Investments in a Market Full of Conmen
by Bill Bonner: Subprime
State of Mind
Dow up more
than 100 points yesterday. Gold up $18.
more do you need to know?
dont you feel youre wasting your time?
was being sympathetic. She gave us a look of pity, tightly controlling
her face muscles; as if it might slide into contempt at any moment.
After spending so much time with rocks, dirt, cement
doing such real things, we admitted that writing about
economics and finance seemed a little light. As if there is nothing
you were building things
changing the landscape
peoples lives. Putting water in their houses
setting up solar power systems.
Yes, it was
true. There is the world of real things
real work and real
results. And there is a whole phony world of economists
hustlers and conmen
fools and knaves. Wall
and its victims.
But while the
real world is more satisfying
the phony world makes us laugh.
come as a surprise that the insiders are taking advantage of the
crisis they caused. But the scale of the rip-off
the audacity and subtlety of it
Yes, it is
fun to watch a good flimflam artist at work. And those managing
the US financial system are among the best.
One day, years
ago, when our office was still in the slums of Baltimore, we got
a knock on the door. It was after 7pm, but we were still at our
the doorway was a slender white man in blue working clothes
looked like a mechanic or a dishwasher repairman.
so sorry to bother you, he said with a slight Pennsylvania
Dutch clip to his words. But I saw your light on
well, I just didnt know what else to do.
Im a neighbor
I work at Dunbars (an air-conditioning
contractor) down the street.
to bother you. Its embarrassing for me. But you see, I was
working late too
everybody had gone. I realized I was the last
one in the shop. So, I locked up at Dunbars. I was in a bit
of a hurry, I guess. And so, I
I locked my own car keys and
my wallet in the shop.
just call another of the employees. But Im the only one with
keys, except the boss and hes down the ocean (a local expression
for having gone to Ocean City, MD). So I didnt quite know
what to do.
a mess. Im really embarrassed to be bothering you with this.
But heres the problem. Its my wife. Shes deaf.
So, I cant call her and tell her I wont be home tonight.
Ive got to get home or shell worry herself silly about
take a bus
I live up in Pennsylvania
not too far over
the line. But I locked up my wallet. I dont have any way to
pay for a ticket
He went on
to explain that he hated to borrow money. That hed never borrowed
money before in his life.
had no money on him. So, he went to borrow it from a co-worker.
like a lot of BS, she said, pulling a $20 bill from her wallet.
seems completely sincere, we replied.
We gave the
man the money. He added that his wife made the best apple strudel
in Pennsylvania, and solemnly pledged to come back tomorrow morning
with a pie as well as our money.
The next morning,
we watched our watch. 8AM
not yet. 9AM
he must be waiting
to take a break. 10AM
guess hell come over at lunchtime.
At 12:30 we gave up. We repaid the co-worker, who laughed out an
I told you so.
Ive been had. But you know something, it was worth it.
lets himself be rolled from time to time. Suspicion and cynicism
are unflattering. Besides, he will spend $20 on lunch and forget
it immediately. A good hustle, on the other hand, is memorable.
And a good flimflam is rare and elegant.
So it is that
we look on the Fed, the Treasury, and their Wall Street accomplices
with admiration. They have flimflammed the entire nation
100 million households in America
and not one in 1,000 has
any idea what is really going on.
thoughts on the greatest flimflam ever
key rate down to zero
the Fed gives its insider friends money
for nothing. Trillions of dollars worth.
reach for their wallets. They know they are being robbed, but they
have no idea how
or by whom.
getting a fair return on their savings, they get practically nothing.
The idea is
to force them into riskier investments. The Fed admits its strategy
without shame or remorse. And it works. The poor Mom & Pop saver
takes his money to Wall Street. And then, Barry Dyke author of The
Pirates of Manhattan II: Highway to Serfdom explains what
happens. He calls it a biblical transfer of wealth
Main Street to Wall Street.
the mutual fund industry and corporate America has hijacked Americas
savings through 401(k) retirement plans. It uses workers
savings in 401(k)s funded with mutual funds to fuel outrageous
compensation packages, fund shaky companies going public, accelerate
speculation and to finance the corrupt Wall Street business model.
It is an unprecedented biblical transfer of wealth from Main Street
to Wall Street and corporate America. It is an unprecedented transfer
of economic and investment risk onto the little guy. Main Street
America has been taken to the cleaners with 401(k)s. It is a biblical
transfer of wealth which will take most Americans years to recover
problem today is that there is no savings or patient capital for
regular Americans. The US Commerce Department found savings to
be around 1% of earnings during the 2007 housing bust, up to 8%
in 2008, down to 5.8% in September 2010 and slid to 3.6% in September
2011. There is a major difference between saving and investing,
but to Wall Street and the mutual fund industry the only way to
save according to them is to put it into volatile highly-complex
no-guarantee stock mutual funds.
into a 401(k) is NOT SAVING. It is speculating. Heres the
proof. According to the Investment Company Institute 2011 Fact
Book, Americans have 77.4% exposure to volatile equities
in their retirement accounts. That is horrific. The Federal Reserve
is at the heart of this savings debacle. By dropping interest
rates next to zero, The Fed has forced Americans into volatile
markets in search of yield. The only winners in this tragedy are
the mutual fund giants, Wall Street and corporate executives with
pay packages which would make King Solomon blush. In many respects
this wealth transfer is worse than the Great Depression when people
were more self-reliant and had a stronger family unit.
the federal government, bankers, government workers and highly
paid executives rarely speculate with their own fortunes the way
Americans are forced to speculate in their 401(k)s.
Mr. Dyke might
have added that pushing money into Wall Street also pushes up prices
on stocks, bonds, and other Wall Street products. At first, this
makes the small investor feel smart. His investments
go up. Of course, not as much as the rich 1%, who own
far more of Americas capital structure than he does.
interest rates create bubbles. The Fed is now inflating its third
major bubble in the last 15 years. This time, in US Treasury bonds.
When it blows up, a good portion of the savings of American households
locked in pensions, mutual funds and insurance programs
gets blown to smithereens.
is consumer price inflation too. You cant add $2 trillion
to the nations base money supply without some effect on prices.
It could take a while to show up, but it would take a doubling of
consumer prices just to bring the current base money supply per
person back to normal levels. And that assumes the Fed straightens
and does no more money printing.
And who will
bear the hurt? The clever elite? Those who understand the hustle?
Those who own gold
offices and apartment buildings?
Or those whose wealth is counted out in drips and drabs
wages and meager savings?
Oh Dear Reader
Bonner is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st
The New Empire of Debt: The Rise Of An Epic Financial Crisis
and the co-author with Lila Rajiva of Mobs,
Messiahs and Markets (Wiley, 2007). His
latest book is Dice
Have No Memory.
Since 1999, Bill has been a daily contributor and the driving force
behind The Daily Reckoning.
© 2012 Daily Reckoning
Best of Bill Bonner