What’s he talking about? Today, we take a look and invest right alongside his idea. And it should start to pay off with the arrival of the first swallows of spring in 2010. It’s also timely now — in this weak-kneed economy — because it has traditionally held up well even in when the economy is on the ropes. Even the Great Depression couldn’t put this thing down.

We start with simple truths. The world’s population has more than doubled since 1950 — from about 2.5 billion to 6.7 billion. By 2050, there will be more than 9 billion people on the planet. Almost all of this growth will come from undeveloped markets such as China and India. And they will all be doing one thing, for sure — eating.

Now, hang on. I know that is a banal insight by itself, but this story has layers like a tiramisu. The second layer is the mix of food eaten, which is important. These undeveloped economies are getting richer. Predictably, as people everywhere have done and continue to do when they have a little more money in their pockets, they change their diets. They spend more on food. The average Chinese spends 40 cents of every additional dollar earned on food. In India, it’s about 70 cents of every additional dollar. What do they buy?

Read the rest of the story at PennySleuth.com.

Oil didn’t move yesterday. Neither did gold.

The Wall Street Journal reported that markets were reacting to “mixed data”.

That is to say, some reports were encouraging. Others were not. It was as if one weather forecaster called for a blizzard. The other for sunny skies and warm temperatures. Investors didn’t know how to dress.

Among the dark clouds was an item on the falloff in tax revenues. States are having a hard time balancing their books, because their tax receipts are declining. The WSJ reports that they are running 17% below last year.

Since states cannot print money, they’re forced to make cutbacks – typically reducing hours worked per employee as well as the total number of employees. This is a bad thing, says the report, because it increases unemployment and lowers the wage base. This leads to less consumer spending.

Another little cloud appeared yesterday (in addition to the consumer confidence numbers): the vacation timeshare market is collapsing at a record pace.

Well, don’t worry about it. We met a guy who explained the timeshare business to us.

“What you’re selling is a dream. You bring them to the property. You make sure they have a good time. And then you do to the numbers with them. You show them how much they save by coming to your property rather than on a typical vacation. And then you show them the other properties that they can exchange for. They think they can buy a cheap property and then exchange with an expensive timeshare. But it doesn’t work that way. They get stuck in the cheap unit and the dream gets a little faded… And then, they stop coming… and then they try to sell the timeshare. Timeshares are rarely a good investment.”

Besides, timeshares are a small, quirky part of the housing picture anyway. The real story is in the regular housing market. There, if you believe the forecasters, it’s sunny skies.

House prices seem to be stabilising. In some areas, they are going up. Of course, in some places you can get a house at half the price it sold for two years ago. That lures buyers back into the market. If we wanted a house to live in, we might be tempted too. That’s why we like falling housing prices: we get more for our money. But most people want a rising housing market. They think it makes them richer.

They’re likely to be disappointed. They show up at the beach with their umbrellas and sun-tan lotion… just as a winter storm hits the coast.

Forbes lists eight reasons to “remain worried about housing”.

• The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000 more expensive for first-time buyers.

• The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-backed derivatives. What will happen when it stops?

• Mortgage lending standards are tightening up generally.

• Houses are still not cheap. Forbes cites Shiller’s numbers, putting the average house price 41% higher than it was in 2000. Incomes did not increase during that period; ergo, houses are still too expensive.

• Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market.

• The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, during the school break. Then, sales fall with the autumn leaves.

• There are still huge numbers of houses that will be repossessed. Forbes says only 12% of option ARMs have been reset. More repossessions will increase the supply of desperate sellers and decrease prices.

• There’s a ‘shadow inventory’ hanging over the housing market. It could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilise. As they put their houses up for sale, that too will hold prices down.

Some wiseacre economist has probably already come up with eight reasons why housing prices will go up. But the key thing to recall is that this is a depression. It’s a major restructuring of the economy, not a standard post-war recession. After 64 years, the consumer has finally rung a bell. He has reached his limit. He cannot borrow more. He cannot spend more. He is finally cutting back. That fact will echo through the entire world economy – and through the US housing market – for many years.

Houses, like stocks and corpses, may bounce. But they will not begin a real bull market again for a long, long time.

***Our old friend Marc Faber is “highly confident” that things will turn out badly.

“The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society,” he writes.

“We have a money-printer at the Fed,” he continues, which guarantees runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well.

Meanwhile, Paul Volcker says that China’s rise merely “highlights the relative decline of the US.”

So there you have it: China on the way up, America on the way down .

That’s the drama that we’re watching every day here at the Daily Reckoning. In our view, the peak of US wealth and power probably came during the period between the fall of the Berlin Wall and the fall of Lehman Brothers. But there are probably a lot more shoes to drop before people are fully aware of what is going on.

The way we see it, almost the entire 20th century was a mistake, a dead end. Europeans were clearly on top of the world when the century began. Then, after WWI the Europeans in America took the lead role. But WWI shook their faith in their evolving political order.

Not long after, German hyperinflation and the Great Depression shook their faith in their economic and financial order. This left a huge vacuum, which was soon filled by ruthless adventurers and ideological schemers. Much of the rest of the century – from 1939 to 1989 – was spent in hot wars and cold wars against these Bolsheviks, Fascists, Stalinists and Maoists.

In the end, the more reasonable and consensual societies of the West won the battle. But they, too, were transformed by 50 years of war and nearly a century of bad ideas .

“Whoever fights monsters should see to it that in the process he does not become a monster. When you look into the abyss, the abyss also looks into you,” Nietzsche warned.

Looking into the abyss created by Mussolini, Hitler, Tojo, Pol Pot and the rest, Western societies decided both to fight them and to join them. Tax rates soared. Regulations multiplied. University professors taught socialism, Freudianism, modernism, cubism, feminism, racism… and every other ‘ism’ they could think of. Parents spent good money to send their children to universities that turned them into mush-heads.

And – perhaps most ominous – in the United States of America, the military grew into a greedy, grasping goliath… the very thing Eisenhower had warned against.

Then, there were counter-trends in the 1980s… led by Margaret Thatcher in England and Ronald Reagan in the US. But these were mostly frauds . Top marginal tax rates were rolled back. And there were some cuts in regulatory procedures. But government spending tended to go up anyway. Worse, Ronald Reagan mistook the Soviet Union for a genuine threat and increased military spending even further to combat it.

And now, the US staggers under the weight of its eternal wars… its imperial illusions … and its everlasting efforts to provide bread and circuses. If it kept its books like a private enterprise, it would be broke. If it were a public corporation, it would be de-listed.

Still, it spends and spends… and there is no stopping the spending. Trillions are spent on wars in Iraq and Afghanistan, for no apparent reason. But who complains? Too much money is at stake. There are too many lobbyists for too many industries and too many special interests involved. Military spending – even in a time when America faces no substantial challengers – cannot be rolled back. Neither can social spending.

Marc Faber is right. There too, there are too many people with too many dogs in this fight. Both military and social spending will continue to expand until the empire is ruined.

Until tomorrow,

Bill Bonner

Source: A Century of Bad Ideas

Obama has pledged to introduce a windfall profit tax on oil companies and raise income tax for those earning over $250,000 a year if he wins the White House. McCain favors a lower corporate tax rate (from 35% to 25%) and suspension of fuel taxes during summer. Both seek tax cuts for the middle class.

“Investors should focus their minds around one uncomfortable fact,” says Martin Hutchinson in Money Morning. “Whether it’s Obama or Republican John McCain who wins the White House, expect some policy changes that won’t sit well with investors — or with the U.S. economy.”

Of all the anticipated changes, the most widely publicized is the expected introduction of a so-called “cap-and-trade” carbon-emissions-control system. Both Obama and McCain favor such a system and Congress is currently drafting legislation that is not expected to pass this year (while George W. Bush is still president), but to form a template for legislation from a Democrat-controlled Congress to be signed by either Obama or McCain in 2009.

The most economically efficient way to curb carbon emissions is by means of a carbon tax. Such a tax would penalize emissions by polluters at a flat rate per ton, and could be offset by reductions in other taxes – a decrease in the corporate tax rate, for example – thus neutralizing its overall economic effect.

Provided the tax was set at a moderate rate, it would provide incentives to shift from carbon-based fuels to other energy generation systems, while the market itself would determine which carbon uses would be discontinued and which were too expensive to change. It wouldn’t matter too much at what level the tax was initially set, since a moderate error in setting the level would produce only moderately suboptimal polluter behavior, as the incentives produced either a little too much clean-up and consequent economic damage, or not quite enough.

The carbon tax is unpopular with politicians, because of the word “tax.” From bitter experience, they have found that raising taxes leads to unpopularity and, ultimately, to electoral defeat. Even if other taxes are lowered, the squawks of the complaints and protest of the losers are always much louder than the contented purring of the winners. That explains their preference for a “cap-and-trade” emissions policy, under which politicians pretend to give something away, providing licenses to pollute, which can then be traded among users.

The main difference between the cap-and-trade schemes of McCain and Obama is this: McCain would allow the government to give out permits to polluters while Obama would auction off permits.

At first glance, McCain’s approach appears more pro-business, but consider this: If the government gives out the permits, it gets to choose which companies get what permits. That creates a huge new playing field for lobbyists and opens the door to all sorts of new opportunities for corruption, as polluters “compete” to gain the political favor of an emission permit allowance. Already in the draft Congressional legislation provision is being made for favored groups to be given special allowances of emission permits – essentially the same as the government giving them cash, as the permits will have value.

Under Obama’s proposal, however, the government will auction off the permits. That will ensure that their price is set by a market process, and that companies neither gain nor lose by their special access to legislators. It’s a much more honest process, and a much-better representation of the “free market.” And the extra revenue it generates can be returned to the taxpayers via tax reductions in other areas.

Indeed, the only disadvantage of Obama’s proposal compared to a carbon tax is that the government has to determine initially how much carbon should be emitted. That is a very difficult parameter to determine, and an error of 1%-2% in either direction can have a huge effect – as shown by the 2004-07 European Union emission permits, where too many were given out. As a result, the prices in the permit trading market dropped 98% in a couple of weeks, as companies discovered there were ample permits for all. A market with that degree of uncertainty is far more likely to result in corporate-finance game playing than in any serious reduction in emissions.

McCain’s proposal contains a number of additional potentially detrimental features. Under it, reducing emissions in emerging markets can satisfy emissions requirements. But as the European Union has discovered, one spin-off effect has been the creation of a thriving market in Chinese environmental-cleanup scams. Further complicating the scene is the fact that some industries would be partially exempted in order to allow for transitional difficulties – providing another fertile field for government meddling and corruption. Still, even with Obama’s proposal, a “cap-and-trade” system is likely to do significant economic damage, and given the fact that legislation would need to be drafted by Congress, the chance of huge economic distortions must be considerable.

A second area where both candidates essentially agree is that taxes will be higher. McCain obfuscates this, because he needs to preserve his relations with the Republican “base.” But he has made it very clear that fiscal discipline in terms of balancing the U.S. federal budget is his most important economic objective. And he favors further activity in the Middle East, a fact that’s likely to involve an expansion of defense spending. Since, even without a recession, the federal deficit in the years to September 2008 and 2009 will be close to $500 billion, McCain’s balance-budget objectives cannot be achieved without tax increases, both reversal of most of the 2001 and 2003 tax cuts and increases beyond that.

Obama has been more up-front about his desire to reverse the 2001 and 2003 tax cuts, and to impose Social Security contributions on incomes above $200,000. Since he also favored U.S. Rep. Charles B. Rangel’s bill, which increases income taxes on higher incomes, an Obama administration could potentially increase the top marginal rate of income taxes increase from 35% to 52%.

Obama also favors an increase in the capital gains tax rate from its current 15% to at least 20%. On the positive side of the budget, an Obama administration would presumably save money in the Middle East. And his health-care plan, which mandates coverage for children but not for adults, would presumably be somewhat cheaper than Hillary Clinton’s plan.

Nevertheless, tax increases are inevitable no matter who wins in November. And if Obama were to win those new levies might include a supercharged capital-gains tax and even dividend-tax increases – either of which could hammer U.S. stock prices.

A third area of agreement between the candidates is in greater regulation of the financial-services business. From the viewpoint of a retail investor, this may be a good thing: After all, who could object to fewer scams and rip-offs, or-less-egregiously overpaid investment bankers?

For the day, July crude oil soared $10.75, or 8.4%, to close at an all-time high of $138.54. For the week, the contract climbed 8.8% on the NYMEX.

The still-weak greenback today fell more than 1% to $1.5674 per in late-afternoon trading – its lowest point since May 28 – after employment data from the U.S. government detailed a bigger-than-expected 0.5% decline in non-farm payrolls.

U.S. stocks were pounded. The Dow Jones Industrial Average plunged 394.64 points – or 3.13% – to close at 12,209.81. The tech-laden Nasdaq Composite Index skidded 75.38 points, or 2.96%, to end the day at 2,474.56. And the broader Standard & Poor’s 500 Index plummeted 43.37 points, or 3.09%, to finish the week at 1,360.68.

Troubling Trends

The U.S. payroll numbers really spooked investors. The unemployment rate jumped to a higher-than-expected 5.5% in May, up from 5% in April, as employers put 49,000 Americans out of work.

Employers have now cut payrolls for five straight months, leaving the jobless rate at its highest level since October 2004. The 0.5% rise was biggest monthly jump since 1986. The total number of unemployed has reached about 8.5 million people, up from 6.9 million a year ago when the unemployment rate was 4.5%, the Bureau of Labor Statistics reported.

The unemployment rate is expected to reach at least 6% by early next year.

The dollar’s decline Friday followed an equally dramatic tumble Thursday, when the greenback fell 1% on news that the European Central Bank (ECB) hinted at an increase in the European Union’s main financing rate.

“It is not excluded that, after having carefully examined the situation, that we could decide to move our rates a small amount in our next meeting in order to secure the solid anchoring of inflation expectations,” ECB President Jean-Claude Trichet said at a news conference.

The ECB has remained hawkish on inflation, holding its key lending rate steady, even as the U.S. Federal Reserve cut its benchmark Federal Funds rate seven times in a desperate bid to revive the U.S. financial-services sector while also averting a recession.

Between Sept. 4 and April 22, the dollar plummeted 14% against its European counterpart as a result of the divergence, and the $1.6019 it reached on April 22 was an all-time low.

The Greenback “Head Fake”

After reaching that nadir, the greenback posted a slight 3% rebound, hitting a five-week high on May 2 after Fed Chairman Ben S. Bernanke signaled a pause in the U.S. central bank’s rate reductions.

In a May 8 financial commentary, however, Money Morning Investment Director Keith Fitz-Gerald warned investors that the dollar rally was “a head fake of legendary proportions.”

Recent events have derailed the greenback’s rally – and validated Fitz-Gerald’s warning.

Friday’s employment figures compounded the negative effect of Trichet’s comments by fueling speculation that the U.S. Federal Reserve would be unable to reverse course and start raising rates as most analysts have been predicting without pulling the rug out from under the U.S. economy. Should the ECB raise its rate in July, the results could be devastating for the dollar, which could slip into an out-of-control spiral.

“The big shock was the rise in the unemployment number,” Samarjit Shankar, a foreign exchange analyst at The Bank of New York Mellon (BK), told Bloomberg. “It damps the outlook for a tightening in U.S. rates and strengthens the case for $1.60 [against the euro].”

Oil and Gold Soar

Commodities, priced in dollars, soared on the greenback’s freshly exposed vulnerability.

“Many investors used the latest sell-off in the dollar as an excise to get back into the [oil] market,” Andrey Kryuchenkov, an analyst at Sucden (U.K.) Ltd. told Bloomberg. “Concerns that demand is flattening in the near term have been overshadowed by persistent inflationary worries.”

Crude oil for July delivery jumped $5.49 a barrel, or 4.5%, Thursday before extending its gain to a record high above $137 Friday.

Money Morning’s Fitz-Gerald – one of the first investment gurus to predict triple-digit oil prices – recently boosted his target price for crude oil from the $187 level he projected back in December to a new level of $225 a barrel.

Gold climbed 2.7%, returning to the $900 an ounce mark as the dollar stumbled.

“Gold rallied in line with moves down in the dollar.” David Thurtell, analyst at BNP Paribas SA (OTC: BNPQY) told Reuters. “The worry is if unemployment is climbing, then mortgage defaults and subprime losses rise.”

Money Morning today (Friday) published a research report reiterating its earlier prediction that gold prices could reach $1,500 – or even $2,000 – an ounce, thanks to the powerful global trends that are forcing many commodity prices to new record highs.

Gold is traditionally used as a hedge against financial uncertainty. It also makes commodities priced in the U.S. currency cheaper for holders of other currencies.

Source: Oil ‘Bulls’ its Way Above $139 on its Way to a New Record as the U.S. Dollar Resumes its Descent

At this point, Ben Bernanke has to feel like Barney Fife. Remember how on the Andy Griffith Show, Andy only gave Barney one bullet and he had to keep it in his pocket? Mr. Bernanke has to feel like he is running out of bullets and needs to keep them in his pocket.

The economy isn’t improving the way he had hoped. With the cuts being done in 25 basis point increments, the most the Fed has left is nine. Of course, they could go the same route as the Bank of Japan and start cutting by 10 basis points.

It won’t be long until the Fed has to make inflation the main concern and at that point, they will have to make moves to strengthen the dollar. This would help counter act the tremendous rise in oil prices.

Lord William Rees-Mogg says that this is just the tip of the iceburg… “I do not believe that the world is on the edge of another Great Slump, but the combination of the deflationary effect of the collapse of a widespread housing bubble with the inflationary effect of higher prices for oil and food does present Governments with the most difficult economic problems since the 1970s. It was then called “stagflation,” to reflect stagnant inflation. Both horns of the stagflation dilemma now look sharp and threatening.”

Jack Crooks tells us what lies ahead for the U.S. economy, oil, and China’s growth.

Click here to watch the video and find out more.

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Read on at Dow Jones MarketWatch.

“No matter what you think, now is the time to buy,” says value investor Chris Mayer.

“At the beginning of recessions, investors tend to continue buying the stocks that were acting well when the economy was growing. That means momentum stocks, or stocks that have gone up. But as you get into the recession, people start to think about valuation again. Momentum stuff starts to not make sense.”