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The Daily Reckoning | Thursday, March 17, 2011 Markets rebound as fear evaporates and "selling fatigue" kicks in, Disasters "over there"...and what Obama and Warren Buffett have to do with them, Plus, Bill Bonner with fandangle Fed fantasies and family updates... Selling Fatigue or Genuine Rally? Why Markets are Rebounding Despite Continued Crisis Eric Fry Reporting from Laguna Beach, California... During the last 24 hours, fear evaporated from the global financial markets as completely as water from a Fukushima reactor. The Nikkei recovered from a 5% plunge to end the day down about 1.4%. Most European markets have rebounded about 2% and the Dow Jones Industrial Average is busy attempting a similar feat. Today's gains probably have more to do with mere "selling fatigue" than they do with a genuine conviction that stocks are a "buy." But, selectively, folks are trying to capitalize on what they perceive to be "oversold" situations. One group of astute investors known to your editor reached the following conclusions yesterday: 1) Japanese stocks may well represent a solid contrarian opportunity after the recent panic-driven selling. The problem is that any gains for American investors will likely be offset by an appreciation in the yen versus the dollar over the short term. 2) It's too early to tell, but uranium-linked stocks may also be a "buy" following their recent rout. Nuclear power produces about 13% of the world's energy. That's not easy to replace. Depending on the outcome at Fukushima Daiichi, uranium producers could recover to their pre-Japan quake highs. 3) The world faces an energy crunch as nuclear and oil become problems. Natural gas will be a big winner. It is a relatively clean way of producing electricity. 4) Gold should do well when the margin selling ends. Japan's rebuilding efforts will increase its already yawning deficits, pile on more public debt and lead to a new flood of paper money from the Bank of Japan. "Rare earths" are also back in vogue. But the hottest "rare earth" investment of the moment has nothing to do with iridium, scandium, yttrium or any of the other "-ium" metals. The hottest rare earth investment today is element #53: Iodine. Iodine is not particularly rare from a geological standpoint. But that doesn't mean it's easy to find on a pharmacy shelf. Geologically, iodine represents 450 parts per billion of the earth's crust, which means its about ten times more abundant than gold. Based on parts per billion, therefore, Iodine is not so rare. But based on pills per pharmacy, good luck. Never mind that Japan's nuclear crisis is more than 5,000 miles away from California, the crisis is close enough to trigger an "iodine rush" in the Golden State. Yesterday morning, your editor strolled into the Laguna Beach CVS store and asked to buy iodine tablets. The pharmacist laughed, "Can't get it." "Really?" "Yep," the pharmacist replied. "It's impossible to get." The Daily Reckoning Presents Who's Holding the Bag? by Eric J. Fry When disaster strikes, the initial victims are rarely the only victims. Collateral consequences fan out in surprising ways. Sometimes, the individual/entities who are left holding the bag are not the ones we would expect. The tri-disasters in Japan will provide a classic example. There will be obvious immediate victims, as well as less obvious subsequent victims. Investors might find it worthwhile to consider who some of the subsequent victims might be. Let's call this little game, "Who's Holding the Bag?" Before starting the game, please consider a couple of seemingly unrelated data points: 1) Oceans are a tremendous national asset...and a potent national narcotic. 2) In the midst of the two most serious international crises of his presidency – the civil strife in the Middle East and the growing environmental disaster in Japan – Barack Obama played golf...for the 61st time since his Inauguration. What's the connection between these observations? Simply this: Americans – from the President on down – tend to feel that what happens "over there" has nothing to do with what happens "over here." Moammar Gadhafi may be inflicting horrors upon his own people for the sake of maintaining his brutal regime, but that's happening on the other side of the Atlantic. The Japanese people may be losing the fight against the mother of all nuclear disasters, but that's happening on the other side of the Pacific. Sure, these events aren't great. But they are far, far away. In fact, they are so far away that they are easy to ignore...unless and until they become impossible to ignore. Recent financial market trends illustrate this phenomenon. Despite the horrors in Libya and Japan – not to mention the serious financial deterioration of numerous Western governments – the US stock market has been amazingly resilient. Until this week, US stocks had maintained the bullish tone they've been exhibiting for two years now. The Dow Jones Industrial Average did not finally slip into negative territory for the year-to-date until yesterday...and already the Blue Chips are back in the black. Maybe the Dow's and the President's seeming indifference to overseas crises is appropriate, maybe it's delusional. It's true that Libya and Japan are both very far away. The President and the Dow are both right about that. But it's also true that an unchecked foreign crisis sometimes becomes a major domestic crisis. In other words, sometimes we should care about what happens "over there," not merely for the sake of humanity, but for the sake of (financial) self-preservation. Okay, now we're ready for our game... "Who's Holding the Bag?" The initial bag-holders of the Japanese tri-disasters are, of course, the Japanese people themselves. Day-by-agonizing-day, they are struggling to cope with the consequences of an epic earthquake that triggered an epic tsunami that triggered an epic nuclear disaster. But beyond these frontline victims, who else or what else may suffer during the weeks and months ahead? In no particular order: the holders of Japanese stocks, the holders of any stocks, Prius dealerships in the US, suppliers to the nuclear power industry, the Libyan opposition, AIG, Berkshire Hathaway and the US government. "Following a natural disaster, one sector that immediately comes to mind is the insurance sector," a research report by TD Securities observes. "Overall, we believe the impact to North American insurance companies will be manageable, and in most cases minimal. Among the reinsurance companies, Berkshire Hathaway's (BRK.A-N) wholly owned subsidiary General Re and Swiss-based Swiss Re(SWCEY-Q) could realize losses from this event." Within the insurance industry itself, the frontline victims would include Japanese insurers like Tokio Fire and Marine, Nippon Life and Dai-Ichi Life. Investors have already taken this bleak prospect into account. The Topix index of Japanese insurance stocks has tumbled 23% during the last month. By comparison, the KBW Index of American insurance stocks has slipped only 7%, while Berkshire Hathaway has barely budged. To be sure, Berkshire is unlikely to suffer debilitating losses from Japan's disasters, but it is certain to suffer some losses. AIG likewise. This government-coddled, taxpayer-financed insurance company recently completed a purchase of Fuji Fire & Marine. The deal closed just one month ago. And what about AFLAC, which derives an enormous chunk of its earnings from Japan? The loss estimates issuing from Japan are likely to grow over the weeks ahead, which means that the insured losses are also likely to grow. So maybe the selloff in the US insurance sector is not over yet. Insurance companies are logical victims of the Japanese disasters; the Libyan opposition, less so. Suffice it to say that the rebels' fortunes began to fade the moment the Japanese tsunami kicked Libya off the front pages of the world's newspapers...and President Obama resumed tuning up his golf game. But the President may have much more in common with the Libyan opposition that he realizes. The US government, itself, could become a major victim of the Japanese disaster. Japan, as the second-largest foreign holder of US Treasury securities, owns nearly $900 billion worth of these IOUs. It's not hard to imagine that the Japanese government would sell a chunk of this stockpile to pay for the enormous cost of reconstructing northern Japan, not to mention the potential enormous costs of compensating victims of the nuclear disaster. If/As/When the Japanese decide to part with some of their Treasuries – or merely discontinue buying them – US interest rates could rise, perhaps significantly. But clearly, the consequences of the Japanese crisis will not be all bad. As the TD Securities analysts point out, Forest products producers, steel mills and heavy equipment manufacturers may all benefit from the disaster. "Following the Kobe earthquake in 1995," the analysts write, "many of the Japanese building codes were changed to encourage the use of wood/lumber to build earthquake resistant structures. With a massive, multi-year rebuilding effort ahead, Japan is likely to look to its traditional lumber suppliers, including western Canada, to fill their lumber requirements. The Canadian lumber producers most exposed to Japan include Interfor Ltd. (IFP.a-T), Canfor Corp. (CFP-T) and West Fraser Co.(WFT-T). TimberWest Corp. (TWF.un-T) also ships a significant volume of raw logs to Japan." Additionally, the analysts continue, "Japan will require steel for its reconstruction efforts. While the total requirements are difficult to forecast, it is expected to be enough to push steel prices higher. Stocks with leverage to steel prices include Russel Metals (RUS-T) and US Steel (X-N). Construction equipment and heavy machinery will also be required for both the clean up and the massive reconstruction. Global heavy equipment manufactured Caterpillar (CAT-N), stands out as a [potential] beneficiary. "It is still far too early to determine the full extent of the economic and human toll the earthquake and tsunami will have on Japan," the TD analysts conclude. "The country will rebuild once the search and rescue and clean-up efforts have been completed, but it will be at a significant cost. We expect equity markets to face aftershocks over the near term as events continue to unfold." Agreed. Regards, Eric J. Fry, for The Daily Reckoning Bill Bonner How Quantitative Easing Has Paralyzed the US Economy Bill Bonner Reckoning from Baltimore, Maryland... Who can you trust? Whoa... Big sell-off in stocks yesterday. The Dow down 242 points. Investors were worried... ..about new explosions in Japanese nuclear plants... ..about Europe's periphery states on the verge of default... ..about revolutions, demonstrations and civil wars in the oil producing states... ..about this...about that... But along comes the good ol' Federal Reserve. It's telling Americans not to worry. The economy is on a "firmer footing" it says. Oh? Is it? We don't think so. But we'll let the Fed tell its side of the story first. Here's the report from Bloomberg: Federal Reserve officials signaled they're unlikely to expand a $600- billion bond purchase plan as the recovery picks up steam and the threat that inflation will fall too low begins to wane. The economy is on a "firmer footing, and overall conditions in the labor market appear to be improving gradually," the Federal Open Market Committee said in a statement yesterday after a one-day meeting in Washington. While commodity prices have "risen significantly," inflation expectations have "remained stable." Really? Is the economy on a firmer footing? Well, let's look at the evidence. On Friday, the numbers showed that shoppers were going back to the malls that once knew them. Sales figures showed the biggest rise in 4 months. But unemployment is still "elevated," with about 10% of the labor force out of work, depending on how you twist the numbers. Houses are still being foreclosed. And house prices are still going down. And get this, the Michigan consumer sentiment index has dropped to 68 – only 4 points above its low set after Lehman went broke. Odd, isn't it? We mean, how is it possible that people who have no jobs...and whose main asset is falling in value...can spend more money? Maybe this is the answer. Maybe Ben Bernanke's program of QE – in which the Fed puts in $4 billion per day in an effort to boost stock prices – is paying off. Stocks went up. People felt richer. They spent more. The Fed figures also show a modest rise in consumer credit – the first increase since '08. Savings rates are also on the decline again. But here's another explanation: People are able to spend more because they're defaulting on their mortgages. More than one in 10 mortgages is not being paid. That frees an enormous amount of money for other things. It's not the same as genuine, sustainable growth...but who cares about that? Well, the point is, if the Fed is counting on a real recovery – so it can take away all the funny money it's been pumping into the economy – it will probably be disappointed. The funny money has created a funny economy. The feds have been pumping in money at a record pace. Not only through quantitative easing...but also through deficit spending and ultra low interest rates. Rates have been close to zero for the last 27 months. And the deficit keeps growing. But each time they bring out a chair, the economy forgets how to stand on its own two legs. Now, after years of sitting down...it is paralyzed. At least, that's our theory. If the feds take away their QE program – now scheduled to expire in June – the economy is likely to fall on its face. The Fed says it will take away QE as planned. We say it will find an excuse to continue the program, if not immediately...after a decent interval. So, who ya gonna trust? The world's most famous and powerful economists? Or The Daily Reckoning? The feds – who told you there was nothing to worry about in '07...and besides, they said they couldn't spot a bubble if it was stuck to their noses...? Or The Daily Reckoning, who told you to duck? And more thoughts... More thoughts? Well, we don't have any more thoughts, so...we'll give you an update on the family. As long-term Daily Reckoning sufferers know, we have 6 children, who have appeared in these updates from time to time over the years. They appear less frequently now, simply because we see less of them. Will is in Florida, with his wife and growing family. He's working on exciting project. "Paypal with gold," he describes it. Sophia is busy in her career as a massage/yoga/physical therapist. Maria is in California...getting small parts in movies, such as The Social Network and TV shows, such asCSI. Jules has begun his musical career, composing songs and singing at clubs in New York. Henry is in college, in his third year as a pre-med student. Only Edward, the youngest, remains at home. And he finishes his high school career in June. Yesterday, concerned with his career as a scholar, Elizabeth organized a meeting with his teacher. "Oh yes, Edward... Hmmm... Well, he has a classic case of senior slump," said the professor. "I think what happened was that after he got accepted to a couple universities," his mother explained. "Then, he decided that he didn't have to work anymore." "Yes... We see that from time to time," the teacher continued. "But Edward is an extreme case. He really just seemed to stop trying. He comes to class but doesn't pay attention. He only does half his homework. "Okay... So maybe it doesn't really matter. I mean, he's on target to graduate. And he's been accepted at a university. But how's he going to do when he gets to a big university and he's gotten in the habit of slacking off?" It was a good question. We put it to Edward. "Look, I'm no good in school, anyway," the young man replied. "I'll work when I have to work. But there's no point in working when I don't have to work. I don't like it. And it doesn't do me any good. I'm not a good student. I've never been a good student. And working hard now won't make me a good student." He had a point too. What could father-knows-best say? "You're probably right... It won't make any big difference for this year. And you'll start out next year with a clean slate. At least, it will be clean academically. But it won't be empty. You'll have your own habits...your own self-discipline. And the way you feel about yourself. "And you want to feel good about yourself. You don't want to feel like a kid who slacks off or gives up just because there's no immediate payoff. "All right, so you're not a great student. So what? Over the long run, it's not the great student who succeeds. It's the guy who gets to work...and doesn't get distracted...or thrown off course. "When you're 40 years old, no one will care if you were a great student or not. But they'll care if you work hard...if you keep at it...if you don't give up. If you care about your work...and always try to do a good job. "Remember... No one knows who will succeed or why. All they know is who deserves to succeed. And that's all you can do...deserve it." "Okay Dad...I'll get back to work..." Regards, Bill Bonner for The Daily Reckoning