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Take This Away & the US Stock Market Crashes PDF Print E-mail
Written by Bill Bonner - Diary of a Rogue Economist & Chris Hunter   
Wednesday, 23 April 2014 10:53

Yesterday, we were explaining how the US empire and the Fed-induced credit bubble depend on each other. To make a long story short, after the 1970s there was not enough juice in the US economy to pay for a welfare state at home... and an imperial juggernaut all over the world. 

The solution? More credit. 

Borrowing by the private sector created some $33 trillion in excess (above the traditional level of debt to GDP) economic activity. It fueled sales... spending... jobs... corporate profits (heavily concentrated in the financial sector) and investment profits. 

All of these things gave voters the feeling they were making progress. And they gave the government tax revenues, which it badly needed. 

Debt grew. We've been over the numbers so often we don't need to repeat them. More important, the economy – and the US empire – became more and more dependent on debt just to continue doing business as usual. 

Debt no longer provided a big boost to economic growth; it was necessary just to stay in the same place. Take it away, the stock market crashes... and the economy goes into recession or depression. That was what happened in 2008-09. The private sector stopped taking on debt. And all Hell broke loose.

Hog Wild on Spending

The background: The Bush II Administration went hog wild on spending. It did so largely because it was the most overtly pro-empire US administration ever. 

Covertly, it was also the most pro-welfare state administration in history. Guns and butter – the Bush team liked them both. It never met a country in which it didn't want to meddle... never found a trap into which it didn't want to put its big foot... and never saw a spending bill it wanted to veto. Under cover of "security" spending, it blundered into the biggest deficits in history. 

After the 9/11 attacks, jingoism clouded budget discussions. "Security" depended on a strong economy... which depended on continuing credit expansion. 

Then... and again after the crisis of 2008-09... the credit expansion seemed in danger of coming to an end. But the Fed came to the rescue; and its chiefs were hailed as Scipios and Caesars. 

Alan Greenspan and Ben Bernanke got their mugs on the cover of TIME magazine, as though they were conquering heroes, rather than nerdy economists with dubious theories. 

In 1999, TIME labeled Greenspan, along with Robert Rubin and Larry Summers, "The Committee to Save the World." And later, The Atlantic labeled Bernanke "The Hero"... andTIME named him "Person of the Year." 

Their real contributions? 

They helped Americans go further into debt... which in turn helped unproductive industries keep their grip on a large part of the nation's resources.

More Rules

And now, the feds exert more and more control over the way money is spent... and invested.The Economist reports: 

Ever since Lehman Brothers went bankrupt in 2008 a common assumption has been that the crisis happened because the state surrendered control of finance to the market. The answer, it follows, must be more rules. 

The latest target is American housing, the source of the dodgy loans that brought down Lehman. Plans are afoot to set up a permanent public backstop to mortgage markets, with the government insuring 90% of losses in a crisis. 

Which might be comforting, except for two things. First, it is hard to see how entrenching state support will prevent excessive risk-taking. And, second, whatever was wrong with the American housing market, it was not lack of government: far from a free market, it was one of the most regulated industries in the world, funded by taxpayer subsidies and with lending decisions taken by the state. 

But... the more the state protected the system, the more likely it was that people in it would take risks with impunity. 

That danger was amply illustrated in 2007-08. Having pocketed the gains from state-underwritten risk-taking during the boom years, bankers presented the bill to taxpayers when the bubble went pop. Yet the lesson has not been learnt. Since 2008 there has been a mass of new rules, from America's unwieldy Dodd-Frank law to transaction taxes in Europe. 

Some steps to boost banks' capital and liquidity do make finance more self-reliant: America's banks face a tough new leverage ratio. But overall the urge to regulate and protect leaves an industry that depends too heavily on state support. 

Since investors know governments will usually bail out big financial firms, they let them borrow at lower rates than other businesses. America's mortgage giants, Fannie Mae and Freddie Mac, used a $120 billion funding subsidy to line shareholders' pockets for decades. 

The overall subsidy for banks is worth up to $110 billion in Britain and Japan, and $300 billion in the euro area, according to the IMF. At a total of $630 billion in the rich world, the distortion is bigger than Sweden's GDP – and more than the net profits of the 1,000 biggest banks. 

In many cases the rationale for the rules and the rescues has been to protect ordinary investors from the evils of finance. Yet the overall effect is to add ever more layers of state padding and distort risk-taking.

Predictably, the return on investment falls... and growth slows. As it does, current output is less able to keep up with debt service costs and current spending. The need for more credit increases. 

But now we hear the federal budget situation is improving. Tax receipts are up. Expenditures are down. Alas, this is a temporary phenomenon. Congressional Budget Office estimates show the federal deficit bottoming out this year and next – still at over $500 billion! – and then turning up again. 

This is good news for the empire... and for the credit-dependent economy. Debt can't grow unless someone is foolish enough to borrow. So, the Fed has become the borrower of last resort. It will continue to borrow to fund the empire... and its zombie industries... until they all blow up. 

Regards,

Bill

Editor's Note: The single best way to protect your portfolio from the collapse of the credit bubble Bill warns about is to buy gold. That's why we've identified five ultra-cheap gold playsto get you started. 

Market Insight:
The Real Bubble Is in Bonds 

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

When most folks think of bubbles they think of stocks... 

But the really dangerous bubble blowing up right now may be in the US bond market. 

The Fed wants low interest rates to spur the real estate market (through cheaper mortgages) and to spur the stock market (by making bonds a less attractive alternative). 

Low interest rates also allow Uncle Sam to borrow cheaply to keep funding its budget deficit. 

But these low interest rates are allowing the US corporate sector to gorge on debt. 

And I mean gorge... 

As the chart below shows, non-financial companies have borrowed the equivalent of 55% of US GDP.

DRE-042314-Final-CL-pic

Last year, total US corporate bond issuance was $1.3 trillion – higher than its pre-crisis levels. More important, the amount of junk bond issuance – basically, lending to companies with higher risk of default – rose to $336 billion. That is far in excess of pre-crisis levels. 

Who's lending all this money at ultra-low rates of return? 

US banks and other large financial institutions. 

What happens when rates start to rise again? 

We don't know exactly. But we don't expect it will be pretty. 

Unlike bonds, gold doesn't have any counterparty risk. If you're interested in owning gold at knock-down prices, don't forget to check out our special report on the gold market here. 

 
10 Stocks Crossing Below Book Value PDF Print E-mail
Written by Canada Stock Channel   
Tuesday, 22 April 2014 16:12

Unknown

Screen Shot 2014-04-22 at 4.12.39 PM

 

(1) BTO.CA Crosses Below Key Price/Book Valuation Level triggered: 10/04/2013

B2Gold is a gold production group with mining operations in Nicaragua and a portfolio of development and exploration assets in Colombia, Nambia, Nicaragua and Uruguay. Co. operates the Libertad Mine and the Limon Mine in Nicaragua. Co. owns or has a material interest in the Gramalote and Mocoa properties in Colombia, the Otjikoto property (Namibia) and the Bellavista property in Costa Rica. Co. also has options to earn an interest in a joint venture in Uruguay with Weeping Apple S.A. and two joint ventures in Nicaragua with Radius Gold Inc. and Calibre Mining Corp., respectively.

Screen Shot 2014-04-22 at 4.15.35 PM

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Faber: Frontier Markets vs. Emerging Markets PDF Print E-mail
Written by Marc Faber via ETF.com   
Tuesday, 22 April 2014 07:35

093750-marc-faberETF.com: Over the past year, frontier markets have done extremely well compared to emerging markets. What are your thoughts on frontier markets?

Marc Faber: I have to go back some time, because the expression "frontier markets" did not exist in the '80s or '90s. It's a more recent expression for markets and economies that haven't opened up yet and are more recently opening up and joining the global economy. So, what you would have called emerging markets are now called frontier markets. Some of them have colossal booms, and then also colossal declines.

Now, is Vietnam a frontier market or an emerging market? In my book, it's basically an emerging market. But it's ranked as a frontier market. And Mongolia is also a frontier market, as are most African markets.
Some of them have had good performance, because the zero percent interest-rate policy of the U.S. means that capital flows somewhere in some kind of assets. Frontier markets are relatively risky assets. Five years ago, all the German dentists were investing in Vietnam, and then it collapsed. More recently, they all wanted to buy Myanmar assets.

But investors must understand, yes, long term, they will grow, but there is an execution risk. I'm the chairman of a fund in Cambodia, and I'm not managing the fund, I'm just the chairman of the board, so I look after investors' interests, but the manager so far has really failed to perform particularly well, given the strong growth rate Cambodia has, for the simple reason that they invested money in numerous assets that didn't work out.

So this is not such a simple game. We always have to consider, optically China had macroeconomically the best growth anyone could imagine for the last 15 years. But I wonder who has made money in Chinese stocks. Not many people.

also....

Marc Faber Long China Via Hong Kong

Trouble in Asia will lead to higher Gold demand

 

 
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Greg Weldon
17 April 2014 ~ Michael Campbell's Commentary Service

We are pleased to introduce a new feature to the Inside Edge with the first of a regular contribution from Greg Weldon. Greg's video and...   Read more...

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