Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Thursday, May 13, 2010 Europe's moribund currency slips for a third straight session, Two actionable ways to play the long side of our Trade of the Decade, Plus, Bill Bonner on fast debt, faster cars and slick moves in a French bar... Debt Car Pile Up The futility of increasing debt on the road to prosperity Joel Bowman Reporting from Taipei, Taiwan... Turns out a trillion euros just ain't what it used to be. The moribund currency fell for a third straight session in overnight trading. The downward pressure has been almost unrelenting ever since Europe's anti-brain trust drove a $957 billion stake through the credibility of the world's major, alternative fiat currency (the greenback being, for the time being, the paper I.O.U. of choice). After exhibiting an astounding - for the political class - degree of conviction and fiscal integrity in the face of the rioting Hellenes, European leaders caved like a cheep deck of cards over the weekend. The package promises $560 billion in new loans (debt) and $76 billion under an existing lending program (more debt). The International Monetary Fund plans to contribute up to an additional $321 billion (more debt). Perhaps the most astounding aspect of the whole euro-crisis is that individuals occupying positions of influence still believe piling new debt upon old debt is akin to some kind of road to future prosperity. Surely the subprime meltdown - itself caused by layer upon layer of unserviceable debt - can't be that distant a memory for them. Apparently applicants for high office need to check the "goldfish" box when the memory aptitude question comes up. And what kind of message do they think this conveys to the world's investors? A few Molotov cocktails and a rowdy bunch of ne'er-do-wells down tools for a few days and the continent's political backbone turns to Plasticine? Unsurprisingly, some central banks may have already begun cutting purchases of euros. Stuart Thomson, of Ignis Asset Management in Glasgow, today told Bloomberg, "The ECB is on its way to quantitative easing, its reputation was damaged over the weekend, and the support it had been getting from central banks wasn't spotted this morning... Central banks are normally in supporting the euro but they haven't been seen today." Of course, it takes more than merely the precipitous collapse of a 16- nation currency to dissuade the marching mobs. Behaving somewhat out of character, the Greeks aren't taking their portion of the handout lying down. Not by a long shot. This, from Reuters: "Greek workers on Wednesday called a 24-hour general strike for May 20, the latest in a series of protests against planned pension cuts linked to an international 110-billion-euro ($139.7 billion) bailout for Greece." This isn't over yet, fellow reckoners. Not by a long shot. (As we were writing these words, in fact, news that the leader of Spain's largest union will call a public sector strike was just coming across the wires.) We can't wait to see what happens when the Spaniards line up for their "fair share" of the increasingly worthless bailout goop...and the Italians...and the...well, you've read this list before...and it ends at Uncle Sam's doorstep. Gold, meanwhile, rocketed to another all-time nominal high overnight. It's still a long way off its real, inflation-adjusted record - somewhere around the $2,300 per ounce mark - and we're not predicting an end to gold's secular bull market any time soon. The appeal of the "barbarous relic," as many are just coming to discover, is that, unlike inked paper supported by spineless politicians and back-patting vote- buyers, it does not owe anybody anything. It is no one else's liability. To the extent that you do not trust the political will to defend a paper currency, in other words, you ought to trust the yellow metal in your hand.  The Daily Reckoning Presents Buy Japan AddisonWiggin When we revealed our new Trade of the Decade in The Daily Reckoning earlier this year, the reaction we got from a lot of readers could be summed up in one word: "Huh?" Almost no one quarreled with the first part of our trade, "Sell US Treasurys." But almost no one agreed with the second half, "Buy Japanese stocks." From a contrarian standpoint, this negative reaction toward Japanese stocks warmed our hearts. Where has been the worst place to park your money for the last 20 years? What investment is so dull, so currently irrelevant, people don't even talk about it anymore? The answer: Japanese stocks. In the early '80s Japan Inc. was the marvel of the world. The Japanese had their technology, their management style, their strict adherence to national ethic and focused, organized capitalism. The stars seemed aligned for Japan. And they stayed that way for the decade. The Nikkei 225 Index rose from 6,500 to nearly 40,000. Ivy league MBA programs were teaching a whole new set of buzzwords in Japanese, like "kaizen," the concept of ongoing improvement. Americans even started to eat raw fish. Throughout the '80s, the Japanese bubble was inflated largely by credit, much like the US a few decades later. Stocks, bonds, real estate, art - even golf courses - became so desired that investors began borrowing money to have them. Soon enough, most Japanese had to borrow to afford a stake in Japan Inc. When these asset classes, by sheer force of nature, began to correct, losses were exacerbated by countless loans going bad. Leverage, as the US would also learn later, works in both directions. In the last days of 1989, the music stopped. The bubble went bust...and Japanese stocks tumbled into one of the most severe and enduring bear markets in modern finance. The Nikkei fell as much as 80% from peak to trough and is still down more than 70% from its 1989 high! Sure, there were five sucker rallies along the way. They ranged from as little as 34% to as much as 136%. Each one lured spectators back into the water. And each one whisked most of them back out to sea. Eerily like the US today, Japan sought to cure this problem with easy money. Interest rates were slashed to zero to bring the economy and the stock market back to "the good