Motley Fool Hidden Gems Investing - Motley Fool Money: 02.12.2010

Episode Date: February 12, 2010

The EU deals with big problems in Greece. Google announces big plans for broadband. And U.S. retailers report better than expected January numbers. On this week's Motley Fool Money Radio Show, we discuss those stories, debate the relative merits of Coca-Cola v. Pepsi, and share three stocks on our radar. We also talk with MIT Professor and former IMF economist Simon Johnson, co-creator of the economics website baselinescenario.com and co-author of the upcoming book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. everybody needs money that's why they call it money from fool global headquarters this is motley fool money welcome to motley fool money i'm your host chris hill and i'm joined by motley fool senior analyst seth jason james early and shannon Zimmerman. Guys, good to see you. Good to see you, Chris. So happy to be here. Coming up, we'll talk with economist Simon Johnson about the problems in Europe and know they don't involve snow. We'll take a look at Google's high fiber, Coke against Pepsi, and we'll give you an inside look at a few of the stocks that are on our radar.

But we begin with the snow. The blizzard of 2010 brought record snowfall to the D.C. area, and a big chunk of the U.S. got hit with snow, including Dallas, for crying out loud. Guys, let's just go around the horn here. Shannon, we'll start with you. What is your headline for Snowmageddon? Well, can I ask a question first? Simon Johnson, he's going to be on the show? Yeah.

Oh, suddenly I feel much more important than I did just moments ago. That guy's good. He is good. So my take is that the snowpocalypse was good news for the neighborhood kid economy. So we had some kids in our neighborhood coming by to shovel snow, and they were quite upfront about the price. It will be this much, and I will do this. And no, I will not do the back, because no one can get back there anyway.

And we hired a couple of them, and they did a fine job. So I think the neighborhood economy is going to support us into the next quarter. The kids in my neighborhood are sneaky. They say, can we shovel your walkway for free? And then, you know, by your own guilt, you're going to give them something. But I actually declined. I love snow, though, so I'm happy. I almost actually did some winter camping in my backyard last night.

I'm kind of an outdoorsy type. Wait, wait, wait. You could build a good cave in my yard if you want. I was worried the neighbors would think it was another domestic dispute, so I didn't. But, you know, it's pretty fun. So you set up a tent in your backyard and just slept outside in the snow? I padded the snow down, yeah, and I was ready to do it like it's training for my alpine missions. Good times, good times.

Seth Jason, your headline for the week? Oh, I'm tired. I have bruises on me from shoveling. I'm from Minnesota, and so I consider it kind of a personal affront if there's any snow on my driveways or sidewalks within a day or two of this stuff happening. And it just kept coming. I just kept shoveling. My shovel broke. You couldn't buy a new one.

My other shovel broke. I ended up putting steel plates that I had left over in the garage on my shovel. And, yeah, it's incredible. All right, let's try and bring it back to actual business and investing. Are there companies that actually benefit? Hernia surgeons are going to do great business. Are there companies that benefit from this type of winter emergency condition? Home Depot, Lowe's?

Are they selling more stuff throughout the year? They're selling more shovels, but, you know, they're selling fewer barbecues. And I will gloat that my recommendation in, I believe, Stocks 2010, the Motley Fool Special Report, Compass Minerals, CMP is the ticker, is up about 13%. They make rock salt. So that's probably one of the few companies that's actually doing pretty well. And folks might want to have a look at natural gas, either via the ETF that tracks the futures of natural gas or a company like Chesapeake,

although I know Seth is not a massive fan of Chesapeake, owing to the compensation plan. Just because the CEO had to come money by his art when he went broke. No big deal. Because you know what? It was pretty cold, in addition to being pretty snowy. And we turned up the heat, as a matter of fact, and that's got to be good news for natural gas prices. All right, let's move on. Big problems for the European Union. On Thursday, EU leaders pledged to support Greece, which is running a huge budget deficit. But, James, let's kick it to you. What do Greece's problems mean for the EU, and what do they mean for us here in America?

It's not good, Chris. Greece is kind of the California of the EU. Its borrowing costs have actually doubled in the past couple of months. That's a lot. The problem is simply overspending. I think currently 30% of Greeks are employed by the Greek government. Now, for perspective, about 10 years ago, I think— Tax dodging is a big deal there, too, right?

