Brazil is a marvelous and massive country where private wealth thrives without embarrassment, where well-protected and healthy familial dynasties form the infrastructure of social and economic life, where technology is popular and beloved by everyone, where the police leave you alone and where Americans can feel right at home.

The world is changing fast. Freedom in America is slipping away so quickly that we are already seeing a wave of young people leaving in search of new opportunities, just as people from around the world once came to America to live the dream. Brazil is one of many countries benefiting from the generational emigration from the US.

Discovering this rattled me more than I might have expected. But the young people themselves are not unhappy, and I can see why. They are valued. They are earning good money doing interesting things. They have access to one of the most beautiful and exotic and friendly places on Earth. They eat well, live well and have rich social lives.

More than anything else, they have the sense of freedom.

Now, you might wonder how it is that people have to leave the “home of the free” to find freedom. Over the last 10 years, something horrible has happened to the United States. The police state has cracked down hard, not so much on “terrorists” or real criminals, but on regular citizens. The news items spill out of my feed on an hourly basis, things that just shock and alarm those who are paying attention.

Maybe it is not so surprising. The US military is larger than most of the world’s militaries combined. We have the largest prison population on the planet, and most are locked up for nonviolent crimes. The political culture focuses more on the need for security than for freedom. Add it all up and you have the perfect recipe for the emergence of a police state.

But most Americans are not entirely conscious of the change. It has been fast, but slow enough not to cause alarm. It hits you only once you leave. This happened to me two years ago when I went to Spain. I could move about and do what I wanted without bumping into authority at every turn. I felt it again in Austria last year. It is not something you can quite put your finger on, just a sense that you are not under constant surveillance in suspicion. You can breathe easily.

It was the same in Sao Paulo, Brazil, a happy and prosperous land of exotic fruits, thriving markets, consumer products that actually work and are not depreciated by regulatory mandates, and polite and warm people.

I received a very generous invitation to be a main speaker at the third conference on Austrian economics sponsored by Mises Brasil, a young organization with a very bright future. It was founded only four years ago. Yet today, it has a gigantic presence in Brazilian intellectual life. The hunger for the intellectual basis of freedom is palpable.

Three hundred or more people were here to listen to lectures and engage in debates on ideas. The audience was a sea of young people, most everyone under 30. They were students, professionals, traders and workers of all sorts, all passionate about freedom and the economic answers provided by the Austrian tradition of Ludwig von Mises, F.A. Hayek and Murray Rothbard.

What most excited them was the classic idea of laissez faire — that is, the idea that society can thrive on its own in the absence of central management and that the government operates as a drain on society. The culture of the group was certainly more intellectual and educational than political. They were invigorated by ideas and given hope by the idea of freedom. Apparently, nothing like this organization existed in Brazil until recently. Now the group’s website is one of the most heavily trafficked in the country.

My hosts were enormously generous with their time, and they knew exactly what I really wanted to do on the first day: see the delights of the open-air markets. I was told they are in the center of town. If you had seen a map of Sao Paulo, you would know just how odd it is even to imagine such a thing. The city seems to be everywhere in sight, everywhere you turn, going on forever. It is like 100 New Yorks.

Driving here is not for the faint of heart. The street layout makes no rational sense at all. I could have been driven the short distance between the hotel and the conference center a hundred times and still not have had the slightest clue about the layout. I was told that it would take at least two years of living here to gain a sense that you really know the place.

Go to a high spot in the center of town and look around on all sides. Everywhere you see a beautiful thing, a world built by millions of human hands. No central plan could have made this. No single mind could have conceived of it. To anyone who is intellectually curious, the obvious questions are how does this place work? How is order achieved? The answer is one that few people in the United States seem to care about today. The miracle is obtained through the coordinating forces of the market itself, of millions of free people interacting in small ways toward their mutual self-betterment. This is the answer that inspires a lifetime of intellectual curiosity.

On the first lunch on my first day, my hosts took me to a place like I had never seen, and they are as unconscious of its significance as Americans would be startled by its very existence. Again, it seemed to be in the center of town. To obtain entry requires extensive security checks. But once you are in, a new world emerges: restaurants, soccer fields, gigantic swimming pools of many varieties and delights as far as the eye can see.

This is a city within a city. But it is entirely private, what Americans would call a “country club,” but of a particularly elaborate type. It is not hidden away in some alcove on the outskirts of town. It is right there in the city for everyone to see — something nonmembers can also take pride in. It is marvelous in every way, a living monument to the possibility of orderly, privately owned anarchist communities.

One thing kept gnawing at me during my entire visit. I kept coming across people who were members of large and extended families with roots very far back in Brazilian history. They were impressive entrepreneurs, but the wealth was more robust than you would find in a place like Silicon Valley. It reminded more of Gilded Age families in the United States, people who carried themselves with grace and confidence born of excellent breeding and material security.

As I thought about it more, the ingredients were unusual by American standards: large and extended families, protected wealth, well-bred youths, a predominantly young population. What was the reason for this? I developed a quick, back-of-the-napkin theory. It had something to do with the inheritance tax. So I asked my hosts, “What are estate taxes like in this country?” The answer came fast: There are none. Some areas charge 3%, maybe 6%, but it is rather easy to escape even those minimal charges.

This contrasts with the United States, where estate taxes can be as high as 35%. We’ve been looting our best families for 100 years. We’ve gouged and smashed the richest generations of American capitalists upon death ever since the Progressive Era. We’ve been living one generation at a time. Time horizons have fallen. Large-scale, privately held capital accumulation has been discouraged, even made illegal. Families have shrunk in size. The population has become ever more aged.

This tax policy has eaten the heart out of the desire of a free people to create dynasties. So our wealthy have to hide. They are encouraged to give their money away to causes, rather than to children. We live one generation to the next. Children are perceived of as an economic burden, rather than a path to immortalizing a legacy.

In Brazil, the time horizon extends beyond the single lifetime. And this is what has given rise to the dramatic cultural, social and economic differences between our countries. These dynasties serve as robust intermediating institutions between the individual and the state. We have ever fewer such things in the United States. Maybe this is what accounts for the incoherent sense that this is a freer country than the US.

There are other factors, too. The military consumes only a tiny percentage of wealth, and Brazilians dread wars because they know that they will be roped into supporting whatever wacky war the US starts. What’s more, the police are well-known to be as likely to commit as prevent or punish crime, so they are not trusted. Security is extremely important in Brazil, but everyone knows that it is a private function and not anything anyone would entrust to the state.

The beautiful thing about Mises Brazil as an organization is that it is working to further encourage these instincts and to spread an intellectual culture that openly embraces liberty as a model of life itself. They publish books and monographs, hold conferences and spread the liberal tradition far and wide among an idea-hungry generation. This is all about the future, and Mises Brazil is right to have confidence in it.

As I waited in the customs line to enter the US again, we were all shown a film designed to introduce America to new visitors. The film featured kids in ballet class, people riding horses, barn raisings, people water surfing, dances from coast to coast, smiling people of all ages, all against the backdrop of an exciting Coplandesque musical score. It ended with the Statue of Liberty. It was wholly inspiring, but there was something missing: The government was nowhere to be seen.

How I wish this film were the whole truth about our country. It once was. But the American dream is not about geography; the American dream is an idea that moves like a spirit around the world, landing wherever people are willing to embrace it and confess it as creed. That spirit has landed in Brazil, and it was a great honor to be witness to it.

Regards,

Jeffrey Tucker,
for The Daily Reckoning

Brazil and the Spirit of Liberty 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

…and his head stuck firmly in his computer screen.

But we will soldier on, Fellow Reckoner. We will ignore the blissful and beckoning distractions of one of the world’s most famous esplanades just across the way. We will pretend the little cabanas down by Ipanema’s Post 10 have exhausted their supplies of frosted, cachaça-based refreshments and that the hot bods tanning on the sand and frolicking in the water are really just figments of our imagination. We will turn away from this little heaven on earth and cast our gaze, instead, upon its equal and opposing force…

…but not just yet.

We’re here in South America’s largest economy to scope out opportunities in the local business scene. The country is booming, as you’ve no doubt heard. And as far as the BRIC countries go, Brazil might just be our favorite. Well, at least it’s our favorite to visit. Unlike China, Brazil’s demographics are favorable. Unlike India, its social mobility is flexible. And Unlike Russia, the weather is agreeable. Also, the South American nation didn’t just “re-elect” Vladimir Putin. Then again, many would argue, neither did Russia.

All of which is not to say the place is without its “fair share” of problems. It has many. Official growth here has slowed. Considerably. The parasite class — politicians in Brasília — had forecast a growth rate of 4.5% for the year 2012. Now they figure it will be closer to 2.7%. Policy makers are “under pressure,” say the papers, to “do something.”

A standard quote from The Financial Times:

With the world economy slowing, many argue Brazil needs a fresh spark to keep it growing. Policy makers are under pressure to consider a second generation of reforms in areas such as taxation, infrastructure and education to make the country globally competitive.

Hmm… Maybe policy makers do have a role to play. But we’d bet that role is best served by getting out of the way and allowing the magic of the market to work its wonders.

Fortunately, there is a growing contingent of young entrepreneurs who are advocating just that. Your editor was delighted to meet a handful of them at the III Conferência de Escola Austríaca hosted by the Instituto Ludwig von Mises Brazil, this past weekend. A crowd of young and excited attendees sat glued to their seats while absorbing presentations from a host of Austrian School superstars, including Laissez Faire Book’s own Jeffrey Tucker…the only man to inspire a standing ovation after his spectacular speech on Intellectual Property in the Digital Age.

Imagining what a country like Brazil could do if the ideas of liberty and freedom were to take hold here is, in itself, an inspiring thought experiment. And the blossoming trend of independent young thinkers and innovative entrepreneurs is one we hope to be a part of in the very near future. As, it seems, do many others.

Tellingly, attendees at the conference hailed not only from around Brazil, but also from Europe and the US, both struggling markets that promise little or no future for the generation currently graduating from universities there. And these fugitive career seekers are not alone.

Portugal’s official unemployment rate — not atypical for the PIIGS economies — stands above 14%. The reality on the ground, however, is likely much worse than that. Among youths, the figure is closer to 40% and, as one Reuters journalist writing from Lisbon put it recently, the former colonial power offers “little hope for a sharp, job-generating recovery any time soon.”

Conversely, Brazil’s official unemployment rate hovers around multi-decade lows (between 5-6%). Given the common language, it’s hardly surprising therefore to find youth flocking to the opportunity rich South American powerhouse. Continued the Reuters piece:

Emigrating is fast becoming a preferred option for many seeking a decent living as their bailed-out economy suffers under debt, low growth and poor competitiveness. Portugal’s booming ex-colonies in Africa and Brazil are a natural choice.

Similarly, the employment situation in the US is inspiring many fresh-faced college grads…inspiring them to learn a new language and to seek jobs abroad, in healthier, more promising markets. And why not?

While student loan debt in the US recently surpassed outstanding credit card debt, unemployment data for the youth demographic suggests the cost of education might not have been worth it. Data from 2011 reveal that more than half of all US graduates with a bachelor’s degree were either unemployed or underemployed at the end of last year. What does underemployed mean? From a recent CNBC article:

In the last year, [students with bachelor’s degrees] were more likely to be employed as waiters, waitresses, bartenders and food-service helpers than as engineers, physicists, chemists and mathematicians combined (100,000 versus 90,000). There were more working in office-related jobs such as receptionist or payroll clerk than in all computer professional jobs (163,000 versus 100,000). More also were employed as cashiers, retail clerks and customer representatives than engineers (125,000 versus 80,000).

Why flip burgers in Alabama, Kentucky, Mississippi or Tennessee (states with the highest rates of youth unemployment, along with the Mountain West region) when you could move to Rio de Janeiro and start an online business of your own? Why hang around waiting for government handouts on the streets of Lisbon when you could be flashing your skills in São Paulo’s bustling professional scene?

For many, the “service and protection” of the US government is no longer an adequate response…in fact, it’s becoming the very reason to leave. More on that, tomorrow…

Joel Bowman
for The Daily Reckoning

Why the World’s Unemployed Youth are Flocking to Brazil 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I recently read about Mark Lightbown, who used to run the Genesis Chile Fund. Author John Train described him as a quirky and well-mannered Englishman who traveled with a shopping bag full of his effects, on the theory that no airline would ever make him check it.

Anyway, in 1990 after Pinochet stepped down, Lightbown moved to Santiago to launch the fund and take advantage of a potential Chilean recovery. As he settled in, he noticed the number of trucks delivering Coca-Cola to restaurants in Santiago. Digging a little deeper, he found that Coke consumption in Chile was widespread. So he thought, as incomes improved and Chile rebounded, Coke ought to do pretty well.

As it turns out, the local Coca-Cola bottler, Andina, was a publicly traded company. He read the annual report and visited the company. The office was on the ground floor of the bottling plant. It was functional, not an ostentatious Greek temple — a good sign. The general manager, a man named Eulogio Pérez-Cotapos, was pleased to see him. He didn’t get many investor visits. Pérez-Cotapos told him about what Andina was trying to do and that he expected volumes to grow 10% per year and profit margins to improve as more volume improved the efficiencies of the plant.

Sounds like a great story, right? Yet Andina was trading for four times earnings. And it had 60% of the soft drink market in Chile. Lightbown bought a million dollars’ worth of stock. Ten years later — having not sold a single share — his stake in Andina was worth $70 million. That’s a 70-bagger in a decade.

It worked out even better than he hoped because Andina created new products (such as fruit juices) that it didn’t have when Lightbown made his first investment. The fruit juice business actually grew even faster than the soft drinks.

It all sounds so easy now. Of course, buying a Coca-Cola bottler was a good idea! Yet Andina lingered at four times earnings when Lightbown bought it. Nobody wanted Andina. He recalls a local broker who tried to talk him out of buying it. Why? First, the company had not grown for years. As is typical for many investors, the broker looked backward, instead of forward. And second, Pepsi was moving into the market and an advertising war ensued. This made locals worry about sleepy Andina holding up its profit margins in the face of such an onslaught.

This brings us to a counterintuitive point Lightbown makes. “Very few people think in the same terms as a foreign investor.” Which means, curiously, that locals sometimes overlook a great idea because it is in their backyard and they hold certain prejudices that are slow to adjust to a new reality.

I don’t know what happened to Lightbown or the Chile Fund since. It doesn’t matter. The story serves as an example of the power of a firsthand observation — and a simple one, at that.

Today, I doubt such an easy opportunity exists in Chile. It is a fairly developed market these days. But you never know, so I am here to explore a little and see what’s what. One easy firsthand observation struck me as I drove around Santiago. There are an awful lot of cars. Traffic is thick.

Wherever I go in my travels, I can’t help but notice how many cars are on the road. In the last 12 months, I’ve been to South Africa, Colombia, Vietnam, Thailand, Cambodia and now Chile. Buying a car is one of those basic things nearly everyone does when they can afford it. This leads to an obvious conclusion: The number of cars on the world’s roads will continue to rise as the emerging markets close the gap with the Western world.

This brings us to the auto parts suppliers.

Mario Gabelli, the famed investor behind Gamco, is one who gets it. I like the way Gabelli thinks, and I count him among my favorite investors. In the latest Barron’s Roundtable, Gabelli hit on this theme:

On a global basis, about 74 million cars will be sold in 2012, including 13.8 million in the US, reflecting a significant cyclical recovery. There are approximately a billion cars on the road around the world, including 240 million in the US. But the big growth will come from China, which had 8 million car sales in 2007 and will have 20 million in 2013. How can I make money on this?

Well, all those cars need parts. Gabelli likes a trio of plays: Genuine Parts, Navistar and Dana Holding. He didn’t mention Federal-Mogul (NASDAQ:FDML) this time around, but his firm is the third-largest institutional holder of the stock. Clearly, the old wizard likes the makers of parts for cars and trucks. I see a lot of value here, too.

Generally, investors like to go where the growth is. You have that in the automotive world. Growth of production just based on the platforms in place and current expansion plans should be strong out to 2015 in emerging markets. But it’s not like North America is a slouch here, either. North American production should grow nearly 7% per year. Only Europe is really sluggish, at 3.3%.

The problem with growth is that you usually have to pay for it. Not so among the auto parts suppliers. They are all pretty cheap on earnings and cash flow.

And these companies will be sitting in a really sweet spot in the global economy over the next several years.

Regards,

Chris Mayer,
for The Daily Reckoning

Thoughts While Sitting in Chilean Traffic 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Here is why I think his new book, World Right Side Up, is important. In the last decade, something astonishing has happened that has escaped the attention of nearly every American citizen. In the past, and with good reason, we were inclined to imagine that if we were living here, we were living everywhere. We were used to being ahead. The trends of the world would follow us, so there wasn’t really much point in paying that close attention. This national myopia has long been an affliction, but one without much cost. Until very recently.

One symptom of the change is that it used to be that the dollars in your local savings account or stock fund paid you money. The smart person saved and got rewarded. It seemed like the American thing to do. It is slowly dawning on people that this isn’t working anymore. Saving alone no longer pays, thanks largely to a Federal Reserve policy of zero-percent interest.

But that’s not the only reason. There’s something more fundamental going on, something that Mayer believes is going to continue for the rest of our lifetimes and beyond. The implications of his thesis are profound for investors. It actually affects the lives of everyone in the digital age.

Mayer points out that sometime in the last 10 years, the world economy doubled in size at the same time the balance of the world’s emerging wealth shifted away from the United States and toward all various parts of the world. The gap between us and them began to narrow. The world’s emerging markets began to make up half the global economy.

When you look at a graph of the US’s slice of global productivity, it is a sizable slice, taking up 21 percent, but it is nothing particularly amazing. Meanwhile, emerging markets make up 10 of the 20 largest economies in the world. India is gigantic, larger than Germany. Russia, which was a basket case in my living memory, has passed the UK. Turkey (who even talks about this country?) is larger than Australia. China might already be bigger than the United States.

Check these growth rates I pulled from the latest data, and compare to the US’s pathetic numbers: Malaysia and Malawi: 7.1%; Nicaragua: 7.6%; Dominican Republic 7.8%; Sri Lanka: 8.0%; Uruguay, Uzbekistan, Brazil, and Peru: 8.5%; India: 8.8%; Turkey and Turkmenistan: 9%; China: 10%; Singapore and Paraguay: 14.9%.

Then there’s the measure of the credit-default swap rating, which is a kind of insurance against default. The French rate is higher than Brazilian, Peruvian and Colombian debt. In the last 10 years, the stock markets of those Latin American countries far outperformed European stock markets. Also, many emerging economies are just better managed than the heavily bureaucratized, debt-laden economic landscape of the US and Europe. As for consumption, emerging markets have already surpassed the United States.

“These trends,” writes Mayer, “will become more pronounced over time. The creation of new markets, the influx of hundreds of millions of people who will want cellphones and air conditioners and water filters, who will want to eat a more varied diet of meats and fruits and vegetables, among many other things, will have a tremendous impact on world markets.”

Why does he see the trends as creating a “world right side up”? Because, he argues, this represents a kind of normalization of the globe in a post-US empire world. The Cold War was a grave distortion. In fact, the whole of the 20th century was a distortion too. Going back further, back to 1,000 years ago, we find a China that was far advanced over Western Europe.

I read Mayer’s prognostications with an attentive ear, for several reasons. His book is not the result of thousands of hours of Internet surfing or cribbing from the CIA World Factbook. He is an on-the-ground reporter who will go anywhere and do anything for a story about emerging wealth. The result is the kind of credibility that can’t be gained any other way.

But there is another reason. Mayer is often cited as one of a handful of people who saw what was happening in the housing market in the mid-2000s and issued several lengthy and detailed warnings. Not only did he foresee the bust, but he explained why the boom was taking place. He saw a perfect storm brewing with a combination of subsidized loans, too-big-to-fail mortgage agencies and a Federal Reserve policy that was designed to distort capital flows. He called it like few others.

This is not because he is a magic man. It is because he is schooled in solid economic theory — this becomes obvious in page after page — and also because he is intensely curious to discover the workings of that theory in the real world. In his way of thinking, if we can’t understand or expect change, we can’t understand markets, much less anticipate their direction.

Another thing: Mayer is less interested in big aggregates like GDP (and other such “economic monstrosities”) and more interested in taking a “boots-on-the ground view, a firsthand look.” His aim: “stay close to what is happening and what we can understand in more tangible ways.” And he seems close to everything: cement factories, the hotel industry, ranches and farms, coal and cellphone companies, financial houses, glassmakers, water purification companies — all the stuff that makes up life itself.

And what he discovers again and again are localized institutions that are cooperating globally (trade!) to build capital, wealth and new sources of progress that no one planned and hardly anyone anticipated. Here is the story of the building of civilization as it has always happened in history, but tracked carefully and precisely in our times.

In this book, he uses this combination of smarts plus fanatical curiosity to examine all the main contenders for the future: Colombia, Brazil, Nicaragua, China, India, the UAE, Syria, South Africa, Australia, New Zealand, Thailand, Cambodia, Vietnam, Mongolia, Argentina, Russia, Turkey, central Asia, Mexico and Canada. Here he finds innovation, capital, entrepreneurship, creativity, a willingness to try ideas and a passion for improving the lot of mankind.

His reporting defies conventional wisdom at every turn. Page after page, the reader will find himself thinking, That’s amazing. Nicaragua is not socialist. Medellín, Colombia (the “city of eternal spring”), is not violent. Brazil is no longer a land of rich and poor, but rather home to the world’s largest middle class. China is the world’s largest market for cars and cellphones; even in the rural areas you can buy Coke and a Snickers bar. India is the world’s leader in minting new millionaires. Cambodia (Cambodia!) ranks among the world’s most powerful magnets for investment capital. Mongolia has one of the world’s best-performing stock markets.

He also discovers many large American companies that have seen the writing on the wall and opened up factories, manufacturing plants, financial services and retail shops all over emerging markets. These companies are attracted by the intelligence of the workers, the relatively unregulated and low-tax legal environment and the cultures that have a new love for enterprise. And the returns are there too. The bottom line is sending a signal for them to expand.

It’s particularly intriguing to read about how all these emerging-market entrepreneurs overcome terrible and destructive bureaucracies — they exist everywhere! — that try to gum up the works, as well as bureaucrats who know nothing of business yet have the power to kill it off. Yet their very inefficiency is the saving grace. They can’t control the future. The brilliance of the market somehow finds the workaround.

Mayer’s main interest is in finding investment opportunities, and he lays them out in great detail here. If you think about it, this is just about the best vantage point from which to examine a new and unfamiliar world. Commerce is the driving force of history, the road map of where we’ve been and where we are going. To track down the profitable trade is likely to provide more valuable insight than all the academic speculations.

This is a very exciting book. It weaves history, geography, economics and firsthand reporting into a marvelous tapestry, one that is as beautiful as art and as complex and varied as the world itself has become in our times. A fine stylist, Mayer offers some fantastic one-liners in every section (“Change is like a pin to the balloons of conventional wisdom”) and his detailed stories give you the sense that you are traveling alongside him, like walking with Virgil in Purgatorio and Paradiso in one trip.

Mayer quotes Marco Polo: “I have not told half of what I saw.” In the same way, I’ve not told even 5 percent of what’s in this extraordinary tour of the world most people don’t know has come to exist only in the new millennium. There is no way a short review can do this book justice. There is so much wisdom packed in its pages. It is a meaty and enormously credible look at a world most people have never seen. In ten or twenty years, people will point to this book and say: this guy chronicled and understood what few others did.

Regards,

Jeffrey Tucker
Executive Editor Laissez Faire Books for The Daily Reckoning

It’s a New World, and America Is Not Leading It 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Burma’s generals, supported by their patrons in China, are probably not opening the country up out of the kindness of their hearts (although we concede this is possible). They’re doing it because there is probably more money in running the country at a profit than in exploiting poor people through force and coercion. This more or less supports the point we were making a few days ago: profit IS socially responsible, as it lifts standards of living and allows people to pursue their own interests.

We’ve never been to Burma. But we had dinner with our friend, Doug Casey, in Sydney last year when he was in town for a conference. We asked him where he would go if he was a young man just starting out in life looking for fame, fortune, and adventure. He said Burma. The map below begins to tell you why.

The city of Mandalay isn’t on the map above. But Mandalay is more or less in the middle of Burma. If you took a 700-mile-long piece of string, held an end in Mandalay, and then rotated it around 360 degrees, you’d have 700 million people living inside the circle you’ve just drawn. That’s over 10% of the world’s population. Mandalay is a place you’d want to avoid if you don’t like crowds, in other words.

But if you see Burma as the crossroads between India and China, and if you see the Bay of Bengal as a vast new source of oil and gas for the Emerging Markets, and if you see that Burma is the same size as Thailand, but has a GDP one-tenth the size, you start to see how much could happen there in the next 50 years. And that’s not even mentioning the beaches, temples, and islands that are sure to attract tourists from all over the world, including the new middle class of China.

In the meantime, we’ll note that international oil companies have only been awarded 16 exploration blocks off-shore of Burma since 1960. That will probably change in the coming years.

Keep your eye on Burma!

Regards,

Dan Denning,
for The Daily Reckoning

A Shout-Out to Myanmar! 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Europe’s banking sector holds 2½ times as many assets as the U.S. banking sector. It’s huge. And it’s in big trouble. Europe’s banking sector needs cash — mountains of cash.

As a result, it will have to sell more than $1.8 trillion of assets, which will likely take a decade to work through. For perspective, it sold only $97 billion from 2003–10. “The list of asset sales is the longest I’ve seen in 10 years,” says Richard Thompson, a partner at PricewaterhouseCoopers in London. Knowing how these things work, the final tally could well be double that. The world has never seen anything this big before.

Where will the cash come from?

This is our opportunity. There is no better, more-reliable way to make money than to buy something from someone who has to sell. Bankers are the best people in the world to buy from. Believe me, I know.

