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Welcome to the "Wolf Creek Pass" School of Monetary Policy

I don’t know if you folks remember that hit ditty: a humorous tune about two truckers attempting to manhandle an out-of-control 1948 Peterbilt down the “other side” of Wolf Creek Pass – a death-taunting section of U.S. Highway 160 where the elevation drops a hefty 5,000 feet in a relatively short distance.

The song’s two characters – a truck driver named Earl and his brother, who’s his partner as well as the song’s narrator – are taking a flatbed load of chickens on a speedy trip down this winding, two-lane Colorado highway. After the narrator gives Earl the above-mentioned warning, the ancient semi’s brakes fail.

From there on down, the narrator tells us that the brothers’ trip “just wasn’t real pretty.” The truck careened around hairpins and switchbacks, and then raced at an uncontrolled 110 mph toward a tunnel with “clearance to the 12-foot line” – with chicken crates sadly “stacked to 13-9.”

The drivers and the runaway Peterbilt “went down and around and around and down ’til we run outta ground at the edge of town… and bashed into the side of the feed store – in downtown Pagosa Springs.”

Believe it or not, I started thinking about this funny old country tune the other night – right after I’d read a piece about QE3 and the U.S. Federal Reserve.

As zany as it first sounds, the parallels are striking.

December 2011 - Page 3 of 8 - Money Morning - Only the News You Can Profit From- Money Morning - Only the News You Can Profit From.

  • What Kim Jong Il's Death Means for the Global Economy

    All eyes are on North Korea and its repressed economic system this week after the country announced early Monday that Kim Jong Il, the ruling dictator for 17 years, died Saturday. The political instability to follow Kim Jong Il's death could ripple through the global economy, weighing on confidence and growth.

    Kim Jong Un, the third son of the deceased leader, will take his place. Kim Jong Un is only in his late-twenties, and has only been groomed for the role since 2008, compared to his father's 14 years of training.

    While North Korea has remained economically isolated from much of the world, its military aggression, volatile relationship with South Korea and the United States, and the uncertainty surrounding Kim Jong Un's readiness to lead has put the world on alert.

    "This is a tinderbox situation," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Almost nothing is known about Kim Jong Un, this "Great Successor.' The deeper questions are the longer-term issues related to a potential power struggle within the ruling elite, given that Kim Jong Un may not have the training nor the power base from which to assume control. Now is the time to watch carefully."

    That said, here's what to monitor in the global economy as North Korea rebuilds after Kim Jon Il's death.

    North Korea's economic future: North Korea is a notoriously closed society and has shunned foreign investment. Kim Jong Il had started to show signs of possibly being open to economic reform. He even toured Chinese factories to learn about their rapid economic growth, and visited Russia to discuss building a gas pipeline across North Korea.

    Of course, that's unlikely to change at least until the country's new leader gets established.

    Still, there's hope the long-term outlook for North Korea will change since Kim Jong Un has more Western world exposure than his father, having attended school in Switzerland. That could encourage him to reach out more to other countries to help improve his impoverished nation.

    "With China as its example, I am hopeful that North Korea comes out of its shell and slowly crawls to its borders to see who is willing to start a dialogue and trading with the rogue robot nation," said Money Morning Capital Waves Strategist Shah Gilani. "If it's going to be a scary and not a salutary coming out party, all bets are off; but I'm a betting man, and I'm betting North Korea will emerge from its cocoon."

    South Korea's economy: South Korea faces the biggest economic disruption. The country already forecast a drastic export slowdown for 2012, with shipments growing only 7.4% next year, compared to 19.2% in 2011. The threat of North Korean instability could also slam consumer confidence, and cause the economy to grow even slower than the 3.7% gain predicted for next year.

    To continue reading, please click here…

  • Five Fallacies of the Keystone Oil Pipeline

    There's been a lot of buzz about Keystone oil pipeline recently, but unfortunately, the facts about the project have been obscured by political wrangling.

    That's not good for the investors who have money at stake. So here's what you really need to know about the Keystone oil pipeline – and more importantly, the five biggest fallacies being espoused by unscrupulous politicians and the debate-warping mainstream media.

    First proposed by TransCanada Corp. (NYSE:TRP) in 2008, the 1,700-mile Keystone oil pipeline would carry 700,000 barrels of crude per day from the Canadian oil sands in Alberta to refineries in Port Arthur, TX.

    As far as facts go, that's about all the politicians in Washington agree on. Now here's where the truth ends and the spin begins:

    Fallacy No. 1: The Keystone pipeline will create 20,000 jobs … or 100,000 jobs.

    TransCanada commissioned a study that said construction of the pipeline would create 20,000 construction jobs, and more than 100,000 spin-off jobs. Republican (and a few Democratic) supporters have been only too happy to repeat these numbers in speeches in support of the pipeline.

    The State Department, in its study, came up with a more modest figure of 5,000 to 6,000 construction jobs.

    The discrepancy comes from how the TransCanada study calculated the jobs. That study used a "one person, one year model." So if it takes 6,500 workers two years to build the pipeline, that's 13,000 jobs, with the other 7,000 coming from supply manufacturers.

    And if that math isn't fuzzy enough for you, take a look at the calculations for the 118,000 spin-off jobs.

    That number is based on the one person, one-year model in addition to something called the multiplier effect, which takes the capital costs of the project and feeds it into a formula. In short, these job numbers are about as reliable as a politician's campaign promise.

    And yet one more delicious irony: Back in 2009, Republicans complained that the $787 billion stimulus package failed to create long-term stability given that many of the jobs created only lasted as long as the public works projects that were proposed.

    Democrats defended the temporary nature of the employment, arguing that it was a necessary step in order to boost economic demand around the country. Now it's the Democrats arguing that the Keystone project fails to create permanent jobs, while Republicans argue the project is needed to combat unemployment.

    Fallacy No. 2: Keystone pipeline will increase greenhouse gases, worsening climate change.

    Well, yes and no.

    The argument from Democrats is that the process of extracting the oil from the Athabasca fields will generate greenhouse gases. Sure enough, it does. But stopping the Keystone pipeline won't change that unless it prevents production, a long shot at best.

    You see, the Keystone pipeline isn't the only game in town. At least one other proposed pipeline would run across British Columbia to Canada's west coast, where it would be exported to Asian markets.

    The greenhouse gas impact studies assume no Keystone pipeline means no production from the Athabasca oil sands, and assume as well that the Keystone pipeline would pump nothing but oil sands product at 100% capacity 100% of the time – not likely.

    The true impact of the Keystone pipeline on global greenhouse gas emissions isn't clear, but would be far lower than its opponents claim.

    Fallacy No. 3: The United States is dangerously reliant on hostile energy sources.

    To continue reading, please click here…

  • Why Mark Mobius is Betting Millions on this Acronym

    You may be surprised to learn that some of the world's best investors are buying heavily right now – not because they think we've hit a bottom, or even the bottom, but because they're setting themselves up for the next big run.

    Take Mark Mobius, for example.

    Long regarded an emerging markets pioneer, Mobius is in charge of more than $50 billion worth of assets on behalf of Franklin Templeton. Lately, he's snapping up Romanian real estate, Nigerian banks, Kazakhstani oil companies and more.

    Why?

    There are many reasons, but basically it comes down to this: Despite the fact that emerging markets returned almost 250% from 2001 to 2010, the old playbook no longer works.

    And I have to be careful when I say that because many investors will blithely assume that emerging markets are dead. They're not – it's just time to redraw the map because the best opportunities are no longer where you'd expect.

    It's no longer about the BRICs (Brazil, Russia, India, and China), for example. Sure these countries remain great places to stake your claims on the wealth of newly found purchasing power and consumerism, but it's the so-called MINTs (Mexico, Indonesia, Nigeria, and Turkey) that may offer a faster route to riches.

    Or the Next 11, or N-11, as Jim O'Neill, the economist who coined the term "BRICs" a decade ago, calls them. The N-11 is basically the MINTs plus Bangladesh, the Philippines, and Pakistan plus a few more countries on the fringe of "civilized" thinking.

    Then there's the VISTA (Vietnam, Indonesia, South Africa, Turkey, and Argentina) nations and the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa).

    Seriously?

    Yes. For the first time in modern history, emerging markets are no longer completely dependent on Western economies nor demand, a point you've heard me make repeatedly in the past. At the risk of sounding like a broken record, this gives them an unprecedented range of options largely independent of the political, financial, and economic swamp the developed markets have become.

    This is not the kind of thing you're going to pick up on in the mass media, but every single one of those nations is set for a runaway investment boom because they are advancing faster than almost everybody expects.

    In fact, many of the big investing houses like Goldman Sachs Group Inc. (NYSE: GS), Fidelity, HSBC Holdings PLC (NYSE ADR: HBC) and others feel the same way I do – that the MINTs and N-11 have the potential to be every bit as profitable over the next 10 years as the BRICs were over the past 10 years.

    To continue reading, please click here…

  • Latvia’s Internal Devaluation: A Success Story?

  • We're Closing In On a 70% Dividend

    Lately, it seems billionaire precious metals investor Eric Sprott is grabbing headlines almost daily.

    Sprott believes in silver and gold as money, and he has little faith in paper currencies.

    That explains his recent acquisition of a chain of currency exchange outlets, which he aims to gradually build into the safest kind of bank – one that makes no loans, and could eventually offer gold- and silver-backed checking accounts.

    Leave it to Sprott to flip a long established business model on its head.

    And now he's at it again.

    Ever the investing activist, Sprott's latest move involves a "call to action" for silver producers, challenging a business practice typical of most – saving in cash.

    Sprott has sent a letter to silver producers, suggesting that they reinvest some 25% of their earnings back into silver, rather than in cash at the bank.

    On the surface, it doesn't look like such a dramatic step.

    But after deeper analysis, it's clear such a move will accomplish two significant things for shareholders:

    • It will heighten exposure to a commodity that the investor initially bought those shares for.
    • And it will protect the investor from the risk of devaluing currencies the company would have held instead.

    In fact, the move is brilliant.

    And as I keep digging, I realize that the implications go well beyond these two shareholder advantages.

    To continue reading, please click here…

  • AeroVironment Inc. (Nasdaq: AVAV) Is the Future of the Defense Industry

    If you don't know about AeroVironment Inc. (NASDAQ: AVAV), it's a name you need to follow.

    My fascination with the founder of AeroVironment, which designs, develops, produces, and supports aircraft and energy systems, started when I was 12 years old. History was made that year when a man-powered aircraft flew across the English Channel for the first time.

    I remember the flight clearly. The 70-lb aircraft made the 26-mile journey in 2 hours and 49 minutes.

    The idea that a man could pedal a bicycle fast enough to fly across the channel seemed crazy to me at the time. But it was made possible because of groundbreaking designs by Dr. Paul MacCready.

    MacCready made the first human-powered aircraft in 1977, the Gossamer Condor. Two years later came the Gossamer Albatross, the first fully human-powered aircraft to cross the English Channel. MacCready won the prestigious Kremer prize, which honors pioneers in human-powered flight, for each design.

    His innovative creations led TIME magazine to call him one of the "greatest minds of the 20th century."

    MacCready started AeroVironment in 1971. His imagination and persistence helped the company become a leader in creating UAVs (Unmanned Aerial Vehicles). Now AeroVironment has grown into the largest provider of UAVs to the U.S. military.

    UAVs will play an incredibly important role in our country's future. The art of war is evolving, and these devices have become the next key tool in the U.S. arsenal.

    With its great niche in the defense industry, AeroVironment Inc. is a "Buy." (**)

    Providing for the Future of Defense

    When I think of UAVs, I think of the hunter-killer models the United States uses in its "War on Terror."

    However, those are typically large, expensive, unmanned planes with missiles attached to them, which can fly three to five days without refueling. But in fact the U.S. military has purchased thousands upon thousands of small handheld UAVs, with the smallest designs weighing less than five pounds each.

    These drones are revolutionizing the real-time gathering of battlefield information. The smaller breed of UAVs use a localized Wi-Fi type communications package instead of broadcasting their information to military satellites. This gives field troops direct access to intelligence, without it having to be relayed back from the United States.

    The new UAVs also allow American soldiers to scout enemy territory without having to risk their lives.

    To continue reading, please click here…

  • Why We May See a Rally in U.S. Stocks

    With so much negative news dominating the headlines, investors can't be blamed for being worried or shying away from stocks. But if you take closer look at the market – specifically the Standard & Poor's 500 index – you might be surprised by what you see.

    The S&P 500 is down just 3% year-to-date, and is actually up more than 5% over the past three months. The indexes for China, India, and Brazil, on the other hand, are all down over the past three months. Brazil's market index is down 19% year-to-date, China's is down more than 21% and India's is down more than 24%.

    "People don't understand that the S&P 500 has now outperformed the BRIC nations (Brazil, Russia, India and China) for four years," Richard Bernstein, CEO and chief investment officer for Richard Bernstein Advisors, told USA Today. "We are in the very early stages of a resurgence of the U.S. equity markets, and I don't think people are aware of the shift that is going on."

    Indeed, many analysts actually think U.S. stocks are cheap right now.

    The price/earnings (P/E) ratio for the S&P 500 dropped to 12.8 as of the third quarter of 2011. The historical average for the S&P's P/E is 15, meaning stocks are moderately underpriced.

    In fact, the average P/E has been even higher in recent decades. Since 1988 the S&P average P/E has been 19.2 – which translates to a 33% discount for current stock prices.

    Four Reasons for a Rally

    Corporate America has quietly been rebuilding since the financial crisis of 2008, but the constant barrage of bad news – the multiple disasters in Japan in March, budget battles in Washington, concern over the Eurozone debt crisis – has camouflaged much the progress that's been made.

    "The pessimism today is actually creating opportunities for investors," Kate Warne, chief investment strategist at Edward Jones, told USA Today. "There are a lot of short-term concerns, a lot of serious risks, but investors really need to keep their eyes on the horizon, because we are also seeing strong fundamentals. And that is what is driving the market longer term."

    Analysts have identified several positive signs – in addition to the relatively low S&P 500 P/E ratio – that indicate U.S. stocks are stronger heading into 2012 than many realize:

    • Cheaper commodities: The prices for commodities have fallen significantly since the first half of 2011, which should give corporate earnings a boost at least through the first couple of quarters of next year.
    • Lean and Mean: The fiscal discipline dictated by the financial crisis of 2008 has helped many companies weather the troubles of 2011. And now many companies are poised to quickly grow profits as soon as worries ease.
    • Dividend Increases: Companies that pay dividends have been increasing them, and that should continue. Despite the increases, the overall payout ratio has dipped to 29% from a 50-year average of 45%. Higher dividends mean a higher total return for investors, and provide some insurance against downturns.
    • More Buybacks: Buyback activity among U.S. companies rose to $439 billion in 2011 and is expected to rise to $500 billion next year. That sort of money flowing into the stock market helps boost prices.

    With fundamentals strong, a run of positive news, or even neutral news, could be the catalyst that triggers a big rally in U.S. stocks.

    To continue reading, please click here…

  • Zynga IPO Flop Proves Social Media Listings Are Still Suspect



    A strong debut by Zynga Inc. (Nasdaq: ZNGA) today (Friday) could have redeemed the tarnished reputation of social media companies. Instead, the online game-maker became the latest addition to salvage yard full of over-hyped social media companies that didn't live up to the promise of their initial listings.

    After debuting at $10 a share, Zynga stock tumbled 7.75% to $9.25 in just four short hours of trading.

    Money Morning Capital Waves Strategist Shah Gilani wasn't surprised.

    "I don't particularly like the position the company's in. It's got a lot of competition at its heels and I'm not sure about the valuation of the stock," he said on Fox Business' "Varney & Co." program this morning. "I think there's a lot of hype in the social media space."

    Indeed, Zynga's failure follows in the footsteps of Pandora Media Inc. (NYSE: P), LinkedIn Corp. (NYSE: LNKD), and Groupon Inc. (Nasdaq: GRPN).

    But that's not all.

    Here's what Zynga's initial public offering (IPO) means to investors going forward:

    • Zynga will set the tone for 2012: The tech IPO market this year has fizzled, and was in desperate need of a spark that Zynga didn't provide. This is an undesirable lead-in for Facebook Inc., which is expected to debut in the second quarter of 2012. It might also hurt Yelp! Inc., the business review site that filed for an IPO on Nov. 17.
    • It could influence future tech-IPO overpricing: Zynga drastically scaled back its initial pricing by more than 50% since July, when it was valued at $20 billion. Tech IPOs priced earlier in the year received a barrage of criticism for overpricing, but there's been much less of the same talk surrounding Zynga's range of $8.50 to $10. If it fails to close above $10 a share today, future tech IPOs may rethink their strategies.

    To continue reading, please click here…

  • Why Zynga Stock is Sinking

    Loading the player …

    Why Zynga Stock is Sinking

    Zynga Inc. started trading today (Friday) at $10 a share and after a few hours was already seeing red. Money Morning Capital Waves Strategist Shah Gilani joined Fox Business' "Varney & Co." Friday morning and detailed why Zynga stock should be avoided.

    Watch and discuss




  • The Five Most Idiotic Things Congress Did This Week

    As life for the average American has gotten harder and harder, elected officials in Washington have done little to help.

    Congress wastes much of its time on political posturing and bickering. And in those rare instances when our representatives actually do something, they usually make a mess if it.

    It's no wonder the job approval polls for Congress have fallen into single digits.

    Here at Money Morning we've pointed out many of Washington's worst offenses over the years, but the truth is that the nonsense in our nation's capital never really stops – and not all of it makes the evening news.

    To erase any doubt, here are five ridiculous things that happened in Washington just this week:

    Any Excuse for a Fight: For the past week, Congress has been arguing about extending into 2012 the payroll tax cuts, which put about $1,000 into the pocket of the average worker in this year.

    Most Republicans and Democrats alike agree it's a good idea. But instead of simply approving it, both sides are using it as a political pawn. House Republicans have tossed approval of the controversial Keystone XL pipeline into their version of the bill, which many Democrats oppose for environmental reasons. And Senate Democrats, with urging from U.S. President Barack Obama, have added a surtax on millionaires to pay for the payroll tax cut, which Republicans oppose.

    As if to prove just how incredibly dysfunctional Congress can be, Senate Majority Leader Harry Reid, D-NV, on Wednesday threw a routine government spending approval package into the mix to try to force Republicans to negotiate on the payroll tax issue. Failure to approve that bill would force a government shutdown – the same crass tactic Republicans used over the summer during the debt-ceiling crisis.

    Drop it in the Memory Hole: On Monday Debbie Wasserman Schultz, D-FL, insisted during an appearance on Fox News that the nation's unemployment rate had not risen since President Obama has been in the White House.

    The U.S. unemployment rate was 7.8% in January of 2009, when President Obama took office, and 8.2% in February 2009, his first full month in office. Unemployment peaked at 10.1% in October 2009, and hovered above 9% for most of 2010 and 2011. It fell to 8.6% last month.

    Wasserman Schultz is no backbencher, either – she's also chair of the Democratic National Committee.

    Who Cares if You Have to Pay More for Gas? Most Americans favor getting tough with Iran, but not many want to pay more to gas up their cars – not that House lawmakers are worried about that. The Iran Threat Reductions Act, which the House passed on Wednesday, is intended to strengthen sanctions against Iran, but one nasty side effect could be a disruption of the oil markets. Iran is the world's fourth-largest producer of oil.

    "This may cause short term difficulties for the world's oil market, and it may rankle some of our allies, but it is necessary, because stopping Iran's nuclear program is of paramount strategic importance, and we're running out of time," said Rep. Howard Berman, D-CA.

    To continue reading, please click here…