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The Daily Reckoning | Monday, August 27, 2012 Fed-sponsored deception...hiding in broad daylight, Question: How is North Dakota like Mongolia? Plus, investing when honesty is casualty #1, and plenty more... ------------------------------------------------------- External Advertisement Finally... a “Loophole” for the Rest of Us... Did you know that a recent IRS report revealed almost 1,500 of America’s 230,000 millionaires avoided paying any federal income tax at all in 2009? None at all.  Get the feeling they know something you don’t?  Well now there’s a “loophole” for the rest of us. It’s like a rich man’s break on a regular Joe budget. More than half a million Americans have already made use of it... and you could, too, starting today...  Here’s how it works.   Quotes of the Day... “Achievements on the golf course are not what matters, decency and honesty are what matter.”  — Tiger Woods “Honesty is for the most part less profitable than dishonesty.”  — Plato   Champions of Dishonesty How the Fed is Bastardizing the World’s “Best Policy”   Eric Fry Reporting from Laguna Beach, California... Honest money requires honest stewardship. If, therefore, the dollar is to be an honest, trustworthy currency, the Chairman of the Federal Reserve and the Secretary of the Treasury must also be honest and trustworthy. Anything less is a threat to the dollar’s value, which is a threat to the very foundation of the US economy. Given this inescapable truth, what are we to make of the revelation that the Chairman of the Federal Reserve and the Secretary of the Treasury allowed the multi-trillion-dollar Libor fraud to operate for more than four years? “LIBOR, which stands for London Interbank Offered Rate, may seem like a meaningless financial obscurity to most folks,” we explained in the July 19th edition of The Daily Reckoning, “But this particular obscurity happens to determine the pricing of trillions of dollars’ worth of credit lines and credit derivatives. “Therefore, rigging Libor is a little like rigging magnetic north...or its modern-day equivalent, the Global Positioning System (GPS). Every compass in the world would point to a deception. More importantly, your Paris-bound jet might touch down in Tripoli. And even if your Paris-bound jet touched down in nearby Lyon, you’d still be a little annoyed... “According to press reports,” we continued, “only three of the 16 banks that establish the Libor rate have admitted — or sort of admitted — to posting fraudulent LIBOR rates... But very few filthy kitchens contain just three cockroaches.” Just a few days later, the world learned that the Federal Reserve and US Treasury were scuttling around with the roaches. Chairman Bernanke and Secretary Geithner knowingly allowed the Libor fraud to operate for four years! Incredibly, this outrageous revelation produced very little outrage. But the public non-reaction does not make the behavior of Bernanke and Geithner any less outrageous. If the stewards of the world’s reserve currency are able to tolerate four years of cheating in the Libor market, what other frauds do they consider insignificant? Or worse, what other frauds might they be directly aiding and abetting? This fraud was not victimless, Dear Reader, quite the contrary. Day after day, week after week, unwitting investors lost money they did not deserve to lose...as the Libor-riggers made money they did not deserve to make. The cumulative losses would be incalculable. But that’s not all... The biggest victim of this crime may be the US economy, itself. Dishonest financial markets paralyze capital. Generally speaking, investors refuse to invest in markets they perceive to be rigged or highly manipulated. And paralyzed markets tend to paralyze economic activity. What’s more, the Libor scandal is not the first instance of large- scale, clandestine market-rigging that has occurred with the full knowledge — if not full cooperation — of the Federal Reserve and/or US Treasury. Remember all those secret, not-so-little loans the Fed doled out in 2009 to various financial firms? These were loans the Fed never disclosed at the time and never expected to disclose...ever. They were secret. “Recent disclosures from the Federal Reserve reveal that honesty was one of the earliest casualties of the 2008 financial crisis,” we observed in the December 15, 2010 edition of The Daily Reckoning. “These disclosures contain a number of juicy tidbits, like the fact that Goldman Sachs received tens of billions of dollars in direct and indirect succor from the Fed... “Thanks to the Fed’s massive, undisclosed assistance, Goldman Sachs managed to project an image of financial well-being, even while accessing tens of billions of dollars of direct assistance from the Federal Reserve... “On June 17, 2009, thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. Just six days before this announcement, Goldman sold $11 billion of MBS to the Fed. In other words, Goldman ‘repaid’ the Treasury by secretly selling illiquid assets to the Fed... “During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment. “Did private investors not have the right to know that the Federal Reserve was secretly recapitalizing Goldman’s balance sheet during this period? Did they not deserve to know that the Fed’s MBS buying was producing Goldman’s ‘perfect’ trading record during this timeframe? “Yes, would seem to be the obvious answer.” But instead, private investors were forced to match their wits against massive, secret manipulation by the Federal Reserve. This secret manipulation would not become public until 18 months after the fact — long after unwitting investors had lost (or won) the capital the Fed’s dishonesty caused them to lose (or win). Clearly, secret market-rigging is the Fed’s lifestyle, not an occasional lark. So the investment capital that is now huddled on the sidelines is unlikely to be thinking, “I’m sure glad the Libor scandal is over and done with. Now I can invest with confidence.” Instead, it is likely to be thinking, “Wow! What’s next? If the Fed allowed Libor-rigging, what other frauds is it allowing...or directly conducting?” By his own admission, as early as 2008, Bernanke knew large banks were posting fraudulent LIBOR postings. Geithner has also admitted to knowing about it in 2008. But when the Congressional Financial Services Committee asked the Chairman last monthwhy he never put a stop to the fraud, he replied, “[The Libor rate] is constructed by a private organization in the UK, and so our direct ability to influence that is limited.” Geithner provided a similarly feeble defense. Seriously? Both men possessed the power to halt a crime spree. Neither did. Instead, they simply winked and nodded at the criminals. Bernanke and Geithner have been doing so much nodding and winking during the last few years that they are starting to resemble narcoleptics with turrets syndrome. “[Bernanke] is insulting his audience to say there was nothing he could do,” gripes Dean Baker, co-director of the Center for Economic and Policy Research, “That is complete nonsense. If he had called up [the head of the Bank of England, Mervyn] King and said that King has to fix the Libor [fraud], and if he doesn’t this all goes public, then King would have had no choice... Bernanke allowed this fraud to continue, violating his responsibilities as Fed chair.” The United States deserves better.  The financial markets deserve better. The US dollar deserves better. And yet, the most scandalous aspect of the LIBOR scandal is that it has produced almost no scandal whatsoever. The Chairman is still the Chairman, doing the same stuff he’s been doing for the last six years, whatever that stuff might be. (Don’t worry, we’ll probably learn all about the stuff he’s been doing, eventually...maybe). The Chairman of the Federal Reserve doesn’t have to be particularly brilliant, or stylish, or entertaining, but he ought to be particularly honest...or at least not particularly dishonest. That’s just no way to run a money-printing business. “The Libor scandal is clarifying, if not shocking,” remarks James Grant, editor of Grant’s Interest Rate Observer, “On both sides of the Atlantic, investigations into the alleged manipulation are shifting from the bankers who supposedly did the fudging to the regulators who permitted it...” Even in the best of circumstances, the Federal Reserve Chairman is a professional price-fixer and market-rigger. “The private sector manipulated prices opportunistically. The public sector rigs them on principal,” Grant quips, “In the United States, the Federal Open Market Committee fixes, or ‘sets,’ the funds rate... It manipulates the yield curve via Operation Twist. It manipulates the mortgage market, along with every other department of the credit markets, via so-called quantitative easing. It attempts to manipulate the stock market (and expectations concerning the stock market)...”  Although these manipulations are usually inimical to free market dynamics, they are, at least, disclosed publicly. Therefore, because they usually unfold in plain view, they do not usually repel or inhibit investment to any great degree. But when the world’s leading price-fixer starts conducting and/or ignoring secret market manipulations, that’s very bad news. As one professional investor put it recently, “The Fed is manipulating so many markets at once that it has become tougher to identify a genuine free-market price in the financial markets than to identify a genuine female in a Bangkok bar... I don’t want to play in markets like this.” And neither do many other investors or entrepreneurs. Increasingly, the folks with the capital to risk are refusing to risk it on anything. They are simply refusing to play the game...any game.  The 2012 Survey of Affluence and Wealth in America, from American Express Publishing and Harrison Group, finds that the wealthiest Americans are hoarding three times as much cash as they were two years ago. Their savings rate soared to 34 percent in the second quarter of 2012, up from 12 percent in 2007.  This skyrocketing savings rate is the flip side of lost confidence. A whopping 82 percent of the wealthy respondents said they would increase their spending and investing if they had more confidence in the future. “[The wealthy are] basically stuffing money under the mattress,” says Jim Taylor, vice chairman of Harrison Group. “This has resulted in people managing their risk to a ‘no loss’ position rather than a ‘real gains’ position,” Taylor said. “That’s not the great tradition of American investing.”  Clearly, deception and dishonesty are no way to restore or inspire confidence in the financial markets...or to revive America’s legendary entrepreneurial dynamism. The economy doesn’t need low rates; it needs honest rates. It needs to know that the free market is setting prices in the financial markets; not the Federal Reserve....or fraudulent banks with the blessing of the Federal Reserve. Perhaps the Fed Chairman should add “honesty” to his short list of “policy tools.”   The Daily Reckoning Presents The Mongolia of America   Chris Mayer Question: How is North Dakota like Mongolia? Answer below...but first a little background. As I made very clear at this year’s Agora Financial Investment Symposium in Vancouver, I am very bullish about Mongolia. This is one emerging market that is likely to continue emerging very rapidly. A couple months back, I visited the Mongolian city of Ulaanbaatar — a classic boomtown. Kicked off by a surge in mining, real estate prices have soared in Mongolia’s largest city. But there is a long way to go. Ulaanbaatar illustrates a great principle of emerging-market investing: Buy real estate close to the city center early in the bull market. You can apply this same analysis to the US, which is increasingly a motley mix of states in very different economic circumstances. North Dakota, for example, may have more in common with Mongolia than with neighboring Minnesota. North Dakota and Mongolia are both wide-open spaces and relatively sparsely populated. (North Dakota-born CBS correspondent Eric Sevareid called his home state “a large, rectangular blank spot on the nation’s mind.”) Both are resource rich. And both are in the early stages of a boom. In the case of North Dakota, it already had some of the richest agricultural land in the US. Now it has oil — lots and lots of oil. North Dakota has become the second-largest producer of oil in the US, behind only Texas — thanks to the Bakken. The Bakken is the biggest oil discovery in at least 40 years. It is part of the Williston Basin, which is a giant 300,000-square-mile patch that extends under North and South Dakota and Montana in the US, as well as Saskatchewan and Manitoba in Canada. Though discovered in 1951, the Bakken was — for years — too costly to develop. Then in the beginning of the 2000s, new technologies began to deliver promising results. It was the beginning of a revolution. Various estimates put the Bakken as one of the largest oil fields in the world. And oil companies can get it out profitably at under $70 a barrel under current conditions. As a result, oil companies are going to drill the you-know-what out of it. Already, North Dakota alone doubled its output of the black stuff in the last two years. With 7,000-plus producing wells and more than 50,000-plus possible (just with current technology), this bull is still young. Chris Mayer’s Special Situations Presents... Could This Create More Millionaires Than the Bakken Oil Reserve Has? ONE little-known, revolutionary oil recovery technique is taking the American oil industry by storm.  It could produce up to 4 TIMES MORE OIL than North Dakota’s huge Bakken reserve will.  And potentially mint riches for savvy wealth-builders.  Click here now for the inside scoop on this unique energy phenomenon. The boom is sucking up available bodies anywhere it can get them. North Dakota has the lowest unemployment rate in the country. Basically, there isn’t any. An anecdote: Denny’s had to close its restaurant in Minot, ND. It wasn’t for lack of business. It was because it couldn’t afford to pay people to staff it. Denny’s was paying people as much as $16 an hour to work there. (If you’re young and you want to start your working life in a boomtown without leaving the US, head over to North Dakota.) Other anecdotes give you a flavor of the boom. The McDonald’s that had to close in the middle of the day because it ran out of food. Or the Wal-Mart that stopped stocking the shelves. First, because it can’t find people to hire to do it. And second, because nothing stays on the shelves for long anyway. Now the company just drops the pallets directly in the aisles. People take what they want and go the registers. Last year, the state legislature approved $1 billion for new roads, water and sewer lines. The roads can’t handle the thousands of heavy trucks running over them every day. There are ruts 4 inches deep at some intersections caused by the force of the trucks when they stop. Sewage lagoons are full and the system strains to process the waste. There is a ton of money and men and machines headed to the Peace Garden State. Just look at the number of people flying to the cities in the thick of the Bakken this year compared with last. Traffic to Minot is up 62%; Williston, up 41%; and Dickinson, up 73%. As you might expect, there is a big housing shortage, too. I’ve never been to the Bakken — at least, not yet. But the numbers are unbelievable. You can rent a metal box in a “man-camp” for $2,400 per month — that includes food. Rental rates for apartments are similar — but they don’t include the food. People who have been to the Bakken tell me the shortage is there for the eye to see: RV parks and “man-camps” and full hotels. A simple motel room in Williston can set you back $200-plus per night — provided you find a vacancy. Recently, a publicly traded real estate company completed a 145-unit apartment complex. Overnight, renters tied up 133 of them for 36 months. There was a 350-person wait list for the last 12 units. The initial yield for the property owner is 16%! Knowing a good thing, the company also grabbed 40 acres of land that can support another 850 units. That company is Investors Real Estate Trust (IRET). Its headquarters are in Minot, ND. Management declares it “the gateway of the Bakken.” Founded in 1970, IRET is the lone REIT in the upper Midwest. It has a mixed portfolio of property — office, industrial, retail, residential and medical. Unfortunately, about half of the portfolio is in Minnesota — which isn’t in the Bakken. Other property is spread around in Nebraska, Kansas, Montana and other states. Only about 20% is in North Dakota, but it’s all within the radius of the Bakken. That’s where the growth is. (Although the upper Midwest economies are doing better than the rest of the US, on average.) I’m not recommending IRET, because it has too much debt for my tastes. And though the dividend is fat, cash flows don’t cover it. But it is one to watch. At some point, it will right its balance sheet, and that might provide a window to grab a toehold in Bakken real estate — in the Mongolia of America. Regards, Chris Mayer for The Daily Reckoning Editor’s Note: The growth story in North Dakota is truly incredible...especially when considering the prevailing economic climate in the other 49 states. But this is just one of the many stories Chris is following right now. A relentless world-traveler, Chris prides himself on getting the kind of detailed information you can only get when you actually put your “boots on the ground.” And readers of his Capital & Crisis newsletter know that better than anyone — it has one of the highest renewal rates of any Agora Financial publication. That means when people sign up for Chris’s advice they aren’t just takingit...they’re keeping it; knowing they can rely on it when they need it most. Click here now to find out why they find this service so invaluable. ------------------------------------------------------- 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