The Road to Perdition

“While wages in India and China increase about 10% per year, real incomes in America and Britain are mostly stagnant. And now the Asians are getting uppity. They want more than a few pieces of paper with green ink on it. They want the world’s real resources – the kind a central bank can’t print. Meat, corn, gas and gold – all are at or near record highs. All of a sudden, people in the occidental world are not the only ones using gasoline…and eating beef.

“In the United States and Britain, too, the proles increased their standards of living. But not like the Asians, who made things and sold them at a profit. Instead of earning more, they borrowed more. And now, while the skinny Chinese and Indians race along at 10% annual GDP growth, our countrymen stagger under the weight of their own heavy debt. How can they hope to compete with the heaving masses of Asia for jobs, for food, for capital, and for fuel?

“The Yank and the Brit could not be less prepared or more poorly positioned. They already live beyond their means. They can expect no wage gains. Their costs are rising. And with three billion Asians hard on their heels, they can’t expect a breather – prices will continue to rise; wages will not.”

Bill Bonner
October 8, 2007

Keep reading today’s essay here:

The Road to Perdition

And now over to Short Fuse…


Views from the Fuse:

People will do crazy things when money is involved. We wrote an article last year called “The Debt Made Me Do It” citing people that have killed their entire families because they felt there was no way to dig themselves out of debt.

Now, from Clarksville, Tennessee, comes news that the local barber killed himself during a City Council meeting where his request to rezone his home as commercial was denied.

The AP reports: “After the 5-7 vote Thursday night, Ward stood and walked toward the council.

“‘Y’all have put me under…I’m out of here,’ he said before shooting himself in the head with a small handgun.

“Ward said the rezoning would increase his property value, allowing him to secure a loan to offset debt he incurred when he expanded his shop.”

Now, of course, this is not something that happens every day. But you can see what occurs as debtors get increasingly desperate…and the reasons for this desperation are glaringly obvious.

“With each passing day, we add $2.43 billion to our record-high national debt, and the dollar continues to fall in value, further eroding our already insufficient retirement savings…What are most Americans doing about it?” wonders Free Market Investor’s Christopher Hancock.

“They’re consuming even more, even if that means dipping into their savings or taking on debt they’ll never be able to repay.”

This behavior, continues Chris, has to do with “an economic struggle…an innate and uniquely American fear of being left behind (or, even worse, completely left out)…It has to do with an individual’s fight for their particular piece of the proverbial American pie.”

In a nutshell…Americans believed that the good times would never end…that their home ATM would never be tapped out…and that the credit would always be EZ and plentiful. That, as we all know, is not the case. Just take a look at soaring foreclosure rates and loan defaults.

Now we see this false sense of euphoria spilling over to the stock market. As we mentioned last week, two of the United States’ biggest banks, Citigroup (NYSE:C) and UBS (NYSE:UBS) said they were writing down $9.3 billion in debt because of the credit crunch, and the markets reacted with glee! In fact, the Dow hit a new record high on the news.

“Why this apparent insouciance?” wonders the Economist. “Because it seems investors can’t lose.

“‘Take your pick,’ says Gerard Minack, a strategist at Morgan Stanley: ‘Equity markets are either behaving as if the worst is over for credit and housing problems or they remain convinced that the [Federal Reserve] can offset whatever bad news may unfold.’ In other words, bad economic news means the Fed will cut interest rates and good news means recession will be avoided.”

So, what category does Friday’s BLS data come under? It looked like good news at first glance, but, like most things, when you dig a bit deeper…the truth comes out.

“The jobs report is bogus,” opines Addison at The 5 Min. Forecast. “If you suffered through the BLS official site, for example, you’d find they allow themselves a margin of error of 129,000 jobs. Any deviation less and you’re in an area that statisticians called insignificant ‘noise’.

“‘September jobs data cannot be believed,’ alerts our government stats watchdog John Williams, helping us to unpack the Labor Department’s methods.

“‘The Bureau of Labor Statistics can bring in the monthly payroll gain anywhere it wants to. And the Administration knows that a number in a certain range – that can be dismissed as statistical ‘noise’ or revised away the next month – will move the markets as effectively as a Federal Reserve policy action.

“‘Accordingly, when I suggested last month that the 4,000 jobs loss reported for August was designed to help push the Fed into its easing, one indeed has to wonder what is going on in the background, when August revised to an 89,000 jobs gain in the September report. One might read the current September 110,000 jobs ‘gain’ as a sign the Fed can hold steady at the next meeting, rather than taking action that would tumble the U.S. dollar further.'”

Welcome back, dear reader.

We had an agreeable weekend, mostly spent catching up with old friends in Buenos Aires.

Americans are happy down here; it is one of the few places where the dollar is not going down. You go into a restaurant and you are pleasantly surprised, rather than depressed, as you are in London or Paris.

How come the dollar and the peso stick together? It is partly because the Kirchner government controls the peso/dollar exchange rate – trying to hold the dollar at around 3.15 pesos. And partly because, north of the Rio Grande and south of the Rio Plata, both governments are destroying their currencies at about the same rate.

