Worse Than 2008…

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Dear Diary,

“Are we the last people in the world to do this?” we asked our friend Sergio.

“One of the last,” he replied.

Marta, our cook and housekeeper, a cheerful young woman in her twenties, was pouring orange soda into the mouth of a calf.

The calf had no choice in the matter. It was tied up and on the ground. Its right ear had already been clipped. A “B” had been branded on its rump. And a necklace of red and orange pompoms had been festooned over its head.

The poor, suffering beast did not realize that it was the fair maiden of yesterday’s marcada – the branding of the cattle – an offering to Pachamama, the Earth goddess many of the indigenous people of the Andes still worship.

At the Diary, we favor lost causes, underdogs and die-hards. Maybe that is what attracted me to this place. It is at the end of the road. It is also where Marta’s ancestors – if any survived – resisted the Spanish conquistadores for more than 100 years after the rest of the region had given up.

Today, it is where old customs and traditions hang on.

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Too Much Debt

But let us turn to the more familiar world – the world of money. We’ll come back to the ranch in a minute.

Yesterday, the Dow fell 78 points, or 0.4%. Gold was more or less unchanged. An ounce of the yellow metal sells for $1,205 an ounce in New York this morning.

Somewhere ahead is much more exciting action. The Dow could fall 1,000 points… or 2,000 points in a single day.

And when this happens, we believe the ensuing chaos and panic will be worse than in 2008.

First, because debt is higher today than it was then. Six years ago, the official public debt in the US was under $10 trillion. Now, it’s about $18 trillion. Total debt is higher too – about $50 trillion in 2007; it’s now closer to $60 trillion.

And as Boston University professor Laurence Kotlikoff points out, the “fiscal gap” – the difference between what the feds have agreed to pay out in Social Security, Medicare, Medicaid, etc., and the present value of all its future tax receipts – stands at $210 trillion. That’s 1,066% higher than Washington’s official figure. (Editor’s note: Not 211% higher, as mistakenly stated yesterday.)

When the Next Crash Comes

There was more subprime mortgage debt in 2007. But now we have subprime auto debt, subprime student debt, subprime government debt and subprime corporate debt.

The crisis of 2008 came at the top of a boom. We’re now nowhere near a boom.

Americans are saving money, not spending it. China is slowing down, not speeding up. World trade is fading, not growing.

And the velocity of money – the rate at which each dollar in circulation is exchanged from one transaction to another and a key indicator of boom conditions – started going down in the late 1990s. And it’s still going down.

Home ownership has fallen to a 20-year low. Labor force participation has been in decline for 15 years. And the rate at which men of working age drop out of the labor force and become “inactive” has risen 33% since 2008.

These things mean that when the next crash comes, the economy will be less resilient. Already weak, the economy will sink still lower.

What will the Fed do? Will it have any choice? Won’t it be forced to respond in an energetic, aggressive way?

(More details to come tomorrow…)

Harvest Time on the Ranch

For now, let’s return to the ranch…

“I’ve always heard it was an Inca festival. A harvest festival,” said Sergio. “But it might not be Inca at all. It could be something the local tribes came up with.”

Sergio keeps the ranch connected to the “outside world” – a five-hour journey by 4×4 away in Salta City (the capital of Salta Province).

Sergio lives in Salta and visits the ranch once a week to make sure it has what it needs. He is not “local.”

The local tribe was called the Gualfines. They lived in the hills and valleys of what is today the ranch called “Gualfin.”

Whether the people who live in the hills and valleys here today are descended from them or not is a matter of debate. The locals of Indian descent say, “Yes.” People, like Sergio, of Spanish descent say, “No, we exterminated the Indians that were there in the 16th century.”

Whoever they were, they left plenty of traces. Stone terraces show where they lived and farmed. Pottery – with elaborate designs – shows that they were about as advanced technologically as Greece circa 5000 BC.

The Greeks had their gods. The Gualfines had theirs, too. And it was to Earth goddess, Pachamama, we were offering our young heifers.

The Roundup

The night before, Jorge, the farm manager, had planned the whole thing.

He knew we wanted to help with the roundup. He also knew that, as gauchos, we were worthless. So, he told us to meet him in the middle of the field. There, we would help drive the cattle from the watering tank to the stockyard near the house.

Somehow, we missed the rendezvous. The herd went by us on the north side of the valley. The distances are so great that we neither heard it nor saw it. And since it has rained recently neither was there a cloud of dust to alert us to the herd’s movement.

It wasn’t until one of the local gauchos, Pablo, came riding up… with his red beret and his Peruvian horse, looking like a character from a cheap romance novel… that we realized we had lost the plot.

We raced to get back into the story as quickly as we could. And we were soon following the herd along with the other gauchos.

“Aiiihuu!”

“Yip, yip, yip…”

Vaca!”

The idea was to yell to keep the herd moving. But it hardly seemed necessary. With us were five or six dogs that barked and bit at the heels of the cows.

The dogs were all the motivation the herd needed. The calves rushed ahead to get away from the dogs. And the cows rushed ahead to protect their calves.

Every once in a while, one or more cows would make a break for it. They’d notice an untended perimeter and bolt for open country. But the dogs punished this out-of-the-box thinking.

Immediately, the dogs were on the case. Whether they were trained for it or just did it by instinct, we don’t know. But they rushed after the escapee and attacked so furiously that the poor animal would soon regret its decision and cut its losses by coming back to the herd.

Riding Upside Down

The cows and calves were in good shape. Late rains have kept the pastures greener for longer than usual. The animals were plump.

One of the tiny calves, however, was bleeding from its rear.

“What’s the matter with that one?” we asked Jorge.

“Oh… a condor attacked it. When they are young like that, the condors try to take out their eyes… or tear out their entrails. It happens more up in the mountains. But it can happen down here, too. I’ll put some disinfectant on it. The calf may survive.”

The roundup went without a hitch. Well… until one of the big bulls broke away in the sector we were supposed to be guarding.

The bull had just left the herd and ran down the river and was headed up into the hills. It was our responsibility to stop him.

We took off at a gallop, yelling at him to change course. But the big bull showed no sign of obeying. It was probably then that we overplayed our hand.

We thought we might try to sting him with the end of our bridle, which we used as a whip. Perhaps we leaned over too far… or perhaps tempted him to attack. Cause and effect tend to get blurred when you are falling off a galloping horse.

The saddle must have been loose. It slipped under the horse’s belly. Rather than ride upside down, your editor decided to throw himself into the riverbed, aiming for sand rather than rock.

In the event, the sand cushioned his fall; he got up quickly, hoping the cowboys would give him some credit for not having broken his neck.

Regards,

Signature

Bill

Further Reading: Don’t let the crash Bill sees coming catch you off guard. There are some surprisingly simple steps you can take now to protect your savings… and even set yourself up to profit as investors hit the panic button. Start preparing here now.