Casey Research – Gold Silver & World Views
Scrolling feed from Casey Research Daily Dispatch – news views and insights from one of the industry’s best.
- Wed, 27 Aug 2014 06:16:00 +0000: Dimes on Black and Dynamite on Red - Casey Research - Research & Analysis
Let’s play a game. Here are the rules: flip a coin. If it comes up heads, I’ll pay you $1.Tails, you pay me $5.
Of course not. No one would play this game. Yet stock market investors are unwittingly playing a game just like it today, according to Hussman Funds Manager John Hussman.
John believes that at today’s lofty prices, the US stock market is worse than overvalued. It’s a speculator’s nightmare: minimal upside with retirement-ruining downside. His advice is to sell your stocks and wait for the stock market to revert to its mean, as it always does.
Below, you’ll find John’s latest analysis—including the clues he’s looking for that will warn when a stock market decline is not just inevitable, but imminent. You can find more of John’s analysis on his Fund's website.
Before I sign off, one quick announcement: time is just about up to register for our Thriving in a Crisis Economy Summit at the discounted rate. The Summit is in San Antonio on September 19-21, and will feature an all-star faculty including Alex Jones, Doug Casey, Charles Biderman, Lacy Hunt, and Mish Shedlock. Click here to see the rest of the faculty and to sign up.
Hope to see you in San Antonio!
Managing Editor of The Casey Report
Dimes on Black and Dynamite on RedJohn Hussman, President, Hussman Investment Trust
The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle.
At the same time, we have very little view with regard to short-term market action. If one reviews market action surrounding major pre-crash peaks such as 1929, 1972, 1987, 2000, and 2007, you’ll observe a sort of “resilience” in the major indices on a day-to-day and week-to-week basis even after market internals had already corroded. In 1987, for example, the break following the August bull market peak was largely recovered over the course of several weeks before failing rapidly in October. In 2000, the market actually experienced a series of 10-12% corrections and recoveries before a final high in September that was followed by a loss of half the market’s value. In 2007, the initial break in mid-summer was fully recovered, with the market registering a fresh nominal high in early October that marked the end of the bull market and the start of a 55% market collapse.
As economic historian J.K. Galbraith wrote about the advance leading up to the 1929 crash, the market’s gains “had an aspect of great reliability… Indeed the temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But it has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently, discredited.”
None of this implies that the market will or must collapse in short order. Stocks remain strenuously overvalued, overbought, and overbullish, but those conditions have persisted uncorrected much longer in the present instance than they have historically. That doesn’t encourage us to abandon our concerns, but it does make us less aggressive about investment stances that rely on any immediate unwinding of what we continue to view, along with 1929 and 2000, as one of the three most reckless equity bubbles in the historical record.
Our perspective is straightforward: on the basis of measures that have been reliably correlated with actual subsequent market returns in market cycles across a century of data, we estimate that the S&P 500 Index will be no higher a decade from now than it is today. On the basis of nominal total returns (including dividends), we estimate zero or negative returns for the S&P 500 on every horizon shorter than about eight years. See Ockham’s Razor and the Market Cycle for a review of the total return arithmetic behind these estimates, and Yes, This Is an Equity Bubble for additional background on our present concerns.
At the same time, we don’t have strong views about immediate market prospects. Still, even a run-of-the-mill completion to the present market cycle would wipe out more than half of the market’s gains since the 2009 low, so whatever gains the market experiences in the interim are likely to be transitory, and few investors will retain them by exiting anywhere near the top. Frankly, we doubt that the present cycle will be completed with the S&P 500 even above 1,000 (a level that we would associate with historically normal subsequent total returns of roughly 10% annually). We readily accept that 3-4 more years of zero interest-rate policy would justify market valuations 12-16% above what would otherwise be “fair value” (see Optimism vs. Arithmetic to see why), but we also recognize that the vast majority of bear markets have overshot to the downside. In short, an informed view of market history easily admits the likelihood that the S&P 500 will lose half of its value over the completion of the present cycle.
We could certainly observe very constructive or even aggressive opportunities without that outcome. Those opportunities are most likely to coincide with a material, if less extreme, retreat in valuations, coupled with an early improvement in market internals. But here and now, we don’t observe any investment merit in equities, and with market internals deteriorating, any remaining speculative merit has also receded quickly.
As I emphasized last week, “While we’re already observing cracks in market internals in the form of breakdowns in small-cap stocks, high yield bond prices, market breadth, and other areas, it’s not clear yet whether the risk preferences of investors have shifted durably. As we saw in multiple early selloffs and recoveries near the 2007, 2000, and 1929 bull market peaks (the only peaks that rival the present one), the ‘buy the dip’ mentality can introduce periodic recovery attempts even in markets that are quite precarious from a full cycle perspective. Still, it’s helpful to be aware of how compressed risk premiums unwind. They rarely do so in one fell swoop, but they also rarely do so gradually and diagonally. Compressed risk premiums normalize in spikes.”
Those spikes will make it quite difficult to exit in the nice, orderly manner that speculators seem to imagine will be possible. Nor are readily observable warnings (beyond those we already observe) likely to provide a clear exit signal. Galbraith reminds us that the 1929 market crash did not have observable catalysts. Rather, his description is very much in line with the view that the market crashed first, and the underlying economic strains emerged later: “the crash did not come—as some have suggested—because the market suddenly became aware that a serious depression was in the offing. A depression, serious or otherwise, could not be foreseen when the market fell. There is still the possibility that the downturn in the indexes frightened the speculators, led them to unload their stocks, and so punctured a bubble that had in any case to be punctured one day. This is more plausible.
“Some people who were watching the indexes may have been persuaded by this intelligence to sell, and others may have been encouraged to follow. This is not very important, for it is in the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.”
- Tue, 26 Aug 2014 06:23:00 +0000: Canada Is Back in Black - Casey Research - Research & Analysis
The unconventional technologies that have unlocked the oil and gas within the Western Canadian Sedimentary Basin (WCSB) will bring profits to companies operating there as long as West Texas Intermediate (WTI) oil prices stay above US$85 per barrel and natural gas prices remain above US$4 per million cubic feet (Mcf). We see the best of these companies having a great run for at least the next 12 months.
The WCSB encompasses some 1.4 million km2 from British Columbia and the Northwest Territories in the north to Manitoba in the south of Canada.
Reason 1: The Weak Canadian Dollar
The Canadian dollar continues to weaken against the US dollar; we predict this trend will continue throughout 2014 and 2015. The Bank of Canada is in no rush to increase interest rates. Its latest Monetary Policy Report declared a “lower Canadian dollar should provide additional support” to the economy, which is certainly true for the WCSB. In fact, for every 10 cents the CAD weakens relative to the USD, the cash flows of exploration and production (E&P) companies increase by 15%.
Reason 2: Drop in Oil Price Differential
The heavy oil in western Canada is priced as Western Canadian Select (WCS), comprised of heavy conventional and bitumen crude oils that are blended with diluents. WCS is exported from Alberta south to the United States for refining.
Currently this oil trades for around 15% less than the lighter, sweeter WTI: US$83 per barrel (WCS) versus US$99 (WTI) on May 5, for example. But this differential will narrow if refining capacity of WCS opens up.
There are two ways this can happen: increasing the amount of WCS that can get to refiners; and increasing the amount of product refiners can generate.
Both of these developments are happening. We’re pretty convinced that the Keystone XL pipeline will be approved; but even if it’s not, rail capacity is ramping up rapidly to get WCS to transport heavy crude to refiners. Rail’s current capacity of 150,000 barrels of oil per day (bopd) is expected to reach 800,000 bopd by 2015; companies that can take advantage of this spike could increase netbacks by more than C$10 per barrel.
The sixth new coke drum is lowered into place at the BP Whiting refinery (courtesy nwibq.com).
Second, in the next year, 330,000 bopd of heavy oil refining capacity is expected to come online from the coker expansion underway at BP’s Whiting Refinery on the southern shore of Lake Michigan (see above). There’s also excess refining capacity along the US Gulf Coast due to the decrease of heavy oil production in Mexico and Venezuela.
All these factors mean the price differential between WCS and WTI will narrow, increasing the profit of many Canadian players.
Reason 3: Canada Will Find New Customers for Its Oil
The United States has traditionally depended on Canada for much of its energy needs, and Canada depended on the United States as a friendly export market. However, this relationship is changing. With newfound oil sources in the US and the continued controversy and delays over Keystone XL, Canada is looking to hedge some of its risk by shopping its oil elsewhere.
Suncor (SU.TO) is currently building an offloading terminal on the St. Lawrence River, for instance, looking to follow the lead of Husky Energy (HSE.TO), which now exports to India from offshore eastern Canada. Crescent Point Energy (CPG.TO) is following Husky’s and Suncor’s diversification efforts.
On the West Coast, Imperial Oil (IMO.TO) is selling oil from its Kearl oil sands project to Malaysia. IMO transports it from Alberta southwest to the Vancouver port via the Trans Mountain pipeline. Builder and operator Kinder Morgan (KMP) is looking to increase capacity of the 60-year-old pipeline as much as 12 times, to 600,000 bopd.
Then there’s the proposed Northern Gateway pipeline to also transport heavy oil from Alberta to British Columbia coast, this time more due west to Kitimat for shipping to Asian markets. Like Keystone XL, construction of Northern Gateway is meeting a lot of opposition—and like Keystone XL, we think it will get built anyway.
In short, Canada is finding eager customers for its oil with or without the United States.
Reason 4: Technology Is Bringing Faster Profits
Geologists consider the WCSB mature as far as conventional drilling is concerned—meaning most of the easy oil has already been pumped from the ground. What’s the game-changer now is unconventional technology—everything from horizontal (versus vertical) drilling to multiple wells branching out from a single well pad.
Thanks to drilling achievements like longer horizontal bores, it’s taking less than nine months for many projects in the WCSB to recoup their costs. That’s good for two reasons: production brings in profit sooner, of course; and it also means the typically dramatic decline rate in production is less of an issue.
Newer technologies such as zipper fracs—working two wells alternately from the same pad—are proving to increase initial production as well as speed up the payback period even more.
The net result is lower-cost penetration in the WCSB. That’s bullish for the oil producers with the right acreage in the oil patch. Those are the ones more likely to pass on their profits to shareholders in the form of dividends.
In a global market where investors are chasing yield, the WCSB is turning out to pay respectable yields at current natural gas and oil prices. But buyer beware: not all companies are the same, and many companies we’ve researched will have a difficult time maintaining their high yields.
(If you’re interested in higher-risk/higher-reward mid-tier producers as well as large-cap companies, you may want to consider subscribing to our more in-depth newsletter, the Casey Energy Report. Two of the WCSB recommendations in our CER portfolio have done very well the past six months.)
Reason 5: Natural Gas—WCSB’s Add-On Value
The US bonanza in natural gas supply that resulted from the shale revolution hasn’t stopped the recent rally in North America’s natural gas prices.
A cold winter and late-season snowstorms in the United States has depleted inventories. At 822 bcf (billion cubic feet) at the end of winter, total US inventory was 878 bcf less than last year and 992 bcf (about 55%) less than the five-year average. It’s recovered somewhat—981 bcf as of April 25—but still has a lot of catching up to do.
Obviously, less supply means an increase in price. Canada’s gas benchmark AECO is expected to increase in price as well for the same reason. Storage levels in Canada are 60% below its five-year average.
Putting It All Together
For these reasons, we believe Canadian E&P companies have plenty of room to deliver exceptional shareholder value. As long as oil stays above US$85 and US$4 per Mcf, many companies in the WCSB will remain quite profitable, and their dividends will keep coming.
So here’s the obvious question: What companies will give us the best potential to profit from the upswing in the WCSB? Can we find US-listed companies that operates there?
In several of the preceding points, we’ve noted that existing infrastructure is key. Investors often steer clear of investing in WCSB companies because of past infrastructure restraints— that is, until now. What a pipeline can’t accomplish, rail can; refinery capacity is on the rise, and Canada is expanding its customer base. Put together, it means infrastructure is no longer a bottleneck for the WCSB.
Now for my shameless sales plug. In the Casey Energy Report, we have found companies whose stocks have gained +30% and have been paying industry-leading yields. To access that research and many other profitable opportunities, you can subscribe to the Casey Energy Report at no risk with our full money-back guarantee. If you don’t like the Casey Energy Report or don’t make any money over the first three months, just cancel your subscription and we’ll issue a prompt refund, no questions asked. Even after the initial three months, you can cancel anytime and get a prorated refund on the unused part of your subscription. Get started with the Casey Energy Report now.
- Mon, 25 Aug 2014 11:52:00 +0000: Must-Read Book of 2014 - Casey Research - Research & Analysis
We’re going to take a break this week from our usual fare of industry insight for metals and mining investors, pulling back for a look at the big picture. The biggest picture, in fact: the current human condition, within the context of all of history—and even prehistory.
This is the subject of our friend and fellow contrarian investor Bill Bonner’s new book, Hormegeddon.
The cryptic title, I must admit, is my second greatest disagreement with what I think is clearly one of the best and most important books written in many years.
It’s a clever combination of hormesis (the biological phenomenon of small doses of something being good for an organism while large doses are damaging or fatal) and Armageddon. The meaning being that our civilization suffers from too much of many good things and is headed for a catastrophic correction, if not complete collapse.
Whether one agrees with that conclusion or not, it certainly poses a question every thinking person should consider, and then plan to act accordingly—which dovetails perfectly with our views of gold for prudence and gold stocks for speculative profits.
But there’s an immediate benefit to reading the book as well: despite the rather sobering—if not horrifying—line of reasoning, the text is brilliant and very, very funny. If H. L. Mencken has an heir in our day, it may well be Bill Bonner.
Long ago, a friend suggested that I should start a daily email letter and build a huge mailing list, “like Bill Bonner’s Daily Reckoning.” My reply was that while I might have plenty to say, and have great confidence in my analytical skills and ability to deliver valuable information, I didn’t think I could deliver entertaining copy on a daily basis, as Bill has done for so many years.
In Hormegeddon, Bill continues that amazing track record, delivering page after page of informed, insightful, frequently challenging, and very humorous writing.
Let me share a few of my favorites:
Bonner’s Law: In the hands of economists, the more precise the number, the bigger the lie.
But there are those who believe they can make the right decision more right, or the poet more poetic. And while many of these snake oil salesmen content themselves with a quick buck and the next train out of town, some of them go for the long con. These are the central planners.
Constructing a public policy out of public thinking is like building a skyscraper out of marshmallows. The higher you go, the squishier it gets. Because the information blocks themselves are not solid. Instead, they are combinations of theory, interpretation, guesswork, spin, hunch and prejudice.
The trouble with The Economist, The Financial Times, the US Congress and most mainstream economists is not that they don’t know what is going on, but that they don’t want to know. It would be counterproductive. Nobody gets elected by promising to do nothing. Nobody gets a Nobel Prize for letting the chips fall where they may. Nobody attracts readers or speaking fees by telling the world there is nothing that can be done. Instead, they meddle. They plan. They tinker. Usually, the economy is robust enough to thrive despite their efforts. But not always.
Imagine that Warren Buffett moves to a city with 50,000 starving, penniless beggars. This is what economists would say about that city: “Stop whining...the average person in the city is a millionaire.”
In other words, there was so much fudge in the GDP figures that you could get tooth decay just looking at them.
Enough. I don’t want to spoil your fun.
It’s not all pointed levity, of course; there are charts and tables and many cogent arguments. Among the most striking of these was a chart on page 256, showing Zero Hour—the point beyond which every incremental dollar of US debt has no impact on GDP. That’s due to arrive next year. (Maybe the Mayans just missed it by three years.)
And Bill’s bottom line, while agreeing 100% with Doug Casey’s view, is anything but funny:
A blow-up in the US money will be felt around the globe. It will probably be the biggest public policy disaster of our lifetimes. What exactly will happen, and when it will happen, we will have to wait to find out. But it will be bad, that much is certain. We will hit rock bottom.
What about my other disagreement, besides the inscrutable title? With all due respect, I think Bill misjudges the economic (never mind social) impact of the Internet.
The Internet. A time waster, like television. Not a wealth booster, like the internal combustion engine.
What data supports this conclusion? Lackluster GDP growth since the Internet began its explosive growth. Aside from Bill’s own arguments that GDP numbers are meaningless, I would say that real economic growth, whatever it is, would have been much, much less than it has been since the advent of the Internet, were it not for this technology and the game-changing efficiencies it has, is, and will bring.
Which is not to say that the signal-to-noise ratio is not distressingly high, which I think is his real point.
At any rate, if we do differ on this matter, it is a small thing compared to the long-overdue and necessarily merciless analysis of the current human condition Bill has given us.
It’s a bonus that—at least for independent thinkers—the book is as fun as it is important.
I, at least, found it much more gripping than any novel I’ve read for years. Frankly, I had only intended to glance at it, but it sucked me right in.
So I do highly recommend Hormegeddon to all our readers. Just be sure you’re sitting in a comfortable chair, maybe with a drink and a snack at hand.
And fear not: We’ll be back next week with more coverage and analysis of metals and mining investments today. This week’s message is that Bill Bonner’s book provides ample support for our investment strategies.
Senior Metals Investment Strategist
Editor's Note: Louis James was asked to review Bill Bonner's new book, Hormegeddon, which he did--not realizing that Bill has much more to offer, including several free gifts and access to more of Bill's insightful thinking, going forward. Click here to find out more, or here to cut to the chase.
Rock & Stock StatsLastOne Month AgoOne Year Ago Gold 1,280.87 1,306.30 1,370.70 Silver 19.43 21.01 23.04 Copper 3.22 3.21 3.33 Oil 93.96 102.39 105.03 Gold Producers (GDX) 26.10 26.59 29.37 Gold Junior Stocks (GDXJ) 40.94 42.89 48.62 Silver Stocks (SIL) 13.44 14.16 15.66 TSX (Toronto Stock Exchange) 15,535.55 15,315.13 12,674.35 TSX Venture 1005.58 1,010.88 935.04
Gold and Silver HEADLINES
India Gold Smuggling Explodes YoY (Mineweb)
According to figures released by the Indian government, it intercepted $44 million worth of smuggled gold at the country’s airports between April and June. That compares with $82 million for the entire year ending March 31.
Last year, between April and July, the Mumbai airport customs had seized 61.46 kilograms gold, while this year it seized 403.52 kilograms. Customs officials at the Chennai airport in the South also reported seizing much more gold than last year.
Owing to the high import duty imposed last year on gold by the government to bring down the nation’s fiscal deficit, it’s clear that gold smuggling is rampant across the country. Imagine the endless flows of the yellow metal that do make their way across the border unhindered and your head may spin.
Did the Indian government really think they could stop a thousand-year tradition?
China is said to have allowed three more banks, including a foreign lender, to import gold, sources with direct knowledge of the matter told Reuters. The move comes as the world’s top gold buyer gears up for its strongest effort yet to gain pricing power of the metal.
This brings the number of firms allowed to import gold into China to 15, and comes ahead of the launch in September of a new international bullion exchange in Shanghai, with which China hopes to become a price-discovery center.
China and other Asian gold trading centers such as Singapore are calling for more localized pricing of the precious metal as they seek alternatives to the so-called London fix, the global benchmark for spot gold prices, which is under investigation by regulators on suspicion that it may have been manipulated.
Jeff outlined a couple weeks ago what other steps the Chinese might be undertaking to build up their gold reserves.
Based on World Gold Council statistics as published in its quarterly Gold Demand Trends reports, central banks have been buying at a higher rate this year than last, with a reported 240 tonnes purchased in the first half vs. the 180 tonnes the same period a year ago. One has to bear in mind that these figures exclude any purchases China may have made to boost reserves.
The biggest recent buyer, based on published data, has been the Russian Federation, reported to have increased its holdings by a further 9.33 tonnes, following an 18.6 tonne increase in June. This pushes its total gold holdings above 1,100 tonnes. Russia now has the world’s fourth-largest national official holdings (excluding the IMF), yet it still falls substantially behind the US, Germany, Italy, and France.
We can’t help but wonder… how much gold do the Chinese own now?
Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers
- One of our favorite gold exploration teams reported some early-stage drill results, which are extremely encouraging since they’re in one of several targets located in a major mining area of Quebec.
- This Canadian-based producer just announced some intriguing quarterly results, the importance of which the market has not yet grasped, giving us a clear opportunity. With this company, however, high-margin production takes a backseat to the discovery potential—if just a couple of the company’s 15 exploration targets work out, it should take these shares to a whole new level.
- A number of BG companies have released quarterly reports—stay on top of your stocks by checking the latest important news and our comments.
- Fri, 22 Aug 2014 06:27:00 +0000: Can Any Government Be Moral? - Casey Research - Research & Analysis
We all know that governments can be immoral (Nazi Germany, the USSR, Mao’s China, and the several others leap to mind), but can governments truly be moral? I think this is a crucial question and one that has very seldom been addressed.
You might think that the government aspect of this question would be the hardest part to discuss calmly. After all, people fight about politics and government every day, and often all day. It’s the obsession of the age.
But it isn’t government that’s the most difficult part of this, it’s morality. People freeze when you bring up the subject, expecting an onslaught of confusion and turmoil. A generation or two of academic and political wranglings have turned a subject that children could understand into a painful mess.
We’ll explain this in today’s article, of course, but for 98% of us, the basic moral programming we were born with—if left unadulterated—is enough to guide us quite nicely through life. As a friend of mine who lived almost to 100 used to say: Life is simple, we just keep screwing it up.
Also in this issue of The Room, Doug French takes the question of morality even further, presenting a morality test for capitalism and government. And I think testing is appropriate for the things we spend time and treasure on: run intelligent analyses, to see if they stand up to a test or fail it.
We’ll also take a moment to examine a major fail on the part of modern “justice.”
One other note: Casey Research's 2014 Summit in San Antonio (September 19-21) has been filling up fast. Rooms at the hotel are running out fast. If you'd like to join us, please make your reservation now.
Okay, with all that said, let’s get to it.
Can Any Government Be Moral?
The Morality Test: Capitalism vs. GovernmentDoug French, Contributing Editor
Everyone has been taking shots at capitalism, from the Pope to best-selling author Thomas Piketty. They say that letting the market and entrepreneurs have their way leads to wealth inequality. There will be people who are poor and people who end up rich, and that’s immoral, they claim.
The Daily Kos admits capitalism is stunningly successful at creating wealth, but, “The creation of wealth does not make it a moral system.” The article continues:
[an] important aspect of capitalism that occurs in both theory and practice is its immorality; capitalism puts the importance of profit and wealth accumulation before the interests and human rights of people, namely the laboring class.
The Kos folks go on about Apple making 60% profit margins, the price of the stock soaring, and its executives getting rich, but…
If capitalism worked as it was supposed to, these laborers would be making much more money. The problem is, capitalism is working as it is supposed to: create as much wealth as humanly possible, and Apple is certainly doing that. The assumption that it makes everybody’s lives better however, is a falsity.
But economic historian Deirdre McCloskey doesn’t see the Industrial Revolution and beyond happening on the backs of slaves, whether they work at Apple or somewhere else, but by “changes in the way people thought, and especially how they thought about each other.”
McCloskey makes the case that people started liking Schumpeterian “creative destruction” and embracing new ideas that replaced old ones. Creativity destroys old stuff and old ways of doing things, and when people started to like it, wealth and prosperity began to happen for the masses.
It was once that the only path toward honor was being a soldier or a priest. “People who merely bought and sold things for a living, or innovated, were scorned as sinful cheaters,” writes McCloskey, who reminds us that in 1800 the average daily wage was $3 in today’s money.
Then, as McCloskey points out, things began to change, and Europeans and others…came to admire entrepreneurs like Ben Franklin and Andrew Carnegie and Bill Gates. The middle class started to be viewed as good, and started to be allowed to do good, and to do well.
In McCloskey’s words, the middle class was given “dignity and liberty” for the first time in human history, and suddenly the masses became literate, automation took hold, innovation broke out everywhere, as did civil rights, and leisure time, information, and advances in all areas kept (and keep) piling up.
The economic historian calls it the “Middle-Class Deal.” The shift first took place in Europe, subsequently in America, and is now under way in India and China. McCloskey says the Great Recession of 2007-09 was nothing significant compared to…the Chinese in 1978 and then the Indians in 1991 adopting liberal ideas in their economies, and welcoming creative destruction. Now their goods and services per person are quadrupling in every generation.
Remember the $3 a day people were making? Now it’s $100 in the middle-class liberty and dignity parts of the world. Young people, and we’re not just talking about the Mark Zuckerbergs of the world, are many, many times better off than their ancestors. McCloskey explains:
All the other leaps into the modern world—more democracy, the liberation of women, improved life expectancy, greater education, spiritual growth, artistic explosion—are firmly attached to the Great Fact of modern history, the increase by 2,900 percent in food and education and travel.
Dang. McCloskey’s right. Much of the world has come a long way in a couple hundred years. And all it took was the embrace of entrepreneurial capitalism.
Whole Foods founder and CEO, John Mackay, believes capitalism and business get pigeonholed unfairly with a justification that humans only act out of self-interest, allowing enemies (like the Daily Kos) to do “ great damage to the ‘brands’ of business and capitalism, because it allows the enemies of capitalism and business to portray them as selfish and greedy and exploitative.”
Mackay echoes what McCloskey put numbers to: Capitalism and business are the greatest forces for good in the world. It’s been that way for at least the last three hundred years… and they don’t get sufficient credit for the amazing value that they have created.
Anti-capitalists insist it has been FDR’s New Deal, the Tennessee Valley Authority (TVA) and the Federal Deposit Insurance Corporation (FDIC), to name a few government programs, that have created the dandy living we enjoy. However, while these folks want to blame dog-eat-dog, cowboy capitalism for the crash of 2007-09, it was, in fact, directly a result of Roosevelt’s creation of depression-era pro-housing government programs like the FHA, Fannie Mae, Freddie Mac, and deposit insurance, that codified moral hazard into banking.
In a bit more irony, the results of the TVA should offend the sensibilities of big government apologists. The TVA’s “excessive damming of the river has led to some of the largest floods the country has ever seen (730,000 acres to be exact),” explains Intellectual Takeout. “Through eminent domain, thousands of people have been forced from their homes. While white farmers were compensated, black tenant farmers were not.”
Besides meddling with capitalism’s wealth creation in an attempt to smooth out the differences between rich and poor, what are the most visible examples of government programs? Fighting multiple wars for more than a decade. Is it any wonder one Nobel Peace Prize winner has killed thousands using the CIA’s drone program? “Turns out I’m really good at killing people,” President Obama said quietly to his aids. “Didn’t know that was gonna be a strong suit of mine.”
The dronemiester-in-chief doesn’t brag about killing people in public, but instead waxes philosophical about the evils of the free market. He told some Kansans last year that capitalism doesn’t work. “It has never worked,” Obama said to applause.
It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible postwar booms of the ’50s and ’60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.
But for the last 100 years, capitalism has been hamstrung by President Obama’s favorite thing: government. One-half of virtually every transaction—money—is controlled by the government. And the currency is worth but a tiny fraction of what it once was under government stewardship.
Harry Binswanger wrote in Forbes that American capitalism hasn’t been the same since the passage of the Sherman Antitrust Act of 1890. He points out that there are 430 federal agencies overseeing all aspects of American business.
The Federal Register is a daily digest published by the federal government since 1936, and it illustrates how government regulation has exploded.
The register contains proposed regulations from agencies, finalized rules, notices, corrections, and presidential documents. The Daily Caller points out,
The 1936 Federal Register was 2,620 pages long. It has grown steadily since then, with the 2012 edition weighing in at 78,961 pages (it has topped 60,000 pages every year for the last 20 years).
This is the opposite of the liberalization taking place in China and India. While capitalism soldiers on, trying its best to morally generate wealth, government does the only thing it knows how to do: kill, whether it’s commerce and prosperity or people.
Commerce is more resilient than people. Individuals can’t survive government’s murderous force, but commerce finds a way.
Morality stands for cooperation and peace. Immorality is force, standing in the way of dignity and liberty. It is capitalism that embodies morality, while government killing and destruction defines immorality.
What Are the Odds?
As I was putting this issue together, I got a couple of emails from Jeff Clark and Bud Conrad, concerning the immorality and injustice of the US government. In particular, they addressed the insulting events surrounding the IRS experiencing seven “hard drive crashes,” which (“oh so sorry”) excused them from admitting that they were engaged in political thuggery.
Here’s what Jeff sent over—some calculations from a data center administrator:
I run a data center. Disk drives that are left running continuously last between two and three years…. The odds of a disk failing in any given month are roughly one in 36. The odds of two different drives failing in the same month are roughly one in 36 squared, or 1 in about 1,300. The odds of three drives failing in the same month is 36 cubed, or 1 in 46,656. The odds of seven different drives failing in the same month is 37 to the 7th power = 1 in 78,664,164,096.
Jeff adds that the odds are greater that you will win the Florida Lottery 3,426 times than having those seven IRS hard drives crash in the same month.
Then Bud chimed in, saying:
His statistical method could be argued with, but the conclusion would still be the same.
There was crook.
The probability of the crook going to jail is still zero. The crimes of many people not being prosecuted allows (encourages) more crimes as we have seen the probability of government crimes much bigger is close to 100%. Come back for a fair trial Mr. Snowden. You will be put in solitary confinement with no blankets.
Bud is right: No one is in any danger of going to jail for this. As the Bible says in one place, “Justice has fallen in the streets.” Or in this case, she died in Washington DC.
And one more thing: All of those missing IRS emails had recipients. Why not get copies from them… or from the mail administrators in-between? Heck, why not just get them from the NSA?
Not long ago, I received a set of photos from my oldest friend, Scott, entitled, “Why Women Live Longer than Men.” I laughed, winced, and laughed more.
So, men, take a look and laugh a bit at yourself, because if you’re anything like me, there’ve been more than a few times when you could have been talked into these situations.
And ladies, you marry us, so maybe you should laugh at yourselves a bit too!
That’s It for This Week
Have a great weekend, and remember that morality is simple: What you don’t like, don’t do to others. If you can remember that simple line, and act on it, you can hold your head high, forever.
Editor, A Free-Man’s Take
- Thu, 21 Aug 2014 12:52:00 +0000: Microsoft’s Mobile Comeback: Fantasy or Possibility? - Casey Research - Research & Analysis
It was one of worst predictions in recent memory. In a 2007 interview, former Microsoft CEO Steve Ballmer said, “There’s no chance that the iPhone is going to get any significant market share. No chance.”
It reminds us of when Sir William Preece, an official with the British Post Office, weighed in on an earlier incarnation designed by Mr. Bell, not Mr. Jobs: “The Americans have need of the telephone,” said Sir William, “but we do not. We have plenty of messenger boys.”
To make matters worse, Ballmer predicted that Android would also fail, since Google wasn’t charging a licensing fee to its OEMs. Of course, he was talking his own book. But it still stands out as intensely blind to what customers really wanted.
However, today Microsoft has thrown everything the company has at mobile. It’s dropped the pen and embraced touch in every version of Windows (poorly, many have said). It’s spending millions advertising its phones, and billions to acquire the only notable company still making them. Is it all too late? Or can Microsoft rise from the ashes and find another multibillion-dollar business to add to its stable?
A Two-Man Race
A look at the market-share numbers illustrates just how spectacularly wrong Ballmer was about the iPhone and its operating system (iOS) and Android.
As you can see, Android and iOS currently control over 90% of the US and global markets, forming a true duopoly, with both systems having a meaningful share.
With global share of less than 8% in 2010 and deteriorating to less than 4% in 2013, Microsoft is currently irrelevant in the smartphone market. Is this because the company was late to the party?
Not really. Microsoft actually got a head start in the market, launching its first smartphone (the Pocket PC 2002) in 2001. New models under a new name (Windows Mobile) were launched annually in four of the following five years and, incredible as it might now seem, the company actually became a market leader in those halcyon days. By Q1 2004, Windows Mobile had captured 23% of worldwide smartphone sales; and in 2007, US market share peaked at 42%.
However, shortly thereafter, the wheels started to come off. In 2008, US and global share fell to 27% and 14% respectively. By 2010, Windows Mobile was a bit player with US share of 7% and global share of 5%.
So how did Microsoft lose its place in one of the biggest and most explosive markets in history? It wasn’t because of timing: the company was a smartphone pioneer. It wasn’t because of a lack of resources: when Windows Mobile’s share peaked in 2007, Microsoft had $21 billion in cash and equivalents, free cash flow of $15 billion, and an R&D spend of $9 billion… surely enough financial wherewithal to at least maintain, if not gain, share.
“They had everything they needed to execute,” said tech analyst Raven Zachary in a Wired article. “It was theirs to lose and they lost it.” Well, something was lacking—what was it? In a word, vision.
While Apple was designing a consumer-centric product that would redefine the utility of the mobile phone from a mere communication device to a lifestyle product, Microsoft remained PC- and enterprise-centric in its development of smartphones. This tunnel vision was on full display when in 2007, Ballmer based his prediction of failure for the iPhone on the fact that it lacked a physical keyboard. And it caused Microsoft’s product developers to miss the importance of mobility, touchscreens, and an extensive apps ecosystem. By the time the company realized its error, it was way behind the competition.
A Lost Cause?
Should Microsoft just give up on the devices market altogether? Yes, say some industry analysts, including Chetan Sharma. “(T)here is little appetite or need for another platform”, says Sharma. “Microsoft might be better off giving up on its device dream and just focus on services on top of the platforms that dominate.”
It could be that Microsoft will do just that. Abandonment of, or perhaps apathy toward, the developed markets, particularly the US, appears especially sensible. In those maturing markets, brand loyalty among users is highly developed, users are “locked in” to platform ecosystems, and carrier (e.g., Verizon) support is firmly established. Since these factors are self-reinforcing, the incumbent systems (i.e., Android and iOS) aren’t apt to be seriously challenged in the foreseeable future. Persuading significant numbers of users to switch to a smartphone with a Microsoft platform (now called Windows Phone) would be a tall and expensive order. With Microsoft’s flagship Office programs now arriving for iPhone and iPad alike, there are signs the company may be admitting it has lost the battle for the OS, and relegating itself to app provider alone.
But all may not be lost in the OS war, either, which would be good news for the Windows Phone and any other platform provider that missed out on the developed markets. There’s a next wave of smartphone uptake that will be coming from emerging markets over the next three to five years. Stoked by growing economies and increases in real income, there will be mass migration from feature phones to smartphones in these markets. And the numbers will dwarf anything we’ve seen before.
It’s a second chance for Microsoft in the platform business, and if it can execute, the impact on the company’s revenues could be significant. For example, if Windows Phone can capture share of 15% in emerging markets by 2017, with an average sales price of $150 per device, the resulting revenue would be well over $20 billion. That’s almost 25% of fiscal year 2014’s total revenue of $87 billion.
But is there any reason to believe Microsoft will succeed this time? Some people think so, and here’s why:
- Nobody is entrenched: Smartphone uptake is still in the early stages in the emerging markets, so brand loyalty and the app lock-in phenomenon have not yet taken hold. This means no platform providers are yet entrenched (such as Android and iOS are in the developed markets) and that challengers have a window of opportunity in these emerging markets.
- The Nokia factor: In April of this year, Microsoft closed the deal on its $7.2 billion purchase of Nokia’s phone and tablet business. Strategically, the purchase was a move by Microsoft to expand its presence in emerging markets, for while there’s little recognition of the Microsoft brand in these markets, the Nokia brand is well known and established. Microsoft will be attempting to leverage the Nokia brand to attract users of competitive phones as well as to move, over time, Nokia’s feature phone user base to the higher-end Windows Phone. Nokia possesses other capabilities that will be useful in establishing Windows Phone in emerging markets—capabilities that were previously missing at Microsoft. They include: relationships with carriers; a distribution network; manufacturing capacity and know-how; and a staff of talented hardware engineers.
In the February 2014 report titled Mobile Platform Wars, GSMA Intelligence analysts state their belief that a duopoly, or perhaps an oligopoly, of smartphone platform providers will form in the emerging markets, much as has happened in the developed markets. And they believe this will happen in short order: “[A]ny challengers would need to establish a minimum share (5%) in the next 1-2 years to have a chance of being a long-term competitor.” So the bar is set. We’ll be watching. If Microsoft starts to make progress in the mobile space, it could be a worthwhile investment. In the meantime, we’re looking elsewhere.
Thankfully for Microsoft, the onslaught of the tablet—another market in which the company fell woefully behind despite being first to market by many years—has subsided. Desktop PC sales have leveled off, and should end 2014 up for the first time in three years, as businesses give up on the tablet as a productivity device (try typing out a three-page memo on an iPad, and it’s obvious why) and refresh their aging PCs. The end of support for Windows XP this year should help that upgrade cycle. That’s good news for Microsoft shareholders, and buys the company a lot of cash to continue its seemingly Sisyphean push up the mobile market share hill.
In the next issue of BIG TECH, due out September 2, we’re recommending a stock we believe is undervalued and poised to rise over 30% in the next 12 months or so, thanks in part to that PC sales rebound.
For access to this recommendation, simply sign up for a risk-free trial, and you’ll be the first to hear about it. If you decide to keep your subscription, it will cost a mere $99. That’s nothing compared to the profits just this one investment should bring. But, if for any reason you’re unsatisfied, simply cancel to receive a prompt, courteous, and complete refund of the entire subscription price. You have 3 full months to make up your mind.