Martin Hutchinson
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This Birthday Is Nothing to Celebrate
The world's 7 billionth person is likely to be born today (Monday).
However, this birthday isn't something to celebrate.
Since the global population passed 6 billion only in late 1999, we've added more than 80 million people each year on average. And the environmental footprint of those people is expanding rapidly as emerging market populations modernize.
The planet may be able to accommodate these extra people and their consumption – but then again, it may not.
And if it can't, the drain on our planet's resources could harm us all.
So we'd better find a way to reduce population growth – fast.
Of course, if you think I'm about to propose something along the lines of China's one-child policy, you couldn't be more wrong.
We have economic means of population control that are neither coercive nor costly. And the sooner we implement them, the better.
A Disaster in the Making
When Thomas Malthus warned of overpopulation in 1798, the global population was approaching 1 billion – a level it reached in 1804. It had grown in the previous three centuries from 500 million in 1500. Thus, if the gradually increasing prosperity of 1500-1800 had continued – without the Industrial Revolution increasing world production capacity artificially – it would have reached 1.62 billion by 2011.
There is a very good case to be made that 1.62 billion is today's natural population, and that the growth since 1800 is artificial, caused by the Industrial Revolution removing previous limits on production. At that level, almost all serious environmental problems would go away. Even if all 1.62 billion of the world's inhabitants enjoyed Western living standards, the global warming and pollution effects of their output would be easily absorbed by the planetary ecosphere.
Around 2004, U.N. population projections had us reaching a population of 8 billion by 2027, then peaking at around 9.3 billion just before 2050 and declining slowly thereafter. Alas, the latest projections are not so sanguine. They have no peak in population this side of 2100, with population passing 10 billion and reaching 10.12 billion in 2100.
At this level, an environmental disaster is very likely.
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The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS)
I've made no secret of my aversion to Treasury bonds. Yields right now are irrationally low, and thus do not accurately reflect U.S. credit risk.
And since inflation is already running higher than bond yields – and is likely to rise even further – Treasuries offer an inadequate return at best, and at worst, a capital loss if sold before maturity.
Even Treasury Inflation Protected Securities (TIPS) aren't as safe as you might think.
Fortunately, the U.S. Treasury is finally thinking about issuing something useful: Floating rate notes (FRNs).
If the Treasury does end up issuing FRNs, and the pricing is reasonable (and the U.S. Treasury still has a credit rating better than junk bonds), then you should seriously consider buying some.
Don't Trust TIPs
Floating rate debt issues are not that common here, but there have been many in Europe. They were even more common in my early banking days in the 1970s – when interest rates were generally rising.
FRNs have one great advantage over fixed-coupon bonds: If interest rates go up, fixed-coupon bonds go down, sometimes by a lot if the bonds have a long time to maturity.
For example, if 30-year interest rates rise from 4% to 5%, the trading price of a 30-year bond ($100 face value) will drop to $84.48. If you were to sell at that point, you'd lose 15% of your principal – the equivalent of nearly four full years worth of interest.
However, a floating rate note on a good credit rating should always trade near par. If short-term interest rates go up from 1% to 5%, the note will pay 5% in the next interest period, so it will still trade close to par. That means you have principal protection as well as interest rate protection.
Theoretically, TIPS should offer similar protection. And they do if interest rates always stay at the same margin above inflation. But in periods like the present, interest rates trade below inflation, so the price of TIPS gets bid up above par.
Today, 10-year TIPS yield only 0.19% and 30-year TIPS yield only 1.00%. Since real bond yields in normal markets should be in the 2% to 3% range, there is potential for the loss of principal here. Indeed, in real terms there is a certainty of loss of principal – the "on-the-run" 30-year TIPS trade at a price above $128, so over the next 30 years you are bound to turn $128 into $100 in real terms – not a good deal.
Sidestepping Uncle Sam
Additionally, there is another problem with TIPS: The government sets the price index to which TIPS are linked. And if you think the government is too honest to fudge the price statistics to make its debt cheaper, I have some sad, disillusioning news for you.
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A Nobel Prize for Steve Jobs?
The Nobel Prize in Economics was awarded Oct. 10. It went to Christopher Sims and Thomas Sargent – two fairly obscure economists whose main work was on rational expectations theory.
That followed by five days the death of Steve Jobs, whom the Nobel Prize committee never recognized in any way.
That hardly seems fair, to me.
Jobs made billions of dollars, built the most recognizable global brand since The Coca-Cola Co. (NYSE: KO), and revolutionized the way we consume media. Sims and Sargent, though certainly brilliant, hardly contributed as much.
So why don't the Nobel Prize committee award a Nobel Business Prize annually?
The Nobel Foundation wouldn't even have to offer up very much prize money, since presumably any businessman worthy of the prize would already be rich.
You may think the Financial Times has got ahead of me on this, since it recently discussed a Nobel Prize in management. But no, a Nobel Prize in business is absolutely not the same thing as a Nobel Prize in management.
Here's the difference, as well as some other truly deserving Nobel candidates.
Business vs. Management
Nobel prizewinners in management would be sharks – people like "Neutron Jack" Welch, the long-time head of General Electric Co. (NYSE: GE). Welch achieved enormous wealth for himself and spectacular stock price growth with a combination of ruthless cost cutting, short-term profit maximizing, crony capitalist deals with the government, and dodgy accounting of pension liabilities.
As we now know, 10 years after he left, the U.S. economy is not better off for Welch's work at GE, and GE shareholders have found themselves locked into a dull, slow-growth conglomerate that suffers intermittent profit explosions from its unmanageable and low-quality finance side.
Welch was management. Jobs was business.
That's the difference.
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The "Currency Manipulator" That's About to Put 3 Million Americans Back to Work
Think U.S. jobs are destined to drain away to China forever? Think U.S. unemployment will grow and grow while cheap overseas labor supplants American workers? Think your children will be forced to work selling Big Macs to Chinese billionaires?
Well, boy has the Boston Consulting Group (BCG) got news for you.
The United States' No. 1 strategic consultancy's latest study shows 2 million to 3 million manufacturing jobs and about $100 billion in output can be expected to return to the United States from China by 2020.
That's right. China, so often the scapegoat for U.S. joblessness – and an alleged "currency manipulator" – actually is becoming our best ally in the fight against high unemployment.
The BCG team says three things will bring millions of Chinese jobs back to America:
- Soaring Inflation. China's annual inflation pulled back to 6.2% in August after hitting a three-year high in July. It's rumored that the People's Bank of China will allow the yuan to rise further to curb rising prices. A stronger currency will make the country's exports and labor less competitive.
- Rising Wages. Chinese labor is steadily becoming better educated and more affluent. The central government is targeting an increase in minimum wages of 13% a year through 2015.
- And A Stronger Yuan. The yuan has risen about 30% against the dollar since 2005. Again, the great motivator here is not the saber rattling of U.S. politicians, but rather troubling levels of inflation that could spur civil unrest.
Made in the U.S.A. (Again)
Indeed, Chinese manufacturing, which had been much cheaper than U.S. manufacturing for the last decade or so, is suddenly less competitive in certain sectors.
This should come as a huge relief for Americans.
Modern telecommunications and the Internet revolution made it easier and cheaper than ever before to run a global supply chain. Consequently, U.S. manufacturing was priced out of the market.
We saw it first in cheap clothing – a highly labor-intensive industry where U.S. factories were already struggling.
The move to Chinese clothing sourcing, pushed into overdrive by Wal-Mart Stores Inc. (NYSE: WMT), brought immense cost benefits to U.S. consumers. In fact, the Bureau of Labor Statistics price index for apparel has declined by 15% in nominal terms since 1993, compared with a 50% increase in consumer prices as a whole.
U.S. Federal Reserve Chairman Ben Bernanke and his predecessor, Alan Greenspan, helped this process along with their ultra soft money policies. We haven't had much inflation because of the price declines brought by outsourcing, but for many years it has been exceptionally cheap to raise money for investment in emerging markets. China and other emerging markets already had a cost advantage in cheap labor, and the Fed's loose monetary policies further encouraged outsourcing.
As a result, U.S. workers can now buy cheaper clothes from China through Wal-Mart, but are losing jobs and being forced to accept lower wages. And since Bernanke cannot be persuaded to reverse policy and raise interest rates, it was beginning to look as though U.S. jobs would drain away until American wages were at Chinese, or even African, levels.
However, the BCG report is a very welcome sign that this process could actually be coming to an end. Chinese wages have risen so much that U.S. labor is now competitive when its higher productivity and lower transport costs are taken into account.
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Bring On the Tobin Tax – But Only After Making This One Key Fix
The European Commission (EC) on Sept. 28 proposed a Tobin tax for the European Union (EU). It's likely to pass, in one form or another, but it won't stop there.
The United States will be next – and as investors we should be grateful. I just hope policymakers make one key change first.
