The Battle Between Greed and Fear
London, England
Monday, February 11, 2008

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*** The Year of the Rat - and that's a good sign?…what the Giants winning the Superbowl has to do with our chance of a recession…

*** The fierce battle rages on…commodities and gold continue to hit new highs…

*** Can buying a house bankrupt you?… In loco parentis…and more!

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It's the Year of the Rat, dear reader. Cheer up.

"The Year of the Rat is supposed to be good for business…good for money…that's what I heard."

We were walking down the street in Paris' Chinatown. It was Friday, the second day of the Year of the Rat. Out in the street, a young girl in a gaudy costume hammered on a wooden drum. Beside her, two Chinese dragons undulated…stood up on their hind feet (the boy in front jumped up onto the bent legs of the boy behind him). Suddenly, firecrackers went off…a series of them…that lasted for about two or three minutes.

"This is the section of the town known as Belleville. Elle magazine calls it a 'babel town' because there are so many different nationalities speaking so many different tongues. We heard Chinese, of course…but also Arabic, along with dozens of other languages from Asia, Africa and India that we couldn't recognize.

"This is the area that Edith Piaf came from," a colleague explained. "It was a working-class French area. Then the Arabs came…and then the Africans…and now the Chinese."

A minute or two later, the two dragons came into the restaurant where we were having lunch.

"What are they doing?" we asked the Chinese waiter.

"They're probably hungry," he replied.

Against the good omen from the Rats is a bad one from the Giants. The Giants won the Superbowl…something they had not since the early '90s. The last time they did so, the U.S. economy went into recession soon after.

Then, there is the January Effect. As January goes, so goes the year, say the old timers.

If so, 2008, is going to be bad. In technical market terms: this January was a stinker.

On the other hand, copper is going up! Copper is often said to be "the metal with a Ph.D. in economics," because it tends to be a good advance indicator. Industries planning to build more refrigerators, more houses, or more airplanes buy copper. The price of copper rises…reflecting more economic activity underway. Copper is up 13% so far this year, after a steep tumble in October and November of last year. Is copper telling us that the worst is over?

Commodities, generally, are going up. The CRB index hit a new record high at 518 last week. Gold is near its all time high too. But there is still time to get in on our Trade of the Decade - especially since we think the price still has quite a ways to go. Find out how you can pad your portfolio with our favorite yellow metal - for just a penny per ounce. Click on the link below:

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And then, there's the bond market. What story are bonds telling? They went up in the fall, signaling a coming business slowdown. But lately, they've been going down - a sign of inflation and/or growth.

No, dear reader, we don't know which way it is going to go. There is a fierce battle raging - between inflation and deflation…between Mr. Market and the market manipulators…between greed and fear…between growth and recession.

In short, Boom…or Bust? Rats or Giants?

"Yes" is our answer. We're likely to see them all. Most likely the market manipulators won't be able to save the boom, because it has always been fraudulent and hollow. But they are god's own gift to the gold market. The more inflation they pump into the system to try to revive the boom, the more gold rises.

Our guess: At best, stock prices…house prices…buyouts…and Wall Street bonuses will stagnate. At worst, they will all go down. U.S. stock prices are down about 9% so far this year. House prices are said to be down about 10% from their top. And the financial industry is still reeling from the subprime debt crisis…which has leaked into all forms of debt - home equity, credit card, corporate, buyout, SIV…you name it. Last week, the Financial Times estimated losses from subprime alone at $400 billion. Banks and grand investment houses are quaking. Two of America's biggest had to be bailed out by foreigners. And the news this morning is that one German bank had to be bailed out with $7 billion.

Meanwhile, commodities and gold continue to hit new highs.

Expect corrections, reverses and surprises along the way…but the basic pattern is likely to hold for many months: inflation in commodities and gold….deflation in housing and stocks.

Still, the most important thing is to stay out of the crossfire. In any given month, the battle could go either way. Any day now, we could have a buoyant rally in stocks…and a breathtaking correction in gold. Or, stocks could crash…and gold could shoot over the $1,000 mark. Watch out. Hold gold and cash. Be happy.

*** While the battle between greed and fear rages in the markets another battle - for the hearts and minds of the public - is the one that will actually determine the outcome. 

We opened up our laptop computer this morning and got a headline on the Compuserve homepage:  "Can buying a house bankrupt you?"

A year ago, we would never have seen such a headline.  Instead, then, the Internet was alive with stories of how much property was going up…why it would go up forever…and how the reader could buy a house with no money down.  "No credit? No problem!" said the ads.

Now, the average lumpenhouseholder has come to see buying a house as a threat.  If you're not careful, says the accompanying article, a house can turn into a "money pit."

Meanwhile, the whole world has its hopes pinned on Americans.  The worldwide boom of the last 10 years had a single, primary progenitor - the American consumer.  Thanks to his willingness to spend money he didn't have on things he didn't need…the whole world economy shifted into high gear.  Miners in Western Australia dug ore out of the ground, using tractors built in Japan; then, they shipped the dirt to China on ships built in Korea. 

The Chinese took the ore, heated it up, smelted it, rolled it, pressed it…and then put the pieces together to create finished products - which they sold to Americans on credit.

Everything seemed to work fine until prices of American houses began to soften.  Suddenly, the U.S.-based consumer had nothing to consume with.  He had no more equity to "take out" of his house.  Instead, lenders were asking him to put it back in!

Already, stock markets all over the world have registered their alarm.  While U.S. stocks are down 9%, those in Europe and Asia are down 12%…14% …or more.  The Chinese stock market hit a high over 6,000 in October.  Now, it's around 4,600, and it looks remarkably similar to the Nasdaq on its way down.  If it continues to follow the Nasdaq path, it will settle under 2,000 sometime next year.

"The Thrifty American Becomes A Nightmare for Global Economy," says the New York Times. 

"The very global interconnections that many thought might spare the United States now appear to be working in reverse:  American consumers will pull back from their exuberant spending, cooling demand for goods worldwide, dragging down the global economy.  This could in turn stifle foreign demand for American goods."

And so, the whole world turns its weary eyes to the American consumer.  Will he or won't he?  Can he or can he not? 

The U.S. consumer, they note, is famously big hearted…and small brained.  He has been willing to ruin himself in order to boost up the global economy…putting himself deeper and deeper into debt, so the Chinese can build factories and put peasants to work on assembly lines.  But now, the poor American…the world's buyer of first and last resort…the selfless taker of all the world's junk, gadgets and gaudy luxuries…has reached the end of his rope.   With no alternative left to him, he seems to be coming to his senses.

*** This past week, Elizabeth was doing the worst kind of parenting. "In loco parentis" is how the law describes it.  Edward's class at school studies German.  It has worked out a regular exchange with a German school.  One week per year, Edward goes to live with a German family.  Another week, a German student comes to live with us.

Last week, we hosted - or, we should say Elizabeth hosted; your editor spent much of the week working in London - a 15 year-old girl named Catarina.  She was a delightful girl…pretty and very well mannered. 

The idea was to speak French with her so she would be more at home with the language.  But her French was not nearly as good as her English.  Almost all the German students prefer to use English; so we spoke English at home.

The problem with being the substitute parent of a teenager is that you know you are up against an energetic and resourceful opponent, but you don't know exactly what tricks he'll use against you.   Your own children have grown up right under your own eyes.  You know what they'll likely get up to…and you know their weaknesses; so you can generally devise a strategy to deal with them.  But someone else's teenager is a mystery.  You have to wait…and be on constant alert.

All went well, until Friday.  Edward is only 14; he is not yet interested in girls.  It was his older brother, Henry, 17, who caught Catarina's eye.  Edward would chatter away - about electronic games and movies.  Catarina politely listened.  But when Henry entered the room, her eyes widened and she waited for Henry to speak.

From Henry's point-of-view Catarina was too young.  He has his own friends and his own weekend agenda.  He was not interested in Edward's exchange student. 

Then…on Friday evening…a group of young people came to the door.

"Oh…they are my friends from Germany…we are going out to Tom's house."

The friends were one girl, who looked a bit older than Catarina, and three tall boys - all with blond hair…one with an earring - who looked as though they might be as older Henry and ready to take command of a Panzer.  They were bigger than the French boys. 

They seemed more relaxed…and more aggressive.  French boys - at least those in our neighborhood - would stand stiffly and carefully introduce themselves, shaking hands with the parents.  These boys didn't know what to do.  They were more like American teenagers, polite, but less formal than the French.  The girl was polite too.  But she was dressed in black, with silver chains looping around her waist. 

"Are Tom's parents at home?" asked Elizabeth.

"Ya they are at home," said one of the boys. 

"Good, then I'll talk to Tom's mother just to make sure it is all right."

"Uh…we don't have the number of the phone."

"Well, where do they live…what's the address?"

"Uh…we don't know exactly…we know where it is…not too far from here…but we don't know the address."

"Well, when you get there…please ask Tom's mother to call me…"

"Ya…okay."

It was an hour later.  Still no call. 

"We can't let her go out with a group of older boys…and not know where she is…or what is going on," said Elizabeth.  "We're responsible for her while she's here in Paris.  We shouldn't have let her go."

"But she's 15 years old…I'm sure it's all right," said the head of the household, with a feigned sense of confidence.

"But we don't know…we don't even know who Tom is…you can't just let 15-year-old girls do what they want…not in a big city like this.  Who knows what they'll get up to?  And we don't know her.  She seems nice, but we don't really know anything about her."

Eventually, we tracked her down by cellphone.

"Yes, I'm sorry I didn't call," she explained.  "But Tom's mother is not here."

"Well, then you'd better come home," said Elizabeth.

A half hour later the doorbell rang.  She was home. 

"I hope I didn't cause any trouble," she said.

"We were probably worried about nothing.  She's a very sweet girl," Elizabeth concluded.  "But you never know."

Until tomorrow,

Bill Bonner
The Daily Reckoning

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The Daily Reckoning PRESENTS: This week, the Mighty Mogambo looks at the actual employment numbers. And guess what? It turns out that government spending really is the economy. Read on…

OIL CRISIS RUSH HOUR
by The Mogambo Guru

I get a real laugh out of people saying that oil will go down in price, as it is ludicrous to even think so, particularly since supply is dropping, per a CommodityOnline.com report that, "Fifty-four of the top 65 oil-producing countries have declining production rates".

And demand for oil will be going up, as I gather from Doug Low, writing in "The Oil Drum: Europe", who extrapolates that, "In the next 11 years we will consume more than we have in our entire history. So in order to double the size of our economy, which we will do at 6% growth in 11 years, we will require more resources than we have required during our entire history, including electricity." And all of that takes oil. Lots of it. Lots and lots and lots of it.

And it is not only oil that is going up in price, but everything is going up, as an article in the Financial Times quotes David Mackay of Kellogg, the breakfast cereal conglomerate, that inflation is really making them wince, as, "There's really nothing that's gone down: wheat, edible oils, corn, packaging, the price of oil and diesel - everything is up anywhere between 19 per cent and 30 per cent."

This is due to, as Martin Hutchinson of GreatConservatives.com and writing The Bear's Lair column at PrudentBear.com implies, the Federal Reserve and the federal government (except Ron Paul) are a bunch of morons, and that, "The final report card can now be written on the fiscal management of the Bush administration, the primarily Republican Congresses since 2001 and the Federal Reserve Chairmen of the period. One's only regret in writing it is that no grade lower than F has been discovered."

And part of that egregious mismanagement is that not only are prices rising in a terrible inflation, thanks to the damnable Federal Reserve creating so much excess money and credit, but you soon won't even have a job to pay the higher prices! Anthony Cherniawski of the Practical Investor newsletter has taken a look at the recent employment report, and notes that it, surprisingly, "Omitted from the report was the CED Birth/Death Model, which normally puts a positive spin on the employment report. Not this time! According to this model, all sectors of the economy suffered losses, with the grand total 378,000 jobs lost in January." Yikes!

And while we are here, let's look at the actual employment numbers, which shows that the number of people employed is 146.248 million, while last year at this time the number of employed was 145.915 million, a gain of a lousy 333,000 jobs in a year! Hahaha! Hell, spooky Homeland Security and all those noxious airport security people probably added that many jobs! Hahaha! I was right; government spending IS the economy!

And the unemployed are jobless for longer periods, too, as the average duration of unemployment went up to 17.5 weeks, up 6% from the 16.5 weeks duration a year ago!

But this was not about jobs, but about the oil we need to get to our stupid jobs in our cars, radio blasting and passing slower cars driven by people who are only going the speed limit and who somehow think speed limits at rush hour are "laws" or something. And as to oil, we read of Gary Dorsch, of Global Money Trends Newsletter, citing Milton Freidman and Anna Swartz, who famously said, "Inflation is always and everywhere a monetary phenomenon. As the government increases the rate at which it prints money, the result is too much money chasing too few goods and services. Higher wages don't cause inflation, and the whopping oil price increases between 1973 and 1980 didn't cause the stagflation - a stagnant economy with rising inflation. Rather, the oil price hikes were the form inflation took."

And if you want to see the form inflation took from the perspective of the Japanese, the Agora Financial's 5-Minute Forecast reports that, "Japan is the world's largest holder of U.S. Treasuries. Of the country's $973 billion in reserves, $580 billion are U.S. bonds. That investment, versus the value of the yen, is down about 13% over the past year alone." Hahaha!

The dollar going down in purchasing power, which is the same as an increase in prices, has cost them 13% in one year, all thanks to the despicable Federal Reserve creating all that money and credit, so that the government could borrow it and spend it, which went into the hands of Americans, which ended up in the hands of the Japanese thanks to the trade deficit.

And before you start crying about, "Oh, those poor, poor Japanese! Won't somebody please, please think of the Japanese children? Boo hoo hoo!", I have some news for you that might finally shut you up; inflation in the USA is running (extrapolating from John Williams' shadowstats.com) about 13%, too! So you lost 13% of your buying power in one year, too, thanks to inflation! Hahaha!

Now let's hear you whine, "Oh, poor, poor me! Won't somebody please, please think of the American children? Boo hoo hoo!"

The answer is "no". Children need the painful lesson burned into their brains of what happened when their parents acted like morons. Sort of like the first time my stupid kids caught me taking money out of their piggy banks, even though I told them that I only bought them the stupid piggy banks in the first place so that there would be sources of cash around that I could dig into when I wanted some money but my wife won't let me have any. Just like Wall Street telling you lies to get you to, "invest for the long haul"; it's a guaranteed loser for the majority of investors, Wall Street takes all they want, and the government takes a big ol' cut from both sides in taxes and fees.

I remember I even explained to them, "I'm Wall Street and the government. You're peon garbage that I am going to bleed dry." Sure enough, they never forgot it!

Until next week,

The Mogambo Guru
for The Daily Reckoning

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The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.
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