The Daily Reckoning December 6th


The Egyptian Train

Opportunities are usually like a train. Any questions?

Opportunities are usually like a train. They arrive and then they depart…and disappear down the tracks. Choo-choo!!


But opportunities are not always the same kind of train. Some are Swiss trains. They arrive on time, leave on time. End of story. Some are like Amtrak trains. They arrive on time…or not. Leave on time…or not…and frequently stall on the tracks for 30 minutes or so, mid-journey, due to some power outage, signal failure or whatever.

But even Amtrak trains offer a relatively reliable arrival and departure schedule. The most puzzling opportunities — and often most important opportunities — are like an Egyptian train.

So unreliable is its arrival and departure that you begin to doubt that any such train actually exists. Last night, Joel Bowman shared his experience taking a train from Luxor to Cairo a few years back.

He and his family arrived at the station around 8:00 PM — about one hour before the scheduled arrival — then waited patiently for a few hours, then impatiently for a couple more hours…but the train did not arrive. Finally, Joel’s exasperated father demanded answers. He worked his way up the chain of command until getting to the top guy.

“When will the train arrive?” Joel’s father barked.

“I guarantee that it not arrive in less than five minutes,” the Egyptian train supervisor smiled.

The train finally arrived about two hours later, and lurched out of the station on its 8-hour trip to Cairo…that lasted about 14 hours.

On some level, everyone understands that opportunities are like trains. And yet, most folks live their lives as if opportunity is like a car, sitting in their garages, waiting for them to decide when to leave and where to go.

But that’s not true. There is no expression in the English language for the “Car that got away” or “Whoops, too late, the car’s left the garage.”

All of us have missed trains. Each of us has a story about a “train that left the station.” It might have been a certain job offer we wished we had taken, a certain date we wished we had not declined, a certain lie we wish we had not told, or a certain truth we wish we had not told.

There are moments in every life where binary options present themselves. A real life, “Let’s Make a Deal.” You must choose Door number one or the curtain where Carol Merrill is standing. One option opens to a chain of life-altering opportunities, the other opens to a goat on a leash — i.e., life-changing forgone opportunities.

If you think back on the most important trains you’ve missed in your life, I’d bet that very few of them were “Swiss trains” — predictable, definite choices between “Option A” and “Option B.” I’d even be willing to wager that few of them were Amtrak trains. Probably, for most of us, the most memorable missed train was an “Egyptian train.”

Either the opportunity seemed so grim and uninviting that we never honestly considered it in the first place or, alternatively, we actually bought a ticket and sat on the platform. But after so many hours had passed, we doubted ourselves and left.


Preparing for adversity is an Egyptian train ride, preparing for national adversity is, perhaps, the ultimate Egyptian train ride.

Friends and family rarely understand why you’d want to ride on that stupid thing in the first place. And then, even after you’ve “bought your ticket,” you sit and sit on the platform while time slowly passes. Everyone else goes about their lives. You look like an idiot.

To use the most infamous example, the opportunity to escape the Holocaust was certainly not a Swiss train; it was an Egyptian one. With few exceptions, the folks who saved themselves, inflicted severe hardships upon themselves by selling businesses, abandoning lifetime friends and familiar neighborhoods to relocate elsewhere.

And even after arriving on the platform of their “new lives,” they would have possessed very little confidence that they had made an intelligent decision. Many of them must have felt like paranoid idiots, in other words.

We say Bravo! for paranoid idiots. Both before and since Nazi Germany, many are the paranoid idiots who saved themselves, or at least their wealth, by boarding the clangy, rickety Egyptian train of emigration and/or international diversification.

The financial survivors of the serial financial crises of the last three decades were the folks who took steps well in advance to diversify their assets out of their national currencies and financial institutions into dollars and foreign financial institutions.

Argentineans understand this imperative viscerally, thanks to generations of fiscal mis-management and corruption. Americans don’t. We are accustomed to being the land of opportunity, the preeminent global super-power, the issuer of the world’s reserve currency. We are the cat’s meow. Why on earth would we ever board any train?

Maybe we shouldn’t, but sovereign dominance is never a lasting endeavor. The First become last…or at least no longer first.

The nearby chart illustrates this point very clearly. Seventeen years ago, three of the five so-called PIIGS nations, possessed AA credit ratings or better. At the same time, the Latin nations of Brazil, Chile and Columbia labored under “junk” credit ratings, or near-junk.

Fast-forward to the present, the once-highly-rated European nations in this chart have plummeted into the ranks of junk, or near-junk, credits. Conversely, the formerly junk Latin credits are now investment-grade.

Such is the way of nations…and always has been.

Responding to the millennia-long reality that no nation possesses a monopoly on opportunity, individuals throughout history have attempted to relocate from less desirable locations to more desirable locations. In other words, throughout history a certain percentage of the world’s inhabitants have felt they lost the “lottery of life,” or at least that they did not win it.

Warren Buffett, the Chairman of Berkshire Hathaway and latter-day champion of “fair taxation,” has said that anything good that happened to him could be traced back to the fact that he was born in the right country, the United States, at the right time (1930).

“I was born in 1930,” Buffett explained to a Fortune reporter a while back. “I won the ovarian lottery. I was born in the United States. … I was born white. … I was born male. … I had all kinds of luck.”

The same thing could be said of millions of Americans born in 1940, 1950, 1960, 1970 and 1980. But what about 2012? Still true?

To be continued…


Eric Fry
for The Daily Reckoning

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


Holiday Mirth, Economic Myth

“Commerce and religion and patriotism are all part of what we have come to know as the holidays,” opines Leigh Eric Schmidt, a humanities professor at Washington University in St. Louis.

“Consumption during the holiday season has come to have a kind of patriotic quality in the United States,” he tells The New York Times.

And it didn’t start with George W. Bush — who, as it turns out, never did tell Americans after Sept. 11 and in the midst of the 2001 recession to “go shopping.” What he did say in December 2006, as it was obvious to everyone the housing market was rolling over, was this:

“As we work with Congress in the coming year to chart a new course in Iraq and strengthen our military to meet the challenges of the 21st century, we must also work together to achieve important goals for the American people here at home. This work begins with keeping our economy growing. …and I encourage you all to go shopping more.”

“Party on!” we ad post-epochally.

As with many unintended phenomena in America, the idea that we can consume our way to wealth rooted itself firmly during the administration of the 32nd president of the United States, Franklin Delano Roosevelt.

“FDR,” says Harvard historian Lizabeth Cohen, “and many who advised him, felt that the best route out of the Depression was putting money in consumers’ pockets so they could, in a sense, buy us out of the Great Depression.”

In 1939, he went so far as to move up Thanksgiving that year by one week — from Nov. 30 to Nov. 23 — thus extending what’s come to be known as the “holiday shopping season.”

Eighteen months later, he acknowledged the scheme failed. “The experiment had not worked,” The New York Times reported in May 1941. People bought no more in 1939 than in 1938, extra shopping days notwithstanding.

The myth that consumers can spend their way out of a recession goes along with a half-truth repeated every time the media reports retail sales figures.

“Consumer spending drives nearly 70% of economic activity,” said a CBS News report when the numbers came out last Friday.

Well yes… if you consider the formula for GDP to be a valid measure of “economic activity.” Which, for various nefarious reasons we explored yesterday, it’s not.

But far be it from us to bust economic myths this holiday season. Our friend John Papola makes the point far more entertaining… and helps puts today’s 5 in the holiday mood:

Program note: We’ve recently teamed up with John and his crew at Emergent Order for several video projects. Among them is our documentary project Risk!. They’re going to help us take Risk! over the finish line. We plan to begin airing episodes of the new film early in 2013… stay tuned!

Addison Wiggin

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

Holiday Mirth, Economic Myth appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Why the Rich Immolate Themselves

In the Gilded Age of the late 19th century, the American rich walked tall. They dressed the part. Top hats, canes, tails, spats, you name it. They built glorious mansions for all the world to see. They traveled in style, and did so publicly. They were profiled in popular magazines. Indeed, they were idolized and studied and emulated.

Today, the rich are different. They wear jeans and sneakers and ratty-looking sweaters. If they build large homes, they make sure they are inaccessible and nearly invisible. They talk like the people. They affect the way of the common folk. They pretend to be like everyone else. If they are famously rich, they give vast sums away, sometimes to dubious causes. They even call for taxes on themselves.

