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The Daily Reckoning | Thursday, June 2, 2011 Moody's threatens to downgrade US - gold responds honestly, Giant breakthroughs in nanotechnology...and how to play them, Plus, Bill Bonner on vicious feedback loops and double-dips ahead... ------------------------------------------------------------ External Advertisment More than a Trillion Barrels The biggest oil reserve ever discovered isn't in the Middle East or Russia... It's just a few hours north of the US-Canada border. And it's chock-full of 1.7 trillion barrels of crude - enough to keep America running at full speed for more than 50 years. The catch: just one company holds the key to this reserve. Find out its name right here. A Perfect Union of Truth and Beauty Gold Rallies in the Ugly Face of Financial Markets Joel Bowman Reporting from Buenos Aires, Argentina... There is beauty in life, and there is truth. The two are not mutually exclusive, necessarily, though a coincidence can be rare. Often times, the truth is not as attractive as we would like for it to be. And sometimes beauty is but a lie. But every once in a while, the two converge...and the result is rarely displeasing. More on truth and beauty below, but first, a look at the unusually ugly, perennially untrustworthy financial markets... The Dow was down by as much as 78 points in morning trading today, adding to yesterday's 280 point shellacking. Not as attractive as some might have hoped, in other words, but probably more in line with the true, underlying economic trends of the day. The 30 bluest chips on the US market are down more than 500 points (4.1%) over the past month. The newspapers, as usual, are in a scramble trying to determine the cause of the sudden market unrest. And, as usual, they miss the forest for the trees. Ventured one stock analyst earlier in the week, as quoted by MarketWatch: "While it is clear economic statistics have softened, we believe this is largely attributable to Japan, the European debt debacle, the Middle East and our continuing weird weather." To which he might as well have added, "and the now-confirmed double dip in the US housing market...and generation-high unemployment...and the unreliability of official statistics...and the rise in commodity prices...and the deathly creep of inflation...and the lackluster performance of the home team in this or that local circus/sporting event..." While it is true that markets react to events such as those described above, it is a mistake to assume that said events occur in a vacuum. Far from being the cause of market distress, they are in fact symptoms of a much greater problem. It is a problem that ratings agency Moody's - typically late on the scene - addressed just this morning, when it threatened to "place the US government's rating under review for possible downgrade" if there is no progress made on increasing the statutory debt limit in coming weeks. Apparently investors needed a friendly reminder from the ratings agencies that the world's largest economy is also the world's (and perhaps history's) largest debtor. Never mind about Greece, or Portugal, or even Spain. Let's remember for a moment who is holding, by far, the biggest bag of I.O.U.s...about 14.3 trillion of them, at last count. Gold, that magnificently honest metal, responded to Moody's announcement exactly as you would expect it to respond. It rallied. In fact, it rallied by about $15 within a couple of hours. In many ways, gold can be seen as a kind of "BS barometer." The less trustworthy a currency becomes, the less respect gold affords it. Over the medium haul - which is to say, the past decade - the anti- dollar hedge has performed this task rather admirably. At the turn of the century, one greenback was worth about 1/250th an ounce of gold. Today, the world's temporarily preferred fiat money is barely worth 1/1,500th of an ounce. Gold is beautiful for many reasons, but chief among them must be the fact that it doesn't tell lies. Gold is beautiful and it is true, in other words...and it is also beautiful because it is true. It responds dutifully, dispassionately to safe haven demand; demand nurtured by reckless and untrustworthy policies perpetrated by those in a position to manipulate dishonest paper currencies. Expect gold, therefore, to continue "calling BS" on the United States' commitment to a "strong dollar policy" in the months and years ahead. Byron King's Outstanding Investments Introduces... Third World America... Once the economic envy of the world...we're now sitting on the verge of bankruptcy and mass chaos... This shocking report explains how our $14 trillion debt crisis is threatening our very way of life...turning our once great nation into Third World America. Click this link to watch Third World America and find out how to protect your loved ones and your wealth before it's too late... The Daily Reckoning Presents Nano-Engineering Making Big Strides Ray Blanco Scientific and technological advances are increasingly powered by our ability to build things at the atomic level. Mimicking processes that take place in biology, scientists are using custom self-assembling structures to power new molecular breakthroughs. At the atomic level, there is no fundamental difference between the various scientific disciplines. Improving nanotechnology is converging them at an accelerating rate. An often-overlooked transformational technology is air conditioning. We don't usually think too much about it unless it stops working. It has, however, had profound impacts on how we live and could add profit to your portfolio... The great majority of residential units use vapor compression refrigeration. These systems work by compressing a refrigerant fluid in a pump, which raises the temperature of the refrigerant. After being compressed, the high-pressure vapor is run through a tube to a heat exchanger. Here, the heat is radiated outside. Once cooled, the refrigerant condenses from a vapor into a liquid and moves through a thermal expansion valve. When it crosses the valve, the refrigerant is decompressed and drops in temperature. The now-cold refrigerant is then piped through the coils of another heat exchanger, where interior air transfers its heat and is cooled. The refrigerant is then cycled back to the compressor pump and the cycle starts again. Vapor compression refrigeration isn't the only game in town, however. Other technologies, like absorption refrigeration, accomplish the same task using a different method. Rather than using an electrically driven pump to compress a refrigerant, absorption chillers use a heat source to condense refrigerant. In both cases, the evaporation of a refrigerant is used to carry heat away from indoor air. Absorption refrigeration isn't as energy efficient as vapor compression refrigeration. However, in industrial environments that have a large source of heat, like power plants, it makes sense. Since the heat is going to get vented to the environment anyway, it can be put to work driving this type of air conditioning system. Typically, absorption chillers are large and expensive when compared to the more common refrigeration technology. The economic case is that they pay for themselves over time by saving electricity. However, they have not had much of a role to play in residential air. A typical home does not have a ready source of waste heat - while it does have a ready source of electricity. In absorption chillers, an evaporated refrigerant adheres to a solid surface. The refrigerant is usually a water solution. For the system to work well, a large surface area is needed. The large amount of surface area makes absorption units too large to be practical for home use compared to vapor compression They are used, though, in off-grid situations where a heat source like propane burners is available. New technology, however, is changing things. Pacific Northwest National Laboratory has developed improved materials for use in absorption air conditioning systems. Using engineered nanostructures that self-assemble into 3-D shapes, a much-larger effective surface area is created. The end result is a unit 75% smaller that costs half as much as current technology. In addition, the nanostructures bind more weakly to water molecules than current materials. This means that less heat is needed to drive the refrigeration cycle. It also speeds up the process of absorbing and releasing water molecules. The efficiency gains and lower heat requirements mean that the most common heat source in the world - the sun - could be used to power the air conditioner during the time of the day when it is most needed. Solar water heaters similar to those seen on the roofs of many homes today could provide the heat source needed to keep homes cool. Today air conditioning units are in 85% of US homes and account for 16% of total residential electricity consumption. And nanotechnology is paving the way to not only reduce costs but boost efficiency. This is not the only sector where nanotechnology is making a significant impact. And in the future we will continue to see more and more developments in this arena. Nanotechnology is one technology sector that that tech investors should be diving into right now. Once these developments become mainstream, early investors could be taking large profits. The Power Shares Lux Nanotech ETF (NYSE:PXN), which holds a portfolio of nanotech companies, is a pretty good proxy for this sector. But the nanotech sector is a target-rich environment for stock-pickers who can differentiate between "gee-whiz" technologies and those with genuine, large-scale commercial application. In my investment letter, Technology Profits Confidential, I am continuously monitoring "breakthrough technologies" like nanotech to identify the next generation of successful tech companies. You can find out more about some of the fascinating technologies we're monitoring at the moment right here. Ad lucrum per scientia (toward wealth through science), Ray Blanco, for The Daily Reckoning Ray Blanco's Technology Profits Confidential Presents... Why It's NOT the End of America... This is actually the greatest moment to be alive - and to grow incredibly wealthy. Warning: What you're about to see is controversial. It will offend the "Gloom & Doom Crowd". Watch this urgent presentation now. Bill Bonner Declining House Prices Weigh Heavily on Underwater Homeowners Bill Bonner Reckoning from Baltimore, Maryland... It is still unclear which way the market is going. If only they made it easier for us! But yesterday, the Dow took a 279-point hit. Oil lost $2, closing at $100. Gold rose $6. And look at this... The yield on the 10-year note sank below 3%. Go figure. Inflation is at 5%...and people still lend the feds money for ten years at only 3%. Why? Are they stupid? Are they crazy? Maybe. But interest rates go down in a correction. And we're in one. Now, it's official. Everybody knows. There is no recovery. QE2 is a failure. And housing is in a double-dip. The feedback loops are all turning vicious, and nasty. The Great Correction is beginning to bite harder. The rich don't feel the pain...and the poor are used to it. But the middle classes suffer; they've had it too easy for too long. Mobs are out on the streets of Barcelona and Athens. Will they soon be out in Atlanta and Baltimore? Maybe. They've got as much reason as anyone. How many Americans lack decent jobs? How many are underwater? How many are on food stamps? But who will lead the revolution? Remember