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The Daily Reckoning | Tuesday, October 11, 2011 Mobthink peccadilloes...and the opportunities they create, Chris Mayer with a couple of textbook crisis plays for your portfolio, Plus, Bill Bonner on why we’d be lucky to only see another Great Depression and plenty more... ------------------------------------------------------- Urgent Message From Addison Wiggin I had no clue what Addison was doing in the office SO early Friday morning. Especially with a camera crew. You see, Addison doesn’t often appear on camera. I knew something big must have been cooking. And now that I’ve just seen the footage, I finally get the reason for his urgent message. Check out this rare video warning that he’s recorded for you... right here... Full Employment is Easy Examining the Warped Logic of a Labor-Obsessed Economy Joel Bowman Reporting from Buenos Aires, Argentina... First up, the market noise... Stocks worldwide were up big time yesterday, mostly buoyed by news that the politicos in Europe had “renewed their commitment to talk about trying to eventually come to an agreement” about how to fix a problem they themselves caused and did not see coming. Or something like that. Bravo. We’ll stick to our storyline on this one: “Bankrupt entities tend to go bankrupt,” as Eric Fry pointed out while in Europe last week. “Greece will default...eventually.” And with it, we would add, will follow a few other chain-linked lemmings. Maybe that list will “only” include an assortment of other PIIGS’ rinds. Maybe it will include the euro itself. Time will tell. For the moment, Slovakia appears to be the lone voice of reason over on the continent, steadfastly refusing to give in to the bailout crowd. Our friends at The 5-Minute Forecast had more on the dissenting Slovakian cry in today’s issue. Back in the US, there was also “less bad” news on the jobs front to pluck investors’ strings. The economy added 103,000 jobs for the month of September...barely enough to keep up with population growth. “That is not a lot of jobs,” noted Bill Bonner in these pages yesterday. “There are about 150 million people who make up the labor force. This number increases — by immigration and population growth — by about 1.2 million per year. So, 100,000 new jobs doesn’t do much to restore full employment.” Let’s see, there are roughly 14 million unemployed souls in the United States...depending on where you get your figures. If, as some economists reckon, it takes 100,000 jobs per month just to keep up with population growth (others say it’s more like 150,000), that leaves 3,000 “surplus” jobs created in September. At this rate, the US will be back to full employment in...wait for it...388 years! It’s all part of Obama’s Jobs Act...for the year 2399. But wait. That’s assuming those 3,000 jobs are even worth creating anyway. In his classic work, Economics in One Lesson, Henry Hazlitt correctly calls out society’s obsession with jobs as the “fetish of full employment.” Allow us to take a step back for a second here. Why are we so concerned with incurring the cost of labor anyway? Hasn’t our entire evolution as a species depended on our gaining more production with the same labor input, or the same production with less labor? There’s even a fancy word for this equation: efficiency. But if full employment, in and of itself, is the holy grail of a healthy economy, why not just ban factory machines? Bang. Problem solved. Think of all the people it would take to assemble an inhabitable lodging and to farm for our daily crust. “Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment,” observed Hazlitt. See? It’s simple. Following the politicos’ warped logic, a breakthrough medical technology that instantly cured every illness on the planet would be a terrible thing. Just imagine all those newly unemployed folk, formerly laboring in the healthcare industry! “Nothing is easier to achieve than full employment,” continued Hazlitt, “once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment.” In point of fact, we should be cheering increases in productivity, not in the cost input of labor. Still, in a world where less bad news (based on tortured statistics and skewed realities) is celebrated as outright triumph, spinning one’s wheels in the mud of ignorance is as good as a victory lap. Ergo, investors took Friday’s job figures and the eurocure lip service at face value, donned their rally caps and bid up the Dow some 250 points (or nearabouts). If one were to gauge the broader market’s health on yesterday’s activity alone, they would conclude that all is well on the continent and that the US is, as the saying goes, “kicking ass and taking names.” The opposite is true, of course, except that the US really IS taking names...but not for the purpose you might think. (Wait...is that a knock at the door?) Why, we are left to wonder, do people rally behind such asinine ideas? Why are we so very prone to temporary delusions and groupthink nonsense? Perhaps there is no good answer. Maybe some things in life are simply beyond our knowing. Why, for example, do people pay $10 for a bookmark when a $1 bill holds a page just as well? Why do the people at the Chinese takeout store down the street bind their Chao Fan con Carne Tuesday Special meal in so much bloody wrapping? It’s a two-block delivery route! (But still the meal is irresistible. Damn you, flavor enhancer 621!) More germane to the theme of these pages, why do people routinely believe that productivity and solvency can be commanded by wave of a politician’s magic wand? Ahh...for these mobthink peccadilloes we should be grateful. They create opportunities for anyone actually paying attention. In today’s guest essay, resident value maven and Hazlitt adherent, Chris Mayer, reveals two simple ways to “play a crisis.” Please enjoy... 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 Daily Reckoning Presents Long-Haul Buys: A Pair Chris Mayer A pair of my favorites are buys once again, for the first time in a long time. So I thought I would spend a little time fleshing out why these two stocks are such good ones to own for the long haul. The first is Brookfield Asset Management (NYSE:BAM), which owns 170 hydroelectric and wind facilities; 275 million square feet of commercial real estate; and ports, railroads, pipelines, transmission lines and timberland. The company is a storehouse of hard assets that should provide good returns over time. In fact, the stock has been a great performer: I love that management owns 19% of the stock, which probably has a good deal to do with that outperformance. BAM is not likely to do stupid things. In the past, BAM, led by CEO Bruce Flatt, has been an ace acquirer of distressed assets. “We’re in the business of buying great assets at less than replacement cost,” Flatt says. This is exactly what we try to do in my Capital & Crisis newsletter, and it’s a good sign for BAM. BAM itself is cheap again. Net tangible assets alone are worth at least $33 per share, based on the IFRS (International Financial Reporting Standards). These are fair value estimates used in BAM’s financial statements on which it reports every quarter. Then there is the franchise value of its asset management business, estimated at $6 per share. All together, BAM’s net asset value is at least $39 per share, and growing. BAM also generates $1.5 billion in free cash flow annually. The market cap is about $18 billion today. So you are paying only 12 times free cash flow for BAM, a price not often seen for a business of this quality. In addition to BAM, Canadian Natural Resources (NYSE:CNQ) is a buy once again. Of the large oil companies, this is by far my favorite. One of the reasons I like it is captured in the nearby chart. The management team owns a good chunk of stock, far more than peers. Murray Edwards, vice chairman and large stockholder, co-founded CNQ back in 1998, when it had nine people and a market cap of $1 million. CNQ is way off its high of $52 per share, giving us a chance to add to this wealth-creating oil behemoth. You can pick up shares on CNQ at only six times 2010 cash flow, at $5.81 per share. It is also a low-cost producer of both natural gas and heavy oil. This is only a part of CNQ’s value, which resides in a large, high- quality asset base. This net asset value has increased dramatically since we’ve owned it, as the nearby chart shows. CNQ’s net asset value per share is north of $60 per share. That’s a 20% compound annual growth rate since 2000! It has what the Street likes to call “organic horsepower.” With just the assets it owns currently, CNQ could increase oil production by 10% each year for the next three years. Also, there is potential for big discoveries. The company has identified five 1 billion-barrel oil structures off the coast of South Africa. Drilling commences in 2012. With its focus on return on investment and a strong balance sheet, I expect CNQ to continue to deliver good results for shareholders over time. It’s one of the few oil stocks I’d hang onto through the economic cycles. As with BAM, CNQ can use the downturns to pick up assets on the cheap. Both have done so in the past. That is how you play a crisis. Regards, Chris Mayer, for The Daily Reckoning Joel’s Note: Each and every week, Chris sends an update to his Capital & Crisisreaders, alerting them to exactly the kinds of opportunities he describes above. The next alert is due out this Friday. If you’re not already receiving his emails, you can click here to ensure you’re on the list. Cancer “Magic Bullet?” Small Biotech Set to Rocket? A little-known biotech company is making medical history...but with FDA fast track review 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. Bill Bonner Permanently High Unemployment Bill Bonner Reckoning from London, England... Little by little, one step at a time, the mainstream press is beginning to understand. There was no ordinary recession. There will be no ordinary recovery. And something is very wrong. A Great Depression? We should be so lucky, writes David Leonhardt inThe New York Times: UNDERNEATH the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted “the most technologically progressive decade of the century.” The 1930s was a tough time to earn a living. But great things were happening. Much of the technology that would later become ubiquitous...and which would power the post-WWII consumer boom...was developed in the ’30s. But what new technology is coming along now? Do you see anything that will later cause a boom? We don’t. Leonhardt continues: It would clearly be nice if we could take some comfort from this bit of history. If anything, though, the lesson of the 1930s may be the opposite one. The most worrisome aspect about our current slump is that it combines obvious short-term problems — from the financial crisis — with less obvious long-term problems. Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and health care. Together, these problems raise the possibility that the United States is not merely suffering through a normal, if severe, downturn. Instead, it may have entered a phase in which high unemployment is the norm. Yes, dear reader, welcome to the Great Correction. It will probably be long. It will probably be slow. It will probably be like Japan over the last 20 years. Even the Fed is managing expectations downward. It says we’ll have unemployment over 7% until after 2015. Leonhardt thinks we’re following Europe’s pattern — with high unemployment as a more or less permanent feature of the US economy. He’s probably right about that. Price inflation is giving way to price deflation. That means, labor rates — which are generally less flexible — tend to be too high. ‘Wait a minute, Bill. Are you saying that the American working stiff, who you say hasn’t had a raise since 1974, is still earning too much money?’ Well, yes...that’s what it looks like. But just look at the average American worker. Is he smarter than a Chinese worker? Does he work harder than an Indian? Is he better trained or more skilled than a Brazilian? We’re not talking about people who are really educated. If you’re a good engineer or a clever marketer, you probably are earning more than ever. But most people aren’t. Most people don’t have any real skills — including those who went to college. You get a degree in communications. Or in psychology. Or sociology. Or politics. What do you really know? Not much. If you’ve got some luck and some pluck, you can use your skill at reading and writing to leverage yourself into a real job. But not everybody can do that. The typical person doesn’t have any real skill. When the economy was booming, it didn’t matter. He didn’t need any skills. Anybody could get a job. And a credit card. And a house. But now, he’s struggling. The house is underwater. The job has disappeared. And he still has no skills. How much can a person like that expect to make? About as much as the average unskilled person in other countries...which is a lot less than he intended to make. The emerging markets are gaining on us. We read last week that wages in Russia have gone up 12 fold since the early ’90s. In India, they double every 10 years. In Shanghai, college educated people earn nearly as much as they do in the US. But while some economies emerge...others submerge. Some go up. Some go down. And the working classes are bound to run into each other somewhere in the middle. How long will it be before an unskilled laborer in Tennessee earns about as much as an unskilled laborer in Turkey, Russia or Indonesia? We don’t know. In the meantime, getting paid as much as an illegal immigrant is not a very attractive prospect. Millions would rather not work at all. Get food stamps. Take it easy. Watch TV. That’s why unemployment is high, at least in a theoretical way. People are unwilling to work for what they are really worth. You want to put people back to work? Just cut wages in half. Presto, mission accomplished. Seriously, it would be easy to fix the unemployment problem. Just eliminate all the safety nets, welfare, unemployment, disability, minimum wages and other employment legislation. Let price and demand get together on their own. Anyone who really wanted to work would lower his wage to the point where an employer was willing to pay him. The economy would boom. But that’s another story. And no one — other than Ron Paul — is going to mention it in Congress. A French economist — Jacques Rueff — was way ahead on this. He realized that you would never be able to fix unemployment by rolling back labor laws. So he figured another way of lowering wages — create inflation! That, he said, was the real genius of ‘Keynesian counter-cyclical stimulus spending.’ It created inflation, which lowered real wages...thus putting people back to work. It defrauded the working class; but it was for their own damned good! And more thoughts... The mainstream press is also coming around to seeing things our way on other matters. Leonhardt again: In particular, three giant industries — finance, health care and housing — now include large amounts of unproductive capacity. Housing may have shrunk, but it is still a bigger, more subsidized sector in this country than in many others. Health care is far larger, with the United States spending at least 50 percent more per person on medical care than any other country, without getting vastly better results. (Some aspects of our care, like certain cancer treatments, are better, while others, like medical error rates, are worse.) The contrast suggests that a significant portion of medical spending is wasted, be it on approaches that do not make people healthier or on insurance-company bureaucracy. In finance, trading volumes have boomed in recent decades, yet it is unclear how much all the activity has lifted living standards. Paul A. Volcker, the former Fed chairman, has mischievously said that the only useful recent financial innovation was the automated teller machine. The common question with these industries is whether they are using resources that could do more economic good elsewhere. “The health care problem is very similar to the finance problem,” says Lawrence F. Katz, a Harvard economist, “in that incredibly talented people are wasting their talent on something that is essentially a zero-sum game.” In the short term, finance, health care and housing provide jobs, as their lobbyists are quick to point out. But it is hard to see how the jobs of the future will spring from unnecessary back surgery and garden-variety arbitrage. They differ from the growth engines of the past, which delivered fundamental value — faster transportation or new knowledge — and let other industries then build off those advances. Of course, these were themes we were talking about 5 years ago. The finance industry was largely a scam...but so is education and health too. Trillions are invested, with no real payback. The same could be said for the US military. It’s the largest single capital consumer in the world. In the 1930s America was developing new technologies and building new industries. Today, she is subsidizing her zombie industries of the past — and getting nothing from it. But at least the Pentagon is entertaining. It is like a huge football franchise with 300 million fans, every one of whom is forced to buy season tickets! Regards, Bill Bonner for The Daily Reckoning