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The Fear Factor Strategy: When the S&P 500 crashed 43.3%...this strategy bagged an average 102.9% return. And now it could happen again, turning every $1 these stocks tank into $3 to $7 of gains for you. Find Out How Here. ----------------------------------------------------------- Markets in need of a good, long rest...otherwise known as a "correction," Eric Fry on investing in a post-bloom, monocarpic America, Plus, Bill Bonner on the perils of borrowing $2.4 trillion a year "just to keep the lights on" and plenty more... The Daily Reckoning | Monday, March 29, 2010 The End of the Year-Long Rally? Seeing investments through the eyes of a correction Eric Fry Reporting from Laguna Beach, California... Although the US stock market managed to post a slim gain last week, it struggled noticeably during the back half of the week. The Dow Jones Industrial Average attempted several rallies of various magnitudes...but they all failed. As a result, last Tuesday's closing high of 10,889 was the highest close of the week, despite the fact that the Dow ventured toward 11,000 later in the week, before ultimately ending the 5-day trading session at 10,854. Does this feeble trading action portend the denouement of a magnificent year-long rally? Is the Dow's dazzling 70% advance off the lows of March 2009 finally coming to an end? It feels that way to your editors here at The Daily Reckoning. But, be forewarned, we've been wrong once or twice before. We are not rooting against the stock market, of course. We simply have a hard time conjuring up enthusiasm for pricey stocks. It feels like the stock market is in need of a good, long rest - also known as a correction. But do not despair; there are always selective stocks to buy, even when the overall market is pricey. And furthermore, long-term investors can (usually) afford to ignore intermediate-term volatility. Fortunes typically accumulate over years, not over months or weeks. This observation leads us to the topic that inspires today's edition of The Daily Reckoning: What are the best investments to own or to avoid during the next few years. What, in short, is the "Trade of the Decade?" In the January 4th edition of The Daily Reckoning, Bill Bonner offered his new Trade of the Decade: Sell long-dated Treasury bonds, buy deep- value Japanese stocks. Your California editor agrees wholeheartedly with the first half of this trade, but has a different suggestion for the second half...and he shared these views in a recent presentation to the Investment University Conference in San Diego, California, which occurred on St. Patrick's Day. What follows is a lightly edited transcript of that presentation... Doors Close at 4pm Sharp, This Tuesday* Time is running out to secure free lifetime subscriptions to some of our best selling services... Our publisher is calling it "our best offer in the last 4 years." * But it's only available until 4 PM on Tuesday, March 30th. After that, it will NEVER be repeated again! Click Here For All The Details. The Daily Reckoning Presents Trade of the Decade: Sell Everything Eric Fry Happy St. Patrick's Day to everybody. I have only one clean Irish joke to share with you, and here it is: What's Irish and sits on your lawn? Patty O'Furniture. That's all I got. Anyway, I wish the Luck of the Irish to everyone here today...as well as the luck of the French...the Swedish...the Latvians...the Brazilians...and the luck of every other nation on the planet...because I think we might need it. As regular Daily Reckoning readers may know, I just rejoined the crew about five months ago. I originally wrote The Daily Reckoning with Bill Bonner near its inception. He started it in 2000; I joined him in 2001. I wrote it with him until 2005 and then I split off for a few years and wrote The Rude Awakening, and then rejoined him a few months ago. So about 10 years ago, when I first started working with Bill, he came up with this idea for a Trade of the Decade. It was really just a literary device. But it ended up being a brilliant investment call. Everyone loved stocks at the time; and everyone hated gold. So Bill just took the other side of both trades: Sell stocks and buy gold. This Trade of the Decade provided a great thematic backdrop for everything we would write about during the ensuing 10 years. We would write about the coming housing bust, about runaway government deficits and about lots of other things that provided absolutely no reason whatsoever to buy stocks, but plenty of reasons to buy gold. For good measure, we would also write about the scoundrels on Wall Street and about the hazards of leverage. And every once in a while, we would write about the hazards of leverage in the hands of the scoundrels on Wall Street. And that was yet one more reason not to buy stocks. So here's a picture of the last 10 years in a nutshell: you can see that gold performed very well and that stocks did not. In fact, stocks delivered a negative return. So we were right - more or less - about what we anticipated. But that's not really great news...which reminds me of that expression, "Be careful what you wish for." I was talking to a married friend of mine recently and he said to me, "Eric, be careful what you wish for. I was chatting with my wife the other evening and I said, 'Honey, we really need to communicate more effectively. So if you don't tell me how you're feeling, I'm not going to know how to make you happy. And so she said, 'Okay, get off of me.'" So now what? What's next for us investors? What's the next Trade of the Decade? I don't know of course, but I'll offer a guess. Bill has offered his guess already. He has suggested selling Long-dated Treasury bonds and buying deep-value Japanese stocks. I agree with the first half of the trade. But the second half of my Trade of the Decade is to buy uranium. So my trade is to sell toxic assets and buy radioactive ones. I think this is a trade that will unfold nicely over 10 years, but over 10 weeks or 10 months I'm not so sure. So check back in 10 years and we'll see. My Trade of the Decade derives from the idea that the US and most of the other Developed Nations - also known as Welfare States - have begun an irreversible decline, and meanwhile SOME Emerging Markets have begun a very long-term growth phase. These divergent trends won't unfold in one day. In fact, they may not even unfold in one decade. But the time has arrived to begin considering the investment implications of these trends. The good news is that even as mature economies like the US die, they won't be all bad. Many things improve as they die. I think of maple leaves, for example, and agave plants. I learned a little something about these Agave plants. They are "monocarpic." I didn't know that word. Now I do. Monocarpic plants flower just once, then die. It feels to me like the US is like a monocarpic plant that has just flowered. The bloom was spectacular. We just enjoyed one of the most incredible economic performances of any nation ever, which morphed into one of the most spectacular credit bubbles of all time. But it feels like that's over now. The ensuing bust won't unfold all at once, but it will unfold. That's a guarantee. And one very solid clue that the bust is coming is that the government is trying to extend the bubble. We know this about governments: They are good at borrowing. But when it comes to re-paying loans. Not so good. Some of you might have already known that governments sometimes default on their obligations. I was shocked to learn this. In fact, I couldn't believe it. So I Googled "government" and "default" and sure enough, my query returned 160,000,000 responses. When I changed the query to "government default on debt," I still got 10,000,000 responses. So I read some of those query results and its true; governments do default sometimes. It's not moral and it's not right, but it happens. In general, you don't want to lend money to a government when times are bad. It's okay to lend money to governments when times are good. They don't typically default or renege when times are good. But in a fair- to-poor environment you need to be careful. This is simply an historic fact. I ran into a fascinating little tidbit from a book about French financial history entitled, "The Undying Debt," by Francois Velde. This is a story from the past. But it may also be a story from the future: "With the opening of hostilities [in WWI], the Bank of France suspended the link between francs and gold, and part of the war was financed with large issues of paper currency. When France's prime minister re- established the link in 1928, he could only do so at 20% of its pre-war parity." So in other words, the French got into a fix. They got out by defaulting on 80% of their obligations. The history of French financial management is not so different from that of any other nation. Time after time, France found itself a little short. And time after time, it defaulted...devalued...and reneged on its promises. To the extent that, over a three-century period of time, French government debt equal to ten ounces of gold - with a present value of about €7,850 - was reduced, says Velde, to €1.20. Oh mon Dieu! C'est pas vrai! Yes, it's true. Governments default just as inevitably as Agave plants flower. But the timing is uncertain. So where are we now in the fiscal lifecycle here in the US? Well I'm going to share a few vignettes. No answers; just some observations. Vignette #1: The US government - as well as several governments in Europe - is attempting to supplant aspects of the private sector. I don't think that's going to work. You cannot ever convert a parasite into a host. They are completely different organisms, which perform completely different functions. So right now we have credit contracting rapidly in the private sector, while it is expanding dramatically in the public sector. Business lending is falling at a 16.6% rate...the steepest plunge since 1948. But government borrowing is more than making up for the shortfall in private borrowing. Unfortunately, government borrowing is not the same thing as private sector borrowing. Private sector borrowing facilitates capital formation. It facilitates capitalistic enterprise. But government borrowing burdens it. Government borrowing impedes it. Government borrowing produces more parasites. That's about all it does. Check out this chart: It shows employment trends in the greater Washington, DC area. The upwardly sloping blue line is federal employment. The downwardly sloping yellow line is private sector retail employment. Now I don't know what you all think about this chart, but I don't think these are the kinds of employment trends that will produce national prosperity. These are the kinds of trends that will make the economy less productive...at least that would be my guess. But I'm always willing to test my assumptions. So let's conduct a little poll. Raise your hand if you receive better customer service from your local DMV than from your local Starbucks. [No hands raised] Well I don't either. Vignette #2: Talented individuals are fleeing the US The