The Daily Reckoning October 17th

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Loopholes: Another Word for Freedom

Let’s say that a thief demands $100 and lets you keep $10 because he likes your suit. He calls that a deduction. The next day, he demands the whole $110. He says that he is not stealing more. He is only eliminating deductions and closing loopholes. That’s the GOP’s tax plan in a nutshell.

They say that it is not about raising your taxes. That’s what Democrats do, and Republicans don’t do that sort of thing. Instead, Republicans favor the “flat tax” that is “revenue neutral.” They will “pay for the tax cuts” by capping deductions on high income earners. Or perhaps they will just remove the mortgage interest deduction or other “loopholes” that allow you to keep more of your money.

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How stupid do they think we are? Sadly, they might be right. Most people’s eyes glaze over when politicians start talking tax reform. They understand that “raising taxes” is generally bad, but they do not understand that “eliminating deductions” amounts to the same thing. Either way, you pay. The only real difference is the public relations pitch.

Actually, the GOP has been raising taxes for decades, just less openly so. Reagan’s tax increase of 1983, as recommended by the Greenspan Commission, was disguised as a premium increase to save Social Security, but it was actually a gigantic increase in the payroll tax that was later applied to general revenue. It put off the endgame for Social Security for a while, but for the average taxpayer, it was nothing but a tax increase.

This tax has extracted some $2.5 trillion since it was first enacted. Somehow, Reagan maintained his reputation as a tax cutter, and still does to this day. It has something to do with the need for partisan illusions. Premiums, they tell us, are not taxes. The same thing is happening with the Romney ticket. It is out there every day talking about raising taxes, just with a different name, yet the Democrats blast back with the claim that the Republicans are busting the budget with proposed tax cuts.

Both parties are pushing for some kind of tax reform, but the key rule is “revenue neutrality.” All these plans are doped out with the presumption that the planners can perfectly anticipate future revenue, but the regime change has no effect whatsoever on people’s behavior in the marketplace.

They presume that a cut here will decrease revenue by a certain amount and that an increase there will increase revenue by a certain amount. The truth is that you can’t know. No one expected or anticipated that government revenue would collapse after 2008, for example, and that was with no tax overhaul at all. The political parties can cite all the “studies” they want, but no one can perfectly anticipate the effects of changes in the tax law.

In effect, the rule of “revenue neutrality” means that no one is talking about serious change in taxes at all beyond increasing them in more or less serious ways. It’s the same with spending cuts: Politicians can talk about them, but they will not deliver them so long as the Federal Reserve stands in the background ready to print any amount money to cover any amount of debt that the Congress runs up.

If anything, the GOP position is the more dishonest of the two parties because the GOP is forever claiming that the Democrats want to raise taxes whereas the GOP does not. The truth is that both parties have their green eyes fixed on your bank account with the intent to grab more one way or another. The choice voters face really comes down to how they want their tax increases packaged: as a hurt-the-rich scheme or as a flat-tax scheme.

Every tax reform in my lifetime has actually been a push for higher taxes in one form or another. And there are still other ways to raise taxes besides raising taxes, reducing deductions, capping deductions, and closing loopholes. You can raise tariffs, increase user fees, enact quotas, inflate the money supply, or outright confiscate people’s property through police state tactics. All these methods suck resources from the private economy into the government.

The goal of every tax reform is to do this in the sneakiest way possible.

The media are no help in clarifying language. When a politician proposes a cut in taxes, the reporter imagines that he or she is a clever and hard-hitting journalist by shooting back: “How are you go to pay for that?” Nonsense. If the thief decides not to take your wallet, he shouldn’t be asked how he is going to pay for his failure to steal.

Of course, all of this is beside the point, really. The core problem is spending. If the government didn’t spend money, it wouldn’t need to tax anyone. The only real way to lower taxes over the long run is to cut spending, but again, this is not going to happen. Even those who talk about spending cuts are really talking about cutting the rate of increase in spending over five or 10 years in budget projections that have never panned out even one time in the history of the universe.

Knowing all of this makes you doubt the whole point of these ridiculous political debates. Yes, that’s the idea. It is worse than pure entertainment because the whole show masks the greatest racket in the world today. A useless elite is living off your money and telling you that you are better off as a result. And when you question why, they throw accounting trickery and fancy language in your face that all amounts to the same thing: The beatings will continue so long as you don’t run away.

And running away is precisely what is happening. The lower on the list of economically free countries the U.S slips, the more people are looking to the underground economy or to emigration to protect their own freedom. What this suggests is that the scam isn’t working as well as it used to. It’s long past time that people stop believing these thieves, much less trusting their motives.

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Jeffrey Tucker

Original article posted on Laissez-Faire Today

Loopholes: Another Word for Freedom appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Moody’s Leaves Spain’s Credit Rating Unchanged

Front and center this morning, the currencies are on the warpath versus the dollar this morning. It’s been about a month (when QE3 was announced) that we’ve seen moves like these by the currencies versus the dollar. So, what brought about this strong upward move? Well, I’m glad you asked! Late yesterday afternoon, about the time everyone was ready to head out the door, Moody’s announced that they were keeping Spain’s credit rating unchanged at a notch above junk. Remember my discussion about this long-awaited announcement by Moody’s?

Well… In case you missed class that day, I explained that by having Spain’s credit rating fall to junk bond status, it would really hurt Spain and the euro (EUR), for, if bonds were junk status, they would have to be removed from any global bond indexes. And if they were removed, that would mean they would be sold, along with the euro. But that didn’t happen, and you can bet your sweet bippie that there were lots of trades betting on this to happen that had to be reversed, before the losses mounted. And, so, the party spilled out into the streets, with traders and investors buying euros like there’s no tomorrow!

But the Moody’s announcement isn’t just all about the euro. It’s a stamp of approval for risk. Remember last week, I told you that it appeared that the risk sentiment was returning. Well, I would have to say that it’s in full force this morning! Overnight we saw China allow the renminbi/yuan (CNY) to reach another all-time high versus the dollar. I would have to think that, given this move, the Chinese know that their print of third quarter GDP tonight is going to be good. Otherwise, why would they jump in with both feet? Why not wait-n-see?

The Aussie dollar (AUD) has rallied back to $1.0335. I have long been calling the Aussie dollar the proxy for risk and global growth. And so, with the Aussie dollar pushing toward its 200-day moving average of $1.0345, that’s a very indication that it’s risk on. I think the Aussie dollar will have to wait to get past its 200-day moving average of $1.0345, until that Chinese GDP report prints tonight, to confirm that China’s economy bottomed out in the second quarter, and is on the rebound. But then, lines of resistance just aren’t what they used to be in the currencies. Which is to say that the 200-day moving average could be blown past today ahead of the Chinese GDP report. The markets wait for no one…

One currency that’s lagging and hasn’t joined the party in the streets is the Canadian dollar/loonie. The loonie got the stuffing knocked out of it yesterday, when Bank of Canada (BOC) Governor Carney made dovish comments, and pretty much said that no rate hike is coming. So, the markets in their infinite wisdom (NOT!) took those comments to indicate that the next move would be a rate cut. And the loonie was left at home, not able to join the other currencies to party in the streets.

I had a discussion with a Canadian fellow yesterday via email, and he wanted me to know that the loonie is too strong. I simply told him to look at the Canadian fundamentals. They have been strong, and that’s what traders and market participants look for when they want to buy a currency. I’m fully aware that the Canadian government and BOC don’t like it one bit when the loonie gets above parity, but unless they want to cut rates, in the middle of a housing problem, or intervene and sell loonies, their hands are tied.

And that’s what BOC Governor Carney was attempting to do yesterday with his dovish comments. He was doing the old Japanese Jawbone your currency weaker trick. It used to work for the Japanese, but then they never acted on their words, and the markets called their bluff. What will Carney do here? I guess we’ll just have to wait-n-see, eh?

Speaking of Japan… Japanese Prime Minister, Noda, is planning on introducing a new round of stimulus by the end of November. Oh boy! What’s it going to be this time? Let’s see, they’ve tried just about every stimulus in one’s imagination, and done them for two decades now. I guess why not try something again, since it’s worked the 100 times it failed before! I shake my head, and think about how here in the US we’ve followed Japan down this road of economic stimulus. Are our leaders willing to keep following Japan down this road? I sure hope not! But, I wouldn’t put anything past them!

I have a former colleague that really watches data like a hawk, and when I mentioned how retail sales soared in September, he sent me this note: “Chuck — Taking a look at the non-government (a.k.a. seasonally) adjusted figures for September Advanced Retail Sales reported yesterday, year-over-year total retail sales were up only 3% versus a reported 5.4%, while month-over-month figures were actually DOWN 7.5% versus the seasonally adjusted +1.1% reported.” (Thanks, Tim!)

So, once again, it’s all in how you figure the numbers. As I said recently, my dad used to always tell me that figures lie and liars figure. Now, I’m not calling anyone in the government a liar, I’m just questioning the data they keep spitting out. I’m to the point now that I don’t believe one iota of data that comes out of the government. Isn’t that sad? Now… If I were on the Butler patio, you would really get my thoughts on these reports. But, can’t do that here, so I’ll just move along.

Speaking of retail sales… A colleague in NY, Brian, sent me a note yesterday and a link to a story that reported how analysts are looking at satellite images of retailer’s parking lots, to get a true picture of sales. So, I clicked on a couple of the images, and one was from a Wal-Mart, and the other from a Target, and the parking lots didn’t scream “Strong Retail Sales”! So… We have another tool to use to expose these reports for what they are.

Yesterday, the government reported that US Industrial Production increased 0.4% after contracting 1.4% in August. Hmmm… Again, funny how that all appears, isn’t it? And Capacity Utilization gained 0.3% from August’s 78 reading. Oh! And that stupid CPI report for September printed too, and showed that consumer inflation gained 0.6% in September versus August, or 2% annualized. But, remember, the government really only looks at the “Core inflation number” which takes out food and energy, because, these aren’t things we use every day! And the Core inflation number was only up 0.1% in the month. Me? I prefer to not look at any of these trumped up, hedonically adjusted numbers.

Long ago, in a galaxy far away, I told you that inflation is a personal thing. And how inflation affects your pocket book/wallet is up to you and the things you do. Me? Inflation is soaring. And not just 2% in the past year! Of all the reports the government rigs to make look better, this is the one that really ticks me off, but… The markets use the numbers, so I have to at least acknowledge their existence!

Gold (and silver) is attempting to get back on the rally tracks again this morning, with the shiny metal up $3.75 as I write. I find this lagging move versus the dollar to be very interesting. I have to question what’s going on, when the rest of the currencies are taking liberties versus the dollar, the euro is 1.3125, the price of oil is up, and gold lags.

Bloomberg ran an article on physical gold that I found to be very interesting…

“The head of industrial and precious metals trading at Barclays, Cengiz Belentepe, has told Bloomberg that investors are selling their investments in gold ETFs and opting for the safety of allocated physical gold.

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“According to Barclays, gold holdings in ETF products are growing at a slower pace than in 2004-2009 because some investors may be moving to physical bullion after initial purchases of an ETF.

“Gold ETFs have a very significant degree of counter-party risk to the many counter parties such as the trustees and the many custodians and sub custodians. The ETF is a second rate form of paper gold in which one becomes an unsecured creditor of a trust rather than the outright, beneficial owner of allocated and segregated coins and bars.”

Chuck again. Well… I guess I could say I told you so. But physical gold either allocated or non-allocated is the preferred way to hold gold in my opinion. And if we could get all those people that buy the gold ETF to buy physical gold instead, the price manipulators would be out of business in a heartbeat!

The British pound sterling/sterling (GBP), really pushed higher overnight, following the euro. But when sterling rallies it really says something about what people think of the US dollar. For the UK is no “seashells and balloons” economy. The Bank of England (BOE) has taken a page out of the Fed’s book on keeping Treasury yields low, by buying huge chunks of Gilts (British government bonds). So, things here aren’t good. But when sterling rallies versus the dollar, it makes one sit up and notice, eh?

I received a note from a reader who wanted me to talk about the Mexican peso (MXN). My initial reaction was, “Do I have to?” in a whiny voice, too! The peso has really been one of the better performing currencies this year, and one has to wonder why… Yes, they have 4% interest rates, but where’s the “risk premium”? I explained this risk premium a few times in the past, so I won’t go there again, but it’s important to note many times in the past investors have gotten burned to a crisp investing in pesos. I would want to be paid a premium over the internal interest rate to take on that kind of risk.

But like Canada, Mexico relies on the US economy and tourists. And since I’m talking about Mexico… My friend, Ed Steer, whom I met 5 years ago in New Orleans, ran a story on Mexican gold this morning that fits in well here. “The Mexican journalist Guillermo Barba, who last year revealed via GATA that the Bank of Mexico was refusing to disclose the location and form of the 93 tonnes of gold it supposedly had purchased recently…announced this week that he has pried the answer out of the bank, using Mexico’s freedom-of-information law just as GATA has been using US FOI law.

“Ninety-four percent of Mexico’s gold, Barba reports, is said to be vaulted at the Bank of England in London…that is, at the center of the fractional-reserve gold banking system.

“So much for Mexico’s sovereignty…and so much for Mexico’s gold.” – GATA (from Ed Steer)

And then the Singapore dollar (SGD), reached a 1-year high versus the dollar last night at 1.2160 — a very strong move for the Sing dollar…but right in step with the strong move in the renminbi. Remember, these two pretty much go lock-step with each other!

To recap… Moody’s left Spain’s credit rating a notch above junk last night, thus taking a huge weight off the shoulders of the risk assets, and sent the euro soaring past 1.31, the Aussie dollar past $1.0325, and the rest of the usual suspects with similar gains. Even sterling rallied versus the dollar; and with all that’s wrong in the UK what does that tell you about the dollar?

Chuck Butler
for The Daily Reckoning

Moody’s Leaves Spain’s Credit Rating Unchanged appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

With Friends Like These…

“We are looking for ways for the euro to become another currency of legal circulation and to be accepted in the Panamanian market,” says Panamanian President Ricardo Martinelli.

No, dear reader… you have not been suddenly transported back to 2007…when rappers and supermodels were shunning dollars and demanding payment in the Esperanto currency.

Why now? When the eurozone’s continued existence is open to question?

Mr. Martinelli ventured to Berlin this week… and declared his dual allegiance to the dollar and the euro while standing next to German Chancellor Angela Merkel.

It’s a big deal because, as he acknowledged, “In Panama, the currency in free circulation is the American dollar.”

“You vill take ze euro and you vill like it!”

“Panama’s dollarized economy,” says a Reuters dispatch, “is one of the fastest growing in Latin America, expanding 10.6% last year with help from heavy infrastructure spending including the expansion of the Panama Canal.”

Does Mr. Martinelli know something about the fate of the dollar that we don’t? Doubful.

Still, we wonder whether he cleared this with anyone in Washington before he jetted off to Europe. He does remember what happened to Manuel Noriega when his paymasters in D.C. got fed up with him, right?

Perhaps he should have made a stopover in Switzerland before making his decision…

“I can’t exclude that in the coming years we may need the army,” Swiss defense minister Ueli Maurer says of the potential for euro-violence to spill over his country’s well-defended borders.

Quite the statement, only a few days after the European Union was awarded the Nobel Peace Prize… Heh.

Maurer also questioned, according to NBC News, how long “money alone” could quell the crisis. Since Switzerland hasn’t seen any conflict since the Treaty of Paris in 1815, one wonders if the defense minister is just getting cabin-fever and jumping the gun, so to speak.

Cheers,
David Gonigam

With Friends Like These… appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Growth Opportunity in the “Other” Thailand

Yesterday, Capital Account’s Lauren Lyster sat down with Chris Mayer to discuss the burgeoning country of Myanmar, and why he sees it as one of the world’s next great growth stories.

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Editor’s Note: Chris Mayer recently penned an excellent article about his experiences while traveling in Myanmar. Click here to read it now.

 

Growth Opportunity in the “Other” Thailand appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

This American Energy Player Is A Buy…

Last week we covered two of America’s upcoming energy hotspots: North Dakota’s Bakken formation and the Eagle Ford in Texas.

Today I’m back with some pressing information pertaining to the Eagle Ford.

In fact, as I type from San Antonio, TX (a few miles north of the profit-packed Eagle Ford) there’s a new company that I want to make sure you have on your radar…

If you’re not familiar with the Eagle Ford formation in South Texas, now’s the time to get caught up.

From what I’m hearing today this American power play is set to sustain current levels for many years to come. According to DrillingInfo’s Allen Gilmer, the Eagle Ford is one of the “greatest geo-political advantages” our country has ever seen. And here’s the kicker, Gilmer believes this hotspot could sustain drilling at current rates anywhere from “40” to “300” months.

That’s a wide range, I know. But considering the boom that’s happening here today, I’m shocked to hear that drilling activity could last as long as another 25 years!

Regardless of the exact timeframe for this drilling activity (but trust me it’ll be decades), it shows this massive wealth-building opportunity is for real…and it’s knocking on our doorstep.

Important for our purposes today, Gilmer also revealed a fairly common occurrence in oil and gas booms. In particular “some companies are going to get very wealth where others aren’t” he says.

That’s one of the reasons I rushed to get this write-up out to you – today I want to make sure you know about a handful of companies that are set to rise to the top of this long-term play.

These “cream of the crop” players are proving their ability to leverage real world know-how and technology. This, in turn, gives them profit opportunities other companies only dream of.

In previous discussions about the Eagle Ford, we’ve covered a handful of these companies – Statoil (STO), EOG Resources (EOG) and ConocoPhillips COP) to name a few.

From what I’m seeing here in San Antonio at the Eagle Ford Developing Unconventional Oil & Gas Conference, these companies are all still leading the pack in the Eagle Ford.

Statoil is moving right along with development. In fact, today Torstein Hole, a Senior VP at Statoil, unveiled breaking news that the company is moving along with plans to fully operate 50% of its Eagle Ford joint venture (with Talisman Energy.)

Statoil will be operating the Eastern section of its JV with Talisman – this is a unique oil-filled area that should allow Statoil to utilize its expertise in tight, high-pressure oil (something many companies simply don’t have the know-how to accomplish profitably.)

Moving forward I also heard great stuff about EOG Resources. Although there wasn’t a representative present, DrillingInfo’s Gilmer acknowledged that EOG has a “critical advantage” over other companies in lower grade zones.

Simply put, while other companies try to eek out a margin, EOG is making it happen on a large scale.

Not to mention, EOG was also put in the spotlight by Bank of America’s Director Of Energy Investment, Mark Sooby. He noted that EOG not only sits in the “sweetspot” of the play, but the company also enjoyed the highest initial production of any Eagle Ford wells (over 4,000 barrels per day.) Needless to say, things are looking great for EOG.

Another company that I heard from directly offered some eye-opening stats about their Eagle Ford position…

ConocoPhillips is currently enjoying a breakeven around $37 per barrel of oil equivalent in the Eagle Ford. Wow! Hadn’t heard that stat before! (To put that in perspective with the big picture, the Eagle Ford as a whole could soon be producing 1.5-2 million barrels per day, up from over 600k today. If other producers are anywhere near the breakeven of Conoco this could be huge news. Stay tuned.)

With $37 breakeven, it’s no wonder Conoco is on track to pour $2.5 billion of direct investment into the Eagle Ford this year alone. That’s quite a premium to the $600k (each) that it’s putting into both its Bakken and Permian assets.

So to say that the Eagle Ford is “the” hottest shale play these days, is not an understatement for Conoco.

Plus as Don Hrap, President of Americas for ConocoPhillips, says we have a “phenomenal position in North America” and addressing the Eagle Ford in particular he says it’s a play that will “be around for decades.”

Add it up, and there’s plenty of reason to respect Conoco’s future production, and of course its 4.6% dividend.

There is, however, one company that I failed to mention recently.

The way I see it, when you talk about the Eagle Ford, along with the companies mentioned above, you also need to talk about Pioneer Resources (PXD.)

Pioneer was one of the first movers in the Eagle Ford back in 1991 with conventional drilling. Then in 1999 it began unconventional horizontal drilling. Today, Pioneer is one of the leading “technology” producers in the formation.

Their long-term know-how in this play is really starting to pay off, too.

According to President and COO, Tim Dove, the company has a “tremendous technical advantage” in the Eagle Ford. The data backs up his claim, too. 80% of Pioneer’s wells are above the median estimated ultimate recovery (EUR.) Simply put, that means Pioneer knows how to get more oil out of the ground that its competitors.

Better yet, the company is doing it at ever-decreasing costs!

Here’s an example that proves my point.

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One of Pioneer’s recent accolades is increased EUR from “choked” wells. Choking a well is a process where you throttle back the production rates in the beginning of the well’s life.

While testing this process, Pioneer found that, 180 days out, these “choked” wells were producing much more total oil. Quite a breakthrough! The company name is quite apropos, too.

Better still, at the same time it’s developing new ways to increase EUR, Pioneer is still finding new ways to cut costs.

The most recent cost-saving technique didn’t use any new technology at all. While a lot of the industry is moving to ceramic sand (used as a propant to help oil and gas flow underground) Pioneer challenged this practice in the Eagle Ford.

Now, instead of following the industry to higher cost, manmade sand, Pioneer reverse engineered the process and found a way to use natural white sand with the same efficiency. The savings? Over $700k per well.

Year to date Pioneer is up a modest 17%. But, If there’s one take-away from my time here in San Antonio it’s that Pioneer should be on your list of Eagle Ford “buys.”

This company is using real-world technology, to produce more oil, at lower costs…something any investor would like to see.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

This American Energy Player Is A Buy… appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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