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The Daily Reckoning | Thursday, February 10, 2011 Foreclosures up...food prices soaring...and the post goes broke, Generals still fighting old wars...and other investing traps to avoid, Plus, Bill Bonner with what to make of the Great Correction now and a look at who will be left holding the bag... ------------------------------------------------------- Microcap "Stealing" Oil from Iran Could Return 4,599%! One tiny company has found a way to legally "steal" oil from Iran's largest oil field... Which means it's now sitting on oil reserves that could be worth over fifty times its total market-cap, setting the stage for an astronomical run-up of 4,599%! Resource expert Chris Mayer shares everything you need to know about this urgent opportunity in his brand new presentation... Click here to watch it right now. When the People Push Back Fending Off the Onslaughts of Government Intervention Joel Bowman Reporting from Punta del Este, Uruguay... Not much time for careful cogitations today, Fellow Reckoner. In fact, we barely have time for careless ones. We're on a bus right now, traveling from Uruguay's capital of Montevideo to the seaside town known to locals simply as "Punta". But wouldn't you know it...they've gone and enabled the bus with a Wi- Fi connection. We're in the middle of nowhere and somehow, some way, the news still finds us. Day by day, it's getting harder and harder to avoid. So we recline our chair, flick the reading light on overhead and take a look around the empire from right here on our Uruguayan coach. The reports are flooding across the wires that Egypt's dictator of 30 years is to step down. You remember Hosni Mubarak - "good friend" of one Dick Cheney and outpost sentinel for the US over in the MENA region. He's been the focal point for the rage of a generation of young Egyptians who have been busily protesting up and down the Nile. They want the old coot out, they say. This is a new generation, after all, and they're wising up to what's been left to them: poverty, massive unemployment and a generally pitiful existence. Not much, in other words. When the protests began, the Egyptian government suspended the Internet and disabled texting capabilities for cellular phones. They saw what happened in Iran a year earlier, where angry citizens took to the social media waves to bring news of the electoral fraud there to the world. They published videos of police brutality and tweeted their hearts out for all to see. "There's no way we're having any of that," Hosni must have thought. "Cut the cables!" It didn't matter, of course. The truth has a reliable habit of making its way into the light eventually. In Egypt's case, Google set to work developing "speak-to-tweet" technology, whereby citizens there could call a specific number and have their recorded voice messages converted into micro-blogs. And lo! "The government is spreading rumors of fear and of burglary and of violence," said/wrote/tweeted one concerned Egyptian. "The only incidence of theft and burglary are done by the police themselves." This will come as a shock to almost nobody. It's just what you'd expect from the crumbling edges of a failing empire. Kings, warlords, gangsters and presidents have for millennia fought to protect their privilege and power. It's what they do. And, for just as long, "the people" have been pushing back. Like all others, this trend has its ebbs and flows. For generations at a time the state gains ground, encroaching on the rights and lives of those it affects to serve. Then, when the masses have finally had enough, they storm the palace grounds and give their oppressors the boot...only to replace them with a new ruler, one who promises "change." Today, while the outposts burn in far off lands, the Antoinettes continue the party closer to home, right there in the US of A. But there's something very different about the "post-recession" vibe at this shindig. For one thing, the cost of eating cake (and of eating in general) is skyrocketing. Corn, which is used to feed the cattle, hogs and chickens, has doubled in the past six months. That has a knock-on effect. Fellow Reckoners flooded our inbox last week with stories of price hikes at their grocery stores and gas pumps. Ben Bernanke says this has little to do with his ark-worthy flood of US dollars into the world economy. Right. A trillion here...a trillion there... "What, me worry?" In other news, foreclosures in the US jumped 12% in January from the previous month. According to a report from real estate data firm RealtyTrac, lenders foreclosed on 78,133 properties for the month. "The numbers will inevitably go up," Rick Sharga, senior vice president at RealtyTrac, told the papers. "It's just a question of will it be sooner or will it be later." Meanwhile, The US Postal Service is hinting that it may default on some of its financial obligations later this year after reporting yet another quarterly loss. The cumbersome government agency said it suffered a loss of $329 million in the first quarter of federal fiscal year 2011. That was up from a loss of $297 million a year earlier. Faced with a problem caused by too much spending, the Obama Administration has promised to do just what it ought to avoid; that is, to spend more...more than any other administration in the history of the republic. More waste...more incompetence...and, incredibly, more intervention. But that's just how it goes, isn't it? It goes...until it doesn't. The wheel turns. So do trends, fashions and, yes, Fellow Reckoner, even investment opportunities. Chris Mayer has more on this in today's guest essay. Please enjoy... Inflation...Oil Shocks...Economic Turmoil...It's Back To The 1970s...! The New OIL WAR and Why Iran Threatens Your Money... According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year. Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue. Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead... Click here to watch Byron's value-packed presentation now. The Daily Reckoning Presents The Worst Possible Investing Mistake Chris Mayer There are many mistakes people make that ensure they won't get rich investing. In 2011, I think one in particular mistake will hurt more than others. I can sum it up by citing the phrase, "Generals fighting the last war." I have come across many people in my travels who, despite a 50%-plus drop in the stock market from its peak in October 2007 to the March 2009 bottom, are still waiting for the market to crash. They missed one of the greatest rallies in the history of Planet Earth because they looked backward when they should've been looking ahead. I know people who still think the housing market will crash. Yet housing prices are already down 30% from the peak nationwide. Housing is now more affordable than it's been in a generation, as we've seen. I know people who still won't touch a tech stock, even though the tech bubble burst and hit bottom eight years ago, or who won't even think about owning a Brazilian stock, because they lost money on one when Brazil blew up in the 1990s. These are not dumb people. Most of them are successful in their chosen fields. But even smart people can get stuck in their views...which become outdated - and unprofitable - as the world changes around them. It is like Mark Twain's old dictum about the cat and the stove. "She will never sit on a hot stove lid again - and that is well," Twain said, "but also she will never sit down on a cold one anymore." Over the holidays, I read a good paper on this subject entitled, "Investment Strategy," by Barton Biggs in January 1977. Biggs was a well-known strategist for 30 years at Morgan Stanley. More recently, he wrote a very good book about investing called Hedgehogging, which I would recommend. Anyway, Biggs wrote his paper as a sort of New Year's address to the money managers under his charge. He began by talking about all the experiences an investor accumulates over a career, even a career as short as 10 or 15 years. "He has had his share of winners and bloody noses," Biggs writes, "his back is permanently twisted from whipsaws and he has gotten whatever benefit there is to get from being run up and down the market flagpole countless times." As the old saying goes, "Experience is a comb that life gives you after you lose your hair." But seriously, that experience is important, especially if you have a few hairs left. Experience gives you a sense of the market's habits, its moods and conventions. You have a working knowledge for some of its industries and stocks. And you've probably learned a great deal about yourself, such as your tolerance for risk. But that experience also comes with barnacles that latch onto your hull. Biggs captures it eloquently: The problem is that in accumulating experience, he also acquires prejudices against industries and stocks because he has lost money in them. It is easy to...become an investment bigot with a closed mind on many subjects... A fresh, opportunity-minded mind, uncluttered by prejudice, is crucial for superior investing in an environment where the one constant, the one inevitability is change and industry group rotation. By definition, there can be no uninvestable industries. In short, an investor should never say, "Never." As in, "I'll never buy a housing stock," or "I'll never buy an airline stock." Biggs calls that kind of thinking "pure, fat, unadulterated laziness." There is a time and place for all things. I know I have to work hard to cultivate an open mind about all things investing. I try to change as the market changes. I don't want to be one of those guys who say the same thing every year even though the market has clearly changed. So while I always insist upon a favorable risk/reward proposition, I do not care what shape or structure that proposition takes. For example, I was bullish on fertilizer stocks in 2005 when I recommended Agrium to the subscribers of Capital & Crisis. After the stock tripled, I urged subscribers to sell the stock. I subsequently turned bearish on fertilizer stocks in 2007. In 2008, after the fertilizer stocks had collapsed, I told my subscribers to buy them once again. Since these 2008 recommendations, PotashCorp has more than doubled, while Mosaic (NYSE:MOS) sits atop a 57% gain. But I suspect we'll exit this position once again in 2011, as the grain story reaches a feverish pitch. Also in Capital & Crisis, I recommended various hotel, real estate, insurance and bank stocks in 2004-2005. I told subscribers to exit these positions - usually very profitably - in 2006. I did not recommend any