I was a vice president of corporate banking for 10 years before I started writing newsletters in 2004. I would get at least three or four requests every year from some investor group asking if we had any assets we were looking to unload. Why? Because they know banks are stupid sellers.

I once had a big real estate deal go bad on me. But I knew I was covered by good collateral twice over. You’d never know it based on the pressure I got to get rid of the thing once the borrower stopped paying and the bank took the asset. I knew, given a little time, I could sell the property and make a bundle for the bank. But the folks at the top didn’t want to hear it. They wanted that bad loan gone. They wanted to wipe it off the books fast.

So I sold it quickly, basically at fire-sale prices. It was still the most-profitable loan the bank made that year, because I got a price a good 35% above the loan amount. But the group I sold it to — which could’ve been more patient in marketing the property – flipped it again and made an easy 50% above that. The bank left a lot of money on the table and knew it — and didn’t care.

But institutionally, banks can’t really hold bad debts for long. As soon as they report a big bad debt on a quarterly financial statement, some annoying things happen. It means they have to put aside more capital for this particular loan, which they hate to do, as it lowers profitability and requires a lot of paperwork. It can raise the attention of regulators, which banks hate. It can raise shareholder suspicions about lending practices, which banks hate. So the usual way to deal with bad debts is to clear ’em out as fast as possible. (Unless you’re swamped with bad debts in a full-blown crisis, in which case you try to bleed them out and buy time to earn your way out, and/or patch them up as best you can to keep up appearances while you pray for a miracle — or a bailout.)

With the EU banking sector loaded with trillions of stuff it must sell, the mouths of knowing investors drool with money lust. These are deals the big boys do. Prem Watsa, the brain behind Fairfax Financial and dubbed by some as “the Warren Buffett of Canada,” gets to do these deals. Wilbur Ross, the billionaire investor famous for investing in distressed assets, gets to do these deals. Warren Buffett he gets to do these kinds of deals.

Normally, you need a fat wallet to get in this club. But I recently found a way to get into this “club” that a public-school teacher could afford.

One such investor is a guy named Bill McMorrow. You’ve probably never heard his name before. But his current joint venture fund has returned 42% annually since it began in 1999 by buying up distressed property from banks.

McMorrow has a lot practice buying stuff from banks. In 1995, he bought up property debt from troubled Japanese banks. In 1997, he waded into Hawaii’s busted property market, picking up a 450-acre land parcel at Kohanaiki on the “Big Island.” In the U.S. financial crisis in 2008, he bought up apartment buildings in California. This is the sort of thing that builds 42% annual returns through the storms of crisis-filled markets.

His company and partners recently bought $1.8 billion of U.K. real estate from the troubled Bank of Ireland at a 20% discount to the face value of the loans.

“This is a very high-quality loan portfolio,” McMorrow said. “All the loans are current.”

There are 170 properties that secure these loans. All of the property is in the U.K., and 60% is in London. It’s a mix of office, multifamily and retail, with a smattering of industrial property, hotels and land. I’m betting he’ll make a mint.

McMorrow is a real estate guy through and through. It’s what he knows. He’s been at it for 36 years. So his opinion and track record ought to carry water. “When you look at the opportunities around the world,” McMorrow said, “we really feel over the next three–five years that the greatest opportunities — for all the reasons that everybody reads about now everyday — exist in Europe. The markets here in the United States, although there will always be some opportunities to buy things at prices that we like, have become, I would say, way more efficient. There is more capital and there is more efficiency in the market, so prices in many cases got bid up to the point where we’re probably not buyers.”

But in Europe, the banks have to raise cash. I think the EU crisis, as boring as it is, is about to get a lot more interesting as investors get a chance to pick up cheap assets from the biggest fire sale in the history of earth.

Regards,

Chris Mayer,
for The Daily Reckoning

The Biggest Fire Sale in History 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

$40 trillion left to go!

Hey, don’t hold us to those figures. But yesterday European sages cut another deal to stave off the truth. Instead of defaulting openly and honestly — as Greece has done over and over again ever since 1827 — the Greeks will be ‘rescued.’

Sayeth Lucas Papademos, the technocrat leading Greece through its vale of deceit:

“It’s no exaggeration to say that today is a historic day for the Greek economy.”

He’s right. It’s no exaggeration. It’s an outright lie!

What’s historic about the 15th rescue?

And as soon as the Greeks are fished out of the water, they’re to be given a shave and a haircut. No kidding. They’re supposed to shave off more public employees, more spending, and more benefits.

Already, one of 5 people is out of a job…with 2 out of 5 unemployed among young people. In November alone, 126,000 Greeks lost their jobs — the equivalent of 3.5 million job losses in the US, in a single month.

But the Greeks aren’t the only ones who are suffering. Their creditors are supposed to suffer a $100 billion haircut, too. Sounds like a default to us.

And what’s important about Greece’s 6th major default on its foreign debt? It defaulted for the first time in 1827. Since then, it’s made a habit of it.

The important thing, from our point of view, is that the Europeans are de-leveraging…getting rid of debt — at least a little, around the periphery of Europe.

Trouble is, there’s a whole lot more. And the level of debt, generally, is still increasing — thanks to the very same officials who just cut the latest Greek deal.

Here is where the numbers get a little unreliable. No, heck, they’re totally unreliable. But at least they give us a sense of the scale of the problem.

If you have debt equal to 100% of your income you can probably handle it. If the interest rate is 5%, you devote one twentieth of your revenue to debt service.

But if your debt goes to 200% of your income, the burden of the past begins to weigh on the future. You have to cut spending and investing, because so much of your income must be used to pay for things that have already been produced and consumed. Growth slows. The economy groans.

At 5% interest, you’d have to devote a full 10% of your income just to pay the interest. At 10%, you’re in real trouble…with one of every 5 dollars already spoken for, even before you get it.

The world produces about $50 trillion worth of output per year. Some countries — usually poor ones — have very little debt, for the simple reason that no one would lend them money. Others — such as the UK and the Netherlands — have total debt burdens over 500% of GDP. (Much of it is mortgage debt, which is a special case…since it may be considered an on-going expense, a substitute for rent.)

Even at 200% of GDP, debt doesn’t have to be a permanent and irreducible drag. If the economy grows faster than the debt, the burden becomes lighter over time. That is what happened in the US, for example, after WWII…and again, during the Clinton years.

The problem now — grosso modo — is that the growth is in the countries with little debt…and the debt is in the countries with little growth. In the US, for example, debt increases two to three times faster than GDP.

Most of the developed world is not so different from Greece. Some have more debt. Some have less. Overall, they have government debt equal to 100% of GDP. Household debt adds another 200% of GDP…or more; the typical developed country has total debt somewhere around 300% of GDP.

Total GDP is about $40 trillion. So in order to get total debt even down to 2 times GDP they need to wipe out $40 trillion of debt.

A long way to go…a tough row to hoe…

Austerity comes to the USA?

Not exactly. But The Wall Street Journal reports that taxes are set to go up:

First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term capital gains rises to 20%.

Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners.

Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250,000 for joint filers).

Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases).

The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).

Unless action is taken, these tax increases will take some of the metal out of America’s already-anemic ‘recovery.’

And here’s something else that’s blocking the path to genuine recovery: Young people no longer start off in life with a clean slate. They’re heavily burdened with debt. They can’t spend. They can’t buy.

Bloomberg reports:

As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said.

“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”

The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,” the Fed said.

Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Recent college graduates carry an average debt load of more [than] $25,000 each, which can limit their ability to qualify for mortgages even if they’re fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-olds.

Calling it a “student-loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

Normally, the housing ‘escalator’ works like this. Young people buy starter houses from older people. The older people move up to the family homes, buying the houses of people who are selling out so they can buy retirement houses. If the starter houses aren’t bought, the escalator stops. Young people can’t buy; so, older people can’t sell.

The other part of the story — not widely reported — is the enslavement of the young to the old. In effect, instead of families paying for their children’s education, they force the children to borrow the money from the government. Then, paying it back, the money is recycled to old people — through Social Security, Medicare, and so forth. Meanwhile, the government borrows trillions more to fund their giveaway programs. In the US, the total is over $15 trillion and rising — most of it destined to pay benefits for people over the age of 50.

And guess who’s supposed to pay for all this debt? The young, of course!

How long before they revolt?

Regards,

Bill Bonner
for The Daily Reckoning

Opposing Trends in Debt and GDP Growth 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Well, Dear Reader, we’re here to tell you: America is in decline.

We can give it to you straight because we’re not running for public office. And if we were elected, we would immediately demand a recount.

Anyone who tells you America is not in decline is either running for office…or not paying attention.

In 1969, more than one out of every three dollars of income in the entire globe was earned in the US. That’s what the IMF’s World Economic Outlook tells us.

By 2000, that number had fallen…but not by much. The US still took home 31% of global income. But in the last 10 years, the US share has fallen hard — losing more than 7%. Now, only 23% of the world’s income is generated by the US.

Ten years ago, China’s economy measured about 1/8th the size of the US. Now, it is 41%. Another decade and it will be the biggest in the world. It is already bigger by several measures. And even if its growth declines to 7% a year, it will still surpass the US in a dozen years.

Hey, don’t take it personally. The entire developed world is in decline — with America leading them all down.

By 2050, according to a new study from HSBC, today’s emerging economies — as a whole — will be larger than Europe, America and Japan put together.

The New York Times reports:

The American economy’s reported 2.8 percent growth in the fourth quarter, at an annual rate, was seen as mildly encouraging. But it meant that over the previous 10 years, the economy had grown at a compound annual rate of just 1.7 percent. Until the current cycle, there had been no similar prolonged period of slow growth since the Depression.

The International Monetary Fund’s latest forecasts indicate that there is not likely to be a pickup in growth anytime soon, either in the United States or other large industrialized countries.

…if the fund’s forecasts of 1.8 percent real growth in 2012 and 2.2 percent in 2013 prove to be accurate, the 10-year American rate at the end of 2013 will have fallen to 1.5 percent… But it will still be a little above the 0.9 percent compound growth rate in the decade from 1929, the year the Depression began, to 1939.

For Britain, which endured a horrible decade in the 1970s that led to talk of the “British disease,” the previous postwar low, not shown in the charts, was in the 10 years ending in the second quarter of 1983, an annual rate of 0.95 percent. The figure for the 10 years through 2011 is 1.4 percent, but the I.M.F. predictions indicate the 2013 figure will fall to just 0.94 percent. The fund expects the British economy to grow by just 0.6 percent this year and by 2 percent in 2013.

The situation is even worse in Italy, where the fund expects the economy to contract by 2.2 percent this year and 0.6 percent the following year. If that happens, Italy’s economy will be smaller at the end of 2013 than it was 10 years earlier. The French economy is forecast to have grown at a 1 percent annual rate over the same 10-year period.

As the developed economies stagnate, the ‘emerging’ economies grow. Nineteen of the world’s top economies in 2050 will be those we regard as “emerging” today. China and India will hold the number 1 and number 3 spots, with the US sandwiched between them.

So far, we are just talking about numbers. Try to imagine a world in which today’s emerging markets have more economic power, and vastly more people, than today’s leaders. It is not just China and India who will be calling the shots, but Brazil, Turkey, Russia, Mexico and Indonesia too.

New technologies, new fashions, new ideas, new music, new cars, new movies…all are likely to come from countries where, today, Westerners are afraid to drink the water. Now, they are imitating us. Soon, we will be listening to pop Indian sitar music, eating doner kebabs and watching movies made in Jakarta.

Military power, too, is likely to shift to the growing economies. Like a body builder with a protein shake, they will use their increasing resources, human as well as material, to add muscle. But their muscle will be young, built with new technology and new techniques. America’s geriatric, expensive, bureaucracy-ridden, zombified military industry will be unable to match it.

It is one thing to talk nonsense to the voters. They love that kind of stuff. It flatters them. It comforts them.

But only a fool would believe it.

Which is what worries us. The candidates seem to think “declinism” is just a state of mind…and that economic and military success can be had by act of willpower.

“Decline,” writes Charles Krauthammer, “is a choice.”

And it’s a choice the candidates think they can avoid just by giving more money to America’s military industry.

“I will insist on a military so powerful no on would ever think of challenging it,” adds Mitt Romney.

But military spending is not a way to resist decline; it is a sign of it…and a cause of it. Osama bin Laden understood how it worked. By 2000, he had already brought one great empire, the Soviet Union, to its knees, luring it to spend money it didn’t have in a war it couldn’t win. He thought he could do the same to the US. So far, it looks as though he was right.

Lt. Col. Daniel L. Davis has been described as a “whistleblower.” He’s ratting out the military for failing in Afghanistan, just as Osama bin Laden predicted.

He doesn’t seem to understand. The military is not protecting the US in Afghanistan; there’s nothing to protect it against. Nor did it ever intend to “win” a war in Afghanistan. It never even identified what winning would mean or how it would know when it had won. This was always a zombie war, not a real war. Its purpose was only to transfer wealth and power to the military industry. In that sense, the war is a great success.

The Armed Forces Journal has the story:

Truth, lies and Afghanistan
How military leaders have let us down

By LT. COL. DANIEL L. DAVIS

I spent last year in Afghanistan, visiting and talking with US troops and their Afghan partners. My duties with the Army’s Rapid Equipping Force took me into every significant area where our soldiers engage the enemy. Over the course of 12 months, I covered more than 9,000 miles and talked, traveled and patrolled with troops in Kandahar, Kunar, Ghazni, Khost, Paktika, Kunduz, Balkh, Nangarhar and other provinces.

What I saw bore no resemblance to rosy official statements by US military leaders about conditions on the ground.

Entering this deployment, I was sincerely hoping to learn that the claims were true: that conditions in Afghanistan were improving, that the local government and military were progressing toward self-sufficiency. I did not need to witness dramatic improvements to be reassured, but merely hoped to see evidence of positive trends, to see companies or battalions produce even minimal but sustainable progress.

Instead, I witnessed the absence of success on virtually every level.

Regards,

Bill Bonner,
for The Daily Reckoning

When Emerging Markets Shape the Developed World 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I’ve found many people are particularly energized about predicting a hard landing for China’s economy, but I believe the country is no sinking ship. China isn’t fast-approaching an iceberg in the dark of the night like the Titanic. Beijing has long been anticipating the ice chunks and subtly adjusting the rudder around inflation without steering the economic ship too far off course.

China’s government angled its vessel away from inflation by increasing the required reserve ratio (RRR) every month for the first six months of 2011 and raising interest rates three times. Once inflation was sufficiently under control, the country began to steer in a direction of growth again.

Recent results show how positive this easing has been. In its latest research this week, BCA Research reported that despite the policy tightening of 2011, the “most recent economic data out of China has all but confirmed that the economy remained incredibly resilient.”

One significant data point is the sharp increase in money supply. After the country hit a low level of monthly money supply growth, the three-month change in M-2 money supply climbed to record levels during the final month of the year, says Greg Weldon of Weldon Financial. He says that money supply “pegged at +6.419 trillion, easily exceeding the previous record 3-month increase, seen at the peak of the global crisis, in March of 2009.

Easing in China is expected to continue through 2012, with ISI Group anticipating a potential RRR cut after Chinese New Year celebrations in February, then possibly again in April, June and August. Also, loans “have become more readily available in recent weeks,” says ISI. This should all be bullish for commodities, such as copper, oil and gold, and also trickle down to boost share prices of natural resources equities.

Chinese Copper Inventories Increase

Base metals were the laggards among commodities last year, with copper one of the worst performers, losing 21 percent.

Global consumption of copper increased only 4 percent in 2011, which is lower than the 10 percent growth in 2010, but higher than the decade-average of around 3 percent, says Macquarie Research. China’s consumption of copper—which makes up 40 percent of the global demand—was a primary reason for decreased consumption, as the country was drawing down on its own supply throughout the year.

This can’t continue forever, Macquarie says, adding that “demand made on new supply direct from producers would need to rise, with positive implications for prices.” Europe’s largest copper fabricator agrees with that sentiment, indicating that it anticipated China’s copper demand would be strong in 2012, according to Barclays.

A recent rise in copper imports is likely the result of restocking China’s depleted copper inventories. As is typical for China, after the metal fell in price last fall, the world’s largest buyer of the metal advantageously scooped up copper to replenish its cupboard, says Barclays Capital. As shown below, copper inventories into China reached a record low in 2011, but have sharply reversed recently.

An increase in copper demand places pressure on the supply side, which continues to experience shortfalls in mine output versus forecasts. These are caused by a variety of factors, such as weather, labor strikes, or simply a poor grade deposit. While Macquarie says there’s a possibility the world’s two largest copper mines, the Los Bronces mine in Indonesia and Peru’s Escondida mine, could deliver year-over-year increases in production, it concludes “it is highly unlikely that miners will succeed in delivering this level of additional output in total.”

While Chinese demand growth for commodities is not expected to be as robust as it has been historically, demand is expected to pick up throughout 2012. As confidence returns, Macquarie says there should be “a slow gradient of recovery in the near term before gathering pace into the mid-year.”

Increasing Reliance on Energy Imports

China’s rapid growth and increasing reliance on other countries for key resources has made a powerful case for commodities over the past several years. These three charts from BCA Research illustrate that once the country shifted from exporting to importing a commodity, there was no looking back.

You can see in all three how dramatically the energy balance has shifted to an ever-increasing dependence on imports. In each major commodity, after China began importing, growth took off.

China became a net importer of crude oil in 1994, and today, is the second-largest oil importer in the world. BCA forecasts the country is expected to surpass the U.S. as the largest oil importer in only a few years.

To obtain more natural gas, China spent years building massive pipelines to transport the commodity from Russia and other western Asian counties, and since 2006, natural gas imports have “gone vertical,” says BCA.

Coal, which accounts for the majority of total energy consumption in China has also been imported since 2008, and since that time, imports rose substantially.

Even with these imports, energy consumption is only a fraction of developed countries. The China story is just getting started: Urbanization just surpassed the 50-percent mark, hitting what I believe to be the pivotal moment that dramatically shifts buying patterns, driving an enormous demand for housing, consumer staples and durable goods. You ain’t seen nothing yet!

Happy Chinese New Year!

This weekend, the world’s largest annual migration takes place. Millions of people in China head home to celebrate Chinese New Year and welcome in the Year of the Dragon. U.S. Global Investors’ research analyst and Shanghai native Xian Liang recently talked about the significance of the dragon in Chinese culture:

“Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well.”

After bounding through a tough Year of the Rabbit, we anticipate the Year of the Dragon will breathe fire back into Chinese markets in 2012. Kung hei fat choy!

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

It May Take a Dragon to Breathe Fire Into Markets 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. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

But the IMF did throw the euro (EUR) a bone this morning, saying that they will seek $1 trillion in an attempt to boost their resources to bail out countries (read Eurozone peripheral countries)… And… Germany had a great auction result this morning… So… The euro, which traded as low as 1.2734 overnight before the IMF statement, has gained back one full cent to 1.2834, as I write… Of course, by the time I get to the currency round-up that euro figure could be much different… Volatile times, for sure!

Look at that Aussie dollar (AUD)! Back to $1.04 and change this morning! WOW! This currency looked like it was headed for the slippery slope after the Reserve Bank of Australia (RBA) cut rates. I remember telling you then that the rate cut made no sense, but… With the markets’ pro-growth mentality, they just might look at the rate cut as a reason to reward the Aussie dollar… And slowly but surely the markets have done just that!

