The Room : Gold

The Room – 06/12/2009

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

The Room Special Alert:

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

September 18 – 20 at the Westin Tabor Center in Denver

David

Dear Readers,

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

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

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

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

centrally planned economy

capitalism,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

plug-in hybrids

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

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

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

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

Health Care, Everyone?

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

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

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

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

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

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

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

Again, according to Dr. Hogberg…

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

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

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

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

Again quoting politico.com...

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

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

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

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

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

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

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

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

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

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

Don’t get me started…

No More Big Bucks for You!

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

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

Fortunately, We Have the Law

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

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

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

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

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

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

Relying on Webster this time,

prūd,

prod, prud, prou

prode

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

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

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

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

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

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

Capital Gains… What Capital Gains?

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

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

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

Why, Mama Sam, of course.

The Road Less Traveled

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

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

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

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

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

21 Economic Models Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Promoting Free Market Economics…

By Louis James

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

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

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

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

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

Start by watching this somewhat odd video linked here…

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

www.comdig.com

www.deanlebaron.com

www.leadership.gather.com

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

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

Interesting times, indeed.

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 06/05/2009

David Galland — Fri, 05 Jun 2009 19:10:00 GMT

Dear Reader,

Before getting down to the business of trying to make some sense out of the Bizarro World we’ve stumbled into, I want to thank all of you who wrote in response to last week's edition of these musings.

And I want to apologize for the e-mail flub-up that resulted in many of you receiving a rather odd response that had next to nothing to do with the e-mail you sent. Further, I'm sorry to say that this e-mail issue was only discovered yesterday, which means I haven’t had a chance to respond to your many good thoughts.

Quickly scanning the pile of e-mails, however, I was happy to see a lot of them contained high praise for the guest editorial Decline and Fall of the American Empire by James Quinn. I have passed those e-mails on to Jim and let him know we’d love to hear more from him in the future.

Also, since we’re chatting, I’d like to mention that we are considering making The Room a daily, versus a weekly, publication. That would allow us to be more timely and to deliver the content in more bite-size segments, rather than the weekly magnum opus as is currently the case.

What do you think? Drop me a line at David@CaseyResearch.com .

While you're at it, maybe you'd like to suggest a new name for this column/blog/musings thing that better reflects its nature and the fact that it is delivered daily, should we decide to go ahead with that change. (And your input will definitely factor into our decision.)

Finally, before we move on to what's important for the week's news, I’d like to mention our new weekly e-letter, "Conversations with Casey." By now, as a Casey subscriber, you should have received the first edition of this new publication. The genesis of it is simply that, since partnering up with Doug Casey in 2004, one of the great benefits of our association has been that it gives us the opportunity to chat on a regular basis. I can assure you that Doug is as interesting and colorful in casual conversation as he is in the written word or his platform speeches.

And so, thanks to all sorts of wonderful modern technology, we figured it would be a pretty simple matter to record quick discussions with Doug and get them out the door to provide Doug’s latest thoughts on the passing parade and to introduce Doug and Casey Research to a wider audience. If you did not receive your copy of the inaugural issue, check your spam filter, or click here to sign up.

Now, on to the week’s big news, and more… starting with the unemployment data that are getting so much attention as I write.

Unemployment Falls!

“Job Losses in the U.S. Slow, Signaling Recession Is Abating”

(Bloomberg headline, June 4)

For the week ending May 30, it was widely reported, initial jobless claims eased to 621,000 unfortunates, a reduction of 4,000 over the previous week. Let's ignore for a moment that that is an awful lot of people freshly added to the line for unemployment benefits. Let’s focus instead on the fact that the 4,000 improvement was on the revised data put out by the Labor Department.

Originally, for the week ending May 16, the numbers released stated that 623,000 people were newly unemployed – but that number was subsequently revised upwards to 625,000. Should a similar adjustment be made a week or so down the road, and 2,000 people are added to the 621,000 number, the May 30th numbers would bump back up to 623,000 – for an actual improvement of just 2,000, or just 0.32% of the total. Anyone who sees a bottom in those numbers is either delusional or deceitful.

Elsewhere, the Bureau of Labor Statistics released the employment stats for the month of May, stats that generated the following comments from our own Bud Conrad…

Housing Market Bottoms!

"US Housing Market: Pending Home Resales Rocket 6.7%”

(BusinessWeek, June 4)

There was also much made this week of the notion that the housing market was bottoming. The most pointed-to statistic was an improvement in the pending sales of existing homes in April. To wit, signed contracts… not actual sales.

Not to be a grouch, but as you can see in the chart here, there is a natural uptrend in housing sales in the March to June period. So the latest numbers are not out of left field but reflect to some extent seasonal patterns.

Even so, the bump in sales of 6.7% was still quick good news and, by historic terms, the logical outcome of low interest rates and sharply falling prices. Even so, it is waaaaayyyy too early to spot a turn in the bend as far as housing is concerned.

In fact, the only real trend in motion at this point, you can see in the chart here. It’s from the National Association of Realtors and shows home sales bouncing along in the basement. As you don’t need us to tell you, rising interest rates will merely increase the pressure on home sales going forward. The odds are good that sales will not fall off a cliff quite as steep as witnessed in 2007. But to expect the opposite – that at any time soon, we’ll see a surge of buying sufficient to chew through close to a year’s worth of housing inventory, and therefore begin to drive prices back to the upside – is to expect the highly improbable.

Another trend in motion can be seen in this chart, showing how the subprime foreclosures are starting to ease, but the larger market of prime mortgages is now heading for even bigger trouble.

So, Why the Stock Market Rally?

Over the last month or so, the stress-tested banks have raised over $84 billion in new capital. Of course, much of this is in response to the fact that now the government is insisting on compensation caps for banks that have received TARP funds. And it is now set to enforce those caps with the help of a soon-to-be-appointed "Special Master for Compensation," who will report directly to Treasury Secretary Geithner.

(Note: the term “Special Master” is not my creation but that of the White House – we truly have moved into a strange new world.)

Not wanting to have to answer to the Special Master, the recipient banks are scrambling to raise the capital needed to pay off their loans and get out from under TARP’s big, fat thumb.

But I also strongly suspect that a key reason these firms are pumping out paper as fast as they can is because they realize that to wait will mean to raise more capital at a lower share price, not a higher one. In addition to a very top-heavy rally, there is the still unresolved fact that the foundations of the nation’s largest financial institutions rest on piles of suspicious paper that, absent the recent rejiggering of the accounting rules, would have them on their knees. If the captains of these enterprises really thought the green shoots were going to grow into golden fields of wheat, they would wait as long as they could in order to get a better price for their shares – rather than shoveling the stuff out the door as fast as they can at these reduced prices.

Likewise, insider selling continues apace. According to Eric Roseman, writing for our friends at The Sovereign Society (sovereignsociety.com)…

“According to InsiderScore.com, officers and directors of publicly traded American companies have increased their selling of company stock since early May to its highest levels since 2006.”
There is a popular saying in poker circles that goes something like, "If after the first half hour, you don't know who the sucker is, then it's you."

In the current scenario, a large percentage of American investors still don't know they're the suckers, or even that there’s a game being played. Unfortunately, the facts of the matter will be revealed to them shortly.

Ed. Note:

Casey Trend Trader

click here

Gold Can’t Be Beaten

The war spending authorization bill that is now working its way through the U.S. Congress originally included a provision to hand the IMF $100 billion to pass along to other countries struggling with the financial crisis. (Hey, what’s $100 billion here and there?) And it also authorized that same institution to sell about 13 million ounces of gold. While those provisions were included in both Obama’s IMF plan and the Senate bill, it was removed from the House bill. The odds are, however, that by the time the legislation passes, they will be put back in, despite considerable Republican opposition.

Perhaps anticipating passage, gold has come under a fair amount of pressure in recent weeks, but each time, it has managed to stage an impressive comeback. The chart here shows gold’s action so far in 2009.

While there’s no question that gold could test the $900 level again, particularly if the IMF sale is approved, there has been a palpable lessening of the voices stridently calling for deflation as the inevitable result of the current financial crisis. Yes, they’ll return, but next time around, as the government unleashes its next wave of monetary inflation in response to the continued downturn in the markets we are anticipating, they’ll quickly be overwhelmed by the circumstances on the ground.

On that front, our own Bud Conrad has just sent over an important piece of work that looks to answer the question, “When will the price inflation reemerge?”

Over to you, Bud…

Debt Collapse and Inflation

By Bud Conrad, Chief Economist, Casey Research

Most of us understand the general idea that if the money supply increases, prices will rise.

Attempting to prove that notion, economists develop elaborate theories and definitions around the various measures of money and try to make comparisons of growth rates of money to increases in prices. Unfortunately, the correlations do not give reliable results. One of the biggest problems is that we don't have a universally accepted definition of money supply.

To give you my perspective, I provide this analysis that goes beyond traditional bank deposits to look at a broader measure of money supply including debt. I then examine what has happened during the credit collapse, to see what the short-term effect has been on inflationary pressure.

The Federal Reserve publishes a narrow measure of money supply called M1, and a broader measure called M2. They used to publish M3 and “L” as even more comprehensive measures of money, but they were both eliminated.

M2 includes most deposits at banks plus the base money supply of M1, which includes all the currency and deposits held by banks at the Federal Reserve. This is obviously an inadequate measure of the debt instruments that can be used to purchase items and grow the economy. For example, mortgage debt is used to buy houses, and corporate bonds are issued for corporations to expand their factories and operations. So the following discussion is an attempt to look at the combined traditional measures of money as provided by the Federal Reserve, as well as other measures of debt, to see what is happening to what may be thought of as a broader measure of money by adding by the following items:

U.S. Treasuries

Agency Bonds

Agency Residential Mortgage-Backed Securities

Non-agency Residential Mortgage-Backed Securities

Commercial Mortgage Backed Securities

Investment Grade Corporate Bonds

High-Yield Corporate Bonds

Asset-Backed Securities

All of the above forms of debt add to the ability of the economy to expand. So, the following analysis demonstrates what has been going on in the quantities of this form of debt outstanding to see whether there are inflationary pressures or deflationary pressures from the expansion or contraction of the quantity of debt.

The starting point is to look at the quantity of face value of debt outstanding. That number is then discounted by price actions and expected loss of value in defaults. Credit Suisse performed an analysis of each class of debt at four points of time, starting from early 2007 through spring 2009. Adding up all this outstanding debt shows that, in total, the amount of debt has been in modest decline, most rapidly in the latter half of 2008.

Drilling down a bit further, though, you can see that whereas forms of private debt have taken a serious drop recently, government-backed debt has been continuing its steady growth. Real estate debt that was not backed by government – for example, jumbo loans – showed the biggest drops in amount outstanding. Corporate bonds also slipped.

Three layers of government-guaranteed debt are the U.S. Treasuries, the agency bonds and Agency Residential Mortgage-Backed Securities. The reason the agency debt is considered strong and not collapsing is that it is guaranteed by the federal government, now that Fannie Mae and Freddie Mac have been taken over. The other forms of debt are privately held, and they contain the deflationary seeds from the credit collapse. This debt, when marked to market for the value it could be sold for today, has lost as much as 30% of its face value. Total debt of this set of classifications has dropped from $21 trillion to $18.4 trillion as of the fall of 2008. It recovered to $20 trillion by the spring of ’09, partly by the expansion of government debt.

The chart shows the deflationary collapse of private debt, which occurred into the early part of 2009, as being bigger than the expansion of government-supported debt. Thus we have experienced deflationary pressure.

But look what is already beginning to occur, as the government’s debt expansion gains pace. We already know, because it has told us, that it will issue $2.5 trillion of additional Treasuries to fund its big deficit and bailout programs.

By averaging the growth rate of the sectors from 2007 to 2009 with the growth of the latest quarter, we can extrapolate to a scenario of what the debt might look like in spring of 2010. Government spending will keep the debt expanding. Looking forward, we know that government debt, especially in the form of Treasuries, is likely to expand greatly. It is likely to grow more than the private debt will be collapsing. Therefore inflationary pressures are likely to return.

The value of debt outstanding helps us analyze the pressure toward higher inflation. The size of bad debt collapse being smaller than the expansion of government-supported debt suggests the return of inflationary forces in a year or less.

Worth a Read

David again. Last week, a top Democrat suffered a mental breakdown of sorts when he actually told the truth about who is really running the show down in the smelly swamp of Washington.

blurted out an obvious truth

And…

Goldman Sachs' new top lobbyist was recently the top staffer to Rep. Barney Frank, D-Mass., on the House Financial Services Committee chaired by Frank. Michael Paese, a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank's committee in September, will join Goldman as director of government affairs, a role held last year by former Tom Daschle intimate, Mark Patterson, now the chief of staff at the Treasury Department. This is not Paese's first swing through the Wall Street-Congress revolving door: he previously worked at JP Morgan and Mercantile Bankshares, and in between served as senior minority counsel at the Financial Services Committee.
You can read the full article here, though I suspect it won’t tell you anything you don’t already know.

Since we’re on the topic of the smelly swamp, here’s a quick update from the place from Don Grove…

Adult Supervision

By Don Grove, Casey Research's Washington correspondent

I have heard that those who have had the dubious honor of being in the immediate presence of the president say there is no doubt that he is the smartest person in the room. Even our own Doug Casey has acknowledged that Obama “is no moron. Far from it.” High intelligence is no substitute for maturity and common sense, however. The guys who ran Long Term Capital Management were geniuses, including two Nobel Prize-winning economists, yet they screwed up royally and it took a Fed-sponsored bailout to stop the hemorrhaging.

The gullible electorate saw Obama as a savior. He’s not. He may be smart, but he lacks maturity and common sense. Only we ourselves can offer the salvation we seek. What we need from the president and Congress is just enough common sense to get out of the way.

Our nation and the world suffer from a popular misconception that smart people in government will solve our problems – and, of course, that they need more money to do it. Not! Revenue measures from speed cameras to requiring licenses for tax preparers and bullying low-tax jurisdictions to catch tax evaders all share a fundamentally flawed underlying assumption: that the government has a legitimate need for more money. That’s ass-backwards. We may choose to squander our scarce resources on government meddling in good times, but when money is tight, such profligacy has to go.

People do amazing things when left to their own resources. For example, our national savings rate has been going up since economic disaster hit. The average person need not be brilliant to know to hunker down in hard times, cut expenses, reduce debt, and set something aside for an even rainier day, conveniently providing capital for new productive enterprise in the process. But our government is still busy giving these sensible people bad advice in hopes of reanimating the lifeless corpse for one more miraculous cycle of spending-driven opulence. Paddles! Clear!

The Fed’s efforts to jump-start a recovery by throwing money at our problems have floundered. Chairman Bernanke testified this week before the House Budget Committee. He acknowledged that interest rates are going up in response to raging deficits, despite the Fed’s efforts to nurture those promising green shoots of recovery. For example, the Fed’s purchase of Fannie Mae bonds briefly prompted a housing refinance boom, but that has now fizzled as rates creep inexorably upward as if they had a mind of their own and owe no fealty to the Fed.

Congressman Paul Ryan (R-Wisc.) told Bernanke “that there is no free lunch." Ryan noted that “Treasury is issuing debt and the central bank is buying it. It gives the alarming impression that the U.S. one day might begin to meet its financial obligations by simply printing money.” [Aren’t we already there?] Not to worry. Bernanke assured Ryan that: “The Federal Reserve will not monetize the debt. Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation.” Hopefully the former, undoubtedly the latter.

Should we take comfort from Bernanke’s assurances? No. Bernanke seems to live in a fairytale world immune from the harsh realities real people grapple with every day. According to the Fed chairman:

In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.
See? It’s all about inflation “expectations,” which, being “stable,” will “limit further declines in inflation.” Now, is that a good thing? Wasn’t that a bad thing a little while ago? Oh, well. Obviously smart people like Bernanke and the president have this figured out, and we all just have to have the right expectations. Still, I have this foreboding sense that the parents have stepped out and unruly children are wasting hot water, leaving doors open, bullying, and may be about to burn down the house.

Mom!

Also from Don…

Don mentioned that he participated in the last Washington DC phyle meeting… so I asked him to do a quick write-up as a way of providing some insight into the value one of these informal meet up groups might offer. (Personally, I've never been to one -- although our Summits seem to me to be larger versions of these smaller events.) Here are Don's notes...

Up to this point, we have done little more than provide communications assistance for the various Casey phyles that have cropped up around the country and in the world. We were discussing getting more involved, maybe by providing some special content for the meetings or helping define the guest speakers -- that sort of thing. If you are currently running one of these groups and would be interested in receiving more help from us, drop us a note at phyles@CaseyResearch.com.

If you're interested in attending one of these groups, drop us a note as well, and we’ll hook you up with the closest organizer.

David again… this just in from the “General,” a British friend now observing his homeland from the comfortable distance of Portugal…

Saving Private Brown

Following the well-publicised expenses scandal, Gordon Brown, the Labour P.M., now has a mutiny in the ranks. In the last few days, eight of his ministers have resigned, of which six are inner-cabinet ministers. This has precipitated a huge cabinet reshuffle, which is still going on as I type this on Friday afternoon. That is not Brown's only problem. Yesterday British voters went to the polls for local government elections. Full results will not be known until this evening; however, early results indicate that the Conservative Party led by David Cameron is already thrashing the Labour Party. On Sunday evening, we will also get the results from the 27 countries that are participating in an election for the European Parliament. Again Labour is expected to be easily beaten by the Conservatives.

On top of all this, British Members of Parliament have put down a motion of No Confidence in the PM for debate this Wednesday. Informed pundits and the media only give Brown a 50/50 chance of surviving next week. Already a number of MPs are circulating a petition forcing Brown to resign. Alternatively, he may be forced to call a general election, which the Conservatives are almost certain to win.

So what is Brown doing tomorrow? Well, he is off to Normandy for the 65th anniversary of D-Day. He will also be meeting there with President Obama and other world leaders. With his troops already mutinying and with so many walking wounded in his regiment, he might be well advised to “hang out” at the Normandy beaches and not return to the UK, where there is an awful lot of shrapnel flying about.

Quote of a lifetime from actor David Carradine, who yesterday was sadly found dead in a Bangkok Hotel, under mystifying circumstances. David was 72. His best-known films were Kung Fu and Kill Bill. He was well known for his sense of humour. My favourite quote of his was: "Never buy anything from someone who is out of breath."

Miscellany

Remember Hill-Bill? This week, someone forwarded me what I thought was a very insightful analysis of how Obama has effectively shifted his former competitors, the Clintons, to the trash heap of history. Well worth a read… linked here.

More Tech You Like: Sorry, but I can’t find out which of you sent along this tip… but thanks, whoever you are.

“I have been using the free Grand Central (now Google.com/voice) for over a year and it's great. A free phone number, transferred to any or all of your "real" phone numbers, call screening, time-of-day routing, incoming number blacklist, conference calling, voice to text messaging, google 411 integration, call return and more. Worth a look.”
The Kettle Is Now Calling the Pot Black. A couple of subscribers forwarded a commentary that ran on the website of Russia's Pravda news service. It offered a fairly sharp critique of the path America now finds itself on. Considering the source, the comments are pretty eye-opening... Here's an excerpt:

There’s much truth in those words. Regrettably.

Well, that’s it for this week. Sorry that I can’t share any music with you this week. It’s just that none really jumped out at me.

As I put away the tools for the day, and the week, I see that the DJIA has managed to rally by a meager 37 points, while gold has had a bad day, down $25 on the day… and oil is holding strong at $68. Sure, gold could go down a bit… but it’s hardly worth thinking about. The trend for much higher inflation is cemented in at this point.

As always, thanks for reading, and for being a subscriber to a Casey Research publication.

David Galland
Managing Director
Casey Research, LLC.

The Room – 05/22/2009

David Galland — Fri, 22 May 2009 17:57:00 GMT

A dose of sanity returned to the markets this week, starting with cracks beginning to show in the U.S. dollar. Consequently gold, the not-so-barbaric relic, seems to be attracting an awful lot of attention. Instead of falling, as so many pundits have been predicting it should, it has begun to string together a number of impressive up days. Another run at $1,000 in the weeks just ahead is not out of the question.

Also this week, the U.S. stock market hit a pothole on the road to Happy Days Again, helped along, apparently, by massive selling by corporate insiders...

"...in the last couple weeks, company chief executives and chief financial officers have gone from big buyers to heavy sellers. According to InsiderScore.com, two weeks ago there was a slight bias towards selling, while last week turned in the biggest disparity of sellers to buyers — more than 1.2 sellers for every buyer — since September." (WSJ)
In addition, the chart for long-dated U.S. Treasury bonds this week – shown here – resembles a steep cliff. It appears that the U.S. Treasury Department's irrational exuberance for every bailout program that lands on its desk is finally beginning to raise doubts about the government's ability to repay its many obligations. Ahead of us on the curve, the sovereign debt of the UK is thought to be a tea cozy away from being downgraded from the AAA status normally assigned to a respectable country's sovereign debt.

While no one likes to be the bearer of bad news, this week's market action is a welcome confirmation that just maybe we haven't lost our minds here at Casey Research. I can't begin to recount the number of times I woke up in the morning wondering if we were missing something really, really big regarding the current crisis. After all, both the dollar and the stock market have held up remarkably well in the face of what appears to be irrefutable evidence that the U.S. currency and economy are now racing down the fast track to a devastating collision with the reality that there is no such thing as a free lunch.

Despite many opinions to the contrary, the government cannot "fix" an economy as massively broken as ours. At least the fixing involves throwing out some magic combination of regulations, jawboning, newly created money, and backroom deals with fiscally irresponsible and financially bankrupt cronies.

We are, I would opine, at the crossroads of a new paradigm in American history. We have to be, because the path we have recently traveled to get here has been wiped out by an avalanche of bad policy and institutionalized self-dealing on a biblical scale. We are not going back to the bubble years anytime soon, any more than the Japanese have or will in our lifetimes.

That is not to say that America is doomed or that we should begin eyeing the ground for roots and berries. Rather, the citizenry of this nation – and the world, for that matter – are going to have to adapt their personal outlook to the way things are, and not the way network television has portrayed them these many years. Not everyone is going to have a new car every couple of years.

Of course, it's going to take awhile for this notion to sink in. Humankind, and Americans in particular, are forever looking forward to a bigger and brighter future. To the extent that said view of the future includes ever larger high-definition TVs, the latest gadgets, and an ATV parked in the backyard right next to the trampoline and above-ground pool, expectations will have to change. Probably in conjunction with the simultaneous receipt of one's first unemployment check and one's first unpayable credit card bill.

Illuminating these post-apocalyptic thoughts, just below is the text of an e-mail I received yesterday from Dominick, a valued subscriber and correspondent of some duration.

I heard an interview on National Public Radio this week with a bunch of graduates from the college class of 2009. They universally lamented the fact that there were no jobs of any description available. Experts and various callers chimed in with their suggestions for the unlucky class. One graduate with a degree in nursing complained that contrary to expectations, there were no nursing jobs on Long Island where she lived. Apparently a lot of the hospitals in the area have closed or are closing. One caller helpfully suggested that she might want to move to another part of the country where nurses were still in demand. Her reply was along the lines of "No way," and that it wasn't fair. In other words, she was entitled to her job exactly where she wanted it.

These attitudes, too, will be changing in the weeks and months ahead.

There was a day, albeit a day long ago, where Americans were far more adventurous and willing to take on risk than they are today. They were also, if the need arose, willing to roll up the sleeves and put in a hard day's work. None of that spirit was in evidence among the callers to this particular program, whose default mode seemed to be to take a job with government and/or move back in with their parents.

So, how are the coddled generations going to cope with the world as it is, as opposed to the world they want it to be?

We are going to probe deeply into that, and a number of related topics, in the upcoming edition of The Casey Report, which will include an interview with Neil Howe, the author of Generations and The Fourth Turning (among many other works on generation research). Meanwhile, I have some general thoughts...

A continued resurgence of socialism. Socialism is really just a softer-looking form of communism. Few people will go so far to suggest that they are active communists these days. But if you properly phrase the question, I suspect that a majority of young Americans, and maybe a wide majority, are socialist in attitude. Many would even overtly identify themselves as a believer in that form of collective, a clear sign of societal amnesia, given all the lessons that history has provided about that system's shortfalls. Consequently, the world will set about relearning the lesson that you cannot build a productive society by punishing the productive elements of society. Joe Biden's public retort when a woman asked him what she should tell her friends who were unhappy about having their taxes raised, was, "It's time to be patriotic, that's what you say to them."

Watch this clip of then-candidate Biden defending this point of view, and see if you can spot the direct correlation between his words and the concept Marx expressed in his "from each according to his abilities, to each according to their needs."

Also note the obvious passion he brings to the topic. This is not simply campaign jargonizing but a deeply held conviction.

I may be hoping for too much, but I wish that Americans of any income range would be able to look past their personal bias to spot the clear fallacy of this approach. Strictly speaking from a fairness perspective, it wasn't the business owner, successful or otherwise, who led us into this dead end – it was the government and the many special-interest groups firmly latched to the teats of that government. To get a bit metaphoric, it wasn't the fellow owning a chain of dry cleaners who drained the well of American wealth and then replaced the water of enterprise with quick-hardening cement. Again, that would be the U.S. government.

And yet, according to Biden et al., the patriotic thing to do is to take your hard-earned money and give it to the government to give to the needy, whose ranks are currently swollen with the bumbling executives of Goldman Sachs, Bank of America, JPMorgan, and similar Wall Street institutions.

But those comments are based on the notion of fairness. Let's forget fairness for a moment. Forget that letting the Bush tax cuts expire already amounts to the largest tax increase in history, and let's get entirely practical.

Who does the public think is ultimately going to do the heavy lifting needed to bring the economy back into some sort of equilibrium?

As I don't need to tell you, it will not be the government. Thus, every new tax and regulation or insane government dictate simply add more bricks to the wall that entrepreneurs must climb in an attempt to build a sustainable economic recovery.

Which brings me to a second prediction -- the creation of a new wave of quasi-state companies. If you like Freddie Mac and Fannie Mae, then you'll like the new wave of Franken-businesses that will morph out of enterprises that the government decides are too important to fail. Need to prop up a unionized car company? No problem. Just have the USG take a lot of taxes from unpatriotic taxpayers and hand them over to the "new and improved" car companies – companies that are building the next generation of cars, whether people like them or not. For a picture of what's coming, look no further than Amtrak, which has shown an unblemished track record of almost 40 years of losing money. The losses are now exceeding $1 billion a year.

To quote Amtrak's February 2009 independent auditors report...

The Company has a history of substantial operating losses and is dependent upon substantial Federal government subsidies to sustain its operations. There are currently no Federal government subsidies appropriated for any period subsequent to the fiscal year ending September 30, 2009 ("fiscal year 2009") as discussed in Note 2 to the financial statements. Without such subsidies, Amtrak will not be able to continue to operate in its current form and significant operating changes, restructuring or bankruptcy may occur. Such changes or restructuring would likely result in asset impairments.
So, what does the government propose? To build a series of high-speed bullet trains to crisscross the country.

I could go on, but I'm a little short on time this morning, given that Doug Casey and all of our senior editors and staff are gathering at the office here today for a rare in-person management meeting.

Before I rush on, however, I would like to underscore the point I am trying to make, because I think it's an important point. At this stage of the crisis, the government is doing almost everything exactly wrong, the exact opposite of what they should be doing. And the public, correctly scared as they are of the dark and threatening skies overhead, are scurrying under the government's hastily constructed tent.

We shall come out of this just fine -- though we won't come out of this anytime soon, unless there is a 180° shift in government policy, the sort of shift that traditionally only occurs as a result of a popular uprising of strong emotions, expressed eventually at the ballot box. Since the majority of the emotions now swirling around are very much oriented towards more, not less government, we are nowhere near the end of this thing.

As investors, therefore, that is how you have to rig your portfolio -- and that is how we are rigging the portfolio recommendations made in our various letters.

For a final word on the subject of where we are in the economy, I would like to turn the platform over to Howard Davidowitz, the outspoken chairman of Davidowitz & Associates, a company that provides strategic consulting to the retail industry.

What Davidowitz is currently telling his clients, and what he'll tell you in the video clip you can view here, is best summed up in his comment, "If the consumer isn't petrified, he or she is a damn fool."

Crime Scene

As a matter of personal taste, not policy, no one in our household watches network television anymore -- with the exception of Survivor, which never fails to entertain by celebrating humankind's remarkable capacity for self-delusion. Even so, when watching that program, one is forced to sit through trailers for an apparently very popular genre these days -- grisly "true life" police dramas, including any number of geographical derivations of something called Crime Scene Investigation, conveniently abbreviated to CSI. The trailers alone are sufficiently gruesome, but I warn the kids to avert their eyes, which they do willingly.

This week anyone paying attention would have seen a real-life crime scene every bit as gruesome. A U.S. House of Representatives committee passed new greenhouse gas legislation, legislation that includes a cap-and-trade system.

If it were socially acceptable to swear in print in polite company, I would do so right now. Instead, I will express my continued belief -- though maybe it is just a forlorn hope -- that there is no way cap-and-trade legislation can make it into law at this point in time (hopefully at no point in time, but especially at this point in time).

Even so, it boggles the mind that, with everything else going on, the government would spend any time at all on this issue just now. So why are they? A couple of reasons...

First, thanks to a misplaced road sign, over the past couple of decades, millions of young people mistakenly wandered onto the path of "environmental remediation" and related academic pursuits, versus something far more useful and productive. This despite the fact that the world has never been cleaner and is clearly on the trend to get cleaner still.

How did this massive misallocation of time and resources come about? I have read a defensible argument that the entire green movement, which initially cropped up in Germany in the 1970s, was funded by the Soviet Union as a clever attack on the underbelly of capitalism. Given academia's natural attraction to socialism – the attraction to a worldview that seeks to bring down businesses based on the inevitable waste that they must produce in their production processes – it is understandable. But this is a topic for another day.

However, there is something more to the rushed passage of this latest round of government meddling in the affairs of business here in the U.S. It is, if you believe the polls – or just your common sense – that the average American is ignorant of exactly what "cap and trade" actually means. And I quote...

In other words, if the Democratic leadership is going to make good on its promises to its many environmentally oriented supporters, it's going to have to do so pretty darn quickly. At some point the public at large will catch on to the crime that is about to be committed through the cap-and-trade legislation. Under the best of circumstances, it will be a huge waste of time and resources. Under even moderately bad circumstances, it will result in further hardship and taxes dumped onto the back of American enterprise.

There is something else pushing Congress from behind on this issue: a massive lobbying effort by "rent seekers," who are now well positioned to earn big profits from this legislation. Below is a link to a very informative article from the Wall Street Journal. While the author, Bjorn Lomborg, is a fairly rabid socialist himself, I give him credit for at least being honest in his critical analysis of his colleagues in the environmental movement. You can, and should, read his competently constructed critique of the goings-on at the World Business Summit on Climate Change in Copenhagen that is opening this weekend.

As you will read, what is happening behind the scenes is not just shameful but, in my view, a criminal fraud.

Read Lomborg's article, The Climate-Industrial Complex here.

Just So You Know

This week, Treasury Secretary Timothy Geithner, concerned about talk that the U.S. government could lose its AAA bond rating, clarified his goal for government deficits in the years just ahead.

Just so you know, the government expects the deficit to be about 13% of GDP in fiscal year 2009. As we see it, that understates reality by a wide margin. The actual number is likely to be closer to 18%, or $2.5 trillion.

For fiscal 2010, Geithner forecasts the deficit will drop to 8.5%, or about $1.17 trillion. If the government's projections are as far off next year as they are this year, the actual 2010 deficit would ring in at about $1.6 trillion, or about 11.5% of GDP.

For fiscal 2011, the deficit according to Geithner will fall to 6% of GDP, or $840 million. But again, applying the same margin of error for the forecast as we expect to see this year would put that number at about 1.15 trillion. That's still almost three times the prior record of $436 billion, set by George Bush in 2008.

Of course I can't help but comment that the government is out of touch with the reality it is creating with its out-of-control spending, and that the vast majority of the money is going down a rat hole. But it is also important to try and look past the blunt numbers to some of the consequences of this fiscal insanity.

For instance, taking as our starting point the current U.S. debt of $11.3 trillion and adding in the projected additional deficits just discussed, the country will end fiscal year 2011 with a total debt of $16.5 trillion, or about 46% higher than it is today.

That would mean total federal debt would be about 120% of total GDP. That's almost exactly the previous record set in the concluding years of World War II.

One of many tangible consequences of this accumulated debt will be a staggering burden of interest payments. At just 4%, the government would be forced to pay on the order of $660 billion per year in interest payments.

But what happens when interest rates rise to 10%, let alone the 20% Doug Casey feels they are headed for? While it's hard to get one's mind around the latter number just now, the former is certainly within the realm of possibility, given the current trend.

So, how does the government cover $1.65 trillion in annual interest payments?

The answer is, it doesn't.

All of which is to say that we are racing toward a situation where the government will have absolutely no other choice besides massive inflation or an outright default. The stirrings this week suggest that Mr. Market is starting to come to the same conclusion. That means he will also come to the conclusion that interest rates must go up -- either to offset the pending inflation or to compensate for the growing risk of a default.

I'm sure economists have some fancy term for this situation, but vicious cycle will suffice for now.

By the time the politicians stop dithering around with the deck chairs, the ship of state will have sunk, with the survivors clinging to the wreckage. It is our intention – in fact more than that, it is our firm goal -- to make sure our subscribers have a comfortable seat in the lifeboats.

I am not kidding or being disingenuous when I tell you that there has never been a better time to be a subscriber to our various publications. The problem, of course, is that we have quite a few of them, and each is geared to helping you to manage various subsets of market opportunities. For gold and other natural resources, the go-to publications are BIG GOLD, the International Speculator and Casey Investment Alert. For energy, it's Casey Energy Opportunities and Casey Energy Confidential. Overall portfolio strategies, which include plays on rising interest rates, are covered by The Casey Report. And for strategically designed options and futures trades, look no further than the Casey Trend Trader.

Any one of these publications can be instrumental in helping you make it through the shipwreck just ahead, but all of them combined will get you through it in especially fine style. To that end, we are now working on a new membership organization called Casey's Club. It allows you to subscribe to all of our publications and alert services with one low initiation fee... and receive all of them, as well as any services we'll launch in the future, for as long as they are published.

The final details are being worked out now. We'll have more on this first-ever Casey lifetime offer soon.

Tar Baby

I will confess to a strong dislike for fundamentalist religions that advocate as part of their daily ritual the murder of innocents or the suppression of women. Thus, I have zero sympathy for the Taliban or similar groups now being chased around Pakistan, Afghanistan, or other corners of the Middle East.

Anyone who chooses to live by the sword is welcome, as far as I'm concerned, to die by the sword.

Unfortunately, the U.S. seems to be the only country that wants to wield the sword with which they will be smote. Is it because we are somehow more righteous than other nations? Is it that it's our destiny to police the world and to make it over in our own image? Or is it something else, perhaps an overriding and possibly even delusional sense of specialness made ever more acute by the world's largest military budget?

Who knows, maybe it's that Israel – a nation whose neighborhood keeps its back against the wall constantly – has for many decades proven effective at lobbying American congressmen for their undying support. That is not an anti-Semitic remark but a verifiable fact. I don't blame the Israelis for manipulating U.S. policy -- if I were in their position, I would do exactly the same. Instead, I blame the systematic weaknesses within the United States government that allow it to be so readily manipulated.

Regardless, as a result of the normal quirks and accidents of history, we have arrived at a place where U.S. boots are once again firmly planted on the ground in an unwinnable war halfway across the globe. Just as we replaced the French in Vietnam, we have now replaced the Ottoman Turks in Iraq and the Soviets in Afghanistan.

Consequently, even with the more "enlightened" Obama in office, the military budget for the wars in Iraq and Afghanistan is again being ratcheted up. The Senate will pass a funding bill of over $91 billion this week to cover the costs of fighting those wars.

Tellingly, by the end of this year, it is expected that there will be more than twice as many U.S. soldiers in Afghanistan as there were at the end of 2008. The cost of the Afghan adventure will in 2009 exceed that of the battle in Iraq.

As with the antagonist in Uncle Remus' famous parable, we are now well engaged in attacking the tar baby. I suspect the results will be much the same.

Confidence Inspiring 101

I'll admit that I am something of an Anglophile, enjoying as I always have some of the British traditions such as complete British breakfast, afternoon tea, British humor, and a pint of Boddingtons over a game of snooker.

But I do have to wonder whether someone has been slipping something into the warm beer of the British public lately, with a double dose for members of the government over the past decade or so.

There are too many signs of mass insanity to ignore this point, starting with the willing adoption of some of the world's most egregious and intrusive surveillance policies, followed by a rush towards monetary self-mutilation.

For the latest example, the UK Treasury refused to provide the results of the stress tests it had put its banks through. Rationalizing this refusal, the UK Treasury commented that publishing the information could increase instability and result in the government having to undertake even further measures to shore up that country's financial system.

How's that for confidence inspiring?

It shows just how foolish the British have become in dealing with such matters. All they had to do was follow the lead of the U.S. Treasury Department and simply come up with a poorly crafted but well-delivered set of outrageous lies about banks' solvency!

I mean, really old chaps, you can do better.

Random Thoughts

I'm running out of time, well before I run out of topics. So I'm going to go a little wild here, with some quick observations...

On Gold... Everyone seems to like gold these days, including top-performing hedge fund manager John Paulson. The majority of his holdings are now invested in all things gold. Here are his current top portfolio holdings:

Top 15 Holdings (by % of portfolio)

SPDR Gold Trust (GLD): 30.37% of portfolio
Wyeth (WYE): 13.96% of portfolio
Rohm & Haas (ROH): 13.44% of portfolio
Boston Scientific (BSX): 8.4% of portfolio
Gold Miners ETF (GDX): 6.81% of portfolio
Kinross Gold (KGC): 5.87% of portfolio
Philip Morris International (PM): 3.42% of portfolio
Petro-Canada (PCZ): 2.96% of portfolio
Schering Plough (SGP): 2.26% of portfolio
Mirant (MIR): 2.22% of portfolio
Gold Fields (GFI): 2.21% of portfolio
JPMorgan Chase (JPM): 1.65% of portfolio
AngloGold Ashanti (AU): 1.15% of portfolio
St Jude Medical (STJ): 0.91% of portfolio
Embarq (EQ): 0.81% of portfolio

The Russians Also Like Gold. "MOSCOW, May 21 (Reuters) - Russia's precious metals and gems repository plans to quadruple gold purchases this year to about 3 percent of national output to help miners survive the economic slowdown, a source within the organisation said on Thursday. The repository, known as Gokhran, plans to buy 5 tonnes (160,754 ounces) of gold from about 15 enterprises this year, up from 1.2 tonnes in 2008, the source told Reuters on condition of anonymity.

"...Gokhran was founded in 1920 with the aim of centralising and storing Russia's supplies of precious metals and gems. Today, the body is subordinate to the Finance Ministry and its total reserves are a state secret."

The Chinese Don't Like Dollars. This week the Chinese and the Brazilians began working in earnest on a new regime that would allow each country to use each other's currency in intrastate trade, bypassing the U.S. dollar. Actions speak louder than words, and the Chinese have been saying a lot with their actions of late.

Pension Benefit Guaranty Corp – Next Up for Bankruptcy, I Mean, Bailout. According to our own Bud Conrad, PBGC, the government entity that guarantees the pensions of some 44 million Americans, is in deep trouble. You can read this story of epic self-dealing by America's favorite investment banks and its government stooges by following this link...

Tech Talk

A software that I find particularly useful, is SnagIt (learn more here). It allows you to very easily capture any image on a computer screen and then paste it into another document. For those of you who like to blog, SnagIt is an essential tool.

The following came in from subscriber Steve H. While I haven't personally had a chance to try out the software yet, I plan on it...

jott.com

Do you have a technology you like to share with others? Or any comments at all about this edition of The Room? If so, send them my way at David@CaseyResearch.com.

Miscellany

Oil Spills? Bring ‘em On... Check this out.

A bit of British Humor. A moment ago, I mentioned my fondness for British humor. Follow this link to a car review from a British newspaper, hands down the funniest car review I have ever read.

Joe Cocker. A subscriber this week reminded me of Joe Cocker, an artist whose name is largely faded from memory, but who was certainly unique in his time. You can view a funny "translation" of Joe's wild performance at Woodstock by pasting this url into your browser window: http://www.elwp.com/Joe%20Cocker.html. Viewing that video made me wonder, "Whatever happened to Joe Cocker?" Thanks to the miracle of the Internet, I found that he is still alive and well and maybe even coming to a town near you soon. Check out his rather fancy website here, http://www.cocker.com/.

And that, dear readers, is that for this week. Even though I started well before the crack of dawn, I am now running late and ready to sign off. A quick glance at the screens tells me that the Dow is up 26 points and gold is holding steady at $957 per ounce.

Until next week... thanks for reading and for being a subscriber to a Casey Research publication.

As dire as the outlook may be, quoting Joe Cocker, together we'll get through all of this, "With a little help from our friends."

David Galland
Managing Director
Casey Research, LLC.

The Room – 05/01/2009

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

Dear Reader,

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

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

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

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

Chrysler

General Motors

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

Ford Motor

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

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

John Dingell

Sander Levin

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

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

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

Editor’s Note:

You can watch his appearance here

The Day the Earth Stood Still

By Doug Casey

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

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

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

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

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

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

Editor’s Note:

The Casey Report

much

Not yet a subscriber?

The Casey Report

clicking here now

Watch What You Wish For

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

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

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

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

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

We’re All About to Die!!!!

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

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

Here’s Shannara …

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

Google Map of the U.S. and Mexico

just in Texas

this Ron Paul video

here’s a video

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

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

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

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

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

Helen Keller, The Open Door

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

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

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

A Word from Mother England

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

exploded

Technology YOU Love!

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

"Text Aloud"

http://nextup.com

AT&T Natural Voices

Text Aloud

.doc

.pdf

Internet Explorer

Fire Fox

The

Casey Report

Big Gold

The Room

***

http://www.xmarks.com/

***

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

PDF reDirect Pro

***

www.k7.net

***

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

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

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

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

Miscellany

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

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

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

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

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 04/17/2009

David Galland — Fri, 17 Apr 2009 15:22:00 GMT

Dear Reader,

Being new to a profession is always a challenge. The neophyte wants to impress his superiors, but lacking experience, is left to rely upon what natural skills he possesses. And, often, will try to make up for any shortcomings in specific skills by displaying a double dose of enthusiasm and energy.

Our new president, for example, has a great many skills related to successful politicking, but none at all specifically related to the task of being president of the world's most powerful country. This is not a job that one can prepare for.

And so We the People, his new bosses, are left to observe Obama leaning heavily on his considerable political skills – and his obvious energy – in an attempt to impress.

He is trying to do so through a constant stream of new pronouncements emanating from the White House, or wherever Mr. Obama happens to be standing at the moment. On one day he wishes to put an end to nuclear weapons, on the next to reach an accommodation with the Iranians. While he’s at it, he'll be (maybe) pulling the troops out of Iraq, but redeploying them into Afghanistan and maybe even Pakistan.

Hopping on Air Force One to bask in foreign adulation, he might close the afternoon by announcing he’s going to rescue the indebted mortgagees while dealing with bank insolvency. With hardly time for a deep breath, we see commitments to salvage the U.S. car industry -- but without overly inconveniencing its unionized workers -- followed by a promise to tackle the thorny question of immigration. Over afternoon tea or perhaps a Seder supper, he pronounces that help is on the way for Mexico in its “war” with its drug gangs, then over breakfast dedicates himself to assembling an “armada of allies” to wipe the earth clean of Somali pirates.

Worried that those initiatives may fail to impress, Obama’s administration then treats us to news that it will reform the tax code (if only to tighten the weave of the net) and close down the world's "tax havens." Further, before this December, if the Obamites have their way, carbon emissions in the United States will be smashed down to the levels of 50 years ago (which is to say that what is left of American manufacturing will soon become Indian or Chinese manufacturing). In support of that goal, a comprehensive cap-and-trade program will be initiated, invoking tens of billions of dollars in new taxes on American enterprises each year.

While I have the chronology wrong, the actual list of initiatives proposed so far by the energetic Obama is correct, though not complete. In fact, the list goes on and on… and expands even as I write: with the administration’s encouragement, the EPA is set to declare carbon dioxide -- you know, the stuff that makes plants grow -- a threat to public health.

In any event, the point I am trying to make, other than to offer President Obama a kindly word of advice that maybe he should take a deep breath and pause in his many exertions, is that rather than impressing, he is increasingly at risk of blowing all of his considerable store of political capital and going down in the history books as something of a failure.

There is a saying in marketing that I've always found true, and I think it is very appropriate in this instance. Namely, "The more you emphasize everything, the less you emphasize anything."

I, for one, am getting dizzy from watching Mr. Obama's antics and trying to understand exactly what he’s looking to accomplish, other than endeavoring to impart the impression that he’s accomplishing a lot. But there is a big difference between creating an impression and actually delivering the goods.

Sooner rather than later, I suspect, Congressional Democrats -- looking just over the horizon at the next election -- will realize that not only is the economy on tilt but so perhaps is their president, at which point he will be forced to begin a program of massive backpedaling with serious consequences to his credibility.

For those of you who are supporters of Mr. Obama and hoping for the best from his administration, now might be a good time to drop him an email suggesting he might wish to rein in his goals before spinning into oblivion. For those of you who don't particularly care for Mr. Obama, at the pace things are going, I think you’ll find your worst fears about the ambitious president will remain unrealized.

Alternatively, finding himself all of a sudden at risk of becoming marginalized and being fired at the end of his four-year probation period, Mr. Obama might take a serious gamble to regain his relevance – a war with Pakistan? While one can only hope not, stranger things have happened.

Why Do You Buy Gold?

As you can see from the chart below, since the latter part of February, the GLD gold ETF has been on a down trend, reflecting the underlying action in gold.

The retracement, while unwelcome, is understandable given the news about persistent deflation in widely followed indices such as the consumer price index. Also pushing things in the wrong direction, there are the U.S. dollar’s recent gains against the euro. And, as discussed here last week, we've also heard that the IMF is going to be dumping a fair bit of gold in its attempt to rebuild its war chest.

Not exactly cheery news for our favorite yellow metal. In fact, in any other than the Bizarro World in which we now live, the chart for GLD would be looking a lot worse than it is. As you can see more clearly in this next chart, the volume in GLD has fallen off quite a bit of late, which is a good proxy for broader interest in gold. Granted, we live in a particularly volatile and unpredictable age, which means anything can and likely will happen on any given day that can change virtually anything or even everything. But the odds are pretty good that absent one of those "shocker" incidents, gold is likely to remain range bound, perhaps even trend lower, until the inflation that has been baked into the cake by the government’s massive infusions of money makes itself known.

Which brings me to a question: Why do you buy gold?

Being clearly able to answer that question is the only way you can intelligently determine both the quantity of gold you ultimately buy and the timing of when you will buy (and eventually sell).

I mention this because on far too many occasions, I have had conversations with individuals, or received emails from subscribers, who view gold with an almost romantic affection. That's a mistake. As Doug Casey recently wrote, it's important not to fall in love with something that cannot love you back.

While gold can backstop your portfolio and place a solid foundation under your net worth, in the final analysis it is simply an asset, albeit one with unique properties that make it an especially attractive form of money.

It’s because of those unique properties that many of you own gold, as a form of insurance against inflation and other forms of monetary mayhem. In our view, that is the most important reason to own gold, especially these days. Viewed through that lens, the latest price setbacks for gold should be of almost no concern, unless you have not purchased your full allocation to the metal -- in which case, beginning to buy on the dips makes sense.

On the other hand, if you're a speculator in gold, your challenge becomes trying to discern gold’s current trading range so that you can buy when it's low and sell when it’s high. Reflecting the extreme volatility that grips almost all markets, gold's trading range these days is fairly wide, roughly between $800 and $1,000.

Frankly, absent a shocker event, I see no reason for gold to break out of that range decisively anytime real soon… at least not until we see the inflation that is the inevitable outcome of the Fed’s determined destruction of the dollar and U.S. government deficits of a magnitude that would bring tears to the eyes even of the late Lord Keynes.

Entourage

As you may have heard, our media star president is heading off to the Summit of the Americas next week to engage in another round of photo opportunities with other politicians.

Given the obvious importance of the event, it is no wonder that he is taking an entourage of over 1,000 important U.S. delegates, including wife Michelle's full-time makeup artist, a presidential first.

So what are the lofty goals of this important summit?

According to the AP…

Obama's priority list for the trip that begins Thursday is stacked with matters of concern across the Western Hemisphere – the crippling recession, the warming of the planet, the trafficking in drugs, the gloom of poverty. Crime, despair and political unrest south of the border can all undermine U.S. interests.
In order to meet and discuss these many challenges, the princely sum of $80 million will be spent by summit organizers, an amount that does not include the staggering sums involved with transporting the Obamas and their entourage to the Caribbean island where the summit will be held.

Not to worry, I am sure that all 1,000 of our delegates are necessary and worth the cost of sending them on their spring break and putting them up in the style they are quickly becoming accustomed to.

Interestingly, as is the case with these highly staged events, the outcome has already been decided and the post-summit agreement already drafted. Again, according to the AP...

The draft summit agreement, negotiated laboriously, speaks broadly about cooperation on climate change, education, safety and prosperity. But it makes no direct mention of the overarching crisis of the time, the global economic swoon. In fact, most of it was negotiated before the crisis hit with full force last fall.
If you excuse me for being a bit of a skeptic, a Grinch even, don't you think this all could have been handled with a couple of conference calls? Because as you and I both know, in the final analysis nothing will come out of this grand holiday other than a noticeable increase in local rum sales.

All of which moves me to ask, is anybody actually keeping a tab on the president's tab? Does no one now occupying the polished corridors of power in Washington understand that the economy is wrecked, and that every dollar counts?

Is anybody out there?

Ed. Note:

Entourage

Opportunity Knocks?

The chart shown here is of the CRB commodities index. A couple of things jump off the page, at least to me. The first is, that was one hell of a slide in commodities prices. The second is that it sure looks like it's trying to put in a bottom.

The contrarian in me tells me that this is a picture of a very interesting opportunity in the making. Again, no guarantees the commodities complex can't go lower, but the simple fact is that people need to eat, to keep the power on, and to actually produce the things necessary for daily life. Thus, looking for opportunities to get intelligently positioned in the commodities complex, with the expectation of a double or better over the next five years (without leverage… with leverage, the returns could be manifold that), seems to make a lot of sense.

Rest assured that in The Casey Report -- and for those of you with a higher net worth and a familiarity with futures and options, the Casey Trend Trader – we will be sharing a variety of strategies to get positioned in this trend.

The Down Low

Upon reading that Homeland Security has issued a report this week warning about the rising threat from "right wing extremist" groups brought to mind a topic I’ve been meaning to comment on for some time.

The topic is simply, armed revolution.

While I doubt their ability to get the specifics right, I suspect the general thesis of the Homeland Security report is probably correct. Namely, that some Americans may be willing to go to the mats should the U.S. government continue to infringe upon their rights, with stronger gun control measures being a likely tripwire.

Supporting that contention, below is an excerpt from an email that someone forwarded to me – not in support of the idea, but rather to show me that there are those willing to entertain the idea of a gun-battles-in-the-street sort of revolution.

(Note: The term "Three Percenters” refers to the 3% of colonialists who, the authors of this email allege, were the minority who actually took up arms against the British in the American Revolution, versus the 97% who were largely just bystanders. In the modern context, it is this 3% who are supposedly ready to grab arms and use them against the government.)

Below is the excerpt… which, as you will read, is inflammatory stuff.

Three Percenters today do not claim that we represent 3% of the American people, although we might. That theory has not yet been tested. We DO claim that we represent at least 3% of American gun owners, which is still a healthy number somewhere in the neighborhood of 3 million people. History, for good or ill, is made by determined minorities. We are one such minority. So too are the current enemies of the Founders' Republic. What remains, then, is the test of will and skill to determine who shall shape the future of our nation.

The Three Percent today are gun owners who will not disarm, will not compromise and will no longer back up at the passage of the next gun control act. Three Percenters say quite explicitly that we will not obey any further circumscription of our traditional liberties and will defend ourselves if attacked. We intend to maintain our God-given natural rights to liberty and property, and that means most especially the right to keep and bear arms. Thus, we are committed to the restoration of the Founders' Republic, and are willing to fight, die and, if forced by any would-be oppressor, to kill in the defense of ourselves and the Constitution that we all took an oath to uphold against enemies foreign and domestic.

We are the people that the collectivists who now control the government should leave alone if they wish to continue unfettered oxygen consumption. We are the Three Percent. Attempt to further oppress us at your peril. To put it bluntly, leave us the hell alone. Or, if you feel froggy, go ahead AND WATCH WHAT HAPPENS.

(As an aside, I’m sure Homeland Security appreciates it when these self-described revolutionaries make their identities well known by sending around broadcast emails.)

Supporting the notion that people are loading up out of concern that the government has designs on their weapons is this citation from Bloomberg…

sales

I can attest to the fact that the local gun store is clearly thriving; it has recently undergone a top-to-bottom renovation in order to more comfortably accommodate its many patrons. The trend toward more gun sales is also evident in the share price of Smith & Wesson (SWHC) over the last six months…

So, it’s not out of the question that the stage may be set for what could turn into a series of confrontations between the government and its harshest critics.

Some random thoughts...

As is true of almost all successful species, it’s human nature to want to group together. This tendency toward the collective is perfectly understandable in that it allows for a more efficient sharing of resources. There are other benefits, including a sharing of the protective duties and chores that would otherwise take an inordinate amount of time and/or resources should each individual be forced to undertake them. While I personally shy away from most forms of collectivization, that so many gravitate toward that condition is easily understood.
Along with this natural desire to collectivize, it is equally natural for an individual or individuals to assume power of the collective, once formed. As often as not, the group encourages and even demands that a particular individual or individuals assume the reins of power. We can all recall the kids who, even in our kindergarten classes, would naturally assume a leadership role and be supported in that role by many.

Perhaps this is related to a subconscious quest for better genes, or simply because most people prefer it when others stronger than themselves take on the responsibility of decision making. Regardless, the tendency to gravitate to power is a clear and present human trait.
Which brings me back to the “Three Percenters.” Imagine, for a moment, the logical outcome if this group were to actually rise up and win the day? In my construct, all this would achieve is that the national collective would replace the current leadership with that of another sort. While I am not any more enamored of the current power elite than I was of the bumblers they replaced, I suspect that I might like living under the rule of the Three Percenters even less.
While I don't doubt that we'll see incidents of violent pushback against the current government, and maybe even something as dramatic and devastating as the Oklahoma bombing (notably carried out by a veteran of Gulf War I), the idea that a group of homegrown revolutionaries could actually outgun our modern army is ludicrous.

There is a significant difference between 1776 and the situation today. Not only does the U.S. government not have to deal with long supply routes, as was the case with the British, but today even the best-equipped gun shop has nothing in stock to remotely compare with the sophisticated armaments the U.S. government has at its disposal, thanks to decades of massive military budgets. When we can take out houses in Peshawar using drones operated by technicians comfortably seated in a Nevada command post, how much trouble, really, will it be to handle a small cadre of malcontents operating in Poughkeepsie?
The danger, therefore, doesn’t come from the outbreak of a guerrilla war here in the U.S. -- although dramatic incidents and perhaps even large-scale riots are almost a certainty over the next 10 years -- but rather from the government’s reaction to these events.

Already, local police are being equipped and trained to view even commonplace crime with a military sensibility. And we have seen a breathtaking degradation in individual liberties in response to the 9/11 attacks.

Of course, this degradation is not apparent to most, other than as modest inconvenience at airports. That’s because most of us will never experience the dire consequences of a negative assessment of our email records and other similar intrusions upon our privacy – picture a door being kicked in in the middle of the night followed by a quick trip to a dark cell. Even so, the fact that the government has been willing to cross previously unimaginable lines in its fight against real and imagined terrorists is a clear indicator that, should domestic disturbances begin to reach anything approaching a regular tempo, the response could be extreme.

So what is one to do? Given humankind's tendency toward collectivization, and for the collective to be controlled by a small power elite that will not generally give up the reins once taken, it seems logical to me that the only sane response that we as individuals who value our individual freedoms can have is to learn the fine art of keeping a low profile. Or, to use modern slang, to keep things on the “down low.”

Put another way, trying to swim against a powerful river, a river that stretches back to the very beginning of human time on this planet, will only wear you down and eventually pull you under.

In my opinion, people should spend a lot less time worrying about the collective and a bit more time thinking about the steps that they can take as an individual to enjoy an excellent life while simultaneously keeping out of harm's way.

To be sure, that might involve eventually coming to the conclusion -- as some Jews did in Germany pre-WWII -- that as warmly as one might feel about their hometown, to remain in place is to risk everything. By the time the sentimentalists were being packed up for camps, the realists had already set up shop in far less dangerous climes.

In the current instance, as much as we may complain about the growing power and meddlesomeness of the U.S. government, most people are able to go through their lives largely unaccosted – saved by the tax man. But that doesn't mean you should be blind to the hard historical evidence that any country, no matter how enlightened it might seem, can and will change... and in some cases, dangerously so.

It is for this reason that my globetrotting partner Doug Casey has long advocated having at least one foot in another country. And by "one foot," I mean some percentage of your assets, ideally some property, and at least a working knowledge of the place and some local connections.

Don't get me wrong, I think the United States of America is a great place, and the odds are good that as bad as things might get, it will remain in solid contention as one of the top five countries in the world in which to reside. But if things took a decided turn for the worse, long before I would even begin to get it into my head to grab up arms, I’d be headed for the nearest international airport.

Having traveled the world extensively, I can say with complete confidence that there are many, many other countries where one can live an exceptional and fulfilling life, even if – or maybe even especially if – you don’t have very much money.

I apologize if this comes across as rambling or disappoints those of you looking only for investment advice, but I think the point is important... the point being that we each have to deal with the realities of where we live, and getting overly heated up serves no real purpose. Sure, join up with your fellows in protesting higher taxes, write your congressman, and make your voice heard – but don't overlook the need to also organize your life in such a way that you generally fly below the radar of the powers-that-be, and so that you can move on to friendlier climes in the unlikely event that becomes a necessity.

Most of all, don't forget to smell the roses.

To quote Robert Friedland speaking at our recent Las Vegas summit, "The situation is hopeless, but it is not serious."

Tax This!

Given that this week encompassed the dastardly date of April 15, I thought at least a passing reference was in order.

To assist in making a reference, I turn to the folks at Reason magazine who have put together a worthwhile short video on the topic, which you can view by clicking here.

Elsewhere, I thought it was interesting to read this week that the governor of Texas publicly pondered the idea of Texans seceding from the union, should the federal government continue its insane tax-and-spend ways. Here's what he had to say on the subject...

"We've got a great union. There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that. But Texas is a very unique place, and we're a pretty independent lot to boot," Perry said Wednesday.
And, of course, as I'm sure you have been reading about, there has been an outbreak of anti-tax "tea parties" around the country.

So there's hope. The situation is hopeless, but not serious.

That’s It for This Week!

Before signing off today, I would like to thank all of you who responded to my solicitation last week for feedback on whether the U.S. should sell "economic citizenships." The views I received were roughly split down the middle, with half in favor of a program that offered citizenship in exchange for a significant investment in U.S. real estate, and the other half dead set against anything that would allow more foreigners into the country. Next week, when I have a bit more time, I'll try to share some of the juicier excerpts from both sides of the argument.

As I sign off just after midday on Friday, April 17, I see that the Dow has stalled out and is flat on the day. Given that today's news includes that Citigroup's earnings were stronger than estimated, as well as the profits earned by GE -- I cannot help but take it as a very bad sign for the stock market that it has not managed to mount a further rally.

Meanwhile, gold has fallen again and is now trading at $868 per ounce. It could go lower, but per above, at this stage in the game, with the longer-term fundamentals for gold firmly in place, its short-term price action is of very little real concern.

Until next week, thank you very much for reading and for subscribing to one or more Casey Research services!

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room – 04/03/2009

David Galland — Fri, 03 Apr 2009 15:00:00 GMT

Dear Readers,

In the March 6, 2009 edition of this missive/blog/column/whatever you want to call it, I listed three "Desperate Measures" the U.S. government might turn to next in its futile attempt to rearrange the ruined economy into something more resembling a perfect world.

Suspend "mark to market" rules. At the time of my initial write-up (which you can read here), highly placed sources within the financial services industry that I spoke to were of the opinion that no significant changes would be made, for the simple reason that to do otherwise would risk destroying what little credibility was left for the financial sector.

As you now know, the government has strong-armed the FASB into modifying the rules, essentially allowing companies to "mark to model." Which simply means that the same financial wizards who helped create the models so pivotal to causing the mess in the first place are now free to dust those models off, give them a little tweak, and use them to fabricate more attractive values for the toxic waste than the market was willing to assign. Some might term these rule changes outrageous, fraud even... I call it business as usual.
Bad bank. The government has moved forward with this initiative as well, essentially rigging up a system that literally guarantees that a very small handful of firms -- likely just four or five -- will receive the sweetheart deal of the century, at the same time that the U.S. taxpayer gets the short end of the stick… right up the side of the head.
Fed buys long-term Treasuries. This, too, has now come to pass and is likely to accelerate. While there are many ways that one could describe this latest initiative, I find it best to keep these things simple... it's called inflation.

Maybe next week, I'll try to come up with some new candidates for desperate measures, but for now I would like to turn my attention to the much-anticipated and widely watched G20 meeting that has just wrapped up in London.

I imagine, because it is such a headliner event, many of you expect me to wax with some vitriol about it, but I fear I must let you down.

Sure, it bothers me that our president traveled to the event with an entourage of 500, including secret service agents, paper carriers, and other lucky sycophants -- all of whom were put up in grand style at taxpayer expense. (By way of comparison, my Portugal-based correspondent General Watson reminded me that when Maggie Thatcher was prime minister, for state visits, she used to travel commercial with a small group of aides. Often times, the other passengers were unaware she was even on the plane. )

This sort of excess is somewhat ironic and maybe even a little hypocritical, given Mr. Obama's derogatory comments about companies flying executives to corporate meetings in places such as Las Vegas, a topic I briefly touched upon last week.

I cannot begin to imagine what sort of costs are involved in transporting all those people -- along with three presidential helicopters and any number of stretch armored limousines -- to Europe, then keeping them in clover for a week... but I suspect it would be more than enough to keep the occupants of a moderately sized city in some third-world country in food for a decade or so.

G20 Meeting, Who Cares?

While I often don't succeed, I try to focus these weekly comments on matters that are actually of some importance -- on a broader scale, and to me personally. With that filter in place, the G20 meeting barely registers a blip.

Sure, there were a lot of fine-sounding speeches by politicians, but since when are those worth the paper they are written on? And yes, they managed to agree in principle to give over $1 trillion to the IMF – a topic I’ll have more to say about in a minute. In addition, they promised to collectively put the shoulder to the wheel in an effort to create a massive, new, global regulatory regime.

Run for cover? Hardly.

On the radio yesterday, I heard an African intellectual bemoaning the fact that the G20, by its numerically limited scope, excluded the representatives -- and therefore bypassed the inputs and opinions -- of over 180 other, lesser nations whose names did not make it onto the invite list.

Now, let me ask you, when it comes to implementing the high-sounding pronouncements that emanated from the G20 meeting, what are the odds that this collection of talk-a-crats will actually be able to come together to the extent required to create a functioning bureaucracy that delivers on its promises at any time in, say, the next 1,000 years?

Which makes the laments of the above-mentioned African intellectual all that more laughable. Can you imagine political junket-goers from 200 countries getting together and accomplishing anything other than drinking the hotel bar dry?

For the source of my skepticism, look no further than the United Nations.

(One thing I do find mildly amusing at gatherings such as the G20 is a circus of professional protesters who flail their thin arms at the rather better-equipped, truncheon-wielding security forces. The source of my humor is that the vast majority of these individuals are there to encourage the representatives of the world's governments -- the very same governments whose names should appropriately be entered into the blank following the question "Who is most responsible for the mess the world is in?" -- to further expand and extend their powers. Memo to protesters: the solution to bad government is not more government.)

The IMF

It seems somewhat ironic that the IMF, which was founded in 1944 as part of the Bretton Woods arrangement, should now be viewed as a possible source of the world's salvation.

In the way of history, its original purpose was to "promote international monetary cooperation," specifically by attempting to maintain fixed exchange rates for the world's many currencies. The idea was that the IMF would step in whenever a country suffered from a temporary deficit in its balance of payments. To help the country avoid having to debase its currency to meet its external obligations, the IMF will provide a short-term loan. These loans came with "strings" attached, in the form of various demands for monetary reform following the Keynesian principles favored by the functionaries of the organization.

According to a briefing paper prepared by the CATO organization for Congress (which they'll never read anyway)...

Read the complete paper here

In addition to spawning a coterie of kleptocrats around the world, the IMF has also failed miserably in its role of managing the global monetary system, witnessed by the persistent inflation the world has suffered since its founding.

(As for the fixed rate system it was supposed to be managing, that came to a sudden halt when the U.S. government closed the window on gold convertibility, a central tenet of the same Bretton Woods agreement that birthed the IMF.)
So what function does the IMF currently serve? Shedding light on that topic is Ken Ewert, writing in The Freemen...

Why then, the widespread support for the IMF? The reason is more straightforward than many of us would like to believe. When governments speak of the need for "increased economic coordination," what they mean is that governments around the world want to better synchronize their inflationary monetary policies. Inflation is politically expedient for every government in our age. It temporarily stimulates economic activity and in so doing buys considerable political favor. Only later when the unpleasant effects appear -- rising prices, economic dis-coordination, consumed capital, and unemployment -- does the inflation become a political liability. The illusive goal pursued by governments around the world is to reap the political benefits of inflation without paying its subsequent costs.
Even so, perhaps out of sheer frustration or even spite, the Chinese, Russians, and any number of other nations are now openly discussing the idea that the IMF should be given both the resources and the responsibilities to create a new international monetary regime that would serve to demote the U.S. dollar to just another currency, albeit a still very important one.

Ed. Note

The G20 moves the world a step closer to a global currency

Read it here.

Many observers assume the Chinese are bluffing when they raise the topic of pushing the U.S. dollar aside as the world's reserve currency... or that these comments were otherwise cooked up in a Beijing political meeting to give the Obama administration pause in its headlong rush to debase of the U.S. dollar.

Those assumptions could prove wrong -- the Chinese may be sincere in their calls for a new monetary regime. I say that after reading a paper written by Zhou Xiaochuan, governor of the People's Bank of China, titled "Reform International Monetary System. ”

I highly recommend that you at least give the article a quick scan, because it shows that Zhou has a clear understanding of the various monetary systems and a clear preference for currency that is "anchored to a stable benchmark and issued according to a clear set of rules." He goes on to take a direct shot at the world’s fiat monetary system, saying, correctly, "The acceptance of credit-based national currencies as a major international reserve currencies, as is the case in the current system, is a rare special case in history."

Read his essay by clicking the link here.

As per above, I am completely confident that despite China's wishes, the world's leading governments won't be able to get out of their own way long enough to produce a new monetary system -- let alone one that is based on something other than political hot air. That leaves the door open for a single country to decide to break the mould by backing its currency with gold or some other basket of tangibles. That, of course, we shall watch for with some anticipation.

Before leaving this subject, I thought I'd share the contents of a message that our own Bud Conrad sent across this morning on the topic of China and the beefed-up IMF Special Drawing Rights...

The IMF's Gold

Those among you who find gold to be an attractive asset, which I suspect is most, are well aware that this week the IMF announced that it was likely to sell off 400 or so tons of gold in order to continue supporting the borrowing habits of its regular clientele.

While these special sales have been threatened in the past, this time around it looks like it might actually happen. While the idea of the sale might spook the gold markets for a bit, the actual event is likely to have little if any lasting effect… other than continuing to hollow out the IMF.

That's because the odds are very high that the gold will never actually make it onto the market, but instead will trade hands in an off-market transaction between the IMF and the Chinese or some other nation looking for the earliest opportunity to trade its much abused paper dollars for something of tangible value.

At this writing, of China's $2 trillion in reserves, only about 1% is held in gold. There has been credible talk of them boosting that percentage to as much as 10%.

At $900 per ounce, the math looks something like this…

At 32,000 ounces per ton, 400 tons equals 12,800,000 ounces. Multiplied by $900, we arrive at a total value of the intended IMF sale of $11.5 billion.

Ready to be deployed against that amount is as much as another 9% of China's $2 trillion reserves -- which adds up to $180 billion. And that's just China. Of course, there are any number of other countries sitting on piles of U.S. dollars and viewing the outlook for those dollars in fairly negative terms.

So, sure, the notion of a big IMF gold sale might spook the gold market a bit… but in the final analysis, it will amount to less than a hill of beans.

The Closing Door

Speaking selfishly, a human trait I won't apologize for, the headlong rush of global governments to debase their currencies might be viewed as something of a positive. That's because, being aware of it, we can take steps to arrange our investments in such a way that we should be able to profit from it.

Unfortunately, the currency debasement is only one of many actions we can anticipate that governments will take going forward. Because as they set about destroying their currencies, they’ll simultaneously be looking to raise revenue elsewhere -- specifically by squeezing the productive segments of society out of whatever money they can. But of course, until they actually put up The Wall, most people of means, in most countries, are still free to pick up their bags and move to climes where their capital is better treated.

Understanding that, one of the major initiatives that came out of the G20 soirée just ended was a rededication by the world's bureaucrats to tighten the vise on any country deemed to be overly capital-friendly. Doug Casey, who has long anticipated these developments, has warned that time is running short for U.S. citizens in particular to diversify globally.

Specifically, the gang of 20 announced they were going to use a list just published by the Organization for Economic Cooperation and Development to aggressively go after "tax havens." Regrettably, that list includes names such as Costa Rica and Uruguay, places that we know many of our subscribers have an interest in.

The implications of these moves on personal freedom are not to be sniffed at. While the G20 countries may lack the organizational skills to create a functional new monetary system or widespread regulatory regime, it is a fairly easy matter to apply financial pressures on “errant” countries. They have a lot of experience in that regard. And so, to quote the G20 communiqué on the subject, "We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over."

Few nations can stand up to the pressure of global sanctions, and so many if not most of those nations are likely to roll over. The only way to stave off this latest assault on the free flow of money would be if there were an eruption of a widespread public outcry, complete with rampaging mobs and a liberal throwing of rocks. But as you and I both know, that’s not going to happen.

Some of you may think that I am making much ado about nothing, but I believe it's important to view these sorts of developments not based upon the world as it now is… but rather as it could be.

That exercise is usually helped by taking a quick glimpse in the rearview mirror. And, looking back over history, you can find any number of examples where despots have taken control of governments and engaged in the wholesale confiscation of private property, either overtly or through determined inflation.

Up to this point in time, with some limitations, a person could always take some comfort in the idea that -- should push come to shove -- they will be able to escape to another jurisdiction with enough wealth to start over again.

In the brave new world we are headed for, that simply may not be possible.

As something of an experiment, I recently walked into a bank in Uruguay and asked for the papers required to open an account (one, I can assure you, that I would have fully disclosed), but was told in an apologetic tone by the bank manager that they would not accept accounts from Americans.

The door is closing, the noose tightening.

Letters from You

David again... as JK's email confirms, while there has been a huge pick-up in the interest in gold compared to even a couple of years ago, we are nowhere near the mania phase. In fact, if you step back and look at the situation dispassionately, you’ll note that gold has remained strong not because of but in spite of the current economic environment. An environment that includes, of late, a clear deflationary trend pretty much across the board in the commodity sector.

All of which is to say that once the environment for gold begins to change for the better and the consequences of today’s inflation begin to be widely felt, then and only then will gold really begin to move. In the interim, we can expect gold to fluctuate, which – for those of us who are comfortable getting positioned now, ahead of the crowd – simply means additional buying opportunities.

Miscellany

I'm sure the orphan will thank them later. It’s good to know that the poor orphans are safe from the horror of being adopted by zillionaire rock stars. Thanks in no small part to human rights groups, led by the Human Rights Consultative Committee, a coalition of 85 groups that apparently have nothing else to do with their time and their donors’ money, the Malawian government turned down Madonna’s request to adopt a second orphan from that country. Why should they oppose this adoption? Easy, it was out of heartfelt concern that the impoverished orphan might enjoy a better life than they. (Click here for more)
Kick them when they're down. This item also got my attention this week... “March 31 (Bloomberg) -- A Senate panel approved new restrictions on credit-card interest rates that are broader than those adopted by the Federal Reserve in December, brushing aside objections from Republicans and the banking industry.

“…The bill, known as the ‘credit card bill of rights,’ also would require the signature of a parent for a borrower under age 21, unless there’s proof of independent income or completion of a financial education course.”

So, let me get this straight. First the government bails out the banks, then promptly handcuffs them in their ability to price for the elevated risk of credit card loan losses, assuring that the money provided them will soon get flushed down a rat hole. Or, more likely, they’ll just stop offering credit. But wait -- isn’t that the very problem the government is trying to fix?

Now, I'm no fan of many of the practices of credit card companies, but I'm even less of a fan of the government establishing what is essentially price controls on the credit industry, with an added dose of nanny state thrown in via the requirement that adults – and anyone over the age of 18 is certainly an adult – must first take a course in finance prior to being allowed to get a credit card.

Do I think that adults will benefit from taking courses in finance? Of course. Do I think that they should be forced to it? Absolutely not. What's next, mandatory courses in parenting before being allowed to have a child?
Soup lines. Many commentators have observed that all that the current financial crisis is missing now is the sight of soup lines around the blocks of our cities. Actually, there's a reason these haven’t yet appeared. Namely that, thanks to the innovation of food stamps, the inconvenience of a soup line is no longer necessary. And at this point, according to a report just released by the Agriculture Department, fully 10% of Americans are now relying on food stamps for some portion of their daily bread. That is roughly 32,000,000 people – a very long line, indeed.

And on that unhappy note, I must sign off. As I do, a quick glance at the screens tells me that the S&P 500 is flat, taking a breather after the strong gains of last couple days. Given the onslaught of continued bad news, including the latest, poor unemployment numbers, the stock market should be in a freefall at this point.

And it probably would be if it hadn’t been buoyed up by the change in the "mark to market" rules that will soon usher in a new era of obfuscation and outright deceit. Those changes will also serve to extend the current downturn, for the simple reason that they postpone the value discovery process that ultimately must occur in order for some semblance of confidence to return to investment markets.

In the history books, I suspect that the best they'll be able to say about these rule changes will be "it seemed like a good idea at the time."

Meanwhile, I note that gold is below the $900 level for the first time in a while. I'd be very surprised to see a drop to below $850 anytime soon, and maybe never. If it were to happen, however, I’d be just one of many on the phone to the bullion dealer.

Until next week, thank you for reading and for subscribing to a Casey Research publication.

Sincerely,

David Galland
Managing Director
Casey Research

The Room – 03/20/2009

David Galland — Sat, 21 Mar 2009 03:36:00 GMT

Dear Reader,

I worry I shall disappoint you today. After all, how can mere words, pecked out awkwardly on a shaky airplane table, adequately communicate all that has occurred this week?

As regular readers may guess, the plane I am on is taking me to Las Vegas for our sold-out Crisis & Opportunity Summit. While the event was deliberately scheduled to give the Obama administration an opportunity to reveal its cards after having been handed Bush's busted hand, the timing has turned out to be especially propitious, coming as it is at the end of a week that seems to be of some historic significance.

Of course, we wish you were joining us here in Las Vegas -- if you aren't -- but as your correspondent, I will certainly include notes from the event in next week's missive. But that is then, and this is now.

And now, everything is going to hell.

Bernanke's Gamble

Last week I posed the rhetorical question, "Wen is Enough?" in which I mused about the possibility of the Chinese cashing in their dollar chips and turning inward with their investing. Analysts of every stripe pooh-pooh that idea, intoning that the Chinese are now stuck with their dollar reserves, and that, further, the U.S. Treasury market is the only one with sufficient liquidity and safety to meet the needs of cash-rich foreigners.

This week we saw two developments related to this story.

The first was the Treasury International Capital (TIC) report. It is data released by the U.S. Treasury on international purchases and sales of U.S. assets. When foreigners are purring contently, the TIC report confirms that foreign investors are buying up U.S. assets, particularly long-dated Treasuries, as those represent a long-term bet on the U.S. economy and, by extension, the dollar.

Conversely, when foreigners are unsure about the outlook for the U.S., the TIC reflects this by confirming a sell-off of U.S. assets, coupled with a shift in what Treasury buying there is from the more optimistic long-term end of the time scale, to the skittish "ready-to-bolt" short-term end.

Which brings us to the just released January TIC, which was, to use the word selected by one reliable observer, a "disaster."

Our own Bud Conrad, writing with one wing (the other being smashed up in his rather spectacular bicycle accident last week), provides the big picture.

Here are some of the highlights:

1) January saw $148 billion net capital outflows from U.S. securities.

2) These big capital outflows are hard to square with the dollar's January rally.

3) Both private and official investors sold long-term U.S. assets. Aside from December, foreign investors haven't been buying long-term U.S. assets since the crisis began.

4) U.S. investors bought a bunch of foreign bonds. U.S. investors have been selling off foreign bonds and equities throughout the fall, so this marks an interest change. Is it evidence of nervousness about the dollar's future?

5) Banks stopped piling into U.S. assets.

6) Private investors reduced their Treasury bill holdings by $44 billion, and banks reduced their net dollar deposits by $119 billion.

Conclusion: The substantial selling of U.S. securities shows growing concerns about U.S. economic prospects. It is not a good sign for the dollar.

David again.

One of the interesting aspects of the January TIC was the wholesale exit from U.S. agency paper, shown in the chart here.

Given that these agency securities (paper issued by Fannie, Freddie, and others) are for all intents and purposes guaranteed by the U.S. government, the sell-off of these assets is a clear signal that Wen Jiabao and other foreign creditors are now doing more than just talking about their concern over the creditworthiness of the world's largest debtor... they are taking action. Specifically, eschewing agency debt instruments and putting what money they still invest in Treasuries into the short-term stuff that can be dumped in a proverbial heartbeat.

Which brings us to our second story.

As we have previously discussed here and in other Casey Research publications, the dismal January TIC numbers confirm that the foreign buyers so essential to financing the U.S. government's elevated spending needs are falling well short of fulfilling those needs. Couple this with what has to be a sharp fall-off in tax revenues, and the government begins to find itself not just between a rock and a hard place, but between the jaws of a Maxpower Industrial Grade Locking Vise Grip.

And so, this week, the Fed announced it was going to whip up a large batch of fresh cash for the purpose of buying the agency securities and even long-term Treasury bills that no one wants.

Here's a quote from Bloomberg on the baseline story...

March 18 (Bloomberg) -- The Federal Reserve said it will buy $300 billion in Treasury securities and increase its purchases of mortgage and agency debt in an effort to bolster housing and hasten the end of the recession.

"To provide greater support to mortgage lending and housing markets, the committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage- backed securities," the Federal Open Market Committee said in a statement in Washington today. "Moreover, to help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."

Chairman Ben S. Bernanke is becoming more aggressive after unemployment climbed to 8.1 percent and economists forecast the economy will shrink through the middle of the year. Fed officials also kept the benchmark interest rate at between zero and 0.25 percent. The central bank also said it will consider expanding the Term Asset-Backed Securities Loan Facility to include "other financial assets," the statement said.

Altogether, this latest explosion in money creation comes to $1.2 trillion -- somewhat more than the Chinese now hold in U.S. dollar-denominated reserves, reserves that have been built up by years of heavy trade and regular (self-serving) investment in support of the U.S. government's endless spending.

And, with the flip of a proverbial switch, the Fed has diluted the dollars that make up those reserves with another cool $1.2 trillion infusion of funny money.

So much for President Obama's strong assurances last week to Wen Jiabao that the U.S. government can be counted on to be a careful shepherd of the dollar.

The dollar failed to concur with Obama's assurances by staging a sharp sell-off and, in the process, sending our favorite yellow metal up handsomely.

And the government isn't done yet.

Earlier this week, we also heard that the Treasury was considering using the Term Asset-Backed Loan Facility (TALF) program to lend up to $1 trillion to their buddies – I mean highly respected financial firms – to buy up a variety of discounted, albeit troubled assets, sweetening the deal up by making the loans "non-recourse." Simply translated, that means "can't lose."

Back in the good old days, these sorts of deals traditionally involved paper bags stuffed with unmarked bills... but that was much more inconvenient. Again, turning to Bloomberg...

As it's currently set up, the TALF may lend as much as $1 trillion to investors from hedge funds to pension funds and insurance companies to buy recently created securities backed by loans for car purchases, college education and real estate. Applications for its first loans are due tomorrow.

Broadening the TALF to include older, illiquid and lower- rated securities could allow the participants in the public-private investment funds to potentially repackage assets and sell them on to a wider group.

So, what does this all mean? Simply that the government is literally willing to do "whatever it takes" in its attempt to return the country to its bubble days, a notion that any sane observer would instantly recognize as a delusional fantasy. But hard reality and vote-getting often don't get along, and so instead we get a government on the determined path of least resistance... unleashing an ever-escalating airlift of dollars.

Sharp Words

And now I feel the need to express thoughts that might strike some as a little "sharp."

This morning, as I was driving to grab a pre-flight coffee, I heard an ad for a local car dealer promoting that – thanks to one of the federal government's many new programs – by purchasing a new car in 2009, you are able to deduct the state and local taxes you would otherwise pay come tax time. This, according to the announcer, would save you $1,500 on a $25,000 purchase. And this, they say, was just one of a number of new federal programs they could help you use to save money on your new car purchase.

For reasons that only a neurologist (or maybe a psychiatrist) could fathom, despite having heard a litany of bailout and stimulus news over the last year, this proved to be the final straw, and instead of just shaking my head in dull resignation, I felt anger.

Sitting with a friend over my coffee a few minutes later, I tried to put the source of my agitation into words. The conversation picks up after I explained to him the message of the commercial.

He: "Dude, I hear ya, and I hate all this stuff, but it's necessary."

I: "Why is it necessary? Who is going to pay the $1,500 that the government doesn't have in the first place? This and all the stimulus programs are just putting the country further and further into debt. And who's going to pay for that debt? Not us, but our children and their children. Sure, we're going to get stuck for more taxes now, but there is no way the Obama administration can cover all this new spending with taxes, and the foreigners aren't going to keep lending to us. So, it comes down to borrowing more and more, beggaring future generations."

"Hey, it wasn't Obama who got us into this mess, man."

"No, it wasn't, and I'm not saying it was. It was Bush and the entire Congress, with some of them, like Barney Frank, more responsible than others. But it's Obama's ball now, and he's calling the shots. And as much as I want to give him the benefit of the doubt, I can't believe what he's doing."

"Well, he's got to do something, man, otherwise the economy would crash and everyone would suffer even more pain."

"Exactly!" I said, maybe even sputtering a bit, "But it is our generation that should take the hit. It is us who should feel the pain of the collapse. We did it to ourselves by standing idly by while the government and its many friends in the banking sector got us into this mess. And don't forget the orgy of spending and personal debt that the population engaged in, encouraged every step of the way by the government's easy-money policies. This all happened on our watch, but instead of taking our medicine, we the people are now encouraging the government in its many efforts to reinflate the bubble, fully aware all we are really doing is trying to shift the mess onto the backs of our children, and their children, and probably their children's children. What a bunch of cowards we are."

(That, of course, is not a perfect recounting of our conversation... I'm pretty sure I interjected one and maybe two "rat bastards" into my diatribe.)

You can call all of this quantitative easing if you wish; I call it institutionalized cowardice walking hand in glove with mob psychology.

Or you can call it "change."

If, however, I were the Chinese, I would call it "enough" and accelerate my plans to swap my dollars for just about any tangible asset at this point. There's no reason for them to stick around to share the pain we have all but guaranteed our children.

Protectionism

While there is a fair amount of debate about the causes of the Great Depression of the 1930s, there is one lesson from that dire circumstance that pretty much everyone agrees on: that the global trade war set off by the U.S. with the Smoot-Hawley Act and its many tariffs only made things significantly worse and helped prolong the depression. Further, everyone agrees that the world, faced with an economic crisis such as that now unfolding, would never make that mistake again.

But then the U.S. government went ahead anyway and slapped our trading partners in the face by including the Buy American provision in the recently passed stimulus package.

Those trading partners are starting to slap back.

First, Mexico announced this week that they would, henceforth, be foisting tariffs on a wide array of U.S.-made products... this in retaliation to the entirely disingenuous refusal by the U.S. government to live up to the terms in the NAFTA agreement whereby Mexican trucks would be allowed to drive on U.S. highways.

"Unsafe!" say the unions and their government backers, supported, oddly, by outraged talk show hosts of a more conservative leaning, whose normal free-market instincts are apparently trumped by xenophobia.

For the record, Mexico is the United States' third largest trading partner, behind Canada and China. Even so, we all know in our heart of hearts that the Mexicans are really just looking for an excuse to smuggle drugs and illegal aliens across the border, so the hell with them! If they want a trade war, bring it on!

Then there are the Chinese, who this week decided to institute a new "Buy Chinese" clause, at least as far as Coca-Cola buying a controlling interest in a successful Chinese juice company is concerned.

Regardless of how this stuff gets started, once it does, it can very quickly snowball, with national sensitivities getting hurt and exporters on both sides of the disputes being the ones taking it in the neck.

Too bad no one in government is actually involved in an export or import business, or any business at all, for that matter. Because then they might understand that these actions have real consequences, today, just as they did in the 1930s.

Now, don't get me wrong. I am not so naïve to think that our trading partners don't try to gain the system in order to help their export companies succeed in U.S. markets. But I am not so blindly nationalistic that I think we don't try to do exactly the same thing.

Even so, for better or worse, thanks to its past success, the U.S. serves as a role model for the rest of the world and, in that regard, is held up to a higher standard. That we are willing to overtly move toward protectionism, whether by reneging on elements of NAFTA or through the Buy American provision, risks setting off a chain reaction of protectionism. Just as did Smoot-Hawley.

But we'd never make that mistake again, right?

Evil Capitalist Polluters!

Despite the quickly mounting deficits caused by stimulus money flying here and there like a St. Patrick's Day snow flurry, the new administration remains fully committed to tackling the all-important topic of global warming.

In fact, if current plans come to fruition, crisis or not, Team Obama may require the evil capitalists that run the few remaining manufacturing concerns to spend up to $2 trillion on "cap and trade" credits.

An excerpt from the Washington Times on the topic...

President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House. A top economic aide to Mr. Obama told a group of Senate staffers last month that the president's climate-change plan would surely raise more than the $646 billion over eight years the White House had estimated publicly, according to multiple a number of staffers who attended the briefing Feb. 26.

"We all looked at each other like, ‘Wow, that's a big number,'" said a top Republican staffer who attended the meeting along with between 50 and 60 other Democratic and Republican congressional aides. The plan seeks to reduce pollution by setting a limit on carbon emissions and allowing businesses and groups to buy allowances, although exact details have not been released.

At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015. A White House official did not confirm the large estimate, saying only that Obama aides previously had noted that the $646 billion estimate was "conservative."

"Any revenues in excess of the estimate would be rebated to vulnerable consumers, communities and businesses," the official said. The Obama administration has proposed using the majority of the money generated from a cap-and-trade plan to pay for its middle-class tax cuts, while using about $120 billion to invest in renewable-energy projects.

Mr. Obama and congressional Democratic leaders have made passing a climate-change bill a top priority. But Republican leaders and moderate to conservative Democrats have cautioned against levying increased fees on businesses while the economy is still faltering. House Republican leaders blasted the costs in the new estimate. "The last thing we need is a massive tax increase in a recession, but reportedly that's what the White House is offering: up to $1.9 trillion in tax hikes on every single American who drives a car, turns on a light switch or buys a product made in the United States," said Michael Steel, a spokesman for House Minority Leader John A. Boehner. "And since this energy tax won't affect manufacturers in Mexico, India and China, it will do nothing but drive American jobs overseas."

Now, of course, the Washington Times heavily skews Republican and so can be counted on to point dramatically at every Obama misstep, but the fact that anyone is even thinking about foisting another bureaucracy -- and a massive new tax regime -- on struggling businesses is, in my view, just plain insane. And for the record, while businesses do go out of business, they don't pay taxes... that burden falls only to consumers, who ultimately get passed the tab.

Even so, at the rate things are going, by the time the full force of the new taxes are felt in a couple of years, the $650 billion, or $2 trillion -- whichever the number turns out to be -- may amount only to roughly enough in inflation-adjusted dollars to buy a Big Mac, hopefully with fries and a shake.

The Coming Credit Crisis

Oh, you thought we've already had our credit crisis? Sorry, so far we've only seen the first act. As for what's next, this came to me this week from a trusted correspondent who works in the consumer credit arena. It's from the Herald News...

There is a common perception in America that most of us live beyond our means with credit cards financing the party. However, the newly released Federal Reserve Board's Survey of Consumer Finances for 2007 tells a different story. According to their results, it's easy to see that the middle class has been steadily increasing its consumer debt in order to keep up with inflation.

An easy translation of that is the average Joe is using his Visa card to pay the light bill and keep his family fed. He's not partying, but trying to find a way to live from day to day. That news has real repercussions for what the next rollout of bad news and blow to our already battered confidence in the economy is most likely going to be.

The Fed's survey, which is taken from a carefully selected cross-section of 4,500 consumers, shows that since the last reading in 2004, median family incomes dropped slightly for middle income Americans, particularly those headed by a single parent. Average incomes for the wealthiest 10 percent rose substantially, by 8.5 percent.

The mean amount of credit card debt being carried by individuals rose 25 percent, from $3,000 to $7,300, a much faster rate of increase than in previous years. That doesn't sound significant enough until all the pieces start to come together.

The survey noted that the majority of the credit card debt has shifted from stand-alone companies, such as Capital One, to 87.1 percent being held by commercial banks. Those are the very same banks the feds have been working with to ferret out poisonous mortgage debt. Commercial banks that are doing well also made the same decision to not lend short-term consumer debt in large quantities to high-risk people. That means that the debt that is most likely to go unpaid is sitting with the same banks that are already in trouble.

Also, most consumers in the middle income category reported they were saving less than 1 percent, which makes sense if it's already taking a credit card to pay for the basics of life.

So the picture that's forming is an average voter who has a family to support but fewer real dollars in order to accomplish the feat and vital credit sources that have quickly disappeared except for the bill, with no monetary reserve to get through a tight year.

Add on top of that the climbing unemployment rate of this very same group.

It becomes easy to see the very real likelihood that a lot of the retail debt now held by weakened commercial banks will go unpaid. Consumers will choose paying for pretty much anything else before catching up the credit card debt when there isn't enough to cover all of the essentials. A damaged credit report will stop being seen as enough incentive if there's a risk of foreclosure on the house or the phone being disconnected.

Banks will start to make hard decisions about covering the debt owed to the retailers who accepted in good faith the bank-generated credit card. It all starts to roll downhill again.

What's astounding, given that the survey is generated by the feds, is how little Bernanke and his crowd are talking about the coming tidal wave. It can't be that we're still practicing the idea that if we look away long enough it won't all fall apart, yet again.

Fannie Mae, AIG, WaMu and Lehman were apparently not a big enough lesson. One of the more galling aspects is that right now there is not only no significant consumer loan modification being offered in this category but instead, banks are trying to generate bottom line income by charging fees of 25 percent based on a consumer's balance. There was a time when that was called usury in the United States. It starts to beg the question of what real differences exist anymore between the dreaded payday loan and some of the bank-issued credit cards.

It's also possible to conceive that consumers are now paying down debt that consists more of fees owed than actual retail debt. That's where we are at the moment.

If nothing is done, voters can rightfully say that, once again, big business and another pending bailout of some titan of industry on the taxpayer dollar mattered more. After all, the Federal Reserve was the one who gathered the necessary information and then stuck it in a drawer.

David again. In previous financial crises, credit card defaults were the first sign of trouble... this time around, it has largely been mortgages. That's because so many people were so far over their head with their upside-down mortgages and the sheer burden of homeownership that they knew trying to stay in the house, in many cases bought as speculations, was a non-starter. And so, instead they let the mortgages go in record numbers, while hanging on to their lifeline – the credit cards.

That the credit crisis is now intensifying into credit cards is, and should be, deeply concerning. As bad as credit card defaults have gotten, they are getting worse. In fact, this week the news came out that, in February, credit card defaults rose to a 20-year high. Amex and Citigroup (of which you, if you are a U.S. citizen, are now a proud owner) are particularly hard hit, with net charge-off rates rising to 8.7% and 9.6%, respectively.

Now, it is not my role in this world to be a bearer of bad news but rather to make sure that you are fully in the picture. And that picture at this moment is fairly bleak. Okay, it's downright dark. So don't make the mistake of thinking that the worst is behind us... it's not.

That said, the stimulus will almost certainly have some effect once it starts to hit into the economy. But the effect will be short lived and should be treated like a lit firecracker. Kind of exciting with the fuse fizzing away, but hold on too long and the result will be very painful.

"AIG Scum Out of Town!"

That was the epitaph scrawled into the dust-encrusted rear window of an SUV stopped in front of me here in the town that serves as world headquarters of Casey Research. A town that also happens to be the location of a prominent resort built with AIG money.

This sort of outrage over the AIG bonuses was underscored by the CNN reportage I was forced to watch on the large flat-screen TV stuck on the wall in front of the exercise equipment down at the local gym. (I don't have cable at home, and never intend on getting it.)

According to CNN, the citizenry and its elected officials are up in arms because AIG lived up to contractual agreements to pay the executives who continued to work at the firm rather than deserting the sinking ship to look for more permanent employment elsewhere (and, yes, a number of those who got bonuses were helpful in the actual company-sinking).

As I am on a plane, I can't yet say whether or not the government has followed up on its threat to pass legislation, retroactive no less, levying a 90% tax on the bonus recipients, but it won't surprise me if it does.

I'll come back to that momentarily, but am going to juxtapose that story with a second story that caught my attention while attempting to whip my body into shape. The story started with CNN's cameras showing a large ballroom filled beyond capacity with bureaucrats and contractors who were lined up literally down the hallway to get and complete the paperwork needed to get their share of the stimulus funds now being made available. The only catch, according to one interviewee, was that the projects for which they sought free money had to be "shovel ready" -- meaning the recipients had to begin spending the money they received this year. Thus, the ballroom seemed to have the same sort of frenetic energy one might attribute to a mosh pit, with the recipient hopefuls jostling elbow to elbow while clamoring for their share of the quick cash.

Doing my best to test your levels of concentration, I now return to the AIG story. Given that the government provided AIG with over 150 billion dollars in bailout funds, it is a safe assumption that the powers-that-be felt such a massive bailout was necessary. In fact, according to officialdom, it was critical because, should the company fail, it would lead to a real global catastrophe.

Is it too much of a stretch, therefore, to think that the government might actually want the company to succeed in working its way out of the trillions in CDS and other problem derivatives linked to the company? Or that, to accomplish that goal, the company might need to attract or retain executives with a certain skill set?

Now, it is not my intention to be a cheerleader for the morons that brought AIG to its knees in the first place, and I was very much against the bailout in the first place. Rather, I am simply trying to follow some sort of basic logic related to these bonuses.

And it doesn't seem illogical to spend $165 million in bonuses if that raises the odds of recouping a return on the $150 billion already dropped into the company and, more importantly, the hundreds of billions of more potential losses lurking in the AIG closet. (Remember, thanks to the misguided bailout, the government has put you, the taxpayer, in the position of owning 80% of AIG... and virtually all of any further losses they incur.)

So, as distasteful as the whole mess is, I can find some small rationale for the AIG bonuses.

But how, as a taxpayer, am I to rationalize the ballroom full of bureaucrats and their friendly contractor friends, each clamoring for a million here or a million there to fill in some pot holes, build a new bridge, or a knock together a new community center? Why are these things necessary, now of all times, with the country already struggling like Atlas with a groin pull under a world of debt?

The answer, simply, is because the administration believes that this grand experiment will somehow produce an economic miracle, magically reinflating a bubble that easy money and massive spending created in the first place. And Congress, in all its wisdom, and only after great study and deliberation, signed off on the stimulus, just as they did with the Iraq war and the Patriot Act.

Sure the AIG bailout was an outrage, and the bonus money is just an extension of that initial outrage... but so is the stimulus spend-a-thon.

As is the notion that Congress would even consider using tax policy – pay up or go to jail, to be specific – as a punitive measure. By the time this plane lands, I hope against hope that the bill has failed... because if it hasn't, then the government will have discovered a new tool for its large and growing arsenal of coercive powers. While we can't know whom they will turn it against next, you can be assured that, in time, they will.

The sponsor of the bill to use taxes as punishment was Congressman Steve Israel (D-Huntington), who grandly stated upon announcing the legislation...

"American families shouldn't be forced to reward these professional financial failures with extravagant bonuses that could buy fancy cars and yachts," Israel said in a statement. "AIG may not like it, but since they had to come to the federal government for help, the federal government now has a say in how they spend taxpayer money."

I wonder what Rep. Israel would say if someone proposed a bill to tax 90% of the salary of the "professional financial failures" who have led our country into a depression, and who are now throwing taxpayer money around in the trillions, beggaring the populace for generations to come?

[Okay, I am now in Las Vegas and, sure enough, they passed the legislation. Whether you think that AIG or other bailout bonus recipients are greedy and deserve punishment or not, the horrible precedent of punitive taxation aimed at a select group of citizens has now been established.

And there is something else that I heard this morning that is as concerning. It was an overt death threat by New York's Attorney General Cuomo, who has managed to extort the names of all of the employees of Merrill Lynch who, under the terms of their employment contracts, received bonuses over the last year. The company has asked Cuomo not to make those names public over fear for the safety of their employees in this overheated atmosphere. To which Cuomo has replied that he will hold off for a bit, but only to see which employees return the bonuses so he can strike their names off the list. In other words, return your bonuses or else suffer the potentially dire consequences.

We are deep in uncharted water, and it is only going to get deeper from here.]

It Just Doesn't End

Another thing that I just have to comment on this week is that the IMF is seriously considering joining the money-printing game, pumping out Special Drawing Rights that countries around the world can use as money.

As my plane is beginning to descend, and writing about this stuff is beginning to weigh on my good temper, I will leave it to the Telegraph to fill out the story...

The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.

Alistair Darling and senior figures in the US Treasury have been encouraging the Fund to issue hundreds of billions of dollars worth of so-called Special Drawing Rights in the coming months as part of its campaign to prevent the recession from turning into a global depression.

Should the move, which is up for discussion by the summit of G20 finance ministers this weekend, be adopted, it will represent a global equivalent of the Bank of England's plan to pump extra cash into the UK economy.

http://www.telegraph.co.uk/

If the U.S. dollar manages to come through this crisis and retain its status as the world's reserve currency, I will be very surprised. Maybe, just maybe, whatever is next will be backed by something more tangible than political promises. But that's just a pipe dream.

Miscellany

Inflation? What Inflation? Regular readers may remember that last month the inflation numbers came in significantly higher than expected. "A fluke," we were assured. But this week, the CPI from February was released, showing that once again the CPI was up 0.4%, an increase over the 0.3% the prior month. And the highest inflation reading since last July.

Another anomaly, we are told, caused because gasoline unexpectedly spiked over 8% for the month... but increases were seen in a broad range of other items, including clothes, of all things. Could it be that the China discount, another topic we have mentioned in the past, is starting to fade away right along with our foreign trade? When you consider, as does Jeff Clark in the current edition of BIG GOLD, how strong gold has been over the last year, in the face of a strong dollar and a general absence of inflation – can you imagine how strong it will get when the reverse is true?

How high could gold go? A lot higher than you might think. To read the current edition of BIG GOLD and find out, risk-free, click this link. The current edition also includes the latest and most comprehensive article I have ever seen on whether the GLD ETF is actually safe... essential reading.
Videos? I know this is oldish news, but I think I have finally figured out why President Obama gave Gordon Brown a 12-pack of DVDs as his symbolic gift of friendship when Brown came calling at the White House in one of the first state visits of the Obama administration.

It struck me that the gift was analogous to the time I forgot to get my wife a birthday present and had to hightail it down to a local spa to buy a day pass complete with relaxing herbal wrappings and a massage. In this case, I'm pretty sure that as Gordon Brown was walking up the front steps, someone slapped a forehead and said something to the effect of, "Oh, crap... we forgot the present. Quick, didn't Bush leave behind some DVDs?"

I just wish I could have been there to see the expression on Brown's face, or heard what he had to say when he got back to his room.
Got Gold? If Not, in Zimbabwe You Starve. This is not a funny story. Rather, it is a video showing how the only thing now standing between many in Zimbabwe and starvation is their ability to pan for gold. There are parts that are hard to watch, but the message – that even in the most dire of situations, gold is still used as money – is a worthwhile one. You can watch the video here.
Tea Party. There are increasing signs, overseas and in the U.S., that we are entering a new phase of social unrest. In Cincinnati, a group of citizens outraged over the stimulus staged a tea party. Expect more.
Casey Phyles Updates and Info.

The next SoCal Phyle meeting will take place Saturday, March 28, 2009 from 1:30pm - 5:00pm (or so) at the Baja Cantina, 311 Washington Blvd., Marina Del Rey, CA 90292 http://www.bajacantinavenice.com.

The next Calgary Phyle meeting will be held Tuesday, April 7, at 7:00pmatCadence Coffee, 6407 Bowness Road NW, Calgary, Alberta http://www.cadencecoffee.com/main.html (All inquiries regarding the Calgary Phyle can be directed to calgaryphyle@yahoo.ca )

People looking to start a group: Daniel in the Lapeer, Yale, Port Huron, MI region. Homer in Winter Park, FL.

And that, dear readers, is it for this week. I am sorry for having gone on so long. Believe it or not, I actually cut out about five pages of notes on other topics I wanted to discuss this week. But for now, I must sign off and turn my attention to the Summit, which starts later today.

As I sign off, I see that the U.S. stock market is down modestly (the DJIA is off 33 points) and gold is hanging tough around $960. I wonder what the government will do next if the stock market takes another big dive from here? I suspect we won't have long to wait to find out.

Until next week, thanks for putting up with my ramblings... and for subscribing to a Casey Research publication.

David Galland
Managing Director
Casey Research, LLC.

The Room – 03/16/2009

David Galland — Mon, 16 Mar 2009 17:55:42 GMT

Dear Reader,

This week I tripped over an old musical favorite, I'm Your Captain, by Grand Funk Railroad, which is what I'm listening to as I begin this weekly missive.

While the song has a little rust on it, for those of you who haven't taken a ride on Grand Funk Railroad of late, it's a nice enough trip. You can listen to it here.

Now, on to what seems important this week.

Citi-Mae

This week Vikram Pandit, the CEO of Citigroup, a bank that has managed to lose $38 billion over the last five quarters, sent around an internal memorandum in which he said he was "encouraged" by the company's performance so far in 2009.

This fig leaf was enough to light the fuse to a pretty decent rally in U.S. stocks.

Looking at the Citigroup stock chart over the last three years, I have a hard time believing that there is anything left to be discouraged about.

The government's efforts to keep the mega-bank afloat to date have been nothing short of herculean, with infusions of over $45 billion in new capital. As important, the Treasury and its many agencies have agreed to cover losses from over $300 billion in toxic paper held by Citi. (With the new TALF plan, they can go much, much higher than that, if required.)

With that sort of support, it is safe to assume that the bank has been chosen by Team Obama to survive... though in a form that may be less than satisfying to existing shareholders.

Several things jump off the page when reading the biography of Vikram Pandit, the aforementioned CEO of Citi.

The first is that he is an impressive guy: lots of degrees, directorships, and high-level work experience... all of the right sort of credentials. You know, the sort possessed by the very same best and brightest who helped bring Wall Street to its knees in the first place.

Second, he seems to lack certain restraints when it comes to OPM (other people's money), witnessed by the fact that it was he who stubbornly insisted on going forward with the purchase of a new $50 million private jet for the company – this after receiving the aforementioned bailout. (Not to mention that the jet was to be of French manufacture, adding a measure of salt to American wounds.)

Most importantly, however, is that he clearly has a knack for making good deals for bad assets. Case in point, he sold Old Lane Partners, an underperforming hedge fund with just $4.5 billion under management, to CitiGroup for $800 million -- a truly ridiculous amount. He personally made close to $200 million on the deal.

And now, it seems, he's trying to engineer the same sort of buy-out for CitiGroup... but this time the buyer is... you!

Specifically, Citi has offered to convert the preferred shares held by the Treasury into common stock, effectively finishing the process of seeing the bank nationalized. Quoting Financial Week...

Wall Street Journal

The fact that an internal memo from a drowning bank in a crashing economy can ignite a strong rally tells us that at least some investors are tiring of the bear market, and are willing to throw down cash in the hope that it's time for the bull to run again. So, we could see the market rally for a bit longer, but the odds remain good that it's a bear market trap.

In the case of Citi-Mae – my suggestion for the company's post-nationalization name – we the people will soon be responsible for the company's mountain of dubious debt from tens of millions of credit card accounts, mortgages, commercial paper... and that's just for starters.

No wonder Mr. Pandit is so enthusiastic.

Wen Is Enough?

This week, we had a swarm of China-related stories. In one, China's premier Wen Jiabao took time during his annual press conference to express his concern about the safety of China's holdings of Treasuries, warning the U.S. government, in so many words, that China is now paying close attention to its financial affairs. The implied threat being that, should the constant currency abuse escalate, they might consider taking their renminbis elsewhere.

"Nonsense," say the punditry, explaining authoritatively that China doesn't have any option but to continue propping up the dollar. After all, selling their Treasuries would devastate the value of their hundreds of billions of dollar-based holdings. A weaker dollar would also make China's export-reliant economy less competitive, pushing said economy even further onto the reef.

"True," I answer, speaking aloud to no one but my sleeping dog. "But it's worth harking back to April 2001 and Hainan Island in the South China Sea."

Newshounds among you will recognize the time and the place as the location of what the media likes to call an "incident" between the forces of China and the U.S. Specifically, after colliding with a harassing Chinese military jet, a damaged U.S. spy plane was forced to land on Hainan Island where it was captured by the Chinese military.

And there the plane, and its crew of 24, sat for almost two weeks. Despite the U.S. government's most strident diplomatic efforts, including getting really red in the face, the Chinese simply refused to release the crew or the plane. It was only after the U.S. government bowed to China's unswerving demand that it issued an official apology – which it did on April 11, that the crew was allowed to leave, on April 12.

The spy plane, however, was not allowed to leave until mid-July... and then only in the pieces that Chinese engineers left it in after dismantling it and going through it with a tortoise shell comb.

At the time, the Chinese government was exporting over $100 billion a year of product to the U.S. Didn't seem to concern them in the slightest at the time that the U.S. was making all sorts of hollow threats about the spy plane.

So, now that Chinese exports to the U.S. are about three times the level they were in 2001, are the Chinese three times more likely not to want to cause trouble for the U.S. today?

Didn't seem that way when, this week, five Chinese boats harassed a U.S. spy ship operating in international waters, 75 miles off China's coast. My favorite part of the incident was when one of the Chinese ships got so close that the U.S. Navy ship, U.S.S. Impeccable, opened fire with a water cannon. In response, the Chinese crew stripped down to their underwear and enjoyed a mid-week shower.

It reminds me of the classic scene in Monty Python and the Holy Grail, when the crusaders demand the surrender of the French castle.

Why, look, thanks to the wonders of YouTube, you can watch it here!

The point, however, is simply this: people are people wherever you go... but they have certain cultural idiosyncrasies. The Afghans, for instance, possess a strong national pride about having taken on – and defeated – the masters of the universe at any given time. Denny Crane from Boston Legal would sum up their martial confidence by intoning, "Never lost, never will." And so, we can expect them to rise up every time they are invaded.

Likewise, the Chinese have a reputation for not allowing themselves to be dictated to by foreign governments, unless, of course, said foreigners arrive with an army, as did the Japanese in WWII.

Thus, should the current administration conclude in their many weighty calculations that the Chinese have no choice but to scrape and bow to the mighty dollar, they risk making a gross miscalculation... in this case, one that could bring what's left of the U.S. economy to its knees.

It is worth pondering, however, whether the Chinese may begin to march to their own drummer, no matter what the U.S. does or doesn't do, at this point. I say that because, whether out of national pride or the realization that the debt-fueled economic engine of U.S. consumption is terminally broken, there is little question that China is turning its attention to stimulating its own economy by inward-looking spending. Versus, say, investing that money in non-yielding U.S. Treasuries, especially of the riskier long-dated variety.

The situation is directly analogous to the build-out of the interstate highway system here in the U.S., a topic I touched on in passing recently. The build-out of that system, which finally got underway during Eisenhower's administration in 1956, cost about $100 billion to complete. While I don't have time to go deep here, there is little argument that the interstate highway system helped grease the skids of commerce, paying back the government's investment many times over through a variety of transport-related taxes and overall improvements in GDP.

In constant dollar terms, the U.S. GDP in January of 1947 was $1.570 trillion. By January of 1957, as the interstate highway system was getting built, GDP had risen to $2,300 trillion, a 46% increase. By January of 1966, however, GDP had reached $3,372 trillion, a 60% increase over the preceding ten-year period. While I can't attribute the additional gain to the growing highway system, there is little question it was a contributor.

The point I am trying to make is that the Chinese leadership is very capable of figuring out the benefits of better and more highways, ports, dams, electrical lines, and other infrastructure improvements ... and of deciding that continuing to lend to the world's biggest debtor won't pay off nearly as much, over the long run, as using their pile of cash to finish building out their own key infrastructure.

Nothing stays the same in this world, except human nature, that is. The Chinese, with their hundreds of billions in reserves, and 1.4 billion people, are not going to stay in place. At the point when they decide it is time to look inward, and that point may be now, the world's financial regime will begin to change.

Sure, the U.S. monetary hegemony could be maintained for awhile longer, and likely will. But there are no guarantees, and to dismiss the Chinese as whipped dogs could be a very big miscalculation.

Since we're on the topic of China's infrastructure build-out, Simon Black and Fitzroy McLean from Without Borders have uncovered a China-based cement company that is uniquely well positioned to profit. To learn how you can profit from the remaking of China's infrastructure, visit this link.

Before moving on, I came across the following chart I thought you might find of interest. It presents a breakdown of what it is the Chinese sell the U.S. so much of. Looking the chart over, it's easy to conclude that Chinese exports to the U.S. are only going to come under more pressure (not a lot of furniture changing hands just now, I suspect). That lessens the importance that the Chinese will attribute to their U.S. relationship in the future.

Speaking of Exports

I don't watch much television but do make an exception for Survivor on CBS every Thursday night. I like the show because it offers the voyeuristic experience of watching members of the Homo sapiens species as they cavort around in more primitive tribal settings. With much of the bling and bluster stripped away, what's left to observe is the hominid mind at its most calculating as it schemes to climb over the heads of its fellows to win a million dollars.

Last night, as I waited for the show to begin, I was treated to a spot of local news, the top story being that the Burlington City Council had rewarded a bridge rebuilding contract to an out-of-state construction company. Members of the local citizenry were interviewed and were uniformly outraged. "There are local companies desperate for work, and they give the job to a company from Maine! Unbelievable!"

It's an interesting philosophical conundrum. After all, the land and the people of Vermont and neighboring Maine couldn't be any more homogeneous. Okay, so maybe they eat lobster with more regularity... but other than that, it's mostly about some lines on a map and small differences in local ordinances.

Live and let eat, I say, but I suspect most of the tribe would disagree. At least if you pay attention to all the "Buy Local" bumper stickers being sported around these days.

(Sometimes, the sloganeers try to show a broader mind, expanding the phrase to "Think globally, act locally"... which is really just a dressed-up way of saying the same thing.)
As is well demonstrated on Survivor, when things are going well around camp... say, after having won a reward challenge against the other team and finding yourself surrounded with sundry food items and maybe a few beers, then humanity is all good cheer and generosity.

But lose a string of challenges, resulting in a depleted food supply and sleeping in the rain under poor shelter, and the human character soon forgets all sense of charity and each individual looks with steely eyes to their own needs.

The broader economy is much the same, if for no other reason than it is really nothing more than the sum total of human action.

While the connection may be hard to see at this moment, this week it was reported that both imports and exports have fallen yet again. According to Bloomberg...

imports

exports

Echoing the theme of this section, there was also this...

Christopher Low

Reducing these matters to a more understandable level, we come back to the case of Burlington and the Maine-based bridge builder. Or, to a positively human scale, by looking to the weekly lesson provided by Survivor. To wit, the world is beginning to wonder where its next meal is coming from, and they are not about to let some other person/state/country beat them to it.

The U.S. has already let its intentions be known by passing the "Buy American" provision in the new stimulus package.

The Swiss this week made their intentions clear by announcing that they were going to actively intervene in the foreign exchange markets in an attempt to weaken their currency and therefore make their products more competitive to consumers in other nations. They will do so by buying up the currencies of their largest trading partners. The Japanese have tried this move, as have the Chinese and others. Soon, everyone will be doing it.

In its write-up on the Swiss move, the Wall Street Journal opined...

As the U.S., while wounded, is still the world's single largest market, it's likely to be the currency against which most others try to depreciate (the Swiss are likely to focus on the euro, however).

Paradoxically, to some extent the U.S. is a willing "victim" in this manipulation, as the greater buying pressure on the U.S. dollar allows the Fed to print, print, print without having the debasement of the currency become apparent.

Of course, it will hurt U.S. exports if the currencies of our major trading partners fall in comparison to the dollar, but for the time being, a strong dollar helps to reduce the cost of energy imports and other such essentials. And it masks the prolific spending now underway, and further envisioned, by the Obama administration.

The problem, of course, is when all those dollars begin to flow back this way... for example, when the Fed finally crosses the line and governments around the world decide it is now in their best interest to rid themselves of the greenback.

It won't happen overnight or probably anytime real soon... but at this rate, it is all but a given.

Snippets from the Swamp

Donald Grove, our stalwart Washington correspondent, took time out of his busy day to shoot over a couple of updates on the never-ending machinations now underway in the corridors of power. ..

Making Friends with Crisis

Never waste a good crisis

Feeding Frenzy

Gold Stocks – a Knock at the Door

While it is not much of a payoff for the one hour that our own Louis James, editor of the Casey Investment Alert and International Speculator, spent on the phone with the reporter, the fact that Barron's did an article at all on the attraction of investing in junior gold explorers is worth noting.

You can read "Thar's Green in Them Thar Gold Stocks" via the link here.

Then there was the article from Newsweek, also this week, titled "Cash in a Mattress? No, Gold in the Closet." While the author is clearly a skeptic – which I think is healthy, frankly – the fact that gold is beginning to show up more and more in mainstream media will only add to its luster.

Here's an excerpt from the piece...

The price of gold is near an all time high—it topped $1,000 an ounce on March 13—yet the number of Americans who are taking delivery of gold coins and bars is rising. According to the World Gold Council, Americans bought 600 tons of gold bars and coins in 2008, a 42 percent increase over 2007. That's not as much as in Europe, where gold mania has become epidemic—but significant given the metal's high price. An uptick in the U.S. economy, and buyers are likely to find they've been part of a giant, golden bubble.

And for those of you with more time on your hands, here's a link to the full article.

Miscellany

The Greater Depression -- How Did It Come About? As I was going to press, I received this link to a Saturday Night Live skit that gave me a couple of chuckles. As we can all use all the chuckles we can get just now, here's the link. (And, please, for those of you who are from either side of the political spectrum who may take offense, please don't... satire is as American as running a trade deficit.)
Mea Culpa. In the current edition of The Casey Report, we included a chart showing the performance of various recent short recommendations, compared to the S&P 500. None of our recent shorts has been nearly as profitable as that of GE from our December article, "Shorting the Big Debtors." The only problem is that we equivocated on that recommendation, then in January, due to concerns over the possibility of government action, and actually formally announced we were not going to recommend making the short.

Thus, the graphic was wrong and could rightfully be misconstrued as misleading. The simple fact is that while we were right in bringing GE to readers' attention as a short candidate when it was trading much higher than it is today... we didn't follow through with a formal recommendation, and so we cannot claim it.

I won't go into a long explanation of how this screw-up happened, other than to say that it was an honest mistake by a researcher and a lack of attention on my part as managing editor. It has now been fixed in the edition.
Phyle News. By all accounts, the recent phyle meeting in Toronto where Louis James, Jeff Clark, and Doug Hornig stopped by was a big success. Angus, thanks for inviting the team to participate, and thanks to the group as well.

Meanwhile, the Calgary Phyle, which hosted the very first meet-up of Casey Research subscribers, will be getting together at the Cadence Coffee, 6407 Bowness Road NW on April 7 at 7:00 pm. You can get questions answered, or RSVP, by emailing calgaryphyle@yahoo.ca . Alex, the owner of Cadence Coffee, is the organizer of the phyle. If you can't make it to the April 7 get-together, stop by any time and introduce yourself as a fellow subscriber.
Argentina in Las Vegas. For those of you heading to our sold-out Crisis & Opportunity Summit, I wanted to mention that David "Santiago" McIlvaine from Doug's La Estancia de Cafayate project in Argentina, as well as Jack Zehren, the lead architect and land planner for the project, will be at the event. Property owners can catch up on the latest, and anyone interesting in learning more can do so.

And that, dear readers, is that for this week. As I sign off, I see the stock market is about flat, but still well up on the week. Gold has had a good day, topping $930, but coming back slightly. As you may remember, as I was writing this missive last week, I took a quick break to short the broader market... and was well up by the end of the day. A little while before the market closed, I got distracted long enough to miss the window to sell and lock in my profit, and then stubbornly hung on... the net result being a good thwacking as the stock market soared this week. Fortunately, I also bought some GLD as the gold market briefly dipped below $900 and so my net losses are minor, and I'm still holding both my short and my GLD as the week comes to a close.

While I do think the stock market could rally more here, I just can't see a sustained rally at this point. Could happen, but if it did, I'd be okay, because I am not leveraged or playing (a good word) with money I can't afford to lose.

The markets remain unpredictable and dangerous at this point. So caution is the word...

Until next week, when I'll be writing from Las Vegas, thank you for reading and for being a subscriber to a Casey Research service.

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/20/2009

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

Dear Reader,

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

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

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

Making It Up on the Fly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Credit Capitulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About That Whole Deflation Thing…

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

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

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

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

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

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

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

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

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

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

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

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

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

I wonder if the foreign dollar holders are buying it?

China Dumping Dollars?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s Talk Gold

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

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

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

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

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

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

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

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

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

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

Shattered Hope

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

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

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

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

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

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

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

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

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

Just for Fun

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

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

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

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

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

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

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

"Done!" replies the government official.

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

A Really Good Read

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

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

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

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

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

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

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

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

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

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

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The thumps being my head repeatedly hitting the desk.

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

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

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

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

We live in interesting times.

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 01/30/2009

David Galland — Fri, 30 Jan 2009 19:11:00 GMT

January 30, 2009

Dear Reader,

Like most people, I occasionally find myself overwhelmed by the tasks involved with everyday life.

This week, I have been, to use the old adage, "working like a dog." Though, now that I think about it, I have a hard time imagining the origin of the term. Even in his youth, my now elderly companion General Beauregard Piddle didn't seem to take on anything more rigorous than climbing up on an unattended couch for a nice nap.

In any event, it's been one of "those" weeks. And so today, as I prepared to write this weekly missive, I found myself groaning, "Arrgh, I've got to write The Room," to my ever patient and entirely wonderful wife.

"But," she said, misunderstanding the nature of my apparent complaint, "I can't see how that's a problem. There's so much to write about."

"Exactly!" I said, "That's the problem!"

In actual fact, I almost always look forward to these weekly writings as a form of personal reflection and even entertainment... and as a usual way to keep myself in the flow of the passing parade.

But some weeks – most weeks, it seems of late – the sheer volume of important news that I should comment on, at least if I were trying to be a good correspondent, is so staggering in dimension, it is a real challenge to know where to begin.

So, instead, I start by writing about old dogs and wonderful wives. Go figure.

Okay, enough of that. Procrastination is almost never a good idea, unless it is on the part of legislators who, I always hope, procrastinate to the extent that they don't ever quite get around to doing anything. Unfortunately, with the mantra of the moment being "Yes, we can," that is probably a false hope.

Turnaround in Interest Rates?

A few weeks ago in these musings -- January 9, 2009, to be more exact -- I wrote the following in response to Bud Conrad's latest projections of a deficit that could go to $3 trillion in fiscal 2009...

Well, this week we began to see a whiff of the situation just described. Here's the article from Bloomberg...

Note that Bloomberg still estimates the total deficit at $1 trillion. They are dead wrong... my money (literally) is on the number coming in much closer to Bud's stunning projection. And that means that interest rates will have to go higher... much higher.

It is for that reason that all four editors of The Casey Report -- Doug Casey, Bud Conrad, Terry Coxon and yours truly -- are in agreement that positioning yourself to profit from rising interest rates should be the big money-making play for 2009 and beyond.

It's not too late to jump on board... and it's easy to do so, with the no-risk, three-month trial being offered for The Casey Report. Click here for details...

Bait for the Two-Legged Rat

I have often said that humans are like rats in that they are extremely ingenious when it comes to looking after their personal interests. Lock a rat in a metal box and it will almost be able to figure a way out. Almost. A human would actually have a shot at it.

In the debate about what went wrong with the economy and how to fix things, the topic of loose credit standards usually arises early in the discussion. And correctly so. Due to loose credit standards, people without the financial resources to own a home were practically carried across the threshold by predatory lenders.

Well, at least that's how the outraged political class and their adoring punditry see things.

According to that section of the jeering crowd, these lenders were so avaricious, greedy, and downright dastardly that they would actually hand the keys to a $500,000 house to an individual with not just poor but pitiful credit and with little or no money down. Bastards!

Of course, as a former banker (shudder), I have a somewhat different perspective.

Because no matter how devious or dastardly a lending institution might be, it wouldn't even contemplate making such loans if it didn't have a fairly well-reasoned plan in mind to actually get paid back... with interest.

Enter the government in the form of the Federal Housing Administration (FHA) and the quasi-state-owned (and now absolutely state-owned) Fannie Mae and Freddie Mac. Absent their guarantees, the private sector would never, but never, have made the loans just described. That's because...

As a result, within the acceptable tolerance range for any human endeavor, banks are historically careful in setting lending standards.

But add into the equation a rate-slashing Fed looking to stimulate things a bit, side by side with a bloated Uncle Sam looking to engage in some social engineering by putting people without the credit or means into a house, and the picture quickly changes. Why, even the FHA's own website does a good job of summing up the role they played in the pumping up the housing bubble. Some relevant excerpts...

For lenders, our mortgage insurance protects lenders against loss if the homeowner defaults on his or her mortgage loan

For the record, there are about 55 million single-family mortgages in the U.S., so the FHA has over 10% covered.

But the FHA is just one of Uncle Sam's kissing cousins. Others, including the aforementioned Fannie and Freddie, guarantee another 31 million mortgages between them. So, in total, U.S. taxpayers now stand behind about 65% of all home mortgages in the U.S. But it is worse than that, because ever since the credit crisis began, over 80% of all new mortgages generated have been "conforming" in order to go onto the books of a government agency.

Thanks to Uncle Sam's largess and no-risk lending guarantees – warmly applauded by the nation's banks and sundry money shoppes, to be sure – since 1992 there has been about a 50% increase in U.S. homeownership.

Is it any wonder, therefore, that until recently you could spot a loan officer by the wide smiles on their faces, as well as their ink-stained fingers, the result of producing prodigious quantities of freshly printed loan contracts?

The way it all worked was very simple. Uncle Sam shouts for all lenders to hear, "Bring me your poor, your unqualified, your liars, and your wannabe speculators, and I will buy up their loans, allowing you to make a quick profit for generating them, and then passing them like a hot potato into my portfolio."

Given the opportunity to make money by giving money away – not a real hard sale – the lenders rose to the occasion. A rat, sniffing out a crust of bread down an unguarded alleyway, would do much the same.

Likewise the masses, equally quick to discern the opportunity, can hardly be faulted for scrabbling to take the house, oftentimes along with a loan that put extra money in their pockets in the process.

No one was much concerned about paying for the homes; the lender's risk was assumed by the government and the unqualified buyer didn't have much of any money in the game, and besides, everyone was certain that house prices could only go in one direction, up. As for the government, well, the government doesn't really pay much if any attention to the money it spends, because it's not their money. It's yours – if you are a U.S. taxpayer, that is.

But you have never paid much attention to how the government spends your money, have you? No, like a former client of wily Mr. B. Madoff, you just assumed Uncle Sam was on top of his game.

Of course, as the smell of free cheese and wealth without end spread throughout the ether, more and more two-legged rats acted on what they perceived to be their self-interest, causing a steady influx of new buyers to stream into the alley of homeownership. Many of the early adopters, sensing that if one was good, two could only be better, began to double and even triple up.

And the next thing you know, you have a housing bubble of historic proportions.

But you know all this, so why am I repeating history? Well, because this week, I stopped in at a local sandwich shop and, to occupy myself with something other than looking out the window, took hold of a regional real estate guide that, as part of its editorial features, includes a table showing all of the lenders who do business in the area – 16 in all.

Among other information, the lenders' table displayed whether or not the various lending institutions offer "Mortgages to Buyers with Less Than 20% Down?"... and whether they "Offer Mortgages with Credit Scores Under 600?"

Even today, after all the news and global angst, 9 out of 16 still advertise that they offer loans to individuals with credit scores below 600, and four of them actively promote the fact that they'll go down to 580 – which is roughly the credit rating of an escaped felon on the run for credit card fraud. But such a loan, each of the listing institutions further qualifies, is available "Only w/FHA."

And 12 out of 16 will still give you a loan with less than 20% down... in fact, "w/FHA," the solid majority will still provide a loan with less than 5% down, and one touted the availability of a 103% loan.

Alas, despite the understandable desire of lenders to earn yet more cheese by generating poor-quality mortgages for Uncle Sam, borrowers now believe real estate can only go down. Given the oversupply, they are largely right for the foreseeable future. On that basis, they whiff the downside, spot the trap that waits behind the front door of Home Sweet Home, and scamper away.

The lesson in all of this, other than that once I get pounding away on the keyboard, I seem to have no off-switch, is that the real cause of the housing-led crisis was a failure to appreciate the similarities between humans and rats. Every government interference in the market, no matter how well intentioned, carries the seeds of dangerous unintended consequences. Just ask the twenty-something welfare mothers of the 1980s who, when offered monthly pay for each new offspring, quickly converted their wombs into baby factories.

I wish I could say that this lesson – that humans, like rats, will always figure out a way to pursue their self-interest, even if it requires chewing through a real or proverbial wall – has been understood, thanks to the crash.

But as evidenced by the following item, also just in from Bloomberg, it's clear that the lesson is far from learned... at least by certain rats...

Dolts!

Fortunately, there is consolation to be had from the current trend towards more and bigger government. Namely, if you can fully understand what's going on and what's coming next, you have a rare opportunity to – in the words of a stock promoter who used to speak at conferences some years ago – get "stinky, filthy, sloppy rich."

We'll do our part to help you achieve that elevated position, in our various publications and at the upcoming Casey Research Crisis & Opportunity Summit in Las Vegas, March 20 – 22.

Speaking of that event, even though we still haven't gotten around to widely marketing it, the Las Vegas Summit is now more than 2/3 sold out... with less than 100 seats remaining. You should make the effort to get there if you can... there isn't a better time to step away from your computer and everyday life and spend a couple of days in the active contemplation of what's coming next and how to profit. You will get your most pressing questions answered. An updated schedule and registration information is available by clicking here.

Obama Watch

Looking past the rhetoric to the actions of those with their hands on the tiller of power this week, we find some items of interest.

Higher-mileage, lower-emission standards on the way. It increasingly looks as though the enviro-alarmists within the Obama administration are willing to pursue a scorched-earth policy in order to advance their agenda. This week, they set the ball in motion to accelerate the date when car manufacturers have to dramatically reduce emissions and raise fuel mileage... and looked to set a precedent whereby individual states can set their own, even more rigorous, standards. In the best of times, these sort of dictates are often stupid and counterproductive. In the worst of times, they are also dangerous.

In my view, left alone, people and industries will fluidly adapt to changing conditions... even if that adaptation means some businesses will fail and others rise. Unfortunately, the government and far too many members of the voting public just don't see it that way. And so, as with the housing crisis, expect unintended consequences.

Not having to look very far for examples of this principle in action, it was reported this week that State Farm Insurance will be dropping 1.2 million customers and withdrawing from Florida's residential home insurance market after state regulators refused the company's request for a rate hike. According to Bloomberg...
Stimulus or another brick in the wall? This just in from Washington Correspondent Donald Grove...
(Don isn't the only one encouraging a "no" vote on the stimulus bill. Check out this ad from the folks at CATO... http://cato.org/special/stimulus09/cato_stimulus.pdf
Things that go bump. Recently I shared comments by Fitzroy McLean, former intelligence operative and co-editor of Without Borders, on the topic of the daily intelligence briefings that every U.S. president since Bill Clinton has received. To recap, this briefing contains info on a wide range of real and potential threats. The president is then asked to make a decision on how to act. Failure to do so carries with it the potential for a political blowback, should the threat assessment turn out to have been accurate. Thus, even though he was only in office a few days, President Obama approved a drone attack into Pakistan's sovereign territory, killing 20 or more locals, including a number of women and children.

Now, I can't say, because I don't know, whether the intelligence leading to the attack was sound, or whether the "collateral damage" was worth it. But it is important, in my view, to note that the new president has shown himself willing, like his predecessor, to ignore international law and risk further destabilizing an already unstable ally. Was the drone attack warranted? Or was President Obama simply continuing the new presidential tradition of covering his hindquarters by acting reflexively to things that go bump in the night?
Speaking of Afghanistan. This week, we also heard Defense Secretary Robert Gates confirm that (a) there will be a build-up of more U.S. troops in that country, and (b) the whole notion about helping stabilize the country through development activities will likely be back-burnered in favor of just killing unfriendlies. In his own words, the DefSec testified...
As is made clear in Counterinsurgency Warfare by David Galula (available at http://www.praeger.com), probably the best book ever written on the topic, you simply can't win a war against insurgents with blunt military force alone. Gates, who I am almost positive has read the book, knows this, so I find a certain tired resignation in his words. We send more troops to Afghanistan not because we expect to win, but because Obama said we would in his campaign.

Supporting my contention of the futility of the conflict is the fact that the Soviets were incredibly brutal in their attempt to pacify the country, going so far as to drop toys that would explode when handled, the idea being to blow the hands off the next generation of Mujahedeen. So, let me ask you – if we aren't willing to go to that sort of extreme, and beyond... and we have given up on the idea of winning Afghan hearts and minds through on-the-ground politicking and development... then what, exactly, is the endgame?

To get a better sense of the situation, watch this video, it details an eye-opening trip to the largest arms bazaar in the Khyber Pass. (Thanks to Dave M. for sending it along.)

The link is here: http://www.vbs.tv/full_screen.php?s=DGFE2305DC&sc=1363196

But if we pull out, won't a new gang of terrorists reestablish themselves and begin to train for the next 9/11? Could happen, but there are better ways of dealing with those threats than getting deeper and deeper into a country that history has correctly awarded the moniker as "graveyard of empires."

(While its lyrics refer to a different sort of road, this week I've been listening to Chris Rea's The Road to Hell, which seems fitting to a discussion of the Khyber Pass. You can listen to it here)

The above list of actions of the Obama administration is not in any way meant to be a complete tally of what's been going on. For example, according to the news, later today President Obama is expected to "issue executive orders to reinforce the rights of organized labor." And he has added to his new administration Harvard Professor David Cutler. According to Harvard's web site...

"Cutler, who specializes in health care and public economics, is a vocal proponent of increasing America's health care spending, arguing in his most recent book, "Your Money or Your Life: Strong Medicine for America's Health Care System," that such spending has been worthwhile despite its high costs."
To all of which I can only repeat, "stinky, filthy, sloppy rich."

Go Gold!

For obvious reasons, there has been a lot of news on the gold front this week, with an increasing number of articles showing up in the mainstream financial media on the shift towards gold as a safe-harbor investment. Even famous hedge fund managers and other institutions are beginning to buy into the case for gold. And not just bullion, but gold stocks. This from Bloomberg this week...

Meanwhile, GLD, the largest gold bullion ETF, reported that its holdings reached an all-time high of 832.57 tonnes last week.

Miscellany

Bye, Bye, Bobby. The freshly minted Zimbabwean $100 trillion note didn't last long. This week, that nation's befuddled kleptocracy finally threw in the towel on its own currency and is allowing the citizenry to use pretty much any form of currency they can get their hands on to trade among themselves. Without the power to print and no reserves of anything of value left, the end of the Mugabe administration can't be far off. In fact, I'll go on record saying that he'll be out of power within three months. Want to bet $100 trillion Zimbabwean dollars on it?
Scapegoat Bank, MEMBER FDIC. Recently I discussed the idea of the government implementing a "bad bank," an idea that has come to life this week, with the FDIC raising its hand to manage same. Subscriber and correspondent Ian M. of Toronto sent in the following this week, which I thought was both interesting and relevant.

And that, dear readers, is that for this week.

Juggling my responsibilities as managing editor of The Casey Report, the next edition of which is due out on or about February 6, I started this week's edition of The Room yesterday afternoon... and so I am finishing up earlier than usual, at about 11:15 am. While I can't say where the markets will end today, I can report that, at this moment, the DJIA is off about 84 points, oil is up modestly to $46.05, and gold is up to $920.

Given the sheer volume of bad news this week, with unemployment continuing to reach new highs, home sales continuing to collapse, and consumer confidence – and spending – in a steep slide, the stock market should have been crushed... but it wasn't. That it wasn't, I can only view as being due to base building in anticipation of Super Obama's magical plan... you know, the big New Deal "get it done" plan to end all plans.

It's coming...

And I am going...

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/24/2008

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

Dear Readers,

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

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

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

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

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

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

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

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

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

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

They are about to find out.

The Trial of Gold

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

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

The trial of Gold had begun.

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

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

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

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

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

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

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

"Yes?" asked Judge Market, looking grumpy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Oh, alright. Have at it."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Mr. Cuomo, any objection?"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unflustered by the bluster, Galland began to speak.

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

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

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

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

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

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

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

Galland nonchalantly replied:

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

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

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

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

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

"Yes. Right away," said Galland.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"No, sir."

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

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

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

Funeral for an Economy

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

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

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

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

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

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

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

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

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

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

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

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

So, why do I relate that scene today?

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

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

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

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

How Long Will the Foreigners Support the Dollar?

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

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

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

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

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

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

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

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

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

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

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

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

Credit Sucks and Don't Forget It

Friend and correspondent Sunni forwarded this in, this week.

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

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

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

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

Laughing Out Loud (When No One Else Is Looking)

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

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

CEO - Chief Embezzlement Officer

CFO - Corporate Fraud Officer

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

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

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

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

BROKER - What my broker has made me.

STANDARD AND POOR – Your life in a nutshell

STOCK ANALYST - The idiot that just downgraded your stock.

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

FINANCIAL PLANNER - A guy whose phone has been disconnected.

MARKET CORRECTION - The day after you buy stocks.

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

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

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

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

PROFIT – An archaic word no longer in use.

Miscellany

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

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

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

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

Best Regards,

David Galland
Managing Director

The Room - 10/17/2008

David Galland — Mon, 20 Oct 2008 16:31:14 GMT

Dear Reader,

Keeping up with the complex drama now flashing across the global screen is becoming more challenging with each passing day.

In lazier days, a scene might be allowed to unfold at a measured pace, the interactions between major characters developed through subtle nuance and lingering shots and close-ups of, perhaps, the furrowing of a brow or the sly upturning of the corner of a mouth.

These are not those days.

Instead, we are living in the world of 30-second commercials, directed by a speed-addicted music video director, strung together in a nonstop explosion of two-second jump cuts.

One minute stock markets are soaring, the next crashing. Gold jumps $20, then falls $40. Banks fail, banks get bailed out. Politicians elbow each other out of the way to throw billions, trillions even, into deep, dark holes. Oil tumbles, then bounces, then tumbles again.

While the volatility has allowed me to make some fun money through the all-terrain investment vehicles of futures and options, it has also made the task of trying to keep current on the news and, more importantly, on what's important, daunting indeed.

Even so, it is Friday morning and so, cup of coffee at hand and the music turned up on Citizen Cope's Bullet and a Target (the very same position that the Fed now finds itself in), I turn to the task at hand... the task of trying to make some sort of sense out of the chaos.

Given the frenetic nature of the markets, I hope you'll forgive me if my commentary this week is similarly frenetic.

Unintended Consequences

As you likely know, we are not optimistic about the outlook for real estate, that lynchpin of the U.S. economy. This pessimism is evoked by a number of factors, starting with the simple fact that residential housing increased by about 50% between 1992 and 2007, massively outpacing population and income growth over the period. As you absolutely know, much of that excess inventory is in the hands of individuals who simply can't afford to pay the freight.

Then there is our hardened belief that the equivalent of an express train wreck is about to happen in the 4 – 6 trillion dollar U.S. commercial real estate market. There will be a lot less in the way of Ho! Ho! Ho! this holiday shopping season, and a lot more Oh... Oh... Oh's.

And none of it is helped by the inevitable rise in interest rates, which are today at near 50-year lows. While we might not be quite at the bottom, we're close... after which we expect a persistent rise as the government bailouts flow through the inflationary pipeline. Of course, wounded housing markets react about as well to rising interest rates as I do to the prospect of my taxes going up in the next administration.

Unfortunately for the housing market and by extension the U.S. economy, we are already seeing the ghosts of what's to come. This just in from Bud Conrad...

The result is that housing will be further hurt with the higher rates and will continue to fall in price.

On the same topic, the news is out this morning that in September, single-family home starts in the U.S. fell to the lowest level in 26 years. Just 544,000 new homes would be built over the next 12 months (if the trend were to stabilize here, which it won't).

Just so you have the right perspective, at the peak of the bubble, annualized housing starts in the U.S. were running at 2,265,000 units, so we're seeing about a 75% decrease.

By the time this is over, it wouldn't surprise me to see housing starts fall to 10% of the peak.

Of course, housing is far more than just "another" economic stat. In addition to the tragic financial and emotional implications of coming up short on the mortgage on a personal and even societal basis, there are the direct consequence to the broader economy. No more excess equity to borrow against to fund shopping sprees, and none to allow for a comfortable retirement for far too many.

This is, and will continue to be, a big problem for the economy. While there is no soft solution at this point, the best we could hope for is that the damage will be quick to come and quick to pass. But the only real way for that to happen is for house prices to fall to the point where ready buyers are available. And that entails workouts between lenders and borrowers, or outright foreclosures, to clean up the mess and allow the market to function as it certainly can, and will again... if left to its own devices.

Unfortunately, the plans now being bandied about by the government envision pretty much the polar opposite of letting the market clean itself up. Rather, they involve taxpayers buying defaulting mortgages and even the imposition of a moratorium of some duration on foreclosures. Most people read news such as that and shrug it off. It may help to view these ideas through a narrower spectrum.

For example, imagine you are the president of a small bank and you had lent money in good faith to someone in the neighborhood. We'll call him Joe as that seems to be a popular name for these sorts of examples these days.

For reasons only known to him, Joe has stopped paying on his mortgage, leaving your little bank on the hook for $200,000. Following procedure, you have Mrs. Smith down in the lending department send Joe a nice letter asking him what's up, to which she receives no response. So you personally send him another letter, this one offering to have him down to the bank to have a chat and see if you can work things out.

No response, no money.

So, uncomfortable at having to perform the duty, you give Joe a call and he admits he is in over his head. When you offer to help him work out a payment plan, he calls you a blood sucker and hangs up on you.

Pained by the outcome of your loan, because you'd rather be getting paid back on the agreed-upon terms, you call up your lawyer and reluctantly authorize the expense of beginning the foreclosure proceeding. At that point, you know you will likely spend thousands and the better part of a year trying to get back your property (and it is your property). But what choice are you left with?

And then you hear – as does Joe - that Congress is going to pass a moratorium on foreclosures, and you reach into the locked drawer of your desk for the flask you keep there for such occasions. Joe, meantime, heads down to the local deli for a six pack to celebrate free rent for the foreseeable future, perhaps paying for his purchase by selling off the copper pipes he's ripped out of the guest bathroom.

This exercise is, of course, little more than the morning musings of a sleep-deprived mind, and I am well aware that the circumstances surrounding the defaulting on loans are as varied as humanity itself. Even so, the underlying principles are the same. There is a contractual agreement between a lender and a borrower that no one had to be waterboarded to sign. In the event of a failure to perform on the part of either party, it is up to the two parties alone to resolve -- with the help of an impartial judiciary if an impasse occurs. Interjecting an overreaching government run by perfect-worlders into the process can only gum up the works.

And, I would contend, result in just the sort of unintended consequences now being reflected in jumping mortgage rates. Or, for that matter, the entire housing mess in the first place... much of which is the unintended consequence of Greenspan ratcheting down interest rates instead of pouring himself a nice cup of tea and watching as the participants in the dot-com mania received their just desserts.

Personally, I am shocked by the rising cacophony of calls for more, not less, government regulation. Given the widespread chanting now going on in favor of elevated levels of oversight, retribution, taxation, meddling, and outright nationalization, it is clearer than ever that the views I just expressed are in a minority. And the situation is only going to get worse as the next wave of well-intentioned government operators step up to the controls... controls that are being firmly bolted onto the machinery of markets.

We are about to enter a dark period for the free markets. That's the bad news.

The very good news is that, seeing it coming, you can anticipate where the next unintended consequences will occur and position yourself to profit.

Getting Stupid

Despite gold weakening over this week, we remain utterly unconcerned about gold... and I couldn't mean that more sincerely. In fact, I just now paused for a moment to email my broker to sell a $750 put option on gold.

While somewhat off topic, I'll provide some details because I love this kind of trade (which I learned about at our Futures and Options Summit, as an aside).

Selling a $750 put earns me a fat premium – the higher the volatility, the higher the premium -- of $6,300. That money goes straight into my account. While there is a bit of nuance (for example, the potential for an inconvenient margin call), the worst case is that if gold is trading below $750 in March of 2009, when the option settles, I'll be on the hook to buy 100 ounces of gold at $750. Actually, less than that, because of the premium I have received. If at expiration, gold is at or above $750, I will have earned the premium with no money down.

The trick, of course, is to want to own the underlying commodity at option price. And you can use this sort of strategy for stocks, too.

Using futures and options, which I earlier referred to as the all-terrain vehicles of the investment world, gives you a nearly limitless number of opportunities to profit... regardless of the direction of markets. (We'll be launching a trading service soon, but that is a story for another day.)

But there are opportunities outside of futures and options. In fact, the junior resource sector, which has been a big disappointment of late, is now officially reaching stupid levels of valuations.

On that front, this week I was looking at a high-quality junior gold exploration company that is being followed in our International Speculator letter. The company has been advancing a big deposit in a great location in Canada and has just released its first resource estimate. The report confirms that the company has proven up just shy of 5 million ounces in a near-surface deposit, and the deposit is still wide open, so you can expect them to add significantly to the resource in the months ahead.

Generalizing, in an "okay" market, gold in good ground sells for around $50 per ounce. And Ontario, Canada, the ground where this deposit is located, is some of the best (as opposed to, say, the Congo). In a better market, gold in the ground might sell for $80 to $100 per ounce. And in a heated-up market, such as we saw back in 2005, valuations can rise as high as $150 or even $200 (which would be steeply overvalued, at anywhere near today's prices).

So, what value is now being assigned to the 5 million ounces of gold (plus blue sky) this very well-run junior is sitting on? Dividing the market capitalization of the company by the number of ounces of gold gives us a valuation of an unbelievable price of just $5.20 per ounce.

Okay, okay, I can almost hear you saying, "What's the problem with the company? I bet they are low on cash, and so shareholders are going to get hugely diluted when they go back to the market to finance."

To which I reply, "Nope – they have enough cash in the bank to cover an estimated two years of operations." In other words, we have looked at the company in depth, and there is nothing wrong with it – other than the broader market and forced selling by cash-strapped funds and investors.

And, as good as this company is, there are any number of other quality juniors – virtually all of which are now selling for the sorts of prices you might have expected to pay back in 1998, before the gold price took off, and before the companies had even found anything. But in this case, the company has 5 million ounces on the books.

And it is not just in futures and options and junior golds where you can find opportunities now. There are some great businesses that have been as heavily punished by non-discerning selling as bad businesses.

While caution remains the watchword of the day for the majority of your portfolio, if you have the capacity, be vigilant for the sort of stupid values just discussed. No need to rush in, but rather buy in tranches, maybe taking positions in 20% increments over the next six months. It may take awhile for you to realize the big returns -- there is a real threat to the equity markets later this year as aggressive tax-loss selling meets up with the retraction in consumer spending in the traditional holiday shopping season -- but after that, things, for the right businesses, selling at the right valuations, should begin to look up.

Given our view of where the economy is headed, you'll need to pick your battles carefully... and we'll be on your side every step of the way... but the time to begin laying out your plans should begin now, and not after gold is racing for the moon with the gold stocks close behind.

So, no big rush... just some food for thought. Of course, we'll continue to keep our many ears close to the ground on your behalf.

The Greater Repression

In my spare time, I'm working on a separate article titled "The Greater Repression," the theme of which is that one of the outcomes of the current financial crisis will be an acceleration in the growth of the state, and the coercion that that implies.

On that topic, did you read how Henry Paulson got the heads of the nine major banks to sign on to the Treasury's plan to partially nationalize them? He basically called them into a room, put a one-page document in front of them and informed them that they were required to sign it. Some excerpts from a story out of the New York Times from earlier this week...

...by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

Mr. Paulson announced the plan Tuesday, saying "we regret having to take these actions."

Pouring billions in public money into the banks, he said, was "objectionable," but unavoidable to restore confidence in the markets and persuade the banks to start lending again.

... All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.

... "It was a take it or take it offer," said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. "Everyone knew there was

only one answer."

(You can read the full New York Times article by clicking here.)

But wait! Thanks to a top-secret Casey Research hidden video cam, you can actually watch a video clip of the meeting itself!

The video segment covers the pivotal point in the meeting when Paulson makes a convincing argument as to why bank presidents should fall in line and get on the team. Watch it by clicking here now.

No question about it, we are not only in uncharted waters economically but politically as well. All the media reports on the crisis have painted the free market as the culprit and called on the government to fix everything, whatever it takes.

It is like inviting a wolf into your house to get rid of a mouse. Sure, the mouse may go away (at least temporarily), but then the real trouble begins.

Bretton Woods II

This week, a number of you brought to my attention a rising call from the heads of some governments for a return to something that resembles the discarded Bretton Woods agreement, an agreement that had as a central tenet the convertibility of paper currencies into gold.

Naturally, we salute the notion of a return to a more disciplined approach to the handling of government finances than that which is now favored, and which might be loosely expressed by imagining a conversation such as "Hey Hank, Bennie here. Listen, I'm running short, can you print up a hundred billion or so and shoot them over when you get a chance? Thanks. No, no rush. Tomorrow afternoon would be fine. Best to the Missus, see you down at the club."

That the prime minister of Britain and the head of the European Central Bank have both referenced Bretton Woods this week can only be taken as encouraging. In time, we are convinced, circumstances will force a return to such discipline, with a system based on gold, or at least a mix of tangibles, including gold.

But I wouldn't start holding my breath. For starters, Bretton Woods was almost unilaterally shaped by the U.S. government to take unto itself the keys to a global monetary hegemony. It would border on delusional to think the U.S. will hand those keys off to anyone else until forced to it by events out of its control. Thus, while we might see a sit-down of top finance ministers at some point in the next year (in a six-star seaside resort, one might assume), the actual business of crafting a new monetary order will drag on and on and on.

The potential game changer will be if the currency crisis we foresee as inevitable reaches the point where no one wants any unbacked currency almost at any price. You'll know when that point is approaching when the price of gold blows through $5,000.

Burn, Baby, Burn

Last week, I shared my new basement digs for a day with Brian the electrician, who was putting in a fan and upgrading some fixtures. In addition to being a fine judge of music, commenting as he was putting away his tools at the end of the day that "The music here was the best of any job I've ever been on," our conversations revealed that he is also a financial analyst of no small potential.

"Early last year when I saw all the building going on and the prices of houses going up, I told myself that this couldn't last. So I let go of my employees and sold my new pick-up truck back to the dealer and bought a used one. I've been putting money aside ever since."

Smart guy. Of course, I asked him how business is now.

"Real slow," he answered in the cautious patois that marks a native New Englander. "Except for this one company that deals with fire and damage," he added. "They've been real busy, and they expect to be a lot busier."

"Oh, why?" I inquired.

"Well, apparently, it's because so many people have been putting in wood-burning stoves, trying to save on energy costs and all that."

"I wonder if it could also be because sometimes a fire can solve a problem," I asked. "You know, like a mortgage you can't afford or a business that is failing, if you get my drift."

"Yep," he said with a knowing nod, "and there's that, too."

I was reminded of that conversation the following day as I was watching cable television while laboring down at the gym on the stairway to good health, otherwise known as the cursed StairMaster (it's the only time I watch cable, because I refuse to have it at home).

Through sweat-stung eyes, I watched video coverage by the ScareMasters – CNN, in this case -- of a wildfire somewhere in California. From the bird's-eye perspective of a helicopter cameraman, I watched as flames jumped a road and began doing their worst to what looked to be a dealership specializing in large pick-up trucks.

"Why," I panted to myself silently, "didn't the dealer, who surely knew the fire was approaching, gather around some folks and drive those nice trucks out of harm's way?"

Then I remembered my conversation with Brian the electrician and nodded knowingly to no one, imagining in my mind's eye the owner of the dealership watching the same broadcast and dreaming of a fat insurance check and a nice, long holiday followed by a fresh start. Who knows, perhaps he'll turn to selling the new fuel-efficient cars that U.S. car companies, freshly cashed up themselves with a nice $25 billion handout, will soon be producing with the aid of their five million new employees (I think that was the number bandied about by Obama in the debate).

But I digress. Because in addition to the economic motives for the pending wave of mysterious fires that are likely to descend on the nation, I fear a social motive.

In that regard, I have read and even heard on talk radio (which I occasionally listen to in order to keep my blood heated to the point where I won't fall asleep behind the wheel, a particular problem I have on any drive of more than about 30 minutes) that the Republicrats are all steamed up about the purported voter fraud being perpetuated by the lefties of Acorn.

Now, I can't say, because I can't know, whether or not Acorn and the Demopublicans are actually in the process of stealing votes, but I will say that that particular line of attack is one that has the potential to result in serious consequences.

Think it through.

Let's say that the drumbeat about Acorn really takes hold and fires up the imagination of McCain loyalists, as it certainly seems to be. Okay, now let's say that Obama wins, maybe thanks to a couple of squeakers in states such as Ohio. Could we perhaps see some serious civil disturbance, and maybe even worse, as good, patriotic Americans pick up their rifles and decide that their country has been taken over, unjustly, by terrorist lovers?

Could happen.

Okay, now let your mind swing the other way. That the Republicrats manage to challenge voter registrations in said key states and McCain actually wins? At that point, might the dashed aspirations of Obama's many admirers spill over into the streets? Certainly not out of the question.

Now, I am not saying that people shouldn't be vigilant about vote fraud... but it strikes me as the sort of issue that one wants to tread very carefully on – to double- and even triple-check the facts on the ground – before starting with a lot of arm waving.

Especially in an environment as politically charged and economically challenged as we are currently living in.

It has been a long time since I watched, as a teenager, the cities of America burn. And if I can make it all the way through to my long nap without seeing it again, that would be just fine.

In the final analysis, it won't really matter who wins – and I know that grates with many of you – but it's true. The economic stage has been set and the furniture cemented into place. The leading actors in the next act will be, as if marionettes controlled by the hands of a god, made to follow, not lead, the events that are now both inevitable and imminent.

The only question now is, will the transition to what's next be calm and orderly, or will the old war cry "Burn, Baby, Burn" be heard again?

I really don't know what makes the idea of the presidency so appealing that people would go through such personal trauma to attain the station. If you could, and did, walk in tomorrow and offer me the office, I would politely thank you for the offer and escort you as quickly as socially acceptable to the front door.

Laughing Between the Tears

On any given day, I swear I am going to delete all my email accounts, put the boots to my cell phone, and retreat to a nice, quiet cave. But then I get an email from a friend with a whopping good joke, and I forgive Mr. Email from stealing so much of my time.

This week, I received a few at least somewhat related to the current crisis and so thought I'd pass them along. This might become an occasional feature.

The first three came to me via Hugo in London...

For Geography students only: What's the capital of Iceland? Answer: About Three Pounds Fifty...

Quote of the day (from a trader): "This is worse than a divorce. I've lost half my net worth and I still have a wife."

Here's another one, from subscriber and correspondent Ronin...

Now we are trusting the economy of our country to a pack of nit-wits who couldn't make money running a brothel and selling booze?

Today, I received the following from the hard-working researcher/editor Shannara Johnson.

As the topic is Sarah Palin, those of you who are Obama fans will especially appreciate it... but so will anyone with a sense of humor or an appreciation for creativity and technology. Click the link here: http://www.palinaspresident.us/. After you click, an interactive photo will load. Clicking on the items in the room and on the desk makes fun things happen!

Joke of the Week

This came to me via Clyde Harrison, one of the smartest (and funniest) guys working in the commodities sector today...

Chuck replied, 'Well, then just give me my money back."

The farmer said, "Can't do that. I went and spent it already."

Chuck said, "Ok, then, just bring me the dead donkey."

The farmer asked, "What ya gonna do with him?"

Chuck said, "I'm going to raffle him off."

The farmer said, "You can't raffle off a dead donkey!"

Chuck said, "Sure I can. Watch me. I just won't tell anybody he's dead."

A month later, the farmer met up with Chuck and asked, "What happened with that dead donkey?"

Chuck said, "I raffled him off. I sold 500 tickets at two dollars apiece and made a profit of $998."

The farmer said, "Didn't anyone complain?"

Chuck said, "Just the guy who won. So I gave him his two dollars back."

Chuck now works for Goldman Sachs.

Miscellany

Phyles. Herb in Jacksonville is looking for additional phyle members. Ditto, Ron in Southern British Columbia is going to try to start one. And I have had some correspondence with Vermonters interested in getting together. Not sure when or where, but if you contact us, we'll try to set something up with some of the Casey crew. As always, if you are interested in meeting up with other Casey subscribers, drop Kristen a note at phyle@CaseyResearch.com.
Bud in New Zealand. Bud Conrad will be the keynote speaker at the CFA Society of New Zealand's Fourth Annual Forecast Dinner in Auckland, Thursday, November 6. I am sure that he'd be happy to take time during his trip to meet up with subscribers in the area. Drop us a note at info@CaseyResearch.com and we'll try to set something up.

And that, dear readers, is it for this week.

As is my habit, I turn (with no small sense of suspense) to the screens to see how the day is going for things financial. I see that the DJIA is up 166 points on news that consumer confidence has fallen the most on record. Now, there's a reason for a stock market rally!

And gold is down, again, to $784 in spot markets, while oil has come back a bit... to just a touch over $70 per barrel. And that gold stock that just announced a 5-million-ounce deposit? I just took a glance at the portfolio page of the International Speculator, on our web site, and see that it is down another 11% today!

My next task after signing off is to call my broker. I could, and probably will, take a loss over the short term, but I don't care, because I would kick myself if I missed the bounce on that particular stock.

(As an aside, I am not being coy by not sharing the name of the stock with you... I have mentioned it to provide a real-life example of how stupid valuations are getting in the resource sector. It would be unfair to existing International Speculator subscribers to share the name here, in the open. They are entitled to buy their fill without any added competition. I hope you understand.)

And with that, I must sign off by thanking you sincerely for spending some time with me this week, and for being a subscriber to a Casey Research publication.

Hang in there – and hang on tight – because who knows where this joy ride is heading next.

David Galland

Managing Director

Casey Research, LLC.