40% of Washington, D.C. residents at one time were employed by the D.C. government. So D.C. has the edge there, or had the edge. The key point, though, is metastasizing into what we're calling the club med countries, Spain, Portugal, well, just those two, I guess. And it's sort of testing the depths of this European socialism. But, yeah, France and Germany and others are backing Greece. And I think the takeaways for investors are get out of French, Swiss, and German banks in that order. They have exposure to Greek loans.

And consider a trip to Europe. Your dollar is going to go a lot further. Seth, do you like to travel over to Europe? Yeah, I'm actually considering a trip to Italy. And, you know, I'm always looking at Spanish real estate as that bubble pops. But I was just looking at the GDP numbers that came out in the EU, and it ain't so great. Right now, the only economy that crawled ahead in the fourth quarter was the French, and that was because they had their own sort of cash pour clunkers program.

And Italy kind of double-dipped down, so did Spain. So Germany stagnated. This ain't good. Yeah, I think that what happened in Germany is quite important for the U.S. economy as well in terms of a warning sign. We've talked in the past on the show about inventory bounce, and we've had that. We had pretty dramatic GDP growth a couple of quarters back as manufacturers replenished depleted shelves, and that's exactly what happened in Germany. Germany has developed Europe's manufacturing economy, and it was tepid in terms of its GDP growth this time around, too. Google wants you to have more fiber.

On Wednesday, the company announced plans to build and test ultra-high-speed broadband networks in a number of locations across the U.S. The network will be open access, meaning other service providers can take advantage of Google's infrastructure. Guys, this ain't going to be cheap, so what's in it for Google? Oh, this is an excellent publicity stunt slash pressure tactic. The reason it's interesting is Google saying, hey, we're going to build this expensive thing. By the way, they haven't said what it's going to cost. They have no idea. They haven't pledged any capital towards it.

But I believe what they're trying to do is to force, one, the government's hands and then the telecom's hands into building higher speed broadband networks. Because, of course, Google stands to gain the most of probably any company if we get faster and faster data speed. So if Google builds for whatever cost a small broadband network that's much faster and can therefore convince the government perhaps to throw money at it or convince the other telecoms to do that, then in the end, Google has made the small capital investment in a few places but can reap the rewards from a nationwide network that will be much more robust. So this is genius for them if it works. James? Chris, South Korea has Internet connections about eight times faster than we do. We actually used to be the world leader in broadband, and now we're one of the slower developed countries. And that goes back to Michael Powell, Colin Powell's son, running FCC about 10 years ago.

He decided to classify Internet connectivity as basically an information service as opposed to a telecom. And what that did was not mandate the incumbent line owners to let other companies use their lines as we have with telecoms and as most of the rest of the world has with broadband. We actually have slower broadband now because of that. Google, just like Seth said, is timing this perfectly. I don't think they're really trying to become an actual sort of telecom fiber optics provider. No, their margins would go down the hall. Yeah, this is basically, I mean, they do lead in, they have a huge, they basically rule the online video market if you look at the market share for that.

So they have an incentive, but they really wanted to kind of nudge development, I think, politically and economically in this direction. All right, coming up, we'll dig into one of the biggest rivalries in the world. That's right. It's Coke versus Pepsi. That and more. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in the studio with Seth Jason, James Early, and Shannon Zerman. Okay, guys, time for some quick takes. U.S. retailers reported stronger than expected sales in January. Sales in November and December

were revised higher as well. Seth, total retail sales, excluding gasoline, were up Half a percent. So time to pop the champagne? Whoopee! Yeah, well, I'm looking at a nice chart here from the excellent blog Calculated Risk, which shows retail sales without gasoline, which is very, very volatile and represents a pretty large chunk. So you look at the red line here, and if you look at the level where we are now and then you draw a line backwards, you see that we are back to sort of 0.5, 0.6 levels of retail spending when you don't consider gasoline. There's actually some pretty interesting data.

If you go to the Commerce Department's report, download it like the nerds we are, and take a look at the numbers, you can see that the good news, if this is good news, is not shared across all retailers because furniture, electronics, and appliance stores are actually seeing still pretty significant drops from last year at this level down in the electronic and appliance stores, down 7% year over year. I mean, last year was pretty lousy, and this year is not much better.

