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• Wed, 22 Feb 2012 20:39:00 +0000: Doug Casey on Africa - Casey's Daily Dispatch
  
  Author: 

  Doug Casey
  Synopsis: 

  Africa abounds with signs of new prosperity, but it's uncertain whether this trend will continue.

  
  

  (Interviewed by Louis James, Editor, International Speculator)

  Doug: Lobo, you were in Africa – the Congo – last time we talked. How did that go?

  L: I saw a lot of changes from my previous visit to the DRC in 2006. That brings up an interesting question, as we do invest in companies working in several African countries, and you've described the continent as "a perpetual basket case." What's your take on Africa today? Is it doomed to remain the heart of darkness, or could things be looking up at a last?

  [Ed. Note: The reference here is to the Democratic Republic of the Congo (DRC), not the Republic of the Congo (ROC).]

  Doug: I think it's very much an open question at this point, as to whether Africa has a dim or bright future. It's all about management, not resources. Africa has always had plenty of resources, but the worst management possible. Resources are actually a liability for most places. The classic examples of places not needing natural resources for success are Japan and Hong Kong. They have essentially zero natural resources, but became immensely prosperous because they had good property rights and predictable laws. On the other hand, you've got countries like Venezuela and Nigeria that have been blessed – or cursed, as the case may be – with great mineral wealth, but are absolute basket cases. And they'll stay that way until the governing philosophy changes.

  Success of a society is totally a "people" thing – management. Without social systems that encourage prosperity – which is to say, encourage personal freedom – natural resources are counterproductive. They just become something for the strongest thugs to steal. Since the mineral rights in Africa all belong to the state, the best way to steal the diamonds, gold, oil, or whatever, is to get control of the government. Governments are obstacles to prosperity almost everywhere, but in Africa they are totally counterproductive. They're exclusively vehicles for theft and repression.

  All across the continent, every regime – and I can't think of a single exception – became a hellhole after the colonial powers left. They exported nothing but minerals – the farms and plantations all went back to the bush – and imported nothing but crazy ideas and luxury goods for the rulers, mostly from Europe. Then, to compensate, Western governments have shoveled a trillion dollars of "aid" into the continent over the last 50 years. That was all money stolen from poor people in rich countries that ended up lining the pockets of rich people in poor countries. It cemented the poor Africans to the bottom of the barrel. Crucifixion is too good for people who promote foreign aid.

  I attribute almost all of Africa's disastrous problems to colonialism. If Europeans came there as traders, it would have been beneficial to everyone. But they came as conquerors, destroyed the existing native cultures, engaged in horrendous wholesale slaughters – the Congo being perhaps the worst example – and imposed alien religions and political systems on the natives. My friend George Ayittey details this in his books.

  L: My 11-year-old daughter is somehow aware of this – when I came back this time, she told me she was deeply offended by the rulers and other rich thieves in African countries who redirect foreign aid to their bank accounts in Switzerland, while the people it's intended to help starve. But it occurs to me that what you said about the mineral rights is true of Latin America and other places as well; if you want to mine, you don't go to the people living on the land, you go to the government to buy or rent the right to do so.

  Doug: Yes. The only exception I know of is the US, where if you own the surface rights to a piece of land, you own the subsurface rights as well, including mineral rights. It's only if someone wants to mine on government land that they need to file claims and deal with the government. This is one reason why the US was the world's most prosperous and least corrupt country in the past. Private property rights like this served as one limit to the size and importance of the state.

  L: Right. And as a "people system," the ability of individuals to own mineral rights had a lot to do with America's westward migration in the 19^th century – the great gold rushes and such. Mining was also one of the main things that paid for that expansion. But we're straying from the subject. It's new to hear you say Africa's fate hangs in the balance; I'm used to hearing you say the place is hopeless. What would be a possible pathway to improvement?

  Doug: Well, unbeknownst to most people, it seems that GDPs on the continent have been expanding very rapidly over the last decade. Now, of course those figures – issued by inept, despotic, and kleptocratic governments – are highly questionable, but most of the countries in Africa are actually starting to turn around, and strongly. Part of it is because they're starting from such a low base. But most of it is because things have improved so much from the way things were in the '60s and '70s. In those days most of Africa was run like Haiti was under Papa Doc – or worse.

  L: That may be so, but a major source of that growth is the Chinese money pouring into the continent to lock up natural resources – and escape the dollar trap, to boot. Is that really a reason for optimism, or does it just mean the new thieves in presidential ribbons will continue gorging at the trough, with no lasting benefit to the people?

  Doug: I remember when I first went to Zambia, in 1985. I don't believe there was a bookstore in Lusaka – although they sold a few dog-eared Marxist tracts at what laughably passed for the best office supply store. The same thing in Tanzania, where I stayed in the best hotel, but had one light bulb to move between my bedroom and bathroom. That kind of thing was typical. Now the whole continent is changing. Everybody has a cell phone – except me, I hate the damn things – and access to the Internet. People are moving into the cities and joining the middle class.

  Africans aren't stupid; they've just been sold on every stupid collectivist idea that's come down the pike from Europe. A bloated state controlled by a kleptocracy has been the pattern so far, but there's change in the air. The disastrous colonial period and the catastrophic post-colonial period are receding into history. As I recall, the first African country to free itself from its colonial overlord was Ghana in 1957, followed by a whole spate of independence movements in the 1960s. Ghana was a nightmare under Nkrumah, but by the time I went there in 1994, it was to play polo with our excellent partner at Casey Research, David Galland – talk about a small world! – and the place was already on its way up.

  L: That would be true for sub-Saharan Africa. I think the very first was Libya.

  Doug: That's right; Libya in 1951, and then Egypt in 1952. At any rate, I suspect they had to go through a stage during which the people thought that independence alone would make their countries as rich as those of their former colonial masters. That was the stage where an African thought he was successful if he could wear a tie, have a pocketful of pens, and carry a clipboard, even if he didn't know how to write. When the Congo went independent, there were only something like a couple dozen natives who even had a high-school education. They were ripe prey for Uhuru jumpers and neo-colonialists from the IMF and World Bank. That's changed. Those worthless institutions are now on the ragged edge of bankruptcy, and Africans have become much more sophisticated. There's an understanding that it's not a matter of race; your enemy – or friend – can be white or black. And soon a lot of them are going to be yellow.

  L: You really believe that?

  Doug: I didn't say they’ve all become free-marketeers. But I do think they are starting to realize it doesn't matter if the thief is a white guy on a throne in Europe or a fellow black who's made himself president for life. People don't have to be deep political thinkers to simply want governments that work – meaning, they allow prosperity to flourish. Of course, no government produces any prosperity. But even kleptocrats are starting to realize it's much better to steal 10% of a huge pie than to try to steal 90% of a tiny pie.

  L: Okay…

  Doug: On the other hand, there's a huge problem in Africa, stemming from the fact that none of these countries truly represent the historic homelands of a specific people. The lines on the maps were all pretty much drawn up in boardrooms in Europe during the 19^th century without regard for tribal homelands, differences in language, or even to geographical barriers, in some cases. With the possible exception of Egypt – and to a much lesser extent Ethiopia – each of these countries is an agglomeration of different tribes, ethnic groups, and religions that don't mix well together.

  The result of this has been that the governments of these countries have become prizes sought after by each group, to be used for profit and to reward buddies by stealing from everyone else.

  L: Could the countries be reorganized along tribal lines to result in something more peaceful and durable?

  Doug: That would be a step in the right direction. But they'd just find other differences upon which to base plundering a new group of victims for the benefit of a new group of fat cats. The best hope would be the complete breakdown of the nation-state as a way to organize society, and for the various groups to self-organize into voluntary social systems, along the lines of the phyles we've discussed in the past. Id say the same thing for Europe, Asia, and the Americas as well, where different sorts of tribalism are alive and well. The nation-state is definitely on its way out; it was a really suboptimal – I'm being kind – way for people to organize.

  L: Perhaps so, but wouldn't you still have a threat of war between Hutus and Tutsis and other such feuding tribes?

  Doug: Maybe. Maybe not, if they weren't forced to mix. South Africa has avoided a civil war in spite of having a dozen or more major black tribes, as well as two white ones.

  L: That could be just around the corner there…

  Doug: Yes, they've been very fortunate and dodged the bullet so far. We'll see. In Nigeria, where there were an estimated 300 different tribes at the time of gaining independence in 1960, they had a civil war that was knee-deep in gore during the late '60s in Biafra. Now there's tension between the Muslims in the north and Christians in the south; Nigeria, like all these countries, is an artificial construct that should be disassembled. Sudan just broke in two for similar reasons, and the new trouble in northern Mali has similar roots. If these very different peoples weren't forced to live under the same political system, they wouldn't feel the need to fight for control of it. It's best to let others go to hell in their own way.

  L: Okay, I can see that.

  Doug: I think this is a global trend, by the way – as we discussed in our recent conversation on Europe. What about you – did you see much evidence of tribal conflict in the Congo?

  L: I asked people about that, actually. I asked them if a country as big as the DRC – second-largest in Africa, and eleventh-largest in the world – could stay together with all its different tribes. I was reminded that the most recent war only ended in 2003, with residual problems lasting into 2004 – they were still quite visible when I was there in 2006. It was all very fresh then, and the country still had the appearance of an armed camp, with many of the survivors dressed in rags…the ghosts of hundreds of thousands of dead still in their eyes.

  This time, I saw signs of new prosperity – many of the family farms I flew over had new tin roofs on a building or two, and cheap Chinese motor-scooters swarmed the jungle pathways like insects. There's a highly visible UN military presence along the border between the DRC and Rwanda, but still, Sunday afternoon brought out a lot of smiling people in new, brightly colored clothes. It's just a beginning, but these people are busy rebuilding. The ones I spoke with think most Congolese don't want to hear about tribal divides and the like; they just want to get back to earning a living.

  Doug: That makes sense. With hundreds of different ethnic groups and local languages, there's no reason for the place to pretend it's one country. I was a big fan of Katanga trying to secede back in the '60s. At least they share a common language in the DRC – French. The tribes all have their own languages, but decades of Belgian colonial occupation at least left behind a lingua franca that helps them all to communicate. It was the first African country I took a real interest in. I still recommend a really good movie, Dark of the Sun, about the mercenaries in Kasai province in the '60s. I passed through M'Buji-Mayi when I was there. One thing I remember clearly was an old 707, acting like a tramp steamer of the air. The plane was totally without ID, painted in primer. I walked up to the pilot, who was a really good-looking Belgian girl in her 30s. One thing I asked her was how she navigated. She said, "I'm the queen of the GPS," and showed me her handheld device. I last saw that plane when I looked up as I was sitting in a café in Uganda several days later. It made me feel like that guy who saw the girl in the T-bird at the end of American Graffiti…. Anyway, I love weird places, and Africa is still full of them.

  L: I'm sorry to say that the people I met were more mundane. But again, the answer to the question is not that the people feel all united into one nation as a result of their history, but rather that no one had time for nonsense. The people are tired of fighting. Sort of like Colombia, at the end of the violencia.

  That's very different from the answer I got in Ghana, where the largest tribal group – by a large majority – is the Ashanti, who are seen as warlike. Since they are fierce and a majority, none of the other tribes are willing to take them on, and there is a sort of pax Ashanti.

  Doug: Which is different again from Zimbabwe, where the contest was largely between two tribes, one represented by Mugabe – who is a Shona – and the Ndebele tribe, led by Nkomo. The Shona won. Maybe that will mean the crates of Shona stone sculptures I bought there a few years ago will have political as well as artistic value someday. But back to the DRC – where did you go, just Kivu province?

  L: Last time I flew into Lubumbashi in southern DRC, and this time I flew into Bukavu, on the southern shore of Lake Kivu, which straddles the border between the DRC and Rwanda. This is all to the west of Lake Victoria, in an area that's sort of Africa's equivalent of the Great Lakes. It's remote, mountainous, and covered with jungle known to harbor both guerillas and gorillas. Both seem to be dying out – unfortunately in the case of the latter. I saw no sign of either, but I heard of a guerilla attack on a town near one place my chopper set down one day, six months prior.

  Doug: I visited the same place in 1998, after the preceding war, the one that overthrew the dictator Mobutu, who was a US stooge who looted the country for many years. That was just before the war you're talking about, in which Rwanda, Uganda, and several other countries got involved; something like four million people died. Nobody knows exactly how many. But I visited the city of Goma, on the north end of Lake Kivu. I stayed at a friend's house on the lake, and we'd go swimming in the lake each morning. The first morning, as we looked across the water at the Rwanda border, only a few hundred yards away, I asked my friend if he was able to take his daily swim during the big troubles in Rwanda – back in 1994 when they killed about a half a million people in 100 days. He said no, because there were bodies floating everywhere in the lake.

  L: That's a big lake – it takes three hours to reach Goma from Bukavu by speedboat.

  Doug: They say almost a million people died in that particularly nasty episode.

  L: You'd never know it to look at the place today. There are colorful villages on the shores of the lake, bright tropical flowers in abundance, fishing boats on the water. Some very nice hotels and villas – I heard there are waterfront homes selling for a million dollars in Bukavu. The water was so clear, you could see the bottom of the lake in places, before the wash from the chopper ruffled the surface. I looked and didn't see any bones.

  Doug: Maybe they're covered with sediment now… something for future archeologists to unearth and puzzle over the machete marks on the bones. A million bucks for a house? I'll wait until I can get something like that castle in Rhodesia on the Mozambique border I should have bought during the war there. That was a 100-bagger, as it turned out. Oh well, my whole life would have been totally different – an alternate reality.

  L: So, again, why is it that you're more positive on Africa's prospects now than in the past?

  Doug: Well, there are two ways you can look at the future of Africa. One is that when they have these wars that last decades, it changes the local culture and engrains bad habits in the people that can take a long time to get rid of. The other view is as you said: after a certain amount of such stupidity, people get tired of it and start acting more intelligently.

  L: Is there a historical example of a country "cursed" with great mineral wealth and actually benefiting from it – in the sense of the whole society achieving a higher standard of living, rather than just the thieves in control of the government?

  Doug: The only ones – and this may sound biased, but it's just a historical fact that people would do well to think about – are societies that were offshoots of Anglo-Saxon culture. The America that was (before they turned it into the United States), Canada, New Zealand, Australia.

  L: Why would that be? The Protestant work ethic?

  Doug: That's part of it. I think the ideas of the Enlightenment era – specifically the classical liberal ideas that so influenced the likes of Jefferson and Franklin – combined with the "rugged individualism" imposed by frontier life had a lot to do with it. The concept of English common law was a big factor. Ideas matter. Actions flow from ideas.

  Of course, Argentina didn't have the English tradition, but nonetheless was once dominated by ideas that enabled wealth creation, and it became one of the wealthiest countries on earth – though most of the silver that gives the place its name was actually in Peru and Bolivia. But that was over a hundred years ago, and the steady replacement of liberal ideas with socialist ones has been accompanied by a matching fall in prosperity, in spite of great natural resources. It's no longer a place to start a business, but it's a spectacular place to live… unlike Africa, which I view as a great place for merchant-adventurer type business, but not so great as a place to live.

  L: Well, Africa is no bastion of free-market thinking – this analysis doesn't seem very hopeful.

  Doug: Perhaps not now, but when people are tired of old ways that not only don't work and periodically lead to genocide, they may open up to new ideas. Many good people there – like my friend Leon Louw, who runs the Free Market Foundation – are looking for what works, and the continent has improved immensely. Markets work. And there certainly are abundant opportunities for entrepreneurs there.

  L: It is indeed a very good sign that such organizations are cropping up all over Africa. Thompson Ayodele has done a very good job with his Initiative for Public Policy Analysis in Nigeria, as has James Shikwati with the Inter Region Economic Network in Kenya, and my friend Kofi Akosah with his Africa Youth Peace Call in Ghana. But would you really encourage Westerners to try their luck in Africa?

  Doug: As we discussed in our conversation on starting out or starting over, if I were a young adventurer, I'd go to Africa, even more so than to Latin America or the Orient. The skills and experiences and connections you have – ordinary and offering no particular advantage in the US – would be extraordinary and of great advantage there. And the more obscure the country, the better: I wouldn't go to South Africa or Kenya, which are relatively developed. There are fortunes to be made in really backward and troubled places. Maybe Sao Tome, or Guinea Bissau, or Guinea Conakry. Maybe Cameroon, or Gambia, or Benin.

  L: Maybe Burundi? I stopped there on my way to the DRC this time – I confess I'd never even heard of it before.

  Doug: I first heard of it because I collected stamps when I was a kid. But yes, that's the sort of place I mean.

  L: By the way, on my previous trip to Africa, I stopped in Togo, which you'd asked me to drop in on…

  Doug: Really? How was it?

  L: It was much nicer-looking than I expected, for a place so far off the beaten track that almost no one even knows it exists. But maybe I should have known that was a positive sign; if it was in the news, that would almost certainly mean there were bad things going on. Slowly winning the struggle for prosperity is not newsy. When I got there, I saw a typical West African country, but with a lot of visible wealth in the form of nice real estate around the capital city.

  I also stopped in Rwanda on this last trip, and it too looked cleaner and more well-maintained than I expected. I found that very hopeful – a sign of a focus on economic progress, rather than picking fights with neighboring countries.

  Doug: I'd like to go to Togo some day, it being one of the relatively few countries I haven't been to. I just want to check it out and see what makes the place tick… I remember its postage stamps too.

  But, we should also mention that North Africa is something of a region apart, with its own political dynamics. It also has mineral wealth, particularly in hydrocarbons. Perhaps we should remind our readers of our conversation on the Arab Spring, which is the main trend to be watching in the area.

  L: Sure. We should also say something about South Africa, which is still one of the wealthiest countries in Africa, and a destination for many investors' dollars, especially in the natural-resource sector that we focus on.

  Doug: Yes. In spite of that wealth, both in terms of one of the single richest natural resource endowments in the world, and one of the highest per capita GDPs in Africa, I have to say I don't think the place is safe for investors – and it's getting worse by the day. We do not invest in any South Africa plays – not for ideological reasons, like those who opposed apartheid – but because of the country risk. The people running the show are not just thieves; they are so hostile to enterprise, they've taken the place from producing over 60% of the world's supply of gold a couple decades ago to less than 12% of world gold production today. There's a high risk of nationalization in the country, if not force majeure in the form of violent chaos. South Africa is a powder keg with a lit fuse of unknown length – but it's lit. I have lots of friends and relatives there and things seem mellow at the moment, especially in Capetown, which is one of the prettiest places on the planet. Then again, the whole world is at the edge of a financial precipice at the moment.

  L: Okay, so if South Africa is on its way down, is there a place in Africa on its way up that you'd invest in?

  Doug: Maybe Zimbabwe – I might have to go back there. Perhaps I could be persuaded that it has bottomed. It might have, now that it allows people to use whatever currency they want. Mugabe is on his way out, although African dictators seem to have preternaturally long lifespans. This could be the time to get in cheap – especially if I was interested in living there... which I'm not. The problem is keeping physical control of your property. It'd be highly speculative, but cheap is the key. I'll buy anything if it's cheap enough. At a low-enough price, the downside becomes negligible – the potential reward becomes vastly greater than the apparent risk.

  L: "Cheap enough" trumps even country risk. That applies to some of our investments in Africa plays; they are discounted for being there, which creates acceptable risk/reward ratios.

  Doug: Yes. You can lose everything, investing in Africa – but then, increasingly, you can lose everything investing in the US… say, if someone finds a piece of wetlands on your farm or whatever nonsense they come up with next.

  L: Okay, so for investors, the bottom line is that there are opportunities, but serious due diligence is required – preferably via boots on the ground – and by waiting for the perfect pitch in terms of a price low enough that the probability of a loss pales in comparison to the possibility of a win.

  Doug: Exactly. And if you're of a certain age or mental inclination, then Africa is the closest thing to a wild frontier left on the planet, a place to go and seek your fortune. But enter at your own risk.

  L: Very well, then. Thanks for your insights.

  Doug: I just don't want to hear from anyone's lawyer if they wander into a war zone and don't resurface for a decade…. Talk to you next week.

  L: Until then, take care.

  [Whether you invest in Africa, Asia, or anywhere else in the world, you would be wise to follow the Casey NexTen.]

• Tue, 21 Feb 2012 22:30:27 +0000: Stick with the Science - Casey's Daily Dispatch
  
  Synopsis: 

  Recent scientific studies debunk energy myths from environmentalists and the energy industry alike.

  
  

  Dear Reader,

  A couple of general items here before we get to today's business. For all our readers who were unable to join us in the Casey Pavilion at the 2012 Cambridge Vancouver Investment Conference, we're happy to offer the next best thing – a video compilation of the best presentations from the event. It's a great watch if you have some time and want to increase the breadth and depth of your investment knowledge.

  If you like those talks, perhaps a trip to Florida should become part of your April plans. Casey Research is hosting the "Plan B" Summit at the Hyatt Bonaventure in Weston, FL from April 27-29.

  Wondering about the name? Well, for most investors "Plan A" is now out the window. If we as investors want to preserve our capital and to profit, it's time to get serious about finding alternative ways to get through trying times in the best possible shape. This is what the Casey Research "Plan B" Summit will revolve around – with relevant analysis and practical investment advice from a blue-ribbon faculty. Learn more about the Summit or pre-register now for early-bird pricing –it runs through March 2, so act fast.

  Marin Katusa

  

  Chief Energy Investment Strategist
  Casey Research

  
  It Pays to Stick to the Science

  By Marin Katusa, Chief Energy Investment Strategist

  Does fracking make tap water flammable? Is crude from Canada's oil sands the dirtiest source of energy on the planet? Based on a typical article in the mainstream media, you could easily conclude the obvious answer to both questions is "yes."

  Turns out the science says otherwise. At the annual meeting of the American Association for the Advancement of Science (AAAS) last week in Vancouver, two leading researchers released studies that countered precisely those claims: Chip Groat of the University of Texas found "no direct connection" between fracking and groundwater contamination, while Andrew Weaver of the University of Victoria determined that emissions from Alberta's oil sands are unlikely to make a big difference to global warming (coal, however, poses a major threat).

  Our goal here is not to snub environmentalists. Rather, we highlight these revelations to point out that science is the only tool we have to determine whether new techniques to access energy are viable. We chose that adjective carefully: a viable energy-extraction technique today is not simply one that can turn a profit but one that is also low impact, clean, and efficient.

  The problem is that these characteristics are difficult to define, and that leaves them vulnerable to manipulation. There are lots of parties out there hard at work spinning tales to meet their ends. Environmentalists want to paint every fossil-fuel advancement with a black brush; energy companies want people to understand that there is no clean way to meet today's energy demands; and politicians support or decry energy decisions based on their agenda of the day (and, dare we observe cynically, the amount of lobbyist funds going into their re-election campaigns).

  Moreover, energy issues bear two other challenging attributes. First, they often involve science that is pretty complicated for the average person to understand. Second, the global population increasingly understands that decisions about how we will power our future carry major significance for the future of our planet. Together, these factors mean that a lot of people want to participate in a debate they don't fully understand, which results in a heck of a lot of misinformed parroting and insufficient questioning.

  That is precisely why the average consumer of mainstream media probably believes that fracking contaminates water supplies and oil-sands crude is the worst form of energy on the planet – these two pieces of misinformation have been repeated so often and questioned so little that they would seem to be carved in stone.

  Even for those skeptical of the media, it can be very difficult to decipher what is data and what is spin. For every "study" funded by the oil industry, there is a "review" supported by Greenpeace that reaches the opposite conclusion. When issues take on public prominence, the debate can quickly become very odd: in the Keystone XL ruckus, the media placed quotes from B-list celebrities on an equal footing with those from TransCanada Corp. representatives.

  Public perceptions of energy projects, techniques, and companies really do matter. Public opinion plays a role in defining regulations and deciding on project permits. So how is an investor supposed to navigate this muddy quagmire, where data and spin are so difficult to differentiate? With science – real, objective science. The conclusions presented at the AAAS meeting were drawn from objective scientific experiments; those are the only kind we pay attention to here at Casey Research. Based on the data we gather from those experiments, we predict how an energy debate will play out. At the end of the day, there are three factors that shape our energy future: scientific data, economic realities, and international relations.

  It turns out those are our areas of expertise.

  The New Science

  Let's take a quick look at the new data on fracking and on the oil sands. The fracking study, led by Groat and funded by the Energy Institute at the University of Texas, looked at parts of Texas, Pennsylvania, and New York where gas producers have used horizontal fracturing on their wells. His team found that groundwater contamination, where reported, can often be traced to aboveground mishandling of frac wastewater – leaking storage units and spills.

  They did not find evidence that the fracturing process contaminates aquifers. As for the flammable tap water, Groat concluded it was likely due to ground spills and naturally occurring methane.

  In finding "no direct connection" between fracking and groundwater contamination, Groat has shown fracking to be no different from other oil and gas extraction techniques, as all are prone to leaks and spills of one kind or another.

  The fracking industry and its supporters have long argued that any groundwater contamination near fracs was due to spills and leaks. In fact, the industry and its regulators have been trying to reduce leakage, and one of the companies we recently recommended to our subscribers is riding a wave of demand for better frac fluid storage equipment. That recommendation is already up almost 60% in less than three months.

  That recommendation was based on our knowledge of the data regarding the strengths and weaknesses of the fracking industry. This is the benefit we gain from our expertise in the energy industry.

  The other study released at the AAAS of interest to us came from Andrew Weaver, one of Canada's most-respected climate scientists and the lead author on two reports from the United Nations Intergovernmental Panel on Climate Change. Weaver and his colleague Neil Stewart analyzed how burning the world's entire reserves of coal, oil, and natural gas would affect temperatures; the results were published in the prestigious journal Nature.

  The carbon dioxide released from burning all 170 billion barrels of commercially recoverable oil in the sands would raise world temperatures by all of 0.03° C. If all the 1.8 trillion barrels of bitumen in the oil sands were mined and burned – a very, very unlikely scenario – global temps would rise 0.36° C.

  By comparison, burning all of the world's vast coal deposits would push temperatures up by 15° C., and burning the new global bounty of shale gas would make the world 3° C. hotter.

  "The conventional and unconventional oil is not the problem with global warming," Dr. Weaver said. "The problem is coal and unconventional natural gas."

  It is very nice to see this point scientifically established – the Keystone XL debate was riddled with wild claims about the devastating emissions from oil sands crude. We cringed at each one, because we know most of the claims are bogus. We had already done the calculations and knew that the oil sands are a viable resource. That's why we have long supported the Keystone XL pipeline and are confident it will gain approval in the medium term, because both science and economics support it.

  We expect to see more studies confirming both of these conclusions, and as the scientific proof builds eventually the environmentalists, politicians, and media types – heck, even the B-list actors – will have to accept it.

  The Economics

  We've been discussing data on energy extraction techniques. There's another set of data that matters when it comes to making energy-industry investment decisions: economics.

  To understand global economics, one has to understand not only what the numbers and trends mean, but how that meaning will play out on the world stage. International relations and the oil market are intricately intertwined. "Nuclear power" has more than one meaning. Nations either have energy resources or they need them.

  This is where it becomes so complicated. As an investor, you might understand the science behind natural-gas fracking. You might also understand how natural gas is priced and how the supply glut from shale gas production in the US has depressed gas prices in North America. But how do you take advantage of that knowledge to make a good investment decision?

  Given enough time to research and learn, you could likely come up with a pretty good idea. But here's the catch: you don't have the time. You have a full-time job, which takes up your mental capacity and a lot of your time, and you have a personal life too. Taking on learning all this would be another full-time job. That's where advice from professionals comes in.

  Figuring this stuff out is our full-time job. That's why the upcoming issue of the Casey Energy Report contains two recommendations derived from our dissection of North America's natural-gas sector.

  It all Plays out on a World Stage

  Even world leaders often cannot see through the spin to the science. In some ways that's no surprise, seeing as more spin is thrown at them than at anyone else and they tend not to be scientists themselves. But our leaders have teams of experts advising them, who you might think would see through the accolades and condemnations. Not so much. A perfect example is currently playing out in the European Union.

  The EU is developing a fuel-quality directive that seeks to reduce the carbon footprint of fuels by 6% over the next decade. That is fine, but the directive then places fuel from most conventional reserves into a low-carbon category while giving oil-sands crude a carbon rating 23% higher, putting it in the high-carbon category. Oil-sands supporters have argued vocally that the rule singles out oil-sands crude in a discriminatory, arbitrary, and unscientific way.

  While the directive is motivated by a good and noble cause, in acting on that cause politicians cannot help but do what they do best: politic. We at Casey Research do something else best: interpret data on the energy industry in the light of global economics and international relations to seek out rewarding investment opportunities.

  That's what ignoring the spin and sticking to the science lets you do.

  [There's an oil crisis in the Middle East, but it has nothing to do with Iran. Learn more about it.]

  
  Additional Links and Reads

  Oil Rises to Nine-Month High on Greek Aid Deal, Iran Export Halt (Bloomberg)

  The finalization of a second Greek bailout package gave investors some optimism around a European economic recovery, lifting demand predictions slightly. At the same time, Iran halted oil sales to France and Britain, increasing supply tensions. As a result, oil prices climbed to their highest levels in nine months, with Brent for April settlement reaching US$121.38 per barrel and West Texas Intermediate for March delivery climbing as high as US$106.07 a barrel.

  Shale Oil Boom Drives Down Prices versus Rest of World (The Globe and Mail)

  Even as a second Greek bailout and increasing Iranian tensions drive oil prices up, the shale oil boom in North America continues to hold prices back here relative to the rest of the world. The result is a sharp disconnect between international oil prices and what US and Canadian producers can get for their crude, a divergence that will only widen if refiners and pipeline companies fail to keep up with rising production.

  EU Pays Price for Oil Sanctions on Iran (Reuters)

  The decision to ban oil imports from Iran is intended to punish Tehran for its nuclear program, but businesses and consumers across the EU are starting to pay a financial penalty for the move as near-record prices for crude oil in sterling and euros are compounding the misery many firms and households were already feeling as a result of the region's debt crisis and faltering growth. Swing producers in the Middle East were supposed to be able to make up for the loss of Iranian oil, thus eliminating price increases, but it has not worked out that way – prices are currently at nine-month highs, when priced in US dollars. However, the weakness in the euro and the British pound compounds the problem, lifting oil prices in sterling past their 2008 peaks and prices in euros within 2% of those highs.

  UN Nuclear Inspectors Return to Tehran (New York Times)

  A team of United Nations inspectors arrived in Tehran on Monday for its second visit in three weeks, with a goal of assessing the "possible military dimensions" of Iran's nuclear program. The visit is just one of the factors adding to Iranian-global tensions. The Iranian government has halted oil shipments to Britain and France after warning it would cut off exports to European powers it deems 'hostile.' Tehran also mentioned the possibility of pre-emptively banning oil shipments to Spain, the Netherlands, Greece, Germany, Italy, and Portugal. And even while British and US leaders tried to dissuade Israel from contemplating a military strike at Iran's nuclear facilities, President Ahmadinejad announced the achievement of enhanced enrichment capabilities.

  Iran Struggles to Find New Oil Customers (The Globe and Mail)

  According to two industry executives familiar with the talks, Iran is struggling to find a buyer for nearly a quarter of its annual oil exports as looming sanctions start to bite the world's third-biggest crude exporter. Tehran is trying to sell an extra 500,000 barrels a day to Chinese and Indian refiners, but if it cannot find a buyer by mid-March, Iran will be forced to either put unsold barrels into floating storage in supertankers or reduce output. Either measure would push prices, which are already nearing 12-month highs, even higher.

  Natural Gas Asset Sales Hot Trend for Producers (The Globe and Mail)

  Faced with the prospect of low prices for the next 12-24 months, natural gas producers are starting to sell off assets to preserve cash. Early last week, Chesapeake Energy announced the US$10-billion sale of non-core assets to raise cash. Then on Friday, Canadian natural gas giant Encana announced a C$2.9-billion partnership with Mitsubishi Corp, which is buying a 40% stake in Encana's Cutbank Ridge project in British Columbia. Encana also slashed its capital spending plans for 2012: the company now plans to spend US$2.9 billion, significantly less than the US$4.6 billion it shelled out in 2011.

  US Construction Contractor URS to Acquire Flint Energy for $1.25 Billion (Winnipeg Free Press)

  In a deal that reflects the booming growth in North America's oil-sands and shale-gas industries, San Francisco-based URS struck a friendly deal to buy Flint for $1.25 billion. URS will also assume $225 million in debt from Flint. The deal gives URS a long list of new customers in the booming oil and gas fields of British Columbia, Alberta, and the southwest, Appalachian, and Rocky Mountain regions of the United States.

  Coal Turns Ugly as Gas Cuts Use to 20-Year Low (Bloomberg)

  Coal demand in the US is collapsing as power companies switch away from the fuel to take advantage of the cheapest natural gas in ten years. Appalachian coal, the US benchmark for thermal coal, sank 15% in January and is down 26% from its 2011 high. The price drop has prompted several major producers to close mines. Total consumption for the week ended February 16 was down 4.3% from a year earlier.

  Canada's Oil Sands: Not So Dirty After All (The Globe and Mail)

  This article delves into Dr. Weaver's oil-sands emissions research and uses his conclusions to highlight how the EU's carbon emissions directive is misguided.

  A Little Fracking Humor (YouTube)

  And to close, here's a funny little spoof on fracking – the word and the practice.

• Mon, 20 Feb 2012 21:22:26 +0000: Gold Speaks Up - Casey's Daily Dispatch
  
  Synopsis: 

  An interview with the ultimate precious metals source reveals why every portfolio needs significant exposure to gold and silver.

  
  

  Dear Readers,

  We've been making the round of metals in recent editions – it's back to gold this week, with Jeff Clark going directly "to the source."

  One thing Jeff's article really makes clear is that we all need a Plan B in case the global economy goes off the rails, as we here at Casey Research fear it may. To that end, I encourage you to attend our upcoming Plan B Summit in Weston, Florida, April 27-29. I'll be there with the metals team, our energy team, technology team, and the rest of our key analysts, as well as a great faculty of some of the world's leading independent economic thinkers.

  If you're not yet fully prepared for what's coming, this event could save your financial life.

  Sincerely,

  Louis James

  
  Senior Metals Investment Strategist
  Casey Research

  Rock & Stock Stats	Last	One Month Ago	One Year Ago
  Gold	1,723.00	1,656.00	1,379.00
  Silver	33.48	30.41	30.61
  Copper	3.71	3.73	4.48
  Oil	104.06	100.70	85.05
  Gold Producers (GDX)	54.15	53.18	58.45
  Gold Junior Stocks (GDXJ)	27.84	26.36	38.68
  Silver Stocks (SIL)	24.11	22.27	24.91
  TSX (Toronto Stock Exchange)	12,458.30	12,232.83	14,136.15
  TSX Venture	1,658.15	1,537.72	2,421.89

  
  Gold Speaks Up

  By Jeff Clark, Senior Precious Metals Analyst

  Have you ever had any doubts about gold? Does it sometimes feel like it should be performing better? Are you concerned about its volatility? Do you worry about how it might perform in the future? Have you ever wondered about its true purchasing power? Maybe nervous about a big drop in price again? I decided to go directly to the source to address these concerns: Gold himself. He put his arm around me and asked me to tell you a few things…

  I hear that you've had some worries about me. I understand. Your world is a very uncertain place right now. And when it comes to money, it looks as though your leaders don't understand some basic monetary principles, making things even more unsettling.

  But I want you to know that the problems you're experiencing are actually nothing new. I've seen these monetary, fiscal, and economic difficulties many times before. And I can tell you this: you're safe with me. That's a bold proclamation, but I've provided monetary protection numerous times throughout history – too many to count, in fact. I've served all kinds of people over the centuries, from kings and counts to serfs and servants.

  To put your mind at ease, let's review my core characteristics, along with some history, to show how I can protect you against the monetary danger that's likely to worsen in your near future. We'll also take a look at your peculiar set of circumstances to see how I can be of service. By the time we're done, I think you'll feel much better about my ability to help your portfolio withstand whatever is thrown its way.

  Enduring Characteristics

  Let's start with the basics. I have some characteristics that no other matter on Earth has…
  
  I cannot be:

  • Printed (ask a miner how long it takes to find me and dig me up)
  • Counterfeited (you can try, but a scale will catch it every time)
  • Inflated (I can't be reproduced)

  I cannot be destroyed by;

  • Fire (it takes heat at least 1945.4° F. to melt me)
  • Water (I don't rust or tarnish)
  • Time (my coins remain recognizable after a thousand years)

  I don't need:

  • Feeding (like cattle)
  • Fertilizer (like corn)
  • Maintenance (like printing presses)

  I have no:

  • Time limit (most metal is still in existence)
  • Counterparty risk (remember MF Global?)
  • Shelf life (I never expire)

  As a metal, I am uniquely:

  • Malleable (I spread without cracking)
  • Ductile (I stretch without breaking)
  • Beautiful (just ask an Indian bride)

  As money, I am:

  • Liquid (easily convertible to cash)
  • Portable (you can conveniently hold $50,000 in one hand)
  • Divisible (you can use me in tiny fractions)
  • Consistent (I am the same in any quantity, at any place)
  • Private (no one has to know you own me)

  I am internationally accepted, last for thousands of years, and probably most important, you can't make any more of me.

  "Gold Is Money"

  You've heard that statement before – but do you know what it really means? Money is a medium of exchange and a store of value. Almost anything can be used as money, but obviously some things work better than others. It's hard to exchange things people don't want’ and other things don't store value well. Over thousands of years, I have emerged as the best form of money (along with silver).

  The paper dollars in your wallet are technically a currency, not real money. In other words, they are a government substitute for money. The man you call Aristotle best defined the primary reasons why I'm considered money: a good form of money must be durable, divisible, consistent, convenient, and have value in and of itself.

  • It must be durable because you can't have your money disintegrating in your pocket or bank. That's why you don't use wheat; it can rot or be eaten by insects.
  • It must be divisible, which is why you don't use diamonds or artwork; they can't be split into pieces without destroying the value of the whole.
  • The lack of consistency is why you can't use real estate. One piece is always different from another piece.
  • It must be convenient, which is why you don't use other metals like lead. The coins would have to be too big to handle easily to be of sufficient value.
  • It must have value in and of itself. This is why you shouldn't use paper as money.
  • And one more thing: I can't be created out of thin air. Not even the kings and emperors who clipped and diluted gold coins used paper as money, so Aristotle didn't include this in his list, but it's vital.

  So you see, there's no superstition here. It's simply common sense. I am particularly good for use as money, just as aluminum is good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. If you try to make airplanes out of lead or money out of paper, you're in for a crash.

  And by the way, don't fret about those who say I'm not as good an asset as an income-producing vehicle. They misunderstand my role. I'm not trying to be a stock, for example. My function is as money and a store of value, so the proper comparison is to your dollars, or what you call Treasury Bills (of similar nominal value). And here is where I excel and serve my purpose: since 1913, the US dollar has lost 96% of its purchasing power. I have lost none.

  Remember, I am the only financial asset that is not simultaneously someone else's liability. I don't require the backing of any bank or government.

  The History Lesson

  Because I am eons old, I've observed something throughout history that you may not have thought much about: government fiat currencies are a relatively new invention, and none has endured. Eventually, they have all failed. Me? I've never been defaulted on or worth zero. Remember this the next time you have any doubts about my long-term worth.

  Another of my roles is to protect your purchasing power. Here are a few examples of how my purchasing power has endured:

  • During the time of Christ, an ounce of me purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today, one ounce will still buy a good suit, a leather belt, and a pair of shoes.
  • In 400 BC, during the reign of King Nebuchadnezzar, some scholars reported that an ounce of me bought 350 loaves of bread. Today, an ounce still buys about 350 loaves ($1,700 divided by 350 = $4.85/loaf).
  • In 1979, my average price was $306.68. This bought an average-priced full-size bed. Thirty-three years later, $1,700 would still buy you a nice full-size bed (and then some).

  You can rest assured that over time, I will hold my value. And when you near the end of your life, you can pass me on to your loved ones, knowing full well they will have something that cannot be devalued, debased, or destroyed.

  What Color Is Your Money?

  Like you, I'm concerned about the current state of fiscal and monetary affairs. It seems your government leaders have boxed themselves into a corner. They've incurred too much debt and are spending too much money. It's important that you understand some lessons from history about this kind of behavior so that you're certain of what I can do for you.

  The common denominators that lead to the downfall of every fiat currency are the two big Ds: debts and deficits. With that in mind, consider the following:

  • Morgan Stanley reported that there is "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. US total debt currently exceeds GDP by roughly 400%.
  • Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt will exceed 100% of GDP this year.
  • Investment legend Marc Faber reports that once a country's payments on debt exceed 30% of tax revenue, the currency is "done for." By some estimates, the US will hit that ratio this year.
  • Peter Bernholz, a leading expert on hyperinflation, states unequivocally that "hyperinflation is caused by government budget deficits." Next year's US budget deficit is projected to be $1.3 trillion.

  The solution many of your leaders are pursuing is to create more currency units. Here's an updated picture of the increase in the US monetary base vs. my rise in price since 2008, when your problems starting surfacing.

  

  (Click on image to enlarge)

  The monetary base has grown 205.8%, while my price is up 65.8%. This alone implies that my price in dollars is likely to climb much higher.

  This is also the reason why I'm not in a bubble, as some have tried to claim. It is your central banks and bond markets that are in a bubble. The fact that my price is rising is a warning that what your leaders are doing is unsustainable and potentially dangerous to your currency.

  Think about this: the US has debt backed by debt, based on debt, dependent on debt, and leveraged with debt. You can, for example, buy a bond (i.e., lend money) on margin (i.e., with borrowed money). This is not a sound way to run financial markets.

  Meanwhile, the warning bells continue to sound regarding Europe's debt crisis. In just the past 30 days:

  • Moody's cautioned that it may cut the triple-A status of France, Austria, and the UK; and it downgraded six other European nations including Italy, Spain, and Portugal.
  • Standard & Poor's cut the triple-A status of France and Austria, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia, and Slovenia were downgraded.
  • Fitch downgraded Belgium, Cyprus, Italy, Slovenia, and Spain, and stated there was a 50% chance of further cuts in the next two years.
  • Standard & Poor's downgraded 34 of Italy's 37 banks.
  • Moody's warned just last week that it may cut the credit ratings of 17 global financial institutions and 114 European ones.

  The European crisis is far from over; and the path of least resistance for politicians is to create more currency units. This action can and will have clear and direct consequences: currencies will devalue, and inflation – perhaps hyperinflation – will result.

  Once again, I encourage you to use me to protect some of your wealth.

  How Much Is Enough?

  Given the state of your monetary system, you should accumulate me (and silver) on a regular basis. Just buy some every month and put it in a safe place. After what I've witnessed throughout history, and based on the current path your government leaders insist on pursuing, I suggest using me as your savings vehicle instead of putting dollars in a bank.

  If you don't own enough of me when these fiscal troubles really accelerate, I fear you will regret it. I've warned many in the past about the dilution of nations' currencies, and those who didn't heed my warnings experienced severe financial pain. Excuses won't pay the mortgage nor feed the family when the effects of currency debasement hit your home and pocketbook.

  Make sure you own enough of me to make a difference to your portfolio. This means having more than a couple coins or a few shares of GLD, the latter of which is only a proxy for my price.

  How do you know if you own enough? Ask yourself:
  
  • If inflation returns, or even hyperinflation hits…
  • If the economy is flat…
  • If uncertainty and fear continue around the globe…
  • If stock markets languish…
  • If the amount of spending from the world's governments proves futile…
  • If government interference in the economy continues to increase…
  • If the value of the US dollar takes a major fall…
  • If the world enters a recession or depression…
  • If you wonder if you have enough "safe" money…

   … would you feel that you own enough of me?

  Buy a sufficient amount so that as your currency continues to lose value, your portfolio won't. If you do your part, I promise that I'll do mine.

  Your monetary friend,

  Gold

  P.S. Your friends at BIG GOLD have arranged a limited-time offer for you to buy up to $1,000 worth of me and my cousin silver for no premium. It's a great way to jump-start your bullion savings program. Learn more about BIG GOLD.

  
  Gold and Silver HEADLINES

  Gold Demand Trends 2011 (World Gold Council)

  2011 was the eleventh consecutive year of the current gold bull market. Annual demand increased 0.4% and reached 130.8 million troy ounces (4,067.1 tonnes), with investment demand – physical bar and coin purchases in particular – being the key driver.

  The leading role in the gold-market dynamics belongs to China, though India still led all comers in terms of absolute values of gold consumption. Full-year jewelry and investment demand in China reached 24.7 million ounces (768 tonnes) – a 20% increase. However, India is still the biggest gold consumer with 30 million ounces (933.4 tonnes) of annual demand. Both countries will likely continue playing the leading roles in the gold market in 2012, with China likely becoming the top gold-consuming country.

  World mine production increased 4% year-on-year to reach an all-time high, but this was offset by a 2% decrease in scrap supply and an enormous increase in central bank purchases of 14.1 million ounces (439.7 tonnes), the biggest amount since 1964. WGC analysts conclude, "The continued decline in recycled gold in the face of continuously rising prices is a bullish development."

  We agree.

  India's Gold (FOFOA)

  There are 1.2 billion people in India; 10 million weddings occur there each year. Half of the gold bought in India is jewelry for weddings. A family without gold is seen as an "incomplete family." The World Gold Council sees an opportunity here. Its representative in India created a program to help the poor buy gold. Indians are typically very conservative and save around 30% of their income – a lot of it in gold.

  "When Indians buy gold, they don't think they're spending money. In their minds, that is a savings. That purchase of gold is going to your savings account. It's not an expense, it's an investment."

  In fact, "Gold is more than just a store of value in India. It is a visible status symbol of such cultural importance that demand for it apparently exceeds net-production (savings). To put this in perspective on an aggregated basis, India is importing around $34 billion in physical gold while running a $150 billion overall trade deficit. And the trade deficit is projected to reach maybe $160B this year."

  
  This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

  International Speculator

  • One of our "bottom feeder" companies has made a valuable addition to its exploration team. What do we think?
  • A silver producer we like announced the sale of one of its non-core properties – a deal we like a lot – and delivered very good new drill intercepts. Get the details.

  BIG GOLD

  It's earnings season…

  • Of the five largest gold producers in the world, we only recommend one. Check out its quarterly results and our reaction.
  • This producer's stock rose 7.6% when it released earnings last week, so is it off to the races now?
  • This company had some bad news late last year, handing it a poor quarter. Should we sell, hold, or buy?
• Fri, 17 Feb 2012 22:17:42 +0000: On Drones, Money Bombs and Manufacturing - Casey's Daily Dispatch
  
  Synopsis: 

  Drones, automation and fiat currencies will reshape our world in ways impossible to predict, but here's one outcome you can take to the bank – they'll create a wealth of profit opportunities for shrewd investors.

  
  

  Dear Reader,

  Earlier this week, the US Senate overwhelmingly passed a bill opening the nation's airspace to some 30,000 drones. Naturally, this has stirred concern – as well it should – among pockets of the populace who concern themselves with such arcane concepts as privacy, individual rights and the rule of law.

  As I suspect that some day in the not-too-distant future, this legislation will be viewed as a rather important historical milestone, a few words on the topic seem in order.

  By milestone, I mean that today you can look up and, other than the occasional contrail, expect to see little more than birds and clouds. Five or ten years down the road, however, you will find yourself wondering if that bird is actually a bird or a drone. Worried that it is the latter, you'll reflexively glance at the speedometer of your car or at the backyard burn pile, and wonder if you have observably broken a regulation.

  Even in the confines of your house, you'll find yourself wondering if the drones picked up your angry comments about the latest outrages of the stifling state.

  In short, the world will be a different place, and not necessarily for the better.

  Is the Drone Era a Certainty?

   In a word, yes. Why? In a couple of additional words, it is because drones work.

  

  Even though drone technology is still relatively new – barely a card-flip in the bridge hand of human history – it has speedily evolved to the point where its utilitarian advantages over competing technologies are already undeniable.

  Of course, one of the most visible advantages of drones involves the increasing role they play in the killing sciences. Much in the same way that the first airplanes deployed in war were used solely for aerial surveillance, then quickly morphed into bullet- and bomb-distributing aerial engines of death, so have drones quickly morphed from little more than curiosities into unmanned stealth weapons delivery platforms that can deliver those weapons virtually anywhere in the world.

  Among the many functional advantages offered by a drone…

  • No need to spend fortunes training fighter pilots. While I can't say for sure, I suspect that given even a couple of days on the console of a drone, my teenage son and his friends could be gunning down Pakistani tribesmen as proficiently as they now do the parasitic aliens in Halo 4.
     
  • No need to put those pilots at risk of death or capture. Part of the planning for any aerial strike has to involve serious contingency planning in case things go badly. For instance, by moving ships and retrieval helicopters into a nearby staging area, all of which requires a lot of time and resources. With a drone, it's more like, "Hey, Joe, after you're finished eating lunch, can you do a flyover of Islamabad?"
     
  • They are cheap to deploy and will get cheaper. A modern fighter jet can cost upwards of $150 million per copy – and that's before the massive support network needed to keep it flying. While the cost for a drone varies considerably based on functionality, the all-in costs are far cheaper, and will only get cheaper as commercial competition heats up.

  Which brings us to the broadest of the consequences: because they are so efficacious, you can be completely certain that they will be widely deployed. Ergo, the Drone Era is upon us.

  Stating the somewhat obvious, we humans have an attitude about everything. Those attitudes can be positive or negative, and they can fall anywhere on a scale from very weak to very strong… but there is literally no object on this planet that you and I do not have an attitude about, or which we wouldn't quickly form an attitude about if it came to our attention for the first time.

  As far as drones are concerned, the attitude of the world's governments and the praetorian class that protects them is now strongly positive. That means that they will instinctively look for every possible opportunity to deploy them.

  (And not just for their utilitarian functions, but because of their symbolic value: if you as a branch of government or even a country don't have drones, you are sooo yesterday!)

  But it is mostly their utilitarian functionality that guarantees they'll be cranked out like hot cakes at an IHOP (for those of you unfamiliar with the acronym, it stands for the International House of Pancakes… just so you know).

  Understanding this reality of increasing drone deployments, it can be useful to ponder possible and even probable outcomes.

  For example, there is currently a problem with certain Somalis who look to better their lot in life by heavily arming themselves and setting out over the deep blue sea in the quest of underprotected cargo-bearing ships and expensive yachts. When successful in their exertions, general mayhem typically follows – with guns fired, crews kidnapped, boats scuttled, lives lost, ransoms demanded, etc.

  In order to defeat the aspirations of these enterprising Somalis and to end their shenanigans as a constant threat to regional shipping, the world's governments – at least those who care about such things – could get together, hold numerous meetings between bureaucrats and military attachés, designate an international task force, assign leadership roles on a rotating basis, find a nearby base from which to operate, and purchase or reassign various personnel and armaments including boats, spotter planes, helicopters, fighter jets and so forth.

  Alternatively, a government looking to sharpen its skills in dronery could deploy a couple of killer drones over the contested waters, instructing the operators to be especially attentive for the sight of any fast-moving speedboats filled with armed men. Should such a speed boat be spotted, further instructions could include loosening a warning shot or, if the operator back in Nevada were late for lunch, blow said boat out of the water.

  Within roughly the lifespan of the common house fly, the problem of Somali piracy would be solved – either because they would wise up, or they would exit the genetic pool.

  Now, it is not my purpose to comment on the right or wrong of this particular use of the drones, but rather to try to make the point clear – these things work, and work very well. Therefore, if you are a government in possession of drones, it is only natural that you will begin to use them as replacements for older technologies. And if you're a government without drones, you will seek some of your own.

  I recollect a recent article about a large show/exposition in China dedicated to the aviation industries. As recently as three years ago, just two companies – both from the United States – were exhibiting drones for sale. At that same exposition last year, there were almost 30 drone-flogging companies in evidence, with only a handful from the United States. According to the reporter, the things were virtually flying off the shelf. (Pun not intended but almost unavoidable.)

  The info graphic here shows the adoption of drones by the US military alone. Ultimately, this will be viewed as a snapshot of the early days of a long uptrend.

  

  (Click on image to enlarge)

  Deep-thinking dear readers could probably fill up a notepad with the various uses that we can expect to see drones adapted for going forward, some of which are already beginning to emerge.

  For example, drones are already being used to keep US borders secure from the Mexicans with their despicable aspirations of feeding their families by selling their labor on the cheap in the southern part of the United States. Likewise, we can expect the trend for local law enforcement to deploy drones in the hunt for illegal vegetation to escalate. Perhaps the drones will also be trained to track the specific thermal image and facial features of a target, and then set loose to hunt for the target in the right geographical region. No more sunbathing for Bin Ladens.

  Monitoring car speeds, listening for key words muttered by the population, supporting swat teams in hostage situations, watching coastal waters for drug traffickers, monitoring environment pollution standards, gunning down bank robbers fleeing in cars, intimidating rioters or dispersing noxious gases if they still resist, assassinating foreign leaders, tracking the migratory patterns of rare birds… the uses of drones are limited only by imagination.

  And it's not just in the air that drones will be deployed. As has been the case since the onset of specialized services, what the Air Force has, the Army, Navy, Marines and all other modules of what is generally lumped together as Homeland Security will also want (and vice versa). Therefore, we are now hearing about remote-controlled miniature attack subs and four-legged, weapon-firing Jaguar drones able to chase a perp to ground with extreme prejudice.

  Unfortunately, having formed a strongly positive attitude about drones, the government in all its various manifestations will, in time, overdo it. Whereas today we enjoy reasonably clear skies, tomorrow there will be some percentage of 30,000 drones overhead – and the day after that, mechanized Jaguars will be patrolling the streets of Detroit.

  Which Brings Us to the Topic of Fiat Currencies

  Like drone technology, the adoption of fiat money works remarkably well in achieving the desired result for the issuing governments.

  For instance, it allows a government to make popular choices – as opposed to unpopular ones – when it comes to mob-mollifying social programs. Furthermore, having a sheaf of blank checks connected to a bottomless bank account is very handy when it comes to creating enthusiasm in those voters seeking to better their lot in life without any additional expenditure of personal effort.

  And there's no denying the impressive advantages emanating from the global adoption of fiat money – a historical first: normally fiat money was found in single countries in dire straits, but never before in all the countries of the world at once.

  As most of you know, the roots of this outbreak of fiat money are found in the post-war Bretton Woods agreements but came of age when Nixon closed the window on gold-dollar convertibility. Once that window closed, instead of dumping the unbacked dollars wholesale – an act which would have reversed Nixon's decision virtually overnight – the world's governments sucked it up and, by so doing, let Nixon pull off the crime of the century.

  Simply, continuing to treat US dollars as "good as gold," governments around the world became unindicted co-conspirators in a global scam to defraud their respective populations: by maintaining the fiction that their dollar-denominated central bank reserves had tangible value, and by following suit with their own vigorous money printing.

  Meanwhile, as the de facto provider of the world's fiat reserve currency, the US government gained special advantages, allowing it to pay for its first-at-the-trough position with funny money for around forty years at this point.

  

  The point I am making, albeit in my usual circuitous fashion, is that once modern governments rediscovered and fell in love with the mechanics of creating currency out of thin air, they did what governments always do in these situations – as they are beginning to do with the drones today – namely, they went overboard in a big way.

  It is like the fellow who, at an early age, falls in love with the satisfying taste sensations associated with consuming large meat concoctions, yet fails to understand that too much of a good thing is not a good thing… until the very moment when the stopping of his heart brings the truth of the matter into sharp focus.

  The world's fiat monetary system is now experiencing chest pains.

  While there's not much in this life that is certain, you can take it to the bank – and, if you have been a subscriber to one of our Casey Research services dedicated to gold and silver investments, you hopefully have – that all fiat monetary systems eventually fail.

  Let me say that again, in case the import of that declarative statement didn't make the desired impression.

  "All fiat monetary systems eventually fail!"

  Don't take my word for it. Instead, just look at the historical record and you'll find that, according to work done by monetary scholars such as Edwin Vieira, no fiat currrency has lasted much more than about 30 to 40 years. One study I have seen referenced of 775 failed fiat currencies shows an average lifespan of around 27 years.

  So, let me amend and extend my statement above as thus…

  "The current global fiat monetary system is failing."

  Economics and investments can be complicated – so much so that trying to figure out where things are headed through traditional academic methodologies is largely a waste of time. Therefore, at least in my view, it's helpful to step back and focus on the big picture as evidenced by undeniable truths.

  To that end, a few questions to ponder:

  Is it true that the world has been operating on a fiat currency system since Nixon closed the gold window in 1971? Yes.

  Since 1971, have the world's governments cranked up their money printing, as they invariably do when allowed to print at will? Sure have, see the chart.

  Is it possible to create large quantities of fiat currency out of thin air without eventually devaluing the existing money stocks? Nope.

  

  Is this reflected in the steady decline of the purchasing power of global currencies since the world adopted a fiat system? You betcha. In fact, the US dollar has lost approximately 80% of its purchasing power since 1971.

  Will the debasement of fiat currencies continue until it can't? Odds are good.

  Do the central bankers believe that the latest experiment in fiat money is coming to an end? Seems like it, how else to explain that in recent years they switched from selling their gold to regular gold purchases?

  Will gold play a role in whatever comes after the collapse of the fiat currencies? See answer just above.

  Now, you will have to draw your own conclusions about such things, but because of the fundamental flaws in all fiat currency systems, I can only conclude that failure is inevitable and even imminent (within the next five years, if I were forced to guess).

  If you concur, then using this understanding as a basis for your portfolio strategy makes a lot of sense.

  For those of you who are still new, or remain hesitant, about investing in gold and silver – both of which have survived the test of time, helping people preserve wealth for 4,000 or more years now – do yourself a favor and reach into your pocket for a paid subscription to our BIG GOLD service.

  You'll get a comprehensive monthly overview of the precious metals markets, our best recommendations for mid-cap and large cap gold companies, "how to"  information on buying and selling precious metals in the various forms now available (coins, bars, ETFs, foreign storage accounts, etc), plus all the past issues and special subscriber reports we've ever published – all in all, literally everything you need to know about the topic in easy-to-digest form. At $79 per year, it's inexpensive – and it has a full money-back guarantee, so you have zero commitment or risk for giving it a try, which can do by clicking here now.

  Sorry to have gone all commercial on you, but I am still pained at how many otherwise intelligent investors have failed to take the time necessary to understand the whys and wherefores of precious metals investing. If you are one of those people, stop procrastinating – otherwise you are going to feel like a real ninny five years down the road when the precious metals are trading for a multiple of where they are today.

  Not to go on overly long, I want to extend this general line of musing to a quick discussion about manufacturing here in the United States, and globally. While I have touched on this topic in past issues of this service, something came across my radar this week that really caught my eye and that seems relevant.

  Houston, We Have a Problem

  (and so does Tokyo, Beijing, etc)

  Earlier this week, I received a copy of a long article from The Business Times of Singapore profiling my friend John Mauldin who recently spent a couple of days there on business (John may actually travel more than Doug Casey at this point, which is saying something).

  In the article, the reporter quoted John as saying, and I too quote…

  "Panasonic has one factory in Japan that makes 10 per cent of all the 42-inch TVs in the world. That's a lot of TVs. It has just 15 people. It's completely automated."

  While there is some nuance to the actual number of workers involved – because it doesn't include support staff (shipping clerks, janitors, warehouse personnel, etc) – whether the number is 15 or 50, the point remains, and it's a doozy: manufacturing is evolving to the point where humans are increasingly viewed as an unnecessary liability, not an asset.

  Now think about this in terms of the macro-picture on unemployment. How, with the world's population growing in leaps and bounds, especially in the developing world, are all these people going to be able to find work when the jobs they would have historically done are increasingly being done by machines?

  It reminds me of a huge mining operation I visited in a quaint little town in Sweden. As we walked around the large buildings filled with gigantic mills, crushers and so forth, I think we saw a total of about three employees – casually checking computers and that sort of thing. Not so very long ago, dozens of employees would have been required to do the work.

  In the case of manufacturing, unlike drones and fiat money, the trend of adoption is largely driven by private enterprise (to the extent that such a thing still exists these days). But the higher the hurdles governments put in front of employment – employment taxes, forced benefits, restrictions on termination, workplace regulations, etc – the quicker businesses will adopt automation.

  This all represents a true paradigm shift.

  In fact, I think " paradigm shift"  is not nearly a strong enough term – a "quantum shift"  would be more apt. That's because, like the mysterious and still unknowable aspects of quantum physics, at this point no one can say how the masses are going to find the work necessary to put bread on the table. Especially in countries such as China, for which manufacturing is such an important economic component.

  Regardless, given that the attitude of manufacturing executives around the globe toward automation is now both strong and positive – for the simple reason that it works so well – the pace of human replacement will only pick up speed in the years ahead.

  It's how we humans, in government and out, operate: try it, like it, do more of it.

  From this particular point in history, it's truly impossible to see how things will play out – for the drones, the global monetary system or manufacturing employment – but I suspect "business as usual" won't be one of the outcomes.

  Keep your eyes open and your head down – we're living in that kind of world.

  And don't forget to keep an eye out for the opportunities, even while you remain attuned to the risks. While money can't buy you love, it can buy you options unavailable to those without money.

  (Editor's Note: Knowing that many of you dear readers are speculative minded, I asked our Casey Extraordinary Technology team about ways to invest in drones… here are a couple of replies:

  From Managing Editor, Alex Daley: "Most drones are manufactured by big guys, like Northrup Grumman who makes the Global Hawk. Hard to invest in a way that you'll see direct shareholder benefit from the drone division growth as it's a small part. Or by private companies, for example the number-one beneficiary will be General Atomics, which is privately held. They make the Predator, the Reaper (the one they are now deploying in the big expansion).

  We like ground robots better, as the market is smaller and the leaders are more pure play and publicly traded. Subscribers to Casey Extraordinary Technology recently made a great return on iRobot (IRBT), which gets about half of revenue from those ground robots now. We sold to lock in our profits, and since then it's been knocked back 35%, as we predicted. If a war in Iran happens, it could be a buy again at this price.

  From Editor Chris Wood: "Just an addition to what Alex was saying – on iRobot (IRBT), overall we booked a gain of 97% in just over 15 months. We sold just above $37 leading into the Q4 earnings call, and the stock has since been knocked back to below $25 – $26 range. Their new Warrior robot has been getting a lot of press recently. )

  And now, having used up my daily allocation of words, I will turn the podium over to our own ever-curious Bud Conrad who has been looking at the government's rosy economic data and trying to figure out why it seems out of sync with the real world.

  
  Energy Usage Data Indicate Economic Slowing

  By Bud Conrad

  For somewhat obvious reasons, the amount of trucking fuel purchased over a certain period of time can be a useful indicator as to the state of commerce and, by extension, the economy.

  That data is collected by Ceridian and the UCLA Anderson School of Management. The chart below plots what is called the Pulse of Commerce Index (PCI) and shows a slowing in those fuel purchases, albeit nothing overly dramatic. However, it is considered a reasonably reliable leading indicator, so it's well worth watching.

  To get a better sense of the PCI, in the charts that follow, the PCI index is compared to several indicators of our economy to see if the slowing has been reflected in those measures. As you can see, so far the slowing of goods movement as indicated by the PCI is not reflected in the other measures.

  

  (Click on image to enlarge)

  Stocks have tracked with the PCI since 2003, and there is a small divergence in early 2012 with the PCI falling as stocks are rising.

  

  (Click on image to enlarge)

  Industrial Productions had not slowed yet in the data below, which concludes with December. The PCI latest data is January 2012.

  

  (Click on image to enlarge)

  More on the PCI can be found at UCLA in their report.

  Shifting the lens somewhat, the following charts on energy supply (which is often a reflection of demand) show a big decline since the peak of 2007, and seem to show some further decline in the most recent data.

  

  (Click on image to enlarge)

  The drop in gasoline is even bigger, and the last two monthly data points are new lows.

  

  (Click on image to enlarge)

  And the drop in imports of petroleum products has shown no recovery:

  

  (Click on image to enlarge)

  In total, these indicators are not conclusive that we are facing a slowing economy, but neither are they supportive of an ongoing recovery that is the current theme of politicians and Wall Street optimists. We need more confirmation to say that the US is slowing, but energy is basic to economic growth, and these signals are not lining up with other statistics of continued growth.

  
  Friday Funnies

  Understanding Unemployment

  COSTELLO: I want to talk about the unemployment rate in America.

  ABBOTT: Good Subject. Terrible Times. It's 9%.

  COSTELLO: That many people are out of work?

  ABBOTT: No, that's 16%.

  COSTELLO: You just said 9%.

  ABBOTT: 9% unemployed.

  COSTELLO: Right, 9% out of work.

  ABBOTT: No, that's 16%. [Except according to John Williams, it's about 22%]

  COSTELLO: Okay, so it's 16% unemployed.

  ABBOTT: No, that's 9%...

  COSTELLO: Wait a minute. Is it 9% or 16%?

  ABBOTT: 9% are unemployed. 16% are out of work.

  COSTELLO: If you are out of work, you are unemployed.

  ABBOTT: No, you can't count the "Out of Work" as the unemployed. You have to look for work to be unemployed.

  COSTELLO: But they are out of work!!!

  ABBOTT: No, you miss my point.

  COSTELLO: What point?

  ABBOTT: Someone who doesn't look for work can't be counted with those who look for work. It wouldn't be fair.

  COSTELLO: To who?

  ABBOTT: The unemployed.

  COSTELLO: But they are all out of work.

  ABBOTT: No, the unemployed are actively looking for work... Those who are out of work stopped looking. They gave up. And if you give up, you are no longer in the ranks of the unemployed.

  COSTELLO: So if you're off the unemployment rolls, that would count as less unemployment?

  ABBOTT: Unemployment would go down. Absolutely!

  COSTELLO: The unemployment just goes down because you don't look for work?

  ABBOTT: Absolutely it goes down. That's how you get to 9%. Otherwise it would be 16%. You don't want to read about 16% unemployment, do ya?

  COSTELLO: That would be frightening.

  ABBOTT: Absolutely.

  COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

  ABBOTT: Two ways is correct.

  COSTELLO: Unemployment can go down if someone gets a job?

  ABBOTT: Correct.

  COSTELLO: And unemployment can also go down if you stop looking for a job?

  ABBOTT: Bingo.

  COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work.

  ABBOTT: Now you're thinking like an economist.

  COSTELLO: I don't even know what the hell I just said!

  And now you know why the government's unemployment figures are improving! 

  Magic Numbers

  Speaking of suspect numbers, I have no idea how these things work, but they do. Cut and paste the URL in your browser window and follow the instructions. I guarantee (most of) you will be flummoxed.

  http://www.quizyourprofile.com/guessyournumber.swf

  A Newfie

  Hailing from a small town in an isolated corner of the Big Island of Hawaii, I have zero understanding of the basis for most intra-national, or intra-cultural humor. For instance, why the New Zealanders and Aussies are always making fun of each other. Or why it is that a number of our Canadian subscribers like to send us jokes about people from Newfoundland (which, I am assuming, is the origin of the word "Newfie"). Even so, the following struck me as somewhat funny, in a juvenile sort of way, so I'm sharing it here. (If you are a Newfie, feel free to send me back something that makes fun of folks who hail from Toronto, whence the sender of this particular joke emanated.)

  A Newfie had two red ears and so went to the doctor. The doctor asked the Newfie, "What happened to the ears?"
  
  "Well, I was ironing me shirt and the phone rang… and instead of picking up the phone, I accidentally picked up me iron and stuck it to me ear."
  
  "Oh dear!" the doctor exclaimed in disbelief. "But that doesn't explain the other red ear. What happened to your other ear?"
  
  "The son-of-a-bitch called back."

  The Golfing Nun

  A nun walked into Mother Superior's office and plunked down into a chair. She let out a sigh heavy with frustration. 
  
  "What troubles you, Sister?" asked the Mother Superior. "I thought this was the day you spent with your family." 
  
  "It was," sighed the Sister. "And I went to play golf with my brother. We try to play golf as often as we can. You know I was quite a talented golfer before I devoted my life to Christ."

   "I seem to recall that," the Mother Superior agreed. "So I take it your day of recreation was not relaxing?" 

  "Far from it," snorted the Sister. "In fact, I even took the Lord's name in vain today!"

   "Goodness, Sister!" gasped the Mother Superior, astonished. "You must tell me all about it!"

  "Well, we were on the fifth tee... and this hole is a monster, Mother – 540 yard Par 5, with a nasty dogleg right and a hidden green – and I hit the drive of my life. I creamed it. The sweetest swing I ever made. And it's flying straight and true, right along the line I wanted... and it hits a bird in mid-flight!"

  "Oh my!' commiserated the Mother. "How unfortunate! But surely that didn't make you blaspheme, Sister!"

   "No, that wasn't it," admitted the Sister. "While I was still trying to fathom what had happened, this squirrel runs out of the woods, grabs my ball and runs off down the fairway!" 

  "Oh, that would have made me blaspheme!" sympathized the Mother. 

  "But I didn't, Mother!" sobbed the Sister. "And I was so proud of myself! And while I was pondering whether this was a sign from God, this hawk swoops out of the sky and grabs the squirrel and flies off, with my ball still clutched in his paws!" 

  "So that's when you cursed," said the Mother with a knowing smile. 

  "Nope, that wasn't it either," cried the Sister, anguished, "because as the hawk started to fly out of sight, the squirrel started struggling, and the hawk dropped him right there on the green, and the ball popped out of his paws and rolled to about 18 inches from the cup!"

   Mother Superior sat back in her chair, folded her arms across her chest, fixed the Sister with a baleful stare and said... 

  "You missed the goddamn putt, didn't you?"

  And, Finally, a Wee Bit of Election Humor

  A conservative Republican, a moderate Republican and a liberal Republican walked into a bar – the bartender raised his hand and said, "Hello, Mitt."

  
  Movie Review, Atlas Shrugged

  I'm running late, but I did want to mention that earlier this week my wife and I finally got around to watching Atlas Shrugged, the movie adaption of Ayn Rand's best-selling novel.

  I approached the movie with some trepidation, seeing how it has been soundly criticized by pretty much everybody. And once it began, I understood why, starting with the "Television Movie of the Week" production qualities and continuing with poor scripting delivered by decidedly B-caliber actors.

  That said, the story itself kept us watching and despite a fair bit of eye rolling, by the end of it we didn't consider it a complete waste of time.

  Of course, the shame of it is that this should have been a BIG movie – or even a television special event rather than the low-budget hack job that it is. Ironically, much of the fault for this being the case rests with Ayn Rand herself. That's because she demanded the rights to sign off on the final cut – something that no director and no studio would ever allow (for the simple reason that they could spend hundreds of millions of dollars, only to have the author squash the movie out of artistic differences). Once Rand died, her heir stubbornly followed suit, dragging the process out for years until sheer gravity saw the movie made, albeit as the weak-soup production we watched.

  I know something about the subject, because at one point I was quite close with Ayn's intellectual heir, having met him along with her while hosting them at the New Orleans Investment Conference. At one point following the conference, due to connections I had in the movie industry at the time, I tried to broker a deal with a powerful and sound-minded producer who was very interested in making the movie, but because of the issue over the final cut, the discussions ran into a dead end.

  Coincidentally, earlier this week Doug Casey debated Yaron Brook, head of the Ayn Rand Institute. Their debate is definitely worth a listen, which you can do by clicking here.

  While I don't agree completely with Doug's vision for how societies should organize themselves – i.e., essentially without any government – I found Yaron Brook's comments to differ little in essence from the sort of petty bureaucratic attitudes found in the antagonists of Ayn Rand's stories.

  Despite the failings of her followers, failings that ultimately resulted in the poor-quality movie version of Atlas Shrugged, I think it is safe to say that Ayn Rand's ideas will live on. And that's a very good thing.

  
  Weekend Reading

  Sunspot Mayhem? Speaking of Doug Casey, he has often observed that the thing that finally tips over the applecart – historically speaking – tends to be something that people just don't anticipate happening. While very much an outlier candidate in that regard, it is possible that the thing that triggers the big clampdown and societal chaos that many fear could be extraterrestrial in nature. I'm not talking about aliens but a massive solar flare on a scale that has not been seen for better than 100 years, when the "Carrington Event" literally shocked telegraph operators and set papers on fire.

  I don't need to tell you what the implications of an electromagnetic punch that strong would have on the modern world with all its computers and fragile electrical systems. As one observer put it, it could "bomb us back to the Stone Age." At which point, of course, who knows how the populace – or the praetorian class – cut off from pretty much all forms of communication and modern life support systems, would react. But I suspect a quiet little corner in an agriculture town in the outback of Argentina will be a pretty good place to be.

  Here's a good story on the topic, from WattsUpWithThat.com.

  Drat, Fooled Again! Think the government won't bail the banks out again? Think again… that's exactly what's about to happen. Here's the story.

  And with that, dear reader, I must rush off to other engagements. I hope you have a wonderful weekend, unmarred by sudden solar flares!

  Until next week, thanks for reading and for subscribing to a (paid?) Casey Research service!

  

  David Galland
  Managing Director
  Casey Research

• Thu, 16 Feb 2012 18:17:03 +0000: Could Big Pharma's Patent Collapse Sink Your Portfolio? - Casey's Daily Dispatch
  
  Synopsis: 

  2012 will open up generic versions of $35 billion dollars per year in blockbuster drugs; is your portfolio prepared for a sea change in the pharmaceutical industry?

  
  

  By Alex Daley, Chief Technology Investment Strategist

  Like it or hate it, prescription drugs are big business. The pharmaceutical and biotechnology companies of the world rake in billions of dollars per year in revenues and proportionately large numbers in profits. A large part of that power to make great profits comes from investing in proprietary intellectual property, i.e., brand-name drugs that the companies can patent and sell exclusively for a fixed period of time.

  When those patents expire, generic drugmakers are quick to bring out cheaper versions of the drugs. Without having absorbed all of the high research and development costs that the original manufacturers fronted, these generic drugs tend to be much cheaper and eat up a large portion of the market.

  Every year on average, a few billion dollars' worth of brand-name drugs drop from patent protection and find themselves with generic competition. But 2012 is record setting. More of the most profitable drugs are coming out of patent protection than ever before, by a long shot.

  Better than $35 billion in annual sales is at risk. Nine blockbuster drugs account for the majority of those sales – over $27 billion – with blood-thinner Plavix leading the pack. Plavix raked in more than $7 billion last year for Bristol-Myers, but is expected to see its sales fall by half or more in 2012, thanks to generic competition. Antipsychotic Seroquel and asthma medicine Singulair follow with $4 and $3.5 billion in sales, respectively.

  

  The numbers would have been even higher if Pfizer had not won a high-stakes court battle against Teva last year, defending Viagra from generics until 2019 (that decision is still up for appeal, however).

  With 401(k)s and pension plans around the world heavily invested in pharmaceutical companies – and many individuals relying on the steady dividends and, until now, rock-solid valuations – this spells an entirely new risk for portfolios across the board. Many of the world's largest drugmakers will see declines of 50% or more in their core revenues over the next few years, and that could spell significant trouble come earnings time.

  Leading the downward charge is Eli Lilly. In 2011, the company saw global sales of $21.5 billion. In 2012, $7.2 billion worth of its products face patent expiration, followed by another $8 billion worth over the next three years. This means that some 71% of Lilly's total revenues will be pressured by generic competition. AstraZeneca, with $32 billion in annual revenue, also has more than 70% of its sales at risk over three years.

  Nor is this problem unique to one or two companies. Takeda will see 67% of its revenue at risk. Pfizer, 66%. Bayer, 63%. Johnson & Johnson, 58%. The list goes on and on.

  In a normal year, a few billion dollars in patent-protected drugs would be facing expiration, and the expectation would be for each company to have a rich pipeline of replacement drugs to fill the void created by those older therapies falling out of patent protection. This isn't likely in 2012. Not only is the number of expirations large, but the big pharmaceutical companies have also seen a considerable decrease in their research and development throughput over the past decade.

  Where Is the Next Generation of Drugs?

  Casual observers of the pharma industry, upon seeing the data on the massive number of patent expirations on the horizon right now, could easily conclude that company executives have been asleep at the switch. Maybe they failed to invest in research and development. Maybe they took too much in profits out of the business.

  But it's not that simple. A number of factors have conspired to create the shortfall. One of the most commonly cited factors among pharmaceutical executives is the rapid increase in recent years in the amount of time and money it takes to bring a new drug to market.

  With major lawsuits over the past few decades stemming from side effects of drugs like Accutane, Fen-Phen, and Vioxx resulting in multibillion-dollar settlements and fines, regulators have been feeling pressure for some time to increase the burden of proof that drugs are not just effective but also safe. The result is that the cost to bring the average drug to market has now soared to over $1 billion. And the length of time to market has been increased – by some estimates to as much as double what it once was. While costs and timelines vary greatly depending on the therapy and the disease targeted, it is clear to any industry observer that the bar is now higher.

  Pharmaceutical executives are quick to place the blame for this on the regulators. But they themselves must share some of it. In 2010 alone, at least a dozen pharmaceutical companies were successfully sued by the Department of Justice or state attorneys general and paid out of settlements in excess of $5 billion just for marketing drugs for "off-label" uses (i.e., when a drug is promoted to doctors to help cure a disease that regulators never explicitly allowed it to be marketed for; this is something that often arises organically after a drug has been readily available for some time and researchers have found other benefits). This kind of aggressive sales and marketing tactic has caused regulators to push back hard on drug companies, restricting labeling and rigorously enforcing prescription standards.

  Nor is tighter regulation the sole culprit. These "big pharma" companies also have themselves to blame for supporting largely unsuccessful research and development programs for too long and failing to hold their developers accountable. In the past three years nearly every major pharma company has had to significantly reorganize its research and development efforts, lay off large amounts of staff, shutter programs, and in some cases dramatically reinvent the way they approach R&D.

  The root of this big mess is that the science itself has changed, and the largest companies have failed to adapt.

  The Year of the Small Guy

  With the advent of entire new fields of study – like genomics or nanomaterials – smaller, more nimble companies have raced to the forefront… for instance, Curis Inc. This drug developer has been a pioneer in the field of pathway inhibitors. These biological drugs interfere with the replication pathways that enable cancerous cells to grow out of control. Pathway inhibitor research was born out of both academia and large commercial R&D labs like those in the pharmaceutical companies. And many major pharmaceutical companies have researchers working in that area, looking for biological treatments for cancer. However, instead it was a small company – Curis – that was the first to successfully commercialize the technology.

  Companies like Curis have emerged due to a mass defection from both big pharma's labs and academic institutions. Our understanding of biological medicine in particular has increased greatly over the last 20 years, and that has led to a seismic talent shift from larger R&D efforts to small commercial development.

  The reason is simple: incentive. As a researcher, you can strike proverbial gold with a valuable new approach, even if unproven, but you know it won't happen if you're lost inside a large organization. Better to concentrate solely on your narrower area of expertise, as the founder or early-stage member of a small private company with that specific focus. There are thousands of such biopharmaceutical startups in the United States alone, all of them aimed at producing drugs that serve a large – or even a small but now underserved – market. With a potential payoff that can run into the hundreds of millions or even billions of dollars in sales, the allure is clear.

  And there is no shortage of venture capital available for the drug development industry. Companies seeking anywhere from $50 million to $250 million, on the back of promising early lab research, can usually count on finding enough money from private investors to fund the beginning stages of their work.

  If they are successful and their drug shows promise in early human trials, even if it comes with a $1 billion price tag, there are ways to get a novel therapy to market. The two primary choices are: go public and raise the money from stockholders; or simply sell out to a large pharmaceutical company.

  It is exactly this latter path that many small biopharmas want to follow. These small companies, in an environment where big pharma is starved for new products, hold a great deal of negotiating power. The formula du jour is to strike marketing partnerships, as opposed to wholesale acquisition. In these arrangements, small companies continue to work on the drug, using funds from their larger partners to sustain development, while giving their partners future rights to sell the drugs in one or more markets and keeping a royalty for themselves. This has transformed large pharmaceutical companies from drug developers into drug marketers. And it has created a massive market for entrepreneurs seeking the next Advair or Ambien.

  With 2012's patent-bubble bursting, that market has more potential than ever. After a very successful decade, large pharma companies are flush with cash. Yet with their R&D pipelines comparatively dry, they know that the gravy train is slowing quickly. So the pressure is on for them to make use of that cash and quickly refill their pipelines with new drugs. The only way to do that is to partner with or acquire an even larger number of small biopharmaceutical companies.

  On their end, the little guys are in need of cash, in large amounts. Plus, the little guys don't always have the political connections and necessary muscle to push something novel through a crowd of risk-averse regulators. It's a marriage made in heaven.

  Making It Work for Your Portfolio

  The question remains: what does all this mean for investors? And what is the most effective way to profit from it?

  The patent problems highlighted above aren't news to the institutional traders on Wall Street and around the world. So, profiting from the major revenue hits is not as simple as shorting big pharma stocks and waiting for the market to turn. Long or short, the question for big pharma investors is which ones will pick the real winners from among so many new drugs. Those that place the right bets have a chance of stemming the bleeding – and maybe even coming out whole. But their desperation is likely to lead to a lot of bad decisions, and in addition it remains to be seen if the most promising of those small companies, the ones with the multibillion-dollar-per-year opportunities, are even willing to take big pharma to the dance. While big pharma brings a lot to the table, their sales and marketing talent is just as vulnerable as their researchers were to the lure of a startup's money-machine potential.

  Increasingly, startups are hedging their bets by partnering with a big pharma company on a handful of their therapies, using those paychecks to fund a number of proprietary research projects, and intending to take those other drugs to market themselves. It's a movie we've seen before, with companies like Amgen and Genentech having been formed on the backs of deals with larger distributors, only to parlay that success into building the next generation of billion-dollar pharmaceutical companies.

  Thus, the key to investing success in this race is about picking the right horses. That means not only the companies with the best technology, but those who also really understand their business model and structure their company either for a major partnership or to go it on their own.

  With the number of major drugs coming off patent in 2012 greater than ever before, the opportunity for small drug developers, and investors, has never been bigger. And the stakes for larger companies have never been higher.

  [Our "Curing Cancer" portfolio features four innovative biotech firms that could save the lives of millions… and create a brand-new generation of millionaires. Learn more.]

  
  Bits & Bytes

  Congress Questions Apple over Path Debacle (The Next Web)

  A privacy debacle that started with social startup Path has unfurled into a firestorm over the past week. The company, which was following usual industry practices (as many observers have pointed out), stored address book data from application users on the iPhone on its servers and then used that data for making recommendations. Since that information was revealed, Apple (whose APIs allow it to store data without any kind of notice to users), Twitter (whose application does basically the same as Path's), and even the US Congress (whose members know how to get on TV when they butt their noses in where they don't belong) have become embroiled in the mess.

  New LED Burns Ten Times Brighter (Technology Review)

  In a sort of follow-up to last week's article on the lighting wars, here's a story about Fremont, California-based startup Soraa, which thinks it can make LEDs cheaply enough to replace regular bulbs. The company's new MR16 LED is a 12-watt bulb that supposedly matches the output of a 50-watt halogen while using 75% less energy.

  Doing Biotech in My Bedroom (Technology Review)

  Its practitioners call it "DIYbio." But due to similarities of this movement to computer hackers and their culture, outsiders have dubbed the practice "biohacking" and the practitioners "biohackers." Biohackers are do-it-yourself biologists who conduct their experiments outside the traditional university and corporate laboratory setting – instead taking to basements, dorm rooms, kitchens, and even closets to fiddle with genomes, conduct biotech research, and even develop novel cures for disease. DIY biologists come in all shapes and sizes – from the formally trained, seasoned scientist and biotech founder to the self-taught hobbyist whose daily life has nothing to do with science. In this case, 26-year-old Cathal Garvey dropped out of a Ph.D. program at a big cancer lab to prove that important biotech can be done by just about anyone in an open-source fashion and on a shoestring budget.

  Coffee App Finds Caffeine's Safe Zone (Futurity)

  A new software app from Applied Cognitive Systems called Caffeine Zone 2 Lite can help tell you when a cup of coffee will give you a mental boost and when it will keep you awake.