The Jekyll and Hyde Global Economy

What is the point, anyway? More below…

The Dow seems to be bouncing back – up every day so far this week. One theory: what is attractive in the Dow are the big INTERNATIONAL stocks…those with interests beyond the United States. [Ed. Note: At the time Bill wrote this, the Dow was up…by the time we went to print, it had fallen more than 200 points.]

Here’s a little item that helps make sense of this. The Chicago Tribune reports that while GM (NYSE:GM) lost $146 on every car it sold last year, Toyota (NYSE:TM) made a profit of $3,668. While U.S. manufacturing continues its disappearing act, foreign-based manufacturers are doing quite well. And many of them are subsidiaries of U.S. Dow-listed companies.

Some observers take this as evidence that the U.S. economy is not as vulnerable as it appears; after all, American firms own valuable businesses outside U.S. borders. We take it in just the opposite way…it is proof that people who know what they are doing are getting out of the United States.

As we, and we alone, have been saying, there are two sides to this great worldwide boom. There is the Dr. Jekyll side, and there is the Mr. Hyde side. One is respectable. The other is a monster.

Also in yesterday’s news was a little note that told us that McDonald’s (NYSE:MCD) workers in China are going to get a 30% pay raise. When was the last time people who labored in the fields for Mickey D U.S.A got a 30% raise? The 1960s?

Real wages are rising in China, because the boom is real there. We don’t know whether it is a matter of actual cause and effect, divine justice, or mere coincidence, but the boom in Asia also began with real money…real savings, that is. This real boom was the topic of conversation at our recent conference in Vancouver, and the outcome of the conversations…speeches…debates was always the same: pay attention to the East. Look for the smart, safe sectors to invest in, and you could turn a nice profit.

The boom in the West – principally the Anglo-Saxon countries – is a phony boom. It was fueled with phony purchasing power – EZ credit from the Fed and the lending industry. To simplify, people bought things they didn’t need with money they didn’t have. Since the money they spent came from credit rather than wages, businesses had no additional labor cost to produce additional sales and profits. But the average person went deeper and deeper into debt in order to do it. Not only that, he added to his living costs. Now, he is likely to have a bigger house to take care of…further from his work than ever before…and maybe even a second house.

Part of what Westerners were spending came from central banks, and part of it came from the savings of the East. Asian economies make money by exporting products, primarily to the West. They make profits…and save them. The Chinese save nearly 25% of their earnings, for example. Throughout the East, savings are huge…China has more than $1.2 trillion of reserves. It was these huge real savings from the East, as well as the phony “out of thin air” money from the Western central banks, that fueled the worldwide asset bubble. The symmetry of the system is simple: the East makes; the West takes. The East saves; the West spends. The East lends; the West borrows. The boom in the East is real; in the West it is a fraud.

Nothing comes from nothing….and now the fraudulent boom is beginning to look a little hollow.

The National Association of REALTORS predicts house sales will hit a 5-year low this year. NAR has been optimistic, as you’d expect. It has said that the slump would “bottom out” in 2007. Now, it’s saying the problem could persist “for some time.”

There is “no plan to bail out lenders,” adds a MSNBC report. Meanwhile, Jim Cramer says that if Fed doesn’t come to the rescue with lower rates there’s going to be “Armageddon” in the housing market. Jumbo loans are getting harder to get. And the whole asset-backed commercial paper market is trembling in anticipation of further shocks.

But don’t worry, dear reader, tells us that you can still get an ARM with nice, enticing teaser rate. So, you can still ruin yourself, if you’re a mind to do so…

*** We continue the thought we began to have yesterday…

There are times when you can go along with the masses and times when it is better to do something different. Here in France, people still remember the “30 Glorious Years” following WWII. France prospered. Practically everyone’s living standard improved. Most people mark the end of this period with the arrival of the socialists to power in the ’80s…bringing with them a huge increase in bureaucracy, taxes, and economic rigidity. Mr. Sarkozy, the current president, promises to undo much of this socialist legacy and put France back on the road to growth.

In America, in the 1980s, no socialists came to power. Instead, Ronald Reagan took over the White House. And yet, many similar phenomena occurred. Hourly wages, particularly in the manufacturing sector, stopped rising. The glorious years were over. Instead of wage growth, Americans turned to credit. This trend was led by the Republican Party itself, which announced that ‘deficits don’t matter.’ Living standards continued to increase, but at the cost of huge increases in public and private debt.

When trends turn negative, it is better to buck them…to head in a different direction. This is particularly so when the bad trends approach their inevitably catastrophic consequences.

That is what we think may be coming soon – with falling asset prices and falling standards of living in America, and probably in most of the other Anglo-Saxon countries. This is not a time to ‘go with the flow,’ in other words. The flow will not be going where you want to get.

As a practical matter, the course of action that is best in easy times is essential in hard times. Here, we spell it out for you:

First, you should focus on your own private business…or your own source of revenue. (Bonds, rents, retirement fund, dividend yields…whatever.) Make sure it is solid, protected, efficient and productive. Make sure it is something you understand…something you can see with your own eyes, run by people you trust. If you don’t really understand it…or if it involves any form of “enhanced leveraged credit”…dump it.

Second, own the property you want to own, not the property you’re hoping will go up in price. Begin, of course, with your own house. Is it the house you really want to live in for the next 5, 10, 20 years? Think long-term; the housing slump could easily last 10 years or more. Then, think about the other property you own. Would you still want to own it is if it went down 30% in price? If not, you might want to reconsider.

Third, make sure your savings and investments are diversified out of the dollar. Most experts now expect the buck to stabilize, but you can’t be sure. Ten years from now, the dollar could easily be worth only 10% of its value today. Put some money into euro and yen deposits. Put some into precious metals, too. Our friends at EverBank have a lot of options for investors that want to safely diversify their portfolios with gold or silver. In fact, they have just reopened their MarketSafe Silver CD – but only for a limited time.

(Full disclosure: We have an ongoing business relationship with EverBank. While we may receive an advertising fee if you open an account with them, the relationship we’ve forged allows us to bring you exclusive offers, like the MarketSafe Silver CD, that you won’t see anywhere else during the limited pre-enrollment period.)

Fourth, once your finances are secure you can begin to think about speculating. But don’t confuse speculating with investing. You speculate for entertainment, not as a serious way to finance your family. Are stock prices going up or down? You can’t know. Nor can you know what prices land, commodities, currencies or anything else will sell for in the future. Don’t speculate with money you’re not prepared to lose.

We have a feeling the smart money is speculating against U.S. stocks. Russell may be right; maybe another big upsurge will draw in the public and push the Dow up above 15,000. But we wouldn’t bet on it. Consumers are likely to cut back. Housing is likely to sink for years. Foreigners are likely to want to diversify their dollar holdings into other assets. Profit margins are likely to fall. None of this is particularly favorable for expensive U.S. equities. This is not a prediction; it is merely a look at the odds.

In fact, think about the Chinese announcement the other day: that they will dump U.S. T-bonds if we impose trade sanctions on them. Of course, that won’t be good for either party involved, but the possibility for the destruction of the U.S. currency is there, hanging in the air. Something to think about…

On the other hand, the smart money may be speculating in favor of Japanese stocks. While the United States enjoyed the biggest boom in its history, Japan suffered an on-again, off-again recession from which it has never fully recovered. Japanese companies are profitable. Japan has mountains of savings and a positive trade balance. What’s more, the yen carry trade may now be unwinding.

Mark Cutis chief exec at Shinsei Bank of Toky

“I expect to see a savage unwinding of carry trades with higher Japanese interest) rates, although I suspect short-term you will see a new trading range of 115-125 (for the dollar against the yen). I expect to see the euro/yen rate at 135 within five months. I also expect to see an equity markets sell-off but the Japanese market will hold up, which, along with higher rates, will encourage a repatriation of funds (to Japan) and further increase volatility.”

Bill Bonner
The Daily Reckoning
August 9, 2007

P.S. Finally, remember…it’s just money. Money is a “way of keeping score in life,” says T. Boone Pickens. But that is just for those who like playing the game. The real goal is to live with grace and dignity. You can do that with a small amount of money…or not do it with a fortune.


…over to Short Fuse in Hollywood…


Views from the Fuse:

*** Everyone can sleep a little easier tonight…President Bush has weighed in on the housing market…

Bush recently made a speech at the Treasury Department that, according to the New York Times was an “unusual” decision…”both politically and economically. Presidents are usually advised not to wade into discussions of markets at a time when they are so unpredictable and anxiety-inducing.” Hmmmm…

Don’t worry about the housing market, Bush said in this speech. It’s just a reaction to “a flood of liquidity that came into the market in the past couple years.” Gee – really?

“If the market functions normally” it will lead to a soft landing for housing, according to the President. “That’s kind of what it looks like so far.”

We aren’t sure what Bush’s definition of “normal” is…but even someone with their MBA from Harvard could simply glance through the headlines and see that the housing market is behaving far from normal.

*** We mentioned last week that a few of our speakers at the AF Investment Symposium are very interested in ‘blue gold’ companies…in other words, water infrastructure investments.

“I love water stocks, but only in the context of extreme anxiety about the overall stock market,” writes The Rude Awakening’s Eric Fry, in today’s guest essay.“So why do we like the water industry? In a word: Scarcity.

“We like things that are scarce; they make for good investing. Paper assets have become too popular. I want the other side of that trade: I want to get rid of my paper, and to exchange it for the stuff that powers and feeds the world…and in particular, for the stuff that quenches the world’s thirst every day.”

*** “A prime-beef shortage has caused several famous New York steakhouses to alter their menus,” writes Addison in today’s issue of The 5. “Peter Luger’s, Ben Benson’s and The Old Homestead – three staples of the New York steak scene – have all reduced the presence of prime cuts on their menus because of recent price hikes and supply pinches.”

“‘It’s getting worse,’ said Ben Benson himself, who has recently been offering buffalo steaks in order to cut costs. ‘The problems the ranchers are having are making it more difficult because feed is getting more expensive.’

“According to NY restaurant owners, not only is beef harder to attain, but this year only 0.5% of all beef sold on the market is considered “prime,” considerably down from 2% last year. But don’t worry… you can still get a hamburger at the Old Homestead… for $41 bucks.”

Short Fuse
The Daily Reckoning

P.S. And why is it becoming more and more expensive to feed cows and other livestock? One word: