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The Daily Reckoning | Friday, April 27, 2012 Housing starts fall to a multi-generation low... Has the market finally bottomed? The best flimflam artists in the world (and how NOT to get scammed!) Plus, Bill Bonner on life in the phony world and all the humor that comes with it... ------------------------------------------------------- “Miracle Eyes” Heal the Blind In the 21st Century, a new dawn of medicine has emerged that could soon restore the sight of 10 million people worldwide. It’s a medical breakthrough that is unprecedented in human history. In fact, this amazing technology could eventually improve... and extend... every life of every person on earth. And one tiny California Company, priced under 80 cents per share, is at the forefront of this revolutionary medical treatment.  Click here to get the full details on this explosive penny stock that could significantly advance the field of regenerative medicine — and possibly make you ridiculously rich.   Hustle and Flow Economics Risky Investments in a Market Full of Conmen   Bill Bonner Reckoning today from Baltimore, Maryland... Dow up more than 100 points yesterday. Gold up $18. Google...Apple...what more do you need to know? “Blah, blah, blah...don’t you feel you’re wasting your time?” Our friend was being sympathetic. She gave us a look of pity, tightly controlling her face muscles; as if it might slide into contempt at any moment. After spending so much time with rocks, dirt, cement...cattle, grapes...doing such real things, we admitted that writing about economics and finance seemed a little light. As if there is nothing real there. “I mean, you were building things...changing the landscape...and improving people’s lives. Putting water in their houses...digging reservoirs...setting up solar power systems.” Yes, it was true. There is the world of real things...real work and real results. And there is a whole phony world of economists...commentators...speculators...blowhards and show- offs...hustlers and conmen...fools and knaves. Wall Street...and its victims. But while the real world is more satisfying...the phony world makes us laugh.  It shouldn’t come as a surprise that the insiders are taking advantage of the “crisis” they caused. But the scale of the rip- off...and the audacity and subtlety of it...are breathtaking.  Yes, it is fun to watch a good flimflam artist at work. And those managing the US financial system are among the best. One day, years ago, when our office was still in the slums of Baltimore, we got a knock on the door. It was after 7pm, but we were still at our desk... Standing in the doorway was a slender white man in blue working clothes...he looked like a mechanic or a dishwasher repairman.  “I’m so sorry to bother you,” he said with a slight Pennsylvania Dutch clip to his words. “But I saw your light on...and well, I just didn’t know what else to do. “You see, I’m a neighbor...I work at Dunbar’s (an air-conditioning contractor) down the street.  “I hate to bother you. It’s embarrassing for me. But you see, I was working late too...everybody had gone. I realized I was the last one in the shop. So, I locked up at Dunbar’s. I was in a bit of a hurry, I guess. And so, I...I locked my own car keys and my wallet in the shop.  “I’d just call another of the employees. But I’m the only one with keys, except the boss and he’s down the ocean (a local expression for having gone to Ocean City, MD). So I didn’t quite know what to do. “What a mess. I’m really embarrassed to be bothering you with this. But here’s the problem. It’s my wife. She’s deaf. So, I can’t call her and tell her I won’t be home tonight. I’ve got to get home or she’ll worry herself silly about it.  “I could take a bus...I live up in Pennsylvania...not too far over the line. But I locked up my wallet. I don’t have any way to pay for a ticket...” He went on to explain that he hated to borrow money. That he’d never borrowed money before in his life.  Your editor had no money on him. So, he went to borrow it from a co- worker.  “Sounds like a lot of BS,” she said, pulling a $20 bill from her wallet. “Oh no...he seems completely sincere,” we replied. We gave the man the money. He added that his wife made the best apple strudel in Pennsylvania, and solemnly pledged to come back tomorrow morning with a pie as well as our money. The next morning, we watched our watch. 8AM...not yet. 9AM...he must be waiting to take a break. 10AM...guess he’ll come over at lunchtime. At 12:30 we gave up. We repaid the co-worker, who laughed out an “I told you so.”  “Yes, I’ve been had. But you know something, it was worth it.” A gentleman lets himself be rolled from time to time. Suspicion and cynicism are unflattering. Besides, he will spend $20 on lunch and forget it immediately. A good hustle, on the other hand, is memorable. And a good flimflam is rare and elegant. So it is that we look on the Fed, the Treasury, and their Wall Street accomplices with admiration. They have flimflammed the entire nation... Almost 100 million households in America...and not one in 1,000 has any idea what is really going on.   Uncovered: 2 Unusual and Lucrative Investment Opportunities... These two — but unknown — investment opportunities may prove to be the only things you need to do with your wealth this year... Easy to get into — you can’t afford to wait.  The full report is right here. The Daily Reckoning Presents The Missing 13th Floor   Chris Mayer “About eight years ago, I was going down the elevator of a hotel in Las Vegas with a friend of mine,” Arnaud Karsenti told me. “The elevator skipped the 13th floor. And my friend said to me, ‘How come there is no 13th floor? What a bunch of wasted space!’” The lack of a 13th floor comes from the same fear that prevents people from walking under ladders or causes them to shiver when a black cat crosses their path. But Arnaud decided to make a business out of it. The idea is to find value where others fear to go. Arnaud is the managing principal and co-founder of 13th Floor Investments. The firm manages the Florida Real Estate Value Fund, which, as the name implies, focuses on real estate value investing in Florida. Recently, while in South Beach, I tried to catch up with Arnaud, but our mutually jangled schedules couldn’t mesh. We talked later by phone a couple of times. I want to share what Arnaud and 13th Floor are up to, because you’ll get a fascinating ground-floor view of what’s happening in real estate in the post-bust world. There is also much investing wisdom in what he shared. Finally, the Florida Real Estate Value Fund itself is a fine alternative investment idea. (Later in this letter, we’ll look at another opportunistic way to play distress in real estate.) Arnaud and I started talking about how there can be a big gap between the big picture and the view on the ground. “There’s been a lot of conflict in the data,” Arnaud told me. “Housing is a great area where you can take out the paper every day and read about pricing going down or unemployment pressures, yet the local data in Dade and Broward counties [in Florida] indicate a reverse trend. One challenge for us is to decide what we believe and try to cut through some of the noise of the big macro stuff to really understand what’s going on.” To do this, Arnaud and his team rely on the good old spadework of due diligence. His business partner, Robert Suris, is a local developer and contractor with a keen sense of property value. Together, they meet with builders and bank presidents and dig into local markets. This helps avoid the two big problems with the big-picture statistics: They are backward looking and tend to paint with too broad a brush. Still, Arnaud says there are unmistakable big-picture trends unfolding in real time that are worth paying attention to. He highlighted some important ones: Housing has bottomed. Housing sales and starts are as low as they’ve been going back to the 1960s. Prices have fallen and interest rates are at all-time lows. In most markets, it is now cheaper to buy than rent. Strong rental yields help set something of a floor under prices. There is still a lot of distressed inventory, which is an opportunity that investors slowly munch away on. There is a continued influx of foreign buyers. Buyers from South America in particular fuel a lot of activity in South Florida. Arnaud noted they typically pay all cash. They also focus on Miami’s urban core. To a Brazilian, Miami is cheap. While I was in South Beach, I was not surprised to hear so much Spanish. I was surprised to hear so much Portuguese. Money is cheap. The amount of money sloshing around and the cost of that money drive real estate activity. With interest rates at all- time lows, some rental properties already trade above pre-recession levels. Cheap money won’t last forever, but with the Fed committed to low interest rates to 2014, it seems unlikely to change soon. A shift from homeownership to renting. The homeownership rate dropped big-time when the bubble popped. After peaking at 69.4% in 2004, the national homeownership rate is now the lowest it’s been in 13 years. There are a lot more renters now, and not only because of the stresses of the bust. “It used to be that people got married and then they’d move into a house,” Arnaud said. “Now people do that in their 30s. If you look at what people are doing for that extra 10 years of single life, you see that they are spending more time renting.” Let this speak to the danger of looking too much at past statistics and thinking that they will automatically revert to some magical mean (or average) of the past. “You can’t just pick one statistic and then assume that things are going to revert to the mean because the mean itself changes,” Arnaud said. “Secular changes within a trend can affect the mean permanently.” I asked Arnaud about how long of a window he thinks we have to pick up bargains in real estate. His answer was it depends on the property type and location. “In Miami, forget about it,” he said. “Apart from a couple of special situations that we are involved in, I think it is very hard to find distressed opportunities in Miami right now, as most of it has been picked through. The world has decided that ‘Miami is back.’ It’s almost a boom-like feeling. I thought it would’ve haven taken longer to come back. But it’s right here before us now. People are developing everything from condominiums and multifamily to retail and hotels.” Arnaud’s fund, though, is not purely focused on distressed opportunities, nor is it focused on Miami. “It’s just that distress has been where the most opportunity and action have been in the last couple of years,” he said. “And we’re not focused just in Miami. We have a minority of our holdings in Miami. We’re very active in other parts of Florida, such as Naples and Fort Myers. And we’re starting to get active in Orlando.” The challenge is to balance value investing principles with growth. “If you read about Seth Klarman’s investing approach, for instance, it’s all about buying below book value, below liquidation value, below replacement cost [or the cost to rebuild].” Klarman, as you may know, is a great investor. His Baupost Group has delivered a nearly 500% return to its investors over the past 11 years, while the market rose 7%. “If you do your job right as a value investor, you’re going to benefit from the growth whether you like it or not. But if you rely strictly on your value investing lens, you may miss out on some growth opportunities,” Arnaud warns. “Still, as an opportunistic value guy, you have to be able to live with the trains you didn’t catch.” There are other pitfalls in being too cheap. “One of the dangers of value investing in real estate is buying the wrong product,” he said. “Buying something at a big discount to replacement cost could be a mistake. We just passed on a deal that we could still buy for below replacement cost. But we realized that the reason was the product itself was not a quality product. If you just value everything off a spreadsheet, you can lose sight of some of the intangibles