Sacred Cows and Rat Brains
Research for Online Investors

by John Dalt

6/30/10

Today we are going to shoot some sacred cows, so to speak.  Popular herd mentality is the enemy of society, and most investors.  We are all guilty at one time or another of accepting popular opinion as “truth” as opposed to being a bit of a contrarian.  How many times have you served on a board and made a decision, only to later try to understand how such a stupid decision could have been made?  We also are mindful of every investor’s “rat brain.”  That little gray area we all carry, that causes us to act when confronted by danger.

Reuters has an article on the oil spill cleanup efforts in the Gulf of Mexico.  Many analysts believe the best course of remediation is to let Mother Nature take over.  Mankind’s efforts may cause more damage than the oil itself.  An interesting view, one not talked about in our world view of intervention in all things.

Marine biologists and some environmental experts say the cleanup operations, and chemical dispersants sprayed into the ocean might be more damaging than the oil.  They have three golden rules concerning oil spills:

1.  Don’t spill it in the first place.

2.  If you do spill it, pick it up as quickly and easily as possible.

3.  In the open ocean, leave well enough alone.

Martin Preston is an expert in marine pollution, earth and ocean sciences, of Britain’s Liverpool University.  He said “Economically, clearly the impact has been very large, but environmentally the jury is still out. One of the tensions between environment and politics is that politicians cannot be seen to be doing nothing, even though doing nothing is sometimes the best option."

Current estimates are that the well is spewing 60,000 barrels or 2.5 million gallons of crude oil per day.  The largest recent spill was in 1991 off Iraq’s shores when between 240 and 460 million gallons were spilled as a result of the Gulf War.

In 1979, 140 million gallons of crude oil were spilled off the coast of Mexico in a rig blowout accident like the Deepwater Horizon.  That well took nine months to cap.  For reference, the Exxon Valdez spilled 10 million gallons in 1989.

Simon Boxall, of Britain’s National Oceanography Center has analyzed the spill cleanup of the Exxon Valdez, and found "The chemically cleaned up areas have taken the longest to recover and they are still damaged.  The areas that were left alone actually recovered much quicker."

He points out that 10,000 people were flown into Alaska to help with the cleanup, and the “clean up town” resulted in more damage to the environment that the oil spill.  Preston finished with, “The more delicate an area is…the more significant is the risk of making things worse by acting.”

Your editor asked a friend in the oil business about the oil spill cleanup. His thoughts mirrored much of these scientists.  His main point was one of climate; Alaska is cold, whereas the gulf is warm and the oil would evaporate and break down much quicker.

The other case of herd mentality to cover today is the stock market vs. fixed assets.  How many investors are going to wake up in a few months and kick themselves for buying a 10-year treasury bond that pays less than three percent?

Can you imagine tying up your money ten-years for a return that that is close to, if not less than, the historical rate of inflation?  Right now the Federal Reserve is pumping money into the economy like air into a leaky tire.  We are not seeing the results of all the money being printed, because the banks are not lending it.

The economy will continue to slowly recover, regardless of all the socialist policies coming out of Washington.  As business starts to borrow to expand and meet demand, the inflationary pressure will be like a popping balloon.  Quick and surprising.  There won’t be time to sell the bonds before they drop in price.

Bond values will disappear faster than ice cream on a hot summer day.

We are talking with a bond expert with over 30 years experience in the financial business trading bonds.  We are trying to entice him to bring his expertise to GaltStock subscribers.  We should know more next week.

Thanks to G.C. for reminding us of this quote, it seems timely now that an age of austerity seems to be in vogue:

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."- - Cicero - 55 BC

I bet Cicero and all Romans wished they had listened.  Historians estimate that 20% of the population of Rome became freeloaders that lived off the state.  Rome’s population fell after the wealthy residents refused to support them any longer.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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