The Daily Reckoning February 26th
In 2004, Maurice Underwood was just a man with a van.
When he made the decision to start his own moving company, Underwood was running an established small business in Reno, Nev., providing home cleaning services. A moving business was a natural next step, he thought, after he noticed several of his clients inquiring about moving services.
A year later, the government came calling.
NO MOVEMENT: In some states, licensing laws allow existing moving companies to effectively crush competition. In Nevada, a new moving company must prove that it will not compete with existing carriers like Mayflower. Good luck with that.
One of Underwood’s trucks was cited in 2005 for operating without a license — in the state, anyone can load or unload a truck, but special permission from the state government is required to drive a loaded truck from Point A to Point B. He paid the fine and began the process of bringing his company, Man With A Van Moving, in compliance with the state law.
He soon learned that the only way to get a license in Nevada was to comply with a law requiring proof that his business would not “unreasonably and adversely” affect other companies by creating additional competition.
Another part of the same law indicates the “legislative intent” of the licensing rule — to discourage competition that may be detrimental to the existing carriers in the state.
Timothy Sandefur is a lawyer with the Pacific Legal Foundation, a nonprofit law firm that challenges laws impeding economic and civil liberties. He is the lead attorney on a federal case challenging the legitimacy of the Nevada licensing law, which he calls “the most blatant anti-competition law” in the nation.
Licensing requirements like those in Nevada are part of that broader problem. Known generally as Certificate of Need laws, the requirements apply to trucking companies, movers, limousine and taxi drivers and even hospitals. They allow private companies to use the strength of the state government to keep competitors from entering the market, or to require large upfront investments of time and money that discourage potential competitors.
It adds up to a system that benefits the established, entrenched interests at the cost of entrepreneurs — and, ultimately, consumers, Sandefur said.
“Wal-Mart could make a lot more money if they could use the government to make Target illegal,” he said.
In a federal court filing, the Pacific Legal Foundation argues the Nevada government is “irrationally and arbitrarily discriminating against” Underwood in a violation of the U.S. Constitution’s equal protection clause.
Andrew MacKay, chairman of the Nevada Transportation Agency, which oversees just about anything that moves objects or people around the Silver State, takes a different view of his state’s licensing requirements.
In his six years as chairman of the agency, MacKay says he has never seen an applicant denied a license, provided they go through the entire application process. And he disagreed with the view that the licenses are a means to keep out competition.
“In short, the legislature enacted those laws to ensure that the trucking and shipping industries are adequately protecting the public safety,” MacKay said.
Though he declined to discuss the specifics of the Underwood case because of the ongoing litigation, MacKay said he is a former businessman who understands the importance of competition.
“I believe in the free market,” he said. “But if you’re going to hire a mover or a limousine company, there is an expectation that you are getting someone who can do the job safely and economically, without price gouging.”
The battle rages elsewhere as well.
In 2009, Raleigh Bruner started a new moving company and learned that he had to obtain an “Intrastate Household Goods Certificate” from Kentucky’s perfectly bureaucratic-sounding Transportation Cabinet Division of Motor Carriers.
And the only way to do it was to win approval from the existing license holders in the state.
Once one of those other companies protested, state law requires the new applicant to hire a lawyer — owners are not allowed to represent themselves at the state board — and begin a lengthy process of hearings that costs a new company valuable startup cash.
[Ed. Note: A properly running economy fosters competition, generates more innovation and delivers better products to both customers and society as a whole. On the other hand, a "managed" approach to business and competition through professional licensing creates unintended consequences on an economy that go beyond its limited scope and self-interest. Those who would manage business like this mistakenly believe that what's good for them is good for the rest of the economy and society at large.
On the surface, licensing seems like a good idea. What better way to protect consumers than by ensuring that businesses in a specific market are approved before they open to the public? When the board in charge of granting these licenses, however, consists of the new businesses' future competitors, perverse incentives trump rational decision-making and the good of society is sacrificed in the name of personal interests.
Competition works best when market forces (not vested interests) decide who can do business. Political arguments like claims of price gouging by new competitors in a local market provide great talking points for politicians and people sitting on boards, but language and actions like that have a chilling effect on new business creation.
Jim Cox briefly covers this very topic in Chapter 9 of The Concise Guide to Economics. His book lives up to its name, covering topics like free markets, licensing and the dastardly effects of minimum wage law in easily digestible chapters.
This title and 40 others can be yours free as a new member of our latest project. Click here to learn what else membership provides.]
In practice, the only way a new business can get a license is to prove there are not already enough movers in the market to meet demand, said Tom Underwood (no relation to Maurice), state director of the Kentucky chapter of the National Federation of Independent Business.
“This is a state-controlled monopoly. That’s all there is to it,” Tom Underwood said.
But the days might be numbered for the moving cartels in Kentucky. Brunner filed a lawsuit in federal court last year to get the Kentucky law overturned. Though the case is still pending, there is now legislation in the state Senate that would deregulate Kentucky’s moving industry.
Existing license holders oppose the change, saying it would decrease the value of their licenses, but Underwood points out that the licenses have only become such expensive commodities as a result of the state’s restricted market.
Despite the opposition, Underwood said there is enough support for the bill to be passed into law before the state legislature’s annual session ends in mid-March.
These state licensing laws are hardly a new phenomenon — and neither is the fight against them.
The first such laws were created in the late 19th century and designed to protect semimonopolies like railroads, but they gradually evolved into government-enforced bans on competition in a variety of sectors.
In 1932, the U.S. Supreme Court struck what should have been a decisive blow. In New State Ice Company v. Leibmann, the court struck down an Oklahoma law that banned the delivery of ice unless a new delivery company could prove to a state board there was a public need for more deliveries.
The board that made the decision, perhaps unsurprisingly, was staffed by the owners of existing ice companies.
In the 7-2 ruling, Justice George Sutherland wrote, “It is beyond the power of the state, under the guise of protecting the public, arbitrarily to interfere with private business or prohibit lawful occupations.”
But that ruling did little to stop the march of restrictive licensing laws. In recent years, though, the tide has started to turn.
In 2007, Minnesota lawmakers eliminated a state law requiring new moving companies to give notice to existing companies.
A year later, the Ninth Circuit Court of Appeals overturned a California state law for licensing pest control workers.
In 2009, the Pacific Legal Foundation challenged a similar law in Oregon on behalf of college student Adam Sweet and his startup moving company, 2Brothers Moving. A federal judge declined to overturn the law, but the Oregon Legislature removed moving companies from the licensing requirement, though it remains in place for other types of carriers and taxi companies.
In 2012, Missouri lawmakers brought an end to a similar law that gave existing moving companies veto power over new applicants.
Missouri State Rep. Eric Burlison, R-Springfield, who sponsored the legislation that changed that law, said the old arrangement created some nonsensical loopholes for companies to operate.
New moving companies could obtain federal licenses, but faced a harder time obtaining state licenses, which could be blocked by existing companies.
As a result, some startup companies could legally move a customer from inside Missouri to Kansas or Kentucky or elsewhere across state lines, but would be operating outside the law if they tried to move the same customer to a neighboring town in Missouri.
“It’s absolutely insane that we would forever enshrine certain businesses and make sure they would never get any competition,” Burlison said. “That’s not the role of government and it should never have been the role of government.”
Original article posted on Laissez-Faire Today
Global markets took it on the chin yesterday after unexpected Italian election results materialized.
That’s right: Europe matters again. The never-ending crisis returns! Fear has found its way back into the markets…
The major US indexes ripped higher out of the gate Monday morning. But as soon as anti-austerity votes began to pile up across the pond, spooked investors began making excuses to sell…
By 4 p.m., the S&P had dropped more than 1.8%– its biggest decline of the year. The VIX–which sat at multi-year lows last week–ripped higher by 34%.
Global Macro Monitor reminds us that this dramatic move in the fear index is the 10th largest daily percent increase since 1990– and its biggest jump since August 2011. The data on the weeks following a major VIX pop are about even, with the S&P posting positive returns five out of the past nine occurrences.
Still, it’s apparent that the short-term market attitude has gone negative. We had a couple of big distribution days last week where down volume ruled the day. Now, with yesterday’s sharp decline, it’s clear that the weak hands want out.
Here are a couple of quick notes to help you find your way this week:
The financial and homebuilding sectors were hit hard during yesterday’s selloff. These were a couple of the market’s best performing sectors. Watch them closely to see if investors are rotating out of these names…
Next, it’s important to remember that bad data hasn’t made much of an impact so far this year. We have housing and consumer numbers coming out today, along with additional data later this week. If investors decide that lackluster numbers are reason enough to bolt, you’ll know the market’s mood has shifted back to fear.
“Always buy land after a coup,” said Aren Nunnink, an Aussie expat who moved to Fiji back in 1987 and is now the most knowledgeable real estate agent on the islands.
Aren ought to know about buying land after a coup. He has taken his own advice, and it’s made him a wealthy man.
Aren told a group of us his tale at the Capitalist Exploits private investor conference in Fiji. Chris Tell and Mark Wallace started Capitalist Exploits and write a free e-letter about their global hunt for investing ideas. They focus on private deals and have come to love Fiji, which they call their favorite place on Earth. I met them recently through an introduction from a mutual friend, and we hit it off immediately. They invited me to attend their Fiji conference and, not one to pass up an opportunity to check out a new market, I eagerly agreed.
I found Fiji a fascinating, if sleepy, market. It is a great place to hide out if you worry about Western civilization as a going concern. Way out in the South Pacific, Fiji is far away from just about everybody.
Of course, there are the coups. Fiji has had four in the last 25 years. The latest was in 2006. But these are opportunities, Aren maintains. He has the personal story to prove it.
I will skip over the details, but the bottom line is that Aren was able to buy 120 acres of prime beachfront property for about $88,000 Fijian dollars (about US$50,000) following the first coup in 1987. Since then, he’s sold about $3 million worth of property and still owns a third of it.
“It’s become my model for business success,” he said. “I became quite successful and wealthy because of this. I came to the conclusion that you should always buy land after a coup. Fiji has blessed me by having four coups. After every coup, I’ve bought more land. I actually own lots and lots of land around the Savusavu area.”
Later, over cocktails, I asked Aren more about his experiences with post-coup investing. People learn, he told me. With each coup, the deals are not quite as good as before, because people have learned the values come back.
But the coup dynamics still work. After a coup, there is, as you can imagine, a tremendous loss of confidence. Lots of people want to sell, and prices fall off the cliff. Confidence, though, comes back very quickly. “And because the product [in this case beachfront property] is rare, it very quickly shoots up again,” Aren says.
Fiji had its last coup in 2006. But business and life go on. The military promises elections in 2014. That could be a little value-unlocking event in itself.
Aren is a good storyteller. He told us how it was when he came to Fiji. There were no real estate agents. If you wanted to sell a piece of land, you had to tell the taxi drivers. Then when people arrived, the taxi drivers would tell them about the land. If they helped you sell the land, you paid them a commission.
In fact, there is still a legacy from when this was the case. One of Aren’s largest competitors is called Hussein Taxi & Land Tours. “I trained him,” Aren said. Hussein once worked for Aren, and they sold quite a bit of land together. Hussein, apparently, decided to go into the business himself.
Anyway, Aren’s knowledge of Fijian history was impressive, and he took us through some of the highlights, including the history of freehold land. It’s a long story, but the short of it is that native Fijians own 93% of the land and are the only ones legally entitled to own that land. The remaining land, about 7% of the total land area, is freehold. That’s what foreigners can own.
Many of those foreigners are so-called “haven buyers.” Aren said he recently sold 800 acres to a guy who “doesn’t believe in chemicals” and wants to grow organic food and live “a natural lifestyle.” He wants to get away from the over-industrialized world, as he sees it.
Haven buyers “want to get away from something,” Aren says. “They know Fiji is sustainable. There is plenty of food and water. You can survive here. Life will continue even in times of stress or apocalypse.”
Haven-buyers, take note.
Let’s start with a little quiz. See how many you get right:
Who holds the majority of U.S government debt?
What percentage of products consumed in the U.S. are produced in the U.S.?
What percentage of products consumed in the U.S. are produced in China?
Richard Poulden posed these questions in his annual letter. I met Richard for lunch at the Blue Rain restaurant at the Ritz-Carlton in Dubai last week. He is an ace at turning nothing into something in the mining world. Richard built up Sirius Exploration, a potash concern, from a mere $3 million to a company worth over $460 million. Investors made over 800%. Today, he is trying to do it all over again as the founder and executive chairman of Wishbone Gold.
Richard is one of those entrepreneurial characters that one seems to find often in Dubai. My friend Peter Cooper, whom I like to call “our man in Dubai” and who edits ArabianMoney, made the introduction. All three of us sat at a table behind a glass wall situated behind the hotel’s 10-story waterfall and enjoyed excellent Thai food as we talked about the markets.
Poulden has a definite point of view on the markets, which is worth sharing. And that brings us back round to those questions.
The answer is c) in every case.
“China actually holds only around 7.5% of U.S. debt,” Richard writes, anticipating surprise that China isn’t the answer to the first question. “The vast majority is held by U.S. institutions and individuals.”
The second and third questions also may surprise you. Most of what the U.S. consumes the U.S. makes. And there is little dependence on China for anything. “The point here,” Richard says, “is that this shows you just how disconnected the U.S. economy actually is from the rest of the world.”
Richard is a gold and silver man. He is not one to trust the value of paper currencies. He is also aware of the debt issues of the U.S. Still, he believes the U.S. will be okay. “I know they don’t deserve it,” he says of the U.S., “but it is all going to come right. Never underestimate the underlying strength of the American economy.”
I would agree with this. The big reason why Richard thinks this way will be familiar to long-time readers. “Yes, the shale/hard rock oil and gas reserves under the U.S. are going to make them a net energy exporter in a couple of years,” he writes. “They can once again ignore world energy prices.”
Second, but related, is the comeback of American manufacturing. “Forget cheap labor,” says Richard, “in modern manufacturing, the cost of energy is almost always the key, and this will prove to be America’s salvation.”
Based on these things, Richard “can see how a U.S. recovery on the back of cheap energy, regardless of the debt, could happen.”
At lunch, we talked about China too. “If China is not already the world’s largest economy,” Richard says, “it is certainly the most influential.” China has accounted for most of global growth since 2002. Richard travels quite a bit to China. He acknowledges China has slowed down, but it is still growing quickly. He seems unconcerned about a crash in China and, instead, points to the phenomenal growth potential.
“China will be OK, and the rest of the world will benefit from this,” he says.
He has no such rosy view on Europe. The EU suffers from the same debt problems that plague so many developed markets. But Richard believes the economies of the EU are fundamentally broken. They require a restructuring “like turning around a failed company.” He doesn’t see that happening and so believes there will be no recovery in the EU.
“There’s that old joke that goes, ‘I want to die in my sleep like my grandfather… not screaming in terror like the passengers on his bus,’” Richard says. “Unfortunately, for those in Europe at least, if you are not screaming already, it is time to start.”
Richard is a keen observer of financial markets, but also an active participant as a builder of companies. We talked about the travails of the junior resource sector — all those little penny stocks that speculators love so much.
Like me, Richard has a dim view of the sector at large. Most management teams don’t own much stock and don’t particularly care whether theirs projects become real mines or not. They mostly want to just keep raising money and advance the project. In this way, they can continue to pay themselves.
There are always exceptions, however, and one can make a lot of money backing the right guys. Richard has a track record here, as I’ve mentioned, and a new company called Wishbone Gold. (Richard owns nearly 29% of the stock.) Right now times are really bad in the junior mining world. People seem fearful to do anything. All of these stocks have come way down. Here is a three-month chart of the GDXJ, for instance, which is made up of little gold mining stocks:
It’s been brutal. For a broader perspective, consider that the GDXJ was $40 in May 2011. It is $16 today. As I noted at the time of its peak in the summer of 2011, the commodity bull market was on its last legs. It’s been a swift and nasty down draft for many natural resource stocks since.
No trend goes on forever, however. In this mix of dumped shares, there are some good projects trading at super-cheap prices. I said that I would expect mergers and acquisitions to cure this, as larger gold companies buy out these projects on the cheap.
Richard agreed, and, in fact, this is what his new company Wishbone aims to do. Wishbone Gold went public in July. As described on the company’s website, Wishbone will be a “consolidator of gold projects with commercial potential globally.” The site also adds that “Wishbone Gold has commenced this process through the acquisition of two highly prospective gold licenses in Queensland, Australia and continues to assess the prospectivity of a pipeline of opportunities.” (For more on Wishbone, check out the website here: http://www.wishbonegoldplc.com/)
Let me end with a question of my own. Of the following, which was the best place to put your money over the last 12 months?
c) Bank of America
The answer is c) Bank of America, which was up 45%. The NASDAQ was up 7%, and Wal-Mart was up 19%. Certainly, Bank of America would’ve been a tough choice a year ago. Banks were unpopular and remain unpopular — as do gold stocks. But that’s where future outperformance comes from.
Investors in gold shares, take heart.
Original article posted on Daily Resource Hunter