The Tremors of Economic Calamity

“Check this out: ‘Gas prices hit a record nationwide average of $3.23 per gallon in late May before receding a little, though prices are expected to soar again later this year. Food costs have increased 4.5 percent over the past 12 months, partly because of higher fuel costs. Egg prices were 44 percent higher, while milk was up 21.3 percent over the past 12 months to nearly $4 a gallon, according to the Bureau of Labor Statistics.’

“The result is that when prices go up faster than income, then people start suffering, as is proved by Rev. Melony Samuels, director of The BedStuy Campaign Against Hunger, which is ‘a church-affiliated food pantry in Brooklyn.’ She says that, ‘The pantry scrambled to feed 5,000 new families over the past 12 months, up almost 70 percent from 3,000 the year before.’

“Up 70% in one year! And this is 5,000 new families in dire need, right there in that one place in Brooklyn! Multiply that times the number of all the places in America that are suffering the results of higher consumer prices, which is the inevitable result of the filthy, despicable Federal Reserve creating the money and credit to cause the higher prices, and this is so intolerable that what we ought to do is rise up in open rebellion and install Emperor King Mogambo (EKM) on the throne to rule with an iron fist in one hand and a tasty Taco Supreme in the other, smiting and lashing out in unrestrained fury at Congress, the Supreme Court and the Federal Reserve until all the people are horrified and are begging, ‘Please stop punishing them, Merciful And Handsome Mogambo (MAHM), as they have been cruelly whipped and beaten for their sins, and now they must languish in the infamous Mogambo Dank Dungeon Of Dread And Despair (MDDODAD)!'”

The Mogambo Guru
October 25, 2007

Now over to Short Fuse in Baltimore (for the moment)…

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Views from the Fuse:

An article on MarketWatch this morning reports that an expert has found the roots of the credit crisis: at the Federal Reserve.

Tom Schlesinger, founder and executive director of Financial Markets Center, a think tank that has been monitoring the Fed for the last 10 years, “believes the blame for the crisis falls squarely on the Fed and accuses the central bank of ‘regulatory foot-dragging’ that has harmed the public.”

Well…that’s some pretty good sleuthing, eh? Who would have thought the Fed was largely to blame for the credit crunch?

Of course, Greenspan is doing some finger-pointing as well – right at the ratings agencies.

“People believed they knew what they were doing,” the former Fed chairman recently told a German newspaper, “And they don’t.”

However, this realization doesn’t change Greenspan’s anti-regulation thinking. According to Ol’ Bubbles, the agencies are “already regulated”, by the loss of trust by the investors, and the agencies subsequent loss of business.

Greenspan is quoted on a WSJ blog as saying, “There’s no point in regulating this. The horse is out of the barn, as we like to say.”

Call it what you will… “letting markets work” or “regulatory foot-dragging” – the fact remains that we’ve found ourselves in quite the pickle. And whether you blame the Fed for the credit crisis or not, they will continue to find themselves in the limelight as this unfolds.

“The Fed’s decision to lower the fed funds rate by a larger than expected 50 basis points kicked the dollar index down to a record low,” writes The Survival Report’s Mish Shedlock. “The euro traded over 1.40 per dollar for the first time, and the Canadian dollar reached parity against the U.S. dollar for the first time in over 30 years. These events reached the front page around the country.

“This time, the dollar’s decline coincided with a sharp rise in public awareness about the weakening greenback. As a result, the precious metals bull market may be entering a new phase. When the general public becomes more aware of the dollar’s bleak future, more and more people will see charts comparing the price of gold and the U.S. dollar index and ask themselves why they haven’t been invested in gold.”

There’s no reason to not be invested in gold…especially when you can get it for a penny per ounce.

Warren Buffett, who is usually pretty bearish on the general health of the U.S. economy, is getting noticeably uncomfortable over the state of the greenback. In fact, the Oracle of Omaha said today that he expects further dollar weakness, and is looking into South Korean stocks.

Reuters reports that the dollar has lost “23 percent against the South Korean won since the end of 2003, hit by accumulating current account surpluses in South Korea and a steady inflow of portfolio investment into the country’s financial markets.”

Well, Mr. Buffett isn’t worth $52 billion for nothing…

“My impression is that the Korean market is modestly cheaper than other markets in the world. I think the Korean market will do better for the next 10 years,” said Buffett. Our friends at The 5 Min. Forecast tell us today that he is currently visiting the TaeguTec facility in Daegu, South Korea. TaeguTec is a subsidiary of Iscar – a company Berkshire Hathaway bought a $4 billion stake in last year. While there, he voiced his approval of South Korean steelmaker Posco.

