-
Your say on this year's DR Financial
Darwin Awards,
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Inflation: One nuanced point that could cost
you serious dough,
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Plus, Bill Bonner on depressionary "illusion
killers" and more...
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Joel Bowman, sifting through the mailbox, in Taipei, Taiwan...
Our inbox is so full of idiots, anyone snooping might think we operated a
website ending in ".gov"...
Our faithful (and unfaithful) readers were busy over the weekend,
nominating their choices for this year's
Daily Reckoning Financial Darwin Awards.
It's a tough field, to be sure, so we're keeping the polls open for a
couple more weeks. The contestants thus far are varied and plentiful...
One reckoner raised a hand for "Arnie Schwarzen-begger"...while another
voted for the terminator's entire state of California. Utah and Alaska
also received state dishonors. And then...
"My vote goes to the US Government and the 'man of the year' helicopter
Ben," opined another reader. "Though to be fair, he didn't do it alone. No
man could have. It took Alan and Henry and Tim and countless other
arrogant men to get to that place in time where you could financially
cripple a whole world.
"Mostly it took the American people themselves who got so caught up in
their TV shows and their high standard of living that they did not notice
the biggest heist in the history of the world, taking place in plain view!
It's as though someone walked into their living rooms and started
methodically removing all of their things and they didn't even notice. The
thieves are about to unplug the TV. It should be interesting to see what
happens."
At a quick glance, the ".govs" have it by a long shot over the ".orgs" and
the ".coms"...but the votes keep comin'. Could it simply be a case of too
many clowns and not enough circuses?
"I nominate Barnes Banking of Kaysbille Utah for the Darwin Award," writes
another reader. "They have recently been taken over by the State and the
FDIC."
Horizon Bank, based in Bellingham, Washington (to which we assume the
reader is referring) may be extinct, but is it really uniquely
reckless? Being taken over by the FDIC seems awfully like "resume padding"
for these Darwin Awards. After all, this IS a depression. Competition is
stiff. And just as every hopeful employee cites "conversational
[restaurant] Spanish" or "enjoys traveling," on their curriculum vitae, so
can a laundry list of banks claim being absorbed by the FDIC as a buffer
qualification. Last year alone 171 lenders fell into the federal insurer's
arms...then the FDIC itself went broke! It seems even lending money to
people who can't or won't ever repay it doesn't set one bank apart from
the others.
There were plenty of nominations for individuals, too. One reader from
Virginia submitted the following list of dedicated devolutionists...
"The incomparable John Thain, formerly of Merrill Lynch, who worried more
about decorating his office than guiding his firm...
"Robert Nardelli, value destroyer extraordinaire, first at Home Depot and
later at Chrysler, whose focus was solely on negotiating generous
separation packages for himself...
"Chuck Prince at Citigroup, who couldn't stop dancing while the music
played, and is probably still dancing...
"Rick Wagoner, former CEO of General Motors, whose peerless vision
couldn't see anything coming."
Impressive as the nominations have been so far, we're really looking for
an idiot to stand above the rest. These are competitive times indeed. It
will take a truly prize moron to stand atop this bunch.
You can still email us with your Financial Darwin Award nominee right
here:
2009darwinawards@gmail.com. And, don't forget to make
sure you grab a buck along the way too. Our colleague, Dan Amoss, is
offering a $1, one-month trial membership to his Strategic Short
Report research service in conjunction with our own Darwin Awards
competition. Dan's readers have made a small fortune betting against
ill-fated corporate dinosaurs like Lehman Bros. and Washington Mutual.
Right now he has his eye on a trucking company that he says, "expanded too
aggressively at the peak of the credit boom." With capacity shrinking
fast, Dan's predicting 150% profits for his readers.
Get his next alert here for $1.
Meanwhile, in today's issue, we bring you an essay from Hong Kong-based
money manager, Puru Saxena. Your editor caught up with Puru last week for
some Chinese food and a chat about the general state of the world. Puru
told us he's long gold and energy and, as you might have guessed from
those positions, not optimistic for the future of the West.
"In the US, for example, they've got a Federal Reserve bank that is
neither 'Federal' nor does it have any 'reserves,'" he joked. "We're
bullish on growth markets, metals, assets that can't be 'printed' and,
therefore, inflated out of existence."
In the essay below, Puru explains the common and fundamental flaw in most
peoples' thinking about inflation and why the mistake can be so very
costly...
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The Daily Reckoning
Presents: |
Most people see "inflation" when it hits the
prices of the goods and services they purchase. They don't realize that
this is merely the consequence of inflation. Why does this subtle nuance
even matter and, more importantly, how should it inform the way you
invest? Guest columnist, Puru Saxena, has the details...
Inflation 101
By Puru Saxena
Hong Kong, China
Inflation is a hidden tax, an insidious crime against the public. It is
the easiest way for any government to confiscate the savings of the
public and for generations, wealth has been transferred in this manner.
Remember, money is supposed to be a store of value, however due to
reckless central bank-sponsored inflation, it can no longer fulfill this
critical role. Unfortunately, nobody questions the inexplicable loss of
the purchasing power of their savings, thus, central banks get away with
financial murder.
Inflation distorts the economy, it brings great harm to the public and
it encourages speculation and mindless risk-taking. In fact, inflation
acts as a poison for retired people since they are no longer able to
earn more money in order to maintain their standard of living. So,
thanks to inflation, most senior citizens are unable to enjoy the fruits
of their labor.
Before we delve further, we want to make it absolutely clear that
inflation is defined as the increase in the quantity of money and debt
within an economy. And contrary to what the governments want you to
believe, inflation is certainly not an increase in the general
price level within an economy. Instead, an increase in the general price
level within an economy is a consequence of inflation. Allow us to
explain this subtle yet critical difference:
For the sake of simplicity, let us assume that America's money-supply is
US$100 and this is the amount available to buy the five oranges its
economy produces. Common-sense dictates that under this situation, each
orange will cost US$20. Now, let us introduce a banking-cartel called
the Federal Reserve, which is able to extend credit (via its debt-based
fractional reserve banking system); thereby inflating the supply of
money within America to US$1,000. Under this scenario, with a 10-fold
increase in money available to purchase the same amount of produce, each
of the five oranges will now cost a whopping US$200! An orange is still
an orange; it does not change. What changes is the purchasing power of
the paper money that is used to buy that orange.
Hopefully, you can see from the above-simplified example, how an
inflation in the supply of money and debt causes prices to increase
within an economy.
Furthermore, in its attempt to manipulate the masses, the establishment
does everything in its power to suppress the official 'inflation
barometer'. Governments achieve this goal by shamelessly doctoring their
Consumer Price Index (CPI) and Producer Price Index (PPI) calculations
via various seasonal and hedonistic adjustments. The chart below
highlights the discrepancy between the CPI-U published by America's
Bureau of Labor Statistics and the SGS Alternate CPI, which is
calculated by Shadow Government Statistics using the old methodology. As
you can see, over the past 20 years, prices have been rising much faster
than the officials would have you believe.
|
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Let there be no doubt, inflation is a total
disaster and our world will be a better place without this reckless
money-creation. Contrary to official dogma, our world experienced
tremendous progress during the 19th century, and there was no inflation
during that period. The chart below shows the changes in America's
Consumer Price Index (CPI) over the past two centuries. As you will
observe, the CPI fell for most of the 19th century as the purchasing power
of the American currency rose. However, since the formation of the Federal
Reserve in 1913, the CPI has exploded causing the purchasing power of the
US dollar to spiral downwards.
|
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Given the fiat-based monetary system and banks'
vested interest in expanding credit, we have no doubt that most nations
will experience very high inflation over the coming decade. Accordingly,
we suggest that long-term investors protect their purchasing power by
allocating capital to precious metals, commodity producers and
fast-growing businesses in the developing world.
Joel's Note: Puru Saxena publishes Money Matters,
a monthly economic report, which highlights extraordinary investment
opportunities in all major markets. In addition to the monthly report,
subscribers also receive "Weekly Updates" covering the recent market
action. Money Matters is available by subscription from
www.purusaxena.com.
Puru is also the founder of Puru Saxena Wealth Management, his Hong Kong
based firm, which manages investment portfolios for individuals and
corporate clients. He is a highly showcased investment manager and a
regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio
programs.
Copyright (c) 2005-2009 Puru Saxena Limited. All rights reserved.
---------------------------------------------------------------
And now over to Bill Bonner, who has today's reckoning from
London, England...
The stock market fell 100 points on the Dow index on Friday. We hope
Daily Reckoning readers are out of US stocks. Sooner or later this
jig is going to be up. You don't want to be heavily invested when it does.
