Robbing Peter AND Paul

“On Aug. 1, I-35W Mississippi River Bridge collapsed in Minneapolis…killing 13 and injuring 100 motorists. Since August 1, the dollar’s value has collapsed 3.4% against the world’s major currencies. Maybe there’s a connection…at least metaphorically.

“For decades, federal inspectors knew that a flaw in the structure of the eight-lane I-35W bridge over the Mississippi could easily take down the entire structure. But year after year, the government let the bridge pass inspection. (Hmmm…reminds me of a certain green-hued currency).”

Christopher Hancock
October 16, 2007

Keep reading today’s guest essay here:

Robbing Peter AND Paul

Now some more views from Short Fuse in Los Angeles…


Views from the Fuse:

Helicopter Ben speaks!

In his first speech on the current U.S. economic situation since August, Bernanke told the Economic Club of New York yesterday that the housing bubble burst will be a “significant drag” on U.S. growth into 2008.

“It remains too early to assess the extent to which household and business spending will be affected,” the Fed Chairman said, “[the Fed] will continue to watch the situation closely and will act as needed to support efficient market functioning and foster sustainable economic growth and price stability.”

“We’ve been wondering how inflation can be the Fed’s ‘predominant concern’ if they’re still willing to cut interest rates,” writes Addison in today’s issue of The 5 Min. Forecast “The answer appears to be something like: ‘We’re not worried about inflation, because we’re expecting the economy to struggle.’ Hmmn…

“So…they’ll cut interest rates to spur the economy…and restore inflation to the Fed’s predominant concern? Mind pretzel.”

“If Ben Bernanke thinks he has a problem now,” writes Mike “Mish” Shedlock in yesterday’s issue of Whisky & Gunpowder, “watch what happens when commercial real estate blows up.

“Fannie Mae and Freddie Mac might be able to keep people in their houses in lieu of foreclosure by renegotiating terms down and down again (for a while, anyway, but certainly not forever), but bank funding of unneeded strip malls is another thing, indeed.

“Other shoes to consider would be a derivatives blowup, a massive unwinding of the carry trade, homebuilder bankruptcies, or a collapse of the U.S. dollar. But so many shoes are in the air and falling that it’s going to be difficult to say precisely which shoe hits the ground first. That’s what happens when it rains shoes…

“With all of these shoes starting to drop, it’s time to short short transports. Here’s why…”

As you may have already guessed, Bernanke’s comments were not without consequence…following yesterday’s speech, stocks ended lower. Opening trading was not much better this morning, as all three major indices fell for the second day in a row. This was partly to do with Big Ben’s speech, and partly because “Wells Fargo and Keycorp said bad loans hurt earnings more than forecast…[and] D.R. Horton, the second-largest U.S. homebuilder, declined after saying orders fell 39 percent last quarter,” reports Bloomberg.

Meanwhile, crude oil is heading near $88 a barrel – and our favorite precious metal is outdoing itself…briefly topping $770 an ounce.

And it doesn’t look like the price of gold is going down anytime soon. Analyst James Moore tells MarketWatch that the yellow metal has the “same drivers of weak dollar and high oil – in addition, physical demand is good and investors continue to increase their holdings through exchange-traded funds.”

Don’t be spooked off from the high price of gold if you’ve been batting around the idea of buying some to hang on to – some wealth insurance, as we like to call it. Well, fear not – there’s a way to get gold out of the ground (and into your portfolio) for less than one penny per ounce. No shovel required.

Yesterday, oil rose over $86. Gold shot up too – to $756. Gold has risen more than 19% so far this year.

The commodity index also hit a new record high – over 450.

“This place is going to boom, I can feel it,” said old friend Doug Casey over dinner last night.

“This place” is Argentina. We were having dinner at the Puerto Madero – a section of town where the old docks and depots along the waterfront have been renovated into sleek restaurants and loft apartments. We looked out across the water and saw the neon lights of various corporate headquarters…and the glass and steel office buildings that house them.

“It’s going to boom because it has no debt…and it is a major producer of food. And not only that, it’s already made almost every mistake you can make. It’s had socialism, hyper-inflation, price controls, debt, coups d’etat, military governments – you name it.”

“Yes, but there’s no reason why it couldn’t make the same mistakes again,” suggested another person in our group.

“Yes, and it will…but it’s ready for a little catch-up first. These things always go in cycles. This place is ready for an up-swing; I can feel it.”

Things always go in cycles. Short cycles. Long cycles. Bicycles. Motorcycles. Wash, dry and spin cycles.

But what you never quite know is where you are in the cycle.

We have bought a little property in Argentina because it is cheap – and we like the place. Even if Doug is wrong about the cycle, we won’t be unhappy. We bought value. We’re tempted to buy more. Argentina’s economy is growing nearly three times as fast as the United States. It is coming off a major depression, when GDP growth went negative for a year and a half…when the local currency lost two-thirds of its value…and in which the economy actually shrank as much as 16% in a single quarter.

Now, credit is rare in Argentina. Finally, with the accumulated mistakes of many years washed away, people can build on a new, more solid foundation. In fact, it may be finally coming back after a more than 50 years of backsliding.

Yes, dear reader, you should really see it for yourself. It is a truly beautiful place – and with Argentina sitting right on the edge of a boom, it is primed for you to jump on it…before it jumps without you. Our friends at Agora Travel have put together a trip that will explore all the opportunities that this place has to offer – both as an investment, and a travel destination. Our only words of warning: you might not want to leave.

“Challenge for the USA, the retirement of the baby boomers.”

La Nacion reports on another reason why it is probably late in the cycle for the United States: the country has obligations it cannot meet. The first baby boomer, a woman named Kathleen Casey – who was born on January 1, 1946 – will turn 62 in three months. If we read the article correctly, she’ll be able to begin to collect Social Security. Behind her are 84 million others, almost every one of them counting on getting something from the government – either Social Security, Medicare or Medicaid.

“How about you, Bill?” asked a friend last night. “Are you going to go for partial payments at 62…or wait until 65 to get the whole enchilada?”

We had never thought about it. We always assumed that we would get nothing at all. And we still can’t quite imagine that we will get anything. Anyway, we don’t need it…and don’t really want it. But we have a few years to go before we’ll be ready to apply; who knows what will happen?

The problem looming up with baby boomers’ retirement is a mathematical one. When the Social Security system was set up, there were 42 people working for every one who was getting benefits. In 2030, when the boomers are drawing their checks, the ratio will fall to 2 to 1. The system will go broke. Everyone knows it.

Obviously, benefits will be cut – either by act of Congress…or by act of inflation. The latter is our guess.

Until tomorrow…maybe,

Bill Bonner,
The Daily Reckoning

P.S. We are headed up to the ranch today. We bought an Iridium satellite phone…and a kit that should allow us to send our dispatches from the middle of nowhere, but we’re not promising anything. Our correspondence may be patchy until we get back into the office in Buenos Aires – next Monday.

The Daily Reckoning