The Room : Chrysler

The Room – 06/12/2009

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

The Room Special Alert:

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

September 18 – 20 at the Westin Tabor Center in Denver

David

Dear Readers,

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

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

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

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

centrally planned economy

capitalism,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

plug-in hybrids

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

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

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

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

Health Care, Everyone?

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

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

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

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

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

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

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

Again, according to Dr. Hogberg…

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

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

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

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

Again quoting politico.com...

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

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

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

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

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

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

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

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

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

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

Don’t get me started…

No More Big Bucks for You!

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

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

Fortunately, We Have the Law

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

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

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

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

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

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

Relying on Webster this time,

prūd,

prod, prud, prou

prode

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

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

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

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

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

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

Capital Gains… What Capital Gains?

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

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

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

Why, Mama Sam, of course.

The Road Less Traveled

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

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

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

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

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

21 Economic Models Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Promoting Free Market Economics…

By Louis James

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

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

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

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

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

Start by watching this somewhat odd video linked here…

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

www.comdig.com

www.deanlebaron.com

www.leadership.gather.com

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

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

Interesting times, indeed.

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 05/01/2009

David Galland — Fri, 01 May 2009 23:41:00 GMT

Dear Reader,

I am writing you in some haste this morning, fueled both by what may be an overdose of espresso and a general lack of sleep due to fulfilling my responsibilities as the managing editor of The Casey Report, the final copy deadline for which is inconveniently today.

In the interest of not being discovered face down on my desk, a spilled cup of coffee dripping onto the floor, I'm going to take a few shortcuts in preparing this week’s edition of The Room. Namely, relying on other members of the Casey team, as well as our impressive ranks of correspondents, to fill in some holes. I think you'll be happy with the result.

First, however, a quick word or two is in order about the Chrysler bankruptcy. In last week's edition of this somewhat manic missive, I opined that Chrysler’s bankruptcy was now both inevitable and imminent. Further, I wrote about the proceedings, which have the U.S. Treasury deeply involved in structuring the bankruptcy...

We didn't have to wait long before bankruptcy to be declared or for the government to reveal the nature of its back-office dealings regarding the unions. To quote the New York Times…

Chrysler

General Motors

Isn't it remarkable how very predictable the government can be? Now, anyone want to venture a guess why the unions made out so well in the deal? It's like shooting ducks in a barrel. Again, from the New York Times...

Ford Motor

So, after throwing billions of dollars of your money into these failing car companies, the government has essentially turned around and handed ownership over to unions. Ownership, it might be added, that was lifted out of the pockets of investors. I have little sympathy for any investor stupid enough to have kept their money in these poorly run, constantly unprofitable businesses – and I'm sure many of those investments were made out of some conviction that the U.S. government would step in with an open wallet and make everybody good. Yet, fair is fair and, as discussed last week, there are well-defined procedures in place for liquidating and distributing assets of bankrupt companies. The government simply shuffling the cards around to suit its political aims and rewarding its lobbyist friends at the expense of investors sets a very dark precedent.

Wouldn’t you think that, at a minimum, officialdom would at least thank the investors for their unwilling contribution to the nation's organized worker brigades? Hardly. Quoting Bloomberg...

John Dingell

Sander Levin

Don't you love that "will now be dealt with accordingly in court" threat?

Dorothy, we’re no longer in Kansas... or, as far as I can recognize, the United States.

Hey, look what just popped in -- some "airplane notes" from my globetrotting partner and chairman of the circus, Doug Casey.

Editor’s Note:

You can watch his appearance here

The Day the Earth Stood Still

By Doug Casey

A few thoughts occurred to me on the flight from Buenos Aires last week. I was admittedly in a bad mood thanks to the detailed interrogation one is subjected to on flights to the U.S. (and only on flights to the U.S.). In most airports in the world, security is more stringent than it used to be, but (unlike the U.S.) you can still arrive less than an hour before take-off with no problem. Only on flights to the U.S. (and Israel) are you interrogated.

Maria, our BA concierge, noticed my mood and commented that they were only doing their job. I responded that was also true of the guy who was only driving the train to Auschwitz. Notwithstanding that universal observation, there’s no doubt that flying to and within the U.S. is the bottom of the aviation barrel. Many people I know now avoid it at all cost. Even to change planes, because the U.S. is one of the very few places in the world that requires clearing customs and immigration even if you’re just connecting.

On board, Business and First were only ¾ full, Economy about ½ full. Last year the flight would have been full; it was often impossible to even get a seat on any popular route. It wasn’t Swine Flu fears, because this was several days before that hysteria hit. Clearly the Greater Depression is starting to have an effect.

I flew United, a bad habit I’ve gotten into after about 2 million miles with them. The plane was a 767, but kitted out with seats that only reclined to 45 degrees, and a crappy entertainment system. Both were relics from the ‘80s and completely unacceptable on an overnight flight. Coming from Argentina, of all places, they didn’t even offer beef on the menu -- only chicken or pasta. The cost cutting was egregious on all fronts. Oddly, the napkin sported an eyehole, allowing you to attach it to a button on your shirt. That’s a nice feature on a plane, where a bib is advisable for dining. I remark on it because United eliminated their napkin eyeholes a few years ago, in some accountant’s idea of saving a few thousand dollars a year -- even though it was a big signal to their best customers that the company was in a tailspin. Now they’ve gone back to the nice little eyelets, just as the whole enterprise is about to crash and burn. Perhaps the U.S. government will bail them out as well? Otherwise, they’re almost surely going down for the count this time.

My somber mood was reinforced by watching “The Day the Earth Stood Still,” a remake of the ‘50s classic, this time starring Keanu Reeves. My friend Robert Prechter of Elliot Wave, the only person in this business who may actually be more bearish than I am, would say (I’m sure) that the movie is another indicator of today’s social mood. And the markets don’t cause social mood; social mood generates the markets. This movie was a long way from the buoyant and optimistic theme of ET that we saw at the beginning of the Long Boom nearly three decades ago. The theme of this one is that humans are about to be destroyed, and are pretty much getting what they deserve. I rather liked the depiction of the U.S. SecDef as a woman who’s something of a cross between Madeleine Halfbright and Hillary Clinton. She does her best to push the aliens towards destroying the planet, because that’s part of her job description.

I don’t know if Klaatu and Gort, the movie’s alien protagonists, are on their way, but I know I’m going to be cashing in all of my numerous Frequent Flyer miles on United over the next year, while the company can still get the credit it needs to buy gas.

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Watch What You Wish For

This week, the clearly adept politician Sen. Arlen Specter jumped off the Republican’s burning ship in the hopes of retaining his privileges in the Senate dining room. That, plus the certain swearing-in of jokester Al Franken as the senator of Minnesota, will give the Democrats a filibuster-proof majority in the Senate, which is to say complete control over the government.

Some commentators have called Mr. Specter's ship jumping the greatest gift that President Obama could have received on his 100-day anniversary. However, my conclusion from previous instances when one party so dominates is that the Democrats have more to fear than to gain from an unstoppable majority. And that would be even more so the case today.

Simply, with total control also comes total blame for pretty much everything that goes wrong going forward. Sure, they'll be able to continue (correctly) blaming the Bush administration and, by extension, the Republicans for much of the mess we are now in -- but that artifice will only work for so long, as the vigorous “solutions" implemented by the Democrats begin to blow up in their face. Now, please don't misunderstand -- I am not saying that were the Republicans in control, they would do a better job. Rather, the best one can hope for in democracy is a rock-solid deadlock, one such as the country enjoyed during President Clinton's waning years -- when the Republicans had the president and Congress so tied up in the Affair Lewinsky that the government all but ground to a halt. In hindsight, those were dramatically pretty years from an economic perspective.

In any event, given that the Democrats are energetically readying themselves to get hoist with their own petards, I suspect that their majority won't last long -- and maybe only until the congressional elections next year.

But between now and then, almost every liberal's dream may be realized -- if only temporarily. As for the damage to the country if preposterous propositions such as taxing American industries hundreds of billions of dollars for their carbon output gets passed, that will be felt considerably longer.

We’re All About to Die!!!!

In last week's edition, I wrote an article titled "Panic Number 10," in which I discussed how, over the course of my life, I’ve witnessed approximately ten distinct media-encouraged panics. While it was the imminent destruction of the world due to global warming that served as the context for my musings, hardly was the virtual ink dry when Panic Number 11 flared up in the form of swine flu.

While I'll have more to say on the topic in a moment, taking one of the aforementioned shortcuts, I'll share some of the raw research that the ridiculously hard-working Shannara Johnson threw together at my request.

Here’s Shannara …

http://www.cdc.gov/swineflu/?s_cid=swineFlu_outbreak_001

Google Map of the U.S. and Mexico

just in Texas

this Ron Paul video

here’s a video

David again. While the media seem to have gotten way ahead of themselves in projecting the end of the world due to this particular virus, there is certainly a possibility that it could morph into something more dangerous -- and maybe even catastrophic. While I’m sure no expert on the subject, my constant reading has given me a couple of thoughts that may be of some use.

First, with North America heading into summer and meteorological conditions that are not favorable to the flu, the places to watch are those now entering winter -- for example, New Zealand, where there have already been cases reported. If things start to go seriously off the tracks there, and by that I mean a virulent spreading of the disease coupled with a significant mortality rate, then you can start getting concerned.

Second, if this were truly a pandemic, you would start to see pyramiding death totals, which hasn’t been the case in Mexico. In fact, as Shannara points out, while the media have rushed out a number of 150 dead, the World Health Organization has so far only confirmed about 20 deaths. But regardless of whose number is more accurate, the important thing is that the number is not ratcheting up quickly. If you start to see a progression such as 150 dead this week, 500 dead the next, 1,000 dead the week after that -- that's when you want to start pulling the kids from school and enjoying the pleasures of telecommuting to work. And maybe picking up a few fashionable flu respirators.

Until then, be skeptical and don't buy into this latest attempt by the media to get you all ramped up, or by the government to take upon itself yet more powers, all in the name of providing "security" to the otherwise helpless population.

Speaking of the notion of security, this week Shannara also sent across the following quote from Helen Keller that clearly demonstrates that while that lady may have been deaf and mute, timid and fearful she was not…

Helen Keller, The Open Door

Since we're on the topic, I couldn't let this week go by without mentioning a couple of almost humorous blunders by our trusted officials this week.

The first was the stunningly stupid flyover of New York City by Air Force One, accompanied tightly by a number of fighter jets, for the purpose of taking a photograph that clearly could have been created using Photoshop. Someone who knew how to properly turn a phrase commented that the military director of the White House, who is apparently behind the stunt, was guilty of "felony stupidity." In the event you haven’t yet seen the YouTube footage showing panicked residents of New York reacting in terror to the flyover, here it is.

The second item was Vice President Biden’s helpful suggestion that people avoid flying commercial airlines, due to the swine flu. That ranks right up there with Obama's finger waving at companies that hold meetings in Las Vegas.

A Word from Mother England

Subscriber and UK correspondent Richard Guthrie sent along some quick notes on the state of things in the UK that I thought you’d find informative. Here’s his update…

exploded

Technology YOU Love!

I am now running far behind, but did want to share with all of you some of the thoughts you sent in, in response to my article last week on technologies I love.

"Text Aloud"

http://nextup.com

AT&T Natural Voices

Text Aloud

.doc

.pdf

Internet Explorer

Fire Fox

The

Casey Report

Big Gold

The Room

***

http://www.xmarks.com/

***

(David here – for the record, I have the standard version of Dragon Speaking v. 10, and I find it to be near flawless. That said, if I were to buy it again, I would go with one of the versions that allow you to dictate into a handheld unit, then upload it into your computer later on.)

PDF reDirect Pro

***

www.k7.net

***

http://www.newsvine.com/_news/2008/06/05/1545236-review-finally-a-useful-digital-pen

David again. Before finishing up this week, and on this topic, I would like to mention something that a very smart friend of mine brought to my attention. Namely that there is a true revolution going on in terms of applications being developed for iPhones, Blackberry Storms, and similar advanced telephones/PDAs.

For instance, he pointed out that for something like $19.95, a golfer can now buy a GPS application that shows you where you are in any golf course, distance to the hole and other statistics for which you would previously have to have paid $200 plus to get in a standalone, handheld unit. Likewise, on my telephone, I now have a standard GPS unit. It costs almost nothing. As I write, I am listening to Pandora – mentioned last week – streaming live out of my Blackberry Storm and amplified through a set of portable speakers.

This is a topic, as well as both an opportunity and a risk, that requires a great deal more thought. How, for example, are companies like Garmin going to survive? I’d love to hear your thoughts on the winners and losers as these applications gain traction. As always, drop me a note at David@CaseyResearch.com.

Miscellany

Follow the money. This week, the Milken Institute released its annual Capital Access Index, an annual ranking of entrepreneurial access to capital around the world. Guess which country was the most entrepreneur-friendly last year? If you guessed Canada, which is where the majority of the junior resource stocks followed in our International Speculator letter are located, you guessed right.

While the paper tiger companies are still having trouble getting financing, well-run companies with solid projects are finding the money they need, and on reasonable terms. Even though the junior resource companies may have to wait a bit longer to realize their full potential, it's hard to see how you could get hurt over the medium to longer term by investing some percentage of the speculative corner of your portfolio in companies with proven million-ounce-plus gold deposits, lots of cash, competent management, and which are selling for pennies on the dollar. For more, click here.
Need a job? One of our subscribers and regular correspondents dropped me a note wondering if I knew a senior level oil executive interested in a high six-figure job working for a major Russian oil gas company. If that sounds like something you're qualified for, drop me a note at David@CaseyResearch.com.
Heroin, not love. In discussing last week's musical selection, "Under the Bridge" by the Red Hot Chili Peppers, I thought aloud that the lyrics were about amorous activities under said bridge. It turns out, some of you corrected me, that what was really going on under the bridge was that the lead singer of the band was learning the dangerous joys of heroin addiction.

Love, heroin – pretty close if you ask me. As for this week, another old favorite, Smells Like Teen Spirit by Nirvana, has risen to the surface, one that has a certain application to the viewpoint of many these days, mainly that society owes them something. Regardless, it certainly qualifies as a dramatic song – powerful even – and therefore makes the playlist.

And that, dear readers, is all I have time for this week -- in fact, it was more than I have time for, but as always, I enjoy writing to you and so I tend to go on.

A quick look at the screens shows me that stock markets are largely flat, gold has pushed back down towards $885. So, a relatively quiet day as we head into a weekend that I'm looking forward to more than usual.

Until next week, thanks for reading and thanks for being a subscriber to a Casey Research publication. (And an extra thanks to all of you who contributed to this week’s edition!).

David Galland
Managing Director
Casey Research, LLC.