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The Daily Reckoning | Monday, July 12, 2010 Millionaires hit the "default" button - real estate crisis eats the rich, It's "blastoff" for free markets - the private race further into space, Plus, Bill Bonner on class divisions, those poor rich folk and a wedding in the French countryside... Fragile Recovery or Great Correction Why most economists are ignoring evidence that points to the latter Bill Bonner Reckoning today from Paris, France... Today, we weep! Yes...pity the poor rich. Or those who thought they were rich. They're losing their houses. The New York Times reports that the rich are defaulting on their mortgage loans faster than the poor: The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley. Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population. More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic. By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent. Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment. "The rich are different: they are more ruthless," said Sam Khater, CoreLogic's senior economist. Ruthless? They are just coming to the obvious conclusion faster than their poorer brethren. And it makes sense that they should. They have more money at stake. The obvious conclusion: this is no normal 'recovery.' If prices aren't coming back, why pay off a mortgage loan when you don't have to? We continue to live in a gray zone. It is not as black as the Great Depression. But it's certainly not as bright as the go-go Bubble Era, either. What is it, exactly? Is it a correction? What is it correcting? We don't know. Not exactly. When will it be over? We don't know that either. What will happen next? Wish we could tell you. Let's keep it simple: will prices go up or down? Hey, stop asking so many questions! Look, we're way ahead of most people. Most people - including most economists - think we are in a period of 'fragile recovery.' They think we had a recession. Now the economy is in recovery. If the recovery doesn't seem much like other recoveries in the Post-War era, it doesn't trouble them particularly. Besides, they know what to do - keep money flowing! Here at The Daily Reckoning we are coming to a growing awareness of what bumblers and self-absorbed preeners our fellow economists are. But we'll come back to that. Let's push ahead with what we think we know about what it going on. So far, the economy gives no sign of normal 'recovery.' We'd be deeply concerned if it did. Because what it had before the crisis of '07-'09 was not something to have again. It had the bubble heebie-jeebies, if you know what we mean. Now, the economy gives every sign of being in a Great Correction... ..unemployment is not recovering. In fact, it seems to be getting worse. It would not be at all surprising to see the official unemployment rate go up to 12% in the next leg down... ..housing is not recovering. It has stabilized...but only tentatively. There is still a huge overhang of inventory and underwater mortgages to be resolved. And the latest figures show they're not moving. Under these circumstances, you'd have to be one heckuva optimist to think prices would 'recover' anytime soon... ..credit is not recovering. Instead, it is shrinking... Last week's figures show more contraction. These things do not point to the end of the world. They point to the end of the credit expansion that ballooned up the economy from the first Reagan administration through the last administration of George W. Bush. That expansion is over. Kaput. Finished. What's coming next? We'll see... The Daily Reckoning Presents The Final Frontier...for Your Portfolio Patrick Cox Forget about science fiction...cheaper private space access may actually be just around the corner. Earlier this month, PayPal founder Elon Musk's space exploration company, SpaceX, moved us closer to that goal. It did so by successfully launching a medium-lift rocket into low Earth orbit. SpaceX was the first company to launch a privately funded rocket, Falcon 1, into orbit in late 2008. Other rockets being used by the defense industry are privately manufactured, of course, but they are the product of taxpayer funding. The Falcon is the first orbital platform that adheres to what we could consider an effort of free market entrepreneurship. The new rocket, called Falcon 9, is of a more powerful design, with sufficient thrust to bring passengers into orbit. The payload was an unmanned space capsule, called Dragon. It is a test bed for a future human-rated space vehicle. It is orbiting the planet as I write. It is scheduled to return to Earth in a few weeks. SpaceX has pursued a simple, redundant, scalable design for their rockets. Falcon 9, for example, uses the same Merlin engines as the Falcon 1. As its name suggests, Falcon 9's first stage uses nine Merlins. The second stage also uses a Merlin engine, with modifications for re-ignition and operation in a vacuum. This reduces the final cost of the launch vehicle. Having multiple engines also improves reliability for the same reason that multi-engine aircraft are safer. The rocket can lose an engine and still make it into space. Since reuse also helps reduce costs, the Dragon capsule is designed to perform many missions. Eventually, SpaceX wants to reuse the first and second stages, as well. Although many folks regretted the cancellation of Constellation, NASA's future space vehicle program, that cancellation might actually prove a catalyst for increased long-term space exploration. Rather than depending on a vast wasteful bureaucracy to design and launch rockets, the US space program will contract out transportation services to more efficient startups like SpaceX. No more mythical $600 toilet seats. Instead of a single platform, a diversity of many smaller players will emerge in the space launch business. This is the sort of environment that cuts costs and improves performance. With the Space Shuttle winding down as a launch platform, SpaceX has already earned contracts to resupply the International Space Station to the tune of $1.8 billion. Full ISS resupply missions are scheduled for 2011. Following on June's successful Falcon 9 launch, SpaceX also inked the largest launch contract in history. Iridium Communications plans to put its next-generation communications satellites in space via SpaceX and has signed a $500 billion contract with SpaceX to do so. I strongly suspect that if space launch costs fall enough, we will be seeing space access put to commercial use in unexpected ways. How many people saw the eventual existence of Google, Facebook or even Musk's own PayPal back when the Internet was a small government defense network? Even with more efficient designs and organizational structures, however, rocket technology of the kind being used by SpaceX suffers from the same drawback: propellant. Moving fuel and oxidizer is the single most important logistical component of any space mission. More than 70% of the mass required to get to orbit is fuel. When we consider a possible return to the Moon, this percentage rises to over 95%. Quicklaunch is one of the companies working on resolving this problem. Quicklaunch is a private company founded by Dr. John Hunter, a rocket scientist (literally). From 1989 to 1995, Hunter conducted the Super High Altitude Research Project (SHARP) to develop the so-called "space gun" concept. Instead of cordite explosive detonation, SHARP used gas gun technology. SHARP set records for kinetic energy above Mach 9. It also successfully launched hypersonic scramjet test vehicles for the Air Force between Mach 5 and Mach 9. Dr. Hunter believes that the space gun technology he pioneered at Lawrence Livermore would reduce launch costs for fuel to 5% of the current price. Space gun technology, however, can't be used for humans. The acceleration required to get vehicle to orbital speed is simply too great. This leaves the market for passengers open to companies like SpaceX, which has designed the Falcon for human space launch from the very beginning. Mark Twain once famously said that history does not repeat itself, but it does rhyme. In a sense, access to orbital travel is taking a path similar to what colonial exploration did in the 15th and 16th centuries. Early expeditions were government-sponsored affairs. The Spanish crown, for example, financed Christopher Columbus. However, over time, private enterprises came to dominate the sea routes to the New World. A competitive market of private space taxis will lower the cost to get to orbit, and will open up new vistas for space exploration. Like the early venture capitalists looking to get rich in the New World, today's investors will also grow wealthy. We hope to see space access companies like SpaceX go public in the future. And of course, I'll be keeping a close eye on many other types of transformational technologies. Patrick Cox, for The Daily Reckoning P.S.: While SpaceX isn't an investible firm right now, I have stumbled across some equally exciting emergent tech plays that you can buy shares of right now - just click here to learn all the details... Bill Bonner A Classy Wedding in an Ancient Part of France Bill Bonner Reckoning from Paris, France... This weekend we went to a wedding in rural France. The affair was held in an ancient church, in an ancient town, in an ancient part of an ancient continent. On the ceiling of the stone church were frescoes painted in the 11th century. On the columns, were designs that dated from the same epoch, but had the curious wavy-gravy look of '60s tie-dyed ties. As foreigners, we never know what we're looking at. Is this the real France? Or is this a precious little bit of France that has somehow managed to resist the trends of modern politics and culture? People were well-dressed. And well-mannered. Most were good looking and much better turned out than you would see at the typical American wedding. Almost elegant. But this was no typical French wedding either. In France, the gap between the classes seems much clearer and more rigid than in America. People from different social milieus don't mix. A large American wedding might be expected to have a cross-section of American society. Some rich, some poor. Some cultivated and educated. Some not. American families get jumbled up and mixed. But these people all seemed to be a part of the same group. "We live in a small apartment in Paris," explained a couple we met. "It is so small we can barely seat 6 people for dinner. We do our socializing out here. We try to come most weekends. And, of course, we come for the summer vacation. "Paris is just a place to work. It's hard to have a social life in Paris." Their parents have a magnificent chateau, emblematic of the couple's social status. But in Paris, they are just another couple trying to make ends meet. The wedding mass included chants and songs in Latin. The couple then swore a special oath in front of the local Virgin - one in the bride's family chapel - as the two-hundred guests enjoyed foie gras and champagne on the lawn outside. "You Americans must like this sort of thing," said a guest who had had a little too much to drink. He was a short fellow, clean cut with closely cropped hair. He looked as though he might have worked for the Nixon administration if the Nixon team had included any Frenchmen. "You get to study us as though we were savages on some remote island somewhere. It's a sort of ethnography, I suppose. "Well, you have to remember, that this is not France as it is. This is France as it was. We are royalists. Petainists. Ultra-catholic. Ultra- conservative. We are the people who don't exist anymore. "You go to Paris now. You take the subway. You will find yourself surrounded by Muslims, blacks and communists. We are perfectly happy with the Muslims and blacks. But the communists have ruined the country. Now, more and more people don't work. And those who do work have to carry the non-workers on their backs. Plus, the government makes it harder and harder for them to work. "In my business, we get someone on a three-week contract. If that works out okay, we put them on another three-week contract. And if that works out, we let them stay for 6 months. We have to be very cautious. Because once you get someone on board permanently, they're almost impossible to get rid of. Practically every business operates with employees who are worthless. It's amazing they operate at all. "Well, these kinds of things make the country less and less competitive...and put us deeper and deeper in debt. And with the politics we have, there is no way out. Because the people - the voters - are imbeciles. "The whole idea of democracy is stupid. Countries...nations...societies...are not meant to be led by the common people. The common people are by definition blockheads. They live like pigs. And think like mules. Or sheep. "That's why there is always an elite. The elite should lead. That's their proper function...to help put the rest of the people on a better path. It wasn't the common people who built Versailles, after all. It wasn't the ordinary voter who designed the Eiffel Tower, or found a cure for pneumonia. And the idea that the common people should determine - by their superior numbers - what happens to a whole society is absolutely preposterous. And I can tell you...the experiment with popular democracy is going to end badly, as they always do. "The people are going to continue to demand more benefits, more holidays, more health care and more protections...until we finally go broke." Regards, Bill Bonner, for The Daily Reckoning