“From an economic point of view,” he writes, “World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Deficit spending created an economic boom – and the boom laid the foundation for long-run prosperity….”

In the 1938 US elections, voters showed what they thought of the New Deal; Democrats lost 70 seats in the House. Then as now, the public had lost faith in public spending, says Krugman. Nearly two out of three of those polled said they were opposed to stimulus efforts. Roosevelt buckled under the pressure; he drew back from further spending to fight the slump.

Thank God for WWII! No one opposes military spending in time of war. Krugman made his position clear in 2008 in his New York Times blog.

“The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression.”

According to this line of thinking, the best form of stimulus spending is money spent on the military. It creates consumer demand without creating consumer supply. Consumer prices rise; people spend. The slump is soon over.

But if WWII helped the US economy, think what it must have done for Japan; proportionally, its stimulus efforts dwarfed those of the US…and began much earlier. Just this week, Ichiro Ozawa, running for prime minister of Japan, vowed to take “every measure” to lower the yen and promised a stimulus package more than twice as big as the current program. He was just following in the footsteps of Japan’s leaders from the ’30s. It was “economic security” they said they were after. And they thought they could get it by central planning and government spending. Military spending rose from 31% of the budget in the early ’30s to nearly 50% five years later. By the early ’40s it was around 70% and nearly 100% later on. Deficits and debt soared.

Did that create a boom? You bet it did. Japan was the first nation to get out of the global slump. It boomed…and boomed…and ka-boomed. When it came to warships, planes, and soldiers, Japan was soon among the richest nations in the world. Yes, Americans had more electric fans, automobiles, central heating, aspirin, ice cream, and the rest of the paraphernalia of civilized life at the time. In the mid-’30s, the US produced 40 times as many autos per person as did Japan. Even during the Great Depression, the US out-produced Japan by a factor of 7 and its workers earned 10-times as much money.

Economists can’t even measure real prosperity, let alone fiddle it. So they put on the GDP and employment numbers the way a bald man puts on a cheap wig. It makes him look ridiculous and fraudulent, but it’s the best he can do. Unemployment disappears in a war economy. Japan put a million men in uniform. Two million more were part-time reservists. Those who weren’t in the army were put to work building tanks and planes. By 1941, Japan could produce 10,000 planes a year. If you were a swallow you wouldn’t want to build your nest in Japan’s factory chimneys; they belched smoke night and day.

And talk about fiscal stimulus! Krugman would have loved it – stimulus unfettered by real money or even a casual regard for real prosperity. Takahashi Korekiyo was known as the “Japanese Keynes.” Gillian Tett notes in The Financial Times that he was assassinated in 1936 after he came to his senses and tried to bring state finances under control. He was done in by army officers who did not want the stimulus to stop. Not that we’re being judgmental about it. As far as we know, the quality of central banking could probably be improved by an occasional assassination.

Takahashi wasn’t the first. Before him Junnosuke Inoue had held out for the gold standard and balanced budgets. He was out of office by 1931 and out of luck in 1932, when he was murdered. The gold-backed yen was abolished the day he left office. Then, public spending, deficits, central planning, debt, and inflation ran wild. By 1939, the Japanese were spending $5 million a day on their war with China – a huge sum for the Japanese at the time.

Was the economy improved by all this spending? No, it was perverted…hammered into a grotesque imposter – a parody of a real economy. Most of the nation’s resources were put to work building things almost no one wanted. Then, after the attack on Pearl Harbor, the stimulus efforts were redoubled. Rations were reduced further. Working hours were extended. What few consumer items were available were three times as expensive at the end of the war as they had been when it began. Men were conscripted into factories and the army. Women were expected not only to make the tanks, but to join the home-guard and prepare themselves to repulse the American invaders with sharpened bamboo sticks. What a marvelous economy – operating at full capacity and full employment until General MacArthur finally put it out of its misery.

Regards,

Bill Bonner
for The Daily Reckoning

You say Obama; I say Ozawa! You say boom; I say ka-boom! originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The Fed came out with a report from its regional banks. Almost all the indicators showed a slowing economy. Not that we’re headed into a double-dip. We haven’t even gotten out of the first dip yet. Here’s Bloomberg with the news:

Banks: ‘Widespread Signs of a Deceleration’ in Economy

The Federal Reserve said the US economy maintained its expansion while showing “widespread signs of a deceleration” in mid-July through the end of August, according to a survey by 12 regional Fed banks.

‘Major Disappointment’

The report is “a continuation of the view that was discussed at Jackson Hole that the chairman put forth,” John Taylor, an economist at Stanford University and creator of an interest-rate formula used by central banks, said in an interview on Bloomberg Radio. “It’s not a double dip, it’s not another recession within a recession. But it is a major disappointment in terms of a recovery.”

The regional survey, known as the Beige Book for the color of its cover, offers anecdotal evidence that will help central bankers determine whether more stimulus is needed to reduce a jobless rate stuck near a 26-year high and protect a recovery from the deepest recession since the 1930s. The policy-making Federal Open Market Committee next meets Sept. 21.

President Barack Obama, speaking in Parma, Ohio today, said he recognizes that the recovery has been “painfully slow” and called on Congress to enact measures to cut taxes for businesses and middle-income Americans while letting rates rise for the wealthiest.

Home sales declined in recent months, the Fed said.

Probably the most often asked question in the financial world now is: when is the bond market going to crack? If the economy really were gathering speed, however slowly – as the Fed insists – you’d expect a rise in inflation…and a fall in the bond market.

Practically everything is connected to the bond market. If bonds crack the dollar won’t be far behind (or ahead). If bonds crack there will be one heckuva lot of money looking for a new home. Where will it go? Gold? Commodities? Stocks?

Yep. Probably all of those things.

Bonds are a “risk off” investment. You buy them when you’re afraid that the economy may not recover quickly. You buy them when you suspect that the “risk on” investments won’t turn out so well. Bonds are a retreat…a safe house…a bolt hole…where you can wait out a bad spell in the market.

But wait? Could this be a scary movie? Could investors be like a young couple taking refuge in an abandoned house in the woods…and then discovering that the place was not completely abandoned?

Is there a maniac loose in the bond market?

Well, yes…in a manner of speaking…

We’ve been meaning to warn you.

You’re probably sick of hearing it, dear reader. We’ve been saying it off and on for the last ten years. The US is following in Japan’s footsteps. It will stay in Japan’s tracks – in a long, slow, soft depression – as long as it can.

Not only that, but America’s financial authorities are doing the same thing the Japanese did. And they’re getting the same results – a nation of zombies.

Japan has been in a slump for 20 years. But the worst is still ahead. So far, they’ve been able to cover their stimulus budgets with the savings of their long-suffering people. But now, the deficits are bigger than ever…the debt is the highest in the world…and the people are becoming zombies too. That is, they’re retiring…and expecting to live at the expense of the government.

Only trouble is, the government spent all their pension money.

And now the Japanese will have to borrow from…from whom? That’s the funny part…there isn’t anyone.

The public sector bailed out the private sector. Now, who’s going to bail out the public sector? No one. It’s going broke.

Not a big deal, as far as we’re concerned. But we wouldn’t want to be holding a huge pile of Japanese Government Bonds (JGBs) when the issuers go belly up.

That’s why our modified trade of the decade has us selling JGBs and buying cheap, Japanese small-cap stocks. We’re not so sure the stocks will work out as planned, but we’re confident about the JGBs. If they don’t crack before the end of the decade, we’ll eat our hat.

And guess what? The US bond market will crack too.

We’re on record. The Daily Reckoning says the bond market will crash. But not any time soon. The Japanese managed to keep digging themselves a grave for a long time. We’ll do the same – most likely.

Investors will get even more comfortable with bonds. They’ll settle in…like the young couple in the “abandoned” house. They may even start foolin’ around. Having fun. Making money as bonds rise and yields fall.

But beware. There are maniacs on the loose. And zombies too.

Don’t go down into the basement!

Bill Bonner
for The Daily Reckoning

Keeping a Close Eye on the Japanese Bond Market originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Short sales look timely. Still, there are advantages to a buy side study. First, when the time comes, the opportunities will be broader. Second, the decision to buy will be more a case of negation than attraction. Ruling out unsavory bonds when selecting what to buy will often replicate the process of choosing what to short.

Looking through the wreckage of the 1930s and of the 1970s, there was probably more money lost by premature investments than made by those who waited. This was on the short and long side. New York City is a case in point. Its bust in the 1970s was expected. The stock market had tumbled, a commercial real estate binge of unparalleled excess had desecrated the skyline (new commercial space constructed between 1968 and 1970 exceeded 100% of the city’s commercial building between the World Wars), and – this is as predictable as night following day – from 1968 to 1970, 18 of the largest U.S. corporations left the city and 14 more announced their departure. These included American Can, PepsiCo, General Foods, U.S Tobacco and Shell Oil. Over 1.1 million New Yorkers emigrated from the city in the early and mid-1970s.

In other words, it was so obvious that New York City could not pay its bills that it was too obvious. Anecdotally, there were more investors who shorted New York City too early than those who waited and made money.

By the mid-1970s all New York City bonds were trading for approximately $25 ($100 being par). This was 1933 again, when all City of Miami bonds (yields ranged from 4-3/4% to 5-1/2%, maturities from 1935 to 1955) were quoted at $26. In both cases, the market sulked; yet, in both cases, there were bargains for those who were willing to read legal documents. One such case will be discussed below.

