Sam Zell Speaks

“They call him the ‘Grave Dancer.’

“It was a tag pinned on Sam Zell by an article in 1976 describing his exploits in buying up busted real estate projects on the cheap. The name stuck. It’s a good image for Zell’s style. As Hilary Rosenberg describes in The Vulture Investors, ‘Zell made his first fortune by tap dancing on the tombs of real estate projects…and later, he waltzed into corporate cemeteries.’

“These days, the Grave Dancer is making more money than ever. I’m not sure what Zell’s net worth is now, but I’m sure the figure starts with a ‘B.’ Therefore, when I had a chance to listen to Zell talk about investing, I took it.”

Chris Mayer
November 1, 2007

Now over to Short Fuse reporting from California…


Views From the Fuse:

So…the Fed cut rates by a quarter-percentage point. And the market did exactly what you’d expect.

“Traders took [the day’s] quarter-point fed funds rate cut as a treat for stocks and more horror for the dollar,” writes Options Hotline’s Steve Sarnoff.

“Oil set a record high, reaching a technical resistance zone between $95 and $97 per barrel. The Midas metal is looking to challenge technical resistance just a few dollars above $800 per oz. Gold shares got going, helping our Options Hotline Newmont Mining call to quadruple in just over two-months!

“The true power of Superleverage is not that the spectacular rise was achieved via a 24% move in the underlying shares, but that it was achieved with an always known and strictly limited risk.”

If you’d like to learn about the true power of Superleverage… and to find out how to get in on one of the country’s oldest – and most profitable – options trading services.

But it looks like this could be the last cut for a while…Bernanke has thrown inflation back into the equation. He mentioned yesterday that higher energy and commodity prices may place “renewed upward pressure on inflation.”

Another sign that the Feds are getting anxious that inflation will pick up, according to Bloomberg, is that “the FOMC had its first dissenting vote since December. Kansas City Fed President Thomas Hoenig preferred no change in the overnight lending rate between banks.”

Wow…imagine how nervous they would be about inflation if they actually added up the numbers correctly.

Chuck Butler wrote in today’s issue of The Daily Pfennig, “I know, I know, their reports don’t show inflation rising…But who ya’ gonna believe? The government accountants or – people like this reader that sent me this note…

“‘January 1, 2008 my electric company (PNM) will be raising rates by 16.5%. My trash collection goes up 6%. My catastrophic insurance has gone up 15% (December 2007). A friend in Phoenix says his electric rates are going up 8%. Another friend in the Chicago area says his are going up 22.5%. I’m still trying to shove these ‘non-inflationary’ numbers into the official rate of 2-3%!'”

We asked Congressman Ron Paul specifically about inflation when we interviewed him for our documentary – since he has been notoriously outspoken on the topic. Here’s what Dr. Paul had to say:

“Inflation is very simple – when government arbitrarily out of thin air prints money, or creates money in credit out of thin air. When I talk to many teenagers, grade schoolers, they seem to have no problem comprehending the fact that if you just create a lot of money, it’ll be like Monopoly money and it won’t have value.

“When you print that money, the value of that dollar has to go down and then one of the consequences of inflating the money will be higher prices. But there are a lot of other problems, too, with inflating; it causes financial bubbles and it causes a lot of economic distortions and unemployment…but inflation is very simple. When governments create new money out of thin air, you have inflation.”

Ah…if only everyone realized it was that simple.

“Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,” the Federal Open Market Committee said in a statement after meeting today in Washington. “After this action, the upside risks to inflation roughly balance the downside risks to growth.”

We guessed that the Fed would surprise us…and do nothing. But 91 out of 108 economists interviewed by Bloomberg were sure that they would choose a quarter-point rate cut. They were right; we were wrong.

Not that it matters. Financial officialdom has already made itself clear: they’ll do whatever is necessary to keep this expansion going; the dollar be damned.

And so, the dollar was damned. Yesterday, it fell to another record low against the euro (EUR) – it now takes more than $1.45 to buy a euro. Ouch! Shortly after the euro appeared, in 1998, it sank as low as 88 cents. Now look at it. Americans in Europe have lost half their purchasing power in just seven years…most of it because of the falling dollar; the rest because of rising consumer prices. Americans in America have lost wealth too; they just don’t know it yet.

Your poor editor is going to have to move to a cheaper place…a backward country where people don’t expect to earn much money…where property prices are low…and where you can still get a cup of coffee for less than $4. Hey, we can move back to the U.S.!

In Killen, Texas, you can still get a nice house for $150,000 – or less. In Paris or London, that kind of money will get you nothing. And housing prices in the United States are going down. That’s what Alan Greenspan said. He told an audience that the housing problem was going to get worse before it got better. And he ought to know; more than anyone else, he caused it!

The latest Case-Shiller numbers tell us that housing is falling nationwide – as reported here yesterday. Guess where prices are falling most? In Tampa, Florida, where they’re going down at a 10% annual rate. Next in line is Detroit, where prices are off 9.3%. Overall, California leads the nation in house price declines…at a 5.7% statewide rate. The southern part of the state seems to be getting the worst of it; San Diego houses are down 8.3%.

Most likely, Greenspan is right; we’ve haven’t seen the end, nor the worst, of the housing slump. Why? Because there are a lot of houses on offer…and few people with the money to buy them.

“America’s big, fat housing inventory,” is how Business Week describes it. There are 4.4 million houses on the market – a nine-year record. And it is taking three times as long to sell them as it did in 2005. Again, you can do the math later.

Naturally, mortgage defaults are rising. People get divorced. They wonder who will get to keep the family house. Then, they discover that the house is worth less than they paid for it…and less than they still owe on it…and neither one wants it. “I’m not paying that mortgage,” says one. “You’re not sticking me with that dump,” says the other.

