The Room : International Speculator

The Room - 10/24/2008

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

Dear Readers,

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

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

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

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

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

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

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

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

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

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

They are about to find out.

The Trial of Gold

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

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

The trial of Gold had begun.

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

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

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

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

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

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

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

"Yes?" asked Judge Market, looking grumpy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Oh, alright. Have at it."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Mr. Cuomo, any objection?"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unflustered by the bluster, Galland began to speak.

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

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

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

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

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

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

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

Galland nonchalantly replied:

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

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

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

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

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

"Yes. Right away," said Galland.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"No, sir."

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

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

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

Funeral for an Economy

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

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

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

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

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

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

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

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

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

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

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

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

So, why do I relate that scene today?

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

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

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

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

How Long Will the Foreigners Support the Dollar?

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

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

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

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

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

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

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

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

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

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

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

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

Credit Sucks and Don't Forget It

Friend and correspondent Sunni forwarded this in, this week.

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

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

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

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

Laughing Out Loud (When No One Else Is Looking)

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

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

CEO - Chief Embezzlement Officer

CFO - Corporate Fraud Officer

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

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

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

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

BROKER - What my broker has made me.

STANDARD AND POOR – Your life in a nutshell

STOCK ANALYST - The idiot that just downgraded your stock.

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

FINANCIAL PLANNER - A guy whose phone has been disconnected.

MARKET CORRECTION - The day after you buy stocks.

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

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

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

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

PROFIT – An archaic word no longer in use.

Miscellany

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

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

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

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

Best Regards,

David Galland
Managing Director

The Room - 10/17/2008

David Galland — Mon, 20 Oct 2008 16:31:14 GMT

Dear Reader,

Keeping up with the complex drama now flashing across the global screen is becoming more challenging with each passing day.

In lazier days, a scene might be allowed to unfold at a measured pace, the interactions between major characters developed through subtle nuance and lingering shots and close-ups of, perhaps, the furrowing of a brow or the sly upturning of the corner of a mouth.

These are not those days.

Instead, we are living in the world of 30-second commercials, directed by a speed-addicted music video director, strung together in a nonstop explosion of two-second jump cuts.

One minute stock markets are soaring, the next crashing. Gold jumps $20, then falls $40. Banks fail, banks get bailed out. Politicians elbow each other out of the way to throw billions, trillions even, into deep, dark holes. Oil tumbles, then bounces, then tumbles again.

While the volatility has allowed me to make some fun money through the all-terrain investment vehicles of futures and options, it has also made the task of trying to keep current on the news and, more importantly, on what's important, daunting indeed.

Even so, it is Friday morning and so, cup of coffee at hand and the music turned up on Citizen Cope's Bullet and a Target (the very same position that the Fed now finds itself in), I turn to the task at hand... the task of trying to make some sort of sense out of the chaos.

Given the frenetic nature of the markets, I hope you'll forgive me if my commentary this week is similarly frenetic.

Unintended Consequences

As you likely know, we are not optimistic about the outlook for real estate, that lynchpin of the U.S. economy. This pessimism is evoked by a number of factors, starting with the simple fact that residential housing increased by about 50% between 1992 and 2007, massively outpacing population and income growth over the period. As you absolutely know, much of that excess inventory is in the hands of individuals who simply can't afford to pay the freight.

Then there is our hardened belief that the equivalent of an express train wreck is about to happen in the 4 – 6 trillion dollar U.S. commercial real estate market. There will be a lot less in the way of Ho! Ho! Ho! this holiday shopping season, and a lot more Oh... Oh... Oh's.

And none of it is helped by the inevitable rise in interest rates, which are today at near 50-year lows. While we might not be quite at the bottom, we're close... after which we expect a persistent rise as the government bailouts flow through the inflationary pipeline. Of course, wounded housing markets react about as well to rising interest rates as I do to the prospect of my taxes going up in the next administration.

Unfortunately for the housing market and by extension the U.S. economy, we are already seeing the ghosts of what's to come. This just in from Bud Conrad...

The result is that housing will be further hurt with the higher rates and will continue to fall in price.

On the same topic, the news is out this morning that in September, single-family home starts in the U.S. fell to the lowest level in 26 years. Just 544,000 new homes would be built over the next 12 months (if the trend were to stabilize here, which it won't).

Just so you have the right perspective, at the peak of the bubble, annualized housing starts in the U.S. were running at 2,265,000 units, so we're seeing about a 75% decrease.

By the time this is over, it wouldn't surprise me to see housing starts fall to 10% of the peak.

Of course, housing is far more than just "another" economic stat. In addition to the tragic financial and emotional implications of coming up short on the mortgage on a personal and even societal basis, there are the direct consequence to the broader economy. No more excess equity to borrow against to fund shopping sprees, and none to allow for a comfortable retirement for far too many.

This is, and will continue to be, a big problem for the economy. While there is no soft solution at this point, the best we could hope for is that the damage will be quick to come and quick to pass. But the only real way for that to happen is for house prices to fall to the point where ready buyers are available. And that entails workouts between lenders and borrowers, or outright foreclosures, to clean up the mess and allow the market to function as it certainly can, and will again... if left to its own devices.

Unfortunately, the plans now being bandied about by the government envision pretty much the polar opposite of letting the market clean itself up. Rather, they involve taxpayers buying defaulting mortgages and even the imposition of a moratorium of some duration on foreclosures. Most people read news such as that and shrug it off. It may help to view these ideas through a narrower spectrum.

For example, imagine you are the president of a small bank and you had lent money in good faith to someone in the neighborhood. We'll call him Joe as that seems to be a popular name for these sorts of examples these days.

For reasons only known to him, Joe has stopped paying on his mortgage, leaving your little bank on the hook for $200,000. Following procedure, you have Mrs. Smith down in the lending department send Joe a nice letter asking him what's up, to which she receives no response. So you personally send him another letter, this one offering to have him down to the bank to have a chat and see if you can work things out.

No response, no money.

So, uncomfortable at having to perform the duty, you give Joe a call and he admits he is in over his head. When you offer to help him work out a payment plan, he calls you a blood sucker and hangs up on you.

Pained by the outcome of your loan, because you'd rather be getting paid back on the agreed-upon terms, you call up your lawyer and reluctantly authorize the expense of beginning the foreclosure proceeding. At that point, you know you will likely spend thousands and the better part of a year trying to get back your property (and it is your property). But what choice are you left with?

And then you hear – as does Joe - that Congress is going to pass a moratorium on foreclosures, and you reach into the locked drawer of your desk for the flask you keep there for such occasions. Joe, meantime, heads down to the local deli for a six pack to celebrate free rent for the foreseeable future, perhaps paying for his purchase by selling off the copper pipes he's ripped out of the guest bathroom.

This exercise is, of course, little more than the morning musings of a sleep-deprived mind, and I am well aware that the circumstances surrounding the defaulting on loans are as varied as humanity itself. Even so, the underlying principles are the same. There is a contractual agreement between a lender and a borrower that no one had to be waterboarded to sign. In the event of a failure to perform on the part of either party, it is up to the two parties alone to resolve -- with the help of an impartial judiciary if an impasse occurs. Interjecting an overreaching government run by perfect-worlders into the process can only gum up the works.

And, I would contend, result in just the sort of unintended consequences now being reflected in jumping mortgage rates. Or, for that matter, the entire housing mess in the first place... much of which is the unintended consequence of Greenspan ratcheting down interest rates instead of pouring himself a nice cup of tea and watching as the participants in the dot-com mania received their just desserts.

Personally, I am shocked by the rising cacophony of calls for more, not less, government regulation. Given the widespread chanting now going on in favor of elevated levels of oversight, retribution, taxation, meddling, and outright nationalization, it is clearer than ever that the views I just expressed are in a minority. And the situation is only going to get worse as the next wave of well-intentioned government operators step up to the controls... controls that are being firmly bolted onto the machinery of markets.

We are about to enter a dark period for the free markets. That's the bad news.

The very good news is that, seeing it coming, you can anticipate where the next unintended consequences will occur and position yourself to profit.

Getting Stupid

Despite gold weakening over this week, we remain utterly unconcerned about gold... and I couldn't mean that more sincerely. In fact, I just now paused for a moment to email my broker to sell a $750 put option on gold.

While somewhat off topic, I'll provide some details because I love this kind of trade (which I learned about at our Futures and Options Summit, as an aside).

Selling a $750 put earns me a fat premium – the higher the volatility, the higher the premium -- of $6,300. That money goes straight into my account. While there is a bit of nuance (for example, the potential for an inconvenient margin call), the worst case is that if gold is trading below $750 in March of 2009, when the option settles, I'll be on the hook to buy 100 ounces of gold at $750. Actually, less than that, because of the premium I have received. If at expiration, gold is at or above $750, I will have earned the premium with no money down.

The trick, of course, is to want to own the underlying commodity at option price. And you can use this sort of strategy for stocks, too.

Using futures and options, which I earlier referred to as the all-terrain vehicles of the investment world, gives you a nearly limitless number of opportunities to profit... regardless of the direction of markets. (We'll be launching a trading service soon, but that is a story for another day.)

But there are opportunities outside of futures and options. In fact, the junior resource sector, which has been a big disappointment of late, is now officially reaching stupid levels of valuations.

On that front, this week I was looking at a high-quality junior gold exploration company that is being followed in our International Speculator letter. The company has been advancing a big deposit in a great location in Canada and has just released its first resource estimate. The report confirms that the company has proven up just shy of 5 million ounces in a near-surface deposit, and the deposit is still wide open, so you can expect them to add significantly to the resource in the months ahead.

Generalizing, in an "okay" market, gold in good ground sells for around $50 per ounce. And Ontario, Canada, the ground where this deposit is located, is some of the best (as opposed to, say, the Congo). In a better market, gold in the ground might sell for $80 to $100 per ounce. And in a heated-up market, such as we saw back in 2005, valuations can rise as high as $150 or even $200 (which would be steeply overvalued, at anywhere near today's prices).

So, what value is now being assigned to the 5 million ounces of gold (plus blue sky) this very well-run junior is sitting on? Dividing the market capitalization of the company by the number of ounces of gold gives us a valuation of an unbelievable price of just $5.20 per ounce.

Okay, okay, I can almost hear you saying, "What's the problem with the company? I bet they are low on cash, and so shareholders are going to get hugely diluted when they go back to the market to finance."

To which I reply, "Nope – they have enough cash in the bank to cover an estimated two years of operations." In other words, we have looked at the company in depth, and there is nothing wrong with it – other than the broader market and forced selling by cash-strapped funds and investors.

And, as good as this company is, there are any number of other quality juniors – virtually all of which are now selling for the sorts of prices you might have expected to pay back in 1998, before the gold price took off, and before the companies had even found anything. But in this case, the company has 5 million ounces on the books.

And it is not just in futures and options and junior golds where you can find opportunities now. There are some great businesses that have been as heavily punished by non-discerning selling as bad businesses.

While caution remains the watchword of the day for the majority of your portfolio, if you have the capacity, be vigilant for the sort of stupid values just discussed. No need to rush in, but rather buy in tranches, maybe taking positions in 20% increments over the next six months. It may take awhile for you to realize the big returns -- there is a real threat to the equity markets later this year as aggressive tax-loss selling meets up with the retraction in consumer spending in the traditional holiday shopping season -- but after that, things, for the right businesses, selling at the right valuations, should begin to look up.

Given our view of where the economy is headed, you'll need to pick your battles carefully... and we'll be on your side every step of the way... but the time to begin laying out your plans should begin now, and not after gold is racing for the moon with the gold stocks close behind.

So, no big rush... just some food for thought. Of course, we'll continue to keep our many ears close to the ground on your behalf.

The Greater Repression

In my spare time, I'm working on a separate article titled "The Greater Repression," the theme of which is that one of the outcomes of the current financial crisis will be an acceleration in the growth of the state, and the coercion that that implies.

On that topic, did you read how Henry Paulson got the heads of the nine major banks to sign on to the Treasury's plan to partially nationalize them? He basically called them into a room, put a one-page document in front of them and informed them that they were required to sign it. Some excerpts from a story out of the New York Times from earlier this week...

...by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

Mr. Paulson announced the plan Tuesday, saying "we regret having to take these actions."

Pouring billions in public money into the banks, he said, was "objectionable," but unavoidable to restore confidence in the markets and persuade the banks to start lending again.

... All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.

... "It was a take it or take it offer," said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. "Everyone knew there was

only one answer."

(You can read the full New York Times article by clicking here.)

But wait! Thanks to a top-secret Casey Research hidden video cam, you can actually watch a video clip of the meeting itself!

The video segment covers the pivotal point in the meeting when Paulson makes a convincing argument as to why bank presidents should fall in line and get on the team. Watch it by clicking here now.

No question about it, we are not only in uncharted waters economically but politically as well. All the media reports on the crisis have painted the free market as the culprit and called on the government to fix everything, whatever it takes.

It is like inviting a wolf into your house to get rid of a mouse. Sure, the mouse may go away (at least temporarily), but then the real trouble begins.

Bretton Woods II

This week, a number of you brought to my attention a rising call from the heads of some governments for a return to something that resembles the discarded Bretton Woods agreement, an agreement that had as a central tenet the convertibility of paper currencies into gold.

Naturally, we salute the notion of a return to a more disciplined approach to the handling of government finances than that which is now favored, and which might be loosely expressed by imagining a conversation such as "Hey Hank, Bennie here. Listen, I'm running short, can you print up a hundred billion or so and shoot them over when you get a chance? Thanks. No, no rush. Tomorrow afternoon would be fine. Best to the Missus, see you down at the club."

That the prime minister of Britain and the head of the European Central Bank have both referenced Bretton Woods this week can only be taken as encouraging. In time, we are convinced, circumstances will force a return to such discipline, with a system based on gold, or at least a mix of tangibles, including gold.

But I wouldn't start holding my breath. For starters, Bretton Woods was almost unilaterally shaped by the U.S. government to take unto itself the keys to a global monetary hegemony. It would border on delusional to think the U.S. will hand those keys off to anyone else until forced to it by events out of its control. Thus, while we might see a sit-down of top finance ministers at some point in the next year (in a six-star seaside resort, one might assume), the actual business of crafting a new monetary order will drag on and on and on.

The potential game changer will be if the currency crisis we foresee as inevitable reaches the point where no one wants any unbacked currency almost at any price. You'll know when that point is approaching when the price of gold blows through $5,000.

Burn, Baby, Burn

Last week, I shared my new basement digs for a day with Brian the electrician, who was putting in a fan and upgrading some fixtures. In addition to being a fine judge of music, commenting as he was putting away his tools at the end of the day that "The music here was the best of any job I've ever been on," our conversations revealed that he is also a financial analyst of no small potential.

"Early last year when I saw all the building going on and the prices of houses going up, I told myself that this couldn't last. So I let go of my employees and sold my new pick-up truck back to the dealer and bought a used one. I've been putting money aside ever since."

Smart guy. Of course, I asked him how business is now.

"Real slow," he answered in the cautious patois that marks a native New Englander. "Except for this one company that deals with fire and damage," he added. "They've been real busy, and they expect to be a lot busier."

"Oh, why?" I inquired.

"Well, apparently, it's because so many people have been putting in wood-burning stoves, trying to save on energy costs and all that."

"I wonder if it could also be because sometimes a fire can solve a problem," I asked. "You know, like a mortgage you can't afford or a business that is failing, if you get my drift."

"Yep," he said with a knowing nod, "and there's that, too."

I was reminded of that conversation the following day as I was watching cable television while laboring down at the gym on the stairway to good health, otherwise known as the cursed StairMaster (it's the only time I watch cable, because I refuse to have it at home).

Through sweat-stung eyes, I watched video coverage by the ScareMasters – CNN, in this case -- of a wildfire somewhere in California. From the bird's-eye perspective of a helicopter cameraman, I watched as flames jumped a road and began doing their worst to what looked to be a dealership specializing in large pick-up trucks.

"Why," I panted to myself silently, "didn't the dealer, who surely knew the fire was approaching, gather around some folks and drive those nice trucks out of harm's way?"

Then I remembered my conversation with Brian the electrician and nodded knowingly to no one, imagining in my mind's eye the owner of the dealership watching the same broadcast and dreaming of a fat insurance check and a nice, long holiday followed by a fresh start. Who knows, perhaps he'll turn to selling the new fuel-efficient cars that U.S. car companies, freshly cashed up themselves with a nice $25 billion handout, will soon be producing with the aid of their five million new employees (I think that was the number bandied about by Obama in the debate).

But I digress. Because in addition to the economic motives for the pending wave of mysterious fires that are likely to descend on the nation, I fear a social motive.

In that regard, I have read and even heard on talk radio (which I occasionally listen to in order to keep my blood heated to the point where I won't fall asleep behind the wheel, a particular problem I have on any drive of more than about 30 minutes) that the Republicrats are all steamed up about the purported voter fraud being perpetuated by the lefties of Acorn.

Now, I can't say, because I can't know, whether or not Acorn and the Demopublicans are actually in the process of stealing votes, but I will say that that particular line of attack is one that has the potential to result in serious consequences.

Think it through.

Let's say that the drumbeat about Acorn really takes hold and fires up the imagination of McCain loyalists, as it certainly seems to be. Okay, now let's say that Obama wins, maybe thanks to a couple of squeakers in states such as Ohio. Could we perhaps see some serious civil disturbance, and maybe even worse, as good, patriotic Americans pick up their rifles and decide that their country has been taken over, unjustly, by terrorist lovers?

Could happen.

Okay, now let your mind swing the other way. That the Republicrats manage to challenge voter registrations in said key states and McCain actually wins? At that point, might the dashed aspirations of Obama's many admirers spill over into the streets? Certainly not out of the question.

Now, I am not saying that people shouldn't be vigilant about vote fraud... but it strikes me as the sort of issue that one wants to tread very carefully on – to double- and even triple-check the facts on the ground – before starting with a lot of arm waving.

