We have just returned from the ranch. We’ll give you a brief resume of our visit. There is not much of financial interest in it…unless you are interested in how to not make money in cattle ranching and wine growing. But life isn’t all about making money. And if these Daily Reckonings had stuck to economics and investments, over the last 11 years, your editor would have gone mad years ago.

“You have to understand,” began our lawyer in Salta. “This is a political problem. It’s not a legal problem. You have all the rights on your side. But you don’t have all the politics on your side.”

Our man was explaining how to deal with the problem of squatters. There are 20 or so families who live on our land. Most of them have been there for generations. They have no title to the land they live on, but by custom, recognized by law, they are allowed to continue raising their goats, cattle and sheep on thousands of acres of mountain wilderness.

There are only two requirements. First, they must pay us a token number of animals in “rent.” These animals are largely unsaleable. So we usually don’t bother to collect them. But without the gesture of payment, the people become squatters. And if they are allowed to squat for 20 years, they become legal owners of the property.

Second, they must respect the mutual agreements regarding water and grazing rights that have governed this area for hundreds of years. Beginning in the month of August, for example, they are only allowed to use water one day out of four. Water is scarce in the winter and spring. It must be allocated fairly.

“Whatever you do, don’t try to throw them off your land – even if they don’t pay. I have a client – a rich guy from Buenos Aires. He was in a similar situation. When some of his people wouldn’t pay – you know, they get stirred up by the idea of “indigenous rights” – he took them to court. Of course, he won. But that was just the beginning. One of the leftist political parties got wind of the story. They decided to make a big deal of it. They printed a newspaper that told the story about how he threw poor women and children off his land and then burned down their houses. It was mostly lies. But it was useful politically for them. They even got Christina Kirschner to make a visit so she could be seen protecting poor people from wicked landowners.

“In the end, they caused so much trouble for him that he couldn’t stand it. He had to pay off everyone – the politicians, the poor people…the lawyers. It ended up costing him a fortune.

“So don’t think about trying to get rid of the people who aren’t paying. Instead, just make sure you hold them to the terms of the their deals with the other families up there. As long as they’re respecting the rules for using water and grazing their animals on the right land, don’t worry about the rent. It isn’t important anyway. Just try to get along with them.”

That seemed like good advice. Besides, the economics of the situation are on our side. Or they’re against us, depending on the way you look at it. Life up in the mountains is so hard…so unforgiving…so unprofitable that the next generation of squatters doesn’t seem to want to stay here anyway.

Of course, the same could be said for the ranch itself. It is not profitable. From what we can tell, it will never be profitable.

Here are the basic numbers. We have 500 cows spread over thousands of hectares. It is high, cold and dry. We’re lucky if 50% of the cows have calves each year…many of which do not survive. And then, when they go to the market, the young animals are thin – only 120 kilograms. This gives us a total income of about $30,000, with which we need to pay a staff of 6 gauchos, along with gasoline, tools, taxes, and all the other expenses of running a working ranch.

Why do we bother? Why don’t we leave…along with the squatters? We’re not sure…

Driving down to the ranch from Salta, we found the land greener than we’d ever seen it. After three years of drought, this year it rained.

“We got 250 millimeters of rain this year,” Jorge reported. “About 4 times as much as last year.”

The hills were green. The mountains were green. Cachi, the big mountain we see up the valley, was white, covered with snow. Even the desert floor itself was green.

“It’s so beautiful…so spectacular,” said Elizabeth as we drove up the valley. But the same water that turned everything green also made it difficult to arrive. We could not cross the river at the usual ford. We had to drive an additional half hour. Then, arriving at the farm, where there was usually a dry riverbed, we found another river. Could we get across? We didn’t know. But there was a track leading into the water and coming out on the other side. We put the truck in 4-wheel drive and plunged in. It took us to the other side without too much trouble.

Everybody at the ranch seemed happy. Jorge had a big smile. Maria seemed relaxed. All the gauchos too – Nathalio, Javier, Pedro, Norberto, Gustavo and Jasimiro – all seemed to be in good spirits.

At first, we attributed this era of good feelings to the backhoe. Then, we realized; it was just the rain.

“Oh, it is a great tool,” said Jorge of the backhoe. “We can do things we never could do before. We’ve been able to clear out many of the rocks from the fields. And we’ve been able to put in a water pipe so the cattle out in the field won’t have to walk all the way down to the river.”

To give you an idea of the scale of these infrastructure improvements, the water line is 5 kilometers long. It takes water from a spring in the mountains and feeds it to the middle of the high pasture.

“Wow… You did all that with the backhoe?” We were impressed.

“No… We just cleared the track with the backhoe. We dug the trench by hand. We wanted to save the backhoe for other things.”

Sunday was a special day in the religious calendar. Palm Sunday. We celebrated it at the little church on the ranch with a priest who drove up from a town down in the valley. We are not exactly True Believers. But we never miss a good show, especially when it offers the hope of everlasting life. To tell you the truth, we’d probably settle for twenty years or so more. But if eternity is on offer, who are we to refuse it?

Arriving at the church at the appointed hour, our “palms” in hand…we found no one there, except Maria, who explained that the padre had been held up by the river.

When he finally arrived so did dozens of local people…women and children mostly. We said hello to everyone and introduced ourselves to the priest. He was a replacement padre, while the usual man was in Rome on a special training mission.

“Where do you come from?” he wanted to know.

We explained that we were a family from the Irish diaspora currently living in the USA.

He seemed to be a likeable fellow…warm and agreeable. He gathered the worshippers at the front door and proceeded to give them a remarkable discourse.

In a nutshell, Jesus entered Jerusalem, his path strewn with palm fronds, in the traditional manner of welcoming a king. He must have known it was a set up. But he went along with the prophecy of Isaiah anyway, entering the town on a burro.

But then came the remarkable part…

“And here you have a family of Irish people as owners of the ranch. You are very lucky, because the Irish are very religious. Very good Catholics.

“So you can follow their example. They set a good example for you. Obey them. When they tell you to work, you should work. And help make this cattle ranch a great success.”

