Last week left us with no clear trends. The Dow took a 300-point drubbing on Monday. And the S&P 500 saw its second worst start to February since 1928. But by the end of the week they seemed to have recovered their footing. 

We spent the week in India. 

“I wouldn’t invest a penny in India,” said our old friend Jim Rogers. He may know something we don’t. Then again, we know so little that anyone could know more. 

India was rich 500 years ago, with a GDP per capita among the highest in the world (according to estimates that are, admittedly, probably unreliable.) Now, it’s poor. 

Could it be rich again? Or at least richer than it is now? 

We don’t know. But we traveled to Bombay via Zurich. A greater contrast would be hard to find. Zurich is spotless. Organized. Efficient. Dependable. Bombay is dirty. Disorganized. Chaotic. Zurich is one of the richest cities in the world. Bombay is one of the poorest. 

What accounts for the difference? Culture? Climate? Geography?

Many are the theories. Race was a popular explanation for the difference before World War II. Afterward, climate was a handy explanation. But neither can explain India’s poverty. 

Look at Indians in the US, South Africa and Britain. Out of their homeland they are among the most successful of any ethnic group. In every line of work — art, engineering, business, academia — they are standouts. The new CEO of Microsoft is from India. 

As to climate, the theory changes with the times. When Egypt, Greece and Rome were the world’s leading powers, intellectuals presumed that cold weather was ill suited to civilization. Then, when the locus of progress moved north, so did the theory. Today, the idea that heat makes people lazy is common among people from cold climates. 

Heat may have influenced output before the days of air conditioning. The US Congress used to take the entire summer off to escape the heat of the Potomac. 

But we grew up without air-conditioning 40 miles from Capitol Hill; we don’t recall it slowing us down too much. We worked through the hot summer months doing hard, heavy work in the tobacco fields. 

And today, Miami and Singapore — both hot cities — flourish while Detroit goes bust and Vladivostok is wretched. Generally, Russia is a cold place. But it is hardly a rich place. By contrast, Australia is quite warm — and relatively wealthy. 

One obvious cause of economic retardation is government. The more ambitious and aggressive it is, the more output will be depressed. 

After World War II, the Chinese were one of the world’s poorest people. You could have blamed it on their culture. But millions of Chinese fled to Hong Kong (which was little more than a barren rock) seeking the protection of the British government from the Maoist regime. And they brought their culture with them. 

John Cowperthwaite was the British administrator assigned to watch over Hong Kong from 1961 to 1971. He made it a point not to interfere. He didn’t even allow the collection of statistics on unemployment or income. He didn’t want to provide the meddlers with any fodder for “improving” things. 

In Mainland China, no sparrow could fall without being registered by the Communist bureaucracy. And there was a program to solve every problem. There were Great Leaps Forward, Cultural Revolutions and Five Year Plans aplenty. 

Mainland Chinese became poorer and poorer; the Chinese in Hong Kong got richer and richer. By 1996, Hong Kong had a GDP per capita that was 137% of their British protectors. 

Government quickly reaches the point of declining marginal utility. A little — protecting property rights, enforcing contracts, and keeping people safe from violence — seems to pay off well. A lot is usually disastrous. 

Indians have a lot of government — a relic of the Stalinization of the country under Indira Gandhi. After World War II, Indians sent their elite youth — including Ms. Gandhi — to study in Britain. There they learned the ideas and policies that retarded British growth for almost a generation. Returning to India, they carried Keynes and Marx in their luggage. 

Gandhi took over the top job from Lal Bahadur Shastri, who followed the socialist policies of her father, Jawaharlal Nehru (India’s first prime minister). She then came up with six Five Year Plans. One Five Year Plan is usually enough to kill an economy. The Indian economy took all six treatments and somehow survived. 

Traces of the quack medicine remain today. You will experience a bit of it even before you get to India. You must apply for a visa. Doing so requires paperwork. Paperwork takes time. And Indian bureaucrats are very serious about their paperwork. 

Our application for a visa was rejected when our signature strayed out of the box. 

We had to reapply! 

Regards,

Bill

Market Insight:
Is India a Buy Right Now? 

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

We are not huge fans of the Indian stock market right now. 

Despite a plunging rupee and a current account deficit that reached an all-time high last year, the Indian stock market is not exactly cheap. 

On a 12-month trailing earnings basis, the Indian stock market trades on 14.5 times earnings and yields 2%. That’s not much cheaper than the S&P 500, which trades on a trailing P/E of 17.2 and yields 2.4%. 

We’re much more excited about a really cheap market such as Russia. Where a dollar of underlying earnings can be scooped up for a multiple of just 5.6. And a dollar invested throws off a yield of 3.3% (considerably more than the 10-year Treasury note with plenty more capital appreciation potential). 

Most investors shun the relatively staid value investing approach for more exciting growth stocks. 

But as Ben Inker at investment management firm GMO recently pointed out, a simple strategy of buying the cheapest stock markets in the world is a surprisingly effective strategy. As Inker reports: 

A portfolio built from the cheapest two countries outperformed by 2.8% per year relative to the average country, but a portfolio built from the countries that had been cheapest a year earlier outperformed by 7.4%.

Inker’s test simply ranked all countries in the developing world by valuation and held an equal-weighted portfolio of the cheapest two for the next year. 

If you did this every month from December 1978 to June 1999, you got some pretty serious outperformance. (With a much better performance if you chose countries that were cheapest a year ago. Probably because this left downward momentum to wind down before buying.) 

The two cheapest major stock markets a year ago were Russia and China. 

If Inker’s intuition is correct… and his pattern holds, these are the countries to invest in today. 

India will have to wait.

Where Will the Jobs Come From?
More Unintended Consequences
The Great Divergence: Productivity and Wages
A Most Dangerous Era
How Do You Spell Assume?
Los Angeles, Miami, Argentina, and South Africa

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if weforesee them.

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visibleeffect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

“Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

– From an essay by Frédéric Bastiat in 1850, “That Which Is Seen and That Which Is Unseen”

The devil is in the details, we are told, and the details are often buried in an appendix or footnote. This week we were confronted with a rather troubling appendix in the Congressional Budget Office (CBO) analysis of the Affordable Care Act, which suggests that the act will have a rather profound impact on employment patterns. You could tell a person’s political leaning by how they responded. Republicans jumped all over this. The conservative Washington Times, for instance, featured this headline: “Obamacare will push 2 million workers out of labor market: CBO.” Which is not what the analysis says at all. Liberals immediately downplayed the import by suggesting that all it really said was that people will have more choice about how they work, giving them more free time to play with their kids and pets and pursue other activities. Who could be against spending more time with your children?

Paul Krugman noted that the data means that potential GDP will be reduced by as much as 0.5% per year, which he dismissed as a small number. And he states that people voluntarily reducing their work hours does not have the same economic effect as people being laid off or fired. Which is true, but not the point nor the import of that pesky little appendix.

Where Will the Jobs Come From?

To me the economic and employment effects of Obamacare are another piece of the larger puzzle called Where Will the Jobs Come From? This may be the most important economic question of the next 30 years. Because this topic has been the focus of my thinking for the past few years, I could be reading more into the CBO’s report than I should, but indulge me as I make a few points and then see if I can tie them together in the end.

First let’s look at what the report actually said. The CBO stated that the implementation of the Affordable Care Act will result in a “substantially larger” and “considerably higher” reduction in the labor force than the “mere” 800,000 the budget office estimated in 2010. The overall level of labor will fall by 1.5% to 2% over the decade, the CBO figures. The revision was evidently driven by economic work done by a professor at the University of Chicago by the name of Casey Mulligan. (When you do a little research on Professor Mulligan and look past the multitude of honors and awards, you find people calling him the antithesis of Paul Krugman. I must therefore state for the record that I already like him.) For you economics wonks, there is a very interesting interview with Professor Mulligan in the weekend Wall Street Journal. For those who don’t go there, I will summarize and quote a few salient points.

Let’s be clear. This report and Mulligan’s research do not say Obamacare destroys jobs. What they suggest is that Obamacare raises the marginal tax rates on income, and to such an extent that it reduces the rewards for working more hours for marginally higher pay at certain income levels. The chart below does not pertain to upper-income individuals but rather to those at the median income level.’

What Mulligan’s work does demonstrate is that the loss of government benefits has the same effect on an individual as a tax increase. If you lose a government subsidy because you work more hours, then for all intents and purposes it is the same as if you were taxed at a higher rate. Quoting now from the WSJ piece:

Instead, liberals have turned to claiming that ObamaCare’s missing workers will be a gift to society. Since employers aren’t cutting jobs per se through layoffs or hourly take-backs, people are merely choosing rationally to supply less labor. Thanks to ObamaCare, we’re told, Americans can finally quit the salt mines and blacking factories and retire early, or spend more time with the children, or become artists.

Mr. Mulligan reserves particular scorn for the economists making this “eliminated from the drudgery of labor market” argument, which he views as a form of trahison des clercs [loosely translated, “the betrayal of academic economists” – JM]. “I don’t know what their intentions are,” he says, choosing his words carefully, “but it looks like they’re trying to leverage the lack of economic education in their audience by making these sorts of points.”

A job, Mr. Mulligan explains, “is a transaction between buyers and sellers. When a transaction doesn’t happen, it doesn’t happen. We know that it doesn’t matter on which side of the market you put the disincentives, the results are the same…. In this case you’re putting an implicit tax on work for households, and employers aren’t willing to compensate the households enough so they’ll still work.” Jobs can be destroyed by sellers (workers) as much as buyers (businesses).

He adds: “I can understand something like cigarettes and people believe that there’s too much smoking, so we put a tax on cigarettes, so people smoke less, and we say that’s a good thing. OK. But are we saying we were working too much before? Is that the new argument? I mean make up your mind. We’ve been complaining for six years now that there’s not enough work being done…. Even before the recession there was too little work in the economy. Now all of a sudden we wake up and say we’re glad that people are working less? We’re pursuing our dreams?” The larger betrayal, Mr. Mulligan argues, is that the same economists now praising the great shrinking workforce used to claim that ObamaCare would expand the labor market.

Paul Krugman interprets the CBO estimates to mean a loss of the number of hours that would be equivalent to the loss of 2 million jobs. The Wall Street Journal sees that same number as equivalent to 2.5 million jobs. Professor Mulligan’s research suggests that they are still off by a factor of two and that it could be closer to 5 million job equivalents.

That means a drop in potential GDP growth of somewhere between 0.5% and 1% per year. A small price to pay for universal healthcare, suggests Krugman. I would personally see it as a large price to pay for structuring healthcare reform the wrong way. That we need healthcare reform and that we as a country want it to be universal is clear. But the CBO report makes it evident that there is a hidden economic cost to the country in the way healthcare reform is currently structured. Dismissing potential GDP growth loss of 0.5% per year as “not all that much” is simply not intellectually sufficient.

(And that is taking Krugman’s estimate of 0.5% to be the actual negative effect. There are other economists who can produce credible estimates that are much higher, but for the purposes of this letter Krugman’s lower estimate will do.)

Doug Henwood over at The Liscio Report produced some fascinating research this week on what it has meant for our economy to be growing at a lower rate since 2007. In another report, the CBO offered its own estimate of future growth, which the normally sanguine Henwood thinks has the potential to make us complacent. Let’s jump right to his impact paragraphs (emphasis mine):

Another way to measure where GDP is relative to where it “should” be is by comparing the actual level to its long-term trend. [That’s what’s graphed below.] This technique shows the economy in a much deeper hole than the CBO does.

By this method, actual GDP at the end of 2013 was 86.7% of its trend value. That’s actually 3 points below where it was when the recession ended. Consumption was 87.4% of its trend value; investment, 75.1%; and government, 84.5%. (Note that government, despite perceptions to the contrary, has been falling, not rising, relative to its trend.)

These are huge gaps. In nominal dollar terms, per capita GDP is $8,278 below its 1970–2007 trend. Using the CBO’s less dramatic gap estimate works out to an actual per capita GDP $2,141 below its potential. Either way, that’s a lot of money. One way of reconciling the $6,137 disparity between the figures derived from CBO’s method and the trend method is by pointing to the long-term economic damage done by the financial crisis and recession.

The hit to investment, productivity, and labor force participation is enormous and long-lived. To put that $6,137 number in perspective, it’s very close to the per capita GDP of China. That is not small, and if the CBO is even half right, it’s not going away any time soon.

By the way, Casey Mulligan argues in his 2012 book, The Redistribution Recession, that the expansion of the welfare state through the surge in food stamps, unemployment benefits, disability, Medicaid, and other safety-net programs was responsible for about half the drop in work hours since 2007, and possibly more.

The CBO is de facto admitting that the increase in the entitlement spending due to Obamacare is going to reduce GDP. If Mulligan’s larger projection is right, we could lose roughly 10% of GDP potential over the next decade. That means the pie in the future will be smaller by 10%. That is a huge difference, not an inconsequential one. It means tax revenues needed to pay for government benefits will be 10% smaller. I am not arguing for or against whether such benefits are a proper expenditure of money; I’m simply saying that we cannot ignore the economic consequences simply because they may be politically inconvenient.

Think about this for a moment. We have lost the equivalent of Chinese per-person GDP in the space of seven years as a result of policy choices made by both Republican and Democratic administrations and due to the financial repression visited upon us by the Federal Reserve – which, by the way, has created multiple bubbles. The way we structure our policy decisions has consequences beyond the obvious.

