The Daily Reckoning: A Year In Review, Part II

[pywong]

The Daily Reckoning PRESENTS: The beginning of a New Year is a good time to reflect on the months that just passed us by...and wonder how they will effect the months ahead. 2008 certainly had its fair share of ups and downs (mostly downs)...let’s see how the last six months of the worst year in stock market history treated us...

2008: A YEAR IN REVIEW, PART II

07/01/08 – The Greater Depression and What You Should Do About It
http://dailyreckoning.com/Issues/2008/DR070108.html#essay
by Doug Casey – “For international investment expert Doug Casey, there’s more than a recession on the horizon. He recommends battening down now for the rough seas ahead...with some special information about making sure your investments can weather the coming storms. Read on...”

07/25/08 – Lovable Moronic Capitalists
http://dailyreckoning.com/Issues/2008/DR072508.html
by Bill Bonner “Modern economists are more like auto mechanics. They think they can control the economy with a screwdriver. And to some extent they’re right. Which is why the world economy is in such a mess; they turned the wrong screws.”

08/18/08 – Unemployment Survival Guide
http://dailyreckoning.com/Issues/2008/DR081808.html#essay
by The Mogambo Guru – “Thanks to the horrors of inflation (brought on by the despicable government), many people are turning to subsistence farming just to survive. Of course, the Mogambo has a few other suggestions. Read on...”

08/27/08 – “People are Policy”
http://dailyreckoning.com/Issues/2008/DR082708.html#essay
by Byron W. King – “Pity the next president. A worldwide economic slowdown, a flailing housing sector, and the need for the United States to become less dependent on foreign sources for their energy supply, lands squarely on his shoulders. Bryon King explains that while there are many new and exciting options out there that will change the landscape of how we utilize our energy supply, the real issue is knowing which one to pick. Read on...”

09/09/08 – Investing in the Age of Scarcity
http://dailyreckoning.com/Issues/2008/DR090908.html#essay
by Chris Mayer – “In just the last couple of months, commodity stock prices have melted like ice cream on a hot summer day. Chris Mayer has been burning the phone line and firing off e-mails to people in the field about what they see. What he found, below...”

09/19/08 – The Dumbest Man in America
http://dailyreckoning.com/Issues/2008/DR091908.html
by Bill Bonner “AIG...Lehman...Fannie...they believed their own guff! It wouldn’t be the first time that something like this happened.”

09/26/08 – Too Big to Bail
http://dailyreckoning.com/Issues/2008/DR092608.html
by Bill Bonner “When everybody thinks the same thing, no one is thinking. And now, everyone thinks the market screwed up...and the bureaucrats rush in to unscrew things.”

10/09/08 – Welcome to Murphy’s Market
http://dailyreckoning.com/Issues/2008/DR100908.html#essay
by Byron W. King “If you sold out of the stock market last year – or even back in June or early July 2008 – you probably feel pretty good right now. And if you took the cash and spread it around to a group of well-run banks, so as to take advantage of the FDIC insurance, then you must be feeling fine. Read no further. Take the rest of the day off. But if you still have some skin in the game, you’ll want to hear what Byron King has to say...”

10/30/08 – An Interview with Paul O’Neill
http://dailyreckoning.com/Issues/2008/DR103008.html#essay
From the companion book to I.O.U.S.A. – “Today, we bring you another exclusive interview from the companion text to the documentary I.O.U.S.A. , with former Treasury Secretary Paul O’Neill. Read on...”

11/07/08 – Apocalypse Now
http://dailyreckoning.com/Issues/2008/DR110708.html
by Bill Bonner “The last time the sky fell was 96 years ago. Few saw it coming; no one panicked. But panic wouldn’t exist if it weren’t a useful instinct from time to time. The celestial bricks came unglued in August 1914...”

11/24/08 – Roasting G-20 Weenies on a Golden Spit
http://dailyreckoning.com/Issues/2008/DR112408.html#essay
by The Mogambo Guru “Whenever you hear Keynesian economists try to wax philosophical about modern economic theory, the Mighty Mogambo’s chilling cackle can always be heard in the background. This week, he takes on the G-20 meeting, the abandonment of the Bretton Woods agreement, and his not-so-secret plan to maintain personal wealth. Read on...”

12/04/08 – Gold Looks Bullish as the Dust Settles
http://dailyreckoning.com/Issues/2008/DR120408.html#essay
by Ed Bugos “The price of gold is seeing a modest rally...and Ed Bugos wonders if it is just a ‘retracement rally’ that will give way to new lows, or if we’ve seen the bottom for the yellow metal, and this is just the first of many rallies to come. Read on...”

12/12/08 – Le Bubble Epoque
http://dailyreckoning.com/Issues/2008/DR121208.html
by Bill Bonner “All over the world, prices are falling. Inflation is no longer a sure thing. For the first time since the 1930s America, and many other nations, run the risk that inflation rates will turn negative.”

So that does it for 2008.

[pywong]

The Daily Reckoning PRESENTS: It’s a known fact that we are in the midst of a global recession...and U.S. trade figures are beginning to reflect as such. And, as Chris Mayer explains below, a falloff in trade is one of the looming threats in 2009. Read on...

GLOBALIZATION HALT!
by Chris Mayer 6 Jan 09

Where trade flourishes, business is good. But trade does not always flourish. The linked forces of globalization move in fits and starts.

The authors of Power and Plenty , a new book on trade over the last thousand years, tell us as much. “If anything,” they write, “history suggests that globalization is a fragile and easily reversible process.”

One of the looming threats in 2009 is the reversal in trade flows and increasing barriers to trade.

For the first time since 1982, The World Bank predicts global trade volumes will shrink in 2009. Undoubtedly, global trade enjoyed a boom over the last two decades or so. The global slump, though, is taking a bite out of that happy ride. Already, through November, exports from China, Taiwan, Chile and South Korea plunged by 20% or more.

The falloff in trade is worrisome enough as a globe-trotting investor. In the last several years, companies with operations overseas did much better than those confined to North America. In 2008, though, that wasn’t true. According to Bespoke Investment Group, stocks of companies that booked more than 50% of their revenues abroad fell 46% on average in 2008, versus a drop of 38% for those with no international revenue.

But there are signs that things could get much worse. Because like tea leaves steeping in a pot of hot water, the longer the economic slump persists, the more likely political trouble is to brew. The rise of barriers to trade is a particularly bitter brew of political trouble.

Already, a number of countries have taken actions to close their markets or protect domestic industry. Consider:

– Indonesia – new restrictions on over 500 goods as well as new fees for imports
– Russia – new tariffs on imported cars, poultry and pork
– France – a new state fund to protect French companies from foreign takeovers
– Argentina and Brazil – new tariffs on imported wine, leather goods, peaches and more
– India – a new 20% duty on imported soybean oils.

And then there is the U.S. bailout of the automakers, seen as an unfair subsidy by foreign competitors. This is only a partial list involving some of the bigger economies. However you view these moves politically, there is a good reason we should keep an eye on these things: They will affect how you invest.

For example, Russia is Europe’s largest car market. But now there is a tax on foreign cars of as much as 35%. Moscow wants to protect its automakers. The Russian people are poorer because of it. But as an investor, your favorite automaker, which may have had a nice business selling cars in Russia, may now find it tough going.

Moscow also put high imports on poultry and pork. Russia is the largest market for U.S. poultry. If you own a chicken producer, this is not good news. Your potential profits in a big foreign market are cut, and such tariffs could result in excess poultry staying in the U.S., leading to falling prices and lower profits at home.

All of these kinds of moves tend to happen when economies weaken. They can also bring about nasty trade wars.

In 1930, America passed the Smoot-Hawley Tariff Act. It raised tariffs on a number of imported goods. As the authors of Power and Plenty contend: “It triggered a wave of tariff increases.” By 1931, “average tariffs on foodstuffs had risen 53% in France, 59.5% in Austria, 66% in Italy, 75% in Yugoslavia, more than 80% in Czechoslovakia, Germany, Romania and Spain and to more than 100% in Bulgaria, Finland and Poland.”

These were hard to unwind. It took decades to reverse these anti-trade policies. They certainly didn’t help resolve the Great Depression.

I don’t think it is a coincidence that global trade expanded nearly fourfold since 1990, during a time when the average tariff fell from 26% to 8.8% by 2007.

A reversal of that trend spells bad things for investors. So far, we’re OK. Most of our companies sell goods that other countries can’t get enough of – things like fertilizers, road-building machines and power equipment. In many foreign countries, there is little domestic supply. China, for instance, it is trying to keep fertilizers in, not out. In fact, the Chinese have made it easier to import goods such as potash.

Still, it’s something to watch.

Regards,

Chris Mayer
for The Daily Reckoning

Editor’s Note: For a limited time, Chris is offering what he calls the “Emergency ‘Personal Bailout’ Bundle”. In it, you’ll receive a special DVD copy of the brand new, award-winning documentary, I.O.U.S.A. ...plus the powerful 262-page companion book...plus, our new personal “bailout paycheck” strategy report, which shows you how to collect as many as 78 “personal bailout checks” over the next 24 months.

But supplies are limited...so act now .

Chris is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning . He is the editor of Mayer’s Special Situations and Capital & Crisis – formerly the Fleet Street Letter .

Chris also recently wrote a book: Invest Like a Dealmaker: Secrets from a Former Banking Insider . Get your copy now...

[pywong]

Today's Daily Reckoning

It's the Economy, Stupid
London, England
Wednesday, January 7, 2009

---------------------

*** The economic news continues to bring bad tidings...consumer bankruptcies were up 33% in 2008...

*** The financial crash is causing an economic crash, which will cause a worse financial crash...and around and around we go...

*** Who will spend their savings in ’09?...the CBO puts the budget deficit at $1.2 trillion for this year – and that’s not counting stimulus programs...and more!

“Psst...we’re breaking out of this joint...Saturday night...pass it on....”

Yes, dear reader...we’re breaking out... We’re not going to let these prison bars stop us. A whole generation of American investors is being fattened for slaughter...we’re not going to be among them.

Let’s look at yesterday’s headlines just to see what is going on.

The Dow rose 62 points yesterday. Oil held steady at $48. Gold went up $8. Yields are rising...but you still get paid nothing when you lend money to the U.S. government.

The economic news tells us that things are getting worse. Alcoa said it will lay off 13,500 workers. But all across the country, businesses are either laying off old workers or not hiring new ones. Most of the joblessness never makes the news – until it is already painful to the fellows without jobs. Small businesses don’t announce layoffs. Nor do they send out a press release when they decide not to hire a new kid at the carwash.

After the worst car sales in half a century, Toyota says it is shutting down its plant for 11 days.

And a figure out yesterday tells us that consumer bankruptcies rose 33% last year. But the crash came late in 2008; job cuts didn’t really begin until the last quarter. People didn’t have a chance to get their paperwork together. This year, the bankruptcy numbers should really soar.

Most likely, Americans are still in the dark about what is going on. Heck...their leaders are driving without headlights...why shouldn’t the lumpen too? People don’t seem too sore about what happened to them in ’08. They’re still hopeful that a new administration will find a way to fix things. Yes, they’re planning on cutting back spending and saving money...but they have no idea how their attempts at thrift – magnified by millions of other citizens – will affect the economy.

Levy Forecasts, which was generally right about the financial crash, now says the “damage to the economy will rapidly accelerate the financial crisis.” In other words, the financial crash is causing an economic crash...which will cause a worse financial crash.

Profits are made at the margin. Most sales merely cover costs. It’s the marginal extra buyer – preferably the one who spends his savings, rather his salary – that provides business with profits. On a macro level, salaries are a cost to business. When a man spends his salary, business is merely getting back the money it paid out in labor costs. But when a man spends savings, the money falls to the bottom line as profit.

Who is going to spend savings in ’09? Who is going to spend at all? That’s why business profits are going to fall harder than most people suspect. Unemployment is going up more than most people expect. And stocks are going down more than most people expect.

Barron’s survey of Wall Street’s “top strategists” tells us that the consensus among these fellows is that stock prices will go up 18% in 2009. But these are the same strategists who thought stock prices were going up in 2008 too – instead of crashing 35% – 40%.

Here at The Daily Reckoning , we’re with the Levy bros. Our guess is that stocks will rally...and then crash again, ending the year below where they began it.

There is no doubt that the U.S. economy has entered a major downturn...probably a generational slump, in which the errors of an entire generation will be corrected.

What do we mean by that? Well, since the early days of the first Reagan Administration Americans have been building fences, to keep themselves confined, and forging chains, to wrap around their own ankles. They built cars and houses that demanded more energy – when energy was becoming more expensive. They became accustomed to lifestyles that cost about 10% more than they earned. They began to think that houses and stocks would go up every year...and that foreigners would lend them money forever. Well...you know what happened. Every link was heated white hot in the furnace of mass delusion and hammered on the anvil of wishful thinking – while public officials urged them on!

Now, the whole country drags around these heavy chains of debt...private debt in all its forms – mortgages, student loans, credit cards, home equity lines, commercial loans, private equity finance, bridge loans, road loans, ditch loans. Last year, all of a sudden, this debt got so heavy, the poor debtors started to pitch over. Lenders looked around and worried, not about the return on their money, but the return OF their money. In many cases, it didn’t look like they’d get it back. That is what caused the ‘credit crisis’ – lenders closed their wallets to all borrowers – save one, the only borrower who was 100% sure to pay you back the money when you needed it, the US government. As a result, bonds and gold were the only two major asset classes to go up last year. People bought government bonds to protect against the implosion of private debt. And they bought gold to protect against government bonds.

We recall Nassim Taleb’s turkeys. Until Thanksgiving, he says, the turkey lives well. Everyday, the food arrives. Everyday, he gets bigger and fatter. Then, one day, just before the third Thursday in November, when Americans celebrate their traditional Thanksgiving dinner...with no warning, comes the knife...the crash...the collapse...the discontinuity...the 7 sigma event in the turkey’s life that changes everything.

“That’s why we need to study history,” says Elizabeth, who is working on a master’s degree in 18th century French history at the Sorbonne. “If the turkeys had studied history, they might been warned. In early November, they might have started whispering to each other in the yard: ‘it’s a set-up...we’re all going to be sent to the ovens...break-out planned for tomorrow at dinner...pass it on.’ Then, while a few birds got into a squawk to provide a diversion, the others might have rushed the gate. Instead, they didn’t know what was coming and took it in the neck.”

There are plenty of histories of finance – oral and written. But investors pay no attention. One generation of turkeys learns. The next forgets. One makes money; the next loses it. Every generation has to get its own neck chopped in its own way.

*** With so many citizens groaning and collapsing under the weight of so much debt, it is entirely foreseeable that the feds should pretend to come to their aid. Today’s news tells us that Barack Obama’s rescue mission will bring about $770 billion of cash with it. This comes on top of other rescue missions mounted by the Bush Administration and the Federal Reserve. Altogether, the total cost of these mercy efforts is into the trillions.

In fact, this morning, the Congressional Budget Office has reported that the U.S. government will run a budget deficit of $1.2 trillion in 2009...and that’s not taking into account the stimulus programs.

We have explained why bailouts don’t work. You can’t solve a problem caused by too much debt by adding more debt. The ‘hair of the dog’ technique won’t work – not even if you throw in the whole pooch. But it will have an effect – it will increase the weight of debt to the whole society. The forges are hot again...the hammers are clanging...the smithies are sweaty; now they’re building new chains of debt – public debt. They’re putting up a chain-link fence around the entire United States...and shackling every citizen to a monumental ball. Next year alone, the U.S. federal deficit will go to $1.5 trillion to $2 trillion – or about $20,000 for every family in the country. Over the course of the slump, the total could run to $100,000 per family. This extra public debt is the only sure outcome of the bailout projects.

How will Americans possibly carry so much public debt – along with their already bone-crushing private debt – without collapsing? Who would lend these sub-prime borrowers so much money in the first place?

Give us 24 hours and we’ll have answers to those questions...and give you our break-out plan too. The rest of the turkeys may get the axe...but we’re headed over the fence. We’ve got wings, remember....

*** A dear reader writes: “I respectfully disagree with your assumption regarding the ‘bounce.’ One of the goals of the Bush Administration is to have significant government ‘equity’ presence in Wall Street. This is called ‘Privatization’ when it applies to Social Security – but whatever the Government ‘privatizes’ but retains a hand in, it really ‘socializes.’

“Sufficient ‘equity’ has been poured into NYSE stocks, that the Government can manipulate the Dow (DJIA) much more than it could five years ago.

“As most people find the DJIA and the American economy synonymous, a slow and gentle rise in the Dow is cheering to many. So it is done.

“The Hunts attempted the same thing, with vastly different purpose, with the silver market some 30 years ago. They tried to corner it – and lost. The price went up – but they couldn’t get enough of a controlling share to ‘own’ the market, so they were left with vast holdings of massively overpriced silver.

“(I suspect that the fluctuations in oil prices may have been something similar, just from the pattern – but that’s sheer speculation.)

“We (the taxpayer) are gathering a massive market portfolio of overpriced equities. Like dime stocks, we can drive the price up; but it is so volatile, we cannot sell it all at the higher price – and that would crash the market soundly.

“Our acceleration into Market Socialism is another version of what Governments habitually do – play shell games with values, in order to reap profits. I’m sure that the Soviet Union allowed a little stock market to run here or there, eh? The NYSE is Uncle’s pet now, and it is on strings. Never mind that it is dead. It can still dance.”

*** England isn’t so merry these days. First, it is cold – temperatures fell to minus 10 centigrade, according to that reliable source of meteorological intelligence – the Sun. We knew it was cold because the Sun girl on page 3 had goose bumps all over her naked body. But at least she wasn’t sick with the flu. A record 2.4 million workers called in sick yesterday in England – one out of 12 staff was out. Another two million stayed at home because they don’t have jobs to go to. The financial storm that hit Britain last year continues to send waves over the island’s gunwhales. Big retailer Marks & Spencer said it is cutting 1,700 jobs today. And the firm founded by Josiah Wedgewood 250 years ago went bust. UK stocks are down about 40%. Houses are going down fast too. Unemployment is going up. And Britain’s most profitable industry – finance has gone into a slump. Apparently, half the country is either out of work, down with the flu, recovering from the flu, or pretending to have

Until tomorrow,

Bill Bonner
The Daily Reckoning