“Where did he come from?” Edward whispered.

We found out later. Franco’s Spain! He had left Spain in 1970 and had been in the valley ever since.

Perhaps we should have set him straight. We are not really Catholics; we’re Episcopalians. And we’re not really Irish either.

But then…who cares? This isn’t really a cattle ranch either…

More to come…

Regards,

Bill Bonner
for The Daily Reckoning

The Best Way to Deal With Squatters originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

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The Best Way to Deal With Squatters

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

I recently watched the classic man-eating fish movie “Jaws” and the latest action in the precious metals space reminded me of the tagline for the film, “Just when you thought it was safe to go back into the water…”

Is it safe to swim in the water? Or is Jaws still lurking out there, the physical embodiment of a financial world gone lethal? Can gold still protect us?

Gold has had a magnificent run during the past 10 years, doubling in value since 2008 alone. Gold has set and broke several new price records, most recently reaching $1,500.00 per ounce on the Comex division of the New York Mercantile Exchange in Tuesday's (April 19) trading.

The most commonly-traded gold exchange-traded fund (ETF), the SPDR Gold Trust (NYSE: GLD) ETF, followed suit, closing just shy of $146.00 a share, an all-time high. Mirroring these moves was gold's less valuable (and possibly more appealing sibling) silver, which has been hitting 31-year highs almost daily.

Gold “mania” is seemingly at full strength. But questions remain. Is profit taking the next move? What if you are among the majority of investors who have yet to dip a toe into the water? Is it safe to dive in?

Let's look at three fundamentals regarding gold, along with the rational outlook that should correspond with these facts:

1. Inflation − Naturally, I'm not referring to core inflation, also known as the government's consumer price index (CPI). The CPI is like the calm surface water that hides the beast beneath.

Headline inflation, which is the measure of the total inflation in the economy, is running very hot. There is increased demand for resources thanks to growing economies worldwide and corresponding shortages developing in food, energy and elsewhere. Gold is benefiting from inflation and there seems to be little reason to expect it to slow down.

Money creation in the United States has excess dollars chasing these aforementioned goods. Some think this is a good thing. Some will argue that the Federal Reserve will eventually sop up the extra liquidity. But the reality is they never really will. The dollar has lost 95% of its purchasing power since 1913, the birth-year of the Fed. I see no circumstances under which the dollar will not continue to fall long-term. It will bounce up now and then, but if nothing else, the past 40 years have cemented the dollar's future — and the trajectory is to the ocean floor.

2. Demand − From people, institutions and governments — gold is wildly in demand like the cheesy “Jaws” merchandise sold during the record run of the movie in the 1970s. Faith in virtually all currencies has been shaken, if not destroyed, and will probably never be restored.

The dollar's reserve currency status is threatened. More than threatened, it is visibly on the way out. What was once mere speculation has evolved into blatant measures to see it replaced. It will happen, but it will also take years. When we see countries like Venezuela and China trading with each other without using dollars (or any other currency) the evidence is irrefutable.

We also see many countries increasing their gold holdings (China's has increased from 600 metric tons to 1,054.1 metric tons since 2003), the logical defensive strategy when saddled with hundreds of billions in depreciating dollar reserves: stockpile commodities and natural resources. I give you dollars and you give me gold, oil, or steel — that's a fine exchange for me.

3. Government spending − The U.S. government is losing its credibility. Speculation that the United States will have its credit rating lowered was fueled this week after ratings agency Standard & Poor's lowered its outlook on U.S. debt from “stable” to “negative”.

The United States is the largest debtor nation in the world, nee, in all of human history. Once upon a time, it was the largest creditor nation in the world. In the 1980s, it loaned other countries money, money it really had. Now it borrows massive amounts to service its debt. The nation's well documented entitlement obligations are helping to catapult its annual budget to fantastical extremes.

Action to Take –> Keep your gold or buy some. The facts argue that gold should continue to rise; and not just in dollar terms. Many of these observations can be applied to other countries and currencies as well. I'd love to be optimistic regarding the United States' financial future, but right now things look grim. Jaws is still out there.

– Steven P. Orlowski

P.S. — We found an obscure mining company that tossed back 19% in dividends last year (plus another 34% in capital gains). If you think that's impressive, wait until you see this video…

This article originally appeared on StreetAuthority
Author: Steven Orlowski
3 Reasons To Still Own Gold (or Finally Buy Some)

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3 Reasons To Still Own Gold (or Finally Buy Some)

Whether they realize it or not Americans live in a constant state of fear every day. I’m not referring to the fears of everyday life like losing a job or having an accident of some kind, but rather a more sinister and devious fear; a fear that Americans only dare talk about around the water cooler or at cocktail parties so as not to be taken seriously; a fear they try to mask with a with a whimsical tone of sarcasm or indifference. Whether Americans want to admit it or not, it’s the single greatest fear in their lives: fear of the government.

Right about now there are those reading this thinking: Don Cooper is a drunk. To which I reply: what’s that got to do with it? Maybe more people should drink if that’s what it takes to sober up and confront what they are really afraid of.

In their defense, I’ll admit that reality is scary. No argument that living in delusion is warmer, safer, cozier, and easier. Pretending is always more fun than reality, that’s why we go to the movies. But fear of the government is a fear that invades a person’s soul and – since the government intervenes in every aspect of our lives – it affects every move we make every day.

Fear of the government is hard to recognize and acknowledge. It’s a fear that we are taught early on in life and to which we become accustomed. We inevitably end up tucking it away in the far reaches of our minds in order to function “normally” every day and live our lives. But just as a car backfiring will trigger a sense of fear from a shell-shocked veteran, so too can the State trigger that sense of fear they’ve instilled in us.

One need only ask: when you see a cop in your rearview mirror with his lights on, do you feel a sense of safety and comfort or do you get a shot of adrenaline from your body’s “fight or flight” reflex? Do you immediately start asking yourself what he could possibly pull you over for, other than the fact that he was abused as a child, bullied at school and his mother didn’t love him, and now he’s going to whittle away at that chip on his shoulder by abusing you.

As you search for your proof of government permission to drive (i.e., your license), and your government permission to own the car (i.e., your registration), and your proof of government mandated insurance, do you do so calmly and with a smile on your face and with gleeful anticipation of speaking with someone who gives of himself to serve and protect you, or do you do so nervously, fumbling through your papers hoping everything’s up to date and acceptable to him for fear of being detained for whatever reason and having it affect your job, your family, and every aspect of your life?

And when it’s all over, do you feel glad that it happened or are you just glad it’s over? Later that evening do you recount the story to others with a sense of pride, or do you do so with a sharp tongue and kick yourself for all the things you wish you would have had the presence of mind to say at the time but didn’t? Do you feel happy that you have to pay $150 to the government because you were driving down the street faster than the government allows you to, or are you angry?

And in the end, do you send the money to the government even though you don’t agree with it? Even though you feel it’s unfair to have to pay so much money yet you’ve harmed no one? Of course you do. And why? Because you’re afraid of what the government will do to you if you don’t. In the end, you’ll retreat back into your cubby-hole of delusion in order to justify paying the fine by convincing yourself that what you did was wrong, the government was right, and you deserve the punishment.

My favorite delusional argument from those still attached to the matrix is that they pay their taxes voluntarily. To these people I ask: when you do your tax returns, do you take as many deductions as the government will allow you? Of course, the answer is always yes. Then I ask them that if they could take enough deductions such that their tax liability was zero would they do so? Again, not surprisingly, the answer is yes. I then ask them that if their preference is to pay zero taxes then why don’t they simply refuse to pay taxes. Inevitably, that’s where their train of thought always runs out of track. Of course everyone knows the answer: because they’re afraid of what the government will do.

I challenge everyone to ask themselves: when was the last time you even thought about the possibility you might be robbed, your house broken into or shot at? Can you even remember? Now ask yourself when was the last time you were afraid of doing something that could be deemed “illegal” by the government and for which you could be fined, detained or arrested? Something like not wearing a seatbelt, speeding, making a U-turn, going through a yellow light, not crossing the street at the cross-walk, riding a bike on a sidewalk, forgetting your license at home, taking too many deductions on your taxes, talking on your phone while driving, not allowing strangers to touch you or your children at the airport, cutting down a tree on your own property, owning and transporting a gun, collecting rain water and the list goes on. I would wager the answer is: daily! The first word out of everybody’s mouth when asked a normal, completely benign question these days is: “Well legally…” It’s first and foremost on our minds, and why wouldn’t it be, there are 76,000 pages to just the federal register alone. Some argue that everyone commits at least three felonies every day!

Ignorance is a dangerous thing, and it must be stopped in our lifetime, fo’ it kill somebody.

At the end of the day, all government mandates are enforced at the end of the barrel of a gun, and that scares the hell out of everyone, as it should. But if we truly believe we are free then we have to start acting like it. It’s time we cared about something bigger than ourselves. It’s time we stopped living our lives in fear.

Having said all that, I’m not holding my breath. It’s proven to be difficult to convince people that freedom is more important than the real housewives of New Jersey.

And that’s why I drink!

Regards,

Don Cooper
for The Daily Reckoning

American Fear originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and the great correction.

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American Fear

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

In the past 40 years, not once has the United States' stock market been the best performer in the world in any given year. At best, American stocks have been finding their way into the middle of the pack, and given enough time, the U.S. stock market's results are often in the bottom 20% of all developed markets.

That's why it's important for investors to allocate at least a small portion of their portfolio to international stocks. With the right strategy, the potential rewards are much greater and often carry no more risk than buying a U.S. stock.

Buying shares of an overseas company isn't difficult, either; many companies have shares that trade on U.S. exchanges just like an American stock.

So if you should put some of your money in international stocks, where should you look?

If the forecasts are right, then Brazil's economy will be shoulder-to-shoulder with China, the United States and India by the year 2050. That's quite a growth spurt in the works, considering Brazil's economy is currently only the eighth largest in the world. But 2050 is a long way off, and the investment-worthy opportunities are presenting themselves today — you can't sit on the sidelines with a “wait and see” approach if want to make money from them.

It's not just a pipedream, either. The numbers South America's biggest country have been putting up in recent years do indeed suggest that this Latin American powerhouse will be everything it's expected to be. In fact, it's already on the way. While Brazil was bumped around by the global recession like the rest of the world in 2009, its GDP only fell 0.2% that year. By 2010 it was back on track with a growth rate of 7.8%. Its GDP is expected to grow by another 4.5% in 2011, compared with an expected growth rate of 3.2% in the United States.

Vale SA (NYSE: VALE) may be one of the ideal ways to take a stake in Brazil's accelerating economy. Although categorized as a mining stock, the description doesn't quite do the company justice. Yes, it mines industrial metals — mostly iron — but it also operates several plants and mills to turn what it mines into marketable steel products. Moreover, the company has its own transportation infrastructure that's open to other paying customers. It even generates much of its own electricity to offset the expense and volatility of buying it from a utility company.

All in all, a snapshot of Vale's operation makes for a pretty nice picture. But that's not even the compelling part for investors. What does every growing country need? Infrastructure… If Brazil is going to become a powerhouse by 2050, then Vale is going to build a great deal of the framework behind that growth.

An industrial giant isn't the only smart investment play in Brazil, though.

Believe it or not, consumers who are glued to their cell phones isn't an American phenomenon. It's becoming a global phenomenon, including in Brazil. Cellular phone service provider Vivo Participacoes S.A. (NYSE: VIV) is not only well aware of this, but is profiting handsomely because of it.

Simply put, things went from good to better for Vivo Participacoes in 2010. The company is on pace to earn $2.33 per share for fiscal 2010, and the number is forecasted to reach $2.82 in 2011. That projected growth rate of 21.0% translates into a forward-looking price-to-earnings (P/E) ratio of about 12., compared with the current P/E of 15.6 for the S&P 500.

But this doesn't even scratch the surface. The cell phone and smart phone revolution is just getting started in Brazil, with the bulk of the potential growth still ahead rather than in the past. Latin America's mobile phone market grew 28% in 2010 and is expected to grow by 76% in 2011. Smartphones were the big driver of that growth: that market swelled by 145% in Latin America last year.

In other words, Vivo is in the right place at the right time.

Finally, long-term investors should consider Brazilian water utility and sewage service provider Companhia de Saneamento Basico (NYSE: SBS) – or SABESP — as a way to tap into the growth of a country that's rapidly becoming a modernized, growing nation.

Even by water utility standards, SABESP shares are undervalued. Its trailing P/E of 6.4 and the projected P/E of 6.8 are unheard of for U.S. water utility stocks. As of right now, the average P/E of the United States' major water utility stocks is a hefty 26.1 (the cheapest is American Water Works (NYSE: AWK), with a trailing P/E of 18.5). Yet, none of the major water utility names based in the United Sates have even come close to earning and growing as consistently as SABESP has in the past five years.

Throw in the fact that Brazil's population is expected to grow from 200 million now to 260 million by 2050, and those people will need running water to and from their home, and you've got a big built-in growth opportunity.

Action to Take –> Is Brazil poised to be the world's leader in 2011? Maybe, maybe not. Statistically speaking though, it is likely to outpace the U.S. market no matter how things shape up this year. Any or all three names would offer a smarter risk/reward ratio than most domestic stocks.

– James Brumley

P.S. — We've just identified six surprising events that could break your portfolio wide open in 2011. Knowing these pivot points in advance lets you focus your investing strategy like a beam of light in the dark… and make a lot of money in a hurry. Get them free by simply watching this video presentation.

This article originally appeared on StreetAuthority
Author: James Brumley
The 3 Most Undervalued Stocks in Brazil

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The 3 Most Undervalued Stocks in Brazil

A profitable investment strategy is to buy into a stock with a major catalyst that can potentially take hold and send a stock price higher. That's obviously easier said than done, but many savvy investors who identify a catalyst early on can often snag the stock just before it moves and before the rest of the crowd.

Big changes at a company are a good place to look for catalysts, be it a new management team, new product or a major acquisition. One of the single best catalysts for a stock is often a spinoff. This is when a company separates, or “spins off” a division in order for it to become a publicly-trade company in its own right.

Spinoffs have a good track record of beating the market, according to the Journal of Financial Economics. There are a number of reasons for this. From the new company's perspective, new freedom often means the chance to grow market share and reduce costs without distractions from

Both macro and microeconomic forces suggest that the global water sector is destined to see exponential growth paving the path to opportunity for the PowerShares Water Resources (PHO), the PowerShares Global Water (PIO) and the Guggenheim S&P Global Water (CGW).

From a macro perspective, incomes in developing nations are expected to rise and populations around the world are expected to continue to expand pushing up demand for water. In fact, at current growth rates, it is expected that demand for water will grow by nearly 6 percent annually. This growth is expected to be most prevalent in emerging Asia, where India is expected to see its water demand more than double and China’s to rise by more than 30 percent over the next 20 years.

Further price support in the essential commodity is likely to be driven by a deficiency in supply. Of the water that can be found around the world, a mere 1% can be used for agricultural purposes and human consumption. Additionally, research suggests that soil moisture levels on Earth are declining which could potentially lead to depletion in fresh water tables around the world.

Global supply constraints are further being enhanced due to rapid growth that has been seen in Asian nations which has lead to contamination of rivers and lakes and polluted groundwater. In fact, the World Bank estimates that China’s growth is expected to result in a supply shortfall of nearly 200 billion cubic feet within the next two decades.

In a nutshell, a monumental supply and demand imbalance is developing in the water sector which will likely result in water scarcity and force an influx of investment into the sector on both the domestic and international stage. As mentioned above, some ways to capitalize on the water sector include the following:

• PowerShares Water Resources (PHO), which boasts environmental services giant Veolia Environment (VE) and flow control equipment specialists Flowserve Corporation (FLS) in its top holdings.
• PowerShares Global Water (PIO) boasts French-based Suez Environment, which specializes in producing, distributing, treating, and recovering water as well as wastewater treatment specialists Kemira Oyj in its top holdings.
• Guggenheim S&P Global Water (CGW) holds Swiss-based Geberit AG, which specializes in water sanitary systems and the transportation of water through piping systems.

Read more here:
Three ETFs To Play Water Shortage

HERE IS YOUR FOOTER

I’m the guy who just last week managed to find a plumber who would increase the water pressure in my entire house, defying government controls and thereby causing all appliances to work better. It’s not surprising that this was necessary. Government regulations have made a mess of our daily lives. Whether it is banning effective products or mandating inferior functionality in our appliances and fixtures, government’s role here is indisputably to degrade our quality of life.

So I was stunned to hear President Obama claim exactly the opposite in a speech to the US Chamber of Commerce. He ridiculed those who predicted disaster from government regulations as far back as 1848. “It didn’t happen,” he said. “None of these things came to pass.” Then he went further to say that government regulations “enhanced” industry and “made our lives better.” Regulations “often spark competition and innovation.”

What immediately came to mind is a picture of a race in which some overlord is clamping shackles on the runner’s feet. No, that does not stop the race. The runners develop innovative ways to keep going. Nor does competition stop; it might even become more intense as runners develop new skills they would otherwise not need. All that’s true, and yet we wouldn’t look to this race as the one that is going to set new speed records. Everyone would be better off without shackles.

But Obama’s claim really goes further than saying that somehow industry overcame the costs of regulation. He suggested that we are actually better off than we would otherwise be due to regulations. And he gave the specific example of automatically defrosting freezers. He really did. Here is the statement:

The government set modest targets a couple decades ago to start increasing efficiency over time. They were well thought through; they weren’t radical. Companies competed to hit these markers. And they hit them every time, and then exceeded them. And as a result, a typical fridge now costs half as much and uses a quarter of the energy that it once did – and you don’t have to defrost, chipping at that stuff and then putting the warm water inside the freezer and all that stuff. It saves families and businesses billions of dollars.

Well, this is a precise claim, and it can be checked out. Thanks to many commentators on the Mises Blog and LvMI’s Facebook page, who did some extensive sleuthing, here is what we found.

In 1928, the US Patent Office issued a patent for “defrosting of the cooling element or unit of a refrigerating system.” Still, invention is one thing and marketing and production is another. It took a very long time for these to be seen in real life. More and more patents were issued all throughout the 1920s and 1930s. Most likely, the innovations occurred before this time and would have sped more quickly into the consumer market without the patents, but regardless, an article in Chain Store Age in 1947 writes as follows:

“Auto Defrost,” a recently developed electronic circuit for automatically controlling water defrosting of refrigeration coils has been announced by the Bush Mfg. Co., Hartford [founded 1907], Conn. Advantages claimed for this device are its low price, its ease of installation on existing water defrost systems, and it works independently from the refrigeration system.

Recall that Obama spoke of how the relevant regulations came about “a couple of decades ago.” Well, his timing is off by some 63 years! What’s more, these items were already reaching a retail market by 1948.

A March 13, 1948, edition of the Billboard posted a story datelined from Oakland, California:

Frosted Food O’Mat, Inc., of this city is readying a new ice cream vending machine, designed for grocery stores, super markets, and department stores. Dispenser will be offered both as a coin-operated and a manual device. The vendor will hold up to six flavors, and its makers claim that it has an automatic defroster.

By 1951, these items were already being pushed in homes. An advertisement in Popular Science reads as follows:

Von Schrader Mfg., Co: Amazing Attachment MAKES OLD REFRIGERATORS INTO MODERN Automatic Defrosters! Thirty Million Prospects. Sell without “selling pressure” on sensational Free Trial Plan. Just plug it in and leave it. Frees women from drudgery and mess of defrosting. Saves electricity. Keeps food longer, better. Gives longer life to refrigerator… Women buying by the thousands!

By 1958, it seems like the great innovation was already old news. An advertisement in Life Magazine from 1958, this time from Westinghouse, references a “frost-free, Auto-Defrost Refrigerator” as if it was nearly a standard feature. The main pitch here is that the refrigerator has “cold injector” that chills food faster. It is also styled in the “Shape of Tomorrow.”

Now, this is interesting to me since I can remember problems with freezers in my own lifetime, so it is not automatically crazy to believe that something happened in the regulatory environment of the early 1970s that would have prompted the universalization of frost-free freezers. During this period there began a government push for energy efficiency, and makers were required by government to meet certain targets, just as the president says.

But there is a serious problem. An automatic defroster increases, not decreases, the overall energy use of refrigerators and freezers. As this government report said in 1998: “Refrigerators with automatic defrost have higher occupant consumption (on a label-normalized basis) per unit of occupant activity than refrigerators with manual defrost.”

In other words, the more straightforward way to meet regulations would have been to take defrosting devices out, not put them in! The devices therefore exist not because of standards but in spite of them.

All evidence suggest that the truth is precisely the opposite of what Obama claimed. Frost-free freezers came about in the normal market way. A company found a way to package it as a luxury good available in some markets. Another company saw the advance and emulated it, offering it to still other markets (though the process was likely slowed by the government regulation called the patent). Other companies saw the potential for solving a monstrous household problem and began making them more cheaply and more efficiently, as the target market gradually went from luxury to mainstream. Over time, the improved product was ubiquitous.

This is pretty much the story of every innovation in the history of the world. Whether it is the spinning wheel or the smart phone, private companies innovate in order to outdo their competitors in serving the consumer. They all have reason to become ever more excellent in the service of others. They learn from each other and improve on what exists (in the absence of patents).

It is hard to imagine the alternative scenario that inhabits Obama’s mind. It goes something like this: Private enterprise comes up with a technology that it can fob off on customers and people like it fine but for some maddening problem. Private enterprise doesn’t care. So long as the profits are there, the problems persist. No one in the private sector has reason to change anything. Stasis prevails.

Government regulators, who are constantly scouring around consumer markets to find ways to innovate and improve products, notice the problem and issue some mandate. After some careful deliberation, they march into manufacturing plants with guns:

Listen up: our citizens have a problem with their freezers. They are building up ice. We want you to find a way, some way, to fix this problem. You have until next winter to figure it out. If you do not, you are dead meat.

Industry complies under the gun, scrambling to improve products only because government bureaucrats demand it. Under government edict, enterprise makes the thing, and problems go away. This process is repeated for thing after thing and we are gradually made better off, thanks to the central planners and wise public servants who know better than everyone else. Under this model, the entire developing world might be improved in a matter of months!

This is of course sheer fantasy. So is the claim of Obama that we should be grateful to regulators for all the blessings that flow to us. How many iPhone apps have bureaucrats invented? Will the president’s next claim be that bureaucrats gave us the Wii?

Regards,

Jeffrey Tucker
for The Daily Reckoning

Obama on Auto-Defrosting Refrigerators originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

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Obama on Auto-Defrosting Refrigerators

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

I look forward to every earnings season. It's a time when companies on my watch list may stumble, placing them squarely into value territory. As long as the long-term investment thesis is intact, you've got a rare chance to step in when shares are 20%, 30% or even 40% off recent highs.

To be sure, any company that stumbles in an earnings season goes into the penalty box and doesn't come back for at least another quarter or two. So these earnings season casualties may be range-bound for a bit, but their long-term potential is compelling. I looked at a dozen names that have taken a recent hit and a handful caught my eye.

1. Tellabs (Nasdaq: TLAB)
Tellabs represents a conundrum for investors. It has a respectable market share in the telecom equipment business, though it lacks the scale to currently generate strong profits and is subject to the discretionary spending habits of key customers. Results have been lumpy and shares have fallen steadily during the past five years. But patient investors will likely be rewarded at current levels.

The company's $1.1 billion net cash balance now represents more than half of the company's value, so there is a clear floor for the stock. A sale of the company, which has long been rumored, may be the best exit strategy and the recent share price weakness has heightened that chatter once again. A purchase price, net of that cash, could be up to 1.5 times sales, yielding up to 50% upside in the stock.

2. Power-One (Nasdaq: PWER)
In a similar vein, Power-One also toils in an industry characterized by lumpy demand. And right now, demand has slowed a bit, pushing shares off sharply. Power-One makes a range of electrical equipment from power supplies to inverters to modulators. The company invested heavily in research and development a few years ago, a move that finally paid off as sales more than doubled in 2010. Investors had been expecting continued scorching growth in 2011, but a slowdown in the clean energy sector has led to bulging inventories of Power-One's products among customers. Sales now look set to rise 20% or 30% this year, just half the rate of some of the most bullish forecasts discussed prior to recently-released more sober guidance.

Nevertheless, this looks like a deep-value play, trading at around seven times 2011 profit forecasts. But there are a few caveats: First, shares may not rebound until later in the year as management has noted that the inventory glut will take a while to work off. Second, the company had to issue a large chunk of preferred stock when it was in distress a few years ago. When converted into common shares, the share count could rise by 40 million to 50 million. This is certainly name for your watch list, if not a compelling buy at the moment.

3. Coinstar (Nasdaq: CSTR)
Coinstar has a history of disproving its doubters, and it is once again in defensive mode. When Coinstar first installed coin-collecting kiosks in supermarkets, short-sellers contended that the company's future was very limited. The coin business turned out to be quite effective and quite profitable. When Coinstar then opted to put DVD rental boxes (known as RedBox) next to those coin counters, short-sellers again smelled a losing idea. But it turned out to be a great idea, undercutting Blockbuster on price and perhaps helping to catalyze that retailer's eventual slow demise. (Not dead yet, but on its way…)

Coinstar's sales shot up from $300 million in 2007 to $1.4 billion in 2010. Shares eventually soared toward the $70 mark by the end of 2010, but have since collapsed to around $40. Blame it on a subpar quarter. For a host of reasons, including delayed DVD releases from Hollywood studios, to poor inventory management at the kiosk level, Coinstar trailed the $0.84 earnings per share (EPS) consensus by roughly 20%.

Yet that's not what has aroused short-seller's interest this time. Instead, they predict that Coinstar will soon fall victim to the transition to downloaded movies, especially as Hollywood may try to capture more DVD rental profits at the expense of Coinstar and Netflix (Nasdaq: NFLX).

At least Netflix has a digital streaming strategy, the short-sellers aver. That's why Feb. 16 is an important date to note. That's when Coinstar will hold a day-long set of meetings with analysts, at which time the company may announce an alliance with a digital partner. In one fell swoop, the company could allay those concerns and future-proof the business model.

Yet the kiosk-based business hasn't hit a wall just yet. The company expanded its slate of DVD kiosks form 22,400 in 2009 to 30,200 in 2010. And thanks to recently signed deals with Kroger (NYSE: KR) and CVS (NYSE: CVS), that figure could expand to 27,000 or 28,000 in 2011. That's why analysts are modeling for a 20% to 25% gain in sales and a 40% jump in profits in 2011.

Meanwhile, shares now trade for around four times projected 2011 EBITDA. By my math, the company could stumble badly in its digital transition and still find support at such a low valuation. And if the digital streaming strategy is a winner, then shares may zoom right back to their 52-week high of $67, which is roughly 60% above current levels.

Action to Take –> Stocks that are in favor are harder-pressed to boost their image and their stock price. The stocks mentioned above hold great appeal for contrarians that like to focus on “hated” stocks. It's precisely these kinds of stocks that can capture sharp upside.

– David Sterman

This article originally appeared on StreetAuthority
Author: David Sterman
These Contrarian Picks Could Have 50%-70% Upside

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These Contrarian Picks Could Have 50%-70% Upside

Have you been following the news, dear reader? Food prices are hitting record highs. Riots have broken out in Africa. Already, two governments have been toppled…in Tunisia alone.

Nature seems to be giving us a warning. The thermometer in England hit a 100-year low in December. Airports were blocked by snow all across Europe. Florida, too, shivered in temperatures that hadn’t been seen in generations.

Floods in Australia were worse than any since the time of Noah. An area the size of France was said to be submerged. For a while, it looked like the whole continent might disappear beneath the water.

And then…in America…birds fell from the skies. Whole flocks of them. In Europe too. Thousands of them. And little fishes beached themselves and died.

Surely these are omens. The Second Coming is at hand!

Or maybe not. Even the first coming was largely ignored until hundreds of years later. At the time, only a handful of people knew or cared that Jesus had been crucified. It was only much later that it became a big deal. That’s the problem with history…it’s very hard to see what’s going on when you’re in the middle of it.

Still…you gotta guess…

A study of tree rings tells us that periods of cold, drought and famine have often been accompanied by revolutions and war. People get hungry. Then they get mad. Then they get to work…attacking the system, whatever it is.

Mass man is not a thinker. He is a reactor. He reacts to the weather…to prices…to the economy…to demagogues…and even to ideas. He accepted the system of modern social welfare economies because he was comfortable. But what will he do when the system is unable to make good on its promises? Our guess is that “the system” in the advanced countries is approaching its final stage… Why? It just can’t pay.

We like to read Francis Fukayama. Not because he is right about things, but because he is wrong in a big way…

But so is just about everyone. Most economists see the financial problem in America as a typical recession caused by a lack of demand. If they could just figure out how to stimulate the consumer…everything would be okay.

And most commentators see the political problem in simpleton’s terms too. Like Krugman, they think the democrats are right and the republicans are wrong. Or like Boehner, they think the republicans are right and the democrats are wrong. And then, there are those who think that if the two major parties could just get together…they could sort things out.

Uh uh.