those people who were tempted into buying a house with an $8,000 tax credit? Alas, another government program backfires. Many buyers also used the handy services of FHA financing, with just a 3.5% down payment. Housing is now below its 2009 low. So what happened to those new homeowners? They're underwater! Thanks a lot, feds! The best report on the housing market we've seen so far comes from the "Campbell Real Estate Timing Letter." Robert Campbell cites three studies - from Clear Capital, Zillow, and Case-Shiller. The numbers are a little different in each one. But the conclusion is unmistakable and unanimous: Housing is going down. And with it goes America's middle class. First, Mr. Campbell draws our attention to the connection between bank- owned house sales and house prices. In a nutshell, the more houses sold by the banks...the lower prices go. So you have to ask yourself a question: will the number of bank-owned properties on the market go up or down? He does not make us wait long for the answer. Loan delinquencies are falling. But they are still nearly double the 1995-2005 average. And there are more than 2 million houses in the foreclosure pipeline already - that is, more than 90 days overdue on their mortgage payments. Add those 2 million (most of which will end up as bank-owned sales) to the 2.2 million already in inventory and you have the makings of a glut. "The data...points to the simple fact that the foreclosure pipeline is bloated..." he says, with as many as 7 million properties hitting the bank re-sale or short sale market in the months ahead. What will this do to house prices? They will go down. Then, what will happen? Then, the feedback begins to circle around...biting down hard on middle class derrieres. First, those who are already underwater sink deeper. Many, who have been holding onto to the flotsam and jetsam of the housing disaster, give up. They turn into renters. Then, as housing prices go down, as many as 4 million more homeowners go under the waves too. The single factor that influences foreclosures most is negative equity - more even than losing a job. Once submerged, some owners have no choice; they run out of air. Others make a business decision: it is better to let go of the heavy house weight...they reason...and swim for safety. Interestingly, even many owners who are still ABOVE water will move to higher ground. As prices go down, they will put their houses on the market, trying to rescue the little bit of equity they have left. This - combined with the seizures, foreclosures and 'walk-aways' - will greatly increase the inventory of 'for sale' properties. You know what happens next. More sales lead to further price declines, provoking more defaults and walk-aways, and generally making the entire middle class writhe in pain and disgust. Shiller thinks housing will fall back to its 110-year mean. This would require another 5% to 10% drop in prices, which would leave as many as 20 million homeowners underwater. In Atlanta, 55% of homeowners with mortgages are already underwater, according to Zillow. In Phoenix, the figure is 68%. Imagine how many would be underwater if prices fell another 10%...or more. But don't stop there. Use your imagination. If housing overshot on the way up...won't it overshoot on the way down? Housing prices in Japan dropped 80% - and they're still near the bottom. So far, in the USA, housing is only down to 2002 levels. It has much further to go - probably another 20% or 30%, at least...taking prices back to levels last seen when Monica Lewinsky was still welcome in the White House. And more thoughts... Here's a thought. This double dip in housing occurs even while: 1) Interest rates are as low as they've been in three generations 2) The Fed is pumping about $100 billion a month into the financial system 3) The federal government is running a deficit of nearly $150 billion a month How could the financial situation be more favorable? And what will happen when mortgage rates rise? Oh...now...the teeth are getting sharp. *** In the interest of full disclosure, we should add to yesterday's comments with an admission: we have a grudge against the SEC. Our company was once the target of an attack by the agency. The feds charged us neither with stock manipulation nor trading on insider information. Instead, they pointed an accusing finger in our direction and charged us with a novel faux pas. (It was the first time in history, we believe). The SEC charged us with NOT having inside information. Our analyst talked with a company representative. He published the company man's remark, along with a recommendation to buy the stock. Then, the insider denied that he had said it! The SEC said we had claimed to have inside information and didn't really have it. Normally, the matter would have stopped there. Reporters make mistakes. Under pressure, sources regret and retract their statements, especially with the SEC breathing down their necks. Editors distort. People lie. That's life in the financial press. A Maryland court, hearing these facts, ruled in our favor. But the SEC made a federal case out of it! They pursued this trivial 'he said/she said' case - at a cost of millions of dollars to the agency and to us - at the very time Bernard Madoff was making off with billions. Even Harvard Law School and The New York Times came in on our side; taking no position on who said what, they recognized that the agency had overstepped its bounds and that the First Amendment was in jeopardy. Alas, that didn't stop the SEC. They kept at it until they won the case. Then, the Supreme Court refused to re-examine it. Though our company was found innocent, our analyst had to pay a fine. Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------