Dear Reader,

A friend of mine once asked, “How come you free-market guys always use the Department of Motor Vehicles as an example of government inefficiency? Can’t you find other examples?” Admittedly, I’ve used the example many times.

And sure enough, the DMV has exemplified government inefficiency for decades, but why? Besides inefficiency, it reveals one of the major problems with our form of government: there is almost no incentive to fix smaller problems. On big issues, the government might actually try to do something. Furthermore, citizens will organize. For better or worse, the government has taken action on health care. Also, promises to reduce the deficit, to make national security stronger or to build better infrastructure are commonplace. In a democracy, politicians can run campaigns on these agendas.

However, no one can run a campaign on DMV reform.  When I moved to Maryland, it took me a full six hours of waiting to acquire my driver’s license and registration. The inefficiency was astounding.

But if a politician proposed reforming the DMV, I probably wouldn’t vote for him. My decision to vote would depend much more on his or her other stands on big issues. DMV efficiency simply isn’t an important issue. Sometimes one issue, such as abortion, can swing votes. However, no one is passionate about the DMV. As a result, the system does not change year after year. Only a budget crisis may eventually force change.

I’ve always heard the saying, “Well, if you don’t like something about the government, then vote the person out of office.” But there’s no way to vote on minor issues. Plenty of things simply fall through the cracks because the issues aren’t big enough to warrant campaign stands, organizations and paid lobbyists.

Who’s going to get angry if the government spends a million or two to improve a public park? What about a couple of million for a new tourism office? Or perhaps we could add ten million to the prison guard pensions? As these bills are being passed, they’re so small that no one has an incentive to complain – much like the DMV problem. In economics, this is often known as the problem of concentrated benefits and dispersed costs. Someone who has a million or two to gain lobbies for the issue, but the cost is so dispersed that no one complains. Only years down the road, when there’s a budget crisis, do citizens finally pay attention.

First, we’ll have a reader question for Alex Daley. The reader dared us to publish it; well, so we did. This is an exchange really worth reading. Then Doug Hornig will let out his frustration about a double standard for Clarence Thomas’s tax problems. Last, I’ll briefly cover some news.

A Reader Question for Alex Daley

Reader Question: “Has InterDigital rubbed some egg on your face, having closed last Friday at $58 and change? More seriously, my criticism is not the wisdom of your sell advice at $35 in November past since it had reached your target. What bothers me is that you didn’t reverse your decision when you realized that it was a bad call. Still, it is not too late. I dare you to publish this!”

Alex Daley: The note you sent didn’t contain a name or salutation, so I am not sure how to greet you. But I want to thank you for taking the time to write in with your concerns over the timing of the sell recommendation for InterDigital (IDCC). You are absolutely correct that the stock has blown past our price targets and posted an incredible gain the past few months. While we did post a great gain for our subscribers, we also managed to leave a lot on the table. While I do tend to dismiss “seller’s remorse” as a bit of contradictory emotion – no gain is a gain until realized – it is worth considering how this happened.

When we reevaluated IDCC, what we saw was a company flush with cash (and not returning enough of it to shareholders), but with a potentially difficult transition to make from 3G to 4G. In retrospect, we were overly conservative on the effect new licensing streams would have on Q4 revenues. In the end the company both blew out our own and Wall Street’s Q4 estimates, with huge increases in earnings (especially cash earnings, which the company trades at a low multiple of to this day, near $60/share), and the stock has risen sharply to trade in line with those new numbers.

I’d like to compare this to a stock like OpenTable (OPEN), where a similar trend continued to lift the stock well after our sale. But in the case of OpenTable, the fundamentals underlying our price target never shifted. When we reran our analysis, the price target didn’t move enough to justify a continued hold. What happened instead was that the market began to value the company at a much higher multiple to earnings and revenues than we ever expected or than we are comfortable holding (153x earnings, 22x sales, recently). OPEN is ludicrously expensive. IDCC is not at all, based on the Q4 numbers that posted weeks after our sale.

In our IDCC sell note, we said (emphasis added now):  “We can always buy back in if the cycle we mentioned knocks IDCC back to a level we see as ‘cheap’ or if something fundamental changes that makes the current price look like a good value.”

That very change happened with Q4, and we moved too slowly to catch it. Simple as that. Missing that boat is painful, as we even said in our sell note how bullish we were on traffic management for wireless networks, one of IDCC’s strongest areas. Instead, we were focused on evaluating a host of new opportunities and let the IDCC post-earnings look back fall to the bottom of the priority list. We’re adjusting our timeline for reevaluations post earnings as a result.

I am certainly much happier to be defending a 45% four-month gain than to be facing a loss of similar proportions. Still, it is not just our job to help subscribers find great stocks, but to get the most out of them as well. And that is something we continue to strive for. I’ll point to companies like iRobot, NxStage Medical, Mako Surgical and the many other large gains we continue to hold in our portfolio as proof of our disciplined approach to picking stocks and when to buy/sell.

I will submit your letter (anonymously) and this response to the Casey Daily Dispatch editors today. It is my hope they will publish it, as you raise an important point.

Thank you,


Martha, Clarence, the Big Misunderstanding and Me

By Doug Hornig

Regular readers of the Daily Dispatch will know that I’m the political junkie around here. Not only do I follow what goes on in that vile, corrupt sphere, I actually care. I get angry at betrayals of the public trust. Most of my colleagues, I suspect, regard me with the sense of amusement aroused by a child who proclaims that he wants to become president when he grows up, because he wants to serve his country rather than simply be the most powerful person in it.

I don’t know this for a fact, but I think it’s probably safe to say that I’m the only one at Casey Research who ever seriously considered a run for elected office. It happened a number of years ago, when my local representative to the House of Delegates here in Virginia decided to switch parties.

This guy was a hack. He’d been a Dixiecrat-type Democrat all his life, but, sensing a shift in the political winds, suddenly decided he was a born-again Republican. Only problem, the Republicans didn’t want him. But after he tried to switch, the Democrats didn’t want him either. So he became an Independent and, since he was now voting Republican when he went to Richmond, the GOP tacitly agreed not to run anyone against him in perpetuity.

It was the perfect scenario for a political junkie to get elected to office. Normally, no major party would nominate me, and even if one of them were foolish enough to, I’m basically unelectable. But this was not a normal situation. Under Virginia law, if I filed to run as a Republican, that’s how I would appear on the ballot and the GOP would be powerless to stop me. Assuming the Democrats ran someone, as they always do, then it would be a three-way race. And in a three-way race, as Jesse Ventura so delightfully proved, anything can happen.

A lot of people encouraged me to do it. I had a seasoned political vet who volunteered to be my campaign manager, and an experienced pollster ready to find the right issues to run on. I even had a treasurer lined up. But here’s the thing. When you decide to run for office, you have to fill out paperwork that weighs in at a good pound or more. You have to make public the most intimate details of your life, especially the financial ones. I decided it was all more than I cared to share with strangers, and thus ended my embryonic political career.

However, it never seemed inappropriate that these disclosures should be required of me. Let’s say that my state legislator had to vote on the awarding of some governmental largesse to the XYZ Corporation. And let’s say that he was a paid consultant for XYZ. I’d want that relationship to be public knowledge, not something hidden from his constituents.

Disclosure laws are, in my opinion, a good thing. They’re designed to prevent the big money-fueled corruption that results from blatant conflicts of interest. If you’re a public official and you lie on your disclosure forms, you’ve broken the law.

In this season of political madness, where taxpayers are being asked to bail out gigantic financial institutions that made bad bets to the tune of billions upon billions of dollars, a falsified financial disclosure statement may seem like small potatoes indeed. But it isn’t when the perp sits on the highest court in the land.

Supreme Court Justice Clarence Thomas filed a false financial statement. Not once. Repeatedly. For decades. It’s a crime for which an average citizen would at the least be fined and, considering its frequency and duration, would probably have to do some jail time. Calling it just a “misunderstanding” would not likely help.

Here’s what the big misunderstanding looks like:

The Ethics in Government Act of 1978 requires federal officials like Thomas to file a yearly form in which he notes not only his own sources of income but any non-investment income earned by his wife. Wives are included, reasonably enough, in order to prevent public officials from hiding bribes by funneling them to spouses.

Thomas’s wife, Virginia, makes non-investment money, and a lot of it. For example, from 2003 to 2007 she worked for the Heritage Foundation and was paid more than $120,000 per year, according to the organization’s own IRS reporting. These years were apparently not atypical, as Thomas has now filed “amended” disclosures going all the way back to 1989, but how much she made is really beside the point. Because Thomas failed to report any of it. Every year. Not only that, on the annual disclosure form, under “Spouse’s Non-Investment Income,” there is a little box marked “None.” That’s the one the Justice checked. Year in and year out.

Suppose for a moment that for seven years your spouse has been pulling down $120K per year, yet on your own personal disclosure forms, the ones you filed every April 15, that income somehow slipped through the cracks and you forgot to report it. Think you’d get away with an “Oops”? Maybe, if you were lucky, you’d escape with a fine and a suspended sentence.

Everyone on the Supreme Court reports to work in a building over whose entrance Equal Justice Under Law is chiseled in stone. If Clarence Thomas is allowed to walk, then perhaps it’s time to unchisel it.

Walk he probably will, and it won’t be the jumpsuited perp walk either. D.C. just doesn’t want anything to do with this story. Conservatives are understandably terrified at the thought of losing one of “their” seats on the Court, and all those who couldn’t wait to impeach a president for, um, lying are not-so-strangely mum here; while liberals, still licking their wounds from their butt-whipping in the last election, have shown little inclination to stir the pot. Both seem willing to say the guy made an honest mistake, he fessed up, end of story, move on.

In addition, press coverage of this crime has been lackluster at best. Although it is entirely a legal and not a political issue, it’s treated as if it were. Left-wing talking heads pursue it, right-wing heads ignore it. And the evening news only found it of interest for a day or so.

Perhaps the lack of outcry is because it isn’t perceived as much of a crime. It’s just a simple misdemeanor, right? Actually, it’s that for sure, and maybe more. The for sure part is that Thomas violated statute 5 USC appendix 104, under which an official who “knowingly and willfully” falsifies a required report is subject to a fine of up to $50,000 and up to a year in jail. On each count. Do it some twenty-odd times and it starts to add up. (Thomas could of course claim his conduct was neither willful nor knowing, perhaps insisting that “the dog ate the six hundred grand” or something, but it’d be fun to see him try that in court.) Such violations are supposed to be referred to the Attorney General, and he is supposed to investigate.

However, if you don’t think a misdemeanor of that magnitude warrants impeachment, not to mention a little sojourn in the Graybar Hotel, well, what if it were a felony?

Which brings us to Martha. Martha Stewart did jail time, as everyone knows. But most people, if asked why, would say she was convicted of insider trading on a stock deal. Nope. She was convicted of lying about it, under statute 18 USC 1001.

That’s the one the feds use when they’re looking for something to hang you with and don’t have much. It’s a mighty big umbrella. Whoever, “in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully … makes any materially false, fictitious, or fraudulent statement or representation” is guilty of a felony punishable by up to five years in the slammer. Basically, you can’t lie to the feds under any circumstances.

It’s how they nailed Martha. And Marion Jones, who also did time. And it’s the sword over Barry Bonds’s head.

So why did Clarence do it? Assuming the obvious, that he didn’t have a series of 20 senior moments or was unclear on the meaning of the word None, we’re left to speculate.

His enemies were quick to claim he did it to ward off calls for his recusal in cases that would have a direct financial impact on his wife’s lobbying activities, pointing to such decisions as 2010’s landmark, Citizens United v. Federal Election Commission. It seems unlikely in that particular instance. If lawyers for the FEC were unaware of Mrs. Thomas’s activities, they weren’t reading the newspapers. She was at the time CEO of the lobbying group, Liberty Central, which she founded in 2009. Hardly a secret, and litigants would not have needed a financial disclosure statement before they asked Thomas to recuse himself from a case that was clearly going to have some very nice financial consequences for the Thomas family. But they didn’t.

At the same time, there are many years’ worth of other decisions against which to weigh Ginni Thomas’s interests. Because of the falsified documents, the appearance of impropriety is in the air. It should be dealt with. If Clarence Thomas’s vote is for sale, then let some more serious charges to be brought against him. But even if no one is willing to pursue that one, the fact remains that he admittedly broke the law. He should be held accountable for what he’s done, and impeached, at a minimum.

I’m giving good odds that that won’t happen. We live on Animal Farm, where the pigs declared after the equality revolution that while all animals are equal, some are more equal than others. Our judges are among the most equal.

Doug Casey likes to say that America was originally an idea, and a fine one, but that it devolved into the United States, which is just another country. (Although, we would like to think, not a two-bit country with an openly corrupt judiciary.)

One of the basic tenets of that original, fine idea was that no one should be above the law. Especially someone entrusted with the care of the law. Justice Thomas violated that trust. He did it brazenly, and repeatedly, and he dismissed all his misdeeds in the most cavalier manner imaginable.

So where’s the outrage?

Missing the 800-Pound Gorilla in the Room

By Vedran Vuk

Bloomberg today had perhaps the worst analysis of interest rates that I’ve seen in some time. Essentially, here’s the view: interest rates were rising, but now they’re holding steady. Hence, all is well. Furthermore, economic recovery may be weaker than expected; so inflation should be tame.

First of all, there’s an 800-pound gorilla in the room known as QEII. As I mentioned in an article last week, without the current Fed intervention, rates could possibly be much higher. In the current environment, it’s very difficult to make conclusive statements on rates. Only after QEII ends will there be a clearer picture.

Second, as far as inflation goes, we’ve got bigger things to worry about than economic growth picking up faster than expected. Inflation is necessarily a monetary problem. It is not an economic-growth problem. In post-WWI hyperinflation Germany, people weren’t lugging wheelbarrows of cash because the economy was growing too fast. Instead, it was due to overheated printing presses. The Fed’s actions over the last few years should be the first consideration for anyone thinking about inflation – not economic growth.

Real Estate Slump Continues

By Vedran Vuk

The latest Case-Shiller index shows that real estate prices are down 2.4% in 20 major U.S. cities since last December. The best-performing city was… you guessed it… Washington D.C. with a 4.1% increase over the year. Of the 20 major cities, San Diego was the only other one to make a positive gain with a meager 1.7% increase.

If housing prices continue to slump, this could be a counteracting force to stock market gains. When 401Ks increase, consumers feel wealthier, and consumer confidence becomes stronger. But housing prices have a similar effect on consumer confidence. As a result, a continued housing slump could partially counteract the stock market’s positive impacts on consumer confidence.

Well, that’s it for today. Thanks for reading and subscribing to Casey’s Daily Dispatch.

Vedran Vuk
Casey’s Daily Dispatch Editor