The real problem in Washington and the economy is deeper…it won’t be fixed by bipartisan cooperation – because both parties are wrong. They have to be wrong. They have to respond to the marginal voter, who is a lunkhead.

Nor will the economy recover by inducing the consumer to shop. American consumers already spend too much. They have a savings rate of just 5%…far too low to finance the kind of capital improvements the nation needs. Consumer demand needs to go down, not up.

But getting back to Fukayama, this is the man who – in the dizzy days following the fall of the Berlin Wall – lost his balance completely. He wondered whether we had reached the “end of history.” The idea was that history was the march of progress and that after the triumph of American capitalist democracy no more progress could be made.

The idea was silly…but in a grand kind of way. Besides, the neo-cons loved it. It flattered them and vanity got the best of them. They figured they were the crown of creation; with their arrival on the political scene time could jolly well stop. Perfection had been attained.

That was then. In the here and now, Dick Cheney should be afraid to travel outside the US (for fear he will be arrested for war crimes)…and Francis Fukayama is having second thoughts.

The problem now, he says, is that the system in America has “ensured individual liberty and a vibrant private sector, but it has now become polarized and ideologically rigid. At present it shows little appetite for dealing with the long-term fiscal challenges the US faces.”

Little appetite? As near as we can tell, the politicos are on a hunger strike. There’s no way they’re going to take up the greasy issue of US finances.

Cut the fat? John Boehner just proposed that the feds roll back spending to the levels of 2008. What? He’ll have to do a lot better than that. Federal spending was way out of line in 2008…and it had been out of line for many, many years. Here’s a report from the Independent Institute:

Runaway Federal Spending the Reality for Nearly a Decade

From 1976 through 2001, Uncle Sam could have secured and maintained a balanced budget by cutting federal spending by $570.75 per household per year, according to Craig Eyermann, creator of the online Government Cost Calculator at MyGovCost.org. After 2001, however, government spending grew faster than median household income, and the deficit soared. By 2009, the feds would have had to slash spending by $8,991 per household to close the gap.

House Speaker John Boehner proposed reducing a significant part of federal spending to 2008 levels. That measure may sound bold, but it would be totally inadequate. “That’s like a sedentary senior reducing his daily calorie intake from 5,500 to 4,500; it’s still way too much,” writes Emily Skarbek, director of MyGovCost.org. Policymakers who call for raising the debt ceiling – as has been done 70 times since World War I – are deluded if they believe doing so would result in a substantive improvement.

“Like all gluttons struggling to reform, politicians and presidential advisers will provide plenty of excuses for increasing the debt limit – just this once,” Skarbek writes in The Sacramento Bee. “But if 70 previous increases weren’t enough, why will this increase be different?”

Hey… Wasn’t George W. Bush in charge the whole time, from 2001 to 2008? Wasn’t he a republican? Couldn’t he have simply vetoed these spending bills?

It was the biggest spending spree in US history. How many spending measures did George W. Bush veto? None that we remember.

No amount of bi-partisan cooperation is going to really fix America’s financial situation. Because both parties believe in the same model – spend, spend, spend…elect, elect, elect. It’s the model of the 20th century social welfare state. The government promises to give voters more than they pay for. The voters pledge to keep toiling in massa’s fields and vineyards, paying their mortgages and their taxes. And if called up, they’re ready to sacrifice their lives to keep the system in business.

(If asked, the typical US soldier will tell you that he risks his life to protect his family and his home. But the only war in which his home and his family were really under attack was the one launched by the US government against the southern states. It wasn’t Kaiser Wilhelm or Emperor Hirohito who burned Atlanta. It was Abraham Lincoln.)

More to come…

Bill Bonner
for The Daily Reckoning

Misconceptions About the Consumer’s Role in a US Recovery originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Misconceptions About the Consumer’s Role in a US Recovery

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

The floodwaters in Australia have become Tsunami like, according to reports, and are really devastating. Brisbane, Australia’s third largest city, is being taken over by brown water, which is filled with everything it has come in contact with. Living in the St. Louis area, and being very close to a river that floods all the time, I’ve seen this scenario several times in my life, and it’s not pretty… My thoughts go out to the flooded victims in Australia…

The good news here is that the water is expected to crest today… The euro (EUR) seems to be cresting today, too… The beleaguered and beaten down euro, has received some wind in its sails this morning on two fronts. First, Portugal’s auction of 10-year bonds seems to have gone off just fine, with the yield falling! That’s a great sign, folks… The other source of wind in the euro’s sails this morning is coming from a report fresh from the German data cupboard. German GDP jumped 3.6% in the fourth quarter, which is the fastest economic expansion for Germany in two decades!

Of course, now that I’ve typed that all up, the euro has fallen back below 1.30, from 1.3020 when I began researching the stories… Just can’t stand the prosperity! This morning, one of our markets TVs was on Bloomberg TV, and one of the guys on there (couldn’t catch his name) was talking about how he thought the low for the euro would be 1.25, and that he was telling his customers to buy euros at 1.25, with their target being 1.50! WOW! 1.50? Really? That’s pretty far out there, given all the problems with the periphery countries of the Eurozone. But, that’s what he said. So, he sure picked a nice limb to crawl out on … Good for him! That’s just what we need… More people with conviction in the currency markets!

So… The bias to buy dollars remains in the markets… But for how long? Another week? Another month? Six months? It’s difficult to pick, because every time it looks like the currencies have smooth sailing ahead, along comes another European periphery country with debt problems. (At least that’s what the media would have us believe; and the markets take the bait – hook, line and sinker!) But… I truly believe it will happen, just like all the other short-term rallies the dollar has generated in the past nine years. Of course, historically, the longest weak dollar trend was from 1985, (after the Plaza Accord) to 1995… 10 years… So… If we remain in the “trends” we have the chance to reach 10 years… However, I have to say that for years I preached about the “currency trends,” and I’ve got to re-think that… Yes, all that was good information for us… But what happens if this time the weak dollar trend remains intact for years beyond the historic trends?

And this next story is one of the reasons I believe that we could be in store for years, maybe even decades of dollar weakness, without experiencing a strong dollar multi-year trend… Are you ready for this?

In another baby step toward gaining a wider distribution for the renminbi (CNY), the Bank of China Ltd., one of the country’s four major state-owned banks, has opened trading in the Chinese currency to customers in the US, representing a symbolic endorsement by Beijing of foreign trading in the renminbi.

Now… Doing this – opening an account there to hold renminbi – right now, is next to impossible… The thing that’s important is the fact that China is taking yet another baby step with their currency… And eventually that will hurt the dollar’s chance of mounting another multi-year strong trend.

And… In my never-ending effort to call out the precious metals price manipulators… I bring you this story that appeared on the GATA website… The GATA (Gold Antitrust Action) Committee has done some tough legwork over the years to expose the manipulators, and currently has a lawsuit that’s being heard regarding gold price manipulation. Here’s a story that appeared on their website…

GATA today scored a small but perhaps auspicious victory over the Federal Reserve in our lawsuit seeking access to the Fed’s secret gold files. The judge presiding over GATA’s federal freedom-of-information lawsuit in US District Court for the District of Columbia, Ellen Segal Huvelle, granted GATA’s motion to order the Fed to produce in complete form for the judge’s private review 20 gold-related documents the Fed has sought to keep secret. The judge ordered the Fed to deliver the documents by Friday.

This could very well be the straw that breaks the price manipulators’ backs, folks… And if you take the governors off gold and silver…watch out! And watch out dollar!

You know… I’ve also tried to point out the mess of debt that the US states are dealing with, and have wondered aloud for over a year now, just why this debt problem in the states is not as important to the dollar as the debt problems of the Eurozone states are to the euro…

Well… This morning, I see that one of the US states that I’ve talked about for over a year now, Illinois, has passed a 67% income-tax increase in an attempt to deal with their $13 billion deficit. That’s 67%, folks… Now that Illinois has done this, watch the domino affect come into play with the other states announcing their income tax increases… And if you don’t think this will play hell with consumers’ ability to spend, then this letter isn’t for you… And when consumers can’t spend because their income is being taken away by taxes, eventually the economy will falter…again…

Now… You may recall me telling you over and over again (I laugh, because how could you not recall me telling you this), that taxes in this country will be soaring to deal with the deficits in the future… And our kids and grandkids will have to deal with it… Well, this income tax increase in Illinois is just the beginning of that… And the media is all about Portugal’s debt? Or Ireland’s? Or Greece’s? Give me a break! Before I go on to another thought… I want people right here, right now, to remember who it was that told them that this was all going to happen here in the US because of the deficit spending…

Recall that when the FOMC’s QE2 was announced in November, there were some harsh words between voting members of the FOMC, as they voiced opposing views from Big Ben Bernanke… But… apparently, all these Fed Heads have received the memo now, because voting members of the FOMC this year softened their tone in the debate over the Fed’s controversial bond-buying program. Analysts said the program appears to have strong support but the real test may come later this year. And that’s what I’ve said over and over again… When we get to the “end date” in June, and the FOMC is still discussing the need for additional QE, the you-know-what is going to hit the fan! And the dollar? The selling of the dollar will be the size of Texas!

The Swiss franc (CHF) is seeing some selling pressure… Pressure it hasn’t seen for some time now… But since the beginning of the year when the franc was $1.07 it has fallen over 4-cents… Once again, I was a little ahead of the markets’ movements when I told a reporter in December that I just didn’t see how the franc could get much stronger and that it had probably reached its top… That was when the franc was $1.05… The franc is going to continue to see some weakness, as long as the confidence measures around the world continue to get stronger.

From mid-week on, last week, until last night, the Chinese renminbi lost ground to the dollar (albeit in small moves)… But still, it was strange to see, given the renminbi’s moves for the last six years… All that changed last night, with the renminbi’s record-sized move stronger versus the dollar… The thing that cracks me up about this move and its timing is that China’s Premier, Hu, will be visiting the US next week… So, no wonder the renminbi is back to gaining versus the dollar… The Chinese moved it lower versus the dollar for a few days, so that it could make news with a record-sized move higher versus the dollar! The boys and girls in Washington might not see this for what it is, but I do!

And… One more thing on gold… It seems that with gold falling below $1,400, the demand for physical gold is more than what the suppliers can mint! Here’s another story from the GATA website…

“Demand for gold bullion has been unrelenting since gold’s price dropped below $1,400 an ounce. We cannot meet all the enquiries that we are getting,” said Nigel Moffatt, Treasurer of the Perth Mint, one of the world’s largest gold refiners and distributors. Demand for our coins and medallions is strong, but the biggest demand is coming from banks and traders looking for kilo bars.

All that demand, very little supply, and the price of gold remains below $1,400? I find that to be simply amazing! Don’t you? I mean, this falls under the great line my dad taught me many years ago… “There’s no such thing as a ‘shortage,’ the item is simply in need of a price adjustment”…

Then there was this… Think China’s inflation is their problem alone? Guess again…

When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker-shock.

Though many Chinese are earning higher salaries, the government has become worried that rising inflation could lead to social unrest.

“They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”

Inflation has arrived in China. And after Tuesday’s release of crucial financial statistics by China’s central bank, few economists expect Beijing officials to be able to tame rising prices any time soon.

Right now, the so-called “experts” believe that China’s inflation won’t be that big of a deal here in the US… I say that’s balderdash!

To recap… The Portugal auction went well this morning, with the yield actually falling in the secondary market, which is a strong result for a country that was projected to be on its deathbed. German GDP in the fourth quarter grew at the fastest pace in two decades… The euro rallied on these two news items, but has given back its gains already. The floods in Australia are in the country’s third largest city – Brisbane. And the judge hearing the lawsuit by the GATA regarding price manipulation, asked for the gold records that the Fed was trying desperately to keep from the public… This could end up being HUGE, folks…

Chuck Butler
for The Daily Reckoning

Chinese Renminbi Extends Its Reach originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Chinese Renminbi Extends Its Reach

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.