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The Daily Reckoning | Saturday, August 11, 2012 What investors can learn from a 1971, vintage Big Mac, Readers weigh-in on the police state, the failed state and the state of the markets, Plus, all this week’s reckonings archived for you to inhale at your leisure... --------------------------------------------------------------- CUSTOMER SERVICE ANNOUNCEMENT: My records say we could owe you, dear subscriber, exactly $1,044 in subscriber benefits. You are eligible to claim this amount due to your loyalty as a subscriber. However, you have only until midnight August 21st to let me know whether you want to receive these benefits... or simply let them expire. Please let me know as soon as possible. To learn how to claim these benefits, simply click here. Sincerely, Andrea Michinski Customer Service Director, Agora Financial Joel Bowman, checking in today from Ouzilly, France... Joel Bowman If our Fellow Reckoners were to see the gorgeous weather out here in the French countryside this weekend, and then discover us NOT enjoying a good book by the riverbank but, instead, toiling away at our laptop...well, they would certainly begin to question our judgment. So as not to cast such doubt in their minds, we’ll cease our scribbling and turn the page over without delay to our feature column of the week. Please enjoy... [N.B. This essay originally appeared in these pages on August 6, 2012] The Daily Reckoning Presents Ignoring the Effects of 40 Years of Money Printing Eric Fry Here’s some great news for all of our pot-smoking Daily Reckoningreaders! A recently-concluded study by researchers at the University of Alabama at Birmingham determined that one marijuana joint per week for 49 years does no harm to lungs! But even though five decades of pot-smoking causes no meaningful lung damage; it can cause plenty of damage to one’s potato chip budget. What’s more, a large percentage of the folks participating in this study could no longer recall what a lung was. “It’s that marijuana-inhaling thing, right?” one participant responded when pressed to describe a lung’s purpose. Kidding. The important take-away here is that 50 years of cannabis inhalation is not necessarily healthy, just because a five-decade pothead is still able to draw smoke through a bong. For the sake of metaphor, we’ll call 50 years of pot-smoking a “bad habit.” Like most long- term bad habits, the consequences unfold unevenly and sporadically. And often the consequences unfold so slowly that you barely notice them at all. The US Treasury has been printing paper dollars, backed by nothing but paper and ink, for more than 40 years. That’s a bad habit. And yet, the greenback is still with us and it is still the reserve currency. So it looks like this particular bad habit has produced no harm. And that is absolutely true, provided you don’t mind paying $4.33 for the same Big Mac that cost 50 cents in 1971. That’s right, the price of a Big Mac has soared 866% since the year President Nixon severed the dollar’s convertibility into gold. Your California editor ate a Big Mac yesterday and it was very good, but not 866% better than the Big Mac he used to eat after his Little League games in 1971. “We live in a technological golden age,” asserts Jim Grant, editor of Grant’s Interest Rate Observer, “but in a monetary and fiscal Dark Age...Science and technology may hurtle forward, but money and banking race backward.” The proof of Grant’s assertion: A 1971-vintage dollar has lost an astonishing 88.5% of its value. That’s a bad habit. Revoking Constitutional rights is also a bad habit. So isfanning class warfare. So is militarizing local police departments. So is expanding the role of government in the private sector. So is manipulating interest rates in the name of “monetary policy.” Incredibly, all of these bad habits are unfolding at the same time. Right now. Right before our eyes. And yet, our national “lung function” feels entirely normal. So does our eyesight and our hearing and every other vital sign. We feel completely healthy...even as we are becoming terminally ill. But these bad habits — these incremental changes for the worse — produce their bad consequences so slowly that almost no one will notice them...until it is too late to prevent them. No one knows, of course, the exact date that “too late” might arrive. But according to the research of Peter Turchin, the US is drawing near to an ominous timeframe. Specifically, Turchin says the United States is approaching a period of violent upheaval. He bases his prediction on a field of study called, “cliodynamics,” which identifies significant behavioral patterns in a nation’s history. US behavior, according to Turchin, operates on a 50-year pattern. Turchin did not pull the 50-year number out of the air. He compiled copious historical data about major violent incidents in US history between 1780 and 2010 and concluded that a cycle of violence repeats itself every 50 years in America. “Circa 1870, the North fought the South in the Civil War,” livescience.com explains. “Half a century later, around 1920, worker unrest, racial tensions and anti-Communist sentiment caused another nationwide upsurge of violence. Then, 50 years later, the Vietnam War and Civil Rights Movement triggered a third peak in violent political, social and racial conflict. “Why 50-year cycles?” livescience.com asks. “After a period of sustained violence, [Turchin explains], citizens begin to ‘yearn for the return of stability and an end to fighting.’...The prevailing social mood swings toward stifling the violence at all costs, and those who directly experienced the civil violence maintain the peace for about a human generation — 20 or 30 years. But the stability doesn’t last. Eventually, ‘the conflict-scarred generation dies off or retires, and a new cohort arises.’...As a result, periods of intense conflict tend to recur with a period of roughly two generations (40-60 years).” “My model suggests,” says Turchin, “that the next [peak in violence] will be worse than the one in 1970 because demographic variables such as wages, standards of living and a number of measures of intra-elite confrontation are all much worse this time...After the last eight years or so, notice how the discourse in our political class has become fragmented. It’s really unprecedented for the last 100 years. So basically by all measures, there are social pressures for instability that are much worse than 50 years ago.” But there’s a silver lining to all this: After the next worse-then- ever peak in civil upheaval, we are supposed to get a 50-year break until the next one. For some folks, that’ll mean 50 years of hassle- free pot-smoking. This Could Be The Profit Opportunity Of The Decade... One man’s quest to help people quit smoking has led to what could be the most important “accidental” health discovery since penicillin. And for you - it could be the biggest potential “profit bonanza” since Pfizer accidentally discovered Viagra. Learn more about this amazing opportunity right now, right here. ALSO THIS WEEK in The Daily Reckoning... An Actionable Idea By Chris Mayer Gaithersburg, Maryland Mutual funds are too often just a kind of financial junk food. Investors get a quick and easy portfolio, habitually stuffed with hundreds of stocks. No wonder their returns are frequently poor. But there are exceptions. The folks at Gabelli & Co., led by the stock picking gourmand Mario Gabelli, have cooked up a profitable recipe for serving quality ideas. From January 2006 to the end of 2011, these ideas have returned 210%, versus a negative 5% return for the market overall. There is now a surprisingly easy way to get yourself a seat in Gabelli’s exclusive kitchen. Government-Sponsored Poverty By Jeffrey Tucker Auburn, Alabama Growing up in the Cold War, we tended to look at Russia as a nightmare slave society that was utterly and completely foreign to anything Americans knew or could possibly know, absent some kind of invasion. If I were to summarize the American propaganda message of the time it would be this: We are free, they are not, and that’s why we are rich and they are poor. And, man, did they look poor to our eyes. I could never understand it: How the heck does a once-great people put up with a government that is so obviously and apparently driving the whole population down, year after year? Preparing to Fail By Bill Bonner Paris, France Today, the US has no worthy enemies. Still, it spends $1 trillion a year — fully loaded — to defend itself against them. The ‘terrorists’ and ‘insurgents’ it protects us against have no divisions, no trained officers, no heavy armor, no ships, no aircraft, and no heavy weapons. That is why the news from the front is so boring; the newspapers barely report it. There are no pitched battles. No Napoleonic charges. No breathtaking victories. No Stalingrads. No Gettysburgs. No brilliant strategies. No crushing defeats. The Croquet Party By Bill Bonner Ouzilly, France The sun rises slowly this time of year. And then, it disappears. That has happened almost every day since we’ve been here. It has been the summer that hasn’t been. No sun. No heat. No summer. Normally, the weather south of the Loire river is supposed to be better than north of it. But this year it has seemed about the same — cloudy, windy, cool...more like November than August. Last week, we had a fire in the fireplace during the day...and a thick quilt on the bed at night. The Gift from “Little Pearl Harbor” By Ray Blanco Marco Island, Florida Sometimes medical revolutions happen under the most unlikely circumstances. On Dec. 2, 1943, a surprise air raid on the Allied- controlled port of Bari, Italy, was so successful as to receive the name “Little Pearl Harbor.” Among the ships damaged by aerial bombardment were the SS John Harvey and its load of chemical weapons. Fires set off by exploding bombs released tons of deadly chemical warfare agents into the air and water around Bari, exposing thousands of people and producing hundreds of casualties. Finally! An Options Research Service So Simple and Accurate You’ll Have a Chance to Profit on Your Very First Play! Here are true stories from readers who hauled in big profits on their very first trades... 750% GAIN! “My first trade was a 50% GAIN. My second trade is hard to believe — a 750% GAIN in one working day!” — Eddie L. 200% GAIN! “I pulled out of Bank of America with a 200% gain. It was actually my first profit [with Options Hotline]. It felt like a great accomplishment.” — Rick T. $6,540 Profits! “My first trade... made me $6,540 profits! You are the first newsletter that I have tried out of hundreds that actually delivers what it promises.” — Robert N. Learn how to join first-time traders like Eddie, Rick and Rob who scored wins on their very first trades right here. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, reckoner Weatherman writes in response to Eric’s article The Police State is Here... In the sixties the police drove around in Ford Fairlane station wagons with police dogs and drove up to a scene and turned the dogs loose. So this is nothing new. I think I still have a few old black panther cartoon books in the attic titled “Kill the Pigs” Maybe it’s time to start reprinting and redistributing to school children to prepare young hearts and minds for the coming military state. Next up, Reckoner Bruno has a few comments about the sorry, confused state of the global financial markets... Financial markets are reaching for the sky, as if it were 1999 all over again. Obviously, there is very little brain power backing this euphoria, since most of the trading is done by dumb computers, reacting to mainstream news headlines. Yet, if the people who are supposedly running the show, in the back, were taking a minute to think, they would maybe realize that there is no cause for optimism, on the contrary. Not so long ago, markets used to react to a CEO’s speech, that would translate into his company’s shares going up, or down, depending on the content of the speech. Nowadays, the only speeches that attract the markets’ attention are those given by, or expected from, central bankers! That in itself says it all...it says that the whole economy is so sick that it depends on central banks to keep on going...who cares about CEOs? And there is more... The markets are so hypnotized by, addicted to, central bank policies, that they constantly anticipate their actions, and always in a bullish way, so much so that the latter don’t even need to do anything, save for talking from time to time, to keep the indexes rising. Thus, in the US, some form of QE3 has been expected for months, enough to push indexes to new highs, even though there is at least a fifty percent probability that there will not be any monetary easing anytime soon (why bother?). And in Europe, Draghi’s big mouth has managed to propel some indexes up by almost 10% in a few days, even though no one has the slightest idea what the European central bank will do, if it ever does anything. No brains, all computers, and all in! And finally, a vexed Reckoner Marie wonders... How are we going to pay off our debts if government is now choking the very source of growth: business? Is the end purpose of government to control everything and just tax us to death? Soon we will be nothing but slaves to the government. I thought we were supposed to be progressive not regressive, so why is the policy being shoved down our throats by our elected officials? It seems to be going down the path of government control on everything...including our religious freedom? Isn’t that communism? Is everybody blind to what is going on, or are we just getting so complacent we let our politicians get away with everything including their trampling on our constitution? DR: Even if it were possible (which seems unlikely), is a return to the constitution really desirable? We’re not so sure. Article 1, for example, empowers the government: “To Borrow Money on the credit of the United States,” “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes,” and “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof,” “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures,” “To provide for the punishment of counterfeiting the securities and current coin of the United States” and “To establish post offices and post roads.” Looks to us like there’s quite a bit of room for “creative interpretation” in there...especially by the kind of sociopathic liars that come to fill the hallowed halls of Congress. Besides, didn’t we already run the Constitution experiment? Well, here we are...a couple of hundred years later and suffering the burden of an increasingly oppressive state, with debts piled to Mount Impossible and military strength enough to wipe us all of the face of the earth, many, many times over. The Founding Fathers were breaking new ground with their Constitution experiment. They couldn’t have known how it would end. But we see the results clear as day. Do we want to start that process all over again, knowing how it ends? If not, what’s the solution. Fellow Reckoners might like to chime in here... --- Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning