The Daily Reckoning November 19th


Fiat Money

Despite every effort by governments, the gap between rich and poor continues to grow. It is now the biggest it has ever been in history. All sorts of reasons for this have been proffered, but few, however, seem to realise that it is a simple, inevitable consequence of our system of money and credit. This video, a shorter version of which appears in the film The Four Horsemen (co-written by Dominic Frisby), explains…


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

One Real Estate Indicator is Yelling, “Buy”

I just locked down a 2.875% interest rate, fixed for the 15-year term of the mortgage. No points. With rates like these, I find myself rethinking the idea that I want to pay off my mortgage.

I can do a lot better than 2.875% investing the money. If I just sock it away in gold, I bet I’ll come out way ahead. Finding investments that clear such a low hurdle is not that difficult. This is true especially in commercial real estate, where you can use modest leverage and lock up tenants in long-term leases. You make money on the difference.

Right now is a great time to do this, if looked at from a historical perspective. The 10-year Treasury rate is 1.64% as I write. That is what investors are willing to accept to lend money to the US Treasury for a 10-year term. It seems absolutely crazy. But the Treasury rate we see is something of a forced smile.

The US Federal Reserve, as you know, pledges to keep rates low. So interest rates — probably the most important prices in the whole constellation of prices — are essentially the victim of price fixing. This will have sickening consequences down the road for the US economy, the stock market, the US dollar and more. But for now, it is a license to print money by borrowing cheaply and investing in property.

To see why, you have to understand that Treasury rates are the platforms on which borrowing rates stand. I was a banker before I started writing newsletters. I remember following the “Treasury curve” (all the Treasury rates for different terms) with great interest because we priced our loans off Treasury rates. So if I were in banking today, I might quote a rate of 250 basis points over the 10-year Treasury rate. That would be 1.64% plus 2.50%, for a rate of 4.14%. The rate would change as the Treasury rate changed, or until locked in.

So that’s why Treasury rates are so important. Now let’s look at cap rates.

A cap rate is a real estate term you should know. It’s easy and intuitive to understand. It is basically the return you earn as an owner in the property. So if you buy a building for a million bucks and it generates $100,000 in profits for you after expenses, then the property has a 10% cap rate. (The $100,000 divided by your $1 million purchase price.)

The cap rates available in the real estate world are attractive when viewed against the 10-year Treasury yield. A wider spread between the two means you can earn a wider profit margin. As you can see in the nearby chart, the post-2008 spread is the widest it’s been since the great 2002 bottom.

Spread Between Cap Rate and 10-Year Treasury Yield

From 2002, the NAREIT Index — composed of real estate investment trusts, or REITs —earned nearly a threefold total return over the next five years. That’s pretty good. And I think the odds favor you this time around as well.

There are differences, of course, and I don’t expect an exact replay. In 2002, the NAREIT Index yielded 7%, versus just 4% today. But the spread is more important than the raw yield. And the spread we have today is wide — if only artificially because of the actions of the Fed.


So I think this idea — as with almost all investment ideas — has a time window. When the low interest rate party starts to get into the wee hours and the barmen look ready to make a last call, we’ll have to diligently step for the exit to beat the rush. That won’t happen until at least 2014.

Another caveat to my bullish real estate call is that you have to be a little picky. Not everything is cheap. Already, some of the best properties in the biggest cities are at full price. You get much better value if you look at secondary cities.

As I’ve noted before, the opportunity in real estate is especially attractive because there is still a lot of debt coming due. Including 2012, and through 2016, there is $1.7 trillion in commercial real estate debt coming due. (In Europe, there is nearly trillion dollars of debt maturing in just the next three years.) Borrowers will have to refinance that pile. They will likely have to put cash in the deal — or sell. The latter creates great opportunities for buyers of real estate.

I’ll just give you an example. One of the companies I recommended to the subscribers of Capital & Crisis recently closed a $200 million two-year loan with an interest rate of 1.91%. This company could apply that money toward a project with a 12-13% cap rate. Clearly, the potential value-creation story here is simply tremendous.

Many other real estate companies have similar opportunities to deploy cash with a modest dollop of low-cost debt to go value hunting in real estate. In the process, they will create extraordinary returns, safely, for their shareholders.

