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Message: The Daily Reckoning .. Friday, March 19, 2010
| The Daily Reckoning | Friday, March 19, 2010 | ||
| Et Tu, Bernanke? | ||
| How the Fed is leading the US on the road to financial Moksha | ||
Prices are rising in India - pushed up by the high cost of food. Thanks partly to a disastrous government policy of encouraging the over-use of chemical fertilizer, food prices are shooting up. In a poor country, food is a bigger part of the family budget than in a rich country. India's CPI is rising at about 11%. Flash from the TIMES of India: A man brought his wife to Mumbai from Augangabad. He then took her to the house of someone she didn't know and told her to wait there for him to come back. But he didn't return. The wife asked the owner of the house what was going on. She was informed that she had been sold to the man for 40,000 rupees (a bit less than $1,000). Her family back in Augangabad came to her rescue. They bought her back. A thousand dollars seems like a lot of money to pay for a wife. Especially when you consider all the expenses that come later. Food, shelter, transportation, Gucci, BMW, and so forth... But it's just another proof that the feds are winning! They're reflating the bubble...at least to some extent. Stocks rose again yesterday - largely on the good feelings inspired by Ben Bernanke. The US Fed chief let it be known that if the economy slips back into a slump it won't be his fault. The Dow rose again - 45 points. Gold went up $3. Oil gushed up over $82. That's the 22nd time in the last 27 sessions that the Dow has gone up. And it's now above its high for this rally...at its highest point in 17 months. This brings US stocks back to their levels of... ..1999! Is that progress, or what? Emerging markets, meanwhile - at least the BRICs - are back too. They're back at 1995 levels. Emerging economies are using this new appetite for risk to sell a record amount of debt. When the crisis came in '07, the spread in rates - between emerging market debts and US debts - widened. People knew they could count on Uncle Sam to pay up. They weren't so sure about India, Argentina and Zanzibar. So, the yields on emerging market debt rose. But now that the feds' program of reflation seems to be working, they're going to take a flyer on emerging market bonds. They're still a little riskier than US bonds (or so buyers believe) but they have higher yields. Here in India, for example, a portfolio of municipal and corporate bonds is paying more than 9% interest. Hey, wait a minute...isn't the inflation rate 11%? "Well, that's an aberration," explains an analyst. "It's caused by rising prices for food. The long-term inflation rate is only about 5% or 6%. But the real play on Indian debt is in the currency. The rupee is a relatively strong currency. India just doesn't have the debt problems that you have in America. Our bet is that you can earn 9% on the bonds and maybe another 50% as the rupee strengthens..." The investor in Indian bonds has Ben Bernanke on his side. So does the investor in gold. Bernanke told the world that he'll keep rates at zero for as long as it takes... ..but that's not all... The Fed also announced that it was changing its policy. It said so in such a subtle way that most people probably missed it - including us. We only realized what it had done when we read an analysis this morning in The Financial Times. In the past, the Fed has been "evaluating" the impact of buying up mortgages in order to support the housing (and presumably even the commercial property) market. Now, it says it "will employ its policy tools as necessary to promote economic recovery and price stability." Monetizing private sector debt certainly promotes the hell out of something...but we doubt it really promotes either economic recovery or price stability. What it promotes is the eventual destruction of the dollar...and the US bond market. Behind the bonds stands the dollar. And behind the dollar stands the Fed. The Fed is telling us that it is ready to stab the dollar in the back in order to keep up the illusion of 'recovery.' The Fed's $1.7 trillion bond buying program - quantitative easing - is supposed to come to an end at the end of this month. We were looking forward to seeing what happened when the biggest player in the market - a buyer - dropped out. Now it looks as though the Fed might not drop out after all. Yes, dear reader, the US is still on the road to financial moksha (the final liberation from the cares of this world...achieved by a Hindu sect - the Jains - by starvation.) |
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| The Daily Reckoning Presents | ||
| Bombay Dreams | ||
We have never seen families sleeping on the pavement on Regent Street...nor on 5th Avenue. New York and London are great success stories. Turning the pages here, on the other hand, we read a failure story. It is the story of a people who haven't got much. The world turned against them, relatively, at the beginning of the Industrial Revolution. But if the world turns long enough, it comes back to where it began. To make a long story short, we're betting on rotation. The secret of material success is simple enough. In the beginning there is nothing. In the end, there is much. In between is all the dust and noise of a real economy. Everything and everyone moves - the dirt and raw materials...the bussers and schleppers who carry them, heat them up and hammer them into finished products...the merchants who sell them...and the consumers who use them. The money moves too. But over time...and space...it must all balance out. For every item produced there must be a consumer. For every surplus, there must be a deficit somewhere else. And for every boom there must be a bust. Taking a train from Washington DC to New York City, you can look out your window and see the equation fastened to a rusty bridge, over a rusty river in a city of rust. It says "Trenton Makes, the World Takes." It is a sign that might have been hung on any one of hundreds of bridges in hundreds of different factory towns throughout America and Britain. As a bit of civic promotion, the sign is not completely fraudulent; it is only incomplete. It should have been turned around...probably in the 1970s. That was when Trenton became a taker. For more than half a century, Trenton pumped out exports...then, it spent almost another half a century getting swamped by them. First, it enjoyed a capital investment boom...and then a capital investment bust, followed by a consumer spending boom...and then a consumer spending bust. Now the rest of the world awaits neither its output nor its orders. It is neither maker nor taker, but a dead-end slum. Where will Trenton's next boom come from...or when? No one knows. In the meantime, it must pay for what it already got. America's post-WWII consumer boom came to an end in 2007. For the first time since 1946, consumer credit is falling. Americans are paying down debt. Which leaves us looking out our hotel window, wondering... The best form of government, said Voltaire, is democracy tempered by an occasional assassination. India's government must be as hard as steel by now. In 1984, the Prime Minister, Indira Gandhi, was assassinated by her Sikh bodyguards. Then, in 1991, her son Rajiv Gandhi was also killed, this time by Tamil Tigers. If we were named Gandhi, we'd go into a less dangerous line of work, like being a test pilot. But Sonia Gandhi, widow of Rajiv and the daughter of an unreconstructed Italian fascist, must like excitement. She was elected president in 1998. Her son is also a politician. Western investors needed courage to put their money in India. Six out of nine governments since 1980 have been coalitions, several including communists. In 1999, Pakistan invaded the country. In 2007 Maoist rebels attacked police and killed 50 of them. Last year, terrorists set fire to our hotel. When activists, foreign and domestic, failed to destroy India, nature took a whack at it. A cyclone in 1999 killed 10,000 people. An earthquake in 2001 carried off 30,000. A Tsunami struck in 2004. The next year, monsoons flooded much of the country. Indian stocks paid off anyway. US stock prices went nowhere over the last 10 years; Bombay stock prices more than tripled. Over the 30 years, from the opening of the stock market to the end of 2009, the investor had a return of 17,000%. All over the developed world, governments are getting a death grip on their economies, taking control of vital industries and increasing the state's share of GDP. One of India's advantages is that its feds have been choking the economy for years; now it is becoming a model of negligence. As a percentage of GDP, India offered only perfunctory stimulus to fight the downturn of 2007-2009. Now, China overheats. America cools down. And India grows at 7% per year without breaking a sweat. Wage growth is flat or negative in Trenton; in India hourly earnings double every 10 years. India depends less on exports than any other major developing nation except Brazil. And only the Philippines and Indonesia have less credit as a percentage of GDP. While much of the rest of the world did it...and then over-did it...India hasn't done it yet. There are more autos in the US than there are licensed drivers, and two chickens in every pot; India barely has one vehicle per 100 people and barely any pot at all. This is a country where the getting has just begun. Bill Bonner for The Daily Reckoning |
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