Sub-Prime? So Over! Part II

“Goldman Sachs bucked the trend this summer by making money – pots of money – selling subprime bonds short. Ironically, Goldman also issued what might prove the most toxic of all subprime bonds back in 2006. In other words, the savvy investment bank sold the same junk twice, and make a tidy profit both times.

“Bravo for the Goldman Gang…this time. But next time these guys ride into town, you may not want to be buying the stuff they’re selling.”

Adrian Ash
October 24, 2007

Now, we head over to Short Fuse, reporting from Baltimore…


Views from the Fuse:

Two of America’s biggest homebuilders – KBH (NYSE:KBH) and DR Horton (NYSE:DHI) – say cancellations are running at about 50%. Looks like the housing problem is having more of a negative impact than anyone ever imagined (well, to be fair, some people did imagine…we won’t name names.

This morning, stocks fell for the first time in three days, as Merrill Lynch (NYSE:MER) reported the biggest quarterly loss in its 93-year history on $8.4 billion in writedowns related to credit-market losses.

Bloomberg reports: “Writedowns sparked by the worst housing slump in 16 years have caused third-quarter profits to decline by an average 14 percent for financial companies in the S&P 500, the worst performance among 10 industries, according to Bloomberg data. Makers of computer chips have posted an average earnings drop of 2.6 percent on concern consumer spending will decrease amid a slowing economy.

“‘Today is really setting up to be very symbolic of what’s going to trouble the market,’ said Leo Grohowski, who oversees $162 billion as New York-based chief investment officer at Bank of New York Mellon Wealth Management. ‘We may see more pain before we see gain.'”

So Jim Rogers’ ‘pessimism’ over the state of the U.S. economy isn’t entirely unfounded…and diversifying your portfolio with international assets is a pretty good idea. No one expects the average investor to dump all of their dollars, as Rogers says he’s going to do…but you can position yourself to be protected against the falling dollar, as well as the credit/housing crunch.

Chris Mayer is looking for ways his Mayer’s Special Situations readers can diversify their portfolio outside of the U.S. right now, in fact. He’s been touring India for the last week or so, and is on his way to Dubai.

Before we turn you over to Dave at the DR blog, here’s a snippet from Addison and Ian’s issue of The 5 Min. Forecast…that proves something most Americans have suspected for a while: Bush is a big spender. The biggest, in fact, since Johnson.

The 5 outlines a recent Cato Institute report:

“Discretionary spending soared in Bush’s first term by 48%, not adjusted for inflation, more than twice as much as Bill Clinton spent (21.6%) in two terms.

“Defense spending under Bush has grown an average of 5.7% a year, compared to LBJ’s of 4.9% (adjusted for inflation).

“Homeland security spending also has soared, to about $31 billion last year, triple the pre-9/11 number

“Education spending is up, adjusted for inflation, 18% annually since 2001.

“The 2002 farm bill caused agri-spending to double from 1990s levels.

“Then there was the 2003 Medicare prescription drug benefit – the biggest single expansion in the program’s history – whose 10-year costs are estimated at more than $700 billion” finished the paper.

“‘He’s a big government guy,’ said Stephen Slivinski, director of budget studies at Cato Institute. ‘He has presided over massive increases in almost every category…a dramatic change of pace from most previous presidents.'”

“Allow me to point out the irony of this situation,” Guido Mantega, the Brazilian finance minister, told reporters at a recent global pow-wow. “Countries that were references of good governance, of standards and codes for the financial systems” were now the same countries where financial problems were threatening to wreck global prosperity.

Whoever could he have had in mind? Not the United States of America…the country that has been wagging its fingers for the last 20 years at every two-bit economy in the world?

Americans might have to get used to it. Instead of giving advice to other countries, they may have to take some. There are bound to be plenty of economists in other countries who will want to offer it.

For the moment, they can toss it off. Stocks are still near record highs. Housing prices are only down a few percentage points. The economy still appears to be growing.

Neither investors nor the financial media have yet realized what is going on – the steady destruction of the U.S. economy.

“I’m moving my money out of U.S. assets,” our old friend Jim Rogers told an audience in Amsterdam.

All your money, Jim?

What he said was that he was getting ALL his assets out of the United States. And into what?

Jim Rogers likes commodities, the Chinese currency – yuan (CNY), the Swiss franc (CHF), and the Japanese yen (JPY).

As for commodities, he has spoken extensively on the subject. We have often repeated his comments here at The Daily Reckoning, because we agree with him. Central banks can create as much “money” as they want. But they have a hard time creating more tin, or more soybeans, or more oil. And every day that goes by, there are more people who want tin, soybeans and oil. The population is growing. But not only that, the worlds’ people – outside of Europe and North America – are making money. Now, they’re ready to spend some of that money to improve their standards of living. They’re bidding against us, in other words, not only for jobs…but for food, transportation, energy, shelter and luxuries too.

China’s growing demand is partly the reason for the bull market in commodities – the other reason is simple: people will always need these resources. The demand will always be strong for these everyday items, so the opportunity for profit is immense. Investing in the commodities market can be a bit tricky, but Kevin Kerr has led his Resource Trader Alert to major gains in the past couple of months.

China’s economy is expected to grow this year by as much as 11.7% – or nearly four times as fast as the U.S. economy. Naturally, real wages in China are going up. Rogers thinks you can’t go wrong by moving your wealth into the yuan. He expects it to double…or quadruple…in the years ahead. He likes the yen and Swiss franc, too, because he says they’ve been ‘pounded down’ by the carry trade. Those carry trades have to come to an end someday. When they do, both the yen and the franc will soar.

Argentina got a lot of advice from America over the years. It needed lower taxes, said one bunch. It needed higher said another. It needed to peg its currency to the dollar, said one group of advisors. It needed to ‘dollarize’ completely, said another.

But look what is happening now! IMF chairman Rodrigo Rato told reporters that the U.S. dollar posed grave risks to the entire world economy. “An abrupt fall of the greenback,” said he, ” could lead to a loss of confidence in all U.S. dollar assets…” which could destabilize global markets.

“His words contrasted with those of U.S. Treasury Secretary, Henry Paulson,” says the report in the Buenos Aires ECONOMICO, “who assured the group [of finance ministers] that the strength of the dollar was guaranteed and said he was optimistic about the future of the U.S. currency.”

Who wants to dollarize? Even here in Argentina, the economy is booming. Industrial production is now increasing at an 8.8% annual rate, after registering a blistering increase of 9.8% in August – not too far behind the Chinese. And there are none of the wild excesses of the Chinese economy here. People do not line up to open brokerage accounts. Taxi drivers do not give stock tips. The economy does not depend on selling things to people who cannot afford them. Nor is there much credit in any form. If you want to buy a house – you practically have to have the entire amount in cash.

Guess what is leading the Argentine economy. Finance? Housing? Consumer spending? No… Making automobiles! Imagine that. How quaint. They make things.

And now, get this: Employment is up. Working hours are up. And salaries are rising at a 20% annual rate.

Of course, you can’t have salaries rising that fast without some inflation. The rate of inflation is said to be running over 10%. Sunday is Election Day; there is a lot of argument about how bad inflation is. But it is good to see wages rising somewhere in the Western Hemisphere.

If Argentina keeps growing…it will soon be offering advice to the United States.

“But they’ll find some way to mess it up,” said a cab driver last night.

“I wonder what happened…I mean…where we went wrong. How did it come to this?”

We were standing in front of the U.S. embassy in Buenos Aires, probably the ugliest building in the entire city. A monstrous thing, it looks at though it was designed by Josef Stalin – with massive, bombproof walls…brown concrete…and a forest of antennae rising from the roof.

Embassies are supposed to give foreigners a sense of what a country is…and what it is meant to be. If so, America is in trouble…the U.S. embassy here looks like a prison.

“It does seem like we’ve been through some major change,” said our cousin. “When we were growing up, we weren’t so afraid of everything.”

We used to ride our bicycles down the road without helmets…and without GPS implants. If we got lost, we figured we could always ask a stranger for directions; he might even give us a lift home.

We used to swim in the river, too…amid the floating beer cans and jellyfish. No one ever thought about the health risks. We rode in cars without seat belts. We played ice hockey out on the river in winter…occasionally falling through. One winter, the river froze over so solid that a school bus driver decided to drive across the ice rather than take the long way around. Today, the river no longer freezes over…and he’d be arrested.

“The other thing I notice,” he went on, “is that people don’t have any time any more. They’re so busy making money and doing all the other things they think they have to do. I remember I spent a summer working down at the boatyard…that must have been in the early ’60s. Well, sometimes, we just didn’t do any work at all. Of course, we didn’t earn much money either. But it didn’t seem that we needed so much.

“A guy would come up with a boat that needed some work and ol’ cap’n Crandall, who ran the place, would tell him that we were too busy, when in fact we didn’t have anything to do. Sometimes, we’d just sit around and talk…or fish off the peer…or when hunting season started, we just all went hunting. Now, they won’t even give you the time of day.”

In one of these Daily Reckonings, we suggested to our long-suffering readers, that ‘money isn’t everything.’ And that not everyone wants to ‘maximize efficiency’ at making money all the time. People often have other desires and ambitions – often well hidden, even from themselves. People are neither bad nor good, we’ve also opined, but subject to influence. And under the influence of a modern economy, curiously, people begin to act more like economists say they are supposed to act. That is, the more economists – and the media – tell people that they are supposed to care about money, the more they really do seem to care about it. The more often they are told that they have to use their time efficiently, in order to maximize their earnings, the more then tend to do so… And the more times they are shown the hazards of this big, bad world…the more eager they are to protect themselves.

People come to act more logically…and life loses its graceful ease.

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. In our latest book, written with co-author Lila Rajiva, we examine the patterns of public thinking to better understand how crowds are often manipulated. Pick up your copy here if you haven’t yet:

Mobs, Messiahs, and Markets

The Daily Reckoning