Waiting for the Collapse

Dave Gonigam – June 25, 2012

  • Iceland de-zombifies, while Americans fork over $14 billion a year for JPMorgan salaries and bonuses
  • What regulations can’t fix: Niall Ferguson on the moral rot in the banking system
  • Waiting for The End: Chris Mayer, Tucker, Cox, Casey on the prospect of systemic collapse… and the innovators who will overcome it
  • Markets tank as recession indicator flashes yellow… but one housing indicator looks spiffy
  • Four days to profit on the Aussie dollar… Reader takes issue with “war on the U.S. dollar” theme… Laurel and Hardy face off across the Atlantic with the Three Stooges… and more!

   Hooray for Iceland. The nation has effectively purged an entire class of zombies.

Late on Friday, the Icelandic government repaid $483.7 million in loans to the International Monetary Fund. Ahead of schedule. On top of another early payment totaling $900 million in March.

“Iceland’s main commercial banks collapsed in the space of a week as the global financial crisis struck in late 2008,” says a Reuters dispatch, “imploding under the weight of huge debts built up during an aggressive overseas expansion.”

“But the country’s rebound has been equally surprising,” the article goes on. “Iceland’s economy expanded in the first quarter at its fastest pace since its near meltdown, powered by a surge in exports, tourism and domestic consumption.”

No, it’s not surprising at all. Iceland allowed its rotten-to-the core banks to fail. A couple of bank executives have even — gasp — been hauled off to prison.

Meanwhile in the United States, “the productive sector of our economy is being eaten alive by the unproductive, zombie sector,” wrote Bill Bonner recently.

   Indeed, the biggest zombie bank of all, as ranked by “assets,” collects a federal payout of more than $1 billion every month.

JPMorgan Chase pockets $14 billion a year in implied subsidies, according to figures from the International Monetary Fund, analyzed by Bloomberg.

“Bailouts encourage a reckless confidence among creditors,” says a recent Bloomberg editorial, justifying its figures. “They assume the government will always make them whole, so they become willing to lend at lower rates, particularly to systemically important banks.”

“With each new banking crisis, the value of the implicit subsidy grows.” The $14 billion JPM collects each year works out to about 77% of its net income for the past four quarters.

And Jamie Dimon doesn’t even have the decency to send you a thank-you card.

   “Bankers lose millions of dollars but seem not to care,” said Harvard historian Niall Ferguson in a recent lecture. “Once, they’d have committed suicide for less.”

The change in attitude, Ferguson believes, speaks to “a kind of moral failure — a moral failure in the private sector to finance investment, rather than consumption, and a moral failure in the public sector, in which debt was used as a way of avoiding difficult decisions about taxation and spending in the good times.”

   Under the circumstances, it’s hard not to think the worst: “Last week,” says Chris Mayer, “a friend asked me if I thought the whole economic system was going to collapse.

“I run into a lot of people eagerly awaiting The End,” Chris says. “Yet stubbornly, the world somehow soldiers on. As for me, I always invest as if civilization is a going concern. It’s a more fun way to live. Otherwise, I might as well start raising rabbit hutches for food and building a bunker in the backyard. Fortunately, as someone once said, the world doesn’t end that often.”

“Surprising things, though, do happen all the time — in life and in markets. Nobody stays on top forever. As much as I don’t want to believe it, I think the sun is setting on the dominance of the West. The new world emerging will be almost unrecognizable in a couple of decades.”

In other words, Joseph Schumpeter’s “creative destruction” is at work.

   As is resistance to creative destruction.

“The destruction of bad investments, misdirected capital, and overindebted businesses and consumers,” Addison wrote with Bill Bonner in Financial Reckoning Day, “took much longer in the late 20th century than it had before — because such powerful organizations were trying to prevent it.”

“Through our long history of improvement, every upgrade and every shift from old to new inspired panic,” adds Jeffrey Tucker, in an essay at Laissez Faire Today that went viral after it was picked up at the tech-geek website Slashdot. “The biggest panic typically comes from the producers themselves, who resent the way the market process destabilizes their business model.”

“The promise of the future is nothing short of spectacular — provided that those who lack the imagination to see the potential here don’t get their way.”

Then again, the forces of change might prove too powerful to stop.

   “Over and over,” says Patrick Cox, “we’ve been told to expect the end of accelerating progress. Somehow, it never happens.”

Patrick dismisses the notion we explored a couple of weeks ago — that progress in the last 30-40 years has been limited to computer science. “Computer advances are responsible for the fact that North America is now a leader in cost-effective petroleum and natural gas reserves,” he says by way of example. “As energy is a major component of everything, advances in computer technology have changed everything for the better.”

“Computers have made food so plentiful and inexpensive that obesity has replaced malnutrition as the primary nutritional problem in most of the world. Computer technologies continue to make personal vehicles safer, faster and more reliable. Computers have given us instant access to a body of classic and modern literature and art, at little or no cost that would have been envied by the princes and kings of the past.”

“Increasingly, the limiting factor in scientific process is the human imagination. Fortunately, however, there’s no shortage of imagination.”

   “We’re talking about technological trends that will have the force of history behind them,” adds the inimitable Doug Casey.

“Much of the ongoing revolution in biology lends itself to low-cost research and entrepreneurialism of the type that gave birth to Apple. Undoubtedly, governments and political busybodies will try to stop or slow down progress, but they’ll be unsuccessful.”

