Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Wednesday, February 23, 2011 Wall Street finally "discovers" Libya... What are "OOs" and why should you be paying attention to them? Plus, Bill Bonner on Cereal Wars, freedom fighters and a "river of blood"... ------------------------------------------------------- Urgent Profit Alert To Hit Your Inbox on Wednesday... Witness strategy that produced 97% success – 123 winners in 127 moves! Your profits could start as soon as Wednesday. All the details – right here. For Love of Democracy More Tales of Revolution and Government Stupidity Joel Bowman Reporting from Baltimore, Maryland... Tunisia...Egypt...Libya...a half dozen others on the brink... While restless masses across the Middle East and North Africa region are struggling to realize democracy in their own lands, many here in the USA are just now waking up to some of the not-so-pleasant effects of it. The expression of discontent is more or less the same in each country. The results? Well, we'll have to wait and see... In the beginning, democracy seems a virtuous and decent enough solution to autocratic tyranny. And it is...so long as the process is populated with virtuous and decent people. During the seeds of revolution, dictators are quickly overthrown and the people usually obtain a "voice" through the ballot box. Everyone feels part of the progress, part of the plan. Love, hope and jasmine. All that good stuff. But democracy has the regrettable tendency to remain in the hands of the virtuous and the decent for precious little time. As Winston Churchill once suggested, democracy is "the worst form of government...except for all the others that have been tried." It wins by default, in other words. Over time, once the fanfare of revolution begins to fatigue, the democratic political system matures toward a kind of tyranny of the majority. By the time people get around to voting other people's property into their own hands, the game is more or less over. And while oppressive regimes like those of Ben Ali, Hosni Mubarak and now Muammar Gaddafi present easy targets for freedom-seeking individuals, it's much easier to topple a dictator than to topple "of the people, by the people," no matter how big a mess the people are making of their own condition. Opined our Reckoner-in-Chief, Bill Bonner, on the topic last week: "Is it possible that democracy is just the flavor of the month...an evolutionary development, like all the forms of government that came before it? Is it possible that it succeeded in the 20th century because it was much better adapted to leeching out the wealth and complicity of the average man? It gave him a stake in the system – like getting some prisoners to guard each other, or bribing taxpayers to rat out their neighbors to the IRS? Isn't it possible that by giving the masses a 'voice,' the elites who really control government are better able to take his money...and, if necessary, his life? "Soldiers will do their duty to a dictator, if the price is right," continued Bill. "They will do their duty to the government they helped elect for less. And they will more willingly submit to government's taxes, too, if they feel they are its masters, rather than the slaves. The real difference may only be an illusion, but it is an effective one. In practice, the individual may have less ability to influence the large pool of voting numbskulls than he does to influence a single knuckleheaded autocrat. But heck, we're all democrats now." ..for better or worse, we would dare to add. And this brings us to the current situation here in America today. The individual states, having voted for themselves unsustainable welfare systems and exorbitantly expensive public services, are broke. From The Daily Reckoning Weekend Edition: "States from coast to coast are facing budget shortfalls of a magnitude heretofore unseen, unfathomable, even. More than 40 states are in the red for a combined budget shortfall of $125 billion for fiscal year 2012. California is the worst, with a $25.4 billion hole to fill, more than seven times Wisconsin's gap. Illinois comes in next with a $15 billion shortfall, followed by Texas with $13.4 billion, New Jersey at $10.5 billion and New York at $9 billion." Voters have only themselves to blame. But here at The Daily Reckoning, we like to look on the bright side of life. We celebrate the collapse of governmental incompetence at any and all levels, whether in this country or abroad. And with each passing day, and with each meddlesome, cumbersome, costly bill that is passed, we draw one step closer to that denouement. In fact, so impressed are we with state government incompetence that we've decided to honor it in this year's Daily Reckoning Financial Darwin Awards. Simply put, we asked readers to send in tales and anecdotes of government waste from their own states. Which state is most determinedly enacting bone-headed policies and business-quashing edicts, thereby ensuring their own eventual demise? We'll announce the "winning" state in this coming Weekend Edition, so there's still time to submit your own boots-on-ground observations. For now, here are a couple of examples of what you're up against... Fellow Reckoner, Fred, had this to say from the heart of the Mid West revolt... I was a Wisconsin Department of Transportation field construction engineer for 35 years. One spring in the '80s I was starting a major road reconstruction project and doing survey out in the field with my staff. A massive county paint truck showed up to paint the traffic lane lines. I went over and told the foreman we would be ripping out the pavement and it would be a waste of money. He agreed but had to get the OK from his office. He called in but they told him it was too much work to cancel the work order. So, you guessed it, the road was striped. The very next day, we began removing two miles of pavement – but we did have a nice line to follow. Along the same lines – a lesson in bureaucratic logic. In construction, all the materials going into a project must be documented as to source, material, manufacture, etc. However, some small, insignificant items did not require a formal report. So for these items we had a "Documentation Without Report" form – i.e., a report for things not requiring a report. And this, from a Fellow Reckoner in California, a state leading the charge to bankruptcy with a $25.4 billion budget shortfall... Perhaps this job announcement for the California Corrections Department [could be considered for your Financial Darwin Award Series]: Recreation Therapist, Correctional Facility: Starting Salary: $5,679/month Description: A new job listing this month in San Diego, CA provides this $70,000 a year position description: A recreation therapist, correctional facility, encourages...individual and group activities such as indoor and outdoor games and sports, dance, parties, dramatics, and special interest clubs; Supervises entertainment and movies and assists in planning programs for special occasions. I wonder if we are also paying for party favors and birthday hats. Got something better? Send your tales of government waste to us here: joel@dailyreckoning.com Microcap "Stealing" Oil from Iran Could Return 4,599%! One tiny company has found a way to legally "steal" oil from Iran's largest oil field... Which means it's now sitting on oil reserves that could be worth over fifty times its total market-cap, setting the stage for an astronomical run-up of 4,599%! Resource expert Chris Mayer shares everything you need to know about this urgent opportunity in his brand new presentation... Click here to watch it right now. The Daily Reckoning Presents The Best Investments of the Next 50 Years Chris Mayer Some of the most successful companies of the last half-century all had one thing in common. And I am certain that the best investments of the next half-century will also share this trait. It's pretty simple and intuitive, yet I wonder why more investors don't focus on it. I'll use a simple analogy to reveal this idea. Let's say we have two houses. In one, the family that lives there also owns it. In the other, there is an absentee owner who rents it out. If you had to guess which house would be in better shape after 10 years, which would you guess? If you said the former, where the people who lived there owned it, odds are you'd be right. (There are always exceptions.) It's a truism in real estate that owners take better care of property than renters. The same kind of logic applies in the stock market. When the people running the show are also owners – what's known as the owner-operator model – those companies tend to deliver astonishing results over time. Steve Bregman, a portfolio manager at Horizon Asset Management, recently shared a little experiment. He looked at "the most successful, iconic constituents of the S&P 500 over the past half century." The impact of OOs was clear. These include Wal-Mart. "Think how well it did under the aegis of Sam Walton for 20 years," Bregman says. Wal-Mart delivered a return of 20.5% annually. But after him, Wal-Mart returned only about 9% per year. Then, there is also IBM. Under the Watson family, IBM returned 6.6% more than the stock market. After the Watsons, only 1.7% better than the market. "Good, but not great," Bregman says. The most recent example of an OO's impact is Apple. Without Steve Jobs for over a decade, Apple turned in a return of 3.1% per year worse than the market. With him, 28% per year better. For the whole list, give the following table a look. Granted, this is not a scientific experiment, as Bregman notes. (There is scholarly research out there that backs the idea that stocks with owner-CEOs outperform.) But it does show you the importance of that OO. In only two instances did the company under the OO trail the market. Even then, there is a big qualifier. The table shows that during Jobs I, his first tenure as CEO, Apple trailed the market. But it was only a four-year stretch, which he more than made up for later. And in any event, the table shows results only since the company has been public. If you consider the wealth created by Apple's initial public offering, a different picture emerges. Apple's IPO created more millionaires than any company in history. The original venture capitalists that backed Jobs made billions. There is another advantage to OO-run companies that Bregman points to. The stocks have a low correlation to the S&P 500. In other words, returns were not as sensitive to the overall market as other stocks. Remember, a correlation of 1 means the stock matched the S&P 500 exactly. The lower the number, the less sensitive the stock to overall market movements. On average, the OOs had a correlation of only 0.52. By contrast, the average of the largest 50 companies excluding the OOs is about 0.70. That is a big difference and meaningful when building a portfolio. The OOs are your stalwarts. They tend not to mirror the broader market. In any case, this little experiment shows that there is something different about the decision-making process of an OO-run company and that of an ordinary company – and it shows up in returns. As Bregman points out, there are strategic and tactical advantages to being an OO. You can make decisions that are "at dramatic odds with the mainstream [whereas] most company managements are highly reactive to investor concerns." OOs focus on the business because they own it. They don't worry about the short-term stock price. Hired-gun CEOs think differently. For example, the typical company today has accumulated cash, preparing for known risks, waiting for the "all clear" sign before investing. It seems like a good idea, but it's not what creates great piles of wealth. As Bregman puts it, they are "reacting to a crisis that already happened." By contrast, look at the OOs. OOs accumulated cash before the downturn. So rather than continuing "to husband cash, they have been investing it assertively for the last two years." Bregman gives an example from his portfolio, AutoNation. There are 13% fewer dealerships than there were in 2008, which sounds very scary. Yet AutoNation repurchased 17% of its shares during this rough period. The stock today is at 52-week highs and that investment paid off handsomely. Our portfolio is full of such companies that continued to invest cash in dangerous times. Ironically, it is during such times when investing is safest, because the prices you get are the most attractive. And the assets so acquired become the foundations for great success later on. So that's the case for OOs in a nutshell. It doesn't mean there aren't great investments without OOs. But OOs do tip the odds in your favor. On behalf my subscribers to Capital & Crisis, I prefer to invest in owner-operators. Failing that, I seek managers who show an owner's mind-set. The main point is to think about who owns and controls what we are investing in. Regards, Chris Mayer, for The Daily Reckoning From Hulbert Financial Digest's Best-Performing Newsletter Advisory of the last 10 years...Comes... The New OIL WAR and Why Iran Threatens Your Money... According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year. Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue. Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead... Click here to watch Byron's value-packed presentation now. Bill Bonner The Role of US Debt in the Current Revolution Bill Bonner Reckoning from Paris, France... Cereal Wars...and Zombie Wars... Hey, how 'bout that Ben Bernanke... He's a freedom fighter! Look what he's done to North Africa! Seems like every time we pick up the paper another dictator is toppling over. Where does it lead, we wonder? What would a world be like without dictators? Without them, who will the CIA and the State Department give our money to? On the run (but not quite given up) is Muammar Gaddafi of Libya. Wait... Is this guy a friend or an enemy? We can't remember. Wasn't he a bad guy a few years ago? But recently we've heard that he is a good guy. He's helped with the War on Terror. And he sells oil. Friend or foe, we don't know...but whatever he is, he's beginning to look past tense. As of this morning, reports say he's lost control of Libya's second largest city. His troops are firing on protesters in the capital, where he and his loyal guards are holed up in a few government buildings. His son vows to fight back. He says there will be "rivers of blood" before he gives up. That "rivers of blood" image was used by Enoch Powell in Britain fifty years ago. It came from Virgil's Aeneid, in which a character foresees "wars, terrible wars, and the Tiber foaming with much blood." Powell was referring to the effects of immigration into Britain from Africa and elsewhere. He thought he saw race wars and power struggles coming as a result. But the younger Gaddafi uses the language as a threat, not a prophecy. Still, it didn't do Powell much good. Maybe Gaddafi will have better luck with it. Most likely, he'll high tail it out of the country before the blood is his own. That will bring to three the number of regime changes in the last few weeks. Which leads us to ask: what's up? The answer comes from our old friend, Jim Davidson. He pins the revolutions on Ben Bernanke. Behind the popular discontent is neither the desire for liberty nor the appeal of elections. It's food. And behind soaring food prices is Ben Bernanke. The Arab world is a model Malthusian disaster, says Davidson. Populations have ballooned. Food production has not. Which makes Arab countries the biggest importers of cereals in the world. And when the price of food goes up, the masses rise up too. From Jim's latest newsletter, Strategic Investment: Food prices hit an all-time high in January. According to the UN's Food and Agricultural Organization (FAO) "the FAO Food Price Index (FFPI) rose for the seventh consecutive month, averaging 231 points in January 2011, up 3.4 percent from December 2010 and the highest in both real and nominal terms" since records began. Note that prices have now exceeded the previously record levels of 2008 that sparked food riots in more than 30 countries. "Famine-style" prices for food and energy that prevailed early in 2008 may also have helped precipitate the credit crisis that Federal Reserve Chairman Ben Bernanke described in closed-door testimony "as the worst in financial history, even exceeding the Great Depression." This time around, the turmoil surrounding commodity inflation has taken center stage with more serious riots and even revolutions across the globe. Popular discontent is not just confined to "basket case" countries like Haiti and Bangladesh as in 2008. High food prices have roiled Arab kleptocracies with young populations and US backed dictators such as Tunisia, Egypt, Bahrain and Yemen. Even dynamic economies have been affected. Indeed, all of the BRIC countries, except Brazil, have witnessed food rioting. Well, how do you like that, Dear Reader? All those billions of dollars spent propping up dictators – $70 billion was the cost of supporting Hosni Mubarak in Egypt alone – and then the Fed comes along and knocks them down. The Fed lowers the cost of money so speculators can borrow below the rate of inflation. And then it prints up trillions more – just to top up the worlds' money supply. Is it any wonder food prices rise? Imagine you're a farmer...or a speculator. You can sell food. Or you can hold it in storage. You know the food is valuable. You know the world has more and more mouths to feed everyday. You know food production is limited. And you know Ben Bernanke can print up an unlimited number of dollars. What do you do? Do you sell immediately? Or drag your feet...holding onto your valuable grain as the price hits new highs? Davidson continues: While Mr. Bernanke modestly declines the credit for de-stabilizing much of the world, close analysis confirms that he played an informing role. His QE2 program of counterfeiting trillions out of thin air has helped ignite a raging bull market in raw materials with food and commodities – up 28% in the past six months. The fact that the US dollar has heretofore been the world's reserve currency means that almost all commodity prices are denominated in dollars. As a matter of simple math, when the dollar goes down, the prices of commodities tend to go up. Today, Libya. Tomorrow...Yemen? Or Saudi Arabia. And more thoughts... In North Africa, Cereal Revolutions... In North America, Zombie Wars... Yes, the battle rages in the Dairy State. And yes, Nobel Prize winner Paul Krugman (Economics!) has no idea what is going on: It's "not about the budget. It's about power." He thinks it is a battle between the rich and powerful, whom he calls the "oligarchy," and the decent lumpenproletariat on the other. Wisconsin's governor is trying to bust the union, says Krugman, so that the elite can ride roughshod over poor government workers, cut their pay, and reduce their benefits (thereby downsizing the state's budget deficit). It's not about money, says the New York Times columnist. He's wrong, as usual. The Zombie Wars are always about money. There is less money available and more zombies who want it. In the present case, rather than hire honest people to work at market rates...Krugman wants the state to be forced to deal with a privileged union. Union zombies should bargain with government zombies, he says. Together, in cooperation, not in conflict, they should figure out how to rip off the taxpayer. Stay tuned...the Zombie Wars are just beginning. Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Imported Inflation Hits US Consumer Prices And now this imported inflation is raising consumer prices across the USA. Almost every business in America uses imported energy. Every American eats. As far as we know, you can't buy home-grown pineapples or coffee beans – not in the 48 states! And so, what do you know? Prices are going up. The Like-Minded Mechanics of the Economic Machine On Humanity's Instinctual Need for Democracy The BIS Recognizes the Problems With the US Dollar...Finally Naturally, I was aghast that things have gotten so bad that even the Bank for International Settlements (the infamous BIS) finally got around to noticing that the results of three decades of central banks creating more and more money is not, as they thought, A Truly Wonderful Thing (ATWT). Buying T-Bonds for Dummies Calculating the Misery of Inflation Jewelry Drives the Gold Love Trade This week, the World Gold Council (WGC) confirmed something we'd already suspected: 2010 was a remarkable year for gold. Overall demand grew by 9 percent to reach a 10-year high on increased jewelry demand, strong momentum in key Asian markets and a paradigm shift in the official sector, the WGC says. Sustainable Shortfalls on Unsustainable Debt Moody's Downgrades Japan's Debt. Yen Still Rallies. The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor