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The Daily Reckoning | Friday, March 18, 2011 Making the power of compounding interest work for you, Tattered, faded, and frayed...the Daily Reckoning Crash Alert Flag flies, Plus, Bill Bonner on the upside of losing 35% on a single investment and more... When the Oil Price Portends Recession Bill Bonner Reckoning today from Baltimore, Maryland... What a nuisance! Our laptop computer collapsed this morning. Hours were wasted trying to revive it. We were like a carpenter without a hammer...a clown without a red nose...an idiot without a village. Meanwhile, the financial world seemed to be on the verge of collapse too. Stocks rose 161 points on the Dow yesterday...after a big drop the day before. Gold rose a bit too. This is the kind of market nervousness that usually resolves itself - in a big drop. Yes, our "Crash Alert" flag - tattered, faded, and frayed - is out. Ignore it at your peril! The Fed is still pumping $4 billion of new money into the system every day. And the federal government is putting in another $5 billion of deficit spending every day. With this kind of support, you wouldn't expect asset prices to fall. Instead, they should be soaring. "Don't fight the Fed," the old timers warn. But watch out. The Fed might have lost control. The Great Correction isn't going away. It's intensifying. As you know, it's been war out there. The feds against the market. The market wants change. The feds fight to protect the status quo. It's an ancient struggle. But this phase of it has been going on for more than 10 years. The markets try to go down...to correct their mistakes...to reduce the amount of debt in the system. And the feds fight back with overwhelming firepower - forcing prices back up...adding more debt...preventing bankruptcies. And now the battle is heating up. What to make of it? First, the feds can destroy wealth. They can prevent it. They can move it around. But it's only the private sector - and market forces - that create it. Second, the more the feds meddle in the markets, the more distorted and grotesque the outcome becomes. Regulation, rigged credit markets, bailouts and subsidies - all pervert the natural outcome of market forces. Third, the feds' current use of overwhelming force to block a market correction is creating overwhelming unforeseen and pernicious problems. They put money into the system to try to encourage spending and investment. The money pushes up stocks - giving investors more "wealth" to spend. But it also tempts speculators into risky trades...and pushes up oil prices...giving business and consumers higher energy prices...and less money to spend on other things. Let's look at what happens next. No, the feds didn't cause earthquakes in Japan or revolutions and civil wars in North Africa. But they created such a rickety financial structure...so top-heavy with debt...that almost any calamity can bring it down. As it happens, political troubles in the Arab states...and Japan's nuclear problems...both grip the world's single most important market - oil - like the jaws of a vise. The Arab world produces the stuff. Japan consumes it. Without its nuclear reactors, Japan will rely even more heavily on other forms of energy...leaving more people standing in line with gas cans in their hands. And here's where the feds come in - their funny money had already sent the price of oil from a low near $30 at the bottom of the '09 crisis...to a high over $100 before the first coffee cup started to rattle in Japan. Where the price will go next, we don't know. But it's being squeezed on both sides - supply and demand - simultaneously. And here's something you should know: According to Nomura Securities, every time there is a big increase in the price of oil - 170% or more - there is also a recession. We mean every time in the last 40 years - '74, '79, '90, and '00. And don't forget, it wasn't just subprime debt in the US that spelled doom for the economy in '08. It was also skyrocketing oil prices...that pinched household budgets all over the world. And guess what? The price of oil has already risen more than 170%. It had hit the critical point even before the revolutions in North Africa or the earthquakes off the coast of Japan. Now, under even more pressure, we can expect a higher price of oil...until the bottom falls out again... More thoughts, after today's guest column... The Daily Reckoning Presents The Power of Exponential Technological Change Ray Blanco Every once in a while, my wife sends me an email with the latest on- sale bargains from a membership warehouse club we belong to. One time I noticed a Westinghouse 42" LED LCD flat-screen TV that was on sale for less than $600. Quite a bargain! Our 3-year-old has taken a keen interest to banging away on Rock Band virtual drums (the Beatles version is his favorite). A separate television set seemed advisable to encourage his musical aspirations, so we decided to snatch it up. That $600 TV got me to thinking... We recently disposed of an old Sony TV that we had received secondhand. That unit was one of the early flat-panel plasma models, and was less than a decade old. The original price was a whopping $8,000. It suffered from the burn-in that is infamous in older plasma display technology. It also weighed a metric ton, consumed gobs of power and would get quite hot. However, here in 2011, I am presented with a far better unit. It has better display quality and less power consumption than a 100-watt light bulb. The coup de grace: All of this goodness is available for only 7.5% of the price of the old Sony. Adjusting for inflation, it is even cheaper than that. A large, high-resolution flat-panel television was within the reach of only a relatively wealthy person in 2001. That is not the case today. This state of affairs, of course, is a result of the innovative aspects of an open economy. A manufacturer producing televisions using 2001 technology and pricing would be out of business today. Austrian economist Joseph Schumpeter summed it up well in his book Capitalism, Socialism and Democracy: "The capitalist engine is first and last an engine of mass production, which unavoidably means also production for the masses... The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort." To Schumpeter's words, I would like to add that this process is not slowing down. Technological change is accelerating...exponentially. The types of companies I recommend to the subscribers of my investment letter, Technology Profits Confidential, are precisely those that lower costs through superior technology. These are the "better mousetrap builders" - the innovators who have the world beating paths to their doors. For example, one of the investments I have identified for my readers is a company that stands to benefit from the booming growth of wireless Internet products and technologies. This company has played a key role in lowering costs for the "common man." I can't reveal the name of the company, but I can, and will, highlight some of the reasons for investing in the rapidly growing wireless Internet sector. Last month, Cisco published a fascinating report entitled, Global Mobile Data Traffic Forecast Update. This report contained some very detailed and persuasive predictions about the growth of mobile technologies. I'd like to highlight some of the projections made by Cisco's analysts. They are, to say the least, astonishing. Consider that total global mobile data growth is expected to grow at a 92% compound annual growth rate over the next five years. All that traffic growth won't be coming from existing devices, of course. It will be coming from brand-new ones. Although the bulk of data traffic will still be on laptops and netbooks in 2015, as you can see, the mix of devices will look quite different. While per user growth for laptops and netbooks will grow at a very healthy 42% annual clip, smartphones will do well too, at 24%. Finally, tablets will be growing at a breakneck compound annual growth rate of 105%. The phrase "the power of compounding interest" is a valid and often- repeated mantra for long-term investors. In this context, think about what the power of steep rates of compound growth in smartphones will do for the profitability of the world's mobile market. In addition, tablets are the fastest-growing mobile segment. 2011 has been called the "year of the tablet," but we are just witnessing the tip of a future iceberg. Another big change under way is in the operating system of choice for mobile platforms. The biggest gainer here is Google's Android, which grew at a monthly average of 56.7% for the first nine months of 2010. The second strongest operating system, Nokia's Symbian, managed only 37.9% by comparison. However, following Nokia's recent announcement that it will switch to Microsoft's mobile OS, Symbian will now be relegated to the dustbin. Patrick Cox, editor of Breakthrough Technology Alert, says: There is, in fact, going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android OS has basically won the technological battle of the bands. It will become the standard... Microsoft has been beaten in the mobile space and their proprietary OS is fading fast. Nokia has made a series of blunders as well and is now losing the mobile OS space it once seemed destined to own forever... In Q4 2010, the Android OS was the world's best-selling smartphone platform, ending the 10-year reign of Nokia's Symbian. Recent events have solidified this trend. Open source advocates may have lost the personal computer battles, but they're set to win the mobile war. This opens the doors for third-party developers like they've never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops. The next generation of Android pad computers is simply going to rock. Since Android is essentially free, we can't invest in it directly as a pure play. However, there will be profitable opportunities to ride on its coattails. One avenue is to invest in mobile applications developers. In a recent Forbes interview, George Gilder, senior fellow of the Discovery Institute, explained how crucial "deep packet inspection" (DPI) technology will be to grow the wireless Internet. He said: Deep packet inspection is absolutely critical to our technology and the advance of digital technology, because you can't really have cloud computing, you can't really have video teleconferencing, you can't do any of the new promise of broadband without having ways to differentiate among different packets. I do hope that the FCC will sanely manage the exploding wireless Internet. However, whether or not the US's mobile Internet gets swamped in a regulatory nightmare, the strongest growth will be in the rest of the world. This is a market I will be watching closely and recommend you do the same. Ad lucrum per scientia (toward wealth through science), Ray Blanco for The Daily Reckoning Joel's Note: Chaos in the Middle East...European debt contagion...unmanageable deficits back in the US...and, of course, the horrific disaster playing out right now in Japan. However you look at it, there is certainly no shortage of bad news in the media these days. And that's one of the very reasons why Ray's Technology Profits Confidential is such a breath of fresh air. Along with his colleague, Patrick Cox, Ray is busy day and night hunting down opportunities that are set to change the world...for the better. They're looking at the myriad opportunities across the technology sector and discovering some truly inspiring - and massively profitable - investment stories. Look, we're no stranger to a healthy dose of doom and gloom here at The Daily Reckoning...but there seldom exists a catastrophe which is not accompanied by an upside opportunity. There's always a "better mouse trap builder," as Ray says. And, when it comes to protecting and growing your wealth in a world of corrupt governments, idiotic political leaders and awesome natural disasters, sometimes offense is the best defense. If you'd like to learn more about Ray and Patrick's work - including access to their entire portfolio of breakthrough technology plays - check out their somewhat controversial presentation right here. WARNING: This is Controversial. It Offends "Gloom and Doomers" Here's why it's NOT the end of America... Shocking new presentation reveals epic opportunities - viewer discretion advised for thin-skinned fear mongers. Watch the presentation right here. Bill Bonner Housing Prices Still the Bane of Economic Recovery Bill Bonner Reckoning from Charm City, Maryland... Whoa...this looks bad too. In the housing sector, the fed's ultra-low interest rates are supposed to make it easier to refinance...which is supposed to help firm up prices. But prices haven't firmed. They're still giving way. The latest numbers show prices falling, hitting post-bubble lows in 11 cities. Of the 20 major cities in the survey, only two of them had positive price movements last year. No surprise, only one - Zombietown itself, Washington, DC, home of the feds - showed an increase of more than 2%. Worst hit were the sunshine states - California, Florida, Nevada, Arizona and Georgia. Along with Michigan, more than a third of homeowners in these states have negative equity in their houses...with 70% of them underwater in Nevada. Wealth effect? Not in housing. According to the Case/Shiller numbers, homeowners saw their net housing wealth decline by $650 billion in the last quarter of 2010. And since many more households own houses than stocks - 66% are homeowners - falling housing prices has a much bigger effect on the economy than rising stock prices. And it gets worse. The big wave of resetting (and recasting) ARM loans begins to crash into the housing market next month. There are about $700 billion worth of loans in this group. Many will not be successfully rewritten. Falling housing prices will make it impossible. Homeowners will prefer to walk away, rather than be shackled to a long- term mortgage 30% to 50% higher than the value of the house. Says housing expert Robert M. Campbell: "I continue to believe that the second downward leg in house prices that began in 2010 will likely take US housing prices to a point that is 15% to 20% below current levels." *** And what's this... "This is great...it's down 35% since we bought it." This is not the kind of message you usually get from your financial advisor. But this was no ordinary advisor...and no ordinary advice. Rob Marstrand advises our Family Office on what to do with money for really good, really long-term returns. He was speaking about a Chinese food producer; he thinks this is one of the greatest opportunities to come along in many years. "Doesn't sound so great to me," we responded. "We've lost a third of our money." "You don't understand Bill, this is not the same sort of investing most people do. We let time work for us. The average guy would be petrified. He'd be looking at his retirement account...and wondering how he would make up for a 35% loss. He'll need more than a 50% gain to get back to even. "But we're not concerned about retirement. The key to family office investing success is to find the right positions...get in them at the best prices possible...and stay in until they go where they ought to go. This is a stock that is debt free...and it is trading at less than 3 times this year's earnings. "This is an almost unbelievable gift...but only if you've got the time to take advantage of it. If China blows up...or the world sinks into another big slump...this could stay down for years. But over the long run, this is likely to produce huge gains. If it just went to a 'normal' P/E of 10...you'd quadruple your money. But this is a company whose revenues are growing at 20% per year...so you might expect a P/E more like 20 - which would be about a 700% gain." Will Rob be right about this? We don't know. But our family office investing strategy is a little like the advice we gave to Edward. In the short run, you can't know what will be a big winner and what won't. So, you invest in the things that deserve to be winners in the long run. Regards, Bill Bonner for The Daily Reckoning