The Room : Dollar

The Room – 02/20/2009

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

Dear Reader,

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

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

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

Making It Up on the Fly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Credit Capitulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About That Whole Deflation Thing…

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

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

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

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

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

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

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

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

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

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

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

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

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

I wonder if the foreign dollar holders are buying it?

China Dumping Dollars?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s Talk Gold

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

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

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

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

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

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

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

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

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

Anything is possible, but looking at the shape of things, I would rate the odds of that happening as very low.

Shattered Hope

I was going to do an article this week commenting on some recent media reports that certain U.S. military leaders were expressing concern and dismay that President Obama was actually taking time to deliberate before committing more troops to Afghanistan.

I was going to be complimentary that rather than reflexively throwing men into an unwinnable war, he would reconsider the whole (bad) idea and maybe even start drawing up plans for an orderly withdrawal. But then, on Feb 17, he stepped up to the plate and approved a 50% increase in U.S. troop levels.

I heard the UK defense secretary commenting on the Obama administration’s commitment, in the context of being asked if the UK would commit more troops. While not a direct quote, he said that they are reviewing the situation, but are concerned that there are too many “caveats” applied to the rules of engagement in Afghanistan, and that they would be more willing to add troops if those caveats could be eliminated or reduced.

What he was saying, in plain-speak, is that they want to be able to apply whatever brute force they feel was required, regardless of the collateral damage, in taking out the local opposition to the current occupation by NATO forces.

This is a very slippery slope, and one that the West should already know as a failed idea from even a cursory reading of the history books. As I have commented on in the past, there is no conceivable way that the West could hope to outdo the naked brutality exhibited by the Soviets in their run at Afghanistan. And look where that got them.

So why, exactly, are we marching deeper and deeper into Afghanistan? Call me a cynic, but I suspect it is because President Obama, in the next election, wants to be able to stand up to the inevitable charges that would otherwise fly that he was “soft on terrorism” or “failed to support our troops.”

Getting deeper into Afghanistan is, in my opinion, a great and entirely avoidable travesty.

(On the topic of the Soviets in Afghanistan, The Beast, an older movie about a Soviet tank crew that gets lost in that dangerous country is well worth a watch.)

Enough of all that. To improve my mood, and hopefully yours, I want to share with you a couple of items I came across this week that I think you’ll find amusing.

Just for Fun

This first item came in an email from a friend with the subject: “How the stimulus package works.”

Three contractors are bidding to fix a broken fence at the White House. One is from Chicago, another is from Tennessee, and the third is from Minnesota.

All three go with a White House official to examine the fence. The Minnesota contractor takes out a tape measure and does some measuring, then works some figures with a pencil. "Well," he says, "I figure the job will run about $900: $400 for materials, $400 for my crew and $100 profit for me."

The Tennessee contractor also does some measuring and figuring, then says, "I can do this job for $700: $300 for materials, $300 for my crew and $100 profit for me."

The Chicago contractor doesn't measure or figure, but leans over to the White House official and whispers, "$2,700."

The official, incredulous, says, "You didn't even measure like the other guys! How did you come up with such a high figure?"

The Chicago contractor whispers back, "$1,000 for me, $1,000 for you, and we hire the guy from Tennessee to fix the fence."

"Done!" replies the government official.

And that, my friends, is how the new stimulus plan will work.

A Really Good Read

The following article is reprinted with permission of the publisher of the local newspaper. The article is one of the best-written and most entertaining I have read in any paper in years. It was written for The Waterbury Record by Peter Miller, a well-known local photographer… and a great writer, in my opinion. The article, about an epic battle between a local man and a fisher cat (as you will read, a mean-tempered member of the weasel family) offers a glimpse into life hereabouts, though not all the locals are quite so eloquent. I just love the passing reference to coq au vin. Enjoy…

Scott Broderick of Waterbury Center recently engaged in mortal combat with a fisher cat.

Broderick and his partner, Amber Rae Sulick, are house-sitting for friends in a renovated farmhouse a mile off Route 100 in Waterbury Center, on Gregg Hill Road. In front of the house is a large wetland. Behind the house are woods that scatter down to the Waterbury Reservoir. The pair takes care of the dogs, cats and a coop of chickens.

On Sunday, Jan. 24, Sulick came back from a cross-country ski hike and found three chickens slaughtered.

“They were in the outside pen,” Sulick said. “Two bantams and one black hen. They were lying limp on the snow. Their throats had been sliced and there was a little spot of blood around the neck. They were not eaten or ripped apart. I could see in the snow where the chickens had been chased around the pen. I could see the tracks really well. The animal hopped , two and two, feet together. I thought it was a weasel. This happened between 2 p.m. and 4 in the afternoon, when I was checking for eggs.”

The next day, while Sulick was at work, Broderick went for a snowshoe hike and when he returned, he heard all sorts of commotion coming from the chicken coop.

“There were thumps, squawks, squeals of terror and screams that are best imagined,” said Broderick. “I took off the snowshoes and hurried into the coop. I could see, through the chicken mesh, that Ozzie the rooster was flat on his back, the head turned to the side. He looked dead. A black animal was on top, like a vampire, sucking blood. It looked up at me, showed its bloody teeth and hissed.

“I had two axes by the door, for splitting wood and dispatching, recently, a rooster that we turned into a coq au vin for Christmas dinner. I grabbed both axes, entered through the small door and went after him. The animal — I later found out that it was a fisher cat — leapt off Ozzie and, ignoring me, went after the hens. There were more terrible squawks and screeches. The fisher moved so fast, I was missing on my swings. It then climbed up on poles near the rafters. Suddenly, it turned its attention to me. …Suddenly, I was no longer on the attack but defending myself.”

The fisher leapt through the air and onto Broderick’s chest. “If I hadn’t moved back he would have latched onto my face. I could have ended up like Ozzie, who had his comb chewed off, lost an eye and had a lot of blood sucked out of him,” he said.

“I threw him off and he landed in the corner, where the hens cowered. More squawks, screams and wing-beating,” he said. “The fisher, with incredible speed, climbed back up to the overhead poles and screaming its battle cry, again leapt at me. I knocked him down and then I was screaming, as I hit him with the axe, over and over.”

Broderick was not bitten. Ozzie the rooster was taken inside and given first aid. When it was returned to the coop, the hens circled around him very glad to have the master back. However, the rooster died two days later.

A fisher cat can weigh up to 14 pounds and measure 36 inches, including its bushy tail. They are ferocious predators, related to the wolverine, and feed on porcupines, other wildlife and farm animals. They also have a taste for domesticated cats. Very rarely do they attack humans, but in this case, the fisher may have felt cornered.

Miscellany

* Casey Research Las Vegas Crisis & Opportunity Summit Update. First off, we have finalized the program and are very happy to announce that we have lined up an excellent keynote speaker for the banquet, Professor Tom Rustici from George Mason University. I’m not going to go into any great detail on Professor Rustici here, other than to say he is a terrific speaker with deep (and surprisingly entertaining) insights into the nature of depressions. We have also confirmed John Woolway, a professional bond manager of long experience, to discuss a range of topics related to his specialty, including best ways to invest for income today, opportunities in TIPS, how to play rising interest rates, and more.

All of the rooms at the Four Seasons are now sold out, but we are working on securing a handful of rooms at the Mandalay Bay (the adjoining sister property to the Four Seasons) starting at $189++. Please email summit@caseyresearch.com to get more information.

There are still a handful of seats left, but not many. With everything going on in the world just now, this promises to be our most important – and profitable – Summit to date. Hope you can make it. Registration information, as well as a link to the final schedule, be found by clicking here.

* Gun Control on the Way? Someone sent me an email on a bill called HR 45 Blair Holt Firearm Licensing & Record of Sales Act of 2009. Always skeptical about emailed information of this sort, I had a researcher give it a look and, sorry to say, it’s real. The bottom line is that Congress is taking up a bill that will require gun purchasers to jump through a number of hoops before being able to buy a gun, including pass a test and agree to allowing government officials to come to your house to inspect your guns at will. Failure to properly secure your guns will carry a fine and even the potential for a five-year stint in jail. You can read more about the legislation here. http://www.opencongress.org/bill/111-h45/text.

Knowing as I do the attitude of a number of gun-owning acquaintances of mine, I think legislation such as this could trigger some pretty strident opposition. And for good reasons: one of history’s better-documented lessons is that almost every transition to dictatorship has been preceded by some form of gun control.

* Where Do They Get Their Numbers? Hardly a day goes by of late without some member of Team Obama standing up to announce that this plan or that will create or preserve X million of jobs, or help “as many as 5 million homeowners refinance.” Most people accept such pronouncements as having a loose connection to reality. They don’t.

In fact, that sort of loose talk is highly misleading and counterproductive, because it gives the populace the false impression that the economy is almost mechanical in nature. Push this button or that, and voila, out pops a million jobs. If it were that easy, then why would Team Obama stop at 3 million jobs, as they claim will be created in the latest stimulus bill? Why not just give the knob a few more twists and go for full employment? There’s nothing particularly profound in this observation, because you already know that the economy is a complex system, which is to say, it is largely unpredictable. So, the next time you hear the president or anyone else in the ring of power spouting off some specific numbers associated with this initiative or that, join me in making a loud raspberry sound. Or throw your shoes… whichever makes you feel better.

* New Phyles. Zoe is looking to start up a group in Reno. And Mike in Kingwood, Texas, has started up a phyle and is looking for more members. If you live in or near either of those places and would enjoy sharing views with other Casey subscribers, drop Kristen a note at phyles@caseyresearch.com.

* Music? I often include links to music that has caught my attention over the previous week, but not much of anything has overly moved me of late – I like powerful music – so last week I skipped and I was going to do so again. However, there is one song, from the movie Slumdog Millionaire, that I have had on rotation and find it pretty snappy… it’s called O-Saya by M.I.A. You can hear it here.

(If you have some dramatic and exciting music you’d like to share, drop me a line at David@caseyresearch.com.)

And that, dear readers, is that for this week. And what a week it has been.

To give you some sense of how things have gone, yesterday I recorded an hour-and-a-half-long phone interview with Dave Hightower and Terry Roggensack, the commodities gurus behind our new Casey Trend Trader.

During the interview, which is to appear as a special feature in the next edition of The Casey Report, we talked about just about everything you can imagine as it relates to commodities, including the data they monitor on China’s current stockpiling of commodities… whether or not gold is being manipulated… where the GLD ETF is getting its gold… which commodities are selling at or below the price of production… which ones are poised to rebound first and strongest and which are still at risk… how to structure futures and options trades to tightly control risk (in their entire 27 years in the business, they have never had a major loss)… plus, the outlook for oil and natural gas… when interest rates are likely to turn around, and much, much more.

As we finished, I was so excited about the interview that I pushed the wrong button on my recorder. Then I compounded the error by pushing a second wrong button, sending the entire recording to the permanent trash bin in the sky! In the words of Mr. Broderick, quoted above, on discovering the loss of the recording, there were “…thumps, squawks, squeals of terror and screams that are best imagined.”

The thumps being my head repeatedly hitting the desk.

Fortunately, Mssrs. Hightower and Roggensack are patient and even forgiving individuals, and so we will be doing it all over again. Look for the new interview in the next edition of The Casey Report.

(If you are not yet a subscriber, don’t hesitate for a minute to take us up on our special new subscriber offer. We make it easy and inexpensive to give this unique monthly letter a try, because we’re convinced that once you try it, you’ll want to stay with it. Learn more about the trial offer here.)

As I sign off, I see that the rout in stocks continues, with the Dow off by another 175 points. Oh, and looky there… Senator Christopher Dodd says that the government might need to nationalize some banks. Is it any wonder that gold spot has just cracked over $1,000?

For many moons now, we have cautioned you to “be right and sit tight.” While, as per above, there is no sure way to know where gold is going to go in the short term, there is likewise nothing we can see that doesn’t suggest that it can’t go much higher in the longer run.

We live in interesting times.

Until next week, thank you for reading and for being a subscriber to a Casey Research service. If you find us helpful, don’t hesitate to spread the good word to your friends and associates.

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 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 8/22/08

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

August 22, 2008

Dear Readers,

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

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

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

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

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

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

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

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

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

Fiat Finale

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

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

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

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

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

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

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

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

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

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

But that was what I meant…

Deflation? Don’t Bet on It.

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

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

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

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

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

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

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

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

Inflation, What Inflation?

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

Here is today's data:

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

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

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

Bud

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

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

Got Gold? Lucky You…

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

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

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

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

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

The Eagle Has Been Grounded

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

By IANTHE JEANNE DUGAN
August 21, 2008; Page C1

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

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

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

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

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

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

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

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

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

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

More on Gold’s Shortage

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

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

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

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

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

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

Other short-term precious metals forecasts adjusted.

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

Coming Events

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

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

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

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

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

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

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

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

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

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

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

OBAMA!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Can you say, “sell”?

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

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

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

Miscellany

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

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

That’s It for This Week!

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC

The Bursting Commodities Bubble

David Galland — Tue, 24 Jun 2008 16:24:00 GMT

A steadily growing drumbeat is sounding throughout financial mediadom; a major commodities blowout is in the cards. The most widely quoted reason is a U.S. recession that will sympathetically pop the commodity bubble.

It seems to me that these views are intertwined with a changed perception of how the economy works. A new paradigm if you will.

People used to pay homage to the notion of a business cycle, a somewhat predictable and even stately progression of economic growth leading to excess, followed by a corrective recession. After which the cycle would begin anew.

In today's bold new world, however, most investment observers overlay onto the business cycle a shifting series of rapidly rising - and falling -- sector-focused bubbles.

Because of their noticeable size and influence, it seems to me that the bubbles can mask the underlying business cycle to some extent. Case in point, we all easily recall the dot.com bubble but have a harder time recalling what the prevailing economic times were in the late 1990s. What came after the dot.com bust? Why, the housing bubble, of course.

Of course, bubbles have always occurred. But they appeared only periodically, every generation or so. Prior to the dot.com bubble that heralded in this new era, economic activity was more broadly distributed. When times were good, the sectors that normally benefited, all benefited in something of a range.

Today, however, while most remain somewhat range bound, a single sector appears, Godzilla-like, to cast a shadow over the broader financial landscape. It is that sector that then receives the lion's share of the focus and the investment flows, quickly becoming a self-fulfilling prophecy.

Of late it has been the turn of the commodities to stalk the land. And, if you believe the pundits, it is time for the monster to be brought low. If not by Mr. Market alone, then with the help of the regulators with all their many WMDs (Weapons of Market Disruption).

Before commenting on whether or not I believe they may succeed, a brief observation on the origin of this new bubble era.

In my view, it is largely due to the massive amount of money in various forms sloshing around the globe, most of which emanates from the Quicky Print Fiat Money Machines which have been reliably chugging away at central banks around the globe for decades now. One of the primary outcomes of this odd chapter in monetary history is that the notion of the value of money has been pretty much thrown out of the window... though not one person in a thousand understands that the game has changed.

For example, the Chinese are correct in thinking their reserves include 1.4 trillion foreign currency units, but that fact is increasingly disconnected from any reliable measure of future value.

Underscoring the point, 1 trillion U.S. dollar units set aside 5 years ago are today, adjusted for inflation, worth just $620 billion. But who can say what those 1 trillion units will be worth five years hence?

While it would require far more electro-ink than time allows for today, it is my contention that the utility of the fiat monetary system is beginning to fade. After all, at its core, the acceptance of unbacked money is an act of faith.

And people are losing faith in the fiat currency units they are being asked to accept in exchange for their many labors, or in return for their tangible assets -- and what is more tangible than commodities?

Back to the Bubble

So, are commodities merely the latest bubble, a bubble now resting up against a pin? Or is something else going on?

In my view, the explanation hinges on the difference between, say, a dot.com fantasy company run by a couple of twenty-somethings and, say, oil... the stuff you use to get to work in the morning... or to assure the icicles stay on the outside of your windows.

As much as you might enjoy the software offered by your favorite dot.com, when push comes to shove, you could probably manage without. Oil? Food? Good luck.

To a lesser or greater degree, the same acid test can be applied to the value-add of Bear Stearns and the other financial stocks versus, say, the iron that supports your local highway bridges. Or the copper that is so important to all manner of electronics.

Or even houses and condos bought on speculation by people who couldn't afford them versus the nickel needed to create the stainless steel that is everywhere.

It is my simple contention that while selected commodities can and will get ahead of themselves (and probably already have)... the underpinning reality for their higher prices has far more to do with the value of the currency units they are priced in than with some broader investment fad. To this date, I can count on one hand the number of friends of mine outside of the business circles I run with who have made any investments in commodities.

Add into the equation the clear supply and demand challenges for many of the core commodities and the bubble doesn't seem quite so bubbly.

Here's a picture of commodities against both the U.S. dollar and the major currencies (ex-dollar).

And gold?

Well, while useful in certain industrial applications, gold as a commodity has a unique utility - it is considered as tangible money the world over. It is portable, easily divisible, durable and unquestionably accepted around the world. In an environment of a global crisis in confidence in fiat money, gold will provide a critical function that will only grow in importance in the months and years just ahead.

In short, the occasional corrections aside, this show is far from over.

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You'll find specific answers and actionable advice in our new FREE special report The Recession Tool Kit - 9 Winning Strategies to Profit from Crisis. Including: a nest egg for rainy days and how to buy it... lucrative, low-risk investments that every prudent investor should have... how to make money instead of losing it... and much, much more.

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The Room 4/14/08

David Galland — Mon, 14 Apr 2008 19:05:18 GMT

Written: April 11, 2008

Dear Readers,

No question about it, we humans like to keep things simple. And no wonder; if the world is anything, it is chaotic.

And so we look for our philosophy in un-taxing nuggets, the sort, perhaps, that might grace the back of a cereal box, be squeezed onto a bumper sticker or unfold fully contained in a 5-second sound byte on the evening news.

"Ask not what your country can do for you, but what you can do for your country" pops to mind.

As does, "You are either with us, or against us."

But few hold a candle to, "From each according to his abilities, to each according to his needs."

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.

This willingness, nay, rush, to unthinkingly embrace the simplistic is very possibly coded into our DNA. And for good reason.

After all, if our club-bearing ancestors had paused to inquire more closely into the root reason that the rest of their hunting group was running screaming from the large growling sound emanating from a nearby bush, then we wouldn't be having this chat today. Instead, they took the cue and dedicated themselves to outrunning their companions (a race that our very presence here today attests they won).

Millennia of similar experience, and the need to efficiently sort through the daily onslaught of input our poor minds receive, has resulted in a tendency by humans to think in one of two ways, depending on our individual temperaments and the need at hand.

The first form of thinking is cue-based, or heuristic. The second is termed "systematic." To understand the difference, consider the process you might go through when looking for a new computer. You could do all the hard research yourself; that would be thinking systematically... or you could simply pick up the current edition of some suitable buyer's guide and flip straight to the "Best of 2008" award and you are done.

While we all think in both modes, most tend to shift between the two, some more frequently than others. And because it is more difficult, most of us look to reduce the amount of systematic thinking we are required to do by delegating that responsibility to those who are good at that sort of thing. For example, we might pay an accountant to do our taxes. Likewise, if you are collared for some real or imaginary offense, you could immerse yourself in all the various case laws that apply to your situation, or you could pick up the phone to call a lawyer.

In my view, it is essential in this modern age to keep this aspect of our human nature in clear perspective as you listen to all the electioneering, posturing and pontificating that now competes for your daily attention.

Or, put another way, when confronted with convenient explanations or fine-sounding platitudes, make a concentrated effort to shift into systematic thinking mode.

While I could point to literally hundreds of jingoistic but empty ideas floating through the ether just now, our globe-trotting chairman Doug Casey has just written in from Argentina with a good example , one that has specific relevance to us as investors. Namely that today's inflation is being caused by rising commodity prices.

Rising Commodity Prices and Inflation

By Doug Casey

Many people blame inflation on higher prices of gasoline, wheat, copper, or what have you. This is an old, idiotic, and tragic economic fallacy.

It's idiotic because it confuses the consequences of currency inflation with its cause. And tragic because it blames inflation on those who produce real wealth, as opposed to the government, which is the actual cause.

In today's world, governments, through the central banks, control the amount of money in existence. If they double the money supply, the general price level would double. Of course not everything rises at the same rate. Since inflation initially makes people feel richer, perhaps the prices of Ferraris would go up a lot - but the prices of old Chevys would drop - who wants old cars when loans are out there for a new one?

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.

Inflation causes people to save less. That means there's less capital to invest for new production, even while it encourages more consumption now (to beat anticipated higher prices). This is the main reason inflation causes the standard of living to drop - in addition to causing the business cycle.

Bad Speculators

David again, though continuing on the same theme. This morning I heard an interview between a National Public Radio host and Robert Zoellick, head of the World Bank, about that august body's recently released report on rising food prices and the social unrest now beginning to break out as a result.

I have to say, while I tend to be very skeptical of supra- organizations such as the World Bank, Zoellick impressed me as a reasonable man when he failed to rise to the bait of the interviewer who must have asked the same question 5 times, along the lines of "How much are speculators having to do with the food price run up?"

It was only after much more of the same that the conversation turned to the actual biggest culprit identified in the World Bank survey; the shift toward redirecting food crops, and the land used to grow same, to the production of biofuels. A misallocation that would not have been made without government mandates and massive subsidies.

I recently read a pretty good book on the history of the U.S. dust bowl that has become iconic, along with soup lines, of the Great Depression of the 1930s. The book, titled The Worst Hard Time, was quite revealing... for example, of the stubborn optimism of certain people who -- despite year after year of failed crops and dusters that would cover the floors of their shacks in a foot of fine dust, kill the cattle and even close family members -- refused to move away, figuring it couldn't last forever.

If, in fact, they had done a systematic evaluation of the climate of the dissected areas where they had been encouraged with free land by the government to set up their farms in order to meet global food demands triggered by World War I,they would have found that drought in the Texas panhandle is the norm, not the exception.

In the latter years of the disaster, the Roosevelt administration commissioned an extensive study to reveal what had gone wrong. According to the author, Roosevelt and his merry men expected to find it was caused by climate change coupled with excessive speculation. What the study's leader eventually reported, however, was far less pleasing: it was the government's own well-intentioned but poorly considered machinations that were behind the dust bowl. That's because without the subsidies, the mass migration to an area that was climatologically ill suited to agriculture would never have happened.

Not one to suffer second guessing, Roosevelt pretty much disregarded the study. In fact, he went further and, disregarding the whole "climatologically ill suited to agriculture" part, attempted to solve the problem by ordering the planting of millions of trees... virtually all of which quickly died.

But back to the present. As food prices rise, along with virtually everything else, the sloganeering and rhetoric are going to reach a shrill pitch. The government will begin to point the finger at anyone and anything other than the real causes, starting no doubt with "speculators," who will be portrayed in the same light as war profiteers.

The practical implications of this -- other than stirring up the class warfare so fondly anticipated by Marx as he sat in his grubby chair scrawling a screed against the capitalists -- will be to unleash any number of government "solutions" that will sound high minded, but lead to low results. Price controls... interference in the free flow of foreign capital... trade sanctions... changes in margin requirements for commodities accounts... higher capital gains taxes. It's all coming.

At our recent Scottsdale Summit, one of the more memorable thoughts was shared by Dan Mitchell of the Cato Institute when he pointed out that the government was increasingly using higher taxes on tobacco to raise the costs and therefore curb the habitual use of the noxious weed. "And, you know what, the government got it right. Higher taxes do reduce consumption," Mitchell commented, adding, "So why is it the politicians don't understand that the same principles also apply to commerce and investment markets?"

A good question, but one that most people won't ask themselves as they applaud President Obama's proposed near-doubling of the capital gains tax from 15% to 28%.

Take cover.

Guess Who Will Soon Own 1,000,000 Homes? You Will!

A couple of weeks ago, I mentioned the view of real estate pro Andy Miller that, absent government intervention, the real estate meltdown would be incredibly painful, but relatively short lived. But if the government rolled up its sleeves and set about "fixing" things, the pain could stretch out 10 or even 20 years.

At this point, the odds greatly favor the latter.

In fact, we seem to be in a race to the bottom for the candidates, egged on by the professional posturers that hold forth in Washington.

Case in point, House Finance Committee Chairperson Barney Franks, maybe the least financially savvy human being I have ever heard discourse on the topic of finance, has teamed up with Senator Christopher Dodd to propose the nation set up a special $400 billion taxpayer-funded pool for the sole and specific purpose of buying non-performing loans from troubled lenders.

When confronted by such largess in the past, I have been known to make indelicate remarks. A plan of this degree of sheer disregard for anything remotely resembling the free enterprise system leaves me nearly speechless. $400,000,000,000 is a lot of money, no matter what anyone tells you.

And the democrats are not alone. Even John McCain, bending to the anticipated wishes of the voters this next November, has just done a brisk about-face and announced his own bailout plan. A plan that but for some modest window dressing, is almost identical to that which has been proposed by Mssrs. Barney and Dodd. To quote Bloomberg,

The (McCain) plan would retire old loans that homeowners no longer can pay and replace them with less expensive, 30-year, fixed-rate mortgages that are federally guaranteed. McCain said families would gain "the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home."

Karl Marx would be proud.

But am I being too harsh in condemning government action? After all, when we are talking about collapsing housing prices, we are talking about real hardship being felt by real people... with lots more to come.

It's a good question, even though I asked it myself. But the answer is relatively straightforward, albeit in the form of another question.

"Which economic system has history proven to provide the maximum reward to the maximum number of people over a sustained period of time?"

I think the answer is clear. So, faced with an economic distortion encouraged by decades of government meddling, do we step further away from free-market capitalism and toward yet more meddling? Or, do we accept that there is a price to be paid and the longer the bill remains unpaid, the steeper it inevitably will be?

Humankind is remarkably adaptable and, when pushed to it, resilient. If the government could resist doing anything at this point, lenders would fail, house prices would return to a market clearing level, people in the housing trades would find other employment... but the world would not come to an end.

That said, I can't see any way that the government is going to be able to resist organizing a big bailout... so all I can do is the next best thing: position my portfolio to profit by betting on the inflation that such a bailout makes inevitable.

The Ascent of Humanity

My friend and favorite partner of all times, Doug Casey, is well known to be a pessimist in the short term, but is, I can assure you, equally so a raving optimist in the longer term. Viewing the world through his longer lens, he sent me an interesting, albeit brief, essay from John Robb this week.

It is an update of sort on humankind's progress in trying to create artificial intelligence. Robb's thesis has it that we are very, very close – a few years at most – from being able to reliably duplicate the intelligence of an insect. Within a decade, he expects we will have reproduced the intelligence of a mammal. Say, a rat. And by the end of the next decade, we will have succeeded in duplicating the intellect of a human being.

Each of these milestones, according to Robb, will change the face of the world as we know it. You can read his full essay by following this link here: http://www.blogdimension.com/en/cache?s=36282661-of-rats-and-superempowerment

In making his case, Robb links to a video of the Big Dog robot, which is quite amazing. You can skip straight to the You Tube clip by clicking here. www.youtube.com/watch?v=W1czBcnX1Ww

And this is just one of many areas where humans are making rapid progress toward a more promising future. For instance, if you credit the reports out of the Swiss firm, CERN, they have figured out how to make the Internet 10,000 times faster.

Given that I am already able to use the current version of the Internet to view a wide selection of movies from Netflix, near instantly, it's hard for me to fathom the possibilities inherent in an exponentially faster Internet.

The new system will be available to universities this summer and, I have to believe, will roll out pronto thereafter.

Is there an investment angle in this stunning new development?

While a topic for greater exposition than time allows now, there are two companies (in addition to CERN) that are standing squarely in the path of this breakthrough, and both are related to fiber optics, which is a prerequisite for delivering information at this speed. The first is JDS Uniphase (JDSU), the leader, by a wide margin, in the manufacturing of fiber optics switching equipment. The second, my friend Porter Stansberry told me last week on Jekyll Island, is Verizon (VZ), which has been spending the majority of its revenues in recent years building out the most extensive fiber optics system in the United States. The build-out will soon be done, allowing the company to redirect the billions they have been spending on infrastructure back to the bottom line. And, more importantly, to sally forward as a primary beneficiary of the new and vastly improved Internet.

Watch Out Below

As predicted by our own Bud Conrad, bond insurer MBIA, Inc. was downgraded this week by Fitch Ratings to AA from AAA.

The knock-on effect of this has yet to be felt, but the way these things work is that any of the AAA bonds insured by MBIA will now have to be similarly downgraded, because no bond can have a higher rating than the company that insures it. Holders of these bonds now have to revalue them in their portfolios, especially if, as expected, the other rating agencies follow suit.

For a quick snapshot of the sort of turmoil this could unleash, here is an excerpt from the January 2008 edition of the International Speculator.

Credit Insurance. The smaller corporate and municipal borrowers (which together represent a large segment of the bond market) depend on credit insurance. Now the credit insurers are in trouble. S&P cut the credit rating of ACA Capital Holdings by 12 levels, to CCC (junk), after the company posted a $1.04 billion third-quarter loss in November. ACA has $1.1 billion to cover potential losses on $7.1 billion of bonds it insured. It turned itself over to the regulators for protection in late December. The credit rating companies are now reviewing MBIA Inc., Ambac Financial Group Inc. and other bond insurers because of concern they don't have enough money to cover losses on accelerating downgrades of the debt they guarantee. Weakness in these companies would endanger the value of $2.4 trillion of securities they've insured.

It goes on and on. Certain money market funds have been hurt by the commercial paper meltdown. More may follow. Because of their bond investments, some insurance companies are in the crosshairs as well. Stay tuned...

China's Olympic Torchture

In the March 14, 2008 edition of this weekly feature, I touched on the decision by the Chinese to hoist the Olympic torch to the top of Tibet (Mount Everest, to be more specific) as possibly being one of those accidents of history with serious repercussions.

But I didn't foresee how fast and how far things could have gone off the tracks. In the lead-up to previous Olympics, being selected to run with the torch was a high honor. The sort to be photographed for your personal posterity and dropped in passing into every cocktail conversation you might be drawn into. This time around, however, carrying the torch is akin to being selected by Native Americans of antiquity for the dubious honor of running the gauntlet. You might survive, but it's no sure thing. And it is certainly nothing you'll be bragging about to anyone in particular, lest you be accused of being a keen supporter of oppression.

Even if the Chinese, who have assigned a cadre of toughs to protect the flame, go one step further and borrow the Popemobile to finish delivering the torch to Beijing, the public relations damage they are suffering is akin to the death of a thousand cuts, with each step along the route bringing another cut. (For those of you with strong stomachs and curious about the origins of that term, I provide this link... http://en.wikipedia.org/wiki/Slow_slicing)

While we can't yet know how the Chinese will react to their global humiliation, if you look at the language used by China's foreign ministry in objecting to a U.S. resolution calling for China to stop beating up the Tibetans, you can get a sense of the emotions involved...

Foreign Ministry spokeswoman Jiang Yu labeled the resolution passed Wednesday by the House of Representatives anti-Chinese, saying it "twisted Tibet's history and modern reality... seriously hurting the feelings of the Chinese people."

(I suspect that whoever it was that conceived the idea of taking the torch to Tibet has already received some indication of the leadership's displeasure.

I can imagine a short conversation along the lines of, "Mr. Han, please come in. We would like to talk to you about that idea you had about taking the Olympic torch to the top of Mt. Everest. No need to sit down; in fact, if you'd be so kind to just stand up against that wall over there... yes, that should be fine.")

Given the clout that the Chinese currently have in the global economy, and given the fact that they are actively competing for all manner of natural resources with many of those nations whose spokespersons are now lining up to condemn them over their human rights record, this is definitely a geopolitical situation to keep an eye on.

On that latter point, this week the news came out that China is looking to buy 9% of BHP Billiton, the world's largest mining company... a move that follows their purchase of 9.3% of Rio Tinto in February for $14 billion. And last week it was revealed that they had dropped $2.8 billion to buy a stake in Total, the French oil producer.

This week the market was moved by news that the Chinese are on the hunt to acquire Canadian uranium companies. Referring to its quest for uranium companies, according to Bloomberg...

State-owned China National Nuclear is considering options including takeovers and supply agreements that range in value from "several hundred million dollars to more than a billion," Cui Jianchun, general manager of subsidiary CNNC Finance Co., said in an interview yesterday in Toronto.

Call it what you will, but I think you can safely call it a War for the World's Resources, with U.S. dollars being used as ammunition.

It is too early to discern what will be the ultimate consequences of China's Olympic-sized embarrassment – which will continue through the event's closing ceremonies on August 24 – but they could be serious.

[Ed. Note: In my reading this week, I came across a pretty good essay on this topic on the BBC web site. You can read it here... http://news.bbc.co.uk/2/hi/americas/7339764.stm]

And There's This...

While we are on the topic of China, I thought I would share an email from one of our many fine subscribers. He penned the following in response to my previous skeptical musings on what I see as the myth of Chinese invincibility....

Dear David,

I have been a Casey subscriber for a number of years now and find that one of the highlights of my week is 'The Room.' Your easy style is always a pleasure and it never detracts from the clarity of the underlying message; however, when discussing China - its massive (and growing) economic influence and the ability, or otherwise, of its ruling elite to "manage" the immense changes taking place - I find it odd that no mention is ever made of the demographic time bomb inherent in the One Child diktat.

My wife and I traveled through China in the mid-1990's and wherever one went, you would see groups of parents and grandparents fawning over a single child. Fast forward to today and consider the consequences. Those children have no uncles, aunts or cousins. A typical family would now comprise - in it's entirety - one grandchild, two parents and four grandparents! Also consider the fact that traditionally, boy children are preferred to girls. The result is a significant gender imbalance eventuating in a preponderance of males.

In a society where security in old age has always depended on the support of an extended family, an intolerable burden is now placed on a single grandchild and that grandchild, if it is a male, is also going to have a tough job finding a wife! As this imbalance works its way through the Chinese population, we can expect severe, and unpleasant, consequences.

Yours sincerely,
R.H.

Not a new story, but one that has yet to really play out. Food for thought, to be sure.

Miscellany

Lunch Money. Follow the link here to read another reason for keeping some of your money in gold. I love the bank's response, which is pretty much, "Sorry about that." http://news.bbc.co.uk/2/hi/south_asia/7334033.stm

Out of Silver? There has been a lot of discussion in the blogosphere about the lack of silver coins at dealers. We did some research on the topic and the situation appears to be nothing more than a miscalculation by the mints leading to a temporary shortage in the circular blanks required to make coins. Proof of that point comes from one close acquaintance of ours who placed an order for $1M in silver the week before last and had the bars promptly delivered.

A Solution for Global Warming! I had a good chuckle this week when reading a story by Bloomberg on a study issued by the Proceedings of the National Academy of Sciences about the possible consequences to the environment by a nuclear war involving "100 Hiroshima-size bombs." The story relates how, should such a conflagration occur, it would cause damage to the ozone layer, resulting in an increase in skin cancer, eye damage and similar illnesses caused by more extreme exposure to sunlight. But nowhere in the story was there a single mention of the straight-up death and destruction caused to people by "100 Hiroshima-size bombs" going off, or the ill effects of the clouds of radiation that would soon blot out the sun. They did mention, however, that one possible outcome was that global land temperatures would drop. So, there's that to look forward to.

* Errata. Last week, while writing in the fog of early morning, I misplaced a decimal point when discussing the percentage of GDP represented by Mexican oil exports... which, based on the Export Land Model, should cease in, or before, 2014. While the error was fixed on Monday morning -- to more accurately reflect the total at about 6.5% of GDP versus the errant 65% -- if you viewed this missive over the weekend, you might have seen the erroneous number and so have sallied forth with poor information, for which I apologize. While not nearly so significant, the lower number is still very significant.

That's It for This Week

As I prepare to sign off for this week, it came across the screen that consumer confidence in the U.S. has now fallen to a 26-year low. One of the drivers of this pessimism, according to the report, was the price of gas... a commodity that indeed hits consumers straight in the pocket. Earlier this week, I read a report by the International Energy Agency that they expect oil to remain above $100 per bbl for the rest of the year.

This is one of those stubborn economic inputs that the U.S. government, despite all its real power, is helpless to affect. That's because the U.S. imports over 65% of its oil. We can't, therefore, force producers to sell it cheaper to us... because the Chinese, among others, will simply step in and pay the market price. Confronted with consumer backlash, the only real action I can see that is left to the U.S. government, should it wish to be seen as "doing something," is to subsidize prices. In other words, reach into the public coffers to pick up some of the tab. But that, of course, simply adds fuel of a different sort to the inflationary fires. There is no positive way to view this situation, especially for those who have a long commute, or for businesses – airlines for example – that are so solidly impacted by persistently high fuel prices. On that last point, you might want to check your portfolio for exposure to any companies where fuel looms large in their P&Ls.

As always, thank you for reading, and for subscribing to a Casey Research publication. (If you had this edition passed on to you, and you would like to subscribe... visit us at www.CaseyResearch.com).

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room 3/24/08

David Galland — Mon, 24 Mar 2008 19:52:56 GMT

Dear Reader,

It used to be of no little pride in the small New England town where Casey Research is headquartered that school went forward, no matter the weather. Hail, 8-foot-high snow drifts, ice rain and, should they have occurred hereabouts (which they didn't), I am fairly sure that even hurricanes and tornadoes would not have kept the school administration from its daily labors in the brainwashing of innocent youth.

That all changed when, earlier this winter, a school bus missed the turn on a gently sloping hill and rolled onto its side, fortunately causing no serious injuries (for some reason, which continues to baffle me, the police will stop and ticket you for driving without a seat belt, yet school buses are systematically unequipped with same).

The accident, no doubt, made the school officialdom aware of some previously unexamined legal consequence because the school now delays the morning opening or closes down tight on what appears to me to be so much as a semi-reliable report that a single threatening snowflake has been observed in the general vicinity.

And so it is that, with a modest snowfall in process, the kids are home again today, lounging about and, because it is Friday when I write from home, crowding me out of my office (which counter-intuitively also serves as their toy room). Which leaves me to write to you from a couch upstairs, with stern instructions to the kids that while I may appear to be in residence, they should assume I am a figment of their youthful imaginations until I have finished writing this weekly epistle.

While it is typically with a good deal of pleasure that I sit down to reminisce about the action of the week just ending, this week again, the volume of news coupled with the magnitude of that news makes the task daunting. But no amount of dithering will make the task go away, so here we go.

"Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke"

That headline is not mine, it is from Bloomberg this morning. Bloomberg's enthusiasm is based, as hard as I find it to believe, on little more than that the Fed cut the rate it charges banks to borrow by "just" 75 basis points this week, and that the stock market rallied, then fell, then rallied again in response.

The herd was, apparently, expecting 1%. Further, not only were they expecting this, they were mentally prepared to accept a 1% cut as a sign that the economy remained in dire straits and that, as a result, the Fed would have to continue its loose money policy. According to the punditry, a 75 bps cut indicates that Bernanke and Co. have drawn a line in the sand, signaling they were going to be restrained in their approach to the crisis now stalking the land. Further, this show of confidence portends that the worst of the crisis is nearly behind us.

Ready to push the trigger to buy more commodities on a 1% rate cut, the market instead rushed into buy stocks and sell commodities... then changed its mind and sold stocks and commodities... then bought stocks again, but still sold commodities.

Gold, silver, oil, grain... you name it, if it shows up under the heading Commodities in the back of your favorite paper, then it got hit.

But of course, there was a whole lot more going on this week. We'll come back to the commodities momentarily. First, however, we need to walk up a few floors to get a better view of the bigger picture.

Problem Solved?

Now, you will excuse me if I seem a touch skeptical, but I can't help but notice that short of climbing aboard helicopters rigged to carry pallets of dollars, the Fed is now doing exactly what we have been expecting it to: provide all the liquidity it can muster using its near mystical powers of money creation.

In addition to yet another deep cut in the Fed Funds rate, they are now making the almost unprecedented move (at least since the Great Depression) of lending money to non-commercial banks, in the process effectively putting taxpayers on the hook for $30 billion in suspect collateral from Bear Stearns.

And that's just one of many moves of late, including cutting discount rates by a total of 1%, to 2.5% over the past week alone, and opening up new lending facilities that allow the investment banks to borrow directly from the Fed using as collateral the same sort of suspect paper that brought down Bear.

Playing their part, three of the biggest investment banks, Goldman, Morgan Stanley and, importantly, Lehman, announced that they were going to access this new lending facility, whether they need to or not, in order to remove the "stigma" (their term) of stepping up to the window, so to speak.

Give that some thought for a second. What they were saying for all the world to hear was that they were going to engage in what is effectively an institutional shell game... a deliberate attempt to obfuscate which of the banks are actually in trouble. As a shareholder in one of these companies, you won't have any idea whether your bank is accessing this emergency facility because it is, in fact, in trouble.

Given the estimates that the assets being carried as capital on the books of Bear Stearns were worth only 10% of what was being posted, and the herd-like business practices of the big investment houses, the odds are fairly high that Bear Stearns is not the only institution teetering on the brink.

Yet this week investors seemed to actually buy the idea that the worst is now over, and that the all-clear signal will soon be sounded.

What to believe? Whom to believe? Could the Fed have finally figured out the right combination to re-open the safe of prosperity? And what of the commodities, especially gold?

This week I have received a larger than usual amount of incoming emails presenting all sorts of theories. Some have it that JPMorgan, the world's largest bullion bank, was in real trouble with shorts on gold and had been buying the metal back, helping to fuel its meteoric rise of late, but that the liquidity provided by the Fed has now taken the pressure off and allowed them to stop or slow their buying (our own Bud Conrad has been looking into this notion, but so far has uncovered no solid proof).

As for the financial sector and, by extension the rest of the market, we can't know for sure what's going on behind the scenes, because the government and the big banks are playing it very close to the vest. But we can, from our higher perch, try to sort the unknown from the known, and start with the latter.

This week we had a major bank failure (as predicted many months ago by Bud). Despite Jim Cramer's firm belief in the firm, Bear Stearns, the fifth largest U.S. investment bank and a firm tightly connected as a counter party to hundreds of billions in derivative agreements, suffered a good old-fashioned meltdown.
We know that the share price of Bear Stearns has fallen from over $150 last year to as low as $2.00, and what is left of the firm is now being sucked into JPMorgan, but only because the Fed has agreed to stand behind the deal to the tune of $30 billion, an intervention the likes of which was last witnessed in the Great Depression.
We also know that the vultures were starting to circle Lehman, another member of the big five U.S. investment banks. Absent the Fed's aggressive intervention, the odds were fairly high they would have been next to get hit with the equivalent of a run. This is why the Treasury and the Fed worked so hard to get the Bear Stearns deal cobbled together over a single weekend, before the markets reopened and Mr. Market could recommence beserking. From where I sit, it appears that we came within hours of seeing another of the nation's largest financial institutions crash, potentially taking down the whole house of cards.
And we know the Fed dropped the Fed Funds rate by 0.75, only the second time in the last decade that it has cut rates by an amount that large.

We know some other things as well. For instance, that commodities have been on the equivalent of a one-way-up escalator in recent months. And we know that no market goes in only one direction for any sustained period of time, and so a correction was inevitable. Gold, oil, the grains... they all had to take a breather. And so they have.

But Let's Try to Keep This All in Perspective...

What has actually occurred over the last month, between February 21 and March 20?

	Gold	Silver	Copper	Oil	Bear Stearns	JPMorgan	Lehman
21-Feb-08	$945.00	$17.98	$3.77	$98.39	$82.23	$43.07	$54.14
20-Mar-08	$925.75	$17.53	$3.62	$104.49	$5.96	$45.97	$48.65
Gain or Loss	-2.0%	-2.5%	-4.1%	6.2%	-92.8%	6.7%	-10.1%

Okay, so gold and silver are off a little, copper a bit more, oil is still up, Bear Stearns is a smoking hole in the ground, JPMorgan is up a bit, and Lehman is down 10%. Other than Bear Stearns and, to a lesser degree, Lehman, I'm not seeing anything so earth shattering. (Sure, gold recently took a high dive off the $1,000 per ounce mark... but it is still over $900, a level that not one in ten thousand investors, if asked a year ago, would have expected it to trade at. And oil over $100? Forget about it.)

There are a few more things we know. For instance, that consumers are debt strapped and the housing bubble has burst and is deflating rapidly. And that falling home prices are wiping out the net worth, discretionary spending power and positive sentiment of the U.S. consumer who has, heretofore, shown a seemingly unlimited willingness to go into debt up to their eyeballs to keep the world economy afloat. That is now changing.

We also have proof, if proof was needed, that the government will do whatever it takes to avoid a meltdown. While they are shoving the walnut shells around so fast that it's hard to figure out where the pea is these days, what is increasingly clear is that there is only one real plan at this point: to apply as many billions of dollars as they feel is necessary to keep the ship of state afloat.

And while some might like to think that the country is not in a recession, at this point I am going to put it down as fact that a recession is now underway and that we need to be worried about it becoming much uglier than that.

Blame it on Smokey the Bear

A good way to understand both the degree and the nature of the current crisis is to look at the state of the nation's western forests. Before the 1940s, forest fires were allowed to run their course, just as they had over the millennia. But then the government adopted a policy to fight every fire, a battle epitomized by the introduction of the iconic Smokey the Bear. What has happened since is a massive build-up in the fire risk in federally managed forests.

The following is from a CATO Institute document on the topic...

Since the advent of the Smokey Bear era in the 1940s, tree density in federal forests has increased from 50 per acre to as much as 300 to 500 per acre. Federal forests are filled with dense stands of small, stressed trees and plants that combine with dry deadwood to provide virtual kindling wood for forest fires.

According to Forest Service statistics, some two-thirds of federally held forested lands are in deteriorating health.

The consequence of governmental meddling in the forest is that when a fire now breaks out, it is exponentially larger, more dangerous and more expensive to fight. Nationwide, the forested area now at extreme risk is equal to an area about the size of the state of California.

One of these days, and probably sooner rather than later, there will be a forest fire of biblical proportions... and Smokey's real-life brethren, along with houses and all that moves or doesn't, will go up in smoke.

Similarly, by continuously tampering with the business cycle, the government has led us to the point where the dried underbrush is piled high and just waiting for a match. The Fed was able to throw a quick tanker load of water onto the Bear Stearns fire... but that doesn't mean we are anywhere near out of the woods. (Don't you just love it when your metaphors snap so nicely in line? I sure do!)

Which Brings Up an Interesting Question

Given virtually unlimited power, including the ability to create money out of nothing, or to change any rule or law or convention, bend any arm, or ban or hinder trading in any commodity... just how much power can the U.S. government apply to the problems now besetting our economy and, by extension, the world?

Or, looked at from the reverse angle, given its unlimited power, is there any way Paulson, Bernanke, et al can fail to stabilize things?

It is an interesting discussion, and one that requires more analysis and data than I'm in a position to provide sitting here on my couch on a Friday morning. (We will go into it in more detail in a special report on the crisis that is being worked up for paid subscribers, and which should be issued following our Scottsdale Crisis & Opportunity Summit next week.)

I will, however, comment just a bit further.

Let's start with the proposition that the government has absolute power, which is largely the case these days, especially because the populace is so numb to large numbers that outrage at the beggaring of future generations no longer seems to be of any concern to anyone.

So, the Fed can effectively pump out all the money it needs to "get her done" and if that doesn't do it, then the Treasury can step back in. This approach, from a policy maker's perspective, is quite attractive because it essentially papers over the problem. Look at it this way. If housing prices fall, on average, 20% nationwide, but the currency depreciates at the same level, then housing weakness would be masked... ditto 20% of stock market losses. In case that point is not clear, look at it like this. If your house is worth $100,000 and it loses 20%, its value would fall to $80,000. But if the dollar was to simultaneously lose 20%, then the price of the house would remain $100,000. The average person would be clueless they have just taken a 20% haircut. Pretty cool, eh?

Unfortunately for the government, there are natural limits to everything. In this case, the most immediate threat to this plan resides in the trillions of dollars held by foreigners.

In recent decades these foreigners, trading partners mostly, have been willing to swap our inflation in exchange for market share within the U.S., the greatest consumption engine on the planet (as an FYI, the eurozone just surpassed us).

But that inflation is beginning to be felt back home: in China, in the Middle East, Russia and everywhere between. At some point, the pain, and the realization that inflation in the U.S. is only going to get worse, is very likely to make these dollar holders get serious about breaking their links with the dollar, and dumping the trillions they now hold.

And while U.S. consumers are well aware that everything costs more these days, no matter what the jury-rigged CPI tells them, it is when the foreigners start repatriating our dollars that the real pain of inflation will begin. At that point, the fire starts in earnest.

I call this the Point of Mugabe, named in honor, of course, of Robert Mugabe, the supreme overlord of Zimbabwe. A dictator with absolute power in all matters, Mugabe's maladministration of his country's economy has finally reached the point where today, as much as he dictates against it, inflation runs in excess of 100,000% annually. While the sheeple of that country seem either particularly stupid, beaten down or tolerant, sooner rather than later Mr. Mugabe's ridiculous regime will come to an end, and probably not in a manner that he will find personally pleasant.

In the final analysis, I remain convinced that the praise of Bernanke et al based on their extreme actions this past week will find its way into the history books along with quotes such as these...

"The end of the decline of the Stock Market will probably not be long, only a few more days at most." --Irving Fisher, November 1929

"I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress." --Andrew W. Mellon, U.S. Secretary of the Treasury, December 1929

And, of course, my favorite recent example... Jim Cramer's rant that people should not take their money out of Bear Stearns, just a day before that firm collapsed. You can watch history in the making by clicking here.

We'll have a lot more on this topic in our upcoming special update report on the crisis, which will be sent to all paid subscribers the week after next.

What's Coming

In my reading for the above, I came across the September 2007 edition of the International Speculator and its lead article, Preparing for Crisis . I thought the following excerpt was worth sharing, not just because it shows how spot-on Bud Conrad, the chief economist of this operation, has been in forecasting the specifics of the unfolding crisis, but because it is still as useful today as then in understanding how things are likely to keep rolling out (the full article has much more detail, well worth reviewing). Here's the excerpt.

The credit crisis will not end soon. Here's what we think is coming.

More Defaults. The bulk of the subprime loans are adjustable rate mortgages. The continuing reset of up to $50 billion per month of subprime ARMs will keep mortgage defaults growing, which will keep home prices falling, which means that more of the defaults will turn into unrecoverable losses for the investors holding the paper. The hedge funds that haven't thrown in the towel on subprime mortgages will collapse one by one.
The economy will slow down. Lending to risky customers has dried up. Earnings of most corporations will slide because consumers, who can no longer turn to home equity loans and whose credit cards are already maxed out, will cut spending. The mounting losses in CDOs and the continuing defaults in the housing industry will precipitate a severe credit crunch. The capital of many banks is about to shrink, which will hamper their ability to lend.
Stocks will fall. The next phase down in the stock market will come from reduced earnings estimates for 2008. We could see an auto company or a big bank announce insolvency. Fear, and then the fear of fear itself, and the fear of being the last one out the door will take over. Big, 300 or 400 point moves - mostly down - will become regular events. People have forgotten, but they are going to be reminded, that stocks have, until fairly recently in history, normally yielded about twice as much as bonds, simply because they're riskier.
Dollar down. While U.S. citizens are looking to build cash - another source of pressure on spending and investment - few foreigners now want U.S. dollars or dollar-denominated debt. After the failure of large U.S. institutions begins and the Fed turns the printing presses on full blast in an attempt to keep liquidity in the system, flight to safety will mean a flight from the dollar. How fast they will print is hard to guess. They've already started, but will probably panic as the economy slows, and then turn the presses to high. The dollar will fall in purchasing power. Interest rates will rise across the board, with low-quality paper hurt the worst.

If you are not yet receiving the International Speculator, now is a great time to sign up. With the 3-month risk-free guarantee, you can take a leisurely look at the publication to see if it's right for you. Check it out.

Show Me the Money!

This week we have, as you'd expect given gold's steep plunge, received some email wondering when the junior gold stocks we tend to favor in the International Speculator (among other investments that we feel are appropriate to the current environment) will pick themselves off the mat and get on with the business of making serious money.

This is, of course, a topic I have discussed at some length recently, so I won't go into the topic much again here (look back over the past couple of issues, using the archive link below).

But I will say, again, that I remain convinced that the next big move in the junior explorers is still ahead, and will come as the big gold stocks once again confirm the new reality that they are becoming cash machines. And they begin using their newly beefed-up balance sheets to acquire the deposits needed to replenish their depleting reserves. If you keep selling ounces without replacing them, in time, you are nothing but a shell... and so replacing reserves is a business dictate.

On that front, Barrick just announced that it will spend $10 billion to acquire new mines and resources over the next little while. You can read the story here:

And there's this. This week, PricewaterhouseCoopers released its Mining Deals 2007 Annual Review... which, among other prognostications reported on in an article on same by the folks at MineWeb, included these...

"2008 looks set to see mining deals reach very high record levels as super-consolidation takes place in the market."

Despite the credit crunch, the report finds "little evidence of a slowdown in [mining] deal activity."

"Underpinning these trends is the quest for world scale, resource acquisition and resource diversification," the analysts asserted.

The study noted that exploration costs are at all-time highs, permitting takes longer, and mining companies are facing skills' shortages. "These are significant barriers to meeting what is a major upturn in world demand."

(read the full MineWeb article on the topic by clicking here.)

This is all just the tip of the iceberg if you ask me, and it bodes very, very well for the juniors that are already sitting on a discovery. Yes, it is frustrating that some of our favorites have fallen with the broader markets lately... but this is a sector you need to be patient with.

On that topic, yesterday someone asked me if our subscribers were early adopters. And, after a moment's thought, I answered, "Yes. They are looking to get in early on a trend, and in investments that will provide far bigger returns than average."

Early adopters, however, have to possess both patience and a tolerance for risk. If not, then you may be invested in the right sector, but with the wrong temperament... a recipe for disaster. To wit, you won't have the emotional staying power to get you through the inevitable down swings and so you will invariably sell at exactly the wrong time, on a big setback. By contrast, an individual with the right temperament will continually look to buy under the market and, when that corner of their portfolio dedicated to the quality gold juniors is topped off, will look to continually upgrade at lower prices. Because they won't be chased out by the volatility, they'll still be there to collect the big profits as the endgame unfolds.

This is also why investing only with money you can afford to lose and still sleep well is so important. It assures you don't get over-emotional and greatly improves your odds of staying the course. And in the worst case that we are wrong and these stocks only head down to more or less a total wipeout, you might be discomforted, but you won't be put out of the house.

I guess what I am saying is that we have never made any bones about the volatile nature of these stocks. Please be clear on why you are buying them, and don't kid yourself into thinking they couldn't go down 50% even from here. They can. But we wouldn't be recommending them, or investing in them ourselves, if we didn't think this was a play that will blow the doors off almost any other investment you could be making just now.

Energy Chart of the Week

Public displays of hand wringing over America's dependence on foreign oil have become very popular, but little attention has been paid to how natural gas imports fit into the U.S. energy equation.

[click to enlarge]

Twenty years ago, the United States' natural gas production met nearly all domestic demand, but that is changing - and quickly.

The current situation is nowhere near as dire as America's predicament with oil supplies, of which 60% come from net imports. But the trend of imports making up a greater share of consumption is accelerating at a more rapid pace for "natty" than it is with crude oil. From 1985 to 2007, America's reliance on crude oil imports doubled, but its reliance on natural gas imports has nearly quadrupled.

Because the vast majority of natural gas imports come from Canada - normally considered a safe source of supply - little fuss has been made. If America has to buy more natural gas from its neighbor to the north, what's the big deal? They've been a steady supplier in the past, and it's not the sort of place where rebels run amuck blowing up pipelines, disrupting the supply chain (as has been the case in Mexico).

Under NAFTA's proportionality clause, Canada is bound to send 60% of its natural gas to the United States. The problem is that Canada's natural gas production is declining. Making a bad situation worse, the tar sands require huge amounts of natural gas to ramp up their heavy oil operations. Canadian winters aren't getting any warmer either, which - coupled with a growing population - has meant steady growth in Canada's natural gas consumption.

At recent debates, Hillary Clinton and Barack Obama have been arguing over who would be most qualified to tear up the NAFTA agreement. Lost in this storm of campaign rhetoric was Canada's response. "You might not want to renegotiate NAFTA if you knew how badly you need that oil and gas" was the message from Jim Flaherty, Canada's finance minister. The Canadian government would jump at any chance to wiggle out of NAFTA's proportionality clause, and a Democratic president might give them the opportunity.

The good news is that natural gas imports no longer arrive solely via the pipeline; they also arrive by ship through the emerging global market in liquefied natural gas (LNG). So the United States is not restricted to Canada when looking for natural gas supply, as it was even just twenty years ago. The bad news is that many of the biggest suppliers of LNG are located in the Middle East and Russia - precisely the regions that America wants to become less reliant on for its future energy needs.

[Ed. Note: Over coffee early this morning, I re-read the latest edition of the Casey Energy Speculator. In addition to a number of other excellent articles, it included a fascinating article on "run of river" energy projects, a "green" energy technology that has tremendous upside. It produces power from rivers, without damming them, and with relatively minor disturbance to the environment. The article includes two recommendations, one low risk, one high risk. If you are not yet a subscriber, learn more about giving it a trial run. ]

China Still Is Selling Us More and More

Bud Conrad took a break from his preparations for our sold-out Scottsdale Summit to send over the following chart he thought you would find of interest.

[click to enlarge]

There are a couple of take-aways from that chart, but the one that pops out at me is that it is a picture of American manufacturing being shipped overseas. As a result, while there is no question that a weakening dollar will help American manufacturers, the fact that their ranks have been reduced to such a degree, will likely mute the benefits.

Real Estate, Real Trouble

I ran into the mother of a close friend and a former partner at the store the other day. I don't think I would be exaggerating if I said she was the powerhouse real estate broker here in the resort town that is the headquarters of Casey Research. She is the quintessential über-agent, "can do," "get it done" and "never say die" kind of individual. Always an upbeat word about the local market and tough as nails, when needs to be, to get the sale. Yet, in our check-out conversation she made no bones about the fact that her views on the local real estate market are far less positive these days. In fact, her words were along the lines of, "I don't think that house prices are going to come back for another decade."

In a discussion on the topic of real estate with my mother, who holds down the family fort on the Big Island of Hawaii, she related a tale that I had heard before, but thought relevant to the current market, and so asked her to write down the facts of the case. Here they are:

"Grandpa bought a large house in August of 1929. The address was 10 Sutherland Road, Montclair, N.J. The price was about $45,000. He finally sold it for slightly less in 1945 after trying for years. I have an excellent photo of the house but can't send it until later today when (and if) I manage to reinstall another all-in-one with scanner. Love, Mom"

Could real estate really go down and stay down for 20 years? As hard as it seems to imagine, the answer is yes. This is a topic I'll have more on next week, when I share an interview with one of your fellow subscribers who is a professional real estate appraiser of many years and great experience from Northern California.

And That, Dear Readers, Is It for this Week...

I'm off tomorrow to our Scottsdale Summit. Next week's edition, written on the fly (literally) will likely be a bit reduced. The U.S. stock market is closed for Easter, but I can't even begin to imagine what thrills and chills it has for us next week.

We live in interesting times, indeed.

As always, thank you for taking time to read these hastily assembled thoughts... and, of course, for subscribing.

Warm regards,

David Galland
Managing Director
Casey Research, LLC.

The Room 3/17/08

David Galland — Mon, 17 Mar 2008 21:33:53 GMT

Dear Reader,

You don't need me to tell you, but the $1,000 mark is the latest to fall beneath gold's mighty rise.

Even so, as a benchmark, the number $1,000 is meaningless. It represents no new high in the inflation-adjusted prices that count. And it is not attached to a magic switch that assures, once flipped, the price must subsequently march to the $1,200 forecasted for this year by our own Bud Conrad. (Who is now poking with his fork at the suspicious-looking meat resting on his dinner plate in China where he is visiting.)

Of course, decisively taking out the $1,000 level will, undoubtedly, result in yet more features in the mainstream media and cause yet more regret in the minds of those who have dumbly stood by while watching gold break through the whole numbers divisible by 100. In time, these factors will contribute to a mass migration towards the yellow metal.

But the real significance is one I briefly touched on in closing last week. To wit, so far this quarter, gold has consistently traded much higher than the average price received by the highly visible major gold producers in breaking the right sort of records last quarter.

A bit more detail...

In the fourth quarter of 2007, despite recent comments by certain less-than-attentive observers that the company was still hindered by hedges, Barrick Gold, the world's largest gold producer, was able to realize an average price of $799 per ounce of gold it sold. (That's actually about $10 higher than the average price that gold traded at during the quarter.)

Against those revenues, the company had an average cost per gold ounce sold of just $375, resulting in operating cash flow of some $748 million, better than double that from the previous quarter.

Now, let's jump ahead to some point in late April when Barrick releases its first quarter 2008 results. If prices hold at the average for the month to date, then the average price of gold for the quarter will ring in at $930, or $141 higher than the average price for the last quarter. Assuming no significant change in cost structures over the quarter, and assuming the same level of sales as last quarter, Barrick's first-quarter operating cash flow numbers will rise by another $300 million, pushing the total over the $1 billion mark for the first time in the company's history.

Repeat this record-breaking story pretty much across the industry (a story we continue to follow in more detail in BIG GOLD, which this month extends its analysis into big silver ... learn more) and you have a story that will tell very, very well when compared to the smoking holes that most sectors have left in the brokerage statements of their erstwhile adherents.

Waxing metaphorically, the herd is slow to move, but as the fire of crisis grows to the point where it is visible to all, the herd will move to the safety of gold. We'll be waiting.

The Best-Laid Plans

In recent commentaries, I have mentioned how it is that the fates of nations sometimes hinge on an accident or an unexpected event that renders the best-laid plans worthless, sometimes with catastrophic results. This week's honorable mentions go to...

Hillary Clinton. Recently we learned that the young girl who was at the heart of the most successful political ad of the season, the one showing her sleeping in the middle of the night and the phone ringing threateningly. As you may recall, the voice-over artist rhetorically asks a question along the lines of, "Who do you want to be there to answer it; youth, or that seasoned veteran of such things, "Ma Hil" herself?"

Given the wide acclaim the ad received, followed by two quick primary wins, I had thought Hil's reinvigorated efforts at doing in Mr. Obama had finally succeeded, and that, like the victim of an alley-way knife attack, he was stumbling toward his fate.

But all that changed when the girl, now a young woman, came forward and announced that she was, in fact, an ardent Obama supporter. And even worse for the ever-aspiring Mrs. Clinton, the young actress, perhaps hoping to expose her talents beyond feigning sleep, was only too happy to accept every opportunity to appear on various talk shows and, using her full dramatic range, to espouse the dim view she took of the Clintons' ad.

It is hard to say, yet, if this blunting of the Senator's momentum will prove the final stumbling block, but it very well could. One thing is for sure, voters in the remaining primary states won't be further swayed by that particular ad. And, so, perhaps, the history books will soon record Mr. Obama as the next president. Now some of you likely don't think that this is catastrophic, and I don't want to suggest it will be (though I can say that I am already no fan of his proposed changes in tax policy)... but if he does become president and his term in the highest office does turn out to be catastrophic, then historians may point to a sleeping girl when publishing dissertations that include "what if" scenarios.

The Beijing Olympics. While I haven't thoroughly researched the topic, general commentary has it that China is viewing the upcoming Beijing Olympics as a matter of some national pride... a "coming out" party of sorts, during which they shall display the country's many marvels for all the world to gawk at. Proof of how serious they are about making a good impression may be provided by the fact that they are moving entire industries in order to reduce the city's infamous pollution. And, in an attempt to outdo all others that have come before, they were even going to risk life itself to have the Olympic torch dragged up to the very top of the world... Mt. Everest.

But that may have been the one bridge too far, the misjudgment that catches the attention of the fickle finger. For, as you are probably aware, since 1951 cartographers have been obliged to include the north side of that formidable mountain on a map within the borders of China, and not the independent nation formerly known as Tibet which the Chinese overran in that year, causing some consternation among many, most vocally Richard Gere and his kindred spirits in Tibetan monkdom.

This week, we read that certain parts of Tibet are aflame, and that Chinese troops have moved in to provide the monks with some on-the-spot reeducation. While I can't know, I suspect the odds now favor things going from bad to worse for the Chinese Olympics. If I'm right, then next up we'll see the government of some country or another announce it will, in protest, not participate. It is not inconceivable, even, that the increasingly politically correct United States could bow to pressure to yank the yanks and who knows where things lead from there. I guess we'll have to read the history books to find out.

(When dealing with political topics, one should always tread cautiously. My references to President Obama are, of course, pure conjecture. Senator Clinton has shown herself to be a formidable opponent and so cannot be written off at this point. Likewise, while I continue to think the odds are long against McCain, even a victorious campaign by that elder songster is not out of the question. But forced to it at this point, I'd have to give the tip to Obama. And lest you might wonder which presidential aspirant I actually favor, I will go on record here as being firmly on board for "None of the Above.")

Geologists Rule!

You may have seen the article this week about the soaring demand for geologists, a story we have been following in the International Speculator for some years. The bottom line is that Canadian schools are now graduating just 1,200 geologists a year, which stacks up against demand for better than 9,000. (University programs for geology in the U.S. have all but disappeared in favor of courses related to saving the environment.)

As a result, the starting salary of a freshly turned-out geo now exceeds that earned by a similarly launched MBA by a fairly considerable margin.

While I am pleased as punch to see our hard-working friends in the business being so handsomely rewarded, there is a much more important point to be made here. Namely that with industry demand for geos now outstripping supply by more than 7.5 to 1, the logical move for the producers, which must continuously replace their depleting reserves, is to become increasingly more aggressive about acquiring the junior exploration companies, especially those topped off with good projects.

There is an old adage that says "The best place to find a mine is next to another mine." These days you might modify those pearls of wisdom by saying, "The best place to find your next mine is not by kicking a lot of rocks, but by scrolling through the 'Has Metal' ratings of the exploration stocks followed in our International Speculator." (Has Metal being how we indicate which of those companies we follow already have a significant discovery under their belt, and are, generally speaking, just waiting to sell it off to a major.)

In other words, while the producers can start from scratch and try to find the talent needed to discover their next major gold deposit, they will likely find it more efficient and time saving to simply buy up an exploration company that already has the goods. It is not too late to get positioned in those companies, but it soon will be.

[Warning - blatant pitch coming! Start now, and within a couple of minutes you'll be viewing the entire list of International Speculator "Has Metal" recommendations. It's as simple as taking us up on our fully guaranteed trial subscription offer.

If at any point during your first 3 months, you don't find the International Speculator to be worth every penny you pay, we'll refund all those pennies... so you have nothing to lose for giving it a try. Frankly, if you're not already a subscriber, I can't see why you wouldn't sign up today. Follow the link just below...

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Expert Reveals Wolves Pose No Danger to Sheep

This week I read with some amusement that Standard & Poor's had sounded the "all clear" signal, stating that the worst of the subprime crisis was over. Kevin Brekke, our Switzerland-based editor, came across a similar item earlier in the week and felt moved to write. Here it is...

If you were a hesitant sheep, alone in a field, at dusk, nervously scanning the shadows for anything resembling a pair of fangs or pointed ears, would that headline provide some comfort, some confidence, possibly lulling you into relaxing, letting your guard down, and munching on some tasty clover? Uh-huh, I thought so.

Well, then, how about this:

Economists See US Avoiding Recession
or this,

Experts' Forecast Sees No Recession
If you were a hesitant small investor, feeling alone and in the dark about the markets and the economy, nervously scanning the headlines for anything to help you protect your life's savings, would that headline provide some comfort, some confidence, possibly emboldening you to snap up some bargains in today's beaten-down stocks? And maybe buy some California real estate, and, heck, why not head over to Electronics World and see what's on sale?

Do you think that maybe that's the reaction those headlines were designed to trigger?

I must admit that, although suspect from the start, the headline got my attention. So I reviewed the article and guess what - the author had some other enlightening and insightful observations on the economy, such as:

The U.S. may experience negative growth for 1Q2008

Sluggish job growth for balance of '08

Housing doldrums to persist "for a very long time"

GDP growth for the year of 1.5%

Now, any reasonable person digesting this report, possessing but a modest degree of objectivity, could readily conclude that the author would only admit to what can't be denied - the current environment of bad to worsening conditions - and then supplement it with encouraging predictions of what is just a quarterly report or two away. And if the economy is to grow at an annual rate of 1.5%, with the first quarter likely to be around (or below) zero, then the next three quarters have some heavy lifting to accomplish, a scenario that looks increasingly unrealistic.

But a recession? No.

My point here is that the headline for this report could just as misleadingly have read:

Experts' Report Sees Negative First Quarter GDP
But then that headline doesn't have quite the same reassuring tone, now does it?

One editor's version of this story that hit the wires mentioned the author of this report was an academic and an economist. A quick Internet search of the author uncovered some "coincident indicators." The author is a Ph.D., graduated Princeton, a published academic, holds a university department chair, and is "a frequent visiting scholar at the International Monetary Fund and the Board of Governors of the Federal Reserve System." Sound familiar?

As a random comparison, Ben Bernanke is a Ph.D., graduated Princeton, a published academic, held a university department chair, has contact with the IMF, and is the head of the Federal Reserve System. A coincidence?

A published yet obscure and mostly unknown economist writes a report and Wham! it hits the AP news wire and web pages like a topless photo of Paris Hilton. Now how do you suppose that happened? And who do you think shaped the headline?

With the number of vested interests intent on continuing with the status quo, the confidence game will be kept on life support for as long as needed, and by questionable means. The Fed, the dollar, our government, our banks, our economy, the markets, all rely on the confidence of those dependent on, and profiting from, more of the same. Numbers are fudged, statistics skewed, data manipulated, balance sheets doctored, news sanitized, and headlines managed. Backing and filling operations run around the clock to keep the façade of confidence intact.

The new realities we face will require more than scanning the headlines and watching a few minutes of BigFinancialChannel. Investors today, of all stripes, will need the vigilance to fully vet the information on which they base their investing decisions.

And that's exactly what we at Casey Research strive for every day. As it becomes increasingly difficult to separate the wheat from the chaff, and avoid getting the chaff, investors are supplementing their universe of ideas with the help of newsletter advisory services.

But for those stuck in the old paradigm, blind to the shifts occurring around them, well... Hey! Look over there, fellow mutton-chops. There's some juicy Google shares. Let's munch on those for the moment.

How You Know When the Economy Is in Trouble

This week the moving trucks pulled up in front of the offices of Carlyle Capital Corp, the publicly traded fund operated by the Carlyle Group. The trucks were sent in by the folks down the street at JPMorgan Chase & Co and Citigroup, among others, when Carlyle failed to meet $400 million in margin calls. The long and short was that they seized Carlyle's assets in an attempt to squeeze what remaining value was left in the firm, yet another victim of the ballooning credit crisis.

Now, in case you are unfamiliar with Carlyle, they may be the best-connected firm in the world, boasting a current or former board of directors and major investors that include a veritable Who's Who in the World.

Among the listed members, I found...

Former President Bush, former British Prime Minister John Major, Saudi Prince Al-Walid, George Soros, James Baker III, Colin Powell... the list literally goes on, and on.

These are, without exaggeration, among the most powerful people in the world. So why would the major NY banks, which owe so much of their success to their political connections, engage in such a distinctly unfriendly act as calling in the $400 million and, by doing so, essentially torpedo Carlyle's fund beneath the water line?

All I can come up with is that this is a sign of the deep, deep trouble these and other institutions are in. While the heirs of JPMorgan's carefully built empire may horribly regret the limited choices left to them, the knowledge that there are only a limited number of seats left in the life boat has guided them in their decision, I believe, to place a firm hand on the expensively coiffed head of Carlyle and shove it underwater in the scramble for safety.

David Rubenstein, a principal in Carlyle, sat for an interview with Bloomberg, in which, they report, he was heard to say...

"We have made a lot of money with, and for, these banks and this is a hiccup in a 20-year relationship. We don't think any of them have any animus [sic] toward us and we're not antagonistic toward them."

Using our top secret Casey Quote Translator, Model X-III, we uncover that what Mr. Rubenstein was actually saying was...

"The ingrates, how dare they! Who do they think they are messing with? Oh, boy, oh boy, just wait until the next time the bastards want something from the government, any government, then we'll make them pay! YOU HEAR ME! IT WILL BE NOTHING BUT DARKNESS AND PAIN!!"

Watch out below...

Are You a Skeptic?

Doug Hornig, who edits our Daily Resource PLUS, sent in the following item that I thought instructive and worth sharing...

It occurs to me that Internet credibility is a subject of interest that might fit in the Room sometime, or Doug's End Notes in the International Speculator. We've become so conditioned to getting information from the Net that it can interfere with our good common sense and healthy skepticism. That's why I always keep Snopes.com close to hand.

Case in point: there's an email currently making the rounds. I got it from a mutual friend. Now I love the guy and respect him quite a lot, but we do disagree on some topics about which I find him, well, myopic. He will, it seems, believe anything that supports his view of the terrorist threat or trashes liberals. Thus he sent me a related email, from which I excerpt the following:
This week, the University of Kentucky removed The Holocaust from its school curriculum because it "offended" the Muslim population which claims it never occurred.

This is a frightening portent of the fear that is gripping the world and how easily each country is giving into it.

Now, that seemed unlikely to me. I don't know much about Kentucky, except that they usually have a terrific basketball team, but I couldn't imagine that a major American university would do such an absurd thing. So I went to Snopes and found that, of course, I was right to be skeptical. It's a hoax.

What's especially fun in this case is how the hoax evolved. It's a bit like the old game of Telephone. The story got started when the history department in one small school in northern Britain (the UK) did in fact stop teaching the Holocaust. Someone picked that up and started the rumor that the same thing applied to all UK schools. Then some moron saw that story, thought that UK meant University of Kentucky, and started spreading that rumor.

So, as always with the Net, caveat emptor.

David again.

I would extend Doug's comments to include being skeptical about your sources of information. I have to bite my cheek when I travel around the web world looking at precious metals-related content, and come across ads for various information services being offered by people that I know for a fact have next to no knowledge on the topic, but have only just opportunistically jumped onto the bandwagon. Even worse, there are any number of such services being promoted by people paid to tout the stocks they wax so poetically about. I grit my teeth, wanting to write articles here naming names and pointing fingers, but resist... because who needs the legal hassle.

But, as you are skeptical about stories you receive in emails, so should you be skeptical about the information services you choose to help guide you in your investing.

New Trend: The End of Printed Books

While it dates me, I can still remember the smell that emanated from the very first fax machines. And the joy of being able to move from a manual typewriter to an IBM Selectric.

Even more telling, I can recall, having been involved in a business requiring printing, slogging down to the typesetters and watching as they arranged lead type into frames in preparation for printing.

I remember 8-track audio tapes and know that my children will look back in the future and similarly remember VHS and cassette tapes in much the same way.

What's next? Say goodbye to printed books...

With Amazon's über-successful launch of the Kindle electronic book reader leading the way, and showing the way... coupled with the increased environmental sensibilities now gripping the minds of humanity, the idea of cutting down forests to fill libraries is an idea whose time has passed.

Especially when you consider that, with Kindle, you can actually download full-length books, wirelessly, from pretty much anywhere, in less than a minute. Now nobody loves a proper book more than I, but the idea of loading up your reading device with the latest book you want to read while nestled comfortably in your chair, or while waiting in the airport for yet another delayed fight, is pretty appealing.

Finish the first book in a series and want to go right on to the next? Click and you are good to go.

And further iterations of the readers are now inevitable, given the demonstration of solid market demand. For instance, you could sign up to automatically receive notification that the latest books by your favorite authors are now available.

In short, I think the book readers are here to stay and will soon dominate, leading to the demise of all but art books.

What are the consequences of this shift? For starters, there is probably a big opportunity coming for whichever company captures the space. At this point, Amazon and Sony are in the lead, but it could easily be some other company that takes the lead (never count out Microsoft or Google when it comes to this sort of thing). It could bring the cost of books down.

Of course, on the downside, traditional book printers will need to change or die.

In time, of course, we'll somehow see this feature built into an all-in-one device (phone, Internet, book reader)... but I think that is some years away because no one wants to read a book on a tiny screen.

For the heck of it, if you have any thoughts on how an investor might play the end of traditional books (or wish to disagree with my hypothesis), drop me a line at david@caseyresearch.com and I'll publish the best ideas.

(Since we're on the topic of personal communication technology, going on nothing other than a couple of ads I have seen during my rare viewing of commercial television, I would say that Sprint is in trouble. They are heavily advertising a two-for-one deal on a phone that looks like some cheap toy. Its primary feature seems to be a slide-out keyboard that allows you to type in small type on a tiny black and white screen... a sign that the company is well out of touch with the times, if you ask me.)

End Notes

I have another 10 pages of notes, but less time than required to do them justice, so I will summarize some of the other items that caught my eye this week...

* Making the World a Safer Place. The Consumer Product Safety Commission is being revamped, restaffed and its funding boosted. As part of this new initiative, the cap on fines that the agency can now levy against companies failing to report product hazards will rise from $1.8 million to as much as $20 million, if the Senate bill passes. Using standard operating procedure on these things, Senator Pryor, the bill's sponsor, commented, "The vote is a victory for the health and safety of children."

About time, some will say. Just more regulation and more burden on U.S. manufacturers, I say. When was the last time you or someone you know was hurt by a faulty product?

* Running out of gold. I came across some interesting comments this week by Kevin McArthur of Goldcorp. Here's an excerpt of his remarks...

Goldcorp Inc expects the price of gold to top $1,000 an ounce and stay there for a long time, a development that will allow the company to improve operating margins, Chief Executive Kevin McArthur said on Monday.

In a wide-ranging interview at the Reuters Global Mining Summit, McArthur, who is also president of the Canadian gold producer, said he thinks the price of gold, which was at $973 an ounce on Monday, is not "anywhere near a bubble."

"We are not replacing the reserves that we're mining, and yet demand continues to grow worldwide. We're going to run out of gold," he said of the global gold industry.

* Derivatives Next? The good folks at moneywatch.com had an interesting article discussing Warren Buffett's dim view of the size and scope of derivatives, and postulating that if that bubble starts to deflate, things will go from catastrophic to, well... whatever is two or three times catastrophic. The author, Paul Farrell, kindly provides the latest data from the Bank of International Settlements to illustrate just how big the derivatives bubble, now at $516 trillion, really is...

U.S. annual gross domestic product is about $15 trillion
U.S. money supply is also about $15 trillion
Current proposed U.S. federal budget is $3 trillion
U.S. government's maximum legal debt is $9 trillion
U.S. mutual fund companies manage about $12 trillion
World's GDP for all nations is approximately $50 trillion
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
Total value of the world's real estate is estimated at about $75 trillion
Total value of world's stock and bond markets is more than $100 trillion
BIS valuation of world's derivatives back in 2002 was about $100 trillion
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

* Bank Runs... Dust Bowls Next? My somewhat more pessimistic partner, Doug Casey, wrote again over night that... "The only thing I'm actually pretty sure about is that we're in for the biggest economic/social/financial/political upheaval ever." For those of you aware of Doug's solid record in forecasting these sorts of things, those are words worth noting.

Along those lines, this week we learned that foreclosures in the U.S. had jumped by 60% in February, and bank seizures doubled (a category that now includes the snowboard shop down the street).

Further evidence that this downturn is taking a turn towards Doug's point of view, I came across two items of interest.

The first had to do with a long line-up that formed outside of the Boca Raton Housing Authority when that institution offered up housing vouchers. The scene turned ugly, requiring the services of the local constabulary which these days arrives dressed as if going to war. You can view the photos here... and to keep your finger on the pulse, you should. If you have a similar reaction as I did, you may get a creeping feeling on the back of your neck.

The second involves a tent city that the city of Ontario, California set up in a field at its airport last year, an attempt to help out the area's homeless. The tent city has now expanded from 20 residents to over 250, with many, many more trying to get in. The local government is unsure what to do from here, and so is trying to reduce the influx by letting in only those with some sort of identification proving they are from the area. Where does it lead? Where does it end? I don't know. Photos here.

* Flat Tax... Hah! Years ago, I had lunch with Donald Alexander, who had then just retired as the head of the Treasury. During our lunch, the much younger version of myself asked him "Hey, didn't the American Revolution start over the issue of taxation without representation? Well, my generation never got to vote on income tax, what are the odds of a do-over?" At which point, I remember him dismissively waiving his hand and commenting with something that I recall as disdain, "You're all wet."

While I still like that idea of a re-vote, I'm not holding my breath. Instead, as discussed last week, I'd happily settle for a 10% flat tax. But this week, we learn that if either of the democratic contenders come into power, taxes will be anything but flat. In fact, according to Bloomberg...

Hillary Clinton and Barack Obama both propose significant changes to the tax code that would add to its complexity. His plan emphasizes income inequality, while hers seeks to change Americans' behavior.

Obama's proposal would shift the tax burden toward the rich from low- and middle-income workers. Clinton proposes targeted tax breaks designed to change the way Americans use energy, save money and care for elders.

Obama, 46, "seems to have focused on redistribution," said Michael Graetz, a professor at Yale Law School in New Haven, Connecticut, and a former Treasury official.

Clinton, 60, "is proposing tax credits for everything short of flossing your teeth," said Lee Sheppard, a tax lawyer and columnist at Tax Analysts in Falls Church, Virginia.

The two candidates' plans -- especially Clinton's -- would further complicate a tax system that experts say is already Byzantine. Obama would tweak and augment current laws, while Clinton would introduce even more rules by adding at least nine new credits with complex qualification requirements, phase-outs and sliding scales.

And That's It for This Week...

Sorry to have gone on so long, once again, especially after my comments last week about tightening things up. But we live in a very busy world just now.

As I often like to do, a quick check of the screens as I wrap up shows me that gold is holding strong at $999 and the U.S. stock market is, once again, getting hammered... with the DJIA down 235 points, erasing the misplaced optimism that briefly flared after the Fed's $200 billion gambit to trick the markets earlier this week.

I came across a blog earlier in the week that was kind of sad. It was populated by day trader types, every one of them lamenting about the personal pain they had suffered by jumping back into the financials prematurely. As they told it, they each had figured things just couldn't get any worse... only to learn the hard way that, yes, they could. Elsewhere, I read the views of a pundit, whose name now escapes me, that earlier this week would have been a good time to buy Bear Stearns because, according to him, the company was, despite appearances, a picture of health. At one point today, the market disagreed so vehemently with his advice that it sent the shares of the wounded Bear down a record 53%.

And they say gold is risky.

That's it for now. Until next week, thank you for reading...

David Galland
Managing Director
Casey Research, LLC.

The Room 3/3/08

David Galland — Mon, 03 Mar 2008 17:52:08 GMT

Dear Readers,

It's getting to the point where even the most determined optimist is having a hard time finding a good reason to roll out of bed.

Among just the smattering of news that crossed the lens this week...

Producer prices rose 7.4 percent in January from a year ago, coming on the heels of the news last week that the Comedic Politicized Inflation (CPI) index has risen over the last 12 months at the highest year-over-year rate in decades.
The National Association of Purchasing Management's business barometer has fallen to the lowest level since 2001, beginning to reflect a knock-on slowdown in consumer spending.
And, according to the U.S. Commerce Department today, what modest growth in spending there is, is now coming from inflation and not from confident consumers mobbing local electronics shops to load up on the latest and greatest.
On that latter point, consumer confidence in the U.S. is reliably reported to have grabbed its chest and slumped to the ground, or at least to levels last seen only in 1992.

And no wonder, given that housing prices, the single most important component of the net worth of so many people, are crashing; in December they fell by the most on record, off 9.1% from the year before.

(During a cross-country ski slog over the weekend, a friend who is a housing contractor by trade told me he has not seen a slowdown like this in his 20 years in the business. He knows of only one new house on the flight path to be built in these parts. The property holder has six different contractors scraping it out in a bidding war to get the job, assuring that the victor ultimately receives as a reward a dry and meatless bone at best.)

If the housing sector slowdown with its rising foreclosures and defaults isn't enough to keep our optimist abed, he would have to do no more than flick on the morning news to learn of soaring food prices, a crashing dollar and a tumbling stock market.

No sooner had a trembling hand secured a double dose of Advil, topped off with a cold compress, then he would hear a report of hundreds of millions and maybe even billions of dollars worth of new and unexpected losses being suffered by municipalities, banks, and sundry financial institutions on purportedly "safe" instruments concocted in earlier, more positive times. This week, for instance, we hear that the supposedly invincible Goldman Sachs may take it in the chops for as much as $11 billion due to "variable interest entities," a form of conduit, our faltering optimist learns as he falls back on his pillow in a fatalistic swoon, that holds close to $800 billion in assets, some significant percentage of which are now considered suspect.

At this point, the only folks able to view the unfolding carnage with any casualness are the super-rich for whom almost any conceivable loss would still leave them the requisite funds to live like the royalty of old... and the relatively small handful of investors who've been smart enough to have moved assets out of harm's way and into gold and other commodities early on (a group that I continue to hope includes you, with the help of our various services).

Interestingly, this week it was revealed that the California Public Employees' Retirement System can be counted among the few that have been seeing the nature of the unfolding crisis in the right light, and has at least begun to act appropriately. Calpers, according to Bloomberg...

...the largest U.S. pension fund, may increase its commodities investments 16-fold to $7.2 billion through 2010 as raw materials prices surge to records.

Calpers, which has about $240 billion in assets, agreed at a Feb. 19 board meeting to hold between 0.5 percent and 3 percent of its assets in commodities, spokesman Clark McKinley said. The Sacramento, California-based fund last year put $450 million into commodities, its first such investment.

The agreement is the fruit of Chief Investment Officer Russell Read's efforts since joining in 2006 to boost returns by shifting funds into raw materials and markets such as China and India. Oil has soared above $100 a barrel, wheat breached $13 a bushel for the first time, and gold and platinum climbed to the highest ever since Calpers began investing in commodities.

"We plan on ramping up the program by hiring additional staff," McKinley said by phone yesterday. "We are excited about commodities, which have performed exceptionally well for us."

To which we say, welcome aboard! Better late than never, so hats off to the obviously competent Mr. Read.

Of course, as the pension funds, like the hedge funds, mutual funds and institutional funds in general tend to run in packs, this news can only help solidify the base under our current favorite investments.

Listen and you can almost hear the chat around the polished-wood-encased water coolers strategically positioned around finely appointed pension managers' offices worldwide.

"Did you hear, Calpers got into commodities last year?"

"Yeah, smart buggers. And here we are with our bonuses slashed -- slashed, I say! -- to only $2 million, just because we invested in AAA bonds!"

"Well, if commodities are good enough for Calpers, who are we to argue, eh?"

"Race you to the trading desk!"

Pile on in, we shout enthusiastically, daydreaming about selling our appreciated resource stocks to the stampeding herd a ways down the road.

But that, fellow travelers, is about the only golden lining to be found in the chaos now gripping the world. And while a good investment brings a warmth not unlike a crackling fire and a hot toddy on a cold day, the toddy loses much of its flavor when one considers the impact that the unfolding crisis will have on our less well-prepared friends, family and fellow countrymen (and women, as the case may be).

Commenting on the news in an email exchange from New Zealand this morning, Doug Casey had this to say...

"My own feeling is that by the time this cycle is over, people are going to be shocked by how high gold goes. But it will be a sideshow compared to the circus the Greater Depression will put on."

Unfortunately, however, the news for the unprepared gets much, much worse. There are two areas that I would like to comment on in a bit more depth, starting with Bernanke's testimony.

Bernanke Pushes the Button

Yesterday, while engaged in my periodic physical exertions, or more specifically, while I was clinging to the handles of a medieval masochistic device sternly labeled the "Stair Master" down at the local facility for such things, I managed to snake out a finger to the television monitor to tune into Chairman Ben's testimony in front the House Financial Services Committee.

It was, I noticed when the camera pulled back from Bernanke's oddly detached countenance, a sparsely attended affair. In fact, it seemed to my sweat-filled eyes as if there were no more than five or so members of elected officialdom in the gilded chamber.

(But, hey, why should members of Congress be interested in anything to do with the economy? It's not like there's anything going on these days. Whether or not Roger Clemens is doping - now THAT is worth packing the chambers for!)

In all seriousness, however, Bernanke's testimony yesterday was far more important than most people understand, least of all those now doing "service" in government. Far be it from me to be critical of the pandering class, but I was appalled at how unbelievably, well, stupid the questions were that were pushed toward Bernanke by the handful of Congressmorons who bothered skipping the brunch put on by the American Lawyers Association down the hall in order to be present.

Bernanke's testimony was important because in it he made it abundantly clear that the Fed - and by extension the U.S. government - was coming down firmly on the side of inflation.

Those of you who have been with us for any length of time know that we have been calling for things to arrive at a location loosely identified as "between a rock and a hard place." It has been our consistent belief that the Fed would inevitably be forced to make a decision between letting the economy collapse under the weight of its many debts and obligations, or letting the dollar collapse by shifting into default mode. Which is to say, trying to inflate the country out of trouble.

The specific quote from Bernanke's testimony you want to pay attention to was this...

"The Federal Open Market Committee will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

Note the lack of reference to run-away-inflation that is already making itself known here, there and everywhere.

The news that the Fed is again opting for inflation, while coming as no surprise to us, caught the gold bears flat-footed by sending gold sharply higher, to over $970 as I write.

Speaking from an entirely personal basis, I am, of course, cheered by the rise in gold, thanks to a long-held position in a gold ETF and a portfolio stuffed to the gills with the higher-quality gold exploration and energy stocks of the sort followed in our International Speculator and Casey Energy Speculator services. But there is a real risk arising... a true tipping point... that I am not so sure I'll be happy to see.

While there are many factors that might push the economy over the edge, the one to watch closely now are the foreign holders of the U.S. dollar. As we have mentioned more than once, the amount of U.S. dollars in the hands of foreign holders is at historic levels. In fact, the level of holdings, estimated at as much as $16 trillion, is unprecedented by an order of magnitude.

At this point in the game, we would expect to see wealthy foreign individuals cashing in their dollars for all manner of alternatives, including other currencies, tangible property and, of course, gold and other tangible assets. Given the price of tangibles at this point, that trend is likely well underway.

Diversification out of the dollar by institutional holders is likely also underway. But after that, if pushed to it, will come the big kahunas: the foreign governments and their many trillions.

Up until this point, that they have been reluctant sellers can be understood in much the same way you can understand the concept of Mutually Assured Destruction when discussing the pros and cons of launching nuclear strikes against your similarly armed adversaries. At what point, however, do the foreign governments come to the conclusion that the other side has already "pushed the button"?

Watching Ben Bernanke, there is a reasonable chance, were I a foreign holder, that I might come to the conclusion that he has done the equivalent of just that.

Regardless, the pressure is growing daily on the economies of the Middle East and Asia, which have to date helpfully reinvested the money they have received in exchange for their goods into U.S. Treasury securities. And, by doing so, effectively imported our inflation back home. Even if they wish to continue avoiding the nuclear option, they will at some point be forced to it by the U.S. pursuing a monetary policy one could correctly term "Everyone for themselves!"

Make no mistake that once the tipping point is reached -- and if the Fed makes yet another steep cut at its next meeting on March 18, that could do it -- then things have the potential to shift from crisis to catastrophe almost overnight.

What impact would a true collapse in the dollar have on the global economy? It is a topic we'll continue to poke at here and in our various publications. But for now, keep your eyes wide open and your head down.

I'll touch on the second serious development this week, but the lunch bell has just rung, so I'm going to pass the baton over to Bud Conrad, who has sent over a couple of items he thought you'd find of interest...

Bud on Bernanke

In alarming testimony to the House Financial Services Committee, this week Fed Chairman Ben Bernanke declared: "We have a problem ... the spreads between the Treasury rates and lending rates are widening, and our policy is essentially, in some cases, just offsetting the widening of the spreads, which are associated with signs of illiquidity."

I said at the Denver Summit, and since in articles, to watch out when the Fed cuts and long-term rates don't drop.

It means that the rate-cutting process of printing money to buy Treasuries in an attempt to provide liquidity to lower rates is failing. The confidence in the ability of Bernanke, or anyone else, to stop the collapse is lost when people become aware that printing money makes it worth less. The Fed action becomes the fear, rather than the solution. At this point further cuts won't help the economy, because long-term and riskier rates will reflect that loss of confidence.

(Ed. Note: Bud Conrad recently gave a wide-ranging interview for the Gold Report on where the economy, gold, energy, food and interest rates may be headed. You can view it by clicking here.)

A Trip Down Memory Lane

Our own Terry Coxon sent along a link to a video of Richard Nixon announcing the end of gold convertibility, pointing out that I would especially enjoy the reference to "international speculators."

You can see Nixon make the announcement by clicking here.

The canceling of convertibility was, of course, a seminal event as it left the world with a pure fiat monetary system, an experiment which has subsequently resulted in the steady deterioration of all paper currencies, among other ill effects (including unchecked growth in government, thanks to the removal of any real obstacles to spending).

Will the whole house of cards implodes some day, forcing a return to a gold standard or some other system that forces fiscal restraint? If I was a betting man, I would place large sums that the answer is "yes"... it is inevitable.

In fact, the collapse may have already begun.

Energy Chart of the Week

By Chris Gilpin, Contributing Editor, Casey Energy Speculator

[click to enlarge]

Gasoline prices are comprised of several costs: transportation of oil (usual from some distant corner of the globe), refining costs and profits, more transportation of gasoline (to get it from the refinery to the gas station), taxes from every level of government, and the cost of buying the crude it all started from. This last cost has mounted, and now oil prices hold a greater and greater influence over gasoline prices.

In 2004, oil prices rose 50% from $30 to $45 roughly, and this created a corresponding 26% rise in gasoline prices. In other words, gasoline prices increased half as fast as oil prices did.

As oil prices have risen, the oil cost of gasoline has begun to dwarf all other components. Now when oil prices go up, it will cause a much steeper rise in gas prices. If oil were to make another 50% jump from $100 to $150 - which we think is quite possible in the next year or two - gasoline prices would rise at a rate closer to 35%. The U.S. average for regular-grade gasoline hovers around 310 cents per gallon right now with oil near $100; a 35% increase would lift it to 419 cents per gallon.

The rogue factor in all these calculations is refining capacity. Last spring, a spree of unplanned refinery outages pushed gasoline prices higher when oil had retreated to $60. By the time refining capacity came back online, oil was marching to $100. By having one major cost replace the other, gasoline prices have stayed between 280 and 310 cents per gallon since April 2007.

This may have created a false sense of security among motorists, who saw oil move up twenty or thirty dollars without much of a corresponding rise in gasoline prices. This spring refineries have scheduled their normal outages to switch from winter to summer-grade gasoline, but how many unplanned outages will occur? The U.S. oil-refining infrastructure is outdated and badly in need of replacement, but permitting a new refinery in the Lower 48 has proven to be a near impossible task. It's reasonable to expect a growing number of unplanned outages at refineries in the years ahead, and if any of these correspond with another jump in oil prices, then prices at the pump would roar to new heights.

As a motorist, it's all very annoying. The best tactic is to hedge your rising fuel costs with energy stocks that will benefit from higher oil prices - or trade in your car for one of those Flintstone vehicles. But I hear they can be rather hard on the feet.

[Ed. Note: If you are looking to profit from energy, you owe it to yourself to check out the Casey Energy Speculator. And it couldn't be easier, given that subscriptions come with a 3-month, no-questions-asked, 100% money-back guarantee. Check out the current profit-packed edition by clicking here now.)

The Other Important News of the Week

Last week I pointed to the breaking news Fitzroy MacLean of our Without Borders publication tipped me to, about German intelligence officers paying a Liechtenstein bank employee US$5.9 million to steal a disk containing the names of all the German account holders.

In writing this news up, I posited that the Germans likely also got the account names of non-Germans, "...giving the German government a very nice trading card."

It didn't take long for my intuition to be proved right, as it was announced this week that the Germans were now cooperating with friendly governments around the world so they, too, could corner tax miscreants.

Confirming the point, one of our subscribers sent along a news item from New Zealand about how that country's Internal Revenue Department is offering anyone with an offshore account, especially of the Liechtenstein variety to, in essence, come out with your hands up or else. If you are a New Zealander with assets in the pilfered bank, I have no doubt you are sweating bullets.

Here in the U.S. of A., the Internal Revenue Service is also working hand in glove with the Germans to hunt down the tax cheats.

This is a trend firmly in motion, with serious implications.

First, now that executives and even lower-level employees of banks in tax havens with the right levels of access have seen the going market price for client names, and that rather than being brought up on criminal charges for breaking confidentiality agreements, they will be saluted by officialdom around the world, there will be a rush to capitalize. All that the person needs to do is to grab the list, download the file, or whatever, and make it past the front door to collect on the waiting riches.

In addition to the considerable personal problems this will cause the account holders, it effectively spells an end to the idea of financial privacy.

And that is an important battle to be lost by anyone who values individual freedom. Look at it this way, until recently countries knew that if they squeezed too hard, money would begin slipping across the borders to undeclared safety. With that escape route closed, they can now squeeze ever harder.

Even so, human nature being what it is, you can expect the same people - at least those not in jail following the global witch hunt that will soon extend to the Caymans, Andorra, or any other jurisdictions where the bankers have been accommodative to privacy seekers - to look for other ways of hiding wealth.

Of course, gold, diamonds and other readily portable and fungible assets will find favor. Setting the stage for the battle in the war of the state against the individual: a new round of government confiscations of gold and other such assets, "in the public interest."

I can't see this happening imminently, and we should be able to see it coming, but the threat that it could happen in the next decade, along with foreign exchange controls and similar acts of desperation by the tax farmers, is real.

Now let me be clear. I am not in favor of tax cheating. Per the fresh example from Liechtenstein, the risks are too high and, in my view, always have been. But that doesn't mean that I can't lament the fact that the system is moving closer and closer to the point where you won't be able to enjoy any level of privacy in relation to your financial affairs.

Visa's $19 Billion IPO a Scam?

During the course of dinner with a highly positioned financial services executive the other night, he told me that Visa and MasterCard had lost a major lawsuit related to hidden charges, and that it will cost them a lot of money and force them to change their business in a number of detrimental ways.

Almost immediately thereafter I read that Visa was planning a $19 billion IPO. Coincidence, I wondered?

Curious, I decided to dig a bit. I hadn't gotten very far when I came across a very coherent analysis on the situation by Mish Shedlock. You can read it by clicking here.

Could the broader investment community catch on to the true intent of the IPO, dooming it and by doing so, maybe, lead to yet another giant stumbling? While that remains an outside possibility, it is by no means out of the question given the impact of the lost lawsuit, and that the credit card companies are almost certain to be next to feel the pain of consumer belt tightening.

I suspect most people wouldn't be unhappy if the credit card companies took it in the neck.

On that theme, years ago I interviewed a senior credit card company executive and over the course of our meeting, I mentioned to him that I had recently caught a charge for "lost credit card insurance" on my bill. It was for something like $46 a year - for nothing, as far as I could tell. Indignant, because I hadn't approved the charge, I called the service center and no sooner were the words of complaint out of my mouth than the representative said, "No problem, sir. That charge will be removed." In other words, no questions or pushback at all.

"Oh, that!" my new acquaintance, the credit card executive, commented, a smirk on his face. "That was the idea of the guy in the office next to me. We were running behind on the quarterly numbers and he came up with the idea to bump the revenue."

"You mean," I asked, a somewhat stunned look on my face, "that you simply hit all the credit cards with a $46 charge?" (And we're talking about hundreds of thousands of accounts.)

"Yep. It was a big winner, because most people don't look very hard at their bills."

"But that must be illegal," I said dismayed.

"Probably," he said with a dismissive shrug.

He didn't get the job.

Of course, the flip side of Visa running into trouble will be yet another form of credit that gets tighter... and more costly.

Miscellany

Lines of Lawyers. As predicted, lawyers armed with thick briefcases and high-digit display calculators are increasingly jostling each other in the long lines that are starting to form at the doorsteps of the wounded financial service industry behemoths.

This week, HSH Nordbank, a German sector public bank (translation, they have clout), announced it was going after UBS bank for "hundreds of millions" in subprime losses. As the piling on grows, we'll start to see the major bank failures that our own Bud Conrad has been forecasting these past months. Followed, natch, by the helicopters' worth of bailouts, courtesy of taxpayers.
High-Stakes Shell Game. In a classic shell game, the banks are trying to prop up the AAA ratings of the insurers standing behind the hundreds of billions of dollars of toxic waste now eating away at their portfolios. While cost effective -- $3 to $5 billion is a lot cheaper than the carnage that will follow a downgrade -- the odds are high that they'll invest the money, the insurers will get downgraded anyway, costing them their investments and the value of their portfolios. Unless, of course, the same helicopters show up with yet more taxpayer largess to keep the insurers intact. It would not surprise me in the slightest to see, even, the de facto nationalization of a failing rating agency.
In the "Remember, We're All Only Human" Department ... I came across another anecdote about another of the esteemed members of the judiciary, one Robert Somma, a federal bankruptcy judge appointed by President Bush in 2004. It appears he has stepped down from the bench after police found that he had crashed his Mercedes into another car while drunk and wearing a dress, fishnet stockings and heels, and carrying a purse. "He's a highly respected member of the bar," said a fellow judge, "and remains so." I don't care about his dress code, live and let live, I say... but next time, take a cab.
Look Before You Leap. There was news out this week that Norilsk, the Russian mining giant, was ordering a fleet of super icebreakers to take advantage of the melting of Arctic ice, opening up new routes across the top of the world. Someone might want to tell them not to place their deposit yet, because the Arctic ice hasn't just re-formed, it's thicker than ever. Here's the reference.

That's It for This Week

Major developments are afoot, with the term "We live in interesting times" barely covering it.

While we expect things to continue in a similar vein, and to likely grow steadily worse for some months and maybe even years to come, the best approach at this point is to assure that you and your family come out okay.

It's like the warnings that the flight attendants give during their briefings on the topic of what one should do should yellow oxygen masks start falling on your head while in flight. If you don't first take care of yourself, before turning your attention to the less well positioned, you could find yourself wiped out and of no use to anyone.

As I close my weekly musings, I see that gold is solidly planted at $971, oil is parked over $101 and the long-suffering DJIA is off yet another 295 points.

Wall Street types like to look down their nose at people who invest in gold, silver and other commodities... but they may have to revisit their prejudice, given that the broader U.S. stock markets have been essentially flat over the last 5 years... which means, adjusted for inflation, their favorite sector has been a loser for half a decade now. Decidedly not the case for the precious metals, energy and other commodities.

Until next week, thanks for reading and for subscribing...

David Galland
Managing Director
Casey Research, LLC