Requiem for an Economist

Dr. Kurt Richebächer died about two weeks ago in his home in Cannes, France. He, and his insights into the world financial markets will be greatly missed by long-suffering DR readers and editors alike.

Bill, who knew the Good Doctor for quite some time, writes today’s guest editorial in memoriam…

“One of our greatest complaints is the way the modern world pays homage to its dead,” writes Bill.

“When a good man finally has the mud tossed on his face, he is almost instantly forgotten; so little notice is taken, it hardly seems worth dying. Meanwhile, those who are widely mourned and greatly regretted usually don’t deserve it. When Lindsay Lohan dies, for example, America will probably declare three days of national mourning and hang black crepe on the Capitol.

“Kurt Richebächer met his end with hardly an ‘ave’ from anyone but friends and family. We pause to remember him here for both sentimental reasons and practical ones. On the sentimental side, we remember him as an old friend and fellow idealist. On the practical side he, and practically he alone, understood the worldwide economic boom for what it really is – a sham.”

Bill Bonner
September 12, 2007

Keep reading here:

Requiem for an Economist

And now…more news from Short Fuse in Los Angeles…


Views from the Fuse:

The greenback just can’t seem to catch a break…today, it fell to an all-time low against the euro. So, what’s an investor to do during these times of dollar weakness?

“The first rule of making money in our economy is to structure your portfolio not to lose it,” Bryron King advised. “Even if you are 100% in cash stuffed in a mattress, you have made a certain investment decision and condemned yourself to lose purchasing power over time as inflation robs you. Of course, if you play the stock markets, on any given day, stocks can go up or down, responding to one piece of news or another, to this trend or that. But at the end of the day, you have to ask yourself what you should do about the long-term erosion in the value of the dollar.”

So, clearly, the dollar is NOT the way to go…but do you know what isn’t hitting record lows? That’s right: gold. The traditional, time-proven defense against bad cash and bad credit hit a 16-month high this morning, briefly touching $714.40 an ounce.

“The demise [of the dollar] may or may not be imminent,” continues Byron. “In the meanwhile, consider this ‘your’ time to accumulate precious metals shares at relatively low prices, setting your portfolio up for the long-term rise.”

Another commodity on a tear, thanks to dollar weakness (among other factors) is crude oil. Oil futures reached an all-time high of $80 a barrel this morning.

Despite yesterday’s decision by OPEC to increase production output by 500,000 barrels per day, a report from the Energy Department’s Energy Information Administration (say that five times fast) suggests that supplies are tight, as demand remains strong.

“After their Vienna meeting concluded, OPECers announced the half a million barrel boost will go into effect in November,” reports Addison from The 5 Minute Forecast.

“But will it matter? ‘A 500,000 barrels per day increase would not put much of a dent in what looks to be tight fourth quarter fundamentals,’ said a Lehman Brothers’ report yesterday.

“OPEC nations have accounted for nearly 22 percent of the 8 million barrels a day increase in global demand between 2000 and 2006. The increase in production will basically mollify their own desire for the black goo.”

So, if 500,000 extra barrels a day isn’t going to make much of a difference, imagine what will happen if a hurricane hits an oilfield…geopolitical strife…or any sort of “disturbance in the force.” We aren’t trained economists, or even fortunetellers, but we can tell you this: it won’t be pretty.

The Dow bounced right back – up 180 points yesterday. Gold soared over $721.

What do you think, dear reader? Both went up yesterday…but which is the surer bet?

We have our opinion. What bothers us is that it is too obvious. Central banks and financial intermediaries have been flooding the world with cash and credit. As the quantity increases, it is only reasonable to expect the quality to go down. That’s why we have a problem in subprime debt…lenders stretched to earn more money by making loans to marginal borrowers and then selling the paper on to investors who didn’t ask too many questions. Now, the lenders…and the investors who bought the mortgages from them…are in trouble…and in turn, you could be, too.

Countrywide (NYSE:CFC)…known as “Countryslide” in the New York Post…has seen its share price fall 60% this year. The stock fell 5% on Monday…following word that the firm needed a bailout pronto. The company’s president, Mozilo Angelo, said the business desperately needs cash to continue operations.

Fifty mortgage lenders have closed their doors so far…and probably more will before the correction is over.

We remember quoting Mr. Angelo a couple of years ago. What impressed us was that the CEO of the nation’s largest mortgage lender – the firm makes one in five mortgages in the United States – had no illusions. If we remember correctly, he saw the implosion coming. We wonder what happened? Was he powerless to protect the business? Was the lure of fast profits too much to resist? Did the crisis come sooner…or harder…than he expected?

We don’t know; but we take it as a warning. Even seeing the broad outlines of a problem shaping up doesn’t mean you’re going to be in the clear when it hits.

