 | | The Daily Reckoning | Friday, May 13, 2011 |
- A few actionable tips on how to survive the "Greater Depression,"
- A big picture tale to help the nervous investor sleep at night,
- Plus, Bill Bonner on groping grandmothers, The Donald's delusion and plenty more...
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|  | | | Following the GM Blueprint | | Consumer Spending and the Decline of the US Economy | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
First, a brief look at the markets...
Stocks rallied a bit yesterday, reversing a sharp selloff from the previous day. The Dow added 65 points. The S&P 500 ended up a smidge and the NASDAQ finished 40 points ahead of where it began the session. Gold fell off by almost $25...before recouping all of its losses to end the day more or less where it began, at $1,506 per ounce. Silver trended likewise. As did oil.
All in all, it was a relatively underwhelming day to be watching the markets. Unless you enjoy watching paint dry, or grass grow. Events are unfolding slowly, with sudden, largely unpredictable bouts of "quickly." The sailing is smooth, in other words...until it suddenly isn't.
As far as we can tell, it's near impossible to time these single day, multi-hundred point rallies and selloffs...which is why we long ago gave up trying. Instead, we sit back, take a deep breath, and remain as detached as practically possible from the minute-by-minute minutiae spewing forth from the world's mainstream media outlets. We try to get a big picture view of what's happening, something that helps us sleep at night. Then we have a nip of scotch or a glass of wine and go to bed. Easy.
So what is this "Big Picture" then? Fellow Reckoner, we're shocked you have to ask! Bill has been outlining his Great Correction thesis for some time. We thought you'd have it down pat by now. Just to recap...
The developed markets of the world are unwinding - sometimes slowly, sometimes not - a generation-long credit buildup. Since roughly the end of the Second World War, Americans and Europeans have been on a rabid spending binge. At the beginning, credit expanded more or less in step with growth in productive capacity. The troops, returning from their various missions and adventures abroad, flooded the workforce with productive labor. Factories that had been put to use manufacturing things to blow other things up, returned to building useful stuff...things like automobiles, sink pipes and umbrellas. Production of these items responded largely to the demand for them...as well it should.
Slowly, almost imperceptibly at first, things began to change. The story of General Motors parallels the overall tale of the American economy rather well.
Back in 1954 GM's share of the American market, then the largest auto market in the world, stood at a whopping 54%. The Detroit giant churned out one in every two cars made. The term "rust belt cities" had not yet been invented and places like Pittsburgh, Detroit and Baltimore were humming along to the sounds of metal presses and hammer on anvil. Through the '60s and early '70s, GM continued to cruise along. In 1961 she sold more than half of all the cars AND trucks in the US. Then, with the introduction of the GTO Pontiac Tempest in 1964, Detroit's darling set about ushering in the era of the muscle car. But then something happened: the energy crisis. All of a sudden people didn't want a V8 engine in a medium sized American body; they wanted a four- cylinder engine in a small-sized Japanese body. GM failed to adapt to the changing conditions of the market...as did the American economy at large.
Manufacturing began moving offshore as cheaper labor costs drove a competitive wedge between the new Asian producers and the aging, union- saddled companies in the US. A continuation of that shift through the '80s saw GM's market share in the US drop from 45% to 35% and, for the first time in 59 years, the company actually reported a net loss.
More union-led entitlement shenanigans throughout the '90s and early '00s, coupled with an almost unwavering commitment to inflexibility on GM's part, eventually drove what was once the largest company on the planet into the arms of the US government. A sign of the times, indeed.
Today, China is the world's largest market for automobiles and GM is an embarrassing shadow of its former self. And, as "Jap Junk" and "Korean Krap" outpaced manufacturing efforts at home, the United States itself turned from a nation of producers to a nation of consumers. When Deng Xiaoping was telling the Chinese masses that "to get rich is glorious," Americans - and their Europeans cousins - were beginning to spend more than they earned, relying on debt to finance their increasingly extravagant lifestyles rather than savings and productive capital formation.
The whole process accelerated with EZ money policies under Chairman Greenspan and "the Bernank" and, by the time the Great Recession of '07-'08 rolled around, the Americans were neck deep in a debt hole with nothing but a Chinese-made shovel with which to dig themselves "out."
And still they dig...
As we mentioned in these pages earlier in the week, so deep is the current debt hole in the US that even if the IRS could somehow manage to double its income tax receipts, the federal government would still operate in the red. And that's to say nothing of the economically stultifying effect such an onerous tax burden would have on the economy in general.
