They rush to sue everybody! The investment banks who were midwifes to the birth of FB into the public markets weren’t playing fair, they say. They gave their best clients more and better info than they fed to the public.

Well, what…you mean…could you be saying…that the insiders have an edge?

Well…duh…uh…

“The thing about this IPO,” said a friend at lunch, “was that the whole world was watching. That’s why this was so important. It showed everyone how Wall Street operates. Everybody got burned. And they blame Wall Street…because they can see that the pros were being only half honest. And the other half was incompetent.”

Yes, dear reader, our hunch seems to have been right. The FB launch was a disaster for shareholders…for Wall Street…and for the whole cult of equities that has ruled the investment world for the last 3 decades.

“…a six-decade passion for equities has come to an end,” reports The Financial Times.

“Stocks have not been so far out of favor for half a century,” continues the report… “with equity returns virtually flat for more than a decade, the incentive for investors to take risks by funding smaller, more entrepreneurial companies has declined — eroding a process that has traditionally given managers the flexibility they need to grow. Capitalism with less equity finance would follow a much more conservative model.”

In the US, pension funds allocated as much as 70% of their funds to equities 10 years ago. Now, they’re down to 52%.

Everyone is turning his back on stocks…at least, that’s what the FT says. And analysts are already comparing this FT article to the “Death of Equities” cover story in BusinessWeek in 1979…just before a huge new bull market began.

Relative to bonds, stocks haven’t been this cheap since 1956. That was the year when George Ross Goobey announced he was switching the entire portfolio of Imperial Tobacco’s pension fund into stocks.

Goobey turned out to be a genius. Stocks began a great bull market which continued, aside from a countertrend between 1966 and 1982, for the next 56 years!

And now a lot of people think this is another Goobey moment. Stocks are cheap, they say. Get ready for another grand bull market!

What do we say? Nah…

The problems are:

1) This ain’t 1956…this is 2012. The US is no longer on top of its game. It’s no longer in full expansion. It is slipping…sliding…burdened by high costs…zombie industries…and corrupt governments. Growth rates are low…lower than the rate of debt build-up… There is no reason to think America’s capital structure — either stocks or bonds — will become more valuable.

2) Stocks are not cheap. They are only cheap when you compare them to bond yields. But bonds yields are suppressed by a Great Correction…about which more below. In order to be absolutely cheap, US stock prices will have to be cut in half — at least. That would put yields and P/Es near where you can get a 5%+ yield and buy a dollar’s worth of earnings for $5…not $12. Then, stocks will be cheap.

3) Bond yields fall in a correction because people do not want to increase their debt levels; they want to reduce them. They also reduce spending…which lowers business sales and profits, thus making stocks less valuable, not more valuable. As the Great Correction intensifies (and it appears to be doing so now) we can expect stocks to follow the Japanese example. Japan has been in a Great Correction for 22 years. Its stocks have lost 3/4 of their value. They’re still down 75% — nearly a quarter century after the correction began.

Goobey moment? We don’t think so. It’s time to sell stocks, not buy them.

Regards,

Bill Bonner
for The Daily Reckoning

Facebook Fallout: A Lesson in How Wall Street Really Works originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

“Great empires, such as the Roman and British, were extractive,” the economist Paul Craig Roberts observed recently. “The empires succeeded, because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance.”

But unlike empires of the past, the American Empire has a perverse logic all its own.

“America’s wars are very expensive,” says Roberts, stating the obvious. “Bush and Obama have doubled the national debt, and the American people have no benefits from it. No riches, no bread and circuses flow to Americans from Washington’s wars.”

In the big Iraqi oil auction of 2009, for example, even as US military helicopters droned overhead, the Iraqi oil minister gave out zero contracts to American firms. Not one. And we spent at least $3 trillion on war — $2.9 trillion more than Team Bush’s original budget. So much for paying for war with “oil profits.”

Russia was actually the big winner here. So what gives? The American Empire has perverted the Roman mantra “Veni, vidi, vici” (I came, I saw, I conquered) into the odd imperial slogan: “We came, we saw… we borrowed!”

The results from this turn of phrase are less than desirable. Again Roberts: “Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agribusiness and the Israel lobby use the government to extract resources from Americans to serve their profits and power. The US Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%.

“That is how the American Empire functions,” concludes Roberts. Instead of plundering foreign resources to finance itself, the American Empire is always looking to inflate the next financial bubble. Each of these serial bubbles has the effect of “extracting” wealth from the citizens — by drawing both savings and credit into overly inflated asset classes that then implode.

As the bubbles inflate, robust tax revenues flow to the federal government. As the bubbles implode, tax-payer dollars flow to the connected Wall Street elite. Thus, over time, savings pass from the wallets of citizens to the pockets of scoundrels in Washington and on Wall Street.

For confirmation of this assertion we need look no further than the top o’ the 1%, the Oracle of Omaha. Peter Schweizer of Reason reckoned in his March exposé on Warren Buffett that this folksy fellow “needed the TARP bailout more than most.”

Let’s run through the numbers. Berkshire Hathaway firms in total received $95 billion in TARP money. Berkshire, you’ll recall, held stock in Wells Fargo, Bank of America, Goldman Sachs and American Express. Not only did these companies receive TARP funds… they also dipped into the FDIC’s treasury to back their debt. Total bailout: $130 billion. TARP-enabled companies accounted for 30% of the Oracle’s publicly disclosed stock portfolio.

He’s definitely one of the top beneficiaries of the big bank bailout. And to sharpen the sting, he even got a better deal to help ailing Goldman Sachs than our own government. Buffett got a 10% preferred dividend while the Feds got all of 5%. He cleaned up with $500 million a year in dividends. Without the bailout, you can bet many of his stock holdings would have gone near-zero instead.

Contrast that with a blog post from Rosemarie Jackowski, a community activist at Dissident Voice. She’s describes her experiences working with the underclass in a small town in Vermont.

“In Bennington, there are three very distinct classes,” writes Jackowski. “First, there are the ‘fancy people.’ They are the ones who rule and control everything. They are on the boards — the hospital board, the library board, the select board, the school boards. They have the power — even the power over life and death. They, occasionally during a medical crisis in the hospital, make the decision to pull the plug or allow life to go on.”

Then there is the large group of ordinary citizens. Some are blue-collar workers. Most work hard. Love their families. And have had family in Vermont for generations. They acknowledge the class system in conversation often. They call it the ol’ boys network — cronyism.

The third group consists of those who are in need. Those on the bottom of the economic pile. A poor mother of two disabled children, for example, talked about the oppressive avalanche of redundant paperwork required to get any tiny benefit. The social services system is designed by nameless, faceless, unelected bureaucrats. It is set up to assure maximum job security to the workers in the system. To a struggling family, it often feels like an attack of the “paper churners.” Being poor is a full-time job.

In her post, Ms. Jackowski provides a list of 35 ways poverty robs you of your dignity. Here are just a few:

Poverty means living with shame.

Poverty means working three jobs, and still not “making it.”

Poverty means that you go to work when you are sick. Worse than that, you send your children to school when they are sick.

Sometimes poverty means that you skip meals so that your children can eat.

Poverty means that your housing is never secure…

Poverty means following all of the rules, then graduating with oppressive student debt so that the president of UVM can be paid $447,000 per year.

Tragically, more and more “ordinary citizens” are faced with the challenge of joining this third group of government dependents. Case in point: “In the most recent Census,” writes our managing editor Samantha Buker in The Little Book of the Shrinking Dollar (a book we co-authored for the Wiley Little Book Series), “48% of America qualifies as ‘low income.’ There are more Americans living under extreme poverty than have ever been recorded.

“Since 2009, we’ve added another 4 million souls to the category of low income to below the poverty line. That’s 146 million people in America who aren’t consuming much aside from ever-increasing applications for food stamps.”

In November 2008, food stamp applicants topped 30 million for the first time in history. Today, we’re still posting “record highs,” having added over 16 million more names to the food stamp list.

Does this sound like a nation of financially healthy citizens, able to contribute to the national coffers? Au contraire. Sounds like another case in which our Empire will hand out more than it’s taking in.

Again.

Regards,

Addison Wiggin
for The Daily Reckoning

Borrow-As-You-Go Politics originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Smash! Crash! Crunch! Whack!

Fenders banged up. Radiators steaming. Tires flattened. Whee!

But here’s the most exciting scene in the whole show. Greece and Germany are playing chicken!

Greece presses down the accelerator and heads for Germany. “If you force us out of the euro, all of Europe will go up in flames,” say the Greeks.

“Oh yeah?” say the Germans, turning on the speed in their Mercedes, “ve’ll see about that. Ve haf airbags!”

And we watch. Wonder. Which one will lose his nerve? Or will they crash head-on?

Nobody knows for sure.

But nobody wants to have money in Greek banks…in Europe’s periphery banks…or even in euros…when they find out.

Yesterday, more money leaked out of Greece…and out of the euro. The euro fell to its lowest level in two years as “Europe braced for turmoil…”

One headline said Greece was making plans to withdraw from the euro. The Greeks promptly denied it…which reminded us of what they used to say in Soviet Russia: no rumor is confirmed until it is officially denied…

De La Rue, an English company that prints most of the world’s currencies, would not say whether an order for drachma had come through or not.

Meanwhile, all these wrecks and smash-ups are damaging Europe’s economy. The New York Times is on the story:

Economic reports Thursday showed Europe’s prospects dimming as the long battle to defend the euro zone continued to undermine confidence and raised the prospect of a renewed cycle of demands for austerity.

The relentlessly bleak data, reflecting weakness across the Continent and in Britain, came a day after political leaders again failed to break the deadlock over how to resolve the European debt crisis.

A Markit Economics index that tracks the European services and manufacturing sectors fell in May to 45.9 from 46.7, worse than economists surveyed by Reuters and Bloomberg had expected. An index reading below 50 suggests the economy is contracting. In the first quarter, the euro zone economy grew just 0.1 percent.

Perhaps even more worryingly, German data released Thursday showed signs of a slowdown in an economy that until now had been a bright spot for the Continent. A Markit index based on surveys of purchasing managers of German manufacturing companies fell to 45.0 in May from 46.2 in April.

And Britain’s is worse. New data show the slump is worse than previously thought. The NYT again:

The Office for National Statistics revised the decline in gross domestic product in the first three months of this year to 0.3 percent, up from the 0.2 percent it estimated last month, because of a deeper slump in the construction industry. Construction output dropped 4.8 percent from a year earlier, the agency said, not 3 percent, as it had estimated earlier.

The revised figures were “bad news for UK policy makers as it shows the economy faring even more badly than initially thought,” said Scott Corfe, senior economist at the Center for Economics and Business Research in London. “Indeed, the latest data show the UK economy performing worse than the euro zone economy, which saw zero growth at the start of the year — meaning the UK’s woes cannot even be fully attributable to the debt crisis embroiling the Continent.”

So, stay tuned…let’s see what happens tomorrow…

Bill Bonner
for The Daily Reckoning

Euro Declines as Greece and Germany Play “Chicken” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I just saw a story go across one of my screens that said, “Greeks run university professor out of the country for telling economic truths.” I immediately thought, Good thing that doesn’t’ happen here in the U.S., for I would be a man without a country, eh?

Let’s get to the tape of what happened yesterday and what we can look forward to today. I left you yesterday morning with the thought that the tourniquet had been wrapped around the deep wounds the currencies had received from the dollar the previous day, and it looked as though a handful of currencies would gain on the day. Well, that thought carried through for the day, but the trading ranges were very tight.

The euro (EUR) is getting a weak wind in its sails this morning on news that German Chancellor Angela Merkel is leaving open a potential compromise on debt sharing for the eurozone. Confused? Don’t be! That’s what I’m here for! What this is saying is that even though Merkel has dug her heels in on this eurozone bond issuance idea that I talked about yesterday, she’s leaving open that option. And that’s a good sign, if you believe that a eurozone bond issuance, instead of each country doing their own auctions, would be good and help restore the eurozone and euro.

I think, though, that a true “eurozone bond” will continue to meet strong opposition from Germany. But there’s a compromise that could be worked out, and that’s a general eurozone redemption fund. So each country could retain their sovereignty and issue their own debt, but they would have to contribute to this general eurozone redemption fund, from which bond maturities would be paid. So you see this would very well calm the markets and allow the eurozone countries the ability to scale back their debt. Now, that’s a very good concept, and one that should have been hammered into the skulls of the eurozone leaders at the EU summit… but NOOOOOOOOO! They would rather talk about stuff that’s not going to work!

As longtime fans and first-time callers, you all know that I don’t believe that the Japanese yen (JPY) should be as strong as it is versus the dollar. I believe I’ve made that perfectly clear. But I’ve also said that you shouldn’t throw yourself in front of a bus either. Which is akin to trading versus a trend. And the trend in place right now is to buy dollars and yen. Sure, the Japanese government doesn’t like to see this yen strength, for they have set out to achieve an inflation rate of 1% this year, and they won’t get there with the yen so strong. (They won’t get there either way, who the heck are they kidding?)

But the trend is your friend, right? So yen strength is here for now. I threw in the towel on yen a month ago (remember?). I gave up using fundamentals on yen. It’s a currency on its own course. Oh, by the way, Japan’s latest CPI (inflation) for April printed at +0.2%. That’s a long way from 1%, BUT better than a kick in the shins for the Japanese leaders.

Yes, one day the “debtor countries” like Japan and the U.S. are going to feel the heat. Obviously, that “day” isn’t today, or next week, or month. but I do believe that the dog days of summer are going to return the heat to these two. Especially if stories like the one I have for you coming up after the break get some attention. We’ll be right back!

Well, what do we have here? USA Today yesterday (thanks, John Min) had a front-page story titled “Red Ink 4 Times Official U.S. Tally.” Oh, haven’t I told you before about how our government tends to stretch the truth when it comes to real numbers? And I’ve complained about the fact that the government doesn’t have to account for things like corporations, small businesses or even states! But there it was in USA Today. When using accounting that would put corporate heads into jail, the U.S. reported a $1.3 trillion deficit last year. However, when using accounting that everyone else in the U.S. has to use, the deficit was really, truly and officially — drumroll, please — $5 trillion.

Now, from 2004 to 2011, government deficits would actually be six times the government’s figure of $5.6 trillion.

I can hear the fans of the government style of accounting saying that you shouldn’t include retirement programs in the budget, because — and get this — “Congress can change what it owes by cutting benefits or lifting taxes.” OK, tell me when you think THAT might happen! Are you kidding me? That’s a pretty weak argument. There’s no political will to do what needs to be done. There’s no political will to cut the discretionary spending, which is chump change compared with the Medicare, Social Security and Medicaid expenses.

Onto something else, I feel like the boy who cried wolf — only I’ve been crying wolf for over a decade now! Of course, the problems with the dollar did occur, so some of my crying wolf has helped people. But this debt thing here in the U.S. just continues to grow and grow, sort of like my waistline the past five years.

The Swiss franc (CHF) continues to hold onto the 1.2010-15 cross to the euro, just keeping its head above water enough to keep from taking on water. At any time, traders could very well take out that 1.20 level, leaving the Swiss National Bank (SNB) no course but to react and sell francs and buy euros. And that’s why I tell people at conferences to steer clear of the franc. But what happens if the SNB has no resolve and the traders call their bluff? Then the franc strengthens and I’m wrong.

The Australian dollar (AUD), which on Tuesday was nearing 99 cents again and then experienced what all the other currencies experienced on Wednesday, is back on the rally tracks for the second consecutive day this morning. Maybe those measures we’ve talked about showing the A$ was oversold were correct. But then, in previous turnarounds by the A$, the bounce was more significant than what we’ve seen the past two days. So maybe there’s more to come? If near-term history since 2010 is any indication, that would be a yes, there’s more to come. But I’m not banking on anything from the past holding true these days, fundamentals having been thrown out the window with the bath wash.

Gold also has found its way to the green numbers for two consecutive days. I’ve got to say that the performance of gold (and silver) has been very disappointing this year. But people like Bill Bonner told us all that this could be the first year in the past decade that gold takes a breather, and if we had listened, this would not be so disappointing. And earlier this week, I told you what I believed about the price action from $250 to $1,200 and then from $1,200 to $1,900 and then back to $1,555. The year isn’t half over, so we could still see gold recover this year. But if not this year, then 2013 should be the year of recovery. I say that because I truly believe that the commodity bull market is not over. It has just taken a breather. The challenges to the global economy remain and will remain for years to come. This uncertainty will be the match that lights the fire. And before the legal beagles prepare to slap my wrists, that’s all my opinion, and I could be wrong!

The euro did bump up to 1.26 briefly while I was writing, but is back down a bit. This will be an interesting day with the thin volume in the markets. So be prepared for a wild ride, but then the past couple of Fridays before three-day weekends have been lackluster. So what’s it gonna be, markets?

I completely forgot to mention the incomparable newsletter writer Richard Russell, an absolute must-read for me. I’ve used so many of Richard Russell’s snippets and quotes over the years, you would have thought I would pull that name out without thinking about it!

And I actually heard from the Mogambo Guru yesterday! The Mogambo sent me an email. Longtime readers of the Mogambo Guru know how good he is with his descriptions of government blunders, so you can only imagine an email from him! Thanks, Richard… you are a real friend!

The Chinese renminbi (CNY) has been on a three-week losing streak as the Chinese government guides the currency weaker in an effort to keep their exports on pace to support the slowed-down economy. I’m not too concerned about this three-week move, which has only really been less than 1%. China left the renminbi unchanged for over almost two years during the financial meltdown in the U.S., and then they went back to allowing appreciation. We could very well see that again as the U.S. prepares to enter the backside of the financial hurricane. But remember, the Chinese want desperately to remove the dollar standard, and have publicly said so. They won’t get that to happen with their currency at current levels.

As I’ve told you many times in the past, the Singapore dollar (SGD) mimics what the Chinese renminbi does. So with the three-week losing streak in renminbi, so too do we have a three-week losing streak in the S$. But again, its loss during that three-week losing streak has been less than 1%.

Then, in keeping with my call that the U.S. is preparing to enter the backside of the financial hurricane, I saw this on ZeroHedge.com. You can always find stuff like this there:

“Here in the U.S., I think that The Bernank’s plan was to pretend they didn’t need to print more money, get commodity prices down and then hope that the economy would respond favorably to that development. This wouldn’t have negated the need for more printing; however, it would have bought time and allowed for a potentially lesser degree of action. Instead, what has happened is that the global Ponzi is completely and totally incapable of holding itself together without consistent and increasingly large infusions of central bank money. The debt burden is too large, the malinvestments too pervasive, the corruption too systemic. The whole house of cards that is the global economy will vanish into dust rather quickly without more and more printing. So what do you think they are going to do? If I am correct and the U.S. economy itself is now in the early stages of what will probably turn into a serious economic slowdown, then it will not be easily stopped with incremental central bank policies. The fact that they have waited this long and the fact that the global economy is in the midst of a serious slowdown tells me one thing. They are way behind the curve, and by the time they realize this, it will be too late to stem the momentum. That said, I do expect them to respond, and the fact that things will have gotten much worse than they expected will mean a major response. I’m not talking Operation Twist part deux. I mean a serious print. Potentially, the BIG ONE.”

See, I’m not the only person crying wolf on this economy. It makes looking to gold and silver as safe havens an interesting thought.

To recap: The calm that was in the currencies yesterday morning held through the day, and is still prevalent this morning. The tourniquet has been wrapped around the currencies and metals for now. There’s news out this morning that German Chancellor Merkel is open to a compromise on the eurozone bond issuance idea. Chuck offers up his idea of a compromise. The U.S. fails to account for its expenditures like it demands corporations do. Our deficit last year was really $5 trillion, as if the reported $1.3 trillion deficit weren’t bad enough!

Chuck Butler
for The Daily Reckoning

Accounting for the US Government originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Charlie Munger, Warren Buffett’s partner in crime at Berkshire Hathaway, told CNBC recently, “I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold. They invest in productive businesses.”

In a way, Munger is correct. Gold is uncivilized in the sense that it functions best when civilization functions worst. The more uncivilized a society becomes, the more civilized gold becomes.

So the easiest way to dismiss this statement is to say that maybe it’s 1939 again and maybe this time “we’re all Jewish families in Vienna.” But let’s not let Charlie off the hook so easily. Instead, let’s “unpack it,” in the words of our tutors at St John’s College in Santa Fe, New Mexico. To ‘unpack it’ we need to focus on two key words in Charlie’s statement: “productive” and “civilized.”

Charlie might be right if the world were, indeed, civilized. But maybe the modern world isn’t as civilized as he thinks. Part of what made the world so uncivilized in 1939 was unsound money. The abandonment of the classical gold standard in 1914 made the expansion of the Warfare state possible. The equally unsound system that emerged from World War I — including the Treaty of Versailles — virtually guaranteed that monetary and fiscal instability would lead to political instability. Radical parties like the Nazis flourished.

Gold, on the other hand, is sound money. You are not buying it for a capital gain. You are buying it, by our reckoning, as a way of preserving purchasing power. You extract paper from the fiat money system and turn it into something (bullion) you can later exchange for whatever currency emerges when the financial system becomes more civilized.

Interestingly, for more than a decade Berkshire has underperformed gold — the investment asset Buffett recently called “forever unproductive.”

Since 1997, Berkshire’s shares have declined relative to this forever unproductive asset. The nearby chart depicts the trailing 10-year return of gold since 2007. Thus, the first data point on this chart shows the return an investor would have received from buying gold or Berkshire Hathaway in 1997. Moving across the chart to the right shows subsequent 10-year time frames. Bottom line: Based on a 10-year holding period, there has not been a single moment since late 1997 what an investor would have been better off buying Berkshire Hathaway instead of gold.

No wonder Charlie is so cranky!

This lengthy underperformance by Berkshire may explain Buffett’s and Munger’s very vocal and public hostility toward gold. Or maybe that’s just a function of both men living most of their adult lives in an era where the monetary system was not disintegrating. They are unable to imagine it.

But the chart above isn’t an indictment of the investment acumen of Buffett and Munger. It’s an indictment of the world’s fiat monetary system! A civilized society with civilized people has sound money. An economy with sound money has price stability. This stability allows for long-term planning and investment. This stability rewards investors for identifying which businesses are the most productive and efficient users of shareholder capital.

For these exact reasons, William McKinley campaigned for President in 1896 and again in 1900 as a champion of the gold standard. He won…twice. But just 12 years after his assassination in 1901, the Era of Incivility began: The Federal Reserve came into being. Just 20 years after that, FDR confiscated all privately held gold. And 38 years after that, Nixon cut the dollar’s last remaining ties to gold, thereby establishing today’s very uncivilized “fiat money” system.

In an uncivilized society, where the value of your labor is stolen through inflation (made possible by an unsound money system) long-term planning and investment become much more difficult, if not impossible.

If you accept that we live in civilized monetary times where productive labor is actually rewarded, your brain has been tranquilized by the Big Lie of our times. Munger wants you right where you are. The less you think about how uncivilized the current monetary system is, the less likely you are to question it or disrupt it (which would be inconvenient for Charlie).

But if you live an era that subverts accurate valuation of productive businesses — an era that subverts the productivity of the economy itself by encouraging debt and consumption, owning gold seems prudent, not wacky.

Uncivilized times call for uncivilized investments.

Regards,

Dan Denning
for The Daily Reckoning

Uncivilized Investing originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

There you have it. If you possess absolutely no gold, other than maybe a tooth filling, you are civilized. Congratulations!

If, however, you’ve stashed a few Krugerrands under your mattress, we’ve got some bad news for you. You are hopelessly uncivilized — a financial Neanderthal, deserving of pity from your civilized counterparts.

“I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939,” Munger remarked recently, “but I think civilized people don’t buy gold. They invest in productive businesses.”

Yes, that’s right, Charlie. Civilized people invest in productive businesses…until an uncivilized government decides to steal it, or merely tax and regulate it into oblivion. Some Jews in Vienna in 1939 operated extremely productive businesses. Unfortunately, they could not stitch any of those into their garments.

In other words, Charlie, civilized investment strategies function in civilized societies. In uncivilized societies, gold is usually a better bet. Or to put it another way, as civilizations lose their civility, share prices fall and gold soars…which is exactly what has been happening here in our beloved US of A.

During the last decade and a half, the investment return of Berkshire Hathaway, perhaps the most civilized of American stocks, has trailed far behind that of gold. Civilized folks like Charlie Munger and Warren Buffett consider that 15-year trend a fluke. Maybe so. Or maybe this trend is a warning that America is becoming a bit less civilized — a bit less friendly to productive businesses.

Notwithstanding this trend, civilized folks know better. They shun gold in order to invest in the shares of overhyped social media companies, highly leveraged banks, bonds of bankrupt governments and complex derivatives that are impossible to value precisely… until they go to zero… at which point their precise value is known.

That, Dear Reader, is civilized!

But there is one additional echelon: the über-civilized investor. Über-civilized investors shun gold to invest in über-complex derivatives. These are the folks like Warren Buffett who do not merely shun gold, but also belittle it very publicly while loading up on highly leveraged finance companies that are loaded up on complex financial derivatives.

Often, these banks are run by über-über-civilized investors — the kinds of guys who do not merely load up on complex derivatives, they load up on complex derivatives linked to the bonds of bankrupt governments. Then they utilize a “risk control” methodology that has a perfect record of failing to control risk.

You just can’t get any more civilized than that.

Eric Fry
for The Daily Reckoning

Investing in Gold as World Economies Falter originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

— Neil Sedaka

What’s the Greek word for ‘chutzpah’? We don’t know either.

But the leader of the communists/socialists, Alexis Tsipras, has it. He must have heard that old saying:

“When you owe your bank $100,000, you can’t sleep at night. When you owe your bank $1 million, your banker can’t sleep at night.”

Since the Greeks owe money all over town, he figured he could thumb his nose at his lenders. He told the Germans that they were trapped. They had no choice. They had to keep the money flowing to Greece. Otherwise, the Greeks would default…and cause Hell to all of Europe.

What’s the word for “oh yeah?” in German? We don’t know that either. But surely the Germans have a word for this occasion. A word that means… “We’ll show you what a moron you are…”

In the event, the Bundesbank did the talking. As to the possibility of the Greeks’ departure:

“The challenges this would create for the euro area and for Germany would be considerable but manageable given prudent crisis management.”

Or, in the words Gerald Ford used in responding to New York City’s request for a loan: ‘Drop Dead.’

Yesterday, the Dow was down as much as 170 points as investors wondered what would happen next. The dollar rose to $1.25 to the euro. By the close of trading, the Dow had managed to pull itself up to only a 6-point loss. Everything else was down, down, down…and it keeps going down. Watch out…investors could panic!

In Europe itself, things seem to be coming to a head. It looks like the Greeks might finally leave…or be pushed out of the euro.

Bloomberg continues:

Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

But switching currencies is not an easy thing to do. Bloomberg continues:

It would most likely be necessary to close borders to stop Greeks smuggling out euros to stash in banks elsewhere. But with hundreds of miles to cover, much of it in inaccessible mountain, wood and scrubland, security forces would be stretched thin.

Simultaneously, police would likely have to manage a dramatic spike in unrest and perhaps more political and criminal violence. Already, there have been isolated examples of Germans — or those suspected of being German — being assaulted in apparent anger over EU-enforced austerity.

Greece’s leaders could decide to deploy the army onto the streets in an attempt to reassure the population and bring calm. But that could prove deeply divisive…

The commentariat still insists that it would be against Germany’s interest to push the Greeks out of the euro. One says Germany would be “shooting itself in the foot” or perhaps the head. Another says it would cost a fortune, $1 trillion, according to a report in the Telegraph:

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”.

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Yes, breaking up is hard to do. It would be costly. But money isn’t everything. People do bad things for money, it’s true. But they do worse things IN SPITE OF money.

Where was the money in WWI? In starving the Ukrainians? In Hitler’s ‘final solution’? In the extermination of the Armenians?

You might find a money motive…but few mass murderers are bottom-line oriented. They’re usually world-improvers…

There are some things more important than money. National pride is one of them. Here’s our point. At some point, people stop counting the costs…they go ‘off their heads’…and begin doing things that don’t really benefit anyone in a financial way. So, it may not matter whether it “makes sense” to kick the Greeks out of the European monetary system or not.

Greece was still in it as of yesterday. Today, anything could happen. But at this stage, the Germans may prefer to blow off a toe or two in order to get rid of them.

We went to Toronto yesterday to visit an old friend who made a lot of money in the mining business but now works in bio-tech. Why did you get out of mining, we wanted to know?

“It just got too crowded. You know what they say about the ‘crowded trade.” Get out. Well, I guess it was the big run-up in commodities a couple of years ago that caused it. Suddenly, everyone was starting up a mining company. And they were getting a lot of investment money. Everybody thought he’d get rich in resources.

“But it doesn’t work that way. The mining business is extremely cyclical. Prices go up. It draws in the marginal players. And the good deals disappear. Everything is too expensive. There’s too much production. Too many projects. Too many promoters. And then prices collapse.

“We’ve already had a good pullback. I’m starting to see some good deals again. But I’m waiting a little longer. I think we’ll get some better deals before this is over.”

Our guess, here at The Daily Reckoning, is that Facebook’s IPO represented some kind of high water market for the virtual economy. It was like Blackstone’s IPO in June 2007, which marked the top in the financial economy.

Now, the economy will shift back to the real things…oil, and copper, and precious metals. It could take years.

But heck, we’re not in any hurry either.

Regards,

Bill Bonner
for The Daily Reckoning

Bracing for a Greek Exit originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The talk about a Grexit softened its tone a bit yesterday. The markets were basically saying that Greece could exit the euro (EUR) this weekend! The US is obviously on holiday this coming Monday, and that fact has factored into the calls for an exit this weekend.

Again, I don’t see this happening, as the cost to Greece — the pain and mess — will be far greater to the Greeks than their austerity measures, should they decide to leave. So I’m on the side of the fence that says Greece stays.

The EU summit was a nonevent. EU leaders left the summit without any meaningful plans. They all agreed that Greece needed to stay in the eurozone, but could not come up with any meaningful action that could be taken.

If you go back in time, when the Greek debt problems first called for a bailout, and the markets all thought that the contagion effect would take over all the southern eurozone countries, I told you then that the only way to deal with this — so that there would be no further contagion — is to issue a eurozone bond, and quit having each country hold their own auctions.

Yes, it takes another chink from each country’s sovereign armor, but when each eurozone country decided to give up their sovereignty of their currency, they opened the Pandora’s box of how to lose one’s sovereignty.

So now skip ahead to the EU summit, in which discussion of a eurozone bond would have nipped the daily flogging of the euro in the bud, the EU leaders decided to push that discussion off to the next summit. What? These guys are really beginning to give me a rash! What the heck are they thinking? Oh, I know, they are thinking that maybe with time, the problem goes away, and they don’t have to have that eurozone bond discussion.

My dad used to tell me all the time that most problems will take care of themselves with time. However, I think the EU leaders have chosen the wrong road to journey down. They needed to address this problem right away! So they decided to see if the problem would take care of itself, with time. I’m sure they will rue the day they decided to journey down this road.

OK, the euro this morning is down just a bit, as it shrugs off the nonevent EU summit, and the news this morning that German business climate, as measured by the think tank IFO, fell by the largest one-month margin (negative three points) since August 2011. The experts had thought it would be a negative number but a soft negative number, not a hard negative number.

German flash PMIs (manufacturing indexes) also are showing some weakening. So even the calm in the eye of the eurozone storm, Germany, is showing that the overall weakness in the eurozone is hurting them, too.

Speaking of PMIs, in China, we always get two sets of PMIs. The government issues their report on the pulse of manufacturing, and HSBC (Hong Kong and Shanghai Banking Corp.) issues theirs, and never do the two match up. For instance, last month, the government issued a report that said that manufacturing as measured by the PMI was a number above 50, and HSBC issued a report that said it was below 50. (Remember, 50 is the line in the sand that denotes whether manufacturing is expanding or contracting.)

I always grow suspicious of government reports that don’t line up with those in the private sector. Take the U.S. economic reports versus ShadowStats. There are HUGE discrepancies between these two, but the sheeple here in the U.S. don’t pay attention to any of this. Whatever the government tells them, they swallow hook, line and sinker.

Anyway, getting back to China, the HSBC PMI report showed a seventh month of below 50 for April. The government report is usually printed on a weekend, so we’ll see what this has in store for us this weekend, as the pools open here in the U.S. (ours has been open for a month!) and the smell of charcoal drifts through each neighborhood and we sit back and reflect on the meaning of Memorial Day.

Did you know that Memorial Day was originally called Decoration Day? And that it originated after the Civil War to commemorate the fallen Union soldiers of the war? Notice, it was only the Union soldiers. Apparently, the South held their own Decoration Days in each region on different days. We joined this all together and called in Memorial Day, to honor the men and women that had died while serving in the U.S. armed forces, and later, we said it would be the last Monday of May.

There you go! A public service education announcement! You get it all here, folks! Why go to any other newsletter? Just kidding. Of course, absolute newsletter reads that I have include: The 5 Min. Forecast, anything David Galland writes, Doug Casey, Bill Bonner, David Rosenberg and I even carve out time for my friend John Mauldin once a week, and of course, the Mogambo Guru!

I wanted to write about this yesterday, but forgot all about it until I had hit “send”! UGH! But did you see the latest existing home sales data here in the U.S.? Very strong, and for the first time in a year of Sundays, the home price increased! WOW! Did we just hit the bottom for home prices? Somehow I can’t get my arms around that thought. I just think about the unemployment situation, and the foreclosures coming down the line, and have to think that this was just a one-month blip. But maybe I’m wrong, and it’s time for me to stop being such a negative Nellie.

I really wanted to send Chris a note on this last week, and then something happened that took my attention away from the story. Then I thought I would talk about it first thing this week, but then something happened to take my attention away from the story, so now on Wednesday afternoon, while I’m thinking about it, I will write it down for Thursday. And it’s Thursday!

Basically, I wanted to talk about sentiment, and focus. While everyone was having a cow over the Greek debt and whether they would form a new government and all that, the eighth-largest economy in the world announced that they had miscalculated their budget deficit and what had previously been forecast to be $9 billion turned into $16 billion in deficits. That eighth-largest economy in the world? Not Greece… not Spain… not Italy… but the great state of California.

The sentiment right now is that the eurozone’s center will not hold together, and the focus is on the eurozone’s problems, not those here in the U.S. with the same thing: debt. Trader sentiment and focus is all that’s needed to either make a currency’s day or send it up the creek without a paddle. And right now, the euro has been sent up the creek without a paddle.

Gold and silver saw another day of selling yesterday, and are down once again. (I have some words on this from Ted Butler later today). And the Australian dollar (AUD) has bounced higher this morning. I have given you two measures that are used to calculate if a currency is oversold in the past week and both showed that the A$ was oversold. But that doesn’t always mean that traders will jump to buying, in this case the A$ immediately. Not with the U.S. dollar strength so prevalent in the markets right now. But they will. Traders can’t break free of their urges to react to charts and index measures.

Hey! I just watched the price of gold go from a negative $5 to a positive $5 in less than five minutes! WOW! Maybe the shiny metal can catch some wind in its sails today.

The 7-year U.S. Treasury auction was interesting. The yield on the 7-year note fell to 1.13%. That’s a record low yield, folks. And just when I thought that yields couldn’t really get much lower! I’m sitting here with the thought of “Yes, Virginia, Treasury yields can go lower.” Hey! For the award of financing U.S. deficit spending, you can get 19 basis points of yield out one year. Of course, by the time the broker takes his pound of flesh for doing the trade, you probably end up with a negative yield. And I hate to break this to all you U.S. Treasury buyers, but unless you go out 30 years, you have negative real interest on your holding (real interest is the yield — inflation).

And then the two anti-dollar investments, oil and gold, which have been butchered lately with the dollar strength, at least didn’t lose any more ground overnight. I’ll have to go read the Mogambo Guru to see what he’s thinking these days about the price of oil and gold.

Then, from Ed Steer’s Daily: “This is Ted Butler speaking… ‘The price action this week has been horrid. It is horrid because the crooked commercials on the Comex have made it horrid. There is no legitimate economic justification for the price decline since Feb. 28 other than the price action was created to permit the commercials every opportunity to scare and induce others into selling Comex contracts so that the commercials could buy. Almost every day, the price of silver and gold seem to be put lower in thin overnight trading. Almost every day, we start out “in the hole,” where it is a struggle to get back to unchanged. This is not accidental; it is a deliberate plan to demoralize and keep silver investors confused. It is shameful that the CFTC has been captured by the crooks and is content to look away.

“‘The good news is that the commercials have succeeded in buying record amounts of silver (and gold) contracts. It’s impossible to pick the timing of the next rally, as we are in a sort of “no man’s land” currently, where technical-type buying won’t come in until the moving averages are penetrated to the upside. There still doesn’t appear to be much speculative selling remaining in silver and gold after the orchestrated takedown of the past couple of months, but neither is there any impetus for technical buying below the moving averages. In this environment, it’s not hard for the commercials and HFT practitioners to put prices sharply lower at will. About the only sane reaction to all this is to accumulate and hold physical silver for the long haul, as the short-term manipulative games won’t last forever.’”

Last week at the Las Vegas Money Show, the booth across from ours was Investment Rarities, which is Ted Butler. One of the guys in their booth came over to me and told me what a fan he was of the Pfennig. And I was like, “When you have Ted Butler? WOW!”

To recap: There was blood in the streets yesterday with the risk assets, as the asset prices dropped all day long. Today, we’re seeing some light — not much, but some, for the risk assets. German IFO and flash PMIs say that even Germany is weakening. The eighth-largest economy in the world announced that their budget deficit was $16 billion, not the $9 billion they originally told everyone it would be. And yes, Virginia, U.S. Treasury yields can go lower.

Chuck Butler
for The Daily Reckoning

Currencies Try to Rebound Today originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Revolutions in our understanding of the genome and proteome, however, are opening up new pathways toward vanquishing the cancer foe…

These technologies are maturing and are finally starting to put a dent in the problem. It can take a decade or more to get from the academic lab to the oncologist’s office, but we are beginning to see a harvest in the form of new therapies.

One of the things I love to see in pre-commercial biotech companies is a drug discovery engine that gives it a competitive advantage. An advantage when it comes to discovering and designing next-generation therapies.

Although the main headlines in drug discovery are lately grabbed by breakthroughs in computer modeling or bioinformatics, all successful drug candidates must also be screened in vivo. That is to say, in living organisms.

A superior computer-based discovery process is a huge advantage when it comes to screening millions of potential compounds. Nevertheless, before moving on to human clinical testing, potential suitability must first be verified in animals.

There are the obvious ethical considerations regarding human testing that the FDA helps enforce. However, the prohibitively high cost of testing in humans also demands that a candidate compound be thoroughly vetted before initiating an expensive clinical trial. Researchers must “check their work” as rigorously as possible before assuming these risks.

Here, the older technology has limitations.

Traditional cancer discovery techniques use implanted tumors in animal models to test potential compounds. However, these tumor cell implants, called xenografts, aren’t adapted to an in vivo setting. They are typically grown in a culture and are therefore adapted to that environment.

In this respect, they aren’t truly representative of a real-life tumor, which develops from a mutated cell in a living organism. This causes cancer researchers to drill a great many “dry wells” in their search for a winning formula — since existing in vivo technology turns up a lot of false positives.

One platform is designed to improve on the limitations of the existing technology. It is built upon the revolution in genomics that has enabled researchers to map genetic mutations unique to cancer cells in order to target them.

In addition, advances in genetic engineering now allow researchers to develop custom cell lines that express the same molecular targets as the cancers they want to treat.

It uses mouse stem cells into which cancer-causing gene mutations are inserted. These stem cells are then injected into mouse embryos alongside healthy cells. The chimeric embryos are then implanted into mice, creating a line of custom-made animal models that develop cancers expressing the same cancer targets researchers want to hit.

Unlike tumor xenografts, these tumors are more similar to those that occur in real life, since they form spontaneously in the body. Normal tumor interactions with surrounding tissues are preserved.

Not only that, they also express a genetic variation that is more like what exists in tumors that form naturally in humans.

Since the genetic variation more accurately models what goes on in the real world, it helps identify why some tumors of a specific cancer type respond to a therapy while others do not…

This is important, since resistance to therapy can vary widely from patient to patient, even if the cancer is of the same type.

Companies working towards new ways of discovering drug compounds will maintain the competitive edge in their field. Dilution is the usual downside of investing in pre-commercial biotech companies. Not yet profitable, they need to raise capital to continue funding operations.

However, before you put your money into a small, pre-commercial biotechnology company, you want to make sure they have something no one else is offering.

Regards,

Ray Blanco,
for The Daily Reckoning

Superior Biotechnology Leads to Superior Drugs originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

— Reminiscences of a Stock Operator, circa 1923

Poor Zuckerberg. He’s got all those Facebook shares. And they’re dropping in price. The stock closed a bit over $31yesterday…and then kept sinking… It was down to $30 in afterhours trading.

What did you expect? The company has sales of $4 billion. IF…IF…it were able to claw out a 10% profit margin…and IF a fair multiple for its earnings were, say, 10…the company would be worth $4 billion. Not $100 billion. Four billion dollars. And instead of having shares valued at $15 billion, Mr. Zuckerberg would have shares worth about $800 million.

