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The Daily Reckoning Tuesday, November 10, 2009 Views on the dollar's fragile future from the Yarra River, The "haves" and the "have-nots" of the global water crisis, Gold, stocks and foreclosures all rocket higher and more... Bill Bonner, reporting from Montevideo, Uruguay... The Dow rose 200 points yesterday, bringing it only about 75 points below the 10,300 level. Why is the 10,300 mark important? It's not really...it's just the point where this bounce will equal the bounce following the crash of '29. No reason in particular that this bounce should be the same as the one 80 years ago. But no reason it shouldn't either. Gold rises with the stock market. The yellow metal hit a new record over $1,100 yesterday. Why is that that important? Well, it's not important either. But gold still has another $1,000 or so to go before it equals the last bubble peak in gold, set in 1980 - on an inflation- adjusted basis. The point is, there's plenty of room on the upside for gold...and not much room left on the upside for stocks... Stocks are going to be hit hard when people realize that the recovery is a fraud. When will that happen? We don't know. But another big wave of foreclosures might be the thing that sets it off. "The Second Wave Begins..." This was the title of a report over the weekend from John Hussman. The gist of it is that the long-awaited 'second wave' of foreclosures has, perhaps, finally begun. First, many of the Top 50 metro areas in the US are reporting "sharp increases in foreclosure activity. "Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation's foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave," said James J. Saccacio, chief executive officer of RealtyTrac. "While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009." Hussman: "While the news itself is no surprise in the sense that we have expected and written about this situation repeatedly in recent months, the phrase 'sharp increases in foreclosure activity' is notable in the context of widespread views that credit difficulties are abating. Below is a reminder of where we stand in relation to the reset curve. This news of a shift in the character of foreclosure activity comes precisely in tandem with the beginning of the predictable second wave. The pleasant lull in the reset schedule is decidedly behind us. "The mortgages certainly do not reset at Treasury bill yields or even at standard spreads over LIBOR. Instead, they reset to a 'premium' spread above those rates. That 'yield spread premium' is precisely what the homeowners agreed to in return for the undocumented loan, and is particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value). Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume they now sport very high loan-to-value ratios." So, there you go. If Hussman is right, we'll soon see real estate prices take another tumble. --------------------------------------------------------------- And here's a few thoughts from our resident value investor... "China is the largest importer of soybeans and has been since 2000," wrote Chris Mayer, our resident value-investing hound, in yesterday's issue of The 5-Minute Forecast. "China was once the largest exporter of soybeans, but flipped to a net importer in 1995. It may well be impossible for China to meet its demands for soybeans by producing more of its own. Passport Capital, an astute hedge fund, estimates that in order to grow enough soybeans to become self-sufficient, China would need to cultivate an area about the size of Nebraska. "That looks impossible against China's arable land base, which has been in decline since 1988 - this despite the fact that China's subsidizes agriculture. Another reason is the low level of water resources in China. (See the nearby chart 'Who Has Water... And Who Doesn't.') Soybeans require a lot of water - 1,500 tonnes of water for one tonne of soybeans. "This chart is telling. Who has lots of water? Brazil. So it is no surprise to discover that the increase in demand for soybeans from China has largely been met by increasing soybean acreage planted in Brazil. (Brazil is the second-largest exporter of soybeans in the world, behind the United States and ahead of Argentina and Paraguay.) "The easiest way for China to get around its water shortage is to import soybeans. By importing soybeans, Passport calculates that China is effectively importing 14% of its water needs... "So now we are in a position to connect some dots. China's increasing population and affluence will drive its soybean imports. These imports will come mainly from Brazil. And Brazil, as it converts more arable land to producing farmland, will need a lot of potash and phosphate. What is true of soybeans is also true of wheat and corn and rice and other agricultural commodities. We'll need more of all of them. And all of them face the same challenges for water and land. All of them require lots of fertilizer." How should you specifically invest in this trend? Subscribe to Capital & Crisis to find out. Do it today and we'll throw in a fresh copy of our updated bestseller, Financial Reckoning Day: Fallout, absolutely free. And now, back to Bill... Financiers have the world's financial system in a "doom loop," says the Bank of England. We've thought so ourselves. The bankers take money from the government and use it to speculate, not to lend. "Excess" reserves are at a record high as consumer credit continues to decline. Most people find it both galling and absurd to see the bankers getting $10 million bonuses while there is 10% unemployment. Here at The Daily Reckoning, it's just a matter of curiosity. You'd think there would be more wage competition to drive down bankers' compensation. Why doesn't Goldman go to an unemployment line and make an offer... "Any of you guys want to earn a $9 million bonus?" Surely there would be a few takers. And Goldman would save $1 million. Of course, we're joking. Banking is not a trade you can pick up just like that. Borrowing from the Fed at 1%...lending back to the Treasury at 4%...hey, it must take a few days of training to be able to turn around money like that. On the other hand, there are periods when speculating for a big bank is a breeze. Over the last 7 months, for example, there was almost no way fed-financed traders could lose money. They borrowed dollars - the new carry-trade funding currency - at next to zero interest. It didn't matter what they did with it...they could trade it for Brazilian reals...or buy stocks in Singapore...or buy gold. Almost everything went up against the dollar. Institutional investors - such as those managing money for banks - are judged on how well they do against the benchmarks, the averages, not on how much money they make or how many losses they avoid. If their colleagues are making money, they have no choice. They have to get in the game too. So, they're in a "doom loop," where they continue to bid up asset prices - even at the beginning of a depression. Meanwhile, over in the real economy...the deflation continues. David Rosenberg: "It is like a magic show - the US economy is somehow out of recession with both employment and consumer credit outstanding still in full- fledged contraction mode. "In September, total consumer credit fell $14.8bln making it the eighth month in a row of debt repayment - an unprecedented string of declines. Over this period, the amount of consumer credit (not including mortgages) that has come out of the system has totaled $163bln at an annual rate (or -6.3% at an annual rate). Looking at the fact that total household debt still exceeds long-turn norms of 60% by a factor of more than two, we are still in the early stages of a secular credit contraction that could well end up seeing another $5 trillion of debt collapse. This is a highly deflationary process; it will take time; and while we are bullish on gold and commodities strictly on global supply- demand imbalances, bonds remain a very good place because deflationary episodes provide solid real yields to investors." Let's see. We've tried several ways to gauge how long it will take to de-leverage the private sector (which is another way of figuring how long this depression will last). At 6% a year - assuming private sector has about 2 times as much debt as it should have - it will take about 7 years to get down to a more comfortable level? Did we do the math right? Well, who knows? But every time we do it, we come up with about the same answer - 7 to 10 years, more or less. But it's not that simple. Because as the private sector de-leverages the feds try to prevent it...while they leverage up the public sector. This is bound to stretch the whole thing out...and bound to lead to some serious bust-ups. More thoughts below, but first, here's today's essay... The Daily Reckoning Presents: "Waiter, we'll take the check, thanks...oh, and another bottle of wine." Some subjects are best discussed over wine. As for the rest, they're probably not worth having anyway. Earlier this week, your antipodean editor met up with Dan Denning, the mind behind the Australian Daily Reckoning, to compare travel and market notes and to quaff wine on Melbourne's magnificent Yarra River. We spoke about immigration issues, international travel and investment trends, the cricket...we even spoke about you. Mostly we just spoke about your money...and our money...and everyone else's. What might a dollar be worth a year from now, we wondered, or an ounce of gold, or a portfolio of US equities. More? Less? Who knows? Fortunately, we didn't arrive at any answers (certainty is such a conversation killer). We did, however, hazard a few guesses. For his part, Dan got pretty excited about what he calls some "Major League" days of reckoning ahead for the US government. Now, if you don't hold any US dollars, this information is probably only extremely important. If you do earn or invest greenbacks, however, it is absolutely critical. Dan's thoughts take the form of today's column, offered below... Major League Reckoning By Dan Denning Melbourne, Australia Now there's a real decoupling. Friday's unemployment figures came out in America. They showed that 8.2 million Americans have lost their job since the GFC began in 2007. The official unemployment rate (the one that under-measures actual unemployment) is at 10.2% and growing. Stocks rallied on this news. Employment is said to be a lagging indicator. Economists tell you it's the last thing to recover from a recession. Businesses don't begin hiring until after they are sure the worm has turned in the economy. But right now, there is a pretty big decoupling between the stock market's verdict on the economy (it's all good, man) and the employment market's verdict (it sucks, man). Of course, a flaccid job market is not all that hinders the world's largest economy. Far from it... The supply of new US debt is growing even faster than the Congress makes plans to spend the money. The US Treasury is auctioning off $81 billion in new debt this week. It will sell $40 billion in three-year notes on Monday, $25 billion 10-year notes on Tuesday, and $16 billion in 30-year bonds on Thursday (which is pretty ambitious). You have to wonder who is willing to loan money to the United States government - given the state of its fiscal and monetary policies - for thirty years at below 5%. But the Treasury is anxious to auction as much long-term debt now as it can, locking in what it believes are low rates. This is another way of saying the Treasury thinks rates will rise (creditors will ask for higher rates when lending to Uncle Sam). In the report from the Treasury's borrowing committee to the Secretary, the committee said it was getting a wee bit worried that the maturity schedule of the Treasury debt portfolio could be in trouble if rates go up. Specifically, it wrote that, "The potential for inflation, higher interest rates, and roll over risk should be of material concern." Perhaps this is why the Treasury and the Fed are considering whether to "move out on the interest rate" curve and try and set rates for longer- term debt. If the market is going to push them up, the Fed will have to push them down (as it has been doing anyway with its purchase plans). Rules are made to broken! Take the statutory US debt ceiling for example. The Treasury's borrowing committee writes that, "Based on current projections, Treasury expects to reach the debt ceiling in mid- to late- December. However, the government's cash flows are volatile, and forecasting a precise date is difficult. Treasury is working closely with Congress to pass legislation to increase the debt ceiling. We will keep financial market participants apprised of developments as the debt outstanding approaches the statutory limit." In other words, the jackasses in the US Congress will have to pass a new law allowing the Treasury to borrow more. This would be comical if it weren't so disgraceful. US monetary authorities continue to tell the world's savers that the US standard of living is not negotiable, even if it means increasing public sector debt to over 100% of GDP. But the world's creditors may not be in the mood to negotiate anyway. We think the rise in gold is one example of creditors deciding there are better things to do with their money. And in the meantime, take a look at the graph below from the Quarterly Refunding Statement of the Treasury's Office of Debt Management. It's a doozy! Click to Enlarge Source: US Treasury Office of Debt Management, Quarterly Refunding Statement Charts, Nov 2, 2009 Sorry about the size. We had to reduce the chart to get the whole thing in. In case you can't read the fine print, it says that in the next five years, there will 73 days on which more than $20 billion in Treasuries mature and 46 days on which more than $30 billion in Treasuries mature. That's 119 days of major league reckoning. Normally, that debt is simply rolled over as a new (or often the same) buyer refinances it. But what do you think will happen in the next five years? The US will be borrowing more and more and probably at higher rates. Our guess? It won't be good for the dollar. Regards, Dan Denning for The Daily Reckoning --- Outstanding Investments Metals Report --- From Hulbert's # 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet... GOLD $2,000: Playing The Ultimate Anti-Dollar Safe Haven "I'm so sure gold will soar higher I'll even make you a guarantee...plus, I'll give you five entirely new ways to play the trend... "Including one hidden way to snap up gold... for less than one penny per ounce..." How can that be possible? Give me the next four minutes and I'll show you how... ------------------------------------------------------ What's Bill doing in Uruguay? We were wondering the same thing... More to come on this later in the week, but first, here's today's Daily Endnote... "There are a lot of houses for rent...you can get a very good deal," reports our oldest son. Will is relocating, from Argentina back to the US. He's moving back to Florida. "Why don't you move back into your own house," his father wanted to know. "Dad, I've got a good tenant in there. Besides, it's not in very good shape. I'd rather sell it than invest more money in it. And there are so many places on the market, I can rent something better. Even after a big drop in prices it is still cheaper to rent than it is to buy something." There are probably millions of homeowners who would like to sell - if they could. This hidden inventory of unsold houses will depress housing prices for a long time. But there's a crisis coming in commercial real estate too. "An extreme amount of commercial debt is to mature over the coming years," writes real estate investor George Karahalios in Marc Faber's Gloom, Doom and Boom Report. "And unlike the residential market, there is no safety net (Fannie Mae) for commercial loans. Instead investors must rely on financing through commercial banks, a few insurance companies, and other private lenders who now demand much higher interest rates and more equity for the risk associated with these investments. Thus, not even the Fed's printing presses can save commercial property prices, and I am expecting certain locations to crash, perhaps falling as much as 50-80% from the peak." So you see, dear reader, there is bad news ahead - a lot of it. Stocks will go down. Gold will go down too - most likely - when people realize that the economy faces a long, deflationary depression...not a period of inflationary growth. But while stocks are fair weather friends, gold sticks by you in foul weather too. Right now, gold is rising on good news. Eventually, it will soar when the news turns bad. (Though...not necessarily right away...) 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 "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.

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