I'll explain.
I penned a column for Money Morning almost exactly one year ago that said major world economies should adopt a "Tobin tax" – a small tax on financial transactions, named after its inventor, Nobel laureate James Tobin.
It's always nice – albeit unusual – when politicians take my advice. And I'm certainly glad that the EC is doing just that. But the commission still hasn't gotten it quite right.
A Promising Proposal
You see, the Tobin tax I proposed would be at a very low rate, perhaps 0.01%. Apart from raising revenue, its main effect would be to inhibit speculation. By that I specifically mean "high-frequency trading," or HFT, where computers trade bonds, stocks, and derivatives in milliseconds.
High-frequency trading is objectionable for two reasons.
First, its proponents claim it provides liquidity to the market, but that's not really the case. In periods of turbulence, the liquidity that HFT supplies is quickly withdrawn, as the institutions operating the trading systems shut them off for fear of large and destabilizing losses. Indeed, liquidity that switches off when it is most needed is of no use at all. To the contrary, it destabilizes the market rather than stabilizing it.
The second reason high-frequency trading is bad is that it uses machines to get trade information before competitors. Of course, trading based on extra-fast knowledge of the trading flow should qualify as inside information, and thus be illegal.
Unfortunately, it can't be made illegal, because market-makers do it all the time. And what's more is that stock exchanges make huge sums of money by renting space within feet of the exchanges' computers to high-frequency traders.
And that brings us to the tragic flaw of the EC's proposal.The Tobin tax proposed to the European parliament by EC President Jose Manuel Barroso would impose a 0.1% tax on stock and bond transactions and a 0.01% tax on derivatives trades.
It's backwards.
The Housing Market is Finally Bottoming – Here's How to Play It
The housing market remains a drag on the economy, but there are indications that it is finally starting to bottom.
Prices have stopped declining, and there is even some sign of life in sales.
Not all the news is good, of course. New home sales dropped still further in August from July, falling to a pathetic 295,000 annual rate compared to the 1 million-plus in the good years. And housing starts fell to an annual level of 571,000 from 601,000 in July – that's 12% below their August 2010 level.
Still, this is to be expected. The new home sector should be the last to turn up. There is a massive overhang of existing homes, both through foreclosures and through suppressed sales from homeowners that are "under water" on their mortgages and can't afford to sell.
With the exception of a very few markets – such as North Dakota (4% unemployment and new jobs appearing from the Bakken oil shale) and the overstuffed bureaucrat haven of Washington and its surrounding suburbs – there should be very few new homes built for the next several years.
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Southeast Asia: Strong Growth, Humming Factories, No Debt Crisis
Gloom has enveloped most of the investment landscape these days, but there is still one region that offers strong growth and serious returns.
I'm talking about Southeast Asia.
There was a time when investors scoffed at the likes of Singapore, Thailand, Malaysia and Indonesia. But no one's laughing now. The naysayers currently are all too busy pulling their money out of the regions they always assumed were safe – the United States, Europe, and even the trendy BRICs (Brazil, Russia, India, and China).
Indeed, there are precious few flourishing economies in the world today, and none look as promising as the ones you'll find in Southeast Asia. We're talking about countries that have pro-market governments, thriving manufacturing sectors, ample natural resources, and – with the exception of Singapore – wage levels that can still grow a great deal before pricing themselves beyond their Western competitors.
That's quite a lot by today's standards.
Just take a quick look around the rest of the world and you'll see what I mean.
Searching for a Savior
U.S. growth has fallen off a cliff and no amount of "stimulus" seems likely to get it back on track. Economic growth in Europe is stalled as well, and the continent is further jeopardized by the potential collapse of Greece and the European Union (EU). Even Australia and Canada, both with strong mineral and energy sectors, seem to be slowing as demand wanes in the wealthy West.
Emerging markets seem like a better bet for our money at first glance, but they, too, have problems when examined more closely.
Brazil and China are battling inflation. Brazil has a government that seems unable to stop spending, while China has a thoroughly corrupt government and a banking system with an enormous hidden bad debt problem. Russia is a snake pit, from which a foreign investor is unlikely to escape alive. And India, while growing rapidly, has a serious inflation problem and a government as corrupt as it is economically inept.
Fortunately, one incandescent bright spot shines through the darkness: Southeast Asia. So let's take a look at some of the investment opportunities being illuminated.