My own 2.875% mortgage reminded me of the advantages afforded those with good credit and their ability to borrow at super-attractive rates. The same is true in the corporate world. Now is the best time to use these advantages in real estate since 2002.


Chris Mayer
for The Daily Reckoning

One Real Estate Indicator is Yelling, “Buy” appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

I, Twinkie

Oh how everyone (of a certain class and income) makes fun of the Twinkie, the ultimate symbol of modern food decadence and phoniness. I don’t get it. Have the critics ever tried one? They are so appealing and delicious: light, spongy, sweet, and creamy, all in a tiny package.

The news that the parent company Hostess was going out of business caused a huge run on Twinkies in my own community. Every store had an empty space where they should have been. The preppers were right: we should have stocked up for emergencies like this.

Meanwhile, the haters have been generating a legion of lies about Twinkies ever since food puritanism took over elite culture. Therefore, the urban myths are legion. You know them all. It can stand up to a nuclear holocaust. It is made entirely of artificial ingredients, the ultimate frankenfood. It is responsible for the obesity epidemic. And so on.

So don’t you just know that plenty of cultural snobs and anti-market ideologues were experiencing serious schadenfreude at the news that the labor unions have strangled Hostess? They are probably thrilled to kick this snake out of the American garden of Eden they are trying to create and cast the whole line of products to the Mexican outer darkness.

It pains me. It really does. More than half a billion Twinkies are sold every year. They bring incredible joy to multitudes who don’t happen to live next to an old-world French pastry shop. The market has been bringing this treat to the masses for 70 glorious years, and all that the cultural elite can do is sneer.

Let’s take just a moment to give the Twinkie a bit of respect, as a symbol of the complex economic structures of our time that cannot be replicated by you, me, or any government in the world. It takes a giant market, an extended order of trade, and an unfathomably complex division of labor to make a Twinkie and deliver it to your pallet.

No, it would never existed in an economy planned by the government. Moving mountains and shipping ingredients all over the world just to please you and me? It would never be allowed. Plus, there is no way a government planner could make it happen. The processes are too complex and carefully calibrated by the price system to be economically feasible.

Let’s quickly kill a few myths. Contrary to the claim, it is made of 100% natural ingredients. Everything in it comes from the earth — as much a product of mother nature as a carrot or bean sprout — with the only difference that it goes through a more extensive production process through time and space. And the reason for the long processes: to make a better product for you and me (which no one forces us to eat).

Twinkies have a remarkable and laudatory shelf life of 25 days, which is rather wonderful for something so puffy and moist. it stays fresh for a time long enough for you to consume it and enjoy it. Time was when hardtack was pretty much all that could last for long travels. Do the food puritans want us eating that rather than yummy sweets? (I don’t want to hear the answer.)


It’s a myth that it can survive a nuclear explosion but it seems to me that it would be a good thing if it could. Why should survivors of war-torn lands not have access to good food that contains essential proteins in eggs and a source of energy in its cane sugar?

And let’s give a hand for the Hostess company’s marketing too. Unlike the Apple and Monsanto, the Twinkie benefits from no monopoly protection from government. Anyone can make an imitation and plenty do, such as Mrs Freshley’s Gold Creme Cakes and Little Debbie’s Golden Cremes. Still, the Twinkie survives with a high name-brand status, or did until the unions killed it. This nicely demonstrates that “intellectual property” is not necessary for profitable production over a long period of time.

It turns out that there is an entire book that details what is in a Twinkie and how it is made. It is Twinkie, Deconstructed, by Steve Ettlinger (Hudson Street Press, 2007). He began the book to try to figure out what all the strange ingredients listed on the label actually are. There are 39 of them, and he devotes a chapter to each one, discovering one by one that every ingredient serves the essential purpose of making the product better. If he began the project with the goal of exposing this frankenfood, he came away from the long project with profound respect for the food item.

As Ettlinger tells the story, the Twinkie was the invention of Charles Dewar, vice president of Continental Bakeries, who figured out how to idle shortbread pans for a different purpose besides make a strawberry treat, which he could not make in the off season (in the old days, there were such things as off seasons). The basic ingredients were the same as they are now (wheat, sugar, soybeans, and eggs).

The name he came up with from seeing a billboard for “Twinkle-Toe Shoes.” It was a great plan, and the cakes were hugely popular, except for one thing. The shelf life (the holy grail of food retailing) was only two days. The market for the cake was huge but the company couldn’t satisfy the demand. It took decades of research and experimentation but the probably was finally solved in the 1950s, and that’s when the ingredient list became longer.

For most of the Twinkie bakeries around the country, the wheat for the cake flour (which is highly specialized) comes from small, family farms (including Amish farms) that have only a few employees, thanks to technology. The enrichment blend of ferrous sulfate and B vitamins is added to white flour on government mandate, presumably to end the disease pellagra. If you don’t like the extra vitamins and iron, call your congressman.

Ettinger explodes other myths such as that Twinkies roll off an assembly line and go straight to the packet. Not so. They are baked and browned just like regular cakes, and that’s because, well, they are regular cakes. But do they need to be so sweet? The sweeteners work as preservatives, adding color, and causing the ingredients to blend better. Plus, we like sugar. But not too much, which is why corn syrup is also in there because it doesn’t crystallize.

(If U.S. sugar tariffs didn’t drive up the price so high, the company might have been able to withstand union pressure more. Also, while I’m against corn subsidies as much as the next guy, every baker knows that corn syrup has its place. And anyone who blames it for the rise in obesity might take note that the average daily calorie intake of Americans has risen by 600 since 1980, and corn syrup only accounts for 10% of that. A more obvious factor: people eat vastly more because they can afford to and it’s there to eat.)

The demonized preservative in the Twinkie is the miracle food compound called sorbic acid. How the ancients would have loved this stuff! It’s sole job is to keep the mold away. Mold is the stuff that forms around moist areas such as your bathtub. If there isn’t anything in food that molds — think of pita chips — you don’t need it. But once you add leavenings, eggs, cream, and put a wet and spongy thing inside a plastic bag, you have got a serious mold issue. You know this if you have even baked a cake and let it sit out for a few days.

Sorbic acid — it was discovered in berries in 1859 in berries but today is made as a gentle petroleum product with less toxicity than salt — is the earth’s greatest enemy of mold. It is an amazing compound that makes grocery stores possible. If you see something like that in a bag that says “no preservatives,” run don’t walk. It could be deadly. As it is, the Twinkie only contains tiny trace amounts, just enough to make the product safe for you and me.

People today use the word preservative as if to insinuate that it is some poison that capitalistic corporations insert into our food to profit from poisoning us. Actually, people have struggled to preserve food since the beginning of time. The line between food that gives health and food that kills is a tiny turn of time, practically one minute to the next.

Modern preservatives were discovered at the dawn of modernity, at the height of the Renaissance when music and painting became truly beautiful, when the masses starting eating like kings, and when the common person first had a chance at social mobility. Preservatives meant that the average person had a greater chance at not dying from eating.

If you doubt it, put flour, milk, and egg in a bag and put it on the counter overnight. I wouldn’t suggest eating it.

Don’t tell me that Twinkies kill. They are made the way they are precisely so that the food will not kill — thereby solving a huge problem that has vexed us for millions of years. Preservatives preserve your life. As a result, anyone can have access to a legendary dessert treat without having to bake at home or live close by to a pastry shop.

The market works astonishingly hard for you to have a Twinkie. Its creation is the culmination of work that began in the ancient days and continues to now, and it combines technology, an unfathomably complex division of labor, trade among all nations from China to the Middle East to Oklahoma, and a level of capital sophistication that just blows the mind.

Put it down if you want to — that’s your right — but don’t take its existence for granted, much less celebrate when the coercive power of unions shut them down. The unions and sugar tariffs are doing to a great company what mold does to food. Sadly, we’ve got no ingredient to defend enterprise against parasitism. The U.S. is made that much worse off without the Twinkie. Our loss is Mexico’s gain.

Jeffrey Tucker

Original article posted on Laissez-Faire Today

I, Twinkie appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

An Event that Has Income Investors “Petrified”

“This could be absolutely huge!” says Jim Nelson of our income desk.

Seldom does Jim indulge in exclamation points, so we sat up and took notice when he tipped us off to a “fiscal cliff” issue you won’t hear about from the financial media.

First, the essential background: Remember the Simpson-Bowles commission, the “blue-ribbon panel” appointed by President Obama to solve the debt-and-deficit issue once and for all?

Well, they didn’t, because they could never come to terms… but now White House and Congressional negotiators are dusting off Simpson-Bowles as they try to tiptoe back from the edge come Dec. 31.

Amid a laundry list of proposals to change the tax code, Jim has helpfully highlighted one for you…

“That single line has one of the largest areas of fixed-income investors petrified,” says Jim.

“Matt Posner, legislative coordinator at Municipal Market Advisors, had this to say: ‘In the Senate, even before this election, there was bipartisan talk already that this 28% idea had legs.’ The 28% Posner is referring to is the maximum amount of muni bond interest an investor can deduct from taxable income under some more recent, more detailed proposals.

“Any proposal that would put the tax-exempt status of municipal and state bonds into question could have absolutely devastating effects. Even if, as the Simpson-Bowles report stated, only new issues fall into this tax status, we’ll still see billions of dollars in withdrawals.

“After current munis mature, there will be nowhere to roll those investments into if new ones are taxable — that whole allure of munis is their tax exemption. And with the run-up of bond prices across the board, those current muni investors will just take their gains and move on.


“That’s just one more nail in the fixed-income coffin,” says Jim… but it also opens the door to some advanced income solutions on his radar.

Dave Gonigam

The preceding article was excerpted from Agora Finacial’s 5 Min. Forecast. To read the entire episode, please feel free to do so here.

An Event that Has Income Investors “Petrified” appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Politics of Mr. Market

Mr. Market appears to be a Republican, or maybe a Libertarian, or even an Anarchist…but definitely not a Democrat…at least not anymore. Ever since the day Barack Obama reclaimed the White House for another four years, the stock market has done nothing but downtick.

This observation is not partisan; it is empirical. Since the day President Obama won the election, the S&P 500 Index has slumped more than 5%. One week does not make a trend, but it does raise an eyebrow. What’s wrong? Why the bad vibes? Is it something President Obama said? Is it something he didn’t say?

If forced to guess, we’d attribute the recent selloff to deeds, not words…Bi-partisan deeds. We’d attribute the recent selloff to the utter capriciousness and, yes, lawlessness, of what we have termed the post-capitalistic era of the American experiment.

Obama is not the cause; he is merely one of the players in a much larger tragedy. He is part of the script that asserts, “The Constitution is often a reliable guide. But in some cases, we know better.” Lots of Republicans participate in the same immorality tale.

There are the laws on the books…and then there are the unwritten rules. Increasingly, the unwritten rules trump the written laws. The written laws apply to the folks who cannot name their Congressman. The unwritten rules apply to the folks who own their Congressman…or possess some other corrupt form of influence and/or favoritism.

It has always been thus, Dear Reader. But in olden times, the cronies tended to conceal their corruption from the public and usually from the highest powers in the land. Today, shame is an anachronism. The cronies either conspire openly with the highest powers in the land — usually by portraying their frauds as a “national imperative.” At a minimum, the cronies understand that process-servers will never appear at their front doors, no matter how reprehensible their financial crime(s) may be.

Sporadic national injustice is as much a part of the American historical narrative as sporadic national self-sacrifice. Even while defeating the Nazis, for example, we imprisoned Japanese-American citizens. But in this example, as in numerous other examples, some kind of higher cause validated the transitory injustice. Today, however, the “higher good” is purely greed, while the injustices are widespread and reprehensible.

Four years ago, someone(s) manipulated the silver market for personal gain. The manipulations that produced those gains also produced losses for innocent and unwitting participants in the silver market. Then, one year ago, Jon Corzine, in his role as CEO of MF Global, authorized the use of client funds to satisfy MF Global’s own liabilities. $1.6 billion of “segregated” customer funds disappeared, and remain missing still.

These two frauds share a connection, according to our go-to gal for all things financial, Lauren Lyster, host of Capital Account. The connection is this: Fraud destroys the confidence that makes capitalism possible…especially when fraud goes unpunished. In fact, the English language has a word for that; it’s called “cronyism.”

The longer that cronyism operates in a financial market the more dysfunctional the market becomes. Eventually, investors lose confidence. Loss of confidence cripples risk-taking, which cripples entrepreneurialism, which, eventually, dooms capitalistic societies.

In a recent edition of Capital Account, Lyster draws a connection between manipulation in the silver market and the bankruptcy of MF Global. She asks her guest, Bart Chilton, CFTC Commissioner and author of Ponzimonium, if these particular frauds — and others like them — have severely damaged investor confidence.

“The numbers support a decline in confidence,” Lyster asserts. “The CME’s [Chicago Mercantile Exchange] Q3 profits are down 31%, volume has declined. Is this all a reflection of lost confidence in the wake of M.F. Global?”

“That and a whole laundry list that we don’t have time to get into,” Chilton replied. “The financial sector has messed up left and right over the last several years.”

“In general then, looking at these markets today,” Lyster continues, “would you say [to investors], ‘Don’t have faith in regulators. They may not be able to do their jobs. Don’t have faith in the laws that we hold dear or the rules, such as that segregated customer accounts will never be touched. Are all those things just, game off?”

Chilton, a regulator, answered, “Well, I wouldn’t say, ‘Don’t have confidence in regulators.’ But sometimes it takes us some time to act.”

Chilton goes on to argue for “new regulations.” Lyster counters by suggesting that we merely enforce the old regulations.

Hmmm…There’s a novel idea.


Eric Fry
for The Daily Reckoning

The Politics of Mr. Market appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

What’s Black, Dusty…And Set To Profit?

Coal isn’t going away any time soon.

What’s better, knowing this simple truth could be our ticket to profit.

Geez, have you seen the price of coal stocks lately? The way the chart looks for many of the U.S. majors, you’d think the industry is about to shut its doors.

But from what I’m seeing, that’s far from the case. And today I want to prove it to you…

Two big names in U.S. coal have been simply crushed this year:

Alpha Resources – down 66%
Arch Coal – Down 56%

Looking further out, the past five years represent an epic downfall for king coal. Get this. In 2008 Alpha was a $100 stock and Arch was a $70 stock – now both trade around 6 bucks a share. There must be blood in the streets!

Most other coal plays in the U.S. have had a similar fate, too. And fundamentally it makes some sense…

After all, coal is considered “dirty” energy. So legislation has not been favorable here in the U.S., especially under the Obama administration.


Plus, at the same time the coal industry is facing a formidable headwind from Washington, the shale gas boom has made coal-burning power plants and coal-using steel manufacturers virtually a thing of the past. Natural gas as you know, is now cheaper, more efficient and cleaner to burn. So when coal-fired power plants have the choice to switch, they do. Same goes with big steel manufacturers like U.S. Steel.

It’s a coal bloodbath! It’s also our perfect opportunity to buy low in this resilient power source…

You see, although U.S. coal use is dropping off the charts, demand from Asian and European markets is booming.

Just remember, coal is plentiful… easy to transport… and cheap. The way I see it, this versatile fuel source isn’t going anywhere – and rock-bottom prices for some of the industry’s best companies represent a true opportunity.

The best way to look at this situation is through U.S. coal exports. After all, the export numbers should be a good indication of where the industry is heading. Here’s a look at the recent export action…

Of note, 2012 is on pace to set the record for coal exports with a forecast of 125 million short tons, smashing the previous record, 113 million short tons, in 1981.

This is another reason why America’s future is very promising. Along with more petroleum product exports, and potential LNG exports and manufacturing exports the U.S. is seeing a huge rebound in coal exports!

When you take a close look at the ticker tape you can see who’s buying, too: China, India, Brazil and Europe are the major markets. Coal use in those markets has been ramping up of late. After all, those countries don’t have a bounty of cheap natural gas – so easily-transferable coal is the second best option. It’ll remain that way for years to come.

Coal stocks are due for a rebound. With shares beaten down to 3-year lows, now’s the time to look at your favorites. More on this to come…

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

What’s Black, Dusty…And Set To Profit? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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