The Bubbles of a Global Market Hot Tub

Almost no issue is ever beyond question. And so it goes that global warming must also be scrutinized. Thus, as the world pushes toward a "greener way of thinking", Bill Bonner dusts off his microscope and examines the topic of the day.

"The sun became as dark as black cloth, and the moon became as red as blood. Then the stars of the sky fell to the earth like green figs falling from trees shaken by mighty winds

"The first angel blew his trumpet. Hail and fire, mixed with blood, came pouring down on the earth. A third of the earth was burned up, a third of the trees, and every blade of green grass.

"Then the second angel blew his trumpet. Something that looked like a huge mountain on fire was thrown into the sea. A third of the sea was turned into blood, a third of the living creatures in the sea died, and a third of the ships were destroyed.

"Then the third angel blew his trumpet. A large star, burning like a torch, dropped from the sky and fell on a third of the rivers and on the springs of water…A third of the water turned bitter, and many people died from drinking the water, because it had turned bitter."

– The Book of Revelations

A man who doubts the global warming hypothesis is asking for trouble. He might just as well question the virgin birth in St. Peter’s or praise a sirloin steak in Benares. He is sure to be damned by everyone.

The whole earth is going green. Every newspaper tells us so. And anyone who stands in the way of this great trend will be treated like a holocaust denier – that is, like a wicked kook.

Communism, famine, plague, the Huns – all the old enemies are in retreat. Now, climate change and terrorism are the threats du jour. All a good citizen has to do is pick one…or both. Then, he can be properly lined up and enrolled in the crusade – cajoled, connived and conscripted into fighting a battle in which he is almost sure to be the loser.

Climate change got off on the wrong foot in 1974, when TIME magazine’s cover pronounced the coming of "Another Ice Age," somewhat prematurely, it turned out. Now, the same TIME magazine is warning us that the old globe is on the verge of burning up, but no one giggles.

Instead, the media and the activists march along with the serene confidence of a religious cult, convinced that the world is in imminent danger and only they can save it. Politicians, corporate do-gooders, and investors are not far behind…each hoping to get something out of the whole things. And bringing up the rear guard are the yeomen soldiers…the poor grunts who will go along with anything, so long as it’s sufficiently idiotic.

Our beat here at The Daily Reckoning is, of course, money…not politics. But there are billions of dollars at stake in global warming…in subsidies, tax incentives, contracts, taxes, carbon credits, the whole shebang. Besides, like any great public spectacle, global warming has its comedic dividends as well as its financial returns.

Why are rising temperatures a threat, anyway? Practically everyone we know welcomes warm weather…and looks forward to the mosquito months more than a white Christmas. You’d think a few more days of sunny skies and outdoor barbecues would be to their liking.

Today, in Paris, we saw several groups of American tourists – dressed for summer, with their shorts and flip-flops. How they must wish Europe were more like Florida and not gray and chilly.

Rising temperatures would be good for tourism, and for more practical reasons too. Growing seasons would be longer. The well-fed complainers have fingered carbon dioxide as the culprit, but we know that plants are fond of CO2. Longer growing seasons plus higher levels of CO2 boost crop yields, say the experts. And that helps keep people from starving.

Nonetheless, for reasons never fully explained to us, global warming is viewed not as a boon to humanity but as the dawn of its doomsday.

Mr. Ban Ki Moon, as we mentioned earlier this week, is both the current Secretary General of the United Nations and a man whose feet seem to have left Mother Earth. Writing in the IHT, the U.N. man asserts, "the science is clear. The earth’s warming is unequivocal; we humans are its principle cause." We are always impressed with people like Mr. Moon. As a scholar of climate change, we suspect his credentials are as good as ours, which is to say – he has no idea what he is talking about. Most people would hedge their bets…roll meal around in their mouths…mutter under their breath…on one hand this, on the other that. But Mr. Moon comes down, unequivocally, like a hammer on an egg, with a bold, powerful lie.

The science is anything but clear. Even some of the world’s greatest scientists are scratching their heads. The idea of global warming rests on three major things: A series of observations – melting ice, rising temperatures in certain places; a guess about how the earth’s climate works – the so-called greenhouse hypothesis; and a proof, of sorts, based on some further observations that suggest that as CO2 levels have risen over the last century or so, temperatures have, as well. The hypothesis further supposes that higher CO2 levels are caused by humans.

But a quick reading of the literature yields more questions than proof. Atmospheric CO2 concentrations have apparently risen 21% in the last century. But, during the Depression of the 1930s, when human CO2 emissions dropped 30%, CO2 in the atmosphere continued to rise. Maybe human activity really doesn’t contribute that much to global CO2 levels. Even during the Eocene era, there was three to four times as much CO2 in the atmosphere, and that was 20 million years before the first SUV was built.

One of the great scientists of our time, Freeman Dyson, concludes:

"Concerning the climate models, I know enough of the details to be sure that they are unreliable. They are full of fudge factors."

Yet, those very same climate models are now read by many as passing Biblical judgment on the entire planet. "The Big Thaw," proclaims the cover of this month’s National Geographic. The cover shows a photo of a polar bear on a melting iceberg. The reader thinks the poor animal is doomed…and guesses that he must be doomed too.

But no problem is so pressing and so monumental that heads of state can’t get together and turn it into a carnival sideshow. Today’s International Herald Tribune carries a photo of George W. Bush, Vladimir Putin and Angela Merkel sitting together, apparently enjoying a lighthearted moment. The headline tells us that they are getting close to solving the problem; the American president has signed on to "consider" cutting carbon-dioxide emissions.

This is surely a historic moment. Future historians will look back and label it a turning point. For now, the chief of the world’s chief carbon dioxide-emitting tribe, has taken the first step towards saving the planet from the evil of warmer weather. The world still has a chance, dear reader.

Meanwhile, at the grass-roots level, the fight against carbon dioxide takes on an absurdity of its own. A group was formed recently to campaign against airline traffic, especially on short-hauls, on the theory that airplanes use too much fossil fuel and thus leave big "carbon footprints" all over the skies. The activists made one good decision, deciding to call themselves "Plane Stupid." From there on, things went into a tailspin.

To draw attention to their cause, the group decided to occupy the London headquarters of EasyJet. They invaded the building, hung out a banner, and locked arms around it so that neither customers nor employees could enter. At that point, someone should have pointed out to the saps that EasyJet’s headquarters were in Luton, not London. The world-improvers had targeted the headquarters of EasyGroup, which has nothing to do with air travel.

Is global warming worth worrying about? What do we know? But, we wouldn’t be so suspicious if there weren’t so many billions of dollars at stake. Not that we doubt the sincerity of Al Gore or the other earth savers; in fact, we don’t know how the old planet survived so long without them. But pile up so much bread in one place and it is bound to attract rats.

The most likely remedy is a new tax on carbon-based fuels, designed to raise prices and discourage users. Who will collect the money? Politicians. Who will they redistribute it to? The needy and sick? No, they will tell you that the money will go into wind, sun and sea energy…into hydrogen and hydroelectric. But neither wind nor water makes campaign contributions.

No, dear reader, the high-minded money will pass through the usual low, greasy palms – cronies and contractors, oil companies, honey-tongued lobbyists, fleet-footed hustlers, and private equity investors. Gradually and inevitably, the Holy Cause for which the tax was imposed will be as forgotten as the Bill of Rights and the loot will make its way into the customary lost causes and holes in the ground, most prominently at the Pentagon – the biggest gas guzzler this side of Hell.


Bill Bonner
The Daily Reckoning
June 8, 2007

Editor’s Note: Don’t forget – you can hear Bill (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is "Rim of Fire: Crisis & Opportunity in the New Asian Era" – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt

Financial bubbles, like wars, used to be rather localized. They were caused by certain specific events and circumstances. France went to war with England several times, for the French throne as well as for reasons we can’t recall…the emperor of Paraguay went to war with Brazil and Argentina in the mid-19th century, egged on by his Irish mistress…at about the same time, America went to war with itself.

Likewise, certain specific conditions would cause a sharp run up in, say, the Kuwait stock market…or the price of tin. Then, when the conditions changed, the bubble would pop and investors would wonder how they could be so foolish.

The 20th century saw the first of the World Wars – I and II – when fighting ranged all over the globe. In WWI, England and Germany battled it out in Africa…and the Middle East…and in Eastern Europe, as well as the part of the war that we know best – the Western Front. Then, again, in WWII, the bullets flew practically everywhere. Italian troops invaded Greece. Future U.S. president John F. Kennedy washed up on the coast of Australia. American bombers leveled cities in Japan. Russian tanks ran down German civilians in Prussia.

The 21st century, meanwhile, is witnessing the first truly global financial bubble. The world has gone mad again, but not in the same old way. This time, not everything is affected. And not everyone is touched to the same degree. But all over the planet, markets are bubbling up. All over the globe, people sit in them and sip champagne as if they were hot tubs in Santa Fe.

We pause for further proof (if any were needed), that we here at The Daily Reckoning are not only mortal, but very occasionally prone to error. When the tech bubble crashed in 2000-2002, we presumed U.S. markets would continue to follow the Japanese example…into a long, slow slump. We even wrote a book on it, with Addison Wiggin – Financial Reckoning Day. Well, the book was a NY TIMES bestseller, as we say every chance we get, but it is easier to sell a book than it is to predict the future. It’s been five years and the financial reckoning day still hasn’t come. Should we hang our heads and admit we were wrong? Maybe we will just hang our heads.

What happened was that the Feds came to the rescue with so much new money and credit that the world’s speculators couldn’t go broke. Instead, they were forced to get rich. Who would have thought that you could sell a commercial building in London at a cap rate below 4%? But some lunkheads in Spain bought the HSBC building at that price. Who would have thought that you could sell one of Andy Warhol’s oeuvres for more than $1 million? Yet, one sold recently for $71 million. Who would have thought that people would line up to buy Chinese stocks at 40 times earnings…or Iraqi bonds at just a few points over U.S. Treasuries?

To make a long story short, the titanic stimulus given by the U.S. economy has had a worldwide effect. The American – along with many of his cousins in the rest of the English-speaking world – went on a spending spree. Dollars flowed out of the United States…and into foreign countries, where central banks "sopped them up" by printing more of their own currencies. No nation wanted its own money to go down faster than the U.S. brand, because it would put them at a commercial disadvantage. Result – a huge competition to inflate paper currencies.

Financial whiz kids found that they could borrow money very cheaply – Japan and Switzerland lent at rates near 1%. Speculators took the money and proceeded to do to world capital markets approximately what American homeowners did to the U.S. housing market – take a good thing too far. With so much money around, it was hard to make a bad investment. No matter how much you overpaid, someone would come along behind you and pay even more.

The "easiest credit conditions in a generation," as Tim Bond explains it in yesterday’s Financial Times, have become a kind of financial "little blue pill" getting everyone hot and bothered. Borrowing money has never been easier. As a result, everything is going up, even old, tired investments that no one thought would ever rise again. Excited investors have forsaken their own homebound treasuries in favor of more exotic…and more risky…fare. When you’re eating so many financial oysters, there’s hardly an investment target in the world that doesn’t seem fair and fetching. Frisky speculators are chasing after sultry Venezuelan bonds, although Hugo Chavez is supposed to be an admirer of Trotsky…and diving into bed with Chinese stocks, just when China’s communist rulers are desperately trying to knock down stock prices!

And now they’ve all come to believe that these ultra-low borrowing rates are eternal. Like the American home speculators – who’ve bet their solvency on ever rising house prices – professional money managers are making multi-billion dollar gambles based on the fantasy that today’s cozy credit rates will last forever…or, at least until a greater fool shows up.

Meanwhile, earlier this week, the European Central bank raised rates over 4% – for the first time in six years. The German bund shot through the 4.5% level, the highest since 2002. Japanese two-year bonds rose over 1% for the first time in more than a year. New Zealand hiked its rates to an extraordinary 8%. And the U.S. 10-Treasuries edged up to the 5% level…the highest in 10 months.

What will happen next, we don’t know. We are mortal, remember, and maybe even more mortal than most.

Maybe this tide of liquidity, worldwide, has some more flow in it. Maybe Richard Russell and Jeremy Grantham are right – the grand tsunami finale is still ahead. Or, maybe the tide has already turned.

Yesterday, the Dow went down nearly 200 points. All 30 Dow stocks fell. The index has gone down more than 400 points in the last three days. Morgan Stanley issued a "sell" signal to its customers. And U.S. household borrowing dipped to a nine-year low; now that the air has gone out of the housing bubble, the poor householder has nothing to borrow against.

So maybe we weren’t entirely wrong about the coming Japan-like slump. Maybe we were just early. We will keep our Crash Alert flag up…just in case.

More news…


Addison Wiggin, reporting from the land of blue crabs and Natty Bohs:

"Oil prices may yet get a kick in the arse. Abdalla El-Badri, secretary general OPEC, threatened to blackmail the entire Western world this week. El Badri hammered the West’s infatuation with ethanol and biofuels, calling them unsustainable and impractical. So far, from what our sources on the ground report, we agree. But then El-Badri becomes unhelpful…

"If the U.S. is successful in cutting petroleum use by 20% over the next decade, Badri said, OPEC would cut production and send oil’s price "through the roof". OPEC controls 40% of the world’s oil supply. So they could do it…"

For the rest of this story, see today’s supersized issue of

The 5 Min. Forecast


And more thoughts…

*** What would a credit crunch mean to you, dear reader?

The longer nothing goes wrong, the more people believe nothing CAN go wrong…and the more they come to count on nothing going wrong.

As bull markets turn into bubbles, rising prices bring in even more speculative money, sending prices even higher and reinforcing the speculator’s confidence. "See," he says to himself, "I’m a genius." And so he makes even bigger wagers.

No trend lasts forever…and no bubble ever fails to pop, so eventually he will take a loss. But so what? Easy come, easy go. Maybe he has taken some money off the table. We don’t know if he’s better or worse off. No one is ever completely crash proof, but the smart speculator drives a car with seat belts and air bags.

But the dumb one has staked his financial future on a vain hope. On a personal level, he is the one who bought a bigger and pricier house than he could really afford on a Neg Am, I.O., Low-Doc loan. Maybe he ran up a lot of credit card debt, too, and bought a shiny new SUV – on credit, of course. When the housing bubble ends, he finds himself in a pickle.

"Yeah…I never could sell the house…it’s a pain in the neck," reports a friend from Florida. "I must have bought it right at the top of the market, and now there are 20 others just like it for sale on the same block."

But it gets worse.

"And I tried to sell that car I bought too. I’m going to take a big loss there too. Nobody seems to want a gas-guzzler anymore."

Our friend is lucky. He’s young. He’ll recover. He’s moved out of the country and taken up a whole new situation. For him, the whole thing is a good learning experience.

But imagine that you are over 50…and faced with a recession. You stand to lose real money…lose your house…your savings…and feel like a chump and a failure. Downsizing your personal life can be painful and humiliating.

Real speculators attempt to take advantage of price trends. They sometimes win and sometimes lose. But if they know what they are doing, they don’t make themselves dependent on the trend. Because they know trends come and trends go.

American householders came to depend on rising property prices…and a credit expansion…merely to continue living in the style to which they had so recently become accustomed.

The trick is to take advantage of a trend, but make sure you won’t be ruined when it comes to an end. Have you got ‘stop-losses’ in place? Can you cut back easily – either on your personal or your business expenses? Could you live with central bank rates of 7%, 8%, 10%? How badly would you suffer if the Dow crashed 30%? Suppose your house was worth 30% less?

Here at The Daily Reckoning headquarters we have no advice…but we have a plan. We are ready to downsize. Ah yes…give us a good credit contraction and will retreat to a country cottage. Oh, what a delight…a fire in the hearth to keep us warm…a garden to keep us fed… We will live on pennies. We will be strong from our labors during the day. We will sleep well at night. We will ask nothing from the world of modern finance…and expect nothing from it.

And occasionally, for Elizabeth’s birthday perhaps, we will dig up one of our buried Kruggerands and buy her something nice. Yes…a new pair of gardening gloves so she can pull weeds out of the cabbage patch without injuring her delicate hands…or maybe a new kerchief, that she could wrap around her head while bending over the (wood) stove cooking us a hearty meal…or a new pair of rubber boots that she could slip on before going out to slop the hogs.

Oh happy paradise…oh sweet tranquility…oh the simple life…once lost, now rediscovered…thanks to the coming credit contraction! We can hardly wait.

*** "Well, what happened," we asked Ferris Bonner, a.k.a. Henry yesterday.



"Well the whole thing was so stupid. The school year is over. I think they realized that they were being silly. I mean, there was no reason for me to be in school anyway…I’ve already taken my tests for this year. We weren’t doing anything."

"But you got someone to call the school and pretend to be me…?" we protested.

"Yes, and I’m sorry about that. I shouldn’t have done it. I know I’ve brought shame onto the family…and sullied the family escutcheon. I should never have gotten someone to call the school and pretend to be you, dad. I should have gotten someone to call and pretend to be mom; she has a better accent…

"…Just kidding."


The Daily Reckoning