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Friday, April 17, 2009 The water crisis still as bad as ever in China... Economic decline slowing? Really? The recession digs its claws into the king of the search engines... A morality play in three parts by the DR playwrights...and more! China's Water Crisis by Kate Incontrera Baltimore, Maryland A story that colleague Chris Mayer has been following over the past few years caught our eye this morning. "China Faces a Water Crisis," reads the headline. This has been going on for quite some time now...and it's no wonder. After decades of immense economic growth and the flood of hundreds of millions of villagers to cities, China can't keep up with the demand for water. Another big problem for the Chinese is access to clean water. Between drought and rampant pollution, clean water is becoming more and more scarce in the country. Says Business Week: "In February, one of the most [severe] droughts to hit China in a half-century affected some 5 million people and 2.5 million livestock in the provinces of Hebei and Henan, near Beijing. "Father south in Yancheng, Jiangsu, 300 kilometers from Shanghai, more than 200,000 people were cut off from clean water for three days when a chemical factory dumped carbolic acid into a river. Just before the Olympics last June, the coastal city of Qingdao, site of the sailing events, saw an explosion of algae in nearby waters that may have been caused by pollution." Additionally, the water resources that the country does have are greatly mismanaged. According to the World Bank's statistics, of the estimated 65% of the country's water that goes to agriculture, less than half of that actually makes it to the crops. "Better management of water resources is a first step," wrote Chris Mayer to his Mayer's Special Situations readers in April of 2007. "One of the best ways to improve water use is to tackle the efficiency of the biggest users of water: farmers. In China, conservation is going to be forced on farmers simply because the supply is very limited. One of the best ways for farmers to improve water use in this area is through more efficient irrigation." Mayer's Special Situation readers have been hot on the trail of the water crisis story in China - and the one occurring on the United States' own soil - since the newsletter's inception in the summer of 2006...and their water plays still continue to do well. Clearly, this is a story that won't be going anywhere anytime soon. To learn what other opportunities for profit Chris is offering readers, see his special report: The Biggest Resource Breakthrough Since 1901 Now we turn to Addison for a look at the second wave of the housing tsunami: "Quick quiz: how can you own real estate like this...and lose money?" asks Addison in today's issue of The 5 Min. Forecast. "Leverage, of course. "Faneuil Hall, the Boston historic site and tourist trap, was among the $29 billion portfolio of commercial real estate owned by General Growth Properties (GGP) - the second largest mall owner in the U.S. GGP also has a huge stake in the Inner Harbor, the biggest source of tourist revenue in Baltimore...and half the suburban Petri dish south of town known as Columbia, MD. Gack. "This morning GGP grabbed the mantle as the biggest property bankruptcy in American history. GGP's aggressive 'growth' model left it strapped with $27 billion in debt, which as you can imagine, has been increasingly hard to service. Oops. "We've been expecting this 'second wave of the housing Tsunami' for some time. Looks like it may be coming crashing ashore in as spectacular a fashion as the bankruptcy of Lehman last September." You can protect yourself from the second wave of the housing Tsunami...learn about the seven 'super shields' you should be using to protect yourself from the second leg down of the housing bust by clicking here. And back to Kate in the land of Bohs, beehives and blue crabs: We've been reporting this week that Bernanke sees the economic decline in the United States slowing...which is a bit confusing, judging from this week's flurry of negative economic data. Foreclosure filings are at record highs...retail sales are down...and the economic stimulus just keeps coming. Is the economic decline really slowing? Our intrepid correspondent, Byron King, tackles this question: "My view is that there's a lot of liquidation still to occur. We've seen a pause in housing prices going down, for example. This was because of a nationwide trend of banks and other mortgage holders to defer foreclosures during the winter. But now it's spring. And many people who were living in places that they cannot afford are still living in places they cannot afford. When (not 'if') foreclosures go up, there will be more housing on the markets in many areas. This will depress prices even more. "As for the stimulus programs? Well, about $90 billion is programmed to get disbursed - via federal programs and through state and local governments - by Sept. 30, the end of the government's fiscal year. That's about five months away. About $200 billion more will move into the spending pipeline in fiscal 2010, starting Oct. 1. All that money will pay for a lot of pothole patching over the summer, into the fall and well into the next election year. Are we surprised?" Haven't gotten your fill of Byron? See more from him here. And yet another sign of the times...the recession digs its claws into the almighty search engine: Google. Its first quarter results show that Google had its first quarter-on- quarter decline in sales, citing cutback in online ad spending. Their outlook for future quarters is "muted" and no rebound is in the cards as of yet. Speaking about the overall economy's effect on the search engine powerhouse, "We're basically in uncharted territory," said Google chief executive Eric Schmidt. "The economic environment...remains tough. Google absolutely feels the impact." We tend to agree with Schmidt's view over Bernanke's. The economic environment is tough...and will most likely remain so for quite some time. Time to hunker down for the long haul. That just about does it for us today. Bill should be back on Monday. Enjoy your weekend, Kate Incontrera The Daily Reckoning P.S. Keep reading for today's guest essay. It's an oldie...but a goodie. --------------------- Special Offer --------------------------- A Secret Way to Multiply a 39% Gain... Into Nearly 314% Stop paying full price for stock gains... This secret can pay without buying a single share...with much less risk and much less work...for anybody who's finally ready to get started... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Some of you may recognize today's DR essay, published first in April of 2005. It never hurts to be well acquainted with one's past...even if that past happens to include mistakes. At the height of the housing boom, many mistakes were made...and made again. This 'play' written during that time, offers some insight into what those who made themselves players in the biggest bubble of all time were thinking. And perhaps you'll learn a little something from it. Read on... The Failed Intervention: A Morality Play in Three Parts by Addison Wiggin Baltimore, Maryland CAST OF CHARACTERS: A.W. (a.k.a. Renter #1) T.D. (Renter #2) K.I. (Renter #3) L.S. (Unwitting Speculator #1) C.D. (Unwitting Speculator #2) M.N. (Real Estate Investor) A.P. (30-Year Fixed Rate New Homeowner) Chorus: Café patrons and waitresses TIME and SCENE: Mid spring 2005 A.D., our great nation is in the throes of a tenacious housing bubble. Whole cities have been tantalized, wooed and seduced by this Siren song of easy wealth; entire populations rendered giddy by profits... on paper. Nearly every conversation heard around the dinner table... across the bar... in a cab... is focused on one subject: the housing market. The scene opens in Café Hon, a locally famous Baltimore eatery in the trendy suburb (sic) of Hampden, where big hair and gaudy make-up are curiously in vogue and admired. Seven colleagues from the Daily Reckoning's HQ are seated around a Formica-topped table. Lacking an additional 30-yr fixed mortgage holder, the table less-than- fairly represents the breakdown of mortgages nationwide: roughly 60% fixed rate, 40% ARM... 25% of all new mortgage originations in 2004 were real estate investors. LS (Unwitting Speculator #1) is closing on a house the following day. Mere hours stand between her and the single biggest financial transaction of her young life. Can those stalwart pessimists (Renters #1, #2 and #3) lash her to the mast in time to save her from the Siren's tantalizing tune? We shall see, dear reader... below... ACT I - A MORTGAGE BROKER'S WET DREAM Renter #1 : Hey, LS... I'm going to ask you one question. Your answer will determine how much I speak for the rest of this meal. Is your loan... an adjustable-rate mortgage? Unwitting Speculator #1 : Not at all. It's interest only. [A gasp is heard. Ominous Lon Chaney-style horror music rises from the background.] Renter #1 (face wincing): Why... why?! [Screams of horror coming from the kitchen.] Unwitting Speculator #1 : What?! I was tired of throwing away money on rent every month. I wanted to invest in something real... and build equity. Besides, we're going to sell in five years, anyway. So we're cool. [Somebody snickers.] Renter #2 : That doesn't make sense. You are still throwing away money. The only difference now is you pay a finance company instead of a landlord. Renter #3 : And what if you can't sell in five years... doesn't that make you nervous? Unwitting Speculator #1 : [muffled unintelligible remarks... something about the location of the house...a leafy street...children on bikes...speed humps... shiny happy people... yada, yada...] Renter #3: Answer the question. What if you can't sell? Unwitting Speculator #1: Well... I am a little nervous. [nervous laughter] We're risking a huge amount of money... more money than I've ever known. But hey, you only live once! Unwitting Speculator #2: Oh come on LS, don't listen to them. I have an interest only mortgage, too. [More gasps of horror. Another burst of Lon Chaney music.] These guys are all gloom and doomers. Remember, they work for The Daily Reckoning. [Renters' heads snap in unison to glare at Unwitting Speculator #2] Renter #1: And...what about you, AREN'T YOU nervous? Unwitting Speculator #2: Nope. I try to take life one day at a time. I don't look that far ahead. I'm doing okay right now... and besides, in 5 years, I hope to be married. [Unwitting Speculator #2 holds up both hands with her fingers crossed. Smiles.] All (in unison): Awwww. Unwitting Speculator #1: Don't you know it's bad luck to cross your fingers with BOTH hands? ACT II - UNSEEMLY PROFITS Real Estate Investor: What about you Addison, why do you rent? Renter #1 : Well, we live down by the water... in the neighborhood we want to live in... and to tell you the truth, I just don't understand the market anymore. Let me give you an example. When we lived in the same neighborhood before moving to Paris back in 2000, the house across the street went on the market for $97,000. The price was so high, everyone thought the owners were nuts. It was a different time. A friend finally bought the place for $87k, gutted it and started renting to college students. We moved to Paris for four years. Last year, when we were moving back, we looked for a place to buy in Fell's Point... low and behold, we saw the same property on the market. Guess how much? All (in unison): How much... tell us! Renter #1: $357,000. [Renter #1 moves his hands to his hips in disgust. Nods around the table.] A four-fold increase in just as many years!? Tell me, what market - any market - can sustain that kind of growth? Real Estate Investor: Hey, a lot of people I know would say that's still cheap. Besides, it sounds like you were a damn fool to move to Paris. You should have held on for the ride. Still, I think you're right. The market is getting frothy... that's why I just sold my Baltimore properties. [Puzzled looks of intrigue.] Renter #1: Yeah, that's probably a good move. You bought in nice and early, and now you've sold near the top. Then you put the proceeds into a resort property in West Virginia... everyone knows that's an undervalued market. [Fiddle-heavy blue grass music wafts from the kitchen. More nods of agreement around the table.] Real Estate Investor: Yup. The price is up already. We only put ten percent down, but by the time of closing we had accumulated enough equity, the bank said they weren't going to require mortgage insurance. We'd already amassed an additional 10% of equity! 30-Year Fixed: Hell yeah! We made over $30,000 on our house before we'd even slept there! Unwitting Speculator #2: Yeah... same here... my house is way up already, so I have a good margin of safety. And when I get married... All (in unison): Awwww. Renter #1: Hey, 30-year fixed, I know you've already made money on your house, but what do you see in the future? 30-Year Fixed: I have a response, but first I'd like to make a comment... There are some neighborhoods that will always hold value. [muffled remarks... something about the location of the house...a leafy street...children on bikes...speed humps... shiny happy people... yada, yada...] Renter #1 (with much enthusiasm): Au Contraire! (after all, that is THE motto of The Daily Reckoning...) Baltimore is a case study of good neighborhoods gone bad. Look at Druid Hill... beautiful row homes. Back in the '20s F. Scott Fitzgerald and Gertrude Stein held garden parties and entertained European royalty up there. Now look at it. Hell might offer better refuge for a family of four. On the other hand, in the '70s respectable folk wouldn't let their children go down to Fell's Point unchaperoned. It was a haven to bikers, ne'er-do-wells and urchins of the night. Today, they're building spec homes on the water that start at a million plus... Renter #3: Too bad the harbor smells so bad... All (sighing): Yeah... [Pregnant pause. A moment of quiet reflection.] Chorus: At this point, it's not clear what conclusion, if any, can be drawn from the play. When will the housing bubble burst? Is it a bubble at all? Or... will prices keep rising for five years, handing the interest- onlys the last laugh; leaving the renters, humbled once again with egg on their faces... and feeling like chumps? Well, dear reader, this is what makes a market. Still, the renters bumble on... ACT III - THE INTERVENTION Unwitting Speculator #1 (jolted with excitement turning to Renter #1): Oh, that reminds me, can I have the day off tomorrow? I'm closing on my house. [Turns to the table.] Should I wear a suit? 30-year Fixed: Nah...you don't have to wear a suit for those yahoos. [Snickers] Renter #1: Sure, you can have a day off. But I forbid you to use one of these. [Renter #1 holds up a pen. Renter #2 and Renter #3 smile at each other.] Renter #3 (smugly): Ahhh... No pens, no signing. Renter #2 (smug and grinning): Yeah... no pens. 30-year Fixed (Gesticulating expansively, raises his voice): Ah, don't listen to THEM... (mutters to himself) for crissakes. [Check arrives. Curtain falls.] Regards, Your playful playwrights at The Daily Reckoning DISCLAIMER: Any and all events in this dramatic reenactment are purely non-fictional. Any resemblance to real life is intentional; not at all coincidental. Some liberty may have been taken with the facts, but we swear it was in good faith. We may have been embellished a tad for dramatic effect. AUTEUR'S NOTE: It goes without saying, if this reality play had been written in 1999, the object of desire would have been tech stocks instead of houses. A lot has changed since 2005. (Addison fell prey to the Siren song of real estate and now owns a home). And, unbeknownst to the cast of characters, the real estate bubble was about to find its pin...starting with the subprime market. As the subprime loans began to reset at higher rates, borrowers found themselves in over their heads, not able to make their mortgage payments. The subsequent defaults shook the lenders to their cores, causing a ripple effect over the rest of the economy...the effects of which, we are still feeling. We aren't out of the woods yet, unfortunately. Another wave of defaults will soon be upon us when the "Alt-A" and "Option ARMs" reset at higher rates. But there's still time for you, dear reader. Learn from the mistakes of our friends, above, and find out how to protect yourself and your assets (while building a nice cushion of wealth). 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