stocks from these sectors after 2006, since I was worried about the housing bubble. But now that real estate prices have tumbled, this sector and the industries that support it, may be serving up some investment opportunities in 2011. As Roy Neuberger, who didn't suffer a single down year in 68 years on Wall Street, once said, "Fall in love with people...the last thing to fall in love with is a particular security. It is, after all, just a sheet of paper indicating a part ownership of a corporation. Its use is purely mercenary." Knowing this, I still have to fight not to make the very same mistakes I am warning you to avoid. I got burned badly investing in a master limited partnership (Atlas Pipeline) and that experience has hardened me against those structures. I got blasted investing in an oil refinery (CVR Energy), which prejudices me against that model. So I work at this too. But I think Biggs' message is going to be particularly important in 2011. That's because the wind has shifted...and some areas that have been hot will cool. And some areas that I've avoided look promising once again. Mining stocks, for instance, have been red-hot. Miners are flush with cash and spending lots of money on new projects and mines. That's the problem. In 2011, mining companies will pour a record $115-120 billion toward creating new supply. Companies that sell the picks and shovels have also been en fuego. "Exhibit A" is Joy Global, a mining equipment company. Its stock is up 300% since January 2009. With a few exceptions - such as in uranium and gold - I think there is too much optimism around mining-related stocks. The sun shines on no dog for long. Conversely, there are rafts of small banks trading for 60%, 70% or 80% of tangible book value, when acquirers are paying premiums as high as 148% of book to own them. These are sleepy local institutions that typically hold onto the loans they make. They didn't participate in the shark fest that hobbled the big banks. They have loads of cash. There is a lot of insider buying. Yet investors are ignoring these stocks out of prejudice stemming from the financial crisis...and hence, I think there is opportunity here. These are but two examples on either ends of the spectrum. The world changes and your views need to change with it. Don't get stuck. As Biggs said, "Successful investing is like riding a bicycle - either you keep moving or you fall down." Regards, Chris Mayer, for The Daily Reckoning Joel's Note: Did you receive two sell alerts from Chris on Monday? One play could have netted you a none-too-shabby 130% gain in just under two years. The second gave you the chance to cash out half of another position for a 110% profit in less than 12 months. "We'll let the other half ride for now," wrote Chris in that second email. If you DIDN'T receive these emails, but would like to get on Chris' Capital & Crisis email list, we suggest you give it a risk-free trial today. Details here. Revealed: The Full Power and Promise of Science's Next Decade... ..Could give your family FIVE generations of HUGE WEALTH! Expert researcher breaks his silence after 2 years with this shocking new presentation. Get all the details on the most lucrative science breakthroughs ever published, right here. Bill Bonner Increasing Government Debt to Produce Economic Growth Bill Bonner Reckoning from Baltimore, Maryland... Is the Great Correction over? Not quite! Nothing much in the markets yesterday. Dow and gold both essentially flat. So, let's rehearse what we've learned so far. Government's main business is protection. Always and everywhere, its chief responsibility is the security of the nation's borders and the safety of its own officers. As a secondary matter, it is concerned with the protection of the people it governs. Of course, it protects, first and foremost, the interests of the people who control it. A modern democracy is controlled by competing groups. In a combination of larceny and bribery, almost everyone gets something. Elite and powerful groups get a lot. The less powerful masses get a little. In the crisis of '07-'09, for example, government moved fast to protect elite interests - with trillion-dollar transfers to the banks and their bondholders. Then, as the economy weakened, the masses of voters needed bribes too - food-stamps, unemployment relief, shovel-ready jobs, etc. These measures do not produce genuine prosperity. How could they? They are just boondoggles and bailouts. But they give the appearance of stability and they help keep everything under control. But how can the feds pay for all this larceny and bribery? They have to borrow...effectively shifting the cost to the next generation. Debts are incurred now. Money is spent now. It is meant to be repaid sometime in the future, by people who benefit from neither the bribes nor the thefts. The private sector unloaded debt as quickly as it could in '08 and '09. Savings rates went from 2% of disposable income to 7%. We called it a "Great Correction." But now the process of correcting seems to have stalled. While the private sector threw off debt, the public sector picked it up. And now, it looks like the private economy is beginning to borrow again too. Savings rates have fallen back to around 5%. Credit card debt has increased for the first time since the