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The Daily Reckoning | Thursday, December 29, 2011 Taking the (super) long view approach to wealth building, With war drums a beatin’...China and the US march into a new decade, Plus, Bill Bonner on insider looting, “foreign” aide and plenty more... ------------------------------------------------------ Why I’ll “Pay” You $7,403 to Cancel Your Subscription*** I know that sounds funny — me “paying” you thousands of dollars to cancel... But that’s exactly what I want to do today. Please look here to get to the bottom of this insane situation. ***For-your-eyes-only invitation expires promptly on January 4th, 2012 [Ed. Note: Before we continue with our Daily Reckoning Best of 2011 Series...a quick note from Bill Bonner regarding the Bonner & Partners Family Office project... The Ultimate Secret of the Ultra Rich Bill Bonner Dear Reader, What separates the rich from the rest of us? “They have more money,” said Hemingway. But how did they get it? How do they hold onto it? That’s a bit more complicated. I recently drove through a working class neighborhood in Baltimore called Dundalk. It is an area of simple one- and two-storey wooden houses on small lots. Fifty years ago, it was where Baltimore’s industrial labor force lived. They worked in industry — for Bethlehem Steel, General Motors, the B&O Railroad and in the busy harbor. Today, those high-wage industries are mostly silent and rusting. Some sites along the water have been converted to loft apartments for Baltimore’s young professionals. And some of the children and grandchildren have moved away — to the suburbs or to other cities. But most of them are still there. Their parents and grandchildren earned a good living. But few got rich. And now, few of their descendants are rich either. Across town in the rich “old” northern suburbs of Roland Park and Ruxton the people are different. The rich left the city many years ago. But in these green suburbs they remain. Some richer. Some poorer. But by and large the same people whose parents were there 50 years ago. What accounts for it? How come some families stay rich generation after generation, while others never have a nickel? “Culture,” you will say. “Education,” perhaps. You won’t be wrong. But what, specifically, about culture and education is it that makes such a big difference in outcomes? Simply put, you might say the secret is that these “Old Money” families take the long view. But there is something deeper and more important. These families know how to turn time into an ally instead of an enemy. They have worked out very specific strategies that use time to boost its investment returns (much higher rates of return...with lower risk). And they have worked out ways to use time to prepare the family to not only protect money...but to make it grow. This is why they invest in education and training. And why they make sure family members add to their collective wealth, rather than subtracting from it. It is why they try to guide their children to suitable spouses. They know that a rotten apple will spoil the barrel. It is why they spend time and money on lawyers and accountants, too — making sure that the structures are in place to pass along wealth and protect it. It is why they prefer deep value assets over momentum investing. Over time, value rises to the top. Momentum slows. It is why they will wait a long time — many, many years — for the right investment at the right price. It is why they like investments with long-term payoffs — such as timber, mining and infrastructure. And it’s how they are able to benefit from compound growth — letting relatively modest gains grow over several generations. It is why they are almost fanatical about eliminating costs — taxes, investment charges, and unrewarding living expenses. They know that wear and tear, over time, will wreck their family fortunes. It is why they develop long-lasting partnerships with the professionals they need to make sure their interests are protected and their plans are carried out. Let me ask you something. If you thought you’d live forever, would you do anything different? Wouldn’t your attitude to your money change a little? Wouldn’t you slow down, realizing that you’re not in such a hurry to make money? And wouldn’t you reduce your spending too — knowing that your money would have to last you a long, long time? The truly wealthy are careful to spend their money on things that hold their value over time. It is why they do not trade in and out of investments. Instead, they find a few positions and stick with them — for decades. It is also why they prepare their families, over the course of many, many years, so that they will be prepared for the challenge of managing and enlarging the family wealth. This is what separates the serious money from the here-today- gone- tomorrow crowd. The serious money knows there’s a lot more to successful wealth building...especially over the long run...than just stock picking. Instead of trying to control the uncontrollable — the returns you get from stocks — they are focused on what they can control. Of course, most really wealthy families have a family office somewhere in the background making sure these things are on track. And without someone dedicating time to making these things happen, they often don’t. Most generational wealth transfers fail. Money that was hard earned is lost through poor investment decisions and lack of planning. When it comes down to it, you might say that successful families do all the things unsuccessful families don’t want to do. These things take work. But if you’re determined to keep wealth in the family, the sooner you start on them the better. Sincerely, Bill Bonner Founder, Agora Inc. P.S. Membership is currently closed at Bonner & Partners Family Office. The next intake — our only one of the year — is January 2012. If you’d like to receive an invitation to join at that time, simply fill out this brief declaration of interest here. External Advertisement The $70 Billion Secret of the Mulliez Family You’ve never heard of the Mulliez family. They take their privacy seriously. But using a family secret, they have been able to provide 520 family members with enduring wealth...over generations. This is just one of the family wealth secrets Agora founder Bill Bonner and a small group of advisors have been using to secure their wealth in these uncertain times. If you are interested in finding out more about how Bill’s group can help you, you can find details here. [Ed. Note: A stagnant decade for the United States...set against the rise and rise of China. What will the next decade look like? How will the geopolitical landscape change...and could we be headed into another war as the paths of these two economic powers converge? Addison surveyed the surroundings after a few key state actions a few months back... “The March of (Trade) War,” which first appeared at DailyReckoning.com on October 12, serves as today’s installment of our Daily Reckoning Best of 2011 Series. Please enjoy... The Daily Reckoning Presents The March of (Trade) War? AddisonWiggin “I want to go to war with China,” declared a presidential candidate last night on national TV. Granted, we’re taking this declaration out of context. A little, anyway. “I don’t want to go to a trade war,” said former Sen. Rick Santorum. “I want to beat China. I want to go to war with China and make America the most attractive place in the world to do business.” Before we begin, we have to say we’ve been dutifully ignoring the “China issue” for months. Jim Chanos’ dire prediction of a collapse of the red charade amid our own fledgling effort to get a publishing business started in Beijing have put a damper on much of our enthusiasm since spring 2010. Not to mention the fact that following our trip to China in May of that year, we made a series of stock recommendations for Chinese companies listed on US exchanges... they were about as popular among readers as a pimple on the arse of a bus driver. Still, the rhetoric among political candidates, and a growing pile of evidence that the rancor between the New World and the Middle Kingdom threatens to dominate the headlines in 2012, has lead us to break radio silence today. Let’s follow the breadcrumbs... Yesterday, by a vote of 63-35, the US Senate passed a chest-thumping bill that aims to punish China for “manipulating” the remnimbi. “The proposed legislation,” explains Singapore’s Business Times Washington correspondent, Leon Hadar, “would replace the current system under which the Treasury Department is required to cite countries that ‘intentionally’ manipulate their currencies.” Instead, we’d get a system “under which the Treasury would determine whether any foreign currencies are in fundamental misalignment, and propose ways to correct the imbalance with countries that are named. Countries that fail to fix their currencies would be subject to anti-dumping duties and other penalties.” The reaction from Beijing was swift. The official Xinhua News Agency invoked the ghost of the Smoot-Hawley Tariff Act that helped turn a depression into the Great Depression. “Comparing the current political and social situation with that of 80 years ago,” said Xinhua, “we can find stark similarities: an economic downturn, a high unemployment rate, marked popular discontent and growing political conflicts, especially when presidential politics is getting hot.” Thus, hours after the vote were TV viewers treated to the sight of another candidate, Mitt Romney, saying he’d immediately brand China a currency manipulator upon taking the oath of office. But he hastened to add, “I don’t want a trade war with anybody.” Too late. A different kind of “trade war” is already underway. China has already outmaneuvered the United States for the postwar oil spoils in Iraq... without ever firing a shot. “China is the biggest beneficiary of Iraq’s oil treasure,” declares Gal Luft from the Institute for the Analysis of Global Security. “Chinese companies backed up by the Chinese government enjoy serious advantages over the international oil companies (IOC) and also have better bargaining power.” In the summer of 2009, Iraq awarded contracts to develop seven major oil fields. China’s CNPC was the big winner... along with Russia’s Lukoil, Malaysia’s Petronas and France’s Total. Exxon Mobil got leftovers. In the summer of 2011, the Iraqi and Chinese governments signed two economic cooperation deals. China builds pipelines and other infrastructure, Iraq gives China access to oil. PetroChina is already planning two pipelines that would stretch from Iraq all the way to China. “Exxon, on the other hand,” says Morningstar analyst Allen Good, “has shareholders to answer to and can’t simply bid up resources without regard to return on investment.” “China has the money and is clearly a rising power,” explains Cameron Hanover analyst Peter Beutel. “It can offer political help, technological help in some cases, military aid — which none of the major [oil companies] can. “So take Libya, for example. China can offer guns and weapons and can offer political protection to the new government. So can France, but the majors can’t. That’s the biggest difference right there.” That would be ironic, considering how some experts believe the Libya war was a Western attempt to checkmate China. “China has extensive energy investments and construction investments in Libya,” said former Reagan Treasury Department official Paul Craig Roberts last spring. “They are looking to Africa as a future energy source.” In November 2006, China invited leaders of 48 African countries to Beijing to discuss economic issues. No. 1 on the agenda was access to energy and minerals: China’s big move... The following month, the Bush White House authorized the formation of AFRICOM — a new US military command with oversight for Africa. Previously, the duties were split among three other regional commands. Discussing it during congressional testimony in late 2007, Defense Department adviser Peter Pham was explicit about AFRCIOM’s aims: They were “protecting access to hydrocarbons and other strategic resources, which Africa has in abundance... a task that includes ensuring against the vulnerability of those natural riches and ensuring that no other interested third parties, such as China, India, Japan or Russia, obtain monopolies or preferential treatment.” ...and America’s countermove; AFRICOM had its first “big war” this year... in Libya. “Washington is trying to cripple its main rival, China,” declares Paul Craig Roberts, “by denying China energy. That’s what this is really about: a reaction by the US to China’s penetration of Africa.” There’s also a looming US-China conflict in China’s own backyard. “Today, America maintains the most powerful military in the Pacific region,” writes John Feffer of the Institute for Policy Studies, “ supported by a constellation of military bases, bilateral alliances and about 100,000 service personnel.” “To Be Specific, It’s Our Pacific,” was the title of a popular American song during World War II. American leaders still see it that way. And they don’t like what’s building right now in the South China Sea. “The time to use force has arrived in the South China Sea,” declared the Communist Party newspaper Global Times on Sept. 27. “Let’s wage wars on the Philippines and Vietnam to prevent more wars.” China has a long-standing territorial dispute with the Philippines and Vietnam over two clusters of islands, the Spratlys and the Paracels. The region is estimated to hold 7 billion barrels of oil and 900 trillion cubic feet of natural gas. “We expect South China Sea tensions to continue,” says former Philippine president Fidel Ramos. “China’s proximate aim, it seems to me, is to limit American freedom of access” and “erode the credibility of Washington’s security guarantees to the East Asian states.” Not that the Pentagon would stand still for this. It has ambitious plans to build up US forces on Guam — “a new aircraft carrier berth,” says UPI columnist Martin Walker, “submarine and logistics bases, facilities for more stealth warplanes, B-2 and B-52 bombers on Guam and to move 8,600 US Marines to the island.” “This could be terribly, terribly dangerous if we turn into a trade war,” says Vancouver veteran and China bull Jim Rogers. “Whenever people get slapped in the face, they always think they have to slap back.” And it wouldn’t even take a shooting war to do lasting damage. “If America does put tariffs on the Chinese, the Chinese have various weapons at their disposal; they can stop buying American government bonds; they can sell American government bonds.” “If they did that, interest rates in America would go through the roof.” Overnight, the rates the US Treasury pays on its long-term debt would explode. Government would have no choice but to drastically cut back services or simply print money. The US Senate just took us a step closer to this scenario. Perilous times, indeed. Addison Wiggin 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. And now back to Bill Bonner, with the rest of today’s reckoning from Baltimore, Maryland... Insatiable US Debt and Other Jokes Bill Bonner Yesterday, the Dow dropped 139 points...with all 30 Dow stocks lower. Gold lost $31. It seems to be heading towards $1,500...or maybe $1,400...or lower! But don’t expect us to do any serious thinking this week. We’re celebrating 12 days of Christmas. And we’ve got 7 more to go. The holidays don’t stop us from having an un-serious thought or two, however. For example, later in the week, we’re going to give you our predictions for 2012... You need to be prepared...in case the world doesn’t end on schedule. Who knows, maybe the Mayans miscalculated? Here’s a prevue: Stocks will go down. Gold will go down. The dollar will go up. The US may be going broke, but perversely, people want dollars...and US Treasury debt. It’s the only thing they can count on. If the feds ever run out, they know they can depend on Ben Bernanke & his central banker friends to give them more. Here’s the Bloomberg update: The US government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits. The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The US drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest. While Standard & Poor’s stripped the US of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6 percent this year. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of US assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses. “If the last two weeks are any indication of how next year will start, there’s near-insatiable demand,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at auctions, said in a Dec. 21 telephone interview. “We have a significantly shrinking supply of risk-free assets in the world and US Treasuries are one of the few left.” Yeah, yeah...insatiable demand. We’ve heard that before. In 1999 there was an insatiable demand for stocks. Remember, there were 70 million baby boomers preparing for retirement. What choice did they have? They had to buy stocks, right? Wrong...stocks went down in January 2000. In real terms, they’re considerably lower now — depending on how you adjust for inflation. Then, in 2005, remember the insatiable demand for housing? More immigrants. More families getting richer. Everyone wanted to get on the housing ‘escalator’ before it was too late. But in 2007 it turned out that investors were already satiated. They had enough housing...and housing debt. And now, demand for US government debt is ‘insatiable.’ Heh...heh...heh... But wait? Aren’t we implying that US government debt is in a bubble. Doesn’t that suggest that it will soon go down? Yes. Well...maybe. US government bonds are in a bubble...with the highest prices and lowest yields in more than a century. But bubbles do not necessarily blow up right away. It can take time for the pin to approach... And Mr. Market is a pretty cunning old fellow. Our guess is that he will want to draw more of the world’s wealth into the US bond market...before blowing it up. Does that mean you can safely buy US bonds in 2012? Not at all! Stay away...far away... Bubbles are always dangerous. And a bubble in the world’s reserve asset — US dollar-denominated debt — is the most dangerous ever. When it blows...penguins at the South Pole will have to cover their ears. Deaf people will complain about the noise. And the shock wave will knock down a large part of the entire world’s capital structure... Beware, dear reader, beware... And more thoughts... Here’s how government really works. The insiders get richer; the outsiders get poorer.The New York Times has the story: WASHINGTON — When Representative Ed Pastor was first elected to Congress two decades ago, he was comfortably ensconced in the middle class. Mr. Pastor, a Democrat from Arizona, held $100,000 or so in savings accounts in the mid-1990s and had a retirement pension, but like many Americans, he also owed the banks nearly as much in loans. Today, Mr. Pastor, a miner’s son and a former high school teacher, is a member of a not-so-exclusive club: Capitol Hill millionaires. That group has grown in recent years to include nearly half of all members of Congress — 250 in all — and the wealth gap between lawmakers and their constituents appears to be growing quickly, even as Congress debates unemployment benefits, possible cuts in food stamps and a “millionaire’s tax.” Mr. Pastor buys a Powerball lottery ticket every weekend and says he does not consider himself rich. Indeed, within the halls of Congress, where the median net worth is $913,000 and climbing, he is not. He is a rank-and-file millionaire. But compared with the country at large, where the median net worth is $100,000 and has dropped significantly since 2004, he and most of his fellow lawmakers are true aristocrats. Largely insulated from the country’s economic downturn since 2008, members of Congress — many of them among the “1 percenters” denounced by Occupy Wall Street protesters — have gotten much richer even as most of the country has become much poorer in the last six years, according to an analysis by The New York Times based on data from the Center for Responsive Politics, a nonprofit research group. *** How do the insiders get rich? Here’s another story that provides part of the answer. The government gives “foreign aid” to poor countries. And then, it turns the ‘foreign’ aid into military aid...so the money goes into the pockets of Pentagon contractors...their lobbyists...and their pet politicians. Two Thirds of US Foreign Aid is Really Military Aid Monday, December 26, 2011 David Wallechinsky, Noel Brinkerhoff When some Americans complain that foreign aid is wasting taxpayer money abroad that could be put to better use at home, they may not realize that today’s version of foreign aid isn’t what it used to be. Call it the Pentagon-zation of US foreign assistance. Until a few years ago, the State Department was the leading US government agency when it came to doling out foreign aid. But beginning in the second term of George W. Bush’s presidency, and continuing through the Obama administration, the Department of Defense has surpassed the State Department in supporting foreign initiatives, most of which have been military oriented. For the past two years, the Pentagon has been given $10 billion more than the State Department for foreign aid projects. With $17 billion, Defense officials plan for the coming year to invest in foreign military and police training, counter-drug assistance, counterterrorism activities and infrastructure projects, among other programs. Among the expenditures included in the recently passed 2012 National Defense Authorization Act are $1.1 billion to the government of Pakistan for alleged counterinsurgency efforts and $415 million for two programs known euphemistically as the Combatant Commander Initiative Fund and the Commander Emergency Response Fund. Translated into everyday English, this means cash that can be handed out by US commanders. Regards, Bill Bonner for The Daily Reckoning