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The Daily Reckoning | Thursday, June 23, 2011 Buyers flock to Miami real estate...foreign, all-cash buyers, that is, Profiting from transformational technology breakthroughs, Plus, Bill Bonner with more thoughts on the "Lost Century"... ------------------------------------------------------- Cancer "Magic Bullet?" Small Biotech Set to Rocket? A little-known biotech company is making medical history... but with FDA fast trackreview status for their cancer treatment, this small company might not stay "little-known" for long... So you must move fast if you want to get in on the ground floor of what could be the biggest medical breakthrough in decades... Click here to learn more now. How to Benefit from Depressed Housing and a Declining Dollar Foreign Homebuyers Selectively Enter the US Housing Market Eric Fry Reporting from Laguna Beach, California... The US stock market has returned to its losing ways...in a big way. After losing 80 points during yesterday's trading session, the Dow Jones Industrial Average has tumbled another 200 points today - setting the Blue Chip index on course for a seventh straight losing week. The stock market was bouncing around in positive territory for most of the trading session yesterday, before cratering in the afternoon. According to the financial newswires, stocks sold off in response to an official admission from the Federal Reserve that, yes, the economy is not doing so hot. "The economic recovery is continuing at a moderate pace," the Fed's statement declared, "though somewhat more slowly than the committee had expected." While the sluggish economy is hardly new news, it was apparently news to investors that the Fed considered the sluggish economy to be news of any kind. Hasn't the sluggish economy been the continuous topic of the last dozen or so Federal Open Market Committee (FOMC) meetings? And hasn't the FOMC declared on numerous occasions that it was devoting the full power and prestige of the Treasury's printing presses to combating deflation and spurring the economy toward recovery? And hasn't Ben Bernanke repeatedly bemoaned the fact that the economy refuses to recover as briskly or robustly as he had hoped? So what's the news? A real news story would be an FOMC press release that went like this: "Hey, we thought we could spark an economic recovery by printing a bunch of money and buying Treasury debt. But the tactic failed. Now we have no idea what to do." But until that day arrives, the Fed will continue to epitomize Einstein's definition of insanity: Doing the same thing over and over hoping for a different result. For nearly 100 years, the Fed has presided over the debasement of the US dollar. Despite all the meetings, pronouncements, Congressional testimonies and Ivy League theories, the Fed has achieved only one verifiable result: It has converted a 5-cent Coca-cola into a $1 Coca- cola. In other words, the dollar has forfeited about 95% of its value since the Fed came into existence in 1913. "The Federal Reserve has exchanged the gold standard for the PhD standard," James Grant, editor of Grant's Interest Rate Observer, quipped yesterday on Bloomberg TV. Absent the constraints of gold-based money, Grant explains, the Fed has increasingly played games with the paper-based kind...and this game- playing corrupts the free market. "The Fed is in the business of imposing false values," says Grant. "It is imposing false values across a range of markets. It has given us a zero percent funds rate...levitated the stock market...[and] depressed the value of the dollar... "My suggestion," Grant continues, "is that we learn to live in a world of transparent and objective values. And for that, the Fed might just take a little risk... We ought to get rid of the PhDs [at the Fed] and install someone who majored in a nice solid bachelor's degree, with a concentration in unintended consequences." Grant may one day get his wish. But so far, the Phds are still running the show...and are doing so in increasingly bizarre ways. They are printing money to generate economic growth, and then seem genuinely shocked when this moronic tactic fails. Ben Bernanke is taking dollar debasement to a whole new level. What used to be a subtle art has now become an overt manufacturing process. Bernanke has informed the world that he is printing dollar bills to buy Treasury securities. He calls it "quantitative easing." The rest of the world calls it larceny. But this larceny is creating a wide range of unintended consequences - bad for some, good for others. "By creating so many dollar bills," Grant explains, "it's like a break ball in a pool game. You don't know exactly into which pocket the balls are going. But you know things are changing... The Fed has instituted this vast enterprise call 'quantitative easing.' And the consequences of this are still playing out." The real estate market in Miami Beach makes Grant's point. As we noted in yesterday's edition of The Daily Reckoning, "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." For many foreigner buyers, the depressed US housing market, combined with the falling value of the US dollar, has moved American homes and condominiums to the discount shelf. In dollar terms, for example, the US median single-family home price has dropped nearly 30% since mid- 2005. But in terms of the Brazilian real, the median in US single- family home price has tumbled more than 50%. That's a big reason why Brazilians are combing the streets of South Beach looking for properties to buy. Almost no locale in America suffered as severe a housing bust as Miami. Prices fell more than 50% from peak to trough - and more than 65% in terms of the Brazilian real. "In Rio [de Janeiro's] exclusive Leblon enclave," Bloomberg News reports, "apartments sell for an average $1058 a square foot... In Miami's South Beach, the average condominium price was $354 a square foot during this year's first quarter. 'Five years ago, it was the other way around,' explains Craig Studnickly, president of a Miami real estate firm that caters to Brazilian buyers. 'Miami was trading for $500-$1,000 a foot. Rio was trading for $300 or $500. It has absolutely switched.'" Not surprisingly, therefore, Brazilians and many other foreigners with strong currencies are snapping up select portions of America's deeply discounted real estate. To take maximum advantage of the simultaneous declines in US real estate and the US dollar, most foreign buyers purchase their properties with all-cash transactions. "Brazilians today have the tide and the winds in their favor," Jose Nunes, owner of a Miami-based realty explains to Bloomberg News. "The exchange rate being the tide and prices here being the winds. If one of these falters, demand will also falter." All-cash buyers are becoming an increasingly visible presence, especially in second-home markets like Miami and Phoenix. Nationwide, all-cash buyers now represent more than 30% of all homebuyers - up from about 15% two years ago and around 7% throughout the housing boom. But in Phoenix, all-cash buyers have become more than half the market. A similar trend is developing in Miami. In Phoenix, most of the cash buyers are retiring baby boomers, many of whom would rather pay cash for a home than leave that cash in a bank earning nothing. (Thank you, Ben Bernanke). In Miami, many of the cash buyers are nouveau riche Brazilians, along with a large number of snowbirds from Canada, looking to take advantage of the weak dollar. (A second thanks to Ben). "In the Miami area," Bloomberg News reports, "Brazilians bought 9% of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans. There are probably not enough nouveau riche Brazilians or vacationing Canadians to rescue the entire US housing market. But there may be enough of them to spark a recovery in selected locations like Miami Beach. One key point of this story, at least for us, is that not all hard asset investments are created equal. The forward-looking investor must not only consider what has worked in the past, but also try to imagine what might work in the future. This investor must also attempt to understand the nuances within a specific asset class - to understand what might cause Miami real estate to appreciate, even if Milwaukee real estate does not. Hard asset investments are not homogenous. Natural gas is not nickel. Cocoa is not cotton. And when it comes to real estate, Milwaukee is not Miami...for better or worse. The Beginning of the End For Money-Grubbing OPEC Israel just discovered what could be the 2nd largest oil basin in the world - officially giving OPEC the middle finger. Watch this urgent briefing for your chance to profit from Israel's world-changing $27 trillion discovery. The Daily Reckoning Presents Profiting from the War Against Bacteria Patrick Cox In all my years of research, I have never seen such an era of innovation and breakthroughs in the medical field as we are witnessing today... Today we are seeing more and more small biotech companies racing toward the next big breakthrough. To be on the forefront of technology in this day and age can lead to outstanding profits... In the coming years we could see major developments in the treatment of cancers, Alzheimer's decease and many other life-threatening deceases - in fact there are many companies coming close already. But one biotech area that sometimes gets forgotten by investors is an area that has not seen a major breakthrough since the 1920s... What area are we talking about? Antibiotics. Before I tell you what to look for, first a little background... Near the end of the roaring '20s, a young bacteriologist working in the inoculation department of London's St. Mary's Hospital made an accidental discovery. Before leaving on a long summer holiday, he had stacked Petri dishes of live bacterial cultures in a corner of his lab. Upon returning, he discovered that some of the cultures had become contaminated by a mold. A closer examination of the spoiled experiment revealed that everywhere a speck of mold had grown, the bacterial culture had dissolved. Of course, the young scientist I am talking about is Alexander Fleming, recipient of the Nobel Prize in physiology or medicine. As you know, the contaminant in the cultures was the penicillium mold. Scientific lore has it that his first reaction to the ruined bacterial cultures was to throw the Petri dishes into a sink filled with disinfectant, irritated that he would have to run the experiment again. When it struck him that he accidentally discovered an anti-bacterial, only one dish was left floating with the lifesaving penicillium mold intact. Fleming would later go on to cultivate the mold and study the properties of its anti-bacterial secretion, penicillin. Unfortunately, isolating the antibiotic compound to a therapeutically acceptable purity would have to wait a decade longer. At the University of Oxford, pathologist Howard Florey and chemist Ernst Chain solved the problems of penicillin extraction and purification, for which they share a Nobel with Fleming. Moreover, American drug companies learned the secrets of penicillin mass production during the height of World War II. A strain was needed that would readily grow in large vats. After a worldwide search, a particularly useful strain was found growing on a cantaloupe in Peoria, Ill. Mass production of the precious antibiotic meant that the war's wounded had access to a lifesaver. With penicillin, millions of lives were spared that would otherwise have been lost. Penicillin was not active against all types of infectious bacteria, however. In the 1950s, breakthroughs in the study of the penicillin molecule allowed it to be modified for wider use. This allowed for the creation of a whole family of penicillin-derived antibiotics. It also formed the basis of a search for new antibiotics that is still ongoing today. Fleming's contaminated Petri dish was a medical breakthrough that changed the world. Before this wonder drug, death from bacterial infection was commonplace. Unfortunately, the benefits of penicillin are now in peril. All conventional antibiotics work by binding to a target inside a bacterium. For example, bacteriostatic antibiotics work by blocking enzymes important in bacterial reproduction so that the body can catch up with the infection and eliminate it. Bacteriocidal antibiotics, on the other hand, kill the germs outright. Bacteria, however, evolve defenses against antibiotics. They do this in several ways. Bacteria can evolve their "efflux pumps," mechanisms for expelling antibiotics and toxins. They can also modify the molecules targeted by antibiotics themselves, rendering them useless. We are also discovering that bacteria have far more "communal intelligence" than previously thought. Not only can resistance develop in a single bacterial genetic line, horizontal gene transfer means that once a bacterium develops resistance, it can share the genetic information with others. The results of this evolving resistance are frequently in the news. We hear about outbreaks of antibiotic-resistant "flesh-eating" bacteria in hospitals, for example. Even with our best drugs, hospital infections are still the fourth leading cause of death in the US. Recently, a lethal strain of antibiotic-resistant E. coli has been making headlines in Europe. Unfortunately, it has been more than a decade since the last truly novel antibiotic compound hit the market. These bugs evolve rapidly, yet traditional drug development methods are running out of targets. If we do not develop a new set of defenses soon, we risk being overwhelmed. Fortunately, we may not need to rely on serendipity as much as Fleming did in the 1920s. Science has developed a whole new set of tools for drug discovery. Computational biology has created the ability to screen millions of potential antibiotic compounds at speeds that are orders of magnitude faster than traditional techniques. A greater understanding of the bacteria and the human body's own anti- bacterial defenses at the molecular level means that we can create compounds that mimic the latter's own defensive activity. While much of the pharmaceutical industry suffers diminishing returns by looking for new variants to old antibiotics, I recommend you research companies that are working toward completely new compounds to fight the bacterial plagues of our time. By finding companies on the verge of brand-new developments, you could have the opportunity to get in on the ground floor...and could possibly pave your way toward transformational gains. Yours for transformational profits, Patrick Cox for The Daily Reckoning P.S. I recently recommended a small firm using such transformational technology to discover new antibiotic compounds to my Breakthrough Technology Alertsubscribers. The beneficial consequences of their research could be even further reaching than I had first expected. To get the full report on this small biotech, simply click here. Could Your Cash Stash Go Bone Dry During Retirement? You bet it could! Social Security now ADMITS it might run out of money to cover future payouts... So watch this free presentation now - or die broke. Details right here... Bill Bonner Economic Growth in the Internet Age Bill Bonner Reckoning from Waterford, Ireland... Are you keeping up with our theme this week, dear reader? We're having a hard time ourselves... First the news, then we'll come back to... The Lost Century. Yesterday, the stock market retreated - 80 points on the Dow. Still no clear direction... So let's return to our story for the week. So far, this 21st century has been a delightful flop. A washout. At least, for Americans. At least, from an economic point of view. Here's the evidence in a nutshell: There are no more full time jobs in the US today than there were when the century began. In terms of per capita wealth, Americans are now worse off than they were when the century began. The value of US houses, for example, is about back where it was when the century began. And household earnings, adjusted for inflation, are lower. And America's industries, businesses, and enterprises too are worth not a penny more today than they were in 2000. And now...the background. First, we admit to a keen interest in this sort of thing. Here at The Daily Reckoning, we are connoisseurs of disaster. And no disaster is more delicious than one smothered in a sauce rich in irony. So, you will recall that when the century began, most people thought it was the most promising period in history - especially in the history of the United States of America. The Soviet Union had ceased to exist. China had joined the capitalists. And George W. Bush told the graduating class of the Naval Academy in Annapolis that America was the world's "only surviving model" for a successful system. It was so successful, in fact, that Francis Fukuyama thought it signaled an " end of history." What more work had history to do? Perfection had already been attained. The US was dynamic and flexible. Its democratic political system could adapt to whatever changes and challenges it confronted. Its capitalistic economic system could push ahead on every front. And its scientists and innovators were discovering new things at a breathtaking rate. History could pack up and go home. You remember Moore's Law? It told us that computing power would double every 18 months. And with computers came not just a new world...but a better world. Innovators could innovate faster. They had all the world's knowledge at our fingertips. There would be no more reason for error...darkness and sin would be banished from planet Earth. We would all be smarter, richer, healthier...for ever, and ever. Amen! What could go wrong? Well, so far, everything. For starters, in 2001, a tiny group of fanatics brought down two NY skyscrapers and caused the Pentagon to panic - a very self-serving panic, we should add; defense contractors have made billions in profits out of the Pentagon's hysteria. Since then, the US has spent $1 trillion fighting 'terrorism' - easily the worst military investment in world history. For every single 'terrorist' killed, the US spent billions, to say nothing of the soldiers and civilians who died. Then, the digital revolution was a flop too. An enormous flop. Millions of people may be using the worldwide web...looking at photos of Congressional crotches, for example. And hundreds of people may have become billionaires by selling Internet stocks to the masses. But how much has the Internet contributed to the wealth of nations? Apparently, not a damned thing. At least, as measured by the results. And more thoughts... Nowhere was the Internet revolution more focused than in the USA. Nowhere did people have higher hopes for it. And nowhere were the results more disappointing. The typical teenager now spends half his life...not just half his waking hours, but more than half a day on some sort of electronic device. Does it make him smarter? Richer? More civilized? More coherent? Not so's we've been able to detect! Not every technological advance results in an increase in standards of living. Take Twitter, for example. Or nuclear weapons. Or dozens of other innovations and inventions. The Internet, like TV before it, is a great entertainment device. It is also very useful, improving productivity in a vast number of industries. But it has not speeded up GDP growth or improved living standards. Great boosts in living standards have been driven by big increases in energy use. The discovery of fire, for example, surely increased standards of living for ancient man...and enabled him to broaden his territory enormously. Human populations increased. The really big boom came in the 19th century when we learned how to use the earth's stored-up energy - in coal...and then in oil. GDP growth rates - which had been negligible for thousands of years - soared above 5%. Human population bulged too. European countries - and their colonies - were on the case first. The use of stored energy allowed them to spurt ahead of their competitors in Asia. Over the course of the 19th and 20th centuries, Europeans came to dominate the world. Now, the 'emerging markets' are catching up. They're using oil too - lots of it. And they're registering growth rates above 5%. Meanwhile, growth rates in the developed world have declined... In real terms, as mentioned above, US growth in the 21st century seems to have fallen back to medieval levels. Why? Who knows? We will guess that it is a combination of things. Most important, the US is in a period of debt consolidation. After 60 years of credit expansion, it is time to reduce debt. That alone could be responsible for the failure of growth and material progress. But why was there so much debt? Because the economy failed to produce real growth. After 1973, wages, for example, adjusted for inflation, went nowhere. How could families continue to increase their standards of living? The Fed, the dollar-based monetary system, and the financial industry encouraged households to go into debt. Will debt be reduced back to 1974 levels? Maybe... If so, it will take another 5 to 10 years...or maybe 20. What then? The Great Correction could be a bigger, grander...longer-term phenomenon. Perhaps the boom phase of the energy revolution is behind us. Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity - fired by coal, oil...and later, atomic power - made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental...with diminishing rates of return from innovations. The Internet did nothing to change that. It was not a 'game changer.' The game is the same as it has been since the steam engine was first developed, with the big leaps in technology and material progress already behind us. Regards, Bill Bonner for The Daily Reckoning