The Room : McCain

The Room - 10/10/2008

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

October 10, 2008

Dear, Dear Reader,

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

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

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

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

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

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

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

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

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

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

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

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

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

It is this.

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

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

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

Oh no! Not that old saying.

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

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

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

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

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

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

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

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

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

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

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

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

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

Go Gold

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

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

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

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

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

Lust for Gold Dust

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

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

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

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

A Quick Conrad Commentary

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

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

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

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

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

Snippets

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

Running Out of Digits

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

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

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

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

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

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

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

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

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

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

The Really BIG Bubble

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

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

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

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

What to Watch Now

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

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

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

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

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

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

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

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

Businesses will fail. Industries will grind to a halt.

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

Vive Le Difference!

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

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

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

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

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

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

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

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

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

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

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

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

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

And, Now for Something Entirely Different...

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

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

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

Correspondence

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

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

Sleep Walking into a Brave New World

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

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

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

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

It is worth reading, which you can do here.

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

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

Miscellany

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

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

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

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

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

David Galland

Managing Director

Casey Research, LLC.

The Room - 10/03/2008

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

Dear Readers,

We're no longer in Kansas, Dorothy.

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

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

But, what?

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

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

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

Guns?

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

The "etc." must mean guns.

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

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

But that was then, and this is now.

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

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

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

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

Do You Know How the Fed Is Managing Your Money?

By Bud Conrad

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

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

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

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

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

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

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

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

Call Us Utopians... or Free Marketers

Ed. Note

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

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

Oink! Oink! For Shame!

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

The Big Debate

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

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

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

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

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

World on the Edge

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

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

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

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

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

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

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

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

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

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

More on the Global Situation

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

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

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

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

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

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

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

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

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

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

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

So, things could always be worse.

Ed. Note

An Interesting Perspective on European Energy

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

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

Slovakia, Finland and Macedonia 100%

Bulgaria 96%

Serbia 87%

Greece 82%

Czech Republic 79%

Austria 74%

Turkey and Slovenia 64%

Hungary 54%

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

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

Putin is a genius.

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

Ed. Note

Casey Energy Opportunities

Learn more here

Blarney Barney

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

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

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

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

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

Economics 101 for Politicians

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

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

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

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

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

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

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

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

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

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

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

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

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

Miscellany

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

And that, dear, patient readers, is that for this week. There was so much more I wanted to cover, and will next week... but time has slipped away. As I sign off, I see that the DJIA is up a flaccid 121 points, not very impressive given the passage of the bailout. What, I wonder, will the government do when next week, or the week after maybe, the U.S. stock market takes another header for 500 points? Stay tuned. Meanwhile, gold is at $826, down considerably over the past week.

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

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

Sincerely,

David Galland

Managing Director

Casey Research, LLC.

The Room - 09/26/2008

David Galland — Tue, 30 Sep 2008 21:34:16 GMT

September 26, 2008

Dear Readers,

What a world I have returned to from my cloistered retreat at the beautiful Vivenda Miranda, scenically situated on a cliff outside of the quaint port town of Lagos, Portugal.

Everything has changed.

Everything is changing.

The storm we have so long tried to help you prepare for is upon us. At this point, I can only hope you have your sails rigged for the storm now breaking, because time is running out.

The violent volatility I warned of when last I wrote has arrived, with towering waves now rising up and smashing into the economy - and as an unavoidable consequence, our personal portfolios -- from all sides.

Overnight the holders of my mortgage, WaMu, failed, the largest bank failure in history. This week, the golf course that I usually play on was taken over by the government... last week it belonged to AIG.

As you don't need me to tell you, that same government now wants to spend over a trillion dollars to bail out Wall Street and to shore up the money market mutual funds - which have so far flown under the radar screen despite portfolios stuffed to the brim with bad paper.

While no one was paying attention, U.S. automakers used their election year leverage to win approval for $25 billion in low-interest loans.

As you can see in the chart shown here, the monetary base of the U.S. has surged, a topic we'll have more on in The Casey Report, which will be released next week. Even before the bailout, the government has begun doing what it knows best... pumping up the money supply in a desperate attempt to save the economy from the crash it so desperately needs.

According to Reuters, last week the Fed lent nearly $188 billion per day, on average, to banks and money managers.

Last week, as this fiscal prolificacy was underway, gold surged as we expected it to. This week, it has consolidated, holding its gains but not pushing higher yet.

We don't care.

Owning gold right now is the right thing to do, on multiple levels. Others are now quickly coming to that same understanding. This week, I have had two calls from people I haven't heard from in years, asking me how to buy gold. And then there's this...

From a correspondent in Switzerland...

So, we call Bank Cantonale Bern. The Cantonale Banks are like BofA in the States - it's a huge retail banking company with branches in most towns. We learn, yes, they have limited bullion for gold but no silver.

The surprise came when we arrived at the bank this afternoon. The bank has a teller window, segregated off to the side of the others, with a sign above the window that read,

"Change & Gold" (foreign currency and gold coins)

We had to wait in line. I bought the last of the one-ounce bullion they had - Krugerands. And there were people behind us in line. The woman who helped us said that the demand for gold has been so strong that they made it available via front-line employees, rather than through a bank representative in a private, "behind the counter" transaction. And they haven't had silver for several weeks. She said supplies of silver had been sporadic at certain branches in Zurich.

So there you have it. A retail bank where you can conduct business in gold just as easy as Swiss francs. A developing trend? One can only hope.

Just a few minutes ago, my dear friend Mr. Watson, whose birthday it was I went to help celebrate in Portugal, tipped me to this... from the Toronto Star.

Coin dealers from the U.S. to Canada have reported a surge in buying of bullion coins and other gold products as troubles in the financial markets prompt people to seek a safe haven in precious metals.

"Demand has exceeded supply for American buffalo 24-karat gold one-ounce bullion coins, and our inventories have been depleted," the mint said in a note to its dealers. "We are, therefore, temporarily suspending sales of these coins."

The trading herd will follow the physical buyers. The recent $100 surge was just a precursor. The lag in understanding - and action - is understandable. The global economy is in a true paradigm shift. People don't want to believe what their eyes and ears are telling them. And so, at this point the trading herd is standing en masse, eyes wide open, nostrils flaring, muscles twitching spastically, waiting for the news that will tell them which way to bolt for safety.

While they are only to be used by the attentive, and with great caution, I am now using a variety of options and futures strategies to leverage what's coming. I will never risk so much as to put myself in any real financial trouble. But, with that filter, I am now positioning myself for higher gold prices and a falling stock market (I suspect one more dead-cat bounce after the bailout is passed... then watch out below).

Higher interest rates are a sure thing, but there will likely be a lag between now and then as well. Structure things right, and you can ride through any possible downturn, then earn extraordinary returns as things move in your favor. But the key thing to remember is that, like hot chili sauce, a little leverage goes a long way... and a lot of leverage can burn you, badly.

Knowing where your money is has also become very important. In the upcoming edition of The Casey Report, we'll also be presenting a detailed explanation of how to be sure your bank will be one of those still standing after the storm.

Ed. Note

The Casey Report

Try our 3-month no-risk trial now.

Whatever the final form of the bailout, and I am convinced there will be one - the money may not flow in exactly the way that Wall Street wants, but it will flow nonetheless -- in the medium to long term, the die is cast. The hegemony of the U.S. dollar in international trade is coming to an end (more on that momentarily). Given the lack of a tangible alternative, namely one that is not solely faith based, a new currency regime will arise. It's impossible to gauge from this distance what it will ultimately look like, or who will sponsor it (there is talk of the IMF fulfilling the role), but it's safe to assume it will have to include gold and other tangibles.

We live in dangerous, yet exciting, times. We'll continue doing our part to keep you in the know, and on the right side of things.

Moving along, I want to share a front-seat analysis on this week's congressional hearings on the bailout from Donald Grove, our new Washington correspondent.

The Bailout: Behind the Scenes

By Donald Grove

I went to hear Fed Chairman Ben Bernanke testify this morning before the Joint Economic Committee (Chairman Chuck Schumer, D-NY), primarily on the Bush administration's capital markets intervention proposal. I thought I would pass on my observations, which will probably be different than what you read in the mainstream press. Bernanke has had it rough lately. He was testifying yesterday with Treasury Secretary Hank Paulson and SEC Chairman Chris Cox before the Senate Banking Committee (Chairman Chris Dodd, D-Conn) and was scheduled to testify with Paulson later this afternoon before the House Financial Services Committee (Chairman Barney Frank, D-Mass).

Schumer recalled that Bernanke last appeared before the Joint Economic Committee in April, following the narrowly averted collapse of Bear Stearns. He said "Most of us thought we had just witnessed an event that we were likely never to see again in our lifetimes. And yet, here we are, only six months later, and we are discussing a crisis many orders of magnitude greater." Schumer stated, as did others, that "we must act and we must act soon." Those statements were not without reservations, however, and I would add that not acting may be the more prudent course. There seems to be a compulsion on the Hill to do something, even if it's wrong. I guess that's what legislators think their constituents expect - and maybe they do. New York Mayor Michael Bloomberg told NBC's "Meet the Press" that "nobody knows exactly what they should do, but anything is better than nothing." Not necessarily so - in fact, probably not so. "Expecting Congress to fix the current financial crisis is like expecting an arsonist to put out the fire he started," said Representative John Shadegg (R-Az).

Schumer told Bernanke that "Americans are furious" and that he and probably each of his colleagues have heard "amazement, astonishment, and intense anger" from constituents. No doubt, but why? According to Schumer, "over the last eight years, we were told that markets knew best, that financial alchemy had reduced risk to an afterthought, and that we were entering a new world of global growth and prosperity. Instead, what we have learned is that we now have to pay for the greed and recklessness of those who should have known better." Talk about the pot calling the kettle black. I personally recall hearing Schumer in a hearing on the Hill within the last eight years demanding that the less fortunate be given access to home mortgages so they, too, could realize the American dream. He was not alone. The former Fed chairman urged Americans to avail themselves of adjustable-rate mortgages. As was often noted during today's hearing, there is plenty of blame to go around. What worried me was the tendency to lay blame for this debacle on the free market.

As I noted above, I think doing nothing may be the best thing Congress can do right now. In fact, if Congress had done nothing in the past, we might have avoided a lot of these problems. It's never too late to stop meddling. Why not start right now? Rep. Kevin Brady (R-TX) suggested that we just let the free-market system correct itself. Of course the Fed chairman did not agree. He told Sen. John Sununu (R-NH) that we need to figure out what the price should be on complex securities so that private capital can come in and help buy them up so that banks can reestablish capital to make loans. Ron Paul, in prime form, said that most illiquid assets are illiquid because they are not worth anything. He added that price fixing prolonged the Great Depression, and that is what is being proposed now. He said that messing with prices risks socialism. Paul said the Fed is not smart enough to fix prices. Hear! Hear! Nor, I would add, is the Treasury Secretary or Congress. The free market, however, is uniquely able by its very nature to set prices just right, including, by the way, interest rates - the price of money.

Congressman Paul asked where this $700 billion will come from. Not from taxes or borrowing from China. He said it will come from us, presumably through the insidious tax of inflation. He explained that the downturn in housing is because housing is overpriced. Let housing prices come down, he said. He said, "We can't solve inflation with more inflation." Paul asked the Fed chairman where his authority comes from and noted that only 15% of Americans care about the Constitution or the rule of law - and less than that in Washington, D.C.

Bernanke conceded that price fixing was counterproductive but insisted that we have to somehow "discover" what prices are. Duhhh! That's what the free market is for! As to his authority, he cited the Federal Reserve Act ..... "now if you disagree with the Act...." Well, I do disagree, and I think Ron Paul also believes that the creation of the central bank in 1913 was where a lot of this trouble started. Nevertheless, I don't think the Fed has even been complying with the mandate and constraints of the Act.

Refreshingly, retiring Senator Jim Saxton, ranking member on the Committee (R-NJ), noted that it would be nice if we could go to a safe at Treasury and take out about 5% of GDP to bail out financial institutions, but we can't. We have to borrow it, he said (albeit probably surreptitiously from our unborn progeny). I am always heartened to see that someone on the Hill realizes that. Unfortunately, I suspect that a majority of Americans do vaguely suppose that there is something like a big safe with real money in it that the government taps to pay for things like this - kind of like believing that the Social Security Trust Fund is bundles of hundred-dollar bills stacked up in a cool, dry place.

Vice Chairman Carolyn Maloney (R-NY) asked if this proposal to intervene in the credit markets to the tune of $700 B would affect inflation and wondered if the Fed might have to raise rates. Bernanke said that this was not a stimulus. He said that if it helps the economy grow, the Fed may have to raise rates sooner, but the he did not expect it to have any effect on inflation. I'm speechless! Of course it's inflationary. I also have to wonder whenever I hear a comment like this, whether he actually believes that an expanding economy causes inflation - like some mysterious act of God - and that it is the Fed's role to counter that by raising rates.

He explained that this would not be an expenditure. He said it would be "acquisition of assets." If there is a loss, he said, it would be much less than $700 B. I think I agree with Ron Paul. We are basically trying to pretend that the real estate bubble never popped by saying that the debt instruments based on those inflated values still have value. Several legislators expressed their frustration over the fact that Hank Paulson added other toxic waste to the mix this weekend - car loans, student loans.

Congress is trying to add its own unique signature to this boondoggle. For example, there is talk of coming up with the money by placing a surcharge on those making over a certain amount per year (I think $1M). There is also a move to restrict the compensation of financial institution executives. Amy Klubuchar (D-MN), said, "There should be a limit on what you can make when taking our money." Bernanke said there has to be an incentive for risk taking. "For this to work," he said, "we need a wide range of participation. If we stigmatize institutions that participate, they won't participate." Jeff Bingaman (D-NM) suggested a $200 B tranche with Warren Buffett at the head of the board of some administering organization to "get these institutions functioning again." Bernanke noted that Buffett had invested $5 B in Goldman Sachs and that the Oracle of Omaha had said that we "go over the precipice if Congress does not act."

There was also a bright side to proposals from legislators. Kevin Brady suggested that Congress look at a holiday on the capital gains tax or temporarily lowering repatriation road blocks since taxes now make it too expensive to bring capital home from overseas. He noted that three years ago, $300 B came home when the tax barriers were lowered. Bernanke said these actions alone will not solve the problem. Again, I am not holding my breath - more likely that we will see exchange controls.

Representative Lloyd Doggett (D-TX) noted that although Bernanke says he will be "acquiring assets," he has asked Congress to raise the debt limit to do it and is acquiring the assets because they are toxic waste and we don't know what they're worth. "In Texas," he said, "we say ‘those chickens are coming home to roost.'" Then he thought better of it and said "vultures are coming home to roost." He said we have a bankrupt ideology. I'm not holding my breath waiting for taxpayers to get their $700 B back. Ron Paul later said that after Doggett's comments, he can't tell who the conservatives are.

As is often the case in exchanges with the Fed chairman, there was an emphasis on market psychology, not real sound money practices. The whole concern seems to be for creating the illusion of economic stability as if stability could not actually be achieved, so the illusion is the best we can do. For example, Schumer asked whether a $150 billion installment, with the rest to come later, wouldn't be enough to assure markets that Congress is serious. Bernanke agreed that it is about psychology and said $700 B is what the administration thought it would take to provide psychological reassurance. Representative Carolyn Maloney asked where he got that figure. He said it was not science. It's about 5% of the $14 trillion in outstanding residential and commercial mortgages, on which the loss rate is about 5 %. I couldn't help thinking that returning to the gold standard would certainly show the market that Congress was serious and would allow real financial planning instead of trying to guess at the unintended consequences of clumsy government intervention in the free market.

There was a lot of discussion of the technical aspects of getting banks lending again - putting taxpayers first, strong congressional oversight, enticing financial institutions, including foreign institutions, to participate in the auction of these troubled securities, fire sale vs. hold-to-maturity prices, the Fed paying a premium for them. Senator John Sununu asked if firms would be willing to sell at below book value. Bernanke said (apparently now agreeing with Ron Paul) that "over time there is no way to hide the real value of an asset." I think that was a "yes," but I found myself wondering whether the objective here isn't to pay above-market value for these securities with taxpayer's money. I think it is.

Bernanke said this is the most significant post-war economic crisis for the United States and the world. He noted the hardships for those on Main Street if banks can't lend - consumer credit dries up, car and small business loans are unavailable. Baron Hill (D-IN) asked Bernanke what he should tell his constituents who asked if their stock portfolios and 401(k)s were going to lose value. Bernanke said "yes," they would lose value if Congress does not act. He said the credit system is like plumbing that permeates the economy. He said choking credit takes the life blood out of the economy. That may be, but perhaps it should not be. It occurred to me that there are two components to interest: opportunity cost and risk of lost purchasing power. If you take away the latter, I think the credit system becomes quite simple and we don't have to go through all these contortions, and probably don't need the Federal Reserve. Inconveniently, the government would have to live within its means like the rest of us.

Bernanke said the pain on Main Street would be very significant if Congress does not authorize this plan. He urged Congress to solve this problem now and come back later and look at reforming regulation. As Representative John Shadegg said, however, you can't expect an arsonist to put out the fire he started. There is no way we are going to avoid pain at this point. It seems to me that each time Congress tries to avoid it, the inevitable pain gets worse. Let's bite the bullet and get it over with and for God's sake, no more regulation!

Jim DeMint (R-SC) said that unbridled capitalism is not at fault. He said this problem was caused by the government and its implied guarantee. He said we removed accountability for risk from the enterprise system and that this was a failure of government intervention, not a failure of the free market. Bernanke tried to clarify that he was not talking about heavier regulation, just reformed, smarter regulation - maybe even less regulation. I'm afraid I have evolved from a libertarian into an anarchist and find not the slightest comfort in those words. I was happy to hear DeMint point out that some of the institutions that Bernanke found too big to fail were government-created GSEs. He said that none of these programs support free-market activity. He noted that the Sarbanes-Oxley "monster" chased capital off shore but failed to tell us about Bear Stearns. He concluded that "no amount of government regulation will eliminate corruption if risk is removed." Bravo!

Rep. Phil English (R-PA) was troubled by the extraordinary power this proposal would give to the Treasury Secretary, an unelected official. He suggested that this was the path to "Crony Capitalism." I will add that the next Treasury Secretary will inherit this power and will not only be unelected, he or she has not even been named.

Rep. Maurice Hinchey (D-NY) observed that Bernanke and Paulson went to the White House with this problem last Thursday but had to have known about it before that. He wondered why Congress had been kept in the dark. Bernanke cited efforts taken to correct the problem, including the discount window, CDSs, and the market's natural healing process. Hinchey said he was skeptical in April when Bernanke and Paulson told the Committee that the economy was growing and that our financial institutions were healthy. He said there was motivation to keep this under cover and that we are seeing manipulations and distortions of the mortgage market. Bernanke cited the sharp interest rate cuts in January. Apparently he was still hopeful that they would work in April and did not want to alarm the Committee. He suggested that Congress "should look at substantial regulatory reform." He suggested a "1-2 punch. Stabilize and then fix it so it does not happen again." Again, I say that fixing it will take more than adjusting a few dials or fine tuning some regulations. The overhaul necessary to fix this I suspect no one on the Hill has the guts for except Ron Paul, maybe Tom Coburn.

In conclusion, I would say it sounds like this bailout may not be a done deal. Constituents are ringing phones off the hook, telling their legislators "don't do it." Many are suspicious that it came up so quickly and that they are being asked to act so quickly. Representative Mike Pence (R-IN) told CNN, "There are those in the public debate who have said that we must act now. The last time I heard that, I was on a used-car lot. The truth is, every time somebody tells you that you've got to do the deal right now, it usually means they're going to get the better part of the deal."

Always the optimist.

Regards, Don

More Views on the Bailout From the Washington Post...

During testimony before the House Budget Committee, Peter R. Orszag -- Congress's top bookkeeper -- said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.

"Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," Orszag said in his testimony. "Establishing clearer prices might reveal those institutions to be insolvent."

In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X's real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.

Such companies "look solvent today only because it's kind of hidden," Orszag said. "They actually are insolvent" already, he said.

From Ron Paul...

Dear Friends,

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The events of the past week are no exception.

The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."

That describes the current bailout package to a T. And we're being told it's unavoidable.

The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.
Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.
Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.

There goes your country.

Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.

Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.

Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.

The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?

When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?

Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.

In liberty,

Ron Paul

Quotes from the Quislings

Not to be indelicate, but the working title I had chosen for this next section was "FCUK YOU!"... that, by virtue of my feeling that strong words are in order for the quislings who purport to be free marketers and who have been lined up to support the government's bailout.

Here's my Rogues List...

Laurence Fink

BlackRock Inc

"If this plan works, taxpayers are not going to be out money," Fink, a pioneer of mortgage-backed securities, said in an interview with Bloomberg TV.

... Based on current prices, buyers of distressed debt, including the government, will earn "strong returns over the next five to seven years," said Fink, who declined to say whether his New York-based company will bid on contracts to manage the proposed Treasury fund.

And there's the well-regarded Mr. Buffett...

"I am betting on the Congress doing the right thing for the American public and passing this bill," Buffett said on cable channel CNBC today. "I certainly have a vote of confidence in Goldman and vote of confidence in Congress."

Of course, Buffett didn't mention how much money his company stood to lose if the government failed to rush into the breach. Or how much extra money he'd make by trading his good name to Goldman for a sweetheart deal that will form a footnote in all future books on financial topics... but only if the bailout goes through. Among other kisses, Buffett's coup includes perpetual preferred shares that pay a 10% coupon. Simply, that means if the U.S.G. bails out Goldman, Buffett will collect $500 million a year on his $5 billion investment, and his payments will come before those sent to any other shareholders. He also gets under-the-market warrants on another $5 billion worth of shares.

Goldman never would have agreed to this deal unless their feet were roasting in the coals of calamity. One can hardly blame Buffett for making his move (it's not like he couldn't withstand the loss of $5 billion, should the worst come to pass), but now that he is so handsomely positioned, his cheerleading should be viewed as the disingenuous self-dealing that it is.

And then there's this, from the Washington Post, quoting mega-bond manager Bill Gross...

"The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight."

On that last bit, I feel it's worth mentioning that Freddie and Fannie may have "enjoyed" more government oversight than any other two institutions on the planet.

If there is one certainty, and there are several related to this fiasco, it will be that the free market will be made the patsy, and the result will be a public outcry for more, not less government.

