Corruption, forecasting and those privileges - emailed to subscribers
Mon, 28 Aug 2006

This email we are going to talk a little about corruption, as it relates to forecasting.

In the class on indicators last May, I spent a little time outlining the process of how government granted licenses capitalize into a tradable privilege. Understanding this activity - rent seeking - is the basis of an ability to forecast well. Indeed, the government creation of the license, once allowed to capitalize, forms the very basis of the real estate cycle that we study. Despite whatever Gann says, this is the most important cycle to know about.

Keep in mind though, the following is not meant as an attempt to convert you to any particular style of thinking, though you all know of my opinion that the world would be a far better place if government raised its revenue from resource rents instead of taxation on labour and capital. So:

It is now believed that the EU is losing 50 billion Euros annually to what is called 'Carousel' tax fraud. Organized criminal gangs and terrorist networks are known to be financing themselves by shipping high value items like mobile phones for example into an EU area not levying Value Added Tax (VAT). Such goods are then however sold to you and me with the VAT added but not then paid to the appropriate collecting authorities. These organized networks can even then sometimes re-export the goods through a chain of other linked corporations (hence the name carousel) and reclaim the VAT that was never paid in the first place.

If government collected its revenue from its land and resource base, instead of a tax like the VAT, such criminal activity could not occur. Euros 50 billion annually to terrorist networks...

In the UK, the government is looking to award another casino license. Rather conveniently, a Mr Philip Anschutz - a wealthy US businessman, has recently taken on a lease of the London Millenium Dome with an eye to turn it into a 'super-casino'. The government man in charge of overseeing such developments ? Deputy PM Prescott. Prescott was recently 'invited' to the private ranch of Mr Anshutz, in Colorado, to "talk about the role the Dome could play in the 2012 London Olympics". Prescott was also one time Minister for Town Planning, so has quite a knowledge of the planning process controlled by government. Handy really, since the super-casino is expected to add much value to property in the surrounding area, much of which has been bought up by Anschutz already it appears. Rent seeking bringing potential corruption to government.

To Italy and Mr Berlusconi. Yet another Italian judge has once again indicted the former PM on fraud charges. This time for buying film rights offshore and then selling them through his own TV network (govt granted) at inflated prices. This helped to reduce his media empire profits and hence tax bill by 60 million euros says the judge. Well he's just adding value to his license. Wouldn't you ? The Guardian Weekly, July 14, reports the savings so made were 'earmarked' for his children by his first marriage.

Remember, the community would only have to collect, yearly, the value of the licenses created by government, to eradicate this behaviour. It doesn't, so we can see how such behaviour develops to corrupt those in government. And when the license owners themselves ARE the government...

Hence, when you follow EIS stuff, you are doing something especially rare. Few in the world are presently teaching this style of economics. Understand about government granted licenses / annual rental values, the largest of which is land price, and you can see where such community behaviour originates.

As to timing, real estate has shown in the past a very clear, average 18 year pattern of boom / bust. Since economic behaviour is still being driven by the same rent seeking influences, it will repeat.

Gann then seemed to find a way of timing this exactly. Which brings me to the date of July 17. For those that were there at the May class, and had done Gann, recall that at morning tea I pulled you aside and gave you a ten minute lesson on how the market tells you well in advance which dates will be the most important / emotional for the year. At this time I showed you that the SPI was clearly highlighting July 17 as a major date for the year and that this would be a low. (With associated volatility in world events and by definition, a high in some other markets as the SPI reacts to these.) This is exactly what we got. (65 days off the top for the SPI)

Rest assured that Gann discovered how you can know this before it happens. Rest assured I won't be mass marketing this knowledge any time soon.

Gann did not hide this knowledge in his books, but he makes you work for it. This is as it should be. So the future therefore, will always be profitable for those who have done the hard work. How can it be otherwise ? This is the advantage of study and hard work to gain knowledge. It is as Gann said it is.

Now we count off July 17 and should note that 90 degrees later is around Oct 17. This will be important for a change of trend for most stock markets.

We can do the same for the oil market. With such high prices, the search is on to find more oil. (Though ultimately, nothing cures high prices like high prices.) So oil companies, with their vastly improved balance sheets and record profits are buying up exploration permits in every part of the world possible. Cash-strapped governments are eager to sell them the permits to do so; a government granted license. Noted the Guardian newspaper, July 14 about this process: "The race for assets has even included territories that were formerly shunned by the West, such as Libya. The Libyan government has attracted better terms from western firms than anyone had's absolutely staggering what companies are forking out."

See, the license values are capitalizing. The formation of a bubble here is certain and eventually companies will overbid for them. Hence you have a cycle arising. i think the process with oil exploration permits will time itself into the 18 year real estate cycle into 2009. This is why I teach about government granted licenses and want you to understand the process.

If you were following the Russian oil dramas with Yukos oil, Mikhail Khodorkovsky and Putin, this again is just the rent seeking playing out. The drama started with a few very well connected Russians grabbing the oil permits Boris Yeltsin gave away, and has ended with another redistribution this time back in favour of the Kremlin. Perhaps 30 to 50 billion was involved, serious money and proof that there is enough wealth in the world to keep us all in the pink if enough of us wanted it collected as revenue for government instead of allowing the wealth to privately capitalize.

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