The geniuses who run hedge funds must see the traps, too. Still, many walk right in. Moody’s says the default rate on high-yield debt is likely to double. And today’s news brings word that two more large funds have barred withdrawals. Investors are trapped in Pirate Capital and Y2K Finance. Pirate says that two of its Jolly Roger funds have lost 80% of their money in the past year. And Y2K, run by Wharton Asset Management, is down a similar amount.

“Neither a borrower nor a lender be…”

If only people had paid attention to Shakespeare. But who reads the classics anymore? And who can blame the moneylenders? They didn’t make any money unless they lent. And borrowers? Who doesn’t want to get in line when someone is handing out money? And now both lenders and borrowers are in trouble. Everyday brings more evidence – foreclosure rates, defaults, late payments

Still, you wouldn’t know it by looking at consumer spending. Consumer credit rose 3.7% in July. That’s down from 5.9% in June, but still considerably higher than GDP growth. Credit from mortgage lines has become harder to get, so the lumpen borrower is switching to more expensive credit from credit cards. Our guess is that the real impact of the real estate slump hasn’t quite registered yet. So far, only about a third of the ARMs written in 2005 and 2006 have been reset. And, so far, the average house price has been barely affected. Jobs are plentiful. Credit cards are easy to come by.

Success is a hard thing to overcome, we keep saying. The American consumer has been so lucky for so long it will take him a long time to realize what a bind he’s gotten himself into.

*** Ben Bernanke is a smart man…and an idiot. Yesterday, the smart man spoke to a crowd in Berlin and delivered such a clear-headed, honest appraisal of the world financial situation, we’re surprised it was not followed by a stock market crash.

Bernanke pointed out that the great boom has been largely a result of saving done by oil producers and Asian exporters. He did not explain it, but this money freed Americans from the need to save any money themselves. Instead, they just borrowed from overseas savers – while their own money was used for consumption. Nor did he describe the real, long-term consequences of this division of financial labor: Foreigners become rich producers and savers; Americans (along with many of their Anglo-Saxon cousins in Britain and Australia) become poor consumers and debtors.

What he did explain was that this easy money is probably going to dry up “over the next few decades” as oil exporting countries and Asian manufacturing countries begin to consume more of their own output. China, for example, is almost certain to save less and spend more in the years ahead. Inevitably this will mean pressure on Americans to save more themselves…and consume less. It will also mean higher real interest rates in the United States, a lower-value dollar, and lower U.S. asset prices.

Two years ago the idiot Bernanke spoke and noticed the same phenomenon. But then, he referred to it as a “global savings glut,” and encouraged the fantasy that Americans were doing the savers a big favor by taking their money. He made it seem like such a benign and salutary exchange. They do the saving…we’ll do the spending. They do the producing…we’ll do the consuming. “They sweat,” said one financial pundit; “we think.”

The conceit of it had about the same effect upon American investors and consumers as finding an over-turned liquor truck in the street. Soon, they were helping themselves to armloads of bottles – and the party was on!

“We are so clever, we no longer have to do the hard work,” they told themselves. “We are such geniuses; we no longer have to save. We are so ‘inventive’…we are so ‘creative’…we have the most ‘dynamic economy’ and the most ‘flexible’ markets. Hey, let’s face it – we’re just smarter than everyone else.”

But now, the cops are on the scene and people are throwing up in the bushes. “The party is over,” says the Financial Times. And the Fed is said to be considering a cut in its benchmark rate at its meeting next week – just as we predicted. American subprime borrowers (and lenders) no longer look like geniuses. Instead, they look like the yahoos they always were. Suddenly, many of the biggest players on Wall Street and in Greenwich don’t look so smart. And the Europeans pat themselves on the back – “See…Americans are morons,” they tell each other. “Just like we thought.”

*** “History has proved France right,” says Nicholas Sarkozy. He was referring to the war in Iraq, which France decided to duck. Whether history has proved France right or wrong, we don’t know…but the war certainly looks like a losing proposition.

We’ve been following the American public debate on the subject. There seem to be two schools of thought – equally absurd and self-interested. The war was a good idea, they all agree; but many think the Bush administration made a mess of it. Presumably, it would have been a big success if others had run the show. And there is another large group that blames the Iraqis. “We did our part,” they say to themselves. “Too bad the Iraqis weren’t able to get their act together to take advantage of it.”

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. Today’s International Herald Tribune reports that hundreds of people gathered to remember 9/11 yesterday. Osama bin Laden praised the suicide hijackers. What role he played in the affair has never been clarified – largely because, even after six years, the most wanted man in history has never been brought to justice.

How come?

The Daily Reckoning