The Flirting Mistress of Prosperity

One man’s Crack-Up Boom is to another man “The Greatest Economic Boom Ever.” That is what Fortune magazine calls it on the current cover.

And now everyone is coming to see that we are in the midst of a huge, worldwide credit boom. And most recognize it’s prominent features:

– Rapid economic growth in Asia. News yesterday told us that China is set to overtake Germany as the world’s third largest economy by the end of the year – thanks to Chinese GDP growth rates in the double digits.

– Globalization of trade and finance. Asia is growing so fast largely because its exports are sizzling. Ships are backing up in ports all over he world, trying to keep up with it. Large financial deals typically include players from several different countries.

– Financialization of the world economy. Almost everything can now be packaged and sold as a financial asset – including works of art, collectibles, farms…you name it.

– And behind it all – a rising tide of liquidity. The United States emits dollars. Other countries emit their own currencies, attempting to keep up with the greenback. Everywhere, the liquidity level increases – pushing up asset prices.

Our old friend Steve Chapman writes in the Chicago Tribune that the U.S. economy is in great shape. The stock market is near record levels; unemployment is down to 4.5%; inflation is running below 3%. “Recessions used to come along every four to five years, but since 1991 we’ve only had one mild downturn, back in 2001.” Americans have grown so accustomed to prosperity that we take it for granted,” says Steve.

Ah, that’s the trouble with prosperity. It is like a mistress; as soon as you take her for granted, she begins to pout and flirt with strangers.

And that is the fundamental difference between a Crack-Up Boom…and The Greatest Economic Boom Ever. Here at The Daily Reckoning we don’t think you can take mistresses or prosperity for granted. Instead, they need to be handled carefully, given proper respect, shown appropriate appreciation…and, occasionally, allowed a tantrum.

That the U.S. economy has had only one minor recession since 1991 we take as cause for alarm…like a teenager who is unusually polite; we figure he’s up to something. But most economists, and sensible people too, regard the lack of a major correction as a good sign; they believe it signals that the economy is so healthy it needs no correction.

The economy is not really healthy at all – especially not in America.

The latest report from the New York Times tells us that the rich are doing better than ever. It’s a new “Gilded Age,” says the gray lady. Wealth is once again being concentrated at the top – just as it was before the Great Depression. Then, it was the great men of industry – the Vanderbilts, the Rockefellers, Carnegies and Fords – who controlled vast wealth. Now, it is the great men of finance – the Schwarzmans, the Petersons, the Kravises, and the Kolhbergs – who get the dough. According to the TIMES, only 15,000 American families now collect 5% of total national income – equivalent to $9.5 million per year each.

Hey, good for them. But while the Carnegies and Fords boosted real incomes for the whole population, the Schwarzmans and Kravises seem to keep it to themselves. The average American is increasingly trapped between the Scylla of stagnant income…and the Charybdis of increased expenses. He has a bigger house, a bigger mortgage, more cars and a more expensive living standard. But he has no more money to pay for it.

Bummer.

From Houston comes word that more and more Americans – already the hardest working race on the planet – are giving up old-fashioned vacations. Either they don’t want them…or they can’t afford them. And even when they do go off for a while, they take their portable phone and portable computer with them so they can keep up with work while they’re away.

And now oil prices are rising again. They’re just pennies away from the record high set last August…and Goldman says a barrel of oil may go to $95.

Meanwhile, analysts are now projecting that the housing slump could last for years – that there is a ‘second wave’ of housing hurt coming our way. This wave could not only affect the equity you have in your house…but all of your investments. The Survival Report’s Mish Shedlock shows you three solid hedges against the coming bust.

Our friend and colleague, Porter Stansberry reports:

“The number of U.S. home foreclosures rose 87% in June year over year. There were 164,644 loan default notices, scheduled auctions, and bank repressions, led by California, Florida, Ohio, and Michigan. If you assume that each of these homes is worth the median U.S. home price, that’s $36 billion in defaults. And if you assume the banks, hedge funds, and bond managers that own these debts will recover 75% of this value, that’s an estimated $9 billion in losses…in one month.”

“We’re trying to sell our old house in Maryland,” said an associate in Baltimore, “because we bought a new house and have already moved in. Right now, we’re paying two mortgages, so we want to get rid of the old place as soon as possible. So far, we’ve had a few people look at it. And we’ve actually had a couple of offers…but they were both contingent on the buyers being able to sell their houses. So we looked on the Internet to find out what the odds of them being able to sell quickly really were…and we found, in both cases, that they were trying to sell houses in areas where there were hundreds of houses just like theirs for sale. It didn’t look good for them…and it doesn’t look good for us. For us it’s not too much of a problem, because we bought our house many years ago. We have a lot of equity and a small mortgage. But I don’t know what other people do in this situation…”

We don’t know either…but, as always, we’ll find out.

Bill Bonner
The Daily Reckoning
London, England
Tuesday, July 17, 2007

More news:

————–

Addison Wiggin, reporting from Baltimore…

“Core inflation rose 0.3% in June (0.1% higher than forecast), thanks largely to a surge in domestic auto prices, said the U.S. Labor Dept. in a release this morning.

“If this truly is the measure of inflation the Fed watches the closest, they should be noticing a trend. Core inflation ticked up at a similar pace in May. Chairman Bernanke is expected to continue expressing the Fed’s woes over rising inflation during his scheduled congressional testimony tomorrow. We’ll be sure to translate his comments for you soon after they’ve gurbled forth.”

For more from Addison, see today’s issue of The 5 Min. Forecast

————-–

And more views:

*** We’ve been talking a lot about the newest newsletter that we launched this past Friday – and since many of our dear readers have shown an interest in it, here’s Greg Guenthner (know as ‘Gunner’ around these parts) to give you the thinking behind his latest service, Bulletin Board Elite:

“Over-the-Counter Bulletin Board securities or stocks that trade on the Pink Sheets aren’t what you normally find here in the pages of my newsletter, Penny Stock Fortunes. And it’s not that we don’t appreciate them. After all, some of these tiny wonders can show investors seemingly impossible gains in a matter of months, weeks or even days.

“The fact is they’re just too illiquid and difficult to trade for such a large readership. Too many people buying at once can cause huge price spikes, only for the stocks to tank the very moment the volume subsides. If you don’t believe us, log onto any penny stock chat room and see for yourself how sheer speculation can wildly move the bulletin board market.

“After all, the bulletin board and Pink Sheets are prime territory for ‘pump and dump’ schemes. This is when unscrupulous people buy shares of a small, illiquid company and then begin to hype the company’s potential to anyone who will listen – mostly folks who stumble onto faxes with ‘hot investment tips’ or overhyped message board posts on the Internet.

“Then, all of the sudden, the good news stops. The crooks pull the plug on their pumping efforts after selling their shares during the mania. The volume drops back to almost nothing, and the stock plummets back to its normal levels.

“Despite all of this, there are plenty of small, reputable public companies that aren’t yet listed on major exchanges. And we realize it is incredibly difficult to find reliable information to aid your bulletin board investment decisions. Until now…

“Our readers have spoken, and we’re listening. Over the past few months, we’ve been working on another way to deliver you ‘underground recommendations’ on many of the faster moving smaller companies on the OTCBB and Pink Sheets. To do that, we finally came up with my newest service, Bulletin Board Elite.”

*** Wall Street has taken little notice of the Crack-Up Boom. All it sees is The Greatest Boom Ever.

You can have both. Zimbabwe has one of the world’s hottest stock markets. It also has an economy that is falling apart. So bad are conditions in Zimbabwe – during a record stock market boom – that a local bishop has written an open letter encouraging neighboring countries to invade Zimbabwe and arrest its lawfully elected president, Robert Mugabe. People are on the verge of mass starvation, warns the clergyman.

That is the charm of markets. They are able to enjoy themselves while the rest of the world suffers, and able to suffer while the world enjoys itself. Anything could happen, dear reader – including an even bigger boom on Wall Street.

*** The Labor Department reports that the number of people working in housing construction actually went up in June. Could the government be wrong? Ha…ha…ha….

Next, it will be telling us that inflation is under 3%…ha…ha…ha…

*** Our old friend Ron Paul is still trying to roll his rock up the hill. A report from Paul Joseph Watson:

“Presidential candidate Ron Paul says the U.S. is in ‘great danger’ of a staged terror attack or a Gulf of Tonkin style provocation while also warning that a major collapse of the American economy is on the horizon and could be precipitated by the bombing of Iran and the closure of the Persian Gulf.

