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The Daily Reckoning | Wednesday, June 22, 2011 US housing market continues southward...as stock markets rally, Food, water, land - buying today what China will consume tomorrow, Plus, Bill Bonner on schleppers, humpers and the mainstream media... ------------------------------------------------------- URGENT NEWS... Breakthrough: New "Magic Bullet" Technology Could Zap Deadly Cancer Cells at Will In the latest clinical trial, over 85% of cancer patients achieved complete or partial remissions of their symptoms using the "magic bullet" technology. This is a rare opportunity to get in early on a little-known Biotech Company that's making medical history... Click here for full details. When Bank Profits Hurt Home Sales The Curious Reversal of a Once Symbiotic Relationship Eric Fry Reporting from Laguna Beach, California... The US stock market posted another nice gain yesterday, as the US housing market recorded another dismal decline. The Dow Jones Industrial Average, for its part, added 110 points to 12,190. But the US housing market slipped deeper into the murky depths of uncharted territory. Purchases of existing homes fell 3.8% in May from the prior month to an annual rate of 4.81 million homes. At that pace, sales this year would drop below last year's 13-year low of 4.91 million. At the same time, the price of the median home fell nearly 5% year- over-year to $166,700, which is roughly the same price of a median home nine years ago. "An unemployment rate hovering around 9% and tight credit standards," Bloomberg News observes, "mean it may take years to absorb the 1.8 million distressed properties on the market that are weighing down home values." The National Association of Realtors (NAR) provides a more comprehensive explanation for the housing market's persistent weakness - an explanation tinged with vitriol. In the NAR's 18-page, lavishly illustrated "Realtors Confidence Index" report for May 2011, the Association's Chief Economist, Lawrence Yun, blames both the soft economy and the "perverse new banking mindset" for the housing market's difficulties. "[T]he spring economy was basically OK," Yun's analysis begins placidly. "It was expanding, but at a low rate of growth...Jobs were being created, but perhaps not in the industries that generate the big bucks." But after a brief nod to the soft economy, Yun pillories the banking industry for its refusal to lend. "Adding to the challenge is the fact that banks are not lending," he says flatly. "Banks are still hoarding cash and contracting lending activity...[They] are adding profits to their bottom lines, due partly from their ability to access money on the cheap, thanks to government backing of deposits, and by buying tradable assets such as realtors in government bonds. The inevitable too-big-too-fail taxpayer bailout if something were to go wrong is also quite reassuring for the large banks. "In the 'good old days,'" Yun continues, "there used to be a rule: the 3-6-3 banking rule. The bank would offer 3% interest to depositors, charge 6% on loans, and then be on the golf course by 3:00 p.m. That rubric has now been replaced with a new one: give nothing to depositors, give nothing to those who want to borrow, buy tradable assets, get an easy 3% yield from government bonds, and pretend to work long hours to justify a high salary and bonus. Partly because of this perverse new banking mindset...pending home sales in April took a tumble, falling 11% from the previous month." The substance of Yun's scathing rebuke of the banking industry is not nearly as surprising as its source. Historically, the NAR and the banking industry relied on a close symbiosis to nourish themselves. Whatever was good for one of them was automatically good for the other. Easy credit nourished the housing bubble, just as the housing bubble fattened bank profits and provided the wherewithal to continue extending easy credit. Yun's analysis therefore, is not so much the clinical commentary of a dispassionate economist as it is the bitter musings of a rejected symbiont. But no matter his motive, Yun makes a compelling argument, especially in his concluding remarks: Before I end this column - especially considering what some may view as a harsh take on bank profits - I don't mean to suggest that profit per se is a bad thing...Profit has been the engine for economic prosperity in many countries. A modern example is China. China was very poor when Chairman Mao came into power to create his "paradise on earth" by punishing and exterminating greedy profiteers and landlords. China remained very poor - some would say became even poorer - with about 50 million of its citizens dying of starvation by the time Mao died. After his death, China experienced an astonishing economic expansion - from profit being permitted and from the introduction of competition into the economy. So the profit motive can serve a country's economy quite well. But private profits that rely on taxpayer backing (as is the case with banks today or with Fanny Mae/Freddie Mac during the good years) clearly raise questions about economic fairness. If taxpayers support the banks, the banks should give back in responsible levels of homeowner lending." Yun does not state the opposing corollary: If taxpayers do not support the banks, the Free Market will quickly determine both the "market clearing" price of residential real estate and the true level of "responsible lending." Despite the perverse banking mindset that is impeding a recovery in the housing market, the perverse activities of the Federal Reserve are providing an unintended support to the real estate market. The Fed's monetary manipulations - which are both weakening the dollar and suppressing short-term interest rates - are drawing growing numbers of all-cash buyers into the housing market. Foreign all-cash buyers, in particular, are becoming a conspicuously large presence in several regional markets like South Florida. More on this developing story in tomorrow's Daily Reckoning... But for today, we turn our attention away from the struggling real estate market to the flourishing agricultural sector...again. Israel Gives Money-Grubbing OPEC the Middle Finger Israel just discovered what could be the 2nd largest oil basin in the world today. This could spell the beginning of the end for OPEC - and huge gains for you. Details here. The Daily Reckoning Presents Buy Food! Chris Mayer A headline caught my eye last week, beyond all the ink spent on European debt woes. It read, "Hungry China Shops in Argentina." China already buys most of Argentina's soybean exports. And now China's largest farming company is trying to lock down acreage for more soybeans. It also unveiled a plan to grow wheat, corn, vegetables, fruit and even wine - all for export to China. The moves in Argentina mirror China's efforts in other parts of the world to secure food supplies. The simple reason is that China is having more and more problems producing the foodstuffs it needs at home. The biggest challenge may be finding sources of water. For months, south and central China have been suffering from drought. In the spring, Beijing sent deep well-drilling teams from all over the country to these parched provinces. The aquifers these regions relied on were dry. They needed to drill deeper. This required more specialized equipment. Hence, Beijing's order. Unfortunately, drilling deeper wells is only a short-term fix. Deep- underground aquifers can take hundreds of years to replenish. Tapping these wells is merely a kind of advance on the future. You have to pay it back later when you can't tap the water anymore. This is the idea, too, behind "water-based food bubbles." You tap a nonrenewable water supply that gives you the boost you need to grow food, but as with a financial bubble, it is bound to pop. Then, food production collapses. Droughts come and go, but they have been more severe in China in recent years. The drought in Shandong was the worst in 200 years. Drought lingered in Sichuan province a few years ago, and it was the worst in a century. And last year, a drought in northern China hurt the corn harvest (and made China a net buyer of corn abroad for the first time). Drought has also hit areas not normally associated with drought. The Asia News Network reported that through May, rainfall in Taiwan was down 35% compared with the average in the past 30 years. In the western part of the island, rainfall was down 90% in April and May. Taiwan is normally a relatively wet island and good for growing things. Before it became a mini-Japan, Taiwan was a large exporter of oranges, bananas, asparagus and mushrooms. The foundation of its economy was agriculture. China's southern and central provinces are normally wetter. Hubei, in the central part of the country, is known as the "land of a thousand lakes" - hundreds of which are now "dead," meaning you cannot extract water from them. In fact, drought had reduced China's largest freshwater lake, in Jiangxi, by 80%. The irony of all this is that earlier this month, the skies opened up over China. Now they have too much rain. As The Wall Street Journal reports: "The flooding, triggered by heavy rains that started early this month, has caused widespread suffering in more than a dozen provinces and regions, with state media calling it the worst in decades in some areas. In addition to the 175 known deaths, 86 people are missing and some 1.6 million people have been displaced by the flooding, which has caused more than $5 billion in damage as of Monday..." It has also caused extensive crop damage. Production of grains, fruits and vegetables has fallen by more than 20%. Food prices are soaring. Hundreds of thousands of acres of crops have been destroyed. We may speculate why China's weather has been more severe in recent years. But one thing is undeniable, and it takes us back to the story I led off with: China will need to buy more of its food abroad. By importing food, it essentially ups its water needs as well. Of all the things China demands, food and water would seem to be among the most important and most resilient. I think a recession in China would hurt demand for food. People would not eat as well. They would likely eat less meat. Less meat means fewer grains for livestock. So grain prices are vulnerable to recessions too, just as are oil and copper. But volumes are fairly steady over time. If you look at long-term grain production, you would see a steady chart moving upward over time. Recessions barely make a dent in the long-term trend. While prices may have swung wildly from time to time, production has marched steadily upwards. More recently, you can look at production and see an inexorable increase over time. You can also see persistent shortfalls relative to consumption: This is partly why inventory levels have been tight and prices have stayed high. So given the long-term trends, there are some good investable themes around this. The most-volatile ones would be the fertilizer stocks. But there are less-volatile ideas that you can park in a long-term portfolio and not care so much about weather patterns and short-term crop prices. Just think about all those grains - that chart, going up and to the right. Those grains need to get to market. They need to be cleaned, sorted, packaged, stored and shipped. That's one reason I like businesses such as Viterra (VT:tsx) and Alliance Grain Traders (AGT:tsx). These firms do exactly those things. And they do it on a global scale. They have dominant market positions and advanced facilities. Both should prove good long-term investments on the grain trade. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: Chris is no stranger to hunting ahead of the pack. He was early on the water story...early on the fertilizer opportunity...early on the "land bank" theme, and countless other big picture trends. In the column above, Chris has kindly offered a couple of companies for you to put on your watch list...but for his full, up-to-the-minute investment research, you'll have to sign-up to his exclusive Mayer's Special Situationsmailing list. Find out how to do so here...and get a couple of his more in-depth reports free of charge. Uncovered: A Way to Tap into an "Other" Pool of Government-Backed Income Potential... ..that only a handful of Americans know about. And with Social Security becoming less and less of a guarantee, now is the time to act. Click here now and discover a way to protect your retirement from the uncertainties surrounding Social Security. Bill Bonner Perpetual Investor Confidence Bill Bonner Reckoning from London, England... Yesterday, the Dow rose 109 points. Gold went up $4. The 10-year US note is still trading below 3% yield and oil is still below $95. So, what's new? The markets seem still to be wondering...waiting...watching to see what happens - just as we are. The Greek premier won a confidence vote in parliament. That seemed to give investors some confidence. The idea is that if the Greeks can act like they know what they're doing, the rest of Europe can give them some more money. Meanwhile, Japanese officials appear to be taking a direct approach. They are said to be intervening in the stock market, buying when the market heads down. That must give investors confidence too. And back in the USA, everyone seems to be waiting to see what happens when QE2 comes to an end. If stocks and bonds go down, the federales are sure to come into the market one way or another too. Another reason for confidence. So at least at the top level, all the world's major financial officials are in harmony...all singing the same tune... And all the world's investors are confident. All a bunch of boneheads, and all going broke together. Everyday we see a little more of the picture. It is as if we were on a boat. We hear the sounds of other river traffic. The clangs of bells. The workmen yelling to one another. The sound of the motors. But the fog keeps us from seeing who they are or what they are doing. Now, the fog is lifting a bit. And not just for us. Even The Financial Times - the pink paper - is beginning to see things more clearly too. That is, they're beginning to see things our way! Clive Crook, writing in Monday's paper, sees America headed in Japan's direction. After a recession, America usually gets back to work quickly, he notes. But this time, something is wrong. This time it is different. Yes, dear reader, it's different from the typical post-war recessions America has known up until now. It's more like the Great Depression...or Japan's "lost decade." Crook and other pink paper journalists - especially Martin Wolf - have spent a lot of ink misunderstanding the crisis of '07-'09 and its aftermath, usually arguing for more bailouts and more central planning. But they're no dopes. At least they can see it is not working. And now Mr. Crook notices that one bad thing leads to another bad thing...and so on. When people don't have jobs, for example, they can't spend. And when they can't spend, sales go down. And so, businesses cut back...and there are even more people without jobs. America was supposed to be so dynamic. It was thought - in the late '90s...and again in the mid '00s - that the flexibility of the US economy would protect it from a serious downturn. If the auto industry imploded, for example, the autoworkers in Detroit would just move to LA. Problem solved. But what if there was also a serious downturn in the housing market? And what if there weren't any jobs in LA either? Turns out, in a slump, America's economic joints get stiff. Now, people can't sell their houses. So they can't move. They stay where they are because, even if they had a job, they couldn't support two residences. Alas...problem not solved. Today, in the USA, there are about 25 million people who want to tote barges and lift bales, but the barges and bales have gone. Busmen find nothing to bus...schleppers are given nothing to schlep...and humpers have nothing more to hump. Surplus labor tends to lower prices...which, with interest rates stuck to zero like a fat tick on a lazy dog, real interest rates go up. This was called the 'paradox of toil' by Paul Krugman and Gauti Eggertsson. The two economists think it is a paradox. It is really just the other side of the credit cycle...the retreat, where everything goes wrong. Consumers cut back in order to save money. Less demand lowers prices. So, consumers begin to anticipate lower prices...and cut back even more! And as businesses are squeezed, they try to get more out of existing employees. Who wants to hire new employees when the fate of the economy is so unsure? In a healthy economy, higher productivity raises wages. But now it lowers them. Businesses need fewer employees to meet the reduced demand - and they have lots of unemployed workers to choose from. Not only that, other things being equal, higher productivity reduces prices...which further inflames the desire to save, rather than spend...and further suppresses prices and employment. Another paradox? Maybe, but it is just more of the nasty slipping, sliding, bumping and crashing you get as you tumble along the downcycle. And more thoughts... One thing that has increased productivity is the Internet. You can find things faster. You can make connections faster. You can shop more easily and more efficiently. You can store and use information more cheaply. Surely the Internet must be an improvement for the whole human race, right? But here's the paradox. Thanks to the Internet, fewer people use the mail. So the US Post Office goes broke (it is expected to run out of money this summer...last we heard). This puts thousands of letter carriers out work. And thousands of printers. And don't forget the newspapers. Ad sections are smaller. Classified advertising has almost disappeared. And thousands of ink-stained newsmen are out of jobs too. In almost every industry, the Internet has reduced costs and improved efficiency. As a consequence, the US economy has never produced so few new jobs. And as a consequence of that, households have less to spend...businesses sell less...and the economy slumps. *** When the cycle turns, everything works against you... As we reported yesterday, it will take a long time to re-absorb all the people who've lost jobs in this go-around. According to the study we mentioned yesterday, it's supposed to take another 10 years to get unemployment down to pre-recession levels. So what happens to someone who waits years to find a job? He loses his skills. Here's The Financial Times again. This time it gives us another reason unemployment will remain high: Americans don't have the skills they need for serious jobs: Eric Spiegel, chief executive in the US for Siemens, the German engineering group, said the problem exposed weaknesses in education and training in the US. Siemens had been forced to use more than 30 recruiters and hire staff from other companies to find the workers it needed for its expansion plans, even amid an unemployment rate of 9.1 percent "There's a mismatch between the jobs that are available, at least in our portfolio, and the people that we see out there," Mr. Spiegel told the Financial Times. "There is a shortage (of workers with the right skills.)" He said Siemens was having to invest in education and training to meet its staffing needs, including apprenticeship programmes of the kind it uses in Germany. However, a recent survey from Manpower, the employment agency, found that 52 percent of leading US companies reported difficulties in recruiting essential staff, up from 14 percent in 2010. A mismatch? You mean, being able to use Facebook doesn't make you a master machinist? You mean, a degree in sociology doesn't qualify you for a job? You mean, you can run up $50,000 worth of student loans...and still not be able to do anything useful? Regards, Bill Bonner for The Daily Reckoning