The Room : Food Prices

Where Is the Economy Going in the Next Six Months?

David Galland — Mon, 28 Jul 2008 15:04:21 GMT

By Bud Conrad
Chief Economist,
The Casey Report - Casey Research

As investors, the question we have to focus most of our attention on just now is what impact the credit crisis, the bursting housing bubble and the actions of the U.S. government will have on the economy and investment markets in the next six months.

We have seen the Fed and the federal government move to panic mode as they try to keep the system afloat. As expected, they have cut rates, as well as having given away checks and rearranged the Federal Reserve's entire balance sheet.

The underlying problems have not been fixed with this massive bailout. There are still many credit pot holes out there and new lending remains highly constrained. Even the government tax rebate checks, rather than boosting the domestic economy, were largely absorbed by higher oil prices. The resulting cut-back in consumer spending, coupled with ongoing constrictions in lending, will cause a severe slowing of the economy.

But the much bigger implication is that the Fed is busy pouring more gasoline on the fire by fighting the collapsing housing bubble, a housing bubble created by excess liquidity, with yet more liquidity. That is the key point that should be taken from this mess. The dollar is now firmly on an even steeper slope to its ultimate demise. Other currencies will be sliding down the same slope, so another paper currency is not the answer.

This, then, is a high-level context for many of our investment recommendations in the months ahead.

Short Term Projections

1. The housing decline is not yet done, because we will need another year to unwind foreclosures in the pipeline. In addition, the exuberance shown by appraisers at the height of the housing bubble still has a long ways to go to fully deflate. What is that house on the market down the road really worth? At this point, no one knows... and no one will know until it and many others are bought by willing buyers (as opposed to unwilling lenders taking them onto their books in a foreclosure).

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.

3. The financial/banking system is weaker than understood. The complexity of the global system and the ubiquitous presence of interlocking financial and credit instruments and literally trillions of dollars in derivatives has left the world's banks teetering on the edge.

Adding a push from behind, we have broadly rising inflation and soon the persistently higher interest rates that are the bane of fixed-income investors and financial institutions in general. As the dollar continues its fall, and the banks continue to come under pressure, the lack of confidence in these keystones of the modern financial system will deepen. Already, the Sovereign Wealth Funds that rushed in early in the credit crisis to prop up the big investment houses are now signaling that, at least for the time being, they are going to step back and watch how things shake out.

4. A slowing economy - recession - coupled with inflation, creates a condition often referred to as stagflation, presenting much bigger policy challenges for the government than one or the other alone.

5. The food crisis. Shortages of food production come from rising energy and fertilizer costs. Rising demand comes from a shift in diet, especially in emerging markets, where increasing prosperity leads the citizenry to add more protein to their diets. Important shortages in grains have arisen that don't allow for a bad crop year. Most concerning is that these shortages are occurring despite good crop production last year, an occurrence that can be blamed, in part, on the diversion of some agriculture production for ethanol and bio-diesel.

These food shortages have already contributed to a doubling and tripling in the price of grains over the last two years. But even these elevated prices have not been sufficient to offset the higher costs of the energy required to produce the crops. And, despite today's higher prices, agriculture still lags the price increases seen in many other commodities.

[For more information on the subject of food, watch my recent appearance on FOX Business News here.]

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. In the long term, they will recover in nominal terms, though not in actual terms. That's because, while their nominal prices may return to current or near current levels, the dollars used to express their value will have much reduced purchasing power... making those assets a mediocre investment for the foreseeable future.

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 occurrence of crisis and panic. 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 the Chief Economist of Casey Research, LLC., publishers of Doug Casey's International Speculator which provides unbiased research and recommendations on the highest quality junior exploration companies.

Casey Research has also recently launched a brand new monthly advisory, The Casey Report, which focuses on the most powerful trends now driving the U.S. and global economy, and how to profit from those trends. As a special introductory offer, when you subscribe to either the International Speculator or The Casey Report before the end of July 2008 you will receive the other free of charge for as long as you remain an active subscriber. Plus, your subscription comes with a full three month money back satisfaction guarantee... so you have nothing to lose when you try these publications today. Learn more about this special offer now.

The Battle for $900 Gold

David Galland — Tue, 06 May 2008 15:23:36 GMT

by David Galland Casey Research- International Speculator

The current "battle" in the gold market is around the $900 level, a fairly steep retrenchment from the recent highs of $1,011.

Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing disaster in this correction and dropping their gold as they run for cover.

So... do we at Casey Research think we're now seeing a reversal in gold's fortunes?

In a word, no.

I'm not going to go into meticulous detail here, because that sort of coverage is found in our Casey Research paid publications. But I do want to share some thoughts with you that may be of some use... if for nothing more than playing them back to me in sarcastic emails several months down the road if we're proven wrong.

A few key things to ponder as the battle for $900 gold rages...

1. The current correction is not yet exceptional: Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%.

During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 18% at its worst, is only marginally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 - falling from $725 to $567 - analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they're the norm for any sustained bull market. In the 1970s' sustained gold bull market, a similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And, I would stress once again, you have to be invested with money that you can afford to lose a substantial portion of and not be overly concerned. Otherwise you'll invariably become shell shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.

2. The big gold companies are delivering: One of the largest mining companies in the world, Newmont Mining, just released its first-quarter 2008 financials, the first of the big gold producers to do so.

As we have been forecasting, they had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw their cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from Q1 last year. And the company's cash operating margin rose to a record $537 million in Q108 over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we'll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont's shares on releasing its financials? They fell, albeit modestly, victim to this week's softening gold price and a dumb remark by the minister of mines of Ghana - where Newmont has significant projects - about the need for mining reform in that country. More on that latter topic momentarily.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.

3. Oil is stubbornly holding on over $100 and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world.

We've said for years that there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point - because, again, no market goes straight up or down - the trend is clearly for sustained high prices. This is additional support for gold in our view.

So... given gold's correction, you might go right ahead and sell your gold. I'm hanging on to mine. And if I'm hanging on to my gold, I'm hanging on to my gold stocks, because that's where the real juice will be.

When I look at the alternatives and the amount of risk I have to take to get even a 10% return right now, I am comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, 500% gains down the road will catch me up in a hurry.

Good investing,

David Galland

David Galland is the Managing Director of Casey Research, publishers of the Daily Resource PLUS, a free e-letter offering a concise recap of the 24 hour action in gold, silver, energy, base metals, currencies and more... as well as Doug Casey's monthly International Speculator advisory, presenting comprehensive, unbiased research on undervalued gold and other resource stocks.

A three-month 100% money-back trial is available that allows you to view all current recommendations and decide for yourself whether the International Speculator is right for you. Learn more.

The Room 4/29/08

David Galland — Tue, 29 Apr 2008 14:56:33 GMT

Written: April 25, 2008

Dear Reader,

What an interesting week!

Having been a single parent for two weeks, with the kids on spring break for the second of those, I have attained a whole new level of appreciation, yes, I think that's the word, for the difficulty associated with holding down the home front.

I'll have some more thoughts on the topic of domestic servitude in a bit, but first I want to turn to this week's even more interesting developments in the gold markets.

The Battle for $900 Gold

With few exceptions, as gold has approached each new psychological price barrier in the unfolding bull market, it has gingerly touched the barrier, fallen back and then traded in a fairly narrow range before decisively taking it out and moving on. Not unlike, perhaps, Napoleon's army, with small skirmishes leading up to a full-scale assault and crushing victory.

The current battle is around the $900 level, a fairly steep retrenchment from the recent highs of $1,011. Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing Waterloo in this correction and dropping their gold as they run for cover.

So let's get to the nub of it.

Do we think we are now seeing a reversal in gold's fortunes? That, rather than cheering gold on as it defeats the fiat army and breaks through one whole number barrier after another... we'll now be playing a dirge as gold retreats down through those same whole numbers on its way toward lonely exile as a broken footnote of history?

In a word, no.

I'm not going to go into meticulous detail here, because that sort of coverage is found in our paid letters. But I do want to share some thoughts that may be of some use... if for nothing more than playing them back to me in sarcastic emails several months down the road if we're proven wrong.

A few things to ponder as the battle for $900 gold rages...

Current Correction Not Yet Exceptional. Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%. During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 13.9% at its worst (so far), is only fractionally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 - falling from $725 to $567 -- analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have subsequently missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they're the norm for any sustained bull market. In the 1970s' sustained gold bull market, a very similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And, I would stress once again, you have to be invested with money that you can afford to lose a substantial portion of and not be overly concerned. Otherwise you'll invariably become shell shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.
Big Gold Companies Delivering. Newmont just released its first-quarter 2008 financials, the first of the big gold producers to do so. As we have been forecasting, they had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw their cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from Q1 last year. And the company's cash operating margin rose to a record $537 million in Q108 over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we'll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont's shares on releasing its financials? They fell, albeit modestly, victim to this week's softening gold price and a dumb remark by the minister of mines of Ghana -- where Newmont has significant projects -- about the need for mining reform in that country. More on that latter topic momentarily.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.
Oil is stubbornly holding on over $100 and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world. As we have discussed in our various publications, there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point - because, again, no market goes straight up or down - the trend is clearly for sustained high prices. Gold is well supported, in our view.

So, What's Going On?

This week Dennis Gartman, who I am told is a fairly widely followed guru, announced he was exiting gold because, as he expressed it, the yellow metal had failed to rally last Friday to the extent he thought it should. But the final straw, according to his letter, was that the following day he saw some TV commercials that called for people to sell their scrap gold.

"What caught our eye over the weekend was a déjà vu moment when watching national television here in the US Saturday morning. We saw a brief show regarding the massive selling of gold jewellery on the part of the public to cash in on gold's sharp rise. The public is selling its old wedding bands; high school and college rings; necklaces; write bands "bling," [sic] et al, and it is doing so aggressively."

Now, he didn't provide any hard data to actually prove anything -- for instance, is the ratio of scrap coming on the market now running at extraordinary levels versus demand. But for the sake of argument, I'll assume he is right and that an extraordinary number of American consumers, strapped for cash thanks to the unfolding financial crisis, will dump their gold.

Will their heirlooms heading for high heat and then back onto the market as bullion overwhelm the bull market? Could that be the cannon barrage that ends the charge of the golden bull? Will that be what it takes for people to turn their back on gold in favor of the bottomless dollar?

I'm sorry, but I just don't see it. What I do see, as mentioned, are the facts on the ground. And those facts include rapidly rising global inflation and more bad news on top of bad news for the financial sector, housing, banks, etc.

In just the last couple of days, there has been hard data showing that -- per the comments of real estate expert Andy Miller, which I have recently related here -- the commercial real estate sector is now heading into serious problems. A report by the Office of Thrift Supervision this week has it that non-performing commercial loans rose by a factor of five last year, and now represent 4.6% of the total.

And the fuse on that very big barrel of powder is still freshly lit. How big? At this writing, there are well over $3 trillion in outstanding commercial real estate loans. So, 4.6% of that is not a small number. But it will be viewed as such when commercial defaults head for 10% or even 20%.

[Ed. Note: Andy also points to a pending bloodbath in the condo market. Providing support to that contention, I had a conversation this week with a top realtor in the small resort town that serves as global headquarters for Casey Research. She told me that of the 112 condos put up for sale in this town last year, only 12 sold.]

Credit card debt is also starting to go south, fast. You don't need me to tell you, but I will anyway, that a reasonably well-maintained fence post could have gotten a credit card between 2000 and 2007. And so it is no surprise that this week we heard that the Target discount stores were writing off over 8% of their outstanding credit card balances. A straw in a tornado, if you ask me.

I could go on, and on, and on... but won't. I will say, however, that faced with these far-from-resolved challenges, there is only one certainty: the government will mount a massive artillery barrage. But instead of grape shot, it will be greenbacks they'll be firing as fast and as furious as they can.

Technical, Shmechnical

More than once in the past I have blown a passing raspberry in the general direction of the technical analysis that Mr. Gartman relies on, in addition to his television programming, for his investment recommendations.

After a long career in this business, I think I have some basis for my general disdain for the art of technical analysis. Note I didn't say "art and science" because as far as I can tell, other than some scientific-sounding parlance, there is nothing scientific to it.

Am I being too hard on technical analysis? Maybe. But I think I have a legitimate gripe when I point out that technical analysis is so subjective that two analysts can look at exactly the same wiggly lines and draw two completely different conclusions... and they can still both be wrong.

And an analyst can, using the same methodology month after month, readily explain with a straight face how it was that the results predicted in the previous month but which came out differently than expected, are actually consistent with their previous forecast.

Consider this paragraph I received from a well-known technical analyst this week (who will go unnamed because I actually like him a lot). Commenting on the U.S. dollar, his service writes...

The USD appears as an ending diagonal triangle pattern, currently in wave 4 of wave (5). The last update indicated that the USD was possibly in a (contracting) triangle but it will likely complete as an (ending diagonal) triangle.

Contracting triangles and ending diagonal triangles are both very corrective patterns. The previous newsletter indicated that a possible triangle was in play and the pattern appears to have evolved into an ending diagonal triangle pattern. We have both possibilities illustrated in the animated chart below. The contracting triangle pattern would suggest the downside is complete, while the ending diagonal triangle indicates that one more wave down is expected to complete the pattern. A move above the green horizontal line would indicate that the contracting triangle is complete. We are expecting one more choppy wave down to the recent lows and this would indicate the ending diagonal pattern is completing. Ending diagonal patterns always end with sharp reversals to where the pattern began, so once it is complete, we can expect a sharp rally above 73.

Hold on a couple of seconds while my head stops spinning. Okay, that's better, I'm back.

Now, could the U.S. dollar, which has been beat mercilessly these many months, make a rally? Of course. It would be extraordinary in the extreme if it did not. But to actually try to manage one's portfolio based on the tangled technical entrails such as those splattered on the page just above is, at least for my money, a non-starter.

Instead, I have to look at the bigger picture. And the bigger picture is a serious financial crisis getting worse, and rising inflation and even trade protectionism now sweeping the world.

You go right ahead and sell your gold. I'm hanging on to mine. And if I'm hanging on to my gold, I'm hanging on to my gold stocks, because that's where the real juice will be.

Maybe not this month, or next... or maybe not until this fall, or even beyond. But when I look at the alternatives and the amount of risk I would have to take to get even a 10% return right now, I am very, very comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, 500% gains down the road will catch me up in a hurry.

Other Views

Casey Research Chief Economist Bud Conrad dropped me an email in response to a call made by one technician to sell gold. His comment...

The reasons provided here are technical, looking at the moving averages, "moving average crossover," etc. To trade this, you need to know when to get out and when to get back in; which requires two timing decisions. I don't know that many famous, rich technical traders. Soros, Rogers, Buffett are all fundamental investors.

My view is still long-term bullish, and I am even more convinced after looking at the actions of the Fed to debase the dollar, and the world food shortages and Peak Oil energy shortage that drove crude to $120.

My $1,200 gold prognosis for the end of the year is intact.

I also spoke to Doug Casey, who is currently working out of an apartment in Buenos Aires. His basic take is that while he is concerned that we'll see more weakness in the gold shares, based on the old adage "Sell in May and go away," he remains entirely bullish on gold and it is where all his loose cash goes.

Clyde Harrison, the creator of the Rogers International Commodities Index and now the Brookshire Raw Materials Fund (www.brookshirerawmaterials.com), and one of the smartest guys in the commodity business, sees most commodities trading in a range for the next few months. The exceptions are copper, which he is a screaming bull on... and rice, which he thinks is a great shorting opportunity.

A Word About Political Risk and Gold Stocks

This week, the Ecuadorian government committed economic suicide on behalf of its struggling population. It did so by passing a six-month moratorium on all exploration and mining development.

As a consequence, as you read this, the technical staffs of the many good companies working in Ecuador are draining their last beers in Quito before climbing onto planes for their new jobs in more mining-friendly corners of the world. Rest assured they will not go unemployed, given the massive shortage of skilled help in the sector. And they won't be returning to Ecuador anytime soon.

This end of mining in Ecuador has cheered the very active NGOs working there, which make their daily bread by interfering with any extractive industry (that is not an exaggeration - we have met with them there).

In fairly short order, however, this draconian move will backfire on the politicians, and the Ecuadorian people, in a big way. For the simple reason that money goes where it is treated best. Certainly not the case in a country where existing contracts can be nullified literally overnight based on nothing more than a light breeze.

Soon, once the last of the disgruntled miners throws up his hands and stomps out, the hallways of the country's ministry of finance will grow silent enough to hear a beetle crawl.

And it will stay quiet until the ranks of the poor, swollen by the unemployed former staffs of the many resource companies previously doing work in the country (and their many dependents), make their voices heard outside of the windows of government. Punctuated, we hope, by the occasional attention-getting rock being delivered through said windows.

At which point the staffs of the NGOs will retie their ponytails, quickly pack their L.L. Bean distressed-washed backpacks (equipped, no doubt, with the latest personal rehydration units) and follow the geologists out of the country, leaving the Ecuadorian people to their own devices.

Unfortunately, this sort of idiocy is not a trait of Ecuadorian politicians alone. The fact is that resource bull markets inevitably lead the locals to put aside any form of rational thought and reach instead for masks and guns. All in the name of the "good of the people," of course.

In recent months, the Democratic Republic of Congo, a misnomer if there ever was one, pushed the reset button on all current mineral concessions. And this week, per above, the Ghanaian minister of mines commented that that formerly steadfast bastion of mining and sound contract law was going to do a rethink with an eye towards grabbing a bigger share of the mining pie.

And it is not just the third world where this sort of thing goes on; how many energy companies (and their investors) were blindsided by the penurious new royalty regime heralded by the brights running Canada's Alberta province? And how many will likewise be affected if the U.S. moves ahead with mining reform, as appears now to be likely?

The fact is that the extractive industry has few friends and many detractors. And so you can get everything right when picking a good company to invest in (Aurelian in Ecuador, for example), but still get cut off at the knees by the politicians.

I mention this because it is near the top of my mind as I write. And because here at Casey Research, we will be redoubling our efforts to stay in even closer touch with the countries where our recommended companies have important projects. (We had been watching Ecuador closely, including receiving and reading regular local reports written in Spanish, but we were still surprised - along with the companies working there - that the Ecuadorian legislature moved so quickly, and in such a negative direction.)

To help us in our efforts, we are in the process of setting up correspondent offices in all of the major mining jurisdictions, establishing an even more highly tuned early-warning network, if you will. This will still be no guarantee that we can't get blindsided, but it certainly can't hurt.

Regrettably, as with pretty much every investment you make, politics looms large. In fact, it now towers above all other inputs by a very wide margin. And on that topic...

Food & Politics

Lately, there has been a tremendous amount of media coverage about rising food prices. In fact, it has risen to "OJ" status. Not as in Orange Juice, the healthful breakfast beverage, but as in the affair of "OJ Simpson," a media-created frenzy designed to assure avid readership by a citizenry suffering from wholesale attention-deficit disorder.

While there are certainly structural issues that are putting pressure on food, and likely will for some time, this week one of my regular correspondents, Steve Henningsen of The Wealth Conservancy, forwarded a link to an excellent article on the food crisis that appeared on mises.org. You can read it here.

http://www.mises.org/story/2952

I find it very interesting to watch the actions being taken by governments in response to the rising food prices. The Indian government, which retains the programming received at the end of a swagger stick while part of the British Raj, announced this week it will be prohibiting certain food exports.

The less hidebound Thai government, by contrast, said this week that they have no intention of stopping the export of rice, but rather are viewing higher prices as a commercial opportunity for their farmers.

Meanwhile, the Canadian government announced that it was going to pay pork producers $50 million to kill their hogs, 150,000 of them. I don't have time to go into the long-term problems caused by this sort of meddling, but I will report the news from a hog farmer friend of ours in the U.S. that, even without subsidies, he and his cohorts in that business are now killing their male baby hogs and using them for compost.

And there are increasing calls in the U.S. for the regulators to change the rules on commodities contracts in an attempt to stop speculation.

But, other than the laissez faire Thais, none of these actions will plant another ear of corn or another stalk of grain. Instead, killing exports will only hurt farmers, assuring that the food shortage becomes a real food crisis.

What to do? Personally, I have recently been acting on Doug Casey's recommendation to buy beef... with hogs as well. While the cost of feeding them may cause a flood of meat on the market in the near term, as the farmers cull their herds... in time, and probably sooner rather than later, there will be a meat shortage.

[Ed. Note: Our own Bud Conrad was early into agriculture as an investment, and has been doing a lot of analysis on the topic. We'll continue to update you on his recommendations in the International Speculator. If you are interested in staying up-to-date on agricultural investments, details about our three-month, no-risk trial can be found here.]

Junk By Any Other Name

This week Moody's announced they were downgrading 32 different tranches of previously AAA-rated "Alt-A" mortgages. These are popularly referred to as "liar loans" - by the very same people who sold them in the first place -- because these loans don't require the applicant to provide proof of income or assets.

Given the previously staid reputation of the industry, one would expect that when down-grading bonds, the rating agencies would review their paperwork and realize that, perhaps, Mr. Jones in the cubicle down the hall made a slight oversight when initially appraising the bond portfolio. And so, after a quick admonishment to be more careful in the future, the rating agency would drop the portfolio down a notch or two.

Oh, if it was only so. Instead, what is going on is akin to learning that Mr. Jones has been indulging in a daily dose of hallucinogens. And so the latest Moody's downgrades are seeing many of the bonds knocked back from AAA, which is supposed to be above reproach, to junk status overnight. And Moody's is far from done; they have put another 254 Alt-A bond tranches on their negative ratings watch list.

The lame-stream media may want you to believe that the credit crisis is over, but quite the opposite is true - it's accelerating.

And so, for your further reference in the weeks and months ahead, I provide just below a guide to the Moody's rating scale, lifted wholesale from the AARP website. (Try not to giggle as you read the description of Aaa-rated debt...)

Moody's Bond Ratings

Aaa -- Best quality, with the smallest degree of investment risk.

Aa -- High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds.

A -- Possess many favorable investment attributes; considered upper-medium-grade bonds.

Baa -- Medium-grade bonds (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade.

Ba -- Have speculative elements; futures are not as well assured. Bonds rated Ba and below are generally considered speculative.

B -- Generally lack characteristics of a desirable investment.

Caa -- Bonds of poor standing.

C - Lowest-rated class of bonds, with extremely poor prospects of ever attaining any real investment standing.

Of course, downgrading a bond from AAA to junk overnight is not unlike pulling it out of the drawer and setting a match to it. I can tell you one thing. If I were a conservative buyer of AAA bonds, I would be none too happy. It's a good time to be a lawyer.

I Am Womyn!

Laundry, cooking, tidying up, promoting basic hygiene and healthful activities, all while trying to keep up with my regular duties at Casey Research... for a day or two at the beginning of my wife's European vacation, it was something of a personal challenge. Sort of like seeing a mountain and, strapping on the boots, striding forth indomitably, chin up and eyes flashing with the goal of reaching the distant top.

But the difference between mountain climbing and a steady course of single-parenting is that the mountains of daily duties are as if on a moving sidewalk, coming at you one after another, no end in sight.

For one shining moment this week, I pushed what I thought was the final load of laundry into the basket, but no longer than 15 minutes later uncovered a new stash of the stuff, tucked into a forgotten hamper. Then I realized the sheets on the beds needed changing, then the kids had a particularly muddy play session and next thing you know, the vanquished pile had returned with reinforcements.

Summing up the experience: while many and maybe even most members of the male gender have long paid polite lip service in acknowledging the challenging task their wives have in keeping up with domestic chores -- lip service usually accompanied with an understanding though insincere smile and maybe a gentle pat on the derriere -- the time has come to admit that women are tough. Far tougher than men, in fact.

Forget this whole, "Woe is me, I have to work at the office all day" nonsense. Many women have to work all day, but only after working all morning to get the kids out the door to school. Then, on return from their day jobs, they are greeted with yet more work, providing sustenance to the crowing beaks of their broods before rolling up the sleeves to get the laundry done, the pets fed, the kids to bed, etc. ,etc. -- ad infinitum.

While I have always tried to chip in and do my fair share of the daily chores, I realize now that what I consider "my fair share" is probably a tenth of what has to go on to keep the household from regressing to a level on par with that experienced in the Dark Ages: dirt-covered floors, filthy, rag-clothed children and mangy dogs fighting each other for the underprepared table scraps.

And so, speaking only for myself, I hereby apologize to all womynhood for my personal lack of true understanding these many years. And I'll go one step further and swear that, should they allow me into their club, I shall from this point forward be a card-carrying feminist. Let my people go! I say.

Furthermore, I will throw my wholehearted support behind Hillary. Compared to any of her gender, Obama and McCain are wimps that she could take with one hand while the other was flipping the morning pancakes!

Manhunt Report: Diamonds Are a Girl's Best Friend?

Last week I promised an update on "Manhunt." Well, true to her word, the subject in our experiment in matchmaking has sent her first report, which follows...

Inquiring minds want to know an update to Manhunt, an ad which ran in this Casey Research publication a few weeks ago. The response has been overwhelming. I've never experienced so many quality emails -- and quality males -- all in one place, courting me, all at the same time. I'm quite overwhelmed and am at a loss for words at the moment. To best illustrate what it has been like to be me ever since Manhunt was published, I present to you Marilyn Monroe's performance in Gentlemen Prefer Blondes:

Marilyn Monroe vocalized:

The French were bred to die for love they delight in fighting duels
but I prefer a man who lives
and gives expensive jewels.

A kiss on the hand may be quite continental
but diamonds are a girl's best friend . . .

Are diamonds really a girl's best friend? No, no. Oh, no, no, no, no, no, Marilyn Monroe. Nay, I say. Diamonds are not a girl's best friend, at least not in this day and age of the New Diamond Age. The song of myself I sing:

The French were bred to die for love they delight in fighting duels
but I prefer a man who gives
and lives to break the rules.

A kiss on the hand should be intercontinental
Casey Research Subscribers are a girl's best friend . . .

I happily excuse Marilyn's perspective. To each her own. Not to mention Marilyn's performance was in 1953. That was then, and this is now. The world transforms. Values change. Courtship e-volves. An "anti-suitor" sent me an email, implying that I was a gold-digger. I clarified to him:

I'm not a gold digger. Should I be? But I'm a libertarian-digger. More precisely, a security-digger. Meeting a man well invested in metals would provide me with a greater sense of security. I'd like to be optimistic, but realistically, I don't see the dollar just dropping -- I see it altogether imploding. My lifestyle is extraordinarily simple, and I like it that way. I detest shopping, especially for shoes. And diamonds really bore me. A dog is a girl's best friend.

As for gentlemen, some still prefer blondes, but others turn their heads for brunettes. In fact, some even say that blondes are becoming an extinct species. Nevertheless, I digress.

The Manhunt has practically become a full-time job for me. What's a woman to do when she has handfuls of wonderful men at her fingertips? Proceed slowly. Set up a spreadsheet. Track and filter accordingly, for, more valuable than diamonds or gold, is the ability to connect with like-minded people. Or, in my case, to ultimately find a compatible long-term mate. The Project Manhunt men who've contact me are gems -- individuals of great value. If someone gets filtered out due to partner incompatibility, I still keep him on record for friendship-ability.

Two weeks into Project Manhunt, the content/experiences I've already encountered are worthy of being written into a book. (Suitors: Don't worry, I won't use your names. Nor will I send your contact data to marketers. I'm pro-privacy.)

I don't want to waste much more of David Galland's newsletter space, so before I go, I'll provide you with tidbits of Project Manhunt tabloid gossip. One man has proposed marriage to me via email. Another is a kind widower with children, and his family sounds quite dandy. A different suitor wants me to be his co-pilot -- seriously -- and is eager to teach me how to fly his plane.

Matches aren't made overnight and I'm certain Project Manhunt e-courtship shall continue for quite some time. So keep the emails coming, boys. Stay tuned for Project Manhunt Report #2 titled "Material Girl."

Miscellany

The philosopher/poet George Santayana is credited with the words, "Those who cannot remember the past are condemned to repeat it." I wonder what he would say, then, about White House Press Secretary Dana Perino. According to an article my friend Brian Hunt read in Playboy (which I am sure he reads only for the articles) and quoted to me, she admitted on a radio program that she didn't know what the Cuban Missile Crisis was.

"I was panicked a bit because I really don't know about the Cuban Missile Crisis," Perino said of the time during a White House briefing when she was asked a question that referred to the confrontation. "It had to do with Cuba and missiles, I'm pretty sure."

It is always remarkable to me how it is that people labor under the impression that those in positions of power possess a superior intellect, sharpened by years of study.

And so I'd like to thank Ms. Perino for doing her part to help correct that wrong impression. (Just for the heck of it, this week I am going to survey every adult I meet on their awareness of the Cuban Missile Crisis and see whether Ms. Perino's ignorance on the topic is, rather than an indictment of political class, a commentary on the failure of American education.)

Also in the Miscellany category this week....

Dallas Phyle. Maria W., who has taken it upon herself to organize a get-together of Casey subscribers in the Dallas/Ft. Worth area has written in that the first meeting will be held Friday, May 2nd at 6:30 pm at Beau's at the Crescent Court Hotel. If you'd like to attend and share views with other members of the Casey family, then drop us a note at phyle@caseyresearch.com and we'll get you connected.
Bud Conrad in the Big Apple. Casey Research Chief Economist Bud Conrad will be speaking on the topic of "Peak Everything" and doing a workshop at the upcoming Hard Assets Conference at the Marriott Marquis in New York. You can learn more about the conference by visiting this website. http://www.iiconf.com/pebble.asp?relid=62254
Save the Witches! Some people have suggested that the massively undeveloped and fertile lands of Africa might hold the solution to world hunger. Based on many business trips to Africa over the years, I'm not so optimistic. You may better understand my skepticism if I relate an experience I had with a driver I once used to take me here and there in South Africa and Bophuthatswana.

He was, I can assure you, a very elegant and well-spoken man. After spending much of a week in his company, I thought I knew him fairly well. Until one morning, while reading the morning paper, I came across an item describing how some local villagers had become convinced that three young women had sold lightning to the devil who then hurled it back in the vicinity of the village. To assure it wouldn't happen again, said villagers rounded the women up, locked them in the trunk of an abandoned car and set it on fire.

When I asked my driver about this unfortunate incident, he went on a diatribe - not against the barbaric ritual, but soundly in favor of it, claiming that the presence in Africa of the white man had erroneously deprived the locals of their magic. We didn't speak a lot after that.

Of course, while this sort of ignorance will only be put to rest with economic success and the educational opportunities that accompany such success, there is nothing to say that Africa can't, or won't, someday be a more successful continent. But I fear it may be many decades away. I mention this because this week, someone sent me a link to a rather humorous example of the superstitions that continue to plague Africa... a widespread panic over the theft of men's private parts, to use a delicate term. If you have nothing better to do, click here to give it a read...
China's Coal. Just last week in these musings, we discussed the outlook for coal. Which, depending on how you view these things, is either helped or hurt by the news that China is down to just 12 days' supply. For a country that is largely run by coal, this is no small thing and should provide a lot of support to coal for some time to come.

(Coal is, of course, one of the areas we follow in our Casey Energy Speculator, an exceptional value in our admittedly biased opinion. Checking it out is easy with our risk-free three-month trial. Don't like it, cancel within 3 months and you get all your money back... what could be more fair than that? Learn more by clicking here.)

And That, Dear Readers, Is That for This Week

As always, I sincerely appreciate you taking the time to read and to subscribe to a Casey Research publication. If you have written me in the last ten days and I have not responded, I apologize as the household tasks, on top of my duties with Casey Research, have vaporized any spare time. I will endeavor to respond early next week (my wife returns tonight... big party!).

As I sign off, gold is battling back toward $900 and the DJIA is off a fair bit based on the news that U.S. consumer confidence has plummeted to the lowest levels in 26 years (no surprise there).

A couple of weeks ago, I closed with a guess-the-gold price competition. We'll do it again this week. The parameters are that you have to have your bet in by midnight (EST) Monday, April 28. The person closest to the intraday spot price high for the week, as of noon on Friday, May 2, wins a one-year subscription to BIG GOLD, our publication dedicated to providing profitable analysis on large-cap, gold and silver-producing and near-production companies. Send your entries to David@caseyresearch.com.

My bet for next week's high? $927.

See you next week!

David Galland
Managing Director
Casey Research, LLC.

The Room 4/22/08

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

Written: April 18 2008

Dear Readers,

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

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

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

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

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

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

The Energy Picture

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

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

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

Where does he see the price going from here?

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

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

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

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

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

Coal's Comeback

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

* Values for 2008 are preliminary reported numbers subject to revision

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

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

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

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

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

So, How Are Things Going?

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

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

Here's a Trading Idea...

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

The obvious is to buy food commodities.

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

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

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

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

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

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

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

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

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

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

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

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

On the Topic of Interest Rates

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

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

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

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

President Obama?

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

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

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

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

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

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

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

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

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

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

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

Another Casey First

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

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

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

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

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

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

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

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

Q&A

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

Hi David,

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

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

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

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

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

Yours truly,

Linda

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

Linda:

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

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

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

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

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

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

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

Terry

In Defense of Marx

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

David

Based on your following statement:

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

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

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

Ross

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

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

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

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

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

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

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

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

It's Official: I'm Out of Touch

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

According to Bloomberg:

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

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

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

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

Inflation Watch

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

Here's the story.

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

Political Pandering

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

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

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

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

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

The Price of Gold

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

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

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

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

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

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

Miscellany

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

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

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

Until next week...

David Galland
Managing Director
Casey Research, LLC

The Room 4/14/08

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

Written: April 11, 2008

Dear Readers,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rising Commodity Prices and Inflation

By Doug Casey

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

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

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

If the money supply is stable, and one commodity goes up a lot, the price of others must drop - the general price level, in terms of dollars, stays the same.

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

Bad Speculators

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

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

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

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

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

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

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

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

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

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

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

Take cover.

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

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

At this point, the odds greatly favor the latter.

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

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

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

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

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

Karl Marx would be proud.

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

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

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

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

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

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

The Ascent of Humanity

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

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

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

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

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

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

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

Is there an investment angle in this stunning new development?

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

Watch Out Below

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

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

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

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

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

China's Olympic Torchture

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And There's This...

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

Dear David,

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

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

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

Yours sincerely,
R.H.

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

Miscellany

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

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

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

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

That's It for This Week

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.