Strategic Investment

Surviving the Obama Depression:
Your Future of Blackouts and Shortages as the U.S. Becomes a Third World Country

The concept of contracts being enforced ended in this country in the fall of 2008 and early in the term of the radical socialist ninny in the White House. They screwed bond holders in the GM and Chrysler deals – broke contracts all over the place. This by our own gobmint. We are now indeed a third world country, where negotiating never ends.

– Rob Wilson, September 3 2009

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the “sudden stop” – the cessation of capital inflows to both the private and public sectors. There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers. But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a “sudden stop.”

– William Buiter, Financial Times
“Fiscal expansions in submerging markets;
the case of the USA and the UK”

There is perhaps no better place on earth to contemplate economic decline than in this cosmopolitan city of Buenos Aires, with its somewhat slummy, discount version of European cafe life that seems to have been distilled from an old post card of Paris or Rome as they might have been on the eve of the Great War.

Buenos Aires is full of Parisian-style patisseries, known here as confiterias, and Roman-style emporias de las pastas frescas artesanales. The city also has Michelin-caliber kitchens, such as La Bourgogne, El Sud, Casa Cruz and Nectarine, where you can eat splendidly for a fraction of what you’d pay in Europe.

But economic decline is not just a matter of living well at a discount for those who have managed to retain a smidgen of solvency through eight decades of misgovernment. Decline has a darker side.

In the ultimate expression of recycling, a multitude cartoneros (literally, “cardboard collectors”) prowl the sidewalks of Buenos Aires, pushing unwieldy gray carts made of baling bags on wheels as they deconstruct the city’s garbage. This from a Christian Science Monitor report:

Nearly 30,000 “cartoneros” invade the city’s neon-laced streets every night pushing handmade canvas carts, overturning garbage cans, strewing trash along the streets and collecting materials that they sell to recycling centers – each on average earning 10 to 15 pesos, about the cost of a large pizza.

As befits a thoroughly politicized economy, the cartoneros have become an officially recognized profession, subsidized by the government to dump trash all over the street and rummage through it for recyclables. The cartoneros hold some of those exciting “green” jobs you keep hearing about.

They also stand as a living refutation of the demagoguery that played so destructive a role in Argentina’s past.

Then as now, demagogues claimed that maintaining an open market economy was unacceptable; they had worked up a lusty appetite for “change” during the Belle Époque prosperity. But in those days, demagoguery was not a paying sport. The masses to which demagogues appealed were not permitted to vote in Argentina until high property requirements for the ballot were waived on the eve of World War I. Before the election of 1916, only the richest 10% of Argentine men voted.

When the distribution of ballots is equal but the distribution of economic assets is unequal it is elemental, if seldom acknowledged, that voting will tend toward the equalization of economic assets.

Lake Woebegone Arithmetic

Back when universal male suffrage was introduced, the Argentine elite identified closely with the British upper class. They reasoned that since Britain had experienced more or less universal male suffrage since 1885, that Argentine prosperity could survive adopting it. They reckoned without the world crises that soon disrupted Argentina’s economy; Argentina’s terms of trade fell about 50% from 1910 to 1921.

Then as now, one of the issues that most inflamed demagogues was wide income disparities. The old Argentine arguments make an interesting twist on current complaints against globalization. In those days, critics alleged that only the rich benefitted from free trade because they could sell primary products at a high profit that enabled them to afford expensive imported manufactured goods that were beyond the means of the ordinary worker.

Today, after the collapse of the Bubble Epoch, we hear griping about globalization that is the inverse of those old arguments. Anti-globalization critics fret that free trade hurts the poor because it permits consumers to buy cheaper manufactured goods, which thereby undercuts the high wages of the ordinary worker while “the rich get richer.”

The moral of the story may be that at any point where the dynamics of the free economy lead to disproportionate gains market critics will agitate for change that involves a lot of political intervention in the economy.

As a “local lady” told Flora Lewis of The New York Times in 1990, “All our grandparents were rich.” This smacks of the arithmetic of Lake Woebegone, where “all the children are above normal.” But for Argentines of a certain class it would have been true. On the eve of the Great War, Argentina had about one-tenth the population of the United States – but among them were probably more who were wealthy by world standards than were Americans at that time.

Although precise figures on income distribution in Argentina date only to the 1930s, there is good reason to believe that the top 1% of Argentines earned a third or more of national income before export markets collapsed in 1929.

After years of redistribution, quantitative easing and forced industrialization to achieve “national independence,” the sudden spur to exports of grain and beef caused by World War II raised the percentage of income earned by the top 1% of Argentines to 26% in 1943. It would have been considerably higher before the Great War.

The lucky minority of super-rich Argentines were the proprietors of vast tracks of the Pampas – arguably the most fertile agricultural region in the world. In many places, the top soil was ten feet deep.

The Argentine pampas make up more than a quarter of a million square miles – an area larger than France – of which 8.2% of the land titles accounted for 80% of the productive area. As weather conditions in the pampas permitted two harvests a year, that area was twice as productive as the wheat growing regions of Canada. This is part of the reason that Argentina vied with Canada and Australia as the leading destination for British capital before the Great War.

Like the US today, Argentina was a rich country dependent on foreign capital. In those days, the main source of international capital was the City of London. The staggering cost of the Great War crippled Britain’s ability to export capital. Net property income from abroad plunged from 8% of British GNP in 1910 to just 4.5% by 1920. Argentina suffered along with the British capitalists.

During the 1920s, London was still prepared to lend a trickle to Argentina at only 90 basis points above the interest rates on British government Gilts. In New York it was another story: Argentine loans found few takers. The loans that were made were of short duration and at high interest rates of 7%.

As a result of the lack of foreign capital inflows, investments in Argentina declined sharply. And the rapid GDP growth achieved by high levels of capital accumulation earlier in the century receded. Between 1890 and 1913 the Argentine capital stock had grown by 4.8% annually; from 1913 to 29 it grew by only 2.2%. The opportunities for continued expansion of the Argentine economy dwindled correspondingly.

For a Spanish-speaking country, Argentina was thoroughly Anglicized in 1929. In that year, Sir Malcolm Robertson, the British Ambassador to Argentina, said, “Without saying so in so many words, which would be tactless, what I really mean is that Argentina must be regarded as an essential part of the British Empire.” He was certainly not wrong. Though as he was widely quoted, it is difficult to parse how “tact” came into his comments.

In any event, no country suffered more from the decline of the British Empire than Argentina, the only country in Latin America to drive on the left. Wealthy Argentines congregated at the sumptuous Jockey Club in Buenos Aires, conceived as an extravagant version of a London gentlemen’s club, with a portrait of the Duke of Wellington positioned at a point of pride over the mantel. Wealthy Argentines, like the Martinez de Hoz family, sent their sons to Eton. And Argentines enthusiastically took up English sports, such as cricket, rugby and polo. There was even a rare Eton Fives court in Buenos Aires. (Eton Fives is the form of the handball played at Eton.)

When de-globalization gathered steam as British capital receded after the Great War, Argentina applied for membership in the British Commonwealth to avoid having its exports punished by steep tariffs. The application was vetoed by Canada. Argentina later signed a Commonwealth-like trade treaty with Britain – the Roca-Runciman Pact that gave British goods preferential tariff rates in Argentina. This required Argentines to deposit payment for their export goods with Bank of England, to be offset against the $2.14 billion of loans Argentina still owed to British creditors.

That treaty notwithstanding, Britain was much more open to free trade with Argentina than was the emerging power of the United States. No doubt, part of the reason was that, unlike Britain, the US economy was competitive rather than complementary to the Argentine. Instead of welcoming Argentine meat, as Britain did, the US imposed import barriers after briefly running a trade deficit with Argentina.

The high tariff policy of the Republicans worsened the situation as the 1921 and 1922 tariff hikes hit Argentina hard, laying prohibitive rates on wheat, corn, meat, wool, hides, flax and sugar. Many Argentine exports had been on the free list; now only two were. Argentina protested. But it got little relief.

When the Great Depression began in 1929, Argentina was the world’s leading exporter of wheat, corn, beef, wool, hides, and several other primary products. The Argentine economy was still quite prosperous.

USA: The Next “Submerging Market”?

Argentines consumed more imported goods per capita than Americans. Argentines also owned more cars per capita than Americans, or indeed, than any other country except Britain. But rather than building on its economic progress to that point, Argentina pioneered the dynamics of the “submerging market,” the process through which a once rich economy devolves into poverty and economic retardation.

Like it or not, this is a process destined to engage the attention of Americans, as the United States under Barrack Obama rapidly adopts the very policies that brought ruin to Argentina.

After 1929, Argentina responded to the Great Depression with a “tremendous growth of statism” – the use of the state to own or guide economic institutions. As result, the number of government enterprises grew rapidly, as did bureaucracy. What did not grow rapidly was the Argentine economy.

Argentina’s example shows how a surge of statism could result in dramatic economic retardation.

Hence the fact that Argentina’s politicized economy today has subsidized jobs for cartoneros who live on garbage. It is hard to credit that they enjoy more income, more dignity, a greater chance of advancement or more of anything other than bad odor than even unemployed workers did in the pre-1929 free economy.

Lidia Quinteros, a shoemaker-turned-cartonero and activist, ominously advises Americans, “When a crisis happens in your country, you’ll have to do the same thing.”

That’s what I am afraid of. The crisis has happened, and I fear it is leading the United States in the same direction that Argentina took after the onset of the Great Depression in 1929. At that time, Argentina moved away from an open, free economy that was one of the world’s most prosperous, to become a closed, politicized economy, where government rather than the market determined investment priorities.

Of course, all these years later, one could say there is good news and bad news. Decay seems to have had some attractive results. For one thing, it seems to have mobilized the desire of women to look alluring. This is something I noticed decades ago as a (temporary) economic advisor in the former Soviet Union.

Before the fall of Communism, the women you saw on the streets there looked as though their deepest desire was to be mistaken for Mrs Breshnev. Afterward, they all dressed like expensive French whores. As Governor Mark Sanford of South Carolina could attest, there are some smoking hot women in Buenos Aires.

Steep economic decline, that included a multi-billion-percent inflation and decades of negative compound growth, hit Buenos Aires like an economic neutron bomb, wiping out families but sparing many handsome structures left over from a century ago when Buenos Aires was one of the world’s wealthiest cities.

Choosing the Wrong Path

Wherever you turn, there is a lot of faded elegance to be seen. That said, I am not insensible to the fact that one cannot merely stroll the streets of Buenos Aires and look around. That would be a recipe for a breaking a few bones or at least twisting your ankle. You have to be careful not to fall on the broken sidewalks, or tumble over destitute persons lying about, especially sprawled near the doorways to any sort of food establishment.

At night when the confiterias close, the adjacent sidewalks are blocked by crowds of homeless begging for scraps of day-old bread and pastries that would otherwise be thrown out.

From the vantage of my bathroom window, I can see the courtyard of a crumbling four-storey mansion built a century ago by a minor “lord of the Pampas.” No homeless here. But the rotting remains of the pergola and the classical 60-degree architectural trellis have been stacked along with dead limbs from a rubber tree and fallen palm fronds to form an incendiary hazard. It looks like the makings of a perfect “bonfire of the vanities.”

The derelict mansion next door, like the Belle Époque apartment from which I write, was built when the phrase, “rich as an Argentine” was a self-evident cliché, not an historical curiosity.

In 1929, Argentina was rich. By some accounts it was the fourth richest country per capita – richer than Germany, richer than France and much richer than Japan on a per capita basis. That was a lifetime ago. Today, after eight decades as the pioneer “submerging economy,” Argentina has fallen far behind Europe North America and Japan.

I suspect that the example of Argentina’s steep decline holds lessons for the United States. Like the US today, Argentina entered the Great Depression in 1929 heavily dependent on foreign capital, with highly unequal income dispersion, wide political resentments and lots of what would become bad debts in the banking system.

The path Argentina took out of depression led from bank bailouts to runaway budget deficits, hyperinflation and decades of negative compound growth.

An open, free economy was replaced by a closed system, hobbled by intervention and inward looking strategies after the Great Depression.

Many of these changes were set in motion by a charismatic demagogue, Juan Perón.

The Rise of a Demagogue

Perón burst into the national scene in September 1930, less than a year into the Great Depression, when he was one of only a few soldiers to organize a military coup that overthrew Argentina’s elected government.

Peron and his wife, Eva: The beginning
of the end of the Argentine middle class

A junior officer at the time, he negotiated to become the secretary to the minister of war as his reward for helping plot the successful coup. In that capacity, he had himself assigned to Italy as military attaché, where he took a tutorial in fascism at the feet of Mussolini.

Eventually, Perón returned to Argentina to apply the leadership methods of Mussolini to implement similar fascist economic policies. Perón was driven by his interest in power. He cared little for economics per se, except to use economic grievances to increase his own power, which he did adeptly.

Like Barack Obama, Juan Perón advanced rapidly up the power ladder. He was first under secretary of war, then secretary of war, then head of the labor department, moving on to become vice president. (He was part of the military group that ousted Ramírez with General Edelmiro Farrell.)

Perón recognized that labor was susceptible to his organization and control. By giving them goodies, he gained their devoted support. Perón used the term descamisados (shirtless ones) to convey his sympathy for the urban and rural working classes and the lower middle class. At political rallies, he would remove his suit jacket and rail against the rich.

Thanks largely to Perón, monetary depredations and predatory taxation wiped out once wealthy families, as the economy of a once-rich country submerged to a lower level of development.

Perón is still a controversial figure in Argentina 35 years after his death. Although he grievously harmed Argentina’s economy, he created many make-work jobs for his supporters in bureaucracy and government-run enterprises.

The current president of Argentina is a Peronist who has continued his legacy of predatory policies.

Harvard economic historian Alan Taylor argues that “much of Argentina’s precipitous decline in relative economic performance can be attributed to deleterious conditions for capital accumulation.” In other words, after 1929 it was hard to make money and keep it.

Partly this was because, as Taylor puts it, statist “price disincentives channeled funds away from, rather than toward, those investment activities which are the precursor of growth.”

The Perils of Statism

There is no more emphatic example of how government intervention retarded the Argentine economy than the tale of the telephone business, which began auspiciously in 1881.

Until 1929, Argentine telephones were operated profitably by a British-owned company, Unión Telefónica del Río de la Plata Ltd. In 1946, Perón’s government bought Unión Telefónica and renamed it Empresa Nacional de Telecomunicaciones (ENTel). ENTel rapidly became a deficit-ridden, poorly administered behemoth. By 1990, prior to being privatized again, ENTel’s bloated workforce of 47,000 had been mismanaged under 28 chief executives in the previous 30 years.

The service was then arguably the worst in the world, even worse than the poorest African countries. Argentines had to wait as long as 15 years to obtain a phone line, and then installation cost as much as $1,500.

Unbelievable? Don’t laugh.

You can expect similar dysfunctional outcomes in the energy sector in the United States, as the federal government under Obama retreats into an inward-looking import-substitution policy – just as Argentina did under its charismatic demagogue, Juan Perón.

Note that like Obama, Perón had a fascination with cutting edge and doubtful energy projects. In 1951, Perón announced the Huemul Project that he claimed would produce nuclear fusion before any other country.

The project was led by an Austrian scientist Ronald Richter. Perón proclaimed that energy produced by the fusion process would be delivered in milk-bottle sized containers, which could be used in airplanes and other vehicles. Success was proclaimed; but no proof was given.

When independent scientists investigated Perón’s Huemul Project to provide nuclear fusion in milk bottles. They revealed the project was a fraud.

When Perón took office, Argentina had the world’s second largest gold reserves. But these were soon squandered nationalizing industries and funding politicized investments, like the Huemal Project, to provide energy through nuclear fusion.

I fear Obama will do for the all-important energy sector in America what Perón did for telephones in Argentina. In the years to come, I predict that you will look back nostalgically on the days when you could flip the switch and turn on the lights. Obama’s energy program, which entails an array of subsidies for extracting sunbeams from cucumbers, could change all that.

Obama’s insistence on forcing conversion of US energy production to costly, unproven and unreliable alternative sources, plus his punitive cap-and-trade carbon taxes, will make Al Gore richer; it will certainly make you poorer.

Obama will put you in the business of forecasting rolling blackouts. In the years to come, you won’t be able to put aside a freezer full of meat – or even a freezer full of tofu burgers. Your electricity is going to flicker off in erratic blackouts, like it does in Nigeria, Angola, Bangladesh and other Third World hell holes.

Furthermore, the outages will involve constant fears for public health because pumps supplying running water and sewage treatment will be halted. Imagine how your wellbeing will be affected under Obama’s new nationalized health care, when power supplies to hospitals fluctuate erratically.

Also, you’re not going to enjoy shopping in the America of the future because you’ll find that the charming high-school grad who is used to scanning bar codes at the checkout line will take a long time to tally your purchases with pen and paper when the computer system is down.

The American economy will be crippled. Airlines will avoid night travel. And the only source of dependable power will be expensive diesel generators (but we won’t want to use them to avoid “global warming.”)

How Obama Will Destroy Prosperity

As the US follows the same policy path as Argentina, it will obtain similar results. Perverse policies will destroy prosperity and inspire thinking people to get out, and/or get their money out. This is already happening.

In 2008, more than two million Americans emigrated, marking the first time that net legal and illegal migration will have reduced the population of the US.

This is an important inflexion point that will enable Obama to brag that he was the president who solved illegal immigration – by making it unattractive for immigrants and natives alike to live in the United States.

In the future, the government will be more focused on prohibiting people from leaving. As part of this sensitivity, the US government will impose exchange controls to prohibit individuals from escaping.

Soon after, the government will demand that people who had the foresight to take their money out bring it back. Portfolio investments will be the most vulnerable to forced repatriation.

Based on the assumption that governments do the same predatory things over and over again in similar circumstances, it is probably safer to put your money to use buying property abroad rather than to acquire only portfolio holdings.

Although the U.S. government will resort to draconian measures to tax the “rich” (and you may be less than delighted to discover that you are “rich” by the elastic definitions they will use), destructive economic policies will diminish tax revenues even as government spending runs amok.

Then you will be destined to see another result pioneered in Argentina.

As economist Mauricio Rojas put it, “The government couldn’t pay its bills, so it tried to inflate them away. The rise in prices between 1976 and April 1991 was an incomprehensible 2.1 billion times. During approximately the same period, per capita income sank by over 25% and the poverty rate among Argentine households soared from 5% to 27%.”

Standing in Long Lines

An astonishing result of the inflation was that a billion dollars worth of Argentine pesos was reduced in value to only 47 cents over 15 years.

Argentina’s annual deficits amounted to an average of 14% of GDP – on a similar scale as Obama’s budget deficits. This year’s deficit is tracking at $1.8 trillion this year alone. And $9 trillion more is projected in the next few years. The federal government under Obama is now spending nearly 200% of taxes taken in.

Among other consequences of runaway budget deficits and hyperinflation was the virtual disappearance of the income tax in Argentina. It shrank to just 1% of GDP as the value of the previous year’s income became pocket change by the time taxes were due.

During hyperinflation, the biggest contributor to the Argentine budget was energy tax. Not coincidentally, these stand to be a major factor in America’s future under Obama.

Another predictable consequence as Obama reduces the United States to Third World economic status will be wage and price controls to suppress the evidence of inflation caused by printing money to finance deficits. As implied above, only about 50% of the current US budget is supported by tax revenue. The rest is being spent out of an empty pocket. It will get worse as we follow Obama down the road to fascism.

Gas lines during the 70’s oil shortage

Runaway deficits eventually lead to runaway inflation. Runaway inflation in a politicized economy leads to price controls, which inevitably lead to shortages… and then to rationing.

Your future in America will involve standing in long lines. Get ready for it.

Argentine-style nostalgia for the “good old days” will predominate in the American imagination as the US follows Argentina into economic retardation.

Of course, the Argentines, like Americans today, were by no means aware that the policies of successive governments were destined to lead to decades of hyperinflation and negative, compound growth. No country ever set out to bring ruin upon itself.

“Smiley-Smiley”

The Argentine leaders who adopted destructive policies in the wake of the last depression thought they were responding with creative solutions in a difficult situation.

They were constrained by the fact that Argentina was heavily dependent on borrowing foreign capital. Lacking fiscal resources, they adopted policies remarkably similar to those championed by Obama in the United States today – beginning with a bank rescue plan that set the stage for hyperinflation.

As Morten Roed Sørensen, of Denmark’s national bank, observes:

The recession (the Great Depression) also had political consequences. Government intervention replaced laissez-faire in the field of economic policy . . .Monetary policy also changed. Like many other countries at the time, Argentina used the gold standard, although the exchangeability of banknotes for gold was suspended for long periods (1914-1927 and again, finally, from 1929). In 1931 a decisive step away from the gold standard was taken, as the money supply was from then on increased independently of movements in the central bank’s gold reserves. From a present-day point of view this was a sensible step, as the recession required an easing of monetary policy. The monetary-policy measures taken by the government and the central bank in 1935 were somewhat more doubtful, although presumably inevitable.

At this point, the government took over all “bad debts” accumulated by the unregulated banking sector during the 1920s and 1930s. In reality, this step was financed via monetary financing and totaled approximately 4 per cent of GDP (della Paolera et al. 1999). This paved the way for the extreme, inflationary monetary policy seen in later periods.

Ominously, the bank bailouts that sent Argentina hurtling toward ruin amounted to a much smaller percentage of GDP than Obama’s bank bailouts. As we have previously reported, according to the Inspector General of the TARP program, these bailouts are nearly 100% of US GDP.

But that is by no means the worst of it.

The most distressing parallel between Argentina after 1929 and the United States today is not the specific policy similarities arising from path dependence of governments undergoing similar solvency crises at the onset of depression.

The more worrisome issue is that Obama seems to be precisely the same type of charismatic demagogue as Perón, who imprinted Argentina so negatively with perverse economic policies and fascist dictatorship. He left Argentina in a mess that Obama seems entirely capable of duplicating. As one Argentine critic quipped, ”We socialized the losses and exported the profits.”

Like Perón, Obama’s views are a curious amalgam of radical leftwing notions in a fascist framework. As Jonah Goldberg, bestselling author of Liberal Fascism: The Secret History of the American Left, From Mussolini to the Politics of Meaning, argues the big government wing of the Democratic Party is the intellectual heir of Mussolini.

Godlberg suggests that the differences between Mussolini-style fascism and the brand practised by Obama are stylistic rather than substantive. As George Carlin said recently on HBO’s “Real Time with Bill Maher” when he said that “when fascism comes to America, it will not be in brown and black shirts. It will not be with jackboots. It will be Nike sneakers and smiley shirts. Smiley-smiley.”

The Narcissus Principle

Of course, a fascist demagogue can be as troubling in Nike sneakers as in jackboots.

I was first alerted to the potential dangers of Obama by prominent Israeli psychologist Dr Sam Vaknin, who suggests that Obama is a narcissist with much the same personality profile as many dictators.

Dr Vaknin is a world authority who has written extensively on narcissism. He observes:

I must confess I was impressed by Sen Barack Obama from the first time I saw him. At first I was excited to see a black candidate. He looked youthful, spoke well, appeared to be confident – a wholesome presidential package.I was put off soon not just because of his shallowness but also because there was an air of haughtiness in his demeanor that was unsettling. His posture and his body language were louder than his empty words.

Obama’s speeches are unlike any political speech we have heard in American history. Never a politician in this land had such quasi “religious” impact on so many people.

The fact that Obama is a total incognito with zero accomplishment makes this inexplicable infatuation alarming. Obama is not an ordinary man. He is not a genius. In fact he is quite ignorant on most important subjects. Barack Obama is a narcissist.

Although I am suspicious of psychobabble, Vaknin is an acknowledged world authority on narcissism. When he talks about the subject everyone listens.

Vaknin says Obama’s language, posture and demeanor – and the testimonies of his closest, dearest and nearest – suggest the president is either a narcissist or he may have narcissistic personality disorder.

Narcissists project a grandiose but false image of themselves. Among those to whom he compares Obama are David Koresh, Charles Manson, Mao Zedong, Joseph Stalin, Kim Jong-il and Adolph Hitler.

All these men had a tremendous influence over their fanciers. They created a personality cult around themselves and with their blazing speeches elevated their admirers, filled their hearts with enthusiasm and instilled in their minds a new zest for life. They gave them hope. They promised them the moon, but alas, invariably they brought them to their doom.Charmed by the charisma of the pathological narcissist, people cheerfully do his bidding and delight to be at his service. He creates a cult of personality – focused on one thing alone and that is power.

I was particularly struck by Dr Vaknin’s reading of Obama’s autobiography.

Obama’s election as the first black president of the Harvard Law Review led to a contract and advance to write a book about race relations. The University of Chicago Law School provided him a lot longer than expected and at the end it evolved into, guess what? His own autobiography. Instead of writing a scholarly paper focusing on race relations, for which he had been paid, Obama could not resist writing about his most sublime self. He entitled the book Dreams from My Father. Not surprisingly, Adolph Hitler also wrote his own autobiography when he was still nobody. So did Stalin.For a pathological narcissist no subject is as important as his own self. Why would he waste his precious time and genius writing about insignificant things when he can write about such an august being as himself?

Narcissists are often callous and even ruthless as the norm, they lack conscience. This is evident from Obama’s lack of interest in his own brother who lives on only one dollar per month.

A man who lives in luxury, who takes a private jet to vacation in Hawaii, and who has raised nearly half a billion dollars for his campaign (something unprecedented in history) has no interest in the plight of his own brother. Why? Because, his brother cannot be used to increase his power.

A narcissist cares for no one but himself. […] What can be more dangerous than having a man bereft of conscience, a serial liar,  holding an office of great power?

Many politicians are narcissists. They pose the usual threats to others. […] They are simply self serving and selfish and are prone to passing ill-advised laws.

Obama evidences symptoms of pathological narcissism, which is different from the run-of-the-mill narcissism of a Richard Nixon or a Bill Clinton for example. History shows plenty of evidence that pathological narcissists can be dangerous.

The downside of this is that if Obama’s policies turn out to be the disaster I predict, he could prove to be a dangerous demagogue.

All Praise Obama

I predict that by the end of Obama’s presidency, Obama will have begun to behave more like Juan Perón at his worst – repressing dissent, nullifying rights and employing bully boys to physically intimidate his critics.

I suspect his behavior will become more dictatorial as it becomes increasingly evident that his extravagant ‘stimulus’ and ‘bail out’ policies have failed to ignite a genuine recovery, and his popularity suffers accordingly.

As former Merrill Lynch economist David Rosenberg points out:

It is so evident, with fiscal stimulus accounting for 100% of global economic activity this year and an estimated 80% government contribution to world GDP growth in 2010, that this entire recovery is as illusory and artificial as it was in the treacherous 1930s.

When President Hoover’s well intended efforts to turn back the tide of depression failed 80 years ago, he became a widely reviled figure. Luckily, Hoover was a man of wide accomplishment who was not suffering from anything resembling pathological narcissism.

Unlike Hitler, Mussolini, Stalin, Perón, (and dare I say, Obama,) Hoover did not fancy standing on balconies delivering stirring harangues to multitudes of his enchanted followers. I can’t say that I have the same confidence about Obama.

We already know that Obama’s administration has undertaken efforts to create “a cult of personality” around Obama that are reminiscent of Juan Perón’s efforts to use state power to encourage popular adulation.

I hinted above that I think Obama could prove to be the Juan Perón of the United States. Now couple Dr Vaknin’s warnings about Obama’s power hungry personality with the Obama administration’s Education Department mandate to U.S. schools.

They were told by the federal government to assign a project to all children to praise Obama. Those in grades K-6 were to define what Obama has done for them and how they can help Obama. Grades 7-12 were to write how Obama has inspired them, all with posters of Obama and his pronouncements in the classroom.

I don’t know how you feel. But I see this as a creepy lesson in fascism that is the equal of anything Juan Perón picked up in his tutorial from Mussolini in the 1930s.

You may think I am joking. But the Education Department mandate to which I refer is real.

Among the activities the government initially suggested for prekindergarten to sixth-grade students: that they “write letters to themselves about what they can do to help the president.” Another task recommended for students immediately after listening to an Obama speech: to engage in a discussion about what “the president wants us to do.”

The “help Obama” curriculum plan brought sharp criticism from many citizens, including some who complained that classrooms were being used to spread political propaganda. In response, the White House announced it was revising the lesson plan that was distributed by the Department of Education.

This is not the only example of the Obama administration using government power and money in outrageous ways to underwrite the Obama program.

Note that a White House official was caught on tape advising hand-picked artists and writers that they could be guaranteed federal grant money if they dedicated themselves to celebrate Obama and his policies. A writer was encouraged to compose a poem celebrating Obama’s election as president. And other creative artists were encouraged to create plays, films and music celebrating Obama’s health care, energy and environmental policies. See Obama voter Patrick Courieiche’s account of this attempted manipulation here. He says:

I’m not a “right-wing nut job.” It just goes against my core beliefs to sit quietly while the art community is used by the NEA and the administration to push an agenda other than the one for which it was created. It is not within the National Endowment for the Arts’ original charter to initiate, organize, and tap into the art community to help bring awareness to health care, or energy & environmental issues for that matter; and especially not at a time when it is being vehemently debated. Artists shouldn’t be used as tools of the state to help create a climate amenable to their positions, which is what appears to be happening in this instance. If the art community wants to tackle those issues on its own then fine. But tackling them shouldn’t come as an encouragement from the NEA to those they potentially fund at this coincidental time. And if you think that my fear regarding the arts becoming a tool of the state is still unfounded, I leave you with a few statements made by the NEA to the art community participants on the conference call.

“This is just the beginning. This is the first telephone call of a brand new conversation. We are just now learning how to really bring this community together to speak with the government. What that looks like legally? […] Bare with us as we learn the language so that we can speak to each other safely…”

Is the hair on your arms standing up yet?

A Disturbing Discovery

In the future, as Obama’s depression policies become about as unpopular as Hoover’s were in the Great Depression, you can expect Obama to strike back at his critics, much as Perón did, when he got his thugs to burn down the Jockey Club, repressed newspapers, and enacted the desacato laws (the laws of disrespect) that made it a crime to criticize him.

Obama will be somewhat constrained by the American tradition of respecting civil liberties. But only somewhat. The accumulation of powers in the imperial presidency over many years will give Obama and his true-believing minions’ ample scope to punish those who withhold support from Obama in the ongoing “emergency.”

For one thing, the imposition of wage and price controls will give government bureaucrats life and death power over almost every business. By withholding critical supplies from Obama critics they can impose serious economic harm. Don’t forget that the Gestapo not only rounded up Jews and dissidents, it also enforced wage and price controls.

Further to that, as clever as Obama is, I would not be surprised if he used health laws under his new system to force people who cause him trouble into involuntary quarantine. News reports already indicate that the government is preparing plans to forcibly impress large numbers of Americans into quarantine under the guise of preventing a flu pandemic.

Here I quote the website Zero Hedge:

Zero Hedge obtained some interesting documents from the CDC web site. They contain blank ‘forced quarantine’ orders from Iowa and Florida regarding novel H1N1 – including quarantine to a ‘secure detention center’ – which appear to be recent – dated April 2009. Some may be aware the NIH and CDC just held an H1N1 conference in DC – August 19-21 2009 – that focused on ‘mass fatality management.’ For many, this should be cause for concern. As is becoming clear, our government is quite corrupt. The idea that this same government is now preparing for forced quarantine and mass vaccination should make anyone who has been following recent events shudder. There is something going on here, but governments have not come clean with the public. Why ‘secure detention centers’ in the US and ‘secure vaccination centers’ in France if there is nothing to be concerned about?

It is becoming increasingly clear that a global mass vaccination campaign is planned – likely to become mandatory in the 193 WHO member countries, despite serious safety concerns regarding these untested novel H1N1 vaccines, some of which are now known to contain high levels of the deadly adjuvant squalene.

Others may be aware that it was only last week that the Massachusetts State Senate passed a law making it a relatively serious crime to refuse a mandatory vaccination or to break a quarantine order. This law also includes rather astounding violations of the 4th Amendment, including warrantless searches and seizures of property if deemed necessary in an ‘emergency.’

This new Massachusetts law also included authorizations for illegal arrest without a warrant and of forced vaccination of the public. But the political activity is not limited to the states. Yesterday Obama held meetings with senior cabinet officials regarding H1N1 ‘pandemic prepardness’ including HHS Secretary Sebelius. So this is not idle speculation. There is something going on here. Either the government knows something we do not, or this is the biggest hype since the dot com bubble.

On to this sobering conclusion:

Here at Zero Hedge, we are expecting a flock of economic black swans soon, and a pandemic – whether real or hyped – may be part of this flock. An economic collapse will be no doubt be triggered soon, and it will be convenient for the political elites to blame the collapse on an external factor, such as a pandemic or a war. Furthermore, the fall H1N1 pandemic may be a convenient pretext by which dangerous levels of expanding social control can be established by elites which have proven themselves utterly corrupt and morally bankrupt.

That’s the bad news. The good news is that Obama has given a speech advising Americans to better prepare for the future that awaits them by saving more. Specifically, the Treasury Series I bonds recommended by Obama to help Americans to increase their savings now earn 0.00%.

That will give you some cushion to fall back on when Obama turns the United States into a not-so-original copy of the original “submerging economy,” Argentina.

Sincerely,

James Davidson

Surviving the Death
of the American Dream

History repeats itself, first as tragedy, second as farce.

– Karl Marx

“Don’t cry for me, Argentina,” was a fetching refrain from Andrew Lloyd Weber’s operetta Evita,  about fascist dictator Juan Perón and his charismatic wife, Eva. With apologies to Weber, for neglecting the music, and to his lyricist, Tim Rice, I give you the Reader’s Digest condensed version of their account of the tragedy of Argentina.

As you have probably heard, Reader’s Digest, like much else in the United States, has recently gone bankrupt. So I hope I don’t owe the bankruptcy trustee a royalty for that reference.

In any event, the more closely you review the parallels between Argentina under Juan Perón and the United States under Barrack Obama, the more they resonate.

We will take the riches from the oligarchs

Only for you, for all of you

And one day, you too will inherit these treasures.

In Obama’s America, like Perón’s Argentina, the rich are going to pay for all the goodies lavished on the people by “a government able to give us the things we deserve.”

The news is currently crammed with details of Obama’s initiative to spend trillions of dollars on a remake of the U.S. health-care system to give the uninsured the health-care coverage “they deserve.”

Not incidentally, Perón shared Obama’s fascination for malinvesting national resources in half-baked energy projects. Perón promised to deliver Argentina from the rigors of world oil markets through the magic of nuclear fusion in a milk bottle.

We know how that turned out.

I expect little better from Obama’s even more expensive dedication to state-directed investment in alternative energy.

The Road to Economic Retardation

If Marx was right in his observation about history repeating itself as a farce, it will be no laughing matter when Obama leads the US down the road to ruin along which Perón took Argentina.

Of course, it is not clear how even a talented duo like Weber and Rice could reprise their triumph with Evita as a farce relocated to the United States telling the tale of Americans enthralled by their new president.

If the National Endowment for the Arts gets its way and lots of creative people are induced to write subsidized poems, plays and films celebrating Obama as “everything” (as Perón was once celebrated) I can’t see this turning out to be much more than a farce.

Still, the implications for your life will be many if Obama insists on acting as if he is“The One: The hope and the reality of the American people, with his own source of light.” Here, we are not talking about alternative energy, but megalomania.

As George Will put it recently on efforts by the Obama White House to harness the arts community to support his recovery agenda, the effort also “was the beginning of a small scandal that illuminates something gargantuan – the Obama administration’s incontinent lust to politicize everything.”

There is not really much of a mystery about where this leads. In time, the US will become economically retarded like Argentina. In time, runaway spending will lead to runaway inflation, the collapse of the dollar and probably social collapse as well.

As Voltaire warned centuries ago, “Paper money eventually returns to its intrinsic value: zero.”

My Favorite Carry Trade

If all this happened instantly, you could minimize the damage to your family fortune by simply going short the dollar. Thanks to Obama’s “recovery agenda,” the US currently sports invisibly low interest rates, which open the door to leveraged profits from betting against the dollar in the “carry trade.”

There will be more details on this in Crisis Strategy Alert. But the basics are straightforward. The bursting of the Japanese credit bubble in 1990 opened the door to a “carry trade” that facilitated trillions of dollars in leveraged profits by big traders. They borrowed yen at low interest rates and invested the funds in areas of high return like dot-com stocks, commodities and US real estate.

Now Obama is setting up one of the greatest carry trade opportunities in history by effectively promising to destroy the dollar while the Fed holds interest rates low.

There is, of course, an inherent risk in diving headlong into a carry trade against the dollar: the likelihood of another abrupt deflationary crisis over the next 12 months. A return to an acute stage of the solvency crisis will rally the dollar.

Ideally, the time to establish a carry trade is during such a crisis. But this may be impractical, as credit may not be available during such an acute stage of distress. This is why it’s best to carefully select your carry trade during a time of optimism about a coming recovery.

My favorite option for the carry trade now (and probably for the foreseeable future) is to borrow dollars to acquire Brazilian government bonds, like those we hold in our portfolio with a greater than 40% gain this year.

You can still get 12% interest on the longer dated Brazilian government bonds. Brazil is one of the world’s most dynamic economies. And it is now a major lender to the US. I expect Brazil to grow much faster than the US in the next half century. I also expect the Brazilian currency, the real, to trade to a premium over the dollar when production from the 70 billion barrels of new Brazilian oil reserves comes on line.
Among other options for carry trade investment are high yield stocks, gold stocks and instruments. We will address these in detail as time passes in Crisis Strategy Alert, because they may entail the need for more nimble trading than our Strategic Investment portfolio.

On Becoming “Invisible”

As I indicated elsewhere in this issue, the likely consequences of Obama’s presidency will be dire for future American economic growth. Realistically, this means that protecting yourself solely through portfolio investing may not be practical.

When Perón put Argentina on the road to ruin, those who fared best in protecting themselves were not necessarily the nimblest traders on the Bolsa de Comercio de Buenos Aires – but those who left the country and placed their investments outside the reach of Argentine laws.

With that in mind, one of the shrewder things you could do might be to either move abroad or get your money out while you still can. To that end, we are scheduling a conference in Buenos Aires this November 7th. Click here for all the details.

The setting of Buenos Aires is important. It underscores a useful point about economic retardation. It shows that some fraction of the population will find a way to live well, even under the most counter-productive laws. Egalitarian compression may devastate fortunes and lead to decades of negative compound growth. But life goes on.

People still fall in love. Marry. Have children. And guide them through even the snares and hazards imposed by charismatic demagogues.

It provides a useful perspective to see that, although Perón devastated Argentina’s economy by imposing a lasting legacy of statism, there is still scope to live well in Argentina.

Will the same thing be true in the United States during and after hyperinflation?

Perhaps. But perhaps not immediately.

Even if the story of America’s imitation of Argentina ultimately proves to be a farce, many tears will be shed over the death of the American Dream. Many fortunes will be wiped out.

I can’t pretend it is farfetched to suppose that policies that squandered wealth and brought on economic retardation in other countries could have similar effects in North America. To the contrary, that is the result to be expected.