Right now, the market is dilly-dallying. Investors are enjoying a picnic.
Alas, they've spread their picnic blanket on the side of Vesuvius. It
could blow up at any time.
We are in a depression. Not yet a 'great' depression. But it's a pretty
good depression; and we'll take what we can get.
Depressions take time. They go away eventually, but not before they've
done their work. Among the jobs this one has to do is to knock stocks down
to bargain levels. Or hold them down while inflation takes them to bargain
prices. Either way, we've got a long road ahead. In the meantime, we'll
keep our Crash Alert flag flying. The dilly-dallying could end any day -
in a panic to get out of stocks.
Depressions are illusion-killers.
One fellow imagines that somehow he will be able to afford a new house -
even though he hasn't got a real job.
A real estate investor thinks the market for new condos in Florida always
goes up...no matter how many they build.
GM believes it will muddle through somehow... It loses money on each sale;
maybe it can make it up in volume!
The job of a depression is to destroy illusions...to bring people down to
earth. And that begins with questions:
Is this stock really worth 20 times earnings?
What happened to the buyers?
How do I know the bank is solvent?
In this weekends' Washington Post, a columnist wonders what GM
executives were thinking when they allowed the best automotive franchise
in the world go broke. They probably weren't thinking much at all. They
didn't need to. Business was good for a very long time. American auto
sales expanded for an entire century. Remember the glory
years...'50s...the '60s? GM came out with new and better models every
year. People paid attention - they measured the fins...admired the
chrome...and listened to the roar of GM horsepower.
The highway system was getting better and better. Salaries were increasing
- at least, until 1973. Gasoline was 25 cents a gallon. Everyone wanted to
'See the USA in a Chevrolet.'
But nothing fails like success. GM was the world's biggest and most
successful company. Naturally, it attracted parasites. The unions wanted
more and more - more paid time off...more health care benefits...better
retirement programs. Management became parasitic too. It was too
comfortable and too well-paid to resist. Everyone went along...getting
what they could get...all the way to bankruptcy.
"When a machine broke down and stopped the assembly line," explains Paul
Ingrassia in his book Crash Course, "workers would take an
unscheduled break and wait for an electrician or machinists instead of
rushing to fix it themselves. Only skilled tradesmen were allowed to
repair machinery, even if ordinary workers were capable of doing it -
rules enforced not only by the national contract but also by the separate
local contracts at each factory. The electricians or machinists often took
their time getting to where they were needed, so that the plant would have
to go into overtime to make up for lost production and everybody would get
more money."
As GM goes, so goes the nation. The 20th century saw Detroit hustle and
bustle...then it went on cruise control. That was true of the whole
country, too; America was so successful she couldn't overcome it. Like the
labor unions at GM, every major group got a little edge...a little
advantage...food stamps for the poor...bailouts for the rich... And
everywhere you looked there were more petty tyrants enforcing
pettifogging, perverse rules.
"This sidewalk is closed," announced a municipal employee, working on the
sidewalk on Charles Street in Baltimore last week.
It was a silly matter. But Americans have become so burdened with claptrap
rules that they no longer question them. And they've become so accustomed
to being bossed around that the fight has gone out of them.
"No, it's not," your editor replied, stepping over a pneumatic hose.
"Dumb son of a b****," came the response...
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And more thoughts...
There was no joy in Baltimore on Saturday night. The Ravens lost their
game against the Colts.
Football is often said to be a substitute for armed warfare. It has its
strategies, its heroes, and its casualties. The city of Baltimore - or
most of it - would probably have preferred a win against the colts to a
win in Afghanistan or Iraq.
War is a game played for mortal stakes. But there is less difference
between war and football than is generally realized. There is nothing at
stake in most wars - just like football games. Still both sides are so
keen to win they make fools of themselves. Supporters wave flags and sing
victory songs. And if their team wins, THEY feel like winners, even though
they played no role whatsoever in the victory.
Nor are all wars bloody affairs. Many societies conducted stylized
warfare...often with very few battlefield casualties. The West was able to
dominate the world, say some military historians, because the Greeks...and
later the Romans...and later the Europeans...were more ready to die.
Regards,
Bill Bonner,
for The Daily Reckoning
---------------------------------------------------------------
Here at The Daily Reckoning, we value your questions and
comments. If you would like to send us a few thoughts of your own, please
address them to your managing editor at
joel@dailyreckoning.com
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