The markets appear euphoric about the ability for European policy makers to deliver on new promises. Low market expectations were met. We, too, have a positive takeaway, but only because of one detail of the grand plan; actually, let’s call it a “grand sketch,” as many details are still unknown.

The Good

Just as the U.S. bailout fund “TARP” was used to bolster U.S. banks as opposed to buying toxic securities in the market, the most effective tool to bolster confidence in the Eurozone is to ensure banks are able to stomach losses on their sovereign debt holdings. The movement to focus on banks in earnest started earlier this month. On October 5, 2011, German chancellor Merkel embraced the notion that bank capital must be bolstered; we turned significantly more positive on the euro that day. Her change of heart came after the market had provided ample “encouragement,” in the form of widespread selling of bank shares and debt; the process had been enabled by European stress tests that disclosed sovereign debt holdings in detail.

The Gross Domestic Product (GDP) in Canada declined 0.1% in the second quarter of 2011 over the previous quarter. Canada’s labor market has 34.3 million people of which 7.1% are unemployed. The inflation rate was 3.2% in September 2011 and interest rate was last reported at 1%. Exports amount to more than 45% of its GDP. Canada is one of the few developed nations that are a net exporter of energy. Canada also exports motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment and electronics. The U.S. is by far its largest trading partner, accounting for about 79% of exports. The government has a debt level of 84% of GDP and the government’s budget has a little deficit of 2.1% of GDP. Reason enough to look for investment alternatives outside the United States.
I screened Canadian stocks listed in America. Such companies are American Depositary Receipts (ADRs). 177 companies are listed in America of which 32 have a dividend yield of more than 2% and 19 yielding over 4%. In order to discover real bargains, I observed only stocks with low forward P/E (ratio less than 15) and price to sales ratios (ratio less than 1). Here are the best stocks from my screening results with cheap price ratios as well as a dividend yield of more than 2%:
1. Sun Life Financial (SLF) is acting within the life insurance industry. The company has a market capitalization of $13.8 billion, generates revenues in an amount of $21.0 billion and a net income of $1.8 billion. It follows P/E ratio is 7.8 and forward P/E ratio 7.8. P/S ratio is 0.7 and P/B ratio 0.9. Dividend Yield: 6.2%.
2. The Cash Store Financial Services (CSFS) is acting within the credit services industry. The company has a market capitalization of $165.4 million, generates revenues in an amount of $190.2 million and a net income of $24.1 million. It follows P/E ratio is 11.3 and forward P/E ratio 8.1. P/S ratio is 0.9 and P/B ratio 1.9. Dividend Yield: 5.1%.

3. Manulife Financial (MFC) is acting within the life insurance industry. The company has a market capitalization of $22.9 billion, generates revenues in an amount of $34.2 billion and a net income of $926.2 million. It follows P/E ratio is 26.7 and forward P/E ratio 7.5. P/S ratio is 0.7 and P/B ratio 0.9. Dividend Yield: 4.1%.

4. Methanex (MEOH) is acting within the specialty chemicals industry. The company has a market capitalization of $2.3 billion, generates revenues in an amount of $2.3 billion and a net income of $131.4 million. It follows P/E ratio is 17.5 and forward P/E ratio 7.0. P/S ratio is 1.0 and P/B ratio 1.8. Dividend Yield: 2.8%.

5. Magna International (MGA) is acting within the auto parts industry. The company has a market capitalization of $8.7 billion, generates revenues in an amount of $27.1 billion and a net income of $1.1 billion. It follows P/E ratio is 8.4 and forward P/E ratio 7.6. P/S ratio is 0.3 and P/B ratio 1.0. Dividend Yield: 2.7%.

Take a closer look at the full table. The average P/E ratio (P/E ratio) amounts to 16.6 while the forward P/E ratio is 13.4. The dividend yield has a value of 5.3%. Price to book ratio is 2.1 and price to sales ratio 2.4. The operating margin amounts to 18.4%.

Innovation has become standard in the ETF industry in recent years, as dozens of issuers have continued to roll out exciting new products offering exposure to new asset classes and investment strategies. The climb to 1,300 funds–more than doubling the size of the ETF lineup in just a few years–has been driven primarily by innovation, not duplication [see also Build America Bond ETFs: Crushing The Muni Competition].

One of the latest developments focuses on one of the world’s most important economies: China. While there are more than a dozen options in the China Equities ETFdb Category that can tap into the country’s stock markets, there have historically not been many options available for those looking to invest inChinese bonds. That has changed in 2011, with the introduction of a number of financial products that focus exclusively on debt denominated in the Chinese currency.

Guggenheim won the race to the finish line, rolling out the first China bond ETF, the Yuan Bond ETF (RMB), last month. PowerShares was just a step behind, debuting its Dim Sum Bond Portfolio (DSUM) just a day later. Then even more recently, Van Eck stepped up to the plate with a Dim Sum fund of its own, the Market Vectors Renminbi Bond ETF (CHLC), which debuted in mid-October.

The launch of these funds is obviously an exciting development for investors; they open up a previously inaccessible asset class that has the potential to bring both valuable return enhancement and diversification benefits. Below, we highlight everything advisors considering a position in these funds need to know before establishing a position for their clients:

1. Where’s The Yield?

International debt–particularly emerging market debt–has become popular in part because this asset class generally offers a considerably higher yield than the paltry returns available from U.S. securities. But those expecting eye-popping yields on China bond ETFs might be disappointed; none of the new funds offer overwhelming current returns.

That’s because the bonds that make up these ETFs generally towards the short end of the duration spectrum. The index to which RMB is linked had a weighted average maturity of just 2.6 years through August. At the end of the third quarter, DSUM’s effective duration was just 2.9 years [see more on DSUM’s Fact Sheet]. Meanwhile, CHLC also has a very short term focus, as close to 90% of the bonds mature in five years or less [see also Forget BRIC ETFs: Look To VISTA Nations For Better Opportunities].

The focus on short-term bonds results in relatively low yields on these products, though the current returns may look rather meaty compared to short-term U.S. bond ETFs. But if you are in the market for double digit distribution yields, you’ll have to look elsewhere; Dim Sum bonds may offer an upgrade from traditional Western debt, but aren’t anywhere close to 10%.

2. Currency Exposure Is There…Kinda

The real appeal of Chinese bonds is the ability to participate in anticipated increases in the value of the Chinese currency relative to the U.S. dollar. In coming years, the renminbi is expected to appreciate as Beijing gives more flexibility to a currency that many in the international community believe has been depressed historically to boost the Chinese export market.

It should be noted that there are, in effect, multiple versions of the Chinese currency. The renminbi is traded in mainland China, while the yuan is traded offshore in Hong Kong (the onshore currency is often denominated as CNY while the offshore version is shown as CNH). The values of these two currencies generally move in unison, but it is not unprecedented for meaningful deviations in value to occur. The offshore CNH generally trades at a premium to the CNY currency, but that relationship inverted in September amidst a steep sell-off in risky assets.

U.S.-listed Dim Sum bond ETFs generally offer exposure to the offshore version of the Chinese currency, a distinction that may not have a huge impact on returns but is certainly worth noting.

3. Understanding Dim Sum

All three of the China bond ETFs currently available to U.S. investors hold securities traded in the Dim Sum bond market. It’s important to understand exactly what the Dim Sum market is, and what types of securities are traded there. The Dim Sum bond market first popped up in 2007, but developments in 2010 had a meaningful impact on expanding the scope of the space. That’s when banks and supranational entities were permitted to issue RMB bonds in Hong Kong, significantly expanding the universe of potential issuers.

While most Dim Sum bonds are issued by Chinese entities, these developments have opened up the market to firms from around the globe. It’s important to recognize that the Dim Sum bond market is young–meaning that the liquidity available may not be any near to on par with Western bond markets–and that the lineup of issuers is no longer limited to Chinese corporations and governments [see a nice primer on the Dim Sum bond market].

4. Impact of Cash Creations

Generally, new shares of an ETF can be created when an authorized participant exchanges a basket of the underlying securities for shares of the fund. In certain cases, however, it is possible for APs simply to deliver cash, which the fund manager must then invest in the underlying holdings of the ETF.

DSUM’s prospectus notes that with the nature of the underlying assets–many of the bonds that make up the fund are illiquid–cash creations will be somewhat frequent. RMB similarly notes that unlike most ETFs, that fund “may effect creations and redemptions for cash, rather than in-kind.”

There’s nothing shady or inherently wrong with this approach; because many of the component bonds to not trade regularly with heavy volumes, the cash creation feature is necessary in certain asset classes to ensure that the creation/redemption mechanism can function properly. So this is no trick or major red flag, but it is worth noting because it can impact the tax efficiency and tracking efficiency of the fund [see also WisdomTree Rolls Out Australian Bond ETF (AUNZ)].

Currently, none of the three Dim Sum bond ETFs have significant cash allocations. But if these funds begin to grow quickly–and it would be a surprise if they didn’t–it might be interesting to see how quickly they are able to deploy new cash, and if they are able to do so.

5. Western Influence

The portfolios of all three consist of a number of Chinese issuers, including both government agencies and corporations. But while every bond held by these funds is denominated in the Chinese currency, not every debt issue necessarily comes from a local Chinese entity.

One of the largest positions in RMB is in a bond issued by European consumer products giant Unilever, while DSUM and CHLC include bonds issued by carmaker Volkswagen. Again, this isn’t necessarily a major issue; the primary appeal of these funds is in the currency exposure, which is very pure (noting the onshore vs. offshore issue highlighted above). But the presence of some Western issuers is probably worth noting as well, as it impacts the risk / return profile achieved.

6. Expense Gap Is Meaningful

Generally, expenses charged by similar products are pretty close. But among China bond ETFs, the differential is pretty significant; DSUM charges 0.45% while RMB charges 0.65%. Currently, CHLC is the leader in the space, charging investors just 39 basis points a year in fees. Considering that yields in this space are moderate, that gap is worth considering when weighing the potential options.

7. Light On Diversification

Neither of the China bond ETFs currently on the market has a particularly deep portfolio; all three have about 2 individual bonds, with securities in both RMB and DSUM accounting for 10% or more of the total portfolio. So there is a fair amount of issuer-specific risk in these funds, and that changes in the price of specific bonds could move the needle for the entire fund.

As mentioned above, the Dim Sum bond market is relatively young. It is widely expected that the number of debt securities traded there will increase significantly in coming years, which would presumably increase the number of securities available for inclusion in these funds. But for the time being, China bond ETFs feature some significant concentrations of exposure.

U.S.-listed ETFs are now serving up exposure to Dim Sum bonds, an exciting development for investors anxious to expand the geographic scope of their fixed income portfolios and potentially enhance the current return delivered. Before diving in, however, there’s a lot to learn about this asset class; the lesson, as always, is to do your homework before jumping in to a position.

[For more ETF insights, sign up for our free ETFdb newsletter]

Disclosure: No positions at time of writing.

ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.

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Headlines scream gloom and doom, but Vikas Ranjan of Ubika Research sees brilliance on the horizon. As emerging markets develop, opportunities for profit abound: it’s only a The Energy Report, Vikas discusses the new Ubika Mining 30 Index and some companies ready to feed the need.

The Energy Report: Vikas, Ubika Research launched its Mining 30 Index on October 1, during a time of less-than-robust projections for the global economy. Why commodities, and why now?

Vikas Ranjan: It is true that in the short term, the global economy does look sluggish. However, we are very optimistic about the longer-term health of the global economy, especially the emerging markets. Countries like China, India, Brazil, South Africa, Russia, Indonesia and Vietnam will continue to grow at a robust pace. Commodities are a big part of that growth story. At this stage, a slight economic downturn creates an opportunity to spot undervalued assets. 

TER: How did you choose which commodities to focus on? 

VR: Because our investment thesis concerns broad-based growth in emerging markets, we looked for commodities that are used in a range of industries. We asked ourselves what particular emerging markets will need the most in the next five to 10 years and which commodities will meet those requirements. Base metals like copper, nickel and zinc address the need to expand infrastructure, and agricultural commodities like potash and phosphate are key to feeding an increasing population. 

TER: About 19% of the index is coal companies. Why did you allocate such a large percentage of the index to an energy source that governments are increasingly trying to phase out? 

VR: Coal is going to be in use for a long, long time. More than two-thirds of the world’s energy still comes from coal. China sources 80% of its energy from coal, as does India. In fact, the largest market cap company in India is Coal India Ltd. (COALINDIA:NSE), which went public about a year ago. In the next five to 10 years I don’t see any energy source coming close to coal. Beyond electricity generation, coal is also used to produce steel. Coal may be phased out in the future, but that future is far, far away.

TER: Could the Ubika Mining 30 Index serve as an indicator of global economic health, similar to copper, the so-called barometer of global markets? 

VR: Copper will still play its role as an early indicator, a bellwether, for the direction of the global economy. There really is no substitute. However, a broader index, like the Ubika Mining 30, may provide a more decisive indication of the health of the economy, though it may take time for its performance to reflect what is happening in the global economy.

TER: Since its launch, the Ubika Mining 30 is up roughly 12%. Which companies on the index do you believe will continue to outperform the broader market? 

VR: All 30 companies are highly prospective, with solid fundamentals and strong management. We’re pretty optimistic about most of them. Of course, we will keep a close eye on their performance and make changes as needed. 

Having said that, we have more in-depth research on a few of them: Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX), Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX), Glen Eagle Resources Inc. (GER:TSX.V) and Champion Minerals Inc. (CHM:TSX). 

TER: As of June 20, you had a model price of US$2.56 on Allana Potash. At that time, the company had about US$60 million (M) in cash. How much does the company have now, and will it be enough to carry it through the bankable feasibility study?

VR: Allana is our top pick in the junior potash exploration field. It has a strong prospect for a potash mine in Ethiopia. 

Its price has come down quite a bit; it’s now trading at US$1.02. This is what happens when expectations run ahead and when markets in general tumble, causing more high-profile stocks like Allana’s to get impacted negatively. But we will stay by our model price. The resource estimate far exceeded our expectations. It has more than 1 billion tons (Bt) of potash resource at its projects, most of it in the measured and indicated (M&I) category. We think that Allana has close to US$50M in the bank, and it’s fully funded to move forward with a bankable feasibility study. If anything, Allana is less risky than it was 18 months ago.

TER: In your research report, you note the possibility of a takeover. Do you expect that to happen before the bankable feasibility study or after?

VR: At current levels, I suspect Allana would probably not consider a takeover offer because the price does not reflect its true value. I think it will continue to build value in its assets and its share price will reflect that.

After the bankable feasibility study, once the value of those deposits are proven, bigger players will start to show serious interest in Allana’s exploitable potash. 

TER: Let’s move on to Rodinia Lithium. Its flagship project is the Salar de Diablillos Project in Argentina. Rodinia recently had positive brine processing reports, yet the stock, which is trading at US$0.21, didn’t move at all. Why is that?

VR: Lithium is a little out of favor right now. Although it has other uses, lithium’s major role is in electric vehicle batteries. Demand is generally down now, and this is reflected in lithium exploration stocks. General economic conditions have also impacted stock valuations. 

Rodinia is moving ahead. It has been getting very good exploration results and has had some good results on the processing side. We believe in Rodinia’s prospects; it has good projects and a good management team. The company is focused on its Argentinean project right now, but it also has land in the U.S. The stock will likely bounce back once the general sector regains strength. 

Another advantage for the company is the strategic investment from Shanshan, China’s largest lithium-ion battery materials provider. It shows that the company is attracting right type of interest. Rodinia has a good technical team with previous experience in lithium projects and process development. So we remain optimistic about Rodinia’s prospects.

TER: There are quite a few salars in that region of Argentina, and other companies are working on brine projects there. Do you foresee consolidation?

VR: I would assume so. That is typically what happens when junior companies like Rodinia develop these assets. It’s much less likely that it will produce the deposits. If a company has built a good deposit base, has moved the project along and advanced it, it will have better chances of attracting outside interest. Rodinia is in the right place, in one of the most prolific belts for lithium deposits.

TER: Glen Eagle Resources has several projects based in Québec, Canada; a very safe jurisdiction.

VR: We’re very excited about Glen Eagle. The company is focused on phosphate. It also has a reserve on a lithium project next to Canada Lithium Corp. (CLQ:TSX; CLQMF:OTCQX).

Glen Eagle recently announced an option agreement to acquire 100% of the Moose Lake phosphate property. It’s immediately adjacent to a phosphate property called Mirepoix, which is controlled by Arianne Resources Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:Fkft). A grab sampling and initial work were very promising. Glen Eagle is currently developing its Lac Lisette phosphate project. It is presently drilling on it. The Lac Lisette property is 40 km away from Arianne Resources’ Lac à Paul property, and shares the same main road.

Phosphate, like potash, has tremendous use in agriculture and is in high demand. Glen Eagle is very undervalued because not many people know about that resource. Its market cap is about US$18–20M. Right next door, Arianne Resources is roughly a US$140–150M market cap company. We see Glen Eagle closing that valuation gap once it starts to prove up the deposit. We have a model price of US$0.96 on that stock. It trades at about US$0.43. We started covering Glen Eagle when it was about US$0.30.

TER: The last company you mentioned is Champion Minerals. That’s trading at about US$1.25. What’s your model price for that one?

VR: We don’t have a model price, because Champion Minerals isn’t part of our in-depth research. We had it as a stock-watch list pick. 

This is an iron-ore exploration company with some very good properties in the Labrador/Québec area. It has been getting some really good results and management is good. They’re in a very prospective area for iron ore exploration, near other majors and prospective companies. For example, Consolidated Thompson Iron Mines Ltd. (CLM:TSX) acquired Quinto Mining Corp., which had properties next to Champion Minerals’ property. We feel this project could be a prospective inclusion candidate.

TER: You also operate the Ubika Cleantech 30 Index. As of December 31, 2010, the combined market cap of the companies on that index was US$7.8B. By October 14, 2011, the value had fallen to US$5.8B. Why is this sector underperforming?

VR: It has been a rough year for cleantech. Our index has fallen along with other benchmark indexes, in similar proportions or even more, for various reasons. Most of the companies in our index are very early-stage companies. Most have no revenue because they are at a pre-commercial stage, and they fluctuate more widely. It’s a classic case of market euphoria and high expectations taking hold and running ahead of fundamentals. 

Cleantech is a very broad sector, so not everything is performing badly. The energy side of it, such as solar and wind, has not proven to be as commercially viable as anticipated. Investors are getting disillusioned, wondering if these companies will become commercial. It’s a classic research-and-development (R&D) situation. Some of these companies come out well, but many will fall by the wayside. It hasn’t helped that there have been some high-profile failures.

TER: Has Solyndra’s bankruptcy hurt the credibility of the renewable energy/cleantech sector as a whole? 

VR: It has tarnished the industry. It was certainly not good for the cleantech sector. It also shows you that it is risky for the government to get too involved, for example, in selecting prospective winners or losers in a sector that is still at such an early stage. The better approach is to provide a conducive environment, one that spurs more innovation and R&D, but that ultimately lets the market decide. 

TER: What’s your outlook for the sector?

VR: Winners will emerge. Investors are looking for companies that can solve a particular problem countries face, especially emerging countries. Examples are companies that have solutions for water pollution, for helping countries improve the livelihood of their population. 

TER: Which companies fit this description?

VR: Champion Minerals is developing fuel technology to reduce emissions by reconfiguring diesel engines to use compressed natural gas (CNG) or liquefied natural gas. That is an example of a company with clean technology that is both retrofitting and allowing new commercial vehicles to use CNG-based engines. Natural gas is still a fossil fuel, but it’s a lot cleaner than, say, diesel. In the last year or so, Westport’s stock has gone up 40%–45%. It’s a good example of a commercial company with rapidly rising revenue that will continue to do well. 

Clearford Industries Inc. (CLI:TSX.V) is another example. The company developed a patent for a small-bore sewer system. Centralized sewage systems push everything to a single location for treatment. These centralized systems place heavy demand on water, and they are inefficient and costly for emerging countries like India, China and Peru. 

Clearford developed a solution that treats sewage in a localized environment, suitable for a small community or a collection of small communities. It has anchored its technology in India, where it won a major contract with a large real estate developer that will use the technology for a development of something like 6,000-plus houses or apartments. Once Clearford gets that commercial proof, it should do very well. Getting the first contract under the belt is the biggest challenge. On August 11, 2011, Clearford announced that it has signed a memorandum of intention with Engineers India Ltd., a major engineering consulting firm owned by the Indian government, to jointly pursue projects using Clearford technology in India. This clears the path for the company’s growth among municipalities and cities.

TER: Any others?

VR: I still like H2O Innovation Inc. (HEO:TSX.V), a major player in Canada’s water treatment industry. It designs and produces environmentally friendly water treatment systems, especially for wastewater and industrial processed water. It has been performing relatively well even in the downturn. This is one of the fastest-growing companies in Canada. Its revenue has grown through acquisition, and it has a client base of over 500 installations worldwide. This is a good example of a commercial company solving a real problem. 

TER: Do you have any parting thoughts for us?

VR: I would conclude by saying that we don’t believe the global economy is dipping into a double-dip recession, which was a major concern in the summer and early fall. We believe the markets made their lows for the year in August, and we see better times ahead. Yes, there is a slowdown, and developed countries are struggling, but the growth story in emerging markets is intact. 

TER: Excellent. Thank you. 

Vikas Ranjan, a principal of Ubika Research, has over 15 years’ experience in investment management, finance, customer analytics and research. His experience includes management positions with TAL Global Asset Management and Bank of Montreal. He holds a Bachelor of Arts in economics, a Master of management studies from University of Mumbai, and a Master of Business Administration in finance from McGill University. Vikas co-founded P2P Systems Inc., which was acquired by Microforum Inc.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Allana Potash Corp. and Rodinia Lithium Inc.
3) Vikas Ranjan: I personally and/or my family own shares of the following companies mentioned in this interview: Allana Potash Corp. and Rodinia Lithium Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None.

Never in a million years did I expect them to impose a haircut of 50 percent, this shows at least somebody is starting to accept reality. -Investment WeekNever in a million years did I expect them to impose a haircut of 50 percent, this shows at least somebody is starting to accept reality. -Investment Week – Jim Rogers Blog

Diversify your asset holdings & where you hold those assets

You should not only diversify your asset holdings, but also diversify where you hold those assets, in case they’re seized by politicians as the welfare state enters its death throes. said Marc Faber who ends with an alarming prediction : “The governments, they’re going to f— you all, that’s for sure. – Dr. Marc Faber’s Blog

So much information and so many ideas come to us daily in the financial press. We’re able to fill up our trash basket in just minutes.

In The Financial Times, for example, Larry Summers recently offered a solution to America’s housing debt problem. And in The Herald Tribune our favorite comedian, Thomas L. Friedman, tells us about the next Internet revolution and what a wonderful world it will create.

Meanwhile, stocks appear to be on the march again. The Dow is up over 4% for the week. And oil is back over $90 per barrel.

Once again, ‘recovery’ hopes are building. The Europeans just have to sort out their debt mess. And Americans too!

And that should be easy. There are so many smart people on the job!

In Europe, Monsieur Sarkozy and Frau Merkel — not to mention an army of technicians, bankers and delusional incompetents — are finding ways to solve Europe’s debt crisis. How? By adding more leverage…debt…and confusion. To simplify, today’s bad debt will be guaranteed by tomorrow’s bad debt. The authorities are just hoping that between today and tomorrow is sufficient time for them to get away. It may be a bigger problem, they say to themselves, but at least it will be someone else’s problem.

And who knows, maybe Mr. Friedman will be right. He’s wrong with such conviction and such regularity that there is bound to come the time when he is right by accident. Now he tells us he sees another ‘tech revolution’ coming, this one based on ‘the cloud’ and the social media. Surely this one is going to make us all rich…or make the world a better place…whichever comes first.

He hardly mentions the last tech revolution, which he also thought would make us all rich. It did nothing of the sort, of course. Against all odds, the last decade bucked the course of 300 years of history. With the help of the new technology — at their fingertips — Americans got poorer!

But that’s a long story.

So, let’s turn to Mr. Summers. He tells us that the problem with the US economy is that people have lost too much money on their houses. And if house prices sink further there is little chance that the economy can get out of its present low-growth slump.

Right so far. But what to do about it?

The man with all the answers steps boldly forward and proposes to make a bad situation worse. How would he address the problem of too much mortgage debt? By increasing the amount of mortgage debt!

“It is a central irony of financial crisis that while it is caused by too much confidence, too much borrowing and lending, and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.”

That may seem stupid to you and other sensible mortals, dear readers. But Mr. Summers sups with the gods, where the rules that cover the rest of us don’t apply. He says the problem with public policy is its “inability to appreciate this truism.”

The real truism is that Larry Summers has never understood what is going on. Nor will he. His whole career is based on not understanding. It’s served him well so far; he’ll stick with it.

The idea behind Mr. Summers’ solution is that you subsidize what doesn’t work; you reward failure. So, instead of abolishing Fannie and Freddie, for example, you give them more money…

Failed mortgage lending is a big drag on the economy. So, you lend more!

You could apply the same logic to other failed industries — such as education. Education spending has soared over the last 40 years. But test scores show there has been no payoff…no improvement at all.

One of the ways the feds shift resources to this zombie sector is with student loans. Bloomberg has the report:

William Prince, of Rosenberg, Texas, knows just how inescapable student loans can be. The 52-year-old father of two started paying off $51,000 in college debt 15 years ago and now owes $57,000. “I don’t expect to pay these loans off in my lifetime,” he says. Prince, a criminal justice major who works in private security, had to defer payments during three bouts of unemployment, and the accumulated interest left him deeper in debt.

Americans now owe about $950 billion in student loans — more than their total credit-card debt. The weight of those IOUs is a frequent refrain for Occupy Wall Street protestors and their online supporters. On the “We Are the 99 Percent” Tumblr blog, which features hundreds of pictures of people holding handwritten signs describing their desperate financial situations, student loan concerns exceed those about children, unemployment, and health care, according to an analysis by Mike Konczal, a fellow with the nonprofit Roosevelt Institute.

Desperation may have something to do with that outcry. Two out of five Americans with federal student debt can’t make monthly payments and either defer, default or are delinquent, according to Mark Kantrowitz, publisher of Fastweb.com, a free scholarship-matching service, and FinAid.org, a source of student financial aid information…

We’ll save Larry Summers some thinking. What to do about this trillion-dollar weight of student debt? Lend the students more money!

Regards,

Bill Bonner,
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.

Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the new book from Bill Bonner, is now available for purchase. It is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. Whether you’re new to these Daily Reckonings, or one of Bill’s “long suffering” readers, this is one you surely won’t want to miss.

Special Report: Obama’s Burning Shame Revealed Here… This is the unspoken, burning shame that could kill Obama’s presidency… It could spell the end of his short political career… It’s all revealed in this extremely urgent and controversial documentary report. Don’t wait, watch now.

 

 

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