Debt Becomes Her

This is going to be a dress-down-Friday edition of The Daily Reckoning. Not that there isn’t a lot to be reckoned with. It’s just that we’ve done enough reckoning for one week. Besides, it’s summer…time for a break…a different way of looking at things…a slower pace…a more relaxed schedule.

So, we got out to the office by 6AM so we could complete our reckonings by 1PM…and then marshal the children into squads for various assignments around the house. One group will paint windows and shutters. Another will clean up the office. Still another will finish painting the inside of the gypsy wagon. If we get everyone working at peak efficiency we’ll be able to finish our projects before the dinner bell sounds at 8PM! Ah…taking it easy… More below…

We were surprised to see the papers already talking about “Back to School Shopping.” Our summer vacation just began yesterday!

We’re also wondering how this fall’s shopping season is going to turn out. The subprime mortgage problem must be starting to pinch a lot of subprime families. October is the big month for adjustable rate mortgages. That is when the number of resets reaches its peak; by our calculations nearly half a million families will feel the effects that month alone. How much shopping are they going to do? We’ll find out…

Treasury Secretary Paulson says the subprime mess will not affect the rest of the economy. He must have had a lot of practice lying at Goldman Sachs (NYSE:GS)…or else it just comes naturally to him. Affecting the rest of the economy is precisely what the subprime credit debacle is doing – just as you’d expect.

At the bottom end, consumers still seem to be coping. Consumer spending is said to be going up – though, at a slower and slower rate. The little guys, like the big guys, have learned to take chances. They believe that nothing ever goes too far wrong. Whenever a correction threatens, along come the feds with more money. Worst case, they figure, the economy will turn a little soft – as it did in 2001-2002. They didn’t cut back spending then; they don’t expect to do so this time either.

On the rare occasions when we actually worry about the future…we wonder what will happen when these poor lumpenhouseholders realize what has happened to them, for they are the big losers of this economic era. Jobs and wages are moving to Asia – leaving them behind. And they actually helped finance…they helped to speed up…the process – by buying more from Asia than they could rightly afford. Now, they are the most indebted people in the world…with the most expensive lifestyles to support…and with the slowest income growth outside of Africa. While the foreigners have gotten richer and more competitive…America’s middle and lower-middle classes have merely gone deeper into debt…and added to their monthly expenses. They have bigger houses to heat and cool. They have more cars. They have more gadgets and second homes. And in the years ahead, they’ll find themselves competing with these dynamic foreigners for jobs…for earnings…for fuel…even for food – while trying to avoid bankruptcy.

At the upper end, speculators are discovering that money doesn’t always come along when you need it.

The TIMES of London reports that the big banks are stuck with a half a trillion dollars’ worth of debt. The banks financed deals, expecting to sell the paper on to investors. But, suddenly, investors don’t want it.

Many deals may be “on hold” for months, says the Financial Times. Turmoil in the credit market may last for years, the paper continues. The Wall Street Journal take s up the theme with an unseasonable metaphor…the leveraged deals have “freezed” in the pipeline, says the WSJ.

Small wonder. Investors who got in on these deals must wish the pipe had frozen sooner…or that they had listened to Chris Mayer’s advice – and put their money in stocks that the Wall Street mainstream has caught onto yet…catch up stocks that erase years of falling behind.

Caxton Associates (JNB:CAT) sent out a letter to its nervous investors; it was combating “unfounded rumors,” it said, that its funds were in trouble.

Investors in Bear Stearns’ (NYSE:BSC) two funds found that rumors concerning those funds were not unfounded at all. The funds went bankrupt. And now, the investors have gone to court, saying they were misled as to what was in them. Accredited Home Lenders Holding (NASDAQ:LEND) says it may go bankrupt. Homebuilders and lenders all over the country are running scared.

Meanwhile, many hedge funds are said to be barring investors from taking their money out; they are struggling to avoid being forced to mark their assets to market. Like down-market consumers, they’re hoping to wait out this soft patch.

A total of about $1.7 trillion is supposed to be in hedge funds. Surely, a lot of it will come out…or disappear…before this downdraft in the credit markets is over.

And it won’t be over for a while…most likely.

Our old friend, Jim Rogers, says the housing bubble is “one of history’s biggest bubbles.” Rogers says he’s still short investment banks and homebuilders.

This thing “has a long way to go,” he believes.

*** The LA TIMES reports that Americans now buy more imported cars than those made at home. This must be an important milestone. The car business is a big business. It is also a complex business, and a high-tech business, with long supply chains involving hundreds of different industries and thousands of different skills.

But don’t worry, dear reader. All those people who used to be involved in the auto business will go into finance. That’s where the money is…

Well, that’s where the money is when the country is in a credit bubble. But when the bubble pops, the money disappears. People who used to sell mortgages wish they could get jobs selling cars.

The U.S. auto business isn’t dead yet. But with China just introducing its cars into the American market, it may not be long before it gives up the ghost. Of course, the auto business isn’t the only way to make money. But it was a good way to make money for a long time. And you have to wonder…if the US of A can’t be competitive in autos, what can it be competitive in?

Have a nice weekend,

Bill Bonner
The Daily Reckoning
August 3, 2007

P.S. The good ol’ summertime…

We typically invite friends and relatives to visit during the month of August. The group gets so big, often, that we need help in the kitchen; so, we hire a temporary cook for the month.

The arrival of the new cook is always greeted with apprehension…and excitement. You never know how he’ll turn out. These are not professional cooks, but people we’ve been able to dragoon by word-of-mouth…or the help-wanted sections of the local papers. Sometimes they’re good; sometimes they’re not so good…

More on this, below. But first…Short Fuse with some views from Los Angeles…

Views from the Fuse

*** We got to spend some time last week with Dan Denning, who now runs the Daily Reckoning’s Australian version.

Over a meal of halibut cheeks at Vancouver’s Joe Fortes, Dan outlined his speech from the day before for us.

“Most of the world’s growth is going to come from the ‘rim of fire’ in the next few years,” he told us. “Opportunity is migrating to the Far East for investors…the period of time when America was the only region that mattered and the only engine of growth is long gone.”

Indeed – just look at the U.S. dollar. Today, the greenback dropped the most in close to a month against the euro, and fell verses the yen on housing market fears and data that showed payroll slowdowns.

“The great dollar standard is ending,” said Dan, “and the dollar is not done declining relative to other currencies.”

So – what to do? Diversify out of dollars and into other currencies?

“Currency diversification is OK…but I would diversify into solid goods. People need to seriously consider investing in the overseas markets.

“Global money supply is driving the resource boom…and, as Marc Faber puts it, the uptrend in resources has many, many years to go.”

“Also,” Dan added, “I know Addison is skeptical, but I’m a bull on alternative energy. I think there are some lucrative opportunities there.”

We can understand Addison’s skepticism – ethanol, the most-hyped of alternative energies, that has been deemed to be the savior from our oil dependence, is, for lack of a better word, a fraud.

That’s not the only alternative energy out there, though…in fact, some of the other options, if nothing else, make for some pretty good investment prospects…

*** You can always count on Chavez to supply some interesting fodder…

“Here’s a funny story,” writes Addison. “Sean Penn, the Oscar-winning actor, has become quite close with Hugo Chavez. Penn recently called Cheney and Rice ‘villainously and criminally obscene people,’ and apparently that struck a chord with Hugo.

“Hugo got on Venezuelan TV on Wednesday and publicly welcomed Sean to the country. ‘He’s one of the greatest opponents of the Iraq invasion,’ Hugo claimed.

“Yeah, we oppose the invasion, the war and Cheney, too. We’re not all that fond of Rice either. But does that put us in bed with that Venezuelan nutjob?”

*** In keeping with today’s relatively ‘light’ issue, here’s the man that everyone loves to hate, the Mogambo Guru:

“The Economist magazine reports that (in England, anyway) ‘cocaine is cheaper now than it was a decade ago.’ A decade! Maybe the new way that the government/Fed calculates its hedonically-jiggered inflation statistics, ‘proving’ that inflation is always going down or is even ‘benign’, is actually correct in some things!

“The lesson of this? When you can’t afford food because of the rising cost of food, you can use the Fed’s new ‘substitution effect’, which is to substitute cocaine (which went down in price) for food (which went up in price) in your market basket, and thus inflation is reduced to less than zero for you! Hahaha! Who knew? Drugs as an anti-inflationary device! And probably lose a lot of weight, too!

“Or maybe the government/Fed will just disguise the inflation in breakfast cereals by pricing breakfast cereals as ‘dollars per box’ and not ‘cents per ounce’! Therefore, since the price per box did not go up because there is less cereal in each box, inflation in cereals would be zero!

“And with the ‘substitution effect’ in play, we can then assume that the Fed will say that all consumers would try to escape higher prices in other foodstuffs by switching to breakfast cereals (which still cost the same in ‘dollars per box’), which in turn would be substituted by cocaine (which went down in price), driving overall inflation in food to less than zero! Hahaha!

“And the breakfast cereal company itself would have to be pretty stupid not to at least mention how they are selling more boxes of cereal (although neglecting to mention that they are actually selling less actual cereal since each box has less cereal in it), hopefully driving the stock, and the stock options of the executives, up! And taking the whole stock market up with it!”

*** And Bill’s final note:

Improbably, one skinny young French woman didn’t know how to cook at all. Elizabeth showed her how to prepare a few dishes that we all liked. By the end of the month, she seemed to be getting the hang of it.

One Swiss man would stand over the stove with a cigarette in his mouth, dropping ashes into the soup. When the children would annoy him, he’d lose his temper and chase them around the kitchen table with a butcher’s knife in his hand.

Another French woman was a treasure. She always made what we liked…and always smiled as she worked in the kitchen. And last year, we got lucky again. Our cook was a black woman from Alabama, who made grits and pecan pie. The kids loved her. We tried to get her back this year, but she had moved on.

Our new cook arrived on Tuesday. Dark haired, mid-40s…with a pleasant, attractive face…she was born in New Zealand and grew up in Australia. Anya is very discreet. After four days living with us, we still know little about her…except that she once lived in a commune in New Zealand where people went about naked…and is now working on a Ph.D. in French philosophy at the Sorbonne, taking odd jobs to support herself.

More to come…

That about wraps it up for today. Enjoy your Friday!

Short Fuse
The Daily Reckoning

P.S. Dan Denning wrote a book on the wealth migration from the West to the Far East, called The Bull Hunter. As the China story gets bigger than ever, the insights and information found in Dan’s book continue to ring true.

The Daily Reckoning