The Room : Economic Forecast

The Room – 02/27/2009

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

February 27, 2009

Dear Readers,

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

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

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

The Bad News

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

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

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

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

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

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

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

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

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

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

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

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

The Good News

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

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not

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learn more about our Trend Trader trial offer here

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

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

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

Now, take them.

A Musical Interlude

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

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

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

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

A Golden Opportunity

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

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

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

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

Watch it by clicking here.

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

Rand Refinery Ltd.

Johan Botha

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

Damn Foreigners

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

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

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

This is a dangerous game.

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

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

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

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

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

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

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

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

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

Look for the Union Label

By Donald Grove, Casey Research Washington Correspondent

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

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

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

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

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

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

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

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

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

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

Here are the orders for those who wish to scrutinize.

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

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

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

Thank God it’s Friday!

Regards, Don

State Sovereignty – Saying “No” to the Feds

By Shannara Johnson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Revolt – Part I

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

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

Dear IRS,

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

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

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

Ed Barnett
Wichita Falls

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

Tax Revolt – Part II

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

Tax the table at which he's fed.

Tax his tractor, tax his mule,

Teach him taxes are the rule.

Tax his work, tax his pay,

He works for peanuts anyway.

Tax his cow, tax his goat,

Tax his pants, tax his coat.

Tax his ties, tax his shirt,

Tax his work, tax his dirt.

Tax his tobacco, tax his drink,

Tax him if he tries to think.

Tax his cigars, tax his beers,

If he cries, tax his tears.

Tax his car, tax his gas,

Find other ways to tax his ass.

Tax all he has, then let him know,

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

When he screams, then tax him some more.

Tax him till he's good and sore.

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

Put these words upon his tomb,

“Taxes drove me to my doom...”

When he's gone, do not relax,

It’s time to apply the inheritance tax.

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

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

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

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

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

Miscellany

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

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

Stay the course.

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 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 - 10/03/2008

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

Dear Readers,

We're no longer in Kansas, Dorothy.

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

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

But, what?

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

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

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

Guns?

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

The "etc." must mean guns.

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

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

But that was then, and this is now.

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

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

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

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

Do You Know How the Fed Is Managing Your Money?

By Bud Conrad

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

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

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

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

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

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

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

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

Call Us Utopians... or Free Marketers

Ed. Note

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

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

Oink! Oink! For Shame!

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

The Big Debate

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

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

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

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

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

World on the Edge

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

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

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

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

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

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

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

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

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

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

More on the Global Situation

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

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

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

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

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

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

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

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

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

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

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

So, things could always be worse.

Ed. Note

An Interesting Perspective on European Energy

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

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

Slovakia, Finland and Macedonia 100%

Bulgaria 96%

Serbia 87%

Greece 82%

Czech Republic 79%

Austria 74%

Turkey and Slovenia 64%

Hungary 54%

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

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

Putin is a genius.

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

Ed. Note

Casey Energy Opportunities

Learn more here

Blarney Barney

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

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

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

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

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

Economics 101 for Politicians

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

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

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

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

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

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

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

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

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

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

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

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

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

Miscellany

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

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

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

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

Sincerely,

David Galland

Managing Director

Casey Research, LLC.

The Room - 09/26/2008

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

September 26, 2008

Dear Readers,

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

Everything has changed.

Everything is changing.

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

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

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

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

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

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

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

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

We don't care.

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

From a correspondent in Switzerland...

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

The Casey Report

Try our 3-month no-risk trial now.

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

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

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

The Bailout: Behind the Scenes

By Donald Grove

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

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

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

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

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

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

From Ron Paul...

Dear Friends,

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

The events of the past week are no exception.

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

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

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

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

There goes your country.

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

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

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

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

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

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

In liberty,

Ron Paul

Quotes from the Quislings

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

Here's my Rogues List...

Laurence Fink

BlackRock Inc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About Those Foreigners...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Musical Interlude

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

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

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

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

Explosions in the Sky

The Birth and Death of the Day

It's Natural to Be Afraid

All of a Sudden I Miss Everyone

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

KRS1 - Sound of Da Police ...

NWA - F*** Da Police

Pink Floyd - Another Brick in the Wall Pt. 2

Public Enemy - Fight the Power.

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

JS Bach's Toccata and Fugue

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

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

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

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

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

www.generalfuzz.net

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

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

Gypsy Soul

Obsession Confession

Slash

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

How about Classical Gas for a movin' song?

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

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

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

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

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

McPalin Is Toast

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

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

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

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

Huh? What?

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

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

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

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

Miscellaney

Phyling On

phyle

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

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

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

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

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

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

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

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

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

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

I'll leave it at that...

Until next week,

David Galland
Managing Director
Casey Research, LLC.

The Room 09/12/2008

David Galland — Fri, 12 Sep 2008 19:14:37 GMT

September 12, 2008

Dear Readers,

In today’s “special” edition of the Room, I want to go somewhat beyond the latest news and observations on same.

Instead, I want to discuss the big picture as it relates to the U.S. and global economy.

I do so because it is growing more important with each passing day to get a solid fix on where things stand and, more importantly, where they are going next and how you can protect yourself. It’s hard to overstate just how unpredictable and dangerous the economic and investment environment has become.

While these are topics we’ll be covering in today’s online event, Casey’s Crisis & Opportunity Update, the situation at this point is moving so fast, and is so highly charged, that it is time to pay very, very close attention to things.

As you should expect, we have been furiously fingering the tea leaves in an attempt to make actionable sense out of the big moves now in motion. While there is much that we know about the unfolding events, there is also much that is unknowable – for instance, how much longer the long-suffering foreign holders of U.S. dollars will be patient.

In our quest for answers, we’ve been digging through the data and comparing notes with others we respect. For instance, earlier this week I spoke with real estate entrepreneur Andy Miller, who recently sat for a very insightful interview for the current edition of The Casey Report. In Andy’s view, the government takeover of Fannie and Freddie was a seminal event in U.S. history, ranking right up there, in his words “… with the Crash of 1929 or even the Civil War.”

We agree.

To set the stage, I want to share a lengthy excerpt from an article we just published, titled “The Biggest Bailout of All Time.” If you’ve already read it, skip to the next section.

The Biggest Bailout of All Time

(Published 9/10/08)

On Sunday, September 7, Treasury Secretary Hank Paulson, flanked by James Lockhart, the new conservator from the Federal Housing Finance Agency, announced a plan to take over the operation of Fannie Mae and Freddie Mac and to guarantee their debt. They cited what we all knew, that they did not have enough capital to continue operating. Their business is to borrow to lend for housing mortgages, and to guarantee half the country’s housing mortgages, about $5.4 trillion. The equity and preferred is all but wiped out as all dividends are suspended and management and the board are fired.
This is the biggest bailout ever. If 10% of the $5 trillion of guarantees must be made good by the government, the payments would be $500 billion. That is the size of the annual U.S. defense budget. The outstanding debt of the U.S. held by the public is the size of the guaranteed mortgages. It is huge.

We from Casey Research have seen this coming for more than a year:

International Speculator

Unusual Aspects

The Treasury will add funding to Fannie and Freddie when their assets are less than their liabilities. The Treasury gets warrants to own 79.9% of the equity. Fannie and Freddie are allowed to expand mortgage lending through the end of 2009 but are required to wind down their $850 billion of debt at 10% per year until they are essentially out of business at only $250 billion debt.

The effect on the Credit Default Swap (CDS) market could be big: there are about $1.47 trillion of CDS on Fannie/Freddie-backed mortgages. The creation of the conservatorship is probably a credit event, triggering the payment of the insurance on the debt. But as we know, the insurers are already weak, and forcing them to pay could eliminate them as ongoing business, thus creating a cascading loss of the value of insurance on other debt they guarantee.

The "New Secure Loan Agreement" that is designed to bail out the debtors of Fannie and Freddie will also be used to bail out the Federal Home Loan Banks. $274 billion additional housing market funding was passed through the FHLB last year, and it is safe to assume there are problems there too.

Who Will Rescue the Taxpayers from Fannie and Freddie?

The U.S. Government has decided to spend an enormous amount of money to prevent the two mortgage giants from defaulting. What will be the real effects?

The rescue won’t resuscitate the housing market. As much as prices have declined, they still haven’t come down enough to make houses affordable. (They only seemed affordable for a while because of the artificially low interest rates the Federal Reserve engineered during the housing boom through its inflationary policies.) Don’t expect the rescued Fannie and Freddie to revive the housing market; the government’s rescue package requires them to shrink their operations.

The rescue won’t end the credit crisis that is pulling the economy into recession. Fannie and Freddie are perhaps the biggest, but certainly not the only, institutions that overcommitted to risky mortgages. Banks, insurance companies, and pension funds are holding billions in the same kind of dangerous stuff. And they still must get through another two years of interest “resets” on subprime mortgages created during the housing boom. As those resets occur, there will be more defaults on mortgages that borrowers can no longer afford – or no longer want because the loan balance exceeds the value of the house.

The rescue helps keep bad decision makers in place. Managers of banks and other financial institutions that invested heavily in Fannie and Freddie paper get let off the hook. They get another chance to make more bad decisions about how to deploy trillions of dollars of capital. And the politicians who passed the laws that encouraged Fannie Mae and Freddie Mac to take all those wild risks? They’re up for reelection.

Implications for the Future

The complete collapse of the agencies that provided 80% of new mortgages year-to-date is now here. The whole structure of creating mortgage-backed securities and passing them on is gone. There will be no creating new phony tranches of sliced and diced SIV debt, and no CDO and no CDS and no AAA-rated toxic waste. We don’t know what happens to $62 trillion of notional CDS derivatives, but somebody is holding a disaster. This financial crisis is far from over.

By itself, the government might be able to manage some of these problems, but the problems are not isolated: the Federal Deposit Insurance Corporation (FDIC) guarantees $4.3 trillion worth of bank deposits… but has only a $50 billion reserve to cover bank failures.

Interest rates are close to 50-year lows, from the Fed cutting the short-term rate, and as a result of the flight to Treasuries as a “safe harbor”… which serves to drive rates down. But the longer-term implication of the bailout is more deficits… and more deficits will weaken the dollar and therefore, in the longer-term, drive interest rates higher -- especially for non-government-guaranteed debt, to cover inflation and increased risk.

There will be many more financial institutions in trouble: perhaps 150 banks will fail, including probably one or two big banks, like Lehman, Citi, or Merrill. FDIC is next to need a bail-out, in our opinion, once a big commercial bank goes under.

