Burgeoning Trouble in Colombia?

Kevin Brekke, Editor, Metals & Mining Division

Dear Reader,

Vedran will be away for a few days this week and next, taking a much-earned and well-deserved break from the daily grind. In his absence, my colleague Chris Wood and I will step into his shoes here at the Daily Dispatch.

My thinking of late has been drawn to the notion of freedom. No, not the freedoms that have been "granted" to us by some self-declared authority external to the individual. I mean freedom in the broadest sense, in all of its embodiments: complete freedom. John Lennon, in his timeless song Imagine, posed a challenge for all listeners: "Imagine no possessions. I wonder if you can. " Reframe it and consider this one: "Imagine complete freedom. I wonder if you can. " Can you imagine that?

Last year I spent  eight weeks wondering around India. I had studied the country's history, religions, and culture in college and was entranced by it all. And besides, I enjoy the food and am a neo-vegetarian (meaning I do eat poultry and fish). What more incentive did I need?

From the moment I exited the jet bridge into the terminal at Indira Ghandi International, airport I knew I wasn't in Kansas anymore. The exotic smells, colorful textiles, turbans, tunics, and big smiles from mahogany-skinned, polite locals were enough sensory overload to almost induce vertigo.

I made my way from Delhi to Agra, willingly taking in the tourist attractions. Then on to Jaipur to visit the famed gemstone merchants, and lastly settling in the coastal state of Goa. I traveled by tuk-tuk, train, hired car, and airplane. Along my route I lodged at a variety of properties spanning the gamut from an upmarket resort to Rajasthani tents in an ashram-inspired ecovillage in Kerala.

Yet, even in a yoga village that lacked electricity and plumbing, a wi-fi signal was not far away… just a short adventure through an open field and down a paved road to an Internet café, much to the amusement of the cud-chewing oxen eyeballing one's every move. It really is a connected planet.

In the '60s and '70s, Kerala was "Mecca" for hippies from Western Europe and America and attracted in general global wanderers seeking an alternative to the suffocating lifestyle and ideological norms of the occident. Among the attractions was the freedom of expression and movement that is palpable throughout the country, but particularly so in Goa.

That point was brought home one evening on the beach. Every Wednesday the famed Ajuna Flea Market takes place, a tradition that goes back decades. It is a free-style, rambling maze of stalls and stands that sell the usual flea-market fare, as well as the not-so-usual. I made my way through the festival bustle to a beachfront hangout that offered adult beverages to catch my breath and partake in a bit of hydration therapy.

Shortly thereafter, a woman appeared out on the sand near the waterline. She was dancing with a palm frond that she subsequently lit on fire and continued twirling and frolicking about. It was all very tantric.

When the flames first licked skyward, my initial thought was that she is asking for trouble and I glanced around fully expecting the police to arrive at any moment. Instead, the performance drew the attention of other free spirits who joined in, and a mini dance party started to take shape. No badges ever showed up.

This "burning palm" party reminded me of another pyrotechnic inspired gathering: the Burning Man Festival. Held yearly in the Nevada desert, this conclave of nonconformists and free-thinkers encourages them to express themselves creatively and experimentally. In the festival's early years, the event was lightly organized and loosely controlled. A few thousand participants showed up, and a spontaneous community sprouted amidst the once-barren Black Rock Desert.

As the name suggests, the festival concludes with the torching of a huge effigy of a stick man, a primitive end to what has become a techno-laced event.

A bonfire the size of a multistory building was destined to attract a lot of attention, and it did. Unfortunately, it also made it onto the radar of several governmental agencies, which is to say, the event has been organized, monitored, controlled, regulated, and permitted. The "free" in "free spirit" has been institutionalized – all the badges insist, "You will get the freedom we allow you to have."

If you think I exaggerate, take a look at this page from the Burning Man website. Being advised to study 15 pages of arrest-avoidance techniques before participating in an event is not my idea of a fun time... and it certainly does not fall within my definition of personal freedom.

There are no fewer than six federal, state, and county law-enforcement agencies that monitor the event. The event must take place in a designated zone, complete with a hard perimeter. There is one, and only one, official entry and exit point that all participants must use or be ticketed. Officials patrol the perimeter, inside the venue, and the road leading to the event on the alert for behavior for which a participant can be ticketed, fined, or arrested.

The question in my mind is which location best defines freedom: Goa or Burning Man?

The Burning Man event is a sad analogy for the state of the whole country. Just as the participants at Burning Man are likely seen as corralled cows ready to be milked for revenue due to breaking some absurd "ordinance," so, too, are the citizens of the USA. As we have covered here in the Dispatch numerous times, the runaway growth in the number of laws and regulations in the US has greatly raised the probability that its citizens will break some unknown and obscure law every time they venture outside their own homes (or even perform various activities within the home).

But every challenge has a solution. For those seeking to regain lost freedoms there is good news: the remedy can be both fun and painless. The whole-hog option is to leave the US and set up a residence in a country that best suits one's sensibilities. If that is not possible, then consider vacationing in an appealing country and using the time as an interview for possible part-time residence. Once a good fit is discovered, return there often to become familiar with the area, its people, housing options, the infrastructure, etc. That way, if circumstances arise that require leaving one's home country, a familiar place is already established.

Happy hunting and safe travels!


Early Warning on Colombia

By Louis James

Last week, we mentioned the trouble we see brewing in Argentina. This week, we're sad to say we see somewhat elevated country risk in Colombia. The risk, however, is not the usual political risk of stupid governments getting too greedy for their own good. Our sources in country are telling us that there's increased guerilla activity in Colombia. The BBC has provided good coverage of recent attacks and the potential political effects.

This is apparently happening mostly in the lowlands, far from the mineral exploration companies we're invested in. Nevertheless, it could generate alarming press, and that could considerably dampen investor enthusiasm for Colombia plays.

On the other hand, in Mexico – where the drug war is literally a war that takes thousands of lives every year – companies working away from the dangerous areas have not been punished by the market. We may see the same in Colombia, but North Americans' perceptions of Mexico and Colombia are not the same, so we're cautious.

We're not ready to exit the Colombian stage, as it has a lot going for it, including new free-trade agreements, but we are concerned and will be monitoring the situation closely. For now, we would not advise taking on any more risk in Colombia until we can see how this disturbing trend will play out.

[Cultural, political, and economic shifts can swiftly change the direction of an investment. Can you keep up with all these developments on your own? The Casey Report can keep you up to date. The current issue includes Doug Casey's 2012 forecast for US politics and the economy, China, the Middle East, and much more; Terry Coxon discusses how to best hold gold in an IRA; and Don Grove examines the influence of the Occupy Wall Street protests on Obama's presidency and his hopes of winning reelection. From now until midnight EDT Friday, you can subscribe to The Casey Report at the astonishing low price of just $98/year. As always, a three-month trial is absolutely risk-free. You have nothing to lose… but much to gain. Start your subscription today.]


Ready for Another Big Bailout?

By Doug Hornig

Thanks to an outpouring of complaints and a reversal of similar plans by major competitors, Bank of America finally canceled its plan to start charging customers a $5 fee to use their debit cards for purchases. The plan had particularly rankled those who contend that it had nothing to do with covering legitimate expenses and everything to do with covering bad bets that the bank has made in other areas. (The amount the bank charges merchants for its service is about three times what it actually costs to process a transaction.)

Several other recent BoA decisions have also generated anger. In May, the bank raised its checking account fees, which include e-banking, by 34%, and in June it initiated a $35 overdraft fee on overdrafts of a penny or more. Next year, it will trot out a new "essentials" checking account structure that tacks on yet more mandatory fees.

Some activists have been urging depositors to respond by pulling their money out of BoA, and a few politicians have chimed in. "Vote with your feet. Get the heck out of that bank," says Senator Dick Durbin (D-IL).

People who leave their money with BoA already know (or should) that they're taking a fair-sized risk. In late September, Moody's dropped the credit rating of the bank's long-term holding company two levels, from A2 to Baa1, and cut its retail bank rating from A2 to Aa3. There are over $1 trillion in deposits still in an institution sitting on a status that is barely north of junk.

"Bank of America is the only US lender that lacks a rating of A3 or higher among the five firms listed by the Office of the Comptroller of the Currency as having the biggest derivatives books," Bloomberg wrote in an October 18 story.

Behind the word "biggest" lies a reality that is truly mind boggling. Bank of America's holding company – the parent of both the retail bank and the Merrill Lynch securities unit – held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. That's trillion, with a T.

And here's the really cool part. Can you guess who's on the hook if that gargantuan derivatives book blows up in BoA's face?

We are.

A lot of that potentially toxic waste used to be over in the Merrill division, but that wasn't so good, because investments there have no federal backing. And with the bank's near-junk status laid bare by the Moody's downgrade, it "spurred some of Merrill's partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions," Bloomberg wrote. "Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody's decision, said a person familiar with the matter. "

Do you get what's going on here? The retail unit has the FDIC as a backstop (paid for with our money); Merrill doesn't. So BoA shifted who-knows-what-kind of toxic paper from one division to another, et voilà! Instant respectability. And, "Because of the favored treatment of derivative contracts in receivership, it appears highly likely that losses on derivatives would result in losses to insured deposits ultimately borne by taxpayers," wrote Rep. Brad Miller (D-NC), one of eight House members who signed a letter to Secretary of the Treasury Tim Geithner.

Instead of the FDIC doing its regular job of protecting mom and pop, it's been forced to open an ATM at the big casino. As Rep. Maurice Hinchey (D-NY) put it, "This is the opposite of capitalism – the risks are socialized and the benefits are privatized."

"Forced" is the operative term. Bloomberg again:

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said [people with direct knowledge of the situation], who asked to remain anonymous because they weren't authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting.

FDIC vs. the Fed? No contest there.

Now, the Fed – according to Bloomberg – has the power to limit these kinds of transfers "under Section 23A of the Federal Reserve Act, which is designed to prevent a lender's affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate."

However, it also has the power to grant exemptions to 23A. Whether BoA specifically asked for Fed permission before making its recent moves is unclear, as none of the parties involved is saying much. But it probably didn't have to. The bank received such an exemption in September of 2010 and can be forgiven if it feels it's been granted an implicit guarantee that it is too big to fail.

"As a general rule, as long as transactions involve high-quality assets and don't exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act," Bloomberg wrote, quoting Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

High-quality assets? Hmmm…

Though it's probably all perfectly legal, that hasn't stopped some lawmakers from stepping in. In addition to the abovementioned Miller's letter, a similar one has emerged from the Senate.

"This provides an additional safety net subsidy for one of the biggest derivatives dealers that is contrary to … the original intent of the Federal Reserve Act and the Federal Deposit Insurance Act," 10 senators wrote in a letter to Fed Chairman Bernanke, Acting FDIC Chairman Martin J. Gruenberg, and Acting Comptroller of the Currency John Walsh.

Of course, it's always possible that BoA's derivatives basket is full of Grade A stuff and that no bad will come of this.

But experience suggests that, while we should hope for that outcome, we should also prepare for the next big bailout.


Additional Links and Reads

China – The Next Crisis Center (Financial Sense)

In this in-depth interview of Casey Research Chief Economist Bud Conrad by Jim Puplava, Bud talks about the situations in Europe and China. Bud is particularly concerned that China's overleveraged banks and overbuilt real estate bubble could implode with serious consequences. The sequence of events he expects is that a European collapse could precede the Chinese collapse.

Will the Latest Plan "Fix" the Eurozone? (Ludwig von Mises Institute)

Not likely, according to Frank Shostak. He suggests that what is needed to set a platform for healthy economic growth is raising the level of capital in the overall economy, not just in the banking sector. The key source for the lifting of capital in the economy is an expanding pool of real savings. And the loose monetary policies that continue at the ECB are much to blame for the current crisis.

A Sister's Eulogy for Steve Jobs (New York Times)

Of all the pieces I've read on Steve Jobs during his life and since his passing, this might be my favorite. It's a transcript of the eulogy delivered by Jobs' sister, Mona Simpson, at his memorial service.

That wraps up today's issue. We hope you enjoyed spending part of your day with us as much as we appreciate your support. Thanks for being a subscriber to a Casey Research service.

Kevin Brekke
Casey Research, LLC

Nov 03, 2011