| The Daily Reckoning | Monday, December 6, 2010 | - Can debasing the dollar really, ahem, "save" the global economy?
- How opting out of "limiting choices" can help increase your wealth,
- Plus, Bill Bonner on growing unemployment, housing market distress and other reasons to be optimistic...
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| | | Assault on Unemployment | The Fed's Misguided Beliefs About Currency Debasement | | | Eric Fry | Reporting from Laguna Beach, California... What does it mean? The chart above shows that the 30-year Treasury bond yield is now higher than the interest rate on 30-year mortgages. What does it mean? The answer is not immediately apparent. On the surface, this chart indicates that the average American mortgage-holder is a better credit risk than the US government. After digging a little deeper, the picture doesn't change very much. The average American mortgage-holder is genuinely trying to repay his debts. The US government isn't. Treasury bonds remain the global benchmark for safety and reliability. But at the same time, Federal Reserve Chairman, Ben Bernanke, is busy establishing a new global benchmark for dumb ideas. He is busy printing up dollars in the name of dollar stewardship. The man considers it a good idea to sacrifice the dollar's hard-won reputation in the pursuit of a lower unemployment rate. He considers it prudent to exchange America's world-leading credit-worthiness for short-term economic benefits. But the global economy does not operate according to the wacky theories of academia. It follows the common sense principles of the real world. Chairman Bernanke does not seem to grasp the fact that the Federal Reserve does not create jobs; the private sector does. Nevertheless, last night on 60 Minutes, Bernanke defended his quantitative easing campaign as an essential assault against unemployment. "At the rate we're going," said the Chairman, "it could be four, five years before we are back to a more normal unemployment rate." Therefore, Bernanke continued, additional quantitative easing is "certainly possible... It depends on the efficacy of the program." In other words, the Chairman will continue to debase the dollar for as long as it takes to revive economic growth...or to destroy it. According to the academic theories that Bernanke embraces, the Federal Reserve can stimulate the economy by printing dollars and buying Treasury bonds, thereby lowering interest rates...and facilitating capitalistic ventures. In the real world, however, currency debasement is just that, currency debasement...which is just a form of wealth destruction. And notwithstanding Ben Bernanke's theories, destroying wealth never creates it. Bernanke believes he is waging a war against economic malaise and unemployment. Unfortunately, his arsenal features a falling dollar and a rising inflation rate. These dynamics are not lost on bond investors...or at least not completely lost. Yields on long-term Treasury securities have been climbing since August. Last week, the 10-year T-note yield pushed above 3.0% for the first time in months. 30-year bond yields have also been climbing. So Bernanke's tactics are working, right? Hardly. The economy added a paltry 39,000 jobs in November, as the unemployment rate jumped to 9.8 percent, the highest level since April. So if you're keeping score at home, it's... Bad Economy: One Dumb Ideas: Zero
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| The Daily Reckoning Presents | How to Be Self-Reliant in the Age of Turmoil | | | Simon Black | We have entered what I call the Age of Turmoil, a time that is marked by rapid change and fluctuating crises. The old system of debt and consumption that gave us great salaries, generous benefits, stock market and housing appreciation, and a high standard of living is gone forever. What's happening right now is a major sea change: the game is being reset, and the rules are being rewritten. I'm not being pessimistic, and this is not a cause for fear. We shouldn't be afraid of the Age of Turmoil, but rather prepare for it by becoming more self-reliant. Those who are prepared will survive, thrive, and be well-positioned for the enormous opportunities that await. Conversely, those who cling to their faith in the old system, desperately hoping for a return to the carefree days of the past, will have their lives turned upside down. This is because all the major elements of the old system - our political process, our money and financial institutions, the job market, police forces, etc. - only function as long as the system is operating normally. Think about how things work under the old system - people are effectively given pre-packaged options for the major decisions in their lives. Do you want to be a doctor? Follow this career template. A pilot? Follow that one. Investing your money? Select from these mutual funds. I call these "limiting choices," and they are a staple tradition in our modern society. Our realities are defined by people and regulations which govern our thinking, restrict our options, and constrain our creativity. When you walk into a bank, for example, no one is going to sit down with you and say, "Hey I think you should protect yourself from a depreciating currency, let's talk about gold allocation and taking some options in the renminbi." No, instead you get two limiting choices that are jammed down the throats of millions of customers: the generic savings account, or the generic checking account. Even the political process is full of limiting choices. How many times have you gone to the polls and been forced to decide between two equally vapid, insipid candidates? In the end, you vote for the limiting choice who is "less bad," the lesser of two evils. These limiting choices work just fine as long as the system is functioning properly...they're efficient and help maintain order. Human nature is such that most people abdicate the power of choice in their lives, and limiting choices provide basic direction, making it easy to follow the herd. The trouble is, limiting choices are not designed to help you survive when the system collapses. Limiting choices like the standard career template of racking up huge university debt, or investing in index funds, or holding cash in a savings account, or relying on social security, etc. were all successful tactics over the last 20 years. In the Age of Turmoil, they've become destructive. As soon as confidence cracks and the system starts to fail, everything unwinds...and people whose realities are defined by limiting choices will have their lives turned upside down. The way out, the way to survive and thrive in this turmoil, is to reject limiting choices and define your own reality through what I call universal choice. In fact, I consider "defining your reality" to be the first pillar in achieving self-reliance in the Age of Turmoil. This entails being actively engaged in the major problems and decisions we face in life, and developing the independent mindset to design our own paths from an entire universe of possibilities, not just limiting choices. Planting multiple flags is a great example of cultivating this independence and defining your own reality. Instead of the limiting banking choices provided by your hometown bank, you can open a foreign bank account in alternative currencies, or store gold in a private vault overseas. Instead of the limiting investment choices provided by your broker for standard blue chip stocks and index funds that have yielded negative returns for a decade, you can invest in alternative assets like foreign companies or international real estate based on out of the box trends that you identify. Instead of limiting career choices provided by the guidance counselor that will result in massive student loan debt and little else, you can learn valuable skills that solve people's problems, or head to thriving economies overseas looking for more interesting opportunities and adventures. The key theme in defining your reality is to think creatively beyond the limiting choices that the old establishment puts in front of you. In fact, when you consider many of the world's greatest historical figures, the main factor they all shared was a common rejection of limiting choices. People like the Wright Brothers, Gandhi, Bill Gates, and Ayn Rand all dismissed convention and defined their realities based on possibilities that they conceived. I'm absolutely convinced that the greatest outcomes await those who can take this step. Regards, Simon Black, for The Daily Reckoning Joel's Note: Mr. Black describes himself as an international investor, entrepreneur, permanent traveler and, perhaps most importantly, a free man.
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| | | | Bill Bonner | Investing in India: Optimism in the New New World | | | Bill Bonner | Reckoning from Kuala Lumpur, Malaysia... We arrived at the Oberoi Hotel in Mumbai after President Obama had left. As we were leaving, President Sarkozy was arriving. It is a Grand Hotel. They come. They go. Nothing ever changes. One of the problems with traveling so much is that you spend much of your time in a jet-lag fog. It was hazy when we left Mumbai. It is hazy in Kuala Lumpur. Was it the weather...or us? But when we read the news, our eyes opened wide. Friday's jobless numbers were shocking. The latest figures show unemployment increasing, not going down. Here's the New York Times write-up: The United States added a total of just 39,000 jobs last month, down from an upwardly revised gain of 172,000 in October, the Labor Department reported on Friday. With local governments shedding jobs, the additions in the private sector were too small to reduce the ranks of the unemployed or even to keep pace with people entering the work force. The unemployment rate, which is based on a separate survey of households, rose to 9.8 percent in November. It was the highest jobless rate since April and up from 9.6 percent in October. The outlook remains bleak. More than 15 million people are out of work, among them 6.3 million who have been jobless for six months or longer. Many are about to exhaust their unemployment benefits, which have been extended repeatedly by the government because of the severity of the downturn. The latest snapshot of the labor market cast a pall over what had been a brightening picture of a steadying economy. The stock markets shrugged off the report, which was well shy of the forecast for a gain of 150,000 jobs, as all the major indexes rose slightly on Friday. Part of the surprise in the November report was that layoffs, which had subsided earlier this year, picked up again. The number of people who were unemployed because they had been laid off or had concluded a temporary assignment increased by 390,000. We don't want to rub it in. But "we told you so" springs to the lips like a cup of beer to a football fan. Meanwhile, the housing market is weakening. The Case Shiller index shows prices in such hot-spots as Phoenix and Las Vegas, at the lower part of the market, down by more than 40% - and still dropping. Some of them are now below their levels of 10 years ago. So how can you have a real recovery when... A) Fewer people have jobs (less household income)? B) The average household's major asset is losing value? But heck, this is fantasyland now. Anything can happen. The feds are bailing out the banks all over the world...and entire countries, too. Investors actually bid up stocks slightly even after the employment news. The Dow rose 19 points on Friday. Gold rose $16. "What would you recommend to our viewers," asked a Bloomberg reporter in Mumbai yesterday. "Well, I don't make recommendations," we replied. "Especially not to Indians. "But there are some periods and some places when it makes sense to be positive and optimistic...and there are times and places when it doesn't. "If you're an Indian investor, I think you can be generally positive about the financial future. Yes, there are bound to be more crises...more corruption scandals...and more disasters. But there's a trend going on that is probably too big to stop. It's regression to the mean. India is catching up with the West. Wages are growing at maybe 15% per year. The stock market goes up almost every year. And many companies - in terms of growth - are still very cheap. "The population is growing fast. The economy is growing fast. There's plenty of capital for investment. There is plenty of knowledge and skill. There is no reason why this growth can't continue for many, many years... "So, an Indian investor can be optimistic. He should be optimistic. He should want to own a piece of that growth...a piece of the future. "Alas, the situation is very different in the developed world...especially in the USA..." Continued below... And more thoughts... "The US and Europe are struggling just to stay in the same place. They're mature societies...with populations that are getting old and economies that are largely worn out. In Europe this year, for the first time ever, more people will retire than join the workforce. And in America, the Social Security fund, for the first time ever, will pay out more than it takes in. These are two major developments. They signal the beginning of the end. "I saw in the paper that China just set a new record with a passenger train that goes 300 mph. But almost all records are being broken - and they're being broken in China or another 'emerging' market. The biggest, the most, the fastest...it's all happening. But it's not happening in the old, developed world. "I think it was Karl Lagerfeld who noticed that Asia today is the New World. America and Europe are now part of the Old World." *** Meanwhile, in the Old World...no plausible plan to save the dollar...and the credit rating of the US...is at hand. Here's Bloomberg with the story: Dec. 3 (Bloomberg) - President Barack Obama's debt commission rejected a $3.8 trillion budget-cutting plan as members from both parties opposed its mix of tax increases and spending cuts in programs such as Social Security and Medicare. The rejected proposal would have reduced the annual deficit to about $400 billion in 2015, from this year's $1.3 trillion, and begin reducing the debt. The plan by Bowles and co-chairman Alan Simpson would have increased taxes by $1 trillion by 2020 by scaling back or eliminating hundreds of tax deductions, exclusions or credits such as those allowing homeowners to write off interest on their mortgage payments. It would also have cut individual and corporate income tax rates. Social Security benefits would have been cut, the gas tax would have gone up by 15 cents, discretionary spending would have been reduced by $1.6 trillion and Medicare would have been pared by $400 billion. *** An interesting feature of the rise of the "East" is that you don't have to be in the East to participate. Latin America is one of the fastest growing regions. This suggests that the phenomenon - regression to the mean - does not depend on any particular political or economic conditions. In other words, you don't seem to have to worry about what party is in power, what they call themselves, or what policies they follow. Look at this, another report from Bloomberg: Dec. 3 (Bloomberg) - Turkey is converging with the BRIC nations in the credit market as the country's economic rebound sends the cost of insuring debt against default to the lowest in at least a year compared with Brazil, Russia, India and China. Investors are becoming more confident in Turkey as its economy grows at the second fastest pace in the Group of 20 major economies after China and record-low interest rates help spur local consumer demand. Turkey's government plans to reduce public debt to 42.3 percent of gross domestic product this year, 40.6 percent next year and 38.8 percent in 2012, and bring the budget deficit down to 2.8 percent next year from 4 percent this year. Turkey's GDP grew an annual 10.3 percent in the second quarter, matching China's as the fastest expansion the period among G-20 economies. *** Foreigner often have funny ways of expressing themselves in English. In today's New Times of Kuala Lumpur is this headline: "Probe into Teen Prostitutes." It's English. But we wouldn't put it that way. In Paris's Orly Airport, we recall seeing a sign: "Retarded passengers' waiting room." In the airport in Mumbai is a "Mishandled Luggage Depository." And on the airplane from London to Mumbai, a steward on the Lufthansa Airline made the following announcement: "For the inconvenience of passengers, we have arranged for a bus to take them..." Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
| | | | | | The Pros and Cons of Investing in India What about investing in India? The Sensex seems much too high to us... Then again, there are a lot of companies that are little researched that are cheap...and growing fast. What I like about the Indian economy is that it seems to grow no matter what happens. Boom, bust, assassination, tsunami, riot – it doesn't care. Thinking the Unthinkable The Shaky Foundation of the Financial System | The Federal Reserve and Its Secret Set of Books Shockingly, "nobody at the Fed seems to have any idea what the losses on its $2 trillion portfolio really are," which probably explains why Rep. Grayson said, "I am shocked to find out that nobody at the Federal Reserve is keeping track of anything." Economic Ruination in Three Words or Less Surviving Inflation | The Rising Sea of Debt, Part Two of Two The dollar has indeed been much stronger of late... This implies that dollar-denominated debt has become more rather than less expensive to service in real terms. This is in direct opposition to what the Federal Reserve is trying to achieve with QE2, which is to raise the rate of inflation. The Rising Sea of Debt, Part One of Two A Century of Money Mischief | |
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