Especially in an environment as politically charged and economically challenged as we are currently living in.

It has been a long time since I watched, as a teenager, the cities of America burn. And if I can make it all the way through to my long nap without seeing it again, that would be just fine.

In the final analysis, it won't really matter who wins – and I know that grates with many of you – but it's true. The economic stage has been set and the furniture cemented into place. The leading actors in the next act will be, as if marionettes controlled by the hands of a god, made to follow, not lead, the events that are now both inevitable and imminent.

The only question now is, will the transition to what's next be calm and orderly, or will the old war cry "Burn, Baby, Burn" be heard again?

I really don't know what makes the idea of the presidency so appealing that people would go through such personal trauma to attain the station. If you could, and did, walk in tomorrow and offer me the office, I would politely thank you for the offer and escort you as quickly as socially acceptable to the front door.

Laughing Between the Tears

On any given day, I swear I am going to delete all my email accounts, put the boots to my cell phone, and retreat to a nice, quiet cave. But then I get an email from a friend with a whopping good joke, and I forgive Mr. Email from stealing so much of my time.

This week, I received a few at least somewhat related to the current crisis and so thought I'd pass them along. This might become an occasional feature.

The first three came to me via Hugo in London...

For Geography students only: What's the capital of Iceland? Answer: About Three Pounds Fifty...

Quote of the day (from a trader): "This is worse than a divorce. I've lost half my net worth and I still have a wife."

Here's another one, from subscriber and correspondent Ronin...

Now we are trusting the economy of our country to a pack of nit-wits who couldn't make money running a brothel and selling booze?

Today, I received the following from the hard-working researcher/editor Shannara Johnson.

As the topic is Sarah Palin, those of you who are Obama fans will especially appreciate it... but so will anyone with a sense of humor or an appreciation for creativity and technology. Click the link here: http://www.palinaspresident.us/. After you click, an interactive photo will load. Clicking on the items in the room and on the desk makes fun things happen!

Joke of the Week

This came to me via Clyde Harrison, one of the smartest (and funniest) guys working in the commodities sector today...

Chuck replied, 'Well, then just give me my money back."

The farmer said, "Can't do that. I went and spent it already."

Chuck said, "Ok, then, just bring me the dead donkey."

The farmer asked, "What ya gonna do with him?"

Chuck said, "I'm going to raffle him off."

The farmer said, "You can't raffle off a dead donkey!"

Chuck said, "Sure I can. Watch me. I just won't tell anybody he's dead."

A month later, the farmer met up with Chuck and asked, "What happened with that dead donkey?"

Chuck said, "I raffled him off. I sold 500 tickets at two dollars apiece and made a profit of $998."

The farmer said, "Didn't anyone complain?"

Chuck said, "Just the guy who won. So I gave him his two dollars back."

Chuck now works for Goldman Sachs.

Miscellany

Phyles. Herb in Jacksonville is looking for additional phyle members. Ditto, Ron in Southern British Columbia is going to try to start one. And I have had some correspondence with Vermonters interested in getting together. Not sure when or where, but if you contact us, we'll try to set something up with some of the Casey crew. As always, if you are interested in meeting up with other Casey subscribers, drop Kristen a note at phyle@CaseyResearch.com.
Bud in New Zealand. Bud Conrad will be the keynote speaker at the CFA Society of New Zealand's Fourth Annual Forecast Dinner in Auckland, Thursday, November 6. I am sure that he'd be happy to take time during his trip to meet up with subscribers in the area. Drop us a note at info@CaseyResearch.com and we'll try to set something up.

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

As is my habit, I turn (with no small sense of suspense) to the screens to see how the day is going for things financial. I see that the DJIA is up 166 points on news that consumer confidence has fallen the most on record. Now, there's a reason for a stock market rally!

And gold is down, again, to $784 in spot markets, while oil has come back a bit... to just a touch over $70 per barrel. And that gold stock that just announced a 5-million-ounce deposit? I just took a glance at the portfolio page of the International Speculator, on our web site, and see that it is down another 11% today!

My next task after signing off is to call my broker. I could, and probably will, take a loss over the short term, but I don't care, because I would kick myself if I missed the bounce on that particular stock.

(As an aside, I am not being coy by not sharing the name of the stock with you... I have mentioned it to provide a real-life example of how stupid valuations are getting in the resource sector. It would be unfair to existing International Speculator subscribers to share the name here, in the open. They are entitled to buy their fill without any added competition. I hope you understand.)

And with that, I must sign off by thanking you sincerely for spending some time with me this week, and for being a subscriber to a Casey Research publication.

Hang in there – and hang on tight – because who knows where this joy ride is heading next.

David Galland

Managing Director

Casey Research, LLC.

The Room 09/12/2008

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

September 12, 2008

Dear Readers,

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

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

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

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

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

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

We agree.

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

The Biggest Bailout of All Time

(Published 9/10/08)

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

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

International Speculator

Unusual Aspects

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

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

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

Who Will Rescue the Taxpayers from Fannie and Freddie?

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

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

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

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

Implications for the Future

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

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

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

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

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

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

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

David Again, With a Public Service Announcement

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

expanding audit program

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

The Reason Paulson Panicked

By Bud Conrad, September 11, 2008

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

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

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

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

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

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

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

This situation is still very fluid and far from resolved.

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

David again.

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

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

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

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

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

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

And then, there’s this…

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

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

But it gets worse.

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

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

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

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

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

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

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

Well, not exactly. The AP article continues…

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

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

It is an untenable situation. It cannot end well.

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

What Does This All Mean to Investors?

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

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

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

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

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

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

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

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

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

Me: That sounds deflationary.

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

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

Me: What about the rebound in the dollar?

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

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

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

Me: What about gold stocks?

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

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

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

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

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

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

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

Me: What structural damage are you referring to?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Me: What about base metals? Still bearish?

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

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

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

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

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

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

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

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

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

Me: What about other opportunities?