Existing house sales in the United States fell at an 8% rate in the last quarter – twice as much as the experts expected. Meanwhile, car sales were falling at a 15% annual rate.

And in California…house prices are falling…the dollar is falling…and billions of dollars’ worth of wealth is going up in smoke – literally! California is on fire. Five people are dead…and a million have been evacuated. “It’s the biggest mobilization in the history of the state,” says today’s La Nacion. The poor Californians…we hope our Daily Reckoning readers in the Golden State are out of harm’s way…

So far, only the marginal buyer…and the marginal lender…and the marginal investor…and the marginal homeowner…have been really hurt. But could problems in the credit markets move beyond the margins and into the mainstream? Could the conflagration in California portend more fireworks elsewhere?

Our Argentina financial analyst, Paola Pecora, was reading The Daily Reckoning yesterday.

“The trouble with you American financial writers is that you are too naïve,” she commented. .

“Down here in Argentina,” she continued, “we don’t wonder IF we will have a financial crisis…we only wonder WHEN.”

Argentines don’t trouble themselves wondering who will suffer when the trouble comes, either. They’ve seen this movie. They know the plot. The government always tries to rig this price or fix that market. It routinely lives beyond its means – attempting to buy political support by spending money or controlling prices. Then, inevitably, it puts off the day of reckoning as long as possible. And then, when things blow up, it’s a big mess.

The smart people…the rich people…typically come out okay. They’ve got their money – or much of it – out of the country. Besides, when you’re debt free – with a nice house…enough to eat…and a nice car – how rich you are is just a number. And it is a number that varies with currency exchange rates and inflation.

But the middle classes are not so lucky. When trouble comes, typically, they are the ones who suffer. They have something to lose…but not enough. Their living standards go down. Of course, exactly how the crisis affects them depends on what kind of crisis it is. Inflation can wipe out their savings and their pensions. (Now, in Argentina as in America, many things tend to be automatically adjusted for inflation. But in both countries, the authorities bend the numbers so that losses from inflation are never fully made up.) Market crashes, deflation, defaults and currency depreciations hurt the middle classes too – reducing incomes, smashing nest eggs, and generally making almost everyone poorer.

“Americans are impoverished by a lack of experience,” we explained to our Spanish teacher, Gabriela. The last really major financial setback was in the 1930s; hardly anyone is alive who remembers it as an adult. After so many years with so little serious trouble, we can’t imagine that anything really awful will happen; nothing really awful ever does.

Really awful things happen to other people, not to us.

Of course, we would much rather be impoverished by a lack of financial experience than by a lack of money. But we have an intuition that one might lead to the other.

This is why we advise you, dear reader, to educate yourself – so you have the tools to protect your assets from this mammoth downswing in the U.S. economy. But where to put your money at a time like this? We recommend checking out sectors of the market that are often overlooked by Wall Street…penny stocks, for example.

Since 1926, no other class of stock has made investors more money than penny stocks. In other words, investors who buy shares of the smallest companies on the market beat those who buy stock in companies like Microsoft, GE, IBM, Intel and Cisco. And let’s face it, every neighbor, friend and family member you have invests in the same large stocks as the rest of the world.

We keep saying: housing is not an investment; it’s a consumer item. Here comes an old friend with new evidence:

“The idea that housing doesn’t go down turns on its head when you actually calculate in the real-world costs of interest, taxes, insurance, etc. For instance, before those costs are counted, it looks like 16 out of the 17 top real estate markets in the 1990s were in the black. Once you add them in, however, it turns out that not one of the top property markets went up. They were all negative.

“In the 2000s, up to May 2007, you get something similar…three markets that, in unrealistic terms supposedly shot up 18%, 33%, and 36% during that period, are all actually net losers…down 10.5%, 13.4%, and 28.2%. As in negative. The gains were phantom stats from the fantasy world of no-cost property ownership.

“Running through the rest of the list, the other major markets did still make money. But instead of the astounding triple-digit gains property owners love to point to as proof that this bubble was the real deal, you find out that only two of the markets – net of costs – actually crossed the 100%-gain mark (instead of 10 markets). And annualized, only two markets were even a little above 10% gains in property values.

“Not bad, but not a miracle by any stretch.

“Two more of those top markets just barely squeaked past the annualized 8.5% gains in the S&P 500 for the same period. All the rest of the top 17 markets looked at in this article did worse than the S&P. During what was supposed to be the biggest property boom of all time.

“Again, this isn’t to say there wasn’t a bubble. Just that it truly was an event completely devoid of sanity.”

Finally, we’re on our way back to London tonight. We probably won’t be able to write very much tomorrow.

Bill Bonner
The Daily Reckoning