In the end, now that the government has broached the topic, the $700 billion is going to get spent... whether it starts by going into the pockets of the Wall Street, or is cycled back into the public pocket through the vehicle of FDIC guarantees, or making the money market funds whole, or giving millions of householders a free ride on their mortgages... or simply writing checks to consumers... it, and a lot more is going to get spent.

For my money, and it is my money (and yours), the best argument for the bailout was offered by none other than President Bush, who succinctly opined in a meeting yesterday of congressional leaders, "If money isn't loosened, this sucker could go down."

Unfortunately this sucker, aka the economy, is going down no matter what they do at this point.

At this point, all we can do is to wait and watch. Focus on liquidity for your personal portfolio and prepare for the worst. It's coming.

About Those Foreigners...

In all of the frenzy, the U.S. Government seems to be largely ignoring the foreign holders of our many trillions of dollars. This is also, as we have repeatedly said would be the case, because foreigners don't vote, and if they do decide to dump their dollars - as we expect they will (and actually are) - they will only hurt themselves. Or, so runs the logic of desperate policymakers, relying on MMAD (Monetary Mutual Assured Destruction) to rationalize their massive unleashing of dollars.

If you've voted for any of the clowns running our country for the last 40 or so years, you might want to take a moment to apologize to your children and, if you have them, your grandchildren as well. (Ron Paul supporters, you can take a pass on this.)

That's because, as I mentioned above, the U.S. Government has managed to squander the unbelievable advantage of being the suppliers of the world's de-facto reserve currency... an advantage made almost miraculous given that it was backed by nothing.

All the bureaucrats had to do was show even modest restraint and occasionally take a few moments to remind themselves of the principles of self-reliance and open opportunity that made this country what it is. Instead, the political class, cheered on by the voting public, fell in love with virtually every perfect-world social program, every new make work, corporate suck-up and pork barrel program waved in front of their snout-bedecked faces these many years. In the process, they have traded away something that no nation will again enjoy... a global blank check.

Bud Conrad is assembling the eye-opening hard data showing the trend reversal in foreign investment in U.S. dollar assets for the next edition of The Casey Report.

In the meantime, the anecdotal evidence is beginning to mount, an example being this item from MarketWatch this week..

HONG KONG (MarketWatch) -- Chinese regulators have asked domestic banks to stop lending to U.S. financial institutions in the interbank money markets to prevent possible losses during the financial crisis, the South China Morning Post reported Thursday. The China Banking Regulatory Commission's ban on interbank lending of all currencies applied to U.S. banks, but not to lenders from other countries, the report added, citing a source.

I don't need to tell you that the Chinese government operates on group-think. For an official arm of the government to take this step is a howitzer shot across the bow of the U.S. ship of state.

Meanwhile, the current administration has managed to almost entirely alienate the Russians with our persistent meddling overseas ("Avoid foreign entanglements," said George Washington and Thomas Jefferson. "Take over the world," answered a succession of modern politicos). Not shy about giving as good as they get, the Putinistas are moving game pieces closer to home ground.

The memorandum was signed on Monday in Caracas, as a Russian Navy squadron, including the heavy cruiser Peter the Great and three escorts, set sail from St. Petersburg to join Venezuelan vessels in the first show of Russian naval power in the American hemisphere for many years.

They have been preceded by the Russian Air Force, which dispatched a pair of long-range bombers to Venezuela for the past week. A Russian naval spokesman told Mineweb the squadron will operate in the Caribbean, and will enter the sea from the Atlantic Ocean.

And the official mouthpieces of the Russian government, this one from the Russian News and Information Agency, are firing torpedoes at the U.S. dollar. This excerpt from an article entitled "Time for a gold rouble" published yesterday...

Second, the Russian leaders might also consider making their own currency, the ruble, convertible into gold. The idea of gold convertible currencies is extremely unpopular among most economists; they dismiss gold as a "barbarous relic" (to use the famous phrase of John Maynard Keynes) and suggest either the present regime of paper currencies or, at best, a link to a basket of commodities.

Both these solutions are highly artificial and based on the same level of state control which has now just so spectacularly failed. Indeed, which is more "barbarous" -- the reintroduction of gold as an instrument of payment, or the practice of amassing huge quantities of the precious metal to keep it locked underground in the vaults of central banks? The contempt of the Keynesians notwithstanding, it is an indisputable fact that gold does remain the ultimate store of value, which is precisely why states own so much of it.

At this point, even our "friends" are starting to make excuses and reach for their coats. This from a Reuters report on the strong words falling out of the mouth of the German finance minister...

In some of the toughest language since the crisis worsened this month, German Finance Minister Peer Steinbrueck told parliament the financial turmoil would leave "deep marks" but was primarily an American problem.

"The world will never be as it was before the crisis," Steinbrueck, a deputy leader of the center-left Social Democrats, told the Bundestag lower house.

"The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar."

It is impossible to fully appreciate, let alone understand, the implications of the loss of the dollar's global reserve status... but it's a topic we'll be digging into. It won't happen overnight, but it will happen.

A Musical Interlude

For something a little lighter, I want to share some of the musical recommendations that were sent by readers in response to my recent solicitation.

Before getting to your recommendations, however, I'll tell you that today I have been listening, repetitively, to the soundtrack from "Once," an excellent film we watched earlier this week. Our own Louis James had first recommended it, followed by another friend, and so I thought I should check it out. It is a simple, beautifully executed, romantic little film... overlaid with powerful music.

The track I'm currently listening to is one of my favorites, "When Your Mind's Made Up." You can listen to it and see a scene from the film, compliments of YouTube, by clicking here. It starts slow, then builds to the point where it pretty much blows me away -- just the kind of music I love.

Okay, so that's my entry this week... now here are yours.

Explosions in the Sky

The Birth and Death of the Day

It's Natural to Be Afraid

All of a Sudden I Miss Everyone

My All Time 5 Favorites... Foo Fighters - Pretender - awesome video where they fight the riot police, btw...

KRS1 - Sound of Da Police ...

NWA - F*** Da Police

Pink Floyd - Another Brick in the Wall Pt. 2

Public Enemy - Fight the Power.

As you may have noticed, I like my music with a message... Music to overthrow your government by! Jeff B.

JS Bach's Toccata and Fugue

It is surpassed only by Hector Berlioz's Requiem, scored for full symphony orchestra, a double choir, and a brass band in each of the hall's four corners. Despite its title, it's a rouser! If you have a good sound system, open

http://www.youtube.com/results?search_query=berlioz+requiem&search_type=&aq=2&oq=berlio

Start with Requiem et Kyrie, and keep going. C V.

First off, the Isley Bros, in general, are hard to beat. For passion and purity of voice you gotta hear (the late, due to cancer) Eva Cassidy, not exactly rockin' music but well worth the listen. I was delighted to actually find recordings of her live performances on YouTube, though her best album was Songbird.

Other mentionables from assorted categories that are worth a listen and whom you may or may not be familiar with (we're about the same age) are Dan Hicks and His Hot Licks (hippie country rock), Zap Mamma (world), (the late due to dying) Shirley Horn (torch jazz), and early John Mayall (blues).

www.generalfuzz.net

Thanks for all the great insights so far. . . James

So here is my must have for you and maybe you are already enlightened... Yo La Tengo. Writing beautiful rock and roll for 20 years. Check Youtube "Today is the day" and listen to the live performance on John McEnroe's show. Then graduate to "Blue Line Swinger" It is a 9 minute song and the first time you hear it, by minute 4 and 20 seconds your foot will be tapping, the second time I think it will be tapping the whole time. John W.

Gypsy Soul

Obsession Confession

Slash

While speaking of songs that get me movin' (and STOP me from working), I might mention one called Orinoco Flow (Sail Away) by Enya. Sounds as if it would be rather staid if you know anything of her, but there again is something about that song... it got airplay at a time when I was training for powerlifting at some ungodly early time in the morning before work. Whenever that song would come on, I would have to wait to start my set, but I was awake and movin' by the end of it.

How about Classical Gas for a movin' song?

Country music provides the bulk of the really good guitar playing (and I honestly am not that impressed by most rock guitar playing). Roy Clark has been my favorite since I was a kid (although I don't really care to have him sing). And if they were to map my DNA, I believe they would discover a Boogie gene.

And on that note, give a listen to an Aussie flatpicking champion named Tommy Emmanuel.

Now back to work (me, not you). Matt B.

A tune that is a favourite of mine and in keeping with the problems at present (Chris Rea's Highway to Hell) (listen carefully to the lyrics) for your entertainment. Chris M.

David again, I have many more... and will try to cycle in your recommendations in future editions. But for now, time is running short and I need to move on. Thanks to all of you who have contributed... my musical horizons have been expanded.

McPalin Is Toast

This week I finally found the time to spend a little time, figuratively speaking, with Sarah Palin (encouraged by an article Doug Casey is preparing for The Casey Report on McCain's surprise running mate).

I have to say, I was pretty shocked. As I think many Americans will be, as they watch the candidate in action in the weeks just ahead.

The following quote is from Palin's interview with Katie Couric, in response to a question on the bailout.

"That's why I say, I, like every American I'm speaking with, we're ill about this position that we have been put in [fumbling for words to continue] where it is the taxpayers looking to bail out. But ultimately, what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy. Um, helping, oh -- it's got to be all about job creation too. Shoring up our economy, and putting it back on the right track. So healthcare reform and reducing taxes and reining in spending has got to accompany tax reductions, and tax relief for Americans, and trade, we've got to see trade as opportunity, not as a competitive, um, scary thing, but one in five jobs being created in the trade sector today. We've got to look at that as more opportunity. All of those things under the umbrella of job creation. This bailout is a part of that."

Huh? What?

Listen, I know there are McPalin supporters out there and, I will say it again, strictly from a personal perspective - i.e., I really don't want to pay any more taxes - if I were forced to pull a lever, it would be for McCain (because a victory by him would mean gridlock, that glorious state where the government's power to "do good" is curtailed). So, don't get angry or send me emails accusing me of being some sort of commie-sympathizer or member of the left-wing media conspiracy.

I'm sure Sarah Palin is a perfectly wonderful person, but she is way out of her league here. And, shortly, the boomerang effect of her media appearances is going to smack McPalin upside the head.

If you don't believe me, watch the following excerpt from the Couric interviews, this one on Palin's purported experience in foreign affairs. (You may have already seen this, because it's starting to make the rounds on the net... which is exactly the problem.)

At this point, I can't see any conceivable way McPalin wins. Which means, get ready for a serious asset stripping come next year.

Miscellaney

Phyling On

phyle

In any event, Herb in Jacksonville, FL is looking to start a phyle.

And the next meeting of the Sacramento phyle is scheduled for September 30th with Ron Parratt of AuEx (one of my favorite explorers) as a guest participant.

And the Toronto group, one of the most active, will be held on October 3... with our own Doug Casey sitting in.

For more details on any of these get-togethers, or any of the other phyles now up and running (this is all happening organically, by the way... all we're doing is facilitating the introductions of the new members to the organizers), contact Kristen at phyle@caseyresearch.com.

Well, that's all that time allows for today. It has been a long and immensely interesting week. We are living through a crisis of a magnitude seen only once a century. While one might take satisfaction by being able to say "I told you so" to sundry friends and associates - you know, the ones who have habitually rolled their eyes and parroted the "all is well" mantra of the financial talk show hosts whenever you have tried to warn them about what's coming... the reality is that these are dangerous times. Even for the prepared.

So, be careful. Especially when discussing topics related to wealth and precious metals ownership. Those who "have" could easily become targets for those who "have not" as this crisis unfolds. Mum's the word.

As I sign off, stocks are largely flat and precious metals are up nicely, to $888. If I were to guess what's going to happen next, it will be that an agreement on the bailout will be announced, the stock market will have another dead-cat bounce... after which it is going to start on a sharp slide.

As always, I greatly appreciate you using some of your valuable time to read this column, blog, musings - whatever it is. Your comments and suggestions are always welcomed, and often directly responded to, by writing david@CaseyResearch.com.

A final note. If you have friends who you think might benefit from our service, we would take it as a great favor if you'd tell them about our services and suggest they take us up on our 3-month no-risk trial subscription for The Casey Report. The next three months should be particularly important, so now's the time to act. You'll be doing them a favor, if for no other reason that our analysis is unbiased because it is beholding to no one except you, our subscribers.

As for the money managers and other talking heads now cheering for the bailout versus warning the people who listen to them to run for cover... well...

I'll leave it at that...

Until next week,

David Galland
Managing Director
Casey Research, LLC.

The Room 8/22/08

David Galland — Wed, 27 Aug 2008 14:43:32 GMT

August 22, 2008

Dear Readers,

Summer weather, at least that of the preferable sort, has finally returned to the corner of the globe where your correspondent sits listening, too loudly, to Michael Franti’s Yell Fire!. ( http://www.youtube.com/watch?v=H7WASrQFg8o) For those of you unfamiliar with Franti and his band Spearhead, his genre is what might be termed “Revolution Rock”… as in taking it to “the man.”

While I don’t agree with many of his lyrics, which skew far left, I do like the music and his thematic focus on peace and, paradoxically, burning things down. Regrettably, in his view the rebuilding would be of a socialist paradise.

It is, of course, deeply ingrained in human nature to want everything wrapped up in a nice utopian package. Problems arise, however, because one person’s idea of utopia is another’s idea of hell. And, inevitably, even utopia’s champions awaken one morning in full agreement that their vision was hell… just ask Robespierre or Trotsky.

In the end, no one gets their utopia because the entire notion is merely a dangerous fiction that, in the attempt, leads only to the disenfranchisement of one group or groups in favor of another. And, in time, of everyone.

In that light, I think it is safe to predict that, within a year of taking the White House, the Obamians, initially imbued with a perceived mandate for change and the power to nurse their perfect world vision will quickly learn three things.

First, attempting to “manage” a country as big and complex as the U.S. is, in the best of times, far more complicated than they now imagine. Second, after a series of failed experiments and a resulting sound thwacking about the ears, they’ll learn to embrace the same well-worn path of compromise, deceit and vote buying used by Republican and Democrat predecessors alike over the last century or so. And, third, as they find themselves assailed on all sides -- the economy in ruins -- they’ll finally learn that their particular vision of utopia is a fantasy.

The same would hold true for the McCainians, should the fates smile on them this November.

But either way, it will be the long-suffering taxpayers of the economy – you and I, to be specific – that will be strapped into the traces and forced to provide the muscle required to pursue the reigning utopian whimsy.

While I’m not planning to go down the revolution path, taking up residence in Galt’s Gulch seems more attractive to me with each passing day.

Fiat Finale

In last week’s edition of The Room, I shared some thoughts about the fall in the euro and the concomitant rise in the U.S. dollar. At the time, my marginally younger self wrote…

“If you think the thing through, precedent to the global monetary crisis, the euro first had to stumble. Well, it now has. The next stage -- and given the volatility of the situation, I don’t think we’ll have to wait long for it – will be the realization that there is no safe fiat currency. It is at that point that the massive hurricane, a crisis of confidence in the entire fiat system, will begin ravaging the global economy in earnest.”

This week, the trading herd quickly came to the conclusion that, by running back to the dollar, they had run back into a burning house and, singed hair smoking, many came running back out.

