The Daily Reckoning October 29th

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Sandy for Stimulus

Markets are closed this afternoon. Maybe tomorrow too. There’s a storm a brewin’.

Investors must have been wondering how long the good weather would last…how long it could last. Stocks have been on the up and up since March of 2008, the nadir of the crisis. They’ve doubled from then ’till now. A 100% increase in four and a half years. And yet, looking around, things don’t seem to be twice as good now as they were then. The average American’s wage didn’t double between the Beijing and London Olympics. Productivity didn’t increase by 100% either. Nor is the workforce of today twice the size of the 2008 workforce.

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What then, aside from stocks, has doubled since those panicky days of four years ago? Student debt has been on a rampage recently, ticking over the $1 trillion (not a typo) in outstanding loans milestone earlier this year. But even that hasn’t doubled since 2008. What about national debt? The debt clock first rolled over the $10 trillion (also not a typo) during Obama’s first year in office. Since then it’s blown out to $16.2 trillion. A terrifying increase, to be sure…but still not a 100% increase. (Though we’re assured the republicrats are working hard to meet that goal.)

Oh wait! Here’s something…the food stamp line! From roughly 26 million participants back in 2008 to nearly 47 million today, the government’s SNAP program is very close to doubling in size. And, according to Obama’s Secretary of Agriculture Tom Vilsack, that’s something to be very proud of indeed.

“I should point out,” Vilsack said in an interview last month, “when you talk about the SNAP program or the food stamp program, you have to recognize that it’s also an economic stimulus. Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs. It’s the most direct stimulus you can get in the economy during these tough times.”

Vilsack’s “logic” is eerily similar to the permanently-startled Nancy Pelosi, who infamously characterized unemployment benefits as “one of the biggest stimuluses (sic) to our economy. Economists will tell you, this money is spent quickly. It injects demand into the economy, and it’s job creating. It creates jobs faster than almost any other initiative you can name.”

So there you have it. According to the politicos, a bull market in unemployment and food stamp program participation is actually good for the economy. A real Keynesian bonanza. We can only imagine the stimulus the coming hurricane will deliver to the eastern seaboard when it makes landfall sometime today.

So never mind battening down the hatches, Fellow Reckoners. It’s time to open the shutters and put your valuables out in the street, right in the path of destruction. The recovery hurricane is on its way, bringing with it wealth and abundance, one broken window at a time.

Regards,

Joel Bowman
for The Daily Reckoning

Sandy for Stimulus appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Swimming in the Jury Pool

As the old saying goes, no good deed goes unpunished. The chronicling of my courtroom rant against drug laws has prompted a few readers to question my libertarian bona fides and label me as statist, self-righteous grandstander.

My piece has given these readers a reason to take their eye off the state for the moment and focus their energy on the real enemy: me. For example, one reader calls for me to repent and search my soul. He has even produced graphics to spread all over the Web the describe me as an evil menace to society, the very cause of the tyranny of our times.

By way of background, as explained in my piece last week, I was called to jury “duty” for a marijuana case. I told the judge outright that to my mind, no crime occurred, that I would not convict and, further, that I would attempt to nullify that laws that would otherwise convict the defendant. The incident created a notable courtroom stir. I was not chosen for that jury.

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One reader writes in:

“Your piece in Laissez Faire show how you knowingly and willfully abandoned your fellow man to the thugs and their gulag. Why should anyone be on a jury to rescue you when you come into their cross hairs for one of the ‘three felonies a day’ that you commit? You self-righteously abandoned that kid and allowed aggressors to ruin his life forever… How will we ever have juries nullify anything if we are unwilling to suffer the crap necessary to rescue our fellow man? I hope you get charged with some federal crime and some ‘libertarian’ juror openly abandons you. Closing your heart toward this innocent man is despicable. You need to repent and write him a public letter of apology and circulate it to everyone that read your article in Laissez Faire.”

In the view of my interlocutor, my mission was to lie under oath, like those in the French underground. He is sure that I would be selected for the jury, despite there being less than a 25% chance. Then, once on the jury, I would need to lie under oath again. Next, my job would be to steer 11 other Southerners who oppose the legalization of marijuana into believing that it should be legalized. I would then talk them into defying the judge’s order and risk a contempt of court charge. Presto, after all of those stars have lined up, the marijuana trafficker is found not guilty, the drug war is over, and we all live happily ever after.

