The Room : China

The Room – 04/03/2009

David Galland — Fri, 03 Apr 2009 15:00:00 GMT

Dear Readers,

In the March 6, 2009 edition of this missive/blog/column/whatever you want to call it, I listed three "Desperate Measures" the U.S. government might turn to next in its futile attempt to rearrange the ruined economy into something more resembling a perfect world.

Suspend "mark to market" rules. At the time of my initial write-up (which you can read here), highly placed sources within the financial services industry that I spoke to were of the opinion that no significant changes would be made, for the simple reason that to do otherwise would risk destroying what little credibility was left for the financial sector.

As you now know, the government has strong-armed the FASB into modifying the rules, essentially allowing companies to "mark to model." Which simply means that the same financial wizards who helped create the models so pivotal to causing the mess in the first place are now free to dust those models off, give them a little tweak, and use them to fabricate more attractive values for the toxic waste than the market was willing to assign. Some might term these rule changes outrageous, fraud even... I call it business as usual.
Bad bank. The government has moved forward with this initiative as well, essentially rigging up a system that literally guarantees that a very small handful of firms -- likely just four or five -- will receive the sweetheart deal of the century, at the same time that the U.S. taxpayer gets the short end of the stick… right up the side of the head.
Fed buys long-term Treasuries. This, too, has now come to pass and is likely to accelerate. While there are many ways that one could describe this latest initiative, I find it best to keep these things simple... it's called inflation.

Maybe next week, I'll try to come up with some new candidates for desperate measures, but for now I would like to turn my attention to the much-anticipated and widely watched G20 meeting that has just wrapped up in London.

I imagine, because it is such a headliner event, many of you expect me to wax with some vitriol about it, but I fear I must let you down.

Sure, it bothers me that our president traveled to the event with an entourage of 500, including secret service agents, paper carriers, and other lucky sycophants -- all of whom were put up in grand style at taxpayer expense. (By way of comparison, my Portugal-based correspondent General Watson reminded me that when Maggie Thatcher was prime minister, for state visits, she used to travel commercial with a small group of aides. Often times, the other passengers were unaware she was even on the plane. )

This sort of excess is somewhat ironic and maybe even a little hypocritical, given Mr. Obama's derogatory comments about companies flying executives to corporate meetings in places such as Las Vegas, a topic I briefly touched upon last week.

I cannot begin to imagine what sort of costs are involved in transporting all those people -- along with three presidential helicopters and any number of stretch armored limousines -- to Europe, then keeping them in clover for a week... but I suspect it would be more than enough to keep the occupants of a moderately sized city in some third-world country in food for a decade or so.

G20 Meeting, Who Cares?

While I often don't succeed, I try to focus these weekly comments on matters that are actually of some importance -- on a broader scale, and to me personally. With that filter in place, the G20 meeting barely registers a blip.

Sure, there were a lot of fine-sounding speeches by politicians, but since when are those worth the paper they are written on? And yes, they managed to agree in principle to give over $1 trillion to the IMF – a topic I’ll have more to say about in a minute. In addition, they promised to collectively put the shoulder to the wheel in an effort to create a massive, new, global regulatory regime.

Run for cover? Hardly.

On the radio yesterday, I heard an African intellectual bemoaning the fact that the G20, by its numerically limited scope, excluded the representatives -- and therefore bypassed the inputs and opinions -- of over 180 other, lesser nations whose names did not make it onto the invite list.

Now, let me ask you, when it comes to implementing the high-sounding pronouncements that emanated from the G20 meeting, what are the odds that this collection of talk-a-crats will actually be able to come together to the extent required to create a functioning bureaucracy that delivers on its promises at any time in, say, the next 1,000 years?

Which makes the laments of the above-mentioned African intellectual all that more laughable. Can you imagine political junket-goers from 200 countries getting together and accomplishing anything other than drinking the hotel bar dry?

For the source of my skepticism, look no further than the United Nations.

(One thing I do find mildly amusing at gatherings such as the G20 is a circus of professional protesters who flail their thin arms at the rather better-equipped, truncheon-wielding security forces. The source of my humor is that the vast majority of these individuals are there to encourage the representatives of the world's governments -- the very same governments whose names should appropriately be entered into the blank following the question "Who is most responsible for the mess the world is in?" -- to further expand and extend their powers. Memo to protesters: the solution to bad government is not more government.)

The IMF

It seems somewhat ironic that the IMF, which was founded in 1944 as part of the Bretton Woods arrangement, should now be viewed as a possible source of the world's salvation.

In the way of history, its original purpose was to "promote international monetary cooperation," specifically by attempting to maintain fixed exchange rates for the world's many currencies. The idea was that the IMF would step in whenever a country suffered from a temporary deficit in its balance of payments. To help the country avoid having to debase its currency to meet its external obligations, the IMF will provide a short-term loan. These loans came with "strings" attached, in the form of various demands for monetary reform following the Keynesian principles favored by the functionaries of the organization.

According to a briefing paper prepared by the CATO organization for Congress (which they'll never read anyway)...

Read the complete paper here

In addition to spawning a coterie of kleptocrats around the world, the IMF has also failed miserably in its role of managing the global monetary system, witnessed by the persistent inflation the world has suffered since its founding.

(As for the fixed rate system it was supposed to be managing, that came to a sudden halt when the U.S. government closed the window on gold convertibility, a central tenet of the same Bretton Woods agreement that birthed the IMF.)
So what function does the IMF currently serve? Shedding light on that topic is Ken Ewert, writing in The Freemen...

Why then, the widespread support for the IMF? The reason is more straightforward than many of us would like to believe. When governments speak of the need for "increased economic coordination," what they mean is that governments around the world want to better synchronize their inflationary monetary policies. Inflation is politically expedient for every government in our age. It temporarily stimulates economic activity and in so doing buys considerable political favor. Only later when the unpleasant effects appear -- rising prices, economic dis-coordination, consumed capital, and unemployment -- does the inflation become a political liability. The illusive goal pursued by governments around the world is to reap the political benefits of inflation without paying its subsequent costs.
Even so, perhaps out of sheer frustration or even spite, the Chinese, Russians, and any number of other nations are now openly discussing the idea that the IMF should be given both the resources and the responsibilities to create a new international monetary regime that would serve to demote the U.S. dollar to just another currency, albeit a still very important one.

Ed. Note

The G20 moves the world a step closer to a global currency

Read it here.

Many observers assume the Chinese are bluffing when they raise the topic of pushing the U.S. dollar aside as the world's reserve currency... or that these comments were otherwise cooked up in a Beijing political meeting to give the Obama administration pause in its headlong rush to debase of the U.S. dollar.

Those assumptions could prove wrong -- the Chinese may be sincere in their calls for a new monetary regime. I say that after reading a paper written by Zhou Xiaochuan, governor of the People's Bank of China, titled "Reform International Monetary System. ”

I highly recommend that you at least give the article a quick scan, because it shows that Zhou has a clear understanding of the various monetary systems and a clear preference for currency that is "anchored to a stable benchmark and issued according to a clear set of rules." He goes on to take a direct shot at the world’s fiat monetary system, saying, correctly, "The acceptance of credit-based national currencies as a major international reserve currencies, as is the case in the current system, is a rare special case in history."

Read his essay by clicking the link here.

As per above, I am completely confident that despite China's wishes, the world's leading governments won't be able to get out of their own way long enough to produce a new monetary system -- let alone one that is based on something other than political hot air. That leaves the door open for a single country to decide to break the mould by backing its currency with gold or some other basket of tangibles. That, of course, we shall watch for with some anticipation.

Before leaving this subject, I thought I'd share the contents of a message that our own Bud Conrad sent across this morning on the topic of China and the beefed-up IMF Special Drawing Rights...

The IMF's Gold

Those among you who find gold to be an attractive asset, which I suspect is most, are well aware that this week the IMF announced that it was likely to sell off 400 or so tons of gold in order to continue supporting the borrowing habits of its regular clientele.

While these special sales have been threatened in the past, this time around it looks like it might actually happen. While the idea of the sale might spook the gold markets for a bit, the actual event is likely to have little if any lasting effect… other than continuing to hollow out the IMF.

That's because the odds are very high that the gold will never actually make it onto the market, but instead will trade hands in an off-market transaction between the IMF and the Chinese or some other nation looking for the earliest opportunity to trade its much abused paper dollars for something of tangible value.

At this writing, of China's $2 trillion in reserves, only about 1% is held in gold. There has been credible talk of them boosting that percentage to as much as 10%.

At $900 per ounce, the math looks something like this…

At 32,000 ounces per ton, 400 tons equals 12,800,000 ounces. Multiplied by $900, we arrive at a total value of the intended IMF sale of $11.5 billion.

Ready to be deployed against that amount is as much as another 9% of China's $2 trillion reserves -- which adds up to $180 billion. And that's just China. Of course, there are any number of other countries sitting on piles of U.S. dollars and viewing the outlook for those dollars in fairly negative terms.

So, sure, the notion of a big IMF gold sale might spook the gold market a bit… but in the final analysis, it will amount to less than a hill of beans.

The Closing Door

Speaking selfishly, a human trait I won't apologize for, the headlong rush of global governments to debase their currencies might be viewed as something of a positive. That's because, being aware of it, we can take steps to arrange our investments in such a way that we should be able to profit from it.

Unfortunately, the currency debasement is only one of many actions we can anticipate that governments will take going forward. Because as they set about destroying their currencies, they’ll simultaneously be looking to raise revenue elsewhere -- specifically by squeezing the productive segments of society out of whatever money they can. But of course, until they actually put up The Wall, most people of means, in most countries, are still free to pick up their bags and move to climes where their capital is better treated.

Understanding that, one of the major initiatives that came out of the G20 soirée just ended was a rededication by the world's bureaucrats to tighten the vise on any country deemed to be overly capital-friendly. Doug Casey, who has long anticipated these developments, has warned that time is running short for U.S. citizens in particular to diversify globally.

Specifically, the gang of 20 announced they were going to use a list just published by the Organization for Economic Cooperation and Development to aggressively go after "tax havens." Regrettably, that list includes names such as Costa Rica and Uruguay, places that we know many of our subscribers have an interest in.

The implications of these moves on personal freedom are not to be sniffed at. While the G20 countries may lack the organizational skills to create a functional new monetary system or widespread regulatory regime, it is a fairly easy matter to apply financial pressures on “errant” countries. They have a lot of experience in that regard. And so, to quote the G20 communiqué on the subject, "We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over."

Few nations can stand up to the pressure of global sanctions, and so many if not most of those nations are likely to roll over. The only way to stave off this latest assault on the free flow of money would be if there were an eruption of a widespread public outcry, complete with rampaging mobs and a liberal throwing of rocks. But as you and I both know, that’s not going to happen.

Some of you may think that I am making much ado about nothing, but I believe it's important to view these sorts of developments not based upon the world as it now is… but rather as it could be.

That exercise is usually helped by taking a quick glimpse in the rearview mirror. And, looking back over history, you can find any number of examples where despots have taken control of governments and engaged in the wholesale confiscation of private property, either overtly or through determined inflation.

Up to this point in time, with some limitations, a person could always take some comfort in the idea that -- should push come to shove -- they will be able to escape to another jurisdiction with enough wealth to start over again.

In the brave new world we are headed for, that simply may not be possible.

As something of an experiment, I recently walked into a bank in Uruguay and asked for the papers required to open an account (one, I can assure you, that I would have fully disclosed), but was told in an apologetic tone by the bank manager that they would not accept accounts from Americans.

The door is closing, the noose tightening.

Letters from You

David again... as JK's email confirms, while there has been a huge pick-up in the interest in gold compared to even a couple of years ago, we are nowhere near the mania phase. In fact, if you step back and look at the situation dispassionately, you’ll note that gold has remained strong not because of but in spite of the current economic environment. An environment that includes, of late, a clear deflationary trend pretty much across the board in the commodity sector.

All of which is to say that once the environment for gold begins to change for the better and the consequences of today’s inflation begin to be widely felt, then and only then will gold really begin to move. In the interim, we can expect gold to fluctuate, which – for those of us who are comfortable getting positioned now, ahead of the crowd – simply means additional buying opportunities.

Miscellany

I'm sure the orphan will thank them later. It’s good to know that the poor orphans are safe from the horror of being adopted by zillionaire rock stars. Thanks in no small part to human rights groups, led by the Human Rights Consultative Committee, a coalition of 85 groups that apparently have nothing else to do with their time and their donors’ money, the Malawian government turned down Madonna’s request to adopt a second orphan from that country. Why should they oppose this adoption? Easy, it was out of heartfelt concern that the impoverished orphan might enjoy a better life than they. (Click here for more)
Kick them when they're down. This item also got my attention this week... “March 31 (Bloomberg) -- A Senate panel approved new restrictions on credit-card interest rates that are broader than those adopted by the Federal Reserve in December, brushing aside objections from Republicans and the banking industry.

“…The bill, known as the ‘credit card bill of rights,’ also would require the signature of a parent for a borrower under age 21, unless there’s proof of independent income or completion of a financial education course.”

So, let me get this straight. First the government bails out the banks, then promptly handcuffs them in their ability to price for the elevated risk of credit card loan losses, assuring that the money provided them will soon get flushed down a rat hole. Or, more likely, they’ll just stop offering credit. But wait -- isn’t that the very problem the government is trying to fix?

Now, I'm no fan of many of the practices of credit card companies, but I'm even less of a fan of the government establishing what is essentially price controls on the credit industry, with an added dose of nanny state thrown in via the requirement that adults – and anyone over the age of 18 is certainly an adult – must first take a course in finance prior to being allowed to get a credit card.

Do I think that adults will benefit from taking courses in finance? Of course. Do I think that they should be forced to it? Absolutely not. What's next, mandatory courses in parenting before being allowed to have a child?
Soup lines. Many commentators have observed that all that the current financial crisis is missing now is the sight of soup lines around the blocks of our cities. Actually, there's a reason these haven’t yet appeared. Namely that, thanks to the innovation of food stamps, the inconvenience of a soup line is no longer necessary. And at this point, according to a report just released by the Agriculture Department, fully 10% of Americans are now relying on food stamps for some portion of their daily bread. That is roughly 32,000,000 people – a very long line, indeed.

And on that unhappy note, I must sign off. As I do, a quick glance at the screens tells me that the S&P 500 is flat, taking a breather after the strong gains of last couple days. Given the onslaught of continued bad news, including the latest, poor unemployment numbers, the stock market should be in a freefall at this point.

And it probably would be if it hadn’t been buoyed up by the change in the "mark to market" rules that will soon usher in a new era of obfuscation and outright deceit. Those changes will also serve to extend the current downturn, for the simple reason that they postpone the value discovery process that ultimately must occur in order for some semblance of confidence to return to investment markets.

In the history books, I suspect that the best they'll be able to say about these rule changes will be "it seemed like a good idea at the time."

Meanwhile, I note that gold is below the $900 level for the first time in a while. I'd be very surprised to see a drop to below $850 anytime soon, and maybe never. If it were to happen, however, I’d be just one of many on the phone to the bullion dealer.

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

Sincerely,

David Galland
Managing Director
Casey Research

The Room – 03/20/2009

David Galland — Sat, 21 Mar 2009 03:36:00 GMT

Dear Reader,

I worry I shall disappoint you today. After all, how can mere words, pecked out awkwardly on a shaky airplane table, adequately communicate all that has occurred this week?

As regular readers may guess, the plane I am on is taking me to Las Vegas for our sold-out Crisis & Opportunity Summit. While the event was deliberately scheduled to give the Obama administration an opportunity to reveal its cards after having been handed Bush's busted hand, the timing has turned out to be especially propitious, coming as it is at the end of a week that seems to be of some historic significance.

Of course, we wish you were joining us here in Las Vegas -- if you aren't -- but as your correspondent, I will certainly include notes from the event in next week's missive. But that is then, and this is now.

And now, everything is going to hell.

Bernanke's Gamble

Last week I posed the rhetorical question, "Wen is Enough?" in which I mused about the possibility of the Chinese cashing in their dollar chips and turning inward with their investing. Analysts of every stripe pooh-pooh that idea, intoning that the Chinese are now stuck with their dollar reserves, and that, further, the U.S. Treasury market is the only one with sufficient liquidity and safety to meet the needs of cash-rich foreigners.

This week we saw two developments related to this story.

The first was the Treasury International Capital (TIC) report. It is data released by the U.S. Treasury on international purchases and sales of U.S. assets. When foreigners are purring contently, the TIC report confirms that foreign investors are buying up U.S. assets, particularly long-dated Treasuries, as those represent a long-term bet on the U.S. economy and, by extension, the dollar.

Conversely, when foreigners are unsure about the outlook for the U.S., the TIC reflects this by confirming a sell-off of U.S. assets, coupled with a shift in what Treasury buying there is from the more optimistic long-term end of the time scale, to the skittish "ready-to-bolt" short-term end.

Which brings us to the just released January TIC, which was, to use the word selected by one reliable observer, a "disaster."

Our own Bud Conrad, writing with one wing (the other being smashed up in his rather spectacular bicycle accident last week), provides the big picture.

Here are some of the highlights:

1) January saw $148 billion net capital outflows from U.S. securities.

2) These big capital outflows are hard to square with the dollar's January rally.

3) Both private and official investors sold long-term U.S. assets. Aside from December, foreign investors haven't been buying long-term U.S. assets since the crisis began.

4) U.S. investors bought a bunch of foreign bonds. U.S. investors have been selling off foreign bonds and equities throughout the fall, so this marks an interest change. Is it evidence of nervousness about the dollar's future?

5) Banks stopped piling into U.S. assets.

6) Private investors reduced their Treasury bill holdings by $44 billion, and banks reduced their net dollar deposits by $119 billion.

Conclusion: The substantial selling of U.S. securities shows growing concerns about U.S. economic prospects. It is not a good sign for the dollar.

David again.

One of the interesting aspects of the January TIC was the wholesale exit from U.S. agency paper, shown in the chart here.

Given that these agency securities (paper issued by Fannie, Freddie, and others) are for all intents and purposes guaranteed by the U.S. government, the sell-off of these assets is a clear signal that Wen Jiabao and other foreign creditors are now doing more than just talking about their concern over the creditworthiness of the world's largest debtor... they are taking action. Specifically, eschewing agency debt instruments and putting what money they still invest in Treasuries into the short-term stuff that can be dumped in a proverbial heartbeat.

Which brings us to our second story.

As we have previously discussed here and in other Casey Research publications, the dismal January TIC numbers confirm that the foreign buyers so essential to financing the U.S. government's elevated spending needs are falling well short of fulfilling those needs. Couple this with what has to be a sharp fall-off in tax revenues, and the government begins to find itself not just between a rock and a hard place, but between the jaws of a Maxpower Industrial Grade Locking Vise Grip.

And so, this week, the Fed announced it was going to whip up a large batch of fresh cash for the purpose of buying the agency securities and even long-term Treasury bills that no one wants.

Here's a quote from Bloomberg on the baseline story...

March 18 (Bloomberg) -- The Federal Reserve said it will buy $300 billion in Treasury securities and increase its purchases of mortgage and agency debt in an effort to bolster housing and hasten the end of the recession.

"To provide greater support to mortgage lending and housing markets, the committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage- backed securities," the Federal Open Market Committee said in a statement in Washington today. "Moreover, to help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."

Chairman Ben S. Bernanke is becoming more aggressive after unemployment climbed to 8.1 percent and economists forecast the economy will shrink through the middle of the year. Fed officials also kept the benchmark interest rate at between zero and 0.25 percent. The central bank also said it will consider expanding the Term Asset-Backed Securities Loan Facility to include "other financial assets," the statement said.

Altogether, this latest explosion in money creation comes to $1.2 trillion -- somewhat more than the Chinese now hold in U.S. dollar-denominated reserves, reserves that have been built up by years of heavy trade and regular (self-serving) investment in support of the U.S. government's endless spending.

And, with the flip of a proverbial switch, the Fed has diluted the dollars that make up those reserves with another cool $1.2 trillion infusion of funny money.

So much for President Obama's strong assurances last week to Wen Jiabao that the U.S. government can be counted on to be a careful shepherd of the dollar.

The dollar failed to concur with Obama's assurances by staging a sharp sell-off and, in the process, sending our favorite yellow metal up handsomely.

And the government isn't done yet.

Earlier this week, we also heard that the Treasury was considering using the Term Asset-Backed Loan Facility (TALF) program to lend up to $1 trillion to their buddies – I mean highly respected financial firms – to buy up a variety of discounted, albeit troubled assets, sweetening the deal up by making the loans "non-recourse." Simply translated, that means "can't lose."

Back in the good old days, these sorts of deals traditionally involved paper bags stuffed with unmarked bills... but that was much more inconvenient. Again, turning to Bloomberg...

As it's currently set up, the TALF may lend as much as $1 trillion to investors from hedge funds to pension funds and insurance companies to buy recently created securities backed by loans for car purchases, college education and real estate. Applications for its first loans are due tomorrow.

Broadening the TALF to include older, illiquid and lower- rated securities could allow the participants in the public-private investment funds to potentially repackage assets and sell them on to a wider group.

So, what does this all mean? Simply that the government is literally willing to do "whatever it takes" in its attempt to return the country to its bubble days, a notion that any sane observer would instantly recognize as a delusional fantasy. But hard reality and vote-getting often don't get along, and so instead we get a government on the determined path of least resistance... unleashing an ever-escalating airlift of dollars.

Sharp Words

And now I feel the need to express thoughts that might strike some as a little "sharp."

This morning, as I was driving to grab a pre-flight coffee, I heard an ad for a local car dealer promoting that – thanks to one of the federal government's many new programs – by purchasing a new car in 2009, you are able to deduct the state and local taxes you would otherwise pay come tax time. This, according to the announcer, would save you $1,500 on a $25,000 purchase. And this, they say, was just one of a number of new federal programs they could help you use to save money on your new car purchase.

For reasons that only a neurologist (or maybe a psychiatrist) could fathom, despite having heard a litany of bailout and stimulus news over the last year, this proved to be the final straw, and instead of just shaking my head in dull resignation, I felt anger.

Sitting with a friend over my coffee a few minutes later, I tried to put the source of my agitation into words. The conversation picks up after I explained to him the message of the commercial.

He: "Dude, I hear ya, and I hate all this stuff, but it's necessary."

I: "Why is it necessary? Who is going to pay the $1,500 that the government doesn't have in the first place? This and all the stimulus programs are just putting the country further and further into debt. And who's going to pay for that debt? Not us, but our children and their children. Sure, we're going to get stuck for more taxes now, but there is no way the Obama administration can cover all this new spending with taxes, and the foreigners aren't going to keep lending to us. So, it comes down to borrowing more and more, beggaring future generations."

"Hey, it wasn't Obama who got us into this mess, man."

"No, it wasn't, and I'm not saying it was. It was Bush and the entire Congress, with some of them, like Barney Frank, more responsible than others. But it's Obama's ball now, and he's calling the shots. And as much as I want to give him the benefit of the doubt, I can't believe what he's doing."

"Well, he's got to do something, man, otherwise the economy would crash and everyone would suffer even more pain."

"Exactly!" I said, maybe even sputtering a bit, "But it is our generation that should take the hit. It is us who should feel the pain of the collapse. We did it to ourselves by standing idly by while the government and its many friends in the banking sector got us into this mess. And don't forget the orgy of spending and personal debt that the population engaged in, encouraged every step of the way by the government's easy-money policies. This all happened on our watch, but instead of taking our medicine, we the people are now encouraging the government in its many efforts to reinflate the bubble, fully aware all we are really doing is trying to shift the mess onto the backs of our children, and their children, and probably their children's children. What a bunch of cowards we are."

(That, of course, is not a perfect recounting of our conversation... I'm pretty sure I interjected one and maybe two "rat bastards" into my diatribe.)

You can call all of this quantitative easing if you wish; I call it institutionalized cowardice walking hand in glove with mob psychology.

Or you can call it "change."

If, however, I were the Chinese, I would call it "enough" and accelerate my plans to swap my dollars for just about any tangible asset at this point. There's no reason for them to stick around to share the pain we have all but guaranteed our children.

Protectionism

While there is a fair amount of debate about the causes of the Great Depression of the 1930s, there is one lesson from that dire circumstance that pretty much everyone agrees on: that the global trade war set off by the U.S. with the Smoot-Hawley Act and its many tariffs only made things significantly worse and helped prolong the depression. Further, everyone agrees that the world, faced with an economic crisis such as that now unfolding, would never make that mistake again.

But then the U.S. government went ahead anyway and slapped our trading partners in the face by including the Buy American provision in the recently passed stimulus package.

Those trading partners are starting to slap back.

First, Mexico announced this week that they would, henceforth, be foisting tariffs on a wide array of U.S.-made products... this in retaliation to the entirely disingenuous refusal by the U.S. government to live up to the terms in the NAFTA agreement whereby Mexican trucks would be allowed to drive on U.S. highways.

"Unsafe!" say the unions and their government backers, supported, oddly, by outraged talk show hosts of a more conservative leaning, whose normal free-market instincts are apparently trumped by xenophobia.

For the record, Mexico is the United States' third largest trading partner, behind Canada and China. Even so, we all know in our heart of hearts that the Mexicans are really just looking for an excuse to smuggle drugs and illegal aliens across the border, so the hell with them! If they want a trade war, bring it on!

Then there are the Chinese, who this week decided to institute a new "Buy Chinese" clause, at least as far as Coca-Cola buying a controlling interest in a successful Chinese juice company is concerned.

Regardless of how this stuff gets started, once it does, it can very quickly snowball, with national sensitivities getting hurt and exporters on both sides of the disputes being the ones taking it in the neck.

Too bad no one in government is actually involved in an export or import business, or any business at all, for that matter. Because then they might understand that these actions have real consequences, today, just as they did in the 1930s.

Now, don't get me wrong. I am not so naïve to think that our trading partners don't try to gain the system in order to help their export companies succeed in U.S. markets. But I am not so blindly nationalistic that I think we don't try to do exactly the same thing.

Even so, for better or worse, thanks to its past success, the U.S. serves as a role model for the rest of the world and, in that regard, is held up to a higher standard. That we are willing to overtly move toward protectionism, whether by reneging on elements of NAFTA or through the Buy American provision, risks setting off a chain reaction of protectionism. Just as did Smoot-Hawley.

But we'd never make that mistake again, right?

Evil Capitalist Polluters!

Despite the quickly mounting deficits caused by stimulus money flying here and there like a St. Patrick's Day snow flurry, the new administration remains fully committed to tackling the all-important topic of global warming.

In fact, if current plans come to fruition, crisis or not, Team Obama may require the evil capitalists that run the few remaining manufacturing concerns to spend up to $2 trillion on "cap and trade" credits.

An excerpt from the Washington Times on the topic...

President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House. A top economic aide to Mr. Obama told a group of Senate staffers last month that the president's climate-change plan would surely raise more than the $646 billion over eight years the White House had estimated publicly, according to multiple a number of staffers who attended the briefing Feb. 26.

"We all looked at each other like, ‘Wow, that's a big number,'" said a top Republican staffer who attended the meeting along with between 50 and 60 other Democratic and Republican congressional aides. The plan seeks to reduce pollution by setting a limit on carbon emissions and allowing businesses and groups to buy allowances, although exact details have not been released.

At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015. A White House official did not confirm the large estimate, saying only that Obama aides previously had noted that the $646 billion estimate was "conservative."

"Any revenues in excess of the estimate would be rebated to vulnerable consumers, communities and businesses," the official said. The Obama administration has proposed using the majority of the money generated from a cap-and-trade plan to pay for its middle-class tax cuts, while using about $120 billion to invest in renewable-energy projects.

Mr. Obama and congressional Democratic leaders have made passing a climate-change bill a top priority. But Republican leaders and moderate to conservative Democrats have cautioned against levying increased fees on businesses while the economy is still faltering. House Republican leaders blasted the costs in the new estimate. "The last thing we need is a massive tax increase in a recession, but reportedly that's what the White House is offering: up to $1.9 trillion in tax hikes on every single American who drives a car, turns on a light switch or buys a product made in the United States," said Michael Steel, a spokesman for House Minority Leader John A. Boehner. "And since this energy tax won't affect manufacturers in Mexico, India and China, it will do nothing but drive American jobs overseas."

Now, of course, the Washington Times heavily skews Republican and so can be counted on to point dramatically at every Obama misstep, but the fact that anyone is even thinking about foisting another bureaucracy -- and a massive new tax regime -- on struggling businesses is, in my view, just plain insane. And for the record, while businesses do go out of business, they don't pay taxes... that burden falls only to consumers, who ultimately get passed the tab.

Even so, at the rate things are going, by the time the full force of the new taxes are felt in a couple of years, the $650 billion, or $2 trillion -- whichever the number turns out to be -- may amount only to roughly enough in inflation-adjusted dollars to buy a Big Mac, hopefully with fries and a shake.

The Coming Credit Crisis

Oh, you thought we've already had our credit crisis? Sorry, so far we've only seen the first act. As for what's next, this came to me this week from a trusted correspondent who works in the consumer credit arena. It's from the Herald News...

There is a common perception in America that most of us live beyond our means with credit cards financing the party. However, the newly released Federal Reserve Board's Survey of Consumer Finances for 2007 tells a different story. According to their results, it's easy to see that the middle class has been steadily increasing its consumer debt in order to keep up with inflation.

An easy translation of that is the average Joe is using his Visa card to pay the light bill and keep his family fed. He's not partying, but trying to find a way to live from day to day. That news has real repercussions for what the next rollout of bad news and blow to our already battered confidence in the economy is most likely going to be.

The Fed's survey, which is taken from a carefully selected cross-section of 4,500 consumers, shows that since the last reading in 2004, median family incomes dropped slightly for middle income Americans, particularly those headed by a single parent. Average incomes for the wealthiest 10 percent rose substantially, by 8.5 percent.

The mean amount of credit card debt being carried by individuals rose 25 percent, from $3,000 to $7,300, a much faster rate of increase than in previous years. That doesn't sound significant enough until all the pieces start to come together.

The survey noted that the majority of the credit card debt has shifted from stand-alone companies, such as Capital One, to 87.1 percent being held by commercial banks. Those are the very same banks the feds have been working with to ferret out poisonous mortgage debt. Commercial banks that are doing well also made the same decision to not lend short-term consumer debt in large quantities to high-risk people. That means that the debt that is most likely to go unpaid is sitting with the same banks that are already in trouble.

Also, most consumers in the middle income category reported they were saving less than 1 percent, which makes sense if it's already taking a credit card to pay for the basics of life.

So the picture that's forming is an average voter who has a family to support but fewer real dollars in order to accomplish the feat and vital credit sources that have quickly disappeared except for the bill, with no monetary reserve to get through a tight year.

Add on top of that the climbing unemployment rate of this very same group.

It becomes easy to see the very real likelihood that a lot of the retail debt now held by weakened commercial banks will go unpaid. Consumers will choose paying for pretty much anything else before catching up the credit card debt when there isn't enough to cover all of the essentials. A damaged credit report will stop being seen as enough incentive if there's a risk of foreclosure on the house or the phone being disconnected.

Banks will start to make hard decisions about covering the debt owed to the retailers who accepted in good faith the bank-generated credit card. It all starts to roll downhill again.

What's astounding, given that the survey is generated by the feds, is how little Bernanke and his crowd are talking about the coming tidal wave. It can't be that we're still practicing the idea that if we look away long enough it won't all fall apart, yet again.

Fannie Mae, AIG, WaMu and Lehman were apparently not a big enough lesson. One of the more galling aspects is that right now there is not only no significant consumer loan modification being offered in this category but instead, banks are trying to generate bottom line income by charging fees of 25 percent based on a consumer's balance. There was a time when that was called usury in the United States. It starts to beg the question of what real differences exist anymore between the dreaded payday loan and some of the bank-issued credit cards.

It's also possible to conceive that consumers are now paying down debt that consists more of fees owed than actual retail debt. That's where we are at the moment.

If nothing is done, voters can rightfully say that, once again, big business and another pending bailout of some titan of industry on the taxpayer dollar mattered more. After all, the Federal Reserve was the one who gathered the necessary information and then stuck it in a drawer.

David again. In previous financial crises, credit card defaults were the first sign of trouble... this time around, it has largely been mortgages. That's because so many people were so far over their head with their upside-down mortgages and the sheer burden of homeownership that they knew trying to stay in the house, in many cases bought as speculations, was a non-starter. And so, instead they let the mortgages go in record numbers, while hanging on to their lifeline – the credit cards.

That the credit crisis is now intensifying into credit cards is, and should be, deeply concerning. As bad as credit card defaults have gotten, they are getting worse. In fact, this week the news came out that, in February, credit card defaults rose to a 20-year high. Amex and Citigroup (of which you, if you are a U.S. citizen, are now a proud owner) are particularly hard hit, with net charge-off rates rising to 8.7% and 9.6%, respectively.

Now, it is not my role in this world to be a bearer of bad news but rather to make sure that you are fully in the picture. And that picture at this moment is fairly bleak. Okay, it's downright dark. So don't make the mistake of thinking that the worst is behind us... it's not.

That said, the stimulus will almost certainly have some effect once it starts to hit into the economy. But the effect will be short lived and should be treated like a lit firecracker. Kind of exciting with the fuse fizzing away, but hold on too long and the result will be very painful.

"AIG Scum Out of Town!"

That was the epitaph scrawled into the dust-encrusted rear window of an SUV stopped in front of me here in the town that serves as world headquarters of Casey Research. A town that also happens to be the location of a prominent resort built with AIG money.

This sort of outrage over the AIG bonuses was underscored by the CNN reportage I was forced to watch on the large flat-screen TV stuck on the wall in front of the exercise equipment down at the local gym. (I don't have cable at home, and never intend on getting it.)

According to CNN, the citizenry and its elected officials are up in arms because AIG lived up to contractual agreements to pay the executives who continued to work at the firm rather than deserting the sinking ship to look for more permanent employment elsewhere (and, yes, a number of those who got bonuses were helpful in the actual company-sinking).

As I am on a plane, I can't yet say whether or not the government has followed up on its threat to pass legislation, retroactive no less, levying a 90% tax on the bonus recipients, but it won't surprise me if it does.

I'll come back to that momentarily, but am going to juxtapose that story with a second story that caught my attention while attempting to whip my body into shape. The story started with CNN's cameras showing a large ballroom filled beyond capacity with bureaucrats and contractors who were lined up literally down the hallway to get and complete the paperwork needed to get their share of the stimulus funds now being made available. The only catch, according to one interviewee, was that the projects for which they sought free money had to be "shovel ready" -- meaning the recipients had to begin spending the money they received this year. Thus, the ballroom seemed to have the same sort of frenetic energy one might attribute to a mosh pit, with the recipient hopefuls jostling elbow to elbow while clamoring for their share of the quick cash.

Doing my best to test your levels of concentration, I now return to the AIG story. Given that the government provided AIG with over 150 billion dollars in bailout funds, it is a safe assumption that the powers-that-be felt such a massive bailout was necessary. In fact, according to officialdom, it was critical because, should the company fail, it would lead to a real global catastrophe.

Is it too much of a stretch, therefore, to think that the government might actually want the company to succeed in working its way out of the trillions in CDS and other problem derivatives linked to the company? Or that, to accomplish that goal, the company might need to attract or retain executives with a certain skill set?

Now, it is not my intention to be a cheerleader for the morons that brought AIG to its knees in the first place, and I was very much against the bailout in the first place. Rather, I am simply trying to follow some sort of basic logic related to these bonuses.

And it doesn't seem illogical to spend $165 million in bonuses if that raises the odds of recouping a return on the $150 billion already dropped into the company and, more importantly, the hundreds of billions of more potential losses lurking in the AIG closet. (Remember, thanks to the misguided bailout, the government has put you, the taxpayer, in the position of owning 80% of AIG... and virtually all of any further losses they incur.)

So, as distasteful as the whole mess is, I can find some small rationale for the AIG bonuses.

But how, as a taxpayer, am I to rationalize the ballroom full of bureaucrats and their friendly contractor friends, each clamoring for a million here or a million there to fill in some pot holes, build a new bridge, or a knock together a new community center? Why are these things necessary, now of all times, with the country already struggling like Atlas with a groin pull under a world of debt?

The answer, simply, is because the administration believes that this grand experiment will somehow produce an economic miracle, magically reinflating a bubble that easy money and massive spending created in the first place. And Congress, in all its wisdom, and only after great study and deliberation, signed off on the stimulus, just as they did with the Iraq war and the Patriot Act.

Sure the AIG bailout was an outrage, and the bonus money is just an extension of that initial outrage... but so is the stimulus spend-a-thon.

As is the notion that Congress would even consider using tax policy – pay up or go to jail, to be specific – as a punitive measure. By the time this plane lands, I hope against hope that the bill has failed... because if it hasn't, then the government will have discovered a new tool for its large and growing arsenal of coercive powers. While we can't know whom they will turn it against next, you can be assured that, in time, they will.

The sponsor of the bill to use taxes as punishment was Congressman Steve Israel (D-Huntington), who grandly stated upon announcing the legislation...

"American families shouldn't be forced to reward these professional financial failures with extravagant bonuses that could buy fancy cars and yachts," Israel said in a statement. "AIG may not like it, but since they had to come to the federal government for help, the federal government now has a say in how they spend taxpayer money."

I wonder what Rep. Israel would say if someone proposed a bill to tax 90% of the salary of the "professional financial failures" who have led our country into a depression, and who are now throwing taxpayer money around in the trillions, beggaring the populace for generations to come?

[Okay, I am now in Las Vegas and, sure enough, they passed the legislation. Whether you think that AIG or other bailout bonus recipients are greedy and deserve punishment or not, the horrible precedent of punitive taxation aimed at a select group of citizens has now been established.

And there is something else that I heard this morning that is as concerning. It was an overt death threat by New York's Attorney General Cuomo, who has managed to extort the names of all of the employees of Merrill Lynch who, under the terms of their employment contracts, received bonuses over the last year. The company has asked Cuomo not to make those names public over fear for the safety of their employees in this overheated atmosphere. To which Cuomo has replied that he will hold off for a bit, but only to see which employees return the bonuses so he can strike their names off the list. In other words, return your bonuses or else suffer the potentially dire consequences.

We are deep in uncharted water, and it is only going to get deeper from here.]

It Just Doesn't End

Another thing that I just have to comment on this week is that the IMF is seriously considering joining the money-printing game, pumping out Special Drawing Rights that countries around the world can use as money.

As my plane is beginning to descend, and writing about this stuff is beginning to weigh on my good temper, I will leave it to the Telegraph to fill out the story...

The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.

Alistair Darling and senior figures in the US Treasury have been encouraging the Fund to issue hundreds of billions of dollars worth of so-called Special Drawing Rights in the coming months as part of its campaign to prevent the recession from turning into a global depression.

Should the move, which is up for discussion by the summit of G20 finance ministers this weekend, be adopted, it will represent a global equivalent of the Bank of England's plan to pump extra cash into the UK economy.

http://www.telegraph.co.uk/

If the U.S. dollar manages to come through this crisis and retain its status as the world's reserve currency, I will be very surprised. Maybe, just maybe, whatever is next will be backed by something more tangible than political promises. But that's just a pipe dream.

Miscellany

Inflation? What Inflation? Regular readers may remember that last month the inflation numbers came in significantly higher than expected. "A fluke," we were assured. But this week, the CPI from February was released, showing that once again the CPI was up 0.4%, an increase over the 0.3% the prior month. And the highest inflation reading since last July.

Another anomaly, we are told, caused because gasoline unexpectedly spiked over 8% for the month... but increases were seen in a broad range of other items, including clothes, of all things. Could it be that the China discount, another topic we have mentioned in the past, is starting to fade away right along with our foreign trade? When you consider, as does Jeff Clark in the current edition of BIG GOLD, how strong gold has been over the last year, in the face of a strong dollar and a general absence of inflation – can you imagine how strong it will get when the reverse is true?

How high could gold go? A lot higher than you might think. To read the current edition of BIG GOLD and find out, risk-free, click this link. The current edition also includes the latest and most comprehensive article I have ever seen on whether the GLD ETF is actually safe... essential reading.
Videos? I know this is oldish news, but I think I have finally figured out why President Obama gave Gordon Brown a 12-pack of DVDs as his symbolic gift of friendship when Brown came calling at the White House in one of the first state visits of the Obama administration.

It struck me that the gift was analogous to the time I forgot to get my wife a birthday present and had to hightail it down to a local spa to buy a day pass complete with relaxing herbal wrappings and a massage. In this case, I'm pretty sure that as Gordon Brown was walking up the front steps, someone slapped a forehead and said something to the effect of, "Oh, crap... we forgot the present. Quick, didn't Bush leave behind some DVDs?"

I just wish I could have been there to see the expression on Brown's face, or heard what he had to say when he got back to his room.
Got Gold? If Not, in Zimbabwe You Starve. This is not a funny story. Rather, it is a video showing how the only thing now standing between many in Zimbabwe and starvation is their ability to pan for gold. There are parts that are hard to watch, but the message – that even in the most dire of situations, gold is still used as money – is a worthwhile one. You can watch the video here.
Tea Party. There are increasing signs, overseas and in the U.S., that we are entering a new phase of social unrest. In Cincinnati, a group of citizens outraged over the stimulus staged a tea party. Expect more.
Casey Phyles Updates and Info.

The next SoCal Phyle meeting will take place Saturday, March 28, 2009 from 1:30pm - 5:00pm (or so) at the Baja Cantina, 311 Washington Blvd., Marina Del Rey, CA 90292 http://www.bajacantinavenice.com.

The next Calgary Phyle meeting will be held Tuesday, April 7, at 7:00pmatCadence Coffee, 6407 Bowness Road NW, Calgary, Alberta http://www.cadencecoffee.com/main.html (All inquiries regarding the Calgary Phyle can be directed to calgaryphyle@yahoo.ca )

People looking to start a group: Daniel in the Lapeer, Yale, Port Huron, MI region. Homer in Winter Park, FL.

And that, dear readers, is it for this week. I am sorry for having gone on so long. Believe it or not, I actually cut out about five pages of notes on other topics I wanted to discuss this week. But for now, I must sign off and turn my attention to the Summit, which starts later today.

As I sign off, I see that the U.S. stock market is down modestly (the DJIA is off 33 points) and gold is hanging tough around $960. I wonder what the government will do next if the stock market takes another big dive from here? I suspect we won't have long to wait to find out.

Until next week, thanks for putting up with my ramblings... and for subscribing to a Casey Research publication.

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/16/2009

David Galland — Mon, 16 Mar 2009 17:55:42 GMT

Dear Reader,

This week I tripped over an old musical favorite, I'm Your Captain, by Grand Funk Railroad, which is what I'm listening to as I begin this weekly missive.

While the song has a little rust on it, for those of you who haven't taken a ride on Grand Funk Railroad of late, it's a nice enough trip. You can listen to it here.

Now, on to what seems important this week.

Citi-Mae

This week Vikram Pandit, the CEO of Citigroup, a bank that has managed to lose $38 billion over the last five quarters, sent around an internal memorandum in which he said he was "encouraged" by the company's performance so far in 2009.

This fig leaf was enough to light the fuse to a pretty decent rally in U.S. stocks.

Looking at the Citigroup stock chart over the last three years, I have a hard time believing that there is anything left to be discouraged about.

The government's efforts to keep the mega-bank afloat to date have been nothing short of herculean, with infusions of over $45 billion in new capital. As important, the Treasury and its many agencies have agreed to cover losses from over $300 billion in toxic paper held by Citi. (With the new TALF plan, they can go much, much higher than that, if required.)

With that sort of support, it is safe to assume that the bank has been chosen by Team Obama to survive... though in a form that may be less than satisfying to existing shareholders.

Several things jump off the page when reading the biography of Vikram Pandit, the aforementioned CEO of Citi.

The first is that he is an impressive guy: lots of degrees, directorships, and high-level work experience... all of the right sort of credentials. You know, the sort possessed by the very same best and brightest who helped bring Wall Street to its knees in the first place.

Second, he seems to lack certain restraints when it comes to OPM (other people's money), witnessed by the fact that it was he who stubbornly insisted on going forward with the purchase of a new $50 million private jet for the company – this after receiving the aforementioned bailout. (Not to mention that the jet was to be of French manufacture, adding a measure of salt to American wounds.)

Most importantly, however, is that he clearly has a knack for making good deals for bad assets. Case in point, he sold Old Lane Partners, an underperforming hedge fund with just $4.5 billion under management, to CitiGroup for $800 million -- a truly ridiculous amount. He personally made close to $200 million on the deal.

And now, it seems, he's trying to engineer the same sort of buy-out for CitiGroup... but this time the buyer is... you!

Specifically, Citi has offered to convert the preferred shares held by the Treasury into common stock, effectively finishing the process of seeing the bank nationalized. Quoting Financial Week...

Wall Street Journal

The fact that an internal memo from a drowning bank in a crashing economy can ignite a strong rally tells us that at least some investors are tiring of the bear market, and are willing to throw down cash in the hope that it's time for the bull to run again. So, we could see the market rally for a bit longer, but the odds remain good that it's a bear market trap.

In the case of Citi-Mae – my suggestion for the company's post-nationalization name – we the people will soon be responsible for the company's mountain of dubious debt from tens of millions of credit card accounts, mortgages, commercial paper... and that's just for starters.

No wonder Mr. Pandit is so enthusiastic.

Wen Is Enough?

This week, we had a swarm of China-related stories. In one, China's premier Wen Jiabao took time during his annual press conference to express his concern about the safety of China's holdings of Treasuries, warning the U.S. government, in so many words, that China is now paying close attention to its financial affairs. The implied threat being that, should the constant currency abuse escalate, they might consider taking their renminbis elsewhere.

"Nonsense," say the punditry, explaining authoritatively that China doesn't have any option but to continue propping up the dollar. After all, selling their Treasuries would devastate the value of their hundreds of billions of dollar-based holdings. A weaker dollar would also make China's export-reliant economy less competitive, pushing said economy even further onto the reef.

"True," I answer, speaking aloud to no one but my sleeping dog. "But it's worth harking back to April 2001 and Hainan Island in the South China Sea."

Newshounds among you will recognize the time and the place as the location of what the media likes to call an "incident" between the forces of China and the U.S. Specifically, after colliding with a harassing Chinese military jet, a damaged U.S. spy plane was forced to land on Hainan Island where it was captured by the Chinese military.

And there the plane, and its crew of 24, sat for almost two weeks. Despite the U.S. government's most strident diplomatic efforts, including getting really red in the face, the Chinese simply refused to release the crew or the plane. It was only after the U.S. government bowed to China's unswerving demand that it issued an official apology – which it did on April 11, that the crew was allowed to leave, on April 12.

The spy plane, however, was not allowed to leave until mid-July... and then only in the pieces that Chinese engineers left it in after dismantling it and going through it with a tortoise shell comb.

At the time, the Chinese government was exporting over $100 billion a year of product to the U.S. Didn't seem to concern them in the slightest at the time that the U.S. was making all sorts of hollow threats about the spy plane.

So, now that Chinese exports to the U.S. are about three times the level they were in 2001, are the Chinese three times more likely not to want to cause trouble for the U.S. today?

Didn't seem that way when, this week, five Chinese boats harassed a U.S. spy ship operating in international waters, 75 miles off China's coast. My favorite part of the incident was when one of the Chinese ships got so close that the U.S. Navy ship, U.S.S. Impeccable, opened fire with a water cannon. In response, the Chinese crew stripped down to their underwear and enjoyed a mid-week shower.

It reminds me of the classic scene in Monty Python and the Holy Grail, when the crusaders demand the surrender of the French castle.

Why, look, thanks to the wonders of YouTube, you can watch it here!

The point, however, is simply this: people are people wherever you go... but they have certain cultural idiosyncrasies. The Afghans, for instance, possess a strong national pride about having taken on – and defeated – the masters of the universe at any given time. Denny Crane from Boston Legal would sum up their martial confidence by intoning, "Never lost, never will." And so, we can expect them to rise up every time they are invaded.

Likewise, the Chinese have a reputation for not allowing themselves to be dictated to by foreign governments, unless, of course, said foreigners arrive with an army, as did the Japanese in WWII.

Thus, should the current administration conclude in their many weighty calculations that the Chinese have no choice but to scrape and bow to the mighty dollar, they risk making a gross miscalculation... in this case, one that could bring what's left of the U.S. economy to its knees.

It is worth pondering, however, whether the Chinese may begin to march to their own drummer, no matter what the U.S. does or doesn't do, at this point. I say that because, whether out of national pride or the realization that the debt-fueled economic engine of U.S. consumption is terminally broken, there is little question that China is turning its attention to stimulating its own economy by inward-looking spending. Versus, say, investing that money in non-yielding U.S. Treasuries, especially of the riskier long-dated variety.

The situation is directly analogous to the build-out of the interstate highway system here in the U.S., a topic I touched on in passing recently. The build-out of that system, which finally got underway during Eisenhower's administration in 1956, cost about $100 billion to complete. While I don't have time to go deep here, there is little argument that the interstate highway system helped grease the skids of commerce, paying back the government's investment many times over through a variety of transport-related taxes and overall improvements in GDP.

In constant dollar terms, the U.S. GDP in January of 1947 was $1.570 trillion. By January of 1957, as the interstate highway system was getting built, GDP had risen to $2,300 trillion, a 46% increase. By January of 1966, however, GDP had reached $3,372 trillion, a 60% increase over the preceding ten-year period. While I can't attribute the additional gain to the growing highway system, there is little question it was a contributor.

The point I am trying to make is that the Chinese leadership is very capable of figuring out the benefits of better and more highways, ports, dams, electrical lines, and other infrastructure improvements ... and of deciding that continuing to lend to the world's biggest debtor won't pay off nearly as much, over the long run, as using their pile of cash to finish building out their own key infrastructure.

Nothing stays the same in this world, except human nature, that is. The Chinese, with their hundreds of billions in reserves, and 1.4 billion people, are not going to stay in place. At the point when they decide it is time to look inward, and that point may be now, the world's financial regime will begin to change.

Sure, the U.S. monetary hegemony could be maintained for awhile longer, and likely will. But there are no guarantees, and to dismiss the Chinese as whipped dogs could be a very big miscalculation.

Since we're on the topic of China's infrastructure build-out, Simon Black and Fitzroy McLean from Without Borders have uncovered a China-based cement company that is uniquely well positioned to profit. To learn how you can profit from the remaking of China's infrastructure, visit this link.

Before moving on, I came across the following chart I thought you might find of interest. It presents a breakdown of what it is the Chinese sell the U.S. so much of. Looking the chart over, it's easy to conclude that Chinese exports to the U.S. are only going to come under more pressure (not a lot of furniture changing hands just now, I suspect). That lessens the importance that the Chinese will attribute to their U.S. relationship in the future.

Speaking of Exports

I don't watch much television but do make an exception for Survivor on CBS every Thursday night. I like the show because it offers the voyeuristic experience of watching members of the Homo sapiens species as they cavort around in more primitive tribal settings. With much of the bling and bluster stripped away, what's left to observe is the hominid mind at its most calculating as it schemes to climb over the heads of its fellows to win a million dollars.

Last night, as I waited for the show to begin, I was treated to a spot of local news, the top story being that the Burlington City Council had rewarded a bridge rebuilding contract to an out-of-state construction company. Members of the local citizenry were interviewed and were uniformly outraged. "There are local companies desperate for work, and they give the job to a company from Maine! Unbelievable!"

It's an interesting philosophical conundrum. After all, the land and the people of Vermont and neighboring Maine couldn't be any more homogeneous. Okay, so maybe they eat lobster with more regularity... but other than that, it's mostly about some lines on a map and small differences in local ordinances.

Live and let eat, I say, but I suspect most of the tribe would disagree. At least if you pay attention to all the "Buy Local" bumper stickers being sported around these days.

(Sometimes, the sloganeers try to show a broader mind, expanding the phrase to "Think globally, act locally"... which is really just a dressed-up way of saying the same thing.)
As is well demonstrated on Survivor, when things are going well around camp... say, after having won a reward challenge against the other team and finding yourself surrounded with sundry food items and maybe a few beers, then humanity is all good cheer and generosity.

But lose a string of challenges, resulting in a depleted food supply and sleeping in the rain under poor shelter, and the human character soon forgets all sense of charity and each individual looks with steely eyes to their own needs.

The broader economy is much the same, if for no other reason than it is really nothing more than the sum total of human action.

While the connection may be hard to see at this moment, this week it was reported that both imports and exports have fallen yet again. According to Bloomberg...

imports

exports

Echoing the theme of this section, there was also this...

Christopher Low

Reducing these matters to a more understandable level, we come back to the case of Burlington and the Maine-based bridge builder. Or, to a positively human scale, by looking to the weekly lesson provided by Survivor. To wit, the world is beginning to wonder where its next meal is coming from, and they are not about to let some other person/state/country beat them to it.

The U.S. has already let its intentions be known by passing the "Buy American" provision in the new stimulus package.

The Swiss this week made their intentions clear by announcing that they were going to actively intervene in the foreign exchange markets in an attempt to weaken their currency and therefore make their products more competitive to consumers in other nations. They will do so by buying up the currencies of their largest trading partners. The Japanese have tried this move, as have the Chinese and others. Soon, everyone will be doing it.

In its write-up on the Swiss move, the Wall Street Journal opined...

As the U.S., while wounded, is still the world's single largest market, it's likely to be the currency against which most others try to depreciate (the Swiss are likely to focus on the euro, however).

Paradoxically, to some extent the U.S. is a willing "victim" in this manipulation, as the greater buying pressure on the U.S. dollar allows the Fed to print, print, print without having the debasement of the currency become apparent.

Of course, it will hurt U.S. exports if the currencies of our major trading partners fall in comparison to the dollar, but for the time being, a strong dollar helps to reduce the cost of energy imports and other such essentials. And it masks the prolific spending now underway, and further envisioned, by the Obama administration.

The problem, of course, is when all those dollars begin to flow back this way... for example, when the Fed finally crosses the line and governments around the world decide it is now in their best interest to rid themselves of the greenback.

It won't happen overnight or probably anytime real soon... but at this rate, it is all but a given.

Snippets from the Swamp

Donald Grove, our stalwart Washington correspondent, took time out of his busy day to shoot over a couple of updates on the never-ending machinations now underway in the corridors of power. ..

Making Friends with Crisis

Never waste a good crisis

Feeding Frenzy

Gold Stocks – a Knock at the Door

While it is not much of a payoff for the one hour that our own Louis James, editor of the Casey Investment Alert and International Speculator, spent on the phone with the reporter, the fact that Barron's did an article at all on the attraction of investing in junior gold explorers is worth noting.

You can read "Thar's Green in Them Thar Gold Stocks" via the link here.

Then there was the article from Newsweek, also this week, titled "Cash in a Mattress? No, Gold in the Closet." While the author is clearly a skeptic – which I think is healthy, frankly – the fact that gold is beginning to show up more and more in mainstream media will only add to its luster.

Here's an excerpt from the piece...

The price of gold is near an all time high—it topped $1,000 an ounce on March 13—yet the number of Americans who are taking delivery of gold coins and bars is rising. According to the World Gold Council, Americans bought 600 tons of gold bars and coins in 2008, a 42 percent increase over 2007. That's not as much as in Europe, where gold mania has become epidemic—but significant given the metal's high price. An uptick in the U.S. economy, and buyers are likely to find they've been part of a giant, golden bubble.

And for those of you with more time on your hands, here's a link to the full article.

Miscellany

The Greater Depression -- How Did It Come About? As I was going to press, I received this link to a Saturday Night Live skit that gave me a couple of chuckles. As we can all use all the chuckles we can get just now, here's the link. (And, please, for those of you who are from either side of the political spectrum who may take offense, please don't... satire is as American as running a trade deficit.)
Mea Culpa. In the current edition of The Casey Report, we included a chart showing the performance of various recent short recommendations, compared to the S&P 500. None of our recent shorts has been nearly as profitable as that of GE from our December article, "Shorting the Big Debtors." The only problem is that we equivocated on that recommendation, then in January, due to concerns over the possibility of government action, and actually formally announced we were not going to recommend making the short.

Thus, the graphic was wrong and could rightfully be misconstrued as misleading. The simple fact is that while we were right in bringing GE to readers' attention as a short candidate when it was trading much higher than it is today... we didn't follow through with a formal recommendation, and so we cannot claim it.

I won't go into a long explanation of how this screw-up happened, other than to say that it was an honest mistake by a researcher and a lack of attention on my part as managing editor. It has now been fixed in the edition.
Phyle News. By all accounts, the recent phyle meeting in Toronto where Louis James, Jeff Clark, and Doug Hornig stopped by was a big success. Angus, thanks for inviting the team to participate, and thanks to the group as well.

Meanwhile, the Calgary Phyle, which hosted the very first meet-up of Casey Research subscribers, will be getting together at the Cadence Coffee, 6407 Bowness Road NW on April 7 at 7:00 pm. You can get questions answered, or RSVP, by emailing calgaryphyle@yahoo.ca . Alex, the owner of Cadence Coffee, is the organizer of the phyle. If you can't make it to the April 7 get-together, stop by any time and introduce yourself as a fellow subscriber.
Argentina in Las Vegas. For those of you heading to our sold-out Crisis & Opportunity Summit, I wanted to mention that David "Santiago" McIlvaine from Doug's La Estancia de Cafayate project in Argentina, as well as Jack Zehren, the lead architect and land planner for the project, will be at the event. Property owners can catch up on the latest, and anyone interesting in learning more can do so.

And that, dear readers, is that for this week. As I sign off, I see the stock market is about flat, but still well up on the week. Gold has had a good day, topping $930, but coming back slightly. As you may remember, as I was writing this missive last week, I took a quick break to short the broader market... and was well up by the end of the day. A little while before the market closed, I got distracted long enough to miss the window to sell and lock in my profit, and then stubbornly hung on... the net result being a good thwacking as the stock market soared this week. Fortunately, I also bought some GLD as the gold market briefly dipped below $900 and so my net losses are minor, and I'm still holding both my short and my GLD as the week comes to a close.

While I do think the stock market could rally more here, I just can't see a sustained rally at this point. Could happen, but if it did, I'd be okay, because I am not leveraged or playing (a good word) with money I can't afford to lose.

The markets remain unpredictable and dangerous at this point. So caution is the word...

Until next week, when I'll be writing from Las Vegas, thank you for reading and for being a subscriber to a Casey Research service.

Sincerely,

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 - 01/23/09

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 - 10/24/2008

David Galland — Mon, 27 Oct 2008 15:47:33 GMT

Dear Readers,

I have woken in the pre-dawn to find our direst predictions coming true, with global stock markets taking yet another pounding and U.S. stock futures limit down.

Serving as a proxy for the mindset now gripping governments around the world, French President Sarkozy has announced that the French government will, henceforth, buy shares in important French companies in an attempt to prop them up.

"We will intervene massively whenever a strategic enterprise needs our money," said Sarkozy, a supposed economic conservative, as he pounded the table on behalf of nationalizing industry.

The New Age of big government is upon us. Armed with Harry Potter-like magical monetary wands, they are wildly conjuring a deluge of money from thin air to bind the free market and keep it from facilitating the resolution of economic and investment dislocations created over decades.

Bud Conrad tells me he is having a hard time adding up all the fiat money that has been committed to the battle for economic – and, by extension, political – survival over the past couple of months. The numbers rolling off the lips of officialdumb have progressed well past the hundreds of millions, or even hundreds of billions, and have now reached the trillions.

In that theme, the Fed announced this week that it would drop over half a trillion – $540 billion, to be exact – on the purchase of suspect commercial paper now clogging the portfolios of "safe harbor" money market funds. Given that there is a total of $3.4 trillion of your money resting in those very same funds, the commitment of $540 billion – about 16% of the total – should be taken as an indicator of just how bad the problem really is.

A friend of mine, employed as an executive in the money fund business, worried aloud to me over a cup of coffee a couple of months back that if even 5% of the total holdings were found lacking, the huge money market complex that provides his paycheck would be in deep trouble. That the Fed is opening the bid with 16%, therefore, says much.

Now my friend doesn't need to worry... his hefty paycheck is secured, compliments of Uncle Sam or, more accurately, the suckers whose pockets he so smoothly picks. Similarly, the stock portfolios of French shareholders are also now secure, compliments of Sarkozy.

On the topic of suckers, there is an old poker saw that goes, "If you are playing poker and within 30 minutes you can't figure out who the sucker is, it's you."

Well, the game has now been going on for about 50 years, and the average taxpayer is still glancing around, bug-eyed, trying to figure out who the sucker is.

They are about to find out.

The Trial of Gold

They filed into the docket, faces bright and smiley despite the shackles around their arms. The leader of the gang, Mr. Gold, was pushed forward into the defendant's chair. The rest, including Ms. Silver as well as the members of the resource share clan, Biggie Goldshares, Junior Goldshares and Ms. Silvershares, were manhandled onto the hard bench just behind. Rather than looking discomforted at the treatment or the ugly smells and sounds of the crowded courtroom, they just looked around pleasantly, as if on a church-sponsored outing to the local zoo.

Calling the court to order, the bailiff announced that all should rise for the judge. Shortly thereafter, Judge Market entered from stage left, a stern look in his eye. Approaching the dais, he arranged his robes around him and took his seat before gaveling the court to session.

The trial of Gold had begun.

"Mr. Gold, you and your cohorts have been accused of misleading investors into thinking that you would help them preserve their wealth, when exactly the opposite has been true of late. How do you plead?"

"Not guilty, Your Honor," Mr. Gold answered brightly, receiving a dour look in return.

"Mr. Cuomo, you may question the witness," Judge Market announced impatiently.

As Mr. Gold made himself comfortable in the witness stand, Andrew "Son of" Cuomo, taking a break from his well-oiled political career, I mean, job as New York attorney general, to serve as the public prosecutor in this high-profile case, rose smoothly to his feet, patted an imaginary loose hair into place, shot his cuffs, and approached the defendant.

"Mr. Gold, behind me in this court are good folks, hard-working folks, who believed in you. Yet you have failed to perform as advertised. How can you sit there, all shiny, and claim that you have not deceived the public in this regard?"

A pleasant and, some might say, radiant smile fixed on his face, Mr. Gold responded in an even voice. "I'm just a simple metal. I've never made any claims one way or another, so I don't know where people got it into their heads that I'm anything special. But for thousands of years now, people have been chasing after me, all over the world. Beats me why."

"Your Honor, if I may." The defense attorney, Mr. Reason, rose to his feet.

"Yes?" asked Judge Market, looking grumpy.

"I know it's a bit unusual, but Mr. Gold is not exaggerating when he says he's, well, kind of simple. If it pleases the court, it might speed things along if I could ask some expert witnesses to assist in answering the prosecutor's questions. Can do?"

"Highly irregular," said the Judge, glancing over at Mr. Gold where he sat, his smile and countenance oddly reassuring in the dark, smelly courtroom. "Mr. Cuomo, any objection?"

Seeing the fond looks in the eyes of many in the courtroom as they stared, fixated, at Mr. Gold... and after a quick consultation with his internal popularity meter and coming to the conclusion that he didn't want to appear mean-spirited, Cuomo nodded in agreement.

"Thank you," Mr. Reason said reasonably. "Then I would like to ask the Ghost of Murray Rothbard to join Mr. Gold on the witness stand."

As the court watched, their collective mouths somewhat agape, Rothbard's ghost floated softly to the witness stand and landed on the rail next to Mr. Gold, who winked at him amicably.

"Ahh, okay, well..." Mr. Cuomo, stammered, looking a little discomforted by the sight of Rothbard's ghost, his transparent bow tie ruffled slightly by some unfelt celestial wind. "How do you answer the charge against Mr. Gold that he has lured people to him under false pretenses?"

"I'd like to answer by quoting from an excellent book on the topic, the very best, in my opinion," said Rothbard's ghost with a wry smile. "It's called The Mystery of Banking and it is written by... me!"

In all countries and all civilizations, two commodities have been dominant whenever they were available to compete as moneys with other commodities: gold and silver.

At first, gold and silver were highly prized only for their luster and ornamental value. They were always in great demand. Second, they were always relatively scarce, and hence valuable per unit of weight. And for that reason they were portable as well. They were also divisible, and could be sliced into thin segments without losing their pro rata value. Finally, silver or gold were blended with small amounts of alloy to harden them, and since they did not corrode, they would last almost forever.

Thus, because gold and silver are supremely "moneylike" commodities, they are selected by markets as money if they are available. Proponents of the gold standard do not suffer from a mysterious "gold fetish." They simply recognize that gold has always been selected by the market as money throughout history.

Generally, gold and silver have both been moneys, side-by-side. Since gold has always been far scarcer and also in greater demand than silver, it has always commanded a higher price, and tends to be money in larger transactions, while silver has been used in smaller exchanges. Because of its higher price, gold has often been selected as the unit of account, although this has not always been true. The difficulties of mining gold, which makes its production limited, make its long-term value relatively more stable than silver.

Concluding with a large smile and a wave of the hand, Rothbard's ghost graciously accepted Mr. Reason's words of gratitude for taking time out of his schedule to make an appearance, then stood on the rail of the witness box and, with a flourish, took a deep bow before flying out the door to return to his ethereal seat in the heavenly branch of the Austrian School of Economics.

Mr. Cuomo played for a moment with a well-manicured cuticle before whipping around, his finger jabbing in the direction of Mr. Gold. His voice rose dramatically.

"And what, Mr. Gold, do you have to say on the topic of inflation? Can you deny that you and your friends claim to be inflation hedges? If so, then how do you answer to the fact that you are now selling for a lower nominal price than back in 1980! And, in inflation-adjusted terms, you are well behind! You, sir, are a fraud!"

Mr. Gold's smile remained unchanged, his countenance pleasant as always. "I'm sorry, but I really don't understand what you are talking about."

Mr. Reason again took to his feet. "Mr. Cuomo, if I may?"

"Oh, alright. Have at it."

"The defense calls Terry Coxon of The Casey Report. Mr. Coxon, would you be so kind to answer Mr. Cuomo's question."

Coxon made his way from a seat at the back of the courtroom where he had been enjoying the show and walked over to stand next to the witness box. Unable to help himself, he reached out and gave Mr. Gold a pat on the arm.

"So, Mr. Coxon," Son-of-Cuomo barked, "How do you explain that in 1980, gold touched $850. And here, 28 years later, it is trading for less than that – even though inflation has been persistent throughout the period. The claim that gold is an inflation hedge is simply false!"

Speaking slowly, to be sure that Mr. Cuomo understood, Coxon replied...

What moves gold isn't the rate of inflation but the change in the rate of inflation.

When people expect higher inflation, they bid up gold. When people expect lower inflation, demand for gold drops, even though "lower" may still be very high. That's why gold trended down in the 1980s, even though the inflation rate was high. The inflation rate was high, but it was declining.

There is a simple reason for this relationship. Gold and the dollar are both a store of value. Gold is more reliable in the long run, and the dollar is more reliable over shorter periods. Because they do somewhat the same thing for their owners, they are competing products, but with different attributes.

For example, the cost of holding dollars for their usefulness as a store of value is the gradual erosion of purchasing power -- price inflation. In a period of rising inflation, using dollars for storing value becomes relatively more expensive than using gold. So the demand for gold increases. And since the supply of gold – in ounces – is nearly fixed, the price per ounce goes up.

To sum it up, the price of gold is lower today than in 1980 because the rate of inflation now is lower -- much lower -- than in 1980.

Judge Market looked thoughtfully at Mr. Gold. "Mr. Cuomo, any more questions for this witness?"

"Not at this time, Your Honor," Cuomo said, flicking an imaginary piece of dust off the sleeve of his silk suit as Coxon returned to his seat and the bag of popcorn he had left there.

"But I do have a question for you!" he said, with a glare at Mr. Gold. "You sit there so calm, nonchalant, even. The public looks to you to remain a bastion of stability in challenging times. But as the financial crisis has swept over the land, you have been gyrating wildly. I accuse you of luring in investors by pretending to be calm, but in actual fact being dangerously volatile!"

Mr. Gold smiled and shrugged. Again, Mr. Reason took to his pins.

"I'd like to call Jeff Clark, editor of Big Gold. I believe he has some charts that might help in answering that charge. Mr. Clark."

His step enthusiastic, Clark walked briskly up to the bailiff and handed him two charts, which were, in turn, dutifully walked up to Judge Market.

"We'll call these exhibits A and B," said Judge Market, pulling on a pair of tortoise shell specs for a closer look.

From the wings, an overhead projector was presented and Clark walked over to it, flipped it on, and laid flat a transparency. Helpfully, the bailiff lowered the lights a touch.

"I think gold has gotten a bum rap," Clark began, his face aglow from the light of the projector and, perhaps, his passion for the subject at hand.

"In fact, despite recent weakness, between January 1, 2007 and October 10, 2008, when I prepared this chart, gold is up 42.6% while the bellwether S&P 500 is down 36.9%.

"For my second chart, I'd like to address the notion that gold is more volatile than stocks," Clark said, sliding exhibit A from the projector and replacing it with exhibit B.

Mr. Cuomo, thinking about the whupping his own portfolio of Wall Street darlings had taken of late, turned to Jeff Clark and almost spat out, "Since we're on the topic of stocks, let's talk about the big gold stocks. They were supposed to do better than the physical metals, but they have been hammered just as hard or even harder than many other stock sectors!"

In the back of the room, Biggie Goldshares examined his shoes, while Clark cleared his throat and said...

No stock has escaped undamaged in the global carnage, including gold stocks. The down-drafts have been breathtaking, and it's easy to imagine that gold stocks will just keep falling. Here's what happened...

For starters, hedge funds continued deleveraging, which can cause significant moves in market prices due to their use of margin. Withdrawals in U.S. hedge funds hit $43 billion in September alone. Meanwhile, mutual funds and "basket of commodities" ETFs continued selling off due to disappointed, or frightened, investors. This means the good was sold along with the bad. Add in the intensifying fear in the marketplace and few buyers were to be found.

Second, as the sea of red numbers continued splashing across headline news, investors fled in droves. Many simply didn't want to be the last one out of what they believed was a burning building, so "Dump everything!" was the mantra. Many stocks, in a perverse use of logic, were sold because they had value. Lots of investors simply fled to cash, which is where investors reflexively go when they see a market rout.

Lastly, right or wrong, gold stocks are perceived by some as riskier than your average IBM or GE. Further, few gold stocks pay dividends, and the ones that do only yield 1-2%. Some sellers might have stuck around if they were getting 8-10%.

So, is that it for gold stocks? Look at the reasons outlined above: where does it say investors sold because inflation is dead? Where does it say the public left because the government has promised not to print money to solve their problems? Where does it indicate gold is no longer viewed as a safe haven? Has mankind lost interest in war? Does the dollar's recent rise mean its ills have been cured? Banks are fine? The economy has a bright future?

The bottom line: the base case for gold stocks remains intact, because at some point the public will see them as the place to go for profit. Gold will rise, and regardless of what the general market is doing at the time, gold stocks will separate and follow gold up. The best days for gold stocks still lie ahead, because a much higher gold price is assured by all the recent efforts to stave off a recession. Since gold stocks were pulled down by a general market panic and for reasons unrelated to fundamentals, our advice is to hold on. We're confident their day will come. And we'll sell when the problems that have yet to push gold to new inflation-adjusted highs have all played out. In the meantime, we need to be steady while others are fearful.

From the back of the room, a hand shot up. Judge Market, already resolved that this was to be no ordinary proceedings, looked over his glasses at the owner of the hand.

"Yes? And who are you? And why are you interrupting?"

"Louis James, senior editor of the International Speculator," the mysterious stranger spoke up loudly for the courtroom to hear. "I would like to add a historical fact related to gold stocks in a crisis."

"Mr. Cuomo, any objection?"

In reply, Son-of-Cuomo simply shrugged and dropped into his seat.

"Go ahead, Mr. James," Judge Market said, rocking back in his chair, his eyes attentive.

Approaching the witness stand, James turned to the assemblage and proceeded.

Homestake Mining Company (now part of mining giant Barrick Gold, NYSE.ABX) offers a worthwhile illustration of the potential of gold stocks even during depressions. As a bit of a background, for more than 100 years, the company operated the Homestake mine in South Dakota. For you television fans, you may recognize the Homestake as being a centerpiece in the recent HBO series Deadwood.

In any event, in 1935, right in the middle of the Great Depression, Homestake recovered enough gold to make $11.39 million in net income, a record that stood for nearly 40 years – and that was at a time when the U.S. government had set the price of gold at $35 per ounce. Homestake shares showed some volatility but weathered the great stock market crash of 1929, ending the year slightly up. From 1926 to the end of 1935, they went ten-to-one, soaring from $50 to $500.

With fluctuations as you'd expect, they held on to those gains until taking off again during the 1970s bull market for gold. When you get home, you can learn more about it with some rather ugly but eye-opening charts available at this website: http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/HomestakeHist.gif.

Cuomo rose to his Gucci-shod feet with a wicked look on his face. "Mr. James, since you are here, maybe you could tell the jury why it is that Mr. Gold's known associate, Junior Goldshares, has done even worse, almost consistently losing money for investors over the past year. Lots and lots of money! What can you possibly say in Junior's defense?"

"Sure, happy to oblige," said the ever-obliging Mr. James, then launched into the answer.

In hindsight, it would have been nice if we'd taken even more profits than we did in August of 2007 and gone to cash – and now had that capital available to back up the truck for today's screaming buys. But the economic house of cards, which appears to finally be coming apart, could have done so last fall. At the time, cashing in on base metal plays, which can be expected to suffer with a slowing economy, and holding on to precious metals plays, for which the opposite is true, made perfect sense.

We would certainly go to cash rather than hold on to any conventional investment that has exposure to "toxic paper" or that can be expected to do poorly in a slowing economy.

But gold's day in the sun is coming soon, and we still believe the stocks give us leverage on that rising star. So, as stated in the most recent edition of the International Speculator, we're not selling anything unless we think the company doesn't have what it takes to make it through to the other side.

Of course, some investors might want to do some strategic tax loss selling, then look to buy back in the new year. The problem is that often times once you are out of the market, you can miss the big moves while waiting for the right moment to jump back in.

"Not much consolation for investors who have already lost money to Junior Goldshares while waiting for the big returns to materialize," sniffed Cuomo, looking meaningfully at the jury.

"No, it's not," James agreed. "No one likes to take an investment loss. But I have to say something here in Junior's defense. Namely, I have to remind folks of the speculator's credo, because no one's ever made a secret out of the fact that Goldshares are speculative in nature.

And that credo goes like this: "Speculators invest 10% in the hope of receiving a 100% return, while investors invest 100% in the hope of a 10% return."

In the International Speculator, a very apt name for the topic we cover, it has been our constant warning that investors should invest in Goldshares with no more than 20% of their portfolio. That's for the simple reason that while these stocks can offer big rewards – life-changing rewards, in fact – investors in the sector must be willing to accept big risks. Well, today, because of panic dumping, we are seeing the worse side of Goldshares.

Even so, for illustrative purposes, let's do the math on the losses that an investor who limited their investments to just 20% of their portfolio would have suffered with Goldshares. Assume, for example, that you lost 75% on the 20% of your portfolio that you allocated to the sector. In that case, your net loss on your overall portfolio would have been just 15%. Not fun, but not particularly bad, all things considered.

Conversely, take an investor who was 100% invested in the S&P 500 over the period mentioned by Jeff Clark earlier. In that case, they'd now be down almost 40%. Actually, looking at the market action today on my iPhone, the losses would be even worse than that.

"Now, hold on!" Mr. Cuomo sputtered. "All of this is good and well, but you can't all honestly be saying that you still think gold and even gold shares are still a good investment!"

Mr. Reason, stood again. "One more witness?"

"Oh, all right, but I want an answer to my question!" Cuomo barked, adding with a dramatic flourish, "The world wants an answer, nay, demands it!"

"Call your witness," Judge Market said, unimpressed.

"The defense calls David Galland, managing director of Casey Research.

A handsome, well-dressed man, his sublime intelligence palpable even from across the room, rose from the galley and approached the witness stand where Mr. Gold smiled happily at him.

"Okay, whoever you are, start talking," Cuomo said sharply. "You tell the jury how it is you could possibly be bullish about anything related to precious metals at this time. I mean, for gawd's sake, man, the global economy itself is collapsing. It is deflation that investors must be worried about. And yet, and yet... are you going to stand there and actually tell me you think investors should hold on to their precious metals investments? You are, I contend, either mad or deluded, or both at the same time!"

Unflustered by the bluster, Galland began to speak.

Economies and investment markets are complex systems, which is to say that predicting them with any certainty is an impossibility. Thus, my comments should not be taken to reflect certainty, but rather the best interpretation I can make of the situation as we see it.

For some years now, we have been warning that the house of cards, which has been built on a fiat monetary system, would come tumbling down.

It was because of the excess and the distortions that this system make inevitable that Doug Casey and others in the organization looked at the tea leaves and saw a Greater Depression, but one of an inflationary nature.

So, here we are, with the crisis upon us. There is no question that there is a massive deleveraging going on as individuals and corporations look to rebuild their stocks of ready money by dumping assets of all description. Real estate and equity markets are crashing as a result at the same time that U.S. Treasury instruments rise in value even though their yields are negative and falling. While buying into an instrument with a negative yield, at this point in time, many feel it is better to lose some money at a measured pace than take the sort of beatings being doled out in competing financial instruments.

Of course, as U.S. Treasuries are denominated in dollars, the inflow into those instruments has helped strengthen the dollar, putting pressure on gold and silver, which are, per Terry Coxon above, viewed as a competitive form of money. You can see that correlation in the chart here that Bud Conrad, who couldn't make it today because he is preparing for a trip to New Zealand, sent over.

The panicked reaction of investors in all sectors is understandable. The crisis we are now witnessing is not just of a once-in-a-generation scale, but once in a century. And so the scramble for safe harbors and cash is perfectly understandable. It's why Treasuries are so popular, and it's why gold has largely held its own in the broader scheme of things.

"Do you have a point to make?" Cuomo sneered from his seat.

Galland nonchalantly replied:

I was merely setting the stage for where we are at this point in history. And by that I mean, here and now, October 24, 2008. You see, when panic and confusion are the watchwords of the day, as they now are, there are two attributes of the successful investor that become especially important. The first is to stay calm. The second is to try to look beyond the immediate.

Many investors have, like the participants in the Charge of the Light Brigade – the anniversary of which, by the way, is tomorrow, October 25 -- have misread the signals and rushed straight into the cannons of the bear market, being wiped out in the process. Or, in their rush for the rear, they have dumped everything indiscriminately, suffering unnecessarily big losses on great investments.

Will the market continue to rig for deflation for the immediate future? Absolutely. And for the next little while, we can expect nothing other than bad economic news. Therefore, caution in all things financial is called for. Of course, if you have a good reserve of cash, then you could take positions in the inverse stock market ETFs and short positions on banks, financials, and real estate plays recommended in The Casey Report. But in a market as uncertain as this, such positions should be approached carefully, because of the increasing presence of governments in the markets.

Specifically, with each passing day, the risk increases of market-distorting government interventions, including short-sale bans, trading halts, direct interventions in individual stocks, increased margins on targeted commodities, etc. That greatly increases the risk for short-sellers.

"Are we going to get back to the topic of Mr. Gold et al. at some point? I have a hair appointment at 2:00 pm," Cuomo said, looking down for his reflection on the highly polished top of the table in front of him.

"Yes. Right away," said Galland.

You see, most of our recommended investments are not short-term in nature, but rather look for big trends that you can invest in when they are deeply out of favor. Our base case about the nature of the crisis, and especially the government's reaction to it, has not changed. In fact, if a year ago, you had asked us to estimate the amount of money the governments of the world would unleash in an attempt to head off an economic downturn, none of us, not even Doug Casey, our resident guru now wandering the highlands of Argentina, would have come remotely close to estimating the actual numbers being deployed.

To put some meat on that point, over the last month and a little bit, the monetary base of the United States has increased by a previously unimaginable and unprecedented 20%.

And our own Bud Conrad now estimates next year's U.S. government deficit at better than 10% of GNP, an also unprecedented number. And that doesn't even factor in the impact on the deficit from the fall-off in tax revenues that is inevitable given the likely depth of the downturn.

And it gets worse than that, because if you step back just a bit, you'll realize that, while financial markets have been devastated, the damage to the real economy is just now getting started.

Which is to say that the scope of the government's monetary exertions to "fix" everything are only beginning to ramp up. The Democrats, who look likely to control the whole shebang in Washington, are already calling for yet more stimulus and expensive intervention, including, this week, a call for the government to guarantee the nation's defaulting mortgages. Given that 265,968 mortgages went into foreclosure in September alone, this potential bit of largess is unlikely to come cheap.

"Has anyone ever told you that you're long winded," Cuomo asked.

"Yes, they have. It is a personal problem I struggle with every day.

Be that as it may, investors today have several choices, or some combination thereof, they need to make in face of the economic crisis.

They can choose to try and time this market over the short term, but if they do, they better use some very tight controls and pay a lot of attention, because literally anything can happen.

They could also choose to sell everything, take the tax losses, and sit in cash until that point when the inflation we see as inevitable makes the cost of holding that cash too expensive.

Or they can set aside enough cash to assure that their quality of life is not at risk in a collapsing economy and cautiously begin searching out the extraordinary values to be had in gold and other inflation hedges. There is no rush, but one would want to be positioned ahead of the big demand for these inflation hedges we see coming when the wall of government money begins to hit the economy next year.

As Doug Casey recently put it, and as the ghost of Rothbard seconded above, gold's highest and best use is as money, and sometimes it can also be a terrific investment. With the caveat that the near-term deflationary pressures will continue to periodically whip up headwinds for gold and other inflation hedges, we think that Mr. Gold, Ms. Silver, and the resource share clan are screamingly good investments. Personally, I am content with my resource holdings and am holding tight.

"Mr. Cuomo, do you have any further questions or comments before I pass judgment?" Judge Market asked.

"Only that I think these gold bugs are lunatics because everyone, but everyone now thinks that we are going into a deep deflation," Mr. Cuomo said dismissively. "I rest my case."

"Yes, that is so," Galland responded. "But, sooner than most people expect, we think that everyone, but everyone will begin to believe that it is a historic level of inflation they need to most worry about. At that point, Mr. Gold and all his friends will be waiting for them."

"Mr. Reason, do you have any closing comments?"

"No, sir."

"Then would the defendants rise," the judge intoned.

"In light of the evidence presented here today, and because a sound judgment in this case involves the passage of time, I'm going to postpone judgment on this case, and release the defendants with the stipulation that they report back here in six months. At that time, we will update our arguments and Mr. Gold, you and your friends had better have made amends by that time, or else. Do you understand?"

"Not really," Mr. Gold said brightly, "but I'll be back."

Funeral for an Economy

Years ago, I was asked to be one of six pallbearers for an elderly in-law in Montreal, the first time I had ever been asked to perform that somber service.

On the appointed day and hour, the pallbearers -- which included, I addition to myself, four elderly contemporaries of the departed as well as the deceased's younger son, who was of a similar age to my own -- assembled at the foot of the fifty or so stairs leading up into the imposing church to wait for the hearse. As befitted the occasion, we were all dressed in our best suits and spoke quietly among ourselves.

With the crowd assembled inside, the transport arrived and two burly attendants opened the door of the long, black vehicle and slid the large casket out on a purpose-built gurney. I can recall one of the attendants looking at the many steps leading to the church, and then back at the six of us pallbearers, and making a concerned face. He then instructed us on the technique involved in carrying a casket, watched as we positioned ourselves, and said a helpful "One, two, three, lift," which we did.

As the attendant slipped the gurney back into the hearse, leaving the six of us holding the large box carrying our dear friend and relative in mid-air, a shock went first through my body, and then my mind. The casket was too heavy!

It literally felt like someone had asked me to carry a pallet of bricks. But there I was, dressed in my finest, struggling to hold on to the front left rail of the elegant casket, looking with a silent whimper at the fifty steps.

In any other circumstance, I would have let go of the weight with a loud yowl, followed by a stream of obscenities at whomever it was that had played such a bad joke on me. That, as you can imagine, was not possible given the circumstances.

And so, surprising even myself at the inner strength I was able to muster, I lifted my foot onto the first step and hauled my burden unsteadily up the narrow stairs, not evoking in my mind's eye the toils suffered by the everyday Egyptian pyramid slave.

The process was repeated, painfully, step after step, sweat now pouring out of every one of my pores. In my cranium, red claxon horns blaring, simultaneously warning me that I was either going to split a gut or drop the remains of my dear friend and in-law onto the steep steps... after which, as sure as night follows day, the conveyance would begin a quick and dangerous backwards slide down the steps to an unhappy conclusion.

It was then that my straining brain remembered my fellow pallbearers, the dear departed's old friends. If I, a young man in the prime years of life, was almost done for, how could the poor old gentlemen possibly be bearing up? Oh, the tragedy, the human emotion that poured forth from me as I thought of how they must be suffering, and so I risked a concerned backward glance.

Only to see to my everlasting shock, that each was as unshaken as they had been thirty steps below, their elegant suits unruffled, their brows as dry as a freshly powdered infant. Except one, the young son of the deceased, who had been assigned the position on the rails at the far right rear of the troupe. His face was red as a beet, his face as wet as if in a shower, his eyes bulging and the veins on his temples writhing like snakes. In short, his countenance mirrored my own.

At first my brain could make no sense of the scene, but then I noticed that the four elder gentlemen, their faces somber but relaxed, were not in any definition of the word actually "lifting" anything, but rather had their hands resting lightly, daintily even, on the same rails that the two youngest members of the party were clutching as if for life itself.

Somehow, and to this day I still can't imagine how, we made it to the top of the stairs and into the church and then back down again an hour later, but I distinctly remember laughing out loud at the memory that evening when stretched out on a couch, exhausted to my core. And I laugh at it now, the memory of those elegant gentlemen going through the pretense of labor while the able-bodied carried all the weight.

So, why do I relate that scene today?

It is because it strikes me as a good metaphor to the potential of what may come to pass in the years just ahead as the government looks to pay for its many programs by raising taxes on the most productive of society.

While the Obamites, for instance, talk about modest tax increases on the rich, they fail to add into their calculations the impact of letting the Bush tax reductions expire. That one act alone will, over time, add the weight of hundreds of billions, trillions even, in taxes to the backs of the successful. And it will see a return of the estate tax, a tax that I find personally repugnant, given that the money it takes will have made it through the many tax harvestings I will have put up with throughout my career, making it to the finishing line only to have the state confiscate some large percentage of it rather than having it go to my far more deserving heirs.

And I suspect, politicking concluded, once the extent of next year's deficits is apparent, all promises about keeping taxes down will be swept aside for the hot air they are.

But with each new tax passed, the government increases the risk that the casket will be dropped.

How Long Will the Foreigners Support the Dollar?

With a U.S. government deficit in excess of $1 trillion next year, how long will foreigners be willing to invest in government T-bills and the like? Not overly long, we suspect. A suspicion heightened by the following item off the wires this week...

BEIJING (Dow Jones)--China should be very cautious in using its massive foreign exchange reserves to purchase foreign financial institutions, a senior Chinese official said Sunday.

Zheng Xinli, vice director of the China Communist Party's Central Policy Research Office, said at a forum that China should instead use its foreign exchange reserves to buy foreign resource companies, oil fields, and iron ore, copper and aluminum mines in foreign countries to meet China's demand for the resources.

China's foreign exchange reserves are the world's largest and last stood at $1.9 trillion at the end of September.

Zheng said the global financial crisis gives China a chance to internationalize the yuan.

He urged China to accelerate the pace of the yuan's convertibility reform, in an attempt to allow the Chinese currency to play a key role in the region.

On the topic of China, there was also this, this week... another of many signs that the Chinese remained focused on their future economic needs and are not afraid to act to take advantage of the current financial chaos to buy what they need on the cheap...

(Dow Jones)--China Development Bank may raise the small stake it holds in global mining giant Anglo American PLC (AAL.LN) as the value of the miner's shares has been falling on a worsening economic outlook, the South China Morning Post reported Monday, citing unnamed sources.

"CDB has a stake in Anglo American and it is actively looking at options for that stake," said one source.

"Alternatively, since it sees itself as a bridge between Anglo American and China, it could bring in other parties to take a stake," the source said.

The report didn't say how much China Development Bank owns in Anglo American, but said the bank "evidently" lent US$805 million to Chinese tycoon Larry Yung to fund his purchase of a 1.13% stake in Anglo American in 2006.

Anglo American spokesman James Wyatt-Tilby said in the report the terms of the financing placed ultimate ownership of the stake with CDB.

Credit Sucks and Don't Forget It

Friend and correspondent Sunni forwarded this in, this week.

On average, Americans have eight credit cards apiece and 20 percent of those cards are maxed out, reports CardWeb.com, which tracks the lending industry.

Americans now hold more than $850 billion in credit card debt, four times as much as in 1990. About 58 percent of cardholders do not pay down the entire balance each month. That group carries an average card debt of more than $17,000, according to the Consumer Federation of America."

This week, American Express announced that in the third quarter, they had suffered a 59 percent year-over-year decrease in net income from their credit card division.

This is yet another area in the economy we see getting much worse before it gets better.

Laughing Out Loud (When No One Else Is Looking)

Having received a nice response from you all after last week's humor installment, and having received an influx of new entries, I thought I'd repeat the exercise this week again.

This week's entry comes from friend Beth G... a revised definition of financial terms.

CEO - Chief Embezzlement Officer

CFO - Corporate Fraud Officer

BULL MARKET - A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET - A 6- to 18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING - The art of buying low and selling lower.

P/E RATIO - The percentage of investors wetting their pants as the market keeps crashing.

BROKER - What my broker has made me.

STANDARD AND POOR – Your life in a nutshell

STOCK ANALYST - The idiot that just downgraded your stock.

STOCK SPLIT - When your ex and their lawyer split your assets equally between themselves.

FINANCIAL PLANNER - A guy whose phone has been disconnected.

MARKET CORRECTION - The day after you buy stocks.

CASH FLOW - The movement your money makes as it disappears down the toilet.

YAHOO - What you yell after selling it to some poor sucker for $240.00 a share.

WINDOWS - What you jump out of when you're the sucker who bought Yahoo at $240.00 a share.

INSTITUTIONAL INVESTOR – Past-year investor who's now locked up in a nuthouse.

PROFIT – An archaic word no longer in use.

Miscellany

I am running really, really late today... so I will sign off right after mentioning that Alex in Calgary, who technically sponsored the first phyle in his coffee shop, would like to organize an ongoing group. If you are interested, contact phyle@caseyresearch.com.

As I sign off, accompanied by Tchaikovsky's 1812 Overture (the song aficionados of the movie "V" will recall this from the pivotal scene), I see the DJIA is off over 400 points, and gold has pulled back from the abyss and is now trading at $730.

Frantic, exciting, challenging, and sometimes tiring times we live in.

Hang in there... until next week, thank you for reading and for subscribing...

Best Regards,

David Galland
Managing Director

The Room 09/19/2008

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

September 19, 2008

Dear Readers,

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

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

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

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

Where Is the Bottom of the Markets?

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

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

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

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

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

David Galland

Rick Rule

So Why Are We Still Bullish on Commodities?

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

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

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

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

SHUIT Happens!

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

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

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

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

the largest un-hedged miners in the world!

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

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

Can Our Government Save Us from All Evil?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

International Speculator

It’s currently the third image down

www.youtube.com/watch?v=XwzYtdA6y_U

Boobus Americanus

Casey Investment Alert

International Speculator

Options & Futures

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

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

A Ride to the Rescue

Multiple Personalities

Buck Broke Mountain

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

And from the Desk of Doug Hornig…

chutzpah

sturm und drang

that’s

Olivier again for the closing remarks.

Panama

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

TV?

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

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

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

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

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

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

Olivier Garret
CEO
Casey Research

The Room 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

The Room 4/29/08

David Galland — Tue, 29 Apr 2008 14:56:33 GMT

Written: April 25, 2008

Dear Reader,

What an interesting week!

Having been a single parent for two weeks, with the kids on spring break for the second of those, I have attained a whole new level of appreciation, yes, I think that's the word, for the difficulty associated with holding down the home front.

I'll have some more thoughts on the topic of domestic servitude in a bit, but first I want to turn to this week's even more interesting developments in the gold markets.

The Battle for $900 Gold

With few exceptions, as gold has approached each new psychological price barrier in the unfolding bull market, it has gingerly touched the barrier, fallen back and then traded in a fairly narrow range before decisively taking it out and moving on. Not unlike, perhaps, Napoleon's army, with small skirmishes leading up to a full-scale assault and crushing victory.

The current battle is around the $900 level, a fairly steep retrenchment from the recent highs of $1,011. Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing Waterloo in this correction and dropping their gold as they run for cover.

So let's get to the nub of it.

Do we think we are now seeing a reversal in gold's fortunes? That, rather than cheering gold on as it defeats the fiat army and breaks through one whole number barrier after another... we'll now be playing a dirge as gold retreats down through those same whole numbers on its way toward lonely exile as a broken footnote of history?

In a word, no.

I'm not going to go into meticulous detail here, because that sort of coverage is found in our paid letters. But I do want to share some thoughts that may be of some use... if for nothing more than playing them back to me in sarcastic emails several months down the road if we're proven wrong.

A few things to ponder as the battle for $900 gold rages...

Current Correction Not Yet Exceptional. Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%. During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 13.9% at its worst (so far), is only fractionally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 - falling from $725 to $567 -- analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have subsequently missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they're the norm for any sustained bull market. In the 1970s' sustained gold bull market, a very similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And, I would stress once again, you have to be invested with money that you can afford to lose a substantial portion of and not be overly concerned. Otherwise you'll invariably become shell shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.
Big Gold Companies Delivering. Newmont just released its first-quarter 2008 financials, the first of the big gold producers to do so. As we have been forecasting, they had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw their cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from Q1 last year. And the company's cash operating margin rose to a record $537 million in Q108 over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we'll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont's shares on releasing its financials? They fell, albeit modestly, victim to this week's softening gold price and a dumb remark by the minister of mines of Ghana -- where Newmont has significant projects -- about the need for mining reform in that country. More on that latter topic momentarily.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.
Oil is stubbornly holding on over $100 and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world. As we have discussed in our various publications, there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point - because, again, no market goes straight up or down - the trend is clearly for sustained high prices. Gold is well supported, in our view.

So, What's Going On?

This week Dennis Gartman, who I am told is a fairly widely followed guru, announced he was exiting gold because, as he expressed it, the yellow metal had failed to rally last Friday to the extent he thought it should. But the final straw, according to his letter, was that the following day he saw some TV commercials that called for people to sell their scrap gold.

"What caught our eye over the weekend was a déjà vu moment when watching national television here in the US Saturday morning. We saw a brief show regarding the massive selling of gold jewellery on the part of the public to cash in on gold's sharp rise. The public is selling its old wedding bands; high school and college rings; necklaces; write bands "bling," [sic] et al, and it is doing so aggressively."

Now, he didn't provide any hard data to actually prove anything -- for instance, is the ratio of scrap coming on the market now running at extraordinary levels versus demand. But for the sake of argument, I'll assume he is right and that an extraordinary number of American consumers, strapped for cash thanks to the unfolding financial crisis, will dump their gold.

Will their heirlooms heading for high heat and then back onto the market as bullion overwhelm the bull market? Could that be the cannon barrage that ends the charge of the golden bull? Will that be what it takes for people to turn their back on gold in favor of the bottomless dollar?

I'm sorry, but I just don't see it. What I do see, as mentioned, are the facts on the ground. And those facts include rapidly rising global inflation and more bad news on top of bad news for the financial sector, housing, banks, etc.

In just the last couple of days, there has been hard data showing that -- per the comments of real estate expert Andy Miller, which I have recently related here -- the commercial real estate sector is now heading into serious problems. A report by the Office of Thrift Supervision this week has it that non-performing commercial loans rose by a factor of five last year, and now represent 4.6% of the total.

And the fuse on that very big barrel of powder is still freshly lit. How big? At this writing, there are well over $3 trillion in outstanding commercial real estate loans. So, 4.6% of that is not a small number. But it will be viewed as such when commercial defaults head for 10% or even 20%.

[Ed. Note: Andy also points to a pending bloodbath in the condo market. Providing support to that contention, I had a conversation this week with a top realtor in the small resort town that serves as global headquarters for Casey Research. She told me that of the 112 condos put up for sale in this town last year, only 12 sold.]

Credit card debt is also starting to go south, fast. You don't need me to tell you, but I will anyway, that a reasonably well-maintained fence post could have gotten a credit card between 2000 and 2007. And so it is no surprise that this week we heard that the Target discount stores were writing off over 8% of their outstanding credit card balances. A straw in a tornado, if you ask me.

I could go on, and on, and on... but won't. I will say, however, that faced with these far-from-resolved challenges, there is only one certainty: the government will mount a massive artillery barrage. But instead of grape shot, it will be greenbacks they'll be firing as fast and as furious as they can.

Technical, Shmechnical

More than once in the past I have blown a passing raspberry in the general direction of the technical analysis that Mr. Gartman relies on, in addition to his television programming, for his investment recommendations.

After a long career in this business, I think I have some basis for my general disdain for the art of technical analysis. Note I didn't say "art and science" because as far as I can tell, other than some scientific-sounding parlance, there is nothing scientific to it.

Am I being too hard on technical analysis? Maybe. But I think I have a legitimate gripe when I point out that technical analysis is so subjective that two analysts can look at exactly the same wiggly lines and draw two completely different conclusions... and they can still both be wrong.

And an analyst can, using the same methodology month after month, readily explain with a straight face how it was that the results predicted in the previous month but which came out differently than expected, are actually consistent with their previous forecast.

Consider this paragraph I received from a well-known technical analyst this week (who will go unnamed because I actually like him a lot). Commenting on the U.S. dollar, his service writes...

The USD appears as an ending diagonal triangle pattern, currently in wave 4 of wave (5). The last update indicated that the USD was possibly in a (contracting) triangle but it will likely complete as an (ending diagonal) triangle.

Contracting triangles and ending diagonal triangles are both very corrective patterns. The previous newsletter indicated that a possible triangle was in play and the pattern appears to have evolved into an ending diagonal triangle pattern. We have both possibilities illustrated in the animated chart below. The contracting triangle pattern would suggest the downside is complete, while the ending diagonal triangle indicates that one more wave down is expected to complete the pattern. A move above the green horizontal line would indicate that the contracting triangle is complete. We are expecting one more choppy wave down to the recent lows and this would indicate the ending diagonal pattern is completing. Ending diagonal patterns always end with sharp reversals to where the pattern began, so once it is complete, we can expect a sharp rally above 73.

Hold on a couple of seconds while my head stops spinning. Okay, that's better, I'm back.

Now, could the U.S. dollar, which has been beat mercilessly these many months, make a rally? Of course. It would be extraordinary in the extreme if it did not. But to actually try to manage one's portfolio based on the tangled technical entrails such as those splattered on the page just above is, at least for my money, a non-starter.

Instead, I have to look at the bigger picture. And the bigger picture is a serious financial crisis getting worse, and rising inflation and even trade protectionism now sweeping the world.

You go right ahead and sell your gold. I'm hanging on to mine. And if I'm hanging on to my gold, I'm hanging on to my gold stocks, because that's where the real juice will be.

Maybe not this month, or next... or maybe not until this fall, or even beyond. But when I look at the alternatives and the amount of risk I would have to take to get even a 10% return right now, I am very, very comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, 500% gains down the road will catch me up in a hurry.

Other Views

Casey Research Chief Economist Bud Conrad dropped me an email in response to a call made by one technician to sell gold. His comment...

The reasons provided here are technical, looking at the moving averages, "moving average crossover," etc. To trade this, you need to know when to get out and when to get back in; which requires two timing decisions. I don't know that many famous, rich technical traders. Soros, Rogers, Buffett are all fundamental investors.

My view is still long-term bullish, and I am even more convinced after looking at the actions of the Fed to debase the dollar, and the world food shortages and Peak Oil energy shortage that drove crude to $120.

My $1,200 gold prognosis for the end of the year is intact.

I also spoke to Doug Casey, who is currently working out of an apartment in Buenos Aires. His basic take is that while he is concerned that we'll see more weakness in the gold shares, based on the old adage "Sell in May and go away," he remains entirely bullish on gold and it is where all his loose cash goes.

Clyde Harrison, the creator of the Rogers International Commodities Index and now the Brookshire Raw Materials Fund (www.brookshirerawmaterials.com), and one of the smartest guys in the commodity business, sees most commodities trading in a range for the next few months. The exceptions are copper, which he is a screaming bull on... and rice, which he thinks is a great shorting opportunity.

A Word About Political Risk and Gold Stocks

This week, the Ecuadorian government committed economic suicide on behalf of its struggling population. It did so by passing a six-month moratorium on all exploration and mining development.

As a consequence, as you read this, the technical staffs of the many good companies working in Ecuador are draining their last beers in Quito before climbing onto planes for their new jobs in more mining-friendly corners of the world. Rest assured they will not go unemployed, given the massive shortage of skilled help in the sector. And they won't be returning to Ecuador anytime soon.

This end of mining in Ecuador has cheered the very active NGOs working there, which make their daily bread by interfering with any extractive industry (that is not an exaggeration - we have met with them there).

In fairly short order, however, this draconian move will backfire on the politicians, and the Ecuadorian people, in a big way. For the simple reason that money goes where it is treated best. Certainly not the case in a country where existing contracts can be nullified literally overnight based on nothing more than a light breeze.

Soon, once the last of the disgruntled miners throws up his hands and stomps out, the hallways of the country's ministry of finance will grow silent enough to hear a beetle crawl.

And it will stay quiet until the ranks of the poor, swollen by the unemployed former staffs of the many resource companies previously doing work in the country (and their many dependents), make their voices heard outside of the windows of government. Punctuated, we hope, by the occasional attention-getting rock being delivered through said windows.

At which point the staffs of the NGOs will retie their ponytails, quickly pack their L.L. Bean distressed-washed backpacks (equipped, no doubt, with the latest personal rehydration units) and follow the geologists out of the country, leaving the Ecuadorian people to their own devices.

Unfortunately, this sort of idiocy is not a trait of Ecuadorian politicians alone. The fact is that resource bull markets inevitably lead the locals to put aside any form of rational thought and reach instead for masks and guns. All in the name of the "good of the people," of course.

In recent months, the Democratic Republic of Congo, a misnomer if there ever was one, pushed the reset button on all current mineral concessions. And this week, per above, the Ghanaian minister of mines commented that that formerly steadfast bastion of mining and sound contract law was going to do a rethink with an eye towards grabbing a bigger share of the mining pie.

And it is not just the third world where this sort of thing goes on; how many energy companies (and their investors) were blindsided by the penurious new royalty regime heralded by the brights running Canada's Alberta province? And how many will likewise be affected if the U.S. moves ahead with mining reform, as appears now to be likely?

The fact is that the extractive industry has few friends and many detractors. And so you can get everything right when picking a good company to invest in (Aurelian in Ecuador, for example), but still get cut off at the knees by the politicians.

I mention this because it is near the top of my mind as I write. And because here at Casey Research, we will be redoubling our efforts to stay in even closer touch with the countries where our recommended companies have important projects. (We had been watching Ecuador closely, including receiving and reading regular local reports written in Spanish, but we were still surprised - along with the companies working there - that the Ecuadorian legislature moved so quickly, and in such a negative direction.)

To help us in our efforts, we are in the process of setting up correspondent offices in all of the major mining jurisdictions, establishing an even more highly tuned early-warning network, if you will. This will still be no guarantee that we can't get blindsided, but it certainly can't hurt.

Regrettably, as with pretty much every investment you make, politics looms large. In fact, it now towers above all other inputs by a very wide margin. And on that topic...

Food & Politics

Lately, there has been a tremendous amount of media coverage about rising food prices. In fact, it has risen to "OJ" status. Not as in Orange Juice, the healthful breakfast beverage, but as in the affair of "OJ Simpson," a media-created frenzy designed to assure avid readership by a citizenry suffering from wholesale attention-deficit disorder.

While there are certainly structural issues that are putting pressure on food, and likely will for some time, this week one of my regular correspondents, Steve Henningsen of The Wealth Conservancy, forwarded a link to an excellent article on the food crisis that appeared on mises.org. You can read it here.

http://www.mises.org/story/2952

I find it very interesting to watch the actions being taken by governments in response to the rising food prices. The Indian government, which retains the programming received at the end of a swagger stick while part of the British Raj, announced this week it will be prohibiting certain food exports.

The less hidebound Thai government, by contrast, said this week that they have no intention of stopping the export of rice, but rather are viewing higher prices as a commercial opportunity for their farmers.

Meanwhile, the Canadian government announced that it was going to pay pork producers $50 million to kill their hogs, 150,000 of them. I don't have time to go into the long-term problems caused by this sort of meddling, but I will report the news from a hog farmer friend of ours in the U.S. that, even without subsidies, he and his cohorts in that business are now killing their male baby hogs and using them for compost.

And there are increasing calls in the U.S. for the regulators to change the rules on commodities contracts in an attempt to stop speculation.

But, other than the laissez faire Thais, none of these actions will plant another ear of corn or another stalk of grain. Instead, killing exports will only hurt farmers, assuring that the food shortage becomes a real food crisis.

What to do? Personally, I have recently been acting on Doug Casey's recommendation to buy beef... with hogs as well. While the cost of feeding them may cause a flood of meat on the market in the near term, as the farmers cull their herds... in time, and probably sooner rather than later, there will be a meat shortage.

[Ed. Note: Our own Bud Conrad was early into agriculture as an investment, and has been doing a lot of analysis on the topic. We'll continue to update you on his recommendations in the International Speculator. If you are interested in staying up-to-date on agricultural investments, details about our three-month, no-risk trial can be found here.]

Junk By Any Other Name

This week Moody's announced they were downgrading 32 different tranches of previously AAA-rated "Alt-A" mortgages. These are popularly referred to as "liar loans" - by the very same people who sold them in the first place -- because these loans don't require the applicant to provide proof of income or assets.

Given the previously staid reputation of the industry, one would expect that when down-grading bonds, the rating agencies would review their paperwork and realize that, perhaps, Mr. Jones in the cubicle down the hall made a slight oversight when initially appraising the bond portfolio. And so, after a quick admonishment to be more careful in the future, the rating agency would drop the portfolio down a notch or two.

Oh, if it was only so. Instead, what is going on is akin to learning that Mr. Jones has been indulging in a daily dose of hallucinogens. And so the latest Moody's downgrades are seeing many of the bonds knocked back from AAA, which is supposed to be above reproach, to junk status overnight. And Moody's is far from done; they have put another 254 Alt-A bond tranches on their negative ratings watch list.

The lame-stream media may want you to believe that the credit crisis is over, but quite the opposite is true - it's accelerating.

And so, for your further reference in the weeks and months ahead, I provide just below a guide to the Moody's rating scale, lifted wholesale from the AARP website. (Try not to giggle as you read the description of Aaa-rated debt...)

Moody's Bond Ratings

Aaa -- Best quality, with the smallest degree of investment risk.

Aa -- High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds.

A -- Possess many favorable investment attributes; considered upper-medium-grade bonds.

Baa -- Medium-grade bonds (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade.

Ba -- Have speculative elements; futures are not as well assured. Bonds rated Ba and below are generally considered speculative.

B -- Generally lack characteristics of a desirable investment.

Caa -- Bonds of poor standing.

C - Lowest-rated class of bonds, with extremely poor prospects of ever attaining any real investment standing.

Of course, downgrading a bond from AAA to junk overnight is not unlike pulling it out of the drawer and setting a match to it. I can tell you one thing. If I were a conservative buyer of AAA bonds, I would be none too happy. It's a good time to be a lawyer.

I Am Womyn!

Laundry, cooking, tidying up, promoting basic hygiene and healthful activities, all while trying to keep up with my regular duties at Casey Research... for a day or two at the beginning of my wife's European vacation, it was something of a personal challenge. Sort of like seeing a mountain and, strapping on the boots, striding forth indomitably, chin up and eyes flashing with the goal of reaching the distant top.

But the difference between mountain climbing and a steady course of single-parenting is that the mountains of daily duties are as if on a moving sidewalk, coming at you one after another, no end in sight.

For one shining moment this week, I pushed what I thought was the final load of laundry into the basket, but no longer than 15 minutes later uncovered a new stash of the stuff, tucked into a forgotten hamper. Then I realized the sheets on the beds needed changing, then the kids had a particularly muddy play session and next thing you know, the vanquished pile had returned with reinforcements.

Summing up the experience: while many and maybe even most members of the male gender have long paid polite lip service in acknowledging the challenging task their wives have in keeping up with domestic chores -- lip service usually accompanied with an understanding though insincere smile and maybe a gentle pat on the derriere -- the time has come to admit that women are tough. Far tougher than men, in fact.

Forget this whole, "Woe is me, I have to work at the office all day" nonsense. Many women have to work all day, but only after working all morning to get the kids out the door to school. Then, on return from their day jobs, they are greeted with yet more work, providing sustenance to the crowing beaks of their broods before rolling up the sleeves to get the laundry done, the pets fed, the kids to bed, etc. ,etc. -- ad infinitum.

While I have always tried to chip in and do my fair share of the daily chores, I realize now that what I consider "my fair share" is probably a tenth of what has to go on to keep the household from regressing to a level on par with that experienced in the Dark Ages: dirt-covered floors, filthy, rag-clothed children and mangy dogs fighting each other for the underprepared table scraps.

And so, speaking only for myself, I hereby apologize to all womynhood for my personal lack of true understanding these many years. And I'll go one step further and swear that, should they allow me into their club, I shall from this point forward be a card-carrying feminist. Let my people go! I say.

Furthermore, I will throw my wholehearted support behind Hillary. Compared to any of her gender, Obama and McCain are wimps that she could take with one hand while the other was flipping the morning pancakes!

Manhunt Report: Diamonds Are a Girl's Best Friend?

Last week I promised an update on "Manhunt." Well, true to her word, the subject in our experiment in matchmaking has sent her first report, which follows...

Inquiring minds want to know an update to Manhunt, an ad which ran in this Casey Research publication a few weeks ago. The response has been overwhelming. I've never experienced so many quality emails -- and quality males -- all in one place, courting me, all at the same time. I'm quite overwhelmed and am at a loss for words at the moment. To best illustrate what it has been like to be me ever since Manhunt was published, I present to you Marilyn Monroe's performance in Gentlemen Prefer Blondes:

Marilyn Monroe vocalized:

The French were bred to die for love they delight in fighting duels
but I prefer a man who lives
and gives expensive jewels.

A kiss on the hand may be quite continental
but diamonds are a girl's best friend . . .

Are diamonds really a girl's best friend? No, no. Oh, no, no, no, no, no, Marilyn Monroe. Nay, I say. Diamonds are not a girl's best friend, at least not in this day and age of the New Diamond Age. The song of myself I sing:

The French were bred to die for love they delight in fighting duels
but I prefer a man who gives
and lives to break the rules.

A kiss on the hand should be intercontinental
Casey Research Subscribers are a girl's best friend . . .

I happily excuse Marilyn's perspective. To each her own. Not to mention Marilyn's performance was in 1953. That was then, and this is now. The world transforms. Values change. Courtship e-volves. An "anti-suitor" sent me an email, implying that I was a gold-digger. I clarified to him:

I'm not a gold digger. Should I be? But I'm a libertarian-digger. More precisely, a security-digger. Meeting a man well invested in metals would provide me with a greater sense of security. I'd like to be optimistic, but realistically, I don't see the dollar just dropping -- I see it altogether imploding. My lifestyle is extraordinarily simple, and I like it that way. I detest shopping, especially for shoes. And diamonds really bore me. A dog is a girl's best friend.

As for gentlemen, some still prefer blondes, but others turn their heads for brunettes. In fact, some even say that blondes are becoming an extinct species. Nevertheless, I digress.

The Manhunt has practically become a full-time job for me. What's a woman to do when she has handfuls of wonderful men at her fingertips? Proceed slowly. Set up a spreadsheet. Track and filter accordingly, for, more valuable than diamonds or gold, is the ability to connect with like-minded people. Or, in my case, to ultimately find a compatible long-term mate. The Project Manhunt men who've contact me are gems -- individuals of great value. If someone gets filtered out due to partner incompatibility, I still keep him on record for friendship-ability.

Two weeks into Project Manhunt, the content/experiences I've already encountered are worthy of being written into a book. (Suitors: Don't worry, I won't use your names. Nor will I send your contact data to marketers. I'm pro-privacy.)

I don't want to waste much more of David Galland's newsletter space, so before I go, I'll provide you with tidbits of Project Manhunt tabloid gossip. One man has proposed marriage to me via email. Another is a kind widower with children, and his family sounds quite dandy. A different suitor wants me to be his co-pilot -- seriously -- and is eager to teach me how to fly his plane.

Matches aren't made overnight and I'm certain Project Manhunt e-courtship shall continue for quite some time. So keep the emails coming, boys. Stay tuned for Project Manhunt Report #2 titled "Material Girl."

Miscellany

The philosopher/poet George Santayana is credited with the words, "Those who cannot remember the past are condemned to repeat it." I wonder what he would say, then, about White House Press Secretary Dana Perino. According to an article my friend Brian Hunt read in Playboy (which I am sure he reads only for the articles) and quoted to me, she admitted on a radio program that she didn't know what the Cuban Missile Crisis was.

"I was panicked a bit because I really don't know about the Cuban Missile Crisis," Perino said of the time during a White House briefing when she was asked a question that referred to the confrontation. "It had to do with Cuba and missiles, I'm pretty sure."

It is always remarkable to me how it is that people labor under the impression that those in positions of power possess a superior intellect, sharpened by years of study.

And so I'd like to thank Ms. Perino for doing her part to help correct that wrong impression. (Just for the heck of it, this week I am going to survey every adult I meet on their awareness of the Cuban Missile Crisis and see whether Ms. Perino's ignorance on the topic is, rather than an indictment of political class, a commentary on the failure of American education.)

Also in the Miscellany category this week....

Dallas Phyle. Maria W., who has taken it upon herself to organize a get-together of Casey subscribers in the Dallas/Ft. Worth area has written in that the first meeting will be held Friday, May 2nd at 6:30 pm at Beau's at the Crescent Court Hotel. If you'd like to attend and share views with other members of the Casey family, then drop us a note at phyle@caseyresearch.com and we'll get you connected.
Bud Conrad in the Big Apple. Casey Research Chief Economist Bud Conrad will be speaking on the topic of "Peak Everything" and doing a workshop at the upcoming Hard Assets Conference at the Marriott Marquis in New York. You can learn more about the conference by visiting this website. http://www.iiconf.com/pebble.asp?relid=62254
Save the Witches! Some people have suggested that the massively undeveloped and fertile lands of Africa might hold the solution to world hunger. Based on many business trips to Africa over the years, I'm not so optimistic. You may better understand my skepticism if I relate an experience I had with a driver I once used to take me here and there in South Africa and Bophuthatswana.

He was, I can assure you, a very elegant and well-spoken man. After spending much of a week in his company, I thought I knew him fairly well. Until one morning, while reading the morning paper, I came across an item describing how some local villagers had become convinced that three young women had sold lightning to the devil who then hurled it back in the vicinity of the village. To assure it wouldn't happen again, said villagers rounded the women up, locked them in the trunk of an abandoned car and set it on fire.

When I asked my driver about this unfortunate incident, he went on a diatribe - not against the barbaric ritual, but soundly in favor of it, claiming that the presence in Africa of the white man had erroneously deprived the locals of their magic. We didn't speak a lot after that.

Of course, while this sort of ignorance will only be put to rest with economic success and the educational opportunities that accompany such success, there is nothing to say that Africa can't, or won't, someday be a more successful continent. But I fear it may be many decades away. I mention this because this week, someone sent me a link to a rather humorous example of the superstitions that continue to plague Africa... a widespread panic over the theft of men's private parts, to use a delicate term. If you have nothing better to do, click here to give it a read...
China's Coal. Just last week in these musings, we discussed the outlook for coal. Which, depending on how you view these things, is either helped or hurt by the news that China is down to just 12 days' supply. For a country that is largely run by coal, this is no small thing and should provide a lot of support to coal for some time to come.

(Coal is, of course, one of the areas we follow in our Casey Energy Speculator, an exceptional value in our admittedly biased opinion. Checking it out is easy with our risk-free three-month trial. Don't like it, cancel within 3 months and you get all your money back... what could be more fair than that? Learn more by clicking here.)

And That, Dear Readers, Is That for This Week

As always, I sincerely appreciate you taking the time to read and to subscribe to a Casey Research publication. If you have written me in the last ten days and I have not responded, I apologize as the household tasks, on top of my duties with Casey Research, have vaporized any spare time. I will endeavor to respond early next week (my wife returns tonight... big party!).

As I sign off, gold is battling back toward $900 and the DJIA is off a fair bit based on the news that U.S. consumer confidence has plummeted to the lowest levels in 26 years (no surprise there).

A couple of weeks ago, I closed with a guess-the-gold price competition. We'll do it again this week. The parameters are that you have to have your bet in by midnight (EST) Monday, April 28. The person closest to the intraday spot price high for the week, as of noon on Friday, May 2, wins a one-year subscription to BIG GOLD, our publication dedicated to providing profitable analysis on large-cap, gold and silver-producing and near-production companies. Send your entries to David@caseyresearch.com.

My bet for next week's high? $927.

See you next week!

David Galland
Managing Director
Casey Research, LLC.

The Room 4/14/08

David Galland — Mon, 14 Apr 2008 19:05:18 GMT

Written: April 11, 2008

Dear Readers,

No question about it, we humans like to keep things simple. And no wonder; if the world is anything, it is chaotic.

And so we look for our philosophy in un-taxing nuggets, the sort, perhaps, that might grace the back of a cereal box, be squeezed onto a bumper sticker or unfold fully contained in a 5-second sound byte on the evening news.

"Ask not what your country can do for you, but what you can do for your country" pops to mind.

As does, "You are either with us, or against us."

But few hold a candle to, "From each according to his abilities, to each according to his needs."

Thus wrote Karl Marx, by reliable accounts a penniless, unpopular, slovenly loser throughout the entirety of his miserable existence. Yet, avoiding any deep contemplation, the masses gravitated to his slogan, resulting in hundreds of millions of deaths and untold misery that carries forward even to this day.

This willingness, nay, rush, to unthinkingly embrace the simplistic is very possibly coded into our DNA. And for good reason.

After all, if our club-bearing ancestors had paused to inquire more closely into the root reason that the rest of their hunting group was running screaming from the large growling sound emanating from a nearby bush, then we wouldn't be having this chat today. Instead, they took the cue and dedicated themselves to outrunning their companions (a race that our very presence here today attests they won).

Millennia of similar experience, and the need to efficiently sort through the daily onslaught of input our poor minds receive, has resulted in a tendency by humans to think in one of two ways, depending on our individual temperaments and the need at hand.

The first form of thinking is cue-based, or heuristic. The second is termed "systematic." To understand the difference, consider the process you might go through when looking for a new computer. You could do all the hard research yourself; that would be thinking systematically... or you could simply pick up the current edition of some suitable buyer's guide and flip straight to the "Best of 2008" award and you are done.

While we all think in both modes, most tend to shift between the two, some more frequently than others. And because it is more difficult, most of us look to reduce the amount of systematic thinking we are required to do by delegating that responsibility to those who are good at that sort of thing. For example, we might pay an accountant to do our taxes. Likewise, if you are collared for some real or imaginary offense, you could immerse yourself in all the various case laws that apply to your situation, or you could pick up the phone to call a lawyer.

In my view, it is essential in this modern age to keep this aspect of our human nature in clear perspective as you listen to all the electioneering, posturing and pontificating that now competes for your daily attention.

Or, put another way, when confronted with convenient explanations or fine-sounding platitudes, make a concentrated effort to shift into systematic thinking mode.

While I could point to literally hundreds of jingoistic but empty ideas floating through the ether just now, our globe-trotting chairman Doug Casey has just written in from Argentina with a good example , one that has specific relevance to us as investors. Namely that today's inflation is being caused by rising commodity prices.

Rising Commodity Prices and Inflation

By Doug Casey

Many people blame inflation on higher prices of gasoline, wheat, copper, or what have you. This is an old, idiotic, and tragic economic fallacy.

It's idiotic because it confuses the consequences of currency inflation with its cause. And tragic because it blames inflation on those who produce real wealth, as opposed to the government, which is the actual cause.

In today's world, governments, through the central banks, control the amount of money in existence. If they double the money supply, the general price level would double. Of course not everything rises at the same rate. Since inflation initially makes people feel richer, perhaps the prices of Ferraris would go up a lot - but the prices of old Chevys would drop - who wants old cars when loans are out there for a new one?

If the money supply is stable, and one commodity goes up a lot, the price of others must drop - the general price level, in terms of dollars, stays the same.

Inflation causes people to save less. That means there's less capital to invest for new production, even while it encourages more consumption now (to beat anticipated higher prices). This is the main reason inflation causes the standard of living to drop - in addition to causing the business cycle.

Bad Speculators

David again, though continuing on the same theme. This morning I heard an interview between a National Public Radio host and Robert Zoellick, head of the World Bank, about that august body's recently released report on rising food prices and the social unrest now beginning to break out as a result.

I have to say, while I tend to be very skeptical of supra- organizations such as the World Bank, Zoellick impressed me as a reasonable man when he failed to rise to the bait of the interviewer who must have asked the same question 5 times, along the lines of "How much are speculators having to do with the food price run up?"

It was only after much more of the same that the conversation turned to the actual biggest culprit identified in the World Bank survey; the shift toward redirecting food crops, and the land used to grow same, to the production of biofuels. A misallocation that would not have been made without government mandates and massive subsidies.

I recently read a pretty good book on the history of the U.S. dust bowl that has become iconic, along with soup lines, of the Great Depression of the 1930s. The book, titled The Worst Hard Time, was quite revealing... for example, of the stubborn optimism of certain people who -- despite year after year of failed crops and dusters that would cover the floors of their shacks in a foot of fine dust, kill the cattle and even close family members -- refused to move away, figuring it couldn't last forever.

If, in fact, they had done a systematic evaluation of the climate of the dissected areas where they had been encouraged with free land by the government to set up their farms in order to meet global food demands triggered by World War I,they would have found that drought in the Texas panhandle is the norm, not the exception.

In the latter years of the disaster, the Roosevelt administration commissioned an extensive study to reveal what had gone wrong. According to the author, Roosevelt and his merry men expected to find it was caused by climate change coupled with excessive speculation. What the study's leader eventually reported, however, was far less pleasing: it was the government's own well-intentioned but poorly considered machinations that were behind the dust bowl. That's because without the subsidies, the mass migration to an area that was climatologically ill suited to agriculture would never have happened.

Not one to suffer second guessing, Roosevelt pretty much disregarded the study. In fact, he went further and, disregarding the whole "climatologically ill suited to agriculture" part, attempted to solve the problem by ordering the planting of millions of trees... virtually all of which quickly died.

But back to the present. As food prices rise, along with virtually everything else, the sloganeering and rhetoric are going to reach a shrill pitch. The government will begin to point the finger at anyone and anything other than the real causes, starting no doubt with "speculators," who will be portrayed in the same light as war profiteers.

The practical implications of this -- other than stirring up the class warfare so fondly anticipated by Marx as he sat in his grubby chair scrawling a screed against the capitalists -- will be to unleash any number of government "solutions" that will sound high minded, but lead to low results. Price controls... interference in the free flow of foreign capital... trade sanctions... changes in margin requirements for commodities accounts... higher capital gains taxes. It's all coming.

At our recent Scottsdale Summit, one of the more memorable thoughts was shared by Dan Mitchell of the Cato Institute when he pointed out that the government was increasingly using higher taxes on tobacco to raise the costs and therefore curb the habitual use of the noxious weed. "And, you know what, the government got it right. Higher taxes do reduce consumption," Mitchell commented, adding, "So why is it the politicians don't understand that the same principles also apply to commerce and investment markets?"

A good question, but one that most people won't ask themselves as they applaud President Obama's proposed near-doubling of the capital gains tax from 15% to 28%.

Take cover.

Guess Who Will Soon Own 1,000,000 Homes? You Will!

A couple of weeks ago, I mentioned the view of real estate pro Andy Miller that, absent government intervention, the real estate meltdown would be incredibly painful, but relatively short lived. But if the government rolled up its sleeves and set about "fixing" things, the pain could stretch out 10 or even 20 years.

At this point, the odds greatly favor the latter.

In fact, we seem to be in a race to the bottom for the candidates, egged on by the professional posturers that hold forth in Washington.

Case in point, House Finance Committee Chairperson Barney Franks, maybe the least financially savvy human being I have ever heard discourse on the topic of finance, has teamed up with Senator Christopher Dodd to propose the nation set up a special $400 billion taxpayer-funded pool for the sole and specific purpose of buying non-performing loans from troubled lenders.

When confronted by such largess in the past, I have been known to make indelicate remarks. A plan of this degree of sheer disregard for anything remotely resembling the free enterprise system leaves me nearly speechless. $400,000,000,000 is a lot of money, no matter what anyone tells you.

And the democrats are not alone. Even John McCain, bending to the anticipated wishes of the voters this next November, has just done a brisk about-face and announced his own bailout plan. A plan that but for some modest window dressing, is almost identical to that which has been proposed by Mssrs. Barney and Dodd. To quote Bloomberg,

The (McCain) plan would retire old loans that homeowners no longer can pay and replace them with less expensive, 30-year, fixed-rate mortgages that are federally guaranteed. McCain said families would gain "the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home."

Karl Marx would be proud.

But am I being too harsh in condemning government action? After all, when we are talking about collapsing housing prices, we are talking about real hardship being felt by real people... with lots more to come.

It's a good question, even though I asked it myself. But the answer is relatively straightforward, albeit in the form of another question.

"Which economic system has history proven to provide the maximum reward to the maximum number of people over a sustained period of time?"

I think the answer is clear. So, faced with an economic distortion encouraged by decades of government meddling, do we step further away from free-market capitalism and toward yet more meddling? Or, do we accept that there is a price to be paid and the longer the bill remains unpaid, the steeper it inevitably will be?

Humankind is remarkably adaptable and, when pushed to it, resilient. If the government could resist doing anything at this point, lenders would fail, house prices would return to a market clearing level, people in the housing trades would find other employment... but the world would not come to an end.

That said, I can't see any way that the government is going to be able to resist organizing a big bailout... so all I can do is the next best thing: position my portfolio to profit by betting on the inflation that such a bailout makes inevitable.

The Ascent of Humanity

My friend and favorite partner of all times, Doug Casey, is well known to be a pessimist in the short term, but is, I can assure you, equally so a raving optimist in the longer term. Viewing the world through his longer lens, he sent me an interesting, albeit brief, essay from John Robb this week.

It is an update of sort on humankind's progress in trying to create artificial intelligence. Robb's thesis has it that we are very, very close – a few years at most – from being able to reliably duplicate the intelligence of an insect. Within a decade, he expects we will have reproduced the intelligence of a mammal. Say, a rat. And by the end of the next decade, we will have succeeded in duplicating the intellect of a human being.

Each of these milestones, according to Robb, will change the face of the world as we know it. You can read his full essay by following this link here: http://www.blogdimension.com/en/cache?s=36282661-of-rats-and-superempowerment

In making his case, Robb links to a video of the Big Dog robot, which is quite amazing. You can skip straight to the You Tube clip by clicking here. www.youtube.com/watch?v=W1czBcnX1Ww

And this is just one of many areas where humans are making rapid progress toward a more promising future. For instance, if you credit the reports out of the Swiss firm, CERN, they have figured out how to make the Internet 10,000 times faster.

Given that I am already able to use the current version of the Internet to view a wide selection of movies from Netflix, near instantly, it's hard for me to fathom the possibilities inherent in an exponentially faster Internet.

The new system will be available to universities this summer and, I have to believe, will roll out pronto thereafter.

Is there an investment angle in this stunning new development?

While a topic for greater exposition than time allows now, there are two companies (in addition to CERN) that are standing squarely in the path of this breakthrough, and both are related to fiber optics, which is a prerequisite for delivering information at this speed. The first is JDS Uniphase (JDSU), the leader, by a wide margin, in the manufacturing of fiber optics switching equipment. The second, my friend Porter Stansberry told me last week on Jekyll Island, is Verizon (VZ), which has been spending the majority of its revenues in recent years building out the most extensive fiber optics system in the United States. The build-out will soon be done, allowing the company to redirect the billions they have been spending on infrastructure back to the bottom line. And, more importantly, to sally forward as a primary beneficiary of the new and vastly improved Internet.

Watch Out Below

As predicted by our own Bud Conrad, bond insurer MBIA, Inc. was downgraded this week by Fitch Ratings to AA from AAA.

The knock-on effect of this has yet to be felt, but the way these things work is that any of the AAA bonds insured by MBIA will now have to be similarly downgraded, because no bond can have a higher rating than the company that insures it. Holders of these bonds now have to revalue them in their portfolios, especially if, as expected, the other rating agencies follow suit.

For a quick snapshot of the sort of turmoil this could unleash, here is an excerpt from the January 2008 edition of the International Speculator.

Credit Insurance. The smaller corporate and municipal borrowers (which together represent a large segment of the bond market) depend on credit insurance. Now the credit insurers are in trouble. S&P cut the credit rating of ACA Capital Holdings by 12 levels, to CCC (junk), after the company posted a $1.04 billion third-quarter loss in November. ACA has $1.1 billion to cover potential losses on $7.1 billion of bonds it insured. It turned itself over to the regulators for protection in late December. The credit rating companies are now reviewing MBIA Inc., Ambac Financial Group Inc. and other bond insurers because of concern they don't have enough money to cover losses on accelerating downgrades of the debt they guarantee. Weakness in these companies would endanger the value of $2.4 trillion of securities they've insured.

It goes on and on. Certain money market funds have been hurt by the commercial paper meltdown. More may follow. Because of their bond investments, some insurance companies are in the crosshairs as well. Stay tuned...

China's Olympic Torchture

In the March 14, 2008 edition of this weekly feature, I touched on the decision by the Chinese to hoist the Olympic torch to the top of Tibet (Mount Everest, to be more specific) as possibly being one of those accidents of history with serious repercussions.

But I didn't foresee how fast and how far things could have gone off the tracks. In the lead-up to previous Olympics, being selected to run with the torch was a high honor. The sort to be photographed for your personal posterity and dropped in passing into every cocktail conversation you might be drawn into. This time around, however, carrying the torch is akin to being selected by Native Americans of antiquity for the dubious honor of running the gauntlet. You might survive, but it's no sure thing. And it is certainly nothing you'll be bragging about to anyone in particular, lest you be accused of being a keen supporter of oppression.

Even if the Chinese, who have assigned a cadre of toughs to protect the flame, go one step further and borrow the Popemobile to finish delivering the torch to Beijing, the public relations damage they are suffering is akin to the death of a thousand cuts, with each step along the route bringing another cut. (For those of you with strong stomachs and curious about the origins of that term, I provide this link... http://en.wikipedia.org/wiki/Slow_slicing)

While we can't yet know how the Chinese will react to their global humiliation, if you look at the language used by China's foreign ministry in objecting to a U.S. resolution calling for China to stop beating up the Tibetans, you can get a sense of the emotions involved...

Foreign Ministry spokeswoman Jiang Yu labeled the resolution passed Wednesday by the House of Representatives anti-Chinese, saying it "twisted Tibet's history and modern reality... seriously hurting the feelings of the Chinese people."

(I suspect that whoever it was that conceived the idea of taking the torch to Tibet has already received some indication of the leadership's displeasure.

I can imagine a short conversation along the lines of, "Mr. Han, please come in. We would like to talk to you about that idea you had about taking the Olympic torch to the top of Mt. Everest. No need to sit down; in fact, if you'd be so kind to just stand up against that wall over there... yes, that should be fine.")

Given the clout that the Chinese currently have in the global economy, and given the fact that they are actively competing for all manner of natural resources with many of those nations whose spokespersons are now lining up to condemn them over their human rights record, this is definitely a geopolitical situation to keep an eye on.

On that latter point, this week the news came out that China is looking to buy 9% of BHP Billiton, the world's largest mining company... a move that follows their purchase of 9.3% of Rio Tinto in February for $14 billion. And last week it was revealed that they had dropped $2.8 billion to buy a stake in Total, the French oil producer.

This week the market was moved by news that the Chinese are on the hunt to acquire Canadian uranium companies. Referring to its quest for uranium companies, according to Bloomberg...

State-owned China National Nuclear is considering options including takeovers and supply agreements that range in value from "several hundred million dollars to more than a billion," Cui Jianchun, general manager of subsidiary CNNC Finance Co., said in an interview yesterday in Toronto.

Call it what you will, but I think you can safely call it a War for the World's Resources, with U.S. dollars being used as ammunition.

It is too early to discern what will be the ultimate consequences of China's Olympic-sized embarrassment – which will continue through the event's closing ceremonies on August 24 – but they could be serious.

[Ed. Note: In my reading this week, I came across a pretty good essay on this topic on the BBC web site. You can read it here... http://news.bbc.co.uk/2/hi/americas/7339764.stm]

And There's This...

While we are on the topic of China, I thought I would share an email from one of our many fine subscribers. He penned the following in response to my previous skeptical musings on what I see as the myth of Chinese invincibility....

Dear David,

I have been a Casey subscriber for a number of years now and find that one of the highlights of my week is 'The Room.' Your easy style is always a pleasure and it never detracts from the clarity of the underlying message; however, when discussing China - its massive (and growing) economic influence and the ability, or otherwise, of its ruling elite to "manage" the immense changes taking place - I find it odd that no mention is ever made of the demographic time bomb inherent in the One Child diktat.

My wife and I traveled through China in the mid-1990's and wherever one went, you would see groups of parents and grandparents fawning over a single child. Fast forward to today and consider the consequences. Those children have no uncles, aunts or cousins. A typical family would now comprise - in it's entirety - one grandchild, two parents and four grandparents! Also consider the fact that traditionally, boy children are preferred to girls. The result is a significant gender imbalance eventuating in a preponderance of males.

In a society where security in old age has always depended on the support of an extended family, an intolerable burden is now placed on a single grandchild and that grandchild, if it is a male, is also going to have a tough job finding a wife! As this imbalance works its way through the Chinese population, we can expect severe, and unpleasant, consequences.

Yours sincerely,
R.H.

Not a new story, but one that has yet to really play out. Food for thought, to be sure.

Miscellany

Lunch Money. Follow the link here to read another reason for keeping some of your money in gold. I love the bank's response, which is pretty much, "Sorry about that." http://news.bbc.co.uk/2/hi/south_asia/7334033.stm

Out of Silver? There has been a lot of discussion in the blogosphere about the lack of silver coins at dealers. We did some research on the topic and the situation appears to be nothing more than a miscalculation by the mints leading to a temporary shortage in the circular blanks required to make coins. Proof of that point comes from one close acquaintance of ours who placed an order for $1M in silver the week before last and had the bars promptly delivered.

A Solution for Global Warming! I had a good chuckle this week when reading a story by Bloomberg on a study issued by the Proceedings of the National Academy of Sciences about the possible consequences to the environment by a nuclear war involving "100 Hiroshima-size bombs." The story relates how, should such a conflagration occur, it would cause damage to the ozone layer, resulting in an increase in skin cancer, eye damage and similar illnesses caused by more extreme exposure to sunlight. But nowhere in the story was there a single mention of the straight-up death and destruction caused to people by "100 Hiroshima-size bombs" going off, or the ill effects of the clouds of radiation that would soon blot out the sun. They did mention, however, that one possible outcome was that global land temperatures would drop. So, there's that to look forward to.

* Errata. Last week, while writing in the fog of early morning, I misplaced a decimal point when discussing the percentage of GDP represented by Mexican oil exports... which, based on the Export Land Model, should cease in, or before, 2014. While the error was fixed on Monday morning -- to more accurately reflect the total at about 6.5% of GDP versus the errant 65% -- if you viewed this missive over the weekend, you might have seen the erroneous number and so have sallied forth with poor information, for which I apologize. While not nearly so significant, the lower number is still very significant.

That's It for This Week

As I prepare to sign off for this week, it came across the screen that consumer confidence in the U.S. has now fallen to a 26-year low. One of the drivers of this pessimism, according to the report, was the price of gas... a commodity that indeed hits consumers straight in the pocket. Earlier this week, I read a report by the International Energy Agency that they expect oil to remain above $100 per bbl for the rest of the year.

This is one of those stubborn economic inputs that the U.S. government, despite all its real power, is helpless to affect. That's because the U.S. imports over 65% of its oil. We can't, therefore, force producers to sell it cheaper to us... because the Chinese, among others, will simply step in and pay the market price. Confronted with consumer backlash, the only real action I can see that is left to the U.S. government, should it wish to be seen as "doing something," is to subsidize prices. In other words, reach into the public coffers to pick up some of the tab. But that, of course, simply adds fuel of a different sort to the inflationary fires. There is no positive way to view this situation, especially for those who have a long commute, or for businesses – airlines for example – that are so solidly impacted by persistently high fuel prices. On that last point, you might want to check your portfolio for exposure to any companies where fuel looms large in their P&Ls.

As always, thank you for reading, and for subscribing to a Casey Research publication. (If you had this edition passed on to you, and you would like to subscribe... visit us at www.CaseyResearch.com).

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room 4/7/08

David Galland — Mon, 07 Apr 2008 16:03:54 GMT

Dear Readers,

This week finds me writing from Room 2218 of the infamous Jekyll Island Club. The hotel's adjective comes from a secret meeting held here in 1910 involving some of America's most powerful men. Here's an official history of that seminal event...

Soon after the 1907 panic, Congress formed the National Monetary Commission to review banking policies in the United States. The committee, chaired by Senator Nelson W. Aldrich of Rhode Island, toured Europe and collected data on the various banking methods being incorporated. Using this information as a base, in November of 1910 Senator Aldrich invited several bankers and economic scholars to attend a conference on Jekyll Island. While meeting under the ruse of a duck-shooting excursion, the financial experts were in reality hunting for a way to restructure America's banking system and eliminate the possibility of future economic panics.

The 1910 "duck hunt" on Jekyll Island included Senator Nelson Aldrich, his personal secretary Arthur Shelton, former Harvard University professor of economics Dr. A. Piatt Andrew, J.P. Morgan & Co. partner Henry P. Davison, National City Bank president Frank A. Vanderlip and Kuhn, Loeb, and Co. partner Paul M. Warburg. From the start the group proceeded covertly. They began by shunning the use of their last names and met quietly at Aldrich's private railway car in New Jersey. In 1916, B. C. Forbes discussed the Jekyll conference in his book Men Who Are Making America and illuminates, "To this day these financiers are Frank and Harry and Paul [and Piatt] to one another and the late Senator remained 'Nelson' to them until his death. Later [following the Jekyll conference], Benjamin Strong, Jr., was called into frequent consultation and he joined the 'First-Name Club' as 'Ben.'"

And so it was that the Fed, that blight upon the U.S. dollar and instrument of unlimited government power, was born. Some of you, learning in last week's missive that Doug and I were heading to this place, wrote strong words condemning the place as if it had a life of its own. Like, perhaps, the set piece of one of those classic horror films.

But writing from the perspective of an instant expert (as I have only been here three days now), the hotel is grandiose and very pleasant in a Southern manor sort of way. The food is excellent, the amenities are plentiful and the weather far more agreeable than that gripping my hometown in the Northeast. I would, however, caution you to avoid the place in summer; in addition to high heat, the bugs are reputed to be both fierce and relentless. Even now, in early spring, the truth of that reputation is confirmed by the occasional no-see-um enjoying a snack at my personal expense.

Apparently, the old club had fallen into disrepair after World War II, when the money men that founded the place, including J.P. Morgan himself, stopped coming here in favor of the more refined holiday resorts of Europe. Such disrepair, in fact, that it was closed for four decades before eventually limping back into existence as a 4H camp and, some have said, even a flop house. Thanks to a substantial infusion of cash from the state of Georgia, or, more correctly, the taxpayers of Georgia, the club and its grounds have been restored to their former state of glory and are now very much up to code.

But why are Doug and I here? As much as I wish it was pure holidaying, or even plotting to replace the Fed system and returning to one that is actually based on something more tangible than political whim, we are here at the invitation from a friendly competitor, Porter Stansberry, to attend his annual editors conference.

It has been an interesting experience because Stansberry tends to focus on investment areas we tend to avoid. That said, there is a solid contrarian streak that flows through the organization, such as the one that has some editors talking about homebuilders being a good buy just now.

Homebuilders? Surely you jest, I thought to myself as I listened to the presentation. But then, Steve Sjuggerud, editor of the highly popular and widely read Daily Wealth, discussed how, in a typical housing collapse, the shares in the homebuilders will go down by as much as 75% to 90%, a level that would make it seem hard to get hurt. But the more important thing is that when they rebound from those depressed levels, they can go up by as much as 300% to 500%.

Consulting the ever-reliable stock research tool on the CaseyResearch.com website, I find that Steve has a point. Centrix (CTX), which is shown in the chart below and will be mentioned later, is off by about 68%.

And the following chart is from another of the nation's largest builders, Toll Brothers (TOL), which is off from about $57 to $24... a loss of about 58%.

While I personally am of the belief that the real estate that underlies these companies has a long way to go before touching bottom... a topic we'll return to momentarily, it is hard to argue with Steve's basic premise that, at some point, the home builders sell at such a steep discount that there is pretty much only one way they can move: up.

It is a classic contrarian play and one to watch for. When the blood-letting has these stocks down by 80% or more, which I think we'll see, you can assume that pretty much anyone who is going to sell will have sold... which, for the speculative minded, is the time to buy. Then sit back and wait for the next upswing. It may take quite awhile for the payoff, but provided the companies have the financial ability to avoid bankruptcy - a matter for further and serious investigation - in time the upswing will come and provide a big payday.

The Trillion-Dollar Sure Thing

After falling as low as $887 earlier in the week, gold has come quickly back to $907 as I write in the wee hours of Friday morning. Why the fall? Sometimes it is hard to divine the minds of humankind, so I'm not really sure. Misplaced optimism? Profit taking?

Even so, gold showed its spine, returning quickly to the $900 level, a level which, as we have recently discussed in this missive, may be the new base for the yellow metal... a level below which people intuit that gold is "cheap." Which it is.

Why? Because it is the U.S. dollar that most people use when assessing the value of gold. And the U.S. dollar is being increasingly put at risk by the growing list of bailouts that are hastily engineered by the government and all its various apparatchiks. During a phone call the other day, our own Bud Conrad started tallying up all the money that the government has applied or committed to the unfolding crisis so far. The sum is now closing in on one trillion dollars.

Does that number concern you? Does it surprise you? Does it make you, mouth agape, stumble toward the nearest barkeep, your hand waving in a frantic attempt to capture his attention so that he might provide a restorative?

I suspect not.

Thanks to our being inoculated with a steady dose of large numbers, a number as huge as a trillion probably only softly touches your individual consciousness. The way, perhaps, that an acquaintance in this gentle clime might helpfully brush a fallen magnolia blossom from the shoulder of your white linen suit.

The impact should, however, register more like a solid slap across your ruddy jowls delivered by a southern belle after an imprudent remark encouraged by one too many mint juleps.

But a trillion-dollar bailout, just like a three-trillion-dollar war - or more correctly, in addition to a three-trillion-dollar war -- carries with it consequences. As an old and wise friend of mine now in his twilight repose in Portugal likes to ungrammatically say, "There ain't no such thing as a free lunch." And he's right, mostly.

A basic tenet of economics has it correctly that if you flood the market with a large supply of anything, the value of each successive unit must fall. Money is no different, and monetary inflation will, as sure as day precedes night, result in price inflation. And you don't need me to tell you that the cost of pretty much everything at this point is going up.

While the sort of price inflation that eventually stirs the masses to action is still ahead of us, there is little question at this point that it is inevitable. Therefore, betting that interest rates will rise as lenders demand compensation for the anticipated erosion in the value of their money between the time it is lent and the time it is returned to them, is as close to a sure thing - even a free lunch -- as you can imagine.

In the past I have mentioned those fairly rare occasions where Doug Casey, our illustrious chairman and resident guru here at Casey Research, gets a certain look in his eye and speaks with a certain tone in his voice that indicates that he is issuing forth, oracle-like, a forecast that invariably comes true. His view on the inevitability of interest rates rising strongly over the next few years is delivered with that same force of conviction. In fact, he is on the record, as recently as yesterday morning, saying it is the single most powerful trend he sees just now.

Personally, I have placed my bets on that particular outcome and you might want to consider doing so as well.

One of the best ways to do so is with properly organized EuroDollar puts. If you are a subscriber of the International Speculator and want to re-read our write-up on that investment strategy, simply access the March 2008 issue from the archives, or by clicking here.

If you are not yet a subscriber to the International Speculator, sign up today with our 3-month, 100% satisfaction money-back guarantee. Click here to learn more and sign up now.

(There is a reason that this publication is now in its 28th year, but me telling you and seeing for yourself - without risk - are two different things.)

China on the Brink?

At our recent Scottsdale Crisis & Opportunity Summit, I had an exchange with one of our many interesting subscribers. In the interest of his privacy, and because of where he calls home, I will call him only CG. He is an international entrepreneur whose latest venture has led him to take up residence in China for some time now.

In Scottsdale he told me that he had translated some recent observations I had made in this weekly column on the topic of China for his Chinese wife. His wife, as he relayed it, said something to the effect of, "He is exactly right. How does he know this?"

While it is always flattering to have one's opinion thought worthy by those in the know, what I found most interesting, and why I share this story here, is that my comments were about the potential for civil unrest in China. Not to be repetitious, but I think the topic important enough to repeat the paragraphs which CG's wife found so revealing... here they are:

After all, while many of the world's economic observers fawn over China's remarkable progress, the facts are simple. (a) The U.S. already has the infrastructure in place that China is now trying to build; (b) China is run by a cadre of corrupt communist comrades, not exactly a model ripe for emulation by a thinking person; (c) they have over a billion mouths to feed. Which is to say, any setbacks that cause the aspirations of its large public to be disappointed could result in social unrest and worse. (The rocketing cost of rice, up almost 100% over the last year, may be a catalyst for such unrest.)

Adding to the discomfort about the potential consequences of social unrest, one only needs to glance casually into the cupboard to find tightly packed examples of the culture's apparent disdain for steadily beating hearts.

Reaching into said cupboard, we pick up Barbara Tuchman's excellent Stillwell and the American Experience in China to read her accounts of General "Vinegar Joe" Stillwell's arrival in that country in the support of Chiang Kai-Shek, as despicable a two-legged creature ever to have wandered onto the human stage. In between other duties, Joe had to restrain himself, and his men, from opening fire on officers of Mr. Kai-Shek's nationalist army that would routinely punish the loss of even so much as a single lice-ridden blanket by a foot soldier with summary execution.

But as degraded as Chiang and his fellows were, they were nothing compared to the big guy himself. Based on readings on the topic, confirmed with an airplane seat consultation with an academic who had made the study of such things his life's work, Chairman Mao was reliably responsible for the unnatural deaths of over 50,000,000 of his fellow countrymen.

To disabuse you of the notion that China has reached a level of permanent stability, I would like to share with you a YouTube video that our own Louis James brought to my attention. While I have only watched part 1 of the 8 parts available (I plan on ordering the full documentary), it's enough to give you a better sense of the place than you'll get from the mainstream media.

The documentary is called The Tank Man and it is quite moving. View it here...

One of the consequences of a sense of unsettledness in that populous nation will almost certainly be a move to stash away more gold, something they can do more easily these days, thanks to a liberalization of gold ownership that began in 2005.

How You Trade: The Casey Broker Survey...

Recently we conducted a fairly comprehensive survey of how you, our highly valued and much appreciated subscribers, traded the resource stocks. Do you favor online brokers or the full-service variety? Do those of you domiciled in the U.S. buy on Canadian markets or over-the-counter? Who are your favorite brokers? What are the best ways to save on commissions? All these questions and more were addressed in the survey, the results of which you can read by clicking here.

We would also like to thank those of you who took the time to take the survey... it offers a valuable look at an important topic.

My Mother's House - Continued

Jim Turk of GoldMoney.com likes to view the economy and markets, using as his lens grams of gold, as opposed to the U.S. dollar, a fiction at this point. Apparently a regular reader of these weekly ramblings, he weighed in on the recent discussion of the current value of my mother's childhood home, a photo of which she sent along since my first posting on the topic. Here are Jim's comments...

Here's another way of looking at the price of your mother's childhood home in Mont Clair, New Jersey, which you note was purchased in 1929 for $45,000, sold below that price almost 20 years later, and now valued by Zillow.com at $1.24 million. Your comment that "the actual current value of the property is likely closer to twice that value" because it was subdivided into a number of lots is a pretty good estimate when viewed in terms of real money.

The dollar in 1929 was defined as 23.222 grains of gold, which meant that one ounce could be exchanged for $20.67. So that 1929 price was really 2,177.1 ounces. Gold today is trading around $930, which means the adjusted purchase price of your mother's house, allowing for inflation and other debasement of the dollar, is $2,024,703. It's not quite double the Zillow.com estimate, but that could be because gold is still relatively undervalued notwithstanding its rise in price the past several years.

In any case, this example explains why gold is money -- gold communicates value very effectively over long periods of time, making it the ideal money for economic calculation.

Regards
Jim Turk
(www.goldmoney.com)

While on the topic of real estate, I'd like to share another email from one of our subscribers, Frank, on a topic that I think you'll find of interest. As you'll see, he touches on some recent transactions made by Centrix, the homebuilder mentioned earlier.

I am a subscriber to Big Gold and International Speculator.

I am a real estate developer based in Sacramento, CA and doing business throughout Northern California. If you use this information, please do not use my last name.

In the Sacramento and surrounding area MLS, 51% of all listings are REO or short sale. 61% of all actual transactions are REO or short sale. With a bulge of ARM resets through July, the existing resale market should be soft for the next fifteen months anyway.

The real blood bath is bulk residential lots, both paper lots and finished lots. The privately held builders are mostly headed to bankruptcy. Of the big residential, privately held developers in my area, literally perhaps two survive and all the rest go down. When I meet with a residential developer who wants to "fire-sale" lots, there is no possibility for a transaction because in most cases the debt exceeds the land value. Which brings up the lenders. The lenders are not foreclosing yet. Why? Are they not being leaned on by the regulators yet? The attitude from the lenders so far is denial that they have problems. Other banks have problems but not them.

Some of the public builders are starting to dump lots. 30 days ago, Centex sold approximately 880 paper lots that they had paid $60,000,000 for three years ago and had spent an additional $10,000,000 in entitlements for a total of $70,000,000. They sold these for $8,000,000. $70,000,000 to $8,000,000 in three years! Centex sold 97 finished lots on Friday, March 28, for $27,000 per lot. The cost to finish these lots was approximately $40.000 per lot, therefore the residual land value is less than zero. 12 months ago, Centex had over $900,000,000 in unrestricted cash. Today they have just over $65,000,000. Do you see a trend? I think the residential market starts to come back in California in 2-3 years. The public builders run out of lots over the next 18-24 months and California keeps growing and there is continual if diminished housing formation.

Additional bad news is that the retail and office markets are starting to roll over now. These foreclosures have not started but will soon and will lag residential by 12 months or so. Office vacancies are rising and the big box retailers and grocers have all pulled out of the market.

In a follow-up email, I asked the author of that email, "How are you going to manage?" To which Frank responded...

Thanks for asking about me. I have no bad projects, one that is underperforming has NO DEBT! That is how you survive as a developer. Plus, having turned $250,000 into $1,500,000 over the last eight years, thanks to your investment publications plus Richard Russell's Dow Theory Letters, I know I will survive just fine.

I would keep one thing in mind, just about everybody is bearish on the real estate market and that is when it will eventually turn. I say the bottom is in 2009, not 5-10 years out, and then we will start a slow process of recovery but from a much lower base.

I've said it before, and I'll say it again. We have the best subscribers in the world. If you have comments you'd like to share, drop me a note at david@caseyresearch.com.

Energy Chart of the Week

Natural gas markets used to be regional and disconnected. Not so long ago, the gas price in Europe bore little relation to the gas price in the United States and vice versa.

Pipelines, even just fifteen years ago, were the only way that natural gas, on a mass scale, was transported. But not anymore...

The rapid growth of the liquefied natural gas (LNG) business has transformed natural gas into a global commodity. Nations like Japan now rely on LNG supertankers for the fuel to meet a significant chunk of their energy needs.

LNG is linking together natural gas markets from around the world. It's allowed the tiny Middle Eastern nation of Qatar, which has the world's third largest natural gas reserves (after Russia and Iran), to become an energy superpower.

Generally, the higher associated costs of LNG (liquefaction, transportation, regasification) have meant that the LNG price has been higher than the U.S. domestic price. This trend flipped between 2003 and 2006 due to a sudden uptick in LNG supply followed by Hurricanes Rita and Katrina, which wiped out production in the Gulf of Mexico and drove up domestic prices.

[click to enlarge]

In the last two years, we've seen LNG prices rise higher than Henry Hub prices once again. Indonesia's state-owned Pertamina just negotiated a deal with Japanese gas companies to sell LNG at over US$10/MMBtu until 2011. The Japanese are competing with Taiwan, South Korea, and a fast-growing Chinese market, all of which are clamoring for more LNG. When a minor earthquake took a Japanese nuclear power plant offline, Japan had to scramble to pick LNG for its natural gas-generated electricity, paying over US$20/MMBtu for some cargos, proof that its deal with Pertamina is no stretch and might actually look like a steal in a few years.

Another factor that few investors realize is that LNG prices in Asia are tied to the Japan Crude Cocktail, a benchmark for crude oil markets in the region. As the dynamics of Peak Oil make themselves felt, LNG prices will rise in tandem with oil prices.

Combine this with a growing need for cleaner fuels, like natural gas, and it's clear that the LNG market, and consequently LNG prices, are headed higher for a long time to come.

[Ed. Note: Jeffrey Brown, one of the faculty members at our Scottsdale Summit, is a petroleum geologist. He gave a very compelling presentation on the concept of the Export Land Model, which shows how declining production combined with rising consumption can result in oil & gas export countries rapidly reaching the point where they can no longer export.

Among many interesting points he made during his presentation, the most interesting was that, based on current trends, Mexico will ship its last barrel of oil to the U.S. in or around 2014... just 6 years from now.

This has, in my opinion, huge implications. For one, Mexico is currently the second largest source of oil for the U.S., so we will have to fight it out with our international competitors to replace that oil. Secondly, Mexico gets something like 65% of its GDP from its oil exports... which means we could see some real trouble south of the border.

You can read some articles by Jeffrey on the Export Land Model on EnergyBulletin.net, but for ways to invest in this trend, there is no better source than the Casey Energy Speculator or, for the more active traders among you, the Casey Energy Confidential. The trend of higher oil prices is a trend in motion that will stay in motion for years to come... so getting positioned in the right plays now should pay off in spades going forward.]

Miscellany

LAX Phyle. We have yet another brave individual willing to help coordinate a get-together with other members of the Casey "phyle" (yet-to-be-named)... this time in Los Angeles. If you live in that area and would like to meet up for a cup of coffee down at the corner store (or whatever passes for same in a city of 3.8 million), drop Kristen a note at phyle@caseyresearch.com and she'll help get you organized.
Just for laughs. Back in the day, I periodically used to have to suit up in coat and tie and wander through the canyons of Wall Street and other haunts of Corporate America where I would sit in endless meetings listening to oh-so smart people wax forth on things like strategic planning and "best practices." It did not take me long, even though I am a college drop-out, to ascertain that underneath the suits were just human beings. Conversant in the latest nomenclature and buzz words, yes, but human beings nonetheless. Someone kindly forwarded me the following video, which is funny - especially to those of you in the Southwest... but on one level, it is a bit close to the truth. Click here to view.
Favorite headline of the week: "Some homes worth less than their copper pipes"

And That, Dear Readers, Is That for This Week

I am now going to take advantage of the weather and the good company to wander the local golf links. I am fairly new to the sport, but enjoy learning it.

I usually close with a quick check of the markets, but I started so early this morning in order to rendezvous for the just mentioned game of golf, that the stock markets won't be open for another hour and a half.

Speaking of the stock market, you may have wondered why I made no mention of the new "Paulson Plan," but when you think of it, why bother? The final form of same will only really arrive after many months and endless political re-jiggering. In the end, the odds are good that the plan, if there even is one, will bear little resemblance to the current version being floated. Pay attention to the big trend, and the rest of this stuff is just noise.

And with that, I take my leave for a rare day of doing not much of anything at all.

Thank you for reading.

David Galland
Managing Director
Casey Research, LLC.

The Room 3/10/08

David Galland — Mon, 10 Mar 2008 16:16:14 GMT

Dear Fellow Global Adventurers,

This past week I came across worthy comments from Dr. Marc Faber of the Gloom, Boom & Doom Report in which he comments that, by continuing to cut interest rates, Bernanke will eventually "destroy the U.S. dollar."

If Bloomberg is reporting accurately, and I see no immediate reason in this case to doubt them, Dr. Faber also said...

In the U.S., they pursue essentially economic policies that target consumption, which in my opinion is misguided. They should pursue economic policies that stimulate capital investment and capital formation.

We share Dr. Faber's sentiments on the outlook for the dollar. And his thoughts on how to solve the many challenges facing the U.S. economy resonate with us here at Casey Research, as well.

The fly in this otherwise pleasant and lightly scented ointment, however, is that -- thanks to the nature of democracy and even humanity's shared psychology -- Bernanke is powerless to take Marc up on his common-sense recommendation. In my opinion, the Fed is left with no course of action but to destroy the dollar.

I say that due to the mechanical aspects of Marc's suggestion. You see, in order for the government to stimulate capital investment and capital formation, it would have to greatly reduce the weight of its own dead hand on businesses and individuals.

There is a saying that capital flows to where it is best treated, the veracity of which can be proven by considering that on the order of 25% of the world's construction cranes are currently deployed in Dubai. And that city has no real resources of its own; it's located in the most geopolitically unstable corner of the globe, and has a physical climate that is measured only in terms of hot, really hot, and even hotter.

Properly restructured, the U.S. could, at the risk of sounding nationalistic, kick Dubai's butt. And China's as well.

After all, while many of the world's economic observers fawn over China's remarkable progress, the facts are simple. (a) The U.S. already has the infrastructure in place that China is now trying to build; (b) China is run by a cadre of corrupt communist comrades, not exactly a model ripe for emulation by a thinking person; (c) they have over a billion mouths to feed. Which is to say, any setbacks that cause the aspirations of its large public to be disappointed could result in social unrest and worse. (The rocketing cost of rice, up almost 100% over the last year, may be a catalyst for such unrest.)

Adding to the discomfort about the potential consequences of social unrest, one only needs to glance casually into the cupboard to find tightly packed examples of the culture's apparent disdain for steadily beating hearts.

Reaching into said cupboard, we pick up Barbara Tuchman's excellent Stillwell and the American Experience in China to read her accounts of General "Vinegar Joe" Stillwell's arrival in that country in the support of Chiang Kai-Shek, as despicable a two-legged creature ever to have wandered onto the human stage. In between other duties, Joe had to restrain himself, and his men, from opening fire on officers of Mr. Kai-Shek's nationalist army that would routinely punish the loss of even so much as a single lice-ridden blanket by a foot soldier with summary execution.

But as degraded as Chiang and his fellows were, they were nothing compared to the big guy himself. Based on readings on the topic, confirmed with an airplane seat consultation with an academic who had made the study of such things his life's work, Chairman Mao was reliably responsible for the unnatural deaths of over 50,000,000 of his fellow countrymen.

I digress.

Returning to my theme, the U.S. has everything it needs to be more than competitive on the global stage. All that needs fixing, really, is to eliminate the single largest obstacle to capital formation, the heavy weight of government. To be metaphoric, it is hard enough to successfully climb the mountain of capitalist endeavor -- having to do it with a large sack of rocks weighing on your spine greatly reduces the odds of success.

There are many ways that this reduction in the weight of government could be accomplished. A well-timed nuclear backpack going off in the nation's capital pops to mind. But such a solution would only be temporary and would lead, unquestionably, to a Hydra-like regeneration of even more and bigger government in its place.

No, the far better approach would be to put the institution on a strict regime. To treat the government the way a heartless physical fitness coach might, whose lunch money is entirely dependent on his client losing all but the essential ratio of body fat.

Personally, I can see no better way of getting right down to it than by anchoring spending by reinstituting a gold standard, then tossing out the entire tax code in favor of a level tax of 10%. (With the amount of wealth that would be created, forgiving even that burden for the true unfortunates would be of no fiscal consequence.)

In addition to providing a welcoming home for capital, among the many other advantages of making these moves, would be; (a) the elimination of the Fed. With no need to "manage" the currency, their disastrous reign over the world's money supply would come to a quick end; (b) the elimination of the horrible waste and costs associated with tax preparation, estimated to be a minimum of $150 billion a year, before taking into account all the personal time and worries that go into the current process; and (c) the government would be forced to be far more selective in its pursuits and to curb its unceasing expansion plans.

Making a necessarily loose calculation and using the current economy for same, a gold standard and flat tax together would require the government to live with a budget of about $1.38 trillion per year, requiring a substantial reduction in the $3.1 trillion it is projected to burn up in 2008.

But the reality would be not quite so stark, as the tax receipts would soar in the new economy as the world beat a path to set up to do business in the U.S.

There's just one problem with that practical, though utopian, view.

Which brings us back to the nature of democracy and the psychology of humankind. While the votetariat may talk a good game, when it comes right down to it, the majority is interested in seeing its favorite uncle not spend less but more.

More on health care. More on fighting global warming (or cooling, whichever idea has the most traction at the moment). More on bailing out subprime borrowers and lenders alike. More on the social security net. More on FDA inspections, more on financial regulation, more on building bridges and more on commissions to study the drug habits of professional athletes. Some want more money for Homeland Security and war, others want more money for foreign aid to this or that country or to protect pygmy elephants as they meander through dark jungles on the other side of the world.

Not very long ago, my own dear mother provided illumination on the topic when she told me that she, who had been a big Ron Paul supporter, had retracted her support after hearing him comment to the effect that he would, as she put it, "eliminate my Social Security."

And there's something else. The Germans have a word, Schadenfreude, which loosely translated means taking pleasure at seeing others fail. The tightly linked obverse of that sentiment is that we take umbrage when someone succeeds a bit too much.

Consider the indignation in some circles at Bush's "tax cuts for the rich"... tax cuts that will almost certainly fade away into the darkening horizon as the next administration comes to power.

But tax cuts for the rich... or, more accurately, those who aspire to wealth and succeed in gaining same, is exactly what the country needs to power through the looming crisis.

What the country doesn't need, really, is to keep depreciating the currency. What will it take for the average voter to wake up to the reality that the U.S. dollar has lost 81% of its value since its link to gold was cut in 1971?

If things continue on the current flight path, which is pretty much headed straight at the ground, we may soon find out.

The Right Way to Look at the U.S. Economy Today

[click to enlarge]

In the lead article of our December 2006 International Speculator ("Users Guide to Fiscal Calamity", view archives) we pointed out that the 20-year bubble in financial assets was only temporarily and lightly deflated in 2000, as the Fed's money pumping shifted the asset bubble to the housing market.

As a consequence, going into the current crisis, the long bubble was not only intact but larger than ever.

In the wee hours this morning, in between arranging his shirts and socks for a 6:30 am departure for a look-around of China, our own Bud Conrad somehow found the time to throw together the chart above, updating the data on the asset bubble.

If you step back from the chart, squint at it slightly, and use the power of your mind to add the two lines together, one representing equities, and the other housing... then mentally assign a net asset value to both... what you come up with is a clear road sign that the bubble still has a long way to go in a collapse, and that the collapse has begun.

Confirming that point, as I was writing this, the news came across the screen that U.S. payrolls contracted again in February, the second month in a row, and the most in five years. Understandably, the stock market is again in a free fall.

This is all but a continuum at this point. Yesterday, for instance, we learned that, collectively, the equity in American homes is now less than the debt owed on those homes. This is the first time this has ever occurred, or at least since the Fed started tracking that data in 1945. It is no wonder, therefore, that foreclosures and "walk-aways" are also breaking all the wrong records.

Rushing about trying to keep the wall from collapsing on top of the economy, the Fed announced today that it will further ramp up the largely indiscriminate, cut-rate lending it is making available to the banks, indicating that any hopes for a more intelligent approach to sorting things out will go unfulfilled.

Desperate Acts - Continued

On the topic of desperate acts, in recent editions of these musings, I have pointed to attempts by the bureaucrats to maintain the status quo by paying off bank employees in tax havens for client lists, selling off state lotteries and closing parks, etc.

On that general theme, this week provided additional examples:

The first entry is from Jubak's Journal, which appears regularly, it seems, on MSNMoney.com...

The Pension Benefit Guaranty Corp., the government agency that protects the pensions of 44 million workers in case their employers can't (or won't) pay promised benefits, has announced that to avoid going bust it will double the percentage of its portfolio -- to 45% -- that it puts into stocks. An additional 10% will go into alternative investments, including hedge funds.

In other words, facing a $14 billion deficit and even larger projected shortfalls, the Pension Benefit Guaranty Corp., or PBGC, decided not to save (by raising premiums) or to live within its means (by cutting benefits) but to gamble in the financial markets by taking on more risk. The PBGC was so proud of its new strategy that it announced it on Presidents Day, when the U.S. financial markets were closed and almost no one was paying attention.

While Mr. Jubak is to be thanked for bringing a little levity into the day, his indignation misses a key point. It's not as if they are actually betting with their own money. Even a complete wipe-out of the organization's remaining capital would be papered over with a quick press release that the government has had to step in and bail it out. People will shrug off the news, if they even notice it, as just another billion here, a billion there.

Unlike them, I view these billions as just more bricks in an increasingly rotted and dangerously tipping wall.

The second item comes from Bloomberg...

Jefferson County, Alabama, in a move that may cost it $184 million, said it wouldn't pledge reserves against $5.4 billion of interest-rate swaps tied to sewer debt that its bankers may demand.

...The county, which includes Birmingham, confronted a March 7 deadline to put up the $184 million in collateral or buy insurance to meet its obligations to JPMorgan Chase & Co. and three other banks on 13 swaps after S&P and Moody's Investors Service began downgrading the sewer debt last week.

"The county commission faces difficult decisions on the sewer system debt. However, these decisions will not be made at the expense of the county's employees," Jefferson County Commission President Bettye Fine Collins wrote in a memo to the workers.

I love Bettye's unusual candor... no question where her loyalty rests. Destroy the county's credit rating? Blow off $184 million? No sweat. But cause any expense or discomfort to the county's employees, no way.

Energy Chart of the Week

Last year showed both the promise, and the problem, with liquefied natural gas (LNG) imports to the United States.

[click to enlarge]

The promise is that rising LNG imports will offset dwindling natural gas imports coming down the pipe from Canada. Alberta, especially, will consume a much greater proportion of its own natural gas production to extract and upgrade their massive tar sands resources. With an emerging global market in LNG, a drop-off in regional supply shouldn't matter, or so the conventional thinking goes.

The problem is that the rest of the world is clambering for LNG as well - and they're willing to pay higher prices for it. In the first half of 2007, the U.S. was able to track down a number of cargos and imported a record amount of LNG. Then, a minor earthquake forced the Japanese to shut down a nuclear plant, and they had to rely on natural gas-fired power plants to make up the shortfall. In their desperation, Japan outbid nearly everyone for LNG cargos, and U.S. LNG imports plummeted. There was no sense in paying $12/MMBTU for LNG, when natural gas in North America cost nearly half that.

There are five regasification terminals for LNG in the Lower 48 and lately two of them have been sitting idle. LNG imports are still very low in the beginning of 2008. Last year, LNG imports averaged 45 Bcf per month, but in the first two months of 2008, that's down to 21 Bcf per month. Discouraging news for consortiums working to build more of these very expensive and very controversial regasification LNG terminals.

The wild fluctuations in LNG imports to the U.S. in 2007 demonstrated that until prices within North America go much higher, the U.S. will not participate in the global LNG market. The idea that LNG will flood the U.S. natural gas market with new supply and keep down prices is ludicrous.

North American natural gas prices will rise - as they have been for the entire decade - until it makes economic sense to go out and compete with the likes of Japan, Spain and others for expensive LNG cargos. By keeping an eye on LNG prices, we can gauge where domestic prices are headed. LNG prices are, in that sense, a leading indicator of domestic natural gas prices ¬- and, with the inevitable corrections along the way, they point to a future with natural gas prices of well over $10.

[Ed. Note: On behalf of subscribers, the team at the Casey Energy Speculator, which includes Dr. Marc Bustin, by well-deserved reputation one of the world's top unconventional oil & gas specialists, have been very closely watching the natural gas sector, including developments with LNG. If you want to know what they know, and their latest recommendations to profit, simply take the monthly service (complete with weekly online updates) for a test drive today. An unquestioning 3-month, 100% money-back guarantee assures your satisfaction. Check it out now.]

Bootstrapping It

Were you to place the America of today on a scale with the America of yesteryear, there are a number of measures by which the current model would fall short. At least if I was the one doing the weighing.

Consider, for instance, that in his time, which was the early 20th century, H.L. Mencken was, by a wide margin, the most popular newspaper columnist in the land.

For those of you who haven't yet had the pleasure of reading his writings, I would suggest you run, not walk to the nearest book store to pick up a collection. My personal favorite is the Vintage Mencken as assembled by Alistair Cooke.

Meanwhile, to tide you over, here are a couple of a multitude of his many quotable quotes...

"In the United States, doing good has come to be, like patriotism, a favorite device of persons with something to sell."

"It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office."

There was another author from earlier times, one Horatio Alger, Jr., who was wildly popular in the 19th century based on his many dime story novels, mainly about scrappy lads who managed through honesty and hard work to fight their way out of poverty and into the proverbial mansion on a well-sited hill. (That he had a base predilection for the same scrappy lads failed to dent his popularity, it seems.)

This comes to mind because of an article Doug Casey thought you might enjoy. It is the story of a young man with everything, who decides to test the American dream by dropping out of his usual society, ignoring his material advantages, and with just $25, to try and attain some modest level of financial stability.

While some of you may be tempted, after reading the article, to catalogue the various reasons why the young man was a success, while others less fortunate at birth would be doomed to fail, I think the mere act of making that catalogue is wrong-headed. What the world needs these days, in my view, is a lot more of the "can do" attitude, and a whole lot less of the helpless victim mentality that so unprofitably grips the minds of such large swaths of current society.

In any event, here's the story...

Eye on Liechtenstein

Kevin Brekke, our Switzerland-based editor, has been helping us keep an eye on the developments in Liechtenstein, a canary in the coal mine, as far as we are concerned, for the outlook for financial privacy. Here's his latest report...

Hey David,

Well, as the news cycle exerts its influence on the Liechtenstein Event, like gravity it has pulled the story from the front page, to the back page, to off the page. But here's what we know (or what the media would have us think we know) as of Thursday, 6 Feb:

In true fascist government style, German politicians were clamoring for microphones and face time in front of the cameras to pound their collective chests with, as one newspaper caption put it, "true pride in their actions." I guess in Germany under the Merkel & Co. regime, coercion, bribery, and buying stolen property is considered praiseworthy. In any case, it was announced that close to 200 Germans had come forward and were cooperating with the tax authorities.

The scope of interest has also been revealed to encompass not just bank accounts in Liechtenstein, but also family and company trusts, and safe deposit boxes. The tax authorities were quite clear in their charge that anyone with cash in a foreign bank safety deposit box must be doing something illegal. Apparently being in possession of your own money outside your home country confers upon the citizen a verdict of guilty - guilty of what we don't know, but guilty nonetheless. And besides, it's so much more profitable and expedient to exercise habeus grabus than to ask questions and uncover the facts.

Not surprising was the piling-on of other socialist countries drooling to get their hands on a piece of this action. Greece, Italy, Spain, Portugal, Sweden, Great Britain, Ireland, and of course France, all expressed keen interest and deep concern to expose their own tax miscreants in the pursuit of "social justice." So pathetically desperate is Britain that their tax minister has announced that they will pay 100,000 pounds for a similar DVD with the names of British account holders.

In all fairness, there was a bright spot in this otherwise dark episode. A few clearer heads managed to elbow their way to the mic and interject some legal and ethical ponderings upon the shouting mob, er, the media. Sweden and Great Britain said that although they will pursue individuals to recoup tax revenue, they would likely not be able to bring criminal charges to bear, as the information was obtained via a crime - theft. Oh, those pesky details. The standouts so far have been Finland and Denmark. They took the argument further by saying that the theft of goods should not be rewarded - it's neither ethical nor legal.

More as it develops...

And That's It for This Edition...

It is an absolutely stunning day outside, and I swore to our production team that I would get this missive to them early, so I am going to line up both of those objectives and sign off now.

But first, a couple of quick housekeeping announcements.

Our Casey Research Crisis & Opportunity Summit is completely sold out. If you happen to come across a link to the event, please ignore it because we simply won't take any more registrations.
Based on subscriber feedback, we are going to re-double our efforts to tighten up the length of our monthly publications to no more than 24 pages. That said, knowing how prolific our team is, I suspect you'll be receiving additional special reports in between editions on topics that catch their collective eyes and that benefit from more in-depth exposition.

As is my custom, a quick check of the screen reveals that gold is hovering around $975, which is almost $200 higher than the average realized price of gold sold by Kinross Gold and other producers in producing their highly profitable Q407 financial results (to wit, the next quarterlies will only be better).

I also see that the DJIA has broken fairly decisively below the 12,000 benchmark. It's going lower.

Until next week... thank you very much for reading.

David Galland
Managing Director
Casey Research, LLC.

The Room : China

The Room – 04/03/2009

G20 Meeting, Who Cares?

The IMF

The IMF's Gold

The Closing Door

Letters from You

Miscellany

The Room – 03/20/2009

Bernanke's Gamble

Sharp Words

Protectionism

Evil Capitalist Polluters!

The Coming Credit Crisis

"AIG Scum Out of Town!"

It Just Doesn't End

Miscellany

The Room – 03/16/2009

Citi-Mae

Wen Is Enough?

Speaking of Exports

Snippets from the Swamp

Gold Stocks – a Knock at the Door

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 - 01/23/09

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 - 10/24/2008

The Trial of Gold

Funeral for an Economy

How Long Will the Foreigners Support the Dollar?

Credit Sucks and Don't Forget It

Laughing Out Loud (When No One Else Is Looking)

Miscellany

The Room 09/19/2008

Where Is the Bottom of the Markets?

So Why Are We Still Bullish on Commodities?

S*HUI*T Happens!

Can Our Government Save Us from All Evil?

Options & Futures

And from the Desk of Doug Hornig…

Panama

TV?

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…

The Room 4/29/08

The Battle for $900 Gold

So, What's Going On?

Technical, Shmechnical

Other Views

A Word About Political Risk and Gold Stocks

Food & Politics

Junk By Any Other Name

I Am Womyn!

Manhunt Report: Diamonds Are a Girl's Best Friend?

Miscellany

And That, Dear Readers, Is That for This Week

SHUIT Happens!