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Don't Think About White Elephants *** Americans need time to recover from their mistakes...is anyone in the market for a $26 million mansion – fully equipped with an indoor ice rink and movie theater? *** It only makes sense that following the biggest credit expansion ever, comes the biggest credit contraction of our lifetimes... *** Why we still believe in gold...reports of the Dububble from Aussie Joel...and more! --- ONLY 1 DAY LEFT... --- ...To Profit from Slow Volcano Power In the following report, you will discover one of the most powerful untapped energy sources in America today. It’s fast, clean and efficient...and it’s right under our feet. Click below for all the details. But we urge you to hurry. There is a limited number of spaces, and this offer is only available until midnight tomorrow. --------------------- Oil rose to $116 yesterday. The Dow gained 26 points. Gold went up too – to $829. After the biggest spending and borrowing binge in history, Americans need time and money. They need to pay their debts. They need to build savings for their retirements. They need time and money to recover from their mistakes. What kind of mistakes? Well, down near the bottom of the ladder, people bought houses they couldn’t really afford to own in places they couldn’t afford to live. And cars they couldn’t afford to run. Those mistakes need to be undone. Which is why there are so many foreclosed houses on the market...and why house prices generally are falling. S&P/Case-Shiller reports that house prices took their biggest hit ever in the second quarter of this year. They were down 15.4% from the year before. Further up on the ladder, the rich are now embarrassed by their own housing mistakes. New Yorker magazine reports that it is the ‘season of white elephants’ in Greenwich, Connecticut. Speculators began huge mansions – in the “Georgian Stockbroker” style, for example, complete with indoor swimming pools, wine cellars, movie theatres, dozens of bathrooms, even ice-skating rinks – and now find the buyers have disappeared. Want to buy a $28 million spec house? Go to Greenwich. At the investment level there were plenty of mistakes too. Subprime mortgage lending dominated the headlines for the last 12 months, but the same reckless spirit found its way into transactions all over the economy. Private equity, IPOs, student loans, shopping malls, fast-food joints – while the going was good, everyone wanted to go along. And now, they all need time and money to pay for their errors. The baby boomers say they are postponing retirement. Some are going back to the office. A county in Alabama says it will have to declare bankruptcy. The FDIC says its “problem list” of banks lengthened by 30% during the second quarter. Bank earnings fell to their second lowest level in 19 years, says Bloomberg . In London, tens of thousands of jobs have already been lost in the financial sector, says the Financial Times . IPOs, where the City (equivalent to Wall Street in New York) made much of its money, have “fallen off a cliff.” We have lived through the biggest credit expansion ever. Ahead is perhaps the biggest credit contraction ever. Why? Because it takes time and money to correct mistakes. The bigger the mistakes; the longer and more expensive the correction. Corrections can be tough on the economy – and on the individual consumer. Most have no idea what lies ahead...but our friends at Strategic Investment have made some interesting forecasts. Read their latest report, which outlines not only the next 5 supershocks the U.S. economy should brace itself for, but how you can protect your portfolio – and even turn a nice profit. See the report here . When money and credit flow, they tend to raise prices. You get inflation – first of asset prices...later, of consumer prices. When money stops flowing, prices come down. As George Soros puts it, the willingness to lend is directly related to the value of the collateral. Both tend to rise and fall together. Currently, lenders are wary and the value of the collateral is falling. Everyone knows house prices are going down. But U.S. stock prices are going down too. Adjusted for consumer price inflation, they’ve been going down since the end of 1999. That is, a $50 stock is still worth about $50...but the 50 bucks ain’t what it used to be. It buys only 1/5th as much oil, for example. This trend, towards lower asset prices, is likely to last a long time. To protect ourselves, we began buying gold in 2000. So far...so good. *** “Gold hasn’t done too well lately, maybe it’s time to get out...” The thought comes up from time to time, most recently from a visitor from Maryland. “If the world economy is slowing down, commodities aren’t the place to be,” he went on. “Gold either. People buy gold to protect themselves from inflation. But inflation isn’t going to increase in a recession. You’d be better off in cash until this thing turns around.” Our guest voiced what is probably the dominant opinion of the summer – that a worldwide slowdown means price increases will slow down too. Without the hot breath of the inflation hounds chasing it, gold will go back to sleep and the Fed can continue to rescue speculators from their mistakes. That’s why the U.S. 10-year Treasury note yields all of 3.78%. Yes, investors know they will lose money if inflation remains above 4%. But that risk – they believe – is worth taking for the safety of the dollar and the full faith and credit of the U.S. Federal Government. Besides, inflation is almost sure to go down. This view may turn out to be right. But when we think of moving to cash we pose the question: what cash? And there’s the problem. The planet’s alpha cash is the dollar. And while the dollar may have some limited upside in a punk market (it’s already gone up about 7% against the euro), the potential downside is enormous. What if the bond market is wrong about inflation? What if the increase in producer prices – now running at nearly 10% – works its way into consumer prices? What if demand from the developing world doesn’t slack off as expected? What if there is war? What if the U.S. economy worsens...and the feds need to cut rates and offer further $100 billion bailouts? What if Asian, Arab and Russian creditors lose faith in the dollar and switch to euros? Any of these things could be catastrophic for holders of U.S. Treasury bonds. At 3.78% yields – it hardly seems worth the risk. Shorter-term Treasury bills barely pay anything at all. So what cash do you hold? We choose gold because it is cash that no central bank manages. No one prints. No government backs. And no one ever threw away a gold coin. Gold will always hold an intrinsic value – so we’ll keep holding gold. And perhaps you’ll want to take out a golden insurance policy for your portfolio as well. See here: *** Colleague Joel Bowman of The Rude Awakening lives in Dubai. We wondered whether the place was the bubble we had heard, so we posed the question to him. His reply: “My short stay here in Dubai has led me to believe that Dubai & Co. is a largely unsustainable enterprise. “Dubai’s lifestyle makes the average American look like a prudent, energy-conscious, environmentally-friendly health nut! I read the other day that 60% of the average Emirates’ total income is spent on consumer goods – Gucci totes, designer abayas and million-dollar number plates. “I read with interest the ‘Frapp On Ice’ story just the other day – about how Starbucks will close 600 stores over the next year as discretionary consumer spending shrinks. That story was all the more amusing for me as I actually read it on my laptop... in the Starbucks that just opened in the lobby of my building last week. There are now six Starbucks within walking distance from my front door (and I don’t walk far – it was 125 degrees on Monday). We also have numerous Seattle’s Best, Krispy Kreme’s and the rest of the strip mall junk to go along with them. It’s like anytown USA...super-supersized. Which brings me to my next point... “Jumeirah Beach Residence (or JBR for the cool kids) is a 36-building project that opened a year or so ago. Each building is around 40 stories and there is said to be space for 25,000 people to live here. But where are the people, I ask myself? So few apartments are occupied that I still notice when a conspicuous new light comes on at night in the surrounding buildings...yet, apparently, most are sold. I can’t see the newbies rushing to cut more keys as rent prices have, get this, risen by over 50% since we moved in in December. We took a relatively comfortable two-bedroom with a decent view, but if I walked in off the street today I couldn’t get a studio on the first floor for the same price. “The story is similar elsewhere in the city too. Projects are developed, pumped through the massive Dubai & Co. media arm and, voila! the joint is 50, 60, or 70% taken! ‘It’s another success story,’ ring the papers ‘Dubai’s world-beating ingenuity triumphs again!’ chorus the king and his merry band of sycophants. But, best as I can make out, the biggest developments – including JBR, touted as the ‘largest single-phase residential project in the world’ – are still ghost towns. “A friend of mine was out the other day to inspect a house he saw for sale in one of these new developments (Arabian Ranches, in this case). The price was at the top-end of his budget and he was ‘umming and ahhing’ about it until the estate agent casually threw in, ‘now, this property is only available in lots of 10.’ In other words, the development is being sold off in 10-house chunks to middle-men who then flip ‘em and burn onto the next ‘world beating’ development. “So who’s buying all these vacant houses, streets and islands? Some – and not just the conspiracy theorists either – say Dubai is a massive funnel for dirty Russian money. Others, including myself, reckon speculators buy into the hype...hoping a bigger idiot will buy into it a year later and hand them a handsome return. *** “What a project!” Yesterday, we drove down oak-lined lanes to a tiny village on the side of a hill. A friend, Guillaume, inherited a castle and was showing it to the “Friends of Old Houses” group. We thought we’d have a look. The place was built of granite over many centuries. Guillaume’s grandmother lived there until she died in 2000. Her bedroom is about the only room in the house that is still liveable. Otherwise, it is a ruin. Leaks in the roof destroyed beams and rafters. Thieves stole furniture and paintings. Walls – even ancient stone walls – cracked and crumbled. We stepped carefully – watching out for the holes in the floor. “This house has been in my family since 1217, when the Count de Cordon built it or bought it. He was my great-great etc grandfather. Of course, I can’t let it fall into ruins. It’s the family chateau.” Guillaume is a gendarme during the workweek. On weekends, he is a mason, a painter, or a carpenter. He has about 100 years’ worth of repairs to make – including installing electricity and plumbing. Recently, Guillaume has been sent on 6-week tours to French Guiana, in South America, where his mission is to stop illegal gold mining. “It’s all jungle. A miserable place. I can see why we used to send prisoners there. Who else would want to go? “These miners sneak across the border with Brazil. They’re almost all Brazilian. But they’re very industrious. They will carry pieces of a bulldozer with them – on their backs, because there are no roads. And they’ll but them together. Then, by hand...or with these smuggled machines...they just dig up the earth, looking for gold. “We’re sent out in teams of 5 to 10...we parachute down to the jungle clearings...then we run them off. Usually, they take off when they see us. Then, we set fire to everything. We destroy their shacks and their machines. “You wouldn’t believe the kind of mess they make. Hundreds of acres can be torn up in a few weeks...and then, they wash all dirt down the river. “Our problem is that once we get on the ground, we have to travel by foot...and sleep in hammocks, just like the local Indians. And the mosquitoes bite the hell out of us. But you get used to it....” Back in France, Guillaume returns to the family chateau and gets back to work. Until tomorrow, Bill Bonner --- Special Offer --- Get Ridiculously Wealthy as Tiny Stocks Explode Ever wish you could’ve bought Google when it was a penny stock? How about Apple? For some “in-the-know” investors, those stocks probably made them a fortune. Well, now it’s your turn... Read the following report, and be among the first to snag some of the most undervalued stocks on the market. It just might be the most lucrative decision of your investing career. |
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| The Daily Reckoning PRESENTS: Pity the next president. A worldwide economic slowdown, a flailing housing sector, and the need for the United States to become less dependent on foreign sources for their energy supply, lands squarely on his shoulders. Bryon King explains that while there are many new and exciting options out there that will change the landscape of how we utilize our energy supply, the real issue is knowing which one to pick. Read on... “PEOPLE ARE POLICY” In the world of energy and scarcity, the name of the next president will matter to us quite a bit. “People are policy,” as Ronald Reagan used to say. But then again, a lot of energy and scarcity facts defy party labels. The energy resources are out there. They are what they are and where they are. We can exploit the resources or not. But it’s not like in Star Trek. There’s no “dilithium” power source out there to keep the economy running. So for the next president and his administration, it’s a question of doing something. The U.S. can always just go on importing large amounts of its energy supply. That sure has worked well for us, hasn’t it? Here at home, there’s offshore oil and gas. There’s onshore oil and gas. There’s coal. There’s uranium. There’s biomass, wind, solar, geothermal, falling water and tidal power. There are conservation and efficiency methods. And there are big choices to make. At the end of the day, the next administration will have to decide to do something to keep the pipelines full and power lines energized. Or the pipelines and power lines will start to run down. And then the next president will have bigger problems on his hands than just deciding which of his friends to appoint as federal judges, or who gets what plum job. What can the U.S. afford to do? I’ve written before that the capital costs for energy projects have swelled in recent years. The costs for key