The Daily Reckoning Australia
Ouzilly, France - Melbourne, Australia
Tuesday, 21 August 2007
---------------------
***Half-time in the credit crisis...strip club transactions...positive
black swans...
*** Soothing cloud of nitrous oxygen covers investors...believing in
two great delusions...
*** The markets let out a big hoorah...gypsy wagon manufacturing
services...and more!
---------------------
IMPORTANT REMINDER: In order to ensure that you receive future emails
from the Daily Reckoning, please add dr@dailyreckoning.com.au to your
e-mail address book.
---------------------
From Dan Denning in Victoria:
--Is it over yet? Opinions in the financial media are mixed over
whether the worst of the credit crisis is behind is, or whether it's
half-time. The Australian market did not pause for reflection
yesterday. It took action. The ASX/200 was up 261 points on the day to
close within shouting distance of 6,000. It was the biggest one day
gain in ten years.
--Woo hoo!
--And hold everything. The US Senate is getting involved in the crisis.
That should fix things right up. Christopher Dodd, a Democratic Senator
from the well-heeled state of Connecticut (home to thousands of Wall
Street and hedge fund professionals) convened a meeting last night with
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry
Paulson.
--Dodd is a showoff. Doesn't he know politicians belong in strip clubs,
where they can do less damage to the public good? A politician is just
as comfortable in a "gentleman's club" as he is on the campaign trail.
And how different are the two places anyway? In both cases you find
elected officials doling out cash in exchange for favours. On the
campaign trail, it's taxpayer cash in exchange for votes. At least the
strip club transaction does not involve the theft of a third party's
hard-earned wages.
--How about BlueScope Steel? The company reported net profits of AU$686
million for its full-year results, nearly double last year's net
profit. It's benefiting from big infrastructure spending at the State
level here in Australia and growth in its Asian business. It's also a
sign that there are indeed some businesses in Australia not directly
affected by Americans who can't pay their mortgage.
--But we suspect the full effect of the crisis in the credit markets
hasn't been felt yet. It feels like a sucker's rally in blue chips that
allows sellers to liquidate in a rising market. Where will the buying
come from, we wonder. The Future Fund?
--The next two months won't be smooth sailing. In October, US$50
billion in subprime loans re-set. Right now, behind closed doors,
thousands of investors are busy trying to unload their exposure to
asset-backed securities. But who is going to buy? The Fed?
--We'll have to cut the notes short today. We're writing about positive
black swans in the next issue of the Australian Small Cap Investigator.
It's the good kind of black swan, an unlikely event that turns out to
be highly profitable for investors. There are certain kinds of
businesses where positive black swans flourish. And many of them are
now on sale after the recent correction.
--Woo hoo!
--- Advertisements Keep the Daily Reckoning Free ---
========== $555,527 in 3 months! ==========
** I banked this money in 3 months.
** I didn't even have to do any work in those 3 months!!
** I did not have any product of my own in this instance.
** It did not cost me a cent on promotion or marketing.
** I did not use any of my own marketing skills (which are limited).
** It didn't come about because I was introduced to 'the right people'.
** It took a total of just a few short hours of my time.
Give Me Just 5 Minutes And I'll Reveal How You Can Copy My Exact Plan!
http://draustralia.c.topica.com/maahwqmabAHG4bJhLLIbafpTkF/
---------------------
From Bill Bonner in Ouzilly:
We take a moment to look at the big, wide world of money every day. And
when we look today what we see is a monumental, soothing hallucination
settling over investors, like a giant cloud of nitrous oxygen.
On Friday, of course, the market bounced - up more than 200 points. A
neighbour interpreted this move for us at a party Saturday night:
"Did you see what happened on Friday? Stocks went up everywhere. It's
over. The crisis is over. Because the central banks can always put in
more money and credit. That's what happened. The US Fed cut lending
rates and markets came back. I'm not worried. I think we're going to
see higher prices."
The man speaking was a retired French banker. Like everyone else with
any money, he has been watching recent events and wondering what was
going on. And like almost everyone else, he has come to the wrong
conclusion. As to where stock prices are headed, we are as dumb as
everyone else. Many times we have tried to look into the future - even
when we were on vacation. But we've never gotten the hang of it. It
just isn't possible to know what will happen.