ol' days." Japanese banks were pumped full of public funds to keep them afloat, but saddled with so much regulation they were labeled "zombies" of the industry, unable to thrive in any market condition. Because they were not forced to recognize and write off their bad debts, Japanese "zombie" banks have been reluctant to lend to anyone, especially to risky borrowers like new businesses. The same Japanese who were the smartest, most innovative culture in the 1980s were often perceived as incompetents in the 1990s - incapable of adapting to change and repairing their damaged economy. To make matters worse, Japan had the oldest population in the world, with one in five citizens over 65...not the best foot soldiers for the battle against recession. But today, you can buy Japan Inc. for almost the same price as when the whole mess first began - but that same price includes 30 years of innovation and (some) GDP growth. There are currently 200 companies on the Tokyo stock exchange selling for less than the cash held on their books, but hardly anyone is writing about it. "Nobody is interested in Japan," says Dr. Marc Faber. "All the funds have withdrawn money from Japan; they have given up on Japan." Corruption and crime is low. War seems unlikely. Incomes and employment have stabilized and the Japanese have returned to their thrifty, saving-oriented ways. Japan has a new government too, one that's promised to reduce spending and bureaucracy. Japanese government debt is very high, approaching 200% of Japan's GDP. The interest rate on this debt cannot go up from its very low levels, or it might suffocate the economy. So the alternative would feature some form of money-printing like "quantitative easing" - i.e. buying government bonds with newly printed yen. The Japanese government knows it is facing a tougher funding environment over the next decade. Many savers - the traditional buyers of Japanese government debt - will become spenders in retirement. That means these traditional buyers of government bonds will become sellers. Japan may need to attract international capital to keep refinancing its government debt. If its currency weakens over the next few years, by the middle of the decade, international investors will be more enticed to buy yen and yen-denominated government bonds. When the currency of a manufacturer's home country weakens, and it is selling products into markets with stronger currencies, the effect on profit margins can be dramatically positive. So world-class, export- oriented manufacturing companies based in Japan could lead Japanese stocks higher. Could things in Japan get worse yet? Maybe over the next couple of years... but they've been beaten down for so long, it's hard to imagine much worse. Many investors have given up hope, which has pushed valuations to low levels. We'd rather bet on Japanese stocks over the next decade than against them. All the same, we're not going to put our eggs in one basket. That's why we have two fund recommendations to take advantage of the world's most- hated asset class. First is the iShares MSCI Japan Index Fund (NYSE:EWJ). It mirrors the performance of the MSCI Japan Index, a very broad swath of Japan's largest companies. And it gives you a good shot at outperforming the benchmark Nikkei 225 Index. On both a one-year and a five-year basis, EWJ has beaten the Nikkei. But don't limit yourself to the blue chips. In almost every market turnaround, small-cap companies lead the way. So pick up the Fidelity Japan Smaller Companies Fund (FJSCX) as a supplement. This fund outperformed the MSCI Japan Index during the post-rebound in 2009. And it might do so again when Japan really starts to rebuild. Plus, you'll gain exposure to many companies in this fund that you won't find in EWJ. Remember, this is the Trade of the Decade. Not the Trade of the Week. Buying gold in early 2000 at $300 didn't look like a very smart move in the summer of 2001, when it was $260. Patience counts. Addison Wiggin, for The Daily Reckoning P.S. Daily Reckoning readers can still grab three free months of my newest research service, Addison Wiggin's Apogee Advisory. Seriously, it won't cost you a cent. All I ask in return is that you pitch in with a little constructive feedback. What do I mean by that? Details Here. Tired of trading "gurus" giving you lousy recommendations that lose money? How's This for a WINNING STREAK! Last year, I recommended 37 trades to my readers, every one a winner! With a total gain of 4,647% you could have claimed $232,381 in Profit! But don't take my word for it. See for yourself right here... Bill Bonner Why the Gold Price Rises on Good News and Bad Bill Bonner Reckoning from Paris, France... A very short message today.... We're hosting our first Family Office Partner's Reunion... The family office is just a different way of holding and organizing wealth. In fact, it's a different way of thinking about money. Instead of making money to enjoy yourself, you enjoy the idea that the rest of the family will be able to enjoy it. And if you do it right, maybe several generations will enjoy it. Do you have to be rich? Well, it helps. But the answer is no. It's just a different way of looking at it... You have to have some money that you don't intend to spend yourself, of course. Then, you draw the family into the project of increasing it...managing it...and using it. The amount probably matters less than the idea itself. Even with $10,000, you could go to your children and say: "Here...this will be the cornerstone of the family wealth. Let's manage it together. Maybe by the time your children are your age, it will be a much more important legacy." [Ed. Note: Long-suffering DR readers, as our Reckoner-in-Chief likes to call them, can actually apply to be part of Bill's Bonner & Partners Family Office program. If you're interested, please take a moment to consider this personal invitation, here.] Then again, maybe they'll just buy a sports car. Can you still buy a sports car for $10,000? We bought our first real automobile for $78. It was a '37 Plymouth. Beautiful car. All original. And it ran well...for a while. We were only 16. We didn't have