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The Daily Reckoning | Thursday, December 22, 2011 The Chili Peppers say “Throw away your television...now!” The first in the Daily Reckoning “Best of 2011” Series, Plus, Bill Bonner on just what this Great Correction is supposed to correct and plenty more... ------------------------------------------------------- 4 Times More Oil Than The Bakken? North Dakota’s booming Bakken oil reserve has created plenty of overnight millionaires. But now a revolutionary new technique — created right here in the US — could produce up to 4 times as much oil as the Bakken... And potentially mint an even bigger wave of millionaires in the process... So what exactly is it? Just Click Here Now For The Full Story.   Only the Most Pressing News... Why Shutting Out the Noise Every Once in a While is a Good Thing   Joel Bowman Back in Buenos Aires, Argentina... Renegades with fancy gauges Slay the plague for it’s contagious Pull the plug and take the stages Throw away your television now — Red Hot Chili Peppers from “Throw Away Your Television” Did stocks go up or down yesterday? To be honest, we didn’t look. Actually, we made a promise not to. After spending the past week in paradisiacal Nicaragua, talking to real individuals about meaningful ideas and projects, your editor couldn’t quite bring himself to open a newspaper or turn on a television. To do so would have been like smoking a cigarette after going for a late afternoon surf. All that good and pure and healthy exercise...spoiled by inhaling a lungful of lies, half-truths and editorially-tortured statistics. In the words of Mark Twain, those who don’t read the news are uninformed...but those who do are misinformed. As a natural consequence of avoiding the mainstream newsmedia, we are unsure of anything that has gone on in the world over the past 24 hours, save for the fact that we traveled from a Central American country to a South American one via the perverse discomfort we have now come to expect from North American customs and security agents while stopping over there. For all we know, the southern Eurozone might have fallen into the Mediterranean overnight...the Occupy movement might now be running its central HQ from the top of the Empire State Building...or the earth, finally fed up with listening to people argue over whether or not humans impact the climate in any meaningful way, might have hurled herself unapologetically into the sun. Without the talking heads on the evening news to inform us of world events, how could we possibly hope to know any better? As it turns out, your editor’s media fatigue couldn’t have come at a better time. In fact, we’ve politely asked our immediate circle of friends and family to spare us from all but the most urgent current affairs (see earth-hurling-into-sun scenario above as a likely candidate for what might constitute “urgent”) for the next few days. It’s time to recharge...and to reflect. With that in mind, today marks the first edition of our “Best Of” series for 2011. We’re going to call it...wait for it...the Daily Reckoning Best of 2011 Series. To kick off our imaginatively-titled compilation, we turn to our resident value maven, perennial DR favorite and excellent hat- wearer, Chris Mayer. Please enjoy... [This column originally appeared in the April 28 issue of The Daily Reckoning.]   External Advertisement An Oil Warning from Dr. Kent Moors He may be the only energy consultant connected enough to know that this is coming... or perhaps the only one courageous enough to say it. Either way, Dr. Kent Moors has issued an official warning. Americans, as you’ll see, are about to be blindsided by supply- driven oil shortages and skyrocketing prices. This “Oil Constriction” is imminent. And today you have a chance to know about it — and profit from it — before it becomes a household term. Full story... The Daily Reckoning Presents The Milkman Indicator   Chris Mayer Our family has a milkman. Yes, a milkman, just like in the old days. He comes every Friday and drops off a crate full of cold bottles of milk, along with tubs of yogurt and butter, cheeses and sometimes meats. You place your orders online, and the milkman brings it your doorstep, fresh from a local family-owned farm not far from where I live. I mention this because I got an interesting e-mail from the farm over the weekend, which I think sums up what we face in today's economy. The problem we face is particularly insidious because lots of people don't really understand what causes it, which allows it go on. But before getting to abstractions, let's look at the e-mail I got from my milkman. "We would like to take the time to tell you," it begins, "that due to some large price increases we are facing on materials we use to bottle milk...we must raise the price of our glass bottled products." The e-mail then goes on to show, in some detail, exactly what price increases the farm sees. The milkman is a model of good disclosure and transparency. Many of our banks and corporations should use this e-mail as a model for communicating with the public. The sources of the pain include a 4% increase in the cost of glass bottles and a 6% increase in the cost of plastic caps. The farm has also seen a 14% increase in shipping costs in just the last six months due to the rising price of fuel. There is more: a 2% increase in materials such as latex gloves and hairnets, a 5% increase in lab supplies for milk testing and an 8% increase in the chemicals used to clean the plant and equipment. "I hope that you can all see that we have seen a huge increase in total," The e-mail continues. "This is why at this point it has become a must to increase the price of our bottled products 7%. This is always an agonizing decision for us, but sometimes can't be avoided." We might call this the Milkman Indicator. I can tell you that this is happening across the economy right now. I follow a lot of companies, and rising raw material costs are at the top of the list of concerns facing anybody who makes anything. Naturally, as investors, the idea would be to play those who benefit from such rising raw material costs and fade those who cannot pass on these costs to their customers. So for example, the rising cost of glass bottles makes me think of Owen-Illinois. This is the world's largest glass container company. I recommended it in my investment letter, Capital & Crisis in December. Part of the thesis there is that price increases in 2011 would help raise margins and profits. So far, the stock hasn't gained much ground, but the core idea behind owning it is still very much in play. This has actually been something of a mini-theme in Capital & Crisis, where I have recommended several specialty producers of materials that are rising in price. Another idea is to own the producers of the commodities rising in price, like many of the energy and mining stocks I have recommended. This phenomenon of rising raw material costs brings us around to causes. Why is this happening? The short answer is that our Federal Reserve is printing a lot of money. It's funny how I can explain this to my 12-year-old using monopoly money - and he gets it - yet it seems economists with Ph.D.s and fancy titles in think tanks and government agencies don't get it all. When you create a lot of money, that money loses some value. It buys less than it did before. That's what we're seeing, in essence. The main barometer for monetary creation is the Fed's balance sheet. When it expands, so too does the amount of money sloshing around. All that money sloshing around has to go somewhere. People buy stocks, commodities and gold. There are many, many ways to show this, and I've seen many different kinds of charts that all show the same thing. But I grabbed the one below from today's Wall Street Journal to show you: So "QE2" is the fancy name given to a very base and simple act: money printing. And you can see that as the Fed's balance sheet has swelled, so too have stocks and gold surfed the wave of cash. The dollar has also weakened (buying less), and rates on mortgages have gone up. This is just the beginning. We know how past bouts of money printing ended. Badly. Look again at that table above that shows mortgage rates. Those rates are in the 4-5% range. In the 1980s, it was rare to see new home mortgage rates below 10%. In 1982, the average interest rate on a new home mortgage was 15.12%. These cycles often take a generation to play out from peak to trough and to peak again. Mortgage rates of 10% didn't just happen in one year. It was a slow buildup over a good two decades. The average mortgage rate in the 1970s was 8.8%, compared to 11.79% in the 1980s. In the 1960s, mortgage rates were in the 5%s. Look at gold. It didn't jump to $1,500 in a year. It's been in a 10- year bull market. So to wrap up here, I think we're looking at a long period when prices rise and the cost of money rises. I doubt the Fed's resolve to take back the cash it put in, until it gets really bad. Then another Paul Volcker will arrive on the scene to break the inflation and a deep recession will ensue, like a nasty hangover. Until then, I think the Fed will keep the bar open and let the good times roll. This means gold up, dollar down, interest rates up and commodities up. And the prices the milkman charges will go up as well. Regards, Chris Mayer, for The Daily Reckoning Joel’s Note: Aside from that hat-wearing aptitude we mentioned above, Chris Mayer also has rather a unique knack for spotting opportunities in markets most other investors overlook. We’ll hear more from him in coming “Best Ofs,” but for now, we’d urge you to check out his latest investment report. You might not believe where he’s hunting for profits next. Check it out here.   A Wealth Chance This Extreme Pops Up Once Every Few Lifetimes Only 62 people know exactly why these four companies could change the world. Starting right now, you’re #63 on the inside. That means you’re on the verge of massive wealth. Click here for the full story — you can’t afford to miss this epic, one-time wealth chance.   Bill Bonner Correcting the Growth of Human History   Bill Bonner Reckoning from Baltimore, Maryland... And so, yesterday, the northern hemisphere had its shortest day of the year. In Baltimore, the sun never rose and never set. It was gray all day. Then it was night again. And so the days dwindle down to a precious few. In astronomical terms, the year is already over. We have passed the winter solstice. From here on out the days grow longer. In terms of the Gregorian Calendar, we still have a few more days to go in 2011. Then, we face a new year. New challenges. New crises. And new opportunities. Will 2012 be the year the human race goes into a downturn...a slump...a correction? Time moves on. So do opinions. Investors were all hot to put their money on stocks on Tuesday. They thought the euro debt crisis had been solved. And housing was looking up in the US. But yesterday, there was no follow-through. It was as if they had forgotten what they were so excited about. That’s the way it has been all year. One day, investors are sure recovery is right around the corner. Then, they turn the corner and there’s nothing there. 2011 began with most people expecting a recovery. Now, they know; there’s something else going on. Something more complicated...something different from the typical recession/recovery pattern they’ve been used to. If they looked more closely, they would notice that each of the recoveries since the ’80s has been a bit weaker than the one that preceded it. The feds still fight downturns in the same way — with counter-cyclical fiscal and monetary policy. Each time output goes down, the Fed reduces interest rates. This cuts the price of credit, which usually gets people going again — with new investments and new hiring. But credit is not so different from everything else in the world of economics. The law of diminishing marginal utility applies. The first dollar you borrow pays off. You put it to work building new, more efficient and more productive businesses. The investment pays off. Later borrowings are less effective. Finally, they don’t work at all. Part of the explanation is merely that the borrowers shift from borrowing for very productive purposes to borrowing for less productive purposes...to borrowing not to produce at all. There’s no payback when you borrow to consume. Zero. Finally, the recession of 2001 was met with a muscular Fed response — with much lower interest rates and a federal budget far in the red. But the recovery was the weakest ever. It was a “jobless” recovery, with an unusually slow rehiring pattern. Now, 10 years later...we have something new — a jobless non- recovery! People are beginning to wonder. What is really going on? Even Martin Wolf, chief intellectual at The