Tuesday, October 20, 2009

Son of a Bubble; Addison Wiggin on Demographics and the Capitalist Meme

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The Daily Reckoning
Tuesday, October 20, 2009

  • Traffic jams and new generation investors in India,
  • Investor anxiety levels trend down toward "big, fat selloff" levels,
  • No jobs...no credit...no sales...but plenty of "recovery" and more...
  • ---------------------------------------------------------------

    Eric Fry chimes in from Laguna Beach, California...

    Stocks prices are very, very high... Our contrarian colleagues over at The 5-Minute Forecast continuously lament...which means that the collective anxiety of investors is very, very low. Our colleagues don't mind that a rising stock market is adding trillions of dollars to the asset side of household balance sheets. That's good news. But the worrisome part is that a falling stock market could erase those trillions from the ledger just as quickly as they first appeared. And as our colleagues correctly point out, rising share prices, coincident with falling investor anxiety, usually adds up to a big, fat stock market selloff...

    Stock Market Indices

    "In fact," The 5-Minute Forecast reports, "market volatility is at a 13-month low. The VIX - a gauge of trader uncertainty - is down to 21, the lowest level since pre-Lehman crisis. It's actually fallen 11 days in a row, the longest losing streak since 2005. (Contrarian alert!)"

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    Son of a Bubble
    by Bill Bonner
    London, England

    What a great recovery!

    No jobs...

    No credit...

    No sales...

    But look at those stocks!

    And oil! And gold! And even London property!

    Real estate agents in London say they are sold out...as prices go to records. Well, asking prices...that is. As for sales prices, that is another story.

    Still, London is driven by finance...and finance seems to have gotten out of rehab. It's party time again.

    The Wall Street Journal is talking about a "full recovery" in luxury goods sales by 2011. And Wall Street itself is pricing stocks as if the record profit margins of '05 and '06 were just around the corner.

    In other words...investors' expectations have not changed. They think things will return to the way they were in the Bubble Epoque.

    How could that happen? A full recovery implies a number of things...

    ..that the 'Son of Bubble' will be as big as his dad...

    ..that all those people without money or jobs will somehow find the wherewithal to spend again...

    ..and that the baby boomers will stop saving for their retirements and begin to party like it was 2006 again...

    Remember, Bubble Epoque spending, sales and profit figures were made possible by borrowing. People spent every penny they earned...and then "took out equity" from their houses in order to spend more.

    What they really got was a house with a bigger mortgage - without moving!

    At the height of the bubble period, if we recall correctly, Americans were taking out more than $500 billion per year. Now, they're putting back nearly $500 billion a year in savings.

    We don't like to be party poopers here at The Daily Reckoning. But there is no way to get a rerun of the Bubble Epoque on those numbers.

    What we see happening is a typical post-crisis bounce...powered by easy cash and credit from the feds. How long can it go on? How far can it go? No one knows. But if you want answers, we'll go way out on a limb:

    It won't go on forever. And it won't go to the moon.

    And most likely...it won't be long before the whole thing comes to a crashing end.

    Here's noted analyst John Hussman:

    "The stock market has never been this overbought."

    Hussman says that the only time stocks were this overbought was on Nov. 28th, 1980. That was the last rebound in the great bear market that had begun in 1966. Afterwards, stocks fell another 30% before finally hitting bottom in August 1982.

    That's why we have our Crash Alert flag flying over the headquarters of The Daily Reckoning. We put it up two weeks ago. No crash so far. But it can't be too far in the future.

    And more thoughts...

    *** While champagne and caviar is served out in the speculative economy of bankers and hedge fund managers, its bread and branch water for the poor folks stuck in the real economy.

    First, we have some figures from the Center for Responsible Lending. Nearly 3 million houses are expected to be foreclosed in 2009. And there are 8 million still to go!

    Yes, we've crossed the foothills of sub-prime already. But the Rockies of Alt-A, jumbos, and other salacious mortgage instruments are still ahead.

    And what happens to people who lose their houses? The New York Times reports that more and more foreclosure sufferers are becoming homeless. The article gives a 'typical' story. A woman loses her house. She stays with friends. She sleeps in her car. She tries to find work. Eventually, she runs out of options and checks into a homeless shelter.

    What's a little odd about this story is that this woman has three grown children...six grandchildren...and even a great grandchild. Now, what's going on here? Are all those kids so heartless that they won't take in grandma? Or is grandma so insufferable that no one can stand her?

