Agora Financial’s Rude Awakening

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Laguna Beach, California

• 3,000 points in two years…and she ain’t done yet!
• Is the beautiful idea that was America lost?
• A shortage of sand in the Sahara and plenty more…   

Joel Bowman, reporting from Rude H.Q. in Laguna Beach, California…

The market is drifting gradually lower this morning. It’s nothing too drastic…just the slow, quiet erosion of American wealth and confidence. Outside the last month, we haven’t seen the Dow at these levels since August 2006.

Almost two years ago to the day, your senior Rude editor, Eric Fry, offered some words of warning in a column titled “the Housing Bust Begins” in these very pages.

“Yesterday’s existing home sales data confirm the fact that the housing boom-boom is going bust-bust. Sales of existing homes fell 11.2% from a year earlier, while the absolute number of homes for sale jumped to a new record.

“Based on the current rate of sales,” Fry continued, “a 7.3-month supply of homes awaits buyers, the most in 13 years. Net-net, the housing market does not appear to be heading for the ’soft landing’ that Ben Bernanke says he expects, but rather, the crash landing that many of us fear.”

But while inventories ballooned and home prices busted, the stock market continued to soar. As puzzled economists traced the toxic debt instruments linked to these homes all the way back to Wall Street, the Dow Jones Industrial Average stormed to an all time high. Since that monumentally flawed zenith – 14,093 on October 12 last year – the index has lost almost 3,000 points.

Needless to say, that soft landing of Bernanke’s remains as elusive today as a street without a “foreclosed” sign in downtown Laguna Beach.  

It appears, contrary to their own opinion, that modern economists can not remedy the situation with simply a lever pull here and a button push there. Bill Bonner delves into their strangely deluded world for some insights below.

Enjoy…

— Bulletin Board Elite – Final 661 Spots —

JUMPER No. 1, Jan. 18, 2007: Defense stock soars 2,341% in 12 months — then another 47% after joining the NASDAQ Capital Market

Those who’d bought just $1,000 worth of this little-known defense stock only a year earlier could have been sitting on $24,410. And after its first four months on the NASDAQ — when this “jumper” zoomed up another 47% in value by May 22 — they’d have been able to cash in for more than $33,148.93!

But that’s nothing compared to what one microcap expert has lined up.

In fact, he’s sitting on 18 companies that have just as much potential if not more … If you are one of the first 661 to sign up, you will receive the names and analysis for all 18, plus any other ones he comes out with in the coming year.

So, check this out right here before it’s too late 

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Lovable, Moronic Capitalists
By Bill Bonner

The first economists – the two Adams, Adam Smith and Adam Ferguson – called themselves “moral philosophers.” They were studying the human economy as though it were an anthill — to see how it worked. They figured it must follow rules – just like all other things under Heaven – and tended to see
mistakes people made, such as spending too much money, as moral failings.

Modern economists are more like auto mechanics. They think they can control the economy with a screwdriver. And to some extent they’re right. Which is why the world economy is in such a mess; they turned the wrong screws. But it’s why we moral philosophers are having such a good time; finally, we get to laugh and say “I told you so.”

In the news last week was word that the Argentines are taking back their national airline – Aerolineas Argentinas. Back in the heyday of privatization – led by economists from the University of Chicago – they sold it to a Spanish group. But now the Iberians can’t seem to make a go of it – not with oil over $130 a barrel – so the Argentines are re-nationalizing it.

What is the likelihood that the heirs to Juan Peron will do a better job of running an airline than a private company? You might put the same basic question to Gordon Brown. What are the odds the Labor Party will run Northern Rock better than private owners? And in the United States of America – almost 30 years after the Reagan Revolution – the federal government is effectively nationalizing the biggest and most important financial institutions in the world, Fannie Mae and Freddie Mac. Between the two of them, Fannie and Freddie hold almost half the entire nation’s mortgages – equal to about a
third of the US GDP. It probably won’t be too long before General Motors is nationalized too. Someone is going to have to pay GM’s pension bill. Even if the company isn’t nationalized, its health and pension obligations probably will be. But can America’s Republicans and Democrats do a better job of running a mortgage company or an auto company than card-carrying capitalists?

On the evidence, maybe so.

