The Daily Reckoning February 11th

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The Four Signs of a Collapsing State

“This used to be a hell of a good country, I can’t understand what’s gone wrong with it.” said George Hanson in the movie “Easy Rider.”

My old friend Joe Sobran (1946-2010) loved that line and quoted it often.

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Sobran, who worked alongside William Buckley at National Review during its heyday, was one of the smartest people I’ve ever known. After a lifetime of thinking about politics, he eventually decided that there was only one way out of our troubles: the whole of the government has to go.

[Editor's Note: Joe's key influence was Hans-Hermann Hoppe. Hoppe's Book The Theory of Capitalism and Socialism convinced him that nothing that the government does nothing to contribute to the betterment of society as whole. A new edition of this book is now available for download in the Club.]

Sobran was ahead of this time. The latest polls show that 9 in 10 people distrust government to do the right thing. Forget partisanship at this point. The largest political grouping in this country is against government in general. Sure, people are glad to grab benefits as programs allow, believing that they might as well get something back for all the times they have been robbed.

Does public opinion matter? Absolutely. Government an inherently unstable situation becuse they are few and we are many. The real question is not why revolutions happen but why isn’t there a revolution every day? What is it that keeps these guys in power, aside from the threat of violence? There has to be more to it.

David Hume, in his First Principles of Government, argued that it is public opinion that keeps the racket going. That is a more important thing than violence or guns. It is what people believe about themselves and their government that is the key. Without it, government would collapse. And we see this in history. The precondition for every revolution is the lack of belief in the system that governs them.

The government has strong interest in shoring up public opinion.

According to Hoppe, it does this through the control of four institutions:

  • education
  • communication
  • money
  • security

A government that fully monopolizes these four institutions and prevents any alternatives from forming is secure in its rule for decades if not centuries. But when they begin to fall, the rulers begin to lose their grip on power. For this reason, all governments have made the control of these institutions a priority.

Control of education allows the political class to inculcate a sense of civic obligation and duty, set the parameters of approved thought, and keep revolutionary ideas from entering into the culture. If you can get the kids at a young age and train them, all the better. This is why every state the world over has worked to secure its control over education. The goal is not to make everyone smart but rather to make everyone obedient.

Control of communication reinforces this tendency to properly filter the ideas that people hold. This is why censorship is one of the first and long-lasting functions of government. It is not to protect you and me against hearing or seeing things that would corrupt our hearts and souls. The idea is to maintain a firm grip over what people believe about the political system and to keep outlying ideas underground and at the margins of society.

Money comes next. Historically, this is one of the earliest institutions that the state seeks to monopolize. Only in the 20th century has the excuse been to keep unemployment down or keep the banking and financial systems stable. The real reason is, as Hoppe explains, to provide a funding source for government that doesn’t require taxation. Taxes make people mad. Devaluation and inflation flies under cover of night.

Finally, there is the need to monopolize the provision of security, which means controlling courts, police, and justice. The idea here is to be able to tell the population that the government is keeping everyone safe. If government is not there, terrible things will happen: monsters will take over.

Now, using this model, we are in a position to access the stability any regime. Looking back at the anti-socialist revolutions of 1989 and 1990, we can see that all four conditions of control had collapsed, and so therefore the people no longer believed. We saw this too in the Arab spring. We can even look back the American and French revolutions and see the same thing. In each case, the government systems of control fell and private alternatives took their place. The revolution happened.

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How does this apply to us today in the U.S?

Consider communication. Twenty years ago, that monopoly was in tact. The government ruled the networks, controlled the press, owned the telephones, censored the radio, and there were few alternatives outside word of mouth and the ham radio.

Today? Wow. The communication monopoly is completely smashed. The internet, cellular networks, the explosion of media outlets, and the astonishing growth of all forms of human interaction on a global level mean that this side of state control has been obliterated.

The educational system is cracking in a huge way. We learn more from digital networks than from government-owned classrooms. The kids still show up but do they believe? Not really. The dream of inculcating generations in dedicated belief in the civic system is just gone.

Homeschooling continues on the march, and the products of this system are occupying important positions of influence in the culture. Online venues are huge. The university-level system is poised for massive correction in the downward direction.

The money system is seriously broken. The Fed prints and prints but it is not inspiring economic recovery or even bringing about the inflation that would be necessary to cover the government’s astonishing debt level. A measure of the monopoly’s effectiveness is the lockdown of bank lending and the downgrade of U.S. bonds that occurred last year.

Because of this failure, new forms of private money are flourishing: precious metals, digital currencies, gift cards, cash-based credit cards. Peer-to-peer lending is booming. More challenges to this monopoly appear by the day.

Police, justice, and security? This is an interesting case. Thirty years ago, the police were not militarized, the courts were not clogged to the point of being useless, the jails were not full to capacity, and there was a sense that the system was flawed but essentially workable. That is no longer true.

After 9-11, the state overreached and militarized the entire security system in this country, thereby exposing its essential nature. More and more people are catching on to the reality that the security system is not there to protect us but rather to protect the state itself from us.

Hoppe’s checklist provides an extremely revealing look at the stability of the political system today. How far are we from a real or de facto revolution in which private society displaces the corrupt and bankrupt public system? It could be sooner than anyone predicts.

A Theory of Socialism and Capitalism shows us what to look for and how to access the triggers that make dramatic change possible.

Final note: if these ideas in this article seems outlandish, it is wise to compare them to the ideas in circulation in the U.S. colonies in 1775. A whole general favored the abolition of government. “The instant formal government is abolished, society begins to act,” wrote Thomas Paine. “A general association takes place, and common interest produces common security.”

We’ve travelled a long way from these ideals. Thanks to technology and the breakdown of government monopolies, we are travelling down the other direction toward freedom.

Yours,
Jeffrey Tucker

Original article posted on Laissez-Faire Today 

The Four Signs of a Collapsing State appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Student Loans Going the Way of Housing

Colleges are good at getting people enrolled. They get kids lined up with education loans. The money goes to pay exorbitant prices on textbooks. It pays for meal cards. Tuition is crazy high. Parents go along and shell out until their bank accounts are barren.

What colleges are not good at is getting the kids degrees. And those without those degrees have a hard time getting a good job to pay back a student loan. Instead, they fall into delinquency, starting off life saddled with an unpayable debt.

According to Fair Isaac Corp. (FICO), delinquencies on student loans made in the last two years have reached 15%. The pool of loans made between 2005-2007 is almost as bad, with 12.4% past due. Bloomberg reports that “almost 60% of bank managers surveyed in December expect delinquencies to worsen in six months, FICO said.”

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The analogy with housing is unavoidable. Do you remember 2007? The peak in the price of housing had come and gone. But the leverage of the major investment banks was peaking at over 30 times at Bear Stearns, Merrill Lynch and Morgan Stanley.

Freddie Mac announced it wouldn’t buy risky subprime mortgages and mortgage-related securities. Subprime lender New Century failed. Bear Stearns liquidated two hedge funds that invested in mortgage-backed securities. The interbank market froze completely. A deal to take Sallie Mae private fell apart.

And in the middle of 2007, subprime delinquencies reached 15%. Catch that number? It’s the same as the student loan delinquency rate today.

Of course, when the subprime delinquencies hit 15%, that market was circling the drain, but few people realized it. In contrast, more and more people are realizing that there is a serious problem with student loan debt.

“This situation is simply unsustainable, and we’re already suffering the consequences,” stated FICO analyst Andrew Jennings. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever larger student loans without greatly increasing the risk of default.”

Curiously, Sallie Mae stock (SLM) rose on the delinquency news. But then again, the company would appear to be very much a going concern. Core earnings for 2012 were more than $1 billion, benefiting from the lowering of loan loss reserves and operating expenses.

Charge-offs increased to 4.19% of loans in repayment. Not to worry, says Sallie Mae: It expects that to decline in 2013. The company pays a 50 cent annual dividend, so it sure beats money market rates. And SLM says it will make $2.30 a share this year.

What could go wrong?

“You’re starting to see delinquencies pick up, and that trend is going to continue,” Compass Point Research & Trading’s Michael Tarkan told Bloomberg. “That’s the reality that we live with in student loans.”

The day after Bloomberg spilled the news from Fair Isaac, TransUnion made public that according to their work, “more than half of student loan accounts are in deferred status, where the repayment of the principal and interest of the loan is temporarily delayed. Deferred loans now represent 43.5% of all student loan balances.”

TransUnion points out that “more than half of college graduates under 25 are unemployed or underemployed — the highest rate in 11 years.” This makes going back to school and racking up debt a reasonable option.

“With the economy either in recession or slowly coming out of it during the study period, we had expected that student loan balances might increase as consumers frustrated with the job market went back to school to work toward a different career path,” said Ezra Becker of TransUnion. “However, the rate of growth we observed was truly eye-opening,” he added.

What kind of lender would be lending money to permanent students with bad prospects? The government, of course. “Between 2007-2012, federal loan balances jumped 97%, while private loan balances only rose 4%,” writes TransUnion.

There is a wide difference in delinquency rates between student loans backed by the government and private student loans. “From 2007-2012, federal student loan delinquencies rose 27%, while private loan delinquency rates actually dropped 2% in that same time frame,” claims TransUnion. “The 90-plus-day delinquency rate for federal loans was 12.31% as of March 2012, compared to 5.33% for private loans.”

The idea of students actually graduating from college is starting to get some attention. The New York Times reports:

“‘This is the first time in the history of modern higher education in which all the communities have come together — community colleges, research institutions, public universities, and small liberal arts colleges — and reached agreement that completion needs to be our most important priority,’ said E. Gordon Gee, the president of Ohio State University and chairman of the National Commission on Higher Education Attainment.”

The Times points out that 80% of students think they’ll graduate. Well, statistics show only half that number actually get the job done. So a report coming out this week calls for colleges to:

“find ways to give students credit for previous learning, through exams like the College Board’s College-Level Examination program, portfolio assessments, or other college equivalency evaluations. It also calls for more services and flexibility for nontraditional students, suggesting innovations like midnight classes, easier credit transfers, and more efficient course delivery, including online classes.”

Another idea gaining attention: a $10,000 degree, a so-called 10K-B.A. The extremely smart head of the American Enterprise Institute writes that this is what he obtained. “It is true that I am no Harvard man,” he writes. “But I can say with full confidence that my 10K-B.A. is what made higher education possible for me, and it changed the course of my life.”

While traditional colleges wrestle with the quandary of passing out degrees, you might wonder if Sallie Mae’s dividend is safe. Everything looks peachy over there. But one should remember Sallie’s sister, Fannie, that paid $1.18 in dividends in 2006 and $1.50 in 2007. The stock traded just below $66 a share in August 2007.

Today, it fetches less than 28 cents, and dividends are a distant memory. Get ready: We could be on the precipice of a wild ride in the student loan market. How it will play out in real life will be as surprising as the wreckage of the housing crash.

Sincerely,

Doug French
for The Daily Reckoning

Student Loans Going the Way of Housing appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Are Newsletters Flashing Warning Signs?

The stock market is like a crowded canoe. If enough people in the boat lean far enough over the same side, you’ll see a swift reaction.

That’s why sentiment surveys are so useful. If you can gauge exactly when opinions begin to shift toward extreme levels, you can plan to play the snapback move no one else saw coming…

There are a ton of sentiment gauges out there. But many of them — such as consumer confidence — are a more useful measure the economy, not the markets. So if you’re looking to find out how the market will probably react in the short-term, your best bet is to find out what newsletter writers are recommending.

This is not a sales pitch. You’ll see why in just a second…

Stock and Nasdaq Newsletter Sentiment vs. S&P 500

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Here’s a chart showing 10 years of newsletter sentiment compared to the S&P 500. Whenever the sentiment reading pops above 70%, the broad market has pulled back to some degree on a consistent basis. As of the most recent reading, bullish sentiment is topping post-financial crisis highs.

So unless newsletter writers have all bought new thinking caps, their bullish recommendations point to a correction in the near future. That’s right — it’s not a bad bet to go against newsletters when most of them are in agreement.

The folks at sentimenTrader have the stats:

“There have been a total of 9 weeks when the combined level neared 70% (a couple of them were clustered together). A month later, the S&P 500 showed a negative return every time, a median of -3.1%. Its maximum gain during the next month averaged only +0.1% (using weekly closes) while the maximum downside averaged -4.4%.”

As you can tell from the gauge, newsletter writers can be a fickle bunch (reserve your judgment — I might know one or two). The needle can swing between extremes a few times a year…

Even so, this is one gauge worth watching should the market continue to melt up. I’ll keep a close eye on any new developments in the coming weeks.

Best,

Greg Guenthner
for The Daily Reckoning

Are Newsletters Flashing Warning Signs? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Uranium: Opportunities In The Unloved Metal

Uranium is one of the most cyclical and volatile materials that I have ever followed.

In the last 20 years the price of uranium has risen from 20 dollars up to 130 dollars, and dropped back down to 40 dollars, where it is now. It’s been all over the map.

It is also one of the most useful natural resource commodities. The energy density – how much energy you can produce per pound — is much greater than with other energy sources available. Water, natural gas, oil, or coal, don’t pack as much punch per pound. In some senses, it is the most efficient energy source in the world.

Nations can store enough material to run plants for decades. In case of crisis, it is the most strategic energy source on the planet. Countries like Japan, Korea, Taiwan, or Singapore are energy and storage-constrained, yet have high per capita energy use. For them, uranium is vital.

The One-Off Event That Shaped The Market

Fukushima, the meltdown that struck a plant in Japan in 2011, caused the green metal to plunge.

The trauma in Japan severely disrupted the market for uranium. Japan shut down its domestic nuclear industry. As a result, demand fell by 15 or 20 million pounds overnight. In addition, the utilities dumped their existing inventories. They couldn’t use uranium to generate electricity, so they sold it for whatever they could get.

So, while wiping out 15 to 20 million pounds in demand, they added 15 million pounds of supply – a 35 million-pound swing. That’s about 1/5th of the entire market — about 190 million pounds.

The price of uranium tumbled from 85 dollars a pound down to 40.

Very recently the Japanese have acknowledged the need for the green metal. Energy prices have spiked since they decided to shut down nuclear power. In some industrial applications, electricity bills have risen five-fold. Japanese demand has been responsible for essentially doubling the price of liquefied natural gas, as every spare cargo in the world has gone to Japan. Even the newly elected, staunchly anti-nuclear government has grudgingly acknowledged that phasing out nuclear is not an option.

The Japanese government responded to the disaster at Fukushima by vowing to phase out nuclear power, but their actions told a different story. Shortly after Fukushima, the Japanese government – through its foreign investment arm Jogmec — signed a joint-venture arrangement to explore for and develop uranium in Uzbekistan. Why would you spend money to explore for and develop something you weren’t going to use? This is the agency tasked with providing for Japan’s raw material needs.

We conclude that Japan’s use of nuclear power will resume. The 35-million-pound swing that you saw in the market was a one-off, not an ongoing event.

And don’t forget, before this one-off event, supply and demand were in a reasonable balance. At 80 dollars a pound, uranium produced more energy output to raw material cost than anything else. Meanwhile, producers made enough to explore for and develop new resources.

There’s the rub. New uranium is brought to market by the mining industry, which cannot afford its production costs at the current market price of 40 dollars pound. It takes much closer to 80 dollars a pound for mining of new supplies to be economic. Thus, until prices increase, miners won’t create the new supplies needed to keep up with current needs.

The Rest Of The World Needs Nukes

In the West, uranium is a political issue. It is unpopular in the United States, Germany and other developed nations. However, the rest of the world — emerging and frontier markets – is focused on attaining the same sort of lifestyle that the West enjoys. That is extremely energy intensive.

To reach our level of comfort, frontier and emerging markets will create demand for all energy sources — solar, wind, hydrocarbon energy, coal, and nuclear. Nuclear power production is increasing, but today’s price of 40 bucks a pound does not generate the supply to run those plants. The price needs to head higher.

Another thing you need to consider is that nuclear power still generates 18 per cent of electricity supply in the United States. Despite being politically unpopular, the long-term alternative to nuclear energy is not having the lights go on when you flip a switch – not an option in the United States.

Finally, Germany — which has also announced that it will phase out nuclear power — is faced with an interesting choice. They’re proposing, I suppose, to replace nuclear with solar energy. Well, one problem is that the sun doesn’t shine in Germany. Another is nighttime. Current technology simply does not allow solar energy to be a viable alternative to nuclear.

The German government is really involved in a political –and fairly cynical – ploy: reduce consumption of German-generated nuclear power but import it from France and Poland. Worldwide, the demand for nuclear power will continue to increase, and since mining is uneconomic at current prices, utilities will need to start paying more in order to satisfy their demand. In fact, meeting demand will require a price point of about twice the current price.

How To Play It

As you know, doubling the price of uranium would more than double profit margins for those that produce it already. Therefore, the companies that explore for and produce the metal should do well, in addition to the commodity itself.

Right now, uranium is a deeply unloved resource. As we have seen, it’s unloved for a variety of reasons. When you think about nuclear, you don’t think about a light going on; you think of Hiroshima, Chernobyl, Nagasaki, or 3 Mile Island.

But uranium is an essential commodity for the world to continue to enjoy the way of life that we experience now, which is energy intensive. Uranium suffered a price drop that the investment community thinks is an ongoing fact, but that is actually a one-off event. What happened in Fukushima, while tragic, will not alter the demand for uranium in the long term.

Uranium prices are set for a turnaround. As the idled power capacity comes back online, and the impact of Japanese selling is reversed, the market will return to pricing equilibrium, which we believe is around 80 to 85 dollars a pound. This is of course a wonderful move from the current price of 40 to 45 dollars per pound – and music to the ears of those that produce it.

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Thank you for reading,

Rick Rule

Original article posted on Daily Resource Hunter

Uranium: Opportunities In The Unloved Metal appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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