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The Daily Reckoning | Wednesday, December 22, 2010 Fight or flight? How best to deal with falling empires, Caipirinhas and currency questions from Brazil, Plus, Bill Bonner on invisible borders and plenty more... ------------------------------------------------------- Five Market "Wealth Quakes" Could Land You 10,720% Gains in the Next 13 Months New presentation reveals shocking 2011 predictions! These five "Wealth Quake" events could make you 10,720% richer in the next year...just for starters. But you must hurry! This epic presentation expires soon. For the biggest shot at huge wealth - watch this right now. Economies in Motion The Cyclical Nature of Economic Dominance Eric Fry Reporting from "Rio de Laguna"... Today's Daily Reckoning offers something for everyone...or perhaps nothing for anyone. You be the judge. The first guest essay, authored by Simon Black, a self-proclaimed "permanent traveler" and "free man," addresses the emotionally charged debate between rabid patriotism and expedient self-preservation. Specifically, Black argues that one's birthplace may confer opportunity, but it should not impose compulsory lifelong obligations. "Nobody is born with a mandatory obligation to invisible lines on a map," he asserts. Black's arguments will sound treasonous to some Daily Reckoning readers, but compelling and provocative to others. We don't take sides in this debate, but we consider the debate intriguing and worthwhile, not matter what side you take. More broadly, Black's arguments raise into high relief one very valuable investment insight: Economies are not static; they are dynamic. They are always and forever progressing through cycles - from growth to recession; from vigor to fragility; from dominance to decline. And once an economy "hits bottom," it often finds the collective means, innovation and determination to revive itself, and resume a new phase of growth. No country better illustrates the cyclicality of economic conditions than Brazil - a perennial also-ran that is becoming an exemplar of economic dynamism. For so long did Brazil fail to achieve its obvious potential that it became the brunt of an infamous insult: "Brazil is the next great country...and always will be." But this joke is growing old...and inaccurate, as the nearby chart illustrates. The respective unemployment rates of Brazil and the US have flip-flopped during the past decade. Nine years ago, the Brazilian unemployment rate topped 12%, while the US unemployment rate was less than half as high. Today, the US rate is hanging up around 10%, while the Brazilian unemployment rate is roughly half as high. Brazil may not be the "next great country," but it is making serious strides away from being a chronically underachieving country. Meanwhile, the Unites States, arguably the "greatest country" on the planet, is struggling mightily just to arrest its decline toward marginality. In today's second guest column, Chris Mayer, editor of Capital & Crisis, presents some fascinating insights about Brazil's resurgence. Chris recently conducted an investment due diligence trip to Brazil. Upon returning from this South American hotspot, Chris shared a variety of (mostly bullish) insights with his subscribers. We have excerpted one of those insights to re-publish in today's edition. Therefore, please enjoy today's "double issue" of The Daily Reckoning. And as you enjoy it, please consider these two very different essays as complementary parts of the identical observation: Economies are perpetually in transition from weakness to strength...and back to weakness again. Because this tendency continuously influences financial market trends, investors cannot afford to ignore it. Citizens, on the other hand, can afford to ignore this tendency...at least most of the time. But maybe not all the time...or in every single circumstance. Let the reader decide! Chris Mayer's Special Situations Presents... Did You See The Video About The American Nuke Bomb LOST Under Ancient Ice Fields? Way back in 1968, an American B-52 crashed in northwest Greenland... Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet... But there's an unknown penny stock set to rise 2,000% from this sorry situation. Sound unbelievable? Watch this presentation for proof... The Daily Reckoning Presents Is A Police State Worth Fighting For? Simon Black In 43 BC, over 2,000 years ago, warring consuls Antony, Lepidus, and Octavian were duking it out with each other over control of Rome following Julius Caesar's assassination the prior March. Each had legions at his disposal, and Rome's terrified Senate sat on its hands waiting for the outcome. Ultimately, the three men chose to unite their powers and rule Rome together in what became known as the Second Triumvirate. This body was established by a law named Lex Titia in 43 BC. The foundation of the Second Triumvirate is of tremendous historical importance: As the group wielded dictatorial powers, it represented the final nail in the coffin in Rome's transition from republic to malignant autocracy. The Second Triumvirate expired after 10 years, upon which Octavian waged war on his partners once again, resulting in Mark Antony's famed suicide with Cleopatra in 31 BC. Octavian was eventually rewarded with nearly supreme power, and he is generally regarded as Rome's first emperor. Things only got worse from there. Tiberius, Octavian's successor, was a paranoid deviant with a lust for executions. He spent the last decade of his reign completely detached from Rome, living in Capri. Following Tiberius was Caligula, infamous for his moral depravity and