But it seems probable that a clear majority of the world's investors
now believe in two great delusions: one, that central banking has taken
the risk out of investing...and its corollary; that market prices are
now on the rebound. Again, they may be right - by accident - about the
latter point. But it will prove to be an expensive triumph, in our
view, because they are surely wrong about the former one. Central
banking has not taken the risk out of investing; it has magnified it.
On Friday, the Bernanke Fed looked a lot like the old Greenspan
Fed...riding out to rescue speculators like the cavalry to the aid of
desperate pioneers. The trumpet sounded...the rifles fired...and the
savages were beaten back.
"Thank god for the boys in blue," said the pilgrims. "They come along
just when you need them. Now, we can go and settle that rich bottomland
across the river. They'll always protect us."
If only running an economy were so easy! We're on vacation, so we're
not going to think about it too much. But it was only a week or so ago
that the Fed told us that inflation was the real enemy. Now, Ben
Bernanke has cut the discount rate by half of a percentage point in
order to counter the deflationary effects of a credit crisis.
Banks - and other financiers - got themselves into trouble because they
had too much money on their hands. They lent it out much too freely. So
Bernanke comes to their rescue. And with what? More money of course.
The markets let out a big hoorah on Friday. But how, exactly, is a
lower discount rate going to solve the problem? In October of this
year, the big hump in mortgage resets comes - with more than US$50
billion in mortgages to be adjusted upwards. Then, next year another
half a trillion in mortgages is to be reset, with the final peak coming
in March.
The typical subprime borrower from 2004-2006 will have to come up with
about US$400 per month more. Where will he get the money? Who will lend
to him? And why would he borrow?
If you think the rate of foreclosures is up now - just wait until
October. And it won't just effect those subprime borrowers.
Unfortunately, you could be the best homeowner in the world...maybe
you've even paid off your mortgage... but if there is a foreclosure
near your house, it could lower the value - by up to US$20,000!
Yes, we're all believers in the Theology of Capitalism now. That is, we
don't think we have to look too deeply into the Holy Mysteries that
surround modern markets. The place is full of miracles; that is all we
need to know.
But when it comes to real, free-market capitalism, we are all agnostic.
People think that central banks can collude to manipulate the
markets...and thereby avoid a much-needed correction forever. Our guess
is that investors will pay dearly for the delusion.
"The world is flat after all," a friend wrote us, sending the following
item:
"Yi Xianrong, a banking and finance expert at the Chinese Academy of
Social Sciences, said Chinese banks had been lax as they built up 3
trillion yuan (US$396.2 billion) of mortgage lending.
"'The quality of housing loans are much worse than the subprime loans
in the United States,' Yi was quoted as saying by the South China
Morning Post.
"At least there has been a credit check system (in the United States)
but in China anyone can borrow money to buy a house."
See, dear reader. Americans aren't the only ones. Now, everyone can
take part in foolish trends and fads.
Before we sign off for today, we'll give you a quick glimpse into our
days of 'leisure'. We are using this vacation to figure out how to
simplify our lives. So far, we've taken out the windows on the top
floor so that we could paint them. And we've put up a bit of stonewall
near the farmhouse. Now, we just have to figure out how to make an
arched doorway.
"And what qualifies you to think that you can make an arch in a stone
wall," asked Jules, with an almost insolent tone in his voice.
"There's nothing to it. People have been making arches for thousands of
years. It can't be that tough. I'm just going to use a lot of cement to
hold it together."
"Sounds like a lawsuit coming..."
Also, we finished the gypsy wagon...except that when we parked it near
the pond, we realised that we would have to make some screens for the
windows, as there are mosquitoes down by the water. It is built on an
old hay wagon, about sixteen feet long and six feet wide. Inside, there
is a little gas stove, a table with two chairs and a bed. It is very
cute...a perfect place to have a cup of tea, read a book or take a nap.
"Well, it looks like a good place to shoot the swamp rats," said Henry.
"I can put the rifle out through the window and hit them when they are
crossing the pond."
We have huge swamp rats. They aren't really rats at all. Instead, they
are a South American animal - nutria - that somehow got loose in France
and now are everywhere. Occasionally, someone will make a pâté out of
them which is tasty. And they aren't harmful, except to the banks of
the pond. But we don't like the look of them.
The gypsy wagon is meant to be painted in bright colors. But when we
were painting it, the red we were using seemed almost blindingly
bright. So, we decided to go with a sober grey for the main exterior
color, trimmed with bright blue and red. Now we regret the decision.
From a distance, the thing looks too pale...it looks a little sad; as
if it had been abandoned.
