What’s more, the satellite states became independent nations. The empire on its borders devolved into a series of secessions. The map looked totally different one day to the next.

The central power — said to be ruthless and all controlling — lacked the will to fight it out and just gave up, completely unable to control events. The pretense of communism in all these places was dropped, industry was privatized, the countries adopted their old names and their populations were rolled into the global division of labor after 50-plus years of being shut out.

The central plan stopped working, and not only in Moscow. The U.S.’ central plan also excluded the possibility that something this dramatic could happen. A decade of foreign and economic policy had been based on the Kirkpatrick Doctrine that totalitarian states were invulnerable and could only be contained or destroyed from the outside. It was on that basis that the U.S. chose its friends and enemies in the world.

Once the Iron Curtain was pulled back, we found societies ridiculously behind in the march toward material progress. The workers’ paradise had never materialized. And everyone wondered what we had really been afraid of all those years.

There’s no question that the Soviet state was an incredible threat to its own citizens — between 60-100 million deaths at government hands over 72 years — but was it really a threat to you and me? Far from being a superpower, it became clear that the Soviet Union had been decaying from within for a very long time.

I was raised at the tail end of the Cold War, but I find it nearly impossible to describe to younger people what it was like to be surrounded by the great Manichean conflict of those days. It consumed all political thinking from 1948-1991. Hundreds of thousands of experts devoted their lives to strategizing about it, writing about it and making a living off it in many different ways. It was the whole reason behind the gargantuan military empire that the U.S. put together over half a century. It was all done in the name of keeping us safe.

And then one day, it was gone.

Americans feared the communist menace for most of the 20th century. Russia was the embodiment of all evil but for those few years when, implausibly, Russia was oddly deemed an ally in World War II’s even mightier struggle against the horrors of Japan and Germany. Then in 1948, the status quo ante was restored again, and the Red Scare returned with a vengeance — from threat to ally to threat again in a matter of a few short years. It was a turnabout satirized in Orwell’s 1984 (flip the last two numbers and you see the point)…

The great debate of my early political experience concerned whether Russia should be treated as a unique evil in the world or just another country with whom the U.S. should have diplomatic relations. The thinker and intellectual who won the day was Jeane Kirkpatrick. Long before she became secretary of state, she wrote a famous essay, “Dictatorships and Double Standards.” This 1979 classic became a blueprint for the foreign policy of the next decade.

This powerful piece of writing excoriates the Carter administration for its alleged wimpiness on foreign policy, particularly with regard to its unwillingness to support authoritarian, noncommunist governments against the leftist rebels. The idea here is that we can live with authoritarian regimes and eventually democratize them, whereas once a state falls to communism, it is gone forever.

Therefore, the U.S. should back noncommunist thugs of any variety, whether in or out of power. That’s how the U.S. ended up supporting the Islamic fundamentalists in the mujahideen in Afghanistan, for example, that later became the Taliban and later the terror network that the U.S. now says is the mortal enemy.

Kirkpatrick couches in her claims in history, noting, “there is no instance of a revolutionary ‘socialist’ or communist society being democratized.” From there, the forecast is implied: It could never happen, ever. “There are no grounds,” she writes, “for expecting that radical totalitarian regimes will transform themselves.”

A little more than 10 years later, she was not only proven wrong, but history conspired to shred her entire analytical model to bits and toss it in the air like so much confetti. Not only has the Soviet Union vanished, but China is completely transformed. Cuba is privatizing. North Korea is probably the toughest nut to crack, but it too will relent in time.

Now, one might say that it was precisely the military buildup she inspired that brought about this result. The problem with that claim is that the military buildup was not designed to bring about that result, but rather to permanently “contain” the global Soviet reach and prevent it from spreading. In the mid-1980s, not a soul — and certainly not Kirkpatrick herself — anticipated that the next decade would open without the existence of the Soviet state at all.

What had been her mistake? She attempted to forge a law of politics based on recent history projected into the future. Her law blew up because there are no laws of politics of the sort she imagined. There are no permanent regimes. There is no impenetrable system of rules. States are created by elites and uncreated by everyone else. They are all more vulnerable than they appear, because they all consist of the few tricking the many into coughing up their property and giving up their lives on grounds that are ultimately revealed to be lies. When people catch on, the states get shaky and eventually crumble, sometimes when we least expect it.

This is a fact to celebrate, for if any state could create permanent rule, human freedom wouldn’t stand a chance. This is because every state is a conspiracy against liberty. No state is satisfied with just a bit of power and no more, just a bit of your money and no more. There is never enough. We must give and give until our freedom is completely suffocated. In the end, the people don’t like this and will not stand for it forever. This is true everywhere in all times.

Today, our own theorists say that the United States has figured out the key to permanent rule. Madeline Albright called the U.S. the one “indispensable nation.” Mitt Romney said that the U.S. is “the greatest nation in the history of the Earth.” Surely, the current configuration of the United States will last forever. Surely, it is destined to be the one stable and eternal global hegemon. It is the U.S. now that embodies Hegel’s divine will on Earth.

The lesson of the Soviet collapse is not just that socialism doesn’t work. It is that all-embracing statism cannot last, regardless of whether this comes about under one-party tyranny or the illusion of democracy. This experience of 20 years ago ought to instill some humility. In the same way that the Soviet experience was upended, the future history of the last superpower could change just as quickly.

There’s No Such Thing as a Stable State was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

How do I know these things? Larry Reed, now president of the Foundation for Economic Education, and I visited this country for a full week during that volatile year of 1985. In those days, the superpowers had somehow decided to choose this little country as its theater for one of the last showdowns of the Cold War.

The U.S. said that the communists had taken over at the behest of the Soviets and they were exporting their revolution around the region. The Soviets said that the U.S. was trying to topple a democratically elected government by funding death squads. Remember Oliver North and all that? The drama was intense.

We went there to see what was going on. From the American press reports, we had every expectation of finding a civil war and communists battling it out with freedom-loving rebels. What we found was very different, indeed. We ended up meeting with leaders on both sides of the great issue of the day, but they weren’t dressed in battle gear. It was more like a political squabble of the kind that you find on Capitol Hill every day. We met with high-ranking officials in the current regime, as well as opposition leaders like Violeta Chamorro, who was later elected as president.

Before leaving on the trip, I had read a wonderful book by New York Times reporter Shirley Christian. It was called Nicaragua: Revolution in the Family. Her detailed report documented how what appears to be a revolutionary environment on the outside is actually a fairly normal tug-of-war between two ruling factions. Ideology plays very little role in reality beyond serving as a pretext of sorts. When one side gets control, it does things to hurt the other side, and so on. In other words, politics as usual.

I was amazed to hear this. This was a far cry from the language you were hearing from Washington at the time about how this was the battleground of the great Manichean struggle of our epoch. But it wasn’t just budding Cold Warriors like me who got taken in. There were first-world political pilgrims from the left who got sucked up into the theater and came to Nicaragua to experience the new egalitarian utopia as well. These people provided the main amusements for the week.

And so everywhere we went, we bumped into literature majors from the United States, seminarians from West Germany, women’s rights advocates from the U.K. and assorted Hollywood gadabouts who came to mix their labors with the liberators now in control. We all lived together in downtown Managua in a hotel that catered to our every need. So much for the workers and peasants. We truly lived like kings for a week.

Breakfast was amazing, with juices from all over the region. I’ve never seen anything like it since. The coffee was beyond-belief great, so strong that it had to be cut with hot fresh milk. You could eat a gigantic lunch and pay only a buck or two. Dinner always seemed to feature entertainment of some sort and the local liquor, which, I learned from experience, is rather dangerous for inexperienced drinkers.

My favorite bar was not far from the capitol building. I don’t recall the name, but at the time, I just called it the “communist bar.” That was because that’s where all the communists hung out to drink nearly every evening. Again, they were all from the United States and Western Europe, and they would sit around talking about the great utopia being built before their eyes. There were pictures of Che, Castro and Lenin on the walls. The reading material was Soviet Life magazine, and I would swear that some of the issues dated from the 1950s. Larry and I would flip through them and laugh uproariously at the pictures and propaganda. I don’t know whether this junk was brought in by the students or shipped directly by Moscow, but as I think about it, the former scenario is more likely.

One night we went to a movie. I was a smoker at the time, so I experienced that singular pleasure of blowing smoke up in the air during the movie and watching it mix with the light of the projector and create a beautiful film noir ambiance. I recall thinking that this was a pleasure that I could never experience in the United States. Maybe there is something to this communist idea after all! (Kidding.) I’ve since learned that smoking has been banned in theaters, and tragically so.

We hopped into a cab after the movie. Larry and I were in the back seat and two jaded-looking women were in the front seat. I tried to make small talk about how good the movie was. One of the women shot back at me: It was a terrible movie, but exactly what you would expect given how American imperialists send their cast-off flops down here to exploit the workers by extracting their money. Silence followed this stern lecture. I piped up again, innocently saying that, even so, I thought the movie was pretty good. She grunted extreme disapproval of my opinion, and we rode in silence until we got back to the hotel.

The next morning at breakfast, I met Gary Merrill, the former husband of Bette Davis who had starred in many films at his height, including Davis’ smash hit All About Eve. He was wearing a dress. I asked why. He said that he could do this in Nicaragua because it was a free country where the human spirit was liberated thanks to socialist control. I asked if he considered himself a communist. “All I know is that this works,” came the reply.

We had a charming meeting overall, but he said that he had to go because he was meeting with some government officials. That meant that he needed to change out of the dress and into a suit. I asked him why he must give up his freedom when meeting with government officials. He responded that it was just an intuition he had that he would make a better impression in a suit. Good intuition! We met with Gary several more times on that trip, and I can’t but have the fondest memories of his good cheer.

Later that day, we decided to do some sightseeing of government buildings. We were taking pictures like crazy at the ministry of defense building, asking all the soldiers and guards to pose. Some thug came up to us and told us to stop. We resisted a bit and suddenly found ourselves under arrest. They took Larry’s camera and planned to ruin all the pictures. But they never figured out how to open it. They gave us our equipment and let us go. The benefit from our point of view: We had a cool story to tell!

Looking back on the event, I’m realizing that the fastest way to get arrested in Washington, D.C., would be to try to get as close as possible to the Pentagon with a camera and take pictures of all the guards. You would probably be held for slightly more than a few hours!

On this trip, I also learned something about currency exchange. The government in those days tried to keep tight control on the rates. There was a government rate that you got at the hotel and the airport. And then there was the market rate that you could get on the streets.

You didn’t have to look far to find a currency exchange dealer. There were kids that seemed as young as 7 and 8 years old, budding young entrepreneurs. They were everywhere outside the hotel, and no one bothered them. Their math skills were absolutely amazing. They could figure the exchange rates on any amount in a matter of seconds.

How did they know the market rate? It is a bit mysterious to me, but they must have run back and forth to each other in some kind of cooperative/competitive arrangement, perhaps arbitraging with the dealers around the block or the other side of town. It was hard to say, but there was no question that they were the masters of the craft.

I think about this when I hear people object to the idea of competitive currencies in the United States. People say, oh, it would be so confusing and no one could figure it out! Perhaps there would be a learning curve, but surely over time, the math skills of the typical American could rise to the level of a peasant Nicaraguan child. It’s a tall order to be sure, but it is possible.

Much to my disappointment, we saw no bloodshed, death squads, gulags or secret missile stashes. All the communists I met I could have also met by visiting the local university. And the government officials were pretty much like those you would meet anywhere: greedy, lazy, puffed up and useless. Everyone knew this. I assume the same is true today.

A few years later, the “dictator” of Nicaragua submitted to a democratic election and was tossed out. Later on, long after the Cold War ended and everyone stopped caring about this country, he was re-elected. Nothing much changed either way.

“Most Americans,” writes investment guru Chris Mayer, “would be surprised to learn Nicaragua is the second-safest country in Central America, behind only Costa Rica. “The World Bank ranks it as the easiest country in Central America, Panama excepted, in which to start a new business. Or that in ‘ease of doing business,’ Nicaragua ranks well ahead of such perennial darlings as Brazil or India — or even neighboring Costa Rica. A recent IMF report said that Nicaragua was the Central American country that best protected investors’ rights.”

I can believe that. It is certainly among the most beautiful places I’ve ever visited, and I would take a week here over any visit to the Old World on the Continent. The food is better and cheaper, and the people seem far more insistent on and appreciative of their core freedoms. People say that going there now reminds one of how few freedoms we have remaining in the U.S.

How history turned on a dime: Our country is looking more and more like the nightmare that the U.S. said it was stopping from taking over Central America. Today, Central America is the beneficiary of a glorious benign neglect, whereas the “freedom fighters” finally got their way in the United States and brought us a tyranny that Daniel Ortega would never have dared impose even at the height of his power.

Nicaragua and the Cold War Political Theater was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

First, my thanks to James Wesley, (sic) Rawles–and will someone please tell me why the comma is there? That is what appears on the front and back covers and title page of his monumental work on preparedness for a world gone mad through the collapse of commerce, transportation, food distribution networks, society, law enforcement, the government, and virtually everything else that requires a working part more complicated than a ball-bearing. (Expand my territory to 1865 since a significant factor in the South’s loss was inadequate amounts of shiny little BBs that still go in skateboard wheels. Another was the inability to protect railroad tracks and rolling stock.)

The fun started when I leapt far out on a branch here at W&G with JWR’s PATRIOT in my slavering jaws and dropped it into the trading pit where money is made. It was very brave of me, not because I doubt regulars at the Bar, you delightful folk always looking for ways to increase our assets, but because I sometimes suspect my two brilliant, delightful, achieving progeny refer to my fascination as “Mummy’s Secret Shame That Scares Us Senseless and Will Cause Us to be Eyed Askance By Corporate Management at the Highest Levels.” They only said “scares,” bless them.

I am now liberated! Considering TEOT-WAWKI is no longer completely whacko, kooky, deviationistic, or a symptom of early dementia, we’re pioneering point men on the track of super-colossal profits! Me? A nutball domestic dissidentt? Nah, I’m a future Johanna Jacob Astor. I am not alone!!!  SurvivalBlog reports an average of 165,000 “hits” a week, so many it is hard even to keep tatters of our treasured Contrarianism around us. Even if a lot of those are daily readers, let’s out-think the competition by starting now.

The real question is, “In a USA/world bereft of reliable transportation, fossil fuels, electricity, working factories, and even ordinary food, what products and services will there be wide-spread, localized markets for?” (And you were starting to doubt that I can still frame a coherent, intelligent question.) A secondary question to ponder afterwards is, “If you cannot position yourself to control farm and ranch land, running water, and ammo dumps, what could you do to ensure that you have a skill that will be in great demand, thus keeping you from cleaning out pigpens, wielding the earliest idiot stick (a shovel, not a slide rule), or serving as some warlord’s court jester?”

Let us start with…the Scythians. They are of interest because they made the (groan) cutting edge agricultural implement of their time, still known as a “scythe,” which some insist upon pronouncing as “sigh,” contributing to the downfall of humanity as we know it. Scythes are still available at modest cost, and it is trickier to learn to use one correctly than one might suppose of a pole with a sickle on one end. I believe the art involves a smooth, easy, rhythmic stroke, sparing your back, and keeping a sharp edge on the blade, but suggest that those with Amish or living relatives of Old World descent consult your families’ oldest members. This is a splendid project!  Even before the last McCormick Reaper has worn out or refuses to run on biodiesel, you could A. capture a good market share of scythes for at least your state or county, B. open a school to teach scything, or C. rent out gangs of scythers you trained; or D. merely become proficient in the use of the scythe and support yourself harvesting grain.

Sugars, I am NOT joking. YES there will be a need for those who are able to harvest grain! And hay. Scythe lawns. You could even storm Bastilles with them, if we had one.

Buy modern sharpening machines, complete with guides, and work out how to power them in alternate ways,* and a good supply of stones and files. Somebody may have to sharpen those scythes, as well as machetes, (gorgeously lo tech, sturdy, and good for innumerable tasks), kitchen knives, and scissors. In the olden days “tinkers” wandered around sharpening swords, knives, precious scissors, farm implements, mowers blades, and so forth. While you are at it, pick up some old push lawn mowers. Again…if an “it” happens, few will be able to sharpen their own utensils and the time you will save them will be worth big rutabagas or whatever any given farm or hamlet had to barter. Tinkers repaired pots, but our modern ones will probably last well. Still…brazing, soldering, even welding? You could branch out into inexpensive new knives for inventory you trade for better but dull knives, and even franchise, teaching your skills and making stunning profits on your inventory some years later. Yes, your stock piles will be irreplaceable, so plan what you will move into with the excessive proceeds. Marry foreseen needs to old solutions. (* Alternate methods include the obvious–treadles, tread mills, steam, pig-power, the external-combustion engine, wind, solar, and alternate fuels for a generator–and many, many more, such as a kick sharpening stone or potter’s kick wheel.)

Obvious trades which are disappearing or whose current practitioners are insufficient to service a local area of perhaps a hundred square miles eventually…sadleries, farriers, bee-keepers, dowsers, wolf-hunters, butchers (mechanical deboning machine operators do not count), jewelers, gunsmiths, and cobblers.

Whoo-boy, “and cobblers.” Throughout much of history those lucky enough to have shoes (a very few worked out how to make moccasins, basically) a pair of shoes cost a minimum of a month’s wages. A full coat or cloak ran half a year’s salary–the reason for which becomes obvious when we’re dealing with just hand-carding, hand-spinning, hand-looming, and sewing by hand. Shoes don’t grow on trees. Mostly they come from China, Italy, Brazil, and other far-away places.

Affluence was long more clothing than a set to wash, a set to wear, and a set for Sunday. Clothing washed by hand on rocks or rub-boards with harsh home-made soap wears out extremely quickly. You don’t wash clothes after one wearing in such societies. (Buy at least a gross of socks while that still means 144, okay?) Here’s a really good idea: find an old-fashioned treadle sewing-machine. This is harder because most of them had their guts ripped out about 1950 and ladies planted ivy in the stand. Mine still works; I’ve had it since ’69 because it is beautiful and classic fine technology. I will be amazed if some far-sighted entrepreneur doesn’t sell new ones as I speak. Anyone with a treadle Singer (treadles can power any number of things via pulleys; so can bicycles, such as a small generator that ran the modern machine you have.) could set up as the “mending” person and dress-maker an entire village used. Every time you find thread on sale buy it by the box full, because if anything is “high tech” in this field it is modern thread. Purchase pounds of pins and needles when you see a local fabric store go out of business. For many, many a century a needle was a prized possession and pins were all but priceless. Stock silk thread (embroidery thread, too) because it is far stronger than cotton or polyester.

Become adept at making soap, and I don’t mean from expensive materials from Hobby Lobby. The process isn’t hard, and if you can turn out a relatively non-abrasive product from lye (leached from ashes), a sensible source of animal fat (no, not palm oil unless you live in the tropics), and so forth, in WW II there was very little hausfraus wouldn’t do for a cake of soap. Master making candles and small oil lamps; again don’t use costly commercial supplies. No one will care about colors, fancy shapes or scents; you want the cheapest wax and wicking you can find and to learn several basic techniques, all easy. This time of year through after Christmas you will probably find traditional tapers for a quarter each. Buy a bunch–ALL of you. I count myself extremely fortunate that I have always enjoyed arts and crafts, and what I can’t make out of cloth, yarn, glue, and assorted lightweight objects Charles can make out of metal, lumber, wire, and PVC pipe. A big factor in survival and success will be how broad your knowledge and skills are. Plain old paint will be quite valuable; buy the odd lots at hardware stores if you have a place to store them–perhaps between boards to make shelving.

Most of us kept our beloved slipsticks (in their leather cases, of course) out of sentiment, and they went from being an intellectual status symbol about 1960 to a quaint anachronism. When power is precarious the abacus and the slide rule will return to state of the art. If you just want a personal backup, get a solar- or motion-powered watch with a calculator. Don’t try to run the first bank you open with it, though. Bank examiners? There won’t be any. That bank will be based on your full faith, credit, and deposits of silver, gold, copper, ammunition, and possibly bushels of wheat.

That list should keep those who fear they cannot prepare to become Cattle Kings, Soybean Sultans, or Mackeral Magnates busy thinking of similar tasks they have mastered or are interested in–such as keeping bees or learning to make cheese of all sorts from both cows’ and goats’ milk and putting a hunk into the enzymines and cultures which produce distinctive types of cheese. Learn to grind lenses by hand, if only for reading glasses. (Stock several first class non-prescription pairs for your use.)

NOW let’s nibble on where the big hard money will be found. There won’t be any fiat money (other than small, local currency for ease in the community), but there will be universally-desired trade goods as well as classic hard money.

The kids in Patriot missed what we call a real “sitter” while at the Barter Faire. They walked away from a man who TOLD them he willing to pay a fortune in things they wanted for a simple fabrication task beyond him or anyone he knew, when they knew what the man wanted, and he had the item he needed duplicated for a pattern with him. A Group member had already churned out copies of a similar item they wanted in large quantities quickly! IN the process he had trained several other Group members to assist him in assembly-lining. Piece of cake, guys. Smile vulpinely, and suggest he name a price on delivery. Hold him up for more. How many would he like, will Sunday do, HMOD? Product guaranteed; if it does not function perfectly, no charge. Several talked to him and all knew they had the capability and the materials. Nope, dumb and happy, they wander away to gawk at the other offerings instead of acting like incipient Titans of Industry. They didn’t even mention it to those who were home on guard duty and were planning on return for both the final two Faire days. You must learn to at least SEE needs you can fill even if you do not anticipate all of them.

No matter what you make, grow, do, raise or just happen to have lots of, chances are good that at least one of them will become a money-maker. In Agrarian and low-tech societies little actual “cash money” changes hand. This is fine; you don’t care if you get cash, kind, or kine, so long as you make a good profit on something it cost you sensible amounts of time and priceless supplies to make.  Still…people can be so odd! An Episcopalian friend was killed at the time I designed and fabricated custom ecclesiastical regalia; my work hung in seven states and I was on hugging terms with three Bishops, including the one for her Diocese. I offered the church an altar cloth or a frontal in Elizabeth’s memory. The Altar Guild declined frostily, but invited me to donate the price of a commercial work! They rejected a gift of something beautiful their church needed. You don’t want to know what even an altar cloth costs, or how much work goes into one made entirely by hand instead of a factory in Rye, New York. The cost of a Frontal and even a matching Chasuble is staggering.

The important part of that odd story is that we run across those who would rather do without than change their ways. Ignore them. Your world will expand as time recedes, so make hay while the sun shines and prepare stock of unique items for when transportation becomes available for even distances we now travel in two hours. Keep your eyes and ears open for changing conditions, opportunities to be a supplier, or a better methods of dealing problems.

I dote on Engineers, as you know. Such fascinating minds! MDC and Pita are both engineers–Pita being the wag who watched me work out how to stock a Conestoga wagon destined for a stark new pioneering colony with no stores at all from scratch for three solid years without telling me gently to go to SurvivalBlog because he was enjoying watching me do it! S’okay; it was enormous fun and good mental exercise. WE like to play with combining old ideas in new ways and, “How could we ____ if we had ____ to work with?”

Tonight MDC and I discussed what may be a future empire in power machinery in about three exchanges: “As soon as time permits let’s design an external-combustion steam compressor so that we can power things that go roundy-round, back and forth, up and down, and side to side or push.” (Darling Charles smiles fondly when I explain with mock grandeur, “That’s the technical description; I don’t know how you laymen put that!”) Charles twinkled, “That will be fun, and we can see how to modify existing designs.” I concluded with, “Now that I grasp that the Internet sells things we odd few would want, I’ll find out if my idea already exists! Then we can decide whether to buy one or just take off across country.”

That was the sum total of a complete, comprehensible, sensible plan of action: I described the problem, as he jokes frequently–sometimes at very odd times, such as when grilling hamburgers!–”We have the technology!” and we had laid out a brief plan to check designs, availability of working models to modify, and see what sort of extra supplies we might need. So we went back to reading our Sci Fi books.

Will we ever build one? Yeah, sure, if we don’t end up somebody’s lunch meat for the week and need it. That sort of thing is Pita’s idea of glorious amusement, too, and he has a great talent for intriguing designs. He and I planned an irrigation system based on an ancient Egyptian bucket irrigation system that will lift water fifteen feet or so and it works. If what you can build is a wheel and all you have to carry water in is gourds you have grown, of can it could be done. It was done for thousands of years and exists today in slightly more permanent form.

The three of us think the world is a gigantic Erecktor set just for us to play with, and we collect all sorts of things to cannibalize from.

Soft smile…yes, we’re colorful, eccentric, joyous, and very little of the world around us has been interested in our passion, not counting those who televised “Junk Yard Wars.” I covered the last two points hoping to kickstart the minds of those who have never played “Fifty Ways to Use a Brick.” Or a thimble, a rake, or old Venetian blinds. You might give alternative thinking a gentle try.

You may be moved to recount one of my weird tales to friends over dinner…and it just could be that one of you will say, “I’ve always wondered if it were possible to make a bligcup, but I couldn’t work out how to smicicate the ninplinks.”

Another might chip in, “I don’t even know what your widget is, but I sure know how to smicicate waldrups.” And a third, “I’ve got a basement full of ninplinks!”

If it turns out that ninplinks are similar enough to waldrups so the technology transfers you’ll be on your ways to fortune in the Old World order.

Or perhaps your wife will say patiently, “You’re talking about an egg separator. I never use ours because it is so easy to do by hand.”

Most of America has eschewed–or been denied!–training in the scientific method, knowledge of the laws of cause and effect, exposure to logic, and the utter joy of solving problems–even very minor, silly ones–because they are there. Forget Sir Edmund Hillary and the mountain because there are a lot of entertaining mole hills out there that may become far more important in the future. There aren’t a lot of MacGyvers around. If you find one, try to make at least a pet out of him. If you’re a big enough packrat he’ll love it. If you can, cultivate a good, old-fashioned efficiency expert–a genuine time-and-motion one, not the sort that come up with “just in time inventory.”

My inventive hero is Thomas Alva Edison. (Not John Galt.) Edison said, “There is a better way. Find it.” In the world that may come into being, what will be the better ways were discarded long ago. Survival and wealth both start in the mind and involve what is and what was long before, not what you have lost or cannot get.

Regards and Merry Christmas,

Linda Brady Traynham

December 16, 2009

Emerging Technologies in a Post Post-Modern World was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Letís do some housing math.  Last fall there were about one million delinquent mortgages.  Let us presume the current figure is now fifty percent worse ñ i.e. one point five million homes.

Assume that the average delinquent loan has a face value of about $180,000, and that a typical mortgage would have a term of from 15 to 30 years to maturity.  Under normal circumstances the borrower would be required to pay about $10,800 per year in interest and principal to amortize the loan.  Because of the variable rate mortgages this cost would be about $20000 per year per loan.

We are told that the housing crises is the cause of the current financial problems of the banking industry and  that fixing the housing crises is a critical first step in restoring financial stability to the economy. On a worst case basis presume that all delinquent mortgages are in default, which is not true because some of the borrowers could make partial payments or could pay if the terms of the mortgages were renegotiated.

The annual cost of the delinquent payments would be $30 billion.  Are we to believe that for a cost of less than $2.5 billion per month all of the defaults of all of the banks on all of the sub prime mortgages could be resolved?

Why then are we talking about payments to banks and financial institutions of more than a trillion dollars? Is there no one in Washington that does the math? Wait, you say, the problem is more difficult. You are right, other complications must be considered.

If the Federal government, on a temporary basis, guaranteed the monthly payments of the mortgages that are delinquent, the banks would have no reason to presume, as they do, that the outstanding balance of the loan is in default.  When banks make this presumption they deduct the total value of the loan from their reserves.  They declare this amount to be a loss which impacts their capital account. The formal declaration of loan default triggers a secondary default of derivative securities for which the sub prime mortgages are collateral. This in turn activates the credit default swaps obligations.

Housing market foreclosure proceedings and the subsequent sale of assets by public auction creates an environment of pure opportunism in which there is no floor price.  The structure of the market encourages instability and low pricing.  This procedure obviously has a negative affect on the whole real estate market.

With respect to renegotiation of troubled mortgages the method of evaluation of property is important.  In a stable, unemotional market the value of a home would be the replacement cost plus the value of the land.  Both factors can be reasonably determined by skilled evaluation. In some instances the land could, in fact, have only nominal value.  In any normal market the value thus determined should represent the minimum basic price at which a house would be sold and also the value for mortgage purposes.

Let us take a typical sub prime home with a 10 year variable rate loan, now at 11%, in the amount of $200,000 which is now under water by $50,000.  The ownerís monthly cost is $2507 per month.   If the calculated assessed value determined by the procedure proposed above is $170,000, a new 30 year fixed rate mortgage at 6% would cost $1049 per month.  The bank would now have a non toxic asset on its books equal to 85% of the original loan value. It is only the remaining 15% that is toxic.

What would be the cost of settling all 1500000 delinquent mortgages, using the same assumptions?   The total amount owing would be $255 billion which would convert into $217 billion of credit worthy loans and toxic assets of $38.25 billion.  Even in a worst case analysis this is the cost of stopping the housing slump, refinancing the banking system and restoring the credit markets to normality.  In total it represents only a few days of normal Federal Government spending.

A matter of great complexity would be the renegotiation of the terms of outstanding credit obligations so that the principal would be secure but the rates of return would be reduced. It took Canada many months to negotiate an arrangement to prevent the default of collateralized debt obligations.

So, maybe my calculations are a bit off.  Suppose the number of homes to be refinanced is double the amount calculated.  Suppose other uncertainties of equal magnitude exist. Nothing adds up to the trillions of dollars spent and proposed to be spent. The magnitude of these expenditures must inevitably lead to the deterioration of the US dollar as a currency.  And, if a significant portion of leveraged debt can be saved, AIG might not need more bail out money.

At this time, with unemployment of 8%, most wage earners are better off than they were a year ago  Oil and gas prices are down, clothing prices are at sale levels.  Cars are being sold at much reduced prices (5 years at 0% interest), housing prices will never again be as low as they are. It would cost only $100 billion per year to double unemployment benefits for the unemployed. Investors, and particularly retirees, have suffered greatly.  With stock prices at enticing fifteen year lows there is hope of some recovery but perhaps something should be done for them as well.

Would someone please kindly explain to me how my calculations can be so wrong! CNN has suggested that the cost of the recovery program proposed to date will be in excess of $2,4 trillion. Is there no one in Washington that can do simple math or is there some rule that rounds off any calculation to the nearest eleven zero figure.

John E. Conner

John Conner is a former Royal Canadian Air Force pilot, an economist and he’s founded and headed a company or two. He’s now retired and free to pour a shot at the Whiskey Bar now and then.

Math of Subprime Mortgage Default was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Roubini’s four forces of Stag Deflation are: a slack in goods markets, a “recoupling” of the rest of the world with the U.S. recession, a slack in labor markets, and a sharp fall in commodity prices. These factors would, “reduce inflationary forces and lead to deflationary forces in the global economy,” he writes in an article in Forbes.

“Aggregate demand is now collapsing in the U.S. and advanced economies, and sharply decelerating in emerging markets,” he writes. “There is a huge excess capacity for the production of manufactured goods in the global economy, as the massive, and excessive, capital expenditure in China and Asia (Chinese real investment is now close to 50% of gross domestic product) has created an excess supply of goods that will remain unsold as global aggregate demand falls.”

You’ll have to bear with us a moment, dear reader, as we work out what this means. First, though, is Roubini right? Well, he’s certainly right that there’s a big fall in aggregate demand in the U.S. It’s obviously passing through to manufacturers and commodity producers (China and Australia). But won’t monetary and fiscal policy designed to combat deflation…you know…cause inflation?

Roubini takes that point head on. He says the liquidity measures taken on by the Fed to get credit flowing and recapitalise U.S. banks are not all inflationary. He says once liquidity is restored to the credit markets (banks begin lending, money market funds starts buying commercial paper again) the central bank can simply “mop up” excess liquidity before it seeps into the real economy to cause inflationary damage.

And what about the tendency of governments to fight debt deflation with inflation? Not a worry either, says Roubini. He says that most of the household debt in the U.S. is short-term variable rate debt that’s resistant to being “inflated away” by cranking up the printing presses. Is he right?

Well it all comes down to how much money the Fed and the Treasury are going to need before the recapitalisation of the American financial sector is over and how they plan to raise that money. The banks will probably need more capital than anyone’s expecting. And there are other landmines down the road.

In short, the Treasury and Fed will need more money. Roubini assumes the Fed can simply remove the lending backstops it’s provided once the market returns to normal. But what if it doesn’t and the Fed can’t? What happens next?

Governments get money three ways, taxing, borrowing, or printing it. You can rule out an increase in taxes large enough to fund the Fed’s needs. It won’t happen with an economy already contracting. Even if Obama raises taxes, it won’t be enough to meet the Fed’s immediate needs. That leaves borrowing and printing.

On September 17th, the U.S. Treasury announced a Supplementary Financing Program. It initiated the program at the request of the Federal Reserve. The Fed needed the Treasury to go out and sell more bonds so the Fed would have money to fund its various lending backstops. The Fed was nearly broke.

Since then, thanks largely to the huge flight to Treasuries sparked by deleveraging and the collapse of the dollar/yen carry trades, the Supplementary Financing Account set up by the Treasury has fed the Fed nearly $560 billion. Some of that may have gone to AIG. Some of it to Fannie and Freddie. Some may go to Chrysler, Ford, and GM. Who knows?

But the main point, from Roubini’s perspective, is that as long as the Fed can finance its lending with new borrowing from the Treasury, it’s not inflationary. The only thing that would make this armada of liquidity measures and loan guarantees and bailouts truly inflationary is if the Treasury couldn’t go out and sell new bonds to gullible foreign investors. As long as the Treasury can sell more bonds, the Fed can make more loans without sparking inflation.

But if we’re right and the bond bubble began bursting in late October, well then the Treasury’s line of credit with global savers is nearing an end. Global creditors will be reluctant to finance American deficits. In order to borrow, the Treasury is going to have pay much higher rates of interest to reflect the credit risk the U.S. government has become.

Trouble is, the U.S. can’t afford to borrow at higher interest rates right now. So that leaves the option Roubini thinks is least likely: printing money. The fancy term for it would be “monetizing the debt.”

That means the Fed would buy public debt issued by the U.S. Treasury with freshly printed money. And THAT, we reckon, is super inflationary. Any time you start rolling out new greenbacks to pay for new bonds which you give to corporations in exchange for their garbage securities, you’re going to damage the confidence people have in the currency (the U.S. dollar).

But then, Roubini has been right about an awful lot lately. It’s possible the Fed will not be forced to monetize the debt. It’s possible that a global contraction is truly deflationary. We don’t really know. But we’re not nearly as sanguine as Roubini that you can expand the monetary base as quickly as the Fed has and be confident it can all be mopped up later without causing inflation. Try getting motor oil out of an engine and back into the bottle.

Regards,

Dan Denning
November 05, 2008

Falling Commodities and Inflation in the Wings was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“…Take a look at this chart of gold prices measured in the top 10 most important world currencies…”

So the spot gold price sank in October, dropping right back to 13-month lows at $683 an ounce.

After failing to breach $930, this collapse marked the third step lower from March’s all-time high of $1,032. And from a technical perspective, the Gold Chart looks horrible — recording lower lows and lower highs for the last six months and more.

Right? Well, fact is, the action has actually been greatly muted if we allow for the shocking volatility in gold’s No.1 competitor for “safe haven” funds, the almighty U.S. Dollar.

You see, like so much else, the market action just described only sets Gold in terms of the greenback (against which it has still tripled since July 1999).

Versus pretty much every other world currency, in contrast, gold in fact enjoyed a banner month this October — delivering gut-wrenching volatility plus new record highs — starting right here in London, home to the world’s $60 billion-a-day trade in wholesale Gold Bullion Bars (a.k.a. the “spot market”).

Mid-month, gold also leapt to new record highs for Australian, Canadian, Danish, Estonian, Hong Kong, Hungarian, Icelandic, New Zealand, Norwegian, South African, South Korean, Swedish, Turkish and Russian investors.

Oh, and the 350 million souls in the Eurozone. Plus the 1.1 billion people of India.

Gold Prices have of course slipped back — and sharply — against all major currencies since reaching €685 an ounce for European investors and savers on Oct. 10th. (That marked a near-tripling from the low of Jan. 2000.) In the spot market, gold’s now trading almost 13% lower as the month-end draws near.

And notable by its absence from the rogues’ gallery of fast-sinking currency zones listed above is the Chinese Yuan, as well. More spectacularly, the world-destroying Japanese Yen has squashed the price of gold since turning sharply higher against everything — real estate, global equities, emerging-market debt, even the Tokyo Nikkei — in mid-July.

But if we really are witnessing a global currency crisis led by the destructive reversal of the Yen Carry Trade (and it certainly looks like it from inside a wallet of Sterling or New Zealand Dollars, let alone Forints or Krona), then just what kind of fight is gold putting up as the apparent “ultimate” safe-guard against currency shocks?

Regular visitors to BullionVault may recall a chart we offered in August this year, a chart showing the Gold Price in terms of the world’s top 10 currencies by economic output. It’s not perfect; the GDP weightings for 2008 will need revising, perhaps, when this year’s full-year data becomes available early next year.

But as a measure of truly globalized gold prices, it both softens the U.S. Dollar’s long slide of 2002-2008 on the currency markets, as well as tempering this month’s intemperate highs in gold bullion vs. the Aussie, Loonie, HK Dollar, Forint, Kiwi, Krone, Rand, Won, Lira, Ruble, Euro, Pound Sterling, Rupee and various Kronas.

You can’t help but spot the volatility — otherwise known as “My gold just crapped out!”

The way “quant jocks” figure the violence in asset prices, in fact, the daily volatility in this global gold price has more than doubled since August to a three-decade record.

You might also note, however, that gold really has risen sharply against all major world currencies so far this decade, not just the U.S. Dollar. And no one should imagine it will be an easy ride — whether up or down — from here.

There’s too much at stake when you try to measure that $60 billion daily turnover in physical gold against the $3.2 trillion daily turnover in official government currencies.

Regards,
Adrian Ash

November 03, 2008

Greg’s Endnote: What Adrian doesn’t know about storing gold offshore isn’t worth knowing.

And just a quick reminder to all Whiskey Shooters: Our discount offer for your “Personal Bailout Plan” ends tomorrow when we will have a new President-elect…but the same old growing deficits. Those deficits are going to be more economic trouble than anything we’ve ever seen; don’t be caught unprepared.

Gold Versus the World’s Top 10 Currencies was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Investors are always on the lookout for the next big thing. You know the sort, a big-picture idea so powerful and long-lasting that you can confidently ride your investments through the ups and downs that market life presents. Holmes calls these “global megatrends” — “sustainable and substantial growth in capital expenditures in any country or sector.”

Holmes offered a couple of past examples. There was the massive growth of infrastructure in the ‘50s and ‘60s, which included the postwar rebuilding of Europe and the massive highway system build-out in the U.S. There was the 1990s megatrend, which led to massive growth in information technology and data communications. And there is the present megatrend: “Unprecedented change in global growth driven by globalization, urbanization and wealth creation, [which] leads to a global infrastructure boom on a massive, intractable scale.”

That’s quite a mouthful, but I believe Holmes is right. Holmes also cites numerous studies — one by Booz Allen Hamilton, as well as ones by World Energy Outlook, the U.S. Department of Transportation, the OECD and a host of other official-sounding places. But the total bill, give or take a few trillion, is about $41 trillion out to 2030 – for water, power, roads and bridges, as well as marine and seaports.

This is your next megatrend. Don’t miss it. We have some ideas at work here, but before we get too ahead of ourselves, let’s look again at some of the key points of the thesis.

First, some mega population shifts. By the end of 2008, half of the world’s people will live in urban areas. Leading the way are some 500 million Chinese and another 540 million Indians. The world’s cities are getting a lot bigger. Beijing alone grew from 12 million to 16 million in the past decade. Plus, there are a lot more souls on the orb than ever — 6 billion of us. Next year, the world’s total urban population alone will exceed the total world population in 1965.

This helps drive economic growth. Asia as a whole, for example, is building five times more homes than the U.S. Incredibly, China alone is constructing 80 percent of them. This, in turn, drives consumption of many commodities, including things you may not think of immediately — like cement. Asia — excluding Japan — uses about 14 times as much cement as the U.S. Asia ex-Japan has also overtaken the U.S. in steel production by a country mile. Asian steel production is more than six times the U.S.’ Electricity consumption is 32 percent more than the U.S.’

I could go on like this for pages…the stats are simply amazing. But I think you get the idea. The industrialization of Asia’s enormous populations has unleashed a torrent of demand for the basics.

There was a lot of discussion at the conference in Vancouver about just how much of Asia’s economic growth begins with U.S. consumers. The answer isn’t clear, as you might expect. But it is clear that trade routes in Asia are flourishing. I’ve talked about the New Silk Road before. It’s one of my favorite themes — the opening of old trade routes that stretch across the Middle East through India and into China. Holmes had a chart that showed that the Asian stretch of that old road is still healthy — despite an economic slowdown in the U.S.

Asian trade is ticking up, even as U.S. exports take a dip. It’s not the only data point, either. Asian retail sales are also trending higher as U.S. retail sales head lower. I think it’s a bit arrogant on the part of some analysts to say that China exists to satisfy our needs for rubber toys and cheap underwear. In their view, a U.S. slowdown dooms most of Asia’s export-driven economies. Plenty of evidence shows that’s not the case, at least not yet.

In fact, Asian demand is on the rise for a whole host of goods. In 2008, vehicle sales in Asia ex-Japan are set to exceed those in the U.S. First time that’s ever happened. Sometime in 2008, also for the first time ever, there will be more Internet subscribers in China than in the U.S. I suspect that’s one top spot that the U.S. will never claim again. There are also four times the number of mobile subscribers in Asia than in the U.S.

All of these points come from Holmes presentation, which I think painted an amazing panorama of the truly historic shifts in the global economy.

As fast as the Asian economies are growing, their demand for power is growing faster. You can also expect to see increasing use of aluminum, copper, iron ore, coal and nickel — all basic infrastructure materials.

Holmes offered that to satisfy the global demand for copper, the world would need to mine as much in the next 25 years as it has up to this point in history. These predictions may prove wildly inaccurate. But even if they are only directionally correct, it points to a long bull market in the basics.

I have recommended stocks that are deeply involved in the megatrend of infrastructure. Companies like ABB Ltd. (ABB: NYSE), the world’s largest builder of power grids, and Astec Industries (ASTE: NASDAQ), a leading manufacture of road-building equipment. Plus, I have also recommended companies that own the basic commodities the world will need — copper, oil, natural gas and more.

As we come to learn early in our investing careers, the market seldom moves in a straight line. Years can separate cause and effect. One of the great megatrends in the market today is this idea of infrastructure and all that it entails. So don’t let the recent volatility in the stock market blind you to long-term investment opportunities.

These are the moments to enter the fray, not to run from it.

Regards,
Chris Mayer
September 15, 2008

Asian Infrastructure was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Drug companies large and small have renewed their interest in one specific health care sector. It’s a true form of preventative medicine — a rapidly growing field that’s already decimated countless dangerous and deadly diseases.

Now biotechs and Big Pharma are in a race against time. Their mission is clear: Rid the world of the onslaught of superbugs and diseases that could cause the next great epidemic. And they’ll use second-generation technology to create some of the world’s most powerful drug saviors.

There’s money to be made in this field — and it hasn’t gone unnoticed by some of the planet’s top investors.

George Soros’ resume is nothing short of impressive. His legendary Quantum Fund returned investors an average 42.5 percent per year for 10 years — a total of 3,365 percent gains. In 2007, he raked in a staggering $2.9 billion, making him the Street’s No.1 earner for the year…

And then there’s Warren Buffett — an investor who needs no introduction. An initial $10,000 investment in Buffett’s famous holding company Berkshire Hathaway would have been worth more than $1.2 million at the end of last year…

Sure, they’ve made their money by occasionally taking different routes. However, Soros and Buffett are “sharing” some intriguing ideas these days, according to James Altucher, managing director of Formula Capital and author of Trade Like Warren Buffett. The two moguls are putting up big bucks for health care, he says, with a concentration on vaccines…

This bit of info may go against perceptions of Buffett as the ultimate value investor. Altucher claims this is a common misconception. Rather, Buffett is what he calls a “long-term demographic investor.”

That’s why Buffett and Soros are investing in health care and biotech stocks like GlaxoSmithKlein, Johnson & Johnson and Sanofi Aventis. These companies have a lot in common — most importantly, they are the world’s most prolific developers of vaccine treatments.

I’ve found an opportunity Warren Buffett can’t get his hands on — an opportunity to get in on not one, but two emerging biotechs in a race to create the ultimate cancer vaccine.

For years, the vaccine landscape was ruled by the basics — measles, mumps and rubella. And, of course, annual flu shots for the elderly and those affected with immune disorders. The market for vaccines was relatively stagnant. In 2005, vaccines accounted for less than three percent of the global pharmaceutical industry, according to the Wharton School of business.

It just wasn’t very profitable to make cheap flu shots. And the antiquated process of incubating the inactive viruses to go into the shots is time-consuming, and the shots are easily contaminated.

Now we’re looking at a transition to a different kind of vaccine. In fact, we saw the wave of next-generation vaccines hit the development pipeline as early as three years ago. Professors at Wharton saw the transition coming:

“In the past, a lot of attention was paid to the childhood vaccines, but more and more research and development is focusing on vaccines for adolescents and young adults, or even on adult vaccines for diseases such as cancer,” Wharton health care systems professor Patricia Danzon commented more than two years ago. “The health system approach to vaccines really has to adapt to accommodate these new products.”

This quote appears very prophetic today. Just look at Merck’s recent success…

Merck’s most recent quarter, reported in May 2008, saw revenue rising to $5.8 billion, with much of its sales growth attributed to Gardasil, the company’s blockbuster cervical cancer vaccine.

Merck, along with many of the other major drug companies, is in the process of developing numerous vaccine treatments for a variety of diseases — some common, some deadly. But there is also a select group of micro caps poised to make major medical breakthroughs with their proprietary vaccine technology.

One of these companies is a biotechnology company focused on active cellular immunotherapy. Essentially, this is a method of using a patient’s own cells to stimulate the body’s immune system to attack a cancer cell as if it were a virus or bacteria.

You see, that’s the main problem with the human immune system and the current methods of cancer treatments. The immune system doesn’t fight cancer cells, because it doesn’t recognize them as a threat. And chemotherapy attacks and kills all cells, even healthy ones. Now a better treatment is in the works — one that teaches the body to target the cancer cells.

Using active cellular immunotherapy, this company has developed a vaccine that trains the immune system to recognize and eliminate prostate cancer cells. The company is also looking at tweaking the drug to fight other types of cancer, including breast, ovarian and colorectal cancers.

Clinical trials have shown that administering the treatment to patients with late-stage cancer prolongs life by about four months. These few months may not sound significant, but they’re a start. And these results are impressing leading doctors of cancer research.

Regards,
Greg Guenthner
July 23, 2008

Small-Cap Vaccines was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And today’s aviation industry has a big crisis on its hands. As a percentage of airline costs, fuel is now about 35 percent of the total — up from only 13 percent at the start of the decade. It is the airline industry’s No. 1 expense. The cost of fuel puts enormous pressure on the industry. At the same time, regulators are pushing for cleaner planes with fewer emissions.

“The price of oil has challenged and changed all realities for the aviation industry,” says Tim Clark president of Emirates, a Dubai-based carrier. “This is the greatest crisis in aviation’s history — bigger than the Gulf wars, Sept. 11, SARS and past oil shocks.”

If oil prices stay where they are and nothing else changes, the airline industry will lose about $6 billion this year, compared with a profit of $5.6 billion last year. Many airlines will be taking that familiar stroll into the bankruptcy courts. Globally, 24 airlines have already filed in just last the seven months.

The industry is trying — and will try — lots of different tactics to fend off elimination. One of these is to push for more fuel-efficient aircraft. And that is the opportunity for investors to cash in on this crisis.

It starts with the jet engine. Recently, the Wall Street Journal published “Jet Engine Makers Launch New War” — all about the drive for new fuel-efficient engines. The piece notes that airlines worldwide want to replace their existing fleets with next-generation planes, not the current oil-guzzling models. The goal of the jet engine makers — or rather, the mandate put to them by their customers — is to deliver at least double-digit gains in fuel-efficiency.

As the WSJ reports: “Developing fuel-efficient engines requires the use of exotic alloys and ceramic coatings that can cope with internal engine temperatures that would be above the melting points of untreated metal components.”

Enter cobalt. It’s a tough metal with a high melting point of 2,700 degrees Fahrenheit. This higher melting point allows it to maintain its strength at higher temperatures than other metals can. Cobalt alloys have higher melting points than either nickel or iron alloys.

As a result, one of the main uses of cobalt is in superalloys such as those that jet engine makers need. In fact, the making of superalloys consumed about a quarter of global cobalt production, of which about 75 percent wound up in aircraft.

Cobalt would seem to have a nice backdrop of long-term demand. But it doesn’t stop there. Defense spending is also on the rise globally. A Financial Times report on aerospace notes that India, China, Brazil and certain Middle Eastern countries are all upping their defense spending. India alone may spend $40 billion in 2009.

Cobalt is an important part of all that, too. In fact, the U.S. and the Soviet Union used to stockpile cobalt for defense purposes. Those stockpiles are long gone, but the role cobalt plays in defense still exists.

As exciting as the aerospace angle is, a potentially bigger market could be batteries for hybrid cars. As I pointed out in the last issue, there are 5-10 pounds of cobalt in a typical hybrid car battery. Hybrid car sales will probably hit 500,000 cars this year. And that is growing rapidly.

Kitco recently noted that cobalt holds an electric charge better than almost any other metal. That makes it hard to replace, even at $50 per pound. “And the current electric batteries work so well,” Kitco notes, “[that] there is little incentive to change their structure (and other metal prices have skyrocketed, as well as cobalt — nothing is cheap anymore).”

With the failure of banks and the troubles of big financials such as Fannie Mae, cobalt seems a nice place to be. A while ago, I recommended a “cobalt play” to the readers of my investment service, Mayer’s Special Situations. The name of the stocks is OM Group (OMG: NYSE). I should warn you that the stock is a bit speculative. But let me share a few of the particulars…

OMG carries a seemingly absurd valuation. It’s not often that you find profitable and growing companies with no net debt trading for big discounts to book value. The specialty chemical industry — a tribe to which OMG belongs — is undergoing heavy consolidation. Companies are getting bought out left and right. Dow Chemical bought Rohm and Haas for a 74 percent premium. And then Ashland came along and bought Hercules for a 38 percent premium.

Companies that make low-margin chemicals are looking to beef up on companies that make high-margin, or specialty, chemicals. Because OMG is cheap and very profitable, it has to be on someone’s radar. I hope that it doesn’t get bought out. I think we’ll do better holding the stock. But the deal-happy scene in the chemical business is another potential backstop of value here.

Hard to believe that anyone could buy all of OMG for anything less than at least book — which is $36 per share. And even that would bring howls of protest. After all, the stock was in the $50s for much of the past year. We will see.

In any event, let’s bring this back around to the aviation crisis. A familiar theme in the pages of my letters over the years has been this Templetonian notion of focusing on the opportunities that problems present. The late great John Templeton made this idea a key component of his investment — and life — philosophy.

The high price of oil is a big problem for many industries.

So if you have a good way to mitigate the high price of oil, you have a business. I think the big winners over the next few years are going to be those companies that have a solution to the high price of oil. Those companies have products that other people will pay up for, because fuel-efficiency is a must. The aerospace industry must become more fuel-efficient.

Cobalt alloys will be a big part of that trend.

Regards,
Chris Mayer
July 22, 2003

P.S.: Cobalt alloys are certainly going to be a big part of the coming efficiency renaissance in energy. But there has also been another breakthrough recently that could be the biggest moneymaking opportunity available to you. Some are already calling this energy breakthrough a “miracle” and for good reason too. My readers of Mayer’s Special Situations have already been told about this.

Fuel Efficient Airlines was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

For some industries, such as airlines, finding a more fuel-efficient way to do business is a matter of survival. According to a recent Financial Times article, it’s “triggered a massive jump in the price of obscure and scarce metals that are used to improve the fuel economy of jet engines.”

The quest for fuel-efficiency goes beyond just the airlines, of course. It extends to rail cars and automobiles, to power plants and high-speed drilling. Vanadium’s primary use: to strengthen steel. Combine it with titanium and you get the best strength-to-weight ratio of any engineered material. That makes it practically irreplaceable in aerospace and other industries. Companies also use vanadium to produce sulfuric acid, and in nuclear power plants. Vanadium also promises new advances in battery technology. Giant vanadium batteries power wind farms and solar power plants.

In the great infrastructure boom, vanadium takes its place at the table of other rare and obscure metals that are growing much more important. The price of vanadium, as with many of these metals, is way up. For most of last year, vanadium cost $40 per kilogram. In February, it hit $90 per kilogram. It has since come back some, but it rallied to over $80 again recently.

The rocketing vanadium price is no mystery. Demand is strong, while supplies are constrained. A big part of the supply constraint lies in South Africa. That’s because a massive electricity shortage is preventing many mines from operating at full capacity. As the CEO of Windimurra Vanadium, an Australian mining company, put it: “The market is very sensitive to power supply issues. Large South African miners are facing up to 15 percent restrictions to their power supply… The supply of vanadium will remain tight, and that’s factoring in a best scenario for South African producers, which is no guarantee.” In March, Xstrata, which produces about 12 percent of the world’s vanadium, said it would cut its deliveries by 10-15 percent in the second quarter. And Highveld, the world’s biggest producer of vanadium, said in February that power outages posed a “considerable threat” to future output.

The vanadium market also has some interesting quirks. For example, 98 percent of the world’s vanadium comes from only three countries — China, Russia and South Africa. South Africa, we know, has power issues. China’s Sichuan province, devastated by earthquake, was also a rich vanadium producer. Moreover, China is becoming as much a consumer of vanadium as a producer. So vanadium exports from China are dropping. Last year, China ended its export credits for vanadium because it needed the metal more at home. This year, China went further and put an export tariff in place.

China’s vanadium use per quantity of steel is still well behind the curve compared with the U.S.’ If China were to use as much vanadium as U.S. steel producers, the vanadium market would face a one-third increase in demand. That’s a pretty nice long-term tail wind for vanadium.

Russia’s Evraz Group is the world’s largest producer of vanadium, with about 27 percent of supply. I think it’s safe to say that Russia has been an uneven producer of certain commodities. And as the Russians like to change the rules of the game as it suits them, I would not rely too heavily on Russian supply. And finally, there are no stockpiles of vanadium or substitutes of equal quality.

So where are the opportunities?

It’s tough to find a good pure play that is easy to buy. Most of the producers are in China or South Africa or Australia. And these producers make lots of other metals. You wouldn’t buy Xstrata just because you like vanadium. You’d also have to understand a host of other metals that contribute much more to Xstrata’s bottom line than vanadium. One interesting company is Denison Mines. Vanadium could represent up to a third of Denison Mines’ revenues in 2008. The problem with Denison is that it is mainly a uranium play. To invest in Denison, you have to like uranium; you get the vanadium exposure as a bonus. Denison is probably cheap, although I haven’t looked at it in great detail.

Some of the best ideas are just in the prospecting stage or emerging as producers. There are a few in Australia, including Windimurra Vanadium and Reed Resources. Both have big vanadium resources and could each eventually represent 6-8 percent of global production.

One of my favorite vanadium ideas I’m keeping an eye on is Largo Resources (LGO.V: CDNX). Largo has the world’s highest-grade vanadium mine, in Brazil. It’s close to infrastructure and located in a mining-friendly state. The company should have a completed feasibility study in July. Production should start in 2010. It’s highly speculative, but promising.

The company also has a molybdenum and tungsten project in the Yukon, called Northern Dance. These metals are also important in infrastructure.

Scarcity is a great thing when you are an investor. Finding companies that own something scarce — with good long-term demand behind it — is a winning formula for finding good ideas.

Regards,
Chris Mayer
July 15, 2008

P.S.: Finding an interesting and scarce metal to invest in like vanadium is certainly an idea worth looking into. But that isn’t where the resource profits you could be making end. Recently, an amazing resource breakthrough occurred that some people are already calling a miracle. This breakthrough has come from the use of two new technologies that have made possible what was once thought to be impossible.

Investing in Vanadium was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.