The Room : Depression

The Room – 07/10/2009

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

Dear Reader,

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

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

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

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

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

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

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

clicking here

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

Casey's Trend Trader

More about the Trend Trader here

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

Opportunity Knocks

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

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

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

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

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

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

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

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

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

And that sets up the opportunity.

Playing the Bounce

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

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

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

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

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

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

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

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

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

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

Speaking of Unemployment

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

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

Ed. Note:

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

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

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

average duration

benefits

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

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

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

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

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

Wicked Game

you can listen to it here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

See you in Denver!

Statehouses in the Poorhouses

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

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

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

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

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

We may find out.

Report from CYCLE

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

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

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

Too Funny

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

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

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

Doug:

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

Miscellany

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

And That's That for This Week

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

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 04/10/2009

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

Dear Reader,

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

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

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

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

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

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

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

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

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

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

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

iShares Dow Jones US Financial Sector (IYF)

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

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

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

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

Speaking of Zombies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Why not?"

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

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

"Yes," he said with a wry smile.

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

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

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

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

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

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

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

The Cloudy Crystal Ball

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

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

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

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

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

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

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

Feed the Pigs, Own the Pigs

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

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

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

Need I say more?

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

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

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

A Shift in Tide for the Trade Deficit

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

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

Maybe not.

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

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

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

The More Things Change...

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

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/10/2008

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

October 10, 2008

Dear, Dear Reader,

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

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

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

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

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

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

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

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

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

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

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

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

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

It is this.

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

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

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

Oh no! Not that old saying.

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

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

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

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

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

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

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

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

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

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

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

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

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

Go Gold

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

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

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

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

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

Lust for Gold Dust

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

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

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

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

A Quick Conrad Commentary

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

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

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

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

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

Snippets

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

Running Out of Digits

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

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

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

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

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

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

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

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

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

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

The Really BIG Bubble

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

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

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

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

What to Watch Now

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

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

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

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

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

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

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

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

Businesses will fail. Industries will grind to a halt.

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

Vive Le Difference!

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

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

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

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

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

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

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

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

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

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

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

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

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

And, Now for Something Entirely Different...

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

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

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

Correspondence

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

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

Sleep Walking into a Brave New World

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

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

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

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

It is worth reading, which you can do here.

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

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

Miscellany

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

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

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

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

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

David Galland

Managing Director

Casey Research, LLC.

The Room 3/24/08

David Galland — Mon, 24 Mar 2008 19:52:56 GMT

Dear Reader,

It used to be of no little pride in the small New England town where Casey Research is headquartered that school went forward, no matter the weather. Hail, 8-foot-high snow drifts, ice rain and, should they have occurred hereabouts (which they didn't), I am fairly sure that even hurricanes and tornadoes would not have kept the school administration from its daily labors in the brainwashing of innocent youth.

That all changed when, earlier this winter, a school bus missed the turn on a gently sloping hill and rolled onto its side, fortunately causing no serious injuries (for some reason, which continues to baffle me, the police will stop and ticket you for driving without a seat belt, yet school buses are systematically unequipped with same).

The accident, no doubt, made the school officialdom aware of some previously unexamined legal consequence because the school now delays the morning opening or closes down tight on what appears to me to be so much as a semi-reliable report that a single threatening snowflake has been observed in the general vicinity.

And so it is that, with a modest snowfall in process, the kids are home again today, lounging about and, because it is Friday when I write from home, crowding me out of my office (which counter-intuitively also serves as their toy room). Which leaves me to write to you from a couch upstairs, with stern instructions to the kids that while I may appear to be in residence, they should assume I am a figment of their youthful imaginations until I have finished writing this weekly epistle.

While it is typically with a good deal of pleasure that I sit down to reminisce about the action of the week just ending, this week again, the volume of news coupled with the magnitude of that news makes the task daunting. But no amount of dithering will make the task go away, so here we go.

"Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke"

That headline is not mine, it is from Bloomberg this morning. Bloomberg's enthusiasm is based, as hard as I find it to believe, on little more than that the Fed cut the rate it charges banks to borrow by "just" 75 basis points this week, and that the stock market rallied, then fell, then rallied again in response.