“Speaking to The Alex Jones Show, the Texas Congressman was asked his opinion on Cindy Sheehan’s recent comments that the U.S. is in danger of a staged terror attack or a Gulf of Tonkin style provocation that will validate the Neo-Con agenda…

“‘I think we’re in great danger of it,’ responded the Congressman, ‘We’re in danger in many ways, the attack on our civil liberties here at home, the foreign policy that’s in shambles and our obligations overseas and commitment which endangers our troops and our national defense.’ ‘Every day we’re in worse shape and right now there’s an orchestrated effort to blame the Iranians for everything that’s gone wrong in Iraq and we’re quite concerned that the attack will be on Iran and that will jeopardize so many more of our troops, so I would say that we’re in much greater danger than we even were four or five years ago,’ asserted Paul.

“The presidential candidate expressed his despair that the situation in Iraq will not change until there is a total collapse of the American economy.

“‘There’s no way we can afford what we’re doing, whether it’s domestic spending or the international spending and very few people talk about the real cost of this economically speaking…this is unsustainable and it will be a threat to our dollar,’ said Paul, adding that the onset of the meltdown could be sparked by the bombing of Iran and the closure of the Persian Gulf.

“The Congressman added that the collapse was in its early stages with the major indication being a reduction in the living standard of middle class Americans but that ‘one single major world event’ could change things overnight and precipitate a major downturn.

“Paul said that national and world events, especially the degrading situation in Iraq, were attracting support for his presidential campaign due to his resolute position on embracing a non-interventionist foreign policy.

“The Congressman concluded by surmising that record lows in approval ratings for Bush, Cheney and Congress showed that, ‘The American people are alive and well and disgusted, yet they haven’t had good alternatives…it’s justifiable, they are looking for true answers and options and quite frankly I think that’s probably one of the reasons why our campaign is growing by leaps and bounds right now.'”

*** We also got news from home. Doctor Emily H. Wilson died at 102.

Mother reports:

“I remember her so well. She came to West River (a very rural, tobacco growing, oyster-dredging region of Maryland) back in the ’30s or early ’40s. She was the first woman doctor in the area. I think she was probably the first woman doctor in the whole state, I don’t know. But at first, people didn’t want to go to a woman doctor. At least, the old people didn’t. They thought there was something unnatural about it. But she set up her office in the old Tea House and stayed there for the next 50 years – at least.

“She was not very talkative or very social, I think. She did her work. And she had her share of setbacks in her personal life. But she always had a half-smile on her face.

“And I remember, too, when you were born. Your father was in the army, stationed at a base in Canada. So, I was staying with my father. And when you were ready to be born, we called Dr. Wilson’s and she came right over. She thought things were happening pretty fast, so she called the State Police, who sent a car to escort us to the hospital in Annapolis. (People were more civilized back then. Call the State Police today…and you will get a recording. Then they will refer you to another government agency) I never saw my father drive so fast. He had an old Packard and was probably going at 40 miles per hour, but it was very fast for him. He didn’t drive very often or very well. I was terrified. But it all worked out well.

“You could always count on Dr. Wilson. She was never far away. She looked after three generations of us…my mother, me, and you when you were a child. I’ll miss her…

“But that’s the real trouble with growing old. You know more people who are dead than alive. And you miss them terribly. Finally, you look around and you are the only one left…the only one who still remembers what things were like…then, you have no one to remember things with. Then…I guess it’s time for you to go too.”

The Daily Reckoning PRESENTS: These days, some analysts are claiming that the bull-market in commodities is solely due to monetary inflation. But as Puru Saxena explains, to have a bull-market in any sector, supply and demand must also be out of whack. Read on…

SUMMER SALE

We are witnessing a generational bull-market in all types of natural resources (energy, food and metals). This boom in commodities is largely due to supply and demand imbalances plus the ongoing monetary inflation, which is adding fuel to the fire.

Today, the various central banks continue to pump money and credit into the system and combined with the rising per-capita consumption levels in Asia and Latin America, you can begin to understand why the prices of commodities are at record-highs.

