The Daily Reckoning December 7th


What If?

Is America still the undisputed “Numero Uno”? Not according to the Economist Intelligence Unit’s (EIU) “Where to be Born Index.” A quarter of a century ago, America topped the list. Today, it is #16.

This quirky EIU Index attempts to measure which country will provide the best opportunities for a healthy, safe and prosperous life in the years ahead. The index links the results of subjective life-satisfaction surveys — how happy people say they are — to objective determinants of the quality of life across countries. And the idea is to forecast which country would be best to inhabit 18 years out, when a baby born today becomes an adult.


Obviously, the EIU’s assessment is not the last word on a nation’s quality of life, but it does at least provide food for thought…and it does corroborate a growing body of empirical data that suggest the American quality of life has degraded somewhat.

While playing around with some numbers on the back of a Rancho Santana cocktail napkin, for example, we stumbled upon some shocking contrasts between Nicaragua and the US — shocking to us, at least.

Last year, the Supplemental Nutrition Assistance Program (SNAP) — i.e. food stamp program — in the United States spent $7.4 billion more than it did the year before. $7.4 billion happens to be almost identical to the entire GDP of Nicaragua, a nation of 5.9 million inhabitants. SNAP used its incremental $7.4 billion to feed 4.4 million of America’s poorest citizens. Meanwhile, all 5.9 million Nicaraguans — rich and poor alike — managed to “live on” $7.4 billion.

Here in Nicaragua, the government is too poor to operate a SNAP program. In fact, the Nicaraguan government is too poor to do much of anything. Not only is it too poor to feed its own poor, but it is also too poor to create a maze of government agencies to hassle its citizenry. The government’s entire annual budget is only about $1.6 billion, which is less than 1/50th the size of the SNAP budget.

These comparisons tell us little about how things ought to be, but they tell us a lot about how things are. Specifically, they tell us that the United States spends a spectacular amount of money trying to “manage poverty.” And yet, the more the US tries to manage poverty, the more poverty spreads. The ever-expanding budget of the FNS does not beget self-reliance; it begets ever-expanding government reliance.

During the last four years, the number of Americans receiving food stamps has doubled from 23 million to 46 million, while the direct cost of providing that support has skyrocketed from $30 billion annually to $71 billion. (The FNS’ total budget topped $100 billion this year).

Number of Americans Receiving Food Stamps vs. Americans With Full-Time Jobs

To continue the comparisons between the rich Americans and the poor Nicaraguans, the US spends 4.7% of its GDP on its military, while Nicaragua spends only 0.7% of its GDP. The US employs 13 times more police per 100,000 citizens than Nicaragua — 233 vs. 18. And yet, very few US cities are 13 times safer than Managua — El Paso, Texas being one of the rare exceptions.

Number of Homicides in Various Areas

These sharp contrasts are exactly what one would expect when comparing the world’s wealthiest nation to the Western Hemisphere’s second poorest nation (top prize in that category falls to Haiti). Similarly, it should come as no surprise that the median income in Nicaragua is only 1/10th of what we Americans call the “poverty line.”

Net-net, the US is still a very, very rich country and Nicaragua is still a very, very poor country. That said; several gauges of America’s economic condition have been deteriorating over recent years, at least relative to similar gauges of Nicaragua’s economic trajectory.

As the chart below illustrates, Nicaraguan GDP growth has staged a remarkable rebound from the war-torn decade of the 1980s. Meanwhile, US GDP growth has been downshifting from its robust pace of the ’80s and ’90s.

US vs. Nicaraguan GDP Growth for the Last Three Decades


More recently, the Nicaraguan economy has been producing rapid employment growth, while the US has been producing rapid unemployment growth.

Change in Employment, US vs. Nicaragua

Regrettably, as the US private sector struggles to grow, the US government’s debt burden is soaring. During the last six years, America’s federal indebtedness has increased from less than 70% of GDP to more than 100%. During that identical timeframe, Nicaragua’s government debt burden has decreased from more than 110% of GDP to nearly 70%.

Government Debt-to-GDP, US vs. Nicaragua

Why look at these trends?

Because the next 25 years will not be like the last 25 years, guaranteed. The world always changes…but not always for the better. What if that portion of the world called “America” is changing for the worse?

Just asking.


Eric Fry
for The Daily Reckoning

What If? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Holy Hangman Still Kills

Half of Americans think that government is their benefactor. The other half think it is a sworn enemy. Depending on the day and the issue, they can and do switch sides.

These hydraulics are at work in the never-ending arguments about taxes, medical care, marijuana, education, war — you name it. This is how government pits one group against another in mutual pillaging, like primitive tribes of people who have yet to discover how to make stuff, trade, and get along.

The struggle is tearing up civilization in an epic battle that neither side will win. The only real victor in this battle is the government itself.

“It is not that governments begin in virtue only to end in sin,” said one astute observer. “Government begins by protecting some against others and ends up protecting itself against everyone.”

These are the words of Robert LeFevre, a brilliant writer who lived from 1911-1986. He had huge influence in his day, long before these views became mainstream among the smart set. He saw everything government does through this lens of divide and conquer. He explained that war and empire are every bit as dangerous to human flourishing as transfer payments, regulations, and loose money policies. He explain the true nature of government as few others have.

His masterful book The Nature of Man and His Government was published in 1959. I think of this as part two of Bastiat’s The Law. It’s that good.

It astonishes me that something so clear, so prophetic, so penetrating, yet so calmly rational could have been written a half-century ago, at a time when most people think government was pretty darn small (and it was, compared with today’s). This book anticipated our times as few books in his time did.

It’s not really an anti-government screed at all. LeFevre said that government is a tool and nothing more. It is created by people who are fearful of something (invasion, old age, poisoning, violence, etc.). They expect government to take away their fears. Instead, it adds to them.

That’s because government can do only one thing: coerce people. It does this by making and enforcing ever more laws that steal your property and run your life. The more it does this, the less people have money and freedom to run their own lives.


Many people deny this. They imagine the government is the means toward social justice, global peace, equality for all, morality and virtue, health and well-being, racial purity, and prosperity forever without recessions.

True, none of this ever happens, no matter how much money and power the government is granted. But people are not deterred. Why? Because they have not yet come to terms with the truth that LeFevre explains in this short book.

And that is the root of the vast number of social and economic problems we have today. It doesn’t matter who is running the show, wrote LeFevre, any more than it matters who is operating the guillotine. The government is doing what governments do: divide and conquer society and grind the people’s rights and liberties into the dirt.

The mistake, he said, was in creating one in the first place.

Why not just create government and put restraints in place? Well, that’s what the Founding generation attempted to do with the U.S. Constitution. They created an apparatus that deliberately disabled the ability of government to do what it does. There were three branches, complex systems for making new laws, and checks and balances running every which way as in a Rube Goldberg machine.

Old-world observers laughed and said that this was the most convoluted system of government they had ever seen, one that would guarantee that government would never work very well. What they didn’t understand was that that was precisely the point.

But in time, government broke free of the limits. It was bound to happen.

As LeFevre said, government “is an instrument of force and coercion. And there can never be an instrument of force and coercion which will consciously restrain itself. It must be restrained. Yet there is no tool capable of such restraint. For any type of tool, whatever its nature, which is allegedly formed to restrain and contain government, would, by its own nature, simply become a government’s government.”

People say that government has gone mad in our times. LeFevre disagreed. “Government which passes and enforces endless rules and codes is not out of character when it does so,” he wrote. “It is in character. That is the way any government operates. And the longer a given government endures, the more numerous will be the laws it enacts. It is the business of government to pass laws and to enforce them.”

Keep in mind when you read the following that we are talking about 1959 here:

“Today governments concern themselves in general not with criminals, but with law-abiding citizens. Every citizen is a victim of the aggressive tactics of government… the average person today, buttressed in by government, surrounded and overshadowed by government, finds himself a lawbreaker several times during an average day. And this fact turns him from being a law-abiding citizen into a lawbreaking citizen, and equates him with any criminal who, in fact, breaks a law with aggressive intent.”

Yes, but what about the absurdities of the TSA today? What of the excesses of the police, the aggressiveness of the regulators, the wickedness of the bureaucrats, and the invasiveness of the national spy network?

LeFevre responds: “Government has but a single standard: obedience. Its decrees, good, bad, or indifferent, are enforceable. And the men in government cannot recognize a law which need not be enforced. If the government has adopted a policy, the policy must be carried out, even though one policy may be aimed at social stability and the other at social injustice.”

I’m thinking of my recent investigations into how the car came to be regulated. One group of regulators wanted it to be safer. Another group wanted it to consume less gas. The goals are in tension, even contradictory. They both prevailed, and the results are absurd. They created a mess and, in so doing, shut off the creative forces of the market to invent new and better things.

This is only one case. There are millions more. We are surrounded by the distortions born of government rule. We are poorer, sicker, and less civilized than we would otherwise be. And what’s especially sad is that we don’t necessarily know what we are missing, because government makes invention and creation illegal in any sector it fully controls.

LeFevre says it again and again. Government was created by people as a tool. That tool has not accomplished its goal.

“Government, when it is examined, turns out to be nothing more nor less than a group of fallible men with the political force to act as though they were infallible.”

And so he says with positive optimism: It can similarly be uncreated. It can be undone. It can be dismantled. We can have a society based on voluntary action and trade. We need only to make that choice.

I’m thrilled that this book is going to reach a totally new audience with this Laissez Faire Club release. It is packed with wisdom and accessible to everyone. Maybe this release will also go some distance toward illustrating that Robert LeFevre should rank among the 20th century’s most overlooked prophets of both the problem and the solution to our contemporary problems.

Jeffrey Tucker

Original article posted on Laissez-Faire Today 

The Holy Hangman Still Kills appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Natural Gas: To Export Or Not To Export

It’s been a big week for natural gas, which means one thing: big opportunity for you!

Two telling reports have dropped out of the stork’s mouth and landed on your editor’s desk.

Both have to do with the future of natural gas. And both also lead to an all-but-guaranteed way to profit from the cheap and abundant fuel source…

If you’ve been looking for a 5-year price forecast in natural gas – you’ll want to take note of the Energy Information Administration’s 2013 Annual Energy Outlook (early-release.)

“With increasing natural gas production, reflecting continued success in tapping the nation’s extensive shale gas resource, Henry Hub spot natural gas prices remain below $4 per million Btu (2011 dollars) through 2018” the report portends.

From my perch this seems to be the most realistic estimate for prices ($3-5 in the next 5 years) – especially considering we’ve barely scratched the surface of our natural gas riches. Take a look at it in chart form:


And if crude prices remain resilient, which I believe they will (anywhere from $75-100), we can expect to see continued downward pressure on natural gas prices. The reason is simple, this from the EIA:

“The resilience of drilling activity, despite low natural gas prices, is in part a result of high crude oil prices, which significantly improve the economics of natural gas plays that have relatively high liquids content (crude oil, lease condensates, and natural gas liquids). Also contributing to growing production volumes are improved drilling efficiencies, which result in a greater number of wells being drilled more quickly, with fewer rigs and higher initial production rates.”

It’s good to see that most of the major research outfits are giving credence to the abundance of America’s shale gas. That said, cheap natural gas looks to be in our future for at least the next 5 years.

And brings us to the second important report of the week…

According to a report from the National Economic Research Associates (NERA) the U.S. would enjoy a “net benefit” from exporting natural gas.

This government-commissioned report is a ground shifter, and will likely lead president Obama to OK liquefied natural gas (LNG) exports in the coming year.

Is it the right call? You can be the judge of that, but here are a few points to consider…

Although tons of money, effort and smarts go into producing a comprehensive write-up (the NERA report for instance is over 215 pages!), just a few wrong variables or incorrect assumptions can kill the whole thing. I like to think of it as tilting a moon-rocket a few inches off its launch pad – all of a sudden there’s plenty of momentum heading in the wrong direction.

I’m sure that plenty of the number crunching for this government-summoned report is correct – but there are a few assumptions I’m worried about. Without crunching a single number, let’s walk through this process…

We have two options: we can export or not export.

If we export, the assumptions are pretty simple. Processing and export facilities build up over the next few years and begin exporting product via LNG ship to foreign markets. With the price differential between, say, Asia’s natural gas prices and ours, there’s plenty of money to be made. And yes, this is undoubtedly good for the U.S. economy.

But is it necessarily better? There’s the rub…

If we choose not to export – and force a gas glut to remain onshore in the U.S. – there are countless variables and assumptions that could be made. This is where the NERA report falls short.

First off, in simple terms, the net benefit from exporting raw natural gas can NOT be better than exporting a value-added product (such as chemicals, fertilizers, and other goods that require natural gas as a feedstock.)

All else held equal a value-added product will create more jobs and more wealth in this country than simply exporting the raw material. Think of the net benefits of exporting, say, handmade wooden chairs as opposed to the raw lumber.

Geez, for an example of this, just look to China’s raw material policy. China knows well that a raw material is worth a lot more if you can turn it into a sellable product. Why export rare earth metals when you could start building a technology sector of your own, right?

In that light, I’d much rather see the U.S. become a stronghold for natural gas-based, value-added products.

Or you can look at it this way…

“We’ll be the dumbest people in town if we ship clean natgas and import oil” I recall T. Boone Pickens saying last year at a shale conference. Pickens’ point is simple: why ship something that we know we have in abundance, is relatively cheap, efficient and burns clean. Instead he believes we should be using more of it here at home – replacing coal use, building out American manufacturing, adding it to the vehicle fuel mix and more.

Indeed, you can see which way I’m leaning in this export argument, but there are a lot of arguments either way.

For today, let’s not get weighed down with the details. Instead, let’s find the best way to play it – regardless of the outcome!

Export, Or No – Here’s How To Play It…

No matter which faction wins the export debate, there is a clear investment winner.

Regardless of where the natural gas goes, the companies that can transport and process it stand to make a killing – no matter what the price! Indeed, there’s still plenty of time to look at you favorite pipeline plays.

“It’s just like the real estate business, you want to put your store on a busy corner,” says Kevin McCarthy, the highly-regarded fund manager of Kayne Anderson Midstream/Energy Fund (KMF).

“You want to have a pipeline or a processing facility” he continues, “in an area where you think there’s going to be multiple opportunities to grow.”

McCarthy’s fund, which invests in a lot of the big name midstream players is up 23% year over year – yep, it’s clear that he knows a thing or two about the pipeline and midstream biz. [Editor’s note: For a quick look behind the curtain, McCarthy’s fund holds a lot of household midstream names, including: Williams (WPZ), Kinder Morgan (KMP), Enbridge (EEP), Golar (GLNG) – plus a company we’ve covered here, Dcp Midstream (DPM)]

McCarthy, along with your editor, is banking on a multi-decade boom (and buildout) in America’s shale gas patch. As companies jockey for part of the action there will surely be winners in this sector…

As an investor, if you’re investing in the sweet-spot of this market (whether it be moving natural gas inland to a processing facility or seaward towards an export facility), you can make a killing from the consistent, natural gas-based dividends that these firms payout.

An easy way to pick up some of the best players would be to invest directly in McCarthy’s fund, Kayne Anderson Midstream Energy (KMF.) It’s a shotgun approach to be sure, but so far McCarthy has proven his marksmanship.

Share price has pulled back from October highs and right now the dividend yield is listed over 6%. Not bad, right?

If you’d like to ride the coat-tails of one prolific midstream player, McCarthy is a great choice. Any continued pullback in share price (with fiscal calamity on our radar) and this company is a buy.

Keep your boots muddy,
Matt Insley

Original article posted on Daily Resource Hunter 

Natural Gas: To Export Or Not To Export appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.


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