    We always take the 'glass half full' approach here at The Daily Reckoning. So this reminds us of what is so nice about depression: it brings families together. It also improves manners. Grandmothers know they need to watch their behavior, or they'll be sent to a homeless shelter.

    (We have our mother here with us much of the year. We had a word with her last night... more below...)

    ---------- Energy & Scarcity Investor Breaking Report ---------

    Beginning today, Wednesday October 21...

    A Hidden Global Crisis... And a Chance for Seven Times Your Money

    Powerful decision makers are meeting to map out their response to a looming global crisis. And you won't read a word about it in The New York Times. Or see it on CNN.

    What's more, the decisions they make at this "strategic summit" could mean up to 613% gains for people who act quickly enough.

    The "strategic summit" is scheduled for Wednesday, October 21. And we've got the scoop. Read on here for more info...but don't delay.


    *** Once you knock them down it is harder than ever for grandmothers to get back on their feet. Why? They're not as flexible as they used to be. Besides, they have no way to earn money.

    Mortimer Zuckerman, editor of US News & World Report, provides the figures:

    Of people who are out of work, more have been jobless for longer than at any time since 1948. More exhaust their unemployment benefits before finding a new job than ever before. And if they are lucky enough to find work, they'll work the shortest workweeks since 1951.

    In other words, the baby boomers have never seen times so rough...for themselves as well as for their children. One American in nine depends on the government for his daily bread. There are 6.2 million more people on food stamps than when the recession began. And there are 6 people waiting in line for each job opening, up from 1.7 when the recession started.

    The baby boomers meanwhile figure they will have to keep working longer than expected. Sixty-three percent of them say they expect to delay retirement in order to build up more retirement savings.

    This is bad news for younger workers, who were hoping the boomers would get out of the way to free up some jobs. Among young Americans, unemployment hasn't been so high since 1945.

    If that weren't bad enough, the government has made things worse by increasing the minimum wage; that alone cost the young an estimated 300,000 jobs. In a depression, prices fall. The price of labor falls too...but not easily. That's why inflation usually helps increase employment - it lowers the real cost of labor. But people do not accept wage cuts readily. And then, along come the feds with a crackpot scheme to INCREASE wages...making the situation worse.

    Naturally, Zuckerman looks at these facts and comes to the wrong conclusion. The headline:

    "The free market is not up to the job of creating work."

    "Only massive programs are equal to the challenge of restoring stable growth to our economy," he writes, in The Financial Times. What kind of massive projects? He mentions an "infrastructure bank." He might have said a war. WWII worked wonders for unemployment. All of sudden, anybody who wanted a job could find one.

    But it's all hokum and claptrap. The Soviet Union put everyone to work. You can see where that got them. It's not the fact that people are sweating on a job site that makes a society prosper; they also have to be doing things that add to their wealth. Infrastructure, like any other capital investment, makes sense only when it pays off. The Japanese poured more concrete per square inch than anyone before or since. They proved that you can put up all the bridges and canals you want; it still won't restart the economy.

    The free market is the only thing that can create worthwhile work. Because it is the only thing that knows - by sales and earnings - which projects make sense.

    But we're facing a losing battle. People much prefer soothing lies.

    Heck, we like them too.

    Mundus vult decipi et decipiatur!


    The Daily Reckoning PRESENTS: We've been lamenting the slow demise of The Empire in this space for some time now. But...where to now, dear investor, where to now? In today's feature essay, Addison takes us on a rough ride through one of many possibilities.

    Demographics and The Capitalist Meme
    by Addison Wiggin
    Mumbai, India

    There is a crazy, night-and-day difference between Dubai and Mumbai. We were staying in the Taj Mahal Palace and Tower, the most notable target of terrorist attacks this time last year. Much to their delight, the mastermind of those bombings - Hafiz Mohammad Saeed - was released to house arrest this morning after an odd trial in Pakistan.

    What strikes me first is demographics. Dubai's indigenous culture is small and practically invisible to the casual tourist. In Dubai, the ambient noise you hear is construction equipment. Almost no smells stand out. Everything is modern, new and arid.

    In India, there are people everywhere...living everywhere...sidewalks, riverbanks, parks, monuments. There are shanties built on any available spot. You hear the sound of people...the murmur of voices, bicycles, car horns. Even today, when the weather is a beautiful 30 or so and the breeze steady, the air is tropical, dank and full of all manner of indescribable odors.

    Soon after we arrived at the Taj, a sarapi-wrapped young lady delivered Chris and I personalized letters. Each informed us that due to state elections being held, it would be illegal for the hotel to serve us alcohol of any kind beginning at 5 PM on that day, ending 48 hours later. We found out later too that if our partners here in India were to keep the office open for work on Election Day, they risked being arrested, fined and possibly put in jail.

    "Can a democracy be a dictatorship at the same time?" an op-ed asked in this morning's Times Of India in response to the draconian efforts the Maharashtra state had taken to boost voter turnout. The idea simply: if people weren't allowed to work and didn't have the option to spend the day drinking... they might turn out and vote. Right.

    In Mumbai, voter turn out was just over 40% - respectable by some US standards - but down a bit from the last election in 2004. "Worth 2 days without the hooch?" might have been our op ed title, had we been asked to submit one.

    When we asked one of our colleagues here if he voted or not, he said 'no' and laughed. "Maybe if there were a category that gave me the option to choose 'none of the above', I would do so. But there isn't."

    Bureaucracy and corruption, are the two words we've heard most this week when asking what's holding India back. In one example, a national auction for oil and drilling rights held on Monday closed with only half of the contracts even receiving bids. A conflict between the Oil and Energy Minister and his brother have left many would be suitors for the rights contracts unsure who's calling the shots. This week, no one wants to put their own money down in fear of losing it unceremoniously.

    Upon entering one of the security firms we visited we faced a door, but no walls. It looked every bit as if an architect had gotten carried away with "form" and completely forgotten "function"... Or a cubicle concept plan for "open space" office design gone horribly awry. Later we learned they'd planned to install glass walls several years ago during a renovation, but had never received permits to erect walls higher than 7 feet in their own office space. Huh?

    "If we were willing to bribe the local building authority," our host suggested, "the walls could go up this afternoon."

    Bribes, corruption and bureaucracy are part of the culture. But it's also part of what makes Mumbai work. "This is a 'make do' city," our travel compatriot Chris Mayer observed while we were driving around the city shooting video for a documentary short we hope to produce on the opportunities in the Indian market. We'd stopped in front of the state Police Headquarters for Maharashtra. It's a formidable colonial era building. But apparently they don't like you taking pictures... or stopping at all... in front of the building. An angry police officer began yelling at our driver in Hindi. Several officers carrying impressive weapons were standing behind him.

    "Uh, maybe they don't like us shooting here?"

    The driver got out and disappeared around the corner behind a truck followed by two of the police officers. One stood watching us in the back of the car. A few minutes later the driver returned.

    "It's okay," he said and we carried on about our business.

    Later we learned a quick 100-rupee note had saved us from a trip inside the police headquarters, rather than just gawking at its façade.

    With 16 million residents here, many whom live below the poverty line, the roles defined over the millennia help ensure every mouth gets fed. The only part of the city that gets consistent electricity and water is Southern Bombay. The other parts of the city, and everywhere else in the country, go through regular interruptions in basic power.

    Traffic is really a sight. Harsh, a twenty-two year old graduate of Northwestern in Chicago, explained that the population has been trained by years of scarcity to try to push their way to the front of the line. It used to be because they didn't have rice, bread or food; but now, they've been doing it for so long, it's a cultural thing. So, for example, when a train pulls up to the station everyone tries to get on at once. That's the way they drive, too.

    "Harsh represents the future of India," his father Jayesh told us proudly. Jayesh and his family have been stockbrokers since 1954 when his grandfather founded KC equities "For years Indians have felt like second class citizens of the world. But not these guys. They grew up with the Internet. They're highly educated, motivated, confident. Rather than striving to stay in the United States after university, they're coming back to India to participate in the development of the economy, the markets here."

    Having been to Dubai and meeting Moe, we were struck that a trend seems to be underway. In 1976, Richard Dawkins authored a book called The Selfish Gene, in which he identified a cultural unit - called a meme - that evolves and transforms as it gets passed from one human being to another.

    Today, the "capitalist meme" is still actively cultivated here in the US. But because of access and speed of modern communications ... coupled with the crisis in markets and entitlement programs in the West... that meme is being carried by young, intelligent, educated, active and motivated youth to the far corners of the earth. Indeed, in today's Wall Street Journal's op ed pages, Susan Hockfield, the president of MIT, laments that the current immigration policy in the US is actively aiding and abetting the return of science and engineering students to their home countries.

    But more so, opportunities in Dubai, Mumbai... Shanghai... are inviting students back home in droves as well. At dinner one night, Jayesh made this suggestion to his son: make a list of all the things you take for granted in the US and start businesses to provide them to the Indian market. Refrigeration, for example, or electricity and roads. India is the world's second largest producer of fruits and vegetables, but it loses 30-40% of them because lack of refrigeration. (For more on the opportunity presented here, be sure to check out Chris Mayer's Special Situations this week. You can do so this week for $1... Details here.)

    Indeed, the small cap companies we looked at while working with our partners at Equitymaster.com included:

  • India's largest financier of trucks and construction equipment
  • The company leading the introduction of RFID and AIDC technology into retail purveyors
  • The leading LED displays and light bulb maker in India
  • The world's second largest steelmaker
  • Largest producer of roses in the world
  • Foreign direct investment into the Indian stock market is still restricted and won't be available until the rupee and dollar become fully convertible. And that won't likely happen for several years. India is a net importer of grains etc. If the rupee were to float openly on the world's forex exchanges speculation alone could cause major disruptions in India's ability to feed itself.

    For now, there are several companies available on the NYSE via ADR. And People of Indian Origin (PIOs) can invest in special accounts directly in the Indians markets. Likewise, Indians are now able to invest $250,000 a year outside the US. But progress in opening the flow of capital between India and the West remains a question for the future.

    Bureaucracy, corruption and regulation are indeed impediments to short term growth. And reforms in a democratic society may come slowly... but the long-term opportunities are abundant. We intend to be there when they break.


    Addison Wiggin
    for The Daily Reckoning

    P.S. We left the Taj at 2 AM to catch a flight at 5 AM. Our flight passed through Doha, Qtar and reached New York by 3 in the afternoon.

    "We will know we're really making progress," our friend Ajit quipped as we enjoyed a final glass of wine on Friday evening, "when we can set the flight times of our own airlines heading to the West."

    Joel's Note: As you probably already know, Addison and Chris have been coordinating a "go-team" of boots-on-ground analysts, researches and market hounds around the globe to help us discover the best opportunities in the explosive emerging markets. Riding these markets can be risky business, which is why knowing the right people in the right places is so terribly important. If you're interested in more information about our global research network, here's some more information.

    And Finally, Bill Bonner with Today's Daily Endnote...

    "Look, Mom...there's a worldwide depression going on...

    "...if you want to stay with us you're going to have to straighten up ..[mother has a bad case of osteoporosis]...

    "...no more drinking late at night. No more parties 'til 3 in the morning... No more sticking us with your gambling debts..."

    "Oh...okay...but is it alright if I just sit in the corner and do my crossword puzzles?"

    "Well, I guess so... Just don't ask us for anymore 8-letter words that mean 'a lot.' It's plethora. It's always plethora."

    We made it very clear - she better mind her Ps and Qs or she's out on the street!

    "But you're being very silly...as usual. I remember the real depression. I was born in 1921. So, I was 8 years old during the crash of '29. Then, I was a teenager throughout the depression.

    "It wasn't anything like what is going on now...I remember my father was director of a local bank in Baltimore. My mother was ill, so he didn't want to trouble her, I guess. And I was so young I really didn't know what was going on. Then, one day Aunt Sophie sent a note with a news clipping, saying she was so sorry to hear about what had happened. I read the news. The bank had failed. My father had all his savings in the bank. When rumors began that the bank was going to fail, he felt couldn't pull his money out, because he was one of the directors. I guess you would say he went down with the ship. But he never even mentioned it. Even after we all knew, he acted as though nothing had happened.

    "Then, he was too old to start over. All we had was the little farm. And we only had that because it belonged to mother. She was still ill. So I went down to the farm with her to take care of her while my father continued to work in the city. Then, he retired completely and came down too.

    "I liked the house. You know...where you were born. But it didn't have heat, or electricity or plumbing. It was just an old farmhouse that had never been modernized. And then, in the depression, we didn't have the money to do anything to it. So, we just lived there as it was. It seems strange now. But then, a lot of people lived like that. We got water from a spring. We used oil lamps. In the winter, we had to start a fire to melt the ice water before we could take a bath.

    "But by then the war had started. I remember sitting in the parlor listening to our old radio when President Roosevelt told us about the bombings at Pearl Harbor. I must have been in my early 20s. My father was home then and he told me that it wasn't a good idea for me to stay at home...I was too isolated. He suggested I join the WAC - the Women's Army Corps.

    "Of course, that changed everything. I had never been away from home. And the next thing I knew I was on a train for Texas. That's where I met your father. He had just come from Pearl Harbor where he was stationed when the Japanese attacked. We met at a New Year's party. We wanted to get married right away...because he was leaving for the South Pacific...but I couldn't get married in Lent. So, we waited until after Easter."

    Until tomorrow,

    Bill Bonner
    The Daily Reckoning
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