Volume IV, Issue 7/ July 2010
Welcome Letter
Welcome Back. It has been another busy month for Without Borders. I have been spending a lot of time in Peru where there is opportunity a plenty these days. From a pure lifestyle perspective, it is not an attractive option for me personally, despite its rich cultural and historic offerings. It is, however, a great place for aspiring entrepreneurs with more hustle than money. It is also an exciting place to invest and speculate. The country is simply awash in opportunities. Therefore, this month will be part one of a two part series on Peru. This month I will cover the politics and economics as well as its capital markets. Next month we will focus on the entrepreneurial opportunities in Lima and the city of Cusco.
But first, we take a detour. Before we get into our Peruvian discussion, lets talk about the state of the political economy, or Politiconomy as we like to call it, since there is no longer any real distinction between Politics and Economics.
As I have mentioned before, my wife was born and raised behind the iron curtain. Whereas, I may from time to time rant about the trend towards socialism as unprecedented or shocking, she merely views it as a return to the ¨normal¨ behavior of governments. When we first met I was a flag waving US Army Airborne Ranger celebrating our victory over communism. My conviction that a new era of freedom and democracy was upon us was so absolute that when my wife’s suspicion of all government rose to the surface, I would assume a pedantic tone and explain how she just had the misfortune of growing up under an oppressive regime that did not respect individual liberty or democracy.
My wife, being far wiser than I, would merely shake her head and say, “You can never really trust a government because governments attract the worst elements in society. Governments exist to protect those inside government”. I remember the distain and pity I felt for such thinking as I arrogantly explained that in America the system was created to limit government. Government in America is designed to be weak. I would extol the virtues of the US Constitution as I pointed out how it empowered the individual and not the collective. I would sanctimoniously point out that freedom of the press and freedom of speech would never allow the politicians and bureaucrats to lie to the people. I would invariably remind her how in the Eastern Bloc the State owned media would run stories about how people were starving in the streets in America and Western Europe and how they would broadcast lies about external threats to scare people into supporting government.
I would explain that information technology would set people free and that with information came the power that would never let governments fool their people again. I explained to her how in Western democracies opposing views keep the government in check and academia and the press would never tolerate the blatant distortion of facts to protect or further the agenda of those in power.
Imagine how silly I feel now.
As a general rule I don’t watch television. We don’t have television on our farm. Most television shows are just bubble gum for the brain. But just the other day I was in the conference room of a major bank in Lima. I was early so they ushered me into the wood and flat paneled room where our meeting would take place. As the receptionist poured coffee I noticed one TV was tuned to CNBC and the other to Bloomberg. On screen number one an advisor to President Obama was spinning like a whirling Dervish dancer as he tried to explain away the most recent housing data. On the other screen the CEO of a bailed out bank was extolling the strength of the recovery despite the record number of unemployed. CNBC then had a terrorism “expert” on to discuss the latest threats and Bloomberg switched to the implications of state run healthcare. I was struck by how little pretense existed and that the segments were little more than propaganda. One shill after another spouted the script designed to affect public sentiment and the financial markets. I felt like the guy who lived along the border between East and West Berlin who watched the newscast about the poverty and violence in the West while just outside the window and across the DMZ relative peace and prosperity was there for the viewing. It was almost surreal.
As more coffee arrived I thought about those early conversations with my wife. I long ago came around to her way of thinking on government. A life spent in small wars and in and around politics will do that. As will a better understanding of economics. Yet I am still shocked by the way the American government has been able to co-opt the masses with such ease. Just think about it for a minute. Economic Central Planning. Media Subjugation. Free Healthcare. Government owned corporations run by the workers. A constant external threat. Blatant and Brilliant. It sounds very Socialist but it is not.
In America the difference is that the powerful elite are not political party members but rather the banking and industrial elite who have managed to usher in a regulatory system which made them the majority partner with government in the running of the State.
This is not Socialism. Socialism is a system where the State owns and controls the means of economic production. The system today is a variant of Fascism. Fascism is the system whereby the State directs the economic activity of privately owned industry. Today’s system in the west is not true Fascism because in true Fascism the balance of power lies with the State yet in today’s system the balance lies with the largest corporations. Besides, you can’t use the word Fascism without evoking images of jackbooted racists.
Ron Paul and others have started calling today’s system Corporatism. They define Corporatism as a system where businesses are nominally in private hands, but are in fact controlled by the government. In a corporatist state, officialdom acts in collusion with their favored business interests to design polices that give those interests a monopoly position, to the detriment of both competitors and consumers. But this is only one part of the entitlement driven system that eventually destroys all democracies.
I don’t like the term Corporatism because it implies that somehow corporations in general are a negative force. And corporations and Capitalism are so closely linked that the name will only confuse the already ignorant and malleable masses. It is not corporations that are bad. It is an environment, which allows for political influence to manifest itself through regulation that has caused many of today’s problems. We need to rally against the regulatory bodies that distort markets by creating barriers to entry and stifle innovation and competition.
Regulatory bodies are mostly faceless and unaccountable. The heads of regulatory agencies don’t have to stand for election. Bureaucrats who are mostly clock punching functionaries, incapable of understanding their cog or the overall machine, staff these agencies. These agencies are expensive and wasteful. They are a literally a tax on society. Without exception, these agencies could be reduced by more than three quarters or eliminated entirely. Most of the functions these agencies perform could and would be provided by the private sector in a way that would not use force to ensure compliance. Yet, although my Libertarian philosophy detests the waste and inefficiency of these agencies it is their contribution to the abdication of personal responsibility that is more bothersome.