"We'll just have to repaint it," we told the kids.
"I'm not painting that again," said Edward. "I already painted it three
times, because you kept changing the colours. It's going to stay that
way..."
The quality of our labour is not necessarily what we would like. But we
can't really complain. We pay Edward, 13, just one euro an hour...or 20
euros per week for a 20-hour work week (he is on vacation too). At that
rate, we have to accept a little back talk.
"Dad," said Sophia, in a much more positive mood, "this gypsy wagon
turned out pretty well. Maybe we should make more of them and sell them
over the Internet."
Hmmm...gypsy wagon manufacturing...a new business opportunity. That
would simplify things!
--------------------
LEARN MORE ABOUT DAILY RECKONING AUSTRALIA EDITOR DAN DENNING
DID YOU KNOW? The Daily Reckoning's editor, Dan Denning, is the author of
the New York Times best-selling book, The Bull Hunter: Tracking Today's
Hottest Investments
Ask for it in your local bookshop or buy it online from Dymocks here: http://draustralia.c.topica.com/maahwqmabAHG5bJhLLIbafpTkF/
--------------------
The Daily Reckoning PRESENTS: Capitalism punishes those who have made
financial errors. This process is the economic equivalent of natural
selection, in which the weak and unfit are eliminated. But by injecting
'liquidity' into world markets, central banks are blocking this
process, and creating a whole lot of trouble along the way. Bill Bonner
exposes...
THE CENTRAL BANK CLOT
by Bill Bonner
The financial industry, most of the time, operates under false
pretenses. The business of true capitalism is to destroy them. The two
are natural enemies.
"Central banks seek to unblock markets," reported the Financial Times
on August 12. The gist of the story was that the financial industry
seemed to be having something akin to a cardiac infarction and central
bankers, rushing in like heart surgeons from the golf course, were
attempting a bypass. If successful, we were led to believe, Bernanke,
Trichet and the lot would get their mugs on the cover of Business Week
and TIME, and soon join the great assembly of capitalism's saints.
In fact, what the bankers were up to was the exact opposite of what the
FT reported. At the end of that week and the beginning of the last one,
central banks all over the world were engaged in a vigorous attempt at
price fixing and market manipulation; that is, they were trying to
block markets from doing what they needed to do.
As we mentioned two weeks ago, no man worships capitalism. Instead, if
he has any sense, he fears it...and aims to put a stop to it as soon as
he is able. In any economy, mistakes are made. People invest in
projects that don't pay off. They pay too much for a stock. They lend
to people who can't pay the money back. If these errors were to go
unpunished, the mal-investment and misallocation of resources would
continue. Eventually, the whole shebang would collapse into a heap of
unwanted products and un-performing assets. That is why we have
corrections...bear markets...and panics; they are an economy's
equivalent of natural selection, eliminating the weak and unfit.
The key variable in capitalism is the cost of money - the interest
rate, which establishes a "hurdle rate" against which to judge all
financial transactions. It is the natural environment in which
capitalists must survive. If a new project will return 5% per year and
the cost of money is 6% per year, the proposed investment doesn't make
it. But if the cost of money drops to 1%, all of sudden even the most
absurd and clownish investments get to reproduce. Soon, the world is
full of them.
In a free market, the 'hurdle rate' is set like all other prices -
based on supply and demand. But central banks meddle with interest
rates - typically pushing down on the short rates, and thus lowering
the hurdle rate for all borrowers. In fact, most of the freaks now
crowding the financial world are the spawn of central bankers who held
down rates too low for too long.
Corrections can take many different forms. Occasionally, speculators
panic; they stop worrying about the return ON their money all-together;
instead they fret about the return OF their money. Then, it becomes
hard to borrow at any rate.
Over the last few weeks, capitalists have become edgy and disagreeable.
Lured by an artificially low lending rate, maybe they lent a little too
freely. Maybe they spent a little too much. Maybe their speculations
weren't as good as they thought they were. Mistakes were made; they
needed to be corrected. As a result, markets began to wobble. Stock
prices came down, with more than a trillion dollars trimmed from US
stocks alone. And credit markets began to constrict; banks on both
sides of the Atlantic were stuck with nearly a half a trillion dollars'
worth of corporate loans that investors refused to take.
These were the facts when, on the ninth of August, the capitalist cops
were doing their job. They were beating up homeowners who had bought
houses they couldn't afford. They were taking their cudgels to the
lenders too...and to CDO speculators, hedge fund players, imprudent
bankers, and whiz-kid mathematicians. And once their blood was
up...they were whacking away at everyone who came into range -
including stock market investors, pension fund managers, City
investment banks. Rich, poor...smart, stupid...they were giving them
all a good thrashing.
But then, along came the central bankers.
On August ninth and tenth, the Bank of Japan, the European Central
Bank, the Bank of Canada and the Fed all began to intervene. One report
said the ECB had 'injected' US$215 billion into the system. Others said
the Fed had put US$38 billion to work. By Monday, the Bank of Japan and
the ECB were still at it...colluding to knock down the hurdle all
together. The BOJ put in another US$5 billion, which was already having
a "calming effect" on Asian markets, said the papers. On Monday, too,
the ECB put in another 47.7 billion euros.
Whatever the final numbers turn out to be, it is a lot of new money in
a short period of time - more than at any time since the days
immediately following 9/11 in 2001. Lending by the New York Fed was so
vigorous that the fed funds rate fell to the lowest rate since 2004.
The purpose of all this lucre was said to be to provide "liquidity".
What is liquidity, you may wonder? Lo...it is the same cheap money that
got markets in trouble in the first place! It is as if they had opened
a new mortgage lender in Santa Ana, California, offering no-money-down,
teaser-rate, no-document adjustable rate mortgages.
If we're lucky, borrowers won't fall for it and the cops can get back
to work.
Bill Bonner
for The Daily Reckoning Australia
Editor's Note: Bill Bonner is the founder and editor of The Daily
Reckoning. He is also the author, with Addison Wiggin, of The Wall
Street Journal best seller Financial Reckoning Day: Surviving the Soft
Depression of the 21st Century (John Wiley & Sons).
Buy it Online at Angus & Robertson:
http://draustralia.c.topica.com/maahwqmabAHG6bJhLLIbafpTkF/
In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an
Epic Financial Crisis, they wield their sardonic brand of humor to
expose the nation for what it really is - an empire built on delusions.
Buy it Online at Angus & Robertson:
http://draustralia.c.topica.com/maahwqmabAHG7bJhLLIbafpTkF/
--- FREE FOR DAILY RECKONING READERS ---
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We started Money Morning to give you that "must know" information, help
make you a better investor and ultimately, keep more of your money.
Money Morning is designed for the serious investors who can't afford to
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Ouzilly, France - Melbourne, Australia
Tuesday, 21 August 2007
---------------------
***Half-time in the credit crisis...strip club transactions...positive
black swans...
*** Soothing cloud of nitrous oxygen covers investors...believing in
two great delusions...
*** The markets let out a big hoorah...gypsy wagon manufacturing
services...and more!
---------------------
IMPORTANT REMINDER: In order to ensure that you receive future emails
from the Daily Reckoning, please add dr@dailyreckoning.com.au to your
e-mail address book.
---------------------
From Dan Denning in Victoria:
--Is it over yet? Opinions in the financial media are mixed over
whether the worst of the credit crisis is behind is, or whether it's
half-time. The Australian market did not pause for reflection
yesterday. It took action. The ASX/200 was up 261 points on the day to
close within shouting distance of 6,000. It was the biggest one day
gain in ten years.
--Woo hoo!
--And hold everything. The US Senate is getting involved in the crisis.
That should fix things right up. Christopher Dodd, a Democratic Senator
from the well-heeled state of Connecticut (home to thousands of Wall
Street and hedge fund professionals) convened a meeting last night with
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry
Paulson.
--Dodd is a showoff. Doesn't he know politicians belong in strip clubs,
where they can do less damage to the public good? A politician is just
as comfortable in a "gentleman's club" as he is on the campaign trail.
And how different are the two places anyway? In both cases you find
elected officials doling out cash in exchange for favours. On the
campaign trail, it's taxpayer cash in exchange for votes. At least the
strip club transaction does not involve the theft of a third party's
hard-earned wages.
--How about BlueScope Steel? The company reported net profits of AU$686
million for its full-year results, nearly double last year's net
profit. It's benefiting from big infrastructure spending at the State
level here in Australia and growth in its Asian business. It's also a
sign that there are indeed some businesses in Australia not directly
affected by Americans who can't pay their mortgage.
--But we suspect the full effect of the crisis in the credit markets
hasn't been felt yet. It feels like a sucker's rally in blue chips that
allows sellers to liquidate in a rising market. Where will the buying
come from, we wonder. The Future Fund?
