January 29,2011

There was a doctrine being touted in the late 70's and early 80's called an "Industrial Policy".  Japan’s Industrial Policy had them buying everything they could; from US real estate to American industry.  "Japan Inc." was how we referred to this formidable new political and economic force.  Those who led the charge for the US to adopt its own Industrial Policy included President Jimmy Carter, Walter Mondale, Lester Thurow, John Kenneth Galbraith, and Robert Reich.  The goal was a USA Inc. and the recommended National Industrial Policy became known simply as the NIP.

Industrial Policies aren't purely communist, fascist, socialist, or capitalist.  They are a hybrid. These policies are more often called state or crony capitalism. Under this particular brand of statism the government, regardless of its political system, "buddies up" with business. Industrial Policy is directed by government decisions rather than the market.

Today China is employing this tactic and being praised for its government "leadership." China has developed Sovereign Wealth Funds to buy all the rare resources they can around the world.  The Chinese government has imposed wage and price controls to fight inflation, and capital controls to keep money inside the Chinese economy.  Exchange controls as well as import and export controls are used to run trade surpluses, while the government scheme's to make sure their command economy moves toward greater world wide growth and dominance.  The result is a communist government with a controlled economy.  China allows only as much freedom and enterprise as deemed necessary to achieve its goals. Its policy is an Industrial Policy where government leads and the individual follows.  It is not capitalism despite the claim of many editorials.

Like Japan, an Industrial Policy will work in China for a while.  Then it will go the way of Japan and implode.  That day may be sooner than we think. Neither the Japanese nor Chinese governments can keep their hands off their citizens.  It will eventually be this need for control that brings their experiments to an end as their economies simply stop. There are those who believe we should become more like Japan and China. And the temptation will be to do just that, especially by businesses and corporations that are offered subsidies or special treatment.  These bribes often become too tempting to pass up.

When you hear that in order to compete in the world we need to make investments in education, energy, technology, research and development, like China, ask yourself who they mean by "We?”  Is it the private sector or government? And who is going to pay for all this "investment?"  It is usually the American taxpayer.  If it is both government and the private sector, ask yourself if you really want the government as a partner? Any such partnership usually ends up with the government as the senior partner.

According to the proponents of a government led Industrial Policy government funding is essential. They tell us that without the government investing in the economy we cannot keep up with countries like China.  Why are we being asked to emulate other countries?   This is an invitation to move toward a command economy of our own; regulated, directed, and led by government.

Japan and China are the land of "We."  America is the land of "I" and stands for the "Individual."  In America "We" are individuals, but in statist nations "We" is the state. Though commonplace in other
nations, US citizens spoke loud and clear on November 2nd when they rejected this kind of government intervention and intrusion into their lives.

Do not fall into the trap set by those who claim "We" must invest in our future to work our way out of our problems and progress as a nation. When politicians say "We" they speak of a future determined by the government, not by you.  The new programs being touted are designed to benefit government. Government employees will benefit from these programs at your expense. As was the case in the past with the five year plans of the Soviet Union--and now China--it isn't individuals who will run these programs but government.

The premise that without state planning progress is not possible is absurd. Look at the progress of West Germany versus East Germany after WWII, or the Soviet Union versus the United States. State planning proponents insist that without public education, we wouldn't have education, and that we wouldn't even have teachers if government didn't provide them.  They ask, without an energy department who would create new sources of energy? Unless government supplies health care, we’re told that our health care would be inferior.  We are supposed to believe that without government sponsored research and development we would have no scientific progress, new medical devices, medicine, or cures.  We are also to believe that if we didn't have a government created infrastructure we wouldn't have sewers, roads, or

In most debates over how much public investment we should have in health, education, energy, or transportation, you rarely hear the premise itself challenged. The entire concept of public investment is counterproductive and yet the usual response to additional public spending is limited to whether we should increase it or decrease it. The answer for how much the government should invest into the economy should be zero.

Teachers, engineers, and scientists need not be government employees. Nor any professions save soldiers, police, and those who work within the court system--none of which are part of the producing economy. The government is good at providing an army to defend our nation.  States are good at providing a police force to protect individual life and property.  And government has been pretty good at providing a court system to settle disputes.  These are all proper functions of government.

We need to end the Department of Education, Department of Transportation, the Environmental Protection Agency, research and development programs, and other federal agencies. They need to be run by the independent states, or even better, their function be left to the private sector. According to most advocates of bigger government, if these agencies were eliminated all progress would end.  Further, they claim that if we extend the reach of these agencies, along with their programs and budgets, prosperity will return.  This is the pitch for an Industrial Policy.  We will be hearing a lot more from its advocates
in the months to come.

After the "shellacking" the democrats took in the November election Barack Obama made a 90 degree turn.  He turned away from the left and toward the right.  Many conservatives hope he will become more
"business friendly."  I suggest we all be very wary of such a friendship.  State Capitalism is as dangerous as Socialism.  The left was tempted by government intervention which promised to enhance their
objectives, and the lure of partnering with government will be just as compelling for business people and Republicans.

Whether it comes from the left or the right, centralized power is a way of reducing individual decision making and replacing it with government decision making. This country does not need to just turn from left to right; it needs to make a 180 degree turn away from big government toward limited government and increased individual responsibility.  America’s citizens need to limit government control and regulation and insist on individual freedom.

It's time for America to choose its direction.

Market Update:

What a week. We had a plethora of economic data thrown at us. On Monday we were informed the deficit was going to increase to 1.5 trillion dollars, a record high. The Fed decision (or non-decision) came on Wednesday, and spiked all markets.  Japan's credit rating was lowered this week,  and Japan's stock market ROSE in response.  On Friday we got the GDP figures, and during this all, saw the eruption of riots throughout Egypt. Wednesday saw the biggest gain in a very long time for resource stocks.  There was an equally sharp sell off Thursday, wiping out all gains.  And finally Friday saw a sharp rebound of these stocks once again, as the stock market plunged.  What to make of it?

At the end of the day it's all about preserving wealth and making a profit for investors and traders. I sold my TBT to raise cash because many stocks fell so fast and furious, which I think presented some good re-entrance points. After all, one of the most enviable positions a trader can find himself in is to take a position at the beginning of a launch, and this is what appeared to be happening on Wednesday.

As your stocks move sharply higher you can place stops at, or just below, your buy point. If you are wrong and are stopped out as stocks reverse, you lose nothing.  If some of these stocks increase in value, you can raise your stops and lock in guaranteed profit. That is exactly what happened on Wednesday.  We had a launch.  But it's rarely that easy--and by the end of Thursday the entire move had been wiped out.

This is called a "bull trap,” where the bulls jump in on a spike up, then get there heads handed to them on a major reversal.  They stand there caught in the headlights of an oncoming train and get run over by it.  Well, I've been around too long to take the bait.  Discipline dictates that we cut losses quickly and let profits run.

So I’ve placed stops to protect my downside, (and that's putting politely).  Any reversal will stop me out and return me to a one third cash position.  I picked up Silver Wheaton, one of the best silver companies around.  Without any increase in silver prices, this company can grow on increased earnings alone.
This fits in nicely with the rest of the portfolio, and I hope I am able to keep the position.

There are half a dozen factors that can cause commodity prices to rise, and another half dozen that can cause them to fall.  The world is a complicated place. While I have no idea which way the markets will move next week, I'm positioned for a move in either direction. I'm hoping that direction will be up.

Obviously, the main driver of gold immediately ahead will be what happens in Egypt. Will riots spread to other countries, or be contained?  Is this a democratic revolution, or will it be an Islamic revolution?  Will our allies in the mid east become more friendly, or turn out to be our enemies?  The future hangs on the resolution of such questions -- and so do our investments.  I will be monitoring the situation closely.

Portfolio by weight:


Copper Fox Metals

Rubicon Minerals

Silver Wheaton


US Silver Corp

Rochester Resources LTD