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The Daily Reckoning | Thursday, October 14, 2010 An impending high noon showdown between currency debasers and reality, Equity over debt: a Hindenburg tale of paltry returns and disastrous flight paths, Plus, Bill Bonner's thoughts on easy money, hard gold and...capers... ------------------------------------------------------- Expert Researcher Breaks His Silence To Reveal a Chance at FIVE Generations of Wealth... The next decade will change everything. In government. In the markets. In science and technology. Will you be ready for it? This shocking new presentation reveals how you could turn the next decade into a 5-generations wide stream of wealth for your family. It's fast, easy, and cheap. Start your shot at wealth by watching the presentation, right here. Commodities Rally With Everything Else And why they're still the better long-term play Joel Bowman Reporting from Colonia, Uruguay... The room was humming harder as the ceiling flew away When we called out for another drink the waiter brought a tray - From "A Whiter Shade of Pale" by Procol Harum Everything up; dollar down. That's been the trend of late, in anticipation of what the pundits are calling QEII - the Federal Reserve's earnest promise to further debase the currency through the purchasing of government bonds...and assorted other shenanigans and high jinks to be announced in due course. The thinking, if you can call it that, behind the Fed's program is both simple and simple-minded. By threatening to ignite an inflationary inferno, the world's central bankers - from Washington to the Far East - are hoping to "bring forward" future demand. Flooding the system with freshly-inked bills, they promise to make the dollar of tomorrow a little (or a lot) leaner than the dollar of today, thereby incentivizing savers to spend more on things their children won't have the chance to buy for themselves when there is no more money (of value) left in the bank. This kind of modern day monetary phlebotomy, whereby bankers promise to restore the strength of a hemophiliac economy by draining ever more of its crucial liquid, is, of course, nonsense. The fact that it works for a while, however, is key to the fraud. In the short term, people see all the "right" things - stocks, bonds, their national GDP - going up. They think they've hit upon an eternal sunrise. Then comes high noon...followed by the somber realization that afternoon is nigh. By nightfall, the eternal sunshine of the optimist's mind is left, once again, out in the shivering cold, struck by the reality that central planners can't stop nature from running its course. At the moment, however, a deadly high noon showdown seems a long way off. Stocks rose beyond 11,000 this week, tacking on another 75 points in yesterday's session alone. Commodities are on the march too. The Continuous Commodities Index (a basket of 17 major commodity market prices rolled into one composite index) hit a fresh, two-year high this week, with everything from the grains to silver, copper, lumber, cotton and crude oil all creeping higher. And that's to say nothing of gold, that curious outsider of the financial world. The spot price rose above $1,380 per ounce yesterday. Gold bulls, as the newswires enthusiastically inform us, already have "$1,400 in their sights." The metal could be flirting with a short-term correction, posit some. With so many foamy mouthed traders piling in on the buy side of the trade, a few brave souls reckon it's due for a quick snapback, possibly shedding $100 before it resumes its lunar trajectory. Maybe...but we'd rather be long central banker arrogance than short day trader enthusiasm, at least from an investment perspective. Traders will get it partly right and partly wrong along the way, in other words, but meddlers will always claim they know more than they can possibly know about the way the world works. Worse still, they always act as if they believe such a claim. And so, with men of such impossible confidence manning the world's printing presses, who would be willing to bet against gold over the long haul? Right now, the Dow/Gold ratio (assuming $1,380 per ounce gold and 11,100 on the Dow) is pretty close to 8:1. Historically, stocks become cheap and gold expensive at a ratio of between 1:1 and 2:1. In other words, when you can buy every company on the Dow Jones Industrial Average for the price of one or two ounces of gold, it's time to sell your metal and load into, what will then be, massively out of favor stocks. As for now, the sun is probably still on the rise. Everything is going up. Our bet is that this trend continues until, very suddenly, it doesn't. Video Presentation: Check Out This Canadian Penny Stock! This Canadian penny stock play just won the rights to an estimated $172.5 billion oil bonanza... The profit potential could be enormous for investors who get in early. Resident geologist Byron King has all of the details in this exclusive video presentation. There's still time to get in... Click here to watch the presentation immediately. (Turn your speakers on.) The Daily Reckoning Presents The Really, Really Long Bond Ian Mathias For the time being, income investors are probably better off being owners than lenders. Many solid US companies are paying dividend yields of 2%, 3% and 4%. Short-term corporate bonds, meanwhile, yield next to nothing. The bond market is getting nuttier by the day - offering ever- lower interest rates at ever-higher risks. The recent spate of 100-year bond issues illustrates the point. 100 years ago, back in 1910, Zeppelins were all the rage. After patenting his design at the turn of the century, Count Ferdinand von Zeppelin had successfully made his rigid airship the one and only legitimate form of flying transportation. True, in 1910 there were some country boys named the Wright Brothers tinkering with terribly unstable gliders and propeller flying machines. But the Zeppelin was the standard. You see, it just made so much more sense at the time...make a big cylinder out of the thinnest metal possible, fill it with cow intestines then fill those intestines with light, flammable gas; power the thing with a fire-breathing engine to float thousands of feet above ground... What's not to love? While the Wrights toiled on their design, Zeppelins ruled. The world's first airline, DELAG, flew Zeppelins exclusively. Zeppelins had conducted commercial cargo and passenger flights long before Americans risked their lives or merchandise with airplanes as we know them today. Zeppelins were a hit with the German military too, while in 1913 the American Army deemed the Wright model C "dynamically unsuited for flying." They had this nasty way of nose-diving and killing everyone on board, the Army said, and soon after discontinued its business with the Wright Company. So imagine this: You're an investor, alive and well in 1910. You have to chose to lend to one of these companies money for the next 100 years... Do you write Count Ferdinand a century bond, or do you loan the money to the Wright Brothers? The Wrights, as you know, had the right idea, even though the opposite seemed true at the time. Had you lent them money 100 years ago, there's a chance you'd get it back today, plus interest. Their company became the largest aircraft manufacturer in the world by the end of World War II and is now known as Curtiss-Wright, a publically traded component manufacturer with a $1.4 billion market cap. Count Ferdinand and his Zeppelin, however, slowly floated into an antiquated reality until the Zeppelin industry - quite literally - crashed and burned into New Jersey in 1937. Your best shot at getting your 100-year Zeppelin bond cashed today would be mugging the crew of the Goodyear Blimp. The moral of the story: The vast majority of people, your editor included, don't know squat about what the world will be like 100 years from now. We can guess, but little more. And in the "game" of investing, guessing is a scary thought. Better to know for sure, or as close to sure as you can get. Yet, the 100-year bond is now officially back in vogue. The last three months have seen the trifecta of century bond offerings: A stalwart American company: Norfolk Southern, arguably the oldest railroad operation in the US, raised $250 million in August when it sold bonds to investors due in 2110. A powerful multinational bank: AAA-rated Rabobank raised $350 million a month later selling 100-year bonds of their own. A struggling sovereign state: Mexico borrowed $1 billion in early October, which most of its lenders won't see until this time in 2110. Here's the best part: For the privilege of borrowing "investor" capital into the next century, not one of these issuers paid over 6%. This is the latest chapter in the most powerful trend in investing at the moment: the hunt for yield. Investors are so hungry for high- yielding, stable return they are willing to take outlandish risks...like buying a 100-year bond from a government that has suffered two major currency crises and one sovereign default during the last 30 years. Why? As with most financial bubbles, ask the Fed. Having pushed interest rates to 0%, the Federal Reserve has made the cost of borrowing money around the world its cheapest...ever? Microsoft recently sold a wave of three-year bonds at a stunningly low 0.8% yield. Under such low-rate circumstances, companies can raise cash for almost nothing. Investors, meanwhile, are left gnawing on meatless bones... If you can finance your retirement on 0.8% annual returns, please tell us your secret. So the average investor has to choose between a savings account that yields 1%, bonds that might yield even less and a stock market that just suffered its biggest collapse since the Great Depression. This explains most investment trends of 2010. Appetite for yield is why the S&P Dividend Aristocrats index is outperforming the S&P 3-to-1 this year. It's why, according to Dealogic, US companies have sold a record $168.5 billion in high-yield bonds so far in 2010. And it's why investors are willing to entertain the idea of letting railroads, banks and struggling states borrow their hard-earned dollars for a hundred freakin' years. But the same way there are two sides to every story, not all century bond buyers are foolhardy investors. In fact there's a good chance that, should deflation worsen in the US, 100-year bond owners will be able to sell their bonds on the secondary market for a premium. Here's one example: Norfolk Southern Railroad has issued 100-year bonds before. As of this writing, it would cost an investor $1,110 to buy a $1,000 century bond Norfolk Southern issued in 2005. That premium to par value is a sign of investor demand...the same way stock investors pay insane earnings multiples for "hot" companies like Google. Even though overpaying for that Norfolk Southern bond will cut it's yield from 6% to an effective rate of 5.3%, investors can't find better yield elsewhere...or they're betting they can sell those bonds to a greater fool down the road. In bond trading parlance, income investors are getting pushed "out on the curve." Rates for US Treasuries and short term, investment-grade corporate debt are so dismal that anyone seeking meaningful income (like over 5%) has to take on an unusual amount of risk. Either they must take on default risk by lending to sketchy companies teetering on bankruptcy. Or they must expose themselves to interest-rate risk by lending for obscenely long periods...like 100 years. Maybe, 100 years from now, a railway from West Virginia to New York (or the coal that it's carrying) will be as useful as the Hindenburg. What will become of those Norfolk Southern 100 year bonds then? Geesh, will the Fed even be around in 2110? It wasn't in 1910. If the dollar makes it to 2110, it'll be one of the longest lasting currencies in the history of the world... What will those bonds be worth if they have to be redeemed in Ameros? Or yuan? These are all questions Norfolk Southern century bond buyers are willing to dismiss...for a measly 5.9%. As Eric Fry and Bill Bonner have reckoned in these pages before, we may be witnessing a sort of "peak debt" in the investment world. Earlier we mentioned that remarkable bond issue from Microsoft. It's worth adding, the company currently pays a 2.6% dividend. So if you were forced to buy its debt or its equity, which would you choose...three years of 0.8% and no chance of capital appreciation, or three years of 2.6% dividends and a stake in future earnings? We'd sooner take our chances with a solid yield and an uncertain future than a bond coupon that inflation will certainly consume. We don't exactly crave a stake in the company that brought you the Zune, but with bonds at 0.8%...what's the point? There is money to be made in bond trading, like always. But for investors looking for stable returns and substantial yields, corporate debt - or any debt for that matter - ain't what it used to be. Unlike years past, corporate equity is now the source of the best income risk/reward ratios. To repeat: income investors, for the time being, are better off being owners than lenders. Regards, Ian Mathias, for The Daily Reckoning P.S. If you're looking for stable, high-yielding dividend stocks to add to your portfolio, you have to check out Lifetime Income Report. For a remarkably inexpensive subscription, we'll send you our favorite dividend opportunities every month, plus all the market analysis you need to make informed income investment decisions. For a free preview, click here for the latest Lifetime Income Special Report... Inside you'll find one of our favorite new income opportunities. Now YOU Can Beat The Bastards At Their Own Game... Hidden Gov't Documents Let You Predict Stock Moves Imagine what you could do with this intelligence... Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too! Click here to watch this shocking presentation right now. Bill Bonner Why Bernanke's Money Printing Promises Spell Disaster Bill Bonner Reckoning from Buenos Aires, Argentina... Today, we're headed up to the ranch... Which means we're going to take a few days off from these daily reckonings. Instead of reckoning with gold, fed policy, stocks and interest rates...we're going to reckon with things that are easier to understand but harder to actually do anything about. Cattle. Water. Grapes. Capers. Capers? Yes, apparently, the high, dry valleys are good for growing capers. "Why bother," asked a friend in Paris. "Aren't you supposed to be enjoying that place? You don't want to work when you go there." Au contraire. We like working. Especially on things we know nothing about. Truth is, we barely knew what capers were. Those little salty things that they put in with fish, olives, pickles. We don't really know what they do with them. But we're going to plant some anyway to see how they do... It helps keep the people up there busy. Otherwise, they have no jobs. We feel the heavy weight of a landowner's responsibility...to make the farm more than just a place to relax. We have to try to make it pay! Meanwhile, stocks, commodities, practically everything is slobbering...breathing hard...hot and bothered. Probably capers too. Why? Because everything points to more easy money from the Fed. And everyone knows what easy money does. It causes prices to bubble up. Asset prices, that is. It doesn't do much for the economy - not when the economy is de-leveraging. But it can really cause havoc in the financial markets. The Dow went up another 75 points yesterday. Oil is up to $83. Gold is headed to $1,400 - and after that, the moon. Whee! What fun it is to think about all that new, Fed-created money bubbling into the markets...pushing up everything in its path... Ben Bernanke gave the Japanese some advice about 10 years ago. He said that if their economy was stuck in the doldrums it was their own damned fault. He didn't put it that way. He said their problems were largely "self-induced." Which is a polite way of saying it was their owned damned fault. He made it clear that he wouldn't let that happen to him. He'd use the tools at his disposal to light a fire under the economy. Anyway, that's what he told them. And now, here he is. In Tokyo. Well, not literally in Tokyo. You know what we mean. He's faced with almost the same set of problems that faced the Japanese - a sluggish, de-leveraging, funky kind of economy. "Across the US, long recovery looks like recession," says The New York Times. So far, Bernanke has done about the same things they Japanese did. And so far, he's gotten about the same results. But investors are betting that he won't stop there. They're betting that they can take him at his word...that he'll pull the trigger on enough quantitative easing to light up the whole world. Or blow it up. Yes, the markets seem to be jumping for joy at the prospect. Ben Bernanke is supposed to announce a program of easy money...not just a little easy money...but a lot of it. Analysts are talking about the Fed buying between $100 billion and $1.5 trillion in bonds. Of course, investors have probably already priced that kind of QE into the price structure. So, what are they gonna do if Bernanke does the expected thing? Ben Bernanke's momma didn't raise no moron. He knows the whole world is watching. If his gesture falls short of what investors expect, they'll sell. And if he doesn't do something dramatic, they'll accuse him of being a coward...and they'll sell too. Only if he surpasses their expectations will asset prices really take off. And, of course, the dollar will fall. Which is what he's hoping for. It will be a disaster for the economy. Printing press money always is. But it should be fun to watch. *** The story of the rescued miners brought tears to our eyes. With so much claptrap and folderol in the news, it was a delight to see a real triumph...a genuine victory...for the human race. We tip our hat and raise our glass to the whole rescue team. Especially to those drill operators from Pennsylvania. Good on you! 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

The Argentine Boom...And Why It’s Killing the Peso “This country is in a boom,” said the editor of a financial magazine in Buenos Aires. “Everything is going up. Everything is selling. And inflation is roaring at 25% per annum.” To hear him tell it, Argentina is everything America wishes to be. Its people shop. Its restaurants are full. Its economy is growing at more than 8% a year. Why? The Illusion of Modern Money Will the US Economy Ever Again See Full Employment? US Debt on the Shoulders of 90 Million People Well, just the federal budget deficit – alone! – means that each, each, EACH of the 90 million American private-sector workers in the Whole Freaking Country (WFC) must produce enough profit by their labors (as they are the only workers who can actually make a profit from their labors) to pay down another $18,889 in federal debt accumulated over the last year! Bond Investors Are People Too The Duck-Like Noise of a One-Legged Economy Tax Revenue’s Flat, Spending’s Out of Control October’s half over already, so in honor of the Halloween holiday month we’re posting a Reason TV video clip on the US’ fiscal house of horrors, in 3D no less! Well... that’s assuming you have the old-school red and green 3D glasses on hand. According to the Congressional Budget Office, government spending has skyrocketed while tax revenue as a percentage of GDP has stayed consistent over the past seven decades. The Fed’s Teenage Temper Tantrum A letter to Senator Scott Brown – The Fed’s Political Interference Must Be Stopped The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor