Agora Financial’s Rude Awakening

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Taiwan, Taipei

• Stocks plummet to 300 points 1997 levels – another lost decade,
• The most destructive element of Keynesian economic policies,
• Why Ron Gordon is just oh-so-happy today and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

“These days are like calendar comets,” says Ron Gordon, a teacher from California, in the L.A. Times, “you wait and wait and wait for them, then they brighten up your day — and poof — they’re gone.”

Ron is excited…and he should be. Today is a very special day, one that marks a curious confluence of mathematical abstractions. It’s a day when Pocket Protector Brigade members around the world unite, when math geeks debating the importance of Kurt Gödel ’s Incompleteness Theorem put their differences aside and their slide rules away to rejoice in harmony.

That’s right, folks: Today, March 3, 2009, is a square root day. (Three is the square root of nine.) We suspect Ron hasn’t been this excited since February 2, 2004.

There are only nine square root days per one hundred years and, unfortunately for Ron and his buddies, they occur less frequently as the century drags on. It’s just one of those sad realities.

Another sad reality, one closer to the editorial theme of this newsletter, is the INCREASING frequency of cataclysmic economic events. Last century, we note, market crashes took decades to fester…now they take just a few years. Between the crashes of 1929 and 1973-4, for example, Americans mostly busied themselves with normal, everyday human activities, like rotating the tires on the T-Bird and marching off to wars around the world. Nobody thought much about volatility indexes or price-to-earnings ratios. They were too busy building stuff.

These days you can hardly get through your miso soup at a Taiwan sushi-train without hearing the phrase “global economic meltdown”…and most people here don’t even speak English!

Everyone from your gardener to the pool boy knows that markets are at their lowest levels since 1997. The babysitter can probably recite, play-by-play, yesterday’s 300-point selloff on the Dow. It is much harder to find someone who can explain what caused the problem, and harder still to understand what’s being done about it. Why are we bubble-hopping with such regularity these days? How much will be lost before stability is restored? $2 trillion? $10 trillion? And what part does the trend from building stuff to printing dollars play in the whole process?

We don’t have any answers, of course; only guesses, theories and hypotheses that time will eventually test for us. We reckon gold’s a good bet over the long run, that’s no secret. We also think the stock market has further to fall, though not without brief perforations of delusional optimism. And we still don’t trust stuff nobody can value, like CDOs, MBSs and any company with a balance sheet clotted with them.

But fear not, Rude reader, we are not entirely without a clue here. In today’s “Twin Rude” edition, a couple of our finest thinkers are on the case for you. Dan Amoss, editor of the Strategic Short Report, and Byron King of Energy & Scarcity Investor fame, delve into the perverse world of money printing to give you the scoop. Read on for more below…

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Money for Nothing
By Dan Amoss

With deflation fears running wild, few economists are writing about the integrity of the U.S. dollar. Willem Buiter is an economist who’s widely considered to be an expert in financial and currency crises. He just wrote an excellent post on his Financial Times blog. You can read the entire piece at this link.

In short, Buiter details the most destructive element of Keynesian economic policies: constantly putting off painful adjustments and doing something to “fix” the business cycle now. I translate Keynesian policies as follows: “Let the consequences of deficits and inflation fall on the shoulders of those living in the long run.”

The idea of “stimulating” the economy is shortsighted and ignores serious consequences. It short-circuits adjustments that are necessary for an economy to become more competitive and efficient. It also diverts scarce capital and resources from the private to the public sector.

But you can imagine how politicians latch onto the Keynesian “have your cake and eat it too” policy regimen, with the ability to pay with a promise of future taxes levied on those who do not vote in the next election.

You don’t have to be a recipient of the Fields Medal in mathematics to figure out that Keynesian economic policies cannot work in the long run; a working knowledge of compound interest will do. In academia, Keynesian policies work; in the real world, they do not. Taxes can simply not be raised high enough to repay debts. Currency debasement will fill the gap.

For Keynesian policies to avoid risking destruction of the currency (or inflation), one would have to assume that future politicians would have the guts and the character to tell voters that they’re going to raise taxes and cut government spending dramatically when times are good to pay down the debts incurred during the stimulus.

Some may consider it a fraud on future generations (I do); others may consider it “stimulus.” But in today’s climate of fear, it doesn’t really matter what individuals think. The consequences of letting the deleveraging process feed on itself may lead to a sharp, painful depression, and that is politically unacceptable. So we’re going to have our “fix” in the form of deficits and bailouts, rather than going “cold turkey.” After all, most of our elected leaders have been taught in school that the New Deal “saved” us from the Great Depression.

