Ignorance is Bliss

The Daily Reckoning – Weekend Edition
February 18-19, 2006
Baltimore, Maryland
By Kate Incontrera

MARKET REVIEW: IGNORANCE IS BLISS

Ben Bernanke stepped up to the plate as new Fed chairman this week, attempting to put out fires and soothe fears – and apparently, he did a pretty good job. He told everyone exactly what they wanted to hear…but that doesn’t make it the truth.

In his debut before Congress, he delivered his first economic report to the House Financial Services Committee, explaining that the U.S. economy is growing at a good, healthy pace.

We know someone who might be inclined to disagree: Dr. Kurt Richebächer.

"The current U.S. economic recovery that began in November 2001 is – despite all the associated hype – the weakest one by any measure, except residential building," says the Good Doctor.

"Of all measures, the current U.S. economic recovery looks by far best in terms of real GDP growth," he explained. "As this is, moreover, the most popular and widely used general measure of national economic performance, it has generated a common perception that the U.S. economy has done extraordinarily well in the last few years.

"That GDP growth looks by far best for this economic recovery has its overt reason in the fact that it is an abstract aggregate concerning everybody and nobody. Moreover, it is easily levitated by creative accounting of the inflation rate, of which the BLS is for well-known reasons a great master. Just 2%, more or less, in the inflation rate makes all the difference between apparent solid economic growth and stagnation."

And what of our record-breaking $725.8 billion trade deficit? The world improvers in Washington are having a field day with this one – saying that the Chinese, with whom 28 percent of the entire trade deficit is with, need to let their currency rise against the dollar – or else…

But Bernanke shoots to minimize the possibility that China might suddenly dump some U.S. debt, saying, "I don’t think that the Chinese ownership of U.S. assets is so large as to put our country at risk economically."

Yeah, they only own $819 billion worth of U.S. assets, mostly in Treasury debt…but that’s nothing to worry about. It’s not like it gives them any political leverage…but that’s a story for a different time.

So, knowing all of this, why doesn’t anyone really question the supposed "growth" of the U.S. economy? There is little attention being paid to the inverted yield curve, which usually signals an upcoming recession. Greenspan, without offering any sort of explanation, just empty rhetoric, said that the flattening yield curve doesn’t have to mean a recession. And Bernanke mumbled something about a "global savings glut" and figured no one would question it.

"But that doesn’t make sense," argues Dr. Richebächer. "Greenspan has argued that the low longer-term interest rates reflect the Fed’s eminent policy posture over the past few years, leading to the low core rate of inflation and sharply diminished risk premiums."

Without question, the U.S. bond purchases by Asian central banks help to keep U.S. longer-term bond yields down. Yet they are grossly insufficient to accommodate the credit deluge flooding the U.S. economy and its asset markets at these low rates.

Dr. Richebächer concludes: "Greenspan’s reference to low-risk premiums as an explanation for the low long-term rates just serves as a diversion from the all-too-obvious true cause: the greatest credit excesses in history."

Kate Incontrera
The Daily Reckoning

P.S. The powers that be say that this trend of overspending and under-saving is all part of the recovery ahead. However, the moment all that excess credit is withdrawn, everything falls apart!
House prices fall, stocks fall, U.S. bonds fall, the dollar falls, everything falls. Because liquidity is sucked out of the system. Nobody has money to spend. So there’s no demand for the assets that only those with lots of credit and easy money can typically afford.

At this very moment, this is the gravest danger facing the American economy – and Dr. Richebächer won’t mince words. Read his full report on this false recovery…and learn about his crisis-countering money move that will not only dull the impact of this coming crash, but could also make you richer.

— Daily Reckoning Book Of The Week —

The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century
by James Kunstler

Kunstler established a writing career criticizing American suburbia, and his animosity against his bete noire does not abate here. It’s a wide-casting, statistics-studded ramble through energy production and technologies, world economic and political history, and climatology that culminates in predictions that the suburbs are doomed. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

THIS WEEK in THE DAILY RECKONING: The War on Terror…tensions in Iran…Peak Oil…trade deficits…soaring debt…the last five issues of the DR touch on all of these issues…

Wars of Terror      02/17/06
by Bill Bonner

"Here at The Daily Reckoning, we are opposed to war, in the sense that we are opposed to election fraud or stomach gas. But we take it for granted that war happens from time to time. Read on… "

Between The Devil And The Deep Blue Sea   02/16/06
by Justice Litle

"Iran controls the critical Strait of Hormuz, a geographical oil chokepoint through which 40% of the world’s oil travels in any given year."

Unfavorable Balanaces     02/15/06
by Hans Sennholz

"The financial world, apparently, is ignoring the trade deficits and the rapidly rising American indebtedness."

The Syriana Syndrome     02/14/06
by James Kunstler

"Despite the claims of those who believe that the Earth has a creamy nougat center of oil, the supply of this critical resource is actually finite."

A Golden Imagination     02/13/06
by The Mogambo Guru

"In case you want to test your imagination, Sprott Asset Management says that they can easily imagine $80,000 per ounce. And now, I am imagining it and having pleasant little daydreams about it, too."

— Advertisement —-

What Weighs 11 Pounds, Has 2,400 Pages and Will Cost Each and Every One of Us $9,366 This Year? Answer: the president’s budget.

As the Government Printing Presses Run Full Throttle, 3 Million American Factory Jobs Vanish, the Dollar Flirts With a 4-Month Low, Gold Races Past $570, And The Trade Deficit Hits an All-Time High of $725.8 Billion…

"The United States can be likened to Rome before the fall of the empire. Its financial condition is worse than advertised. It has a broken business model."
– USA Today paraphrasing David Walker, Comptroller General of the United States

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HEADLINE, NEWS And INSIGHT: The Peak Oil debate continues…and who better to guide us along than Whiskey and Gunpowder’s Byron King. See "Gentlemen, Start Your Engines," below…

Words of Wisdom From the World’s Last Macroeconomist
by Rick Barnard

"’I realize,’ he said in his thick German accent, ‘that there is no one left to talk about macroeconomics. Some people come close, but no one sees the whole picture. I am one of the last voices left.’"

Gentlemen, Start Your Engines
by Byron King

"Over the next 20 years, the absolute quantity of petroleum available to the world on any given day will decline."

Big Bang Theory: Housing Bubble meets pin
by Paul Mampilly

"It’s fitting that the end of the housing bubble is aligned symmetrically to Greenspan’s retirement from his position chairman of the Federal Reserve."

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FLOTSAM AND JETSAM: Kurt Richebächer is, and has been for many years, a well-known name amongst the economic elite. But did you ever wonder how he made it to his lofty position? Rick Barnard explains…

The Surprising Start of an Economic Legend
by Rick Barnard

If you want to know what is really happening in the U.S. economy, there is no better source of information than Dr. Richebächer. He has always been an outspoken critic of things he disagrees with, and he refuses to join the consensus for the sake of joining them.

I’ve known about this trait for as long as I’ve worked about him. But as I delve into the stories of his life that made him the man he is today, I was surprised to learn how long his independent streak has been a part of his life. Even more amazing was how his gift of independence has led to radical changes in his life.

I knew, for example, that things he wrote as chief economist of the Dresdner Bank did not sit very well with the chief German central banker at the time. As Dr. Richebächer recalls, at an annual Christmas party for bankers the man dedicated his speech to attack Dr. Richebächer personally. Soon after, the board of the Dresdner Bank demanded Dr. Richebächer be fired. Luckily, the bank’s president held Dr. Richebächer in high regard. He suggested a compromise – Dr. Richebächer could write what he liked, but only if he made it clear that he was speaking for himself, and not the Dresdner Bank.

That was the birth of The Richebächer Letter.

But it turns out Dr. Richebächer has never been afraid to speak his mind or take a stand for his beliefs, as I found out at dinner recently.

He told the tale to me at a small restaurant adjacent to his apartment building. We had just finished a delicious meal of roast duck with honey and apple, and were slowly making our way through a bottle of wine.

"Did I ever tell you the story of how I chose a life in academics?" he asked.

"No," I replied, and leaned closer to take in every detail.

You have to remember that Dr. Richebächer grew up in Germany during the Nazi years. And his candor about life under Hitler has been quite unexpected – especially stories about his small acts of defiance against the regime.

Dr. Richebächer had been drafted into the German army before the country declared war on England and France. Only a sudden paralyzing illness kept him from the front lines.

"Officially, I was listed as ‘mutilated on account of the war,’" he told me. "But in reality, I was not mutilated by the war, because there was no war."

Dr. Richebächer was living at home with his parents when war began in earnest.

One night, he was listening to the radio with his family, when the news reported that a German U-boat had managed to sink a British aircraft carrier. Dr. Richebächer’s father was overjoyed with the news, but Dr. Richebächer thought it was terrible. And he was so upset by his father’s reaction; he stormed out of the house.

He took refuge in a friend’s house. And he determined he could not return to his father. But where could he go? He lived in a small German town, and did not know very much about life beyond it.

His friend had a suggestion: "Have you considered going to the University?"

Such a thing had never crossed his mind. To that time, he figured he was destined to live and die in the town he was born in. Until then, a formal education had been unthinkable. But as his friend pointed out, since he was technically a war veteran, he could take advantage of an education.

"And that was how I began my academic career," he told me.

It’s such a telling detail, and just a part of the incredible the amount of things I’ve learned. In fact, I cannot believe I decided on taking such a short trip here. I leave Dr. Richebächer sometime tomorrow, even though there is just so much more to discuss.

Dr. Richebächer realizes this. He and I have talked the possibility of me returning soon, possibly in the summer.

When Dr. Richebächer told this to his housekeeper, a delightful woman with a wicked sense of humor, she asked me if it was true. I can barely speak French, and she knows just a bit of English, but she has a way of getting her point across.

"You will return in the summer," she drawled slowly in French, using gestures to get her point across.

"It’s possible," I said in kind, hoping my pronunciation wasn’t as poor as it usually is.

"Hmmm. Por business? O por les femmes?" she asked, swaying her hips a bit.

Even with the gesture, it took me a second to understand what she meant. Was I coming back for business, or for the women that would be populating the now-empty beaches in a few months’ time?

"Business, of course," I said with a straight face.

"Uh-huh," she said. "In summer, lots of women here," she added with a wink.

So now I guess I have two reasons to return soon.

[Ed. Note: Dr. Richebächer only sees five reasonable places to invest your money in the coming year – and it has nothing to do with real estate, or even gold. One of these investments is a very simple but powerful hedge against a collapsing stock market. The payoff could be huge – about 600% over the next nine to 12 months.