Anarchy – An Investor's Best Friend

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A revolution is underway – one that will topple the existing order.

It’s not the sort of revolution that decapitates monarchs or murders czars. But a revolution is underway, and it is the kind that’s going to overthrow faith in government.

But that’s not necessarily a bad thing. In fact, it might be a very helpful thing.

I think it is time now to begin investing as if there were no government guarantees…or at least no reliable government guarantees.

For my entire lifetime, no financial guarantee has been more reliable than the guarantee of the US government. The T-bond was the safest security, the dollar, the safest currency. No one doubted that Medicare, Unemployment insurance, food stamps, Social Security, etc., would be there for them if and when the time came.

But that confidence is wavering. Treasuries and the US dollar remain the go-to assets in times of stress. But at the margin, faith in a government guarantee is wavering. As this cycle unfolds, I predict that faith in government guarantees will all but disappear.

Why do I say this?

Because governments in the West are already growing feeble and untrustworthy. And not just economically. There are some sociological trends that are pointing in the same direction. As you examine life here in the States, for example, it is easy to see a government that is becoming a bit unreliable, at best, and hostile, at worst.

In fact, I would argue that the same government that initially advocated “life, liberty and the pursuit of happiness” is actively standing in the way of all three.

Now I’ve got a trivia question for all of you. What do all four songs in this clip (scroll down for clip) have in common?

All four songs were recorded originally on a Gibson guitar…

Some of you are laughing knowingly. Some of you are still perplexed. So I’m going to read you a little story about Gibson guitars we ran in The Daily Reckoning about one month ago. This story is extremely well written. I wish I had written it myself, but it was written by Joel Bowman:

Armed agents from the US Fish and Wildlife Service raided two of Gibson’s production facilities in Tennessee and its Nashville headquarters last Wednesday. The agents confiscated “nearly $1 million in Indian ebony, finished guitars and electronic data,” according to the company’s CEO, Henry Juszkiewicz.

“It was a nightmare,” fumed the CEO after the incident, “We had people sitting there making guitars. We had no weapons.”

This is not the first time the feds have actively sought to bum Gibson’s vibe (a job-creating vibe, let us not forget – Gibson’s Tennessee factories alone employ over 700 people). The feds last crashed the party back in 2009, seizing a shipment of ebony from Madagascar. They claimed they were there – and, again, armed – to enforce the Lacey Act, a century-old endangered species act that was amended in 2008 to include plants and animals.

But it’s worth noting that Gibson is not your typical enemy of the planet.

“Agents seized wood that was Forest Stewardship Council controlled,” Juszkiewicz noted, in a quote carried on the company’s website. “Gibson has a long history of supporting sustainable and responsible sources of wood and has worked diligently with entities such as the Rainforest Alliance and Greenpeace to secure FSC-certified supplies. The wood seized on August 24 satisfied FSC standards.”

The CEO says the government won’t tell him exactly how – or if – his company has violated that law.

“We’re in this really incredible situation,” continued the CEO. “We have been implicated in wrongdoing and we haven’t been charged with anything,” he says. “Our business has been injured to millions of dollars. And we don’t even have a court we can go to and say, ‘Look, here’s our position.’”

Maybe this raid was a random event. An outlier. But I don’t think so. Consider the case of Pascal Vieillard, whose Atlanta-area company, A-440 Pianos, imported several antique Bösendorfers.

Mr. Vieillard asked officials at the Convention on International Trade in Endangered Species how to fill out the correct paperwork – which simply encouraged them to alert US Customs to give his shipment added scrutiny.

There was never any question that the instruments were old enough to have grandfathered ivory keys. But Mr. Vieillard didn’t have his paperwork straight when two-dozen federal agents came calling. Vieillard faced up to a year in federal prison and a fine of $100,000. His company could be fined $500,000 and be placed on probation for five years.

So he decided to settle. He pleaded guilty to a misdemeanor count of violating the Lacey Act, and was handed a $17,500 fine and three years probation.

That seems capricious to me. But that’s part of the new, fire-ready-aim law enforcement culture that exists throughout the United States.

The American government has become like a mean drunk – a big, burly mean drunk. He’s angry and you can’t really say anything near him that won’t elicit some kind of angry response.

It doesn’t matter that the drunk may have been a wonderful husband and father for many years…or that he might go through rehab and be a great guy in the future. Right now, at this moment, he’s a mean drunk.

When you get too close to him, you have to be careful what you do.

You’ve all seen this person, right?

Even when normal things are happening around him, he reacts abnormally. When you’re in the presence of a mean drunk, there are no right answers to any question. There are no positive, fruitful conversations.

Am I exaggerating? Am I stretching this metaphor? Maybe, but let me share a couple more anecdotes….

In 2003, two long-standing government agencies disappeared.

The Immigration and Naturalization Service (INS) and the US Customs Service both disappeared.

In their place emerged the Department of Homeland Security that oversees agencies with very intimidating names like:

  • (ICE) Immigration and Customs Enforcement
  • (CBP) Customs and Border Protection
  • Federal Protective Service
  • National Protection and Programs Directorate
  • Transportation Security Administration

That’s a lot of protecting going on. What happened to the good old Customs Service?

You don’t get that anymore.

So now that Department of Homeland Security boasts that it employs 2.2 million “first responders” nationwide.

According to The Washington Post, “The Department of Homeland Security has given $31 billion in grants since 2003 to state and local governments for homeland security and to improve their ability to find and protect against terrorists.”

Ergo, every single cop in the country is a “First Responder” in the War on Terror. You know the meter maid? She’s a first responder. And it’s true; she’ll be the very first person to respond to your expired parking meter, no doubt about it. But now she is enlisted as an agent in the war against terror.

So if every cop is a First Responder, that means every incident to which they respond is some kind of threat or crisis.

Here’s what a First Responder used to look like. His name was Big Bill. See he’s swinging his nightstick and he’s smiling.

Here's what a First Responder looks like now.

Back in the 1950s, the First Responder helped Sally find her lost cat, Puff. His name was “Big Bill.” He was a nice guy. But now Big Bill, when he’s off duty, blogs on a Facebook page called “Big City Cops.” The blog’s logo is a skull and crossbones and its motto is, Oderint dum metuant.

You know where that phrase comes from? The sadistic Roman Emperor, Caligula. It means, “Let them hate, as long as they fear.” This is the logo of a Facebook page for policemen! I think I liked Big Bill more when he was looking for Puff, instead of “domestic terrorists.”

So these are just a few anecdotes. They don’t mean anything necessarily. They could be distant outliers that have nothing to do with mainstream culture today. But it feels like these disturbing outliers are becoming more numerous, while also moving dangerously close to the middle of the bell curve.

So I submit that Uncle Sam is getting a little crazy. He’s a mean drunk. He’s also broke. So after he’s finished hassling you, he will probably try to force you to pay for his drinks.

Do you want to loan money to this guy? Do you want to place your financial future in his hands? Do you want to believe anything he tells you? Do you want to trust that he won’t change his mind later and renege on a promise?

Just asking.

Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Mr. Fry launched the sometimes abrasive, mostly entertaining and always insightful Rude Awakening. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times, San Francisco Chronicle and Money. He appears regularly on business news stations like CNBC and Fox.

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