The US Through the Looking Glass

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The Daily Reckoning | Saturday, January 5, 2013 Unpacking conventional wisdom for some uncommon sense, The death of William McKinley...and the ensuing Era of Incivility, Plus, the Daily Reckoning Best Of 2012 Series archived for your virtual bookshelf... --------------------------------------------------------------- Immortality — will you want it when it’s available? A California biotech company has deciphered not only the genetic code that stops and then reverses aging... It has also patented a technology enabling it to flip a genetic switch within our DNA, the “God Switch”. It makes human cells immortal. They do not — will not die. This could be your chance to live forever. And this video clip is the proof. Joel Bowman, checking in today from Buenos Aires, Argentina... Welcome to the beginning of the new year, Fellow Reckoner, where nothing is quite as it seems. Here is a world seen through the looking glass, where the “Department of Defense” becomes the “Department of Offence,” “Department of Education,” the “Department of Indoctrination.” It’s an Orwellian, Newspeak world in which “quantitative easing,” means money printing, where “homeland security” means fear and insecurity and where something called a “Social Security Trust Fund” is neither secure...nor funded...nor to be trusted. We meant to publish the column below, penned by Mr. Dan Denning, earlier in the week in our Daily Reckoning Best Of 2012 Series. Alas, time got away from us. Anyway, Dan’s piece is a great example of critical thinking...of turning conventional wisdom on its head, of “unpacking” terms to discover their true meanings and implications. In a world of fiscal cliff chatter, trillion-dollar coins and centrally planned economics, Mr. Denning’s voice is a brainwave of fresh and welcomed thought. Please enjoy... [Note: This column originally appeared in these pages on May 24, 2012] The Daily Reckoning Presents Uncivilized Investing By Dan Amoss Uncivilized times call for uncivilized investments. Charlie Munger, Warren Buffett’s partner in crime at Berkshire Hathaway, told CNBC recently, “I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold. They invest in productive businesses.” In a way, Munger is correct. Gold is uncivilized in the sense that it functions best when civilization functions worst. The more uncivilized a society becomes, the more civilized gold becomes. So the easiest way to dismiss this statement is to say that maybe it’s 1939 again and maybe this time “we’re all Jewish families in Vienna.” But let’s not let Charlie off the hook so easily. Instead, let’s “unpack it,” in the words of our tutors at St John’s College in Santa Fe, New Mexico. To ‘unpack it’ we need to focus on two key words in Charlie’s statement: “productive” and “civilized.” Charlie might be right if the world were, indeed, civilized. But maybe the modern world isn’t as civilized as he thinks. Part of what made the world so uncivilized in 1939 was unsound money. The abandonment of the classical gold standard in 1914 made the expansion of the Warfare state possible. The equally unsound system that emerged from World War I — including the Treaty of Versailles — virtually guaranteed that monetary and fiscal instability would lead to political instability. Radical parties like the Nazis flourished. Gold, on the other hand, is sound money. You are not buying it for a capital gain. You are buying it, by our reckoning, as a way of preserving purchasing power. You extract paper from the fiat money system and turn it into something (bullion) you can later exchange for whatever currency emerges when the financial system becomes more civilized. Interestingly, for more than a decade Berkshire has underperformed gold — the investment asset Buffett recently called “forever unproductive.” Since 1997, Berkshire’s shares have declined relative to this forever unproductive asset. The nearby chart depicts the trailing 10-year return of gold since 2007. Thus, the first data point on this chart shows the return an investor would have received from buying gold or Berkshire Hathaway in 1997. Moving across the chart to the right shows subsequent 10-year time frames. Bottom line: Based on a 10-year holding period, there has not been a single moment since late 1997 what an investor would have been better off buying Berkshire Hathaway instead of gold. No wonder Charlie is so cranky! This lengthy underperformance by Berkshire may explain Buffett’s and Munger’s very vocal and public hostility toward gold. Or maybe that’s just a function of both men living most of their adult lives in an era where the monetary system was not disintegrating. They are unable to imagine it. But the chart above isn’t an indictment of the investment acumen of Buffett and Munger. It’s an indictment of the world’s fiat monetary system! A civilized society with civilized people has sound money. An economy with sound money has price stability. This stability allows for long-term planning and investment. This stability rewards investors for identifying which businesses are the most productive and efficient users of shareholder capital. For these exact reasons, William McKinley campaigned for President in 1896 and again in 1900 as a champion of the gold standard. He won...twice. But just 12 years after his assassination in 1901, the Era of Incivility began: The Federal Reserve came into being. Just 20 years after that, FDR confiscated all privately held gold. And 38 years after that, Nixon cut the dollar’s last remaining ties to gold, thereby establishing today’s very uncivilized “fiat money” system. In an uncivilized society, where the value of your labor is stolen through inflation (made possible by an unsound money system) long- term planning and investment become much more difficult, if not impossible. If you accept that we live in civilized monetary times where productive labor is actually rewarded, your brain has been tranquilized by the Big Lie of our times. Munger wants you right where you are. The less you think about how uncivilized the current monetary system is, the less likely you are to question it or disrupt it (which would be inconvenient for Charlie). But if you live an era that subverts accurate valuation of productive businesses — an era that subverts the productivity of the economy itself by encouraging debt and consumption, owning gold seems prudent, not wacky. Uncivilized times call for uncivilized investments. Regards, Dan Denning for The Daily Reckoning New breakthrough fuel could power your car It took the earth 300 million years to make the oil we burn. Imagine if we could squeeze that whole process into just a few months... a few weeks... or even a few days. Because that’s exactly what could be happening. At least a half-dozen labs and companies are working on this, right now. If they get it right, we could literally “make” as much gas for your car as you need. We could make fuel for planes, trains, and diesel trucks this way too. Find out more by clicking here. The Daily Reckoning’s Video of the Year... Stocks were falling, volatility had spiked, perceived safe haven yields plummeted to record lows and the Libor scandal had just broke. Headlines were touting “Global Economy in Worst Shape Since 2009.” It was June of 2012 and a large group of contrarian investors had convened in Vancouver for the Annual Agora Financial Investment Symposium. The theme of the conference was ‘Innovate or Die: Empire at a Turning Point.’ It seemed to be a sign of the times... From the sidelines of that conference, our own Eric Fry spoke with Capital Account host, Lauren Lyster. The two talked about the miserable state of the economy and what the US might learn from the extinction of the Irish Elk and whether the US has become “Too Sexy to Survive.” Seriously. Catch their conversation, which aired during the 2012 conference, right here: ALSO THIS WEEK in The Daily Reckoning... Politics, Politics By Chris Mayer, 09/04/12 While I have no love of government, I do love America. I love its history. I love the great big mass of land it inhabits. I love several of its cultural attachments — such as barbeque and blue crabs, blues and jazz, poker, American sports like football and baseball and American beers — to name just a smattering. I enjoy the company of many fellow Americans. But in the land of politics, I am the standing opposition. Whoever is in power, I’m against him. No Consent Required By Joel Bowman, 06/28/12 “Libertarianism: The radical notion that other people are not your property.” We don’t know who first said those words. But we’ve seen the bitty meme circulating the social media sites recently. Could people finally be catching on? Probably only the “radicals”... A Tale of Two Whistleblowers By Joel Bowman, 09/14/12 Justitia, commonly referred to as Lady Justice, is said to be blinded or “impartial” in administering her duties. She is supposed to have no masters, to serve no particular interest over another. Increasingly, however, Lady Justice appears to be doing the bidding of one very special interest: that of the United States government. By way of illustration, let us observe the startlingly oppositional cases of two whistleblowers. The “Corzine-Dimon Syndrome” By Eric Fry, 05/15/12 On its best days, the American judicial process is a blindfolded Lady Justice — prosecuting the truly guilty and exonerating the truly innocent. On its worst days, it is a Water Wiggle — whirling around unpredictably, without any apparent connection to guilt, innocence, Constitutionality or the proportionality of alleged crimes to one another. The Student Loan Time Bomb By Dan Amoss, 11/14/12 A hidden time bomb ticks away inside the government budget: Within a handful of years, US taxpayers will be on the hook for over $100 billion in student loan defaults. Just last Friday, the US Department of Education released new data on student loan defaults. In short: The hissing sounds coming from the student loan bubble are getting louder. Too Much of a Good Thing By Bill Bonner, 08/20/12 In the years 2007-2012, Nobel Prize winning economists Paul Krugman and Joseph Stiglitz — along with celebrity economist Jeffrey Sachs and practically all their colleagues — failed to notice the most- important thing to happen in their field. But not noticing things came naturally, easily to them. In fact, you might say they had built their careers on not noticing things, especially the most- important thing in economics. Feed the World, Make Money By Chris Mayer, 10/29/12 Opportunities abound in feeding the world, from farmland to irrigation to processing crops to boosting the nutritional content of basic foods. The outline of the story rests on a couple of estimates: a 30% increase in world population by 2050, which would necessitate a 70% increase in food production. Even if those numbers turn out to be only close-to-right, they provide a reliable base to build on, investment-wise. In Stamps We Trust By Eric Fry, 09/24/12 The FNS calls the economic benefit of its activities the “multiplier effect.” We call it the “broken window fallacy.” Fixing a broken window generates “economic activity.” But that doesn’t mean breaking windows produces prosperity. Likewise, feeding the poor creates economic activity, but that doesn’t mean increasing the number of people who receive food stamps produces prosperity. The Hurricane Whisperer By Joel Bowman, 08/30/12 The Feds use a number of complicated instruments to determine which way the economic breeze is blowing, almost all of them baloney. Then they imagine that, after holding their windsocks out in the hurricane, they can command the gales to blow in any direction they so desire. And what’s more, people actually believe them! The Fed Is Officially Insane By Dan Amoss, 09/07/12 There’s an old saying that defines insanity as doing the same thing over and over again and expecting different results. The Federal Reserve wants to test that theory. Fed officials have been all over the media for weeks, laying the groundwork for a third round of quantitative easing. By preparing markets for QE3, the Fed refuses to let real-world evidence get in the way of its beloved theories. QE operations haven’t worked; they’ve just promoted government spending and higher savings rates to make up for low interest rates. Why “gold $2,000” is a joke... On April 24, 2007... one gold expert said “gold is on its way to $2,000 per ounce.” At the time, gold was trading around $688 and the mainstream figured he’d lost his mind. But anybody who listened had the chance to make up to 175% on the metal alone... and up to three times more on related metal plays, as I write you today. So what’s this gold expert’s latest prediction? Click here to find out. The Weekly Endnote... No time for reader mail today, Fellow Reckoner. If you made it through the eleven articles — plus video interview — above...well...good for you. It’s probably Monday by now and time to get back to work anyway. --- Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. 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