Recently, my father-in-law hired a timber consultant to appraise the value of a large tract of timber he’s planning to harvest along the Mattaponi River in central Virginia. Before we went to meet this fellow, my father-in-law told me, "This guy’s been in the business for years – he knows his stuff." But I wondered…

On a damp Saturday morning, as we walked through a stretch of towering beech trees, I asked the timber man which species he’d recommend we plant following the projected harvest. He didn’t hesitate for a second. "Loblolly pines."

Now, I have no particular prejudice against pine trees. They just happen to be soft and cheap. They lack any real material quality other than providing an inexpensive source for framing brick-faced Dutch Colonials or serving as the Christmas centerpiece for millions come December.

So I asked: "Would you consider planting black walnuts?" I didn’t know the exact price difference, but I know black walnuts are worth considerably more than any species of soft Virginia pine.

"Black walnuts? You wouldn’t want to do that," he said. I pressed him for a good reason. He rubbed his beard for a second. "Black walnuts take twice as long to grow. You’ll have to wait more than 30 years before you ever see any cash from that type of tree. You can harvest loblollies in half that time."

I felt like the third-grader who truly believes his teacher when she assures her class that there’s never a "dumb question." Nine out of 10 quickly comprehend the meaning. There’s never a "dumb question" – as long as that question does not challenge the teacher’s all-knowing authority on any and all matters. One student, bless his heart, always takes the bait. At that moment, I was that student.

Since timber contracts usually entail a great deal of money, I kept digging – much to my father-in-law’s chagrin.

"How much would a mature loblolly pine sell for?" I asked.

"About $100."

"And what about a mature black walnut?"

"Well, you could probably sell a good walnut for $1,000," he presumed. "But you’ll never see that money," he chuckled. "Maybe your children will."

Is that fact so easy to dismiss? First, let’s be clear that timber investments are no different from stock, bond or even housing investments. In each case, you expect the asset in question to produce an adequate return over some designated period of time.

In this particular case, the question whether to plant pine or black walnut pivots around the individual’s particular investment time horizon. Loblolly pines mature roughly twice as fast as black walnuts. So someone who plants a pine receives twice as many cash flows as the man who plants walnut. But let’s consider the quality of those cash flows…

If a single walnut were worth exactly twice as much as a loblolly pine, the decision to opt for pine would be quite easy. But a single walnut generates approximately 10 times the cash flow of a single pine. Meaning over a 30-year period, a walnut harvest will generate five times the return as an investment in pine.

The 30-Year Timber Investment Race:

Pine: $100 per tree x 6 harvests = $600
Walnut: $1,000 per tree x 3 harvests = $3,000

For many, the decision to opt for walnut seems self-explanatory. Why then do most landowners opt to plant loblolly pines?

What happens when the majority of hardwood forests are being replaced with pine? The exponential supply growth of pine forests is bound to affect the price of a single tree 15 years down the road. And it won’t be to the upside, come harvest time.

Meanwhile, the dwindling supply of 30-40-year-old black walnuts will, assuredly, drive up the market price for the precious hardwood.

These are the long-term economic conditions my father-in-law must consider.

We tend to believe that the overwhelming, seemingly unquestioned conviction to plant pine demonstrates a growing trend among all investors today.

There’s a new investing generation. A generation weaned on the bottle of instant gratification. The stock market, for its part, has become the speculator’s lottery ticket. The evolution of complex financial instruments, cheap credit and a material-obsessed society formed this trend.

One of the more unique aspects of American culture, we believe, is class mobility. Americans tend to believe in their capacity to rise above the class to which they were born. In fact, this concept has been infused into our society from the very beginning. Our political icons constantly remind us of achieving the American Dream and becoming an "ownership society," as if to say that when you do better and achieve more, you will find happiness.

Many Americans believe in the interminable joys associated with great wealth. They think that the sooner they achieve fame and fortune, the sooner they will enter the exclusive club of perpetual nirvana.

But wealth creation takes time, while asset price inflation takes a loose central bank. So America has chosen asset price inflation over true wealth creation. The speculator has replaced the investor. We day trade, flip condos and buy options.

Instead of picking up a copy of Benjamin Graham’s The Intelligent Investor, today’s investor shuns returns below double digits. Earning 9% won’t cut it if someone else is earning 10%. Stock markets have morphed to symbolize divine measures of prosperity in every form. And when Mr. Market doesn’t treat you well, you turn to Dr. Fed. And with the flip of a switch, he can quickly whip Mr. Market back into shape, or so we’ve come to believe.

The concept of wealth creation is Free Market Investor’s core theme. Our friend Marc Faber wisely points out, "It is important to distinguish between wealth creation arising from increased market valuation (asset inflation) and wealth creation through saving and investments."

As my former colleague the late Dr. Kurt Richebächer opined:

"American economists have never been as strict as European economists in making this distinction in wealth creation between rising market valuations and rising capital stock through saving and investment. Yet what has happened lately in this respect puts economic reason on its head. Protracted house price inflation, deliberately engineered by the Fed, is presented to the public as a virtually wondrous new policy stance in creating wealth and economic growth. It is hard to believe that such a grotesque perception is possible."

Focus for one moment on the premise that societies accumulate wealth slowly over generations. A true return on invested capital, like a tree growing in a forest, takes time to bring to fruition. Some investments, naturally, produce better returns than others. The key: Find the investments that have the potential to produce the greatest returns with an acceptable level of risk. When those investments trade for less than their intrinsic value, the potential for above-average returns can be fully realized.

In the case for cultivating the black walnut, the asset most timber investors lack is the patience to sit quietly and let their superior investments develop.

If market timers and the financial media followed this advice, many people would find themselves searching for other work. Instead, many investment professionals make a handsome living opining the ebbs and flow of quarterly earnings guidance, despite the fact that 59% of Wall Street’s "consensus" earnings forecasts miss the mark by a mortifyingly wide margin. In such a world, a good timber company can easily go unnoticed.

Regards,

Christopher Hancock
for The Daily Reckoning
June 26, 2008

Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Christopher’s desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

People who believe that history repeats itself are asking themselves: Is this a rerun of the ’30s…or a replay of the ’70s. Is it a deflationary recession we’re rehearsing? Or an inflationary recession? How is this story going to turn out?

We look around. We don’t see any breadlines…and people aren’t dressed nearly as well as they were in the ’30s. But now people get their free food through plastic "Independence" cards…proving that they are 100% dependent on the taxpayer for their daily bread. And as for dress…what do we know? If people like wearing flip-flops, pedal pushers, and shirts with reptiles on them, does that change the plot or alter the outcome?

It doesn’t look like the ’70s either. No afro hairdos…no muscle cars…no polyester shirts. (We had one…a brown one with white stitching. It clung to our manly, young body and almost electrocuted us each time we took it off. Elizabeth threw it away the first time our back was turned.)

Still, the economy is beginning to look a little like the ’70s.

"Stagflation fears vexing Bernanke," says the Chicago Tribune.

"Spectre of inflation returns to global economy," adds a front-page headline on the Financial Times.

In the following reckoning we don’t disagree. But we add a much-needed nuance. Not only is the spectre of ’70s inflation haunting the economy…so is the spectre of ’30s deflation.

Check out this headline: "Biggest drop in housing since Great Depression."

Yes, dear reader, get ready for a whiter shade of pale, as the two apparitions join in a ghostly hullabaloo. To the question – which will be have, inflation or deflation? – we have consistently replied, ‘both.’ And la voila – here they are.

But we’re no longer alone in this opinion. Yesterday, the world’s greatest investor and richest man, Warren Buffett, agreed with us.

"Stagflation," he said, was becoming a bigger and bigger problem. "I think the ‘flation’ part will heat up and the ‘stag’ part will get worse."

The Financial Times saw its inflation ghost in the huge price increases announced by Dow Chemical and South Korea’s Posco. The former is America’s biggest chemical group; the latter is the world’s fourth biggest steel maker.

Meanwhile, said Mr. Charles Holliday, CEO of Dupont, and not putting too fine a point on it:

"Inflation is here big time."

You think you’ve seen inflation, said a spokesman for mining giant BHP Billiton. You ain’t seen nothing yet. On Monday another mining group, Rio Tinto announced a price increase of 96.5%. Billiton said that even that would not be enough; it signaled a price increase of over 100%.

"Now," as Crocodile Dundee might have put it, "that’s inflation."

"The sustained rise in the price of oil and commodities has hammered industries such as airlines and carmakers, and deepened fears of a global inflationary spiral as producers pass on higher costs to manufacturers and consumers," the FT figures.

The Reuters CRB index is up 45% in the last 12 months. So far this year oil is up 42%. Natural gas has risen 76%. Corn has popped 58%. Soybeans 26%. Base metals are up about 30%.

Buffett is right…the ‘flation’ part is heating up. You see it in the newspapers, the check lines and, prominently, at the gas station. But what about the ‘stag’ part?

*** We live in a world powered by fossil fuel and designed – particularly in America – for a time when it was cheap and plentiful. Too bad that world no longer exists. Instead of building the world of the future, we built the world of the past. Now, we have to turn our backs on it, move on, and rebuild. This time, we have to build a world designed for oil that is significantly more expensive.

"Our civilization is based on fossil fuel," writes Martin Wolf in the FT. "But since the end of 2001, the real price of oil has risen some six-fold. Today the real price is higher than since the beginning of the previous century."

How expensive will it get? We don’t know. Our guess is that it will go down, not up, but still end up about twice as high as the price five years ago. T. Boone Pickens says oil output worldwide is peaking out. And never before have Americans had to compete with so many other people for it. Back in the early 20th century, a roughneck could sink a well in West Texas and have the oil all to himself. Now, there isn’t much oil left in Texas…and what little there is has to be shared with three billion people, many of them with incomes rising a lot faster than ours. If Pickens is right, it stands to reason that the price will probably be higher than it used to be – in real terms.

That prices are rising in nominal terms should come as no surprise either. For many years, central banks have increased money supply faster than the rate of GDP growth – often several times faster. Now that this monetary inflation is turning into consumer price inflation, no one likes it very much. But the only way to stop it is the Volcker way – that is, pushing up rates and forcing a recession. People would like that even less.

Already, the world’s capital markets are deflating. While prices for commodities and oil have risen steeply this year, stocks in Britain and America are down about 11%. Stocks in Europe have fallen even more – about 18%. And in Asia, markets have been beaten up and beaten down. The Shanghai market has lost 44%. Hong Kong is off 18%. And Vietnam has been whacked – down nearly 60% from the peak.

In America, the average stock may be down only a little more than 10%…but some industries have been hit much harder. Airlines, for example, are falling out of the sky. Finance is down about 40%. And homebuilding? Don’t even ask…

So, for now, the Fed isn’t fighting inflation at all; it’s fighting another ghost from the past – deflation. You don’t lend money at less than half the level of consumer price inflation if you’re fighting inflation. You only do when you see the ghost of the ’30s hard on your heels. Yesterday, the Fed must have looked back…seen the spectre of deflation…and decided to leave rates were they were.

*** Little noticed among all the noise and smoke is the way the two ghosts – of ’30s deflation and ’70s inflation – join forces.

As we explained yesterday, expensive energy is destroying the suburbs. That’s not all, as Americans are forced to pay more for fuel, they pay less for other things. The whole retail sector suffers. And much of the hospitality industry; this year Americans are planning on taking ‘stay-cations.’

The Fed tries to jolly things up with more money and credit, but what happens? Oh, cruel, cruel fate! The money feeds into other economies…and into the prices of commodities. Then, as fuel, food, and raw materials bills go up…the extra expenses weigh down the economy like a concrete block tied to a corpse in the East River.

Yes, dear reader, the ghost of ’70s inflation frightens the economy…only to be followed by the ghost of ’30s deflation. Between the two of them, they’re going to scare the living daylights out of us.

*** "Bill," began a message from our farm manager in Argentina, "we are in the wrong business."

Yes, we are in the cattle business – in Argentina, no less. Cattle prices have risen only 1% this year. South of the Rio Plata, the cattle business is worse. Farmers have been getting rid of cattle so they can plant corn, soybeans and wheat. Result: cattle prices have fallen. Often, it’s hard to find anyone who will even take the cows away. Why? Because buyers can’t get them to market, since the grain farmers have blocked the roads into Buenos Aires.

That’s the nice thing about being a grain farmer, you have time on your hands. You can hang around a roadblock…or go give your congressman a fright. Not so with dairymen and cattlemen. They’ve got to stay near their animals.

Yesterday, apparently, the blockades in Argentina were lifted…but we doubt we’ll see much pick up in the beef market.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The 30-Year Timber Investment Race originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Gas prices hit another record high. Soaring food prices ignite riots the world over. It should come as no surprise that a 71% increase in food prices since 2006 has the good citizens of South Africa, Morocco, Egypt, Ethiopia, Bangladesh and Mozambique up in arms.

And if you thought things couldn’t get any worse, the Financial Times reported on Monday that U.S. mortgage rates soared last week amid a sharp rise in Treasury market yields. Make no mistake, inflation’s back. A Volker-like response may seem alarmist, even far-fetched, to many. However, investors are bracing for the Federal Reserve to raise rates going forward.

At least those rate increases could help U.S. Treasury Secretary Paulson fulfill his recent promise to “defend the dollar.” Secretary Paulson is on the final day of a four-day trip to Saudi Arabia, Qatar and the United Arab Emirates to negotiate currency and economic issues (i.e., a supply increase) from members of the OPEC cartel.

Shall we say America’s relationship with OPEC is a bit strained? Perhaps we’ve stayed a bit too long and expected a bit too much. The greenback keeps sliding down a cliff. Oil-producing states holding their dollar currency pegs are importing more and more inflation. At some point, both parties must reconcile that M3 – the fullest measure of U.S. money supply – can’t outpace a nation’s GDP forever.

Regardless, the Fed seemed content to exchange $16 billion worth of Treasury notes for mortgage- and asset-backed securities last Thursday. In its 10th Term Securities Lending Facility (TSLF), the Fed gave desperate investment houses another chance to dump their worthless derivatives for good ol’ American IOUs. To date, brokerage firms have dumped $175 billion on the Fed’s balance sheet.

Even holders of the mighty euro are feeling the pinch. We read in The Economist last week that customs seizures of counterfeit goods rose by 17% in the EU last year. Cigarettes and clothing accounted for more than half the sham gear seized.

It seems like desperate times call for desperate measures. And the masses, desperate for answers, call on politicans for help.

And any political production worth its salt has three main characters: the hero, the martyr and the villain. Heroes (politicians) need a martyr (America’s middle class) and a villain (oil companies) – and, if they’re lucky, a super villain (foreign oil companies).

Our colleague Eric Fry sums it up best: “When share prices soar, we call it a ‘bull market.’ When home values soar, we call it ‘healthy price appreciation.’ But when oil prices soar, we call it ‘speculation’ and ‘manipulation’…and then we gaze around for someone to blame.”

The members of Congress recently convened a special hearing to berate, rebuke and ridicule executives from five major oil companies. Each congressional inquisitor took a turn excoriating the oil companies for daring to earn a profit, especially when so many Americans have so little money. It just isn’t fair.

A few months earlier, you may recall, Congress invited the heads of America’s leading financial institutions to a little tête-à-tête. During that encounter, the congressional inquisitors took turns admonishing the finance CEOs for feathering their nests a bit too lavishly. But none of the execs in attendance drew much criticism for frittering away billions of dollars of shareholder wealth.

Therefore, the essential message from the nation’s top lawmakers is clear: Losing billions of dollars of shareholder wealth is a bad thing, but not nearly as bad as adding billions of dollars to shareholder wealth. In fact, earning billions for shareholders is such a bad thing that it must be legislated away or taxed into extinction.

Where were the nation’s top legislator-inquisitors when the NASDAQ bull market of 1999 and 2000 was powering higher? Where was the outrage over the “speculation” that produced obscene “windfall profits” for the Wall Street firms?”

We’re not so sure. But we continue to see that many in the West want to go through life pretending they’re still the greatest story never told.

It comes as no surprise. From Dutch tulips to dotcoms, people fool themselves into believing it’s “different” this time.

It’s never different this time.

Regards,

Christopher Hancock
for The Daily Reckoning
June 5, 2008

P.S. Our advice: Embrace the madness. We here at Free Market Investor are hard at work finding our next great way to profit in the face of this U.S. foolery. And for a very limited time, you can get Free Market Investor, along with every single newsletter and options research service Agora Financial currently publishes for as long as we publish them.

That’s right. The Agora Financial Reserve is open. You can get our investment research newsletters: Outstanding Investments, Strategic Investment, Capital & Crisis, Easy Money Options, The Emerging Capital Report, Free Market Investor and Penny Stock Fortunes. On top of that, you get our stock and option research services: Resource Trader Alert, Options Hotline, Gold & Options Trader, Mayer’s Special Situations, Strategic Short Report and Energy & Scarcity Investor. All of these. For life.

Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Christopher’s desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

Inflation’s Back: Embrace the Madness originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

A dozen or so gun-laden soldiers from China’s People’s Liberation Army (PLA) stood quietly among the customs agents at Lo Wu Station. The KCR East Rail, the commuter train that left Hong Kong at Tsim Sha Tsui 45 minutes prior, pulled in for its last stop. Shenzhen, once a remote Chinese fishing village nestled peacefully at the mouth of the infamous Pearl River Delta, towered in the distance.

My friends and I exited the train onto the long, cracked concrete platform. A drainage stream littered with rusty steel barrels trickled by. On the northern bank, a retaining wall backed by an even more daunting barbed wire fence served to support the numerous lookout posts dotting China’s most traversed southwestern border. This wasn’t the Rio Grande.

Lo Wu is called a "control point." I imagine the Chinese authorities used the Korean DMZ as a suitable inspiration.

Consequently, I saw no need to draw the army’s attention. My friends, Western journalists from Hong Kong, certainly weren’t the red-carpet type. So we hung back, letting the hundreds of Chinese scurry by.

The rush for customs ensued. The soldiers, dressed in their long pea-green military topcoats, suspiciously surveyed the masses. And the masses nudged to and fro, like cattle in a stockyard, hoping to find the most expedient line to re-enter the mainland.

My fire engine red North Face duffel bag drew some stares, but Western garb doesn’t fascinate as much in Shenzhen as it would in the more remote, rural regions of northern China. After all, I should thank some among the Chinese hustling all around me for stitching it together. That’s probably also true for just about every item of pure Americana attached to my privileged self. And if the Chinese didn’t construct the authentic item, they could easily point me to an alley where I could haggle the repro.

Shenzhen, Deng Xiaoping’s first attempt at capitalism, Chinese-style, received the elevated status of China’s first Special Economic Zone (SEZ) in 1980. Seemingly overnight, factories popped up along the hot, humid delta like a nasty, uncontrollable case of Southern kudzu. Naturally, more factories required more transportation. Shenzhen became the world’s fourth busiest port by 2005.

Within 20 years, market reforms turned a relatively remote city the size of Green Bay, Wis., into an industrial and financial powerhouse on par with Chicago.

Wal-Mart shelves and Christmas mornings in the West have been built on a 90-hour, six-day workweek in the East. The last 20 years of growth have produced more than 90,000 export-oriented processing firms on the mainland, with nearly 70,000 based in Shenzhen’s Guangdong province alone.

It’s no wonder Chinese officials fear what a slowdown in the export economy may bring. Domestic growth and stability have risen with Chinese workshops. And make no mistake, the first three long-term domestic priorities on Beijing’s list are and will remain stability, stability and more stability.

The yuan-dollar peg has gone a long way in ensuring constancy. Chinese economic growth – we would argue, all economic growth – ensues under the auspice of a stable currency.

But ties to the greenback have recently come with a price. American policymakers have facilitated a weak dollar. The Fed, for its part, announced another $200 billion injection on March 11. Its most recent funding equals the $200 billion Bernanke set free on March 7. For its part, the dollar didn’t know what to think ($400 billion in four days). Or else, it’s in a rather cruel denial.

For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.

On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note reached a record high of 16 basis points on March 12. German bonds traded at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government’s ability to pay…an increase shows the opposite.

"That’s certainly eye-opening," writes our esteemed colleague Chris Mayer. "The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds."

Officials in Beijing must keep shaking their heads. China holds more than $387 billion in Treasury securities.

For China, a weak dollar makes critical imports (wheat, corn, iron and soy) more expensive. Expensive imports mean higher prices. Higher prices mean more inflation. More inflation means less stability.

Chinese Premier Wen Jiabao addressed the equal and opposite reaction on the other side of the planet.

"The primary task for macroeconomic regulation this year," he decreed, "is to prevent fast economic growth from becoming overheated growth and keep structural price increases from turning into significant inflation."

In his annual policy speech to China’s legislators, Wen clearly labeled rising commodity prices and the subsequent food shortages as China’s No. 1 policy issue for 2008.

So Beijing finds itself in a bind.

Going forward, yuan appreciation would certainly help alleviate rising prices (commodity imports would be cheaper). Export dependence, however, has thwarted this policy. On the other hand, protecting the export industry by enforcing a close yuan-dollar peg only intensifies further inflation as the dollar continues to slide.

In the meantime, Beijing has turned to price controls. But price controls are nothing more than a short-term stopgap. Price controls disincentivize ample production. Shortages ensue. Prices, therefore, rise even higher.

Beijing may have hope. China’s appetite for consumption keeps growing. We see signs that China’s GDP growth is no longer so export dependent.

According to The Economist, "The World Bank’s latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year in the fourth quarter of 2007. Overall GDP growth slowed only modestly (to 11.2%) because of faster growth in domestic demand, which contributed an impressive 10.8 percentage points."

These recent numbers suggest that the Chinese economy appears to be transitioning into a sustainable form of adolescence. Achieving a more proper balance between domestic production and consumption should enable Beijing to gradually allow more currency appreciation as a means of fighting inflation.

What that will mean for the American consumer remains to be seen. Political threats of more American protectionism combined with a rising yuan won’t do much to alleviate John. Q Public’s pain. If anything, he’ll have to spend more of something he already doesn’t have.

On the other hand, companies with assets denominated in Chinese yuan should see a boost. Companies earning profits from people with money to burn (the Chinese) shouldn’t do too badly, either.

And I’ve found a company that satisfies both conditions.

This company owns the franchise to manufacture, market and distribute the products of the Coca-Cola Co. And we’re not just talking 7-Elevens on Hong Kong Island. This company also distributes Coca-Cola products in Taiwan, as well as in 11 states in the U.S. and seven provinces in mainland China. This represents a total franchise population of over 420 million people, or, if you prefer, 6.4% of the world’s population.

And that’s just the tip of the iceberg.

At Free Market Investor, we’ve warned investors to be very cautious on stocks reliant on American consumers. We stressed shifting focus from companies that produce luxury items (such as Apple, Starbucks or P.F. Chang’s China Bistro) to companies that provide staples (such as Altria Group, Budweiser, Coca-Cola, Exxon or Johnson & Johnson).

Even if John Q. Public lost his house and credit card, he’d use that last $20 to buy what he needs. The list would read something like this: toilet paper, Diet Coke and a pack of smokes.

Every month brings us closer to this reality. In February, over 223,650 American homeowners filed for foreclosure. On top of that, unemployment insurance applications increased nearly 20-fold. Investingwise, that puts us back to the basics. Forget the MacBook Air and start thinking consumer staples.

For investors, companies that own or produce revenue streams from tangible assets (rental income), consumer staples (Coca-Cola) or natural resources (oil and natural gas) should prosper. Finding a single company – a conglomerate – capable of producing cash flow from all three seems even better.

That’s the beauty of many conglomerates. Conglomerates often operate within a diversified group of income-producing industries. Meaning revenues aren’t tied to any one particular division. Diversified income streams typically strengthen a company’s margin of safety.

Regards,

Christopher Hancock
for The Daily Reckoning
May 14, 2008

P.S. We doubt the world will stop consuming Coke. Investors holding Coca-Cola stock seem to agree. The company trades for 22 times earnings and 6.31 times book. And lest we forget, Berkshire Hathaway, Coca-Cola’s largest shareholder, holds a respectable $11.8 billion stake.

However, distributing Coca-Cola products to more than 420 million people is just one of the world-class businesses the Hong Kong conglomerate we are looking at engages in.

Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Christopher’s desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

Ben Bernanke, too, says the crisis is easing.

But he went on to say that the situation is still "far from normal."

What is far from normal, we wonder? The Dow went down 44 points yesterday, leaving stock prices about where they’ve been for the last 10 years…nothing abnormal about that.

Consumers are still spending money, too. And since they don’t really have any money to spend, they’re still borrowing. A report in yesterday’s news tells us that one in ten baby boomers has to borrow money just to pay everyday expenses.

But here’s something unusual: house prices went down in two-thirds of America’s cities, according to Bloomberg. In Cleveland, half of all subprime mortgages end in foreclosure.

Houses are America’s number one asset…and the cornerstone of most families’ financial plans. When they go down…so does the consumer economy. At least, that’s our working hypothesis. So far, houses are down about 13%. The economy is down too – but not dramatically. The latest GDP growth figure came in at 0.6%. With the population growing at 1%, that means the average person is getting poorer. So our hypothesis is working…marginally.

Nothing very exciting happened in the markets yesterday, so we will use today to spin out a broader version of contemporary economic history.

Let’s begin with another working hypothesis – give a man a license to counterfeit currency and he will stay up all night printing new bills. In effect, when the Nixon Administration cut the final link between gold and the dollar, in 1971, the feds could print all the counterfeit money they wanted. Normally, you’d expect the dollar to become worthless.

That is exactly what we expected in the ’70s. But then a few things happened that saved the dollar…and seemed to prove that our working hypothesis didn’t work anymore. Paul Volcker was brought in to protect the dollar. This he did – by driving up interest rates and bringing on the worst recession since the ’30s. But then, other things took over…the Reagan/Thatcher Revolutions…deregulation of industries…the rejection of central planning…the collapse of the Soviet Union…the Chinese renaissance…Wal-Mart…the Internet…just-in-time inventory systems…and globalization.

All of these things tended to increase productivity and lower prices. The biggest thing was probably in the labor market, where hundreds of millions of new workers came into the modern economy (who would slave away all day for less than a tenth the typical wage in America) and reduced the cost of labor and finished product.

We wondered how much ‘just-in-time’ inventory systems saved consumers. In the latest Grant’s Interest Rate Observer we find an estimate from Fred Smith, founder of Federal Express:

"In 1980, logistics costs – including the carrying costs of inventory, plus warehousing and transportation costs – were about 17% of GDP. Last year, they were about 10%."

"Fast cycle logistics," he says, reduced costs by nearly a trillion dollars a year.

But wait, there’s more…after Volcker cast out the devil of inflation, interest rates could come down. Thus, began a quarter century of falling interest rates and increasingly accessible credit. This eventually produced the absurd and pernicious consequences we describe here in The Daily Reckoning. Just as teenaged kissing leads to petting…which leads to…well, you know how it works, dear reader…success leads to complacency which leads to excess. But the long bull market in bonds (bonds go up when interest rates go down) also vastly increased the supply of capital available for new industries…and caused an explosion in output capacity.

Higher output at lower cost = deflation.

And let’s not forget oil. The basic ingredient in modern economies – petroleum – fell in real terms from the mid-’70s almost all the way to the war on Iraq.

Let us look, briefly at the oil market. When the United States invaded Iraq, we were told that $10 oil was right around the corner. Then, as the war went from triumph to tribulation…the oil price rose. Still, the war’s backers believed they had done good. Higher oil prices couldn’t last, they said. The National Review said oil was a "bubble" in ’04, when it was at $50 a barrel. Then, Steve Forbes said it was a "bubble" at $70 a barrel in ’05. Now…a Goldman expert says it will go to $200 a barrel.

Success leads to excess. Sooner or later oil really will be in a bubble…and sooner or later the bubble will pop. But when? At what price? China is doubling its use of the slick liquid every seven years. In the United States, there are 480 cars per 1,000 people. In China, there are only 10. And China could be the world’s largest automaker in just a matter of months. Our advice to Americans: fill up your tanks.

In the meantime, we return to our short version of U.S. contemporary economic history:

With prices stable or actually falling, over the last 20 years, central bankers felt they could ‘stimulate’ the economy whenever it needed a little more pep. The most memorable example, of course, followed the micro-slump of 2001-2002, when the Greenspan Fed dropped rates down to 1% and held them there for over a year. But the printing presses ran hot for many, many years. Over practically the entire period, from the late ’80s to ’08, the U.S. money supply increased at an average annual rate of about 8% – or about twice as fast as GDP growth.

And now, we are in a period which many take for normal. Our financial Vesuvius has rumbled several times in the last quarter century – the crash of ’87, recession of ’93, the Asian crisis and collapse of LongTerm Capital Management in ’97 & ’98, dotcom crash, and bear market of ’00-’02, recession of ’01-’02, and finally the credit crunch of ’07-’08.

Once again, the ground is shaking beneath our feet. And once again, people are wondering if they should head for shelter. ‘Don’t worry about it,’ say the pundits. ‘It will pass…just as it always does. This is just normal…"

If our hypothesis still works…inflation will blow its top soon.

*** Gold retreated $15 yesterday. Oil bounced back to $125. And in April, food prices rose 0.9% – the most since 1990.

Yesterday, we mentioned that clothing prices were on the rise. Today, the Wall Street Journal says shoes are taking a hike upwards.

Here in London, inflation is at its highest level in six years. In China, 8% consumer price inflation is spooking the financial authorities. And import prices in the United States jumped 1.8% in April.

Why would imports be going up so fast?

Ah…glad you asked. Because that is what is really not "normal" about the latest tremors. For 20 years, inflation has been held in check by the group of happy events we described above. But what will hold it back for the next 20 years?

China used to export deflation, as the economists put it. Now, with prices rising in the Middle Kingdom, it has no choice – it must export inflation. With inventories at 30-year lows – there are no price cuts coming from there either. Wages are rising. Raw material prices are soaring. Food is out of control.

But wait, there’s more…

Remember the great credit expansion of the last quarter century? For 25 years, the cost of money got cheaper and cheaper and cheaper…to the point where the Fed was lending money at negative real rates (and still is!) In 1982, the yield on a 10-year Treasury note was nearly 16%. Today, it is under 4%.

But now, money is becoming more expensive. If the credit cycle has turned, as we think it has, lending rates will go up with inflation. And the cost of money…along with the cost of other essential components…will drive up prices for nearly everything.

What will the U.S. consumer do? He has little prospect of higher wages – not with so many billions of people willing to work for less. His main asset is falling in price. Credit is getting tighter. And his cost of living is going up – maybe sharply up.

This time he won’t be able to borrow his way out. This time, more credit…lower rates…and more inflation won’t help him. This time, inflation will hurt him.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The True Chinese Economy originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Well… The Jobs Jamboree on Friday was interesting in that it wasn’t as bad as forecast, losing only 20K jobs in April… Folks… That’s still negative job growth, but that mattered none to the dollar bulls, who claimed that the storm clouds have been lifted and shouted for everyone to get back into the dollar pool!

But for everyone that still thinks this is a recession that we’re going through (and we can add former Fed Chairman, Big Al Greenspan to that list), there were some disturbing pieces of the Jobs Jamboree that the media failed to mention. Long time readers of this letter know that I’ve always tried to shy away from the media hype of the total jobs created drama. Instead I’ve always focused more on the Average Hours Worked, and Average Hourly Earnings for clues to the economy… And here is where the dollar bulls should have taken note.

Weakness in manufacturing is still quite evident as this sector lost 46K jobs, but more importantly, the hours in their workweek fell from 41.2 hours in March to 40.9 hours in April. The overall economy lost some time in their workweek too… And even more alarming is the fact that hourly gained only 0.1%, not the 0.3% forecast, and not even close to inflation.

OK… So… The idea here is that we still had a negative jobs growth number and the other pieces looked weak too. I would hope the markets would take a step back and see it for what it really is.

I think though, that with the unemployment rate falling to 5% (even though we all know that number is trumped up) the Fed is probably going to be on hold next month. But, that’s six weeks away, there’s a lot that could come up in that time… So more on that thought as we go along.

The European Central Bank (ECB) will meet this week, and once the markets turned the calendar and saw the ECB meeting they began to focus their attention to the fact that Eurozone interest rates have a wide positive interest rate differential to the dollar and, more importantly, will most likely remain that way, as the ECB will keep rates steady as she goes this Thursday.

Warren Buffett was in the news this weekend, and with all the stuff he had to say, I pulled out the stuff that means something to us… Let’s listen in…

Warren Buffett had this to say… “If I landed from Mars today with a billion Mars dollars, or whatever they call them on Mars, and I was thinking about where to put my money, I wouldn’t put it all in the U.S. currency.” He went on to say, “The U.S. is going to continue to follow policies that make the dollar weaker.”

OK… Now you’ve got some BIG NAMES, Jimmy Rogers and Warren Buffett on the Marquee lights, with the “also starring” list of names witch include yours truly all singing from the same song sheet.

Someone sent me a note this weekend, and asked a good question… With the carry trade back on the books and the low yielders getting sold again, the high yielders don’t seem to be getting the same love this time around. Does that mean the carry trade is buying something else these days?

Ahhh Grasshopper… Yes, it does… It means that the funds are going toward U.S. stocks… So, stock jockeys have that going for them… But as quickly as the carry trade was put on and pushed stocks higher, it can turn around like we saw in March, when the high yielders got sold. As I’ve gone on record as saying many times… I believe that a trade considered to be as “risky” as the carry trade is setting stocks and whatever assets are being bought at the time, for big losses. There are just too many “unknowns” in risk events out there to get too fat and sassy about the fortunes of U.S. assets.

Another Bear Stearns, and this turns on a dime… And don’t tell me “that won’t happen” I’m not saying it will… All I’m saying is the downside risk here should be the driver of this bus.

Unfortunately, “downside risk” isn’t helping the Japanese yen (JPY) or Swiss franc (CHF), as they get sold to finance the stock purchases. It’s gotten pretty ugly for these two in the past week.

OK… I’ve been a little worried about the Indian rupee (INR) lately, as it slowly lost ground to the dollar in the past month. I’m sure that a lot of that movement was driven by the weaker euro (EUR)… I’m also thinking that there was some intervention involved when the rupee was gaining nicely versus the dollar. That’s just a guess on my part, but it sure looks like and smells like intervention.

Bank of America put out a note to investors this weekend, which highlights their affection for the rupee. They point to the soaring inflation rate, which just printed at 7.57%, and believe the Central Bank will have to raise interest rates… Thus, pushing rupees higher versus the dollar. Hmmm… Sounds about right to me!

I have a long time friend in the bond business that sent me a note the other day regarding the Treasury’s announcement regarding bond auctions…

“The Treasury will be un-retiring the three-year auction and maybe the seven-year auction as a slowing economy requires more Federal borrowing.”

Hmmm… You know, the Fed’s statement the other day wasn’t exactly “sold on the economy”… And this note of needing more borrowing by the government, leads me to believe the Fed is just pulling straws, and that the Treasury is left to do the dirty work.

In other words… The Fed is well aware of the economy cards it holds… It’s just bluffing. I wonder when the markets will call the Fed’s bluff?

So… All the stimulus checks are “in the mail”… Or as I see it the $150 billion tax. I’ve gone on record here and in dozens of interviews regarding how I feel about this “stimulus package”, but, Ty Keough sent me a note last week that cracked me up. This is Dave Barry’s Take on Government Rebate Checks…

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgen.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn’t that stimulating the economy of China?
A. Shut up.

Currencies today Cinco de May A$ .9415, kiwi .7835, C$ .9825, euro 1.5480, sterling 1.97, Swiss .9485, ISK 76.50, rand 7.6070, krone 5.1250, SEK 6.0425, forint 163, zloty 2.2250, koruna 16.30, yen 105.10, baht 31.65, sing 1.36, HKD 7.7945, INR 40.60, China 6.9875, pesos 10.46, BRL 1.6490, dollar index 73.33, Oil $116.70, Silver $16.62, and Gold… $866.85

That’s it for today… Thanks to everyone for the notes on Friday. Yes, it was a great weight taken off my mind… Got to see a great game Friday night with my beloved Cardinals coming out on top. Great company at the game too! Two of three from the Cubs ain’t too shabby! My darling little granddaughter was at the house yesterday… What a CUTIE! I don’t think she knows what to think of me at this point; she tries to avoid me at all costs! But then why would she be any different from any other woman that I’ve ever known? HAHAHAHAHAHAHA…

So… It’s Cinco de Mayo today… Celebrate wisely. A few years ago I carried on about Cinco de Mayo, and told a story about when I was in Cancun and so on… One reader was very upset with this… So, every year since, I think about how upset this guy was with me… And say… Have a great Cinco de Mayo today!

Chuck Butler
May 5, 2008

Cinco de Mayo! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Analysts and pundits have been calling for the death of the American consumer for quite some time. But now…I believe we’ve reached a point at which there’s no turning back. Debt financing (home equity lines or credit cards) has run its course. It’s been fueled by cheap credit (prolonged low interest rates).

Cheap credit creates more dollars. More dollars create higher prices. (We note that rising prices aren’t the only economic consequence associated with inflation. For simplicity’s sake, we’ll stick to rising prices.)

According to Nathan Lewis, author of Gold: The Once and Future Money:

"Inflation is defined as a decline in a currency’s value…Prices in the devaluing country would eventually adjust to the devalued currency. In other words, something that cost $100 (equivalent in value to 1 ounce of gold) before the devaluation will tend to cost $200 (equivalent to 1 ounce of gold) afterward. However, the price adjustment process, in practice, can take a very long time to fully play out. Prices for internationally traded commodities will tend to adjust first, typically within a year or so of devaluation. Other prices (medical expenses, rent, education expenses, etc.) can take up to two or three decades to fully adjust. The slowness of adjustment is due in large part to the existence of long-term contracts."

Lewis points out: "The dollar, worth 1/35 ounce of gold since 1934, was eventually devalued to a nadir of 1/850 ounce at the end of the Carter administration. During the 1990s, U.S. base money grew at an average rate of 7.14% per year."

In fact, M3, the fullest measure of U.S. money supply, has increased at roughly 8% per year since 1971. Lest we forget, with a stroke of the pen, as Roosevelt did in 1933 and Nixon did in 1971, the government can confiscate the currency and tear it to shreds.

Meaning the money supply increases at 12%, but the inflation rate magically stays at 2-3%. How can that happen?

First, I believe the lag effect described in Lewis’s quote has played a significant role. The price adjustment process, Lewis explains, can take up to two or three decades to fully adjust. That’s the dirty little secret regarding inflation. So while central bankers seemingly ignore the potential lag effect, they continue printing money, which we believe only exacerbates the problem.

It’s been a little more than 30 years since we’ve cranked up the printing press. The effects of that decision are just now being felt. CPI adjustments like "owners’ equivalent rent" have combined with cheap Chinese imports to help delay the lag. But goods subject to "hedonic" adjustments and Chinese deflation can’t hide the era of silent inflation forever.

As Paul Volker, former Fed chair, cleverly noted: There’s no inflation unless you have to buy something.

The second factor driving prices higher stems from Southeast Asia. "Chindia’s" insatiable demand for raw materials only amplifies the problem. Consequently, we’re not surprised to read that commodities just hit an all-time high, with the CRB at 509 and wheat over $10 per bushel.

The third factor working against the American consumer is termed "COLA."

COLA stands for "cost-of-living adjustment." Typically, salary adjustments are based on the annual increase in consumer prices (inflation) or the consumer price index (CPI).

When the money supply consistently outpaces the inflation rate, a consumer’s purchasing power quickly diminishes. Only you haven’t noticed the effect yet, dear reader, because Chinese imports have delayed the hangover. But the days of importing Chinese deflation are coming to an end.

The point: Inflation, by definition, is a decline in the currency’s value. And "currency devaluation," Henry Hazlitt, the late libertarian philospher, economist and journalist for The Wall Street Journal, The New York Times and Newsweek, pointed out:

"[Inflation] discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse."

The thief, the politician and the banker are seemingly playing the same game. They’re playing the law of large numbers. Whether they steal by the sword or by the pen, their craft effectively erodes the tangible wealth of a productive society.

Inflation robs citizens of their productive efforts. It erodes their tangible wealth. It leads, in effect, men toward desperate remedies.

Consequently, the average citizen isn’t left with many options. He can always study to become a legislator or a central banker.

If that doesn’t work, may we suggest dark hoods and dark pants?

So I ask: Where will your money be when Americans stop spending?

We believe businesses with tangible assets trading at depressed prices are a great place to look. A recent article entitled "Lake Mead Could Dry up by 2021" by Andrea Thompson, a staff writer for LiveScience, got us thinking. She writes:

"Lake Mead, a key source of water for millions of people in the Southwestern United States, could go dry by 2021, a new study finds."

The study concludes that natural forces such as evaporation, changes wrought by global warming and an increasing demand from the booming Southwest population are creating a deficit from this part of the Colorado River system.

Along with Lake Powell, which is on the border between Arizona and Utah, Lake Meade supplies roughly 8 million people in the cities of Las Vegas, Los Angeles and San Diego, among others, with critical water supplies.

The system is currently at only half capacity thanks to a recent string of dry years, researchers say.

Land and water: What could hold better value?

The world’s immediate need for fresh water remains paramount. In China, for example, two out of every three major cities have less water than they need. Cities in northeast China have roughly five-seven years left before they run completely dry.

Each year, the Gobi Desert devours 2,460 square miles of Chinese soil, an area roughly the size of Delaware.

Why is Asia’s largest desert growing so quickly?

Through a process scientists call "desertification." Basically, China’s rapid economic growth comes at a great price. Air pollution inhibits precipitation. Researchers from Israel’s Hebrew University of Jerusalem and the Chinese Academy of Meteorological Sciences found that on hazy days, precipitation from the top of Mount Hua in China’s northwestern Shaanxi province is cut by up to 50%.

Consequently, one-quarter of China currently finds itself buried beneath sand. But those lucky enough to fill their pipes have another problem: 90% of China’s city aquifers are deemed polluted. Seven hundred million Chinese drink water contaminated with either animal or human waste. In most cases, their murky glasses contain both.

Westerners, however, take water for granted. We simply turn on the tap and it flows. But that’s certainly not the case the world over. And from they way things are looking, that may not be the case here much longer. Lakes around the U.S. are running dry. In the West, we see this happening at Lake Mead. In the east, it’s Lake Lanier.

Arid landscapes, low rainfall and quickly depleting underground water tables make fresh water one of the most pressing issues facing countries.

You see, water, in essence, is a commodity. When scarce, it’s the one commodity even more valuable than either oil or gold.

Solutions vary. Some have proposed towing icebergs. Despite being highly inefficient, we’re not assured the icebergs will even be there to tow.

Others argue for heavy investment in desalination. We see two potential problems here. First, desalination requires massive amounts of energy, as well as specialized, expensive infrastructure. Saltwater conversion also produces a byproduct of concentrated seawater that some scientists claim contributes to marine pollution.

We also like to point out that desalination takes place at sea level. For flat regions like the Middle East, where desalination plants account for a majority of total world capacity, that isn’t too much of a problem.

But what about countries with steep terrain? Pumping water to higher altitudes (Nevada) presents a significant challenge both economically and physically.

And finally, for the most part, countries use desalinated water for washing, filling swimming pools and watering golf courses…they rarely use it for drinking.

We tend to believe that water rights in this century will be valued much like oil rights were in the last.

Regards,

Christopher Hancock
for The Daily Reckoning
February 28, 2008

P.S. Our friend and colleague Chris Mayer has been focusing on the opportunity found in this commodity for quite some time and has written extensively on the subject.

Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Christopher’s desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

Oil held at $99 yesterday. The Dow dropped 9 points. And the dollar fell to its lowest level ever against the euro. If you want to buy a euro today, it will cost you $1.51 cents.

Gold shot up too – another $12, bringing the price to a new record of $961.

Why is the dollar falling? Why is gold going up?

You already know the answer, dear reader. Because the people who look after the dollar want it to go down. They’re doing all they can to make sure it loses its value. And so far, at least at that, they’re succeeding.

"Dollar hits low as Fed chief hints at rate cut," says the Financial Times. "Bernanke says bank will act to support growth."

The Fed is caught in the same crossfire as everyone else. On one side, housing prices are dropping…consumers are running out of money…and banks are afraid to lend. On the other, the supply of paper money is soaring…forcing up prices for just about everything that isn’t a financial asset.

Oil…gold…copper…wheat…tractors…farmland – they’re all being pushed up by inflation.

Central bankers don’t normally reduce interest rates in the face of rising consumer prices. But our poor Bernanke-led bank consortium feels it has no choice. The cannons of deflation to the left of them…the artillery of inflation making louder noises to the right – they’ll attack on the left!

Why?

Two reasons. First, they believe they can lick inflation any time. That was what Paul Volcker showed them 25 years ago. Inflation can be beaten by clamping down on lending…raising interest rates…and tightening up on the money supply.

But deflation? The present generation of the world’s central bankers watched Japan struggle for 18 years. They think they learned something.

The Bank of Japan has economists too. They read the same economics textbooks. They attended the same prestigious universities. They believed the same claptrap theories of dead economists. They cut rates down to "effectively zero" (monetary policy)…and they spent more on useless government projects than any government had (fiscal policy). What more could they do?

(Well, Anglo-Saxon critics said they were wimps, unwilling to let the big banks fail, so the economy could get back on its feet. More on that later.)

Central bankers are more afraid of deflation than they are of inflation, in other words, because they find it a harder disease to cure.

The second reason why the Fed is attacking deflation and not inflation is purely political. "Change" may be something every candidate promises, but it is something no candidate really wants…at least, not the sort of change that Mr. Market is sending their way. After a huge boom…Mr. Market is delivering a correction. That is just the way he does business. Boom…bust…and boom again. But neither the voters nor the politicians are very keen on the bust part. And they all think they can…and should…do something to prevent it. Hence, the Fed fights deflation…and leaves inflation alone, since they believe that inflation instigates growth (and is often mistaken for growth by casual observers).

But it looks to us as though BOTH deflation and inflation are becoming more dangerous.

"Inflation may be worse than we think," says a Wall Street Journal article. Yes, we wouldn’t be surprised.

One thing that is definitely going up fast is the price of gasoline. Per gallon, drivers are paying 19 cents more than they did just two weeks ago. Some experts think the price will go to $4 per gallon before the summer comes. This is very bad news for the consumer.

"You’re adding an oil shock on top of a crunch on credit and a housing collapse," said Nigel Gault, an economist at Global Insight. "Even the U.S. economy cannot withstand all of that at the same time."

As anticipated, consumers are doing the only thing they can do, they’re spending less money:

"Retail earnings dive," reports the New York Times. What happens to a consumer society when consumers stop consuming? Ah, dear reader, you know the answer to that too – it shrinks.

*** Our first extra thought is that we should move more money out of the dollar. It just keeps going down against the euro and gold.

Our second thought is that we don’t have a second thought. So we’ll go back to the first thought.

The problem with this thought is that it is too obvious. The world’s governments are flooding the planet with paper money. Gold is a kind of Noah’s ark. It can preserve our capital until the excess liquidity dries up. No wonder everyone wants to get on board.

In the United States, as we keep pointing out, the supply of paper money is rising three times the speed of GDP growth. In places like Russia…it is growing five or six times as fast as GDP. China’s inflation is at an 11-year high…and at more than 7% is becoming alarming. Don’t expect Chinese exports to hold down prices in the United States anymore…now they’re just another inflationary pressure.

Meanwhile, the masses are deeply in debt. Their major asset is what they live in, and house prices are about the only thing going down. Their only other major resource is their own labor – which is overpriced in global terms. Inflation will bring it down to more competitive levels.

The government is deeply in debt too. It has let out notes it can’t pay…sold bonds it can’t honor…and made promises it can’t keep. Inflation, there too, would reduce the burden.

What’s more, the custodians of America’s paper money – as we point out above – are desperate to avoid price stability. They want the dollar to lose value; they see it as the only way they can prevent Mr. Market from doing what comes naturally.

And we will add one extenuating circumstance just to thicken the plot: the great dollar-based empire is probably peaking out. Since WWI, America has been the world’s hegemonic power. Since WWII, the dollar has been the world’s hegemonic currency. And since 1971, the hegemonic money has been on its own…unsupported by anything harder than cellulose. But nothing lasts forever. China, India and Russia have come into the global market. They’re shaking things up…growing fast…and offering U.S. business more lower-cost competition than they’ve ever had to face before. Wealth and power is being blown across the Pacific with the trade winds…from North America to Eurasia.

All of this signals, to us anyway, a cheaper dollar and a lower standard of living – relatively – in America. In terms of gold, we expect the dollar to be worth less. Then again, since all currencies are now in competition with the dollar…we expect gold to go up against them all.

And since the U.S. authorities will likely struggle so hard to prevent this unpleasant change, it also seems likely that the price of gold will at least recover to its inflation-adjusted peak set in 1980. Then, gold briefly hit $850. But that was when the dollar was worth a lot more than it is today. Adjusting to current dollars, we expect to see the price hit $2,500 before this bull market in the yellow metal is over…and we aren’t the only ones. Our respected colleague Byron King asserts that the gold price still has quite a ways to go – and assures those who have yet to invest in the yellow metal that there’s still time – even at these prices. In fact, you can get gold out of the ground and into your portfolio for just a penny per ounce.

The only thing that bothers us about this forecast is that it is so obvious.

*** Finally, a milestone: William F. Buckley died. When we get around to it, we’ll write up an autopsy report. Here, we give you the instant coroner’s verdict: He was a handsome, well-bred, pompous, conceited and clever windbag who twisted American conservatism in such a grotesque way even its own parents wouldn’t recognize it.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Death of the American Consumer originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Strong economies need strong infrastructure.

Strong infrastructure needs strong spending.

More spending means more government contracts. More contracts mean more campaign donations.

It gets better.

Every elected official represents a district with a broken bridge. A new bridge needs a new ribbon and a new name. Hence, the more bridges they build, the more votes they receive.

And here’s the best part. They accomplish this benevolent feat without losing lives or raising taxes! Better yet, everyone in Washington can play along.

Unfortunately, more spending means more debt. The U.S. Congress will turn to the U.S. Treasury. The Treasury wants to balk. But they turn on CNN, and another bridge collapses over the mighty Mississippi.

So they shrug.

The U.S. Treasury will turn to foreign buyers. Foreign buyers should (will) require a higher rate of return for holding a depreciating currency. Interest rates should (will) rise. The race to sell U.S. assets to foreign hands keeps flowing south like the mighty Mississippi.

To make matters worse, analysts forecast future rate cuts. The latest Federal Reserve committee meetings on Oct. 9 showed a consensus supporting a 50 basis point cut… maybe so, maybe not. We really don’t care. We have no idea what direction interest rates are heading. But we do know this.

The American dollar should (will) continue heading south.

Eurozone finance ministers quiver. On Oct. 8, the day before the U.S. leaked a forthcoming rate cut, the Europeans announced their intentions to actively depreciate the euro against the Chinese reminbi, the U.S. dollar and the Japanese yen. They claim a weaker euro will ease pressure on the European economy.

Europe, in a sense, showed its hand. And the Fed quickly trumped it one day later. Go, Fed!

This dubious policy is finance-speak for this: The sovereign nations of the world are engaged in a perpetual sprint to boast the least valuable currency. They’re in a race to the bottom, so to speak…a race to become, well, in a sense, worthless.

The reason: Currency depreciation makes domestic goods less expensive to foreign buyers. Consequently, a perceived re-emergence in a nation’s domestic manufacturing may take place, as foreigners demand cheap "Made in the Most Worthless Currency" widgets.

You see, it’s a win-win for Washington.

Washington’s charitable handouts (debts) buy the bridges that buy the votes. Those charitable handouts (debts) also undermine the dollar-denominated debt.

The cheap dollar creates cheap exports. More exports create more jobs. More jobs… more votes. The cycle continues.

But here’s the real kicker: Devaluing the greenback devalues the foreign debt that started this whole mess to begin with. So in the long run, we don’t owe as much as we borrowed, inflation adjusted.

It’s a win-win for Wall Street, too. The municipal underwriting business takes off. Banks now repackage municipal debt like mortgage debt.

The fees keep rolling. Seven-figure bonus days are here once again.

However, this game has one or two setbacks.

First, higher spending sans higher taxes works only when foreigners demand our debt. But that may not be the case much longer. The Chinese have eased their appetite for American IOUs.

Second, more debt means we print more money. More M3 means more inflation. You haven’t noticed the effect yet, dear reader, because Chinese imports have delayed the hangover. But the days of importing Chinese deflation are coming to an end, as well.

Despite what others may think, Alan Greenspan is no dummy. He knew when to jump ship. Greenspan said that over the long run, the biggest problem facing the U.S. economy is "the re-emergence of inflation," and rising interest rates.

We concur with Mr. Greenspan.

High inflation combined with high interest rates kill the middle class. That’s the real long-term problem of fiat currencies. A fiat money system prompts legislative profligacy and inevitably produces inflation. The system stimulates the growing gap between the haves and the have-nots.

Consequently, the have-nots will turn to their elected saviors in Washington. They’ll demand a change.

Washington will listen with empathetic ears. They’ll yell at the rich while they tax the poor. Like Alan, they’re no dummies. They know who really puts them in office.

So in the end, they’ll assuage their disgruntled voters with more contracts for more new bridges. Which, in turn, will most likely precipitate further inflation. Remember, personal taxes can go only so high before even the rich revolt. Most studies project that watermark near 50%. So tax hikes can go only so far.

As Bill Bonner points out: "The goal here – as with all government programs – is to produce the desired benefits while pushing the costs onto someone else. That’s how politics work. You promise something… and you force someone else to pay for it. You rob one Peter voter… and spread the loot among the Pauls."

And so we’ll beat on, dear reader… like boats against the current.

Regards,

Christopher Hancock
for The Daily Reckoning
December 6, 2007

P.S. That picture, dear reader, looks bleak. We know. We’re not happy about it either. Aside from certain domestic infrastructure stocks, we’re still firm believers in buying cheap foreign assets.

We believe that our long-term investment in Southeast Asian property development and infrastructure stocks looks sound. It feels sound. Of course, feelings mean squat.

While the dollar keeps falling, your assets should remain invested in businesses that derive revenues in sound foreign currencies. When those dividends get converted back into U.S. dollars, you should have more discretionary spending to buy Blackberries, handbags and iPods.

Better yet, Hong Kong property stocks own many tangible assets denominated in Chinese yuan. As the yuan begins to appreciate, the values of those assets will appreciate as well.

Yesterday, the Dow decided to keep us wondering. It rose almost 200 points. In our view, the tide is going out. The credit cycle peaked out this past spring…and the great wash of cash and credit is now ebbing.

But if we’re right, we’d expect to see asset prices go down. So far, housing prices ARE going down. The last figures we saw showed U.S. housing prices down 13%. Robert Shiller, who probably knows more about housing cycles than anyone, says they’ll probably go down 30%-40%. In Britain, houses just registered their third losing month in a row – with many more to come.

You can count on lower housing prices – at least in real terms – dear reader. Because there is no way that the average house can remain out of reach of the average buyer for very long. Houses are consumer items, not investments. They will fall in price to a level where the consumer can afford them.

But stocks are not consumer items. They are capital items…investments that go up and down based on various things – animal spirits, credit, earnings, etc. Earnings are going down (they always revert to mean)…and the credit cycle has probably turned negative.

Yesterday, the number one man at Legg Mason (NYSE:LM) said that credit markets were in the worst shape in 47 years. And a Washington Post writer opined that it was the "biggest mess since ’29."

That leaves "animal spirits" – Keynes’ term for market sentiment. The animals are still believers. They’ve come to think that capitalism will make them rich…and that capitalism’s custodians will make sure that nothing goes wrong. And whenever they begin to doubt it, Ben Bernanke and his fellow zookeepers throw them some red meat. A rate cut is coming…and a plan to rescue the mortgage market – relief is on the way!

But can the feds always save investors from their own mistakes? Can they make sure that stocks remain high forever? Can they protect the dollar…and make bad loans good again?

No…of course not. But that doesn’t mean they won’t try! The animals would be very disappointed if they didn’t.

Our old friend Rick Ackerman comments:

"We always expected the Fed to pull out all the stops when the U.S. economy began to slip into the void, but we never could have imagined the spinmeisters would invent ‘mortgage welfare’ even before recession had been officially declared. Treasury’s latest plan is designed to make it easier for certain ARMs borrowers to temporarily freeze their starter rates to avoid foreclosure. We know the situation is dire because the big lenders are signing on without even having their arms twisted…Paulson’s plan is not merely being fast-tracked, it is being shot out of a legislative cannon."

But will the feds hit the mark? Will they be able to reverse the tide…or like King Canute, merely look like silly old fools?

We’ll see, won’t we?

*** "You gotta have Plan B. That’s what we’ve learned from living in Africa," said a colleague last night. "Americans are so naïve. Well, I guess you should say that they are happily naïve…and so far, they’ve been able to be naïve without negative consequences…a situation that is probably changing.

"You believe you can turn on the lights…and they’ll always go on. You think you can walk down the street and you won’t get hi-jacked or robbed (well, maybe you wonder about that). You think your Social Security system will look out for you in your old age…and that your officials will be more or less honest…and that your dollars will have some value. Well, you may have some questions about that, too…

"But here in Africa, we’ve learned better. Things don’t always work the way they should. Governments change. Circumstances change. You can’t really count on anything. We’ve seen what happened in Uganda…Ivory Coast…Nigeria…and what is happening now in Zimbabwe. Zimbabwe was a great country. Now it is a disaster. A total disaster.

"That’s why, if you’re smart, you’ll have a Plan B. We all have a Plan B…meaning, we have another passport…and a bank account outside the country…or something, so we won’t be stuck if things really go bad.

"Not that we expect it here anytime soon. I think South Africa has more good years ahead of it…at least 5 to 10. But as for the long run, who knows? It’s an African country. And you can’t count on anything forever. The different tribes of Africans are struggling for control of the country. Mbeki is a Xhosa. This fellow Zusa is a Zulu. He’s been tried for rape…his top people have been involved in all sorts of corruption. And you’ve got all these drug dealers and criminals coming down from Nigeria. They just sneak across the border. There doesn’t seem to be any way to stop them. Which way the country goes depends on which tribe gets control…and how fast they’re able to work their control down into the judicial system and other parts of the administration.

"So you have to have some way to get out of the place, if it goes really bad. And you have to have a Plan B to protect yourself against all sorts of failings. That’s why we have our own generators, for example, because we can’t depend on the power system to work properly. And it’s why I keep a stash of Krugerrands. You don’t know which way the paper currency will go. But those gold Krugerrands will always be good money."

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. Long time DR sufferers know where we stand on gold. We think of it as wealth insurance…after all, the long-term value of the greenback is zero. Why not pad your portfolio with our favorite yellow metal? For a limited time, a new U.S. government-backed guarantee lets you own gold with no risk…but with 100% of the gains should gold prices take off.

The Virtue of Being Worthless originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Yesterday, we had just about every Fed Head, save Big Ben, out on the speaking circuit… And not one of them could muster up the words to save the dollar. Instead, they allowed the markets to continue their fear of credit, liquidity, and writedowns… And SEC investigations ruled the day. And why not? The news lately hasn’t exactly been giving the markets a warm and fuzzy!

And yesterday had GM reporting a $39 billion deferred tax charge, along with more writedowns at Morgan Stanley, and an announcement that the nation’s leading lender, Countrywide, is being investigated.

And before I move on, even St. Louis Fed President, Mr. “I love the economy” William Poole, said that the “housing fallout may force more rate cuts.” Hmmm, glad to see that he has come around to believing what I believe the Fed is going to feel that they have to do… Cut rates!

So… The bad fundamentals continue for the U.S. economy and dollar… And right when things are beginning to look dark and crusty. Big Ben Bernanke goes before Congress today to talk about all of these things, and his outlook for the economy. At this point, I’m not sure why anyone would value his opinion… But this is a pre-scheduled event… It used to be called the Humphrey-Hawkins testimony… But the bill that required the Fed Chairman to come before congress ended long ago, and Big Al Greenspan, Big Ben’s predecessor just kept the spirit of the bill going.

Yesterday, I gave glowing reviews to the Reserve Bank of Australia for raising rates in an election period, and then the next day the government reports that the number of people employed climbed by 12,900, the 12th consecutive increase, following a revised 8,300 gain in September. There’s actually a labor shortage in Australia… You know what that means? It means wage pressures and wage pressures mean… Inflation! So, as I said a few weeks ago… Expect a rate hike before the end of the year, and one before March, and one before June in 2008… The one before the end of the year is a done deal.

Today marks the central bank meetings of both the Bank of England (BOE) and the European Central Bank (ECB). As I’ve said before, we could see a rate cut from the BOE, although I’m of the belief they will wait, while the ECB is a “no-go” on rates for sure. As I said yesterday, ECB President Trichet would love to hike rates because he knows all too well that $98 oil is going to haunt his inflation scene… But… Economic growth is slowing in the Eurozone, so he’ll have to let the strong euro do his dirty work. It’s a good thing the euro doesn’t sing… I’m a fool to do your dirty work, oh yeah… I don’t want to do your dirty work, no more.

The carry trade currencies have reversed roles again… This on again off again stuff is really giving me a rash! Let’s just decide on a pattern and stick with it, eh? I just want serenity now! But with the Dow being dumped to the tune of 360 points yesterday, risk was being taken out of the markets… And when that happens… The high yielders get trashed, and the low yielders become darlings.

For instance… Japanese yen (JPY) is seeing the underbelly of 113 for the first time in a while, and Swiss francs (CHF) hit a multi-decade high versus the dollar! On the other side of the trade… Kiwi (NZD), and Icelandic krona (ISK) got sold… Aussie (AUD) also saw some selling but I think most of its selling was tied to profit taking.

The Chinese renminbi (CNY) didn’t see any profit taking, and has moved to the highest level versus the dollar since the drop of the peg in July of 2005. Ever since our friend and investment guru, Jim Rogers, talked about moving his dollars to China to invest in renminbi, yen and Swiss francs, things have been pretty crazy with renminbi. It’s nice to see the move, although it’s still as slow as molasses.

The Canadian dollar/loonie (CAD) continues to impress with its performance versus the green/peachback… I believe that last week I said that we could see some profit taking in loonies as it had jumped up so fast. There are calls on the street that it looks overbought, and that may well be, but when oil is churning toward $100, and gold is looking at new record highs, why wouldn’t investors be buying the loonie?

So… Keep your pants on here… There may be a technical correction, but as long as oil and gold continue to book new record highs, the loonie will be underpinned. That’s my opinion of course… I don’t know if this is actually going to happen any more than anyone else! It’s just how I see it!

Speaking of oil… We did see $98 oil yesterday… But since then the price has retreated to below $96. I saw a headline that was touting this decline as some kind of good news. Hey! Bonehead! $96 was a record high just a couple of days ago! So… We dropped back to the previous record high, and that’s something to get lathered up about? I don’t think so, Tim! Now… If the price of oil dropped, say, the same percentage it dropped yesterday, for about a month… Then… And only then, could we get lathered up over the drop!

So… As we head to the Big Finish, the European markets are waiting for announcements from the BOE And the ECB. A rate cut from the BOE could very well spark a mini-dollar rally of sorts, so be prepared for that. If both decide to forego rate cuts this month, then there should be a relief rally for sterling (GBP) and euros, along with the other European currencies that are so tied to the euro.

I will have hit the send button long before the announcements are made, so Chris will tell you about them in tomorrow’s Pfennig.

Currencies today: A$ .9285, kiwi .7740, C$ 1.08, euro 1.4680, sterling 2.1060, Swiss .8850, ISK 59.80, rand 6.5140, krone 5.2870, SEK 6.3110, forint 172.90, zloty 2.4810, koruna 18.33, yen 112.85, baht 31.58, sing 1.4390, HKD 7.7670, INR 39.32, China 7.4210, pesos 10.79, BRL 1.7390, dollar index 75.40, Oil $96, Silver $15.29, and Gold… $834.30

That’s it for today… Well… I don’t have any health news to share with you… As I said yesterday, I’m going to go with the “no news is good news” thought. I’m told that I will hear from the doctor after one o’clock today. Hmmm… Anyway… You all have been so kind with your positive thoughts for me… Again… Thank You! Since the medical people don’t believe this to be life threatening, I’m getting on that plane tomorrow morning with my beautiful bride and little buddy, and heading to Amelia Island. I’ll be there through next Wednesday, as corporate meetings begin there on Monday… But I’ve got the whole weekend to just sit back and get all this health stuff out of my mind! I’ll send notes to Chris from the road, but other than that, I’ll talk to you next Thursday! Time to go… I hope you have a Tremendous Thursday!

Chuck Butler
November 8, 2007

Fear Overrides Fed Speak originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

“For decades, federal inspectors knew that a flaw in the structure of the eight-lane I-35W bridge over the Mississippi could easily take down the entire structure. But year after year, the government let the bridge pass inspection. (Hmmm…reminds me of a certain green-hued currency).”

Christopher Hancock
October 16, 2007

Keep reading today’s guest essay here:

Robbing Peter AND Paul

Now some more views from Short Fuse in Los Angeles…

————–

Views from the Fuse:

Helicopter Ben speaks!

In his first speech on the current U.S. economic situation since August, Bernanke told the Economic Club of New York yesterday that the housing bubble burst will be a “significant drag” on U.S. growth into 2008.

“It remains too early to assess the extent to which household and business spending will be affected,” the Fed Chairman said, “[the Fed] will continue to watch the situation closely and will act as needed to support efficient market functioning and foster sustainable economic growth and price stability.”

“We’ve been wondering how inflation can be the Fed’s ‘predominant concern’ if they’re still willing to cut interest rates,” writes Addison in today’s issue of The 5 Min. Forecast http://agorafinancial.com/5min/. “The answer appears to be something like: ‘We’re not worried about inflation, because we’re expecting the economy to struggle.’ Hmmn…

“So…they’ll cut interest rates to spur the economy…and restore inflation to the Fed’s predominant concern? Mind pretzel.”

“If Ben Bernanke thinks he has a problem now,” writes Mike “Mish” Shedlock in yesterday’s issue of Whisky & Gunpowder, “watch what happens when commercial real estate blows up.

“Fannie Mae and Freddie Mac might be able to keep people in their houses in lieu of foreclosure by renegotiating terms down and down again (for a while, anyway, but certainly not forever), but bank funding of unneeded strip malls is another thing, indeed.

“Other shoes to consider would be a derivatives blowup, a massive unwinding of the carry trade, homebuilder bankruptcies, or a collapse of the U.S. dollar. But so many shoes are in the air and falling that it’s going to be difficult to say precisely which shoe hits the ground first. That’s what happens when it rains shoes…

“With all of these shoes starting to drop, it’s time to short short transports. Here’s why…”

As you may have already guessed, Bernanke’s comments were not without consequence…following yesterday’s speech, stocks ended lower. Opening trading was not much better this morning, as all three major indices fell for the second day in a row. This was partly to do with Big Ben’s speech, and partly because “Wells Fargo and Keycorp said bad loans hurt earnings more than forecast…[and] D.R. Horton, the second-largest U.S. homebuilder, declined after saying orders fell 39 percent last quarter,” reports Bloomberg.

Meanwhile, crude oil is heading near $88 a barrel – and our favorite precious metal is outdoing itself…briefly topping $770 an ounce.

And it doesn’t look like the price of gold is going down anytime soon. Analyst James Moore tells MarketWatch that the yellow metal has the “same drivers of weak dollar and high oil – in addition, physical demand is good and investors continue to increase their holdings through exchange-traded funds.”

Don’t be spooked off from the high price of gold if you’ve been batting around the idea of buying some to hang on to – some wealth insurance, as we like to call it. Well, fear not – there’s a way to get gold out of the ground (and into your portfolio) for less than one penny per ounce. No shovel required.

Yesterday, oil rose over $86. Gold shot up too – to $756. Gold has risen more than 19% so far this year.

The commodity index also hit a new record high – over 450.

“This place is going to boom, I can feel it,” said old friend Doug Casey over dinner last night.

“This place” is Argentina. We were having dinner at the Puerto Madero - a section of town where the old docks and depots along the waterfront have been renovated into sleek restaurants and loft apartments. We looked out across the water and saw the neon lights of various corporate headquarters…and the glass and steel office buildings that house them.

“It’s going to boom because it has no debt…and it is a major producer of food. And not only that, it’s already made almost every mistake you can make. It’s had socialism, hyper-inflation, price controls, debt, coups d’etat, military governments – you name it.”

“Yes, but there’s no reason why it couldn’t make the same mistakes again,” suggested another person in our group.

“Yes, and it will…but it’s ready for a little catch-up first. These things always go in cycles. This place is ready for an up-swing; I can feel it.”

Things always go in cycles. Short cycles. Long cycles. Bicycles. Motorcycles. Wash, dry and spin cycles.

But what you never quite know is where you are in the cycle.

We have bought a little property in Argentina because it is cheap – and we like the place. Even if Doug is wrong about the cycle, we won’t be unhappy. We bought value. We’re tempted to buy more. Argentina’s economy is growing nearly three times as fast as the United States. It is coming off a major depression, when GDP growth went negative for a year and a half…when the local currency lost two-thirds of its value…and in which the economy actually shrank as much as 16% in a single quarter.

Now, credit is rare in Argentina. Finally, with the accumulated mistakes of many years washed away, people can build on a new, more solid foundation. In fact, it may be finally coming back after a more than 50 years of backsliding.

Yes, dear reader, you should really see it for yourself. It is a truly beautiful place – and with Argentina sitting right on the edge of a boom, it is primed for you to jump on it…before it jumps without you. Our friends at Agora Travel have put together a trip that will explore all the opportunities that this place has to offer – both as an investment, and a travel destination. Our only words of warning: you might not want to leave.

“Challenge for the USA, the retirement of the baby boomers.”

La Nacion reports on another reason why it is probably late in the cycle for the United States: the country has obligations it cannot meet. The first baby boomer, a woman named Kathleen Casey – who was born on January 1, 1946 – will turn 62 in three months. If we read the article correctly, she’ll be able to begin to collect Social Security. Behind her are 84 million others, almost every one of them counting on getting something from the government – either Social Security, Medicare or Medicaid.

“How about you, Bill?” asked a friend last night. “Are you going to go for partial payments at 62…or wait until 65 to get the whole enchilada?”

We had never thought about it. We always assumed that we would get nothing at all. And we still can’t quite imagine that we will get anything. Anyway, we don’t need it…and don’t really want it. But we have a few years to go before we’ll be ready to apply; who knows what will happen?

The problem looming up with baby boomers’ retirement is a mathematical one. When the Social Security system was set up, there were 42 people working for every one who was getting benefits. In 2030, when the boomers are drawing their checks, the ratio will fall to 2 to 1. The system will go broke. Everyone knows it.

Obviously, benefits will be cut – either by act of Congress…or by act of inflation. The latter is our guess.

Until tomorrow…maybe,

Bill Bonner,
The Daily Reckoning

P.S. We are headed up to the ranch today. We bought an Iridium satellite phone…and a kit that should allow us to send our dispatches from the middle of nowhere, but we’re not promising anything. Our correspondence may be patchy until we get back into the office in Buenos Aires – next Monday.

Robbing Peter AND Paul originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

“The reason seems simple. People find comfort in knowing lots of other people have made the same choices…like fans routing for a sports team. Human beings naturally gravitate towards the crowd. And ‘crowds cannot think. They can only feel and act.’

“So their behavior only seems rational in the fact that ‘everybody’s doing it.’”

Christopher Hancock
October 12, 2007

Keep reading today’s essay here:

Living La Vida Loca

Now over to Short Fuse, reporting from Baltimore…

————–

Views from the Fuse:

Move over subprime ARMs – there’s a new beast to deal with in the housing market.

An article on Reuters says that while many have been singling out the rate resets on ARMs as the reason for the surge in loan defaults as of late, the actual answer is much simpler: falling home prices.

Says Reuters: “A drop in home prices pushes up defaults and forces more leveraged borrowers into foreclosure. This, in turn, puts extra supply to the housing market and pushes down home prices at the margin and the cycle starts again ultimately.”

Basically, what’s been happening is a nationwide overvaluation of home prices during the peak of the housing boom. But now that prices are starting to fall off (dramatically in some areas), many homeowners are left “upside down” in their mortgage – owing more on their loan than their house is actually worth.

This is occurring with a frequency more than anyone is realizing, warns our friend Mike “Mish” Shedlock, over at the Survival Report, and housing is nowhere near its bottom.

“Weakness will continue at least through mid-2008,” he says. “If the general economy heads into a slump, as we believe likely, housing will remain weak all through 2008 and perhaps substantially longer. Twenty-year manias are not resolved in two-three years.”

Another factor that is irritating the housing market are the lax lending standards that we saw last year, which permitted borrowers – often of the subprime persuasion – to take on too much debt.

Case in point: Beazer Homes. Yesterday, the major home builder admitted that “it had broken federal rules to help buyers of its homes qualify for federally insured mortgages,” reports the New York Times.

“The statement did not indicate precisely how the rules had been broken, nor did it disclose the volume of mortgages involved. Beazer said it hoped to reach a relatively inexpensive settlement with federal regulators over the practices, which it said were related to rules governing down payment assistance for home buyers.

“Beazer’s statements came as it reported that sales of new homes plunged in the third quarter. It also said it would restate several years of financial statements, with changes going back to 1999, because it had improperly used reserves to first hide earnings and then to overstate them.”

Yikes. We’ll keep you updated…

It’s the end of the world as we know it…and we feel fine!

India is booming. China is booming. The latest news from the Middle Kingdom tells us that its trade surplus is rising at a 56% annual rate.

Heck, even Argentina is booming. Its economy has been growing about three times faster than the U.S. model for the last five years.

Yesterday, your editor and his old friend Doug Casey were invited to lunch at the American Club in downtown Buenos Aires. Our hosts were mostly men who have been living and doing business in Argentina for decades. They’ve seen it all – corruption, hyperinflation, defaults, chaos, riots, depression…you name it. “What’s the real story down here?” we wanted to know.

“I wish I could tell you,” said one gentleman from Texas. “I’ve been down here for more than 30 years…and I don’t know what’s going on. Nobody does.”

“I work in the government,” said another young man. “And I can tell you, they don’t have any idea. It is an incredible, unbelievable mess. Everything is spin…not substance.”

“Hey…how’s that any different from the United States?” asked Doug.

Many people come to Argentina for the tango or the beef or the property values. We come to have a look at the future. Whatever drama lies ahead for the United States of America…we have a feeling it has rehearsed down here on the pampas.

Yesterday, the Dow went down a bit. But it could still be in a bullish phase. The index is still near an all-time high. And even the homebuilders look as though they may be bottoming out. Not that it particularly matters to us. Even if stocks continue to rise in nominal terms, it is of no interest – because they are too expensive to be good investments. And what we care about is real value, not just the numbers that follow a dollar sign.

In real terms, the Dow has been cut in half since 2000. You used to be able to sell all your Dow stocks and buy more than 40 ounces of gold. Now, sell them and you get only enough money to buy 18 ounces.

No, dear reader, the Dow is a fake-out…a sideshow…a distraction. The real drama is in the dollar itself. And the real excitement is in the gold market. Yesterday, gold rose more than $10 – to a new high for this cycle…at $758.

Oil rose to almost $83 yesterday, too. And the dollar fell to less than $1.42/euro (EUR).

The falling dollar is not just a speculator’s plaything. It is the dollar in which almost all Americans’ hopes and dreams are calibrated. If a house is worth 300,000 dollars…those 300,000 pieces of paper may represent a lifetime’s worth of past effort…and it may also represent hope for future repose. Pensions, insurance plans, stock portfolios, bonds…everything we earn and everything we spend – it’s almost all in dollars.

As we pointed out yesterday, the dirty little secret of America’s advanced capitalism is that it socializes much of the risk…and most of the losses. The big banks…big financial houses…or even the little householders…get in trouble and the government rushes to their aid. “Here, have some more money,” says the Fed.

Where does that money come from? It’s a long story…but it’s not a new story. It’s a story that was played out in ancient Rome…in 18th century France…in 20th century Germany…and now is a long-running show north of the Rio Grande.

In effect, and often literally, central bankers create the money – as Keynes put it – “out of thin air.” No harm in that, you say; it’s got to come from somewhere. Except, this new money competes with all the old money that people worked so long and hard to accumulate. As you will see, below, neither an economy nor a person can tell the difference between a dollar that came from the sweat of one’s brow and one that came out of thin air. The result is to increase the overall supply of dollars and reduce the value of each and every one of them. That is the phenomenon we know as “inflation.”

The consequences of inflation are well known. So is its source. Everyone knows, in other words, who gets killed and who fires the gun. What we add today is just an incriminating detail – the motive.

Why would the U.S. central bank want to create inflation? Blame Congress…the politicians always want to spend more money than they can raise in taxes. They make the difference up by borrowing…and then the loans need to be refinanced…and more loans added…and the whole thing just goes down a lot more easily if there’s a little extra money floating around.

Or, blame consumers. They spend money they don’t have on things they don’t need. Who do they think they are, members of Congress? They, too, are a lot happier when the money is flowing. And, when the voters are happy, the politicians are happy…and when the politicians are happy, they don’t put a lot of difficult questions to their central bankers…so the central bankers are happy too. Let’s face it; everyone is happier when there is a little inflation in the system. Economists even came to believe that inflation helped boost employment…and that it encouraged consumers to spend…and that it actually helped created a more dynamic, more robust economy. So, you see, dear reader, even economists are happier with a little whiff of inflation in the air. And if you can make economists happy…aren’t you doing God a service?

Okay…now we’re getting to the deep, dark heart of the matter. Blame God. God created man. And man likes a little inflation. A little extra money makes people feel like they are getting something for nothing. Who doesn’t like that?

But God didn’t stop there. He made man. And man likes to get something for nothing. But God made sure there was a worm in this apple. “Something for nothing” always comes at a high price. If the dollar had merely retained its value since 2002 and all else remained even, Americans would have about $10 trillion more of purchasing power today. Instead, they are getting used to foreigners coming in, buying their assets and telling them how cheap everything is. Yes, things are cheap to foreigners; they have real money. But things are not cheap to Americans.

The crisis of 2001-2002 reduced Argentines’ wealth by nearly two-thirds. All of a sudden, if they took a trip to Europe, for example, they found they had only a third as much money as they had had before. Foreigners were coming into the country to buy apartments and farms…the Argentines themselves didn’t have the money to compete with them. Argentina’s rich were fine. They had always kept their money in Miami or Switzerland. They had assets outside of the country. They had sources of revenue and ways to protect them. But the middle classes had their money in pesos. They earned their money in pesos. They counted on the value of their peso-pensions…and their houses…and their savings. But when the crisis came…their money disappeared. Argentina’s middle classes were practically wiped out.

Argentina? Look at Zimbabwe, says old friend Marc Faber. The story is the same, but it is more entertaining. And it is still in the hyper-farce stage. Inflation is officially running at about 7,000% per year. But unofficial estimates say the rate for this year will turn out to be more like 100,000%. Marc visited Zimbabwe recently. He says he went out to buy a bottle of orange squash on Monday; it was 120,000 Zim dollars. On Tuesday, the price had gone up to 180,000. And by Friday, it was at 600,000.

This would seem all very funny, but currencies mean something to ordinary people. At the margin, they can make the difference between life and death. Thanks to Robert Mugabe’s financial management, the average man in Zimbabwe can expect to drop dead at the age of 37. As recently as 1990, he could have looked forward to 60. While life expectancy plummeted, so did job expectancy. The average guy has only a 50/50 chance of finding work.

But here’s the kind of detail that gives us hope for the future. We may not survive it, but at least it will be amusing. It’s apparently the Africans’ turn to head the UN Commission on Sustainable Development. Naturally, they turn to a country that has found a way to sustain un-development – Zimbabwe. The country has been going downhill ever since they kicked Ian Smith out of office in 1979.

(Ian Smith is still alive, we believe. He is living in Cape Town, South Africa. Perhaps he should be called back to service…like Churchill in WWII…or Petain.)

The man given the post of heading up the commission on sustainable development is named Francis Nhema, a crony of Robert Mugabe. His personal contribution to sustainable development is that when he was given one of the farms stolen from white farmers, he let it go to rack and ruin.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Living La Vida Loca originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

IT’S NEVER DIFFERENT THIS TIME

Beating the S&P has become like a golf handicap: expressed in a number that gets bandied about, and maybe embellished a point or two, to impress any financial “mind” polite enough to listen.

The goal is simple, But for many, the attempt is futile and childish, grossly naïve in its fundamental premise. Most try, but few succeed.

Fifty years ago, keeping your head above water meant saving a dollar. Now, squeaking by has become the 13% annual return that nearly ruins a manager’s financial career/reputation by narrowly clearing the S&P by a mere 50 basis points.

But there’s a new American generation… an entitlement class of children playing children’s games… a generation weaned on the bottle of instant gratification. They’ve been told to expect more for less… they’ve been assured that it’s OK to spend more than they make… because in the end, the government will be there to brace their fall.

Unfortunately, mommy and daddy are broke. And so is Uncle Sam. But the American family keeps spending despite that the consumer savings rate for all of 2006 remained a negative 1%.

The 2006 figure proudly surpassed the negative 0.4% savings rate in 2005. These two years produced the most reckless lack of savings since the negative 1.5% savings rate in 1933, during the Great Depression.

So while most Americans woefully stare at double-digit APRs as they cut another check for the minimum monthly payment, the debt continues to rise.

It won’t be long before the notion of keeping your financial head above water will require more effort than signing your name on the back of yet another new credit card.

Hardly anyone beats the market for more than a few years, so why do we waste so much time and money trying? And more importantly, why do we deem our investing success relative to what a bunch of strangers are doing? It’s comical when you stop and think for a second. As Jason Zweig cleverly points out in Ben Graham’s The Intelligent Investor, no one’s gravestone reads, “HE BEAT THE MARKET!”

Expectations today shun returns below double digits. Earning 9% won’t cut it if someone else is earning 10%.

That type of thinking negates what Warren Buffett calls the very first rule of investing: “Don’t lose money.”

As investors, we’re looking for a margin of safety… companies trading near or below their intrinsic value with an established earning power. That’s basically it.

So here are four basic criteria you can expect from Free Market Investor. You may recognize the thinking. Warren Buffett coined the parameters. It’s a bit cliché, but we’ll humbly concede that if the wheel ain’t broke… well, you know the rest.

So let’s begin. We always ask ourselves these four things:

1)      Is the business easy to understand?

2)      Does the business sell at a fair price?

3)      Does the business operate with a long-term competitive advantage?

4)      Does the foreign stock trade on a U.S. exchange?

For explanation’s sake, we’re going to lump the first two rules together in the following example.

Is the business easy to understand and does it sell for a fair price?

This is a fictional story of a small biotech company. We’ll call the firm “CureAll Pharmaceuticals.” CureAll currently holds patents on two mildly significant drugs that treat a rare blood disorder. Proceeds from those sales pay the rent, but the company continues to operate in the red. The company’s immediate future rests on a breakthrough pipeline drug capable of curing prostate cancer.

Here is where our story begins.

One of the world’s most respected financial newspapers reports that the small biotech company CureAll Pharmaceuticals, based in Raleigh, N.C., cleared Phase II clinical trials for a remarkable new drug researchers suspect has a 90% probability of effectively curing early-stage prostate cancer.

The drug can be administered in pill form. Effective treatment will require one pill every three months. The FDA has signaled that passing Phase III trials seems likely. Anticipation builds.

Prostate cancer affects more men than any other form of cancer. The American Cancer Society estimates 220,900 new cases of prostate cancer were diagnosed in the U.S. in 2003 alone. No males are immune. The risks increase with age. Family history also increases the likelihood.

The breakthrough of such a drug would mean a great deal to a great many people. There’s no way to quantify the benefits.

Even before Phase III clinical trials begin, the company’s stock takes off. Investors are willing to forego 120 years of future earnings for a single share. Who could blame them? This is the miracle cancer drug we have all been hoping for.

Two years pass, and FDA approval looms even closer. The stock price continues to climb. The atmosphere around CureAll’s stock feels strikingly similar to the sentiment for Internet search engines in the early 1990s.

You may remember, back in 1994, Yahoo’s search engine started as a simple directory for the then-small universe of Web sites. The stock price rose side by side with the market all the way to its peak in 2000. On the last day before the new millennium, Yahoo closed at $432.69. Its diluted earnings per share that year were 6 cents on the dollar. And investors and pundits were predicting that Yahoo was set to go even higher.

We termed the 1990s the “new economy.” We said times had changed. Many considered earnings to be irrelevant. We all know how that story ends.

By the end of 2000, Yahoo closed at $25, down 94% in less than a year.

But it’s now 2007. Times have changed.

Investors argue CureAll maintains a tangible revenue-producing product. The dot-com companies had nothing like this, they said. That is why speculators got burned. “It’s different this time,” they claim.

CNBC and the financial press jump on board. They interview a host of potential candidates for this cancer-curing drug. Even pundits left of the far left begin cheering capitalism’s conquest. They jump on the business-minded bandwagon. They claim seed money from cutthroat VC firms is finally being put to good use. Society and Wall Street are meeting face to face for the very first time.

Soon, management announces a press conference. The greatest minds in medicine start making public statements. This looks to be the breakthrough society has been anxiously awaiting. The stock takes off. The share price now trades for 200 times earnings.

Among a host of reporters, doctors and investors, CureAll’s management discloses final FDA approval. The room explodes with applause and cheering.

Wall Street wholeheartedly jumps on board. The stock climbs even higher… by the end of the trading day, CureAll’s shares are going for 250 times future earnings.

Here’s where our story takes a turn.

In all the hype, investors confused the tangible benefits of the drug for the tangible benefits of the stock.

Unfortunately for investors, the costs of producing this innovative drug are astronomical. Gross margins are less than 5%. Operating margins are then even half of that.

Critical inputs come from shaky supply sources. To make matters worse, CureAll’s current blood disorder drugs are about to go off patent. The future pipeline contains the only high-margin, cash cow product that could effectively put the company firmly in the black. But FDA approval for that drug requires successful DNA rebuilding in the Jensen sarcoma as well as full atomic models with sugar phosphate nucleic acid structures of 25 different lab rats.

That’s tough to read, much less to comprehend.

Like Yahoo, the hysteria surrounding CureAll’s drug eventually surrenders to the financing and fundamental earning power behind it. Although cancer patients are rewarded, investors suffer. The stock falls 94% by the end of 2007.

The story of CureAll demonstrates two common traps that readers of The Offshore Speculator will be encouraged to avoid: First, steer clear of businesses you don’t fundamentally understand. And second, never pay too much for an asset, regardless of how great that asset may be.

You see, all market bubbles eventually come to an end. There’s no telling what triggers the retraction. Some average investor woke up one day and realized that he’d probably not recoup his investment on a company with an earnings multiple well above 200. It’s really common sense.

Value investors like Benjamin Graham and Warren Buffett know that throughout history, the average price-to-earnings ratio of the stock market has been 15.3 – which means investors have traditionally been willing to pay $150,000 or so for $10,000 in earnings.

Yesterday, it was Yahoo, and today, it appears to be Google.

Growth projections are large, and they’re built on a very fragile assumption. They assume Google will be the leading search engine for years to come. They assume a competing programmer will fail to construct a better algorithm. They assume real competition will not enter the market. In an industry with little to no switching costs, that’s a pretty risky assumption.

As value investor Christopher Browne points out, there is nothing wrong with owning a great business that grows at fantastic rates… it’s a matter of paying the right price for that business.

Browne goes on to say that investors should determine an intrinsic value, wait for someone to overreact or under-react to news and buy the stock when the market prices the shares for less than they’re worth.

In the case of CureAll Pharmaceuticals, investors would have been wise to short the stock the day after the cancer-fighting drug received FDA approval.

But so it goes.

Google’s just another name for the same story. It’s a story whose message is focused on hubris and greed. Regardless, investors today are singing the same historical tune: “It’s different this time.”

It’s never different this time.

Regards,

Christopher Hancock
for The Daily Reckoning
May 22, 2007

P.S. It’s time to separate yourself from the investing masses, especially if you are headed toward retirement. And as an investor, it’s time to protect your assets, so they can grow as well. Successful investing will require a combination of patience, realistic expectations and, most importantly, buying shares of businesses at the right prices.

Editor’s Note: Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Christopher’s desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

The older we get, the younger we are. We have been laughing at the Chinese…for it is obvious that they are new to the ways of runaway markets. Throwing off their drab Mao suits…and fresh off the farm…these bumpkins act as if they fell off the turnip truck just last week.

But it is we who must have been born yesterday. We open our eyes, look around – the more we see the less we’ve seen anything like it. More details on last week’s art auctions have come our way…each one increasing our puzzlement.

Mao to the left of us…Mao to the right…he’s almost as big as Che!

Only seven months ago, art lovers took a look at one of Andy Warhol’s concoctions and judged it to be worth $17.37 million. It was a photographic portrait of Mao Tse Tung, taken out of a 1963 edition of Newsweek magazine, and then silk-screened, multiple times, over a green background. Warhol was an adman. He knew a good image when he saw it.

But how he transformed his slick images into collectible ‘art’ is one of the greatest triumphs of mass marketing and mass delirium in history. The International Herald Tribune struggled to explain it: Of the Mao confection, “the uneven repetition conveys the impression of a recurring obsession that the viewer in vain seeks to shake off,” it says. Or the impression that Warhol didn’t apply the ink very well.

But now, in May of 2007, a group of bidders – everyone of them apparently of sound mind – ran up another of Warhol’s works to$71.7 million, a new record, and more than four times the previous record. This second Warhol masterpiece is reproduced for us in Friday’s IHT. It is a photo of a burning car tinted all in green. Warhol, stretching the limits of his creative genius, called it “Green Car Crash (or Green Burning Car).” It was last seen at auction in 1978, when it went for just $70,000. In 30 years, it has gone up 100,000%.

What else has gone up 1,000 times in 30 years…or more than 300% since last November? We can’t think of anything. Which must mean that these art buyers are even smarter than the Chinese lining up to open brokerage accounts in Shanghai…or luckier.

Chinese shares hit another record high yesterday, after a sharp drop Friday. The market shuddered at the end of last week because the Peoples Bank of China said it was raising interest rates – to try to sop up some of the speculative juice in the market. But it’s a bubble; and in a bubble all news is good news. And so, Monday, the Middle Kingdom rocked and rolled, ending the day with stock prices more than 1% higher than the previous high.

Meanwhile back to the world of art…

The auction at Christies “exceeded the experts’ highest expectations, [and] revealed a hitherto unparalleled urge to buy,” IHT concluded.

We conclude something a little different.

First, we look at the paintings. Some are cute. Some are clever. Some are decorative enough for a laundry room. But who would spend serious money to buy them? We don’t know.

But what we do know is that whatever value buyers saw in Warhol and similar artists a few years ago, they see a lot more of it now. Prices have gone up dramatically in the last few years. Remember, these are objects with no ‘earnings’ – save the pleasure owners get from looking at them. Since the paintings themselves have not changed, we have to conclude that the buyers have changed. For some reason, as yet unexplained, they want to own these paintings more than they did before…as evidenced by the fact that they bid against each other to see who is willing to pay the most to take them home.

So remarkable is this whole phenomenon to us that we decided to spend the whole of last night in meditation and prayer, trying to make sense of it. Unfortunately, the whiskey ran out by 11 PM…so we went to bed without getting to the bottom of it.

But even in our few hours of contemplation we were able to realize that OECD is probably right. Cheap money is making a lot of things a lot dearer than they used to be – especially status. Landmark buildings all over the world are being sold at prices that were unheard of a few years ago. Rent yields are so low…it looks as though the buyers want to lose money. Luxury yachts are crowding harbors from St. Tropez to Santa Monica.

Stocks, too, are hitting records – and not only in China. The S&P 500 hit a new high yesterday too – breaking a record set seven years ago. Meanwhile, oil has climbed over $70 a barrel…but still, at the top end, gas-swilling private planes are becoming much more fashionable. “The popularity of executive jets has never been stronger,” says today’s Financial Times. But pity the poor status-hungry hedge fund manager. He puts in his order for one of the leading models, and then discovers he has to wait a couple of years to get delivery. What’s he going to do? Go to Christies and buy a Warhol?

More news:

————–

Addison Wiggin, reporting from Baltimore…

“The Shanghai index rocketed a full 1% higher yesterday. The freakish index has now grown 52% in 2007 alone. The Chinese central bank also announced another interest rate increase yesterday – the second of the fastest back-to-back hikes in 17 years.

“The dollar slept on the news. But the Chinese foray into the capital markets may awaken speculators very soon…”

For the rest of this story, and more insights into today’s markets, see

The 5 Min. Forecast

————-

And more thoughts:

*** Everyone is feeling the effects of the high price of crude when they fill up the tank of their car – but wait until people start paying closer attention to their electricity bills…

“I almost fell out of my office chair when I recently opened our Connecticut Light & Power bill. WOW! The bill jumped almost 30% year over year with little change, if any, in usage,” reports our resident energy expert, Kevin Kerr.

“Neighbors and friends reported the same spike. The reason? The electric companies are now dividing charges into two parts: transmission and the actual production. The bottom line is prices are skyrocketing right along with the rest of the energy complex. Remember, most electricity is derived from natural gas-fired plants. Some are nuclear and hydro, but natural gas is the real culprit here. Last year, prices were down because natural gas prices fell, but if extreme weather sets in, so will high natural gas prices.

“As investors, we must hedge ourselves against these market events. There are ways we can protect a measure of our portfolio from Mother Nature’s wrath.

*** Another way you can protect yourself (and turn a nice little profit) from rising energy costs – and a falling dollar – is by taking advantage of EverBank’s World Energy CDs.

The World Energy CD is a new FDIC-insured deposit account where you can automatically hedge any U.S. dollars you put in, simply by spreading them evenly – and automatically – between all four politically stable, energy-centric currencies: the British pound, Norway’s krone, Australian dollar and the Canadian loonie.

Seeing the way all four of these currencies have soared against the greenback lately, this CD might just be the best and easiest way available to both hedge against a falling dollar and profit from a rise in oil, simultaneously.

We’ve secured an exclusive offer to this CD for Daily Reckoning readers. If you call or e-mail now, you can lock in the World Energy CD before your local utility hikes rates again. But this exclusive offer ends next week…so get to it.

*** All the ancient literature has much the same theme: a great man is ruined by his own success and his own vanity. He begins to believe that he’s invincible. And then, he over-reaches, tempting the gods to put him in his place.

That’s why humility is such an important quality. A truly humble person is less prone to the kind of exuberant excesses that plague presidents, company executives, entrepreneurs, homeland security drudges, teenagers, emperors, investors and celebrities.

That is why we work in France. It humbles us.

We were reminded of this great benefit yesterday, at a meeting. Three lawyers, one architect, one insurance agent and two administrators sat down with approximately a three-foot stack of documents to try to figure out what went wrong with one of your editor’s biggest investments – a seminar center in France.

The lead lawyer was a mature man with a self-confident air. He was enjoying himself, partly because he was getting paid $400 a hour and partly because it was clearly entertaining for him to see a foreigner – an American to boot – who had let himself be ripped off in France.

“Ha ha…I guess you thought you could sign the contract and that was all there was to it…ha ha… But didn’t it ever occur to you to check this architect’s documentation…or to make sure that he had gotten the proper permissions from the authorities…? You didn’t even check his invoices. I wish we could all be so lucky as to have American clients. They’ll believe anything.”

The renovation project began well enough. The architect in question was the friend of a friend. He spoke well. He had an answer for everything. He seemed to have good taste. And he seemed to know what he was doing.

Visiting the job site, we saw nothing wrong. It was dusty…walls were broken down and rebuilt…rotten beams were taken out…concrete was poured.

“When you get into an old building, you never know what you are going to find…and you always find a situation that is worse than you imagined,” said the most senior of the lawyers. “And then, too, you never can tell if the people working on it know what they are doing until you get to the end and turn on the water…and plug in a hairdryer.”

When we visited the project, there were workers putting in pipes every which way. Wires ran hither and thither. How were we to know they were running the wrong way?

The architect attending the meeting was the not the first architect on the job. Nor was he the second. Nor the third. He was the fourth. He seemed honest, competent, direct – just like the three before him. He dressed in a conventional way – with an open rust-colored shirt. The only thing that gave away an artistic streak was his eyeglasses, which were rectangular and a turquoise color.

He, too, seemed to be having fun. Not merely because he had just signed a contract which would bring him thousands of dollars for doing what the previous three architects had failed to do, but also because it is always fun when you get paid to criticize others’ work.

“The electrical system can hardly be called a system,” he explained. “We tried to make sense of it, but it is incomprehensible. Now, you’d think an electrician would instinctively connect wires together. It’s not rocket science. But there are a lot of wires that aren’t connected. Not to anything. And half the outlets don’t work. The fire alarm system doesn’t work either. Lights go on for no apparent reason and off for no apparent reason. My colleagues and I were frankly baffled.

“You could, of course, go to the electrical contractor and demand that he correct his work. But I wouldn’t do that if I were you. He plainly had no idea what he was doing.

“You are aware, of course, that this is deemed, by law, a public building,” continued our fourth architect, trying to suppress a smile. “So you are required to have exit signs and the like…not to mention a fire alarm. Well, your electrician put the signs up…but in the wrong place. He has exit signs leading into the kitchen…where the fire is likely to be.”

It was a long day. A stupidity followed an incompetence followed a fraud. As each one came to light the lawyers’ and architect’s eyes twinkled with contentment. They had before them a fool…(your humble editor) and they were happy to help prove it.

“You paid to have the walls of the bathrooms painted,” continued the fourth architect. “But the bathroom walls are covered with tile. They are not painted. So, too, you were charged for painting some of the walls that have wallpaper on them. You also seem to have paid one contractor who did nothing at all. In fact, there is no record of his ever showing up on the job site.”

“I’ve seen a lot of this kind of thing,” said the lead lawyer. “I’ve done a lot of work in Africa. There, you take it for granted that you are going to get ripped off. It’s just their way of doing business. You build it into your budgets…it’s not a big deal. But even in Africa there are acceptable limits…a code of behavior. You do a project and you expect the local architects and contractors to steal about 15% of the project costs…people get mad if they steal more than that.

“You know, I had a client who told me a story. There was an African politician who came to Paris to visit a French politician. He was invited to the French politicians house. The house was beautiful…furnished with fine antiques…and valuable paintings. So the African asks: ‘How can you afford all these luxuries on your salary?’

“The Frenchman points out the window. ‘I’ll let you in on a little secret. See that bridge. I got that bridge built. And I put 10% of the contract costs in my pocket.’

“A few years later, the Frenchman goes to Africa and visits the African politician. He discovers that the African’s apartment is richly decorated too…with antiques from Paris…and paintings that looked like they came from the Louvre. So he asks: ‘How can you afford all this on your salary?’

“‘I learned it from you,’ the African replied. ‘Look out the window. See that bridge?’

“‘No…I don’t see any bridge,’ says the Frenchman.

“‘No, you don’t. Because I took 100% of the contract costs.’

“So you see,” the lawyer continued, “we don’t mind a little bit of corruption. But when people get carried away, you end up with nothing. And it looks to me as though your first architect got a little carried away.”

———————

It’s Never Different This Time originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.