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The Daily Reckoning | Wednesday, October 5, 2011 Unhappily ever after...and other eurozone fairytales, An investment theme to rival the great market stories of our era, Plus, Bill Bonner takes the first caller on The Daily Reckoning “Battered Goldbug Hotline”... ------------------------------------------------------- Little-known “loophole” could triple investing income In 1986, Ronald Reagan signed a little-known “loophole” into law. Today, the special “10-86 Payback Plans” it created are allowing some Americans to collect as much as three times the income that regular bonds and stocks pay. We’re talking solid yields — without even touching the stock market. Click here now for all the details. The Survivability of Sovereign Default Equally Assessing Both Success and Failure in a Capitalist System Eric Fry Reporting from Laguna Beach, California... “Adjusting for slippage.” That’s how Greek Finance Minister, Evangelos Venizelos, characterized his nation’s downwardly revised budget deficit forecast. The deficit that was supposed to total a hefty 7.6% of GDP for the 2011-12 fiscal year will now total an even heftier 8.5%, at least until the next adjustment for slippage. To be fair, the Greek government is not alone in “adjusting for slippage.” Many governments’ deficits around the world have been adjusting upwards because economic growth has been adjusting downwards. Not surprisingly, stock markets around the world have been slipping on the adjustments. Numerous factors are to blame for bringing global growth to its knees. But the sovereign debt crisis in Europe is certainly high on the list. This unfolding crisis does not merely pose a clear and present danger to Europe’s most heavily indebted nations, or to Europe’s most heavily exposed banks, the crisis also threatens to destroy the euro itself. “The euro is Confederate money. It is the emission of a confederation of states,” scoffs Jim Grant, editor of Grant’s Interest Rate Observer, in a recent Barron’sinterview. “The centrifugal forces in Europe are strengthening, and they are beyond the capacity of governments to deal with. The euro will break up.” Whether Grant is right or wrong about the euro’s fate, the mere fact that the euro faces possible extinction is enough to cast a pall over many parts of the global economy. Will Greece default? Will Portugal follow? And what about Spain and Italy? Can the euro experiment survive multiple sovereign defaults? Can it survive even one default? These are the questions that promote widespread uncertainty in Europe, widespread anxiety in global financial markets and widespread paralysis in the global economy. The leaders of the EU believe they can restore order to the chaos by doing all the things that never work: Throw money at lost causes Force a struggling nation to raise taxes into the teeth of a deep recession Impede the process of bankruptcy, liquidation and recapitalization These tactics won’t work; they will merely forestall the inevitable. If the EU wishes to save the euro, it must lose Greece. And even then, it may be too late to save the euro. But that may not be such a bad thing. Switzerland and Norway seem to be doing okay, even without the euro. In other words, the growing financial distress in Europe “may be fatal, but it’s not serious,” as our friend, Doug Casey, would say. “Greece is a lost cause,” The Financial Times declared yesterday. “No amount of fiddling, massaging or austerity is going to get the country to meet its fiscal targets...Athens is in a vicious spiral that poses a grave threat to the eurozone. It is time for policymakers to get their priorities right. The task now is not to save Greece, but to save the eurozone.” Maybe so, or perhaps the task now is for the policymakers to stop making new policies and to get out of the saving business altogether. Let capitalism do its dirty work. Successful capitalism relies on busts as well as booms. “Capitalism is not just about success — that’s the easy part,” Jim Grant states in hisBarron’s interview. “It’s also about failure — recognizing it, dealing with it, liquidating it, properly pricing it... To the extent we allow markets to clear, we’ll be on our way.” Defaults and bankruptcies are a staple of economies that flourish over the long-term. The destructive portion of “creative destruction” plays a vital, therapeutic role. But the leaders of the eurozone clearly have no appetite for the slightest taste of creative destruction. Instead, creative denial is the order of the day. Sovereign defaults and financial sector bankruptcies aren’t part of the script; they’re not part of “happily ever after.” You won’t find them in nursery rhymes, not even in German nursery rhymes. Defaults and bankruptcies may be slightly better than “what little boys are made of,” but they are not even close to “sugar and spice and everything nice,” which appears to be the approximate objective of the EU leadership. But here’s the problem: Folks who spend a lot more money than they earn are not supposed to live happily ever after, at least not right away, and neither are the folks who loaned all the money to the folks who spent it. That storyline doesn’t seem right. It feels contrived. Usually, the folks who spend a lot more money than they earn live happily in the here-and-now...until the borrowed money runs out. After that, not so happily. The next chapter in the story is called, “Bankruptcy.” The EU leadership is trying to rip that chapter from the book. Bad idea. A Great Correction is underway, as Bill Bonner continuously reminds us all. And the Great Correction will do its work, no matter how many bailout schemes, loan guarantees or “stability facilities” the policymakers place in its path. But remember, creative destruction is not just about destruction; it is also about creation and the investment opportunities that result. The column below highlights the creativity that’s powering the next generation of mobile technologies.... The Mother of All Financial Bubbles is Just Now Starting to Pop... It’s time to learn the truth...and to get prepared. If you have the right plan set up, you won’t suffer when this bubble fully bursts. But — and this is the most important point — you must have a plan. And you must be prepared before this epic crisis hits. Click here now. The Daily Reckoning Presents Invest In What The Kids Are Doing... Peter Charles Everybody wants to find the next Google to invest in. Eric Schmidt, the CEO of Google, says put your best people in mobile. That’s an interesting concept. So what he’s trying to say is mobile is the future. Mobile is where technology is going. Basically, it’s because everything that you do that can be digitized is going toward mobile. Whether it’s voice, music, entertainment, information, everything is going toward mobile. So if Eric Schmidt, who runs one of the most significant technology companies on the planet, is basically saying put your best people in mobile, maybe as investors, we should be putting our best technology dollars into mobile. So... To put it into perspective, we look at mobile, and we think about how significant it is. What does it really mean? There are a little bit less than 7 billion people on the planet. And we compare mobile to other technologies and other industries. Think of automobiles. There are a billion automobiles registered in use today worldwide. There are 1.1 fix-line phones. There are 1.2 billion personal computers. Just think about that. 7 billion people, 1.2 billion personal computers. That includes tablets, PCs, laptops. There are 1.6 billion television sets. There are 1.7 billion credit card users worldwide. There are 2 billion Internet users. Think about that. There are 2 billion — again, there are more Internet users than people with PCs, that’s important. There are 2.2 billion people with a banking account. This includes everywhere, the United States, developed countries, developing nations, underdeveloped, doesn’t matter. This could rival the great market stories of our era. What you’re about to see is so secretive — you could easily see huge profits BEFORE the story hits the mainstream. This is what we’re looking at here. There are 3.9 billion radio receivers in use today. So there’s the number. There are 5.2 billion mobile subscribers out there. Unique, 3.7 billion. That’s over half the world population with mobile phones. When you think about it, it makes sense. Pretty much everyone in this room has a mobile phone. Any of the developing countries, everyone has a mobile phone, kids have mobile phones. In some of the smallest countries, some of the poorest countries, the only way they can communicate is via mobile technology. Then we think about the future as investors. We’re all investors here. We’re all looking for the next Google, the next great opportunity, great investment. If you’re thinking technology, what you want to do is — what are the kids doing? Not what I’m doing, not what you’re doing. What are the kids doing? Because that’s where the real future is. That’s where the growth is going to be. One in three teens today send over 100 text messages per day. If they’re sending 100 text messages, they’re receiving 100 text messages. That’s 200 text messages a day. And they’re doing that on their mobile phone. ChaCha, a mobile phone company, surveyed teens. 61% of the teens said, “If I could have one device, it would be a mobile device.” Not a computer. 18% of them said they would want a computer, and 61% said they would want a mobile device. These are the kids that are growing up, and they’re going to be running future technologies, future businesses. Clearly, mobile is the future. And sticking with the teens, try to understand what they do with their mobile phones. You would think that they talk on their mobile phones. They don’t. Based on the ChaCha study, 68% of the teens prefer to text. Talking, only 10%. It’s not very much. The most telling figure is email. Less than 1% of the kids are actually emailing each other nowadays. So this is, again, from an investor’s standpoint, understanding where the trend is. Where are the opportunities? What’s going on? Where are the changes happening? So again, it’s not what you and I are doing. I still fax. Email is still important for me. But where is the future going to be? Where is the next Google? You never hear about adversities in mobile. Maybe because mobile is probably the most advanced, most important productivity tool on the planet. Think about it today. If you didn’t have a cell phone, how would you communicate with your spouse? How would you communicate with the office? How would you stay in touch with your kids? Just imagine. So it’s a productivity tool that’s accessible to everybody. So there’s the number, $1.18 trillion in revenues last year. It’s very big. And it’s not just big, it’s growing. Growth is pretty much the lifeblood of earnings and investors. Without growth, without real dollars, without real buying power, you don’t have an investment. So mobile is big. So the macro picture is telling us that it’s big, and it’s growing. Other trillion-dollar industries, cars, food, clothing, construction, weapons, banking. I don’t know anybody buying banks nowadays, but banking is a trillion-dollar industry. Mobile is the fastest-growing trillion-dollar industry. What you don’t see on the list? You don’t see movies, music, pharmaceuticals, you name it. They’re not trillion-dollar industries. Again, trillion-dollar industries are very rare. A trillion-dollar industry that’s even growing is a once-in-a- lifetime opportunity. Anybody ever heard of Angry Birds? Angry Birds is taking off leaps and bounds. The rest of the industry is hurting. But yet, Angry Birds, or Rovio, the maker of Angry Birds, they’re getting ready to launch a billion-dollar IPO. And this is a company that maybe two years ago probably didn’t really exist. This is all due to mobile technology. It’s a mobile-based platform. Bigger than Angry Birds is a company called Zynga. Who has heard of Zynga? Zynga is getting ready for a billion-dollar IPO. Their sales are up five-fold from last year, from 120 million up to 600 million. They’re getting ready for a $1 billion IPO. That’s not a $1 billion market cap. That’s $1 billion in cash. We’re talking about a market cap of anywhere between $20-30 billion. Again, this is all new. This is all due to mobile technology, and these are the things that, as investors, we should be paying attention to. It’s important that, as investors, we understand that the Internet, which is big, is adapting to mobile, and pretty much everything is adapting to mobile. So if you’re running a business, you want to think about your mobile strategy. If you’re looking for an investment, you want to think about your mobile strategy. Regards, Peter Charles, for The Daily Reckoning Only 62 People Know Exactly Why These Four Companies Could Change the World Now you’re #63 “on the inside” — and you’re on the verge of raking in lasting wealth. This could go down in history as the story of our era. Click here for all the details. Bill Bonner Economic Growth According to the World’s Leading Economists Bill Bonner Reckoning from Paris, France... We were on the edge of our chairs yesterday. We wanted to see if the Dow would crash through the 10,000 barrier. A break below 10,000 would probably hit the markets like a drone attack on a birthday party... ..perhaps causing investors to panic...and the feds to do something really stupid. The feds are getting ready. They’re being egged-on by some of the world’s leading economists. Nobel prize winner, Peter Diamond, for example, urges the feds to spend more money on infrastructure projects. Richard Koo, a top economist in Japan, says US government spending is the only thing that can prevent a deeper downturn (more below...). And, of course, there’s Paul Krugman! We know what he thinks...spend, spend, spend...tax, tax, tax...control, control, control, control. And here’s Mr. Ben Bernanke. He wants action too. The New York Times: Mr. Bernanke described the nation’s economic health in bleak terms, saying that “the recovery is close to faltering,” and suggested that avoiding another recession might require fresh government action. “We need to make sure that the recovery continues and doesn’t drop back,” he said. Such talk from a Fed chairman usually means the central bank is preparing to reduce interest rates, and Mr. Bernanke said that the Fed was not ruling out such a step. But on Tuesday, as at other recent appearances, he made clear that his remarks were aimed at the rest of the government. Mr. Bernanke has repeatedly called on Congress to adopt a plan for paying down the federal debt, as well as for reducing inequities and loopholes in the corporate tax code, two ideas that enjoy wide support among economists. On Tuesday he also focused on housing policy, suggesting that the government could help underwater homeowners refinance and also improve the availability of mortgages for potential buyers. The central bank, he said, “is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability.” Yes, all these economists and economic officials still believe in MORE. If we just spend more money...they believe...we’ll end up with a healthier economy which will give us all more stuff! Of course, it makes sense. They are the guardians and beneficiaries of our dinosaur institutions. Mr. Bernanke’s #1 job is protecting the banks. Mr. Geithner’s job is protecting the flow of tax revenues to the government. Mr. Krugman’s job is to protect his own reputation and revenue stream — both of which lean on more Keynesian spending. All these dinosaurs need more. They believe in more. More is all they know. But more no longer works. The economy has had enough... ..enough credit...enough spending...enough investing...enough regulation...enough debt...enough central planning! It’s stuffed. It’s fed up! But yesterday, stocks rose. The Dow put another 153 points between it and the 10,000 mark. We’ll just have to wait to find out what happens when it falls below. Gold, meanwhile, lost $41. We’ve been expecting gold to fall. It has fallen. But not as much as we anticipated. But, heck, we’ve got time. We can wait. The headlines, however, completely misinterpret the situation. “Gold bugs battered...” says one. Battered? Do you feel battered, dear reader? If so, call our new Battered Goldbug Hotline. We just set it up for dear readers like you. (More below...) And more thoughts... Money Magazine interviewed Richard Koo, chief economist with Nomura Research Institute. We’ve been following Mr. Koo for years. He was one of the few economists who seemed to understand what was really going on. He knew that the US was not suffering from a ‘normal’ recession, but from what he calls a “balance sheet recession.” People have too much debt. They need to work it down. In the meantime, prices go down...along with GDP growth. Here’s his analysis: Typical recessions are part of normal business cycles, when overconfident businesses overproduce and then have to cut back. This is what I call a balance-sheet recession. It’s caused by an overload of debt. It’s a very rare type of recession that happens only after the bursting of a nationwide asset bubble, like a real estate bubble. Once the bubble bursts, the debt remains. The assets, in this case homes, are underwater; their prices are way down, but all the consumers’ original debt remains. Monetary stimulus doesn’t work until balance sheets are repaired. Right now consumers are using their cash to pay down their debt. The economy is depressed because no one is borrowing or spending. Consumers don’t want to borrow, even at [very low] interest rates. And lenders don’t want to make loans to consumers who will struggle to pay them back. You need fiscal stimulus. That means the government should borrow and spend the money in the private sector. When Japan fell into recession about 20 years ago, we had no idea what was happening. Interest rates were lowered to zero, but the economy still did poorly. Unfortunately, Mr. Koo believes he can manipulate an economy...and get it to do what he wants. He thinks the secret, in a balance sheet recession, is fiscal stimulus: Every time the government stimulated the economy, it rebounded nicely. Then when they pulled back, it lost steam again. Some people look at Japan and say the government spent huge sums on public projects and there was no real growth, so spending didn’t really cure the economy. The early ’90s recession in Japan was far worse than people realize. Commercial real estate prices nationwide in Japan fell 87% from the peak. Imagine US housing prices down 87%. The fact that the Japanese government halted what could have been an enormous drop in GDP in the early ’90s speaks to the success of its economic policies. But Japan did suffer a major recession again in 1997. The Japanese made a horrendous mistake in 1997. The Organization for Economic Cooperation and Development and the International Monetary Fund said to Japan, “You are running a huge fiscal deficit with an aging population. You’d better reduce your deficit.” When the government cut spending and raised taxes, the whole economy came crashing down. I see exactly the same pattern in the US today. If the government acts to cut the deficit while people are continuing to pay down their debts, then we could have a second leg of decline that could be very, very ugly. He’s right. It could get very ugly. The economy could die. But you think that’s ugly? Mr. Koo ain’t seen nuthin’ yet. In order to keep the Japanese economy alive...the Japanese feds took up the savings of an entire generation of workers. They spent the money on various projects of doubtful worth. Now, they have no money. Just debt. What will they tell the workers when they want their retirement money back? Then...we’ll see ugly. *** Our first call came in this morning: “Is this the Battered Goldbug Hotline?” “Yes...you’ve come to the right place.” “Thanks...I need help. I’ve been battered by the nasty gold market.” “You poor thing...go ahead...spill it out...here at BGH, we’re ready to help.” “Well, I bought gold about 5 years ago. It was at $700. Then, it went up every year...year after year. I made a lot more money than all my friends. My stupid brother-in-law bought the banking sector instead. What an idiot.” “Go on...” “Well, the price went up and up...and I thought it was going to hit $2,500. I mean, it would have to get to $2,500 just to equal the rise in the ’70s. And we all know that things are much worse than they were then. But instead...sniff, sniff...it fell! I couldn’t believe it. And when I checked yesterday, it was down to just $1,616. And maybe it will head down now...and keep going down. I feel very battered. What can I do?” “Wait a minute...haven’t you more than doubled your money, from $700 to $1,600. What’s wrong with a 100% gain?” “Well, nothing, but I thought it was going to $2,500.” “What would you have done if it had hit $2,500?” “Well, I guess I would have waited for it to go up some more. I would have held onto it. I’m a long-term investor.” “But you’re holding onto to now, right?” “Well, now I don’t know. It looks like it might be going down.” “You mean, you would hold at $2,500 but sell at $1,600?” “Well, yes...” “Then, do me a favor. Call your brother-in-law. Tell him he’s talking to a moron. You’re supposed to sell high, and buy low...not the other way around. Click.” And you, dear reader, do you have a question about gold? Would you like some advice? Do you feel battered? Just call our Battered Goldbug Hotline. Another helpful service brought to you by The Daily Reckoning. (Calls will be billed at $1 a second...and we will put you on hold while we read the newspaper. Check your personal horoscope. And have a glass of wine.) Regards, Bill Bonner, for The Daily Reckoning