The Rude Awakening
Edinburgh, Scotland
Wednesday, May 9, 2007 ------------------------- - Elbowing your way into the Chinese bubble,
- Cash: a poor substitute for debt,
- Too many tattoos, not enough credit and six days left for half off…
------------------------- Temporarily absent from the Laguna Beach rental market, Joel Bowman reports from Britain… "So you mustn't be a surfer?" guessed the teller who was assisting in closing our bank account in California last week. "An avid surfer, actually," we replied. "Then you are surely a golfer too?" continued our inquisitive teller.
"No. Not at all." With a perplexed look on her face, our teller finally questioned, "So, why are you moving to Scotland again?" It is true, Rude reader, that we have left the land of excess for the home of Loch Ness. It is not that we enjoy haggis any more than tacos or wee scotch nips more than mojitos. Our recent relocation has nothing to do with a preference for kilts over mini-skirts or U.K. Brits over O.C. brats either. The reason behind this seemingly counter-intuitive migration is simple: debt. More precisely, it is our lack of documented history of debt that has squeezed us from the Laguna Beach rental market. Foolishly, we had relied in the past too heavily on the money we actually had in the bank, rather than the money we wished we had in our bank. Our lack of borrowing simply to repay, coupled with the fact that we have lived abroad for many years, has exposed us to the equivalent of financial leprosy: no credit. And, as millions of debt-burdened Americans know too well, no credit means no home. This is not a gripe, we assure you, for the peripatetic at heart does not need a great deal of persuasion to set him off on the road again. In fact, we would dutifully surrender the privilege of forking over a monthly rent payment for the burden of a traveler's life any day that ends with a "Y." We certainly don't blame anyone for being a bit leery to a sub-prime renter, either. In lieu of anything respectable to lodge in the credit report section of the rental application, we resorted to what we thought was the next best thing…actual money. On a one year lease, your cash-strapped editor offered to pay up to 6-months in advance, including a double security deposit. No dice. There is no substitute for debt, it would seem…not even cash. But, surprisingly, it is the excess of debt and the lack of cash that seems to be leading us all to ruin. Bill Bonner ponders this and more below… --- Only FIVE Days Left --- 600% in 6 Months, Guaranteed Or You Pay Nothing Today you have an exclusive chance to grab 6 free months of Agora Financial's best performing options service. That's a $500 value you can have for nothing. There's One Catch: You MUST Respond Before Midnight on May 14th…Learn How Right Here --------------------------- Sow's Ears From Silk Purses
By Bill Bonner "The horror! The horror!"
- Heart of Darkness, Joseph Conrad The trouble with vacations is that they are much too serious. Instead of war, depression, bankruptcy, and hyperinflation, we are dealing with things where the stakes are really high. Instead of reflecting on trade deficits and subprime credit markets, we have to think about things we actually know something about, and issues over which we might actually have some influence. One daughter has a boyfriend covered with an exterior of colorful tattoos, and an interior as dull as airplane cutlery. Another daughter has a boyfriend who seems gentlemanly and ambitious. The latter is almost too good to be true, while the former is almost too bad to be false. One son wobbles between medical school in the United States, and business school in France. The other is wondering whether to pursue a career as a bank manager…or a bank robber. The point is, every decision is important; and every bit of parental advice has to be carefully considered…and judiciously administered. Even good advice is likely to be taken badly. The counselor has to be on guard; like a zoologist giving antibiotics to a sick polar bear, he is lucky to avoid having his limbs torn off. So for us, it is a great joy to be back from our vacation, back in work-a-day world, where we can get some rest…and have a good laugh or two. We noticed that the outrageous trends that were going on when we left, have become even more outrageous. Seeing a disaster coming…investors are rushing to get in on it before it is too late. China is clearly in a bubble. Shanghai stocks are up 250% since 2005 - and 35% this year alone. Still, investors are so eager to get in at these prices - while they can still get hurt - that they take up Chinese bank IPOs at twice the PE ratios of banks in developed countries. And what do they actually get when they buy a share? What exactly is a bank chartered and regulated by communists? They haven't a clue. But so much foreign money is elbowing its way into China that, in 2007, the central bankers are getting bruised just trying to keep up with it. China is expected to accumulate more than half a trillion dollars in foreign exchange reserves - twice as much as last year. How does it get that money? It prints up currency of its own to buy the foreign currency from businessmen and investors - who are selling Chinese made goods (including stock certificates) to foreigners at a breakneck pace. Everywhere, extravagant amounts of cash are flooding into overpriced investments in absurd places. Local central banks are printing money at a furious pace (lifting the great global tide of liquidity) to keep from increasing the value of their own currencies. This freshly minted cash comes into the world like a newborn baby - ready to claim its fair share of resources all its life while being a burden in the long run; but at the crib, it's a joy to everyone. And now we enter the dark heart of this whole cockamamie tale. China is not the only place investors can get themselves into trouble. More than a third of the money that trades hands on the Brazilian stock exchange comes from overseas investors. Brazil has always been the 'country of the future,' but six years ago, Brazil's future was so dismal it looked like it would default on foreign loans. Now, foreigners give it so much money it doesn't know what to do with it all. At the present rate, Brazil's dollar reserves could go up 100% this year. Meanwhile, who would have thought that investors would scramble to buy Hugo Chavez's paper? But, then again, why wouldn't they? If they will buy banking stocks in a country organized on Marxist-Leninist principles, why not the slippery bonds of a Latin American strong man who professes to be a follower of Trotsky? Investors not only take up the Venezuelan bonds happily, they do so at less than 7% yield…barely 200 basis points more than the sovereign debt of the United States of America. Officially, the Venezuelan Bolivar is quoted at 2,150 to the dollar. On the black market it trades for 3,750 to one. And it's sinking fast - down 15% so far this year. No wonder. The money supply is increasing at 65% per year…while the inflation rate is, officially, 20%. And Chavez is still increasing government spending by 50% a year. But Venezuela has oil; and it is to the black goo, not to Hugo Chavez, that investors look for security. But just as investors often search for ways to turn a silk purse into a sow's ear, so do governments more than occasionally strive to turn their good fortune into national catastrophe. Caracas seems to be doing so in classic manner, spending more than even his country's oil revenues will permit. What will happen when the Venezuelan treasury runs out of cash and credit? Will Hugo Chavez cinch up the nation's belt in order to honor his commitments to the foreign capitalists he despises? Two months ago, Ecuador threatened to default on its bonds; Chavez cheered it on. Even long-dated dollar-denominated bonds issued by Iraq, trade at yields less than 10%. In that heart of darkness, too, investors are counting on oil to make sure they get their money. The trouble is, whether in the jungles of South America or in the deserts of the Middle East, the politicians above the ground can destroy a nation's credit faster than the oil below ground can salve it. Back in the U.S.A., one of the good things investors are intent upon getting too much of, is in Las Vegas. 'Excess' is an old word, but it seems to have been invented in anticipation of modern Las Vegas. Nothing about the city is modest or restrained. Over on The Strip, Goldman Sachs (NYSE:GS) is buying Carl Icahn's four casinos…for $1.3 billion. The city had a total of 35,000 hotel rooms in the 1970s, which seemed like more than enough to us. Now, it has five times as many - 151,000. But 'too much,' as we noted earlier, has dropped from the English vocabulary in Nevada, and perhaps in the rest of the world too. The Venetian alone is adding 3,200 new rooms. And the owners of the old Stardust Casino judged it too small, so they blew the place up last month to build a new development, Echelon Place, with more than 5,000 rooms. Meanwhile, MGM's new City Center development is supposed to cost $7 billion, making it the most expensive development in Las Vegas history. Everywhere you look, it is the same. Intrepid investors push deeper and deeper into the jungle…exploring… searching…reaching…for some way to ruin themselves in style. [Joel's Note: If you wish to read more of Bill Bonner's unique reflections on this ever-perplexing world, be sure to visit www.dailyreckoning.com . ---------------------------- Did You Notice…? Banking on Energy
By Addison Wiggin We're big fans of a couple of phrases over at The Daily Reckoning: "I told you so" - which doesn't happen nearly often enough, and "if only." The latter we find ourselves lamenting all the time…"if only" Nixon hadn't cut the lifeline binding U.S. dollars directly to gold, maybe greenbacks wouldn't look so anemic today. Or "if only" America hadn't burned up all her oil, maybe we wouldn't face the prospect of $5 gasoline this summer. The days of the dollar being backed by more than a wink and a smile, of course, are long gone. Meanwhile, world currencies with an ipso facto energy "backing" are doing very nicely…even as the purchasing power of the U.S. dollar collapses. Take the British Pound.Lots of factors sent it soaring. But with energy in short supply, England's vast share of the North Sea oil riches look almost as good as the gold-backed greenbacks of yesteryear. The same goes for Norway's Krone… Canadian dollars, backed by Alberta fields and oil sands… even Australian dollars, backed by vast stockpiles of coal, gas, and - of course - uranium. It came as no surprise to us that the world's biggest investors have hedged their money by shifting cash into these foreign "energy-backed" currencies. It's hardly the newest trick in the book. Or the craziest. Though, until recently, it's been relatively tough to do. But that's changed, now that our pals over at Everbank have helped us pull together a special kind of new FDIC-insured deposit account where you can automatically hedge any U.S. dollars you put in, simply by spreading them evenly - and automatically - between all four of those politically stable, energy-centric currencies I just mentioned. They call it the "World EnergySM Index CD." And given the way all four of these currencies have soared lately against the greenback, it might just be the best and easiest way available to both hedge against a falling dollar and profit from a rise in oil, all at the same time. This World EnergySM Index CD is completely new. It's not even posted yet on Everbank's customer website. In fact, they've opted to give Agora Financial readers first crack at this, before they open it up to the rest of the market. If you're interested in finding out more, the only way to get info is to either email them at worldmarkets@everbank.com or call 800-926-4922. Just be sure to mention you read about it here in the Agora Financial when you write or call. --- Capital & Crisis Investment Report --- ALERT: You could be missing out on lucrative 50% average gains a year if you're not following the… Three Secret "Sweathog" Stratagies To avoid missing out on these spectacular gains, let me show you three secret sweathog investing strategies that a small circle of tuned-in investors are quietly using to build their fortunes. The full report is right here. | 
