Agora Financial’s Rude Awakening

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Ouzilly, France

· Congratulations taxpayer, you’ve just bought $65 billion more AIG risk,
· China sets Asian and European markets on fire with a 4 trillion yuan package,
· Tomorrow’s crises viewed through the eye of history and plenty more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

Chaos causes chaos…panics precipitate panics…bailouts beget bailouts.

Before we get on with the usual Rude ramblings, please allow us a moment to marvel at the unwavering magnanimity of the American taxpayer. It truly is amazing that, after picking up the $85 billion bar tab on behalf of AIG, the taxpayer’s have again agreed to take on more risk, upping the open limit to $150 billion.

We’re joking, of course, desperately trying to inject a little humor into a desperately humorless situation. Inside, we’re livid. Any taxpayer would be.

The move to bolster AIG’s bailout package comes as the insurance giant announced it lost a record $24.5 billion, or $9.05 a share, in the third quarter. After scaling back to initial $85 billion loan, the U.S. Treasury will buy up $40 billion of preferred shares and purchase a further $52.5 billion of mortgage securities owned or backed by the company, the Fed said this morning.

“Taxpayers will take on more risk to give Chief Executive Officer Edward Liddy time to salvage AIG,” Bloomberg explains this morning. No doubt this is the first taxpayers have heard about the destination of their confiscated wages.

At the very least, John Q. Public might be wondering why, every time he reaches for a newspaper, he finds that his government has dished out more of his hard-earned money to prop up flailing Wall Street giants. Blow a few hundred billion here, lop a few points of the value of his money there, redistribute his earnings to moribund firms over there…pretty soon John Q. is going to start asking questions like, “Hey, where’s all my cash going?”

The rub here is that most of it is not even his cash…it’s not even cash he might earn in the future. The “money” comes from loans his kiddies and their kiddies will one day be saddled with.

We expect this kind of thing in communist regimes. In fact, China, not wanting to be outdone by the U.S. in the redistribution of wealth arena, announced a $585 billion state sponsored stimulus package of its own over the weekend. Asian and European markets rallied overnight on the hope that splashing a cool 4 trillion yuan around the economy will help reignite China’s slowing growth. The package includes tax cuts, allowances for infrastructure spending and easing of credit requirements.

You can just imagine the Chinese government officials meeting before they made the announcement. After hours of head-scratching and consternation, one fellow leaps to his feet, “Wait, I’ve got it…cheaper credit!”

“Genuis!” exclaims another, “What could go wrong with that?”

In the cheery column that follows, Bill Bonner delves into a yesteryear mottled with plagues, wars and financial crises with an eye to where we may be headed tomorrow. Details below…

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Apocalypse Now
by Bill Bonner

“Utter piffle,” is how Terence Blacker of The Independent describes it. He is the voice of Fair Reason. To him, the idea that the sky is falling now is an “insult to past generations who have faced more grievous threats with courage and calm.” But that’s the trouble with Fair Reason; she never looks up. Like the wife who thinks her husband ‘would never do something that,’ she’s appalled when she finally sees what he’s been up to.

Nassim Taleb has made a career out of warning people. His “Taleb distribution” describes the occasional apocalypse: usually, things happen in a respectable, bell curve kind of way…the way Fair Reason thinks they should…and then, all Hell breaks loose.

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. By 1918, 40 million people had died. But that was just the beginning. WWI bankrupted or destroyed almost every major government of Europe. The plumy families that had dominated the continent for centuries – the Hohenzollerns, the Romanoffs, the Hapsburgs – were all clobbered. The Ottoman Turks fared no better. Then, scarcely 20 years later, France’s Third Republic was another victim…and so was Germany’s Third Reich.

But that was only the half of it. Between the two wars, came hyperinflation and destitution in Germany, America’s Great Depression and something far more deadly – the world’s worst plague, the Great Flu Epidemic of 1918-1920. The illness is known to us by its WWI alias, the “Spanish Flu.” Propagandists didn’t want the world to know how many French, American and English soldiers were dying of the disease. So they referred to it as though it only wiped out Iberians.

First spotted in young soldiers at Fort Riley, Kansas, the virus was soon found almost all over the world. Japan was the only major population center spared. Curiously, the disease killed off young adults more often than old people or children – somehow turning a strong immune system against its owner in what scientists call a “cytokine storm.” How many people gave up the ghost? Estimates range from 20 million on the low side to 80 million top end – that is, at least twice as many people who had died in the war.

Before the 1914-1945 catastrophe was the 1789-1812 calamity – roughly the period from the French Revolution to the Battle of Waterloo. It not only included the collapse of five different forms of government in France – Monarchy, First Republic, Directory, Consulate, and First Empire – but also inflation, 3 currency collapses, major political debacles throughout Europe, the Napoleonic Wars, as well as the last major famine in France in 1795.

War, bankruptcy, chaos, plague and famine – when trouble comes, it comes with a mob at its back. As usual, the Greeks provided an early example. Athens must have been the Goldman Sachs of the classical world. But when these masters of the ancient universe tried a hostile takeover of Sparta, it failed miserably…leaving them as exposed Bear Stearns. Sparta counterattacked and laid siege. Then, the bugs joined the attack in 430 BC. Thousands were killed by plague – including Pericles himself. Weakened by disease, hunger and war, Athens surrendered, was enslaved, and the Golden Age was over.

Later, it was the Romans’ turn. Bankruptcy, wars, stupidity – all took their toll. Then, in the 6th century, came another major onslaught: disease. Of the 80 monasteries around Constantinople in 540AD, none survived. Ghost ships, in which everyone on board had died of plague, drifted in the Mediterranean. European civilization seemed to fall apart.

Again, in the 14th century, came 100 years of war in France…along with starvation and plague. A couple of cold, wet summers caused famine in Western Europe. Young children were abandoned. Old people starved themselves to free up food for their families. Meanwhile, the Mongols attacked in the East, hoping to conquer all of Europe. And when they retreated, they left a going-away present – the plague. The Black Death of 1347-1351 killed off more people than the war or the Great Famine of 1315. Towns and fields were abandoned as a third of the population died. “So many died that all believed it was the end of the world,” said Agnolo di Tura of Siena, who buried his five children with his own hands.

New Scientist magazine comments: “Many people dismiss any talk of collapse as akin to the street corner prophet warning that the end is nigh.” But, more and more scientists are taking the end of civilization threat seriously, the magazine continues. Complexity – such as derivative financial instruments and “just in time” inventory systems – is making “our society…ever more vulnerable.”

In his 1988 book, The Collapse of Complex Societies , Joseph Tainter argued that all societies – like all organisms – are doomed. Each challenge requires a solution. Each solution takes resources. Eventually, the solutions – and readers may substitute the word “bailout” for solution – brings more challenges and takes more resources. Eventually, the system collapses under the weight of if all.

When the stars fall, even the angels get out of town.

[Joel's Note: Fortunately, the dire outcome won’t be as dreadful as it sounds…at least not for some. Last week we published a series of “all-terrain” stock ideas, offered up by the Rude readership. We called it our “Chicken Longs” Group Research Project, whereby readers sent in investment ideas that should offer some safety during turbulent times ahead. In fact, many pay our very attractive dividends and can be snapped up for unheard of valuations.

Catch the weekend edition or visit our website for the entire two-part column. Also, throwing his pick into the mix, our resident “value guy,” Chris Mayer, sent around a report he’s been working on for a few months that quite nicely fits the chicken long bill. If you missed Chris’ report yesterday all about how to collect “mining royalties,” you can still access it here

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[Rude Endnote: “Maldivian-like reefs, know where we can find them?” asks one reader, currently stationed in Kabul, Afghanistan. “And a beach and place to snorkel…the Caribbean is a bit pricey these days.”

“How about some info on cheap stocks in India,” writes another. “The BSE Sensex has come off about 23% since the beginning of October…There must surely be some bargains around in there worth your scouting out…”

Okay, so cheap stocks in India and affordable beachfront properties around South East Asia. Anything else, Rude readers? Next thing you’ll be demanding we have a couple of cocktails on the beach for you too! Man, the things we do…

Our trip starts in just over a month and will carry us from Dubai, here in the Middle East, to an as-yet-undetermined destination somewhere in the Far East. If you want to make any additions to your editor’s “things to investigate” notebook, send ‘em in to the address below.

Until tomorrow…

Cheers,

Joel Bowman

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