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Guns, Drugs, Crime and Incarceration in the U.S.

A few incidents that have received national attention in recent weeks have got me thinking.

Guns, Drugs, Crime and Incarceration in the U.S.

Smith & Wesson (SWHC and Sturm Ruger (RGR)

A Crazy Recommendation ---

First, Happy Labor Day, both to those of you who, like me, still labor from week to week and to those who are enjoying a well-earned retirement. At Cabot, we work hard to serve all of you, and we appreciate the trust you’ve shown in us.

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On a more serious note, a few incidents that have received national (even international) attention in recent weeks have got me thinking about the relationship between guns, drugs, crime and incarceration in the U.S.

The first was the intentional shooting of Michael Brown in Ferguson, Missouri three weeks ago by a police officer.

The second was the accidental shooting of a firearms instructor in Arizona by a nine-year-old girl handling an Uzi. (It was six years ago that an eight-year-old boy at a gun show in Massachusetts accidentally killed himself with an Uzi.)

Unless you spent the past few weeks disconnected from the world, you know enough about those incidents, so I won’t annoy you by repeating the facts.

But I will supply some new facts to add to the big picture.

1. The U.S. has the highest incarceration rate in the world, more than six times that of the average developed nation.

chart

2. The U.S. prison population has grown nearly 700% over the past 40 years, with particular growth attributable to the War on Drugs. Happily, the trend is reversing now.

chart

3. Many who aren’t locked up are killed. In the U.S., police kill roughly 1,000 people per year in the line of duty.

By comparison, in 2011, police in Australia killed six people, police in Germany killed six people, and police in England and Wales killed only two people. Police in England are allowed to carry a gun only when the situation warrants. As a result, only 5% of English police carried guns last year.

Also,

4. Our local police forces, assisted by Federal policy, are becoming increasingly outfitted with military grade equipment—as was evident in Ferguson, in part because (unlike the police in England) they are facing a well-armed citizenry.

5. And while the majority of firearms are owned by law-abiding citizens, many firearms find their way into the hands of criminals.

6. Meanwhile, the War on Drugs has been no more successful than Prohibition was nearly a century ago. But while Prohibition enriched U.S. gangsters like Al Capone, the War on Drugs has been particularly successful in enriching gangsters south of the border.

7. As a result, many Central and South American gangs have become more powerful than the local authorities.

Just last week, for example, in a prison uprising in Brazil, five inmates were killed by fellow inmates before officials acquiesced to the demands of the gang leaders.

And now Brazil has the same prison problem we have.

8. Thanks largely to incarcerations related to narcotics, Brazil’s prison population has more than quadrupled since the 1990s.

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So what’s the answer?

First, I think it’s important to define the problem.

I think the main problem is that too many young men are in prison.

The follow-on problems from this include:

An epidemic of poor families with no father figure.

The lost productivity of so many young men and the economic costs of locking them up.

The reinforcement of a culture of disrespect for the police.

And more.

And why are so many young men in prison?

They lack the skills needed in our rapidly changing economy so they turn to crime.

They were caught up in the War on Drugs.

They are the victims of an excessively powerful police culture that focuses on punishment rather than correction.

They found guns easy to acquire.

So what’s the solution?

More education and less punishment would be a good start.

Paying teachers more and paying police less would be helpful.

Scaling back the arms race (the ownership of increasingly powerful weapons by both individuals and authorities) would help, and can be accomplished with the help of both the National Rifle Association and Congress.

The trend toward legalized marijuana will help.

And the trend toward reduced prescription of opioids will help.

Last, but not least, increased awareness of the problem will help—and I’m hopeful that the events in Ferguson are part of a trend that is getting there.

As evidence, in fact, I present these two charts of Smith & Wesson Corp. (SWHC) and Sturm Ruger (RGR), the leading gun manufacturers in the U.S.

chart

chart

Sales of guns have been slowing this year and some institutions—like the California State Teachers’ Retirement System— have begun divesting these stocks at the behest of their stakeholders.

Note: I have nothing against either of these companies; in fact, in years past, when their charts were attractive, I have recommended both stocks.

Furthermore, as a proponent of the free market, I support their right to serve their customers, as well as the right of the National Rifle Association to represent these customers.

But the U.S. has a major problem and these companies and the NRA are part of it.

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On the investing side, I’m now going to surprise you with what might seem a crazy recommendation.

But first a little background.

It’s well known that contrary investing involves acting in opposition to majority.

Ideally, a contrary investor sells at tops, when everyone wants to buy, and he buys at bottoms, when everyone wants to sell.

Baron de Rothschild put it succinctly when he said, “Buy when there’s blood in the streets.”

Anyway, here at Cabot we’ve been working on a new investing system using exchange-traded funds (ETFs) of specific countries.

The system is mechanical, based on detecting improving momentum in the charts.

The goal is to own a few ETFs at a time that are trending up, and to sell them after they top out, switching—if possible—to the next wave of healthy ETFs. The results of back testing have been very encouraging thus far, and I hope to write more about this is the future.

The Developed Economies ETFs in our study that work well using this system include:

Austria
Belgium
France
Germany
Hong Kong
Netherlands
Sweden
Switzerland
Taiwan
United Kingdom

The Emerging Markets ETFs that work well include:

Brazil
China
Malaysia
Russia

So guess which one of these gave a buy signal last Thursday at the market close?

Which one would be most contrary, least comfortable—even crazy?

Yes, it’s Russia.

Here’s the chart.

chart

Now, I’m not saying you should run out and buy RSX here—although I am going to watch it carefully. There’s blood in the streets right now, and with every acre Russia takes in Ukraine, it gains valuable assets.

But I do want you to think about doing what’s uncomfortable, because that’s a great way to invest. You don’t want to join the crowd; you want to be in front of the crowd.

So today, what’s the crowd been doing here in the U.S.?

The crowd’s been buying, enjoying good economic news and sending market indexes to record highs.

So here’s what I recommend doing.

Sell something. Take some partial profits, especially if you have a stock that’s had a good run and is well regarded.

Suggestions include Apple (AAPL), BitAuto (BITA), China Mobile (CHL), Chipotle Mexican Grill (CMG), Home Depot (HD), Keurig Green Mountain (GMCR), Health Net (HNT), Skechers (SKX), SkyWorks Solutions (SWKS), Tesla Motors (TSLA), TriQuint Semiconductor (TQNT), Under Armour (UA) and WhiteWave Foods (WWAV).

Yes, I’ve recommended buying some of these stocks in the past and I expect to do so again in the future. But today I think it’s a great day to act contrary and pay yourself.

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.