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The Daily Reckoning | Tuesday, April 13, 2010 Personal income plummets as "green shoots" tighten their grip, Proof the government can't spend its way to prosperity (as if you needed more), Plus, Bill Bonner with more thoughts on the Great Correction and the difference between thinking and worrying...  Spending to Prosperity A parasitic government’s plan to save the economy Joel Bowman Reporting from Taipei, Taiwan... "Like politicians?" asked our friend, Michael. We couldn't help but laugh. "Yes," we answered. "Just like politicians." Your editor occasionally spends his Saturday afternoon helping a Taiwanese friend with his English. Our friend manages a large retirement fund here and, as with many professionals in the developing world who interact frequently with western business people, Michael is tireless is his pursuit to improve his second language skills. Part of this past weekend's lesson was devoted to explaining the word "parasite." Michael, as you can see, is a fast learner. "Yes, yes!" he exclaimed. "We have many parasites here, too! And in China...they have them also. And Europa. They are everywhere, it seems." "Eu-rope, Michael," we corrected. "It's pronounced 'you-rope.'" "Haha... Yes. You...Rope! Good one, teacher Joel. Like rope for hanging. 'You rope' is hanging. Good one!" We had just been chatting about Greece's woes and, like we said, our friend is a fast learner. Of course, not all parasitic relationships result in death by hanging for the host. Some result in death by torture...or by starvation...or taxation. In the wild world of economics, parasitic governments can and do employ all of these methods to snuff out their free market hosts. Not unlike the strangler fig, which begins its life as a seemingly innocuous seed, deposited high in the forest canopy by passing birds, government programs invariably start out very small. But as these seedlings germinate, plunging their roots down to the earth below, they gradually envelop the very tree atop which they sit. Eventually, the stranglers sprout leaves, which soon monopolize the host's access to sunlight. Then, when their roots reach the ground, they gradually overtake the supply of nutrients in the surrounding soil. What was once a miniscule seed, lodged high in a tiny crevice of a great elm, eventually becomes the prison of a rotting trunk. In an interview with 60-Minutes last March, Fed Chairman Ben Bernanke used the term "green shoots" to describe what he saw as early signs of an economic recovery. The Federal Reserve's "Beige Book," a survey of regional economies, found that a number of districts displayed "signs that activity in some sectors was stabilizing at a low level." With an increasingly entangled public and private sector, it is sometimes difficult to tell whether it is the host or the parasite that is growing stronger. In the year that has passed since Bernanke's "green shoots" interview, stock markets on Wall Street have soared. So has the average salary for public sector employees. Main Streets outside the DC area, however, have not faired so well. According to a report from the Commerce Department's Bureau of Economic Analysis, real personal income for Americans has fallen by 3.2% over the last year. "This is hardly surprising," Douglas Holtz-Eakin, an economist and former director of the nonpartisan Congressional Budget Office, told The Wall Street Journal. "Under President Obama, only federal spending is going up; jobs, business startups, and incomes are all down. It is proof that the government can't spend its way to prosperity." Of course, that won't stop it from trying. After factoring in government "transfers" - which include things like food stamps, Social Security, unemployment insurance, Medicare and assorted other federally-funded employment disincentives - personal income has actually risen under Obama's watchful eye. From January 2009 through to February 2010, "adjusted" income is up 1.2%. "Progress," as defined by parasitic governments, is whatever helps its roots reach the ground. And now for today's column... [If you missed Part I of our inaugural Daily Reckoning Group Research Project, you can find it here.] The Daily Reckoning Presents Daily Reckoning Group Research Project: Trade of the Decade, Part II Joel Bowman We asked. You answered. We asked you, the Daily Reckoning readers, to submit your ideas for the "Trade of the Decade." You responded with a flood of excellent responses. We regret that we cannot publish them all. Yesterday, we presented some of your submissions. Today, we present a few more. So without further ado, here's goes: Reader B. Bundsen kicks off today's selection with a call to "Buy stupidity; sell responsibility." We like the thinking behind this one. It was probably considered "stupid" to buy gold circa 2000, right? "I think the short (US) stocks/long gold trade is still a winner," chimes another reader, A. Urhina. "If I were pressed for an alternative I would probably go for short UK gilts (a variation on Bill's short for the decade) and long well-balanced emerging market economies (are there any?)" A reader by the name of Anil opted for a wetter buy side recommendation. "Buy: Water Sector. PHO is one bet, but there are several others," he writes. "Sell: Oil. Everyone expects oil to be more expensive, so my bet is that we come up with alternatives which reduces the demand for light sweet crude." Next, an anonymous reader suggests, "[the] best bull trade of the decade will be medical records software companies. First they will sell the software, mandated into the market for a while, then they will collect for licenses and updates. "[The] best short position of the decade will be bonds - generally, municipal bonds; specifically, general obligations for California, Illinois, New Jersey, and large cities like New York, Philly, and LA." C. Cummings, another reader, offered this pair trade: "Buy: Agriculture, and the more global the agriculture equity, the better. There are plenty of ways to play this, this most straightforward being DBA. Or 50% DBA and 50% MOO (my preference). "Sell: the US Dollar; this is probably going to be the trade of the century and not just the decade. Lots of ways to play this one too, the easiest being UDN, or long-dated puts on the dollar for more leverage. I prefer this approach versus shorting the government bills/notes/bonds because it is simpler and probably less subject to manipulation." Government manipulation, Mr. Cummings? Well we never...! "Go long emerging markets," was reader D. Dartt's vote, "especially Brazil and India. Be careful not to load up too much on Russia and China. Short the Euro." On a slightly different line of thinking, a reader named Danny suggests this simple long/short: "Buy small mammals, sell dinosaurs. "More concretely," Danny explains, "Buy biotechnology (BTK) and sell utilities (DJU). Buy biotech because it will continue to grow very fast and eventually biotech will encompass nanotech and make a number of industrial sectors obsolete. Sell utilities because there will be a growing trend towards self-sufficiency, and more people will get off the grid for things like electricity and water. Affordable technology will make that possible. So big utilities will be the newspaper sector of the current decade." Reader A. Slinkard suggests: "Short: Biofuels and US Treasuries. Both are dead ends. Buy: Natural gas and iron ore. Both have tremendous potential in the next decade." A reader by the name of C. Gaylord offers an opinion sure to raise the ire of the goldbugs: "Let's get EVERYONE riled up!" he writes. "SELL GOLD!! Gold has had a good run the last decade. It's time for a change although gold will probably still go up over 4 times. Buy the three metals needed most that are just getting started in industry. Molybdenum, Lithium and Titanium. Moly - makes steel stronger. Lithium - for all the new Hybird batteries. Titanium - will be needed to make the strength of steel stronger so they can use less, thereby reducing the cost and weight of the new Hybird cars and airplanes. "Buy base metals that are underpriced: lead, copper, iron. There is one simpler trade," concludes Mr. Gaylord. "SELL paper money. It will all be useless." Another reader, John, suggests we "buy the makers of rose-tinted spectacles" and "short everything else." And from Italy, Mr. Monticello reckons we ought to "Short 50% Euro and 50% Yen. Go long 25% each in bonds: Brazilian real, Turkish lira, Australian dollar, Norwegian kroner." "Unless I have no brain," writes another reader, D. Mol, "this is a no- brainer: Buy precious metals. Sell or short all bonds." Then there's this one, from Agora Financial Reserve member, M. Readling: "You are probably looking for something more specific, but a couple of years ago I told a less-than-perceptive friend that he should be long anything that can be packed up and shipped to China (like wheat), and short anything that couldn't (like his house). I don't know if he bought any wheat, or not, but he is still in that house. Judging from what he said the other day, maybe not much longer." J. Scharp told us to "buy wheat and short Los Angeles real estate." J. Pratt reckons we ought to go "Short 30-year US Bonds (real surprise, eh?) and long equally corn, soybeans and wheat." F. Merciadri agrees: "Short Cities, Long Rural Areas." "In simple terms," adds another reader, Bruce, "sell cash, buy seeds! The cash in our hand - or more correctly the Federal Reserve notes - has been on a wave of popularity while completely devoid of any true value. On the other side of the trade is an asset class that has been trivialized by cheap imports and farm subsidies that have made it an asset we take for granted. "Food is a major expense for most of the world," reasons Bruce, "and will most likely regain that position here as the correction continues. Farmland, seeds, livestock and gardening tools seem a sure place to put your cash. So long as the sun and rain continue, (things that the Government can't tax or mess with), the planting of food crops is a fairly sure way of multiplying your value. With a few dollars spent now, the following years could be spent eating from your investment. Not only will you eat for a long time on the returns, but you will undoubtedly eat better, and the exercise and good food will make you healthier. This in a time of rationed health care will be even more beneficial." With another trade straight from the ground beneath us, R. Sharp chimes in: "I like rare earth elements - mining and processing. This is currently a hot item because rare earths are essential in manufacturing high- performance magnets needed for electric cars and wind turbines, as well as for optical materials in advanced TV screens. China, which for many years has had a near monopoly on rare earth mining and production, is now limiting exports, a situation that is likely to get worse before it gets better. "Because of China's monopoly in mining and production," continues Mr. Sharp, "I'd look at mining ventures outside China, particularly by American, Australian and Canadian companies. One never knows about the future, but I like the risk/reward ratio here." D. Wogstad agrees: "A market segment of interest that I believe holds great promise this decade is 'rare earth metals.' These are metals used to produce high- powered permanent magnets which in turn are used in motors and generators. With increased emphasis on alternative energy (specifically wind power) and non-polluting automobiles, there will be significant demand for wind turbine generators and electric motors to propel automobiles. "Unfortunately for the United States, this market is being cornered by the Chinese. But for the savvy investor, cornered markets mean skewed pricing and extraordinary profits. "On the sell side," continues reader Wogstad, "anything in the 'semi- luxury goods' category won't fare too well. The continuing demise of the middle class in the United States will curtail the sales many goods formerly aspired to by the middle class; jewelry, furs, boats, etc. I think this decade will be characterized by the middle class living within their now diminished means." And finally today, a reader S. Carter sent in the following thoughtful comments: "Sell: Electric Utilities at peaks (well, don't wait for peaks, just SELL!) "Premise: Essentially, fixed dividends based on a highly regulated model produce the equivalent downside of a long-term T-Bill with additional exposures. As rising commodity pricing, rapidly increasing health care/benefits expenses related to its workforce and generally expanding operating costs to keep an aging infrastructure functional. Add also the need to install extremely expensive mercury, NOx and SOx emissions controls on conventional generating stations, and the eventual cost of CO2 mitigation, and the average utility ratepayer is looking at forking out a lot of dough in the form of rate increases (+100%) with no visible improvement in service. Electricity is a commodity, and brand loyalty is a tough thing to achieve. "Now the tougher question: What to buy? Commodities, particularly oil and agriculture "Premise: Peak global oil production coupled with massive increases in demand from India, China and other emerging economies point to severe shortages and higher prices to serve as the rationing mechanism. Supply and demand will be in balance when the cost of the last (i.e. most expensive deep salt or oil shale reservoir) barrel of oil produced plus a 'reasonable' return is recovered in the price, and the last buyer is willing to pay that price. Price elasticity is surprising with this commodity, and a double or triple from the current low '$80's/bbl seems likely over the next 10 years. Add in the long-term fall of the value of the dollar, and you could see even greater upward pressure on oil pricing. "Global inventories of agricultural products are at the lowest levels in decades (listen to Jim Rogers), and tillable land is hard to come by outside of Brazil. Buy ETFs focused on corn, wheat, soybeans and rice (load up now - in fact, store some in your basement: Not the ETF shares, but the ag commodities themselves! That's not just talking your book; it's putting your money where your mouth is...)" Your Fellow Readers for The Daily Reckoning Joel's Note: We'd like to thank all of our fellow reckoners who contributed their Trade of the Decade ideas for our first ever Daily Reckoning Group Research Project. Unsurprisingly, many of your "long" suggestions centered on gold as a safe, reliable store of wealth. We couldn't agree more. In fact, a couple of weekends ago we ran an article from our friends over at BullionVault, tracking the performance of the yellow metal over the past decade against a basket of global currencies. The results were pretty astounding. [If you missed the article, you can check it out here.] Often times readers write in asking about the best ways to invest directly in gold. As part of your strategy, we suggest taking a look at the services BullionVault - winner of the Queen's Award for Enterprise Innovation, 2009 - offer. Right now, BullionVault can help you buy gold vaulted in Zurich on $3 spreads and 0.8% dealing fees. Check 'em out here. Bill Bonner Stop Worrying About the Financial Crisis Bill Bonner Reckoning from Buenos Aires, Argentina... When will the de-leveraging bust resume? When we stop worrying about it. This afternoon, we realized that deep down, our feelings had changed: we had stopped worrying about a resumption of the bear market. Not that we've stopped thinking about it. We think about it every day. And we're sure it's coming. But we have stopped worrying. No matter what we think, we feel that somehow this will work out okay...we'll be all right. We'll stumble along... Thinking and worrying are two very different things. Thinking is purely superficial. It's the worrying that counts. When you're worried about a financial crisis, you sell out your risky positions and hunker down with cash. When you're not worried, you're happy to float along... You'll change course when the danger becomes more imminent, you tell yourself. But don't forget: This is a Great Correction. It began almost exactly three years ago, when New Century Financial - the second largest subprime mortgage company in the US - filed for bankruptcy. It will continue until debt levels in the private sector have worked themselves down to more reasonable levels. How long will that take? Maybe 5 years. Maybe 20. Meanwhile, you can't expect much from this economy. Businesses are not going to add jobs. Consumers are not going to shop. Is that all there is to it? No, there's a lot more. That's why it's a Great Correction and not just an ordinary run-of-the-mill correction. ..there's the correction of the huge the expansion of credit ..there's also the correction of the stock market ..and the correction of the real estate bubble ..and the correction of the world economy and its dollar-based monetary system Here's what to expect: ..US stocks will begin falling again ..foreclosures, already running at twice their normal level, will increase ..bankruptcies, now at record levels, will go up too ..bonds will eventually collapse (but may turn out to be decent investments for a while longer...as the de-leveraging continues) ..the dollar too could go up when the crisis feeling returns; over the longer run it will be dangerous to hold it ..China will go through a financial crisis (potentially 'Dubai times 1,000.' As Jim Chanos puts it) ..states, cities, and entire countries will declare bankruptcy... Those things don't seem like threats to you? Well, they don't feel like threats to us either. But that's what makes them so dangerous... ..we've stopped worrying about them. And more thoughts... - We're headed up into the mountains today to check on our high altitude beef. We'll write when we can. - "I came here because I felt that my children would have a better future here than in Britain," said a colleague at lunch yesterday. "It's very hard to live well in Britain; the country is too crowded. And things are too expensive. If you want a decent house at a decent price, you have to go way out of London. Even then, they're not easy to find. And then, you spend half your life traveling back and forth to work. "But there's something else. I think Britain's glory days are past. The economy might grow in absolute terms. I hope so. But it is unlikely to grow as fast as Argentina or Brazil or any one of dozens of overseas economies. "That's true for America too. I don't think the US is finished, by any means. But if you want to give your children the best combination of lifestyle and economic opportunity, there are better places to live." Few people would bet on Argentina's financial future. The country is a serial inflator...prone to self-inflicted financial wounds. It has shot itself in the foot so often, it hardly has any feet left! Most people would say that investing in Argentina is 'too risky.' But that just goes to show that people don't understand risk. They look at the past and use it to measure the future. What they don't realize is that risk in financial markets is not like rainfall or earthquakes. Earthquakes are completely indifferent to what we think about them. But the financial markets are more sensitive than a poet. People who've lived through financial crises don't want to see another one. Or, to put it more specifically, if you've just been through a bear market you're not likely to pay too much for stocks. You'll think it's "too risky" to buy expensive stocks. So, stocks will not become expensive. The risk of another crash will be low. Germans lived through a period of hyperinflation in the '20s. To this day, they are deathly afraid of rising consumer prices. People who are accustomed to stable prices...and a rising stock market...have a different attitude. Analysts look at their history and pronounce the market "safe." But it's actually very risky...because prices are high and investors are complacent. The riskiest markets are probably those judged safest by the analysts. The safest are those thought to be risky. We recalled Elizabeth's words: "You can be successful by accident. You can have a family by accident. But you can't have a successful family by accident." The blue lights of police cars lit up the street in front of where we are staying in Buenos Aires. Your editor had summoned them after his youngest son, Edward, 16, had failed to come home. It was 2 AM. "He's tall, dressed in a blue shirt and jeans..." we explained. "Is it normal for him to stay out without calling you?" asked the federale. "No...he's usually a good boy." "Maybe he is just out with his friends." "But we just got here. He doesn't have any friends here." "Looks like he has some now." Two hours later, we called off the manhunt. Edward came home. Not a care in the world. "What's the matter? Why are you still up, Dad?" he wanted to know. "Answer one of my questions first." "What?" "Where were you until 4 AM?" "I was just out at a club, dancing..." It is useless to argue with a teenager. Especially at 4 AM. "Go to bed. We'll talk about it in the morning..." "Okay...sorry..." "When you told the police that your son had disappeared...did you say 'desaparecido?'" asked a friend. "They're sensitive about that. Because they rounded up thousands of young people they didn't like and 'disappeared them' in the '80s. "You should have said: 'My son has disappeared. No, I'm not blaming you. I just want to find him.'" 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