The Daily Reckoning February 13th
[Note: This piece was originally published on January 25th, 2012]
Shortly after President Obama was elected, NBC News interviewed a young woman from Detroit named Peggy Joseph. She explained that she was excited about Obama’s election because “I won’t have to worry about putting the gas in my car. I won’t have to worry about paying my mortgage.”
In the three years since, President Obama may not have actually paid her mortgage or filled up her tank, but judging from last night’s State of the Union address, he’s still trying.
The president’s address — more campaign speech than policy platform — was long on calls for “fairness” and “opportunity,” but it really boiled down to the president’s vision of a society where government does everything for everyone — financed, of course, by higher taxes on “the rich,” who need to pay “their fair share.”
The president’s argument ignores the fact that the rich already pay a disproportionate share of federal income taxes. In fact, the much-reviled 1 percent earns 16 percent of all income in this country, but pays 36.7 percent of all federal income taxes. One might conclude that this group is already paying its fair share.
Take, for example, the president’s renewed push for a so-called “Buffett rule,” based on the idea, in Obama’s oft-cited formulation, that investors such as Warren Buffett should not pay a lower effective tax rate than their secretaries. He even had Buffett’s secretary, Debbie Bosanek, sitting in the presidential box.
Buffett makes most of his money from investment income (capital gains and interest), and he pays a capital-gains tax rate on that money. That tax rate could theoretically be lower than the tax rate that Ms. Bosanek pays on her wage-based income, although only if Ms. Bosanek’s income is fairly high and she took few deductions. However, the president’s narrative ignores the fact that Buffett’s income had already been taxed at the corporate level. When the effect of both taxes is combined, the real effective tax rate is closer to 45 percent. That is quite a high rate on an inherently risky activity — investing — that our tax code should encourage.
And significantly, note that the president’s solution to this supposed problem is not to reduce taxes on Ms. Bosanek, but to raise them on Mr. Buffett.
That is because the president sees the Buffett rule and his complaints about other tax loopholes as simply a tactic, the camel’s nose under the tent, in his desire for more money for the federal government. That is why his actual tax proposals, hidden behind rhetoric about “millionaires and billionaires” and the “wealthiest 1 percent,” would actually raise taxes on people earning as little as $200,000 per year, as well as many small businesses. And many of his proposals will probably hit people with incomes even lower.
And he wants that money so that he can spend it.
The president might have given lip service to the need to reduce deficits and the debt, but most of his speech was a laundry list of government programs to spend more money doing more things for more people. From health care to housing, from worker education to industrial policy, from “green energy” to college loans, the president sees the government as both the engine of our prosperity and the guarantor of fairness.
The president’s vision of the state of the union is a zero-sum one in which, if some people get rich, it must make other people poor. If Warren Buffett makes money, then Peggy Joseph won’t have gas for her car. The only alternative is for the government to step in and make Mr. Buffett pay for Ms. Joseph’s gas.
Of course there is another option.
We all seek a society in which every American can reach his or her full potential, in which as few people as possible live in poverty, and in which no one must go without the basic necessities of life. More important, we want a society in which every person can live a fulfilling life. But the evidence is now inescapable that the best way to achieve that goal is not through welfare-state redistribution of wealth, but through the creation of more wealth. We should judge the success of our efforts not by how much charity we provide to the poor, but by how few people need such charity.
Would it not be a better America if we could make it possible for Ms. Joseph to get a better job so that she could afford her mortgage and her gas? For that matter, wouldn’t we like a country where she could afford a bigger house and a second car? Nothing that the president has proposed would help bring that about.
Poverty, after all, is the natural condition of man. Indeed, throughout most of human history, man has existed in the most meager of conditions. Prosperity, on the other hand, is something that is created. And we know that the best way to create wealth is not through government action, but through the power of the free market. Last night, President Obama said, “This nation is great because we worked as a team [and] have each other’s backs.” Others might suggest that this nation is great because we are free.
We will probably spend the next year debating these two visions. Last night’s speech was the start.
The topic of drones came up on MSNBC’s Morning Joe. Advertising guru and pro-drone Donny Deutsch pushed back against a skeptical Joe Scarborough saying, “What’s the big deal? There was no due process at Waco.” It’s just a difference in technology, he said. “It’s a more advanced way of dealing with problems,” Deutsch contended with a straight face.
I guess Donny figures that the government will never consider him to be a problem.
Scarborough fumbled around in response, saying something to the effect that the then attorney general (Janet Reno) thought children were in imminent danger.
Scarborough, however, rightly wondered, “I’m not sure how you save the children by burning the place down.”
Many Americans didn’t care about civil rights when Janet Reno’s ATF agents stormed the Branch Davidian compound, and they don’t seem to care now.
Many Americans seem to be either blissfully ignorant, or foursquare behind this Game of Drones. All this droning on about drones came to light because of a memo of approved drone targets leaked to The New York Times and the confirmation hearings for the CIA chief position. Obama’s selection is the droneinnator himself, John Brennan.
A year ago, a poll showed that 83% of Americans are all for using unmanned drones against suspected terrorists overseas, and nearly six in 10 strongly support the practice.
Maybe that doesn’t get your blood pressure up, but in the same poll, people were asked if they supported using drones to target American citizens who are suspected terrorists. Two-thirds said they supported using drones on Americans too!
That kind of result makes me think the rest of us should sleep in shifts.
What’s scary is that Mr. Deutsch describes himself as a liberal. And since he has his own company and works in advertising, he must have at least some sympathy for capitalism. Yet he’s all for trusting the government to blow up supposed enemies and ask questions later.
So what kind of mixed-up ideological mess is Deutsch? The same as many young people, according to The New York Times. In a Page 1 piece titled “A Growing Trend: Young, Liberal and Open to Big Government,” Sheryl Gay Stolberg writes that even in states like Montana, young people are steering the electorate toward Democratic candidates.
Instead of going to college, reading Atlas Shrugged, graduating, finding a job and embracing individualism, young people are graduating under a pile of debt they can’t see out of, moving back in with their parents and looking for help from Uncle Sam.
“At the same time, this is not a generation of socialists,” Matt Singer of left-leaning Forward Montana told the Times. “They are highly entrepreneurial and know that some of what it takes to create an environment where they can do their own exciting, creative things is having basic systems that work.”
A study by the Pew Research Center says under-30 voters are the only group that says government should do more to remedy problems.
“My analysis has been for a while that it’s going to come down to not whether the government should address certain problems, but how,” Ruy Teixeira of the Center for American Progress told the Times.
So young people think too little regulation caused the financial crisis and is the reason they can’t get jobs. Government is not the enemy, as Reagan once said, but is, instead, what built individual businesses and success stories, as Obama pointed out. Oh, and it keeps us safe by blowing up bad guys, whether they have U.S. driver’s licenses or operate overseas.
Yes, it’s all just simple problem-solving, as Mr. Deutsch puts it.
One of the problems law enforcement and the Department of Homeland Security have is keeping an eye on all of us. The United States is a big country. There are lots of people breaking the law each and every day. People growing pot. People making moonshine. People buying too much Sudafed. In fact, there are so many laws that we all break a few without even realizing it. The days of criminal intent are long gone. Ignorance is no defense.
But the manpower required to police us all is expensive. In many places, union contracts call for cops to retire in their 50s at 100% of their highest salary. Law enforcement needs a cheaper way to keep an eye on us lawbreakers.
There is a pent-up demand from law enforcement for drones. For the moment, the Federal Aviation Administration (FAA) has blocked the use of unmanned aircraft for surveillance purposes, due to concern about clogging the skies with flying robots that crash more often than piloted aircraft.
The folks at the FAA are being pressured to lighten up and permit the use of drones by government agencies. The result of that pressure is HR 658, which authorizes appropriations for the FAA through fiscal 2014, and buried in it are the provisions to begin a “drone-apalooza” with 30,000 unmanned aircraft.
According to Jay Stanley of the ACLU, “This bill would push the nation willy-nilly toward an era of aerial surveillance, without any steps to protect the traditional privacy that Americans have always enjoyed and expected.”
Among other things, HR 658 will require the FAA to streamline its process within 90 days for government agencies to operate drones. The bill requires the FAA to allow government public safety agencies to operate drones weighing 4.4 pounds or less, as long as certain other conditions are met. The agency will be required to establish a pilot program within six months to create half a dozen test zones for integrating drones “into the national airspace system.”
Maybe this doesn’t scare you. Perhaps you drive the speed limit, pay your taxes and
go to church on Sunday. Remember, the government decides who is guilty and who is innocent. When the Constitution was written, there were three federal crimes. Now there are thousands. Logic doesn’t matter. Criminal intent doesn’t matter. The idea that the punishment must fit the crime went bye-bye with Nixon’s war on drugs.
As outrageous as this is, there is little public outcry. Opinion-makers like Donny Deutsch say it’s all good, as long as it keeps us safe. Normally, the younger generation would be questioning authority and storming the barricades. Instead, they’re worried about their financial security.
That leaves only a few of us to protest this outrage. The Laissez Faire Club has created a petition to stop HR 658 and derail the nomination of John Brennan as head of the CIA. We are looking for 150,000 signatures to make the pro-freedom, pro-privacy message heard.
Make your voice heard by signing here. And remember, if we’re going to hit our 150,000 target, we’ll need your help passing this along to your friends too.
What little privacy we have left is in danger.
Original article posted on Laissez-Faire Today
On one particular occasion when Albert Einstein was presiding over a physics final exam, a puzzled student asked him, “Dr. Einstein, “Aren’t these the same questions as last year’s exam?” Einstein replied, “Yes, but this year the answers are different.”
In every branch of science, the “answers” change from year to year, decade to decade. To illustrate the point, let’s consider the up-and-down…and up again story of the humble coconut.
During World War I, the coconut helped Uncle Sam keep his doughboys safe out in the trenches. Gas mask factories used the carbon from charred coconut shells to manufacture gas absorbents. The government even encouraged people in the US to use coconuts in many recipes so that the shells could be shipped to Europe for gas mask production.
Then, during the Second World War, the coconut rolled up its sleeves again and lent a hand. It turns out that coconut water has the same electrolyte balance as human blood. Emergency transfusions with coconut water as a replacement for intravenous plasma saved many soldiers.
The life-saving coconut also played a major peacetime role as an important component of the American diet. Coconut oil was a common ingredient in countless recipes.
But by the mid-1980’s, the coconut became engaged in a very different sort of war — a war for market share against soybean producers. In 1986, the American Soybean Association (ASA) launched a take-no-prisoners campaign against coconut oil. Importantly, the ASA enlisted “scientific research” to wage its campaign. The ASA started “warning” the public against health risks associated with saturated fats found in tropical oils. Therefore, the health-conscious among us had to shun butter, bacon, steak, cheese, and most of the other good stuff that’s high in saturated fat…It was a very sad time.
Coconut oil, according to the experts of the time, was the worst of the worst because it contains a very high percentage of saturated fat. All fats are composed of molecules called fatty acids that can be classified based on their saturation: there are saturated and unsaturated fatty acids. Coconut oil has a high content of saturated fats (92%), which is roughly six times higher than the saturated fat content of soybean oil.
Maybe the ASA had genuine concerns for tropical oil consumers… Or maybe the ASA simply wanted to increase the sales of domestic soybean oil, which already accounted for more than 70% of all edible oils sales, and decided to eliminate the competition using a health angle as a smoke screen for a trade issue. The scientific data to back up the ASA’s claims certainly seemed strong at the time, emboldening other organizations to join the anti-coconut crusade as well.
Groups such as the Center for Science in the Public Interest and the National Heart Savers Association, established and funded by Nebraska millionaire and consumer crusader, Phil Sokolof, waged their own campaigns against tropical oils. Together with ASA, they stirred the media into frenzy. In 1988, full-page advertisements started to appear on national newspapers, with dramatic headlines like “The Poisoning of America!”
So successful were these attacks that coconut oil’s reputation deteriorated quickly from “health food” to dietary pariah. Across the board, health authorities and media began asserting that unsaturated fatty acids found in nuts, avocado, vegetable and fish oils, were the only “good fats” that could improve blood cholesterol levels, ease inflammation, stabilize heart rhythms, and play a number of other beneficial roles.
Movie theaters began cooking their popcorn in soybean oil. Food makers and restaurants stopped using tropical oils and switched to soybean and other vegetable oils. By the mid-1990’s, coconut oil sales had plummeted. The Malaysian palm oil industry, the largest supplier of palm oil, tried to protest against what it termed a “smear campaign” against tropical oils, and even caused some advertisement claims to be withdrawn. But the damage was done. Coconut plantations suffered enormous losses and island nations of the South Pacific that depended on coconut for their livelihood went into a deep economic depression.
But even after winning the battle for public opinion, the ASA tried to persuade lawmakers to introduce legislation against cholesterol-rising saturated fat, and proposed that consumers be warned on products labels. (Funny how this time around the ASA wanted to “label it”… Last fall, the ASA supported a coalition of farmers, food producers, growers and retailers to oppose Prop 37, a Californian ballot initiative that would have required a warning label on food products containing genetically modified ingredients. Over 90% of the soybean grown in the US is genetically modified, and the ASA obviously did not want to see a warning label on its edible oil.)
But ASA’s about-face on edible oil labeling is not the only irony of our story. Here’s another one: By chasing coconut oil off of stores shelves, the ASA cleared the way for oils that contain the now-dreaded trans fats.
“Healthy” unsaturated oils such as soybean and other vegetable oils are pretty unstable by nature and can go rancid rapidly. So manufacturers increase the shelf-life of these oils by using a hydrogenation process that turns the liquid oil into a more stable solid form (like margarine). But the hydrogenation process also creates trans fats, which, as it turns out, are much worse for one’s cholesterol levels than the saturated fats they replaced. We now know that trans fat consumption is associated with heart disease, diabetes and obesity.
But here’s the ultimate irony of the coconut oil story: About ten years ago, the scientific community began backpedaling from the “saturated fats are bad” narrative. Several research teams published persuasive evidence that saturated fats were not so bad after all. Then, two years ago, a widely publicized report from the Oakland Research Institute demonstrated that there is no measurable connection between consuming saturated fats and the risk of heart disease. The report analyzed the findings of 21 epidemiologic studies that followed 350,000 people for up to 23 years.
Researchers looked at the relationship between saturated fat intake and stroke, coronary heart disease (CHD), and cardiovascular disease (CVD). They concluded that there was insufficient evidence to link dietary saturated fats with increased risks of CHD, stroke, or CVD. Several other scientific studies corroborated the findings of the Oakland Research Institute’s report.
Researchers in the nutrition field started to realize that not all saturated fats are created equal and began to understand that the size of the fatty acid in an edible oil matters. The vast majority of fats in our diets are composed of long-chain fatty acids (LCFAs). But coconut oil actually contains an unusually high percentage of medium-chain fatty acids (MCFA). And these fatty acids might actually reduce the risk of coronary heart disease associated with high cholesterol.
A few studies reported that the combination of MCFA found in coconut oil increases the level of HDL or high-density lipoprotein (good cholesterol) and also increases the level of LDL or low-density lipoprotein (bad cholesterol), but does not seem to impact the ratio of the two. By contrast, trans fats increase the level of LDL and decrease the level of HDL, which negatively impairs their ratios.
So when it comes to coconut oil, it seems pretty clear that that the scientific “answers” are changing. This formerly healthy food that became “unhealthy” may be on its way to becoming healthy again. In fact, several folks are touting the once-despised oil as a natural cure-all. Bruce Fife, a naturopathic doctor and nutritionist, has been leading public opinion into a complete 180-degree turnaround by writing a few books that praised the virtues of coconut oil.
Not surprisingly, the Coconut Research Center has discovered some additional health benefits. Taking a page from the ASA’s playbook, the CRC lists over 50 health conditions that can be cured or alleviated by coconut oil, including hormonal and metabolic imbalances, viral infections and degenerative diseases. This natural marvel might also make you thinner or ward off the flu…or it might not.
So should we trust Dr. Fife and the Coconut Research Center today more that we should have trusted Mr. Sokolof and the ASA a few years back? Or is the scientific pendulum simply swinging from one extreme to the other?
The bottom line is that there is simply not enough evidence to substantiate any sweeping claims that have been made about coconut oil. The scientific community may have demonstrated that coconut oil is not as unhealthy as we once believed, but that conclusion is still a big leap from demonstrating that it is healthy.
But one thing we do know; in science, the answers can change…sometimes dramatically. That’s why forward-looking investors will want to keep an eye out for the latest “answers.”
I’ll cut right to the chase…
Gold is set to drop to $1,550.
The spot price briefly dipped below $1,640 early yesterday, posting new five-week lows. It rallied back above $1,650 by the end of the day — but the damage is done.
After a weaker push last summer that failed to break $1,800, gold has consistently trended lower for more than four months. Yesterday’s brief breakdown is just advance notice that lower prices are in store for gold in the near future…
Looking back over the past two years, you can see how gold has significantly lagged the S&P 500 since mid-2011. Even a brief moment of outperformance early last year was short lived when the spot price failed at $1,800 for the third time in less than 12 months…
Gold just can’t shake this slump. And as $1,650 falls this morning (Gold sits at $1,647 now), $1,550 won’t be far behind.
Now, I’m not some lunatic who doesn’t understand the strong fundamental arguments backing gold. Rampant money printing and overseas demand are the first that come to mind. Both are valid points. But gold’s decade-long bull market has attracted more than a few momentum buyers. And like it or not, these weak hands are adding to the selling pressure.
Here’s what you have to do:
First, don’t get too hung up on the story right now. You can scream about how gold isn’t acting like you think it should until you pass out. But none of your arguments can change the price action.
Next, if you’re a long-term gold buyer, you have to understand just how important the $1,550 range has become over the past two years. This is gold’s price floor. A bounce higher from the $1,550s is the perfect long-term entry point.
However, if we see continued weakness at $1,550, all bets are off…
Did you hear the U.S. Mint just ran out of silver? In mid-January, the Mint suspended sale of the 2013 run of its popular U.S. “Eagles.”
The new silver Eagles sold out fast. They went on sale, and buyers bought everything they could lay hands on. Within days, the shelves at the Mint were stripped bare. It’s not the first time that this has happened.
The Mint quickly announced that it’s obtaining new supplies of silver. It will stamp out more Eagle coins. There will be more to buy, or so they say. And yet… people in the silver markets are squirming — and I’ll tell you more about that, below.
Right now, silver sells for $31.50 per ounce, give or take. That’s if you can find somebody to sell you their silver at that price. If you’re a normal, everyday retail buyer, good luck trying.
Let’s say you want to buy some silver. You call up one of those companies that advertise on the radio and find out that there’s a markup to $40 or more for 1-ounce bullion coins. That’s if they have any to sell to the likes of you. After all, are you a big wheeler-dealer?
If you want the fancy versions of silver coins — “uncirculated” and “proof” specimens — the price is twice (or more) the posting for basic metal.
The bottom line is that silver is hard to get. You have to plan ahead to obtain the metal, and even the U.S. Mint gets its numbers wrong, now and again.
From what I’m seeing — and I’ll explain this, below — one of these days, the Mint might not simply resume sales so quickly. It won’t have the basic metal. And I suspect we’re going to see silver prices move much higher.
The Global Silver Shortage
First, let’s review the global scramble for silver. How much of a problem is it? Well, it’s not just the U.S. Mint that has to worry about supply. Industrial users are in a bind, as well. I mean big, important companies.
Here’s an example. Last summer, I visited a storage vault dug deep into solid rock and buried in the hills north of Zurich, Switzerland. It’s a massive complex, right down the road from a Swiss Army base (and that’s no accident). You can enter this facility only by prior appointment, because the Swiss customs department has to do a background check on you. The Swiss are very thorough, you may have heard.
The vault is constructed with huge steel beams and enclosed by thick, reinforced concrete walls. Accompanied by an armed guard, you have to walk down a long, sloping set of corridors and then take an elevator to get to the deep levels. Heck, it’s like visiting a secure, military command bunker — of which I’ve seen a few in the course of my life’s journey. Finally, after a hike, you arrive at the business end of this facility.
This is no fly-by-night, rent-a-locker storage operation just off the interstate. It’s world-class. It’s a Swiss Fort Knox. In fact, in one zone of the vault, the Vatican keeps its gold. Seriously. As the vault manager told me, “Ja, de pope. He puts his faith in God. But he keeps his gold in Switzerland.”
Don’t laugh too hard. That line about the pope is sort of funny, but there’s a serious point to be made with all the security — physical, political and legal — for precious metals. Storing gold in Switzerland? “Uneasy lies the head that wears a crown,” as Shakespeare wrote in Henry IV, Part II. Today, even the Vatican is worried, evidently.
In another zone of the same complex, a German automaker — a household name whose motorcars are revered across the world — stores industrial quantities of silver, and I mean a LOT of it. Here’s a photo of just a few pallets that belong to the German company.
These pallets cover the floor of a large room and are loaded down with innumerable 22-pound bags (10 kilograms, actually) of .999 fine silver. There’s way more silver than what you see in the photo, but it’s among the few pictures I was allowed to take.
Why does the German company store dozens of pallets of silver in a secure vault deep in the mountains of Switzerland? It’s simple, really. So that the metal is there when the carmaker needs it. As one purchasing manager explained later in my travels, “For some metals, like silver, there’s no such thing as ‘just in time’ delivery anymore.”
In other words, this German company buys silver when it’s available. In fact, the company buys as much as it can acquire. Then it stores and stockpiles the material in a vault in the mountains of Switzerland, right next to the pope’s gold.
The moral of the story is that when you need something, you need it. It has to be there when the time comes. That’s the key to the silver story.
Why Isn’t This “News”?
Are you beginning to suspect that perhaps there’s something going on with silver? Maybe there’s — not to put too fine a point on it — not enough silver to go around?
Exactly. Despite many silver mines across the world and the silver developer wannabes out there raising cash on the stock markets of the world, there’s just not enough physical metal to meet actual demand.
Oh, yes, people trade “paper silver.” But real silver — the kind you put into 22-pound bags — is scarce. It’s scarce enough, at least, for one of the largest German automakers to store its silver in a Swiss vault, next to the pope’s gold.
Then again, does anything about this silver issue strike you as odd? In particular, high demand and scarcity of silver isn’t exactly a news item in the mainstream U.S. media, right? Is the story on ABC News? CBS’ 60 Minutes? MSNBC? Is silver part of any plotlines on NCIS or CSI? Does Jay Leno crack jokes about silver? Nope.
So, asks the skeptic, is this silver scarcity thing a “real” story? Well, sez I, in reply, what would it take to get silver into the news?
For the average U.S. media-absorber — including almost all of the political class who set national spending and monetary policy — the global scarcity of silver may as well be happening on the far side of the moon. Heck, in the U.S., with its low-common-denominator Potemkin media, the silver story may as well not exist.
Since I’m on the topic, I have to wonder what it would take for the U.S. media to pick up the silver story. I suppose Oprah would have to interview Lance Armstrong and Lindsay Lohan about the metal. Jennifer Aniston would have to hit the talk shows, smile demurely and discuss the decline of the dollar. Brad Pitt would have to sit down with Joan Rivers and explain why everyone ought to buy precious metals as part of their fashion statement.
Then the silver story might get some traction. People might begin to care about the monetary and industrial squeeze that’s reflected by the supply and demand issues behind silver.
Until then? The investment field is wide open. You can set yourself up to make some money. With silver prices poised to head higher, now’s the time to find your favorite silver bargains and buy in cheap.
That’s all for now. Thanks for reading.
Original article posted on Daily Resource Hunter