DC Basic Points Dec 2012

Basic Points
THE FINAL PROBLEM
December 21, 2012
Published by Coxe Advisors LLP

Distributed by BMO Capital Markets
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Don Coxe THE COXE STRATEGY JOURNAL
THE FINAL PROBLEM
December 21, 2012

published by
Coxe Advisors LLP Chicago, IL
THE COXE STRATEGY JOURNAL THE FINAL PROBLEM

December 21, 2012
Coxe Advisors LLP. Author: Editor: 115 South LaSalle Street, 11th Floor Chicago, IL USA 60603
Donald Coxe dc@coxeadvisors.com Angela Trudeau at@coxeadvisors.com
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Basic Points is published exclusively for BMO Financial Group and distributed by BMO Capital Markets Equity Research for clients of BMO Capital Markets, BMO Nesbitt Burns, BMO Harris Private Banking and BMO Private Bank. BMO Capital Markets Equity Research Manager, Publishing: Desktop Publishing and Distribution Coordinator Monica Shin monica.shin@bmo.com Anna Goduco anna.goduco@bmo.com
THE FINAL PROBLEM OVERVIEW

In this final issue of Basic Points, we discuss what we consider The Final Problem for central banks, governments and investors in the industrial world. Tragically, capitalism's greatest triumph and the powerful global economic expansion were interrupted by capitalism's greatest infamy. The Crash was caused primarily by the major banks of Wall Street and Europe that we have long labeled as the B5The Big, Bad, Bonused, Bail-out Banks. A recession spread rapidly across the Industrial World, and panicky central banks and governments united to rescue collapsing banks, at enormous taxpayer cost. Interest rates were slashed to near-zero during the crisis, when outright deflation loomed. The ensuing recoveries have been so tepid that money continues to be astonishingly cheap for governments, and corporationsand, bizarrely, for banks. What we have called The Financial Heroin continues to flow into the veins of once-vibrant economies. Meanwhile, the segments of the population still being punished for the bankers' sins are in the lower- and middle-classes, who have long relied on saving through banks and short-term instruments. In this final issue, we cite Homer's description of a society in The Odyssey as we consider the question: When will it be possible to phase out their emergency economic and social support programs? We discuss the likelihood that the sustained dependence of governments on zero interest rates and moregenerous social benefits creates a self-sustaining system that pushes risk-taking and capitalism off to increasingly distant horizons. In the short term, if a fiscal deal in Washington survives the demands of extremists in Congress and the White House, the US economy should continue with its modest growth. The towering deficits will continue, but the inevitable crisis will probably be pushed further down the road. Canada, with the best-managed banks and the soundest macro policies, will continue to grow moderately. In the eurozone, there are currently no alarm bells to drown out the Christmas bells, but economies remain weak and the PIIGS remain crisisprone. Our long-cycle view remains intact: Global economic leadership will continue to reside with the former socialist Asian economies that most enthusiastically embraced capitalism to emerge from poverty. We call their astonishing performance "The greatest efflorescence of personal economic liberty in history." Since these economies have far higher commodity content than the frail, senescent Western economies, commodity prices should remain firm. Best wishes for the holiday season and next year. For those who wish to keep informed on our views, a new product offering will come shortly to those who express interest to us via our website. Many thanks for your sustained, enthusiastic support over this long timespan. You have been truly wonderful! Don Coxe December 2012 1
December 2012
THE COXE STRATEGY JOURNAL
THE FINAL PROBLEM

President Reagan observed that nothing in Washington is so permanent as a temporary government program. This time, the Crash-spawned record levels of fiscal deficits have endured three years into the recovery, as have the Fed's zero interest rates. Investors and businesses have become accustomed to zero and near-zero rates on debt and economic growth. What happens when (if?) central banks start raising rates and government social spending is cut while unemploymentparticularly long-term unemploymentremains high? Should investors long for a reversion to normal fiscal and monetary policies, or be terrified of the likely consequences? This discussion of The Final Problem is appropriate for the final issue of this publication's two decades of commentarya long lifespan for a strategy journal. We began publishing just after the collapse of Marxism's greatest triumph, the Soviet Union. Thanks largely to President Reagan and Margaret Thatcher, Stalin's empire joined the Bourbons and Ozymandias, shattering not with a bang, but a whimper. The West had won. The sudden death of Mother Russia was a horrendous shock to most socialists. China, India and Indonesia drew the appropriate conclusions, and committed their economies to progress along capitalist lines. That momentous global revolution meant that Basic Points was blessed with a near-perfect background for its concepts at its birth and in its first fifteen years of distribution. As long as industrial nations' stock and bond markets prospered amid economies progressing on mostly capitalist lines, and the principal challenge to these economies was from emerging economic powerhouses embracing ruggedly capitalist themes to create competitiveness and progress, our free market-based recommendations drew a wide audience of investors. For the first time in the modern era, massive monetary expansion and plunging yields have failed to ignite an economic recovery that would drive investors from bonds to stocks. That is the root of the investment problem.
Should investors long for a reversion to normal fiscal and monetary policies?
December 2012
THE FINAL PROBLEM

Basic Points and the Bond Bull
Little did we know that the bond bull had barely reached puberty. Basic Points was created in 1992 primarily as a bond-oriented strategy publication that would also comment on important trends in equity markets. Most of us involved in its design assumed that the bond bull market born in August 1981 would, like all its predecessors, soon succumb to the bond bears born amid strong economic growth. After blowing out the candles on its eleventh birthday, it would surely age rapidly and die. We felt vindicated in that bond forecast when, a year later, bonds stopped rallying and were hit hard, with the Treasury Ten-Year's yield climbing from 5.2% to 8%. Little did we know that the bond bull had barely reached puberty. He has recently attained Methuselah status, celebrating his 31st birthday shortly after attaining a record 1.43% Ten-Year yield. Romping on sunlit uplands, the bond bull has the last laughoutliving Basic Points. However, this boffo bovine has long since outlived his welcome. In recent years, his success has been achieved, not for his own value, but as the default asset among an unappealing range of choices.
US Treasury Two-Year Note Yield December 19, 2007 to December 19, 2012
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 0.25
December 2012
Three years ago, we coined the term "financial heroin" for the zero and nearzero yields central banks were providing. A financial historian contemplating that yield chart for the Treasury Two-Year Note can only marvel. How, based on history, can there be a functioning US economy? Five years ago that note yielded 3%, modestly above the inflation rate. Now it seems to have been transmogrified into a North American extension of Japonaiserie, yielding a barely-perceptible 0.24%, as investors jettison concerns for a return on money in favor of preoccupation with a return of money. But, as remarkable as those Two-Year yields may be, over the long term, the bond bull has been most impressiveand rewardingfor investors in longterm Treasurys.
30-Year Treasury Bond Yield December 19, 1982 to December 19, 2012
14 12 10 8 6 4 2 Dec-82 Dec-86 Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 2.81
Long-term, non-callable, high-quality bonds have, on a cumulative basis, outperformed US stocks over 31 years. Under free-market economic theory, that is supposedly impossible.
If capitalism were in a hospital and this chart were at the end of its bed, visitors would be ordering flowers for the widow. The long-term performance of the Long Treasury documents a trend unique in modern economic history: Long-term, non-callable, high-quality bonds have, on a cumulative basis, outperformed US stocks over 31 years. Under free-market economic theory, that is supposedly impossible. The basic math of capitalismits Law of Gravitystates that Risk Assets, such as stocks and real estate, must, over the long term, deliver higher returns than risk-free assets.
December 2012
THE FINAL PROBLEM

This cumulative long-term underperformance of the risk assets, which have historically been the incentives for capitalist managers and investors, arose because of two gigantic busts coming within just eight years: They are the bad priests in the secular church of capitalism. The first blow to the Reagan-born Boom mentality of the late 20th Century was the Triple Waterfall Crash of Technology Stocks, starting just after the old Millennium died. Then came the frantic, force-fed housing booms in the US and most European countries, which ended with the Momma Bear1 Bank Crash of 2007-9.
KBW US Bank Stock Index (BKX ) July 1, 2002 to December 19, 2012
120 110 100 90 80 70 60 50 40 30 20 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12
48.56
Those disasters continue to inflict pain on financial markets, and, more importantly, economies across the Industrial World. Capitalism bleeds not from its failure but because of wounds inflicted by a tiny minority of greedy people masquerading as capitalists. They are the bad priests in the secular church of capitalism. Result: the S&P this year has been trading where it did thirteen years ago, and bonds have been trading where they have never before. The global economy continues to grow, albeit modestly. Thankfully, capitalism isn't deadyet.
Teddy Bears, Baby Bears, Momma and Papa Bears are described in Chapter One: The Taxonomy of Bears; The New Reality of Wall Street (2003, McGraw Hill)
December 2012
However, thirteen years of cumulative zero returns is enough to induce financial triskaidekaphobia. Shell-shocked pension funds are fleeing from stocks to bonds; in response to the zero capital appreciation on stocks and central bank promises of sustained zero short-term rates, they are overweighting the asset class that seems to keep on outperforming, even though current bond yields are off the bottom of the charts. The result is an historic rejection of the Capital Asset Pricing Model (CAPM) with its Efficient Frontier for projecting asset returns according to risk. (For readers unfamiliar with this formula, an oversimplified definition might be helpful: the CAPM ranks asset classes according to risk and expected longterm returns, with Treasurys and other AAA-rated government bonds being the risk-free asset classes against which all others are measured. A pension fund decides what its long-term expected rate of return should be, and constructs an asset mix composed of a wide range of asset classes, based on their respective risks and historical rates of return.) With current yields so low, this investor flight to bonds is the money under the mattress approach to wealth-building. According to The Financial Times, US public and many private pension funds are still projecting that they will, for decades ahead, earn 7-8% long-term returns, while European and Asian funds have been slashing their projections to 5%. The US practice makes as much sense as promising to pay aging, expensive sports stars at their current rate for a further 20 years. Not even the Cubs would do that. How can US pension plans get away with forecasting such optimistic expected returns? In part, the US projections could be rooted in a peculiarity of pension funding rules under the Employee Retirement Income Security Act (ERISA) and the pension fund costing rules for calculating corporate profits as set out in Financial Accounting Standard Board's pension profitability rules under FASB 87.
How can US pension plans get away with forecasting such optimistic expected returns?
December 2012
THE FINAL PROBLEM

We commented on this anomaly in 2003, when we discussed the report of IBM's pension fund, which was based on its own version of the CAPM. IBM was projecting an 8% future rate of return on its fund's bonds, at a time the Thirty-Year was yielding roughly 4.8%down from 9.4% in 1990. According to practices under ERISA, regulators can look at funds' previous asset class returns as the basis for future projections. The regulators accepted IBM's contention that its long-term annual bond returns were far above 8%, so there was apparently nothing wrong with projecting those splendid returns forward. The IBM pension fund return implicitly assumed a neverending bond bull; as a result of the rules of FASB 87, that projection produced earnings-per-share gains that were most welcome when the company was struggling in rebuilding mode. The CAPM faces an existential challenge to its formula of projected returns above the Risk-Free Rate of Return on government bonds. Meanwhile, the Basel rules for bank investing and accounting face a different kind of existential challenge. The increasingly perilous finances across most of Europe have meant that the risk-free rating applied to sovereign bonds has become increasingly dubious. Previously, the eurozone's proclaimed rule of admitting only financiallysound governments committed to modest deficits had convinced bond rating services and investors that all European sovereign bonds were risk-free. Result: portfolios of banks and pension funds became heavily laden with debt from what came to be known as the PIIGS (and now, in the Orwellian sanitized form, as the GIIPS)Portugal, Ireland, Italy, Greece and Spain. At an early stage in the Grand Illusion, Greek Ten-Year bonds briefly yielded as few as eleven bps above German Bundswhich were the unquestioned standard of excellence. In a Chicago speech last year, Axel Weber, former head of the Bundesbank, cited this dependence on a flawed model as a major factor in the ongoing eurozone crisis. "The banker who bought Greek bonds for eleven bps over Bunds wasn't making an investment decision, but was buying off the model, seeking a bonus for outperformance," he said, with an audible sneer.
...what came to be known as the PIIGS (and now, in the Orwellian sanitized form, as the GIIPS)...
December 2012
According to The Financial Times, "UK pension funds are holding more bonds than equities for first time since the so-called cult of equities in the 1950s..... Alan Wilde, head of fixed income and currency at Barings, added, 'The cult of equity is dead or at least has been on life support since 2002/3 following the dotcom crash and corporate problems in the US with the likes of Enron'..... Pension funds have been slowly switching back to bonds in an attempt to best the volatility of equity markets and receive a guaranteed income stream to meet pension payments.....The Pensions Regulator.....said UK funds hold 43.2% in gilts [UK government bonds] and fixed interest compared with 38.5% in equities." The Long-Term Capital Market crisis of 1998 came from reliance on a fatallyflawed modelthe Value at Risk model based on Black-Scholes. The Crash of 2008 came from reliance on yet another fatally-flawed model: decades of reliable returns on home mortgages and instruments tied to home mortgages gave AAA ratings to home mortgage portfolios. That blanket approach stimulated a cancerous growth in complex instruments with heavy weightings in dubious or outright fraudulent mortgages. Where there are losers, there must be winners. There have been some notable beneficiaries from the lemming-like flow of investment funds into bonds. Financially strong cash-generating companies with records of modest or nonexistent dividends, such as IBM and Microsoft, have been borrowing big at rates of 1% or less to pay dividends, thereby attracting equity investors committed to stocks yielding more than the Financial Heroin ratezero, or near-zero. Historically, companies that floated bonds to pay dividends were regarded with disdain. Now, they are the new blue chips for conservative dividend funds. Benjamin Graham would be aghast.
There have been some notable beneficiaries from the lemming-like flow of investment funds into bonds.
December 2012
THE FINAL PROBLEM

Central Banks Fatten Up As Economies Slim Down
The central bankers assured investors that zero and near-zero rates were temporary emergency injections... Those microscopic yields on debt of governments deemed sound were the products of the 2008 crisis, as central bankers and governments rushed to rescue banks and economies. The central bankers assured investors that zero and near-zero rates were temporary emergency injections that would not trigger stagflation, because economies were so weak. Once economies rebounded, rates would return to normal. The surge in gold prices was, Street economists assured us, based on flawed analysis of the supposed inflation risks from what some of us considered the financial elephantiasis suddenly bloating central bank balance sheets.
US Monetary Base January 1,1992 to December 19, 2012
2,500 2,000 1,500 1,000 500 0 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12
Source: Federal Reserve Bank of St. Louis
2,651.80
Japan: Monetary Base January 1,1992 to December 19, 2012

1,300,000 1,200,000 1,100,000 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12
Source: Bank of Japan
1,244,449
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December 2012
Switzerland: Monetary Base January 1,1992 to December 19, 2012

350 300 250 200 150 100 50 0 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12
Source: Swiss National Bank
348.950
...the federal government has been spending on a scale not seen since World War II, boosting the National Debt by more than 40% in just four years.
European Central Bank: Base Money (Monetary Base) February 1,1999 to December 19, 2012
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11
Source: European Central Bank
347,812.00
What we have found most worrisome is the poor US economic performance since 2009 despite an all-out effort from Washington to revive the sick economy. The Obama Administration and the Fed have united to pull the US out of recession by employing the techniques recommended by the two best-known macro economists of the last centuryJohn Maynard Keynes and Milton Friedman. The Fed has ballooned its Monetary Base more dramatically than ever before (and is about to do much more) and has hugely lengthened the duration of its assets; simultaneously the federal government has been spending on a scale not seen since World War II, boosting the National Debt by more than 40% in just four years.
December 2012
11
THE FINAL PROBLEM

Yet, despite all that Fed monetization and all that spending and all that new debt, the US economy has barely avoided sliding back into the recessionary bog. Unemployment rates remain high, but would be truly grim were it not for the many millions who have given up looking for jobs and goneItalian styleonto disability benefits and food stamps. Example: last month's Nonfarm Payroll report showed a slight decline in the unemployment rate, largely because a further 330,000 people dropped out of the workforce. Where have all the workers gone? The Presidentand most economistsassumed that all that fiscal and monetary stimulus would kick-start a sustained recovery. Republicans have wasted the nation's time in wailing of the waste in the $798 billion of Obama-Pelosi stimulus spending. Of course, much of the stimulus money was wasted on cronyism, but Keynesian economics decrees that what counts is spending the moneynot how efficiently it is spent. Keynes said that even paying men to dig ditches and fill them up was better than practicing tightfisted monetary policies. The ditch-diggers would immediately spend their paychecks, and the economy would rebound. In today's enlightened times, men (and women) aren't paid to report for work to do something useless: they're paid to stay home and watch TV. But they are still consumers. Had Obama not turned on the spending fire hoses full blast, the economy might well have slipped back into recession. Where the hoses were directed is less important. Government is, by its nature and employment practices, far less efficient than the private (non-big-banking) sector in allocating resources, except for maintaining civil order and defending the nation against enemies. As for waste, the Bush Administration was no model of flinty proficiency. Its "No Child Left Behind Act" failedat large costto improve the tragically low academic standards in so many of the major metropolitan school districts. It also launched a war against Iraq at a time the nation was already at war in Afghanistan based on dubious intelligence about Weapons of Mass Destruction. (They weren't there, but the Pentagon is now alarmed that they were trucked to Syria for safety prior to the invasion and are available to the desperate Assad.) The reason the economy is struggling to stay above water is not because of government waste and corruption. Even Ben Bernanke suggested, half-seriously, that scattering money from airplanes was better than doing nothing.
Republicans have wasted the nation's time in wailing of the waste...
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December 2012
Therefore, what investorsand legislatorsshould ask is, "Why won't the economy grow?" Apart from Paul Krugman and his allies on the Extreme Left, nobody believes the nation can go nearly a hundred billion deeper in debt every month forever. When will the economy be strong enough for a return to something even vaguely approaching fiscal prudence? We suggest two explanations: one from a respected economist, and one of our own.
1. Robert Gordon's Thesis

Professor Robert Gordon of Northwestern University, a distinguished economist with a global reputation, has recently advanced a provocative thesis that is attracting considerable attention.2 In the early days of the Obama Administration he, like most academic economists, was very optimistic that Obama's and Bernanke's policies would pull the nation out of the recession and put it on a sustained path to strong growth. He was confident enough to predict 4% GDP growth for late 2009 and thereafter. That never happened. Why? Dr. Gordon has pondered this question and come up with a worrisome answer: we aren't getting the huge, sustained gains from transformative and disruptive new technologies that kick-started and sustained earlier recoveries because of multiplier effects that stimulated job creation across broad sectors of the economy. And we may not be seeing any more of them. In his thesis, the rapid growth and ascent to world economic leadership of the United States is due to three successive industrial revolutions: No. 1 - steam and railroads from 1750 to 1830; No. 2 - electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum, from 1870 to 1900; and No. 3 - computers, the web, mobile phones from 1960 to present.
2
...we aren't getting the huge, sustained gains from transformative and disruptive new technologies that kickstarted and sustained earlier recoveries...
(See, for example, Martin Wolf's admiring analysis of his work in The Financial Times: Is unlimited growth a thing of the past? October 2, 2012)
December 2012
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THE FINAL PROBLEM

He notes that the Edison light bulb and the Bell telephone came out almost simultaneously, and those inventions stimulated the birth and rapid growth of the US electricity and telephone industries which became major drivers of economic progress for decades, creating millions of jobs directly and indirectly, while improving productivity on a sustained basis. At about the same time, Benz was perfecting the internal combustion engine; within a few decades came the Model T Fordpriced at $850 initially and thanks to assembly-line production, just $300 by 1925. Nearly everyone could afford a car, and that meant roads, gas stations, and repair shops had to be built, year in, year out, and the oil and gas industry had to produce more fuel, year-in, year-out. Eisenhower's peacetime victory of getting Congress to commit to the Interstate Highway System re-launched the faltering economy in the 1950s. Such a huge series of projects took a while to build momentum. Perhaps more importantly, it took a few years to generate the multiplier effects from interchanges and new supply chains. That growth had just begun to feed on itself as JFK won an election on the platform of "Getting America moving again." Here are some other examples of key productivity and economicallystimulative breakthroughs: 1. The Otis elevator (Technology's gift to the Chicago Loop) was one of the important spinoffs after electricity became available. It meant that buildings where people worked (and later, lived) could be more than eight stories high. The multiplier effects have continuedon and offfor more than a century. Skyscrapers changed city's skylines and created workspaces within range of each other that led to sustained productivity gains. 2. Willis Carrier's invention of air conditioning had major implications for skyscraper development. But its most crucial effect began in the 1920s, as air conditioners spread into the backward and depressed American South. The multiplier effects of this breakthrough have continued within the USA, and across much of the tropical and sub-tropical world. 3. Air travel created millions of good jobs worldwide, spawned growth in vacation communities and conventions, and eventually became the basis
...came the Model T Ford priced at $850 initially and thanks to assembly-line production, just $300 by 1925.
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December 2012
of high-end global supply chains. It is, for example, estimated that there is more than one job on the ground for every plane landing at Chicago's O'Hare airport. However, Gordon notes, it has long since ceased to be progressing in a transformative way. With the abandonment of the SuperSonic Transport service operated by British Airways and Air France, airlines have actually increased significantly the time it takes to fly the fastest civilian airplanes across the Atlantic in the most modern aircraft, a setback he considers virtually unique in the history of industrial technology. Then came the digital revolution, which in comparison to the two industrial revolutions, has come and matured quickly. For three decades, computers, the Internet and cellphones have promoted global growth in ways planned and unplanned. He doesnt downplay the significance of this revolution, but is skeptical that it will be a big job-generator in the USA going forward. Dr. Gordon hasn't seen many transformative breakthroughs on a net US job-creating basis in recent years, and suspects they may not happenbecause future advances will face the headwinds generated, in part, by that very success. These include demography, education, inequality, globalization, energy and the overhang of consumer and government debt. The Internet is a classic capitalist creation which promotes creative destruction across wide sectors of society, but, at least for the USA, he doubts that it will be the basis of major net jobs gains in the foreseeable future. Those who lament the loss of brick-and-mortar bookstores and shops are probably sentimentalists. However, it is unclear that Web distribution, which, in its early stages was fueled by evasion of state and municipal sales taxes, is a sustainable macro-model for job creation and GDP growth. He believes that net global productivity growth will continue, but the productivity growth of the US will abate while the rest of the world advances. Dr. Gordon is an enthusiast about infrastructure investmentroads and bridgesbut doesn't see such projects as inherently transformative in a macro sense. It costs a lot more to build a bridge today than in the Depressionand employs far fewer workers. His thesis has evoked debate, but nobody has, to our knowledge, ridiculed it or refuted it.
...future advances will face the headwinds generated, in part, by that very success.
December 2012
15
THE FINAL PROBLEM

AgricultureSustained Productivity Gainer
In a small group discussion of Gordon's thesis of the great economic inventions, I suggested he include agriculture by adding Justus von Liebig's discovery of the Law of Limits to Plant Growth, which triggered the development of the fertilizer industry, thereby launching the expansion of yields per hectare, and allowing the planet's population to multiply while starvation rates fell. He found that the three elements of plant growth were potassium, nitrogen, and phosphorus. Each plant growing in each locale had specific needs for each of the three chemicals, and spreading more of one or two without the third would not deliver good returns. Chemical fertilizers became huge contributors to global population growth. Potash Corporation's charismatic Bill Doyle tells of an exchange he had at a social event with a guest who asked him what he did. When he said he was head of the world's biggest fertilizer company, the reply was, "Well, of course, I believe we should only use natural fertilizers." "An appealing idea, I'm sure," smiled Doyle, "but we'd have to close all the national parks and forests." "Why?" "Because we'd need all that land to provide grassland for all the cattle we'd need to produce the manure we'd need to produce the crops we need."
...we'd need all that land to provide grassland for all the cattle we'd need to produce the manure we'd need...
Pharmaceuticals as Transformative
What about pharmaceutical breakthroughs that lengthen lives and make millions of people more productive? They are truly wondrous, but they come at huge cost: Social Security, Medicare and pension plans are being undermined and even bankrupted by keeping people alive longermuch longer. (We discussed Peter Thiel, of PayPal fame, who is one of the successful entrepreneurs who are committing themselves to funding research into what they call immortalitylengthening lives by centuries. They talk coolly of the prospects of achieving such longevity within decades. He is not, we understand, behind the eerie project of keeping Ted Williams' brain cryogenically for the day when technology will permit installing it in some lucky athlete's craniumwho could be transformed into the next batter to hit .400.)
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December 2012
2. Our Thesis
We agree with Dr. Gordon's macro view, but suggest that there are special factors hampering the economy this time. Collectively these problems form today's Final Problem. We are of the view that two forces stand in the path of resuming rapid, sustained economic growth in the USA and Europe. In essence, we believe that by prolonging the administration of the cure for the Crash, the economic impact might well prove to be almost as debilitating over the longer term as the disease. We also wonder whether a series of interlocking and selfreinforcing factors guarantee that what we call "financial heroin" must keep flowing. As a result of the implosion of much of the private economy, and the explosion of government programs and entitlements, the private sector may not be able to produce enough real wealth to pay for the government and still finance its own sustained growth. Under Obama, Washington's share of the economy has soared to a postwar record of 24%, up sharply from the mid-teens in the Clinton and Bush eras. However the Fiscal Cliff clash between the Far Left and the Far Right is ultimately resolved, Obama is emerging the victor, leading a united party, and the Republicans are deeply dividedso Washington's share of GDP will continue to grow, and the economy will continue to struggle. Big government is what 52% of the voters wanted and that's what they'll get. Elections matteras they should. Meanwhile, as too many politicians and pundits are preoccupied with the Fiscal Cliff and in refighting the election, the continued flow of financial heroin may already be undermining the functioning of the private economy. Clients will recall that we coined that term three years ago when we were on a panel in Denver with the eminent David Dodge, who had recently retired as Governor of the Bank of Canada. He said in his speech that it was important that central banks move interest rates back to normal levels as soon as possible, primarilybut not entirelybecause of the risk of inflation.
Obama is emerging the victor, leading a united party, and the Republicans are deeply divided...
December 2012
17
THE FINAL PROBLEM

As he spoke, I thought of what my father had told me of his experience in the Italian Campaign in WWII. He performed more battlefield anesthetics than any other Canadian doctor, for which he was cited. He said that the key skills needed were (1) identifying which wounded soldiers needed heroinwhich was, by far, both the riskiest and most potent anesthetic, and (2) when it was necessary to withdraw it in favor of morphine. That switch produced great pain for wounded soldiers accustomed to heroin, because morphine wasn't as potent. But the soldiers had to be taken off heroin as soon as possible because they would soon be addictsuseless as soldiers and possibly destroyed as human beings. I began my speech by suggesting that zero interest rates were financial heroin. Mr. Dodge commended me, saying this was a great analogy. In discussion later, we agreed that failure to exit from zero rates would create huge problems. As the years pass, and the heroin and handouts keep flowing, we increasingly worry about the longer-term harm to the US economy from zero interest rates, the extensions of the duration of unemployment benefits, and the dramatic increases in the numbers of recipients of food stamps and disability benefits. Could the cumulative effect of all that well-intended government assistance mean that too much of the population might be morphing into a new version of the lethargic Lotus-eaters Homer describes in The Odyssey? Odysseus' ship was blown off course and landed on an island (supposedly near present-day Libya) where the residents, who dined on the lotus flowers, were peaceful, happy and sleepy. They willingly shared the flowers with crew members: Any crewman who ate the lotus, the honey-sweet fruit, lost all desire to send a message back, much less return, their only wish to linger there with the Lotus-eaters, grazing on lotus, all memory of the journey home dissolved forever. But I brought them back. I forced them, hauled them under the rowing benches, lashed them fast.3 This account of Odysseus's alarm at the effects on his battle-hardened crew from the opiate in the flowers, and his forcible roundup made us wonder whether years of government support and poverty programs at a time that manufacturing and heavy labor jobs have been disappearing might have a similar effect on millions of Americansand on the seemingly dwindling lan vital of the American economy.
...their only wish to linger there with the Lotus-eaters, grazing on lotus...
The Odyssey / Homer; translated by Robert Fagles, 1996
18
December 2012
Millions of Americansparticularly menhave been dropping out of the workforce and migrating to disability benefits (and food stamps, and other benefits) at participation rates approaching those for which Southern Italy has been long renowned. They are replacing time in the workplace with the TV and its hundreds of channels to dull their intellects and drive. As economists note with increasing concern, the percentage of the Long-Term Unemployed keeps growing even as overall unemployment numbers shrink modestly. This is a slowly-unfolding national tragedy, because the longer these people are off work, the less likely are they to qualify for the available jobsat least in the eyes of potential employers who aren't eager to add employees anyway, in face of rising taxes, slow demand growth, and the onset of ObamaCare. The result is that each deal between Obama and Congress includes a provision to renew support for the long-term unemployed. How do the zero interest rates figure into this large-scale lassitude? (1) Banks and businesses are hoarding cash, even though it yields near-zero. Why take needless risk? (There is already discussion about the possibility of negative short-term funds.) As cash grows, the economy doesn't. The Keynesian multiplierin the form of rapid growth of M-1 and M-2hasn't kicked in. Bernanke keeps increasing the supply of water but he can't make the horses drink. (2) The Fed's Operation Twist has so depressed long-term rates that a HighYield bond today yields what an AA corporate yielded even a few years ago. Biggest losers (apart from pension funds) from Ben's Lotusian formulas for bad banks: seniors saving through bank deposits and "safe" Treasurys. Their incomes decline inexorably. (3) More and more investors satisfy themselves with the lotus-like dreamy risk aversion of investment in bonds whose yields are as minimally nutritious as flowers, shrinking from the unpalatable stock market that has given a zero return for approximately the time it took Odysseus to return from Troy to Ithaca. (4) The longer the Lotusian heroin flows, the more dauntingand remote becomes the possibility of central banks returning rates to normalcy. Is the economy already too dulled and disappointed to withstand the changes accompanying an economic recovery? The US deficit is already
More and more investors satisfy themselves with the lotus-like dreamy risk aversion of investment in bonds whose yields are as minimally nutritious as flowers...
December 2012
19
THE FINAL PROBLEM

at Himalayan levels, although the cost of servicing the debt rises only modestly in comparison, because, as outstanding bonds incurred in more muscular times mature, they are rolled over into heroin-priced bonds and bills. Mr. Obama brashly claims credit for the drop in interest costs below forecasts as his big spending cut in his bargaining with Mr. Boehner. What will happen when (if?) Treasury ten-year rates move back to their average levels of the five years before the Crashroughly 4.25%? What programs would have to be slashed or eliminated? What would happen to rates on the $1 trillion in student loans, the increasingly osteoporotic backbones of the over-priced and over-tenured university and college system, that now exceed national credit card debt? What would happen to the already-fragile stock market? Would the frail housing recovery survive the onset of higher-rate mortgages? As for the government, a 2% rise in blended Treasury yields would add roughly $300 billion to annual debt servicing costsroughly three months' current deficits, and roughly half the presumably painful non-military spending cuts proposed in one of the many proposed deficit-reduction compromises that circulate in the smog of Washington. How could Dr. Bernanke take his still-fragile patient off the financial heroin and inflict such terrible pain? The heroin analogy suggests serious problems preventing the economy from regaining its mojo through risk-taking. One of capitalism's crucial attributes is its cold-eyed use of the price mechanism to allocate resources and evaluate risk. When the economy is vibrant, equity prices rise, the Keynesian animal spirits revive, and money flows to increasingly-risky investments.
CBOE S&P 500 Volatility Index (VIX) January 1, 2012 to December 21, 2012
28 26 24 22 20 18 16 14 12 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 17.11
How could Dr. Bernanke take his still-fragile patient off the financial heroin and inflict such terrible pain?
20
December 2012
But the sustained flow of financial heroin may be diluting the effectiveness of the capital pricing mechanisms. The VIX Index has this year treated disappointing economic growth, fears of the fiscal cliff, and intermittent eurozone crises with a Lotusian "What Me Worry?" attitude. As more and more Street commentators assure us, central bankers have, after years of struggling, accumulated the knowledge, connections, strategies and firepower to handle almost any crisis. So we don't need volatility protection anymore. Relax and sniff the flowers! Capitalism only works well when its Risk/Reward principles are functioning effectivelyand there are both winners and losers. Its failure came when the Big Bad Bonused Bailout Bankers collectively agreed on risk and leverage strategies that rewarded them on Croesus scale, with the risk being assumed first by their counterparties, then by their stockholders, then by their governments, andultimatelythe global economybut not by the greedy, reckless riskcreators. Yes, through pressuring the banks under the amendments to the Community Reinvestment Act in 1997 to make loans to minority applicants with 3% or less down, the government, and Fannie and Freddie, pushed the industry toward what turned out to be the abyss. IBD (Investors Business Daily) cites a recent study showing the leap of such high-risk loans from less than $300 billion in 1997 to $6.1 trillion in 2008. It quotes Jamie Gorelick, (during her brief $120 million tour at Fannie Mae when it bulked up on subprimes) telling a bankers' convention Fannie wanted more "CRA-friendly loans." The banks caved because (as we have learned from discussions with bank executives) if their CRA scores weren't high enough to satisfy the government, they'd be banned from mergers and would face a wide range of other penalties, including constraints on bonuses. But "The Devil made me do it" is a pathetic defense for a betrayal of capitalist principles that triggered a global financial collapse. Investors collectively seem to believe that risk has been marginalized because The System has learned how to prevent crashes, and therefore they need not feel pain. Is the pricing mechanism of capitalismpain vs. gainso anesthetized, and has the economy been so weakened that it cannot withstand normal interest rates?
Capitalism only works well when its Risk/Reward principles are functioning effectively and there are both winners and losers.
December 2012
21
THE FINAL PROBLEM

We can't resist summing up our concerns with a limerick: Flower Power's Hour Most of The West's economies are being reduced to being handmaidens to big, financially-stressed governments and big, financially-distressed banks. Ben gives us the Land of the Lotus. The Dems give us chances to vote us More Washington gifts, With no need for thrift, While we drink in the dream words from POTUS.4 Fortunately, there are a few strong Asian economies that still believe inand practicesome of the core concepts of capitalism. Most of The West's economies are being reduced to being handmaidens to big, financially-stressed governments and big, financially-distressed banks. Economic growth under Capitalism has never been driven by those institutions and bureaucracies. It has been driven by inventions, free trade, risk-taking, upward mobility and creative destruction. Until that muscular, risk-accepting society returns, the historic high returns on the stock market will not. The only competitive and risky Lotus is a racing car.
For those not steeped in Beltway acronyms, POTUS stands for President of the United States.
22
December 2012
The Arab Revolutions

We received criticism when we expressed doubts about the likelihood of happy outcomes from the dreamy demonstrators in Tahrir Square, and their cell-phone-linked counterparts across most of the Arab world. To us, this was a spontaneous and probably fragile outpouring that would probably be taken over by illiberal men with tough agendas who had long been awaiting the fall of the old-line dictators with limited agendas. It is what happened to the liberal Girondists in the French Revolution and the liberal Mensheviks in the Russian Revolution. The Egyptian Revolution is particularly tragic, because it evolved spontaneously and was broadcast live globally on TV, and seemed to come to a bloodless, successful conclusion because of the intervention of the American President, who had long been identified with support for Africans seeking freedom from oppression. Those of us who questioned the likelihood that the secretive and determined Muslim Brotherhood had suddenly become a liberal, tolerant, non-sectarian force for democracy crossed our fingers. Its Constitution commits it to Shariah and jihad, but this wouldn'twe were toldaffect the Brotherhood's behavior in government. Early reviews in the mainstream media were breathlessly optimistic: the Brotherhood accepted full rights for women and Christians, would respect Egypt's treaty with Israel, and welcomed Western tourists. Its leadership promised not to contest the parliamentary elections or the election for the Presidency. Egyptians now know how those promises have worked out. They see how courts have begun imposing lengthy jail sentences on Coptic Christians for making remarks deemed insulting to Islam. They see how the army has, to preserve some of its privileges and profits, become the protector of the new regimeand not of the dissidents. Nor is there much reason to be optimistic about Libya. The Benghazi deaths of four brave Americans in a terrorist raid on the anniversary of 9/11 are testimonials to the Administrations delusion that Al Qaeda had been vanquishedand to the chaos that follows the collapse of a dictatorship. Egyptians now know how those promises have worked out.
December 2012
23
THE FINAL PROBLEM

As this week's devastating report confirms, weeks of requests for increased protection were denied by State. No one in the Administration thought that 9/11 might be an anniversary event for terrorists, because "The War on Terror" is a term banned from usage by anyone in authority. When the slaughters occurred, they blamed it on a videoand jailed the creator. To us, the worst outcome of the Libyan "liberation" for Africans to date has been the takeover of peaceful, historic Timbuktu by forces allied to Al Qaeda in the Mahgreb who were battle-hardened and armed in the Libyan campaign. But even in our most pessimistic moments, we did not anticipate the horror story that Syria has become. Aleppo is said to be the oldest continuouslyinhabited city in Asiaperhaps the world. Damascus has long been characterized by scholars as the birthplace of the Christian Church, because of Paul's conversion. Throughout the sweep of history, those cities have never experienced savagery on such a scale. Amid the unraveling of authoritarian regimes across the Mideast, Israel, as the lone democracy, is now more isolated than it has been since the Yom Kippur War. Its Iron Domethe latest triumph of its amazing technology industriesprotected it against the rockets Hamas had accumulated from Iran and other sources. However, Turkey is no longer a quiet ally, with President Erdogan dismissing Israel as "a terrorist state." Next year, according to almost all the experts, Iran will be testing its first nuclear weapon. Summing up, if you, like us, found the news from the Mediterranean distressing this year, prepare for greater disappointments in 2013.
To us, the worst outcome of the Libyan "liberation" for Africans to date has been the takeover of peaceful, historic Timbuktu...
24
December 2012
The Commodity Outlook in Coming Years

The second commodity boom since Nixon closed the gold window was interrupted by the Bank Crash. That Crash left scars worldwide, but mostly in the industrial world, where government debt suddenly exploded, and continues to grow faster than GDPs. Thanks to medical science and the pharmaceutical industry, Baby Boomers will be living longer than they expected, and, thanks to the tech mania and the Crash, with less money than they expected. Thanks to their collective reproductive restraint, there will be fewer workers to pay for their Social Security and ObamaCare. Fortunately for them, there are several billion people in Asia who will keep global GDP increasing even as Europe and the US will be collectively engaged in Sisyphean struggles to grow economies fast enough to service the government debts for which the Boomers and Gen-Xers can claim the greatest credit. The Emerging Economies which gave us The Greatest-Ever Commodity Boom got a sharp shock from Wall Street in 2008, and are now adjusting to the reality that their basic economic and business models need redrafting. China and India, in particular, assumed that the capitalist economies would continue to prosper from their reliance on the sound economic principles which these new economic powerhouses had eagerly adopted. Unfortunately for the Asians, the West is, with a few exceptions, no longer driven primarily by capitalist risk-taking, and its new political leadership is collectively dedicated to collectivist approaches to paying for welfare statism. The economic flab and flatulence that now characterize the eurozone and is gaining credence in the US, means Asian powerhouses won't have strong export markets in the Old World. So what does this mean for commodity prices? The fashionable view on Wall Street these days is that, if there ever was a "Commodity Supercycle," it's over. Strategists long adept at finding new parades and leaping in front of the marchers are telling us that commodities are losersor even kaput. ...Baby Boomers will be living longer than they expected, and, thanks to the tech mania and the Crash, with less money than they expected.
December 2012
25
THE FINAL PROBLEM

What is the evidence for this catastrophic commodity price collapse? Compared with five years ago, Brent Crude Oil is up 16%, Copper 14%, Iron Ore 24%, Corn 64%, and Soybeans 30%, while Wheat is down 9%. As for the precious metals, Gold is up 98% and Silver has doubled. The one major commodity that makes the collapse case for these trendfollowers is Natural Gas, which has plunged 52%. That however, is the US price, which is a victim of the shale miracle. Elsewhere in the world, natgas sells for as much as three or four times the US priceand far higher than where US prices were five years ago. Yes, many commodity prices are below their peaks, but so is the S&P, which doesn't prove that equities are dead. (We cannot resist noting that one of the most determined proclaimers of the end of the commodity boom is Citigroup, whose stock price five years ago [reverse split-adjusted] was $311, and now trades for $37.25). Since we have so often made the case for well-chosen commodity stocks, and since we could be deemed partis pris because we are established commodity stock portfolio managers, we'll just note that the economies growing far faster than any North American or European economies continue to be the price-setters for commodities. The commodity stock investor is, in essence, relying on that growth disparity to continue, whereas the commodity stock rejecter is saying it will not. Those who ridicule commodity stock investing are tacitly saying that the GDP of the OECD countries will, once again, outperform the GDP growth of China, India, Indonesia et al over the next five years. Apart from momentum, what makes that implied forecast look absurd is that the national debts and national cash flows of leading Asian nations look blue chip compared to the US and the eurozone. We can understand that the Obama backers on the Street have rose-colored glasses about what he will achieve in his second term, and therefore reject commodity stocks, but we do not share their belief in his financial prudence. He submitted no budgets in his first two years in office, then submitted one that was voted down 79-0 in the Democratically-controlled Senate. His entire re-election campaign was based on endless insistence that "if the millionaires and billionaires paid their fare share," the rest of society wouldn't be facing tax increases. Boehner tried to get the House to pass such a tax boost, but by that time Obama had moved the goalposts: he wanted tax increases for all the "rich"including those earning $250,000 a year.
We can understand that the Obama backers on the Street have rose-colored glasses about what he will achieve in his second term...
26
December 2012
This could have been a teaching moment in the world's leading democracy. As George Will pithily puts it, "Americans have become happily accustomed to receiving $100 worth of government services and paying $60 for the privilege." The truth is that nearly everybody is going to have to pay more taxes. What we find most disturbing is that by denouncing the rich and, until last week, making no other fiscal proposals, the President is demagoguing. His argument is the equivalent of those yahoo Republican Tea Partiers who demand that Washington eliminate its deficits by cutting off foreign aid. He has been unwilling to put real reform of Social Security and Medicare on the table, and he excluded tort reform from ObamaCarewhich would have generated huge savings at the expense of a collectively dubious group of tort lawyers, who are, coincidentally, big backers of the Democratic party. The President has "bargained" by doing what he enjoys mostflying out in his wondrousand extremely costlyplane to speak to adoring audiences. He still wants to believe that he can singlehandedly solve all the nation's problems by talking to friendly crowds for TV clips. His only announced sizable budget cut in the Fiscal Cliff negotiations is to slash $1 trillion from future costs of fighting two wars. Conservatives compare this to cutting spending by pledging not to build a ski resort on Mars. Neither side in the current negotiations is addressing realistically the problems of financing unsustainable entitlements in a slow-growth economy. So we retain our enthusiasm for commodities and commodity stocks. We do, however, agree with the conclusions from Leuthold's latest bulletin, that commodity stocks tend to outperform when the Producer Price Index rises faster than the Consumer Price Index. That has been the case for most of this century, but not recently. During the Stagflation era, that relationship prevailed most of the time. Which leads, naturally, to...
Conservatives compare this to cutting spending by pledging not to build a ski resort on Mars.
December 2012
27
THE FINAL PROBLEM

The Special Case of Gold
...just maybe the currency itself was a post-modern metafiction that could easily go out of fashion... How could we let the final issue of Basic Points reach readers without updating our views on the absolute necessity of maintaining portfolio investment in goldand primarily through gold mining stocks? Some may sigh, "Can he possibly have anything new to say on this subject? Haven't we heard it alland all too often?"
Gold October 1, 1992 to December 21, 2012
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12
1,645.90
The agony for gold investors of Gold's Triple Waterfall collapse finally ended the week the War on Terror began. The first gold bull market began in August 1971, when Nixon closed the Gold Window and ended in 1980, followed immediately by two decades of Triple Waterfall decline. Central bankers were heavy gold buyers as long as the Gold Window was open, and in more measured activity thereafter until, by common agreement, gold prices rises needed to be discouraged because they fostered an inflation mania. The central bankers thereafter became gold sellers. When interest rates collapsed and concerns about the dollar began to re-emerge during the Obama era, central bankers began creeping back into bullion on little cat feet. In part, their willingness to buy gold is because of past over-gorging on dollars. When the bankers began to worry about their perilously high dollar exposure, the Eurozone came to their rescue with a great new alternative in the form of the currency of the world's second-biggest and second-richest economic unit. So the bankers eagerly plunged into euro-denominated paper. When it became apparent that not only were many of the eurozone issuers dubious credits, but just maybe the currency itself was a post-modern metafiction that could easily go out of fashion, then the central bankers began to go back to bullion. 28 December 2012
The astonishing recent increases in Chinese and Indian economic power and personal wealth have naturally meant that interest in gold as an investment among citizens in those countries has surged. As we wrote after our first trip to India, poverty-stricken women working in the fields of Uttar Pradesh were wearing gold armbands. When we asked our guide how such poor people could afford gold, we were told it was their dowry. Under Indian law, at marriage, title to the bride's property and possessions goes to her husband; except her gold. She retains title to gold in her dowry. We asked whether such displays of wealth in such poor communities would not put the women at risk from robbers, our guide was shocked, "No one would be so evil as to rob a wife of her dowry!" In China, the leading banks have, with government encouragement and support, made bullion-buying (gold, silver and platinum) easy for customerseven the poor. Result: Chinese have become the world's biggest gold-buyers. The richer Indian people become, and the richer Chinese people become, and the more that central bankers have reason to worry about the politics and profligacy of the eurozone and the US, the more those gold buyers will influence gold prices. What has produced the big swings in gold prices in recent years has been participation by major hedge funds in gold futures, Gold ETFs (and, to a limited extent, in bullion).
Gold Commitment of Traders: Net Speculative Positions (number of contracts) December 19, 2012
300,000 250,000 200,000 150,000 100,000 50,000 0 Jan-04 Apr-05 Jul-06 Oct-07 Jan-09 Apr-10 Jul-11 Oct-12
In China, the leading banks have, with government encouragement and support, made bullion-buying easy for customers even the poor.
163,699
Source: Meridian Macro Research LLC
As this chart shows, interest in gold from commodity speculators has waned latelyalong with the bullion price.
December 2012
29
THE FINAL PROBLEM

We were surprised to learn that there is a Gold version of the VIX Index. In recent months, it has behaved like the traditional VIXshowing little more expectation of coming excitement than one would expect from a community of lotus-eaters:
CBOE Gold ETF VIX Index (GVZ) October 1, 2011 to December 19, 2012
45 40 35 30 25 20 15 10 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 13.69
...showing little more expectation of coming excitement than one would expect from a community of lotus-eaters...
We remain of the view that gold's long-term outlook remains bright. It may be the last asset left standing if governments run out of money to spend and central banks run out of money that people believe in. But it doesn't require Apocalypse to be a sound, long-term investment. We have even coined (we say, blushingly) a mnemonic of why gold is a necessary investment based on our own initialsDGMC: D for Demographic Decay G for Government Policy Failures M for Monetary policies that debase money C for Crises arising from any or all of the above Why is Demographic Decay a reason for buying gold? Because it is at the core of the fiscal challenges to the Welfare State. As we have been saying since this publication was born, birth dearths are temporary fiscal benefits but longterm fiscal disasters. In the near term, they increase female participation in the work force, swelling GDP growth and tax receipts, and slowing the increases in public educational costs. In the long term, they make inflation-hedged pension and medicare promises costly, then burdensome, and eventually unaffordable.
30
December 2012
We routinely cite Japan as the model for most Western economies in the era of demographic decline and decay. A decade ago, we noted that Japan had more morticians than obstetricians, as deaths overtook births. The latest statistic is that sales of adult diapers there now exceed sales of babies' diapers. Canada will be in that fix within a few decades, and only the Latinos are keeping the US from a similar profilealthough second-generation Latinos' birth rates are plummeting. Gold's intrinsic value rises inversely to the funding levels of government social programs. In the US, Medicare faces financial collapse within a decade without major funding boosts; the Social Security Trust Fund is a victim not only of longevity, (which most people know), but also of Washington's continuous cuts in payroll taxes, and of the collapse in interest rates; the date for the Fund 's extinction now approximates the expected lifespan of a new octogenarian.
There has never been a three-year period since 1975 when monetary base growth in the industrial world was remotely close to where it has been since 2008.
Conclusion
The soi-disant sophisticates who sneer at commodities don't tell their clients that gold bullion's performance since Nixon closed the gold window is almost exactly equal to the performance of the S&P with dividends reinvested. That was a four-decade period when monetary policies were mostly moderate most of the time. There has never been a three-year period since 1975 when monetary base growth in the industrial world was remotely close to where it has been since 2008. That process is set to continue as far as the eye can see. Moreover, the growth in government debt and in the size of balance sheets of the major banks that have already been bailed out once has no historic precedent. Therefore, in our view, the likelihood that the S&P will perform as well as gold in the next three years is remote.
December 2012
31
THE FINAL PROBLEM

Agricultural Commodities
Corn January 1, 1992 to December 21, 2012
9 8 7 6 5 4 3 2 1 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12 6.97
Wheat January 1, 1992 to December 21, 2012

11 10 9 8 7 6 5 4 3 2 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12 7.91
Soybeans January 1, 1992 to December 21, 2012

18 15 12 9 6 3 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12 14.09
32
December 2012
Thanks to the Great Midwest Drought of 2012, we now know that geneticallymodified seeds work splendidly to mitigate drought damage. Corn prices shot up from $5.55 a bushel in June to $8.39 in August amid talk of a new Dust Bowl before slumping to $7.12 in September as thousands of farmers reported unexpectedly high harvests. The FAO had scheduled a crisis meeting in Rome and was ready to proclaim the third world food crisis until the USDA reported that it was going to be raising its per-acre returns substantially. Those happy returns were a source of pride for the big seed companies, a source of joy for their investors, and a source of shock for the anti-GM activists. The GM seeds far outperformed the "natural" seeds.
Monsanto (MON) December 19, 2011 to December 19, 2012
95 90 85 80 75 70 65 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 91.68
Those happy returns were a source of pride for the big seed companies, a source of joy for their investors...
Syngenta (SYT) December 19, 2011 to December 19, 2012

390 370 350 330 310 290 270 250 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 376.50
It has been our case since 2007 that investing in the leading and emerging agricultural input companies with strong management, technology, vision and distribution is to be participating in one of the most momentous aspects of human progressprofitably, and at low risk. We stick by that forecast. December 2012 33
THE FINAL PROBLEM

Energy
Crude Oil (West Texas) January 1, 1992 to December 19, 2012
140 120 100 80 60 40 20 0 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12 88.91
Crude Oil (Brent) January 1, 1992 to December 19, 2012

Natgas January 1, 1992 to December 19, 2012

34
December 2012
During the election campaign President Obama had some good things to say about the nation's production of oil and gas, along with the ritualistic bashing of oil and gas companies' tax breaks and "subsidies." He has the great good fortune to be President at the time of one of US history's greatest oil and gas discovery, and production boomsan economic miracle the Left has reflexively opposed. This despised sector created far more wealth and jobs than his Green Energy boondoggles. But if the Far Left doesn't find ways to block its progress, it will transformatively trigger a vast expansion of US industry in Robert Gordon-style, as major plastics and chemicals plants migrate to the US. This year, experts proclaimed that North America is now on the cusp of becomingonce againenergy-independent and a net exporter of oil and gas. With all that oil in the shale and oil sands being developed, it is time for oil enthusiasts to admit that we may not see $145or even $125for West Texas Intermediate (WTI) for many years. We don't even know how long WTI will deserve the name "benchmark," as a multiplicity of crude oil prices complicates calculations of oil companies' profitability. That said, North American exploration and production companies with great reserves and smarts can look at the rest of this decade with enthusiasm. The new stars of the oil industrythe nimblest of the long-suffering refinersare benefiting enormously from the new arbitrages and price spreads arising from those fast-changing patterns in production, distribution and exports of North American crude oil and products. More challenging for investors in coming years will be the profit outlook for costly deepwater ocean exploration as oil production ramps up onshore from Texas to Fort McMurray. Nevertheless, the continuing crises in the Mideast will likely keep a premium valuation for oil and gas properties in politically-secure countries. Thirty-five years ago, the Shah of Iran proclaimed "Oil and politics don't mix." He was warning his fellow OPEC members that they had to get over their resentments against Israel and its Western supporters and become partners in global economic progress through reliableand reliably-pricedoil production. Three years later, he was deposed in the revolution that brought in the Ayatollah Khomeini, whom Jimmy Carter rapturously embraced as a "saint." The Shah was wrong, and he was soon dead wrong. Oil and politics mix mightily when politics turn radical, as the Keystone dispute attests. We shall soon know whether this President is oil-wise, or a more charming update of Jimmy Carter. December 2012 35 The Shah was wrong, and he was soon dead wrong.
THE FINAL PROBLEM

Base Metals
We strongly recommend capital cowardice as a core investment policy to clients.
Copper January 1, 1992 to December 19, 2012
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07 Jul-09 Jan-12
3.65
In all previous boom cycles for base metals, copper was "King Copper." In this century, the oldest base metal of them allironhas been King. Chinese steel production remains remarkably strong, although observers keep predicting a severe softening. We continue to recommend underweighting in the base metals, but the outlook for copper and iron ore prices is improving amid signs of renewed economic vitality. Major iron ore expansions have been put on hold, and optimists think supply and demand are back in balance. Longer term, we recommend maintaining exposure to companies with the best ore bodies in the best countries. Political risk is becoming a more challenging problem for investors as rich tax-exempt NGOs and other organizedand sometimes disorganizedopposition threatens more and more projects, even in countries with records of mostly honest and accommodative politics and policies. As a former colleague of ours used to say, "Capital is a coward." By that he meant that wise investors naturally flee from political and litigation risks. We strongly recommend capital cowardice as a core investment policy to clients.
36
December 2012
The Big Picture

1. China
The new leaders took over in China as the US was voting to keep the same leaders in place. Each decade when a new Triple-P is announced (President, Premier and Politburo) the wisdom of Deng Xiaoping is reaffirmed. This changeover was more challenging than the previous switch, because of the revelations of corruption and the Bo Xilai scandal, which embarrassed the leadership on the front pages of newspapers around the world. But despite that unwonted tabloidism, the Old Order prevailed in the form of the New. Only the Papacy or the British Royal Family handle succession more smoothly. We know no more about the new Beijing duo than we have been reading from respected Western sources. We admire the proficiency of the changeover, and are relieved that the sordid and sensational aspects have been suitably addressed. What we know is that the astonishing growth of Deng's eradouble-digit for three decadescontinues despite all those Wall Street "experts" who told us that the supposed miracle is about to burst, kaleidoscope-style, due to fraudulent financial statements and rampant corruption. They were telling us from 2006 onward of a coming collapse and it turned out they were right: they just got the geography wrong. (Of course, they never warned of Wall Street's pending disaster.) The Chinese and Indians watched capitalism's implosion with disbeliefand continued on with their progress. So we are pleased that the predictors of Sinodoom 2012 are once again shown to be hopelessly wrong. We have been told annually that Chinese GDP is overstated. However, when independent experts and the IMF add up external and internal data, the results tend to confirm the Chinese claims as being of considerably greater reliability than the financial statements of many leading Western banks. So, let us accept the skeptics' claim that China's growth may actually have shrunken to merely 6%. That means it is growing only 2.5 times as fast as the US, five times as fast as the UK and seven times as fast as the eurozone. We should collectively rejoice in China's success. China is fast on its way to being the world GDP leader and the most reliable major economy. Already, China's progress has hauled more than 900 million people out of poverty December 2012 37 The Chinese and Indians watched capitalism's implosion with disbelief and continued on with their progress.
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and onto healthy diets in just two decadesthe most stupendous large-scale improvement in human wellbeing in history. That is Momentum, with a capital M. We have long believed that central bankers who want to create higher rates of inflation get their wishes fulfilled. Some day, Chinese growth will cease to be miraculous and will become merely impressive. Not soon, say we.
2. The Fed Sets a New Benchmark

Last week's Fed announcement reiterated that the Board sees little chance of abandoning its zero rate policy in the next three years. In a surprising policy change, it proposes to target monetary growth to a flawed statisticthe unemployment rate. The Fed has been targeting inflation since Volcker's era. What is a relatively recent phenomenon is that it has been targeting "desirable" inflation 2%31 bps above the yield on the Ten-Year Note. That has changed: the Fed now thinks 2.5% inflation would be just fine. We have long believed that central bankers who want to create higher rates of inflation get their wishes fulfilled. Japan is the sole exception, but Japanese demography has long been uniquein human history. It will be a few decades before European and North American population shrinkage reaches Japanese levelsand a few centuries before Japan ceases to exist.
3. European Woes
There is no end to the eurozone rescue dramas, but in recent weeks three new distractions have emerged for Euroelites: Catalonian pressures to exit from Spain have intensified; British patience with the EU is being exhausted, and David Cameron faces a party revolt that may force him to hold a referendum on exiting the EU; Ritorna, Silvio! We were, perhaps, premature when we wrote La Commedia e Finita! Mario Monti (briefly known as Super Mario) is stepping down as Premier and the raffish Berlusconi is running againfrom two potentially devastating court convictions and toward another premiership, which would grant him immunityagain. Marx observed that history repeats itself, first as tragedy, then as farce. The mercurial Berlusconi may be about to reverse the Marxian order of destiny.
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December 2012
The Final Problem

Four years and counting... When will Washington summon the courage to slow the flow of Lotusianliquidity and tell people and marginal businesses and banks that the time to revert to normalcy has finally come? The longer the exit is delayed, the costlier it will be for governments, the unemployed, and the underemployed. Telling addicts they have to start the path to cold turkeyhoodand meaning ittakes political courage. But, as my father noted about the vehement reactions from wounded soldiers when their heroin was withdrawn, addiction is easy, but withdrawal is hard. How can the White House, Congress and the Fed slow the flow of Lotusianliquidity when more people and marginal businesses are getting hooked every week? By targeting the unemployment rate, and eschewing the economic indicators that central banks have learned over the decades, the Fed has apparently put itself on autopilot. The longer the nation accepts this radical change in the monetary rules, the more obsolete will Fed meetings become. This makes sense for Bernanke and his colleagues: they won't be demonized for yanking away the punch bowl: they will be letting the economy decree that zero is no longer the right price for money. When the unemployment rate falls below 7% at a time of better economic growth, a new generation of bond vigilantes will emerge, and yield curves will begin to steepen. The Fed can step up its money printing, but the market will soon take charge. Assuming, (as seems reasonable) that this occurs at a time that Washington is bracing for another debt ceiling "crisis," Risk will return to financial markets. ...addiction is easy, but withdrawal is hard.
Conclusion
Our assumption: there will be more interim deals and debt ceiling dramas, but the fundamental finances of the US will continue to erode. Actual US national debt/GDP (adjusted for trust fund holdings of Treasurys) is already near Italian levels. There is, in reality, little time left before foreign governments begin to worry that the US is no longer a haven for foreign exchange fund investing.
December 2012
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Sunspot Index since 1750
Source: Solar Influences Data Analysis Center; Royal Observatory of Belgium.
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December 2012
Afterword
We can hardly close the book on Basic Points without updating our thoughts on two highly controversial themes that have regularly been included in these pages. Jevons, the first economic cycle theorist who had a 100% batting average, but has long since been considered batty.
1. Global Warming or Cooling?

One regret we have about ceasing publication now is that this question will probably be settled in the next few years. If the sunspots do not return and the world warms up, then the warmists will win the debate. We have long maintained that past climatic variations, as recorded in the history books, were probably caused primarily by changes in sunspot activity. The medieval warming period (1000-1300) for example, gave us Europe's great cathedrals. Almost no major cathedral has been built since then. Why? The climate historians note the onset and durability of remarkably long growing seasons during that period. Church services routinely included prayers for the harvest, and harvest yields expanded dramaticallyas did prosperity and population. The Church pointed to the efficacy of prayersand the need for bigger churches for the growing populations. Meanwhile, in the non-Catholic North, the Vikings were expanding their reach to the Northwestwhich they named Greenlandand as far West as present-day Newfoundland and Labrador, where they grew grapes, naming that currently chilly region Vinland. Then the world turned colder and the rains came relentlessly, and the crops failed, year-after-year, and people died of starvation and disease. Thus weakened, they were in no shape when the Black Death arrived. Galileo was the discoverer of sunspots, which means we have a record of solar activity for virtually every day since his time. As the British astronomer Herschel discovered, sunspot activity was directly correlated to length of British growing seasons. Each eleventh year, when the spots virtually disappeared, there were crop failuresand bank failures. That periodicity became the basis of the predictions of Jevons, the first economic cycle theoristwho had a 100% batting average, but has long since been considered batty.
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The most recent period of sunspot inactivity ended in the early 19th Century and the sun has been vigorous most of the time since then.
ISES Solar Cycle Sunspot Number Progression December 3, 2012
Al Gore and friends ascribe that to cars, cows and coal...
Source: NOAA/Space Weather Prediction Center; http://www.swpc.noaa.gov/SolarCycle/index.html
Recently, as NASA notes, the sunspot activity has shrunken to its lowest level in two centuries and the most recent forecasts from the astronomers are that a prolonged period of inactivity may have already begun. Since the sunspots returned in earnest, earth's temperatures have climbed roughly 1.6 degrees Celsius. Al Gore and friends ascribe that to cars, cows and coaland industrial activity generally. However, as admitted by the London Met, (the best-known European keeper of global climate statistics) there has been no measured increase in global temperatures for 15 years.
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December 2012
Our dissent from the claims of climatologists and ecologists is that it is far too early to conclude that mere man has done so much in the universe. The coincidence between the industrialization and increased agricultural output on earth and the soaring sunspot activity should induce cautionparticularly if there are some powerful groups who stand to benefit from convincing us that man alone is to blame. This sunspot cycle already promises to be weak enough to have a perceptible impact on global temperatures. The correlation between sunspot activity and global temperatures over the past four centuries is better than 80%. However, since nobody has proved exactly how solar activity influences our climate, it remains a theory that could be merely a long-running coincidence. We know that proof of sunspot influence that the Left would accept is a long way off. (It took the Catholic Church more than three centuries to admit Galileo had nailed it.) Already, for example, investors are excitedly celebrating Obama's re-election with its Solyndra-redux possibilities: the Solar Power group of stocks had been one of the worst-performing group in IBD's catalogue of 197 groups this year, but since the election, it has been on a tear and has become one of the top performers on a six-month basis.
Already, for example, investors are excitedly celebrating Obama's re-election with its Solyndra-redux possibilities...
2. The Disappearing Bees

Few of our enthusiasms have evoked a warmer reader response than our reporting on Colony Collapse Disorder (CCD) in the apiaries of North Americaand more recently, Europe. We have received honey from some part-time beekeepers, and enthusiastic verbal support from hundreds of readers. They keep sending us reports of studieseach with its claim to have "positively" identified the culprit. We have read them all and are sad to admit that they tend to contradict each other. More recently, we have begun to conclude that CCD may be like cancer: there are multiple causes. We are positively inclined to the view that trucking two-thirds of the nation's bees across the nation to fertilize California's almond crop is a high-risk enterprise. Admittedly, North American bees came across the Atlantic in ships that must often have been far more disruptive to bee happiness than Ford-150s.
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Since we aren't going silent, but intend to continue our conference calls andfrom time to timeto publish special commentaries on whatever interests us, we hope to continue to hear from you about every new published study. CCD continues to kill bees at an alarming rate and we aren't convinced that the responseimporting vast quantities of bees from across the Pacificis necessarily wise. A cousin who is a successful professional apiarist in Saskatchewan keeps telling us that bringing in bees on that scale is dangerous. Saskatchewan bans bees from abroad, but we cannot imagine how effectively that ban is enforced. He also argues that trucking bees is unwise. He and his fellow apiarists in Central Saskatchewan keep their bees the year 'round, and he believes that is why he his bees have never experienced CCD. The many scientific studies about the impact of pesticides and herbicides also command our respect, because worker bees obviously are going to absorb products sprayed on plants.
CCD continues to kill bees at an alarming rate...
Au Revoir But Not Goodbye

And so, we close the last page of Basic Points. For those of you who want to keep in touch with us and our future offerings, we ask you visit our website: www.coxeadvisors.com. For all of you, our heartfelt thanks and our wishes for the holidays, New Year's and 2013.
Don Coxe
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December 2012
THE FINAL PROBLEM RECOMMENDED ASSET ALLOCATION

Recommended Asset Allocation Capital Markets Investments US Pension Funds
Allocations October 2012 31 1 1 3 4 6 6 15 11 4 2 10 1 5 Allocations December 2012 Changes 29 2 0 4 3 4 5 7 15 11 5 0 10 1 6 1 +3 unch unch 1 +1 unch unch +1 2 unch unch +1
US Equities Foreign Equities: European Equities Japanese and Korean Equities Canadian and Australian Equities Emerging Markets Commodities and Commodity Equities
(ex-Gold & Gold Stocks)
Gold & Gold Stocks Income Generating Assets Dividend Stocks Bonds: US Bonds Canadian Bonds International Bonds Inflation Hedged Bonds Quality High-Yield Bonds Cash
Bond Durations
Years October 2012 5.25 5.25 4.00 7.25 Change unch unch unch unch Allocations December 2012 5.25 5.25 4.00 7.25
US Canada International Inflation-Hedged Bonds
Global Exposure to Commodity Equities

Years October 2012 32 % 28 % 28 % 12 % Change +4 2 1 1 Allocations December 2012 36 % 26 % 27 % 11 %
Agriculture Precious Metals Energy Base Metals & Steel
We recommend these sector weightings to all clients for commodity exposure whether in pure commodity stock portfolios or as the commodity component of equity and balanced funds.
December 2012
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THE FINAL PROBLEM RECOMMENDED ASSET ALLOCATION

Recommended Asset Allocation Capital Markets Investments Canadian Pension Funds
Allocations October 2012 Equities: Canadian Equities US Equities European Equities Japanese, Korean & Australian Equities Emerging Markets Commodities and Commodity Equities
(ex-Gold & Gold Stocks)
Allocations December 2012 Change 16 5 1 5 4 5 7 15 unch unch unch +4 unch -1 +1 unch
16 5 1 1 4 6 6 15
Gold & Gold Stocks Income Generating Assets Dividend Stocks Bonds: Canadian Bonds Market Index-Related Real-Return Bonds International Bonds Quality High-Yield Bonds Cash
15 12 3 1 15
15 12 3 1 11
unch unch unch unch -4
Canadian investors should hedge their exposure to the US Dollar.
Bond Durations
Years October 2012 5.25 5.25 7.25 4.00 Change unch unch unch unch Allocations December 2012 5.25 5.25 7.25 4.00
US (Hedged) Canada Market Index-related Real Return Bonds International
Global Exposure to Commodity Equities

Years October 2012 32 % 28 % 28 % 12 % Change +4 -2 -1 -1 Allocations December 2012 36 % 26 % 27 % 11 %
Agriculture Precious Metals Energy Base Metals & Steel
We recommend these sector weightings to all clients for commodity exposure whether in pure commodity stock portfolios or as the commodity component of equity and balanced funds.
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December 2012
THE FINAL PROBLEM INVESTMENT RECOMMENDATIONS

1. Boehner's defeat in the House came as we were going to press. No Democrats and few Tea Partiers voted for his balanced proposal; the Far Right and the Far Left are united against compromise. Obama holds more cards at the moment, so we believe he will, in large measure, achieve both his goalsa fiscal deal that will undermine the nation permanentlybut probably after his departure. He is using the Fiscal Cliff to open deep divisions within the Republican Party that willhe hopesprevent a replay of his "shellacking" in 2010. Therefore, we are leaving our Recommended Asset Mix largely unchanged. 2. The most dynamic sector of the US economy is the shale gas and oil boom. Unless Hollywood, the NGOs, the EPA and some Democratic state governments win, the oil and gas companies will continue to supply the economy with the lowest cost fuels in the industrial world, and drive a construction boom in the chemical industry. Overweight companies that can continue to profit from those trends. 3. The Keystone Pipeline was an election issue. Obama won. His decision on this issue will not only be a major factor for the Canadian economy's outlook, but for the continuation of the shale boom. We hope to be pleasantly surprised by him, but recommend investors defer new commitments to Canadian oil sands stocks. 4. Apple's recent fall could prove to be the beginning of the most significant such drop since Newton sat in an orchard. If the sudden onslaught of pessimism about the outlook for America's most dynamic corporate success story of this century proves well-founded, investors will have to rethink their current complacency about the sustained competitive dynamism of US tech stocks. The stock rather suddenly looks like a cheap call on the future of Silicon Valley. Question: if you think Apple is rotting, why should you overweight techs? 5. Japan has had only one election result in two decades that gave investors good reasons to buy Japanese stocksKoizumi's election in 2001. The second could be Shinzo Abe's election, which is triggering a devaluation of the greatly overvalued yen. Since Koizumi's exit, the yen has climbed by a third amid a weakening economy. It hit an all-time high against the dollar of 75.6 last year and was nearly back there in October. It is rallying and if it breaks 86, it could, (from the chart) rally all the way to 125 or even 145. Buy Japanese stocks and sell shares of American and European competitors of the surviving Japanese global giants.
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6. Xi Jinping came to power as Obama was trashingand thrashing Romney. On schedule, Chinese economic numbersand equity prices turned upward. The politburo seems to display a far greater appreciation of the rewards to a nation from a capitalist-oriented economy than 52% of American voters. The long Chinese equity bear market has probably ended. Buy the interlisted stocks in Hong Kong. 7. Prime Minister Harper's decision on the CNOOC and Petronas takeover bids for Nexen and Progress Energy was a wise blend of economic sense and realpolitik. The next big Canadian export boomLiquified Natural Gashas begun. Buy shares of Canadian (and US) companies with major exposures to the huge fields of Northeast British Columbia and, to a lesser extent, Northwestern Alberta. 8. Some Canadian financial institutions were modestly downgraded by a rating agency last week, but Canadian banks look bullet-proof compared with their Wall Street rivals. Remain overweight. 9. The Fed is resuming rapid expansion of the Monetary Base. Japan will soon be flooding the currency markets with yen. The ECB remains expansionary. The three major currencies are, once again, simultaneously reflating, and promising to stay expansionary until the Promised Land of Prosperity appears on the horizon. US fiscal deficits will continue at rates that would have seemed unacceptable even a few years ago. It is almost impossible to conceive of a more bullish longer-term backdrop for gold. The good mining stocks should be core investments for almost any long-termoriented portfolio. 10. Bond buyers, begin to beware of good unemployment news. Apart from central banks, who will buy your bonds if the economy ever starts growing at a rate that we used to call "normal?" When the economy starts growing again, and unemployment near 6.5%, they will be sharpening knives at the slaughterhouse for the Bond Bull. Meanwhile, relax.
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December 2012
Au Revoir But Not Goodbye

At year-end, we will conclude our arrangement as Strategy Advisor for BMO Financial Group, publishing this final issue of Basic Points, and on December 28, making our last Client Conference Call for BMO Nesbitt Burns and BMO Capital Markets. It has been a great run. We thank our amazingly loyal readers for giving us the platform to expound our views on history-based investing. We also thank BMO Financial Group for their support in promoting Basic Points and for letting us publish highly-personal commentary without interference. When we first joined BMO, it was a big Canadian bank with an industry-leading private client division and a relatively modest external presence. Thanks to its prudent, client-centered management practices in a North American industry, which was dominated by imprudent, self-seeking managements, it is now a major North American financial institution with a growing global presence. We'd like to think we made a small contribution to that stellar performance. We shall continue to deliver our investment recommendations in Conference Calls (and transcripts), with occasional essays on major themes. We hope to continue our relationships with our loyal fans, in a format that will increase our exposure across a far wider investment community. We shall also continue to advise the Global Commodity Strategy team of our partner, BMO Global Asset Management, as they create commodity equitybased investment solutions for a wide range of clients.
Don Coxe December 21, 2012
December 2012
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Basic Points

THE FINAL PROBLEM

December 21, 2012

Published by Coxe Advisors LLP

BMO Capital Markets Disclosures

(1) (2) (3) (4) (5)

Don Coxe THE COXE STRATEGY JOURNAL

THE FINAL PROBLEM

December 21, 2012

Coxe Advisors LLP Chicago, IL

THE COXE STRATEGY JOURNAL THE FINAL PROBLEM

Donald Coxe dc@coxeadvisors.com Angela Trudeau at@coxeadvisors.com

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Japan: Monetary Base January 1,1992 to December 19, 2012

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Switzerland: Monetary Base January 1,1992 to December 19, 2012

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Republicans have wasted the nation's time in wailing of the waste...

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1. Robert Gordon's Thesis

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The Odyssey / Homer; translated by Robert Fagles, 1996

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The Arab Revolutions

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The Commodity Outlook in Coming Years

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Source: Meridian Macro Research LLC

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Wheat January 1, 1992 to December 21, 2012

Soybeans January 1, 1992 to December 21, 2012

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Syngenta (SYT) December 19, 2011 to December 19, 2012

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Crude Oil (Brent) January 1, 1992 to December 19, 2012

Natgas January 1, 1992 to December 19, 2012

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The Big Picture

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