Monthly Archives: August 2008

Jim Rogers: the future of the US involves exchange controls and politicians with Swiss accounts

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Take a minute to chew on this interview of Jim Rogers by Keith Fitz-Gerald at Seeking Alpha:

(Rogers) “If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn’t let the Chinese buy the oil company, wouldn’t let the [Dubai firm] buy the ports, et cetera.

But I’m really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they’re somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.

Before World War II, Japan’s yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That’s a collapse. That was also a bottom.

These are not predictions for the U.S., but I’m just saying that things have to usually get pretty, pretty, pretty, pretty bad.

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation.  And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.

[Q]: Treason? Wow, I didn’t know that.

Rogers: Yes…an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies.  Anything. You could even use other people’s currencies.

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by ’39 they had full-exchange controls...”

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[Q]: Is there a specific signal that this is “over?”

Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.

[Q]: They’ll move their own money.

Rogers: Yeah, because you look at people like the Israelis and the Argentinians and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.

[Q]: We saw that in South Africa and other countries, for example, as people tried to get their money out.

Rogers: Everybody figures it out, eventually, including the politicians. They say: “You know, others can’t do this, but it’s alright for us.” Those days will come. I guess when all the congressmen have foreign bank accounts, we’ll be at the bottom.

But we’ve got a long way to go, yet.

In respect to the future of the US and what to do about it in your personal life, Rogers and I are on the exact same page. I once had the chance to ask him if he thought we could go through a phase of deflation along the way, and he said no, that Bernanke would buy stocks, bonds or real estate and do whatever it took to avoid deflation, and of course end up destroying the currency.

Gold washout to continue: weak hands forced to sell

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The gold price dropped the most in 25 years last week, 8.4%, and remains down about 21% from the all-time high of $1,033 in March. Investors’ surveys showed bullishness on the metal in the high ninety percent range in March, with a bounce back to near 90% during the second peak of $989 in June. Simply put, almost everyone thought gold would go higher. The commentaries on Kitco.com hummed with the surety that gold would soon retake its 1980 inflation-adjusted high of $2500 as the dollar slid to Peso-like status.

The atmosphere was cult-like, and a bit intoxicating for libertarian-minded gold bugs (are there any other kind? ok, anarchy-minded), yours truly included. We are all waiting for the return of non-liability, non-printable, non-degradable, timeless money, for if civilization marches on (some would say, for civilization to march on), gold and silver should at some point reassume their rightful places in society. They just do the job so much better than all the kinds of paper, shells, clay tablets, fiddle sticks and digits that have been tried over the years. The great hope is that specie is taken up spontaneously when the world’s corrupt (is there any other kind) governments implode from the debt that their fiat money has enabled.

Well, I would say that that possibility grows stronger with each misstep by our bankers-in-chief, but it is by no means a sure thing in the near future, more like a long-shot, since the anti-gold and pro-central banking propaganda runs deep after a century of indoctrination and dumbing down of the populace. Our governments have become masterful manipulators, and crisis-management is their specialty (if you think Katrina was a failure, you must not have gotten any of that $80 billion), so don’t count on 1776 all over again. More like 2001 in Argentina: meet the new boss, same as the old boss.

But yes, while governments get viscous in a crisis (and be sure, retaining control over the nation’s money is top priority, justifying all kinds of emergency measures), they do get weaker internationally, and the financial system is international. I do expect to see greater use of digital gold banks among the world’s citizens who are free to use them, and the precious metals may see a resurgence in hand-to-hand use in markets where governments turn a blind eye, such as the bazaars of Asia.

I have believed since first waking up to gold that we would see a 1:1 Dow:Gold ratio again, but when the breakaway run to $1000 started in 2007, I became convinced that deflation would snuff it out and I bought long-dated puts to hedge my holdings. Deflation is now destroying wealth at a blistering pace, and gold is being wrested from weaker hands, such as people who need cash more than their old bracelets, or momentum-chasing hedge funds facing margin calls and withdrawals.

We are just now entering the strongest phase of the credit crunch, when bank failures will be a near-daily occurrence and the equity markets will be knocked back to 2002 or 2003 levels in short order. Job losses are mounting, and consumers are getting very tight, bringing bankruptcies to all kinds of bubble-era self-indulgence industries: home furnishings, electronics, coffee shops, restaurants, organic foods, big autos, toys with small engines, pleasure travel, clothing and accessories.

As of last week, almost every major asset class had tipped its hand, and all will lose to the house: cash and treasury paper. Real estate went first, then commercial paper, then stocks, then municipal bonds, and this summer energy and all of the metals turned. All I am waiting for is a washout in corporate bonds, but they can’t be far behind.

How low could gold go? A 50% retracement of the run from $253 in 1999 to $1033 would be $643. I give it better than even odds that we go a bit lower than that. But keep in mind that I think stocks will fall 80% from their highs and real estate 60%. Commodities are much more volitile, so a 40% fall in this context could still be considered a bull market setback (the same goes for oil). I’ll certainly be buying if it happens, and I won’t ever give up hope of being able to pay for groceries with silver pocket change or a home with an electronic gold transfer.

Key to happiness is freedom not income, says intriguingly timed study

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The Financial Times brings us word of a new study by a handful of researchers in the US and Germany, published here in pdf. Some excerpts:

ABSTRACT—Until recently, it was widely held that happiness fluctuates around set points, so that neither individuals nor societies can lastingly increase their happiness. Even though recent research showed that some individuals move enduringly above or below their set points, this does not refute the idea that the happiness levels of entire societies remain fixed. Our article, however, challenges this idea: Data from representative national surveys carried out from 1981 to 2007 show that happiness rose in 45 of the 52 countries for which substantial time-series data were available. Regression analyses suggest that that the extent to which a society allows free choice has a major impact on happiness. Since 1981, economic development, democratization, and increasing acceptance of diversity have increased the extent to which people perceive that they have free choice, which in turn has led to higher levels of happiness around the world, as the human development model suggests.

Ok, makes sense so far.

But the strongest support for the claim (my note: which the authors challenge) that the happiness levels of countries have not risen over time comes from the United States, which provides by far the longest and most detailed time-series data on SWB. Hundreds of surveys have measured happiness and life satisfaction among the American public in almost every year since 1946. No other country has a comparable database, and the US data show a flat trend from 1946 to the present.

This finding was very surprising to me, since I would have thought that the degradation of community and family and the steady creep of totalitarianism and tabloid society would have had a negative effect on happiness in the US. I would have expected happiness to decrease over the last 60 years even as material wealth has increased, since earlier studies have shown a decoupling of happiness with wealth after a basic comfort level is reached (at about $10,000 per capita). As the authors explain their thesis:

This societal-level shift is linked with individual-level value changes, from giving top priority to economic and physical security toward giving top priority to self-expression values that emphasize participation, freedom of expression, and quality of life… The underlying theme of this shift in life strategies is to deemphasize external authority and maximize individual autonomy.

That’s certainly where this individual’s priorities lie, and why he has chosen a life outside of the US. My own conclusion from reading this study is that its methodology for measuring happiness must be flawed, since it relies heavily on asking people versions of the question, “how happy are you?” It seems to me that various societies may have typical responses to the question that do not reflect their actual well-being. Maybe it just is never acceptable for a Japanese to wax on about how great his life is, while it is perfectly normal for a Mexican to do so.

Maybe people don’t really know how happy they are as a society if they don’t have perspective across time and geography, something that very few possess (as evidenced by such phenomena as the success of propaganda or occurrence of financial bubbles). I also suspect that this little study of studies was commissioned and promoted as part of the west’s campaign to spread “freedom and democracy” at the point of a gun.

It’s release is particularly timely in light of the new tensions in Eastern Europe, since it shows that the strongest shift towards happiness in the last 30 years occurred in that region (hint: evil Russia wants to repress its poor neighbors again, and the USA must help them preserve their newfound happiness). Also notable is that China’s happiness has decreased according to the survey, since of course we are to believe that despite outward material success, those smiles at the Olympics are just for show, ordered up by the Party leaders.

At any rate, here is the chart the authors provide, from the World Values Survey. Draw your own conclusions.

Click on image for sharper view.

Mainstream contrarianism crushed

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Markets move in whatever way induces the maximum pain on the maximum number of participants. Those players who mock “mainstream” opinion, if experiencing more success than the crowd, are bound to get overconfident and to see their ranks swell at just the wrong time. Then they themselves are the mainstream, and true contrarians are to be found on the other side of their trades.

Here are ten pillars of what I consider the “mainstream contrarian” movement that just ate a big slice of humble pie:

#1 The dollar is toast, and will keep falling until hyperinflation sets in.

#2 Gold and silver’s rise cannot be stopped until the US trade and budget deficits are brought under control and the debt is reduced–that is, never.

#3 Global oil production has peaked, so oil will continue ever upwards. Oh, and we’ll bomb Iran any day now.

#4 China and India’s growth will continue unabated, and with it, their demand for commodities at any price.

#5 Financial stocks will fall without bounces. Long live SKF!

#6 CPI vastly understates inflation. Just look at M3 or shadowstats.

#7 We are experiencing a return to 1970s style stagflation.

#8 US Treasury bonds are toast.

#9 Deflation cannot happen in a fiat money regime. Bernanke told us he wouldn’t allow it.

#10 When the depression comes and the dollar becomes worthless, the sheeple will awake to the truth about their government and demand their republic back, with Ron Paul as their leader and gold as money.

 

Here’s a tip for frustrated contrarians: Join the deflationists. We’re a super-exclusive club of curmudgeons and equal opportunity shorts. We are gold bugs, but just made some righteous dough shorting gold. We know that oil has peaked, but we shorted it anyway! We know China will rule us all, but we shorted commodities. We know the US is bankrupt, but we aren’t afraid to go long the 30-year.

In a few years, we’ll be pretty popular, but then I think most of us will have moved on, maybe to the hyperinflation camp. If recent history is any guide, the ones who make the most noise (ahem, Peter Schiff) will find it hardest to make the necessary corrections and self-contradictions before the next big pivot.

Bull’s bear John Mauldin gets a lot more bearish

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Every week one or two different people, not always the same ones, forward me the latest missive from John Mauldin of Millenium Wave Advisors, LLC.  This is no surprise, since he claims to have over 1.5 million subscribers. Thanks for thinking of me, guys, but I’m a subscriber myself. I like how he presents ideas from this and that analyst and money manager, and it’s important to read popular writers to stay on top of the zeitgeist.

Mauldin’s catch phrase of late has been ‘muddle through,’ as he has been strolling through the wreckage of the economy with rose colored glasses on. All last year, he was making the case that we would only experience a mild recession and period of below-trend growth, and that a major bear market was not in the cards. For instance, here is presenting the old decoupling case:

“It is going to take some time for the economy to work itself through the current credit crisis and the collapse of the housing bubble. I suspect the US economy will grow below trend for at least another year. We will work through it, as we always do. But it is the return of the Muddle Through Economy….

The sectors that are outperforming are all large multi-nationals that get as much as 50% of their earnings from outside the US, and the global economy is doing well. Those that are not doing well are tied to US domestic consumer spending and the financials…

If we saw a 30% drop in the 40% domestically impacted sectors (with healthcare and utilities basically flat) and a 10% rise in the rest, that would be an overall drop of only about 7%, which is not much of a bear market in the total index, although there would be sectors that are ugly.”

So it was with some satisfaction this morning when I read Mr. Mauldin’s “correction” of his January 2008 predictions (he first re-prints his old predictions, then updates them):

” “So let’s get to the predictions. I think that we are in a recession for most of the first half of this year, and that we begin a slow recovery in the second half. It will be a Muddle Through Economy for at least another year after that. That would suggest that most companies will come under serious earnings pressure. If history is any indicator, that means we should see a bear market in the first half of this year. How deep will depend on how fast the Fed cuts, but I don’t think we are looking at anything close to the bear market of 2000-2001. Still, I wouldn’t want to stand in front of a bear market train.

“Consumer spending is going to slow, and it will be slower to rebound, for reasons outlined above. That will also make the recovery in the stock market a little slower. But I expect to become bullish on the market sometime this summer, if not before. I’m looking forward to it.”

To be blunt, that optimism now seems misplaced. I think we are likely to stay in recession for perhaps the rest of the year and well into 2009 before we start a very slow recovery. It is not time to get bullish on stocks, as I have been writing for the past few months. Earnings are going to continue to come under pressure, and earnings are what drive the stock market over the long term. We could see total S&P 500 as-reported earnings drop below $50. You do the math. Even with a 20 multiple, that does not yield a pretty picture.

I think we are going to test the recent lows and then watch the market go lower as the market gets disappointed in the earnings from the third quarter, and re-test those lows again. We are in for an extended period of Muddle Through, while we wait for the housing market to find a bottom and the credit crisis to abate.”

To be blunt, that optimism now seems misplaced. I think we are likely to stay in recession for perhaps the rest of the year and well into 2009 before we start a very slow recovery. It is not time to get bullish on stocks, as I have been writing for the past few months. Earnings are going to continue to come under pressure, and earnings are what drive the stock market over the long term. We could see total S&P 500 as-reported earnings drop below $50. You do the math. Even with a 20 multiple, that does not yield a pretty picture.

I think we are going to test the recent lows and then watch the market go lower as the market gets disappointed in the earnings from the third quarter, and re-test those lows again. We are in for an extended period of Muddle Through, while we wait for the housing market to find a bottom and the credit crisis to abate.”

Mauldin today even seems to repudiate decoupling, as he quotes Desmond Lachman of the AEI:

“… The ‘decoupling’ optimists are ever hopeful that China’s rapid growth, together with the rest of Asia’s emerging market economies, will offset any U.S. economic downturn. But they tend to forget that Asia is filled with export-dependent economies: in some countries, exports to the United States alone [emphasis mine] account for more than 10 percent of annual GDP. The “decouplers” also forget how relatively small these Asian economies still are, at least in relation to the G-7 industrialized economies. Even the vaunted Chinese economy is barely 15 percent the size of the U.S. economy.”

So here we are in August 2008: Housing prices are down 20% nationwide, Bear Stearns has collapsed,  bank runs have begun, Fannie and Freddie have been bailed out, global stock markets are down 20%, the commodities indexes are down about 25% from their peak in June, and even John Mauldin admits that S&P 500 earnings could fall to $50.

That last bit is the scarriest, since if Mauldin is thinking $50, who knows how low they can go? And by the way, the median bear market PE is not 20, it’s 10.

The Dow has bounced in gold, too

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The Dow peaked at 44 ounces in late 1999, up from 1 ounce in 1980, and has since been in a steady “silent crash,” to borrow a phrase from Robert Prechter. It has so far bottomed out earlier this year at around 12 ounces, but with the decline in gold to under $800* and the bounce in the Dow to around 11,700, the ratio is back up to almost 15 (still a dangerously high level–take a look below at where the Dow peaked in 1929).

Since deflation took hold in force last year, the crash has been making some noise, as the nominal Dow has finally turned lower. If you think this trend will continue, the Dow’s bounce since mid-July appears as a shorting opportunity in both nominal and gold-priced charts. We might be experiencing the last chance in decades to get 15 ounces for the Dow, since this cycle has a very long period.

Click chart for sharper view. Source: chartsrus.com

But maybe the bounce in Dow:Gold will go further, if gold continues down towards the technically important level of $600 (see chart below for a sense of how much air is left to come out of this market after its premature dash to $1000) before the Dow has a chance to catch up. Commodities do crash faster than stocks, but one other thing is for sure: the Dow has a lot further to fall than gold, since in a financial crisis, whether inflationary or deflationary, nobody thinks of stocks as a safe haven.

Source: kitco.com

[*Bragging rights claimed: I sold half of my puts on gold this morning for about a 160% profit, since we could bounce from here.]

Now we know what the strong dollar policy is

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Paulson meant that he was waiting for the US-lead depression to catch up with the rest of the world and bring down rates in Pounds, Euros, Yen and Australian dollars. He’s a genius after all. It’s working:

Source: http://quotes.ino.com/chart/?s=NYBOT_DX

Even gold, that running vote of confidence in paper money, has backed well off the disconcerting 4-digit level:

Source: Kitco.com

How could people suddenly have such a preference for the dollar again? Don’t they know that it, like the Constitution, is just a goddamned piece of paper? Well, Paulson won’t admit this part of the policy, but you may have heard lately about people and companies going broke. Broke means no money (such as dollars). Since dollars accounted for a huge share of the bad loans made in the bubble, the implosion of that debt is akin to a shortage of dollars.

The dollars were never really there, just debt, but when you get a loan, it sure feels and works like money. And when it comes time to pay it back, money is what you need. Right now, nobody seems to have much of it, so those who do are getting the sense that they should hang onto it. That means a slower velocity of money (the pace with which it changes hands), which is deflationary by even by mainstream economists’ definition (M V = P Q).

So, who wants to guess how much longer Peter Schiff can hold out with his inflation case?

Some historical perspective on tax rates and brackets

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The income tax was established in the horrible year of 1913, the same year the US got its central bank.  (This also happens to have been the last year of peace, free trade and the international gold standard before war, depression, fascism and communism destroyed the best of western civilization.)

The tax got its foot in the door with a top marginal rate of 7%, but as soon as the US was conned into WWI, the rate shot up to over 75%. It came down after the war and was 25% through the 1920s, but FDR raised it in the Depression and WWII to over 90%, where it remained until 1963. Few people remember that the top rate remained over 70% until the Reagan administration got it down to 50% and then 28%.

Source: http://www.truthandpolitics.org/top-rates.php

The reason these rates are collectively forgotten is that they were felt by very few. In nominal dollars, the top bracket started at $500,000 in 1913 and went to $2,000,000 in WWI and $5,000,000 during WWII. Multiply these figures by about 20 and 15, respectively, for the equivalents in 2008 dollars. Even the top bracket of $200k in 1980 was big money–it would buy a nice beach house or Park Avenue apartment.

The top bracket was lowered to under $30k by 1988, and while it has since been raised to over $300k, thanks to inflation this is merely an upper middle class income.  It’s worth noting that in the 1920s only the top 20% paid any direct federal tax at all, whereas now the average American works for half the year to cover the sum of various taxes.

The lesson here is to not be surprised if federal rates are hiked to well over 50% in the coming years as the budget deficit shoots past the $1 Trillion mark. And I wouldn’t count on the top bracket going back to $60 million either, now that middle class earners are used to the government calling them rich.

Why is Wachovia not selling stock?

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I really hope they don’t blow their last chance, with the stock still up 90% from the low last month. It would really hurt to be where Washington Mutual is right now. These banks remind me of microcaps I’ve seen, where shareholders get diluted 5:1 just so the company can raise a few months of burn (analogous to writedowns in this case). But Wachovia’s market cap is still $31 billion. That’s good money likely to go poof when this bounce is over, so they had better act fast.

Source: Yahoo! Finance

Here’s WaMu. Not much of a bounce, from three to four dollars. I don’t know what they’re going to do with a market cap of just $7 billion:

Source: Yahoo! Finance

If I were CEO Robert Steel I’d be on the phone every day to Dubai and Singapore begging for money. No scratch that, I’d fly out there and beg in person for as much cash as I could get at whatever price it took, even if it were $4.00. Better a 70% discount from $15 than $4. I’ve seen this happen over and over again with microcaps, when a CEO thinks his company’s troubles are temporary and tries hold out for better terms. But the longer they hold out, the further the stock slips, and before they know it they’re signing over 90% of the company plus a ratchet provision to some New Jersey fund with a history of SEC violations for a couple of million bucks.

These are just two of many huge lenders who cannot lend: welcome to deflationary depression of the 2000s.