They rush to sue everybody! The investment banks who were midwifes to the birth of FB into the public markets weren’t playing fair, they say. They gave their best clients more and better info than they fed to the public.

Well, what…you mean…could you be saying…that the insiders have an edge?

Well…duh…uh…

“The thing about this IPO,” said a friend at lunch, “was that the whole world was watching. That’s why this was so important. It showed everyone how Wall Street operates. Everybody got burned. And they blame Wall Street…because they can see that the pros were being only half honest. And the other half was incompetent.”

Yes, dear reader, our hunch seems to have been right. The FB launch was a disaster for shareholders…for Wall Street…and for the whole cult of equities that has ruled the investment world for the last 3 decades.

“…a six-decade passion for equities has come to an end,” reports The Financial Times.

“Stocks have not been so far out of favor for half a century,” continues the report… “with equity returns virtually flat for more than a decade, the incentive for investors to take risks by funding smaller, more entrepreneurial companies has declined — eroding a process that has traditionally given managers the flexibility they need to grow. Capitalism with less equity finance would follow a much more conservative model.”

In the US, pension funds allocated as much as 70% of their funds to equities 10 years ago. Now, they’re down to 52%.

Everyone is turning his back on stocks…at least, that’s what the FT says. And analysts are already comparing this FT article to the “Death of Equities” cover story in BusinessWeek in 1979…just before a huge new bull market began.

Relative to bonds, stocks haven’t been this cheap since 1956. That was the year when George Ross Goobey announced he was switching the entire portfolio of Imperial Tobacco’s pension fund into stocks.

Goobey turned out to be a genius. Stocks began a great bull market which continued, aside from a countertrend between 1966 and 1982, for the next 56 years!

And now a lot of people think this is another Goobey moment. Stocks are cheap, they say. Get ready for another grand bull market!

What do we say? Nah…

The problems are:

1) This ain’t 1956…this is 2012. The US is no longer on top of its game. It’s no longer in full expansion. It is slipping…sliding…burdened by high costs…zombie industries…and corrupt governments. Growth rates are low…lower than the rate of debt build-up… There is no reason to think America’s capital structure — either stocks or bonds — will become more valuable.

2) Stocks are not cheap. They are only cheap when you compare them to bond yields. But bonds yields are suppressed by a Great Correction…about which more below. In order to be absolutely cheap, US stock prices will have to be cut in half — at least. That would put yields and P/Es near where you can get a 5%+ yield and buy a dollar’s worth of earnings for $5…not $12. Then, stocks will be cheap.

3) Bond yields fall in a correction because people do not want to increase their debt levels; they want to reduce them. They also reduce spending…which lowers business sales and profits, thus making stocks less valuable, not more valuable. As the Great Correction intensifies (and it appears to be doing so now) we can expect stocks to follow the Japanese example. Japan has been in a Great Correction for 22 years. Its stocks have lost 3/4 of their value. They’re still down 75% — nearly a quarter century after the correction began.

Goobey moment? We don’t think so. It’s time to sell stocks, not buy them.

Regards,

Bill Bonner
for The Daily Reckoning

Facebook Fallout: A Lesson in How Wall Street Really Works originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

— Neil Sedaka

What’s the Greek word for ‘chutzpah’? We don’t know either.

But the leader of the communists/socialists, Alexis Tsipras, has it. He must have heard that old saying:

“When you owe your bank $100,000, you can’t sleep at night. When you owe your bank $1 million, your banker can’t sleep at night.”

Since the Greeks owe money all over town, he figured he could thumb his nose at his lenders. He told the Germans that they were trapped. They had no choice. They had to keep the money flowing to Greece. Otherwise, the Greeks would default…and cause Hell to all of Europe.

What’s the word for “oh yeah?” in German? We don’t know that either. But surely the Germans have a word for this occasion. A word that means… “We’ll show you what a moron you are…”

In the event, the Bundesbank did the talking. As to the possibility of the Greeks’ departure:

“The challenges this would create for the euro area and for Germany would be considerable but manageable given prudent crisis management.”

Or, in the words Gerald Ford used in responding to New York City’s request for a loan: ‘Drop Dead.’

Yesterday, the Dow was down as much as 170 points as investors wondered what would happen next. The dollar rose to $1.25 to the euro. By the close of trading, the Dow had managed to pull itself up to only a 6-point loss. Everything else was down, down, down…and it keeps going down. Watch out…investors could panic!

In Europe itself, things seem to be coming to a head. It looks like the Greeks might finally leave…or be pushed out of the euro.

Bloomberg continues:

Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

But switching currencies is not an easy thing to do. Bloomberg continues:

It would most likely be necessary to close borders to stop Greeks smuggling out euros to stash in banks elsewhere. But with hundreds of miles to cover, much of it in inaccessible mountain, wood and scrubland, security forces would be stretched thin.

Simultaneously, police would likely have to manage a dramatic spike in unrest and perhaps more political and criminal violence. Already, there have been isolated examples of Germans — or those suspected of being German — being assaulted in apparent anger over EU-enforced austerity.

Greece’s leaders could decide to deploy the army onto the streets in an attempt to reassure the population and bring calm. But that could prove deeply divisive…

The commentariat still insists that it would be against Germany’s interest to push the Greeks out of the euro. One says Germany would be “shooting itself in the foot” or perhaps the head. Another says it would cost a fortune, $1 trillion, according to a report in the Telegraph:

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”.

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Yes, breaking up is hard to do. It would be costly. But money isn’t everything. People do bad things for money, it’s true. But they do worse things IN SPITE OF money.

Where was the money in WWI? In starving the Ukrainians? In Hitler’s ‘final solution’? In the extermination of the Armenians?

You might find a money motive…but few mass murderers are bottom-line oriented. They’re usually world-improvers…

There are some things more important than money. National pride is one of them. Here’s our point. At some point, people stop counting the costs…they go ‘off their heads’…and begin doing things that don’t really benefit anyone in a financial way. So, it may not matter whether it “makes sense” to kick the Greeks out of the European monetary system or not.

Greece was still in it as of yesterday. Today, anything could happen. But at this stage, the Germans may prefer to blow off a toe or two in order to get rid of them.

We went to Toronto yesterday to visit an old friend who made a lot of money in the mining business but now works in bio-tech. Why did you get out of mining, we wanted to know?

“It just got too crowded. You know what they say about the ‘crowded trade.” Get out. Well, I guess it was the big run-up in commodities a couple of years ago that caused it. Suddenly, everyone was starting up a mining company. And they were getting a lot of investment money. Everybody thought he’d get rich in resources.

“But it doesn’t work that way. The mining business is extremely cyclical. Prices go up. It draws in the marginal players. And the good deals disappear. Everything is too expensive. There’s too much production. Too many projects. Too many promoters. And then prices collapse.

“We’ve already had a good pullback. I’m starting to see some good deals again. But I’m waiting a little longer. I think we’ll get some better deals before this is over.”

