Living in an Investor's Paradise

It is raining again today. We don’t know how much more of this vacation we can stand…

We’ve had one big up day this week in the stock market. Then, one little up day. And then one little down day. What does that tell us? Nothing.

The stock market has not corrected. Nor has there been much real movement elsewhere. Oil is still near $70. Gold is still around $666.

The dollar has risen, however. Instead of paying nearly $8 for a gallon of gas in France, we now pay only about $7.86.

Big whoop, as the kids say.

Meanwhile, no one seems the least bit interested in the really big news:

This boom is a fraud.

The Theology of Capitalism is a false god.

And the prosperity that Americans enjoy today is a swindle.

We’ve been saying so for the last eight years. (Yes, this month marks the eighth anniversary of The Daily Reckoning…which is why we’re taking a two-week vacation; we’re tired!) But now it’s official – the New York Times said so – the average American earned less in 2005 than he did in 2000. Incomes went down only one single year in the last half of the 20th century. But never five years in a row! And this was when the housing boom was in full bubble mode.

Let’s see, the average guy went further into debt during the period…while his income went down. If he isn’t poorer, who is?

And yet, the average guy thinks he is getting richer. He’s got more stuff…including a bigger house…and more cars. And practically the whole world thinks the United States has a dynamic, prosperous economy. But if the average guy gets poorer during the biggest boom in history…what kind of prosperity is that?

Allow us to answer our own question: It is flim-flam prosperity. It is the kind of prosperity you feel when you’ve just bought a doublewide trailer with a subprime ARM. It is the kind of prosperity you get when you take a trip to Europe on your credit cards, expecting to refinance your house when you get back in order to pay off the debt. It is the kind of prosperity that turns you into a pauper.

Not only is the average guy unaware that he is being swindled, so is the average investor. He sees nothing wrong. In fact, what he sees is that nothing CAN go wrong.

We were shocked yesterday when a fund manager, on vacation in France, stopped by the house to chat.

“Do you really think we can have a major correction?” he asked. “I think it is almost impossible. A major correction requires a fall in the supply of money and credit. But every central bank is putting out more and more money and credit. And they’ve shown that they will put out as much as is needed to keep things moving along. I don’t think we’ll have a major correction any time soon.”

He has become a true believer in the Theology of Capitalism. He thinks the old-timed religion, with its fire and brimstone…the capitalism of delirious booms and cranky busts… has been replaced by a kinder, gentler variety…in which central bankers make sure no one suffers, ever.

An investor’s Valhalla…a speculator’s Elysium…a debtor’s Eden…right here on planet earth. Gone is the nasty business cycle. Banished are bear markets. Forbidden are credit crunches, bank failures and rising unemployment.

Oh, dear reader…we can stop writing The Daily Reckoning right now… Our moment of rest has come. There is nothing more to be reckoned with.

*** Twice as many houses were foreclosed in July ’07 as July ’06. Default notices were sent to 180,000 people. Repossessions are up 93% from a year ago. House sales are at their lowest point in four years…and there are expected to be 2 million foreclosures this year.

Could it be that the poor, average American will be finally awakened from his dumb sleep by the sound of the housing crunch?

Deutschebank reports that the average house went up 52% in real terms between ’92 and ’06. This does not sound like much compared to the stories coming from Manhattan, La Jolla, and Miami Beach…but it represents a huge increase in the apparent wealth of America’s families, whose main asset is the leaky roof over their heads and the flooding basement beneath their feet.

But that increase did not come out of nowhere. The lending industry provided mortgages to people who previously did not qualify. This pushed up demand for housing at the bottom – which had the effect of raising up the entire nation’s housing stock. The middle-class homeowner was able to move into a McMansion because some bad credit risk bought his old house at a premium price.

Now, that extra demand from subprime borrowers is being withdrawn – by more cautious lenders, by rising rates, by defaults and foreclosures. It is not unreasonable to expect that the real increase in housing prices the nation enjoyed from ’92 to ’06 will become a real decrease. Possibly half the previous increase will be erased…possibly the whole thing.

What will the average American think then?

*** We saw in the paper that Karl Rove urged Republicans to come up with a new idea if they wish to remain in power. We have a suggestion: How about an old idea? Why don’t the Republicans try becoming conservatives again?

Since few Republicans know what conservatism is, we will spell out a program for them:

1) Balance the Budget

2) Cut taxes

3) Don’t meddle in anyone’s affairs, domestic or foreign, unless you really, really have to

There, that’s simple enough even for a Republican. And at least it would give voters a real choice.

Could this sort of program catch on? No chance.

Because too many people have come to expect something for nothing. No one wants to balance the budget, because then the government would have to curtail its program of bread and circuses. No one in government wants to cut taxes, because it would mean less money for the government to spend. And no one wants to stop meddling in other peoples’ business – it would mean giving up too much power and money; what would all the lobbyists, consultants, lawyers and war-profiteers do?

But what about when the middle-class realizes it is getting poorer? Won’t voters demand a change of direction?

Yes, they probably will. They will want “Relief!” They will want moratoria on debt collections and foreclosures. They will want lower rates from the Fed and higher spending from their government. They will probably want more war too; bellicosity is the traditional refuge of scoundrels and bankrupts.

Until tomorrow,

Bill Bonner
The Daily Reckoning
August 27, 2007

And a few more views…

…from Short Fuse…


Views from the Fuse:

*** Hurricane Dean made landfall today in Mexico, strengthening to a category 2 storm, with winds up to 100 mph, forcing over 1,000 residents to evacuate.

Dean moved into the Bay of Campeche, shutting down the entire oil fields operations, including 100 oil platforms, three major oil exporting ports and the Cantarell oil field, which is Mexico’s most productive.

Well, ’tis the season…commodities traders must get very little sleep in the hurricane months of the year. But Dean isn’t the only storm that has traders and investors on edge…the storm of selling on Wall Street has most up nights.

“The sea of red that was the commodities markets last week was more an act of covering margin calls in the equity markets than a well-thought fundamental shift. After all, what do soybeans and wheat have to do with subprime mortgages? We saw selling in key staple commodities across the board as traders reached for any source of equity they could in the wake of the Dow’s relentless selling.

“Both storms are impacting commodities and resource stocks across the board. Such ill weather, however, is providing plenty of opportunity for those who stay calm and know where to look.”

Luckily, Kevin’s Resource Trader Alert subscribers are staying calm and sitting pretty – because Kevin tells them exactly where to look…

*** Very interesting news coming from China today – by way of The 5 Min. Forecast:

For the first time, Chinese citizens will be allowed to purchase shares on the Hong Kong exchange. Domestic investors can now open accounts at the Bank of China and trade all aspects of the Hong Kong market.

“This is, potentially, a big deal,” explains Addison, “The Chinese have $2.2 trillion in savings… which can now be deployed in the market. Chinese traders no longer have to jump through the mainland’s bureaucratic hoops when moving money internationally.”

“‘It is sometimes hard to believe,’ Chris Mayer tells us, ‘but the impact of China on the world economy could still be much greater as the economy liberalizes further and as it gets larger. Right now, China has a lot of money. And where it ultimately invests that money could have a major effect on market prices.'”

“‘Personally,’ Christopher Hancock chimed in, ‘I’m amazed this didn’t make the front page of the Financial Times. This is probably the most important financial development in China since the entry into the WTO in 2001.

“‘This is great news for the Hong Kong market, especially Chinese companies that don’t have either a Shanghai or Shenzhen listing. This also gives Chinese citizens a way to access foreign exchange markets by investing in companies listed in Hong Kong that derive a majority of their profits in other currencies.’

“The Hang Seng Index in Hong Kong jumped 6% on the news — the biggest gain in eight years. The Hang Seng China Enterprises Index, which tracks mainland Chinese companies traded in Hong Kong, soared nearly 9%.”

For more breaking news, check out what Addison and Ian have been up to at The 5 Min. Forecast

*** Just because something hasn’t happened ever before – doesn’t mean it never will. In echoing Bill’s sentiment in his above piece: people have begun to expect something for nothing…there’s seems to be this sense of ‘entitlement’ pervading our society…but eventually people will realize that there’s no such thing as a free lunch – and even though it’s a total cliché: that if something looks to good to be true, it probably is.

Unfortunately, some people are being forced to learn that the hard way. Take investors in Sentinel Management Group – a money market fund. On Tuesday, Sentinel Management Group froze assets in a $1.5 billion fund, saying too many investors are trying to withdraw their money. “We have never experienced a situation quite like this one,” Sentinel Management said. “Liquidity has dried up all over the Street.”

“What happened is that Sentinel thought that just because it has not seen something yet, it could not happen,” writes Mike “Mish” Shedlock in today’s guest essay.

“This is, in essence, the same thing that happened to the models at Moody’s, Fitch, and the S&P, and various quant models. On Tuesday, Sentinel asked the U.S. Commodity Futures Trading Commission for permissions to halt redemptions. The request was denied.”

Be sure and check out today’s guest essay for more on Sentinel – and some free tips on how to not become a Sentinel victim.

Until tomorrow,

Short Fuse
The Daily Reckoning

P.S. By the by, Mish’s Survival Report readers were more than prepared for the “liquidity crunch” and the housing debacle. In fact, they even made some money off of it…

The Daily Reckoning