crisis began. Non-revolving credit is reported to be at a record high. Government debt, meanwhile, is soaring. The US deficit last year was greater than all the money borrowed by the US government from its founding until 1986. And the Obama administration will borrow more than all previous administrations put together. Is the Great Correction over? Where will this end? Bankruptcy? Hyperinflation? Or revolution? Maybe all of the above. But wait. What if the peoples' representatives "see the light"? What if they turn the situation around, forcing the US government to de- leverage along with the private sector? Well, anything is possible. But we wouldn't count on it. Meanwhile, there's another part to our hypothesis. Over time, stable societies become more and more rigid as elites get a tighter grip on them. They become "zombified," with more and more of the society dependent on giveaways, bribes, boondoggles, protected markets and redistributed income. In a democracy, that means that the numbers begin to work against evolution. Against change. Against natural correction. More and voters get more from the government than they pay for it. They will not permit any change to the system, because any change would be harmful to them. So, over time, governments become less and less able to produce wealth...less dynamic...less responsive to evolutionary adjustment. How does that work, exactly? Well, it works in many, many different ways. But here's a simple example. If the crisis of '07- '09 had happened back in the 19th century the big banks involved would have gone broke. Not only that, the bankers involved would have lost everything - including their personal mansions in the Hamptons. Because back then, typically, a banker was personally responsible for his losses. Neither banks nor investment houses had the advantage of corporate protection. Today, the failures remain in business. The failed executives continue to receive bonuses. Their losses are socialized...picked up by feds and spread to people who don't deserve them - notably, the next generation. Most people think this process will last forever...with the costs pushed infinitely into the future. But it won't. "Stability leads to instability," said Hyman Minsky. We see it coming. Stability makes people think that the system is eternal. They lend to the government at low interest rates...or even accept its new, paper money as though it was the real thing. This permits the government to run up far more debt than it could in an "unstable" era. The debt then becomes unsustainable...and the system collapses. When? Who knows? But sooner or later, the lenders revolt. Or the next generation does. And more thoughts... As we reported yesterday, young people have extremely high rates of unemployment in most parts of the world. Why? It's explained by our hypothesis. [Ed. Note: Bill and Addison dedicated a whole chapter of their bestselling book, Financial Reckoning Day, to the coming demographic crisis we're now seeing unfold around the world. For an in depth look at the effects of this "youth bomb," be sure to swing by Laissez-Faire Books and grab yourself a copy of their book. Do so today and we'll knock 20% off the price. Simply punch in this code [E401M202] when you check out. Oh yeah...you'll also receive a copy of the award-winning Documentary, I.O.U.S.A., absolutely FREE. Can't beat that!] The older generation is taking advantage of the younger generation, shamelessly. Labor rules help protect existing jobs...but stand in the way of new ones. The cost of public pensions and health care too increase the price of taking on new employees - while rewarding almost exclusively older ones. Union labor contracts favor senior union members, not junior members. Minimum wages laws also pinch unskilled new workers more than their older, more experienced competitors. We saw this phenomenon in France, which has the most protective labor laws in the world. Small artisans refused to hire young assistants or to teach them their trade. It was simply too expensive and there was too much paperwork involved. They preferred to retire...leaving their businesses to retire with them. In our small town, it became hard to find a plumber or a brick mason - even as the government paid welfare benefits to thousands of young people who "couldn't find work." *** Poor Merced County, California. USA TODAY reports that things have changed. The Great Correction is still underway: Life has changed in ways big and small in this central California county, which is still trapped in the wreckage of a housing boom that went bust five years ago. The median home price, $116,000, is down 68% from its peak in 2006. Three of five homeowners with a mortgage here owe more on their loans than their houses are worth, compared with about one in five nationally. Socked by a sharp loss of property and sales tax revenue, Merced County and its cities have slashed budgets, workers and services. The grass is being mowed less often in city parks. A senior center is open fewer hours. Families have adjusted, too. Forget dreams of making big bucks on California real estate. Many here now count the years - guessing, really - until they'll no longer owe more on their homes than they're worth. "We're in survival mode, waiting for recovery," says Stephen Hammond, 42, pastor at Bethel Community Church in Los Banos, a Merced County town of 35,000 amid cotton and tomato fields. More cuts are possible because of looming budget deficits, Merced government officials say. Dozens of other communities nationwide may face the same tough choices in the wake of huge drops in home values, which often lead to less property tax revenue. In Merced, the impacts have hit hard, and they hint at what may be to come for others. For Merced County government, property taxes are the No. 1 source of general fund revenue, says Scott De Moss, deputy county executive officer. Property tax revenue has dropped 25% during the past three years. Almost 15% of the county's workforce has been slashed. Social and mental health service positions took the biggest hits, officials say. In the city of Merced, sales tax revenue is down 24% and property tax collections, about 34%, from 2007 levels, city officials say. That's forced cuts in the police and fire departments. Police might not show up anymore to take fender bender reports and firetrucks may no longer always roll on the same calls as ambulances, says Merced City Manager John Bramble. The city's 80,000 trees now get pruned once every three years, instead of every two. The senior center is open 28, not 40, hours a week. Asphalt patches, not new concrete, are being used to repair sidewalks. "People are used to a higher level of service," says Bill Spriggs, who serves as mayor for the city of 80,600. "But this is the new normal." In Los Banos, the grass is now cut in city parks every 15 days. It used to be cut weekly. Vacant houses dot nearly every neighborhood. New roads end in cul-de-sacs surrounded by vacant lots. A weather-beaten billboard announces a 35,000-square-foot retail center that is "coming soon" but never has. The double whammy of the recession and the real estate crash has forced changes in how consumers spend, plan for their futures and view their neighbors. Businesses also have suffered, because homeowners have less equity in their homes or none at all. Overlaying everything is a local economy in which one of five workers is jobless, in part because of the collapse of the area's once-fast-growing home construction industry. The "last good year" was 2008, says Greg Parle, owner of the Branding Iron Restaurant in Merced. Business is off at least 20% since then, he says. He's adding lower-priced items to the menu. The region's ability to foster such small businesses will suffer because of so much lost home equity. Almost one-quarter of small- business owners borrow against their homes or use them as collateral to fuel businesses, according to a 2009 Gallup survey of small-business owners. That'll likely be less now in Merced and other places with so many underwater homeowners. Start-ups will feel the greatest impact, says Mark Schweitzer, director of research for the Federal Reserve Bank of Cleveland. Loreina Childress, 39, a county environmental health worker, has felt the impact of the new normal at home and work. The previous work of 26 in her department is now done by 21. At home, a lot remains vacant, and there are more renters in her neighborhood than before the real estate bust. Childress bought her Merced County home in 2006, when the market was still hot. She owes $241,000 on the 1,500-square-foot home that might sell for $140,000. John Betham, 58, and his wife, Sandra, 55, are staying put. They owe $375,000 on their Los Banos home. They estimate it would sell now for $150,000. *** We warned him. Former President George W. Bush might as well hand in his passport. Unless he travels to a country where the fix is in, he's likely to be arrested. Here's the report: GENEVA, Feb 5 (Reuters) - Former US President George W. Bush has cancelled a visit to Switzerland, where he was to address a Jewish charity gala, due to the risk of legal action against him for alleged torture, rights groups said on Saturday. Bush was to be the keynote speaker at Keren Hayesod's annual dinner on Feb. 12 in Geneva. But pressure has been building on the Swiss government to arrest him and open a criminal investigation if he enters the Alpine country. 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 When the Unemployed Lose Faith in the System Every organization has some people in control of it. Government is no exception. Often, the people with real control are not those who appear to have the reigns of power. Sometimes, the real power is hidden...behind the scenes... Ben Bernanke’s Hot Money Growth or Hot Money: What’s Really Affecting Food Prices The Violent Declines the Follow Overbought Rallies I am as skeptical as the next guy about technical analysis, maybe more so, so I was kind of intrigued when Robert McHugh of Main Line Investors wrote an essay titled “Time Analysis of the Coming Market Top.” Buying Silver While It’s Still Relatively Cheap The Government-Gold Screw Job of 1933 The Inflation Tipping Point (Part Three of Four) [Continuing from Part Two...] Alongside the evidence that credit deflation reversed into inflation around mid-2010, we also notice that commodity prices began to rise sharply around this time. What the BLS is Actually Pulling its Numbers Out Of The Violent Declines the Follow Overbought Rallies 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