Milton Friedman warned that if you put government in charge of the Sahara there would soon be a shortage of sand. But the heirs to Friedman have some explaining to do. The smartest of them have crashed airlines, busted banks and wrecked builders. They’ve ruined businesses so simple that even a half-wit could have made a profit. Fannie and Freddie couldn’t win at their business, even though the deck was stacked in their favor from the very beginning. And the Friedmanites’ beloved markets — which are supposed to “look ahead” and anticipate trouble before it happens — must have shut their eyes years ago. They walked out into the blazing desert without a map or a hat; no wonder they’ve been acting strange.

To many of the world’s politicians and opinion mongers, the evidence of the last 12 months has proved what they always suspected – that capitalists are greedy s.o.b.s. But we would have spotted them that…and readily conceded that they are often morons too. Still, a system in which people get what they’ve got coming is infinitely better than a system in which people take only what government gives them. That’s the essential difference between capitalism and socialism: one yields to Armani-clothed fraud; the other to cheap-suit force. Both have their moral failings. But one is wicked; the other is merely dumb.

Want to know who caused Aerolineas Argentina’s bumpy ride…and who’s responsible for bringing down Fannie and Freddie? Follow the money. Before 1971, in the Bretton Woods monetary era, major economies used the dollar as a reference of value. The greenback was a North Star – helping businessmen and investors find their way. The U.S. dollar was reliable because it was tied to gold, which the U.S. Treasury promised to deliver to any country at a rate fixed at $42 an ounce. Then, on August 15, 1971, the U.S. Treasury reneged. Egged on by modern economists, the last link with gold was cut. Governments, investors and businessmen could still look to the dollar as a point of reference, but good luck to them. This disgraceful mischief caused even the stars to wobble.

Since then, the U.S. government could print almost as many dollars as it wanted. Arguably, it printed too many. For something – perhaps it was too much cash and credit in circulation – led American homeowners to think house prices would rise forever. They over borrowed, homebuilders overbuilt, and Fannie and Freddie – even with all their Ph.D. economists on the payroll – over-lent. And something – maybe it was the same thing – caused the price of oil to rocket upwards 400% in the last five years. The airlines hadn’t seen that coming either. So, the big lenders and the high fliers are in trouble.

Those are only two of a long list of today’s troubles that can be traced…directly or indirectly…to the world’s monetary system of the last 37 years. Businessmen, consumers and investors respond to financial signals. If interest rates are set too low, they tend to borrow too much. If the money supply expands too rapidly, they expand too rapidly too. To make a long story short, a bubbly supply of cash and credit led to bubbly markets. The U.S. and major foreign stocks market bubbled up to all-time highs in January 2000; then they headed down. In inflation adjusted terms, most never recovered. Then, in 2003, it was housing’s turn…followed by emerging markets…and lately, oil and commodities.

Sure, the capitalists are greedy. And sure, many of them make mistakes. But with feds rearranging the heavens, it’s a wonder they didn’t wash up more often.

[Joel's Note: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: Mobs, Messiahs and Markets

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[Rude Endnote: We thought we’d conclude this morning’s edition with some of choice comments offered by Doug Casey at last week’s Agora Financial Investment Symposium in Vancouver, Canada. Enjoy and send any comments you would like to make to the address below.

On the disappearing American identity—

“America is DEAD. It doesn’t exist anymore. It’s been replaced by ‘The United States’ — not even ‘These United States.’ America is not a place. America is an IDEA.”

On regulatory agencies—

“What’s the sense in the bureau of Alcohol, Tobacco and Firearms? You’ve got a government agency dedicated to restricting the 3 things you need for a decent party.”

On governmental authority—

“I don’t have a problem with authority. I just don’t like people telling me what to do!”

On the end of America— “The situation is hopeless — but not serious.”

On our leaders (and misleaders)—

“They look like humans, but they’re actually reptiles… Power doesn’t corrupt — it draws the corrupt. That’s why government and the media are completely corrupted.”

If you would like to catch Doug’s vitriolic, though highly entertaining speech in its entirety - along with presentations from legendary investor Jim Rogers, Bill Bonner, James Howard Kunstler and our own Eric Fry, be sure to grab the audio recordings here.

The MP3 set goes for $99 and the CDs (about a dozen of them, I think) run for $149…but ONLY for today. After tonight, the special conference price offer expires and the price jumps. Click here to grab your copy.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com