inputs – steel, cement, copper, aluminum, machinery, labor – have outpaced inflation. And it won’t all come to an end just because the Beijing Olympics are over. There’s still a lot of concrete to pour in the Middle Kingdom. So the world commodity boom will continue its long-term trend upward. And according to the latest data, the costs to build different kinds of power sources have increased dramatically. The relative changes are astonishing, if not sobering. According to the U.S. Federal Energy Regulatory Commission (FERC), the capital costs of building power generation capacity in the U.S. in 2008 compared with 2003-2004. The inflationary environment in power generation capital costs has impacted all types of systems. Nuclear has increased the most, because it uses the most steel and concrete. Costs for coal systems have increased quite a bit, as well. At the same time, the fact is that coal and nuclear generate in excess of 60% of the U.S. electricity supply. And much of the installed base is between 30-40 years old, with a significant amount even older. So this installed base of power generation systems is coming to the end of its design life. What will replace it? We had better figure that out now, because it will take the next 20 years (and more) to build the next generation of power systems and plants. On the other hand, wind power has been affected to a lesser extent by capital cost inflation. Combined cycle and gas turbine combustion still remain cheaper than wind, but wind made up a lot of ground in 2003-2004. These effects will play out over the next few years. These are things that neither the next president nor his policymakers can do anything about. They will just have to ride the wave. And look at geothermal. It has become more expensive to build out geothermal capacity, but not that much more so. So geothermal is among the most competitive systems out there. And on the surface, wind appears “cheaper” to build than geothermal. But that does not take into account that geothermal is far better for baseload power. That is, geothermal can supply power pretty much 24 hours per day, seven days per week. Wind, on the other hand, is limited to times when the wind blows. So it might take, say, three or four separate windmill sites to ensure 24-hour coverage, instead of one geothermal site. We can only expect that fossil fuel costs will rise over the next few years. Really, who thinks that coal or oil will get cheaper? Rising fuel costs will further damage the economics for fossil-fired power generation, along with rising capital costs. And despite the relative cost advantage for coal-fired power, the climate change debate is affecting the energy markets. Uncertainty about the future “carbon regime” is a key factor. There are many questions. That is, will there be a “cap and trade” system on a national or worldwide basis? Both of the major party candidates are discussing this. And cap and trade could manifest itself in many different forms. We might see national limits on carbon emissions. Or there could be taxes on carbon. (British Columbia already has a small tax on carbon. And what happens to small taxes? Yes, of course.) In addition, the U.S. could enter into any number of treaties that set limits on overall carbon emissions. What will this do to U.S. industry, both domestic and international? This is no idle musing, either. Large companies like General Electric are making extensive preparations for a future of limitations on burning carbon. Even now, we are living with the effects of the debate over climate change. The prospect of dramatic carbon regulation has already altered the economics for the coal industry. In the past two years, we have seen numerous cancellations for proposed U.S. coal plants, from Texas to Montana to Pennsylvania to North Carolina. At the same time, renewable power systems are a fast-growing industrial sector. But renewable power systems cannot in any way meet the scale of future demand in the near to medium term. The industrial infrastructure is just not there to build large numbers of basic systems for wind, solar and even geothermal. Anyone who says we’re going to do vast amounts of renewable this or that within the next four years just does not know what he’s talking about. So you can be sure that energy efficiency and demand control (higher prices and smart metering) are key near-term responses. That is, in locales where customers are exposed to fluctuating daily power prices, demand control is more likely via higher prices. In places where customers see relatively static pricing for energy usage, we can expect to see mandatory efficiency measures gain ground. And if the next U.S. president does not get energy right, nothing else that he does will really matter very much. Until we meet again, Byron W. King |
Wednesday 27 August 2008
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