The global politiconomic system is on the verge of collapse in no small part because of these agencies. They are the main distributors of unwarranted largess in the form of handouts and subsidies. It was foolish to believe that government could legislate and regulate the business cycle, just ask China and Russia, who are now trying to roll with it, instead of subdue it. It is more foolish to think that government, through regulatory bodies staffed by people who wear short sleeved shirts with a tie, could assume the responsibly of hundreds of millions of people. Yet this is the mentality of the masses;
- I don’t have to think about what I eat. I pay my taxes. The Department of Health and the Food and Drug Administration are there so I can assume that if it is legal it must also be safe to ingest.
- I don’t have to think about educating my kids. I pay taxes. The Department of Education will ensure the education is extemporary.
- I don’t have to think about my retirement. I pay taxes. I have Social Security and a 401K in an SEC regulated mutual fund.
- I don’t have to worry about the strength of the currency. I pay taxes. The Department of the Treasury and the FED do that.
- I don’t have to worry about what happens to the poor in the community. I pay taxes. The Department of Housing and Urban Development and the Department of Labor will deal with that.
The list goes on and the argument is fundamentally flawed for no other reason than the majority of voters do not pay taxes. The mere idea that the government replaces the need to be responsible for one’s own life and community is disturbing on many levels beyond the financial costs of these agencies.
And when it comes to corporate responsibility the abdication is much worse. Banks and big businesses would have you believe that it was the “system” that broke down. It was not their decisions that were flawed. After all, the SEC, the Federal Reserve, the Department of the Treasury, the FDIC, numerous congressional committees and countless other local and state regulatory agencies were aware of what was going on and they did not see the crisis coming. Greenspan and Bernanke told everyone there was nothing to worry about so they were not really required to ensure their balance sheet was in good shape.
But beyond the cost of these agencies and their contribution to the abdication of personal responsibility, what bothers me most about these agencies is the barriers to progress they present.
The cost of regulatory compliance is the single largest barrier to entry for small innovative companies in any regulated industry. According to the Office of Management and Budget, a never to be trusted lackey of the executive branch, federal regulatory compliance costs American manufacturers $380 Billion per year and the regulatory compliance costs are “disproportionately burdensome for businesses with less than 500 million in annual revenue”. Large companies lobby Washington for more regulation not less. It is a misnomer that Drug companies want less involvement from the FDA. The FDA is what keeps small innovative companies from entering the market. Airlines routinely lobby for more regulation, as do the largest Banks. They just lobby for the type of regulation that reduces competition and favors institutions with economies of scale. That is why the recent financial bill was fought tooth and nail; because it would have reduced barriers for smaller more nimble firms.
It’s no wonder that the area where the economy has grown and entrepreneurship has flourished is in unregulated industries. The cause of the crisis was not too little regulation, it was the assumption that existing regulation allowed for the abdication of personal or corporate responsibility. Regulation is a crutch and a barrier to entry. The solution is less government regulation.
The Tea Party folks, though mostly well intentioned, are doing all of us a disservice by calling Obama a Socialist. He is not. The debate should promote the understanding that for many years there has not been a free-market in the US. Don’t let the financial crisis be in any way tied to the free market. Since government controls the private sector through taxes, regulations, and subsidies, and has done so for decades it is folly to say that Free Market Capitalism was at the heart of the crisis. If you must enter the debate then focus on the nexus of big corporations and big government regulatory agencies. Don´t allow the disastrous results of decades of government growth and regulated industry influence to be ascribed incorrectly to free market capitalism or used as a justification for more government expansion. If you choose not to enter the debate there is always room for new freedom fighters in Fitzroy McLeanistan.
There endeth the rage against the machine. Now we proceed to the Peruvian frontier where greener entrepreneurial pastures await.
In This Edition
While in Peru we looked at all types of investments, but certainly the extractive industries dominate the landscape. A couple months ago Carlos Andres of the Frontier Research Report brought to your attention a junior gold company operating in Peru that is now trading 30% higher than when he first recommended it. This month we bring you a large producing mining company with a bright future. As we will explain in the Actionable Intelligence portion of the letter there are several market events converging that will create a once in a decade buying opportunity. We will also talk a bit about Brazil and what we learned from a recent trip about the Politiconomy and how it affects your portfolio.
And as I look at the clock and the calendar I now admit to myself and you, dear subscriber, that my horrid work habits have once again made a looming deadline all but fanciful. To that end let me close this Welcome Letter with a ditty that just hit my inbox. A cigar smoking and scotch swilling friend, subscriber, plastic surgeon, and intellectual adventurer extraordinaire we call Doc penned it;
Tonga Awaits
Waiting here in Tonga,
We’re running out of light.
Without Borders has a deadline
That’s getting mighty tight.
Fitz is banging at the keyboard.
His Mac’s a smokin’, too.
All he wants now
Is to get this damn thing through.
The natives are getting restless and
The cauldron is stoked to boil.
The Editor doubles his efforts
As the drums begin to beat.
He hits the send key at the last second
And avoids being the tribe’s cooked meat.
- Doc
That my friends is the work of a true Renisance Man. Doc is a bon vivant welcome at my humidor or liquor cabinet any time and anywhere.
Yours in Exploration,
Fitzroy McLean
Chief Bon Vivant and Speculator