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The Daily Reckoning | Monday, June 28, 2010 World Cup woes for the Eurozone...among other, more pressing issues, Why most Americans would be shocked to see Beijing today, Plus, Bill Bonner on where the world leaders are actually leading us and another trip to the motor vehicle authority... The Eurozone Crisis... On AND Off the Pitch How bad old ideas are leading old western powers down the path to ruin Eric Fry Reporting from Laguna Beach, California... The Eurozone Crisis: The Europeans can't balance a budget...or win a soccer game. More below. But first... The gimpy US stock market continued limping along last week. The Dow Jones Industrial Average stumbled 307 points, or 2.9%, to 10,144 - pulling its return for the year-to-date solidly into the red. Just a few months ago, in the hopeful days of late April, the Dow breezed through 11,000 on its way to a pleasing 7% gain for the year thus far. At that moment, the Dow was also sitting atop an incredible 70% jump off the lows of March 2009. But the tone and behavior of the US stock market has changed a bit since then. The animal spirits that were chasing share prices higher have gone into hibernation. And as share prices fall, so do the hopes and expectations for a strong economic recovery. Markets make opinions, as we never tire of observing. So no one should be surprised that the slumping US stock market is making the opinion that the economy is less than rosy. And a steady stream of downbeat economic data is reinforcing that opinion. Just last week we learned that homes aren't selling very well. Before that we learned that employers aren't hiring very well. And before that we learned that consumers aren't consuming very well. When you add it all up, it's easy to understand why investors aren't investing very well...and why the stock market's June swoon continues. For some weird reason, June is often a negative month for stocks. In fact, along with September, June is one of only two months on the calendar that has produced a negative return during the last fifty years. Thankfully, however, during this particular June, the World Cup has provided a welcome diversion. Some of us Americans, for example, have turned our attention to the home team's thrilling exploits. Could these "cardiac kids" carry their good fortune into the first round of playoffs? And could this team advance far into the tournament? The answer arrived quickly, as the American team lost to Ghana on Saturday. Although disappointing, the American loss was not out of line with expectations. The US team was never a favorite to advance far in this year's World Cup. By contrast, some of the perennial favorites turned in abysmal performances. France fell early; Italy shortly thereafter...and England after that. Because of these shockers, the 2010 World Cup has started to feel more like a macro-economic metaphor than a sporting event. Of the six G-7 countries to field teams in this year's World Cup - France, Italy, United Kingdom, Japan, Germany and the United States - only Japan and Germany remain. Meanwhile, all four nations from the core of South America's Mercosur economic zone - Argentina, Brazil, Uruguay and Paraguay - remain in the competition. Indeed, Uruguay has advanced to the quarterfinals for the first time since 1970. Punctuating this remarkable metaphorical contrast between Emerging Market nations and the traditional economic powers of the Developed World, the soccer teams from Chile, Ghana, South Korea and Slovakia all advanced to the Round of 16, even while the teams from Switzerland, France, Italy and Australia were taking flights back home. The "Azzurri" - as the Italian team is known - faced an especially hostile homecoming. The Italians had not produced such a poor World Cup result in more than 50 years. And that's not all; the Italians are the reigning World Cup champions from the 2006 engagement. As a result of their early exit therefore, the Italian team joined the ignominious list of defending champions who failed to advance out of pool play. The others include France (2002), Brazil (1966) and the 1950 Italy team. Italian newspapers showed no mercy, comparing the defeat to the weakness of an entire nation. "Azzurri, the mirror of a country," a writer for the independent newspaper Il Fatto Quotidiano remarked. "A country without memory, without identity, without an idea of the future." This assessment is perhaps is bit too harsh. But certainly, "ideas of the future" are in very short supply - both in Italy and in the rest of the heavily indebted Western economies. Every Western nation has plenty of ideas about how to spend money it doesn't have. But none of them has a clue about how to correct the excesses of decades-long deficit- spending. Instead, the most popular "idea of the future" also happens to be the most popular idea of the past: Increase government spending to "stimulate the economy," rescue too-big-to-fail institutions and maintain "essential" social programs and entitlements. An inescapable corollary to this idea of the past, present and future is that the government MUST borrow money it does not have in order to continue its do-gooding and society-improving. Your editors here at The Daily Reckoning think this idea is a bad one...and that the time has come for a good idea...or at least a new bad idea. The old bad idea, like the old Italian soccer team, has led us to a bad result - a dead end. Perhaps it's time for something entirely new...like allowing the economy to stimulate itself...without government help. Perhaps its time for some ideas that are so old they would seem entirely new - ideas like allowing too-big-to-fail companies to fail, or mortgage-holders to default, or property prices to fall. And perhaps, if these processes proceeded without government impediment, economically infirm entities and practices would perish - making way for renewed growth. A few years back, the Argentineans, Brazilians and Uruguayans allowed lots of things to fail, including their own currencies. Today, their economies are revitalized and ascendant. The Mercosur nations have not established an economic heaven on earth. Far from it. But neither are they devoting every sinew of their national muscle to digging themselves out of debt. Government debt relative to GDP is lower in both Brazil and Argentina than it is in every single G-7 country!...Meanwhile, the Mercosur's GDP rose last year, even while the Eurozone's GDP fell. "This is the result of a process," Italy's Corriere della Sera newspaper explains. "This is not the failure of a single mission... The problem is what we have become." An observation about a failing soccer team or about a failing economic system? Let the reader decide... [Eric's note: Here's a brief P.S. to last week's series of reader emails about the "benefits of expatriation." One observant reader sent along the following correction: "In today's Daily Reckoning the article TEN BENEFITS OF EXPATRIATION strongly implies something that I think is very misleading, and is substantive. Section #2 ends with sentence 'Expatriation lifts the death tax burden...' "About 15-20 years ago, I looked into the pros and cons of expatriation, as I was legally resident outside the US. My research indicated that there were 2 drawbacks that are not mentioned in the article. First, to take away the economic incentive to expatriate, I understood that the US had instituted a policy whereby you would have to pay a fee, quite similar to the inheritance tax, in order to renounce citizenship. While it was not clear how they would collect it appeared there were some mechanisms. Perhaps this policy was changed. If not, it should be explained, since the article implies that you simply renounce citizenship to reap the benefit for your estate." After doing a little digging, your Daily Reckoning editors unearthed the following information: An "exit tax" applies to anyone who renounces their citizenship, if they have had more than $129,000 in tax liability, on average, for the previous five years or if they have more than $2,000,000 in net worth. If the tax applies, there are two pieces. First, all of your worldwide assets are treated as sold, with the result that you are then taxed on the capital gains. As to this piece, no gains, no tax. Secondly, things like IRA accounts are not taxed as if sold, but rather are deemed to have been distributed, thereby triggering ordinary income recognition on those amounts. There are various nuances but that appears to be the gist of it. Please speak with a professional and informed accountant to be sure of these details.] The Daily Reckoning Presents How to Invest in What China Really Needs Chris Mayer There must be more communists in Berkeley than in Beijing. That thought crossed my mind as we swept through Beijing's wide streets, crowded with cars and lined with tall modern buildings. A more bustling capitalistic city would be hard to imagine. I think most Americans would be shocked to see Beijing today. A friend of mine, well traveled and well-read, told me he thought he would find a city to compare to Mumbai or Managua. Instead, he found a city to compare to New York or Chicago. I sent back video clips of some of the highlights to another friend. After watching a few clips he wrote: "I suspect that what a lot of Americans are unsure about is the size and scope of what's really there in everyday life in China. In most memories, it's a nation of rice scroungers...raking the good earth with fingers crossed." One of the clips I sent gave you a peek inside a busy Carrefour, a French retailer running a Wal-Mart-like operation in China. My friend continued, "Yet here there's a butcher with piles of fresh, red meat out in the open (it MUST be selling fast to be out like that)... and 30 kinds of toothpaste on the shelves... and 60-plus cash registers jammed with customers." All of the world's best-known brand names were on display in brightly lit wide aisles. You almost have to see it to believe it. Even in the five years since I was here last, Beijing has changed a great deal. Surprise, though, has become something of a routine here. In 2001, consensus opinion had the population of Beijing hitting 14 million by 2040. It topped that by 2003. Today, it has about 22 million people. Also in 2001, experts thought that Beijing would have - gasp! - 1 million cars on its roads by 2010. It also topped that figure in 2003. Today, there are nearly 5 million cars on the road. China is now the world's largest car market and is quickly becoming the world's largest market for a number of consumer goods. It's also the world's largest market for mobile phones. We saw plenty of Beijingers chatting away at checkout counters and in their cars just as people do in the US. The whole country isn't like this, of course. We wandered about 40 minutes from downtown and visited a small village still technically in Beijing. We walked down dusty lanes, past modest dwellings and a small Buddhist temple. Villagers smiled as we passed. They don't see foreigners here much, but you could stop and get a Coke and a Snickers bar. We also happened to meet the head of the village, who greeted us warmly and showed us inside his house, a small courtyard home. After snapping a group picture, he asked us to e-mail a copy, and we dutifully wrote down his address. Some of these homes don't have a private bathroom, but you can still send e-mail. That's China for you, in a nutshell. It's been an uneven advance - and there is still a long way to go. Back in central Beijing, we visited a Bank of China branch. There were 77 teller windows. In the central foyer was a display case with gold and silver coins for sale, as if they were pens or tote bags. The Chinese buy more gold than anybody else, recently surpassing India. I tell you all this to prepare you for this key idea. As CLSA, the Asian investing specialists, put it in a recent report: "The future of Asia is domestic." This is an important shift. For a long time now, China's economy (and Asia's generally) has been geared toward servicing the West, toward exports. Now begins a transformation, the rise of the Asian consumer. One key data point here is disposable income. CLSA notes that the number of Asians (excluding Japan) with disposable income of $3,000 annually will rise from 570 million to 945 million by 2015. More than two-thirds of that increase will come from China alone. As CLSA notes, "The consumption spending of this middle class will rise from US$2.9 trillion to US$5.1 trillion by 2015, with China, India and Indonesia contributing to 69%, 16% and 4% of the increment." By 2014, about 44% of the population in China will top this $3,000 threshold - a 27% increase over 2009. These numbers back what I intuitively grasped on my trip. There is a big mass of consumers that want all the things many of us take for granted - like Crest toothpaste and bluejeans and air conditioners. That's a lot of fresh money in the pool - and companies like Yum! Brands, McDonald's, Wal-Mart, Carrefour, Starbucks and many others are all jockeying for a share of the prize. And in many cases, they already have substantial businesses here. You can see their presence while you are driving around Beijing. Servicing this growing middle class is going to be an important investment theme for the next several years. Chris Mayer, for The Daily Reckoning P.S. Following my research trip to Beijing, I put together an investment report for Daily Reckoning readers' perusal. It's titled: The New Chinese Middle Class: Eight Tiny Stocks Set to Explode from the Largest Population Trend in History. If you want to grab a copy, let me know here and I'll make sure you get a copy this week. I'll be following the China story over the coming months here in these pages, but my Mayer's Special Situations readers will get first crack at any specific investment ideas (including those first eight stocks). If you would like to join us for a month, just to check the service out, you could look into grabbing a $1 trial sub right here. It's probably the easiest and cheapest way to check out what we're doing and to decide whether it's right for you. Bill Bonner Welcoming the Failure of the Economic Recovery Team Bill Bonner Reckoning from Waterford, Ireland... The latest from the G20 meeting in Toronto. As you recall, the meeting was billed as a showdown between the Germans and the Americans...that is, between the deficit cutters and the big spenders... That is, between the people without a hope and the people without a clue. TORONTO (AP) - World leaders must work together to make sure the global recovery stays on track, Treasury Secretary Timothy Geithner said Saturday. Geithner made his remarks as President Barack Obama has warned his counterparts from the Group of 20 nations to not reel in measures to stimulate their economies too quickly. The United States fears doing so could endanger the global recovery. Asked if the global economy could slip back into another "double dip" recession, Geithner said the answer to that question hinges on decisions made by world leaders. "It is within the capacity of the people who are going to be in those rooms together in the next few days to avoid that outcome," he said. "If the world economy is to expand at its potential, if growth is going to be sustainable in the future, then we need to act together to strengthen the recovery and finish the job of repairing the damage of the crisis." As near as we can tell, the recovery has been on the wrong road since it started its motor. And the folks in Toronto couldn't put it "back on track," even if they knew what they were doing. All they can do is get out of the way. The system has too much debt. It needs to get rid of some of that debt - by write offs, defaults, and pay downs. Things that must happen, must happen sooner or later. Better sooner than later. But what IS happening now? World trade is breaking down - the Baltic Dry index, a measure of world trade, recently fell 17 days in a row. Consumer spending is breaking down - the "consumer discretionary" sector has turned ominously negative. Stocks are breaking down - the Dow fell 9 points on Friday...145 points the day before.... Employment is breaking down - you know the story. Housing is breaking down - not since 1963 have people bought so few new houses. Does this sound like a recovery? Of course not. What it sounds like is a defeat. A failure for the recovery team. But don't worry, boys, sometimes failure is the best you can hope for. And come to think of it...defeat is not so bad. Think how much better off the Chinese would have been if Mao's long march had ended in the total collapse of his army. And suppose George W. Bush hadn't been such a total failure? People might not have elected Barack Obama. And what if the invention of the television had never caught on? Americans might still have some dignity and brains.... Not only do collapse and failure help prevent bigger mistakes, they also correct mistakes after you've made them. Running up debt equal to 362% of global GDP was probably not the smartest thing the human race ever did. Trying to 'recover' the economy and reproduce the system that produced those debts is even dumber. Instead, let's have a good old fashioned correction...a collapse...a failure of the Geithner, Bernanke, Obama team. We're going to have it anyways. Bring it