Agora Financial’s Rude Awakening

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Dubai, UAE

· Spreading the wealth from North to South, East to West,
· Gordon Brown goes brown-nosing for cash in the oil-rich Gulf,
· Plus, how to turn market fear into personal profits and much more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

When the president of the United States visited this region almost a year ago, the city of Dubai closed down for the entire day. Locals and expats alike jokingly refer to this event of yore as “Bush Day,” a day when they stayed home from work and watched movies as the leader of the “free world” took a Big Bus tour of the city.

Now, twelve months later, as W’s presidential twilight years draw to a close, another of the West’s leaders journeys to the Gulf region. Like Bush, England’s Gordon Brown is not particularly popular in the polls. But this captain from the west has more pressing issues to deal with than the restoration of his public image; he needs cash to rescue the world’s “emerged” nations from the brink of financial collapse. And so, hot on the trail of the dollars and pounds that have poured from the west into the Gulf ever since oil was first discovered here, Gordon Brown shot his cuffs, donned his best smile for the cameras…and went panhandling.

Making no bones about the goal of his mission, Brown has said that he wants “hundreds of billions” of extra dollars from the oil-rich Gulf States, to be pledged to the International Monetary Fund.

The IMF is already burning through its $250 billion reserves, providing around $30 billion in emergency loans to Iceland, Hungary and Ukraine in the past few weeks alone. Pakistan has also said it may call on the international body for a quick cash advance. Somewhere in the vicinity of $5 billion should do the job, they reckon.

“The Saudis will, I think, contribute like other countries so we can have a bigger fund worldwide,” said Brown after a three-hour meeting with Saudi Arabia’s King Abdullah late Saturday in Riyadh.

“The oil producing countries, who have generated over $1 trillion from higher oil prices in recent years, are in a position to contribute,” he continued, employing the kind of misguided logic that Karl Marx would be proud of. He might as well have gone the whole hog and recited the creed straight from the Critique of the Gotha Program: “From each according to his ability, to each according to his need.”

Usually, when a man finds himself in the unfortunate position of having to beg for alms, he does so with a sense of humility. He may even come to the realization that, but for the kindness of strangers, he might be infinitely worse off. The dire situation Mr. Brown finds himself in, and the crisis in the west that led to his fundraising mission, seems not to have dampened his sense of moral superiority.

Just two weeks ago Mr. Brown severely reprimanded OPEC for its decision to cut oil production in the face of falling prices. The OPEC nations say they needs to defend a floor for prices in order to fund and develop future energy projects; projects that may or may not end up fuelling engines in the countries Mr. Brown is here to represent. Whether or not OPEC is telling the truth, we must admit that we find Mr. Brown’s diplomatic stratagem a tad puzzling.

Brown described OPEC’s production cut as “wrong for the world economy,” arguing that such a measure was “absolutely scandalous” at a time when the world is suffering through an economic crisis.

Translation: “It is wrong that OUR economy must suffer through high oil prices…but we would still like you to use the money YOU made from high prices to solve our problems.”

Pleading for help from one side of the mouth while sharply criticized from the other is seldom an effective tactic. It must be said, of course, that your editor is not here to defend a monopolistic cartel. We’re simply suggesting that if Mr. Brown chooses to go brown-nosing for money, he might think about refining his tactics a little. Either that, or learn to speak Chinese or Japanese…they made (and saved) lots of money from the west too.

Beggars can’t always be choosers but, if they play their cards wrong, they can end up losers.

Leaving aside Britain and the Middle East for the moment, Bill Bonner takes us on a journey from North to South America where, from the back seat of a cab in Buenos Aires, he reveals a lesson or two the Argentineans have learned that neither Keynes nor Smith bothered to mention. Details below…

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Disappearing on the Pampas
by Bill Bonner

Last week, at the annual convention of the nation’s mortgage bankers in San Francisco, protestors used bullhorns to heckle attendees; they demanded a moratorium on foreclosures.

Meanwhile, south of the Rio Plata, a mob formed in Buenos Aires too. Their gripe was that the government of Christina Fernandez de Kirschner was grabbing their pension money. ‘No way,’ replied the queen of the pampas. We are just going to “rescue” it from the wicked capitalists. Like a Doberman rescuing a hot dog, the Argentina government will swallow $26 billion worth of private pension funds. The federales say they are taking the money into protective custody. It will just “disappear,” say protesters.