The dollar is up in the short term on what we expect is a short covering rally, but that is not consistent with long-term implications, so we don’t expect it to stay up.

Homeowners gain, as Fannie and Freddie are allowed to continue to expand in 2009. But after that, they will be looking for a newly reconstituted system beyond what is in the conservatorships that are being asked to unwind. The long term is unclear.

The U.S. Treasury is now in the mortgage business. The financial future of the world is crumbling, and this is the biggest step in that change.

David Again, With a Public Service Announcement

Before we move on, I would like to pause for a quick public service announcement.

expanding audit program

Okay, with that out of the way, let’s move on to the topic of who is actually in control of monetary policy in these here United States. And for that, I gladly turn the page over to our own Bud Conrad.

The Reason Paulson Panicked

By Bud Conrad, September 11, 2008

Foreigners have been reinvesting their trade surplus into the U.S. The Federal Reserve keeps a custody account for foreign central banks, acting like a broker for them in buying U.S. Treasuries and agency debt. Agency debt is debt issued by agencies, most notably Fannie Mae and Freddie Mac. The Fed publishes the data weekly. It is the most up-to-date source of foreign investment.

The chart below shows what happened monthly. Foreigners broke a record for selling off their holdings at the annualized rate of $280 billion in August.

The U.S. housing market and Freddie and Fannie in particular have depended on foreigners buying their debt to fund mortgage loans. The above data show a loss of confidence by foreigners and a reversal from buying $200 billion a year… to selling off their holdings. There were other pressures, including PIMCO’s Bill Gross demanding a bailout before his huge fund would invest. But this foreign investment pullback was undoubtedly a big reason that Paulson had to act over the weekend to keep the whole agency debt market from collapsing.

Think through the implications of the largest bailout in history being dictated by foreign central banks -- I suspect that the Chinese are the main culprit, based on Paulson’s frequent travels there of late. Think through the fact that our monetary/fiscal policy is now essentially being dictated by foreigners. The bottom line is that the U.S. is now in the position of a third-world country because of our debt!

On the topic of the size of the bailout and the likely cost: in my view, a 10% loss on the $5 trillion insured by Fannie and Freddie is entirely plausible. That would mean that the government would have to come up with $500 billion… just to make the operations whole. But that doesn’t do anything to recapitalize their businesses so that they can continue as a successful ongoing enterprise. That would likely require another $300 billion to be credible.

Now where does the federal government get that kind of money… $800 billion? It means no health care program for Obama, or no defense spending or nuclear power initiative for McCain.

One of the risks a new president might face would be if the public catches on to the fact that the U.S. Government is going to have to pay close to a trillion dollars to bail out foreign central bank holders of bad debt from Freddie and Fannie. Given the trade-off – i.e., no new social programs – many people might decide that bailing out the foreign central banks isn’t such a high priority. The conclusion from that is that the bailout and reconstitution may not happen as planned, for financial reasons; never mind, constitutionality, or just because lawmakers feel duped by estimates of $25 billion. What happens if the mortgage defaults reach 20%? It could happen.

This situation is still very fluid and far from resolved.

“On a Scale with the Crash of 1929 and the Civil War”

David again.

When Andy Miller used that phrase in relation to the Freddie and Fannie takeover – and he didn’t use it flippantly – I took notice. As you know, here at Casey Research, we believe the unfolding crisis will be one for the history books… but we are not used to hearing such words from a mainstream business executive.

So, why was the Freddie and Fannie takeover so significant? Simply, it puts the economy even further out into deeply uncharted waters, with the U.S. Government now standing directly behind the organizations that, per Bud’s earlier comments, have year-to-date been responsible for guaranteeing some 80% of all U.S. mortgages.

Because the event is unprecedented, the consequences are also unpredictable.

To make that point, consider that since making the takeover announcement, the situation has continued to evolve. Or, more accurately, devolve… evidenced by the following items:

The problem with this move, and it is symptomatic of the problem with the whole stinky mess, is that if you ignore longer-term funding obligations that cause it to balloon into the stratosphere, total U.S. Government debt now rings in at about $9 trillion. Toss $5 trillion onto that number, and you might just scare the wrong people… i.e., the foreign holders of dollars.

If there is one thing you can count on, it is that the Treasury will try to find some clever way to obfuscate the true cost of the bailout, which will be exponentially larger than the $25 billion they have suggested. (Recall that the cost of the Iraq war was initially estimated by the administration at $50 to $60 billion… current estimates put the total at closer to $3 trillion.)

And then, there’s this…

So, what these fine senators are proposing is essentially a 3-month moratorium on paying mortgage payments for many. Other than a testament to the stupidity of career politicians, it represents a huge step in the wrong direction… for taxpayers. I am as sympathetic as the next guy to the challenges now being faced by homeowners. But whether you give a person a 90-day or a 9-month moratorium, if you can’t afford the home, you can’t afford the home. This sort of legislation only assures that the bills mount or the loans go that much more in arrears. And it assures that once the moratorium is lifted, the process of actually cleaning up the mess will drag out for that much longer.

Meanwhile, many of the homes in question will be deserted, vandalized and stripped down to the sticks. And, as Andy Miller pointed out in his Casey Report interview, the disincentives will mount for private lenders to make mortgage loans. Thus, the housing crisis can be expected to continue, possibly for years, setting up a powerful negative feedback loop, with yet more downward pressure on prices, more defaults, more foreclosures, more debt moving onto the back of taxpayers.

But it gets worse.

Now that the government has made it clear that it is in the bailout business, it will be very hard for them to draw the line on who qualifies.

For instance, as we have been talking about for some time now, Lehman Brothers is about to be folded into someone else’s family. And Merrill Lynch is right behind them. As was the case with Bear Stearns, will the government end up as a party to whatever deal is struck? Probably.

Then there is the whole banking sector, which is in deep, deep trouble. It is looking more likely with each passing day that WaMu, a giant, will fail. They will be far from the last, as the trend of bank failures is far closer to the beginning than it is to the end.

And then there is the matter of faltering industry. This from the Associated Press earlier this week…

I love how the lobbyists have thoughtfully packaged their well-timed pitch for the big bucks in the wrapping of “energy independence.” And that part about the auto industry being an essential component to the “backbone of the U.S. economy” is inspired. Funny, I thought the backbone of the economy was the free-market system that, in its less diluted form, was responsible for making the U.S. the world’s richest economy.

But no worries. No responsible politician would authorize a bailout of this magnitude to a group of car makers who, as friend Porter Stansberry points out, collectively have a market capitalization that is less than half the amount being requested.

Okay, okay, Obama, courting the union workers, might roll for it, but not McCain. At least we can count on that.

Well, not exactly. The AP article continues…

“Democrat Barack Obama has criticized Republican rival John McCain for not supporting the full $50 billion loan program. McCain said last week he supported fully covering the $25 billion loan program in the energy law.”
Oh, well.

In my view, the government is desperate at this point… desperate to do something, anything, other than let the chips fall where they may… and must, if the country is going to move on. Instead, as the crisis gains momentum, the government has shown that it will try to manage things, but what it will really end up doing is rushing from emergency to emergency, stepping in again and again as the lender of last resort.

It is an untenable situation. It cannot end well.

Before continuing, I wanted to share a photo from Casey Researcher and daily correspondent Ed Steer of a bear that I think deserves serious consideration as the new poster child for U.S. industry.

What Does This All Mean to Investors?

Earlier this week, I was interviewed by a news service. As we talked, the notion struck me that the interview format might be useful in addressing some of the concerns expressed in the emails I have received lately. And so, with no other interviewer handy, I decided I’d tackle the job myself.

Me: Thanks for making time available today. I can imagine you’re a bit busy, you know, with everything going on in the markets and all.

David: My pleasure. Yes, things are certainly busy, but I’m taking off for a vacation to Portugal next week, so I’ll probably survive.

Me: What’s that music I hear in the background? I can barely hear you.

David: Sorry about that, it’s Polly by Nirvana. It’s actually one of their more mellow songs. Too bad about Kurt Cobain, the guy had a real talent but he couldn’t handle the success and made a lot of bad decisions, not the least of which was frying his brain with excessive quantities of unhealthful stimulants. His later music was truly horrible, but he still managed to secure his reputation by killing himself.

Me: Pretty morbid, but how about we talk about investments? Let’s start with gold. You’ve been very vocal in your bullishness on gold. But as we speak, gold is trading around $750. Are you still bullish, or are you starting to curb your enthusiasm?

David: I’ve never been more bullish. Now, stop rolling your eyes. I’m serious, and here’s why. When trying to understand where investment markets may be headed in the future, we have to largely rely on a combination of hard facts and observations of cause-and-effect relationships that history has shown to have some correlation.

So, what are the hard facts of the situation today? Well, for one thing, we are in the grips of a truly monumental financial crisis, one for the history books. We have the government essentially taking responsibility for over half of the mortgages in the nation, and by passing “anti-predatory lending” legislation and otherwise messing in the free market, assuring that what few private lenders there are still in the mortgage business will soon exit. We also know that the housing bubble was the largest in history, on the order of $30 trillion. And we know that that bubble, and all the little bubbles that spun off from it, were critical drivers of U.S. consumption which, in turn, was a critical driver of global economic growth.

And we know that the housing bubble is now deflating, quickly, with absolutely no turnaround in sight.

Me: That sounds deflationary.

David: No question. As Terry Coxon put it so succinctly, we now have an economy where lenders are afraid to lend, and borrowers are afraid to borrow. That is not a formula for economic growth but contraction. But it is important to interject the factor of time into this discussion. Is the economy in a downturn? Absolutely. Will investments that suffer in an economic downturn suffer in this downturn? Absolutely. Will the government do everything in its power to try to curb this downturn? Absolutely.

Which is why I remain so bullish for gold. While gold is temporarily out of favor with the trading herd, in this day and age, information moves quickly. As the government redoubles its efforts to fix all the many ails of the U.S. economy – and its only real power comes from the printing press – Mr. Market will take note and the pendulum will shift back towards tangibles.

Me: What about the rebound in the dollar?

