Five Years of The 5

Dave Gonigam – April 26, 2012

  • Dow 13K then, Dow 13K now… Marking five years of The 5
  • Fed suddenly concerned about inflation? Amoss on the dollar-oil link, Mayer on the China factor, King on a resource crisis you haven’t started to worry about
  • Freedom of movement: Patrick Cox on promising and potentially profitable research into healthy new cartilage cells
  • A mock trade update… why you can’t “work your way through school” anymore… the last word on Apple (for now)… a free-market solution to government’s grassy mess… and more!

   It was a Thursday. It was the 26th of April. “The Dow punched through 13,000 yesterday,” Addison wrote.

Today is a Thursday. It’s the 26th of April. And we can write, with total accuracy, “The Dow punched through 13,000 yesterday.”

With that, we kick off our fifth-anniversary episode of The 5. There’s something special in it for you, something we’ve never done before. Read on…

   Not everything is the same as it was on that April day five years ago. “Fund managers and day traders were foaming at the mouth in excitement,” we said of the reaction to Dow 13K.

Now… having topped 14,000… sinking below 6,500… and recovering to 13,140 at last check (without accounting for five years of inflation)… the mood is rather more fretful.

   “I do not recall ever hearing so much noise about a less-than-5% pullback coming after an 18% rally,” says Fusion IQ chief and Vancouver favorite Barry Ritholtz.

“Part of the blame,” he explains, “goes to underinvested managers who missed the Q1 rally… There are not many things more powerful than a big client asking their adviser/fund manager, ‘Why are we carrying so much cash with the market ripping higher?’”

“Given the [Federal Reserve] backdrop, the near-term downside (90 days) is probably limited to 15% pullback. That number has been determined by me through a highly precise and technical technique known as ‘guessing.’”

In addition, Mr. Ritholtz figures there’s a 65% chance the recent pullback is a consolidation move… and a 35% chance the market’s reached a top. “I reserve the right to change my mind as new data come in, as I work in the even more sophisticated technique of ‘Quantitative Guessing’ — which has worked out so well for the Fed.”

   Ah, yes, the Fed. The highlight from Ben Bernanke’s press conference yesterday was captured in a headline that crossed the ticker on Bloomberg TV:

“Bernanke: Inflation Above 2% May Erode Fed Credibility.”

That is, whatever credibility the Fed retained after Bernanke declared in 2005 that “We’ve never had a decline in housing prices on a nationwide basis.”

Regardless, the Fed does seem a mite more concerned about inflation these days.

“Inflation has picked up somewhat,” reads the statement issued yesterday after it’s two-day meeting, “mainly reflecting higher prices of crude oil and gasoline.”

   Oil, priced at $66 per barrel five years ago, is up about 50 cents this morning, to $104.61.

   “The endless series of quantitative easing from central banks has forced oil producers to think more like Austrian economists,” says our macro maven Dan Amoss — seeing higher prices still down the road.

“More and more oil producers will wake up to reality and demand higher prices to offset the dilution of yen, yuan, euros, pounds and dollars. Erste Group illustrates the impact of a pure fiat money system on oil prices with this shocking chart:

“This chart,” Dan explains, “starts with an index value of 100 in 1971, when the U.S. shut the ‘gold window’ and an international monetary system based on the paper U.S. dollar began.

“Note that this chart is on a logarithmic scale. The oil price is stable measured in terms of gold. But measured in dollars, the difference is remarkable: The U.S. dollar has lost more than 98% of its purchasing power versus oil.”

   Still, you can’t discount the impact of supply and demand… and “China has been the biggest driver of global oil demand for years,” Dan goes on.

“Its economy — especially manufacturing and construction — has slowed. Imports of everything from iron ore to machinery are rolling over. Year-over-year growth in electric power production has slowed to 5%, after having grown at a 10-15% rate in 2010-11.”

“Yet China’s oil imports keep growing fast enough to offset declining imports from U.S. and European economies. China is still at a stage in its economic development in which its population highly values the mobility that cars offer. Many other emerging economies are also at this point of development.”

“Even if the growth rate of oil imports slows, the absolute level of imports has reached a point at which it exerts constant pressure on an aged oil infrastructure that can barely keep up.”

   “Longer term, I think China’s economy will be much bigger than it is today,” says the well-traveled Chris Mayer, with his own thoughts about the China slowdown. “But there will be hiccups, and the risk of one now is high.”

“Of the markets I’ve been to and follow, I’d say I’m worried about China. I think China is due for more than just the soft landing everyone seems to expect. I think China is starting to lose its cost edge in certain areas of manufacturing. I see spiraling wages and surging costs of living. I see a vulnerable banking system and shaky property market.”

Nor is Chris enthusiastic about Brazil. “I see a heavy-handed government making a lot of bad moves lately,” he says. “Brazil is also a difficult place to do business. In South America, I’d rather invest in Colombia, Chile or even Peru.”

On those opportunities, you can learn much more in his new book, World Right Side Up.

   And now for a resource crisis you hadn’t started to worry about yet: a worldwide copper shortage.

“The copper crisis will make the current rare-earth crisis look minor by comparison,” says metals consultant Jack Lifton, who spoke at a conference in Toronto attended by our resident resource expert Byron King.

“According to Mr. Lifton,” Byron reports, “the global copper industry isn’t increasing output nearly as fast as demand for the red metal is growing. ‘Just China alone is building a new grid for half a billion people. That’s like doing North America all over again, from scratch, and then some. Everything depends on moving electrons around on copper wire. And we’re approaching the point where there’s not enough copper to make enough wire.’”

That was corroborated by another speaker, the head of materials technology for the Chevrolet Volt. The car contains miles and miles of copper wire. “GM engineers had to design the car so that it would be difficult for thieves to strip the copper wire from the powertrain,” says Byron.

“In other words, in an era of expensive oil and rising commodity prices, thieves won’t just siphon gasoline from the fuel tank. They’ll also strip the wiring from an electric car.”

Byron picked up several investment ideas at this conference in a sector you might label technology metals. “The space is relatively small,” he says. “The number of quality companies is relatively limited.” But he’s pulling together some recommendations set to profit from the same trends driving a potential copper shortage. Stay tuned…

   Gold is perking up a bit this morning. The bid is currently $1,656. Silver, after dipping below $30 briefly yesterday, has recovered to $31.04.

For amusement’s sake, we’ll note the price five years ago today was $677.

   The greenback is no better or worse than it was five years ago, at least relative to the world’s other major fiat currencies. Then, the dollar index stood at 81.4. Today, it’s 78.9.

All the currencies are moving within a tight range of late — which means a likely payoff tomorrow for the “mock trade” suggested on Monday by our market-sentiment maven Abe Cofnas.

He offered up two plays betting on the yen staying in a range between 79.75-82.75. At last check, it’s 80.84.

   “The significance of this data is profound,” says Patrick Cox, drawing our attention to an opportunity in the biotech sphere.

Peer-reviewed research in the journal Regenerative Medicine finds that a certain line of stem cells is capable of growing human cartilage. “The study,” the journal says, “documented conditions in which the cells can be propagated on a large scale, conditions in which the cells can be differentiated into cartilage in the laboratory, and evidence that the cells could repair damage to knee joints in rat models.”

“The paper,” Patrick adds, “also shows that BioTime’s cells will regenerate not only needed cartilage in an injured animal joint, but also the subchondral bone, which the cartilage attaches to. This is what stem cells are supposed to do: adapt to actual biological need.”

Here again we see the potential of “induced pluripotent stem cells” taken from your own body and transformed into not only healthy tissue — but youthful tissue, as though you were 20. No wonder Patrick was so willing to be a human guinea pig and have some skin cells removed earlier this month to be transformed into new, healthy and youthful heart cells.

[Ed. Note: We can hardly wait to see what transpires in the next five years in biotech and high-tech. And we’ll stay on top of it for you. At the same time, we’ll also guide you through the minefields laid by politicians and central bankers.

To thank you for your continued readership, and to celebrate five years of The 5, we’re doing something we’ve never done before. We’re going to make the Agora Financial Reserve — our highest level of service — as accessible as we’ve ever made it.

We’re not talking about slashing the membership fee. Nor are we talking about any “giveaways” to sweeten the deal.

We’re talking about a way for you to test-drive the Reserve without forking over the full-freight membership fee. For a limited time, you can access the research of every editor we’ve mentioned in today’s 5

  • Patrick Cox’s tech and biotech recommendations
  • Byron King’s natural resource recommendations
  • Chris Mayer’s recommendations gleaned from extensive world travels
  • Dan Amoss’ recommendations driven by big-picture macro trends
  • Abe Cofnas’ short-term “binary option” trades.

Plus, Steve Sarnoff’s Options Hotline, Greg Guenthner’s small-cap research, Jonas Elmerraji’s technical analysis and Jim Nelson’s income investing ideas.

Plus free admission to the Agora Financial Investment Symposium… where you can rub shoulders with the likes of Barry Ritholtz, Rick Rule and Marc Faber.

Yes, it’s a lot of information to absorb. That’s why the Reserve isn’t for everyone and we limit it to only 1% of our readership.

But if you think you might belong in our own “1%”… you’ll never have a better chance to find out for sure. Addison shares the details at this link. You don’t want to dally. Celebrations like five years of The 5 come along rarely… and we’re keeping this offer open only through tomorrow night at midnight.

   “Just a quick comment on the student loan mess,” a reader implores after yesterday’s episode. “Whatever happened to working your way through college?

“Not only does it reduce the financial burden, but it teaches character and a stick-to-it attitude.”

“Bail out the banks that loaned the money? Don’t make me laugh. No one with a brain bigger than a pea would suggest that…. or would they?”

The 5: We like the “bootstraps” sentiment, but…

We’ve shared a variation on this chart before. It illustrates the problem with “working your way through college” nowadays; the pay that comes with waiting tables has nowhere near kept pace with rising tuition costs…

Indeed, government attempts to make higher education more “affordable” have backfired even worse than they have for health care. A stunning accomplishment, really…

   “Student loans are definitely a building crisis,” writes another. “I have two children with a combined debt of $60,000. It is mind-boggling how they will ever repay, but they’re not giving up.”

“It has been pushed on these kids so hard that they must have a degree to get a job that any kid can apply and get funding for college with no thought to the direction, the ability or the long-term consequences of not seeking a viable education that will pay.”

“How is it the banks in collaboration with the government think they can loan out a trillion dollars betting on the future repayment, with no collateral or asset value to back it up? Betting on the ability of young people to get an education and secure a job with no criteria or limitation on what career they will pursue?”

“It is criminal that the government pushes these loans and guarantees and indebts these people to the servitude of the lender, and then makes the loans nondischargeable in bankruptcy. How long can this go on — until they loan another trillion dollars worth of unserviceable debt?”

“What I would suspect in time is that the statists will bind the borrowers to servitude to the state for repayment. And that is a tragedy worse than the loss of the trillion dollars.”

The 5: The “pushing” continues, we see in today’s Wall Street Journal: “When baby boomers born in 1955 reached age 30,” it frets, “they had about two years more schooling than their parents… In contrast, when Americans born in 1980 turned 30 in 2010, they averaged about eight months more schooling than their parents.”

Love the underlying assumption: Society evolves only as each succeeding generation spends more and more time in the ivory tower. Ultimately, we achieve nirvana when no one ever has to leave and enter the workforce…

   “The sheer emotional response,” writes a reader reacting to the Apple kerfuffle in our virtual pages this week, “to a well-thought-out investment thesis by Mr. Mayer tells me two things:

  1. A smart person will heed the sage advice about the market staying irrational longer than you can stay solvent, and
  2. Apple will almost certainly be a good short one day in the not-too-distant future. Nothing warms the heart of a short seller like the lemmings screaming ‘Shut the @?!* up’ in irrational rage as they charge ever harder for the cliff.

“As an aside… it just goes to show you that even when people PAY for an investment opinion, they really just want their biases confirmed.”

“Keep up the contrary thinking…”

The 5: Thank you. We shall. One of the essential elements that have defined The 5 from the beginning is the reader input. We are continually blown away by the thoughtful contributions we receive… and the vigorous debates they sometimes instigate.

Truly, The 5 wouldn’t be what it is without you.

Once again, to thank you for your continued support and to mark five years of The 5… we’re offering extraordinary trial memberships in the Agora Financial Reserve — lifetime access to everything we publish, plus a host of other members-only benefits.

We’ve never made it this accessible. And after midnight tomorrow, we may never again.


Dave Gonigam
The 5 Min. Forecast

P.S. Congratulations to readers who trade Abe Cofnas’ recommendations for real. They had the chance to collect 67% gains this morning on the British pound.

Reserve members get these recommendations free for life — along with everything else we publish. If you’ve ever thought about joining, now’s your best chance ever.

Last week, Laissez Faire Books executive editor Jeffrey Tucker struck a nerve when he posed a simple question: Why don’t lawn mowers work as well as they used to? The answer, not surprisingly, lay in government regulations designed “for your own good.”

Today Jeffrey returns, having discovered a solution that — in this one small realm of life, anyway — allows you to take your power back. (He has 10 more solutions to nagging government-generated problems just like this one too. Read on…)

The Great Lawn Mower Hack

By Jeffrey Tucker

Dear Reader,

The functioning of millions of our consumer products has been wrecked by government regulations in ways that are extremely hard to detect and difficult to narrow down. The other day, I wrote about discovering the reason lawn mowers have mysteriously stopped working and stopped improving over the last decade or so. (I now have a hack that I can tell you about below.)

But that’s just the beginning.

Someone pointed out to me that Band-Aids no longer stick. That seems right to me. I began to fish around the regulations for a clue. It is extremely difficult to find the one thing that caused it, since no regulation states outright that “Sticky Band-Aids are hereby banned.” The reason is usually very complicated.

Looking around, I found myriad restrictions on how bandages can be produced. Most pertain to the types of glues used. I found a mandate that forces manufacturers to put a long and terrifying warning label on any product that uses a particular type of glue and wondered if perhaps this is the problem: Manufacturers are declining to use the stuff because they don’t want to terrify the people they are trying to heal.

But I wasn’t sure. I took a break and went to store, where I saw a friend of mine who is a doctor. I asked him outright why Band-Aids no longer stick.

Without missing a beat, he said, “Because government banned the glues that work!”

I can’t prove he is right, but I assume so. Sometimes only industry insiders know these sorts of things. For example, I wouldn’t have known that government banned cloth aprons in commercial kitchens had a restaurant owner not told me the story of having to throw away piles of great stuff and start buying government-approved aprons.

It applies to so many products that don’t work like they used to. Today, unless your toilet makes some explosive bomb-like sound when it flushes, it is probably not doing the job and probably not staying clean after use. Unless you add phosphates to your detergents, your dishes and clothes are not getting clean. Government regulations are the reason your refrigerator died too soon and why your white paint turned yellow.

(Editorial Note: I’ve written a full report called “Hack Your Showerhead” that comes with joining me in the Laissez Faire Club, the world’s first gated digital community dedicated to liberty. In the report, I uncover 10 simple things you can do to get big government out of your life. Also as a Charter Member, you get physical copies of three great books on economics, an unrelenting stream of free eBooks, member forums, videos reviews and more.)

You can dismiss these points as nothing more than “first-world problems,” but it’s actually more serious than that. The essence of civilization comes down to whether the small things in life perform as they should and improve over time. Regulations are stopping this, systematically bringing about regress. These people are wrecking the world one consumer product at a time.

But let’s return to the lawn mower. I touched on only one major aspect of the problem: the clumping problem from the bagging process. There are more problems, such as how the “self-propelled” mower moves more slowly and pathetically than it used to. Government regulations mandate that the wheels must stop moving within three seconds after the propulsion bar is released. That mandate required manufacturers to weaken the engines.

And why is it that we can’t just push our mowers forward with our fingers, rather than having to hold down a long bar with both hands? This, too, is a government mandate. The bar must be there, and it must be held down with both hands. This is the way it has to be because the government has actually drawn up an official blueprint for gas-powered, walk-behind, grass-bagging mowers. There can be no progress under these conditions.

The problem my article focused on was how regulations mandate that steel casing go all the way to the ground to prevent a “foot probe.” This cuts off the airflow that makes the grass fly up and into the bag.

Your ability to collect your grass in a bag was mandatorily sacrificed for your own good. What? You have no interest in sticking your foot underneath a running mower? Doesn’t matter. Government is protecting you.

In any case, here is a short history of life: Government erects barriers to progress, and then the market finds some workaround that is not perfect but helps blunt the effects of government’s attack. It’s true in the lawn mower case as well.

There are two engineering issues to overcome: airflow and grass redirection. A company called Arnold, which specializes in parts for outdoor equipment and prides itself on innovation, invented what it calls the “extreme blade” that does two things. It uses an elevated blade tip for redirecting grass into the bag, and it also puts extra slits into that tip. The slits help use the existing air in the sealed lawn mower casing to create a windy circulation, as well as to chop up the cut grass even further so that the clippings are lighter. The result is absolutely marvelous.

The blade is more expensive. And you have to go through the trouble of taking off the old blade and adding a new one. Most consumers won’t even think to do this and imagine that they aren’t qualified to even try. They will never figure out that there is an answer to their woes. After all, I went through three mowers in 10 years before being clued in that some company had invented a workaround to the problem of government regulation.

This is the archetypical case of how all these things happen. Some product works great, and then the government wrecks it through a stupid new mandate. The thing stops working. Consumers get mad and blame the product maker. A few years go by and some entrepreneurial company jumps out in front with a decent workaround. Meanwhile, millions of consumers are stuck with the stupid old thing and get mad and don’t know the fix. They start to blame the manufacturers for their woes. In the worst case, the company that finds the fix patents the answer, which means that others can’t copy the solution.

This scenario pertains to a vast number of products, including many that we haven’t noticed along the way are gradually depreciating our standard of living. We just get used to it. Government regulators have a field day with our liberties, and we live vaguely vexed lives.

Another workaround — and really the best approach — to get around government regulations is to buy the product that is so revolutionary and amazing that there aren’t government regulations yet crafted that ruin it. This is pretty much how it works in the digital world. Apple and Google and others — not government agencies — are responsible for authorizing applications that come along daily. That’s why the digital world is progressing.

This same level of progress doesn’t usually happen in the physical world because it is so heavily controlled. However, as long as we are talking about lawn mowers, have a look at something truly revolutionary. It is called the Robomow. It is amazing. It mows your lawn for you. That’s right. You turn it on and the whole yard gets mowed on its own.

A reader actually told me that the whole thing works wonderfully well. But the price is unapproachable: $1,500-2,000. The producer has a lockdown on the patent. That situation will exist for some time, thereby preventing the price from falling and restricting this wonderful innovation to only the elite in society. The way that patents slow down innovation and limit access to cool stuff is a subject for another day.

Regardless, if you have a drink in your hand (provided by private enterprise), offer a toast to the free market and its ever-amazing capacity for overcoming the barriers to the good life that government puts up.

Yours in Liberty,

Jeffrey Tucker
Executive Editor
Laissez Faire Books

P.S. You don’t have to be the doormat that regulators walk on day in and day out. Get my report on “Hack Your Showerhead: Plus, Nine Other Ways to Get Big Government Out of Your Home” that comes with joining me in the Laissez Faire Club.


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