Despite the fact that the Dow and S&P 500 were able to overcome yesterday's unfortunate data, ending slightly up as the closing bell rang, this morning was a different story all together. Concerns over the what effect the weak economy will have on corporate profits hit the overseas markets hard. Japan's Nikkei index tanked 9.6% and European shares plunged about 7% this morning.

The gloom over growth expectation is now worldwide...says one expert:

"Periods of panic punctuated by occasional calm appears to be the manner of the things for now."

The Dow, S&P and Nasdaq futures all fell so much that they set off the "circuit breaker rules". In other words, the exchanges reached pre-specified limits that can't be broken until pit trading starts. However, once trading opens, all bets are off. Hence, the 'bloodbath'.

You how the saying goes: America sneezes, and the rest of the world catches a cold. It might be time to stock up on tissues...we are looking at a case of walking pneumonia.

*** The FOMC is meeting next week and the general consensus is that they will indeed cut rates. Really, how could they not? But some speculate that they will go where no Fed has gone before: below 1%.

"Everyone at the Fed has pretty much told you they're going to cut," said Rich Yamarone, director of economic research at Argus Research. "They're in kitchen sink mode now. Rate cuts, fiscal stimulus, bailouts - they're throwing in everything they can right now."

However, there's a chance that lowering rates below 1% won't even make a blip on the radar in the United States' struggling economy...rate cuts just aren't as important as they once were.

"It's a window dressing, only a psychological weapon," said Sung Won Sohn, economics professor at Cal State University Channel Islands. "Right now, the problem isn't the cost of the Fed's money, it's that the existing money supply isn't circulating. The pipelines are clogged."

*** The price of oil fell below $65 a barrel today, even though OPEC decided to cut oil production by 1.5 million barrels a day starting next month. The black goo is selling for 50% less than it was just a few months ago due to a pretty major crimp in global demand.

In a statement released by OPEC they said: "Oil prices have witnessed a dramatic collapse - unprecedented in speed and magnitude. This slowdown in demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time."

The saving grace here could be the recent dollar strength. Today, the greenback rose against most major currencies - except for the yen. The yen rose to a 13-year high against the dollar overnight.

"The Japanese currency also surged against the euro after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the IMF. Fear that pressures in Eastern Europe will have a negative effect on Euroland is another reason the euro continues to drift lower vs. the US$. European banks lending to emerging markets is about 21 percent of GDP and UK banks loans are around 24%, compared to 4% for the US and 5% for Japan. Eastern European currencies continue to be under speculative attack, and the currency markets are selling the Euro due to its close relationships to these emerging markets."

*** The signs of the difficult economic times the United States is facing is showing up everywhere...and most likely at your favorite restaurant as well. Chris Mayer explains:

"The convulsing U.S. economy is really the big topic of conversation everywhere. It's affecting all kinds of businesses now. Anthony Bourdain, whose book Kitchen Confidential is one of my favorites, recently talked about how the economy is affecting the restaurant business. He was at Caesar's Palace in Atlantic City doing some kind of cooking demonstration. Afterward, he offered some thoughts on what the recession will bring: 'There are going to be a number of real sea changes in the business model of the fine-dining restaurants, and in basic menus. The proportions are going to change, the menu selections are going to change.'

"The upside to this? 'Cooks will learn to how to cook shanks and shoulders and hooves and snouts well.' In other words, they'll learn to really cook using things previously discarded. It has long been a theme running through Bourdain's books and his TV show that great cooks (and great food) emerge from essentially poorer cultures. Whether it is the budgetary constraints or shortages or lack of certain ingredients, these cooks must be more creative. They learn skills that cooks in richer circumstances never learn. Brilliant cooks and wonderful dishes are born in such environments.

"What does this have to do with investing? Well, besides simply noting the ripple effects of Wall Street's self-immolation, I think that living through this environment will make you a better investor. Anybody can invest when things are going well - a lot of skills don't matter when the markets are rising. But when things get dicey, it suddenly becomes important again to understand what you're buying and to know how to value assets.

"Right now, there is still a tremendous amount of fear out there, which leads to valuations far removed from underlying business values. If you can't get excited about some of the values on your screen now, I'm not sure what you're hoping for."

*** Yesterday, everyone's favorite former Fed chief testified in front of the House committee about the nation's worsening credit crisis.

"We are in the midst of a once-in-a-century credit tsunami," he said to the House Oversight and Reform Committee.

That said, Big Al believes that the United States will emerge from this crisis with a "far sounder financial system." And that he was "shocked" that the financial system broke down.

However, some Committee members weren't buying Ol'Bubbles song and dance (and neither were you, dear reader - but more on that below).

CNN reports that in his opening statement, Rep. Henry Waxman, D-Calif., committee chairman, opined that the current crisis could have been prevented "if regulators had paid more attention and intervened with responsible legislation. The list of regulatory mistakes and misjudgments is long and the cost to taxpayers and the economy is staggering."

By and far, you agree with this sentiment. We asked yesterday for our long-time DR sufferers to write in about your thoughts to Greenspan's testimony...and here's what you had to say:

"I think Big Al and the Federal Reserve's lending practices are largely part of the blame," writes one DR reader.

"It was the Federal Reserves practice of lending money out for virtually free (1% for over a year) that I believe was the core problem that fueled all of the rest of the items that Big All mentioned. Guess he forgot to mention that item.

"Then Bernanke took over (realizing that the housing market was becoming way over valued) and raised the overnight lending rate 0.25 % every time they met till they finally 'popped' the housing bubble (which needed to be popped, but way to late). You can see it on the chart.

See this key interest rate chart at bankrate.com from 2001 to 2008:

"I guess it was fun while it lasted!"

Writes another:

"As always the case with Mr. Greenspan it is not what he says but what he is not saying.

"He is not telling that he supported (reckless) lending by offering money below inflation rate.

"He is not telling that people should not trust rating agencies because they are paid by the issuer.

"He is not telling that his oversight on the financial market was insufficient and lax.

"The mistakes he mentioned others made are surely lessons to learn from.

"But no doubt in my opinion; Mr. Greenspan is one of the main culprits originating this crisis."

And another: "Yes Greenspan is full of it but what a 'maestro'. After whipping the morons on the hill over and over through the years (they were afraid to parse his babble for fear of looking uninformed or stupid) Greenspan mea culpas that his 'free market' philosophy let him down. Har har har har har har har!!! He feeds them gibberish in which he now supports more regulation after having virtually blown up the world through incompetence and self-serving water carrying for his masters. Now he lays it at the feet of the 'free market' in one of the most managed economies on the earth. The dopes on the hill are used to beating up on slow-witted baseball players so this was easy for Mr. Maestro. Out the door he went without a single mention of the guillotine as a fitting punishment."

We'll leave you on that uplifting note...have a great weekend!

Short Fuse

The Daily Reckoning Australia

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In addition to extremely poor 3rd quarter earning results, Realty Trac reported that over 81,000 home were foreclosed upon in September. This is a 71% increases from the same time period just a year ago.

"I wouldn't be surprised to see foreclosures increase as the economy slows down," said Rick Sharga, Realty Trac's VP of marketing. "The people living paycheck to paycheck are at risk if they lose their jobs. It will cause more people to lose their homes."

It could be argued that perhaps these homeowners should have thought about that minor detail before they took on mortgages they couldn't truly afford, but we digress...

Shelia Blair, chairwoman of the FDIC is working on a plan to help the struggling homeowners.

"Loan guarantees could be used as an incentive for services to modify loans," Blair said, "Specifically the government could establish standards for loan modifications and provide guarantees for loans meeting those standards."

The outcome of which being, Blair continued, "unaffordable loans could be converted into loans that are sustainable over the long term."

This news should make the protesters that we at the Mortgage Bankers Association annual convention this week happy. MarketWatch reports that several members of the political protest group Code Pink showed up at the convention and the groups co-found Medea Benjamin "walked on stage during a panel discussion on Fannie Mae and Freddie Mac and demanded a moratorium on foreclosures. Meanwhile, outside the Moscone West Convention Center in San Francisco, another group of people picketed as convention attendees entered on Monday morning."

Code Pink and the Party for Socialism and Liberation were in full effect at the convention, with their main issue being the over $700 billion bailout. The battle cry was "Jail them, don't bail them." Catchy.

"The main point, and the main issue for everyone, is there should be a stop to foreclosures and evictions and the government should be assisting the victims of the crisis and not the people who created it," said Richard Becker, spokesman for the Party for Socialism and Liberation.

But why are they protesting at the MBA conference? "The relationship between the mortgage bankers and Wall Street is just connecting a couple of dots," Benjamin said. "When the housing bubble became a more general economic crisis, the ways to deal with it were coming from Wall Street and the bankers, and not coming from the point of view of who were the victims of this, people who had been pushed into loans they should never have gotten," Benjamin said.