David: There is a very high correlation between gold and the dollar…and between gold and oil, which is, of course, priced in dollars. It’s hard to argue with the contention that the U.S. dollar was oversold, and that oil was overbought. So, the U.S. dollar has had a bounce, as was inevitable because trees don’t go to the moon, and no investment moves in just one direction. And oil corrected, for much the same reason. As a consequence, gold took a big hit. But what happens as the crisis continues to unfold and the trading herd remembers that the U.S. dollar is trash? Oh, and so is the euro and the pound and the yen? Where is the money going to go next? The Chinese renminbi? Sure, some of it might… but I have to believe that more and more of it is going to find its way into gold.

I recently commented that the 24-hour trading volume on currency futures contracts is worth about $3.2 trillion. Against that number, gold trades about $26 billion and silver just $4.5 billion. When the currency traders start looking for their next safe harbor, I have to believe that some small percentage is going to head into tangibles. And what’s more tangible than gold?

It may not happen overnight, but it will happen. And when it does, the gold price is heading back toward $1,000 in a hurry.

Me: What about gold stocks?

David: To answer that question, you have to start by separating the gold stocks into two categories; the junior explorers and the producers.

Starting with the latter, I remain very bullish on the big producers. At today’s gold prices, the good ones, such as we follow in BIG GOLD, are throwing off large amounts of free cash. How many other sectors can you say that about these days? But the story is even better, because the stocks have been punished along with the broader market and with gold. Thus, they are selling for ridiculously low valuations, by just about any standards.

Historically, there have been a number of occasions where the gold stocks have initially fallen with the broader markets, but then snapped back relatively quickly and head to new highs. I think we’ll see this pattern repeat, and I don’t think we’ll have to wait overly long for it.

There is one other factor in the favor of the big gold companies, but it’s not particularly good news for investors in the junior exploration companies for the near term. Namely that the cashed-up big gold companies are beginning to pick off the juniors with serious deposits that lack the cash to make forward progress in these challenging times. And, thanks to the current market conditions, they don’t have to pay big premiums for those companies. So, that’s a big plus for the producers, but not so good for some of the juniors.

Me: Speaking of the juniors, seems like you should have seen the meltdown coming.

David: We certainly didn’t foresee the depth of the pullback in the juniors. At this point, the losses on juniors are a similar scale as those suffered by investors in the financials, which we did anticipate. In our defense, we did make a couple of moves relatively early on that I think were important. The first was to recommend selling all our appreciated base metals juniors back in August 2007, locking in big gains. Our rationale back then was that base metals were particularly susceptible to the economic downturn we saw coming, and that made it all the more important for subscribers to take their considerable profits off the table.

The other move, made around the same time, was to begin tightening up the portfolio of our remaining stocks, shifting our focus primarily to the highest-quality juniors involved in advanced stages of gold exploration. That was consistent with our view that gold’s role as a monetary metal would become highly valued in the economic crisis. That view hasn’t changed, but the structural underpinnings of the junior resource sector has taken a major hit, causing even the highest-quality juniors to suffer big setbacks.

Me: What structural damage are you referring to?

David: First and foremost, there has been a flight from risk. And we have never made it a secret that the junior resource stocks are risky – it’s what gives them such wonderful upside – which is why we constantly remind investors to only take positions with a relatively small percentage of their portfolio.

Regardless, in the process of trying to reduce risk, an increasing number of investors began trying to unload their juniors, at the same time that buying interest was drying up. That has effectively kept the lid on most of the stocks, even those that have delivered the drill results needed to confirm they are sitting on a major new deposit.

The situation has been exacerbated by a wave of redemptions by investors in the funds that had moved into the smaller resource plays – RAB Capital being the latest example. To meet those liquidations, the managers have been forced to sell, almost without regard to price.

So, ironically, just when everything should be breaking the way of the juniors, they are struggling.

Me: Is it time to throw in the towel on the juniors?

David: Personally, I’m holding. But I am doing so because the positions I own that actually matter – to wit, those of any real size – are all in companies that used their shareholder capital efficiently to discover and/or prove up significant discoveries.

And, per our criteria for the vast majority of the companies we are following in the International Speculator and Casey Investment Alert services, the companies I own are well cashed up and have proven management teams. It is highly unlikely that the deposits they have found are going to be returned to the former property owners or dumped in a fire-sale… at least not as long as the cash holds out. And they have cash.

So, I think, in the longer run, they’ll come out a lot more than fine. Could they get cheaper in the short term? Absolutely. If a fund is forced to dump everything, then quality is no longer a protection; in the short term, the stock is going down.

Between now and the end of the year, I would only look to invest in very special situations. A recent example was a company we brought to the attention of CIA readers on August 15 that subsequently announced a major discovery, giving readers a quick opportunity to lock in a gain of as much as 75% within a couple of weeks. But, as we expect to see in this market, the stock has since come back a bit, though we’re still well in positive territory.

So, the special opportunities are out there, but they take a lot of work to uncover. Fortunately, hard work doesn’t bother people around here very much.

But returning to something I said earlier, we really can’t know what tomorrow is going to bring. With market conditions as volatile as they are today -- and I expect things to get violently volatile before this is over – who is to say that gold doesn’t do a runner through $1,000 almost overnight? That could be a big game changer, and it is certainly not out of the question given the powerful uncertainty hanging over the global economy just now.

So, personally, I’m maintaining my positions in the juniors and looking to raise cash for the truly amazing opportunities I think the quality juniors are going to offer once things bottom early next year. At the point where there are no more sellers, these stocks are going to explode to the upside. As Rick Rule put it in my recent call with him, and Rick is one of the most successful resource investors ever, he is becoming very, very bullish on the better-quality juniors.

If I was pressed to it, I would say that the companies that we are following in the International Speculator and the Casey Investment Alert are going to do exceptionally well next year. We’ll have to get through this lag between the cause of their finding a major deposit and the effect of getting paid for it, but they will get paid.

I know that many of Aurelian’s shareholders were disappointed by the price that Kinross paid for them – but the number worked out to be about $88 per ounce in the ground. Not really all that bad, given that that ground is located in a very politically unstable place. By this time next year, the premium on good deposits, in good jurisdictions, should rise considerably.

Me: You focused your comments on the quality junior resource companies. What about the other 95%? You know, the paper tigers with indifferent management, small or non-existent mineral deposits, and little to no cash?

David: If you own any stocks that fit any part of that description, I’d be looking to beat the market to the punch by selling as soon as possible. Certainly before any serious year-end tax selling gets underway.

The bottom line is that bad companies will have a very bad outcome, simply because they are not going to find the cash they need to survive.

Me: What about base metals? Still bearish?

David: The world’s manufacturers are not going to all close up shop and go away, no matter how bad things get. Despite the big run-up in the prices of many base metals, copper for example, supply inventories throughout the period have not shot up as you might expect they would. So the supply/demand remains fairly tight, and we expect it will continue that way for the foreseeable future.

Our big concern about the base metals has been a sell-off due to broad concerns about a major economic downturn. Since our sell signal last August, we have seen much of the froth come off the base metals and, in the case of some of the metals, a steep sell-off. As the depth and scope of the crisis become widely apparent, we see base metals becoming oversold. At that point we expect to be buyers, competing for our shares with the end users who actually need the feed for their smelters or for their factories.

Me: What about oil? Given the positive correlation with gold, the outlook for oil seems important.

David: It is. While oil, like base metals, may take a few more hits as recession fears spread, the medium to long-term outlook is very bullish. As we have discussed at some length in Casey Energy Opportunities, on the order of 70% of the world’s production is now in the hands of state-run energy companies. That’s important for two reasons.

The first is that, unlike a private company where management has to be attentive to the expectations of shareholders, a government entity will respond only to the wishes of officialdom. As Rick Rule points out, governments have, for decades, dedicated large percentages of their oil revenues to the task of mollifying their populations with all manner of social programs. That money is not being spent to find and develop new fields. Which, in turn, assures that oil supplies will remain tight, and shortages are a locked-in certainty in the years just ahead.

Similarly, I have written about Jeffrey Brown’s Export Land Model, which shows that Mexico will go offline as an exporter to the U.S. within the next six years. While much of that has to do with geology, there’s no question that a diversion of oil revenues to social programs has limited new exploration.

Then there are the geopolitical aspects. If the big oil-producing countries, which include Russia, Saudi Arabia, Iran, Venezuela, think the price of oil is getting too low, they have it in their ability to stir things up or organize a cut in production, and loudly announce same, to drive prices back up. There are a lot of geopolitical apples in the air just now, not the least being the very real potential for an Israeli attack on Iran.

And just today, Venezuela tossed the U.S. ambassador out and announced it is withdrawing its U.S. envoy. Despite all his bluster and bravado, Venezuela is still the third or fourth largest supplier of oil to the U.S., depending on the day, so, who knows, maybe this time around Chavez ends up cutting off the U.S. and redirecting the country’s oil elsewhere? If there is one truth about history, it is that anything can happen at any time.

So, the outlook for oil remains strong. At least until we get the inevitable breakthrough in technology, I think it will be solar, that changes the entire game. But before that happens, the odds are high we’ll see $200 a barrel.

Me: What about other opportunities?

David: Now you’re talking. In a time of great crisis, there is also great opportunity. It’s all a matter of orientation. Being aware of the scope of the problems now challenging the global economy – and a surprising number of investors are still unaware of just how serious this situation is -- gives you a real leg up in positioning your portfolio to profit. In fact, it is getting hard to keep up with all the many ways to profit from this crisis, though we’re certainly giving it a good try in The Casey Report. Shorting regional banks with portfolios stuffed to the gills with condominium mortgages, or anticipating the inevitability of rising interest rates, or shorting financials, or buying more gold at today’s low prices, or buying natural gas companies on the cheap… and… and.

In the final analysis, I am sorry to say that the common man is going to take a serious hit here. But for the uncommon man, and by that I mean anyone actually willing and able to act decisively at the right time in the right sectors, the potential to earn investment fortunes in the next year or two is very real.

We see it as our job to keep our readers up to date on the unfolding situation and on the ways to play it. It’s a job we take seriously, even though we do sometimes talk to ourselves.

Taunting the Tiger

You may recall the tragic tale of the teenagers, encouraged by the liberal application of pot and alcohol, who thought taunting the tiger at the San Francisco zoo last year was a good idea, a notion that changed quickly when the tiger jumped the fence and expressed his displeasure in that special way only angry tigers can.

I recalled that story when reviewing the following story emanating, as usual, from that towering bastion of hijinks and stupidity, Washington D.C.

Now, rules are rules and all that, but at this particular moment, Congress might want to look the other way on new legislation to tax foreign investors in the U.S.

After all, should the IRS succeed in its endeavors in this regard, it might, just might, make the U.S. less attractive as a place for foreigners to park funds. And right now, I think the U.S. probably needs all the investment capital it can get.

Why, no sooner had those words rolled onto the screen than the following popped up in an email from the ever reliable Mr. Steer…

http://www.chinadaily.com.cn/china/2008-09/12/content_7020656.htm

I suspect, but can’t know, that given the general environment where bonds will soon look like a really, really bad idea, and stocks won’t look much better… at least not those in the U.S., given the proposed IRS enforcement, coupled with that whole collapsing financial markets thing… the Chinese and others in Asia will see some wisdom in adding some more precious metals to the portfolio mix. It wouldn’t take much more than a percentage point or two of $4 trillion to do some pretty amazing things to the price of gold.

A Very Useful New Service

Last week, I finally found time to do something I have been meaning to do for years but have always put off: I sent off a bunch of my old VHS tapes to be transferred to DVD.

The tapes, from my youth and my family life, have been gathering dust and slowly degrading.

Well, anyway, I finally got around to researching the best way to handle the transfer and settled on the Photo Archival Company. I don’t do a lot of product endorsements, but the service was so excellent – including changing my delivery instructions over the weekend – the prices so reasonable (about $10 a tape) and the quality of the transfer so good, I highly recommend them.

I was particularly amazed that they were able to successfully transfer, and retain the quality of the initial recording, of one tape that was almost 25 years old, of a very strange adventure I was involved with in Africa.

In any event, as I suspect you probably have old VHS tapes or Super 8’s, whatever, lying around, you may find this service as useful as I have. Check it out.

Miscellany

Good perspectives on gold. Frank Holmes, the top-performing gold fund manager, often comes across interesting facts and insights, which he shares on his website (you can read some of his recent postings by clicking here). Recently Frank co-authored an excellent book on gold investing, titled GoldWatcher. It’s quite well done and well worth the price, even though it’s not available on Kindle yet.
Orange County phyle starting up. If you live in Orange County, California, we have a subscriber who is willing to organize get-togethers. Drop us a note at phyle@caseyresearch.com.
Doug takes on James Carville and Fred Thompson, live… The annual New Orleans Investment Conference is coming up, Nov. 13 – 17. It has become something of a tradition for the organizers of this long-running event to put Doug Casey up against all manner of opposition in a debate format. This year’s challengers should be particularly interesting, especially Carville, who is famous for his rapier wit. Can Doug prevail against this media slick? Only one way to find out… be there. More details on the conference can be found here.
Music makes the world go round. I was thrilled to get so many emails with so many great songs I have never heard – and reminders of many great old songs I have. I was going to do a compilation of all your recommendations in this edition but ran out of time, so I will save that for the edition after next, when I am back from Portugal. Until then, thanks to all of you who took the time to write with your favorites!

And Finally…

And with that, I will sign off for this week… and for next as well, as I’ll be visiting with friends in Portugal. As I sign off, gold is trading up at $753, and the U.S. stock market isn’t open yet… I started quite early today. But a glance at the news suggests another rough day... with retail sales falling further and Lehman teetering.

One item of interest to gold investors, a group I am happy to belong to, has it that U.S. Producer Prices fell 0.9% in August. At first glance, that might seem a reversal of last month’s robust gains. But scratch at the data a bit, and you find that producers paid 9.6 percent more for goods in August 2008 than they did in August 2007. And, taking out food and energy, you find that the gain in “core” prices in August was 3.6%, the biggest year-over-year increase since 1991.

Even so, you can expect the pundits to point to the data as a sign that the inflation has been tamed, giving the government yet more license, as if they needed it, to belly up to the money bar.

Which brings me to one final item before I sign off.

The days ahead are going to try the mettle of most people and the quality of our lives will, in the end, be determined by how well we cope. It is important to keep things, good and bad, in their proper perspective. There’s more to life than money, and we as a species are truly resilient.

In that regard, I think the photo here, from Ireland during a recent flood, strikes a resonant chord.

Next week Olivier Garret, our hard-working CEO, will be writing this column.

And so, until the week after next, thank you for reading and for being a subscriber.

David Galland
Managing Director
Casey Research, LLC

The World as We See It

David Galland — Thu, 04 Sep 2008 16:51:10 GMT

4 reasons why this may be the worst crisis since the 1930s – and 4 projections for what’s going to happen

by Bud Conrad

The Casey Report Webinar– Casey Research

I identify the foundational forces now driving our economy to establish a basis for the investment recommendations you’ll read in this advisory in the months to come.

The role of the U.S. as the world's dominant economic superpower is now challenged by an out-of-control growth in debt and a deterioration in its reputation as a financial haven. The dollar is losing its special status as the global "reserve currency," is leading, in turn, to higher inflation, higher interest rates, weakening financial assets (stocks and bonds) and runaway prices for commodities.

Let the data and let them speak for themselves, with some interpretation along the way:

1. U.S. Government Deficits: From Bad to Worse

Government deficits are the root source of the creation of money... and its eventual debasement. Simply, when the federal government spends more than it raises in taxes, it eventually has to create more money (in complicity with the Fed) in order to pay the bills.

Of course, it can borrow the money, but that often includes borrowing newly created money from the Fed. The deficits remain and they accumulate and in time. They must be resolved, either by payment or default, either overtly or covertly through the mechanism of inflation.

While some level of government deficits may be acceptable over modest periods of time, the U.S. deficit is now well past the point of being acceptable. The deficit will soon grow to monster proportions as the baby boomer retirement obligations exceed the ability to tax the declining number of workers contributing to the Social Security and Medicare funds.

Projections of the likely deficit compared to GDP growth make it clear that the government is faced with hard choices. The easy path of just letting the dollar fall is the most likely.

2. The Expanding U.S. Trade Deficit

It is consumers who primarily receive the money provided by U.S. government deficits. In this globally interconnected world, they then spend a portion of that money on foreign goods. An unintended consequence of the ballooning government deficits, therefore, is a large and growing trade deficit.

The foreign recipients of those dollars – whether Chinese manufacturers or Middle Eastern oil sheiks – have, in recent years, turned around and reinvested those dollars in U.S. Treasuries. They have done so because of the perceived safety of those instruments, and because of the sheer volume of the dollars they have to invest. In addition, it has been in their commercial interest to help finance the U.S. deficit.

With the trade deficit now running at $750 billion per year, and much of that money coming back into U.S. Treasuries, the U.S. government has grown dependent on foreigners to sustain the continuing deficits.

That level of debt would normally cause extreme weakness in a currency – just as it would in the value of debt owed by a deeply indebted individual. However, the sheer magnitude of the foreign holdings provides something of a bastion against a total collapse in the dollar.

Even so, some foreign holders are easing toward the exits... through the purchase of an operating company or resource deposit here, or a landmark New York building there. They might make a billion-dollar equity investment in a brand name company, or exchange some dollars for a basket of currencies or a ton or two of gold. It's a delicate balancing act, because if they get too aggressive, they risk triggering a mad dash for the exits, a nightmare scenario where the value of their trillions of dollars in holdings would be devastated almost overnight.

3. Rising Oil Prices Affect... Everything

The growing global demand for oil, coming as it is against a backdrop of limits being hit in production growth, is a major contributor to today's big price rises.

The clear and present danger is that we are now using several times more oil than we are discovering. The world currently produces about 310 billion barrels of oil per decade. That amounts to about three times the current discovery rate of 100 billion barrels per decade.

According to the Peak Oil calculations, we have already used about half of the energy stored over the last 100 million years. Against that, we have a steady increase in demand emanating from population growth and economic development, especially in Asia. This, coupled with the dearth of major new discoveries, assures that energy markets will remain at high prices, for the foreseeable future. The current big drop from almost $150 to $110 has happened from a slowing economy and from some conservation at the extreme high gas pump prices, but the long term view is that the lack of reasonable alternative to petroleum argues for continued higher prices returning to the previous peak in the year ahead.

As energy is a component in the manufacture of all goods and services, this is of no small consequence. Energy has been the basis of the abundance of our current existence and has allowed human population to grow from 1.5 billion to 6 billion over the last century.

4. War Affects the Deficits and Hurts the Dollar

The war in the Middle East adds unwanted pressure on oil and ratchets up government spending. Less obvious is the damage to U.S. prestige that is important in the ability of the U.S. to attract much-needed foreign investment.

The Congressional Budget Office estimates the war will cost 3 to 4 trillion dollars, an amount of sufficient size that it will affect the U.S. financial system.

Regardless of the short term political ups and downs or even a new administration, the pressures from war for big deficits and for dollar depreciation are inescapable.

Where Is the Economy Going in the Next Six Months?

Projections

1. The housing decline is not yet done, because we will need another year to unwind foreclosures in the pipeline. The housing bubble still has another 10% to 20% to go to fully deflate.

2. Consumers in the U.S. are not able to expand credit and are increasingly concerned about the outlook for the economy, so they will slow spending both at home and on imports, which means we are in a recession or about to confirm one.

3. The financial/banking system is weaker than understood. The global system and literally trillions of dollars in derivatives has left the world's banks teetering on the edge. Don't jump back into financials.

4. A slowing economy – recession – coupled with inflation, creates a condition referred to as stagflation, as the simulative bailouts compete with the debt implosion of overleveraged financial institutions and real estate, to leave us with stagnation and still high costs.

The result of this is that the inflation rate, interest rate, food, energy and precious metals are heading higher as the dollar is debased.

Higher rates are not good for housing and stocks.

Finally, it is important to recognize that the world remains in the throes of a deep and serious crisis. While many analysts will express the view that the worst is over or that, after a modest downturn, things will bounce back just like they always have, our view is that what we will actually witness going forward is a fairly steady erosion of paper currency purchasing power and sluggish economic growth. The crisis will accelerate, moving faster, even, than in previous major shifts such as that witnessed in the 1970s.

While history may find we are too pessimistic at this point in time, in our view it is far better to prepare for a worsening crisis and hope that it does not materialize, than to expect business as usual.

Bud Conrad is Chief Economist with Casey Research, specialists in natural resource and precious metals investing. And now, you can have the opportunity to sit in on a round-table discussion of the economy, the market, and the best ways to profit from this crisis – free and online. The Crisis and Opportunity Summit is the first-of-its-kind event by Casey Research.. giving investors exceptional information and analysis for over a quarter century. Simply click here now to sign up for this free event.

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