All finance is a reenactment. In his seminal study, Municipal Bonds: A Century of Experience (1936), A. M. Hillhouse wrote: “The major portion of over-bonding by municipalities arises out of real estate booms.” As precedent, Hillhouse quoted H. C. Adams, who wrote in 1890 (Public Debts): “[T]he bonding of a town, and the expenditure of the money procured in showy works, is the occasion of gain to those who speculate in real estate….” Hillhouse, having quoted Adams’ observations of a previous property-boom, municipal-bond bust, should have known better than to write: “There will be no justification for a city [in the future to use] the excuse… that its tax revenues have dried up in times of falling property values.” So, if you miss this one, your children will have the same opportunity.

As for the current wasteland, revenue bonds are a choicer flock to choose from than general obligation bonds. The following distinction between the two is extracted from my seminal study (The Coming Collapse of the Municipal Bond Market): “Revenue bonds are repaid using the revenue generated by the specific project the bonds are issued to fund (fees from a public parking garage, for example).” General obligation bonds are thought to be safer, at least they are advertised as such, because “they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit. The ability to back up bond payments with tax funds is what makes general obligation bonds distinct from revenue bonds.”

However, it is not possible to draw blood from a stone and we will soon see municipalities that can not meet their bond commitments unless they discover an oil field larger than BP’s folly. Half Moon Bay, California, may already meet this ignoble state. From recent reports, the budget and books are so unintelligible that the city is disincorporating and may become an appendage to San Mateo County. Half Moon Bay’s bonds and yawning deficit will presumably be the burden of San Mateo County.

As a side note, the depth of incompetence on display in this instance would not be tolerated in a grammar school Citizenship Day. Given the state of the country, there will be even more amazing feats of fiscal suicide. Another participant is Standard & Poor’s, which stamped a AA- rating on $18 million of Half Moon Bay debt issued in 2009. Bondholders note: do not expect logic to guide negotiated workouts.

As for the bondholder, there are several difficulties here. Disincorporation has few if any legal precedents in California. (“It’s an option that hasn’t been tried in the state since 1972, when the tiny city of Cabazon (about 2,000 people) disincorporated.” – San Mateo County Times, August 27, 2010) The Cabazon precedent is not one to take on faith. Half Moon Bay and San Mateo County may have competing interests. A judge may have different ideas yet about how Half Moon Bay should resolve an $18 million lawsuit that the city lost related to development rights on a 24-acre property.

Just where do present circumstances leave the debt holder? That is, the owners of Half Moon Bay’s $18 million issue of [Legal] Judgment Obligation bonds. And what of the free-for-all that follows? Propzero.com, jumping into the Half Moon Bay debate, suggests that disincorporation “may be the answer for many California cities struggling with too many spending commitments and not enough money. Digging out of budget holes may be harder than simply shutting things down.”

As goes Half Moon Bay, so goes the country, or so it seems. If San Mateo County is stuck with the Judgment Obligation bonds, and a large annual deficit, it is a sure bet the county will appeal to the state; Governor Schwarznegger will appeal to President Obama; and the president will appeal – to Congress?

It was easier to bottom fish among CDOs that were trading at $15 (as a group) in 2008 than to wager on these contingencies. Revenue bonds are comparatively easy to understand. In a large-scale, municipal-bond swoon, revenue bonds will sell off. That will be true even if these are water bonds, supported by the revenue that customers pay for services; even if these revenues cannot be touched by the grasping Yoga Instructors’ Union. (Half Moon Bay residents are distraught at the loss of municipal yoga instruction – San Mateo County Times.)

We return to New York City to note the lack of perceptiveness in a time of chaos. In April 1975, the city  defaulted on a short-term note. It missed an interest payment (maybe more than one, it isn’t clear). The coupon was eventually paid, but the “New York City default” was highly publicized.

The Municipal Assistance Corporation (MAC) was formed. In The Bond Book, Annette Thau explained that MAC bonds were not obligations of New York City: “The revenues to pay debt service were backed, not by the taxing power of the city, but by the state of New York, and by a special lien on the city’s sales tax and… on a stock transfer tax.” These were revenue bonds that initially yielded “10% as compared to 8% for securities with comparable rating and maturity.”

Thau went on to tell her readers that the winning team does its homework: “This episode demonstrates why it pays, literally, to be very precise about exactly which revenue streams back debt service. In this instance, MAC bonds were tarred by the woes of the city, even though they were not obligations of the city….”

Revenues used to pay MAC bondholders could not flow to the city until the coupons were already met. This is true of services in different municipalities today. Utilities often fall in this category. Advanced critical reading skills are a prerequisite to distinguish a $25 from a $75 bond.

What of critical services in municipalities without predictable sources of revenue? In July, Indianapolis, Indiana, decided to sell its water and sewer utilities. In August, San Jose, California, discussed privatizing its water utility. There are many other such discussions. The media reported both the Indianapolis and San Jose decisions as sales. From precedent, the transactions may be more complicated than that.

It would be unusual for a local government to relinquish all control. There are many different possible arrangements with investors. At one end, there have been attempts to issue corporate stock in the municipality. This was proposed in Coral Gables, Florida, during the 1930s. It did not work but investment bankers are more inventive today. (Or, maybe not. Assets to be pledged by Coral Gables included “the municipal golf course and club house, the Venetian pool, the Coliseum….” Maybe not the one in Rome, but investment bankers are inventive.)

Probably the most likely arrangements are Public-Private Partnerships. In such partnerships, the investor, a “concessionaire,” steps in after bonds stand no chance of repayment. These might be for a vital service such as a water system, airport, or toll road. Concessionaires pay off all or a portion of the debt in exchange for the right to operate the asset for a negotiated return. Internal rates of return generally fall between 13% – 20%. This is a very simplified description.

There are many other investment approaches that haven’t been mentioned. Those mentioned are merely outlined. If it is not obvious, it must be emphasized how preliminary this discussion has been before making an investment. The most important advice here, on the short or long side, is to be patient, to understand the documents of the security, the laws and covenants that bind related parties, and to know the history of municipal bond defaults. This will open the investor’s imagination to the most improbable scenarios.

Regards,

Frederick Sheehan,
for The Daily Reckoning

[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]

Making Money from Municipal Waste originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

For 2010, America’s slipped again… and this time it’s fallen two slots. The US stayed below Switzerland — which retained its top ranking from last year — but, newly fell behind Sweden and Singapore in that order… no longer even clinching the proverbial bronze medal.

From Bloomberg:

“The U.S. ranked 87th for macroeconomic stability, and American businesses also increasingly questioned the government’s ability to avoid meddling in the private sector and viewed it as a wasteful spender, the forum said. In its index of financial market development, the U.S. fell to 31st from ninth in 2008.

“Switzerland held the premier position in the survey thanks to ranking fourth in the world for its business sophistication and second for its ability to innovate, the WEF said.

“Sweden climbed two slots to second, surpassing Singapore which remained third. Sweden was credited for its transportation and high level of ethical behavior, while Singapore won points for its lack of corruption and for the efficiency of its government.

“Germany, Japan, Finland, the Netherlands, Denmark and Canada rounded out the top 10, the composition of which was unchanged from last year. Among the other Group of Seven economies, the U.K. and France each rose one spot to 12th and 15th respectively, while Italy stayed 48th.”

Weighed down on the rankings thanks to its heavy debt load, Greece is the lowest positioned EU country. It fell 12 places from last year and now checks in at the 83rd spot. Ouch. The US, with its rising debt and deficit, is poised to make a similar move at some point in the future without drastic budget changes. American’s ranking was also hurt by its lack of macroeconomic stability, deteriorating institutional environment, weakened financial markets, and its unsound banking system… for which the US is now ranked 111th.

You can read more details in Bloomberg’s coverage of slipping US competitiveness.

Best,

Rocky Vega,
The Daily Reckoning

Dropping Like a Rock… the US Continues to Lose its Competitive Edge originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Martin Hutchinson of the Bear’s Lair lays it right out there, too, with “Combining the Worst” in that “both new home sales and existing home sales for July dropped by double-digit percentages to levels never seen in the history of the series.”

The worst ever! Even my little pea-brain can see the significance in this! Wow!

Then, perhaps trying to calm me down, he admits that maybe “ever” is kind of a relative term, in that “While for existing homes the series dates back only to 1999, for new homes it dates back to 1959.”

It worked! I realized that new houses have always gone up in price for the last half century because inflation was a fact-of-life for half a century because the government deficit-spent for half a century and the Federal Reserve created the money needed for a half a century, which only proves that Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, is a malevolent demon from hell who has destroyed us by creating So, So Much Money (SSMM), and we ought to track this man down and punish him relentlessly!

Well, you can see that Mr. Hutchinson does not want to get into a weird, hate-filled discussion about tracking people down and exacting vengeance with mob-rule mentality, and he tries to bring the discussion back around to home sales by saying that the result is that “the decline in new homes sales tells us that 50 years of growth has been wiped out in that market”!

Wow! A half-century, gone!

And all of this misery, and people owing more on the house than their house is worth, is at a time that the “Case-Shiller 20-city house price index” is still 47% above the January 2000 value! In fact, “house prices are still about 5-8% above their long-term average in terms of incomes,” which seems surprising in light of all the negative press of the decline in house prices over the last few years!

With a sense of horror, I realize that, sure enough, this 47% increase in house prices “matches the consumer price rise during the period”! Gaaahhh! 47% inflation in consumer prices over 10 years!

This means, to my Sheer Mogambo Outrage (SMO), that all things cost about 47% more than they did in 2000, which is a compounded 3.9% inflation per year, which is not only historically horrifying, but is about half of the real inflation rate Right Freaking Now (RFN), which is above 8%, as calculated by John Williams at shadowstats.com!

In short, We’re Freaking Doomed (WFD), and the only way I can find to be “un-doomed” is to buy gold, silver and oil with every penny you can scrape up before that penny loses most, or all, of its purchasing power.

And I say this not because I am a smug, know-it-all loudmouth who loves the sound of his own voice and tricking people into believing that I know what I am talking about, but because if there was another way to preserve wealth against governmental debasement of the currency in the last 4,500 years of history of governments debasing currencies, I would have probably heard about it.

But just mindlessly buying gold, silver and oil makes investing so easy that you say, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Are New Home Prices Rising? Nope, That’s Just Inflation. originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Out on those distant tails, you might find the creative genius of a Bill Gates or a Thomas Edison…or of that Chinese guy who invented gunpowder. On the other side of the curve, you might find the incomprehensible perspective of a Pol Pot or a Hernando Cortes…or of that woman who underwent 31 operations over 14 years so that she could look like “Barbie.”

Then, occasionally, you find those individuals like Vincent van Gogh who were so idiosyncratic that you can’t really say which thin tail they would occupy.

But, by definition, most of us live our lives where most of us live our lives – i.e., somewhere near the mainstream. That’s mostly a good thing. It is safe, comfortable, and conducive to a lengthy and well socialized existence. Out on the Serengeti, for example, the “outliers” usually become lunch…or if they’re lucky, dinner, a little later in the day.

But mainstream thinking and mainstream behavior also possesses a very dark side. It lacks insight. It shuns self-examination. It repels intellectual honesty and creativity. Mainstream thinking, therefore, can sometimes nurture more detritus than a petri dish; more dysfunction than a sanitarium. In Ages past, mainstream thinking has nurtured idiocies as innocuous as the periwig or as horrific as the virgin sacrifice.

In 1923, Sir Winston Churchill rebuked one particularly horrific manifestation of the mainstream thinking of his day:

“Accusing as I do without exception all the great Allied offensives of 1914, 1916 and 1917, as needless and wrongly conceived operations of infinite cost, I am bound to reply to the question – What else could have been done?

“And I answer it, pointing to the Battle of Cambrai, ‘This could have been done.’ [I.e., using tanks and other armored vehicles]. This in many variants, this in larger and better forms ought to have been done, if only generals had not been content to fight machine-gun bullets with the breasts of gallant men, and think this was waging war.”

Nearly one century later, many generals of many armies remain just as content as ever to fight machine-gun bullets with the breasts of gallant men. We here in the West believe ourselves to be slightly more enlightened. Maybe we are; or maybe today’s generals simply confuse hi-tech weaponry and body armor with “strategy.” Maybe they confuse “safer” with “safe”…while also confusing “can” with “should.”

But one fact is indisputable: No matter how sophisticated the weaponry and armor, inside the uniform you will still find a man or woman with a life to lose. A second fact is also indisputable: An unarmed 18-year old who watches TV in his living room – without a scrap of body armor, mind you – tends to live longer than his fully armed, and amply protected counterparts on a battlefield.

Over in the financial battlefield, a similarly dangerous form of mainstream thought tends to dominate. “You can’t really know the future,” the financial mainstream insists, “so the best bet is just to charge ahead. Buy and hold!”

These generals direct their troops to lock and load and charge the hill. Don’t worry about the barrage of risks that might blow bigger holes in your net worth than a rocket through a Humvee. Your best protection is just to diversify and charge ahead.

This advice is, of course, hogwash. Diversification provides very little protection when the bullets start flying. In fact, as the events of 2008 made very clear, diversification merely adds to the diversity of casualties on the battlefield.

The safest course of action is to avoid the battlefield entirely. But of course, that course of action never wins a war. The second best course of action is to ignore the generals. Avoid mainstream thought. Avoid the tyranny of groupthink. Edge toward the thin tails of investment guidance and thinking. And don’t be afraid to admit that black is black or that white is white.

Here’s a tip: If something looks risky, it probably is. Here’s another tip: if someone’s investment outlook seems illogical, it probably is.

If you study the ingredients that produce the success of the world’s best investors, you usually find one or more of the following traits:

1. Patience. They are neither afraid of doing nothing, nor afraid of waiting for the positive outcome they anticipate.

2. Selectivity. They never buy “the market.” They always buy specific opportunities that offer a specific risk-versus-return profile.

3. Independence. Mainstream thought is of no consequence to them.

Fortunately for most of us, investment success does not require extraordinary genius, but it does require contempt for mainstream advice and groupthink.

Eric Fry
for The Daily Reckoning

Successful Investing in a Market Dominated by Groupthink originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

While stem cells clearly have the capacity to create transformational therapies, the short-run challenge is to solve the details for particular therapies. Fortunately, that challenge is being met. Astonishing new therapies are racing forward. The repair of damaged tissues and the complete replacement of failed organs with new ones grown from compatible stem cells are on a rapidly approaching horizon. And they’re coming not a moment too soon.

One of the new medical fronts being opened is in the regeneration of damaged bone. By weight, human bone is an amazing material, stronger than steel. It is not only strong, but also somewhat flexible. Bone has an internal structure that takes maximum advantage of the strength of its primary component, calcium phosphate.

The unique features of human bone structure have long spawned attempts at biomimetics, which means “mimicking life.” For example, the description of the internal structure of the head of the thighbone in the 1850s by German paleontologist Hermann von Meyer influenced architecture. One example is the lattice structure of the Eiffel Tower.

Unlike steel structures, bone has one enormous advantage. It is capable of self-repair when damaged. As we age, however, we tend to lose bone density and strength. As we age, we are less able to heal damaged bone. In a sense, you could say the problem is not so much that we age; it is that we lose the ability to regrow. In large part, this is due to the reduction in endogenous stem cells needed to repair the damaged bone. Another part of the problem is a dearth of available growth factors that promote healing in older people. These molecules send signals to cells, telling them to grow and repair damaged bone.

The current standard of care for damaged bone repair uses bone grafts donated from a different part of the patient’s body. The donor bone is usually taken from the hip, or from one of the leg bones. Of course, this procedure has the disadvantage of creating a second surgery site on the body, along with all of the attendant expenses and risks of complication and infection.

A recent study found that after a year, 10% of the patients that have this autograft harvest procedure had clinically significant pain at the donor site. An additional 44% reported some kind of pain at the donor site. Prior to the harvesting procedure, the site was, of course, healthy. In many bone repair procedures, however, these grafts are necessary. A material is required to fill the void in the damaged bone, which also provides an environment for the bone to heal.

But one of the most promising new regenerative technologies would eliminate the need for those bone grafts. This technology utilizes a kind of bioactive “mortar” that can be applied to the site of a bone injury. Once applied, the mortar mimics the regenerative behavior of healthy bone mass, thereby repairing the injured site. Think of how a mason slaps mortar between bricks and you get a rough idea of how effective this technology could be. Clinical trials of this process show that it is at least as effective as bone grafts. However, the data also showed fewer infections, fewer serious adverse events and fewer surgical complications.

With all potential applications taken into account, this breakthrough product could represent an enormously profitable opportunity for the small biotech company that developed it. In the United States alone, total bone grafting procedures are a $4 billion annual market. Meanwhile, this same product offers promise for treating sports injuries like rotator cuff repairs and chronic tendon problems like tennis elbow or plantar fasciitis.

With the huge demographic shift caused by the baby boomer generation’s aging, “regenerative therapies” will become an enormous business opportunity. Companies and investors that develop these therapies will strike gold.

The Great Age of Regenerative Medicine is upon us. Are you ready?

Patrick Cox
for The Daily Reckoning

No More Bones to Pick originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

So it has…at least according to the World Economic Forum (WEF), the outfit that puts on the big annual shindig for the rich and powerful in Davos, Switzerland.

Two years ago, the United States were still No. 1 in the WEF’s eyes. Then last year, Switzerland took over the top spot. Now both Sweden and Singapore have vaulted ahead.

The WEF surveyed 13,500 people in 139 countries to establish their rankings. The US has lost ground due to both a “weakening of public and private institutions,” say the data crunchers. “Lingering concerns about the state of its financial markets” don’t help.

Sweden, by contrast, has “the world’s most transparent and efficient public institutions, with very low levels of corruption and undue influence.” Which loosely translated from wonk-speak sounds like, “You’re better off dealing with honest socialists than crony capitalists.”

In any event, here are the WEF’s top 10…

As if to underscore the WEF’s assessment…and knock out another support column for the “recovery”…the Federal Reserve’s Beige Book is losing some of its lily-white sheen. The period from mid-July through the end of August brought “widespread signs of a deceleration.” Of the Fed’s 12 regional banks…

• Two report healthy expansion (Boston and Cleveland)
• Five report moderate expansion
• Five report mixed or slowing conditions.

Oddly, the stock market seemed to like this report, rising steadily after its release. Perhaps traders are buying into the Fed’s “New Goldilocks” thesis – something we identified back in April.

That is, growth is too slow to return to full employment anytime soon, but still strong enough the Fed won’t have to resort to full-bore quantitative easing, at least not for a while.

In the “New Goldilocks” economy – instead of “just right,” we get lukewarm. We’re happy with it. Except the porridge keeps cooling. And there’s an autumn breeze blowing in the kitchen window.

Addison Wiggin
for The Daily Reckoning

US Economy Falters in the Face of Global Competition originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

An article at the Zero Hedge website says Paul Krugman is either “an imbecile or a fraud.”

We wouldn’t go that far. He might be only mildly retarded…or the victim of higher education. He has learned so much about modern economic theory that there is no room left in his brain case for good, old common sense.

More on that later in the week….

In the meantime, the Dow closed up 46 points yesterday…not enough to get excited about one way or the other. Oil traded at $74 when they turned off the lights. And gold slipped a little, but still is close to a new record.

This time gold approaches its old high in silence. All eyes and ears are focused on the US Treasury market, which many analysts say is in a bubble. Few notice gold creeping up to an all-time high.

Neither gold nor Treasuries are really in bubbles – yet. Gold is about where it ought to be, it is about as valuable as it has usually been for the last 2,000 years. And Treasuries? Well, there the story is more complicated. But here’s something interesting: 30 years ago, 30 year US bonds gave you a double-digit yield. Now, they give you less than half that much. And short-term loans to the government give you a yield with almost no digits at all.

Thirty years ago, the fellow running the Fed – Paul Volcker – worked to lower inflation. The current occupant of that post – Ben Bernanke – labors to raise inflation.

Thirty years ago, a wise investor should have taken Volcker at his word and bought US Treasury bonds. What’s a wise investor to do now? Take Ben Bernanke at his word and sell them?

Maybe. We will leave the question dangling…and turn to real estate. Let’s imagine that Ben Bernanke succeeds. Let’s imagine that he nudges consumer price inflation upwards. What happens to mortgage rates? Well, they go up too. Then, what happens to the housing market?

Ooh la la… Housing would be a dead guy walking. There are millions of people who are not buying already – even with the lowest rates since the Eisenhower era. Imagine all those who will not be buying at higher rates!

But many people think real estate has bottomed out. One of our colleagues posed the issue yesterday:

“I think we’re seeing the bottom of the real estate market. There are deals out there. Now is the time to act.”

He was proposing to buy an office building in Baltimore. It had been offered to us for $2.2 million two years ago. We passed. Now it is available at $1.5 million. We will offer $1.1.

“Maybe the downturn is over and maybe it isn’t,” we replied, with our customary helpful assurance. “But why not wait? If prices are going up, they probably won’t go up by much…and not fast. There’s too much inventory coming onto the market.

“So why not wait and see? If the market steadies…or rises…you won’t give up much. If, on the other hand, it goes down…you could get a much better deal by waiting.”

As near as we can tell, the US real estate market is just waiting. It doesn’t know whether to go up or down. Some areas are cheap – Detroit, Las Vegas, California. And some areas have barely dropped at all – such as Washington, DC, where the zombies live.

Also, there can be a big difference depending on what kind of property you are looking for. There are buyers at the top and the bottom, but not at the middle.

At the bottom of the market are the bargain hunters – bidding on what they consider good deals. At the bottom and lower part of the middle of the market there are also people taking advantage of record low interest rates. They do the math – but only on a month-to-month basis. At today’s low rates they can buy a mortgaged house and make a reasonable monthly payment. What do they have to lose? They need a place to live.

There are buyers, too, for properties at the top end. Rich buyers still have money – though not as much as they had three years ago. They still buy the properties they want when they want – though they may pay less.

The problem, according to our sources, is in the middle. Couples with two incomes. People who need substantial mortgages, but are thoughtful about their money. People who see a house as a substantial part of their assets and the purchase as an investment decision as well as the choice of a place to live. They don’t want to make a mistake.

Is it a mistake to buy now? They’re not sure. So they play it cool. They don’t want to put down a big down payment and then find it wiped out as the market slouches again.

David Lionhardt in The New York Times:

At times, real estate seems to be in the early stages of a severe double dip. Home sales plunged in July, and some analysts are now predicting that the market will struggle for years, if not decades.

Others argue that the worst is over. As Karl Case, the eminent real estate economist (and the Case in the Case-Shiller price index), recently wrote, “Buying a house now can make a lot of sense.”

No one doubts that prices rose roughly with incomes from 1970 to 2000. The issue is whether that period was an exception. Housing bears like Barry Ritholtz, an investment researcher and popular blogger, say it was. The government was adding new tax breaks for homeownership, and interest rates were falling. These trends won’t repeat themselves, the bears say.

As evidence, they can point to a historical data series collected by Mr. Case’s longtime collaborator, Robert Shiller. It suggests that house prices rose no faster than inflation for much of the last century.

The pattern makes some intuitive sense, too. As people become richer, they spend a shrinking share of their income on the basics. Think of it this way: someone who gets a big raise doesn’t usually spend it on groceries. You can see how shelter seems as if it might also qualify as a staple and, like food, would account for a shrinking share of consumer spending over time. In that case, house prices should rise at about the same rate as general inflation and well below incomes.

Here’s the scary thing, at least for homeowners: if this view is correct, house prices may still be overvalued by something like 30 percent. That’s roughly the gap between average household income growth and inflation over the last generation.

It’s also the overvaluation suggested by Mr. Shiller’s historical index. Today, it is around 130, which is way down from the 2006 bubble peak of 203. But it’s still far above the 1890 to 1970 average of 94.

In effect, the bears are arguing that housing was in a multidecade bubble and has now entered a multidecade slump.

Bill Bonner
for The Daily Reckoning

US Real Estate Market Sits in the Waiting Room originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

The Canadian dollar/loonie (CAD) rallied very nicely after the rate announcement, and the lack of “talking down” the loonie by the BOC…

The Aussie dollar (AUD) rallied nicely overnight, on the news that more jobs were created in July than forecast… Recall that yesterday I said the number of jobs created would exceed the forecasts, and they did… Not as large a difference as I said, but still, more than forecast! 30,000 and change jobs were created, versus the forecast of 25,000…

The reason this report put some wind in the Aussie dollar’s sails is that, for the most part, the markets were resigned to thinking that the rate hikes from the Reserve Bank of Australia (RBA) were over for 2010. This report brings back the question in their minds of whether or not the RBA will or won’t hike rates again this year.

Another commodity currency is in the news this morning but for a different reason… Norway has announced that they are buying Greek government bonds, as they do not believe that Greece will default on them. So… First Norway funds a retirement for every citizen, then they create a fund for all unborn citizens to come, and then this… Buying Greek bonds… I think they are very shrewd investors, and this just may be a coupe for them in the future… And it helps Greece!

The Bank of England (BOE) is meeting as I type, but there’s nothing here to look at, move along…

And just when you thought that (well maybe), the euro (EUR) might be able to step around the problems with the banks being undercapitalized… European Central Bank (ECB) Executive Board Member, Stark, came out and made comments about the banks needing more capital…

So… Before it was the FT, and other sources making these claims about European banks, now it’s one of the ECB’s big boys saying it… I don’t think the euro gets to side step this!

However… It has to be intriguing to traders, etc. that Norway has stepped up to the plate for Greece… That maybe the euro can hold on and kick the can further down the road, for every time they do, something happens to ease the pain the euro has suffered this year.

Yesterday, was a good day… It’s after midnight and I’ve got you on my mind! I’m talking about gold and silver here… Yesterday it looked like gold just might climb back to its all-time high, and silver to levels it hadn’t seen in some time… But in the overnight markets, there must have been some profit taking, for both of these metals have backed off their lofty prices of yesterday. To me, it has to be profit taking, because there would be no other reason to sell gold and silver right now… There’s just too much uncertainty in the world!

Today, being a Thursday, we’ll get the Weekly Initial Jobless Claims, which should remain around 470,000… We’ll also see the color of the latest trade deficit. The “experts” have forecast a decline in the trade deficit from $49.9 billion in June to $46.8 billion in July… I’m not that convinced that the trade deficit drops by that much…

Then there was this… From The Washington Post…

Most Americans say the planned Muslim community center and place of worship should not be built in Lower Manhattan, with the sensitive locale being their overwhelming objection, according to a new Washington Post-ABC News poll.

I guess we shouldn’t get our hopes up that just because the majority of Americans don’t want something, that we don’t get it… Remember Health Care? The majority of Americans didn’t want it, but got it any way… Of course, I’m sure that in the mid-term elections coming up in November, those who voted for it, when their constituents said no, are going to hear about it…

To recap… The Bank of Canada DID raise rates and DID NOT talk down the loonie… And Australia posted a strong jobs number for July… The commodity currencies have rallied on these two pieces of data… Gold and silver were humming along quite nicely too yesterday, but have run into some profit taking overnight. And… Norway is going to spend some of their massive reserves on Greek bonds…

Chuck Butler
for The Daily Reckoning

Commodity Currencies Punch a Hole in Risk Aversion Fog originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."