Frontier Investing

Addison Wiggin – May 23, 2011

  • Frontier investing… Our on-site inspection of a communist nation with two publicly listed companies
  • Patrick Cox with three breakthroughs in electrical power, robotics and aging — including "the last stock you'll ever need"
  • Eurozone worries bring on the safety trade… with one notable exception
  • Singapore going the way of Dubai? Judge this "world's biggest" for yourself
  • Monday mailbag: "Doctrinaire libertarianism," the end of the world and even a thing or two that make sense

   While flying from Kunming, China, last week to Vientiane, Laos, we flew over the western edge for Xiangkhoang province — better known by another name, the Valley of the Jars.
Ninety sites in the valley are dotted with massive rocks carved into jars — as few as one, or as many as 400.

"According to legend," states a Wikipedia citation, "an ancient king created the jars to store rice wine after a great victory in battle. But archeologists say it's more likely they had something to do with ancient burial practices.

"Only one jar among the thousands is decorated — with carvings on the outside depicting humans, arms raised, knees bent. On the basis of those carvings, scientists date the jars to between 500 B.C.-A.D. 500."

Archeologists have trouble studying these sites today because they're littered with land mines dating back to the war in Vietnam next door in the 1960s and 1970s.

   That same flight from Kunming also took us from the "emerging market" in China where we've been attempting to set up a local office for the better part of 18 months, to the "frontier market" of Laos.

In 1975, weeks after the United States famously left the area (via helicopter atop the U.S. Embassy in Saigon), the king of neighboring Laos was deposed by communists. The communists and their concomitant bureaucracy reign today. Per capita GDP is just south of $1,000 annually.

Why — we can read your mind — bother seeking opportunity in a place such as this at all?

Apart from the fact that we're curious and we can't help ourselves, the Lao government, in partnership with a South Korean firm, opened the Lao stock exchange on Jan. 11 of this year with two shares listed. Leopard Capital, our hosts on the tour, were the "first mover" in this space and owned a pre-IPO position in one of the two shares available to foreign investors at the time: a hydroelectric producer partially owned by the state.

The other share, a partially state-owned bank, became available the day we visited the exchange. Today, the Lao market was up nearly 8%. The last two days saw it fall 30% combined.

Leopard prides itself on "first-mover advantage" in markets where others fear to tread. Over the next week, we'll take a look at what such an approach to extreme value investing of this sort entails. Lessons, we assume, can be learned about making money… even in the most unlikely places.

Stay tuned.

   "Historically, great fortunes have always been created when times were bad," says our tech and biotech maven Patrick Cox, covering a frontier of the mind, rather than in geography. "This is more true today than it's ever been because we've entered into a period of unparalleled scientific and technical progress."

   "Imagine," Patrick says, "a piece of rock the size of a golf ball giving a person a lifetime supply of electricity. A piece the size of an SUV could give a lifetime supply of energy to a town of about 50,000 people."

The rock is called thorium. A pound of the stuff can produce as much electricity as 200 pounds of uranium. Used in a nuclear reactor, thorium…

  • Is far safer than uranium
  • Generates less waste
  • Is much more abundant.

Maybe most important, it can't be turned into a weapon. That's why thorium power never took off after World War II and uranium did.

But thorium's time has come, Patrick says. Existing nuclear plants can use it, much as a car that uses leaded gasoline can use unleaded too.

"It's just a vastly superior design, and there are many options," Patrick said in a recent interview with Baltimore's NPR station. "The thing to remember is that thorium requires an extra neutron to work. In order to create fuel, you have to add a neutron. If you stop adding the neutron, then the reaction stops. This is completely meltdown-proof."

   "Everything is driven by the inexorable forces of Moore's law," Patrick continues, turning his attention to the exponential growth in the capacity of microprocessors.

Most of the time, we think about this growing capacity in terms of a computer — or, more recently, a smartphone. But one of the most powerful uses is in robots… which came in enormously handy after the earthquake and tsunami in Japan.

At the damaged Fukushima nuclear complex, a device called the PackBot — weighing 68 pounds — measured radiation levels, oxygen levels, temperatures and the presence of gas leaks. A larger robot called the Warrior — tipping the scales at 351 pounds — could do actual heavy lifting, along with checking for contaminants.

And unlike people, robots don't worry about radiation exposure. And as the technology progresses, even better devices are in the offing. "They will be stronger, with better balance, handling and battery life," Patrick recently told CNBC.

   "We've never experienced anything like it in human history," says Patrick about the breakthrough that has him excited the most in 2011. "The last time a global-scale war ended, in 1945, mortality rates plummeted — as they will when this drug is widely adopted."

Here's the background: "In the last decade or so, it has become increasingly clear that inflammation plays a major complicating role in almost all diseases. When we are young, the primary role of this important biological response is to heal injury or infection."

That was one thing when a typical human life span was 40 or 50 years. But as we age, it becomes a problem. "It is now understood that inflammation plays a role in virtually all diseases. In fact, inflammation increases the rate of aging itself and leads to various pathologies.

"This is why your dentist lectures you about flossing. Inflammation from unhealthy gums increases the odds of getting heart disease and even Alzheimer's."

One company Patrick follows has taken a naturally occurring alkaloid and synthesized it. Scientists have been doing something like this for two centuries now — turning a poppy into morphine, for example.

But think about a breakthrough that could neutralize all the most-common diseases of aging caused by inflammation. It took Patrick a long time to wrap his mind around the implications.

"It took me weeks to overcome my initial skepticism," he says. "I've spoken at length to extremely important, respected scientists and have hours of taped interviews. I've read tens of thousands of words on the science behind this breakthrough. I've visited one of the world's top biotech research laboratories and have met researchers whom I've known about for over a decade, but never expected to meet."

Conclusion: "Not only are the implications of this discovery going to change the world as we know it, but they could produce large returns for early investors. It could be the last stock you'll ever need."

A bold claim… but he furnishes ample proof in his latest presentation. We urge you to give it your attention now.

   It's "risk off" as a new week begins. Markets are jittery about the eurozone again…

  • S&P downgraded its outlook for Italian government debt from "stable" to "negative"
  • Spain's ruling Socialists got clobbered in regional elections yesterday, casting doubt on the future of Spanish austerity measures
  • Greece is scrambling to sell off unspecified assets (the Parthenon?) to stave off a "restructuring" (read: stretching out the payments) of its debt.

Ten-year Greek bonds yield 16.98% as of this writing. In the credit default swap market, traders now give Greece a 68.7% probability of defaulting in the next five years.

At the moment, the market impact looks like this…

  • The Dow and the S&P have both tumbled a little over 1%
  • Oil is off more than 3%, to $96.90
  • Yields on 10-year U.S. Treasuries are down to 3.1%… their lowest all year
  • The euro clings to $1.40… while the dollar index has moved decisively above 76 for the first time in a month.

   Gold, however, is holding its own in the face of this action. At last check, the spot price was $1,513 — virtually unchanged after Friday's run-up. Silver is likewise steady at $35.15.

In euro terms, gold has reached a record of EUR 1,080 an ounce.

This will be interesting to watch. We could be entering a period much like the first half of 2010 — in which the dollar index ran up 19%… but gold did not fall accordingly. Indeed, it rose 11%… before powering up another 13% by year-end.

   The Shanghai Gold Exchange plans to launch exchange-traded funds to help meet demand for precious metals. No timetable yet, but no doubt the exchange's managers have noted overwhelming demand for overseas gold ETFs — which Chinese first got access to in January.

As we noted last week, China is now the No. 1 source of investment demand for gold — surpassing the longtime leader, India. And the Chinese central bank has a long-term aim of growing its gold reserves eightfold.

We've said it for months, and we'll say it again: It's not too late to get rich with gold. Here's how.

   Maybe the new "gold as money" law in Utah will have a little more impact than we first thought.

Earlier this year, the legislature passed and the governor signed legislation affirming gold and silver's status as currency. The only practical effect we saw at the time was precious metals became exempt from state capital gains taxes.

Now along comes an entrepreneur named Craig Franco, who plans to open the Utah Gold and Silver Depository next week. He has no website yet, so we're left to rely on an Associated Press account that says, "The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings."

"I expect a wait-and-see attitude," Franco says. "Once the depository is executed and transactions can occur, then I think people will move into the marketplace."

Based on this, we're not sure how the "debit-like card" is supposed to work… or how it differs from other efforts like those of our friends at GoldMoney.com. But we'll keep an eye on it.

   OK, so it's not an indoor ski resort in the middle of a desert… but this does give us pause when thinking about whether the boom in Asia is getting a little ahead of itself.

The world's largest indoor skydiving simulator opened last week in Singapore.

Located on the island resort of Sentosa, iFly Singapore is the country's first indoor sky-diving venue. It boasts the world's largest wind tunnel — 56.5 feet high and 16.5 feet wide.

Customers get two "dives" of 45 seconds each. Beginners are exposed to wind speeds of no more than 100 miles an hour.

The cost is 89 Singapore dollars, which this morning works out to about US$73. Compared to iFly's San Francisco offering, that's steep — you can get in at off-peak hours for just $50.

Maybe it's a good business, we don't know.

   "As the complimentary reader pointed out last week," a reader writes, "you write beautifully — if your object is to tell people what they already believe or to convince the very few people who are incapable of analysis and are not yet committed to a point of view."

The 5: Right. We thought our object was to sell financial newsletters, but sure…

"As far as making a valid case for doctrinaire libertarianism," the reader continues, "you will need to prove either that a true free market economy does not require economic growth or that perpetual economic growth can be accommodated by a finite world.

[Now there's a mind pretzel for you. Wait… it gets better…]

"I seriously doubt that many people would accept the changes that would be necessary in this world to allow economic expansion to extend into outer space. It is insufficient to suggest that a way will be found to overcome the drawbacks of the colonization of space without providing closed energy balance equations for a successful colonization program.

[We're colonizing space already? We thought for sure Patrick would be all over it… what's the ticker? We'll let him know… ]

"People don't seem to be able to wrap their minds around the simple exponential function that governs the continuous growth of anything."

[Now I get it… you're French and you're using web-based translation software, right?]

The 5: Until this morning, the term "libertarian party" was our favorite oxymoron… but now you have given us a better one: "doctrinaire libertarianism." Thank you.

Still, to use your logic, isn't the onus on policymakers and bankers to prove endless growth is possible? Why else their fascination with those terms — "GDP," "recessions," "depressions," "inflation," "deflation," "stimulus" — describing growth or shrinkage as the case may be?

The economic doctrine en vogue in Washington and on Wall Street demands endless growth, real or fictitious. Without endless growth, there's no way to even imagine servicing the endless debt they're mounting.

It's not our beat. But your letter implies we can envision some alternate policy mix that is better than the one their currently following. If we can, it's also probably simple: Stop promising more than you can afford to deliver.

   "I love The 5 Min Forecast," writes another reader who apparently shares diminished mind capacity on a scale similar to ours. "I believe you are spot on."

Still, we've been at this long enough to know there's a caveat coming… a big "but"…

"However," the reader continues, "some of your gold pricing arguments could be flawed because they assume a static amount of the yellow metal. In fact, the supply of gold is ever increasing, even if at a slower pace.

"Just as the supply of money has increased, so has the supply of gold. The chart would most likely still show that money is growing faster, but not quite at the same level of disparity."

The 5: Indeed. But what's more important, the overall supply… or the rate of increase in production? In general, world gold production keeps pace with the increase in global population. World production of paper money has far outpaced both.

   "First, thank you, thank you, thank you," another reader thanks us thrice. "I deeply appreciate your views, opinions and suggestions.

"My question is what's a 'working stiff' like me to do? Seems your advice is most applicable to those who already have substantial assets. I'm guessing about $500,000 or more? What can I do to protect what little I have and, in fact, prosper from current and emerging economic events?

"Would deeply appreciate your suggestions."

The 5: You'd be surprised at the diversity of net worth among our readership. And we have a variety of entry-level services available at "working stiff" prices, depending on where your interests lie.

If it's energy and natural resources, we have Byron King's Outstanding Investments — the No. 1 performing newsletter over a 10-year period, according to Hulbert Financial Digest.

If it's undervalued stocks you're looking for, Chris Mayer's Capital & Crisis is for you. If you want to take a flier on penny stocks, we there's Penny Stock Fortunes. High-tech and biotech? There's Technology Profits Confidential… If it's income you need, Lifetime Income Report is the way to go.

And there's our own Apogee Advisory… which turns our own observations, the places we go and the people we meet, into actionable advice. Good luck.

   "If you print this comment," our last reader writes today with a first, "then it is worthless.

"Someone needs to tell Patrick Cox that if the doom and gloom people are right about May 21, then any stock is the 'last stock you will ever need'!

"I surely hope that you (can) print this!"

The 5: We were on a plane returning from Cambodia to the United Sates on May 21.

We left Phnom Penh at 8 a.m. local time, endured several layovers in Guangzhou and Beijing and then flew 13 hours to Washington Dulles. After traveling nearly 28 hours, we landed at 7 p.m. on the same day.

In effect, we gave the gloom and doom prognosticators a full extra 12 hours to get their May 21 Armageddon prophecy straight.

Alas, here we are.

And since it's now Monday, May 23, it's safe to conclude the original purpose of Patrick's statement holds. What can we say, he's a long-term thinker.

Indeed, "if the research and promise," Patrick reveals does "pan out" as he suspects, "your children, your grandchildren and their grandchildren might not want other stocks, either."

You owe it to yourself to give Patrick's newest presentation a look. It will be available for only the next week.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. "Frontier Investing" brings with it a disparate and interesting group of people.

A quick survey of our fellow travelers in Laos include an Austrian triathlete living, training and investing from his home in Thailand; an Princeton, N.J.-based American couple who oversaw construction of the first post-invasion oil refinery in Afghanistan; an Australian adventure-traveler who made his living as a stand-up comic for 12 years; an Italian investor in solar technology and gelato stores in Paris; a Colombian woman whose family exports more coal from Colombia than any other and has since gone into gold prospecting; a retired British stockbroker who was until recently speculating in Spanish real estate; a Hawaiian-born Lao economist with a Ph.D. in development economics from Oregon; pension fund managers from Switzerland, France and Austria; a Lao entrepreneur making his way from a travel agency through import/export to tapioca farming and production; and an Indian fund manager who, we discovered after a very short conversation, worked with our partner in India a lifetime ago on an emerging markets desk at a brokerage in Florida.

Phew. And those are the few we recall off the top of our head.

We've invited the lot of 'em to join us in Vancouver at the end of July, as we think many of those interesting folks would enjoy the attendees who already hail from 29 countries. Doug Clayton, founder of Leopard Capital and our host in Laos and Cambodia, will be speaking in the general session about his efforts in Southeast Asia, Colombia and Haiti.

As of this morning, only 32 seats remain for this year's Agora Financial Investment Symposium, July 26-29 in Vancouver, British Columbia. A week ago today, the number was 81. At that rate, we'll sell out in the next few days. If you want to avoid going on a wait list, here's where to act.

rspertzel

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