By Doug Doan
Like many of you, I am often gobsmacked by the silly decisions coming out of our federal government. For every politician or senior government official with the courage and insight to focus national attention on the most pressing problems, there are many more, determined to push idiotic policies that erode American economic power and national security.

Take for example the chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, who showed real courage and warned that the greatest threat to national security did not come from Islamic militants or state sponsored terrorists, but from our ballooning national debt. Mullen had it exactly right, but his warning was largely ignored. Since Mullen’s warning about excess government spending, the nation’s annual deficit has increased to over $1.5 trillion per year. Clearly, the rest of Washington does not share the Admiral’s concern.

No doubt, we all have a least-favorite politician who we believe is unusually foolish and obtuse in dealing with the nation’s urgent challenges. Mine is Senator Charles Grassley. For years, I have watched Grassley pontificate and posture as a crusader against waste, fraud and abuse. But from firsthand experience, I knew that he was anything but. The real Charles Grassley, in my view, is a two-faced charlatan, keen on public preening, while simultaneously ensuring his underhanded double dealings are never exposed. Grassley seems representative of everything that is wrong in Washington.

Then I had a moment of epiphany. Instead of grousing about a politician like Charles Grassley, I needed to find a way to benefit from the senator’s consistent stupidity. Put another way: why not profit from Senator Grassley’s boneheaded policies with a few selective trades?

So about a year ago, I put on the Senator Grassley trade (CORN MAN) and bought corn futures on the Chicago Mercantile Exchange. My reasoning was simple: Senator Grassley, in an effort to boost the fortunes of Iowa corn farmers, had almost single-handedly instituted a series of policies across multiple federal agencies that would cause corn prices to rise.

First, Grassley championed the diversion of large amounts of the nation’s corn supply into ethanol, beginning at 5 percent of the national corn crop, rising to a whopping 40 percent today. At the same time, Senator Grassley pushed the U.S. Trade Representative to erect barriers to imported ethanol. Next, Grassley badgered the EPA to increase the amount of ethanol Americans were forced to buy against their will by increasing the subsidized ethanol blend required in gasoline to 15 percent (previously 10 percent). Put simply, I concluded that Senator Grassley was a one man wrecking crew, responsible for a wide variety of market distortions.

The trick was to design a trade to capitalize on Grassley’s stupidity and make profit on it. My first trade was to buy a single corn futures contract, betting that the cost of corn would continue to rise. That worked out so well that I bought three more contracts. Not long thereafter, I bought ten contracts, representing 1270 metric tons of corn.

Boy, have I been rewarded!

Over the past year, the price of corn, largely because of Grassley’s efforts, has increased almost 84 percent and anyone who had bet on the price moving up was a big winner. At the end of a year, my CORN-MAN trade, based on Senator Grassley’s stupidity, resulted in a gain of over 500 percent. Not bad.

That got me to thinking about other stupid politicians and how I might put similar trades on the abundance of bad policy in Washington. Given the inordinate supply of stupid politicians and government officials pursuing silly policies, it was all too easy. Here are some other Stupid Politician Trades:

The Henry Waxman Trade (WAX-ON): Congressman Henry Waxman is the Hollywood-based congressman (D-CA) with a long history of loathing for free enterprise and unfettered markets. He has been the single greatest champion of increased government regulation, believing that all of America’s challenges can be solved by imposing additional regulations and something he euphemistically calls “oversight” into every aspect of American lives.

In particular, Henry Waxman has turned his attention to the healthcare industry and, in a variety of different committees, seems to have pushed for increased regulation and stifling bureaucratic red tape. I also discovered that Waxman salted key government agencies, such as the Food and Drug Administration (FDA) with his former staffers.

Clearly, Congressman Waxman had disrupted the market and provided a trading opportunity by hampering those companies with innovative new drug discoveries attempting to gain FDA approval. My simple investment thesis is that drug and biotech companies, as a direct result of Henry Waxman, are unlikely to gain FDA approval quickly for new discoveries. The FDA has erected multiple barriers for companies to navigate, driving up the costs of getting a new drug approved to over $1 billion.

Hence, by shorting companies with promising breakthrough discoveries, I am betting that no matter how innovative or important the new discovery (for example: a cure for Alzheimer’s), the FDA will not approve the drug. So far the (WAX-ON) trade looks promising. FDA drug approval rates have fallen to historic lows, and the costs associated with navigating the bureaucratic maze created by Henry Waxman are growing.

Another promising Stupid Politician Trade was the Carol Browner Trade (OIL CZAR). Carol Browner served as President Obama’s czar for global warming and established near-complete control over the Obama Administration’s policies on oil exploration, energy, EPA and climate policy.

After reviewing her record, I became convinced that Carol Browner was particularly hostile to domestic fossil fuel production and would likely erect additional barriers and restrictions to any company trying to increase domestic production of oil and gas. In addition, Browner seems equally hostile to nuclear energy, coal-fired power plants and, apparently, has come to the conclusion that America’s energy needs can be met by an expansion of solar and wind power.

While I respect Carol Browner’s passion, I question her math. Currently, solar and wind power provide less than 1 percent of U.S. energy needs. Even if Browner could increase solar and wind power generation by 100 percent, it would still be a tiny percentage of U.S. needs. So, I came up with a trade that could make a profit on Carol Browner’s hallucinatory belief that American energy needs can be fully met by killing off domestic production of oil, gas, coal and nuclear power.

I decided the best leveraged trade to capitalize on Carol Browner’s stupidity was to invest in oil refiners. Oil refiners are more profitable when refining the dirtier (mostly foreign) oil with high sulfur content. American oil, by comparison, is less dirty and inexpensive to refine.

Thanks to Carol Browner’s policies, our nation is far more dependent upon foreign sources of oil and the supplies of domestic oil are not keeping pace. Hence, the USA is going to become even more dependent upon foreign oil. So, refiners, capable of converting more toxic foreign oil into gasoline and other distillates, are going to make lots of money.

Like all investments, Stupid Politician Trades have some risk that investors should weigh carefully. After all, it is possible that politicians such as Grassley, Waxman, or Browner could reconsider their positions, perhaps even concluding that they were wrong, market disruptive, and contrary to the interests of the nation. But, it seems likely the risks of Grassley, Waxman or Browner ever opening their minds and admitting that they were wrong is close to zero.

A more immediate risk is that the stupid politician could lose his seat, or, in the case of Carol Browner, be dismissed. Carol Browner’s departure was just announced, so that trade is no longer as attractive.

Coupled with the risk of a politician losing election, or being replaced, comes a new opportunity. For example, if Charles Grassley should lose his seat, one could immediately take an investment position to make a profit. Instead of buying corn, it would be time to sell corn, and especially ethanol, as prices would likely revert to normal market forces and decline in absence of the huge multi-billion dollar subsidies that now exist for corn-base ethanol production.

Similarly, in the event that Henry Waxman loses his congressional seat or retires, one could remove the (WAX-ON) trade that shorts drug and biotech companies and replace it with a (WAX-OFF) trade which would feature buying those very same innovative biotech companies that might now have an honest chance of bringing their new drugs to market.

However, not all stupid politicians offer a tradable thesis. They may seem almost certifiable but may not be in a position to disrupt the market and create a tradable opportunity. The obvious point is that not all stupid politicians offer an investor a chance for outsized gains.

My advice is to watch the government news reports consistently and keep a close watch for one of your favorite stupid politicians or government officials. With a little work, you could find some investable ideas of your own and come to love these guys as much as I do.

Doug Doan is an active Angel Investor and serves on the Board of the Border Trade Alliance.