a driver's license yet, but we were getting ready. Then, the first real, roadworthy automobile we bought - at 17 years old - was a '61 MGA. Remember those? A little British sports car. A two- seater. What fun we had with that! We would play hooky from school, for example, and drive down to Chesapeake Beach. Or, we drove into Washington, DC, where we claimed to be over the legal drinking age and nobody asked any questions anyway. Or, sometimes we just drove around with the top down. Back in those days there was very little traffic on the roads of Southern Maryland. You could drive where you wanted. Then, you could stop by the side of the road and explore the woods...or drive to some empty beach along the Chesapeake... What a great time it was to be young, white, and pretend to be over 21! Maybe it was a great time to be young and black, too. We don't know. One of our friends at the time was a black girl named Ruby. Segregation had ended just a few years before. Blacks and whites did not mix socially. But we'd put the top down on the car and drive around together. There wasn't anywhere to go, really. And nothing much to do. But on a nice day, it was a delight just to be out and about in the little red sports car. People would stare and shake their heads... A white boy with a black girl? It just didn't seem right! Whatever happened to Ruby? We don't know... Maybe she'll read this and we'll hear from her. Why are we reminiscing? Well, that little sports car only cost us $200. Too bad we didn't put it in a barn somewhere and hold onto it. Today, it would be worth thousands. You can't buy an MGA for $200 dollars today, partly because they are collectors' items and partly because the dollar ain't what it used to be. Why ain't the dollar what it used to be? Don't ask silly questions. You know perfectly well. Because it's just paper. And in The Wall Street Journal yesterday was the harbinger of something big. A guest editorial suggested that the US return to the gold standard! The stock market went up 148 points yesterday. Gold went up even more - $22. Stocks have gone nowhere in the last 11 years. Gold is at an all- time high. And now gold goes up on 'good' news and on 'bad' news. Inflation? Gold goes up. Deflation? Gold goes up. When stocks go up...gold goes up more. When stocks go down, gold goes up anyway. Why? The gold market is anticipating a blow-up in the world's monetary system. We see it coming too. We've already seen what happens when a small country runs up too much debt. Investors get worried. Interest rates rise. The country can no longer borrow to cover its deficits...or to pay its past loans. Disaster. But the Greek situation is not very different from the situation in dozens of other countries - including Portugal, Spain, Italy, Britain and the USA. America is unique...and just the same. It is already so deep in debt that even if you taxed 100% of Americans' income, the resulting take wouldn't be enough to cover the deficit (people would earn less). And if you cut the Pentagon budget by 100%...you'd still have a deficit too. It would take a remarkable act of political courage and discipline to put the US back on the path towards sound public finances. Do you see that happening? We don't. Instead, what we see are more deficits - from here to kingdom come. Already, the US national debt (to say nothing about the unfunded liabilities and future debts already in the pipeline) is approaching 100% of GDP. (Greece is at 120% of GDP...soon to be 150%). At 100% of GDP, the economy must grow at least at the same rate as the interest charge on the debt - or the debt will get larger and larger. In other words, if you paid 5% on the debt...and the rate of GDP growth were 5%...then, if you devoted all the additional growth to paying the interest on the debt, you'd stay in the same place! The last measure of growth in the US was 3.2%...probably declining. (We'll set aside the important question as to whether this growth is real or fiction.) But long-term borrowing costs for the feds are headed to 5%. And as investors lose confidence in America's ability to pay...or its willingness (or ability) to keep the dollar from falling in value...the carrying cost on debt grows. It is probably too late already. We are probably past the point of no return, as economists Rogoff and Reinhart insist. In our view, the US could still save itself IF it could make an extraordinary commitment to budget cutting. But we won't hold our breath. Instead, we'll buy more gold. And more thoughts... In a bar in Paris... A woman, blond hair, well-shaped, came in. Tanned and confident. She took a chair at the bar and ordered a coffee. It was 9AM. Your editor was sitting at a table writing his Daily Reckoning. Men in blue coveralls stood at the bar drinking their morning coffee. A couple of businessmen sat at a nearby table. When the woman entered the bar, everyone noticed. Not that there is any shortage of beautiful women in Paris. But no one wants to miss an opportunity to look at one. The woman enjoyed the attention. There was a slight smile on her face as she sipped her coffee and read a newspaper. A man in blue jeans, about 45, with graying hair and a George Clooney look about him, entered the bar. He stood near the woman and ordered a coffee. At first, he did not seem to notice her. He looked calm. At ease. Then, when he noticed the woman drinking coffee beside him, his left foot rose so that the toes tapped the floor. He glanced at her...then glanced away...then shifted his posture once...twice...still tapping his toe on the floor. He looked at himself in the mirror behind the bar. He brushed his hair... He looked like he was searching for a cigarette... Then, he took out a Blackberry and began checking messages...glancing at the woman from time to time...tapping his toe...shifting around...looking in the mirror... He cleared his throat. He leaned toward the woman... He reached for a lump of sugar in the bowl in front of her... "Pardon..." he said. She looked up. She smiled. She went back to reading her paper. His smile slumped. He drank his coffee and left the bar. Regards, Bill Bonner, for The Daily Reckoning