The Room : Interest Rates

The Room – 04/03/2009

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

Dear Readers,

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

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

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

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

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

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

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

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

G20 Meeting, Who Cares?

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

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

Run for cover? Hardly.

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

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

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

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

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

The IMF

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

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

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

Read the complete paper here

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

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

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

Ed. Note

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

Read it here.

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

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

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

Read his essay by clicking the link here.

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

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

The IMF's Gold

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

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

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

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

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

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

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

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

The Closing Door

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

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

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

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

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

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

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

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

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

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

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

The door is closing, the noose tightening.

Letters from You

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research

The Room - 01/30/2009

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

January 30, 2009

Dear Reader,

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

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

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

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

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

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

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

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

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

Turnaround in Interest Rates?

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

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

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

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

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

Bait for the Two-Legged Rat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dolts!

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

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

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

Obama Watch

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

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

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

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

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

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

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

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

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

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

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

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

Go Gold!

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

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

Miscellany

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

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

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

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

It's coming...

And I am going...

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/24/2008

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

Dear Readers,

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

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

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

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

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

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

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

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

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

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

They are about to find out.

The Trial of Gold

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

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

The trial of Gold had begun.

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

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

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

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

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

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

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

"Yes?" asked Judge Market, looking grumpy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Oh, alright. Have at it."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Mr. Cuomo, any objection?"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unflustered by the bluster, Galland began to speak.

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

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

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

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

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

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

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

Galland nonchalantly replied:

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

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

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

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

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

"Yes. Right away," said Galland.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"No, sir."

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

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

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

Funeral for an Economy

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

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

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

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

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

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

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

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

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

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

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

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

So, why do I relate that scene today?

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

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

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

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

How Long Will the Foreigners Support the Dollar?

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

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

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

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

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

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

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

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

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

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

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

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

Credit Sucks and Don't Forget It

Friend and correspondent Sunni forwarded this in, this week.

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

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

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

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

Laughing Out Loud (When No One Else Is Looking)

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

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

CEO - Chief Embezzlement Officer

CFO - Corporate Fraud Officer

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

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

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

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

BROKER - What my broker has made me.

STANDARD AND POOR – Your life in a nutshell

STOCK ANALYST - The idiot that just downgraded your stock.

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

FINANCIAL PLANNER - A guy whose phone has been disconnected.

MARKET CORRECTION - The day after you buy stocks.

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

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

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

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

PROFIT – An archaic word no longer in use.

Miscellany

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

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

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

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

Best Regards,

David Galland
Managing Director

Where Is the Economy Going in the Next Six Months?

David Galland — Mon, 28 Jul 2008 15:04:21 GMT

By Bud Conrad
Chief Economist,
The Casey Report - Casey Research

As investors, the question we have to focus most of our attention on just now is what impact the credit crisis, the bursting housing bubble and the actions of the U.S. government will have on the economy and investment markets in the next six months.

We have seen the Fed and the federal government move to panic mode as they try to keep the system afloat. As expected, they have cut rates, as well as having given away checks and rearranged the Federal Reserve's entire balance sheet.

The underlying problems have not been fixed with this massive bailout. There are still many credit pot holes out there and new lending remains highly constrained. Even the government tax rebate checks, rather than boosting the domestic economy, were largely absorbed by higher oil prices. The resulting cut-back in consumer spending, coupled with ongoing constrictions in lending, will cause a severe slowing of the economy.

But the much bigger implication is that the Fed is busy pouring more gasoline on the fire by fighting the collapsing housing bubble, a housing bubble created by excess liquidity, with yet more liquidity. That is the key point that should be taken from this mess. The dollar is now firmly on an even steeper slope to its ultimate demise. Other currencies will be sliding down the same slope, so another paper currency is not the answer.

This, then, is a high-level context for many of our investment recommendations in the months ahead.

Short Term Projections

1. The housing decline is not yet done, because we will need another year to unwind foreclosures in the pipeline. In addition, the exuberance shown by appraisers at the height of the housing bubble still has a long ways to go to fully deflate. What is that house on the market down the road really worth? At this point, no one knows... and no one will know until it and many others are bought by willing buyers (as opposed to unwilling lenders taking them onto their books in a foreclosure).

2. Consumers in the U.S. are not able to expand credit and are increasingly concerned about the outlook for the economy, so they will slow spending both at home and on imports.

3. The financial/banking system is weaker than understood. The complexity of the global system and the ubiquitous presence of interlocking financial and credit instruments and literally trillions of dollars in derivatives has left the world's banks teetering on the edge.

Adding a push from behind, we have broadly rising inflation and soon the persistently higher interest rates that are the bane of fixed-income investors and financial institutions in general. As the dollar continues its fall, and the banks continue to come under pressure, the lack of confidence in these keystones of the modern financial system will deepen. Already, the Sovereign Wealth Funds that rushed in early in the credit crisis to prop up the big investment houses are now signaling that, at least for the time being, they are going to step back and watch how things shake out.

4. A slowing economy - recession - coupled with inflation, creates a condition often referred to as stagflation, presenting much bigger policy challenges for the government than one or the other alone.

5. The food crisis. Shortages of food production come from rising energy and fertilizer costs. Rising demand comes from a shift in diet, especially in emerging markets, where increasing prosperity leads the citizenry to add more protein to their diets. Important shortages in grains have arisen that don't allow for a bad crop year. Most concerning is that these shortages are occurring despite good crop production last year, an occurrence that can be blamed, in part, on the diversion of some agriculture production for ethanol and bio-diesel.

These food shortages have already contributed to a doubling and tripling in the price of grains over the last two years. But even these elevated prices have not been sufficient to offset the higher costs of the energy required to produce the crops. And, despite today's higher prices, agriculture still lags the price increases seen in many other commodities.

[For more information on the subject of food, watch my recent appearance on FOX Business News here.]

The result of this is that the inflation rate, interest rate, food, energy and precious metals are heading higher as the dollar is debased.

Higher rates are not good for housing and stocks. In the long term, they will recover in nominal terms, though not in actual terms. That's because, while their nominal prices may return to current or near current levels, the dollars used to express their value will have much reduced purchasing power... making those assets a mediocre investment for the foreseeable future.

Finally, it is important to recognize that the world remains in the throes of a deep and serious crisis. While many analysts will express the view that the worst is over or that, after a modest downturn, things will bounce back just like they always have, our view is that what we will actually witness going forward is a fairly steady occurrence of crisis and panic. The crisis will accelerate, moving faster, even, than in previous major shifts such as that witnessed in the 1970s.

While history may find we are too pessimistic at this point in time, in our view it is far better to prepare for a worsening crisis and hope that it does not materialize, than to expect business as usual.

Bud Conrad is the Chief Economist of Casey Research, LLC., publishers of Doug Casey's International Speculator which provides unbiased research and recommendations on the highest quality junior exploration companies.

Casey Research has also recently launched a brand new monthly advisory, The Casey Report, which focuses on the most powerful trends now driving the U.S. and global economy, and how to profit from those trends. As a special introductory offer, when you subscribe to either the International Speculator or The Casey Report before the end of July 2008 you will receive the other free of charge for as long as you remain an active subscriber. Plus, your subscription comes with a full three month money back satisfaction guarantee... so you have nothing to lose when you try these publications today. Learn more about this special offer now.

The Room 4/22/08

David Galland — Tue, 22 Apr 2008 16:29:58 GMT

Written: April 18 2008

Dear Readers,

I am running quite late this sunny New England morning. But I have a good excuse: my wife has left me.

Well, it's not all that dramatic... it is just that she has hived off for Europe for a ten-day gallivant with friends, leaving me in sole charge of the children, pets and sundry household duties. Survival under such circumstances has required me to rethink standard operating procedures. First and foremost, rather than rolling out of the sack at a leisurely 7:00 am in order to make it to school by 8:00 am, the kids are now rousted awake at 6:30 am. Under my new regime, all forms of maternal cosseting have been vanquished. Instead, following the required morning absolutions, they find themselves, sleeves rolled up, feeding and walking the menagerie, setting and clearing plates, helping to prepare meals and dashing brooms this way and that.

Then it's off to the playground for a solid course of healthful chasing after a basketball before the school bell rings.

All in all, I'm quite proud of how well I am managing to whip this place into shape. A self-satisfaction that slipped into the morning call with my wife yesterday. After listening silently as I related how I have whipped the place into good order, she commented, a bit coolly, it seemed to me, "Very nice, dear. Now when I get home, perhaps you could remember this new routine of yours and stick with it versus, say, sitting about over a nice cup of coffee while reading the morning news on your computer."

I have long believed that pride cometh before the fall and suspect that, provided I am not ousted in a coup by the grumbling natives before my wife returns home next week, I shall find myself hoist by my own petard following her return.

But to the extent that my service as Mr. Mom has undeniably disrupted my schedule this week, I am going to have to get right to it. While I am never sure where my wanderings will take me, I suspect this will be a fairly eclectic issue.

The Energy Picture

Yesterday I had a long and interesting conversation with Jeffrey Brown, the petroleum geologist who spoke so authoritatively on the topic of peak oil at our Scottsdale Summit. As it was only recently that I touched on Brown's studies of the Export Land Model in this column, I won't go into a lot more detail today. But I did want to share the gist of a couple of comments that he made which stuck in my mind.

On the topic of those who dismiss the peak oil believers as kooks, he said something to the effect of, "It is, in my view, ironic that some people believe peak oil theorists are delusional. That's because it is the height of delusion to think that we can treat a finite substance, oil, as if it is available in infinite quantities. It is not."

He also commented that, as is reflected in the $115 price, things are going in the wrong direction, and fast. As he put it, even the most determined pessimist couldn't have foreseen even a few years ago that things would get this bad, this fast.

Where does he see the price going from here?

"I think we are going to see a geometric progression in oil prices: $50, $100, $200, $400. It's just a question of how short the periods are between doublings."

He went on to discuss that it now looks as if global crude production peaked in 2005. Since that time, the production of total liquids has been basically flat. And, per comments reported here a few weeks ago, his model shows that Mexico, on any given day the 3rd largest source for imported oil into the U.S., will stop exporting oil in 2014... at the latest.

There was much more to our conversation, which I recorded and will work up into a longer article soon. Meanwhile, you can read a research paper on the topic of the Export Land Model by following this link: http://www.energybulletin.net/38948.html

Peak oil is not about running out of fuel. It is about running out of cheap fuel. Unless and until there is a serious technological advancement (see the Kurzweil article at the end of this column for one promising area), this is a trend you can make your friend... versus letting it kick you around each time you visit the petrol pump or pay the electricity bills.

While we are on the topic of energy, here's a brief look at what's going on in coal, the world's third most important mass energy source (after oil and gas) from Chris Gilpin of our Energy Research team...

Coal's Comeback

It wasn't too long ago - just 2006 actually - that coal had been written off as an old, dirty fuel that had no place in the 21st century's energy equation. What a difference a year makes...

* Values for 2008 are preliminary reported numbers subject to revision

The prejudices against coal were largely based on allegiances to the idea that actions taken to prevent global warming - such as carbon controls - would crush the coal industry. It turns out that the practicality of a simple-to-extract, easy-to-ship fuel like coal outweighed these wishy-washy ideals, and the international coal market went into overdrive.

The price paid for a particular type of coal varies considerably, according to moisture, ash, sulfur, calorific value, and the availability of user-specified grades at their time of need. Australia is the main supplier of coal to some of the world's biggest importers - namely Japan, Korea, and Taiwan - and the price for thermal coal at its Newcastle port has become a global benchmark.

The Newcastle benchmark doubled for all grades of coal in 2007, and spiked to dizzying heights in the early part of 2008 when heavy rains forced the closure of several major coal mines in Australia. Thermal coal at Newcastle went for as much as US$129, and has now pulled back slightly as the flooded mines have been drained and resumed operations, but the price remains well over US$100.

Coal is no longer the stealth play that it was in 2007, but there are still opportunities to be had. One area to keep an eye on are U.S. coal prices, which remained dormant through much of 2007, but are waking up in 2008, influenced no doubt by coal's international resurgence.

[Ed. Note: If energy is not yet part of your portfolio, you are out of sync with one of the most important trends in generations. At the risk of seeming boastful, I think the new and improved Casey Energy Speculator is, by an order of magnitude, the most comprehensive service available for investors looking to keep closely in touch with everything now going on in energy and, more importantly, the best ways to profit. You don't need to take our word for it, though.... Click here for details on our 3-month, 100% money-back guarantee.]

So, How Are Things Going?

Bud Conrad dropped me an email with the following chart reflecting a recent survey on the level of satisfaction felt by the citizenry as to how things are going in the U.S. While I suspect the trend expressed in the chart has more to do with a general dissatisfaction in the level of personal largess transferred to the respondents by Uncle Sam, this sort of Jimmy Carter level of dissatisfaction won't go unnoticed by the politicians.

In fact, I'll go on record here and now that we are on the verge of seeing a New Deal announced. It won't happen this year, but almost immediately after President Obama takes power. I will bet that, trying to draft off the heuristic connotations of that phrase, Obama will even use the term "New Deal." But, in the same way that a Hollywood movie producer names his movie sequels, it will likely be called the "New Deal II"... which will then be used to excuse all manner of re-jiggering of, well, everything. You heard it here first...

Here's a Trading Idea...

I have an idea that is very risky, but potentially very profitable. Starting with one of the biggest trends of the day, soaring food prices, we should ask ourselves how we can profit.

The obvious is to buy food commodities.

But there may be a better play. Namely, only a drooling idiot can be supportive of bio-fuels at this point.

Even the greenest of greens must have come to the realization at this point what a huge screw-up this has been.

The play, therefore, is to figure out what market is going to be most affected by the government pulling the plug on bio-fuel subsidies... and play that angle.

Everything being equal, the dolts that conceived this moronic idea in the first place could be expected to stubbornly remain with it for years to come. But everything is not equal. Instead, we now have all sorts of reports by quasi- and supra-state organizations pointing the finger at bio-fuel as a major factor in the rising food prices. We will soon have photos of starving children underscoring the damage caused by this latest example of government miscalculation.

Most importantly, we have a change in the presidency coming. That allows whomever is next to cancel the subsidies and blame it all on Bush and his cronies.

The only question in my mind is, what's the best way to play this?

As far as I know, no one else is looking at this angle just now... which leaves the opportunity wide open.

I ran this idea by options and futures expert Steve Belmont, a partner with the RMB Group (RMBgroup.com). Here's his response:

The answer to your e-mail is simple. 1) Buy call spreads on sugar. 2) Buy relatively cheap out-of-the money puts on soybeans, corn and rice. I believe this is the next big trade in terms of reward to risk on the board, despite what all "fundamentals" say -- partially for the very reasons you mentioned, partially because of what I saw in Bud's charts. Everything looks the same -- all at the top of the parabola.

Nobody is taking this approach, just like nobody I knew thought interest rates could rise. The thinking has demand from China and India, etc. making it "different this time." Whenever I hear that, I get suspicious. Full disclosure: I own puts in corn and soybeans and am looking to buy puts on rice.

While Steve's strategy is certainly contrarian just now, primarily because you risk being too early, the general idea that bio-fuel subsidies will end is, I believe, a good one. What are your thoughts? Drop me a line at david@caseyresearch.com.

[Ed. Note: Note Steve's mention of interest rates, a call that we featured recently in the International Speculator and that I mentioned last week. A couple of weeks ago, I bought EuroDollar puts - a strategy recommended by Steve and his team - and am happy to report my position has almost doubled already. Both Doug Casey and Bud Conrad are on record as saying that playing rising interest rates may be the single best move you can make today. This, and other crisis strategies, will continue to be closely followed in our flagship International Speculator.]

On the Topic of Interest Rates

Not sure if you caught this story, but the Wall Street Journal ran a piece this week questioning whether or not the widely used LIBOR was actually valid, or if it was being manipulated by the banks to downplay what they are really paying for short-term money. You can read the full article by clicking here.

But here's the nub of the problem, according to the WSJ:

The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

In this market, at this time, you have to be on guard against, well, just about everything. People are desperately hoping that the banks will stop performing like broken Whack-A-Moles, taking it on the head over and over. But we are nowhere near out of the woods at this point.

President Obama?

Above, and in other editions of this weekly missive in the past, I have expressed the view that it will likely be President Obama who next sets his heels on the Resolute desk in the Oval Office (the desk, a gift from Queen Vic herself back in 1880, was built from the remains of the British frigate HMS Resolute).

This week one of you wrote to say, "Not so fast, I think you are jumping the gun on Obama."

For entertainment purposes only, I will risk offending the politically sensitive by sharing why it is that I think Obama will be the next prez.

Here's my calculation at this point. Despite the contention by many in the Democratic party that Hillary's stubborn refusal to get out of the race is hurting Obama's chances in the general contest this fall, I think the opposite is true. In fact, every day she stays in the race improves Obama's chances.

That's because Hillary's attack dogs are turning up every possible stone trying to get the dirt needed to bury Obama. Provided he can prevail (and at this point it is almost a statistical certainty he will), then the Clintonistas' constant attacks will serve to inoculate him in the public mind against these very same charges, should the Republicans later try to dredge them up ahead of the November vote.

Put another way, everyone will have heard all the bad stuff available about Obama and so will mentally relegate it to yesterday's news. Further, he will have had the opportunity to practice the messaging that will best allow him to dodge whatever charges the Clintonistas raise.

Meanwhile, back at Sunny Acres, McCain is enjoying a nice long holiday. But once the contest between Hil and Bama is settled, that holiday will come to an abrupt end and the massive dossier compiled by the Democrats on his many faults will be unleashed... just in time to do the most damage ahead of the final contest.

While some of what McCain will face when the general election kicks off in earnest did briefly surface during the Republican contest, that was pre-school for what is coming. He has, if you credit the fairly credible reports, alienated a lot of people with his temper, people that won't mind a little payback. Then there was the fact that he was caught with his hand in the proverbial cookie jar with that whole Keating S&L scandal, his rendition of Bomb, Bomb, Bomb Iran (seemed funny at the time, but I have to believe it won't play well in a 60-second attack ad aired over and over). And then there was the whole cozying-up-to-the-lobbyists thing and his apparent confusion over the key players in Iraq and Afghanistan, etc., etc.

Who knows, maybe Obama's folks will borrow Hillary's 3:00 am ad and repurpose it against McCain. "It's 3:00 am in the morning, who do you want answering the phone?" Cut to John McCain thrashing, confused, for the telephone. "Who the hell's calling at this time of the damn morning! And who am I anyway?" (Sorry, McCain fans... I just couldn't help myself.)

And so his holiday will come to a screeching halt, just in time for the popular vote.

That's how I read it and, if I can find the right counterparty, how I'll bet on it. At least, if I win, I'll have some small head start on the higher tax bill Obama's perfect world will require.

Another Casey First

A couple of weeks back, I took the unusual step of posting an ad from a friend and subscriber looking for the ideal mate. (The early response, she has informed me, has been quite good... with a fuller report due any day.)

Another subscriber with whom I stay in fairly regular correspondence mentioned in passing that he was temporarily in the ranks of the unemployed. As I have always enjoyed our correspondence - Clifton is a very knowledgeable amateur historian - I suggested that if we could help a friend find a mate, we could help a mate find a job. After all, what are phyles for if not to help when help is needed. In any event, I suggested he write up an ad for himself. Which he did, and which follows...

David and I have something in common other than precious metals. Both his stepfather and my father served in the CBI Theater during WWII. His was in the air as an Ace, mine drove the Burma Road.

I thank David and the Casey gang for allowing me to use this forum. I'm relatively new to the Casey family, but not so to precious metals, thanks to my dad.

I'm looking for an opportunity. My resume includes a lot of positions, since I did a career change from sales and sales management into accounting (MBA, CPA), and I've walked away from more than one unethical situation. Most recently I've been in the homebuilding/land development arena, but am open to a different industry.

An avocational writer, I have written numerous short stories and novels. My interests include the card game Skat, coins, books, guns, dogs, comic books and red zinfandel. I am a Vietnam Era Veteran having served as an MP in the US Army.

I would prefer to telecommute from Northern Alabama with occasional travel as necessary, but am open to relocating for the right opportunity.

If you can assist me with either a traditional accounting/finance role or an amalgamation across my interests, or if you are an agent or editor looking for new blood, please contact me. Voshen357@knology.net

Q&A

As usual, I received a number of letters from readers this week. Here's a couple I thought you might find interesting.

Hi David,

Thank you for your thought-provoking, funny letters. As a new subscriber, I'm trying to wrap my head around a few issues raised in the April 11 issue of "In the Room." My first question is technical, the second historical/philosophical.

Doug Casey writes, "If the money supply is stable and one commodity goes up a lot, the price of others must drop -- the general price level, in terms of dollars, stays the same." What is the relationship between the effect of currency inflation on commodity prices, and the effect of the cycle of supply and demand (and the resulting state of the infrastructure) of each individual commodity?

More philosophically, in reference to your discussion about the housing bailout, you champion the virtues of free-market capitalism. I have to be the devil's advocate here, for no one else is. Isn't it free-market capitalism, unrestrained by governmental oversight, that makes sweatshops possible? Notice that when regulation tightened in this country, working conditions improved, wages went up, and the "free market" hightailed it to the Third World, where anything went, and despite occasional boycotts, still goes -- at least as compared to labor standards here.

Wasn't it a lack of preventive, regulatory oversight that allowed the housing crisis to brew and erupt? The "free market" wasn't so free after all, even to those who preyed on ignorant and marginally solvent borrowers -- and who then, attempting to "spread" (hide and pass on) the risk, sliced and diced these shaky loans into pieces too small to recognize, thus giving new meaning to "death by a thousand cuts."

No matter how wonderful, everything has its dark side, an unrestrained market as well as governmental regulation.

Yours truly,

Linda

Given my time restraints, I asked our own Terry Coxon, a senior editor who works on the International Speculator and BIG GOLD, to respond. For those of you who are unfamiliar with Terry, he was Harry Browne's partner and editor for years and, among other accomplishments, founded the Permanent Portfolio Fund. Here's his response..

Linda:

1. Commodities and inflation. The initial effect of an increase in the rate of monetary inflation (an increase in the growth rate of the money supply) is to lower interest rates. This tilts the demand for goods in general toward capital goods (long-lived assets, such as buildings and machinery) and away from short-lived, consumable goods (such as socks and toothpaste). That's why the recent run-up in housing prices outstripped the rise in consumer prices.

Among commodities, the earliest to be affected by an increase in the rate of monetary inflation will be commodities associated with the production of capital goods -- such as lumber and metals. Consumable commodities, such as foodstuffs, will lag behind and then later catch up. This closely matches what we've seen over the last few years -- the monetary inflation that pushed short-term interest rates down to 1% and produced a boom in housing construction also set off a rise in the prices of metals, but only more recently has fueled a rise in the prices of wheat, rice and other foods.

2. Sweatshops. Milton Friedman remarked that if his parents hadn't worked in sweatshops in Chicago, he would never have gotten an education. What could he have been thinking?

If by sweatshops you mean people working in rough conditions for low wages, it is possible for determined, energetic government action to change matters. The government can, for example, require that every workplace maintain a temperature of 80 degrees or less. And it can prohibit paying any employee less than a certain wage rate. Sounds nice. But the effect on employees ranges from bad to catastrophic -- because the cost an employer is willing to incur for a person's labor is limited unbendingly by the value that labor adds to output.

Air conditioning and other workplace amenities (even fans) come with a cost, which is a cost of maintaining an employee. It is inescapable that if the government requires such amenities, then it imposes such costs -- which reduce the wages the employer is willing to pay. The employees might like the air conditioning, but the fact that it is installed only by government mandate is proof that the employees would prefer sweat and higher wages.

The effect of minimum wage laws is even worse. Name any minimum wage rate and there are people whose labor doesn't add that much value per hour. So no one will hire them. In the U.S., these victims of government are generally teenagers, who tend to be short on the education, reliability and work experience that make labor productive and valuable. Some of them never get their first job, and with time they become chronically unemployed and eventually unemployable. Not even slavery is as effective at keeping the poor poor as vigorously enforced minimum wage laws.

Outside the U.S., measures to shut down sweatshops would have even worse effects. The children sewing clothes in Bangladesh only get 50 cents per hour because that is about what they add to the value of the factory's output. Requiring a minimum wage of 75 cents per hour would destroy their jobs and leave them earning nothing. Some would die. An effective boycott would be just as cruel. Boycott the clothes they make because you don't like the terms of their employment and you boycott their opportunity to live.

Terry

In Defense of Marx

I also received the following email message, in response to my less than flattering description of Karl Marx last week.

David

Based on your following statement:

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

It's clear that you are an absolute cretin. Marx's slogan is a fabulous one, and any civilized culture would do well to aspire to it.

But being a bourgeois imbecile, it's no wonder you deride it. As for Marx being responsible for millions of deaths, uh, no, I think you'll find that those responsible were people with names like Stalin, and Mao, who distorted Marx for their own ghastly purposes. Now grow up or shut up!

Ross

At 53 years old, I suspect the whole "grow up" thing is simply not going to happen. And I don't really feel compelled to shut up, either. So I will comment, albeit briefly, that while Marx didn't actually pull the trigger on the uncountable millions who have died based on his fine-sounding ideas, he might as well have.

That's because the slogan that popped to his mind one day, and which you are so deeply fond of, "From each according to his abilities, to each according to his needs" contains within it a clear and implicit promise of coercion and even violence.

Any platitude, even Marx's, might be used by an individual as a reminder to act in a certain way toward their fellow man. But when it is adopted as government policy, which was clearly Marx's desire and goal, it becomes an entirely different thing altogether.

Simply (as a "bourgeois imbecile," I am capable of no complex thoughts), what happens if I, as the individual in Marx's equation who is able to produce more, am unwilling to give of my bounty to others unable to produce more?

There may be any number of reasons why I might not want to hand over goods I have earned, or shoulder extra work so that others less able may live more comfortably. For instance, I might want to save money to start a new business. Or, I may be concerned about the future and want a little extra padding to assure my immediate family doesn't have to go without. Or, I may simply enjoy the feeling of fine Corinthian leather on my car seats.

But regardless of my reasons, I may decide that, no thanks, I'd rather keep the fruits of my labor all to my selfish self.

Leaving the government in Marx's utopian world with only one option... coercion. They can forcibly take the goods from me, or they can send me to a work camp. And they can take away the controls of production, which was Marx's proposed solution. But when they do, they will be taking away the incentives to innovate and to produce, leading inevitably (just check the history books for proof) to an economic meltdown. Just as inevitably, the government - looking to protect itself - then resorts to anything and everything to stay in power. Stalin and Mao are not the exceptions in this form of government, but the most likely consequences.

There is more to this discussion than I have the time or the inclination to go into here. But if you, Ross, have reached this stage of life still believing in Marx and communism, then I'm betting you are still pondering how Santa Claus manages to slide down your chimney each Christmas.

It's Official: I'm Out of Touch

I read this morning, as I watched the stock market rise, that the reason for the rally has to do with the fact that Citigroup's first-quarter revenue plunged "only" 48 percent.

According to Bloomberg:

The New York-based firm's first-quarter net loss of $5.11 billion, or $1.02 a share, compared with earnings of $5.01 billion, or $1.01, a year earlier. Analysts estimated the company would report a loss of $4.75 billion, according to a survey compiled by Bloomberg.

So, a year-over-year swing, in the wrong direction, of about $10 billion is good news? I must be out of touch with the new reality, because I just don't get it.

Apparently, however, the rationale for such ebullience - which has the Dow up 197 points as I write - is because people are, once again, seeing Citigroup's results as not quite as bad as they could have been. This, apparently, signifies the beginning of the end. And because things are going to improve, the Fed can now be less aggressive in cutting rates... which has strengthened the dollar, taking a (temporary) bite out of gold.

Now, one could comment endlessly on these sorts of market movements. But I think it is a waste of time. No question that traders will continue trying to spot the patches of blue through the thick gray overcast. But this storm, according to everything we see and reliably report on in our various publications, is just getting rolling and before you know it, lightning and hail the size of grapefruit will be sending the equities market running for cover.

Inflation Watch

It is getting harder by the day to keep up with all the negative inflation reports. The latest, out of the UK, has it that the government there is waaaaaay understating the real inflation rate. Specifically, that instead of it bouncing along under the 3% rate, it is actually running closer to 15%, based on a basket of items that the Daily Mail categorizes as "must pay." You know, those annoying things like food and fuel which governments like to leave out of their inflation indicators.

Here's the story.

Meanwhile, Faith, one of your fellow subscribers, sent along the following link to a YouTube confrontation between Ron Paul and Fed Chairman Ben Bernanke. While I would rank the caliber of most questions asked of Bernanke by most Congressmen on a level with those that might be asked by a grammar school social study class, Ron Paul gets into Bernanke with both elbows. It is a very interesting exchange, stunning almost. Check it out here.

Political Pandering

How low will a presidential candidate stoop to pick up a vote? If you trust the evidence, the answer is, pretty low. Among that evidence are the promises of the Democrats that, if elected, they will change the current regs so that union organizers will be able to unionize a company based on a signed petition, versus the secret ballot that companies can now insist on.

Now picture this. With the secret ballot system, you step into a private booth and vote to unionize, or not.

Under the proposed rule change, George from down in the shop stands in front of you, toothpick between his teeth, proffering you a sign-up sheet. "Here, sign this," he says. So, what are you going to say? "No thanks? I have noticed how so many of the unionized industries have been destroyed and moved off-shore to be competitive." I don't think so.

It reminds me of the close friend of a former partner of mine who set up a vegetable stand by the side of the LI Expressway. After a week or two, a guy in a big caddy drives up and gets out. Toothpick between his teeth, he says, "Looks like a nice business youse got here. Whaddaya do wit your garbage?" "Oh, nothing much. It's just a couple of garbage bags' worth that I toss in the trunk of my car and take home." "Dat right. Well, you know what? I think you could use a dumpster." "Really, it's no trouble at all," my partner's friend replied. To which his new acquaintance said, cracking his knuckles as he spoke, "No, you don't understand. You NEED a dumpster. It will be here in the morning. You just pay us rent for $500 a month and everyone's good, right?"

But back to the present, while I have nothing against unions, I understand enough about human nature to understand what a fundamentally flawed idea it is to force businesses to unionize based on a petition. The last thing the U.S. needs at this point is yet more reasons to ship industry overseas. One can only hope this is one of those situations where the politicians are doing the only other thing they do better than pandering... lying, in this case to the heads of the unions.

The Price of Gold

In my closing comments last week, I wrote the following....

A final check of the numbers as I prepare to put the tools to rest has it that gold is hovering around the $926 level, while the DJIA is taking a hard shellacking, down 223 points.

For entertainment purposes only, I'm going to bet that gold is going to go over $950 in the coming week. In fact, I'll go one step further, and say it will peak at $953 for the high next week (as of noon next Friday, April 18). If you want to get in on the game, send in a specific guess of gold's high for the week (also by noon Friday). If you are right, we'll comp you for a year of BIG GOLD... with a tie, going to whoever sends in their prediction first. Drop me an email with your prediction, and any other comments you have about this week's edition, to David@caseyresearch.com.

The high for the week, using intraday spot prices, rang in at $953.90... so I'd have to give my crystal ball high marks. But I was outmaneuvered by Anne V., who actually nailed it right on the head, winning herself the free one-year subscription to BIG GOLD. Here's her entry:

"David I think gold will touch 953.9 next week. And I hope some of our gold juniors follow suit!"

As for the juniors, the next and most important trigger will be the next round of quarterly reports issuing forth from the large producers. Those reports will start coming out within a week or so, and will continue into mid-May. If they are as positive as I think they will be, the attention on the mining sector will ratchet up considerably. Stay tuned, things are about to get interesting.

Miscellany

A friend in need. Say what you will about Colombia, they have had more than their share of turmoil and trauma. And think what you will about the War on Drugs -- the Colombians, at least to this casual observer, seemed to have jumped on the team, supporting the U.S. effort to interdict supplies at the source by, among other things, allowing U.S. soldiers to tromp all over the place and engage in blanket dusting of crops using various insecticides. I also have no doubts they paid close attention to the admonitions of the U.S. government to build a diversified economy. But when it came time to approve a new free trade agreement with them, politics trumped and the Colombians were turned back at the door. Not sure what message the rest of the world will take away from this, but I think the bigger point to pay attention to is that the trade barriers are only beginning to go up. And not just in the U.S., but around the world. Not a good trend if you ask me.
Ascent of humankind - continued. Underscoring his optimistic view on the world we live in - or soon will - our globetrotting chairman sent along a link to an excellent article by Ray Kurzweil. Kurzweil, who is well known and respected in the science community, points to the exponential advances in computing power, and how that same level of technological leap-frogging is now being applied to other crucial fields as well. I have often commented to my kids that their generation may live to 200 years of age. And if you credit Kurzweil, the odds in favor of that happening are improving daily. Here's a link to the article.
Crisis, what crisis? According to Bloomberg, "The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007, according to a Merrill Lynch & Co. index of bonds yielding at least 10 percentage points more than Treasuries." Read those numbers again. $4 billion to $206 billion in a year? Look for cover if you haven't already found it.

And that is that for this week's particularly rushed edition of The Room. I apologize for any poorly worded or ungrammatical expressions, as at this point I have the choice of doing another pass through what I have just written, or picking the kids up from school.

As always, I greatly appreciate you taking the time to read this weekly missive. As I sign off, the DJIA is up 234 points and gold is trading at $916. Time to worry? Hardly. But it is time to pick up the kids and so I will sign off for this week.

Until next week...

David Galland
Managing Director
Casey Research, LLC

The Room 3/10/08

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

Dear Fellow Global Adventurers,

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

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

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

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

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

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

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

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

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

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

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

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

I digress.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[click to enlarge]

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

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

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

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

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

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

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

Desperate Acts - Continued

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

On that general theme, this week provided additional examples:

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

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

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

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

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

The second item comes from Bloomberg...

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

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

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

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

Energy Chart of the Week

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

[click to enlarge]

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

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

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

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

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

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

Bootstrapping It

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

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

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

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

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

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

There was another author from earlier times, one Horatio Alger, Jr., who was wildly popular in the 19th century based on his many dime story novels, mainly about scrappy lads who managed through honesty and hard work to fight their way out of poverty and into the proverbial mansion on a well-sited hill. (That he had a base predilection for the same scrappy lads failed to dent his popularity, it seems.)

This comes to mind because of an article Doug Casey thought you might enjoy. It is the story of a young man with everything, who decides to test the American dream by dropping out of his usual society, ignoring his material advantages, and with just $25, to try and attain some modest level of financial stability.

While some of you may be tempted, after reading the article, to catalogue the various reasons why the young man was a success, while others less fortunate at birth would be doomed to fail, I think the mere act of making that catalogue is wrong-headed. What the world needs these days, in my view, is a lot more of the "can do" attitude, and a whole lot less of the helpless victim mentality that so unprofitably grips the minds of such large swaths of current society.

In any event, here's the story...

Eye on Liechtenstein

Kevin Brekke, our Switzerland-based editor, has been helping us keep an eye on the developments in Liechtenstein, a canary in the coal mine, as far as we are concerned, for the outlook for financial privacy. Here's his latest report...

Hey David,

Well, as the news cycle exerts its influence on the Liechtenstein Event, like gravity it has pulled the story from the front page, to the back page, to off the page. But here's what we know (or what the media would have us think we know) as of Thursday, 6 Feb:

In true fascist government style, German politicians were clamoring for microphones and face time in front of the cameras to pound their collective chests with, as one newspaper caption put it, "true pride in their actions." I guess in Germany under the Merkel & Co. regime, coercion, bribery, and buying stolen property is considered praiseworthy. In any case, it was announced that close to 200 Germans had come forward and were cooperating with the tax authorities.

The scope of interest has also been revealed to encompass not just bank accounts in Liechtenstein, but also family and company trusts, and safe deposit boxes. The tax authorities were quite clear in their charge that anyone with cash in a foreign bank safety deposit box must be doing something illegal. Apparently being in possession of your own money outside your home country confers upon the citizen a verdict of guilty - guilty of what we don't know, but guilty nonetheless. And besides, it's so much more profitable and expedient to exercise habeus grabus than to ask questions and uncover the facts.

Not surprising was the piling-on of other socialist countries drooling to get their hands on a piece of this action. Greece, Italy, Spain, Portugal, Sweden, Great Britain, Ireland, and of course France, all expressed keen interest and deep concern to expose their own tax miscreants in the pursuit of "social justice." So pathetically desperate is Britain that their tax minister has announced that they will pay 100,000 pounds for a similar DVD with the names of British account holders.

In all fairness, there was a bright spot in this otherwise dark episode. A few clearer heads managed to elbow their way to the mic and interject some legal and ethical ponderings upon the shouting mob, er, the media. Sweden and Great Britain said that although they will pursue individuals to recoup tax revenue, they would likely not be able to bring criminal charges to bear, as the information was obtained via a crime - theft. Oh, those pesky details. The standouts so far have been Finland and Denmark. They took the argument further by saying that the theft of goods should not be rewarded - it's neither ethical nor legal.

More as it develops...

And That's It for This Edition...

It is an absolutely stunning day outside, and I swore to our production team that I would get this missive to them early, so I am going to line up both of those objectives and sign off now.

But first, a couple of quick housekeeping announcements.

Our Casey Research Crisis & Opportunity Summit is completely sold out. If you happen to come across a link to the event, please ignore it because we simply won't take any more registrations.
Based on subscriber feedback, we are going to re-double our efforts to tighten up the length of our monthly publications to no more than 24 pages. That said, knowing how prolific our team is, I suspect you'll be receiving additional special reports in between editions on topics that catch their collective eyes and that benefit from more in-depth exposition.

As is my custom, a quick check of the screen reveals that gold is hovering around $975, which is almost $200 higher than the average realized price of gold sold by Kinross Gold and other producers in producing their highly profitable Q407 financial results (to wit, the next quarterlies will only be better).

I also see that the DJIA has broken fairly decisively below the 12,000 benchmark. It's going lower.

Until next week... thank you very much for reading.

David Galland
Managing Director
Casey Research, LLC.

The Room 3/3/08

David Galland — Mon, 03 Mar 2008 17:52:08 GMT

Dear Readers,

It's getting to the point where even the most determined optimist is having a hard time finding a good reason to roll out of bed.

Among just the smattering of news that crossed the lens this week...

Producer prices rose 7.4 percent in January from a year ago, coming on the heels of the news last week that the Comedic Politicized Inflation (CPI) index has risen over the last 12 months at the highest year-over-year rate in decades.
The National Association of Purchasing Management's business barometer has fallen to the lowest level since 2001, beginning to reflect a knock-on slowdown in consumer spending.
And, according to the U.S. Commerce Department today, what modest growth in spending there is, is now coming from inflation and not from confident consumers mobbing local electronics shops to load up on the latest and greatest.
On that latter point, consumer confidence in the U.S. is reliably reported to have grabbed its chest and slumped to the ground, or at least to levels last seen only in 1992.

And no wonder, given that housing prices, the single most important component of the net worth of so many people, are crashing; in December they fell by the most on record, off 9.1% from the year before.

(During a cross-country ski slog over the weekend, a friend who is a housing contractor by trade told me he has not seen a slowdown like this in his 20 years in the business. He knows of only one new house on the flight path to be built in these parts. The property holder has six different contractors scraping it out in a bidding war to get the job, assuring that the victor ultimately receives as a reward a dry and meatless bone at best.)

If the housing sector slowdown with its rising foreclosures and defaults isn't enough to keep our optimist abed, he would have to do no more than flick on the morning news to learn of soaring food prices, a crashing dollar and a tumbling stock market.

No sooner had a trembling hand secured a double dose of Advil, topped off with a cold compress, then he would hear a report of hundreds of millions and maybe even billions of dollars worth of new and unexpected losses being suffered by municipalities, banks, and sundry financial institutions on purportedly "safe" instruments concocted in earlier, more positive times. This week, for instance, we hear that the supposedly invincible Goldman Sachs may take it in the chops for as much as $11 billion due to "variable interest entities," a form of conduit, our faltering optimist learns as he falls back on his pillow in a fatalistic swoon, that holds close to $800 billion in assets, some significant percentage of which are now considered suspect.

At this point, the only folks able to view the unfolding carnage with any casualness are the super-rich for whom almost any conceivable loss would still leave them the requisite funds to live like the royalty of old... and the relatively small handful of investors who've been smart enough to have moved assets out of harm's way and into gold and other commodities early on (a group that I continue to hope includes you, with the help of our various services).

Interestingly, this week it was revealed that the California Public Employees' Retirement System can be counted among the few that have been seeing the nature of the unfolding crisis in the right light, and has at least begun to act appropriately. Calpers, according to Bloomberg...

...the largest U.S. pension fund, may increase its commodities investments 16-fold to $7.2 billion through 2010 as raw materials prices surge to records.

Calpers, which has about $240 billion in assets, agreed at a Feb. 19 board meeting to hold between 0.5 percent and 3 percent of its assets in commodities, spokesman Clark McKinley said. The Sacramento, California-based fund last year put $450 million into commodities, its first such investment.

The agreement is the fruit of Chief Investment Officer Russell Read's efforts since joining in 2006 to boost returns by shifting funds into raw materials and markets such as China and India. Oil has soared above $100 a barrel, wheat breached $13 a bushel for the first time, and gold and platinum climbed to the highest ever since Calpers began investing in commodities.

"We plan on ramping up the program by hiring additional staff," McKinley said by phone yesterday. "We are excited about commodities, which have performed exceptionally well for us."

To which we say, welcome aboard! Better late than never, so hats off to the obviously competent Mr. Read.

Of course, as the pension funds, like the hedge funds, mutual funds and institutional funds in general tend to run in packs, this news can only help solidify the base under our current favorite investments.

Listen and you can almost hear the chat around the polished-wood-encased water coolers strategically positioned around finely appointed pension managers' offices worldwide.

"Did you hear, Calpers got into commodities last year?"

"Yeah, smart buggers. And here we are with our bonuses slashed -- slashed, I say! -- to only $2 million, just because we invested in AAA bonds!"

"Well, if commodities are good enough for Calpers, who are we to argue, eh?"

"Race you to the trading desk!"

Pile on in, we shout enthusiastically, daydreaming about selling our appreciated resource stocks to the stampeding herd a ways down the road.

But that, fellow travelers, is about the only golden lining to be found in the chaos now gripping the world. And while a good investment brings a warmth not unlike a crackling fire and a hot toddy on a cold day, the toddy loses much of its flavor when one considers the impact that the unfolding crisis will have on our less well-prepared friends, family and fellow countrymen (and women, as the case may be).

Commenting on the news in an email exchange from New Zealand this morning, Doug Casey had this to say...

"My own feeling is that by the time this cycle is over, people are going to be shocked by how high gold goes. But it will be a sideshow compared to the circus the Greater Depression will put on."

Unfortunately, however, the news for the unprepared gets much, much worse. There are two areas that I would like to comment on in a bit more depth, starting with Bernanke's testimony.

Bernanke Pushes the Button

Yesterday, while engaged in my periodic physical exertions, or more specifically, while I was clinging to the handles of a medieval masochistic device sternly labeled the "Stair Master" down at the local facility for such things, I managed to snake out a finger to the television monitor to tune into Chairman Ben's testimony in front the House Financial Services Committee.

It was, I noticed when the camera pulled back from Bernanke's oddly detached countenance, a sparsely attended affair. In fact, it seemed to my sweat-filled eyes as if there were no more than five or so members of elected officialdom in the gilded chamber.

(But, hey, why should members of Congress be interested in anything to do with the economy? It's not like there's anything going on these days. Whether or not Roger Clemens is doping - now THAT is worth packing the chambers for!)

In all seriousness, however, Bernanke's testimony yesterday was far more important than most people understand, least of all those now doing "service" in government. Far be it from me to be critical of the pandering class, but I was appalled at how unbelievably, well, stupid the questions were that were pushed toward Bernanke by the handful of Congressmorons who bothered skipping the brunch put on by the American Lawyers Association down the hall in order to be present.

Bernanke's testimony was important because in it he made it abundantly clear that the Fed - and by extension the U.S. government - was coming down firmly on the side of inflation.

Those of you who have been with us for any length of time know that we have been calling for things to arrive at a location loosely identified as "between a rock and a hard place." It has been our consistent belief that the Fed would inevitably be forced to make a decision between letting the economy collapse under the weight of its many debts and obligations, or letting the dollar collapse by shifting into default mode. Which is to say, trying to inflate the country out of trouble.

The specific quote from Bernanke's testimony you want to pay attention to was this...

"The Federal Open Market Committee will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

Note the lack of reference to run-away-inflation that is already making itself known here, there and everywhere.

The news that the Fed is again opting for inflation, while coming as no surprise to us, caught the gold bears flat-footed by sending gold sharply higher, to over $970 as I write.

Speaking from an entirely personal basis, I am, of course, cheered by the rise in gold, thanks to a long-held position in a gold ETF and a portfolio stuffed to the gills with the higher-quality gold exploration and energy stocks of the sort followed in our International Speculator and Casey Energy Speculator services. But there is a real risk arising... a true tipping point... that I am not so sure I'll be happy to see.

While there are many factors that might push the economy over the edge, the one to watch closely now are the foreign holders of the U.S. dollar. As we have mentioned more than once, the amount of U.S. dollars in the hands of foreign holders is at historic levels. In fact, the level of holdings, estimated at as much as $16 trillion, is unprecedented by an order of magnitude.

At this point in the game, we would expect to see wealthy foreign individuals cashing in their dollars for all manner of alternatives, including other currencies, tangible property and, of course, gold and other tangible assets. Given the price of tangibles at this point, that trend is likely well underway.

Diversification out of the dollar by institutional holders is likely also underway. But after that, if pushed to it, will come the big kahunas: the foreign governments and their many trillions.

Up until this point, that they have been reluctant sellers can be understood in much the same way you can understand the concept of Mutually Assured Destruction when discussing the pros and cons of launching nuclear strikes against your similarly armed adversaries. At what point, however, do the foreign governments come to the conclusion that the other side has already "pushed the button"?

Watching Ben Bernanke, there is a reasonable chance, were I a foreign holder, that I might come to the conclusion that he has done the equivalent of just that.

Regardless, the pressure is growing daily on the economies of the Middle East and Asia, which have to date helpfully reinvested the money they have received in exchange for their goods into U.S. Treasury securities. And, by doing so, effectively imported our inflation back home. Even if they wish to continue avoiding the nuclear option, they will at some point be forced to it by the U.S. pursuing a monetary policy one could correctly term "Everyone for themselves!"

Make no mistake that once the tipping point is reached -- and if the Fed makes yet another steep cut at its next meeting on March 18, that could do it -- then things have the potential to shift from crisis to catastrophe almost overnight.

What impact would a true collapse in the dollar have on the global economy? It is a topic we'll continue to poke at here and in our various publications. But for now, keep your eyes wide open and your head down.

I'll touch on the second serious development this week, but the lunch bell has just rung, so I'm going to pass the baton over to Bud Conrad, who has sent over a couple of items he thought you'd find of interest...

Bud on Bernanke

In alarming testimony to the House Financial Services Committee, this week Fed Chairman Ben Bernanke declared: "We have a problem ... the spreads between the Treasury rates and lending rates are widening, and our policy is essentially, in some cases, just offsetting the widening of the spreads, which are associated with signs of illiquidity."

I said at the Denver Summit, and since in articles, to watch out when the Fed cuts and long-term rates don't drop.

It means that the rate-cutting process of printing money to buy Treasuries in an attempt to provide liquidity to lower rates is failing. The confidence in the ability of Bernanke, or anyone else, to stop the collapse is lost when people become aware that printing money makes it worth less. The Fed action becomes the fear, rather than the solution. At this point further cuts won't help the economy, because long-term and riskier rates will reflect that loss of confidence.

(Ed. Note: Bud Conrad recently gave a wide-ranging interview for the Gold Report on where the economy, gold, energy, food and interest rates may be headed. You can view it by clicking here.)

A Trip Down Memory Lane

Our own Terry Coxon sent along a link to a video of Richard Nixon announcing the end of gold convertibility, pointing out that I would especially enjoy the reference to "international speculators."

You can see Nixon make the announcement by clicking here.

The canceling of convertibility was, of course, a seminal event as it left the world with a pure fiat monetary system, an experiment which has subsequently resulted in the steady deterioration of all paper currencies, among other ill effects (including unchecked growth in government, thanks to the removal of any real obstacles to spending).

Will the whole house of cards implodes some day, forcing a return to a gold standard or some other system that forces fiscal restraint? If I was a betting man, I would place large sums that the answer is "yes"... it is inevitable.

In fact, the collapse may have already begun.

Energy Chart of the Week

By Chris Gilpin, Contributing Editor, Casey Energy Speculator

[click to enlarge]

Gasoline prices are comprised of several costs: transportation of oil (usual from some distant corner of the globe), refining costs and profits, more transportation of gasoline (to get it from the refinery to the gas station), taxes from every level of government, and the cost of buying the crude it all started from. This last cost has mounted, and now oil prices hold a greater and greater influence over gasoline prices.

In 2004, oil prices rose 50% from $30 to $45 roughly, and this created a corresponding 26% rise in gasoline prices. In other words, gasoline prices increased half as fast as oil prices did.

As oil prices have risen, the oil cost of gasoline has begun to dwarf all other components. Now when oil prices go up, it will cause a much steeper rise in gas prices. If oil were to make another 50% jump from $100 to $150 - which we think is quite possible in the next year or two - gasoline prices would rise at a rate closer to 35%. The U.S. average for regular-grade gasoline hovers around 310 cents per gallon right now with oil near $100; a 35% increase would lift it to 419 cents per gallon.

The rogue factor in all these calculations is refining capacity. Last spring, a spree of unplanned refinery outages pushed gasoline prices higher when oil had retreated to $60. By the time refining capacity came back online, oil was marching to $100. By having one major cost replace the other, gasoline prices have stayed between 280 and 310 cents per gallon since April 2007.

This may have created a false sense of security among motorists, who saw oil move up twenty or thirty dollars without much of a corresponding rise in gasoline prices. This spring refineries have scheduled their normal outages to switch from winter to summer-grade gasoline, but how many unplanned outages will occur? The U.S. oil-refining infrastructure is outdated and badly in need of replacement, but permitting a new refinery in the Lower 48 has proven to be a near impossible task. It's reasonable to expect a growing number of unplanned outages at refineries in the years ahead, and if any of these correspond with another jump in oil prices, then prices at the pump would roar to new heights.

As a motorist, it's all very annoying. The best tactic is to hedge your rising fuel costs with energy stocks that will benefit from higher oil prices - or trade in your car for one of those Flintstone vehicles. But I hear they can be rather hard on the feet.

[Ed. Note: If you are looking to profit from energy, you owe it to yourself to check out the Casey Energy Speculator. And it couldn't be easier, given that subscriptions come with a 3-month, no-questions-asked, 100% money-back guarantee. Check out the current profit-packed edition by clicking here now.)

The Other Important News of the Week

Last week I pointed to the breaking news Fitzroy MacLean of our Without Borders publication tipped me to, about German intelligence officers paying a Liechtenstein bank employee US$5.9 million to steal a disk containing the names of all the German account holders.

In writing this news up, I posited that the Germans likely also got the account names of non-Germans, "...giving the German government a very nice trading card."

It didn't take long for my intuition to be proved right, as it was announced this week that the Germans were now cooperating with friendly governments around the world so they, too, could corner tax miscreants.

Confirming the point, one of our subscribers sent along a news item from New Zealand about how that country's Internal Revenue Department is offering anyone with an offshore account, especially of the Liechtenstein variety to, in essence, come out with your hands up or else. If you are a New Zealander with assets in the pilfered bank, I have no doubt you are sweating bullets.

Here in the U.S. of A., the Internal Revenue Service is also working hand in glove with the Germans to hunt down the tax cheats.

This is a trend firmly in motion, with serious implications.

First, now that executives and even lower-level employees of banks in tax havens with the right levels of access have seen the going market price for client names, and that rather than being brought up on criminal charges for breaking confidentiality agreements, they will be saluted by officialdom around the world, there will be a rush to capitalize. All that the person needs to do is to grab the list, download the file, or whatever, and make it past the front door to collect on the waiting riches.

In addition to the considerable personal problems this will cause the account holders, it effectively spells an end to the idea of financial privacy.

And that is an important battle to be lost by anyone who values individual freedom. Look at it this way, until recently countries knew that if they squeezed too hard, money would begin slipping across the borders to undeclared safety. With that escape route closed, they can now squeeze ever harder.

Even so, human nature being what it is, you can expect the same people - at least those not in jail following the global witch hunt that will soon extend to the Caymans, Andorra, or any other jurisdictions where the bankers have been accommodative to privacy seekers - to look for other ways of hiding wealth.

Of course, gold, diamonds and other readily portable and fungible assets will find favor. Setting the stage for the battle in the war of the state against the individual: a new round of government confiscations of gold and other such assets, "in the public interest."

I can't see this happening imminently, and we should be able to see it coming, but the threat that it could happen in the next decade, along with foreign exchange controls and similar acts of desperation by the tax farmers, is real.

Now let me be clear. I am not in favor of tax cheating. Per the fresh example from Liechtenstein, the risks are too high and, in my view, always have been. But that doesn't mean that I can't lament the fact that the system is moving closer and closer to the point where you won't be able to enjoy any level of privacy in relation to your financial affairs.

Visa's $19 Billion IPO a Scam?

During the course of dinner with a highly positioned financial services executive the other night, he told me that Visa and MasterCard had lost a major lawsuit related to hidden charges, and that it will cost them a lot of money and force them to change their business in a number of detrimental ways.

Almost immediately thereafter I read that Visa was planning a $19 billion IPO. Coincidence, I wondered?

Curious, I decided to dig a bit. I hadn't gotten very far when I came across a very coherent analysis on the situation by Mish Shedlock. You can read it by clicking here.

Could the broader investment community catch on to the true intent of the IPO, dooming it and by doing so, maybe, lead to yet another giant stumbling? While that remains an outside possibility, it is by no means out of the question given the impact of the lost lawsuit, and that the credit card companies are almost certain to be next to feel the pain of consumer belt tightening.

I suspect most people wouldn't be unhappy if the credit card companies took it in the neck.

On that theme, years ago I interviewed a senior credit card company executive and over the course of our meeting, I mentioned to him that I had recently caught a charge for "lost credit card insurance" on my bill. It was for something like $46 a year - for nothing, as far as I could tell. Indignant, because I hadn't approved the charge, I called the service center and no sooner were the words of complaint out of my mouth than the representative said, "No problem, sir. That charge will be removed." In other words, no questions or pushback at all.

"Oh, that!" my new acquaintance, the credit card executive, commented, a smirk on his face. "That was the idea of the guy in the office next to me. We were running behind on the quarterly numbers and he came up with the idea to bump the revenue."

"You mean," I asked, a somewhat stunned look on my face, "that you simply hit all the credit cards with a $46 charge?" (And we're talking about hundreds of thousands of accounts.)

"Yep. It was a big winner, because most people don't look very hard at their bills."

"But that must be illegal," I said dismayed.

"Probably," he said with a dismissive shrug.

He didn't get the job.

Of course, the flip side of Visa running into trouble will be yet another form of credit that gets tighter... and more costly.

Miscellany

Lines of Lawyers. As predicted, lawyers armed with thick briefcases and high-digit display calculators are increasingly jostling each other in the long lines that are starting to form at the doorsteps of the wounded financial service industry behemoths.

This week, HSH Nordbank, a German sector public bank (translation, they have clout), announced it was going after UBS bank for "hundreds of millions" in subprime losses. As the piling on grows, we'll start to see the major bank failures that our own Bud Conrad has been forecasting these past months. Followed, natch, by the helicopters' worth of bailouts, courtesy of taxpayers.
High-Stakes Shell Game. In a classic shell game, the banks are trying to prop up the AAA ratings of the insurers standing behind the hundreds of billions of dollars of toxic waste now eating away at their portfolios. While cost effective -- $3 to $5 billion is a lot cheaper than the carnage that will follow a downgrade -- the odds are high that they'll invest the money, the insurers will get downgraded anyway, costing them their investments and the value of their portfolios. Unless, of course, the same helicopters show up with yet more taxpayer largess to keep the insurers intact. It would not surprise me in the slightest to see, even, the de facto nationalization of a failing rating agency.
In the "Remember, We're All Only Human" Department ... I came across another anecdote about another of the esteemed members of the judiciary, one Robert Somma, a federal bankruptcy judge appointed by President Bush in 2004. It appears he has stepped down from the bench after police found that he had crashed his Mercedes into another car while drunk and wearing a dress, fishnet stockings and heels, and carrying a purse. "He's a highly respected member of the bar," said a fellow judge, "and remains so." I don't care about his dress code, live and let live, I say... but next time, take a cab.
Look Before You Leap. There was news out this week that Norilsk, the Russian mining giant, was ordering a fleet of super icebreakers to take advantage of the melting of Arctic ice, opening up new routes across the top of the world. Someone might want to tell them not to place their deposit yet, because the Arctic ice hasn't just re-formed, it's thicker than ever. Here's the reference.

That's It for This Week

Major developments are afoot, with the term "We live in interesting times" barely covering it.

While we expect things to continue in a similar vein, and to likely grow steadily worse for some months and maybe even years to come, the best approach at this point is to assure that you and your family come out okay.

It's like the warnings that the flight attendants give during their briefings on the topic of what one should do should yellow oxygen masks start falling on your head while in flight. If you don't first take care of yourself, before turning your attention to the less well positioned, you could find yourself wiped out and of no use to anyone.

As I close my weekly musings, I see that gold is solidly planted at $971, oil is parked over $101 and the long-suffering DJIA is off yet another 295 points.

Wall Street types like to look down their nose at people who invest in gold, silver and other commodities... but they may have to revisit their prejudice, given that the broader U.S. stock markets have been essentially flat over the last 5 years... which means, adjusted for inflation, their favorite sector has been a loser for half a decade now. Decidedly not the case for the precious metals, energy and other commodities.

Until next week, thanks for reading and for subscribing...

David Galland
Managing Director
Casey Research, LLC

The Room 2/11/08

David Galland — Mon, 11 Feb 2008 21:00:00 GMT

Dear Readers,

Good morning! And welcome to this edition of The Room!

If that salutation suggests a certain snap in my step, well, you'd be right.

After all, one can't let one's attitude be overly colored by the gloom and pessimism now stalking the land.

No, this is America... or, at least that is the turf upon which my own chair is currently parked. And no matter how bad things may be, they are, on the whole, no better or worse than those of most other places.

In fact, America has some significant commercial advantages over many countries, especially those which aspire to provide their citizenry a nest of perfect comfort in all the important ways, including semi-permanent employment. "You hire them, you retire them" is a phrase you might hear down at town hall in much of the world.

Not in the ol' U.S. of A. No siree. In those cases where management makes a major flub or reaches too far for the annual bonus and, in so doing, accidentally flips on the Equity Value Death Laser Model 2000-X, you need hardly wait for the minute hand to travel a single rotation before the guillotines are dragged out of storage.

Since July 2007, for instance, Countrywide has held going-away parties (however muted) for 11,000 employees. Morgan Stanley and JP Morgan have both bid farewell to 1,000 of their former stalwarts, with announcements that more will follow once they can afford to buy the requisite pink paper on which to print the traditional "so long and thanks for all the memories" notes.

Meanwhile, Lehman Brothers escorted 3,750 of its less close family members to the door, and Citigroup has begun trimming its rolls, a process by which its alumni will, it is reported, increase by 20,000.

The list goes on and on. In fact, according to the bean counters down at the Department of Labor Statistics, at least 1,408,852 people lost their jobs in 2007 (through November), due to mass layoffs... a 6% increase from 2006. Of that total, many were formerly involved with the building trades which, alone, have lost 284,000 workers since employment in that feast-or-famine sector peaked in September of 2006.

And, I need not remind you that the neck-chopping is just getting started.

While it is, of course, unpleasant to be one of those looking down into the basket while the hooded man finishes his preparations, it is this ability - and willingness - to view the common laborer as something of a disposable item that allows America to bounce back so quickly after periods of economic adversity.

Friend of long standing, Bill Bonner, wrote an excellent piece in his always worthwhile Daily Reckoning (dailyreckoning.com) earlier this week in which he commented:

Americans misunderstood the nature of capitalism itself. It is not an "economic system" that makes people automatically richer. It is a moral system... a system that rewards virtue and punishes error. You don't get richer because of Free Enterprise. Indeed, as the economic history of the last quarter-century shows, you can get poorer. The market system merely provides the setting in which you get what you deserve. You could get rich - if you were to do the right thing: work hard, save your money, innovate, take chances, forgo consumption. But do the wrong thing... and you will pay for it.

Bill is, in my view, right on the money.

Now, please, make no mistake. I would race even a humanitarian on the scale of Al Gore to be the first to pull the lever on any magic machine that reliably delivered on the promise of effortless wealth, health and happiness to all humankind. Sadly, such a machine does not exist.

(And, yes, that is a photo of Al Gore, taken at the recent Davos gala... if you ask me, he has been personally sequestering too many carbon units of late.)

And so we are left with only one economic model that has been proven to actually provide the most benefit to the most people over any period of time: capitalism.

In fact, if you think about it, pure capitalism is really just a continuum of the world's first discernable economic model; "survival of the fittest."

While previously success was gained through skill with the club or at throwing rocks accurately, in the modern-day iteration, the successful are those who understand how to effectively run a business, or know how to make themselves particularly valuable to their employer.

(There is another class of individuals which one has to begrudgingly credit as successful these days; the bureaucrats and other parasitic professions. They understand how to tap into the communal lifeblood and, once entrenched, sink barbs into the body politic to assure they cannot be ejected until they leave of their own free will, a lifelong pension in hand. Their long-term survival, however, is questionable... because they propagate so quickly that, over time, they risk killing the host, or being chased out of their jobs by workers brandishing torches and pitchforks.)

The data continues to confirm that we are headed into a deepening crisis here, which means that unemployment, the first whiffs of which we have now smelled, will only grow worse. In some countries, the economic pain will be deep and dragged out by well-meaning but misguided policies.

In the U.S., however, the odds are relatively good that after the brush fire burns through, the businesses will remain standing, albeit with much lighter attendance at the Friday morning pep talk, ready to pick up the pieces and get smartly back to work.

But it is time to prepare for the brush fire.

How bad could it get? In my view, and the view of most of us here at Casey Research, while the risk is certainly there, the odds remain long against widespread soup lines. If for no other reason than that if you overlay the economic happenings of the last 300 years with the number of months where soup line-level economic havoc has been the order of the day, it quickly becomes clear that massive meltdowns are statistically very rare in the more established economies.

Yet, though rare, the historical record is equally clear that they do happen.

Given the degree of uncertainty just now, it is not unreasonable to take a little time to examine your current circumstances. Do you own some gold bullion to provide protection against a serious crisis? Have you taken steps to offset losses in other areas - and hopefully pull down nest-padding profits - by building a portfolio of quality gold stocks? Are you able to raise a bit more cash "just in case"?

As importantly, are you trying a bit harder to look after your health? Cutting back on the snacks, a little more exercise? Having a health crisis in the middle of a financial crisis would be the very definition of unfortunate.

As well, if you are still in the work force, it is worth taking steps to improve your personal value as an entrepreneur or an employee. On that topic, longer-term readers know that while in my late teens I discovered, with full credit to Earl Nightingale for the revelation, the fountain of wealth: studying a topic you care about one hour a day, just like a college student studies their books.

If you work for a company, how much do you think you could learn about your company and its competition by studying just one hour a day, even after only a few months? Think your new-found knowledge would impress the boss? Darn right it would.

Or, if you are in a dead-end job, or suspect you may be one of those soon to be led to the guillotines, now is a good time to begin studying something that might help you in your next career. The secret is that it must be a subject you are passionate about. Follow your heart, and the money and your life satisfaction will follow.

As a personal aside, in recent weeks, I have turned my daily studies to electronic marketing media - an area that has the advantage of being helpful to almost any business, or anyone with entrepreneurial aspirations. (If you think you might benefit from that same course of studies, there are many good websites where useful, and free, information on the topic is available. One of the best I have come across is marketingexperiments.com.)

Oh, and since we're on that topic, I'd like to mention that we are looking for an experienced marketing director to help us spread the word about Casey Research... just drop me a résumé at David@caseyresearch.com.

But, back on topic, while it is my style and temperament to comment on the world with a lighter tone, make no mistake that I feel very strongly for those whose life's travails have left them unsatisfied, financially or emotionally. You can let it get you down, or you can set your jaw against the challenge and get down to work.

There are, per Bill's comments above, no guarantees built into a capitalist system... other than, one would hope, a guarantee that you get to play on a more or less level playing field. Regretfully, in modern-day America, the system has been substantially degraded by a legislative system that is willing and able to meddle in literally any aspect of life, or bestow almost any grant, opening the door for businesses and their lobbying organizations to influence legislation in much the same way I can get my old dog General to beg by holding up a piece of ham.

In the final analysis, each of us has to look after ourselves and our loved ones. If you look to the government, which is bankrupt beyond all possible repair at this point, to provide you with your retirement, or to assure that the safety net remains intact, you will be setting yourself up for steady disappointment and a life that fails to provide anything more than the barest of necessities, if that.

What Futures Markets Are Saying About Interest Rates and the Economy

By Bud Conrad

The combined effect of a slowing economy and the Fed cutting its rate to stimulate has caused the expectation for 3-month dollar-denominated investments called Eurodollars to drop in 2008 to below 2.5%, but then to rise into the future. (Despite the name, this has nothing to do with the euro currency).

[click to enlarge]

I interpret this to reflect a slowing in the economy through 2008, but that then the inflation will pick up, and investors will require higher rates to cover that inflation. It is part of recognizing that the Fed cuts rates by providing more liquidity. The result is that in the short run rates drop, but in the longer run inflation returns and rates have to rise to cover that inflation.

Making Money in a Crisis

In the current edition of the International Speculator, we provide a list of ETFs you can use to play the current financial crisis.

But, as Bud Conrad points out, it is really not that hard to find successful investments if you open your eyes and use logic. And, I would add, if you understand the various instruments available to you to act on these opportunities.

For example, it's no secret to anyone that the housing construction industry is in a slump.

So, what material is widely used in the building of most houses? The answer, lumber, is obvious.

As you might expect, therefore, and as is demonstrated in the chart just below, lumber prices have fallen along with the activity in the building sector.

[click to enlarge]

According to Bud, who is well versed in the futures markets...

"If you were to play the futures markets, you could have bought a contract for 110,000 board feet of 2"x4" priced at $217/1,000 ft. The contract is worth $23,000. The $90 price drop shown in the chart represents a profit of 900 points, which you multiply by $11 per board feet = almost $10,000. As the initial margin is $1,650, your returns could have been roughly 700% over a six-month period."

Of course, futures markets can swing both ways, and steeply so, and so should only be approached after a great deal of hard research and paper trading. Options trading, while also risky, offers the advantage of high leverage, but with identifiable and limited risk. Taking the time to learn more about options can also pay off, but again, be careful only to invest with money you can afford to lose.

Ed. Note: At the risk of being perceived as cementing a reputation for being crassly commercial, I am compelled to mention that, in addition to giving other profit-making ideas, options specialist Robert Meier of the RMB Group will be presenting a workshop on the right - and wrong - ways to use options at our upcoming Crisis & Opportunity Summit in beautiful Scottsdale, AZ on March 25, 26 & 27. If you are planning to attend, you'll need to register within the next seven days because there are only about 20 seats remaining. The secure link to learn more and register is just below:

http://www.caseyresearch.com/crpmkt/crpSolo.php?id=106

People Say the Funniest Things...

For some reason, the memory comes to me of the time when, putting in service as the best man at a wedding, I greeted Eleanor Mondale, the ex-vice president's beautiful daughter, in the receiving line. I was single at the time, and so the sight of Ms. Mondale, a model back then, was particularly well received. For some reason, however, the words that tumbled out of my mouth on making her acquaintance - and I still don't know where they came from - didn't appear to make exactly the right impression.

"Nice shoes," I said, looking at her feet. "I bet they must hurt." (In my weak defense, her shoes had very high heels and with very narrow tips.)

A quizzical expression passed over her attractive countenance (shown in the photo) before she replied, "Ah, no. They are just fine, thank you," before she hurried away, glancing back as she moved, I suspect, to be sure I wasn't following her.

John McCain had such a moment when, in a randy mood last year, he burst into song (poorly, it must be added) with the theme that the U.S. government, ideally under his leadership, should engage in the mass annihilation of the unfortunates who, by accident of birth, live under the Iranian theocracy.

(I refer, of course, to his rendition of "Bomb, Bomb, Bomb Iran"... posted for all posterity here... http://www.youtube.com/watch?v=hAzBxFaio1I)

Now, because we serve a broad audience, I suspect that there are any number of you who might agree with Senator McCain's musical sentiment, responding to any critics of same with a roll of the eyes and a comment along the lines of, "C'mon, really! Has everyone lost their sense of humor? Jeez!"

While I admit that the idea of unleashing waves of missiles against another country and the thought of "collateral damage" is a knee-slapper, I do wonder if a majority of the U.S. electorate will share the joke come election time.

I suspect not.

As a result, I strongly suspect that Sen. McCain's long-held aspirations to the highest office may likewise be scuttled.

Especially because, in addition to the somewhat concerning psychology revealed by his impromptu outburst of nihilistic verse, the perma-Senator is firmly on record as being in concert with the idea that America should occupy Iraq for 100 years, a sentiment that is not in step, if you believe the polls, with the majority.

And as a result, Obama or Hillary will be elected. (Sorry, Ron Paul fans, he may have raised a lot of money, but he's been effectively marginalized by the media and his fellow Republicans.)

And this points to the sticky wicket in democratic politics. You see, I am personally quite sure that I would prefer the economic policies of Sen. McCain over those of Sen. Clinton or Sen. Obama... but I'm equally certain that I would prefer either of those candidates' less martial backgrounds and leanings over those of Sen. McCain.

It is a classic no-win proposition. And so I prepare instead to cope the best I can with the damage that I see coming. Given that it is likely the Democrats will soon be ruling the roost, that means preparing for an acceleration of the feel-good policies that have laid such a solid foundation for escalating inflation - and higher gold prices.

My old associate from EverBank (Everbank.com), Chuck Butler, recently shared a Warren Buffett quote with the readers of his Daily Pfennig e-letter. Longer-term readers know that there are issues on which Mr. Buffett and I fail to see eye to eye, but in these remarks, I am in agreement. And I quote....

If something is unsustainable, it's going to have consequences; so far the consequences have been a general decline in the dollar against major currencies. If we continue the same policies, we're going to get the same results in the next five or 10 years.

He also had this to say about inflation... "Inflation has been in remission and is likely to be more prevalent in the next 10 years."

There are many things that cause dislocations in the marketplace, but few are as predictably disruptive - and, if you know how to play things, profitable - as government. The writing is on the wall. Now you just need to take the steps to prepare yourself to profit.

Quick Takes on Politics

At this point in the election cycle, it is probably appropriate for us to share, once again, the world's shortest political quiz, a reliable tool to tell you where you really belong on the political scale.

You can take it here: http://www.theadvocates.org/quiz.html

And, to assist you in contemplating the human frailties that argue so convincingly in favor of restricting the power afforded to any government, there is the following video featuring the antics of one of the anointed of America's political class. While you may have seen one of these videos in the past, this one is particularly well executed. Follow the link just below...

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

The Housing Market - Watch Out Below

One of the more interesting aspects of the current soaring default rate on home mortgages -- the very same defaults that are now bedeviling financial institutions around the globe -- is that the sophisticated models that were created to predict the behavior of the borrowers failed so badly.

This week, in an article in the Financial Times (ft.com), they discussed these failures at some length. Following are some excerpts I thought you would find of interest...

"There has been a failure in some of the key assumptions which supported our analysis and modeling," Mr. McDaniel admits. "The information quality deteriorated in a way that was not appreciated by Moody's or others." Mortgage borrowers, in other words, did not behave as expected.

The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first -- and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. More-over, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans -- turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.

"In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage," says Malcolm Knight, head of the Bank for International Settlements, the central banks' bank. "Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortization mortgages, keep paying off their credit card balances but hand in the keys to their house . . . these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities."

And this...

In recent months, Washington politicians have devoted a great deal of attention to the problem of "resets". This refers to the fact that many subprime borrowers took out loans in recent years at initial, ultra-low "teaser" rates, which typically rise (or "reset") after a couple of years. Around 1m of these subprime loans are due to reset this year, which means that many households could suddenly face sharply higher repayments. That in turn has sparked fears of a looming further rise in delinquencies by increasingly cash-strapped households.

To offset this risk, the administration of President George W. Bush recently brokered a plan to freeze the resets. Yet in private, Treasury officials admit that while the scheme might help at the margins, it is unlikely to be a "silver bullet". This is because one dirty secret of recent mortgage data is that, thus far, there has been a surprisingly weak correlation between rate resets and delinquencies. That suggests that the reset freeze may have only a limited effect on foreclosures this year.

And....

Some economists suspect that if house price declines continue but the US jobs market holds up, the pattern of high mortgage defaults relative to other forms of consumer credit could continue. However, if the US slips into recession or even a protracted period of rising unemployment, delinquencies might rise on a wide range of consumer credits, implying a return to a more traditional pattern. Indeed, some banks are starting to brace themselves for this latter shift. "The problems in the credit markets are spreading to the consumer sector - the next area of concern is auto loans and credit cards," says John Thain, chief executive of Merrill Lynch.

I am reminded of a website that Doug Casey (who was first among others) brought to my attention this week. It is www.youwalkaway.com.

Should you click that link, you will find an enterprising e-biz that makes its money by providing homeowners, tired of the burden of paying their mortgages, with a kit that shows them the ins and outs of walking away with no further liabilities. And, even better, it explains how said mortgagees can live payment-free for the typical 8-month period it takes before the lenders are able to escort you from the premises.

Unfortunately for the economy and for those holding the "AAA" rated paper built out of these corrosive loans, www.youwalkaway.com is likely to become an increasingly popular site. Which brings me to...

Neutron Loans

Yesterday I had a pleasant lunch with a financial planner friend of mine. As he tends to deal with a more upscale clientele, he was unfamiliar with a category of mortgages sometimes called "payment optional."

If you thought "Ninja" mortgages were about as bad as it got -- you know, No income, No job, No Assets - then that is only because you haven't come across the payment optional feature offered to many of those same mortgagees.

In a nutshell, payment optional allows borrowers to elect to pay only a portion of their mortgage payment in any given month, rolling the balance-due but unpaid amount back into the original loan. This option was offered under the guise of allowing borrowers to deal with an emergency cash need. You know, the car breaks down and so, for a month, you pay less on your mortgage in order to have available the funds required to repair the car.

The problem, of course, is that many consumers, swept up in the giddy housing boom and romanced by the mortgage originators, borrowed more than they should have. And, when finding themselves unable to make the required payments, they began to fall back on the payment optional feature in order to get them through to the next payday.

With the magic of compounding interest now working against them, the situation was, and is, clearly untenable, assuring a steady supply of fresh customers for youwalkaway.com.

Bloomberg had a good article on the topic. For those of you short of time, here's a quick excerpt...

Feb. 7 (Bloomberg) -- Joe Ripplinger took out a $184,000 mortgage in 2006 and makes his payments every month.

Now he owes $192,000.

The 66-year-old Minneapolis house painter has a payment-option adjustable-rate mortgage. It allows him to write a check for $565 a month even though he owes $1,300. The difference is added to the mortgage, and when his total debt reaches $212,000, or after five years have passed, his monthly minimum will jump to about $2,800, which he can't afford.

"We're barely making it right now," Ripplinger said.

The estimated 1 million homeowners with $500 billion of option ARMs are beyond the help of interest-rate cuts by Federal Reserve Chairman Ben S. Bernanke. While subprime borrowers face an average increase of 8 percent or less when their adjustable- rate mortgages reset, option ARM homeowners may see their monthly payments double after their adjustments kick in.

"We call them neutron loans because they're like a neutron bomb," said Brock Davis, a broker with U.S. Express Mortgage Corp. in Las Vegas. "Three years later the house is still there and the people are gone."

You can read the article in its entirety by following the link here.

http://www.bloomberg.com/apps/news?pid=20601109&sid=akYNTEygRJH8&refer=exclusive

The Honorable Richard L. Armitage

Our own Bud Conrad attended a talk at Stanford last night by Richard Armitage, called Diplomacy: Humanitarianism in Action. Here's Bud's report:

Armitage was the second-in-command at the State Department, serving from 2001 to 2005 during Colin Powell's tenure. He had a front-row seat of the decision to go to war on Iraq. He served in Vietnam, was implicated in the outing of Valerie Plame, is on the board of directors of Conoco Phillips and is now working for John McCain's presidential campaign.

He strode on the stage and spoke without notes, evoking the image of a weak impersonation of General Patton. He wore a rumpled suit and was the only person with a tie. The speech was lightly attended, with an audience of only 60 or so. I guess students are more interested in basketball than a conservative who is now slipping off the political stage.

While the speech was of no particulate import, befitting the empty suit he has become, at the reception afterward I gained this most important insight: I asked him what the reason was for going to war in Iraq, and specifically if it was about oil.

He demurred, saying that he was part of the decision and the focus was on WMD (Weapons of Mass Destruction) and on bringing the light of democracy to the region. I pursued to ask how long we would be in Iraq. His answer was "a decade," although with decreasing forces. We didn't discuss the costs, as he still supports the original decision, but from the view of an economist, I have my interpretation. Namely, that we will be spending $100 to $200 billion per year we are there, so, if his assessment is correct, we can expect to add another $1+ trillion to the tab of what we've spent so far.

This ensures continued U.S. deficits and lower productivity, which confirms my basic thesis that the dollar will continue to come under pressure.

(On the topic of wars with Iraq, Doug Hornig, editor of our Daily Resource Plus, sent along the following YouTube video, featuring a rather interesting 1994 interview with *** Cheney. http://www.youtube.com/watch?v=S9YuD9kYK9I)

Get Well Soon

Living in a ski resort as I do, it is not unusual to hear a debate around the dining table on the topic of what is more dangerous, skiing or snowboarding.

Each side of the debate has their opinion, but our own Dave Johnsen, the programmer who assures our websites work each day, decided to wade in decisively on the topic, crashing his snowboard into a tree and breaking his fibula, as well as tearing his ACL, MCL, LCL, and meniscus.

Confined to bed after eight hours of surgery yesterday, he will have abundant time to jot down his further thoughts on the skiing vs. snowboarding debate. In the meantime, all of the Casey team would like to wish him a speedy recovery. (Oh, and if the website starts to get all wiggly, you can now appropriately assign the blame... to snowboarding.)

1984

It is, at this point, a tired literary device to reference George Orwell's seminal work, 1984, when commenting on the recent erosion of personal liberties.

Yet, the notion of an all-powerful entity snooping into your everyday affairs, ala Mr. Orwell's Big Brother, is sufficiently disturbing that observers of these things can't help but to drag it out, much in the same way others commenting on another genre might recall Frankenstein, or Dracula.

Unfortunately, while monsters made from reconstructed men or eternally living blood suckers are pure fiction, Orwell's monster is increasingly real.

Earlier this week, one of our researchers related a conversation between himself and his tax accountant. While requiring him to fill out a rash of new government forms, she commented that, in her role as a professional tax preparer, she no longer worked for him but for the government.

But it gets much worse. You see, our elected officials are now fast-tracking legislation to institutionalize warrantless eavesdropping on your every communication.

Don't believe me? Click the link below...

http://blog.wired.com/27bstroke6/2008/02/sen-rockefeller.html

The Quiet Revolution in Natural Gas

By Chris Gilpin, contributing editor, Casey Energy Speculator

While natural gas production has hummed along, slowly increasing in the U.S. over the past ten years, it would be a big mistake to think that everything is business as usual. There is a major shift underway in the natural gas industry. Conventional gas production is going the way of the dodo bird, while unconventional production - from sources like coal bed methane, tight gas and gas shales - has stepped up and made itself known as the future of natural gas.

The Lower 48 has been pumping more natural gas from unconventional sources than conventional ones since 2000 - the trend is accelerating. Conventional gas could soon account for less than a third of overall production.

The transition from conventional gas to unconventional has been remarkably smooth. It turned out to be much less of a challenge to exploit unconventional sources of natural gas than to exploit unconventional sources of oil, such as oil shale and tar sands (both of which have been nightmares from an engineering perspective).

A conventional gas operation is rather discreet, with a single well working every 640 acres or so, while a Coal Bed Methane (CBM) project dots the landscape with wells everywhere, as many as one per 80 acres. There's a lot of needless hand wringing over the aesthetics of such operations, but what interests us is how this infrastructure build has affected the landscape of supply and demand. For instance, the average production per well has been dropping precipitously.

[click to enlarge]

Despite its growing popularity, unconventional gas is no one's first choice. CBM projects require a huge amount of infrastructure to duplicate the same amount of production as one conventional well. Your average conventional gas well in the U.S. produces about 600 Mcf/d, while your average CBM gas well often pumps out less than 100 Mcf/d.

To make up the difference, the industry has been forced to drill, fracture, dewater, and maintain a lot more wells - all of which costs money. Gas producers have no choice but to pass these expenses along to the broader market, which has been a major factor in the rise of natural gas prices from $2/Mcf in 1998 to over $6/Mcf today.

The same story holds true in western Canada where CBM has just begun catching on in the last few years. The average initial productivity of a gas well drilled in the Western Canadian Sedimentary Basin has dropped from 1,000 to 300 thousand cubic feet per day over the last five years, a combination of ailing conventional gas resources and the rise of unconventional ones.

Without unconventional gas, the U.S. would be left trying to outbid the rest of the world for cargoes of LNG (liquefied natural gas), an unappealing scenario.

Many of the most intriguing investment possibilities now lie in parts of the world outside of the U.S. where unconventional technology is breaking virgin ground. Alberta is just starting to ramp up CBM production. Southeast Asia has huge reserves of unconventional gas that have never been properly explored. Using the American experience as a template, natural gas-producing regions all over the world are learning that it pays to think unconventional.

[Ed. Note: Dr. Marc Bustin, a senior researcher for the Casey energy division, is one of the leading unconventional gas experts in the world. The team is watching for opportunities in gas to open up in the spring and summer, after prices ease up due to seasonal considerations.

In the meantime, the energy division just updated a Special Report, North America's Top 5 Uranium Explorers... featuring the 5 best junior uranium stocks.

This is of particular interest now, because the uranium juniors as a sector have swung from massively overbought to deeply oversold. As determined contrarians, the time is fast approaching to begin reloading in the sector, and these are the companies you'll want to own.

As a subscriber to the Casey Energy Speculator, you'll find the report in the Special Reports section of this website... for everyone else, you can receive the report free of charge if you subscribe today.

Remember, your subscription comes with a no-questions-asked, 3-month money-back guarantee. Click here to get "North America's Top 5 Uranium Explorers" today.]

Affordable Health Care for All

Not so long ago, I was chatting with a cab driver while riding from JFK into Manhattan, when the conversation turned to what constituted a living wage. "I can't even afford health care," he said grumpily, weaving his cab with the grace of a ballet dancer between gaps in rumbling semi-trucks. With a snort he commented, "I'm not much of a Hillary fan, but the time has come for universal health care."

"That may be so," I chimed in from the back seat, "but I once lived in Canada and while there, watched someone I cared for deeply enter the nationalized health care system. After many months of bureaucracy and red tape, he ended up dead because they didn't run the tests that would have discovered his cancer, until it was too late."

"Yeah, but..." he started, his thoughts cut off by the need to concentrate on cutting off the competitor's cab trying to squeeze onto the expressway beside him.

"Here's a question," I continued. "If you didn't have to pay so much of your money in taxes... income taxes, property taxes, taxes on gasoline and all the things you buy... how much money do you think you'd save every year?"

"A lot!" he replied, a happier note in his voice as his mind contemplated the idea.

"So, if you didn't have to pay all those taxes, but instead maybe just a 10% flat tax, do you think you might be able to afford health insurance then?" I asked, rhetorically.

"Hadn't thought of that," he said, shaking his head with some confidence. "But, yes, I could. No problem."

So, what do you think? Could my "Unified Theory on Solving the U.S. Health Care Dilemma" qualify me for a Nobel prize? Who knows, I might actually have a chance, given that the bar on that prize seems to have been precipitously lowered in recent years.

Miscellany

A number of you have sent in the article from the NY Times discussing how merchants there are starting to post signs announcing "Euros Accepted." A sign of the times, to be sure, but I'm watching for the day that they start posting signs "Gold Accepted."
Ernst & Young made headlines this week by saying that most metals analysts' predictions of metal prices "have consistently and significantly lagged behind the actual spot market," and that mining and metals equities have been undervalued. To which I reply, "Welcome to our world."

Here's just one of a number of memorable points they made in their report:

"It is our view that current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices, rather than the conventional wisdom that the industry is near the top of a cycle."
I asked one of our researchers to do an analysis of what price level gold needs to reach before we would, based on historical precedence, start seeing serious movement in the gold stocks. For data points, we looked back at two prior gold bull markets, then adjusted the price of gold back then to reflect the current purchasing price of the dollar. While we are still working on the data, a quick look suggests that, if history is a guide, gold has to break over $1,000 decisively to get the masses involved in the stocks. But when they do come, the returns are spectacular. We'll have more on the topic here, and in our other publications, in the near future.

A quick glance at the screen before signing off shows me that Wall Street is again painted red... and that gold, silver, many of the base metals, oil & gas are all higher.

It is especially gratifying to see gold come back so strongly from the whupping it took earlier this week, especially considering all the trash talk about our favorite metal of late. Including, most notably, Dennis Gartman who is calling for it to correct down to $810, though he nuances his comments by stating that even at that level, it would still be in a bull market and poised to surge again.

While we cannot predict the future, nor pretend to, neither can we yet see a scenario that does not favor gold reaching Bud Conrad's forecast of gold over $1,200 this year.

And that, fellow planetary travelers, is that for this week. As always, thank you for spending time with me today.

Next week I am going to endeavor to write an entire edition without mentioning the word "government" once. Until then...

Sincerely,

David Galland
Managing Director
Casey Research, LLC.