What’s changed?

Here’s one theory: Property rights are weak today. This came to me in looking at the Index of Economic Freedom and how the U.S. is slipping further and further. The main reason given in the survey is that property rights are no longer secure here. The government can enter your factory and shut it down anytime. It can freeze your bank account. It can prevent mergers and acquisitions. It can slap on regulations that make your product unmarketable. Civil forfeitures are common.

The more property is vulnerable to looting by any source, the more people have the incentive to hide their wealth. In extreme cases, the rich might have a reason to publicly destroy their own wealth as a signal to would-be looters: I am not worth what you think I’m worth. This might be why so many among the rich are aggressive in their push for higher taxes. It’s a way of saying, “My money doesn’t matter to me, so it should not matter to you either. Leave me alone.”

I’m thinking about this whole subject because I just read an extremely interesting paper by economist Peter Leeson. It is called “Human Sacrifice.” He actually seeks to come up with an economic explanation for the persistence of human sacrifice in certain tribal conditions. It’s not such a surprising topic for him. He is, after all, the author of The Invisible Hook: The Hidden Economics of Pirates, a book that became one of the most praised and admired historical books in the last few years. It is also a fantastic read.

His new paper looks into the economics of human sacrifice. He focuses on the 19th-century experience of the Konds, an indigenous Indian people located in the eastern province of Orissa, India.

It was an agricultural community that variously prospered depending on weather conditions. Here, annual ritual sacrifice of human beings from other tribes, purchased with money collected from within the tribe, was practiced to great fanfare in opulent ceremonies. It was brutal and ghastly. The number of lives lost is uncountable, but very large, judging from every available report.

The whole thing was justified on religious grounds. But might have there been another reason?

Consider a seemingly unrelated fact: The great problem that vexed the Konds was intertribal relations. Within their own communities, they had peace and security. But outside of them, there was insecurity and chaos. It was not uncommon for the Konds to invade other tribes and steal what they could, nor was it uncommon for outsiders to do the same to them. All the tribes lived in fear of each other. Property rights were always vulnerable to invasion.

Professor Leeson tries to connect the dots here and make sense of the sacrifice in light of the insecurity of property rights. By putting on a hugely conspicuous display of disregarding something as valuable as a human being paid for with community money, Leeson theorizes, the tribe was attempting to broadcast the idea that there really was nothing of value to be stolen from them. This was a public act to ward off envy and invasion.


Tellingly, the sacrifice would take place in the middle of the agricultural season. “By sacri…ficing humans between the sowing and harvesting of crops, Kond communities destroyed wealth preemptively,” Leeson writes. “By sacrificing humans during the agricultural cycle but not appreciably after its completion, Kond communities destroyed wealth before other communities realized their output values and, in the event that those values incentivized aggression, before communities could mobilize for such aggression.”

Now, to illustrate the thesis, Leeson looks at the experience of how the practice came to end. Understandably, British colonial powers did everything they could to stop it. They tried moral suasion. They tried threatening violence They tried pure monetary payoffs. But nothing worked. The human sacrifices continued.

Finally, the colonial powers tried something more creative. They offered negotiation and justice services that would bring about peace and trade between tribes, provided that the Konds would stop the ritual sacrifice of human beings. The Konds readily accepted and the practice came to an end.

Professor Leeson briefly speculates on the implications here. How many others have made a show of poverty and wealth destruction as a means of disincentivizing violence? He suggests that this helps account for why monks in the Middle Ages made poverty part of the religious discipline. The Middle Ages were dangerous times to be rich, and monasteries were often exactly that. To avoid attracting looters, pillagers, and invaders, the monks took vows of poverty. (This is not to belittle the religious motivation, but only to say that it had a practical purpose as well.)

This makes a tremendous amount of sense to me.

And the applications of this idea are all around us. I know people who drive old cars when they could easily afford new ones because they want to avoid incentivizing theft. The same is true of people who could live in large houses in the center of town, but instead choose small apartments and keep their large real estate holdings out of public view.

This also explains what have come to be called “self-hating billionaires,” who conspicuously parade their attachment to welfare ideology and redistributionist politics. It’s all an effort of self-protection in times when property rights are so insecure. Better make a display of your disregard for wealth than tempt the state to disgorge you of all you own.

So think of this the next time that you see a sweater-clad Bill Gates giving hundreds of millions to far-flung charity causes that you know probably won’t amount to much. And consider that this might be a reason that CEOs of very successful companies like to follow Steve Jobs’ lead and dress in jeans and sneakers. They might even forgo the large house in favor of a minimalist apartment.

People do what they do to survive. When property rights are not secure, the well-to-do make public acts of self-immolation in order to survive.

Should the time come when property rights are secure again, we will see the behavior change. None of us will be truly safe until the rich again walk the streets with pride, live in huge houses in full view of the hoi polloi, and dress proper to their station in life.

After all, a world that is not safe for the rich is not safe for the rest of us either.

Jeffrey Tucker

Original article posted on Laissez-Faire Today 

Why the Rich Immolate Themselves appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

A Trip To Texas: Gold & Black Gold!

I recently spent a couple of days in Austin, at the University of Texas (UT), attending a conference on oil, natural gas and energy issues.

Incidentally, though, the first thing that grabbed my attention was gold!

That is, UT’s endowment holds 664,300 ounces of solid, physical gold…

According to Kyle Bass, one of the directors of the UT endowment fund, “Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can’t print any more of.”

Indeed. Good academic governance starts at the top, right? What’s not to like?

It’s a delightful place. Founded in 1883, UT today has about 50,000 undergraduate and graduate students, including over 5,000 in engineering. Overall, the school awards about 12,000 degrees per year, across many fields — arts and sciences, engineering, medicine, law, etc.

UT boasts a beautiful campus — spotless, actually — nicely laid out. The architecture has roots in Spanish Mission style, and there’s a thoughtful, consistent mix of old and new. I’m compelled to note, however, that the campus-dominating Darrell Royal Memorial Stadium sort of reminds me of the giant alien spaceship from the movie District 9.

The UT locale is right down Congress Street, a few blocks from the impressive Texas state capitol building. Everything seems to be close to everything else at UT. The overall school ambience is pleasant. The place is filled with friendly, smiling young people who walk tall, look you in the eye and say hello.

“The kids enjoy it here,” said one faculty member with whom I spoke. “You can sort of see it in the delayed graduation rates. Maybe it’s a sign of the times, but we have students who slow down toward the end. They just don’t want to leave. And then? When we finally push them out the door? Well, Austin has some of the best educated taxi drivers you’ll ever find.”

According to a senior faculty member from the Department of Engineering, UT has about 1,200 students majoring in mechanical engineering alone. Another faculty member told me that there are about 600 students majoring in geology. In recent years, these students have had little trouble finding great jobs. It was music to my ears.

All in all, it was a nice visit to a great school — truly a national asset. Oh, and the energy conference was fabulous too…

About That Energy Conference…

The conference took place in the UT Alumni Center, which is right across the street from the aforementioned Darrell Royal Memorial Stadium. Makes sense, right? Keep the football fans near and happy.

The first thing that happened when I walked into the main event room was that I (almost literally) bumped into Scott Tinker, the state geologist of Texas. I met Scott a few years back, at an energy conference in Cape Town.

Among other things, Scott is a third-generation oil guy. He worked in the oil industry before moving into academe. He’s on the geoscience faculty at UT. He’s a past president of the American Association of Petroleum Geologists (AAPG). He sits on the National Petroleum Council. And Scott is a wealth of information about all things having to do with hydrocarbons.

In his talk to the meeting, Scott started out with a very basic point. He showed a graph of global population growth and rising energy use. The image showed an astonishing correlation. “Energy is about people,” he noted, to lay the foundation point, which was/is that rising energy demand is a fact of life and will remain so for a long time to come. The question is where will the world get all that energy?

Then Scott moved to the technical side of things. He discussed recovering hydrocarbon molecules from “tight” formations like shales via hydraulic fracturing — “fracking.” The presentation touched an area known as “petrophysics,” or how fluids behave inside rocks. Scott’s talk included a series of slides taken at superhigh magnification, just to illustrate the literal size — or, better, lack of size — of the pores in those tight rocks.

When you frack a formation and attempt to recover gas or oil from shale, for example, you’re dealing with ultra-small pore volumes inside rocks — volumes that make the width of a human hair look like the Golden Gate Bridge. As a matter of chemistry and physics, shale oil/gas moves at scales where hydrocarbon molecules behave in odd ways, because they’re acting at just slightly over an atomic level.

The behavior of hydrocarbon molecules at near-atomic scales kicks up an entirely new set of questions. Basically, do the old, classical rules of oil and gas engineering still apply?

In other words, is Darcy’s law – describing the flow of a fluid through a porous medium – still valid? Hey, you can’t drift away during these technical points. This last item, about Darcy’s law, is key to understanding what’s happening out in the oil biz these days. It’s critical to understanding where things are headed — micro and macro.


Indeed, “This is not your father’s energy business,” said Scott Tinker, the state geologist of Texas, who knows a few things about the energy business. “Heck, it’s not the energy business that you and I grew up in,” he added — to a crowd of mostly… umm… older people.

“Here at the University of Texas, even among the faculty,” added Scott, “we don’t understand a lot of what’s happening in these tight rocks a whole lot better than our students. We’re figuring it out too.”

Which is not to say that a lot of people aren’t drilling and fracking a lot of wells in a lot of formations across the country and producing a lot of oil and gas. It’s just to say that the state of the art — even at a fabulous, historic, energy-focused legacy institution like UT — is still finding its learning curve.

It also means that “we” — as in the U.S. and the rest of the energy-consuming world — are a long way from being able to make clearheaded, long-term energy policy and investment decisions based on true understanding of the fracking technology upheaval.

The Drilling Treadmill

Recently, I described the complexity of drilling a new type of well and fracking the reservoir rock. I discussed fracking and the cost and complexity of these new wells and production techniques.

Back in October, I stated, “Even the ‘good’ case for fracking ought to make you stop and think. Fracked wells tend to cost five times what wells used to cost, and then your well depletes twice as fast. That makes for a factor of 10 in terms of reduced investment efficiency.”

Here’s another way of looking at it. Let’s graph out the rapid decline rates for new wells. Indeed, across a multitude of shale gas plays, fracked wells decline in the range of 40% during the first year of operation. Much of the estimated ultimate recovery (EUR) is upfront. Look at the production profiles in this image.

In other words, no sooner have you drilled your well than it’s instantly entering a phase of dramatic depletion. It’s Darcy’s law at work — or not, per Scott Tinker’s excellent points.

Now, if you’re an operator, suppose that your new well is producing all its product upfront, and it’s an era of historically low pricing. Whoops. You’ve drilled a well that needs $7 natural gas to pay off, but you’re collecting only $3.50 at the wellhead. There goes the whole economic case for what you’re doing.

And suppose you’re that operator, looking ahead to maintaining output. Your new well is fast depleting, so now you almost immediately must drill another well, with more wells to follow. Welcome to the drilling treadmill. What’s the capex? What’s the cash flow? Are you making money? Who’s your banker? What about those shareholders, eh?

Then looking ahead, by year five, you’ve got little more than a low-volume, high-maintenance “stripper” well. Great business model, right?

At a larger scale of thinking about it, is this kind of energy treadmill really the way to energize the national economy? What are the inputs versus what’s the value of the output? It gets into that “energy return on investment” (EROI) idea.

Just consider what it “costs” to drill and frack each well. Consider the geologic work, the geophysics, leasing, permitting, pre-drill engineering, site-construction, drilling, completion, fracking, operations and maintenance. Did I miss anything? Darn right I did… this is a SHORT list!

Now consider the externalities. Think of the land use issues. Think of the traffic from hauling stuff in and out, tearing up the roads and bridges. Think of the water use. Think of the pipeline grid that has to be built out. There’s a long list of other issues. All for wells that offer a quick pop of hydrocarbon and then decades of stripper status.

Yes, all of this makes for jobs for geologists, landmen, lawyers, bureaucrats, engineers, drillers, truck drivers, backhoe operators, well loggers and much more.

But long term, it tightens the economics of energy production. How investable is this? Good question.

That’s all for now. Thanks for reading.

Byron King

Original article posted on Daily Resource Hunter

A Trip To Texas: Gold & Black Gold! appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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