Dear Reader,

A quick comment is in order on the recent stock rally. While I could provide that comment, few people do the "dose of reality" thing better than my globetrotting partner and friend of many years, Doug Casey.

Begging the forgiveness of our paying subscribers to The Casey Report, I would like to quote Doug from the current edition, just published...

Just a few words about where we’re in this ongoing crisis. While many in the media are now saying that things are looking up, and that the worst may now be over, I think it’s just begun. For several reasons…

For starters, stocks are cheap relative to where they’ve been over the last five years, but they’re not cheap relative to historic bottoms (e.g., 1 times book, around 6-8 times earnings – after big earnings cuts – and 6-10% dividend yields). Treasuries are in a bubble. And, as hard as it has fallen, residential property has not yet bottomed.

But the worst is yet to come. And I’m not talking about student loans, car loans, and credit card debt. Or Social Security, Medicare, and Medicaid. Or the looming bankruptcy of most states and many municipalities. The real crisis will be in pension funds, commercial real estate, and life insurance companies. The life insurers own mostly commercial real estate, mortgages, and bonds; many will be totally busted, even before people start cashing in their whole life policies. You don’t even hear about these three things in the press yet.

Of course that’s all in addition to the fact half of U.S. hospitals are currently running at a loss -- even before legions of the poor start really overwhelming their emergency rooms. And the balance of trade deficit has yet to turn around and go positive – which will be devastating to both the dollar and the average American’s standard of living.

Sorry to be unremittingly bearish. But the Greater Depression is still very early days. Hang on to your hat.

David again. Given that Doug and, to a somewhat lesser degree, our own Chief Economist Bud Conrad, are deeply negative about the current economic set-up, I make it my personal mission to try and look at the brighter side of things -- though readers of this weekly missive might find that assertion laughable. It has been, I admit, a challenge to find the sunny spots in the economy over the last year or so, a challenge I have often failed at.

Even so, I had been expecting this latest rally for a couple of months, based in part on the large amount of cash sitting on the sidelines and looking to get "active." People don't enjoy being constantly bearish, and investment managers, whose livelihood – not to mention the payments on their Maseratis – depends on deploying the money entrusted to them, are always looking for excuses to be bullish.

If you look at the history of these sorts of crises – the domestic paradigm of which is the Great Depression of the 1930s – you will see that even in an event as dire as that, there were any number of fairly significant bear market rallies. In fact, it may surprise you to learn that of the 20 largest stock market rallies in the history of the DJIA, 17 occurred during the Great Depression.

While I agree to the level of my DNA with Doug's assessment of the dark outlook for the U.S. and global economy, I am of an equally firm opinion that the stock market will bottom well before the economy recovers anything close to the effervescent days of recent past.

The chart here helps make the point. Specifically, even though the Great Depression lasted well into the 1940s, the stock market bottom was put in all the way back in 1932. It is important, Doug and I agree, not to conflate the stock market with the economy. While they are certainly linked, they are not the same.



That is not to say that you could have invested in the stock market at any point following 1932 and made a profit. Far from it.

But rather, as the chart confirms, there was a significant opportunity for those who got positioned following the DJIA’s wipeout and capitulation in 1932, by which point it had fallen a full 90% from its pre-crash peak.

With the market now off "only" about 50% from its pre-crisis highs, we believe that there is still a steep cliff waiting for unwary equity investors on the other side of the current stretch of Happy Highway.

Even so, the rally now underway could last for a while, maybe even a month or so – and therefore offer traders a quick speculative opportunity.

Personally, since recommending that our Casey Report subscribers close all short positions on March 31, I’ve been long the iShares Dow Jones US Financial Sector (IYF) , an index ETF made up of the Dow Jones largest financial sector stocks, a veritable rogue's gallery of large-cap, insider financial institutions including JPMorgan, Bank of America, Goldman Sachs, and others. It has done very well. It is a trading sardine, and one you should only approach with caution, because it could turn into a money shark on a moment’s notice.]

But the real opportunities will come on the other side of this rally, when investors learn the full wrath of a very angry Mr. Market... and again following that dose of hard reality, when the investment masses are huddled in a fetal ball, sucking their thumbs and whimpering pathetically.

In the first part of that two-part profit equation, we’ll be shorting the zombie institutions who are only briefly being reanimated by the current bear market trap… and in the second part, we’ll be buying deeply undervalued stocks with both hands.

As an investor, you can choose to speculate on the rally lasting a bit longer, but do so only with the understanding that things could turn on a dime – and when that happens, your dime can quickly turn into a couple of pennies. Alternatively, one can make a good case for simply remaining patient, with heavy allocations to both cash and gold. In either case, as we explained in the current Casey Report, now's a good time to begin getting positioned for the inevitable turnaround in interest rates.

[It would be remiss of me not to mention that The Casey Report offers a generous no-risk trial period, for those of you who are interested in staying closely in touch with the evolving economic and investment situation, and the various ways to profit. Click here to learn more.]

Speaking of Zombies

(For the more musically adventurous, while you read this next bit, you might want to listen to a song in a genre I normally don't gravitate to – and I almost guarantee you that most of you will hate -- the "Goth” classic Bela Lugosi's Dead by Bauhaus. But really, unless you're a bit of a freak, you probably want to give this one a pass.)

Casey Research CEO Olivier Garret and I traveled to the Washington DC area earlier this week for several meetings, including a cup of coffee with Washington correspondent Donald Grove.

The thing that struck me most on this visit to our nation's capital was the large number of homeless people wandering its streets. There was not a single city block, it seemed to me, where one could walk without having to weave in and out of the slowly moving, numb-countenanced, living testaments to failed lives.

Please do not think I’m insensitive, I’m not (or at least I like to think I’m not… a friend once told me I was the most insensitive sensitive person he knew). Rather, I provide this observation to make the point that even at the very epicenter of our coddling government, some significant percentage of the citizenry appears to have veered onto a very bumpy stretch of life’s road, leaving them with addled brains, the clothes on their backs, and not much more.

Also commonly seen on the streets of Washington D.C. are the well-coiffed, Armani-suited creatures of government that are, in my opinion, zombies of another and more dangerous sort. Rather than simply trying to shuffle in your way long enough to solicit a voluntary donation, this elevated breed of zombie gravitates to the power that resides in Washington DC, with the clear intent to use it to forcibly shake you down and then, if in the mood, proceed to suck the blood out of your very existence.

While the first form of zombie should, and does, evoke a certain amount of sympathy, the latter deserves nothing but scorn.

Shifting gears, but still in Washington, as is often the case, because of my prior experience in the trade, I took the opportunity to chat with the taxi driver who delivered us from the train station to our first meeting.

He was a very engaging, middle-aged man from the nation of Eritrea who had been residing in these United States for about 16 years. After discussing the geography, politics, and the language of his country of birth -- a discussion that included a demonstration of his native language, a fascinating collection of sounds and words that would not have been out of place in the Star Wars bar scene – the conversation turned to life in the big city.

"So," I inquired, "how's business?"

"Pretty good," he replied. Adding, rather perceptively, I thought, "I figure this place will probably do all right. It should be one of the last places to experience a bad economy."

"Good point," I concurred. "After all, it seems like the business of government is a growth business these days."

"Yes," he added, "the business seems very good."

"What about crime?" I asked, my countryside sensibilities always attuned to the dangers of big-city life.

"It's better than it was ten years ago, but it seems like it's getting worse lately."

"How many times have you been robbed?" I asked, never thinking to ask if he had been robbed -- if you’ve driven a taxi in Washington DC for any time at all, that you’ve been robbed is a given.

"Yes, recently," the cabbie volunteered, "but they didn't take my money."

“Why not?"

“The two guys told me that I was such a nice person, they decided not to rob me. They also told me to tell my fellow cabdrivers that they should not assume that all young black men are robbers, and should pick them up. They were quite angry, you see, because they had to wait for a long time before any cab would pick them up, which was me."

"But, in fact, they were robbers, right?" I asked.

"Yes," he said with a wry smile.

(Not only am I not insensitive, I’m also not prejudiced… and I apologize if that story might be misconstrued as such… I just thought the robbers’ admonition to their intended victim to be something approaching a classic in the annals of irony.

In fact, for the record, the cab driver from Eritrea was well dressed, fit, thrilled to be in America, and happy in his work… all of which was in stark contrast to the lecherous Las Vegas cab driver I mentioned a couple of weeks ago, who was fat, sloppy, and an all-around malcontent. Given the choice of neighbors, the good-natured and hard-working Eritrean or the "all-American" cab driver from Las Vegas, the Eritrean immigrant would get my vote, hands down.)

Since I seem to have fallen into a slipstream here, I’ll go with it a bit further.

Have you seen the idea bandied about that the U.S. government could provide substantial support to the free fall in housing prices simply by offering immigrants the ability to gain citizenship, perhaps after some modest waiting period, by purchasing a house with a value in excess of some reasonable number – say $300,000?

This is not a new concept but was used very successfully by the Canadian government, on the verge of the Chinese takeover of the former British colony of Hong Kong, to encourage immigration from the well-heeled community of Hong Kong Chinese. Likewise, countries like Switzerland have for years offered economic citizenships, albeit with a higher price tag.

I gather from John Mauldin, who spoke at our Las Vegas seminar, and who had run this idea by his subscriber list, that it had generated a lot of negative feedback. I have a hard time seeing what the problem is, given the destruction of the net worth of so many American homeowners… and given this nation’s long and altogether positive experience with immigration.

What am I missing? Drop me a line at David@CaseyResearch.com.

The Cloudy Crystal Ball

For no particular reason other than curiosity, I spent some time this week looking at a couple of charts that conventional knowledge says should provide something of a look into the future.

The first chart, shown below, tests the idea that the stock market is a sensitive precursor indicator for the economy in general.

But if you look at the chart, you’ll see that the DJIA peaked about two years after the peak in the housing market, the key economic driver of the recent boom times.



Is there something to be learned from the chart? Besides the fact that the old adage about the stock market as a leading indicator doesn’t hold much water, it suggests that you should be paying far closer attention to what's going on in the real economy, rather than the stock market.

While the headlines of the financial press of late have carried story after story discussing whether the recent stock market rally is signaling the bottom in the economic downtrend, if you focus only on the tangible data emanating from the real economy – data that confirm continuing negative trends in unemployment, house prices, and defaults in virtually all credit instruments – you're likely to get a much better fix on where we are in the economic cycle.

The second chart has to do with the old saw that “Dr. Copper” is particularly adroit at predicting turns in the economy. While you might look at the chart below and see something I don’t, what I see is a very poor correlation between copper and the beginning – or end – of recessions.

In hindsight, the idea that a single indicator, however logical it might be, can tell you anything important about the future seems silly. If for no other reason than if it could, everybody would pay close attention to it and act accordingly, and so it would quickly lose its potency.

Feed the Pigs, Own the Pigs

Speaking of old saws, I’m sure you've heard the oft-repeated story about how a smart guy once captured a heard of especially wild pigs, a story that is usually set in some remote corner of the state of Georgia.

For the few of you who haven't heard the story, all the smart fellow does is to begin putting feed on the ground in a certain spot where the pigs are known to pass… and to repeat this activity daily for several weeks. At that point, with the wild pigs accustomed to the apparent manna from nowhere, the man builds a pen surrounding the feeding spot and waits until the next time the pigs are snout-deep in their victuals – at which point he simply closes the door of the pen.

That story came to mind on reading this week that the new HUD secretary, Shaun Donovan, has gone on record as saying that banks that receive TARP funds will soon be required to modify the terms of their mortgage loans to ease the burden on those struggling to pay.

Need I say more?

Probably not, but I will add a footnote in the way of the photo below, which I swiped from my favorite blog, www.planetmoron.com. The photo is of the prototype for a new vehicle to be produced by a partnership between GM and Segway… in other words, this rolling coffin will be funded in no small part with the taxpayer funds you were so kind to provide.

No, seriously, I’m not joking… they actually think they are going to sell these things, simply because they can label them green. Really, who are these people? Where do they come from? How did they make it through the gene pool intact?

Then again, anyone insane enough to strap themselves into one of these devices and pull into an active roadway likely will be removed from the gene pool in a hurry.

A Shift in Tide for the Trade Deficit

Our own Bud Conrad threw together the following chart showing the recent deep reversal in the trade deficit.

Some people might view this chart with optimism – because we all know trade deficits are bad, especially those of historic portions. And so, a reversal in the trade deficit can only be good, right?

Maybe not.



Seeing this sharp reversal, a couple of thoughts come to mind.

For instance, the foreigners on the receiving end of the deficit have been redeploying the massive quantities of dollars they received by selling us flat-screen televisions, etc., to buy up equally massive amounts of U.S. government debt. In fact, they have been the largest buyers of U.S. Treasuries, by a wide majority, in recent years. Thus, a reversal of the trade deficit means that these same foreigners will now have far less cash with which to purchase U.S. Treasuries… at the very same time that the U.S. government has obscene amounts of Treasury bills to sell.

Our own Doug Casey has often said that while one should be concerned about the trade deficit, it is when the trade deficit goes into reverse that you should get most concerned. Doug’s point is simply that the reversing trade deficit is likely an advance indicator that the flow of dollars is beginning to reverse and head back toward our shores. Put another way, over the last decade Americans have essentially exported their inflation, but the reversal in the flow strongly suggests that we are now heading toward the opposite scenario.

The More Things Change...

Tim Diering from the office sent over a cartoon, cut from the pages of the Chicago Tribune circa 1934.

While the cartoonist clearly demonstrates a flair for the dramatic in his etchings, I found the general talking points eerily similar to those you might come across these days in the public discourse about the Obama administration's liberal application of stimulus, combined with equally generous implementations of new and larger government programs.

You can view a full-sized version of it here.

Miscellany

What’s a Trillion, Part II. A week or so ago in this column/blog thingy, I included a link to a very competently done graphic demonstrating just how much money $1 trillion really is. I thought that would be the last word on the topic, but then John from the office sent over a link to a video that does an even better job of communicating just how much $1 trillion is. Give it a watch by clicking the link here …

… and then use the tool on this page to forward this missive to a friend or relative in the hopes of illuminating more and more people as to both the magnitude and the insanity of the government's plans to spend trillions -- and as much as $12 trillion has been committed so far -- in trying to return to the halcyon days of the bubble years now gone by.

What’s a Ton(ne)? As we have also touched upon lately, often times you will find that the media uses “tons” or “tonnes” when discussing the sale bulk quantities of gold. Yet, because gold is most commonly priced and sold in troy ounces, using any other measure serves mainly to obfuscate the situation and confuse the average reader.

In an attempt to resolve this question once and for all – and I am encouraged in this effort by both Doug Casey and reader Steve D. -- there are 32,150 troy ounces to the metric ton or tone, which is the measure usually used in discussing large gold sales, but shouldn’t be. [Note: Whenever here in the U.S., you read the word “ton” without a qualifier, it almost always means short ton. There are 2,000 lbs. to the short ton and 2,205 lbs. to the metric ton. To confuse you even more, likewise, a troy ounce differs from a standard, or avoirdupoiss, ounce – the former equals 31.1 grams, the latter only 28.4 grams.]


A “tonne” of gold seems a lot… a lot more than 32,150 ounces. So, maybe the use of tonnes is a deliberate attempt to spook the market? I’m not conspiracy-minded, but just maybe…

Panama Errata. In a recent article titled "Move Your Money Out of the Country, and Soon," the editors of Without Borders provided the names of several firms in Panama that might be able to assist readers with the international component of their portfolios. One of the firms involved, Verdmont Capital, S.A. contacted us to let us know in no uncertain terms that they will not accept American clients. Apparently, other companies named also no longer accept U.S. clients.

We are sorry if any of you wasted time by reaching out to those firms. At least you can take consolation in the knowledge that Uncle Sam is keeping a close eye on your money.

And that, dear readers, is it for this week’s edition. With the markets closed for the Easter holidays, I won’t be offering a final comment on the market action, as I so often do.

I will, however, wish you all a very happy holiday. May all the golden eggs be yours!

Until next week, thank you for reading and for being a subscriber to a Casey Research publication.




David Galland
Managing Director
Casey Research, LLC.

---

Posted 04-10-2009 11:18 AM by David Galland