Fantasy Island

You thought the housing crisis was bad in the United States? Wait ’til you see what happens in Britain.

“We thought some new top in conceit had been reached when we saw last week’s cover of Country Life magazine in London,” writes Bill in today’s guest essay.

“‘Why everyone loves England,’ was the headline.

“While, the gentry’s rag exalts Britain’s geographic particularities, the headline might be useful for any publication in the country. The travel press could use it in every issue; everywhere you look, vacationers find something to like about England. The tabloids pull it out to describe illegal aliens sneaking aboard ferries in order to make their way into Britain’s robust service industry. And in the financial press, too, that everyone loves England is a practically indispensable headline; it explains why property prices always go up…and why Britain’s economy can never go down.

“To put it plainly, we spend the next few minutes explaining why the headline may soon get a rest.”

Bill Bonner
September 17, 2007

Keep reading here:

Fantasy Island

And more thoughts from Short Fuse in Los Angeles…


Views from the Fuse:

Everyone knew that the markets would be holding their collective breath today, awaiting tomorrow’s Fed decision…but then Britain’s fifth biggest mortgage lender, Northern Rock, had to go and throw some more fuel on the fire.

Stocks are down across the board this morning as the British bank added to global credit concerns by asking for emergency lending, causing thousands of customers to withdraw their savings, which is never a good sign for a bank. It’s such a bad sign, in fact, that Northern Rock’s shares were down 34% this morning.

“It’s clear today that the British public has lost a lot of faith in the lender,” writes Addison in today’s issue of The 5 Min. Forecast. “The FTSE 100 closed down 2% on Friday, almost exclusively on this news. Depositors in Northern Rock have withdrawn over 2 billion pounds – 10% of the banks total deposits – since Friday.

“But Northern Rock isn’t the only over-exposed lender/bank in town…” See today’s issue of The 5 for a quick U.K. rundown published in today’s Daily Mail…

Meanwhile, Reuters reports that Greenspan had this to say today on the credit market and housing turmoil: “chances the U.S. economy will fall into recession have risen as a result of the prolonged housing slump, and that increasing inflationary pressures will make monetary policy a lot more difficult.”

In other words… “Glad I don’t have your job anymore, Bernanke.”

Chris Mayer told his Mayer’s Special Situations readers to ignore the buzzing from the media and analysts on what the Fed will do tomorrow.

“No one knows what the rate should be, just as no one knows what the price of oil should be. That’s why we have markets to sort these things out. Markets are a means of discovery. Interest rates should abide by market forces just as the price of doughnuts and coffee do.

“That’s too much to handle for the highbrow thinkers on Wall Street and the intellectual set. They like to pull levers and push buttons and fool around with trying to steer the economy as if it were an ocean liner. As the years roll by, I am really developing a strong distaste for policy wonks and people who seem to have all the answers. All the sages teach us to be careful of what we think we know.

“My advice is to ignore riveting coverage of the Fed. In the short term, it’s a guessing game as to how the market may react to the Fed’s moves. Over the longer term, other factors become far more important – such as what you own and what you paid to own it.”

Of course, Chris has positioned his readers to profit no matter what the Fed does (or doesn’t do) tomorrow. 

One last note…Ol’ Bubbles had his first televised interview last night on 60 Minutes. And while he had little new to say about the housing market and his choices to keep interest rates low for so long, he did have a few interesting things to say about working with the Bush administration…

The New York Times reports:

“‘I’m just very disappointed,’ he said glumly, as he sat in his living room. ‘Smaller government, lower spending, lower taxes, less regulation – they had the resources to do it, they had the knowledge to do it, they had the political majorities to do it. And they didn’t.’

“In the end, he said, ‘political control trumped policy, and they achieved neither political control nor policy.’

“Mr. Greenspan said he met frequently at the White House with President Bush and Vice President Cheney, but his enthusiasm for the new administration cooled as he discovered that Mr. Bush ignored much of his advice.”

The Times goes on to point out that the former Fedhead’s observations are in line with another ex-Bush administration player: former Treasury Secretary Paul O’Neill…and we can vouch for that.

We’ve interviewed Mr. O’Neill for our upcoming documentary, and on the working with the Bush administration, he had this to say:

“The reason I agreed to come in [to his position as Treasury Secretary under this administration] is because I saw lots of things that needed to be done, I believed in our economy…and I was encouraged to believe that Bush 43 was up for the difficult political things that needed to be done to make course corrections. Those course corrections still include, not acted on, fixing the Social Security Trust Fund, fixing the Medicare Trust Fund and fundamentally redesigning the way the federal tax system works. I thought there was some prospect that President Bush would entertain the difficult political choices that needed to be made in order to act on these things…”

Unfortunately, as O’Neill goes on to say in his interview, the Bush administration wasn’t necessarily interested in taking his advice. After 9/11, O’Neill said, he was against further tax reductions, pointing out that “we needed rainy day money for the prospect of [war in] Iraq and another set of attacks like 9/11.

“That was not a popular view, and in fact, it led to a conversation with the Vice President where he basically told me, ‘Don’t worry about further tax cuts, it’s okay, Ronald Reagan proved that we don’t need to worry about deficits.’ You know, I gotta tell you, this was really a shock to me because whatever you may think about Ronald Reagan, I don’t think he or anyone else proved that it’s possible to ignore deficits.

“I think it is true you can be sanguine about deficits for a short period of time, but you can’t be sanguine about mounting debt for the United States of America…you know, when the Bush 43 administration took over, we had something around 5.6 trillion dollars worth of national debt. Today [in April 2007] the number’s 8.8 trillion…that’s not an innocent change, it is a monumental change in the debt service that we have to do in addition to, and on top of all of the other things our country needs to do.”

We all know how that story ended…Paul O’Neill was asked to leave his post as Treasury Secretary…and our debt today sits at over $9 trillion. Well, if nothing else, we have plenty of fodder for our documentary. Stay tuned…

We looked down this morning…just to make sure.

Recently, readers have been writing to complain about our views on Iraq. They’ve accused us of being a coward…of being a sissy…of lacking cojones, in other words.

We had to look. And sure enough…nothing had changed.

And then we wondered – what is the connection? Do blockhead world-improvers have bigger cojones than other people? More below…

Meanwhile, back in the world of money and markets, there was little movement on Friday. Gold held at $717. Stocks were down slightly.

Oil eased over $80 last week. At present prices, you can trade an ounce of gold for about nine barrels of oil. Historically, the ratio was usually about one to 15. Either oil is too expensive or gold is too cheap. Sell oil…buy gold? The oil side of that trade looks dangerous to us. The gold side is surer. When things start to shake and slide, people turn to gold for something solid to hold onto. Oil, on the other hand, is slippery.

Also in the news last week were more stories about the problems in subprime…and housing generally. The International Herald Tribune described a typical situation:

“A Minnesota couple had a mortgage on a modest house. The interest came to $11,400 per year on the $205,000 loan. But now, the rate has been adjusted upwards – to 9.3%. This puts the annual interest charge up to $19,000. The couple didn’t have an extra $7,600 to put into their mortgage payments, so they tried to refinance. Alas, 2007 is not 2005. Lenders are not standing in line to offer them money. What’s worse, they find they can’t refinance at all without paying thousands in pre-payment penalties. These penalties are another source of outrage for the politicians, who’ve vowed to prohibit them.”

“My guess is that this real estate problem is going to change the whole mentality of the baby-boomers,” said a friend yesterday. “We’re going to go back to our roots in the 1960s and focus on happiness, rather than money. What I mean is that we’re going to give up on money as a source of happiness…either because we finally got money and then discovered that it didn’t make us happy…or, probably for most people, the wealth we thought we had – in our houses – is going to disappear.

“We’re too old to build wealth by saving it…or by earning it. So, we’re going to focus on being happy the way we did in the ’60s, when we didn’t have any money. We’re going to remember how happy we were back then, with nothing. There’s going to be a huge new interest in the spiritual side of things…in music…in living inexpensively…and maybe even in drugs.”

