Beating the Wrong Horses

September 24, 2012

  • “The U.S. is sinking”… Jeffrey Tucker discovers why the U.S. is now #18 in global economic freedom…
  • The invisible bread line continues to grow… Eric Fry drops in from Nicaragua to explain why America refuses to teach its citizens how to fish…
  • While the economy deteriorates, Byron King has one potentially profitable product that could be hot as the iPhone as early as Christmas…
  • Mr. Market’s case of the Mondays… Why oil is on its way down… did Germany just foretell an upcoming gold standard? Why one reader thinks we’re “beating the wrong horses”… and more!


  “The U.S. is sinking,” our book maven Jeffrey Tucker writes, “now down to the 18th freest in the world, below Finland and Canada.”

Over the weekend, Jeffrey interviewed economics professor and editor of the Economic Freedom Index, Robert Lawson, and posted it to the Laissez Faire Blog. According to Mr. Lawson’s 2012 Economic Freedom of the World report:

“U.S. ratings have declined in four of the five areas of the EFW index. The rating in Legal System and Protection of Property Rights (Area 2) dropped by more than 2 points between 2000 and 2010. While it is difficult to pinpoint the precise reason for this decline, the increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs, and the violation of the property rights of bondholders in the bailout of automobile companies have all weakened the United States’ tradition of the rule of law and, we believe, contributed to the sharp decline of the Area 2 rating. The rating for Freedom to Trade Internationally (Area 4) fell by over one point, and the ratings for Size of Government (Area 1) and Regulation (Area 5) by more than a half point. The only area where the United States’ rating was basically unchanged was Access to Sound Money (Area 3).”

The 2012 leaders of economic freedom? Hong Kong is ranked No. 1, with an 8.9 out of 10 score. Singapore comes up next at 8.69, then New Zealand (8.36), Switzerland (8.24) and Australia and Canada (both 7.97).

“The big upward movers,” Jeffrey writes, are, “Uganda, Zambia, El Salvador and Nicaragua. Nicaragua in particular is singled out as a strong mover in the direction of freedom. It is now ahead of Portugal, Hungary, Latvia and the Czech Republic.”

In many ways, it’s better to be in the developing world. You don’t have as much government to deal with nor do you have to contend with the legacy costs or aging infrastructure of the developed ones. The subject will no doubt arise once again at our next gathering of the Rancho Santana Sessions, scheduled kick off Dec. 6-7, 2012. If you’d like early details on the session, call Andrea Michinski at (800) 708-1020 or email

 As if on cue, we learned this morning the virtual bread line continues to grow like a weed. Food stamp users reach record high of 46,670,373 as of June 2012. As the United States’ economic freedom goes down, its government dependency accelerates. Compare this to only four years ago, when there were 30,841,790 food stampers in October 2008, the dawning of the crash.

“Last year,” our Daily Reckoner Eric Fry writes, ironically, from Nicaragua, “the Supplemental Nutrition Assistance Program (SNAP) — i.e., food stamp program — in the United States spent $7.4 billion more than it did the year before. $7.4 billion happens to be almost identical to the entire GDP of Nicaragua, a nation of 5.9 million inhabitants.

“SNAP used its additional $7.4 billion to feed 4.4 million of America’s poorest citizens. Meanwhile, all 5.9 million Nicaraguans — rich and poor alike — managed to ‘live on’ $7.4 billion.

Success: The Government Dependency Package…

“Here in Nicaragua,” Mr. Fry continues, “the government is too poor to operate a SNAP program. The government’s entire annual budget is only about $1.6 billion, which is less than 1/50th the size of the SNAP budget. ($1.6 billion also happens to be the amount of customer money Jon Corzine ‘lost’ as CEO of MF Global. It’s not easy to lose customer funds equal to a nation’s entire annual budget and not go to jail, but Corzine pulled it off). So that means poor Nicaraguans must rely on themselves or their families for their daily bread… or else starve.

“Poor Americans, by contrast, need not rely on themselves or their families for their daily bread, because they can rely on the government. In fact, poor Americans can rely on the government’s food stamp program for as long as they earn less than the official poverty threshold of $10,896 per year, which is about four times the size of the average Nicaraguan income.

“These comparisons tell us little about how things ought to be, but they tell us a lot about how things are. Specifically, they tell us that the United States spends a spectacular amount of money trying to ‘manage poverty.’ And yet the more the U.S. tries to manage poverty, the more poverty spreads. The ever-expanding budget of the FNS does not beget self-reliance; it begets ever-expanding government reliance.

“Nevertheless,” Eric writes, “the more poverty spreads in the U.S., the more agencies like the FNS portray government reliance as economically advantageous.

“Here’s an idea: Provide help to those who need it; spare the rest of us the bogus economic theories that justify the government’s intrusion into every nook and cranny of private life.

“It’s good to feed the hungry; but it’s also good to liberate the capitalistic forces that create opportunities for self-reliance. ‘Give a man a fish,’ as the saying goes, ‘you feed him for a day. Teach a man to fish, you feed him for a lifetime.’

“Beware the economy whose government tells its citizens, ‘No fishing pole required; we’ve got plenty of fish for you.'”

  Meanwhile, Norwegian researchers have patented a way to grow semiconductors on strips of graphene. We bring it up briefly today to highlight a theme we’ve been grappling with in The 5 lately. While the “macro” environment continues to deteriorate… and gloom and doom appears to be the mood of the news cycle, opportunities on the margin… in housing, biotech and nutraceuticals and nanotechnology continue to surprise.

Last year, we introduced the opportunities presented by the new material grapheme: first discovered in 2004… and the reason Andre Geim and Kostya Novoselov, two Russian physicists won the Nobel Prize last year.

In November 2011, we saw the ability to inkjet graphene sheets. But this new material isn’t really going to take off until it makes a consumer product as hot at the iPhone… which some sources say could be as early as this holiday shopping season… four months from now.

“The simple use of a graphene-based ink and modified but standard inkjet printers could bring closer the possibility of flexible, low-cost wearable computing devices,” the researchers said. Samsung, for example, has let slip it has plans to use graphene for a flexible screen display for your mobile unit.

[Ed. Note: Research and development of graphene is locked up in academic labs of as yet private companies and big-gun corporations like Samsung and IBM. They’re sure to grab first-user advantage when these consumer products get patented and brought to market.

As such, we’ve taken an approach to this field that has worked consistently since the Great California Gold Rush of 1849…. we’re looking for the small-cap companies that’ll be providing the sticks and shovels for the graphene revolution… Byron King explains here.]

130  In the markets, the Dow sits 25 points lower than Friday’s close, 13,553. Nasdaq minus 23 points, 3,157, and the S&P lost 4 points, lowering to 1,455.

Oddly enough, Monday downturns are nothing new:

“Monday is the only day the stock market is more likely to fall than to rise,” The Associated Press reported last month. “The Dow Jones industrial average has been down 10 of the past 11 Mondays. And the two worst days in market history are both known as Black Monday.

“There’s no single reason why Mondays are so blue,” AP goes on. “Then again, there’s no single reason the market rises or falls on any given day, driven as it is by the whims of traders placing millions of individual buy and sell orders.

“Some anecdotal evidence comes to mind: Companies are prone to release bad news on Friday nights, when fewer people are paying attention. Monday is the first day investors can react.

“And when companies collapse, they often do it late Sunday or early Monday, after spending a last weekend trying to stay afloat. See Wachovia, Bear Stearns and, most famously, Lehman Bros. investment bank, on Sept. 15, 2008.”

  Likewise, gold lost $12.40 of its gains last week, grabbing a chair at 1,756.60. Silver plopped down 56 cents, now resting around $34.08.

 Oil keeps the low it attained last week after the mystery plunge on Monday and the downward hangover thereafter. It now sits at $91.25.

“I have said before that I think the oil bull market is on its last legs,” Chris Mayer offers up, our guess hearing someone say “oil.”

“In this,” Mr. Mayer goes on, “I’m just playing the odds. History and economics dictate what those odds look like.

“For example, we know stock markets don’t trade for 30 times earnings — as the U.S. stock market did in 2000 — for long. That was a figure far above the long-term average for stocks. And stocks subsequently crashed,” Chris points out.

“We know housing prices can’t sustain a price of 32 times the cost to rent them — as they did when housing prices peaked in 2006. That was again far above the long-term average of just 20 times. Housing prices later crashed.

“Similarly, we can conclude that the current oil price — which is currently 230% above its long-term inflation-adjusted price — won’t last either.

“The current bull market began in 1998. The average oil price in 1998 was just $11 per barrel. So the current bull market is 14 years old. And the U.S. oil price is nearly nine times what it was in 1998,” Chris concludes. “It’s been a great run.”

 “Green shoots of respect for the classical gold standard,” Ralph Benko writes, keeping us apprised of his efforts to restore common sense to the world’s monetary system. “They are beginning to pierce the decaying concrete of neo-Keynesianism monetary theory all over the world.

“The gold standard’s purpose is by no means to privilege the wealthy and prejudice workers or debtors. The purpose of gold is to unwind the Faustian bargain throttling our economy and stifling job creation. The purpose of the gold standard is to propel the world economy into a new era of vibrant, widespread prosperity.

“On Sept. 18,” Mr. Benko goes on, “the London office of Deutsche Bank — one of the most respected banks in the world, and a bellwether of elite opinion — published a Global Markets Research paper entitled Gold: Adjusting for Zero. It was written by two esteemed mainstream analysts Daniel Brebner and Xiao Fu:

“Gold is not really a commodity at all. While it is included in the commodities basket, it is, in fact, a medium of exchange and one that is officially recognized (if not publicly used as such). We see gold as an officially recognized form of money for one primary reason: It is widely held by most of the world’s larger central banks as a component of reserves. We would go further, however, and argue that gold could be characterized as ‘good’ money, as opposed to ‘bad’ money, which would be represented by many of today’s fiat currencies.

“On the very same day of the Deutsche Bank report, Herr Dr. Jens Weidmann, president of the Bundesbank, gave a speech entitled Money Creation and Responsibility. The Bundesbank is the only member of the ECB’s governing board to oppose Mario Draghi’s sovereign debt purchase policy, a policy disturbingly like that of Bernanke’s ‘Buzz Lightyear’ monetary strategy of QE ‘to Infinity and Beyond.’
“Weidmann stated that ‘Concrete objects have served as money for most of human history; we may therefore speak of commodity money. A great deal of trust was placed in particular in precious and rare metals — gold first and foremost — due to their assumed intrinsic value. In its function as a medium of exchange, medium of payment and store of value, gold is thus, in a sense, a timeless classic.'”

  “You are beating the wrong horses,” one critical reader chastises us over a couple of themes that have resonated over the past week here in The 5, “beginning with student loans, continuing in the reality of the housing market.

“First, many students have ‘padded their education expenses by using their credit cards as a great junket on vacations et al., living the good life they think they have been raised to have, without producing any income to cover their gross desires. When you list those $100,000 costs, this is the reason!

“Second, the housing boom was facilitated by government, through its captive banks, even though they knew the birthrate in this country was falling and the market would be severely contracted for the future as a result.

“To cover this known discrepancy, government promoted the ‘buy your dream’ and subsidized outlandish ‘improvements’ to dwellings covered in this deliberate ‘economic mishap’ and then allowed ‘equity loans’ to ensnare prior homeowners carried away with this nonsense.

“To try and gain real investors with the lines you are casting proves how unthinking you all continue to be.

“I’ll bet you all have granite countertops in your kitchens and your wives and children carry on about argon gas and its effects on the environment. They now sell an expensive ‘sealer’ to assuage that lapse in judgment!

“I do enjoy your Laissez Faire and do hope it restores some reason to your staff…for the future at least!”

The 5: Wow, you are clearly new to the class. One wonders where to begin:

The Daily Reckoning (1999-present)

Financial Reckoning Day (2003, updated 2009)

Empire of Debt (2005, updated 2009)

The Demise of the Dollar (2005, updated 2008)

I.O.U.S.A. (2008)

The Little Book of the Shrinking Dollar (2012)

“You better know Addison’s arguments in order to survive the next decade, whether he is right or wrong.” writes Jim Rogers of our latest work.

Addison “does an admirable job of highlighting the dangers of the Federal Reserve’s monetary policy. Americans from all walks of life will see their savings dwindle as the dollar’s purchasing power is further weakened. Wiggin’s exploration of investment alternatives warrants a closer look,” suggests Congressman Ron Paul

The work “is not an academic paper published by some ignorant economists,” adds Marc Faber, “Not only does Addison convincingly and disturbingly argue that ‘every paper currency in the history of civilization has eventually lost its entire value,’ but he also offers ways to protect your wealth.”

For the record, and your edification, we cover the housing and student loan bubbles in The 5 because, despite your moral superiority on the subject, our analysts have dug into the opportunities presented by these malinvested markets and are offering ways in which you can profit from the trends at play. Indeed, if you’re interested in 47 ways to protect your wealth from a shrinking dollar, please do your homework here.

Happy reading,

Addison Wiggin

The 5 Min. Forecast

P.S. It’s true, Laissez Faire is our latest project. After writing tomes of economic history, tiresome analyses of financial, currency and credit markets and touching the hot stove of public policy debates, we’ve come to the conclusion that a private club with like-minded people is far better use of our time.

“Work with people who want to work and contribute,” one could say, “forget trying to persuade those who don’t want to be persuaded.” If you’re inclined to join in the good fight, here’s an exclusive invitation.


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