| | The Daily Reckoning | Tuesday, June 14, 2011 |
- "What Recovery?" The mainstream finally catches up with reality,
- A thirsty, 5-year old "special situation" gains momentum,
- Plus, Bill Bonner on mean reversion, falling profits and plenty more...
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|  | | | Life in the So-Called Recovery | | Why “Saying” the Economy is Recovering Doesn’t Make it So | |  | | Eric Fry |
Reporting from Laguna Beach, California...
"What Recovery?" Time Magazine finally got around to asking in its latest issue.
Better late than never, we suppose. The Daily Reckoning has been asking that question for months already...
"America's recent economic 'recovery is just a dismal version of 'Mother May I,'" quipped Dan Amoss, editor of the Strategic Short Report in early March. "Almost every 'one step forward' will succumb to 'two steps backward.'"
Two weeks later, we reiterated, "America's economic recovery contains more cracks than Humpty Dumpty...after suffering his 'great fall.' Somehow, all of Bernanke's horses and men managed to slather enough monetary glue onto the fractured pieces of our economy to hold them all together. But the reconstructed economy does not look very much like the original one. Humpty Dumpty is now a Picasso.
"While it's true that a few 'headline' economic numbers - like GDP growth and industrial production - are flashing signs of recovery, numerous other data points are flashing red. Net-net, this recovery is suspect."
We wanted to see the recovery that everyone else claimed to see, we really did, but we were never able to make out its image, no matter how hard we squinted. Blame us for a lack of imagination.
Most of the folks on Wall Street insist they see plentiful signs of economic growth. But then, a lot of folks insist they see aliens out their windows...or the Virgin Mary in their grilled cheese sandwiches.
Maybe the folks on Wall Street are right. Maybe a recovery is unfolding right below our noses. But to us, the "green shoots" of recovery look suspiciously like the AstroTurf of desperate governmental stimulus efforts. From a distance, the stuff looks like the real deal...or even better. But up close, you find a fake - a parody of economic vitality that will never grow into anything real or self-sustaining. Even worse, the AstroTurf also smothers the soil that could potentially yield productive enterprises.
As a result, the so-called recovery is producing a wide range of severely recessionary phenomena. For starters, according to a recent CNN poll, a whopping 48% of Americans surveyed believe that a 1930s- style depression is "very likely" or "somewhat likely." That's the highest reading since the beginning of the 2008 credit crisis.
Aren't folks supposed to become more confident during recoveries? What's the problem? We don't know precisely, but we can surmise imprecisely. A lot of stuff is broken. Jobs are hard to come by, debts are difficult to repay and household wealth is extremely difficult to regain.
Meanwhile, the US government's mushrooming debt burden is scaring the bejeepers out of any American with a 5th grade aptitude for arithmetic. According to the latest figures, every American has become a kind of fiscal pack mule - saddled down with nearly half a million dollars of present and future government liabilities.
Those distant liabilities wouldn't seem so troubling if they did not feel so immediate. But virtually all of America's wealth-creation trends are moving in the wrong direction: taxes are rising, per capita incomes are slipping, inflation is rising and homeowners' equity is collapsing.
Since the peak of the housing bubble in early 2006, homeowners' equity has collapsed from $14.7 trillion to $6.9 trillion - a staggering loss of wealth equal to more than half of US GDP. In fact, homeowners' equity is even lower today than it was at the end of 1999!
Not surprisingly, a very close correlation exists between the amount of equity Americans have in their homes and the attitudes of Americans toward the economy. You could say these two data series move tick for tick.
But real estate wealth is not the only disappearing act of the last decade. American households have also lost about $2 trillion of stock market wealth during the last five years.
These aren't pretty numbers. Very few households are better off today than they were five years ago...or even ten years ago. Many are worse off. This bad news might not feel so bad if the US economy were producing a steady stream of good news. But it isn't.
To the contrary, the federal government continues to spend the money that no one seems to have, while Ben Bernanke prints the dollars that fewer and fewer people seem to want. When and how this perverse merry- go-round will end no one knows, but it might be a good idea to jump off your pony as soon as possible and find a safer carnival ride...like precious metals or foreign real estate or water (as Chris Mayer explains below) or, indeed, any other asset that isn't a dollar bill or a promise to re-pay a dollar bill at some future date.
"There are already elements of [economic] fragility," said New York University professor Nouriel Roubini in a weekend interview. "Everybody's kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest... We're still running over a trillion-dollar budget deficit [in the US] this year, next year and most likely in 2013. The risk is at some point, the bond market vigilantes are going to wake up in the US, like they did in Europe, pushing interest rates higher and crowding out the recovery."
What recovery?
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| | The Daily Reckoning Presents | | Blue Gold...Still Shining | |  | | Chris Mayer |
About five years ago, I launched my investment service, Mayer's Special Situations with a special report, entitled Blue Gold.
The report laid out the compelling long-term case for investing in water-related stocks. The stocks I recommended in that report have performed extremely well, far outpacing the S&P 500 Index. But the investment backdrop for the water sector has become even more compelling today than it was five years ago.
Nalco Holdings (NYSE:NLC), a water treatment company I recommended in the Blue Gold report has been an excellent performer. It is up about 60% since my recommendation, while the S&P 500 has gained no ground whatsoever. I expect this long-term outperformance to continue. Recently,The Financial Times interviewed CEO Erik Fyrwald, who had many interesting comments.
Fyrwald began by saying that water was the "No. 1 issue facing the world." A few good excerpts:
"I travel about 50% of the time, often into the developing markets, such as China, India, parts of Africa, that are not only water starved today, but increasingly water challenged... their water consumption is rising, while they are water challenged already, and that makes a huge challenge for them...
"I have been going to China and India for 20 years, and 20 years ago - even 10 years ago - the focus on water was minimal. Water treatment and recycling didn't exist significantly. It was there for industrial global companies that built operations in China or India. But the Indian companies, the Chinese companies, weren't concerned about water, either cleaning it up for effluent or recycling it. Today, I can tell you that leading Chinese companies and leading India companies are very concerned about water and are starting to adopt very advanced techniques for both cleaning up the water and also the recycling and reuse of the water. That is why we are seeing tremendous growth in those countries..."
Sitting right there in the sweet spot of the Asian water story is Hyflux Ltd., another company I recommended in my report. The stock has done very well, and a big part of the reason is the company's CEO, Olivia Lum.
She won Ernst & Young's World Entrepreneur of the Year 2011. Her story is amazing.
She turned the mere $15,000 she started with into one of the largest water treatment companies in the world. The Financial Times profiled her, and included more personal details that I didn't know.
For example, she was adopted at birth and lived with four other orphans in a tin-roof shack in Kampar, Malaysia. She avoided becoming a child laborer - the fate of many - at the peanut factories and rubber plantations. Instead, she sold papaya from a stall and paid for her own textbooks and bus fare to school. She went on to college in Singapore to study chemistry. Her job out of college was at GlaxoSmithKline, where she studied water treatment. To start Hyflux, she sold her car and small house.
It's a remarkable story. And her company still is a great investment, as it has huge opportunities in China and India and across the Middle East and North Africa.
Nalco and Hyflux are two of the best companies in what may prove to be one of the very best investment sectors for the next five or ten years.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: The water issue was a perfect fit for the launch of Mayer's Special Situations, the service Chris uses to deliver nuanced profit opportunities to his subscriber list. A special situation might be a company that receives little or no attention from the mainstream press...a quirky scenario in which a company has been sold down to ridiculously low valuation based on rumor...some kind of merger or acquisition...or one of a million other things for which Chris scours the market.
The basic idea here is to take advantage of situations most people don't pay attention to and...as he demonstrated with his Blue Gold Water Report, there are few better minds in the field at finding them than Chris Mayer. If you'd like to take a gander at the latest Special Situation Chris has his eyes on, check out his presentation here.
