Normal Markets

Normal Markets
By Bill Bonner

"You can't always get what you want, but...
...you get what you need."

The Rolling Stones

"Wall Street staged a tentative recovery yesterday, a day after its worst
slide since 2001, as investors bought defensive stocks and took comfort in
reassuring words from Ben Bernanke, Chairman of the Federal Reserve."

"Bernanke helps calm nervous markets," said the headline in the Financial
Times article on the subject.

According to the report, the head of the US central bank wished investors to
know that there was no cause for alarm, because the markets were working
'well'.
They were functioning 'normally', he said.

On this point, we have no doubt. It is normal for prices to rise to
unrealistic levels. It is normal for a correction to follow, when they fall
back down to more ordinary heights. It is normal even for asset prices to
crash occasionally...after having run up too far too fast.

Our doubts arise when we consider the circumstances.
Mr. Bernanke told investors that his economic forecasts were unchanged. His
soothing words and professorial demeanour led them to believe that they had
nothing to worry about. But a normal market is like a normal tornado. Both
can whip things up and tip over the out-house.

Let us turn to Zimbabwe for a little instruction and entertainment. You will
recall our dictum: a normal correction is opposite and equal to the
deception that precedes it. Thanks to the scheming of the Mugabe government,
the prices of consumer items are soaring.
The inflation rate was 600% a year ago. Now, it's 1,600%. "This means that
on average goods and services normally purchased by households for final use
in Zimbabwe were about 17 times as expensive in January
2007 as they had been 12 months before,'' said the man in charge of
distorting the figures. Readers who want to keep up with the rate of
inflation in Zimbabwe are invited to go to mukuru.com where they can get a
quote.
According the figures on the website, the Zimbabwe dollar has lost 16% this
week alone...and now sits about 10,000 to one against the U.S. model.

Meanwhile, Gideon Gono, Zimbabwe's central bank chief, said the problem was
caused by 'new farmers.' These new farmers are unlike the old farmers in
that they don't actually grow anything. This came about because the
government decided to confiscate white farmers'
land - in the name of 'justice' - and turn it over to political hacks and
cronies.

We only mention this to show how 'normal' markets work.
They tolerate fools and knaves for a very long time, but never forever.

But the nice thing about the markets is that the punishments tend to fit the
crimes. The greater the deception and scheming...the harder the punishment.
The farther out of the ordinary prices go...the more they have to move to
get back into the ordinary. The greedier investors become, the more they
lose.

If the markets are really functioning as well as Ben Bernanke thinks, they
will soon correct the foolish and absurd bubbles blown up by today's excess
liquidity.
Even after the mini-collapse of this week, Chinese shares are up 34% this
year. Investors, quoted in the Financial Times, say they are not worried.
They expect to continue investing in the stock market and are confident they
will make money. Little wonder; over the last 12 months, Chinese stocks are
up more than 100%.
Stocks in Vietnam - another Marxist paradise - are up 51% this year, again
after this week's price slippage.
Over the last year, they're up 200%. Again, reports tell us that speculators
have no intention of getting off this gravy train until it comes to a full
stop.
Junk bond investors are just as bullish. Even after openly threatening
default, Ecuadorian bonds still yield only 11%. And in the former Soviet
republic of Latvia real estate agents say property prices went up 40%
between July and September of last year (according to the FT). GDP growth in
that tiny Baltic nation hit 12% in 2006 - faster even than China.

All over the planet, people working in the money shuffling industry are
making more money than they ever made before, financial assets are more
expensive than they've ever been before, and more money and credit is being
added than was ever added before.

Normally, you'd expect a correction.

Ben Bernanke tells investors to relax. Markets are functioning normally, he
says. He might as well tell sinners not to fear because God is just. But
that's what they should be worried about.

Regards

Bill Bonner
The Daily Reckoning

Bill Bonner in Houston:

*** What next?

As you know, a Battle of the Bubbles is going on. The worldwide bubble in
liquidity is still getting bigger and bigger. The Euro money supply, for
example, was shown to be growing at its fastest pace in 17 years.
The supply of the local currency in India is growing at a 21% annual rate.
In the US, the authorities no longer report M3, the broadest measure of
money supply. But experts have clocked it growing at about 10% per year -
three times faster than the goods and services it is meant to buy.

Where all this money is coming from is a long story.
Where it is going is simpler. It is going into financial assets, which have
been going up many times faster than consumer prices.