Today, money and power shift from the west to the east. That's the mega-trend playing out under our nose; the direction the capital is flowing. Slowly but surely, the emerging markets of the world are becoming more and more business friendly. The west, meanwhile, is clamping down with more restrictions, tighter regulations and the heavy hand of government on every budding businessman's shoulder...and wrapped around his throat.
So how, aside from that nip of whisky and/or glass of wine, do you sleep soundly at night? How do you take advantage of the current situation, rather than allow it to take advantage of you? Doug Casey, a perennial favorite at our investment symposium in Vancouver, shares some insights in today's column...
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| | The Daily Reckoning Presents | | Keeping Capital in a Depression | |  | | Doug Casey |
Nothing is cheap in today's investment world. Because of the trillions of currency units that governments all over the world have created - and are continuing to create - financial assets are grossly overpriced. Stocks, bonds, property, commodities and cash are no bargains. Meanwhile, real wages are slipping rapidly among those who are working, and a large portion of the population is unemployed or underemployed.
The next chapter in this sad drama will include a rapid rise in consumer prices. At the beginning of this year, we saw the grains - wheat, corn, soybeans and oats - go up an average of 36% within one month. In the same time frame, hogs were up 30.7%. Copper was up 29.1%. Oil was up 14%. Cotton was up 118%. Raw commodities are the first things to move in an inflationary boom, largely because they're essential to everything. Retail prices are generally the last to move, partly because the labor market will remain soft and keep that component down, and partly because retailers cut their margins to retain customers and market share.
We are in a financial no-man's land. What you should do about it presents some tough alternatives. "Saving" is compromised because of depreciating currency and artificially low interest rates. "Investing" is problematical because of a deteriorating economy, unpredictable and increasing regulation, rising interest rates and wildly fluctuating prices. "Speculation" is the best answer. But it may not suit everyone as a methodology.
There are, however, several other alternatives to dealing with the question "What should I do with my money now?" - active business, entrepreneurialism, innovation, "hoarding" and agriculture. There's obviously some degree of overlap with these things, but they are essentially different in nature.
Active Business
Few large fortunes have been made by investing. Most are made by creating, building and running a business. But the same things that make investing hard today are going to make active business even harder. Sure, there will be plenty of people out there to hire - but in today's litigious and regulated environment, an employee is a large potential liability as much as a current asset.
Business itself is seen as a convenient milk cow by bankrupt governments - and it's much easier to tap small business than taxpayers at large. Big business (which I'll arbitrarily define as companies with at least several thousand employees) actually encourages regulation and taxes, because their main competition is from small business - you - and they're much more able to absorb the cost of new regulation and can hire lobbyists to influence its direction. Only a business that's "too big to fail" can count on government help.
It's clearly a double-edged sword, but running an active business is increasingly problematical. Unless it's a special situation, I'd be inclined to sell a business, take the money, and run. It'sAtlas Shrugged time.
Entrepreneurialism
An entrepreneur is "one who takes between," to go back to the French roots of the word. Buy here for a dollar, sell there for two dollars - a good business if you can do it with a million widgets, hopefully all at once and on credit. An entrepreneur ideally needs few employees and little fixed overhead. Just as a speculator capitalizes on distortions in the financial markets, an entrepreneur does so in the business world. The more distortions there are in the market, the more bankruptcies and distress sales, the more variation in prosperity and attitudes between countries, the more opportunities there are for the entrepreneur. The years to come are going to be tough on investors and businessmen, but full of opportunity for speculators and entrepreneurs. Keep your passports current, your powder dry, and your eyes open. I suggest you reform your thinking along those lines.
Innovation
The two mainsprings of human progress are saving (producing more than you consume and setting aside the difference) and new technology (improved ways of doing things). Innovation takes a certain kind of mind and a certain skill set. Not everyone can be an Edison, a Watt, a Wright or a Ford. But with more scientists and engineers alive today than have lived in all previous history put together, you can plan on lots more in the way of innovation. What you want to do is put yourself in front of innovation; even if you aren't the innovator, you can be a facilitator - something like Steve Ballmer is to Bill Gates. It will give you an excuse to hang out with the younger generation and play amateur venture capitalist.
This argues for two things. One, reading very broadly (but especially in science), so that you can more easily make the correct decision as to which innovations will be profitable. Two, building enough capital to liberate your time to try something new and perhaps put money into start-ups.
Hoarding
In the days when gold and silver were money, "saving" was actually identical with "hoarding." The only difference was the connotation of the words. Today you can't even hoard nickel and copper coins anymore because (unbeknownst to Boobus americanus) there's very little of those metals left in either nickels or pennies - both of which will soon disappear from circulation anyway.
We've previously dismissed the foolish and anachronistic idea of saving with dollars in a bank - so what can you save with, other than metals? The answer is "useful things," mainly household commodities. I'm not sure exactly how bad the Greater Depression will be or how long it will last, but it makes all the sense in the world to stockpile usable things, in lieu of monetary savings.
The things I'm talking about could be generally described as "consumer perishables." Instead of putting $10,000 extra in the bank, go out and buy things like motor oil, ammunition, light bulbs, toilet paper, cigarettes, liquor, soap, sugar and dried beans. There are many advantages to this.
Taxes - As these things go up in price and you consume them, you won't have any resulting taxes, as you would for a successful investment. And you'll beat the VAT, which we'll surely see.
Volume Savings - When you buy a whole bunch at once, especially when Wal-Mart or Costco has them on sale, you'll greatly reduce your cost.
Convenience - You'll have them all now and won't have to waste time getting them later. Especially if they're no longer readily available.
There are hundreds of items to put on the list and much more to be said about the whole approach. This is something absolutely everybody can and should do.
Agriculture
During the last generation, mothers wanted their kids to grow up and be investment bankers. That thought will be totally banished soon, and for a long time. I suspect farmers and ranchers will become the next paradigm of success, after being viewed as backward hayseeds for generations.
Agriculture isn't an easy business, and it has plenty of risks. But there's always going to be a demand for its products, and I suspect the margins are going to stay high for a long time to come. Why? There's still plenty of potential farmland around the world that's wild or fallow, but politics is likely to keep it that way. Population won't be growing that much (and will be falling in the developed world), but people will be wealthier and want to eat better. So you want the kind of food that people with some money eat.
I'm not crazy about commodity-type foods, like wheat, soy and corn; these are high-volume, industrial-style foods, subject to political interference. And they're not important as foods for wealthy people, which is the profitable part of the market. Besides, grains are where everybody's attention is directed.
But there are other reasons I'm not wild about owning any amber waves of grain. Anything you want to plant will practically require the use of a genetically modified (GM) seed from Monsanto. I'm not sure I really care if it's GM; all foods have been genetically modified over the millennia just by virtue of cultivation. And $1 paid to Monsanto typically not only yields the farmer $5 of extra return, but produces lots of extra food - which helps everybody. But I wouldn't be surprised if someday the giant monocultures of plants, all with totally identical purchased seeds, don't result in some kind of catastrophic crop failure. This is a subject for another time, but it's a thought to keep in mind.
In any event, agricultural land is no longer cheap. But I don't suggest you look at thousands of acres to plant grain. Niche markets with niche products are the way to fly.
I suggest up-market specialty products - exotic fruits and vegetables, fish, dairy and beef. The problem is that in "advanced" countries - prominently including the US - national, state and local governments make the small commercial producers' lives absolutely miserable. Maybe you can grow stuff, but it's extremely costly in terms of paperwork and legal fees to sell, especially if the product is animal based - meat, milk, cheese and such. Niche foods are, however, potentially a very good business. Eternal optimist that I am, I see one of the many benefits of the impending bankruptcy of most governments as again making it feasible to grow and sell food locally.
Above all, though, this isn't the time for business as usual. You'll notice that "Working in a conventional job" didn't occur on the list above. And I pity the poor fools working for some corporation, hoping things get better.
Regards,
Doug Casey,
for The Daily Reckoning
Joel's Note: Get more valuable advice on how to survive in a crisis in The Casey Report - a monthly newsletter brimming with top-notch analysis of US and world events, economic research, trend forecasts and investment advice for the big-picture investor. Details in this free report.
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| | | | Bill Bonner | | Chinese Growth on a Mountain of US Debt | |  | | Bill Bonner |
Reckoning from Shanghai, China...
Americans must be the most gullible simpletons in the world. They will believe anything. No fantasy is too absurd. No lie is too ridiculous. Much of what they now take for granted an earlier generation would have taken for preposterous, outrageous, and criminal.
According to presidential candidate Donald Trump they are prepared to believe that China is to blame for their financial problems... No kidding. When asked what he'd do to fix the US economy, 'The Donald' says he'd 'get tough with China.'
What dastardly thing are the Chinese doing? What devious, underhanded act are they committing?
Ah ha! An act of commerce! They're delivering quality products to America at discount prices! Trump says he'll slap a 25% tariff on Chinese-made goods.
How exactly this would be better for Americans he didn't explain. Says our old friend Grover Norquist:
"Tariffs are not paid by the Chinese. They're paid by Americans who buy things made by the Chinese."
Americans are barely able to keep up with their expenses already; raising prices wouldn't do them any favor that we can see.
But in the US, crackpot ideas are as common as democrats.
In the '90s, Americans thought they could get rich by buying companies that weren't earning any money. Then, they thought they could get rich by buying a house. When that went bad, they whined for bailouts and handouts. And now they think the feds are helping them by printing more money. Honestly, you can't make this stuff up!
But their delusions don't stop there. They also believe that for the last 10 years the world's only super-power has been at war with 372 Muslim extremists. And that somehow we'll be safer if we let TSA agents grope our grandmothers and pat down our toddlers.
And how about this? It is obvious to the whole world that US Commander- in-Chief Obama ordered a hit squad to disappear Osama bin Laden; but in the USA, people think the SEALs were conducting a heroic military operation. And they dumped his body in the ocean because they didn't want to offend the Muslim brotherhood.
You have to like people who would believe something like that. They're loveable half-wits...earnest morons with the skeptical intelligence of a puppy.
Nor does it bother them that their national financial plan is a calamity. Everyone who has thought about it for more than a second realizes that the secret to gaining wealth is to make money...save it...and invest it in new and more productive business opportunities.
And yet, the government's financial strategy for 4 decades has been to encourage consumer spending and borrowing, a program that is sure to lead to poverty.
This strategy did not boost real economic growth in the US. But it did wonders for China. We are now on a plane, en route to Shanghai from Beijing. China is supposed to be a poor country. But there is no evidence of it so far.
Instead, there are automobiles, highways, skyscrapers - as far as the eye can see. Factories by the thousands. Warehouses. Docks and freight yards. Plants. Mills. Apartment blocks that New York would be proud of. Office towers that Baltimore would envy. Trains. Loading platforms. Bridges. Storage yards. Assembly units. Round buildings. Square buildings. Rectangles. Ovals. Low rise. High rise. The scale of activity is breathtaking. And we haven't reached Shanghai yet.
Is there any description of China that doesn't end in 'st'? It has the biggest, newest, most daring and innovative buildings. It has the fastest trains...the most roads and cars. The richest. The poorest. It has everything.
It has people too... Smart, hardworking people. Instead of borrowing to boost their standards of living, the Chinese save their money in order to reduce their standard of living...boost the next generation's.
The Chinese have already pulled off a miracle. It has only been 32 years since Deng Xiaoping opened up China to making money. In that time, the nation has gone from a third world dump to the world's 2nd largest economy...whose growth rate continues to be shocking.
What's their secret? China is a zombie-free zone. The 'safety net' is thin here. There is plenty of corruption and inside dealing, no doubt. But people work hard...save their money...and expect to live by their own efforts.
But the Chinese have gotten a lot of help from America. The feds encouraged Americans to buy things they didn't need with money they didn't have. The Chinese merely took the orders...and the money. Now they have the biggest stash of dollars in the world, while the US has the biggest, stinkiest pile of debt the world has ever seen.
And more thoughts...
We have just had our best airport and hotel experiences ever. Arriving at our hotel - the China World Hotel in Beijing - the staff again met us at the entrance. They greeted us by name and showed us directly to our rooms. There was no waiting to check-in. There were no lines. There were no incompetent or surly flunkeys.
Then, we drove to the huge Beijing airport - the largest in the world. There, uniformed airline employees met us at the curb...took our luggage...and whisked us through the check-in security process. The whole thing took only minutes, with almost no waiting at any step. It was a pleasure.
*** "You haven't seen the real China," one of our Dear Readers who has lived in China for many years explained. "You're just looking at the top cities. It would be like going to the US and only visiting New York and San Francisco. You wouldn't have a very good idea of what the country is like.
"If you go out to some of these second and third tier cities, you get another picture all together. They're pretty grim. And poor. And there are still millions of people who earn almost nothing.
"These poor people keep coming to the cities to find work. The government knows it has to keep the economy growing so that these people don't become a problem. But so far, I've been very impressed. The people running the country may be communists, but they're not stupid. And to tell you the truth, this is a much better system than we have in America.
"I don't know why the US would want to push democracy on the whole world. And I don't know why Hillary Clinton would want to lecture China about human rights either. China isn't intentionally killing people. China doesn't have troops in other countries. China is minding its own business...and building its economy - just like America used to do.
"And not having a democracy is really a good thing. A benign dictatorship can make the kind of changes you need to make. That's what they do here. They can do things that require huge capital investments but only pay off far in the future. They can do things that are unpopular, because they don't have to stand for election every 4 years.
"That's why the US is such a mess. We're digging ourselves a deeper and deeper hole each year. But nobody can stop it. Because every member of Congress has to face the voters. And the people who vote are also the people who benefit from government spending - especially teachers and retirees. So you can't fix the problem. It just gets worse and worse until it falls apart.
"Democracy is very overrated."
Regards, |
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