The Room : Casey Research

The Room – 07/10/2009

David Galland — Fri, 10 Jul 2009 17:59:00 GMT

Dear Reader,

In the June edition of The Casey Report, and again in the edition that was put to bed July 2, we warned that the U.S. equities markets were on the edge of the next leg down in the slow-motion crisis now unfolding. (You can read both issues... more here).

While there is no such thing as a sure thing, the idea that the worst could be behind the economy is almost unimaginable, given the deep structural flaws and governments doing what Doug Casey correctly calls the "exact opposite" of what they should be doing.

Namely trying to solve a debt crisis by adding more debt.

Of course, as turmoil returns to the broader stock market, investors will again scramble for "safe harbor" investments, and that spells trouble for commodities and commodity-related equities, which are viewed by many as "recovery" investments.

While it often marches to its own drummer, in June and again in July, we warned that gold, too, will be affected, though more moderately so. Looking over the price charts since June for gold and oil – among other commodities – it seems clear the correction has begun.

Even so, for the record, we see any setback to the "tangible" sector as being relatively short lived. That's because commodities are the actual stuff of life – unlike, say, flat-screen televisions, which you can hold off buying indefinitely. Food for the table, on the other hand...

As prices fall, commodity producers, long accustomed to dealing with price volatility, will reduce output to rebalance the supply/demand equation and stabilize prices at a profitable level. Of course, there are circumstances under which a producer will continue to produce, even with prices below production costs – say, to avoid the cost of shutting down and eventually restarting a mine or a well. Though not for long.

clicking here

But for many commodities today, structural issues already make any further reduction in production a quick ticket to shortages and soaring prices: copper, gasoline, sugar, cotton, and hogs, to name just a few.

Casey's Trend Trader

More about the Trend Trader here

Regardless, we see the potential for a return to a period of increased volatility in pretty much all things – including some of our favorite investments – but soon thereafter, opportunity will present itself at our collective doors.

Opportunity Knocks

Using history as our guide, after running for shelter as the next leg down in the economy unfolds, most investors will then cower there until the experts on CNBC (the same ones that completely missed this crisis in the first place) tell them it's safe to get back in the water.

Of course no one can be blamed for being extra cautious just now, and we urge you to follow the herd on that point. However, we would also urge you to remember that the herd is almost always slow to react... in getting out of fragile markets, and especially in getting back in.

At the same time that the level of risk is rising, there is a big, fat opportunity brewing as well. If you are attentive and willing to take actions that run contrary to the herd.

The source of this opportunity comes from the government's highly predictable reaction to the next wave of bad news. That reaction becomes obvious (at least to us) by asking the rhetorical question, "Confronted with steadily worsening unemployment, collapsing real estate prices, bankrupt state governments, skyrocketing bank failures, what do you think they are going to do?"

Cutting back on the spending? Letting the free market run an unfettered course? Not likely.

Instead, the president will ask the public for more patience, as his administration mans the spending pumps even more aggressively. The straws confirming that view are already in the wind; on July 7, one of President Obama's top advisors called for yet another round of stimulus.

Sure, they'll have to be increasingly clever to avoid an even stronger political backlash, but the squeeze they are now in (and, for the record, not all of it was this administration's doing) is getting tighter by the day. They have painted themselves into a corner.

And so, to use an old poker term, they are reaching the point where they'll feel they have no choice but to either fold or go "all in." You know, shoving all their chips onto the table (actually, they're your chips they are playing with, but hey...).

Given the unacceptable political consequences of folding their hand (i.e., doing nothing) and the simple truth that monetary inflation has been the default mode for handling economic downturns for many decades now, we have little doubt the government will take the "all in" approach, a desperate measure designed to buy time (at least through the next election).

And that sets up the opportunity.

Playing the Bounce

There has already been a sea change in awareness among the trading community about the seeds for monetary damage sown over the last year. And with this awareness comes increased sensitivity to further debasement of the dollar. Thus, each new announcement of stimulus lately has triggered a quicker rebound in gold and other commodities – as well as the resource-related stocks.

To be as succinct as possible, a struggle for me at all times, in the same way that we anticipated the resource sector correcting along with the broader markets, we also anticipate it to bounce back much quicker. Supporting that contention, consider the last three 25%+ corrections in the S&P versus the GDX, a gold stock ETF.

From Sep 19 to Oct 27, 2008, the S&P dropped 32%, but the GDX fell 57%. Deflation was then the watchword of the day.
From Nov 4 to Nov 20, 2008, the S&P lost 25% while the GDX fell slightly less, by a 23%. Is it really deflation we fear, the traders asked, or might this whole doubling-of-the-money-supply thing be signaling inflation?
It was during the slide in the S&P that occurred between January 1 and March 2009 that the changing tide in inflationary expectations became pronounced. During that correction, the S&P 500 lost 26%, but the GDX lost only 14% in the first two weeks of January – then roared back 33% by February 17, while the S&P continued to fall.

Subsequently, as the S&P rallied 36% between its bottom on March 9 and July 1 due to the (false) sightings of green shoots, the resource stocks added to their head start, rallying 50%.

In other words, natural resource investors who can keep their heads about them will be able to win in both scenarios: the one where the economy is falling and the government is stimulating (a certainty on both fronts), and the one where the economy begins to recover – or the masses come to believe it is.

The only scenario, in fact, that will disadvantage natural resources is if the government adopts a posture of steely-eyed free marketers that step aside and let the worst come to pass. We would contend that to be highly improbable.

Thus, the way to play things just now, as we see it, is to be cautious, but with the full expectation of aggressively buying up resource bargains before the crowds venture back out of their safe harbors. It might take a month or two (or maybe three), but it's unlikely to be much longer than that.

Investments can be made in certain physical commodities (gold and silver bullion), leveraged commodities positions (using strategic combinations of options and futures), or in selected resource equities, especially those of deeply undervalued and well-positioned companies in the precious metals and energy sectors.

In fact, the biggest challenge you'll face will be choosing between all the many opportunities we see materializing just over the horizon. But if you begin planning now, you should be ready to act when the time for action arrives.

Of course, all of the Casey Research specialty publications will make it a point to help you prepare for the next leg up in our favorite sectors. Of these, the services most dedicated to elephant hunting – namely bagging the really big returns – are Casey's International Speculator and, for especially active investors, our premium Casey's Investment Alert.]

Speaking of Unemployment

As you can see from the chart here, compliments of the monthly Data Farm feature in The Casey Report, the trend in unemployment remains solidly intact. Unemployment is now reaching a point so dire that soon it won't be reported on as further evidence of the economic slump but rather as a driving force (among many) in the ongoing collapse.

As recently as January, the government predicted that, thanks to the stimulus, the unemployment rate would top out at 8%. Despite energetic attempts to conceal the actual numbers, the official rate has still shot up to 9.5%... but the actual number is running closer to a depression-era level of 16%.

Ed. Note:

Worsening unemployment is one of those "important" things people should be paying close attention to. That's because the duration of the crisis – and sadly, the government's many exertions will result in it going on for much, much longer – means that the clock on receiving regular unemployment benefits is running out for more and more of the unemployed.

And, other than rely on the kindness of family members and friends, once the unemployment benefits dry up, what is a person to do? Well, for starters, sign up for special extended unemployment programs. Those programs are seeing a large increase in recipients. Quoting the Washington Times on the topic...

"... there were major jumps in two federal jobless programs. Workers collecting payments from the extended-benefits program increased by 65,000 to 347,000 for the week ending June 20. States also reported that 2.52 million persons were collecting Emergency Unemployment Compensation benefits, reflecting an increase of 81,000.
And this from Bloomberg...

average duration

benefits

This is a trend in motion that will stay in motion and worsen. Which means that the cost of maintaining the social safety net will only grow with each passing day. And, of course, unemployed people, no matter how willing, eventually run out of savings and have to let their debt payments – credit cards, auto loans, home equity, mortgages, etc., etc. – fall by the wayside.

In addition to exacerbating the economic downturn and, by extension, deficits, persistent and growing unemployment will soon lead to social pressure as desperate people begin to do desperate things. Riots in the streets are not out of the question.

And confronted with desperate people doing desperate things, the government will again react predictably – ginning up yet more and larger quantities of bread and circuses.

From where I sit, anything other than letting the situation self-correct in a quick and brutal crash so we can get this over and done with will result in a protracted, torturous death spiral, a negative feedback loop that will last longer than any of us can imagine.

You know what I hope? I hope I'm wrong.

Wicked Game

you can listen to it here

What Really Makes the World Go Round
(and How to Profit from It)

Understandably, people tend to think about energy in terms of the cost of gasoline at the pump or the electricity bills they get each month.

But energy is much more than that. It's the very juice that allowed humankind to graduate beyond being just another dumb animal. Without exaggeration, it's the critical component in most human endeavors, touching everyone and virtually everything that makes up the modern life.

Further, a solid case can be made that each discovery of new and more efficient energy sources coincides with humankinds most stunning advances: in food production, population growth, health, transportation, technology.

Case in point, consider that the rise of nearly unlimited oil and natural gas as mass energy sources began in earnest in the 1860s (unseating whale oil, which was quite limited). At that time the U.S. Civil War (1861-1865) was fought by men on horseback with swords and muzzle-loaded firearms.

Almost impossibly, just 80 years later Paul Tibbets dropped an atomic bomb on Hiroshima. And just 100 years after Lee surrendered his sword at Appomattox, man set foot on the moon.

Simply, the story of energy is step-by-step the story of the ascent of humankind.

I mention this as a circuitous route to make the point that the constant quest to maximize existing energy sources, and to find new ones, is a quest that will never end... at least not until the ultimate breakthrough occurs that allows us to, for example, efficiently harness energy from the sun.

But that is then, and this is now. And right now the energy sector is huge, diverse, and geographically fragmented.

And because of its day in, day out importance, it is also extremely rich in opportunities for investors armed with the right information.

On that front, by now you should have received an invitation to our first ever Casey Research Energy & Special Situations Summit, which is being held in Denver, September 18 to 20.

The registration site for the event, which already boasts one of our most impressive faculty line-ups yet, is now open. Access our summit site by clicking here.

At the event, you'll get concise briefings on specific opportunities in everything from green energy to lithium technology, and from conventional oil and gas in North America, to unconventional oil and gas in Europe. Coal, uranium, geothermal, hydropower, solar, and much, much more will be covered (and, where appropriate, debunked) and the very best opportunities to get positioned for energy profits revealed.

As for the "special situations" in the summit's title, that refers to first-ever programs on emerging homerun opportunities in areas such as rare elements.

All signs are that it will be one of our best – and maybe even our best – summits ever.

As always, it will be a great opportunity for you to meet members of the Casey Research team and to share notes with like-minded individuals. If you've ever attended one of our summits, you already know what I'm talking about. If you haven't, then this is a great chance to find out.

As usual, to keep these events congenial and collegial, we always limit the attendance. Every summit to date has been a sell-out... so, please don't wait to check your schedule and to register.

See you in Denver!

Statehouses in the Poorhouses

People are not the only ones feeling the pinch. As has been widely reported, so, too, have been the states. This excerpt from the Washington Post may not say it all, but it says a lot...

David again. I can well remember the sense of incredulousness I felt back in 2005 when watching state governments, flush with tax loot as a result of booming real estate and investment markets, passing lavish new spending programs. The financial rationale for the many new programs at the time could best be described as "Happy Times Are Here Forever!"

Well, now they are learning the hard way that they are not, leaving the government worker unions scrambling to retain their grips on the public purse. In California, where a pitched battle has been going on over the soaring deficits, the government unions are taking the stance that their backs are up against the wall. That they have pretty much cut all they can cut and still provide the services that the helpless public demands of them. A contention that someone with a brain and a lot of time on their hands answered by assembling the following list of California state agencies.

California Academic Performance Index (API) * California Access for Infants and Mothers * California Acupuncture Board * California Administrative Office of the Courts * California Adoptions Branch * California African American Museum * California Agricultural Export Program * California Agricultural Labor Relations Board * California Agricultural Statistics Service * California Air Resources Board (CARB) * California Allocation Board * California Alternative Energy and Advanced Transportation Financing Authority * California Animal Health and Food Safety Services * California Anti-Terrorism Information Center * California Apprenticeship Council * California Arbitration Certification Program * California Architects Board * California Area VI Developmental Disabilities Board * California Arts Council * California Asian Pacific Islander Legislative Caucus * California Assembly Democratic Caucus * California Assembly Republican Caucus * California Athletic Commission * California Attorney General * California Bay Conservation and Development Commission * California Bay-Delta Authority * California Bay-Delta Office * California Biodiversity Council * California Board for Geologists and Geophysicists * California Board for Professional Engineers and Land Surveyors * California Board of Accountancy * California Board of Barbering and Cosmetology * California Board of Behavioral Sciences * California Board of Chiropractic Examiners * California Board of Equalization (BOE) * California Board of Forestry and Fire Protection * California Board of Guide Dogs for the Blind * California Board of Occupational Therapy * California Board of Optometry * California Board of Pharmacy * California Board of Podiatric Medicine * California Board of Prison Terms * California Board of Psychology * California Board of Registered Nursing * California Board of Trustees * California Board of Vocational Nursing and Psychiatric Technicians * California Braille and Talking Book Library * California Building Standards Commission * California Bureau for Private Postsecondary and Vocational Education * California Bureau of Automotive Repair * California Bureau of Electronic and Appliance Repair * California Bureau of Home Furnishings and Thermal Insulation * California Bureau of Naturopathic Medicine * California Bureau of Security and Investigative Services * California Bureau of State Audits * California Business Agency * California Business Investment Services (CalBIS) * California Business Permit Information (CalGOLD) * California Business Portal * California Business, Transportation and Housing Agency * California Cal Grants * California CalJOBS * California Cal-Learn Program * California CalVet Home Loan Program * California Career Resource Network * California Cemetery and Funeral Bureau * California Center for Analytical Chemistry * California Center for Distributed Learning * California Center for Teaching Careers (Teach California) * California Chancellor's Office * California Charter Schools * California Children and Families Commission * California Children and Family Services Division * California Citizens Compensation Commission * California Civil Rights Bureau * California Coastal Commission * California Coastal Conservancy * California Code of Regulations * California Collaborative Projects with UC Davis * California Commission for Jobs and Economic Growth * California Commission on Aging * California Commission on Health and Safety and Workers' Compensation * California Commission on Judicial Performance * California Commission on State Mandates * California Commission on Status of Women * California Commission on Teacher Credentialing * California Commission on the Status of Women * California Committee on Dental Auxiliaries * California Community Colleges Chancellor's Office, Junior Colleges * California Community Colleges Chancellor's Office * California Complaint Mediation Program * California Conservation Corps * California Constitution Revision Commission * California Consumer Hotline * California Consumer Information Center * California Consumer Information * California Consumer Services Division * California Consumers and Families Agency * California Contractors State License Board * California Corrections Standards Authority * California Council for the Humanities * California Council on Criminal Justice * California Council on Developmental Disabilities * California Court Reporters Board * California Courts of Appeal * California Crime and Violence Prevention Center * California Criminal Justice Statistics Center * California Criminalistic Institute Forensic Library * California CSGnet Network Management * California Cultural and Historical Endowment * California Cultural Resources Division * California Curriculum and Instructional Leadership Branch * California Data Exchange Center * California Data Management Division * California Debt and Investment Advisory Commission * California Delta Protection Commission * California Democratic Caucus * California Demographic Research Unit * California Dental Auxiliaries * California Department of Aging * California Department of Alcohol and Drug Programs * California Department of Alcoholic Beverage Control Appeals Board * California Department of Alcoholic Beverage Control * California Department of Boating and Waterways (Cal Boating) * California Department of Child Support Services (CDCSS) * California Department of Community Services and Development * California Department of Conservation * California Department of Consumer Affairs * California Department of Corporations * California Department of Corrections and Rehabilitation * California Department of Developmental Services * California Department of Education * California Department of Fair Employment and Housing * California Department of Finance * California Department of Financial Institutions * California Department of Fish and Game * California Department of Food and Agriculture * California Department of Forestry and Fire Protection (CDF) * California Department of General Services * California Department of General Services, Office of State Publishing * California Department of Health Care Services * California Department of Housing and Community Development * California Department of Industrial Relations (DIR) * California Department of Insurance * California Department of Justice Firearms Division * California Department of Justice Opinion Unit * California Department of Justice, Consumer Information, Public Inquiry Unit * California Department of Justice * California Department of Managed Health Care * California Department of Mental Health * California Department of Motor Vehicles (DMV) * California Department of Personnel Administration * California Department of Pesticide Regulation * California Department of Public Health * California Department of Real Estate * California Department of Rehabilitation * California Department of Social Services Adoptions Branch * California Department of Social Services * California Department of Technology Services Training Center (DTSTC) * California Department of Technology Services (DTS) * California Department of Toxic Substances Control * California Department of Transportation (Caltrans) * California Department of Veterans Affairs (CalVets) * California Department of Water Resources * California Departmento de Vehiculos Motorizados * California Digital Library * California Disabled Veteran Business Enterprise Certification Program * California Division of Apprenticeship Standards * California Division of Codes and Standards * California Division of Communicable Disease Control * California Division of Engineering * California Division of Environmental and Occupational Disease Control * California Division of Gambling Control * California Division of Housing Policy Development * California Division of Labor Standards Enforcement * California Division of Labor Statistics and Research * California Division of Land and Right of Way * California Division of Land Resource Protection * California Division of Law Enforcement General Library * California Division of Measurement Standards * California Division of Mines and Geology * California Division of Occupational Safety and Health (Cal/OSHA) * California Division of Oil, Gas and Geothermal Resources * California Division of Planning and Local Assistance * California Division of Recycling * California Division of Safety of Dams * California Division of the State Architect * California Division of Tourism * California Division of Workers' Compensation Medical Unit * California Division of Workers' Compensation * California Economic Assistance, Business and Community Resources * California Economic Strategy Panel * California Education and Training Agency * California Education Audit Appeals Panel * California Educational Facilities Authority * California Elections Division * California Electricity Oversight Board * California Emergency Management Agency * California Emergency Medical Services Authority * California Employment Development Department (EDD) * California Employment Information State Jobs * California Employment Training Panel * California Energy Commission * California Environment and Natural Resources Agency * California Environmental Protection Agency (Cal/EPA) * California Environmental Resources Evaluation System (CERES) * California Executive Office * California Export Laboratory Services * California Exposition and State Fair (Cal Expo) * California Fair Political Practices Commission * California Fairs and Expositions Division * California Film Commission * California Fire and Resource Assessment Program * California Firearms Division * California Fiscal Services * California Fish and Game Commission * California Fisheries Program Branch * California Floodplain Management * California Foster Youth Help * California Franchise Tax Board (FTB) * California Fraud Division * California Gambling Control Commission * California Geographic Information Systems Council (GIS) * California Geological Survey * California Government Claims and Victim Compensation Board * California Governor's Committee for Employment of Disabled Persons * California Governor's Mentoring Partnership * California Governor's Office of Emergency Services * California Governor's Office of Homeland Security * California Governor's Office of Planning and Research * California Governor's Office * California Grant and Enterprise Zone Programs HCD Loan * California Health and Human Services Agency * California Health and Safety Agency * California Healthy Families Program * California Hearing Aid Dispensers Bureau * California High-Speed Rail Authority * California Highway Patrol (CHP) * California History and Culture Agency * California Horse Racing Board * California Housing Finance Agency * California Indoor Air Quality Program * California Industrial Development Financing Advisory Commission * California Industrial Welfare Commission * California InFoPeople * California Information Center for the Environment * California Infrastructure and Economic Development Bank (I-Bank) * California Inspection Services * California Institute for County Government * California Institute for Education Reform * California Integrated Waste Management Board * California Interagency Ecological Program * California Job Service * California Junta Estatal de Personal * California Labor and Employment Agency * California Labor and Workforce Development Agency * California Labor Market Information Division * California Land Use Planning Information Network (LUPIN) * California Lands Commission * California Landscape Architects Technical Committee * California Latino Legislative Caucus * California Law Enforcement Branch * California Law Enforcement General Library * California Law Revision Commission * California Legislative Analyst's Office * California Legislative Black Caucus * California Legislative Counsel * California Legislative Division * California Legislative Information * California Legislative Lesbian, Gay , Bisexual, and Transgender (LGBT) Caucus * California Legislature Internet Caucus * California Library Development Services * California License and Revenue Branch * California Major Risk Medical Insurance Program * California Managed Risk Medical Insurance Board * California Maritime Academy * California Marketing Services * California Measurement Standards * California Medical Assistance Commission * California Medical Care Services * California Military Department * California Mining and Geology Board * California Museum for History, Women, and the Arts * California Museum Resource Center * California National Guard * California Native American Heritage Commission * California Natural Community Conservation Planning Program * California New Motor Vehicle Board * California Nursing Home Administrator Program * California Occupational Safety and Health Appeals Board * California Occupational Safety and Health Standards Board * California Ocean Resources Management Program * California Office of Administrative Hearings * California Office of Administrative Law * California Office of AIDS * California Office of Binational Border Health * California Office of Child Abuse Prevention * California Office of Deaf Access * California Office of Emergency Services (OES) * California Office of Environmental Health Hazard Assessment * California Office of Fiscal Services * California Office of Fleet Administration * California Office of Health Insurance Portability and Accountability Act (HIPAA) Implementation (CalOHI) * California Office of Historic Preservation * California Office of Homeland Security * California Office of Human Resources * California Office of Legal Services * California Office of Legislation * California Office of Lieutenant Governor * California Office of Military and Aerospace Support * California Office of Mine Reclamation * California Office of Natural Resource Education * California Office of Privacy Protection * California Office of Public School Construction * California Office of Real Estate Appraisers * California Office of Risk and Insurance Management * California Office of Services to the Blind * California Office of Spill Prevention and Response * California Office of State Publishing (OSP) * California Office of Statewide Health Planning and Development * California Office of Systems Integration * California Office of the Inspector General * California Office of the Ombudsman * California Office of the Patient Advocate * California Office of the President * California Office of the Secretary for Education * California Office of the State Fire Marshal * California Office of the State Public Defender * California Office of Traffic Safety * California Office of Vital Records * California Online Directory * California Operations Control Office * California Opinion Unit * California Outreach and Technical Assistance Network (OTAN) * California Park and Recreation Commission * California Peace Officer Standards and Training (POST) * California Performance Review (CPR) * California Permit Information for Business (CalGOLD) * California Physical Therapy Board * California Physician Assistant Committee * California Plant Health and Pest Prevention Services * California Policy and Evaluation Division * California Political Reform Division * California Pollution Control Financing Authority * California Polytechnic State University, San Luis Obispo * California Postsecondary Education Commission * California Prevention Services * California Primary Care and Family Health * California Prison Industry Authority * California Procurement Division * California Public Employees' Retirement System (CalPERS) * California Public Employment Relations Board (PERB) * California Public Utilities Commission (PUC) * California Real Estate Services Division * California Refugee Programs Branch * California Regional Water Quality Control Boards * California Registered Veterinary Technician Committee * California Registrar of Charitable Trusts * California Republican Caucus * California Research and Development Division * California Research Bureau * California Resources Agency * California Respiratory Care Board * California Rivers Assessment * California Rural Health Policy Council * California Safe Schools * California San Francisco Bay Conservation and Development Commission * California San Gabriel and Lower Los Angeles Rivers and Mountains Conservancy * California San Joaquin River Conservancy * California School to Career * California Science Center * California Scripps Institution of Oceanography * California Secretary of State Business Portal * California Secretary of State * California Seismic Safety Commission * California Self Insurance Plans (SIP) * California Senate Office of Research * California Small Business and Disabled Veteran Business Enterprise Certification Program * California Small Business Development Center Program * California Smart Growth Caucus * California Smog Check Information Center * California Spatial Information Library * California Special Education Division * California Speech-Language Pathology and Audiology Board * California Standardized Testing and Reporting (STAR) * California Standards and Assessment Division * California State Administrative Manual (SAM) * California State Allocation Board * California State and Consumer Services Agency * California State Architect * California State Archives * California State Assembly * California State Association of Counties (CSAC) *0ACalifornia State Board of Education * California State Board of Food and Agriculture * California Office of the Chief Information Officer (OCIO) * California State Children's Trust Fund * California State Compensation Insurance Fund * California State Contracts Register Program * California State Contracts Register * California State Controller * California State Council on Developmental Disabilities (SCDD) * California State Disability Insurance (SDI) * California State Fair (Cal Expo) * California State Jobs Employment Information * California State Lands Commission * California State Legislative Portal * California State Legislature * California State Library Catalog * California State Library Services Bureau * California State Library * California State Lottery * California State Mediation and Conciliation Service * California State Mining and Geology Board * California State Park and Recreation Commission * California State Parks * California State Personnel Board * California State Polytechnic University, Pomona * California State Railroad Museum * California State Science Fair * California State Senate * California State Summer School for Mathematics and Science (COSMOS) * California State Summer School for the Arts * California State Superintendent of Public Instruction * California State Teachers' Retirement System (CalSTRS) * California State Treasurer * California State University Center for Distributed Learning * California State University, Bakersfield * California State University, Channel Islands * California State University, Chico * California State University, Dominguez Hills * California State University, East Bay * California State University, Fresno * California State University, Fullerton * California State University, Long Beach * California State University, Los Angeles * California State University, Monterey Bay * California State University, Northridge * California State University, Sacramento * California State University, San Bernardino * California State University, San Marcos * California State University, Stanislaus * California State University (CSU) * California State Water Project Analysis Office * California State Water Project * California State Water Resources Control Board * California Structural Pest Control Board * California Student Aid Commission * California Superintendent of Public Instruction * California Superior Courts * California Tahoe Conservancy * California Task Force on Culturally and Linguistically Competent Physicians and Dentists * California Tax Information Center * California Technology and Administration Branch Finance * California Telecommunications Division * California Telephone Medical Advice Services (TMAS) * California Transportation Commission * California Travel and Transportation Agency * California Unclaimed Property Program * California Unemployment Insurance Appeals Board * California Unemployment Insurance Program * California Uniform Construction Cost Accounting Commission * California Veterans Board * California Veterans Memorial * California Veterinary Medical Board and Registered Veterinary Technician Examining Committee * California Veterinary Medical Board * California Victim Compensation and Government Claims Board * California Volunteers * California Voter Registration * California Water Commission * California Water Environment Association (CWEA) * California Water Resources Control Board * California Welfare to Work Division * California Wetlands Information System * California Wildlife and Habitat Data Analysis Branch * California Wildlife Conservation Board * California Wildlife Programs Branch * California Work Opportunity and Responsibility to Kids (CalWORKs) * California Workers' Compensation Appeals Board * California Workforce and Labor Development Agency * California Workforce Investment Board * California Youth Authority (CYA) * Central Valley Flood Protection Board * Center for California Studies * Colorado River Board of California * Counting California * Dental Board of California * Health Insurance Plan of California (PacAdvantage) * Humboldt State University * Jobs with the State of California * Judicial Council of California * Learn California * Library of California * Lieutenant Governor's Commission for One California * Little Hoover Commission (on California State Government Organization and Economy) * Medical Board of California * Medi-Cal * Osteopathic Medical Board of California * Physical Therapy Board of California * Regents of the University of California * San Diego State University * San Francisco State University * San José Stat e University * Santa Monica Mountains Conservancy * State Bar of California * Supreme Court of California * Teach California * University of California * University of California, Berkeley * University of California, Davis * University of California, Hastings College of the Law * University of California, Irvine * University of California, Los Angeles * University of California, Merced * University of California, Riverside * University of California, San Diego * University of California, San Francisco * University of California, Santa Barbara * University of California, Santa Cruz * Veterans Home of California

David again... finally. I wonder how many of those agencies existed 50 years ago? And I wonder, really, what would happen if they closed half of those agencies and cut the budgets of the survivors by half?

We may find out.

Report from CYCLE

A few weeks back I mentioned CYCLE 2008 (Casey's Youth Conference for Liberty and Entrepreneurship), the week-long camp for young entrepreneurs that we sponsor in Lithuania. Louis James of our team organized this year's event, and the reviews have been very positive. Happily, even though we mentioned CYCLE at the last moment, a couple of Casey subscribers were able to arrange things to have their own children participate. Here's an excerpt from the notes of one, Natalie.

Up to this point, these camps have only been held annually, in Eastern Europe, but we are considering holding them more frequently and in other areas of the world, including North America. While there may be some commercial gain to be made by expanding this initiative (and no apologies for that), the reality is that there is a dearth of opportunities available to young people these days to learn about the free market and how to succeed in it. Maybe we can do some good.

So, what do you think? Good idea or not? Do you know a kid that could benefit from an immersion course in freedom and free markets? Drop us a note at info@CaseyResearch.com and let us know. We'll keep you posted on any developments.

Too Funny

I have to share this, because it is classic Doug Casey, and I laugh every time I think of it.

The setup is that the nation's media fell all over itself to say kind things in obituaries about Robert McNamara, the former defense secretary who presided over Vietnam and who shed his mortal coil this week.

Louis James, who does the interviews for our new free e-letter, Conversations with Casey, thought that McNamara's passing was something that might have caught Doug's attention and so asked him about it. The result, in addition to being spot on, included some memorable lines, my favorite coming as a result of a follow-on about why the media was so complimentary of the man.

Doug:

If you aren't signed up for Conversations with Casey, it gets very high reviews, and I guarantee you'll never find it dull. Sign up for it here, and don't forget to pass it along!

Miscellany

Casey Phyle News.
- Bend, Oregon, Up and Running. A group of Casey subscribers have started meeting regularly in Bend, Oregon.
- Kansas City Phyle will be having their first meeting very soon.
- SoCal Phyle's Next Meeting Set for July 18, from 1:30 to 5:00 pm. The largest and most active Casey phyle is hosting a program with a speaker reporting on his recent trip to Uruguay, and another from Italy who will be discussing the European perspective on the crisis. The meet-up is at the Steelhead Brewing Company in Irvine California, and space is limited.
If you are in any of those neighborhoods and want to join in the fun, drop us a note at phyles@CaseyResearch.com and we'll get you connected.
Big Changes Coming. Watch your email inbox for an announcement on some exciting and significant changes here at Casey Research. One of those changes will be that this weekly experiment in musing will be going daily (at least for a trial period, likely beginning July 20). The name of the publication will change, too... to Casey's Daily Dispatch. That's just the tip of the iceberg, but I wanted to let you in on the new name now. Watch for the announcement of additional changes soon...

And That's That for This Week

As I sign off this week, the S&P 500 is off 62 points, a slight improvement from earlier in the day, but still well established on a negative down slope, exacerbated, no doubt, by the latest news that the sentiments of consumers are growing less cheery (gee, I wonder why that could be?).

With duty calling, I must now sign off, thanking you for reading and for being a Casey Research subscriber.

Until next week, remember... good things can happen in bad times – if you are sufficiently prepared and have the right attitude.

David Galland
Managing Director
Casey Research, LLC.

The Room – 06/12/2009

David Galland — Fri, 12 Jun 2009 21:08:00 GMT

The Room Special Alert:

Casey Research Summit, this one dedicated to Energy and Special Situations

September 18 – 20 at the Westin Tabor Center in Denver

David

Dear Readers,

Again this week, I was admonished by one of your fellow dear readers, who recommended that I keep my political comments to myself. And furthermore that I, and the entire Casey team, should focus solely on finding the next great investment.

While I can’t and won’t argue with the latter part of his advice -- that is, after all, our overarching mandate, and a mandate we take seriously – I suspect the real issue is that the political views we occasionally express run contrary to those of the author of this rebuke.

Even so, if you give the matter any thought at all, you will almost have to conclude that the business of America is now hugely dependent on the business of government.

As a refresher, the following – compliments of the Encyclopedia of Business – describes the two major foundations economies have typically been built on in modern times: central planning and capitalism.

centrally planned economy

capitalism,

Now, I may be naïve about certain things, for example the autoeroticism of the sort apparently favored by the late David Carradine, but I’m not naïve enough to think that there is such a thing as a "pure" economy that fits either of those two descriptions to a T.

Therefore, the important thing is to understand where your particular economy – in my case, that of the United States – falls on the scale between the two systems.

I usually refuse to jump into the same rumpled bed as the hard right wing of the U.S. political spectrum, but they are probably waving their arms about the same economic concerns we comment on here and in our other publications from time to time.

What makes me different from the Limbaughs et al., and maybe it is a fading difference, is that I really would like the current administration to succeed. As I don't really like either party, either party will do – as long as that party makes intelligent choices about the role government should play in our daily lives.

President Obama appears to be a reasonable, intelligent, and certainly articulate human being. Therefore, I hold out hope that he will eventually come around to making the only logical decision that can be made about the path forward. If for no other reason than that choosing the wrong path will inevitably lead to election defeat.

To prove that simple point, it is hard to miss the rising tide of fiscally conservative attitudes evidenced in the polling booths during the recent European elections. Europe, which is not exactly known for its free-market policies, rose up as one and soundly defeated the hard left socialist candidates on the ballot.

Unfortunately, at this point, Obama and his many government operatives and sycophants appear to be speeding down the wrong road – the road that leads to a continued shift in the direction of a centrally planned economy.

For example, this week the House of Representatives passed a bill that meddles with the choices that Americans make regarding the cars they drive. The idea is to give a marketing boost to the new U.S.-owned auto companies. enticing consumers to buy new cars by taking up to $4,500 out of taxpayers’ pockets and giving the money to others. Those, in turn, give it to automakers that provide cars that drive at least two miles further per gallon in the tank.

Here’s a quick take on the bill from politico.com…

There has always been a problem with a centrally planned economy. When you remove the free market from the supply and demand equation or tamper with the free market, you cause unnatural dislocations and all manner of unintended consequences.

Of course, Mr. Obama enjoys strong union support, and we as taxpayers now own large shares in the American auto manufacturers. Therefore, the good intention of the central planners in Congress is that this "cash for clunkers" law will unleash a new wave of naked consumerism, returning the economy to the happy days we all wish for.

There are, however, more than a few flies in the ointment. Starting with the fact that for the last six years, the top-selling cars in these United States have all been produced by Japanese companies. While many of those cars are now built in the United States, they are not built in Detroit, and they are not built by GM or Chrysler.

It is also worth pointing out that all of the top sellers will easily qualify for the largess being offered by we the U.S. taxpayer. Perhaps the legislators hope that GM's new hybrid, the "Volt,” will ride to the rescue. But Toyota’s well-selling Prius hybrid – which has recently been redesigned, is a huge hit in Japan, and is expected to fare equally well in the U.S. – could throw a wrench in GM’s poorly laid-out plan. Especially because the Prius sells for about half of what the Volt is expected to debut at. With either car, you get the $4,500 rebate, so the choice comes down to this: do you want to pony up an extra $20,000 for a GM-made experiment or get a proven high-quality winner from Toyota for a lot less?

According to a study by researchers at Carnegie Mellon, the premium sought by GM can’t be rationalized:

plug-in hybrids

The problem is the added weight – and the cost of the batteries. The lifespan of the batteries is also a big question mark. According to an article on Mixed Power…

K.G. Duleep, managing director of consulting firm Energy & Environmental Analysis Inc. in Arlington, Virginia, and a researcher on a U.S. study on plug-ins and other advanced autos, said he is very skeptical about the lifespan of the batteries. “I’m very skeptical about the prospects for near-term durability of the batteries. Even in the lab, they aren’t lasting more than seven years,” said Duleep.
So, into the dogfight for what few automobiles will be sold in the crunch years ahead, the new and supposedly improved Government Motors (GM) will send an expensive, so far unproven entrant... which, according to the central planners, will be snapped up in such quantities as to knock off the reigning champs, all Japanese. My take: GM is a dead duck, and the Japanese will be the primary beneficiaries of this latest bit of central planning.

GM was delisted from the NASDAQ this week, and investors looking to buy it must turn to the disgraceful OTC Pink Sheets for their shares.

And this is what the central planners have deemed worthy of dropping $25 billion in taxpayer funds on.

Health Care, Everyone?

The central planners are also hard at work on putting the final bullet into the head of American healthcare. The first shot, Medicare, only severely wounded it.

Speaking of Medicare, the following data points may prove useful as you hear more and more about the greater efficiency supposedly gained by having the government expand its health options to cover everyone.

(FYI: Medicare Part A, passed into law in 1965, covers hospital visits for those over the age of 65 or with certain types of medical conditions; Part B, passed later, covers doctor’s visits and certain outpatient services; Part C allowed private insurers to provide the Medicare benefits; and Part D, passed in 2003, provided prescription drug benefits.)

So, how has that whole Medicare efficiency thing been working out?

The following is from "Medicare for All" Universal Health Care Would Not Solve the Problem of Rising Health Care Costs by David Hogberg, Ph.D.

The fiscal future of Medicare itself is bleak. The Medicare Trustees report notes that, by 2018, revenues for Part A will only be sufficient to cover 80 percent of its costs. By 2080, revenues will only cover 29 percent of costs. “Closing deficits of this magnitude,” the report warns, “will require very substantial increases in tax revenues and/or reductions in expenditures.” The prospects for Part B and Part D are not much better, with the report stating that revenues for those parts will “have to increase rapidly to match expected expenditure growth under current law.” From 2005-2080, the report predicts, Medicare’s share of GDP will rise from 2.7 percent to 11 percent.
There are numerous fiscal problems associated with any government-provided program, especially one that ignores pre-existing conditions, as is the case with the current legislation now being proposed. One is that greater accessibility at a lower cost – or for many, at no cost at all – and providing credits toward government payments to households with revenues of up to $110,000 will make people flock to the docs in large and steady numbers. And that, of course, will drive the cost of healthcare even higher. Call it an unintended consequence if you will, but I will call it a completely natural and to-be-expected consequence.

Thus, though the Obama administration projects that the nation will have to spend another trillion dollars it doesn't have providing medical care for all -- that number is certainly far off the actual tally required.

Again, according to Dr. Hogberg…

Why anyone would want to put every American in a program that is already nearing fiscal collapse is perplexing, to say the least.
As for dislocations, in the current legislation, private insurers will not be able to deny a person coverage for pre-existing conditions or charge them a higher premium. This bit of central planning means simply that everyone will have to pay a higher premium. Furthermore, companies in the healthcare industry will almost certainly have to compete with a government-run insurance program whose mandate will be to ensure that everyone can afford insurance.

Shareholders in private U.S. health insurance companies are already burdened by their share of the costs that those companies have to incur in order to comply with an estimated 130,000 pages of Medicare-related regulations. Now they will not only see the sheer quantity of those regulations ratchet up exponentially, but they’ll have to pay even higher taxes to support direct competition to their companies by the government.

All of which is to say that private insurers are going to have a very hard time competing against their own government, leading to the very real potential down the road for a sole U.S. healthcare insurance provider – “Mama Sam.”

And corporations that already provide insurance, or don't, will be forced to pay even more to the government in order to cover the cost of bringing all the uninsured under the umbrella.

Again quoting politico.com...

R. Bruce Josten, a lobbyist for the U.S. Chamber of Commerce, said: “We are disappointed, clearly.” He participated in weekly meetings with Kennedy’s committee, and the bill that resulted suggests “the only person who has skin in the game is the employers,” Josten said.
Josten is, of course, talking his own book. That's because employers – i.e., corporations – don't actually pay taxes. Consumers do when they purchase the products of those companies, whose costs are calibrated to cover expenses such as taxes. And so, American industry will have to raise the cost of its products, making them less competitive on the global stage.

This reduced competitiveness will result in American corporations going out of business, and more and more people will be added to the unemployment rolls, moving them out of the category of "net contributors" to the new healthcare system and into the category of "net recipients," sending costs ever higher.

Of course, one way that the government, having laid this bed of nails, might decide to respond is by adding entry barriers for foreign-made goods. Which, when you think about it, may be the solution to the automobile conundrum as well?

I'm not sure where one goes to school to learn the fine art of central planning, or even if such a school exists, but I'm fairly sure that even the best of such a school can adequately train its graduates in the effective, long-term, micromanagement of a complex system such as the U.S. economy – or any economy, for that matter.

Is there a potential bright spot for investors in all of this? I think passing of this healthcare legislation, which is a near certainty given the Democrats’ majority, will shake out the weaker insurance companies already buried under mountains of bad investments that are about to get a lot badder. And I have to believe that unless and until Mama Sam passes legislation prohibiting private insurance altogether, there will be a niche for an insurance company that charges very high premiums but promises quick care of the highest quality in return.

Faced with the alternatives of doing business with the upscale private provider or the far less expensive government option (or one of the private companies that try to compete on price with that entity), the bulk of individuals with pre-existing conditions or generally poor health will choose the less expensive option.

Now, I know this whole thing about universal healthcare will strike a negative chord with many of you, including many of our neighbors to the north. And, please don’t think of me as hard hearted. But this gets back to the idea of positive vs. negative rights. If you believe that we the people have the inalienable right to healthcare, then you might as well believe that we also have the right to three square meals a day, a respectable roof over the head, dental care, a top-quality education, a decent wardrobe, transportation to get to our jobs, day care for the kids, and so on and so forth.

The problem is, and always will be, how can you pay for all of this without coercively taking the money out of one family’s pocket in order to shift it into another’s? And by coercively, I mean the direct threat of imprisonment if you don’t hand over the cash. That violates the morally correct right that we should be free from threats of personal harm, extortion, and outright theft.

In fact, the very idea that some faceless government functionary can walk into my house, or my office, at any time and on any pretense and require me to spend my time and resources assisting him in going over my books so that he may demand more money from me – money that will then flow through the machine to be used to purposes I find personally abhorrent -- is a truly warped and disturbing concept.

At least with a consumption tax, you can make a voluntary decision as to which products you buy, with full knowledge of the taxes you’ll also pay. That is very much not the case with income taxes, property taxes, estate taxes, etc., ad nauseam.

Don’t get me started…

No More Big Bucks for You!

For today’s catalogue of evidence that we’re heading toward a centrally planned economy, I provide the following from Bloomberg this week…

Now, far be it from me to champion the insane pay levels of public company officers. But to actually get into the trenches and try to engineer those pay levels to something considered more politically correct strikes me as a serious step in the wrong direction. Shareholders of companies, which these days are mostly mutual funds and other institutions, need to pay a lot more attention to compensation practices than they obviously have been. And if they are too lazy to do so, then they deserve what they get, should they fail to get a level of corporate performance reflecting said pay.

Fortunately, We Have the Law

I wish I could stop there, but I can't. That's because this week, the faint glimmer of hope evaporated that I had felt when the Supreme Court put a halt to the Chrysler bankruptcy so that it might study the legality of the structure the government had imposed on the company’s stakeholders.

The claims of the secured bondholders in that company were – by tradition and legal rights that extend literally back to the beginning of America and to English law before that – superior to the unsecured claims of the union pension operators. Nevertheless, they were ignored and their legitimate claims set aside "for the public good."

Again, my sympathy goes out to pensioners who dedicated their working lives to a company whose executives may have been better qualified as washroom attendants. But to let one's emotions (or political ambitions) willy-nilly trump well-established law seems the height of insanity.

How, now that the precedent has been re-set, are bond investors – or, for that matter, any stakeholder in a company – supposed to evaluate the investments being offered to them? When commercial obligations can be tossed out the window for political expediency, what does that do to the legal certainty that is supposed to be such a big competitive advantage for America?

Commenting on the transaction, an official of the Treasury, which strong-armed the deal into existence, had this to say…

“This morning’s closing represents a proud moment in Chrysler’s storied history. The Chrysler-Fiat alliance has now exited the bankruptcy process and is poised to emerge as a competitive, viable automaker.”
Since we are relying on dictionaries today, let’s look up the word “proud” just to be sure we are understanding this member of officialdom clearly.

Relying on Webster this time,

prūd,

prod, prud, prou

prode

“Advantageous?” Sure, for the unions and, by extension, the political fortunes of Mr. Obama.

“Just?” Hardly. How is it that the unions put up nothing and get 55% of the company?

“Wise?” Politically, maybe. But turning commercial law on its head to try and bail out a twice bankrupt company? And handing the “new” company another $6 billion of money the government very much doesn’t have as an “exit” gift hardly seems intelligent, at least to me.

“Bold?” In my book, that is not the word I would use to describe the government’s bullying tactics, including publicly vilifying legitimate bond holders.

No, proud is not a word I would associate with this takeover. Expedient, reckless, capricious… all of those words seem far more appropriate.

This is one of those seminal events that has the potential to be with us for a very long time – in future bankruptcy proceedings, which I expect we'll see a lot of – and in the very structure of capital markets.

Capital Gains… What Capital Gains?

David M., the coordinator of our SoCal Phyle, sent along an interesting essay written by Chriss Street, the treasurer/tax collector of Orange County, California. He argues against states spending beyond their means, and also against a bailout of the states by the federal government. The essay is worth reading, and you can do so here.

I thought the following excerpt from Street’s essay is especially noteworthy, given the coming increase in capital gains taxes…

All of which raises the question, where is California going to get the money it needs to dig itself out of its current hole… now expected to ring in at about $25 billion for the year?

Why, Mama Sam, of course.

The Road Less Traveled

While we don’t talk about it much, I feel compelled to give a tip of the hat to our senior researchers who think nothing of hopping on planes to far corners of the world, literally risking the worst in their quest for opportunities ahead of the crowd.

What compels me this week was a trip to Colombia Louis James of our International Speculator just returned from. Accompanied by heavy security, he walked the ground on a new discovery with the credible potential to host five million high-grade ounces of gold, and maybe more.

While the armed escort is still advisable in those parts, it is increasingly becoming less so and is mostly just a holdover from the bad old days of the 1990s at this point. Back then, the area Louis visited was bristling with guerillas and out-of-control paramilitary groups who, some say, were even worse. Today it’s peaceful, and the locals couldn’t be happier to see a new gold rush. Colombia has a truly fabled history in gold mining, and it is now politically stable and pro-business – perhaps the most pro-business country in South America. This has led to big profits for investors in successful junior gold explorers (the company Louis visited saw its share price shoot up 104.5% in two days).

Louis will report on the opportunities he found on his trip to Colombia in the next issue of the International Speculator. You can learn more by clicking here.

There is much opportunity, even in challenging markets… but sometimes nothing but putting your boots on the ground will do. And for being ever willing to do that, my hats off to the tireless team!

21 Economic Models Explained

(Thanks to our regular correspondent and longtime friend, “the General,” for sending this along. Sorry if this gores anyone’s ox… or, cow, such as the case may be.)

SOCIALISM
You have 2 cows.
You give one to your neighbor.

COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk.

NAZISM
You have 2 cows.
The State takes both and shoots you.

BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk
away.

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.

SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.

AN AMERICAN CORPORATION
You have two cows.
You sell one and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.

ROYAL BANK OF SCOTLAND VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder, who sells the rights to all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows.
No balance sheet provided with the release.
The public then buys your bull.

A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.

A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk.
You then create a clever cow cartoon image called “Cowkimon” and market it worldwide.

A GERMAN CORPORATION
You have two cows.
You reengineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.

A RUSSIAN CORPORATION
You have two cows.
You count them and learn you have five cows.
You count them again and learn you have 42 cows. You count them again and learn you have 2 cows.
You stop counting cows and open another bottle of vodka.

A SWISS CORPORATION
You have 5,000 cows. None of them belong to you.
You charge the owners for storing them.

A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment and high bovine productivity.
You arrest the newsman who reported the real situation.

AN INDIAN CORPORATION
You have two cows.
You worship them.

A BRITISH CORPORATION
You have two cows.
Both are mad.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No one believes you, so they bomb the crap out of you and invade your country.
You still have no cows, but at least you are now a democracy.

AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive.

Promoting Free Market Economics…

By Louis James

As you may recall, Doug Casey joined me in my yearly teaching sabbatical in Eastern Europe last summer (click here for last August’s report on how it went). It was a smashing success, and the students had such a good time learning about free enterprise and entrepreneurship, most of them are returning this year and bringing friends. The result is a record group of students – about 90 – who will come to learn more about rational economics, creating businesses, investing, and more, at what we now are proud to be able to call the first Casey Youth Conference on Liberty and Entrepreneurship (CYCLE), to be held from June 29 to July 5, in beautiful Trakai, Lithuania.

This year, they’ll have to write a complete business plan to complete the course – we’re excited. The students are as well and are building a web site for CYCLE. It’s still in beta-testing as we go to press, but you can try it here: CYCLE.

Doug sees CYCLE as one of the most cost-effective ways to teach young people about free-market economics, and better yet, to enable them to join the producers and creators in the world who make progress possible. Eastern Europeans have living memory of soul-crushing communism, and they are hungry for this sort of learning – it’s a great environment. In fact, if you have college-age children who would like to join in, drop us a line at feedback@caseyresearch.com, and we may be able to squeeze in a few who can pay their own way.

When we wrote about this last summer, several subscribers wrote to ask how they could help. One simple way to do this is to make a tax-deductible contribution to the same non-profit we are working with to run our CYCLE program. That’s the International Society for Individual Liberty (ISIL), a 501(c)(3) tax-exempt organization. Doug generally believes most charities aren’t worth the dynamite it would take to blow them up, but CYCLE is an educational investment with potentially near- to mid-term returns. And if you’re going to pay for something, it’s nice to be able to take half that money out of the government’s pockets in order to do so. To pitch in, click here for ISIL’s secure donation page or call ISIL directly at 707-746-8796 and tell them you’d like to support CYCLE.

The programs is very cost effective – about $150 per student (they pay part of the cost) – but there are a lot of students this year, so CYCLE could use your help. Thanks!

Miscellany

More Casey Phyles Starting Up. If you are interested in meeting up and sharing notes with other Casey subscribers, this week we received indications of interest from individuals in the following locales. South Africa, New York (Manhattan), Massachusetts, South Carolina, France and Chicago. If you are in any of those places and want to be connected, drop us a note at phyles@CaseyResearch.com.
Poker, Anyone? Our own Doug Casey, who is known to enjoy a game or two of cards now and again, forwarded me an article from the Wall Street Journal about a grab by the Feds of 27,000 bank accounts totaling $34 million. The sole rationale for the grab was that the miscreants apparently had the gall to enjoy playing poker online. What’s next? Users of online adult sites pop to mind. Then what? The slippery slope gets more slippery by the day. You can read the full article here.
IMF Gold Sales. This just in from our Washington correspondent, Don Grove, who is keeping a sharp eye on the proposed vote to allow the IMF to sell on the order of 13,000,000 ounces of gold (to the Chinese).
The Daily Room Thing… Thanks to all of you who weighed in on the idea of converting this letter from a weekly to a daily room. The vote came in slightly in favor of keeping this a weekly. Even so, I think we’ll try going daily for awhile (but not until a couple of weeks from now.) For one thing, there is so much that I could, and even should, be addressing that trying to cram it into one issue at the end of the week is impossible.

Currently, I think that we would segment the daily room (name still not decided), by major topic areas. For instance, commodities, energy, equities, the economy and, of course, politics (with some miscellaneous scattered throughout). We would then focus on those major sectors on the same day each week. Thus, if energy was not of interest to you, you could just skip Tuesday, for instance. In this way, we could focus our research a bit more on what’s important in each of these key areas, while keeping the segments shorter. For fans of the weekly version, at the end of the week, we could do a round-up edition.

Hate the idea? Like it? All input always welcomed at david@caseyresearch.com (though I apologize profusely for being a poor correspondent of late. While I have read all of your emails, I just haven’t had the time to respond.)

Speaking of The Room… this week is my wife’s much-deserved annual road trip, a wonderful week during which I play full-time father and relearn to appreciate what it’s like to manage a household 24/7. If history is any guide, the week will start out with a fair amount of chaos but eventually settle into something resembling order. In any event, Casey Research CEO Olivier Garret has gallantly offered to step in and write The Room next week, while I concentrate on the simple things – like not burning down the house with that new wood-burning tool I bought the kids.

As I sign off, I see that the stock market is just barely keeping its lips above the water line. I continue to believe that a big wave is about to change things, and fairly soon. There are now so many new and existing negatives looming over the market that it can’t be overly long before Mr. Market runs for cover. Among the things to watch for is a surge in commercial mortgage defaults, which are anticipated to almost double from recent months, to some 4.1% of the total outstanding.

(In The Casey Report, we are currently shorting two especially ripe commercial real estate companies… you can, too… details here.)

Then there is the pending wave of Option ARM resets, which will hit later this summer and then soar into next year.

And there is the soon-to-be-widely-reported-on smack up the side of the head to mortgage originations, caused by the recent 75 to 100 basis point jump in mortgage rates.. a jump that occurred over the period of a week and a half. Speaking with insiders in the banking business who shall be unnamed, I learned that the rate increase caused mortgage originations to hit the proverbial wall. Full stop. While the punditry has begun to comment on the likely impact of the jump in rates, when the full extent of the impact becomes apparent in the weeks ahead, it will send a signal that Mr. Market will surely not appreciate.

Rates are going up, and we are positioning ourselves to take full advantage in The Casey Report.

Meanwhile, U.S. exports continue to fall, Treasuries continue to come under pressure as Russia and other countries announce they are going to invest in IMF paper vs. that of the U.S.

And one more thing, especially interesting, that came my way via Steve H. It is about a meeting on June 16 by senior officials of the BRIC nations, in a remote mountain resort in Russia. The concern is that they are working on plans to replace the U.S. dollar as the world’s reserve currency.

Start by watching this somewhat odd video linked here…

The presenter comes across as something of an odd duck, and so I asked Steve (who is a very successful money manager and a very solid guy) if the guy was credible. Here’s his response:

www.comdig.com

www.deanlebaron.com

www.leadership.gather.com

So, I did a bit of looking around and found this reference on the pending meeting, from the Beijing Review.

Now, it is a bit of a leap to think that this meeting will indeed amount to a Bretton Woods II, but without the U.S. in the room… you can bet the dollar will be on the agenda.

Interesting times, indeed.

And with that, I must run… I think I smell smoke.

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 05/22/2009

David Galland — Fri, 22 May 2009 17:57:00 GMT

A dose of sanity returned to the markets this week, starting with cracks beginning to show in the U.S. dollar. Consequently gold, the not-so-barbaric relic, seems to be attracting an awful lot of attention. Instead of falling, as so many pundits have been predicting it should, it has begun to string together a number of impressive up days. Another run at $1,000 in the weeks just ahead is not out of the question.

Also this week, the U.S. stock market hit a pothole on the road to Happy Days Again, helped along, apparently, by massive selling by corporate insiders...

"...in the last couple weeks, company chief executives and chief financial officers have gone from big buyers to heavy sellers. According to InsiderScore.com, two weeks ago there was a slight bias towards selling, while last week turned in the biggest disparity of sellers to buyers — more than 1.2 sellers for every buyer — since September." (WSJ)
In addition, the chart for long-dated U.S. Treasury bonds this week – shown here – resembles a steep cliff. It appears that the U.S. Treasury Department's irrational exuberance for every bailout program that lands on its desk is finally beginning to raise doubts about the government's ability to repay its many obligations. Ahead of us on the curve, the sovereign debt of the UK is thought to be a tea cozy away from being downgraded from the AAA status normally assigned to a respectable country's sovereign debt.

While no one likes to be the bearer of bad news, this week's market action is a welcome confirmation that just maybe we haven't lost our minds here at Casey Research. I can't begin to recount the number of times I woke up in the morning wondering if we were missing something really, really big regarding the current crisis. After all, both the dollar and the stock market have held up remarkably well in the face of what appears to be irrefutable evidence that the U.S. currency and economy are now racing down the fast track to a devastating collision with the reality that there is no such thing as a free lunch.

Despite many opinions to the contrary, the government cannot "fix" an economy as massively broken as ours. At least the fixing involves throwing out some magic combination of regulations, jawboning, newly created money, and backroom deals with fiscally irresponsible and financially bankrupt cronies.

We are, I would opine, at the crossroads of a new paradigm in American history. We have to be, because the path we have recently traveled to get here has been wiped out by an avalanche of bad policy and institutionalized self-dealing on a biblical scale. We are not going back to the bubble years anytime soon, any more than the Japanese have or will in our lifetimes.

That is not to say that America is doomed or that we should begin eyeing the ground for roots and berries. Rather, the citizenry of this nation – and the world, for that matter – are going to have to adapt their personal outlook to the way things are, and not the way network television has portrayed them these many years. Not everyone is going to have a new car every couple of years.

Of course, it's going to take awhile for this notion to sink in. Humankind, and Americans in particular, are forever looking forward to a bigger and brighter future. To the extent that said view of the future includes ever larger high-definition TVs, the latest gadgets, and an ATV parked in the backyard right next to the trampoline and above-ground pool, expectations will have to change. Probably in conjunction with the simultaneous receipt of one's first unemployment check and one's first unpayable credit card bill.

Illuminating these post-apocalyptic thoughts, just below is the text of an e-mail I received yesterday from Dominick, a valued subscriber and correspondent of some duration.

I heard an interview on National Public Radio this week with a bunch of graduates from the college class of 2009. They universally lamented the fact that there were no jobs of any description available. Experts and various callers chimed in with their suggestions for the unlucky class. One graduate with a degree in nursing complained that contrary to expectations, there were no nursing jobs on Long Island where she lived. Apparently a lot of the hospitals in the area have closed or are closing. One caller helpfully suggested that she might want to move to another part of the country where nurses were still in demand. Her reply was along the lines of "No way," and that it wasn't fair. In other words, she was entitled to her job exactly where she wanted it.

These attitudes, too, will be changing in the weeks and months ahead.

There was a day, albeit a day long ago, where Americans were far more adventurous and willing to take on risk than they are today. They were also, if the need arose, willing to roll up the sleeves and put in a hard day's work. None of that spirit was in evidence among the callers to this particular program, whose default mode seemed to be to take a job with government and/or move back in with their parents.

So, how are the coddled generations going to cope with the world as it is, as opposed to the world they want it to be?

We are going to probe deeply into that, and a number of related topics, in the upcoming edition of The Casey Report, which will include an interview with Neil Howe, the author of Generations and The Fourth Turning (among many other works on generation research). Meanwhile, I have some general thoughts...

A continued resurgence of socialism. Socialism is really just a softer-looking form of communism. Few people will go so far to suggest that they are active communists these days. But if you properly phrase the question, I suspect that a majority of young Americans, and maybe a wide majority, are socialist in attitude. Many would even overtly identify themselves as a believer in that form of collective, a clear sign of societal amnesia, given all the lessons that history has provided about that system's shortfalls. Consequently, the world will set about relearning the lesson that you cannot build a productive society by punishing the productive elements of society. Joe Biden's public retort when a woman asked him what she should tell her friends who were unhappy about having their taxes raised, was, "It's time to be patriotic, that's what you say to them."

Watch this clip of then-candidate Biden defending this point of view, and see if you can spot the direct correlation between his words and the concept Marx expressed in his "from each according to his abilities, to each according to their needs."

Also note the obvious passion he brings to the topic. This is not simply campaign jargonizing but a deeply held conviction.

I may be hoping for too much, but I wish that Americans of any income range would be able to look past their personal bias to spot the clear fallacy of this approach. Strictly speaking from a fairness perspective, it wasn't the business owner, successful or otherwise, who led us into this dead end – it was the government and the many special-interest groups firmly latched to the teats of that government. To get a bit metaphoric, it wasn't the fellow owning a chain of dry cleaners who drained the well of American wealth and then replaced the water of enterprise with quick-hardening cement. Again, that would be the U.S. government.

And yet, according to Biden et al., the patriotic thing to do is to take your hard-earned money and give it to the government to give to the needy, whose ranks are currently swollen with the bumbling executives of Goldman Sachs, Bank of America, JPMorgan, and similar Wall Street institutions.

But those comments are based on the notion of fairness. Let's forget fairness for a moment. Forget that letting the Bush tax cuts expire already amounts to the largest tax increase in history, and let's get entirely practical.

Who does the public think is ultimately going to do the heavy lifting needed to bring the economy back into some sort of equilibrium?

As I don't need to tell you, it will not be the government. Thus, every new tax and regulation or insane government dictate simply add more bricks to the wall that entrepreneurs must climb in an attempt to build a sustainable economic recovery.

Which brings me to a second prediction -- the creation of a new wave of quasi-state companies. If you like Freddie Mac and Fannie Mae, then you'll like the new wave of Franken-businesses that will morph out of enterprises that the government decides are too important to fail. Need to prop up a unionized car company? No problem. Just have the USG take a lot of taxes from unpatriotic taxpayers and hand them over to the "new and improved" car companies – companies that are building the next generation of cars, whether people like them or not. For a picture of what's coming, look no further than Amtrak, which has shown an unblemished track record of almost 40 years of losing money. The losses are now exceeding $1 billion a year.

To quote Amtrak's February 2009 independent auditors report...

The Company has a history of substantial operating losses and is dependent upon substantial Federal government subsidies to sustain its operations. There are currently no Federal government subsidies appropriated for any period subsequent to the fiscal year ending September 30, 2009 ("fiscal year 2009") as discussed in Note 2 to the financial statements. Without such subsidies, Amtrak will not be able to continue to operate in its current form and significant operating changes, restructuring or bankruptcy may occur. Such changes or restructuring would likely result in asset impairments.
So, what does the government propose? To build a series of high-speed bullet trains to crisscross the country.

I could go on, but I'm a little short on time this morning, given that Doug Casey and all of our senior editors and staff are gathering at the office here today for a rare in-person management meeting.

Before I rush on, however, I would like to underscore the point I am trying to make, because I think it's an important point. At this stage of the crisis, the government is doing almost everything exactly wrong, the exact opposite of what they should be doing. And the public, correctly scared as they are of the dark and threatening skies overhead, are scurrying under the government's hastily constructed tent.

We shall come out of this just fine -- though we won't come out of this anytime soon, unless there is a 180° shift in government policy, the sort of shift that traditionally only occurs as a result of a popular uprising of strong emotions, expressed eventually at the ballot box. Since the majority of the emotions now swirling around are very much oriented towards more, not less government, we are nowhere near the end of this thing.

As investors, therefore, that is how you have to rig your portfolio -- and that is how we are rigging the portfolio recommendations made in our various letters.

For a final word on the subject of where we are in the economy, I would like to turn the platform over to Howard Davidowitz, the outspoken chairman of Davidowitz & Associates, a company that provides strategic consulting to the retail industry.

What Davidowitz is currently telling his clients, and what he'll tell you in the video clip you can view here, is best summed up in his comment, "If the consumer isn't petrified, he or she is a damn fool."

Crime Scene

As a matter of personal taste, not policy, no one in our household watches network television anymore -- with the exception of Survivor, which never fails to entertain by celebrating humankind's remarkable capacity for self-delusion. Even so, when watching that program, one is forced to sit through trailers for an apparently very popular genre these days -- grisly "true life" police dramas, including any number of geographical derivations of something called Crime Scene Investigation, conveniently abbreviated to CSI. The trailers alone are sufficiently gruesome, but I warn the kids to avert their eyes, which they do willingly.

This week anyone paying attention would have seen a real-life crime scene every bit as gruesome. A U.S. House of Representatives committee passed new greenhouse gas legislation, legislation that includes a cap-and-trade system.

If it were socially acceptable to swear in print in polite company, I would do so right now. Instead, I will express my continued belief -- though maybe it is just a forlorn hope -- that there is no way cap-and-trade legislation can make it into law at this point in time (hopefully at no point in time, but especially at this point in time).

Even so, it boggles the mind that, with everything else going on, the government would spend any time at all on this issue just now. So why are they? A couple of reasons...

First, thanks to a misplaced road sign, over the past couple of decades, millions of young people mistakenly wandered onto the path of "environmental remediation" and related academic pursuits, versus something far more useful and productive. This despite the fact that the world has never been cleaner and is clearly on the trend to get cleaner still.

How did this massive misallocation of time and resources come about? I have read a defensible argument that the entire green movement, which initially cropped up in Germany in the 1970s, was funded by the Soviet Union as a clever attack on the underbelly of capitalism. Given academia's natural attraction to socialism – the attraction to a worldview that seeks to bring down businesses based on the inevitable waste that they must produce in their production processes – it is understandable. But this is a topic for another day.

However, there is something more to the rushed passage of this latest round of government meddling in the affairs of business here in the U.S. It is, if you believe the polls – or just your common sense – that the average American is ignorant of exactly what "cap and trade" actually means. And I quote...

In other words, if the Democratic leadership is going to make good on its promises to its many environmentally oriented supporters, it's going to have to do so pretty darn quickly. At some point the public at large will catch on to the crime that is about to be committed through the cap-and-trade legislation. Under the best of circumstances, it will be a huge waste of time and resources. Under even moderately bad circumstances, it will result in further hardship and taxes dumped onto the back of American enterprise.

There is something else pushing Congress from behind on this issue: a massive lobbying effort by "rent seekers," who are now well positioned to earn big profits from this legislation. Below is a link to a very informative article from the Wall Street Journal. While the author, Bjorn Lomborg, is a fairly rabid socialist himself, I give him credit for at least being honest in his critical analysis of his colleagues in the environmental movement. You can, and should, read his competently constructed critique of the goings-on at the World Business Summit on Climate Change in Copenhagen that is opening this weekend.

As you will read, what is happening behind the scenes is not just shameful but, in my view, a criminal fraud.

Read Lomborg's article, The Climate-Industrial Complex here.

Just So You Know

This week, Treasury Secretary Timothy Geithner, concerned about talk that the U.S. government could lose its AAA bond rating, clarified his goal for government deficits in the years just ahead.

Just so you know, the government expects the deficit to be about 13% of GDP in fiscal year 2009. As we see it, that understates reality by a wide margin. The actual number is likely to be closer to 18%, or $2.5 trillion.

For fiscal 2010, Geithner forecasts the deficit will drop to 8.5%, or about $1.17 trillion. If the government's projections are as far off next year as they are this year, the actual 2010 deficit would ring in at about $1.6 trillion, or about 11.5% of GDP.

For fiscal 2011, the deficit according to Geithner will fall to 6% of GDP, or $840 million. But again, applying the same margin of error for the forecast as we expect to see this year would put that number at about 1.15 trillion. That's still almost three times the prior record of $436 billion, set by George Bush in 2008.

Of course I can't help but comment that the government is out of touch with the reality it is creating with its out-of-control spending, and that the vast majority of the money is going down a rat hole. But it is also important to try and look past the blunt numbers to some of the consequences of this fiscal insanity.

For instance, taking as our starting point the current U.S. debt of $11.3 trillion and adding in the projected additional deficits just discussed, the country will end fiscal year 2011 with a total debt of $16.5 trillion, or about 46% higher than it is today.

That would mean total federal debt would be about 120% of total GDP. That's almost exactly the previous record set in the concluding years of World War II.

One of many tangible consequences of this accumulated debt will be a staggering burden of interest payments. At just 4%, the government would be forced to pay on the order of $660 billion per year in interest payments.

But what happens when interest rates rise to 10%, let alone the 20% Doug Casey feels they are headed for? While it's hard to get one's mind around the latter number just now, the former is certainly within the realm of possibility, given the current trend.

So, how does the government cover $1.65 trillion in annual interest payments?

The answer is, it doesn't.

All of which is to say that we are racing toward a situation where the government will have absolutely no other choice besides massive inflation or an outright default. The stirrings this week suggest that Mr. Market is starting to come to the same conclusion. That means he will also come to the conclusion that interest rates must go up -- either to offset the pending inflation or to compensate for the growing risk of a default.

I'm sure economists have some fancy term for this situation, but vicious cycle will suffice for now.

By the time the politicians stop dithering around with the deck chairs, the ship of state will have sunk, with the survivors clinging to the wreckage. It is our intention – in fact more than that, it is our firm goal -- to make sure our subscribers have a comfortable seat in the lifeboats.

I am not kidding or being disingenuous when I tell you that there has never been a better time to be a subscriber to our various publications. The problem, of course, is that we have quite a few of them, and each is geared to helping you to manage various subsets of market opportunities. For gold and other natural resources, the go-to publications are BIG GOLD, the International Speculator and Casey Investment Alert. For energy, it's Casey Energy Opportunities and Casey Energy Confidential. Overall portfolio strategies, which include plays on rising interest rates, are covered by The Casey Report. And for strategically designed options and futures trades, look no further than the Casey Trend Trader.

Any one of these publications can be instrumental in helping you make it through the shipwreck just ahead, but all of them combined will get you through it in especially fine style. To that end, we are now working on a new membership organization called Casey's Club. It allows you to subscribe to all of our publications and alert services with one low initiation fee... and receive all of them, as well as any services we'll launch in the future, for as long as they are published.

The final details are being worked out now. We'll have more on this first-ever Casey lifetime offer soon.

Tar Baby

I will confess to a strong dislike for fundamentalist religions that advocate as part of their daily ritual the murder of innocents or the suppression of women. Thus, I have zero sympathy for the Taliban or similar groups now being chased around Pakistan, Afghanistan, or other corners of the Middle East.

Anyone who chooses to live by the sword is welcome, as far as I'm concerned, to die by the sword.

Unfortunately, the U.S. seems to be the only country that wants to wield the sword with which they will be smote. Is it because we are somehow more righteous than other nations? Is it that it's our destiny to police the world and to make it over in our own image? Or is it something else, perhaps an overriding and possibly even delusional sense of specialness made ever more acute by the world's largest military budget?

Who knows, maybe it's that Israel – a nation whose neighborhood keeps its back against the wall constantly – has for many decades proven effective at lobbying American congressmen for their undying support. That is not an anti-Semitic remark but a verifiable fact. I don't blame the Israelis for manipulating U.S. policy -- if I were in their position, I would do exactly the same. Instead, I blame the systematic weaknesses within the United States government that allow it to be so readily manipulated.

Regardless, as a result of the normal quirks and accidents of history, we have arrived at a place where U.S. boots are once again firmly planted on the ground in an unwinnable war halfway across the globe. Just as we replaced the French in Vietnam, we have now replaced the Ottoman Turks in Iraq and the Soviets in Afghanistan.

Consequently, even with the more "enlightened" Obama in office, the military budget for the wars in Iraq and Afghanistan is again being ratcheted up. The Senate will pass a funding bill of over $91 billion this week to cover the costs of fighting those wars.

Tellingly, by the end of this year, it is expected that there will be more than twice as many U.S. soldiers in Afghanistan as there were at the end of 2008. The cost of the Afghan adventure will in 2009 exceed that of the battle in Iraq.

As with the antagonist in Uncle Remus' famous parable, we are now well engaged in attacking the tar baby. I suspect the results will be much the same.

Confidence Inspiring 101

I'll admit that I am something of an Anglophile, enjoying as I always have some of the British traditions such as complete British breakfast, afternoon tea, British humor, and a pint of Boddingtons over a game of snooker.

But I do have to wonder whether someone has been slipping something into the warm beer of the British public lately, with a double dose for members of the government over the past decade or so.

There are too many signs of mass insanity to ignore this point, starting with the willing adoption of some of the world's most egregious and intrusive surveillance policies, followed by a rush towards monetary self-mutilation.

For the latest example, the UK Treasury refused to provide the results of the stress tests it had put its banks through. Rationalizing this refusal, the UK Treasury commented that publishing the information could increase instability and result in the government having to undertake even further measures to shore up that country's financial system.

How's that for confidence inspiring?

It shows just how foolish the British have become in dealing with such matters. All they had to do was follow the lead of the U.S. Treasury Department and simply come up with a poorly crafted but well-delivered set of outrageous lies about banks' solvency!

I mean, really old chaps, you can do better.

Random Thoughts

I'm running out of time, well before I run out of topics. So I'm going to go a little wild here, with some quick observations...

On Gold... Everyone seems to like gold these days, including top-performing hedge fund manager John Paulson. The majority of his holdings are now invested in all things gold. Here are his current top portfolio holdings:

Top 15 Holdings (by % of portfolio)

SPDR Gold Trust (GLD): 30.37% of portfolio
Wyeth (WYE): 13.96% of portfolio
Rohm & Haas (ROH): 13.44% of portfolio
Boston Scientific (BSX): 8.4% of portfolio
Gold Miners ETF (GDX): 6.81% of portfolio
Kinross Gold (KGC): 5.87% of portfolio
Philip Morris International (PM): 3.42% of portfolio
Petro-Canada (PCZ): 2.96% of portfolio
Schering Plough (SGP): 2.26% of portfolio
Mirant (MIR): 2.22% of portfolio
Gold Fields (GFI): 2.21% of portfolio
JPMorgan Chase (JPM): 1.65% of portfolio
AngloGold Ashanti (AU): 1.15% of portfolio
St Jude Medical (STJ): 0.91% of portfolio
Embarq (EQ): 0.81% of portfolio

The Russians Also Like Gold. "MOSCOW, May 21 (Reuters) - Russia's precious metals and gems repository plans to quadruple gold purchases this year to about 3 percent of national output to help miners survive the economic slowdown, a source within the organisation said on Thursday. The repository, known as Gokhran, plans to buy 5 tonnes (160,754 ounces) of gold from about 15 enterprises this year, up from 1.2 tonnes in 2008, the source told Reuters on condition of anonymity.

"...Gokhran was founded in 1920 with the aim of centralising and storing Russia's supplies of precious metals and gems. Today, the body is subordinate to the Finance Ministry and its total reserves are a state secret."

The Chinese Don't Like Dollars. This week the Chinese and the Brazilians began working in earnest on a new regime that would allow each country to use each other's currency in intrastate trade, bypassing the U.S. dollar. Actions speak louder than words, and the Chinese have been saying a lot with their actions of late.

Pension Benefit Guaranty Corp – Next Up for Bankruptcy, I Mean, Bailout. According to our own Bud Conrad, PBGC, the government entity that guarantees the pensions of some 44 million Americans, is in deep trouble. You can read this story of epic self-dealing by America's favorite investment banks and its government stooges by following this link...

Tech Talk

A software that I find particularly useful, is SnagIt (learn more here). It allows you to very easily capture any image on a computer screen and then paste it into another document. For those of you who like to blog, SnagIt is an essential tool.

The following came in from subscriber Steve H. While I haven't personally had a chance to try out the software yet, I plan on it...

jott.com

Do you have a technology you like to share with others? Or any comments at all about this edition of The Room? If so, send them my way at David@CaseyResearch.com.

Miscellany

Oil Spills? Bring ‘em On... Check this out.

A bit of British Humor. A moment ago, I mentioned my fondness for British humor. Follow this link to a car review from a British newspaper, hands down the funniest car review I have ever read.

Joe Cocker. A subscriber this week reminded me of Joe Cocker, an artist whose name is largely faded from memory, but who was certainly unique in his time. You can view a funny "translation" of Joe's wild performance at Woodstock by pasting this url into your browser window: http://www.elwp.com/Joe%20Cocker.html. Viewing that video made me wonder, "Whatever happened to Joe Cocker?" Thanks to the miracle of the Internet, I found that he is still alive and well and maybe even coming to a town near you soon. Check out his rather fancy website here, http://www.cocker.com/.

And that, dear readers, is that for this week. Even though I started well before the crack of dawn, I am now running late and ready to sign off. A quick glance at the screens tells me that the Dow is up 26 points and gold is holding steady at $957 per ounce.

Until next week... thanks for reading and for being a subscriber to a Casey Research publication.

As dire as the outlook may be, quoting Joe Cocker, together we'll get through all of this, "With a little help from our friends."

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/20/2009

David Galland — Sat, 21 Feb 2009 04:34:00 GMT

Dear Reader,

We’re going to be flying low and fast in this weekly scan of the landscape in the quest for items that are “important,” as opposed to “merely interesting.”

At the top of the list of what we would consider important is the increasing likelihood that the wheels are about to come off the global economy. And, worse, fly through the air and wipe out any number of innocent bystanders. (By now, you and the other readers of our services should already be safely in the duck-and-cover position.)

It is becoming clear that more than just our subscribers are beginning to understand the depth, severity, and nature of this crisis: as I begin writing this morning, gold has rebounded to just a few ticks away from the $1,000 mark. By the time I am finished today, we could see that mark taken out. More on that topic later, but first…

Making It Up on the Fly

President Obama this week signed into law the new $787 billion stimulus plan, then followed up with a $287 billion housing initiative with $75 billion to support a convoluted plan to keep individuals who can’t afford to stay in their homes… in those very same homes.

I say the plan is convoluted because, simply, it is. And how could it be otherwise?

This and so many of the other major initiatives now flying out of Washington are being brewed up in a proverbial blink of the eye. The stimulus bill – which many in Congress have admitted to never having read before voting on it – runs over 1,000 pages and is mind-boggling in its complexity. Virtually every one of the dozens of multimillion or multibillion spending components included in the bill will require the hiring, training, and equipping of armies of new bureaucrats.

There will be mission statements to be drawn up, buildings to be designed and built, grant programs created, oversight committees assembled, human resources professionals hired, forms to be drawn, and databases to be programmed… and that’s just for starters. To make the point, try to envision the start-up process involved with just the following handful of initiatives, a fraction of the total included in the bill…

* For “Broadband Technology Opportunities Program,” $4,700,000,000.

* For “Digital-to-Analog Converter Box Program,” $650,000,000, for additional coupons and related activities under the program implemented under section 3005 of the Digital Television Transition and Public Safety Act of 2005.

* For “Scientific and Technical Research and Services,” $220,000,000.

* For “Construction of Research Facilities,” $360,000,000.

* For an additional amount for “Operations, Research, and Facilities,” $230,000,000.

* For an additional amount for “Procurement, Acquisition, and Construction,” $600,000,000.

Chris Wood of our office actually went through the herculean effort of reading through the entire stimulus bill and pulling out all of the various spending items contained therein. To review the full list, and as a taxpayer, you should, click here.

As you read through the list, ask yourself just how many of the items are the equivalent of digging holes and then filling them in again… versus something that at least remotely resembles an investment with the potential for a payoff down the road?

My point is this: while I am on principle opposed to any new government spending, a weak case could be made for the government to invest in something that might actually produce a return on the money spent. The government’s investment in building the interstate highway system enhanced the free exchange of goods and services and, by so doing, provided some sustainable increase in gross national product. That, in turn, allowed the government to recoup its expenses – and more – over time through taxes on the increased revenues.

That, however, is an entirely different beast than the massive pork doling and hole digging included in the latest stimulus bill. How, for example, does the $200 million allocated to building and furnishing new headquarters for Homeland Security achieve anything other than support further government bloat (or worse)? How does the $165 million earmarked for the U.S. Fish and Wildlife Service to spend in upgrading wildlife refuges do anything other than give a bunch of aging boy scouts more money to play with? Then there’s the hybrid cars for the military and… and…

And let’s not forget the $75 billion housing foreclosure program, yet another quickly conceived government experiment in social and economic engineering. While I could unleash a rant on the topic, I doubt I’d be able to outdo the subtle sarcasm and pure entertainment value of the one you’ll find at PlanetMoron.com, one of the few blogs I make it a habit to read. Read it here, you’ll enjoy it. http://planetmoron.typepad.com/

The bottom line is that government is just making up this stuff as it goes, backed by not even a scintilla of historic evidence that this approach is going to lead anywhere but to prolonging the crisis and to a major inflation. If you haven’t prepared for it, start now.

Credit Capitulation

Speaking of the housing bill, Doug Hornig, the hard-working editor of the Daily Resource PLUS and regular contributor to our BIG GOLD publication, dropped me the following note today.

Here's a local tale of two friends. One of my buddies, who's never missed a mortgage payment, tried to refinance and was denied. Another fell behind by two months, came home one day, and found a FedEx envelope at his house. Inside was an offer from Countrywide, his mortgage holder, saying they were lowering his payments by $700/month and pushing all his delinquency fees to the end of the mortgage. He took the deal.

To state what should be obvious, as people struggling on the financial edge look around and notice that others in similar circumstances are simply throwing in the towel on their debts and receiving government assurances that they will be provided relief, as well as hard cash, they, too, will begin capitulating. This is a trend in motion that will only worsen until and unless the government steps aside and says, “Sorry, that’s it. Henceforth, you will have to suffer the consequences of your own financial decision making, the government can do no more.”

But, of course, that is not at all what the government is going to do. Instead, they will continue to return to the legislative drawing board, interspersed with trips to the podium to deliver compassionate speeches designed to reassure the populace that yet more help is on the way.

Meanwhile, more signs of credit capitulation are appearing daily. This week, we learned that credit card defaults are on track to exceed 10% this year and could go as high as the “mid-teens,” according to the folks who watch this stuff at Moody’s.

Losses of that magnitude will do a couple of things. For one, they will further damage the margins at the major banks and issuers, which are already suffering mightily. How mightily? Between 2007 and 2008, the world’s largest credit card company, Citigroup, saw its card profits collapse from $4.7 billion down to $166 million. For another, the rising tide of credit card defaults will further freeze up credit lines, unless, of course, Uncle Sam can be chatted up for guarantees and further bailouts (you can get a glimpse of the good Uncle by putting on a fake goatee and donning a red, white, and blue top hat, then looking in the mirror). In fact, the banks are already clearing their throats about the need for yet more money.

At this point, this is akin to a big hamster wheel – with the government running as hard as it can – and the axle of the wheel connected to the arm of a printing press.

In a conversation earlier this week, our own Terry Coxon made an astute observation when he said something to the effect of, “You know, David, if the government had just done nothing when this crisis first appeared a year and a half ago, it would probably be over by now.”

I think he’s right. People would have taken their losses, revalued their assets, gone out of business, moved out of houses they couldn’t afford (or directly negotiated workouts with their lenders), banks would have failed… but the “value discovery” that is a prerequisite to any recovery would be well advanced at this stage.

Instead, governments the world over have decided on taking a different path, trying to print their way out of trouble… a well-worn path that assures this thing will drag on for years.

If there’s a silver lining (besides the personal profit potential for the attentive), it’s that the current path could very well lead to the end of the fiat money experiment. Even the financial celebrity of the day, Nouriel Roubini, is warning of that potential, albeit indirectly. This from Bloomberg:

“The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign,” Roubini wrote on his Web site today. “At some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system -- including deposit guarantees -- could come unglued.”

(Interestingly, Roubini’s prescription for the global economy is to further socialize the private losses by ramping up the stimulus even further… oh, well.)

Money is all about trust. And when the public at large no longer trusts the central banks in charge of their respective currencies – and the steady demand for gold confirms this is a trend in motion – then the fiat money system will come unglued.

All that is missing is a single major government to call it quits on fiat currency and announce they will henceforth link to gold. That will be the game changer. In my view, it is now inevitable. And, at the speed at which things are unraveling, maybe even imminent.

If I had to guess which country might be most likely to go there first, I’d put the odds on Russia.

About That Whole Deflation Thing…

As you might suspect, a number of readers have challenged us on our conclusion that the current monetary inflation must, after a lag, resolve itself in a serious price inflation.

We are always polite in our responses and do try to see the other side. Yet we remain firm in our conviction, thanks in no small part to the observable reality that the governments of the world are reacting exactly as we have long predicted they would to this crisis. Namely trying to print themselves out of the mess they have created.

This week, despite the widespread expectation of further signs of deflation, it was inflation that showed up at the door. Starting with U.S. producer prices, which went up 0.8 percent in January. Then today, knock, knock, consumer price inflation stopped by, rising 0.3 percent month over month. The price of food, in particular, continues to rise at the rate of 10.1 percent annualized.

And the U.S. wasn’t the only country registering an inflation surprise. This from the Financial Times, under the headline, “UK inflation more entrenched than expected”…

Inflation is more entrenched than many economists had imagined, easing only marginally in January as the weaker pound pushed up the price of imports and offset much of the benefit of lower fuel and housing costs.

The consumer prices index rose in January at a year-on-year rate of 3 per cent, down from a 3.1 per cent rate in December, official figures showed on Tuesday.

But retail prices – the measure of inflation felt by most households – defied economists’ expectations of a contraction, registering a 0.1 per cent year-on-year rise in January as rising prices of household goods offset some of the impact of falling mortgage interest payments.

There is a combination of things going on. For one, commodities, which have taken a brutal thrashing (other than gold, of course) are now showing signs of a bottom. And that is to be expected, given that so many are now selling at or near the cost of production. A farmer doesn’t need to have a PhD to know not to plant crops that they are sure to lose money on.

For another, merchants, finding they have less business, are trying to make up the lack of volume with higher prices. I have seen that anecdotally in the local merchants and have heard it from other correspondents. And, as was mentioned in the case of the UK, the weakness of the pound means that the exports it must buy now cost more.

But all that is just window dressing for the flood of money just now beginning to enter the system, thanks to a global race to quantitative easing.

Even as they admit their surprise at the latest inflation numbers, government officials and the punditry are quick to pooh-pooh the notion that inflation can do anything but fall from here. While it would be foolish to expect that inflation can only rise from here, though that is far from out of the question, when you think about it, the government’s view that deflation is the primary problem is the only stance they can adopt.

That’s because to acknowledge the potential for inflation at the very same time they are adopting quantitative easing would be a serious disconnect. And, in the case of the U.S., it could scare away foreign dollar holders.

Thus, the official line is, “There can be no inflation.”

I wonder if the foreign dollar holders are buying it?

China Dumping Dollars?

On February 11, 2009, a senior Chinese Banking official, one Mr. Luo, went on record following a speech in New York as saying that, despite some misgivings, his country would continue buying U.S. treasuries and otherwise supporting the U.S. dollar. The following quote from the Financial Times captures the moment…

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion . . . we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Reading that citation reminds me of some advice I heard from a currency trader some years ago. “If you want to know what a country has planned for its currency,” he said, “listen to what the government says they are going to do, then expect the exact opposite.”

Now, if you were the Chinese bureaucrats in charge of such things, and you wanted to lighten your dollar holdings, would you (a) announce that you were going to be a seller and then try to beat everyone to the door, or (b) announce you were going to be buyer and then slip out the exits while no one was looking?

On that front, there was a rather telling photo in the Financial Times this week, which I liked so much I scanned it for you here.

It shows the official signing ceremony between Rio Tinto and Chinalco, for the largest deal a Chinese state company has ever done… exchanging a pile of 20 billion U.S. dollars for an additional big chunk of equity in the mining giant (with this investment, Chinalco will have invested $33.5 billion in Rio Tinto).

What I liked about the photo was how Rio Tinto’s CEO is poised on the edge of his seat. You can almost read his mind, "Please sign, he's going to sign it, oh please sign it, there he goes, he's going to sign it, oh gawd, I just can't stand the suspense, just sign it! "

Now, to review the transaction, the Chinese take $20 billion of their $700 billion or so pile of U.S. dollars and exchange it for an 18% interest in a company that produces $54 billion worth of a variety of commodities, a company with assets that, at current production rates, should hold out for decades.

Rio Tinto, on the other hand, gets $20 billion to pay down some of the debt it’s run up in its quest for growth. As paying down that debt only helps the company's prospects, the Chinese have just had what might be termed in corporate speak, a "win-win-win." They unloaded some dollars, bought into a stream of essential commodities needed to keep their country’s manufacturing sector at work, and at the same time helped assure that their shares in Rio Tinto, bought on the cheap, will actually weather the current downturn in commodity prices.

And there is one more thing. As such a large shareholder, the Chinese are now able to exert a lot of influence on the company, influence that will almost certainly result in off-take agreements being signed down the road. In other words, while other countries will increasingly be forced to scrap it out for the world’s remaining reserves of key commodities, through this strategic and farsighted business move – and many similar to it – the Chinese are assuring themselves of a reliable supply, long into the future.

Suggesting a certain urgency to the unloading of their dollars at this advantageous time, just days after the Chinalco deal was signed, Minmetals, the Chinese state-owned metals trading company, stepped up to the plate to buy Oz Minerals, the world’s second largest zinc producer, lock, stock, and barrel for $1.7 billion.

Whatever you may think about the Chinese, you have to give them a tip of the hat as economic competitors. While the U.S. and much of the world are in full panic mode, the Chinese are sticking with their long-held plans to secure the raw materials they will need to keep their economy productive for decades to come. And thanks to the global economic crisis, they are now able to fulfill that mandate at a deep discount, and pay for their purchases with a depreciating asset – the U.S. dollar.

Since we are on the topic of the Chinese, the news came out this week that they – and other Asian investors – are not willing to buy any more mortgage-backed securities from Freddie and Fannie unless they are given explicit, versus implicit, guarantees from Uncle Sam (quick glance in the mirror).

Frankly, I don’t see how the government can fail to provide those guarantees, even though the act further solidifies the fact that taxpayers are on the hook for all manner of bad debt.

This is, I suspect, the beginning of the trend that will lead to foreign creditors of all stripes and inclination treating the U.S. government as they might any hapless bankrupt, demanding terms that suit them and not the U.S. government.

But, many analysts opine, the Chinese and other foreign dollar holders have to support the U.S. government and its currency, because otherwise their own dollar holdings will be hurt.

To which I answer, “Rio Tinto” and “Oz Minerals.”

Let’s Talk Gold

Today I have had communications from two friends, one of whom I stay in regular touch with and one I had lost touch with for a couple of years.

In both instances, they expressed their belief that gold is about to rocket higher and wanted my opinion on whether now is a good time to buy.

My answer, after the usual caveat that I really have no idea, is that they need to decide why they want to own gold.

If it is as a core holding – to buy and forget about as insurance against the very real potential of a currency crisis – then buy away.

If, on the other hand, it is as a speculation, then they might want to hold off to see if there is a pullback here. No market goes up in a straight line, and gold will be no exception. That said, if you can wait out a correction that might see gold fall back $100, or even $200, before heading back higher again, then, again, buy away.

I also pointed out that until the inflation begins to really ramp up, there is no penalty for sitting in cash (at least in the U.S.). So, if capital preservation is your goal, then simply sitting on cash is not a bad move for the time being.

At this point, there is every sign that gold wants to go higher. Demand in gold in 2008 was about 29% over that of 2007, according to the latest report from the World Gold Council. And demand for bars and coins was up by 87%, mitigating the fall-off in jewelry sales. One other useful observation in the report was that strong buying kicked in on any dips in the price.

So, we appear to have something of a floor under the price of gold at this point. If you look at the price of gold over the last couple of years, the floor appears to be around the $750 mark. If you are okay buying here, around $1,000 an ounce, with the clear understanding that gold could see as much as a 25% retrenchment, then go for it. If, on the other hand, the potential for that sort of a short-term pullback worries you, stick to cash and maybe you’ll get a chance to buy cheaper, as earlier buyers take profits at the higher prices now available.

But couldn’t gold go down from here, and stay down?

Anything is possible, but looking at the shape of things, I would rate the odds of that happening as very low.

Shattered Hope

I was going to do an article this week commenting on some recent media reports that certain U.S. military leaders were expressing concern and dismay that President Obama was actually taking time to deliberate before committing more troops to Afghanistan.

I was going to be complimentary that rather than reflexively throwing men into an unwinnable war, he would reconsider the whole (bad) idea and maybe even start drawing up plans for an orderly withdrawal. But then, on Feb 17, he stepped up to the plate and approved a 50% increase in U.S. troop levels.

I heard the UK defense secretary commenting on the Obama administration’s commitment, in the context of being asked if the UK would commit more troops. While not a direct quote, he said that they are reviewing the situation, but are concerned that there are too many “caveats” applied to the rules of engagement in Afghanistan, and that they would be more willing to add troops if those caveats could be eliminated or reduced.

What he was saying, in plain-speak, is that they want to be able to apply whatever brute force they feel was required, regardless of the collateral damage, in taking out the local opposition to the current occupation by NATO forces.

This is a very slippery slope, and one that the West should already know as a failed idea from even a cursory reading of the history books. As I have commented on in the past, there is no conceivable way that the West could hope to outdo the naked brutality exhibited by the Soviets in their run at Afghanistan. And look where that got them.

So why, exactly, are we marching deeper and deeper into Afghanistan? Call me a cynic, but I suspect it is because President Obama, in the next election, wants to be able to stand up to the inevitable charges that would otherwise fly that he was “soft on terrorism” or “failed to support our troops.”

Getting deeper into Afghanistan is, in my opinion, a great and entirely avoidable travesty.

(On the topic of the Soviets in Afghanistan, The Beast, an older movie about a Soviet tank crew that gets lost in that dangerous country is well worth a watch.)

Enough of all that. To improve my mood, and hopefully yours, I want to share with you a couple of items I came across this week that I think you’ll find amusing.

Just for Fun

This first item came in an email from a friend with the subject: “How the stimulus package works.”

Three contractors are bidding to fix a broken fence at the White House. One is from Chicago, another is from Tennessee, and the third is from Minnesota.

All three go with a White House official to examine the fence. The Minnesota contractor takes out a tape measure and does some measuring, then works some figures with a pencil. "Well," he says, "I figure the job will run about $900: $400 for materials, $400 for my crew and $100 profit for me."

The Tennessee contractor also does some measuring and figuring, then says, "I can do this job for $700: $300 for materials, $300 for my crew and $100 profit for me."

The Chicago contractor doesn't measure or figure, but leans over to the White House official and whispers, "$2,700."

The official, incredulous, says, "You didn't even measure like the other guys! How did you come up with such a high figure?"

The Chicago contractor whispers back, "$1,000 for me, $1,000 for you, and we hire the guy from Tennessee to fix the fence."

"Done!" replies the government official.

And that, my friends, is how the new stimulus plan will work.

A Really Good Read

The following article is reprinted with permission of the publisher of the local newspaper. The article is one of the best-written and most entertaining I have read in any paper in years. It was written for The Waterbury Record by Peter Miller, a well-known local photographer… and a great writer, in my opinion. The article, about an epic battle between a local man and a fisher cat (as you will read, a mean-tempered member of the weasel family) offers a glimpse into life hereabouts, though not all the locals are quite so eloquent. I just love the passing reference to coq au vin. Enjoy…

Scott Broderick of Waterbury Center recently engaged in mortal combat with a fisher cat.

Broderick and his partner, Amber Rae Sulick, are house-sitting for friends in a renovated farmhouse a mile off Route 100 in Waterbury Center, on Gregg Hill Road. In front of the house is a large wetland. Behind the house are woods that scatter down to the Waterbury Reservoir. The pair takes care of the dogs, cats and a coop of chickens.

On Sunday, Jan. 24, Sulick came back from a cross-country ski hike and found three chickens slaughtered.

“They were in the outside pen,” Sulick said. “Two bantams and one black hen. They were lying limp on the snow. Their throats had been sliced and there was a little spot of blood around the neck. They were not eaten or ripped apart. I could see in the snow where the chickens had been chased around the pen. I could see the tracks really well. The animal hopped , two and two, feet together. I thought it was a weasel. This happened between 2 p.m. and 4 in the afternoon, when I was checking for eggs.”

The next day, while Sulick was at work, Broderick went for a snowshoe hike and when he returned, he heard all sorts of commotion coming from the chicken coop.

“There were thumps, squawks, squeals of terror and screams that are best imagined,” said Broderick. “I took off the snowshoes and hurried into the coop. I could see, through the chicken mesh, that Ozzie the rooster was flat on his back, the head turned to the side. He looked dead. A black animal was on top, like a vampire, sucking blood. It looked up at me, showed its bloody teeth and hissed.

“I had two axes by the door, for splitting wood and dispatching, recently, a rooster that we turned into a coq au vin for Christmas dinner. I grabbed both axes, entered through the small door and went after him. The animal — I later found out that it was a fisher cat — leapt off Ozzie and, ignoring me, went after the hens. There were more terrible squawks and screeches. The fisher moved so fast, I was missing on my swings. It then climbed up on poles near the rafters. Suddenly, it turned its attention to me. …Suddenly, I was no longer on the attack but defending myself.”

The fisher leapt through the air and onto Broderick’s chest. “If I hadn’t moved back he would have latched onto my face. I could have ended up like Ozzie, who had his comb chewed off, lost an eye and had a lot of blood sucked out of him,” he said.

“I threw him off and he landed in the corner, where the hens cowered. More squawks, screams and wing-beating,” he said. “The fisher, with incredible speed, climbed back up to the overhead poles and screaming its battle cry, again leapt at me. I knocked him down and then I was screaming, as I hit him with the axe, over and over.”

Broderick was not bitten. Ozzie the rooster was taken inside and given first aid. When it was returned to the coop, the hens circled around him very glad to have the master back. However, the rooster died two days later.

A fisher cat can weigh up to 14 pounds and measure 36 inches, including its bushy tail. They are ferocious predators, related to the wolverine, and feed on porcupines, other wildlife and farm animals. They also have a taste for domesticated cats. Very rarely do they attack humans, but in this case, the fisher may have felt cornered.

Miscellany

* Casey Research Las Vegas Crisis & Opportunity Summit Update. First off, we have finalized the program and are very happy to announce that we have lined up an excellent keynote speaker for the banquet, Professor Tom Rustici from George Mason University. I’m not going to go into any great detail on Professor Rustici here, other than to say he is a terrific speaker with deep (and surprisingly entertaining) insights into the nature of depressions. We have also confirmed John Woolway, a professional bond manager of long experience, to discuss a range of topics related to his specialty, including best ways to invest for income today, opportunities in TIPS, how to play rising interest rates, and more.

All of the rooms at the Four Seasons are now sold out, but we are working on securing a handful of rooms at the Mandalay Bay (the adjoining sister property to the Four Seasons) starting at $189++. Please email summit@caseyresearch.com to get more information.

There are still a handful of seats left, but not many. With everything going on in the world just now, this promises to be our most important – and profitable – Summit to date. Hope you can make it. Registration information, as well as a link to the final schedule, be found by clicking here.

* Gun Control on the Way? Someone sent me an email on a bill called HR 45 Blair Holt Firearm Licensing & Record of Sales Act of 2009. Always skeptical about emailed information of this sort, I had a researcher give it a look and, sorry to say, it’s real. The bottom line is that Congress is taking up a bill that will require gun purchasers to jump through a number of hoops before being able to buy a gun, including pass a test and agree to allowing government officials to come to your house to inspect your guns at will. Failure to properly secure your guns will carry a fine and even the potential for a five-year stint in jail. You can read more about the legislation here. http://www.opencongress.org/bill/111-h45/text.

Knowing as I do the attitude of a number of gun-owning acquaintances of mine, I think legislation such as this could trigger some pretty strident opposition. And for good reasons: one of history’s better-documented lessons is that almost every transition to dictatorship has been preceded by some form of gun control.

* Where Do They Get Their Numbers? Hardly a day goes by of late without some member of Team Obama standing up to announce that this plan or that will create or preserve X million of jobs, or help “as many as 5 million homeowners refinance.” Most people accept such pronouncements as having a loose connection to reality. They don’t.

In fact, that sort of loose talk is highly misleading and counterproductive, because it gives the populace the false impression that the economy is almost mechanical in nature. Push this button or that, and voila, out pops a million jobs. If it were that easy, then why would Team Obama stop at 3 million jobs, as they claim will be created in the latest stimulus bill? Why not just give the knob a few more twists and go for full employment? There’s nothing particularly profound in this observation, because you already know that the economy is a complex system, which is to say, it is largely unpredictable. So, the next time you hear the president or anyone else in the ring of power spouting off some specific numbers associated with this initiative or that, join me in making a loud raspberry sound. Or throw your shoes… whichever makes you feel better.

* New Phyles. Zoe is looking to start up a group in Reno. And Mike in Kingwood, Texas, has started up a phyle and is looking for more members. If you live in or near either of those places and would enjoy sharing views with other Casey subscribers, drop Kristen a note at phyles@caseyresearch.com.

* Music? I often include links to music that has caught my attention over the previous week, but not much of anything has overly moved me of late – I like powerful music – so last week I skipped and I was going to do so again. However, there is one song, from the movie Slumdog Millionaire, that I have had on rotation and find it pretty snappy… it’s called O-Saya by M.I.A. You can hear it here.

(If you have some dramatic and exciting music you’d like to share, drop me a line at David@caseyresearch.com.)

And that, dear readers, is that for this week. And what a week it has been.

To give you some sense of how things have gone, yesterday I recorded an hour-and-a-half-long phone interview with Dave Hightower and Terry Roggensack, the commodities gurus behind our new Casey Trend Trader.

During the interview, which is to appear as a special feature in the next edition of The Casey Report, we talked about just about everything you can imagine as it relates to commodities, including the data they monitor on China’s current stockpiling of commodities… whether or not gold is being manipulated… where the GLD ETF is getting its gold… which commodities are selling at or below the price of production… which ones are poised to rebound first and strongest and which are still at risk… how to structure futures and options trades to tightly control risk (in their entire 27 years in the business, they have never had a major loss)… plus, the outlook for oil and natural gas… when interest rates are likely to turn around, and much, much more.

As we finished, I was so excited about the interview that I pushed the wrong button on my recorder. Then I compounded the error by pushing a second wrong button, sending the entire recording to the permanent trash bin in the sky! In the words of Mr. Broderick, quoted above, on discovering the loss of the recording, there were “…thumps, squawks, squeals of terror and screams that are best imagined.”

The thumps being my head repeatedly hitting the desk.

Fortunately, Mssrs. Hightower and Roggensack are patient and even forgiving individuals, and so we will be doing it all over again. Look for the new interview in the next edition of The Casey Report.

(If you are not yet a subscriber, don’t hesitate for a minute to take us up on our special new subscriber offer. We make it easy and inexpensive to give this unique monthly letter a try, because we’re convinced that once you try it, you’ll want to stay with it. Learn more about the trial offer here.)

As I sign off, I see that the rout in stocks continues, with the Dow off by another 175 points. Oh, and looky there… Senator Christopher Dodd says that the government might need to nationalize some banks. Is it any wonder that gold spot has just cracked over $1,000?

For many moons now, we have cautioned you to “be right and sit tight.” While, as per above, there is no sure way to know where gold is going to go in the short term, there is likewise nothing we can see that doesn’t suggest that it can’t go much higher in the longer run.

We live in interesting times.

Until next week, thank you for reading and for being a subscriber to a Casey Research service. If you find us helpful, don’t hesitate to spread the good word to your friends and associates.

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 01/30/2009

David Galland — Fri, 30 Jan 2009 19:11:00 GMT

January 30, 2009

Dear Reader,

Like most people, I occasionally find myself overwhelmed by the tasks involved with everyday life.

This week, I have been, to use the old adage, "working like a dog." Though, now that I think about it, I have a hard time imagining the origin of the term. Even in his youth, my now elderly companion General Beauregard Piddle didn't seem to take on anything more rigorous than climbing up on an unattended couch for a nice nap.

In any event, it's been one of "those" weeks. And so today, as I prepared to write this weekly missive, I found myself groaning, "Arrgh, I've got to write The Room," to my ever patient and entirely wonderful wife.

"But," she said, misunderstanding the nature of my apparent complaint, "I can't see how that's a problem. There's so much to write about."

"Exactly!" I said, "That's the problem!"

In actual fact, I almost always look forward to these weekly writings as a form of personal reflection and even entertainment... and as a usual way to keep myself in the flow of the passing parade.

But some weeks – most weeks, it seems of late – the sheer volume of important news that I should comment on, at least if I were trying to be a good correspondent, is so staggering in dimension, it is a real challenge to know where to begin.

So, instead, I start by writing about old dogs and wonderful wives. Go figure.

Okay, enough of that. Procrastination is almost never a good idea, unless it is on the part of legislators who, I always hope, procrastinate to the extent that they don't ever quite get around to doing anything. Unfortunately, with the mantra of the moment being "Yes, we can," that is probably a false hope.

Turnaround in Interest Rates?

A few weeks ago in these musings -- January 9, 2009, to be more exact -- I wrote the following in response to Bud Conrad's latest projections of a deficit that could go to $3 trillion in fiscal 2009...

Well, this week we began to see a whiff of the situation just described. Here's the article from Bloomberg...

Note that Bloomberg still estimates the total deficit at $1 trillion. They are dead wrong... my money (literally) is on the number coming in much closer to Bud's stunning projection. And that means that interest rates will have to go higher... much higher.

It is for that reason that all four editors of The Casey Report -- Doug Casey, Bud Conrad, Terry Coxon and yours truly -- are in agreement that positioning yourself to profit from rising interest rates should be the big money-making play for 2009 and beyond.

It's not too late to jump on board... and it's easy to do so, with the no-risk, three-month trial being offered for The Casey Report. Click here for details...

Bait for the Two-Legged Rat

I have often said that humans are like rats in that they are extremely ingenious when it comes to looking after their personal interests. Lock a rat in a metal box and it will almost be able to figure a way out. Almost. A human would actually have a shot at it.

In the debate about what went wrong with the economy and how to fix things, the topic of loose credit standards usually arises early in the discussion. And correctly so. Due to loose credit standards, people without the financial resources to own a home were practically carried across the threshold by predatory lenders.

Well, at least that's how the outraged political class and their adoring punditry see things.

According to that section of the jeering crowd, these lenders were so avaricious, greedy, and downright dastardly that they would actually hand the keys to a $500,000 house to an individual with not just poor but pitiful credit and with little or no money down. Bastards!

Of course, as a former banker (shudder), I have a somewhat different perspective.

Because no matter how devious or dastardly a lending institution might be, it wouldn't even contemplate making such loans if it didn't have a fairly well-reasoned plan in mind to actually get paid back... with interest.

Enter the government in the form of the Federal Housing Administration (FHA) and the quasi-state-owned (and now absolutely state-owned) Fannie Mae and Freddie Mac. Absent their guarantees, the private sector would never, but never, have made the loans just described. That's because...

As a result, within the acceptable tolerance range for any human endeavor, banks are historically careful in setting lending standards.

But add into the equation a rate-slashing Fed looking to stimulate things a bit, side by side with a bloated Uncle Sam looking to engage in some social engineering by putting people without the credit or means into a house, and the picture quickly changes. Why, even the FHA's own website does a good job of summing up the role they played in the pumping up the housing bubble. Some relevant excerpts...

For lenders, our mortgage insurance protects lenders against loss if the homeowner defaults on his or her mortgage loan

For the record, there are about 55 million single-family mortgages in the U.S., so the FHA has over 10% covered.

But the FHA is just one of Uncle Sam's kissing cousins. Others, including the aforementioned Fannie and Freddie, guarantee another 31 million mortgages between them. So, in total, U.S. taxpayers now stand behind about 65% of all home mortgages in the U.S. But it is worse than that, because ever since the credit crisis began, over 80% of all new mortgages generated have been "conforming" in order to go onto the books of a government agency.

Thanks to Uncle Sam's largess and no-risk lending guarantees – warmly applauded by the nation's banks and sundry money shoppes, to be sure – since 1992 there has been about a 50% increase in U.S. homeownership.

Is it any wonder, therefore, that until recently you could spot a loan officer by the wide smiles on their faces, as well as their ink-stained fingers, the result of producing prodigious quantities of freshly printed loan contracts?

The way it all worked was very simple. Uncle Sam shouts for all lenders to hear, "Bring me your poor, your unqualified, your liars, and your wannabe speculators, and I will buy up their loans, allowing you to make a quick profit for generating them, and then passing them like a hot potato into my portfolio."

Given the opportunity to make money by giving money away – not a real hard sale – the lenders rose to the occasion. A rat, sniffing out a crust of bread down an unguarded alleyway, would do much the same.

Likewise the masses, equally quick to discern the opportunity, can hardly be faulted for scrabbling to take the house, oftentimes along with a loan that put extra money in their pockets in the process.

No one was much concerned about paying for the homes; the lender's risk was assumed by the government and the unqualified buyer didn't have much of any money in the game, and besides, everyone was certain that house prices could only go in one direction, up. As for the government, well, the government doesn't really pay much if any attention to the money it spends, because it's not their money. It's yours – if you are a U.S. taxpayer, that is.

But you have never paid much attention to how the government spends your money, have you? No, like a former client of wily Mr. B. Madoff, you just assumed Uncle Sam was on top of his game.

Of course, as the smell of free cheese and wealth without end spread throughout the ether, more and more two-legged rats acted on what they perceived to be their self-interest, causing a steady influx of new buyers to stream into the alley of homeownership. Many of the early adopters, sensing that if one was good, two could only be better, began to double and even triple up.

And the next thing you know, you have a housing bubble of historic proportions.

But you know all this, so why am I repeating history? Well, because this week, I stopped in at a local sandwich shop and, to occupy myself with something other than looking out the window, took hold of a regional real estate guide that, as part of its editorial features, includes a table showing all of the lenders who do business in the area – 16 in all.

Among other information, the lenders' table displayed whether or not the various lending institutions offer "Mortgages to Buyers with Less Than 20% Down?"... and whether they "Offer Mortgages with Credit Scores Under 600?"

Even today, after all the news and global angst, 9 out of 16 still advertise that they offer loans to individuals with credit scores below 600, and four of them actively promote the fact that they'll go down to 580 – which is roughly the credit rating of an escaped felon on the run for credit card fraud. But such a loan, each of the listing institutions further qualifies, is available "Only w/FHA."

And 12 out of 16 will still give you a loan with less than 20% down... in fact, "w/FHA," the solid majority will still provide a loan with less than 5% down, and one touted the availability of a 103% loan.

Alas, despite the understandable desire of lenders to earn yet more cheese by generating poor-quality mortgages for Uncle Sam, borrowers now believe real estate can only go down. Given the oversupply, they are largely right for the foreseeable future. On that basis, they whiff the downside, spot the trap that waits behind the front door of Home Sweet Home, and scamper away.

The lesson in all of this, other than that once I get pounding away on the keyboard, I seem to have no off-switch, is that the real cause of the housing-led crisis was a failure to appreciate the similarities between humans and rats. Every government interference in the market, no matter how well intentioned, carries the seeds of dangerous unintended consequences. Just ask the twenty-something welfare mothers of the 1980s who, when offered monthly pay for each new offspring, quickly converted their wombs into baby factories.

I wish I could say that this lesson – that humans, like rats, will always figure out a way to pursue their self-interest, even if it requires chewing through a real or proverbial wall – has been understood, thanks to the crash.

But as evidenced by the following item, also just in from Bloomberg, it's clear that the lesson is far from learned... at least by certain rats...

Dolts!

Fortunately, there is consolation to be had from the current trend towards more and bigger government. Namely, if you can fully understand what's going on and what's coming next, you have a rare opportunity to – in the words of a stock promoter who used to speak at conferences some years ago – get "stinky, filthy, sloppy rich."

We'll do our part to help you achieve that elevated position, in our various publications and at the upcoming Casey Research Crisis & Opportunity Summit in Las Vegas, March 20 – 22.

Speaking of that event, even though we still haven't gotten around to widely marketing it, the Las Vegas Summit is now more than 2/3 sold out... with less than 100 seats remaining. You should make the effort to get there if you can... there isn't a better time to step away from your computer and everyday life and spend a couple of days in the active contemplation of what's coming next and how to profit. You will get your most pressing questions answered. An updated schedule and registration information is available by clicking here.

Obama Watch

Looking past the rhetoric to the actions of those with their hands on the tiller of power this week, we find some items of interest.

Higher-mileage, lower-emission standards on the way. It increasingly looks as though the enviro-alarmists within the Obama administration are willing to pursue a scorched-earth policy in order to advance their agenda. This week, they set the ball in motion to accelerate the date when car manufacturers have to dramatically reduce emissions and raise fuel mileage... and looked to set a precedent whereby individual states can set their own, even more rigorous, standards. In the best of times, these sort of dictates are often stupid and counterproductive. In the worst of times, they are also dangerous.

In my view, left alone, people and industries will fluidly adapt to changing conditions... even if that adaptation means some businesses will fail and others rise. Unfortunately, the government and far too many members of the voting public just don't see it that way. And so, as with the housing crisis, expect unintended consequences.

Not having to look very far for examples of this principle in action, it was reported this week that State Farm Insurance will be dropping 1.2 million customers and withdrawing from Florida's residential home insurance market after state regulators refused the company's request for a rate hike. According to Bloomberg...
Stimulus or another brick in the wall? This just in from Washington Correspondent Donald Grove...
(Don isn't the only one encouraging a "no" vote on the stimulus bill. Check out this ad from the folks at CATO... http://cato.org/special/stimulus09/cato_stimulus.pdf
Things that go bump. Recently I shared comments by Fitzroy McLean, former intelligence operative and co-editor of Without Borders, on the topic of the daily intelligence briefings that every U.S. president since Bill Clinton has received. To recap, this briefing contains info on a wide range of real and potential threats. The president is then asked to make a decision on how to act. Failure to do so carries with it the potential for a political blowback, should the threat assessment turn out to have been accurate. Thus, even though he was only in office a few days, President Obama approved a drone attack into Pakistan's sovereign territory, killing 20 or more locals, including a number of women and children.

Now, I can't say, because I don't know, whether the intelligence leading to the attack was sound, or whether the "collateral damage" was worth it. But it is important, in my view, to note that the new president has shown himself willing, like his predecessor, to ignore international law and risk further destabilizing an already unstable ally. Was the drone attack warranted? Or was President Obama simply continuing the new presidential tradition of covering his hindquarters by acting reflexively to things that go bump in the night?
Speaking of Afghanistan. This week, we also heard Defense Secretary Robert Gates confirm that (a) there will be a build-up of more U.S. troops in that country, and (b) the whole notion about helping stabilize the country through development activities will likely be back-burnered in favor of just killing unfriendlies. In his own words, the DefSec testified...
As is made clear in Counterinsurgency Warfare by David Galula (available at http://www.praeger.com), probably the best book ever written on the topic, you simply can't win a war against insurgents with blunt military force alone. Gates, who I am almost positive has read the book, knows this, so I find a certain tired resignation in his words. We send more troops to Afghanistan not because we expect to win, but because Obama said we would in his campaign.

Supporting my contention of the futility of the conflict is the fact that the Soviets were incredibly brutal in their attempt to pacify the country, going so far as to drop toys that would explode when handled, the idea being to blow the hands off the next generation of Mujahedeen. So, let me ask you – if we aren't willing to go to that sort of extreme, and beyond... and we have given up on the idea of winning Afghan hearts and minds through on-the-ground politicking and development... then what, exactly, is the endgame?

To get a better sense of the situation, watch this video, it details an eye-opening trip to the largest arms bazaar in the Khyber Pass. (Thanks to Dave M. for sending it along.)

The link is here: http://www.vbs.tv/full_screen.php?s=DGFE2305DC&sc=1363196

But if we pull out, won't a new gang of terrorists reestablish themselves and begin to train for the next 9/11? Could happen, but there are better ways of dealing with those threats than getting deeper and deeper into a country that history has correctly awarded the moniker as "graveyard of empires."

(While its lyrics refer to a different sort of road, this week I've been listening to Chris Rea's The Road to Hell, which seems fitting to a discussion of the Khyber Pass. You can listen to it here)

The above list of actions of the Obama administration is not in any way meant to be a complete tally of what's been going on. For example, according to the news, later today President Obama is expected to "issue executive orders to reinforce the rights of organized labor." And he has added to his new administration Harvard Professor David Cutler. According to Harvard's web site...

"Cutler, who specializes in health care and public economics, is a vocal proponent of increasing America's health care spending, arguing in his most recent book, "Your Money or Your Life: Strong Medicine for America's Health Care System," that such spending has been worthwhile despite its high costs."
To all of which I can only repeat, "stinky, filthy, sloppy rich."

Go Gold!

For obvious reasons, there has been a lot of news on the gold front this week, with an increasing number of articles showing up in the mainstream financial media on the shift towards gold as a safe-harbor investment. Even famous hedge fund managers and other institutions are beginning to buy into the case for gold. And not just bullion, but gold stocks. This from Bloomberg this week...

Meanwhile, GLD, the largest gold bullion ETF, reported that its holdings reached an all-time high of 832.57 tonnes last week.

Miscellany

Bye, Bye, Bobby. The freshly minted Zimbabwean $100 trillion note didn't last long. This week, that nation's befuddled kleptocracy finally threw in the towel on its own currency and is allowing the citizenry to use pretty much any form of currency they can get their hands on to trade among themselves. Without the power to print and no reserves of anything of value left, the end of the Mugabe administration can't be far off. In fact, I'll go on record saying that he'll be out of power within three months. Want to bet $100 trillion Zimbabwean dollars on it?
Scapegoat Bank, MEMBER FDIC. Recently I discussed the idea of the government implementing a "bad bank," an idea that has come to life this week, with the FDIC raising its hand to manage same. Subscriber and correspondent Ian M. of Toronto sent in the following this week, which I thought was both interesting and relevant.

And that, dear readers, is that for this week.

Juggling my responsibilities as managing editor of The Casey Report, the next edition of which is due out on or about February 6, I started this week's edition of The Room yesterday afternoon... and so I am finishing up earlier than usual, at about 11:15 am. While I can't say where the markets will end today, I can report that, at this moment, the DJIA is off about 84 points, oil is up modestly to $46.05, and gold is up to $920.

Given the sheer volume of bad news this week, with unemployment continuing to reach new highs, home sales continuing to collapse, and consumer confidence – and spending – in a steep slide, the stock market should have been crushed... but it wasn't. That it wasn't, I can only view as being due to base building in anticipation of Super Obama's magical plan... you know, the big New Deal "get it done" plan to end all plans.

It's coming...

And I am going...

Until next week, thank you for reading and being a subscriber to one or more Casey Research services.

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 01/23/09

David Galland — Tue, 27 Jan 2009 15:39:00 GMT

January 23, 2009

Dear Readers,

Like a runaway train, the crisis is heading at breakneck speed down the hill and towards the next sharp turn.

Though we are reasonably sure about the ultimate destination – an inflationary wreck – we can’t be entirely sure what exactly awaits around the next corner. Is it a reasonably long straightaway that gently slopes upward for a spell, allowing the train to slow to a safer speed? Or is it a broken trestle bridge hanging over a gap a mile wide and a mile deep?

Some typically random thoughts on the topic…

Obama at the Bat

As you don't need me to tell you, Obama's coronation, complete with a full court of princes, princesses, and even a couple of jesters, was greeted by the massive crowd with rousing choruses of God Save Obama... but by the financial markets with a sharp sell-off.

Since then, the market has struggled to do its part in heralding in the new American Era, managing, so far, to muster only a tepid one-day blip. Meanwhile, the economic news just gets worse. And worse.

This has investors keyed up and waiting in a nervous state of anticipation for Team Obama to step up to the home plate.

Given all that is at stake, when Team Obama eventually emerge from their many collaborations and deliberations to make the BIG announcement on their plans to save the world, we suspect they will be carrying a very big bat. As the new Treasury secretary stated, the plan they’ll present will be “dramatic.”

That leads us to conclude that one of two scenarios must almost surely follow...

Scenario One: They announce something that is so large it blows the mind and settles the markets. Evidence of this scenario being the one unfolding would be if, on hearing the details of the New Deal, your reaction were something along the lines of… "Wow, I can't believe they'd go that far, but I guess it's the kind of medicine needed just now."

At which point my guess is that the financial markets would take a deep breath and the Obama rally would start, giving the global economy an early spring break.

Scenario Two: Obama strikes out. They step up to the plate with a flimsy little bat that the next hard pitch shatters into small pieces that fly into the eyes of the crowd. A lot of arm waving occurs as the global economic train rounds the bend and spots the abyss just ahead. Positioned as they are in the engine at the front of the train, Team Obama start to frantically grab for levers, sparks fly, a fire breaks out, smoke, brakes screaming, people ducking for cover… you get the idea.

Which way do I personally think things will break? I quote myself from the July 18, 2008 edition of this column/blog thingy.

So, here we are. As predicted back in July, Obama has been sworn in and he is working on a New Deal. Further, this New Deal will almost certainly be geared entirely toward increasing, not decreasing, the weight of government on the economy.

With that view in mind, one might lean toward Scenario One… yet I have a hard time imagining what the government can do at this point that could be so BIG that they’ll be able to smooth the global waters and mollify the restless masses. Especially with such a steady drumbeat of bad news coming from both the U.S. and overseas… the UK, China, Eurozone, Japan, etc., etc., etc.

That I can’t envision such a plan at this very moment is only because my imagination hasn’t been sufficiently amped up with enough coffee this morning. And so, with the benefit of another shot of espresso, I remember that the U.S. government can do pretty much anything it wants, short of opening up concentration camps, and get away with it… for a time at least.

In fact, with a bit more effort, I do see one plan shaping up that might, just might, do the trick.

And that is for the U.S. government to set up a new operation with a forward-looking title such as “The Economic Recovery Corporation of America.” All of the nation’s banks and any other institution deemed “important” by the administration would earn shares in this new entity by handing over the toxic assets that now pollute their portfolios.

With all its wisdom, the U.S. government would provide management expertise to work the paper out over time, keeping the new “Bad Bank” afloat in the interim with government guarantees. To the extent that the government actually has to make good on any of its guarantees, it would recoup the losses taken prior to the contributing institutions receiving any share of the proceeds from the liquidations. To help get this idea through Congress, the Treasury would set a realistic time table for the workout – say, ten years – and confidently project that the new entity would ultimately make money from its activities.

Of course, there would be a lot of detailed work to make this idea work, but the plan – which has already been hinted at by members of the administration – could be packaged in such a way that it could be deemed acceptable even to members of Congress, despite the hefty price tag.

As to the size of that price tag, the outstanding toxic paper on the books of the banks is currently estimated at somewhere between one and two trillion smackers.

“But Congress would never pass another big bailout to the greedy banks!” some would say.

To which I might reply, “For Bush, you are right. He had burned through all his goodwill. But at this early stage in his administration, provided the thing was properly packaged with an extra big helping of spin, our shiny new president can get pretty much anything he wants.”

So, that is how Scenario One might come to pass; a national Get Out of Jail Free card for banks. Followed, I suspect, by governments around the world quickly following suit. Problem solved, crisis over. The Obama rally starts and the world enjoys several months of respite before the hard reality that this thing is far, far from over smacks the global economy up the side of the head. More on that in a moment.

But what about Scenario Two – Obama strikes out? It could very well happen. People are very skittish just now. If history has repeatedly demonstrated anything, it is that governments are heavily prone to miscalculation. In the current situation, should they propose a plan that leaves people muttering to themselves, “What? That’s it? You must be kidding!” the retribution would come hard and fast.

Unfortunately, until we actually hear the details of “the plan” – which should be announced relatively soon – we simply can’t know which way things are going to break.

There are, however, a couple of things that I think we can be pretty sure of, in either scenario.

Gold soars. In Scenario One, the market will correctly see the fresh wave of new money as inflationary – as it has at virtually every new bailout announcement over the last six months – and send gold spiking upwards. In Scenario Two, the scramble for safety triggered by the looming abyss will likewise send people scrambling for gold. Going out on the limb a bit, I’m going to guess that gold is headed over $1,000 within the next month or three.

There will be a crash, regardless. All Scenario One does is postpone, and for not very long (three months?), the day of reckoning. It does nothing to actually resolve the massive misallocation of capital built up over decades of excessive spending and debt creation. The plan, at least as I envision it, just assures that the government’s debt soars even further. And, should it succeed in actually getting banks to loan and strapped consumers to borrow again… it just exacerbates the situation.

In addition to gold, I also think there are going to be some spectacular trading opportunities coming up, opportunities we are well geared up to take advantage of with our new Casey Trend Trader service.

It is now up and running, but heretofore, only for our Alert subscribers. A broader release on the service will be out soon… it is temporarily hung up in some minor administrative details related to the announcement itself. Watch for it.

Swearengen on the New Administration

Last week I reprinted a rather strongly worded and entirely unflattering farewell to George Bush by my dear friend and business partner, Doug Casey.

In response, I received several strongly worded emails from readers, including one from a Vietnam vet who threatened to beat me up for, I guess, exercising the right of free speech that soldiers are regularly attributed with fighting for. Oh, well.

In that, in the same edition, I expressed some skepticism about the economy’s prospects under the Obama administration, I also received several emails from readers suggesting we get on board with the Obama express… emphatically stating that we owe the guy a decent chance to fix things.

While I think I have tried to be fair in my assessment of what we might expect of Obama, I will accept that, even at this early point in his administration, I am skeptical.

To help explain why, I will take a roundabout approach by stating that Doug and I share a passion for the now canceled HBO series Deadwood.

Deadwood, about the founding and early days of that infamous Wild West town, is not for everyone, due primarily to equal parts sex, violence, and truly obscene language. Yet if you can get past the first couple of episodes – and almost no one I know other than Doug has – the degraded milieu of the show begins to grow on you. Especially when you realize that the writers regularly use iambic pentameter to express their most colorful language.

So, other than being aficionados of violent westerns (Doug's favorite movie of all time is The Wild Bunch, and I cast top ten votes for The Outlaw Josey Wales and The Searchers), what does this have to do with anything?

Stick with me for a minute, because there was a scene in Deadwood that struck me as relevant given this week's inauguration of Mr. Obama.

The set up is that Al Swearengen, the hard case who was instrumental in the founding of Deadwood, finds his turf being cut into by George Hearst, the scion of the Hearst dynasty who is trying to hone in on the nearby Homestake Mine, the biggest of the Black Hills mines, and one of the largest in North America. Hearst is a hard-charging bull who knows what he wants, and what he wants, he gets (in real life, he ended up buying Homestake in 1877 for $70,000... in today's money, that's $1,347,705).

In any event, Hearst sends a flunky over to Al Swearengen's saloon and invites him to his hotel room for a pow wow about the future of Deadwood, a future he very much wants to control. When the meeting doesn't go exactly as Hearst intends, he has his henchmen grab Al, hold his hand down on a table, remove a couple of fingers with a bowie knife, then toss him out on the street.

About a week later, Hearst decides he wants to meet again with Swearengen. And so he sends the same flunky back to Swearengen’s saloon to request that Al, once again, follows the flunky back to a meeting with Hearst.

Upon hearing the request for a second meeting, Swearengen, his hand still swaddled in bandages, raises one eyebrow skeptically and says the immortal words, "Why, the must take me for an optimist."

Well, given my life experience to date, an experience that has involved watching a succession of presidents pursuing policies that have each, in turn, increased both the size of government and its many obligations to the point where we are now on the brink of the worst financial debacle since the nation’s founding, you will excuse me if, when asked by anyone to grab hands around Obama's campfire, my mind returns to Swearengen’s words, "Why, the must take me for an optimist."

But wait, say Obama's many fans, he's different! He really will change things!

To which I reply: Bush’s inauguration, $40 million (a ridiculous amount); Obama's, $170 million (an insane amount). I would have been impressed if he had a modest affair in the Rose Garden, with a modest little wine and cheese served afterward. But $170 million?

It says to me like little else can that the new administration is, at the least, still living in the past – a past marked by excesses in all things.

And so, for the time being, like Al, I am going to have to be convinced by something other than words.

Leaving off on the topic, other than the sheer spectacle and Obama’s seemingly well-practiced, beatific countenance as he walked toward the inaugural podium, the thing that jumped out at me the most was when a camera zoomed in on a T-shirt that was apparently quite popular with the crowd, and that is pictured here.

Skepticism aside, I sincerely do hope that Obama does a better than average job… but yet, I can’t help but find the expectations inherent in the iconography that surrounds the man deeply concerning. The higher the expectations, the harder the fall.

The Continuing Crisis

Item One: Real Estate Still in Real Trouble. I can remember some years ago being shown a fixer-upper selling for $750,000 in a neighborhood near the San Francisco airport where one would have to be stupid or well armed to go out after nightfall. My, what a difference a few years make. This from Bloomberg…

Jan. 21 (Bloomberg) -- Home prices in the San Francisco Bay Area fell 44 percent last month from a year earlier as discounted, foreclosed properties lured buyers, MDA DataQuick said.
In a conversation this week with real estate pro Andy Miller, he shared his view that there is literally nothing, but nothing, that any government body in the world can do about real estate until values fall to the point where equilibrium returns. And we are nowhere near that point. It doesn’t hurt to be looking for that dream property you have always wanted, but the smart money is holding off buying… probably through the end of this year. (As all real estate is local, there will of course be exceptions.)

Item Two: Let's Piss Off China! In his Senate confirmation hearing, Treasury secretary nominee Timothy Geithner went on record that… “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.” Adding, “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”

This audience, more than most, is aware of the fact that foreigners – led by China – were responsible for buying something like 80% of the U.S. Treasury bonds sold over the last couple of years. So, naturally, it makes perfect sense that the likely new Treasury secretary would come out of the starter’s gate with tough words for China, even though buyers will have to be found for record quantities of Treasuries in the months just ahead.

The distinguished New York Congressman Charles Rangel seconded Geithner by warning that, “What they can’t work out diplomatically, we can work out legislatively.”

See my earlier remarks on governments serially making miscalculations.

Item Three: What Price Oil? I recently commented on the fact that the price of many things has either already fallen, or soon will fall, below the cost of production. On that general topic, regular correspondent and über-researcher Marko F. of Canaccord sent along the following item this week.

The IMF recently compiled a list of break-even prices that various oil-producing nations require in order to avoid a budget deficit in 2009. Those figures are as follows: Bahrain $84, Kuwait $34, Oman $78, Qatar $24, Saudi Arabia $54, United Arab Emirates $24, Algeria $60, Azerbaijan $35, Iran $90 (!), Iraq ($94), Kazakhstan $67, and Libya $53.
While there is some internal debate here at Casey Research on the outlook for oil prices, my personal sense is that it is approaching oversold. One of many recent developments in the energy scene supporting that view occurred this week when we learned that the output at PEMEX, Mexico’s state oil company, fell 9 percent in 2008. This is, unfortunately, a trend solidly in motion: from its peak production of 3.8 million barrels per day in 2004, Mexican production is now ringing in at just 2.8 million bbl/d, a startling drop of 1 million bbl/d in just four years.

The consequences of this decline are serious, starting with the simple fact that the already embattled Mexican government derives over 40% of its revenue from PEMEX. As the underlying cause of the production decline is that the giant Cantarell field is well past peak, this is not a situation that will be quickly or easily resolved.

While this heightens the odds that Mexico will become a failed state, it also supports Jeffrey Brown’s time line that by 2014 – if not sooner – Mexico will stop exporting oil.

So, sure, oil and gas might stay under pressure for a bit longer… but the time will come, and probably sooner rather than later, when you’ll want to begin positioning yourself for some exceptional contrarian profits.

Casey Energy Opportunities

The Casey Report

Casey Research Crisis & Opportunity Summit

more info here

Item Four: Car, Anyone? In a recent edition of these weekly musings, I mentioned that, while flying into Newark recently, I could see a sea of unsold cars waiting on the dock of the port. Apparently, this is a growing problem, as you can see for yourself by clicking this link.

Item 5: Credit Denied. Regular correspondent Jeff B. sent this along earlier today.

Item 6: Who’s at Fault? This just in from Casey Research Washington correspondent, Don Grove.

Item 7: Next, It Gets Ugly. There was an interesting article in the Times of London this week on the growing number of violent protests flaring up around the world. Here’s an excerpt.

And here’s a link to the full article.

A sign of times to come? I think the answer is, yes… especially as more and more people hit the unemployment lines.

Item 8: The Unemployment Lines. John Mauldin, who has just signed on as a faculty member for our March 20-22 Crisis & Opportunity Summit, puts out an excellent weekly letter, titled Out of the Box (more here http://www.investorsinsight.com/). In his latest edition, he sheds some useful light on the government’s prettied-up employment statistics. Here’s the quote:

There is much more I could include under the topic “The Continuing Crisis,” but time and space prohibits it.

From the big-picture perspective, while one should practice optimism at every chance in everyday life – life is much happier that way – when it comes time to roll up your sleeves and work on your finances, pessimism remains the word of the day… and likely, the week, month, and year as well.

In time this storm will pass, just not real soon, and not because some government spokesperson – no matter how well spoken – says it has.

Crisis & Opportunity Summit Update – Going, Going…

There are a couple of important developments to share in regards to the upcoming Casey Research Crisis & Opportunity Summit, being held at the beautiful Four Seasons in Las Vegas, March 20-22.

The first is that the Summit is now more than half sold out, despite almost no marketing on the event (we wanted to hold off until the first draft of the schedule was ready).

Further, the deeply discounted room block at the Four Seasons at $195 a night, versus an amount normally almost twice that – is almost sold out (we are trying to negotiate for more).

And finally, the aforementioned schedule is now finished. While discussions continue with several additional individuals we are determined to land as faculty – including Congressman Ron Paul and former GAO Comptroller David Walker – the line-up as it now stands is, I think, exceptional. By the time the event is over, participants will come away well armed with the hard facts and specific knowledge needed to both persevere and prosper in the crisis now unfolding. While our various services will provide you with most of what you need to know to stay ahead of the crowd, the added advantage of this Summit is that it allows you to get the answers to all your many questions, in a collegial and almost familial setting.

In any event, I’m not going to pitch you hard on attending; rather, I wanted to let you know that if you might be interested in attending, you can now view the schedule by clicking this link.

Then, act quickly if you want to attend… this event will, without question, sell out.

Hope to see you there!

And That’s It for This Week…

As I wrap up this week, I see that the stock market is trying to end the week on a softer note, and the Dow is down only 57 points. But, whoa Nelly! Gold is up strongly, up $37.60 to $896.40. Per above, I am increasingly convinced we’re on our way back over $1,000.

For those of you who appreciate the musical selections I share now and again, I was just listening to Tori Amos’ song Cornflake Girl, a soft classic. I went looking for the song on YouTube to share it with you and came across the following video of her doing a live performance. While I like the song on the original album, until seeing this video I had never seen her perform… which, after watching her cavorting about the stage, I am now fairly sure I never will. But she has musical skills, I’ll give her that. Here’s the (strange) link.

For something entirely different, a couple of you have sent me a link to a fantastic video commentary on the bailout by Fred Thompson. Well worth a watch. Here it is… http://blip.tv/file/1528079

And that, dear readers, is that for this week.

Be of good cheer… why not?

Thanks for reading and for sharing this journey with us.

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/03/2008

David Galland — Fri, 03 Oct 2008 14:53:44 GMT

Dear Readers,

We're no longer in Kansas, Dorothy.

At this point, the world's financial markets are in the firm grasp of a massive tornado. Our vision is blurred with fast-moving images of abandoned houses, crumbling banks, pontificating politicians, alien-looking Treasury secretaries on one knee, and suicide stock and commodities charts.

When the whole mess crashes back on terra firma, the landscape will look considerably different.

But, what?

We remain convinced that the result, with the unavoidable time lag, will be inflation on an epic, global scale. But if history provides one lesson in rich abundance, it is that the future is unpredictable.

Who is to say that the government of these United States -- and of similarly indebted and in-trouble countries "over there" -- aren't too late to the game? Or that even $700 billion, or a trillion... or...?... will not prove to be too little, too late?

In such an environment, the only thing we can say with any degree of certainty, as we do in the current edition of The Casey Report, is "take cover." Loosely defined, that's the technical term for grabbing guns, gold, and cash, and ducking below the edge of the trench until the cloud of flying projectiles passes by.

Guns?

That's the advice of none other than Barton Biggs, Merrill Lynch's legendary global investment strategist, as reported in Bloomberg and forwarded by subscriber and correspondent Ed T...

The "etc." must mean guns.

A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage," he writes in his new book, "Wealth, War and Wisdom."

Given that Barton's book was released this January, one can only wonder what he knew, and when, about what's now unfolding. Whatever it was, he was one of only a very small handful of Wall Streeters to offer a candid assessment – rather than one of the bought-and-paid-for variety – of the potential for a true disaster striking the heart of the economy.

But that was then, and this is now.

And now it is a time for serious reflection on just how serious things are, and, as important, what you might do to further prepare.

For the rest of this issue, I am going to fly pretty fast and low, a necessity given the sheer volume of input coming across the screens.

As musical accompaniment as I start off, I'm listening to a suitably hard-pounding, new song with an end-of-the-world theme, They Say by Scars on Broadway. If you are one of those with more pacific musical sensibilities, you may wish to pass on this week's selection; it's hard rock at its best (or worst, depending on your POV.)

Let's kick things off with breaking news from Bud Conrad, our own chief economist and workaholic without peer...

Do You Know How the Fed Is Managing Your Money?

By Bud Conrad

While the world concentrates on the drama surrounding the Treasury's request for a multi-year $700 billion bailout, the latest iteration starting with an installment of $250 billion, they are missing a far more important move to debase our dollar being undertaken the Fed. Specifically, in the two weeks ending October 1, 2008, the Fed added another $502 billion of new liquidity to the banking system. This infusion of over half a trillion dollars is extremely important as it is dollar debasement writ large. And yet, almost no mention of it is being made by politicians and the media alike.

The Fed is planning to do even more: on September 29 it made the following announcement:

Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmark's Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.

http://www.federalreserve.gov/newsevents/press/monetary/20080929a.htm

As a result of those moves, 1) the TAF will rise to $300 billion from the existing $150 billion; 2) two times the $150 billion will add another $300 billion over the year-end. The swaps had already been issued at the amazing level of $290 billion, and I am just amazed that they plan to provide $620 billion.

The Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) was announced September 19, which allows money market funds to borrow at low rates to provide liquidity to the asset-backed commercial paper market.

In total, these programs don't seem to have worked. Despite the massive liquidity intervention with promises of more, the fear assigned to second-tier commercial paper remains high, with the rate staying at the extreme level of the last two weeks:

The conclusion is that while the Congress and public are fiercely debating the $700 billion Paulson plan to turn the U.S. Government into a giant investment bank, buying toxic waste with the proceeds of Treasury borrowing, the Fed is already massively pouring gasoline on the fire with its multi-pronged paradigm shift from lender of last resort for commercial banks, to market manipulator and guarantor of a wide range of financial institutions. This can only lead to dollar debasement and loss of trust in the U.S. financial system.

Call Us Utopians... or Free Marketers

Ed. Note

As I write, the U.S. House of Representatives is, once again, preparing to vote on Paulson's bailout (more on that topic momentarily from our new man on the scene, Don Grove). In that we've received a number of emails asking what our position is on the bailout, I thought I'd set it down in writing.

First and foremost, we are of the opinion that the government should stop meddling in the markets. Instead, it should step aside and let the banks and other institutions fail. The housing bubble has to be resolved by prices falling to a point where buyers find them attractive. It won't be solved by competing with private lenders or declaring moratoriums on home foreclosure. In other words, the government should avoid, at all costs, the default mode of meddling, especially by using its fiat monetary powers to inflate the country out of this long-coming crisis.

Of course, the outcome might be that this downturn would be particularly deep – thanks to the scale of the market dislocations created by the "good works" of government, egged on by its many parasitical toadies from the last 50 years or so. But it wouldn't necessarily need to be prolonged, because people will know where they stand, and quickly.

But that position presupposes that the government would simultaneously take other actions to encourage wealth building, like lightening the tax load on everyone, reducing barriers to entry for businesses, fairly dramatically cutting size of government, and reducing the expensive business of empire building/maintenance (along with the wars that engenders). And, to assure that things never again run out of control, the Fed would be dismantled and the nation put back on a gold standard.

In short, if the nation is going to benefit from the medicine we would propose, then a paradigm shift in the standard operating procedure for the country is required. Fortunately, our "leaders" don't need to look very hard for a working model: a quick perusal of the very same principles that gave the United States the unprecedented economic kick-start that moved it from subsistence farming to the world's most powerful economy in just a bit over 100 years will do fine.

As none of that is going to happen, however, the following are far more likely scenarios, in my personal opinion:

Scenario A. The bailout passes, but only with everyone involved promising to increase regulation in order to avoid it happening again... and raising taxes to boot, based on a flawed rationale that this will help pay for the cost. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal (he'll come up with a phrase that evokes the same idea, but spun just different enough to be claimed as his own), and then the size of the government really ramps up. Inflation rages.

Scenario B. The bailout fails, the markets get slammed, the meltdown accelerates until the point that the increasingly desperate government passes Plan B, the net cost being more or less identical to Scenario A. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal, and then the government really ramps up. Inflation rages.

So, when you come right down to it, our position is correctly called utopian, or even delusional... because the odds of a voting majority of Americans waking up to the true nature of the problem and resolving themselves to taking their medicine, good and hard, and swearing off the government teat for good, are unlikely in the extreme.

Instead, to quote a succinct email I received yesterday from my dear partner and resident guru Doug Casey...

"Cockamamie schemes will proliferate from all quarters. The only solution is liquidation, total deregulation, and cutting back the government massively. But there's no way that's going to happen. The only question is which combination of harebrained schemes the government will embrace."

The Arabs have a saying that is quite apropos, "The dogs bark, but the caravan moves on."

This caravan is inexorably on its way to an inflationary catastrophe. Done barking, the dogs turn back to their calculations on ways to invest to take advantage.

Ed. Note

Oink! Oink! For Shame!

By Don Grove, Casey Research Washington D.C. Correspondent

Have you been concerned about the BAILOUT? Like me, you may have completely misunderstood what this is about. Fortunately, our senators have set us straight with a 442-page tome that only a bureaucrat could love. We've come a long way from the modest 3-page draft statute that Hank Paulson brought to the Hill on September 20. This is pork barrel politics at its finest.

You may have thought this was just about bailing out banks. Like me, you may be surprised to learn what that entails. Among other things, it's about arrows – yes, arrows.

Not just any arrows. We're talking about favored tax treatment for "wooden arrows designed for use by children." Now for those who would protest that this important provision is just too costly during this time of global economic crisis, don't worry. The senators have sensibly clarified that the favored arrows are only those having a "shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine." See HR 1424 § 503 (attached and linked so you can search the PDF and find this comforting language for yourself). Obviously that leaves one very important question unanswered: How big are they? Well, "5/16 of an inch or less in diameter."

Is that all it takes to bail out a bank? Certainly not. It takes wool; yes, wool. I will admit that as I reveled in the House defeat of HR 3997 Monday, I had completely overlooked the critical importance of wool to the economic well-being of every American. Of course we're talking specifically about "fabrics of worsted wool" and "yarn of combed wool." HR 1424 § 325. It's also about rum, health care, economic development in American Samoa, bicycle commuters, Indians, recycling, and oil spills.

It was clear to the Senate that the House got it wrong. What can you expect from that unruly crowd? Unfortunately, Article I, § 7, clause 1 of the Constitution requires that "All Bills for raising Revenue shall originate in the House of Representatives." Bummer! What's the Senate to do – just stand by? Not! Fortunately, that same clause continues, "but the Senate may propose or concur with Amendments as on other Bills."

Now it just so happens that a handy little piece of legislation had already passed in the House, been sent over to the Senate for its approval, and had been languishing on the Senate's legislative calendar since March: HR 1424, the Paul Wellstone Mental Health and Addiction Equity Act of 2007. Perfect. Everyone is in favor of mental health and against addiction. Let's roll it out and load it up. In one busy day, this obscure 45-page bill designed "to require equity in the provision of mental health and substance-related disorder benefits under group health plans" was magically transformed into an $800 billion vehicle to save the world – with something in it for everyone – and for only $100 billion more than the House bailout bill. Such a deal.

In times of great crisis, Rome would select a magister populi who answered to no one and was empowered to take whatever steps were necessary to alleviate the crisis. In his original September 20 bailout plan, Hank Paulson proposed that "ecisions by the [Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Hey, Paulson's a smart guy. Letting him work out the details would have kept it simple – too simple. Instead, we now have a bailout plan that Congress can be proud of, and the secretary has been properly reined in, as has, hopefully, his yet unnamed successor.

We were assured that American taxpayers would probably get their money back and might even show a profit on this exercise. Meanwhile, just to be on the safe side, Paulson built in a little room to maneuver. His draft would have raised the national debt limit by providing "that Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000." The Senate, in its infinite wisdom, left that very important part of Paulson's proposal completely intact. See HR 1424 § 122. I think it's fair to say that the United States Government is technically incapable of saving (on our behalf or otherwise) or of ultimately paying off its debts. The statutory debt ceiling now stands at $10.615 trillion. See http://www.treasurydirect.gov/govt/charts/charts_debt.htm. Sounds to me like we will never see our $800 billion again.

Always the optimist.

Regards, Don

The Big Debate

I wouldn't be a very good correspondent if I didn't at least mention the much-anticipated vice-presidential debate last night.

Despite my skeptical comments about Sarah Palin last week, I assumed she would do well in the debate. And, speaking strictly as an observer of the art of debate, she did. Whoever coached her did a masterful job, as she gets full marks as a student of same, starting out in fine form with the well-delivered line "May I call you Joe?" (He should have answered, "Sure, if I can call you Sarah?", punctuated with a smile and a wink.)

But was there actually anything important to be gained from the experience of watching the two candidates swap half-truths, exaggerations and outright lies? Maybe...

Biden is a card-carrying socialist. Now, I don't mean that as an insult, per se, but rather as what seems to me a statement of fact. The body of his comments and clear vitriol against "free markets," capitalists, loose regulations... coupled with his constant drumming for more regulation, tax increases, and a multitude of perfect-world programs, confirmed his view that the fate of the world and everything in it is best coddled, coerced, and otherwise shepherded along by Big Brother. Listen, we live under majority rule. If the majority really want the fingers of the government in every pie, and if you believe the polls, they do... then who am I to argue?
Palin is a true believer. A mind that is trained from youth to unquestioned acceptance of the fantastical (an apt description, I believe, of those raised under the circumstance of extreme religiosity) is a mind trained to believe just about anything. It came across loud and clear that Governor Palin is a true believer, as is her running mate. If our unfortunate current president labors under one psychological challenge more than any other, it is his certainty. And once certain, he lets nothing and no one stand in the way. I fear that the same would be in store, should McPalin get elected. While I continue to favor the economic policies of the McCain/Palin team, the thought of this pair of mavericks, by gosh, unleashed on the world is enough to send me looking for a thick slab of cement to hide behind.

George Washington, Thomas Jefferson, where are you when we need you most? They certainly won't be on the ballot come November 3.

World on the Edge

There has been much commentary about the current financial fiasco being an "American" problem, usually followed by the tossing of a few bricks at the greedy capitalists. While there is no question that Wall Street's ever-creative financial engineers did a smack-up job of investment alchemy, turning pigs' ears into (exploding) silk purses, that doesn't let the rest of the world off the hook for loading up on the stuff by the container load before taking the time to actually understand what they were buying, or the risks involved.

The phrase caveat emptor is more than just two high-sounding words. One assumes that by the time one achieves a certain elevated station with a major banking institution, whether in New York or Dublin, one understands concepts such as due diligence and risk/reward ratios. As hard as it is to believe, many of the foreign banks are even more leveraged up than the much-maligned U.S. banks.

In an article earlier this week, Marc Faber quoted at length from a study by the Centre for European Policy Studies in which the author, one Daniel Gross, points out that Germany's Deutsche Bank has a leverage ratio of 50:1 and is in debt to the tune of two trillion euros, an amount equal to about 80% of the GDP of Germany. And Barclays, with a leverage ratio of 60, has liabilities of 1.3 trillion pounds, an amount equal to the GDP of the UK.

This week Fortis Bank (leverage ratio 33, liabilities equal to 3X the GDP of its home country of Belgium) was nationalized.

And the German government had to cobble together a bank bailout amounting to 35 billion euros, the largest ever in that country.

As discussed in the September 1 edition of The Casey Report, there's an increasing chance that the European Union will not be able to withstand the storm now breaking over it. On that topic, I highly recommend reading the following Oct 2 article by Ambrose Evans-Pritchard in the Telegraph. You can read it by clicking here.

In Faber's article, he also points to another closely watched index related to the global economic situation, the Baltic Dry Index, which tracks the price of shipping. That is used to gauge the level of global trade (a rising index indicates robust demand for cargo shipping and thus economic growth). Well, the index looks like the trajectory of Wily E. Coyote falling off a cliff.

Clearly, the slowdown is global and spreading. The truth of that can be seen in falling commodity prices. At this point, we are advocating staying clear of most commodities, other than gold and selective energy stocks. The former because of its increasing importance as money, and the latter because supply pressure and geopolitics put a floor under the energy sector somewhere near here (more on that momentarily).

No question, the trading herd is now rigging for a serious global downturn. In time, as the inflation that is being baked into the cake every day now makes itself known, the commodities sector, as a whole, will regain its upward momentum... but for now, outside of gold and energy, the best bet is the safe bet of standing aside.

As the commodities move into a position of being extremely oversold, which seems ever more likely, a spectacular contrarian opportunity will be created. But that opportunity is still a ways out.

More on the Global Situation

This week, the Irish government announced they are going to stand behind 100% of bank deposits in that nation. This set off a inflow of money as depositors in other European countries sought the safe harbor offered by that unprecedented guarantee. Reacting quickly, the Greek government, under some added pressure thanks to bank runs in two major cities, followed suit. If you believe observers of the European banking scene, this is only the beginning.

"The whole of Europe will have to do same thing, otherwise Europe will have a split banking system," said Hans Redeker, currency chief at BNP Paribas. British banks are already facing a haemorrhage of deposits to Irish banks that now enjoy the AAA sovereign rating of the Irish state.

Meanwhile, back in the U.S., the current bailout legislation includes a provision that raises FDIC coverage to $250,000. Enough, we expect, to keep the boobus from lining up at the doors of the nation's banks, empty gym bags at hand.

Problem solved? Well, not quite. To quote from Bud Conrad's dissection of the latest developments in the crisis and its implications in the October 1 edition of The Casey Report...

That's a further problem, because the FDIC has just $40 billion in reserve to provide coverage on $4.3 trillion of deposits. That's a penny for each dollar. To put things in clearer perspective, consider that the failure of IndyMac Bank alone wiped $8.9 billion off the FDIC's reserve. Clearly, the cost of bailing out the depositors of hundreds of failed banks will quickly deplete remaining FDIC reserves.

Bringing the matter full circle, the reserves of the FDIC are invested in (drum roll, please...) U.S. Treasuries! So the FDIC will have to sell off Treasuries to obtain the money to refund depositors. That adds to the demand for credit, at a time when credit is scarce. And what happens if, say, 10% of the $4.3 trillion deposits needed to be covered, a distinct possibility given the scope of the crisis? Simple math shows that the government would have to find another $430 billion to bail out the FDIC. While there may be some debate around the current bailout of the big banks that sank themselves with toxic waste, there will be no debate when it comes to bailing out depositors.

Meanwhile, back in Europe, the powers-that-be are thrashing about trying to figure out how to actually manage the widening banking crisis there – this week, a plan for a $400 billion fund was raised and shot down – given that there is no central monetary authority with the power to actually create the funds in the same way the U.S. Treasury can.

Does that mean the U.S. is better prepared to deal with the crisis and will come out of the tailspin sooner?

If I had to vote, I'd vote yes... because as challenged as the U.S. is just now, the U.S. is not burdened with the sort of employee-for-life regulations that cling on to the backs of companies in so many other countries. In the case of Europe, the overburden of EU regulations makes things even worse. While those regulations might feel good to the populace in good times, they are going to become crushing as things grow worse.

China? As I have mentioned on many occasions, the leadership of that country is in a do-or-die (literally) situation when it comes to maintaining strong growth in their economy. Events don't allow time just now to cogitate on how that important country will deal with the slowdown or what effect growing unrest might have on the willingness of its citizenry to own renminbi versus, say, gold. (At least until it's banned, again.) This is an analysis we'll try to turn to in the near future.

Finally, on the topic of global affairs, subscriber and correspondent Steve Hanke, who is also a Forbes columnist, emailed yesterday that, as of last Friday, annualized inflation in Zimbabwe reached 531 billion percent.

So, things could always be worse.

Ed. Note

An Interesting Perspective on European Energy

Yesterday, Marin Katusa, the relentless head of our Energy Division and managing editor of Casey Energy Opportunities sent across the following data points. I found them pretty eye-opening and thought you might, too.

Russia literally has a stranglehold on European gas. Below is a list of the percentage of the gas European countries get from Russia's Gazprom monopoly:

Slovakia, Finland and Macedonia 100%

Bulgaria 96%

Serbia 87%

Greece 82%

Czech Republic 79%

Austria 74%

Turkey and Slovenia 64%

Hungary 54%

While those are some of the biggest-percentage buyers of Russian gas, even if you expand the analysis to all the countries in Europe, the total is still over 25%. Now, check this out...

"As of today we can say that the price growth dynamic has surpassed Gazprom's expectations, and the price for the gas supplied by Gazprom to Europe exceeded $500 in October," Gazprom's statement quoted chief executive Alexei Miller as saying.

Putin is a genius.

We are continuing to look for ways to play this situation.

Ed. Note

Casey Energy Opportunities

Learn more here

Blarney Barney

Over the last little while, I have had to grit my teeth while listening to the politicians pointing fingers at the free market for the mess we find ourselves in.

A few items I came across on that topic pertaining to the views of House Finance Chairperson Barney Frank: "The private sector got us into this mess," Frank said, "the government has to get us out of it. We do want to do it carefully."

And this from an article on Frank's views from the top of the year.

"Reagan's central idea," said Frank, "was ‘Government is not the answer to our problems—government is the problem.' His philosophy is why we're here today."

To which I answer by reprinting something I wrote in the September 21, 2007 edition of this column...

Economics 101 for Politicians

Earlier this week, I heard an interview with Barney Frank, a politician of some duration and standing in the U.S. Congress, on the topic of changing the FHA home loan program to be softer on lenders in this time of tightening purse strings. For those of you unfamiliar with the FHA, it stands for Federal Housing Administration. It's a holdover from the New Deal legislation passed after the Great Depression, and it's unique in that it has managed heretofore to avoid being sucked into the subprime quagmire, largely by virtue of actually maintaining something akin to responsible lending practices.

What struck me most about Barney's many strident comments – and struck me sufficiently hard that I found myself muttering aloud in the privacy of my vehicle, much in the same way that a vagabond pushing a shopping cart full of cardboard might do in public – was when he dipped into the topic of the rates being charged by the FHA to poor-credit borrowers looking for a loan.

I must paraphrase here, because I don't want to listen to the man's voice again, but his understanding of the ways of the world are summed up in words almost exactly like these.

"The FHA is too conservative in its lending, it is charging higher rates than available from private institutions. My GAWD, man, that's just wrong! We are the government!!!" he fumed and sputtered.

When challenged by the interviewer that perhaps individuals with poor credit histories should be required to pay a touch more in the way of an interest rate, he pontificated, begrudgingly, along the following theme.

"Okay, so if someone with poor credit takes a loan and the FHA does charge them more, and they then make their payments on time for three years, we should give them a refund on the excess rates they were charged for being a poor credit risk in the first place. After all, after three years, they would have shown themselves to be good credit risks, so why shouldn't they get a refund?"

It was at that point I unleashed my howl and started the aforementioned muttering.

If a person with his hands on the reins of power is so ignorant on the very basics of how lending (should) work, then any proposed "fixes" are doomed from the get-go. While I probably don't need to point out the flaw in Mister Barney's logic, I will, just because his ignorance needs exposing to as many of his voting public as possible, starting with you.

The reason the FHA has stayed out of trouble is because (a) they have been more restrictive on whom they lend to, and (b) they apply a higher rate to those with marginal credit histories. By applying a high rate for past crimes against creditors to a broader portfolio of poor credit risks, they assure themselves the extra revenue to cover the inevitable losses.

If an individual with a spotty track record of showing up at the repayment window decides to stick to the straight and narrow, then good for them... they will be rewarded with positive notations in their personal credit history. However, as the odds are 100% that a certain percentage of the borrowers will revert to their former practices and spend the mortgage money on beer, the extra interest charged to the whole will be needed to help cover those losses. To refund the bad-credit-gone-good folks, the difference would leave only the exposure to the bad, assuring a smoldering hole in the FHA's balance sheet.

As much as we are loathe to snap a rigid hand to the brow in the direction of any government agency, we will at least give a nod to the FHA for avoiding the current credit mess. We will simultaneously give Frank and his meddling ilk a dismissive wave. "We are the government!" indeed.

The essence of what you actually are, Mr. Frank, is an ignorant tick sucking off the life blood of taxpayers.

That, approximately, is what I muttered aloud to myself in the privacy of my car. Can a shopping cart be far away?

Miscellany

Reckoning day for derivatives? According to the Financial Times, some significant percentage of the $54 trillion in derivatives contracts outstanding, those on now defaulted derivatives linked to Fannie Mae, Freddie Mac, Lehman Brothers and WaMu, have to be settled in October. Think the financial problems are over? Think again. Read the article here.
Gold demand soaring. Also in the FT, which I consider best of the mainstream financial journals (and which is now available on Kindle), was an article entitled "Wealthy investors drain supplies of gold by hoarding bullion bars." You can, and should, read it here.
- Similarly, Germany's Spiegel reports "A Run on Precious Metals." You can read about it here.
- And the Guardian of England carried an article this week titled "There's gold in them thar' shops." Read it here...
New phyles starting up. Brian in Chattanooga, TN, and Philip in Ann Arbor, MI, are both ready to host phyles. Drop us a note at phyle@caseyresearch.com and we'll get you set up if you are interested in attending.

And that, dear, patient readers, is that for this week. There was so much more I wanted to cover, and will next week... but time has slipped away. As I sign off, I see that the DJIA is up a flaccid 121 points, not very impressive given the passage of the bailout. 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.

Until next week, thank you for reading, and for being a subscriber.

Sincerely,

David Galland

Managing Director

Casey Research, LLC.

The Room 09/12/2008

David Galland — Fri, 12 Sep 2008 19:14:37 GMT

September 12, 2008

Dear Readers,

In today’s “special” edition of the Room, I want to go somewhat beyond the latest news and observations on same.

Instead, I want to discuss the big picture as it relates to the U.S. and global economy.

I do so because it is growing more important with each passing day to get a solid fix on where things stand and, more importantly, where they are going next and how you can protect yourself. It’s hard to overstate just how unpredictable and dangerous the economic and investment environment has become.

While these are topics we’ll be covering in today’s online event, Casey’s Crisis & Opportunity Update, the situation at this point is moving so fast, and is so highly charged, that it is time to pay very, very close attention to things.

As you should expect, we have been furiously fingering the tea leaves in an attempt to make actionable sense out of the big moves now in motion. While there is much that we know about the unfolding events, there is also much that is unknowable – for instance, how much longer the long-suffering foreign holders of U.S. dollars will be patient.

In our quest for answers, we’ve been digging through the data and comparing notes with others we respect. For instance, earlier this week I spoke with real estate entrepreneur Andy Miller, who recently sat for a very insightful interview for the current edition of The Casey Report. In Andy’s view, the government takeover of Fannie and Freddie was a seminal event in U.S. history, ranking right up there, in his words “… with the Crash of 1929 or even the Civil War.”

We agree.

To set the stage, I want to share a lengthy excerpt from an article we just published, titled “The Biggest Bailout of All Time.” If you’ve already read it, skip to the next section.

The Biggest Bailout of All Time

(Published 9/10/08)

On Sunday, September 7, Treasury Secretary Hank Paulson, flanked by James Lockhart, the new conservator from the Federal Housing Finance Agency, announced a plan to take over the operation of Fannie Mae and Freddie Mac and to guarantee their debt. They cited what we all knew, that they did not have enough capital to continue operating. Their business is to borrow to lend for housing mortgages, and to guarantee half the country’s housing mortgages, about $5.4 trillion. The equity and preferred is all but wiped out as all dividends are suspended and management and the board are fired.
This is the biggest bailout ever. If 10% of the $5 trillion of guarantees must be made good by the government, the payments would be $500 billion. That is the size of the annual U.S. defense budget. The outstanding debt of the U.S. held by the public is the size of the guaranteed mortgages. It is huge.

We from Casey Research have seen this coming for more than a year:

International Speculator

Unusual Aspects

The Treasury will add funding to Fannie and Freddie when their assets are less than their liabilities. The Treasury gets warrants to own 79.9% of the equity. Fannie and Freddie are allowed to expand mortgage lending through the end of 2009 but are required to wind down their $850 billion of debt at 10% per year until they are essentially out of business at only $250 billion debt.

The effect on the Credit Default Swap (CDS) market could be big: there are about $1.47 trillion of CDS on Fannie/Freddie-backed mortgages. The creation of the conservatorship is probably a credit event, triggering the payment of the insurance on the debt. But as we know, the insurers are already weak, and forcing them to pay could eliminate them as ongoing business, thus creating a cascading loss of the value of insurance on other debt they guarantee.

The "New Secure Loan Agreement" that is designed to bail out the debtors of Fannie and Freddie will also be used to bail out the Federal Home Loan Banks. $274 billion additional housing market funding was passed through the FHLB last year, and it is safe to assume there are problems there too.

Who Will Rescue the Taxpayers from Fannie and Freddie?

The U.S. Government has decided to spend an enormous amount of money to prevent the two mortgage giants from defaulting. What will be the real effects?

The rescue won’t resuscitate the housing market. As much as prices have declined, they still haven’t come down enough to make houses affordable. (They only seemed affordable for a while because of the artificially low interest rates the Federal Reserve engineered during the housing boom through its inflationary policies.) Don’t expect the rescued Fannie and Freddie to revive the housing market; the government’s rescue package requires them to shrink their operations.

The rescue won’t end the credit crisis that is pulling the economy into recession. Fannie and Freddie are perhaps the biggest, but certainly not the only, institutions that overcommitted to risky mortgages. Banks, insurance companies, and pension funds are holding billions in the same kind of dangerous stuff. And they still must get through another two years of interest “resets” on subprime mortgages created during the housing boom. As those resets occur, there will be more defaults on mortgages that borrowers can no longer afford – or no longer want because the loan balance exceeds the value of the house.

The rescue helps keep bad decision makers in place. Managers of banks and other financial institutions that invested heavily in Fannie and Freddie paper get let off the hook. They get another chance to make more bad decisions about how to deploy trillions of dollars of capital. And the politicians who passed the laws that encouraged Fannie Mae and Freddie Mac to take all those wild risks? They’re up for reelection.

Implications for the Future

The complete collapse of the agencies that provided 80% of new mortgages year-to-date is now here. The whole structure of creating mortgage-backed securities and passing them on is gone. There will be no creating new phony tranches of sliced and diced SIV debt, and no CDO and no CDS and no AAA-rated toxic waste. We don’t know what happens to $62 trillion of notional CDS derivatives, but somebody is holding a disaster. This financial crisis is far from over.

By itself, the government might be able to manage some of these problems, but the problems are not isolated: the Federal Deposit Insurance Corporation (FDIC) guarantees $4.3 trillion worth of bank deposits… but has only a $50 billion reserve to cover bank failures.

Interest rates are close to 50-year lows, from the Fed cutting the short-term rate, and as a result of the flight to Treasuries as a “safe harbor”… which serves to drive rates down. But the longer-term implication of the bailout is more deficits… and more deficits will weaken the dollar and therefore, in the longer-term, drive interest rates higher -- especially for non-government-guaranteed debt, to cover inflation and increased risk.

There will be many more financial institutions in trouble: perhaps 150 banks will fail, including probably one or two big banks, like Lehman, Citi, or Merrill. FDIC is next to need a bail-out, in our opinion, once a big commercial bank goes under.

The dollar is up in the short term on what we expect is a short covering rally, but that is not consistent with long-term implications, so we don’t expect it to stay up.

Homeowners gain, as Fannie and Freddie are allowed to continue to expand in 2009. But after that, they will be looking for a newly reconstituted system beyond what is in the conservatorships that are being asked to unwind. The long term is unclear.

The U.S. Treasury is now in the mortgage business. The financial future of the world is crumbling, and this is the biggest step in that change.

David Again, With a Public Service Announcement

Before we move on, I would like to pause for a quick public service announcement.

expanding audit program

Okay, with that out of the way, let’s move on to the topic of who is actually in control of monetary policy in these here United States. And for that, I gladly turn the page over to our own Bud Conrad.

The Reason Paulson Panicked

By Bud Conrad, September 11, 2008

Foreigners have been reinvesting their trade surplus into the U.S. The Federal Reserve keeps a custody account for foreign central banks, acting like a broker for them in buying U.S. Treasuries and agency debt. Agency debt is debt issued by agencies, most notably Fannie Mae and Freddie Mac. The Fed publishes the data weekly. It is the most up-to-date source of foreign investment.

The chart below shows what happened monthly. Foreigners broke a record for selling off their holdings at the annualized rate of $280 billion in August.

The U.S. housing market and Freddie and Fannie in particular have depended on foreigners buying their debt to fund mortgage loans. The above data show a loss of confidence by foreigners and a reversal from buying $200 billion a year… to selling off their holdings. There were other pressures, including PIMCO’s Bill Gross demanding a bailout before his huge fund would invest. But this foreign investment pullback was undoubtedly a big reason that Paulson had to act over the weekend to keep the whole agency debt market from collapsing.

Think through the implications of the largest bailout in history being dictated by foreign central banks -- I suspect that the Chinese are the main culprit, based on Paulson’s frequent travels there of late. Think through the fact that our monetary/fiscal policy is now essentially being dictated by foreigners. The bottom line is that the U.S. is now in the position of a third-world country because of our debt!

On the topic of the size of the bailout and the likely cost: in my view, a 10% loss on the $5 trillion insured by Fannie and Freddie is entirely plausible. That would mean that the government would have to come up with $500 billion… just to make the operations whole. But that doesn’t do anything to recapitalize their businesses so that they can continue as a successful ongoing enterprise. That would likely require another $300 billion to be credible.

Now where does the federal government get that kind of money… $800 billion? It means no health care program for Obama, or no defense spending or nuclear power initiative for McCain.

One of the risks a new president might face would be if the public catches on to the fact that the U.S. Government is going to have to pay close to a trillion dollars to bail out foreign central bank holders of bad debt from Freddie and Fannie. Given the trade-off – i.e., no new social programs – many people might decide that bailing out the foreign central banks isn’t such a high priority. The conclusion from that is that the bailout and reconstitution may not happen as planned, for financial reasons; never mind, constitutionality, or just because lawmakers feel duped by estimates of $25 billion. What happens if the mortgage defaults reach 20%? It could happen.

This situation is still very fluid and far from resolved.

“On a Scale with the Crash of 1929 and the Civil War”

David again.

When Andy Miller used that phrase in relation to the Freddie and Fannie takeover – and he didn’t use it flippantly – I took notice. As you know, here at Casey Research, we believe the unfolding crisis will be one for the history books… but we are not used to hearing such words from a mainstream business executive.

So, why was the Freddie and Fannie takeover so significant? Simply, it puts the economy even further out into deeply uncharted waters, with the U.S. Government now standing directly behind the organizations that, per Bud’s earlier comments, have year-to-date been responsible for guaranteeing some 80% of all U.S. mortgages.

Because the event is unprecedented, the consequences are also unpredictable.

To make that point, consider that since making the takeover announcement, the situation has continued to evolve. Or, more accurately, devolve… evidenced by the following items:

The problem with this move, and it is symptomatic of the problem with the whole stinky mess, is that if you ignore longer-term funding obligations that cause it to balloon into the stratosphere, total U.S. Government debt now rings in at about $9 trillion. Toss $5 trillion onto that number, and you might just scare the wrong people… i.e., the foreign holders of dollars.

If there is one thing you can count on, it is that the Treasury will try to find some clever way to obfuscate the true cost of the bailout, which will be exponentially larger than the $25 billion they have suggested. (Recall that the cost of the Iraq war was initially estimated by the administration at $50 to $60 billion… current estimates put the total at closer to $3 trillion.)

And then, there’s this…

So, what these fine senators are proposing is essentially a 3-month moratorium on paying mortgage payments for many. Other than a testament to the stupidity of career politicians, it represents a huge step in the wrong direction… for taxpayers. I am as sympathetic as the next guy to the challenges now being faced by homeowners. But whether you give a person a 90-day or a 9-month moratorium, if you can’t afford the home, you can’t afford the home. This sort of legislation only assures that the bills mount or the loans go that much more in arrears. And it assures that once the moratorium is lifted, the process of actually cleaning up the mess will drag out for that much longer.

Meanwhile, many of the homes in question will be deserted, vandalized and stripped down to the sticks. And, as Andy Miller pointed out in his Casey Report interview, the disincentives will mount for private lenders to make mortgage loans. Thus, the housing crisis can be expected to continue, possibly for years, setting up a powerful negative feedback loop, with yet more downward pressure on prices, more defaults, more foreclosures, more debt moving onto the back of taxpayers.

But it gets worse.

Now that the government has made it clear that it is in the bailout business, it will be very hard for them to draw the line on who qualifies.

For instance, as we have been talking about for some time now, Lehman Brothers is about to be folded into someone else’s family. And Merrill Lynch is right behind them. As was the case with Bear Stearns, will the government end up as a party to whatever deal is struck? Probably.

Then there is the whole banking sector, which is in deep, deep trouble. It is looking more likely with each passing day that WaMu, a giant, will fail. They will be far from the last, as the trend of bank failures is far closer to the beginning than it is to the end.

And then there is the matter of faltering industry. This from the Associated Press earlier this week…

I love how the lobbyists have thoughtfully packaged their well-timed pitch for the big bucks in the wrapping of “energy independence.” And that part about the auto industry being an essential component to the “backbone of the U.S. economy” is inspired. Funny, I thought the backbone of the economy was the free-market system that, in its less diluted form, was responsible for making the U.S. the world’s richest economy.

But no worries. No responsible politician would authorize a bailout of this magnitude to a group of car makers who, as friend Porter Stansberry points out, collectively have a market capitalization that is less than half the amount being requested.

Okay, okay, Obama, courting the union workers, might roll for it, but not McCain. At least we can count on that.

Well, not exactly. The AP article continues…

“Democrat Barack Obama has criticized Republican rival John McCain for not supporting the full $50 billion loan program. McCain said last week he supported fully covering the $25 billion loan program in the energy law.”
Oh, well.

In my view, the government is desperate at this point… desperate to do something, anything, other than let the chips fall where they may… and must, if the country is going to move on. Instead, as the crisis gains momentum, the government has shown that it will try to manage things, but what it will really end up doing is rushing from emergency to emergency, stepping in again and again as the lender of last resort.

It is an untenable situation. It cannot end well.

Before continuing, I wanted to share a photo from Casey Researcher and daily correspondent Ed Steer of a bear that I think deserves serious consideration as the new poster child for U.S. industry.

What Does This All Mean to Investors?

Earlier this week, I was interviewed by a news service. As we talked, the notion struck me that the interview format might be useful in addressing some of the concerns expressed in the emails I have received lately. And so, with no other interviewer handy, I decided I’d tackle the job myself.

Me: Thanks for making time available today. I can imagine you’re a bit busy, you know, with everything going on in the markets and all.

David: My pleasure. Yes, things are certainly busy, but I’m taking off for a vacation to Portugal next week, so I’ll probably survive.

Me: What’s that music I hear in the background? I can barely hear you.

David: Sorry about that, it’s Polly by Nirvana. It’s actually one of their more mellow songs. Too bad about Kurt Cobain, the guy had a real talent but he couldn’t handle the success and made a lot of bad decisions, not the least of which was frying his brain with excessive quantities of unhealthful stimulants. His later music was truly horrible, but he still managed to secure his reputation by killing himself.

Me: Pretty morbid, but how about we talk about investments? Let’s start with gold. You’ve been very vocal in your bullishness on gold. But as we speak, gold is trading around $750. Are you still bullish, or are you starting to curb your enthusiasm?

David: I’ve never been more bullish. Now, stop rolling your eyes. I’m serious, and here’s why. When trying to understand where investment markets may be headed in the future, we have to largely rely on a combination of hard facts and observations of cause-and-effect relationships that history has shown to have some correlation.

So, what are the hard facts of the situation today? Well, for one thing, we are in the grips of a truly monumental financial crisis, one for the history books. We have the government essentially taking responsibility for over half of the mortgages in the nation, and by passing “anti-predatory lending” legislation and otherwise messing in the free market, assuring that what few private lenders there are still in the mortgage business will soon exit. We also know that the housing bubble was the largest in history, on the order of $30 trillion. And we know that that bubble, and all the little bubbles that spun off from it, were critical drivers of U.S. consumption which, in turn, was a critical driver of global economic growth.

And we know that the housing bubble is now deflating, quickly, with absolutely no turnaround in sight.

Me: That sounds deflationary.

David: No question. As Terry Coxon put it so succinctly, we now have an economy where lenders are afraid to lend, and borrowers are afraid to borrow. That is not a formula for economic growth but contraction. But it is important to interject the factor of time into this discussion. Is the economy in a downturn? Absolutely. Will investments that suffer in an economic downturn suffer in this downturn? Absolutely. Will the government do everything in its power to try to curb this downturn? Absolutely.

Which is why I remain so bullish for gold. While gold is temporarily out of favor with the trading herd, in this day and age, information moves quickly. As the government redoubles its efforts to fix all the many ails of the U.S. economy – and its only real power comes from the printing press – Mr. Market will take note and the pendulum will shift back towards tangibles.

Me: What about the rebound in the dollar?

David: There is a very high correlation between gold and the dollar…and between gold and oil, which is, of course, priced in dollars. It’s hard to argue with the contention that the U.S. dollar was oversold, and that oil was overbought. So, the U.S. dollar has had a bounce, as was inevitable because trees don’t go to the moon, and no investment moves in just one direction. And oil corrected, for much the same reason. As a consequence, gold took a big hit. But what happens as the crisis continues to unfold and the trading herd remembers that the U.S. dollar is trash? Oh, and so is the euro and the pound and the yen? Where is the money going to go next? The Chinese renminbi? Sure, some of it might… but I have to believe that more and more of it is going to find its way into gold.

I recently commented that the 24-hour trading volume on currency futures contracts is worth about $3.2 trillion. Against that number, gold trades about $26 billion and silver just $4.5 billion. When the currency traders start looking for their next safe harbor, I have to believe that some small percentage is going to head into tangibles. And what’s more tangible than gold?

It may not happen overnight, but it will happen. And when it does, the gold price is heading back toward $1,000 in a hurry.

Me: What about gold stocks?

David: To answer that question, you have to start by separating the gold stocks into two categories; the junior explorers and the producers.

Starting with the latter, I remain very bullish on the big producers. At today’s gold prices, the good ones, such as we follow in BIG GOLD, are throwing off large amounts of free cash. How many other sectors can you say that about these days? But the story is even better, because the stocks have been punished along with the broader market and with gold. Thus, they are selling for ridiculously low valuations, by just about any standards.

Historically, there have been a number of occasions where the gold stocks have initially fallen with the broader markets, but then snapped back relatively quickly and head to new highs. I think we’ll see this pattern repeat, and I don’t think we’ll have to wait overly long for it.

There is one other factor in the favor of the big gold companies, but it’s not particularly good news for investors in the junior exploration companies for the near term. Namely that the cashed-up big gold companies are beginning to pick off the juniors with serious deposits that lack the cash to make forward progress in these challenging times. And, thanks to the current market conditions, they don’t have to pay big premiums for those companies. So, that’s a big plus for the producers, but not so good for some of the juniors.

Me: Speaking of the juniors, seems like you should have seen the meltdown coming.

David: We certainly didn’t foresee the depth of the pullback in the juniors. At this point, the losses on juniors are a similar scale as those suffered by investors in the financials, which we did anticipate. In our defense, we did make a couple of moves relatively early on that I think were important. The first was to recommend selling all our appreciated base metals juniors back in August 2007, locking in big gains. Our rationale back then was that base metals were particularly susceptible to the economic downturn we saw coming, and that made it all the more important for subscribers to take their considerable profits off the table.

The other move, made around the same time, was to begin tightening up the portfolio of our remaining stocks, shifting our focus primarily to the highest-quality juniors involved in advanced stages of gold exploration. That was consistent with our view that gold’s role as a monetary metal would become highly valued in the economic crisis. That view hasn’t changed, but the structural underpinnings of the junior resource sector has taken a major hit, causing even the highest-quality juniors to suffer big setbacks.

Me: What structural damage are you referring to?

David: First and foremost, there has been a flight from risk. And we have never made it a secret that the junior resource stocks are risky – it’s what gives them such wonderful upside – which is why we constantly remind investors to only take positions with a relatively small percentage of their portfolio.

Regardless, in the process of trying to reduce risk, an increasing number of investors began trying to unload their juniors, at the same time that buying interest was drying up. That has effectively kept the lid on most of the stocks, even those that have delivered the drill results needed to confirm they are sitting on a major new deposit.

The situation has been exacerbated by a wave of redemptions by investors in the funds that had moved into the smaller resource plays – RAB Capital being the latest example. To meet those liquidations, the managers have been forced to sell, almost without regard to price.

So, ironically, just when everything should be breaking the way of the juniors, they are struggling.

Me: Is it time to throw in the towel on the juniors?

David: Personally, I’m holding. But I am doing so because the positions I own that actually matter – to wit, those of any real size – are all in companies that used their shareholder capital efficiently to discover and/or prove up significant discoveries.

And, per our criteria for the vast majority of the companies we are following in the International Speculator and Casey Investment Alert services, the companies I own are well cashed up and have proven management teams. It is highly unlikely that the deposits they have found are going to be returned to the former property owners or dumped in a fire-sale… at least not as long as the cash holds out. And they have cash.

So, I think, in the longer run, they’ll come out a lot more than fine. Could they get cheaper in the short term? Absolutely. If a fund is forced to dump everything, then quality is no longer a protection; in the short term, the stock is going down.

Between now and the end of the year, I would only look to invest in very special situations. A recent example was a company we brought to the attention of CIA readers on August 15 that subsequently announced a major discovery, giving readers a quick opportunity to lock in a gain of as much as 75% within a couple of weeks. But, as we expect to see in this market, the stock has since come back a bit, though we’re still well in positive territory.

So, the special opportunities are out there, but they take a lot of work to uncover. Fortunately, hard work doesn’t bother people around here very much.

But returning to something I said earlier, we really can’t know what tomorrow is going to bring. With market conditions as volatile as they are today -- and I expect things to get violently volatile before this is over – who is to say that gold doesn’t do a runner through $1,000 almost overnight? That could be a big game changer, and it is certainly not out of the question given the powerful uncertainty hanging over the global economy just now.

So, personally, I’m maintaining my positions in the juniors and looking to raise cash for the truly amazing opportunities I think the quality juniors are going to offer once things bottom early next year. At the point where there are no more sellers, these stocks are going to explode to the upside. As Rick Rule put it in my recent call with him, and Rick is one of the most successful resource investors ever, he is becoming very, very bullish on the better-quality juniors.

If I was pressed to it, I would say that the companies that we are following in the International Speculator and the Casey Investment Alert are going to do exceptionally well next year. We’ll have to get through this lag between the cause of their finding a major deposit and the effect of getting paid for it, but they will get paid.

I know that many of Aurelian’s shareholders were disappointed by the price that Kinross paid for them – but the number worked out to be about $88 per ounce in the ground. Not really all that bad, given that that ground is located in a very politically unstable place. By this time next year, the premium on good deposits, in good jurisdictions, should rise considerably.

Me: You focused your comments on the quality junior resource companies. What about the other 95%? You know, the paper tigers with indifferent management, small or non-existent mineral deposits, and little to no cash?

David: If you own any stocks that fit any part of that description, I’d be looking to beat the market to the punch by selling as soon as possible. Certainly before any serious year-end tax selling gets underway.

The bottom line is that bad companies will have a very bad outcome, simply because they are not going to find the cash they need to survive.

Me: What about base metals? Still bearish?

David: The world’s manufacturers are not going to all close up shop and go away, no matter how bad things get. Despite the big run-up in the prices of many base metals, copper for example, supply inventories throughout the period have not shot up as you might expect they would. So the supply/demand remains fairly tight, and we expect it will continue that way for the foreseeable future.

Our big concern about the base metals has been a sell-off due to broad concerns about a major economic downturn. Since our sell signal last August, we have seen much of the froth come off the base metals and, in the case of some of the metals, a steep sell-off. As the depth and scope of the crisis become widely apparent, we see base metals becoming oversold. At that point we expect to be buyers, competing for our shares with the end users who actually need the feed for their smelters or for their factories.

Me: What about oil? Given the positive correlation with gold, the outlook for oil seems important.

David: It is. While oil, like base metals, may take a few more hits as recession fears spread, the medium to long-term outlook is very bullish. As we have discussed at some length in Casey Energy Opportunities, on the order of 70% of the world’s production is now in the hands of state-run energy companies. That’s important for two reasons.

The first is that, unlike a private company where management has to be attentive to the expectations of shareholders, a government entity will respond only to the wishes of officialdom. As Rick Rule points out, governments have, for decades, dedicated large percentages of their oil revenues to the task of mollifying their populations with all manner of social programs. That money is not being spent to find and develop new fields. Which, in turn, assures that oil supplies will remain tight, and shortages are a locked-in certainty in the years just ahead.

Similarly, I have written about Jeffrey Brown’s Export Land Model, which shows that Mexico will go offline as an exporter to the U.S. within the next six years. While much of that has to do with geology, there’s no question that a diversion of oil revenues to social programs has limited new exploration.

Then there are the geopolitical aspects. If the big oil-producing countries, which include Russia, Saudi Arabia, Iran, Venezuela, think the price of oil is getting too low, they have it in their ability to stir things up or organize a cut in production, and loudly announce same, to drive prices back up. There are a lot of geopolitical apples in the air just now, not the least being the very real potential for an Israeli attack on Iran.

And just today, Venezuela tossed the U.S. ambassador out and announced it is withdrawing its U.S. envoy. Despite all his bluster and bravado, Venezuela is still the third or fourth largest supplier of oil to the U.S., depending on the day, so, who knows, maybe this time around Chavez ends up cutting off the U.S. and redirecting the country’s oil elsewhere? If there is one truth about history, it is that anything can happen at any time.

So, the outlook for oil remains strong. At least until we get the inevitable breakthrough in technology, I think it will be solar, that changes the entire game. But before that happens, the odds are high we’ll see $200 a barrel.

Me: What about other opportunities?

David: Now you’re talking. In a time of great crisis, there is also great opportunity. It’s all a matter of orientation. Being aware of the scope of the problems now challenging the global economy – and a surprising number of investors are still unaware of just how serious this situation is -- gives you a real leg up in positioning your portfolio to profit. In fact, it is getting hard to keep up with all the many ways to profit from this crisis, though we’re certainly giving it a good try in The Casey Report. Shorting regional banks with portfolios stuffed to the gills with condominium mortgages, or anticipating the inevitability of rising interest rates, or shorting financials, or buying more gold at today’s low prices, or buying natural gas companies on the cheap… and… and.

In the final analysis, I am sorry to say that the common man is going to take a serious hit here. But for the uncommon man, and by that I mean anyone actually willing and able to act decisively at the right time in the right sectors, the potential to earn investment fortunes in the next year or two is very real.

We see it as our job to keep our readers up to date on the unfolding situation and on the ways to play it. It’s a job we take seriously, even though we do sometimes talk to ourselves.

Taunting the Tiger

You may recall the tragic tale of the teenagers, encouraged by the liberal application of pot and alcohol, who thought taunting the tiger at the San Francisco zoo last year was a good idea, a notion that changed quickly when the tiger jumped the fence and expressed his displeasure in that special way only angry tigers can.

I recalled that story when reviewing the following story emanating, as usual, from that towering bastion of hijinks and stupidity, Washington D.C.

Now, rules are rules and all that, but at this particular moment, Congress might want to look the other way on new legislation to tax foreign investors in the U.S.

After all, should the IRS succeed in its endeavors in this regard, it might, just might, make the U.S. less attractive as a place for foreigners to park funds. And right now, I think the U.S. probably needs all the investment capital it can get.

Why, no sooner had those words rolled onto the screen than the following popped up in an email from the ever reliable Mr. Steer…

http://www.chinadaily.com.cn/china/2008-09/12/content_7020656.htm

I suspect, but can’t know, that given the general environment where bonds will soon look like a really, really bad idea, and stocks won’t look much better… at least not those in the U.S., given the proposed IRS enforcement, coupled with that whole collapsing financial markets thing… the Chinese and others in Asia will see some wisdom in adding some more precious metals to the portfolio mix. It wouldn’t take much more than a percentage point or two of $4 trillion to do some pretty amazing things to the price of gold.

A Very Useful New Service

Last week, I finally found time to do something I have been meaning to do for years but have always put off: I sent off a bunch of my old VHS tapes to be transferred to DVD.

The tapes, from my youth and my family life, have been gathering dust and slowly degrading.

Well, anyway, I finally got around to researching the best way to handle the transfer and settled on the Photo Archival Company. I don’t do a lot of product endorsements, but the service was so excellent – including changing my delivery instructions over the weekend – the prices so reasonable (about $10 a tape) and the quality of the transfer so good, I highly recommend them.

I was particularly amazed that they were able to successfully transfer, and retain the quality of the initial recording, of one tape that was almost 25 years old, of a very strange adventure I was involved with in Africa.

In any event, as I suspect you probably have old VHS tapes or Super 8’s, whatever, lying around, you may find this service as useful as I have. Check it out.

Miscellany

Good perspectives on gold. Frank Holmes, the top-performing gold fund manager, often comes across interesting facts and insights, which he shares on his website (you can read some of his recent postings by clicking here). Recently Frank co-authored an excellent book on gold investing, titled GoldWatcher. It’s quite well done and well worth the price, even though it’s not available on Kindle yet.
Orange County phyle starting up. If you live in Orange County, California, we have a subscriber who is willing to organize get-togethers. Drop us a note at phyle@caseyresearch.com.
Doug takes on James Carville and Fred Thompson, live… The annual New Orleans Investment Conference is coming up, Nov. 13 – 17. It has become something of a tradition for the organizers of this long-running event to put Doug Casey up against all manner of opposition in a debate format. This year’s challengers should be particularly interesting, especially Carville, who is famous for his rapier wit. Can Doug prevail against this media slick? Only one way to find out… be there. More details on the conference can be found here.
Music makes the world go round. I was thrilled to get so many emails with so many great songs I have never heard – and reminders of many great old songs I have. I was going to do a compilation of all your recommendations in this edition but ran out of time, so I will save that for the edition after next, when I am back from Portugal. Until then, thanks to all of you who took the time to write with your favorites!

And Finally…

And with that, I will sign off for this week… and for next as well, as I’ll be visiting with friends in Portugal. As I sign off, gold is trading up at $753, and the U.S. stock market isn’t open yet… I started quite early today. But a glance at the news suggests another rough day... with retail sales falling further and Lehman teetering.

One item of interest to gold investors, a group I am happy to belong to, has it that U.S. Producer Prices fell 0.9% in August. At first glance, that might seem a reversal of last month’s robust gains. But scratch at the data a bit, and you find that producers paid 9.6 percent more for goods in August 2008 than they did in August 2007. And, taking out food and energy, you find that the gain in “core” prices in August was 3.6%, the biggest year-over-year increase since 1991.

Even so, you can expect the pundits to point to the data as a sign that the inflation has been tamed, giving the government yet more license, as if they needed it, to belly up to the money bar.

Which brings me to one final item before I sign off.

The days ahead are going to try the mettle of most people and the quality of our lives will, in the end, be determined by how well we cope. It is important to keep things, good and bad, in their proper perspective. There’s more to life than money, and we as a species are truly resilient.

In that regard, I think the photo here, from Ireland during a recent flood, strikes a resonant chord.

Next week Olivier Garret, our hard-working CEO, will be writing this column.

And so, until the week after next, thank you for reading and for being a subscriber.

David Galland
Managing Director
Casey Research, LLC

Views from Vancouver

David Galland — Wed, 21 May 2008 16:02:57 GMT

By David Galland, Casey Research

With the downturn in the precious metals markets making even the most stalwart investors question their instincts; it's good to have some advice from the field about what is really going on out there. Here today David Galland, of Casey Research (publishers of Casey's International Speculator) offers some insights into the current state of the precious metal... and what to look for in the companies that mine it.

I have just returned from my bi-monthly pilgrimage to Vancouver, known by many as the Mecca of Mining – or at least to the junior mining exploration sector – to check in on our research team there and to reacquaint myself with the buzz in this hotbed of hot stocks.

If I were pushed to name one impression over all others gained during my trip, it would be the general state of gloom hanging over the place. Were I a writer of the genre of Cormac McCarthy, I might try to describe the mood thus...

"He arrived to a dark sky and laid down on the cold cement and felt the wet of it soak through the back of his suit. He wanted to call a cab but wanted more to sleep here and now."

This, of course, is a far cry from the Vancouver vibe in frothy times, when the deal flow is humming and the investors are biting at every new stock like trout at live bait. In those happier days, the community of junior mining "professionals," a term I use loosely, are a positively effervescent lot. With their fine Italian leather shoes, shiny suits and attentively coiffed hairdos, they positively bubble over with the money they are making by selling large handfuls of the freshly printed paper that is mostly the stock of their trade.

But with a damp fog enveloping the sector since last August, the streets of the town are quiet, the conversations subdued. One sure sign of how dire the outlook is, is that I was asked four or five times, "So, what do you think about technology plays?"

(For those of you new to the Vancouver market, it may be helpful to think about it like one of those multi-colored, multi-cartridge pens most often found in close proximity to members of the local high school chess club. When red is the color of the day, then red it is. But when that falls from favor, a quick click and you are writing in green or perhaps turquoise. In the Vancouver market, when mining is out of favor, the promoters go "click" and just like that, their unwanted mining shells become technology plays.)

While I don’t sense that things have gotten quite that bad, there is no question that they are bad. But bad is a relative term, because it is in a market like this that the smartest speculators plant the seeds of fortune.

On that topic, a couple of further observations...

It’s a buyers market. My many conversations over the past two days have been punctuated by tales of well-known promoter types being unable to close financings, even small ones. Translation: if you are going to invest at this point, be selective, try wherever possible to get into private placements where you can get a share and a warrant... and be firm on the terms you will require in exchange for your money. The mining promoters need you a lot more than you need them.
On a practical level, when a mining promoter tells you that you better hurry up and get your money in because a deal is going to close, be skeptical. If you like the management, and you like the project, tell him that you are only investing in deals with a two-year warrant on good terms.
Stick with quality. Make sure your portfolio is made up only of quality companies that are well cashed up and able to deliver on their aspirations. A number of "wannabe" companies are running out of cash and will either have trouble finding that cash or be forced to offer terms that will be significantly dilutive to existing shareholders.
Watch the cost side of the equation. On companies that are in the feasibility phase, look hard at the potential for bad news on the capital expenditure front. Few things will send a stock down harder than the revelation that the mine they had expected to bring in for $400 million will now cost upwards of $1 billion.

As for the opportunity, the Wall of Worry about the sector now looms so high, it is almost as if we have been pushed back to the "Stealth" phase, the phase where no one wants to hear about the Canadian junior exploration stocks. That spells opportunity, because when there are only sellers and few buyers, the only direction a stock can go is up... once the dust settles. But only for the quality companies; the paper tigers are doomed.

The bottom line: Keeping your eyes firmly fixed on the prize and today’s soft markets means you can get positioned into great companies at deep discounts from where they should be trading. And certainly will be trading, when the broader market understands that the commodities bull market is very much intact and that if you want to buy into the sector, you invariably will have to do it on a Canadian exchange.

David Galland is managing director of Casey Research, publishers of Doug Casey’s International Speculator, now in it’s 28^th year. New subscribers are invited to try a subscription for three full months with the security of a 100% money-back satisfaction guarantee. Learn more and sign up now.

The Room : Casey Research

The Room – 07/10/2009

Opportunity Knocks

Playing the Bounce

Speaking of Unemployment

What Really Makes the World Go Round (and How to Profit from It)

Statehouses in the Poorhouses

Report from CYCLE

Too Funny

Miscellany

And That's That for This Week

The Room – 06/12/2009

Health Care, Everyone?

No More Big Bucks for You!

Fortunately, We Have the Law

Capital Gains… What Capital Gains?

The Road Less Traveled

21 Economic Models Explained

Promoting Free Market Economics…

Miscellany

The Room – 05/22/2009

Crime Scene

Just So You Know

Tar Baby

Confidence Inspiring 101

Random Thoughts

Tech Talk

Miscellany

The Room – 02/20/2009

Making It Up on the Fly

Credit Capitulation

About That Whole Deflation Thing…

China Dumping Dollars?

Let’s Talk Gold

Shattered Hope

Just for Fun

A Really Good Read

Miscellany

The Room - 01/30/2009

Turnaround in Interest Rates?

Bait for the Two-Legged Rat

Obama Watch

Go Gold!

Miscellany

The Room - 01/23/09

Obama at the Bat

Swearengen on the New Administration

The Continuing Crisis

Crisis & Opportunity Summit Update – Going, Going…

And That’s It for This Week…

The Room - 10/03/2008

Do You Know How the Fed Is Managing Your Money?

Call Us Utopians... or Free Marketers

Oink! Oink! For Shame!

The Big Debate

World on the Edge

More on the Global Situation

An Interesting Perspective on European Energy

Blarney Barney

Miscellany

The Room 09/12/2008

The Biggest Bailout of All Time

Unusual Aspects

Implications for the Future

David Again, With a Public Service Announcement

The Reason Paulson Panicked

“On a Scale with the Crash of 1929 and the Civil War”

What Does This All Mean to Investors?

Taunting the Tiger

A Very Useful New Service

Miscellany

And Finally…

Views from Vancouver

What Really Makes the World Go Round
(and How to Profit from It)