Jolly Rotten

“The Roaring ’20s were very lucky years for Americans. Automobiles rolled off assembly lines. Electrical appliances sold like computer games. And the financial sector was more dynamic and innovative than ever before. Huge new inflows of capital created a boom on Wall Street; while new industries coast-to-coast – including the film industry in California – were making ordinary Americans rich. Almost everything they tried – from installment credit to jitterbugging – seemed to work.

“From strength to strength…to catastrophe. The crash came. The credit markets seized up. Risk was re priced, upwards. Assets were re-priced, downward. The U.S. economy contracted 30%.

“Sixty years later, a similarly dizzy boom hit Japan like a typhoon. In the ’80s, the island nation was the envy of the world. Western consumers first learned to say Japanese words such as Toyota and Honda. Then, business executives in New York and London worked on words such as ‘kaitzen’ and ‘zaitech.’ Then, the Nikkei Dow cracked in January of 1990… and we went back to speaking English. Even now, 17 years later, the Japanese economy has still not recovered its ‘bonsai!’ Vigor.

“Financial authorities in both the United States and the United Kingdom know the stories well. They’re determined not to relive them. At least, that is the popular interpretation of this week’s major events. Economists have made another 80 years of progress, they say; now they can avoid these problems. So, when it began to feel like Wall Street in ’29…or Tokyo in ’90, central bankers knew just what to do.”

Bill Bonner
September 24, 2007

Keep reading today’s essay here:

Jolly Rotten

More news from Short Fuse in Los Angeles…


Views from the Fuse:

Those who think the worst is over for the “credit crunch” have another thing coming, according to IMF Managing Director, Rodrigo Rato.

In fact, the impact of the crunch hasn’t even been felt yet – and guess who will be hit the hardest? That’s right, the U.S. of A.

“Credit markets are correcting, but slowly, we aren’t yet at a stage of normality,” said Rato.

“It has an effect on the real economy which will be felt more in 2008, with greater intensity in the United States, less in other areas.”

But the fear of an economic slowdown isn’t just contained to the U.S. economy…Newsweek reports that there “is a sharp drop in the monthly survey of purchasing managers in the 13-nation euro zone – evidence that the credit crisis that began in the U.S. mortgage market and infected British and German banks has now seeped into Europe’s underlying economy.”

“Europe sucks,” Chris Mayer muttered by accident in a radio interview last Friday.

“I instantly regretted saying something so crude on national radio, but it was too early in the morning for me to focus,” he told the 5 Min. Forecast today. He and the host were discussing the prospect of the euro becoming the next world reserve currency.

“Of all the places in the world to invest,” Mr. Mayer then explained, “Europe would be low on my list. I’d rather invest in North America, Asia or South America. I’d rather be in Australia. I think it’s a tossup with Africa. Europe is a museum. Great to visit and a wonderful place to live, I am sure. But as an investment destination, the best action is elsewhere.”

Chris is on the hunt for the next big thing…doing some due diligence on some overseas ideas, for his Mayer’s Special Situations readers.

“The sliding dollar creates a natural opportunity for a dollar-based investor to pick up overseas assets and enjoy a possible double windfall,” says he. “The first stems, hopefully, from the merits of the idea itself. The second windfall comes on the currency gains enjoyed when translating those gains back into dollar terms.”

We are attending a conference here in France…happy to be back on the terra firma of the continent. Not that we don’t like our new life in London…but the French are funnier to watch. And the women are better looking.

Yesterday, we went to mass at the nearby Catholic Church…the poor priest had an uphill slog. The Bible reading was about money. “A man cannot serve two masters,” he quoted the Nazarene. Clearly, there is a choice to be made. But put the question to a random group of Americans, French, or English…in 2007…we’re not sure which way it will go.

Meanwhile, back in the world of money itself…everything still looks pretty good – that is, if you don’t look too hard. The Dow rose again on Friday. The euro (EUR) is still over $1.40.

Wheat, soybeans, oil, gold – and a whole host of other items – are at all-time highs.

All of this bodes well for those who have properly invested in commodities…take, for example, Kevin Kerr’s Resource Trader Alert readers. In September alone, they have racked up 146% gains in wheat in seven days…taken 125% gains in soybean oil in 19 days…and sold half of December gold spread for 100% gain in about eight months.

Not too shabby.

These high prices are transforming the physical world.

In Brazil, the Amazon jungle is being pushed back so planters can grow soybeans. Environmentalists all over the planet are whining about it, but the Brazilians reply: “Hey, this is our jungle; we’ll do what we want…besides, we need the money.”

In neighboring Argentina, the poor cattle are being pushed back too – up to the north…to drier, less fertile land. The regular stock often can’t stand the shock…so the breed is being mixed with hardier races, such as the Indian Brahmin. The mixed-breed beasts can cope with the tougher conditions, but they yield a meat of lower quality. Why take the cows off the good land? Because it is being used to grow wheat and soybeans, of course.

Ireland has gotten rich, too – thanks to a property boom. There, the ugly, old cement-gray houses of the pre-boom era are being replaced by ugly, new cement-gray houses.

London seems to change everyday…with new restaurants…new buildings…new hedge-funds. There is so much money bubbling around the city that hustlers work overtime to figure out how to take it from its rightful owners.

But it is in Asia, where most of the change is happening. Whole cities are rising up, like mushrooms, from the good earth of the middle kingdom. Whole populations – hundreds of millions of people – are on the move, from country shanties to in-town tenements. Whole new industries are waking up to a New China, with a middle class…and millions of rich people too. It is the greatest leap forward ever! China’s auto and truck exports alone are set to grow by 46% this year.

We spoke to a young man here who believes that the key to making money in large U.S. companies actually lies in Asia.

“U.S. companies aren’t going to make much money by selling more product to Americans. Americans don’t have any money. As you keep pointing out, U.S. wages haven’t gone up in a long time…and they’re not going to go up either – because that’s the other half of the equation. A company with a good product – especially a good brand – can make a lot of money now by doing two things. One is lowering its costs by outsourcing labor to Asia…not just manufacturing, but even high-level things like design, research, marketing, legal work. The other thing it has to do is to sell its products to this huge rising market of the Asian middle class.

“If it does these two things, it will have lower costs and higher revenues. If it doesn’t do these two things, it will be stuck with high costs…and a stagnant market – at best. Actually, as the housing problem deepens in the United States, you’d expect domestic sales to fall.”

“Mortgage troubles here to stay,” reports the Minneapolis paper.

He’s probably right. While the average American will probably grow poorer – in both relative and absolute terms – many U.S. companies will probably do quite well. Many already are.

Psst…want to know how to build a small fortune by investing?

Start with a big one!

But if you don’t have a big one, the best you can do is to try to hold on to the small one you make in your business or your career. The average rate of return over the very long-term is only a couple percentage points higher than the inflation rate. Put in a couple stock market crashes…a couple bankruptcies…a couple bad decisions…and a couple crooked investment managers, and you’re lucky to end up with about as much as you had when you started.

There are times when the investing world becomes so dangerous that the most likely rate of return for the average investor will be negative. That is a good time to hold gold; your rate of return will almost certainly be better than actually investing! Gold is a hedge against the unknown…against risks…against error. But like any insurance, it costs money. When you hold gold, you give up the yield you would otherwise get from stock dividends or bond coupons. Now that Bernanke has cut short-term rates, the cost of holding gold has gone down.

Is now the time to buy gold? The money supply in the United States is rising at a rate nearly five times the growth of the economy itself. The Fed, claiming that inflation is now under control, has just cut the price of credit to member banks by half a percentage point. The economic explorer has to rub his eyes and look twice; he can’t quite believe it. How can inflation be under control when prices for key commodities – notably the keyest commodity, oil – are at record levels? He doesn’t have an answer, but he can put two and two together. Whatever kind of ‘flation’ the Fed has been cooking up, we’re going to get more of it. So put on your best bib and tucker, dear reader.

Central bankers – both in the United States and in Britain – had two battles on their hands. They could continue the fight against inflation…holding rates steady, or actually increasing them. Or, they could do an about-face, and fire away at the kind of flation with a ‘de’ in front of it.

“Which way is scarier?” asks the Wall Street Journal.

“It depends,” is our answer. If we were the central bank of China or Japan – with hundreds of billions of dollars in our vaults – we’d probably think the war had taken a nasty turn. Instead of helping to defend our number one asset, the Fed and the BOE are now working to destroy it.

If, on the other hand, we owed hundreds of billions of dollars to Asian creditors, or had a big position in the yen carry trade, or a house in Florida that we couldn’t quite afford – we’d give the latest Fed move a big “hoorah!”

Here at The Daily Reckoning, we give it neither thumbs up…nor thumbs down. We sit on both our thumbs…buy gold…and wait to see what happens next.

And when we mentioned, above, the kind of gains Kevin Kerr’s readers have taken in the past month, we forgot to include a pretty important one: Resource Trader Alert devotees recently sold half of December gold spread for 100% gain in about eight months.

The poor parish priest made a good try. He began by explaining what he was up against:

“This is a difficult passage for us, of course. Here we have Christ telling the story of an overseer who is about to be fired by his master. Seeing that he will need a little support from someone, he goes to people who owe his master money. He makes deals with them, reducing what they owe to the master so that they will owe the overseer a favor. In effect, he is cheating his own master.

“But Christ goes on to say that ‘you can’t serve two masters;’ you can serve God, or you can serve money. Not both.

“We don’t quite understand why Christ seems to approve of cheating the master out of what was rightfully his. It poses a problem for us, because we think cheating is wrong. But Christ often poses very difficult situations…forcing us to think deeply about what our duty to God (as opposed to our duty to our fellow man, and money) really is. This story requires us to recognize that the deals made by men, deals involving wealth, power, and money…are always less important than the deals we make with God.

“The overseer was being fired…we can imagine that he had died, in order to understand this better. After he has left his earthly master’s employment, he has to face a new master, God himself. And that is the relationship that counts. He has to think of THAT master…of THAT obligation…even to the point of doing things that seem to us not to be quite right. The master that must be served is the one that is waiting for you after he leaves his current situation…which, of course, is our life on this Earth.”

It was the best a priest could do.

Until tomorrow,

Bill Bonner
The Daily Reckoning