Bipolar Markets

The Daily Reckoning – Weekend Edition

It’s up; it’s down…it’s up again…

Violent mood swings took control of the markets this week, as they reacted to the volatility in the credit and mortgage markets, which has been exacerbated by the housing bubble burst. All in all, it’s been an interesting August; a month that is usually pretty tame as far as the markets are concerned.

After the injection of billions of dollars in the markets didn’t seem to have any effect, the Fed tried another medication on our bipolar markets, in the form of an emergency rate cut. FOMC announced that they would be cutting the discount rate by 0.05 percentage points on Friday morning – the markets breathed an audible sigh of relief…and subsequently rallied on this decision.

Although the stocks regained some of their losses from earlier in the week after the rate cut, most experts believe that this volatility will be around for months – or possibly until the end of the year.

"The bottom line is the credit situation, the subprime situation, and the confluence of these items runs a lot deeper through the Street than a Fed move or even a Fed rate cut can fix," said Chris Johnson, chief investment officer at Johnson Research Group.

Many analysts commenting on the situation used the term "wake up call" – particularly when they were talking about the central banks.

"The lack of monetary discipline has become a hallmark of unfettered globalization," said Morgan Stanley’s Stephen Roach. "Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy."

"The current post-bubble shakeout is hardly an isolated development. Basking in the warm glow of a successful battle against inflation, central banks decided that easy money was the world’s just reward. That set in motion a chain of events that has allowed one bubble to beget another-from equities to housing to credit."

We can’t jump from bubble to bubble forever…after all, as we noted in our last book, Empire of Debt, eventually, everything regresses to the mean. Interestingly, a Baltimore talk radio host, Ron Smith, thinks that is what is happening now – a reversion to the mean. He talked about this on his show yesterday…and gave Empire of Debt a little shout out:

"Market commentators are forced to utter ever more unprovable assertions about what the future looks like for stocks, bonds, and all the myriad financial derivatives traded electronically across the globe," Mr. Smith wrote in an article on his WBAL website.

"If you want to glimpse the full picture of what’s led to this latest financial crisis, understand this cosmic reality as stated by Bill Bonner and Addison Wiggin in their book, Empire of Debt: The Rise of an Epic Financial Crisis."

This situation has reminded us of something else we pointed out in Empire of Debt: "the force of the correction is always equal and opposite to the deception that preceded it."

If we are right about that, then this ought to be a doozie.

Short Fuse
The Daily Reckoning
August 18, 2007

P.S. The recent market turmoil is a good indicator that it’s time to get yourself some "wealth insurance" – in the form of our favorite precious metal. Before you balk at this suggestion, you should check out this unique opportunity – you will make as much money as you want as gold goes up…without risking a cent if it suddenly reverses.

— The Daily Reckoning Book of the Week —

Empire of Debt: The Rise of an Epic Financial Crisis – Now available in paperback!
by Bill Bonner and Addison Wiggin

After a generation of being spoon-fed reality by media, it’s understandable that Americans are confused about the state of their nation. In Empire of Debt, Bonner and Wiggin wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions.

Americans are rapidly facing a choice: recognize these dangerous delusions and take steps to avoid their collapse. Or remain ignorant of them and risk losing all of their wealth when the house of cards comes crashing down.

THIS WEEK in THE DAILY RECKONING: A lot to write about this week – so if you missed a day of market mania, we have the full reports for you, below…

Market Moves from Humbug to Farce              08/17/07
by Bill Bonner

"Every market is a public spectacle. And every public spectacle follows a certain pattern. It begins with lies and humbug…then, it progresses into farce…"

U.S. Dollar on a Foreign Currency Seesaw                   08/16/07
by Bill Bonner

"People have fewer euro-denominated debts than dollar-denominated debts, so the dollar rises against the euro. On the other hand, speculators in the carry trade have huge yen debts."

Bear Market Reinvents the Question Mark                    08/15/07
by Bill Bonner

"Investors, speculators and householders need dollars to pay their bills. Dollars are what people owe. So dollars is what they must have. When dollars are not so readily forthcoming, they go up in price."

Addicted to Debt                                                          08/14/07
by Bill Bonner

"Endrogado means, in this context, hooked on debt. It describes the poor homeowners of West Camille Street…and much of the rest of the nation…from the most modest family, to the U.S. federal government itself."

Superbanks to the Rescue                                             08/13/07
by Bill Bonner

"What a joy it is to watch central bankers at work! What a spectacle! They are charged with keeping this great modern, capitalist economy going. In practice, that means keeping the bubble in speculative finance from deflating too fast."


FLOTSAM AND JETSAM: The Art of Homemade Booze
The Art of Homemade Booze
By Bill Bonner

On Thursday night, we went to dinner at the home of a local doctor. Present were four couples – the doctor and his wife, a retired customs officer and his wife, and a trim, tanned 40-something fellow who works at the French Ministry of Defense and his dentist wife…along with Elizabeth and your editor.

French dinner parties follow a rigid schedule. Drinks until about 10 PM. Then the four-course dinner, with entrée, main course, salad and cheese course, followed by dessert. At fancy dinners, the cheese and salad are separated into two distinct courses. Plates are changed between courses.

All this takes time. It is usually around midnight when the group gets up from the dinner table and moves to the salon, or living room, for coffee. The conversation continues for an hour or so more. And then someone looks at his wife and says, "Honey, I think it is about time to go home."

That is a signal to the other diners. They may now all stand up in unison and begin to say goodnight to each other. Men shake each other’s hands. Women are kissed on both cheeks. Everyone goes home.

We only bring this up because we are on vacation. Otherwise, we wouldn’t notice. When we are on vacation we make an effort to notice things that we might otherwise take for granted. That is the whole point of it, to leave off with the normal cares and concerns of the rest of the year…and to take up new ones.

So far, the vacation is going pretty well. After writing our brief Reckoning for yesterday, we caught up on our email, which took until noon. This gave rise to various problems and opportunities, which occupied our mind until about 3 PM. Then, we were able to go outside, where we finished painting the windows on the gypsy wagon…and helped Damien lay out some border stones for Elizabeth’s flowers.

Damien’s car is in the shop, so we both got into the old 2CV and drove to his house.

"Ah…this is a real car…" said Damien. "This is a real French car."

The 2CV was France’s answer to the Volkswagen, only cheaper, slower, and funkier. Now, it is a good car if you want to make a fashion statement; it is a bad car if you just want to get somewhere. Its little air-cooled engine can rev the car up to about 50 mph, on a downhill slope. But that’s about the limit. Still, for wandering around in the summertime, with a little style, a 2CV is hard to beat.

"Come on…let’s have a drink," said Damien when we arrived at his house.

"I don’t know…I’ve got to go out to dinner soon…"

"Oh…c’mon…let’s go into the wine cellar."

Damien’s wine cellar is a dark confusion of barrels, bottles and huge glass containers. He makes his own drinks, distills his own liquor, and bottles his own hooch.

"Try some of this," he said, drawing off a large glass from one of the barrels. "This is last year’s ‘pineau.’ What do you think?"

"Hmmm…very good."

When we have finished our pineau… and discussed the weather, the process of making ‘eau de vie,’ the failure of the next generation to appreciate the art of homemade booze, and the general decline of Western civilization…Damien brightened up.

"Ah…here, you have to try this…" he said, turning to a smaller barrel, covered in cobwebs. "I’ve been saving this for more than 10 years. This is made with the ‘noah’ grape. You know, it’s illegal to grow the vines in France and illegal to make the wine. But it’s really good."

We tried it.

"Hmmm…Damien, this is very good," we replied.

We drank our glass…continued our conversation…and then thought to ask.

"Why is this illegal?"

"Oh…they say it drives people crazy. I don’t believe it. I know plenty of people who drink it. They’re not crazy. Well…come to think of it…they are crazy. Every one of them. But it could have been something else that made them that way."


Bill Bonner
The Daily Reckoning

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:
Empire of Debt

The Daily Reckoning