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Global Investing

Try as He Might, Mario Draghi Cannot Save the Euro

Of all the pyramid schemes that governments and banks have perpetrated in the last decade, the Eurozone debt crisis is the most damaging.

No amount of posturing by European Central Bank President Mario Draghi can change that fact.

The market may like what Draghi has to say about the fate of the euro, but tomorrow's big ECB meeting will change little.  

The massive amount of money Draghi will need to print is far too great for the German taxpayer or the ECB's balance sheet.

Eventually, the Eurozone will break up and drag the global economy right down with it.

In the long run, that will mark the beginning of the recovery, but in the short run it will precipitate a banking and economic crisis that will make 2008 look like child's play.

As investors, we had better be prepared.

Politicians Doomed the Euro

The Euro was a reasonably sensible idea, although without political integration it was always likely to cause trouble.

What's more, the technical side of it was for the first ten years handled very well by Otmar Issing at the European Central Bank.  Issing spent his career in the Deutsche Bundesbank and knew what a decent currency looked like.

However, two decisions taken by politicians doomed the currency.

One was to admit Greece into the union, which to any competent observer was a hopelessly corrupt and uncompetitive economy propped up by giant EU subsidies.

More important, though, was the design of the TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) payments system which was replaced in November 2007 by TARGET 2.

As I wrote in an earlier article, it is the secret system that blew another hole in the euro.

Target 2 requires all payments between banks in different countries to go through the national central banks (thus giving those otherwise redundant entities something to do).

Theoretically that's the same system as in the U.S., where many payments are made through the regional Federal Reserve Banks.

However, in the U.S. the larger banks deal direct, and outstanding payments in the regional Fed banks are cleared regularly. What that means is that if Alabama runs a payments deficit with New York, no large balances are allowed to build up.

Conversely, there has been no automatic clearing between the central banks in Europe. This may sound arcane and boring, but I promise you it is not.

These payment imbalances have two nasty side effects.

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How to Boost Your Income in a World Where a Six Figure Salary No Longer Cuts It

It may sound impressive, but a $100,000 salary isn't all it's cracked up to be. What would have cost you $100,000 in 1976 would cost you a whopping $380,000 today.

And that's just adjusting for inflation…

In fact, to get the same benefit from a "six-figure salary" that you would've earned in yesteryear, you'd need to make about $250,000 today.

Welcome to the magic world of 2012. It's a place where taxes go up, prices soar and the middle class gets pushed closer and closer to the brink.

The same thing is true for retirees.

Thanks to the Federal Reserve's zero interest rate policy, a $2 million nest egg isn't what it used to be, either.

For instance, did you know that Moody's recently changed its pension fund return assumptions to 5.5% because of today's low interest rates?

At those levels, a $2 million nest egg would "only" throw off a $110K income stream, which is pretty marginal, especially when you allow for inflation and spiraling medical costs.

What's more, it's not obvious to me how exactly you can guarantee that 5.5%.

As for the 8% returns you were promised all of your adult life on your pension funds, those are long gone, too. In the low-growth economy facing us now, those types of returns are going to be impossible for big funds to achieve.

Take CalPERS, for instance. It's the California Public Employees' Retirement System pension fund-the biggest public fund in the U.S.

CalPERS only recorded a 1% return this year, a long way indeed from the 7.5% return their actuaries were assuming.

But don't worry, there's a way investors can earn better returns and create income streams that can help to put them comfortably above that benchmark six-figure salary-even during periods of low growth.

One of these investments actually yields 8.6% and is heavily undervalued at the moment. More on that later.

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These South of the Border Bargains Offer Investors Real Growth

While the news worldwide seems universally gloomy, it doesn't mean that there aren't any bargains to be had.

If you're looking for opportunities to grow your money in ways that are not dependent on changes in monetary policy or a solution to the Eurozone debt crisis, here's a good one.

It's a brand "new" market that has just had a stroke of good fortune, which means its prospects now look much better than they did before.

It has a decent-sized market, with lots of companies listed in the United States, and low political risk.

It may surprise you to know that I'm talking about Mexico.

Now, I know that Mexico hasn't exactly been at the top of list when it comes to finding safe investments.

For the last decade, Mexico has been bedeviled by the stranglehold of oligarchy, slow growth and an economy which is excessively dependent on the United States.

Admittedly for investors, there did not seem to be much to go for. The big companies, such as those controlled by Carlos Slim, the world's richest man, sold on sky-high P/E ratios and seemed to offer more risk than opportunity. Meanwhile, smaller outfits were stifled by Mexico's bureaucracy and slow growth rate.

But the truth is things have been looking up recently for this down-beaten market.

The Economist panel of forecasters predicts Mexico will grow at 3.7% in 2012 and 3.8% in 2013.

That's nearly double the 2% GDP growth U.S. investors can expect and much more than double the forecast for the Eurozone, which is flirting with a recession.

In today's markets, Mexico is one of the few places that offer investors real growth.

Change South of the Border

But there's another reason for investors to begin to look south of the border.

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The Eurozone Crisis is Far From Over

The Greek election last weekend has brought us a brief reprieve. The nation and the Eurozone have stepped back from the brink.

But the larger truth is that little has changed.

Yes, the Eurozone has survived its latest test, yet there is little indication where it will go from here. Considerable continental support for the common currency remains, and EU officials will soon introduce initiatives to consolidate banking and financial policy in the European Union.

Still, the problems keep mounting, and there is very little resolve to fix them.

At this point, a lot of actions (or lack of actions) could still upset the entire apple cart.

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Apple's (Nasdaq: AAPL) Patent Wars: This Little-Known Swedish Company is the Key

In a single stroke, Apple Inc. (Nasdaq: AAPL) could gain the upper hand in its seemingly endless patent wars with Samsung Electronics (PINK: SSNLF) and others.

Or the tech giant could blow its chance and wind up paying billions of dollars in licensing fees.

The outcome hinges on how Apple deals with a little-known company based in Sweden.

This micro-cap just happened to file a patent for the "swipe-to-unlock" touchscreen gesture in 2002 – three years before Apple filed its patent.

The company, Neonode (Nasdaq: NEON), received its U.S. patent in January.

Neonode holds a number of touchscreen-related patents that could become decisive in several of Apple's mobile computing patent cases.

Already the "swipe-to-unlock" patent helped Samsung defeat Apple in a recent patent case in the Netherlands. Samsung said the patent, as well as a phone Neonode released in 2005, represented "prior art."

"Apple just shot itself in the foot and all the blood is going to go to NEON," Jim Altucher, managing director of Formula Capital and well-known investor, wrote in a blog post Tuesday evening.

Insiders told The Wall Street Journal in April that Samsung plans to use the Neonode patent in a similar but much more crucial case in San Jose, CA, scheduled for a July trial.

And Altucher added a scarier prospect for Apple.

If Neonode does indeed hold the patent trump card for "swipe-to-unlock," it could gun for a cut of Apple's profits by filing its own patent case.

Should Apple be forced to fork over licensing fees to Neonode, it could cost the Cupertino, CA, company billions of dollars a year.

So far all this sounds like a big mess for AAPL and a big opportunity for its patent war rivals. Not just Samsung, but also for such titans as Google Inc. (Nasdaq: GOOG) and Microsoft Corp. (Nasdaq: MSFT).

Yet if Apple acts boldly, it could gain a crucial advantage on its mobile computing competitors.

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The Gloss is Coming Off the Eurozone

Europe, Europe, Europe…

I know, you're sick of hearing about problems in the Eurozone.

But the problem with Europe is that it won't go away. And if it does go away, we'll have even bigger problems. What a mess.

Of course, I'm talking about the Euro-currency zone and the European Union, not Europe itself.

I love Europe. I love every country in Europe. I love the different cultures. I love the different languages. I love the different societal models. I love the history of Europe.

And no doubt all the Europeans love all the same things about their Europe – except maybe some of their history.

But even more than loving Europe, Europeans love their own countries. Why? Because they have different cultures, languages, societal models, and differing views of their history. Vive la différence!

So, whose bright idea was it to gloss over (with shiny promises and, later, a shiny new currency) thousands of years of differences and shove all Europeans into a funnel in the hopes that they'd all come out the other end as one homogeneous mass of humanity?

Oh, that would be the bankers and financiers who wanted a United States of Europe so that the free flow of goods and services payable with a common currency would make everyone better off, and make themselves better, better off, by a lot of betters.

And now, what a surprise! There are differences all across Europe about, well, Europe and what it has become and where it has to go to get out of the mess it's created for itself.

How that's going to end is playing out right before our eyes.

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Gold Prices: How to Climb the "Golden Staircase'

When U.K. subscriber John M. wrote in this week, he got right to the point.

Asked John: "What's happening to gold prices? Why are they dropping?"

For an answer, I speed-dialed Real Asset Returns Editor Peter Krauth – our resident expert on mining and precious metals.

Peter is based in Canada, which keeps him close to the natural-resource companies that proliferate north of the border. He gave me a detailed and insightful answer to John M.'s question.

And he recommended three ways to profit – including an ETF he says is perfect for first-time gold investors.

To explain what's happened with the "yellow metal" – and to project where gold prices will go next – Peter invented a pricing theory that he christened the "Golden Staircase."

"The bottom line, Bill, is that the price of gold has simply entered a consolidation phase – much like it has done numerous times since it entered this secular bull market back in 2001," he told me.

Gold futures were at $1,662.40 an ounce yesterday – well off the yellow metal's high. Here's why.

"If you think back, when gold hit its all-time high of $1,900 last August, we were in the midst of wild speculation that the U.S. government wouldn't resolve its debt-ceiling crisis," Peter explained. "A deal in Congress was reached in time, but Standard & Poor's went on to downgrade the nation's credit rating for the first time in history. Since then, there's been considerable apathy towards gold by the general investing public, pushing its price down about 13%. What's more, government-calculated inflation looks benign, taking away from gold's luster."

And here's where it gets interesting.

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Investing in the “New China” with this Telecom Market Stock

How would you like to get in on the ground floor of the telecom market in a country I've dubbed the "New China"?

It's a country that boasts:

  • 6% annual GDP growth before, after and during and the global economic meltdown.
  • The fourth largest population on the planet. It is also one of the youngest (median age is 28).
  • A centuries-long social and economic connection to China and every strategic Southeast Asian economy.
  • Foreign Direct Investment that has grown exponentially in the teeth of the global crisis.
  • A bigger economy than the Netherlands or Turkey.

I'm talking about Indonesia.

It's a place usually found in the back of the mind of most Western investors. It only crops up if there is an earthquake, a tsunami or political unrest in a far flung province.

But the truth is, Indonesia is nestled in one of the most strategic locations on the emerging market map. It neighbors India, Malaysia, Australia and Thailand.

It also has long historical and economic ties to China.

About 3%-4% of the population is Chinese/Indonesian, and they represent a powerful but quiet voice in the Indonesian economy. That influence, which was buried for many years, is now a highly prized asset.

Investing in the "New China"

From the 1970s until recently, Chinese influence in Indonesian society was largely muted by Indonesian politicians. The Chinese language wasn't taught in schools and Chinese history was stricken from textbooks.

But things are changing rapidly.

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France May be the Domino that Causes the Euro to Collapse

Commentators are wringing their hands again, worried the troubles in Spain could cause the whole euro project to collapse.

As a result, all eyes are now on Spanish 10-year debt yields, which went above 6% last week as the threat of euro-chaos returned.

But it's not Spain the markets should be worried about.

The reality is that Spain is not in too bad a shape and that a rescue would be affordable for the European Central Bank even if it was needed.

The real tottering European domino to worry about is France.

After all, it would be impossible for the remaining solvent members of the EU to bail out France if it began to fall.

The larger reality is that France's fiscal position is considerably worse than Spain's.

The country's debt-to-GDP ratio was 85% at the end of 2011, while Spain's was only 66%. What's more, France's public spending is 56% of GDP, according to the Heritage Foundation, compared to Spain's 45% of GDP.

Spain's current government has also instituted a stiff austerity program, mostly comprised of cuts in public spending, which will reduce its deficit below France's by 2013.

Meanwhile, France's austerity has so far consisted almost entirely of tax increases on the rich -not actual spending cuts.

T

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Investing in Japan: Three Choices One Year after the Disaster

Like it has been for other Japanese families, this past year has been a tough one in my household, too.

Perhaps not surprisingly, Sunday's one-year anniversary brought long-buried emotions to the surface 12 months to the day after the horrific earthquake and the tsunami it spawned devastated Japan.

The tragedy haunts it still. I don't know a single Japanese who isn't affected.

And I still struggle to process the enormity of what's happened in a country where I've spent much of the last twenty years as a businessman, a husband, and a father.

How do you explain a 9.0 earthquake or a 65-foot high wall of water moving at 80 miles an hour?

Or come to terms with the friends and families who were literally wiped from existence

I couldn't explain that to my youngest son, Kazuhiko, when we visited Kamigamo Jinja, our ancestral family shrine to pray shortly after the disaster.

He wanted to know how the spirits of those departed would find their way home each August for Obon, a more than 500-year-old annual celebration when ancestral spirits make their way back to family altars.

My wife, Noriko and our boys, Kunihiko and Kazuhiko, return home to Kyoto this Friday so we'll see if they've made peace in their young lives as so many other children have.

It is through their young eyes that the future does indeed live, as is the case in so many cultures.

The Aftermath of the Japan Disaster

To that end, I'm sure you've seen the many before and after pictures of Japan making the rounds in recent days.

They're staggering and impressive.

But at what cost?

So far Japan has scraped millions of tons of debris from disaster-hit areas into monstrous piles. Only 6% has been burned or otherwise disposed of. You don't hear about that from U.S. news sources.

Nor do you hear about the additional 130 million to 150 million cubic meters of soil that have yet to be scraped, processed or otherwise remediated to eliminate everything from toxic chemicals to radioactive contamination.

That's enough to fill the Empire State Building floor-to-ceiling 143 times.

In the aftermath, only two of Japan's 54 nuclear reactors are online and running. The rest are down for "inspections" and disaster preparedness drills.

There is a good probability that many may never be restarted, especially with anti-nuclear protests building not only in Japan but around the world as a result of this mess. Most are decades old and of questionable design given what we know about nuclear power safety today.

While I used to be a staunch advocate of nuclear power, today I am now firmly against it.

Cleaning up Fukushima is especially problematic on a couple of levels and estimates suggest it may be 40-50 years before the plant is completely decommissioned.

Not only does the Japanese government have to figure out how to contain the mess, but things are so badly mangled on the ground that the Tokyo Electric Power Company (TEPCO) isn't even sure it can locate the melted nuclear fuel rods at the moment!

An estimated 100,000-275,000 people remain in temporary or modified housing according to various sources. The Japanese government is telling people that it may be a decade or more before they can return home — if ever.

To its credit, the government has gone to great lengths to keep neighbors and families together as a means of preserving the cultural groupism that has played such a vital role in Japan's society for more than 1,000 years.

Separating people would have broken that bond and weakened recovery efforts.

So what now?…

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