The End of Peak Greed, Part II

Today, we continue our exclusive discussion between Agora Financial editors…

“My question about the market risk is still the same,” writes Dan Denning, “if credit as an asset class is in a bear market, how will stocks go up from here?

“It was the biggest bubble of all time and the signs that it’s been pricked are all around us. Yet you’re telling me the whole thing’s been factored into stock prices and earnings?


Eric J. Fry
September 10, 2007

Keep reading here:

Agora Financial…Unplugged, Part II

And more thoughts from Short Fuse in Los Angeles…


Views from the Fuse:

Looks like the start of another nervous week for the U.S. markets…

On Friday, the Labor Department data uncovered the first drop in employment in the United States in four years…and today, the dollar is sitting near lows not seen since 1992.

“It’s pretty obvious the Fed is going to let the dollar collapse,” today’s issue of The 5 Min. Forecast quoted Dan Denning in saying, “to prevent major recessionary pain from the housing market in the U.S.”

“Inflation has been the ‘predominant concern’ of the Fed all year long, and for good reason… the dollar has been in the pits for sometime. If the Fed’s hand is forced to lower rates, traders will surely rush in for the kill. And, if there was ever a time for China to bail out of their ‘nuclear option’… this would be it.

“Makes you wonder, could gold reach $1,000 in the next couple of weeks?”

Another time the decision was consciously made to devalue the dollar was in 1985.

The then G-5 (composed of Japan, France, West Germany, the United States and the United Kingdom) gathered in the Plaza Hotel and agreed to devalue the U.S. dollar in relation to the Japanese yen and the German Deutsche Mark by intervening in the currency markets. They called this agreement the Plaza Accord.

The Plaza Accord was meant to reduce the U.S. account deficit, by making industry in the United States less competitive in the global market, by making exports cheaper to trading partners.

The big difference here is, in 1985, the U.S. was still producing ‘stuff’…in 2007, not so much. In fact, two years ago, our biggest export was scrap metal.

Either way…the dollar is taking it on the chin – and we think we’ll stick to gold.

Move over Vegas…Macau, which is 60 kilometers southwest of Hong Kong, is becoming the world’s largest gambling Mecca.

The new Venetian hotel in Macau will have three times as much space as the largest place in Las Vegas…it’s four times the size of the Empire State Building. It will have 3000 rooms…and a banquet hall that can seat 6,000 diners. And get this…this is just the first of 14 new buildings planned for Macau.

The Empire State Building – once the world’s tallest building – used an amazing 60,000 tons of steel. So, if this new casino is four times the size of The Empire State Building…imagine how much steel will be used!

“Steel was the secret to one of the world’s greatest fortunes,” Free Market Investor’s Christopher Hancock tells us.

“I know, it doesn’t seem ‘fancy’ enough, but manufacturing cheap steel was the key to Andrew Carnegie’s wealth.”

In Asia, new buildings are popping up all over – in fact, seven out of ten of the world’s tallest skyscrapers have appeared in this hotbed of wealth creation. And in China alone, 1,000 skyscrapers are planned to dot the Shanghai skyline by 2011.

“China’s demand for steel will double by 2031,” continues Christopher.

“This is nothing short of a ‘second coming for steel…and poses a huge opportunity for investors.”

One company Christopher has recommended to his readers virtually dominates the steel market – and world’s second-richest billionaire just bet $572 million on this one stock.

“All is well?”

We don’t believe it. All is not well at all. Friday, the Dow fell nearly 250 points. Nothing to get worried about in itself. But there is plenty to worry about…and in the last few weeks, investors have begun to worry.

Old timers will remind us that stocks always climb “a wall of worry.” Yes, they do climb a wall of worry when they have been worried down into a hole. But when they are near a top…prices rise against a wall of insouciance and fall against a wall of worry. After a long decline, their worries give them something to hold onto as they hoist themselves out. After a long boom, worries are like lead weights, dragging them down.

We were intrigued last week, when retail reports showed consumers still spending. Where were they getting the money, we wondered? Besides, surely consumers must be getting worried. They are earning less than they did five years ago. And their main source of financing – their houses – are no longer rising in price. One in seven subprime mortgage payers is in arrears. “August home sales in major plunge,” reports the L.A. Business Journal.

Late payments are rising on credit card debt too.

And to make matters worse, they are losing their jobs. Unemployment unexpectedly rose in the latest reporting period – which is what triggered Friday’s sell-off.

“The hangover may be here,” says the Wall Street Journal. Maybe…but word has yet to work its way down from Wall Street to the trailer parks and subprime suburbs. Despite all these things to worry about, Americans don’t seem to be worried at all. The party’s still going on!

“Americans living beyond their means,” is a recent headline from MarketWatch. This must be a headline they keep laying around the shop, like an adjustable wrench, we thought. It would have been handy anytime in the last 20 years.

But the folks at MarketWatch were referring to current events. The same spending news that set us to wondering set their reporters to work too. They called Paul Kasriel at Northern Trust and posed the question: How is it possible that consumer spending is going up?

“There are people who deny man walked on the moon, and there are people who will deny this, too,” he replied. “But the data are overwhelming that households are spending more than their income.”

Americans are still borrowing money, in other words – even at higher rates and on stiffer terms.

This is hardly good news. It can hold an economy together for a while, we guess – but not for very long.

Not that the feds aren’t determined to hold off the much-needed correction – in the worst possible way. What is the worst possible way to postpone a correction caused by too much debt? Give them more credit, of course!

So far, the central banks have cut the discount rate…and word on the street is that they’ll probably cut the key Fed funds rate the next time they meet. And here comes Senator Charles Schumer of New York with more flim-flam – a bill to allow Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) to buy larger mortgages. Fannie and Freddie were set up to help people of modest means buy houses, by taking the credit risk off the hands of those who deserve it and spreading it out among investors and taxpayers. But we live in an age of Marxism for everyone. So now the rich, too, will get more credit from the taxpayers. That is the real genius of the present bubble – it allows buyers to buy what they don’t need with money they don’t have…while the financial intermediaries – lenders and speculators – are able to make their fees and pass along the risks to pensioners, investors, and taxpayers.

What a glorious system! It’s really too bad that it may now be coming apart…it has been so much fun to watch.

We’ve been thinking about two things these last few days.

First, we look around at these marvels of science and engineering…and we wonder. How is it possible that the same man who hunted saber-toothed tigers could build a space station? According to evolutionary theory, there has been very little – if any at all – change in human beings for 100,000 years. Yet, apparently, the caveman carried within his head an extraordinary excess capacity – the ability to build space stations. This violates the fundamental principle of evolution…that every species survives at the margin. None should have significant excess capacity, in other words, because such capacity (larger brains) would give him a competitive disadvantage against other creatures better suited to their environment. It would be a bit like carrying a heavy coat around in the tropics. It would be handy to have in another ice age, but the poor man who had it would likely be beaten in the evolutionary competition long before the temperature dropped.

Second, we wonder if this evolutionary heritage doesn’t explain why people think the way they do. It is a subject we began to address in our new book – with co-author Lila Rajiva – Mobs, Messiahs, and Markets, but it continues to puzzle us.

Here, we have a letter written to a colleague, complaining about the latter’s support of Ron Paul, candidate for president:

“We are spending as much now as we did during WWII for the exact same purpose. Like it or not, we are in WWIII, a war against men as evil as Hitler, Mussolini, Hirohito. Fascist, unconscionable Muslim terrorist rats, determined (they’ve said so) to destroy you, me, our children and our way of life. I’m a Korean Veteran. I know what I was fighting for. Do you? Ron Paul sure doesn’t. What in the world do core libertarian beliefs in limited economic and social constitutional government have to do with the war in Iraq? A great many libertarians want us to win this war because all Americans would then be safer. Defeat would greatly strengthen those who have declared war on us.”

The letter reminded us of Hermann Goering’s famous remark, upon hearing that the Vatican had condemned Nazi Germany.

“How many divisions does the Pope have?” he asked.

Any comparison between the “War on Terror” and WWII must be largely fantasy, as near as we can determine. The terrorists – whoever they are – have no divisions at all. No tanks. No bombers. No fighter jets. No infantry. No artillery. No country. No reserves. No staff. No discipline. No military tradition. No armaments factories. No railroads. No stocks of fuel. No logistics to speak of. Nor anything else that marks a modern, worthy enemy.

Yet, apparently intelligent people are still able to say that “we are in WWIII.”

Here is our question: If the human brain had the excess and unknown capacity to create the Eiffel Tour and the Empire State Building, what other capacity did it have? Did it have the capacity for putting 2 and 2 together…and getting 13? Did it have the capacity for committing strange and unbelievable acts of absurdity…like the War on Terror and Liars’ Loans?

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. We think we’ll stick with our Trade of the Decade. Gold flew up to $709 yesterday – as traders sought to get away from the dollar. “Gold provides refuge against declining dollar,” says the Financial Times.

The Daily Reckoning