Tag: bill bonner

The Beer Theory of Credit Quality

by Bill Bonner – Bonner and Partners.com:credit

Here’s a firsthand report directly from one of our dear readers:

Greetings from Greek islands. Although news seems bad from reading papers etc., life here is rolling along. I am vaca with family and pulled out 500 euro from ATM last night (Sunday, June 28) on island Hydra. Restaurant accepted Amex. So far so good.

Yes, so far, so good.

But the steamroller is still rolling.

Americans aren’t really interested in what happens to the Greeks – unless they happen to be on “vaca” there. But the chief obstacle in Greece is the same one in China and in the United States: too much debt.

The Germans and Greeks can blab, hondle, and bluff all they want. It won’t go away.

According to financial services company Credit Suisse, Greece has total debt – including households, businesses, and government – equal to 353% of GDP.

But U.S. debt is even higher at 370%. Germany, that supposed paragon of financial virtue, is at 302%. And China, with its state-controlled economy, is at 250%.

All are in good shape compared to Britain. It has total debt equal to 546% of GDP. Japan is in an even worse state. Its total-debt-to-GDP is 646%.

And if the Credit Suisse numbers are correct, Ireland is off the charts with total debt equal to more than 1,000 times GDP.

But the Greeks are feeling the heat because they can’t service their public sector debt right now. They can’t pay it for the very same reason they got it in the first place – false pretenses.

First, they claimed they met the guidelines for entry into the euro zone. Then they claimed they could afford to live in the style to which they became accustomed. Then they claimed they would pay back the money they borrowed to make payments on the debt they couldn’t afford.

None of it was true.

Now, with their backs to the euro wall, they can’t “print their way out” of their predicament. Their creditors expect them to pay up. The Germans, in particular, see it as a moral responsibility.

“That’s the difference between beer drinkers and wine drinkers,” says a friend. “The beer drinkers pay.”

 

The Beer Theory of Credit Quality

Bond investors believed the euro promised stability and security. It was backed not by the wine drinkers, but by the beer drinkers.

We’re not sure how Ireland – a big beer-drinking country – fits into this story. But our friend notes that the countries of Northern Europe – where they also drink mostly beer – tend to repay their debts. Southern Europe – Spain, Italy, and Greece – are bad credit risks.

On the streets of London at this time of year, people stand on the sidewalks with barrels of beer in their hands. And on the Fourth of July holiday, more Americans will raise glasses of beer than wine.

Still, we doubt the “Beer Theory of Credit Quality” will hold up under the pressure of a generalized credit contraction.

In Europe, the beer drinkers of the north sold automobiles, for example, to the wine drinkers of the south. Then, when the winos couldn’t pay, the beer swillers gave them more credit.

Now, when the Greeks still can’t pay, the Germans are getting huffy about it.

And everybody is nervous. If the Germans put the screws to the Greeks, they invite problems with the rest of the wine drinkers.

What the Greeks owe is peanuts compared to what the Italians and Spanish owe. And if the credit stops, who’s going to buy the Germans’ BMWs, Audis, and Mercedes?

Nobody wants the credit to stop.

 

Star-Crossed Debtors

That is also true of another pair of star-crossed debtors – the Chinese and the Americans.

Like the Greeks and Germans, the Chinese lent, and the Americans spent.

And now, what a surprise… it’s the Chinese who seem to be in trouble.

Wait, what do the Chinese drink?

We don’t know. But the Shanghai index fell 17% in the last 18 days. And it dropped another 5% yesterday. (More on that below in today’s Market Insight.)

According to the McKinsey Global Institute:

China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007.
Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable.”

McKinsey says total world debt is now more than three times global GDP.

That is a “macro obstacle” about as big as they get. It is a steamroller.

And it is headed for us all… no matter what we drink.

Article originally posted at Bonner and Partners.com

This is Why Your Wages Aren’t Rising

by Bill Bonner – Bonner and Partners.com:wages

We ended last week wondering what had gone wrong: How come the 21st century has turned out to be such a dud?

Where are the jaw-dropping new inventions? Where are the rising incomes? Where is the dynamic, sizzling economy we expected?

Back in about 1963, we recall trying to picture ourselves in the 21st century. The rate of progress then was so fantastic we had to stretch to imagine it.

Every year, Chevrolet, Ford and Chrysler put out a new and better automobile. In 50 more years, surely cars would be regularly flying through the air!

In 1969, Neil Armstrong walked on the moon. It was just a matter of time before we had a colony there… from which we could explore the solar system.

Then in 1970, the pocket electronic calculator appeared. Half a century later, imagine the condensed knowledge and computing power we would be able to carry around.

 

Aging Economies

The only one of those things that realized its apparent potential was the increase in computing power.

