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The Daily Reckoning | Tuesday, November 30, 2010 Europe unravels as global equities slump, Gold: The best answer...or the only one? Plus, Bill Bonner passes on a solemn warning... ------------------------------------------------------- Here a Way YOU Can Beat The Bastards At Their Own Game... Hidden Gov't Documents Let You Predict Stock Moves Imagine what you could do with this intelligence... Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too! Click here to watch this shocking presentation right now. Death Comes for Us All US Dollar Fights the Euro in a Battle With No Victor Bill Bonner Reporting from London, England... We awoke to a blizzard. After a few months away, we had forgotten how miserable London's weather can be. As near as we can tell, the sun doesn't reach this part of the world - at least, not in the winter months. And the winter hasn't even begun. Snow, sleet, rain - it is all coming down. But Londoners don't seem to mind. They trudge to work over their slippery sidewalks...march over their frozen bridges... Seeing them coming over Blackfriar's bridge, we remembered T.S. Eliot's line about how surprising it was that "death had left so many undone." Eventually, death gets us all. And not just us... Banks. Corporations. Trends. Bull markets. Paper currencies. Monetary systems. Empires... For example, death seems to be stalking the euro as well as the dollar. "Irish rescue fails to appease markets," says the front page of The Financial Times. Europe's leaders came up with €85 billion that was supposed solve the Irish problem. It was especially important that it create a buffer between Ireland's banking and funding issues and those of the rest of Europe. Well, it took about 24 hours for the buffer to give way. Now, Spain's bolsa is in freefall. Portugal's asset prices are giving way. And there's pressure on Italy and even France. Even the biggest banks are slipping (see below). Yes, dear reader...and you thought you had problems. We had not paid much attention to the European financial issues. We thought we had enough to worry about already, what with Ben Bernanke trying to destroy the dollar and the US going broke. But hey...that's just the beginning. Since Bernanke announced his program to undermine the dollar, the old greenback has actually risen against its main rival - the euro. How do you like that? Bloomberg reports: The dollar gained the most since August against six major counterparts as concern that Europe's debt problem will worsen and military action in Korea will escalate boosted demand for the US currency as a refuge. The greenback rose against the yen for a fourth straight week, the longest streak in 20 months, after North Korea shelled a South Korean island and said "escalated confrontation" will lead to war. The euro fell for a third week versus the greenback as investors speculated Portugal and Spain will be the next European countries to need a financial rescue. The US added jobs in November for a second month, data next week may show. "The euro has further to fall against the dollar," said Kathy Lien, director of currency research at online currency trader GFT Forex in New York. "If there is a war amongst the Koreas, the yen would fall off aggressively against the dollar." The problem with the euro is that it is too good for many Europeans. Everyone wants a flexible currency these days. That is, they want one that will act like a good dog...one that will "get down" off the furniture when it is told to do so. Alas, all the currencies are unruly mutts. The dollar won't go down, even though Ben Bernanke pulls the rug out from under it and gives it the old "bitch slap" with the back of his hand. And the euro won't go down because the Germans don't want it to go down. Of course, this doesn't make the Germans very popular with the Spanish...the Irish...and the rest of the peripheral crowd. They want a cheap currency so they can pay their debts. The Germans, on the other hand, cannot seem to forget the horrors of the Weimar days...when you could take a wheelbarrow full of paper money to the store and not be able to buy a loaf of bread. The more you look at the European banking and sovereign debt crisis the more dangerous and insoluble it seems. Try to fix one part of the problem and you make another part worse. The Germans don't want to pay to bailout the Spaniards...and the Italians...et al. But German banks have nearly half a trillion euros worth of their debt. The Irish taxpayer doesn't want to pay to bail out the banks either. He's already facing austerity measures that would choke and appall Americans. Yesterday, the Obama team proposed freezing federal salaries - that is, leaving them 50% to 100% higher than private sector wages - for the next two years. "We are going to have to budge on some deeply held positions," said the decider. His proposal would save...are you sitting down, dear reader...$2 billion by the end of 2011. Let's see, that would cut the deficit by approximately 3 tenths of one percent...BFD - that's shorthand for "so what." In Ireland, government workers already agreed to a pay cut. And now the Irish feds are supposed to fire 10% of their public workforce...with another 10%, probably, a few years from now. How much austerity will the Irish be willing to take in order to protect banks from their losses? They could leave the euro...revive the punt...and shirk their commitments in the old-fashioned way - by devaluing their currency. But wait... If the Irish opt out of the euro...the whole shebang could come falling down. "If the euro fails, Europe will fail," says Ms. Merkel, chancellor of Germany. And if the euro fails...banks fail...companies fail...trade fails...and then US companies fail...US banks fail... Who knows where this would lead? And only we seem to want to find out. But what to do? A colleague gives us advice...below... The 10 Gold and Silver Stocks to Buy Now ... It's no secret that gold and silver keep breaking record high after record high. But what many investors fail to realize is that a handful of companies are likely to post even bigger gains as precious metals prices continue to heat up. Click here for our 10 favorites right now! The Daily Reckoning Presents America's Leading Export: Inflation Chris Mayer "Depending on how bad a crisis gets, gold ranges from being between the best answer and the only answer." Inflation is on everyone's lips these days...everyone in Asia, that is. Because Fed Chairman, Ben Bernanke is so busy pumping up the US money supply to battle a perceived deflationary threat here at home, he is putting pressure on overseas economies to print money at the same pace, in order to prevent their currencies from appreciating against the dollar and, thereby, become less "competitive." The mechanics of all this are a bit complicated, but suffice it to say that the US is "exporting inflation." This important topic hit the front page of yesterday's The Wall Street Journal's Money & Investing section. The paper posted official inflation rates for the biggest emerging market economies in Asia. India leads the pack with an 8.6% official inflation rate. At that pace, prices would double in India in less than nine years. Indonesia is at 5.8%, China at 4.4% and South Korea at 4.1%. These are on the high side and increasing. Folks worry that central banks in these countries will tighten up their loose monetary policies to try to rein in inflation. In so doing, these people worry economic growth will slow or even reverse. And that would have a wide impact on the world's stock markets, as most of the growth that companies enjoyed in the last year came from Asian markets. After all, those rising commodity prices that delight commodity investors are due in good part to the demand from places like Asia. China is already at work trying to contain price increases. It has implemented price controls, which never work. It has also tried to boost the reserve requirements of its banks, essentially forcing them to hold more in reserve and lend less. This kind of tinkering and meddling creates its own problems and almost always ends badly. I should send a copy of Henry Hazlitt's Economics in One Lesson to the world's central bankers and policymakers - if only they'd read it. I was in Baltimore last week recording an interview with my publisher, Addison Wiggin. We talked about this book, because Agora Financial has acquired the rights to it. We think it is an important book, so we are reprinting it. (You'll hear more soon.) Anyway, Hazlitt's book is full of good principles and prescient predictions. The one key lesson he hammers home is to think not only of the immediate impact of any act or policy on one group, but to reason out the longer-term consequences for all groups. For instance, the policy of encouraging homeownership seems a good one. But Hazlitt points out the problems of government-guaranteed mortgages. He wrote this passage in 1946, which is startling for its prescience. This describes exactly what happened in the big housing bubble that popped in the financial crisis: "Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize bad risks and to defray the losses. They encourage people to 'buy' houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily over-stimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages) and may mislead the building industry into an eventually costly overexpansion." Remember, this was written in 1946! If only more policymakers and central bankers had read and understood this passage, we could have avoided a lot of pain and losses. This is also a pretty good way to think as an investor. For example, Hazlitt writes about inflation. He makes some good points that most people overlook. Inflation, he tells us, doesn't mean that all prices rise at the same time. Inflation is really a process, as the newly printed money courses its way through the economy. "The process of inflation is certain to affect the fortunes of one group differently from those of another... It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run, it brings ruinous consequences to the whole community. Even a relatively mild inflation distorts the structure of production. It leads to the overexpansion of some industries at the expense of others... When the inflation collapses, or is brought to a halt, the misdirected capital investment - whether in the form of machines, factories or office buildings - cannot yield an adequate return and loses the greater part of its value." This brings us to the inflation worries in Asia. Most of the time, you'll hear commentators talking about economies "overheating" as if it is the duty of central banks to cool things down. But really, the damage is already done. Inflation distorts markets. It leads to people making investments they might not otherwise have made. So the only choice is continuing the inflation to its ultimate flameout, or stopping it earlier. Either way, the "misdirected capital" - as Hazlitt dubs it - loses the greater part of its value. Anyone who owned, say, a homebuilder stock over the last five years knows this all too well. Where is the misdirected capital in Asia? That's what you want to avoid. It's hard to say, or investing would be easy. But it seems fair to say that real estate is one to be careful about. The building spree in Chinese cities has surely been abetted by lose money and an approving nod from the powers in Beijing. The whole region, but China in particular, has had a great boom in heavy industry. Producers of cement and steel are concerns, in my view. But the process of inflation also creates areas of neglect. The great commodity boom we've enjoyed in the last decade came about in part because the industry has been starved for capital for a long time. Investors were drawn first to the telecom, media and Internet darlings of the 1990s...then to the miracles of subprime loans and financing in the 2000s. As a result, the resource sector received very little new investment. The last financial crisis also tightened the spigot on investing in resources. A whole raft of projects suffered delay, or even cancellation. This, too, doesn't fall evenly on all commodities. Some have been harder hit than others. Just this past weekend, I read a good piece in Barron's on the titanium miners. From the piece: "Titanium miners have painted themselves into a corner, as a lack of investment during the downturn has made it difficult to keep pace with booming emerging-market demand now. Higher prices are likely to result." It goes on to cite some titanium plays. Iluka Resources - trading under the ticker ILU in Australia - is the second largest miner, after Rio Tinto. Its stock is up 112% this year. South Africa's Exxaro Resources is up 25% and Kenmare Resources is up 21%. The latter has a mine ramping up in Mozambique. We've seen other commodities enjoy tight supply: uranium, iron ore, hard coking coal and rare earths. Each of these has gone up in price in the last year. No doubt there are some distortions in these markets, too. But new supply is not so easily forthcoming, leaving a window for investors to make some good money. Another commodity that should be good no matter how Asia's inflation story plays out is gold. The strength of gold reflects concerns of the creditworthiness of the issuers of paper money. As a result, gold is near 52-week highs. Yet the stocks of gold miners have lagged the metal. Gold miners should put up some great numbers in the next few quarters, though, sending their shares higher. Hang onto your gold stocks. Finally, if you read only one economics book in your life, Hazlitt's is the one I recommend. I tell people that this book changed my life because it changed many of my ideas on economic questions and set me on a path that I still follow today. You'll find Hazlitt's book is also a doorway to other thinkers, should you decide to go deeper. His final section, "Notes on Books," contains many excellent recommendations. I found Hazlitt back in 1996 while browsing bookstore shelves. I had been studying finance and the great investors - Ben Graham, Warren Buffett, Peter Lynch, Phil Fisher and others - for several years. But I felt I wanted to get a better grounding in broader economic principles. I was looking for one readable book that had a good summary. Hazlitt's book is the one I found. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: As Chris mentioned above, we've acquired the rights to Hazlitt's Economics in One Lesson, in addition to a wealth of other economic- and freedom-leaning books. For Reckoners looking to flesh out their own personal freedom library, here's a link to the Laissez Faire Books website. Also worth checking out is an essay Hazlitt himself wrote regarding his Economics in One Lesson masterpiece. We've linked to it in these pages in the past, but his is a message worth repeating, so here it is again. Outstanding Investments Precious Metals Report BETTER THAN GOLD! One investment should rocket even faster than gold over the next 12-24 months... yielding at least 3-to-1 gains on every dollar invested... GUARANTEED. In fact, I'm so sure of this, I won't charge you a penny to show you how. Click Here Now For Details. Bill Bonner Pinch Your Pennies Before It's Too Late Bill Bonner A colleague warns us: "It's time to save every possible penny. Next year is going to be worse than 2008 - a lot worse. "Here's why: 1. The euro is going to fail. Ireland, Spain, and Italy's sovereign debt cannot be financed. Shares of even the biggest and strongest of Europe's banks (Deutsche Bank) have begun to "roll-over." 2. More QE in Europe and America will make it much more difficult for businesses to invest across borders. That will result in massive trade problems and could easily cause a global famine. Most people don't realize how dependent the world has become on free trade for basics, like food. Here's what agriculture prices have done since July when QE II began. Vastly higher ag prices are not bullish for financial markets or world order. 3. Housing in the US is going to collapse, again. The various games that have been played to prop up the housing market in the US have failed. Tax credits, etc. haven't worked...and they never had a chance. I have good contacts in this industry and it is completely bleak. With foreclosed properties making up 25%-50% of the inventories, housing prices will continue to fall 10%-15% a year - or more. There will be no new net demand for homes for a long time. Several major homebuilders will go bankrupt, including the largest, Pulte. 4. Lots of major US corporations - see GE - have unsustainable debt loads. These companies will end up bankrupt and will fire at least 50% of their employees over the next three years. 5. Muni/State finance: You guys have seen all of the numbers. Probably half of the states and munis in the US are being run in a way that's completely unsustainable. As these cuts are made it will have a big impact on the economy. See what happened to Cisco last quarter, all because of cutbacks at the local government level. "The problems of 2008 haven't gone away. We've just borrowed a lot more money to make people think everything would be okay. As the veneer wears off, there's going to be a real panic; and this time it will be worse, because there's zero trust and confidence left in the government or the bankers... "If I were in your shoes, I'd make sure every business unit I controlled was being run in a very prudent way, with a big cash flow buffer. I'd make sure they were ready to cut overhead by 50% in 30 days..." Regards, Bill Bonner for The Daily Reckoning Joel's End Note: With more years in the financial publishing industry than your editor has had cold beers, Bill Bonner has built a wealth of invaluable contacts around the world. These friends and colleagues are contrarian thinkers, industry insiders, money managers, independent- thinking analysts and the like...exactly the kind of people successful investors seek out when deciding what to do with their own money. And now, thanks to the Bonner & Partners Family Office program, you can tap this wealth of information to help guide your own investment decisions. If you haven't yet read the family office invitation, direct from the desk of Bill's son, Will Bonner, you might like to give it a quick read, here. ------------------------------------------------------- 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 The European Debt Crisis at a Glance Let’s look at how the European debt situation developed. When Europe brought out the euro in 2002, it changed everything. All of a sudden, you could lend money to Ireland or Greece without having to worry about the Irish pound or the Greek drachma. They were all using the euro, which was managed by the Germans. So why not lend to one of these peripheral states of Europe and earn a little more interest? Cutting Expenses to Borrow More Money Yeah, Thanks A Lot! Consumer Price Inflation: The Wolf at the Door I knew I was pretty sloshed when I started giggling about the perverse idiocy in which bankrupted governments wallow, as The Wall Street Journal had a nice headline that said it all: “States Raise Payroll Taxes to Repay Loans.” Hahaha! I mean, what kind of crazy crap is it when the government is so desperate for money that it is raising the cost of hiring people at the same time as 10% unemployment has, literally, decimated the workforce? This is crazy! Why the Government Hates Deflation Buy Gold: It’s the Only Way to Combat Government Spending Putin Suggests Russia Could Join Euro Zone, Make Euro World’s Reserve Currency At a recent conference on economic cooperation in Germany, Russian prime minister Vladimir Putin explained it was “quite possible” that in the future Russia would join the eurozone. He also expressed that the move would probably bring about the replacement of the US dollar with the euro as the world’s reserve currency. There is No Food Inflation; the BLS Made Sure of That McMoran Exploration Co. (NYSE:MMR) — Still Bullish on Drilling in Shallow Waters The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor