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David Galland – How “Social Proof” Helps Smart Investors

By David Galland, The Casey Report

As a young man in a foreign land, my curiosity was piqued by the crowd standing five or six deep in a circle. On pushing my way forward, the focus of the crowd’s attention quickly became apparent – a fight, although for reasons I’ll explain momentarily, “fight” is not the right word.

The setting was the annual wine festival in Neuchâtel, Switzerland. I was just 18, a wet-behind-the-ears puppy from a small town in Hawaii. But even in the remote backwaters of my youth, the Swiss reputation for a certain decorum and circumspection had made its way into my consciousness. How then to explain the sight of several dozen Swiss citizens, a cross-cut of ages and gender, standing placidly by as one young man proceeded to batter another?

Now I have seen a number of fights in my life – in pre-PC days it was how kids often concluded their strongest disagreements (today, very much not the case) – and this was no fight. It was a beating, and a brutal one at that.

Adding to the surrealism of the scene – already surrealistic enough given the tableau of a polite crowd of plain Swiss folks watching the brutality, cow-like, against a setting of the placid beauty of the Swiss countryside – was that the girlfriend of the man being beaten was screaming in anguish as she appealed, futilely, to the crowd to intercede.

While memory can dim with time, I can still recall the scene, and my emotions, quite vividly. My initial reaction was that this was wrong, and I was unable to comprehend why no one did anything – especially in that the champion of this country fight had so dominated the contest that his opponent was all but knocked out, lying bloody on the ground unable to defend himself. Not content at his domination and ignoring the man’s screaming girlfriend, the champion pulled his victim to his feet as I watched in shock and, holding him standing with one hand, brought his other fist back dramatically and bashed the poor guy in the jaw, sending him crashing back to earth.

Clearly intending to do it all over again, he bent over and began to lift the target back to his feet. It was at that point that it dawned on me that no one else in the crowd was going to intercede in the carnage, not even to raise a voice in opposition. Instead, they were quite content to stare stupidly at what could have very well evolved into murder.

Recognizing the situation as some form of societal aberrance – though not understanding then how apparently normal people could fail to act against such wanton viciousness – I pushed my way through the crowd and into the circle and grabbed the brute, spun him around, and yelled “Enough!” in his face.

Things then proceeded to get a little wiggly. Dropping his victim, whose girlfriend quickly helped him crawl off into the crowd, the brute stared at me, uncomprehendingly at first, probably because of my use of an English word. But with his blood still up, it quickly became clear I was to be his next target. At which point, and I kid you not at all, someone tugged at my sleeve and when I turned, forced the handle of a knife into my palm. While I was still trying to register what had just happened, the herd made a noise that brought my attention back to the Swiss brute, and I was shocked to discover that he, too, was now similarly armed.

Now there were any number of reasons I had made the trip to Neuchâtel that day – to sample the local viniculture, tuck into a nice fondue for lunch, perhaps even to meet a cute Swiss girl – and I can assure you without double-checking that nowhere on the list was “get into a knife fight.”

And so without the slightest shame at overtly exhibiting cowardice, I dropped the knife and turned tail, shoving my way through the tightly packed crowd and making good my escape by leaping up on a parked car and running its length, then diving back into the crowd on the other side.

What Happened?

In the years following the events just related, I often wondered what happened that day. How was it that a crowd of otherwise normal-looking people – and Swiss at that! – could have stood by so passively as one man brutalized another, ignoring even the dramatic pleadings of the victim’s girlfriend?

Answers didn’t begin to come to me until some years later when I picked up Professor Robert Cialdini’s excellent book, Influence. In it, Professor Cialdini discusses a number of stimuli that trigger an automatic response in people, including the effect that “social proof” has on the human mind.

The mechanics of social proof, while somewhat complex, are pretty easy to understand. Simplistically, we humans have a strong tendency to glance over at other members of the herd in an attempt to gauge the correct action or reaction to take in any given circumstance. While this tendency can be useful in identifying the right bread plate to use at a fancy dinner party, it can also have devastating consequences.

In one of the most notorious examples of the downside of social proof, in 1964 Kitty Genovese was slowly murdered on a New York sidewalk over the course of about 30 minutes, despite 40 or so witnesses, none of whom took action. They figured someone else would.