--The next two months won't be smooth sailing. In October, US$50
billion in subprime loans re-set. Right now, behind closed doors,
thousands of investors are busy trying to unload their exposure to
asset-backed securities. But who is going to buy? The Fed?
--We'll have to cut the notes short today. We're writing about positive
black swans in the next issue of the Australian Small Cap Investigator.
It's the good kind of black swan, an unlikely event that turns out to
be highly profitable for investors. There are certain kinds of
businesses where positive black swans flourish. And many of them are
now on sale after the recent correction.
--Woo hoo!
--- Advertisements Keep the Daily Reckoning Free ---
========== $555,527 in 3 months! ==========
** I banked this money in 3 months.
** I didn't even have to do any work in those 3 months!!
** I did not have any product of my own in this instance.
** It did not cost me a cent on promotion or marketing.
** I did not use any of my own marketing skills (which are limited).
** It didn't come about because I was introduced to 'the right people'.
** It took a total of just a few short hours of my time.
Give Me Just 5 Minutes And I'll Reveal How You Can Copy My Exact Plan!
http://draustralia.c.topica.com/maahwqmabAHG4bJhLLIbafpTkF/
---------------------
From Bill Bonner in Ouzilly:
We take a moment to look at the big, wide world of money every day. And
when we look today what we see is a monumental, soothing hallucination
settling over investors, like a giant cloud of nitrous oxygen.
On Friday, of course, the market bounced - up more than 200 points. A
neighbour interpreted this move for us at a party Saturday night:
"Did you see what happened on Friday? Stocks went up everywhere. It's
over. The crisis is over. Because the central banks can always put in
more money and credit. That's what happened. The US Fed cut lending
rates and markets came back. I'm not worried. I think we're going to
see higher prices."
The man speaking was a retired French banker. Like everyone else with
any money, he has been watching recent events and wondering what was
going on. And like almost everyone else, he has come to the wrong
conclusion. As to where stock prices are headed, we are as dumb as
everyone else. Many times we have tried to look into the future - even
when we were on vacation. But we've never gotten the hang of it. It
just isn't possible to know what will happen.
But it seems probable that a clear majority of the world's investors
now believe in two great delusions: one, that central banking has taken
the risk out of investing...and its corollary; that market prices are
now on the rebound. Again, they may be right - by accident - about the
latter point. But it will prove to be an expensive triumph, in our
view, because they are surely wrong about the former one. Central
banking has not taken the risk out of investing; it has magnified it.
On Friday, the Bernanke Fed looked a lot like the old Greenspan
Fed...riding out to rescue speculators like the cavalry to the aid of
desperate pioneers. The trumpet sounded...the rifles fired...and the
savages were beaten back.
"Thank god for the boys in blue," said the pilgrims. "They come along
just when you need them. Now, we can go and settle that rich bottomland
across the river. They'll always protect us."
If only running an economy were so easy! We're on vacation, so we're
not going to think about it too much. But it was only a week or so ago
that the Fed told us that inflation was the real enemy. Now, Ben
Bernanke has cut the discount rate by half of a percentage point in
order to counter the deflationary effects of a credit crisis.
Banks - and other financiers - got themselves into trouble because they
had too much money on their hands. They lent it out much too freely. So
Bernanke comes to their rescue. And with what? More money of course.
The markets let out a big hoorah on Friday. But how, exactly, is a
lower discount rate going to solve the problem? In October of this
year, the big hump in mortgage resets comes - with more than US$50
billion in mortgages to be adjusted upwards. Then, next year another
half a trillion in mortgages is to be reset, with the final peak coming
in March.
The typical subprime borrower from 2004-2006 will have to come up with
about US$400 per month more. Where will he get the money? Who will lend
to him? And why would he borrow?
If you think the rate of foreclosures is up now - just wait until
October. And it won't just effect those subprime borrowers.
Unfortunately, you could be the best homeowner in the world...maybe
you've even paid off your mortgage... but if there is a foreclosure
near your house, it could lower the value - by up to US$20,000!
Yes, we're all believers in the Theology of Capitalism now. That is, we
don't think we have to look too deeply into the Holy Mysteries that
surround modern markets. The place is full of miracles; that is all we
need to know.
But when it comes to real, free-market capitalism, we are all agnostic.
