Where Will the Hoards Go?

September 26, 2012

  • Honduras’ cojones: one experiment “to be the most economically free entity on Earth”…
  • Spain sticks another foot in the grave… riots in South Africa… gold production cut by 39%…
  • The U.S. “economy doesn’t run on corn” (but close!)… why the word “bubble” doesn’t mean anything anymore…
  • Patrick Cox’s flu drug makes big waves… Indian clothing store named after evil… The 5 sits idly as one reader vents… why we’re still thinking about manufacturing… and more!


  “The future will remember this day as that day that Honduras began developing,” says MKG Group CEO Michael Strong,. “We believe this will be one of the most important transformations in the world, through which Honduras will end poverty by creating thousands of jobs.

“Our goal is to be the most economically free entity on Earth.”

We’re thankful a reader brought a Fox News report on the U.S. development firm to our attention last night. But we’ve been discussing “resilient communities” of this nature for some time now.

 As debt, obligations and restrictions tighten up in the West, we expect alternatives to evolve in places formerly off the beaten path. Our thesis: Opportunities still abound… but like life itself, they move, hide, spread out.

The thesis started 15 years ago when the greater Agora invested in Nicaragua… Chris Mayer, our managing editor, has been on the beat long enough to have already written two books on the subject…. and invest across six different continents… and you may have noticed we’ve recently joined forces with the Hard Assets Alliance to help facilitate trades in precious metals.

The more investors, entrepreneurs and venture capitalists leave the U.S. in pursuit of economic freedom, the more countries vie to attract their ideas, skills and resources to their sticks. And as it turns out, Honduras has the cojones to try what terrifies the tyrannical:

“Honduras plans to form three ‘charter cities’ that will operate outside the nation’s constitution as ‘special economic zones’,” International Business Times writes, “in a bid to promote foreign investment in a country with the world’s highest murder rate and where over half the population lives below the poverty line.”

We’ve dispatched The Daily Reckoning’s Joel Bowman and Chris Mayer to investigate Honduras further. They just haven’t arrived yet. We’ll update you when they do…

  “It will bring a lot of investment into the country,” says Honduran President Porfirio Lobo Sosa of the project, “[and be] a center for many employment opportunities for our people.”

This tiny yet-to-be-named experimental city will “become a Central American beacon of job creation and investment,” advocates of the project tell Fox News, “by combining secure property rights with minimal government interference.”

130  The MKG Group plans to “provide a sound legal system within which to do business,” Michael Strong says. “The whole job-creation machine — the miracle of capitalism — will get going.”


MKG plans to invest $15 million for the basic infrastructure, according to president of Honduran congress, Juan Hernandez, who estimates the city will create 5,000 jobs within the next six months and as many as 200,000 in the future.

Unlike yesterday’s “mad science experiment” with police forces in New Jersey, this is one story we expect to sink our teeth into. Stay tuned…

  “There is no political will for austerity in Spain,” Dan Amoss writes, keeping us up to date on history’s most boring and slow-moving crisis. “That much is clear from the rising energy of protests in the streets of Madrid.

“Protests against government budget cuts have only just begun. Debilitating strikes are on the way. We may even see the wealthy northeastern region of Catalonia vote to sever financial ties to the national government.

“Such an event would touch off a catastrophic loss of confidence in Spanish government debt… and the euro, now that the ECB has committed itself to buying unlimited Spanish bonds. The ECB may ultimately find itself as the only buyer of Spanish debt.

“Spanish Prime Minister Mariano Rajoy is almost certain to request an EU bailout in the coming weeks,” Dan predicts. “But budget orders handed down from EU bureaucrats to Spain will fail. Deficit reduction targets will not be met.”

 “In an interview with The Wall Street Journal,” Dan writes, “Rajoy outlined a few laughably small budget reform plans, including adjusting retirement ages. That’s not enough. Spain can’t afford to fiddle around the edges. It needs a financial restructuring, focused on the zombie banks. The banks still haven’t come close to admitting their real capital shortfalls.

“Until there is a restructuring,” he concludes, “with substantial haircuts for bank shareholders and bondholders, projections of an economic recovery are pure fantasy.”

 “The term ‘bubble’ once had a specific meaning in the context of financial markets,” Eric Janszen writes, pulling us further into today’s real insanity. Janszen is a man after our own heart. He began his website iTulip.com, covering the tech stock mania, in 1998, roughly commensurate with our own Daily Reckoning birth year. He followed the tech bust with a forecast of the housing bubble… and is now forecasting a crash in the Treasury market. [Heh. Sound familiar?]

The term “bubble” used “to refer to a complex process of asset price inflation,” Janszen continues, “wherein a group of insiders engaged the greed instinct of the herd with an assist by government in the form of excessively cheap money and lack of enforcement of securities law, but now refers to anything that appears extreme and temporary. Today, you can read about a Justin Bieber bubble.”

Rather than asserting the U.S. Treasury market is in a “bull market” or “bubble” or that the Fed is performing “financial repression,” Mr. Janszen prefers to call a duck a duck: “The correct term is ‘price fixing,'” he writes.