Likewise, the very average Swiss citizens I encountered that day in Neuchâtel clumped together and, seeing that no one else was making a move to intercede, stood mute.

In any event, understanding the concept of social proof – and its close cousin “social convention” – seems to me to be of fundamental importance to us as members of the human race, and as investors.

As far as the former is concerned, if you ever find yourself doing the same thing as everyone else, it should concern you. Stop and ask whether you are doing the thing because you want to or because you think it is the right thing to do – or are you doing it just because it’s what everyone else does?

As for the latter, if you rely on the cues coming from the mainstream financial media and officialdom, you would likely believe the country has exited the latest economic crisis and will now steadily make progress towards a return to normalcy.

Even I find myself fretting that maybe we have it wrong about the nature, depth, and likely duration of this crisis. The hard data say the crisis will almost certainly again worsen and – given the tenuous nature of the world’s monetary and economic systems – perhaps even result in a wholesale breakdown.

Yet, the indicators we look to for warning signals – the stock market and interest rates, to name two – are signaling that nothing particularly untoward is headed this way. This despite the data related to the “big two” of unemployment and housing being truly terrible, and zero progress being made in reducing the runaway deficit.

It gets harder to reconcile when the data clearly point to the eurozone as being in the grips of a slow-motion break-up, but yet the euro continues to hold up remarkably well.

Or that the Middle East is in flames and gasoline prices are over $4.00 a gallon in many U.S. localities. This week the International Energy Agency went on record with a statement that if additional supplies of petroleum don’t come online urgently, prices could spike higher and do serious further damage to the global economy.

Meanwhile, restaurants appear to be doing good business, and the parking lots in the local “box town” (Dick’s Sporting Goods, Best Buy, etc.) are full on the weekends: social proof that all is well, even though my own research tells me it very much isn’t.

It Gets Worse

The seeming disconnect between the true state of the world’s economy and the public reaction is actually not a particularly bad thing for those who have their eyes open. After all, anyone who can see what’s coming, while the masses do not, has the opportunity to get positioned in investments that will do well when the truth of the situation becomes evident to all.

But there are matters much more important in this life than money-making.

This week, the Supreme Court ruled by an 8-to-1 majority that search warrants are no longer required before police commence to kick in your doors. Instead, the new test of armed intrusion into your house revolves around whether a policeman hears what he or she interprets to be “suspicious” noises coming from within your abode.

And this is just the latest in a long, long series of actions of a similar ilk that, together, add up to a vicious beating of the citizenry’s constitutional rights.

Where’s the public clamor, the outrage? A casual glance around reveals the masses as dumbly going along with these and other such travesties. But only because they are.

In the face of such apathy, it should come as a surprise to no one when the government continues to degrade individual liberties in favor of the all-powerful state.

It’s always been something of a joke that you can tell if a politician is lying by whether or not his lips are moving. But the joke has now morphed into a hard fact. Thanks in no small part to the mechanics of social proof, lying, deceiving, self-dealing, and obfuscating by the leadership are now considered perfectly normal and acceptable.

Now, I wish I could muster up some hopeful thought to interject at this point – even the smallest sign of a pushback against the state’s growing envelopment of all that comes under its gaze – but for the life of me, I can’t.

Rather, I feel today as I might have all those years ago in Neuchâtel if, on discovering the brutal beating going on, I had been bound and gagged and forced to stand in the crowd and watch it continue to its bloody conclusion.


But Not Helpless

The fact is that I am not bound and gagged. At least not yet.

And thus, while I still have the ability to do so, I will continue to take measures to protect my family and myself – first and foremost, by diversifying globally.

For many people, the idea of packing up and picking up in order to head elsewhere is a non-starter. They may feel an obligation to aging family members back home or have small children and worry that somehow a life abroad will not suit. Or they may not have the funds or income stream to assure they’ll be able to get by for a protracted period.

While there are good responses to all of those concerns, the truth is that physically expatriating is not for everyone. Yet that shouldn’t stop you from prudently – legally – diversifying some of your wealth globally.

Although I have mentioned it before, I’ll again mention what I took away as the biggest lesson of Adam Fergusson’s book When Money Dies. And that lesson is that if in the early days of the great German inflation, you had taken the simple step of investing money even one foot across the border with France or Switzerland, you would have saved yourself. Those who stayed put – who out of apathy, ignorance, or misguided nationalism left their money in the currency units of their native country, Germany – saw that money made worthless over the course of just a few years.

Of course, it is not strictly required that you have your wealth parked in assets domiciled in another political jurisdiction – gold and silver close at hand can serve much the same purpose. That said, if all of your eggs are in one basket, and that basket is located in a single, corrupt political jurisdiction, then the potential for that basket being grabbed away from you remains a constant threat.

For those of you with the means and a sense of adventure, creating a home away from home in a place you like is also a very worthwhile endeavor – though should you do so, I can assure you that your friends and family will think you unconventional. Maybe even unpatriotic or paranoid.

But that’s only because that is what they have been taught to think, and because they look around and don’t see other people doing it – so it seems strange to them.

Now don’t get me wrong: the United States is certainly still largely an agreeable place to live and to do business in. And it’s likely to remain that way for years to come. If I had to place a bet on any one scenario, that is the bet I would make.

That said, if the current trends continue, as they show every appearance of doing, then in our lifetime individual liberty could, de facto, be extinguished. While that may seem a radical statement, just ask yourself how secure your liberty will be if all three branches of the government purposely degrade the substance and intent of the U.S. Constitution and Bill of Rights?

The records of the last decade or so make it clear that the Executive branch and Congress are all too willing to push constitutional rights aside for political purposes, or in an “emergency” – even institutionalized torture is no longer off the table. With the latest ruling on search warrants, the Supreme Court has thrown its hat into the same ring.

And things could get much worse, much quicker than most think they could. All it would take is another 9/11 – perhaps like the Oklahoma bombing, with domestic origins. Regardless of where it comes from, should an attack of the scale of 9/11 happen – as it almost certainly will – the final nails on Liberty’s coffin would be pounded in and the already-militarized domestic security apparatus will become openly antagonistic to those who take opposing views.

When sitting down to write today, I hadn’t planned on writing on this particular topic. But the Supreme Court’s ruling has clearly gotten under my skin. Even more bothersome than that has been the lack of public outrage at the ruling. After a day or two in the news, the ruling has now vanished from the public discourse, injected into the code of law like a dose of slow-acting poison.

Some readers may think that diversifying internationally is the wrong thing to do – that as a good American I should burn the proverbial boats and fight for what’s right. To which I would reply that I don’t intend on wasting what remains of my life in a knife fight with a far better armed opponent.

You’ll make your own decisions about how to best look after yourself and your family. But if you look to your fellow citizens for clues as to what’s going on, and how to react to it, you will be setting yourself up for a very rude awakening.

Trust your own instincts.

[Every month, David and his co-editors of The Casey Report help savvy investors look behind the smokescreens government and mainstream media create to disguise the grim truth. And while the investing herd is losing money without even realizing it – through monetary depreciation – they show the way to extraordinary profits in the face of crisis. Read more here.]

KWN Blog: Rob McEwen – Once $3,000 Falls Gold will Launch Like a Rocket

May 27

As our subscribers know, we always link to and recommend reading/listening to Eric King. The quality of the people he interview is truly great and one of the contributers is Rob McEwen. When asked how he arrived at his gold target McEwen responded:

“Looking at economic history and the cycles before, the $5,000 number is a fairly easy number to get to if you look at the last cycle where gold went from about $40 an ounce in 1970 to $800 in 1980. So, you had a twenty-fold move, and the low point for us recently was $250 back in 2001, and if you applied the same twenty-fold you arrive at $5,000.” Read more…

Japan Experiences Inflation for First Time in Over Two Years

AP, May 27

Japan’s consumer prices in April rose for the first time in more than two years on a spike in energy and tobacco prices, the government said Friday.

The rise in Japanese consumer prices was mainly due to a surge in petrol and tobacco prices.

Japan’s core consumer price index, which excludes fresh food, climbed 0.6pc last month from a year earlier, marking the first year-on-year increase since December 2008, the Ministry of Internal Affairs and Communications said.

The rise in Japanese consumer prices was mainly due to a surge in petrol and tobacco prices. The ministry said education costs were also higher in April. On a month-on-month basis, Japan’s core consumer price index was up 0.4pc last month.

Economist Hiroshi Watanabe at the Daiwa Institute of Research said the April increase in consumer prices does not mean Japan’s economy has emerged from deflation.

“The April results were mainly lifted by temporary factors, such as a surge in tobacco prices. Overall, Japan’s economy still remains under deflationary pressure as the economy has yet to post a steady recovery,” he said.

The world’s No. 3 economy has been battling periods of deflation — or a steady decline in prices — since the 1990s. Deflation is a burden as it can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.

Faced with tumbling output and exports following the March 11 earthquake and tsunami, Japan’s economy recently slipped into a recession after contracting at an annualized rate of 3.7pc in the January-March quarter.


Chinese Rare Earth Metals Prices Soar

By Leslie Hook, May 2

A gravity-defying leap in the price of Chinese rare earth metals has triggered fears that the cost of components used in a range of goods from mobile phones to hybrid cars could soar.

The three to fivefold jump in prices since January comes after China, the world’s biggest producer of rare earths, has clamped down on domestic output.

The implications could be far-reaching. Although annual consumption of the metals is small relative to that of other commodities, rare earths are found in everything from fluorescent lights to wind turbines. They are very difficult, if not impossible, to substitute. Read more…

Mycket intressant Reuters artikel för Dacha ägare


Chinese rare earth producer gets approval for rare earth exchange – report

According to Chinese state-media, Baotou Steel Rare Earth Hi Tech has won approval from local government to state an exchange to trade in the metals

Posted: Friday , 27 May 2011


China’s biggest rare earth producer, Baotou Steel Rare Earth (Group) Hi Tech , has won local government approval to start an exchange to trade the increasingly lucrative metals used in many high-tech goods, state media reported on Friday.

The regional government of Inner Mongolia, where the Shanghai-listed company’s mining and processing operations are based, gave the “green light to the establishment of a rare earth exchange in the city of Baotou,” the Xinhua news agency reported, citing city officials and an earlier statement from the Baotou Steel Rare Earth (Group) Hi Tech.

That company and another, Inner Mongolia Hi-Tech Holding Co. Ltd., will run the exchange, said the report, which did not say when the bourse would open or whether the central government has also given its nod.

The report called the decision a “breakthrough” in Chinese companies’ efforts to establish a unified national exchange that will “regularise market flows of rare earths” and give them greater leverage over foreign buyers.

But the exchange would confine itself to relatively modest trading in at least some of the 17 elements categorised as rare earths, the report suggested.

“The government required that the exchange should not deal in futures trading,” it said.

“Sources close to the matter say the exchange can only deal with spot transactions of rare earth.”

The exchange will nonetheless help China “play its influence over rare earth pricing on the global market,” said Xinhua, citing industry observers.

China controls about 97 percent of rare earth output, and has alarmed customers in Japan, the United States and Europe by clamping down on production and sale of rare earth elements, citing a need to clean up highly polluting production processes and to stop illegal exports.

The crackdown cut exports by 62 percent in the first four months of 2011 compared with a year earlier, and has been a windfall for rare earth miners and prospectors outside China, such as U.S. firm Molycorp Inc .

China’s exports of rare earths fell by more than half in April from a year previously, a Reuters breakdown of detailed Customs data showed this week, despite headline official data that indicated a rise of 46 percent.

This month, Beijing said it will crack down on smuggling of rare earths and impose quotas for exports of rare earth alloy products as part of its campaign to strengthen control over the sector. (Reporting by Chris Buckley; Editing by Ken Wills)


Ur en FT artikel idag citerar vi:
As China cuts further export quotas – this year’s overseas sales licence is 4.5 per cent lower on an annualised basis than last year’s and more than 40 per cent below the 2009 quota – global demand for the metals has been growing.

Beijing has also clamped down on smuggling, which at one point accounted for about one-fifth of total sales, further squeezing the global market.

Statistics collected in Hong Kong show exports of rare earth metals have halved over the past year to reach just 1,819 tonnes last month. At the same time, the value of exports has soared to more than $121,000 per tonne, a 10-fold increase from a year ago.

Traders say that Chinese customs officials are policing exports and require that sales contracts match an internal price list, known by some as the “secret price”. They say sales of rare earths are quicker, but that offers are withdrawn more often because of rapid price moves.



With China planning to reduce output, manufacturers are braced for a sustained period of high prices. In February, Premier Wen Jiabao outlined a “five-year plan” for rare earths that included increased state oversight, raising environmental standards, a crackdown on smuggling, the closure of illegal mines and consolidation of rare earth producers. A new environmental code for rare earths mines will come into effect in October and Beijing has halted issuing new licences for the mines.

“China has been rectifying the rare earth industry, taking environmental protection and other things into account,” Lin Donglu, secretary general of the Chinese Society of Rare Earths, says. “Rare earth output will definitely be reduced.”

Yin Jianhua, rare earth analyst at Antaike, says: “Over the next five years China will probably continue reducing exports.”

This shift in policy follows similar policy changes on other commodities. Beijing has launched an industry-wide “consolidation” process for coal over the last two years, which has dampened output and forced China, once an exporter, to import large amounts of coal, pushing up prices.

China has also purged illegal and environmentally damaging mining of antimony, a metal used in fireproofing goods. The crackdown on antimony has pushed the cost of the commodity to a record high.

In the face of concern from industry and from global capitals, China has insisted that it will continue to be a reliable supplier of rare earths. However, rising prices fit neatly with China’s ambition to end its role as supplier of cheap rare earths to the world. As Mr Lin of the Rare Earths Society says: “Prices of gold, oil and other commodities are all high. Why should the cost of rare earths not be high, too?”

Den sista meningen sammanfattar väl vad jag läst om kinesernas åsikter i frågan när klagomål på höga priser kommer på fråga. Typ, var är ni när vi plågas av höga järnmalmspriser från era producenter? Varför ska vi bedriva rovdrift på vår miljö för att ni ska slippa smutsig produktion av REE överhuvudtaget?


Ytterligare av intresse från Mineweb:

More Chinese rare earth export strictures driving prices higher still

With the price for rare earth materials increasing for 15 months straight, exploding through the $1,000 per tonne mark at the start of the year, fresh strictures are likely to benefit rare earth miners

Author: Shivom Seth
Posted: Friday , 20 May 2011


In a bid to tighten its grip on the rare earths market, China’s state cabinet has taken an unprecedented step – prohibiting any increase in production capacity for existing projects. Though the country’s State Council, China’s cabinet, has said that this will separate rare earths from crude ores, the policy will have far reaching ramifications on taxes, which are set to go northward, as also banning all new projects.

The national guideline aims to promote sustainable and healthy development of the country’s rare earth industry. The cabinet has said it will take effective measures to speed up transformation of the development pattern of the industry in order to protect and properly use rare earth resources.

China has already said it aims to cap the total output of rare earth oxide at 93,800 tonnes this year. This is 5.16% higher as compared to the quota set for last year.

The country is also set to strictly regulate industrial access, in a move that will concentrate 80% of the precious metals mining business in the hands of the three biggest companies. A newswire agency report quoted officials as saying that China Nonferrous Metal Mining Group and China Minmetals would be in the reckoning and are set to gain.

Dire warning

Though investment banker Goldman Sachs warned its investors at the start of the month in a detailed report, that the Asian major would further reduce its export quotas, which would push prices higher, the intensity of the current announcement is rather severe.

In its report, the bankers said that China was keen to curb rare earths and minor metals to conserve resources and protect the environment. The cabinet has also decided to crack down on smuggling of rare earths and impose quotas for exports of rare earth alloy products, in a bid to control and reform the sector.

At the start of the week, China had rocked the world with news that it was increasing export restrictions on rare earths contained in iron alloys. The new ruling, which comes into play today, expands export quotas to alloys that contain 10% or more rare earth elements.

China controls 95% of the global export market for rare earths. Its quota slashing policy has caused a jump in prices for the metals.