Overnight, The Aussie dollar got a boost from the news that the latest check on consumer confidence showed a rebound this month. The markets will look next to the Aussie Jobs report, which is due out today… And again the experts have forecast a rebound in Aussie job creation… If that holds true, the Aussie dollar should be able to maintain this 2 ½-month high versus the US dollar!

I know I talked briefly about this in the past, but… Could the Aussie dollar become a “safe haven” currency? Now that would be more like it, eh? A country with a trade surplus, narrowing debt, and “things” that other countries want! The problem is that the Aussie dollar can’t go toe to toe with regards to volume, with the majors of the US, UK and Japan… But if tiny little Switzerland can be regarded as a “safe haven” currency, then why not Aussie dollars?

OK… That’s my 30 seconds on the soap box, this morning… But even with me banging my fist on the podium, the markets won’t listen, and they’ll decide what a safe haven currency is in the end.

So… Chris (and thanks, Chris!) brought you the news on all the downgrades by the ratings agencies… Should that have all been done long ago, though? I don’t know why anyone pays attention to what these agencies have to say any longer…

Here’s a prime example… S&P lowered the AAA rating of the US last August, right? Well, let’s see… Since then the yield on the 10-year, which is the bell ringer for bonds, yield has gone from 2.82% to 1.85%… So, just to explain bonds for those new to class… With bonds, yield and price have an inverse relationship… So, when the yield goes down, like it has for the past six months, the price goes up, which makes the bond more expensive. And to make a bond price go up, and yield to go down, the bond has to be bought by the truck load… Which, makes you wonder if anyone cared that S&P cut the US rating… Doesn’t it?

It’s nice to see the Chinese renminbi (CNY) on the currency appreciation tracks again. I did a ton of reading on my mini-break, and a lot of it was on China… (The US and Eurozone too!) And what I read reinforced my thoughts that China is working to remove the dollar standard. But it will be a long process. And it looks as though Russia is now joining China’s move away from having their trade terms settled in dollars, but signing currency swap agreements.

Look, folks… I know that some of you think I get enjoyment from telling you these things, but that doesn’t have one iota of truth to it… Having these countries sign currency swap agreements to remove dollars from the terms of trade is a BIG DEAL! And will eventually lead to the dollar being removed as the reserve currency of the world… Which means we can’t run up deficits like we do, print money like we do, and live like we do, because everything, and I mean everything will cost more…

We could have avoided what looks like is just down the road a bit… But our leaders chose not to… They, instead, chose to fund every program known to mankind, and borrow money to pay for it. I warned and warned about the deficit spending, and what it would do to not only our purchasing power, but our national security… And now, it’s led to this… I shake my head in disgust, and think about what could have been… But, if you don’t think having the reserve currency of the world is important, then take a look at the UK after WWII… They had to devalue their currency twice! And talk about a dark, depressing, drag on an economy!

OK… That talk can go on for hours (and has), but, as I said, it’s nice to see China back on the currency appreciation tracks… That was also very nice to see such a strong fourth quarter GDP number of +8.9%… Moderation… Not collapse… Remember who told you that many months ago, and many times since…

Don’t forget that the Singapore dollar (SGD) follows the renminbi… So, if the Chinese are ready to begin another round of currency appreciation versus the dollar, the Sing dollar will move along with the renminbi…

While I’m here in Asia… I will remind everyone that Asia is where I see the majority of economic growth this year… The emerging markets will have some, but Asia will have the most. So, I like most Asian countries outside of Japan… And here’s something that will make you bang you fist on the table… 28% of high-tech manufacturing jobs left the US from 2000 to 2010… That’s equal to 687,000 jobs…

The expansion of science and engineering capabilities in China and its neighbors are really making things difficult for the US president’s mandate to improve exports…

Here’s the thing, folks… When the president got up in front of the nation and said that the US would improve exports by “X”, what was he thinking? I’ll tell you… A weaker dollar, and a stronger renminbi…

And here’s a glimpse into that thought process… Remember when St. Louis Fed President Bullard, was asked if the rounds of quantitative easing (QE) were successful, one of his answers was: The dollar depreciated…

And those rounds of QE… The Fed told us that they were doing them to inflate the economy and produce jobs… When in reality, QE was done to weaken the dollar, to help meet the president’s mandate… I’ve always told you that the government wants and needs a cheaper dollar…

You had better stop there, Chuck…

Gold has had a nice run so far this year… With the low for the year (yes, I know we’re only 18 days into the month) coming on January 3… $1,566.25 … Gold has added about $90 to its price since January 3…

As the dollar, euro, pound sterling (GBP), and franc (CHF) fail to attract investment, those dollars head to gold… And as long as Japan keeps their interest rates at zero, there’s no reason to buy a currency that, according to Jim O’Neil from Goldman Sachs, is 25% overvalued… So, those investors turn to gold too…

And look at that Brazilian real (BRL)… Beaten down, and sent to the woodshed for more beatings, the Brazilian real proves to be resilient… Crazy moves in this currency, folks… And like I’ve always told you, only money from the “speculative investments” portion of your investment portfolio should be used here… And, and iron stomach to handle all the volatility… But in the end, remember… Brazil needs to attract a boatload of investments and cash to fund the infrastructure projects for the World Cup and Olympics that are coming to Brazil…

OK… It’s economic data dump day… PPI (wholesale inflation), the TIC Flows, and two of my faves, Industrial Production and Capacity Utilization, will all print today. The only two I really care about are IP and Cap U… Both should see slight improvements in December over November results… The TIC Flows have pushed the markets to become comfortably numb, which is a real shame.

Then there was this… A reader sent a note to Chris yesterday chastising him for calling out US Treasury Secretary Geithner… He said that we are “almost constant in anti-Obama administration political spin. Greenspan was the one calling the shots in those days not Geithner.”

OK… First of all, political spin is not what we do here… We call them as we see them, just like we did with Bush’s $500 billion budget deficits… But let me spell something out for this reader about Geithner… He was the head of the NY Fed, the lead Fed Bank and the one responsible for regulation… The NY Fed failed miserably… They had the regulations, but not the will to enforce them… And as I said, Geithner was the head of that bank… That’s what Chris and I talk about… Which is NOT anti-Obama administration spin…

To recap… We did have a currency rally going on when I arrived this morning, but it has since backed off. The currencies rallied on news that the IMF was going to seek $1 trillion for a rescue fund. Germany and the IMF lowered their 2012 economic growth forecasts. And Germany had a very successful bond auction this morning. And it’s a data dump day…

Chuck Butler
for The Daily Reckoning

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