While some of the hot money flowed, reluctantly, one has to assume, back into the mortally wounded euro, some of it also made its way into the yen, which is being touted as a new “safe harbor” for money looking to avoid the worst of the currency storm. In my mind, that is a sure sign of how desperate things are becoming, given that yen-denominated instruments offer next to no yield and are linked to an economy entirely dependent on imported oil. And if that is not enough, Japan has also seen a steep reversal in its GDP, threatening a return to its two-decade-long economic meltdown.

More importantly, looking at the price of gold this week, it becomes clear that money is also finding its way back into gold, helping the yellow metal bounce well off last week’s low of $786.

While the finale for fiat currency will take time to unfold, and requires as prerequisite the masses developing a “felt need” for a reliable “it’s-not-a-fiat-currency” play… the quick rebound in gold this week is certainly a step in the right direction.

During a far-too-rushed 9 holes of golf before the opening of business yesterday, a friend asked me if gold’s recent stumble had worried me. Paraphrasing my response…

“One should never be complacent or overly certain that any investment trade they are making will work out as planned. As such, the setback in gold caused me to reflect upon my base case scenario.

“On doing so, I can’t see that there have been any fundamental changes in the economy or in the outlook for the economy. Has the government decided to let the chips fall where they might in the housing market? Have they announced a decision to link the dollar to gold or some other tangible, or to cut taxes, or to dial back the massive government programs that require those taxes? Has the Treasury told Freddie and Fannie they are on their own? Nope. None of it. In fact, the only change is that gold has gotten cheaper. So, I’m not worried…”

What I think I actually said was, “What has fundamentally changed that should make me optimistic about the U.S. dollar, or pessimistic about gold? Nothing. So, fuhgeddaboudit. Now, how about making the putt.”

But that was what I meant…

Deflation? Don’t Bet on It.

There has been analysis presented here and there suggesting the government of these United States is not inflating the money supply in response to the truly unprecedented economic conditions now holding sway. In fact, some of the analysis has it that the U.S. money supply is actually contracting. This is a fairly complicated discussion, and time and space don’t really allow for it here. But I will repeat our core thesis that, with the controls of the proverbial printing presses never far from the hands of the powers that be, there is almost no chance that they will not use those controls over and over, and to whatever degree they feel is needed, to avoid an economic crash.

When Bernanke made his oft-repeated comment about dropping dollars from a helicopter, should the need arise, he wasn’t just being glib… he was stating a truth.

While the Fed and the Treasury have shown a noteworthy amount of creativity in the succession of plans they have shoved into the arena, each one doomed to fall under the gladiatorial trident of a hostile Mr. Market, they are quickly running out of options not involving a helicopter. The almost certain failure of Freddie and Fannie, the logical consequence of which will be, essentially, the U.S. government stepping into the role of the world’s largest provider of mortgage financing, is simply not tenable and will require not just helicopters but C-130 cargo planes on an unprecedented scale. Of course, they’ll do their very best to obfuscate the reality of the situation, but that won’t change the reality one bit.

But back to the topic of whether or not the money supply is or is not expanding, the folks at ShadowStats.com put out a note this week that sheds some helpful light on the topic…

Monthly July M3 Gained $81 billion. In the last several days, I have received a large number of subscriber requests for comment on monthly M3 growth, given a popular-media story of a private estimate out in the U.K. of a $50 billion monthly contraction in July U.S. M3 money supply. Based on my regular estimation of ongoing M3, no such contraction took place in the series as traditionally defined by the Federal Reserve (methodology discussed in the August 2006 SGS Newsletter); to the contrary, monthly M3 increased by roughly $81 billion.

…While interesting, month-to-month money supply changes can be misleading, given the vagaries of Fed reporting. Year-to-year change, as discussed in the August 3rd Money Supply Special Report, provides more-reliable, long-term indications of monetary trends.

On a year-to-year basis, annual M3 growth slowed to around 15.4% in July, from 15.8% in June and was down from the all-time high annual growth rate of 17.4% seen in April. Nonetheless, the current M3 annual growth remains highly inflationary, rivaled outside the current period only by the events preceding Richard Nixon’s closing the gold window and imposing wage and price controls in August 1971. The current pattern of slowing annual growth appears to be an artifact of the still-deepening banking solvency crisis, which likely will see still further Fed accommodation and liquidity expansion in the near future.

Could the Fed and the Treasury make a mistake and put their hands in their pockets and keep them there as Freddie and Fannie fail, joined soon thereafter by a meteor storm of failing banks and financial institutions? Will they resist “doing something” or even “whatever it takes” to try and turn around the free fall in home prices – that key driver of the economy? Unlikely, in the extreme, we say. Meanwhile, watch what happens to Freddie and Fannie… because that will provide hard evidence as to which way Washington is going to skew.

Inflation, What Inflation?

The pundits, including Bernanke (no bias there), are spouting off hopefully about inflation moderating, now that the prices of oil and commodities have come off somewhat. I suppose they think by merely talking about lower inflation, they can lower inflation… don’t hold your breath. Confirming that sentiment, the Producer Price Index, a leading indicator, rang in at a stunning new high this week. This from our own Bud Conrad…

Here is today's data:

Producer Price Index
Weight		July 2008	June 2008
Total finished	100.00%	1.2%	1.8%
ex food & energy	57.05%	0.7%	0.2%
Total intermediate	100.00%	2.7%	2.1%
ex food & energy	72.70%	2.0%	1.3%
Total crude	100.00%	4.2%	3.7%
ex food & energy	16.37%	3.4%	-0.2%

1.2% for the month is 15% a year
4.2% is over 50% a year

The foolish idea that there is no inflation because of recession or some such excuse is just not matching reality.

Bud

It is worth recalling, per Terry Coxon’s excellent article “Eats & Heats” in The Casey Report, that without an open-ended supply of new money, the price of a select basket of commodities can’t create inflation. Instead, people, forced to pay more for a necessity, say, oil or food, will simply cut back on non-essentials.

The widespread price increases we are now seeing are a clear sign that the chickens spawned by years of fiscal prolificacy are coming home to roost.

Got Gold? Lucky You…

There is clear evidence that a gold price of anywhere near $800 is now considered cheap. Nothing underscores that more than the surge in demand for one-ounce American Eagle coins, the increasingly popular way for citizens to express their preference for hard money over the fiat dollar.

As you don’t need me to tell you, this week the U.S. Mint suspended shipments of the American Eagle due to the fact that it miscalculated rising demand and simply ran out of coins. While some will, and have, read all sorts of implications in this development, to me it is a straight-up sign that the dollar’s credibility is crumbling.

Humans reflexively equate scarcity with value. It’s why large diamonds command such a premium over the common piece of glass. Or why the best way to privately sell a used car is to “accidentally” schedule a viewing of two prospects at the same time. One car, two buyers, the demand-meter goes up.

Viewed from that perspective, the widely spread news of the Mint suspending sales of the American Eagle, albeit temporarily, one assumes, will only help to further cement gold’s desirability in the minds of the many.

Here’s a story that broadcast the story to a mass market, from the Wall Street Journal…

The Eagle Has Been Grounded

Mint Halts Gold-Coin Sales
After Supply Depleted Amid Price Drop

By IANTHE JEANNE DUGAN
August 21, 2008; Page C1

As gold prices tumbled from their highest level ever, investors and collectors loaded up on one-ounce "American eagle" gold-bullion coins. The buying spree came to an abrupt halt this week after the U.S. Mint stopped selling the coins for the first time since production began 20 years ago.

[Ed Note: Not so… the Mint has suspended sales of Eagle coins in the past, most recently in September of 2007.]

