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The Daily Reckoning | Wednesday, October 26, 2011 Dear Readers respond to a question posed by Addison’s new “Project X”... The importance of breakthrough technologies...going back to Tesla and Faraday, Plus, Bill Bonner on the trouble with saving money in a consumer- based economy... ------------------------------------------------------- External Advertisement Mr. Right (On the Money)... and His Next Big Move He gave his readers a chance to bag four triple-digit gains on Aug. 8, the same day every stock in the S&P 500 fell. Now Shah Gilani’s eyeing some of the most potent — and overlooked — companies in the market. They’re just as powerful — if not more so — than IPOs. And you don’t have to be an accredited investor to buy them.Here’s why. You’ll also hear about the two special companies Shah’s recommending today. Thoughts From a Concerned Public What Really Worries People About the Current US Crisis Joel Bowman Reporting from Buenos Aires, Argentina... First, the markets. Major indexes in the US gave back all of Monday’s gains yesterday (and then some) as concerns over the Eurozone resurfaced. The Dow surrendered 200+ points for the session. The NASDAQ and the S&P 500 tracked similar paths. It’s all noise, of course, pumped up by media attempts to distract from the real, underlying cause of this unshakable, ongoing and decidedlynon-recovering trajectory of the global economy and, in particular, the welfare/warfare states within it. Teleconomists and policy wonks prattle on about a “crisis of confidence,” citing, for example, consumers’ new found tendency to pullback on discretionary purchases, preferring instead to pay down debts...or simply walk away from them. The antidote for this, say the planers, is more stimulus, more steroid injections into the economy to spur washing machine-buying moms, pick-up truck-buying dads and gewgaw-infatuated teens back into spending mode. Ain’t gonna work. Why? Broke people don’t spend. And consumer economies without consumers soon shrivel and die. The planners exhibit here a typical misreading of the subject at hand. What the western world is experiencing is not a crisis of confidence, but a spending hangovercaused by the preceding crisis in overconfidence. And so we see the most debt-soaked nations on earth — those that took the biggest swigs from the punchbowl — suffering the biggest hangovers. David Rosenberg describes it as a balance sheet recession. Bill calls it The Great Correction. And Doug Casey has coined the delightful phrase The Greater Depression. Whatever your definition, one thing is for certain: Neither Mr. Rosenberg, Mr. Bonner nor Mr. Casey controls the spigots at the world’s central banks. That job requires a gross misunderstanding of the situation at hand, one bordering on the obscene, a prerequisite that amply disqualifies the above-mentioned parties. The situation in a nutshell: The US has too much debt. The Eurozone has too much debt. Both are slouching toward extended periods of pain and suffering, during which people residing in those places may fairly expect their standard of living to decline...meaningfully. At least our Fellow Reckoners appear to have a firm grasp on the situation at hand, as shown by their responses to Part I of the new project Addison has dubbed, somewhat mysteriously, “Project X.” Those who expressed interest in yesterday’s invitation to partake in “Project X” were invited to share with us some of their hopes and fears regarding the future. Specifically, participants were asked: “What are your biggest concerns about America and your retirement?” Herewith we provide a small sampling of answers. (We have purposefully withheld names to protect “Project Xers’” privacy.) Some respondees expressed their concerns in a simple, concise manner. “That Obama would win another term,” wrote one. “Financial ruin,” penned another. Others provided a slightly broader range of anxieties... “The continued intrusion by government into every facet of life with dollar erosion and excessive taxation,” for example. Or, as another wrote, “Govt. spending money they don’t have, and printing their way forward. [And] how to protect my retirement assets.” Still others drilled down into the specifics. They touched on war spending, on a fundamental erosion of values, on private wealth confiscation. Here’s one “Project Xer,” concerned that... “We will not ‘back up’ in time. We should stop the wars and focus on a sustainable economy. Since that is unlikely, my concern is that the government will start measures that confiscate wealth and ruin the dollar, effectively wiping out savings and taking away real stores of wealth that smart (or even, just lucky) people have put away. Costs will be too high for people who once would have been very comfortable in retirement.” Another writes that the greatest threat to America and an individual’s retirement is... “The loss of the basic ideals and beliefs that built the greatest nation in the history of the world. And, what that portends for the future of capitalism. The ‘Occupy’ activities and the loss of civility and respect, along with the dumbing down of young people, will do more to topple the US than the real problems you folks talk about. Because without understanding and education, the youth will, once again, be influenced by the wrong people...” One of the overarching themes we ran across while perusing the responses, a thread many Reckoners will surely identify with, was that of currency debasement, inflation...even hyperinflation. “As per Bill’s advice,” wrote one respondee, “I am sitting on what I consider a lot of cash. Will this be inflated away or exchanged by the government for 10 cents on the dollar for a new currency. I am diversified. I just am unsure as to whether to hold this electronic cash in dollars or some other currency.” And of course there’s the ever-present danger of engorged government choking ingenuity, entrepreneurship and vitality out of a once vibrant economy. “I’m worried,” wrote one Project Xer, “about the growing government presence. Taxes, regulations, corruption. Theft of my assets through taxation or law. Loss of liberty. Misguided citizens demanding the redistribution of my wealth. For my retirement, I’m worried about growing my portfolio. Finding ways to save as my real wages decline. Finding additional passive income streams so that my (more than) full-time job is not the only source of funds.” “The biggest concern,” chimed another, “is how to make as much money as fast as possible (minimum to medium risk) for my retirement so I can quickly and safely get our family, money, gold and silver out of the United States to Belize, Costa Rica, Nicaragua, etc. Your financial newsletters and ‘International Living’ are invaluable to me and I am excited about ‘Project X.’” Grave as these concerns are, Project Xers might find some consolation in the fact that they are not alone, that we’re listening...and working on a revolutionary solution set for you. That’s what Project X is all about. As you’ve probably read, Addison has been working away on this thing for the past six years, largely in secret. What he is unveiling is something Agora Financial has never done before. It’s not a newsletter...or a documentary...or a conference...or a book. Project X, in Addison’s own words, “could not only change the way you look at the world, it could revolutionize the way you invest, build new wealth, fund your retirement and even provide for your family.” Interested? Get on board here. When Will Obama Confess to the Secret “Timebomb” Event Ahead? Obama and Congress won’t even talk about it but we’ve got a much bigger problem ahead than anybody cares to admit and it could hit harder than the 2008 banking collapse. What problem? Nothing less than a secret new meltdown for world oil supplies — with gas potentially doubling in price and oil potentially about to hit $300 — and it could hit as early as the end of this year. Click Here to Continue Reading... The Daily Reckoning Presents An Electrifying Profit Opportunity Patrick Cox Biotechnology, nanotechnology and semiconductors are all areas investors watch closely for the next great new tech. However, transformational technology investment opportunities aren’t always found in what are commonly regarded as “breakthrough technology” fields. Sometimes, breakthrough technologies quietly emerge in mature, well- established industries. One particular transformational technology company, for example, can more than double the economic efficiency of electrical motors and generators. The global market for electric motors and generators is enormous, dwarfing even the computing market in size...and it has been around for over 100 years. Almost every ampere of electrical current flowing into your home was originally produced using an electrical generator. Moreover, almost every appliance and device that turns electrical energy into mechanical work uses an electrical motor to do it. Motors and generators accomplish the same electrical/mechanical conversion, though in the opposite direction. In a sense, they are mirror image devices, but they rely on the same basic technologies. The electrical revolution of the 20th century, motors and generators being the most important component, owes an enormous debt to 19th- century innovators such as Michael Faraday and Nikola Tesla. Faraday, a chemist by education, carefully studied the relationship between electricity and magnetism. In so doing, he discovered the principle of electromagnetic induction in 1831. Electromagnetic induction is the production of electrical current by the motion of an electrically conductive material through a magnetic field. Faraday went on to formulate what is now called Faraday’s law of induction, a basic law of electromagnetism. The discovery ranks as one of the greatest, if not the greatest, electrical discoveries of all time. Using