There are two solutions.

One is to try to outsmart the demagogue and his minions… to try to stay one step ahead and get out while you can.

The other is hunker down with your family, friends and loved ones and try to live in the spirit of Bob Dylan’s song: “When you got nothing, you got nothing to lose / You’re invisible now, you got no secrets to conceal.”

The Pulse of the Economy

We can’t deny that the economy is getting better. More than $11.6 trillion will buy you something. Nearly every report that has come out in the last six months has proven that.

I want you to look at a few important economic charts. Most of these charts are courtesey of John Mauldin and Calculated Risk. These guys are great at creating charts from the official data.

The first chart is of the US unemployment rate.

Unemployment has risen sharply and is close to the levels of the double-dip recession in the 1980’s. Honestly though, this chart is misleading. For one thing, we no longer calculate unemployment as we did in 1983, much less in 1933. I explain everything in a note I e-mailed to a friend where I talk about the U-6 Unemployment number …

… the U-6 number counts “discouraged workers” and people who are looking for full-time work but can only find part-time.

Today the U-6 rate stands at 16.8%. This tells you that right now unemployment is worse than during the double-dip recession of the 1980′s.

For comparison, the Great Depression had unemployment of 25%. Most people (even Obama and Bernanke) believe that unemployment will keep climbing until late 2010. In essence, the U-6 number could hit 25% by the end of next year. So really unemployment – at least how it feels to people on the street – is at nearly 17%.

This second chart does unemployment a little more justice. It shows you how many people are unemployed.

Unemployment is not only bad, but it’s getting worse. And credit card defaults, mortgage defaults, and all sorts of bad things follow the unemployment rate when it goes up.

That means you can expect more banks to fail in the years ahead as borrowers go broke. This is certainly not the stuff bullish recoveries are built on. But for our analysis today, it’s one of the only big weaknesses we could find.

You see, much of the fall we saw after Lehman collapsed was the result of a massive reduction in outstanding credit. Credit collapsed and became harder for most people to get. This led consumers into spending less and saving more.

As you can see, the savings rate climbed to 4.8% this year. One analyst from PIMCO, Richard Clarida, is calling for the savings rate to climb to 8% over the next few years.

This is bad news for anything that relies on US consumer spending over the next few years. It’s not good for Macy’s or mall stores like Abercombie and Fitch. The fact is the consumer won’t be in America, the consumer will be in Brazil and eventually even China.

But credit won’t remain tight forever. We’ve already seen many signs that credit is getting much easier to access… well at least for those who can truly afford it.

The London Interbank Offer Rate (LIBOR) has shrunk to levels unseen since before the crisis went full blast in September.

The A2P2 spread which tells us how commercial paper is doing has also declined to normal levels…

The TED Spread – which is the spread between the three month loans interbank rate loans and the three month Treasury – dropped to the low range of its normal spread.

As you can see, according to the TED Spread everything is back to normal.

Even the CBOE Volatility Index (VIX) is showing improvement…

Today the VIX finds itself around the 25 range. This is high, but a far cry from nearly 80. Clearly, things aren’t nearly as volatile as they were in the panic stricken day’s post-Lehman.

But are things really getting better? By these measures, the credit markets seem to think so. But you know very well that James and I both think that there’s something on the horizon. Something that will take the market down one more time.

A hint of trouble to come is incorporated in some rather sluggish measures of bank lending and money supply. Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early summer: Ambrose Evans Pritichard quotes Congdon, “There has been nothing like this in the USA since the 1930s.”

Along the same lines, M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at the less drastic rate of 1% rate since April. This may be setting the stage for a deeper episode of the solvency crisis.

Whether it’s that, a blowup in Chinese growth… or US hyperinflation… or, what I personally think will happen next, a mucked up attempt by the Fed to withdraw itself from the markets… things are seeming a little too cushy right now.

Investors are willing to take on too much risk in stocks even though the rewards aren’t clearly there. Really, the stock market is expensive, with the P/E of the S&P 500 eclipsing over 140.

It’s just insane. But that doesn’t mean it could not keep going on for months.

Portfolio Update

So don’t kid yourself; going against the trend is a recipe for pain. It’s one of the reasons we’ve refrained from entering into many short positions.

In fact, we’ve only got one short position right now, outside of China. That position is a synthetic short through the PowerShares DB Crude Oil Short Fund ETF (NYSE:SZO). We’re up about 8.2% on that position. And the sole reason we entered into it was due to seasonality. James and I discussed about how oil use drops during after summer driving season. This tends to affect prices by pushing them down. So far, that’s exactly what’s happened.

Other than that one position, we are long commodities via Petrobras Brasiliero (NYSE:PBR) [up 47%], the MarketVectors Gold Miners ETF (NYSE:GDX) [up 17.47%], and Witwatersrand gold (WGR.TO)[up 91.67%].

We’re also holding onto Money4Gold Holdings Inc. (MFGD.OB) but are currently down about 45% in this position. However, we’re expecting the company to post strong results for the current quarter.

I also wanted to clarify a little something about our positions in the PIMCO California muni fund (NYSE:PCK) and the Van Kampen California fund (NYSE:VCV).

About four days ago we had a new reader chime in and threaten to cancel. Reason? Well, they saw one of our recent promotions pitching these California funds, but when they went to our track record it showed that we had already sold the position.

I completely apologize for the confusion.

We did sell the position… but we bought back in August. The only reason we sold was because we wanted to avoid the nasty risk that a California bankruptcy would push every investor out of these funds. Thankfully, bankruptcy never came to pass. And we got back into both companies.

Right now both companies are listed as buys in our portfolio. So if you haven’t had a chance to take advantage of these babies… and enjoy the monthly dividend payments they provide… then you should buy into them soon.

Until next month,

Charles Delvalle

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