A Tale of Three Bubbles

Dave Gonigam – April 25, 2012

  • Defiling sacred cows: Housing then… student debt now… Apple later
  • How an event today called “1Tday” signals “the source of a future financial crisis”
  • The real numbers, from an impartial source: Can everyone just shut up about how “the bailouts made taxpayers money”?
  • Busybody bureaucrats try, try again to kill off whatever’s left of the family farm
  • Harassing a truth-teller, now formalized… the town that was too broke to be good neighbors… readers shocked, just shocked, that we’d try to make money with our new establishment… and more!

   “See any similarities to the U.S. housing market?” read the email from our acquaintance Stephen Johnston.

Mr. Johnston manages a fund that invests in Canadian farmland… but he’s also an astute macroeconomic observer. And this morning he’s hot on the trail of what our own Patrick Cox and Byron King have identified as “the higher education bubble.”

   Today is “1Tday” — as heralded by an organization that brands itself the “Occupy Student Debt Campaign.”

By their estimate, the total amount of student loan debt is to surpass $1 trillion today.

We’re not sure how they come by that estimate; the Consumer Financial Protection Bureau, an arm of the Federal Reserve, figures we passed the $1 trillion mark “several months ago,” which jibes with our own reckoning late last year.

Even if you go by a more conservative estimate of student loan debt — ironically, from another tentacle of the Fed — it still outranks car loans and credit card balances…

   “U.S. student loans,” writes Mr. Johnston, “are a prime candidate to be the source of a future financial crisis with the predictable QE response, bank bailouts and all-around money supply shenanigans.

“In the same way that artificially low interest rates and risk subsidies from Fannie Mae and Freddie Mac drove homeownership rates and prices to unsustainable levels,” he goes on, “subsidized loans to students have led to the rapid growth in what can only be described as the diploma mill business, while at the same time pushing the cost of such education to stratospheric levels.”

   “To grow,” writes Addison in the new issue of Apogee Advisory, “the American Empire is always looking to inflate the next bubble.

“These serial bubbles each have the effect of ‘extracting’ wealth from the citizens — in the form of bigger mortgages, heftier credit card statements and stuffed stock portfolios. The ‘extracted’ money is, over time, passed from the wallets of citizens to the pockets of the well-connected.”

And the student loan bubble? “This bubble that has already taken flight,” he writes, “now it’s flying dangerously close to a few pins.”

Already lenders like J.P. Morgan Chase and U.S. Bank are bailing on new student loan issuance.

But a dozen other companies remain “all in.” And you might be surprised at some of the names. They might even be in your portfolio. We identify every one of them in the new Apogee issue. Access here.

   Meanwhile, here’s a new signpost to tell us that we’re not done dealing with the consequences of the last bubble: The $700 billion monstrosity known as the Troubled Asset Relief Program is still a money loser, 3½ years on.

“It is a widely held misconception that TARP will make a profit,” writes TARP inspector general Christy Romero in her quarterly report to Congress this morning. She figures when all’s said and done, TARP will lose $60 billion. At the moment, taxpayers are still owed $118.5 billion.

With this, we’re going to borrow a phrase from Vancouver favorite Barry Ritholtz (which we cleaned up for the audience at The Daily Reckoning): Could someone at CNN please tell Erin Burnett to pour herself a tall glass of “Keep Your Mouth Shut” and go sit quietly in the corner?

The dimwitted fiancee of a Citigroup exec lectures Occupiers about how “taxpayers actually made money on the Wall Street bailout”

Ms. Romero, meanwhile, says whether TARP makes a profit or loss masks “the bigger picture of… whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry in the form of TARP 2.0.”

The inspector general has already spoken heresy by declaring TARP a money loser. We’ll say what she can’t without jeopardizing her job security: It’s too much to assume the “lessons” have even been “learned,” much less implemented.

   Major U.S. stock indexes are all up today, pulled largely by the strength of one company’s earnings.

“Stocks Rally on Apple’s Strong Beat,” says a headline at The Street. After yesterday’s episode of The 5, that “strong beat” elicited some…um… hostile email.

“Nice call on AAPL!” said one, as we dive into a representative sample. “I’m sure you saw the blowout quarter. It’s the greatest company on our planet and you had the outrageous nerve to advise shareholders to sell.”

“Would you just [‘Keep Your Mouth Shut’] about Apple already?” says another (which we cleaned up). “Why make fools of yourselves over a stock you have never recommended? I feel bad for the fools who actually shorted it on your call.”

“Chris Mayer’s ‘Sell Apple’ call may soon add to his enviable record,” writes a less-hostile, but nonetheless impatient, reader. “The logic he laid out as he presented his case certainly makes sense and events may well play out along the lines he anticipates. But it has yet to put any profit in the pockets of those that sold Apple based on Chris’ advice.”

Well, that depends on when they bought, right?

Careful readers will note there was not a time frame attached to Chris’ call; he merely laid out the “logic,” as that last reader said. It may take a couple more quarters to play out.

Along those lines, Marc Faber — who’s coming back to Vancouver this year — sees China headed into recession. “If you go and slow down from a gross rate of, say, 10% [GDP] to a gross rate of 3%, there is a recession. And I don’t believe in the gross figures China publishes.”

If China falls out of bed, what happens to iPhone sales? Maybe the same thing that’s happened to iPod sales — down 15% year over year — as that product has reached saturation.

Until that day, we’re braced for more abuse and invective. Chris and Addison are used to it, having both sounded the lonely alarm about housing in 2004-05.

   Gold is treading water, as it has for most of the last week and a half. The spot price sits at $1,640. Silver’s at $30.87.

   The SEC has followed through on its threat to file an “administrative action” against the plucky rating agency Egan-Jones.

The firm stands accused of “material misrepresentations and omissions” about its staff levels and the background of that staff when it applied for SEC permission to rate sovereign debt, municipal debt and asset-backed securities.

According to The Wall Street Journal, which appears to have a mole in the SEC feeding it stories about this case, the SEC warned Egan-Jones about some sort of enforcement action last October. That would be three months after the agency had the temerity to pre-empt the “respectable” S&P by downgrading U.S. sovereign debt from AAA.

Because this isn’t a civil case, it won’t be tried before a federal judge; rather, it will go before an SEC administrative judge.

Talk about a stacked deck…

   The U.S. Labor Department will try to kill off whatever remains of the family farm.

The agency is proposing to apply child labor regulations to farm work — forbidding anyone under 18 from a long list of tasks on their own family’s property.

“The new regulations,” according to The Daily Caller website, “would also revoke the government’s approval of safety training and certification taught by independent groups like 4-H and FFA, replacing them instead with a 90-hour federal government training course.”

According to the American Farm Bureau Federation, the regulations could be made final as early as August — clearing the way for Labor Department inspectors to swarm family farms.

Not noted in The Daily Caller account is the fact that last year, the Transportation Department attempted its own takedown of small farms. It proposed that anyone driving farm equipment on — or even across — a public highway obtain a commercial driver’s license.

After a hue and cry, the department backed off. We shall see if the same occurs this time…

   The town of River Rouge, Mich., is too broke to figure out what’s driving their neighbors across the Canadian border nuts.

Tests have found “a mysterious humming sound that has drawn hundreds of complaints in Windsor, Canada, for more than a year is emanating from Michigan,” according to a UPI report.

It’s come to be known as the Windsor hum. The Ontario provincial government has logged 500 complaints. “I was in bed, it was about 2:30 a.m. and I could just hear this pulsing noise,” one homeowner says. “I couldn’t get back to sleep.”

The testing has traced the noise to an industrial area called Zug Island — in River Rouge. But in another example of how the “mother of all financial bubbles” makes itself felt on the local level first… city fathers “have said they don’t have the money to find the precise source of the noise.”

Maybe the Canadians can take up a collection?

   “Signed up last week,” a reader writes of our latest project. “Not a chance I would miss all that,” he enthuses, “basically free information, plus the discounts, and another layer of education.”

   “You had me convinced that Laissez Faire Books was going to be a bastion of support for the free market system,” writes another reader with tongue firmly in cheek.

“Now after reading yesterday’s 5 I learn you are trying to make a PROFIT!! Horreur!”

“Oh, wait a sec. Isn’t making a profit one of the basic motives of a free market system? I’m confused.”

   “The reader who carped about ‘Laissez Faire Books becoming another moneymaking proposition, rather than a public service’ is in desperate need of the information he may learn from Laissez Faire.”

“Tell him I’ll pay for his first two months if he promises to read the free books and comment on them to The 5. That way, I can see if I got anything for my money.”

The 5: “The best ‘public service’ we could provide,” said Addison via instant message this morning, “is to build a successful business that serves our customers well.”

   “I like the idea of your current project,” another reader writes in. “However, I would be more likely to buy the books if they were e-books that could be used on the Apple iPad and the Amazon Kindle.”

The 5: Heck, that’s the main attraction. You get one e-book a week for as long as you maintain your membership. Seriously, the benefits of membership are more than we can list here and stay within our allotted 5 Mins. Jeffrey Tucker, who’s doing yeoman’s work heading up this project, has a comprehensive list at this link.


Dave Gonigam
The 5 Min. Forecast

P.S. The Federal Reserve’s Open Market Committee is out with its every-six-weeks statement. It delivered no surprises, promising once again to keep interest rates near zero “until late 2014.”

Because this was a two-day FOMC meeting, we’ll be treated later today to a Ben Bernanke news conference. We’ll pick apart anything worth picking apart tomorrow.

P.P.S. Our friends at First Federal have secured a supply of Mint-State 1/10th-ounce American Gold Eagles. And right now they’re able to offer the best price in more than two years. If you missed the announcement earlier today from Nick Bruyer, check it out.

The idea behind the aforementioned relaunch of Laissez Faire Books evolved in fits and starts over the last three months. And the way it happened is a remarkable story in its own right. Here to tell it is Laissez Faire Books executive editor Jeffrey Tucker…

The Secret History of the Club: Part 1

by Jeffrey Tucker

“Launch” has been the watchword this week in the world of Laissez Faire Books. It’s been on everyone’s mind since the brilliant idea of a club first emerged in the early weeks of 2012.

When the launch finally happened, I experienced one of those moments: “Pinch me so that I know I’m not dreaming.” I was, at that very moment, flying through the air on an airplane, logged into the Internet with my portable laptop, running about five different applications that allow real-time interactions with the mortals on earth.

This was not even possible a few years ago. It’s like a dream world, a miracle that is part of our daily lives, a gift to us from the entrepreneurial class working within a market framework. It has produced results no one could have expected only a few years ago.

I was reflecting on this amazing reality when suddenly, there was a stillness that I detected from those doing the work at the home office. The texts and chatter had stopped. I texted Doug Hill, who has worked so hard on this project from his position at Agora Financial.

“How’s it going?” I asked.

“Rockin’,” he said.

I pulled up the page to see what he meant. Rockin’ indeed. The Laissez Faire Club was live. We existed. It finally happened. The thing that was a dream only a few weeks ago was suddenly a reality.

Here is the proof of a notion that has consumed me for years, a theory I gleaned from my years of reading the works of Ludwig von Mises: The world we see is the realization of the ideas of the past; the world of the future will consist of the ideas we hold today. We need only to dream, create and act, and the course of history is changed.

I don’t doubt that there will be books written in the not too distant future about the early days of the Laissez Faire Club, this history-changing idea. The future of this venue, the combustible mixture of commerce and intellectual work, might determine the future of human liberty itself. It is a reinvention of the whole project of creating and distributing the best ideas.

This short account is just the beginning. There are so many moving pieces, so many creative minds and talented people involved, so much extraordinary drama. Had this launch been made in a reality television show, it would be bigger than The Office.

The genesis stretches back in time before I got involved. Agora Inc. has long had an interest in the acquisition, preservation and refurbishment of undervalued assets. Look at the properties it owns in Baltimore, Md., the historic buildings that it has made its own. Look at the land in Nicaragua now becoming a luxury resort. Look at the way this company has changed the lives of so many people around the world by giving them the tools to manage their own lives.

Laissez Faire Books was one of those undervalued assets. It had a mighty history stretching back to 1973, but since the digital age, there was a wide perception that it had been in decline, changing hands every few years and never quite able to change with the times. Addison Wiggin and Bill Bonner decided to take it on with the goal of doing for this company what Agora had done for so many physical properties.

I came into the mix in November 2011, and the first task was to migrate to a modern Web space. For those who have never attempted this, you would be amazed at the work here. We were talking about a large inventory that had to come to life in a new way. Building a commercial space from the ground up takes time, but it is doable; migrating a giant store from one space to another is not unlike moving a city from one state to another.

But it finally happened, and in a relatively short time. The release came the first week of January. It was thrilling and wonderful, a perfectly beautiful website. Yet we all knew the truth: We had just begun. There had to be something else. There was something wonderful waiting to happen; we just had to discover what that thing was.

The pieces came together gradually in late January. It began with Joe Schriefer from Agora, who said that we really need small set of great books that offer a total economics education in one small package. Brilliant! Addison Wiggin and I talked it through, and it was rather obvious what these had to be: Hazlitt, Hayek and Garrett.

But is that really all? Surely not. Let’s talk e-books. What if we gave them all away for free with the purchase of the physical books? Sounds great to me: I love nothing better than free books. And how many of these free books can we actually give away? Dozens, hundreds, thousands. How about one per week, forever? Perfect. It can be done. Each will have new editorial notes, new introductions, amazing art, the best possible functionality.

Still thinking. What if we provide a way for people to discuss these books? There are public forums everywhere, but I knew from experience that their value is limited and unstable. What if we make them private, a members-only deal, so that everyone has a stake in keeping them as civil and intelligent as possible? We were all beginning to see how this works. Big ideas, a community of discussion, reckless generosity, practical effects.

And what is the context in which this appears? The government is growing and wrecking the physical world in every possible way. Standards of living are slipping. Despair is growing. Politics provides a nice diversion of energy, but no real answer. Ah, but the digital world is different: It allows us to create our own civilization.

Now the fullness of the possibilities is emerging. We need our own private city, not so that we can hide, but so that we can think and discover in peace. This new world should be a place where ideals rule, where friendships blossom, where we can all learn together. We can disagree without being nasty or argue, and expect to learn at the same time, checking our experiences and ideas against others.

The time between the period in which we had only glimpsed this and when it all came together was no more than a few days. Then it was born: the Laissez Faire Club. Now we have it. Here, we combine the magic of the commercial marketplace with the thrilling uncertainty that comes with a free thinking society of ideas.

Having the model is one thing. Building the software infrastructure is another. This where the fun began, and this is when I really got know the inside culture of this place called Agora. There have been so many times when I wished that everyone could see what I’ve seen in this place. It represents the very best of what modern commercial life has to offer, an institution that is a great servant of the market that drove its creation and growth.

Every employee has something to contribute. The diversity of the cast of characters is real kick. Regardless of their official title, they are all interested in ideas. They might be technicians or accountants or customer service people or database managers, but they care about so much more than what they do. Any topic is fair game.

As an example… On my way out of the office one day, the mastermind behind the database infrastructure of a Agora’s Web family gave me an inspired painting that he had done. It is a treasure, a scene from a graveyard in France in which a 500-year-old statute is brought to life amid spring blooms.

Another example… A book author was talking about how she anticipated with fear and joy an open performance she would attend the following night. The opera is Charles Gounod’s Faust, and she is right: scarier than any modern movie.

A cover designer was looking for inspiration. It was provided by a payment systems operator who knew the book in question very well. He pounded out a great paragraph explanation for the designer while I was still thinking about the question. The result was genius.

I wish I could write a personal tribute to each one. They’ve all made contributions to making this dream come true.

The place can be quiet and solemn one minute, and then, just as quickly, become a place of frenzied fun and wild laughter. Employees work to the point of exhaustion, all in the service of the customer, but somehow never seem exhausted. At the end of the day before launch, I was slumping over a desk, holding my head up with my hands, feeling as if the last ounce of energy had been drained from me. I picked myself up and went out into a large room on the second floor where the copywriters and editors work. They had all been through what I had been through. But there were no long faces. They were still brimming with energy and excitement about what was coming. They were smiling and joking. Instantly, I felt a change come over me. The inspiration came back, as did the energy.

In any office like this, in which everyone cares so intensely about the results, there will be arguments, and even explosions and strong words. Everyone is used to differences of opinion, passionately expressed. They are allowed. No one holds back, even in a manner that disregards the company hierarchy. There is nothing phony about the culture here. If you are going to explode, bring it on.

But what is truly wonderful is that even the most-tense moments, even following sharp exchanges and argument, normalcy and collegiality returns with ease. And quickly. There is no grudge. We all want the same thing. We are on the same team. Each day is new. Each hour is a chance to do something great.

Reflecting on how this could be, and why this culture of honesty, innovation and collegiality is so sadly lacking in other sectors of life, it finally hit me. The gaze of this institution is always outward and upward, toward the North Star of the commercial marketplace: the consumer. At Agora Financial, he even has a name: Bob. Bob is the archetype of the person we serve. He is smart, searching, inquisitive and hoping for a better life through better ideas.

Well, Bob has a new home. A happy home of ideas and friendship. We made it for him. We invite him in so that we can serve him generously and for as long as he finds benefit in what we do. Bob might be you. Join us and see.


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