"Due to the unprecedented demand... our inventories have been depleted," the Mint -- part of the U.S. Treasury Department -- told its dealers Friday. "We are therefore temporarily suspending all sales of these coins."

The move shocked sellers and collectors of the coins, which are the most widely traded in the U.S. Suppliers became angry as they turned away customers. Theories about the decision's underlying cause ran rampant -- from investors in gold futures to Russia's invasion of Georgia.

…The Mint says it simply was wiped out. It has sold 311,000 ounces of the coins this year -- about 50% more than in all of 2007. In the first few weeks of August alone, buyers snapped up 63,500 ounces.

Meanwhile, our friends and partners on KitcoCasey.com, Kitco.com confirm the shortage by posting the following on their much trafficked website.

IMPORTANT NEW NOTICE: Demand for bullion products has increased significantly in recent days. As a result, we may experience delays in supply and possibly delays in processing and shipping by our vaults.

No question, this is a friendly trend for those of you who have placed a bet on gold as a safe harbor in the monetary storm we see coming.

As an aside, there is an interesting historical antecedent to this situation… in 1970 when, among others, France under de Gaulle rushed to the then-open U.S. gold window to exchange dollars for gold, per the terms of the Bretton Woods agreement. Of course, the outcome of that bit of geopolitical theater was that Nixon closed said gold window.

Wonder what the government will do when the tide of the U.S. populace trading their dollars for gold reaches a flood stage? Maybe suspend the American Eagles permanently?

More on Gold’s Shortage

Steady correspondent Ed Steer passed on along the following email. I suspect many of you have seen it, but I am reprinting it here for those of you who did not. It offers an insiders perspective of the gold shortage from a large physical gold-trading operation.

Subject: UBS Metals Daily: 20/08/08: "Busiest in My Career"

We had a long conversation with our physical gold specialist in Zurich yesterday as he wanted to update us on what had gone on in the market over the past few weeks. Erwin, who has traded our physical book for 20 years, reports that over the past two weeks our vault staff have been the busiest he can remember across his career with demand for all types of gold from all sorts of clients. The only time we were as busy as this was in the first half of 2005, when rampant demand from India bought all the gold we could supply. Recent demand has been as strong as this, but more geographically spread: the Middle East, some parts of Europe and other Asia (ex India) have also seen very good buying, with refineries struggling to supply their customer needs. We have heard anecdotal evidence of Indian kilobar premiums above $2/oz, much higher than the usual 60-80c, and other premiums are also extremely strong both in Switzerland and in the important gold-consuming markets. The demand we have seen is strongly suggestive of an evaporation of scrap supply, something that has been a large part of the gold market over the past year, which is another important sign.

As the largest clearer in Switzerland, we can say with confidence that the physical gold market has demonstrated that it collectively considers gold to be attractively priced between $780 and $820/oz. The last time we saw strong (but not this strong) gold demand was in August 2007 with gold around $660/oz. We had estimated that gold would have to get down to $700-750/oz to stimulate demand, but this proved too pessimistic: after a year of dull fundamental demand, the gold industry can wait no longer and has had to pay up to $800/oz, a much higher price than we expected.

So why, in the face of this very strong physical demand, has gold fallen? The answer is simple: long liquidation by investors and speculators trading on the OTC and futures markets. The accompanying chart shows how Tocom open interest fell has declined over the past couple of months: we showed the COTR for Comex gold on Monday in the daily. Gold ETF holdings have held up pretty well so far with no sign of the frantic liquidation seen in the Platinum ETF. But a combination of speculative liquidation and new short selling was enough to counter the strong physical demand, and gold sank lower. Another way of looking at the impact of the strong fundamental demand is in gold's performance relative to other precious metals. As we noted in yesterday's Metals Daily, gold has greatly outperformed silver, platinum and palladium and we attribute this to the much greater proportion of price elastic demand for gold than for the other precious metals.

The final point to consider is that the recent transactions have been between fast money, selling; and sticky money, buying. A large amount of gold has moved into the hands of longer term holders. And while the frantic demand of the past two or three weeks will probably soon slow, that won't matter: long positioning is now greatly reduced. Any shorts looking to cover may find fewer sellers than they expect considering the strong hands that now hold gold. We hold our one- and three-month forecasts for gold at $850 and $900/oz respectively. All that stands in the way of an impressive tactical gold rally is a correction in the dollar. If you are confident that EURUSD has seen its low for the near term, buy gold now.

Other short-term precious metals forecasts adjusted.

Following the sell-off across the precious metals markets that has seen all metals fall, we have adjusted our short-term precious metals forecasts, something that we did not do when we cut our short-term gold price forecasts a couple of weeks ago. In line with our view in gold, we see some upside in one month for all precious metals and further upside over a three-month period. We now forecast that platinum will trade to $1550/oz in one month and $1700/oz in three months; we see palladium at $300/oz and $350/oz in one and three months respectively; we expect silver to increase to $14.70/oz in one month and $16.40 in three months; and we see some recovery in the rhodium price from current levels just above $4000/oz, although we do not recommend investors trade rhodium due to the illiquid, opaque nature of this market.

Coming Events

In addition to the collapse of Fannie and Freddie, and the fire sale of what’s left of Lehman, there are a couple of coming attractions I wanted to bring to your attention.

The first is our Crisis & Opportunity Update, Casey Research’s first-ever online event, which will be broadcast Friday, September 12.

The genesis of the idea comes from a 2004 meeting between Doug Casey, Bud Conrad, Terry Coxon and myself in a San Francisco Starbucks.

It was the first time that we all sat down as a group. In the wide-ranging discussion that followed, we found that we agreed, unanimously, that the U.S. was on a one-way path to a serious monetary crisis. From that meeting, we rigged the proverbial sails for many of the forecasts and recommendations you have subsequently read in our publications.

The same group is reconvening for an unrehearsed, in-depth discussion on the global crisis now unfolding, and, as importantly, how you can protect yourself and profit. As this is something of an experiment for us, we are going to make the online event available free of charge.

As a Casey reader, you’ll be sent an email, probably next week, on how to sign up and participate. It should be, I believe, very timely and very worthwhile. More soon.

The second thing I want to bring to your attention is the upcoming edition of The Casey Report, due out September 2, the primary focus of which is the housing market.

For the upcoming issue, I did a long interview yesterday with real estate entrepreneur Andy Miller, the quintessential pro whose daily labors involve transactions valued in millions of dollars. A longtime acquaintance of Doug Casey’s, Andy gave what most considered the best of many stellar presentations at our Scottsdale Summit earlier this year.

What he has to say about the implications of what’s now going on behind the scenes in real estate is essential to your well-being… not to mention your pocketbook.

If you have not yet signed up for a subscription to The Casey Report, now is the time to do so… taking advantage, of course, of our no-questions-asked, 100%, three-month money-back guarantee.

I guarantee you’ll find this next edition of The Casey Report worth every penny you pay for your entire subscription… times ten… or you get all your money-back. Learn more and sign up now, you’ll be extremely glad you did.

OBAMA!

If pushed to it, I would probably favor McCain being elected… but only, and I use that word deliberately, because having a Republicrat in the White House with a Demopublican-controlled Congress would mean gridlock, the best possible outcome.

But the tea leaves continue to point to Obama taking the prize, an outcome that was made more likely by McCain’s latest gaffe: not being able to remember how many houses he owns in a media interview, kicking the blocks out of his whole subtheme of Obama as an elitist out of touch with the common man.

