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The Daily Reckoning | Thursday, June 3, 2010 Whipsawing markets take investors for a ride, The pain in Spain: how not to encourage sound economic productivity, Plus, Bill Bonner on unfavorable market odds, BP's blunder and the troubles with being twenty-something... ------------------------------------------------------- Better Than GOLD! We're telling folks right now to hang on for gold bullion trading 198% higher than today's already high levels, within the next 12-24 months... But one investment should rocket even faster than gold over the next 12-24 months...yielding at least 3-to-1 gains on every dollar invested...GUARANTEED. In fact, we're so sure of this, we won't charge you a penny to show you how. Get the details here... Federal Meddlers Distort the Markets Why government intervention makes investing even harder Joel Bowman Reporting from Taipei, Taiwan... We told you it'd be a bumpy ride. Stocks managed to recoup losses from the previous two sessions yesterday. The Dow ended higher by more than 200 points. Similar gains were registered in the broader markets and over in Europe and Asia, too.  Taken alone, yesterday's action might look like quite a confident move by Mr. Market, as if he were strutting around in a brand new suit. We even heard one commentator enthusiastically refer to it as "decisive." The fellow looked excited enough. He even seemed to believe what he was saying. It didn't feel decisive to us, though. Unless by "decisive" the gentleman meant "changes mind daily." Maybe "capricious" would be a better word...or "bi-polar"...or, better still, "indecisive."  Nope, Mr. Market is not sporting any spiffy new threads. He is not strutting. He is struggling. And so are investors. They are struggling to determine what, if anything, about this "recovery" is real and what is phony baloney. With so much monopoly money swimming about, and so many state-sponsored data read outs, experts' projections, predictions and balderdash concoctions, it's a full time occupation just sorting the facts from the fiction.  And that's just part of the problem when governments and meddlers crash parties they're not invited to. They create artificial demand - or borrow it from the future - to make today's numbers look better than they really are. Pretty soon, everything is out of whack. People who don't need new cars trade in their old clunkers for shiny new autos; folks who need to save their money are encouraged to visit the retail stores and to buy more stuff they don't need with money they never really had. Prices become distorted. Businesses make decisions based on the wrong information. They overspend and malinvest. From an investors' perspective, it makes the already difficult job of putting your money to work that much harder.  As one friend recently put it, "I know how to trade markets...it's trading whimsical government policy that's the trouble." Dr. Marc Faber, editor of the venerable Gloom, Boom & Doom Report and perennial favorite at the Agora Financial Investment Symposium, addressed the worrying trend of increasing state intervention in his latest issue. "...it is no longer sufficient to analyze macroeconomic and microeconomic trends and individual companies and sectors; we now increasingly need the help of a political analyst who can warn us of what governments' next regulatory 'Schnapsideen' (ideas developed while heavily intoxicated) are likely to be. "...government interventions in the free market," Faber continued, "irrespective of whether they occur through monetary of fiscal policies or direct measures and regulation (such as the government taking over, subsidizing, or bailing out companies, etc.), bring about unintended consequences that are difficult to forecast. But what is easy to forecast is that the increased government intervention brings about more uncertainty about the future, and that uncertainty is poison for capital spending and sustainable economic growth." That the government busies itself distorting markets is bad enough. Sadly, however, that's just the beginning. More often than not, their myopic actions end up destroying that which they set out to protect in the first place. Henry Hazlitt refers to this as the "fallacy of overlooking secondary consequences." Hazlitt explains: "This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups." Take, for example, the issue of minimum wages. It seems intuitive that raising the mandatory hourly salary of a low-income worker would positively impact the less privileged members of the workforce. That's what makes the concept such a compelling, politically expedient sell for meddlers seeking re-election. Unfortunately, most often and for most low-income workers, this warm and fuzzy policy actually does them more harm than good.  "Most estimates suggest that each 10 percent increase in the minimum wage reduces employment in affected groups of workers by roughly 2 percent," explains James Sherk, an economist at the Heritage Foundation. Sherk makes the point that raising the cost of labor beyond what the market naturally tolerates invariably results in companies cutting back on employees and on the hours they work. Result: higher barriers of entry for un- or underemployed people and less productivity for the economy as a whole. That, in turn, means fewer available jobs for the very people advocates of the minimum wage policy affected to be serving in the first place.  One only need look at markets where extensive government intervention is the norm to see how this little tale inevitably plays out. For some excellent examples of how not to run a government, we invite our fellow reckoners to have a look at how the welfare warriors of Europe are doing.  In today's essay, guest columnist Jaime Levy Moreno, a student at St. Louis University's Madrid campus in Spain, does just that. In the wake of the country's recent downgrade, we though a few words about the state of affairs there might be in order. Please enjoy...  Retirement, "Plan B" - Receive Paychecks Every 12 Days For Life Without ever doing a moment's work, you can now legally sneak onto the "payroll" of over 1,000 of America's best companies. You receive a check as often as every 12 days, and annual income can run as high as $120,000 or more. Learn more here. The Daily Reckoning Presents Spain's Dropout Generation Jaime Levy Moreno [Ed. Note: This article originally appeared on the indispensible Mises.org website on Tuesday, June 01, 2010.] In the last two decades in Mediterranean Europe, and especially in Spain, a new social group has emerged, called jovenes (youngsters). Members of this group exhibit several specific characteristics. First, jovenes are usually male, aged 25-35, although some members are in their 40s. Second, they are in a perpetual state between graduation and their first job. Third, they usually live with their parents to save money, allowing them to go out at least three times a week. Fourth, they occasionally work a part-time job - if only due to the pressure imposed by their parents. Last, and most important, they receive unemployment benefit credits and renew their membership on the "unemployment list" from time to time, so that the state subsidies don't run out during their "temporary" hibernation. It would be very unfair to put all the blame on them for their lack of initiative. They play a vital part in what is called the "Atlas generation." They have the weight of the world on their shoulders, and they are going to be the ones in charge of paying for the economic sins of their parents. It is important to analyze the reasons why this social group has appeared, what the situation is like today, and what the consequences will be of this phenomenon in the future. For the last ten years, and especially since the recent financial crisis started, Spanish unemployment has risen astronomically, reaching a record of around 20%. This, of course, does not count the thousands of illegal immigrants, who don't appear in the official state statistics. Aside from the vast number of unemployed, another significant group of people work in part-time jobs with "garbage contracts" or very low salaries. Members of this group are called mileuristas (those who earn only €1,000/month). This group appears above the jovenes in the social pyramid. Mileuristas normally live at home and dream of becoming economically sufficient eventually, or they live in cheap rented apartments funded by state money, which comes directly from taxpayers' pockets. Finally, we find a smaller group at the top of the pyramid. This group is formed by either a lucky few, or in some cases, hardworking and generally outstanding young people. This group has very decent jobs (normally around €2,000/month starting salary) and are the sons and daughters of wealthy families that normally receive a more-or-less high-quality private education. They end up employed in the family business or in some firm where their parents or family members have contacts. Outside of this pyramid we will also find a group of people that decide to study for an "oposición" (state exam) in order to work for the government. Depending on the complexity of their education, and their success on the exam, they will end up working for the first time between the ages of 26 and 35 and will be decently, or even very well paid, for the rest of their lives. It is also very important to give special attention to the number of years that people are called "students" in Spain. The quality of a university graduate has been devalued in recent years to the point where an employer will no longer be impressed at all by an undergraduate degree in a job interview. Consequently, at least a master's degree or some kind of postcollege specialization accompanied by proficiency in at least three languages is demanded. This, of course, means more years spent as a student and, for the most privileged ones, a year or two living and exploring foreign languages abroad. Not so long ago in Spain, it was an honor to have a college degree and even more prestigious to hold a graduate degree, which only a few people could achieve due to the expense and hard work that it involved. Now it is almost free to study in a Spanish public university. This is viewed as a great accomplishment that gives opportunities to people from lower classes, who will sometimes end up forming part of the group of "hard working and outstanding young people." But, to be honest, this group is quite small. The effort to make it easier to be a student is largely a way for the government to lower the unemployment rate. In order to explain why it is so hard for recent graduates to obtain a decent job in Spain, it is important to know that labor costs are very high for employers - a consequence of strict laws that protect workers. Four weeks' vacation a year is the mandatory minimum. An artificially high minimum wage places a floor under the supply of workers and the demand for jobs, creating a devastating imbalance. This means there is a huge demand for jobs and little desire on the part of employers to fulfill it. Additional reasons for the lack of job offers in Spain include the excessive finiquito, the final pay a worker is entitled to under Spanish law when fired: 45 days of salary for each year worked at the company. Furthermore, taxes on employers are very high - at least a 50 percent of each worker's annual salary, which means that if someone is paid €20,000 a year, it costs their employer at least €30,000 a year to hire them. All this makes an employer very reluctant to hire an employee, which creates a high rate of unemployment and a huge number of "garbage contracts." These taxes also promote black-market activity, which either sidesteps the established rules or ignores them altogether. The taxes on employee wages are very high as well, which brings us back to the mileurista social status. These taxes create a substitution effect: firms have become desperate for new technologies to reduce labor inputs. One recent example in Spain is McDonald's move to start substituting workers with new machines that take the order for the customer, reducing the number of workers. The goal is to leave only two sets of employees - the ones in the kitchen and ones that hand the food to you at the counter. Spain's misfortunes have been complicated since joining the eurozone. The ability to obtain very low interest rates to borrow money - the same interest rates as in more powerful and savings-oriented economies like Germany - worked as an incentive for companies to borrow money for infrastructure and housing construction. Around 800,000 houses have been built each year in Spain, more than France, Germany, and England combined. This meant a surge in the supply of jobs in construction industries. Unfortunately, this demand for labor was met mostly by immigrants who now find themselves unemployed with few possibilities. Huge loans to finance this housing boom, especially from the Spanish "cajas" (saving banks) now cannot be paid back and have resulted in a huge government bailout. As a result, the Spanish government has undertaken an increasingly large debt, financed by the continual issuance of new bonds. This borrowing has strained Spain's public finances, lowered its bond rating, and reduced the demand investors have to continue funding this deficit spending. At the same time, the bust has caused a severe decline in tax receipts, especially in taxes like the IVA (value-added tax). Consequently the state has received less income and in response is now increasing consumption taxes to cover the shortfall (effective next month). These increased taxes will, in the end, translate to less spending and more constrained profits for all producers. They will also make Spain a very unattractive place for companies worldwide to start or continue their business. All these effects will ultimately mean more unemployment, which takes us back to the young "Atlas generation." Ironically, many members of this generation have complete faith in the government to take care of all these issues for them. They choose to stay at home until they are middle-aged and delay getting married and creating a family until their mid-to-late 30s. They also have an increasingly huge debt issue, which they will eventually have to take care of. If current trends continue, within a few short years in Spain each employee will have to pay for one pensioner on social security. Only 40 years ago, ten employees took care of one pensioner through their social-security contributions. The Atlas generation, by putting off marriage and children, has worsened this worker-pensioner imbalance. The yearly rate of births per fertile woman in Spain is only 1.2, one of the lowest in the world, and it will likely decline in coming years. The only way to solve this problem would be to lower taxes, especially employment taxes, dramatically. Doing so would encourage employers to offer more jobs and employees to have larger families. Unfortunately, this option isn't of much interest for the politicians in Spain, who prefer to maintain the socialist status quo regardless of which political party is in power. Jaime Levy Moreno,  for The Daily Reckoning Secret Society of Analysts, Economists, and Market-Watchers Want You To Know... This "triple timebomb" could make market recovery in 20010 or 2011 next to impossible. But a select few will get very rich while the crowd runs away...learn about the Society's 7 exclusive "Super Shields" right here. Bill Bonner Buying Stocks at the End of the World Bill Bonner Reckoning from Baltimore, Maryland... Well, they don't make it easy for you.  Yesterday, the Dow rose 225 points. Enough to keep people guessing. Enough to keep people in the market. Enough to give the 'recovery' spotters something to look at and investors something to hope for. Is the market really headed down...or not? Most likely, yes...it's a real bear market. And it will probably continue for years.  And even if it isn't, it's probably best to think it is. Why? Because most stocks have still not hit their ultimate lows. If you can't see the bear market's final lows in your rear view mirror, they must be ahead of you. Remember, the broad pattern of the stock market is from an epic high to an epic low...with years of up and down movement in between.  When you buy stocks in the middle of the market's pattern...when they're not cheap...you're completely at the market's mercy. If it goes up, you do all right. If it goes down, you lose money.  Since we don't know what direction the market is going, we'll just wait until stocks are cheap. Then, we won't have to worry about which direction the market takes. Besides, if we don't know which direction the market is going, we have to assume that there are even odds it will go down or up. Even odds aren't good enough for us. We don't want a level playing field. We want a playing field tipped in our direction. We don't want an honest card game; we want a deck we stacked ourselves.  