The Room : Bud Conrad

The Room – 05/15/2009

David Galland — Fri, 15 May 2009 16:48:00 GMT

Dear Reader,

Last time I wrote, I labored under the after-effects of a mild case of “immoderation.” In response to which the ever-moving Doug Casey (writing from Washington D.C.) sent along the following witticisms, which I thought you might enjoy...

After a week of engaging in all manner of healthful activity, I am ready once again to tilt my lance against the armies of absurdity that assault the senses more or less constantly these days.

This week, for instance, Alan Greenspan opined that the economy has bottomed, and the stock market actually rallied in response! It’s akin to Bernard Madoff announcing he is opening a new money management service from the secure facility where he now resides, and having investors rush all over themselves to hand him their money.

Or how about these headlines...

US Retail Sales Unexpectedly Fall for Second Month (Bloomberg)… and, Foreclosures: “April was a shocker"(CNN)… or Unemployment Claims in U.S. Jump More Than Forecast on Idled Auto Plants (Bloomberg).

Now, despite my ready access to a large and very capable team of researchers who are intensely curious and focused on facts, I won’t claim anything close to perfect knowledge about anything. But I will claim that any economic observer who is “shocked” by any piece of bad news these days has either been misreading their doctor’s instructions on their daily doses of Valium, or is just plain stupid.

But the absurdity doesn’t stop there. Not by a long shot.

For proof of that contention, look no further than the crime of omission the mainstream media are now committing by failing to report, emphasized with banner headlines, the train wreck now occurring with the government’s finances.

Starting with the trouble the U.S. Treasury had on May 7 when it tried to auction off $14 billion in long-term bonds. Skeptical buyers demanded higher yields, forcing the rate to rise from 4.19% to 4.29% over the course of the auction.

But even that is just the tip of the iceberg. The latest developments have to do with the sharp shortfall in tax revenues we have been anticipating.

Here’s the story…

Tax Revenues Tanking

While everyone else has been focused on the banks’ stress tests and how much government is spending to bail out troubled “too big to fails,” a disturbing trend on the other side of the equation is now emerging: how much (or rather, how little) the U.S. government is receiving in tax revenues.

After combing through the past 25 editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, we created the following chart.

Here’s what’s going on:

In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.
Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!
When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus -- on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper.

Using the government’s own expense projections, the revenue shortfall, even if it doesn’t worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. For reasons we’ve discussed at some length in The Casey Report, those expense projections are likely to be significantly understated.

Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009… in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion “adjustment” alone totaled more than any full-year budget deficit in the nation’s history.

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

In other words, events are rolling out almost exactly as we have been anticipating. Below, for example, are some useful excerpts from an April 3 article titled “Widening Deficits” by Casey Research CEO Olivier Garret. To quote…

In the midst of the Great Depression, the 1931 federal tax revenues had fallen by 52% from their 1929 highs. While we do not expect anything that dramatic in 2009, it would not be unrealistic to see a 20% to 25% reduction in cash flow from tax collections this tax season. Such a drop would pose significant challenges given that spending commitments are off the charts and climbing.
Later in that same article, Olivier continued,

Olivier’s forecast of failed auctions and rising interest rates on Treasuries proved more prophetic as a May 7th story from Bloomberg reported:

So, what does all this mean?

As per above, the rock-and-the-hard-place scenario we have been predicting is unfolding before our eyes. At this point, other than sharply changing course and letting the free market cope with the crisis through a brutal “survival of the fittest” scenario, the government is left with no other option than to accelerate its buying up of its own debt.

Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for the stunning rise in interest rates we are now positioning ourselves for in The Casey Report (and, you can too… learn more).

Super Fed, Super Cop?

Did you see that the Obama administration wants to turn the Fed into a “super cop” to regulate any company considered by the government to be “too big to fail”? If not, you can read the story here…

That notion caught the attention of Bud Conrad, no big fan of the Fed. In his own words…

video of testimony by the Inspector General

anything

David again. Speaking of banking, there is a short but very informative video that explains in simple terms what a sham the recently concluded bank stress test really was. Watch it here…

Sharks Eat Sharks

Dear friend and regular UK correspondent Sadia sent me a collection of links to the unfolding media scandal now underway in England over the egregious abuses of expense accounts by members of parliament in that country. Here’s her email…

Times: Parliament's darkest day: MPs suspended and Michael Martin at risk

Linked here

Times: Shahid Malik stands down as Justice Minister after PM orders inquiry into his expenses
Linked here.

Daily Mail: Bring them to justice! The Mail helps to launch campaign to prosecute sleaze MPs
Linked here.

Independent: The married couple who took taxpayers for £282,731
Linked here.

FT: MP claimed for non-existent mortgage
Linked here.

Guardian: MPs' expenses
Linked here.

Telegraph: MPs' expenses
Linked here.

David again. My purpose for including all those links was not to invite you to spend the rest of your day in idle reading, but rather to make the point that there is an honest-to-goodness, blood-in-the-water media frenzy now underway in England. Members of both the ruling party and its loyal opposition are (correctly) under assault – which is to say, the very institution of government in the UK is running for cover.

The good news, for this side of the Atlantic, is that you can bet your last dollar that the desk editors of various U.S. media factories, having taken note of the satisfactory increase in eyeballs-on-pages being generated in England over the expense scandal, are now urging their reporters to look for – and find – a similar scandal in Washington D.C.

I suspect they won’t have to look too hard.

While no fan of the whole genre of news-as-entertainment, I expect to be highly entertained by the revelations of expense abuses by U.S. congressmen and sundry bureaucrats that should be coming to a media outlet near you soon.

Eat Dirt

Given the general outlook and views of those here at Casey Research, it is something of an oddity that we are headquartered in Vermont. It is, in fact, something of an accident -- the outcome of the usual twists and turns of life that brought me to this place roughly 25 years ago. Subsequently, Casey Research followed along.

The "oddity" part has to do with the fact that this is one of the highest-taxed states in the union, and the overarching political temperament could be accurately described as "socialist." In fact, Vermont's Senator Bernie Sanders is the nation's only elected (openly declared) socialist.

Yet, the place has much to recommend it, including a general lack of population due to the aforementioned high taxes and a well-earned reputation for cold winter weather. But it also has an abundance of beautiful scenery, scenery that includes any number of ski hills and even the shores of the six largest lake in the country. When the weather is good here, Vermont is very nice indeed.

I mention all of this because I came across a story this week from one of our fellow residents, an amateur environmentalist by the name of Annie Leonard who has created a popular YouTube video about America's "stuff"... the general theme being that to own "stuff" is bad. Very bad.

To give you a sense of her views, here is an excerpt from an article on her film.

“We’ll start with extraction, which is a fancy word for natural resource exploitation, which is a fancy word for trashing the planet,” she says at one point. “What this looks like is we chop down the trees, we blow up mountains to get the metals inside, we use up all the water and we wipe out the animals.”

There is an old saying, "Beware what you wish for because you may get it.” While I cannot find it in my heart to hope that Ms. Leonard gets her wish, because then we would all be living in caves and subsisting on roots and berries, I can certainly hope that the populace come to their senses before her Luddite notions gain any real traction.

Alas, I think it is a false hope because she has just signed a contract with Simon & Schuster to publish a book on the same theme. Further, her video is now being widely distributed to the nation's schools to be used in their normal curriculum of brainwashing.

You, too, can glimpse the future we should aspire to, according to Ms. Leonard, by emulating the world of the past – by taking 20 minutes now to view the same video, “The Story of Stuff,” that millions of schoolchildren will be viewing in the months and years ahead.

This seems to be an appropriate time to mention that we are now homeschooling one of our children... and none too soon. More on that topic on another day.

(But since we are on the topic, however briefly, if you have any good recommendations for online courses for middle- and high-school students, I would greatly appreciate it if you'd shoot them my way, at David@CaseyResearch.com.)

Word from the (Mexican) Street

Earlier this week, as part of an effort to further calibrate our investment advice to the needs of our readers, I reviewed a count of Casey Research subscribers by geographic location. As usual, I was pleasantly surprised at the large number of countries in which our subscribers reside – including Burkina Faso, Lebanon, Brunei, Nepal, and well over 100 more.

Once again tapping into this widespread network, I was able to solicit a first-hand report “from the ground” as to the state of things in Mexico. Jeff B., a longtime correspondent, filed this dispatch on how the swine flu hysteria had affected life in his current home town of Acapulco…

Star Trek – “Stayed Wide Awake”

Last weekend, I took the kids to see the new Star Trek movie. While most movie reviewers tend to use some number of stars or perhaps thumbs pointing upwards or downwards in order to communicate their opinions on the movies they watch, I have a simpler system that emanates from the hours I keep.

Using my rating system, uninteresting movies warrant a "long nap" -- literally.

Mediocre fare will garner "periods of napping," or perhaps "occasional nodding off.” It is only the very best movies that rate "stayed wide awake throughout" -- the rating I enthusiastically award to the latest entry in the Star Trek movie franchise.

As a youth, I enjoyed Star Trek but would not categorize myself as a "Trekkie" (generally speaking, a self-imposed moniker that always struck me as categorizing oneself as "delusional" and maybe in need of "getting a life"). Even so, it was fun to see how the director managed to seamlessly introduce the Star Trek characters as they came together in their early careers, the background against which the movie unfolds.

But even if I had never seen a Star Trek episode, I have to believe that the overall plot and production values of the film would have sucked me in and kept me glued to my seat, as they did. The only disappointment came in mild doses, mostly associated with brief appearances by one of the original cast members whose age is sufficiently advanced at this point that you can detect a slight but distracting whistling of his dentures as he delivers his lines. But that’s a petty critique of what is otherwise a very tight movie.

So, at least by my rating system, if you're looking for an entertaining, interesting, and action-packed film for a rainy weekend, Star Trek may be just the thing.

Miscellany

Lecture on the Great Depression. While there is as much or even more misinformation on the Internet, and a great deal of mindless -- make that mind-numbing -- stupidity on services such as YouTube, there is no debate that there is also much excellent content available. For instance, if you have 49 minutes available, you can listen into an excellent lecture on the Great Depression sponsored by the Von Mises Institute. All that’s required is that you click the link here.
Charlotte Phyle… Grant in Charlotte is looking to get a phyle started. If you are in the area, drop us a note at phyle@CaseyResearch.com and we’ll get you hooked up.
Trade War… with Canada? As I was getting ready to go to press, someone sent me an article from today's Washington Post on the topic of a burgeoning trade war between the U.S. and Canada, the unintended – or maybe intended – consequence of the "Buy American" provisions inserted by Congress into the recent stimulus package. Here's an excerpt to give you a flavor of the thing...

Once again reminding one of the reason to run in the opposite direction whenever one hears the phrase "Hi, I'm from the government and I'm here to help." (Read the full article here)

And with that, I must sign off for the week, noting as I do that the U.S. stock market is jumping around like a yo-yo, with the DJIA down 36 points as I sign off. Gold continues to defy its naysayers by holding firm at $930, and oil is changing hands at $58 a barrel, no small feat given the surpluses now filling storage tanks, and even oil tankers, around the world. There is big money moving into inflation hedges just now… but merely a trickle compared to what’s to come.

Until next week, thanks for reading and for being a Casey Research subscriber…

David Galland
Managing Director
Casey Research, LLC.

The Room – 04/10/2009

David Galland — Fri, 10 Apr 2009 16:18:00 GMT

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...

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.

iShares Dow Jones US Financial Sector (IYF)

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.

The Room - 10/10/2008

David Galland — Fri, 10 Oct 2008 19:27:07 GMT

October 10, 2008

Dear, Dear Reader,

In last week's edition of this meandering missive, I mused as follows...

"What, I wonder, will the government do when next week, or the week after maybe, the U.S. stock market takes another header for 500 points? Stay tuned. Meanwhile, gold is at $826, down considerably over the past week.

Like when a tsunami sucks the water away from the shore just before hitting, we're in a transition period. I'm not worried about where gold is going next. I wish I could say the same about the world."

According to the number crunchers, the U.S. stock market is on track to have its worst week since 1937. Which, as you can see from the DJIA chart here, is an acceleration of the broader trend that has held sway for some time now.

While we can't yet say what action the U.S. Government will take next, glancing over the horizon, we see a growing number of countries implementing a euphemistically named "market holiday." In Iceland, all banks and markets are now enjoying a day off. And Kevin Brekke, our Switzerland-based researcher, just wrote that there is a rising call to halt trading in Germany. It would not surprise me in the slightest if the same were to occur in the U.S.

As has previously been noted, we are wandering through deep woods, with little in the way of a map to guide us. And so we must rely on what few signs we can discern. And one of those signs is that, literally, all of the "solutions" to the problem now being pushed forward by governments around the globe have to do with trying to re-generate an expansion of credit through the liberal application of a thick layer of monetary grease. In other words, trying to solve the problem with more of the same.

It's like trying to sober up a prostrate drunk by pouring Vodka down his throat as a restorative.

To the extent that these exertions fail, government is forced to fall back on the coercive powers they have taken unto themselves over the decades... slap down the short traders, clamp shut the markets, or... or... we just can't say. But in our mind's eyes, we can hear the motto of our century, "Whatever it takes," bubbling from the blubbery lips of officialdom around the world.

Playing their part, the MMM (Mass Media for the Mindless) intone that the smart move for investors to make now is to play for the big bounce, a drumbeat that was heard especially loud as the week of October 5 opened for business.

This notion that sunny skies are surely just ahead was being championed, of course, by all of the king's men and most of the punditry. It is as if the words "The worst is now behind us" are etched on the inside of their lungs.

And so they urged the investing public to jump back onboard the Rebound Express... maybe even with the use of leverage, just to be sure to squeeze all of the juice possible out the rally that surely cometh.

On Monday and again on Tuesday, I received several emails from readers inquiring for my opinion on that very same theme, often accompanied by articles from this sage or that about the pending rally.

My response to one such inquiry is as follows...

It is this.

Everyone operates from within the framework of their experience. The author's experience is that when his phone begins ringing, it's a bottom. Or when the candlestick chart shows that X level is below Y, then a bounce is due.

He is likely right in one sense... that no market goes in one direction consistently, without pullbacks and bounces.

But what if this time things are, in actual fact, different?

Oh no! Not that old saying.

Well, consider that America has historic (as in, never happened before) levels of trade deficits, government deficits, record levels of personal indebtedness, the largest housing bubble ever – a housing bubble that qualifies as the largest financial bubble in history (by a wide margin), record number of dollars in the hands of foreigners, etc.

So, before we broke through all those negative records, one could have said, yeah, but for those things to happen, things would have to be different... and they were.

Both Doug Casey and Bud Conrad are on record saying that the entire global financial system – a system built on the house of cards of a fiat currency – may be about to fall. That the holders of trillions of dollars in misallocated capital and derivatives anchored to that capital may be about to learn just what the underlying value of a fiat currency actually is, and demand something else.

Look at the stock chart of the Great Depression and you won't see it moving in a straight line... there are bounces along the way... but if you had bought ahead of most of those bounces, it would have been a financial disaster.

All of which is a long way of saying, the author you quote may be right... but I would play the bounce only with money I could afford to lose.

Gold at these prices should be a good monetary medium to transfer wealth to calmer waters... that, and not as a speculative investment, is its best and highest purpose just now. And it is a hell of a lot safer than pretty much any mainstream security (by virtue of the fact that credit markets are frozen... which makes it kinda hard to buy raw materials, meet payrolls, build inventories, buy capital equipment, etc.)

Unless and until the credit markets are working again, caution is the word.

Prior to this week, perhaps, the concept that the world we live in might not be quite so predictable and well organized – you know, that stocks fall, then quickly recover, allowing you to close shop and head down to your preferred martini bar for a $15 libation -- had not made it through the well-coifed craniums of the young and the restless that now dominate the world of finance.

An email from our Jake Weber, the Chicago-based editor of our very useful (and free!) new e-letter, Casey's Charts, shed a passing glimpse on the cost associated with misunderstanding the nature of what's going on just now...

My friend, who's a day trader here in Chicago, said that he lost $100k for the company in 10 seconds, and had he waited 10 more seconds, it would have been $300k. It's a different game...

Now, multiply that experience by the tens of thousands, handling tens of millions, and you can begin to get a sense about the hard dose of reality that has been meted out to the optimistic this week.

It is said that a picture can tell a thousand words (or, these days, given inflation, is it a hundred thousand?), and so I would share the accompanying photo from the Financial Times. One can't say with certainty, but I suspect the look on the young gentleman's face is not enthusiasm but panic.

No $15 martini today, though a bottle of cheap gin in a darkened room might be called for.

Go Gold

As I don't need to tell you -- or at least those of you who have been with us for any length of time – the core fixative in our prescription for the immunization of portfolios large and small from the dark age now descending on global financial markets is a healthy dose of bright and shiny gold.

I hope you didn't drag your feet in laying in supplies, because it is now all but impossible to find physical gold... pretty much in any form (other than expensive rarities), anywhere.

Personally, I've never seen anything like it. Even in the gold bull market scramble of the late 1970s, you still could still walk into pretty much any gold shop and pick up an ounce or two (with a short wait in line, at worst).

Likewise, I couldn't have imagined we'd see such a disconnect between the paper price of gold – which, while comforting, seems restrained to us – in light of the physical shortages and all that those shortages imply.

Shedding some light on that topic, Sally Limantour, the editor of our soon-to-be-launched trading service, forwarded the following excerpt from recent writings by Bill Fleckenstein, one of the few money managers with the foresight to see what was about to unfold...

Lust for Gold Dust

If that's the case, it could cause a mad scramble at the COMEX, because there's not enough gold to meet the open interest. It looks like physical gold, as compared to paper gold, is rapidly becoming the flavor of the day -- meaning that a huge price move may lie just in front of us.

And, if that thesis is correct, when more folks start understanding it, there might not be enough gold around to satisfy demand at anywhere near current prices -- and their attention will turn to the place where they can find gold, namely the gold miners, whose job it is to "make" more. (With the price of energy dropping as world GDP slows, the profit potential for the gold miners is liable to be the best it has been in many years.) So, I think the stage may be set for a dramatic move in gold stocks.

This, of course, is a thesis we subscribe to in our BIG GOLD letter, which is dedicated to following the fortunes of the large market capitalization producers – as well as the various ways you can buy and hold the monetary metal (in the next edition, the BIG GOLD team looks for – and finds – physical gold available for purchase. Learn more.)

The bottom line is that if you are in gold and -- we continue to believe, gold stocks and other assets connected to gold – hold on tight because as interesting as things have been so far, the next three or four acts promise to bring down the curtain.

A Quick Conrad Commentary

Our Casey Research chief economist, the always-working Bud Conrad, shot me the following note and chart in an email yesterday. While his words are succinct, they do a good job of summarizing the situation as it now stands.

Taken together, the dollar is overvalued and stocks are still not reflecting the multi-year recession that, I expect, will bring much lower earnings than the current estimates that keep the CNBC rubes saying stocks are undervalued.

Until I hear something different from the government, other than pouring more gasoline on the fire, I don't expect this crisis to even begin to be solved. At this point, I don't think they have even determined what the problem is, namely too much debt and its deleveraging.

They are working on the wrong problem with the wrong solutions.

Meanwhile, the chart here provides a glimpse at where those solutions are taking the U.S. economy. Not a pretty picture. Gold remains the only safe harbor.

Snippets

The following items arrived this week from Mr. Watson, my longtime friend and correspondent in Portugal.

Running Out of Digits

To which I reply by sharing the message off a bumper sticker I saw earlier this week, "If you aren't angry, you aren't paying attention!"

Iceland on Ice. British local governments, it is now revealed, may have as much as 1 billion pounds parked in Iceland banks, banks with an AA rating. They all parked funds there on the recommendation of John Prescott, Tony Blair's deputy prime minister! The Iceland government wanted to seize control of the three bankrupt banks but discovered that there was no law on the books allowing them to do this. So they used the anti-terrorism laws to seize the banks' assets. Look out, America. Meanwhile, the Iceland president just had a heart attack and was rushed to hospital for heart surgery. I wonder if there is a cause-and-effect relationship at work?

David again, on the topic of Iceland, the following excerpt came out of an article that just came across the wires from an English news source...

Financial crisis: Gordon Brown to sue Iceland over near £1bn of frozen bank deposits

Gordon Brown has described the behaviour of the Icelandic government following the bank collapses as "totally unacceptable", adding that the Government was considering legal action.

The Prime Minister is furious that 300,000 bank customers are blocked from accessing deposits in online bank Icesave.

There are also concerns that councils and police authorities might not be able to retrieve nearly £900m of taxpayers' money which is stranded in Icelandic bank accounts.

Mr. Brown told a press conference: "We are taking legal action against the Icelandic authorities. We are showing by our action that we stand by people who save."

Alistair Darling, Chancellor of the Exchequer, added: "The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here."

In sandbox lingo, those comments would be equivalent to, "If you don't give me back my ball, I'm going to tell my mother!" Regardless, one government giving raspberries to another is not exactly the sort of big love international cooperation everyone is cooing about lately.

The Really BIG Bubble

As I wrote in the September 1 edition of The Casey Report, which focused on housing and how much longer the meltdown in that important sector might last, the global housing bubble at $30 trillion ranks as the biggest financial bubble in history.

It is, in fact, an amount roughly equivalent to the GNP of the entire world.

But my contention that it was the biggest bubble ever was an error. The Really BIG Bubble is in global derivatives, as shown here in this snapshot from the International Swaps and Derivatives Association. As you can see on the lower right-hand side of the really big bubble, the Credit Default Swaps alone come to over $54 trillion... and they are now coming unglued.

While we cannot know how the game will end, the simple fact that the pieces involved are this big is a lot more than a little concerning. I sincerely hope the best case will appear in a fresh suit and pressed tie and announce that all is well. For the time being, however, preparing for the worst case seems appropriate.

What to Watch Now

We expect this crisis to unfold in stages. So far, we have seen the real estate bubble beginning to deflate (and it has a long ways to go, increasingly involving commercial real estate, a play we are already profiting from in The Casey Report), a freeze-up in credit, the emergence of violent market volatility... and now a global stock market meltdown (dare we say "crash"?).

Next up will be widespread bank failures, corporate bankruptcies, soaring unemployment, increasingly draconian government interventions, all of which will end in a massive inflation. How's that for a string of happy thoughts?

Unfortunately, we'll have a lot of time to discuss those various developments in the weeks, months, and even years ahead.

For now, however, the key measure to watch is the London Interbank Lending Rate, or LIBOR, as it is referred to in the trades.

As you may already be aware -- being a whole lot more astute than most people in such matters -- LIBOR is the rate at which banks are willing to lend money between themselves. In addition to being viewed as a measure of trust and normalcy in the global financial system – and on that measure, an upward-spiking LIBOR is the equivalent of a flashing red light these days – it is also used as a feature in financial contracts worldwide.

For example, if you have secured a loan to build your factory or a line of credit to finance the stream of materials you need to manufacture your goods, the underlying terms of your agreement almost invariably use LIBOR, plus some percentage, to express the interest rate you'll pay on the loan.

LIBOR is so widely used in this manner that it is estimated to be linked to over $370 trillion worth of financial contracts. Thus, when LIBOR spikes by 1.44% to 5.38%, as it did earlier this week (it has since settled in around 4.82%... for the moment), the financial consequences to already struggling businesses are huge.

To get the full picture, you have to understand that, pre-crisis, LIBOR was ticking along at about one-half of a percent. So, in raw numbers, multiply a 4.3% increase in LIBOR across $370 trillion worth of contracts and you come up with a financial punch in the gut of almost $16 trillion.

Businesses will fail. Industries will grind to a halt.

Watch LIBOR. Unless and until those rates come down, you can forget about that whole "Happy days are here again" thing. (And, when LIBOR does eventually come down, we'll still be in the deep, dark woods... just in another quadrant of the woods.)

Vive Le Difference!

The McCain/Palin team, correctly in my view, hurls bricks at Obama/Biden for looking to the government to fix all that ails.

Set the free market free, I cheered, pumping my arm enthusiastically in the air with a loud whoop or two thrown in for effect.

But then I came across the following, and my arm dropped across my forehead in an swoon of bitter despair.

"And it's my proposal, it's not Senator Obama's proposal, it's not President Bush's proposal," McCain said. His campaign estimates it would cost about $300 billion, some of which could be diverted from an existing $700 billion rescue package.

Democrat, Republican... two sides of a statist coin if you ask me.

But wait, just when my despair was about to turn to cynicism, I came across this other item from Bloomberg... they caught the culprit behind the financial crisis!

His name, in case you hadn't heard, is Kenneth Rickel. And better yet, he's from Beverly Hills! Rich and greedy, just as we suspected. Bring out the duct tape and truncheons, I say!

From Bloomberg's report on the miscreant behind the crime of the century...

Just what kind of short seller is our man Rickel? Not a naked short seller, like the kind Cox normally vilifies. And while the SEC may have called his civil violations "illegal," it didn't accuse him of fraud.

According to the SEC's complaint, Rickel covered short sales on 14 companies with shares he bought through their public stock offerings. If he'd covered his bets with stock he bought on the open market, he would've been OK under the rules. In a short sale, an investor sells borrowed shares, hoping to buy them back at a lower price and pocket the difference as profit. (Naked shorts sell shares without borrowing them first.)

And what was the totality of Rickel's ill-gotten gains? $207,291. For shame, Mr. Rickel, for shame! (You can read the whole story here:)

Kind of reminds me of Barney Frank's blaming the housing collapse on the free market (see last week's edition). On that topic, someone -- and I am sorry to say I don't recollect, but thanks to whomever you are -- sent along the following.

Which brings me to my song of the week, a classic and very appropriate to today's situation. It's Ship of Fools by World Party. You can listen to it here.

And, Now for Something Entirely Different...

I'm tired of writing about doom and gloom. So, let's take a quick breather by spending a few minutes on one of my favorite topics... the more optimistic topic of technology. This week, a couple of items came to my attention.

Cars for Teens. The first is that Ford announced they are coming out with a new car that allows parents control over maximum speed, music volume, and required seat belt usage. As the father of two pre-teens and remembering my own experience as a teenager behind the wheel (final tally four accidents, one serious), I am solidly in Ford's customer demographic for this innovation.

Kindle 2 Coming. Subscriber and regular correspondent Marv A. tipped me off to the fact that the much anticipated Kindle V.2 is on the way. In fact, here's a peek at it. As readers of any duration know, I am in love with this technology... and even more so with each passing day. If you don't have a Kindle yet, you just don't know what you're missing. In any event, here's a link to an article on the new version. I'll be a buyer (that will make three for a family of four... but I suspect it will be four for four in the not-too-distant future.)

Correspondence

I have received many wonderful and thoughtful emails over the last couple of weeks (along with a few not so wonderful, but hey, it is what it is). While I read all email addressed to me, the problem comes in responding, which takes longer. The problem is that the incoming mail – perfectly understandable given the temper tantrum being thrown by global markets – has reached the point where I am falling hopelessly behind.

Next week, I will try to be a better correspondent.

Sleep Walking into a Brave New World

"It's unreal," said Dean Price, 24, a graphic designer in London. "We've been sleep-walking into this. Everyone talks about Orwell and 1984, but no one ever does anything about it."

I'm running out of time, but I don't want to end this week without hoisting a warning flag about the rising tide of fascism, which typically occurs during economic crisis.

You don't need me to point out the signs that are there for everyone to see, if they weren't too sheepish or just too busy trying to survive to do so. Gitmo, wiretapping of civilians (and, according to breaking news, soldiers in Iraq and their loved ones), U.S. spy satellites being redirected to within U.S. borders for law enforcement purposes, even the deployment of a U.S. Army brigade within the U.S. with a specific mandate to be available to "help" in the event of a domestic emergency of an unspecified nature. A democratic congressman, during the floor debate on the big bailout, said that he and a number of his colleagues were told that if they didn't vote in favor of the bill, "the stock market would crash, and within two weeks martial law would be declared." (You can look all those references up for yourself. I would have done it for you, but I am already out of time.)

The quote at the top of this segment comes from an article I came across on Bloomberg this week on the very slippery slope that Britain is now on. It started with surveillance cameras here and there and has expanded to the point where even local councils have been given permission to deploy spy cameras and wire tapping.

It is worth reading, which you can do here.

As an aside, I am re-reading Orwell's 1984... on my Kindle, of course. It is a true classic and well worth a re-read, especially now.

My point is simple: if there was ever a time to be vigilant, this is it.

Miscellany

You Think Times Are Tough in the U.S.? Last week, I discussed the fact that, as bad as things are in the U.S. financial system, it is as bad, or worse, in Europe. How bad? Well, I can't say for sure if this photo out of England is real or not, but if things keep going the way they are, it could be... (thanks to Bill W. for sending that along!)
Stock Sale Notice. As is our policy, please be advised that a member of our team intends to sell his shares in Allied Nevada, a company we are currently have as a buy. The decision to sell is entirely due to the need to raise some of the money needed to pay a tax bill and has nothing to do with the company or its prospects. Also per our policy, he will not sell until you have had a head start of two business days.
Phyle Announcements. Glenn in Auckland, NZ, is looking to start a get-together group for subscribers, as is Hans in Tampa, FL. The inaugural gathering in Los Angeles is Oct. 18 at 7:00 pm at The Church and State located at 1850 Industrial Ave (east downtown LA). The next phyle meeting in Seattle is scheduled for Oct. 21 at 7:00 pm at the Starbucks in downtown Mercer Island, WA. For more on these events, drop a line to Kristen at phyle@caseyresearch.com.

That's it for this week. As I sign off, just after midday, I see the DJIA is off by 368 points, the S&P is off another 39 points to 865, and gold, after a morning surge, has backed off to around $880 per ounce, as traders close out positions ahead of the weekend. This weekend, the G-7 finance ministers, the IMF and Worldbank all meet in Washington, DC. Understandably, there is a lot of uncertainty in the markets about what's going to happen on Monday.

Speaking of which, Sally Limantour, in the current edition of The Casey Report, provided the technical break-up/break-down levels for a number of markets... i.e., the levels at which a breakthrough signals a bigger move up or down. I asked her to update the levels for stocks and gold. The current break-up level for the S&P 500 is 1005, the break-down is 825. For gold, the break-up is $942, the break-down is $866.

Now, obviously, those numbers move with time... but at least now you know what the traders are watching.

We live in interesting times. Stay in touch...

David Galland

Managing Director

Casey Research, LLC.

The Room 09/19/2008

David Galland — Mon, 22 Sep 2008 20:43:31 GMT

September 19, 2008

Dear Readers,

Hi, I am Olivier Garret, this week’s editor of The Room.

What a rough week out there. My mind wanders as I drive at a crawl (I am not known to be a patient driver) behind a car full of “leaf peepers,” as Vermonters affectionately call the tourists who invade our state every autumn. I wonder how my friend David Galland is doing in Portugal, sipping the local wines with no access to his emails? It may be the worst week to be without market news -- or perhaps not…

Hopefully David is enjoying himself while celebrating an old friend’s birthday with a group of other newsletter editors and industry peers.

Meanwhile, Treasury Secretary Paulson and Fed Chairman Bernanke are not exactly having a day at the beach as they try to solve our nation’s problems. By the way, this past week, it seemed to me that Lehman drew the wrong lottery number while AIG appears to have hit the jackpot. I wonder how many other “private enterprises” will be lucky enough to get bailed out at taxpayers’ expense in the next few months: WaMu, Wachovia, and hundreds of other financial institutions, GM, Ford, Delta, United?

Where Is the Bottom of the Markets?

For several years, we have been warning about the emerging crisis in our publications, and during the past few months, The Casey Report has been emphasizing that what started as a subprime mortgage issue is now quickly evolving into a full-scale depression. I actually wish that our analysis had been flawed and that the government officials who had claimed that the subprime crisis was contained and the markets would rebound in the second half of the year had been right.

Unfortunately, the Fed’s quick fixes did not stick and current events are reinforcing our conviction that this is much more than a normal cyclical correction. It seems as though no securities are being spared these days. Of course, the financials are taking a beating as expected, but we are feeling the ripple effect in all sectors of the economy, including commodities and the junior sector.

Recession fears usually negatively affect the commodities market, as investors expect industrial activity and consumption to decline. This time, however, the very sharp correction of recent months in commodities has been amplified by the need for liquidity on the part of many hedge funds and institutional investors.

Is this the end of the commodity bull market? I am convinced that we are actually feeling the effect of a relatively short-lived, albeit very painful correction. As the Fed and the Treasury continue to intervene in the market, they continue to lose ground and credibility, caught between a sharp recession and strong inflationary pressures. In an effort to bail out the financial sector (soon to be followed by the broader insurance, auto, and airline industries), they have no choice but to start injecting hundreds of billions in liquidity into a contracting market place. This, in turn, will contribute to the makeover of a stagflation period of historical proportion that will make the ‘70s look like a tea party.

Is it time to run for the exit? My answer is a definite “No,” but don’t take my word alone for it. I would like to quote a short excerpt from a fascinating interview of one of the most respected players in the resource markets, Rick Rule. You can read the full interview in this month’s edition of BIG GOLD. Here it is:

David Galland

Rick Rule

So Why Are We Still Bullish on Commodities?

In spite of a sharp recession, the rest of the world will not stop (although it may experience downturns for a while). The aspirations of hundreds of millions of emerging middle-class Chinese and Indian citizens will eventually be attained -- they will continue to work hard to see their standard of living climb and will increase their consumption of food, energy and durable goods. This, coupled with the inflation and debasement of the dollar, will inevitably start a new run for tangible commodities long before this crisis is over.

It is hard not to panic in the current environment and not to run for cover. Instead, we believe it is time to adjust our strategy, taking new input into consideration, of course, but generally speaking, stay the course: continue to invest in precious metals, energy, and other commodities, and buy stocks of discounted top-quality producers and juniors. Some reallocations could also be used to minimize tax liabilities for the year.

In the meantime, make sure that if some of your stink bids get filled, you take money off the table as soon as you can on short-term news. Over the last few weeks, we have seen some great stocks get hit hard by redemptions, then rebound somewhat (20%, 30%, or 50% in a few days). The trend could continue downward for a few months before we see a real turnaround in the resource markets; in the meantime one needs to use the current volatility to acquire great stocks cheaply and take some quick profits. Last week, our Casey Energy Confidential alert provided an opportunity for double-digit gains within a couple of days on several stocks. Subscribers were able to recover their initial investment and retain free positions on some great stocks.

More than ever, we believe in gold and quality gold stocks. I would like to share with you an article recently sent by Nicholas Pingitore, one of our readers:

SHUIT Happens!

HUI Index Components
Company Name	Symbol	% Weighting	Market Cap (9/11/08)
Barrick Gold	ABX	15.83%	23.35 billion
Goldcorp Inc	GG	14.98%	17.72
Newmont Mining	NEM	11.91%	16.3
Randgold Resources Ads	GOLD	6.57%	2.45
Iamgold Corp	IAG	6.43%	1.32
Eldorado Gold Corp	EGO	5.80%	2.02
Agnico-Eagle Mines	AEM	5.49%	6.31
Gold Fields Ltd Adr	GFI	5.21%	4.64
Kinross Gold	KGC	4.96%	7.29
Harmony Gold Mining Adr	HMY	4.80%	2.67
Yamana Gold	AUY	4.12%	5.27
Hecla Mining	HL	3.91%	0.54
Coeur d'Alene Mines	CDE	3.54%	0.77
Northgate Minerals	NXG	3.47%	0.32
Golden Star Resources	GSS	2.99%	0.28
TOTAL MARKET CAP			91.25 Billion

The total market cap of the HUI is less than $92 billion. Now compare that figure with the below chart of diversified companies.

Company Name	Symbol	Market Cap (9/11/08)
Johnson & Johnson	JNJ	197.12 billion
Microsoft	MSFT	244.42
Exxon Mobil	XOM	386.07
Intel	INTC	111.49
General Electric	GE	270.98
Proctor & Gamble	PG	219.23

Editor’s note: Fannie Mae, Freddie Mac and AIG used to be in the above list but we had to write their market cap down to almost $0 and take them out...

the largest un-hedged miners in the world!

http://www.commodity-trading-solutions.com/

Back to Olivier – as I am not a regular columnist for Casey Research, I would like to share a little bit of my personal experience.

Can Our Government Save Us from All Evil?

All of the rhetoric from our politicians on what our government should do to protect its citizens reminds me of a period 18 years ago when I traveled frequently on business throughout what was then Eastern Europe.

I remember arriving in Warsaw about twelve months after the fall of the Berlin Wall in East Germany; the city was grim, dark, and polluted. The best hotel in the city was in a state of disrepair with broken fixtures. Service was poor and the food was horrendous (the hotel was still state-run).

http://www.poloniatoday.com/history13.htm

I traveled around the country to the famous city of Gdansk, seat of the Solidarity revolution and one of the largest ship building ports on the Baltic Sea. On the road, I met a few smoky Trabants, some local versions of Fiats (1960s design), and many horse-drawn carriages (trucks were rare then). Everywhere I went, life was grim. Most enterprises were state-run with large bureaucracies and very low productivity.

Throughout this trip, as well as many prior trips to Yugoslavia, Hungary, Czechoslovakia, and Romania, I remember being horrified by the state of disrepair, sadness, and darkness of the communist bloc societies.

My trip to Poland in 1990 was in the aftermath of the fall of the Berlin Wall; in Warsaw, there was suddenly a glimmer of hope in the midst of the darkness. Many locals immediately started to set up “shops” on the sidewalks, trying to sell whatever miserable belongings they could spare in order to trade them for something else they needed.

Over the next 3 years, I returned to Poland several times, and each time I discovered progress in this country’s steady march away from the yoke of 50 years of state dictatorship. With each trip, I saw gigantic state enterprises shutting down with all of the disruption and pain it caused in people’s lives. These inefficient monsters were soon replaced by smaller, more nimble entrepreneurial firms. Streets began to look cleaner and brighter, with new paint on many buildings and new cars parked along the roads. For many people, standards of living were visibly improving; others were still the victims of the harsh transition to capitalism.

In 2006, I returned to Poland after 13 years of absence. I found in Warsaw a modern and vibrant city that could rival many other Western European cities of similar size. It was clean, modern, with signs of new wealth throughout its middle class. Although I am sure there are still some people left on the margins of society, they have become a small minority.

In all, it took 15-plus years of hard work and entrepreneurship to rebuild a modern society out of the destruction brought by 50 years of socialism. The Poles rejected overwhelmingly their central government and adopted many of the free-market ideas that made for the early success of America. Their journey was often painful, but they transformed their country into a better, more prosperous land. They quickly became more successful than their East German neighbors, who were led to believe that their salvation was to come from their fellow West Germans rather than through their own enterprise and hard work.

It is interesting to me that after having “won” the Cold War and having freed Europe, the United States is gradually becoming a centralized state where we abandon capitalism and individual liberties in the name of fear of failure or terrorism. Not all is perfect in Poland, but they have moved in the right direction (at least until their integration into the EU), while capitalism and entrepreneurship are being trampled in the U.S.

Recessions are painful and difficult to deal with, but it is better to poke the bubble early than to prolong the pain. I do not know any other alternative than to let the market correction take its course. Delaying the burst of a bubble only makes the pain worse when it finally explodes.

I spent several years of my working life restructuring businesses. Many people have asked me: How difficult is it to lay off half of the employees of a distressed business? How can you do it? Invariably, my answer is: very easily. I look at the remaining half and know that if I do not make a difficult choice today, the business will close and the other half will lose their jobs as well.

After failures and bankruptcies, people and nations have the opportunity for a fresh start; with innovation and hard work, generations of Americans have managed to better their lives and those of their children. I can’t say I feel we have achieved the same in the last 10-20 years.

Back to what comes next. I have asked our Chief Economist Bud Conrad to share a few comments and a chart that illustrates the dilemma faced by Paulson and Bernanke:

Bud correctly points out that as our domestic consumption slows, China and other exporters to the U.S. will see a decline in their activity that will be accompanied by a corresponding reduction in the financing of our debt. Continued injection in liquidity by the Fed will contribute to further devaluation of the dollar.

Foreign lenders see their U.S. investments being hit by the combination of currency devaluation and write-offs of stocks and bonds. The only possible way for our government to retain and attract foreign funds will be to increase interest rates. This will be a very challenging decision as long as our economy is in a recession. In spite of calls to ease interest rates in the short run, it will be difficult for the Fed to continue to support a policy of negative real rates if it needs to encourage foreign investment.

At the risk of being redundant, I have also asked Louis James to give us his thoughts on current events. Here is what he has to say:

International Speculator

It’s currently the third image down

www.youtube.com/watch?v=XwzYtdA6y_U

Boobus Americanus

Casey Investment Alert

International Speculator

Options & Futures

Last month, several attendees to our Chicago Options & Futures Intensive asked me if Casey Research would ever consider launching an Options Alert to complement The Casey Report. At the time, I responded that Doug, David, and I had discussed the possibility of launching such a service within six months but that we would only do so if we found a very experienced editor for this service.

I now have the pleasure of announcing that Sally Limantour, a 30-year veteran floor trader on the Chicago Commodities Exchange, has decided to join our team and launch this new alert service for us. In addition to being a professional options and futures trader, Sally is teaching online intensive training classes for traders and is a talented newsletter writer. I have asked Sally to write a short note to introduce you to her world.

A Ride to the Rescue

Multiple Personalities

Buck Broke Mountain

Especially in these tumultuous times, options and futures provide unique investment opportunities to profit from almost any major trend and to tailor investments to literally any risk/reward strategy. The Casey option alert will be a unique service that will combine both educational and trading advice. We anticipate launching this service during the second half of October and will keep you informed as soon as details are finalized.

And from the Desk of Doug Hornig…

chutzpah

sturm und drang

that’s

Olivier again for the closing remarks.

Panama

At Casey Research, we do not usually announce conferences until we have picked a destination, a topic, and a date. Last month in Chicago, we announced to attendees that we were planning a conference in Panama in November and that details would come in September. Unfortunately, it turned out that we could not finalize all of the arrangements to our satisfaction in order to make it happen for this date, and we will have to delay this event until after the turn of the year. We thank you for your patience and will let you know as soon as we have secured a venue and planned the program. Stay tuned…

TV?

Many of you have had the opportunity to hear Bud Conrad at our conferences, but have you ever seen him on TV? As one might expect, with the developing crisis, the mainstream media are beginning to pay attention to what the Casey Research contrarians have to say. In the past several weeks, it seems that the opinions of Doug Casey, David Galland, Terry Coxon, and Bud Conrad have been heavily sought by Fox Business, CNBC, the Boston Globe, and Dow Jones Newswire (WSJ), to name a few. In case you have missed Bud’s latest appearance on CNBC, I have included the link below.

http://www.cnbc.com/id/15840232?video=852271347&play=1

Before I leave you to take my second son, a high school senior, for a seven-hour drive to New Jersey to visit Princeton University, I wanted to continue David’s tradition and let you enjoy a very appropriate song for these trying times.

http://www.youtube.com/watch?v=zeo0_3gN190

While it has been a tall order to fill in for David, he will fortunately be back at the helm next week.

Thank you for being our subscribers. It truly is a pleasure to work for such a fine group of sophisticated investors. I look forward to the opportunity to meet many more of you during future conferences or travels to cities where Casey Phyles get together.

Olivier Garret
CEO
Casey Research

The Room : Bud Conrad

The Room – 05/15/2009

Tax Revenues Tanking

Super Fed, Super Cop?

Sharks Eat Sharks

Eat Dirt

Word from the (Mexican) Street

Star Trek – “Stayed Wide Awake”

Miscellany

The Room – 04/10/2009

Speaking of Zombies

The Cloudy Crystal Ball

Feed the Pigs, Own the Pigs

A Shift in Tide for the Trade Deficit

The More Things Change...

Miscellany

The Room - 10/10/2008

Go Gold

A Quick Conrad Commentary

Snippets

The Really BIG Bubble

What to Watch Now

Vive Le Difference!

And, Now for Something Entirely Different...

Correspondence

Sleep Walking into a Brave New World

Miscellany

The Room 09/19/2008

Where Is the Bottom of the Markets?

So Why Are We Still Bullish on Commodities?

S*HUI*T Happens!

Can Our Government Save Us from All Evil?

Options & Futures

And from the Desk of Doug Hornig…

Panama

TV?

SHUIT Happens!