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The Daily Reckoning Tuesday, November 24, 2009 Looking back on the financial crisis that's still yet to come, Peak Metals: Why these (other) vital metals are set to soar, Plus Claptrap...Nonsense...Tom Friedman...and plenty more... --- Worried About the Global Economic Slowdown? --- These Six Companies Are Still Making Big Profits in China And Could Double or Triple Your Money in a Year or Two! Tony Sagami has written six Raging Profit Reports on his favorite little-known companies that are serving China's hungry consumers. And he wants to get them in your hands free of charge. Click here to read more... --------------------------------------------------------------- Joel Bowman, reading aloud the introductory role call from Taipei, Taiwan... Could it be, dear reader? Is it time already to log the folly and collective lunacy of the global financial crack-up in The Ghost of Crises Past? The mainstream media says so...the markets say so...even Wall Street's bonus recipients say so... ..but the irreversible laws of nature and uncommon sense scream, "NO!" Bill Bonner reckons there's still "Hell to pay"...at least. So far we've only wiped out ten years of stock market wealth, employment progress and real income gains, observes Bill. That still leaves a couple of decades' worth of irresponsible credit expansion to clean up... And that's to say nothing of the "waves of debt" battering the US economy, adds Ian Mathias...nor the fragile state of the currency straining to hold it all together... There are, of course, still places where one might make a buck, chimes Chris Mayer. There's money in metals, Mr. Mayer assures us. In fact, the immutable reality of supply and demand virtually guarantees certain metals will appreciate over the coming years (Hint: They're not ONLY the ones you're thinking about)... We've got all these stories, and more, in today's edition of The Daily Reckoning... First up, Bill Bonner reports from London, England... Claptrap! Nonsense! Balderdash! Everywhere we look, someone is saying something ridiculous. Which is good news to us. This Daily Reckoning was getting to be serious work...what with the world facing a total financial meltdown and all. So, we're pleased to be able to lighten up by, once again, telling you what an idiot Tom Friedman is. You already knew that? Well, it doesn't hurt to repeat it... We hadn't seen much of the old Tom recently. His recent editorials in The New York Times were no smarter than before, but a bit subdued...as if some chemical trace of good sense had slipped into his system, perhaps from a paper cut. But now, he's back, big as life and twice as stupid. We'll come back to Tom in a moment, but since this is a financial service, we should probably begin with the financial news. The Financial Times is looking over its shoulder. The recession is over, it says; time to take stock of the damage. "Beyond the Crisis... With most of the world's economies officially out of recession, the FT launches a series examining the legacy of worst global economic crisis since the 1930s," says the FT. But according to the figures below the headline, the crisis wasn't so bad. The US economy walked backward only 3.5%. Now, it's making progress again. The FT editors should keep their eyes on the road. The 'recession' did more damage than they think. And it isn't over... There's more trouble ahead. The 'recession' in the US has wiped out... ..ten years of stock market progress. Actually, stock prices are no higher than they were in 1998... ..ten years of employment progress. You have to go back to the '90s to find a time when so few people were working in America... ..ten years of income gains. The typical household had less real, disposable income than it had 10 years ago. In other words, a whole decade has been lost. Baby boomers are now ten years older, and less prepared for retirement than any previous generation in US history. In Florida, joblessness has reached 11.2% - officially. Unofficially, nearly one out of 10 people is either unemployed, or underemployed. The jobless picture gets even grimmer when you consider the effect of long- term unemployment on the unemployed. "It's a killer disease," says Thomas Cottle of Boston University. "People are going to be damaged and may not recover in their lifetimes." The FT elaborates: "The longer people are out of work the more their skills decline and the less appealing they become to employers." That puts the boomers in a bad spot. If they lose their jobs now they may never work again. Which means, they will face retirement with very little money...and a keen interest in making sure the feds keep the money flowing their way. They may not recover in their lifetimes... Housing starts are at a 10-month low. Mortgage applications are at a 12-year low. As far as we can tell, both housing and employment figures are getting worse. In short, the 'recession' is far from over, even if the feds are able to jive up the GDP figures from time to time. --- The Agora Financial Reserve is Officially Open --- We'll Pay You $5,909 to Cancel Your Agora Financial Subscription Right Now We know it sounds preposterous, but it's true. Not only that... If you act now* you'll receive every one of our elite publications... And that's in addition to the nearly $6 grand we just mentioned. Just give us 10 short minutes out of your day, and we'll explain everything. *The doors to the Agora Financial Reserve are only open a few short weeks out of the year. We suggest you take advantage while you can. --------------------------------------------------------------- And more thoughts... Meanwhile, in yesterday's market action...the big thing that happened was the same thing that seems to happen every day lately. Gold hit a new record high. It rose almost $18 to close at $1,164. Now, the question we must ask ourselves is an old one: is this the final, blow-out phase of the gold bull market that began 10 years ago? Or is it a trap...intended to catch the Johnny-come-latelies in the gold market? Of course, we don't know any more than any other human being knows. But we've been watching Mr. Market for a long time. And we've come to the conclusion that he's an SOB. Trouble is, you never know exactly what kind of an SOB he's going to be. Is he going to lure investors into the gold market and give them a good whack? Or, is he going to drive the price of gold all the way to $3,000...and leave us behind? The old-timers, the scarred and battered confrere of gold bugs, in which your editor humbly confesses membership, are a bit skeptical of this latest run-up in gold prices. We bought gold years ago. Heck, we bought so many gold coins so long ago that we've forgotten where we buried them. So, we wouldn't mind seeing gold race right up to its rendezvous with monetary destiny - without stopping for red lights or little old ladies in the crosswalks. Trouble is, we don't think the world is ready for it. What do we mean by that? We were hoping you wouldn't ask. It's complicated and confusing. In many ways, it's more of a feeling...an instinct...and a hunch...than a hard analysis. But here goes: Look, here's the hero of the financial crisis, David Einhorn. In 2007, he figured out that the banks were going to get killed on their mortgage debt. He shorted them - particularly Lehman Bros. He made a fortune for himself and his investors. Well, what's he doing now? Guess. He's buying gold: David Einhorn, quoted in MarketWatch, said that given the present situation gold was the bet he felt most confident to make: "If the chairman of the Fed is determined to debase the currency, he will succeed," Einhorn said. "Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself." In other words, gold is a one-way bet. But wait. It's not like Mr. Market to offer investors one-way bets. There's usually more to the story. And the twist is probably this: Deflation will surely lead to more steps to debase the currency, but those steps don't necessarily or automatically take the feds where they want to go. We have no doubt that the Fed chairman is determined. What we doubt is that he is capable. We doubt, too that a 3.5% downturn over 24 months corrected 30 years of credit excess. There's still Hell to pay. It means another big takedown in the stock markets...crashes in China and emerging markets...and collapsing commodity prices. Investors won't like it. Will they turn to gold for safety? Or to the dollar? A year ago, they dropped gold and ran to the dollar. Will they do the same this time? We don't know, but we doubt that SOB, Mr. Market, will make it easy for us, either way. Back to Mr. Thomas L. Friedman. What we like about Mr. Friedman is that he is such an unworthy opponent. It is like playing darts with a blind man or a boxing match against a paraplegic. In a battle of wits, The New York Times columnist is unarmed. We get to pummel him, confident that he can't hit back. Yesterday's column must have been intended to reassure Americans. The 21st century might be the American century too, he says. Yeah, yeah...the Chinese have more of our money than we do. And yeah, they can beat the pants off of us in commerce. And yeah, we're all growing old and going broke. But we still have something that nobody else has: imagination! Forget capital formation. Forget savings. Forget relative pay scales. Forget the trade deficit. Forget de-leveraging. Forget mortgage debt and the zombie banks. And forget the public debt and the other $100 trillion worth of financial obligations of the US government. We can still walk with a swagger and hold our heads up high. Because we've got...imagination! Why don't other nations have imagination too? Why couldn't they invent things such as sub-prime mortgages, color-coded Terror Alerts, and the Ultimate Fighting Competition? Friedman does not attempt to explain the Imagination Gap. So, we will just take it as a given. But he goes on to say that he is worried. In addition to imagination, the other critical ingredient to success in today's world, he says, is