 | | The Daily Reckoning | Thursday, January 20, 2011 |
- China vs. America: How to avoid the fallout by tending your own garden,
- Is the muni market a buying opportunity or imminent train wreck?
- Plus, Bill Bonner on those whacky unemployment numbers, protecting the "family money" and plenty more...
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|  | | | When Empires Collide | | The Oddly Symbiotic Relationship Between the US and China | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Yesterday, against the better advice of Voltaire, your editor spent the afternoon tending another's garden. The weeds had grown long on the lawn and the vines' creeping tendrils spanned the entire stretch of the backyard wall. The yard, having been left to its natural state, was beginning to look like a jungle. We sweated against the sun, mate close at hand, the cool earth beneath our fingernails.
Why all the effort? For one thing, we write for a living; it's good to get one's lily-white hands dirty from time to time. For another, the garden is out back of the house we are temporarily occupying here in Argentina's capital. Our rental agreement is particularly favorable, so it behooves us to look after the place, to help out those who are taking care of us. Besides, we work (in the office downstairs) with an Englishman and, as we all know, there is nothing quite so offensive to an English gentleman's eyes as the sight of an unkempt garden...with the possible exception, that is, of a disorderly queue.
We'll return to our backyard in a second. First, let's take a look a little farther afield...
The markets were awash with non-activity yesterday. The Dow Jones Industrial Average ended the day a dozen points lower than where it began the session. Gold shed a few bucks. If you were sleeping off a hangover, you barely missed a thing. Not so today. Within an hour and a half of the open, the Dow was seen lurking around 80 points below its open. Gold, too, had fallen $21 before lunch. What's going on?
"US Stocks Slip On China Worries," says one headline...
"Stocks open lower despite jobs data," reads another...
"Stocks, Commodities Decline on China Rate-Rise Concern," asserts a third...
If the mainstream press gets anything right, it is by accident only. The rise of China...unemployment...declining productivity in the west; these are not driving factors, Fellow Reckoner. They are not causes. They are effects. Symptoms of a larger trend. As usual, newspaper editors have put the horse before the cart. They should spend more time in the garden, digging around in the dirt, and less time making cocksure assertions about what's causing daily, hourly, minute-by- minute moves in the world markets.
Bill has more on what Harvard economist Lawrence Katz calls a "genuinely puzzling" employment situation in his notes below. So we'll take up the China question...
The relationship between the world's two competing superpowers is indeed a curious, if not curiously symbiotic one. One nation produces, the other consumes. One borrows, the other lends. One is a capitalist in communist uniform, the other talks of freedom and liberty even as the weeds of encroaching bureaucracy threaten to paint the Capitol red.
The Americans, for their part, press China hard on her human rights record and on the issue of currency manipulation. And they do so, amazingly, with a straight face.
To be sure, China's human wrongs record is nothing short of disgraceful. It's true, for instance, that while last year's Nobel Peace Prize recipient welcomed China's leader to the White House this week, the recipient of this year's award, a noted Chinese dissident, sits in a dank cell back in the Middle Kingdom. The media in China is heavily censored, operating behind what is sometimes referred to as the Great Firewall of China.
All this is hardly surprising. The state, as a wholly unnatural entity, is anathema to freedom...whether it barks orders and exerts force in Chinese, English, Swahili or other.
Back in the "Land of the Free," Americans are engaged in a persistent struggle against the meddlesome zeal of their own public servants. Harry Reid, Obama's senate majority leader, and the man who referred to President Hu as a "dictator," lately referred to the Congress over which he and fellow do-gooder, Nancy Pelosi, presided as one of the "most productive in history."
Translation: more laws, more meddling, more interference...than ever.
On the economic front, Fed Head Ben Bernanke is furiously tinkering with any and every aspect of the monetary system he can get his grubby mitts on. While the administration points the finger at China for artificially suppressing the value of its yuan, Helicopter Ben works overtime to fix interest rates, devalue the greenback and rescue institutions in desperate need of failure.
Meanwhile, Treasury Secretary Tim Geithner sells off the financial security of future generations of Americans to the highest bidder - usually China - at scheduled auctions...in broad daylight...for all to see!
Currently, your child's share of the national debt is around $45,000. Come 2015, provided current trends continue, it'll be bumping up against $70,000. China will own an unnervingly large portion of that debt. If policy makers in the US are so concerned about China's human rights record and its monetary meddling, how can they possibly justify shackling their children with debt handcuffs that are, so to speak, "Made in China"?
Generally speaking, the state tends toward war, either on the battlefield, the balance sheet, or, more often, a combination of the two. The endgame between the US and China will be no different.
"The situation is hopeless...but it's not serious," as our friend, Doug Casey, likes to say. Which brings us back to our own garden...
What can we, as individuals, do to protect ourselves from the inevitable, impending collision of these 21st century empires? For one, we can speculate on the distortions that arise in the market as a result of geopolitical jostling. Readers may recall, for example, the recent "disruption" in the rare earths sector, a sector China dominates with some 97% of world production.
Byron King, editor of the Energy & Scarcity Investor, has written extensively about the rare earth story - and the associated opportunities for investors - in these pages in the past.
"China will 'cooperate' with the international community on future rare earth exports - ONLY to the extent that the overall process benefits China," Byron observes in his latest presentation on the subject. "Otherwise, they'll always have an excuse for what they're doing or not doing."
"Ten years ago," Byron continues, "China exported 75% of its production of rare earth metals to the rest of the world. Today it exports less than 25%, even though the production in the last 10 years has more than doubled."
"There IS a GREAT future for the rare earth industry in the West," Byron concludes. "But you have to be careful about chasing momentum. You need to invest wisely, with a focus on companies that can actually deliver an end product after managing years of capital expenditure, and forming-up many systems of systems."
We "little people" may not carry much weight when it comes to international political gamesmanship, but we can, as that wise Frenchman advises, tend to our own garden. To that end, Byron has just made his new presentation, in which he details his favorite rare earth play, available to Daily Reckoning readers. Interested Reckoners can check it out here.
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| | The Daily Reckoning Presents | | Why Retirements Are Going Bust, Again | |  | | Jim Nelson |
Forget 2008... We're seeing the worst hit to retirement accounts right now!
Mutual funds, specifically tax-exempt funds, have long been favorites among near retirees. With the clock ticking, where would you go for an edge on retirement building? And if you could find tax-free, high- yielding, considerably safe income, wouldn't you take it?
Unfortunately, those who bought into this line of thinking over the past several years have just rudely awoken to a major collapse.
Many municipal bond funds offer investors a tax-exempt source of income that is backed by the full faith and credit of US cities and states. These, in turn, have an implied backing by the federal government. (After all, would Obama really let California break off into the ocean?)
And with a gigantic slew of near-retirement-aged baby boomers, weak interest rates, and 2008's stock performance stuck in the back of investors' minds, the municipal market has looked as sexy as ever. Over the past two years, we've seen nothing but cash inflows into muni funds. But that trend has reversed with a vengeance.
We've noted the recent outflow of bond funds in weeks past. But that was just headline stuff. A mere sampling of the pain funds in general have felt. Here's what the muni universe has looked like:
Quite a hit. And of course, when a panic like this starts, bottoms can be a tricky subject.
The muni market isn't a clear one. We're not saying it has no transparency. We're saying that often, no one can really make heads or tails out of the figures. But here are the steps, as best as anyone can understand so far, that caused this two and a half month panic.
First, we saw a QE2 build up. We discussed this program before. But quickly, it simply opened up a pile of $600 billion (plus another $300 billion potentially) to buy up medium-term Treasuries. In theory, this should push yields down, spitting more cash into the rest of the economy, nudge the inflation rate higher, stimulate job growth, and save the planet from a flesh-eating super robot. Okay, one of those things wasn't part of the deal. Nonetheless, what it did was virtually nothing...so far. But the anticipation of the program led investors out of the muni market and into Treasuries.
After QE2, the new threat to city and state debt was the potential end of the Build America Bonds program. Then the actual end of BAB. And it certainly doesn't look like the new "deficit-conscious Congress" will inspire similar attitudes at the state government level any time soon.
In this time period, we also had a number of rating downgrades and bad press, such as the rating cuts to San Francisco and Philadelphia. We saw threats to California and Illinois as well, even going so far as comparisons to Greece and Ireland.
Sure, all of these factors, combined, led to some of the muni outflows. But all they really did was lightly nudge the giant calamity of muni investor losses down the giant figurative hill.
Once investors started pulling out of muni mutual funds, the funds had to sell some of their muni bonds. That led to a decline in actual muni prices...which led more fund investors to sell. This circular pattern is actually still happening. Take a look at this:
Even if you know nothing about charts, you can tell this ain't pretty.
This chart represents the past nine months of trading of the iShares municipal ETF. It tracks the most popular municipal bonds on the market. And since the first week in November - which corresponds to the first week of fund outflows - all bets have been off.
All the technicals, all the support, all the buyers have turned away from the municipal market completely. And this pattern may continue for some time. Of course, as we noted above, no one can truly read the muni market 100% of the time... That is especially true now.
So what does this say? We don't know. There seems to be two drastically different points of view in the press. That much we do know.
Meredith Whitney, the "genius" that called the banking crash of 2008, went on 60 Minuteslast month claiming that the muni market will see more defaults than anyone can imagine. She called for "hundreds of billions" in losses.
As widespread as that show is - and her own newly-acquired following - it wouldn't surprise us if some of the recent selling came from that interview. And we're even less surprised by the backlash it caused in the rest of the media.
Joe Weisenthal, a largely-followed and highly-syndicated author for Business Insider, struck back at Whitney, claiming the free fall in muni prices is 100% attributable to the downward selling spiral we summed up above, which he called "the feedback loop"... instead of actual risk of defaults.
Charles Gasparino wrote on Huffington Post that Whitney needed to "finally come clean." He wants her to show her evidence of the "hundreds of billions" in losses prediction.
Celebrity (kind of) economist David Rosenberg went so far as to claim that the muni market fall is "a huge long-term buying opportunity".
And who knows? Maybe they are all right. We expect muni funds will find a bottom at some point. And then, just as quickly as they stabilize, they'll fall again on actual news of defaults. It won't take much in the way of a real scare to truly collapse these investments.
Regardless of their future, the point is: we're entering into panic mode on some of the best performing and hottest assets for pension plans, 401(k)s and IRAs. Pensioners are no doubt beginning to reel again.
We're keeping a critical eye on this whole situation. And, of course, we never stop looking for solutions.
Regards,
Jim Nelson,
for The Daily Reckoning
Joel's Note: If you're not yet familiar with the details of Mr. Nelson's "Scandinavian Income" strategy - a way of locking in retirement security without having to rely on good ol' Uncle Sam - you might wish to check it out here.
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| | | | Bill Bonner | | How to Get the US Back to Full Employment in 30 Days | |  | | Bill Bonner |
Reckoning from Paris, France...
A short DR today... We're in the airport, on our way back to Washington. Below...we'll tell you more about one family's economy... But first, let's look at the whole world's economy...
Nothing much happened in the markets yesterday anyway.
"Why jobs aren't part of US revival," asks a New York Times headline.
The US now has a higher unemployment rate than Russia...or Britain...or Germany...or Japan. When it comes to joblessness, the US is a world leader.
But why? Economists can't figure it out. Harvard economist Lawrence Katz says it's "genuinely puzzling."
After admitting that he has no idea why there are so many people without jobs, columnist David Leonhardt goes on to tell us that "fixing the job market will take years."
Hmmm... How does he know that? And how does he think he can fix something if he doesn't know how it's broken?
No point in asking questions like that... The fixers never know what is going on...but they're always ready with a solution.
In Leonhardt's case, he proposes a few meddles that are bound to make the situation more complicated...and generally, worse.
So, since we've been giving unsolicited advice lately, we won't hold back today.
First, why are so many people unemployed? The answer is very simple. Because there is no profitable work for them to do as present labor rates. Thanks to previous meddles, the US economy focused itself on building houses and importing geegaws from overseas for people who couldn't afford to pay for them. This was a dead-end economic model. And the end came in 2007. Now, the latest figures show an uptick in manufacturing...which is clearly the direction to go. But it will take years before the US economy has made the adjustment to a new, healthier model...making and selling things at a profit.
In the meantime, unemployment levels will remain high.
But wait...there's more. For which the adjustment is taking place, US authorities are trying to block it. How? By taking resources from the new, unborn industries and using it to prop up the old, dying ones. Like Wall Street, for example. The financial industry grew like Topsy in the bubble years. It began to shrink in the crisis of '07-'09, but the feds came in and pumped more than a trillion dollars into the financial sector, producing record profits for the big banks, but depriving the rest of the economy of much needed capital.
Not only that, the feds also take the pressure off labor to make adjustments. Food stamps, minimum wages, unemployment compensation, make-work, shovel-ready boondoggles - all these things cause workers to think they can continue as before...that a "recovery" of the good ol' days is just around the corner...and that they'll soon be earning as much as they were in 2007. Maybe more!
Want to really fix the unemployment problem? Listen up. Eliminate all bailouts, subsidies, giveaways and support systems - both to business and to labor. Abolish all employment restrictions and employment paperwork. All free labor - undocumented non-citizens - to compete equally with native-born workers. Cut taxes to a flat 10% rate for everyone. Abolish every government agency that begins with a letter of the alphabet. Then abolish the rest of them.
We confidently guarantee that the nation would be back at full employment within 30 days.
But wait...you're not reading The Daily Reckoning to solve the nation's problems. And we're not delusional enough to think our advice is going to make any difference whatsoever anyway.
So, let's turn back to our normal, dreary work...trying to figure out what is going on in the world economy.
And now...back to our thoughts...such as they are. They have little to do with the world economy, it's true. But they may be helpful to your family's economy:
On this trip to Europe, we visited with two of our Family Office partners...
The "Family Office" is the organization we use for investing, and preserving, our own family money.
What's "family money"? Glad you asked. It's money that is owned by a family, rather than by one person alone... It's money that is expected to grow and endure...for generations, if you're lucky.
Not many people have "family money." It's hard to get. And hard to hold onto. You can get money by accident. But you can't get family money by accident.
Of course, you need some money. But that's the easy part. You can have a family fortune of any size. It's how you look at it...and how you manage it that matters...not how much money you have.
But it's the family that is hard...that's where most family wealth usually washes up. And it's why you have to prepare the next generation...develop a family culture that lasts...and avoid conflicts that destroy both the family and its money.
It's hard work. And it's getting harder. And becoming more necessary too. When the European and American economies were in full expansion, each generation could make its own way. Now that growth has slowed...it will be harder to start with nothing and build a fortune. The next generation may need help...
Stay tuned.
Regards,
Bill Bonner
for The Daily Reckoning
P.S. We're still accepting applications to join our Bonner & Partners Family Office program. Dear Readers interested in joining us can review the invitation, here.
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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 atjoel@dailyreckoning.com
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