Start Investing Like a Crony Capitalist Today

Brian Hicks

Updated October 21, 2011

Crony Capitalism isn’t just for well-connected cronies anymore.

The government, private industry, and an army of advocacy groups are colluding more than ever to produce outsized profits for themselves.

A few thousand dollars in political contributions is paid back hundreds of times over in the form of a government contract or favorable regulations.

Pimco’s Bill Gross estimated every dollar of political contributions gets “paid back” as much as 50 times over in government contracts, favorable regulations, or some other benefit. Just think of the hundreds of billions of dollars in government fraud, waste, and abuse…

One government’s waste is usually a well-connected crony’s fortune.

But there are ways to go along for the ride.

Here’s one example of many of how a number of powerful parties have colluded to create one of the top-performing investments of the past 30 years — and how you can join them.

Crony Capitalism: Big Gains, Low Risk

The best-performing asset class over the past 30 years hasn’t been stocks, bonds, or even gold…

It’s been timberland. That’s right — trees.

The NCREIF’s Timberland Index has returned an average of 15% per year since 1987. That’s 40% better than stocks and more than double the returns from gold each year.

The prevailing wisdom on Wall Street for soaring timberland prices has been overly simple. Rationale like “even trees grow during a recession” has been suggested time and time again as the catalyst for the superior returns in timberland.

History shows it’s a much different story…

Only in the U.S.S.A.

It’s tough to imagine an asset like timberland doing so well. After all, supply and demand drive prices.

And yet, timberland prices have steadily increased in the United States — a country half covered by forests.

Thanks to a long-running collusion between the government and private industry to keep supplies low, prices high, and eliminate competition, timberland has significantly outperformed every major asset class over the past few decades.

The Pacific Northwest is a perfect example.

In 1976, the U.S. Forest Service (USFS) identified the spotted owl as the indicator of the health of “old growth” forests. They focused on the northern spotted owl in the dense forests of the Pacific Northwest. This is where the ruse begins…

First, old growth forests are nothing more than very old trees that are marginally denser than newer forests.

Second, the northern spotted owl isn’t even a species; it’s a subspecies. In fact, it’s one of three spotted owl subspecies.

Third, hysterical media reports made it seem as though there were only a handful of northern spotted owls struggling to stay alive. The timber industry counted at least 6,000 birds (3,000 “pairs” as the official numbers went — in order to make the population appear smaller), and estimated as many as 10,000 of the subspecies existed.

Environmental organizations jumped to the spotted owl’s “defense” and in the late 1980s, a number of environmental organizations and law school students petitioned the government to protect the spotted owl and its habitat under the Endangered Species Act. They won.

They’re All in CaHOOTS

The USFS issued regulations deeming 1.4 million acres of old growth forests in the state of Washington as “Spotted Owl Habitat.”

But here’s the thing: There were only 2.6 million acres of “old growth” forests in the state. And at least 1.3 million of those were already set aside for preservation.

Andy Stahl of the Sierra Club Legal Defense Fund stated: “The northern spotted owl is the wildlife species of choice to act as a surrogate for old growth protection. I’ve often thought if it hadn’t [been found], we’d have had to genetically engineer it.”

The end result: All of the old growth timberland was off-limits to loggers.

This is just one example. There are many more.

In Tennessee, environmentalists latched on to the red-cockaded woodpecker.

The population of this particular woodpecker fell to an estimated 10,000. The end result was no trees could be cut down within a three-quarter-mile radius of the bird’s nest.

So for each nest, 1,100 acres of timberland were ruled off-limits. That means as many as 11 million acres of timberland were taken out of the available supply for each of the estimated 10,000 “endangered” woodpeckers.

Follow the Money

All of the efforts have been largely funded by the timber industry themselves. They support many “educational” efforts to teach the public about wildlife habitats and the importance of maintaining forests.

The winners here are easily the big timber companies and their investors in so many ways:

  • Their competition has been largely eliminated. Consider that small timber companies usually only own a few thousand acres of timberland. They could easily be run out of business by the appearance of a single woodpecker or spotted owl. The big timber companies — with millions of acres of timberland spread across many states and regions — would just have to move operations to other areas… That’s not an option for smaller timber companies.

  • They win because the prices of their products are at artificially inflated prices. Right after the old growth forests in Washington were deemed off-limits because of the northern spotted owl, old growth forests in neighboring Oregon soared. Data from private sales in the region showed the prices of timber harvested from Oregon sold for as high $900 a board foot. It was only $200-$300 per board foot the before the spotted owl debacle.

  • Finally, they win by the consistent reduction of supply. This has propelled timberland prices and timber stocks steadily higher over the past few decades. Shares of major forestry companies including Plum Creek Timber (NYSE: PCL), Rayonier (NYSE: RYN), and Pope Resources (NASDAQ: POPE) are all up more than 1,000% since the late 1980s — and they’ve paid out regular dividends between 4% and 8% for most of those years.

Start Investing Like a Crony Capitalist Today

Timberland is just one example of many in which big business, government, and other special interests collude for their own gain.

It’s only going to get worse as tax revenues remain stagnant, the government cookie jar gets smaller, and the number of hands reaching into it will continue to rise..

This trend is the primary reason why we’ve created Freedom and Capital. We’re already seeing it play out in real time.

Environmentalists have latched on to a lizard in West Texas and New Mexico in hopes of preventing more oil drilling and exploration in the region. They’re essentially keeping oil production offline when demand and prices are still very high.

And I’m sure some bright-eyed, fresh-out-of-college researchers are scouring the planned route for the Keystone XL Pipeline in hopes of finding an animal or rare species…

The pipeline project intended to transport oil from Alberta and North Dakota to Texas, Illinois, and Oklahoma for refining is a major focus of the environmentalists right now. (Hopefully they can find an animal a little more cute and cuddly than a lizard to curry the public’s favor.)

Crony capitalism investing is not just for long-term investors, either. My colleague Ian Cooper is turning big gains in the most highly-regulated and government-supported industries.

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