The Room : Obama

The Room – 06/19/2009

David Galland — Fri, 19 Jun 2009 19:57:00 GMT

Dear Reader,

David is taking a well-deserved week off, so this week you’re hearing from Olivier.

While David may be off duty, it didn’t prevent him from submitting an interesting article sent by one of our subscribers, along with a couple of comments.

Telegraph: U.S. cities may have to be bulldozed in order to survive

Dozens of U.S. cities may have entire neighborhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

Olivier again. Definitely a creative plan that may prove to be a better use of federal dollars than most of the other infrastructure development projects contemplated by the administration. The problem with most new infrastructure projects is that they end up adding operating and maintenance costs to municipalities and states that can’t really afford them. At least the “wrecking ball programs” should result in decreased long-term overhead for the cities that implement them.

The First 150 Days

Yesterday marked the end of Obama’s first 150 days at the helm of the U.S. of A. None of us doubted that Obama was a savvy and ambitious politician, but even we are impressed by the sheer number of new initiatives the president has undertaken. In less than five months, there are very few campaign promises he has failed to tackle.

One has to wonder, however, whether Obama may be failing to deliver on the biggest of his campaign promises – that of bringing change to Washington. Weren’t we supposed to see the end of politics as usual and of government waste and pork? Instead, we’ve gotten more of the same, with Ben Bernanke, Larry Summers, and their ilk still in charge and Geithner replacing Paulson. The doors continue to revolve between Wall Street and K Street, with the same cabal influencing policy.

Given my inclination to look at facts rather than listen to pronouncements, here is my assessment of the State of the Union after 150 days. Let’s look at a balance sheet of achievements with assets and liabilities as of June 18.

Starting with the assets:

While we have not returned to a healthy credit environment, it is undeniable that the massive injection of liquidity into the financial system by the Fed and the Treasury has managed to thaw the credit freeze we experienced last fall.
After declining by 24% from January 1 through March 9, the S&P 500 has managed to recover and closed at $918 yesterday, up 3.4% for the year in spite of a sharp contraction of real GDP (-5.7%). This may be explained by a reported increase in corporate profits for Q1 (+$42.6 billion, although non-financials declined by $64.2 billion).

One may wonder, however, if the $116.1 billion Q1 increase in profits from the financial sector (following a $178.7 billion decrease in Q4 2008) had anything to do with the changes in the FASB mark-to-market rules that were conveniently adopted by this regulatory board on April 2. (This change did not allow financial institutions to restate 2008 results but, interestingly enough, allowed them to apply the new rules retroactively to Q1 results.)
A better-than-expected unemployment report for May 2009. Non-farm employment figures fell by “only” 345,000 compared to a decline of 504,000 in April. Yet the unemployment rate has continued to grow to an all-time high of 9.8% (for the record, it was 5.3% in May 2008).
Total housing starts increased to 532,000 in May from 454,000 in April. The lowest since the Census Bureau began tracking housing starts in 1959.
Foreclosure filings dipped 6% in May compared to April. Yet they increased 18% from May 2008, marking the third highest month on record. "There were almost one million foreclosure filings in a three-month period, and that's simply unprecedented," reported Rick Sharga, senior vice president at RealtyTrac.
The University of Michigan Consumer Sentiment Index for May hit its highest level since last September, indicating that while consumers are still relatively glum, they are increasingly hopeful the economy will experience a turnaround in the next few months. The final index at 68.7 was higher than April’s 65.1 and November’s 28-year low of 55.3.

So maybe there is some light at the end of the tunnel, and the markets are anticipating the 2009 fourth-quarter recovery Ben Bernanke promised us last March in his 60 Minutes interview. Given Chairman Ben’s track record, though, I wouldn’t bet on a recovery just yet, so let’s turn to the liabilities:

Back in early March, the Obama administration released its forecast for the federal budget for the remainder of 2009 (ending 9/30/09). While the 2009 deficit announced was a staggering $1.8 trillion – four times that of 2008 – the plan is that we will start to see a progressive return to reasonable levels after a few years. Unfortunately, it is already certain that once again actual deficits and unfunded liabilities will rise far beyond current plans. So far, tax receipts are $100 billion lower than forecasted in Obama’s budget, and I doubt that actual spending will come in below.
The Public-Private Investment Partnership (PPIP), announced with great fanfare by Tim Geithner in March, has yet to attract investors. While banks appear to have returned to health, they are still undercapitalized and loaded with toxic assets ready to explode with the next round of bad news.
Over the first five months of 2009, unemployment rose by 3.4 million to 14.5 million.
Foreclosures have declined slightly, but the number of foreclosures from prime borrowers (as opposed to subprime and Alt-A “problem” loans) is rising quickly as job losses increase. We can expect more defaults as a result of the recent layoffs, and we have yet to hit the next wave of Alt-A loan resets that is forecasted to hit later this year and to continue through 2011. The number of new homebuyers may be dwindling soon, too – while 30-year mortgage rates are still low, they are definitely rising. More stringent lending standards and higher rates do not bode well for a recovery in the residential markets.
Commercial real estate is only beginning to see the full impact of the recession. A tight lending environment, stricter loan-to-value ratios, declines in property values, lower occupancy rates, and the lower overall profitability of most properties mean that we will continue to see an increase in defaults in the commercial sector for quite some time.
The Obama administration’s big push for alternative, “green” energies and for a cap on carbon emission is sure to cost American taxpayers and businesses hundreds of billions of dollars while providing no guarantees that it will have any real impact on reducing our dependency on imported hydrocarbons. The administration shows very little support for the only real short- to medium-term alternatives: clean coal, domestic oil and natural gas, and nuclear. In fact, many projects are being curtailed due to lower energy prices and regulatory hurdles and threats.
Not only are we staying in the nightmare of the Iraqi war, we are expanding our involvement in Afghanistan and are drawing closer to involvement in Pakistan --

leading to yesterday’s Senate approval of the war supplemental. Who knows, we may soon be liberating North Korea too.
While universal health care may be a popular concept, it will come at a hefty price, and according to the Congressional Budget Office, it will definitely add to the already staggering, unfunded liabilities of Medicare and Social Security. Who will pay the bill?
Why, the “rich,” of course! By rich, I mean those earning over $250,000 a year. Of course, since raising taxes on the rich and carbon-emitting businesses won’t suffice, new forms of taxation – such as a federal VAT – are being seriously considered in DC. In fact, if you want to get a deeper understanding of the impact of the first 150 days of the Obama administration on future taxation, you should check this link to the Americans for Tax Reform website:. While probably not totally unbiased, it provides a sobering look at what may be upon us.
Inflation is still relatively tame. As we have explained time after time in our publications, we expect the deflationary impact of the recent burst in the asset bubble to soon be overcome by monetary expansion and runaway inflation. As the deficit widens and foreigners lose confidence in the dollar, we can expect the Fed to fill the gap by running its printing presses overtime.
The bailout of the financial, insurance, and auto industries has not only cost taxpayers an enormous amount of money, it is also a clear step towards government control of the private sector.
It is becoming clear that the federal government is challenging contractual rights in the name of the War on Crisis. In the past few months, the protection of stakeholders under bankruptcy has been trampled, contractual bonus obligations have been voided, mortgage lenders have seen foreclosure rights eliminated, and corporations have seen management and capital structure overhauled by bureaucrats without shareholders’ approval. Yet the administration states that private enterprise is the principal element of any economic recovery. Unless coerced, what private investor will want to invest in a challenging economic environment without contractual protections?

One of our subscribers, Tommy K, forwarded a cartoon that appeared in 1934 in the Chicago Tribune. It wouldn’t be too hard to make it current and relevant to our times.

Enough ranting on the state of the union, though. Let me turn to Bud Conrad, who will enlighten us on whether the current stock market rally is the beginning of a recovery or one of those bear market rallies common in serious recessions. I will let you draw your own conclusions.

Where Did the Wealth Go?

Bud Conrad, June 2009

The drop in housing and the stock market decreased consumers’ desire to spend. To understand how big the impact is, I have taken the Federal Reserve’s latest data that was published on June 11 to see what the effect is on the assets of households and nonprofit organizations. The chart below shows all the assets added together are generally growing through the end of 2007. It then shows the levels of decline through the end of the first quarter of 2009. The drop in all assets combined was $12 trillion in just over a year's time. The biggest downturn is in stock market valuation ($7 trillion), and the second-biggest drop in housing ($3 trillion).

Household liabilities decreased a very small amount by comparison. That makes sense, because housing prices can move much more rapidly than the debt on those houses. This very big decline in asset value is both the result of a slowing economy and the cause of future slow growth. As consumers feel less wealthy, they are less likely to spend. The conclusion to be drawn from this loss of wealth is that the slow economy will be with us for quite a while.

Foreigners Are Slowing Investment in the U.S.

Bud Conrad, June 2009

Foreign investment in the U.S. has been one of the supports for our government deficits and for our dollar. With foreigners questioning how large their holdings should grow, a closer look at the total cross-border flows gives some indication of what is going on.

Breaking down foreign purchases of securities into long-term and short-term gives an indication that while foreigners are not yet running away from the dollar, they are reluctant to hold long-term instruments. A logical interpretation is that by holding short-term paper, they retain more flexibility to shift their money towards new investments.

The conclusion from the data is that foreigners are starting to look for alternatives to U.S. investments. Their pronouncements confirm what they are doing. Important meetings are occurring, such as that of the Shanghai Cooperation Organization, where the U.S. was excluded this week and where they discussed looking for alternatives to the dollar.

Olivier again. There are still a few bears around on Wall Street. Goldman Sachs Chief Economist Jim O’Neill said financial markets could weaken in coming weeks amid concern over the government’s intentions to roll back stimulus packages.

See this link.

In fact, it does not take a seasoned economist or a PhD to figure out that there is more downside than upside in the stock market these days.

During the month of May, the S&P 500 traded at an average P/E ratio of 127.48, shattering the previous average monthly high of 58.66 in April. For historical reference, the average P/E for publicly traded U.S. stocks has been around 15.

You may ask, if we see clear signs of a correction and weakness in the dollar, and if inflation is around the corner, why hasn’t gold gone through the roof yet? I can give at least three reasons for its relative lack of strength ($934 this morning):

Seasonality. The gold price typically shows signs of weakness in the summer and picks up in the fall and winter months because of increased jewelry demand.
IMF gold sales. It is expected that the IMF will sell one eighth of its gold reserves (12.97 million ounces) to finance aid programs to developing economies hit by the current crisis.
Deflation. While we are forecasting inflation, there are still some strong deflationary forces at play. We do not anticipate the gold mania to start until deflation fully subsides.

So am I long on gold? More than ever. I see the current softness in prices of precious metal as an opportunity to continue to load up on bullion and stocks of major gold producers, as advised in our BIG GOLD newsletter. If you are not yet a BIG GOLD subscriber, you may want to check it out and follow our recommendations.

Speaking of gold, you may have seen the following article on our site or others: Mint moves to halt possible “run” on gold.

On the same subject, one of our subscribers reports:

Notes from the Field

Although he was just back from a trip to Colombia, Louis James hopped on a plane again this week to go down to Mexico and check out Mexican silver properties there. Louis just sent along preliminary notes from his visit.

International Speculator

A Centrally Controlled Economy?

This week has seen another flurry of activity in Washington. It started with an announcement by Obama on the Financial Regulatory Reform granting the Fed broad authority as a super regulator. After studying the White Paper issued by the White House, our Bud Conrad had the following comments:

We are quickly moving to a centrally controlled economy, private ownership be damned. The source of my opinion is the already 80 pages of general description of the thousands of bureaucrats that will be assigned to direct the economy and not just limit the excesses.
One of the most problematic parts of the proposal, in my opinion, is that the Federal Reserve would be given yet more power and responsibilities in the face of its abject failure to understand and deal with the ongoing economic situation.
The Federal Reserve has stepped beyond its original charter to manage the monetary system and has been taking on loans and responsibilities for specific financial institutions. Look at Mr. Bernanke’s reaction to the simple inquiry by Congress to reveal the names of the institutions to which the Fed handed out almost $1 trillion: he flatly refused to comply.
We don't need more bureaucracy. We need more accountability and prosecution of the crooks that brought us here in the first place. What we will get is an expensive bureaucracy, many reporting requirements, and overhead. This system will add a great burden to the efficient operations of our financial systems.
If exporting manufacturing jobs offshore has hurt our economy, think of what a constipated regulatory system will do to our financial institutions: they will go somewhere else, taking jobs and wealth with them.

I have to say, having the Fed as an unregulated super-regulator is a scary thought.

But there are reports on more activities on Capitol Hill…

Audit the Fed

Don Grove, Casey Research Washington correspondent

The Federal Reserve Transparency Act would require the first audit ever of the Federal Reserve. The bill has 234 sponsors, a comfortable majority of the members of the House, and is gaining momentum.

The Obama administration should be delighted, given its commitment to transparency in government.

Drill, Baby, Drill!

The Senate Energy and Natural Resources Committee adopted an amendment to its energy bill that would allow oil and gas drilling within 45 miles of the Florida coast. If the Senate climate bill becomes law with the Florida drilling amendment intact, it could be sufficient to derail the whole climate bill. "We're simply not going to let this happen," said Bill Nelson (D-Fla).

Yes! That's what I like to hear! As long as they are bickering among themselves, there is less chance they will do any real mischief.

Back to Olivier .

On the subject of hydrocarbons, you may be interested in this article about the recently released 2009 International Energy Outlook. This year’s report released by the Energy Information Administration (EIA) includes the first acknowledgement of Peak Oil by this agency.

At Casey Research, we are so bullish on energy that it will be the central theme of our next conference on September 18-20 in Denver, Colorado. Marin Katusa, Senior Editor of Casey Energy Opportunities, has been working on an extraordinary line-up of experts to cover both conventional and alternative energies in depth. If you have not done so, mark your calendar – registration will open soon.

As we all know, Europe has been struggling with the recession just as much as we have. For a while it appeared as though Italy might have just found the solution ($40 billion more or less) to its financial problems, thanks to the diligence of its border patrol officers, who detained two supposedly Japanese men with $134 billion worth of U.S Treasury bonds in a suitcase.

Check out this story from Asia News: U.S. government securities seized from Japanese nationals not clear whether real or fake.

Unfortunately for Italy, Bloomberg reported yesterday that according to the U.S. government, the notes are fake..

Building Without the Proper Permits

Jacques T. sent us this very funny email I would like to share. Purportedly, this is an actual letter sent to a man named Ryan DeVries regarding a pond on his property. It was sent by the Pennsylvania Department of Environmental Quality, State of Pennsylvania.

While we haven’t verified if this is real or a hoax, it’s quite amusing nonetheless.

SUBJECT: DEQ File No.97-59-0023; T11N; R10W, Sec. 20; Lycoming County

Dear Mr. DeVries:

It has come to the attention of the Department of Environmental Quality that there has been recent unauthorized activity on the above referenced parcel of property. You have been certified as the legal landowner and/or contractor who did the following unauthorized activity:

Construction and maintenance of two wood debris dams across the outlet stream of Spring Pond.

A permit must be issued prior to the start of this type of activity. A review of the Department's files shows that no permits have been issued. Therefore, the Department has determined that this activity is in violation of Part 301, Inland Lakes and Streams, of the Natural Resource and Environmental Protection Act, Act 451 of the Public Acts of 1994, being sections 324.30101 to 324.30113 of the Pennsylvania Compiled Laws, annotated.

The Department has been informed that one or both of the dams partially failed during a recent rain event, causing debris and flooding at downstream locations. We find that dams of this nature are inherently hazardous and cannot be permitted. The Department therefore orders you to cease and desist all activities at this location, and to restore the stream to a free-flow condition by removing all wood and brush forming the dams from the stream channel. All restoration work shall be completed no later than January 31, 2009.

Please notify this office when the restoration has been completed so that a follow-up site inspection may be scheduled by our staff. Failure to comply with this request or any further unauthorized activity on the site may result in this case being referred for elevated enforcement action. We anticipate and would appreciate your full cooperation in this matter. Please feel free to contact me at this office if you have any questions.

Sincerely,

David L. Price

District Representative and Water Management Division.

Here is the response sent back by Mr. DeVries:

Re: DEQ File No. 97-59-0023; T11N; R10W, Sec. 20; Lycoming County

Dear Mr. Price,

Your certified letter dated 12/17/07 has been handed to me to respond to. I am the legal landowner but not the Contractor at 2088 Dagget Lane, Trout Run, Pennsylvania.

A couple of beavers are in the (State-unauthorized) process of constructing and maintaining two wood “debris” dams across the outlet stream of my spring pond. While I did not pay for, authorize, nor supervise their dam project, I think they would be highly offended that you call their skillful use of nature’s building materials “debris.”

I would like to challenge your department to attempt to emulate their dam project any time and/or any place you choose. I believe I can safely state there is no way you could ever match their dam skills, their dam resourcefulness, their dam ingenuity, their dam persistence, their dam determination and/or their dam work ethic.

These are the beavers/contractors you are seeking. As to your request, I do not think the beavers are aware that they must first fill out a dam permit prior to the start of this type of dam activity.

My first dam question to you is:

(1) Are you trying to discriminate against my spring pond beavers, or

(2) do you require all beavers throughout this state to conform to said dam request?

If you are not discriminating against these particular beavers, through the Freedom of Information Act, I request completed copies of all those other applicable beaver dam permits that have been issued.

(Perhaps we will see if there really is a dam violation of Part 301, Inland Lakes and Streams, of the Natural Resource and Environmental Protection Act, Act 451 of the Public Acts of 1994, being sections 324.30101 to 324.30113 of the Pennsylvania Compiled Laws, annotated.)

I have several concerns. My first concern is, aren't the beavers entitled to legal representation? The spring pond beavers are financially destitute and are unable to pay for said representation -- so the state will have to provide them with a dam lawyer. The Department's dam concern that either one or both of the dams failed during a recent rain event, causing flooding, is proof that this is a natural occurrence, which the Department is required to protect. In other words, we should leave the spring pond beavers alone rather than harassing them and calling them dam names…

Being unable to comply with your dam request, and being unable to contact you on your dam answering machine, I am sending this response to your dam office.

Thank you,

Ryan Devries & the Dam Beavers

Miscellaneous

We have received requests for new phyles. Several subscribers want to know if there are existing phyles in either Chicago, Manhattan, or in Massachusetts. No formal group have formed in these areas yet, but if you are interested in organizing or participating in such a group, let Megan know by sending an email to phyle@caseyresearch.com. She will be happy to facilitate contacts in these cities.

Tom in Melbourne, Australia, is interested in starting a new phyle there. Contact Megan if you live in the area, and she will coordinate with him.

Finally, Tommy K. is wondering if the Denver area phyle members would be interested in a summer meeting in Vail he would host with his wife.

12:50 pm… I’m afraid it is time for me to sign out. The Dow is slightly down, the S&P and TSX are up again, and commodities markets are quiet.

Thank you for reading and being a Casey subscriber.

Olivier Garret
CEO, Casey Research

The Room – 06/12/2009

David Galland — Fri, 12 Jun 2009 21:08:00 GMT

The Room Special Alert:

Casey Research Summit, this one dedicated to Energy and Special Situations

September 18 – 20 at the Westin Tabor Center in Denver

David

Dear Readers,

Again this week, I was admonished by one of your fellow dear readers, who recommended that I keep my political comments to myself. And furthermore that I, and the entire Casey team, should focus solely on finding the next great investment.

While I can’t and won’t argue with the latter part of his advice -- that is, after all, our overarching mandate, and a mandate we take seriously – I suspect the real issue is that the political views we occasionally express run contrary to those of the author of this rebuke.

Even so, if you give the matter any thought at all, you will almost have to conclude that the business of America is now hugely dependent on the business of government.

As a refresher, the following – compliments of the Encyclopedia of Business – describes the two major foundations economies have typically been built on in modern times: central planning and capitalism.

centrally planned economy

capitalism,

Now, I may be naïve about certain things, for example the autoeroticism of the sort apparently favored by the late David Carradine, but I’m not naïve enough to think that there is such a thing as a "pure" economy that fits either of those two descriptions to a T.

Therefore, the important thing is to understand where your particular economy – in my case, that of the United States – falls on the scale between the two systems.

I usually refuse to jump into the same rumpled bed as the hard right wing of the U.S. political spectrum, but they are probably waving their arms about the same economic concerns we comment on here and in our other publications from time to time.

What makes me different from the Limbaughs et al., and maybe it is a fading difference, is that I really would like the current administration to succeed. As I don't really like either party, either party will do – as long as that party makes intelligent choices about the role government should play in our daily lives.

President Obama appears to be a reasonable, intelligent, and certainly articulate human being. Therefore, I hold out hope that he will eventually come around to making the only logical decision that can be made about the path forward. If for no other reason than that choosing the wrong path will inevitably lead to election defeat.

To prove that simple point, it is hard to miss the rising tide of fiscally conservative attitudes evidenced in the polling booths during the recent European elections. Europe, which is not exactly known for its free-market policies, rose up as one and soundly defeated the hard left socialist candidates on the ballot.

Unfortunately, at this point, Obama and his many government operatives and sycophants appear to be speeding down the wrong road – the road that leads to a continued shift in the direction of a centrally planned economy.

For example, this week the House of Representatives passed a bill that meddles with the choices that Americans make regarding the cars they drive. The idea is to give a marketing boost to the new U.S.-owned auto companies. enticing consumers to buy new cars by taking up to $4,500 out of taxpayers’ pockets and giving the money to others. Those, in turn, give it to automakers that provide cars that drive at least two miles further per gallon in the tank.

Here’s a quick take on the bill from politico.com…

There has always been a problem with a centrally planned economy. When you remove the free market from the supply and demand equation or tamper with the free market, you cause unnatural dislocations and all manner of unintended consequences.

Of course, Mr. Obama enjoys strong union support, and we as taxpayers now own large shares in the American auto manufacturers. Therefore, the good intention of the central planners in Congress is that this "cash for clunkers" law will unleash a new wave of naked consumerism, returning the economy to the happy days we all wish for.

There are, however, more than a few flies in the ointment. Starting with the fact that for the last six years, the top-selling cars in these United States have all been produced by Japanese companies. While many of those cars are now built in the United States, they are not built in Detroit, and they are not built by GM or Chrysler.

It is also worth pointing out that all of the top sellers will easily qualify for the largess being offered by we the U.S. taxpayer. Perhaps the legislators hope that GM's new hybrid, the "Volt,” will ride to the rescue. But Toyota’s well-selling Prius hybrid – which has recently been redesigned, is a huge hit in Japan, and is expected to fare equally well in the U.S. – could throw a wrench in GM’s poorly laid-out plan. Especially because the Prius sells for about half of what the Volt is expected to debut at. With either car, you get the $4,500 rebate, so the choice comes down to this: do you want to pony up an extra $20,000 for a GM-made experiment or get a proven high-quality winner from Toyota for a lot less?

According to a study by researchers at Carnegie Mellon, the premium sought by GM can’t be rationalized:

plug-in hybrids

The problem is the added weight – and the cost of the batteries. The lifespan of the batteries is also a big question mark. According to an article on Mixed Power…

K.G. Duleep, managing director of consulting firm Energy & Environmental Analysis Inc. in Arlington, Virginia, and a researcher on a U.S. study on plug-ins and other advanced autos, said he is very skeptical about the lifespan of the batteries. “I’m very skeptical about the prospects for near-term durability of the batteries. Even in the lab, they aren’t lasting more than seven years,” said Duleep.
So, into the dogfight for what few automobiles will be sold in the crunch years ahead, the new and supposedly improved Government Motors (GM) will send an expensive, so far unproven entrant... which, according to the central planners, will be snapped up in such quantities as to knock off the reigning champs, all Japanese. My take: GM is a dead duck, and the Japanese will be the primary beneficiaries of this latest bit of central planning.

GM was delisted from the NASDAQ this week, and investors looking to buy it must turn to the disgraceful OTC Pink Sheets for their shares.

And this is what the central planners have deemed worthy of dropping $25 billion in taxpayer funds on.

Health Care, Everyone?

The central planners are also hard at work on putting the final bullet into the head of American healthcare. The first shot, Medicare, only severely wounded it.

Speaking of Medicare, the following data points may prove useful as you hear more and more about the greater efficiency supposedly gained by having the government expand its health options to cover everyone.

(FYI: Medicare Part A, passed into law in 1965, covers hospital visits for those over the age of 65 or with certain types of medical conditions; Part B, passed later, covers doctor’s visits and certain outpatient services; Part C allowed private insurers to provide the Medicare benefits; and Part D, passed in 2003, provided prescription drug benefits.)

So, how has that whole Medicare efficiency thing been working out?

The following is from "Medicare for All" Universal Health Care Would Not Solve the Problem of Rising Health Care Costs by David Hogberg, Ph.D.

The fiscal future of Medicare itself is bleak. The Medicare Trustees report notes that, by 2018, revenues for Part A will only be sufficient to cover 80 percent of its costs. By 2080, revenues will only cover 29 percent of costs. “Closing deficits of this magnitude,” the report warns, “will require very substantial increases in tax revenues and/or reductions in expenditures.” The prospects for Part B and Part D are not much better, with the report stating that revenues for those parts will “have to increase rapidly to match expected expenditure growth under current law.” From 2005-2080, the report predicts, Medicare’s share of GDP will rise from 2.7 percent to 11 percent.
There are numerous fiscal problems associated with any government-provided program, especially one that ignores pre-existing conditions, as is the case with the current legislation now being proposed. One is that greater accessibility at a lower cost – or for many, at no cost at all – and providing credits toward government payments to households with revenues of up to $110,000 will make people flock to the docs in large and steady numbers. And that, of course, will drive the cost of healthcare even higher. Call it an unintended consequence if you will, but I will call it a completely natural and to-be-expected consequence.

Thus, though the Obama administration projects that the nation will have to spend another trillion dollars it doesn't have providing medical care for all -- that number is certainly far off the actual tally required.

Again, according to Dr. Hogberg…

Why anyone would want to put every American in a program that is already nearing fiscal collapse is perplexing, to say the least.
As for dislocations, in the current legislation, private insurers will not be able to deny a person coverage for pre-existing conditions or charge them a higher premium. This bit of central planning means simply that everyone will have to pay a higher premium. Furthermore, companies in the healthcare industry will almost certainly have to compete with a government-run insurance program whose mandate will be to ensure that everyone can afford insurance.

Shareholders in private U.S. health insurance companies are already burdened by their share of the costs that those companies have to incur in order to comply with an estimated 130,000 pages of Medicare-related regulations. Now they will not only see the sheer quantity of those regulations ratchet up exponentially, but they’ll have to pay even higher taxes to support direct competition to their companies by the government.

All of which is to say that private insurers are going to have a very hard time competing against their own government, leading to the very real potential down the road for a sole U.S. healthcare insurance provider – “Mama Sam.”

And corporations that already provide insurance, or don't, will be forced to pay even more to the government in order to cover the cost of bringing all the uninsured under the umbrella.

Again quoting politico.com...

R. Bruce Josten, a lobbyist for the U.S. Chamber of Commerce, said: “We are disappointed, clearly.” He participated in weekly meetings with Kennedy’s committee, and the bill that resulted suggests “the only person who has skin in the game is the employers,” Josten said.
Josten is, of course, talking his own book. That's because employers – i.e., corporations – don't actually pay taxes. Consumers do when they purchase the products of those companies, whose costs are calibrated to cover expenses such as taxes. And so, American industry will have to raise the cost of its products, making them less competitive on the global stage.

This reduced competitiveness will result in American corporations going out of business, and more and more people will be added to the unemployment rolls, moving them out of the category of "net contributors" to the new healthcare system and into the category of "net recipients," sending costs ever higher.

Of course, one way that the government, having laid this bed of nails, might decide to respond is by adding entry barriers for foreign-made goods. Which, when you think about it, may be the solution to the automobile conundrum as well?

I'm not sure where one goes to school to learn the fine art of central planning, or even if such a school exists, but I'm fairly sure that even the best of such a school can adequately train its graduates in the effective, long-term, micromanagement of a complex system such as the U.S. economy – or any economy, for that matter.

Is there a potential bright spot for investors in all of this? I think passing of this healthcare legislation, which is a near certainty given the Democrats’ majority, will shake out the weaker insurance companies already buried under mountains of bad investments that are about to get a lot badder. And I have to believe that unless and until Mama Sam passes legislation prohibiting private insurance altogether, there will be a niche for an insurance company that charges very high premiums but promises quick care of the highest quality in return.

Faced with the alternatives of doing business with the upscale private provider or the far less expensive government option (or one of the private companies that try to compete on price with that entity), the bulk of individuals with pre-existing conditions or generally poor health will choose the less expensive option.

Now, I know this whole thing about universal healthcare will strike a negative chord with many of you, including many of our neighbors to the north. And, please don’t think of me as hard hearted. But this gets back to the idea of positive vs. negative rights. If you believe that we the people have the inalienable right to healthcare, then you might as well believe that we also have the right to three square meals a day, a respectable roof over the head, dental care, a top-quality education, a decent wardrobe, transportation to get to our jobs, day care for the kids, and so on and so forth.

The problem is, and always will be, how can you pay for all of this without coercively taking the money out of one family’s pocket in order to shift it into another’s? And by coercively, I mean the direct threat of imprisonment if you don’t hand over the cash. That violates the morally correct right that we should be free from threats of personal harm, extortion, and outright theft.

In fact, the very idea that some faceless government functionary can walk into my house, or my office, at any time and on any pretense and require me to spend my time and resources assisting him in going over my books so that he may demand more money from me – money that will then flow through the machine to be used to purposes I find personally abhorrent -- is a truly warped and disturbing concept.

At least with a consumption tax, you can make a voluntary decision as to which products you buy, with full knowledge of the taxes you’ll also pay. That is very much not the case with income taxes, property taxes, estate taxes, etc., ad nauseam.

Don’t get me started…

No More Big Bucks for You!

For today’s catalogue of evidence that we’re heading toward a centrally planned economy, I provide the following from Bloomberg this week…

Now, far be it from me to champion the insane pay levels of public company officers. But to actually get into the trenches and try to engineer those pay levels to something considered more politically correct strikes me as a serious step in the wrong direction. Shareholders of companies, which these days are mostly mutual funds and other institutions, need to pay a lot more attention to compensation practices than they obviously have been. And if they are too lazy to do so, then they deserve what they get, should they fail to get a level of corporate performance reflecting said pay.

Fortunately, We Have the Law

I wish I could stop there, but I can't. That's because this week, the faint glimmer of hope evaporated that I had felt when the Supreme Court put a halt to the Chrysler bankruptcy so that it might study the legality of the structure the government had imposed on the company’s stakeholders.

The claims of the secured bondholders in that company were – by tradition and legal rights that extend literally back to the beginning of America and to English law before that – superior to the unsecured claims of the union pension operators. Nevertheless, they were ignored and their legitimate claims set aside "for the public good."

Again, my sympathy goes out to pensioners who dedicated their working lives to a company whose executives may have been better qualified as washroom attendants. But to let one's emotions (or political ambitions) willy-nilly trump well-established law seems the height of insanity.

How, now that the precedent has been re-set, are bond investors – or, for that matter, any stakeholder in a company – supposed to evaluate the investments being offered to them? When commercial obligations can be tossed out the window for political expediency, what does that do to the legal certainty that is supposed to be such a big competitive advantage for America?

Commenting on the transaction, an official of the Treasury, which strong-armed the deal into existence, had this to say…

“This morning’s closing represents a proud moment in Chrysler’s storied history. The Chrysler-Fiat alliance has now exited the bankruptcy process and is poised to emerge as a competitive, viable automaker.”
Since we are relying on dictionaries today, let’s look up the word “proud” just to be sure we are understanding this member of officialdom clearly.

Relying on Webster this time,

prūd,

prod, prud, prou

prode

“Advantageous?” Sure, for the unions and, by extension, the political fortunes of Mr. Obama.

“Just?” Hardly. How is it that the unions put up nothing and get 55% of the company?

“Wise?” Politically, maybe. But turning commercial law on its head to try and bail out a twice bankrupt company? And handing the “new” company another $6 billion of money the government very much doesn’t have as an “exit” gift hardly seems intelligent, at least to me.

“Bold?” In my book, that is not the word I would use to describe the government’s bullying tactics, including publicly vilifying legitimate bond holders.

No, proud is not a word I would associate with this takeover. Expedient, reckless, capricious… all of those words seem far more appropriate.

This is one of those seminal events that has the potential to be with us for a very long time – in future bankruptcy proceedings, which I expect we'll see a lot of – and in the very structure of capital markets.

Capital Gains… What Capital Gains?

David M., the coordinator of our SoCal Phyle, sent along an interesting essay written by Chriss Street, the treasurer/tax collector of Orange County, California. He argues against states spending beyond their means, and also against a bailout of the states by the federal government. The essay is worth reading, and you can do so here.

I thought the following excerpt from Street’s essay is especially noteworthy, given the coming increase in capital gains taxes…

All of which raises the question, where is California going to get the money it needs to dig itself out of its current hole… now expected to ring in at about $25 billion for the year?

Why, Mama Sam, of course.

The Road Less Traveled

While we don’t talk about it much, I feel compelled to give a tip of the hat to our senior researchers who think nothing of hopping on planes to far corners of the world, literally risking the worst in their quest for opportunities ahead of the crowd.

What compels me this week was a trip to Colombia Louis James of our International Speculator just returned from. Accompanied by heavy security, he walked the ground on a new discovery with the credible potential to host five million high-grade ounces of gold, and maybe more.

While the armed escort is still advisable in those parts, it is increasingly becoming less so and is mostly just a holdover from the bad old days of the 1990s at this point. Back then, the area Louis visited was bristling with guerillas and out-of-control paramilitary groups who, some say, were even worse. Today it’s peaceful, and the locals couldn’t be happier to see a new gold rush. Colombia has a truly fabled history in gold mining, and it is now politically stable and pro-business – perhaps the most pro-business country in South America. This has led to big profits for investors in successful junior gold explorers (the company Louis visited saw its share price shoot up 104.5% in two days).

Louis will report on the opportunities he found on his trip to Colombia in the next issue of the International Speculator. You can learn more by clicking here.

There is much opportunity, even in challenging markets… but sometimes nothing but putting your boots on the ground will do. And for being ever willing to do that, my hats off to the tireless team!

21 Economic Models Explained

(Thanks to our regular correspondent and longtime friend, “the General,” for sending this along. Sorry if this gores anyone’s ox… or, cow, such as the case may be.)

SOCIALISM
You have 2 cows.
You give one to your neighbor.

COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk.

NAZISM
You have 2 cows.
The State takes both and shoots you.

BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk
away.

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.

SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.

AN AMERICAN CORPORATION
You have two cows.
You sell one and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.

ROYAL BANK OF SCOTLAND VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder, who sells the rights to all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows.
No balance sheet provided with the release.
The public then buys your bull.

A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.

A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk.
You then create a clever cow cartoon image called “Cowkimon” and market it worldwide.

A GERMAN CORPORATION
You have two cows.
You reengineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.

A RUSSIAN CORPORATION
You have two cows.
You count them and learn you have five cows.
You count them again and learn you have 42 cows. You count them again and learn you have 2 cows.
You stop counting cows and open another bottle of vodka.

A SWISS CORPORATION
You have 5,000 cows. None of them belong to you.
You charge the owners for storing them.

A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment and high bovine productivity.
You arrest the newsman who reported the real situation.

AN INDIAN CORPORATION
You have two cows.
You worship them.

A BRITISH CORPORATION
You have two cows.
Both are mad.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No one believes you, so they bomb the crap out of you and invade your country.
You still have no cows, but at least you are now a democracy.

AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive.

Promoting Free Market Economics…

By Louis James

As you may recall, Doug Casey joined me in my yearly teaching sabbatical in Eastern Europe last summer (click here for last August’s report on how it went). It was a smashing success, and the students had such a good time learning about free enterprise and entrepreneurship, most of them are returning this year and bringing friends. The result is a record group of students – about 90 – who will come to learn more about rational economics, creating businesses, investing, and more, at what we now are proud to be able to call the first Casey Youth Conference on Liberty and Entrepreneurship (CYCLE), to be held from June 29 to July 5, in beautiful Trakai, Lithuania.

This year, they’ll have to write a complete business plan to complete the course – we’re excited. The students are as well and are building a web site for CYCLE. It’s still in beta-testing as we go to press, but you can try it here: CYCLE.

Doug sees CYCLE as one of the most cost-effective ways to teach young people about free-market economics, and better yet, to enable them to join the producers and creators in the world who make progress possible. Eastern Europeans have living memory of soul-crushing communism, and they are hungry for this sort of learning – it’s a great environment. In fact, if you have college-age children who would like to join in, drop us a line at feedback@caseyresearch.com, and we may be able to squeeze in a few who can pay their own way.

When we wrote about this last summer, several subscribers wrote to ask how they could help. One simple way to do this is to make a tax-deductible contribution to the same non-profit we are working with to run our CYCLE program. That’s the International Society for Individual Liberty (ISIL), a 501(c)(3) tax-exempt organization. Doug generally believes most charities aren’t worth the dynamite it would take to blow them up, but CYCLE is an educational investment with potentially near- to mid-term returns. And if you’re going to pay for something, it’s nice to be able to take half that money out of the government’s pockets in order to do so. To pitch in, click here for ISIL’s secure donation page or call ISIL directly at 707-746-8796 and tell them you’d like to support CYCLE.

The programs is very cost effective – about $150 per student (they pay part of the cost) – but there are a lot of students this year, so CYCLE could use your help. Thanks!

Miscellany

More Casey Phyles Starting Up. If you are interested in meeting up and sharing notes with other Casey subscribers, this week we received indications of interest from individuals in the following locales. South Africa, New York (Manhattan), Massachusetts, South Carolina, France and Chicago. If you are in any of those places and want to be connected, drop us a note at phyles@CaseyResearch.com.
Poker, Anyone? Our own Doug Casey, who is known to enjoy a game or two of cards now and again, forwarded me an article from the Wall Street Journal about a grab by the Feds of 27,000 bank accounts totaling $34 million. The sole rationale for the grab was that the miscreants apparently had the gall to enjoy playing poker online. What’s next? Users of online adult sites pop to mind. Then what? The slippery slope gets more slippery by the day. You can read the full article here.
IMF Gold Sales. This just in from our Washington correspondent, Don Grove, who is keeping a sharp eye on the proposed vote to allow the IMF to sell on the order of 13,000,000 ounces of gold (to the Chinese).
The Daily Room Thing… Thanks to all of you who weighed in on the idea of converting this letter from a weekly to a daily room. The vote came in slightly in favor of keeping this a weekly. Even so, I think we’ll try going daily for awhile (but not until a couple of weeks from now.) For one thing, there is so much that I could, and even should, be addressing that trying to cram it into one issue at the end of the week is impossible.

Currently, I think that we would segment the daily room (name still not decided), by major topic areas. For instance, commodities, energy, equities, the economy and, of course, politics (with some miscellaneous scattered throughout). We would then focus on those major sectors on the same day each week. Thus, if energy was not of interest to you, you could just skip Tuesday, for instance. In this way, we could focus our research a bit more on what’s important in each of these key areas, while keeping the segments shorter. For fans of the weekly version, at the end of the week, we could do a round-up edition.

Hate the idea? Like it? All input always welcomed at david@caseyresearch.com (though I apologize profusely for being a poor correspondent of late. While I have read all of your emails, I just haven’t had the time to respond.)

Speaking of The Room… this week is my wife’s much-deserved annual road trip, a wonderful week during which I play full-time father and relearn to appreciate what it’s like to manage a household 24/7. If history is any guide, the week will start out with a fair amount of chaos but eventually settle into something resembling order. In any event, Casey Research CEO Olivier Garret has gallantly offered to step in and write The Room next week, while I concentrate on the simple things – like not burning down the house with that new wood-burning tool I bought the kids.

As I sign off, I see that the stock market is just barely keeping its lips above the water line. I continue to believe that a big wave is about to change things, and fairly soon. There are now so many new and existing negatives looming over the market that it can’t be overly long before Mr. Market runs for cover. Among the things to watch for is a surge in commercial mortgage defaults, which are anticipated to almost double from recent months, to some 4.1% of the total outstanding.

(In The Casey Report, we are currently shorting two especially ripe commercial real estate companies… you can, too… details here.)

Then there is the pending wave of Option ARM resets, which will hit later this summer and then soar into next year.

And there is the soon-to-be-widely-reported-on smack up the side of the head to mortgage originations, caused by the recent 75 to 100 basis point jump in mortgage rates.. a jump that occurred over the period of a week and a half. Speaking with insiders in the banking business who shall be unnamed, I learned that the rate increase caused mortgage originations to hit the proverbial wall. Full stop. While the punditry has begun to comment on the likely impact of the jump in rates, when the full extent of the impact becomes apparent in the weeks ahead, it will send a signal that Mr. Market will surely not appreciate.

Rates are going up, and we are positioning ourselves to take full advantage in The Casey Report.

Meanwhile, U.S. exports continue to fall, Treasuries continue to come under pressure as Russia and other countries announce they are going to invest in IMF paper vs. that of the U.S.

And one more thing, especially interesting, that came my way via Steve H. It is about a meeting on June 16 by senior officials of the BRIC nations, in a remote mountain resort in Russia. The concern is that they are working on plans to replace the U.S. dollar as the world’s reserve currency.

Start by watching this somewhat odd video linked here…

The presenter comes across as something of an odd duck, and so I asked Steve (who is a very successful money manager and a very solid guy) if the guy was credible. Here’s his response:

www.comdig.com

www.deanlebaron.com

www.leadership.gather.com

So, I did a bit of looking around and found this reference on the pending meeting, from the Beijing Review.

Now, it is a bit of a leap to think that this meeting will indeed amount to a Bretton Woods II, but without the U.S. in the room… you can bet the dollar will be on the agenda.

Interesting times, indeed.

And with that, I must run… I think I smell smoke.

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 04/17/2009

David Galland — Fri, 17 Apr 2009 15:22:00 GMT

Dear Reader,

Being new to a profession is always a challenge. The neophyte wants to impress his superiors, but lacking experience, is left to rely upon what natural skills he possesses. And, often, will try to make up for any shortcomings in specific skills by displaying a double dose of enthusiasm and energy.

Our new president, for example, has a great many skills related to successful politicking, but none at all specifically related to the task of being president of the world's most powerful country. This is not a job that one can prepare for.

And so We the People, his new bosses, are left to observe Obama leaning heavily on his considerable political skills – and his obvious energy – in an attempt to impress.

He is trying to do so through a constant stream of new pronouncements emanating from the White House, or wherever Mr. Obama happens to be standing at the moment. On one day he wishes to put an end to nuclear weapons, on the next to reach an accommodation with the Iranians. While he’s at it, he'll be (maybe) pulling the troops out of Iraq, but redeploying them into Afghanistan and maybe even Pakistan.

Hopping on Air Force One to bask in foreign adulation, he might close the afternoon by announcing he’s going to rescue the indebted mortgagees while dealing with bank insolvency. With hardly time for a deep breath, we see commitments to salvage the U.S. car industry -- but without overly inconveniencing its unionized workers -- followed by a promise to tackle the thorny question of immigration. Over afternoon tea or perhaps a Seder supper, he pronounces that help is on the way for Mexico in its “war” with its drug gangs, then over breakfast dedicates himself to assembling an “armada of allies” to wipe the earth clean of Somali pirates.

Worried that those initiatives may fail to impress, Obama’s administration then treats us to news that it will reform the tax code (if only to tighten the weave of the net) and close down the world's "tax havens." Further, before this December, if the Obamites have their way, carbon emissions in the United States will be smashed down to the levels of 50 years ago (which is to say that what is left of American manufacturing will soon become Indian or Chinese manufacturing). In support of that goal, a comprehensive cap-and-trade program will be initiated, invoking tens of billions of dollars in new taxes on American enterprises each year.

While I have the chronology wrong, the actual list of initiatives proposed so far by the energetic Obama is correct, though not complete. In fact, the list goes on and on… and expands even as I write: with the administration’s encouragement, the EPA is set to declare carbon dioxide -- you know, the stuff that makes plants grow -- a threat to public health.

In any event, the point I am trying to make, other than to offer President Obama a kindly word of advice that maybe he should take a deep breath and pause in his many exertions, is that rather than impressing, he is increasingly at risk of blowing all of his considerable store of political capital and going down in the history books as something of a failure.

There is a saying in marketing that I've always found true, and I think it is very appropriate in this instance. Namely, "The more you emphasize everything, the less you emphasize anything."

I, for one, am getting dizzy from watching Mr. Obama's antics and trying to understand exactly what he’s looking to accomplish, other than endeavoring to impart the impression that he’s accomplishing a lot. But there is a big difference between creating an impression and actually delivering the goods.

Sooner rather than later, I suspect, Congressional Democrats -- looking just over the horizon at the next election -- will realize that not only is the economy on tilt but so perhaps is their president, at which point he will be forced to begin a program of massive backpedaling with serious consequences to his credibility.

For those of you who are supporters of Mr. Obama and hoping for the best from his administration, now might be a good time to drop him an email suggesting he might wish to rein in his goals before spinning into oblivion. For those of you who don't particularly care for Mr. Obama, at the pace things are going, I think you’ll find your worst fears about the ambitious president will remain unrealized.

Alternatively, finding himself all of a sudden at risk of becoming marginalized and being fired at the end of his four-year probation period, Mr. Obama might take a serious gamble to regain his relevance – a war with Pakistan? While one can only hope not, stranger things have happened.

Why Do You Buy Gold?

As you can see from the chart below, since the latter part of February, the GLD gold ETF has been on a down trend, reflecting the underlying action in gold.

The retracement, while unwelcome, is understandable given the news about persistent deflation in widely followed indices such as the consumer price index. Also pushing things in the wrong direction, there are the U.S. dollar’s recent gains against the euro. And, as discussed here last week, we've also heard that the IMF is going to be dumping a fair bit of gold in its attempt to rebuild its war chest.

Not exactly cheery news for our favorite yellow metal. In fact, in any other than the Bizarro World in which we now live, the chart for GLD would be looking a lot worse than it is. As you can see more clearly in this next chart, the volume in GLD has fallen off quite a bit of late, which is a good proxy for broader interest in gold. Granted, we live in a particularly volatile and unpredictable age, which means anything can and likely will happen on any given day that can change virtually anything or even everything. But the odds are pretty good that absent one of those "shocker" incidents, gold is likely to remain range bound, perhaps even trend lower, until the inflation that has been baked into the cake by the government’s massive infusions of money makes itself known.

Which brings me to a question: Why do you buy gold?

Being clearly able to answer that question is the only way you can intelligently determine both the quantity of gold you ultimately buy and the timing of when you will buy (and eventually sell).

I mention this because on far too many occasions, I have had conversations with individuals, or received emails from subscribers, who view gold with an almost romantic affection. That's a mistake. As Doug Casey recently wrote, it's important not to fall in love with something that cannot love you back.

While gold can backstop your portfolio and place a solid foundation under your net worth, in the final analysis it is simply an asset, albeit one with unique properties that make it an especially attractive form of money.

It’s because of those unique properties that many of you own gold, as a form of insurance against inflation and other forms of monetary mayhem. In our view, that is the most important reason to own gold, especially these days. Viewed through that lens, the latest price setbacks for gold should be of almost no concern, unless you have not purchased your full allocation to the metal -- in which case, beginning to buy on the dips makes sense.

On the other hand, if you're a speculator in gold, your challenge becomes trying to discern gold’s current trading range so that you can buy when it's low and sell when it’s high. Reflecting the extreme volatility that grips almost all markets, gold's trading range these days is fairly wide, roughly between $800 and $1,000.

Frankly, absent a shocker event, I see no reason for gold to break out of that range decisively anytime real soon… at least not until we see the inflation that is the inevitable outcome of the Fed’s determined destruction of the dollar and U.S. government deficits of a magnitude that would bring tears to the eyes even of the late Lord Keynes.

Entourage

As you may have heard, our media star president is heading off to the Summit of the Americas next week to engage in another round of photo opportunities with other politicians.

Given the obvious importance of the event, it is no wonder that he is taking an entourage of over 1,000 important U.S. delegates, including wife Michelle's full-time makeup artist, a presidential first.

So what are the lofty goals of this important summit?

According to the AP…

Obama's priority list for the trip that begins Thursday is stacked with matters of concern across the Western Hemisphere – the crippling recession, the warming of the planet, the trafficking in drugs, the gloom of poverty. Crime, despair and political unrest south of the border can all undermine U.S. interests.
In order to meet and discuss these many challenges, the princely sum of $80 million will be spent by summit organizers, an amount that does not include the staggering sums involved with transporting the Obamas and their entourage to the Caribbean island where the summit will be held.

Not to worry, I am sure that all 1,000 of our delegates are necessary and worth the cost of sending them on their spring break and putting them up in the style they are quickly becoming accustomed to.

Interestingly, as is the case with these highly staged events, the outcome has already been decided and the post-summit agreement already drafted. Again, according to the AP...

The draft summit agreement, negotiated laboriously, speaks broadly about cooperation on climate change, education, safety and prosperity. But it makes no direct mention of the overarching crisis of the time, the global economic swoon. In fact, most of it was negotiated before the crisis hit with full force last fall.
If you excuse me for being a bit of a skeptic, a Grinch even, don't you think this all could have been handled with a couple of conference calls? Because as you and I both know, in the final analysis nothing will come out of this grand holiday other than a noticeable increase in local rum sales.

All of which moves me to ask, is anybody actually keeping a tab on the president's tab? Does no one now occupying the polished corridors of power in Washington understand that the economy is wrecked, and that every dollar counts?

Is anybody out there?

Ed. Note:

Entourage

Opportunity Knocks?

The chart shown here is of the CRB commodities index. A couple of things jump off the page, at least to me. The first is, that was one hell of a slide in commodities prices. The second is that it sure looks like it's trying to put in a bottom.

The contrarian in me tells me that this is a picture of a very interesting opportunity in the making. Again, no guarantees the commodities complex can't go lower, but the simple fact is that people need to eat, to keep the power on, and to actually produce the things necessary for daily life. Thus, looking for opportunities to get intelligently positioned in the commodities complex, with the expectation of a double or better over the next five years (without leverage… with leverage, the returns could be manifold that), seems to make a lot of sense.

Rest assured that in The Casey Report -- and for those of you with a higher net worth and a familiarity with futures and options, the Casey Trend Trader – we will be sharing a variety of strategies to get positioned in this trend.

The Down Low

Upon reading that Homeland Security has issued a report this week warning about the rising threat from "right wing extremist" groups brought to mind a topic I’ve been meaning to comment on for some time.

The topic is simply, armed revolution.

While I doubt their ability to get the specifics right, I suspect the general thesis of the Homeland Security report is probably correct. Namely, that some Americans may be willing to go to the mats should the U.S. government continue to infringe upon their rights, with stronger gun control measures being a likely tripwire.

Supporting that contention, below is an excerpt from an email that someone forwarded to me – not in support of the idea, but rather to show me that there are those willing to entertain the idea of a gun-battles-in-the-street sort of revolution.

(Note: The term "Three Percenters” refers to the 3% of colonialists who, the authors of this email allege, were the minority who actually took up arms against the British in the American Revolution, versus the 97% who were largely just bystanders. In the modern context, it is this 3% who are supposedly ready to grab arms and use them against the government.)

Below is the excerpt… which, as you will read, is inflammatory stuff.

Three Percenters today do not claim that we represent 3% of the American people, although we might. That theory has not yet been tested. We DO claim that we represent at least 3% of American gun owners, which is still a healthy number somewhere in the neighborhood of 3 million people. History, for good or ill, is made by determined minorities. We are one such minority. So too are the current enemies of the Founders' Republic. What remains, then, is the test of will and skill to determine who shall shape the future of our nation.

The Three Percent today are gun owners who will not disarm, will not compromise and will no longer back up at the passage of the next gun control act. Three Percenters say quite explicitly that we will not obey any further circumscription of our traditional liberties and will defend ourselves if attacked. We intend to maintain our God-given natural rights to liberty and property, and that means most especially the right to keep and bear arms. Thus, we are committed to the restoration of the Founders' Republic, and are willing to fight, die and, if forced by any would-be oppressor, to kill in the defense of ourselves and the Constitution that we all took an oath to uphold against enemies foreign and domestic.

We are the people that the collectivists who now control the government should leave alone if they wish to continue unfettered oxygen consumption. We are the Three Percent. Attempt to further oppress us at your peril. To put it bluntly, leave us the hell alone. Or, if you feel froggy, go ahead AND WATCH WHAT HAPPENS.

(As an aside, I’m sure Homeland Security appreciates it when these self-described revolutionaries make their identities well known by sending around broadcast emails.)

Supporting the notion that people are loading up out of concern that the government has designs on their weapons is this citation from Bloomberg…

sales

I can attest to the fact that the local gun store is clearly thriving; it has recently undergone a top-to-bottom renovation in order to more comfortably accommodate its many patrons. The trend toward more gun sales is also evident in the share price of Smith & Wesson (SWHC) over the last six months…

So, it’s not out of the question that the stage may be set for what could turn into a series of confrontations between the government and its harshest critics.

Some random thoughts...

As is true of almost all successful species, it’s human nature to want to group together. This tendency toward the collective is perfectly understandable in that it allows for a more efficient sharing of resources. There are other benefits, including a sharing of the protective duties and chores that would otherwise take an inordinate amount of time and/or resources should each individual be forced to undertake them. While I personally shy away from most forms of collectivization, that so many gravitate toward that condition is easily understood.
Along with this natural desire to collectivize, it is equally natural for an individual or individuals to assume power of the collective, once formed. As often as not, the group encourages and even demands that a particular individual or individuals assume the reins of power. We can all recall the kids who, even in our kindergarten classes, would naturally assume a leadership role and be supported in that role by many.

Perhaps this is related to a subconscious quest for better genes, or simply because most people prefer it when others stronger than themselves take on the responsibility of decision making. Regardless, the tendency to gravitate to power is a clear and present human trait.
Which brings me back to the “Three Percenters.” Imagine, for a moment, the logical outcome if this group were to actually rise up and win the day? In my construct, all this would achieve is that the national collective would replace the current leadership with that of another sort. While I am not any more enamored of the current power elite than I was of the bumblers they replaced, I suspect that I might like living under the rule of the Three Percenters even less.
While I don't doubt that we'll see incidents of violent pushback against the current government, and maybe even something as dramatic and devastating as the Oklahoma bombing (notably carried out by a veteran of Gulf War I), the idea that a group of homegrown revolutionaries could actually outgun our modern army is ludicrous.

There is a significant difference between 1776 and the situation today. Not only does the U.S. government not have to deal with long supply routes, as was the case with the British, but today even the best-equipped gun shop has nothing in stock to remotely compare with the sophisticated armaments the U.S. government has at its disposal, thanks to decades of massive military budgets. When we can take out houses in Peshawar using drones operated by technicians comfortably seated in a Nevada command post, how much trouble, really, will it be to handle a small cadre of malcontents operating in Poughkeepsie?
The danger, therefore, doesn’t come from the outbreak of a guerrilla war here in the U.S. -- although dramatic incidents and perhaps even large-scale riots are almost a certainty over the next 10 years -- but rather from the government’s reaction to these events.

Already, local police are being equipped and trained to view even commonplace crime with a military sensibility. And we have seen a breathtaking degradation in individual liberties in response to the 9/11 attacks.

Of course, this degradation is not apparent to most, other than as modest inconvenience at airports. That’s because most of us will never experience the dire consequences of a negative assessment of our email records and other similar intrusions upon our privacy – picture a door being kicked in in the middle of the night followed by a quick trip to a dark cell. Even so, the fact that the government has been willing to cross previously unimaginable lines in its fight against real and imagined terrorists is a clear indicator that, should domestic disturbances begin to reach anything approaching a regular tempo, the response could be extreme.

So what is one to do? Given humankind's tendency toward collectivization, and for the collective to be controlled by a small power elite that will not generally give up the reins once taken, it seems logical to me that the only sane response that we as individuals who value our individual freedoms can have is to learn the fine art of keeping a low profile. Or, to use modern slang, to keep things on the “down low.”

Put another way, trying to swim against a powerful river, a river that stretches back to the very beginning of human time on this planet, will only wear you down and eventually pull you under.

In my opinion, people should spend a lot less time worrying about the collective and a bit more time thinking about the steps that they can take as an individual to enjoy an excellent life while simultaneously keeping out of harm's way.

To be sure, that might involve eventually coming to the conclusion -- as some Jews did in Germany pre-WWII -- that as warmly as one might feel about their hometown, to remain in place is to risk everything. By the time the sentimentalists were being packed up for camps, the realists had already set up shop in far less dangerous climes.

In the current instance, as much as we may complain about the growing power and meddlesomeness of the U.S. government, most people are able to go through their lives largely unaccosted – saved by the tax man. But that doesn't mean you should be blind to the hard historical evidence that any country, no matter how enlightened it might seem, can and will change... and in some cases, dangerously so.

It is for this reason that my globetrotting partner Doug Casey has long advocated having at least one foot in another country. And by "one foot," I mean some percentage of your assets, ideally some property, and at least a working knowledge of the place and some local connections.

Don't get me wrong, I think the United States of America is a great place, and the odds are good that as bad as things might get, it will remain in solid contention as one of the top five countries in the world in which to reside. But if things took a decided turn for the worse, long before I would even begin to get it into my head to grab up arms, I’d be headed for the nearest international airport.

Having traveled the world extensively, I can say with complete confidence that there are many, many other countries where one can live an exceptional and fulfilling life, even if – or maybe even especially if – you don’t have very much money.

I apologize if this comes across as rambling or disappoints those of you looking only for investment advice, but I think the point is important... the point being that we each have to deal with the realities of where we live, and getting overly heated up serves no real purpose. Sure, join up with your fellows in protesting higher taxes, write your congressman, and make your voice heard – but don't overlook the need to also organize your life in such a way that you generally fly below the radar of the powers-that-be, and so that you can move on to friendlier climes in the unlikely event that becomes a necessity.

Most of all, don't forget to smell the roses.

To quote Robert Friedland speaking at our recent Las Vegas summit, "The situation is hopeless, but it is not serious."

Tax This!

Given that this week encompassed the dastardly date of April 15, I thought at least a passing reference was in order.

To assist in making a reference, I turn to the folks at Reason magazine who have put together a worthwhile short video on the topic, which you can view by clicking here.

Elsewhere, I thought it was interesting to read this week that the governor of Texas publicly pondered the idea of Texans seceding from the union, should the federal government continue its insane tax-and-spend ways. Here's what he had to say on the subject...

"We've got a great union. There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that. But Texas is a very unique place, and we're a pretty independent lot to boot," Perry said Wednesday.
And, of course, as I'm sure you have been reading about, there has been an outbreak of anti-tax "tea parties" around the country.

So there's hope. The situation is hopeless, but not serious.

That’s It for This Week!

Before signing off today, I would like to thank all of you who responded to my solicitation last week for feedback on whether the U.S. should sell "economic citizenships." The views I received were roughly split down the middle, with half in favor of a program that offered citizenship in exchange for a significant investment in U.S. real estate, and the other half dead set against anything that would allow more foreigners into the country. Next week, when I have a bit more time, I'll try to share some of the juicier excerpts from both sides of the argument.

As I sign off just after midday on Friday, April 17, I see that the Dow has stalled out and is flat on the day. Given that today's news includes that Citigroup's earnings were stronger than estimated, as well as the profits earned by GE -- I cannot help but take it as a very bad sign for the stock market that it has not managed to mount a further rally.

Meanwhile, gold has fallen again and is now trading at $868 per ounce. It could go lower, but per above, at this stage in the game, with the longer-term fundamentals for gold firmly in place, its short-term price action is of very little real concern.

Until next week, thank you very much for reading and for subscribing to one or more Casey Research services!

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/27/2009

David Galland — Fri, 27 Mar 2009 15:31:00 GMT

Dear Reader,

The Las Vegas taxi driver was an old fifty-something, with a mullet hanging out of the back of his battered baseball cap and a potato sack gut hanging over his belt. Having driven a cab myself, long ago and far away, I habitually engage in cabbie chat, as I did now.

“So, how’s biz?”

“Horrible. Thanks to Obama, my family’s going to starve!”

“Really?” I asked incredulously, surprised by both the topic and the heat of his response. “How come?”

“Thanks to him trash talkin’ Vegas, we’ve had 110,000 room cancellations. Once the March Madness basketball tournament is over, this place is going to go back to being a ghost town, just like it was last week, and the week before that. My family’s going to starve thanks to Obama!”

“But they’re not actually going to starve, are they?”

“Yeah they are, I’m telling you. Starve, plain and simple. I ain’t making any money as it is, and once town empties out again, I’m going to go broke and my family is going to starve!”

“Wow,” I said, “so, what are you going to do? Move away?”

“Nah,” he said with no hesitation, explaining, “I like it here too much.”

With a quick and puzzled glance at the neon-illuminated cement wasteland through which the cab was speeding, I had a hard time imagining what attraction the place might have.

“What is it about this place you like so much?” So much, apparently, that he was willing to let his family starve in order to stay.

“Well,” he said in an almost professorial tone, “first, I get to see a lot of naked women. Second, I get a lot of ‘freebies’,” he said lustfully, sending a shudder down my spine. Call it rural naivety, but while I can understand that a working girl has to work, I had a hard time getting around the idea that she had to “work” with him. And for what, a free cab ride?

“Finally,” he concluded, “I like the weather. That’s about it.”

As I couldn’t think of anything else to say – at least not without risking offense -- to a man who was apparently comfortable with the idea of letting his family starve so he could continue to ogle, and apparently fondle, the women of this fair-weathered Sodom & Gomorrah, I turned my attention back to the surroundings.

And what surroundings they are. Lavish. Spectacular. Ridiculous. Some day in the future, perhaps 500 years from now, the gilded ruins of this testimony to humankind’s penchant for excess will be picked over and cataloged by archeologists for the benefit of primary school education.

Then again, with the way things are going, it could be just 50 years. I say that because City Centre, the world’s largest construction project, continues to be built on autopilot, even though it’s only about half finished. And this is just one of a number of other hotels and condo towers in a similar circumstance; started in a more optimistic time, but now merely adding to the unsold inventories that have made Las Vegas the epicenter of the real estate meltdown.

The place is in real trouble. Maybe the degenerated taxi driver will hang on, family be damned, but I suspect that an exodus from the place is inevitable. And can a cluster of mysterious large-construction project fires be far behind? (As an aside, if you own any insurance company stocks… run, don’t walk, to the selling window. It’s not just that certain doomed construction projects are likely to become fire hazards, but that insurance companies notoriously invest their capital in real estate and bonds, both of which are dead ducks, or soon will be.)

I am glad I saw Las Vegas when it was still at its prime. Soon, I suspect, it will be something akin to an urban war zone. As for Obama, the next time he gets an urge to take in a show, he might want to give the place a pass.

A Quick Musical Interlude, Then Something Different

I am going to try something different for the rest of this week’s missive, but before I get to that, I want to share a bit of music many of you may recall. But first, a little backgrounder.

A subscriber and new friend, the talented musical producer and film maker, Sadia Sadia, attended our Las Vegas summit and gave me as a gift a copy of Rick Wakeman’s autobiography, “Grumpy Old Rock Star.”

Those who recognize the name will remember Wakeman as the talented organist for the mega-band “Yes”… as well as the composer/performer for a huge body of solo work, including his much-acclaimed Journey to the Centre of the Earth.

While I wouldn’t count myself as a rock groupie and so Wakeman’s name evoked little in the way of recollection, I began to casually peruse his book, which is really just a collection of stories from his wild career, and got sucked right in. It was a big surprise… interesting, well written, and very, very funny.

As is the way with these things, reading the book reignited my interest in his music, and so I quickly stumbled back upon Roundabout by Yes, a forgotten favorite and one of the band’s best-known tunes. You can listen to it here.

(In the video, the guy dressed up in the glittery cape is Wakeman -- as gifted and as hard-living a rock star as has ever graced the stage -- so hard living, in fact, that he had two heart attacks at the age of 25.)

Now, as for the rest of this edition, I’m going to try to tell a story, but using snippets from other sources with, perhaps, a side comment thrown in now and again.

I am taking this approach because, frankly, since hopping on the plane to Las Vegas last week, the sheer volume of proposed new regulations, legislation, and plain idiocy have outstripped my processing abilities. It seems that every hour or two over the past week, there has been a breaking story that has me saying out loud, “What, are you kidding?” Or, “Wow… we’re really in trouble now!”

It came to me as I started writing to you this morning, that these many stories – rather than just random spatters of inanity – together form a distinct pattern. And the pattern seems to point to a new paradigm now materializing here in the U.S. and, by extension, the world.

As I think the following stories demonstrate, the new paradigm is not one any thinking person will embrace.

Eat the Rich

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead. There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few." (A New Era of Responsibility: Renewing America's Promise. The President's Budget and Fiscal Preview)

One finds many charts in a federal budget, most attributed to such deep mines of data as the Census Bureau or the Bureau of Labor Statistics. The one on page 11 is attributed to "Piketty and Saez."

. . . Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration."

Messrs. Piketty and Saez have produced the most politically potent squiggle along an axis since Arthur Laffer drew his famous curve on a napkin in the mid-1970s. Laffer's was an economic argument for lowering tax rates for everyone. Piketty-Saez is a moral argument for raising taxes on the rich.

. . . Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum: "While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected."

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . It's a legacy of irresponsibility, and it is our duty to change it."

(The Obama Rosetta Stone, by Daniel Henninger, from the Wall Street Journal’s Opinion Journal.Com)

Supporters of Capitalism Are Crazy, Says Harvard

everyone knows

that

(

From

Mises Daily

by Thomas E. Woods, Jr. )

Obama's Latest No-Banker-Left-Behind Scheme

(From CounterCurrents.Org)

What’s Not to Support?

David again. With a deal that has the taxpayer lending the boys club 85.7 cents on the dollar, and assuming all risk should the loans failed to be paid back, who wouldn’t provide “support” to Mr. Obama? But at what cost? Well, at better than one trillion more dollars, if things go off the rails – as they almost certainly will. How do you spell dollar? D-O-O-M-E-D.

By the by, click the following link for an exceptionally well done graphic representation of just how much money a trillion dollars is. Call the family around and give it a click (then pass it on)… http://www.pagetutor.com/trillion/index.html

New York Tax Rise on Higher Earners Hinted as Budget Gap Rises

Not So Fast

Remember Wen?

March 23 (Washington Post)

***

March 25 (Bloomberg)

***

March 25 (Bloomberg)

Timothy Geithner

Zhou Xiaochuan

Barack Obama

David again. If these people are the smartest folks in the room, I wonder who’s cooling their heels in the hallway.

We’re from the Government and We’re Here to Help

9:02 p.m.

(Alec MacGillis on the Washington Blogging site commenting on Obama’s online Town Hall meeting)

***

Barack Obama

Paul Volcker

Peter Orszag

David here. But surely Volcker, that old cohort of President Reagan and champion of fiscal conservatism, won’t recommend punishing overseas investment or raising taxes by another $300 billion?

Sadly, you are laboring under a misconception (you’re not alone).

(Real Clear Markets, The Paul Volcker Myth, Feb 2008)

***

(“Paul Volcker Blasts Idea of Permanently Repealing Estate Tax,” Wall Street Journal, January 2003)

***

EPA Greenhouse Gas Declaration May Pressure Congress

General Motors Corp.

American Electric Power Co

David Bookbinder

…

David again. Don’t you love the “Congress can do it all in one shot” comment. And, yes they can. Even mentioning this sort of legislation in the face of all that now challenges the economy is near criminal. Especially in that it is almost certain to chase away the remaining companies that still endeavor to engage in manufacturing in the U.S..

Radio Worth Listening To. Do yourself a favor and find a comfortable seat and click here to listen to this audio interview of Lord Monckton from the G. Gordon Liddy Show. Monckton is one of the most well-informed – and entertaining – commentators on the topic of anthropogenic global warming on the planet.

“Hold the fort,” I can hear some of you saying. Liddy is a hard-core dogmatic. Hardly a balanced perspective. And you are right. While I have met Liddy on several occasions and enjoyed his company, a reading of his book Will indicates that he is far more than dogmatic. Insane is more like it.

But he does a competent job as an interviewer, and Monckton does a brilliant job as an interviewee. You have to sit through some oddish music in the beginning, but it’s worth taking a listen – no matter where you come down on the issue of man’s contribution to global warming.

Worth Watching… Closely

David, still here. In the following article from the Wall Street Journal, I have boldfaced the relevant words. Words have consequences, and the consequences of these words indicate we may be on the path to another ginned-up “conflict” of the “pay no attention to the man behind the curtain” sort. It could also be an early step toward gun control, a topic that many Americans pay close attention to (and, based on history, for good reason).

Here’s the article – as you read it, see if your mind begins to evoke, as mine did, visions of the author running around waving his or her arms at the new and impending “crisis!”…

address the crisis

the full Senate Committee on Homeland Security and Governmental Affairs, also will offer the highest level of attention from Congress on the issue thus far

extra $100 million

targeting the guns and money from inside the U.S

The government is girding for a possible Katrina-style disaster along the 2,000-mile-long Mexican border

Obama Announces Plans for More Funding for Afghan War

(Washington Post)

***

The End of Summer(s)?

The Innovator's Dilemma

(Adrianna Huffington writing in The Huffington Post)

David here. Don’t you love the “our remarkable president” bit of sycophancy? It reminds me of a conversation I had at the Las Vegas summit with a friend of some duration – an interesting and intelligent individual. It started when she told me she had been a big supporter of Obama’s, but now she wasn’t so sure. The conversation went something like this…

“Why were you such a big supporter?” I asked.

“You know, because he was for change,” she replied.

“Sure, but what does that actually mean? What change?”

“Oh, you know, change from the way Bush was handling things,” she said with a certain uncertainty in her voice.

“So, your vote for Obama was really just a vote against Bush’s policies?” I asked, thinking that wasn’t altogether a bad reason.

“Well, no, I don’t think so,” she answered. “There is something else. You see my father was black and my mother was white, like Obama, so I felt a connection.”

“Fair enough,” I commented, “But was that it? I mean, wasn’t there some particular philosophical point that rallied you behind Obama?”

“Well, er, I’m not sure. But I sure am worried about him now.”

I have always found it remarkable how many otherwise reflective people have a hard time expressing why they support one candidate and dislike another… often viscerally. It is, I believe, strong testament to the ability of the campaign team, and the media, to paint a picture that resonates with the target audience… a picture that, while attractive, more often than not completely lacks a tangible foundation.

Americans may not be very good at manufacturing “stuff” these days, but we are whizzes at selling stuff through multi-channel media campaigns, including fine-talking politicians.

As for Summers, I have previously mentioned that Olivier Garret and I heard Summers at a White House conference last year. When it came time for him to speak, he gave a very lucid and even passionate argument for making Bush’s tax rollbacks permanent (for the not irrational reason that to let them expire will amount to one of the largest tax increases in history, an increase that the economy can ill afford at any time, but especially now).

While I don’t have a full grip on Summer’s broader philosophical and academic views of the economy, I took it as encouraging that he was brought onto Team Obama, though from what I have heard since, it seems like he has grooved right in with the statist views now dominating in Washington. But maybe not, and so, per Huffington, expect him to be an early casualty.

“Fusion Centers” Expand Criteria to Identify Militia Members

(FOX News, 3/23/09)

David again. Be afraid… be very, very afraid.

Glimmers of Hope

Gordon Gets a Thrashing

(“General Watson,” friend and occasional Casey Research European correspondent).

David again. Here’s the video… and it is definitely a “must see” -- if you haven’t yet done so, and most of you probably will have, given the amount it is being emailed around. Click here to watch.

Given the amount of play this video has received, there is hope that the media will look to boost their ratings by finding other champions of fiscal sanity and providing them a soap box. Could happen. Probably won’t.

AIG, I Quit!

David again. Another item that has made the rounds this week is the letter of resignation from an AIG employee.

There is so much to the “evil bonus takers” story that the media, falling back on Ye Olde Witche Hunt as a circulation booster, has ignored, either deliberately or just because they are stupid.

The now famous AIG resignation letter sheds some much needed light, so read it if you haven’t.

Meanwhile, the net result of all of this grandstanding and outright thuggery (for a definition of the word, look up Andrew Cuomo in the dictionary) is that the top executives from AIG and other leading financial institutions are handing in their bonuses with one hand while signing new employment agreements with firms overseas that, as part of those new agreements, are agreeing to replace those bonuses as recruitment incentives.

Even without the enticement, who would possibly want to work for AIG these days?

And so, the American taxpayer, who is already into AIG for $200 billion, has just assured that the asset “we” have paid so dearly for is little other than a gutted shell run by second-rate people. Oh, and those second-raters will be forced to deal with trillions in remaining derivative contracts. It will be akin to asking monkeys to repair jet engines.

Of course, as the next wave of planes begin to fall from the sky, the government will again rush in… with your money.

In any event, the “Glimmers of Hope” part is that the soon-to-be-former AIG employee’s letter may, just may, help cool down the mob psychology that bordered on violence last week.

A Politician I Can Support

(Press TV, March 25)

Some Concluding Thoughts

David again. Remarkably, I could go on, but I fear I have tried your patience enough for one day. So, what are we to make of all these stories?

First, the Obama administration is clearly statist. And they apparently have set their sights on taxing the productive elements of society to the fullest possible measure. As I have noted in the past, however, businesses don’t pay taxes – rather, they just pass the taxes on to their consumers (or they go out of business). And so every time you see a new business tax, cover your wallet.

While the higher net worth individuals will, for a time, accept higher and higher tax burdens, unlike the proverbial frog in a pot of water that is slowly approaching boil, those with the assets to move will – when the temperature reaches uncomfortable – hop out of the pot and head to friendlier grounds.

Recognizing this truth, the Obama administration is already working on exchange controls. That is clear in the Obama campaign promise to use tax policy to punish companies that ship jobs overseas, a promise he is now putting into effect ala Volcker. Once those particular bricks are laid, adding on a few more layers in order to also wall in the individual is a snap.

Now, some of you – many perhaps – arrive at this point in time as supporters of Obama, and so bristle at my remarks. Just as do those of you who favor the views of the strident opposition from the “right,” unhappy at my quick jibe at Bush’s policies.

It behooves me, as the managing director of a company that makes its payroll by offering solace and substance to its subscriber base, to caper and scrape to our clientele. You, to be specific.

To the extent that I offend, I apologize. But only because that is not my intent, no matter the tone of voice I might use in these weekly musings. Rather, I sit here, like you, an observer of the world around us, and I try to make sense of things. Last week, I expressed outrage at the scramble to foist our current problems onto the backs of our progeny. Today, the pattern that is visible in the collection of articles here tells me things are moving quickly beyond the matters related only to the economy. And so, looking over the landscape, I am touched by an entirely different emotion… one of deep concern for the very nature of our society.

What does all this have to do with investing, some of you will angrily write?

That, of everything, has a simple answer: with a clear, albeit disturbing pattern now emerging, so, too, are the personal opportunities to protect yourself and to profit. Gold, silver, foreign investments, contrarian stock market opportunities, strategically structured futures and options strategies to take advantage of volatility – all those and more.

These are, of course, topics we cover in great detail in The Casey Report and our other publications. And to a lesser degree, these weekly ramblings.

Regrettably, because of my duties related to getting the next edition of The Casey Report out by this time next week, I need to leave it at that, despite my promise last week to share some of the highlights from our just concluded Crisis & Opportunity Summit in Las Vegas.

I will endeavor to do so next week. I just felt the material I covered here was more important, and hope you concur.

Miscellany…

Tokyo Phyle. One of our subscribers in Tokyo is looking to start a phyle. If you’d like to meet up with other Casey subscribers in that city, drop Kristen a note at phyle@caseyresearch.com.

You Are the Best! A quick note to say, as I have before, how wonderful it was to spend time with so many of you at the Las Vegas summit. After the event ended, virtually every speaker I talked to told me that the audience was the finest, most intelligent, and impressive they had ever come across. I couldn’t agree more.

Finally, because it’s sort of funny, I wanted to close by updating the story of my quick short on the S&P, using Scottrade. As you may recall, I used words to the effect that one of the advantages of an online trading account is how quickly you can short the market (in that case, using RSW, a 2X inverse S&P ETF). At one point during the day that I was writing that issue of The Room, I was up about $800 and was going to close my position with the quick profit, but got distracted by my son asking me to check out something he was doing on a video game. By the time I remembered my short, the market was closed. Long story short (excuse the pun), that gap in attention has, so far, cost me about $15,000.

I am, however, unconcerned. There is so much bad egg now baked into the cake that the rally of late simply can’t be sustained, and today appears to be wobbling. And so I will hold my inverse ETF shares and even add to them on any further rallies. I’ll let you know how it worked out when I finally close out the position.

In the meantime, I hope you gain some benefit from my experience. Namely, because something is easy – i.e., popping into an online trading account to make a quick trade – it also makes it more likely you will take the action, based on little more than impulse and a quick flush of emotion.

On that note, I will share with you Terry Coxon’s dictate. Which goes something like this, “The next time you spot a really, really exciting investment opportunity, one that you absolutely have to act on immediately, the first thing you should do is to look around for a comfortable chair, sit down in it, and take a few deep and relaxing breaths.”

Always good advice.

And with that, I sign off, thanking you for reading and for being a subscriber to a Casey Research publication. We work only for you, and it is a pleasure to do so.

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/20/2009

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

Dear Reader,

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

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

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

And now, everything is going to hell.

Bernanke's Gamble

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

This week we saw two developments related to this story.

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

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

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

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

Here are some of the highlights:

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

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

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

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

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

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

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

David again.

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

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

Which brings us to our second story.

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

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

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

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

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

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

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

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

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

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

And the government isn't done yet.

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

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

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

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

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

Sharp Words

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

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

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

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

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

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

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

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

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

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

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

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

Or you can call it "change."

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

Protectionism

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

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

Those trading partners are starting to slap back.

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

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

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

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

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

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

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

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

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

Evil Capitalist Polluters!

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

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

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

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

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

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

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

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

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

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

The Coming Credit Crisis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"AIG Scum Out of Town!"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It Just Doesn't End

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

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

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

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

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

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/16/2009

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

Dear Reader,

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

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

Now, on to what seems important this week.

Citi-Mae

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

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

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

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

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

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

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

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

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

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

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

Wall Street Journal

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

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

No wonder Mr. Pandit is so enthusiastic.

Wen Is Enough?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Speaking of Exports

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

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

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

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

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

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

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

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

imports

exports

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

Christopher Low

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

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

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

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

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

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

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

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

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

Snippets from the Swamp

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

Making Friends with Crisis

Never waste a good crisis

Feeding Frenzy

Gold Stocks – a Knock at the Door

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

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

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

Here's an excerpt from the piece...

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

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

Miscellany

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

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

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

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

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/06/2009

David Galland — Fri, 06 Mar 2009 17:22:00 GMT

March 6, 2009

Dear Readers,

Of late, it seems as though I have gotten sideways with the technology deities.

First, as reported recently, was my accidental deletion of an hour-and-a-half recorded interview with trading gurus Dave Hightower and Terry Roggensack.

Then, yesterday, while waiting to put in a phone appearance on the U.S. Global Funds Webinar that many of you sat in on, I carefully put my speaker phone on mute (you can tell it's on because the button lights up) and set about trying to wolf down a chicken salad sandwich before it became my turn to talk.

This led to being reminded of several of life's little lessons. Including...

Eating quickly is never a good idea, because it can lead to aspirating, as opposed to swallowing, one's food.
Once aspirated, a fairly decent-sized piece of food – say, for example, chicken salad – can actually make its way up through one's sinus passages. In fact, with enough coughing, hacking, turning red, grabbing of the throat, choking and blowing, the aspirated morsel can actually traverse the nasal passages and exit through the nose.
And, finally, I was made to recall the fallibility of technology when I learned, after the fact, that a lit-up mute button is no firm guarantee that the phone is actually muted.

It was only when someone stuck their head into my office to let me know that my close run with lunch was being broadcast live that I became aware of the latter point. To which I whispered incredulously, "But that's impossible... I have it on mute, see!" In reply, I received a shrug and a statement that was as accurate as it was succinct, "Must be broken."

For those of you on the call, and especially my fellow presenters, whose carefully prepared presentation, I was later told, was disrupted on multiple occasions, my sincere apologies.

And to the technology gods, I supplicate in your general direction.

Before moving on to more substantive topics, a quick "thank you" to everyone who submitted entries for my growing category of dramatic music. While there were many excellent additions to the library – and I will share more in weeks to come – the hands-down winner this week was sent from Phil of our New Zealand contingent.

You may have seen this particular piece of music/video... because apparently over 1.5 million viewers have. But I hadn't and so really enjoyed the setup and the unlikely singer's powerful delivery. Real goose bump stuff, guaranteed to bring a smile to your day. Enjoy...

http://www.youtube.com/watch?v=bEo5bjnJViA

I might add that the humble phone salesman went on to become an acclaimed opera singer – according to PR Newswire, "his debut album ‘One Chance' stormed to the top of the charts in 13 countries and notched up an astounding 27 platinum and four gold awards." His second album "Passione" is due to being released in April. Proof that even in these days, which are often filled to the brim with hopeless-seeming news, dreams can and do come true.

And now, on to the decidedly less entertaining aspects of our modern world.

Desperate Measures

As I write, the U.S. stock market is not yet open, on Friday, March 6. Yesterday was yet another bad-hair day for stock investors, with the DJIA off 281 points and the S&P 500 off 30 points to 682.

At this point, it is hard to see what Team Obama will do, or even can do, in the attempt to stop the bleeding-out of equities markets.

I mean, consider!

They have announced increases in capital gains taxes, and that didn't work!
In tandem, they announced that the dwindling number of people who still have money to invest should rather give more of that money to the government in the form of higher taxes. And that didn't work.
Members of the Obama administration have gone out of their way in recent weeks to let the financial markets know that, in their expert opinions, the crisis is only going to worsen. In fact, just this week, Goldman Sachs's Secretary of the U.S. Treasury Mr. Geithner, speaking at yet another Senate hot-air festival, reminded potential investors that "this is still a deepening recession and a deepening credit crunch." Those sentiments were echoed by the president himself, who helpfully pointed out that, should the government fail to act with appropriate vigor, things could move from "crisis into a catastrophe."

And yet, the stock market stubbornly refuses to mount anything resembling a solid rally. Go figure.

Hold the phone!

The nice thing about an online discount trading account is how quickly you can place a trade: in this case, buying an inverse S&P ETF, which I just did. We'll check in later to see how the trade works out.]

So, what's Team Obama to do? Besides taxing and trash talking the economy, that is? Well, that and promising to beggar our great-grandchildren by opening the spigots on a tidal wave of monetary Kool-Aid, served up by a new army of fresh-faced Obamacrats?

This is no idle question: while the voting masses will give the prez his 100 days and probably more, a systematic failure in the economy over the next few years is unlikely to be rewarded at the polls. Should such a failure continue to gain steam, Obama risks being labeled even by his own as a false messiah, at which point, out come the stones.

The fact is, despite its many powers and foot soldiers, there's only so much that government can do at this point... and none of it without the steep potential for unintended consequences and naked risk. In no particular order, here's a quick summary of the possible measures left to the increasingly desperate government:

Suspend Mark-to-Market Rules. On March 12, a House Financial Services subcommittee will be gathering for free lattes, donuts, and a chat about suspending mark-to-market accounting standards. Simply defined, financial institutions are now required to establish, for accounting purposes, the fair value of their assets, using as a basis the "price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."

The problem, of course, is that there currently isn't a market for much of the toxic paper now clogging the pipes of banks and other financial institutions. By exposing the folly of past decisions made by these institutions, mark-to-market rules have required these giants of finance to regularly fess up to the huge losses they have incurred.

Hypothetically, by suspending or modifying the rules, the operators of the many beggared institutions could straighten themselves up, adjust the old school tie, run a comb through their thinning but well-coifed hair, and announce that the toxic stuff was actually worth something. The "something" would, of course, be based on this model or that which imputes an elevated valuation at some distant point in the future.

With their persistent capital problems relieved, the bankers would then entice investors back to their equity by speaking in their most stentorian tones while pointing to a fresh set of metrics designed with special appeal to "value" investors.

Or, at least, that's how things are supposed to work out.

The people I have spoken with on this topic have expressed opposing views on whether mark-to-market as it now stands will be nudged over the side of the sinking ship. One well-placed money manager told me that he thinks it's unlikely it will be dumped, but that, if it is, the stock market could stage a 60% rally from here.

Another told me that there was no way that the government will tamper with it, because they would worry (correctly, in my view) that changing the rules in any material sense could be the final straw in destroying the thimbleful of credibility still retained by the financial institutions.

Personally, I think the potential of a change to these rules is very real – with the rationale for doing so announced in double-speak that positively drips of good intentions and sound practices. As to the reaction of the market, who can say? If the changes coincide with a general fatigue among the bears, and are possibly supported by some encouraging buying from friendly parties, they could spark a rally, and maybe a big one.

On the other hand, it could also put the match straight to the powder and result in an explosive collapse.

I wish I could be a bit firmer in my opinion of how this could shake out, but conjecture is all that is possible at this point. I'll keep trolling around for informed opinions, but the key thing now is to watch the upcoming hearings closely, and to watch for the trial balloons that the government likes to send up before making its decision. Knowing what's coming is half the battle, even if only as a signal to run for even deeper cover.
Bad Bank. Speaking of trial balloons, the government has floated veritable blimps with the phrase "Bad Banks" emblazoned across their girths.

A picture of the latest Bad Bank plan, snipped out of the Wall Street Journal, is shown here.

Adding some context to the graphic, the idea is for the government, along with the private sector, to pony up as much as $1 trillion to buy distressed assets.

As the graphic helpfully points out, "Investment managers who agree to put up a certain amount of capital would run the funds."

That caption may be translated as "Goldman Sachs and JPMorgan and other Wall Street insiders will be able to borrow money from the government on extremely favorable terms, with no recourse for failing to repay, as long as they agree to invest it back into the Bad Bank fund. As a reward for providing cover for this operation, the banks would earn billions in fees earned off the bulk of the money deposited in the fund, which will come directly from the Treasury. Big party follows."

Turning to the next caption over, we see that "Investors, such as pension funds, would be able to participate in the funds."

I think I have this part straight. What they are saying is that now that the Friends Of Obama (previously known as Friends of Bush) are well positioned, the investment managers are going to search the world over for the last of the really stupid pension and money managers, a moniker aptly applied to anyone willing to invest in a toxic soup of bad-asset-backed securities. They may find a few who can both drool and write a check at the same time, but not many.

In reality, what will likely happen is that (a) the government will print up another trillion to buy the bad assets, then (b) pay their buddies billions to "take a meeting" at a posh eatery a few times a week. Meanwhile, the financial institutions who sold the toxic stuff off to the Bad Bank fund will be able to sally forth to greener pastures, leaving the taxpayers with the bill for the bailout... and the bankers' many lunches.

Do I think we'll see a Bad Bank? Almost certainly. Will it solve the problems besetting the economy? No. Rather, it will just continue the process of transferring the liabilities from where they belong onto the back of the already overburdened taxpayer.

But it could result in a stock rally, if only for a limited time, and only for the stocks of the companies doing the dumping of the toxic stuff.

As for the overburdened taxpayers: as Doug Casey writes in his Casey Report lead article this month, "Street Fighting Man," taxes are a strong possible trigger for social unrest. It may already be starting, with the first proverbial (for now) shots fired this week in Hoboken, New Jersey, when a mob tarred and feathered the mayor in effigy for refusing to deal with oppressive levels of taxation. More on that story here.
Fed Buys Long-Term Treasuries. The Fed has, periodically, floated the idea of stepping into the market to buy long-dated Treasuries, should the need arise.

We think the need will arise, because of (a) the sheer scale of the government financings that will be required this year, and (b) the fact that foreigners are running out of cash due to domestic spending need and falling exports to the U.S., and maybe even running out of patience with the now official U.S. policy of monetary prolificacy. As foreigners have been about the only buyers of long-dated U.S. Treasuries in recent years, the shortfall caused by their reduced participation can only be made up by taxes – but tax revenues are plummeting right along with the engines of commerce that throw those off as byproduct – or by printing fresh dollars.

Which means, simply, printing is the only answer that will pop to officialdom's mind (the others require inconvenient free-market solutions).

So, what happens when the Fed is forced to begin buying up the longer-term paper?

For a time, interest rates might go down – simply because the primary buyer, the Fed, won't demand higher yields on its money. But rates won't stay down, because nothing will say inflation louder than the Fed becoming the lender of last resort to the Treasury, the self-described spender of last resort. At that point, the price of gold begins to soar, with interest following along in fairly short order.

As I am moving fast, I'm glossing over a new round of stimulus spending, and another after that – but those are pretty much taken as givens for now. And I'm sure I'm overlooking other desperate measures the government might take – for example, exchange controls or the creation of a dual currency system (one for the locals and one for the foreigners) -- but those will be more of a reactive nature following the broader collapse and the return of price inflation.

Of course, the government has the option of calling the whole thing off and turning their attention to supporting the free market... scraping the convoluted and counterproductive tax system in favor of a flat tax... reducing regulations... cutting government spending... but that's just silly talk.

In any event, if you have any thoughts on the topic, drop them my way at david@caseyresearch.com. In the meantime, the above seems a good list of trial balloons to keep a watch out for in the darkening skies.

Kindle Two

As readers of any duration are aware, my recent run-ins with technology aside, I have a fixation of sorts about Amazon's Kindle reading device. As I have described in far too much detail in prior missives, I think the K-I-N-D-L-E spells D-O-O-M for anything other than children's and coffee table book publishers, and I'm not so sure about the former.

Given that the other members of my immediate family agree on the many merits of the Kindle, most nights a scuffle of the friendly sort for the use of it occurs. That, and because I didn't need any other encouragement, really, caused me to rush out and buy the new Kindle as soon as it became available.

While I didn't think it possible, Amazon has outdone itself, smoothing out every first-generation bump and producing a truly elegant new reader.

I'm not going to go into any detail here, because there are now numerous articles on version two, but I will give it my wholehearted endorsement. It is more streamlined, functional, and just all around better than V.1, and that was already best of class, in my firmly held opinion.

Coincidently, this morning subscriber, correspondent, and fellow Kindle aficionado Ryan D. wrote in to suggest that we make our publications more Kindle-friendly (there is a function that allows you to email yourself documents to read on the Kindle, and apparently our letters currently don't "translate" very well). Jumping on the idea, I sent Ryan's email on to our production team, and they have already answered that this seems a task we can manage. And so, if I have anything to do with it (and I do), we will.

Not sure how long it will take, but we'll keep you posted.

Letters from You

I received a couple of letters this week that I thought worth sharing. In the first, D. White takes Jerry C. to task for the ditty on taxation he provided for last week's edition of this missive.

As I read D. White's comments, I chuckled -- but in a chagrined sort of way -- because I had entirely failed to register the point of contention to which she refers, and I near simultaneously remembered that the week before, I had shared the song "It's a Man's World" by James Brown and Pavarotti. Am I a subconscious sexist? I hope not... because I'm certainly not a conscious one.

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

"Not one of these taxes existed 100 years ago and our nation was the most prosperous in the world. We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids."

Well, let's see – there were no cars – so there goes the motor vehicle taxes, license taxes, gas taxes, etc. Of course, at that time, most people couldn't even afford a horse, streets were polluted by equine waste, a trip of 20 miles was a major production, and many people rarely or never left the town they were born in. I guess you think that we were all better off that way. The country may have been the most prosperous in the world (the Brits of that time probably disagreed), but life expectancy was lower, infant and maternal mortality higher, and the standard of living much, much lower. Read "The Jungle" for more details on how swell things were.

Mom had no choice but to stay home and raise the kids. And if anything happened to Dad, they were all likely to wind up in the poorhouse or county farm (they still existed), because she had no opportunity for decent employment. I think most women are grateful for their expanded horizons, Jerry – but perhaps you are the barefoot-and-pregnant kind of guy. If that's the case, let's hope that medical science (funded by the government) quickly gives you a chance to try being Mr. Mom. I'll be happy to personally chain you to the stove – which 100 years ago was much more dangerous than today and the cause of many house fires and women's deaths when their long skirts went up in flames.

Then, to liven up my day, I received this...

All I can say is, thank god Obama is willing to try to do something to unstick the system. Sarcastic philosophical rantings aren't doing it for me... nor do they help our country.

Richard

Here's the response I hastily dashed off in Richard's direction...

So, let me ask you a straight-up question. What is the economic theory – the past examples, if you will – of a government spending and taxing its way out of trouble? How exactly does that work?

The nation is bankrupt and, as would be the case with an individual, it has to come to grips with that fact. Grabbing another handful of credit cards and heading back to the mall solves nothing. It just makes things worse.

I can, and will, comment in whatever tone I see fit when I see a continuation of the same stupid and dangerous policies that got us here in the first place. Hell, I'd even happily go for the extra 40% tax increase that I will have to pay if Obama's budget passes, if it was part of a plan that actually had a chance of working.

But I am indignant at the idea that government should do "something" just "because," with zero basis in even rudimentary economics.

I hope that his rigorous actions give you a lot of personal comfort – that temporary comfort will be paid for by your great-grandchildren.

I include that last correspondence not to show that I can get my hairs up when pushed to it, but rather to stress that the skeptical comments I make now and again really aren't about Obama, per se... but rather, about his administration's clear willingness to stay the course -- the same course but even accelerated – as his predecessors.

Unlike, apparently, the often-contradictory Mr. Limbaugh (who, for instance, called for drug dealers to be shot at the same time he was a secret drug addict), I have no desire to see Mr. Obama fail... provided, of course, that we first define "success."

If in "succeeding," the Obama administration turns the nation into a socialist paradise, trapping my capital with exchange controls, and then slowly (or not so slowly) confiscating it for the "greater good," then I guess I'd prefer him to fail.

On the other hand, if his financial shell game somehow managed to get the country through to greener pastures and better days, then clearly that is an outcome I'd have to salute.

The problem is that, using history as our guide and seeing a litany of new initiatives that hardly help, and in many cases, actively hamper the enterprising individual, the only realistic conclusion I can come to is that the government remains stubbornly on the road to ruin.

The sign post for Bush's road read "To Baghdad." Obama's reads "To a Perfect World."

Both lead off a cliff.

On That Topic...

Thanks to subscriber Matt F. for sending this along...

The government cannot give to anybody anything that the government does not first take from somebody else.

When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation.

You cannot multiply wealth by dividing it.

Dr. Adrian Rogers

Miscellany

Get Well Soon, Bud. In addition to his never-ending quest for truth in economics, our own Bud Conrad likes to engage in somewhat dangerous sports... like windsurfing off the coast of Northern California and, apparently, riding ten-speed bicycles too fast on city streets. Fortunately, it was his left arm he broke in three places, and not his right. Get well soon, Bud.
Phyle News.
- Alex C., who runs the first-ever Casey phyle at his coffee shop in Calgary, is looking to hold a get-together at some point in March.
- John is looking to start a phyle in the Minneapolis/St. Paul area.
As usual, if you are interested in participating in these or other gatherings of Casey subscribers around the country – and the world – drop us a note at phyles@caseyresearch.com.

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

As I sign off, I see that the stock market has reversed rather sharply from its early enthusiasm and is now down 35 points. More to the point, the short position I put on as I began to write you today is about $800 to the good.

To be clear, I am definitely not a day trader. But given the news that greeted the opening bell this morning, that U.S. unemployment is at 8.1%, the highest in 25 years, the early rally made no sense. Ergo, the quick application of a short position.

Importantly, I was comfortable allocating a modest portion of the speculative corner of my portfolio to shorting the broader market, figuring that even if I do badly today, the stream of bad news is certain to continue into next week, and likely next month, and even next year. So, provided I can afford to weather a setback, which can happen at any time, then I am pretty confident I'll be able to close out the position within the week for a nice gain. And if the bottom falls out again this afternoon, then I'll make this a day trade after all and bank the short-term gain. At which point, I might take the family out to a nice dinner, enjoyed without any undue haste.

Adding a little frosting to the cake, I see that gold once again refuses to be pushed down and has bobbed back up to $939. While it is certainly not inconceivable – and maybe inevitable – we'll see it back in the 800s again before the final lift-off, there is no question we are showing firm support in here. And, as hard as we look, we can't see anything in the way of a serious obstruction to it holding up and going higher. Ditto, silver is starting to get pretty interesting, but that is a topic for another day.

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/27/2009

David Galland — Fri, 27 Feb 2009 20:07:00 GMT

February 27, 2009

Dear Readers,

This morning, as I was looking over dispatches from correspondents around the world – from Ed in Alberta… Sadia in the UK… Baldy in Indonesia… the “General” in Portugal… and Nitin in Katmandu – I began to appreciate what it must have been like to be on the news desk during World War II.

I am trying not to be overly pessimistic, but there’s no denying the mass of bad news coming to us from all fronts: the forces of collectivism are using the cover of the crisis they largely created, aided and abetted by capitalism’s quislings, to roll over the individual.

Even so, contained within the dire reportage is also some very good news for you personally, and I’ll touch on that as well in today’s missive.

The Bad News

As fully anticipated, with its first budget plan, the Obama administration has fired a salvo into the side of the productive classes. (For those of you who are not U.S. citizens, feel free to use Team Obama as a proxy for what is likely to occur where you reside.)

Yes, we expected the $1.75 trillion budget deficit, which will, by the time all is said and done, come in a lot closer to the $2.5 trillion number anticipated some months ago by our own Bud Conrad.

Yes, we expected the government to begin raising taxes, which they are proposing to do with vigor – starting with an increase of $1.4 trillion on the people who earn in excess of $250,000 a year. “Right on!” shouts the mob, on the way out the door to burn Porsches.

For no other purpose than to keep the record straight, it’s worth noting that thanks to the government’s steady dose of inflation, $250,000 today will only buy you 77% of what it would have in 1998… and 56% of what it would have in 1988.

A decade from now, given the inflation rate we expect, the dollar’s purchasing power will erode by another 50%, and probably a lot more than that. In fact, at the current rate of money creation, by the time the dust settles, $250,000 might be the annual wage commanded by burger flippers.

But, hey, look at the bright side, at that point everyone will be rich!

The further details of Obama’s budget plan are a hodgepodge of this and that, some of which we even agree with (like cutting business subsidies). On the whole, however, the overarching mandate appears to be to thrust the hand of government, like some motion picture kung fu villain, deep into the heart of American enterprise.

And government’s expansion is far from over. Even as I write, the news continues to pour in…

Citigroup to get another $25 billion bailout from the U.S. Treasury.
Treasury officials work on bailout plan for auto parts manufacturers.
President Obama exploring automatic workplace pensions and an expansion of unemployment insurance.
AIG, now a government lap puppy, takes another big loss, and is again looking to its master for another handout.
Speaking of lap puppies, Fannie Mae, has lost another $25 billion and is looking for $15 billion more from the Treasury. The value of this zombie institution’s net assets is now a negative $105 billion, and eroding. Great investment of your tax dollars, eh?
Then there’s the new administration’s cap-and-trade green tax… a stunning new initiative that will bring many U.S. businesses to their knees. (You can read more about it here.)

There is more, so much more, including a $638 billion reserve fund for healthcare reform in the president’s budget that loudly broadcasts that, “Yes, we’re going there.” There being nationalized health care.

But you already read too much and don’t need me to rehash things as they are.

I will, however, comment on the way things will be, because in that, at least, we can find some good news.

The Good News

My fellow citizens of planet Earth, it is now abundantly clear that the trend toward socialism in all its many disguises is about to, once again, shift into high gear.

We’ve been here before, encouraged by the words of Karl Marx, a distinctly unsuccessful individual (to read his life story is to read of almost unending misery, poverty, and discontent) but a decidedly successful phrase-coiner, knocking the world off its axis with his “From each according to his ability, to each according to his need.”

While no one with any real sense of history, not to mention economics, can take any overt joy at the prospect of the dark clouds of collectivism looming high in the sky above us, there is, if you pay close attention, a very big opportunity in all of this.

Namely, we are now presented with a relatively rare chance to see with some clarity into the future.

Imagine if eight years from now you could step into a time machine and zip right back to this very moment. How much money do you think you could make?

Well, just because the chattering masses have the blinders on as they march forward to their collective penury doesn’t mean we need to join them. And, if we are even a little bit careful, we won’t.

So, what is it about the future we can now see? Some broad strokes…

Currency depreciation.
More taxes.
Rising interest rates.
A price capitulation in real estate, with a collapse in commercial.
Exchange controls (now that Team Obama is raising your taxes, you don’t really think they’re going to let you pick up your wealth and leave, do you? The window for global diversification will soon be closing.)
The return of mega-labor unions.
Trade wars, shooting wars, and other forms of heightened geopolitical tension.

(This is a topic we are discussing at greater length, backed up with specific recommendations, in the March edition of The Casey Report, which will be released on or around March 3. Among its many highlights, Doug Casey is just putting the finishing touches on his article titled “Street Fighting Man” about the prospects for social unrest.)

Provided you keep your personal wealth profile low (there was a reason Sam Walton, founder of Walmart, drove a beat-up pick-up truck), your financial powder dry, and, maybe most important of all, retain your sense of humor, the opportunities in the unfolding crisis will be abundant

We’ll do what we can to help you spot those opportunities in our various services. If you are unsure which of our services is right for you, don’t hesitate to try them all… we offer very generous trial subscriptions, most of which come with a full money-back guarantee if you don’t find the service a good match. We have no interest in trying to rope you into a service that isn’t exactly right for you, so don’t feel bad at all if you try a service and later cancel for a full refund. We’re just happy to have the opportunity to share our research with you.

You can learn about all our services, of course, at CaseyResearch.com.

Ed. Note

Casey Trend Trader

not

Casey Trend Trader

learn more about our Trend Trader trial offer here

Whatever you do, don’t be complacent about what’s coming.

We are long past the point where doing nothing is an option. Review your personal finances, cut out unnecessary expenses, talk to your accountant about tax planning, and, if you’re a U.S. citizen, consider moving at least some of your wealth out of the country while you still can (but please, don’t try to hide it… that’s a fool’s errand). If you own gold, only you and your spouse, if you have one, should be aware of it.

Ask yourself, “If I just dropped in from eight years in the future, what measures would I take?”

Now, take them.

A Musical Interlude

This week, I have been listening – repeatedly, according to certain innocent bystanders -- to the following tracks.

For the rock & rollers among you, Can’t You Hear Me Knocking from the Rolling Stones kicks off with one of my personal favorite guitar riffs. Listen to it here.

And for pretty much anyone, an odd but really well-done duet by James Brown and Luciano Pavarotti singing “It’s a Man’s World,” which was sent along by subscriber David B. in response to last week’s call for dramatic music. Now, I don’t know if this song is as sexist as its title makes it seem (I haven’t listened closely to the words), but watching James Brown doing his natural best to match vocal talents with Pavarotti is, alone, worth the price of admission. Which, in this case, is just a click on the link here.

Have some dramatic music you want to share? Shoot it my way at David@caseyresearch.com.

A Golden Opportunity

While it’s still a long shot, one possible outcome of the deluge of paper money about to hit the global economy may be that governments will be forced by simple math back to a gold standard: when you dump trillions of freshly created paper into the market, inflation must soar.

And because governments produce nothing, the servicing of all their many debts and new spending programs gives rise to the real risk that the inflation could devolve into a Zimbabwe-like downward spiral. At that point, the intelligentsia, uncomfortable at the sight of glowering pensioners growing tired of living on dog food, may be forced back to a sound money system.

For the most part the citizenry has no memory of a gold standard, and even less understanding of same. We expect that to change. And, in fact, an early straw in the wind showed up this week in the form of a YouTube video sent along by subscriber Peter F.

You really must watch this, given that it is an excerpt from a major cable news personality, Glenn Beck, who manages to wax intelligently on matters involving the gold standard. There may be hope after all.

Watch it by clicking here.

Meanwhile, rather than wait for government to act on gold convertibility for their currencies, individuals the world over are doing their own conversions by trading their paper currencies for the hard stuff in record amounts.

Rand Refinery Ltd.

Johan Botha

Many of you have written to us expressing concern about the potential for direct action by the U.S. government against gold, – now that it’s returning to its dominant role as a sound money – including an outright ban or confiscation. We don’t see any signs of that yet, but we’re vigilant.

Damn Foreigners

The rising power of the mob in virtually all of the world’s democracies invariably leads to geopolitical tensions.

That’s because the ruling elites know they need to pander to the blunt-force voting blocs if they are to retain their elevated status. And there are few issues more unifying to the mob than the sight of filthy foreigners taking advantage at the expense of the locals. Whether it’s the damn illegal wetbacks who dare to cut our lawns or wash our restaurant dishes on the cheap, or the crafty Chinamen willing to work for pennies a day to feed their families – thereby taking food out of the very mouths of good union folks here in the U.S.A. – fanning the flames of nationalism is as easy as drawing breath for any politician worthy of the label.

And so we’ll be seeing a lot more of that, too, as politicians on both sides of the spectrum revert to script in redirecting the blame for what is now unfolding, and what is yet to come, to anywhere other than where it belongs.

This is a dangerous game.

For starters, the U.S. is now deeply, deeply in debt to the rest of the world. While the Chinese have, so far, been tolerant, their recent demands for some form of guarantee before they buy any more U.S. agency debt is a clear signal that their patience with the U.S. government’s prolificacy is not without limits.

Some of you might protest that the Chinese and other foreign trading partners, looking for a commercial advantage by keeping our currency high, encouraged the U.S. government to spend, spend, spend by engaging in a policy well described as lend, lend, lend. And you are right. But since when does anyone have to take a loan, just because it’s offered?

At any point during the decades-long run-up in federal government spending, the reigning morons in the Washington swamp could have “just said no.”

Instead, they said “yes,” embarking on foreign adventures… spending trillions on building and then largely ruining the world’s biggest military apparatus… offering financial backing to liar loans… launching the mutant health care scheme that goes by the name of Medicare… and… and… agreeing to whatever other thick, fat-laden slice of pork the politicians thought the lazy-minded voteriat would find agreeable.

We don’t need to look overseas for people to blame. The culprits are still knocking around the halls of power, just wearing new ties (with cute little donkeys on them instead of elephants), their blubbery lips retrained to spout off about the need for new subsidies to promote this or that green energy project “for our children” (conveniently forgetting that their cousin Bob happens to be a big shareholder in said project).

Sorry about that. Got a little carried away, listening once again to Can’t Hear Me Knocking at high volume.

I need to move on, because I have to get back to editing The Casey Report, and because I just got invited to make an appearance this afternoon on Fox Business.

But before I go, I want to bring this down to a more human level by sharing the contents of an email I received this morning from Baldy in Indonesia.

I guess we’ll find out just how splendid isolation really is…

Look for the Union Label

By Donald Grove, Casey Research Washington Correspondent

After last week’s edition of this exercise in fulminating, subscriber Buster H., sent along the following note:

I am surprised you have not mentioned the major stealth labor union executive order signed (without any media coverage) by Obama on Feb. 6. Read the text here.

After reading the referenced document, I shot off a note to Donald Grove, our tireless Washington correspondent, asking him to turn over a few stones to get to the bottom of the story. Here’s his report…

Unions played a big role in putting Obama in the White House. His campaign website assured his labor backers that he would “fight for passage of the [so-called] Employee Free Choice Act” (which would eliminate secret ballots and leave workers who don’t want a union vulnerable to harassment), “ban the permanent replacement of striking workers, increase the minimum wage and index it to inflation to ensure it rises every year,” and “increase the Earned Income Tax Credit to make sure that full-time workers earn a living wage that allows them to raise their families and pay for basic needs.” Once safely ensconced as the nation’s chief executive, it was time for Obama to remember those who put him there.

On January 30, with inauguration festivities still a fresh memory, Obama signed three union-friendly executive orders reversing a series of Bush administration executive orders dictating how federal contractors are to deal with union workers.

Obama said, “We cannot have a strong middle class without strong labor unions. We need to level the playing field for workers and the unions that represent their interests. I do not view the labor movement as part of the problem. To me, it's part of the solution.”

AFL-CIO President John Sweeney, who attended the signing ceremony, said “The executive orders are the first step in a long road to restore balance between workers and corporations. As the weeks and months continue, we thank God that we have a president, vice president, and Congress who are determined to fix our economy so that it works for everyone.”

On February 6, the president tossed labor another bone. While this fourth labor-friendly executive order does not require executive-branch agencies to use project labor agreements on construction projects, “it is the policy of the Federal Government to encourage executive agencies to consider requiring the use of project labor agreements in connection with large-scale construction projects in order to promote economy and efficiency in Federal procurement.” Unions love these agreements, which were prohibited by the Bush administration.

Michael Steele, the new chairman of the Republican National Committee, had a different take, however. He said, “President Obama’s executive order will drive up the cost of government at a time when we should be doing everything possible to save taxpayer dollars. federal contracts should go to the businesses that can offer taxpayers the best value – not just the unions who supported the Democrats’ campaigns last year. Quietly signing executive orders to pay back campaign backers undermines Obama’s promise to change Washington. It is a disappointment for Americans hoping for more transparency and less politics-as-usual in Washington.”

According to two of America’s largest construction industry trade groups, the president’s orders would limit the number of workers hired on new federal jobs to build roads, bridges, and buildings – the very projects touted as creating millions of new jobs as part of the stimulus package. Jerry Gorski, national chairman of the Associated Builders and Contractors, said that 84% of the country's construction workers are not in labor unions. “If the purpose of these projects is to get Americans back to work, why would we pick an approach that would allow only a small percentage of the construction workforce to participate?” Brian Turmail, speaking for the Associated General Contractors, said Obama’s executive order “takes the contractor out of the process of negotiating with their employees and puts the government in that role.”

Here are the orders for those who wish to scrutinize.

2009-01-30 Notification of Employee Rights under Federal Labor Laws
2009-01-30 Nondisplacement of Qualified Workers under Service Contracts
2009-01-30 Economy in Government Contracting
2009-02-06 Project Labor Agreements

A couple have not yet appeared on the White House Briefing Room at http://www.whitehouse.gov/the_press_office.

I’m sure many of you will recall this inspirational jingle: http://www.youtube.com/watch?v=tNTpOnZqeUo

Thank God it’s Friday!

Regards, Don

State Sovereignty – Saying “No” to the Feds

By Shannara Johnson

David again. There have been a number of articles recently about the possible break-up of the Eurozone. Before those of us in the U.S. get too smug, we might want to wonder if something akin to that could happen here. “Never!” I can hear some of you exclaiming, and you are probably right. But we are very much heading into unchartered waters, with a serious power grab on the federal level that leaves the states with much of the costs associated with complying with the spate of new regulations.

Shannara Johnson, a senior researcher and editor here at Casey Research who touches almost everything you read from us – quite amazingly so – found the time to dig in on something of a revolt now brewing in capitals around these 50 states. Her report follows…

Drowned out by the fiscal calamities of recent months, there is a new “movement” in the United States; one that has, incredibly, received little attention from the mainstream media. Not so united anymore, an increasing number of states have been introducing resolutions to declare sovereignty.

Now, to clarify this, a declaration of sovereignty is not the same as secession. Rather, it is the assertion of states’ rights – rights that are guaranteed by the Constitution and have been, in the view of many state governments, eroded or usurped by the bigwigs in Washington, DC.

In the words of Arizona state Rep. Judy Burges, “We are telling the federal government that we are a sovereign state and want to be treated as such. We are not a branch of the federal government.”

The states are pointing to the 9th and 10th Amendments, which affirm, “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people” and “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

Even though it’s not secession, it is definitely a warning shot. The resolutions demand that the Obama administration “cease and desist” from unrestrained government expansion; they also imply that federal laws and regulations that violate the 10th Amendment can be nullified by the states.

So far, ten states have recently drafted or are about to draft bills to declare sovereignty: Oklahoma, Arizona, Missouri, Michigan, Hawaii, Montana, New Hampshire, South Carolina, Washington, and Texas. And according to analysts, up to 20 more states may follow suit this year, including Alaska, Alabama, Arkansas, California, Colorado, Georgia, Idaho, Indiana, Kansas, Nevada, Maine, and Pennsylvania.

The complaints mainly revolve around federal legislation imposed on the states without their consent; pet peeves include gun control laws, martial law provisions, freedom of religion and speech, and out-of-control federal spending.

“Live Free or Die” state New Hampshire’s resolution is one of the harshest:

NH Representative Dan Itse told FOX News’ Glenn Beck, “It’s a line in the sand to tell the federal government that they are no longer allowed to transgress the Constitution, and if they do, then they’re nullifying the Constitution.”

So far, so good. Here at Casey Research, ever the small-government advocates, we might be inclined to applaud the gutsiness of the states’ lawmakers. However, as Beck pointed out in his interview with Itse, some things just don’t add up.

For example, despite tough words and fingering the revolvers strapped to their hips, many governments of the very same states that are declaring sovereignty do not seem to mind holding their hands out for their share of the stimulus money the Obama administration is dangling in front of them. They just don’t like to be told by the feds how to spend it.

The Washington Times reported that Republican governor Mark Sanford of South Carolina “aggressively opposed the stimulus plan. However, in a Thursday morning interview on CBS’ ‘The Early Show,’ Mr. Sanford said his state would accept money from the stimulus bill. Opposing the plan ‘doesn’t preclude taking the money,’ said Mr. Sanford.”

Pragmatism or hypocrisy? Tad DeHaven of the Cato Institute chooses the latter, noting that about a third of average total state spending comes from the federal government. Brian Riedl, a budget analyst at the Heritage Foundation, agrees: “To a large degree, states are scapegoating their budget problems on Washington. It’s tough to be sympathetic for states and local governments when they go $467 billion in federal grants last year.”

Tax Revolt – Part I

Friend and mining stock guru Rick Rule sent the following along this week…

Actual “Letter to the Editor” from the February 5th edition of the Wichita Falls, Texas Times Record News...

Dear IRS,

I am sorry to inform you that I will not be able to pay taxes owed April 15, but all is not lost.

I have paid these taxes: accounts receivable tax, building permit tax, CDL tax, cigarette tax, corporate income tax, dog license tax, federal income tax, unemployment tax, gasoline tax, hunting license tax, fishing license tax, waterfowl stamp tax, inheritance tax, inventory tax, liquor tax, luxury tax, Medicare tax, city, school and county property tax, real estate tax, Social Security tax, road usage tax, toll road tax, state and city sales tax, recreational vehicle tax, state franchise tax, state unemployment tax, telephone federal excise tax, telephone federal state and local surcharge tax, telephone minimum usage surcharge tax, telephone state and local tax, utility tax, vehicle license registration tax, capital gains tax, lease severance tax, oil and gas assessment tax, Colorado property tax, Texas, Colorado, Wyoming, Oklahoma, and New Mexico sales tax, and many more that I can't recall, but I have run out of space and money anyway.

When you do not receive my check April 15, just know that it is an honest mistake. Please treat me the same way you treated Congressmen Charles Rangel, Chris Dodd, Barney Frank, and ex-Congressman Tom Daschle and, of course, your boss Timothy Geithner. No penalties and no interest.

Ed Barnett
Wichita Falls

P.S. I will make at least a partial payment as soon as I get my stimulus check.

Tax Revolt – Part II

Thanks to subscriber and periodic correspondent Jerry C. for sending this along…

Tax the table at which he's fed.

Tax his tractor, tax his mule,

Teach him taxes are the rule.

Tax his work, tax his pay,

He works for peanuts anyway.

Tax his cow, tax his goat,

Tax his pants, tax his coat.

Tax his ties, tax his shirt,

Tax his work, tax his dirt.

Tax his tobacco, tax his drink,

Tax him if he tries to think.

Tax his cigars, tax his beers,

If he cries, tax his tears.

Tax his car, tax his gas,

Find other ways to tax his ass.

Tax all he has, then let him know,

You won't be done till he has no dough.

When he screams, then tax him some more.

Tax him till he's good and sore.

Then tax his coffin, tax his grave, tax the sod in which he's laid.

Put these words upon his tomb,

“Taxes drove me to my doom...”

When he's gone, do not relax,

It’s time to apply the inheritance tax.

Accounts Receivable Tax, Building Permit Tax, CDL License Tax, Cigarette Tax, Corporate Income Tax, Dog License Tax, Excise Tax, Federal Income Tax, Federal Unemployment Tax (FUTA), Fishing License Tax, Food License Tax, Fuel Permit Tax, Gasoline Tax, Gross Receipts Tax, Hunting License Tax, Inheritance Tax, Inventory Tax, IRS Interest Charges/IRS Penalties (tax on top of tax), Liquor Tax, Luxury Taxes, Marriage License Tax, Medicare Tax, Personal Property Tax, Property Tax, Real Estate Tax, Service Charge Tax, Social Security Tax, Road Usage Tax, Sales Tax, Recreational Vehicle Tax, School Tax, State Income Tax, State Unemployment Tax (SUTA) Telephone Federal Excise Tax, Telephone Federal Universal Service Fee Tax, Telephone Federal, State and Local Surcharge Taxes, Telephone Minimum Usage Surcharge Tax, Telephone Recurring and Non-recurring Charges Tax, Telephone State and Local Tax, Telephone Usage Charge Tax, Utility Taxes, Vehicle License Registration Tax, Vehicle Sales Tax, Watercraft Registration Tax, Well Permit Tax, Workers Compensation Tax.

Not one of these taxes existed 100 years ago and our nation was the most prosperous in the world.

We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids.

What happened? Can you spell P-O-L-I-T-I-C-I-A-N-S?

David again. If you are not yet tired of this week’s bashing of government, read the following opinion piece titled “America’s biggest problem is big government” by Dr. Gary Wolfram of Hillsdale College. It’s worth a read. Click here.

Miscellany

Toronto Phyle. On March 3rd at 7:30 p.m., the Toronto Phyle will be hosting three members of the Casey Research team, all of whom are in town for the annual Prospectors and Developers conference. If you are going to be in the area and want to connect with other Casey subscribers as well as Jeff Clark, editor of BIG GOLD, Doug Hornig of the Daily Resource, and Louis James, our senior researcher and editor of the CIA and International Speculator, drop us a note at phyles@caseyresearch.com and we’ll get you the details.
In Other Phyle News… Oren in Israel… John in Boise, ID… Michael in the Quartzsite/Parker, AZ, Blythe, CA area… plus other individuals in Edmonton, Alberta… Kingston, NY, and Wichita, KS, are willing to host subscriber get-togethers. Drop us a note at the email address just above, and we’ll get you connected.

And that, dear readers is that for this week. As I look at the screens, I see that the stock market, after having opened up sharply lower, is now down just a little… while gold is trading at $940, well off from its latest run-up near the $1,000 mark. That’s okay. This is not a sprint we are in but the early days of a grueling trek to what’s next. Gold will be a critical part of our financial travel kit and, at times along the way, a pretty good trading sardine, too. For instance, if it gets knocked back into the mid-$800s.

Stay the course.

Before signing off, I would like to give a special thanks to all of our many correspondents. Over the years, we have built a large and robust international network that now serves as an early-warning system for our team. You collectively make our task of scanning the world for what is important far easier… and individually, you make my job all that more agreeable.

For those of you who will be making it to Vegas, let’s grab a beer together. And for those who won’t, a toast in your general direction.

On the topic of Vegas, or more specifically, our upcoming Crisis & Opportunity Summit, we never did quite get around to sending out a big promotion, but the conference is all but sold out at this point. We can take a few more registrations, but just a few. By this time next week, it will be a complete sell-out. So, if you’re still interested, and you should be, the time to act is now. More info here.

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/20/2009

David Galland — Sat, 21 Feb 2009 04:34:00 GMT

Dear Reader,

We’re going to be flying low and fast in this weekly scan of the landscape in the quest for items that are “important,” as opposed to “merely interesting.”

At the top of the list of what we would consider important is the increasing likelihood that the wheels are about to come off the global economy. And, worse, fly through the air and wipe out any number of innocent bystanders. (By now, you and the other readers of our services should already be safely in the duck-and-cover position.)

It is becoming clear that more than just our subscribers are beginning to understand the depth, severity, and nature of this crisis: as I begin writing this morning, gold has rebounded to just a few ticks away from the $1,000 mark. By the time I am finished today, we could see that mark taken out. More on that topic later, but first…

Making It Up on the Fly

President Obama this week signed into law the new $787 billion stimulus plan, then followed up with a $287 billion housing initiative with $75 billion to support a convoluted plan to keep individuals who can’t afford to stay in their homes… in those very same homes.

I say the plan is convoluted because, simply, it is. And how could it be otherwise?

This and so many of the other major initiatives now flying out of Washington are being brewed up in a proverbial blink of the eye. The stimulus bill – which many in Congress have admitted to never having read before voting on it – runs over 1,000 pages and is mind-boggling in its complexity. Virtually every one of the dozens of multimillion or multibillion spending components included in the bill will require the hiring, training, and equipping of armies of new bureaucrats.

There will be mission statements to be drawn up, buildings to be designed and built, grant programs created, oversight committees assembled, human resources professionals hired, forms to be drawn, and databases to be programmed… and that’s just for starters. To make the point, try to envision the start-up process involved with just the following handful of initiatives, a fraction of the total included in the bill…

* For “Broadband Technology Opportunities Program,” $4,700,000,000.

* For “Digital-to-Analog Converter Box Program,” $650,000,000, for additional coupons and related activities under the program implemented under section 3005 of the Digital Television Transition and Public Safety Act of 2005.

* For “Scientific and Technical Research and Services,” $220,000,000.

* For “Construction of Research Facilities,” $360,000,000.

* For an additional amount for “Operations, Research, and Facilities,” $230,000,000.

* For an additional amount for “Procurement, Acquisition, and Construction,” $600,000,000.

Chris Wood of our office actually went through the herculean effort of reading through the entire stimulus bill and pulling out all of the various spending items contained therein. To review the full list, and as a taxpayer, you should, click here.

As you read through the list, ask yourself just how many of the items are the equivalent of digging holes and then filling them in again… versus something that at least remotely resembles an investment with the potential for a payoff down the road?

My point is this: while I am on principle opposed to any new government spending, a weak case could be made for the government to invest in something that might actually produce a return on the money spent. The government’s investment in building the interstate highway system enhanced the free exchange of goods and services and, by so doing, provided some sustainable increase in gross national product. That, in turn, allowed the government to recoup its expenses – and more – over time through taxes on the increased revenues.

That, however, is an entirely different beast than the massive pork doling and hole digging included in the latest stimulus bill. How, for example, does the $200 million allocated to building and furnishing new headquarters for Homeland Security achieve anything other than support further government bloat (or worse)? How does the $165 million earmarked for the U.S. Fish and Wildlife Service to spend in upgrading wildlife refuges do anything other than give a bunch of aging boy scouts more money to play with? Then there’s the hybrid cars for the military and… and…

And let’s not forget the $75 billion housing foreclosure program, yet another quickly conceived government experiment in social and economic engineering. While I could unleash a rant on the topic, I doubt I’d be able to outdo the subtle sarcasm and pure entertainment value of the one you’ll find at PlanetMoron.com, one of the few blogs I make it a habit to read. Read it here, you’ll enjoy it. http://planetmoron.typepad.com/

The bottom line is that government is just making up this stuff as it goes, backed by not even a scintilla of historic evidence that this approach is going to lead anywhere but to prolonging the crisis and to a major inflation. If you haven’t prepared for it, start now.

Credit Capitulation

Speaking of the housing bill, Doug Hornig, the hard-working editor of the Daily Resource PLUS and regular contributor to our BIG GOLD publication, dropped me the following note today.

Here's a local tale of two friends. One of my buddies, who's never missed a mortgage payment, tried to refinance and was denied. Another fell behind by two months, came home one day, and found a FedEx envelope at his house. Inside was an offer from Countrywide, his mortgage holder, saying they were lowering his payments by $700/month and pushing all his delinquency fees to the end of the mortgage. He took the deal.

To state what should be obvious, as people struggling on the financial edge look around and notice that others in similar circumstances are simply throwing in the towel on their debts and receiving government assurances that they will be provided relief, as well as hard cash, they, too, will begin capitulating. This is a trend in motion that will only worsen until and unless the government steps aside and says, “Sorry, that’s it. Henceforth, you will have to suffer the consequences of your own financial decision making, the government can do no more.”

But, of course, that is not at all what the government is going to do. Instead, they will continue to return to the legislative drawing board, interspersed with trips to the podium to deliver compassionate speeches designed to reassure the populace that yet more help is on the way.

Meanwhile, more signs of credit capitulation are appearing daily. This week, we learned that credit card defaults are on track to exceed 10% this year and could go as high as the “mid-teens,” according to the folks who watch this stuff at Moody’s.

Losses of that magnitude will do a couple of things. For one, they will further damage the margins at the major banks and issuers, which are already suffering mightily. How mightily? Between 2007 and 2008, the world’s largest credit card company, Citigroup, saw its card profits collapse from $4.7 billion down to $166 million. For another, the rising tide of credit card defaults will further freeze up credit lines, unless, of course, Uncle Sam can be chatted up for guarantees and further bailouts (you can get a glimpse of the good Uncle by putting on a fake goatee and donning a red, white, and blue top hat, then looking in the mirror). In fact, the banks are already clearing their throats about the need for yet more money.

At this point, this is akin to a big hamster wheel – with the government running as hard as it can – and the axle of the wheel connected to the arm of a printing press.

In a conversation earlier this week, our own Terry Coxon made an astute observation when he said something to the effect of, “You know, David, if the government had just done nothing when this crisis first appeared a year and a half ago, it would probably be over by now.”

I think he’s right. People would have taken their losses, revalued their assets, gone out of business, moved out of houses they couldn’t afford (or directly negotiated workouts with their lenders), banks would have failed… but the “value discovery” that is a prerequisite to any recovery would be well advanced at this stage.

Instead, governments the world over have decided on taking a different path, trying to print their way out of trouble… a well-worn path that assures this thing will drag on for years.

If there’s a silver lining (besides the personal profit potential for the attentive), it’s that the current path could very well lead to the end of the fiat money experiment. Even the financial celebrity of the day, Nouriel Roubini, is warning of that potential, albeit indirectly. This from Bloomberg:

“The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign,” Roubini wrote on his Web site today. “At some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system -- including deposit guarantees -- could come unglued.”

(Interestingly, Roubini’s prescription for the global economy is to further socialize the private losses by ramping up the stimulus even further… oh, well.)

Money is all about trust. And when the public at large no longer trusts the central banks in charge of their respective currencies – and the steady demand for gold confirms this is a trend in motion – then the fiat money system will come unglued.

All that is missing is a single major government to call it quits on fiat currency and announce they will henceforth link to gold. That will be the game changer. In my view, it is now inevitable. And, at the speed at which things are unraveling, maybe even imminent.

If I had to guess which country might be most likely to go there first, I’d put the odds on Russia.

About That Whole Deflation Thing…

As you might suspect, a number of readers have challenged us on our conclusion that the current monetary inflation must, after a lag, resolve itself in a serious price inflation.

We are always polite in our responses and do try to see the other side. Yet we remain firm in our conviction, thanks in no small part to the observable reality that the governments of the world are reacting exactly as we have long predicted they would to this crisis. Namely trying to print themselves out of the mess they have created.

This week, despite the widespread expectation of further signs of deflation, it was inflation that showed up at the door. Starting with U.S. producer prices, which went up 0.8 percent in January. Then today, knock, knock, consumer price inflation stopped by, rising 0.3 percent month over month. The price of food, in particular, continues to rise at the rate of 10.1 percent annualized.

And the U.S. wasn’t the only country registering an inflation surprise. This from the Financial Times, under the headline, “UK inflation more entrenched than expected”…

Inflation is more entrenched than many economists had imagined, easing only marginally in January as the weaker pound pushed up the price of imports and offset much of the benefit of lower fuel and housing costs.

The consumer prices index rose in January at a year-on-year rate of 3 per cent, down from a 3.1 per cent rate in December, official figures showed on Tuesday.

But retail prices – the measure of inflation felt by most households – defied economists’ expectations of a contraction, registering a 0.1 per cent year-on-year rise in January as rising prices of household goods offset some of the impact of falling mortgage interest payments.

There is a combination of things going on. For one, commodities, which have taken a brutal thrashing (other than gold, of course) are now showing signs of a bottom. And that is to be expected, given that so many are now selling at or near the cost of production. A farmer doesn’t need to have a PhD to know not to plant crops that they are sure to lose money on.

For another, merchants, finding they have less business, are trying to make up the lack of volume with higher prices. I have seen that anecdotally in the local merchants and have heard it from other correspondents. And, as was mentioned in the case of the UK, the weakness of the pound means that the exports it must buy now cost more.

But all that is just window dressing for the flood of money just now beginning to enter the system, thanks to a global race to quantitative easing.

Even as they admit their surprise at the latest inflation numbers, government officials and the punditry are quick to pooh-pooh the notion that inflation can do anything but fall from here. While it would be foolish to expect that inflation can only rise from here, though that is far from out of the question, when you think about it, the government’s view that deflation is the primary problem is the only stance they can adopt.

That’s because to acknowledge the potential for inflation at the very same time they are adopting quantitative easing would be a serious disconnect. And, in the case of the U.S., it could scare away foreign dollar holders.

Thus, the official line is, “There can be no inflation.”

I wonder if the foreign dollar holders are buying it?

China Dumping Dollars?

On February 11, 2009, a senior Chinese Banking official, one Mr. Luo, went on record following a speech in New York as saying that, despite some misgivings, his country would continue buying U.S. treasuries and otherwise supporting the U.S. dollar. The following quote from the Financial Times captures the moment…

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion . . . we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Reading that citation reminds me of some advice I heard from a currency trader some years ago. “If you want to know what a country has planned for its currency,” he said, “listen to what the government says they are going to do, then expect the exact opposite.”

Now, if you were the Chinese bureaucrats in charge of such things, and you wanted to lighten your dollar holdings, would you (a) announce that you were going to be a seller and then try to beat everyone to the door, or (b) announce you were going to be buyer and then slip out the exits while no one was looking?

On that front, there was a rather telling photo in the Financial Times this week, which I liked so much I scanned it for you here.

It shows the official signing ceremony between Rio Tinto and Chinalco, for the largest deal a Chinese state company has ever done… exchanging a pile of 20 billion U.S. dollars for an additional big chunk of equity in the mining giant (with this investment, Chinalco will have invested $33.5 billion in Rio Tinto).

What I liked about the photo was how Rio Tinto’s CEO is poised on the edge of his seat. You can almost read his mind, "Please sign, he's going to sign it, oh please sign it, there he goes, he's going to sign it, oh gawd, I just can't stand the suspense, just sign it! "

Now, to review the transaction, the Chinese take $20 billion of their $700 billion or so pile of U.S. dollars and exchange it for an 18% interest in a company that produces $54 billion worth of a variety of commodities, a company with assets that, at current production rates, should hold out for decades.

Rio Tinto, on the other hand, gets $20 billion to pay down some of the debt it’s run up in its quest for growth. As paying down that debt only helps the company's prospects, the Chinese have just had what might be termed in corporate speak, a "win-win-win." They unloaded some dollars, bought into a stream of essential commodities needed to keep their country’s manufacturing sector at work, and at the same time helped assure that their shares in Rio Tinto, bought on the cheap, will actually weather the current downturn in commodity prices.

And there is one more thing. As such a large shareholder, the Chinese are now able to exert a lot of influence on the company, influence that will almost certainly result in off-take agreements being signed down the road. In other words, while other countries will increasingly be forced to scrap it out for the world’s remaining reserves of key commodities, through this strategic and farsighted business move – and many similar to it – the Chinese are assuring themselves of a reliable supply, long into the future.

Suggesting a certain urgency to the unloading of their dollars at this advantageous time, just days after the Chinalco deal was signed, Minmetals, the Chinese state-owned metals trading company, stepped up to the plate to buy Oz Minerals, the world’s second largest zinc producer, lock, stock, and barrel for $1.7 billion.

Whatever you may think about the Chinese, you have to give them a tip of the hat as economic competitors. While the U.S. and much of the world are in full panic mode, the Chinese are sticking with their long-held plans to secure the raw materials they will need to keep their economy productive for decades to come. And thanks to the global economic crisis, they are now able to fulfill that mandate at a deep discount, and pay for their purchases with a depreciating asset – the U.S. dollar.

Since we are on the topic of the Chinese, the news came out this week that they – and other Asian investors – are not willing to buy any more mortgage-backed securities from Freddie and Fannie unless they are given explicit, versus implicit, guarantees from Uncle Sam (quick glance in the mirror).

Frankly, I don’t see how the government can fail to provide those guarantees, even though the act further solidifies the fact that taxpayers are on the hook for all manner of bad debt.

This is, I suspect, the beginning of the trend that will lead to foreign creditors of all stripes and inclination treating the U.S. government as they might any hapless bankrupt, demanding terms that suit them and not the U.S. government.

But, many analysts opine, the Chinese and other foreign dollar holders have to support the U.S. government and its currency, because otherwise their own dollar holdings will be hurt.

To which I answer, “Rio Tinto” and “Oz Minerals.”

Let’s Talk Gold

Today I have had communications from two friends, one of whom I stay in regular touch with and one I had lost touch with for a couple of years.

In both instances, they expressed their belief that gold is about to rocket higher and wanted my opinion on whether now is a good time to buy.

My answer, after the usual caveat that I really have no idea, is that they need to decide why they want to own gold.

If it is as a core holding – to buy and forget about as insurance against the very real potential of a currency crisis – then buy away.

If, on the other hand, it is as a speculation, then they might want to hold off to see if there is a pullback here. No market goes up in a straight line, and gold will be no exception. That said, if you can wait out a correction that might see gold fall back $100, or even $200, before heading back higher again, then, again, buy away.

I also pointed out that until the inflation begins to really ramp up, there is no penalty for sitting in cash (at least in the U.S.). So, if capital preservation is your goal, then simply sitting on cash is not a bad move for the time being.

At this point, there is every sign that gold wants to go higher. Demand in gold in 2008 was about 29% over that of 2007, according to the latest report from the World Gold Council. And demand for bars and coins was up by 87%, mitigating the fall-off in jewelry sales. One other useful observation in the report was that strong buying kicked in on any dips in the price.

So, we appear to have something of a floor under the price of gold at this point. If you look at the price of gold over the last couple of years, the floor appears to be around the $750 mark. If you are okay buying here, around $1,000 an ounce, with the clear understanding that gold could see as much as a 25% retrenchment, then go for it. If, on the other hand, the potential for that sort of a short-term pullback worries you, stick to cash and maybe you’ll get a chance to buy cheaper, as earlier buyers take profits at the higher prices now available.

But couldn’t gold go down from here, and stay down?

Anything is possible, but looking at the shape of things, I would rate the odds of that happening as very low.

Shattered Hope

I was going to do an article this week commenting on some recent media reports that certain U.S. military leaders were expressing concern and dismay that President Obama was actually taking time to deliberate before committing more troops to Afghanistan.

I was going to be complimentary that rather than reflexively throwing men into an unwinnable war, he would reconsider the whole (bad) idea and maybe even start drawing up plans for an orderly withdrawal. But then, on Feb 17, he stepped up to the plate and approved a 50% increase in U.S. troop levels.

I heard the UK defense secretary commenting on the Obama administration’s commitment, in the context of being asked if the UK would commit more troops. While not a direct quote, he said that they are reviewing the situation, but are concerned that there are too many “caveats” applied to the rules of engagement in Afghanistan, and that they would be more willing to add troops if those caveats could be eliminated or reduced.

What he was saying, in plain-speak, is that they want to be able to apply whatever brute force they feel was required, regardless of the collateral damage, in taking out the local opposition to the current occupation by NATO forces.

This is a very slippery slope, and one that the West should already know as a failed idea from even a cursory reading of the history books. As I have commented on in the past, there is no conceivable way that the West could hope to outdo the naked brutality exhibited by the Soviets in their run at Afghanistan. And look where that got them.

So why, exactly, are we marching deeper and deeper into Afghanistan? Call me a cynic, but I suspect it is because President Obama, in the next election, wants to be able to stand up to the inevitable charges that would otherwise fly that he was “soft on terrorism” or “failed to support our troops.”

Getting deeper into Afghanistan is, in my opinion, a great and entirely avoidable travesty.

(On the topic of the Soviets in Afghanistan, The Beast, an older movie about a Soviet tank crew that gets lost in that dangerous country is well worth a watch.)

Enough of all that. To improve my mood, and hopefully yours, I want to share with you a couple of items I came across this week that I think you’ll find amusing.

Just for Fun

This first item came in an email from a friend with the subject: “How the stimulus package works.”

Three contractors are bidding to fix a broken fence at the White House. One is from Chicago, another is from Tennessee, and the third is from Minnesota.

All three go with a White House official to examine the fence. The Minnesota contractor takes out a tape measure and does some measuring, then works some figures with a pencil. "Well," he says, "I figure the job will run about $900: $400 for materials, $400 for my crew and $100 profit for me."

The Tennessee contractor also does some measuring and figuring, then says, "I can do this job for $700: $300 for materials, $300 for my crew and $100 profit for me."

The Chicago contractor doesn't measure or figure, but leans over to the White House official and whispers, "$2,700."

The official, incredulous, says, "You didn't even measure like the other guys! How did you come up with such a high figure?"

The Chicago contractor whispers back, "$1,000 for me, $1,000 for you, and we hire the guy from Tennessee to fix the fence."

"Done!" replies the government official.

And that, my friends, is how the new stimulus plan will work.

A Really Good Read

The following article is reprinted with permission of the publisher of the local newspaper. The article is one of the best-written and most entertaining I have read in any paper in years. It was written for The Waterbury Record by Peter Miller, a well-known local photographer… and a great writer, in my opinion. The article, about an epic battle between a local man and a fisher cat (as you will read, a mean-tempered member of the weasel family) offers a glimpse into life hereabouts, though not all the locals are quite so eloquent. I just love the passing reference to coq au vin. Enjoy…

Scott Broderick of Waterbury Center recently engaged in mortal combat with a fisher cat.

Broderick and his partner, Amber Rae Sulick, are house-sitting for friends in a renovated farmhouse a mile off Route 100 in Waterbury Center, on Gregg Hill Road. In front of the house is a large wetland. Behind the house are woods that scatter down to the Waterbury Reservoir. The pair takes care of the dogs, cats and a coop of chickens.

On Sunday, Jan. 24, Sulick came back from a cross-country ski hike and found three chickens slaughtered.

“They were in the outside pen,” Sulick said. “Two bantams and one black hen. They were lying limp on the snow. Their throats had been sliced and there was a little spot of blood around the neck. They were not eaten or ripped apart. I could see in the snow where the chickens had been chased around the pen. I could see the tracks really well. The animal hopped , two and two, feet together. I thought it was a weasel. This happened between 2 p.m. and 4 in the afternoon, when I was checking for eggs.”

The next day, while Sulick was at work, Broderick went for a snowshoe hike and when he returned, he heard all sorts of commotion coming from the chicken coop.

“There were thumps, squawks, squeals of terror and screams that are best imagined,” said Broderick. “I took off the snowshoes and hurried into the coop. I could see, through the chicken mesh, that Ozzie the rooster was flat on his back, the head turned to the side. He looked dead. A black animal was on top, like a vampire, sucking blood. It looked up at me, showed its bloody teeth and hissed.

“I had two axes by the door, for splitting wood and dispatching, recently, a rooster that we turned into a coq au vin for Christmas dinner. I grabbed both axes, entered through the small door and went after him. The animal — I later found out that it was a fisher cat — leapt off Ozzie and, ignoring me, went after the hens. There were more terrible squawks and screeches. The fisher moved so fast, I was missing on my swings. It then climbed up on poles near the rafters. Suddenly, it turned its attention to me. …Suddenly, I was no longer on the attack but defending myself.”

The fisher leapt through the air and onto Broderick’s chest. “If I hadn’t moved back he would have latched onto my face. I could have ended up like Ozzie, who had his comb chewed off, lost an eye and had a lot of blood sucked out of him,” he said.

“I threw him off and he landed in the corner, where the hens cowered. More squawks, screams and wing-beating,” he said. “The fisher, with incredible speed, climbed back up to the overhead poles and screaming its battle cry, again leapt at me. I knocked him down and then I was screaming, as I hit him with the axe, over and over.”

Broderick was not bitten. Ozzie the rooster was taken inside and given first aid. When it was returned to the coop, the hens circled around him very glad to have the master back. However, the rooster died two days later.

A fisher cat can weigh up to 14 pounds and measure 36 inches, including its bushy tail. They are ferocious predators, related to the wolverine, and feed on porcupines, other wildlife and farm animals. They also have a taste for domesticated cats. Very rarely do they attack humans, but in this case, the fisher may have felt cornered.

Miscellany

* Casey Research Las Vegas Crisis & Opportunity Summit Update. First off, we have finalized the program and are very happy to announce that we have lined up an excellent keynote speaker for the banquet, Professor Tom Rustici from George Mason University. I’m not going to go into any great detail on Professor Rustici here, other than to say he is a terrific speaker with deep (and surprisingly entertaining) insights into the nature of depressions. We have also confirmed John Woolway, a professional bond manager of long experience, to discuss a range of topics related to his specialty, including best ways to invest for income today, opportunities in TIPS, how to play rising interest rates, and more.

All of the rooms at the Four Seasons are now sold out, but we are working on securing a handful of rooms at the Mandalay Bay (the adjoining sister property to the Four Seasons) starting at $189++. Please email summit@caseyresearch.com to get more information.

There are still a handful of seats left, but not many. With everything going on in the world just now, this promises to be our most important – and profitable – Summit to date. Hope you can make it. Registration information, as well as a link to the final schedule, be found by clicking here.

* Gun Control on the Way? Someone sent me an email on a bill called HR 45 Blair Holt Firearm Licensing & Record of Sales Act of 2009. Always skeptical about emailed information of this sort, I had a researcher give it a look and, sorry to say, it’s real. The bottom line is that Congress is taking up a bill that will require gun purchasers to jump through a number of hoops before being able to buy a gun, including pass a test and agree to allowing government officials to come to your house to inspect your guns at will. Failure to properly secure your guns will carry a fine and even the potential for a five-year stint in jail. You can read more about the legislation here. http://www.opencongress.org/bill/111-h45/text.

Knowing as I do the attitude of a number of gun-owning acquaintances of mine, I think legislation such as this could trigger some pretty strident opposition. And for good reasons: one of history’s better-documented lessons is that almost every transition to dictatorship has been preceded by some form of gun control.

* Where Do They Get Their Numbers? Hardly a day goes by of late without some member of Team Obama standing up to announce that this plan or that will create or preserve X million of jobs, or help “as many as 5 million homeowners refinance.” Most people accept such pronouncements as having a loose connection to reality. They don’t.

In fact, that sort of loose talk is highly misleading and counterproductive, because it gives the populace the false impression that the economy is almost mechanical in nature. Push this button or that, and voila, out pops a million jobs. If it were that easy, then why would Team Obama stop at 3 million jobs, as they claim will be created in the latest stimulus bill? Why not just give the knob a few more twists and go for full employment? There’s nothing particularly profound in this observation, because you already know that the economy is a complex system, which is to say, it is largely unpredictable. So, the next time you hear the president or anyone else in the ring of power spouting off some specific numbers associated with this initiative or that, join me in making a loud raspberry sound. Or throw your shoes… whichever makes you feel better.

* New Phyles. Zoe is looking to start up a group in Reno. And Mike in Kingwood, Texas, has started up a phyle and is looking for more members. If you live in or near either of those places and would enjoy sharing views with other Casey subscribers, drop Kristen a note at phyles@caseyresearch.com.

* Music? I often include links to music that has caught my attention over the previous week, but not much of anything has overly moved me of late – I like powerful music – so last week I skipped and I was going to do so again. However, there is one song, from the movie Slumdog Millionaire, that I have had on rotation and find it pretty snappy… it’s called O-Saya by M.I.A. You can hear it here.

(If you have some dramatic and exciting music you’d like to share, drop me a line at David@caseyresearch.com.)

And that, dear readers, is that for this week. And what a week it has been.

To give you some sense of how things have gone, yesterday I recorded an hour-and-a-half-long phone interview with Dave Hightower and Terry Roggensack, the commodities gurus behind our new Casey Trend Trader.

During the interview, which is to appear as a special feature in the next edition of The Casey Report, we talked about just about everything you can imagine as it relates to commodities, including the data they monitor on China’s current stockpiling of commodities… whether or not gold is being manipulated… where the GLD ETF is getting its gold… which commodities are selling at or below the price of production… which ones are poised to rebound first and strongest and which are still at risk… how to structure futures and options trades to tightly control risk (in their entire 27 years in the business, they have never had a major loss)… plus, the outlook for oil and natural gas… when interest rates are likely to turn around, and much, much more.

As we finished, I was so excited about the interview that I pushed the wrong button on my recorder. Then I compounded the error by pushing a second wrong button, sending the entire recording to the permanent trash bin in the sky! In the words of Mr. Broderick, quoted above, on discovering the loss of the recording, there were “…thumps, squawks, squeals of terror and screams that are best imagined.”

The thumps being my head repeatedly hitting the desk.

Fortunately, Mssrs. Hightower and Roggensack are patient and even forgiving individuals, and so we will be doing it all over again. Look for the new interview in the next edition of The Casey Report.

(If you are not yet a subscriber, don’t hesitate for a minute to take us up on our special new subscriber offer. We make it easy and inexpensive to give this unique monthly letter a try, because we’re convinced that once you try it, you’ll want to stay with it. Learn more about the trial offer here.)

As I sign off, I see that the rout in stocks continues, with the Dow off by another 175 points. Oh, and looky there… Senator Christopher Dodd says that the government might need to nationalize some banks. Is it any wonder that gold spot has just cracked over $1,000?

For many moons now, we have cautioned you to “be right and sit tight.” While, as per above, there is no sure way to know where gold is going to go in the short term, there is likewise nothing we can see that doesn’t suggest that it can’t go much higher in the longer run.

We live in interesting times.

Until next week, thank you for reading and for being a subscriber to a Casey Research service. If you find us helpful, don’t hesitate to spread the good word to your friends and associates.

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 01/30/2009

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

January 30, 2009

Dear Reader,

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

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

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

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

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

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

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

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

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

Turnaround in Interest Rates?

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

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

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

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

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

Bait for the Two-Legged Rat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dolts!

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

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

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

Obama Watch

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

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

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

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

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

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

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

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

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

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

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

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

Go Gold!

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

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

Miscellany

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

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

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

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

It's coming...

And I am going...

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 01/23/09

David Galland — Tue, 27 Jan 2009 15:39:00 GMT

January 23, 2009

Dear Readers,

Like a runaway train, the crisis is heading at breakneck speed down the hill and towards the next sharp turn.

Though we are reasonably sure about the ultimate destination – an inflationary wreck – we can’t be entirely sure what exactly awaits around the next corner. Is it a reasonably long straightaway that gently slopes upward for a spell, allowing the train to slow to a safer speed? Or is it a broken trestle bridge hanging over a gap a mile wide and a mile deep?

Some typically random thoughts on the topic…

Obama at the Bat

As you don't need me to tell you, Obama's coronation, complete with a full court of princes, princesses, and even a couple of jesters, was greeted by the massive crowd with rousing choruses of God Save Obama... but by the financial markets with a sharp sell-off.

Since then, the market has struggled to do its part in heralding in the new American Era, managing, so far, to muster only a tepid one-day blip. Meanwhile, the economic news just gets worse. And worse.

This has investors keyed up and waiting in a nervous state of anticipation for Team Obama to step up to the home plate.

Given all that is at stake, when Team Obama eventually emerge from their many collaborations and deliberations to make the BIG announcement on their plans to save the world, we suspect they will be carrying a very big bat. As the new Treasury secretary stated, the plan they’ll present will be “dramatic.”

That leads us to conclude that one of two scenarios must almost surely follow...

Scenario One: They announce something that is so large it blows the mind and settles the markets. Evidence of this scenario being the one unfolding would be if, on hearing the details of the New Deal, your reaction were something along the lines of… "Wow, I can't believe they'd go that far, but I guess it's the kind of medicine needed just now."

At which point my guess is that the financial markets would take a deep breath and the Obama rally would start, giving the global economy an early spring break.

Scenario Two: Obama strikes out. They step up to the plate with a flimsy little bat that the next hard pitch shatters into small pieces that fly into the eyes of the crowd. A lot of arm waving occurs as the global economic train rounds the bend and spots the abyss just ahead. Positioned as they are in the engine at the front of the train, Team Obama start to frantically grab for levers, sparks fly, a fire breaks out, smoke, brakes screaming, people ducking for cover… you get the idea.

Which way do I personally think things will break? I quote myself from the July 18, 2008 edition of this column/blog thingy.

So, here we are. As predicted back in July, Obama has been sworn in and he is working on a New Deal. Further, this New Deal will almost certainly be geared entirely toward increasing, not decreasing, the weight of government on the economy.

With that view in mind, one might lean toward Scenario One… yet I have a hard time imagining what the government can do at this point that could be so BIG that they’ll be able to smooth the global waters and mollify the restless masses. Especially with such a steady drumbeat of bad news coming from both the U.S. and overseas… the UK, China, Eurozone, Japan, etc., etc., etc.

That I can’t envision such a plan at this very moment is only because my imagination hasn’t been sufficiently amped up with enough coffee this morning. And so, with the benefit of another shot of espresso, I remember that the U.S. government can do pretty much anything it wants, short of opening up concentration camps, and get away with it… for a time at least.

In fact, with a bit more effort, I do see one plan shaping up that might, just might, do the trick.

And that is for the U.S. government to set up a new operation with a forward-looking title such as “The Economic Recovery Corporation of America.” All of the nation’s banks and any other institution deemed “important” by the administration would earn shares in this new entity by handing over the toxic assets that now pollute their portfolios.

With all its wisdom, the U.S. government would provide management expertise to work the paper out over time, keeping the new “Bad Bank” afloat in the interim with government guarantees. To the extent that the government actually has to make good on any of its guarantees, it would recoup the losses taken prior to the contributing institutions receiving any share of the proceeds from the liquidations. To help get this idea through Congress, the Treasury would set a realistic time table for the workout – say, ten years – and confidently project that the new entity would ultimately make money from its activities.

Of course, there would be a lot of detailed work to make this idea work, but the plan – which has already been hinted at by members of the administration – could be packaged in such a way that it could be deemed acceptable even to members of Congress, despite the hefty price tag.

As to the size of that price tag, the outstanding toxic paper on the books of the banks is currently estimated at somewhere between one and two trillion smackers.

“But Congress would never pass another big bailout to the greedy banks!” some would say.

To which I might reply, “For Bush, you are right. He had burned through all his goodwill. But at this early stage in his administration, provided the thing was properly packaged with an extra big helping of spin, our shiny new president can get pretty much anything he wants.”

So, that is how Scenario One might come to pass; a national Get Out of Jail Free card for banks. Followed, I suspect, by governments around the world quickly following suit. Problem solved, crisis over. The Obama rally starts and the world enjoys several months of respite before the hard reality that this thing is far, far from over smacks the global economy up the side of the head. More on that in a moment.

But what about Scenario Two – Obama strikes out? It could very well happen. People are very skittish just now. If history has repeatedly demonstrated anything, it is that governments are heavily prone to miscalculation. In the current situation, should they propose a plan that leaves people muttering to themselves, “What? That’s it? You must be kidding!” the retribution would come hard and fast.

Unfortunately, until we actually hear the details of “the plan” – which should be announced relatively soon – we simply can’t know which way things are going to break.

There are, however, a couple of things that I think we can be pretty sure of, in either scenario.

Gold soars. In Scenario One, the market will correctly see the fresh wave of new money as inflationary – as it has at virtually every new bailout announcement over the last six months – and send gold spiking upwards. In Scenario Two, the scramble for safety triggered by the looming abyss will likewise send people scrambling for gold. Going out on the limb a bit, I’m going to guess that gold is headed over $1,000 within the next month or three.

There will be a crash, regardless. All Scenario One does is postpone, and for not very long (three months?), the day of reckoning. It does nothing to actually resolve the massive misallocation of capital built up over decades of excessive spending and debt creation. The plan, at least as I envision it, just assures that the government’s debt soars even further. And, should it succeed in actually getting banks to loan and strapped consumers to borrow again… it just exacerbates the situation.

In addition to gold, I also think there are going to be some spectacular trading opportunities coming up, opportunities we are well geared up to take advantage of with our new Casey Trend Trader service.

It is now up and running, but heretofore, only for our Alert subscribers. A broader release on the service will be out soon… it is temporarily hung up in some minor administrative details related to the announcement itself. Watch for it.

Swearengen on the New Administration

Last week I reprinted a rather strongly worded and entirely unflattering farewell to George Bush by my dear friend and business partner, Doug Casey.

In response, I received several strongly worded emails from readers, including one from a Vietnam vet who threatened to beat me up for, I guess, exercising the right of free speech that soldiers are regularly attributed with fighting for. Oh, well.

In that, in the same edition, I expressed some skepticism about the economy’s prospects under the Obama administration, I also received several emails from readers suggesting we get on board with the Obama express… emphatically stating that we owe the guy a decent chance to fix things.

While I think I have tried to be fair in my assessment of what we might expect of Obama, I will accept that, even at this early point in his administration, I am skeptical.

To help explain why, I will take a roundabout approach by stating that Doug and I share a passion for the now canceled HBO series Deadwood.

Deadwood, about the founding and early days of that infamous Wild West town, is not for everyone, due primarily to equal parts sex, violence, and truly obscene language. Yet if you can get past the first couple of episodes – and almost no one I know other than Doug has – the degraded milieu of the show begins to grow on you. Especially when you realize that the writers regularly use iambic pentameter to express their most colorful language.

So, other than being aficionados of violent westerns (Doug's favorite movie of all time is The Wild Bunch, and I cast top ten votes for The Outlaw Josey Wales and The Searchers), what does this have to do with anything?

Stick with me for a minute, because there was a scene in Deadwood that struck me as relevant given this week's inauguration of Mr. Obama.

The set up is that Al Swearengen, the hard case who was instrumental in the founding of Deadwood, finds his turf being cut into by George Hearst, the scion of the Hearst dynasty who is trying to hone in on the nearby Homestake Mine, the biggest of the Black Hills mines, and one of the largest in North America. Hearst is a hard-charging bull who knows what he wants, and what he wants, he gets (in real life, he ended up buying Homestake in 1877 for $70,000... in today's money, that's $1,347,705).

In any event, Hearst sends a flunky over to Al Swearengen's saloon and invites him to his hotel room for a pow wow about the future of Deadwood, a future he very much wants to control. When the meeting doesn't go exactly as Hearst intends, he has his henchmen grab Al, hold his hand down on a table, remove a couple of fingers with a bowie knife, then toss him out on the street.

About a week later, Hearst decides he wants to meet again with Swearengen. And so he sends the same flunky back to Swearengen’s saloon to request that Al, once again, follows the flunky back to a meeting with Hearst.

Upon hearing the request for a second meeting, Swearengen, his hand still swaddled in bandages, raises one eyebrow skeptically and says the immortal words, "Why, the must take me for an optimist."

Well, given my life experience to date, an experience that has involved watching a succession of presidents pursuing policies that have each, in turn, increased both the size of government and its many obligations to the point where we are now on the brink of the worst financial debacle since the nation’s founding, you will excuse me if, when asked by anyone to grab hands around Obama's campfire, my mind returns to Swearengen’s words, "Why, the must take me for an optimist."

But wait, say Obama's many fans, he's different! He really will change things!

To which I reply: Bush’s inauguration, $40 million (a ridiculous amount); Obama's, $170 million (an insane amount). I would have been impressed if he had a modest affair in the Rose Garden, with a modest little wine and cheese served afterward. But $170 million?

It says to me like little else can that the new administration is, at the least, still living in the past – a past marked by excesses in all things.

And so, for the time being, like Al, I am going to have to be convinced by something other than words.

Leaving off on the topic, other than the sheer spectacle and Obama’s seemingly well-practiced, beatific countenance as he walked toward the inaugural podium, the thing that jumped out at me the most was when a camera zoomed in on a T-shirt that was apparently quite popular with the crowd, and that is pictured here.

Skepticism aside, I sincerely do hope that Obama does a better than average job… but yet, I can’t help but find the expectations inherent in the iconography that surrounds the man deeply concerning. The higher the expectations, the harder the fall.

The Continuing Crisis

Item One: Real Estate Still in Real Trouble. I can remember some years ago being shown a fixer-upper selling for $750,000 in a neighborhood near the San Francisco airport where one would have to be stupid or well armed to go out after nightfall. My, what a difference a few years make. This from Bloomberg…

Jan. 21 (Bloomberg) -- Home prices in the San Francisco Bay Area fell 44 percent last month from a year earlier as discounted, foreclosed properties lured buyers, MDA DataQuick said.
In a conversation this week with real estate pro Andy Miller, he shared his view that there is literally nothing, but nothing, that any government body in the world can do about real estate until values fall to the point where equilibrium returns. And we are nowhere near that point. It doesn’t hurt to be looking for that dream property you have always wanted, but the smart money is holding off buying… probably through the end of this year. (As all real estate is local, there will of course be exceptions.)

Item Two: Let's Piss Off China! In his Senate confirmation hearing, Treasury secretary nominee Timothy Geithner went on record that… “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.” Adding, “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”

This audience, more than most, is aware of the fact that foreigners – led by China – were responsible for buying something like 80% of the U.S. Treasury bonds sold over the last couple of years. So, naturally, it makes perfect sense that the likely new Treasury secretary would come out of the starter’s gate with tough words for China, even though buyers will have to be found for record quantities of Treasuries in the months just ahead.

The distinguished New York Congressman Charles Rangel seconded Geithner by warning that, “What they can’t work out diplomatically, we can work out legislatively.”

See my earlier remarks on governments serially making miscalculations.

Item Three: What Price Oil? I recently commented on the fact that the price of many things has either already fallen, or soon will fall, below the cost of production. On that general topic, regular correspondent and über-researcher Marko F. of Canaccord sent along the following item this week.

The IMF recently compiled a list of break-even prices that various oil-producing nations require in order to avoid a budget deficit in 2009. Those figures are as follows: Bahrain $84, Kuwait $34, Oman $78, Qatar $24, Saudi Arabia $54, United Arab Emirates $24, Algeria $60, Azerbaijan $35, Iran $90 (!), Iraq ($94), Kazakhstan $67, and Libya $53.
While there is some internal debate here at Casey Research on the outlook for oil prices, my personal sense is that it is approaching oversold. One of many recent developments in the energy scene supporting that view occurred this week when we learned that the output at PEMEX, Mexico’s state oil company, fell 9 percent in 2008. This is, unfortunately, a trend solidly in motion: from its peak production of 3.8 million barrels per day in 2004, Mexican production is now ringing in at just 2.8 million bbl/d, a startling drop of 1 million bbl/d in just four years.

The consequences of this decline are serious, starting with the simple fact that the already embattled Mexican government derives over 40% of its revenue from PEMEX. As the underlying cause of the production decline is that the giant Cantarell field is well past peak, this is not a situation that will be quickly or easily resolved.

While this heightens the odds that Mexico will become a failed state, it also supports Jeffrey Brown’s time line that by 2014 – if not sooner – Mexico will stop exporting oil.

So, sure, oil and gas might stay under pressure for a bit longer… but the time will come, and probably sooner rather than later, when you’ll want to begin positioning yourself for some exceptional contrarian profits.

Casey Energy Opportunities

The Casey Report

Casey Research Crisis & Opportunity Summit

more info here

Item Four: Car, Anyone? In a recent edition of these weekly musings, I mentioned that, while flying into Newark recently, I could see a sea of unsold cars waiting on the dock of the port. Apparently, this is a growing problem, as you can see for yourself by clicking this link.

Item 5: Credit Denied. Regular correspondent Jeff B. sent this along earlier today.

Item 6: Who’s at Fault? This just in from Casey Research Washington correspondent, Don Grove.

Item 7: Next, It Gets Ugly. There was an interesting article in the Times of London this week on the growing number of violent protests flaring up around the world. Here’s an excerpt.

And here’s a link to the full article.

A sign of times to come? I think the answer is, yes… especially as more and more people hit the unemployment lines.

Item 8: The Unemployment Lines. John Mauldin, who has just signed on as a faculty member for our March 20-22 Crisis & Opportunity Summit, puts out an excellent weekly letter, titled Out of the Box (more here http://www.investorsinsight.com/). In his latest edition, he sheds some useful light on the government’s prettied-up employment statistics. Here’s the quote:

There is much more I could include under the topic “The Continuing Crisis,” but time and space prohibits it.

From the big-picture perspective, while one should practice optimism at every chance in everyday life – life is much happier that way – when it comes time to roll up your sleeves and work on your finances, pessimism remains the word of the day… and likely, the week, month, and year as well.

In time this storm will pass, just not real soon, and not because some government spokesperson – no matter how well spoken – says it has.

Crisis & Opportunity Summit Update – Going, Going…

There are a couple of important developments to share in regards to the upcoming Casey Research Crisis & Opportunity Summit, being held at the beautiful Four Seasons in Las Vegas, March 20-22.

The first is that the Summit is now more than half sold out, despite almost no marketing on the event (we wanted to hold off until the first draft of the schedule was ready).

Further, the deeply discounted room block at the Four Seasons at $195 a night, versus an amount normally almost twice that – is almost sold out (we are trying to negotiate for more).

And finally, the aforementioned schedule is now finished. While discussions continue with several additional individuals we are determined to land as faculty – including Congressman Ron Paul and former GAO Comptroller David Walker – the line-up as it now stands is, I think, exceptional. By the time the event is over, participants will come away well armed with the hard facts and specific knowledge needed to both persevere and prosper in the crisis now unfolding. While our various services will provide you with most of what you need to know to stay ahead of the crowd, the added advantage of this Summit is that it allows you to get the answers to all your many questions, in a collegial and almost familial setting.

In any event, I’m not going to pitch you hard on attending; rather, I wanted to let you know that if you might be interested in attending, you can now view the schedule by clicking this link.

Then, act quickly if you want to attend… this event will, without question, sell out.

Hope to see you there!

And That’s It for This Week…

As I wrap up this week, I see that the stock market is trying to end the week on a softer note, and the Dow is down only 57 points. But, whoa Nelly! Gold is up strongly, up $37.60 to $896.40. Per above, I am increasingly convinced we’re on our way back over $1,000.

For those of you who appreciate the musical selections I share now and again, I was just listening to Tori Amos’ song Cornflake Girl, a soft classic. I went looking for the song on YouTube to share it with you and came across the following video of her doing a live performance. While I like the song on the original album, until seeing this video I had never seen her perform… which, after watching her cavorting about the stage, I am now fairly sure I never will. But she has musical skills, I’ll give her that. Here’s the (strange) link.

For something entirely different, a couple of you have sent me a link to a fantastic video commentary on the bailout by Fred Thompson. Well worth a watch. Here it is… http://blip.tv/file/1528079

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

Be of good cheer… why not?

Thanks for reading and for sharing this journey with us.

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/10/2008

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.