Gasoline stations up 29%, non-store retailers, interestingly enough, up 12%. So if you're an investor, download the whole report and see where the money's going because it's not evenly spread. Now, when you say non-store retailers, is that just online retailers like Amazon? That's all that kinds of thing. I guess, you know, your infomercials, people are sitting at home looking at small glowing rectangles and doing their buying, I guess. Yeah, I like infomercials. Home shopping.

Don't knock it. Well, it sets a point about the weak comparisons to this time last year for some segments of the economy. That's tremendously bad news because remember where we were this time last year. And so in the same way that we've discussed in the past that, you know, the earnings reports need to be taken not with a grain but with a block of salt because they're coming against very easy comparables. Well, when retail sales numbers look weak against very easy comps, that's not good news. And I'm a contrarian on all of this. I mean, the whole reason we're so into retail sales is because consumer spending is about two-thirds of our GDP. Ergo, it makes sense to try to boost consumer spending if we want to boost our economy.

But I question that. I don't know that we want to be just a nation of consumers. I think two-thirds of our GDP is too high. You know, we're becoming sort of the Beverly Hills 90210, I guess, as a country. We're cool, but not a lot of substance. Well, leave it to me and to California. And I like Beverly Hills 90210. I mean, the show, not the actual show.

Leave it to James to take the long view. So I agree, and it's even higher than two-thirds of the economy now. But what are we going to do? We're not a manufacturing economy anymore, and I don't think that we really are going to be able to revert back to that. So we're a service economy. It's a low-wage economy. So what are we going to do to replace consumer spending?

It's a tough road ahead. Green power. Green power. And if I can throw in one more bit, it won't be turning soon, at least according to a Consumer Sentiment report that came out on Friday, which showed, guess what, a surprise drop in Consumer Sentiment in February, dropping from 74.4 in January to 73.7 in February. Ben Bernanke playing coy with the financial markets this week. The Fed chief hinted that the Fed might tighten credit, quote, at some point. Shannon, what is he up to?

Ben Bernanke, master of the obvious. So, basically, he used his opportunity for congressional testimony to read from the Fed's standard operating procedure. Well, if inflation rears its ugly head, we will do something about that. We will make it even harder for people to get the credit that they apparently don't want anyway. Banks and historic reserves are at historic highs. Consumers and businesses deleveraging. And, oh, here's what we're going to do when that credit gets too loose. Well, so, what is that but my favorite phrase, political theater?

But I think that there is real harm in that, as I did Obama's mention of deficit reduction during the State of the Union. That's the easy political thing to say. The harder thing is to prepare people for the fact that, well, depending on how the economy goes, and we still are near double-digit unemployment, it may be necessary for the government to be the stimulator of first resort when consumers aren't spending in an economy that's powered to the tune of almost 70% by consumer spending. They did not lay that groundwork. In fact, they head-faked in the opposite direction. And it's going to make that choice much more difficult if they have to make it on down the road. Yeah, but they have to sort of, they have to throw a bone to the crusty types out there who are still worried.

Because that makes them very serious. They're still worried that we're going to have inflation even though we're in this deflationary spiral. Exactly. I'm a crusty type guy. Well, I think there are three takeaways here. First, what's going to happen to the banks and real estate as the stimulus goes away, just logistically? Because these were stimulated basically by both monetary policy, which is Fed setting rates, And fiscal policy, which is a treasury and tax and spending, basically.

Moreover, the biggest thing, though, is what about the U.S.? The Congressional Budget Office estimates that by 2015, the U.S. national debt will be twice its 2008 level. And 2008 was not a low level. So either two things happen. One, we don't have inflation, and rates go up, reverting to a more normal position, I guess. And that means the U.S. might struggle to make its interest payments. or we have to inflate, and there goes our currency. So I am a little bit worried about our debt, I've got to say.

As am I, but that's a long-run problem, and I may have said it last week, I'll say it again. You don't worry about your house's foundation when the thing is on fire. The house may still be on fire. Google launched Google Buzz this week. It's a social media aggregation thingy, obviously aimed at taking it on Facebook. Shannon, you— Thank you, Grandpa. These kids with their interwebs.

It's all a series of tubes. I don't know. Didn't I vote for you? Yeah, exactly. Shannon, you got an e-vite or an invite to Google Buzz. That's right. Yeah, so on Monday, and apparently the status quo – You're the cool kid at the table.

Yeah, well, I'm still looking for my invite to Google Voice, and that's not been forthcoming, Google. Yeah, so I got an invite on Monday, and it was an invite only for one day. And so there's been a big hue and cry, I guess rightfully so, over what CNET has called the privacy nightmare of Buzz. But I think that different people are having different kinds of experiences. If you read the privacy statement of Buzz, though, it is quite frightening. It says that by default, we may automatically opt you into following people who you email most frequently with. So wives, mistresses, crazy ex-girlfriends, who knows, maybe Chinese dissidents. And if you're someone who's living in the U.S. using Google and you opt into the Buzz social network,

which is Google's attempt to be in the mix with Facebook, then you may have some exposure concerns because all of the people that you follow and all the people who follow you are going to be available on your publicly searchable Google profile. That's not good. Are we just old, though? I mean, isn't privacy a thing of the past?

Do the kids really care about that? Is the whole point not to have privacy? I think so, yeah. Privacy is passe. This is a weird mash between Twitter and Facebook. Everyone's got a Gmail account. I really wonder if they're going to just sign up for this and use that as their new Facebook. I don't see this going anywhere.

I see this being about as important as, oh, I don't know, Second Life. But you can see how it could be appealing, right? So you don't have to do anything extra. You're not signing up for a Facebook account or a Twitter account. Here's your contacts list. No, suddenly you're in contact with your ex-mother-in-law. Yeah, it is a little creepy. But Facebook is just one of those things that's popular because it's popular.

So it'll be really hard to put a dent in that. What do you mean it's popular because it's popular? You're on Facebook. Yeah. Yeah, only because everybody else told me I had to be on there. We're too lazy to go to the blog where you actually have decent pictures and stuff. So go on Facebook where the picture quality is lousy and you get stalked by weirdos and everything else.

It's nice to know you. I apologize for that, okay? All right, finally, Coca-Cola and Pepsi both reported earnings this week. Coke matched expectations. Pepsi fell slightly below. James, you're following both of these companies. Break it down for us. Sure.

You know, I was skeptical of Pepsi's decision to buy their bottlers back. Basically, the soft drink companies have owned their bottlers and not owned again over the years. You know, they can't really decide. Bottling is a low-margin business. But it seems to have helped increase Pepsi's quarterly profits. The beverage volume is down. A lot of people don't know that Pepsi actually makes more money from snack food, junk food, basically, than they do from their beverages. North American beverages are not really good at all.

It's a flat, a declining market even. But international food really saved Pepsi's bacon, or whatever you want to call it. Bacon's crisp. And even in spite of rising commodity costs, gross margins were up 115 basis points, which is 1.15%. So I like it. Yeah, the problem for Coke, and I think Pepsi is the better company, one problem for Coke is that sugar is the new gold. It's currently priced at nearly twice its normal cost.

And so Coke is having a sugar high in all the wrong ways right now. And the other problem is that, unlike Pepsi, Coke does not have a salt division to pick up the slack. So, results were okay. Revenue up about 4%, and that factors in the currency favorability. So, you know, that's a bit of a wash there, I think. And profits were squeezed during the quarter, in part because of rising commodity costs. I do think that Pepsi's the better company. I looked at the 10-year record for Coke.

It's produced over the last 10 years an annualized gain of not more than roughly 1%. So, if you're considering Coke, and you think that that's probably what the future looks like, too, consider laddering CDs over that period of time instead. All right, Desert Island, you've got to bring a case with you. Is it Coke? Is it Pepsi? Is it Mr. Pibb? What are you taking? Oh, Bell's Pale Ale. Well, you guys know me. I'm an eco guy.

The only thing I drink are these spirulina green powder drinks, but when I did drink soda, I liked Pepsi much better. Shannon? Vernors. What is Vernors? Maybe it was a Florida-only thing. I don't know. but it's a kind of ginger ale, but it's a little spicier than Canada Dry ginger ale.

It's good. But you know what? It's not Cheerwine. No, it's not. Tahitian Treat also. I might go for that. Tahitian Treat? Tahitian Treat is really, yeah.

Tahitian Treat is about 90% sugar. Oh, yeah. And 10% red stuff. I actually think you're making up Werner. So drop us an email, motleyfoolmoneyatfool.com. I want proof outside of Shannon Zubin. Come on, Werner's fans, help me out here. Werner's exists.

We also want to know your take on Snowpocalypse and any advice you have for Greece and the EU, just drop us an email, motleyfoolmoneyatfool.com. The guys will be back later to talk about the stocks that are on their radar. But coming up after the break, economist Simon Johnson will help us make sense of Chinese banks, the EU's challenges, and why the biggest threat to America's economy may be right here at home. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. and we want to talk a little bit more about the problems with the EU.

Simon Johnson is an MIT professor, a former chief economist for the IMF, and co-founder of the popular economics website BaselineScenario.com. He's also the co-author of the upcoming book, 13 Bankers, The Wall Street Takeover and the Next Financial Meltdown. Simon, welcome to Motley Fool Money. Nice to be with you. We're hearing a lot, obviously, about the snow and its effect on businesses and government. From your perspective, is there any economic benefit to all of this snow?

Well, not really, not in a macroeconomic sense. I think it moves shopping around a bit. It changes when people do things. Although, as long as people kept power, as far as I could see, a lot of people were working right through the snowstorm. It does perhaps redistribute income a little bit from people who own property and sidewalk to people who can wield shovels. That's probably a good thing, but I don't think it's a big deal overall. So, one of the things we're also hearing a lot about lately is the phrase sovereign debt crisis. For the benefit of those who aren't familiar with it, what is it, and how is it relevant to the average investor?

Well, sovereign debt is the money that's owed by governments, government debt. Some of that, of course, in all cases, is owed to your own people. Some of it is owed to foreigners. And a debt crisis is when people start to worry that you may not be able to pay back some or all of that debt. And, of course, what we're looking at right now is a problem in the eurozone, starting with Greece, but maybe also Portugal and Spain are in the line of fire. And most of the debts in euros, most of it's owed to people in and around the eurozone, not necessarily by Greece to Greeks, but other members of the eurozone. And there's a lot of worry that they may not be able to pay. From your perspective, what went wrong in Greece?

Well, when they joined the Eurozone, actually when they joined the European Union much longer ago, they promised to do a lot of structural reform. They promised to make their economy, if you like, more modern, more similar to those other economies they've now locked in with in terms of the exchange rate. And they haven't done it. They also managed creatively some of their numbers to make themselves look better and so on. So now there's a reckoning. Now you realize, everyone realizes that their deficit is unsustainable. They need to make some big fiscal adjustment is the term, but it really means budget cuts and raising taxes.

And, of course, that's never popular with your people. If they get the right kind of support from the outside, from other countries, then maybe they can do it over a period of, say, five years. If they don't get that support, they're probably going to have to do it very quickly, maybe five months. And that's even more painful. Is that what they're going to have to do? And is that what other countries in the EU are going to have to do? because it seems like, just to the average person, and I'll just throw myself in that camp, I look at the EU and I see a lot of different countries with very different economic models

and make-ups and economies of scale, and it just seems like a huge challenge. How do they make that work? Well, it is difficult. You know, it's obviously more variation within the European Union than there is currently within the United States, although historically the U.S. had a lot of regional variation. I think most of the European models are more or less functioning okay, and mostly the process of European integration has gone pretty well. The problem is that when they brought in some of these Mediterranean countries, particularly

Greece, but also Portugal, and maybe even we'll start thinking of Spain in these terms, they really stretched it a bit too far. So the other countries are similar enough, and France, by the way, has changed a lot. France. You should abandon all your stereotypes and go check it out. All of them? I have to abandon all my stereotypes about France? Well, perhaps not the ones about the obnoxious waiters. But in terms of their productivity levels, in terms of their management of public finance and so on, they have become much more Germanic than you would think. But the Southern Europeans who really struggle, the Italians, I think, are going to make it. They've actually

done pension reform, which is a very good thing at this point. The other countries are no doubt about it in trouble this time around. You've said that Europe risks another global depression. Is there a country in the EU that we should be looking at as sort of a bellwether to gauge the economic health of the EU? Absolutely. Look at Germany. Germany is really the heavyweight. It's German attitudes that are going to determine whether or not Southern Europe gets helped. Germany could do with a bit more fiscal expansion itself, by the way. They run a fairly contractionary tight policy. That's not terribly good for their neighbors. They're also very export dependent. So if they can't sell to their neighbors, if they can't sell internationally,

you're going to see bad numbers. And the latest data we have for the fourth quarter suggests the German economy is really sputtering. They're not going to collapse. They're quite resilient, obviously. But as a bellwether, as an indication of what's going on and who's leading and whether Europe is leading, look at Germany. You're listening to Motley Fool Money, and we're talking with Simon Johnson, professor, economist, author, and co-founder of the website at baselinescenario.com. Let's bring it a little closer to home here. In addition to global problems, you've identified a number of problems for the U.S. economy, a soft housing market, a debt overhang for lower-income households. Is there good news for the U.S. economy in 2010?

Well, the good news, if we don't fall off another cliff, honestly, I think that we have a lot of a lot of issues to deal with. You didn't mention the too-big-to-fail banks, which perhaps are not foremost on people's minds right now, but they're going to lead to trouble. I mean, we've got these massive banks where the people who run them are convinced, with some reason, that if things go well, they'll get the upside, and if things go badly, that's my problem and your problem, not their problem. That always ends in tears in every country we've ever seen that. So, yeah, I think 2010 is going to be a rock for the U.S. Obviously, we're still in a recovery phase. The recovery should have been going faster. We should have been bringing jobs back quicker. And now I fear

the effect of the Eurozone, the effect of this kind of domestic issues that you mentioned a moment ago, and some of the banking sector problems, commercial real estate going bad, hurts a lot of small and medium-sized banks. This may mean a slowdown in the second half, not a double-dip recession. I don't think Apple will actually contract. But I think the recovery, which is not going fast, will lose speed. Well, let's stick with the banks because President Obama has taken some heat for not being tough enough on the bailed-out banks. He made the comments earlier this week, I believe it was, about the bonuses being paid out and how he didn't begrudge those. But you've said that the financial industry has effectively captured our government.

What should the president be doing that he's not? He should be toughening the policies and the attitude towards the biggest banks. There was, of course, a move in this direction when he announced the so-called Volcker rules in late January. I think those rules have the right ideas behind them. Don't let the big banks stay big, and don't let them take crazy risks. But unfortunately, the way that they're sort of coming together in legislation, the way the detailed tactical people in the administration are taking this forward, that they're going after a pretty weak version of those rules.

And in addition, the big banks are digging in. They are really quite adamant that they don't want any such restrictions. They're very powerful. They have a lot of money, and their ideological position, the intellectual capture that they've managed on Capitol Hill and throughout the administration is quite complete and actually shocking when you see it up close. That's going to take quite a while to break. If President Obama is going to get tougher with the big banks, is Tim Geithner the right man to help with that job, or does he need someone more like Paul Volcker? I have no problem with Tim Geithner as long as he changes policies. I think the people are fine.

The people are professionals, and they need a different direction from the top, and then they'll do the job. So I think Volcker's ascension or reascension to power, or at least they brought him out of the basement, that was great. Volcker is exactly the kind of guy you want with the vision and the steel, and the bankers are afraid of Volcker, okay? They're not afraid of pretty much anyone else at this stage. how much role he'll have and whether they'll truly take a tough version of his vision and

implement it. That remains to be seen. Well, I'm biased because I like my treasury secretaries to be old and grizzled. And so through no fault of his own, Tim Geithner kind of just strikes me as the kid at the grownups table. And it certainly doesn't hurt that in addition to being old and grizzled, Paul Volcker is, I think, six foot seven. So in terms of striking fear in the hearts of the banks. That probably helps. I'm sure it helps to tower over everybody. China just ordered banks to raise reserve ratios. What does that mean for us here in the U.S.? Well, it means China wants to slow down a bit. That may not be crazy from their perspective. Their economy is growing pretty fast. The big issue for us, of course, is their

exchange rate. And this move on the reserve requirements doesn't affect their exchange. It doesn't push it towards appreciating, which is what we and everybody else needs. They're actually cheating, to be honest. They're cheating on their exchange rate. They're cheating. It's a form of cheating on trade policy. But there's a massive loophole in the international rules. The World Trade Organization doesn't deal with that, and the International Monetary Fund has not been able to deal with it.

So the Chinese will get away with it for quite a while longer, and that's not helpful. And so when you say that they're cheating, who's supposed to call them on that and enforce rules to make sure that they don't? Is it the IMF? Yes, it is the IMF. And there was an attempt over the past few years to beef up the ability of the IMF to make that call and to do something about it. But to be honest, it failed. It failed kind of ignominiously. It failed as the crisis broke. And so it kind of got hidden in that dust. But now, as things begin to stabilize, China's exchange rate becomes more of an issue again, and the failure of the IMF in this space is something unfortunate. We need to recognize it. I'm not suggesting we stand around screaming and shouting about it. We just need to move on. I think we need to change the rules so the World Trade Organization can deal with this kind of unfair trade subsidy. So what is a greater potential threat to our economy and to investors in the U.S.?

Is it China or is it the EU and the current crisis they're dealing with? Oh, it's our banks and none of the above. You see, if our banks were in good shape, if they had plenty of capital, if they behaved responsibly and had decent incentives, I would say we can withstand the eurozone shocks. We're a big economy. We're a quarter of the world economy by ourselves. And the Chinese exchange rate, you know, it would be it would be it would be a side issue. But I think with the financial system, the nature of the one that we have, we are heading for serious instability. Now, I'm not saying we go down.

I'm not saying we even stay flat. I'm saying we go up and down a lot. And every time we come down, there's a big cost for the taxpayer. There's a big cost in terms of lost jobs. There is a lot more inequality in the United States. That's absolutely what you're going to see as a part of this cycle. You know, rich people who do well in the financial sector are going to be pretty happy with this arrangement.

And everyone else is going to get increasingly hammered. the middle class is going to get beaten down. I would suggest, with all due respect to Mexico, we're going to become a lot more like Mexico. In what way? More inequality, more people who are trodden down at the lower end of the income scale. I would guess it comes with more crime. I would guess it comes with a lot more resentment. It probably comes with more extreme populist politics, by the way, but the elite manages themselves through this quite well. Of course, they all go in Mexico. They have second houses in Miami. I'm not sure where the U.S. elite will have its retreats, probably somewhere like New Zealand.

Your next book is 13 Bankers, the Wall Street Takeover and the Next Financial Meltdown. And it comes out March 30th. But give us a sneak preview. What is the next financial meltdown? Because it sounds like you're painting a picture right now with your description of how we're getting closer to being more like Mexico. Yes. Actually, we've been talking about the key themes uh in the book um really it's about uh the kind of financial system we have today how it where it came from and how it changed as a result of the the crisis in the bailout and our argument is it's it's more dangerous uh now actually than it's ever been which which is which i understand is is a striking shocking um point um and and we you know we should i'd like

to come back if if you're willing and we can talk about all the details when the book's out we'd love to have you back. Because it's a heck of a story, and you wouldn't believe it if it weren't right there in front of you. The book is 13 Bankers, the Wall Street Takeover, and the Next Financial Meltdown. It comes out March 30th, but you can pre-order it on Amazon now and check it out because it is getting a ton of praise already. Simon Johnson, we'd love to have you back in April when your book is out, but thanks for being here. My pleasure. Coming up next, it's the stocks that are on our radar. You won't want to miss it.

You're listening to Motley Fool Money. Welcome back to Motley Fool Money. As always, people on the program may have interests in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. I'm Chris Hill, and back in the studio with me, our trio of senior analysts, Seth Jason, James Early, and Shannon Zirin. Guys, we've got a little bit of time, so Seth, we'd love for you to explain an email you sent earlier this week. Whoa, whoa, if I start explaining email in here, I'm going to be doing nothing but. Well, you know, with all the snow we've had, our producer, Matt Greer, wanted to know if you were going to be able to get to the studio.

And your response was, and I quote, I should be in early morning. I was able to get out today. that was the most pantyhose I've ever bought sober. Well, I've got a little ice dam situation on my house, and one of the fixes you can supposedly use for this is you buy some pantyhose, you buy some ice melter, not salt. You need the special kind, calcium something.

And you pour it in so you get these kind of stretchy, loggy things. So then I'm leaning out my windows. I actually cut my hands on icicles, and you're kind of flipping them up, trying to get them across the ice dams, the theory being that they will kind of cut, melt a groove through the ice dam so that the melt water will go out through that groove instead of coming into your roof, up your shingles, and then down your walls and wrecking your house.

I'm sorry to report it doesn't really seem to have helped a whole lot, but the guy at the CVS did wonder why I bought 12 pairs of black pantyhose. Yeah, I was going to say, I'm guessing you got some looks. Yeah, I do look pretty good in black pantyhose, All right. Let's move on. Guys, let's go around the table. One stock that is on your radar. Shannon Zimmerman, we'll start with you. Well, you know, it's a tough time. I'm trying to connect the dots between a couple of themes. This notion that we talked about in the past that, you know, in a flat-to-down market, dividend-paying stocks look especially attractive because their gains are not going to be based

just on price appreciation, but on the income that they throw off. And thinking that since health care reform seems to have collapsed, that it might be good to look in the health care sector for, you know, strong dividend payers. So I'm looking at Bristol-Myers Squibb, a projected yield of about 5.4. that's pretty good. Pretty solid, yeah. But, you know, no growth prospects to speak of. Kind of a weak pipeline. Valuation is okay. So, I'm doing some more work on it, but that's the best that I can come up with right now. Ticker symbol?

BMY. James Early? Chris, I have another dividend stock. It's Constellation Energy. This yields only 2.8%. You might remember this. This is the one that Warren Buffett's Mid-American Energy tried to buy a few years ago, and they ended up just selling a small portion of their nuclear assets to EDF, Electricity de France, instead. Constellation is a utility. It owns Baltimore Gas and Electric, but that's a small part of its business. It's mostly a merchant power generator, meaning it takes the risk of generating power to sell it on the open market. If power is highly

priced, they'll make a lot of money. If power is not, they won't. That's why it's great if it's a nuclear company. Nuclear is very cheap power, so it's made a lot of money doing this, but it's a riskier company. Anyhow, if you think that the U.S. is going to see rising industrial activity, more power usage, Constellation could be a great bet. The ticker is CEG. Seth Jason? If these guys are going to consider all these nice, stodgy, dividend-paying stocks, I'm going to have to go with some old-school, no-dividend craziness.

It's eBay. eBay is on my radar because I see that they were fined by a Paris court this week for buying keywords, misspelled keywords, so that they would steer people to their website who were looking for Louis Vuitton products. And, of course, the French really hate that kind of thing. So eBay is up in arms there. One of their European directors claimed that this ruling just shows Louis Vuitton

trying to harm eBay's reputation, that this settlement was way out of line. But it was $275,000, according to the article I got here. I mean, that's nothing to eBay. I mean, they can blow that on a Scandinavian phone startup in two seconds, in literally two seconds probably. The reason it's on my radar is that if you look at it, it looks like it's trading at somewhere in the neighborhood of 10 times a normalized cash-free cash flow or so, which isn't exactly cheap,

but it's not exactly pricey if you believe eBay is going to fix the sort of top-line revenue malaise and keep going forward. So it's really not on my buy list at this moment, but I'm definitely interested in keeping an eye on it because if they do things right, it should be a cheap business to keep running. Yeah, and eBay is quite interesting to me for a couple of reasons, too.

There's the PayPal piece, which has been a phenomenal acquisition, unlike Skype, and they shook Skype off, and so that was good. And then the apping of eBay, too, the fact that folks can have PayPal on their websites that are independent of eBay, a good development for that company.

I don't think that they've seen all of the growth out of that yet that they're going to see. Just in the minute we have left, we've got Valentine's Day coming up. We're all married. Yes. And we've all suffered a lot of snow. So the question is, to what extent do you think we can use the snow as an excuse to get out of buying a Valentine's Day present for our respective wives? To no extent at all.

Although I have to say that I got a call from my wife earlier today who reports that my daughter, my older daughter, has made a card for me. Mom, what does Dad like? Dad likes a guitar. So she drew something that apparently looks nothing like a guitar, but I'm supposed to act as though, oh, wow, that's my guitar. You got the warning? James? Well, thank you for reminding me first off. I did get flowers today at the market, but I still have to get on the ball.

Seth, you think? Any chance? Yeah, you know, no matter how much snow falls, I still don't have any excuse if I fail to stop at the gas station and buy the chocolates in that rose near the checkout counter. And the beef jerky. It's a pantyhose. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here.

Sure thing, Chris. I want to thank our special guest this week, Simon Johnson. If you missed any part of the show, you can find it at our website, MotleyFoolMoney.com. You can also get a copy of our free report, The Motley Fool's Top Stock for 2010. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening.

We'll see you next week.