Economic Growth in the Internet Age

Are you keeping up with our theme this week, dear reader?

We're having a hard time ourselves...

First the news, then we'll come back to... The Lost Century.

Yesterday, the stock market retreated - 80 points on the Dow. Still no clear direction... So let's return to our story for the week.

So far, this 21st century has been a delightful flop. A washout. At least, for Americans. At least, from an economic point of view.
Here's the evidence in a nutshell:

There are no more full time jobs in the US today than there were when the century began.

In terms of per capita wealth, Americans are now worse off than they were when the century began.

The value of US houses, for example, is about back where it was when the century began.

And household earnings, adjusted for inflation, are lower.

And America's industries, businesses, and enterprises too are worth not a penny more today than they were in 2000.
And now...the background.

First, we admit to a keen interest in this sort of thing. Here at The Daily Reckoning, we are connoisseurs of disaster. And no disaster is more delicious than one smothered in a sauce rich in irony.

So, you will recall that when the century began, most people thought it was the most promising period in history - especially in the history of the United States of America.

The Soviet Union had ceased to exist. China had joined the capitalists.

And George W. Bush told the graduating class of the Naval Academy in Annapolis that America was the world's "only surviving model" for a successful system.

It was so successful, in fact, that Francis Fukuyama thought it signaled an " end of history." What more work had history to do? Perfection had already been attained. The US was dynamic and flexible. Its democratic political system could adapt to whatever changes and challenges it confronted. Its capitalistic economic system could push ahead on every front. And its scientists and innovators were discovering new things at a breathtaking rate. History could pack up and go home.

You remember Moore's Law? It told us that computing power would double every 18 months. And with computers came not just a new world...but a better world. Innovators could innovate faster. They had all the world's knowledge at our fingertips. There would be no more reason for error...darkness and sin would be banished from planet Earth. We would all be smarter, richer, healthier...for ever, and ever. Amen!

What could go wrong? Well, so far, everything.

For starters, in 2001, a tiny group of fanatics brought down two NY skyscrapers and caused the Pentagon to panic - a very self-serving panic, we should add; defense contractors have made billions in profits out of the Pentagon's hysteria. Since then, the US has spent $1 trillion fighting 'terrorism' - easily the worst military investment in world history. For every single 'terrorist' killed, the US spent billions, to say nothing of the soldiers and civilians who died.

Then, the digital revolution was a flop too. An enormous flop. Millions of people may be using the worldwide web...looking at photos of Congressional crotches, for example. And hundreds of people may have become billionaires by selling Internet stocks to the masses. But how much has the Internet contributed to the wealth of nations? Apparently, not a damned thing.

At least, as measured by the results.

And more thoughts...

Nowhere was the Internet revolution more focused than in the USA. Nowhere did people have higher hopes for it. And nowhere were the results more disappointing. The typical teenager now spends half his life...not just half his waking hours, but more than half a day on some sort of electronic device. Does it make him smarter? Richer? More civilized? More coherent? Not so's we've been able to detect!

Not every technological advance results in an increase in standards of living. Take Twitter, for example. Or nuclear weapons. Or dozens of other innovations and inventions.

The Internet, like TV before it, is a great entertainment device. It is also very useful, improving productivity in a vast number of industries. But it has not speeded up GDP growth or improved living standards.

Great boosts in living standards have been driven by big increases in energy use. The discovery of fire, for example, surely increased standards of living for ancient man...and enabled him to broaden his territory enormously. Human populations increased.

The really big boom came in the 19th century when we learned how to use the earth's stored-up energy - in coal...and then in oil. GDP growth rates - which had been negligible for thousands of years - soared above 5%. Human population bulged too.

European countries - and their colonies - were on the case first. The use of stored energy allowed them to spurt ahead of their competitors in Asia. Over the course of the 19th and 20th centuries, Europeans came to dominate the world.

Now, the 'emerging markets' are catching up. They're using oil too - lots of it. And they're registering growth rates above 5%.

Meanwhile, growth rates in the developed world have declined... In real terms, as mentioned above, US growth in the 21st century seems to have fallen back to medieval levels. Why?

Who knows? We will guess that it is a combination of things. Most important, the US is in a period of debt consolidation. After 60 years of credit expansion, it is time to reduce debt. That alone could be responsible for the failure of growth and material progress.

But why was there so much debt? Because the economy failed to produce real growth. After 1973, wages, for example, adjusted for inflation, went nowhere. How could families continue to increase their standards of living? The Fed, the dollar-based monetary system, and the financial industry encouraged households to go into debt.

Will debt be reduced back to 1974 levels? Maybe... If so, it will take another 5 to 10 years...or maybe 20.

What then?

The Great Correction could be a bigger, grander...longer-term phenomenon. Perhaps the boom phase of the energy revolution is behind us. Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity - fired by coal, oil...and later, atomic power - made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental...with diminishing rates of return from innovations.

The Internet did nothing to change that. It was not a 'game changer.' The game is the same as it has been since the steam engine was first developed, with the big leaps in technology and material progress already behind us.

Best Oil Stocks For 2011

Brinx Resources (BNXR, OTC) is a junior natural gas and oil energy development company with excellent resources and the potential for explosive growth. Unlike most start-ups, Brinx is already producing significant quantities of oil and gas.

I expect Brinx shares to triple within a few months, and go up from there. In the next few years, shares could well go up over 10-fold.

There are four reasons why Brinx Resources is a great opportunity:

Reason #1: U.S. energy development projects with huge potential.  .

Increasingly U.S. political leaders are calling for reduced dependence on foreign oil and more U.S. production.

All of Brinx's oil and gas projects are located in the U.S., and they have huge potential. Current Brinx development projects include:

  • Three Sands Project, Oklahoma: 4 million cubic feet of natural gas every month. This project is already producing over 3.8 million cubic feet of natural gas every month, in addition to hundreds of barrels of oil. A high-volume disposal well has also already been drilled and completed. Plans are to complete additional pay zones in the existing wells to increase oil and gas production in the first quarter of next year. There are dozens of additional sites on the property that are ready for drilling. Brinx owns 40% of Three Sands.
     
  • Oklahoma Project, Oklahoma: Up to 1 million barrels of oil. This project is currently producing 300 barrels of oil and 150 million cubic feet of natural gas every day. Five more successful wells are already in the process of completing with the potential to produce between 150,000 and 500,000 additional barrels of oil. Two more wells will be drilled in the upcoming months. All seismic data has been completed and analyzed.
     
  • King City, California: 10,000 acres of oil and gas. Brinx Resources has over 10,000 acres under lease at this site. The King City site has the advantage of relatively shallow oil and gas accumulations, greatly reducing both drilling and production costs.

    Anticipated production is in excess of 10 million cubic feet of natural gas per month in addition to an initial production of 100-150 barrels of oil per day, per well from multiple locations. Seismic data has been completed and is currently being processed.
     
  • Mississippi Palmetto Point, Belmont Oil Field: 3 million cubic feet of gas per month potential. This site is also already producing oil and gas, with the potential for another 3 million cubic feet of gas per month. This site is currently producing 80 barrels of oil per day. Additional wells, including one horizontal well, are to be drilled this year are expected to produce up to 400 - 500 additional barrels of oil per day.

    Overall, production from these three sites has the potential to triple Brinx Resources share price within just months.

    Reason #2: Low stock price in 2011. Brinx is an early-stage energy development company, and few people have heard about this company so far. As a result, Brinx shares are selling for just $0.10 each. This is an extremely low price for a producing energy company with Brinx's resources.

    Based on current production, Brinx shares should be selling for at least two to three times as much. As soon as word gets out about this company, I expect shares to quickly go to $0.20 to $0.30, making this company an easy double or triple for investors who get in now. Further, with share prices so low, I see little risk that they will go lower in the near future. So Brinx Resources is an excellent, ground-floor energy investment opportunity.

    Reason #3: A great management team; stock of previous energy projects have gone up 50-fold. The principal officers of Brinx Energy are President Leroy Halterman and Director Kenneth Cabianca. They have decades of experience with s multi-million dollar oil and gas projects.

    Mr. Halterman is also a licensed geologist with over 40 years experience with oil and gas projects. Some of his previous projects are now producing hundreds of millions of dollars a year in revenue, and shares of these companies have gone up over 50-fold since they were created.

    As global demand for oil and gas rises, so too are shares of energy companies like Brinx Resources, (BRNX), now a Strong Buy

    Reason #4: Soaring global demand for oil and natural gas – and rising prices. While the world is producing and using more alternative energy (solar, wind, bio-fuels, etc.), we are also using more and more oil and natural gas.

    Indeed, the vast majority of the world's energy still comes from coal, oil and gas, and those will continue to be the world's major energy sources for many decades to come.

    That explains why the price of oil and gas have gone up from $20 a barrel nine years ago to over $80 currently, sending the shares of many energy companies skyrocketing.

    While solar, wind and other alternative forms of energy work fine for some applications – such as home heating in warm states or supplemental energy production in windy states – these forms of energy remain both more expensive and less flexible than oil and gas.

    We will likely never have a solar-powered transcontinental jet plane or be able to operate a steel blast furnace on wind energy.

    In addition to providing transportable, reliable and concentrated energy, oil and gas are also essential for the production of plastics, paints, fertilizers and many medicines. Indeed, our entire civilization runs on oil and gas, and will likely continue to do so for at least the next 50-100 years.

    As the world's population continues to grow by up to one billion people in the next 40 years – all of whom need a place to live, food, transportation, lights and heat -- demand for oil and gas will also continue to grow.

    So while production of alternative energy is increasing, so too is demand for and production of oil and gas, as shown by the chart below.

    The bottom line: As world-wide demand for oil and gas rises, so too will the fortunes of companies like Brinx Resources.

    As oil heads toward $100 and higher, Brinx Resources shares could easily go to $1-$2 (10 to 20 times the current price) in the next year . . . making them my next 900% winner.

    That's why I rate Brinx Resources (BNXR, OTC) as a strong buy. I urge you to invest now. By getting in now, you have an excellent chance of at least tripling your money in the next 12 months.

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     • Fording Coal, up 153% in 12 months.

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  • China's Glamour Stocks Are Breaking Down in 2012

    The China uptrend is cracking.
     
    That's bad news for some of China's highest-flying momentum stocks, including Internet companies like Baidu, Sina, and Sohu.
     
    The latest data from the China Internet Network Information Center (CNNIC) shows total Internet users in China reached over 457 million at the end of 2010, a 19% growth rate over the past year...
     
    That's huge in comparison to the stagnant U.S. market. But it's down from a 30% growth rate a year ago.
     
    Even worse for China's online giants, the majority of new entrants to the market are from China's poor farming class, not wealthy city-dwellers.
     
    And these trends are scuttling some monster rallies.
     
    You see, as more people in China started using the Internet, Chinese Internet stocks rocketed. They bottomed last summer. Since then, the gains have been absurd – all these stocks doubled or tripled in less than a year. Just look at the numbers...

    Company
    Market Cap
    52-week Low
    52-week High
    Percent Gain
    Baidu
    $41.3 billion
    $65.90
    $156.04
    137%
    Sina
    $5.2 billion
    $40.05
    $147.12
    267%
    Sohu
    $2.5 billion
    $34.26
    $109.37
    219%

    But since April, these stocks have taken a big hit...

    It's no secret investors were optimistic about these names. The only problem is that optimism leads to ridiculous valuations.
     
    Take Baidu for example. Using last year's numbers, the stock has a price/earnings (P/E) ratio over 76. Even after its recent fall, it's trading at a whopping 30 times sales. (A multiple of 10 is considered expensive.)
     
    To put this in perspective, Google trades around five times sales. Even Amazon trades just over two times sales.
     
    Wall Street analysts justify their buy ratings on stocks like Baidu using their optimistic view of next year's financial results. If Baidu hits these consensus estimates for 2012 earnings, it's trading at a slightly more reasonable P/E ratio around 30.
     
    But betting on blue-sky earnings that far out is a bad idea. More important, Wall Street has been raising its expectations. Over the past four months, the consensus estimate for Baidu's 2012 earnings is up more than 12%. Analysts expect the company to increase earnings per share by about 50% next year.
     
    Rising expectations are the key to justifying a rising, expensive stock. But the market is realizing these numbers don't add up. The stocks are already pulling back. If earnings come in below the optimistic estimates, investors will reset their expectations.
     
    Google went through a similar "reset" in early 2008 – way before the financial crisis slammed the stock market. Shares plummeted from well over $700 in late 2007 to below $420 in early March 2008. That's a 40%-plus drop in three months.
     
    Based on the exuberance in Chinese Internet stocks, these names could fall a lot farther than that. I wouldn't be shocked to see these stocks return to last summer's levels.
     
    Like all great "boom and bust" sectors, there's a lot of money to be made once the momentum breaks. If a bust happens, investors will hate China Internet stocks again. At that point, we can take advantage of cheap prices on some of China's online "trophy assets."