For the last 30 years, the baby boomers have been up-scaling their lives. If our friend is right, the next years will be spent down-scaling…getting rid of things…simplifying…and focusing on things not directly related to money.

Since writing a note in the DR last Thursday, here is an example of the sort of letter we’ve been getting:

“I value your insights into the markets, the economy and investments tremendously. Since becoming a reader of The Daily Reckoning, my portfolio is way up. However, I have just a few points to add to your liberal slant on all things non-financial. You say that the radical Islamists are impotent because they don’t have governments and standing armies? Did a government or standing army kill 3,000 plus people at the World Trade Center? Did a government or a standing army give the strategy, training, explosives and determination to kill 300 people in the Madrid train bombings? And don’t forget the Indonesian nightclub bombing. And by the way, if the 9/11 attacks were a criminal matter, could your ‘cops’ have gone after the Islamic brass in Afghanistan? And, sir, if you haven’t learned it yet, the threat of retaliation is not a reason not to attack your enemies. Particularly when they have already stated that their goal is your death, and that they are working on the means to accomplish their goals. So send your brandy-swilling friends out for a walk and grow some cojones!”

We never thought of our point of view as ‘liberal.’ But the liberals attack us as a ‘conservative,’ so we’re happy to annoy them both – liberals and ‘conservatives’…republicans and democrats. We are truly impartial; we love them all.

If you tried to apply a kind of ‘pure logic’ – admittedly impossible – to the matter, where would it take you? Our critics maintain that some criminals are special. They are so dangerous, so potent, such a threat to life and limb, that the cops can’t deal with them. They must be pursued by the army. (And any man who says otherwise isn’t a real man!)

Of course, to the average American, the current threat posed by the ‘Islamic terrorists’ is vanishingly small. Every day, more or less, someone is murdered in Baltimore. As far as we know, no one has ever been killed by ‘Islamic terrorists.’ Not a single one in the last 350 years. Logically, murder by a homeland Christian (just guessing) is a much larger threat. But there is no great demand for intervention by the troops from nearby Fort Meade.

“This threat is different,” say the cojones crowd. True, it is. But in order to justify a ‘war’ – such as the war in Iraq – they must also believe in a series of abstractions, theories, metaphors and guesswork:

– That there really is an organized group of ‘Islamic terrorists’
– That the group is growing, becoming more effective
– That it will continue to grow
– That it will pose a real danger sometime in the future
– That these terrorists really have it in for Americans
– That they will get powerful weapons and learn to use them
– That international police organizations cannot stop them
– That military intervention can stop them
– That we (or someone) knows what kind of intervention will be effective
– That the effect of military intervention will not be negative
– That collateral damage and unanticipated consequences will not outweigh the benefits
– That there will not be a backlash, actually aiding the terrorists
– That we can afford the intervention; that it’s worth it
– That we Americans are behind intervention (a consideration for true democrats)
– That God himself is on our side (a consideration for religious people)

And so on…and so on…

The odds that any of these things are correct are unknowable. Some are probably more or less true…some are probably more or less untrue. Logic requires that the individual odds be toted up…some added…some multiplied…in order to yield the likelihood that the whole list is correct. We don’t know, but our guess is that an unemotional logician – with cojones or not – would come to the same conclusion as Maggie Thatcher. War always has consequences you can’t foresee. In this one, there were too many “uncertainties,” she said.

No one ever accused Ms. Thatcher of lacking cojones.

“Cojones has nothing to do with it,” says the logical mind. But cojones has everything to do with it, is our guess. The actual odds that military intervention will make the world a better place are probably very small. In any case, they are certainly unknowable. So, the rational person would probably not want to use military force – killing thousands of innocent people…putting millions in danger…spending billions of dollars – except when he had to…

…or when he wanted to.

Critics of the war in Iraq don’t give cojones their due. Critics imagine that the war crowd has made a mistake. They try to argue with them…to meet their foes with reason…and with reasons. What a waste of time. They need to step back and look at the people they’re arguing with; look at all of us.

We have brains. But we have cojones too. Occasionally, we use our brains…and occasionally we howl at the moon…

Bill Bonner
The Daily Reckoning

The Daily Reckoning