Financial Times is beginning to ask questions. “The future is not what it used to be,” he writes. Here at The Daily Reckoning we have known for a long time that the Great Correction is no ordinary recession. We didn’t know exactly what it was correcting, but we had a list of possibilities. Is it correcting the 60-year boom in credit that began after WWII? Seems like it is... Credit, in the private sector, has been going down since 2008. Is it correcting the bull market in stocks that began in August 1982? So far, not much sign of it...but we think so. People are bound to realize, sooner or later, that business profits cannot expand when credit is contracting. Is it correcting the power of the US empire? Yes...perhaps...but that’s a long story for another time... Is it correcting the paper-currency, faith-based, centrally-planned monetary system put in place by Richard Nixon in 1971? Not yet. Instead, US debt — denominated in those paper dollars — gets more respect than ever. But we have a feeling that it will be corrected before this crisis complex is over. On Monday, word got out that the European Central Bank has lined up with the Fed and other central banks to fight the debt crisis by...yes...creating more debt. And more paper currency. It will lend another half-trillion euros — or so — to the banks. The banks are supposed to make more new loans and buy up more old ones. Specifically, they’re expected to take money from the central banks and use it to buy government debt, thus keeping the chickens from coming home to roost as long as possible. In the meantime, economic growth, it is hoped, will finally get into action. Growth, they think, is the “mean” to which the developed economies will revert...which will raise GDP and tax receipts, reducing deficits and debts. But what if growth itself were being corrected? What if the entire period from the invention of the steam engine to the invention of the internet were not the normal thing, but the abnormal thing? What if the “lost decade” we have just gone through is actually the mean...the usual...the normal thing? And what if — after nearly 3 centuries — we have just now reverted to it? Until about two weeks ago, we thought human beings had only existed for 100,000 years. Now, archeologists are guessing that we’ve been around as a species for twice as long. You know what that means? It means that our mean rate of growth — already negligible — is actually only about half what we thought it was. In other words, it took not 99,700 years for humans to invent the steam engine, but 199,700. And now, what if we are not going on to something new, but back to something old? What if the New Age is really more like the Old Age...where growth and progress were unknown. Let’s see, the typical person in 1750 lived better than the typical person in say 100,000 BC. The person in 100,000 BC lived in a cave or maybe a wigwam. The typical person in 1750 lived in a hovel. There were some great houses too, of course. By the 18th century, humans had been building with arches and columns...and domes...dressed stone with elaborate decoration...for thousands of years. But most people had no access to those monuments. They lived in whatever they could put together — usually of wood or mud. They lived on what they could grow...with their own hands, or with the help of domesticated draft animals. They hunted wild animals...or got their calories from their own herds and flocks. The person from 100,000 BC was a hunter-gatherer. But his life was not all bad. At least he got plenty of fresh air and didn’t get caught in traffic jambs or have to watch television. But the progress between 200,000 BC, when mankind is now thought to have emerged...to 1765, when Watt produced his first engine...was extremely slow. In any given year, it was nearly negligible...imperceptible. Over thousands of years there was little progress of any sort, which was reflected in static human populations with static levels of well-being. Then, after 1765, progress took off like a rocket. Over the next 200 years, the lives of people in the developed countries, and the human population, generally, changed completely. It took 199,700 years for the human population to go from zero to 125 million. But over the next 250 years it added about 6 billion people. Every five years, approximately, it added the equivalent of the entire world’s population in 1750. “Progress” made it possible. People had much more to eat. Better sanitation. Better transportation (which eliminated famines, by making it possible to ship large quantities of food into areas where crops had failed). The last major famine in Western Europe occurred in the 18th century when crops failed. After that, the famines in the developed world at least have been intentional — caused largely by government policies. Progress abolished hunger. It permitted huge increases in population. And it brought rising real wages and rising standards of living. By the late 20th century, people took progress and GDP growth for granted. Governments went into debt, depending on future growth to pull them out. So did corporations and households. Everyone counted on growth. Spending and tax policies were based on encouraging growth. The enormous growth in government itself was made possible by economic growth. After all, as we’ve seen in our Theory of Government, beyond the essentials, government is either parasitic or superfluous. The richer the host economy, the more government you get. Today, there is hardly a stock, bond, municipal plan, government budget, student loan, retirement program, housing development, business plan, political campaign, health care program or insurance company that doesn’t rely on growth. Everybody expects growth to resume...after we have put this crisis behind us. Growth is normal, they believe. But what if it isn’t normal? What if it was a once-in-a-centi- millenium event, made possible by cheap energy? Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Let the Depression Burn Itself Out “Power Corrupts...” Collective Action to Prolong a Depression Existing Home Sales: Up or Down? Climax Time: The Top 12 Trends for 2012 Euro Rallies on Positive IFO Index and a Successful Spanish Debt Auction The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. © 2010-2011 Agora Financial, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. 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