The Anti-Terrorist Map

Taking a break from hard economic analysis, Mark Skousen reminds us to beware the "red" zones on the world map…and to take them into account when building our portfolios. [If you are willing to stomach the risk inherent to stock market investing at the moment, that is…]

A few months before September 11, 2001, a certain world map came into circulation. No one noticed. Then, after the terrible events of 9/11, "The Map that Predicted the Terrorist Attacks" was suddenly thrust into the limelight.

I first saw this map a month after 9/11. And I was amazed. "Look where the red is!" I said to myself.

Officially known as the "Map of Economic Freedom," this map is published annually by the Heritage Foundation and the Wall Street Journal. It color codes each world country according to its degree of economic freedom. Heritage uses 10 criteria to determine a country’s level of economic freedom, including such factors as taxation, size of government, business regulation, free trade, and inflation. Countries considered "free" are colored blue, "mostly free" green, "mostly unfree" yellow, and "repressed" red.

The Anti-Terrorist Map: The 2001 Map of Economic Freedom

The 2001 map showed several distinct patterns:

1. Only a dozen countries were painted "blue," including the United States, England, Switzerland, Australia, New Zealand, Singapore, and Hong Kong. The map confirmed Milton Friedman’s statement, "Freedom is a rare and delicate flower."

2. Most of Europe and the Americas (including Canada) was in the "green" (mostly free) category. These countries are known for big government and a large welfare state.

3. Most of Africa, the former Soviet Union, and Asia were in the "yellow" (mostly unfree) category. But I see this pattern in an optimistic way. What color was most of Asia (the Soviet Union and China) 30 years ago? Red. So they are making progress, and some observers think that China ought to be in the "green" category in terms of economic freedom. They may still be "red" when it comes to political and religious freedom, but China has made tremendous progress opening its country up economically.

4. Finally, look where the red is: Mostly the Middle East! The message is clear: closed societies are breeding grounds for intolerance, fanaticism, and violence, even terrorism. This map may also teach us an important lesson: After the U.S. leaves Iraq and the Middle East, if the countries in this region are still in the "red" category, we will have made no progress!

The Anti-Terrorist Map: Achieving a Commercially Open Society

Of the three freedoms – political, religious, and economic – probably a commercially open society, including free trade and foreign investment, is the easiest to achieve at this stage, and will help the most in raising the standard of living in the Middle East. If you give Arabs hope financially and economically for themselves and their family, they are less likely to engage in terrorist attacks and suicide bombings.

Fast forward to the present. Three years later, what does the most recent Anti-Terrorist Map tell us? There have been some positive changes: Canada and Chile are now in the "blue" (free) category. So is Sweden, which was viewed for many decades as the "third way" between the Soviet socialist system and the American laissez-faire system. But it is clear that Sweden, like many progressive countries, has decided that there is no third way, only the free way. Sweden has privatized and cut corporate taxes, and now qualifies to join the "blue" category.

Mongolia, sandwiched between Russia and China, is now in the "green" (mostly free) category, even though it is run by the Communist Party! Late last year, I had the opportunity to lecture there, and was amazed at the interest in free-market economics. I was treated like a rock star – 3,000 students showed up at the largest palace in the capital to hear me speak.

However, there are some setbacks. Argentina is now "yellow" and Venezuela, which is run by a Castro-like Marxist, is in the "red." And the Middle East is still largely in the "red." Stability and prosperity will be extremely difficult to achieve in this vital region of geo-politics. Given the entrenched "red" in the Middle East, it does not surprise me to read of daily assaults on coalition troops in Iraq and Afghanistan.

Does the Anti-Terrorist Map and its evolution influence your investments? It very well might. You never know what the international terrorist groups have planned – better be prepared in advance for the unexpected. Besides, you might just make some money.

The Anti-Terrorist Map: The Anti-Terrorist Portfolio

A few years ago, I created the Anti-Terrorist Portfolio to help protect concerned investors from any major incident. So far, it’s been a success: Last year, the Anti-Terrorist Portfolio advanced 34%.

There are five mutual funds in the Anti-Terrorist Portfolio to protect assets against the financial results of a future terrorist attack or major war in the Middle East. The Anti-Terrorist Portfolio also includes hard assets such as gold and silver coins, and concerned investors should also include stock index annuities.

Here’s how the five mutual funds faired in the past year:

* PIMCO Real Return Fund (PRTNX, $11.49), which invests in Treasury Inflation-Protected Securities (TIPS), rose 4.1%.

* Oppenheimer Real Asset Fund (QRANX, $8.10) was up 5.6%.  Commodity prices could go up a lot more in the years to come.

* Tocqueville Gold (TGLDX, $35.48) jumped 48.8%.  Gold and silver are in a bull market, and the Tocqueville Fund owns both, including bullion coins.

* Fidelity Select Defense Fund (FSDAX, $56.40) rose a remarkable 50.8%. I expect defense stocks to continue to perform extremely well in this bull market.

* Masters 100 Fund (MOFQX, $14.10) was the best performer of the five, advancing a masterful 57.7%. This is a unique fund that seeks out the top 100 best stock pickers in the country, and invests in what they buy. It beat the S&P 500 in every quarter since inception at half the risk. It’s a remarkable investment vehicle.

One note of caution: Not all of the funds listed above will perform equally at all times. For example, during a stock market crash, the defense stocks will likely fall with the rest of the market. So will the Masters 100 Fund, and perhaps even some gold stocks. However, the PIMCO Treasury
securities and the Oppenheimer commodity index are likely to rise.

Good luck!

Regards,

Mark Skousen,
for The Daily Reckoning
April 28, 2004

Editor’s note: Mark Skousen is the editor of Forecasts & Strategies, and the Skousen Hedge Fund Trader, as well as a frequent speaker at Investment U and other Oxford Club conferences. He teaches at Columbia Business School, and is the author of The Making of Modern Economics.

N.B.: The funds mentioned in the essay above do figure into Mark Skousen’s "Anti-Terrorist Portfolio," but should not be considered actual investment advice from your friendly DR staff.

"Housing expected to heat up," says a blurb from USA Today.

Odd. Housing is already so hot, it is sending off sparks.

New home sales…and resales…are both rising. In many cities, house prices are rising at 20% and more annually. Some second-home communities have seen 50% gains in the last 12 months. And yesterday’s news included a little item: a single parking place in Manhattan sold for $160,000.

Even in Baltimore, property is soaring. In the early ’80s, we recall driving down a handsome street in a bad neighborhood. We pulled over to admire a three-story townhouse built for rich people in the 1860s.

While we were looking, a man in overalls came up and said:

"You want to buy that house?"

He seemed shocked when we replied, "Yes."

Turned out, he had bought nearly a whole block of them in the ’70s at an average cost of less than $10,000 a piece. The one we looked at was one of the best of the lot – which he sold to us for $27,500, along with a couple of others we bought as investments.

We spent years working on our house. Your editor scraped off wallpaper and repainted…fixed the plumbing…and killed the rats. In addition, we probably invested about $60,000. Today, it seems like nothing…but it was a lot of money to us back then.

By the early ’90s, the house was beautiful, but the neighborhood was almost as ugly as it was when we first arrived. We were happy to get rid of the place for less than we had in it – about $80,000, as best as we can recollect.

But yesterday came word that a house down the block just sold for $278,000!

We share, vicariously, the sellers’ joy. And we wish the buyers "bonne chance." Last we heard, the neighborhood had scarcely changed. The house itself, we know it well – we used to own it, is the same house it used to be…except perhaps for new paint and a new kitchen. Rents have risen in the area…but no more than costs, and certainly nowhere near as much as house prices.

And now we come to the marvel of it all. When we owned it, we had an ‘asset’ which was mostly a pain in the neck worth about $30 or $40 thousand. Now, another person has an asset worth, well, $280,000. Society as a whole is a quarter of a million dollars richer, right?

Alan Greenspan claims to think so. He told senators that they needn’t worry about how much debt consumers ran up – because the value of their homes was rising, too.

A house is just a house. But consumer demand is not always real consumer demand. Before houses became multi-purpose financial assets – that is to say, when we still owned the house in Baltimore – we might have been able to borrow, say, $30,000 against it. Now, an owner could get $250,000. If it goes up another 20% next year, the new owner could ‘take out’ another $50,000 in ‘equity.’

But what is this strange new purchasing power that comes without sweat or strain? It is not the same purchasing power that comes from actually earning more money…or spending the savings accumulated from previous earnings. It is nothing more than credit – money borrowed against an asset that is worth, in terms of the benefit it provides to those who shelter within its walls, or the stream of earnings it could provide if rented out, no more than it was worth when we owned it 10 years ago.

Borrowed money is not the same as saved money. Real consumer demand is not the same as phony credit-based demand. And just because his house has gone up in price doesn’t mean a consumer can go further into debt without risk.

Household liabilities equaled about 60% of income in 1960. Today, they are close to 110%. American households have no more money to spend. Their incomes stagnate. Their savings are depleted. They are only able to continue spending at the current rate by borrowing more of the inflated value of their homes. Last year, an amount equal to 4.5% of income came from this source. Now, the whole world economy depends on it.

Mr. Greenspan must know it is absurd. Healthy economies do not depend on real estate bubbles. And healthy households do not pay their bills by refinancing their mortgages.

But here at the Daily Reckoning, as you know, we are such naïve optimists. We assume Alan Greenspan is merely telling senators what they want to hear, rather than what he actually believes. We’d rather have a liar than a fool in charge of America’s central bank. Our worry is that we have both.

But now, for more news…here’s Addison:

———————————————————————————————————-

Addison Wiggin reporting from historic Baltimore…

– We are not the only ones to criticize out fearless Fed chief. Ian Macfarlane, the man dubbed ‘the world’s most successful central banker’ by the Sydney Morning Herald, has lambasted Greenspan’s reflationist policies in an article in the same paper. "This must surely rate as one of the most searing critiques Greenspan has ever received from a fellow central banker," remarks the Herald.

– Not only do the wizened old wizards of Washington not see what trouble they are stirring up here in the homeland, but they don’t seem to see what havoc they are wreaking on the rest of the world, either. Half the planet sets its currencies against the greenback…so actually, Greenspan is de facto setting monetary policy for much of the world.

– Meanwhile, ‘the world’ is supposedly entering a third consecutive year of accelerating growth, the Sydney Morning Herald tells us. And yet, Sir Alan’s monetary and fiscal policies are more expansionary than at any time since World War II. "This torrent of money has primed commodity prices and frothed East Asian financial markets into a frenzy that looks suspiciously like 1997," bemoans the paper. "If Greenspan doesn’t take his foot off the pedal very soon he’ll put the world at risk."

– Twisting the knife, Professor Warwick McKibbin, a fellow board member at the Reserve Bank of Australia, adds his two cents to the debate: "We’ve got the loose monetary experience of the 1970s with its inflationary danger, together with fiscal insanity greater than in the early 1980s, crunched up into the present. What American policymakers appear to underestimate is that the world is highly integrated. If you are generating inflation in the rest of the world, it is eventually going to show up in the U.S."

– But despite apparent bursts of lucidity, McKibbin is really just a naïve optimist at heart – he actually thinks there’s a 10 to 15 percent chance that Greenspan’s "promised productivity bonanza" will "absorb the excess liquidity and generate fiscal revenue, and save the world from possible disaster." We would put the chance of Mr. Greenspan saving the world at about, um, zero.

– But the million-dollar question du jour is…will the Fed raise rates, effectively putting an end to its E-Z credit policies? "Let’s be clear about this," writes our friend John Mauldin. "They are going to raise rates. The question is not if, but when."

– We agree – a 1% interest rate is, as your Paris editor has remarked, reserved for emergencies. But by slipping vague and soothing terms like "patience" and "considerable period" into its official statements, the Fed has lulled the lumpen into an expectation that rates would remain low…forever. Now, investors are beginning to wake up and smell the coffee.

– Greenspan is walking on very thin ice. And like a mountaineer stuck on a glacier riddled with crevasses, he will need to tread very carefully indeed if the bond market’s expectations are to be shaped for interest rate rises. One false step, and the massive carry trade – which took years to wind so tight – may unravel alarmingly.

– "I think the Fed will start to change their language and start to clearly let everyone know that they are going to start raising rates," says Mauldin. "I am not certain they think that a two-month warning is enough time to allow the markets to adjust. For what it’s worth, I think it would take more than two months to unwind the massive carry trade we see today without causing some real market turbulence. Perhaps I am just an old worrywart, but I like these type of things to go nice and slow. Speed kills."

– Mr. Market seems to be confused – or perhaps he’s just poking fun at the Fed. At any rate, bad news seems to give him a perverse pick-me-up…while good just drags him down. Yesterday’s solid consumer confidence numbers fell on deaf ears – the market was loath to go anywhere. The Dow and S&P gained a little (up 0.3% and 0.2%) while the Nasdaq lost a little (down 0.2%). The Dow closed at 10,478, the S&P at 1,138 and the Nasdaq at 2,032.

– Benchmark Brent crude futures hit $34.33 yesterday – their highest levels since the Iraq war – while U.S. gasoline hit a lifetime record of 1.2040 a gallon. This latter occurrence prompted Mr. Greenspan, addressing an energy conference in Washington, to issue a warning of his own: the "dramatic" rise in oil and gas futures is apparently "an economic event that can significantly affect the long-term path of the U.S. economy."

– For once, we agree with the man. But unlike our Mr. Greenspan – and regardless of gasoline prices – we do not profess to see much chance of a booming U.S. economy over the next decade. The best we are hoping for is a soft, slow slump.

Bill Bonner, back in Paris…

*** "Consumers pushed into ARMs" says a USA Today headline. It will interesting to see what happens when rates rise…

*** Consumer confidence is at almost a 2-year high.

*** Gasoline is getting more expensive, as it does almost every week.

*** On this day 60 years ago, 749 American soldiers died. They were off the Devon coast, practicing for the invasion of Normandy, when their landing crafts were attacked by German E-boats.