In any event, make no mistake that I have a strong philosophical difference with the noise coming out of the Obama camp on their utopian plans for managing the economy. The litany of proposed solutions to the current economic problems coming out of the Obama camp, none of which involves encouraging the entrepreneurial class, are increasingly revealing a serious new-age socialist agenda. This week, Obama tried to kill two or even three birds with a single shot by talking of creating millions of union jobs in alternative energy. (Adding an extra layer of butter to the unions, he also stated that, upon election, he’ll end tax breaks for companies with overseas operations.)

I could go on, but my friend and occasional golf adversary, Porter Stansberry, did such a good job in an essay he published this week in his SA Digest, that I asked him permission to share it with you. Here it is…

Speaking of the utter corruption of our national politics... OBAMA! proposes to take things to a new level of absurdity and perversion. His "tax plan" has nothing to do with taxes. It's simply a plan to redistribute incomes according to his idea of "fairness."

Not surprisingly, OBAMA! thinks it's "fair" to take money from a small minority of citizens and give the cash to millions of other citizens, who will surely constitute a majority at the polls. What a concept! Just buy the election using the tax code!

Specifically, OBAMA! wants to make income taxes "refundable." What he means is, even if you don't pay taxes, you will still get cash from the government. For example, his "Savers Tax Credit" would match 50% of the first $1,000 people save – if they earn less than $75,000 per year. What about the fact that a couple earning $75,000 a year doesn't pay federal income taxes at all? No matter – instead of getting a tax credit, they'll simply get a check. The same goes for 50% of the first $6,000 poor families spend on health care. OBAMA! also wants to give $1,000 to each working couple and pay 10% of poor families' mortgages – all on a "refundable" basis.

What OBAMA! intends to do is create an entirely new class of working poor, all of whom will be utterly dependent on the government dole.

How will OBAMA! pay for this "fairness"? He can't, of course, without raising taxes significantly on the middle class. But he's still going to raise taxes on the upper income earners, even though he admits doing so won't increase total tax receipts. Why? Because he wants to promote "fairness."

Oh... one more thing. OBAMA!'s plan to "save" Social Security relies on raising the payroll tax by 32% for families earning more than $250,000 per year. Will this actually work? No. Every time you raise marginal tax rates on the rich, you decrease revenues because rich people can defer income or simply stop working.

But according to OBAMA!, even though these policies won't work, they're more "fair." OBAMA!'s plan represents the classic, ultimate problem of an unlimited democracy. It is always in the best interest of the majority to vote itself the rights and the property of the minority. But doing so destroys the fabric of the society, as incentives are perverted and respect for the law evaporates. You can eat the rich... but only once.

Now, those of you who are Obamians may take some umbrage at Porter’s sentiments, or at me for republishing them. Typically, I would receive emails (which you are welcome to send to me at David@caseyresearch.com) admonishing me to stick to investments and leave the politics alone.

Don’t be overly miffed… as investors, it is not just important but critical that we get a sense of what’s on the horizon, politically speaking. If I seriously thought McCain had a chance, which I don’t (sorry, McCainians, but I just don’t), then I would dedicate much more ink to his proposed policies.

For the time being, however, it’s Obama we have to understand in order to prepare. In the way of illustration, I might mention the fact that Obama has made no bones about his intention to raise capital gains taxes as an early order of business. So, what action do you think investors with said capital gains might take in November, should Obama prevail?

Can you say, “sell”?

In order to give you a fighting chance to cope, and even profit, from what’s coming, we are currently working up a special report on Obama’s likely policies as they will likely affect investment markets. It’s no easy task: if you credit his campaign rhetoric, he has big plans… not the least of which are universal healthcare (who wins, who gets hurt?) and a new era of green energy initiatives (who gets the subsidies?), etc., etc.

I’m not sure yet how we’ll distribute it, but will let you know once it’s finished in a week or so.

(And, of course, if the odds begin to swing in John McCain’s favor, then we’ll do an analysis of his proposed policies as well. )

Miscellany

I.O.U.S.A. The folks at Agora have produced a documentary, I.O.U.S.A., which is getting a lot of attention. I have to hand it to Addison Wiggin and the others at Agora behind this project, as they are actually making a credible attempt to wake Americans up to the facts on the ground about the historic debt now burdening the country at all levels. It’s still uncertain how many theaters will carry it in a general release, but you can view a trailer and learn more by following this link: www.agorafinancial.com/iousa.html
Russia vs. the U.S.A. ( er… I mean, “Georgia”). A number of you wrote in response to my comments last week on Russia’s invasion of Georgia. Yes, you are right that Georgia started it… but that they were bombing their own citizens, an apparent given right of nation-states, and had not crossed any borders to do so… not the case with the Russians, technically made Russia the aggressors. But, my key point, that by going into Georgia, the Russians were drawing a line in the sand for further U.S. moves in neighboring states, holds water. On that topic, Ed Steer sent along an interesting essay from Pat Buchanan that you might find of value. Read it here. http://www.antiwar.com/pat/?articleid=13323
Book Recommendations. Subscriber and correspondent Magnus W. wrote asking for some recommendations on good history books. I shot the request out to the team, and here are a few of the responses.
- From Bud Conrad: History is not my specialty, but here is one in our field -- Manias, Panics and Crashes, A History of Financial Crisis by Charles P. Kindleberger.
- From Louis James: For simplicity and density of information, you can't beat the The Encyclopedia of World Facts and Dates : For those who like a spoonful of fictional sugar to make their history go down, I found Neal Stephenson's Baroque Cycle ( The Baroque Cycle - First Editions - Volume One - Quicksilver, Volume Two - The Confusion, and Volume Three - The System of the World ) to be the best historical novels ever written.
- From Doug Casey: Gibbon (author of The Decline and Fall of the Roman Empire (Modern Library Classics) ) is actually not at all hard or intimidating. He's actually an unrecognized comedian, a laugh riot. Rather than a book, I recommend courses from the Teaching Company, particularly Rome and the Barbarians: The Dawn of a New World and Van Der Veers Iliad and Odyssey boxed set . All their courses are superb, however.
- From me: Among my personal favorites are… Lessons from History by Will and Ariel Durant… Intellectuals by Paul Johnson… Peter the Great by Robert K. Massie… The Guns of August by Barbara Tuchman. For lighter fare, in the category of Historical Fiction, any and all of the Flashman novels and any and all of the Sharpe novels.
Phyles, Phyles Everywhere. Kristen Aja, who helps support the various phyles of Casey Research subscribers cropping up here and there, thought it would be a good idea to recap where these meetings of like-minded individuals are now regularly taking place. If you live in or near one of these areas and would like to be connected with the local organizers, drop Kristen a line at phyles@caseyresearch.com.

Here’s the current list of active, or pending, phyles. In the process of forming: Montreal; DC/Baltimore; Annapolis, MD; Bahrain, Saudi Arabia. Already existing: Atlanta; Dallas; London; Ohio (Cincinnati, Columbus, Dayton); Silicon Valley/Palo Alto; Portland, OR; Sacramento; Toronto; New River Valley, VA; Los Angeles; Denver; Princeton, NJ.

That’s It for This Week!

There is so much more to cover but so little time… and so I must sign off. As I do, I note that the inattentive have driven the DJIA up by 181 points this Friday, and gold is trading in the spot market at $822, a modest retracement from yesterday’s close, despite a strong down move in oil of over $6.00, and a modest uptick for the dollar against the euro.

So, it’s largely business as usual as I bid you farewell this week. Unfortunately, business as usual these days is anything but usual.

As always, thanks for spending some of your valuable time reading this week’s edition, and for being a Casey subscriber.

Speaking of which, if you aren’t yet a subscriber to The Casey Report, don’t forget to sign up today in order to receive the pivotal next edition on real estate and much, much more, when it is published on September 2. Learn more here…

Sincerely,

David Galland
Managing Director
Casey Research, LLC