The Dow itself was flat yesterday. Not a very good showing after so many down days. We’ll keep our ‘Crash Alert’ flag up. The bottom could drop out at any time.

The Facebook IPO looks more and more like the end of an era. The end of the pie-in-the-sky social network era. The end of the post-crisis recovery rally. The end of the public’s residual confidence in Wall Street. The end of America’s youthful energy…its era of growth, innocence and hope for the future.

Now, growth rates are low; they’ve been falling for the last 30 years. The baby boomers are neither booming nor babies. Stocks are passé…people want bonds now. And 63% of voters think their children will be worse off than they are.

At least Zuckerberg has it made. He’s got about 500 million shares and options. But every two dollars they fall costs him about $1 billion. So, he’s lost $5 billion since the company went public on Friday.

Still, we’re not going to feel sorry for him. He’s still got $15 billion or so.

Not that we care how much money he’s got. He could have twice as much; he’d still be a putz. We saw the movie!

Seriously, Americans care far too much about money. That’s what people who don’t have it say. They say that too much money is a sign of greed. And that people with too much money can’t relate to everyone else. We lose our sense of community…our public space. People with money live separately from the rest of us. They buy elections and use too much energy…and leave small tips. They’ve got too much power, too much influence, and too much of the pie.

Paul Krugman, Thomas Friedman and Barack Obama want to solve this problem by taking money away from the people who have it. And making it harder for them to earn more.

The guys at J.P. Morgan lost a few billion. You’d think the anti-money crowd would be happy about that. Instead, they want to make a federal case out of it. Practically every pundit is calling for more regulation. “If even good bankers can lose so much,” they say, “we’ve got to get control of them!”

The whole idea that they can regulate risk out of the system is loony. It doesn’t work that way. The more they regulate, the more they distort the market, and the more mistakes investors make.

Investors are buying US treasury bonds, for example, by the boatload. Why? Because the regulators at the Fed have taken the risk out of buying bonds. If interest rates rise, the Fed will buy bonds itself.

Dear Readers and connoisseurs of regulatory FUBARity will appreciate the flexibility of America’s central bank. Its aim is to drive investors into risky assets…by suppressing yields on “safe” treasuries. The unintended consequence is to create depression-like yields…and capital gains for bond buyers. Investors flee stocks…and go into the Treasury bonds the Fed was trying to get them out of. Thus does the Fed manage to bend its right leg far enough to kick its own derriere.

People who don’t like the rich should spend a little time thinking about how the rich got that way. Were they smarter than others? Greedier? Or just luckier?

In our humble observation, we’d say they were a little of all those things. But most of the big increase in wealth the rich enjoyed has come thanks to those same regulators whom the feds want to sic on them.

Yes, dear reader, the rich got richer because of the fixers…not because of the rich themselves. In 1971, Richard Nixon changed America’s money. The old money — backed by gold — flowed to the hardworking producers. It was saved, invested, and put to work. This new money had different ideas. It ran around in different circles. It preferred a different class of friends — bankers, money managers, investors, speculators, venture capitalists, derivative mongers, private equity operators…

You can see this shift illustrated in the difference between Mitt Romney and his father. The ol’ man ran an auto company. He made cars. That’s where the money was back then. He made the Rambler. Remember that? We had one. It was cheap. It was ugly. It ran. What more could you ask for?

But the son never made anything…but money itself. He didn’t run productive companies. Instead, at Bain Capital he was a leading member of the new class of people who fiddled with them.

By 2007, this class had gotten far too big for its britches. The whole capital structure began to wobble. Left alone, it would have crashed to the ground…bringing rich people down to earth with it.

Left to its own devices — without the generous support of the feds — the Dow might have fallen to 6,000 in 2008…and kept falling. And it probably would have brought down J.P. Morgan…and Goldman Sachs…the Bank of America and most of the rest of Wall Street. Even GM, which by then had become a finance company, would have gone out of business.

And today…there wouldn’t be nearly as many rich people to complain about. Problem solved.

Instead, the fixers fixed it so the fixees stayed fixed.

Hey…here’s another bubble…getting ready to blow up. Bubble bubble student trouble:

Student Loans With Over $1 Trillion are Likely One of the Next Hindenburg Zeppelin Financial Infernos

Barry James Dyke, author of The Pirates of Manhattan II: Highway to Serfdom predicts that student loans, in excess of $1 trillion, will likely be one of the country’s next financial infernos.

Federal student loans interest rates will rise to 6.8% on July 1st 2012 from their current 3.4% base if Congress does not act. Banking lobbies oppose any reduction in interest rates. If Congress does nothing, the average student’s $23 thousand subsidized loan costs will increase an additional $5,000 over a ten year period.

The author states, “Student loans are a form of indentured servitude as student loans cannot be discharged in bankruptcy. Student loans do not die with death. Collection agencies can call day and night to collect student loan debts. Garnishment to pay student loan debt is common. Students are not getting enough well-paying jobs to pay back these enormous loans, yet The Department of Education through the Department of Treasury can attach tax refunds to pay off student loans. What is more, our Congress drove the getaway car for academia and the banks in 2005 with the Bankruptcy Abuse and Consumer Protection Act of 2005 — which turned student loans into non-dischargeable debt.”

According to the Department of Education, two thirds of students who earn a bachelor degree use some type of loan to finance their education with an average loan of roughly $23 thousand. The New York Times recently reported that as much as 94% of students borrow to get a college degree.

The taxpayer underwrites roughly $105 billion a year in Title IV student loans a year, with $24 billion going to for profit schools owned by Wall Street asset managers. Student loans guaranteed by the taxpayer are a major source of revenue for the US higher educational system and if default rates accelerate, it could bring about a Greece like debt problem to the nation’s colleges.

“Excessive borrowing for an education will be a dark cloud hanging over this generation for decades,” claims Dyke. ”Default rates on student loans for traditional undergraduate and graduate rates are currently as high as 15.8%, and as high as 48% for for-profit colleges. The New York Fed reports that nearly one in four student loan holders are falling behind on their student loan payments.

Regards,

Bill Bonner
for The Daily Reckoning

The Delusion of Regulating Risk originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".