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

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

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

Taunting the Tiger

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

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

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

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

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

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

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

A Very Useful New Service

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

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

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

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

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

Miscellany

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

And Finally…

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

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

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

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

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

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

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

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

David Galland
Managing Director
Casey Research, LLC

The Battle for $900 Gold

David Galland — Tue, 06 May 2008 15:23:36 GMT

by David Galland Casey Research- International Speculator

The current "battle" in the gold market is around the $900 level, a fairly steep retrenchment from the recent highs of $1,011.

Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing disaster in this correction and dropping their gold as they run for cover.

So... do we at Casey Research think we're now seeing a reversal in gold's fortunes?

In a word, no.

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

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

1. The current correction is not yet exceptional: Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%.

During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 18% at its worst, is only marginally worse than average.

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

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

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

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And, I would stress once again, you have to be invested with money that you can afford to lose a substantial portion of and not be overly concerned. Otherwise you'll invariably become shell shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.

2. The big gold companies are delivering: One of the largest mining companies in the world, Newmont Mining, just released its first-quarter 2008 financials, the first of the big gold producers to do so.

As we have been forecasting, they had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw their cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from Q1 last year. And the company's cash operating margin rose to a record $537 million in Q108 over the prior record $419 million earned in the previous quarter.

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

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

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.

3. Oil is stubbornly holding on over $100 and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world.

We've said for years that there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point - because, again, no market goes straight up or down - the trend is clearly for sustained high prices. This is additional support for gold in our view.

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

When I look at the alternatives and the amount of risk I have to take to get even a 10% return right now, I am comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, 500% gains down the road will catch me up in a hurry.

Good investing,

David Galland

David Galland is the Managing Director of Casey Research, publishers of the Daily Resource PLUS, a free e-letter offering a concise recap of the 24 hour action in gold, silver, energy, base metals, currencies and more... as well as Doug Casey's monthly International Speculator advisory, presenting comprehensive, unbiased research on undervalued gold and other resource stocks.

A three-month 100% money-back trial is available that allows you to view all current recommendations and decide for yourself whether the International Speculator is right for you. Learn more.

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 2/25/08

David Galland — Mon, 25 Feb 2008 20:20:26 GMT

Dear Readers,

Much to talk about this week. Too much, I fear.

I shall, therefore, endeavor to be succinct, a trait, unfortunately, that I seemed to have misplaced in my formative years.

Even so, as I like to believe that humankind possesses an innate ability to better themselves, I shall buckle down post haste and give it the old school try.

Hey, How 'Bout That Gold?

While it's nice to see things going along so swimmingly for our favorite form of money, even I am a little breathless after gold's surge to yet another record this week. And its kissing cousin, silver, has been no slouch either.

But I am not surprised, given that the precious metals are doing what they are supposed to do. Namely, reacting to the rising tide of inflation now beginning to make itself known here in the U.S. and around the world. This past week, we learned that even the Comedic Politicized Inflation index (CPI) is beginning to slip the leash. As you can see in the chart below from Shadow Government Statistics (shadowstats.com), which tracks inflation the good old-fashioned way -- i.e., the way it was done before all the jiggering - the actual rate of inflation is in a steady upward trend. It is only going to get worse from here.

[click to enlarge]

On that front, we have been surveying global inflation and finding that, with only few exceptions, the trend I brought to your attention last week holds true... the inflation the U.S. is experiencing is, indeed, worldwide.

That is not to say that there are no deflationary pressures, there clearly are. Much of which is related to the declining net worth of homeowners whose inflated real estate values are headed in the wrong direction.

The result, we believe, will be akin to one of those television commercials where you have, say, a truck carrying chocolates colliding with another carrying peanuts... followed by a smiling bystander, covered in the accidental mix, licking his lips and finding the formula entirely to his liking.

Except that the stagflationary sludge which is coming next - faltering economies concurrent with higher prices -- will be to almost nobody's liking. Unless, of course, you are smart enough to take the necessary precautions and position yourself to profit. That you are reading this is highly suggestive that you belong in that category.

Here Comes the Gold Stocks

While there are a number of reasonable explanations as to why gold stocks have been lagging, I have come to believe that the single most important reason has to do with the fact that the price of gold was still under $280 as recently as January 28, 2002.

Against that number was a cash cost of around $250 per ounce, which was about as low as it could go, on the average, indicating an industry doing everything it could just to survive. Put another way, as a result of the 20-year bear market up to that point, the industry had been beaten down about as far as possible. Therefore, as gold began its upward move, it did so against the backdrop of an industry in mothballs, running on a skeleton staff and highly optimized operations.

This is important on a number of fronts.

Having been trained in the acid bath of razor-thin margins, gold company management teams were intensely skeptical about gold's rising price. They assumed it would be just another bear market trap, ready to punish unwary optimists who went out on a limb by spending money to ramp up production.
I used the phrase above "highly optimized operations." By that I mean the mines were focusing only on the easy-to-mine, higher-grade material that would allow them to produce a return... maybe. It also meant they were extremely frugal, reluctant to buy new equipment, or hire the bare minimum of employees.
Another survival technique was the selling of future production at a set price, a perfectly rational exercise in a bear market, because it at least assured a price that would cover the known costs.

When you add all that together, especially the inherent skepticism of management, it becomes easier to understand why it was that the industry was slow to act even as the gold price started moving up. In fact, it was only in February 2003, with gold trending over $350, that Barrick Gold Corp., the world's largest, began the expensive process of unwinding its hedges. And it wasn't until November of that year that the company announced it was foregoing forward sales altogether and would work to bring its hedge book back to zero.

At the point that the industry realized that the bull market in gold was for real, it started to scramble to play catch up. Which, in a choo-choo industry like mining, means hiring and training lots of people, buying and refurbishing the equipment needed to reestablish production on more marginal deposits, upgrading facilities, building expensive new mills, etc., etc. And, of course, dealing with the cost of unwinding hundreds of millions of forward hedge contracts.

The rebuilding of the gold mining industry, in short, really only began in earnest over the past few years. As would be expected, the costs associated with this rebuilding required big hits to the financial metrics that institutional investors look at before making an investment decision.

