Whatever Putin Wants, Putin Gets

Vladimir Putin says he wants “a new architecture” for the world.

What?

Bauhaus? Arts and crafts? Frank Lloyd Wright?

He means he is sick of U.S. hegemony. He would prefer that the world economy not be dominated by the dollar and that world politics not be under the thumb of the Pentagon.

He speaks for the Chinese, no doubt, and for the French, the Arabs…and many others.

And guess what. He will get his wish.

Wealth and power are migrating, as Dan Denning puts it, from the West to the East. Growth rates are faster in the East…taxes are lower…and ‘legacy costs’ – pensions to unionized workers, for example – barely exist. Cash piles up in the hands of the Chinese, for example, at the rate of billions per week. Meanwhile, in the U.S.A, cash leaves the country on a one-way ticket. The trade deficit sucks out $2 billion per day. The interest on the U.S. federal debt totes to over $8 trillion, with interest payments of over $1 billion a day (much of it paid to foreigners). Just those two items alone add up to more than $1 trillion per year.

But wait, you say; doesn’t the money come back to the United States – as the foreigners recycle it into U.S. Treasury bonds and other U.S. investments? Yes, much of it does. But it comes back wearing funny clothes and speaking a strange accent. It leaves as an asset – and comes back as a liability! For now, it is no longer something that makes Americans richer; instead the returned dollars are a measure of our poverty. It is as if got on the plane like an old friend – and came back a slave master. Now, we work to pay it interest and dividends.

What Mr. Putin wants, Mr. Putin will get. Eventually. But not yet. Yesterday, the Dow rose like it meant business. The dollar went up too. And over in China, born-yesterday investors still expect prices to rise today, tomorrow, and the day after tomorrow. The Shanghai index is on the rise, again.

In fact, as near as we can tell, the whole Global Bubble…the first one in world history…is still expanding. But watch out – it could explode at any minute.

(You can learn about this Global Bubble – especially as it pertains to the Far East – at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is Crisis and Opportunity in the New Asian Era, and the conference is taking place on July 24-27. This event is sure to sell-out, so be sure to secure your spot now.

Is the art market a leading indicator of this Global Bubble? Or a lagging one?

We don’t know. We watch it for amusement, not for trading signals. And next week, another big art auction should set off giggles.

Would you like to spend millions for a big picture of a dollar sign? How about a big, telescoping geometric pattern? Well, then, get out your wallet, dear reader, because next week both Sotheby’s and Christie’s are set to make history – competing auctions will tell us not only how big bonuses in the financial industry have become, but how batty buyers in the art market can be.

Damien Hirst has a steel cabinet with 6,000 painted pills in it. He calls it Lullaby Spring. Don’t miss that one, dear reader. It’s expected to fetch $8 million. Bacon, Freud – all of the hustlers of the art world will be on display. And it’s too bad Andy Warhol is dead. Wouldn’t he get a laugh out of seeing his portraits of Marilyn Monroe go on the block! His three prints of Marilyn – cleverly entitled “Three Marilyns” – are expected to bring in $14 million.

It is merely laughable that someone would judge this kind of stuff so highly. But it is intriguing that they judge it so much more valuable than it was a few years ago. The inflation in contemporary art is breathtaking; it illustrates how nouveau and how riche the nouveau riche really are.

Indians, Russians, Chinese – not to mention Americans and Englishmen – they are all throwing their money around like people who just got rich…and got rich so easily they don’t know the value of it. What to make of it?

Cash and credit is incredibly easy to come by, we conclude. There’s so much of it around, people seem desperate to get rid of it.

We have a suggestion for them. Just hold on. A credit expansion is always followed by a credit contraction. And this credit expansion has led to the world’s first, and biggest, planetary bubble.

When it corrects, it will be the world’s first, and biggest, planetary bust. So keep your eyes on our Crash Alert flag, dear reader. We may be early. But we won’t be wrong.

Bill Bonner
The Daily Reckoning
London, England
Thursday, June 14, 2007

More news:

————–

Addison Wiggin, reporting from Charm City…

“BP lowered its estimates of proven oil reserves for the first time since 1990. Yesterday the British oil behemoth released its annual “Statistical review of World Energy,” and what’s inside portends the end of the cheap oil era.

“World oil reserves declined by more than 1 billion barrels between 2006-2007, BP claims. The 1 trillion barrels in reserve and projected global production is enough to last the world no more than 40 years at the rate of current consumption.

“They also predicted global oil output would continue to rise to meet demand, but that growth would depend on areas outside the industrialized countries and in regions where state oil firms dominate. How wonderful for our favorite megalomaniacal dictator, Hugo Chavez.”

To see what our Peak Oil guru has to say about this…and to find out how you can get a subscription to his upcoming service – free of charge, see today’s issue of The 5 Min. Forecast

————-

And more thoughts…

*** Zimbabwe…what an exciting place!

The inflation rate is now up to 4,500% per year. Naturally, stuff would be flying off the shelves as people rushed to get rid of it…if there were stuff on the shelves.

Zut!

But that’s the trouble with inflation. At first, it fools people into thinking that there is more purchasing power. Factories churn out more goods. Businesses hire bodies. Investors make capital investments. And production plumps up.

Then, people catch on. There’s no new demand, after all, just more currency bills. Businesses cut back, production falls. Prices skyrocket.

Democratically elected president of the hellhole, Robert Mugabe has been looting the place. Ordinary citizens could change their Zimbabwe dollars for the U.S. brand earlier this year at $1US to $2,900 Zim. Now, the rate is one U.S. dollar per $100,000 Zimbabwean dollars. But if you are one of Mugabe’s cronies, you have the right to trade your Zim bucks at the official rate. It’s not hard to see what happens. The elite buy U.S. dollars on the black market and sell them to the government at the official rate. They never had it so good.

Then, since there is nothing much to buy, they gamble on the stock market. Zimbabwean stocks are the fastest rising in the world – even in real, inflation-adjusted terms. In the last 22 weeks, according to the Financial Times, they’re up 200%.

Of course, it won’t last forever. No bubble ever does – an especially those that are as perverted as the one in Harare. Our advice to Zimbabwe’s investors – take your money and run.

More on inflation in today’s guest essay…

*** We shall return.

Like MacArthur leaving Manila, we have been forced to flee France. A friend – and today’s obituaries – remind us that we are hardly the first. Louis 17th, the future Charles X, had to beat it out of the country. So did Victor Hugo, after he accused the government of treachery in the Dreyfus affaire. So did Charles de Gaulle – after Petain and the Germans took control. And so did Guy de Rothschild, who died on Tuesday. All of them later returned in triumph.

We will too.

Of all the pages of the newspapers, the obituaries are the most instructive and most reassuring. Every day, it is a delight to discover that we are not featured…and a delight to read the stories of people who are.

Today’s Daily Telegraph tells us the Baron Guy Edouard Alphonse Paul de Rothschild is dead. He died at 98 years of age.

In his youth, Rothschild had three things going against him. The French government of Leon Blum had declared war on the 200 powerful families that were said to dominate France at the time. The Rothschilds were at the top of the list. Anti-semites, notably in Hitler’s Germany, had announced that they were mortal enemies of all Europe’s Jews, notably the Rothschilds. And, in 1940, the Germans attacked the French army, in which Guy de Rothschild was an officer.

Capitaine de Rothschild fought the Wehrmacht at the battle of Carvin; afterwards, he was one of only 3 officiers still fit for duty. He was evacuated from Dunkirk, to England, where he was awarded the Croix de Guerre for his conduct on the beaches.

Sent back to France immediately, he was trapped by German forces near Angouleme, escaped, and made his way through Spain and Portugal to New York, where his parents were living. A year later, he was on his way back to Europe to join the Free French forces when his cargo ship, Pacific Grove, was hit by a torpedo. Rothschild spent 12 hours freezing on a raft before being picked up. In London, he finally joined his cousin Jimmy who greeted him with a bottle of 1895 Chateau Laffite – owned by the Rothschild family.

Being a Rothschild had its advantages and its disadvantages. “To the Right wing, a Jew; to the Leftists, a capitalist,” he remarked. After the war, he found his fortune in ruins. The family had left France before the Nazis arrived. This gave enemies an opportunity. They had “abandoned French soil” was the charge. It was a choice, said Guy, “between fleeing the German army or volunteering for cremation.” Nevertheless, in 1940, the Rothschilds were deprived of their French nationality, taken off the register of the Legion d’honneur and stripped of their extensive property.

The war over, Guy de Rothschild got back what was his and proceeded to enjoy life. He was on the French golf team in 1948. His horses won at Chantilly. He and his wife gave stunning parties. He sponsored gala charities to raise money for Jewish causes. Charles de Gaulle refused to attend, however, saying the Jews were too “dominating.”

Meanwhile, Rothschild kept his eye on money too. He took big losses from his Caledonian nickel mines and then the Algerians nationalized his oil interests. But he built up the Banque de Rothschild to 70,000 clients – enough to make it attractive to the government. The Mitterand government nationalized it in 1981.

You win some, you lose some. One of his big wins came when he hired George Pompidou to run his business. Pompidou seems to have done it well; the business flourished. And it didn’t hurt that Pompidou was later elected president of France, either. Them that has, gits. Guy de Rothschild began life with a silver spoon in his mouth, and ended it that way too. He rode to the Lycees Condorcet and Louis le Grand in Paris in a chauffeured limousine, with a footman for a little extra protection. He lived large. But he seemed to get enough out of life to make it – at least so it appeared – profitable and pleasurable. Who could ask for more?

The Daily Reckoning PRESENTS: The U.S. government is often accused of understating the inflation numbers – and as Tom Au points out, that is most likely because they are looking at the wrong type of inflation. Read on…

IDENTIFYING INFLATION

Over on RealMoney, Barry Ritholtz opined that the U.S. government is probably underestimating inflation because it is focusing on the wrong type of inflation. I would agree with that, having identified no less than five different types of inflation: commodity inflation, wage inflation, monetary inflation, fiscal inflation, and foreign exchange inflation. Before discussing “inflation,” it helps to identify which form of inflation is being talked about. Failure to do so may have caused some of the confusion that often surrounds this topic.

The inflation that most American economists remember best (from the 1960s and later) is wage inflation, otherwise known as demand-pull inflation. Workers observe rising prices and demand compensation in the form of higher wages, which creates a vicious cycle of more inflation and more wage demands. This has not been happening until recently in the United States, due to the absence of labor unions, and to what Karl Marx called the “reserve army of the unemployed” in “offshore” markets. This appears to be the form of inflation that the Fed and other U.S. government authorities are focusing on, and it has indeed been benign up to now.

A less common, but more volatile form of inflation is commodity inflation, better known as cost-push inflation. We can see it today in commodity prices such as energy and metals. Energy and food price changes are excluded from “core” inflation because of their period-to-period volatility. But over time, oil price rises have averaged 6% a year, higher than other forms of inflation, and assuming that they don’t cause inflation is really assuming away the problem. Other commodities such as timber rise at 3% a year “real” (above the rate of calculated inflation).

That’s largely because such rises are (wrongly) excluded from the calculation. Another form of commodity inflation that is excluded from the official statistics has been the parabolic rise in housing prices. (The government instead uses a calculation of “owner equivalent rents,” which are basically tied to the benign wage numbers.) Commodity inflation is the most obvious form of inflation today (after having been quiescent in the 1990s), as reflected in higher food, gasoline and gas bills, but is severely understated.

Monetary inflation was most famously seen in Weimar Germany during the 1920s, when the German government went crazy with the printing presses to the point where it took billions of marks to equal one dollar. This wiped out the savings of the middle class, most members of which were compensated with (worthless) “million mark” notes, and eventually led to the rise of Hitler. Nothing of this sort has happened in the western world since, but it is a worry when the United States has a chairman of the Federal Reserve who has talked (hopefully facetiously) of dropping money out of helicopters.

Fiscal inflation is due to excess government spending, for which the budget deficit is a reasonably good proxy. It originated in the “guns and butter” spending of President Lyndon Baines Johnson in the 1960s, and similar spending of today’s President George W. Bush. We have war spending without a “war economy” e.g. rationing or wage and price controls, and if the 1960s are any guide, we will be paying the price later this decade and in the 2010s.

The last type of inflation, foreign exchange inflation, is particularly scary to me, someone who lived in Mexico before and during the peso crisis in 1994. This happens when the local currency (pesos in this case) falls dramatically against other world currencies, thereby sharply raising the price of imported goods, and hence the overall price level.

This is a real worry for the United States when the latest annual trade deficit is somewhere over $760 billion. I’m not looking for anything like the two-thirds fall of the Mexican peso in 1994-95 as a result, but even a 20% across the board drop of the U.S. dollar against the Euro, yen and yuan (the Chinese currency was unpegged from the dollar only in 2005) would be a severe shock stateside.

Regards,

Tom Au
for The Daily Reckoning
June 14, 2007

Editor’s Note: Thomas P. Au, CFA, is a principal with R. W. Wentworth, a financial services firm in New York City. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. and an analyst with Unifund, S.A. of Switzerland and Value Line. He graduated cum laude with a B.A. in Economics and History from Yale University and an M.B.A. in Finance from New York University. Mr. Au is the author of “A Modern Approach to Graham and Dodd Investing.”