of real estate that drive demand.” Those intangibles include aesthetic considerations. “The Brazilian guys who come and want to buy property in Miami are only going to buy quality. They are going to buy value, but they also want something that they think is attractive.” So far, 13th Floor has done a great job navigating the waters. It was early picking up condos in Miami and is now in a position to sell a condo tower for a 36% annualized return. It land-banked a lot of inventory for national homebuilders when no one wanted empty lots. Now 13th Floor is in a position to sell lots to national builders seeking new land, earning annualized returns of 21%, 34% and 29% on three projects. These returns kill what the stock market has done over the same short time frame. Regards, Chris Mayer,  for The Daily Reckoning Joel’s Note: As his loyal followers well know, Chris makes it his business to hunt for value where few others look...even if that means, as if often does, sniffing around despised asset classes and investments long written off by everyone else. It is in these unloved spaces that Chris picks up the real bargains. His latest research presentation is a classic example of this kind of “contrarian investor” mentality. In it, Chris makes a few bets that will, no doubt, invite scorn from the mainstream...which is just the way he likes it. To discover the 3 “bombshell events” set to explode in 2012...and the two lucrative investments Chris has identified to take advantage of them, simply turn your speakers on and click here.   World oil production is about to be shaken to its core... You won’t believe which nation analysts at Wall Street’s biggest banks expect to become the world’s biggest energy producer by 2017 — or the effect it will have on America... our economy... our future... Click here to see who is set to become the new king of oil — and how you can use the news to go for big profits as early as this MAY!   And now back to Bill with more thoughts on the greatest flimflam ever...   Bill Bonner Pushing its key rate down to zero...the Fed gives its insider friends money for nothing. Trillions of dollars’ worth.  The outsiders reach for their wallets. They know they are being robbed, but they have no idea how...or by whom.  Instead of getting a fair return on their savings, they get practically nothing.  The idea is to force them into riskier investments. The Fed admits its strategy without shame or remorse. And it works. The poor Mom & Pop saver takes his money to Wall Street. And then, Barry Dyke author of The Pirates of Manhattan II: Highway to Serfdom explains what happens. He calls it “a biblical transfer of wealth...from Main Street to Wall Street.” Wall Street, the mutual fund industry and corporate America has hijacked America’s savings through 401(k) retirement plans. It uses workers’ savings in 401(k)s funded with mutual funds to fuel outrageous compensation packages, fund shaky companies going public, accelerate speculation and to finance the corrupt Wall Street business model. It is an unprecedented biblical transfer of wealth from Main Street to Wall Street and corporate America. It is an unprecedented transfer of economic and investment risk onto the little guy. Main Street America has been taken to the cleaners with 401(k)s. It is a biblical transfer of wealth which will take most Americans years to recover from. The major problem today is that there is no savings or patient capital for regular Americans. The US Commerce Department found savings to be around 1% of earnings during the 2007 housing bust, up to 8% in 2008, down to 5.8% in September 2010 and slid to 3.6% in September 2011. There is a major difference between saving and investing, but to Wall Street and the mutual fund industry the only way to save according to them is to put it into volatile highly- complex no-guarantee stock mutual funds. Putting money into a 401(k) is NOT SAVING. It is speculating. Here’s the proof. According to the Investment Company Institute 2011 Fact Book, Americans’ have 77.4% exposure to volatile equities in their retirement accounts. That is horrific. The Federal Reserve is at the heart of this savings debacle. By dropping interest rates next to zero, The Fed has forced Americans into volatile markets in search of yield. The only winners in this tragedy are the mutual fund giants, Wall Street and corporate executives with pay packages which would make King Solomon blush. In many respects this wealth transfer is worse than the Great Depression when people were more self- reliant and had a stronger family unit.  The Fed, the federal government, bankers, government workers and highly paid executives rarely speculate with their own fortunes the way Americans are forced to speculate in their 401(k)s. Mr. Dyke might have added that pushing money into Wall Street also pushes up prices on stocks, bonds, and other Wall Street products. At first, this makes the small investor feel smart. His ‘investments’ go up. Of course, not as much as the rich ‘1%,’ who own far more of America’s capital structure than he does. But negative interest rates create bubbles. The Fed is now inflating its third major bubble in the last 15 years. This time, in US Treasury bonds. When it blows up, a good portion of the savings of American households — locked in pensions, mutual funds and insurance programs — gets blown to smithereens. Then, there is consumer price inflation too. You can’t add $2 trillion to the nation’s base money supply without some effect on prices. It could take a while to show up, but it would take a doubling of consumer prices just to bring the current base money supply per person back to normal levels. And that assumes the Fed straightens up...and does no more money printing. And who will bear the hurt? The clever elite? Those who understand the hustle? Those who own gold...houses...offices and apartment buildings? Or those whose wealth is counted out in drips and drabs...from wages and meager savings? Oh Dear Reader...watch out! Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com