Bail-Out Nation

“Once upon a time, American-style capitalism resembled a bare-knuckled fistfight – a continuous “Ultimate Fighting” match in which competitors would pummel one another until a victor emerged. But modern American-style capitalism is more like ‘arts and crafts’ time in one of Manhattan’s pricey nursery schools. Every coddled kiddy’s ‘artistic’ creation – no matter how inept or ghastly it may be – elicits praise from the nursery school instructors. Indeed, every grunt elicits praise…and every boo-boo finds a


“Outside the walls of the nursery school, capitalism is just as brutal and Darwinian as it has always been, perhaps even more so. But on the inside, the privileged kiddies never shed a tear without receiving an immediate hug and a ‘There, there. It’s okay. It wasn’t your fault…and even if it was your fault, Uncle Ben will make it all better.’

“As for discipline; forget it. The coddled capitalists of America’s high finance never receive a slap on the wrist for any misdeed whatsoever. That would be child-abuse. Nor do they ever even receive a time-out for bad behavior. Worst case, punishment arrives in the form of multi-million dollar severance packages.

“Who are these ‘nursery school’ capitalists? They are the folks who receive millions of dollars each year to preside over public corporations and/or to speculate with the shareholders’ capital.”

Eric J. Fry
October 17, 2007

Keep reading today’s guest essay here:

Bail-Out Nation

Let’s see what Short Fuse has up her sleeve in Los Angeles…


Views from the Fuse:

Ay yi yi…things are just getting worse and worse for the housing market, huh?

You don’t need a Magic 8 Ball to see that housing’s outlook is ‘not so good’…a quick glance through today’s headlines on shows us just that.

September housing starts in the U.S. fell to a level not seen since 1993, and building permits – which are viewed as a major indicator of the health of this industry – fell 7.3 percent.

Also, reports Addison from The 5 Min. Forecast, “The National Association of Home Builders confidence index reported a score of 18 for October – the lowest reading in the index’s 23 year history. Builders were also asked to score their expectations for the housing industry’s next 6 months, to which they gave a score of 26, tied with last month’s record low. The third facet of the NAHB’s report – current buyer traffic – also fell, to 15. You guessed it…a record low.

“Yesterday’s report from the NAHB marks the eighth consecutive month of decline. Only two years ago, the overall confidence scored an amazing 74…times have changed.”

The greenback took this news pretty hard, falling against 15 of the 16 major currencies.

“The housing number lent a hand to those who have a pessimistic view on the housing market and believe that it will drag down overall growth,” said Robert Sinche, head of global currency strategy at Bank of America.

Hmmm… “Pessimistic”? Perhaps he meant ‘realistic’? It’s not just a bunch of Debbie Downers or (ahem) a daily on-line financial publication shouting that the sky is falling…the United States’ two most important economic policy makers have said that the housing market is – and will continue – to slow U.S. growth into next year.

As we mentioned yesterday, Bernanke is keeping the focus of the Fed on housing (although it’s pretty clear inflation is a problem as well) and as Chuck puts it in today’s issue of The Daily Pfennig:

“[If] Ben Bernanke is still talking about the slowdown in the economy from housing that certainly sounds as if he’s still more worried about the economy hitting a recession, than rising inflation. As you know, I’m not one to worry about recessions. We’ve had them in the past, they didn’t kill us, they only made us stronger! We need recessions to clean out the excess of the previous booms. And we didn’t get that chance a few years ago, because the Fed, and Big Al Greenspan cut interest rates to the bone, and printed dollars out the yin-yang…

“The longer you postpone the inevitable, the harsher it will be eventually! Big Ben is worried about a recession…”

And our overseas investors are wise to the housing troubles as well, as Japan, China and Taiwan sold U.S. T-bonds at the fastest rate in at least five years.

Bloomberg reports:

“Asia’s dumping of Treasuries exacerbated the biggest sell-off in U.S. financial assets since Russia defaulted in 1998. The dollar has declined by 7.2 percent this year to a record low against the euro as the Federal Reserve cut interest rates last month to support the housing market, reducing the yield advantage of U.S. fixed income assets.

“‘People are concerned about the U.S. dollar falling,’ said Hiromasa Nakamura, who helps oversee the equivalent of $25.7 billion at Mizuho Asset Management Co. in Tokyo. ‘The Fed will continue to cut rates and the dollar may fall for three to six months.'”

“Three to six months”, eh? We’ll bet that the dollar will continue its slow demise for a bit longer than that, but this forecast has people hedging their bets with gold and other precious metals.

Gold is trading near 27-year highs, and while we talk a lot about investing in gold in these pages, let’s not overlook another precious metal: silver.

Silver is up 4 cents to $13.665 an ounce, and lucky for you: our friends at EverBank have just reissued their MarketSafe Silver Bullion CD for another term.

We mentioned yesterday that correspondence from us until Monday is going to be spotty…so today’s missive will be a little shorter than usual – and we can hear those sighs of relief, dear reader.

Back in the USA, the foundation seems to be giving way.

Yesterday, we noticed that credit card debt is soaring. With no more ‘equity’ to pull out of their houses, they are looking for credit wherever they can find it.

Now this, from Dow Jones:

“Cash-strapped Americans raiding their 401(k)s”, reads the headline.

“Despite potential tax and investment problems, more investors have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months…

“Many in the field expect more borrowing in 2008, as consumers struggle with tighter credit and potentially higher mortgage payments…

“‘I think a lot of individuals are looking for different options,'” said an expert quoted by the news service. “‘This is really a last resort.'”

The article continues: “T. Rowe Price has calculated that someone with a balance of $150,000 who borrows $10,000 at age 40 would see an $83,137 difference at 65 even if the loan is repaid, given an 8 percent return on investments and a 7 percent interest rate on the loan…

“‘What I’m finding is Americans in general are spending more than they make,'” said a consumer financial advisor. “‘And as the mortgage industry implodes, they look for where else they can borrow.'”

“Deficits don’t matter,” Dick Cheney allegedly remarked. What was he thinking? Maybe “deficits don’t matter to us politicians.” But they sure matter to people who are trying to balance a family budget. Because of past household deficits, combined with the ingenuity of the lending industry, and the insouciance of the Fed, many families aren’t able to make their mortgage payments.

“Mortgage meltdown,” is how the San Francisco paper sees it.

And from Orland “As foreclosures soar, dreams die.”

Coast to coast, the story is the same. It is the story of an economy late in the credit cycle; it is the story of a downswing, not an up-swing.

Remember, the U.S. stock market is one of the worst performers in the world. This, too, suggests to us that the United States is not in a major cyclical up-swing. When the wind really whips things up…it flies, along with the rest of the turkeys…but never gets very far off the ground.

So, if you want to speculate on stocks, you’re probably better off in markets with more upside potential.

Colleague Graham Summers reports that one of the smartest people on Wall Street, Marty Whitman, has moved more than half of his equity investments overseas. The breakdown is as follows: 53% in Hong Kong; 29% in Japan; 10% in South Korea; and 8% in Western Europe.

Only one of his top five holdings is a U.S. play.

Free Market Investor’s Christopher Hancock believes in investing outside of the United States as well.

“Money will always flow where’s it’s treated best,” he tells us. “And I think you’ll be hard-pressed to find any other place in the world that treats money better than Hong Kong.

“The highest tax bracket doesn’t surpass 17%. Individuals are assessed on only annual employment income. Dividends and capital gains are not taxed. And like many progressive tax systems, Hong Kong grants allowances for certain deductions like charitable contributions.

But this is what really makes Hong Kong an interesting place to put your money…

“Hong Kong recently repealed its inheritance tax on property. Consequently, many Hong Kong property owners (unfortunately, U.S. citizens who own Hong Kong property are still taxed under inheritance laws) are now able to pass down real estate assets without any tax liability whatsoever.

“It’s no wonder 21 billionaires call Hong Kong home. And I would venture to guess that it won’t be long before many more do the same.”

That’s it for us today…

Bill Bonner
The Daily Reckoning

P.S. Chris tells us that prime locations in Central, Admiralty and Causeway Bay, the heart of Hong Kong, will only continue to command premium prices for years to come.

The Daily Reckoning