For sure, this sector has already risen considerably in this bull-market, however I suspect that the uptrend will continue for several more years. Firstly, back in 2001, natural resources were the cheapest they had ever been in the history of capitalism, so this advance has commenced from a very depressed level. Secondly, when adjusted for inflation (even via the bogus official CPI data which understates the inflation menace), commodities remain extremely cheap.

These days, some analysts are claiming that this bull-market in commodities is solely due to monetary inflation and that supply and demand imbalances have no influence whatsoever. I tend to disagree with their assessment because constant monetary inflation has been our reality since the early 1970’s when gold was removed from the monetary system YET the prices of commodities (energy, food and metals) declined significantly between 1980 and 2001. So, it is clear that the debasement of currencies alone is not responsible for the ongoing surge in the prices of commodities.

In order to have a lasting bull-market in any sector, supply and demand must be out of whack. In the case of natural resources today, demand is rising ferociously in China and India whilst supply is struggling. Consider the energy market as an example: At the beginning of this decade, China and India combined used to consume roughly 8% of the world’s oil and today they consume over 11%. Now, to illustrate my point that supply and demand are important factors, I would add that this rising demand (regardless of monetary inflation) would not have translated into a higher oil price IF there was an endless supply of oil. In the current scenario however, the oil price is rising because supplies are extremely tight when compared to demand. In fact, I would argue that humanity is staring “Peak Oil” in its face.

Today the average Chinese person consumes less that 2 barrels of oil per year and the average Indian consumes less than a barrel of oil per year whereas the average American consumes 25 barrels per year. After reviewing this data, you don’t have to be a rocket-scientist to figure out that demand for energy in Asia can only rise in the future. And unless we can find a way to increase supply, the price of oil will continue to appreciate.

If you have invested in commodities, you will be thrilled to learn that apart from energy, the inventory levels of other resources such as base metals or food are also extremely depleted. And these stockpiles are low due to the sudden and unexpected surge in demand brought about by the rapid industrialization and urbanization of China, India and parts of Latin America. A growing percentage of the three billion people in the “emerging” economies are now putting immense pressure on the planet’s resources as consumers, and the scramble to find more commodities is on. Exploration activity, whether for metals or energy, is at multi-year highs and I suspect that billions of dollars will be spent in the years ahead as nations desperately look for additional resources to feed demand.

It is interesting to note that after the brutal correction in commodities last year, energy, food and base metals have recovered, however the precious metals have failed to rally. Moreover, if you compare the performance of the various commodities over the past five years, you will realize that industrial commodities (base metals and energy) have outperformed the precious metals by a wide margin. This was expected as the economic activity has been very strong recently, and gold is a counter-cyclical asset. No doubt, it has been frustrating for investors to watch their gold holdings drift lower for a year. Despite the recent underperformance, I continue to believe that gold is also in a gigantic bull-market, which has a long way to run.

You must understand that in the case of base metals (copper, lead, zinc, nickel and tin), changes in industrial demand, and physical supply cause prices to rise or fall. However, when it comes to gold, investment demand alone is the single most important factor that can make or break a bull-market. And the investment demand for gold is directly linked to the public’s inflation expectations.

If the masses are worried about future inflation, they tend to convert their cash to gold as a store of value. On the other hand, when the public is calm about inflation, the reverse takes place.

Banks are in the business of lending paper currencies so it is absolutely vital for their survival that the public’s confidence in the monetary system remains high and that inflation expectations remain under control. Every central banker knows that if the public really understood the inflation problem, the monetary system would come under strain. So far, the central banks have done a fabulous job of managing the public’s inflation expectations. However, I am of the opinion that this is about to change. As soon as the public realizes that inflation is much higher than the official CPI data, we could see a stampede towards gold.

Recently, precious metals have drifted lower which is typical at this time of the year. In fact, the wonderful summer sale is on! Remember, corrections during a bull-market are opportunities rather than a problem. Once this consolidation is complete this summer, I expect precious metals to soar towards the end of this year.

Regards,

Puru Saxena
for The Daily Reckoning
July 17, 2007

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Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. Money Matters is available by subscription from www.purusaxena.com.

Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.