That’s his scenario. I suspect that this writer and those who sympathize with him have never stepped foot in a courtroom. But I may be wrong and I invite them to write in and tell us their jury nullification stories. How is it done in the real world? What did you say to the 11 other jurors to make them see it your way and risk a contempt of court charge?

Sure, if you don’t nullify, at least you can hang the jury and make the state try the case again. Again, you risk a contempt charge, all for delaying the inevitable. If you think that’s a good use of your time, great, go for it when you have a chance. But why take me to task for telling the truth? There are occasions when a nullification scenario can work, and I defended nullification to the judge. But it really is a matter of judgment and it varies case by case.

Regardless, I didn’t write the piece to pat myself on the back. More than a few people liked the story. Maybe they too have the fantasy of telling a judge, “The law is an ass.” It sounds easy on paper. Put yourself in a position to do it sometime. See if you pull the trigger. Those settings can be extremely intimidating.

Some question why I showed up in the first place, implying that its risk-free to just throw the summons away. But it’s not. Again, you risk a contempt of court charge. And besides, if libertarians think they can do good in the world, maybe it’s by providing a reasoned voice to a jury.

In the second week of jury duty, despite my admissions and outburst, I was still picked for a jury. It was a rape case. Go ahead and stop reading if you think that 1) I should be ashamed of providing slave labor to the state or 2) I should have worked to nullify rape laws.

The prosecutor told us repeatedly the case was simple. It was anything but. The state made it hard. The evidence offered prompted as many questions as it answered. Key witnesses provided testimony that was impossible to follow. We all wanted to raise our hands and ask questions during the proceedings, but that is not allowed. The state didn’t provide certain key witnesses or even inspect the crime scene.

So 12 strangers were left to sort this out. A man’s future was at stake. The state was at best lazy or at worst incompetent in its investigation and prosecution of the case. However, this didn’t matter. After two hours of spirited discussion, the group couldn’t have been further apart. I wondered how we could ever arrive at a verdict. When we left for the evening, the group was almost equally split. The state’s shoddy work was enough to convince more than half the jury.

The next morning, we began deliberations again. The same points were made all over (and over) again. After a sleepless night, three jurors had a change of heart. Another vote was taken, introducing a third verdict option. The group was still very far apart. We had deliberated for four hours. More discussion ensued, positions softened.

Ultimately, after five hours, a dozen strangers came to a verdict all could live with. We will likely never see each other again. But over two days, 12 reasonable people, although untrained, listened, considered, and came together to do a job.

The 12 people on that jury had nothing in common. Yet under the most difficult circumstances, they worked together as reasonable people to complete a task. They did this despite, not because of, the state-sponsored venue — a wonderful microcosm of the possibilities of leaving matters of justice and adjudication to society, rather than nationalizing the process to the state. The same decorum and reason should be common to those who purport to love liberty.

Yours,

Douglas French

Original article posted on Laissez-Faire Today

Swimming in the Jury Pool appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The $1 Gold Bar

As Chinese fakes go, this is as outrageous as it gets.

A factory in Wenzhou has been pumping out fake gold bars carrying the insignia of Australia’s highly respected Perth Mint.

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Like a knockoff Coach bag, the resemblance isn’t perfect… but the kicker is that the bars — surprise, surprise — aren’t made of gold. Or not much gold. “First, we did the silver plating, then the gold plating,” a worker told an undercover reporter from Australia’s Seven Network.

Gold at $1 an ounce!

The reporter paid A$300 for 300 bars. The real thing would have been worth A$510,000.

“If it looks like a deal that’s too good to refuse,” says the Perth Mint’s Ron Currie, “you should refuse it.”

Cheers,
Dave Gonigam

The $1 Gold Bar appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Feed the World, Make Money

Opportunities abound in feeding the world, from farmland to irrigation to processing crops to boosting the nutritional content of basic foods.

The outline of the story rests on a couple of estimates: a 30% increase in world population by 2050, which would necessitate a 70% increase in food production. Even if those numbers turn out to be only close-to-right, they provide a reliable base to build on, investment-wise.

Although this story is a long-term one, there are a few things happening right now that make opportunities in agriculture more urgent. On this topic, my friend Brad Farquhar at Assiniboia Capital in Regina, Saskatchewan, sent me a couple of interesting things over the weekend. Assiniboia Capital manages the largest farmland fund in Canada. As such, Brad is a great source of insight on agricultural markets. I’ve quoted him many times over the years.

Anyway, Brad sent over a newsletter called the Global AgInvesting Quarterly. The letter’s main story is on drought and how it will impact harvests this year. The US just had the worst drought in 50 years. Citing the US Drought Monitor, at the end of August, GAI Quarterly notes:

  • 53% of the US was in moderate drought or worse.
  • 65% of US farms were in areas of drought.
  • 70% of crop and livestock production were in areas of moderate or worse drought.

As a result of these severe drought conditions, the USDA recently cut harvest forecasts for corn and soybeans by 25% and 18%, respectively.

But it is not just the US that Old Man Drought has drained dry. Russia, India and the EU are all struggling with dry weather as well. The GAI points out that drought in Russia will slash this year’s wheat harvest by one quarter, while drought in Southern Europe will reduce the corn and soy crops in Serbia and Bosnia by at least 50%. In India, this year’s dry monsoon season has reduced the nation’s rise crop by 6%, compared to last year. GAI Quarterly speculates, with evidence both anecdotal and empirical, that we’ll see more dry weather in the US Corn Belt — a continuation of a near-term trend.

Meanwhile, the blistering heat that has been a bane to US agriculture has been a boon to Canadian agriculture. Warm weather across the Canadian Prairies has created more prime farming acreage. Brad reports on successful corn and soybean plantings for the first time in Saskatchewan. Brazil is another area that has escaped drought with expected record corn and soybean production.

Dealing with drought means more opportunity for irrigation. Lindsay Corp. is a good play on irrigation. I’ve recommended Lindsay Corp. on two separate occasions to the subscribers of Mayer’s Special Situations. On both occasions, the recommendation produced a double. I think the stock is pricey now, but it is one to watch and grab after the next leg down.

Another stock that plays well with the demand for food is Alliance Grain Traders (AGT:tsx; AGXXF:otcbb). The stock has slipped recently and is below book value of C$13.86 per share and pays 60 cents annually in dividends. At today’s price, that’s 4.7%.

Alliance, you may remember, processes staple foods like lentils, beans and chickpeas — called “pulses.” The company’s headquarters are in Regina, Saskatchewan. (Brad is a shareholder, by the way.) Alliance has facilities in the US, Turkey, South Africa, Australia and China. Long term, I’ve always liked the story here, and my enthusiasm is not diminished by the stock’s tough slog since I recommended it in the summer of 2011.

I visited with the company that summer and have had subsequent discussions with CEO, Murad Al-Katib. Murad always emphasizes his bigger vision for Alliance as a food ingredients company. On its website, Alliance recently posted an excellent presentation that really focused on this aspect of the company. I would like to share some highlights with you here.

Pulses have much to recommend them. In a world where water is a constraint, it takes much less water to produce a pound of pulses than other foods.

Take a look at how many gallons of water we use to produce the following foods:

• 1,857 gallons/lb of beef
• 756 gallons/lb of pork
• 469 gallons/lb of chicken
• 368 gallons/lb of peanuts
• 216 gallons/lb of soybeans
• 43 gallons/lb of pulses

Pulses, as you see, use the least amount of water. They are also high in protein and fiber, nutrient dense, low fat, gluten free and non-GMO. Pulses also make their own fertilizer by fixing the nitrogen in the soil and require half the nonrenewable energy to produce, compared to crops like wheat. Growing pulses, therefore, also lowers carbon emissions.

Food producers are starting to appreciate these things, as Murad predicted they would. I remember sitting in an Italian restaurant with Murad while he explained how one day food companies would mix pulses with wheat to make pasta. Well, that day has arrived.

Food companies are now making flour with pulses and mixing it to make not only pastas, but baked goods, snack foods and other packaged goods. Doing this allows them to boost the nutritional content of many foods. Look closely at the photo below, for example, especially the ingredients.

New Barilla Pasta

Yes, “legume flour blend” — you’ll see more of this, I guarantee it. And once one food producer like Barilla does it, they’ll all follow suit. After all, they can’t let a competitor make all those claims about their healthy pasta, while they stick to old-fashioned wheat flour!

Already, a number of food companies have declared ambitious goals: PepsiCo wants to reduce its water use in five years. Heinz wants to reduce carbon emissions by 20% by 2015. Wal-Mart, Carrefour, Tesco and others are all tracking things like water use and carbon emissions. Products that can help them meet those goals — like pulses — will get more attention.

So this is an exciting story. As Alliance is a global leader in processing pulses, it should see plenty of business in the years ahead. Traditionally, the markets of South Asia, Latin America and the Middle East and North Africa have been the main drivers. But the new emphasis on pulses as a food ingredient, and a water-efficient, protein-rich crop, opens up new markets in Europe, the US and China.

Meanwhile, Alliance has a global network second to none, which Murad and his team have put together over the last dozen years. This network gives it tremendous advantages in market intelligence, logistics, market diversification and its ability to manage risks.

The company has a great future. I have a lot of confidence in the management team, particularly its founder-in-chief, Murad Al-Katib. Insiders own a third of the stock. And I can tell you that Murad takes it personally that his stock is beaten up so badly. He is motivated to make good for his shareholders (of which he is one, and he has most of his net worth invested in Alliance).

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Alliance is a buy and a long-term core holding. Buy some, sit on it, collect the dividend and watch the story unfold.

Regards,

Chris Mayer,
for The Daily Reckoning

Feed the World, Make Money appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Is Big Gold In Big Trouble?

Last week I saw a startling interview with Goldcorp’s CEO.

To be honest, I don’t normally listen to the talking heads on TV. But if the fools at CNBC want to throw a few softball questions to the CEO of a top-10 gold producer, I’m all ears.

What I heard, though, was a little disconcerting. As you’ll see, it could signal another question mark above the heads of gold investors, especially when it comes to big gold…

The interview started out, right to the point…

When Goldcorp CEO, Chuck Jeannes was asked why there was a disconnect (in the past two years) between senior gold miners and the price of gold, he was quick to admit “it has been a quandary.”

You can see this “quandary” in the 2-year chart below…

The three big gold producers that we follow here on a regular basis (for no other reason other than being a great litmus test for the sector) have failed to keep up with the price of gold over a two year period.

Jeannes was quick to ring this up to two factors:

1) He says it was “much easier to put some optionality value in the equities when gold was trading at three or four or five hundred dollars, than it is when gold is trading at $1,700.” So in essence, the market had more to look forward to with gold prices sitting at multi-decade lows, than it does in today’s gold market.

2) He also admits that “10-15 years ago you really had no choice but to buy physical gold or the [gold miners.]” Today with the advent of ETFs more investment cash is flowing away from miners.

Both of these responses shed some light on the situation. But like an election-campaign president, Jeannes failed to address the elephant in the room: skyrocketing costs for senior producers.

How much are costs rising? You may remember the chart that we shared a few months ago:

There’s the rub. Big gold has done a poor job of keeping costs down – total costs per ounce are up almost 70% since 2008. Wow.

And while some companies like Barrick Gold have come out with a more aggressive capital discipline plan (something that Byron King has covered in these pages), it was startling to notice that Goldcorp’s CEO failed to mention cost control upfront.

While commenting on the trend of gold ounces getting more expensive to pull from the ground – a great opening for at least one comment on capital discipline if you ask me – Jeannes didn’t have anything to say about cost-cutting.

Instead he made two last points:

First, he steered the conversation towards scarcity. Specifically saying increasing costs would create more scarcity for the metal and improve sales revenue.

Last, he quipped that with more expensive gold (due to higher costs), the senior miners will have “more leverage” going forward.

Yikes. Although this was a short snippet of an interview it really rings home a startling truth about the mindset of some big gold miners. Cost-cutting still isn’t a priority for some of these guys!

Frankly, there’s no reason why any CEO, let alone Goldcorp’s, would want to cover up any cost-cutting initiatives. That said, you can I can only assume that Jeannes doesn’t have any in mind, or isn’t worried about costs!

We’ll have to wait to see how this starts to play out. But I’m leery to say the least.

Meanwhile there is some good news. Since late July we’ve seen a nice run-up in all the big miners – Goldcorp (GG) up 28%, Newmont (NEM) up 16% and Barrick (ABX) up 16%.

But let’s make sure we keep an eye on this situation. If this recent interview with Jeannes is any indication, equity investors may have some headwind.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

Is Big Gold In Big Trouble? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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