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The Daily Reckoning | Wednesday, August 18, 2010 Developed vs. developing: which one's better, measure for measure? A closer look at capital controls and actual flights to safety, Plus, Bill Bonner on what happens when consumers stop consuming and the changing of the leaves in France... ------------------------------------------------------- Government Retirement Headed for Broke - Shocking New Presentation... It's not in the news. The government wants to keep it quiet. But your retirement "safety net" officially begins to shrink this September 30. That's why you simply must watch this shocking new presentation - and get all the details on the "other" government-backed pension program that can pay you thousands of dollars each year. Learn the full story in this epic new presentation, right here. Shaking Off the Fears of Emerging Market Investing And the increasingly blurry lines between "developed" and "developing" worlds Eric Fry Reporting from Rancho Santana, Nicaragua... Throughout our working years, most of us try to ensure that we receive adequate compensation for our labors. We try to receive an "honest day's pay for an honest day's work." And if there is to be any dishonesty in this calculation, we prefer that we be dishonestly overpaid. But when it comes to investing, most of us are much less exacting. We simply expect to do okay "over the long run." And because we expect to do okay over the long run, we are very tolerant of disappointing returns over the short run. In other words, we expect to get underpaid from time to time. Such complacent - almost fatalistic - attitudes usually produce subpar results. But not always. During most of the last 30 years, simply buying and holding US stocks would have produced a satisfying result. There was enough stock market gold on Wall Street to line the pockets of almost every prospector. But those days are gone. During the last ten years, the S&P 500 Index has produced a negative total return. Over the identical timeframe, most indices of Emerging Market stocks doubled or tripled. Clearly, the buyers of US stocks did not receive "an honest day's pay." These investment results from the last ten years are not necessarily prologue to the next ten years. But what if they are? What if the glory days of "buy and hold" are gone for good? A couple days ago, your editor examined this troubling thought before a small group of investors here in Rancho Santana, Nicaragua. In a brief presentation entitled, "Measure for Measure - Defining Risk in a Post- Bubble World," your editor suggested that the time has come to carefully evaluate the measure of risk one is taking for each measure of return. Now is the moment, he asserted, 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, your editor pointed out that 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. In the post-bubble world: 1) The West is characterized by: a) Rising indebtedness at every level of society, b) Towering "legacy" pension and welfare obligations and; c) Debilitating and hostile regulatory regimes. 2) "The Rest" is characterized by the opposite. As the global financial markets increasingly reflect these dual trends, the distinction between "Developing" and "Developed" is blurring to the point of utter irrelevance. Notably, the stock markets of the Developing World are becoming less volatile...at least relative to those of the Developed Markets. Furthermore, Developing World stock markets are delivering much higher returns per unit of volatility. In fact, foreign stocks in general are delivering high relative returns and low relative volatility. During the last ten years, for example, while the S&P 500 was busy delivering a loss, the SoGen International mutual fund was delivering an average annualized return of nearly 12%. Additionally, the SoGen fund produced its returns with 30% less volatility than an S&P 500 Index Fund! Based on numbers like these, there's no good reason to blindly buy an S&P 500 Index Fund. But of course, we all know that solid facts sometimes produce flimsy deceptions. So the point of this discussion is not to condemn US stocks for all time, but merely to ask the questions, "Why are you buying what you are buying? Are you getting paid adequately for the risks you are assuming?" These questions are easier to answer clinically than they are to resolve emotionally. Even if, for example, a dispassionate analysis of the data would lead us to allocate the majority of our portfolio to Brazilian, Indian and Norwegian stocks, many of us would have a hard time pulling the trigger. US stocks simply feel safer. In response to such anxieties, William Shakespeare's Measure for Measure provides an insightful counterpoint: "Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt." In the column below, Doug Casey, founder of Casey Research, examines some of the doubts that threaten to betray us... Tired of trading "gurus" giving you lousy recommendations that lose money? How's This for a WINNING STREAK! Last year, I recommended 37 trades to my readers, every one a winner! With a total gain of 4,647% you could have claimed $232,381 in Profit! See for yourself right here... The Daily Reckoning Presents Protecting Your Cash, Part II Doug Casey An Interview with Doug Casey from Cafayate, Argentina [To read Part I of this interview, click here] Interviewer: Concerning the risk of foreign exchange controls here in the US, do you think people will have any warning at all? Doug: I think it's going to come out of left field. It always does, with at most an official denial just before it happens. In August 1971, Nixon devalued the dollar, which immediately dropped against gold and all foreign currencies. I think there's a reasonable probability that the government will do that again. Gold may not be part of the equation, but they may decide to put in some sort of fixed exchange rate between the dollar and various foreign currencies. The reason for thinking this is simple: with all the dollars outside the United States devalued by that much, that much of a liability just vanishes into thin air. And in the short term - it's never a long-term fix - US exports would go up. This would "stimulate" the domestic economy. Imports to the US would go down, which would make for fewer dollars leaving the US and adding to the $7 trillion overhang the US already has. Interviewer: I know you hate making predictions, but can you tell us if your "guru sense" is tingling on this so strongly that you think it could happen this year? Or is this more of a 2011 possibility? Doug: The timing on this is really unpredictable. These people don't have a plan. They're acting "ad hoc" to whatever seems most urgent. All the so-called "economists" around government today are really just political hacks. Their worldviews are totally unsound. Interviewer: With all the problems the US has, do you think this could happen now? Could we be reading about new exchange controls on CNN.com this afternoon? Doug: Sure. Although they typically pull these stunts over a weekend. I expect something of this nature to happen any time between tomorrow morning and two years from now. If some form of currency controls are not instituted within two years, I'm going to be genuinely surprised. So, if you're going to take action, you should start heading for the exits now. Not next month, and certainly not next year. Interviewer: For those who don't take action until it's too late, under the scenarios you mentioned, they'll still be able to get money out. It's just that it might be more difficult, time consuming, humiliating, and certainly more expensive to do. For every $100,000 they move, only $90,000, or $70,000, or whatever will get to where it's supposed to go. Can you foresee a more Stalinesque alternative, where they simply can't get anything out at all? Doug: Hopefully not. Anything is possible, and things can change so rapidly...but I'd hate to think of what conditions would be like if they ever became that draconian. It'd be so bad on other fronts that there would be all sorts of even more urgent things on your mind - Americans would get a very quick and unpleasant education in the real meaning of Maslow's hierarchy. Interviewer: Like the Mad Max-style neobarbarians at the door with a battering ram. Doug: Exactly - that's when you'll definitely want to be in more pleasant climes. I'd want to be watching it on my wide-screen, in comfort, not out my front window. Interviewer: We're talking about extremes here... Doug: You know, back in the 1970s there was a spate of books published on financial privacy. In those days, financial privacy was still possible. Now, it's not only no longer truly possible, short of embracing a completely outlaw lifestyle, it's very dangerous to write about it or even talk about it. I kid you not. These days, people who ask too many questions about privacy techniques may well be government stooges... There's lots of handwriting on the wall. All those books on financial privacy were published in the '70s - if you look on Amazon, you can still find them. But there's nothing really worth reading that's been written on the subject in 20 years. It's actively discouraged by the government. I could name - but I won't - at least two authors that got themselves into a real jackpot this way. Forget about the First Amendment. In fact, I even feel uncomfortable talking about it in this interview. So let me once again emphasize that I advise everyone to stay fully within the bounds of the law. That's not for moral reasons, of course; there is no morality to the law. It's strictly for reasons of practicality. Risk-reward ratio. Interviewer: Understood. Loud and clear. Any more investment implications, besides foreign real estate, that you want to draw attention to here? Doug: Yes - and it's another reason for those so very clever boys in Washington to embrace currency controls. They will be disastrous for the US economy, but there's a very good chance that, in the short run, they'll be very good for the stock market. That's partly for the reasons I already mentioned about it temporarily boosting US exports, and hence earnings of US exporters, but also because all that money that can't leave the US will have to go into something. Investors will probably want to put it into equity, rather than debt, while the dollar is depreciating. Again, it's disastrous over the long term, but as a short-term play, buying the blue chips the day the exchange controls are instituted could be a good move. Interviewer: You'd buy the Dow? Doug: I might, if I couldn't think of anything more intelligent or original to do. We'll just have to see what the situation is like. Interviewer: Thanks again, Doug - you've given us a lot to think about. Doug: My pleasure. The Casey Research Team, for The Daily Reckoning Joel's Note: Doug Casey of Casey Research, author of the best sellers Strategic Investing, Crisis Investing and Crisis Investing for the Rest of the 90's, has lived in seven countries and visited over 100 more. He has appeared on scores of major radio and TV shows and remains an active speculator in the stock, bond, commodity, and real estate markets around the world. In his spare time, Doug engages in competitive shooting and plays polo. From Hulbert's #1 Ranked Advisory Letter Over a Five-Year Period... Even if Gold hits $2,000 by the end of this year... here's a hidden way you can get in for less than one cent per ounce Over the next two years, you'll witness the greatest surge in gold prices in market history - at least 119% above where gold sits today, as I write this. But even better, I've just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call "penny-per- ounce" gold. That is, doing this is a "backdoor" way to own as much of a position in gold as you like... for the equivalent of paying a single cent per ounce. Details Here. Bill Bonner Consumer Debt Repayment: The Sign of a Lengthy Correction? Bill Bonner Reckoning from Ouzilly, France... US stocks have been teetering on the top of a wall for weeks. Someone should give them a shove! But yesterday, the Dow rose 103 points. Gold was up $2. This leaves investors hoping, wondering, waiting for another day. "Maybe I can make some money in the stock market, after all," say the mom & pop mutual fund buyers. "I gotta stay in this market; it's going up," say the pros. And so it goes... But the Great Correction continues. Here's the latest from Bloomberg: US Household Debt Shrank 1.5% in the Second Quarter American households pared their debts last quarter, closing credit card accounts and taking out fewer mortgages as unemployment persisted near a 26-year high, a survey by the Federal Reserve Bank of New York showed. Consumer indebtedness totaled $11.7 trillion at the end of June, a decline of 1.5 percent from the previous three months and down 6.5 percent from its peak in the third quarter of 2008, according to the New York Fed's first quarterly report on household debt and credit. The report reinforces forecasts for a slowing economy in the second half of 2010 as consumers hold back on spending and rebuild savings. The Fed last week said the recovery would be "more modest" than it had anticipated and announced it would keep its securities holdings at $2.05 trillion to prevent money from draining out of the financial system. "Everybody understood coming into this recovery that the need for reduction in debt and deleveraging was going to be a pretty significant headwind," said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. "Households in particular continue to be much more conservative than in the recent past." The Fed last week said high unemployment, lower housing wealth and tight credit are restraining the household spending that makes up 70 percent of the world's largest economy. Policy makers repeated a pledge to keep interest rates low for an "extended period" to keep the recovery going. The jobless rate stayed at 9.5 percent in July and has remained above 9 percent since May 2009. Consumer debt increased dramatically in the Bubble Epoque. Paul Wright explains: In 2005, America's 164 million credit card holders charged $2 trillion to their credit cards - amounting to $12,500 per credit card holder. This contributed to massive consumer debt, which rose over seven times in 28 years - from $355 billion in 1980 to $2.6 trillion in 2008. By 2008, consumer debt increased seven times, while the savings rate was seven times lower than in 1980. Now consumers are paying down their debt - or defaulting on it - at a rate of about 6% per year. We don't know where this process will go, but if consumer debt is to be cut in half, it will take about 7-10 years, at this rate. In the meantime, The New York Times calls America's nationalized mortgage lenders, Fannie and Freddie, "zombies." But it says they must be "tolerated for a while." The amount of mortgage payments in arrears is increasing. And the Fed is back in the bond market buying federal government debt. It bought $2.55 billion worth of Treasury debt yesterday. The moaning and whining...the bailouts and boondoggles...the crackpot solutions and ditzy diversions - everything is normal! And more thoughts... The weather in France has turned autumnal. It is drizzling this morning. We started a fire in the kitchen, just to make it a little cheerier. "This has been a great summer," Elizabeth sighed. "We've had four of the children with us...they've all had a good time. No one got too upset or too out-of-line. We didn't have any trouble with the neighbors. And the weather was good - at least for a few days." A few of the neighbors came over last night for a barbecue. The wind was blowing. But it wasn't too cool. So, Damien, the gardener/handyman, brought over some beef that he had slaughtered a couple of days ago and cooked it. Christine, a red-haired woman from across the road, brought a chocolate cake. Other guests brought wine - some from Bordeaux...some from Burgundy. "August is practically a magical month for us," said one of our French guests. "We look forward to it all year long. Because the weather is usually very nice. And it's when almost everyone takes a vacation. We spent two weeks in Burgundy. It was delightful. Christine's brother got married. So we combined the wedding trip with a vacation. "Have you ever been to Burgundy? It's not at all like around here. It's a much richer area. I mean, the earth is richer...so the towns are richer...and there are more of them. You go a few kilometers, and there's another prosperous little town, usually with an old chateau. "Burgundy was the last area that was joined to France...by Louis 14th, I think. The people are very nice. I was surprised by how warmly we were greeted. You know, the French are not always very friendly to strangers. But Christine's brother lives there so we were introduced to many people. And I found them exceptionally charming and friendly. Even total strangers were nice. We had a great time." "It would be so nice to be able to get out and explore France," said Elizabeth later that night. "We haven't really seen anything much, even though we've been here for more than 15 years. But that's what you get when you buy a place. Well, it's what you get when you buy a big, rundown place like this. You spend all your time - every vacation - fixing it up. And since you have a place of your own, it doesn't make sense to go and rent a room in a hotel...or a little house somewhere. "And, of course, then the children become attached to it and look forward to coming here. "But what a nice summer it was. And now it's almost over. The children are leaving. Edward leaves tomorrow. I'm driving him and [his cousin] Catherine to Poitiers to the train station. And then, Henry, Jules and Maria leave on Friday. It will be just us and your mother left here. I'm afraid it's going to be very lonely and sad...I hope the sun comes out..." "Don't worry," said her husband, sounding ironic, but completely in earnest, "we have each other." "Yes..." Elizabeth replied, the edges of her mouth turning down ever- so-slightly. Regards, Bill Bonner for The Daily Reckoning