“People may be able to influence how and when certain things happen, but I don’t think they’ll be able to stop what’s coming. When there’s a steamroller coming at you, it’s best to jump on it, not lie down in front of it.”

Embrace the innovation… or perish.

We cordially invite you to join us atop the steamroller at this year’s Agora Financial Investment Symposium. It gets under way four weeks from tomorrow — Tuesday, July 24 — in beautiful Vancouver, British Columbia:

Doug Casey will be there. He’s among the perennial crowd favorites. Agora Financial editors like Patrick Cox and Chris Mayer will be there too. Niall Ferguson will take time out from his busy schedule of lectures, book writing and documentary making to sort out “the West and the rest.”

High-powered speakers like Dr. Marc Faber, Barry Ritholtz and Rick Rule will join us too.

And as always, Agora Inc. founder Bill Bonner will deliver the Friday wrap-up talk; our Symposium is the only event in which he speaks every year.

With the customary cancellations, we still have a handful of seats available. We’d love to see you there. We’d hate to turn you away… and we had to turn people away both last year and the year before. For a comprehensive rundown of speakers and registration details, please review your invitation here.

   Major U.S. stock indexes are tanking today for no obvious reason. The Dow has given up 12,500. The Nasdaq is down 2%.

Chalk it up to “uncertainty” if you like: The Supreme Court won’t rule on “Obamacare” until Thursday. That’s also the day eurozone leaders meet for another jawboning session we’re told is a “make or break” proposition, like the last three brazillion such “summits.”

   Even a perky housing number can’t turn the tide this morning: New-home sales rose 7.6% last month, to an annualized 369,000.

That’s the best figure since the expiration of the home buyer tax credit in April 2010. Inventory, meanwhile, is down to 4.7 months — the lowest since 2005.

   One of the most reliable recession indicators isn’t flashing red yet… but the yellow is getting more insistent.

The Chicago Fed National Activity Index crunches 85 numbers to come up with a monthly snapshot. Readings below 0 are charitably described as “below historical trend.” Readings below -0.7 have signaled all but one recession since 1970.

As of this morning, the index’s three-month moving average has been below zero for the last three months:

Of the 85 numbers that go into the index, a majority — 53 — turned in a negative performance. The last time that happened was 11 months ago.

   Precious metals are again stuck where they’ve been since Thursday afternoon. The bid on gold is $1,575. Silver’s at $26.83

   The greenback is flat relative to other fiat currencies this morning. The dollar index is at 82.4.

Meanwhile, the Australian dollar sits at parity with the U.S. model — a situation that can’t last, in the estimation of Fear & Greed Trader’s Abe Cofnas.

“The Aussie is weak on economic decline in Australia, slowdown in China and fears in Europe. The European summit will try to put a Band-Aid on the sovereign problem and cause a “dead cat” bounce in the currency. But the bounce will likely be small.”

With that, Abe is counting on the Aussie to end the week within a range of 0.9825-1.0025… thus, this week’s mock trade:

As long as the Aussie ends the week within that range, one of the demonstration plays would return 11.1%… while the other would add up to a 12.9% gain.

Not bad for four days’ work. Last week’s mock trade on the Dow pulled in 29%. And Abe’s paying readers got four winners out of five plays, with gains ranging from 12-34%.
Intrigued? Much more about Abe’s four-day strategy at this link.

   “Why are you all the time talking about a U.S. dollar war?” a reader grouses.

“There is not any moral or legal law that the world has to use the U.S. dollar. It is very normal that when people make a mutual agreement, they do that in terms both parties prefer. Including the U.S. dollar in such an agreement is a disadvantage for both, because the U.S. government is manipulating its currency as no other does, and there will be a day when no one will like it any more.”

“So there is no war against the U.S. or its currency, but just common sense.”

“I hope you will stop this stupid U.S. polarizing talk about wars that actually do not exist. There might be a war between U.S. citizens and the Fed or its rulers, but please let the rest of the world out of this war.”

The 5: We’re only quoting august authorities like the Brazilian finance minister. We can’t help it if he invokes martial language — “international currency war” — to describe the race to the bottom among the globe’s fiat currencies.

We have no truck with other governments exercising “common sense” in bypassing the dollar to carry out trade. We only think it’s worthwhile for U.S. readers to examine the consequences and exercise the same common sense, taking a few simple steps. The time to do it is now… while those steps remain legal.

   “Let’s see,” writes one of our regulars, picking apart the eurozone crisis, “each of the EU countries has to contribute to the EU bailout fund.

“Unadmittedly bankrupt Italy, now receiving largesse, has to contribute a bunch of euros, which Italy borrows at 6 or 7% and loans to the bailout fund at 3%, among many of the examples of EU insanity.”

“In the US, we have Helicopter Ben and his banker buddies, and Chairman Barack doing all of the right things — to destroy the country. The Three Stooges run the EU, and Laurel and Hardy run the U.S.”

“Lordy Lord, we really is in deep, Ex-Lax do-do…”

The 5: And what are the Marx brothers running?

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. We don’t do nearly enough to tout the benefits of Chris Mayer’s entry-level newsletter, Capital & Crisis. But when we get letters like this…

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… we want to make sure we get Chris’ guidance into as many hands as possible. We invite you to review his track record — wins and losses — going back to 2010. For a low-risk way to pull in 42% a year, give this a look.

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