Hedging Your Investment Portfolio by Buying Firearms

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Writing for TheStreet.com on Friday, Doug Kass succinctly summarized just how bad the current economic environment is — even for those who have heretofore been thought to be the "best and brightest" of the investment world:

"[T]he U.S. “economic Pearl Harbor” has humanized and brought down to earth many of the smartest investors in the world (e.g., Warren Buffett), as well as the entire private equity universe, many well-regarded hedge funds and investors (e.g., Marty Whitman and Bill Miller), and some masters of the universe in residential and nonresidential real estate, among others. Many industrialists, including Aubrey Kerr McClendon, Kerkor “Kirk” Kerkorian, Sheldon Adelson and Sumner Redstone, have been thrown under Mr. Market’s bus, as have financiers Dick Fuld, James Cayne, John Thain and even Bank of America’s…Ken Lewis"

The fact that this economic "Pearl Harbor," as Warren Buffet labeled it, has ravaged many of the very best in the professional investment world ought to terrify all non-professional investors of the world. Since there seem to be no investments in which even the best professional investors can find a reasonable degree of safety and security, this bodes ill for those of us who might delude ourselves into thinking we can "beat the market" or just ride out the storm. The equity markets have been plummeting for over a year now, and the forecasts and earnings reports emanating from the corporate world only confirm that things will get much worse for the foreseeable future. The bond markets are equally scary, with tell-tale signs of a bubble in U.S. Government securities, and China signaling that it is just about through buying up our government’s rapidly expanding (and increasingly risky) debt. With these ominous signs in mind, where can investors turn to protect at least a portion of their money?

One answer to that question is to consider investing a portion of your portfolio in firearms — and I don’t mean just buying a revolver to keep on your nightstand to protect the wad of green paper under your mattress. I mean buying and holding firearms and ammunition that you anticipate will go up in price over the coming months and years. There are several economic and political reasons why firearms can be reasonably expected to increase in price, and thus ought to make up a portion of your investment portfolio.

VIOLENT CRIME RATES TYPICALLY RISE IN RECESSIONS

One of the reasons why firearms and ammunition can be expected to appreciate stems from the relationship between violent crime and the business cycle. As one might presume, violent crime rates tend to fall during the boom-phase of the cycle, and rise during the bust-phase. (This is, by the way, yet another reason why we ought to be striving to eliminate the business cycle from the world. See here for the instructions on how to do that.) We are already able to see this relationship at work around the world, with violent crime rates expected to explode in the U.K., and rise dramatically in the U.S. during this recession. Take a look at Detroit for an indication of just how bad the violent crime rate can get during economic hard-times. One would have to be crazy not to own a firearm of some sort in Detroit just for personal security purposes, and things will only get worse as the recession deepens. Crime rates in parts of California already look Detroit-esque as well.

What all this means is that demand for firearms will likely rise as violent crime rates dramatically increase in the deepening recession. And, a rise in demand for firearms will, ceteris paribus, lead to a rise in prices for firearms. If we had a truly free market in firearm production in the U.S., this rise in demand would be matched by an increase in production by firearm manufacturers that would bring prices back down at some point in the future. Unfortunately, however, we do not have a truly free market in firearms. On the contrary, there are a number of government-related factors that are likely to stifle new firearm production (at least for the private-sector) in the future. First and foremost, there is the real possibility that a new "assault weapon" ban will be passed by the Democratic Congress and President.

A NEW "ASSAULT WEAPON" BAN?

Barack Obama has made no effort to conceal his intention to not just reinstate the now-expired Federal assault weapon ban, but to make it permanent as well. (See here, for example.) Whether or not Obama plans to push through a new ban (or, if this was yet another bald lie), is irrelevant to the price of firearms in the near future. The fact that firearms manufacturers have a reasonable expectation that the ban might be passed is enough to keep them from investing in the capital equipment necessary to dramatically increase the production of firearms. Why would Springfield Armory, for example, risk investing millions of dollars to increase the production of M1A’s and XD pistols if the investment could instantly be made worthless with the stroke of a pen by Mr. Obama? They will no doubt attempt to maximize their current production with the capital equipment they already possess (if they are not doing so already), but they would be taking a huge risk if they would choose to invest more money to expand production when the President of the United States has said many times that he wants to ban many of their products. The same is true for every other firearm manufacturer.

Add to this the fact that gun-control advocates have been pressing hard for years for other gun laws (such as legislation mandating so-called "smart guns") that will also require firearm manufacturers to invest more capital to retool (and which will make guns more expensive), and you have all the ingredients necessary to keep firearms manufacturers from investing to increase production. But there’s still more. Gun manufacturers are not in a position to anticipate what kinds of guns will be made illegal by a future "assault weapon" ban, so they cannot start investing in the capitol equipment necessary to produce non-assault rifles and pistols. Who knows which guns the crackpots in Congress will outlaw this time, and what new "safety" features they will mandate? The definition of an "assault weapon" was arbitrary to begin with, and only God knows what the new definition will be.

All of these factors taken together indicate that it will be unlikely that firearm manufacturers will be able to invest the capitol required to increase the production of firearms substantially to meet the rising demand stimulated by the recession. In a market filled with virtually complete uncertainty, such as the current firearm market, businesses are hamstrung by the state and are unable to make reasonable decisions that anticipate consumer demand. The same is true for consumers, who have been buying guns at a feverish pace since Obama’s victory due to their uncertainty about a possible Obama-sponsored "assault weapon" ban. On the bright side, however, you can potentially profit from this government-caused debacle by putting guns in your portfolio today.

GOVERNMENT DEMAND FOR FIREARMS NOT LIKELY TO SLACKEN

Adding still more distortion to the firearms market is the government’s own demand for firearms and ammunition for war-making purposes. The American government is still bogged down in two hopeless wars of attrition utilizing massive amounts of guns and ammo. These wars have partially contributed to the high cost of ammunition. With U.S. soldiers firing over a million rounds of ammunition each year, this massive demand for brass, bullets, propellants and primers has, not surprisingly, caused ammunition prices to skyrocket. There is absolutely no reason to think that this government demand for ammunition or firearms will slacken in the foreseeable future — especially given the fact that Obama intends to expand the war in Afghanistan and Pakistan.

In contrast to the production of firearms for civilians, there are absolutely no barriers standing in the way of increasing production to meet military demands. A firearm manufacturer can invest in capital equipment that produces products demanded by the military and rest reasonably assured that the market will continue to flourish. Expect gun and ammunition manufacturers to shift production away from the uncertain civilian market toward the governments virtually certain and insatiable demand for arms and ordinance.

CONCLUSION

There are very sound fundamental reasons for putting guns and ammunition in your investment portfolio. The money required to get the firearm portion of your portfolio started need not be outrageous. One way to start is to purchase as many Mosin Nagant rifles as you are legally permitted to purchase for the year. These are very accurate and hard-hitting rifles that fire the cheap (for now) 7.64 x 54R round. Another option would be to consider getting involved in reloading ammunition. Of course, if you are not looking for value investments, consider purchasing M1A’s instead of Mosin Nagants. Investors who choose to hedge their mainstream investment portfolio with a healthy dose of guns and ammunition are unlikely to be disappointed with future returns. This is especially true since an investment in firearms can also be employed to defend one’s life, liberty and property against thieves and politicians (if there’s a difference). You definitely can’t say that about owning stock in Bank of America.

Mark R. Crovelli [send him mail] writes from Denver, Colorado.

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