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The Daily Reckoning | Wednesday, October 19, 2011 The ruinous European debt problem is solved! Oh, wait... Chris Mayer on gold and the great appeal of Japanese stocks, Plus, Bill Bonner, watching disasters develop on two continents from Paris... ------------------------------------------------------- External Advertisement Last Chance for 2011 China Silver Panda Coins! I was sure that 2011 China Silver Panda coins were sold out. But I was wrong — and just secured the final cache! Past Silver Pandas are now valued up to 2,600% more than their original price! Which is why you owe it to yourself to take advantage of this last chance opportunity! Who Will Bail Out the Rescuers? A Look Inside the Eurozone Debt Crisis Bill Bonner Reckoning today from Paris, France... Yesterday, rumors circulated that the Europeans had their problems in hand. The Dow rose 180 points. The euro went up too, and now trades at $1.37. For all the talk of a disintegrating Europe, the euro has been holding together pretty well. Gold fell $23 for no apparent reason. As the day went on, however, the euro solution looked less and less like a solution and more like a disaster. Moody’s took Spanish debt down two notches...and warned that it was looking at France. The New York Times has the story: Moody’s warned late Monday of a possible downgrade to France’s flawless credit rating. French finance officials worry that any such move would make it hard for Paris to negotiate solutions, according to an official who was not authorized to discuss the situation publicly. The rally in American stock markets was set off by a report late Tuesday on the Web site of The Guardian, a British newspaper, that France and Germany had agreed to increase the size of the rescue fund — the European Financial Stability Facility — to as much as 2 trillion euros to contain the crisis and backstop Europe’s banks. But almost as soon as those hopes soared, European officials quickly brought them back to earth, with denials flooding forth from Brussels, Paris and Berlin. This latest round of rumors and rebuttals about a European solution was a repeat of earlier situations... Such episodes have played out several times since the debt crisis intensified this year. Most recently, investors have been pegging hopes on a meeting of Europe’s leaders set for this coming Sunday in Brussels, anticipating that a comprehensive solution to the debt crisis might be unveiled. Now that the rating agencies are circling France, the whole rescue project is in danger. It is one thing for the big, strong nations — France and Germany — to rescue the little, marginal nations, such as Greece and Ireland. But who’s going to rescue France? At some point, the Europeans are going to be forced to either default honestly and painfully...or to bail themselves out boldly and fraudulently, like the Americans. Here in Paris, sitting in the Café Vavin, we watch disasters develop on two continents at once. As to the US mess, we think we understand what is going on. The Americans are on the path of self-destruction. They’ll pick up speed, until they finally reach their destination. But as to what is going on in Europe, we have no better idea than Nicholas Sarkozy or Angela Merkel. Why the warning behind this image could... “Forever change the way you think about the stock market... Open your eyes to what you can and can’t expect from the United States government... And even change the ease at which you’re able to buy and sell things... Click the image play button to first learn the warning...and some simple ways to prepare for the uncertain times ahead. The Daily Reckoning Presents Japan, Gold and the Euro Crisis Chris Mayer At last week’s Safety & Survival Summit, sponsored by Agora Financial, I discussed the great appeal of Japanese stocks. This next table below, from Symphony Financial Partners, which runs a Japan-focused fund, shows you the percentage of Japanese stocks that meet three tough valuation criteria: However, as the Symphony guys point out, “low valuations and cash- rich balance sheets are all chants we have heard before.” The common lament of an investor in Japanese stocks is that they are cheap and stay cheap, that the management teams do nothing to unlock the value in their companies, that they just sit on the cash or blow it on dumb projects. So what’s different this time? “The real change,” according to Symphony, “is the discernible increase in high premium M&A/MBO activity.” (MBO stands for “management buyout” and is when a management team buys out a company, taking it private.) For the first nine months of 2011, there were more MBOs than in all of 2010. It looks like it will be a record year for MBOs in Japan. What’s interesting is the fat premiums they are paying to make those deals. On average, buyers are paying 50% above the stock market price! In a September note, the Asian research firm CLSA, gave six reasons for the increase in mergers and acquisitions in Japan: 1. Japan is dirt-cheap. 2. The rules have been changed, with the specified aim of spurring M&A. 3. Companies have so much money it is burning holes in their pockets. 4. Even if companies don’t have the money themselves, banks are falling over themselves to lend them the money. 5. Corporate governance just overtook the US (40% of US companies have poison pills, 45% have staggered boards — which means it takes many years to fire the board — and 70% have golden parachutes. These are not problems Japanese investors have to handle.) 6. Rules on what constitutes a monopoly just got wildly more liberal — from the old, parochial domestic market view to taking a worldview of market share: Nippon Steel/SMI may have had a combined 40% share in Japan, but it had less than 3% global share. Maybe, just maybe, a fire has been lit under Japanese shares... Gold Stocks Still Lagging A radio host asked me last week if I was a gold bug. I asked him what that meant. He said a gold bug was “someone who sticks with gold through thick and thin.” Based on that definition, my answer would be no. I paid no attention to gold throughout the 1990s. It was a dead asset that seemed to only go down in price. I started to pay attention after the tech bubble burst and after then-Fed chairman Alan Greenspan began his loose money policies, driving interest rates lower and, thus, inflating an historic credit bubble. I was a definite gold bull by 2004. But I don’t plan to always be a gold bull. Gold is an asset like any other. It will go up... and it will go down. At some point, gold will be a sell again, but not yet. I feel the same way about gold stocks. I don’t plan to always recommend them, but they are attractive now. In 2011, they have only gotten cheaper. Year to date, the GDXJ, which is an index of small gold miners, is down 22%, even though the price of gold is up 18%! Clearly, small gold stocks are sucking wind. But at the current quotes, gold stock valuations are at lows we have not seen since the last great bottom in gold stocks in 1979. Hang onto those gold stocks. The EU Crisis At the summit, someone asked me if I worried about the EU crisis now unfolding. I don’t remember the answer I gave exactly, but it wasn’t a good one. The problem with the EU crisis is that no one really knows much of anything. I think Pyrford International, a UK fund manager, hit the nail on the head in a September note: “The euro — I think we’re now all heartily sick of reading about it. Everyone has a view, and everyone is profoundly ignorant at the same time. No one knows the answers — there is no template, no relevant past experience.” I think that’s it. The EU crisis is extraordinarily complicated on a lot of levels. With 17 different countries that can’t seem to agree on much, it is hard to handicap an outcome. But the essence of the problem is that some of these governments — like Greece — borrowed money they cannot re-pay. So either the rest of the EU comes to its aid, or Greece defaults. A default means lots of losses for banks (and others) holding the defaulted debt. There are several governments in trouble beyond just Greece. Portugal, Italy, Spain and others are in trouble, too. So do they all get bailouts? Or not? If the EU breaks up, then we’re talking huge losses and the probable disappearance of a number of banks. Just like in 2008 in the US. What this means for US investors is not clear. It’s hard to imagine a prosperous US with the EU in such disarray. Surely, an EU meltdown would affect the US. How many skeletons do US banks have in the closet? Hard to say. But I do think one thing happens inevitably: A whole lot of paper money gets printed to pay the bills, no matter what. Either the European Central Bank prints a lot of money to bail out everybody, or the individual European nations — abandoning the EU — start printing their own money again. The Greek drachma, Italian lira, Portuguese escudo and Spanish peseta may return to the world’s monetary markets before the decade is out. Might this be good for hard assets of the shiny variety? Might the people of the EU buy gold and silver after watching their savings melt away? I think they will. It’s another reason why gold isn’t a sell — and probably won’t be — for quite some time yet... Regards, Chris Mayer, for The Daily Reckoning Joel’s Note: Join the Mayer’s Special Situations email list and get an inside look at the back page — which includes ALL of the companies Chris has recommended to his readers...along with price action, per cent gain/loss since recommendation, research notes, in- depth analysis and more — right here. Chris’s next alert is due out this coming Friday. 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. Bill Bonner It’s Only Just Begun... Bill Bonner We stick to our guns. Yes, dear readers, guns are what you are probably going to want. Right now, the revolutionaries are mostly peaceful. That’s how revolutions begin. The elites think they can manage the situation. They express their sympathies to the protestors. They promise reforms. “We are on their side,” says President Obama. New Yorkers are overwhelmingly behind them. And the press — which ignored them for weeks — suddenly finds nice things to say about their cause, when they can figure out what their cause is. Later on...when the protestors become more violent and more determined...and after the elites push back...then you’ll wish you had guns. The police will shoot the protestors. Then, the protestors will shoot the police. They’ll probably both be shooting at you. It will be a real revolution! And what’s behind it? Forty-six million people on food stamps. One hundred million who have not had a real raise in 40 years. Twenty-five million without real jobs. Twenty million who will never have real jobs. One out of five mortgaged homeowners who are underwater. But that’s just the beginning. Wait until the hoi polloi begin to realize how things work. We remember when the government was throwing money at “minority” contractors back in the ’70s and ’80s. Politicians and lobbyists hustled to find a ‘person of color’ who could be a front man. Savvy businessmen formed new enterprises in their wives’ names. How women got to be a minority we never did understand, but that is how it worked. Maybe it still does. If you were a ‘minority’ you could get special treatment... You could become a zombie. The next big feeding frenzy was the ‘War on Terror.’ Billions were being spent. Again, the insiders got on the phone and invented businesses to take the money — ‘security’ firms...logistics support...armor and equipment...food...training. Software was a favorite. You could spend billions developing software. Who knew if it worked or not? Arnaud de Borchgrave describes how the supply chain worked: Billions have vanished into the offshore accounts of American and foreign contractors. In Iraq, an estimated $6.6 billion are unaccounted for. To power anything at a remote outpost, a gallon of fuel has to be shipped into Karachi, Pakistan, and then driven 800 miles over 18 days to Afghanistan on roads that are sometimes little more than improved goat trails. There are frequent ambushes by Pakistani bandits or Taliban guerrillas who impose “tolls” — and occasionally blow up tankers so others get the message. Then, as “green” legislation became a fad, the insiders saw another opportunity. They called in brothers-in-law and old friends. Engineers were hired. Contracts were let. Companies were listed on the public markets. The Bay Citizen, from San Jose, CA, reports: Three weeks before Solyndra, the solar-panel manufacturer, based in Fremont, declared bankruptcy, the United States Department of Energy issued a $197 million loan guarantee to another Bay Area solar company... Like Solyndra, which failed despite a $535 million federal loan guarantee, SoloPower, based in San Jose, is a politically connected firm that produces thin film panels built with copper, indium, gallium and selenium (or CIGS) instead of silicon, the basis of most photovoltaic panels. Energy Department officials have cited a worldwide drop in silicon prices as a major factor in Solyndra’s demise. Some analysts are now looking at SoloPower and asking why the federal government — as it worked furiously to keep Solyndra from going bankrupt — made a major investment in a company that relied on a similar technology. In its six-year existence, SoloPower has experienced internal discord — it paid a $20 million buyout to its founders — and has yet to turn a profit. Pretty sweet, huh? You start a business. The feds get behind it. The business never makes a penny. But you leave with a cool $20 million. Good work if you can get it. And the people who can’t get it — the people without connections to the elite — are getting pretty upset about it. Regards, Bill Bonner for The Daily Reckoning