 | | The Daily Reckoning | Thursday, August 19, 2010 |
- A deluge of "unexpected" reports batter US stock markets,
- Middle class growth that makes even the Middle Kingdom blush,
- Plus, Bill Bonner on gold's prospects and paying sky-high prices for government paper...
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|  | | | Awash With Bad Data | | And other reasons why the US economy continues unraveling | |  | | Joel Bowman |
Checking in from Houston, Texas...
Stocks are in the dumps today. As we write, the major US indexes have all but erased the hard-fought/delusional gains of the previous two sessions. The Dow, S&P 500 and the NASDAQ are all nursing losses of around 2%.
The panicky mood on Wall Street comes thanks to a "trifecta of bad reports," as one news site put it.
First off, a manufacturing activity report in the Philadelphia region revealed a whole lot ofinactivity. The Philadelphia Federal Reserve's economic index slumped to negative 7.7 for the month of August. Analysts had expected a reading of about the same figure...but in the positive. A reading below zero represents a slowdown; the kind of slowdown any non-analyst might have seen coming.
Meanwhile, the index of leading economic indicators - a measure of what the economy has not yet achieved - increased a puny 0.1% in July (pending future revisions, no doubt). Again, analysts had been expecting a 0.2% increase for the month.
And last, but by no means least, we have the initial jobless claims report. Once again, the "teleconomist" sages had anticipated a small drop in the number of claimants. Instead, the number "unexpectedly" jumped 12,000 to 500,000 last week from an upwardly revised 488,000 the previous week.
"If claims [go] back up above 500k, for at least a few weeks, double- dip risks will rise materially..." The Daily Reckoning's favorite economist, David Rosenberg, wrote (somewhat prophetically, it turns out) in a note after last week's figures were released.
"...98% of the time when Household employment contracts three months in a row," Rosenberg warned, "we are already in a recession or about to head into one. Who knows? Maybe we'll be lucky and this will be the other 2% this time around."
Maybe...but probably not.
All in all, things appear to be unraveling more or less as they should be.
But this week is not about the Great Correction underway in the United States. At least not entirely. Readers will note that their "perennially pessimistic" editors have spent the past few days exploring opportunities in markets with low debt and high growth; with job prospects instead of job rejects; entrepreneur-driven capital formation, as opposed to government-sponsored capital destruction. We've been looking, in other words, at markets not shouldering the burden that too often accompanies the dubious moniker, "Developed."
For instance, Doug Casey, founder of Casey Research, shared with us some thoughts on various South American climes (see Part I and Part II here). Chris Mayer uncovered a couple of incredibly cheap opportunities in the Middle East and Russia (see here). And earlier in the week, Eric Fry brought us his sandals-in-sand thoughts from Nicaragua.
Why the sudden interest in Emerging Markets, you ask? First of all, it's not a sudden interest. And secondly...
"...the time has come to carefully evaluate the measure of risk one is taking for each measure of return," Eric explained from his perch down in Rancho Santana during the week. "Now is the moment...to insist on an honest day's pay, or to saddle up and ride out to a place that treats capital more hospitably.
"To underscore this imperative," Eric continued, "lots of investors carry massively 'overweight' positions in US stocks without ever examining and assessing the risks they are taking relative to competing investment opportunities, like Emerging Market stocks. That's a potentially grave mistake, especially when one considers that the investment world is becoming increasingly bi-polar, to the benefit of the Emerging Markets."
Where to today, then? What exotic locale will suffer the flattering scrutiny of this installment of your Daily Reckoning?
Think cold, inhospitable winters, accompanied by a severe lack of natural resources and an aesthetically challenged local population...then, disregard those thoughts. Today, we venture to Brazil.
Now, don't worry; we're not going to bore our male audience with endless descriptions of bikini-clad beach volleyball players, like the unrelenting intellectual tedium exhibited in the picture below:
Nor do we aim to fatigue or offend the refined sensibilities of our female Reckoners by fawning over the chiseled bods of the local volleyball spectators, seen here:
No. That would be lame. Instead, we have a truly sexy column in store for you today; one that fuses the sensual allure of making money in an exotic land with the tactile pleasures that arise from investing in an infrastructure sector in desperate need of care and attention. Enjoy!
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| | The Daily Reckoning Presents | | The Land of the Future... Today | |  | | Chris Mayer |
Stefan Zweig pegged it right after all. In the late 1930s, the Austrian playwright and writer sought relief from war-torn Europe and settled in Brazil. He loved it. In 1941, he moved there and wrote his book Brazil: Land of the Future. Brazil, he thought, "was destined to become one of the most important factors in the development of our world."
Brazil impressed Zweig with its enormous size - it is bigger than the continental US - and impressive landscapes. He also saw what many saw before him. "Here lies immeasurable wealth of soil that has never been plowed or cultivated," he wrote, "and beneath it are ores, minerals and natural resources that have not in the least been used up nor even extensively explored."
And so it remains today. As I say, Zweig was not the first to find charm in these sunny lands. A long line of travelers and adventurers have said much the same thing. But it took a long time to get going, so much so that it became a joke: "Brazil, the land of the future and always will be."
Still, natural resource booms did help settle and build Brazil, as Zweig observes. Booms in lumber, sugar and cotton settled the north and created Bahia, Recife, Olinda, Pernambuco and Ceará. Gold settled Minas Gerais. Coffee raised São Paulo. Rubber gave life to Manaus and Belem. And on and on...
Today, though, Brazil seems to be putting it all together and the old joke has gone stale. Brazil is the leading exporter of a long list of agricultural commodities. Then there are the big oil discoveries off its coastline. And there is the ample soil and water, as I've written about before. Brazil's net debt is at a level that, in the words of The Financial Times, "makes much of the developed world green with envy."
Meanwhile, unemployment is low. The economy is growing 8-10% a year. Poverty from 2004-08 fell by half. Meanwhile, a growing middle class continues to make its presence felt - retail sales rose 30% in March alone. "There's nowhere else in the world that's had the dramatic change in the middle class like Brazil, not even China," says one analyst quoted inThe Wall Street Journal recently. "You've got an unfathomable amount of money there."
So what are the investment opportunities in Brazil today? I'll have a better handle on things in the coming months as I spend some time down there. But I have some initial thoughts to share here.
For a long time, Brazil was not a place to trust with one's money. But the rules these days are friendlier for investors. Yes, the laws are still complicated and taxes are still high. Labor laws are still outdated and often inflexible. Overall, Brazil is still not a great place to do business. It ranks 129 out of the 183 nations tracked by the World Bank. Yet it still has come a long way. As one partner at a leading international law firm put it, "For the first time in the history of Brazil, we have an excellent environment for investment."
There are plenty of places to look for those investments. Where are the needs most critical? In a word: infrastructure.
Sewage facilities are inadequate. The FT opines that here the "need for investment is perhaps greater than any other sector." While some 80% of Brazilians have access to clean water, less than half have access to a sewage system. And Brazil treats less than a third of its wastewater.
Roads are notoriously bad. Only 10% or so are even paved. As a result, freight costs eat up a third of the value of what's shipped. Sometimes, the freight never arrives. Recently, a McDonald's had to go a day without serving french fries because the supply truck never made it in. The roads affect most everyone since the roads handle some 68% of Brazil's transport needs.
The ports and rail links also feel the strain of a booming economy. Brazil's biggest port, at Santos near São Paulo, handles only a 10th of the traffic of big Asian ports like Hong Kong.
Another way to see these claims of weak infrastructure is to look at Brazilian steel use, which is very low. Brazilians consume only about 100 kilograms of steel per person. That number has barely moved since 1980! The Chinese consumed 30 kilogram of steel in 1980 and now consume 300 kilograms per person. European countries often top 500 kilograms. South Koreans use 1,200 kilograms per person! So there is a lot of room for steel consumption to grow in Brazil.
Lakshmi Mittal, the CEO of the world's largest steel company, summed it up well. "The level of consumption is well below the country's potential. It also indicates a lack of infrastructure investment in the last two decades."
Some of this is in the process of being fixed. Brazil has a huge port in the works near Rio, called Acu Super Port. It is a mammoth project - nearly two miles long, it will hold 10 deep-water berths. Brazil also has plans for more roads, a high-speed rail line between São Paulo and Rio and more.
The best way to invest in rising Brazilian steel use is through native companies. That's because the Brazilians are among the lowest-cost producers of steel in the world. Brazil sits on some of the lowest-cost and highest-grade iron ore and coking coal deposits in the world. Power costs are low thanks to hydropower, which provides four-fifths of Brazil's electricity. And the relative isolation of the Brazilian market from other big steel producers gives the home team a big advantage in freight costs.
The only tricky thing is the Brazilian real, a currency that has been strong of late and raises the cost of Brazilian steel. (We are a far cry from 1990, when Brazilian inflation peaked at 2,950%!) Finally, and somewhat ridiculously, Brazil still has import duties on steel.
Another fact that bodes well for steel use: Energy consumption is also remarkably low. Brazil consumes about 1.2 tonnes of oil equivalent per capita per year. That's less than half what Portugal and Poland use. And they are among the poorer members of the EU. The US uses 7.8 tonnes. Building a new and needed energy infrastructure for Brazil's expanding economy will consume a lot of steel.
Steel is just one idea, but there are many other sectors to invest in in the country. From a big-picture standpoint, it's hard not to like Brazil. As Zweig wrote, "In its geology, this gigantic empire lacks hardly any kind of ore, stone or plant." Finally, it looks like Brazil is taking advantage of its space. (Things would end badly for Zweig, though. Even Brazil couldn't beat back the demons. He committed suicide in Brazil in 1942.)