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Don't Get Stung by President Obama's Deficit-Reduction Plans
In the last 10 days, U.S. President Barack Obama has unveiled three distinct deficit-reduction plans to solve the nation's economic problems.
While all three have their good points, each has its own set of problems, too – including the time-consuming political firestorm we can expect to see as the plans are debated in Congress.
We can make some educated guesses about how this will all play out – and how the final plans will help or hurt the American economy. But the bottom line is that you as an investor can't wait to see how the deficit-reduction saga ends: You need to take action now.
So let's take a look at the proposals, the likely outcomes – and the moves you need to make immediately.
A Trio of Deficit-Reduction Plans
President Obama has unveiled three overhaul plans for the U.S. economy – a "jobs" plan, an "offset" plan and a "deficit-reduction" plan.
Of the three, the "offset plan" that calls for reductions in tax deductions is clearly the best. But there are some good ideas in the other deficit-reduction plans, too – not to mention a couple of real stinkers.
Here's a look at each of the three plans – the good, the bad … and the downright ugly.
The "Jobs" Plan: President Obama's jobs plan is a mix of spending on infrastructure and providing aid to state and local governments, both of which were tried in 2009 and didn't work.
Government infrastructure spending is appallingly expensive in the United States – in fact, it costs more than twice as much here as anywhere else – because of the additional restrictions on its design and labor usage.
However, the Obama jobs plan also included a 3% reduction in employees' Social Security contributions (expanding and extending the current one-year reduction of 2%). Finally, it included a 3% reduction in employers' Social Security contributions, but only for wage bills up to $5 million.
For me, it's the last provision that made most sense and should be extended. Reducing employers' Social Security contributions by 3% reduces the cost of labor – which should expand the demand for it.
Look at it this way: If the "price elasticity" of labor is 50% (estimates for this piece of economic jargon are all over the place, but 50% is about the midpoint), then a full 3% reduction in labor costs should increase demand for labor by 1.5%, or about 2.2 million jobs.
That would reduce the unemployment rate by about 1.2%, taking it from 9.1% to 7.9%. To me, that's well worth doing.
Naturally, the Social Security trust fund can't afford to do this every year, but it should certainly be done for two years, because employer-hiring decisions take time to implement (and because U.S. unemployment still will be higher than we'd like in 2013).
But that's not all. There should be no "Mickey Mouse" restrictions to $5 million payrolls – it's just as important to encourage hiring at McDonald's (NYSE: MCD) or Wal-Mart (NYSE: WMT) as it is to promote hiring at the local corner store.
The cost of this would be about $300 billion, and would be evenly split between 2012 and 2013.
This alone is such a good idea that you could probably abandon the rest of the so-called "stimulus."
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Four Stocks to Avoid At All Costs
If you're like most investors, you probably spend most of your time searching for the "next" Apple Inc. (Nasdaq: AAPL) or next Google Inc. (Nasdaq: GOOG) – in other words, the next big winner.
But finding winners is only part of the equation.
If you're looking to build real wealth, you need to avoid the really big losers – like the "next" Enron, or next Lehman Brothers Holdings Inc. (PINK: LEHMQ).
Portfolio killers like those are the stocks to avoid at all costs.
Let me explain …
How to Win By Not Losing
During my years as a global merchant banker, advisor to governments, financial-news editor and trading-service specialist, I've time and again seen the big losses that can result from arrogant executives (Enron), greed-driven strategies (Lehman) and other investments gone wrong.
But what most investors don't understand is that the fallout from these losses reaches far beyond the losses themselves. You see, that's money that can't be deployed into winners.
As one longtime investing adage tells us, if you suffer a 50% loss on a stock, you need that stock to double in price (a gain of 100%) just to get back to even.
And let's be honest: How many times has one of your stocks doubled – after it took that kind of a beating?
There are many strategies you can use to protect yourself from big losses. Just last week, for instance, I showed you how to bolster your portfolio by investing in companies with strong growth prospects and a record of consistent dividend payouts.
I call those companies "Alpha Bulldogs" – and recommend the shares of the strongest performers to subscribers of my Permanent Wealth Investor advisory service.
In last week's report – "Investment Protection: These Dividend Stocks Yield Twice as Much as Treasuries" – I discussed two specific "Alpha Bulldog" stocks: B&G Foods Inc. (NYSE: BGS), and a second whose identity was withheld specifically for the charter subscribersof our newest premium advisory service – Money Morning Private Briefing.
But as I noted above, finding great investments is only half the battle. In the work that I do for my subscribers, I must also avoid big losers.
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