The Room : Presidential Race

The Room - 10/24/2008

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

Dear Readers,

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

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

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

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

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

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

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

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

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

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

They are about to find out.

The Trial of Gold

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

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

The trial of Gold had begun.

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

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

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

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

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

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

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

"Yes?" asked Judge Market, looking grumpy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Oh, alright. Have at it."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Mr. Cuomo, any objection?"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unflustered by the bluster, Galland began to speak.

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

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

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

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

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

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

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

Galland nonchalantly replied:

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

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

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

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

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

"Yes. Right away," said Galland.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"No, sir."

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

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

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

Funeral for an Economy

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

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

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

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

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

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

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

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

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

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

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

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

So, why do I relate that scene today?

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

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

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

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

How Long Will the Foreigners Support the Dollar?

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

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

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

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

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

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

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

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

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

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

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

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

Credit Sucks and Don't Forget It

Friend and correspondent Sunni forwarded this in, this week.

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

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

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

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

Laughing Out Loud (When No One Else Is Looking)

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

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

CEO - Chief Embezzlement Officer

CFO - Corporate Fraud Officer

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

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

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

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

BROKER - What my broker has made me.

STANDARD AND POOR – Your life in a nutshell

STOCK ANALYST - The idiot that just downgraded your stock.

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

FINANCIAL PLANNER - A guy whose phone has been disconnected.

MARKET CORRECTION - The day after you buy stocks.

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

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

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

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

PROFIT – An archaic word no longer in use.

Miscellany

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

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

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

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

Best Regards,

David Galland
Managing Director

The Room - 09/26/2008

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

September 26, 2008

Dear Readers,

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

Everything has changed.

Everything is changing.

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

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

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

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

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

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

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

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

We don't care.

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

From a correspondent in Switzerland...

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

The Casey Report

Try our 3-month no-risk trial now.

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

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

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

The Bailout: Behind the Scenes

By Donald Grove

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

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

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

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

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

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

From Ron Paul...

Dear Friends,

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

The events of the past week are no exception.

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

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

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

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

There goes your country.

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

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

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

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

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

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

In liberty,

Ron Paul

Quotes from the Quislings

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

Here's my Rogues List...

Laurence Fink

BlackRock Inc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About Those Foreigners...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Musical Interlude

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

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

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

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

Explosions in the Sky

The Birth and Death of the Day

It's Natural to Be Afraid

All of a Sudden I Miss Everyone

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

KRS1 - Sound of Da Police ...

NWA - F*** Da Police

Pink Floyd - Another Brick in the Wall Pt. 2

Public Enemy - Fight the Power.

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

JS Bach's Toccata and Fugue

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

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

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

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

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

www.generalfuzz.net

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

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

Gypsy Soul

Obsession Confession

Slash

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

How about Classical Gas for a movin' song?

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

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

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

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

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

McPalin Is Toast

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

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

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

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

Huh? What?

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

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

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

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

Miscellaney

Phyling On

phyle

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

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

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

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

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

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

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

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

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

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

I'll leave it at that...

Until next week,

David Galland
Managing Director
Casey Research, LLC.

The Room 4/22/08

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

Written: April 18 2008

Dear Readers,

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

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

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

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

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

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

The Energy Picture

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

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

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

Where does he see the price going from here?

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

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

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

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

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

Coal's Comeback

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

* Values for 2008 are preliminary reported numbers subject to revision

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

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

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

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

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

So, How Are Things Going?

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

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

Here's a Trading Idea...

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

The obvious is to buy food commodities.

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

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

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

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

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

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

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

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

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

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

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

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

On the Topic of Interest Rates

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

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

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

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

President Obama?

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

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

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

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

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

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

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

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

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

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

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

Another Casey First

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

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

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

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

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

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

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

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

Q&A

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

Hi David,

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

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

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

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

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

Yours truly,

Linda

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

Linda:

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

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

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

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

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

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

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

Terry

In Defense of Marx

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

David

Based on your following statement:

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

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

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

Ross

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

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

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

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

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

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

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

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

It's Official: I'm Out of Touch

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

According to Bloomberg:

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

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

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

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

Inflation Watch

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

Here's the story.

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

Political Pandering

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

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

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

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

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

The Price of Gold

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

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

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

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

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

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

Miscellany

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

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

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

Until next week...

David Galland
Managing Director
Casey Research, LLC

The Room 2/11/08

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

Dear Readers,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But it is time to prepare for the brush fire.

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

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

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

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

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

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

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

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

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

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

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

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

What Futures Markets Are Saying About Interest Rates and the Economy

By Bud Conrad

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

[click to enlarge]

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

Making Money in a Crisis

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

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

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

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

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

[click to enlarge]

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

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

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

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

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

People Say the Funniest Things...

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

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

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

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

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

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

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

I suspect not.

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

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

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

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

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

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

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

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

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

Quick Takes on Politics

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

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

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

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

The Housing Market - Watch Out Below

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

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

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

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

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

And this...

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

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

And....

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

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

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

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

Neutron Loans

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

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

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

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

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

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

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

Now he owes $192,000.

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

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

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

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

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

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

The Honorable Richard L. Armitage

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

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

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

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

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

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

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

Get Well Soon

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

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

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

1984

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

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

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

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

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

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

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

The Quiet Revolution in Natural Gas

By Chris Gilpin, contributing editor, Casey Energy Speculator

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

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

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

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

[click to enlarge]

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

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

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

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

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

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

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

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

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

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

Affordable Health Care for All

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

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

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

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

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

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

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

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

Miscellany

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

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

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

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

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.