“Great empires, such as the Roman and British, were extractive,” the economist Paul Craig Roberts observed recently. “The empires succeeded, because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance.”

But unlike empires of the past, the American Empire has a perverse logic all its own.

“America’s wars are very expensive,” says Roberts, stating the obvious. “Bush and Obama have doubled the national debt, and the American people have no benefits from it. No riches, no bread and circuses flow to Americans from Washington’s wars.”

In the big Iraqi oil auction of 2009, for example, even as US military helicopters droned overhead, the Iraqi oil minister gave out zero contracts to American firms. Not one. And we spent at least $3 trillion on war — $2.9 trillion more than Team Bush’s original budget. So much for paying for war with “oil profits.”

Russia was actually the big winner here. So what gives? The American Empire has perverted the Roman mantra “Veni, vidi, vici” (I came, I saw, I conquered) into the odd imperial slogan: “We came, we saw… we borrowed!”

The results from this turn of phrase are less than desirable. Again Roberts: “Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agribusiness and the Israel lobby use the government to extract resources from Americans to serve their profits and power. The US Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%.

“That is how the American Empire functions,” concludes Roberts. Instead of plundering foreign resources to finance itself, the American Empire is always looking to inflate the next financial bubble. Each of these serial bubbles has the effect of “extracting” wealth from the citizens — by drawing both savings and credit into overly inflated asset classes that then implode.

As the bubbles inflate, robust tax revenues flow to the federal government. As the bubbles implode, tax-payer dollars flow to the connected Wall Street elite. Thus, over time, savings pass from the wallets of citizens to the pockets of scoundrels in Washington and on Wall Street.

For confirmation of this assertion we need look no further than the top o’ the 1%, the Oracle of Omaha. Peter Schweizer of Reason reckoned in his March exposé on Warren Buffett that this folksy fellow “needed the TARP bailout more than most.”

Let’s run through the numbers. Berkshire Hathaway firms in total received $95 billion in TARP money. Berkshire, you’ll recall, held stock in Wells Fargo, Bank of America, Goldman Sachs and American Express. Not only did these companies receive TARP funds… they also dipped into the FDIC’s treasury to back their debt. Total bailout: $130 billion. TARP-enabled companies accounted for 30% of the Oracle’s publicly disclosed stock portfolio.

He’s definitely one of the top beneficiaries of the big bank bailout. And to sharpen the sting, he even got a better deal to help ailing Goldman Sachs than our own government. Buffett got a 10% preferred dividend while the Feds got all of 5%. He cleaned up with $500 million a year in dividends. Without the bailout, you can bet many of his stock holdings would have gone near-zero instead.

Contrast that with a blog post from Rosemarie Jackowski, a community activist at Dissident Voice. She’s describes her experiences working with the underclass in a small town in Vermont.

“In Bennington, there are three very distinct classes,” writes Jackowski. “First, there are the ‘fancy people.’ They are the ones who rule and control everything. They are on the boards — the hospital board, the library board, the select board, the school boards. They have the power — even the power over life and death. They, occasionally during a medical crisis in the hospital, make the decision to pull the plug or allow life to go on.”

Then there is the large group of ordinary citizens. Some are blue-collar workers. Most work hard. Love their families. And have had family in Vermont for generations. They acknowledge the class system in conversation often. They call it the ol’ boys network — cronyism.

The third group consists of those who are in need. Those on the bottom of the economic pile. A poor mother of two disabled children, for example, talked about the oppressive avalanche of redundant paperwork required to get any tiny benefit. The social services system is designed by nameless, faceless, unelected bureaucrats. It is set up to assure maximum job security to the workers in the system. To a struggling family, it often feels like an attack of the “paper churners.” Being poor is a full-time job.

In her post, Ms. Jackowski provides a list of 35 ways poverty robs you of your dignity. Here are just a few:

Poverty means living with shame.

Poverty means working three jobs, and still not “making it.”

Poverty means that you go to work when you are sick. Worse than that, you send your children to school when they are sick.

Sometimes poverty means that you skip meals so that your children can eat.

Poverty means that your housing is never secure…

Poverty means following all of the rules, then graduating with oppressive student debt so that the president of UVM can be paid $447,000 per year.

Tragically, more and more “ordinary citizens” are faced with the challenge of joining this third group of government dependents. Case in point: “In the most recent Census,” writes our managing editor Samantha Buker in The Little Book of the Shrinking Dollar (a book we co-authored for the Wiley Little Book Series), “48% of America qualifies as ‘low income.’ There are more Americans living under extreme poverty than have ever been recorded.

“Since 2009, we’ve added another 4 million souls to the category of low income to below the poverty line. That’s 146 million people in America who aren’t consuming much aside from ever-increasing applications for food stamps.”

In November 2008, food stamp applicants topped 30 million for the first time in history. Today, we’re still posting “record highs,” having added over 16 million more names to the food stamp list.

Does this sound like a nation of financially healthy citizens, able to contribute to the national coffers? Au contraire. Sounds like another case in which our Empire will hand out more than it’s taking in.

Again.

Regards,

Addison Wiggin
for The Daily Reckoning

Borrow-As-You-Go Politics originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

In contrast, Goyette suggested, “America has become a piñata: Everybody gets a crack at it. Presidents and other elected officials pass the big stick around as a reward to those who help keep them in charge of the piñata party.”

Goyette’s book came out in 2009. Since then, we have learned that the party is even more debauched, nay demented, than he ever imagined. And you, dear reader, were not invited…

• It turns out Federal Reserve officials hold regular meetings with well-connected insiders, tipping them off to future Fed moves. On Aug. 15, 2011, Chairman Ben Bernanke clued in an economist named Nancy Lazar about “Operation Twist” — the Fed’s attempt to bring down long-term interest rates.

Ms. Lazar’s clients, according to The Wall Street Journal, pulled down double-digit returns on 10-year Treasuries between the time of that meeting and the time Operation Twist was unveiled to the public on Sept. 21. Sorry you missed out.

• Treasury Secretary Hank Paulson sat down for lunch with hedge fund managers on July 21, 2008, and informed them a federal takeover of Fannie Mae and Freddie Mac was imminent. Ten days earlier, he swore up and down to Congress no such takeover was in the works.

The takeover, in fact, occurred on Sept. 6 — giving the hedge fund managers their own handsome payday in a six-week span. Again, you were excluded.

Before you object too loudly, we daresay you might wish to consider the consequences.

The Repeal of Habeas Corpus? When Free Speech No Longer Matters

On December 31, 2011, President Obama signed the Department of Defense Authorization Act into law. This is normally the routine annual budget for the Pentagon. But inserted into this year’s bill is language giving the president the authority to use the military to imprison terrorism suspects — including US citizens — indefinitely, and without charges.

In other words, the “great writ” of habeas corpus is in danger of repeal. No longer would the government have to justify to a judge why it holds someone in custody.

“Take away this great writ,” writes The Future of Freedom Foundation’s Jacob Hornberger, “and all other rights — such as freedom of speech, freedom of religion, freedom of the press, gun ownership, due process, trial by jury and protection from unreasonable searches and seizures and cruel and unusual punishments — become meaningless.”

Without habeas corpus, you could be thrown in prison for the “terrorist” act of criticizing the government and the government would never have to declare the precise reason it hauled you away. And in theory at least, the First Amendment would still be in force!

“This defense bill,” says The Rutherford Institute’s John Whitehead, “not only decimates the due process of law and habeas corpus for anyone perceived to be an enemy of the United States, but it radically expands the definition of who may be considered the legitimate target of military action.”

“This bill will not only ensure that we remain in a perpetual state of war — with this being a war against the American people — but it will also institute de facto martial law in the United States.”

135 SWAT Raids per Day: “Life Goes on, But It Is Debased…”

Rampant corruption and the apparatus for wide-scale repression: These are the hallmarks of what military theorist John Robb calls “the hollow state.”

“The hollow state has the trappings of a modern nation-state (‘leaders,’ membership in international organizations, regulations, laws and a bureaucracy), but it lacks any of the legitimacy, services and control of its historical counterpart,” Robb wrote in 2008. It is merely a shell that has some influence over the spoils of the economy.

“The real power,” Robb continues, “rests in the hands of corporations and criminal/guerrilla groups that vie with each other for control of sectors of wealth production. For the individual living within this state, life goes on, but it is debased in a myriad of ways. The shift from a marginally functional nation-state in manageable decline to a hollow state often comes suddenly, through a financial crisis.”

It is in this context that the growing “militarization” of police looks even more ominous than it does on the surface.

The Pentagon has distributed $2.6 billion in military surplus to local police agencies since 1997. Thus do towns of only a few thousand people have their own SWAT teams. Time was their use was limited to hostage-takings and other high-stakes situations. SWAT raids nationwide numbered only 3,000 per year in the early 1980s, according to University of Eastern Kentucky criminologist Peter Kraska.

Nowadays, SWAT teams are used to serve routine warrants. By the time Kraska stopped counting in the mid-2000s, the annual number had exploded to 50,000 — an average of more than 135 per day.

What happens when the tinder-dry combination of piñata-party corruption and a police-state structure meet the spark of violence?

We don’t know where all this is going… but we know it makes us uneasy…which is why we are increasingly interested in casting our gaze for investment opportunity far, far away from US shores.

The US remains a land of (some) opportunity, but it has lost its monopoly.

Regards,

Addison Wiggin,
for The Daily Reckoning

“America Has Become a Piñata…” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

For many Americans, the suggestion that the dollar is losing value is unthinkable — even unpatriotic. The problem is not simply a lack of understanding about the nature of wealth and investment used to sustain it.

Our policy makers and economists make no distinction between wealth created through savings and investment in the real economy versus “wealth” created in the markets through asset bubbles brought about by credit policies.

When I tell people this, I feel like I’m addressing a meeting of folks who want to lose weight at the local burger joint. We as individuals — and as a nation — are addicted to cheap, easy credit. What the government gives, we’ll take. We spend at a high level, and we want to accumulate wealth on the same fast track.

Forget hard work, we’d rather our house go up in value like magic! Traditionally, economists recognized that it took time to build an estate. People and countries could build wealth slowly. Those days are far, far behind us. Now we are at the mercy of what I call serial bubble blowers.

All the U.S. economy’s so-called improvements stem from one main reason: all economic growth during the “recovery” since 2001 can be traced to a seemingly endless array of asset and borrowing bubbles.

First, we saw the stock market bubble, then the bond bubble, then the housing bubble, then the mortgage refinance bubble, then the commodities bubble. Now another bond bubble approaches.

In between, we haven’t seen a single sign of stable, sustained growth. And that makes sense; consumer spending has been surging in excess of disposable income for years. That’s not real growth.

Right now, Washington thinks that another round of stimulus will solve the problem. That’s like saying that overeating will eventually lead to serious dieting. Consumer spending isn’t juicing the economy.

Meanwhile, since the government is broke, all the borrowing they do to fund stimulus, tax cuts, and anything else to save the economy puts us at the mercy of foreign investors. If and when they decide to slash their investments in U.S. dollars or Treasury securities, we’ll have a crash landing worse than anything we’ve seen yet.

It’ll be far worse than Lehman Brothers’ collapse, far worse than 2008’s aftermath.

We depend on foreign investors for everything. Be they private, institutional, or governmental, we need them. If the dollar’s fall frightens foreign owners, they will sell from this immense stock of dollar assets.

But how big are these foreign holdings? You rarely hear about this on financial news channels, so you probably don’t think it’s a big deal. In fact, it’s a big fat deal.

We’re sitting on $15.4 trillion in debt. How is it going to get paid? And by whom?

Back before 1970, foreigners held a 5 percent slice of U.S. public debt. Today foreigners hold nearly half the pie. And the government owes a bunch of it to itself — $4.6 trillion — including what it’s borrowed from the Social Security trust fund.

Is Washington at all alarmed? While the end of 2011 did culminate in near-monthly government shutdown threats, we expect the debt ceiling to go on being raised as it was under every presidency since, well, 1917, when we had a World War to finance.

At last count, it’s been raised 74 times. And lest you believe the crisis came to a head in the Obama administration, we’d like to point out that he’s only raised it three times so far. Famed fiscal conservative Ronald Reagan raised it a whopping 18 times. So you see borrowing to spend is everyone’s favorite game. Darn all the consequences.

Regards,

Addison Wiggin and Samantha Buker
for The Daily Reckoning

Serial Bubble Blowers originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

But her mailbox is stuffed with offers for credit cards and car loans.

We begin today’s episode with “deja vu”-induced vertigo this morning. Three items flitted into our inbox in the last 24 hours. By themselves, the items might not mean much. Coagulated, they give us the same queasy feeling we had in 2007-08.

Credit card lenders issued 1.1 million new cards to subprime borrowers last month — up 12.3% from a year ago, according to the credit-reporting outfit Equifax.

“As financial institutions recover from the losses on loans made to troubled borrowers,” reports The New York Times, “some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.”

Plotted on a chart, it looks like this…

Not exactly 2007 levels, we concede. But the trend is enough to move a former Federal Reserve bank examiner to say, “It’s clear that we are returning to business as usual.”

“Business as usual” meaning…spending more than we earn.

The second item in our 2007-08 trifecta: Like Blackstone a few years back, Carlyle Group — the second-biggest US private equity firm — is going public.

But Carlyle isn’t just any private-equity outfit. It’s based not on Wall Street, but in Washington — the better to connect its umbilical cord to the belly of the beast. The first President Bush was a senior adviser. Clinton White House Chief of Staff Mack McLarty is still one.

“Carlyle plans to sell a stake of about 10% in the IPO,” Bloomberg News reports, “and will start marketing the deal to investors as early as next week.” The valuation it’s seeking: $7.5-8 million.

Undoubtedly, Carlyle’s principals have concluded they’ve made the easy money and now it’s time to draw in the suckers. Just like Blackstone Group, which went public in — drumroll, please — 2007. That worked out very nicely… for Blackstone’s bigwigs, if not for retail investors.

“Contacts in many districts commented on rising transportation costs due to higher fuel prices,” reads a recurring theme throughout the Federal Reserve’s latest Lily White, er… we mean, “Beige” Book — compiling anecdotal reports about the state of the economy.

“Manufacturers in many districts,” reads another passage, “expressed optimism about near-term growth prospects, but they are somewhat concerned about rising petroleum prices.” (Emphasis added.)

There are plenty more such tidbits collected from the 12 Federal Reserve regions…

• Minneapolis and Dallas: Airlines raising fares to cover fuel costs
• Richmond: Rising fuel costs a problem for both land and ocean shippers
• Cleveland, Chicago, San Francisco: Rising fuel costs becoming hard to pass on to consumers

Shades of 2008, when oil started its trend toward $147 a barrel.

Currently, Brent crude — the price most of the world pays — has traded above $100 a barrel for 191 straight days. In 2008, that run lasted 170 days.

This morning, Brent is $120.38.

But don’t get the wrong impression: Just because subprime credit is growing like a weed, a major private equity outfit needs public participation to keep the good times rolling, and oil prices being persistently high doesn’t mean another “Lehman moment” is right around the corner.

Not at all. But we do see it on the horizon once agian.

Addison Wiggin
for The Daily Reckoning

Shades of the ’08 Financial Crisis? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Since that declaration, house prices have continued drifting lower in most parts of the country. The Case-Shiller index of national home prices is down about 4% year over year. Even so, we’re betting this professional investor was merely early…not wrong. US housing isn’t just cheap; it is the cheapest it has been in more than 40 years. And when one considers the possibility that inflation may rear its head soon, housing looks even cheaper still.

If you think we’re crazy, you’re not alone. The housing market is a complete bust right now. The following chart shows the median home price in terms of per capita disposable income. Based on this calculation, home prices are lower than they have been in 40 years!

And it isn’t just that home prices have fallen a long way. For most home buyers, the price of the home is only one part of the true cost of a home. Mortgage rates matter as much, or more, than the purchase price itself. In other words, buying a house is not just a bet on real estate; it is also a bet against interest rates. For the typical buyer of a home who takes out a 30-year mortgage, an increase in interest rates is just like an increase in the price of a home.

Today, because home prices and interest rates are both at extremely low levels, the cost of buying a home with a 30-year mortgage is at an all-time low. To illustrate this stunning fact, the chart below shows the average monthly mortgage payment on the median-priced home, expressed as a percentage of per capita disposable income.

If you can get a mortgage, you are basically taking a reverse bet on the bond market. You could be a long-term borrower at fixed rates, instead of a long-term lender. Right now, you can borrow for 30 years at around 3.3%. After the mortgage tax deduction, for some people the net effective interest rate is nearer to 2%! That’s going to prove an awesome deal if we see inflation again.

But here’s the factor that clinches the case for investing in residential real estate: the long-term supply and demand for housing. Let’s start with supply.

Consider how long it will take to bring new supply to the market. As investors, we want new supply to come slowly.

The number of housing starts is currently lower than at any time in at least the past 50 years. Moreover, new construction is only about half the long-term average. Again, good news for investors in housing, since this means that new supply is growing very slowly.

Meanwhile, housing demand — based simply on demographic trends — should rise inexorably for years to come. Take the growth in households — driven by population growth — and apply a home ownership rate. Demographically, the US is still a growing country. By 2030, there will be 370 million Americans. Even using the long-term average home ownership rate means we’ll need 1.1-1.2 million new single-family homes per year.

In other words, busted markets don’t last forever. The cure for low prices, as the old saw goes, is low prices. Furthermore, a bet on the housing market is not merely a bet on real estate; it is also a bet that inflation will rise.

The US economy may be idling in neutral for the moment, but inflation is revving its engines. How should you prepare?

“Buy gold” is the time-honored answer, and we don’t quarrel with it. But an alternative answer, especially this time around, might be: “Buy a house.”

That’s the advice offered by a growing — but still small — number of very successful investors. John Paulson is one of them. He is the guy who said about a year ago, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

He was early…and his hedge fund performed very poorly last year, mostly because he was too early betting big on a rebound in the US economy. Double wrong! But we still think Paulson’s call on housing may be close to the mark.

Despite his dismal performance in 2011, Paulson is the guy who turned one of the greatest trades of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America…still.

His advice today is very different than it was in 2007. “Buy a house,” he says.

And he has put money where his mouth is…He already owns posh digs in Manhattan on 86th Street, plus a Southampton house he nabbed in 2008. In 2010, he snapped up an 8-acre ranch in Aspen for a cool $24.5 million, before buying a Fifth Avenue condo at a 23% discount to the asking price. (This 26th-floor pied-à-terre will be his “guest house.”)

Let’s flash back in time for a second…

Another successful investor gave similar advice in 1971 — the dawn of one of America’s biggest housing bull markets. The investor was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:

Smith: The best investment you can make is a house. That one is easy.

Cavett: A house? We were talking about the stock market. Investments…

Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don’t want to give tips on a television show. For most people, the best investment is a house.

Cavett: I already own a house. Now what?

Smith: Buy another one.

How good was that advice?

Houses, as an investment, trounced stocks during the inflationary 1970s. The chart below tells the tale.

In the 1970s, US stocks returned about 5% annually — failing to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s, as inflation heated up:

1972 — $30,000
1973 — $32,900
1974 — $35,800
1975 — $39,000
1976 — $42,200
1977 — $47,900
1978 — $55,500
1979 — $64,200

That was a pretty impressive run-up in home prices. Today, I think we could be on the threshold of another once-in-a-generation buying opportunity in the housing market.

The homebuilding stocks seem to agree. Many of them have doubled during the last five months from their very depressed levels. Although the ISE Homebuilders Index is still down about 80% from its 2006 peak, it has been gaining steady ground relative to the rest of the stock market.

The chart below shows the rolling three-year price performance of the S&P 500 index, minus the rolling three-year price performance of the ISE Index. As you can see, the ISE has been lagging far behind the S&P 500 for most of the last five years. But during the last few months, this index has been closing the gap…and looks like it is about to begin a period of outperformance relative to the rest of the stock market.

So we like select homebuilding stocks, but we don’t love them. Unlike the housing market itself, homebuilding stocks have priced in quite a bit of good news already. Not surprisingly, therefore, the insiders at these companies have been doing a lot more selling of their own shares than buying. (Pulte is one conspicuous exception.)

We also like housing-related stocks. As Chris Mayer, our colleague over at Capital & Crisis, observes, “Companies such as Lowe’s (LOW) and Home Depot (HD) would benefit from a recovering housing market…as would the makers of flooring, Mohawk Industries (MHK), the makers of kitchen cabinets, Fortune Brands Home & Security (FBHS) and a whole bunch of stuff in between…In a robust housing market, good fortune would also smile on A.O. Smith (AOS), which makes water heaters for homes.”

But again, we don’t love these stocks. Not at their relatively rich valuations. Even so, we’ll be combing through this sector very carefully for promising investment ideas. In the meantime, for those with the means and the inclination, the best buy in the housing sector is an actual house!

This picture is unequivocal. US home prices are very, very cheap today. “Cheap” does not preclude “even cheaper,” of course. Home prices could certainly continue sliding. But even if that were to occur, mortgage rates might begin rising, which would cause the effective price of a home to increase.

Obviously, buying residential real estate at both a housing market low and an inflationary low would be the optimal entry point — in fact, it would be a screaming buy. And that’s exactly what today’s circumstances seem to be offering.

Perhaps that’s why a large number of very successful professional investors are licking their chops over opportunities in the US residential real estate market.

This out-of-favor asset class has attracted the attention of David Ackman, a hedge fund manager with a fondness for contrarian investments. He calls them SFHRPs, an acronym for “Single Family Home Rental Property.”

“The best investments we have made are the ones no one else would touch,” Ackman explains.

As housing prices have continued drifting even lower, Paulson and Ackman have picked up a little bit of company. The US housing market is becoming a central focus of several “deep value” investors. Over the past weeks, I’ve bumped into three very successful professional investors who were much more eager to talk about their real estate investments than about their stock market investments.

One gentleman in particular, who has made billions of dollars for his investors by buying deep value stocks, was much more eager to talk about his recent real estate investments than his recent stock market investments. He was talking glowingly — if not giddily — about the opportunities in real estate he was coming across.

“I’m not finding much to buy in the stock market at the moment,” he explained. “But real estate is a different story. I wish I had the capital to act on more of the ideas that are coming across my desk.”

We asked this investor if he was concerned about the risk of real estate prices falling even further.

“Nah,” he said as he waved the question aside, “I assume the housing market will remain soft for a while. But the kinds of deals we’re finding should work out well, even if the housing market keeps sliding for a bit. Besides, there’s one lesson I’ve learned repeatedly as a value investor in the stock market: You can have good news or cheap prices. You can’t have both.”

The US housing market has absolutely no good news…but plenty of cheap prices.

Regards,

Addison Wiggin & Samantha Buker,
for The Daily Reckoning

Buy a House! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

At least skydivers and race car drivers understand their risks — more or less — and are knowingly accepting these risks in the pursuit of a particular reward. By contrast, many investors assume risks unwittingly, and out of all proportion to the potential rewards.

They are driving race cars, not to win millions of dollars, but to win a $50 gift card to Dave & Busters. They are tight-rope walking across Iguazu Falls, not to obtain international acclaim and a possible movie deal, but simply to get to the other side. That’s not a good trade.

It is important to understand the risks one is taking…and to be as certain as possible that the risks and the rewards align intelligently.

Every investment carries some degree of risk, the successful investor merely insists that he receive compensation commensurate with the risk he assumes.

That’s easy to say, but how do we do it? Most of us have a hard enough time identifying a truly compelling investment opportunity, much less trying to assess the risks involved. So what’s our opportunity?

Good news. You don’t have to be an expert stock-picker to rack up expert investment returns. But you do have to build a risk-resistant portfolio — one that is diversified in ways that will provide genuine protection against severe capital loss.

The “Permanent Portfolio” has delivered that kind of protection for more than 30 years.

In 1981, the best-selling investment author, Harry Browne, developed a set-it-and-forget-it strategy he called, simply enough, the Permanent Portfolio. The strategy is embarrassingly simple — consisting of just four components: gold, bonds, stocks and cash.

The idea was that at any given time, two or three of these four components might underperform — but the other portfolio components would perform so strongly, you’d get an overall gain that would outpace any increase in the cost of living.

So during an inflationary environment like the 1970s, gold would provide the juice. In prosperous times like the 1990s, stocks would be the engine that pulls the rest of the train. In a garden-variety recession, your cash and long-dated Treasury positions would put you in good stead, while gold and stocks struggled.

Over time, the Permanent Portfolio has followed through on its objective admirably. From 1981-2010, the annual average return was a healthy 8.4%. Only two years have seen losses, and those were relatively small.

And what about 2008? The Year of Doom? The Permanent Portfolio held its ground, and then some — gaining 1.9%.

The Permanent Portfolio isn’t about trying to catch a wave. It’s about surrendering to the reality that you can’t predict the future — and still building up a nice nest egg, whatever the future brings. Set it and forget it.

No doubt about it, Harry Browne’s Permanent Portfolio has performed brilliantly during the last 30 years… and perhaps it will continue to do so. But conditions have changed since 1981. Maybe we should change with them. Browne’s basic strategy remains as valid as ever, but maybe the components that populate Browne’s strategy need to change.

For example, the Permanent Portfolio mutual fund (PRPFX), although based on Browne’s strategy, has tweaked his original allocation somewhat. The mutual fund’s allocation is as follows:

20% gold, 5% silver, 35% US Treasury bonds and bills. 10% Swiss government bonds, 15% aggressive growth stocks, 15% natural resource stocks and/or real estate stocks.

This revised portfolio has been more volatile than the original, but it has also delivered greater returns, especially recently. During the last 15 years, for example, PRPFX has not only produced double the returns of the S&P 500 Index, but it has also outpaced the returns of that other permanent portfolio, Berkshire Hathaway.

But that was then. What about now? Is Browne’s original allocation still optimal? Or is the Permanent Portfolio mutual fund’s allocation an intelligent refinement? Or should investors be heading in an even more radical direction?

If, for example, you are very worried about the future of the US dollar, should you be allocating portions of the permanent portfolio to foreign stocks or bonds?

We don’t know. But we’d like you to tell us. What do you think would be the ideal permanent portfolio for the next 10, 20 or 30 years?

Here are the ground rules:

1) Select three to five investible assets — that means no less than three and no more than five.
2) Do not include any individual stocks, unless those stocks be an ETF or closed-end fund. Do not, for example, include Apple Computer as one of your Permanent Portfolio components (no matter how brilliant that allocation might be!)
3) Make sure the assets you select are public securities or indices. That means they are a mutual fund, ETF, index or commodity.
4) Design your portfolio with the idea that it would be re-balanced annually.
5) If you’d care to add a little color behind the thought process that produced your permanent portfolio, feel free.

We look forward to your submissions and hope to be publishing many of them in a future edition of The Daily Reckoning.

Regards,

Eric Fry and Addison Wiggin,
for The Daily Reckoning

The Permanent Portfolio Revisited originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

We’ll let that sink in for a bit.

[a bit]

“The state will soon begin requiring gift card sellers to obtain ZIP codes from buyers so it can claim the value of cards not redeemed after two years,” according to an Associated Press story.

If you have a two-year old gift card sitting around, you can still use it as long as it’s not expired.

“But if the state has already laid claim to the money,” says the AP, “businesses might have to jump through administrative hoops to get reimbursement — and therefore stop selling gift cards altogether to avoid the hassle.”

American Express’ gift card unit is already bailing from the Garden State.

For the moment, no other state is trying this. At least not until the scads of litigation that resulted from New Jersey’s gambit get sorted out in court.

Meanwhile, scores of businesses in New York City are suddenly learning they’re in arrears on three years’ worth of taxes they didn’t know applied to them.

The city has decided yoga studios must pay a sales tax covering businesses devoted to “weight control” or “health salons.” Audits are underway.

“Yoga classes have been around forever and not taxed,” protests Alison West of the lobbying group Yoga for New York. (In other news, yoga studios have a lobbying group in New York.)

“Last Monday afternoon,” reports The Wall Street Journal, “more than 70 yoga managers, studio owners and instructors sat down in the lotus position to discuss the tax issue — and other troubles — at Yoga Union, a studio in the Flatiron District. West said the atmosphere was ‘concerned, dynamic and productive.’”

Bummer. It’s going to be hard to meditate this bill away.

In Connecticut, what critics have dubbed the “Priceline tax” is working its way through the legislature.

“The proposed bill,” says State Rep. John Piscopo, “would impose a new tax on travel services by subjecting service fees charged by travel agents and other intermediaries for facilitating hotel bookings in Connecticut to the state’s hotel occupancy tax.” That includes outfits like Priceline, Orbitz, and Travelocity.

That’ll be a killer for the sort of quaint mom-and-pop bed-and-breakfast places at the heart of New England tourism; they count on the online outfits to do the bulk of their marketing.

We chronicle these “new taxes and weird fees” to make this point: State and local governments are getting desperate for new sources of revenue. State revenue alone fell $50 billion in 2008-09, Federal Reserve figures show.

“According to experts, it will be years until states have recovered enough to restore services to pre-recession levels,” says U.S. News and World Report.

In the meantime, you and the local businesses you patronize are looking more and more like a milk cow to legions of bureaucrats.

Addison Wiggin
for The Daily Reckoning

New Taxes from a Desperate Government originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

And he’s right about that…

But investors don’t buy gold because they hope it will produce something. They buy gold because they know that no one can produce it. Therefore, the more that folks distrust their national currency, the more they put their trust in the ultimate currency: gold.

The gold price has increased for 11 consecutive years — a time frame during which, coincidentally, it has trounced the investment return of Berkshire Hathaway. Why? Because a new era of monetary destruction is unfolding throughout the Western world. That’s why a growing number of investors are devoting a growing percentage of their investment portfolios to gold and other hard assets.

Nevertheless, the American community of gold lovers remains miniscule by comparison to the community of Berkshire Hathaway lovers or Apple lovers. In this sense, Buffett is thoroughly average — he hates gold just as much as the next guy.

Interestingly, however, Buffett is one of the very few billionaires on the planet who scorns gold. In fact, several billionaire investors have disclosed recently that they are taking the other side of the Buffett “sell” on gold.

George Soros, the billionaire founder of Soros Fund Management LLC, raised his stake in the SPDR Gold Trust (GLD) to 85,450 shares from 48,350 during the last three months of 2011. The billionaire hedge fund manager John Paulson also holds a large stake in GLD.

“Paulson made his way into the financial history books thanks to what many now call the ‘greatest trade ever,’” Money Morning reports:

“Paulson & Co. shorted the subprime mortgage market before the collapse, banking a $15 billion gain. So when Paulson went big again by buying gold in 2009 and 2010, investors took notice… In fact, Paulson’s holdings in the SPDR Gold Trust (GLD) make his firm the biggest stakeholder in this ETF, with a position currently valued at $2.9 billion.”

The billionaire “Bond King” is also singing gold’s praises these days. Bill Gross, the guy who founded PIMCO, the $1.3 trillion financial firm dedicated to managing bond portfolios, remarked last month, “Recent central bank behavior, including that of the US Fed… may as well induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

One final admirer of gold is neither a hedge fund manager nor a billionaire. This admirer is a trillionaire! Literally.

In 2011, China became the No. 1 importer of gold. China was already the world’s leading gold producer. The Asian juggernaut also reduced its holdings of US government securities last year for the first time since the Treasury began keeping the data in 2001. As of Dec. 31, China held $1.15 trillion in Treasuries, down from $1.16 trillion at the end of 2010.

This reduction doesn’t sound like much, but it’s the trend that’s telling: gold up, Treasuries down.

China is not only the biggest importer of gold, it is also the biggest miner of the precious metal. According to the World Gold Council, China produces nearly 50% more gold (about 300 tons per year) than the second-place country… Australia. And not a single ounce of that newly mined gold leaves the country. By law, the Chinese government buys every ounce of gold that surfaces from a Chinese mine shaft… no matter what.

Clearly, the Chinese are taking the “long view” when it comes to gold accumulation. They believe they can trust gold more than US Treasuries.

Maybe Soros, Paulson, Gross and the Chinese are all crazy to buy gold. Or maybe Buffett is crazy not to. Place your bets!

Regards,

Addison Wiggin,
for The Daily Reckoning

Warren Buffett Scorns Gold. Bad Move! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

In other words, housing prices are back where they were when the space shuttle Columbia blew up and Washington was about to foment the doctrine of “preventive war” in Iraq.

Good times.

(The index’s year-over-year decline works out to 3.8%. It would likely have been worse if the weather in January had felt, well, more like January.)

Alas, the Case-Shiller is but one of several limp housing numbers that have been released in recent days.

“From home builder sentiment to housing starts,” writes Diana Olick, one of the more sensible observers of the housing market in the mainstream press, “to home builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it…”

That Ms. Olick is employed by CNBC is one of those freakish facts we can chalk up only to… who knows, sunspot activity.

A year ago, in these pages, we covered a study from Wells Fargo gushed that “there are 51.5 million potential first-time homebuyers born between 1979 and 1991. Roughly 6 million more of these Millennials are reaching the prime home buying age than baby boomers did in 1977.”

The “Millennial” generation – age 30 and under – concluded the Housing Wire[link], will ride to the housing market’s rescue… restoring the National Association of Realtors (NAR) version of the American Dream.

And yet, one year on the opposite appears to be happening.

“Homeownership rates for young adults have plunged back down to near-1990 lows,” writes the aforementioned Neil Howe, “despite record-low interest rates and very attractive prices for a new home.”

What’s more, first-time buyers are disappearing: From 2009-11, only 9% of people age 29-34 got a first mortgage. A decade earlier, it was 17%.

The reasons are legion: According to a Chicago Fed study, several factors are at work: Young couples are waiting longer to have kids… thus the urgency to buy a home is less.

They’re also at what the study delicately calls “heightened income risk”… or what you and I would call “unable to find a dang job.” Unemployment among people 25 and younger is double that for people older than 25.

Too, their inflation-adjusted wages are lower than a decade ago.

All of these downward pressures on the “Y me?” generation arrive at a bad time.

“For someone in his or her 30s,” Mr. Howe continues, citing a separate New York Fed study, “the average college loan balance is now $28,500, and balances over $50,000 are common.

“Debt at this level stifles consumer spending and can render many young people ineligible for home mortgages, no matter how low the interest rate.”

Conclusion: If you’re expecting a Millenial to come and prop up your “investment” in a primary residence… well, dude, he or she might be around the corner looking for a cheap rental instead.

Addison Wiggin
for The Daily Reckoning

Counting on Millennial Homeownership originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The plan’s existence is revealed in a book called The Escape Artists: How Obama’s Team Fumbled the Recovery.

“In May 2009,” writes journalist Noam Scheiber, “the president asked [White House budget director Peter Orszag] to draft a secret memo laying out the government’s options in the event of a fiscal crisis, in which a runaway deficit sent interest rates spiraling upward.

“No other member of the Obama economic team was even aware of the assignment.”

We pause here to tease out Mr. Scheiber’s narrative in which “a runaway deficit sent interest rates spiraling upward”:

• As mentioned yesterday, the government ran up a record monthly deficit of $231.7 billion in February

• Rates on a 30-year Treasury bond have jumped 15% in the last two months. As of this morning, they’re 3.36%. Rates on a 10-year note are up 22% in roughly the same time frame.

• And five-year yields… yikes:

Of course, these rates are still ridiculously low by historical standards. But Mr. Scheiber’s crisis is creeping up from behind.

What’s in the Orszag memo? We don’t know. We’ll explain why in a moment. But we do know neither the White House nor Congress has a plan to wrestle with the rising national debt.

So “instead of developing a long-term plan to avoid the worst-case scenario,” writes James Pethokoukis of the American Enterprise Institute, “it has chosen to plan for the worst-case scenario…

“Maybe the crisis plan is the long-term plan,” Mr. Pethokoukis speculates, “Maybe it’s something like this: a) do nothing; b) keep implementing the Obama health care and environmental agenda; c) wait for markets to finally freak out over rising U.S. debt; d) break the glass and grab the 2009 Orszag plan.”

The glass covering the Orszag memo might well get cracked, mostly by accident, on Jan. 2, 2013.

Under the law passed last minute in August 2011 raising the debt ceiling, something called “sequestration” is supposed to kick in shortly after the new year. “Sequestration” is wonk-speak for automatic spending cuts totaling $1.2 trillion over 10 years.

The cuts will come entirely out of “discretionary” spending. Meaning Social Security and Medicare would be left alone.

Congress and the White House can avoid sequestration if they reach agreement sometime this year on spending cuts and/or tax increases totaling that same $1.2 trillion. The odds of an agreement happening this year? Well, we’ll leave that conjecture up to you.

Addison Wiggin
for The Daily Reckoning

The Orszag Fiscal Crisis Plan originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".