One day of course, the whole process has to go into reverse. That's a long
story too. But never was there a bubble that kept expanding infinitely. The
reason for that is simple too. By definition, it an anomaly. It means that
certain things are growing much faster than other things - bonds faster than
gold...or Chinese stocks faster than retail stocks. Imagine a man's nose
growing faster than his face...or cars growing faster than the roads they
drove on. If this were to continue forever, the whole world would be
ridiculous. That's why there are 'corrections' to put things back in order.

Right now, the Big Bubble Battle is a fight to determine how and when the
worldwide liquidity bubble gets corrected. On the one side, the US housing
bubble is deflating. On the other hand, the amount of cash and credit in the
world at large - judging from the money supply figures - is still
increasing.

And this week, a new battle zone opened up. Equities - especially those in
China and emerging markets - were suddenly taking incoming. All around the
world, stock market investors rose up to attack bubble level share prices.
The following day was calm. And then, yesterday the Dow dropped more than
200 points before staging a wobbly recovery; it ended the day still about
360 points below where it began on Monday. Asian markets continued to go
down - with Chinese stocks giving up another 2.7%.

Meanwhile, central bankers in Beijing, Brussels, Tokyo and Zurich warned
that there was too much speculation going on...and that they were going to
do something about it. So far, they haven't done much. But there's always
tomorrow. And this week, too, our own former Fed chief, Alan Greenspan first
told an audience in Hong Kong that as far as he was concerned recession in
2007 was nothing to laugh at. And then, on Thursday, he backtracked, after
being accused of causing the sell- off himself:

``By the end of the year, there is the possibility, but not the probability
of the U.S. moving into recession,'' Greenspan is reported to have told
another audience.

His earlier statement was ``probably misinterpreted, that's why we see a
clarification today,'' said Glenn Maguire, chief Asia economist for Societe
Generale SA
in Hong Kong.

Our guess is that it wasn't misinterpreted at all.
Greenspan has long made a habit of saying anything people wanted to hear.
After people told him that his 'recession' comment was unwelcome, he took it
back.
Ben Bernanke, too, took the microphone to tell investors what they wanted to
hear.(More below...) Recession, he asked? He didn't see any recession.

Even "Freddie Mac Tightens Standards" says the New York Times. And mortgage
defaults - so far limited to 'subprime' borrowers - seem to be busting into
better neighbourhoods.

"Mortgage Defaults Start to Spread," begins an article in the Wall Street
Journal.

The WSJ reports that a record $400 billion of midlevel loans - better than
subprime...but not quite prime prime - were originated last year. Now, these
loans too are beginning to come under fire.

So now the war's on. Manufacturing in the US has practically run up the
white flag. Housing is under siege. And this week showed that stocks were
vulnerable too.

What next?

We don't know. Our 'Crash Flag' is flying. Our money is tucked away. The bar
at the beach shack is stocked and ready for our return. Heck, if the going
gets really rough...we'll take another vacation!

More news:

Robin Mackrill far from a beach shack...in London:

*** "Trading frenzy takes its toll on markets across the world" the FT
headline reads next to a picture of a frazzled trader with his head in his
hands. It's certainly been quite a week. The FTSE 100 index started at 6,401
and at present sits at 6,097. 300 pips or so the poorer. A performance
echoed on bourses around the globe.

- A blip or a serious splat? Possibly the latter says Morgan Stanley
European equity strategist Rosie Carr, "People initially thought we were
only going to see a small pullback in equity markets, with no major
correction. But it seems they are starting to doubt that." Albert Edwards
over at Dresdner Kleinwort
agrees: "We believe the long and widely awaited correction is upon us." Now
they tell us! Credit sentiment changed fast too as investors become 'more
risk averse' and trading volumes in credit go through the roof reports the
FT.

- Meantime, while all eyes are on the stock market, the oil price is making
a comeback. It ended yesterday a little north of $62 as US oil demand runs
at record levels. But gold has fallen back today to $654 as dealers report a
mood of "extreme caution".

- Tesco shares got a boost when it was revealed this morning Warren Buffett
has a 2.9% slice of Britain's number one grocer. Meanwhile another day,
another bid.
Swiss engineering group Sulzer has bid $2bn for mid-cap engineering
business, Bodycote plc. and takeover rumours abound around Scottish and
Southern.