Our guess, here at The Daily Reckoning, is that Facebook’s IPO represented some kind of high water market for the virtual economy. It was like Blackstone’s IPO in June 2007, which marked the top in the financial economy.

Now, the economy will shift back to the real things…oil, and copper, and precious metals. It could take years.

But heck, we’re not in any hurry either.

Regards,

Bill Bonner
for The Daily Reckoning

Bracing for a Greek Exit originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

— Reminiscences of a Stock Operator, circa 1923

Poor Zuckerberg. He’s got all those Facebook shares. And they’re dropping in price. The stock closed a bit over $31yesterday…and then kept sinking… It was down to $30 in afterhours trading.

What did you expect? The company has sales of $4 billion. IF…IF…it were able to claw out a 10% profit margin…and IF a fair multiple for its earnings were, say, 10…the company would be worth $4 billion. Not $100 billion. Four billion dollars. And instead of having shares valued at $15 billion, Mr. Zuckerberg would have shares worth about $800 million.

The Dow itself was flat yesterday. Not a very good showing after so many down days. We’ll keep our ‘Crash Alert’ flag up. The bottom could drop out at any time.

The Facebook IPO looks more and more like the end of an era. The end of the pie-in-the-sky social network era. The end of the post-crisis recovery rally. The end of the public’s residual confidence in Wall Street. The end of America’s youthful energy…its era of growth, innocence and hope for the future.

Now, growth rates are low; they’ve been falling for the last 30 years. The baby boomers are neither booming nor babies. Stocks are passé…people want bonds now. And 63% of voters think their children will be worse off than they are.

At least Zuckerberg has it made. He’s got about 500 million shares and options. But every two dollars they fall costs him about $1 billion. So, he’s lost $5 billion since the company went public on Friday.

Still, we’re not going to feel sorry for him. He’s still got $15 billion or so.

Not that we care how much money he’s got. He could have twice as much; he’d still be a putz. We saw the movie!

Seriously, Americans care far too much about money. That’s what people who don’t have it say. They say that too much money is a sign of greed. And that people with too much money can’t relate to everyone else. We lose our sense of community…our public space. People with money live separately from the rest of us. They buy elections and use too much energy…and leave small tips. They’ve got too much power, too much influence, and too much of the pie.

Paul Krugman, Thomas Friedman and Barack Obama want to solve this problem by taking money away from the people who have it. And making it harder for them to earn more.

The guys at J.P. Morgan lost a few billion. You’d think the anti-money crowd would be happy about that. Instead, they want to make a federal case out of it. Practically every pundit is calling for more regulation. “If even good bankers can lose so much,” they say, “we’ve got to get control of them!”

The whole idea that they can regulate risk out of the system is loony. It doesn’t work that way. The more they regulate, the more they distort the market, and the more mistakes investors make.

Investors are buying US treasury bonds, for example, by the boatload. Why? Because the regulators at the Fed have taken the risk out of buying bonds. If interest rates rise, the Fed will buy bonds itself.

Dear Readers and connoisseurs of regulatory FUBARity will appreciate the flexibility of America’s central bank. Its aim is to drive investors into risky assets…by suppressing yields on “safe” treasuries. The unintended consequence is to create depression-like yields…and capital gains for bond buyers. Investors flee stocks…and go into the Treasury bonds the Fed was trying to get them out of. Thus does the Fed manage to bend its right leg far enough to kick its own derriere.

People who don’t like the rich should spend a little time thinking about how the rich got that way. Were they smarter than others? Greedier? Or just luckier?

In our humble observation, we’d say they were a little of all those things. But most of the big increase in wealth the rich enjoyed has come thanks to those same regulators whom the feds want to sic on them.

Yes, dear reader, the rich got richer because of the fixers…not because of the rich themselves. In 1971, Richard Nixon changed America’s money. The old money — backed by gold — flowed to the hardworking producers. It was saved, invested, and put to work. This new money had different ideas. It ran around in different circles. It preferred a different class of friends — bankers, money managers, investors, speculators, venture capitalists, derivative mongers, private equity operators…

You can see this shift illustrated in the difference between Mitt Romney and his father. The ol’ man ran an auto company. He made cars. That’s where the money was back then. He made the Rambler. Remember that? We had one. It was cheap. It was ugly. It ran. What more could you ask for?

But the son never made anything…but money itself. He didn’t run productive companies. Instead, at Bain Capital he was a leading member of the new class of people who fiddled with them.

By 2007, this class had gotten far too big for its britches. The whole capital structure began to wobble. Left alone, it would have crashed to the ground…bringing rich people down to earth with it.

Left to its own devices — without the generous support of the feds — the Dow might have fallen to 6,000 in 2008…and kept falling. And it probably would have brought down J.P. Morgan…and Goldman Sachs…the Bank of America and most of the rest of Wall Street. Even GM, which by then had become a finance company, would have gone out of business.

And today…there wouldn’t be nearly as many rich people to complain about. Problem solved.

Instead, the fixers fixed it so the fixees stayed fixed.

Hey…here’s another bubble…getting ready to blow up. Bubble bubble student trouble:

Student Loans With Over $1 Trillion are Likely One of the Next Hindenburg Zeppelin Financial Infernos

Barry James Dyke, author of The Pirates of Manhattan II: Highway to Serfdom predicts that student loans, in excess of $1 trillion, will likely be one of the country’s next financial infernos.

Federal student loans interest rates will rise to 6.8% on July 1st 2012 from their current 3.4% base if Congress does not act. Banking lobbies oppose any reduction in interest rates. If Congress does nothing, the average student’s $23 thousand subsidized loan costs will increase an additional $5,000 over a ten year period.

The author states, “Student loans are a form of indentured servitude as student loans cannot be discharged in bankruptcy. Student loans do not die with death. Collection agencies can call day and night to collect student loan debts. Garnishment to pay student loan debt is common. Students are not getting enough well-paying jobs to pay back these enormous loans, yet The Department of Education through the Department of Treasury can attach tax refunds to pay off student loans. What is more, our Congress drove the getaway car for academia and the banks in 2005 with the Bankruptcy Abuse and Consumer Protection Act of 2005 — which turned student loans into non-dischargeable debt.”

According to the Department of Education, two thirds of students who earn a bachelor degree use some type of loan to finance their education with an average loan of roughly $23 thousand. The New York Times recently reported that as much as 94% of students borrow to get a college degree.

The taxpayer underwrites roughly $105 billion a year in Title IV student loans a year, with $24 billion going to for profit schools owned by Wall Street asset managers. Student loans guaranteed by the taxpayer are a major source of revenue for the US higher educational system and if default rates accelerate, it could bring about a Greece like debt problem to the nation’s colleges.

“Excessive borrowing for an education will be a dark cloud hanging over this generation for decades,” claims Dyke. ”Default rates on student loans for traditional undergraduate and graduate rates are currently as high as 15.8%, and as high as 48% for for-profit colleges. The New York Fed reports that nearly one in four student loan holders are falling behind on their student loan payments.

Regards,

Bill Bonner
for The Daily Reckoning

The Delusion of Regulating Risk originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The Dow rose 135 points. Not very impressive, after so many down days.

Everything has been sinking… Stocks, commodities, oil…

In Europe and emerging markets the damage has been even worse than in the US. Even China is slowing down.

It’s just like…well…a Great Correction!

And look at Facebook. We knew the Facebook IPO would cost a lot of saps a lot of money. But we didn’t expect it to happen so fast. We figured Wall Street would get a chance to squeeze the lumpen a little longer before they fled the market.

As it turned out, the mom and pop investors came into the market to buy Facebook and got whacked right away.

Here’s one completely un-savvy buyer quoted in The New York Post:

“I’m very psychic when it comes to stocks, I really am. I have no retirement, I have no pension, so I try to make money on the market.”

The press reported that cab drivers and plumbers were buying Facebook shares on the first day…for the wrong reasons, of course. One buyer had recently had his house foreclosed. He was buying the stock, he said, to help put his children through school. Good luck on that!

Colleague Justice Litle called it ‘Facebust!’ The hype sent shares up in early trading on Friday. The insiders who moved fast were able to cash out at over $40. But then, the selling overpowered the buying. Justice, writing over the weekend:

Countless idiots, er, optimists expected Facebook shares to pop 50% or more on their first day of trading, not taking into account the fact that, when EVERYONE IN THE WORLD has the same universally telegraphed notion as you — with ability to execute by mashing a mouse button — it is probably not the sharpest play.

At any rate, after a very anemic “pop” reminiscent of discount bin champagne purchased from a gas station, FB shares fell straight to the $38 level (where the IPO was officially priced).

At $38 the underwriter investment banks came in, vigorously “defending the shares” as a matter of business honor. Without the heavy buying of Morgan Stanley and others, for the express purpose of propping up the shares, FB could have seen a death spiral on its first day of trading. This would have forever marred said underwriters’ reputations, which is why it didn’t happen.

(Investment banks are paid a very pretty penny for bringing an IPO to market; one of the services they provide, in exchange for that fat payday, is propping up the shares, i.e. “creating a price floor,” with their own dough as need be, to keep the offering from looking like a dog. This is completely legal and sanctioned by the SEC.)

The Facebook IPO was a sort of psychological fulcrum point. It was perhaps the biggest public participation event of all time, in terms of getting “the man on the street” to take a flyer on a stock. When such tomfoolery works out badly, Joe Sixpack’s taste for risk — the mother’s milk of Wall Street — is that much further soured. (It should be noted that a whole raft of other “social media” stocks — Zynga etc. etc. — fell hard when Facebook came up short.)

In addition to the above, virtually every large mutual fund and long-only money manager on Wall Street felt compelled to purchase Facebook shares (for fear of missing out on “the next Apple” had they not).

If the Facebook hype fails, then — if the Maginot line of $38 price support gives way — it could have an incredibly demoralizing impact on the market as a whole, alongside the ominous “doom loop” that is Greece.

Such are the conditions in which “unease” turns to “maybe we should get out,” which then has a nasty habit of escalating to “GET ME OUT NOW,” acted upon by groupthink investors en masse.

And yesterday, the Maginot Line gave way…

“Market Up, But Investors Dump Facebook,” was the headline report from Reuters. The stock sold off…finishing the day down 11%. What happened to the underwriters, everyone wanted to know. The stock fell below the IPO price on its first full day of trading. Apparently, Wall Street was not willing to come to the rescue — not with its own money.

We had a hunch that Facebook might become the hinge event for this stock market. Shares had been selling off for two weeks prior to the FB launch. But the selling was orderly.

After so much selling for so many days, buyers are bound to come back. So the Dow went up yesterday.

But the FB hinge has creaked…and squeaked…and warned retail investors. They came in the door. They didn’t like what they saw. Many will take to the exits quickly. Others will stick around, until a growing sense of revulsion, mixed with losses, eventually pushes them out.

Ray Dalio calls it a “beautiful de-leveraging.” We don’t see the beauty in it. But we admire it for what it is — a natural and necessary response to the grotesque debt build-up of the last half century. It may not be beautiful, but it is doing its work as best it can under the circumstances.

Households are lowering their debt levels. Businesses are hoarding cash. The private sector, generally, is getting itself into better shape. All very natural…and all things in nature have a beauty, of sorts.

It doesn’t hurt that interest rates are so low. Even the price of gasoline is going down. In this sense, the Great Correction itself is helping…beautifully. The whole world economy is slowing down, lowering prices for energy and housing — two of the biggest items in the household budget.

The way to cut debt is to first cut expenses. Then, you have more money available to pay off your loans. And it’s fairly easy to cut expenses when interest rates are so low.

In 2005 and 2006 we advised Dear Readers to sell their overpriced real estate and rent. Now it’s time to reverse the procedure. At today’s rates…and today’s prices…it’s time to buy.

Here’s why:

In some areas, house prices are down 50%

In those very same areas rents have risen.

At 3% (which you can get on a 15-year fixed rate mortgage) your monthly mortgage payment might be only HALF your rent payment. So you can save money there.

Then, you deduct the interest from your taxes.

And then, the Fed gives you a bonanza when its monetary inflation finally turns into consumer price inflation…or even hyperinflation. Your mortgage balance could be reduced 10%…30%…80% in just a few months.

In other words, you get paid to wait for the feds to wipe out your mortgage!

Cut your expenses. Get into cash. Remember, our ‘Crash Alert’ flag is up. And a lovely correction is underway.

Tomorrow: how the vandals in Washington and at the Fed are defacing the “beautiful de-leveraging.”

Regards,

Bill Bonner
for The Daily Reckoning

Is Facebook the Rusty Hinge of the Stock Market? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Day after day for the last 2 weeks…almost everything has been grinding down.

Stocks, oil, copper, bond yields… It looks as though the whole world economy is slowing down. China, India, America, Europe. All are slowing.

How much longer can this slow down continue?

A lot longer!

We should have some bounce in the markets this week. But beware. Our “Crash Alert” flag is up.

Meanwhile…

We spent the weekend in Charlottesville, VA…at the UVA graduation for our son, Henry.

The University of Virginia is probably the most handsome campus in America. Especially in May. It has a green central esplanade bordered by columned buildings in the Greco-Roman style. At one end is the famous Rotunda. Flowers and trees bloom everywhere.

We know of no other president who achieved anything equivalent. Some waged dubious wars. Some launched weasely social welfare programs. The best of them idled away their careers, shaking hands, making deals, and otherwise shuffling offstage leaving it no better or worse than it was when the curtain first went up. But Mr. Jefferson left an architectural monument that is breathtaking. He would be proud of it today.

It is too bad that the soliloquies of its 2012 commencement exercises came nowhere close to the grandeur of the setting itself. Instead, there was nothing more than the usual hollow, air-head do-goodism you associate with graduation speakers. One urges students to go out in the world and ‘make a difference.’ Another tells them to use their educations for some great public purpose. Another insists that they become the leaders of tomorrow. All declare that their years spent (there was no mention of the money) at UVA were a good investment…both formative and decisive…making them the determined, capable people that they have allegedly become.

