Monday, February 27, 2012

Opportunities for Policy Profiteers

Every time governments come up with a policy to fix something, an investment opportunity is born. That's because government policies always backfire.

It's just a matter of figuring out exactly how they're going to do it... and then coming up with a way to profit.

Today's Money Morning is about ways to find those opportunities - and our best guess at some upcoming ones. 

But first, what do all government policies have in common? They all do one or more of these three things:
  1. They do the opposite of what they are supposed to
  2. They create a bigger problem elsewhere
  3. They cause a bubble
Each of these scenarios creates an investable opportunity for you. And it's a fun one. Ifyou're inclined to enjoy the idea of out-manoeuvring Julia Gillard, pulling a fast one on Tony Abbot and outwitting Reserve Bank Governor Glenn Stevens.

Let's look at some Policy Profiteers of the past...

The most profitable trade ever made, according to investment folklore, was a bet against the Bank of England (BoE). Usually, betting against a central bank is a bad idea. But George Soros 'broke the back' of the Old Lady of Threadneedle Street (as the BoE is known), back in 1992.

He bet against the bank's ability to keep the exchange rate above 2.7 deutschmark to the pound. He won the bet. On what became known as Black Wednesday, the BoE's policy finally fell apart and the pound plunged more than 10% below the targeted level.


You don't need to know all the details of why this happened and what happened next. What you need to know is that Soros reportedly pocketed a billion US dollars from the British government's attempt at currency manipulation.

In fact, history is full of Policy Profiteers who benefitted from revaluations of pegged currencies. The fact that the most profitable trade ever was such a bet shows just how beneficial it can be.

Taking a quick glance around the world at present opportunities of the same kind will have you licking your lips. Soros' former business partner, Jim Rogers, reckons China's exchange rate peg is coming under pressure all the time as the nation gets wealthier.

Switzerland recently pegged its currency to the euro to control the Swiss franc's rise.

If these currencies ever revalue, or break their peg, there could be big moves in the foreign exchange markets.

Policy Profiteers have had a great time. For example, back in the 2000s, a series of government policies conspired to create a housing bubble of epic proportions. If you had bought a house back then, you could easily have doubled your money. Of course, the trick is knowing when to sell up.


What About Some Australian Policy Profiteers?

Our favourite (in a morbid sense) Australian Policy Profiteering scandal was the stimulus of the funeral industry, better known as the Home Insulation Scheme. The Australianreported:
The Australian revealed an audit of almost 1000 homes in Queensland has found that in about 2 per cent of cases, foil insulation was installed inappropriately, causing the roof to become "live".

This means that if home owners enter their roof space and touch the insulation, they could be shocked or electrocuted.

If the foil touches metal frames or pipes, it could cause other parts of houses, including taps, to become electrified.

The Rudd government came under pressure in question time today over the insulation scheme which unions warn risk turning hundreds of homes into death traps.
After four people died, Environment Minister Peter Garrett suspended the program. But that wasn't the end of the story.

News.com.au: 'The Federal Government's decision to end its bungled $2.45 billion home insulation scheme will force dozens of companies into bankruptcy and result in hundreds of workers being sacked.' Yes, this government policy managed to do all three things we mentioned: create a bubble, create a bigger problem and do the opposite of what it was supposed to do.

We have no shortage of Policy Profiteering here in Australia. You could even say our nation was founded by Policy Profiteers taking advantage of British government policy. The creation of a convict colony eventually sparked immigration. 


Opportunities For You

And now, the Australian government happens to be implementing some rather historic policies, from a Policy Profiteer's perspective.

Ever heard of the Boston Tea party? By taxing tea in the colonies, Great Britain sparked a revolution. Can you think of any taxes our Australian government levied on specific goods recently? Well, there's the Mineral Resources Rent Tax. And the Carbon Tax too.

More policies that won't work.


We say that because, according to analysts at the Swiss bank UBS, the European Emission Trading Scheme 'isn't working'. The analysts say, 'The price for emissions certificates has plunged, a development that is actually making coal more attractive than renewable energy.' 

Priceless.

What do the MRRT and the Carbon Tax have to do with Policy Profiteering opportunities facing you? Well, Australia's bungled attempt to extract wealth from its booming industries - mining and energy - probably won't work. The Carbon and Mineral Resources Rent Tax will backfire somehow. 

In fact, it could create a boom in smaller-to mid-cap resource stocks, which aren't the target of the MRRT. Or the explorers who won't bear the burdens of the new taxes. Perhaps the gold stocks, which were exempt from much of Canberra's meddling, will go through a boom. Or companies with overseas operations will weasel their way around Australia's new-found political risk.

One thing's for sure. While the resources and energy industries are in the government's sights, it should create plenty of opportunities for Policy Profiteering.

Nick Hubble
Editor, Weekend Daily Reckoning