
Bill Bonner has this racket all figured out. Same for Karl Denninger
This is how BRIC countries feel and they are taking actions to negate this skullduggery
So they put that past behind them and move on to where Wall Street cannot manipulate them and make billions off them
They are boycotting Treasury auctions
And the Euros know they were lied to when they bought MBS from Wall Street. The ratings were lies
"The BRIC countries are proving it by action"
Proof by action --- the most defensible proof in the world...
And what does that have to do with Wall Street? Apparently, in your mind, any finance has something to do with that evil monster.
Treasury auctions are involve only two parties: a buyer (often a foreign government) and the US government.
" And the Euros know they were lied to when they bought MBS from Wall Street. The ratings were lies"
You appear not to know what lie is. Ratings were done at the state of the art, which like state of the art at any given time is limited. They have been proven to be wrong only in retrospect. A lie, by comparison, is a deliberate misrepresentation of truth.
You ostensibly take a very high moral ground and yet defame scores of people without a moment hesitation or any detectable knowledge. What gives?
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