The metrics were not helped by the shift away from high-grade ore (the lower the grade, the more the material you have to process)or generally rising inflation and a falling dollar. The end result was that the cash cost of production rose by as much as twice what it had been during the mothball years, keeping the margins tight and the miners unattractive as investments.

By contrast, the base metals companies bottomed much earlier, in late 1998 and the first quarter of 1999, thanks to increasing demand out of China and elsewhere. As a result, they were well on the road to recovery when the big price increases for base metals began in 2004, positioning them to make free cash flow hand over fist. Thus, while the gold miners have been largely shunned in recent years, the base metals sector has been enjoying salad days, reflected in multi-billion mergers and acquisitions and, of course, sharply higher share prices.

Here at Casey Research, we are of the firm opinion that now that the worst financial aspects of restarting their industry are behind them, the big gold companies are poised to take off. Proof of this point should come in rapidly improving margins which, lo and behold, we have begun to see in the quarterly reports now being released. Just this week we have learned that Goldcorp's profits almost quadrupled last quarter, Barrick's net profit rose by 28% last year and is expected to build rapidly from here and Kinross has just posted a record quarter, with profits up almost three-fold over the same quarter a year before.

The exception to the pack was an announcement that Newmont lost $933 million in the last quarter. But even there we find confirmation, because the loss was mainly associated with a one-time write-down of costs associated with acquiring new reserves and closing down an unprofitable merchant banking operation. In sum, Newmont took the write down because they could afford to, and because the high price of gold would help mute any investor disappointment. In essence, they have effectively cleaned up the books in order to join the profit party.

We will not long be alone in noting the pending improvements to the bottom line of the big gold companies... the investment herd is coming and, we expect, coming soon.

Now, I am going to dig down one more layer to make a couple of points you may consider blatantly commercial. Be that as it may, I'm not going to shy away from making these points simply because Casey Research will benefit if you take the action I'm going to recommend.

The first point I want to make is that if you don't already have a subscription to BIG GOLD, now is the time to take one. Our number-one pick, Kinross Gold, has already bucked the trend by moving up over 68% in the last 9 months, but the show is just beginning. The underperforming big gold companies and the new producers we are following, are going to catch up in a big way and soon. If you haven't yet subscribed, do yourself a favor and do so today. You can subscribe today for just $79 a year, and your subscription comes with a 3-month, 100% money-back guarantee, so you have less than zero to lose.

Click here to learn more about BIG GOLD and to subscribe.

The second point I need to make has to do with the junior exploration companies.

History has proven that, other than discovery stories, the big gold stocks need to get in gear before the investor sentiment reaches the critical mass needed to spill over into the junior sector. History also shows that, as profitable as the big gold companies are in a bull market, the returns offered by the juniors can blow those away. Exponentially. This upside, of course, comes with a greater degree of risk.

As the existing subscribers to the International Speculator will attest, these stocks can move down just as fast as they can move up... but if you have the tolerance for volatility and invest only with money you can afford to take a 50% (or more) haircut on, then you absolutely have to take a subscription today, while the bargains are still available. Again, we offer a discounted new subscriber rate and a 3-month guarantee... meaning you lose nothing by giving it a try.

Click here to learn more and to sign up for a subscription to the International Speculator now.

If you have the means, you really should have both.

While that may be the most blatant pitch I have ever made in this missive, I hope you can appreciate that I believe every word.

In fact, I have never been more bullish on the gold stocks in my life. That doesn't mean I'm right, but you can rest assured that I am completely, entirely sincere. We have a great team here, all of whom work very, very hard to get things right. Which, generally speaking, we do. Right now, the single best recommendation I can give you is to get very serious about your gold stock portfolio. Know why you own each stock you do, and don't bet the family farm, but be bold and the payoff should be truly extraordinary.

I don't think we are going to have long to wait for the show to really get on the road.

Spy vs. I

An outraged instant message from Fitzroy MacLean of Without Borders, our international investment and lifestyle letter, popped up on my screen earlier this week. Now, given that Fitzroy used to earn his porridge by engaging in covert and overt operations where a failure in risk management could lead to a bullet in the head (he is former CIA and an Army Ranger), he is not easily flapped, so his strident message caught my attention.

He was writing me from Germany where the news had just broken that German intelligence officers had paid on the order of US$5.9 million to a Liechtenstein bank employee to steal a disk containing the names of all the German account holders of the bank (and, I suspect, everyone else... giving the German government a very nice trading card). The purpose, of course, was to crack down on anyone who had been trying to avoid taxes by stashing funds in that tax haven.

Now, unlike Fitz who was appalled that the country's intelligence services were being put to work spying for the tax department, some of you may think that it is good and proper that the tax cheats are being rounded up and hauled off to the cells. If so, then you'll have much to cheer you in the months and years just ahead.

The fact is that governments in all their many permutations are themselves starting to feel the pinch from their overspending and overcommitting to spend more. The pinch will turn to a vice grip as the flaws of the fiat monetary systems they uniformly deploy begin to collapse as they futilely try to keep the *** from bursting.

In the United Kingdom, for example, the government has made the decision to nationalize the failed Northern Rock bank at a cost of almost US$7,000 per citizen. And in Germany, you have a bailout now approaching US$2 billion underway for the 1KB bank.

But this is only so much kinder-play when compared to the U.S., where the banks have been lining up around the block to take advantage of the Fed's Term Auction Facility (TAF). Which is to say, the banks are handing the Fed a bunch of toxic waste as collateral and receiving, in return, tens of billions of freshly minted dollars at a very agreeable interest rate.

And even that doesn't begin to measure up against the $170 billion of handouts contained in the stimulus package.

Which pales in comparison to the larger 2008 budget deficit, now estimated to be over $400 billion.

But all of that is only a splash on the rim of the bucket against the tens of trillions of bills now coming due for the benefits due the retiring baby boomers, a number sure to go higher when President Obama rolls up his well-pressed sleeves to implement universal healthcare... and... and...

The pressure is beginning to be felt all the way down the chain. In California, Governor Schwarzenegger attracted a lot of unhappy attention by suggesting the state start letting criminals out of jail, cutting welfare and closing down public parks and other facilities because that once golden state could no longer afford the bills. Here in Vermont, the governor has proposed selling the state's lottery to raise some pocket cash.

Make no mistake, we are still in the early, more friendly phase of this process. Once the state really starts to come under pressure, it will do whatever it takes to keep afloat.

A relevant comparison, sadly, comes from ancient Rome. During his unhappy term in office, Roman Emperor Caligula first spent the treasury dry, then, after it was depleted, turned to doing whatever it took to keep the state afloat. Which, at that time, involved - among other activities - accusing the wealthier citizens with treason followed by a speedy trial ("Hail Gaius! You're guilty, off to the lions with you. Have a nice day!") and the confiscation of all their property. As things slipped further down the slope, he passed into law incentives whereby friends, relatives and fellow countrymen of said property owners could rat them out, for which they would receive a cut of everything confiscated. And, one would imagine, as a bonus get a front-row box seat to watch the lions eat.

Expect to see more and more of the sort of covert activity engaged in by the Germans spread around the globe. We are at the beginning of the trend, not the end.

Watch yourself.

And Now for Something Entirely Different

As you know, at this point we are avoiding traditional equities (except to short some), and have no interest in fixed income. But we are birds of a different color than most investors, being determined contrarians with a solid speculative bent.

For those of you who skew a bit more toward the traditional, you might appreciate reading some of the material put out by Fidelity Independent Advisors. Olivier Garret, our CEO, and I met Fidelity's Don Dion at a conference last year and were impressed. While I personally wouldn't rush into some of the sectors they follow, you might be more inclined in that direction. If so, check out their free Hotline e-letter by clicking here...

Energy Chart of the Week

By Chris Gilpin
Contributing Editor, Casey Energy Speculator

[click to enlarge]

For the past three years, there's been an unusual divergence between the prices of oil and natural gas. Historically, the price per unit of energy between the two fuels is roughly equal. It might swing apart during cold winters when natural gas prices sometimes spike, or during times when political tensions in the Middle East put a "terror premium" on crude prices, but all things considered, they usually fall back into alignment.

That's because several large industries, and some power plants, have the capacity to switch back and forth between the two fuels. With crude costing twice as much per million British thermal units (MMBtu) as natural gas, you can rest assured that no one is burning petroleum products to power their operations or feed the electricity grid, not if they can possibly help it.

This widening price gap poses a pressing question: is oil overvalued, or natural gas undervalued? Both, is the most likely answer.

What's most fascinating is that this graph also clearly shows that the price of energy per unit - no matter what the fuel source - is rising sharply, proof that the global energy boom is in full swing.

(Ed. Note: If you are looking to get in on the energy boom, that is a sector we follow. You can learn more about the Casey Energy Speculator by clicking here.)

The Mailbag

I had any number of interesting reader emails this week. Here are excerpts from a few I thought you'd find of interest...

"You recommend highly speculative stocks. Given the respect you carry in the industry and the size of your readership, I am concerned about the timing of when you believe it is time to get out of the precious metals. I wouldn't think your exit would have much of an effect on gold or silver, per se, but I would like your honest and transparent belief over how much your "sell signal" will affect those small and highly speculative precious metal mining companies. I think it will be substantial, and frankly, I believe this precious metals bull market may last a lot longer than you seem to think from your writings. I don't want to be caught holding the bag, waiting for a small company to come back from carnage that could ensue when you guys recommend getting out.

Bottom line: How big of an effect do you think your sell signal will have on those stocks?

An excellent question and a welcome sign of a heads-up investor paying close attention to their personal knitting.

The answer, generally speaking, is that we expect the serious Mania phase in the gold stocks to last at least a year. At some point in the run up, likely six months or so into it, we are going to come to the conclusion that the Mania is headed toward its apex and recommend our subscribers begin looking to lock in profits by selling into volume.

Remember, this is pure conjecture, because it is impossible to say with any certainty what market conditions will be like at the time that we begin to feel the Mania is reaching full stride.

However, as the subscriber just quoted so aptly points out, inherent in the discussion above is the fact that, yes, we are likely to put out the sell signal well before the bull market run is over. That should, we would hope, allow for an orderly exit, over a leisurely period of time. Will our recommendation to take profits at that point cause the stocks we follow to take a big hit?

Impossible to say - as much will depend on whether you, the subscribers, decide to rush to the exits, and what the level of the volume is coming into the stocks at that time. I don't think there is much chance of a mass exodus, however, because it is human nature to hang on longer than is prudent. With markets being in full bloom at that point, the odds are that most of you will want to hang around in the hopes of yet another double.

The best way, as always, of viewing our services are as a source of unbiased, deeply considered research on investments to potentially include in your portfolio. But how you manage your portfolio has to remain an entirely personal activity. When you get a 3- or 4-to-1 shot, we would suggest you do yourself a huge favor and, no matter how exciting the party, don't wait for us to tell you to scrape your original investment and a handsome profit off the table.

This is, of course, a topic we will continue to address over time. For now, however, we are still very much in the portfolio-building phase.

Hi David,

I wanted to share a story with you that I found quite shocking and relevant to many of the topics surrounding the current financial predicament this country now finds itself in.

Since I travel just about every week all over the country, visiting and working with our various customers, I try to get a gauge on how the current financial situation is affecting average working Americans. As part of the general IT strategy work we do, we typically do a great deal of process re-engineering work as well. As I have been recently working with a client in a very rural area, we have focused a lot of our efforts trying to eliminate many HR-related inefficiencies in their organization.

As a result of some of the preliminary workshops we ran the first week, I was shocked to find out that at the current client, their 401(k) plan has witnessed a dramatic drop in the number of participants in the plan over the past 3 years, from a high around 59% participation back in 1998. At present they have about 28% of their employees who opt in to the plan. However, only 23% of the employees contribute the full 100% tax-deductible contribution which the company matches at an average rate. On top of this, their HR department has recently added money management classes due to the number of their employees that now find themselves in an ever-increasing pile of credit card-related debt and in a few cases, bankruptcies.

This is just one example of the plight of Americans and the current negative savings rate which we are witnessing now. Given that this is the second-largest employer here in the area, in my mind this is probably a fairly good representation of the overall community at large. Oddly enough, the local Super Wal-Mart was jam packed with local shoppers purchasing everything from flat screen TVs, to groceries and iPods.

So as much as I would like to think that most of these folks who choose not to participate in their companies' 401(k) plan was out of sheer financial hardship and necessity, I am driven to conclude that there are a lot of people out there who simply do not know how to manage their money properly and just make stupid decisions? It would be interesting to see what these averages look like on a national basis?

Just thought I would share that with you.

Human psychology is very complex. You would think, given that their employers were willing to match funds, and that the money saved has tax advantages, people would happily contribute to their 401(k) plans. It is, however, a well-documented fact that people make financial decisions that don't make any sense.

I also believe that decades of intonations by politicians that the citizenry will be looked after has, in my opinion, led people to an unrealistic view of their future, and a naïve belief in the ability of the government's safety net to hold up when they are ready to plop into it. In fact, I think the biggest problem this country will ever face will be the problem of the indigent elderly... 20 or 30 years down the road.

Regardless, there is a new book out on behavioral economics - i.e., what people actually do with their money, rather than what the economists think they should do. It's entitled Predictably Irrational by MIT professor Dan Ariel. While I haven't yet read it, I heard Ariel interviewed yesterday and found his experiments about how people make financial decisions very interesting. He used as an example the decision making that goes into deciding how much to pay for a piece of chocolate. You put the chocolate in your mouth and it melts, creating an enjoyable taste sensation. But what process determines how much you are willing to pay for that sensation? I plan on reading the book.

A unique site. When you click on the website link below, a world map comes up showing what strange & dangerous things are happening right now in every country in the entire world & is updated every few minutes. You can move the map around, zero in on any area & actually upload the story of what is going on. This "map" updates every 300 seconds... constantly 24/7.

http://www.globalincidentmap.com/home.php

Click on any icon on the map for text update information. It's not just about terrorism - it's about everything happening every minute some place in the world of terrorism threats, explosions, airline incidents, etc.

Pretty cool, if accurate. For instance, you would have thought we would have heard something in the main street media (or "lame street media," as some like to call it) about the Indians being arrested while smuggling uranium. I just googled it, and sure enough, there it is. In fact, if media reports are right, this is the second such incident in India in recent years. As if Pakistan doesn't have enough trouble...

MISCELLANY

Think Your Laptop is Small? In a recent edition of these ramblings, I shared my general optimism about the future of humanity, thanks to steady technological progress. That is, of course, a theme often referenced by Doug Casey, the chairman of this organization and my favorite partner of all times. Doug is looking forward, especially, to the era of nanotech, when all things will be possible. While waiting, we can entertain ourselves with a steady stream of cool new stuff. Here is a link to one of the coolest I have seen of late...

Speaking of Laptops... if you are traveling internationally, you may want to give consideration to the idea that the local border clerks - you know, the ones with the warm smiles and hand guns - may take an unhealthy interest in your laptop and decide they should have a poke around, or just confiscate it outright. Some words to the wise here...

The Stella Awards for 2007 are out (www.stellaawards.com). These are the prizes awarded for the most frivolous lawsuits, named after the woman who sued after burning herself on a cup of MacDonald's coffee. Here's the 2007 winner...

Roy L. Pearson Jr. The 57-year-old Administrative Law Judge from Washington DC claims that a dry cleaner lost a pair of his pants, so he sued the mom-and-pop business for $65,462,500. That's right: more than $65 million for one pair of pants. Representing himself, Judge Pearson cried in court over the loss of his pants, whining that there certainly isn't a more compelling case in the District archives. But the Superior Court judge wasn't moved: he called the case "vexatious litigation," scolded Judge Pearson for his "bad faith," and awarded damages to the dry cleaners. But Pearson didn't take no for an answer: he's appealing the decision. And he has plenty of time on his hands, since he was dismissed from his job. Last we heard, Pearson's appeal is still pending.

This is not a new story, but it is instructive, nonetheless... I knew a judge once who was crazy as a rabid rabbit. Eventually, he too was dismissed after getting caught climbing into the window of his ex-wife's house, gun in hand.

About that Ethanol Stuff. We have made derisive noises about the etha-not boondoggle that is costing you a lot of tax dollars and helping to drive up the global cost of food (33% of all the corn grown in the U.S. is expected to be used for the stuff over the next decade). Well, recent news has it that the demand for ethanol not only pushed up the price of food by 4.9% last year, but that it will double the level of greenhouse gases produced over the next 30 years. Okay, now let's see how long it takes before the politicians pass a law which, in principle, explains, "Oh, about that ethanol stuff... well, hmm, never mind." I'm betting it will take a decade, at least.

Protectionism Watch. The last thing the world needs right now is a trade war. But, as I have commented on previously, it may soon get one. The latest sign comes from the Australian government, which is looking to pass legislation that requires that sovereign wealth funds are "independent from the relevant foreign governments." I wonder what part of the term "sovereign" our friends down under don't understand? Meanwhile, Beijing is none too happy following a decision by a U.S. government panel to disallow a Chinese state company, in conjunction with Bain Capital Partners, to buy 3Com Corp. This sort of thing is happening fairly frequently now, and the pace should only accelerate as people get more nationalistic, urged along by politicians looking to assign blame for economic woes anywhere but where it actually belongs.

That's It For This Week!

There is much, much more one could comment on... the failure of auction debt markets (yesterday 395 out of 641 auctions failed. To get a sense of what that means, consider that since the auction debt market was established in 1984, there had been a total of just 44 failures); the shooting down of errant satellites; the burning of embassies; the invasion of our friends the Kurds by our friends the Turks... but there is only so much time in the day, and other responsibilities call.

A quick check of the screens show that gold is holding strong at $944, oil is $96 and the U.S. stock market is, again, down almost 100 points. Business as usual, I'd say.

Until next week, thank you for reading!

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.