The Daily Reckoning November 28th


Sinking Net Worth, Soaring Debt

Behold a new damage assessment from the credit crisis: The net worth of the median American household plunged 47% from 2007-2010.

So concludes a study by New York University’s Edward Wolff. “The debt of the middle class exploded from 1983 to 2007,” he writes, “already creating a very fragile middle class in the United States… [T]heir position deteriorated even more over the ‘Great Recession.’”


Remarkably, if you throw out housing, the picture is even worse: Median nonhome net worth dived 59% between 2007-2010 and is indeed substantially lower than it was in 1962 — which is as far back as Wolff dared to look.

In Washington, Wolff’s study is prompting a thorough reexamination of policies that larded down the middle class with so much debt over the decades.

Just kidding: The Beltway class is latching on to the part of Wolff’s study that noted median net worth among “the 1%” grew 71% between 1983-2010, measured in 2010 dollars.

“Inequality skyrocketed as a consequence of the Great Recession,” says the questionably named Center for American Progress, “taking resources away from middle class, minority and young families while the wealthy made significant gains.”

The statistic is “almost ready-made for an Occupy Wall Street banner,” notes a story at Salon.

Like it or not, here’s another statistic of that ilk: Student loan delinquencies skyrocketed during the third quarter, according to new figures from the New York Fed.

As of June 30, less than 9% of loan balances were 90 days or more in arrears. As of Sept. 30, the number was 11%. That’s bad enough. In the context of the last decade, it’s frightening.

“Nearly all student loans — 93% of them last year — are made directly by the government,” The Wall Street Journal points out.

“The real fallout from the student loan crisis will hit in mid-2013, four years after the volume of government-funded student loans surged,” our macro strategist Dan Amoss wrote in August . “Like the infamous option ARMs (adjustable-rate mortgages) during the housing bubble, these loans have precisely timed fuses: Four years after the loans are made, borrowers must start making payments.”

“Within a handful of years,” he amends his forecast now, “U.S. taxpayers will be on the hook for over $100 billion in student loan defaults.”

Then again, what’s $100 billion in a “real” national debt of $86.8 trillion?

Officially, the national debt stands this morning at $16.3 trillion. But as we’ve long pointed out, that number does not include future liabilities for Social Security and Medicare.


Different people come up with different numbers when it comes to the true national debt: Former comptroller general and I.O.U.S.A. protagonist David Walker reckons it’s $71 trillion. Boston University’s Larry Kotlikoff’s number crunching comes up with a figure three times as big, $222 trillion.

The $86.8 trillion figure comes from former congressmembers Christopher Cox and William Archer, writing in an Op-Ed posted yesterday at Yahoo Finance.

“Were American policy makers to have the benefit of transparent financial statements prepared the way public companies must report their pension liabilities,” the duo write, “they would see clearly the magnitude of the future borrowing that these liabilities imply.”

Contra Messrs. Cox and Archer, they do: The Treasury Department issues an annual Financial Report of the United States Government — every year during the week between Christmas and New Year’s, to make sure as few people as possible see it.

Dave Gonigam

The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.

Sinking Net Worth, Soaring Debt appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

“The Best Unopened Market in the World”

Archibald Colquhoun returned from a trip to Myanmar (Burma) enthusiastic about the opportunities in the country. He wrote a book about it all: Burma and the Burmans: Or, “The Best Unopened Market in the World.”

Colquhoun writes exuberantly about the oil resources of the country, as well as its jade, gold, copper and coal. There are dense forested hills of teak, unspoiled fisheries and fertile valleys. Nor did he forget the potential for reopening old trade routes connecting China and India.

The thing is, he wrote about all this in 1885.

But Colquhoun was right. By the 1920s, Burma was a regional hub and relatively rich. But after those prewar peaks, Myanmar suffered through a long period of decline and isolation, nurtured by an oppressive government. Today, Myanmar is again in the news as it reforms and opens up to the world outside. It is a market of 60 million people poised to join the global economy. It is a large country, bigger than France, with rich stores of natural resources and much untapped potential.

Consider some points from a recent UBS report by Ian Gisbourne titled “On the Ground in Myanmar.” Specifically, consider some comparisons with Thailand, a country it was much the equal of 80 years ago and where the populations are close today:

  • More tourists arrive in Thailand in a single week than arrive in Myanmar in a year
  • There are more hotel rooms in Bangkok alone than in all of Myanmar
  • Current power consumption per capita is only 5% of Thailand’s
  • There are only 300,000 vehicles in Myanmar, compared with 5.4 million in Thailand
  • Former capital and biggest city Yangon has only 740 apartment buildings, compared with 15,000 in Bangkok
  • Mobile phone penetration in Myanmar is 1%. In Thailand, 115%. (Some people have more than one.)
  • Life expectancy in Myanmar is 10 years less than in Thailand
  • Fertilizer use is 43 times greater in Thailand than in Myanmar.

As you can see from just this partial list, there are opportunities in tourism, hotels, power generation, cars, mobile phones, health care and agriculture. Myanmar is like a market frozen in time. But things are changing.

As I write, the government is still hammering away at a new investment law that will open things up and make the rules of the game clearer.

The biggest source of foreign investment right now is oil and gas. Natural gas is Myanmar’s biggest export. (It supplies Thailand with 21% of its natural gas.) Yet the value of Myanmar’s total exports runs to only $9 billion. Compare that with Thailand’s total of $225 billion. There is plenty to do on the oil and gas front. Myanmar is actually one of the oldest oil producers in the world. The country exported its first barrels back in 1853.

In agriculture, Myanmar is the world’s second-largest exporter of rice. The alluvial deltas of the Irrawaddy River are ideal for growing rice. Scottish journalist Sir James George Scott marveled at the inexhaustible soil and the ease of cultivating it back in 1882. “The laziest farm is swampland,” he writes, “where the ordinary rainfall is sufficient to produce the sodden ground requisite for a rice crop.” He goes on:

So rich is the soil of [Burma] that it has only to be scratched to burst into plenty… The southwest monsoon, commencing in early June, soon reduces the ground to a soft sea of mud.

Even today, most people in Myanmar work on farms growing over 60 different crops, including wheat, beans, rubber, sugar and oilseeds.

Beyond this, Myanmar has over 1,800 miles of coastline. Beautiful beaches lay almost untouched by human feet. A few developments have just broken ground. (And I had to smile at the quaint regulations, such as one that requires no building be taller than the coconut trees.) There are over 800 unexplored islands in the Andaman Sea. The country is a significant source of fresh fish and shellfish. It is also one of the largest sources of hardwood in the world.


Real estate is a big opportunity. Hotels, I’ve mentioned. But there has been virtually no development of any kind in Yangon (the old Rangoon). Gisbourne notes that one large shopping center in Bangkok has more retail space than all of Yangon — a city of 4 million people! Similarly, one office building on Sathorn Road in Bangkok has more space than the whole of Yangon.

As the economy develops, the demand for things like hotels and office space and shopping centers will increase manyfold over what exists now. So will the demand for railways and highways, pipelines and refineries, cell towers and power plants.

Of course, predictions like these can go very wrong or take much longer to play out than expected. I read Norman Lewis’ classic Golden Earth: Travels in Burma. Lewis is universally celebrated as a great travel writer, but he is prone to the occasional howler. (Beyond the ridiculous romanticizing of poverty-stricken peasant life, at one point he writes that Burma is “free from the damaging myths of color, race and caste that bedevil the internal relationships of so many nations.” I can’t imagine a more naive statement.)

Anyway, Lewis’ book came out in the 1950s. He wrote glowingly about Burma’s prospects. Yet a military coup lay less than 10 years in the future, which would send Burma on a near 50-year journey in darkness.

So you never know. Nonetheless, the best time to get interested in places like this is when they just start to open up. That time is now. My hunch is that Archibald Colquhoun’s 1885 thesis is back in play. Burma, now Myanmar, is the best unopened market in the world.


Chris Mayer
for The Daily Reckoning

“The Best Unopened Market in the World” appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Which E-book Reader Should You Buy?

We are still in the early stages of a literature revolution, a migration from physical to digital, and it is tremendously exciting to see the number of options that have become available. I still remember when, not too many years ago, people were saying that computers would destroy books and therefore authors and therefore the intellectual foundation of civilization.

Well, the exact opposite has happened — another example of why no one should believe the conventional wisdom. The prophets of techno doom never learn, no matter how many times the market outsmarts them.

The immediate reason for writing this piece concerns a little machine I picked up from a discount Big Lots store on Black Friday. I had seen the ad and couldn’t believe my eyes. For $78, I could buy a 6-inch tablet computer made by Nextbook that can read e-books. It has a backlit screen. With the Android OS, it can do movies, email and weather and has a camera too. It seemed too good to be true. I bought it just as an experiment.

I took it home and was initially impressed. In fact, I’m still impressed that I could pick up for such a low price a machine that would have dazzled the multitudes just five years ago. It does things that would have been miraculous 10 years ago. I can use the machine to make video phone calls to any place on the planet, for goodness sake. It came with pre-loaded e-books. I could use several apps to download more. This darn thing opens up a world of information as never before in human history.

What’s not to like? Well, this is where matters get complicated. You see, normally, I use the iPad. I consider this to be the best of the best of the tablets. I’m in love with the functionality. I bought one in 2011 after having purchased two prior machines made by Sony that specialized in e-book reading. I found both Sony machines, the first and second generations, to be virtually useless. They are still gathering dust.

You can like Sony’s product if you want. I have biases and, just to spell them out, I don’t like what’s called e-ink. Other people think e-ink is fantastic and would never use what I like, which is the backlit screen of the iPad or the desktop computer. Also I like the touch-screen method of navigation. The iPhone spoiled me forever more on the being able to touch the screen and work the machine.

Just based on my own bias here, the early Kindle reader was out of the question. When Amazon came out with it, I publicly dismissed it. I found the hardware primitive and the marketing scheme absurd. I found it preposterous that anyone in a universal digital age would imagine that they can produce the hardware, the firmware, and the products in locked-down proprietary format and expect consumers to go along with such an obvious monopoly scheme.

It turned out, of course, that from the marketing point of view, I was entirely wrong. The Kindle has been an astonishing success, so evidently, you have to take my own market analysis with a grain of salt.

The Kindle Fire was the first product by Amazon with the backlit screen, so it was something I was drawn to. But again, from the perspective of an iPad user, the first generation (which came out last year) struck me as clunky, heavy, and essentially frustrating. I had no interest in it. On the other hand, I had friends who fell in love with it and have never left it. They are dedicated to the Kindle Fire, so there you go: There’s no arguing with taste.

The Nextbook that I picked up seemed easier than the Fire, better than the e-ink Kindle, leagues above the Sony Reader, and — by pre-iPad standards — a stunning and thrilling machine in every way. I probably still feel that way, but I can’t tell for sure. I say that because I immediately ran into problems that reminded me of what it was like to use a Windows desktop in about the year 2000.

The Nextbook came pre-installed with a book app and another one from Barnes & Noble. I knew that the B&N app would take me to the store and want me to spend money. I confirmed that. This is one of several apps on the machine that want me to buy stuff.

But what I really wanted to do was download e-pub files from third-party sources, particularly the ones from the Laissez Faire Club and Project Gutenberg. This I did, and they opened just fine. I was happily reading. Then I closed the book and looked at the bookshelf. The books were not there. The shelf displayed only the pre-installed items.

Solving this puzzle devoured about five hours of my weekend. There was probably an easy workaround, but I never found it. I ended up browsing the machine, renaming some files, and reorienting the file structure so that the bookshelf reflected my entire collection. But there was still a problem. The shelf did not read the metadata from the book itself, so the books were named by their file names, meaning that I couldn’t tell what books I was opening.

The iconography on the tablet itself is opaque and strange and has nothing to do with the human mind. To the Android user, it might be obvious. But to me, there’s a triangle, a half envelope, a stack of dots, a slash, a swirl, and a caret, and there is no way to tell what is what without actually trying them out. Eventually, I found a pathway forward for every operation I wanted to undertake, but doing so consumed an enormous amount of mental and physical energy and time.

At some points in this process, I wanted to throw the machine across the room. The whole experience reminded me of the Windows experience from a decade ago, when to use a computer was also to become an expert in repairing a computer. You spent as much time trying to figure out how to do stuff as actually doing stuff. We lived with it and never knew any difference. And so it shall be for the Nextbook. Anyone who gets one will probably be happy with it because they do not know anything better.

To be sure, this review is deeply unfair. I’m comparing the best on the market (which is the iPad, in my view) with the worst on the market — and what is the fault of the hardware, firmware, and apps is very much mixed up. In any case, this is a dollar-store item sold in stacks at the cash register. There are so many products that are in between. The Google tablet (Nexus) looks just fantastic, is getting great reviews, and is half the price of a an iPad or iPad Mini. Samsung also offers what looks like an outstanding product at half the price. The newer Kindles like the Paperwhite seem effortless (but still won’t read certain file types).

And there will probably be a dozen or more coming on the market in the next months. I’m describing a slice of time, whereas the real market is an ongoing process of change. Nonetheless, consumers don’t buy a process. They enter into a slice of time and demonstrate their preferences.

And so it is a matter of priorities. How important is it to you that you have a machine that works, and works beautifully? It is a sad thing that people just getting interested in e-books will first buy the cheapest item on the market, have a less-than-stellar experience, and never know the difference.

E-books are the future. Tablets are an essential life tool. They are the new home for the vast portion of the information world that has migrated from the physical to the digital realm. Once you realize this, you also realize that it makes sense to put a few more resources toward getting either the best that the market offers or at least going for the midlevel product.

We are, indeed, living in revolutionary times. I admire so much how the market is making a range of products available. But in such times, it makes more sense to me to avoid the dime store specials that just end up wasting precious time. As with most products on the market, it makes sense to avoid the lowest and the highest and get the thing in between.

A quick note about public policy: In the early stages of the end-users desktop industry, government intervened in a huge way to declare what operating systems should contain, what had to be separate, what perfect competition would look like, how much market share a particular company had to have, and so on. Litigation began and went on 10 years, by which time the market had completely changed. Billions were wasted and consumers were no better off. So it would be if the government were to intervene in the tablet market now. Again, the market is a process, and its imperfections must be worked out by letting that process work.


Eventually, in a vibrant market, today’s luxury good becomes tomorrow’s product for everyone. Look at the wristwatch as an example. But the process has to play itself out over time. That time is not here yet. Conclusion for gift getting and gift buying for the holiday season of 2012: Forgo other things and spend more to get quality. For my money, that means the iPad. But for many, it might mean the Kindle Paperwhite or the Samsung or the Nexus. But if you settle for the lowest and cheapest, don’t blame the market for its failures. Praise the market for making miracles available for very low prices.

Jeffrey Tucker

Original article posted on Laissez-Faire Today 

Which E-book Reader Should You Buy? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Four Reasons To Remain Optimistic

The holidays are here. Please allow me be the first to say there’s reason for optimism.

Yes… You read that right: optimism.

I have been thinking a lot about this — about optimism and pessimism and the reasons for both — in recent post-presidential election days. It’s not that I care that Obama won or Romney lost. Please don’t misunderstand me. I didn’t (and still don’t) support either of them.

It’s the whole process that gets me down. It brings out the worst in everybody. And I am always a little blue at election time anyway because the ideas I most cherish — those quaint-sounding notions of liberty and inalienable rights that so moved the Founding Fathers — seem to have no force in the national debate. Instead, we have a free-for-all to see who gets to feast at the government trough.

Yet there are reasons for optimism: big, powerful, long-term reasons to feel good about the prospects for liberty… and for your portfolio, particularly in the U.S. Though the two are related (an idea I hope to develop more in a future letter), we’ll stick with the investing side of it for now.

(As an aside, I would like to point out that the act of investing itself is optimistic. If you were really pessimistic, you wouldn’t invest in anything. You’d spend it all right away or lock down like a survivalist.)

An editorial in last week’s Wall Street Journal by William Conway, a co-founder of the Carlyle Group, titled “Why We’re Investing in America” hit on some of the reasons I’ve started to feel optimistic again — especially about the U.S. Conway writes, “A decade ago, China was the most attractive place to invest.”

But it is no longer. As Conway points out, China has emerged. It is not the same growth story it was. And there are new challenges. A Washington Post story over the weekend highlights one of them. The article was about how so many of China’s wealthier citizens want to leave the country. If it is so good in China, why do they want to come to the U.S.?

It’s not just China. Brazil has problems. It is looking like the banana republic it was and perhaps always will be. India struggles. The EU is shrinking. Japan has mega problems. These are all big markets. And they are all in trouble.

The U.S., compared with this lot, has many attractive attributes.

Conway points to some: rule of law (for the most part), deep and liquid capital markets and transparency to degrees many other markets are not yet up to snuff on. (They are getting there, as my World Right Side Up thesis says they will.) Plus, the U.S. is a big market by itself — 300 million-plus — still the world’s largest consumer market.

And there are four more big reasons to be optimistic, some of which Conway touches on:

  • The housing market is clearly recovering. It is no longer a drag on the economy. Prices have begun to recover in most cities. Investment has started to come back. I’ve been a bull on housing for a while now, and this has been a good call.
  • The banking sector is also recovering. U.S. banks are on the mend. The worst problems are behind them. Recent letters to my paid-up readers have much on my bullish bank thesis.
  • “The discovery and production of new sources of crude oil and shale gas is lowering energy prices, jolting the U.S. into a new energy revolution,” Conway writes. Lower energy prices are good for the economy as a whole. As we’ve covered, this is also an aid to U.S. manufacturing, which leads us to…
  • U.S. manufacturing is starting to come back. I’ve written a lot about this, too. There are definitely opportunities to make stuff in the U.S. and invest with a world-class set of American companies. Conway notes that of the $4.4 billion Carlyle has committed to invest in the U.S., two-thirds of it is in the manufacturing and industrial sectors.

Conway sums up:

“Many in America and beyond have been paralyzed by fear of the fiscal cliff, frustrated with Washington’s partisanship, mesmerized by the presidential election or stunned by the post-Great Recession recovery. Any way you look at it, though, now is a great time to invest — and there is no better place than America.”

I am not quite as optimistic as Conway, but I do believe it is a good time to invest in the U.S., especially as it relates to those four bullet points above — though you still need to be choosy, in particular about the price you pay.

My conclusion should not come as a surprise, really. This is especially true if you’re a reader of my newsletter Capital & Crisis. In those pages we have come to focus on U.S. opportunities – indeed, most of the global plays have been sold off. Instead, we find our focus is on American real estate, American banks and American manufacturers.

There will still be good opportunities abroad, of course. But as you celebrate over the coming holidays, go ahead and put in a few good words for the old US of A. It ain’t dead yet.


Chris Mayer

Original article posted on Daily Resource Hunter 

Four Reasons To Remain Optimistic appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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