next little vignette I will share with you relates to a shocking "brain drain" here in the US. In the recent past, Ninety-two percent of Chinese Ph.D.s in science and engineering would remain in the United States for at least five years after their studies - and 85 percent of Indians. But last year, four researchers from Duke, Harvard, and Berkeley conducted a survey of more than 1,200 foreign-born students. The percentage of Chinese who plan to stay in the US after graduation is now just 54 percent, while the number of Indians who expect to remain is just 58 percent. What's more, only seven percent of Chinese students surveyed and 25 percent of Indian students believed the American economy's best days still lay ahead. But overwhelming majorities of both Indian and Chinese students believed their home country's best days still lay ahead. Now they could be wrong. But we're talking about a sliver of the talent pool that has a good sense for labor market trends and a good sense for where opportunity lies globally. Vignette #3 - An abysmal fiscal trend is unfolding in the US My third vignette relates to America's deteriorating fiscal condition... The US crossed the $1 trillion deficit level for the first time in 1981, and 28 years later, we've added another $11 trillion. The deficit stands at $12.4 trillion right now and over the next ten years US debt is forecast to reach $25 trillion - pushing very close to Greek-like levels of debt-to-GDP. In the last ten years US Federal Debt per person has gone from $20,000 to $40,000. If we were to also include the present value of the government's future unfunded liabilities like Social Security and Medicare, the debt per person would soar to more than $250,000! These statistics may not necessarily mean anything, but they don't necessarily mean nothing. Vignette #4 - Geopolitical risks could exacerbate fiscal weakness On top of bad fiscal trends, you've got omnipresent geopolitical risks that are always lurking in the shadows. Some senior Chinese military officers proposed recently that their country should sell some US bonds to punish Washington for its latest round of arms sales to Taiwan. "Our retaliation should not be restricted to merely military matters," Luo Yuan, a researcher at the Academy of Military Sciences, told Reuters, "For example, we could sanction [the US] using economic means, such as dumping some US government bonds." Probably, Luo Yuan's suggestion will gain no traction in Beijing. Probably. But his suggestion nevertheless underscores the precarious economic arrangements that support the modern world of finance. Prudent investors cannot afford complacency. Geopolitical tensions are not only a China-US thing, they are also a Germany-Greece thing. Everyone thinks Greece will pull out of its mess with austerity measures and German bailouts. I'm not so sure about either assumption. Of almost 31,000 votes cast in an online survey by the German daily "Bild," 82 percent of respondents said the European Union should not rescue Greece. And an editorial in the same paper declared, "The proud, cheating, profligate Greeks" ought to be "thrown out of the euro on their ear." I think this editorial expresses a very pervasive view in Europe that is not expressed by the politicians, but it is one that will influence their decision-making. Unfortunately, Greece's finances are not unique; they are emblematic. Sovereign borrowers are out of control. Greece is just an icon for all of Europe, and also the US. So I view Greece as the Bear Stearns of the upcoming sovereign debt crisis. You may recall that in June, 2007, Bear Stearns stepped in to bail out two of its own hedge funds by pledging collateral for a $3.2 billion loan. Nine months later, in March, 2008, JP Morgan Chase took over a functionally bankrupt Bear. And at that point most of the official Wall Street elite believed that the crisis had been averted. But six months later, on September 15, 2008, Lehman Bros. filed for bankruptcy. And the rest is history. It is amazing remember that 15 months elapsed between the first signs of difficulty in the US financial sector and Lehman's bankruptcy. So mark your calendars; the Sovereign debt crisis should unfurl by May 2011 - that would be about 15 months after the initial headlines about Greece. Now the financial news is not all bad, however. In the Developing World we have some shining stars. And I would be putting my capital there. To be continued... Eric Fry for The Daily Reckoning Joel's Note: Eric will be among the list of luminaries presenting at this year's Agora Financial Investment Symposium in Vancouver, Canada. The event runs from July 20-23 and will take place at the stunning Fairmont Hotel. Early bird registration discounts are still available, but positions are filling up fast. For more details on the event, including speakers and how you can grab your spot, visit our conference webpage here. Or contact Opportunity Travel (formerly Agora Travel) at (800) 926- 6575, or from outside the US (561) 243-6276. Outstanding Investments Online Research Presents With over 40,000 copies now in print, read your free online review copy of the brand new breakthrough financial report from Gold, Silver, and Energy expert Byron King... The Curse of the Incas: Gold's Untold Story and the Shocking New Role It Could Play in Your Financial Survival A 476-year old mistake could soon cost you your retirement. How so? To understand, you have to let me share a little-told story. It starts like this... Bill Bonner How to Invest in the Government-Based Economy Bill Bonner With the rest of today's reckoning from Baltimore, Maryland... Not much time to write this morning...gotta rush... The Dow was up 9 points on Friday...following a week of big news. Congress passed a bill permitting the US government to take over the health sector...about 17% of US GDP. Let's see. The feds don't have any money, right? They've got the biggest deficits ever, and will have to borrow $2.4 trillion this year just to keep the lights on. And now comes news that Social Security has gone into deficit for the first time ever...and 7 years ahead of schedule. The feds took over the mortgage finance industry last year. Practically every single mortgage written last year was underwritten by the US government. And they took over the auto business too. They should be able to do for autos what they did for passenger trains. That is, they should turn Detroit into an Amtrak...which is to say, a Zombie City, if it isn't one already. Then, there was the bailout of Greece. And not only that...there was a weak auction of federal debt. A few years ago, any one of these bits of news could have walloped the stock market. But investors didn't seem to know what to do with the news. The Feds had taken over another big chunk of the economy. But what to make of it? Was that good news or bad news? The stock market seems unable to make up its mind. Finally, it ended the day with less than 10 points of movement. Gold investors had a better idea what to do. They bid up the price of the yellow metal $11. Even central banks are buyers: Central Banks Buy Gold, from MoneyNews: Central banks around the world added 425.4 metric tons of gold to their reserves last year, the biggest increase since 1964, according to the World Gold Council. That represents a 1.4 percent gain to put their holdings at 30,116.9 tons in total. The increase was the first since 1988. Central banks in India, Russia and China were among those boosting their gold reserves last year, as the precious metal jumped 24 percent, hitting a record of $1,226 an ounce in December. Central banks now possess 18 percent of all gold ever mined. "There's clearly been a renaissance of gold in central bankers' minds," Nick Moore, an analyst at Royal Bank of Scotland, told Bloomberg. "It's not just been central banks taking on gold, but a general shift for physical gold in the investment sector." Many are now singing gold's praises, with the precious metal up about 3 percent so far this year. "Gold is quietly, at the edge, becoming the world's second reservable currency, supplanting the euro and rivaling the dollar," money manager Dennis Gartman wrote in his Gartman Letter, obtained by Bloomberg. "The trend shall continue months, if not years, into the future." Regards, Bill Bonner, for The Daily Reckoning ----------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Housing Market Recovery: On the Same Schedule as Godot What happens in the 4th quarter that makes the housing market recover? A sudden influx of immigrants? A sudden increase in employment? We don’t think there will be a recovery...not in the 4th quarter...not this year...not next year...not for 10 years. Chermany vs. Gremerica Social Security Makes History With Negative Cashflow URGENT ‘SWINDLE’ ALERT: Today’s ‘economic recovery’ is not just a big lie, it’s a cover-up strategy for an endless series of government-sanctioned ‘wealth withdrawals’ – direct from your personal savings and retirement accounts! The only good news? You can easily protect yourself – and I can show you how, free of charge. Read on here for details. Government Funded Businesses: Going Where the Money Is In the old days, before America lost its collective mind and allowed a fiat currency, government spending was pretty much fixed... Nowadays, however, the government gave the absurd and incompetent Federal Reserve the right to allow banks to create as much money as anyone wanted. US Inflationary Excesses: Understating the Obvious Financial Talk Show Circuit Lifetime Income Report Introduces... Retirement, Plan B: Without doing a single moment’s work, now you can legally sneak onto the “payroll” of nearly 1,000 of America’s best companies... Take control of your future today with our easy Step-by-Step Guide to using “pension paychecks.” Titanium Metals Corporation (NYSE:TIE) – “On Fire” With Boeing Announcement Titanium Metals Corporation (NYSE:TIE) is a Dallas-based titanium producer with facilities in the US and Europe. Recent reports have shown its shares being widely accumulated on heavy volume. What’s motivating the activity? For the inside scoop, we check in for analysis from Chris Mayer, editor of Agora Financial’s Capital & Crisis newsletter... Animated Rats Serve up Safer Menu Items European Central Bank President: IMF Aid “Very, Very Bad” The Daily Reckoning Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Guest Authors For additional articles and commentary follow The Daily Reckoning on Twitter and Facebook. To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. © 2010-2011 Agora Financial, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the World Wide Web), in whole or in part, is strictly prohibited without the express written permission of Agora Financial, LLC. 808 Saint Paul Street, Baltimore MD 21202. Nothing in this e-mail should be considered personalized investment advice. A lthough our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice.We expressly forbid our writers from having a financial int erest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation.Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.