Which would you prefer, dear reader: to make a dollar...or not lose one? If the odds are even, it assumes one is as a good as the other. But they're not. If you hold onto a dollar, you keep 100% of it. If you make a dollar, on the other hand, you pay taxes on it. After tax, it could end up being worth only 50 cents. That means you'd have to believe a bull market was twice as likely as a bear market before you should invest. Do you think that? We don't. We think this market is more likely to go down than up. By our reckoning, the bear market began in January 2000. The feds fought it with every weapon in their arsenal. Monetary policy. Fiscal policy. Booby traps. Propaganda. Scorched earth. Everything. And the market responded...for a while. Greenspan's 'emergency' low interest rates caused a huge bubble. Stocks rebounded.  And then the bubble blew up. The Dow fell below 7,000 in March 2009. This time, the feds brought out another, even more powerful weapon. They blasted away with "quantitative easing" - adding $1.2 trillion directly to the Fed's reserves. And once again, the market bounced...until about a year later, when the quantitative easing program came to an end.  You can fight a downturn. You can hold off a bear market - for a while. You can distort a correction - making it much more twisted and nasty. But you can't stop it. One way or another, mistakes will have to be reckoned with. Markets will eventually discover what things are really worth. And in a real downturn, they'll always discover that they are worth less than people thought.  History shows that after a peak is reached, stock prices will keep falling until they become bargains again. So, if you knew that a stock would eventually sell for less, why buy now? Why not wait? What's the hurry? The reason given for yesterday's big bounce was a pleasant report from the housing market. More houses are being sold, said the news. Does that get you excited, dear reader? It doesn't do anything for us. Another report tells us that inventories of unsold houses are still building up. Meanwhile, The New York Times reports that there is a crisis brewing in student loans. We didn't have to read the article. Students get out of school. They can't find a job. How do you expect them to pay back their loans? A report in the local paper tells us that more students than ever are enrolling in community college. Overall, the economic reports are broadly encouraging...but still consistent with our Great Correction hypothesis. This is NOT a normal recovery. Nor is it the end of the world.  Our strategy is to wait 'til the end of the world comes; then, we'll buy stocks.  And more thoughts... Recently, we spotted a line of talk so idiotic we thought of Thomas L. Friedman. Pundits are calling on the US government to take charge of the Deepwater Horizon disaster. No kidding. They think the feds should take charge and get the job done. Let's see, what do federal officials know about drilling for oil? Which bureaucrats could handle a serious blowout a mile under the water? The ones who run the Post Office? Amtrak? The US Congress? We're sure the federal government has some intelligent and earnest people working for it. But when it comes to deepwater oil drilling operations, we have a lot more faith in BP to get the job done. But didn't BP already make a mess of it? Well, yes. But when we saw what these operations try to do, we're amazed that any of them work. *** "I don't know what I'm going to do. I'm almost 28 years old. I've spent 7 years in college. And I'm not trained for anything. I'm not married. I don't have a job. And soon, I'll be 30 years old." A young woman was telling us how her life was going. Her job didn't work out. She isn't sure she wants to continue with the career she has begun. She isn't sure she wants to stay in Baltimore. She isn't sure she wants to get together with [a young man she knows]. She isn't sure he is sure either. We gave her our standard line: "There are only 3 important decisions you need to make in your life. What you do. Whom you do it with. And where you do it. Everything else takes care of itself." "Yes, but nothing is taking care of itself. And I don't have any answers to any of those questions." Sometimes we wish we were in our twenties again. Other times, we don't think we could face it. Too many things to figure out.  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 atjoel@dailyreckoning.com Combatting Debt in the Age of De-Leveraging The problem in the world economy is debt. There’s too much of it. Investors who aren’t delusional know that too much debt spells trouble. And when government adds more debt it’s not really going to make things better. It’s going to make them worse. Bad Debts of the World Unite! Consumers Saving to Save the US Economy Leading Indicators Indicate a Lagging Economy The Conference Board’s Leading Economic Index for the US declined 0.1% in April, which was not too bad, especially since it followed a 1.3% gain in March, which is not to mention a 0.4% rise in February. This is, being that it is the Leading Economic Index and is supposed to forecast the future six to nine months out, not very good news... Inflation Still a Problem, Despite “Evidence” to the Contrary Guarding Your Money from Government Onslaughts Lexmark International (NYSE:LXK) — And its Endless “One-Time” Charges Just last week, Lexmark International (NYSE:LXK), a printer manufacturer headquartered in Lexington, Kentucky, announced a five-year renewal of its “blanket purchase agreement” with the Social Security Administration. It’s a significant contract given that the SSA has 62,000 employees sprawling over 1,500 offices. Is this good news for Lexmark all it’s cracked up to be? Hockey Stick Chart: SWFs and Oil Prices UK Research Center Tells Greece to Quit the Euro