Case in point: “If corn prices increased for 20 years, we’d call that a bull market in corn. If subsequently corn prices at an even higher price crashed and the government then stepped in to support corn prices at an even higher price than they were before the crash, because the economy was running on corn, we would not call the resulting rise in corn prices a bull market on corn.”

  “Of course,” Mr. Janszen continues, “our economy doesn’t run on corn. Since the crash, it’s been running on borrowed money. The borrowing is by issuance of U.S. Treasuries.”

Mr. Janszen’s biggest bone to pick is with the bubble theory: “I dislike the term bubble to describe the result of this price-fixing operation, the effect of the Fed and Treasury herding all of us en masse into a wealth-destruction pit.

“Are investors greedily piling into U.S. Treasuries to get rich?” he asks. “Of course not. The word bubble doesn’t mean anything anymore.

“Rather than a bubble, I think of the Treasury market as a cage which, after a decade of interest rate manipulation by government, is crammed to bursting with more or less the same herd as participated in the last two asset bubbles in 10 years.”

In conclusion, a quote from Douglas Adams seems applicable: “If it looks like a duck, and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family anatidae on our hands.”

So what’s an investor to do? If you don’t mind us referring to the duck as a bubble, we’ll tell you step by step here.

  “I’m staggered by the volume of news regarding our core portfolio,” our tech sage Patrick Cox writes. “What we are seeing is buds emerge on the tree of innovation and investor wealth. It’s been winter for a long time now, but spring is on its way. A lot of flowers are preparing to bloom.”

One flower preparing to bloom we’ve been keeping a close eye on here at The 5 is the flu drug we plugged into a couple weeks back.

When we left off, Patrick had already updated us on the successful testing of an orally deliverable form of the flu drug. “I haven’t, however, followed up with all the implications — which are profound,” Patrick readies us with a newborn press release in hand.

“First,” he goes on, “the data referred to in this press release indicate that oral delivery produces a better antibody response rate than the injectable version.

Although it isn’t known why exactly yet, “the oral form,” Patrick explains, “provoked the immune system to mount an immune response better than the response caused by the injectable form of the same drug.”

This week, Patrick’s company “followed up with more data showing superior efficacy of the oral nanoviricides to Tamiflu, the only flu drug on the market. This isn’t surprising, but the company had to do the obvious test to prove their point, that the oral form of their drug is far superior to Tamiflu. In fact, it’s even better than that.”

  “This is great news not just for investors,” Patrick goes on, “but also for those who will contract the next otherwise deadly influenza virus.

“One reason is that this drug is dose dependent and extremely nontoxic. That means that they can simply increase the dose to get complete deactivation of the flu virus. The other reason that this is so important is that oral drugs have other less obvious, but major advantages over injectable.

“Facilities that manufacture oral drugs are much cheaper and much faster to put in place. This drug’s timeline, therefore, has just accelerated significantly. I expect the company to be ready to manufacture for clinical tests in a half-year or so.”

Another reason? “$25 billion is not unrealistic for an oral flu drug with this one’s efficacy.

“Speaking of history,” Patrick concludes, this drug “will be recorded by scientific historians as the world’s first oral nanomedicine. Congratulations to all who are making this happen, including the investors.”

[Ed. Note: if you’re making early New Year’s resolution plans, cashing in on the latest technological advances and securing your health in next week’s dawning of the flu season isn’t too shabby of a start.]

  The Dow is down 20 points, resting at 13,436. The Nasdaq is off 24 points, to 3,093. The S&P is down 6 points, to 1,435. In fact, looking at the markets tab on our new Daily Reckoning site, they’re all down… Global Dow, Europacific, Emerging Markets… down, down, down. Apparently, we picked an auspicious day to go live.

  Oil its down too, off $1.71, to just under $90 a barrel.

  Silver is bucking the trend… but only by a penny, up to $33.75. Gold, however, is not. The Midas metal took another $14.10 haircut from its recent gains. It now rests at $1,746.50.

  Despite gold’s mopey attitude the last couple days, “gold prices are on the edge of a melt-up,” Byron King informed us via email this morning, in response to the ongoing South African turmoil.

“It could happen sooner or later…. but it’ll happen, because it can’t NOT happen.”

  Strikes at South African gold mines have shut down about 39% of capacity,” Bloomberg reports at the crack of dawn, pointing to one potential catalyst.

The unrest “will not end quickly,” Byron comments. “This is not just ‘the natives are restless, so throw ’em a bone.’ At the face of the mine, workers want more money… but actually, over the past decade, they’ve been earning ‘more money,’ while spending it faster than it comes in — inflation in food, energy, housing costs and other social issues that help keep poor people poor. So even ‘more money’ won’t solve the problem, because More is never enough.

“Meanwhile, gold mine managers see rising costs pushing against more challenging extraction. Ore grades are declining, while many mines are deeper and deeper… with energy costs rising (oil and electricity)… and overall worldwide cost inflation for concrete, steel, machinery, equipment, spares and repairs, supplies…

“Then there’s political unrest,” Byron continues on, “illustrated by South Africa’s own Julius Malema with his continuing discussion of ‘nationalizing’ mines, which frightens off foreign investment…

“While the political landscape in other nations is problematic at best… because many other locales have their own issues with workers, ore grades, technical production issues, political problems… e.g., Ecuador, and even Peru…

“Add in the fact that new discoveries are fewer and further apart… with lower and lower grades, and lower overall resource estimates…. and often ‘logistically challenged’ such as the new discovery that I visited the other day in mining-friendly Manitoba — a beautiful piece of geology, and in Canada, to boot, but far from roads and power lines.”

So what is it we’re going to be seeing? “More and more money chasing less and less gold.”

“I didn’t know how much the name would disturb people,” Indian clothing store owner Rajesh Shah told the AFP news agency. Really?

Uhh, what could possibly go wrong naming your business “Hitler”?

“It was only when the store opened I learnt that Hitler had killed 6 million people,” Mr. Shah went on. You don’t hear that every day.

“Jews in the city of Ahmedabad, where the shop opened last month,” the BBC reports, “said using the Nazi dictator’s name was offensive. Israeli diplomats also raised the issue with the Gujarat state government.”

Didn’t see that one coming.

Apparently, Rajesh named the store after a nickname given to his business partner’s grandfather, known for being “very strict.” The swastikas in the logo were a reference to… what, his lapel pins?

Some have shrewdly seen “the name as a marketing gimmick,” BBC reports, “in a country where the former German leader attracts unusual interest in some sections of society.”

“Yes,” Rajesh told BBC, “we are planning to change the name. There has been too much political pressure from the government.”

Again… really?

  “Over the past four months or so,” writes one astute reader, “there have been several references to graphene and how it can be such a game changer for the future.

“The mining company stock that has been talked about — Northern Graphite — is not available for purchase by many of the brokerages, and many of the other graphite mining companies seem to be in trouble with the SEC and other government agencies in Canada. Are there any legitimate graphite mining companies you may be recommending in the near term?”

The 5: Funny you should ask. Byron King dropped in our Baltimore office last week and put together this presentation on exactly that.

  Manufacturing is the thing the U.S. gave up for the ‘exorbitant privilege’ of having the world’s reserve currency,” writes a reader. “It will return to our shores when we no longer bear the burden of having to balance our national needs with our international responsibilities as managers of the reserve currency. Think about that…”

The 5: OK.


  “I appreciate The 5,” a third reader starts out on the right foot, “especially in view of the incredible amount of idiocy in the news lately.

“If my memory serves me correctly, Pontiac, Mich., reduced or eliminated all city police and contracted with the Oakland County Sheriff to supply law enforcement. From what my mother-in-law, a lifelong Pontiac resident, tells me, the new arrangement is working well. Residents can call Oakland County and the response times are as good or better than they were with the city.”

  “My wife and I are in our early 40s and have been married for 20 years, with one child,” writes a fourth in some despair. “We have both worked since we were 15, never really making a ton of money. Right now we make about $58,000 between the two of us. We bought a $90,000 house a year after being married with 20% down. We have put 10% in our 401(k) from the start and the same in a college account for our daughter. We have never been on any type of government program. We never took equity out of our home.

“Somehow, we are still standing and are debt free except for a small balance left on our mortgage. We have gone without many things while I watched everyone around me live high on the hog. I knew they were all lying and way over their heads, but I feel like a schmuck now. I can’t believe the s**t they got away with and still do. There are no rewards for doing what I was raised to believe is the right thing.

“Phase 2: So here we are now and suddenly my wife hit the jackpot and has quite the career brewing. She works her ass off, minimal of 16 hours a day, seven days a week, but the pay with bonus will put her close to $300,000.

“Yay, yippee! Except now all this talk about taxes for couples over 250,000 has me going out of my mind. I would have no problem ponying up my fair share if it went to something that our country really needed. All of your great publications point out all the ways the money is wasted weekly, so I won’t go into that.

“The thing is what is the point? The government wants everyone on their payroll. They want to take away every opportunity we might have to keep some income and make it grow. Why send my daughter to college to get her engineering degree when she is going to turn around and send most of it to the government? What’s the point anymore? I just want to scream and then get in line for all the handouts. You work your ass off while everyone else is playing the system.

“Most of my friends are out-of-work carpenters. Now they all work for cash. They collect unemployment and are on food stamps, but make $100,000 a year in cash. Then they file their taxes and get money back. Only in the USA [Ed. note: That used to mean something very different.]

“I wish the system would just collapse already, because I’m sick of this s**t!

“Thanks for letting me vent.”

The 5: By all means. Jeffrey Tucker touches on a plight similar to yours in a piece we’ve been affectionately referring to as “F$ck you, Bernanke!” And if we may be bold enough to offer, you will find several thousand kindred spirits in the Laissez Faire Club.


Addison Wiggin

The 5 Min. Forecast

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