insanity. According to Roman historians Suetonius and Cassius Dio, Caligula would send his legions on pointless marches and turned his palace into a bordello of such repute that it inspired the 1979 porno film named for him. Caligula was followed by Claudius, a stammering, slobbering, confused man as described by his contemporaries. Then there was Nero, who not only managed to burn down his city, but was also the first emperor to debase the value of Rome's currency. You know the rest of the story - Romans watched their leadership and country get worse and worse. All along the way, there were two types of people: The first group was folks that figured, "This has GOT to be the bottom; it can only get better from here." Their patriotism was rewarded with reduced civil liberties, higher taxes, insane despots, and a debased currency. The other group consisted of people who looked at the warning signs and thought, "I have to get out of here." They followed their instincts and moved on to other places where they could build their lives, survive, and prosper. I'm raising this point because I'd like to open a debate. Some consider the latter idea of expatriating to be akin to 'running away.' I recall a rather impassioned comment from a reader who suggested, "leaving, i.e. running away, is certainly not the proper response." I find this logic to be flawed. While the notion of staying and 'fighting' is a noble idea, bear in mind that there is no real enemy or force to fight. The government is a faceless bureaucracy that's impossible attack. People who try to do so usually discredit their argument because they become marginalized as fringe lunatics. Violence is rarely the answer, and it often has the opposite effect as intended, frequently serving to bolster support for the government instead of raising awareness of its shortcomings. Unless/until government paramilitaries start duking it out with citizen militia groups in the streets, this is an ideological battle...and it's an uphill battle at best. Government-controlled educational systems institutionalize us from childhood that governments are just, and that we should all subordinate ourselves to authority and to the greater good that they dictate in their sole discretion. You're dealing with a mob mentality, plain and simple. Do you want to waste limited resources (time, money, energy) trying to convince your neighbor that s/he should not expect free money from the government? You could spend a lifetime trying to change ideology and not make a dent; people have to choose for themselves to wake up; it cannot be forced upon them. And until that happens, they're going to keep asking for more security and more control because it's the way their values have been programmed. When you think about it, what we call a 'country' is nothing more than a large concentration of people who share common values. Over time, those values adjust and evolve. Today, cultures in many countries value things like fake security, subordination, and ignorance over freedom, independence, and awareness. When it appears more and more each day that those common values diverge from your own, all that's left of a country are irrelevant, invisible lines on a map. I don't find these worth fighting for. Nobody is born with a mandatory obligation to invisible lines on a map. Our fundamental obligation is to ourselves, our families, and the people that we choose to let into our circles...not to a piece of dirt that's controlled by mob-installed bureaucrats. Moving away, i.e. making a calculated decision to seek greener pastures elsewhere, is not the same as 'running away'...and I would argue that if you really want to affect change in your home country, moving away is the most effective course of action. The government beast in your home country feeds on debt and taxes, and the best way to win is for bright, productive people to move away with their ideas, labor, and assets. This effectively starves the beast and accelerates its collapse. Then, when the smoke clears, you can move back and help rebuild a free society. Regards, Simon Black for The Daily Reckoning [Ed. Note: Mr. Black describes himself as an international investor, entrepreneur, permanent traveler and, perhaps most importantly, a free man.] Is Brazil For “Real?” Chris Mayer "We were received with a hospitality hardly to be equaled...for [Brazil] asks neither who you are nor whence you come, but opens its doors to every wayfarer." - Louis Agassiz and Elizabeth Cabot Cary Agassiz, A Journey in Brazil (1879) I recently spent two weeks in Brazil on a four-city tour - in Campo Grande, Sao Paulo, Florianopolis and finally Rio de Janeiro. What can I say about the experience? I can say that the caipirinha - Brazil's national drink - is a potent cocktail; Brazilian meats are very salty; Brazilian desserts are very sweet. This taste for the extremes of the flavor spectrum extends to Brazil's monetary brand, as well. Today, the Brazilian real is strong (and the dollar is weak). The real is now at a 10-month high against the US dollar (having risen 40% from its lows in early 2009). This prompted the Brazilian finance minister to threaten weakening the real. You've probably heard of his comment about a "currency war." What he fears is that the strong real will hurt Brazil's exports by making Brazilian goods more expensive, hence weakening the Brazilian economy. It is a tired line of reasoning. This idea that a country gets rich by destroying the value of its currency is a weed that won't go away no matter how many times you pull it from the soil. What's curious about this notion cropping up in Brazil is that you'd think a Brazilian would appreciate the dangers of weakening a currency. Brazil has had a habit of blowing up its currency over the last 60 years. From 1942 to the present, Brazil went through eight different currencies: Mil Reis, 1833-1942 Cruzeiro, 1942-1967 Cruzeiro Novo, 1967-1986 Cruzado, 1986-1989 Cruzado Novo, 1989-1990 Cruzeiro, 1990-1993 Cruzeiro Real, 1993-1994 Real, from 1994. The present-day real is but a teenager, a mere youth sprung from a bad family. Yet it is among the world's strongest currencies today, bolstered by the commodity wealth and strong growth rate of Brazil's economy. Say what you will about the US dollar, which has been a poor currency as far as retaining its purchasing power over time, it's never gotten so bad that we had to start over - at least not yet. Brazil's experience makes the dollar look like a gold standard. It was not that long ago that Brazil's inflation rate hit 2,700%. It happened in one 12-month period from 1989-1990. Even as late as 1999, Brazil was a financial basket case. In 1998 and 1999, its finances were such a mess that Brazil got the biggest IMF rescue package in history up to that point, $41.5 billion. During the 20th century as a whole, Brazil had a cumulative inflation rate of more than a quadrillion percent. If you were a net saver in Brazil and kept that money in Brazil's currency, you lost big. You might as well have set the money on fire. Today, Brazil is in a different position. The currency is so strong, its politicians fret. American travelers find no bargains in the shops of Sao Paulo or Rio. Brazil, too, has huge currency reserves and is now a net creditor, not a debtor. Brazil is even accumulating gold - the real thing. We met with an economist on our trip there who made a presentation that showed Brazil's central bank has 5% of its reserves in gold - and it's been buying more. Today, US investors go out of their way to buy products that give them exposure to Brazilian reais, instead of US dollars. It's incredible when you think how much things have changed in just the last 10 years. Of course, Brazil could screw it up again. There are some worrisome signs. The new president is Dilma Rousseff. She is a former Marxist guerrilla. Captured in 1970, she was beaten and tortured. Hers is a quite a tale. But she has since mellowed out, supposedly. Most see her as simply continuing the policies pursued under former President Lula. But we'll see... As with any emerging market, there are big problems, but also big opportunities. Still, Brazil's economic challenges seem less complicated and smaller than those in the US, where debt and deficits are much larger. And currency screwups are relative. Forced to make a choice, I'd rather bet on the Brazilian real than the US dollar. (But gold is the best currency of all.) Regards, Chris Mayer, for The Daily Reckoning Joel's Note: Chris recently sent his year-end wrap up to readers of his Capital & Crisis investment newsletter. In it, he took a look at some of their key holdings and also provided a bit of a "report card" summary of the C&C portfolio performance. Here's a passage that caught your editor's eye... We're sure Chris won't mind us pinching it so we can reveal it to our faithful Daily Reckoners: "...the overall average gain per recommendation is up to 25.8%, with a holding period of about 1.5 years. Annualized gains come to about 16.1% since July 2004. Considering the rough terrain over that time - the overall market's return is less than 2% annually - I'd say we've had a good run." There's not really a lot more to be said, is there? Except, perhaps, that you can employ Chris' research for less than you'd pay for a year's subscription to most mainstream financial magazines. Here's a direct link to the C&C order form. We can't really make this any easier... Secure Your Own Retirement Treasure. Introducing... Nine Simple Ways You Can STILL Get Rich With Gold Even as gold soars to record new highs, a respected Harvard geologist reveals how you can STILL use gold nine different ways to get rich. Get the details on this epic profit forecast - right here. Bill Bonner Just Print More Money: The Easy Way to Manage and Economy Bill Bonner Reckoning from Los Perros, Nicaragua... You can't say it didn't work. At least one of Mr. Bernanke's aims was realized. He went into the bond market, and bought US debt, in order to lower long-term interest rates. That was a bust. Long rates went up, not down. He also wanted to raise inflation rates. No success there either; consumer prices are flat. The CPI is still registering the lowest increases since the '50s...rising at about 1% per year. Finally, Mr. Bernanke was counting on the "wealth effect." He would put more money in speculators' hands. They would bid up asset prices. People would feel wealthier. Presto! They would act wealthier - spending and investing more money and thus spurring the economy towards a full recovery. Well, part of it worked. Asset prices went up. The Dow went up another 55 points yesterday. Here's Bloomberg's report: Republican leaders in Congress say they have "deep concerns" about Ben S. Bernanke's second round of quantitative easing. The US stock and credit markets don't share those reservations. The Standard & Poor's 500 Index has climbed 17 percent since the Federal Reserve chairman first indicated on Aug. 27 that the central bank might buy more securities to boost the economy. Junk bonds rallied, with the extra yield that investors demand to own the securities instead of government debt shrinking to 5.45 percentage points yesterday from 6.81 points, according to Bank of America Merrill Lynch index data. "It has been successful," Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, said of Bernanke's policy of pumping money into the financial system, dubbed QE2. "It's contributed to the rally in the stock market" and has "been important in reducing substantially the downside risk of deflation." "As people get more confident about the economy, money is coming into the stock market," said Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School in Philadelphia. "The most important way quantitative easing works is the provision of liquidity." What? Liquidity? There's no lack of liquidity. It's solvency that the market lacks. Adding more credit (liquidity) just makes it worse. But no point in telling Mr. Siegel or Mr. Bernanke that. They're convinced that if they can just stuff enough new money into the system, everything will be all right. Isn't that amazing? Just print up money. Just add cash. Just put in more paper money. See how easy it is to manage an economy? Just print up more money... And more thoughts... We flew from Miami to Liberia, Costa Rica. No problem. We got into a van for the trip to Nicaragua...comfortably rolling along the Pan American highway. There were a few sugar cane fields. But most of the landscape was grazing land...or just forest. After an hour or so, we came upon a line of tractor trailers on the side of the road. At first we thought they were taking a break. Or, maybe one had broken down. "No, this is the border..." said our driver. We passed one truck...then another...then 5 more...then 100... Groups of drivers lollygagged by the roadside. Some hung in hammocks from the undersides of their trucks. "Some of these trucks have been waiting 2 days to pass the border," our informer continued. The Bismarck in us was appalled. "Why can't they organize this better?" we wanted to know. "It must be costing these economies millions of dollars to have so many trucks idled at the border...so many people doing nothing. And think of what it does to trade. You can't ship anything because it must cost a fortune. If they made me dictator of either country I bet I could add a few points to GDP growth overnight. I'd just open the border." "Yes... But they're worried about illegal immigrants. They cause so much trouble, you know." No, we didn't know. But a friend enlightened us. "I just spent two weeks down in Costa Rica. It was amazing. They blame all their problems on the Nicaraguans. Crime. Drugs. I heard a woman tell me she lost her husband because 'he started drinking with the Nicaraguans.' "Then, when I got to the border...you know they're threatening to have a real border war...the Costa Ricans treated the Nicaraguans worse than monkeys. "I guess it's the same everywhere. I was in Geneva. There, they blame the French for all the crime and social problems. In France, of course, they blame the Arabs. And the Arabs blame the Africans. And then, in South Africa, I was surprised to find that they blame all their problems on the Zimbabweans. Almost everywhere else in Africa, they blame the Nigerians. I don't know who the Nigerians blame." We drove by about 1,000 trucks...miles of them...then, there were thousands of people on foot, carrying suitcases...5 gallon buckets...all manner of thing. They were headed north, as we were. Passenger cars passed the trucks...often driving on the shoulder of the road...or through the bushes. At one point, a whole group of cars and minivans, including ours, took a detour off the road...onto a dusty track. We drove through the scrub forest for a minute to two...through what appeared to be a junkyard but was probably a parking lot...and then came back on the highway. But by this time, it bore no resemblance to a highway. It was more like a jumbled up hubbub of refugees fleeing an on-coming army. Trucks, cars, bicycles...people walking, hobbling...all crowded together on a dust-caked road headed north. But to where? There was no movement in the line of trucks. They seemed not to be mobile at all - but stuck permanently where they stood, their drivers setting up lean-tos and other temporary housing beside the road. As for the cars, they rolled slowly onward...dodging...weaving...gaining a yard...slipping off the road...barely avoiding an old woman with a pack on her back. But where was the border? There was no sign of it. At one point, we drove through a fumigator - like a feeble carwash that squirted a mist of disinfectant over the car. Then, it was back into the bedlam. There were no lanes. No rules. No order. No apparent destination nor any way to get there. You could turn left or right. You could go ahead. You could go sideways. There were no signs. No officials. No idea of where you were going or why. Still the mob moved on... And now we were pulled along with it, like a log in a floating jam...we moved with the mass of vehicles. Our driver stopped in front of a makeshift café. He went into a little concrete hut with our passports in hand. A few minutes later, a guard came and asked who we were. He did not seem particularly interested in our replies. He returned the passports. We got back into the flow...slowly making our way to the Nicaraguan border. When finally we reached it, there were no border guards on duty. Three policia sat in plastic chairs chatting. Our van passed. There were no other cars or trucks. What had happened to them all? Why were the trucks stopped when the road was clear? Where were all those people who had been trying to cross the border? "You know," our Costa Rican driver explained, "people are going home for the holidays. You know, the Nicaraguans. They're always causing trouble." Regards, Bill Bonner for The Daily Reckoning