Monday, November 9, 2009
Demographic trends and how to play the coming population boom,
Life since the fall of the Berlin Wall...Has anything really changed?
Four infrastructure stocks to pipe up about and plenty more...
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Bill Bonner, reporting from Buenos Aires, Argentina...
Twenty years ago today...the Berlin Wall came down. This marked the end of the greatest controlled experiment in economics ever conducted. What did economists learn? Nothing...more below...
The financial crisis of '08-'09 was not a head cold. It didn't go away.
It was more like diabetes, a stroke, or cancer. It was serious. Life threatening. We may not recover. Our only hope is to change our habits, undergo some nasty treatments...and endure a long convalescence.
But that's not what most people think. They are convinced that the feds gave the economy a miracle drug. It cleared up the trouble lickety split. Now, our troubles are behind us.
And...
The Dow moved up 17 points on Friday, leaving it above the 10,000 mark. Gold rose too - it is at a new record high, only $5 below $1,100.
According to the news reports, the US economy is 'growing' again. Yes, that's the official storyline.
But wait, what kind of growth is this? David Rosenberg:
"All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush."
The quacks at the Fed and the Treasury department have delivered the biggest jolt of adrenaline in history. People in the private sector won't spend? Heck, the feds will spend for them!
It took the Fed nearly one hundred years to grow its balance sheet - which is the foundation of the US money supply - to $800 billion. Then, after Lehman Bros. went broke, it doubled its balance sheet...to more than $1.8 trillion.
Early last week, the Fed announced that it would keep the firehose- sized IV in place. Then, by the end of the week, the G-20 meeting of finance ministers confirmed said they were all sticking with their stimulus programs.
You can't put that much cash into a financial system without getting some kind of reaction. Goldman is making record profits, for example. How does Goldman make money? It is finance business. It profits by offering credit. When credit expands, the moneylenders and speculators at Goldman make money.
The private sector isn't borrowing. Every day brings more proof.
Consumer credit contracted again in September - the 8th month this year.
Unemployment just passed the 10% mark, reports The New York Times.
"Small Businesses Hunker Down to Survive," says another headline story.
Another big bank went bust in California.
But while the private sector de-leverages, the public sector expands. Now, it's the feds who are doing the borrowing - about $1.7 trillion this year.
This is great for the people who help the feds finance their spending. But all it does is add more debt to the system. And debt is the real problem.
If former OMB director David Stockman is right, we'll see deficits over $2 trillion for a decade.
What people once took for absurd they now take for granted. Such as trillion-dollar deficits. For even with a hole in public finances equal to 13% of GDP the US House of Representatives passed a law overhauling the health care system, at a cost of more than $1 trillion.
What were they thinking?
Well, they were probably thinking that 'deficits don't matter.' And they were probably justifying the expense on the grounds that it was 'countercyclical spending' that would help pull the US out of its slump.
Whatever they were thinking, they weren't remembering what happened 20 years ago. It was 20 years ago today that the Berlin Wall fell, bringing to an end a 40-year demonstration project. The East Germans/Soviets wanted to show the world how well economists working for the government could run an economy.
And we found out!
But first, over to one of our favorite stock pickers for today's essay...
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The Daily Reckoning PRESENTS: The large cities of the world are getting larger...much, much larger. And that means that the demand for urban infrastructure is likely to soar over the next decade or two. Chris Mayer explains, below...
When Pipes Go "Boom!"
By Chris Mayer
Gaithersburg, Maryland
It was pouring rain in Manhattan when I tried to begin my long journey back to my hometown in Maryland. There was a long line for cabs, and I had to get to Penn Station to catch a train. So I took a bicycle rickshaw whose driver was eager for business. "The only way to travel in Manhattan," he said. He was a stout fellow with a shaved head and bad teeth that looked like blackened pylons on an old waterfront.
I hopped in and we zipped through traffic. At one point, he crossed over the double-yellow line daring oncoming traffic. "You don't see any taxicab get away with that!" he hollered back at me after blowing through a red light. Just like being in Asia again!
It was a different way to look at Manhattan, with its towering skyscrapers as far as the eye could see. Somehow, it all seemed a lot bigger in a rickshaw. Hard to believe that within six years, New York will no longer be among the world's five largest cities.
The new top five? Tokyo is No. 1, with a population (35 million) greater than all of Canada. Then follows Mumbai, Sao Paulo, Delhi...and Dhaka. Dhaka? Yes, Dhaka. It's the capital of Bangladesh.
There are some big changes afoot in the world's cities. These changes will create enormous opportunities for investors that a previous generation could barely imagine.
Consider some of these notes from National Geographic Traveler:
In the past 20 years, the world added about 3 million people a week to its urban populations
More than half of the world's populations live in cities and more two-thirds will by 2030
The fastest growing cities are all overseas: India has 40 cities with more than a million people; some Chinese cities are growing at more than 10% per year; and Africa's population should double by 2050.
"All cities are cities of the moment," says Richard Wurman, the celebrated American architect says. He is right. No city stays on top for long. In the year 1000, the most populous city in the world was Cordova, Spain. Beijing was tops in 1500 and 1800. London was the biggest in 1900, New York the biggest in 1950. Today, Tokyo.
The pace of urbanization is particularly swift in China and India. More than 25 million people move to cities each year. Some of the numbers are hard to fathom. As US Global Investors points out in a recent presentation, China will add more people in 15 years than the entire population of the United States.
"There will be up to 50,000 new skyscrapers," the company notes, "the equivalent of building 10 New Yorks. There could be up to 170 new mass transit systems. There are only about 70 in Europe today."
This massive population shift has enormous effects on infrastructure spending. Trillions of dollars will have to go toward building power systems, roads, water and wastewater systems, ports and more.
It's like what the US went through in the early 20th century - only on a much more massive scale. Historian Scott Nelson likens the current period to the Long Depression of 1873-96 vintage. Then, a banking crisis toppled Wall Street, too. Unemployment in New York hit 25%. But the Long Depression also paved the way for rising industries such as railroads, oil and steel and spawned a period of innovation and industrial growth.
As Richard Florida comments in The Atlantic:
In 1870... America's population overwhelmingly lived in the countryside. By 1900, the economic geography had been transformed from a patchwork of farm plots and small mercantile towns to a landscape increasingly dominated by giant factory cities like Chicago, Cleveland, Pittsburgh, Detroit and Buffalo.
Depressions destroy some things and make others anew. Before the Great Depression, few Americans owned a home. But government policies created the long-term mortgage that led to the rise of the suburbs and homeownership of nearly 70% by 2004. The malaise of the 1970s created the Rust Belt, but also saw explosive growth in the Sun Belt.
Now imagine a transformation very much like America's from 1870-1900, as people moved off farms and into cities. Especially imagine it on a global scale in China and India. Future historians will wonder how we couldn't see this great boom unfolding before our eyes - the boom in the building of cities.
This trend creates awesome opportunities for companies that make the bricks and sticks that create cities. Some of the companies that seem especially well positioned to benefit for the "City boom" are Flowserve Corp. (NYSE: FLS), ABB Ltd. (NYSE: ABB), Northwest Pipe (Nasdaq: NWPX) and Astec Industries (Nasdaq: ASTE).
I am bullish on the cheap stocks of debt-light companies that keep civilization a going concern.
Regards,
Chris Mayer,
for The Daily Reckoning
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And with today's Daily Endnote, Bill Bonner...
In 1949, the Soviets and the Allies divided Germany into two parts. One part followed a traditional capitalistic path to reconstruction. The other part took the socialist road. Remarkably, they kept this test going for 40 years.
Of course it was misery for many of the test subjects. People were so eager to get out of the East German control group, they risked their lives jumping over the barbed wire. Then, when the wall was down, the population of East Germany collapsed...more than one out of every ten people moved to the West!
But it was a great experiment for economists. Too bad they didn't learn anything.
What they should have learned is that when it comes to making people materially better off, government spending is a poor way to do it. It's great for the few favored firms who help Washington raise and spend its trillions. It's great for Goldman, in other words,
But what if you don't have an inside track with the government? Well, you're out of luck. You get to stand in line to buy inferior goods and services - produced by government-owned industries and protected monopolies. That was what the East Germans did. And, of course, you get government bureaucrats telling you what to do...and preventing you from improving the quality of your life.
That's what they did in East Germany. And that's what they're doing, now, in the United States of America - in a less obvious, less heavy- handed fashion. Who owns the biggest auto company in the US? Who provides the finance for the finance industry? Who controls the health care and education industries? Who's the biggest employer? Who finances our houses? Who runs our banks?
Well...you know the answer.
But here's another question: who's headed for bankruptcy? Same answer.
What can you do about it? All you can do is to anticipate where this is heading...and position yourself to profit. Or, at least position yourself to protect your assets.
In that regard, you may want to replace the FED with the GLD, if you know what we mean. The Fed is derelict in its duty to protect your paper dollars. GLD - an ETF for gold - is a very simple way of doing your own central banking.
But should you buy GLD now? Ah...they don't make it easy, do they?
So, should you buy gold now?
A quick answer: it depends.
If you're buying gold for quick profits, you will probably be disappointed if you buy it now. The price has been going up for weeks. It's probably ready for a rest.
Also, gold moves up with stock prices - both anticipating an inflationary recovery. We think this will turn out to be a mistake. There is no real recovery underway. And no inflation either.
If and when stocks collapse, gold will go down too. At least for a while.
But if you are buying gold as the Chinese and the Indians are buying it - as a monetary reserve, not a speculation - there is no time like the present. Sometime in the future, we wish we could tell you when, gold at $1,100 will seem like a giveaway.
Until tomorrow,
Bill Bonner
The Daily Reckoning
The Daily Reckoning - Special Reports:
Gold: The Truth About Gold
Fiat Currency: Using the Past to See into the Future
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