The Daily Reckoning

The Maryland House of Delegates just voted to raise taxes. Should we move to Florida…or Delaware?

If we move to Palm Beach, will we ever be able to visit our beloved Maryland homeland again?

The Financial Times reports that thousands of wealthy French people are now moving to London. Their motive? They want to escape the taxes proposed by France’s new president, Francois Hollande.

Should the French impose an exit tax on these “ex-patriots”? Should it then bar them from visiting France?

Of course not.

In England in 1215, the right to travel was enshrined in Article 42 of the Magna Carta:

It shall be lawful to any person, for the future, to go out of our kingdom, and to return, safely and securely, by land or by water, saving his allegiance to us, unless it be in time of war, for some short space, for the common good of the kingdom: excepting prisoners and outlaws, according to the laws of the land, and of the people of the nation at war against us, and Merchants who shall be treated as it is said above.

Here’s the United Nations Universal Declaration of Human Rights. Article 13:

(1) Everyone has the right to freedom of movement and residence within the borders of each State.
(2) Everyone has the right to leave any country, including his own, and to return to his country.

Article 12 of the International Covenant on Civil and Political Rights incorporates this right into treaty law:

(1) Everyone lawfully within the territory of a State shall, within that territory, have the right to liberty of movement and freedom to choose his residence.
(2) Everyone shall be free to leave any country, including his own.
(3) The above-mentioned rights shall not be subject to any restrictions except those provided by law, are necessary to protect national security, public order (ordre public), public health or morals or the rights and freedoms of others, and are consistent with the other rights recognized in the present Covenant.

People should be able to move where they want, no? They should be able to look for lower tax places to live, shouldn’t they? After all, we’re Americans, aren’t we? Aren’t we all descendants of people who tried to improve their lives by moving to a new place?

Apparently, a lot of Americans don’t think so. Facebook is going public. And one of Facebook’s founders has moved to Singapore. He will save, by one estimate, $67 million in taxes by giving up his US citizenship. He says that’s not the reason he gave it up. But you can believe what you want.

And now the politicos are up in arms. Mr. Saverin has helped to give them an asset worth about $100 billion. Are they grateful? Do they bend down and kiss his derriere?

No! They want to tax him even more heavily…and prevent him from ever setting foot in the US again.

Yes, dear reader, there is no thought so dumb…so short-sighted…so low…that it won’t become the law of the land. Bloomberg reports:

Chuck Schumer, D-N.Y., has a status update for Facebook co-founder Eduardo Saverin: Stop attempting to dodge your taxes by renouncing your US citizenship or never come to back to the US again.

In September 2011, Saverin relinquished his US citizenship before the company announced its planned initial public offering of stock, which will debut this week. The move was likely a financial one, as he owns an estimated 4 percent of Facebook and stands to make $4 billion when the company goes public. Saverin would reap the benefit of tax savings by becoming a permanent resident of Singapore, which levies no capital gains taxes.

At a news conference this morning, Sens. Schumer and Bob Casey, D-Pa., will unveil the “Ex-PATRIOT” — “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” — Act to respond directly to Saverin’s move, which they dub a “scheme” that would “help him duck up to $67 million in taxes.”

The senators will call Saverin’s move an “outrage” and will outline their plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their proposal would also impose a mandatory 30 percent tax on the capital gains of anybody who renounces their US citizenship.

The plan would bar individuals like Saverin from ever reentering the United States again.

If Chuck Schumer has his way, entrepreneurs like Eduardo Saverin will think twice before setting up shop in America!

[Editor’s Note: After yesterday’s column, Run, Saverin! Run!r, we were delighted to discover that a brave Fellow Reckoner had actually linked to The Daily Reckoning...on Chuck Schumer’s Facebook page. Ha! Feel free to “like” our bitty missive here and to “share” it on Facebook. Call it non-violent protest. And of course, you can always “be our friend” here.]

Down, down, down…day after day… Stocks down. Yields down.

But what’s this? Gold rose nearly $40 yesterday.

Our “Alert Flag” went up yesterday morning. The Dow fell 156 points during the day. Not that there’s any connection. Most likely, after so many down days, stocks will bounce today. But watch out…

We have a hunch.

Facebook is the biggest deal in the stock market…perhaps ever. It’s a company that didn’t even exist 10 years ago. We know all about the company’s founding; we saw the movie. Twice. Because our daughter has a role in the movie. She’s the waitress in the scene where Zuckerberg means Sean Parker.

Not a bad flick. But from an investment standpoint, Facebook is probably one of the worst moves you can make. Most likely, it will be gone 10 years from now. $100 billion of market capitalization will disappear. Poof! It’s just a website, after all. We looked at a Facebook page, once… We couldn’t figure out why anyone would waste his time.

The trouble with new technology is that in a few years it’s old technology.

Here’s our hunch: The Facebook IPO may mark a major peak…and the beginning of a major bear market on Wall Street.

It happens every time. There’s a big, big deal. And then, it’s over. We’d give you some examples, if we could think of them. But we can’t. You’ll just have to trust us on this.

We don’t really have any evidence or logic to back this up. It’s just a hunch.

But our intuition tells us that when investors finally get the full Facebook treatment, they are going to be turned off by the stock market and Wall Street. Not only will the company turn out to be not worth a fraction of the IPO price…investors will also get a clearer picture of how Wall Street really works.

About that IPO… The idea is to generate a lot of excitement…a frenzy…so that people are eager to get the shares. And with all these Facebook users, who like…like…Facebook…and think they can tell a good investment when they see one…it ought to be easy to create a buying frenzy. Besides, everyone knows shares are intentionally priced below what their backers believe they can get for them. This causes the share-price to “pop” right after the IPO.

Of course, the distribution is tightly controlled. You have to be an insider to get IPO shares. Say…you’ll get them at about $40…and then, you expect them to go to $50 on the “pop.” If it works out as planned, you make $10 per share. This is a lot of money. Easy money. So, the insiders all want a piece of the action.

How do you get to be an “insider”? You have to be a friend of Morgan Stanley. Which is to say, you help Morgan Stanley make money. How? For example, if you are a pension fund or hedge fund you put through a lot of trades. Morgan Stanley makes money on the churn. You make money on the churn, too. Customers don’t make any money on the churn. They pay for every transaction. But who cares about them?

Everyone is convinced that buying…selling…and trading investments makes money. As long as the illusion lasts, Wall Street is happy. The customers are happy too…more or less. They’re participating in the Great Illusion — all trying to make money without actually doing anything.

So everyone churns. And the more you churn with Morgan Stanley the more likely you are to get an allocation of IPO stock. There could be about 50 million shares handed to insiders in this manner. Let’s say they go up $10 in the “pop.” That’s half a billion in gains …in only a few hours.

Dan Ariely explains:

Morgan Stanley and the rest of the investment banks involved will … make sure that their favorite fund manager client “friends” are given lots of free money. Assuming that these “friends” are given 75% of the total number of IPO shares, or a total of 291 million shares, and assuming that the stock does rise from $40 to $50, then these fund managers will collectively, in one day, make $2.9 billion dollars in realized or unrealized profits. That’s right, 2.9 BILLION DOLLARS.

…where and out of whose pocket does this money come from?

Well, just think of it this way… Let’s assume you own a very expensive piece of waterfront real estate, and you hire a broker to sell it for you. After exploring the market and after getting indications of interest, your broker advises you that $10 million would be a great price for your home. You meet with the potential buyers and decide to sell it for $10 million. After the $1 million commission you have to pay your broker, your net proceeds are $9 million. An hour later, you drive by the house and see your broker in the driveway shaking hands with some different people. You pull over to see what’s going on, and you find that the people you just sold the house to for $10 million are very close friends of your broker. To your dismay, you also find out that those friends just sold your (former) house to somebody else for $15 million.

The same exact game is going on here… By the time you drive around the block, these folks will have sold their shares at $50 per share.

I am not sure about you, but I find all of this very depressing.

Regards,

Bill Bonner,
for The Daily Reckoning

Expatriation in the Wake of the Facebook IPO originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Run, Saverin! Run!

Were it not for the fact that you’d still have to suffer the eternal torment of actually living with your wicked, miserable little self, life as a willing and active member of The State might be pretty tempting. After all, Team State — operating in direct competition with Team Freedom — enjoys some rather significant advantages, both on and off the field.

For one thing, Team State writes the rules of the game…rules it claims the right to change at any time and for any reason. It can choose to make Team Freedom’s goal the size of a pea, for example, and its own goal the size of…well…whatever it wants. It can recruit a million, steroid-jacked players to wear its own colors, and limit Team Freedom’s membership to a couple of wimpy, though doggedly irreverent, newsletter writers. Who listens to those guys, anyway? Pshhh…

Off the field, Team State may choose to sequester part or all of Team Freedom’s funding. And if Team Freedom doesn’t like it, Team State — reading again from its own rulebook — can choose to simply begin kidnapping members of Team Freedom at gunpoint and locking them up in cages.

More troubling still, Team Freedom suffers the added disadvantage of large scale defection and even of outright collusion with the enemy. In other words, many of Team Freedom’s players are really (whether knowingly or not) playing for the other team…using morally malleable catchphrases like “fair share,” “civic duty” and “social contract” as a way to distract and bamboozle some of Team Freedom’s star players. They read aloud and with unashamed authority from Team State’s own rulebook, exclaiming with sweaty excitement, “But it’s the law! Look, Team State wrote it down, right here!”

And what can Team Freedom do about all this, other than vote for another member of Team State to act as game referee every four years or so? Nothing. Or so it would seem…

Fellow Reckoners will by now be aware of the latest scheme by Team State to encroach on the lives of those they clearly consider to be “their property.” Sens. Chuck Schumer and Bob Casey, two of the more…er…“active” members of Team State, held a press conference Thursday morning on Capitol Hill where they outlined legislation that would prevent Eduardo Saverin, the Brazilian-born, Singapore residing co-founder of FaceBook, from ever returning to the United States.

Now, why would these senators do such a thing, you ask? What do a couple of freeloading, career barnacles have against the entrepreneurial spirits of a go-getting, 30-year-old success story?

Turns out that, back in September of last year, Saverin decided he didn’t want to be considered a US tax slave anymore…a move 1,700 other now-freer people also made during the same year. Abiding by the law, as decreed by members of Schumer and Casey’s Team State, Saverin relinquished his citizenship and moved to Singapore back in 2010, a place where he (and his property) are treated in less of a “gun-in-your-face, gimme-all-your-money” manner.

According to industry estimates, the move should “allow” Saverin to keep about $67 million more of his own money than he would have otherwise been “entitled to” were he still officially a US resident when Facebook makes its IPO, tomorrow.

Of course, the fact that he followed the law, to the letter, wasn’t enough for the senators. Why? Put simply, they didn’t get (what they saw as) their cut. Curiously, Schumer claims Saverin somehow owes “the country” something…beyond the hundreds of millions of dollars he must — and does — already pay.

“Saverin has turned his back on the country that welcomed him and kept him safe, educated him, and helped him become a billionaire,” Schumer said at the conference. “This is a great American success story gone horribly wrong.”

Apparently, helping to found a free product that serves 901 million voluntary users is not enough for Schumer and Casey. Of course, the Senators are not in the business of voluntary transactions, so we can see how this achievement might be lost on them. After all, their own transactions are made not with a handshake, but looking down the barrel of a gun.

So what’s their beef, specifically, this time?

Facebook today serves approximately 180 million people in the US alone…including both Sens. Schumer and Casey. One might think that, if the Senators were so upset with Saverin, as they piously claim, they would take down their own Facebook pages. Since they have not, we encourage Fellow Reckoners to swing by and leave them a warm and fuzzy message. (See links above.)

Clearly not embarrassed to showcase their own conspicuous lack of real world marketing skills, Schumer and Casey are calling their little bill the “Ex-PATRIOT — Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy — Act.” Seriously. Who, besides Team State, would even let these guys play for their side?

The proposal targets wealthy Americans who seek to renounce their citizenship — and, along with it, their tax slave status — unless the unfortunate, would be escapee can convince the IRS they are not leaving the country “for tax purposes.”

In other words, individuals looking to protect their property must first convince the thieves that they are seeking to do so for reasons other than protecting their property. Yes, you read that correctly. If the person is unable to prove the “innocence of their intent” to the IRS — just imagine! — they will be subject to a 30% capital gains tax on all future US investments…regardless of where they live…and assuming they still want to invest in their former jailer’s country at all.

Stranger still, the newly emancipated individuals will not be allowed back into their cell. Said Schumer: “They could not set foot in this country again.”

The battle line has been redrawn again, Fellow Reckoner. But as always, where the state exists, freedom does not. And where freedom exists, the state does not.

Choose your team wisely.

Joel Bowman
for The Daily Reckoning

P.S. As always, we encourage our readers to “pirate” any and all of our material. Feel free to share and “like” this article…especially, today, on Facebook.

Run, Saverin! Run! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

My most surprising findings in Brazil, aside from the amazing fruits that I didn’t know existed because the US government doesn’t think I need them, were the young American kids who have moved here to find economic opportunity. This I had not expected, but now fully understand.

Brazil is a marvelous and massive country where private wealth thrives without embarrassment, where well-protected and healthy familial dynasties form the infrastructure of social and economic life, where technology is popular and beloved by everyone, where the police leave you alone and where Americans can feel right at home.

The world is changing fast. Freedom in America is slipping away so quickly that we are already seeing a wave of young people leaving in search of new opportunities, just as people from around the world once came to America to live the dream. Brazil is one of many countries benefiting from the generational emigration from the US.

Discovering this rattled me more than I might have expected. But the young people themselves are not unhappy, and I can see why. They are valued. They are earning good money doing interesting things. They have access to one of the most beautiful and exotic and friendly places on Earth. They eat well, live well and have rich social lives.

More than anything else, they have the sense of freedom.

Now, you might wonder how it is that people have to leave the “home of the free” to find freedom. Over the last 10 years, something horrible has happened to the United States. The police state has cracked down hard, not so much on “terrorists” or real criminals, but on regular citizens. The news items spill out of my feed on an hourly basis, things that just shock and alarm those who are paying attention.

Maybe it is not so surprising. The US military is larger than most of the world’s militaries combined. We have the largest prison population on the planet, and most are locked up for nonviolent crimes. The political culture focuses more on the need for security than for freedom. Add it all up and you have the perfect recipe for the emergence of a police state.

But most Americans are not entirely conscious of the change. It has been fast, but slow enough not to cause alarm. It hits you only once you leave. This happened to me two years ago when I went to Spain. I could move about and do what I wanted without bumping into authority at every turn. I felt it again in Austria last year. It is not something you can quite put your finger on, just a sense that you are not under constant surveillance in suspicion. You can breathe easily.

It was the same in Sao Paulo, Brazil, a happy and prosperous land of exotic fruits, thriving markets, consumer products that actually work and are not depreciated by regulatory mandates, and polite and warm people.

I received a very generous invitation to be a main speaker at the third conference on Austrian economics sponsored by Mises Brasil, a young organization with a very bright future. It was founded only four years ago. Yet today, it has a gigantic presence in Brazilian intellectual life. The hunger for the intellectual basis of freedom is palpable.

Three hundred or more people were here to listen to lectures and engage in debates on ideas. The audience was a sea of young people, most everyone under 30. They were students, professionals, traders and workers of all sorts, all passionate about freedom and the economic answers provided by the Austrian tradition of Ludwig von Mises, F.A. Hayek and Murray Rothbard.

What most excited them was the classic idea of laissez faire — that is, the idea that society can thrive on its own in the absence of central management and that the government operates as a drain on society. The culture of the group was certainly more intellectual and educational than political. They were invigorated by ideas and given hope by the idea of freedom. Apparently, nothing like this organization existed in Brazil until recently. Now the group’s website is one of the most heavily trafficked in the country.