Regards,
Chris Mayer
for The Daily Reckoning
Joel's Note: Remember, right now you can grab a one-month trial to Chris' premium research service, Mayer's Special Situations, for only a buck. Here's a very short intro letter in case you're interested.
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| | | | Bill Bonner | | Bonds vs. Tech Stocks for Bubble Supremacy | |  | | Bill Bonner |
Reckoning from Ouzilly, France...
Nothing much happened on Wall Street yesterday.
And there's not much in the press today. The Financial Times talks of mergers and acquisitions, Australia's upcoming elections, and South Africa's drift towards Zimbabwe.
The International Herald Tribune (the overseas version of The New York Times) is concerned with elections in Haiti, Iraq bombings, and China's banking system.
Generally, you are better off not reading the paper. It causes you to think like everyone else, which is to say, not to think at all. Instead, you spend your time getting worked up about things too remote and too complex to understand...things that you can't do anything about anyway.
The issues are complex...but the motives are simple. The NYT and the FT want to sell papers. So they come up with stories that confirm readers' prejudices, flatter their vanities, and distract them from their own concerns and challenges. Readers are encouraged to ignore their own problems and meddle in the affairs of other people.
All we find of interest in the news this morning is that bankruptcies have risen to a 5-year high - just what you'd expect in a major correction.
The Wall Street Journal, meanwhile, carries an article entitled "The Great American Bond Bubble." The authors worry that bonds have gotten themselves into a bubble similar to tech stocks in 1999. You'll recall that back then investors were so sure new technology would pay off that they were prepared to pay astronomical prices for dizzy tech companies. Many of these companies had no realistic business plans, no revenue, no employees, and no hope of making money. Others were embryonic, with a tiny stream of income that they were sure would grow into a flood. It was not unusual for investors to pay 50 times earnings, or even 100 times earnings, for these stocks.
Well, just look at what is happening in the bond market, say the authors. Prices have gone so high - for government bonds - that investors once again are paying sky-high prices for tiny streams of income. In the case of America's inflation-adjusted 10-year notes, the TIPS, for example, investors are now paying more than 100 times the expected annual return.
Why?
Ah...you know the answer. Because there's a Great Correction going on. There's more evidence of it every week. The recent jobs report...new unemployment claims...the latest consumer spending figures...Japanese GDP...European industrial output...
..and sinking yields on Japanese and US government debt...
..all point to a Great Correction.
What can you do with your money during a Great Correction?
If you're smart, you know that most asset values are vulnerable. If you're investing for retirement in 5 years, for example, you're taking a big chance in stocks. If they follow the Japanese example they could go down for the next 5...10...15 years. If they follow the example from the US from the '30s...they've still got another 50% decline coming. Maybe more.
If you're 20 or 30 years old, heck, you can take the risk. Sometime between now and retirement, stocks are likely to trade at prices at least as high as they are now. But if you're 55 or 60 you've got to think about it carefully. The risk is that half your money will be gone when you need it. The reward is what...maybe a 10% gain? Maybe 20%? Not worth it.
The stock market has been shilly-shallying around - up, down, up - for the last 10 years. Investors have made nothing. The boomers are getting ready to retire. They figure they'd rather hold onto what they've got than take a chance on losing it - especially when the performance of stocks has been so poor.
The nice thing about US bonds is that you're sure to get your money.
The bad thing is that you're not sure how much the money you get will be worth.
But that's a problem for another day...
And more thoughts...
"Maria, you're a great investor... You've made good money."
We were asked to look at our daughter's finances. She was afraid she was missing opportunities or taking unnecessary risks.
But when we looked at her account statement we saw that she was doing very well.
"Maria, it says here that if you had invested your money in world stocks, generally, over the last five years you would have turned $10,000 into just a bit more than $11,000. But your investment portfolio has gone from $10,000 to more than $25,000 over that period. Very good. How did you do it?"
"I just bought that stock you told me to buy."
"What stock?"
"Iamgold."
"Oh..."
"But I think the stock went down recently. It's probably time to change to something different, don't you think, Daddy?"
"Hmmm... I don't know. You're not in a hurry. What you want to do is to find something that is likely to pay off and just stick with it until it does.
"Gold will probably go down if the economy continues to slump into deflation - which I think it will. But I don't think it matters. The bigger risk is getting wiped out by inflation. And the big opportunity, for you, is that when inflation comes a knockin' the price of gold is likely to start a rockin' and rollin'.
"So even if the price goes down, it's not likely to go down too low or stay down for too long. On the other hand, when people realize that their savings could be wiped out by inflation, you're going to see gold really fly. It's probably worth waiting for."
Regards,
Bill Bonner
for The Daily Reckoning
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