Jefferson would roll his eyes.

Herewith, we offer an alternative graduation speech. An honest address to the class of 2012. One we will never be invited to give:

I see you before me. Arranged in alphabetical order. From Mr. Aaron from Alexandria to Mr. Zyman of Richmond. You are all suited up…wearing the ancient vêtements that have marked men of learning for hundreds of years. And in a few minutes you will move the tassels on your funny little hats from the right side to the left, indicating that you have been awarded a bachelor’s degree. This signifies that you have joined the few…the elite…the learned.

But how many of you really are learned? How many are imposters? How many are capable of writing a simple essay? How many can decline a Latin verb? How many have mastered calculus and quantum physics?

You’ve heard about the group of men at the old English club. The waiter comes up and asks if they would like some hock. One of them cleverly says ‘hic, haec, hoc.’ So the waiter comes back with drinks for all of them except him. When he asks why, the waiter replies: ‘But sir, you declined the hock.’

How many of you got that joke?

I only ask the question because I am suspicious. Many college grads of today could hardly be called intellectuals. Many have hardly used their brains at all. Some have merely spent the last four years learning a few tricks and the latest jargon of a trade. Marketing, for example. Or journalism. Marketing evolves so fast that whatever you learn here will be mostly obsolete by the time you get a job. If you ever get a job. Besides, the important points could be picked up in a few weeks on the job anyway.

As to journalism, there are a few skills you need to know, which you could pick up in an afternoon; the rest is undifferentiated. You look. You ask questions. You think. And you tell the world what you come up with. No college necessary. In fact, college may hinder you. Instead of using your own eyes and your own brain, and developing your own way of looking at things, you spent your best years in class absorbing the claptrap du jour of the mainstream media.

Others among you have read popular novels or a few history books. You think you know something. Maybe you call yourself a historian. Or perhaps a literary critic. My advice is to keep that to yourself. You have paid a lot of money for something that millions of other people — just as smart as you are — do for a hobby or past-time. There’s not much real knowledge in either of those things…just opinions and ideas which are more vanity and entertainment than genuine learning.

Same thing for those who have spent years studying ‘politics’ or ‘economics.’ Drop the pretense that you know something. You don’t. All you have is a full plate of opinions…most of them preposterous…and most of them indigestible by a thoughtful person.

I don’t doubt that many of the courses offered here — to say nothing of the beer parties — are interesting and fun. But are they worth $160,000 and 4 years of your life? How about some of these titles that I got out of the Course Catalog for 2012: “Fantasy and Values” or “Black Women Authors” or the “Cinema of India” or “Feminist Theory in Anthropology,” or “Creole Narratives” or “Zen” or “Business Ethics”…?

As to that last one, when you get out in the real world, which unless you go to graduate school is happening as of tomorrow…you will find that it is very unlike the make-believe world at this university.

They say that by going to a university you open yourself up to a whole world of knowledge. Yes, perhaps you do gain easy access to a whole world of simplified knowledge and politically correct opinions. But you also cut yourself off from a larger world of real knowledge…the kind you get by doing and observing.

In your course on Business Ethics, for example, you are no-doubt exposed to a number of ideas and theories on the subject. You’d be better off learning it on the job. First, instead of paying someone to teach you, you would get paid for learning. Besides, you can get the ideas and information in the course materials by reading a few $29 books…or read them online for even less. That is true for almost all the coursework in the arts and social sciences. It is all available to you at much less expense. So, in a sense, you have been a sap to pay so much for it.

But you would do even better to combine your reading with real life experience. And in real life you would quickly discover that things are much more complex, much more nuanced, and much less clear than you thought. That’s true in business ethics as it is in everything else. As the Jewish philosopher Hillel explained, the core idea of the Torah, the Bible, the Sermon on the Mount, and business ethics is as simple as this: if you wouldn’t want someone to do it to you, don’t do it to someone else. The rest is detail. And the details depend on the situation, which you only encounter in its full complexity, when you are face to face with it. You don’t encounter it in a book…or in your lecture halls…or in your seminars on campus. So, the time you spend on campus actually prevents and delays you from coming to grips with the real problems you will face in real life…and thus retards your education.

So, you’ve spent — or your parents…or the taxpayers have spent — $150,000 on your education. And you’re retarded.

And now you enter the job market. And don’t think you’ll have an easy time of it. Because previous graduates of this university and others have applied the lessons they learned in school and made a god-awful mess of the economy. There are 14 million people without jobs. About one in 20 young people is jobless. You’re just another one. Frankly, I’m surprised the unemployment rate for young people isn’t higher…given how worthless most young people are.

Why so many unemployed? Because economics professors have taught 3 generations of economists that a command and control economy — to a point — will work. It won’t. But a command and control economy is good for economists and do-gooders, who get jobs commanding.

Economists convinced policymakers…who have their own corrupt reasons for wanting to twist up the economy — to control the price of labor…and prevent it from falling, using a variety of tools and subterfuges. By the way, a ‘subterfuge’ is defined in the dictionary as “an artifice or expedient used to evade a rule, escape a consequence, hide something, etc.”

I mention that because I know that half of you are functionally illiterate. MSNBC recently reported that:

More than 50 percent of students at four-year schools and more than 75 percent at two-year colleges lacked the skills to perform complex literacy tasks.

The results cut across three types of literacy: analyzing news stories and other prose, understanding documents and having math skills needed for checkbooks or restaurant tips.

But one of the subterfuges used by the feds that makes it so hard for you to get a job is student loans. They’ve lent out more than $1 trillion — some of it to you. Rather than work for lower wages, students borrow money at low teaser rates…and go to school. On average, you have about $20,000 worth of debt when you leave this university. And I’ll bet that a lot of you won’t pay up.

But I’ll give you some advice. String your lenders out as long as possible. Eventually, the same college-educated dimbulbs who perverted the employment market will destroy the dollar. Avoid paying your loan long enough and it will probably go away…

Of course, the outlook is not all bad. Some of you will find good jobs — those who have used your time wisely, by studying science and engineering. It’s only the rest of you who are screwed.

The feds keep the price of labor too high. Employers would have to pay you more than you are worth. So, they are reluctant to hire you.

Employers know damned well too that you’ve been retarded by your education. So, they’re leery of hiring you. Especially if they see you’ve taken a class in business ethics. They think you’ll stab them in the back the first chance you get.

And they’re probably right. Because you’ve been told to go forth and create a better world. I’ve seen the surveys. Two out of three of you want to work for non-profit organizations. Why is that? Because your whole weltanschauung…well, I mean, your worldview…has been corroded by your education. You think business is greedy…selfish…and stupid. But where they hell do you think non-profits get their money? Where does the government get its money? How can our society afford to let you waste so many years in college?

All of this money has to come from the productive sector of the economy.

You think you can do good by working for the government or a non-profit organization? Well, I’ve got news. You’ll be a parasite, just like the rest of them. A leech, sucking the life out of the real, productive economy. That’s another reason it’s so hard for you to find a job. The more people who fantasize about getting paid for doing good…for trying to make a better world…the worse the real world gets. Because that leaves fewer people actually doing the kind of real world work that makes the world richer and more prosperous…and better organized…safer and healthier.

So, forget about making the world a better place. Forget about leading anybody anywhere. Forget about thinking you know something. You don’t know enough to lead yourself, let alone anyone else. And most of what you think you know is worthless claptrap. Pseudo-knowledge, in other words.

Finally, don’t try to be a leader. The world doesn’t need any more leaders. It’s got too many already.

Instead, try to find a real job in the real world. Do it well. And mind your own business.

Thank you. And good luck.

Regards,

Bill Bonner
for The Daily Reckoning

To the Class of 2012 originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

If we move to Palm Beach, will we ever be able to visit our beloved Maryland homeland again?

The Financial Times reports that thousands of wealthy French people are now moving to London. Their motive? They want to escape the taxes proposed by France’s new president, Francois Hollande.

Should the French impose an exit tax on these “ex-patriots”? Should it then bar them from visiting France?

Of course not.

In England in 1215, the right to travel was enshrined in Article 42 of the Magna Carta:

It shall be lawful to any person, for the future, to go out of our kingdom, and to return, safely and securely, by land or by water, saving his allegiance to us, unless it be in time of war, for some short space, for the common good of the kingdom: excepting prisoners and outlaws, according to the laws of the land, and of the people of the nation at war against us, and Merchants who shall be treated as it is said above.

Here’s the United Nations Universal Declaration of Human Rights. Article 13:

(1) Everyone has the right to freedom of movement and residence within the borders of each State.
(2) Everyone has the right to leave any country, including his own, and to return to his country.

Article 12 of the International Covenant on Civil and Political Rights incorporates this right into treaty law:

(1) Everyone lawfully within the territory of a State shall, within that territory, have the right to liberty of movement and freedom to choose his residence.
(2) Everyone shall be free to leave any country, including his own.
(3) The above-mentioned rights shall not be subject to any restrictions except those provided by law, are necessary to protect national security, public order (ordre public), public health or morals or the rights and freedoms of others, and are consistent with the other rights recognized in the present Covenant.

People should be able to move where they want, no? They should be able to look for lower tax places to live, shouldn’t they? After all, we’re Americans, aren’t we? Aren’t we all descendants of people who tried to improve their lives by moving to a new place?

Apparently, a lot of Americans don’t think so. Facebook is going public. And one of Facebook’s founders has moved to Singapore. He will save, by one estimate, $67 million in taxes by giving up his US citizenship. He says that’s not the reason he gave it up. But you can believe what you want.

And now the politicos are up in arms. Mr. Saverin has helped to give them an asset worth about $100 billion. Are they grateful? Do they bend down and kiss his derriere?

No! They want to tax him even more heavily…and prevent him from ever setting foot in the US again.

Yes, dear reader, there is no thought so dumb…so short-sighted…so low…that it won’t become the law of the land. Bloomberg reports:

Chuck Schumer, D-N.Y., has a status update for Facebook co-founder Eduardo Saverin: Stop attempting to dodge your taxes by renouncing your US citizenship or never come to back to the US again.

In September 2011, Saverin relinquished his US citizenship before the company announced its planned initial public offering of stock, which will debut this week. The move was likely a financial one, as he owns an estimated 4 percent of Facebook and stands to make $4 billion when the company goes public. Saverin would reap the benefit of tax savings by becoming a permanent resident of Singapore, which levies no capital gains taxes.

At a news conference this morning, Sens. Schumer and Bob Casey, D-Pa., will unveil the “Ex-PATRIOT” — “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” — Act to respond directly to Saverin’s move, which they dub a “scheme” that would “help him duck up to $67 million in taxes.”

The senators will call Saverin’s move an “outrage” and will outline their plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their proposal would also impose a mandatory 30 percent tax on the capital gains of anybody who renounces their US citizenship.

The plan would bar individuals like Saverin from ever reentering the United States again.

If Chuck Schumer has his way, entrepreneurs like Eduardo Saverin will think twice before setting up shop in America!

[Editor’s Note: After yesterday’s column, Run, Saverin! Run!r, we were delighted to discover that a brave Fellow Reckoner had actually linked to The Daily Reckoning...on Chuck Schumer’s Facebook page. Ha! Feel free to “like” our bitty missive here and to “share” it on Facebook. Call it non-violent protest. And of course, you can always “be our friend” here.]

Down, down, down…day after day… Stocks down. Yields down.

But what’s this? Gold rose nearly $40 yesterday.

Our “Alert Flag” went up yesterday morning. The Dow fell 156 points during the day. Not that there’s any connection. Most likely, after so many down days, stocks will bounce today. But watch out…

We have a hunch.

Facebook is the biggest deal in the stock market…perhaps ever. It’s a company that didn’t even exist 10 years ago. We know all about the company’s founding; we saw the movie. Twice. Because our daughter has a role in the movie. She’s the waitress in the scene where Zuckerberg means Sean Parker.

Not a bad flick. But from an investment standpoint, Facebook is probably one of the worst moves you can make. Most likely, it will be gone 10 years from now. $100 billion of market capitalization will disappear. Poof! It’s just a website, after all. We looked at a Facebook page, once… We couldn’t figure out why anyone would waste his time.

The trouble with new technology is that in a few years it’s old technology.

Here’s our hunch: The Facebook IPO may mark a major peak…and the beginning of a major bear market on Wall Street.

It happens every time. There’s a big, big deal. And then, it’s over. We’d give you some examples, if we could think of them. But we can’t. You’ll just have to trust us on this.

We don’t really have any evidence or logic to back this up. It’s just a hunch.

But our intuition tells us that when investors finally get the full Facebook treatment, they are going to be turned off by the stock market and Wall Street. Not only will the company turn out to be not worth a fraction of the IPO price…investors will also get a clearer picture of how Wall Street really works.

About that IPO… The idea is to generate a lot of excitement…a frenzy…so that people are eager to get the shares. And with all these Facebook users, who like…like…Facebook…and think they can tell a good investment when they see one…it ought to be easy to create a buying frenzy. Besides, everyone knows shares are intentionally priced below what their backers believe they can get for them. This causes the share-price to “pop” right after the IPO.

Of course, the distribution is tightly controlled. You have to be an insider to get IPO shares. Say…you’ll get them at about $40…and then, you expect them to go to $50 on the “pop.” If it works out as planned, you make $10 per share. This is a lot of money. Easy money. So, the insiders all want a piece of the action.

How do you get to be an “insider”? You have to be a friend of Morgan Stanley. Which is to say, you help Morgan Stanley make money. How? For example, if you are a pension fund or hedge fund you put through a lot of trades. Morgan Stanley makes money on the churn. You make money on the churn, too. Customers don’t make any money on the churn. They pay for every transaction. But who cares about them?

Everyone is convinced that buying…selling…and trading investments makes money. As long as the illusion lasts, Wall Street is happy. The customers are happy too…more or less. They’re participating in the Great Illusion — all trying to make money without actually doing anything.

So everyone churns. And the more you churn with Morgan Stanley the more likely you are to get an allocation of IPO stock. There could be about 50 million shares handed to insiders in this manner. Let’s say they go up $10 in the “pop.” That’s half a billion in gains …in only a few hours.

Dan Ariely explains:

Morgan Stanley and the rest of the investment banks involved will … make sure that their favorite fund manager client “friends” are given lots of free money. Assuming that these “friends” are given 75% of the total number of IPO shares, or a total of 291 million shares, and assuming that the stock does rise from $40 to $50, then these fund managers will collectively, in one day, make $2.9 billion dollars in realized or unrealized profits. That’s right, 2.9 BILLION DOLLARS.

…where and out of whose pocket does this money come from?

Well, just think of it this way… Let’s assume you own a very expensive piece of waterfront real estate, and you hire a broker to sell it for you. After exploring the market and after getting indications of interest, your broker advises you that $10 million would be a great price for your home. You meet with the potential buyers and decide to sell it for $10 million. After the $1 million commission you have to pay your broker, your net proceeds are $9 million. An hour later, you drive by the house and see your broker in the driveway shaking hands with some different people. You pull over to see what’s going on, and you find that the people you just sold the house to for $10 million are very close friends of your broker. To your dismay, you also find out that those friends just sold your (former) house to somebody else for $15 million.

The same exact game is going on here… By the time you drive around the block, these folks will have sold their shares at $50 per share.

I am not sure about you, but I find all of this very depressing.

Regards,

Bill Bonner,
for The Daily Reckoning

Expatriation in the Wake of the Facebook IPO originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Dow down.

Oil down.

Yields down.

Gold down.

What’s going on?

Yesterday, we drove into Washington, DC, to the Argentine embassy. Friends from Salta were hosting a wine-tasting. It seemed strange to see our Argentine friends — who live in a remote corner of the country — in our nation’s capital. But it was a pleasure to see them…and taste their very strong, high altitude malbecs.

Washington has largely escaped the financial crisis. There is plenty of money in the city, but hardly anyone in town knows anything about economics or finance. It is politics they care about. That’s how they get money, in the old fashioned way — by taking it away from someone else. So, it is only natural that they believe the world of economics should be approached in the same way — by brute force. Command, control, and central planning…that is Washington’s method. That’s what politics is all about.

Of course, politics and economics are natural enemies, not natural friends. An economy works best when willing buyers and sellers, investors and entrepreneurs, consumers and producers are able to get together on their own terms. As Adam Smith explained it, they all look out for themselves…and are all guided, as if by an “invisible hand” towards an outcome that is best for the group. Hayek described it in more detail. Willing buyers and sellers set prices freely. Those prices are rich in information. They tell investors where to invest…and shoppers where to shop…and businessmen where to apply themselves.

The more you interfere with this process, the more screwed up things get. Artificial prices — such as the price of credit set by the Fed — send the wrong signal. Investors make mistakes. Resources are misallocated. Bubbles are pumped up…and then, blown up.

But Washington doesn’t care. It’s not really the gross welfare or wealth of the people it worries about, but the relative wealth. “Fairness” they call it. And relative to the rest of the nation, Washingtonians are getting richer. That’s fair, isn’t it?

Washington is a bad place to run over a pedestrian. If he is a white male, he is almost certainly a lawyer. So, if you run over him…our advice is to back up quickly and run over him again. Finish him off. Otherwise he’ll sue you.

The houses in Georgetown and the Northwest section of the city are handsome. They have carefully-tended lawns and gardens…and a Prius or Volvo parked in front. DC residents — at least those in the Northwest of the city and the Virginia suburbs — are conscious of their ‘carbon footprint.’ They recycle. They are well-meaning, earnest and public spirited… Just the sort of people you would like to run over, in other words.

Driving on Massachusetts Avenue…then up Wisconsin Avenue…and then along MacArthur Blvd…we passed many of the places we’ve heard so much about over the years. Fannie Mae’s huge headquarters…Homeland Security…the Brookings Institution…SAIS…the White House…the Capitol…the US Treasury…the Eccles Building, where the Fed is headquartered… It’s all there.

“It’s amazing how much damage has been done from such a little geographic area,” Elizabeth remarked.

The question we have been asking ourselves for the last 5 years.

Which way will America go? To Tokyo or Buenos Aires? To deflation…or to inflation? To a long, cold drawn-out slump…or a fiery blow-up?

Mr. Market is pushing the US towards Japan. No question about that. After 60 years of credit expansion we now have a natural credit contraction. Households and businesses are paying down…and defaulting on…debt. They’re hoarding cash rather than splashing it around.

For example, young people are driving less…and buying fewer ‘starter houses.’ Gasoline use in America is going down. So are housing prices.

Part of the reason young people are buying fewer houses is that they can’t afford them. The Financial Times reports:

“Young put off buying homes under weight of student debt.”

Yes, dear reader, the feds practically force-fed young people student loans. Like shyster subprime lenders, the feds offered students money at low teaser rates. Now, the rates are supposed to double.

Of course, the poor student thought he would be in fat city when he got out of school. He thought he’d have a well-paying job!

Now, he’ll be lucky to have any job at all…

It looked for a while as if the economy really were recovering. At least, that’s what everybody said. But now Mr. Market has asserted himself again.

Yesterday, US stocks fell again. Oil, copper, Treasury bond yields…everything is going down.

Truck buyers were canceling orders at the fastest rate in two years.

As to housing prices, the FT continues:

The number of first-time buyers has plunged — they comprised 37 per cent of home purchases in 2011, down from 51 per cent in 2010 — sapping the struggling housing market of a traditional source of vitality.

High levels of student debt, along with tighter mortgage requirements and stagnant wages, are forcing young people to delay buying their first homes.

Is there any fed policy that hasn’t backfired? Not that we know of. And the biggest fed policy now — aside from world domination — is the attempt to hijack Mr. Market’s plane, en route to Tokyo, and force it to Buenos Aires.

The feds have put their hearts and souls into this effort. Too bad they haven’t put their brains to it too!

Regards,

Bill Bonner
for The Daily Reckoning

Immune to the Financial Crisis originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

— Andrew Mellon

Down, down, down…

Oil is at a 5-month low. Russian stocks are 20% below their high. Commodities are back to 2010 levels.

Everything is going down. Even gold.

Wait a minute. Since we know from Einstein that all motion is relative, everything CAN’T be going down. If everything were going down, everything would be standing still. Something must be going up as a point of reference.

So what’s going up?

Cash!

Cash is going up against oil, houses, stocks, copper, commodities of all sorts…and just about everything else.

Cash is king.

Why? Because we are in a Great Correction. And in a great correction, prices are corrected. In a bubble, prices tend to go up. This tends to push up animal spirits…encouraging investors and business people to do things that they will later regret. They build houses no one can afford…and shopping centers no one really needs. Then, these things — and the loans against them — appear as “assets” on the books of banks, pension funds, hedge funds, private equity outfits…you name it.