That has changed life on planet Earth. Now, instead of talking to your neighbors in the elevator, you can keep your head down and focus on your smartphone.

We’ve seen couples in restaurants who never talk among themselves – each fiddled with their iPhone through the whole meal.

Is that progress or what?

Since the 21st century began, the average US household has lost income. Bummer.

Why has this happened?

One answer we proposed to readers of our new monthly publication, The Bill Bonner Letter, was that three of the leading economic zones – the US, Europe and Japan – have come to be dominated by old people.

But that explains only a part of it… and probably not the major part.

 

Stopping the Future from Happening

The other reason is that government is always reactionary.

It protects existing voters from those who haven’t been born yet… existing wealth businesses from entrepreneurs… and the past, generally, from the future.

Much of the blame for this flop of a century can be put on government and its cronies in the private sector.

At this suggestion, apologists for big government point out that government spending, as a percentage of GDP, is scarcely higher now than it was in the 20th century.

But today, much more of the private sector has been crony-ized.

Since 1960, the number of rules, regulations and taxes has soared.

As we showed last week, far fewer new businesses are being started now than were in the 1960s.

This is partly because a high wall of regulation, designed to keep out competitors, protects existing businesses.

 

Chock-a-Block with Cronies

The “security” industry is obviously a government affair – dominated by large, entrenched cronies.

But so are businesses in finance, health care, housing and education. They are not exactly married to the feds… but they are so close they spend almost every night in each other’s arms.

When you buy a house, for example, it is considered a private sector transaction.

Fannie Mae, Ginnie Mae and Freddie Mac mortgages don’t show up as government spending.

But the US government created and operates them. And these three “government-sponsored enterprises” are responsible for about 95% of mortgages issued in the last three years.

Banking, medicine and schooling – even at the university level – are so dependent on government rules and government money. And they are so chock-a-block with cronies, that they might as well be government itself.

And take a company such as GE. It is supposed to be in the business of power generators and airplane engines and other major industrial innovations.

But prior to the crisis of 2008, it worked fiddle and bow with the feds to play the government’s distorted yield curve… and then, when that gig was up…. it was saved by more direct federal bailouts.

You can read the whole sordid story at David Stockman’s excellent website, Contra Corner. (Stockman was President Reagan’s budget adviser before quitting in disgust over the administration’s profligate spending.)

In short, after 1960, the economy came to be more controlled by people who were more interested in protecting current wealth than in producing more of it.

Central planning led to a decline in growth rates throughout the rest of the 20th century. The rate of innovation slowed.

What we are seeing in the 21st century is proof of our dictum: The real role of government is to look into the future and prevent it from happening.

Article originally posted at Bonner and Partners.com

The Scary Truth Behind Friday’s Jobs Shocker

by Bill Bonner – Bonner and Partners.com:jobs

On Friday, the Labor Department released a shockingly weak March jobs report. The feds and their cronies on Wall Street spent the weekend trying to put a bag over its head.

Former Pimco CEO and Bloomberg columnist Mohamed El-Erian gave this quick reaction:

The US employment machine notably lost momentum in March, with just 126,000 new jobs added – far fewer than the consensus expectation of around 250,000 – and with revisions erasing 69,000 from the previous two months’ total, according to the Labor Department. The lackluster result ends an impressive 12-month run of job gains in excess of 200,000.

Yes, the employment numbers were ugly. They confirm the other evidence coming in from hill and dale, industry and commerce, households and homesteads all across the nation, and all the ships at sea: This is no ordinary recovery.

Nip and Tuck

In fact, it’s no recovery at all. It is strange and unnatural, like the victim of a quack plastic surgeon.

But the damage was not an accident. No slip of the hand or equipment malfunction produced this horror. It was the result of economic grifters plying a fraudulent trade.

The Dow rose 118 points in Monday’s trading. A 0.7% increase, this was neither the result of honest investing nor any serious assessment of the economic future. Bloomberg attributed it to scammery from the Fed:

New York Fed President William Dudley said the pace of rate increases is likely to be “shallow” once the Fed starts to tighten.

His comments were the first from the inner core of the Fed’s leadership since a government report showed payrolls expanded less than forecast in March.
While data signaling rates near zero for longer have previously been welcomed by American equity investors, concern is building that economic weakness will worsen the outlook for corporate profits.

Get it?

“Shallow” rate increases. Translation: Savers will get nothing for their forbearance and discipline for a long, long time.

Instead, the money that should be rightfully theirs will be transferred to the rich… and to gamblers and speculators… as it has for the last six years.

A Frankenstein Economy

Back to El-Erian who, having seen the evidence of this botched operation, then goes goofy on us. He calls upon the authorities to “do something.”

As if they hadn’t done enough already!

The feds were the ones who injected the credit silicon, hardened the upper lip and created the Monster of 2008.

And then, when the nearest of kin started retching into the hospital wastebaskets, they went back to work. Now, the economy is more grotesque than ever.

But here’s El-Erian, asking for more:

The report is a further reminder of how much more the US economy could – and should – achieve if it weren’t for political dysfunction in Washington and a “do little” Congress that preclude more comprehensive structural reforms, infrastructure spending and a more responsive fiscal policy.

El-Erian is not the only one. One of our favorite knife men, Larry Summers, is suggesting more nip and tuck on the whole world economy.

It was Summers, as secretary of the Treasury between 1999 and 2001, who helped stitch this Frankenstein economy together.

He and his fellow surgeons are responsible for its unsightly lumps and inhuman shape. Their trillions of dollars of EZ credit leaked all over, causing bulges almost everywhere.

Does China have too much industrial capacity? Does the world have a glut of energy? Are governments far too deep in debt? And corporations?And households? Didn’t nearly every central bank in the world try to stimulate demand with cheap credit… thus laying on a burden of debt so heavy that it now threatens the entire world economy?

Poor Larry Summers

Now, Summers waves his scalpel in the air and can’t wait to get the patient back on the table.

He worries that the US should have given the International Monetary Fund more money, which would have “bolstered confidence in the global economy.”

He thinks the world’s problem is that “capital is abundant, deflationary pressures are substantial, and demand could be in short supply for quite some time.”

Poor Larry can’t tell the difference between capital and credit.

Capital – what you get from saving money and investing it wisely – is an economy’s real muscle. EZ credit – what the quacks pump into flabby tissue to try to make things look more fetching – is what has turned the economy into such a freak.

Alas, failing to give more money to the IMF, says Summers, may mean “the US will not be in a position to shape the global economic system.”

That would be a real pity.

Article originally posted at Author Joe WithrowPosted on Categories Finance & EconomicsTags , , , , , , , , , Leave a comment on The Scary Truth Behind Friday’s Jobs Shocker

Hormegeddon Excerpt

submitted by jwithrow.

The following is a particularly truthful yet entertaining excerpt from Bill Bonner’s new book titled “Hormegeddon: How Too Much of a Good Thing Leads to Disaster”. For more information on the book, go here: http://pro.bonnerandpartners.com/BBLHORMV2P/WBBLQ800?h=true.

Today, truly independent thinking isn’t illegal, but it is rare. Psychologists have done a number of studies proving that most people will ignore obvious facts and conclusions in order to remain steadfast with the group. That is, they prefer solidarity to truth. They prefer public information to private information, even though the former lacks meaning, cannot be verified and often is contradicted by personal observation and experiences. That is why people stand in line in airports watching an old lady get patted down by TSA agents, even though everyone knows perfectly well the old gal poses no threat.

It is also why most people can see little difference between a sporting event and a war. In both instances an instinct—developed over thousands of years—causes them to support the home team without quibble or equivocation. Their brains are not adapted to the kind of abstract thinking required to separate one competition from the other. For 99% of our time on earth there was no need.

These instincts make people easy to deceive, especially when they are out of range of the herald’s voice. They are encouraged to believe that the collective projects are beneficial, whatever they are. Often, in a spirit of solidarity, they go along with the gag—for decades—even as the evidence from their daily lives contradicts its premises and undermines its promises. How else do you explain WWI, in which all major combatants continued making extravagant investments in a war, year after year, with no positive return? By the time the war ended there were 37 million casualties and the leading participants were bankrupt. What was the point? What was at stake that would justify such an investment of resources? Apparently, nothing. Nor did the Russians or Chinese readily give up their experiments with communism even when their schemes disrupted the private plans of nearly a billion people over three generations. And already, America’s War on Terror has loomed over us for more than 10 years, even though there have been far more sightings of Elvis and Jimmy Hoffa than actual terrorists.

Not everyone goes along, however. First, a few “out of the box” thinkers question the program. Then, the masses begin to grumble and complain. Unfortunately, that’s when the planners make even more plans. Typically, they urge people to make sacrifices. They promise that it will all turn out right in the end. “You can’t make an omelet without breaking some eggs,” said Lenin. People go along with breaking a few eggs for a while, particularly if the eggs belong to someone else. But ultimately, the problem is not the eggs, it’s the omelet. It has the right shape, it appears sensible and rational. It should taste good. But it’s disgusting. When you cut into it, it’s burnt and runny. There are things inside you didn’t order. There’s probably a hair. And that’s when you realize that you never wanted an omelet. You just wanted some eggs.

Hormegeddon-book