Tuesday, March 26, 2013  

Poor People and Iron Chains

By Harry S. Dent Jr., Editor, Survive & Prosper

Many republicans and free market advocates would love to see virtually no government and no regulations to constrain the unlimited innovation capacity of entrepreneurs and the free markets. 

Most (if not all) kids would love to see virtually no parents or rules. 

Ah… if only it were that simple. 

Unfortunately, people of all ages need some kind of regulation to function optimally. It’s as wired into us as is the need to eat, drink and have sex. 

The sad truth is, without some regulation, we humans regress into nutless monkeys that get bullied by the 800-pound gorillas in the forest, and when that happens, nobody wins… except the 800-pound gorilla.

For evidence of this, look at history before the American Revolution. The 800-pound gorillas created a mafia-like advantage that didn’t pass down to most people. Such dictator and tribal-leader economies are still poor today despite unprecedented growth in technologies. Think Zimbabwe. Think Libya. Think Haiti.

But when power mongers like these are reigned in and made to conform to regulations just like everyone else, the world sees unprecedented economic progress. That’s what happened around the late 1700s / early 1800s when we saw three major revolutions.  

The first was in economics in the late 1700s. The instigator was Adam Smith and his book, The Wealth of Nations, wherein he espoused the principle of the “invisible hand…” the notion that free markets and innovation drove progress naturally from the bottoms-up without excessive government direction or regulation. 

Next up was the industrial revolution, driven by the steam engine. This resulted in an explosion in the use of energy to drive human productivity through machines.  

And finally, there was the American and French Revolutions, both breaking free of the tyrannical reign of monarchs. The French chopped off heads. The Americans severed the cord. 

Hey presto, we have everything we need to prosper… 

You see, free market capitalism rewards the fittest and those that contribute the most. Democracy forces the system to pass down the rewards and opportunities to the people. And the big surprise: when you involve people in the innovation process and give them some stake, they surprise you and add much more innovation.  

The truth is that the most prosperous nations today came from the irreverent puritans that settled America (and the wild-west gunslingers to follow), and the prison colonies of Australia.  

People withless wealth have much greater motivation to innovate than people who already have it made! Wealthy families almost always lose most of their wealth in just a few generations of spoiled kids. 

It was the marriage of free market capitalism and democracy that created the greatest economic revolution since agriculture and urbanization. It enables us to constrain the natural tendencies of the 800-pound gorillas to take all the spoils. 

Now, most people see democracy and free market capitalism as similar principles, but they are in fact opposites that interact to create the dynamics of growth, innovation and progress; like male and female, innovation and destruction, boom and bust, etc. 

So Why the History Lesson?. 

For two reasons…  

First, I believe the study of history is critical to the success of any forecasting efforts (besides which I love it) and second, all this talk of revolution is to illustrate that there’s a cycle here. One you can monitor and use to your advantage. 

That is to say, major revolutions at the highest political, social and technology levels happen every 250 years. And we are now due for the Second American Revolution that will extend globally. Look… 

The 250 Year Revolution Cycle 

Government and clear, simple regulations are a way to leverage the new technologies that lead us to higher standards of living. The challenge is to keep it simple and not let those regulations choke innovation, which is what we now see in our overly complex tax codes and health care systems. 

The 800-pound gorillas found a way to get back their power. They’ve been throwing their weight and B.S. around for decades now. And finally we’re starting to see the sparks that will trigger a bottoms-up revolution in the structure of all business and government to rein those monkeys in again… before they choke the life out of our economy.  

I call this the new Network Revolution and it will be more powerful than the assembly line revolution of the early 1900s. Not only is it going to utterly transform the way we do things, it’s going to boost our standard of living even higher, despite slowing demographic trends in all wealthy countries. 

As it does this, you have the opportunity to invest on the ground floor. There are securities you can add to your investment portfolio. There are business opportunities you can start positioning yourself in now so you’re in the right place at the right time to take advantage of what lies ahead. 

Keep your mind and your eyes open. This is your chance to become the world’s next Rockefeller.

Harry  

P.S.If you missed me on CNBC yesterday, here’s a link to the recording.  

Ahead of the Curve with Adam O'Dell 

Euro Gold: The Ultimate Crisis Hedge 

Rodney wrote about gold yesterday. If you missed it, you can read his article here.

Harry feels the same way, if not more strongly about it. In fact, to say Harry is passionate about the direction of gold, the dollar and the economy is an understatement. He’s willing, even itching, to have heated debates with anyone holding opposing views. It’s a riot to watch! 

We’ve been steering investors out of gold (for the most part) and into the U.S. dollar, even as much of the mass media peddles the exact opposite approach. The difference in our analysis is simple: deflation.  

Fiat currencies, like the U.S. dollar, tend to get a boost when massive amounts of debt are deleveraged. And, despite gold being a good store of value in times of inflation/hyperinflation, it loses value during deflationary environments. 

That said, if you’re itching to buy some yellow metal… there’s one way we’d suggest doing this. Buy gold in euros, not dollars. Let me explain… 

By and large, gold is priced in U.S. dollar terms. But it can also be priced in euros. Here’s a chart of the two quotes: gold in dollars (yellow) and gold in euros (green). 

See larger image 

As you can see, these two quotes mostly move together. And any divergence between the two is easily accounted for by shifts in the exchange rate between the U.S. dollar and the euro. 

But buying gold in euros is the ultimate “crisis hedge” because: 

1) Gold tends to spike higher leading into global financial crisis, and
2) The euro tends to drop in times of crisis as investors flee to the dollar safe haven. 

If gold goes higher, and the euro moves lower, a position in euro-denominated gold would enjoy a “double whammy” boost.  

If this strategy resonates with you, you’ll need to build a “synthetic position,” as there aren’t many investment vehicles that allow you to buy euro-denominated gold directly.

To do this, simply buy a gold instrument (gold futures or a gold ETF, like GLD) and simultaneously sell short an equal dollar amount of a euro instrument (euro futures or a euro ETF, like FXE). To accomplish the “short euro” side of this, without selling short, you could also purchase an inverse euro ETF, such as EUO (but only buy half the amount, as this ETF is leveraged 2x). 

This trade should perform best as crisis fears are climaxing. It’s a great hedge heading into the crisis, but you won’t want to hold it through ‘til the bitter end. I’ll keep an eye on this and write to you again once the tide has turned.