The Rude Awakening
Laguna Beach, California
Tuesday, August 21, 2007
------------------------- - A crisis is still a crisis: $200 billion of bad news,
- Lessons from the Great Depression and times of war,
- Three easy ways to find trouble for your wallet and
more…
------------------------- Eric Fry, reporting from Laguna Beach, California… From the highs of July 19th to the lows of August 16th, the Dow Jones Industrial Average plummeted more than 1,500 points. But over the last three trading days, the Dow has rebounded more than 600 points. What do these gyrations portend? The beginning of the end of an old bull market, or the end of the beginning of a new bull market? Your editors here at the Rude Awakening do not know the answers to these questions. We only know that our fear exceeds our greed. A 600-point rebound does not make bad news good; it does not make the national credit crisis any less of a crisis. Mortgages will continue to go bust, no matter whether the Dow trades near 14,000 or 13,000…or 3,000. But most investors - especially Wall Street's professional investors - would like to believe that the worst has passed. They would like to believe that the Federal Reserve can cure whatever ails the U.S. economy. They would like to believe that the $200 billion that the Fed has pumped into the U.S. banking system - along with a half-percent interest rate cut last Friday - will provide enough "liquidity" to cause normal lending practices to resume. We would like to believe these happy thoughts also…but we don't. Instead, we believe that the Fed finds itself between a hard spot and a granite façade. No matter what the Fed does, borrowers will continue to default on the home loans they never should have obtained in the first place. And no matter what the Fed does, borrowing money will become an increasingly costly and difficult endeavor. We would conclude, therefore, that no matter what the Fed does, share prices on Wall Street will favor the downside over the upside. Enjoy the rally, but don't expect it to last very long. In the column below, Bill Bonner explains why most investors expect the best, rather than prepare for the worst. Bill shared these thoughts at last month's "Agora Wealth Symposium" in Vancouver Canada. ------- Mayer's Special Situations Report -------- "The Biggest Resource Breakthrough Since the 'Beaumont Miracle' of 1901" 64 publicly traded companies are already deeply invested… insiders are already raking in as much as $205,421 per day on the shares… But only one of these cutting-edge companies offers you the "secret wealth advantage" I reveal below… I urge you act quickly. I'll even front you the first $500… but only if I hear back from you by midnight Sept. 4…Details Here -------------------------------------------------- Looking for Trouble
By Bill Bonner You know, gloom and doom ain't what it used to be. Often I think about the good old days - the 50s the 60s; they seemed like good old days to me. And part of the reason that they were such good old days is that, back then, we had a lot of trouble and people appreciated it. Do you all remember the threat of nuclear war? Well I do. I remember as a child, they would have a school alarm and we would crawl under our desks. And I don't know what that was supposed to achieve, but it was kind of fun. And I remember watching Nikita Khrushchev on television. And he stood in the United Nations, took his shoe off, pounded on the podium, and said, "We will burry you," and we thought he meant it. Why shouldn't we? I mean those were times that were very different from today. We had real trouble. At least we thought we had real trouble. Remember the Cuban missile crisis? It's only now that we're beginning to realize how real that threat was. I mean, those guys were on the edge of setting off a nuclear war. Che Guevara wanted a nuclear war. He wanted some terrifying event, some test of real war between capitalism and communism. Imagine if one of those guys had had a stomach ache that day, or an argument with his wife. It might have turned out very, very differently. Back then, the apocalypse business was in a bull market. But the trouble with this modern world is there's not enough trouble in it. It's really an amazing world where you don't have to worry about money. There's always some money. You don't have to worry about jobs. We've had full employment for about as long as I can remember. Had a little slump in the 70s, but it wasn't a big thing. This is so different from the lives of our parents. Many of you, some of our grandparents even, have lived through. My father lived in Denora Pennsylvania. These were poor Irish immigrants who came to America and then my father was born in 1921 and in 1923 his father dies. He's an orphan at the age of two-years-old. And he describes his childhood in the early 20s. They're picking up coal that had fallen out of coal trucks. They're digging up potatoes that farmers had missed. This is a hard life. It's nothing like the life that I have lead, and that most of us have lead. And then when he's ten years old what happens? The Great Depression comes. One out of every four workers in America is out of a job. Ten thousand banks went bust. My grandfather on my mother's side had all of his money in a bank in Baltimore, Maryland. The bank went bust and he was broke. He had an office on the 10th floor of the Maryland National Bank Business. He said a lot of his friends committed suicide. They jumped off the building. And my father had a knack for being in the wrong place at the wrong time. He lives through this period being an orphan, he goes through the Great Depression, then he enlists in the army in 1939. Boy was he lucky, he said. They assigned him the best duty in the whole US army, they sent him to Hawaii. And he was there, he was recovering from a hangover on December the 7th 1941 when these Japanese planes came over. My father's generation knew trouble. They appreciated trouble. What'd they do? They saved their money; they took care. They were careful; they had to be. Savings rate in the USA were always 10% to 12%, up until the 1990s. And these people also believed in owning their own houses. I remember my parents very vividly. You know? They had a mortgage, something like $5,000 dollars, and they were so happy when they paid it off. My father could lose his job if he wanted and he'd still have a place to live. It was a big deal to them. Back through that whole period, the portion of the average home owned by the average family was something like 70%. Now its down to 52%. Now the average person barely owns half of his house. And people don't care about it any more. It doesn't mean anything to them. Owning a home and paying of a mortgage doesn't have the same emotional content it once had. People don't appreciate trouble any more. That's my point. The 1980s transformed the country. Because that was the decade in which the people who had grown up with The Depression and the War gave power to the next generation. The next generation - my generation - came and took over, and we had different ideas. Then the Republican party transformed itself under Regan and the Neo Cons, they took up the idea that deficits don't matter, that debt doesn't matter. And all of a sudden, there was no longer a major political party in America opposed to spending too much money. That was a major, major change that people really, really, don't understand. There was no longer a voice of fiscal conservatism, not a significant voice. And after this point, America became the luckiest nation in the world. It had no major threat, and it had a money, pieces of paper, with no backing in gold, that it could hand out all over the world, and people would give it valuable goods and services. It was just an amazing, amazing thing. But as I've written in The Daily Reckoning, there's nothing like a long run of good luck to destroy a person. And America has had a long run. And when these veterans left, these WWII veterans, these Great Depression veterans, the whole country was transformed and taken over by people like me, with no real appreciation for trouble. Now I saw firsthand our own industry transform. I'm talking about the financial newsletter industry. When I started in 1978, it was a very different industry dominated by a different class of people doing different things. These guys often came from a religious tradition. Many of them were hard religious conservatives, and these people had a vision, really a vision of apocalypse, of hell and damnation. They said look, "You've got to watch out." Their headlines were always something like, "1929 All Over Again," or "Here Comes the Great Depression." And those things meant something to people, because people still had it in their minds, they had it in their instincts, and in their genes. They knew that they were trouble.
But now it's entirely it's entirely different; it's a new world. The dominant emotion among investors is no longer that fear - the fear that we'll have another depression, that we'll have another crash. Those things don't mean anything to people. They've seen a crash. We had a crash in '87, nothing to worry about. No problem. Depression? Forget it, we had a recession in the year 2001. It was nothing, people kept on spending money. People had no idea what a depression or recession really was. And now, I think I mentioned this yesterday, if you look at the magazine covers Fortune magazine, there's a cover that says, "the greatest economic boom ever" that's what we're living through. The greatest-which is true-and all these headlines and the magazines: retire rich. The spirit, the zeitgeist of our age is completely, completely, transformed.
But, my point today, is that when you don't really appreciate trouble, you go looking for it. You have to look for it. And sooner or later you find it. And what is the sub-prime adjustable rate mortgage? It is trouble. You're just looking for trouble. You're signing a contract that says, you're payments are going to automatically be adjusted up to a higher rate than you can afford. I mean this is just pure trouble. And what is a hedge fund/ Where you pay "2 and 20." It is just trouble. You're just asking for it. And think about the enhanced leveraged credit hedge fund that went broke, that was one of those Bear Sterns funds. Imagine, imagine trying to sell that fund to people who lived through the 1930s. "Enhanced, leveraged, credit." Good luck. The idea of it is just mind-boggling. Anyway, what about the 500 trillion dollar derivative market; I mean if you're looking for trouble you're going to find some there, sooner or later. And the $8 billion dollar trade deficit. There's plenty of trouble there waiting to happen. And I think I mentioned this yesterday, I was reading the paper, and they're building condominiums in Florida in Miami. 20,000 new condominiums are being built in a place where they already have 23,000 on the market and the whole thing is just unbelievable. People do not think there's going to be any real trouble. And more money is going into hedge funds than ever before, despite the fact that if anybody troubles to read the paper, you can see that the hedge funds have serious, serious, unknown problems. My point is that if you don't appreciate trouble, properly, you will go looking for it. And if you go looking for it, you will sooner or later find it. [Joel's Note: If you are a thrill-seeker wishing to hunt down trouble for the wallet, we suggest a few ways you can achieve your goal: 1. Retain an unwavering faith in dollars built on promises,
2. Borrow more than you can repay and, whatever you do,
3. Avoid fortifying your portfolio with gold. Non-thrill seekers can start the boring path to prosperity by reading our latest Wealth Insurance Report. It's a way to invest in zero-downside gold and something anyone looking for trouble should definitely avoid. Read on here: Zero-Downside Gold: A Special Wealth Insurance Report ----- Resource Trader Alert Special Announcement ----- Get Ready to Take Profits in as Little as 2 Days… Unlock the Market's "Secret Logic" That Could Double Every Dollar Invested Before the End of 2007. …and this is a secret logic anyone can learn. You don't need an Ivy League education to do this. And "getting" how this works also isn't some kind of inborn skill. It is, in fact, something much easier. See For Yourself Right Here. ---------------------------------------------- Rude Endnote: Will trouble find a home in the crisis-ridden markets this day? Will the rebound continue? Catch all the action from our Baltimore desk when Addison and the lads fire out the 5 in a few hours. Cheers, Joel Bowman
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