The signal on the flag here unfurling is that, compared to the Argentines, the American mob is a bunch of naive chiselers. At least the gauchos can tell the difference between self-delusion and grand larceny. But the average cab driver in Buenos Aires knows more about financial crises than Trichet, Brown and Paulson put together. His training comes neither from Keynes nor Smith. The great Anglo-Saxon economists may have laid out their theories of political economy. But they left some important holes. Argentina’s presidents have filled in the blanks. And what the typical Argentine has learned, the English and the Americans are about to discover for themselves.

Leaving Argentina, our cab driver tried a familiar flimflam. Hearing a foreign accent, he said: “My meter is broken…but the fare to the airport is always a flat 200 pesos.” On the pampas, no self-respecting taxi driver gives a sucker an even break. But then, rarely do markets or governments, either.

“What is the message that the government is giving to the people today?” asks Argentine economist, Roberto Cachanosky. “That it is ready to take their revenues and their savings with no limit…and also, that they will continue to give out information and make announcements that, to say it gently, have no connection to reality.”

“The only secure retirement is one backed by the state,” said a member of the Peronist party, proving Cachanosky’s point. As the country approached bankruptcy in 2001, its leaders followed the traditions of all Peronists, Democrats, Republicans, and National Socialists; when they get themselves in a jamb. First, they lie. Then they steal.

Argentina has a parallel system of state-owned and privately-owned pension accounts. Its state system pension payments were cut by 14% in 2001, and then cut an addition 66% when the peso was devalued the following year. Now, the Kirschner government is nationalizing the private accounts. Set up in 1993, these funds must invest 60% of their money in Argentine bonds. Naturally, bonds backed by the Argentine government are not necessarily the strongest credits in the world. Argentine peso bonds – like pensions – are adjusted for inflation. But the government lies, with a measure of inflation that is less than half the real 30% rate.

As to the dollar bonds, it steals. In 2001, it defaulted on $95 billion worth of loans made by overseas lenders. It didn’t settle up until 4 years later – stiffing the foreigners for 70%. And now the government is in trouble again; it must make a big payment to overseas lenders in 2009. Its main exports – soybeans, gas and oil – are down about 50% this year. And the country has more public debt than it did when it defaulted seven years ago. That’s why the private pension accounts are being seized; the government needs the money.

Things have a way of disappearing in Argentina. After WWII, hundreds, maybe thousands, of Nazis arrived in Buenos Aires from Europe, never to be seen again. Whether people are wanted by the law, or not wanted by the lawmakers, they have a way of vanishing. In the 1970s, when the generals running Argentina wanted to get rid of their opponents, they called on the old Nazis to help ‘disappear’ thousands of them.

Money disappears too. More than a half century ago, Evita Peron posed as an angel. She set up charitable organizations to help the poor and handed out Christmas presents, personally. After the holidays, she went back to her tricks – making the money disappear from the charitable funds and re-appear in her Swiss bank account. And then, after her spirit gave the world the slip, Evita’s own corpse disappeared. People wondered what had happened to the husk of her, until it was retrieved by Juan Peron 16 years later.

Senora Fernandez is a practiced magician too. Her recent acts of larceny have included disappearing Aerolineas Argentina from its Spanish owners…and then disappearing the profits of the nation’s farmers, first by preventing them from selling on the open market and then by imposing a confiscatory tax (later withdrawn) on exports.

“Nationalizing private pensions is theft,” said Juan Domingo Peron himself. The Peronists say they are only acting in the public interest – like the U.S. Treasury and the Bank of England. We would never have done this had there not been a world while financial crisis, they explain.

“The question that many people ask themselves,” continues Robert Cachanosky is: ‘what rate of interest do you need to compensate for the risk of keeping assets within the reach of a government desperate for more funds?”

Answering Cachanosky’s question, today, you can buy 8.28% Argentine bonds at 22 cents on the dollar – giving you a yield of 31%. By comparison, a US 10-year Treasury note, at less than 4% yield, looks like a broken taxi meter to us.

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

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

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[Rude Endnote: Any thoughts on how the power struggle between the cash-rich East and the heavily indebted West might play out? If you feel inclined to comment, please send your thoughts to the address below. We’d love to hear them.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com