on. Get it over with! And more thoughts... Saturday night, we talked to an executive in the airline industry. "Airlines are terrible businesses. Our company is in Chapter 11 right now. But it's nothing to be ashamed of. All airlines go broke. The only exception I can think of is American Airlines. The others have all gone into Chapter 11 at one time or another. Some have gone broke more than once. "As Warren Buffett says, the whole airline industry has never made any money. People seem to want to run airlines. Often, it's a kind of glamour project. Or sometimes, it's just a love of those big machines. "Of course, everyone else makes money. The airplane manufacturers. The pilots. The suppliers. The fuel companies. But the airlines themselves are a disaster. "I've tried to figure it out. And the only sense I can make out of it is that they can never reduce capacity...even when they go broke. The planes are so expensive NOT to operate, that the airlines keep flying even at a loss. "And then Wall Street got the idea of securitizing the airplanes. They took the industry and broke it down into tranches of debt. Some of it was more risky than others. But all they had to secure it with was the panes. Sounded perfectly reasonable. But when the airline receipts went down, the airlines themselves were headed for trouble. Well, imagine that you were a hedge fund and you get a call from Wall Street. "Hey...we're going bust...where do you want your plane delivered?" "No one wants to see a Boeing 747 delivered to his parking lot. And when the industry is suffering, you can't sell them. So, they end up making deals...keeping the big birds in the air...even when they clearly have too many seats and everyone is losing money. "What an industry... "Oh...and you should tell you readers, if anyone is holding airline stocks now, they should sell. The industry has had a good run. But it's late in the game." *** Last week, we went to the Maryland Transportation Authority in Baltimore to renew our license. This weekend, we went to the Annapolis office. This time it was to get a learner's permit for Edward, 16. Your editor will not drive a bit better after renewing his driver's license. Edward, when he gets his learner's permit, will be no safer. So what's the point? We stand in line. We collect papers. We take orders. And we turn into a race of zombies. We arrived at 8:05. Edward got a place in line...his father went to the hardware store. The MTA wouldn't open until 8:30. When the doors finally opened, we realized that this was a very different crowd from our MTA experience on Wednesday. This crowd was white! You could see the cultural and racial differences immediately. Instead of a lot of poorly-dressed, overweight, barely-literate black people we were in the middle of a lot of poorly-dressed, overweight, barely- literate white people. And those were the clerks! The only real difference we could see was that these clerks were less polite than they were in Mondawmin. At least, the only one we saw. She barked commands with a kind of mock efficiency. Then, woe to you if your papers were not in order. You might as well have been an illegal immigrant. Edward didn't have a Social Security card. Instead, his mother had spent three hours going to the Social Security building to get him a form proving he had a Social Security number. "You gotta have a Social Security card." "No... The directions say you need Social Security 'documentation.'" The clerk tossed a piece of paper on the counter. Her pencil pointed to the 6th commandment: "You must show a Social Security card." "Why do you need a Social Security card? He's just getting a learner's permit. He's not getting a job." "Those are the regulations." "Well, they don't make any sense. Why should someone need to have a Social Security card to drive a car?" "I didn't make 'em." "Yes, but it clearly says 'documentation' on the website. And we've got documentation. He has a Social Security number... Seeing the actual card (which has been lost) does not get you anything extra. You don't even make a copy of it. So you're going to make us waste another 3 hours..." "Do you want me to call security?" "Dad..." 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 Health Care and Oil Industries Attacked by Zombies BP is a producer. It is alive. Its flesh is solid. The blood of profits runs through its veins. The zombies are after it. The company was doing fine. But it tripped up in the Gulf of Mexico. The zombies saw an opportunity. In order to buy time...and perhaps save itself...the company paid an enormous ransom...bribe...or tribute to the federal government. Now, ‘political risk’ – more properly known as ‘zombie risk’ – is higher in the US than it is in emerging markets. Phony Choices From a Bogus Profession US Economy Still Inching Toward a Japan-Like Slump Fed Credit, Inflation and the Idiots in the Middle A whole series of alarms occurred after I got the news, although I lost the source, that “food stamp usage just soared to a new record high” of 40.2 million persons. This number is alarming in itself because it means that the economy is so bad that more and more hungry people cannot afford to even feed themselves, sort of like teenagers, but with hopefully better manners and dietary choices. Euro Declines on a Sea of Bankruptcy and Paper Promises The Correlation Between Morons and Government Debt 1.3 Million US Unemployed Losing Jobless Aid On Friday, Congress decided to surprise about 1.3 million unemployed Americans with a much more abrupt end to unemployment benefits than they would have expected. President Obama had requested for up to 99 weeks of jobless assistance, but Congress chose to not pass the bill and the funding will no longer be in place. The Wants and Fears of George Soros Bending to the Modern World