Après Moi, le Déluge
If history has taught one certain lesson, it is that the less fettered an economy, the better humankind is able to do what it does best: run from trouble and run toward opportunity. In this way mistakes are quickly resolved and progress assured.
Conversely, the deeper the muck of regulation, mandates, taxes, subsidies and other bureaucratic meddling, the slower we humans are in following our natural instincts until the point that progress is slowed or even stopped.
It is said that history doesn't repeat itself, but it often rhymes. In the current circumstances, it appears that enough time has passed that current generations have completely forgotten the critical connection between the ability of humans to freely pursue their aspirations and economic progress.
You can see this ignorance in the popular demand for even more, not less, meddling in the affairs of humankind. Should this trend continue – and for reasons I will touch on momentarily, I firmly believe it will – then the aspirations of the productive minority will soon be dampened by ever higher taxes and other attempts to "level the playing field" and the global economy, already in tatters, will fall off the edge.
There is no more timely nor acute example of this growing trend than what is currently going on in France. I refer, of course, to the first round of the presidential election process, scheduled for this weekend.
In France, if no candidate attracts no better than 50% of the vote, then the two leading candidates go to a decisive runoff vote, this time around to be held on May 6.
The current president, Nicolas Sarkozy, a conservative in name only, was running at a fairly steady gait toward re-election (thanks to the head start awarded all incumbents), when leading socialist candidate Francois Hollande came out with a proposal to tax anyone with an annual income of over one million euros at a rate of 75%. He also promised to add a tax on all financial transactions and increase taxes on France's biggest companies to 35% – securing bragging rights as levying the world's third-highest corporate taxes, the US being #1. This all on top of a 25% VAT, one of the world's highest. By some calculations, the result of Hollande's new taxes is that effectively 100% of all incomes over one million euros will now be stripped away by the state.
For good measure, Hollande also promised to reverse the recent modest increase in retirement age from 60 to 62 pushed through by Sarkozy. While I am sure it is mere coincidence, I found it noteworthy that Mssr. Hollande's campaign slogan is "Change – Now!"
Remarkably, at least for those with some small understanding of economics, as a result of leaning into the microphone with these proposals Hollande has galloped ahead of all other potential contenders and is now projected to finish nose by nose with Sarkozy this weekend.
After which the also-rans will be removed from the race, freeing their supporters to share their affections elsewhere. Given that the leading contender for third place with an estimated 14% of the vote is one Jean-Luc Mélenchon – charitably categorized as "far left", a label that can be applied to most of the other candidates – it is projected that the "conservative" Mssr. Sarkozy will go down in double-digit flames come May 6.
Bringing to mind the prophetic utterance of Louis XV: "Après moi, le deluge."
The deluge in Louis' case manifested as the murderous affair commonly known as the French Revolution. In the case of Mssr. Hollande taking up residence in the Palais de l'Élysée, the deluge is likely to manifest in the form of rising interest rates as investors look to protect against an acceleration in the country's debt to GDP ratio, already projected to hit almost 90% this year, exacerbated by a flight of capital, investors, entrepreneurs and large businesses.
As is the nature of such things, because of the aforementioned predilection of humans to run from trouble, we likely won't have to wait for Mssr. Hollande to be formally enshrined in the gilded halls for the trouble to start – it will begin within days and maybe even minutes of the handicappers concluding that his ascendency is a sure thing.
Given that France is the third-largest economy in the already-troubled Eurozone, one can expect the deluge to spread, with potentially devastating consequences. That the guillotines may soon be rolled out across Europe can be better understood by taking into account that the Eurozone sovereign deadbeats are on the hook for roughly nine trillion euros in debt, some significant percentage of which has to be rolled over to ready buyers over the next couple of years. Adding weight to the problem is that, according to the latest figures out of the IMF, Europe's banks may have to sell off up to 3.8 trillion euros in assets, many of them questionable, between now and the end of next year. At least, if they want to remain solvent.
Across the pond, the United States also has aggressive funding needs, given that the "change" we experienced ourselves in the last presidential election has left the government gasping for about $1.4 trillion in additional funding each year. Then there is Japan, officially the world's largest debtor in terms of debt to GDP, where the easy availability of local funding has dried up, requiring that nation to go to the international markets for funding as well.
The phrase "an awful lot of hogs at the trough" comes to mind.
But, as I am prone to do, I drift. My point is not just that these governments are broke and are about to get a lot more broke as interest rates rise on their many debts and financings, but rather that the global trend toward a resurgence in public demand for socialism in response to a worsening crisis is a certainty.
How could it be otherwise when for decades now the schooling of children has been delegated to functionaries of the state?
For evidence, look no further than the screen swipe here. It is a quote from an essay by a college student in the United States on role the government should play:
The writer of those words was a member of a Valencia University economics class. The professor, Jack Chandliss, asked the class to write an essay on what the American dream means to them, and what they want the federal government to do to help them achieve that dream. Out of 180 students participating, only about 10% wanted the government to leave them alone and not tax them too much, but a whopping 80% wanted the government to provide pretty much the whole dream thing wrapped in a tidy bow – including free college tuition and health care, jobs, even the down payment on their future homes, money for retirement and hard cash, taken in the form of taxes from rich people.
While I run up the stairs for another shot of caffeine, take a moment to watch a worthwhile interview with the professor (with thanks to Dennis Miller for sending it along). See you in a moment…
Okay, I'm back. Pretty eye-opening, eh?
The point here is not complex, but it is important.
With the apparatus of state education over many years serving to bamboozle the populace into the hardened belief that government has a positive role to play in virtually all aspects of modern life, it should come to no surprise to anyone that, when push comes to shove, people are now trained to look to government to solve the problems – even when it was the government that created the problems in the first place.
Thus, confronted with the intractable mess they have made, these governments have to keep alive the mythology they have created about their omnipotence. Which is easier said than done, because with things now swirling fairly quickly around the drain, the mob is beginning to lose faith – and even patience.
Which puts these governments in a very tight spot, because the only way they can actually fix things is by doing exactly the opposite of what people have come to expect from their governments, which is always to do more. Put simply, the only hope now is that these governments begin to reduce their roles in their respective economies, and dramatically so. Concurrently, they have to encourage people in their aspirations to greater wealth, by lowering their taxes and unwinding the tangle of regulations they have created over the last half-century.
But if the governments actually tried to take these actions, the brainwashed masses would be positively befuddled then outraged, as it goes against everything they have been taught. Why, it would be like the Pope shuffling his way to the balcony of St. Peter's Basilica and informing the doting faithful that there isn't a god and never has been.
Riots would follow.
So it is that we find ourselves at a particularly interesting juncture in the historical record.
On the one hand you have a majority of the world's population who have been carefully schooled into believing that the institution of government holds the solution to all problems and is the source of succor to all who need it. (Even that subset of the populace who has lost confidence in their current government invariably believes as doctrine that the next and better government can change things for the better and lead the way to the shining castle on the hill.)
In this mix are the politicians and their functionaries, 99.99% of whom believe that, if for no other reason than their re-election prospects, they have to do something to meet the demands of the public.
Of course, under normal circumstances the "something" usually consists of making grand-sounding speeches and otherwise blowing smoke. Today that's just not going to cut it, for the simple reason that the crisis is real, it is spinning out of control, and it's not going to go away unless and until the markets are allowed to breathe again.
Which brings us full circle to the simple truth that the brainwashed public won't stand idly by while the politicians lower taxes and regulations on the profit makers or cut back state pensions and guarantees or otherwise reduce any of the many services the state has taken on itself to provide.
"Between a rock and a hard place" is an inadequate phrase to describe the situation.
Meanwhile, the mob has started to gather, their dark mutterings heard by the politicos who quickly don the red caps themselves, the better to be viewed as one with the people and join in expressing outrage against the capitalists who have been selected as fall guys in this unfolding drama.
When confronted by reporters about the fact that his 75% tax on high-income owners would raise nowhere enough revenue to offset France's towering debt and social obligations, Mssr. Hollande was heard to respond:
"It's not a question of return. It's a question of morality."
When coercion and theft are considered moral, anything is possible, and none of it good.
While I certainly can't say how this is all going to end, I'm pretty sure it's not going to end well.
Speaking of Theft
This week my adopted home of Argentina decided that it, rather than a private firm, should control 51% of YPF, the largest energy operator in the country. The circumstances leading to the re-nationalization of most of YPF are fairly complex, but whatever the problems the government was trying to solve could have been readily solved by encouraging free markets. Instead, for reasons touched on in the article before, the populist solution of re-nationalization was the one selected.
As one might expect, the re-nationalization has justifiably set off a round of condemnation and retaliatory threats from a wide range of sources, including officials from the US, the IMF and the EU.
Which is somewhat ironic, given that roughly 90% of the world's oil is directly owned by government-run corporations or entities that they control. In other words, any country that hasn't already nationalized its energy resources is very much the exception to the rule.
Here in the US, bastion of the free market that it is, the government is far more nuanced in its approach to the energy sector. Rather than overtly nationalize, the government blocks critical pipelines for political brownie points and attempts to solve the matter of high oil prices through regulatory action as opposed to letting the market find its natural level.
Speaking recently in the Rose Garden, President Obama stridently intoned, "We can't afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick."
His plan? According to Bloomberg, it is to fund a six-fold increase for surveillance and enforcement staff at the Commodity Futures Trading Commission to put 'more cops on the beat' overseeing oil markets."
Furthermore, also according to Bloomberg:
I don't have time to once again go into the important role that speculators play in commodities markets, but I can assure you that once the CFTC starts to wield its large new stick around – if for no other reason than to recoup the $52 million it's spending to implement the program – it's going to have the desired result of dampening the enthusiasm of the speculators. And that, in turn, will result in oil companies reducing the amount they spend to bring new sources of oil online. Translation: oil prices will go higher.
But according to the pandering politicians, it's not the consequences that matter; it all comes down to morality – and according to them it's immoral for anyone to make money by taking the other side of the trade when oil companies look to hedge the price of their future production.
You'll want to keep that in mind as the lights start to flicker.
Don't Believe It!
Next week we are hosting our sold out Recovery Reality Check Summit in Weston, Florida. As part of the preparations, I have been working with our own Bud Conrad and with John Williams of the always excellent Shadow Stats on their presentations.
It's been quite interesting, as both Bud and John work hard to see through the government's constant manipulations of economic data to get to a more accurate assessment of reality. The datasets and charts that they have been working on tell a substantially different story than you are hearing in the mainstream press.It was with those collaborations fresh in mind that I came across an excellent article in the Trim Tabs Money Blog of how corrupt the government's information is, and how pathetic a job the financial media does in covering that information. You can read the article – Ignorance is Bliss Regarding Economic Data – and watch the video yourself; following is an illustrative excerpt Commenting on the latest report from the Census Bureau that retail sales rose 0.8% in March, Charles Biderman, President & CEO of Trim Tabs Research wrote:
The Wall Street Journal online site reported not only that U.S. retail sales rose 0.8% in March, but also that Americans spent more on autos. ....Would you believe in this broadband world that what is reported as a hard fact by the financial media morons, is based upon a mailed, snail mail, survey to 5,000 retailers and the mailed back response?
Let's see, the US Census Bureau mails surveys to a mere 5,000 retailers and from the responses mailed back guesses at the fraction of a percent change in month to month retail activity. Wow! One would think that the Census people never heard of credit, debit and cash cards. Actual cash is much less than 10% of sales these days and I would rather have all the credit and debit card data than a survey of 5,000 outfits, wouldn't you?
Believe it or not, Master Card and Visa sell their data to the public and I am sure all would give summary data to the government, if asked. But no, the US government agencies, which also include the Bureau of Labor Statistics and the Bureau of Economic Analysis, in their infinite wisdom ignore available real time data. And what is even more unbelievable is that no one in the financial media – except us that I am aware of – is saying that this data is a bad joke!
As for the purported bump in auto sales reported by the Wall Street Journal, according to Biederman the hard data – i.e., not the subsample from a mailed survey – showed that March car sales were actually off by 6% over February, as opposed to the 1.1% gain the pseudosurvey reported.
This should provide you, dear reader, with some serious food for thought. For instance, if much of the data the government is putting out is manipulated to the point of being false, then you need to find better sources for the information you rely on to make decisions about your business and your investments. And secondly, if most of the world believes in the government half-truths and outright lies, there may be real opportunities to be captured if you can uncover those truths before the masses.
I'll give you a relevant example, from our Casey Research BIG GOLD newsletter.The talking heads on cable television, along with members of officialdom, have been particularly vocal of late about their views that the gold bull market is effectively over. Yet, if gold is now so out of fashion, explain this bit of news…
VIA MAT International (VMI) gold storage limit temporarily reached:
Due to high and growing demand for its services, VMI reached its insurable limits at its vaults in Zurich, Hong Kong, and London, and cannot accept new customers. We spoke with VIA MAT and were told they are investing in new facilities at all three locations. Hong Kong is expected to be ready this May, and Zurich in June or July. No word yet on London. In the meantime, VMI is placing customers on a waiting list. – BIG GOLD, April 2012
For the record, VIA MAT is one of the world's largest providers of secure vaults for storing precious metals on behalf of central banks, large financial institutions and hedge funds. That it has run out of storage space in three of its facilities speaks volumes about actual demand.Being skeptical has rarely been more important.Before moving on, since we're on the topic of trying to separate fact from fiction, I thought the following chart, just in from Bud Conrad, was interesting. It shows that the recovery, such as it is, has been bought at a terrible cost in soaring government debt… but that per-capita income has stalled out.
The glaring conclusion you can draw from Bud's chart is that the government will not be able to squeeze struggling taxpayers for the revenues it needs to meet its obligations… which means we can expect that high levels of deficits and higher and higher levels of unpayable debts for the foreseeable future. The money-printing is far from over.Okay, sure, the government could actually slash its spending and renege on its obligations… but, per my earlier remarks, that's simply not going to happen, not with the mindless masses mulling about muttering madly.Instead, expect a continued rise in socialism at the expense of the shrinking population of the productive.
(As I was writing, an email arrived from the office, letting me know that pre-orders are now being accepted for the complete set of CDs from the Casey Research Recovery Reality Check Summit. Click here for details. )
Speaking of Gold
On the topic of gold, whereas under more typical market conditions gold stocks outperform the metal by upwards of 5:1 – because of the leverage that each $1.00 increase in the price of the metal has on the valuation of the companies sitting on millions of ounces of gold above ground and in reserve – over the last couple of years an anomaly has occurred whereby the gold stocks are lagging gold by 3.6:1. Here's a chart:
When Mr. Market finally realizes the truth about what's coming, gold is going to come surging out of its current consolidation phase… but the big gold stocks are going to do a rocket shot.
Which are the best, most undervalued gold stocks today? There's an easy way to get all the details: sign up for a risk-free trial to BIG GOLD. Click here to get details and to receive immediate access to the latest edition and all the archives.Pay Attention to the Basics
These days the single biggest challenge in trying to analyze where the economy is going and how to invest is the fact that government plays such an outsized role in everything. Thus, you could make a perfectly rational investment decision only to see it turn to ashes in your portfolio simply because of a government machination.While we are very concerned at how the current crisis will ultimately come to an end and all of the various market gyrations we are likely to experience on the way to its conclusion, it is only natural to want to earn some money on our money.
While gold and gold shares are crucial components of our portfolio, it would be the height of folly to overinvest in those segments. For most people, we recommend an allocation of no more than one-third of your portfolio – a whoppingly large allocation by historical standards.
For most people, that allocation should be closer to 20% to 25%. We also are fans of cash, as a way of reducing the very real risks of plunging markets and to maintain liquidity. But as inflation is only going to accelerate from here, that cash has to be viewed as something of a hot potato. We also like oil as a long-term holding.As for the rest, I know a lot of readers like to dabble in common equities… and for understandable reasons, starting with the fact that since the crash, the valuations of many equities have come down to quite reasonable levels.Which brings me to the following list of some of the key financial metrics we regularly screen for when making our recommendations in The Casey Report.
Most of these metrics don't apply to gold stocks, which have always marched to a different drummer, but they do apply to common equities.The general idea is that if you are going to invest in common equities, you need to first be assured you aren't overpaying. That's because if you initiate an investment position by overpaying, you are far more likely to suffer a serious loss if the markets get wiggly. By contrast, if you are able to get a great value for your money, then even if the market subsequently hits an air pocket, it is far more likely that, in time, the stock will bounce back, giving you an opportunity to eventually sell at a profit.
In any event, I thought it would be helpful for those of you who haven't made a study of financial metrics to recount some of the ones we use here. You might want to keep them at hand as a reference the next time you are considering a stock purchase.
Price/Earnings Ratio or P/E Ratio is a company's share price divided by its earnings. It measures how much investors are currently paying per dollar of earnings. High P/E ratios imply that strong future growth is already baked into the stock price. A P/E ratio below 6 suggests deep value.
Price/Book Value Ratio or P/B Ratio is a company's share price divided by its book value. Book value is the theoretical liquidation value of a company's net assets – the amount of cash that would be generated from selling all of the company's assets after fulfilling all of its liabilities. A low P/B ratio suggests a high margin of safety, and a P/B ratio below 0.75 suggests deep value.
Percent change in Earnings per Share from last year is the growth or decline in a company's earnings over the prior year. Earnings are a comprehensive measurement of bottom-line performance, and comparing them year to year helps determine whether a company is growing revenues and managing expenses. In general, 20% year-to-year growth in earnings is very good.
Debt/Equity Ratio indicates the mix of equity and debt a company is using to finance itself. A high proportion of debt indicates the company is aggressive, highly leveraged, and risky. A ratio below 3 generally indicates that a company does not employ excessive leverage, though the threshold of acceptable leverage varies significantly by industry.
Current Ratio measures a company's liquidity, or its ability to meet short-term obligations. It is calculated by dividing current assets (meaning assets that can be liquidated within one year) by current liabilities – or liabilities that are due within one year. A current ratio below one is a warning sign that a company may have trouble meeting short-term obligations, while a ratio above 1.5 is considered sufficiently safe.
Return on Equity (ROE) measures a company's profitability and represents how much profit is generated with shareholders' invested money. A ROE of above 10% indicates that the company is sufficiently profitable.
Net Margin represents how much of a company's earnings ultimately become profits. It measures how effectively a company controls its costs in relation to its earnings. Net margins vary by industry, but as a very general guideline, greater than 5% is good.A final caveat: Just because a company passes the test on some or even all of these metrics, or fails on one or more doesn't necessarily make it a good or bad investment, as there are a lot of factors involved in determining future results. But going through the process of checking the core metrics of a company is an important exercise, if for no other reason than it will give you a much better sense of the company and the effectiveness of its management.
(Of course, if you prefer to leave the securities analysis to others, the team of analysts at The Casey Report are happy to help. More on a no-risk trial here.)
As I am running late and long, I'm only going to have a single Friday Funny today – a video
While I often find the antics of my fellow humans to be tiresome and aggravating (as they probably do my own antics), there are few things I love more about humankind than its creativity.The video I am linking to here is a shining example of that creativity at its finest. It starts with the placement of a stand with a red button on it in a quiet town plaza, with a sign hanging overhead that says "Push to Add Drama"… what happens next is a creative riot.
Miscellaneous; Where in the World to Invest
As you may already be aware, we are big fans of the idea of international diversifying one's money and, if you can swing it, one's life. Which of course, begs the questions… where, and how?
Long-term friend Karim Rahemtulla, the Emerging Markets/Options Editor of Wall Street Daily, tackles those questions in his new book, Where in the World Should I Invest, in which he recounts his global quest for today's most prospective places for your money. The book is well written and well organized with an overview of countries from Russia to Singapore, Cambodia to Egypt and a dozen or so other countries in between. It's a great start in familiarizing yourself with global markets and the opportunities those markets hold for those willing to leave the beaten path. It's available in hardcover and as a Kindle download on Amazon.
Are These Trucks for What I Think They Are For?
A friend sent me these photos with the caption "Nothing to see here." Take a closer look… it sure seems like they are essentially portable jail cells. Maybe one of you dear readers actually knows their real purpose. If so, drop me a note at david@CaseyResearch.com. I'm just curious.
And with that, I will sign off for the day and the week by thanking you for reading and for being a Casey Research subscriber. I look forward to seeing a number of you at next week's Summit… it should be a good one.
Until next time!