This is not prosperity, it’s larceny
By
Bill Bonner Apr 26, 2011
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This is getting interesting. Two major central banks are tightening – China and the European Central Bank (ECB). But nobody seems to care. These central banks are warning investors to sell their high-risk investments. Instead, gold hits new records! And oil keeps rising. Either investors don’t believe China and the ECB are serious... or they’re counting on the USA to come through again – with more money and more credit.
Many mainstream analysts are now looking for gold at $1,500 – and this week they’ve got it. But watch out, they say. Just wait until the latest batch of quantitative easing (QE2) ends! They may have a point. The natural tendency of this market is towards contraction. After a half-century of credit expansion, it’s time to settle debts... to recognise bad investments and to write off mistakes. That’s what’s happening in the housing sector. That’s why about 12 million Americans don’t have jobs. But that’s the way economies work. They “breathe out and breathe in”, says old-timer Richard Russell. Unless we’re wrong, the markets are holding their breath. They’re waiting to see what effect all this pure oxygen – coming from the Fed – will have.
Why are the Feds so desperate to avoid a correction? It’s one part vanity, one part necessity and one part cupidity. In their vanity, the Feds think they can command the economy to do as they want. They think their central planning can succeed, even though central planning by others has been universally disastrous.
But there’s more. They are running what is little better than a Ponzi scheme. That’s where the cupidity comes in. We were delighted to see that Christopher Caldwell, writing in the Financial Times no less, sees it as we do: “The story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity, but luxury.”
We would put it a little differently. What they have been enjoying is not prosperity, but larceny. They’ve stolen from those who can’t vote. Many haven’t even been born. A study by the Urban Institute shows that the Medicare system pays out in ‘benefits’ three times what it collects in revenues. This kind of thing adds debt fast. Pundit Mary Meeker calculates total unfunded liabilities of the US government at $75trn already. Will voters and politicians ‘come to their senses’ and do the right thing? We doubt it. As soon as the older generation realises they are going to lose benefits, the jig will be up.
The zombies won’t vote for spending cuts. Most likely they will vote themselves into an economic catastrophe. That’s the necessity of it. If they want to keep this scheme going, they have to borrow. And if they have to borrow, they have to keep credit easy and cash plentiful.
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Buenos Aires is beautiful. The city is booming, too. Strong agricultural prices have done what they always do in Argentina – they’ve set off a boom. “Property prices are up about 30% over the last three years,” says our BA-based colleague, Rob Marstrand. “But this is such a funny place. I love living here, because you see everything. If not in the present, certainly in the past... or the future. Booms, busts, corruption, inflation – everything.
“Only about 6% of properties are sold with mortgages. So this is a real boom – people are paying cash. But, where does this cash come from? Much of it comes from the bull market in farm products. But there is probably a lot of money coming from the government too. The inflation rate is about 25%. People want to protect themselves. And here, they do it by buying real estate. Americans might want to think about it too.”
Prices are down 30% nationwide in the US. In Florida, Nevada, and most of California, they’re half off. Even if they go down a bit more, there are some very good deals available now. A friend of ours is able to buy apartment buildings for little more than five times rent income. If upkeep and taxes take half of that, that still gives him a 10% return. But it could be much better. Suppose he takes out a 30-year, fixed-rate mortgage. Now, suppose inflation goes up. Every percentage point that consumer prices rise is another percentage point of yield for a fully-mortgaged investor.
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Rob is also in charge of our Family Office investments. “I don’t see anyway that they can unwind all this debt and spending without causing even more problems,” he says. Investors might get some protection from real estate or stocks. But the best protection is gold. “But we’re still in a correction,” Rob continues. “It wouldn’t be surprising to see gold fall – along with everything else – when this round of QE ends. But people are now catching on. When the economy worsens, they expect the Feds to add more stimulus... or lower rates... or more QE. So, they know that over the long run, the effect will probably be to undermine the dollar. I wouldn’t be at all surprised to see gold down 15% in the next sell-off. But when the Feds step in with more spending, gold will be the clear winner. We already own a lot of gold. I feel like I want to buy more of it...”
Bill’s new book, Dice Have No Memory, is out now. Read an extract from it at www.moneyweek.com/dice.
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