Today, though, the U.S. economy relative to the global economy is far different than it was in the 1930s (smaller and less wealthy). Foreign creditors have amassed trillion of dollars of claims on U.S. wealth, and they will probably want something tangible in return.

Net-net, we should not be surprised to see the dollar’s purchasing power erode substantially…at least over the long-term. But here’s the scary thing: this long-term outcome could begin unfolding over the short term.

Joel’s Note: We clumsily interject for a second here to remind you that Dan was on top of this whole bust-up from the beginning, offering his readers some outstanding advice in times of peril, advice that earned them, for example, 450%% on a Lehman Brothers option play in just three months. Want to learn more about his ultimate bear market strategy? Do so here.

Brother, Can You Spare $1 Trillion?
By Byron King

Why do I think the dollar will be toast? Because Congress is planning to spend at least one trillion dollars to (ahem) “stimulate” the economy. Yes, if you spend a trillion dollars, it’ll stimulate something. But where will the money come from? How does the U.S. government plan to raise the money? Do you have a spare trillion dollars lying around, brothers and sisters?

I don’t know about you, but to me, a trillion bucks is a lot of money. It’s almost twice the national defense budget, which is a really big number in its own right. For a trillion bucks, the Navy could buy something like 133 Nimitz-class aircraft carriers. Except at current construction rates, it would take 500 years to build all of them. So just on the numbers alone, the U.S. is about to do something very, very strange in its historical arc.

Speaking of which, let’s look at some history. We’re a far cry from the olden days of a U.S. customs house in every port town. Back then, the U.S. Customs Service collected tariffs and imposts on foreign goods that landed ashore. The old customs houses were the national cash register, sending wagons full of gold down to the national treasury. If trade and commerce were good, the federal government collected more in taxes. When times were tough, the government experienced the lean economy along with everyone else. So in the olden days, the federal government was institutionally inclined to support the growth of business.

(And as an aside, those customs houses made important cultural statements about how the nation viewed itself, as well as just collecting taxes. There are some fine examples of federal customs houses, like the Greek Revival edifice built in the 1830s near the waterfront of New Bedford, Mass.)

That was then. This is now. Things have changed, like night and day. Today, the federal government balances its accounts via funds raised through taxation, borrowing and just plain creating currency out of the ether.

Congress collects a lot of funds through taxes. But not nearly enough to pay for all the spending. It’s not even close. So will Congress raise taxes? And do it during a recession? I don’t think so. Herbert Hoover tried that in 1930. Didn’t work too well.

What about the federal government borrowing? OK, it borrows a lot. But can it borrow even more? Trillions of dollars? From whom? Who has an extra trillion dollars lying around that they want to loan the U.S.? Will China and the oil-exporting nations continue to buy up U.S. Treasury paper? If so, with what? Chinese exports are down. Oil income is way down as well. (Oil is selling at $34 per barrel today.) So good luck with borrowing.

That leaves the U.S. government with only one choice. The U.S. is about to embark on the greatest currency-creating binge in modern history (excluding that of Zimbabwe, perhaps.) A lot of that trillion dollars is going to come right out of nothing. The Fed is just going to monetize the debt. So we’ll have new dollars chasing the same amount of goods. That’s the basic definition of inflation.

The bottom line is you need to own precious metals. Own gold. How much? For now, the more, the better. Own coins, if you can get ‘em. Own bullion, if you can get it. Own shares in good miners with reserves in the ground while you can buy ‘em. Just get some gold.

Joel’s Second Clumsy Note: “The breakthrough that could put oil refineries out of business…” That’s how Byron explained it to us. Right now he is recommending his readers shelter from some of the financial whirlwind out there by getting into some red-hot energy companies on the cheap. He tells us his latest idea has a potential upshot of 250% this year. Sound good? You can read the whole thing here.

And finally, before we head out for dinner, futures on the U.S. markets point to a higher open today. Asia, on the other hand, got slammed again overnight with most indexes down 2-5%.

European measures are doing a little better at the moment. France’s CAC and Germany’s DAX are both up about 1%. Rainy ol’ London’s FTSE is underwater about 1.1%.

Meanwhile, oil is up about a buck to $41 a barrel and gold is hanging on to $925 after yesterday’s brutal $30 selloff. (Good time to buy?)

And…we’re spent.

Until tomorrow…

Cheers,

Joel Bowman

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