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| | | | Bill Bonner | | The Dividing Influence in the US Job Market | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
For 6 weeks, the Dow has been going down. It should be ready to bounce.
But stock market investors didn't get a bounce yesterday. They didn't take a loss either. It was a draw. The Dow closed 1 point higher than on Friday.
As for oil, it was down to $97. And gold lost $13.
Business profits have been near record highs. This is not a good reason to buy stocks. Profits are famously "mean reverting." That is, they go back to normal pretty fast. Which should mean lower profits in the future.
When profits are high it is usually because labor costs are relatively low. That is the case now. But that's not good news. In the US, labor's share of national income is the lowest it has been for almost 100 years. People who own and run corporations enjoy higher earnings. The rich get richer.
But the working stiff doesn't share the joy. He feels he has been cheated. He just doesn't know who cheated him. With 25 million people looking for decent jobs, he has no pricing power. He can't threaten to walk off the job. There are too many people ready to take his place.
So what happens to him? Does he take his losses philosophically? Does he cut back his standard of living...spending less time driving his big SUV and more time reading the classics?
Or does he become bitter...and feel like he has a score to settle?
We have an uncomfortable feeling this morning. It comes from reading before we go to bed. Next to our bed is The Forgotten Soldier, a personal history of war on the Eastern Front in WWII. The author - a private soldier in the Grossdeutschland division - knew nothing of the strategies, logistics, or politics involved. He merely tells us what he saw...what he did...and what he lived through.
What disturbs us more than the events - which were unbelievably shocking and brutal - is the caste of characters. They sound like normal people. But what sensible man would invade Russia - without winter clothing - and let himself get bogged down in a four-year war of hellish slaughter in nightmarish weather? And yet, millions of apparently sensible people did.
The author of The Forgotten Soldier, Guy Sajer, seems like a decent sort. He joined the Wehrmacht willingly, happily and proudly. And he wasn't even German. He was French. He barely spoke German.
Which just proves our point. People are neither good nor bad, but subject to influence.
In England, CEOs got huge pay increases last year. Their compensation rose 32%, thanks largely to such high profit margins.
We haven't seen comparable figures for US CEOs but they are probably not too different. Bankers, for example, are partying again, just like it was 2005.
In Britain, as in America, the middle and lower classes got no raises last year. Or the year before. Or the year before. In fact, their real incomes are going down as the cost of living goes up and their wages stagnate.
Who will they blame for that? Will they carefully analyze the situation...and see how their central bankers and politicians misled and betrayed them? Or will they point their fingers at softer, easier targets.
People are always the authors of their own success. Their failures are always written by someone else.
What kind of influences will be felt by the American people...when they realize that they are no longer on top of the world...when they have lost their houses...and their jobs? And the Chinese try to force an austerity program on them!
Yes, dear reader, borrowers may want to spend, but creditors demand austerity. In Europe, the Germans are trying to force the Greeks to cut expenses. And now, America's major creditor - China - is demanding that the US put its finances in order too.
There are bound to be some feelings of resentment. In Greece, people denounce the Germans as "Nazis." And in America...the pentagon prepares its next dopey war. (More below...)
And more thoughts...
Hey, we told you so. Sort of. Bonner & Wiggin. In their New York Timesbest-seller, Financial Reckoning Day. Published in 2003.
At the end of the 20th century, people thought they were going to get richer and richer, forever and ever...thanks to the Internet! No kidding.
We knew it was nonsense. But we thought the bust that followed might lead to a Japan-like stagnant economy.
We were wrong. Instead, the bear market of 2001-2002 led to a giant bailout...then to a huge bubble in real estate...and then, to a blow up. Then what? A Great Correction...which looks for all the world like a Japanese style slump!
Yale professor Robert Shiller explains how the housing debacle brought Japan to the USA:
An unprecedented bubble in American home prices started in 1997 and ended five years ago. Home prices rose 131 percent in that time, or 85 percent in real inflation-corrected terms, according to the S&P/Case- Shiller National Home Price index. (I helped to develop that index, along with Karl Case of Wellesley College.)
Around the same time, there were bubbles in the nation's commercial real estate and farmland. And there were real estate bubbles in many other countries, too.
Consider this: Home prices rose nearly 10 percent a year on average in the United States from 1997 to 2006, long enough for many people to become accustomed to the pace and to view it as normal. The conventional 30-year fixed mortgage rate averaged 6.8 percent over those years, far below the appreciation rate on housing, so even if you had a substantial mortgage, you were becoming wealthier by the day, at least on paper. People who owned a home over that period had reason to feel pretty well off and proud of their investment acumen. That fed a contagion of optimism and helped to drive the speculative bubble, propelling the economy and the stock market in a feedback loop that repeated year after year.
Instead, home prices tumbled 34 percent nationally from the peak in the first quarter of 2006 to the first quarter of 2011 - or 40 percent in real terms - and they still appear to be falling. The brief "recovery" in home prices of 2009 and 2010 was most likely spurred by federal housing stimulus measures like the home buyer tax credit. After that stimulus ended, prices resumed their downward trend.
During the bubble, the sense of rising wealth and high expectations gave people a good reason to spend and a greater willingness to plunge into investment, too. Government policy makers breathed in the same optimism, which no doubt encouraged them to be lax on regulatory restraint.
The mood is far different now. Our latest survey, covering April and May of this year, included 296 home buyers, and their median expectation for annual home price appreciation over the next decade was down sharply, to just 3 percent. And, in comparison with the 2005 results, few people had extravagant expectations.
The 3 percent figure is well below prevailing rates for 30-year mortgages, now hovering between 4.5 and 5 percent. Amid such low expectations, buying a home with a mortgage certainly isn't being viewed as a way to get rich.
Even for people who have other reasons to buy a house, there may be little urgency to do so. Our 2011 survey found that the median expectation for home price appreciation next year is just 1 percent. So it won't be surprising if new home sales remain abysmally low and few jobs are created in the hard-hit construction industry. And it shouldn't be a shock if the personal savings rate stays at around 5 percent, as it has recently, up from around 1 percent in 2005. This would mean that consumer spending will not drive a strong recovery. *** Here's William Pfaff, wondering about the US military's next move:
Paris, June 7, 2011 - US Defense Secretary Robert Gates was in Kabul at the start of June talking about withdrawal - or non-withdrawal - from Afghanistan, but before he went home he was in Singapore to talk about an enlarged American military engagement in Asia. That was a speech to an International Institute for Strategic Studies meeting, in support of "a robust [US] military presence in Asia." He said that one of the "principal security challenges" to the United States is that some nation would try to keep it out of Asia.
..the United States is now a militarized and militarist empire, of benevolent intention in the minds of the people who have been running it under both Democrats and Republicans since the end of the Cold War. Before that it was a fortress nation, focused [of] a big single threat and a few auxiliary troublemakers. Now it goes in for civilization wars, globally utopian ideologies, and altruistic dominion.
The second world war left the public determined to bring the troops home in a heedless rush, reversed just as quickly when Russia posed a menace. Vietnam ended in a shameless precipitation and lies, the conscripts who had fought it punished by their elders for having done so. Creation of an all-volunteer army afterwards guaranteed that such sunshine patriots and parasitic careerists as Richard Cheney would never again be personally inconvenienced by a national priority.
Now America's perpetual wars can be conducted by profitable corporations mostly behind the public's back, while the Members of Congress conduct their private affairs and pick up their envelopes at K Street addresses...
..The secretary of defense's Singapore press conference last week was alive with questions of a single tenor: will you protect us if China threatens us? ...They are thinking of going to war against China... Regards,
Bill Bonner,
for The Daily Reckoning |
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