Later, as the correction continues, markets discover that these ‘assets’ are not worth quite as much as they thought. Prices go down. Some ‘assets’ become liabilities. They are underwater, with more debt than equity.

Labor rates fall too. There are fewer projects that “make sense”…and they need fewer workers. Business falls off. Unemployment goes up. Salaries go down.

As prices fall, they must fall against something. So they fall against cash. Cash becomes more valuable. You can buy more real assets with every unit. People who hold their cash through a correction usually do well. They are able to buy quality assets, at the bottom, at large discounts to their previous prices.

That’s why so many people are willing to lend money to the feds for such low interest rates. They figure it’s as good as cash.

All this is obvious and hardly worth mentioning. In a better world, we’d all know what was going on…and we could all predict what would happen next: the mistakes would be written off, defaulted on, foreclosed, and marked down…

…and then, the economy could get up, dust itself off, and get back to work.

That’s what used to happen. The first American depression came in 1819. Cotton prices collapsed. Farms were foreclosed. Banks failed. It was over by 1821 — 2 years later.

Then, there was the Panic of 1837. New York brokerage houses failed. Farm prices collapsed. A bank president committed suicide. But it was over by 1843 — 6 years later.

The Panic of 1857 was triggered by the bankruptcy of Ohio Life Insurance and Trust Company. Railroad speculators were ruined. Stocks plunged. Nearly a thousand companies went broke. The resulting depression was hard…but short. Recovery began two years later.

The Panic of 1873 led to a 5-year depression. And the Panic of 1893 hit even harder — with a crash on Wall Street, 16,000 business failures and a 15% unemployment rate. Four years later, the economy was running hot again.

The aftermath of WWI brought the Depression of 1921. By many measures it was as bad as the Great Depression. But it was quick — two years later it was over.

And then, came the Great Depression itself. What made it so great? The feds! Until the 1930s, the feds let the economy take care of itself. Interest rates? They were set by willing buyers and sellers, not by economists working for the government. Monetary policy? Fiscal policy? There were none.

When it was time for a correction, Mr. Market took out a wrecking ball and knocked down the mistakes of the previous boom. The debris was quickly swept away…and it was off to the races again.

Even as late as the 1930s, Andrew Mellon, then Secretary of the US Treasury, advised president Hoover to “liquidate” everything. His idea was to give the correction a helping hand… Rather than wait for the correction to do its work, he’d swing the wrecking ball himself.

That is just what he did in the 1920s. He was Treasury Secretary in 1921 too. And instead of trying to fight the slump of ’21-’23, he helped it on its way. Instead of “countercyclical stimulus” measures, he gave the nation “pro-cyclical” measures. That is, he didn’t increase government spending in order to provide the economy with fiscal stimulus. He cut government spending in order to leave more money in the hands of consumers, investors, and business people.

And it worked. Scarcely 24 months after the beginning of the depression it was over…with unemployment back to 5%.

But the world changed between ’21 and ’31. By the ’30s, the feds had the bit between their teeth. In Germany, the Nazis were already consolidating power and gathering tinder for the Reichstag. In Italy, Mussolini and his gang were wearing funny outfits and plotting out an empire. Stalin was reorganizing Soviet agriculture — which would result in millions of deaths by starvation. And in the western democracies, the meddlers were taking over too.

Instead of thanking Mellon for his input, the feds tried to impeach him! In a few months, Mellon was gone. And then US economic policy was firmly in the hands of people who thought they could do better.

The gist of the new policy was that corrections must be stopped — at all cost. Depressions must be fought. Bankruptcies must be prevented… Markets must be controlled! By bureaucrats!

This new policy was what made the Great Depression great. Mr. Market may have wanted to correct his mistakes; but the feds wouldn’t let him. The depression continued, off and on, throughout the ’30s…and the ’40s too. It didn’t really end until the 1950s.

You might expect the feds would have learned from that experience. Compared to the laissez faire policies of Andrew Mellon their activism was a complete, miserable failure.

Learn? Are you kidding? We’re now in year the 6th year of the crisis that began with the collapse of subprime in April ’07. Does it show any sign of letting up? Any sign of coming to an end?

Nope?

The feds have fought the correction every step of the way…with everything they’ve got. They’ve tried monetary stimulus — taking rates down to zero. They’ve tried fiscal stimulus — with $1 trillion budget deficits for the last 4 years…and no end in sight. They’ve tried “unconventional” measures too — such as QEI, QEII and The Twist. Last year, the Fed funded more than 60% of the US deficit with printed money. And the Fed has increased its holdings of US debt some 3.5 times since 2008, from $479 billion in September, 2008 to $1.66 trillion in March, 2012.

So, put on your seat belts. Sit back. Relax.

Eventually, the correction will do its work. But it could take a long, long time.

Regards,

Bill Bonner
for The Daily Reckoning

Correction Fighting: How Feds Prolong Economic Depressions originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Gold sinking.

Oil sinking.

Copper sinking.

Yields sinking.

We struggled with this, Dear Reader. We meditated. We prayed. We drank heavily.

And finally…we overcame the rank desire to say: “We told you so!”

As you know, Martin Wolf, of The Financial Times, is the voice of The Economics Establishment. All that is great and good in the field — which isn’t very much — is given voice by Wolf. Then, it is acceptable for policymakers, Treasury ministers, and central bankers, not to mention the people you talk to at cocktail parties.

And lo! Here cometh the neo-Keynesian economist. What saith he?

He says the world is drifting towards Japan.

Of course, that was the message 10 years ago from a certain feral economist who will not be mentioned. He maintained that Japan was a leader, not a follower…and that the US would follow in Japan’s footsteps…with about a 10-year lag.

He even wrote a book on the subject, with Addison Wiggin: Financial Reckoning Day.

Where he got these ideas, we don’t recall. What we do recall is that almost everyone laughed at him. “Japan?” they said. “The US is nothing like Japan. We have a dynamic, robust economy. We have Lehman Bros., Bear Stearns and Countrywide ‘low doc’ mortgages. We have Alan Greenspan. And George W. Bush. We have ‘mission accomplished’ in Iraq. We have Silicon Valley, Bernie Madoff and a housing boom. Japan has none of those things. Ha. Ha.”

But now, the last laugh is on the other foot!

Japan’s market topped out in 1990. The US market topped out — in real terms — in 2000. Thereafter, Japan saw on-again, off-again recession…sinking prices, generally…and slumpy conditions. The US economy staged a limp recovery in the ’02-’03 period…then gave investors a bubble head-fake. Now, it’s back to the slump…

…and now, both Europe and America are looking more Japan-like every day.

Martin Wolf explains:

On May 10, 2012, the yield on the German 10-year bund was 1.44 per cent, on the US 10-year Treasury was 1.85 per cent and on the UK 10-year gilt was 1.9 per cent.

These are extraordinary numbers. They are particularly striking in the cases of the US and UK, which unlike Germany, run very large fiscal deficits and are experiencing very rapid increases in public sector indebtedness.