The herd was, apparently, expecting 1%. Further, not only were they expecting this, they were mentally prepared to accept a 1% cut as a sign that the economy remained in dire straits and that, as a result, the Fed would have to continue its loose money policy. According to the punditry, a 75 bps cut indicates that Bernanke and Co. have drawn a line in the sand, signaling they were going to be restrained in their approach to the crisis now stalking the land. Further, this show of confidence portends that the worst of the crisis is nearly behind us.

Ready to push the trigger to buy more commodities on a 1% rate cut, the market instead rushed into buy stocks and sell commodities... then changed its mind and sold stocks and commodities... then bought stocks again, but still sold commodities.

Gold, silver, oil, grain... you name it, if it shows up under the heading Commodities in the back of your favorite paper, then it got hit.

But of course, there was a whole lot more going on this week. We'll come back to the commodities momentarily. First, however, we need to walk up a few floors to get a better view of the bigger picture.

Problem Solved?

Now, you will excuse me if I seem a touch skeptical, but I can't help but notice that short of climbing aboard helicopters rigged to carry pallets of dollars, the Fed is now doing exactly what we have been expecting it to: provide all the liquidity it can muster using its near mystical powers of money creation.

In addition to yet another deep cut in the Fed Funds rate, they are now making the almost unprecedented move (at least since the Great Depression) of lending money to non-commercial banks, in the process effectively putting taxpayers on the hook for $30 billion in suspect collateral from Bear Stearns.

And that's just one of many moves of late, including cutting discount rates by a total of 1%, to 2.5% over the past week alone, and opening up new lending facilities that allow the investment banks to borrow directly from the Fed using as collateral the same sort of suspect paper that brought down Bear.

Playing their part, three of the biggest investment banks, Goldman, Morgan Stanley and, importantly, Lehman, announced that they were going to access this new lending facility, whether they need to or not, in order to remove the "stigma" (their term) of stepping up to the window, so to speak.

Give that some thought for a second. What they were saying for all the world to hear was that they were going to engage in what is effectively an institutional shell game... a deliberate attempt to obfuscate which of the banks are actually in trouble. As a shareholder in one of these companies, you won't have any idea whether your bank is accessing this emergency facility because it is, in fact, in trouble.

Given the estimates that the assets being carried as capital on the books of Bear Stearns were worth only 10% of what was being posted, and the herd-like business practices of the big investment houses, the odds are fairly high that Bear Stearns is not the only institution teetering on the brink.

Yet this week investors seemed to actually buy the idea that the worst is now over, and that the all-clear signal will soon be sounded.

What to believe? Whom to believe? Could the Fed have finally figured out the right combination to re-open the safe of prosperity? And what of the commodities, especially gold?

This week I have received a larger than usual amount of incoming emails presenting all sorts of theories. Some have it that JPMorgan, the world's largest bullion bank, was in real trouble with shorts on gold and had been buying the metal back, helping to fuel its meteoric rise of late, but that the liquidity provided by the Fed has now taken the pressure off and allowed them to stop or slow their buying (our own Bud Conrad has been looking into this notion, but so far has uncovered no solid proof).

As for the financial sector and, by extension the rest of the market, we can't know for sure what's going on behind the scenes, because the government and the big banks are playing it very close to the vest. But we can, from our higher perch, try to sort the unknown from the known, and start with the latter.

This week we had a major bank failure (as predicted many months ago by Bud). Despite Jim Cramer's firm belief in the firm, Bear Stearns, the fifth largest U.S. investment bank and a firm tightly connected as a counter party to hundreds of billions in derivative agreements, suffered a good old-fashioned meltdown.
We know that the share price of Bear Stearns has fallen from over $150 last year to as low as $2.00, and what is left of the firm is now being sucked into JPMorgan, but only because the Fed has agreed to stand behind the deal to the tune of $30 billion, an intervention the likes of which was last witnessed in the Great Depression.
We also know that the vultures were starting to circle Lehman, another member of the big five U.S. investment banks. Absent the Fed's aggressive intervention, the odds were fairly high they would have been next to get hit with the equivalent of a run. This is why the Treasury and the Fed worked so hard to get the Bear Stearns deal cobbled together over a single weekend, before the markets reopened and Mr. Market could recommence beserking. From where I sit, it appears that we came within hours of seeing another of the nation's largest financial institutions crash, potentially taking down the whole house of cards.
And we know the Fed dropped the Fed Funds rate by 0.75, only the second time in the last decade that it has cut rates by an amount that large.

We know some other things as well. For instance, that commodities have been on the equivalent of a one-way-up escalator in recent months. And we know that no market goes in only one direction for any sustained period of time, and so a correction was inevitable. Gold, oil, the grains... they all had to take a breather. And so they have.

But Let's Try to Keep This All in Perspective...

What has actually occurred over the last month, between February 21 and March 20?

	Gold	Silver	Copper	Oil	Bear Stearns	JPMorgan	Lehman
21-Feb-08	$945.00	$17.98	$3.77	$98.39	$82.23	$43.07	$54.14
20-Mar-08	$925.75	$17.53	$3.62	$104.49	$5.96	$45.97	$48.65
Gain or Loss	-2.0%	-2.5%	-4.1%	6.2%	-92.8%	6.7%	-10.1%

Okay, so gold and silver are off a little, copper a bit more, oil is still up, Bear Stearns is a smoking hole in the ground, JPMorgan is up a bit, and Lehman is down 10%. Other than Bear Stearns and, to a lesser degree, Lehman, I'm not seeing anything so earth shattering. (Sure, gold recently took a high dive off the $1,000 per ounce mark... but it is still over $900, a level that not one in ten thousand investors, if asked a year ago, would have expected it to trade at. And oil over $100? Forget about it.)

There are a few more things we know. For instance, that consumers are debt strapped and the housing bubble has burst and is deflating rapidly. And that falling home prices are wiping out the net worth, discretionary spending power and positive sentiment of the U.S. consumer who has, heretofore, shown a seemingly unlimited willingness to go into debt up to their eyeballs to keep the world economy afloat. That is now changing.

We also have proof, if proof was needed, that the government will do whatever it takes to avoid a meltdown. While they are shoving the walnut shells around so fast that it's hard to figure out where the pea is these days, what is increasingly clear is that there is only one real plan at this point: to apply as many billions of dollars as they feel is necessary to keep the ship of state afloat.

And while some might like to think that the country is not in a recession, at this point I am going to put it down as fact that a recession is now underway and that we need to be worried about it becoming much uglier than that.

Blame it on Smokey the Bear

A good way to understand both the degree and the nature of the current crisis is to look at the state of the nation's western forests. Before the 1940s, forest fires were allowed to run their course, just as they had over the millennia. But then the government adopted a policy to fight every fire, a battle epitomized by the introduction of the iconic Smokey the Bear. What has happened since is a massive build-up in the fire risk in federally managed forests.

The following is from a CATO Institute document on the topic...

Since the advent of the Smokey Bear era in the 1940s, tree density in federal forests has increased from 50 per acre to as much as 300 to 500 per acre. Federal forests are filled with dense stands of small, stressed trees and plants that combine with dry deadwood to provide virtual kindling wood for forest fires.

According to Forest Service statistics, some two-thirds of federally held forested lands are in deteriorating health.

The consequence of governmental meddling in the forest is that when a fire now breaks out, it is exponentially larger, more dangerous and more expensive to fight. Nationwide, the forested area now at extreme risk is equal to an area about the size of the state of California.

One of these days, and probably sooner rather than later, there will be a forest fire of biblical proportions... and Smokey's real-life brethren, along with houses and all that moves or doesn't, will go up in smoke.

Similarly, by continuously tampering with the business cycle, the government has led us to the point where the dried underbrush is piled high and just waiting for a match. The Fed was able to throw a quick tanker load of water onto the Bear Stearns fire... but that doesn't mean we are anywhere near out of the woods. (Don't you just love it when your metaphors snap so nicely in line? I sure do!)

Which Brings Up an Interesting Question

Given virtually unlimited power, including the ability to create money out of nothing, or to change any rule or law or convention, bend any arm, or ban or hinder trading in any commodity... just how much power can the U.S. government apply to the problems now besetting our economy and, by extension, the world?

Or, looked at from the reverse angle, given its unlimited power, is there any way Paulson, Bernanke, et al can fail to stabilize things?

It is an interesting discussion, and one that requires more analysis and data than I'm in a position to provide sitting here on my couch on a Friday morning. (We will go into it in more detail in a special report on the crisis that is being worked up for paid subscribers, and which should be issued following our Scottsdale Crisis & Opportunity Summit next week.)

I will, however, comment just a bit further.

Let's start with the proposition that the government has absolute power, which is largely the case these days, especially because the populace is so numb to large numbers that outrage at the beggaring of future generations no longer seems to be of any concern to anyone.

So, the Fed can effectively pump out all the money it needs to "get her done" and if that doesn't do it, then the Treasury can step back in. This approach, from a policy maker's perspective, is quite attractive because it essentially papers over the problem. Look at it this way. If housing prices fall, on average, 20% nationwide, but the currency depreciates at the same level, then housing weakness would be masked... ditto 20% of stock market losses. In case that point is not clear, look at it like this. If your house is worth $100,000 and it loses 20%, its value would fall to $80,000. But if the dollar was to simultaneously lose 20%, then the price of the house would remain $100,000. The average person would be clueless they have just taken a 20% haircut. Pretty cool, eh?

Unfortunately for the government, there are natural limits to everything. In this case, the most immediate threat to this plan resides in the trillions of dollars held by foreigners.

In recent decades these foreigners, trading partners mostly, have been willing to swap our inflation in exchange for market share within the U.S., the greatest consumption engine on the planet (as an FYI, the eurozone just surpassed us).

But that inflation is beginning to be felt back home: in China, in the Middle East, Russia and everywhere between. At some point, the pain, and the realization that inflation in the U.S. is only going to get worse, is very likely to make these dollar holders get serious about breaking their links with the dollar, and dumping the trillions they now hold.

And while U.S. consumers are well aware that everything costs more these days, no matter what the jury-rigged CPI tells them, it is when the foreigners start repatriating our dollars that the real pain of inflation will begin. At that point, the fire starts in earnest.

I call this the Point of Mugabe, named in honor, of course, of Robert Mugabe, the supreme overlord of Zimbabwe. A dictator with absolute power in all matters, Mugabe's maladministration of his country's economy has finally reached the point where today, as much as he dictates against it, inflation runs in excess of 100,000% annually. While the sheeple of that country seem either particularly stupid, beaten down or tolerant, sooner rather than later Mr. Mugabe's ridiculous regime will come to an end, and probably not in a manner that he will find personally pleasant.

In the final analysis, I remain convinced that the praise of Bernanke et al based on their extreme actions this past week will find its way into the history books along with quotes such as these...

"The end of the decline of the Stock Market will probably not be long, only a few more days at most." --Irving Fisher, November 1929

"I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." --Andrew W. Mellon, U.S. Secretary of the Treasury, December 1929

And, of course, my favorite recent example... Jim Cramer's rant that people should not take their money out of Bear Stearns, just a day before that firm collapsed. You can watch history in the making by clicking here.

We'll have a lot more on this topic in our upcoming special update report on the crisis, which will be sent to all paid subscribers the week after next.

What's Coming

In my reading for the above, I came across the September 2007 edition of the International Speculator and its lead article, Preparing for Crisis . I thought the following excerpt was worth sharing, not just because it shows how spot-on Bud Conrad, the chief economist of this operation, has been in forecasting the specifics of the unfolding crisis, but because it is still as useful today as then in understanding how things are likely to keep rolling out (the full article has much more detail, well worth reviewing). Here's the excerpt.

The credit crisis will not end soon. Here's what we think is coming.

More Defaults. The bulk of the subprime loans are adjustable rate mortgages. The continuing reset of up to $50 billion per month of subprime ARMs will keep mortgage defaults growing, which will keep home prices falling, which means that more of the defaults will turn into unrecoverable losses for the investors holding the paper. The hedge funds that haven't thrown in the towel on subprime mortgages will collapse one by one.
The economy will slow down. Lending to risky customers has dried up. Earnings of most corporations will slide because consumers, who can no longer turn to home equity loans and whose credit cards are already maxed out, will cut spending. The mounting losses in CDOs and the continuing defaults in the housing industry will precipitate a severe credit crunch. The capital of many banks is about to shrink, which will hamper their ability to lend.
Stocks will fall. The next phase down in the stock market will come from reduced earnings estimates for 2008. We could see an auto company or a big bank announce insolvency. Fear, and then the fear of fear itself, and the fear of being the last one out the door will take over. Big, 300 or 400 point moves - mostly down - will become regular events. People have forgotten, but they are going to be reminded, that stocks have, until fairly recently in history, normally yielded about twice as much as bonds, simply because they're riskier.
Dollar down. While U.S. citizens are looking to build cash - another source of pressure on spending and investment - few foreigners now want U.S. dollars or dollar-denominated debt. After the failure of large U.S. institutions begins and the Fed turns the printing presses on full blast in an attempt to keep liquidity in the system, flight to safety will mean a flight from the dollar. How fast they will print is hard to guess. They've already started, but will probably panic as the economy slows, and then turn the presses to high. The dollar will fall in purchasing power. Interest rates will rise across the board, with low-quality paper hurt the worst.

If you are not yet receiving the International Speculator, now is a great time to sign up. With the 3-month risk-free guarantee, you can take a leisurely look at the publication to see if it's right for you. Check it out.

Show Me the Money!

This week we have, as you'd expect given gold's steep plunge, received some email wondering when the junior gold stocks we tend to favor in the International Speculator (among other investments that we feel are appropriate to the current environment) will pick themselves off the mat and get on with the business of making serious money.

This is, of course, a topic I have discussed at some length recently, so I won't go into the topic much again here (look back over the past couple of issues, using the archive link below).

But I will say, again, that I remain convinced that the next big move in the junior explorers is still ahead, and will come as the big gold stocks once again confirm the new reality that they are becoming cash machines. And they begin using their newly beefed-up balance sheets to acquire the deposits needed to replenish their depleting reserves. If you keep selling ounces without replacing them, in time, you are nothing but a shell... and so replacing reserves is a business dictate.

On that front, Barrick just announced that it will spend $10 billion to acquire new mines and resources over the next little while. You can read the story here:

And there's this. This week, PricewaterhouseCoopers released its Mining Deals 2007 Annual Review... which, among other prognostications reported on in an article on same by the folks at MineWeb, included these...

"2008 looks set to see mining deals reach very high record levels as super-consolidation takes place in the market."

Despite the credit crunch, the report finds "little evidence of a slowdown in [mining] deal activity."

"Underpinning these trends is the quest for world scale, resource acquisition and resource diversification," the analysts asserted.

The study noted that exploration costs are at all-time highs, permitting takes longer, and mining companies are facing skills' shortages. "These are significant barriers to meeting what is a major upturn in world demand."

(read the full MineWeb article on the topic by clicking here.)

This is all just the tip of the iceberg if you ask me, and it bodes very, very well for the juniors that are already sitting on a discovery. Yes, it is frustrating that some of our favorites have fallen with the broader markets lately... but this is a sector you need to be patient with.

On that topic, yesterday someone asked me if our subscribers were early adopters. And, after a moment's thought, I answered, "Yes. They are looking to get in early on a trend, and in investments that will provide far bigger returns than average."

Early adopters, however, have to possess both patience and a tolerance for risk. If not, then you may be invested in the right sector, but with the wrong temperament... a recipe for disaster. To wit, you won't have the emotional staying power to get you through the inevitable down swings and so you will invariably sell at exactly the wrong time, on a big setback. By contrast, an individual with the right temperament will continually look to buy under the market and, when that corner of their portfolio dedicated to the quality gold juniors is topped off, will look to continually upgrade at lower prices. Because they won't be chased out by the volatility, they'll still be there to collect the big profits as the endgame unfolds.

This is also why investing only with money you can afford to lose and still sleep well is so important. It assures you don't get over-emotional and greatly improves your odds of staying the course. And in the worst case that we are wrong and these stocks only head down to more or less a total wipeout, you might be discomforted, but you won't be put out of the house.

I guess what I am saying is that we have never made any bones about the volatile nature of these stocks. Please be clear on why you are buying them, and don't kid yourself into thinking they couldn't go down 50% even from here. They can. But we wouldn't be recommending them, or investing in them ourselves, if we didn't think this was a play that will blow the doors off almost any other investment you could be making just now.

Energy Chart of the Week

Public displays of hand wringing over America's dependence on foreign oil have become very popular, but little attention has been paid to how natural gas imports fit into the U.S. energy equation.

[click to enlarge]

Twenty years ago, the United States' natural gas production met nearly all domestic demand, but that is changing - and quickly.

The current situation is nowhere near as dire as America's predicament with oil supplies, of which 60% come from net imports. But the trend of imports making up a greater share of consumption is accelerating at a more rapid pace for "natty" than it is with crude oil. From 1985 to 2007, America's reliance on crude oil imports doubled, but its reliance on natural gas imports has nearly quadrupled.

Because the vast majority of natural gas imports come from Canada - normally considered a safe source of supply - little fuss has been made. If America has to buy more natural gas from its neighbor to the north, what's the big deal? They've been a steady supplier in the past, and it's not the sort of place where rebels run amuck blowing up pipelines, disrupting the supply chain (as has been the case in Mexico).

Under NAFTA's proportionality clause, Canada is bound to send 60% of its natural gas to the United States. The problem is that Canada's natural gas production is declining. Making a bad situation worse, the tar sands require huge amounts of natural gas to ramp up their heavy oil operations. Canadian winters aren't getting any warmer either, which - coupled with a growing population - has meant steady growth in Canada's natural gas consumption.

At recent debates, Hillary Clinton and Barack Obama have been arguing over who would be most qualified to tear up the NAFTA agreement. Lost in this storm of campaign rhetoric was Canada's response. "You might not want to renegotiate NAFTA if you knew how badly you need that oil and gas" was the message from Jim Flaherty, Canada's finance minister. The Canadian government would jump at any chance to wiggle out of NAFTA's proportionality clause, and a Democratic president might give them the opportunity.

The good news is that natural gas imports no longer arrive solely via the pipeline; they also arrive by ship through the emerging global market in liquefied natural gas (LNG). So the United States is not restricted to Canada when looking for natural gas supply, as it was even just twenty years ago. The bad news is that many of the biggest suppliers of LNG are located in the Middle East and Russia - precisely the regions that America wants to become less reliant on for its future energy needs.

[Ed. Note: Over coffee early this morning, I re-read the latest edition of the Casey Energy Speculator. In addition to a number of other excellent articles, it included a fascinating article on "run of river" energy projects, a "green" energy technology that has tremendous upside. It produces power from rivers, without damming them, and with relatively minor disturbance to the environment. The article includes two recommendations, one low risk, one high risk. If you are not yet a subscriber, learn more about giving it a trial run. ]

China Still Is Selling Us More and More

Bud Conrad took a break from his preparations for our sold-out Scottsdale Summit to send over the following chart he thought you would find of interest.

[click to enlarge]

There are a couple of take-aways from that chart, but the one that pops out at me is that it is a picture of American manufacturing being shipped overseas. As a result, while there is no question that a weakening dollar will help American manufacturers, the fact that their ranks have been reduced to such a degree, will likely mute the benefits.

Real Estate, Real Trouble

I ran into the mother of a close friend and a former partner at the store the other day. I don't think I would be exaggerating if I said she was the powerhouse real estate broker here in the resort town that is the headquarters of Casey Research. She is the quintessential über-agent, "can do," "get it done" and "never say die" kind of individual. Always an upbeat word about the local market and tough as nails, when needs to be, to get the sale. Yet, in our check-out conversation she made no bones about the fact that her views on the local real estate market are far less positive these days. In fact, her words were along the lines of, "I don't think that house prices are going to come back for another decade."

In a discussion on the topic of real estate with my mother, who holds down the family fort on the Big Island of Hawaii, she related a tale that I had heard before, but thought relevant to the current market, and so asked her to write down the facts of the case. Here they are:

"Grandpa bought a large house in August of 1929. The address was 10 Sutherland Road, Montclair, N.J. The price was about $45,000. He finally sold it for slightly less in 1945 after trying for years. I have an excellent photo of the house but can't send it until later today when (and if) I manage to reinstall another all-in-one with scanner. Love, Mom"

Could real estate really go down and stay down for 20 years? As hard as it seems to imagine, the answer is yes. This is a topic I'll have more on next week, when I share an interview with one of your fellow subscribers who is a professional real estate appraiser of many years and great experience from Northern California.

And That, Dear Readers, Is It for this Week...

I'm off tomorrow to our Scottsdale Summit. Next week's edition, written on the fly (literally) will likely be a bit reduced. The U.S. stock market is closed for Easter, but I can't even begin to imagine what thrills and chills it has for us next week.

We live in interesting times, indeed.

As always, thank you for taking time to read these hastily assembled thoughts... and, of course, for subscribing.

Warm regards,

David Galland
Managing Director
Casey Research, LLC.

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