The Daily Reckoning October 23rd
It’s happened yet again: I found another movie presumably made for kids that easily beats many of this season’s predictable box-office yawners. The movie this time is The Pirates! Band of Misfits. It is the story of a socially complex group of failed pirates — people doing their best to make a life for themselves outside official channels — and their captain’s search for fame in the “Pirate of the Year” pageant.
This supposed kids movie is packed with subtleties, ironic humor, more struggles, and passing references to pop culture. It deals with big and important themes like friendship, betrayal, fame, and the love of money. It deftly handles politics, with an evil Queen Victoria and her loot.
It asks fundamental questions such as is it really stealing if you take it away from the government? It touches on hard questions of vocation and personality, and the difficulties of balancing the love for one’s work and the need for material provision.
The humor even deals with a some sophisticated understanding of probability theory, such as when the captain says concerning the pageant: “Every time I’ve entered, I’ve failed to win. So I must have a really good chance this time!”
Kids seem understand the captain’s fallacy. Do adults?
It’s hard to remember that last movie I saw that was made for adults that offered as much rich content. Feature films these days too often trod over well-packed earth: action, adventure, comedy, romance. Films are cranked out according to the plan and offer no surprises. Most bore me and I can’t wait for them to end. But Pirates was an absolute delight! I would say the same of Madagascar, Kung Fu Panda, Rango, Up, Tangled, and some others.
For the life of me, I don’t know why adults suffer through all the junk put out for their consumption when they could so easily be delighted by the movies supposedly made for kids.
Apparently, I’m not alone in this judgment. A Michigan nonprofit called the Dove Foundation has observed over many years that the average G-rated film in a five-year period was more than eight times more profitable than R-rated movies. Further, the average PG title was about five times more profitable.
The Dove Foundation speculates that family movies have a larger market because of the absence of sex and violence. Such films are more appealing to the largest swath of the bourgeoisie, they speculate. There might be something to that idea. But I’m thinking that there is a much simpler and less finger-wagging explanation that is not directly related to the moral content.
My explanation is this: Kids movies are better because the kids market is more demanding than the rest of the consumer market. And to put it plainly, kids are more clever than adults and they insist that the services they consume are top quality. Kids easily spot a fraud. The market is merely conforming to consumer demand. It’s that simple.
But can it really be true that kids have a keener sense in some areas than adults? Not in every area. Kids have ridiculously short time horizons, for example. But in other ways, they know things that we do not.
Here’s an example of where kids prove themselves much smarter than their parents. From an early age, and really from their first interactions with peers, kids become obsessed with their clothes. They have to have the right clothes made by the right makers and with the right insignias and logos.
Parents find this preposterous and maddening. One year, the kid will want a Hilfiger shirt and the next it must be Izod — but the exact same style and color! Surely, this is proof of the outrageous superficiality of the child’s mind, the way in which immaturity leads to mental fog, and the intense need for parents to constantly shape these dumbbells into people who can make sound judgments.
But there’s the problem: It turns out that the kids are more correct than their parents. Last year, Rob Nelissen and Marijn Meijers of Tilburg University in the Netherlands published a paper in Evolution and Human Behavior showing the result of empirical studies of designer labels. In every case, as a report in The Economist shows, it turns out that wearing the right label leads to more success in every area of life.
Volunteers were shown pictures of people with known designer labels and unknown labels but otherwise wearing the same clothes. People were asked which person enjoys a higher social and economic status. The designer label wearer won easily.
Silly? Not really. Researchers further tested by sending out people to do a survey. The survey workers who wore designer labels had 58% success in getting people to answer questions, but the same people with the same clothes and no label had only a 15% success rate. The implication: People wearing status logos have more credibility.
Then the researchers asked people to put themselves in the position of a boss and asked them to hire people from videos of job interviews. They overwhelming majority picked the people with fancy logos in view, and even rewarded them higher salaries.
Finally, people who collect for charity while wearing designer labels were able to collect more money than those who were wearing the same clothes without the labels. This is interesting because it challenges the first intuition that people just assume that the person wearing the label is richer. Actually, it is even deeper than that: People presume that the person is more trustworthy too. They further proved this point with a game that involved transferring money to people with and without labels.
Overall, then, people who wear designer labels are more successful, more trusted, paid more, and hired more and enjoy better lives. You can say that it ridiculous, and it probably is, but the kids are the objective ones here. They are intuiting the facts. And they are responding to the world around them in ways that are realistic and likely to get them where they want to be. Parents, completely oblivious to these important realities, try to stop this from happening, under the presumption that the kid is deluded.
My own theory is that the longer people live, the more they entrench themselves in their own biases. They get further and further from a central insight of microeconomics: All economic value is subjective. It is determined by no physical or aesthetic or seemingly rational facts. It is determined by the minds of individuals alone. Those valuations interact with the physical world with the output of objective prices. But what people love and loathe is ultimately their own decision.
Kids have fewer biases and hence are better able to discern emergent social norms rooted in subjective valuation that elude adults precisely because the longer we live, the more we are inclined to believe that we are right and the world around us is wrong. We become ever less willing to consider realities that are not our own. As a result, we miss and misunderstand economic trends.
So how can older people gain the special insight that kids have? I might suggest that we take that extra step of declining to watch movies that are dumb, even if they are made for us, and start watching movies that are smart, meaning that they are made for the kids. Here we will find the wit, the intelligence, the cleverness, the character development, the deeper moral issues, the real-life problems of love, friendship, betrayal, power, liberation, and individuality.
And there’s another thing one has to love about kids movies. They are fun. Blessed fun. Take your loved one and see the movie. Fun, if we seek it and embrace it, is something that no power on Earth should be permitted to take away from us.
Original article posted on Laissez-Faire Today
Paradise turned prison?
“Hawaii is a paradise for most visitors,” says The Associated Press. “But it was Wade Hicks Jr.’s prison for five days.”
As our “War on You” file continues to grow… we’re becoming a little overwhelmed. What once was a small pile in the corner of our office is now overflowing out of filing cabinets and taking on a life of its own. Here’s the latest:
After hitching a ride on a military flight to visit his wife, a U.S. Navy lieutenant, Mr. Hicks found himself on FBI’s no-fly list during his layover in Hawaii.
“How am I supposed to get off this island and go see my wife or go home?” Hicks asked a U.S. Immigration and Customs Enforcement agent and bearer of bad news.
Her response? “I don’t know.”
“How could someone on a list intelligence officials use to inform counterterrorism investigations successfully fly standby on an Air Force flight?” AP asks.
After confirming they had the right person and not being told why, Hicks “wonders whether his controversial views on the Sept. 11 terrorist attacks played a role,” AP writes. “Hicks said he disagrees with the 9/11 Commission’s conclusions about the attacks.”
The mystery may remain forever unresolved, as AP points out, “The government doesn’t disclose who’s on the list or why someone might have been placed on it.”
“It’s scary to know that something like this can happen in a free country,” Mr. Hicks said.
“You’re not accused of any crime. You haven’t been contacted by anyone. No investigation has been done. No due process has taken place.”
Although Hicks wasn’t allowed to fly, he was able to score a hotel room at the Pearl Harbor naval base while he figured things out. A base full of submarines, cruisers and destroyers, mind you.
After considering private planes, cruise ships and even a fishing boat from Alaska, Hicks finally received a call five days later informing him he was clear to fly.
Before all is said and done, according to AP, Hicks “plans to seek to recoup his added travel costs from the government.”
Heh… good luck.
In our analogy, the event horizon is relatively easy to pinpoint. It is what Rogoff and Reinhart call the “Bang!” moment, when a country loses the confidence of the bond market. For Russia it came at 12% of debt-to-GDP in 1998. Japan is at 230% of debt-to-GDP and rising, even as its population falls — the Bang! moment approaches. Obviously, Greece had its moment several years ago. Spain lost effective access to the bond market last year, minus European Central Bank intervention. Other countries will follow.
As an aside, it makes no difference how the debt was accumulated. The black holes of debt in Greece and in Argentina had completely different origins from those of Spain or Sweden or Canada (the latter two in the early ’90s). The Spanish problem did not originate because of too much government spending; it developed because of a housing bubble of epic proportions. 17% of the working population was employed in the housing industry when it collapsed. Is it any wonder that unemployment is now 25%? If unemployment is 25%, that both raises the cost of government services and reduces revenues by proportionate amounts.
The policy problem is, how do you counteract the negative pull of a black hole of debt before it’s too late? How do you muster the “escape velocity” to get back to a growing economy and a falling deficit — or, dare we say, even a surplus to pay down the old debt? How do you reconcile the competing forces of insufficient growth and too much debt?
The problem is not merely one of insufficient spending: the key problem is insufficient income. By definition, income has to come before spending. You can take money from one source and give it to another, but that is not organic growth. We typically think of organic growth as only having to do with individual companies, but I think the concept also applies to countries. The organic growth of a country can come from natural circumstances like energy resources or an equable climate or land conducive to agricultural production, or it can come from developing an educated populace. There are many sources of potential organic growth: energy, tourism, technology, manufacturing, agriculture, trade, banking, etc.
While deficit spending can help bridge a national economy through a recession, normal business growth must eventually take over if the country is to prosper. Keynesian theory prescribed deficit spending during times of business recessions and the accumulation of surpluses during good times, in order to be able to pay down debts that would inevitably accrue down the road. The problem is that the model developed by Keynesian theory begins to break down as we near the event horizon of a black hole of debt.
Deficit spending is a wonderful prescription for Spain, but it begs the question of who will pay off the deficit once Spain has lost the confidence of the bond market. Is it the responsibility of the rest of Europe to pay for Spain or Greece? Or Italy or France, or whatever country chooses not to deal with its own internal issues?
Deficit spending can be a useful tool in countries with a central bank, such as the US. But at what point does borrowing from the future (and our children) constitute a failure to deal with our own lack of political will in regards to our spending and taxation policies? There is a difference, as I think Hyman Minsky would point out, between borrowing money for infrastructure spending that will benefit our children and borrowing money to spend on ourselves today, with no future benefit.
In my mind I am playing reruns of old Star Trek episodes with Capt. Kirk shouting, “Dammit, Scotty, you’ve got to give me more power!” as they try to escape a looming black hole. Except, in our national version it’s Paul Krugman playing Capt. Kirk (badly), demanding that Ben Bernanke provide even more QE and Congress more stimulus spending. (I should note that Paul Krugman, like myself, is a science fiction aficionado. That may be the one philosophical point, a singularity if you will, that we agree on.) Of course, the Republicans (Romney) are playing the part of Scotty, yelling back at Kirk, “Captain, I can’t give you any more power! The engines are going to blow!”
The deficit has to be controlled, of course. To continue on the current path will only feed our Black Hole of Debt even more “mass,” making it that much harder to escape from. But to try and power away (cutting the deficit radically) all at once will blow the engines of the economy. Suddenly reducing the deficit by 8% of GDP, either by cutting spending or raising taxes, is a prescription for an almost immediate depression. It’s just basic math.
As I outline in my book Endgame (shameless plug), each country has to find its own path. But it’s clear that Spain, like Greece, is simply going to have to default on part of its debt. So will Ireland and Portugal. Japan will resort to printing money in amounts that will boggle the imagination and terrify the world as they finally come to grips with the fact that they must deal with their deficit spending.
The Glide Path
The US still has the chance to pursue what I call the “glide path” option. We can reduce the deficit slowly, by say 1% a year, while aggressively pursuing organic growth policies such as unleashing the energy and biotechnology sectors, providing certainty to small businesses about government healthcare policies, reducing the regulatory burden on small businesses and encouraging new business startups, creating a competitive corporate tax environment (a much lower corporate tax with no deductions for anything, including oil-depletion allowances), implementing a pro-growth tax policy, etc.
We can balance the budget within five years. If the bond market perceived that the US was clearly committed to a balanced budget, rates would remain low, the dollar would be stronger, and we would steam away from the black hole. I would like to see something like Simpson-Bowles, with an even more radically restructured tax policy. Healthcare is clearly the challenge, but a compromise can be crafted, as has been demonstrated by the several bipartisan proposals that have been sponsored by conservative Republicans and liberal Democrats. The key word is compromise.
The crucial outcome in the wake of the upcoming election will not be whether we end up with a Republican or a Democratic budget, but whether we can achieve the compromise that will be needed to get us on a glide path to a balanced budget.
If a compromise is not crafted in 2013, how will one be crafted in 2014, which is an election year? 2015 may be too late, as the bond market will watch Europe and Japan implode and wonder why the US is any different. Remember, the event horizon is determined by the confidence of the bond market in the willingness and ability of a country to pay its debts with a currency that has a value that can be maintained. Trillion-dollar deficits for the next three years will call into question the value of the dollar. That will mean higher interest rates, which will mean a much bigger, more deadly black hole.
I should note that something similar to the glide path was tried during the Clinton administration. Spending growth was controlled, and the economy was allowed to grow its way out of debt. While the US economy is fundamentally weaker today than it was then, it should be possible for the US free-market economy to once again become an engine of growth.
I think the analogy of an Economic Singularity is a good one. The Black Hole of Debt simply overwhelms the ability of current economic theories to craft solutions based on past performance. Each country will have to find its own unique way to achieve escape velocity from its own particular black hole. That can be through a combination of reducing the debt (the size of the black hole) and fostering growth. Even countries that do not have such a problem will have to deal with the black holes in their vicinity. As an example, Finland is part of the eurozone and finds itself gravitationally affected by the black holes of debt created by its fellow eurozone members. And China has recently seen its exports to Europe drop by almost 12%. I would imagine that has been more or less the experience of most countries that export to Europe.
In science fiction novels, a spaceship’s straying too close to a black hole typically results in no spaceship. There are also hundreds of examples of what happens to nations that drift too close to the Black Hole of Debt. None of the instances are pretty; they all end in tears. For countries that have been trapped in the gravity well of debt, there is only the pain that comes with restructuring. It is all too sad.
The Eagle Ford shale play in South Texas is set to pay dividends, quite literally!
Producers in this booming shale patch are already cashing in. They’ve locked in lease agreements, permitting and have already figured out the best way to get oil and gas to market.
Indeed, the “harvest” phase of this energy cycle is getting under way. Better yet, for resource investors like us, now’s the time to get in on a long-term stream of payouts…
If you remember from our conversation yesterday, there are three evident stages in America’s shale boom: discovery, optimization, harvest.
The discovery phase leads to wildcat profit opportunities. The optimization phase is where you can lock-in on efficient producers and look for more reliable share price growth.
Today I want to discuss the harvest phase, which is where you can cash in on a dividend stream from the flow of oil & gas to market.
To get a grasp on this lucrative stage and the budding opportunities for America’s energy future, let’s take a look at the anticipated oil flow…
Pipeline companies are great place to ping for this data. These companies are always monitoring the future flow of crude oil (and natural gas.) After all, it’s their business to anticipate and plan for pipeline projects… they want to be in front of the energy flow.
According to Greg Armstrong, CEO of Plains All American Pipeline LP (the 4th largest MLP by market cap in the U.S.), production from the Eagle Ford could reach 1.8 million barrels per day (bpd) in “just a few years.” That estimate is a bit more ambitious than other production forecasts, which place Eagle Ford production above 1.6 million bpd in the next five years or so.
But whether it’s 1.6 or 1.8 million bpd, the Eagle Ford production ramp-up will put the rest of North America to shame.
Here’s how it stacks up:
If you’re looking for growth, look to South Texas.
The Eagle Ford is set to ramp up production of oil (not to mention natural gas and associated “wet” byproducts.)
Truly, I wouldn’t have to go too far out on the limb to say that a company like Plains All American (PAA) with assets throughout the formation, will be quite busy in the years to come. Plains holds assets in all of the growth plays listed above – including pipelines, storage, railcars, trucks and barges.
When the oil starts to really flow in South Texas, and across the country, companies like Plains are well positioned to profit. More importantly, for our “harvest” phase discussion, Plains will be able to provide a steady dividend, which today yields around 5%.
Concentrating on the Eagle Ford, Plains is just one of the many opportunities that could offer you stable income as the oil and gas begins to flow…
Another company to look at during this harvest phase is DCP Midstream (DCP.)
DCP has been a midstream player in Texas’s natural gas scene for years, and today finds itself right in the middle of a booming Eagle Ford play. [Editor’s note: in case you’re not familiar with the oil and gas lingo, “midstream” is the logistical stage of gathering and processing oil and gas. While the “upstream” players pull the energy from the ground, the midstream guys gather and process it. From there the “downstream” activities commence, which include selling and distribution.]
Of note, DCP is the No. #1 natural gas liquids (NGL) producer in the U.S. — holding approximately 17% of the market. NGLs are the “wet” byproducts that are produced alongside oil and gas in the Eagle Ford – and with demand for these newly-found byproducts coming out of the woodwork, it’s a profitable business to be sure. Along with NGL processing, the company also holds key pipelines and other midstream assets in the heart of the Eagle Ford play.
As an aside, let me remind you that the Eagle Ford is producing an enormous amount of dry natural gas, along with the oil production. From what I’m hearing the estimated ultimate recovery (EUR) for natural gas-specific wells is even higher than oil-specific wells. Production should be ramping up in the years to come, and even with moderate to low natural gas prices, midstream players can cash in on this boom.
Heck, it wouldn’t be an understatement to say that almost every midstream player in the Eagle Ford area is set to cash in. But here at the beginning of the boom, we’ll be much better served looking at a top-tier company, like DCP.
Since 2009, DCP has gradually increased its dividend payouts. At its current share price, the company supports a solid 5.75% dividend. And I’d be remiss not to tell you about DCP’s 3-year uptrend, after recovering from 2008’s market meltdown, prices are still up 75% since October 2009.
To sum up the situation we’re seeing in the Eagle Ford — and across America’s newly found shale plays — there are plenty of impending bottlenecks. And to mix up my metaphors a bit, for the right midstream players these bottlenecks are cash cows! Indeed, as I type, companies are jockeying for a position to help move crude oil and natural gas to market in South Texas.
But, let me be clear on one point. Profiting from the harvest phase isn’t as easy as it seems. Don’t just run out and grab any 8% dividend-paying company you can find. For instance, plenty of companies with those too-good-to-be-true dividends didn’t make today’s short list of opportunities (for good reason.)
Instead of looking at just a dividend payout, concentrate on a company’s long-term reliability. Have share prices held steady or increased? Has the company been able to keep payments increasing over time?
These are all questions you need to ask yourself before you plunk down any money on dividend payers.
With that said, now’s certainly a great time to go hunting.
Keep your boots muddy,
Original article posted on Daily Resource Hunter