This combination of falling government bond rates with very rapid rises in public sector indebtedness reminds us, of course, of the experience of Japan since 1990.

At the end of 1990, when its “bubble economy” went pop, the Japanese government’s 10-year bond was yielding 6.7 per cent. As the economy subsequently declined, deflation took hold and fiscal deficits and public debt exploded. But yields on 10-year Japanese government bonds (JGBs) fell to close to 2 per cent in 1997 and then, with sizeable fluctuations, to troughs of 0.8 per cent in 1998, 0.4 per cent in 2003 and, recently, to 0.9 per cent. In short, the worse the Japanese government’s present and prospective debt position has become, the lower the interest rates on JGBs has also become.

Similarly, in July 2007, just before the beginning of the crisis and consequent explosion in fiscal deficits and debt, the US 10-year Treasury yielded 5.1 per cent. Now, almost five years later, the bonds of this alleged fiscal basket case yield less than 2 per cent. Again, in the UK, another supposed basket case, with huge fiscal deficits and a slipping austerity programme, yields have fallen from 5.5 per cent in July 2007 to below 2 per cent.

What does it mean?

Well, if the US and Europe are following Japan…and Japan is going nowhere…then three of the world’s large major areas are dead in the water.

And if that is the case, you can expect the entire world economy to “go Japan.”

That will mean lower commodity prices. A lower price of oil. A lower price of gold. Lower interest rates — yes, look for the yield on US 10-year notes to drop below 1%. Bad unemployment figures. Low…or negative growth…falling real estate prices.

…and probably a stock market crash.

Hold onto your hats!

And more thoughts…

Well, okay…so the Yahoo! guy ‘embellished’ his resume a little. Big deal. Really, we’re surprised to see people make such a fuss about it. After all, who can honestly say they haven’t put a little positive spin on their own achievements. We have!

But let us rush to clean up our credentials before Dear Readers make a federal case of it.

Okay…on our age. It says we were born in 1959. Must be a typo. We were really born in 1953…okay…’48.

And, it says we attended Harvard University. Well, yes…we certainly did ‘attend’ Harvard… But through some bureaucratic mix-up our name was never on the official student list and our diploma must have gotten lost in the mail.

As for the Pulitzer Prize, we wouldn’t say that we were awarded the prize, not exactly. There again, it seems to be a case of a slight mis-wording. “Pulitzer Prize-winning” describes the quality of our work…as widely recognized, at least in the office here.

And we didn’t exactly invent the Post-It note. We just invented something like it, with scotch tape and a piece of paper. Same idea.

And, okay, did we really “win” the Nobel Prize in economics? We probably shouldn’t have used the word “win.” We were nominated…well, mom thought should have been nominated. She was putting us “in the running”…or something like that.

There, we hope that clears up any misunderstandings.

*** How do you like that? A guy comes from Brazil. He makes billions helping Zuckerberg launch Facebook. And then he leaves the country. You’d think he’d be more grateful. Or at least more sentimentally attached to the land that gave him so much loot.

But no. Edouardo Saverin is pulling out of the USA. Bloomberg reports:

Eduardo Saverin, the billionaire co-founder of Facebook Inc. (FB), renounced his US citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill.

Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. Saverin’s stake is about 4 percent, according to the website whoownsfacebook.com. At the high end of the proposed IPO market capitalization, that would be worth about $3.84 billion. His holdings aren’t listed in Facebook’s regulatory filings.

Saverin, 30, joins a growing number of people giving up US citizenship ahead of a possible increase in tax rates for top earners. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dormitory and stand to reap billions of dollars after the world’s largest social network holds its IPO.

But the rich are doing it all over the world.

A report from London tells us that the French are moving to town. France’s new president has pledged to raise income taxes on the rich to 75%…and to boost France’s wealth tax too. Wealthy French people are buying houses in South Kensington to escape.

As for the rich in Argentina, they’ve been making tracks for many years. As soon as they get some money they buy an apartment, in Miami!

Here in Baltimore, wealthy people have been getting out of town since the top in real estate in 1927.

And now, the rich are leaving Maryland too. Governor O’Malley says “wealthy people can afford to pay a little more in taxes…”

Well, yes, they can afford it. But that doesn’t mean they will like it.

“We’re moving to Florida,” says an old friend.

“Wait for me,” says your editor…

Meanwhile, the Irish and Spaniards are leaving their homelands too. Money is the reason. But smaller amounts of it. There are few jobs in Ireland or Spain, so they’re leaving to find work.

Even the Chinese are jumping ship. No kidding. Taxes are low in China.

Regards,

Bill Bonner
for The Daily Reckoning

What Happens When the World Economy “Goes Japan” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

As time goes by, these fixes act like friction…they slow the machine. They make it hard to move…inflexible and unresponsive. And over time, more people gain access to a fix — each lobbying group and special interest, each with his own bailout or subsidy…and each desperate to hold onto it.

Output is thus shifted to unproductive activities. The real producers are punished — with taxes and regulations — while unproductive activities are rewarded, with bailouts, handouts and sweetheart deals.

The financial industry was 2.5% of the economy when WWII ended. Now, it is 8.5%. How did it get so big? What does it do for all the money?

The answer to the first question is that it grew as the economy became ‘financialized.’ More and more laws were passed granting more and more special favors and protections to the financial industry. Just read the tax code. Go ahead, we dare you! You will find special allowances and deals for the insurance industry on almost every page. And there are rules and regulations for pension funds. And pensions themselves. ERISA. 401k. 501C3. SEC. FDIC. Dodd-Frank. CFPB. Everything is regulated…controlled…protected…

And all of this happened on the back of the biggest expansion of financial instruments in world history. The feds transformed the economy from one that made things…at a profit…to one that just made money. The money supply in the US increased by 1,300% in the 40 years after Richard Nixon ‘shut the gold window’ at the Treasury. That ‘wealth’ did not take the form of new factories in New England or new tractors in the Old South. It went mostly into money instruments…funneled through the financial industry to the rich people who owned financial assets.

Every potential new competitor had to comply with such a mountain of rules and regulations that he quickly gave up. Even if approved, he could not hope to provide a new product. Instead, he could only provide the same approved services and products that the big, entrenched players already had in stock.

John Kay, writing in The Financial Times, explains what would have happened had the computer industry been tied in the same knots.

“If you needed a licence to enter the US computer business, you can imagine the Computer Regulation Agency interviewing Bill Gates and Steve Jobs in the 1970s. What dutiful regulator would allow someone who had not even completed his Harvard degree to sell software to the public?”

Protected. Coddled. The financial industry went rogue. It was supposed to match investors with worthy investments, helping to bring genuine growth and prosperity to the US. Instead, it matched up most of the new money with itself.

The typical American was impoverished. Forty years after America’s money went rogue, he has not a dime’s more earning power per hour. And 4.5 times more debt, adjusted for inflation.

Regards,

Bill Bonner,
for The Daily Reckoning

The Suspicious Growth of the Financial Industry originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".