We have no figures for Argentina, but M3 – the broadest measure of the money supply – has been increasing in the United States at a 14% rate, the fastest in 35 years. Thirty-five years ago, the U.S. government was struggling with trying to pay for “Guns & Butter” at the same time. That is, the Johnson administration had decided that it could have a war in Vietnam and a war against poverty at the same time. It lost both of them. And one of the costs was domestic inflation, which rose throughout the ’70s to a peak of 12%.

Gold reacted to the rise in inflation by rising too…it went up 20 times – to over $800 an ounce. Imagine if you had just looked ahead at the (now obvious) consequences of the Nixon administration’s decision to cut the dollar loose from gold in ’71. You could have bought gold at, say, $50 an ounce…buried it in the ground…and you would have beat every other asset class or investment category that we can think of. No commissions. No taxes. No worries. No hassles. You would have avoided the collapse of U.S. stocks in the ’70s…the rise and fall of Japanese stocks in the ’80s…the dotcom euphoria of the ’90s…and the housing bubble of 2001-2006.

Then, if you sold your gold your now…you’d have 15 times as many dollars.

But wait? Why would you want to hold dollars now? And if it doesn’t make sense to hold dollars now…when will you EVER want to hold dollars? And if your wealth just sits in the ground, like a forgotten tomb, what is the point of having it at all?

You’re right, dear reader. You’re better off playing the ups and downs of the markets. It’s more fun…if you like that kind of thing.

But, if you’re like us…and the thought of playing the bipolar markets isn’t exactly your cup of tea, we know of a very interesting way to pad your portfolio with gold – for only a penny per ounce. No joke. So, if you’ve been wary of investing in the yellow metal because of the recent near-record highs, fear not.

Meanwhile, speaking of housing, there are a lot of long faces among house sellers this morning. According to the weekend news, the story just becomes more and more depressing.

“American Dream turns to a Nightmare,” begins the report in the Arizona press.

(A modest suggestion to financial journalists: find a better headline. We’ve read that same headline at least 20 times already. This downturn in the housing threatens to last for years. You can’t keep using that same line. Please try to think of something new.)

The Phoenix market was so hot it attracted buyers from all over the country. Now, the buyers have disappeared. Houses are empty. Foreclosures are rising. Who could have guessed that it would turn out this way? Well, anyone who bothered to think about it…but apparently none of the thousands of people who bought houses did! According to the report, people bought houses in 2006 for $250,000…fully expecting that their places would be worth $500,000 in five years. Prices were rising steeply; they couldn’t imagine that it would ever stop.

In Las Vegas, meanwhile, there are still some 568 subdivisions in various stages of building and marketing. An estimated 48,000 houses are already on the market, with more coming.

How things have changed! Just two years ago, buyers lined up for a chance to pick up lots and houses. People would camp out overnight to be first in line. Sometimes hundreds of potential buyers would show up for only a handful of lots. And builders had to limit the number of lots per customer. Buyers always said “yes” and lenders never said “no.” It was paradise for builders.

But now, Business Week reports that builders are desperate to clear away inventory. On September 14th, for example, Hovnanian, one of America’s big nail drivers, announced a “72-hour Deal of the Century,” in which it cut prices by as much as $100,000 in 19 states.

“Massive…six-figure price cuts” are becoming common, says BW. Standard Pacific offered $20 million in discounts at about the same time.

The builders are making a simple business decision; it’s better to get rid of inventory than to carry it. Houses – and here, dear reader, we let you in on a fundamental insight, are a WASTING ASSET, not an appreciating asset. Let them sit around in the desert sun for a while and you see how fast they waste away. The curtains fade; property taxes must be paid; paint chips and cracks; the lawn must be watered and mowed. They might as well be a crop of lettuce.

Better to make them someone else’s problem, the builders concluded.

And so they unloaded them at steep discounts. And then, all the neighbors got to see what their own houses were really worth.

“China oil imports soar,” comes the headline.

The 1950s…the 1960s – what a great time to grow up in the United States of America! You could drive some huge land barge down the wide-open streets…while smoking a cigarette and drinking a can of beer at the same time. The world’s oil…you had it practically all to yourself. Steel too. And rubber. The good things that came out of the earth were loaded onto ships and sent to the USA. Everybody else was either too broke or too hopeless to be able to use them. The communist Chinese were still going around in dunce caps…and trying to make steel in backyard barbecues. The Indians were making a mess of things too – and everyone thought they were going to starve themselves to death.

You had to worry about keeping these morons alive – not about competing with them for a job! It never occurred to us that they would someday take our factories and our work. Back in the ’50s and ’60s, the Japanese were just beginning to make inroads into the U.S. market. But their products were still cheap and often shoddy. If you wanted something good, you had to “Buy American.”

All that has changed. Kids growing up today think that American-made products are cheap and shoddy. They want foreign-made cars…and gadgets that come from overseas too. And they know that for every one of them who can remember what a quadratic equation is, there are hundreds…maybe even thousands…of Asians who can actually do the math better, cheaper and faster.

And they know, too, that every time they drive up to a gas station, there are thousands of Chinese, Indians and other Asians…bidding for that same tank of gas.

Until tomorrow,

Bill Bonner
The Daily Reckoning