Dear Reader,

Mark Twain had it 75% right when he said there are three kinds of lies: lies, damned lies, and statistics.

He just forgot one: media “interpretations” of those statistics.

Checking the economic data on Wednesday morning, I was surprised to learn that the US economy barely eked out 0.1% GDP growth in Q1 2014—a rounding error away from being negative. And given that the government revises its GDP numbers by an average of 0.5% after each initial release, we could easily have stagnation or contraction by the time the numbers are final.

Economists expected GDP to rise 1.1%, so however you slice it, the data are disappointing.

But far more interesting than the data itself is the media’s reaction to it. Even more than usual, the scapegoat varied by where on the political spectrum a news organization fell. Each of these supposedly unbiased organizations—which are supposed to report the facts, not interpret them—embedded their own “reasons” into headlines about why the economy barely grew.

Let’s take a tour around some US media outlets, and I’ll show you what I mean.

Beginning with the leftest of the left, Obama’s White House assures us that the culprit for the weak GDP was the weather. An act of God that couldn’t be helped, you see. The White House also boasts that had it not been for Obamacare’s implementation, the GDP stats would’ve been even worse. More on that in a moment.

Inching slightly to the right, Joe Weisenthal at Business Insider had this to say:

He went on to adorn the pig with the same lipstick as the White House, claiming that the weather, along with several other transient factors, caused the poor GDP reading.

Moving a bit further to the center but still decidedly to the left of it, here’s Newsweek:

And Time:

Weather, weather, weather. You’d think we never had a snowy winter before.

Forbes had this to say:

And the Wall Street Journal:

Finally two measured, objective headlines. An Obama supporter may argue that the usage of “glacial” and “crawl” indicate bias. But given that 0.1% is literally the slowest an economy can grow without stalling, both descriptors are appropriate.

Next up… can you guess where this headline came from?

Yep, good ol’ Fox News plastered that one on its front page. You know, the organization that coined the phrase “We Report, You Decide.” That trip through Journalistic Integrity Land ended quickly.

This last one is a bonus, because Zero Hedge is definitely not part of the mainstream media spectrum:

The headline contains just a hint of negative bias, though the article itself is dripping with sarcasm. As it should, because—if I may go off on a short tangent—the notion that Obamacare “helped” GDP should set off your BS detector.

Technically, Obamacare did help GDP. But that doesn’t prove—at all—that Obamacare made anyone better off. Rather, it illustrates just how flawed GDP is as a measure of economic well-being.

Whenever the government purchases a good or service, GDP rises. Obama throws a $500,000 banquet? GDP goes up. Uncle Sam purchases a $1.4 million Tomahawk cruise missile and proceeds to explode it in the sands of Afghanistan? GDP goes up. Obama invests half a billion dollars in failed solar firm Solyndra? GDP goes way up.

GDP rises in all of these cases, but Americans are better off in none of them. We’re actually worse off for the government having squandered our money. Which should dispel the notion that a higher GDP necessarily equals a more prosperous America. But even all the government waste combined—PLUS Obamacare—hasn’t been able to lift the first-quarter numbers out of the ditch. Now that says something.

Back to the headlines… In a perfect world, one of the most important functions of the media would be to approximate a miner’s canary, to give us an early indication that something is wrong. But with today’s canaries busy squawking about nonsense, filtering out the useful from the noise is a full-time job.

One solution—and I would argue the best solution—is to circumvent the media and go straight to the source, meaning those who actually comprise the economy. That’s what our first article today is all about.

Subscriber Leslie Mackenzie submitted the following story to our Casey Research Storytelling contest. Aside from being a fine writer, Leslie explains how his particular line of work is a bellwether for the economy—and why recent layoffs in his firm make him fearful about what’s ahead.

After that, you’ll find a fine piece of analysis by Bull’s Eye Investor’s Senior Investment Strategist Robert Ross about how the shale boom is improving the fortunes of even those far removed from the energy industry. Then Doug Hornig will weigh in with a short take on Donald Sterling.

Canaries of the Economy Mine

By Leslie Mackenzie

Economists worldwide are always looking for indicators to detect recessions before they begin.

Well, I have a unscientific but very accurate one: my job.

I’m a consulting engineer. For those not familiar, entrepreneurs contact consulting engineers when they want to start a new process or manufacturing business.

We start by preparing feasibility studies, which estimate whether the proposed business will be profitable or not. Or, more precisely, which conditions are necessary to reach the desired level of profitability. We then assist our clients in navigating the entire process from idea to implementation.

Our clients need not only the vision and guts to risk billions of dollars on an idea, but also a strong belief that they will eventually profit. Investments at this level are marathons, not sprints. The expected payback period is usually several years. Tack on a few more for the time it takes to make enough profit to justify the effort.

The crux of my job is to put the numbers and scenarios together so these entrepreneurs can make the most informed decision possible. But at the end of the day, my numbers are educated guesses. My clients’ gut feelings and expectations make the final decision.

Over my career, I have learned to trust that entrepreneurial vision as an indicator of the future, as it’s proven much more reliable than the predictions of politicians and economists. Economists are great at telling us what has already happened. Entrepreneurs are much better forecasters.

The practical consequence of being a consulting engineer is that I live in a continuous and extreme cycle of booms and busts, which usually lead the economy as a whole. I have been extremely busy at times when my friends and neighbors are out of work, and vice versa. Consulting engineers are the canaries in the economy mine.

You see, the unsolvable problem for a consulting engineering firm is that its only asset—the people who do the work—are also its only cost. So in boom times we can demand handsome compensation, but in bust times we are quickly out of work. I like my job; the satisfaction of creating new and better things is extremely rewarding. But the lack of stability in my occupation is not for the faint of heart.

Take vacations, for example: in boom times I have the money, but I am so busy that anything beyond a weekend getaway is impossible. In bust times, I have plenty of time, but my reserve of money must last until the next boom, which may be years away, so it feels reckless and irresponsible to spend it on a vacation.

What are the canaries saying now? Well, just yesterday the guys sitting next to me and across the corridor from me were both laid off, the latest casualties of a downsizing that started about a year ago. The company I work for has shed at least 25% of its workforce, and our competitors are doing the same.

The rest of the world will never hear a peep about this—only I and the other survivors who still arrive at our office’s half-empty parking lot each morning know what’s happening. The sad part is that my company supposedly has enough “job in hand” for all of us—including those who have been let go. However, these projects are “on hold,” meaning that our clients do not believe now is the right time to go ahead. They haven’t completely pulled the plug, but they will wait to pursue their projects until economic conditions improve.

What a stark contrast with the Fed’s declaration of victory in vanquishing any signs of a recession! I can only have a bitter laugh when I read that the Fed is tapering its stimulus because unemployment numbers look better when, in reality, many people have simply given up for looking jobs. Or when politicians and analysts blame businesses for not doing their part to stimulate the economy by investing idle cash. They don’t seem to realize that businesses invest in response to profit incentives, not to edicts.

If the situation were even half as rosy as politicians tell us, clients would be lined up at my firm’s door, looking to get to work quickly. I’ve learned that typically, several different companies will see the same market opportunity, and the winner is the one who gets to market first. When there’s money to be made, my clients don’t waste time.

Right now, it’s the exact opposite: we’re fighting for the scraps of small service or repair contracts, and clients are turning us away.

My ex-colleague who was laid off a while ago always jokes that “A recession is when someone else loses his job; a depression is when you lose yours.” If that’s the case, I’m only in a recession, but only because I’ve been lucky. I’m working on a project in China, where business decisions are made by politicians, not entrepreneurs. Since no one is putting their own money at stake, the project is on a longer leash.

However, my luck ends this month, as the procurement phase of the project is ending. The project won’t need my services until the construction phase begins, which is at least a year away. Unless a new project comes up quick, the company I work for simply can’t afford to keep me around much longer. It’s a bitter reality, but after so many years in this business, I’m used to it.

What are the investment implications? Don’t invest all your eggs in one basket, especially if it’s an engineering consulting company. Usually they’re “employee owned” anyway; no one else would have the stomach for this.

Other than that, listen to the canaries: we’re in for a bumpy ride ahead!

Fracking: Reshaping the Economic Landscape at Home and Abroad

By Robert Ross

It’s no secret that the tectonic plates of global energy are shifting.

The International Energy Agency (IEA) expects the US to surpass Saudi Arabia as the world’s top oil producer in 2015… transforming a former leading energy importer into a net exporter.

But it’s not just oil: the IEA also contends that the US overtook long-dominant Russia as the world’s largest natural gas producer in 2013. And with Russia at odds with Europe and other Western powers over Crimea, we could soon see further shifts in the Kremlin’s monopolistic natural gas export business.

These developments are huge and carry serious implications for the world economy and your portfolio.

On the Home Front

Across America, a trend is in motion: large energy companies are buying fallow tranches of desolate farmland, looking to exploit the previously inaccessible energy beneath them using hydraulic fracturing (AKA fracking).

The effects of this trend stretch far beyond Corporate America’s bottom line.

For one, when an energy company buys land near your town, it brings much more than drill rigs and pipelines. It brings jobs.

Let’s look at Steubenville, Ohio, as an example. It lies just outside of Canton, Ohio, only a few hours from where I grew up, so I’m more than familiar with the small-town culture that permeates the area.

This region, already reeling from the departure of the auto industry a decade earlier, was dealt another blow during the 2008 financial crisis, when housing prices plummeted and jobs disappeared.

That’s when energy juggernauts such as Chesapeake Energy Corporation (CHK) came to town. These titans of the oil and gas industry started acquiring land hand over fist in Steubenville and the surrounding area. Chesapeake alone purchased over $2 billion in land leases comprising 1.35 million acres in the Ohio area, offering a crutch to the limping Ohio real estate market.

Before the energy industry started taking an interest in Ohio, the Federal Reserve Bank of Cleveland estimated that Ohio’s home loan delinquency rate was 10%, or the 29th-highest in the country. Today, this estimate has fallen to 8%.

The commercial property market has stabilized as well. In fact, Ohio saw the yields on its commercial mortgages, packaged and sold as bonds, drop to 8.74% in 2012 from 11.28% a year earlier—representing a serious vote of confidence from the bond market.

But these energy conglomerates aren’t interested in turning around a struggling state’s economy just to be altruistic. As the old adage says, it’s all about location, location, location!

Ohio is lucky enough to sit atop a geological formation known as the Utica Shale, which the US Energy Information Administration (EIA)estimates may hold up to 5.5 billion barrels of oil and 15.7 trillion cubic feet of natural gas.

And business there is booming. In fact, since June 2012, a staggering 1,216 permits have been issued to drill in the Utica Shale, with 829 wells drilled as of the week of April 19, 2014, according to the Ohio Department of Natural Resources.

Overall, energy production in the state is expected to add $4.9 billion to Ohio’s economy in 2014, according to a study from Ohio State University.

With this type of economic activity comes new jobs. A study conducted by Kleinhenz & Associates asserts that by 2015, 204,000 jobs will be created directly or indirectly by the oil and gas business in Ohio alone.

Steubenville’s urban neighbor—Youngstown, Ohio—saw its unemployment rate fall from a high of 13.5% in 2009 to 8.0% in November 2013, much to the credit of energy companies such as France’s Vallourec SA and Switzerland’s Weatherford International. Both of them have built new facilities in the area to supply Ohio’s fracking industry.

The effects are probably most apparent to Youngstown natives, who have seen new businesses opening and succeeding for the first time in decades.

The hotel industry in particular has seen revenue and occupancy rates rise 24% and 20%, respectively.

And this is just a snapshot of what we’re seeing all across the country. In fact, since 2007 the US oil and gas industry has recorded a 40% jump in employment, compared to overall private-sector job growth of just 1%.

Flexing Its Muscles

To me, the most interesting aspect of the US shale boom is that it shifts the balance of power and influence in international energy markets, reining in the previously unbridled power of the long-dominant OPEC. OPEC is often classified as an oil cartel, but another term to describe the organization is “swing producer.”

In this case, “swing producer” means that OPEC controls a large swath of global oil deposits and possesses a lot of spare production capacity. Its spare capacity allows OPEC to increase or decrease supply at minimal additional cost, which affords the organization major influence over global oil prices. Through price fixing, OPEC and its 13 member countries have achieved downside protection in the short and middle terms, giving the cartel unmatched influence over global energy markets. One example of this is the Arab oil embargo of the 1970s, when OPEC jacked its prices up in retaliation for US support of Israel in the Yom Kippur War.

As the chart above shows, inflation-adjusted oil prices hit an all-time high that haven’t been matched since.

Though prices eventually subsided, OPEC had asserted its global dominance in a big way.

And until recently, it hasn’t had a worthy challenger. All that changes, however, with the advent of the US energy renaissance.

An Inevitable Threat

It’s no secret that Saudi Arabia, an OPEC member and the world’s biggest oil exporter, is concerned about the US shale boom.

Saudi oil tycoon Prince Alwaleed bin Talal, one of the world’s richest men, has warned that the kingdom’s oil-dependent economy is increasingly vulnerable to rising US energy production.

In an open letter written in May of last year addressed to Saudi Arabia Oil Minister Ali al-Naimi, Alwaleed warned that the US oil and gas boom will reduce demand for crude from OPEC member states.

In this letter, he cited statistics showing that Saudi Arabia is pumping at less than its production capacity because consumers are limiting oil imports. He also noted that the country’s complete reliance on oil revenue (which made up 92% of the government’s budget in 2012) was unsustainable.

In Alwaleed’s own words, “We see that rising North American shale gas production is an inevitable threat.”

But it’s not just the Saudis who should be worried. As the graph below shows, Nigeria, Algeria, and other OPEC members have seen their exports of oil to the US fall dramatically in recent years.

Last year, Algeria’s oil-export revenue fell by 6%, a staggering blow to a country where hydrocarbons have been the backbone of the economy for decades, accounting for roughly 60% of government revenues, 30% of GDP, and over 95% of export earnings in 2012.

After seeing its oil exports to the US fall in such dramatic fashion, Algerian Finance Minister Karim Djoudi claimed that this lower export revenue tied to “mounting shale production” could force the government to cut domestic spending.

This falloff in revenue could deal a severe blow to a fragile economy that saw a wave of protests in March 2011—protests  that subsided only after the government mollified its citizens with more than $23 billion in public grants, retroactive salaries, and benefit increases.

If the Algerian people decide to revolt again, the government may not have the funds to pay them off.

Investment Implications

Although US restrictions on petroleum exports have not changed since the Arab embargo in 1973, refiners are permitted to ship gasoline and diesel, as well as liquefied natural gas (LNG), abroad.

As the chart below shows, the chasm between gas sold in the US and gas sold overseas, particularly in Japan and Europe, continues to grow.

As production continues to increase, the US will likely become a net exporter of natural gas. This Russian-Ukrainian conflict makes this an even likelier scenario, with Europe—which imports 30% of its natural gas from Russia—threatening to look elsewhere for its gas needs.

This may prompt the US to ramp up the construction of its natural gas export plants in order to take advantage of this shift in demand. This would likely raise domestic prices, which would hurt US companies like Dow Chemical, which have been using cheap natural gas as a feedstock for years.

Those companies at the forefront of these trends—a few of which we’ve already included in our Bull’s Eye Investor portfolio—are poised to reap huge profits.

Many companies in the US energy supply chain offer great opportunities. Among them are companies that provide the complex infrastructure to transport oil and natural gas, such as yield-oriented pipeline MLPs.

MLPs are master limited partnerships that combine the tax benefits of a limited partnership (i.e., the partnership does not pay taxes on its profits) with the liquidity of a publicly traded security. Unlike corporations, MLPs do not pay income tax, which means that they’re able to pass along more earnings to their investors than a corporation can, which translates into huge dividend payouts for patient investors.

We’ve developed a proven system for selecting undervalued MLPs with sustainable dividends, and we disclosed our latest MLP that fit our screen in a recent edition of Bull’s Eye Investor. And although this recommendation is in the double-digits while the S&P 500 has remained flat, we believe it still has a long way to go.

The bottom line is that you and your portfolio need to be positioned for dramatic shifts in the US and global energy paradigm, and we at Mauldin Economics will be there to help when you feel the time is right to take the first step.

Robert Ross is a contributing editor and senior investment analyst of Bull’s Eye Investor, a global investment letter from Mauldin Economics. A native of Cleveland, OH, he graduated top of his class at Loyola University New Orleans College of Business with a degree in economics. After stints as a policy analyst for the Pelican Institute for Public Policy and in the financial advisory division at Merrill Lynch, Robert found his way to Mauldin Economics. Robert also worked as an analyst for Casey Research, where he conducted economic and equity research.

On Donald Sterling: Let the Free Market Work It Out

By Doug Hornig

It was quite a week for legal issues in America the free.

First, the Supreme Court ruled that it’s fine to stop and search your vehicle if an anonymous tipster phones you in as drunk, even though the police have satisfied themselves that your driving’s fine. (Scalia’s scathing dissent is worth a read.)

Then, to its shame, the Court refused to hear a challenge to the clause in the National Defense Authorization Act that allows the president, at his discretion, to unilaterally impose indefinite detention on anyone, without access to courts, if he believes they have any connection with terrorism—which basically amounts to on his say-so. The non-ruling was based on the Court’s opinion that the plaintiffs had no legal standing, because they hadn’t themselves been detained. Which launches us into a Catch-22 world: the Supreme Court’s decision precludes challenges before detention takes place, but once a person is detained into military custody under the NDAA, the law explicitly denies them any access to the courts.

But if you missed these assaults on liberty, that’s understandable, because the week’s news was dominated by endless coverage of the Donald Sterling affair. The media took a 9.5-minute private-turned-public phone conversation—that’s actually mostly about a troubled relationship—and whittled it down to a few ugly but hardly horrendous words about race. Then it used them to pillory the man and call for the NBA to “do something” about this disgusting basketball team owner.

I am not a Sterling apologist. He seems a nasty sort, and he has a shady history. I’ll also leave aside questions concerning violations of privacy, how much the girlfriend made from selling the tape, and whether we should engage in such self-righteous finger-wagging about a relatively petty offense. (Kareem Abdul-Jabbar took those on for us, very eloquently.) Nor do I wish to debate whether a lifetime ban from the NBA and a multimillion-dollar fine are appropriate punishments.

What I think we should be looking at, and what the media are ignoring, is the question of whether a man can be deprived of his property because others don’t like his opinions. That’s what the NBA is proposing to do by attempting to force Sterling to sell a team that he lawfully owns. Apparently, the league has some agreed-upon right to do this if 75% of the other owners vote for it—they’re in conclave even as you read this. But that’s coercive and seems to me a dangerous precedent to set. What’s to prevent a cabal of future owners from forcing out someone because he’s too successful? And if Sterling is as hard-headed as he seems to be, we’re in for years of legal wrangling.

To avoid all that, I have a modest proposition for the NBA: just walk away and let the free market operate. If they can find the brains to do that, then I predict:

• Sterling’s coach, Doc Rivers, will quit. And no respectable coach will want the job, so Sterling will be forced to hire someone incompetent.

• The Clippers’ impending free agents will leave. Its stars will demand to be traded, and if they aren’t, they’ll undermine the new coach.

• No new free agents will pick the Clippers, and no one will agree to be traded there.

• Fans will organize a boycott, and game attendance will drop off; and so on.

In the end, Sterling will wind up with a roster of 12 desperate, minimally talented white guys. The franchise will be such a complete disaster that eventually he’ll have no choice but to wash his hands of the whole mess. He’ll see all this coming, of course, but because they’re not forcing him to, he’ll put the team up for sale voluntarily. Perhaps no one will bid until the price drops to a fire-sale level, at which point Oprah and her consortium of rich friends, as rumored, can step in and buy the club.

Voilà: no tedious lawsuits and everyone’s happy, including big bad Don, because he’ll realize a humongous profit no matter the selling price.

The market will work, NBA. I’m just saying…