My hosts were enormously generous with their time, and they knew exactly what I really wanted to do on the first day: see the delights of the open-air markets. I was told they are in the center of town. If you had seen a map of Sao Paulo, you would know just how odd it is even to imagine such a thing. The city seems to be everywhere in sight, everywhere you turn, going on forever. It is like 100 New Yorks.

Driving here is not for the faint of heart. The street layout makes no rational sense at all. I could have been driven the short distance between the hotel and the conference center a hundred times and still not have had the slightest clue about the layout. I was told that it would take at least two years of living here to gain a sense that you really know the place.

Go to a high spot in the center of town and look around on all sides. Everywhere you see a beautiful thing, a world built by millions of human hands. No central plan could have made this. No single mind could have conceived of it. To anyone who is intellectually curious, the obvious questions are how does this place work? How is order achieved? The answer is one that few people in the United States seem to care about today. The miracle is obtained through the coordinating forces of the market itself, of millions of free people interacting in small ways toward their mutual self-betterment. This is the answer that inspires a lifetime of intellectual curiosity.

On the first lunch on my first day, my hosts took me to a place like I had never seen, and they are as unconscious of its significance as Americans would be startled by its very existence. Again, it seemed to be in the center of town. To obtain entry requires extensive security checks. But once you are in, a new world emerges: restaurants, soccer fields, gigantic swimming pools of many varieties and delights as far as the eye can see.

This is a city within a city. But it is entirely private, what Americans would call a “country club,” but of a particularly elaborate type. It is not hidden away in some alcove on the outskirts of town. It is right there in the city for everyone to see — something nonmembers can also take pride in. It is marvelous in every way, a living monument to the possibility of orderly, privately owned anarchist communities.

One thing kept gnawing at me during my entire visit. I kept coming across people who were members of large and extended families with roots very far back in Brazilian history. They were impressive entrepreneurs, but the wealth was more robust than you would find in a place like Silicon Valley. It reminded more of Gilded Age families in the United States, people who carried themselves with grace and confidence born of excellent breeding and material security.

As I thought about it more, the ingredients were unusual by American standards: large and extended families, protected wealth, well-bred youths, a predominantly young population. What was the reason for this? I developed a quick, back-of-the-napkin theory. It had something to do with the inheritance tax. So I asked my hosts, “What are estate taxes like in this country?” The answer came fast: There are none. Some areas charge 3%, maybe 6%, but it is rather easy to escape even those minimal charges.

This contrasts with the United States, where estate taxes can be as high as 35%. We’ve been looting our best families for 100 years. We’ve gouged and smashed the richest generations of American capitalists upon death ever since the Progressive Era. We’ve been living one generation at a time. Time horizons have fallen. Large-scale, privately held capital accumulation has been discouraged, even made illegal. Families have shrunk in size. The population has become ever more aged.

This tax policy has eaten the heart out of the desire of a free people to create dynasties. So our wealthy have to hide. They are encouraged to give their money away to causes, rather than to children. We live one generation to the next. Children are perceived of as an economic burden, rather than a path to immortalizing a legacy.

In Brazil, the time horizon extends beyond the single lifetime. And this is what has given rise to the dramatic cultural, social and economic differences between our countries. These dynasties serve as robust intermediating institutions between the individual and the state. We have ever fewer such things in the United States. Maybe this is what accounts for the incoherent sense that this is a freer country than the US.

There are other factors, too. The military consumes only a tiny percentage of wealth, and Brazilians dread wars because they know that they will be roped into supporting whatever wacky war the US starts. What’s more, the police are well-known to be as likely to commit as prevent or punish crime, so they are not trusted. Security is extremely important in Brazil, but everyone knows that it is a private function and not anything anyone would entrust to the state.

The beautiful thing about Mises Brazil as an organization is that it is working to further encourage these instincts and to spread an intellectual culture that openly embraces liberty as a model of life itself. They publish books and monographs, hold conferences and spread the liberal tradition far and wide among an idea-hungry generation. This is all about the future, and Mises Brazil is right to have confidence in it.

As I waited in the customs line to enter the US again, we were all shown a film designed to introduce America to new visitors. The film featured kids in ballet class, people riding horses, barn raisings, people water surfing, dances from coast to coast, smiling people of all ages, all against the backdrop of an exciting Coplandesque musical score. It ended with the Statue of Liberty. It was wholly inspiring, but there was something missing: The government was nowhere to be seen.

How I wish this film were the whole truth about our country. It once was. But the American dream is not about geography; the American dream is an idea that moves like a spirit around the world, landing wherever people are willing to embrace it and confess it as creed. That spirit has landed in Brazil, and it was a great honor to be witness to it.

Regards,

Jeffrey Tucker,
for The Daily Reckoning

Brazil and the Spirit of Liberty originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Attention: Our “Crash Alert” flag is flying.

Dow down.

Oil down.

Yields down.

Gold down.

What’s going on?

Yesterday, we drove into Washington, DC, to the Argentine embassy. Friends from Salta were hosting a wine-tasting. It seemed strange to see our Argentine friends — who live in a remote corner of the country — in our nation’s capital. But it was a pleasure to see them…and taste their very strong, high altitude malbecs.

Washington has largely escaped the financial crisis. There is plenty of money in the city, but hardly anyone in town knows anything about economics or finance. It is politics they care about. That’s how they get money, in the old fashioned way — by taking it away from someone else. So, it is only natural that they believe the world of economics should be approached in the same way — by brute force. Command, control, and central planning…that is Washington’s method. That’s what politics is all about.

Of course, politics and economics are natural enemies, not natural friends. An economy works best when willing buyers and sellers, investors and entrepreneurs, consumers and producers are able to get together on their own terms. As Adam Smith explained it, they all look out for themselves…and are all guided, as if by an “invisible hand” towards an outcome that is best for the group. Hayek described it in more detail. Willing buyers and sellers set prices freely. Those prices are rich in information. They tell investors where to invest…and shoppers where to shop…and businessmen where to apply themselves.

The more you interfere with this process, the more screwed up things get. Artificial prices — such as the price of credit set by the Fed — send the wrong signal. Investors make mistakes. Resources are misallocated. Bubbles are pumped up…and then, blown up.

But Washington doesn’t care. It’s not really the gross welfare or wealth of the people it worries about, but the relative wealth. “Fairness” they call it. And relative to the rest of the nation, Washingtonians are getting richer. That’s fair, isn’t it?

Washington is a bad place to run over a pedestrian. If he is a white male, he is almost certainly a lawyer. So, if you run over him…our advice is to back up quickly and run over him again. Finish him off. Otherwise he’ll sue you.

The houses in Georgetown and the Northwest section of the city are handsome. They have carefully-tended lawns and gardens…and a Prius or Volvo parked in front. DC residents — at least those in the Northwest of the city and the Virginia suburbs — are conscious of their ‘carbon footprint.’ They recycle. They are well-meaning, earnest and public spirited… Just the sort of people you would like to run over, in other words.

Driving on Massachusetts Avenue…then up Wisconsin Avenue…and then along MacArthur Blvd…we passed many of the places we’ve heard so much about over the years. Fannie Mae’s huge headquarters…Homeland Security…the Brookings Institution…SAIS…the White House…the Capitol…the US Treasury…the Eccles Building, where the Fed is headquartered… It’s all there.

“It’s amazing how much damage has been done from such a little geographic area,” Elizabeth remarked.

The question we have been asking ourselves for the last 5 years.

Which way will America go? To Tokyo or Buenos Aires? To deflation…or to inflation? To a long, cold drawn-out slump…or a fiery blow-up?

Mr. Market is pushing the US towards Japan. No question about that. After 60 years of credit expansion we now have a natural credit contraction. Households and businesses are paying down…and defaulting on…debt. They’re hoarding cash rather than splashing it around.

For example, young people are driving less…and buying fewer ‘starter houses.’ Gasoline use in America is going down. So are housing prices.

Part of the reason young people are buying fewer houses is that they can’t afford them. The Financial Times reports:

“Young put off buying homes under weight of student debt.”

Yes, dear reader, the feds practically force-fed young people student loans. Like shyster subprime lenders, the feds offered students money at low teaser rates. Now, the rates are supposed to double.

Of course, the poor student thought he would be in fat city when he got out of school. He thought he’d have a well-paying job!

Now, he’ll be lucky to have any job at all…

It looked for a while as if the economy really were recovering. At least, that’s what everybody said. But now Mr. Market has asserted himself again.

Yesterday, US stocks fell again. Oil, copper, Treasury bond yields…everything is going down.

Truck buyers were canceling orders at the fastest rate in two years.

As to housing prices, the FT continues:

The number of first-time buyers has plunged — they comprised 37 per cent of home purchases in 2011, down from 51 per cent in 2010 — sapping the struggling housing market of a traditional source of vitality.

High levels of student debt, along with tighter mortgage requirements and stagnant wages, are forcing young people to delay buying their first homes.

Is there any fed policy that hasn’t backfired? Not that we know of. And the biggest fed policy now — aside from world domination — is the attempt to hijack Mr. Market’s plane, en route to Tokyo, and force it to Buenos Aires.

The feds have put their hearts and souls into this effort. Too bad they haven’t put their brains to it too!

Regards,

Bill Bonner
for The Daily Reckoning

Immune to the Financial Crisis originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Good day. The dollar continued to benefit from the troubles in Europe yesterday, adding to its weekly gains. The dollar index, which tracks the major currencies versus the U.S. dollar, is up 1.86% in the past five days as investors seek the shelter of the U.S. Treasury market.

I was talking to Mike last night, preparing for this morning’s Pfennig, and we agreed that all of this dollar buying is starting to look a bit overdone. At some point, the markets will figure they have “priced in” the Greek exit and will again start to trade on fundamentals.

Speaking of economic fundamentals, we got a ton of data released in the U.S. yesterday, and most of the numbers surprised on the upside. Housing starts and industrial production exceeded forecasts in April. Starts rose 717,000 versus an adjusted 699,000 in March. With the adjustment to last month’s numbers, the percentage gain in housing starts was 2.6% versus an expected 4.7% increase, but the numbers were still positive, which is all the markets focused on.

Building permits, a number that is a bit more forward-looking, were a bit mixed. Last month’s permit number was increased to 769,000, making April’s number of 715,000 look worse. April’s permit number was 7% lower than the March number versus expectations of a 4.5% drop. All in all, the housing numbers show a bit of an improvement in this very important sector of the U.S. economy.

My mortgage guy (I have my mortgage with EverBank, of course!) contacted me yesterday to let me know rates had dropped enough to make refinancing a good option for me. As I mentioned in the opening paragraph, much of the “safe haven” flows back into the U.S. dollar have been funneled into the U.S. Treasury markets.

This fresh round of bond buying has pushed interest rates down, which is obviously helping to support the housing market. The average rate on a 30-year fixed mortgage fell to an all-time low of 3.83% last week, and the average 15-year rate dropped to an all-time low also, according to Freddie Mac.

Another report released yesterday showed industrial production climbed 1.1%, the most since December 2010. The industrial production number was propelled by gains in auto sales, which were the strongest in four years. Half of the gain in factory output in April was due to a 3.9% surge in vehicle sales, according to today’s data. Utility use also increased during April, climbing the most in two years.

In addition, we got the capacity utilization numbers for April, which increased to 79.2%, the highest since April 2008. Chuck always watches this number closely, as it is a very good indication of whether businesses are using all of their production facilities. A rise of this number above 80 is typically an indication that the economy is “running on all cylinders.” We are not quite there, but certainly getting closer!

The combination of an uptick in housing and auto sales was great news for the U.S. economy, and would typically have led to a surge in the equity markets, as these are two of the most important pillars of the U.S. economy. But the stock markets were down here in the U.S., as investors continued to worry about the eurozone crisis.

Data released in Europe yesterday showed inflation slowed last month, and exports dropped in March as the region’s fiscal crisis undermined the economy. The eurozone crisis was also on the minds of the Fed policymakers during their last meeting.

Minutes from the FOMC meeting at the end of April showed members were worried about a loss of momentum in global growth caused by the European crisis. The members of the FOMC “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.” The minutes also pointed out the “fiscal cliff” that the U.S. economy is approaching at year-end, as U.S. lawmakers have to agree on a budget before automatic spending cuts kick in.

We will get a few more pieces of data released this morning, including the weekly jobs numbers and leading indicators. The jobs data are expected to show another 365,000 increase in weekly claims, a bit lower than last week’s 367,000 increase. The numbers of jobless claims have been steadily drifting lower since peaking in March 2009.

I spent a lot of ink this morning on the data releases here in the U.S., so I better move back to the currency markets, which have been dominated by events in Europe. The big news yesterday was an announcement by the ECB that they would temporarily stop lending to some Greek banks in order to limit its risk. ECB President Mario Draghi signaled the ECB would not compromise on key principles in order to keep Greece in the euro (EUR). The ECB said it will push the responsibility for keeping the Greek banks liquid back onto the Greek central bank until they have sufficiently boosted their capital. The announcement was meant as a warning shot for the other peripheral eurozone banks, but lending will probably resume shortly. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement.

Draghi fired another shot at Greek leaders with his first acknowledgment that Greece could leave the monetary union. He said while the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet.” As I mentioned yesterday, the Greeks will go back to the polls on June 17 in what many are now seeing as a vote to exit or remain in the euro.

Chancellor Angela Merkel hosted the new French President Francois Hollande on the day of his inauguration. That just amazes me that the new French president would travel to Berlin on his first day in office. It definitely shows you exactly where the seat of power in Europe is located. I also think it is a sign that Hollande will be much more inclined to cooperate with his German neighbors than some of his election rhetoric indicated. And it wasn’t an easy trip for Hollande to make, as his plane was struck by lightning, forcing a return to Paris to board a second flight to the German capitol.

During the press conference at the end of their meeting, Merkel and Hollande sounded as if they would get along and work together to solve the Greek crisis. Hollande definitely looks like a better partner for Merkel than the last French president, and the two look like they have already started down the path of compromise concerning Greece. The European leaders said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro. Hollande affirmed at the closing of his visit that “we have a common task” to accomplish. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”

Chuck sent me a note yesterday morning suggesting the Australian dollar (AUD) may be oversold: “A charts friend of mine sent me a note indicating the Aussie dollar is showing oversold on the RSI readings. RSI stands for relative strength index, and my research shows that the A$ has reached current RSI levels four times since 2010 and each time, A$ has bounced off these levels. So… maybe the sun will begin to shine in the A$ again soon.”

I watched the Aussie dollar continue to slide after reading Chuck’s email and thought his chartist friend had probably misread something. But as I turned on the screens this morning, I saw both the AUD and NZD have turned around and begun to move higher. These two currencies were helped by Asian stock markets, which headed for their first advance in seven days. A feeling that the U.S. Fed could introduce another round of stimulus also helped buoy these commodity-based currencies.

To recap: The U.S. data released yesterday indicated the economy is still in a “recovery” mode. An increase in housing starts and industrial production showed two of the most important pillars of the U.S. economy, housing and the automobile industry, had stabilized. Another release showed capacity utilization increased to get close to 80. The crisis in Europe continues, as some Greek banks were “cut off” by the ECB. The new French president traveled to Germany, and from the look of things, the leaders are going to show a united front in their battle to save the euro. And finally, the AUD and NZD look like they are oversold, according to the charts.

Chris Gaffney
for The Daily Reckoning

Data Show US Economy is Improving originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Man wasn’t supposed to labor like this. Not under these conditions…with a clear view of a clearer sea…a white sandy beach below his room…the sound of the crashing waves gently carrying through his window…

…and his head stuck firmly in his computer screen.

But we will soldier on, Fellow Reckoner. We will ignore the blissful and beckoning distractions of one of the world’s most famous esplanades just across the way. We will pretend the little cabanas down by Ipanema’s Post 10 have exhausted their supplies of frosted, cachaça-based refreshments and that the hot bods tanning on the sand and frolicking in the water are really just figments of our imagination. We will turn away from this little heaven on earth and cast our gaze, instead, upon its equal and opposing force…

…but not just yet.

We’re here in South America’s largest economy to scope out opportunities in the local business scene. The country is booming, as you’ve no doubt heard. And as far as the BRIC countries go, Brazil might just be our favorite. Well, at least it’s our favorite to visit. Unlike China, Brazil’s demographics are favorable. Unlike India, its social mobility is flexible. And Unlike Russia, the weather is agreeable. Also, the South American nation didn’t just “re-elect” Vladimir Putin. Then again, many would argue, neither did Russia.

All of which is not to say the place is without its “fair share” of problems. It has many. Official growth here has slowed. Considerably. The parasite class — politicians in Brasília — had forecast a growth rate of 4.5% for the year 2012. Now they figure it will be closer to 2.7%. Policy makers are “under pressure,” say the papers, to “do something.”

A standard quote from The Financial Times:

With the world economy slowing, many argue Brazil needs a fresh spark to keep it growing. Policy makers are under pressure to consider a second generation of reforms in areas such as taxation, infrastructure and education to make the country globally competitive.

Hmm… Maybe policy makers do have a role to play. But we’d bet that role is best served by getting out of the way and allowing the magic of the market to work its wonders.

Fortunately, there is a growing contingent of young entrepreneurs who are advocating just that. Your editor was delighted to meet a handful of them at the III Conferência de Escola Austríaca hosted by the Instituto Ludwig von Mises Brazil, this past weekend. A crowd of young and excited attendees sat glued to their seats while absorbing presentations from a host of Austrian School superstars, including Laissez Faire Book’s own Jeffrey Tucker…the only man to inspire a standing ovation after his spectacular speech on Intellectual Property in the Digital Age.

Imagining what a country like Brazil could do if the ideas of liberty and freedom were to take hold here is, in itself, an inspiring thought experiment. And the blossoming trend of independent young thinkers and innovative entrepreneurs is one we hope to be a part of in the very near future. As, it seems, do many others.

Tellingly, attendees at the conference hailed not only from around Brazil, but also from Europe and the US, both struggling markets that promise little or no future for the generation currently graduating from universities there. And these fugitive career seekers are not alone.

Portugal’s official unemployment rate — not atypical for the PIIGS economies — stands above 14%. The reality on the ground, however, is likely much worse than that. Among youths, the figure is closer to 40% and, as one Reuters journalist writing from Lisbon put it recently, the former colonial power offers “little hope for a sharp, job-generating recovery any time soon.”

Conversely, Brazil’s official unemployment rate hovers around multi-decade lows (between 5-6%). Given the common language, it’s hardly surprising therefore to find youth flocking to the opportunity rich South American powerhouse. Continued the Reuters piece:

Emigrating is fast becoming a preferred option for many seeking a decent living as their bailed-out economy suffers under debt, low growth and poor competitiveness. Portugal’s booming ex-colonies in Africa and Brazil are a natural choice.

Similarly, the employment situation in the US is inspiring many fresh-faced college grads…inspiring them to learn a new language and to seek jobs abroad, in healthier, more promising markets. And why not?

While student loan debt in the US recently surpassed outstanding credit card debt, unemployment data for the youth demographic suggests the cost of education might not have been worth it. Data from 2011 reveal that more than half of all US graduates with a bachelor’s degree were either unemployed or underemployed at the end of last year. What does underemployed mean? From a recent CNBC article:

In the last year, [students with bachelor’s degrees] were more likely to be employed as waiters, waitresses, bartenders and food-service helpers than as engineers, physicists, chemists and mathematicians combined (100,000 versus 90,000). There were more working in office-related jobs such as receptionist or payroll clerk than in all computer professional jobs (163,000 versus 100,000). More also were employed as cashiers, retail clerks and customer representatives than engineers (125,000 versus 80,000).

Why flip burgers in Alabama, Kentucky, Mississippi or Tennessee (states with the highest rates of youth unemployment, along with the Mountain West region) when you could move to Rio de Janeiro and start an online business of your own? Why hang around waiting for government handouts on the streets of Lisbon when you could be flashing your skills in São Paulo’s bustling professional scene?

For many, the “service and protection” of the US government is no longer an adequate response…in fact, it’s becoming the very reason to leave. More on that, tomorrow…

Joel Bowman
for The Daily Reckoning

Why the World’s Unemployed Youth are Flocking to Brazil originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

It pays to be rich, powerful and a Democrat with friends in Washington. While Anna Gristina, a Connecticut mother accused of being a New York “madam” sits in a cell on Riker’s Island, Jon Corzine, the former CEO of MF Global sits at home in his New Jersey mansion. MF Global had been a publically traded securities firm with $40 billion in assets, but with liabilities even larger, filed for bankruptcy late last year, after being accused of co-mingling customer funds with its own, a flagrant violation of securities law.

As we all know, prostitution is illegal. Ms. Gristina has been charged with providing attractive young women to testosteronic men for money — a crime, but largely victim-less. Nevertheless, she has already spent two months on Riker’s Island, awaiting a June 21st hearing. Bail for her was set at $2 million in a bond, or $1 million in cash. Despite the misappropriation of an estimated $1.6 billion, Mr. Corzine has yet to be charged. Yet 36,000 clients had their money appropriated under his watch. It is hard not to believe that his status as a former Senator from and Governor of New Jersey, and major bundler for President Obama’s campaign has not provided him special privileges. Is not justice supposed to be blind?

It is hard to imagine that Ms. Gristina, whose business was to introduce consenting adults, could be an enormous risk to society. On the other hand, a wealthy and powerful man who appears to have cheated his clients is a fraud and a menace. MF Global was a public company, until it became the nation’s 8th largest bankruptcy when it filed last October. Thus, not only are customers, for whose funds Mr. Corzine had a fiduciary responsibility, out their money, but shareholders of MF Global lost their investment as well. Of course, it is perfectly possible that the morally challenged Mr. Corzine was unaware that embezzling is a crime. However, as CEO he is responsible for financial transgressions within his firm. It is unfortunate that he is not man enough to admit it.

Mr. Corzine testified before Congress, and claimed not to have been aware that anything amiss was going on. “I simply do not know where the money is.” What a whopper! Keep in mind this is a man who had been senior partner of Goldman Sachs, so not a naïf when it came to financial matters. Until the bankruptcy, Mr. Corzine was on President Obama’s short-list to replace Timothy Geithner as Secretary of Treasury. He was not only the CEO of MF Global, Mr. Corzine, according to some reports, was chiefly responsible for the bets on European bonds that got them into trouble in the first place. An e-mail from MF Global’s assistant treasurer appeared to implicate Mr. Corzine in the wrongful transfer of $200 million to JP Morgan, a transfer which included customer funds. But when Ms. O’Brien was asked questions at a Congressional hearing she pleaded the fifth. Why? Was she afraid of Mr. Corzine? Did she feel threatened by the prosecutors? Surely she did not transfer funds of that amount without some higher-ups’ approval. A lot of us would like the answer to a question recently asked by a reporter for The Financial Times: why wasn’t she granted immunity from prosecution, in exchange for her testimony? Are the prosecutors concerned as to where the answers might lead?

This is not the first time that rich, powerful and politically connected Wall Street types have walked away from prosecution. Prosecutors also took passes on Angelo Mozilo, former chairman and CEO of Countrywide and Richard Fuld, former CEO of Lehman Brothers. Both men disgraced their companies and their industries, while losing millions of dollars for investors who had entrusted their savings with them. Crony capitalism does not only lead to criminal behavior, it reflects a moral decay that threatens our capitalist system and the democracy that underlies it. When the defense uses what Matt Taibbi of Rolling Stone calls a “Wizard of Oz” defense — that the stealing was not deliberate; the misplacement of client funds was due to the chaos that attended the firm’s last few days — it’s obvious the perpetrators, with help from their attorneys, are obfuscating the truth.

Regulatory bodies spend millions of our tax dollars every year supposedly supervising those they are charged with overseeing. The events that led to the financial crisis did not happen because of a lack of regulation; it was a lack of enforcement of existing rules. The response in Washington was, of course, to create new rules, not to punish regulators who did not regulate. The Obama Administration is not afraid of lawsuits and charges. Look at the legal problems his Environmental Protection Agency (EPA) is causing the energy industry. But it is telling that this administration, theoretically so friendly to the poor and defenseless, has not sent one person to jail for the near collapse of the financial system four years ago. They could start by looking at Congress. When it comes to investigating the true causes of the near-financial collapse, this administration is the antithesis of Teddy Roosevelt — talk loudly and carry a wiffle bat.

As insulting, has been the response of the Trustee, James W. Giddings. The role of a Trustee is political in the sense that they are awarded by the courts. And they are meaningful in terms of compensation. For example, Irving Picard, Trustee of what is left of the Madoff Ponzi scheme, through last October had billed $225 million. Mr. Giddings’ firm, Hughes Hubbard, has billed $168.7 million thus far for the Lehman bankruptcy. With that sort of money on the table there is plenty of room and opportunity for shenanigans. Mr. Giddings acknowledged that $1.2 billion has gone missing and that a commingling of customer accounts and corporate funds did take place. But it was, in his opinion, at least in part, due to “sloppy” bookkeeping, and computers and employees who could not keep up. That sounds to me like a “Wizard of Oz” defense. Sloppy bookkeeping! Give me a break! This was stealing.

Incredibly, no one has been arrested. Republican Congressman Michael Grimm from New York City has asked for an independent counsel to take over the federal criminal probe being conducted by the Department of Justice (DOJ.) James Koultas, the leader of the Commodity Customer Coalition, an advocacy group for former MF Global clients recently noted the obvious: “I don’t think the DOJ is going to go up against one of the President’s biggest bundlers without an independent counsel being appointed.”

The near-collapse of the financial system four years ago spooked investors. Taxpayers are already rightfully concerned about the cost to them caused by a few rogue traders, who saw millions in personal profits, and lawmakers whose concern about re-election overcame any worries about the consequences of their legislation. When the guilty go unpunished, crime only increases. Joe Nocera, writing a couple of weeks ago in The New York Times, put it this way: “Giving the big guys a pass isn’t good for the financial markets. And it isn’t good for democracy either.” It is the inverse of James Q. Wilson’s “broken windows” theory that says if broken windows are repaired immediately the incidence of crime will decline. When criminal activities such as these go unpunished, the crime rate goes up.

Everyday small time criminals get busted — drug pushers, hookers, purse snatchers and small-time robbers — but wear a white shirt, steal a few million dollars and have friends in high places, and you can stay at home. It is crony capitalism at its worst. Court appointed lawyers get rich; politicians, who have become wealthy, pay back their friends and remain in office. Very few bad guys go to prison. It is a terrible message, if we want to restore faith and confidence in our markets. Democracy is based on property rights and the rule of law. When property is not protected, the law is meaningless. What really is going on with Mr. Corzine?

Regards,

Sydney Williams,
for The Daily Reckoning

“Jon Corzine – What’s Going On?” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

— Andrew Mellon

Down, down, down…

Oil is at a 5-month low. Russian stocks are 20% below their high. Commodities are back to 2010 levels.

Everything is going down. Even gold.

Wait a minute. Since we know from Einstein that all motion is relative, everything CAN’T be going down. If everything were going down, everything would be standing still. Something must be going up as a point of reference.

So what’s going up?

Cash!

Cash is going up against oil, houses, stocks, copper, commodities of all sorts…and just about everything else.

Cash is king.

Why? Because we are in a Great Correction. And in a great correction, prices are corrected. In a bubble, prices tend to go up. This tends to push up animal spirits…encouraging investors and business people to do things that they will later regret. They build houses no one can afford…and shopping centers no one really needs. Then, these things — and the loans against them — appear as “assets” on the books of banks, pension funds, hedge funds, private equity outfits…you name it.

Later, as the correction continues, markets discover that these ‘assets’ are not worth quite as much as they thought. Prices go down. Some ‘assets’ become liabilities. They are underwater, with more debt than equity.

Labor rates fall too. There are fewer projects that “make sense”…and they need fewer workers. Business falls off. Unemployment goes up. Salaries go down.

As prices fall, they must fall against something. So they fall against cash. Cash becomes more valuable. You can buy more real assets with every unit. People who hold their cash through a correction usually do well. They are able to buy quality assets, at the bottom, at large discounts to their previous prices.

That’s why so many people are willing to lend money to the feds for such low interest rates. They figure it’s as good as cash.

All this is obvious and hardly worth mentioning. In a better world, we’d all know what was going on…and we could all predict what would happen next: the mistakes would be written off, defaulted on, foreclosed, and marked down…

…and then, the economy could get up, dust itself off, and get back to work.

That’s what used to happen. The first American depression came in 1819. Cotton prices collapsed. Farms were foreclosed. Banks failed. It was over by 1821 — 2 years later.

Then, there was the Panic of 1837. New York brokerage houses failed. Farm prices collapsed. A bank president committed suicide. But it was over by 1843 — 6 years later.

The Panic of 1857 was triggered by the bankruptcy of Ohio Life Insurance and Trust Company. Railroad speculators were ruined. Stocks plunged. Nearly a thousand companies went broke. The resulting depression was hard…but short. Recovery began two years later.

The Panic of 1873 led to a 5-year depression. And the Panic of 1893 hit even harder — with a crash on Wall Street, 16,000 business failures and a 15% unemployment rate. Four years later, the economy was running hot again.

The aftermath of WWI brought the Depression of 1921. By many measures it was as bad as the Great Depression. But it was quick — two years later it was over.

And then, came the Great Depression itself. What made it so great? The feds! Until the 1930s, the feds let the economy take care of itself. Interest rates? They were set by willing buyers and sellers, not by economists working for the government. Monetary policy? Fiscal policy? There were none.

When it was time for a correction, Mr. Market took out a wrecking ball and knocked down the mistakes of the previous boom. The debris was quickly swept away…and it was off to the races again.

Even as late as the 1930s, Andrew Mellon, then Secretary of the US Treasury, advised president Hoover to “liquidate” everything. His idea was to give the correction a helping hand… Rather than wait for the correction to do its work, he’d swing the wrecking ball himself.

That is just what he did in the 1920s. He was Treasury Secretary in 1921 too. And instead of trying to fight the slump of ’21-’23, he helped it on its way. Instead of “countercyclical stimulus” measures, he gave the nation “pro-cyclical” measures. That is, he didn’t increase government spending in order to provide the economy with fiscal stimulus. He cut government spending in order to leave more money in the hands of consumers, investors, and business people.

And it worked. Scarcely 24 months after the beginning of the depression it was over…with unemployment back to 5%.

But the world changed between ’21 and ’31. By the ’30s, the feds had the bit between their teeth. In Germany, the Nazis were already consolidating power and gathering tinder for the Reichstag. In Italy, Mussolini and his gang were wearing funny outfits and plotting out an empire. Stalin was reorganizing Soviet agriculture — which would result in millions of deaths by starvation. And in the western democracies, the meddlers were taking over too.

Instead of thanking Mellon for his input, the feds tried to impeach him! In a few months, Mellon was gone. And then US economic policy was firmly in the hands of people who thought they could do better.

The gist of the new policy was that corrections must be stopped — at all cost. Depressions must be fought. Bankruptcies must be prevented… Markets must be controlled! By bureaucrats!

This new policy was what made the Great Depression great. Mr. Market may have wanted to correct his mistakes; but the feds wouldn’t let him. The depression continued, off and on, throughout the ’30s…and the ’40s too. It didn’t really end until the 1950s.

You might expect the feds would have learned from that experience. Compared to the laissez faire policies of Andrew Mellon their activism was a complete, miserable failure.

Learn? Are you kidding? We’re now in year the 6th year of the crisis that began with the collapse of subprime in April ’07. Does it show any sign of letting up? Any sign of coming to an end?

Nope?

The feds have fought the correction every step of the way…with everything they’ve got. They’ve tried monetary stimulus — taking rates down to zero. They’ve tried fiscal stimulus — with $1 trillion budget deficits for the last 4 years…and no end in sight. They’ve tried “unconventional” measures too — such as QEI, QEII and The Twist. Last year, the Fed funded more than 60% of the US deficit with printed money. And the Fed has increased its holdings of US debt some 3.5 times since 2008, from $479 billion in September, 2008 to $1.66 trillion in March, 2012.

So, put on your seat belts. Sit back. Relax.

Eventually, the correction will do its work. But it could take a long, long time.

Regards,

Bill Bonner
for The Daily Reckoning

Correction Fighting: How Feds Prolong Economic Depressions originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Good day. Another busy day on the desk yesterday, as the increased volatility in the currency markets had the phones ringing. Many of the clients calling the desk were worried about the recent drop in the currencies and metals. Some want to bail out, while others are seeing the fall in prices as a good buying opportunity.

We continue to remind callers that diversification is the key to long-term investing success, and the best strategy is to make an investment plan and stick with it. But before I get in trouble with the lawyers, I better get back to the purpose of this letter, which is to give readers a recap of what is going on in the currency markets.

The Greek crisis jumped back onto all of the trading screens last night after the Greeks finally admitted they couldn’t form a coalition government, and planned another election in June. The problem with these new elections is that there is a high risk that leftists opposed to the terms of an EU bailout will sweep to victory in this next election and send the eurozone into a deeper crisis.

Both of the parties who won the largest percentage of the last vote want to remain in the euro (EUR), but promised to “renegotiate” the terms of the bailout agreement. The second round of elections could shift the results further left, making the withdrawal of Greece from the euro a higher probability.

In addition to the Greek crisis, yields on both Spanish and Italian bonds rose yesterday as investors sold and sought safer havens. Moody’s Investors Service downgraded 26 Italian bank ratings, citing Italy’s recession and increasing bad debt. It also warned that Spanish banks face additional challenges.

And there is probably more bad news to come from the rating agency, as a Moody’s official said the rating agency is postponing possible downgrades on more than 100 banks worldwide as it assesses the fallout from JPMorgan Chase’s trading losses.

None of this was good for the euro, and the single currency unit approached the 12-month low of 1.2624, which it reached on Jan. 13. Bad news for the euro corresponded to an up day for the U.S. dollar, which is seen as the only “safe haven” in the most-recent crisis. The U.K. economy fell into a second recession, while Europe has avoided the double dip, according to official numbers released yesterday.

The pound sterling (GBP) was seen as a safe haven from the euro crisis, but the pound weakened the most in a month versus the U.S. dollar after the BOE said the U.K. economic growth was likely to remain “subdued” in the near term.

Central bank Governor Mervyn King admitted the U.K. faced threats from the euro crisis as he released the quarterly report on inflation. “Concerns about the possibility of a disorderly resolution” in the euro area have “adversely influenced asset prices, bank-funding costs and confidence,” the BOE said in the report. “The MPC [Monetary Policy Committee] judges it likely that the possibility of such extreme outcomes crystallizing will continue to weigh on U.K. activity for some time, even if these outcomes do not actually occur.”

Shifting to the U.S., markets will be eagerly awaiting the release of the minutes from the last FOMC meeting, scheduled to be released early this afternoon. Chairman Bernanke said after the most-recent meeting that he is prepared to “do more” to boost economic recovery, which the markets took to mean another round of quantitative easing.

Investors will be analyzing the minutes of the last meeting to try and get a sense of whether or not QE3 is in our future. If there is any indication that another round of easing is in the offering, the equity markets will run higher and the dollar will get sold.

But before we get the minutes this afternoon, we will also get a boatload of other data releases here in the U.S. Housing starts are expected at 685,000, a slight increase from last month’s 654,000, and the month-over-month increase is expected to be a much-better 4.7% increase, compared with last month’s dismal 5.8% fall.

We will also get a report on building permits, which is a more “forward looking” report. Permits are expected to have fallen in April, down 4.5% from March levels. We will also see industrial production and capacity utilization, both of which are expected to show a slight increase during April.

Yesterday was chock-full of data with the release of the CPI and retail sales data. The inflation data showed consumer prices here in the U.S. rose at an annual rate of 2.3% in April, just as a majority of economists had predicted. Readers know neither Chuck nor I put much faith in this “official measure” of prices, and would rather look at John William’s ShadowStats, which pegs the price increases to a more-realistic 10%.

The retail sales numbers weren’t as encouraging, as sales slowed to a 0.1% increase during April, down from a 0.8% gain in March. Other data showed the New York state manufacturing activity improved, mostly due to falling energy prices, and business inventories were up a bit, at a 0.3% increase.

One of the most-important pieces of data released yesterday didn’t get any press in the mainstream media (no surprise there). Data showed the total net TIC flows dropped $49.9 billion in March, but the newsies chose to focus on China’s increase in its holdings of U.S. Treasuries in March. Our friends over at The 5 Min. Forecast had some interesting things to say about the increase:

“Yes, China beefed up its holdings of U.S. Treasuries in March, according to figures out this morning from the Treasury Department. But if you widen the scope and go back six years, a couple of interesting things happen. First, the increase in March was so small as to barely show up on the chart…

“And second… China’s holdings peaked last July. Coincidentally, that was the last month before Uncle Sam lost its AAA rating. The numbers declined markedly through the end of 2011, and stabilized in the first three months of 2012. This is especially interesting when you consider how Chinese imports of gold grew at the same time Chinese purchases of Treasuries were shrinking.”

They point out that China is slowly accumulating gold, but you wouldn’t know that by the recent price movements. The shiny metal dropped again yesterday, to a new low for 2012, at $1,526.97. It has bounced back up from its lows, but is still trading in the $1,540 range.

I pointed out my thoughts that gold is an excellent place for investors seeking a safe haven, but the recent trading patterns show that most investors feel it is more of a “risk” asset. The correlation between gold and the dollar has been moving closer to –1, which would indicate a perfectly negative correlation (a negative correlation indicates gold moves down as the dollar moves higher). The 30-week correlation coefficient between the greenback and bullion is now at -0.66, compared with -0.24 in September.

But some of the biggest investors feel gold will rebound from its current levels. Bloomberg reports that the median estimate of 11 analysts who track gold indicates the price will average $1,740 in 2012. Goldman Sachs’ commodity research team believes the Fed will start a third round of QE in June, which will push the value of gold higher.

Billionaire George Soros raised his stake in gold, according to a filing yesterday reflecting first-quarter holdings. Central banks are buying bullion at the fastest pace in five decades, adding 439.7 tons in 2011, and they will probably purchase a similar amount this year, according to the World Gold Council. Sounds like a good opportunity to increase metals holdings at good prices!

Chuck is working out in Las Vegas this week, giving a couple of talks to packed rooms as usual. I miss attending these shows with Chuck, who is treated a lot like a rock star at them. Fans constantly drop by the booth to shake his hand and pick his brain on the markets. He sent me the following reflections from the floor of the Las Vegas MoneyShow:

“Most people here at the Las Vegas MoneyShow believe, as I do, that the back side of the storm is about to hit the U.S. But then again, 250 of them were Pfennig readers in this humongous room I was in yesterday!

“I said something to the people there when talking about the Pfennig, and it hit me like a brick! I’ve been writing the Pfennig in one shape or form for 20 years now! WOW! Who would have thought that those handwritten notes to salesmen each morning would turn into this 20 years later!

“Even when I was ‘retired,’ after Mercantile performed ethnic cleansing on Mark Twain employees, I wrote the Pfennig from home. Back then, Alex was only 3, and used to sit on my lap and pound away on the keyboard so that portions of the Pfennig looked like this: : )*%PLKE#&^)*!

“Alex is almost 17 now — amazing how time flies, eh? But the point here is that longtime readers that go back to Mark Twain Bank days have been with me through a lot. I’m thankful for your loyalty.”

Chris again. Yes, I remember back 20 years ago, when I would find a handwritten note from Chuck on my desk when I arrived each morning. Back then, we didn’t have the Internet, so he would jot down his thoughts and leave copies on everyone’s desk. We started passing these notes along to the investors we were talking to via fax, and eventually Chuck switched to passing it out electronically.

Then there was this. I haven’t commented on JPMorgan Chase’s $2 billion trading loss, which really put egg on the face of Jamie Dimon, the outspoken CEO of the company. Dimon was one of the loudest voices protesting the additional banking regulations working their way through Washington.

Yesterday, I read a story that I immediately thought would be a great story for this morning’s “Then there was this.” The story, which appeared on Bloomberg and was also picked up by our local paper, was titled “Fed Conflict Raised for JPMorgan.” The article points out that Dimon is one of three bankers sitting on the board of the New York Fed, as required by law.

That’s right, the Federal Reserve Act of 1913 actually mandated that three of the nine seats on the regional reserve bank board be occupied by bankers. The article quotes Sen. Bernard Sanders, who sees an obvious conflict in Dimon’s two roles. “It is an obvious conflict of interest for Jamie Dimon, the CEO of the largest bank in America, to serve on the New York Fed’s board of directors,” Sanders said in an emailed statement. “This is a clear example of the fox guarding the henhouse.”

To recap. Greeks will be returning to the polls in June, and the currency markets are worried about the outcome. The euro dropped again, both on the new Greek elections and a cut to Italian bank ratings by Moody’s. The pound sterling dropped, and may not be the “safe haven” that some investors thought. We got a boatload of data released yesterday, and will get even more out this morning. Most of the data showed the U.S. economy continues to “muddle through.” China is continuing to increase its gold holdings, along with some very influential investors. And I ended today’s Pfennig with a note from Chuck, who is speaking to the masses out in Las Vegas.

Chris Gaffney
for The Daily Reckoning

British Pound Sterling Losses “Safe-Haven” Status originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

On its best days, the American judicial process is a blindfolded Lady Justice — prosecuting the truly guilty and exonerating the truly innocent. On its worst days, it is a Water Wiggle — whirling around unpredictably, without any apparent connection to guilt, innocence, Constitutionality or the proportionality of alleged crimes to one another.

On good days, guilty parties go to prison; innocent parties do not. On very good days, innocent parties do not even have to go to the trouble of hiring a lawyer and showing up in court. Law enforcement agencies correctly decide to spare them the burden (and potential agony) of proving their innocence before a judge or jury.

On bad days, the exact opposite occurs. Innocent parties go to prison, while guilty parties do not. On very bad days, guilty parties do not even have to go to the trouble of hiring a lawyer and showing up in court. Law enforcement agencies incorrectly decide to withhold charges and spare guilty parties the burden (and potential agony) of defending their guilt before a judge or jury.

Once you string enough bad days together, you get a Water Wiggle — a “system” of law enforcement that investigates and prosecutes alleged crimes capriciously, unfairly and disproportionately. You get a system, for example, that:

1) Prosecutes Hall of Fame pitcher, Roger Clemens, for injecting performance-enhancing drugs into his own body, but does not prosecute a single investment banking executive for fraudulently injecting mortgage-backed securities into the US financial system.

2) Tasers-to-death a Mexican national for sneaking into the US to find work, but provides billion-dollar bailouts to finance company executives whose extreme incompetence causes thousands of individuals to lose their jobs. (Bring us your tired, huddled masses so that we can beat them to death).

3) Threatens to shut down porn film studios for failure to comply with “condom laws,” but turns a blind eye to Wall Street’s serial financial rape of the US taxpayer.

4) Fires a 5-year employee of Wells Fargo for shoplifting when she was a teenager, but does not bother to prosecute M.F. Global’s former CEO, Jon Corzine, for allowing (or causing) $1.6 billion of client funds to disappear from the firm he controlled.

In other words, once you string enough bad days together, you get a “system” that punishes minor crimes and rewards major crimes…consistently. You get a system that punishes entrepreneurial initiative by rewarding cronyism.

To reward incompetent finance company CEOs with billion-dollar bailouts, for example, is to punish the employees and shareholders of the prudently operated finance companies that compete with the firms receiving bailouts.

To refrain from investigating and/or indicting Jon Corzine for “disappearing” $1.6 billion of client funds is to punish both the 38,000 M.F. Global customers who are still missing the money they did not deserve to lose and the 1,000 employees who lost paychecks they did not deserve to lose.

To continuously intervene on behalf of politically connected incompetence and sociopathy is to invite the kinds of corruption, recklessness, cronyism and criminal negligence that ruins innocent lives and destroys entire economies.

The US is sprinting down this very path…as last week’s “surprising” $2 billion loss at J.P. Morgan Chase illustrates. Morgan’s egomaniacal CEO, Jamie Dimon, described the furor over the trading loss as a “tempest in a teapot.”

Maybe so, but based on subsequent disclosures about the reckless trading that produced this loss, Dimon looks like a teapot in a tempest — clueless and overwhelmed.

The only surprise about this announcement was that the loss wasn’t $4 billion…or $40 billion. But let’s give it some time. Morgan’s expert traders might still get there.

There’s a direct connection, Dear Reader, between the trading losses at JP Morgan and the conspicuous non-prosecution of Jon Corzine. In fact, there’s a term for this connection. It’s called “moral hazard.”

Most parents understand the term. They understand that the best way to raise a socially dysfunctional brat is to give him a candy bar every time he whines for something, and to give him a $20 bill every time he bullies a classmate. And yet, incredibly, the Federal Reserve, Treasury and Congress are doing exactly that. They are creating a generation of “spoiled brat” bankers.

Just three years after the depths of the 2008-9 Credit Crisis, Wall Street’s power brokers remain as remorseless as ever, as self-entitled as ever and, therefore, as fearless as ever. That’s not a good thing.

Three years after a crisis that nearly toppled the US financial sector, JP Morgan is playing the same old games…as if nothing had changed. The official chitchat from Washington and Wall Street about “risk” and “regulation” has changed quite a bit since 2008, but Wall Street’s behavior is just as deplorable and dangerous as ever.

As the chart above shows, the “gross market value” and “gross credit exposure” of global OTC interest rate derivatives has jumped to its highest levels since 2008. If you don’t understand what these data points mean, don’t feel bad, Jamie Dimon doesn’t seem to get it either. (But if you’d like to understand what these data points mean, check out this report from the Bank for International Settlements).

The only thing you really need to know about the global derivatives market is that risk exposures are increasing, not decreasing. JP Morgan’s balance sheet tells the tale. According to Morgan’s latest quarterly report, the firm was a net seller of credit protection — to the tune of about $206 billion, up from $116 billion as of Dec. 31. In other words, it nearly doubled its risk exposure. Morgan calls this speculation “hedging.” Unfortunately, it is hedging without a hedge, which is the same thing as speculating.

The newly “retired” Chief Investment Officer of JP Morgan, Ina Drew, was supposed to be hedging other exposures at the firm. But hedging is not supposed to produce billion-dollar losses. That’s why it’s called “hedging.”

“[Ina Drew’s] position over the years has always been around hedging,” explains Dina Dublon, a former JPMorgan CFO who worked with Drew for 22 years, “but hedging for profit as opposed to hedging just to counter losses.”

Ah yes…“hedging for profit”…also known as “speculating.”

“The sheer size of this trade,” says Barry Ritholtz, editor of the Big Picture and recurring speaker at the annual Agora Financial Investment Symposium in Vancouver, “makes it far more accurate to describe this as speculation than hedging. The loss was the tell. A true hedge would have been offset by the underlying position that was being hedged — so any loss should have been insignificant. Even a minor correlation error should not lead to a $2 billion hit.

“If we are going to define this trade as a hedge, then there is no other conclusion to reach except that everything at a huge bank is a hedge. And once you define everything as a hedge, well then, nothing is a hedge.”