More Unintended Consequences

Rather than immediately jumping to some kind of conclusion on employment that simply offers a number and doesn’t offer insight, I want us to look at the larger picture of work and what we get paid for it. We are rightly concerned in the developed world about the concentration of income and wealth in the top fraction of the population. When 85 people own 46% of the world’s wealth, as we’ve repeatedly heard the past few weeks, what does this portend for the future?

Understand that wealth distribution is all relative:

You need an annual income of $34,000 a year to be in the richest 1% of the world, according to World Bank economist Branko Milanovic’s 2010 book The Haves and the Have-Nots. To be in the top half of the global population, you need to earn just $1,225 a year. For the top 20%, it’s $5,000 per year. You enter the top 10% with $12,000 a year. To be included in the top 0.1% requires an annual income of $70,000.” (From a brilliant piece by Morgan Housel titled “50 Reasons We’re Living Through the Greatest Period in World History,” in The Motley Fool.)

(Most of the readers of this letter are in the top 1% and many are in the top 0.1%. Feel better about yourself now?)

Now stay with me here. I am going to work toward making a connection between the following section and the Affordable Care Act. In last week’s Thoughts from the Frontlinewe explored the long-term obstacles to growth in emerging markets, as a powerful wave of new technologies shrinks developed-world trade demand for energy and manufactured goods.

I believe this disruption in long-standing trade relationships signals a gradual realignment in the global economy as the developed world moves toward a Third Industrial Revolution and threatens to leave a lot of global workers behind. This week, let’s shift our focus to the long-term impact of tech transformation on productivity and wages in developed markets – particularly in the USA, where the majority of the innovation is happening.

The gist is simple and unavoidable: Since the majority of jobs are vulnerable in some way to automation, almost all of us – your humble analyst included – will have to make a real effort to continually learn and hone new skills in order to participate in the new economy. There has never been a better time for talented workers who possess the right mix of skills and creativity to capitalize on new technology, and there has never been a worse time for workers who lack the skills or creativity to tap into the abundance that awaits. (I invite readers to cogently disagree with that last sentence. I hope I am wrong. Seriously, I think about this a lot and am open to learning.)

The Great Divergence: Productivity & Wages

Over the very long term, the real drivers of lasting economic growth around the world have been the great spurts of innovation enabled by the First and Second Industrial Revolutions – two transformative periods between 1750 and the mid-1970s during which the invention of world-changing “general-purpose technologies” like the steam engine, electricity, and indoor plumbing enabled generations of follow-on innovation and drove massive gains in productivity and real GDP per capita.

The miracle of industrialization was that real wages grew roughly in line with productivity – meaning that the returns to labor and the returns to capital were fairly evenly distributed. As workers produced more output in less time and with less effort, they also received higher pay. This relationship held until the mid-1970s, when real wages suddenly flat-lined in the face of rising productivity.

It seems that the positive effects on wages produced by the First and Second Industrial Revolutions petered out in the late ’70s, just as the Information Revolution was producing what could be called the Information Economy.

Thus far, the gains of the Information Economy have been unevenly distributed, and the past 40 years have not been kind to the American worker. US multinationals began to outsource more and more manufacturing jobs to lower-wage emerging markets just as computers started to enable the use of increasingly capable but also increasingly complex technologies. Average workers could not easily join the Information Economy without the skills or educational foundation to adapt from labor-intensive manufacturing work to knowledge-intensive information work; and so they have not participated in the real wage gains available to higher-skilled workers.

As you can see in the chart below, workers with college and graduate-level educations have enjoyed higher wages while workers with less education have struggled to make ends meet.

Still, earning a college degree does not guarantee gainful employment, something that many of us told our children would happen as we encouraged them simply to “go to college.” Ultimately, scoring a good job comes down to skills. The vast majority of jobs are vulnerable to some kind of disruption or displacement from computer-enabled innovation. Meaning that – at some point in their careers – most workers will have to learn new skills and evolve as technology evolves. As you can see in the following chart from a study by Oxford University professors Carl Benedikt Frey and Michael Osbourne, nearly 50% of all jobs in the United States run a very high risk of displacement or disruption by computerized automation in the coming years. (Warning: reading the study requires the information skills and especially math that they suggest may be lacking.)

All this suggests that the current trend, wherein the average wage earner has not seen his wages increase along with GDP and corporate earnings growth, is likely to continue, not due to some malignant greed on the part of heartless corporate entities but because of the very nature of the Information Economy and the emerging Third Industrial Revolution. Those with skills and adaptability are going to continue to outperform, at least with regard to income, those who have not been able to develop the necessary skills for the coming economic transformation.

The next chart illustrates just how long this trend has continued and how significantly different the directions are between corporate profits and wages as a percentage of GDP. Given the uneven nature of the future employment market, it may be quite some time before we see these lines cross again. The last time it took the deepest recession in our lifetimes, but the bounce down was only temporary.

A Most Dangerous Era

Now, what does the shifting of jobs in a knowledge-based economy have to do with work incentives in the Affordable Care Act? If we structure a society in which people are incentivized not to work, we are going to create a society that not only produces less but that displays a growing disparity in the distribution of wealth. If we offer people economic reasons not to work, we should not be surprised when they take us up on the offer. We can disguise that offer as all sorts of necessary social reforms, but at the end of the day a smaller labor force will affect the size of the pie that we all want to see grow and to partake of. I refer you back to Bastiat, whom I quoted at the beginning of this letter: it is the unseen things in well-intentioned public policies that will have small, incremental, but finally significant effects upon the whole economic body.

I have struggled with allergies off and on over the years. What I have learned is that allergies are incremental. I can be around many things to which I only have a mild allergic reaction, and I have no symptoms. But when I’m around many of them all at once I have to start looking for my allergy medicine. One can argue, perhaps correctly, that the economic effects of a particular policy like the Affordable Care Act are only a minor problem. But it is the cumulative effect of numerous social policies, regulations, monetary policies, incentive structures, lack of educational reform (and the list goes on and on) that takes a toll on our economic body.

If government is small relative to the economy, then incremental changes in its policies have a lesser effect than when the government is large and its policies pervasive.

The coming Third Industrial Revolution requires a profound realignment and restructuring of the incentive systems built into our society. We are talking about a technological revolution that in its compound effects will accelerate change to such an extent that we will see as much change in the next 10 to 20 years as we saw all of last century. Suggesting that one employment- or growth-reducing policy or another only makes a small difference and is worth the price we’ll pay is a flippant dismissal of the dynamics of the situation we face. These things have consequences.

Jeremy Grantham in his recent quarterly letter looks at the incremental effect of a lower growth rate. He tells us that the remarkably steady 3.3% US growth rate from 1880 to 1980 multiplied income 26 times over that century, that the 2.8% average growth from 1980 to 2000 would compound income 16 times over a period of a century, but that the 1.4% rate experienced over the past 13 years would multiply income by just 4 times over a century.

How Do You Spell Assume?

In the same report mentioned at the beginning of this letter, the CBO gave us its economic and budget outlook for 2014 to 2024. They projected GDP growth of 3.1% this year and 3.4% in 2015 and 2016.

But growth, according to the CBO, will fall to 2.7% in 2017 and continue to slow “to a pace that is well below the average seen over the past several decades,” largely because of slower growth in the labor force due to the aging population and mild inflation (under 2.0%) for the next several years.

How significant is this slowing? The CBO estimates if the economy grows just one-tenth of a percentage point slower each year for 10 years, the cumulative deficit will be $311 billion greater than the $7.9 trillion it is now projecting. That 0.5% less GDP growth per year that Krugman expects would therefore translate into another $1.5 trillion added to the deficit that would have to be dealt with either through reduced spending or increased taxes. That amount is just slightly less than 10% of our current GDP. I think that is significant. But that’s just me, the deficit worrywart.

I agree with the conclusion of Ezra Klein (if not his general thesis), writing in Bloomberg on February 6:

Policies don’t exist in vacuums. By untying the link between employment and health care, the Affordable Care Act reduces the incentive to work. But there are ways to increase incentives to work without making people dependent on their jobs for health insurance. We can help people without taking away their health care.

It’s all connected: healthcare, financial regulation, technological transformation, energy policy, foreign policy, trade policy, immigration, tax reform (and the list goes on and on and on). Everything contributes to the environment for business and economic activity; and when the environment is good, that translates into jobs. It is becoming ever more vitally important to focus on how our policies across the board connect and to see them as parts of a whole rather than in a simplistic one-off manner. Does a policy not only allow us as a society to behave in a more responsible manner but also allow us to grow our economy and create jobs? If it doesn’t do both, then it’s back to the drawing board.

I’ll finish with one final chart (courtesy of my friend Philippa Dunne at The Liscio Report).This is a chart of new businesses being created. New businesses are the true engine of economic growth and job creation. Policy makers need to think about this chart with every decision they make. They need to determine why the trend is clearly down and how to reverse it.

Los Angeles, Miami, Argentina, and South Africa

I will be speaking next week at the George W. Bush Presidential Library auditorium with local celebrity investment advisor Erin Botsford, who wrote The Big Retirement Risk: Running Out of Money Before You Run Out of Time. The event is sponsored by my partners at Altegris Investments. (It sold out before I even had a chance to mention it. Sorry.)

And speaking of Altegris, let me suggest for further reading that you look at the work of my old friend Jack Rivkin, who has become (to my great delight) the new Chief Investment Officer there. A respected thought leader, Jack has had CIO roles in the investment industry with Neuberger Berman, Citigroup Investments, and Paine Webber and has overseen tens of billions of dollars. His work has also been featured in one of Harvard Business School’s most-read case studies. You can find his full biography here if you’re interested. If it seems that he’s done a lot (and he has!) it’s because he’s been at it for a while. Jack and I share an avid interest in how the future of technology will shape our society, and I treasure the time I get to spend with him talking about that.

Since joining Altegris in December, Jack has begun offering commentary about global economic and political events, trends, investing, and alternative investments. People in the know in the investment community pay attention to what Jack says. I highly encourage you to visit his “CIO Perspectives” at Altegris.com to read his latest articles. Jack consistently makes very good points in his commentaries, and I think you will find he has real insights on the topics we’ve been discussing of late.

In mid-March I will fly to Cafayate, Argentina, where I get to relax and spend time with friends Bill Bonner and Doug Casey and Mauldin Economics business partners David Galland and Olivier Garret. The plan is to round up a serious four-wheel-drive vehicle and trek to Bonner’s hacienda at 9,000 feet in the Andes. We made the trip last year but had to be towed several times as your humble analyst got us stuck in sand and again as we crossed the river. There is literally no road for the last hour, just (hopefully) dry riverbed and cow paths over very rocky terrain. Quite the adventure and fabulous fun with a great deal of fantastic conversation awaiting us at Bill’s. Last year I even ventured out horseback riding, although I might ask for a less frisky animal this year. I may be a Texan, but I was not born in the saddle.

Then in one of those “you can’t get there from here” trips, I’ll fly back to Texas, only to get on another plane later that same evening to fly to South Africa (don’t even ask). I hope to spend four days at some fabulous game reserve in South Africa but have yet to choose which one. I am open to suggestions. My only requirement is wifi.

It is time to hit the send button. This weekend should prove a great deal of fun. I intend to see The Monuments Men with that long list of (ahem) older stars, and then the next night Paul Simon and Sting are in concert just a few blocks away. When I tell people I’m going, nearly all of them (especially the ladies) tell me their favorite Sting song, but I have to admit that I’m going for Paul Simon. He has been one of my favorites for almost 50 years. His songs dominate my playlist. His music simply feeds my soul. “Bridge Over Troubled Water,” “The Sound of Silence,” “Graceland,” “Diamonds on the Soles of Her Shoes,” and the inimitable “Slip Sliding Away.” I met him once at a Yankees World Series game, but that’s another story. Have a great week and spend some time with your favorite musician. It will make the future world a little less scary.

Your still crazy after all these years analyst,

John Mauldin
subscribers@MauldinEconomics.com

To subscribe to John Mauldin’s e-letter, please click here:
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Timer’s Digest Timer of the Year and Timer of the Decade, Mark Leibovit surprised the audience when asked what he thought was one of the top money making growth opportunity in 2014. Read Michael Campbell’s post regarding this on Facebook HERE

Marijuana: Why We Smell a Profit …

This profiles what could be perhaps the hottest – and one of the largest – markets in the world. In fact, our Institutional Reserach team is busily completing a full sector report on the marijuana industry, which should be released along with the new investor-oriented Daily Bell within the next couple of weeks.

Cannabis. Marijuana. Ganja. That’s right. Marijuana has to be one of the hottest trends going.

Let’s see what the media has to say about it.

RT reports “Recreational pot sales in Colorado surpass $5 million in first week.” The article, published early in January, profiled Colorado’s “first week with legal weed.”

Mind you, pot is not actually “legal” in Colorado – or not from the Federal government’s point of view. It’s just been decriminalized. In any event, legal distinctions aside, “people really like marijuana,” as the article notes.

Here’s more:

Owners of the 37 just-launched dispensaries across Colorado tell the Huffington Post that they’ve already generated a combined total of roughly $5 million in sales since it became legal there on January 1 for adults to purchase and use marijuana for recreational reasons.

Some of the larger dispensaries unloaded as much as 60 pounds of pot each from their shelves during that first week, HuffPo’s Matt Ferner reported on Wednesday, and combined sales on the first of the year alone totaled over $1 million.

“Every day that we’ve been in business since Jan. 1 has been better than my best day of business ever,” Andy Williams, owner of Denver’s Medicine Man dispensary, told the website.

Voters in Colorado approved a measure legalizing medicinal marijuana back in 2000, and dispensaries across the state had until just recently been barred from selling to those without a doctor’s prescription. Denver’s 3D Cannabis Center told the Colorado Springs Gazette that they averaged 25 clients a day in medical marijuana sales before the state’s new law went into effect, but on Jan. 1 they served around 450 customers and before long were forced to close down in order to restock.

If sales continue at the current rate, the state could see $260 million made by marijuana by the end of the year. Some experts, however, have already said that they think annual sales could even double that. The Gazette reported earlier this month that they think the new weed industry could generate $400 million in sales by the end of the year, and Bloomberg News suggested that statistic could climb to $578.1 million a year between wholesale and retail sales.

The confusing part of all this, as mentioned above, is that while Colorado has “legalized” weed, the US federal government has not.

The article points out this perplexing contradiction and then cites attorney Alan Dershowitz to confirm it: “They should be confused,” he’s quoted as saying. “The federal government still takes the position technically that you’re violating federal law if you’re complying with the state law.”

This conflict has been noted by Colorado as well. Members of the Denver City Council have voted for “swift federal action” to allow dispensaries to do business in payments other than cash. Right now, banks and other monetary facilities are leery about accepting “drug money” because of potential ramifications should policy switch again.

But while Colorado legislators may be irritated with the Federal stance, they cannot help but be pleased with the added revenues the state will realize. As the article observes: “Legal marijuana is both heavily regulated and taxed, and by Bloomberg’s estimate will earn Colorado nearly $70 million in excises this year alone.

Other states have noticed the possibilities, as well. Recently, CNBC posted an article on the challenges and potential of selling marijuana. The article tried to envision a mature industry and marketplace, noting that both Colorado and now Washington had “legalized” the plant.

Here’s more:

Amid this historic backdrop, a small merchant-focused pot industry is growing, alongside forerunners to national—potentially public—cannabis companies. The legal marijuana sector could unfold and function like the beer industry, with small batch varieties nabbing market share amid larger brands.

For now, mass cannabis production and scalable business models aren’t as vigorous as they could be because marijuana remains illegal under federal law. Banks and credit card companies are prohibited from processing pot business transactions, according to federal rules.

But working within state guidelines, scrappy entrepreneurs are moving forward with ambitious cannabis business strategies. They see potential for big sales and profits—especially if more mid-sized businesses can transition to large, national brands.

Wealthy individual investors already are tapping private equity firms for a bite of the potentially lucrative marijuana business. “Our investors are from the far left and the far right,” said Brendan Kennedy, chief executive of Privateer Holdings, a cannabis-focused private equity firm.

“There’s old money and new money. You put them in a room and they wouldn’t agree on anything else but this issue,” Kennedy said. Seattle-based Privateer also acquired Leafly.com, which offers online reviews of cannabis strains and dispensaries.

From the above, we can see that many are beginning to see marijuana as lucrative business. The article itself characterizes the opportunity as a “billion-dollar gold rush” led by “ganjapreneurs.”

The article goes on to report an analysis from San Francisco-based angel investor network ArcView Group that forecasts a 64 percent surge in the legal U.S. cannabis market to $2.34 billion by 2014.

Additionally, according to ArcView, the five-year national market could grow to $10.2 billion. The numbers depend to some degree on how many states legalize pot, and how big the states are. If Alaska and Canada hold successful referendums, the market could expand considerably.

What is also helping expand the market is new technology that can be adopted and elaborated on now that marijuana is decriminalized or legalized. Apparently, “marijuana concentrates” are popular, as is the oil from cannabis that can be used for a variety of medicinal purposes.

Variants of the plant can be used for paper, rope and other products in ways that will take pressure off slow-growth trees. And these opportunities deal directly with the plant. There are other, ancillary businesses to arise, including insurance and e-commerce.

But the biggest action will be found growing the plant itself. According to the article, “The precursors of true national cannabis companies have emerged in the form of multistate licensors and are leveraging strong branding and scalable business models.”

Companies that develop strong brands will ” be prime candidates for acquisition or public listing, especially upon federal legalization.” Brands, of course, could include everything from strains of potent marijuana to chocolate-laced marijuana and, of course, the potent oil itself.

The country that is most viably positioned to take advantage of the new “green rush” is not the US, however, but Uruguay, which recently legalized – not decriminalized – marijuana and is welcoming commercial production.

The law allows Uruguayans over 18 to buy up to 40g (1.4oz) of the drug a month and will be implemented beginning in April. The justification is that legalization will help the government reduce the influence of drug cartels and black-market marijuana.

But as we have pointed out, there are complications with the Uruguayan measure. George Soros, for instance, was a significant supporter of marijuana legalization in Uruguay, and Soros is reportedly also a big Monsanto shareholder.

Monsanto has supposedly been developing advanced strains of marijuana in laboratories outside of the United States and such powerful variations may prove attractive for both medicinal and leisure purposes. In fact, the legalization of marijuana may provide Monsanto with a foothold in Uruguay via marijuana.

But regardless of Monsanto’s ambitions, the market that is now being created will likely accommodate a broad spectrum of entrepreneurs and products. It’s rare that the opportunity to get in on the proverbial ground floor of a new and important industry presents itself so obviously and promisingly.

Marijuana is not an untried or untested product and it comes with built-in name recognition and a vast and enthusiastic user base. Whether it is the US, Uruguay or other countries, the catchment for legal marijuana will continue to grow as will its promise and ingestion. 

About the Author Anthony Wile:

Anthony Wile is an active investor, business strategist and consultant, financial markets commentator, publisher and author. Having lived and worked in several leading financial centers around the world, Wile has established an international network of asset managers, banks, family offices, financial analysts, institutional investors and securities firms. Wile is Chairman and CEO of Toronto-based High Alert Capital Partners Inc. and Chief Investment Officer of High Alert Investment Management Ltd., the general partner to High Alert Capital Partners LP.

Anthony is a pioneer of the alternative media, having founded two major websites that have presented many of the top free-market thinkers working today. Many serious commentators have adopted his insights regarding society’s Dominant Social Themes and the Internet Reformation; his personal writing and editorials have been reprinted at numerous sites and read by millions. His insights and perspectives have helped shape the conversation on the Internet when it comes to analysis of the world today and how its sociopolitical and economic trends are evolving.

Wile’s contributions continue to expand. Now chief editor of The High Alert Trends & Sector Report as well as TheDailyBell.com, Wile has recently written two new books, Freedom Investing (2013) that brings together his sociopolitical insights with economic analysis and The Best of Anthony Wile: Select Editorials and Interviews (2013), a compilation of material first published at TheDailyBell.com from 2010 – 2013. In 2003, Wile published his first book, The Liberation of Flockhead, under the pseudonym Yang. The fourth edition of Wile’s well-received book, High Alert, originally released in the summer of 2007, was published in early 2013 to a favorable reception.

Former US congressman and presidential candidate Ron Paul said, “High Alert should be read by everyone who wishes to educate themselves about the dangers fiat money poses to American liberty and prosperity. I wish I could get every member of Congress to read this book.” Wile has assisted with the completion of over a dozen additional free market-oriented books, working as a collaborative editor to several leading free-market thinkers.

As founder and chief editor of well-known, free-market oriented Internet sites such as Free-Market News Network (FMNN) and The Daily Bell, Anthony leveraged more than 20 years of financial and business experience working with growth-oriented companies in a variety of sectors. In aggregate, these free-market educational websites have reached tens of millions of viewers and helped define the cutting edge of alternative news publishing.

In 2008, Wile founded a Swiss-based publishing firm and began publishing The Daily Bell, a leading alternative news website that publishes daily news analysis, editorials and exclusive interviews conducted by Wile with leading opinion makers such as Steve Forbes, Jim Rogers, Peter Schiff and Marc Faber. While living and working in Switzerland in 2009, Wile founded the Liechtenstein-based Foundation for the Advancement of Free-Market Thinking (FAFMT), of which he served as Executive Director until March 2013.

Anthony graduated from Saint Mary’s University (SMU) with a degree in business in 1991 and worked in the Canadian investment industry with Scotia McLeod (Bank of Nova Scotia) and Nesbitt Burns (Bank of Montreal). In 1994 Anthony Wile was made a Fellow of the Canadian Securities Institute, which is a designation awarded to financial services professionals who attain advanced education and experience in the Canadian securities industry.

Anthony has visited every state in the US and every province and territory in Canada. Additionally, he has lived in a number of countries on several continents over the past three decades and has visited or done business in more than 40 countries.