good governance. And here, he's not so sure that the US has it as a genetic advantage. Indeed, he thinks that the body politic USA sometimes comes up with "suboptimal" solutions. "A great power that can only produce suboptimal responses to its biggest challenges will, in time, fade from being a great power - no matter how much imagination it generates," he warns. Wow...deep...right up their with Machiavelli, Clausevitz and Toynbee. How do you come up with optimal solutions, you might wonder? Simple. At least, it's simple in Friedman's world...where everything is simple. His planet is populated by a race of such simpletons that they can come up with better governmental solutions simply by being "better citizens." What's a better citizen? It's someone who is "ready to sacrifice, even pay, yes, higher taxes..." Is that all there is to it? If we pay more in taxes we will have better governance. But how much more do we have to pay? Maybe it can be graphed out. If we pay 25% of our incomes in taxes, perhaps our solutions will be 25% optimal. If we raise taxes to 50%...well, 50/50 on the optimal scale ain't bad. But if we go the Soviet route - to 100% taxation - can we expect optimal solutions 100% of the time? Oh, Friedman, what a lamebrain you are! We'll spot you one on that imagination thing; we don't have any idea what you're talking about. But on governance, where have you been for the last 50 years? If there's one thing we've learned it is that governance is subject to the law of diminishing returns, just like almost everything else - like greenbacks and girlfriends, the more laws you have, the less you appreciate another one. --- Readers Wonder... "Is It Too Late to Invest In Gold?" --- From Hulbert's #1 Ranked Advisory Letter Over a Five-Year Period... Even if Gold hits $2,000 by the end of this year...here's a hidden way you can get in for less than one cent per ounce. Over the next two years, you'll witness the greatest surge in gold prices in market history - at least 119% above where gold sits today, as I write this. But even better, I've just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call "penny-per- ounce" gold. That is, doing this is a "backdoor" way to own as much of a position in gold as you like... for the equivalent of paying a single cent per ounce. --------------------------------------------------------------- And here's Ian Mathias, from The 5-Minute Forecast, chiming in from Agora Financial HQ in Baltimore: Whoever coined the phrase, "There's no such thing as bad publicity," didn't have the poor US dollar in mind. Since this time last week, the old greenback has suffered one abusive headline after another, as the dollar index has slumped to its lowest level in over a year... Hmmm... Maybe the fact that America's national debt officially topped $12 trillion has something to do with the dollar's weakness. Yesterday morning, The New York Times dished up this front-page headline: "Wave of Debt Payments Facing US Government." It turns out that the money our government borrows via Treasury bonds has to be repaid one day - with interest, no less. Breaking news! According to the rag, the government will have to cough up $1.6 trillion just by the end of March. Ten years from now, the mere cost of servicing the debt is expected to reach $700 billion annually, more than three times the current burden. And staying in the Old Line State for the moment, today's essay is below... --------------------------------------------------------------- The Daily Reckoning PRESENTS: No doubt dear readers are familiar with the concept of Peak Oil. It's one we've visited many times in this space. But what about Peak Metal? It's not something we read about in the news...but it seems to make intuitive sense, right? When we extract a resource - any resource - faster than Mother Nature can replenish it, we must expect, eventually, to run out. Unfortunately (or fortunately, depending on how you invest), "eventually" is much closer for some metals than for others. Many and varied are the implications of this reality. Chris Mayer has all the details in today's column, along with a few ways you can position yourself to take advantage of the situation. Please enjoy... Unscramble These Letters: MOLYBDENUM By Chris Mayer Gaithersburg, Maryland The mere whiff of an economic recovery has sent the prices of many industrial metals soaring. A genuine recovery and/or inflationary trend will cause prices to soar even more. Heck, we may not even need much of a rebound. Current extraction rates of certain metal minerals imply we're going to see some big price moves soon. Andre Diederen is a senior research scientist at TNO, in Holland, a sort of think tank aiming to apply scientific knowledge to industry and government. Diederen argues in a recent research paper that we face a "looming metal minerals crisis." "During the next few decades," he says, "we will encounter serious problems mining many important metal minerals at the desired extraction rates. Amongst them are all precious metals (gold, silver and platinum- group metals), zinc, tin, indium, zirconium, cadmium, tungsten, copper, manganese, nickel and molybdenum." Diederen advances in this forecast because many of these metal minerals have relatively low reserves. As we've mined much of the high-grade ores, we now have to dig deeper and process more rock to get a given amount of metal. Lower grades require exponentially more energy, as Diederen shows. So he believes that the "decades-old paradigm of increasing reserves as demand rises" is no longer valid without cheap and abundant energy. The bump up in costs will be so great, in fact, that much of the known mineral resources will never become economically viable reserves. By his estimate, the planet holds less than a 50-year supply of a number of essential metals and minerals. More importantly, we reach peak production of many metals well before the 50-year period is up. For example, the remaining lifetime reserve of zirconium is 19 years, but peak production is well behind us already (1994). Referring to the chart below, Diederen writes: "Although exact data fail, the elements strontium [Sr] through niobium [Nb] will soon reach their peak production or have already passed their maximum extraction rates." All the elements here face stiff headwinds as far as increasing extraction rates. Some of the more interesting ones - from left to right - include silver (Ag), gold (Au), molybdenum (Mo) and niobium. The latter is worth highlighting because Capital & Crisis recommendation, IAMGOLD (IAG:nyse), owns a niobium mine that is something of a wild card to value, but throws off significant cash flow. It is also one of only three such mines in the world and produces 8% of world supply. It's a nice little bonus you get for owning IAMGOLD. Diederen also makes the case that many metal minerals have no acceptable substitutes for their major applications. And finally, even where we have plenty of proven reserves, we may still face supply constraints because so much of the resource is in one place that is not easy to access. An example Diederen uses is chromium, which is mainly located in Kazakhstan and southern Africa. Common ideas people put forward that would avert the Diederen thesis include recycling and technological progress. As to the former, Diederen makes a good case that even with more intense recycling, we'll need more primary production to meet growing needs. As to the latter, he cites the Jevons Paradox: that when we use something more efficiently because of technological progress, we wind up using more of the resource in absolute terms. Certainly, you can see that with oil over the long term. Car engines and all kinds of applications are more energy-efficient than ever, yet our oil usage in absolute terms has gone up materially over the years. The developing supply crunch in these metal minerals sets the backdrop for a major, long-term bull market. Molybdenum is one of the most interesting metal minerals from an investment standpoint. That's why I have recommended Thompson Creek (TC:nyse), a major miner of molybdenum, to the subscribers of my investment letter, Capital & Crisis. I've stuck with this story despite a gut-wrenching, hair-whitening ride. Over the last two years, the stock has traded as high as $25 per share and as low as two dollars. It currently sits at $11.70. The story here is all molybdenum, the price of which has drifted down to about $11 a pound from prices around $35 in the middle of last year. So if we don't see a rise in moly prices, TC isn't going anywhere. But longer term, I see good reasons for moly to rise, mostly tied to the story of steel demand, against a rather tighter supply of moly. But for now, the company had $262 million in cash last quarter end. It also raised another $200 million after the quarter ended. So the market cap is now about $1.6 billion and the company has practically no debt and nearly $500 million in cash. Thompson Creek could be acquired by a copper miner, such as Freeport- McMoRan, looking to boost its exposure to moly. More likely, I think, is that Thompson Creek uses its cash hoard to buy a more-cash-strapped competitor. We'll see. But the stock seems ripe for M&A with all that cash. Detour Gold (DGC:tsx; DRGDF:pink sheets) is another ripe takeover candidate. In a world where the gold majors are struggling to increase production, Detour has the largest deposit not already owned by one of the biggies. As metal minerals prices slowly rebuild their momentum, I would expect to see a large number of takeover deals in the sector. Place your bets now. Regards, Chris Mayer, for The Daily Reckoning P.S. Did you catch our exclusive interview with Dr. Marc Faber just now, detailing his predictions for 2010 and beyond? We went live a couple of hours ago and already it's creating quite a stir. If you just watched it, you know what we're talking about... ..but if you didn't, don't fret. You can still access the archived version by clicking here.   The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.