Now, we agree that $700 billion is a steep price tag to help out Wall Streets 'masters of the universe' - but there is something to be said about accountability at all levels of this crisis. We can't help but wonder how these homeowners did not see this coming. If you live paycheck to paycheck, how did you think you could afford a mortgage payment?

We are astounded by the overwhelming naivete of the American people, who believed that interest rates would always stay low and that they could used their home as an ATM indefinitely.

But, as our fearless leader often points out, "People believe what they need to believe when they need to believe it."

*** The Labor Department reported yesterday that there were more "mass layoffs" (where 50 or more employees are let go at one time) than in any month since September 2001.

From The Washington Post :

"Companies that announced plans this week to cut jobs include Internet company Yahoo (1,500 positions), pharmaceutical company Merck (7,200), National City bank (4,000) and Comcast, the cable company (300)."

Looks like we can forgo the retail boost we usually see in the next couple of months because of holiday spending. Santa's bag is sure to be a little lighter than usual this year...

*** Our friend Chuck Butler highlighted an interesting quote from Founding Father Thomas Jefferson in today's issue of The Daily Pfennig:

"The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution...Bankers are more dangerous than standing armies...(and) if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their property until their children will wake up homeless on the continent their Fathers conquered."

We thought this quote was quite apropos, especially considering that one of the 'Founding Fathers of the credit crisis' testified today in Washington. That's right, Big Al was on the Hill today, and said that we in the midst of a 'credit tsunami'.

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Rick Rule, who is clearly the 'rock star' of the Agora Financial Investment Symposium each year, also had some very straightforward advice for the conference attendees: only invest in things you understand very well. And for him, that understanding lies within the commodities and natural resource markets.

Rick believes the resource bull market still has a way to go. Resource stocks, in his opinion, seem to be an asset that is more popular when they are overpriced than when they are cheap. These assets will be headed lower in the coming months.

"Its better to be a contrarian than it is to be a victim," says Rick, echoing his theme of his speech that he gave last year. "If you are of a contrarian mind-frame, and you are solvent enough that you can use volatility as a tool rather than being victimised by it, these [resource] markets could work for you. Use your head. When stuff becomes less expensive, stuff becomes more desirable. Don't be afraid of price declines - take advantage, rationally, of these opportunities as they present themselves.

"Within the resource and commodities markets, investors haven't been discriminating between the good, the bad and the ugly. They took them all up. When they decline in price, you don't have to buy the bad and the ugly. You are educating yourself to what the good sectors are."

This is just a taste of what's to come from the Agora Financial Investment Symposium. We'll be reporting on the speeches for the rest of the week for those of you who weren't able to join us this year.

Kate Incontrera
for The Daily Reckoning Australia

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In the United States, points out Bill, we look at countries like Zimbabwe and shake our heads in disbelief. It seems almost like slapstick comedy to us.

As Milton Friedman once said, "If you let the government run the Sahara Desert, soon there will be a shortage of sand." And in the U.S., we have Fannie and Freddie, who represent a huge nationalisation event in the United States.

"This is a remarkable thing for the supposedly most 'free market' country in the world," continues Bill. "Nationalising their biggest industry, the mortgage industry. Johnson trying to pretty up the nation's account, so he took Fannie and turned it into a private business."

This added a whole new innovation to the history of nationalisations. The United States created a company where the profits were private, but the losses were to be funded by the government.

"Nationalisation is a great milestone in our economic lives," Bill said to the 1,000 attendees. "Adjusted for the price of gasoline, no one has made money in stocks for 40 years. When you adjust American wages for inflation, you'll see that they've gone nowhere for the past 40 years, either. No one has been getting rich. How is this possible? you have to ask this to find out what's going on, where it leads and what we'll do about it.

"We take for granted that economics matter. We have only been thinking of this for the last 25 years. This idea of capitalism brought to us in the 80s was fatally flawed. People got the idea that to be rich you need a free market and free trade. But really, you don't get rich because of those things - those are just the circumstances that allow you to get rich... if you do the right thing. If you do the wrong thing, it will allow you to go broke. You can't get rich on consumption, as Dr. Richebächer used to say. You need capital formation. Save your money and invest it in productive enterprises."

Kate Incontrera
for The Daily Reckoning Australia

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The big news this morning is that President Bush has dropped his threat of a veto for the housing bill that will bail both Fannie Mae and Freddie Mac out, and also offer relief to homeowners that have gotten in over their heads and now run the risk of foreclosure. CNNMoney.com reports that the legislation would allow the Federal Housing Agency to insure up to "$300 billion in new 30-year fixed rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write-down their loan balances to 90% of the current appraised value of their homes...The cost of the FHA program - which would begin on October 1 and be in place for just a few years - would be funded by fees from Fannie and Freddie."

And of course, since Fannie and Freddie are seriously ill-equipped to offer up those kinds of funds at the present moment, the bill would allow the Treasury broad powers that would provide the mortgage giants with liquidity and a "capital background" - basically an unlimited line of credit. It is generally understood that this will leave U.S. taxpayers with a gigantic bill to pay - in fact, yesterday the CBO estimated the cost of the "rescue" at $25 billion, and said there is a chance that it could end up costing the U.S. government $100 billion in the long term. Does the term "hemorrhaging money" mean anything to you, dear reader?

Kate Incontrera
for The Daily Reckoning Australia

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Oil fell $5 a barrel this morning, as Tropical Storm Dolly is not expected to have as much of an effect in the Gulf of Mexico as experts had previously thought. What was mainly dragging the price of oil down were comments from Hank Paulson on the need for Congress to bail out Fannie Mae and Freddie Mac.

"We're going through a challenging time in our economy," the Treasury Secretary said, "This is a tough time. The three big issues we're facing right now are, first, the housing correction, which is at the heart of the slowdown; secondly, turmoil of the capital markets; and thirdly, the high oil prices, which [are] going to prolong the slowdown."

These remarks coupled with the news that Wachovia reported a net loss of $9 billion on losses related to home mortgages and the bank's declining market value, pulled the price of crude down to $125.95 a barrel this morning.

It's no secret that we are facing a global oil crunch - and increased oil production is not the answer, the Australian DR's Dan Denning tells us.

"The efforts to turn Canada's tar sands and Colorado's oil shale into energy are really just efforts to speed up what would happen naturally over time. But we don't have time. So we throw excess energy at the problem, trying to cook shale in situ or use huge quantities of natural gas to increase oil production via the tar sands. We don't have much excess energy, either.

"Both processes use tremendous amounts of energy for a small net energy yield (energy returned on energy invested, or EROEI). Yet free solar income rains down on the planet each day. The sun is eight-minute energy! We simply don't have an industrial system built to run off the modest amounts of energy we can convert from sunlight. We need a new system or a way to convert a higher percentage of sunlight into usable energy.

"It's not the sort of thing you design on your kitchen table. It's the sort of thing that evolves out of necessity and experimentation. Its evolution obeys the same basic laws that govern the evolution of species...variation, mutation, adaptation. Australia has a wide variety of clever and well-managed companies working on different aspects of the problem.

"But in the big picture, we think human beings are pretty good at adapting when they have to. The alternative is non-survival, which also goes by the name of death. True, civilisations seem to through a life cycle of their own. And perhaps this oil-based one is past its prime. People are quarrelsome and stupid. We may not adapt our way out of this problem before it overwhelms us. But it would be unnatural not to try."

We'll be back tomorrow with a full report from the Agora Financial Investment Symposium. Until then,

Kate Incontrera
The Daily Reckoning Australia

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The Telegraph warns this morning of a global financial meltdown. Although the IMF has upgraded the world forecast for 2008, they have also said there is a "chance of a global recession." Hmmm...

The eurozone is sliding into a recession faster than the United States, the British paper continues. The U.S. current fiscal crisis is the push over the edge that the global economy has feared. The dark twins of the mortgage market have foreign investors nervously chewing their fingernails, as one out of 10 American mortgages are, in essence, owned by institutions and governments in other countries.

The Treasury Department reports that as of June of last year, China holds $376 billion in securities issued by Fannie and Freddie, and Japan holds another $228 billion. While these securities aren't guaranteed by the U.S. government, the New York Times reports, "the housing giants...have attracted overseas investors with a simple pitch: the securities they issue are just as good as the United States government's, and they usually pay better."

Unfortunately, the United States now looks like a giant, international credit risk. And although the idea of Congress issuing a "blank check" to bail the mortgage giants out is worrisome to most, in order to keep the foreign investors the U.S. so heavily relies on (somewhat) confident in the country, Congress really has no other choice. Treasury Secretary Hank Paulson said on "Face the Nation" yesterday that he was "very optimistic that we're going to get what we need from Congress. Congress understands how important these institutions are."

Yup...and so are our friends in the Far East.

Kate Incontrera
for The Daily Reckoning Australia

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"There are lots of reasons for the dollar's decline. No. 1 is chronic deficit spending by the federal government. And No. 2 is chronic trade deficits that have flooded the rest of the world with depreciating U.S. dollars.

"Now those dollars are coming back to haunt us, and I don't just mean things like buying the Chrysler Building. Those dollars are competing for barrels of oil and bushels of wheat.

"Most of the reasons for the declining dollar are like self-inflicted wounds by U.S. politicians and policymakers. We live in a nation whose policy discourages saving and long-term investment, especially in energy systems. And the culture, backed up by monetary policy, encourages overconsumption. How else can we explain the serial 'booms' in the dotcoms, housing and, now, commodities?

"This is not just me bellyaching, either. There's a fundamental economic misallocation at work here. Why do people make bad decisions? Because they can. Why do people jump off bridges? Because they are there.

"People expect that at the end of the day, the U.S. Treasury and Federal Reserve will be down below with a safety net. The monetary gurus will just goose up the money supply to maintain peace in our time. But the long-term price is inflation and a declining dollar, which ruin savings and destroy capital.

"The declining dollar is affecting everything. The dollar decline has much to do with the rising prices for precious metals, energy, other basic commodities and foodstuffs. Sure, there are issues with growing world population (a 'net' of 130 million new mouths to feed every year). And the Peak Oil thesis is entirely valid."

Byron tells us that the key to it all is the declining dollar...and the BEST way to play the dollar decline is with precious metals like gold and silver. He believes that gold has much, much higher to go yet.

Until tomorrow,

Kate Incontrera
The Daily Reckoning Australia

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We asked him the obvious question: Does he see a similarity to today's economic climate to that of when he was at the helm of the Federal Reserve? And do we need the same sort of forceful hand that he lent to the economy during that time period?

"Well, there are all kinds of consequences and uncertainty in the future if we don't deal with these problems. But when I look at back on my lifetime, it was obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the '70s led to the kind of crisis in the late '70s and the early '80s, and it was very uncomfortable. We don't want to have to go through big recessions to teach lessons. We'd like to anticipate what needs to be done while maintaining the growth of the economy. And the threat always is an unstable economy, an unstable currency; and that it's destructive not just to economic life, but it can be destructive of America's position in the world, which is a concern to me more generally.

"But the great challenge, I think, for democracy, is being able to cope effectively with problems that are pretty clearly out in the future, but require action that require some discipline, some restraint today," he continued.

"And that's the test we're going through, and that's a question of education and understanding, I think. So I think as people get better understanding of some basic economic issues, the democracy will be better able to cope with those challenges out there in the future."

This idea of educating America comes up again and again as we promote the documentary. The other night, at a Q&A following a screening at the Philadelphia Film Festival, one audience member suggested that I.O.U.S.A. be shown at every high school. We couldn't agree more. After all, the generation that will have to deal with these debts and deficits should be educated on the subject.

Kate Incontrera
The Daily Reckoning Australia

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"I have no regrets on any of the Federal Reserve policies that we initiated back then because I think they were very professionally done," Mr. Greenspan told CNBC yesterday.

And to the Journal, he said: "I don't remember a case when the process by which the decision making at the Federal Reserve failed."

The Financial Times recently ran a piece titled, "The fed is blameless on the property bubble." James Saft, writing for Reuters says that Big Al argued that the epic bubble was not caused by loose monetary policy, but by "the fall in global long-term interest rates, which, as chairman...of the most powerful central bank in the world, apparently had nothing to do with him."

Albert Edwards, global strategist at Societe Generale Cross Asset Research in London puts it bluntly: "He was the midwife of serial bubbles that are unraveling."

Former Fed chief Paul Volcker remains unconvinced by Greenspan's protests, questioning his cheerleading of the "bright new financial system," that "for all its talented participants, for all its rich rewards, has failed the test of the marketplace."

And in a speech to the members of the Economic Club of New York, Volcker chided Bernanke for "toeing 'the very edge' of the bank's legal authority in orchestrating last month's bailout of beleaguered investment bank Bear Stearns," reports The New York Times.

"Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank," Volcker said.

Kate Incontrera
The Daily Reckoning Australia

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