It is their explanation for why things go wrong, however, that I find most illuminating. Both Schumpeter and Sowell write about “intellectuals” who have academic credentials of some sort but are lacking in knowledge that would make them particularly valuable to the market. Incapable of commanding significant wealth and status through voluntary market mechanisms, these intellectuals resent the wealth of more-successful people. As a result, they envy and resent the entire market system that has failed to reward them as they believe they deserve to be rewarded.

Others have also explored this theme. Another Austrian, Helmut Schoeck, wrote the book that is widely considered a masterpiece of sociology, Envy: A Theory of Social Behavior (Der Neid: Eine Theorie der Gesellschaft). You can go back even further, if you like, to the Tenth Commandment’s proscription on “coveting.”

Intellectuals who consider inequalities in wealth evidence of injustice often seek political remedies. These take the form of legislation and, more often, regulation. In the process, of course, they are able to portray themselves as heroic opponents of injustice. If they have sufficient support, they are also able to acquire significant power, wealth and status. We know from experience, however, that these intellectuals rarely consider their own wealth evidence of injustice.

In Europe, these intellectuals have been far more successful in the past than in America. For this reason, American intellectuals in academia, politics and media have for decades told us that the U.S. is woefully unsophisticated and behind the times. In fact, economists have shown consistently that quality of life is higher for Americans at all income levels than it is in most European nations. It is difficult, however, to compete with a movement that has had, until recently, a near monopoly on pulpits, podiums and programming.

That’s all changed. Not only has the United States seen Keynesian policies on steroids crash and burn, but the European model has been revealed as the house of cards that it is. For decades, governments have propped up living standards by borrowing to appease voters. In effect, nations have consumed at artificially high levels by sending their children the bill.

Naturally, governments run by these intellectuals have tried to raise taxes to support their habits. Many succeeded, but then discovered the reality of the Laffer curve. Taxes necessarily transfer resources from the private tax-generating sector to the public tax-consuming sector. At some point, taxes depress economic growth, which reduces government revenues. This point is usually much lower than the critics of capitalism assume. Moreover, their targeting of the wealthiest individuals is most damaging to the economy. The wealthiest are also those with the most money to invest in the innovations that create all net new jobs.

So we’re seeing tax recipients rioting in Greece and elsewhere. These riots will spread, but it will do no good. The money doesn’t exist to support the intellectuals’ schemes, no matter how bloody their tantrums. Times will get hard enough to create a generation that hates the intellectuals who promised that everybody would be able to retire young with no worries.

We are in the midst of a historic transition. The intellectuals got their way. Now the consequences of their ideologies are going to be painful enough to allow market reforms. That’s how self-equilibrating market mechanisms work.

This is all very good news for North Americans. Canada, by the way, is way ahead of America in learning the limitations of government. America, however, is learning quickly. Three years ago, the intellectuals were gloating that they could use the forthcoming economic downturn for their advantage. The public, they predicted, would blame free markets and give even more power to the planners.

That, as you know, has not happened. Despite the orchestrated efforts of the Occupy Wall Street crowd and other fans of socialism, the American public is far more wary of government than it is of business:

An overwhelming 64% of people surveyed said big government was the biggest threat to the country, compared with just 26% who said big business is their gravest concern and 8% who picked big labor.

Government debt schemes are failing. This is creating remarkable opportunities for investors. It amazes me, in fact, that more people don’t understand this.

On those rare occasions when I watch financial shows, I’m always surprised by the never-questioned assumption that up markets are good and down markets are bad. This is nonsense.

The name of the game for investors is “Buy low, sell high.” Given the inevitable fluctuations of the market, we know that markets have always gone through this sort of big cycle. They always will.

If this were not the case, “Buy low, sell high” would be nearly impossible. Sure, selling high is more fun, but you can’t do it if you haven’t bought low. This seems awfully obvious to me, but it’s clear that most people just don’t get it.

We are at an incredible historic juncture. The world is, once again, realizing it has been duped by fast-talking political scam artists. This is not a new story. In fact, we’ve actually gotten off pretty easy this time. By necessity, market-killing programs will be cut back, freeing investors and innovators to create wealth once again. This liberation of capital will come just as the greatest scientific revolution in history swings into high gear, delivering extended healthy life spans and new levels of wealth. I know it doesn’t always feel like it, but these are wonderful, extraordinary times.

Someday, some younger investor is going to say something to you like this: “You were so lucky to be investing back then, when prices were at rock bottom but the whole world was changing for the better. I’d be rich too if I were investing in those days.”

In fact, they will probably be wrong. Most people never see the big picture while it’s happening. This type of once-in-a-lifetime situation is always easy to see in hindsight. When you’re living through it, though, it takes real character and vision to grasp the opportunities.

Regards,

Patrick Cox

The Ongoing Recovery from the Folly of Intellectuals was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I’ve said repeatedly, in fact, that the company’s technology for acquiring therapeutic stem cells is flawed and obsolete. Specifically, Geron’s stem cell production technique is “heterogeneous differentiation.” In other words, stem cells are allowed to differentiate into many thousands of stem cell types. Scientists attempt to isolate or “cherry pick” the right type of stem cells and multiply them into usable numbers.

The technology doesn’t work. It’s somewhat amazing to me that it’s taken this long for the company to admit it bet wrong but it finally has. The press release, distributed yesterday, states that, “Geron Corporation … today announced that, effective immediately, the Company will focus on its first-in-class oncology programs. As a consequence, the Company will discontinue further development of its stem cell programs and is seeking partners for these novel assets.”

The scientific tools do not exist to screen and identify every single stem cell using heterogeneous differentiation. That, however, is exactly what is needed to produce a pure population of therapeutic cells using that production strategy. So the result is impure cell populations that include stem cells of unknown varieties.

Scientists who developed and supported this technology argued that stem cells require matching “zip codes” to develop. This means that, in theory, a dental stem cell transplanted into the spine would not engraft and become a tooth. Spinal nerve cells with the right biological zip codes would engraft and repair severed nerves.

So far, so good — but there’s more to the story. Stem cells with the wrong zip codes may not turn into inappropriate body parts, but they do cause problems. Geron found microcysts, bubbles of inappropriate tissues, when their heterogeneously differentiated cells were transplanted into living animals.

But I warned my readers that this would likely be the case before it happened. Therefore, my readers should not have been surprised when Geron’s first request to the FDA for clinical tests of a spinal cord therapy was rejected over concerns about impurities in the cell populations. In fact, Geron’s failures on the stem cell front were actually evidence that Biotime Inc. (AMEX: BTX) is the real leader in regenerative medicine.

As I’ve explained before, BioTime has pioneered its own pure stem cell production technology. Known as ACTCellerate, it involves the mapping of stem cell development shepherding cells through the phases of development to produce large pure quantities of identical purified stem cells. If you were at the Vancouver gathering in July, you have seen BioTime CEO Dr. Michael West present the genetic evidence that he can do this.

Then, very recently, BioTime partnered with Cornell University to commercialize a technology capable of producing large quantities of purified endothelial precursor stem cells. This is BioTime’s ReCyte technology. The patient’s own cells are first converted to become induced pluripotent stem cells, identical in function to embryonic cells. They are then potentiated to become endothelial precursors, suitable for rejuvenating the heart, vascular and immune system.

This technology will, I believe, be the most successful medical blockbuster in history. As heart disease kills most of us, it will significantly extend healthy lifespans. Moreover, it will happen much sooner than almost anybody believes. I expect, by the way, to have even more good news for you about this revolutionary therapy in weeks or months to come.

This is not to say that Geron is worthless, by the way. The company still has important assets. It is not, however, an important player in regenerative medicine. Nor has it been for some time. I foresee several benefits from Geron’s exit from the space.

First of all, financial analysts might actually be forced to look around and ask questions about the regenerative playing field. If they ask scientists rather than journalists those questions, they will have to recognize that the company run by “the father of regenerative medicine,” Dr. West, is driving the science.

The second benefit will come from the buying opportunity by widespread misunderstanding. Typically, the market responds to bad news about a single stem cell company by selling off the entire industry. Already, the usual suspects are declaring Geron’s departure from regenerative medicine the end of stem cell medicine.

An Associated Press story has it that Geron’s move has “stark implications” for development of stem cell therapies in the United States. Andrew Pollack of the New York Times says basically the same thing, “The move is expected to be widely seen as a setback for the field,” he writes, “because of Geron’s central role.” Geron’s “central role,” however, is primarily among incurious journalists.

If you believe, as I do, that Dr. Michael West and BioTime are the true innovators, then we will probably have a valuable opportunity to buy BioTime at artificially depressed levels. While I’m not encouraging “trading,” the opportunity exists to make significant short term gains when the conventional wisdom is so wildly wrong.

Regards,

Patrick Cox

Good Riddance to Geron was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I think it’s fascinating to ponder the fact that right now, cosmic rays originating in vastly distant astronomical events are passing through our bodies. We live, in fact, in an ocean of radiation, but the effects have barely begun to be studied.

You may have noticed, if you follow scientific news, that the results of the CERN CLOUD experiment have been published in the journal Nature. A lot of us have been waiting for these results for a long time. The reason is that global temperature records show a very clear correlation with levels of cosmic radiation that impact the earth and its atmosphere. Models, however, have not been able to explain this phenomenon.

In fact, the correlation is inverse. In other words, cosmic radiation has been high historically in times of low global temperatures. This, in turn, is related to solar activity. High levels of solar magnetism block cosmic rays. Therefore, it is hypothesized that cosmic rays during periods of low solar magnetic activity play an increased role in cloud formation. Clouds reflect sunlight, so the Earth cools. When there is high solar activity, which is marked by sunspot activity, cosmic rays are blocked, so fewer clouds form. Theoretically, this would result in global warming.

Because climate science has been politicized to an utterly ridiculous extent, it’s been very difficult to get government-funded scientists to talk about this possibility. The environmental-industrial complex, which consumes billions in tax-provided research funds, is completely vested in the notion that human or anthropogenic activities are the major cause of global increases in temperature, though we’ve seen none of this temperature rise in the last 15 years or so.

Those who hold the contrary position have far fewer resources at their disposal and are at a significant disadvantage in the climate debate. The primary proponents of the cosmic ray theory include Henrik Svensmark, a physicist at the Danish National Space Center in Copenhagen, and his colleagues.

When British particle physicist Jasper Kirkby proposed that CERN, the European Organization for Nuclear Research, test theories tying cosmic rays to climate change, the U.N. and others committed to the CO2 climate change theory immediately dismissed the experiments as irrelevant. Now the first round of experimental results has been released, along with orders from CERN brass NOT to interpret the results.

As I’m under no such prohibition, however, I’ll tell you one thing for sure. Climate science is not settled science. Though the CLOUD study only involved two aerosol gases, sulfuric acid and ammonia, the basic theory that cosmic rays can breed the particles that seed clouds has gained serious credence. Further tests with additional naturally occurring aerosols will reveal much more about the true nature of climate fluctuations.

From Kirby’s published article:

“Ion-induced nucleation [cosmic ray action] will manifest itself as a steady production of new particles [molecular clusters] that is difficult to isolate in atmospheric observations because of other sources of variability but is, nevertheless, taking place and could be quite large when averaged globally over the troposphere [the lower atmosphere].”

These findings, along with other recent discoveries, have shown that the climate model currently used to justify massive government intervention is painfully incomplete. Ironically, I think that the current Great Recession has contributed to the consideration of these findings. When the economy was strong, there was much less resistance to expensive C02-reducing technologies and policies.

Regards,

Patrick Cox

Cosmic Rays Still Changing Climate More Than Mankind Does was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Historically, however, these technological advances have rarely been recognized and welcomed when they first appeared. For the most part, they have been doubted by the general public. Most people didn’t understand the specific technology and believed, despite all historical evidence, that scientific progress had finally leveled off. Often, powerful institutional forces resisted and attacked these emerging disruptive technologies.

Progress, however, cannot be contained. This was true even when the technologically advanced world comprised only the United States and few other developed nations. Today, with an international economy growing more rapidly than America and looking for ways to catch up, it is even more true.

Take, for example, nuclear power. While reactionary anti-nuclear Luddites have managed to slow deployment in America, they failed in France and Russia. Now these states are moving rapidly to the next level, exploiting the vastly superior thorium nuclear potential to serve a rapidly increasing worldwide demand for electrical power.

Think about that. People who have more oil than they could ever use are developing nuclear energy. America, which imports vast quantities of petroleum, is squelching domestic oil production and nuclear power deployment.

Recently, we’ve learned that China, which is already building 25 new reactors, has launched a thorium program as well. By 2020, China plans to have 40 mega-reactors that will produce more electricity than all of America’s 104 plants combined.

In America, you can already sense a growing anger directed at the new age fantasists who promised us an economy powered by windmills, solar panels and corn ethanol. When gas prices hit $5 a gallon, you’ll see, up close and personal, how market forces trump ideology.

If, however, half the money that had gone into worthless climate research and ridiculous subsidies for disastrous technologies like corn ethanol had gone toward nuclear energy production … well, never mind.

Governments and social forces have never, ever succeeded in bottling the genie of innovation permanently. Railroads, automobiles, electrification, telephones, radio, television, computers, the Internet and mobile electronics were all mocked as temporary or unimportant fads when they first emerged. Then, seeing they weren’t going away, these technologies were declared a mortal threat to civil society by powerful interests vested in the old technological status quo.

My associate Ray Blanco, whose ancestors are from Spain, likes to cite a common invocation used by the privileged aristocracy of that country. Toasting or saying goodbye to a friend, they would assert, “Que no haya novedad.” Roughly, this translates as, “Let no new thing arise.”

This was the unstated, but futile, motto not only of the old aristocracies. It was the sincere desire of the print media as the Internet destroyed the newspapers’ monopoly over ad revenues. It’s, evidently, the core philosophy of the existing educational establishment as it fights a bitter losing battle against decentralized new-media education. I could go on.

The real danger involved in trading transformational companies does not come from fluctuations or macroeconomic trends. Innovation always overpowers business cycles.

The danger is that a new technology will be leapfrogged by some unexpected newer technology. In fact, this is the danger inherent in all transformational investing. A transformational technology can be made irrelevant by an even more transformational technology.

Let me give you a theoretical example. We know that thorium nuclear power is set to leapfrog conventional uranium-based reactors. Of this I have no doubt. On the other hand, there are some very smart people working on small-scale fusion. Many of these people are so obsessed with this quest that it borders on a mental disorder, so there’s no way to judge their odds of success. If they do succeed, however, it will make thorium far less important.

(It would also, incidentally, be enormously beneficial for other companies in our portfolio.)

We know that some of our stocks will fail, but a diversified portfolio of true transformational companies is, historically, the surest source of true transformational wealth. Moreover, we know from studying the great investors of history that those who implemented this strategy most successfully were long-term investors. They bought and ignored their holdings even during periods of severe fluctuation.

They understood that, ultimately, market forces always win out over politics and the unpredictable psychology of the stock market. Science moves forward, and those who have faith in human innovation reap the benefits.

Regards,
Patrick Cox
Whiskey & Gunpowder

February 25, 2011

Bet on Transformational Technologies to Trump Political Ideology was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Computers still convey information to users almost exclusively through sight and sound, speakers and screens. We still give information to computers mostly through keyboards, track pads and mouse devices. It has long been predicted that this would change.

Until now, however, interface technology for personal computers has been pretty static. Voice command capabilities have improved somewhat in recent years, but the technology is of limited use. For the handicapped, there are even devices that tap electrical brain signals and track eye movements. Military researchers are moving these extremely expensive technologies forward for combat purposes.

If you play computer games, however, there are other options. There are, for example, controllers like the Wii remote and various joysticks. Why is this important?

It is important because gamers and the gaming industry have pushed personal computing to the limits from the beginning. Important elements of the computer you’re using today were developed for, and financed by, gamers. They range from graphics cards to faster, wider data buses.

It is a mistake to underestimate either the financial or technological impact of gaming. Gaming not only pushes personal computing, it is already bigger and growing faster than the movie business today. The technologies embraced, financed and perfected by the early adopters in the gaming community have a way of making it to the mainstream.

One obvious and underestimated example is 3-D virtual worlds (VWs). Once available only as incredibly expensive training simulations for astronauts and pilots, they reached the public in the form of computer games. Later, they became two-player and then multiple-player and finally massively multiplayer online games (MMOGs). Simultaneously, top corporations, hospitals and the military adopted VWs for training, conferencing and collaborations.

There is, however, one big difference between the VWs used by gamers and the multimillion-dollar systems used to train pilots and surgeons: haptics, or computer touch. Haptics adds touch feedback to our means of communicating with the digital world. This is one of the technologies that will fundamentally change computing, because touch is so critical to our everyday lives.

In advanced simulations, users can touch and feel desks, walls, steering wheels, scalpels and catheters, as well as the tissue they affect, using robotic mechanisms to convey sensations that feel like the real world. Already, crude attempts have been made to bring tactile information to gaming. The Wii and Sony PlayStation controller’s primitive vibrations are examples.

All of these haptic applications take place in 3-D virtual worlds. It is critical that you understand that these worlds are coming fast to your PC. They will not only be gaming environments. They will be educational, productivity and social apps. Your computing experience will transform from a series of flat walls to 3-D offices with intuitive storage spaces as well as conferencing rooms for business and recreation.

Regards,
Patrick Cox
Whiskey & Gunpowder

March 30, 2010

Haptics Get in Touch with the Virtual World was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Specifically, that lesson is that you cannot criticize, even rightly, the previous administration’s deficit spending and then triple the deficit without paying a price. I find this extremely encouraging.

America has a lot to do before the potential of the economy is unleashed again, but the tide has turned. Americans have seen what out-of-control spending does to states under the ideological control of people like Nancy Pelosi. And that lesson will be driven home in months to come. California’s State Controller John Chiang has warned that the state will be unable to pay its bills if legislators do not act on nearly $9 billion in budget cuts sought by Gov. Schwarzenegger.

I have the dubious distinction, incidentally, of having personally introduced the Governator to the champion of markets, Dr. Milton Friedman. Friedman was speaking at an event sponsored by the think tank I worked for not long after Conan the Barbarian was released. I’d read that the actor admired Friedman and invited him to the event. He came, in fact, and I put the two together.

Sadly, Schwarzenegger’s public appreciation of Friedman never really translated into policy. Today, a distressed California serves as an example of what happens when markets are seen as tax farms for politicians, no matter how lofty their goals. Friends of mine in California now admit that Texas, which they once considered a redneck backwoods, actually delivers what California has only promised.

Of course, the July issue of The Economist helped drive the point home. In a now famous article titled “California v Texas: America’s Future,” The Economist painfully detailed the differences between the states. Texans’ preference for low taxes, fiscal restraint and regulatory reform have made the state the envy of America and a magnet for business, capital and talent. California’s emphasis on government-provided benefits has accomplished the opposite.

In the last six months alone, there has been a massive shift in public opinion toward the Texas model. One of the best proofs is the recent CNN poll showing that 56% of the public opposes the administration’s stimulus plan. Only 42% support it. Back when the stimulus bill was signed into law, polls showed 54% support.

This doesn’t mean that President Obama will pivot to the center as Bill Clinton did in similar circumstances. In fact, Obama proposed massive new spending in the same SOTU in which he promised a spending freeze. The most revealing increase was his plan to further subsidize student loans. He wants to limit loan payments to 10% of income above a basic living allowance and forgive remaining debt in 20 years. The telling part of his plan is that those working in “public service” would have student loans forgiven in half the time, after only 10 years. Remember, public service workers already earn, on average, about $20,000 more per year than private-sector workers.

While the president clearly values taxing consumers more than producers, the public won’t stand for it. This is the basis of my optimism. We don’t need a full economic recovery for transformational stocks to prosper. All we need for money to move is investor confidence in the direction of governance and markets. It will come.

Right now, however, there are the triple overhanging threats of a government health care takeover, the cap and trade scheme and new bank taxes. For certain, however, cap and trade is dead. Though America’s mainstream media are still in denial about the collapse of the anthropogenic global warming (AGW) edifice, most of the rest of the world is not. Particularly in India and China, where most growth in carbon production will take place for some time, global warming is increasingly viewed as a failed scam. Here’s an English article from the Indian magazine Open to give you an idea of the tone.

Health care “reform” will certainly not pass in the form desired by the most extreme proponents. Increasingly, in fact, it appears that it won’t pass at all. I am, by the way, in favor of actual reform centered on limiting malpractice lawsuit abuse. Estimates are that we could cut American health care cuts by $3,000 per person per year on average through tort reform. This would eliminate much “defensive medicine” and lower insurance costs substantially. Americans favor this approach by wide margins, especially among the “Tea Party” movement. I expect it to move forward after the 2010 election.

Incidentally, I want to remind readers who went to last year’s conference in Vancouver that Chris Mayer and I were right about the burgeoning Tea Party movement. Today, it polls better than either the Republican or Democratic parties. Back then, our prediction that it would be a major political force was dismissed by others on our final panel.

In short, there is much reason for optimism right now. The trend lines are extremely positive and will begin to yield real benefits soon. Our debt level is seriously awful, but not worse than it was at the end of World War II. America is going to suffer the consequences of an unnecessary excursion into California-style liberalism, but we’ll come out stronger than ever. Moreover, we will be helped by a huge international market that did not exist in the late 1940s, when our economy was powering ahead.

For transformational profits,
Patrick Cox

February 9, 2010

P.S.: Shortly, investor fears are going to be calmed and the truly revolutionary technologies that will power the next period of economic super growth will accelerate further. In fact, legendary analyst John Mauldin is predicting a full-fledged biotech bubble in the years to come. I’ve been privileged to get to know John recently. We’ve been working together on a few projects, and he’s been buying some of our biotechs. I should point out that to avoid conflicts of interest, I cannot own any of our stocks.

Why the State of the Union Was Good News for Tech Stocks was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The health care bill was a cliff. It had become tainted with Chicago-style pressure politics, industry and congressional payoffs, secrecy, profligacy and policy confusion. When the Democratic Party stronghold of Massachusetts elected a Republican senator to the “Kennedy seat,” Obama’s progressive agenda fell into the abyss.

The president then magnified his losses by countering the Massachusetts loss with a populist attack on the very banks he had bailed out. He proclaimed that he would increase regulations on banking institutions. Exempted, of course, were his beloved quasi-governmental agencies Fannie Mae and Freddie Mac, whose fraud and corruption cascaded us into the current Great Recession. Worse, he promised to raise taxes to “get our money back” from a still unsteady financial industry.

The stock market dutifully and predictably plummeted 500 points. Even loyal supporters in the media, who swallowed the administration line concerning the boondoggle stimulus package, broke ranks. If I had to bet, at this point, my money says Obama joins Jimmy Carter on the list of one-term presidents.

I’m writing about this stuff because of the financial consequences, and the news is very good. I never doubted that America would eventually rein in the big spenders and return to fiscal sanity.

I predicted a hard tack to the center when Barack Obama was elected. I also predicted that the health care takeover would not succeed. I didn’t predict, however, that this failure would be so hard and so fast.

The reason I was wrong about the timing was that I didn’t expect him to abandon his centrist campaign promises so completely. I had assumed that he would govern as a pragmatic opportunist, not one of Eric Hoffer’s “true believers.” And I lost faith in my own judgment regarding health care, believing that some watered-down version would pass. Even that outcome is now in serious doubt.

Regardless, the consequence of this shift is extremely positive for the economy and investors because the administration’s ability to expand government has been abruptly curtailed. After unnecessary and public humiliations over the Chicago Olympics, Copenhagen and Massachusetts, the president’s currency is looking a lot like the Venezuelan bolivar.

While the president promises to double down and keep fighting for his progressive goals, Democratic moderates are abandoning ship. Rep. Marion Berry of Arkansas, for example, is only one Democrat who has decided not to run for re-election in this climate of backlash. He now openly mocks the president’s belief that he can prevent a massive shift to the Republicans in the 2010 elections.

So let’s discuss the benefits of these developments. Primarily, we will now see a coalition of Republicans and moderate Democrats grow in power. This means that the most radical of the administration’s legislative goals, cap and trade and a government health care takeover, are almost certainly shelved.

This is extremely good news because cap and trade was an economy killer even in good times. Moreover, it would have had no impact on climate. I believe, as do many scientists shut out of the corrupt U.N. process, that CO2 does not drive climate change. Even if you believe it does, however, many environmentalists have pointed out that the legislation would have no appreciable effect on CO2 levels. Cap and trade was always about raising taxes and delivering control of industry to the intellectual classes.

Incidentally, China and India have confirmed what I predicted. They will not sign even the toothless Copenhagen climate accord. This is the final nail in the U.N.’s effort to institute global governance based on climate concerns. Interestingly, the Indian media credit the vote in Massachusetts for their government’s decision to repudiate the U.N. power grab.

I can’t express how happy this makes me. Economic growth is the only solution to the enormous debt overhang that has been foisted on us by both our political parties. It’s also the solution to most of the developing world’s challenges. Like it or not, all economies have been globalized to one degree or another. Growth in Asia and South America will have beneficial impacts on your portfolio.

We can now expect the administration to start talking about the economy. Unfortunately, the enormous pork-barrel stimulus package and the debt it has entailed has already depleted the fiscal arsenal. Fortunately, two-thirds of the so-called stimulus package has not yet been spent. If Obama were to support the repeal of that spending and institute tax breaks, he could probably accomplish the same thing that JFK did when he faced a lousy economy. A CNN poll just showed that 56% of Americans favor doing so.

It is particularly meaningful that Nebraska voters forced Ben Nelson to take the special advantages he won for the state from the health care bill. Americans are clearly willing to forgo politically gotten gains. Obama himself is now talking about “deficit reduction,” though starting a year from now.

Without spending cuts that I doubt he will support, that’s a synonym for “increased taxes.” The Tea Party movement, which now has higher voter approval than either major party, probably won’t allow that to happen.

Incidentally, it has taken one of the most liberal representatives, Dennis Kucinich of Ohio, to point out the damage liberals have done to themselves by disparaging that movement. He said, recently, “I met with people who were unfairly ridiculed as being just a bunch of Teabaggers and, frankly, they had basic economic concerns just like everyone else, they felt that government wasn’t listening to them, and this is where the Democratic Party better wake up.”

Whether or not one agrees with the movement, the individuals have been alienated by those who insulted them, and this includes the failing media as well as the president.

Anyway, the bottom line is that we’ve turned an incredibly important corner. The delusion that the smart kids could solve all our problems if they just had enough power has been brought back under control, at least temporarily. We will pay the price for the foolishness of the last decade for some time, but lessons have been learned.

I hate to be the optimist in the crowd, but I predict that people will look back in a few years at this as an enormously positive time. Breakthrough technologies will have powered investors and the economy to new financial heights.

The weakness of economists is that we cannot imagine the true nature of exponential growth. In my lifetime, I’ve seen enormously intelligent economists consistently underestimate the ability of free peoples to solve problems. They are making that mistake again now.

Significantly, these lessons are being learned all over the world. The Obama administration’s message has always been that America should be more like Europe. This is contrary to the message of other great Democrats, like JFK. America took that turn toward European-style mixed economies. We did it disastrously with our banking system and then unsuccessfully with health care. And the world has noticed.

If you’d like a little pick-me-up, there’s a great article in The Economist. An excerpt: “America’s most vibrant political force at the moment is the anti-tax Tea Party movement. Even in leftish Massachusetts, people are worried that Mr. Obama’s spending splurge, notably his still unpassed health care bill, will send the deficit soaring. In Britain, where elections are usually spending competitions, the contest this year will be fought about where to cut. Even in regions as historically statist as Scandinavia and southern Europe, debates are beginning to emerge about the size and effectiveness of government.”

My old friend Leonard Read, who brought Austrian economics into the U.S. and funded Ayn Rand when she was writing her first novel, had something to say about times like this. Paraphrasing, he said that three steps forward in human progress are inevitably followed by two steps backward. Yet thousands of years of history have shown that those two wrong steps are always followed by another three that lead to increased freedom and prosperity.

It’s nice to be moving in the right direction again.

Regards,
Patrick Cox

January 28, 2010

Massachusetts Makes Far Left Democrats Think Again was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Let me drive this point home. Without Fannie and Freddie’s certification of millions of bad loans as safe, other banks both domestic and foreign wouldn’t have bought them. More importantly, world financial markets wouldn’t have relied on those packaged loans as collateral and collapsed when they went bad. Fannie and Freddie, both government-sponsored enterprises that are guaranteed and funded by U.S. taxpayers, committed fraud so massive it dwarfs the Enron scandal.

We Austrian economists saw this coming three decades ago. I warned in the 1980s that government involvement in the housing market would inevitably produce catastrophe. Even Republicans attacked me as an enemy of home ownership. The theory, held by many in both parties, was that owning a home made Americans stakeholders in the system and stabilized our economy. Others pushed the envelope further, using Fannie and Freddie as a way to give homes to low-income individuals. All very noble, of course, but it was always doomed. I hate to say I told you so but… well, actually, I don’t.

Our current administration is, of course, sticking to the story line that this “great recession” is a failure of capitalism. This won’t change because so many high-ranking administration officials profited from the mortgage fraud business.

The beginning of the Fannie and Freddie fraud that Pinto documents took place under the watch of Jim Johnson. You may know Johnson as the “trusted adviser” to the president who helped pick his running mate, Joe Biden.

While few know about Johnson’s role in the financial collapse, many know him for his legendary generosity with Fannie’s fake profits. As CEO of Fannie, he bestowed fortunes on his favorite causes, which made him one of the most popular people inside the beltway. Many of my colleagues spoke out against this laundering of the public’s money for personal and political purposes, but were ignored or attacked.

Rep. Barney Frank was the chief defender of Fannie and Freddie, accusing anyone who wanted more oversight of the out-of-control institutions of being heartless, racist or both. While I’m not a huge fan of the Bush administration, the truth is that it made multiple attempts to rein in Fannie and Freddie. Unfortunately, they were successfully parried by Frank.

Over the weekend, administration talking heads were sticking to the line that they have deterred financial disaster with bailouts and stimulus spending.

I was not as worried about the initial financial collapse and resultant recession as I was worried about the so-called fixes. I predicted then that those programs, along with efforts at massive restructuring of the economy, would not only fail to create the jobs and upturn we were promised. I told you they would slow the recovery. I include, incidentally, President Bush’s contribution to our debt and deficit as part of the problem.

Now you can read how this has actually come to pass in a great article by three University of Chicago economists, “Uncertainty and the Slow Recovery,” by Nobel laureate Gary Becker, Steven Davis and Kevin Murphy, in The Wall Street Journal online.

“In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82.Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers — probably much better — there are no signs of an explosive takeoff from the recession.

“We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many and high unemployment.

“The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations — changes that could radically transform the American economy.”

Those changes, the Chicago Boyz say, have inspired hesitation, uncertainty and fear in employers and investors. As a result, they’ve waited on the sidelines to see how things play out. Not very cheering, is it? The result is that while the administration takes credit for “jobs saved,” actual unemployment figures in some areas are at Great Depression levels.

Yes, yes, yes, Obama inherited a mess. The problem with that thinking is that Congress makes policies, not presidents. When government is split, the most a president can do is use the veto, something Bush should have done regularly. For the last two years of his presidency, Democrats had the power of Congress. For two additional years, Congress was split. Democrats who now blame him for the totality of the financial failure are saying, implicitly, that he should have opposed Congress more vigorously, and I don’t think that’s their real message.

Anyway, I’m telling you that I was right about the all the ridiculous big-government solutions for a reason. I am fundamentally an optimist, and I am forecasting remarkable things in the not-so-distant future. I’m not, however, a blinkered Pollyanna like certain high-profile analysts whom we will not name.

My point is this: If someone doesn’t have a history of accurate predictions, he has no right to ask others to believe him when he makes forecasts. And I’m forecasting that the recovery, delayed as it is, will be historically unprecedented. And if you don’t want to believe me, believe Dr. Gary Becker, who has said to me, in both conversation and writing, the same thing. More importantly, he forecasts that the recovery will be driven by the breakthrough technological innovations that we are talking about and investing in now.

For transformational profits,
Patrick Cox

January 14, 2010

Fannie, Freddie, Fraud was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I’ve been warned, incidentally, that any discussion of global warming will elicit complaints from one side or the other, so I would be better off not bringing it up. The notion that climatology is unacceptable in polite conversation is a huge problem. I’ve been following this debate for over 15 years and have worked with some of the important scientists who have advocated openness and more debate in climate research. Real scientists consider this a legitimate scientific issue, not a partisan one.

Moreover, the CRU scandal is enormously relevant to many investor issues. I’d rather lose readers who are offended than fail to keep the rest of you informed. If you’re getting your news from the mainstream media, you may not know yet how damaging this event has been to the credibility of the U.N. and those in the administration who support CO2 controls. (The Canadian press, however, is doing a far better job of covering the story.)

I told subscribers to my newsletter Breakthrough Technology Alert about a year ago, by the way, not to invest in so-called green technologies that rely on subsidies and regulatory interventions. That advice stands now more than ever. Polls show that about three-quarters of Americans consider the scientific theory of anthropogenic global warming false or even fraudulent. Given growing anger over deficits and terrible unemployment statistics, harmful environmental measures passed now are likely to be overturned or blocked after the 2010 election cycle.

I saw this coming for several reasons. One is that the lack of scientific ethics exposed by the CRU whistle-blower is not really news. It has been obvious to those of us who were paying attention for a very long time. The leaked documents make it clear, however, to those who don’t understand the mathematical subtleties of regression analysis or program in Fortran.

For the first time, the general public is learning that the CRU climate model, which the U.N. relies on, purposely hid the Medieval Warm Period (MWP). This obfuscation was necessary because the MWP was not just warmer than it is now; it had a generally positive impact on humans. The University of East Anglia now admits, in fact, that the CRU has no real evidence that the climate is warming and says it will take at least three years to recompile and analyze the data.

The climatological-industrial complex, however, is forging ahead as if nothing has happened. Supporters of an incredibly expensive cap-and-trade scheme, in the middle of the worst economic downturn in modern history, are undeterred. Even without the invention of Enron, cap and trade, the EPA is dead set on treating and regulating carbon dioxide as a pollutant.

You know that stuff you exhale in high concentrations: CO2? The EPA apparently thinks pollution results even with miniscule increases in the 0.038% trace levels of CO2 found in the atmosphere. Obviously, slightly elevated CO2 levels have never resulted in cataclysm before. So why does it say so now?

Its theory is that the planet’s ability to absorb CO2 is maxed out. Additional CO2, it says, will therefore result in skyrocketing CO2 levels. This theory, however, is completely unsupported by evidence. Dr. Wolfgang Knorr at the University of Bristol just published as study in Geophysical Research Letters showing that the portion of the atmospheric CO2 absorbed by plant life, mostly in the oceans, has remained stable since 1850.

In fact, it is the failure of the CRU model to properly address the role of the oceans that convinced me long ago that it’s fundamentally missed the boat. Only about 10% of the Earth’s heat storage is atmospheric. About 90% of the Earth’s energy storage takes place in the waters of the oceans. Water, after all, stores far more energy than air.

Furthermore, ocean temperatures are far easier to measure accurately. Many land-based temperature stations have been compromised due to changes in local conditions, mostly increased urbanization. This is not the case with oceans. NASA has more than 3,000 robotic buoys that dive and surface continually all over the world collecting ocean temperature data at different depths. This information has been transmitted via satellite to NASA since 2003. Compiled, it shows clearly that ocean temperatures are falling.

If the oceans were bleeding heat into the atmosphere, we would see higher air temperatures. The Climategate e-mail leak shows, however, that even CRU knows that atmospheric temperatures have fallen since the late ’90s. This means, I believe, that we are in an extended period of global cooling, not a temporary turnaround. University of Rochester physicists have published recently data showing the historic and central role ocean temperatures play in climate and climate change.

The fact that the U.N.’s climate gurus have destroyed data, hid inconvenient truths and subverted the peer-review process is not, by the way, proof that anthropogenic global warming could not possibly occur. Nor does it prove we are not in a natural period of cooling caused by solar cycles. The only thing it does prove is that models are junk and that the most powerful government-anointed climate scientists have no idea what’s going on — as the leaked e-mails stated over and over again.

This is the big lesson. It isn’t science that has failed. Science isn’t dying, as Daniel Henninger said recently in The Wall Street Journal. Real science is a process of discovering the truth through transparency, experimentation and verification. Look around you. You can see the fruits of real science in the increased length and quality of life that we all enjoy. Science is alive and well in the private sector.

Climategate is a failure of politicians and bureaucrats involving over $90 billion in tax-funded research grants. It is complicated by passionately cheerleading environmentalists who have turned their movement into a kind of religion.

The corruption of scientists by government monies is by no means new. It won’t be the last time, either. Nevertheless, the courage of the CRU whistle-blower demonstrates the robustness of science. The truth has come out.

It remains to be seen if the political drive to control human activities and profit from political wealth transfers will prove more powerful, in the short run, than the truth contained in the leaked e-mails and computer code. In the long run, however, I have no doubt that those who embrace fraud will be outed, if not punished.

My focus is on identifying those transformational technologies with the greatest potential for profit and growth. Those opportunities will not go away even if the fraud inherent in the CRU’s sham models are used to hobble the American economy with destructive cap-and-trade taxation or onerous EPA regulation of CO2. India, Russia, China and many other countries have made it clear they will never adopt such economy-killing measures — especially during a period of economic downturn and high unemployment. They stand more than willing to host the revolutionary disruptive industries that are coming onto the scene today. Many of our top scientists and small caps are already being wooed to relocate elsewhere.

Fortunately, polls show that nearly three-quarters of the American people are extremely angry with the government right now. The old media, which are lobbying for some sort of bailout, will continue trying to cover it up. Having not only endorsed the concept of anthropogenic global warming, but attacked skeptics as subhuman, it is impossible for many to admit they were wrong. Science and technology, though, have already provided alternate avenues of information dissemination. The unwillingness of the old media to report one of the most important stories of this young century is evidence they deserve to fail.

The reversal on cap and trade by Australia, along with a likely change in the government, in large part because of Climategate, ought to act as a warning to the administration. If not, then the people will grow angrier yet and we’ll see another iteration of the revolution next year at the ballot boxes. Science cannot be stopped or even perverted for long.

For transformational profits,
Patrick Cox

December 14, 2009

Science Hasn’t Failed About Climate, Government Has was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Yes, I know. It’s been said before, but it bears repeating. The reason is that we tend to assume that progress will continue as an upward sloping straight line. It won’t, in fact, it will be much more rapid – even exponential at times.

Think about the changes in computer technology we’ve seen in the last few years. Computers have been getting cheaper and faster in relatively predictable ways for a while now.

Don’t be lulled.

The electronics and computing industries are getting primed for a massive transformation in the years ahead. Quantum technologies that were only theories in scientific journals just a few years ago are being prototyped in labs now. These new components will change the way we live forever. They will also create transformational profit opportunities. If you missed the chance to buy into the computer industry when it was young, this is a second shot.

Currently, the mainstream electronics industry processes data by moving bunches of electrons about in huge batches. Think of the components in your PC as electrical plumbing. Data are usually stored as batches of electrons. Imagine your computer’s hard drive as a bunch of very small buckets, some full of water, some not. This will change.

Improved materials technologies from emerging nanosciences are allowing us to replace batches of electrons with the smallest individual unit: the electron. As a result, computers will work at far higher speeds. Additionally, far less electricity will be required to do the same amount of work.

Much of this exciting news is being ignored by the market. It’s an unfortunate truth that investors often lose sight of long-term opportunities to create wealth because they get distracted by the short-term noise and news in the markets. When it comes to big transformational technologies, don’t worry about timing. The returns that disruptive technologies yield justify getting in early.

Quantum Superposition

One important quantum effect that will be used in future generations of computer technology is “quantum superposition.” In a nutshell, this means that a quantum particle can exist in multiple states and everything in between at the same time. This is because a quantum particle, such as an electron, behaves as both a particle and a wave.

Have you heard of the particle wave theory? In practical terms, it means that bizarre and counterintuitive effects occur on very small scales, and they can be harnessed.

This “quantum superposition” effect will, for example, utterly transform how we do “computer math.” Currently, nearly everything done by computers is done in binary. The smallest piece of information a computer handles, the bit, is either one or zero, something or nothing. A quantum computer, though, would be able to store and work with number systems other than binary.

This means computers would become exponentially more powerful because each “quantum bit” (qubit) could store a much greater range of numbers than the two that binary math restricts us to. Imagine a laptop with the computing power of the world’s 10 most powerful supercomputers. Then you begin to grasp the potential of quantum computing.

Decoding Quantum Encryption

Quantum computing also offers the means of making our communications and business transactions far more secure than they are today. Quantum cryptography exploits several remarkable effects of “quantum entanglement.” One is the ability to generate pairs of utterly unique and unbreakable keys. Basically, two random but identical particle keys can be created using entanglement. Since reading a quantum particle alters it, any effort to eavesdrop on communication is detected and that communication is either disrupted or ended.

Using this technology, we can create completely secure communications networks. Recently, Toshiba’s R&D labs announced the successful testing of quantum cryptography over fiber-optic networks. Austrians were able to send entangled photons between two Spanish islands nearly 90 miles apart.

Spintronics

One of the likeliest quantum technologies to go mainstream is the field of spintronics. This is the exploitation of different electron states. The only property of the electron that we use in electronics now is charge. Electrons, however, have another property called “spin.” Because we can change and read this spin, it can be used to compute. Already, the tech giants are investing in this technology. And there’s a reason.

I’ve written a lot about HP’s work on memristor technology. Memristors are going to provide the next great leap in computer technology. HP has been making rapid and well publicized advances. It could, in fact, have product on the market next year. This initially concerned me because HP is too big to get us anything close to a memristor pure play.

Fortunately, memristors can be built using techniques other than HP’s. My associate Ray Blanco has been poring through patents and tech journals. What he’s found is enormously exciting.

Basically, a number of other groups have made similar memristor advances using different technologies. One is based on spintronics. The big question now, however, is not which of these technologies will emerge as the best solution. The question we’re looking at today is who will build these new components. Who, in effect, will be the Intel of the future?

Regards,
Patrick Cox

June 5, 2009

The Quantum Leap of Quantum Computing was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.