these new principles, Faraday went on to build some of the earliest electrical generators and motors. Faraday’s designs, however, were rudimentary and lacking in terms of efficiency and practicality. Later in the 19th century, Nikola Tesla designed improved electrical generators and motors. This included construction of the first induction motor in 1883. While walking through a park, Tesla’s mind conjured an image of an iron rotor spinning in a rotating magnetic field. The invention ended up serving a double purpose. When supplied with an electric current, this design could be used as a motor, converting electricity to mechanical force. On the other hand, if the rotor itself were spun by an outside force, from coal and falling water to gasoline and wind, the design could be used to produce electrical current. The rest, as they say, is history. Tesla’s invention was a key driver for the growth of the world economy in the 20th century. Without his innovations, our modern lifestyles would not exist. No longer did industrial processes have to rely on mechanical and hydraulic methods to transmit power. Electricity could be generated with an induction machine at one location and then sent over long distances on wires to power another induction machine for conversion to mechanical work. Moreover, the electric motor revolutionized our homes and spurred further transformational technologies. Among them are work-saving appliances such as the washing machine, refrigerator and radio. Tesla’s patents are the original intellectual source of every commercial generator and motor on the market today. Conventional motor and generator designs suffer from several drawbacks, however. For example, in small mobile applications such as automotive alternators and portable generators, both machines that do not use permanent magnets, conventional designs suffer from low efficiency. A lot of energy is lost in forms of wasted heat and vibration. Moreover, they are bulky and heavy for the amount of electricity they generate. Machines that do use permanent magnets are generally much more efficient. They are also more compact. The magnets they use, however, come with an entirely new set of problems. Permanent magnets that generate sufficient magnetic field relative to their size for modern purposes use rare earth elements. As most investors know, rare earths are, as the name suggests, scarce and expensive. They are also subject to political risks. Rare earth magnets also suffer from temperature-related performance limitations. Rare earth magnets are very sensitive to heat and do not perform well at temperatures over 200 degrees Fahrenheit. As a result, they normally require some form of active cooling that limits their application. It is reported that late in life, Tesla announced that he had solved some of the inherent limitations of the induction machines he originally invented. Unfortunately, he died without leaving a detailed description. Tesla’s unrealized induction machine ideas have become part of the rich body of urban legends regarding secret Tesla technologies. Fortunately, there is more than enough reason to believe that he was correct when he said that the means to radically improve induction machines exists. In fact, I recently informed the subscribers of Breakthrough Technology Alert about a company that has solved the problems Tesla was working on in his final days. Its road to commercial success has been long and rocky, but it is now, finally, poised to break into the market in a big way. This company has reinvigorated what was thought to be a stale and stable technology. Its patented technology has the potential to revolutionize an ancient industry. Sometimes breakthrough technologies emerge in places you would least expect to find them. Regards, Patrick Cox, for The Daily Reckoning P.S. In addition to opportunities in the transformational field of electric motors, I’ve also tipped readers of my Breakthrough Technology Alert research service to a company that stands to make huge inroads in the health industry. In fact, they’re working on developing a panacea of sorts, a “cure all” that could not only deliver vastly improved health for us all, but also generational wealth-building opportunities for early investors. Sound crazy? Decide for yourself when you review the details of what I call “Panakeia 604” in my latest report, right here. P.P.S. This presentation will be removed from the Internet tomorrow night at midnight. View it now, here. Patrick Cox’s Technology Profits Confidential Presents... KO’s Cancer in 36 Hours! 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 Saving Money in a Debt-Soaked Economy Bill Bonner Reckoning from Madrid, Spain... Last time we looked, yesterday, stocks were falling. We’re on a plane bound for Madrid this morning. So, we’re just going to forget the markets and move directly to the economy that supports them. Both The International Herald Tribune and The Financial Times signal that the American economy has hit a bad patch. Both refer to consumer confidence as a cause of the problem. Consumers aren’t willing to borrow or spend...say the papers...because they lack confidence. What they really lack, of course, is money. They don’t have enough money to continue spending at the bubble era rate...and they have little hope of getting any. “Gloom holds back the US economy,” says the FT. The Conference Board does an index of consumer sentiment. It’s at its lowest point in 40 years. And no wonder. More Americans are unemployed now than there were 40 years ago, or any time in between. And never have house prices fallen so much. The Case-Shiller index puts house prices nearly 4% lower than they were 12 months ago. If all of America’s housing stock has a value of around $20 trillion...this represents a loss of about $800 billion over the last year. “It was all on paper anyway,” you might say. But that was the paper that the baby boomers had hoped to use to finance their retirements. Seventy million of them are supposed to retire over the next 15 years. Few have actually saved enough money. Some looked to the stock market for the money they needed. Others counted on selling their houses. Now, they’re in a jamb. Stocks and houses have gone nowhere in the last 10 years. These years should have been the “peak retirement savings” years for the boomers...when their earnings were peaking out and the beaches of sunny Florida beckoned to them like Lorelei on the banks of the Rhine. But they blew it. They took their peak earnings...invested in stocks or real estate...or simply spent the money. Now, what have they got? They’ve got to do a lot of saving! The trouble with saving money is that it is incompatible with a debt-soaked economy. If your earnings are increasing you can pay back your loans with your extra money. It doesn’t take anything away from the economy. But if your earnings aren’t increasing, you have to reach into your pocket and take out money that was earmarked for other things. This has the inconvenient consequence of reducing consumer spending...which sends the economy into a funk. Even the mainstream press is beginning to understand how this works. Here’s a piece from Atlanta Home: How Debt Deleveraging Killed the Economy By Harris Collingwood October 11, 2011 When US consumers, businesses, and government all pay down debt at the same time, the inevitable outcome is lower growth, higher unemployment, and lower standards of living. Millions of Americans are taking similar steps. Some 8 million US consumers stopped using bank-issued credit cards in 2010, according to the credit-reporting agency TransUnion. The average credit-card balance has fallen 10 percent this year from 2010, to $6,472; US consumer debt has dropped for 12 consecutive quarters, from a peak of $14 trillion in early 2008 to $13.3 trillion last spring, mainly because of mortgages repudiated or abandoned. People are cutting visits to the hairdresser, buying used cars without financing, and living on surplus cheese as they trudge toward the promised land of a debt-free existence. Ponder what economists call the paradox of deleveraging. This occurs when economic actors on all sides — consumers, business, government — all retire their debts at once. Unless their incomes are rising, they can pay off debt only by cutting what they spend. This, in turn, reduces the demand for goods and services, which drives prices down, further trimming businesses’ revenue and thus their ability to pay employees, who in consequence spend less. The cycle continues, until incomes fall so low that there’s no longer cash available to reduce the debt. And as incomes and business profits decline, so do government tax receipts, resulting in fewer police officers, more unfilled potholes, and greater pressure on pensioners. A deleveraging nation, economists say, risks higher unemployment and years of subpar economic growth and could trigger a deflationary spiral in which consumers forgo spending, anticipating lower prices in the future. “When economies are deleveraging,” Atlanta Federal Reserve Bank President Dennis Lockhart said in a recent speech, “they cannot grow as rapidly as they might otherwise.” Such is the bind in which the United States finds itself, three years after the world financial system nearly collapsed amid the collective realization that governments, businesses, and households had all borrowed far more than they could possibly repay — far more, in fact, than there was collateral to secure it. The federal government led the way. Its debt swelled from $907 billion in 1980 to $14.7 trillion in September 2011. The rise wasn’t slow or steady. Powered by tax cuts plus two wars and a Medicare prescription-drug benefit, all financed by borrowing, the debt rocketed during George W. Bush’s administration, from $5.7 trillion in 2001 to $10.7 trillion. Under President Obama, the federal debt has soared by another two-fifths, mainly because of the debt- financed public spending that was meant to stabilize the economy after the 2008 meltdown. Until recently, consumers borrowed almost as avidly. As lenders crafted credit products for borrowers of every need, consumer debt exploded after 1980. The largest increases came from 2000 to ’07, when total household borrowing more than doubled — to $13.8 trillion, mostly for mortgage debt — while consumer prices rose by only one-fifth. Consumers, some economists say, were trying to compensate for stagnant incomes, which gained by only a tenth on average (adjusted for inflation) from 1973 to 2010. Business joined in, especially in housing-related industries, borrowing half again as much in 2007 as in 2000. Small businesses availed themselves of cheap money. But now, the feds pump furiously, still raising debt levels in the public sector, but the tide goes out for almost everyone else. It sweeps millions of households out to sea with it. They are now drowning in debt, ‘underwater,’ with little hope of ever getting back to the surface. The best they can do is to let go the burden of mortgages, student loans, credit cards...all the debt that is dragging them down. Then what? Then, they have to cut back...and save real money for retirement. And you already know what this does to the economy. And more thoughts... “Well, Mr. Smarty Pants,” said our better half, “What’s your solution?” “I don’t have a solution. I only have a resolution.” “What’s that?” “Let the markets sort it out. Let the chips fall where they may. Give bankruptcy a chance.” “But it was the markets that got us into this mess. It was the markets that got people into so much debt. It was the markets that made them think houses would go up forever. It was the markets that rewarded Wall Street for its financial engineering.” “Well...yes...it was the markets reacting to a lot of bad cues and misinformation supplied by the feds.” “Maybe...but if the markets could make such huge mistakes...how do you know they won’t make more of them?” “Hey, the markets never know what anything is worth. They always make mistakes. But they are always finding out what things are worth. And when they realize they’ve been suckered into a bad position, they correct. They’re always correcting their mistakes. And that’s why we have a Great Correction on our hands today.” “But how do you know the correction will be any better than the mistake?” “You’re asking tough questions. I thought we were on a vacation.” “You’re the one who is always talking about these things...” “Of course, we never know anything for sure. That’s why we have markets. They don’t know anything either. But they’re always discovering. It’s sloppy. It’s painful. But that’s just the way it works. “And what’s the alternative? The Soviets tried to eliminate markets. They got smart people together and let them decide how capital was to be allocated, who got what...and at what price. It was the greatest economic experiment ever conducted. And they stuck to it. Over a 70-year period. If people objected, they sent them to Siberia. Some tried to get out of it by jumping over the Berlin Wall; many were shot by the guards. We really should erect some monument to the Soviets for such steadfast zeal and earnest commitment to economic experimentation. Maybe they should get a Nobel Prize. They certainly have done much more than Keynes or Krugman to help us understand how markets work. Sensible people would have dropped the experiment after a few months. But the Soviets kept going. “And now we know. Seven decades after it began, Russia was poorer than when it began. “But that’s the problem with a command economy. It corrects too, but only very reluctantly. Usually after a revolution. “And that’s what we see right now. The private sector — a market economy — is correcting the errors made in the bubble years. It is correcting its debt. It is de-leveraging. But the public sector? Government is a command economy. Decisions are made by bureaucrats, lobbyists and glad-handers. Capital is allocated according to political considerations; they are not guided by the invisible hand of the market. So they don’t correct. They just keep making the same mistake — running up debt — until a correction is forced upon them.” *** A driver was stuck in a traffic jam on the highway outside Washington, DC. Nothing was moving. Suddenly, a man knocks on the window. The driver rolls down the window and asks, “What’s going on?” “Terrorists have kidnapped Congress, and they’re asking for a $100 million dollar ransom. Otherwise, they are going to douse them all in gasoline and set them on fire. We are going from car to car, collecting donations.” “How much is everyone giving, on average?” the driver asks. The man replies, “Roughly a gallon.” *** Electile Dysfunction: the inability to become aroused over any of the choices for president put forth by either party in the 2012 election year. Regards, Bill Bonner for The Daily Reckoning