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The Daily Reckoning | Thursday, May 27, 2010 Investing in the developed nations of tomorrow, today, Daily Reckoning advice for world improvers: Go back to sleep! Plus, Bill Bonner on the worrying trend of public jobs at private  expense and plenty more... Government Growth Measures Endanger the Economy Frightened by the thought of wide-eyed world-improvers Joel Bowman Reporting from Taipei, Taiwan... You could almost imagine Larry Summers making the announcement, pinky finger to his lip and affecting his best Dr. Evil impersonation, "We'll call him...Mini-Stimulus." Summers, President Obama's top economic policy wonk, this week advocated a second, smaller round of stimulus measures in order to sure up the precarious economic recovery. About $200 billion ought to do it, so says Summers. Never mind that this is the same "recovery" Summers could, until very recently, be heard lauding for its strength and resilience. Now, apparently, it needs a bit of help; help that comes, as usual, from involuntary contributions by taxpayers - present and future - and the ongoing, though increasingly worn, kindness of foreign strangers. More debt, in other words...precisely what the nation does not need. But we'll let Summers do the talking: "It has in recent years been essential for the federal deficit to increase as the economy has gone into recession and has been severely constrained by demand," the man who imploded the largest college endowment fund in America's history assured the audience, without so much as a hint of irony. "And I cannot agree with those who suggest that it somehow threatens the future to provide truly temporary, high-bang-for-the-buck jobs and growth measures." Nobody would argue that "high-bang-for-the-buck" jobs are a key element to sustainable economic growth. That's virtually a given. But we would certainly take issue with the assertion that the government is in any position to provide such employment. We want to know, does a census worker provide "bang for the buck?" How about the people who hammer in those signs by the side of the road: "This sign is paid for by funds from the American Recovery and Reinvestment Act." How much bang are these guys providing per taxpayer buck? And what about Summers himself? We're not about to cast disparaging remarks about the guy's character but, seriously, are taxpayers getting any bang for their buck out of this man? Summers: In need of some stimulus himself? In all honesty, we would prefer it if the world-improver community all took a long nap. At least then they wouldn't spend their time dolling out lavish appropriations of other peoples' money to go-nowhere projects and vote-buying, make-work schemes. Alas, the meddlers are on the job, both in the United States and all around the world. You can barely throw a copy of Keynes' "General Theory" without hitting some bozo in the head who thinks he can spend money more efficiently than those who earned it in the first place. Down Under, for example, in your editor's old stomping ground, modern economic theorists are hard at work killing the goose that provides Australia's golden eggs. Earlier this month, the Rudd administration revealed the findings of the Henry Tax Review, said to be the most comprehensive tax overhaul for the country in decades. Among the key recommendations was a 40% Resource Super Profits Tax ("RSPT" for the acronym-obsessed antipodean reader), supposedly designed to afford all Australian citizens a "fair share" in the country's mining profits. According to figures from Citigroup, the RSPT would effectively raise the tax on mining companies operating in Australia to 58%, making it the least competitive environment in the world to do business. It's been a while since we last lived in Australia, but we don't recall theft and wealth redistribution ever being "fair." Maybe we missed something. But leaving aside for a moment the government's alleged role of promoting personal liberty, protecting property rights and enforcing the rule of law, and the fact that nobody has a legitimate claim to resources other than those who invest their time and risk their capital extracting them, the proposed tax has proved an unmitigated disaster for the Australian mining sector. In fact, Moody's estimates that mining companies' earnings may be cut by up to one third when the tax takes effect in 2012. Predictably, shares of the two Aussie giants, BHP Billiton and Rio Tinto, were seen to be down by as much as 18% this month. Both have since indicated that some future projects in Australia - projects that would ostensibly employ thousands of workers and further pad the nation's superannuation (retirement) funds - are now "under review." Rio, itself the world's third-largest mining company, announced it will spend over $400 million to boost iron ore output in Canada, citing the "attractiveness of investing" there. BHP has said the tax would "stymie" investment and Fortescue, Australia's third-largest iron ore exporter, this week suspended $15 billion of projects in the great Southern Land, citing the onerous tax. And let's not forget the Aussie dollar, once seen by investors as a kind of de facto natural resource currency, which has slid almost 14% against the greenback this month. And yet, rather than scoff at the embarrassing situation in Australia, other nations have decided to follow the Aussies down the same road! Chile, the world's biggest copper exporter, is considering levying a temporary mining tax increase to help pay for earthquake reconstruction there and Brazil, the world's second-largest iron ore exporter, behind Australia, has indicated it may tax shipments of exported commodities or raise royalties there. The worrying trend has led some commentators to begin whispering phrases like "resource nationalism" and "mining tax contagion." Our advice to central planners, from the northern to the southern hemispheres: Please, go back to sleep! The Daily Reckoning Presents As the World Turns Chris Mayer In a recent edition of The Daily Reckoning, Bill Bonner observed, "The world turned against them at the beginning of the Industrial Revolution. But if the world turns long enough, it comes back to where it began." He was writing about India. But he could have been writing about China...or Nicaragua...or any one of a number of emerging markets. In the next 1,618 words, I'll share few insights about both China and Nicaragua. These insights share no particular connection to one another, other than the observation that economies do not stand still. The "emerging markets" of one generation are the "developed markets" of the next generation, and vice versa. Change is the one of the great constants in investing. Opportunity makes its nest like a tramp pigeon, never in the same place for very long. There is always something new happening. Asked about his worldview, Mark Mobius, the famous emerging markets investor, once replied: "Things change... You know, that's it in a nutshell." And in this swirl of change lies some big chances at profits. For example, last year China passed the US as the world's largest market for automobiles. First time ever that's happened. There were 13.5 million vehicles sold in China last year - a 40% increase. There are now over 40 million vehicles in China. According to the China Economic Review, over 2,000 cars roll onto the road every day in Beijing alone. China's steps seem to mirror what happened in the US in the 1950s. China wants to use roads to knit the country together and open up trade between its distant provinces and cities. To that end, the Chinese are laying highways like nobody's business. By the end of 2008, China had an estimated 60,000 km of highway. The US has 75,000 km. Over the next few years, China plans to have 85,000 km of roads. This is having some amazing effects. For instance, China recently built a highway from Lhasa, Tibet, which runs all the way to the Nepali border. Along this road is the city of Shigatse, a formerly sleepy town where tourists may stop to gaze at ancient monasteries on their way to Mount Everest. But today, it is also a place where people get rich running freight services along the 515-mile highway. An Economist correspondent traveling this way recently wrote: In the past few years, hundreds of millions of dollars have been spent improving the road. This has included covering its gravel sections with asphalt, which has greatly facilitated cross-border trade. On the Lhasa-Shigatse section, which winds along a valley lined by sand dunes and spectacular peaks, Han Chinese from the interior have opened little Sichuanese restaurants catering to the lorry drivers. The easy mixing of peoples and the freedom to pursue their own ends leads people to trade. Business expands. The quality of life rises. The roads are doing their work. The cars and trucks are coming. Where are the opportunities? The first thing most people think of is the automakers. GM, for all its struggles, is having no trouble selling cars in China. Sales were up 67% in 2009, to a record 1.83 million units. Other carmakers are having similar success. The problem here is it doesn't make much sense to buy, say, GM, because you like its car business in China. There is too much else going on there. I'm more interested in investment ideas that are a step removed from actually building the cars. All those cars will eat up a lot of metals of all kinds, for example. They will also burn a lot of fuel. Dig deeper and you'll find China loves methanol as an alternative fuel to blend with gasoline to lower emissions. China blends more than a billion gallons of methanol in gasoline annually. And its appetite for methanol is growing more than 16% a year. Methanol, made from coal or natural gas, is China's ethanol. Such thinking led us to our methanol play, Methanex (NASDAQ:MEOH). I recommended this stock one year ago to the subscribers of Capital & Crisis, when US methanol prices hit a temporary low of $200 a ton. Today, the price is about $350 a ton. Not surprisingly, therefore, the MEOH stock price has more than doubled during the last year. But the stock is still relatively cheap. At current methanol prices, Methanex could generate over $800 million in EBITDA (earnings before interest, taxes, depreciation and amortization). The total enterprise value - or the theoretical price to buy the whole company on the market - is only $2.9 billion. So it trades for only 3.6 times this potential EBITDA. That's pretty cheap. Another way to look at it is to think about replacement costs - or what it would cost you to build Methanex from scratch. Methanex trades for just under $400/tonne of methanol capacity. That's less than replacement cost of about $700/tonne. There is still a lot of upside here. Shifting to another continent, and another type of observation entirely, change is also unfolding rapidly in Nicaragua. Nicaragua has always been a place of intrigue, mostly because of geography. Before the Panama Canal, this was the place where people thought of building a canal. As a result, American involvement in Nicaragua goes way back. Militarily, the first Marines landed here in 1912 and occupied it until 1933. And the Somoza regime, a dictatorship created and supported by the US, ran the country until the Sandinistas took over in 1979. (If you are interested in learning more, I encourage you to read Nicaragua: Living in the Shadow of the Eagle by Thomas Walker.) As a result of the Sandinista era, most Americans probably have a poor opinion of Nicaragua. But it is a beautiful country with its volcanoes, lakes and a lush tropical climate. The people are friendly, and Nicaragua is safe to travel through. The food is great and so are the beaches. It's also a young country with more than half of the population under 25 years old. (Nicaragua also makes one of the world's best rums, Flor de Caña - "flower of the [sugar] cane." I enjoyed it neat and in the national drink, el macua, made with guava juice.) I recently visited Nicaragua and saw a bit of the country - Leon, Managua and Granada - before settling in at Rancho Santana. The latter is a development project on a spectacular 3,000-acre property on the Pacific Coast near Rivas. Stretches of it remind me of Big Sur with its dramatic coastline. The sad thing is that Nicaragua ought to be a rich country. Nicaragua was once a prosperous place of some renown. In the 19th century, for example, Granada was the most prominent city in Central America, a rich trading city holding down a key spot in global commerce. But the country's economic trajectory took a turn for the worse during the 20th century. Nevertheless, the country's rich natural resources remain. Nicaragua has lots of good land for growing things. The soil supports a wide variety of crops and livestock. Coffee in the north. Bananas, papayas, mangoes, sugar cane and more grow everywhere else. Nicaragua is also the largest country in Central America and among the least densely populated. Nicaragua has another special resource: It is among the most water-rich countries in the world. (I've been making my way through Steven Solomon's new book Water, which is a fat tome on the history of water from ancient times to the present day). In a world where water scarcity is an issue, Latin America stands out for its water wealth. It has 28% of the world's renewable water and only 6% of its population. Solomon writes that the "super Water-Have countries such as Brazil, Russia, Canada, Panama and Nicaragua [have] far more water than their populations can ever use." Lake Nicaragua, one of the largest lakes in the world, is the future water supply of Central America. There are many rivers and lakes, which make useful internal waterways. And Nicaragua has access to both the Pacific and Atlantic oceans. Nicaraguan waters are also great for fishing. Nicaragua holds great potential for wind, geothermal - from volcanoes all along the western half of the country - and hydroelectric power. In fact, Rancho Santana is trying to become self-sufficient in energy. There are ridges there where the wind blows constantly. A wind feasibility study done there lately scored as high as it could. The conditions are ideal. Finally, Nicaragua has great timber resources, as well as mineral resources such as silver and gold. Present-day Nicaragua also illustrates one of the global trends we've been examining during the last few months: the "penthouse gypsy" trend. This term refers to people with money who go where they (and their money) are treated best, wherever in the world that may be. Increasingly, they are no longer in the US or Europe. It may be hard to believe, but there are plenty of penthouse gypsies down in Rancho Santana. Why not? They are able to diversify out of the US, where tax rates are surely going much higher. They get cheap, stunning real estate. Property taxes are hardly anything. You can live very well down here on not much money. I have a good friend who moved to Nicaragua five years ago for this reason. Most Americans worry about confiscation of property. But that risk seems remote after talking to people here. Tourism is the No. 1 cash cow of what is still a poor country. Even Ortega doesn't want to do anything to upset that cash flow. (He owns several hotels.) As far as enforcement of contracts, the IMF and World Bank rank Nicaragua third among all Latin American and Caribbean countries. Foreign direct investment in Nicaragua is soaring - up fourfold since 2000. I can't say my trip to Nicaragua yielded a hot stock tip or big investment insight. But I learned a lot about a part of the world I hadn't explored before. Hopefully, my notes here help you see the opportunities that are out there in this great big world - if only we look at it with fresh eyes. Chris Mayer, for The Daily Reckoning Joel's Note: Mr. Mayer is currently putting together a detailed analysis of the best emerging market investment opportunities you WON'T find on the front page of next week's mainstream newspapers. In particular, he'll be focusing on some backdoor China plays uncovered during last week's field trip to Beijing. We're also working on a special deal for Daily Reckoning readers, whereby you'll be able to access his research for a fraction of the regular price. Details on that next week. Watch this space... Bill Bonner US Government to Kill Its Own Economy Bill Bonner Reckoning from Paris, France... Hey, is this a great recovery...or what? Stocks fell again yesterday. The Dow went down 69 points, closing below 10,000. Gold rose $15...closing above $1,200. The two are still $8,800 apart. But give them time. They've been working their way closer for the last ten years. They'll get there... Single family house prices fell for the 6th month in a row, reports The Washington Post. And get this: "Private pay shrinks to historic lows as government payouts rise," says USA Today. This is the big story. As a share of personal income, never before has the private sector contributed so little. Thank god for the government. Without those checks from the feds, we'd all be broke. The story as told by USA Today: "Paychecks from private business shrank to their smallest share of personal income in US history during the first quarter of this year, a USA Today analysis of government data finds. "At the same time, government-provided benefits - from Social Security, unemployment insurance, food stamps and other programs - rose to a record high during the first three months of 2010. "Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs. "The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. 'This is really important,' Grimes says. " That's the trouble, isn't it? The feds don't really have any money. They don't make anything. They don't create any wealth. So they can only send us checks by taking the money from us - one way or another. And that, dear reader, is the story of the most important trend of our time. The feds are taking a bigger and bigger share of the economy. And the bigger the share they get, the less the rest of it is worth. Because an economy run by politicians and bureaucrats is not a healthy economy. It's a sick economy...it limps along. It wheezes and coughs. And if the trend towards more and more federal control continues...the economy finally dies. If you want the government to take care of you, said Jefferson, "you will soon want bread." He didn't say it exactly that way. We improved it. The feds don't make decisions on the basis of fair play and rational economic choices. Instead, they're political choices - such as bailing out the big banks because they are said to be "too big to fail," or bailing out the big auto companies because they employ too many voters, or bailing out the mortgage industry because too many people would lose their houses if the mortgage industry were allowed to go whither it should. Even in the best of times an investment is a risky thing. Sometimes it will produce a positive return (above the real cost of funds). Sometimes it won't. Imagine what happens when decisions are made by functionaries, political appointees and GS-12s? Capital is then allocated to the wrong projects for the wrong reasons...which result in the wrong outcomes. Bad economic decisions produce bad economic results. Bad economic results lower the value of capital assets...and make almost everyone in the economy poorer. We say, "almost everyone," because the government's employees, lobbyists, and contractors are in a class apart. They are the ruling party and its apparatchiks. While everyone else gets poorer, they get richer. And more thoughts... "Tax increases. Spending cuts." That's the name of the game in Europe. The OECD is calling for them. The IMF is requiring them. Politicians are promising them. Just yesterday, Italy came forward with $30 billion worth of spending cuts. Reading the paper, you might think Europe's leaders have the matter under control. Every day seems to bring fresh promises. But remember, these are the same people who failed to keep within Europe's fiscal targets 57% of the time - even when the going was good. How will they do with their backs against the wall? Better, most likely. But not good enough. The euro-feds will make plenty of gestures. But in the end, it just won't make sense for people to give up present benefits in order to respect promises made by a generation of spendthrift politicians to a ruthless bunch of speculating bankers. The political left, which is leading the opposition to 'austerity' measures, will become more and more attractive to more and more voters. It will be harder and harder to cut spending. This will force governments in the direction of least resistance. They will "print money...go bust...and go to war," says Marc Faber. "We are doomed." *** Oil is still spilling into the Gulf of Mexico at an unknown rate. "Plug the damn hole," says the nation's chief executive to his aides. Why does he bother? His aides don't know anything about plugging oil leaks under the ocean. And those people who do know something about it have been unable to fix the leak. Mr. Obama is not only America's president. He also presides over the biggest single user of oil in the world - the US military. The pentagon uses twice as much oil as the entire nation of Ireland. It sends soldiers in oil-burning airplanes to places of no apparent importance where they drive around in oil-burning machines for no apparent reason. Naturally, oil becomes not just another commodity, but a strategic commodity...worth fighting for. Then, foreign wars use up the oil they were expected to protect. But geopolitics is far beyond our understanding...and even farther out of our range of interest. We will just observe that the law of diminishing returns applies to just about everything. The farther offshore the roughnecks go...the deeper the sea and the higher the waves...the more the costs, the greater the risks and the lower the marginal returns. The return from Deepwater Horizon must be starkly negative... The farther afield US armies go, too, the greater the costs, the higher the risks, and the lower the marginal returns. "Why not just buy oil on the open market?" Well, it's clear you don't know anything about geopolitics either, dear reader...don't you know that our enemies might try to cut us off from vital oil supplies? That's why Germany and Japan lost WWII! We were able to cut of their fuel... "But weren't Germany and Japan fighting for access to oil? Didn't their politicians say they had to invade Poland...and the Philippines...to protect their vital supplies?" No...they were aggressors. They were bad people... "But if they hadn't been the aggressors they wouldn't have been bad people, right?" That's right... "Then, we wouldn't have cut off their access to oil!" Oh, never mind. You'll never understand geopolitics, will you? Regards, Bill Bonner, for The Daily Reckoning