- Private equity - a force for good or the unacceptable face of capitalism?
The debate rages across the financial news pages as a record breaking $45bn
deal by Kohlberg Kravis Roberts and Texas Pacific is announced this week for
US electricity business TXU.
Are they marauding asset strippers who load up on cheap debt then sell on to
the next sucker or efficient managers who re-boot businesses and create jobs
and wealth?

Martin Wolf in the FT draws four conclusions. One, investing in private
equity is not as popularly perceived a one way bet but a 'risky' investment
offering uncertain returns. Second, arguments both for and against have
weight but how far private equity deals can influence the performance of
very large companies is unknown yet, but that shouldn't stop it being
allowed to happen. Third, remove tax breaks and fourth the managers of plcs
should have the option to behave more like private equity ie loading up on
debt.

London-based financier Guy Hands weighed in on the debate yesterday, when he
warned PE was in danger of becoming the "unacceptable and unaccountable face
of capitalism". When PE becomes so big "the public owns you" he says.
Private equity has its worry beads on and as Hands observes it is being
attacked in a benign environment. "We have not done any harm yet..." he
says. Ominous words indeed and maybe the day of harm just came a good deal
nearer after events this week.

- Any would be international entrepreneur might find a glance at the latest
Heritage Foundation/Wall Street Journal Annual Index of Economic Freedom of
interest.
No real surprises at top or bottom but the authors note 'with regret' the
march of economic freedom appears to have come to a stop this year. And this
despite the ongoing Iraqi democratisation experiment...a country which sadly
doesn't feature on the list at all.
For the full listing click on the link below:

http://www.heritage.org/research/features/index/countries.cfm

And more views from Bill...

*** "But Dad," Henry asked. "What would we do if there were a real
depression? Would we have to sell the beach house?"

"Well, if there were a real depression, we probably wouldn't be able to sell
it. We'd have to live in it.
You boys would have to learn to fish so we'd have something to eat."

"We'd probably starve..."

*** "There's more going on here than you think,"
Elizabeth reported.

We had been noticing all the changes that have taken place in Nicaragua
since we first came to the place 7 or 8 years ago. The highway from Managua
to Granada has been rebuilt. It is much better than it used to be.
Granada itself is cleaner and more attractive. There is more traffic on the
roads, and many more new cars.

The beaches are no longer completely deserted.

"Dad...there are a couple of people on our beach,"
Henry told us yesterday. The news came to us like a sighting of an animal
believed extinct. We all rushed out to have a look. Sure enough, there were
two white bodies in the surf.

"Our" beach is about a mile long. A couple of years ago, we never would have
seen anyone on it other than ourselves. Now, every morning, there are a
handful of gringos....and even French people! A boat showed up the other day
with a group of French surfers. The fellow next to us has built a golf
course and put up condos.
Several houses are under construction. Others are already being used.

The Clubhouse nearby is also seeing more use. On the one night we went for
dinner, the place was packed.
There is even a group of permanent residents - Americans who have retired to
the Nicaraguan coast.

"Yes, and isn't it remarkable," Elizabeth continued.
"people are not just 'retiring' there. They're finding new lives for
themselves. Dennis has started a store. I don't know if it makes much money,
but it is an occupation and it's probably kind of fun to have something to
do. And that nice woman we met - I think her name was Margie - she's working
at the local clinic. I think that is really great. She's a retired nurse.
They need her down there. So she's able to do something good...and she must
feel very good about it too. And not only that, she's now getting other
people involved. She said there was a dentist and an opthamalogist among the
people who are moving down here. And they're talking about building a new
wing...for a lab...so people don't have to go all the way into Managua to
have tests done. This is great for everyone... I mean, it's obviously good
for the local people who desperately need this kind of medical attention.
But a lot of people don't know what to do with themselves after they retire.
They come down here...walk on the beach...watch the sunsets...but after a
while, it must get a little boring. But these people are finding ways to use
their time and their training. It makes you wonder what else might be
done..."

*** "What's a 'Great Wall'?" Edward wanted to know.

Edward, 13, is a car buff. He's the only one in the family who seems at all
interested in them. He noticed a new breed of car when we on our way to the
airport this morning. The cars and trucks look like Japanese imports. But on
the back are the words 'Great Wall.'

What kind of cars are these?

We don't really know, but we suspect they are Chinese.
And we will guess that they are a part of the reason US auto companies can't
make any money.