In other words, Dear Reader, nothing has changed since 2008. Absolutely nothing. The only reason Dimon is around to lose $2 billion of the shareholder’s capital in 2012 is because the federal government (i.e., we taxpayers) bailed him out in 2008.

Therefore, Dimon understands the rules of this rigged game very well. He knows he can conduct mega-billion-dollar speculations because he knows that JP Morgan could never bankrupt itself, no matter how recklessly it conducts its business. The US central planners would not allow it. Morgan could build bonfires with $100 bills in front of all its branches every night, and it still would not be able to burn through the federal government’s commitment to keeping it alive.

Jamie Dimon, along with the rest of the coddled Wall Street predators, knows he is just as free to jeopardize the US financial system as he was in 2008. He and his counterparts at Goldman and elsewhere are just as free to place their monstrous heads-I-win-tails-you-lose bets with non-consenting US taxpayers as they were in 2008. No one will stop them.

Vibrant economies and civilized societies rely on law and order. And law and order relies on a foundation of fairness — a basic understanding that bad things are bad and good things are good. But when the powers of government begin to affirm that bad things are okay and good things are irrelevant, all hell breaks loose.

If America is to regain her former glory, she must first regain the integrity to prosecute criminality, no matter how many politicians know the criminals on a first-name basis…and she must regain the courage to let incompetent capitalists fail so that competent capitalists can arise to take their place.

If America is to regain her former glory, she must regain the integrity to prosecute guys like Jon Corzine and the courage to let guys like Jamie Dimon fail.

Eric Fry
for The Daily Reckoning

The “Corzine-Dimon Syndrome” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The Dow sinking.

Gold sinking.

Oil sinking.

Copper sinking.

Yields sinking.

We struggled with this, Dear Reader. We meditated. We prayed. We drank heavily.

And finally…we overcame the rank desire to say: “We told you so!”

As you know, Martin Wolf, of The Financial Times, is the voice of The Economics Establishment. All that is great and good in the field — which isn’t very much — is given voice by Wolf. Then, it is acceptable for policymakers, Treasury ministers, and central bankers, not to mention the people you talk to at cocktail parties.

And lo! Here cometh the neo-Keynesian economist. What saith he?

He says the world is drifting towards Japan.

Of course, that was the message 10 years ago from a certain feral economist who will not be mentioned. He maintained that Japan was a leader, not a follower…and that the US would follow in Japan’s footsteps…with about a 10-year lag.

He even wrote a book on the subject, with Addison Wiggin: Financial Reckoning Day.

Where he got these ideas, we don’t recall. What we do recall is that almost everyone laughed at him. “Japan?” they said. “The US is nothing like Japan. We have a dynamic, robust economy. We have Lehman Bros., Bear Stearns and Countrywide ‘low doc’ mortgages. We have Alan Greenspan. And George W. Bush. We have ‘mission accomplished’ in Iraq. We have Silicon Valley, Bernie Madoff and a housing boom. Japan has none of those things. Ha. Ha.”

But now, the last laugh is on the other foot!

Japan’s market topped out in 1990. The US market topped out — in real terms — in 2000. Thereafter, Japan saw on-again, off-again recession…sinking prices, generally…and slumpy conditions. The US economy staged a limp recovery in the ’02-’03 period…then gave investors a bubble head-fake. Now, it’s back to the slump…

…and now, both Europe and America are looking more Japan-like every day.

Martin Wolf explains:

On May 10, 2012, the yield on the German 10-year bund was 1.44 per cent, on the US 10-year Treasury was 1.85 per cent and on the UK 10-year gilt was 1.9 per cent.

These are extraordinary numbers. They are particularly striking in the cases of the US and UK, which unlike Germany, run very large fiscal deficits and are experiencing very rapid increases in public sector indebtedness.

This combination of falling government bond rates with very rapid rises in public sector indebtedness reminds us, of course, of the experience of Japan since 1990.

At the end of 1990, when its “bubble economy” went pop, the Japanese government’s 10-year bond was yielding 6.7 per cent. As the economy subsequently declined, deflation took hold and fiscal deficits and public debt exploded. But yields on 10-year Japanese government bonds (JGBs) fell to close to 2 per cent in 1997 and then, with sizeable fluctuations, to troughs of 0.8 per cent in 1998, 0.4 per cent in 2003 and, recently, to 0.9 per cent. In short, the worse the Japanese government’s present and prospective debt position has become, the lower the interest rates on JGBs has also become.

Similarly, in July 2007, just before the beginning of the crisis and consequent explosion in fiscal deficits and debt, the US 10-year Treasury yielded 5.1 per cent. Now, almost five years later, the bonds of this alleged fiscal basket case yield less than 2 per cent. Again, in the UK, another supposed basket case, with huge fiscal deficits and a slipping austerity programme, yields have fallen from 5.5 per cent in July 2007 to below 2 per cent.

What does it mean?

Well, if the US and Europe are following Japan…and Japan is going nowhere…then three of the world’s large major areas are dead in the water.

And if that is the case, you can expect the entire world economy to “go Japan.”

That will mean lower commodity prices. A lower price of oil. A lower price of gold. Lower interest rates — yes, look for the yield on US 10-year notes to drop below 1%. Bad unemployment figures. Low…or negative growth…falling real estate prices.

…and probably a stock market crash.

Hold onto your hats!

And more thoughts…

Well, okay…so the Yahoo! guy ‘embellished’ his resume a little. Big deal. Really, we’re surprised to see people make such a fuss about it. After all, who can honestly say they haven’t put a little positive spin on their own achievements. We have!

But let us rush to clean up our credentials before Dear Readers make a federal case of it.

Okay…on our age. It says we were born in 1959. Must be a typo. We were really born in 1953…okay…’48.

And, it says we attended Harvard University. Well, yes…we certainly did ‘attend’ Harvard… But through some bureaucratic mix-up our name was never on the official student list and our diploma must have gotten lost in the mail.

As for the Pulitzer Prize, we wouldn’t say that we were awarded the prize, not exactly. There again, it seems to be a case of a slight mis-wording. “Pulitzer Prize-winning” describes the quality of our work…as widely recognized, at least in the office here.

And we didn’t exactly invent the Post-It note. We just invented something like it, with scotch tape and a piece of paper. Same idea.

And, okay, did we really “win” the Nobel Prize in economics? We probably shouldn’t have used the word “win.” We were nominated…well, mom thought should have been nominated. She was putting us “in the running”…or something like that.

There, we hope that clears up any misunderstandings.

*** How do you like that? A guy comes from Brazil. He makes billions helping Zuckerberg launch Facebook. And then he leaves the country. You’d think he’d be more grateful. Or at least more sentimentally attached to the land that gave him so much loot.

But no. Edouardo Saverin is pulling out of the USA. Bloomberg reports:

Eduardo Saverin, the billionaire co-founder of Facebook Inc. (FB), renounced his US citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill.

Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. Saverin’s stake is about 4 percent, according to the website whoownsfacebook.com. At the high end of the proposed IPO market capitalization, that would be worth about $3.84 billion. His holdings aren’t listed in Facebook’s regulatory filings.

Saverin, 30, joins a growing number of people giving up US citizenship ahead of a possible increase in tax rates for top earners. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dormitory and stand to reap billions of dollars after the world’s largest social network holds its IPO.

But the rich are doing it all over the world.

A report from London tells us that the French are moving to town. France’s new president has pledged to raise income taxes on the rich to 75%…and to boost France’s wealth tax too. Wealthy French people are buying houses in South Kensington to escape.

As for the rich in Argentina, they’ve been making tracks for many years. As soon as they get some money they buy an apartment, in Miami!

Here in Baltimore, wealthy people have been getting out of town since the top in real estate in 1927.

And now, the rich are leaving Maryland too. Governor O’Malley says “wealthy people can afford to pay a little more in taxes…”

Well, yes, they can afford it. But that doesn’t mean they will like it.

“We’re moving to Florida,” says an old friend.

“Wait for me,” says your editor…

Meanwhile, the Irish and Spaniards are leaving their homelands too. Money is the reason. But smaller amounts of it. There are few jobs in Ireland or Spain, so they’re leaving to find work.

Even the Chinese are jumping ship. No kidding. Taxes are low in China.

Regards,

Bill Bonner
for The Daily Reckoning

What Happens When the World Economy “Goes Japan” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Good day. We made it through another Monday without too much damage in the currency markets. You know things are getting pretty rough in the currency markets when we consider an average drop of just over 1% in the currencies “not too bad.” World Markets investors can’t say they weren’t warned we would see some tough times over the first half of the year (see more on this subject in the “Then there was this” section).

The euro (EUR) continued to drop on Monday, falling to its lowest level in almost four months as more and more people begin to imagine a euro without Greece. The dollar has been the biggest benefactor of the latest eurozone crisis, as investors moved money back into the US Treasury markets. The rush back to safety pushed the yield on the US long bond back below 3%, and the shorter maturities are also lower.

The Greeks are still without a unified government after the biggest anti-bailout party decided against joining the government. It is looking more and more as if the Greeks will be forced back to the polls for another round of voting.

And the Greeks aren’t the only ones heading to the polls. The Irish will vote on a referendum May 31, which asks the public to approve the “EU Stability Treaty.” While a sharp turn to the left in Greece and the return of the Socialist party to the French presidency has sent the euro lower, an Irish rejection of the EU treaty could be the last straw for German-led austerity measures.

On the flip side, the stability pact requires only 12 nations to ratify it, and German Chancellor Angela Merkel seems to be warming to adjustments to the treaty’s stringent fiscal rules. While a Greek exit is still a possibility, Germany could still allow them to stay after loosening the rules on maximum deficits. Many of the countries that use the euro are in better shape than Greece, but still need the ability to stimulate their economies.

All of this will be debated and discussed at the next EU summit meeting on May 23. Francois Hollande will be representing France, but it will be interesting to see if the Greek government gets organized enough to send a representative to the bargaining table.

The euro has settled into a tighter trading pattern overnight, and is actually starting to move higher as I write this morning. A better-than-expected GDP reading showed the German economy avoided “double dipping” into a second recession.

Gross domestic product in the 17-nation euro region came in flat for the first quarter, compared with an expected 0.2% decline. Germany’s economy grew 0.5% during the first quarter, a surprisingly strong number, which offset some of the weaker GDP numbers in the peripheral economies.

The dollar index snapped 11 days of gains overnight, as it weakened slightly ahead of a full morning of data here in the US. We start the morning off with the inflation numbers for April, with CPI predicted to have risen 2.3% versus a year ago, down from a 2.7% rise in March. We will also see the Empire Manufacturing number, advance retail sales, total net TIC flows and business inventories. There will be plenty of data for currency traders to move the markets.

If the data show the US economy is continuing to slide, we could see renewed calls for another round of quantitative easing here in the US. The impact of QE3 (or is it 4?) on the currency markets is tough to predict. More stimulus would probably cause the equity markets here in the US to rally, and would give the dollar a short-term boost.

But ultimately, QE is negative for the dollar, as it pumps more money into the markets, driving interest rates lower and causing inflation risks to rise. With this being an election year, the administration is geared now more than ever on the short term, so if the data show any weakness in the economy, we could see another push for stimulus.

An article appearing in yesterday’s Wall Street Journal online was appropriately titled “Rare Speed Bump in Commodities’ Long Run.” The title caught my eye, as it reflects exactly what I think we are seeing, a short-term pause in what I believe will be a continuation of the long commodity bull market. But in the short term, both oil and gold are being sold off.

Worries about the slowdown in China, combined with questions surrounding the eurozone credit crisis have decreased future demand for commodities. Oil dropped below $94 for a short period yesterday before rallying back later in the day. Gold has also dropped, erasing its gains for the year. I just don’t understand why gold is selling off in the face of such uncertainty. After all, gold is the only “real” currency, so why wouldn’t people be moving into gold as they sell positions in “risk” assets? I guess one answer would be that investors are no longer worried about inflation, and some of these investors had accumulated gold positions as an inflation hedge. Others will point toward central bank selling into the markets, getting value from one of the only assets that has maintained value. Still others will undoubtedly point toward “market manipulation,” but I will stay away from that in today’s Pfennig.

Most of the commodity-based currencies have sold off in tandem with the drop in oil and precious metals. The Australian dollar (AUD) continues to slide lower along with the kiwi (NZD) and South African rand (ZAR). Brazil’s real tumbled and traded above two per dollar for the first time in almost three years after finance minister Guido Mantega said the exchange rate doesn’t worry the government. This only led to further selling of the currency, as traders took Mantega’s words as encouragement to sell the real versus the US dollar. Brazil’s government is using a weaker real and lower interest rates to help stimulate their economy. Investors are expecting another cut to the benchmark interest rate by the end of 2012.

Then, Chuck usually uses this section to share something he has read recently that struck a chord with him. Yesterday, I mentioned Chuck’s predictions regarding the euro volatility during 2012, and a couple of readers asked me where they could read his projections. That got me looking through some of the past editions of Chuck’s Review and Focus, and I came across the following in the Jan. 1, 2012, edition:

“As we turn the calendar to 2012, most of us know all too well that this is the year the Mayans predicted apocalypse. But maybe they just failed to finish the calendar! OK, that was my attempt at humor, which I’m sure will get shot down in a heartbeat by many. 2012 will also be an election year, so maybe the Mayans were onto something. Nevertheless, this is the event, or the run-up to the event, that will put the dollar back to its underlying weak trend. I’ll explain in a minute, but first…

“I do believe that in the first half of 2012, nondollar investors using foreign currencies and precious metals will have to have some thick skin and batten down the hatches. This shouldn’t come as a surprise to you, dear reader, for in October 2011, I wrote that we were approaching a perfect storm for dollar strength, and that we should expect to see a period of dollar strength that could last several months. While that perfect storm hovered over the euro and other currencies, not really taking its wrath out on the nondollar investments, the storm became stronger until it finally unleashed itself on the markets late in 2011.

“So here we are starting 2012, just like we’ve started the past few years, dealing with dollar strength. This happens almost every year, due to renewed forecasts for economic vigor in the US, only to see those forecasts fade away by the time summer comes around. And I do believe this is where we are this year, too.”

Chuck wrote those last few paragraphs over five months ago, but he was pretty right on with his call for dollar strength during the first half of the year. Now we will see what happens from here. Will we see that event which puts the dollar back to its underlying weak trend?

To recap: The euro continued to slide yesterday as a Greek exit from the euro was on the minds of most currency traders. Euro leaders will discuss a possible “growth pact” at their summit on May 23, and Ireland will vote on the “stability pact” at the end of May. Looks like volatility in the euro will continue! We will get a ton of data in the US today. Could it point to QEIII? Commodities sold off, forcing commodity-based currencies lower. And we ended with a look back at Chuck’s thoughts for the first half of 2012.

Chris Gaffney
for The Daily Reckoning

Euro Continues to Drop originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Societies become more complex as they age. Each challenge…or opportunity…is met with a new rig of some sort. A tax. A regulation. An organizational fix.

As time goes by, these fixes act like friction…they slow the machine. They make it hard to move…inflexible and unresponsive. And over time, more people gain access to a fix — each lobbying group and special interest, each with his own bailout or subsidy…and each desperate to hold onto it.

Output is thus shifted to unproductive activities. The real producers are punished — with taxes and regulations — while unproductive activities are rewarded, with bailouts, handouts and sweetheart deals.

The financial industry was 2.5% of the economy when WWII ended. Now, it is 8.5%. How did it get so big? What does it do for all the money?

The answer to the first question is that it grew as the economy became ‘financialized.’ More and more laws were passed granting more and more special favors and protections to the financial industry. Just read the tax code. Go ahead, we dare you! You will find special allowances and deals for the insurance industry on almost every page. And there are rules and regulations for pension funds. And pensions themselves. ERISA. 401k. 501C3. SEC. FDIC. Dodd-Frank. CFPB. Everything is regulated…controlled…protected…

And all of this happened on the back of the biggest expansion of financial instruments in world history. The feds transformed the economy from one that made things…at a profit…to one that just made money. The money supply in the US increased by 1,300% in the 40 years after Richard Nixon ‘shut the gold window’ at the Treasury. That ‘wealth’ did not take the form of new factories in New England or new tractors in the Old South. It went mostly into money instruments…funneled through the financial industry to the rich people who owned financial assets.

Every potential new competitor had to comply with such a mountain of rules and regulations that he quickly gave up. Even if approved, he could not hope to provide a new product. Instead, he could only provide the same approved services and products that the big, entrenched players already had in stock.

John Kay, writing in The Financial Times, explains what would have happened had the computer industry been tied in the same knots.

“If you needed a licence to enter the US computer business, you can imagine the Computer Regulation Agency interviewing Bill Gates and Steve Jobs in the 1970s. What dutiful regulator would allow someone who had not even completed his Harvard degree to sell software to the public?”

Protected. Coddled. The financial industry went rogue. It was supposed to match investors with worthy investments, helping to bring genuine growth and prosperity to the US. Instead, it matched up most of the new money with itself.

The typical American was impoverished. Forty years after America’s money went rogue, he has not a dime’s more earning power per hour. And 4.5 times more debt, adjusted for inflation.

Regards,

Bill Bonner,
for The Daily Reckoning

The Suspicious Growth of the Financial Industry originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

What’s going on in the markets?

Well, a gloriously strong chávena de café at one of this city’s many colorful, street side vendors (not Starbucks) will set you back one Brazilian real, or around fifty cents. In other words, pretty cheap. A Caipirinha on the deck of what is surely the most unique hotel bar your editor has recently visited, however, will cost you the equivalent of maybe forty chávenas de café — about twenty dollars. Still, you pay for the view…and for the city skyline in the background.

As for those other markets — the kind with ticker symbols and stock charts — they’re a bit harder to get a handle on. The little arrows have been almost exclusively red this month…and the little squiggly lines tracking index performance have been trending almost exclusively south. In fact, the Dow achieved its so-far high for May at 1pm on the very first day. Since then it’s been down…down…down…

Gold is lower too…down another $15 an ounce overnight. The Midas metal is back to where it began the year, at about $1,565. But how could that be? Aren’t central banks around the world working furiously to debase their flimsy fiat notes? And aren’t the Chinese buying the stuff hand over fist? As Eric Fry showed last week (in his essay “China Buys Gold…No Matter Who’s Selling”), the squiggly line representing the Middle Kingdom’s monthly gold imports from Hong Kong is trending almost exclusively upward.

Yes, Fellow Reckoner, it’s tough to know quite what’s going on in those other markets. Government-caused distortions abound. Price fixing — including for the price of money itself! — sends strange signals to buyers and sellers, convincing them to do things they ordinarily wouldn’t do. Like buy a house they could never afford or speculate in the stock market instead of save their hard-earned for a rainy day. Thus are false booms fueled…and real corrections avoided. For a time…

At least when we pay outrageous prices for a cocktail at a tourist trap we know we’re being taken for a ride. But it’s a ride we’re willing to pay for. Conversely, when the state takes us for a ride, we don’t have any choice. That’s why we have to look for alternative investments…market workarounds…contrarian viewpoints…

Speaking of which, we received the following “letter” from a Fellow Reckoner in response to our Lysander Spooner vs. the USPS musing last week. Writes our friend David S…

Glad to have an excuse to write to you about my own area of research — postal history. We talked a little about postal history near the end of the Rancho Santana Sessions in March.

The Wikipedia article that you cited is inaccurate in part. The United States Post Office did not have a 12-cent stamp in 1844 when Spooner started his American Letter Mail Company; in fact it had yet to issue any stamps. A few local postmasters were permitted to experiment with stamps in 1845; the first national postage stamps in the United States were issued in 1847. In 1844, when Spooner started his company the letter rates in the US were based upon distance and the number of sheets of paper, ranging from 6 cents under 30 miles to 25 cents over 400 miles for a single sheet of paper. And, none of the rates were 12 cents. Since envelopes counted as a second sheet of paper, they were not generally used.

The Post Office Act of 1845, besides strengthening the monopoly on letter mail, reduced the postage rates to 5 cents per half ounce under 300 miles and 10 cents per half ounce over 300 miles. By matching the rates of the private mail companies (there were others besides Spooner) it was easier for the government to force them out of business.

By the time the 3-cent letter rate was established in 1851, Spooner had sold his mail business and moved on to other things. That rate reduction was not so much in response to Spooner as to other reformers. And, the 3-cent rate was not short-lived, but in fact rates were reduced even more. The 3-cent letter rate continued until 1883 when it was reduced to 2 cents; the rate was essentially halved in 1885 when the weight step was raised from half an ounce to a full ounce. The 2-cent per ounce rate lasted from 1885 until 1932 except for a couple years during World War I when the letter rate was 3 cents to raise money for the war effort.

All of this is simply factual background on postal operations in the 1840s — it does not change the essential points about Spooner’s argument against the Post Office Department (as it was known then, the USPS dates to 1971) or refute your conclusions about private business. I just like to see the story accurately told.

There is however, one additional point to consider when seeking to understand Spooner. He was an abolitionist and cheap postage was a major focus of that movement until the 1851 3-cent rate. They needed cheaper rates of postage for mailing anti-slavery tracts. So in many respects the cheap postage reformers of the 1840s were more interested in their other agendas than just in reforming the Post Office. For more on this perspective, you might read my paper, “Cheap Postage: A Tool for Social Reform” published by the Smithsonian two years ago in their postal history anthology. Mine is the final paper in the volume.

I enjoy your columns and I am always happy to discuss postal history.

Thanks for the corrections, David. We’re always happy to discover new and more accurate information…especially when it comes from our Fellow Reckoners.

Joel Bowman
for The Daily Reckoning

The Difference Between Market and Government Swindles originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Congratulations, Federal Reserve! Your zero interest rate policy tempted the world’s most-sophisticated bank to create its own toxic blend of interest income in the derivatives markets.

JPMorgan made headlines late last week for a $2 billion trading loss that’s likely to grow over time. Today, the bank’s CIO fell on her sword for the trading gaffe. Ina Drew, a 30-year veteran of the firm decided today was a good day to “retire” from her trading desk.

JP Morgan’s costly error was the result of “reaching for yield,” just like retirees all over the US are doing. When traditional fixed income securities like Treasuries and CDs provide almost no yield whatsoever, the only remaining option is to reach in to riskier markets to try to find some yield. Reaching for yield — overpaying for income-producing securities in a low-rate environment — usually leads to a painful tumble off the proverbial ladder.

As part of the banking crisis fallout, the Federal Reserve pushed interest rates down close to zero, and is telling investors to expect zero rates until 2014. Savers will have gone six years without interest income, all so the Fed can implement its grand experiment to rebalance portfolios away from cash and US Treasuries.

“We’ll buy the Treasuries,” the Fed implicitly says to investors, “so you can push up the stock market to create a wealth effect for the economy.” This begs the question: What happens if the Fed decides to unwind its gigantic Treasury portfolio? Wouldn’t that reverse the stock market wealth effect at warp speed? The answer is yes, but here’s the dirty secret: The Fed is never going to unwind its portfolio. It’s going to be forced by investors (and Congress) to keep the reserves it has injected into the banking system intact, so it can keep rates low on the US national debt. That’s why we’ve been looking for short ideas that would suffer in an environment of rising commodity costs.

It’s inevitable and unfortunate that retirees starved for yield are overpaying for risky assets like REITs, junk bonds and even financial products that create “synthetic” yield. A synthetic yield means a yield created by derivatives, rather than the underlying security. These derivatives often cap upside returns in exchange for higher current income. As such, these structured products are essentially a slow return of capital masquerading as income. Some annuity products sold to retirees fit this description.

Back to JPMorgan, and the specifics of its $2 billion trading mishap. This is important, because it’s a consequence of our still-broken financial system…

JPMorgan last night warned in its 10-Q that it’s going to take an earnings hit in the second quarter from trades in its Chief Investment Office (CIO). CEO Jamie Dimon felt the need to schedule an impromptu conference call explaining the impending losses from CIO’s hedging activities.

JPMorgan’s Treasury and CIO department is tasked with investing the bank’s excess cash, while hedging the credit risk that exists on the rest of the bank’s $2.3 trillion balance sheet. Most people forget that banks are among the biggest fixed-income investors, and are suffering in a low-interest rate environment along with retirees. It’s hard to shed a tear, I know. So JPM decided it was a good idea to play along with the Fed’s encouragement to exit low-yielding securities and move out along the risk spectrum to invest its excess cash to enhance shareholder returns.

JPM’s $1.1 trillion in deposits exceed its loan portfolio by $407 billion, so it has lots of excess cash looking for a return. At March 31, CIO managed a $374 billion portfolio of securities — presumably in a manner that hedges JPM’s credit risk. There is derivative exposure too, as we discover in the 10-Q. The CIO can create synthetic credit risk by shorting credit default swaps, in which it would collect insurance premiums from underwriting the default risk on a specific entity. The result is synthetic interest income if everything is peachy and default doesn’t occur; if not, the result is repeated margin calls and a complete blowup if the reference entity defaults. Think a mini version of AIG in 2008.

Jamie Dimon refused to provide any detail about the derivative trades on the conference call, but we can guess. Here is my guess: JPM owns a boatload of credit risk. Therefore, if CIO were trying to offset this risk, it would probably sell short credit default swap insurance (CDS). Some of the biggest rises in CDS spreads since March 31 were in European banks. If CIO was short a basket of CDS on European credit indexes that included European banks, then its hedging activities could wind up inflicting large losses. If so, the CIO would have had to post more and more margin with its counterparty as the trade went against it. At some point, Dimon was informed of this unpleasant reality and decided to unwind the losing trade and break the news in the 10-Q.

JPM’s conference call was a stark reminder that investing in large derivatives-trading banks (the “Too Big to Fails”) is investing in a volatile cocktail of credit risk. Executives manage this credit risk with minimal disclosure about what types of risk they’re taking. “Just trust us,” is what they say. “We have sophisticated ‘Value at Risk’ models managed by rocket scientists,” they say. As you recall from the financial crisis, this was a formula that blew up spectacularly.

Jamie Dimon was very defensive and combative in response to questions on the call. He couldn’t provide specifics about the mark-to-market loss lurking in the CIO trading books — for obvious reasons: Other traders on Wall Street, like sharks smelling the scent of blood, would make JPMorgan’s exit from these underwater derivatives positions an even-more painful experience, while pocketing derivatives trading profits.

We won’t know any more detail until JPM reports its second quarter, when Dimon promised to provide more detail — presumably after unwinding the losing trades. This episode is one of many flashing signs that the global banking system is more fragile than advertised. JPM has built a reputation as one of the better risk managers among the world’s largest banks. If JPM had this surprise, what derivatives accidents lie in wait at other banks? With the eurozone on the verge of heightened drama and bank restructurings, I don’t think stock market bulls want to find out.

Finally, I’d be remiss to not mention our wonderful financial system regulators. Using the logic of the idiots (Dodd and Frank) that supposedly “reformed” Wall Street after the financial crisis, what we need now is another new regulatory agency. Dodd-Frank was a thin coat of paint over a cracked and broken banking system; since it failed to accurately diagnose the causes of the financial crisis, it was a dud and a nuisance from day one.

More legal complexity, more wasted money and red tape and more lack of regulator accountability is what we got, when in reality, a big part of the problem was regulators not policing activities at the Too Big to Fail banks. Here’s an idea — one that banking history expert Jim Grant has been pushing for years: It’s called “capitalism.” Take away the subsidies and bailouts for banks, along with the regulatory red tape. If they want to blow themselves up, fine — but losses would fall on the risk managers making those decisions and bank shareholders, not taxpayers or depositors. Push to return the investment banking business back to the partnership model that worked much better. Then, with the senior partners’ capital on the line, we’ll see how many derivatives blowups occur.

Regards,

Dan Amoss
for The Daily Reckoning

A Big Oops at JP Morgan! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

China is falling apart.

Bond yields are falling.

Copper is sinking.

Oil is sliding.

US stocks, too, slipped all last week.

Even gold…that old stalwart friend…turned its back on us last week, closing the week at $1,585.

Oh, dear, dear reader…everything is giving way. What can we hold fast to?

Can we count on the lumpen, dear reader?

As you know, when it comes to investing or politics, the humble masses are our North Star…our guiding light. We can depend on them to be almost always wrong. They fall for jingoes and jackasses every time.

“Stocks for the long run,” was a popular appeal back at the end of the ’90s…just before the stock market produced its worst returns in 60 years.

“The War on Terror” was another popular flimflam; it helped separate the public from $4 trillion or so of its money.

And don’t forget “Change,” from the man who changed nothing.

We had given up on stocks. They were too expensive. Besides, as we put it, the stock market had never completed its historic rendezvous with the bottom. Investors hadn’t given up. P/E ratios were still over 12 or 15. Dividend yields were below 3%.

We wanted a P/E below 8…and then we’d start to consider them. Or, give us a dividend yield over 5%.

Most important, we’ll wait until the public is fed up with stocks…convinced that they are a loser’s game.

Well, that day may not be far ahead. USA Today reports:

NEW YORK — On Main Street these days, investing in the stock market is about as popular as watching a scary movie on a 12-inch black-and-white TV.

Wall Street’s long-running story about how stocks are the best way to build wealth seems tired, dated and less believable to many individual investors. Playing the market isn’t as sexy as it used to be. Since the 2008-09 financial crisis, the buy-now mentality has been replaced by a get-me-out, wait-and-see, bonds-are-safer line of thinking.

Stocks remain out of fashion even though the stock market has risen more than 100% since the bear market ended three years ago. It’s up 25% since October and 9% this year.

Retail investors have yanked more than $260 billion out of mutual funds that invest in US stocks since the end of 2008, says the Investment Company Institute, a fund trade group. In contrast, they have funneled more than $800 billion into funds that invest in less-volatile bonds.

Investors’ chronic mistrust of stocks is reigniting fears that an entire generation is unlikely to stash large chunks of cash in the increasingly unpredictable market as they did in the past.

“Investors have suffered a traumatic shock that has caused severe psychological damage and made them more risk-averse,” says Carmine Grigoli, chief investment strategist at Mizuho Securities USA. Current worries, such as the USA’s swelling deficit, Europe’s unresolved debt crisis and slowing growth in China, have done little to ease their anxiety, he adds.

Investors are choosing ‘safe’ bond funds. Hmmm… Is it time to dump bonds and buy stocks? Or dump them both?

We faced this question a few days ago. We got a check — the payout on a deal we did long ago and since forgotten about.

What do to with it? Cash? Bonds? Gold? Stocks? Real Estate?

We chose cash!

Our guess is that we’ll be on our present path…lagging growth…dragging unemployment…sagging yields…for a while longer. How much longer? Damned if we know…

But Treasury yields are already near or at all-time lows. How much lower can they go? Houses are already down to their most affordable level ever…how much cheaper can they get?

As for stocks, our bet is that they can get a lot cheaper. Mr. Market, should he care to undertake such a mission, could drive the Dow from 12,000 down to 6,000…or even lower. And, if he cared to, he could hold prices at that level for years.

So could he push the 10-year Treasury yield all the way to 1% (now about 1.8%) if he wanted to.

Yes, dear reader, there’s still room on the downside. A lot of it.

One of the nice things about being a long-term investor is that you can wait a long time before you make your move. As Warren Buffett says, you don’t have to swing at every pitch. And there’s no penalty, except missed opportunities, for just waiting for the perfect ball to cross the plate.

That’s what’s so nice about cash. It’s a bat. It’s in your hands.

And we wouldn’t be at all surprised to see Mr. Market toss us a powder puff pitch before too long.

Bill Bonner
for The Daily Reckoning

When Cash is King: Investing with Risk on the Downside originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Good day. And welcome to another week. Chuck is headed out to Las Vegas today, to speak at the MoneyShow. With the travel and difference in time zones, he thought it would be best if we picked up the Pfennig for him this week, so I’ll be sharing my thoughts on the currency markets with you this week (hopefully, with a little help from Mike Meyers).

The euro (EUR) hasn’t gotten any help from the Greeks lately, and the currency markets continued to move out of “risk” positions and back into safe havens on Friday.

I spent a good bit of time this weekend reading up on the Greek political situation, and stole the “Achilles’ heel” phrase from this week’s Economist magazine. I thought that description was perfect for the Greek vote, as the euro has stumbled because of the recent uncertainty in Greece.

Greek leaders have been unable to form a unified government, and there is a real possibility that the Greeks will be heading back to the polls for another vote. As Chuck reported last week, European leaders have approved the next round of bailout funds for Greece, but with the continued leadership vacuum, I have to think this could be the final payment.

If they have another election, the markets will certainly see it as a referendum on whether the Greeks want to stay in the euro. A vote for the same anti-austerity parties would certainly put pressure on European leaders to rethink Greece’s membership in the single currency.

We have heard warnings over the “end of the euro” almost since it began trading, and I never put much credence in those who felt the euro wouldn’t last. But I do think the euro will evolve with the markets, and a Greek departure is a real possibility.

I think the euro will actually be stronger without Greece, like the buffalo herd that is being chased by a pack of wolves. The exit of one, or even two, of the weakest members will actually make the remaining group stronger. But the exit could get ugly in the short term, which is exactly what Chuck warned all of us about in his “currency projections” for 2012.

The euro also weakened after a report released this morning showed industrial production in the euro region contracted in March. German manufacturing was the one bright spot, but gains in Germany couldn’t overcome slower production in Spain and France. Industrial production slipped 0.3% from February, versus forecasts of a 0.4% gain. From a year earlier, production declined 2.2%.

The Greek political uncertainty weighed on the euro Friday, and today’s poor production report continued to push the euro lower, sending it near the lows for the year. The uncertainty in Europe has investors moving out of anything that can be associated with “risk,” which means the higher-yielding currencies got sold.

Looking at the currency screens this morning, the only currencies that are appreciating versus the U.S. dollar over the past month are the British pound (GBP) and the Japanese yen (JPY). I expected to see the yen at the top of the list, as the Japanese currency is seen as a “traditional safe haven.” But the pound sterling was a bit of a surprise.

The pound is being sought out by investors who are looking for shelter from the turmoil on the European mainland. The sterling has appreciated 3.6% this year, a surprise move considering the poor economic fundamentals in the U.K. The Bank of England has been flooding the financial markets with sterling in an attempt to boost the economy, so the appreciation in the face of all of this liquidity is even more impressive. But is the recent appreciation in the pound sterling justified? I hardly think so. The U.K. economy fell into its second recession in the first quarter, the first double dip since 1975. U.K. output is almost 4% lower than the peak in 2008, and unemployment is close to a 16-year high, at 8.3%.

Perhaps currency investors are just looking for political stability, which the U.K. can provide in contrast with the European turmoil and the U.S. elections. Prime Minister David Cameron is sticking to the austerity programs he instituted after his election two years ago, stating that deficit reduction is needed to keep interest rates low. The S&P rating service has affirmed Britain’s AAA rating and stable outlook, a confirmation of Cameron’s calls for further fiscal tightening.

The more traditional safe haven of the Swiss franc (CHF) hasn’t seen a big rise, as the Swiss National Bank has kept its promise to keep its value tied to the falling euro. So currency traders have turned to the pound sterling for shelter from the European economic storm. As Chuck pointed out last week, the U.K. is winning in the “ugly contest” in Europe, but I would certainly think there are some prettier places to park cash (the Nordic currencies are a prime example).

The Australian dollar (AUD) dropped below parity for the first time this year, a pretty dramatic move from a high of $1.0856 at the end of February. The “breaking of the buck” is a pretty big psychological move, and will probably send the Aussie dollar even lower. The commodity currencies all got sold as investors exited “risk trades.” The carry trade continues to be a popular investment strategy, but volatility in the markets can cause losses for these trades, so the renewed European crisis caused investors to sell the high-yielding currencies and move back into the relative shelter of the U.S. dollar and Japanese yen.

The Australian dollar continued to slide in spite of a report that showed the nation’s housing market is improving. Home approvals unexpectedly rose in March, the first positive move in three months. The number of loans granted to build or buy houses increased 0.3% in March versus the Bloomberg median estimate of a 2% decline.

The Aussie dollar, New Zealand dollar (NZD), and South African rand (ZAR) are all dependent on demand for commodities, and most of that demand now comes from China. Demand for the commodity currencies was boosted a bit after China lowered reserve requirements for banks in an effort to stimulate their economy. The PBOC also turned their currency around again, letting it slip vs. the U.S. dollar. China has held off lowering interest rates, choosing instead to reduce reserve requirements and lower the value of their currency. The 50-basis point move, effective May 18, will inject about 400 billion renminbi of liquidity into the banking system, according to estimates by ANZ.

The two moves by China indicate the Chinese policymakers are concerned about the recent slowdown in the global economy. Chinese leaders are looking to boost their economy after a batch of disappointing economic data was released last week. Two separate reports showed China’s industrial production and retail sales grew less than forecast. The industrial output in China increased 9.3% in April, the least since May of 2009. Estimates of Chinese growth have been steadily lowered, down from lofty double digits to the current estimate for 7.5% growth in the second quarter. China’s growth rate slowed to 8.1% in the first quarter from close to 12% just two years ago.

The Chinese economy continues to be the engine of global growth, so any further adjustments to growth projections can have dramatic effects on the currency markets. Many in the markets are wanting to see the Chinese become even more aggressive in their attempts to stimulate growth, and if growth slips below 7.5%, I think we will definitely see more aggressive moves. The 7.5% level has been widely discussed as being the level of growth necessary to maintain harmony in the Chinese economy. A lower level of growth risks social upheaval by Chinese workers who have come to depend on these higher rates of growth.

And a report out of India showed inflation in the world’s second-most-populous nation accelerated in April. The benchmark wholesale price index rose 7.23% from a year earlier, after climbing 6.89% in March. Higher inflation will definitely limit the room for further rate cuts by the Reserve bank. The RBI slashed the benchmark interest rate 50 basis points last month, and further rate cuts were expected in June. But the recent rise in inflation has cut these expectations and should actually help put a floor under the Indian rupee.

To recap: Greek political uncertainty continues to push the euro lower, with a Greek exit from the euro a definite possibility. The pound sterling is being sought out as a “safe haven” currency, taking the place of the Swiss franc, which is tied to the euro. The Australian dollar fell below parity for the first time this year as risk trades got reversed. The Chinese renminbi turned around and headed lower again after the PBOC lowered the reference rate. And a report out of India showed inflation unexpectedly accelerated in April.

Chris Gaffney
for The Daily Reckoning

Pound Sterling as a Safe Haven? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The new Japan is China. It’s an export economy with too much capacity…like Japan in ’89.

The new Greece is Spain. It’s got mortgage debt up the kazoo…

The new Ireland is the old Ireland. Yes, Ireland is now exporting people again…at the fastest rate since the 19th century.

Our old friend Jim Davidson says the new America is Brazil. But what happened to the old America? It’s the new Argentina. Whoa! What a topsy-turvy world! The US is going broke…and going rogue. Just like Argentina in the ’80s…

First, here’s the story on China, from The New York Times:

HONG KONG — China announced Thursday that growth in imports had unexpectedly come to a screeching halt in April — rising just 0.3 percent from the same period a year earlier, compared with expectations for an 11 percent increase. Businesses across the country appeared to lose much of their appetite for products as varied as iron ore and computer chips.

China has been the largest single contributor to global economic growth in recent years, and a sustained slowdown in its economy could pose problems for many other countries. Particularly exposed are countries that export commodities like iron ore and oil and depend on demand from China’s voracious steel mills and ever-growing ranks of car owners.

Exports, a cornerstone of China’s torrid economic growth over the past three decades, grew only 4.9 percent last month — half as fast as economists had expected. And a slump in new orders over the past month at the Canton Fair, China’s main marketplace for exporters and foreign buyers, suggests that overseas shipments by the world’s second-biggest economy, after that of the United States, may not recover quickly.

Growth in other sectors appears to be slowing, too, particularly in real estate. Soufun Holdings, a Chinese real estate data provider, released figures Monday showing that residential land sales in the country’s 20 largest cities had fallen 92 percent last week from the week before, as declining prices for apartments have left developers short of cash and reluctant to start further projects.

There are early signs of a credit crunch, at least among private sector companies. Many seem to be asking their suppliers for more time to pay debts and complaining of cash flow problems. Zhang Jinmei, the sales manager at Qitele Group, a company that makes playground equipment in the coastal city of Wenzhou, said that local investment and lending pools there were starting to charge higher interest rates for loans, a sign of worries about creditworthiness.

“The business environment is getting tougher and tougher,” said Tom Zhang, the sales manager at Hebei Haihao High Pressure Flange and Pipe Fitting Group. “Competition is very intense to get more business — our domestic sales are down from last year, though our export sales are more or less stable.”

And here’s the lowdown on the pain in Spain from Bloomberg:

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt.

The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock.

Spain’s home-loan defaults were 2.7 percent in December, according to the Spanish mortgage association.

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

Spain… is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save.

In both countries, loans to real estate developers proved most toxic. Ireland funded a so-called bad bank to take much of that debt off lenders’ books, forcing writedowns of 58 percent. The government also required banks to raise capital to cover what was left behind, assuming expected losses of 7 percent for residential mortgages, 15 percent on the debt of small companies and 4 percent on that of larger corporations.

When an organization goes rogue it takes up a new mission, of its own choosing…often in cahoots with the enemy it was supposed to be fighting.

You can see this phenomenon in many different places in many different activities. Poor African nations were supposed to be fighting poverty and hunger. But leaders found that losing the battle was more rewarding than winning it. Famine brought aid. And top-end Mercedes sales went up in the capital cities shortly after new aid programs were announced.

Likewise, US cities such as Baltimore and Detroit largely destroyed their own middle class tax bases. So, they came to depend on federal aid programs with perverse incentives. The outside world saw city governments as corrupt and dysfunctional, but they were really responding, rationally, to the choices before them. The worse off you are the more money you get. They went rogue…because that’s where the money was.

The clearest example of this phenomenon is the War on Drugs. The anti-drug warriors went rogue many years ago. They found common cause with drug dealers, both of them now work against the public’s interest. The drug fighters gain power and money by putting resources to work against the drug dealers. The drug dealers gain power and money thanks to the drug fighters who, like regulators, create high barriers to entry, keep out competition, push up prices, and protect the dealers’ profit margins.

The drug dealers should thank the drug fighters. And here, one did:

“I couldn’t have gotten so stinking rich without George Bush, George Bush Jr., Ronald Reagan, even El Presidente Obama, none of them have the cojones to stand up to all the big money that wants to keep this stuff illegal. From the bottom of my heart, I want to say, Gracias amigos, I owe my whole empire to you.”

— Joaqin “El Chapo” Guzman, head of Mexico’s Sinaloa Cartel, as reported by a close confidant (via The Huffington Post)

Colleague Justice Litle explains:

The war on drugs — a war that America has lost — is an excellent example of why the world is so hard to change. Bad laws, bad ideas and bad arrangements persist by the will of stakeholders behind the scenes.

It’s a “tragedy of the commons:” Costs are shouldered by the oblivious many, while profit concentrates in the hands of the few.

There is no way the cartels could have prospered so mightily, for so long, without a symbiotic relationship between criminals, politicians, and the lobbying agents who love them both. If not for the long arm of the law — and the helping hand attached to it — El Chapo and his ilk would have been rubbed out by Fortune 500 corporations (via free competition in a regulated market) quite some time ago.

“Whoever came up with this whole War on Drugs,” one of El Chapo’s lieutenants reports he said, “I would like to kiss him on the lips and shake his hand and buy him dinner with caviar and champagne. The War on Drugs is the greatest thing that ever happened to me, and the day they decide to end that war, will be a sad one for me and all of my closest friends. And if you don’t believe me, ask those guys whose heads showed up in the ice chests.”

But the biggest rogue of all is the only one that still retains the faith and respect of the people — the US military. That alone is remarkable, considering that the Pentagon has a record of failure that stretches back over the last 60 years. In Korea, it accepted a draw. In Vietnam, it withdrew, shamefully. In Iraq, we replaced one corrupt government with another, probably just as corrupt and incompetent too. In Afghanistan, it is ready to get out…leaving the country in the hands of its enemies.

Still, instead of sending military personnel to the back of the bus, the airlines board them along with the first class passengers and even move them up to business class if there are seats available. Mother Teresa can stay in economy!

Additional “investments” in security have been arguably the least productive use of capital in American history. From an outsider’s perspective, it looks like the US military was suckered into spectacularly bad outlays in Iraq and Afghanistan. The New York Times reported as follows:

Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the US? In a survey of estimates by the New York Times, the answer [is] $3.3 trillion or about $7 million for every dollar Al Qaeda spent planning and executing the attacks.

The insiders knew better. The Pentagon has gone rogue. It no longer protects the US from war; it causes wars. It no longer seeks to win wars; it wants them to go on forever. It no longer avoids wasting US resources; it sucks up all it can get.

Like drug fighters and poverty fighters, the fighters in the military were happy to have an enemy…especially one that couldn’t do them any real harm.

Where does this lead? How does it progress? Stay tuned…

Regards,

Bill Bonner,
for The Daily Reckoning

Rearranging the New World Order originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

“Stay at home is still the norm for Americans,” I observed in yesterday’s Daily Reckoning. “but it’s a norm that is slowly fading. Every billion-dollar tick of the government debt clock, every expansion of the government’s regulatory apparatus, every overreaching judicial decision made in the name of a compelling public need,…every intellectually tortured discovery of a new meaning in the Constitution’s 4,400 old words leaves a few thousand more people wondering how prudent it is to consign all their eggs to a single national basket.

“Most Americans still have yet to stick a single financial toe across the border,” I explained, “but more and more are considering it…Because internationalizing your financial life means dealing with the unfamiliar, the project can seem more complex than it really is, so it’s best to start with the simplest measures, even if by themselves they don’t give you all the safety you’re looking for. Even from a simple beginning, what you learn with each step will make the next step easier to plan. Start with the first rung on the ladder of internationalization. Then climb, at your own speed, to reach the right level of protection.”

Yesterday I described the first three rungs of this ladder. Today, I present the rest…

Rung 4: A Swiss Annuity

A conventional annuity contract is a device for accumulating investment returns and eventually converting the value into a lifetime income. The investment return on an annuity from a US insurance company is tax deferred until it is paid out to you. If you buy an annuity from a foreign company, tax deferral is available only if the annuity’s value is tied to the performance of a pool of investments (a variable annuity).

Swiss annuities have long held a special place in personal financial planning. Such an annuity is denominated in Swiss francs, i.e., it’s francs, not dollars, that are owed to you. The Swiss insurance industry has a perfect record; policyholders have never been hurt by a default. And a Swiss annuity comes with an element of protection from would-be lawsuit creditors.

The Swiss franc is, like every other modern-day currency, just a piece of paper. It’s not redeemable for anything, not even a piece of chocolate. But the Swiss National Bank has a remarkable record of restraint in issuing new francs, which means that the franc’s prospects for holding its value have long been rated better than for any other currency.

I believe that is still the case, despite the Swiss National Bank’s current policy of suppressing any further increase in the price of the franc. In September, in order to save export industries from being crushed by the franc’s rapid appreciation against other currencies, the Swiss National Bank announced that it would purchase euros without limit to enforce a minimum exchange rate of 1.2 francs per euro — which implies printing enough francs to pay for those euros. By itself, it is an inflationary move, but it’s not a suicide pact with the European Central Bank (the issuing authority for euros). If the ECB turns to a policy of rapid inflation, I would expect the Swiss National Bank at some point to decouple the franc from the euro and let the franc’s price rise. So owning some Swiss francs, whether directly or through an annuity, is still a good step toward internationalizing your financial life.

Under Swiss law, an annuity is protected from the owner’s creditors if the beneficiaries consist of family members or if the owner has made a beneficiary designation that is irrevocable. For an owner in the US, that protection is not an impenetrable barrier to the winner of a lawsuit, but it is a barrier, and it makes the annuity a less-than-ideal prize for an attacker.

Earnings that are accumulating in a Swiss annuity are not eligible for tax deferral for a US taxpayer. The advantages are currency protection, the reliability of Swiss insurance companies and a measure of asset protection.

Rung 5: Foreign Real Estate

Owning real estate in another country gives you a suite of protections that distinguishes it from other steps toward internationalization.

First, the property’s value will depend on economic conditions in the country you’ve chosen, not on what happens in the US. If the economy of the foreign country grows and prospers, there is likely to be a spillover effect on the market value of your house, apartment, farm or patch of land — regardless of what is going on in the US.

Second, a foreign real estate investment would be hard to digest for any future capital controls imposed by the US. New rules could compel you to repatriate the cash you have in a foreign bank; rules forcing you to liquidate your foreign real estate and bring the money home would be another matter. Selling real estate isn’t quick or easy. How does the government compel an unwilling citizen to do what an eager seller often finds difficult to accomplish?

Third, as a potential prize for a lawsuit attacker, foreign real estate is a stinker. Even if he wins a judgment against you, foreclosing on your foreign property would be difficult to impossible, since it would require the cooperation of the courts in the foreign country, about whose rules and procedures the attacker’s attorney probably knows nothing. But he does know that even if he persuades a court in the US to order you to sell the property, the inherent illiquidity of real estate would give you plenty of opportunities for foot-dragging.

Where to buy? The whole world is open to you… which can be a problem. So many possibilities and no obvious place to start. One approach is to think about where you’ve been that you’d like to visit again or about some place you’ve long wanted to see. Plan to spend a few weeks there. Minimize your hotel hours, to maximize your exposure to the rest of the locale. Try to meet Americans, perhaps expatriates, who know their way around the place and who can point you toward a real estate broker who won’t try to treat you as an out-of-town sucker.

Buying foreign real estate isn’t for everyone. It requires a big investment in time and effort, but it could repay you with an asset that is low on the list of things anyone might try to take from you.

Rung 6: A Foreign LLC for Investments

A limited liability company organized under the laws of a foreign country is easy to set up and not too expensive. To bring the company into existence, you (or a service you hire) would file a simple form with a government office in the country you’ve chosen and pay a small fee. Then you as the LLC’s Manager and you as the LLC’s owner would enter into an agreement (the “operating agreement”) that would be the company’s governing instrument.

As the LLC’s Manager, you would open a non-US bank account or brokerage account in the name of the LLC and transfer your personal cash and investments to that account. Again as Manager, you would make all the investment decisions.

For a US person, a foreign LLC can be a powerful door-opener. It is welcome at many banks and brokerage firms where you personally would be turned away. This enables you to keep a wider range of assets outside the US, which puts more wealth beyond the reach of any arbitrary bureaucratic action. It also gives you investment choices that aren’t available at home.

Access to foreign investments and overseas financial services is reason enough to consider using a foreign limited liability company. But it can do much more for you, although at the cost of some complexity.

Notice the fundamental difference between a foreign LLC and what is going on at the first four rungs of the ladder of internationalization. With the LLC, you no longer personally own the assets you are trying to protect; the company owns them. This makes the LLC a powerful device for reducing your family’s expose to gift and estate taxes. And with the right provisions in the operating agreement, it can provide strong protection against loss to any malicious lawsuit.

If you are the sole owner of a foreign LLC intended for holding investments, you can and almost certainly should file an election for the LLC to be treated as a disregarded entity (indistinguishable from you for income tax purposes). If your spouse or anyone else is going to share in ownership of the LLC, the company can and should elect to be treated as a partnership for income tax purposes.

Rung 7: A Foreign LLC for Business

A business that operates outside the US does even more than a portfolio of foreign investments to give you the benefits of internationalization.

By its nature, a foreign business lives in a different environment than a business in the US. Economic troubles at home might not touch it. If it’s a business that depends on your personal efforts, it’s even less attractive as a lawsuit prize than foreign real estate. Being foreign, it would be outside the range of capital controls in the US. And many of the financial institutions that might turn away an investment-owning LLC because it is owned by an American will welcome an LLC that makes or sells goods or services.

If you already have a business in the US that has foreign customers or foreign suppliers, you may be able to relocate the business’s non-US activities to a foreign LLC. Internet-based businesses are especially amenable to internationalization.

Locating your business in a low-tax or no-tax jurisdiction, if it is practical to do so, can reduce your overall tax burden. In many cases, a foreign LLC that operates a business should elect to be treated as a foreign corporation for US income tax purposes. That can allow the business to reinvest its earnings while it pays little in current taxes and you personally pay nothing.

Rung 8: An International Trust That You Establish

Establishing a trust outside the US is the strongest internationalization step you can take for yourself and your family. Doing so costs more than any other measure, but the costs needn’t be prohibitive if your goal is to move $500,000 or more into the safest structure possible. What you achieve is a very high level of protection from aggressive lawsuits, from potential capital controls and from the possibility of a gold seizure. The trust also puts your wealth in a far better environment for income tax planning and for estate planning.

To serve the purposes of protection and tax savings, an international trust is irrevocable (you can’t simply call the institution you’ve chosen as trustee and say you’ve changed your mind) and discretionary (meaning that the trustee has a responsibility to decide when to send a check to you or to any of the other beneficiaries you’ve included). Putting assets under the control of a trust company under such an arrangement is a big step. You’re not going to do it unless you’ve done the homework needed to understand how and why you can count on the trustee to handle the assets in the way you intend.

Getting the protection and tax savings of an international trust doesn’t require you to give up management control of the assets. The trust can be limited to owning just one thing — an LLC that you manage. The LLC owns all the investments, under your supervision as LLC Manager.

If you establish an international trust, it will be tied to you for income tax purposes. But at the end of your lifetime, it will completely disconnect from the US tax system. At that point, for the benefit of your survivors, it becomes…

Rung 9: An International Trust Someone Else Established

Being a beneficiary of an international trust established by someone other than a living US person is as good as it gets. It’s not linked to you by any transfers you’ve made to it, and you don’t have a determinable percentage interest in it (since it’s a discretionary trust). So until you actually receive a distribution, there is nothing for you to report, nothing for you to pay tax on and nothing a potential lawsuit creditor can hope to take from you. And, having no living connection to the US, the trust is as far beyond the orbit of any conceivable US gold seizure or currency controls as the former planet Pluto.

One Toe over the Line

It’s a long way from walking into the local coin shop and buying a few one-tenth-ounce gold Eagles to setting up a trust in a foreign country. But the distance isn’t nearly as great as you might imagine, and it will get shorter both in fact and in apprehension with each step you take.

As you move up the ladder, you’ll learn about the reporting requirements for US taxpayers. Rung 1 (gold coins in your pocket) entails no reporting, nor does Rung 8 until you actually receive a distribution. Rung 5 (foreign real estate) also is free of reporting requirements, at least for now. But under rules in effect now or soon to come, everything else covered in this article entails filing a form with the US government. The most reliable way to make sure that you stay within the rules, so that internationalization adds to your safety and not to your problems, is to let your accountant know what you are doing. Keep him informed, so that he can see to it that all the reporting requirements are satisfied.

Regards,

Terry Coxen,
for The Daily Reckoning

Protecting Your Assets from an Out-of-Control Government, Part II originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Good day. What a quick week! Next week, I’ll be in Las Vegas — not my kind of city, but it is what it is, and I’ll be there to speak on two different days, so if you’re in the area, drop by. The MoneyShow is free!

That little mini-rally, which a handful of currencies saw yesterday, faded overnight, and those currencies are all back to the levels of Wednesday. UGH! The handful, in case you were wondering, included the Australian dollar (AUD), euro (EUR), Brazilian real (BRL), Norwegian krone (NOK), Swedish krona (SEK), Singapore dollar (SGD) and a couple of others.

Yesterday, we saw the U.S. trade deficit widen from $45.4 billion in March to $51.88 billion in April. It’s not all with China, folks — the majority is with OPEC. Remember, the price of oil in April was well over $100 all month!

We also saw the initial weekly jobless claims, which was flat versus the previous week, at 367,000. The continuing claims remain a problem, folks. I know I talked yesterday about jobs, etc,. and I received a few emails from very disgruntled folks that have been looking for jobs, and don’t believe there are any out there to be found.

That brings me to the thing that I’ve said since 2008 — that a lot of the jobs that were lost were not going to come back, and the jobs that did open up were going to be completely different than what the unemployed person was trained to do. I’m not insensitive to this, folks. I just tried to get it out there a few years ago so that people could begin to make changes.

OK, did you see that the monthly budget statement, which had been a deficit each and every month for so long that I had begun to call it the monthly budget deficit, actually stopped the bleeding in April? The government posted a $59.1 billion surplus in April. WOW!

OK, hold on a minute there. Isn’t April the month that all taxes owed are collected (for the most part, anyway)? The key here is to see where this balance goes the next couple of months. My bet is that it will go right back to the monster deficits that were seen every month prior to April.

Today, we’ll see wholesale inflation (PPI) for April, and the University of Michigan confidence index.

Overnight, we heard that the Greeks were having second thoughts about electing an anti-euro government, and now it appears that the government that will be elected will keep the euro, no questions asked. That’s nice of them! Obviously, calmer, smarter heads prevailed here, because I don’t believe that the Greeks want to see what life is like for them outside of the euro!

Euro traders are kind of lost between two lovers here. They just can’t figure out whether they want Greece to leave or stay.

The Aussie dollar (A$) had climbed back above $1.01 yesterday, but is right back to Wednesday’s level of $1.0050 this morning — losing half a cent overnight. The other day, I talked about the forecast Aussie budget surplus for next year. While that would be great for them, should they achieve that surplus, it won’t really be known if that’s going to be a reality until September.

I also told you, a couple of weeks ago, that I thought bond buyers of Aussie government bonds were behind the resiliency of the A$ in the face of a rate cut. Of course, back then, I thought that the Reserve Bank of Australia (RBA) was going to cut only 25 basis points, and they surprised the markets with a 50 basis point rate cut. That severely inhibited the resiliency of the A$.

And I talked about how it is believed that if Australia does achieve a budget surplus, the supply of Aussie bonds would drop by a large margin. So if that were true, that underpinning that the A$ enjoyed from bond buyers would be damaged. But as I told a small group the other day, “Even if the A$ falls to 95 cents, it’s still a strong currency; just 10 years ago, it was trading around 50 cents.”

As far as today’s prospects for a risk-on day go, I think the chances are slim to none. All the overnight bourses are down, and U.S. stock futures are down.

Everyone is running for the hills after a story in The Wall Street Journal hit the streets last night. According to the WSJ report, “JPMorgan Chase has taken $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to market volatility.”

Most of you all know how I would have reacted to this report in “the old days.” So this is your chance to “be like Chuck” and give me your version of what Chuck would have said in the old days. (You don’t really have to send it to me unless you think you have really nailed it!)

I think I’ll talk about silver now (wink, wink). Did you see that China had introduced silver futures contracts that will trade in renminbi/yuan (CNY) on the Shanghai Futures Exchange? The contracts will not be allowed to fluctuate more than 7% per day. I have to wonder how the Chinese are going to take seeing the price of silver brought down in after-hours trading.

And did you know that China is now the world’s leading producer of silver? No, it’s not Mexico, and no it’s not Peru. It’s China. And that’s good because China is the world’s second leading consumer of silver, behind the U.S.

Have you been following the news on Scotland contemplating leaving the U.K.? That would be a HUGE blow to the U.K., not only prestigewise, but monetarily. Scotland’s economy is second in contribution to the U.K. economy, coming behind the southeast part of England.

The pound sterling, which has defied gravity recently, is beginning to feel the weight of doing a double dip in the recession pool, and everything else that’s going on badly there. Like this morning, they reported that March construction output was very disappointing, which points to a downward revision to first-quarter GDP, which already showed that the U.K. economy was going for a double dip.

Gold enjoyed a day in the sun yesterday, but it’s raining on the shiny metal again this morning. It seems that we’ve returned to the days around 2008 and early 2009, where the dollar is rewarded with bad data. Dollar bugs will tell you that this is how it should be, as the only true safe haven is the U.S. dollar and Treasuries. I want to hit these dollar bugs over the head with a gold bar! Maybe then they would find the true safe haven!

Speaking of gold, I did some math about a year ago and ran it here, and with all the talk about the U.S. paying off its debts by selling its gold holdings, I thought it best to pull this back out:

There are 5,046 tons of gold at Fort Knox
There are 7,716 tons of gold at the N.Y. Fed
Total = 12,762 tons.

There are 32,000 ounces in a ton
12,762 tons x 32,000 = 408,384,000

Price of gold is $1,590
408,384,000 x $1,590 = $649,330,560,000

Sorry, but $650 billion doesn’t pay for even the stimulus that was thrown at us a couple of years ago! But if the price of gold were to be pushed up to let’s say $5,000, then we would be talking about making some inroads to the debt! And if the price were pushed to $10,000, then we’re getting somewhere. But we would still be left with a very large national debt.

You see that’s the problem with deficit spending. At some point, the numbers become so HUGE that you can’t make a difference in total unless you come in with both guns blazing! And then keep those guns blazing! Doing one-off corrections are only chinks in the armor.

For longtime readers, do you remember a few years ago when I tried to show the knuckleheads at CNBC that the markets were being manipulated in the after-hours trading and they laughed and told me to take the story to Hollywood? Well, CNBC has come a long way, I guess, for they allowed Eric Sprott to talk freely about manipulation the other day. Of course, maybe not that long a way, as I wanted to include the link to the video here, but it’s not working. And the folks at CNBC did attempt to ridicule him. But he would have none of it!

Maybe CNBC will have it fixed later. Just Google Eric Sprott at CNBC and look for the most-recent video.

Anyway, Eric Sprott, Ted Butler and others, including me, have done our best to inform the public of what’s going on. Maybe one day, We the People will get the message and exercise our right to contact our representatives and discuss this with them.

Then I saw this on Reuters:

“Financial advisers increasingly warn that U.S. Treasury bonds are close to a bubble and suggest that clients look elsewhere for stable and safe returns. Alternatives recommended include investment-grade corporate and emerging-market bonds, master limited partnerships and preferred stocks.”

I liked that they had finally come around to noticing the Treasury bubble, but nowhere on their list of alternatives do I see gold.

To recap: The mini-rally in a handful of currencies yesterday was wiped out in the overnight markets. And the currencies and gold are back to Wednesday’s levels. The Greeks agree to elect a government that keeps Greece in the euro. The U.S. posted a monthly surplus for the first time a very long time in April, but tax collections are made in April, so one would think that if they can’t book a surplus in April, when can they? And JP Morgan has really thrown a spanner in the works for a risk-on day with their after-market announcement yesterday.

Chuck Butler
for The Daily Reckoning

US Posts Monthly Budget Surplus! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".