People think that central banks can collude to manipulate the
markets...and thereby avoid a much-needed correction forever. Our guess
is that investors will pay dearly for the delusion.
"The world is flat after all," a friend wrote us, sending the following
item:
"Yi Xianrong, a banking and finance expert at the Chinese Academy of
Social Sciences, said Chinese banks had been lax as they built up 3
trillion yuan (US$396.2 billion) of mortgage lending.
"'The quality of housing loans are much worse than the subprime loans
in the United States,' Yi was quoted as saying by the South China
Morning Post.
"At least there has been a credit check system (in the United States)
but in China anyone can borrow money to buy a house."
See, dear reader. Americans aren't the only ones. Now, everyone can
take part in foolish trends and fads.
Before we sign off for today, we'll give you a quick glimpse into our
days of 'leisure'. We are using this vacation to figure out how to
simplify our lives. So far, we've taken out the windows on the top
floor so that we could paint them. And we've put up a bit of stonewall
near the farmhouse. Now, we just have to figure out how to make an
arched doorway.
"And what qualifies you to think that you can make an arch in a stone
wall," asked Jules, with an almost insolent tone in his voice.
"There's nothing to it. People have been making arches for thousands of
years. It can't be that tough. I'm just going to use a lot of cement to
hold it together."
"Sounds like a lawsuit coming..."
Also, we finished the gypsy wagon...except that when we parked it near
the pond, we realised that we would have to make some screens for the
windows, as there are mosquitoes down by the water. It is built on an
old hay wagon, about sixteen feet long and six feet wide. Inside, there
is a little gas stove, a table with two chairs and a bed. It is very
cute...a perfect place to have a cup of tea, read a book or take a nap.
"Well, it looks like a good place to shoot the swamp rats," said Henry.
"I can put the rifle out through the window and hit them when they are
crossing the pond."
We have huge swamp rats. They aren't really rats at all. Instead, they
are a South American animal - nutria - that somehow got loose in France
and now are everywhere. Occasionally, someone will make a pâté out of
them which is tasty. And they aren't harmful, except to the banks of
the pond. But we don't like the look of them.
The gypsy wagon is meant to be painted in bright colors. But when we
were painting it, the red we were using seemed almost blindingly
bright. So, we decided to go with a sober grey for the main exterior
color, trimmed with bright blue and red. Now we regret the decision.
From a distance, the thing looks too pale...it looks a little sad; as
if it had been abandoned.
"We'll just have to repaint it," we told the kids.
"I'm not painting that again," said Edward. "I already painted it three
times, because you kept changing the colours. It's going to stay that
way..."
The quality of our labour is not necessarily what we would like. But we
can't really complain. We pay Edward, 13, just one euro an hour...or 20
euros per week for a 20-hour work week (he is on vacation too). At that
rate, we have to accept a little back talk.
"Dad," said Sophia, in a much more positive mood, "this gypsy wagon
turned out pretty well. Maybe we should make more of them and sell them
over the Internet."
Hmmm...gypsy wagon manufacturing...a new business opportunity. That
would simplify things!
--------------------
LEARN MORE ABOUT DAILY RECKONING AUSTRALIA EDITOR DAN DENNING
DID YOU KNOW? The Daily Reckoning's editor, Dan Denning, is the author of
the New York Times best-selling book, The Bull Hunter: Tracking Today's
Hottest Investments
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--------------------
The Daily Reckoning PRESENTS: Capitalism punishes those who have made
financial errors. This process is the economic equivalent of natural
selection, in which the weak and unfit are eliminated. But by injecting
'liquidity' into world markets, central banks are blocking this
process, and creating a whole lot of trouble along the way. Bill Bonner
exposes...
THE CENTRAL BANK CLOT
by Bill Bonner
The financial industry, most of the time, operates under false
pretenses. The business of true capitalism is to destroy them. The two
are natural enemies.
"Central banks seek to unblock markets," reported the Financial Times
on August 12. The gist of the story was that the financial industry
seemed to be having something akin to a cardiac infarction and central
bankers, rushing in like heart surgeons from the golf course, were
attempting a bypass. If successful, we were led to believe, Bernanke,
Trichet and the lot would get their mugs on the cover of Business Week
and TIME, and soon join the great assembly of capitalism's saints.
In fact, what the bankers were up to was the exact opposite of what the
FT reported. At the end of that week and the beginning of the last one,
central banks all over the world were engaged in a vigorous attempt at
price fixing and market manipulation; that is, they were trying to
block markets from doing what they needed to do.
As we mentioned two weeks ago, no man worships capitalism. Instead, if
he has any sense, he fears it...and aims to put a stop to it as soon as
he is able. In any economy, mistakes are made. People invest in
projects that don't pay off. They pay too much for a stock. They lend
to people who can't pay the money back. If these errors were to go
unpunished, the mal-investment and misallocation of resources would
continue. Eventually, the whole shebang would collapse into a heap of
unwanted products and un-performing assets. That is why we have
corrections...bear markets...and panics; they are an economy's
equivalent of natural selection, eliminating the weak and unfit.
The key variable in capitalism is the cost of money - the interest
rate, which establishes a "hurdle rate" against which to judge all
financial transactions. It is the natural environment in which
capitalists must survive. If a new project will return 5% per year and
the cost of money is 6% per year, the proposed investment doesn't make
it. But if the cost of money drops to 1%, all of sudden even the most
absurd and clownish investments get to reproduce. Soon, the world is
full of them.
In a free market, the 'hurdle rate' is set like all other prices -
based on supply and demand. But central banks meddle with interest
rates - typically pushing down on the short rates, and thus lowering
the hurdle rate for all borrowers. In fact, most of the freaks now
crowding the financial world are the spawn of central bankers who held
down rates too low for too long.
Corrections can take many different forms. Occasionally, speculators
panic; they stop worrying about the return ON their money all-together;
instead they fret about the return OF their money. Then, it becomes
hard to borrow at any rate.
Over the last few weeks, capitalists have become edgy and disagreeable.
Lured by an artificially low lending rate, maybe they lent a little too
freely. Maybe they spent a little too much. Maybe their speculations
weren't as good as they thought they were. Mistakes were made; they
needed to be corrected. As a result, markets began to wobble. Stock
prices came down, with more than a trillion dollars trimmed from US
stocks alone. And credit markets began to constrict; banks on both
sides of the Atlantic were stuck with nearly a half a trillion dollars'
worth of corporate loans that investors refused to take.
These were the facts when, on the ninth of August, the capitalist cops
were doing their job. They were beating up homeowners who had bought
houses they couldn't afford. They were taking their cudgels to the
lenders too...and to CDO speculators, hedge fund players, imprudent
bankers, and whiz-kid mathematicians. And once their blood was
up...they were whacking away at everyone who came into range -
including stock market investors, pension fund managers, City
investment banks. Rich, poor...smart, stupid...they were giving them
all a good thrashing.
But then, along came the central bankers.
On August ninth and tenth, the Bank of Japan, the European Central
Bank, the Bank of Canada and the Fed all began to intervene. One report
said the ECB had 'injected' US$215 billion into the system. Others said
the Fed had put US$38 billion to work. By Monday, the Bank of Japan and
the ECB were still at it...colluding to knock down the hurdle all
together. The BOJ put in another US$5 billion, which was already having
a "calming effect" on Asian markets, said the papers. On Monday, too,
the ECB put in another 47.7 billion euros.
Whatever the final numbers turn out to be, it is a lot of new money in
a short period of time - more than at any time since the days
immediately following 9/11 in 2001. Lending by the New York Fed was so
vigorous that the fed funds rate fell to the lowest rate since 2004.
The purpose of all this lucre was said to be to provide "liquidity".
What is liquidity, you may wonder? Lo...it is the same cheap money that
got markets in trouble in the first place! It is as if they had opened
a new mortgage lender in Santa Ana, California, offering no-money-down,
teaser-rate, no-document adjustable rate mortgages.
If we're lucky, borrowers won't fall for it and the cops can get back
to work.
Bill Bonner
for The Daily Reckoning Australia
Editor's Note: Bill Bonner is the founder and editor of The Daily
Reckoning. He is also the author, with Addison Wiggin, of The Wall
Street Journal best seller Financial Reckoning Day: Surviving the Soft
Depression of the 21st Century (John Wiley & Sons).
Buy it Online at Angus & Robertson:
http://draustralia.c.topica.com/maahwqmabAHG6bJhLLIbafpTkF/
In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an
Epic Financial Crisis, they wield their sardonic brand of humor to
expose the nation for what it really is - an empire built on delusions.
Buy it Online at Angus & Robertson:
http://draustralia.c.topica.com/maahwqmabAHG7bJhLLIbafpTkF/
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Money Morning is designed for the serious investors who can't afford to
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