The Varying States of US Freedom

Dear Reader,

Having subjected everyone yesterday to a rant on personal freedom, I have nonetheless sadistically decided to continue with the topic today and finish off the punishment. I arrived at that decision for two reasons: First, there are additional options besides those suggested yesterday; and second, I hope to appease at least some of those drafting rebuttal emails.

Yesterday I bumped against a common dilemma when giving advice, that being that one size rarely fits all. A solution that applies ubiquitously can possibly be found for some things, but not everything; for example, is there a line of shoes marketed as "one size fits all?" The same challenge applies to personal finance or, in this case, how best to maximize individual freedom in a world where the interplay between government and law enforcement is increasingly looking like a police state.

The three ideas I mentioned yesterday were: Expatriate and get out of Dodge completely; set up a part-time residence that can be used as a vacation home or condo and will be available should circumstances arise where a foreign sanctuary is needed for an extended period; and become sufficiently familiar with a desired locale so that when the time arrives to escape, a familiar destination is at hand. This can be accomplished by using vacations as an opportunity to explore the places on one's list of possible destinations.

For a variety of reasons, each of these alternatives will not be acceptable to the majority of Americans. Financial constraints, family, employment, underwater mortgage… these and many other factors will hold sway over any course of action. And let's face it, most Americans simply are not cut out to tackle the challenges of being transplanted into a foreign country. The thought of learning another language in itself gives most Americans hives. Further still, most Americans like where they live and love their country, warts and all, and would never think of leaving.

However, for anyone who has a constraint to internationalizing, a compromise solution to securing greater personal freedom without fleeing the homeland does exist: choose your state of residence wisely.

An impressively extensive report from the Mercatus Center at George Mason University titled Freedom in the 50 States ranks US states according to a proprietary "freedom index" developed by the researchers. A PDF version of the report is also available.

Here's the executive summary:

This study comprehensively ranks the American states on their public policies that affect individual freedoms in the economic, social, and personal spheres. It updates, expands, and improves upon our inaugural 2009 Freedom in the 50 States study. For this new edition, we have added more policy variables (such as bans on trans fats and the audio recording of police, Massachusetts's individual health-insurance mandate, and mandated family leave), improved existing measures (such as those for fiscal policies, workers' compensation regulations, and asset-forfeiture rules), and developed specific policy prescriptions for each of the 50 states based on our data and a survey of state policy experts. With a consistent time series, we are also able to discover for the first time which states have improved and worsened in regard to freedom recently.

The first link above takes one to a very cool interactive map, where clicking on a state takes one to the state's freedom ranking page, which shows statistics about the state and an analysis of personal, economic, and overall freedom of the state.

Here is the ranking of the 50 states according to the report:

(Click on image to enlarge)

* State tax on income from interest and dividends only.

Gray = States with no tax on income.

Blue = Top five states with the lowest overall tax burden.

Red = Top five states with the highest overall tax burden.

A detailed, state-by-state analysis of taxes is found available from a different source.

I have written before in this space about the importance of residing in a low-tax state. The numbers show that low-tax states have faster population growth, greater employment growth, and higher growth in gross state product. The result is a higher standard of living.

No surprise that the growth in state tax receipts for low-tax states also exceeds that of high-tax states – a fact that, because it is counterintuitive, seems to eludes most politicians. Reduce the tax burden on productive citizens and they will work harder, and the state will draw other workers and businesses from outside the state as well.

From the above table we can see another related benefit to living in a low-tax state – they also appear to offer greater personal freedom. That makes sense. If a state's legislators tread lightly on its citizens' wallets, it follows that the same mindset will apply to other areas of potential state interference in private affairs.

So, if an offshore solution to safeguarding one's freedom is not an option, a careful analysis and comparison of US states can go a long way toward achieving that goal. And the money that is saved from lower taxes can then be invested offshore. This advice does not change regardless of where one decides to call home. At this point, the most important thing an investor can do is to make sure one has a large chunk of wealth sequestered offshore in the appropriate investments and jurisdictions.

[The Casey Report offers ongoing, critical analysis of worldwide and US economic and political trends, focusing on those that are most likely to impact investments. This month's issue features Doug Casey's prognostications for the US presidential election and the economy, as well as trends in the Middle East and China; Terry Coxon offers ideas on how best to invest in gold via an IRA; and Bud Conrad analyzes the Fed’s struggle to keep interest rates low. Until midnight Eastern Time tonight, you can subscribe for just $98 – a remarkable 72% discount off its regular price. As always, a three-month trial subscription gives you access to all the archives and is completely risk-free. Take advantage of this exception offer right now.]

Today's Big Pharma Landscape

By the Casey Research Technology Team

The big drug companies have been enduring a long-term decline in productivity.

Big pharma is investing more and more but getting less and less in the way of results. PhRMA, an organization that represents leading research-based US pharmaceutical and biotechnology companies, estimates that for every 5,000 new compounds that enter preclinical trials today, only five will end up being tested on humans… and among those, exactly one will make it to market. Other organizations peg the approval rate at one in every 10,000 new compounds.

Looked at another way, it now costs on the order of $1.2 billion to bring a new drug all the way to market (up from about $0.5 billion 10 years ago), a process that usually takes at least 10 years, but can take more than 15 years.

At the same time as the law of diminishing returns is setting in, big pharma is also facing a "patent cliff." By year-end 2015, nine of the top ten and 18 of the top 20 best-selling drugs in the world will lose patent protection. That translates into the loss of some $100 billion in sales during this period.

For a sense of the magnitude of the problem, here's a summary of the ten biggest blockbuster drugs that will lose patent protection in the US over just the next year:

Nor have the big guys been making up the shortfall by cutting increasing numbers of deals with small biotech outfits. Quite the opposite. The number of investments and trials declined from 2007 through 3Q10, as is shown here:

(Click on image to enlarge)

This year, the situation seems to have improved a bit, with a surge of FDA approvals. According to a recent FDA press release, it approved 35 new medicines over the past 12 months – among the highest number of approvals in the past decade. But that figure could be misleading. One-third of the drugs approved this year had failed to pass muster with the agency on their first attempts, as opposed to only one-fifth in 2010. Thus, there could be a significant number of carry-overs.

In any event, venture-capital company Burrill & Co. suggests that the recent data are not enough to suggest a significant change in approach at the FDA, nor that strategies to alter the drug development process to improve productivity are paying off: "It is encouraging. But improving the pace at which new drugs reach the public will require much more work, both at the agency and in industry."

Big pharma is neither unaware of nor unresponsive to current conditions. For one thing, companies are culling less-promising research efforts from pipelines or shifting them to countries where it's cheaper to work, such as China. For example, Pfizer is in the midst of an 18% workforce reduction that will see the loss of 6,000 jobs over five years, while Roche very publicly abandoned RNAi research after three years of commitment to it.

GlaxoSmithKline's aggressive plan is likely to see widespread emulation. Glaxo wielded the cost-cutting ax in a big way back in 2008, when it reorganized its scientific staff into small teams called "drug performance units" and assigned them to different diseases. Each DPU had to make its case for funding at the time. Now, on a regular basis, each has to justify its continued existence to a panel of six company executives and three outside industry experts. No one wants to flunk that exam.

Analyst Mark Dainty of Citigroup writes of the shakeup: "It's very difficult to innovate in large companies. Creating smaller teams that behave in a way that biotech companies might do is likely to be conducive to better innovation and decision-making in the longer term."

But Dainty is quick to add that, while it's a bold move that should pay off, "whether it delivers greater returns is a whole other question."

Beyond in-house reorganizations, things are also looking up in the M&A arena. For the first half of 2011, 18 biotech companies were sold for total upfront values of $51.6 billion, putting the industry on track to have its busiest year since '07. That figure was considerably engorged by the $13.7 billion sale of private equity-backed Swiss drugmaker Nycomed to Takeda Pharmaceutical, but there have been a number of other deals with a total value north of $200 million.

The key here, with development costs skyrocketing, is that big pharma is becoming pickier. In years past, companies often took a scattershot approach, gobbling up numerous small biotechs in the hope that one of them had something that would pan out.

Now, the big boys are largely ignoring early-stage startups and are concentrating on companies:

• that are in late-stage clinical trials.
• with blockbuster drug potential, i.e., potential sales of $1B/year or more.
• with very high chances of success in the Phase III trials.
• that own all worldwide rights to the product and have long-term patent protection.

Or, not coincidentally, just the kind of biotechs with which we have stocked our Casey Extraordinary Technology portfolio.

Friday Funnies

An easily understandable explanation of derivative markets:

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed in a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy, and as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most-consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice president at the local bank recognizes that these customer debts constitute valuable future assets, and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS, and PUKEBONDS. These securities are then bundled and traded on international security markets.

Naïve investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi. Heidi then demands payment from her alcoholic patrons. But being unemployed alcoholics, they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations, she is forced into bankruptcy. The bar closes and her eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS, and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

Suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with not only having to write off her bad debt but also with losing over 90% of the presumed value of the bonds. Her wine supplier claims bankruptcy, closing the doors on a family business that had endured for three generations. Her beer supplier is taken over by a competitor, which immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses, and their respective executives are saved and bailed out by a multibillion dollar, no-strings-attached cash infusion from their cronies in the federal government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi's bar.

Golf Laws:

Law 1 – No matter how bad your last shot was, the worst is yet to come. This law does not expire on the 18^th hole, since the law has the supernatural tendency to extend over the course of a tournament, a summer, and eventually, a lifetime.

Law 2 – Your best round of golf will be followed almost immediately by your worst round ever. The probability of the latter increases with the number of people you tell about the former.

Law 3 – Brand new golf balls are water-magnetic. Though this cannot be proven in the lab, it is a known fact that the more expensive the golf ball, the greater its attraction to water.

Law 4 – Golf balls never bounce off of trees and back into play. If one does, the tree is breaking a law of the universe and should be cut down.

Law 5 – No matter what causes a golfer to muff a shot, all his playing partners must solemnly chant "You looked up," or invoke the wrath of the universe.

Law 6 – The higher a golfer's handicap, the more qualified he deems himself an instructor.

Law 7 – Every par-three hole in the world has a secret desire to humiliate golfers. The shorter the hole, the greater its desire.

Law 8 – Topping a 3-iron is the most painful torture known to man.

Law 9 – Palm trees eat golf balls.

Law 10 – Sand is alive. If it isn't, how do you explain the way it works against you?

Law 11 – Golf carts always run out of juice at the farthest point from the clubhouse.

Law 12 – A golfer hitting into your group will always be bigger than anyone in your group. Likewise, a group you accidentally hit into will consist of a football player, a professional wrestler, a convicted murderer, and an IRS agent – or some similar combination.

Law 13 – All 3-woods are demon possessed.

Law 14 – Golf balls from the same sleeve tend to follow one another, particularly out of bounds or into the water (see Law Three).

Law 15 – A severe slice is a thing of awesome power and beauty.

Law 16 – "Nice lag" can usually be translated to, "Lousy putt." Similarly, "Tough break" can usually be translated, "Way to miss an easy one, sucker."

Law 17 – The person you would most hate to lose to will always be the one who beats you.

Law 18 – The last three holes of a round will automatically adjust your score to what it really should be.

Law 19 – Golf should be given up at least twice per month.

Law 20 – All vows taken on a golf course shall be valid only until the sunset of the same day.

A Few Comical Pictures/Cartoons:

We'll end with a video of a couple of really cute babies costumed for Halloween.

That's it for today… and for this week. Thank you for reading and subscribing to Casey Daily Dispatch.

Kevin Brekke
Casey Research, LLC