How You Can Use Government Intervention to Profit on the Stock Market


“Be it or be it not true that man is shapen in iniquity and conceived in sin, it is unquestionably true that Government is begotten of aggression, and by aggression.” – Herbert Spencer, 1850

“This is the gravest danger that today threatens civilisation: State intervention, the absorption of all spontaneous social effort by the State…” – Jose Ortega y Gasset, 1922

“It [the State] has taken on a vast mass of new duties and responsibilities; it has spread out its powers until they penetrate to every act of the citizen, however secret; it has begun to throw around its operations the high dignity and impeccability of a State religion; its agents become a separate and superior caste, with authority to bind and loose, and their thumbs in every pot. But it still remains, as it was in the beginning, the common enemy of all well-disposed, industrious and decent men.” – Henry L. Menken, 1926

We wish we’d seen those quotes on government intervention before the ‘After America’ conference. We would have added them to our presentation.

By the way, if you couldn’t get to the conference, you can still enjoy it. How? By watching a DVD of every presentation, breakout session… and a surprise 30-minute presentation from Professor Steve Keen. Click here for details…

Anyway, we’ve taken the above quotes from the preface of Albert Jay Nock’s, Our Enemy, The State.

The book was on our holiday reading list.

This is appropriate. Because these days, when you go on holiday, you get first-hand experience of intrusion of the State.

A holiday isn’t what it used to be. You used to go away looking forward to a break… looking for time to relax.

Now you go away thinking about how many times a government employee will fondle your private parts at the airport. How they’ll look at you, then your passport, then you again, then your passport…

Finally, they’ll reluctantly affix the ink-stamp.

All – supposedly – to preserve your freedom!

State Asset Theft

One place where “government intervention” – aka theft, has moved into overdrive is a place we didn’t visit – Argentina. Yesterday, Bloomberg News reported:

“Argentine President Cristina Fernandez de Kirchner seized control of YPF (YPF) SA, the nation’s largest crude producer, ousting Spanish owner Repsol YPF SA (YPFD) after a dispute over slumping oil output and investments.”

The report says Argentina will pass a law giving the Argentine government a 51% stake of the Spanish company’s Argentine assets. The government’s excuse? It’s for the “public good”.

Of course, seizing half of a private asset isn’t much different to levying a 50% tax rate. (On a per capita basis, the Aussie government taxes about one-third of every dollar of income made!)

Bottom line, whether it’s here or overseas, the State continues to grow at the expense of private enterprise… and at the expense of civil liberties and property rights.

But physical abuse at the airport wasn’t the only State invasion we suffered. While we were away, electricity retailer, United Energy kindly left a card in our mailbox. It thanked us for allowing them to trample through our front yard to remove a meter box and replace it with a so-called “Smart Meter”.

The “thanks” was a nice touch… but unnecessary.

Because the installation of Smart Meters is compulsory in Victoria. It’s like the taxman thanking you for paying your taxes, or a mugger thanking you after they bash you on the head and steal your wallet.

Government Intervention and Your Investments

Well, you may think we’ll tell you the world is going to pot. That you should shut everything down and forget about trying to make a buck.


Based on what we’ve seen over the past two weeks of holidaying abroad and coming home, we’re more convinced than ever that our investing strategy is spot on.

In fact, we’ll go this far: it’s the only strategy that has even a chance to make you money between now and next year…

Could Government Intervention Make These Stocks “Safer” Than Blue-Chips?

The strategy involves buying a specific asset class that could give you the best return for the risk involved – small-cap stocks.

But hang on. Isn’t government intervention and red-tape bad for small companies? Aren’t you better off investing in big companies that can exploit loopholes…or companies that are big enough to pay the costs of red tape?

If you follow conventional wisdom, that sounds right. But it’s also completely wrong. Here’s why…

You see, red tape and government intervention is just as bad for big companies as it is for small companies.

In fact, it can be worse. Big companies have usually spent years building their businesses, fine-tuning everything… investing in and building infrastructure, administration, production and sales facilities. Now they’re reaping the rewards with sales and profits.

But because big firms are big, it’s often harder for them to change. Take the report that one of the world’s largest carmakers, Toyota Motor Corp. [TYO: 7203], has fired more workers in Melbourne.

It’s facing the same pressures that many other firms are facing, but because of its size, it’s too inflexible to change. Those pressures include falling sales, but also government red tape (minimum wages, unionised labour, the costs associated with hiring and firing workers, etc).

Or what about Myer Holdings [ASX: MYR]. Most of the department stores we visited in the U.S. were bursting at the seams with customers and sales assistants.

As we poked our head into our local Frankston Myer on Sunday afternoon, there were neither customers nor sales assistants. The store was almost empty. Yet the rest of the Bayside Shopping Centre was packed (or as packed as it normally is for that time and day of the week).

In the case of Toyota and Myer, government intervention and red tape is the major cause of their demise.

So, can either survive? It’s possible. But both need to make big changes…

For Toyota it will mean closing down its entire Aussie operation and firing more workers. And in the case of Myer, it will mean closing stores… and firing workers.

Now, don’t get us wrong. Small companies can suffer the same problems. But while many small companies will suffocate from government intervention, others are small enough that they can adapt to the changed environment.

And if they can adapt quickly enough, it can result in a big payday for the company and its shareholders.

Quick-Fire Gains in 2012

The point we’re making is this: whenever a government intervenes, there will always be winners and losers.

The trick is to be on the side of the winning stocks. But that doesn’t mean buying stocks that will profit from government contracts (that’s called “rent-seeking” and we’re not a fan of that).

No, we mean buying stocks that are nimble enough to change if they need to… and if they succeed, could make triple-digit percentage gains.

But the most important thing to understand is that government intervention affects all areas of the economy. And there’s no telling where it will strike next.

So if you’ve invested in a big blue-chip stock, thinking it can withstand anything, think again. Myer has fallen 41.8% since it peaked in 2010… and Toyota is down 59.5% since it peaked in 2007.

Investors bought those stocks as safe and dependable investments. Yet, they’ve made the kinds of losses we normally see when a small-cap stock takes a beating.

Bottom line, if there’s a chance one of your stocks could fall 41.8% or 59.5% you want to make sure there’s a good chance it could gain 100%, 200% or even 500%.

Anything less and it’s not worth the risk.

And right now, there are very few stocks you can genuinely call “safe and dependable”. Even the stocks we suggest you buy for income (dividend stocks) will see plenty of volatility.

That’s why you shouldn’t put your entire wealth into the stock market. But when you can get triple-digit percentage returns from a select breed of stocks (small-caps), there’s no reason you should have to.

As we say, investing in small-caps in a volatile market and with high levels of government intervention and red tape goes against everything conventional wisdom tells you.

And yet – if we’re right – it stands to be the best way to make quick-fire profits in 2012 and 2013.


P.S. It’s a great time to be a small-cap investor now. Some stocks on our radar are trading at prices and valuations we haven’t seen since 2009. In a brand new on-camera interview, we explain why we’re backing small-caps now and how you could bag gains up to 1,566% within the next 24 months. For more details, click here…

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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