The Fed was getting mixed signals, says Bloomberg. On the one hand, the property situation is clearly bad. On the other hand, exports are rising…the stock market looks healthy…and consumers are still spending. It could have stood pat – but Wall Street wanted a cut. And who knows what financial catastrophes could be hidden in those derivative concoctions? If the Fed did not make a gesture to the financial industry, and something bad happened, it would get the blame. And why not? If the dollar continues to fall…well, isn’t that good for U.S. exporters?

The stock market celebrated with a healthy rise, up 137 points. But remember, dear reader, stocks are going up in Zimbabwe and Iraq too. We’re in a worldwide asset boom that has a clear and obvious cause. The Economist puts the rate of price inflation on “all items” (otherwise known as consumer price inflation) at over 16% per year. But member banks can borrow money from the Fed for less than 5%. You can do the math later, dear reader.

Of course, as the U.S. emits dollars, the rest of the world’s nations emit their own paper…trying to keep up. What we are seeing in the currency markets is merely relative, but important, degrees of badness. One currency stinks. Another is rotten. A third is crummy. A fourth sucks. They are all going down…but some faster than others.

What they are going down against is the things that don’t come out of printing presses or the imaginations of central bankers. According to the Economist, the average of these things… “all items”…is rising by more than 16% per year, against the dollar. But some things are rising even faster. Oil, for example. And gold.

Yesterday, the Fed spoke. And then, gold answered.

“We will not permit speculators to be crucified on a cross of strong dollars,” said the feds.

“Then, give us gold,” said investors.

Following the Fed’s action gold rose over $795 before the market closed. Then, the price shot up over $800 in the aftermarket.

“Falling dollar could push gold to record high,” says the Financial Times.

Where have they been?

Our friends at Outstanding Investments are pretty sure that the price of gold is going to continue to the moon – and when it does, they want to be sure they are properly positioned.

Byron King tells us that he’s discovered a way to capture 100% of gold gains – without losing a dime if the price suddenly heads the other way. Find out how to take advantage of zero-downside gold here:

Here’s good news, dear reader. The U.S. economy grew at a 3.9% rate in the third quarter. Numbers don’t lie, do they?

Ha! Numbers are the biggest liars on the planet.

Have you noticed how the whole world has been taken over by numbers? We live with them every day. They seem so precise…so confident…so sure of themselves. The U.S. economy did not grow “a little bit.” It did not expand “slightly.” It is not now just “somewhat larger” than it was a year ago. And it’s not even growing at a 3% rate…or a 4% rate. It’s growing at a 3.9% rate.

The older we get, the more suspicious of numbers we’re becoming.

A man today knows his PIN number, his telephone number, often his fax number, his PSA number, his cholesterol number, his street number, his zip code, his Social Security number…digits, digits, and more digits! He’s likely to know batting averages of his favorite players…and how much his portfolio increased last year…not to mention the standard numbers of a general education – how many states are there, how many members of Congress, what is the boiling temperature of water, what is the speed of light…how many times can you get a speeding ticket in the state of Georgia before they take away your license…and so forth.

Some of these numbers are useful. Many are empty frauds.

When the feds give us a number for GDP growth, for example, what does it mean? Why, it means the economy is expanding…growing…getting bigger. Oh…and what does that mean?

We apologize to long-suffering Daily Reckoning readers, but we will bring out a familiar example: If we cut our own lawn, the GDP is unchanged. If we hire a lawn-cutting service to do the work, the GDP expands. So, what does it really mean to say the GDP grows? In both cases, the end result is exactly the same: the grass has been cut. The only difference is that an amount of money – a number – has changed places, from our pocket to someone else’s. The world has no more money. The world has no more goods or services. The world is unchanged. So what does GDP growth really mean? And how could a precise number – 3.9% – ever hope to describe what has really happened?

To make matters worse, government statisticians – and corporate ones too – typically “crunch” numbers into the shape they want. Numbers get punched, beaten, hammered, bullied, and bamboozled. When the torture session is over they’ll admit to anything. That is how we get a “consumer price index” of only 3%…when everyone knows prices are rising a lot faster.

Finally, for today, we have come back to our house in France…for just a couple days of repose. It is the All Saints vacation in France – Toussaint – and families usually go back to wherever they are from and put chrysanthemums on their relatives’ graves.

“I saw your Aunt Jacqueline’s grave looked a little bare,” said our faithful gardener last night, over a drink. “So, I put some pansies on it. The town was digging up pansies from the square. They were just going to throw them away. So I got some and put them on her grave. I don’t like to see bare graves at Toussaint.”

And comes some bad news…

“We’re going to have to slaughter Nigeria,” said the farmer next door.

Nigeria is a prize-winning Limousine bull. He’s a very big, handsome animal…with such rippling muscles; he looks as though he was designed by a butcher. And he’s been happily doing his work here for years. But everything comes to an end, sooner or later – all bulls too.

“Well, he’s old…and he’s gone a little lame. Still, he could still be useful, but there’s a new fever that has somehow gotten into the cattle population in France. Everywhere they find it, they impose a quarantine. And now it’s around here. Normally, we would be able to sell Nigeria to another farm. He’s probably good for a year or two. But he’s already inseminated all the cows here. And if we keep using him, they’ll be too interbred. So we have to sell him on. But because of the quarantine – which is ridiculous because the malady isn’t infectious – we don’t have the right to move any animals. And if we don’t sell Nigeria to the butcher now, a year from now we might not be able to sell him at all.”

Poor old Nigeria.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning