The Room : Inflation

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 – 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 - 10/03/2008

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

Dear Readers,

We're no longer in Kansas, Dorothy.

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

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

But, what?

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

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

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

Guns?

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

The "etc." must mean guns.

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

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

But that was then, and this is now.

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

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

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

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

Do You Know How the Fed Is Managing Your Money?

By Bud Conrad

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

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

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

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

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

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

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

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

Call Us Utopians... or Free Marketers

Ed. Note

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

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

Oink! Oink! For Shame!

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

The Big Debate

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

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

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

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

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

World on the Edge

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

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

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

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

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

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

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

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

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

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

More on the Global Situation

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

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

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

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

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

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

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

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

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

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

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

So, things could always be worse.

Ed. Note

An Interesting Perspective on European Energy

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

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

Slovakia, Finland and Macedonia 100%

Bulgaria 96%

Serbia 87%

Greece 82%

Czech Republic 79%

Austria 74%

Turkey and Slovenia 64%

Hungary 54%

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

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

Putin is a genius.

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

Ed. Note

Casey Energy Opportunities

Learn more here

Blarney Barney

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

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

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

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

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

Economics 101 for Politicians

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

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

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

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

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

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

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

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

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

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

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

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

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

Miscellany

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

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

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

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

Sincerely,

David Galland

Managing Director

Casey Research, LLC.

The Room 8/22/08

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

August 22, 2008

Dear Readers,

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

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

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

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

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

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

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

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

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

Fiat Finale

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

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

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

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

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

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

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

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

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

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

But that was what I meant…

Deflation? Don’t Bet on It.

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

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

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

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

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

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

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

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

Inflation, What Inflation?

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

Here is today's data:

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

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

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

Bud

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

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

Got Gold? Lucky You…

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

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

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

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

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

The Eagle Has Been Grounded

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

By IANTHE JEANNE DUGAN
August 21, 2008; Page C1

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

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

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

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

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

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

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

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

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

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

More on Gold’s Shortage

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

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

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

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

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

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

Other short-term precious metals forecasts adjusted.

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

Coming Events

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

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

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

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

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

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

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

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

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

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

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

OBAMA!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Can you say, “sell”?

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

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

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

Miscellany

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

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

That’s It for This Week!

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC

Where Is the Economy Going in the Next Six Months?

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

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

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

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

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

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

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

Short Term Projections

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

2. Consumers in the U.S. are not able to expand credit and are increasingly concerned about the outlook for the economy, so they will slow spending both at home and on imports.

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

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

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

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

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

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

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

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

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

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

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

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

The Room 4/22/08

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

Written: April 18 2008

Dear Readers,

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

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

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

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

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

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

The Energy Picture

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

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

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

Where does he see the price going from here?

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

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

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

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

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

Coal's Comeback

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

* Values for 2008 are preliminary reported numbers subject to revision

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

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

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

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

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

So, How Are Things Going?

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

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

Here's a Trading Idea...

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

The obvious is to buy food commodities.

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

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

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

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

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

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

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

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

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

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

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

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

On the Topic of Interest Rates

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

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

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

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

President Obama?

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

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

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

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

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

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

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

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

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

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

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

Another Casey First

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

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

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

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

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

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

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

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

Q&A

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

Hi David,

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

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

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

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

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

Yours truly,

Linda

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

Linda:

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

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

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

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

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

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

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

Terry

In Defense of Marx

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

David

Based on your following statement:

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

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

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

Ross

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

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

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

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

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

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

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

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

It's Official: I'm Out of Touch

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

According to Bloomberg:

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

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

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

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

Inflation Watch

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

Here's the story.

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

Political Pandering

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

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

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

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

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

The Price of Gold

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

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

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

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

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

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

Miscellany

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

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

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

Until next week...

David Galland
Managing Director
Casey Research, LLC

The Room 4/14/08

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

Written: April 11, 2008

Dear Readers,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rising Commodity Prices and Inflation

By Doug Casey

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

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

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

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

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

Bad Speculators

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

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

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

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

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

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

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

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

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

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

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

Take cover.

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

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

At this point, the odds greatly favor the latter.

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

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

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

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

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

Karl Marx would be proud.

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

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

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

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

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

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

The Ascent of Humanity

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

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

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

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

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

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

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

Is there an investment angle in this stunning new development?

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

Watch Out Below

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

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

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

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

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

China's Olympic Torchture

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And There's This...

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

Dear David,

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

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

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

Yours sincerely,
R.H.

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

Miscellany

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

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

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

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

That's It for This Week

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room 4/7/08

David Galland — Mon, 07 Apr 2008 16:03:54 GMT

Dear Readers,

This week finds me writing from Room 2218 of the infamous Jekyll Island Club. The hotel's adjective comes from a secret meeting held here in 1910 involving some of America's most powerful men. Here's an official history of that seminal event...

Soon after the 1907 panic, Congress formed the National Monetary Commission to review banking policies in the United States. The committee, chaired by Senator Nelson W. Aldrich of Rhode Island, toured Europe and collected data on the various banking methods being incorporated. Using this information as a base, in November of 1910 Senator Aldrich invited several bankers and economic scholars to attend a conference on Jekyll Island. While meeting under the ruse of a duck-shooting excursion, the financial experts were in reality hunting for a way to restructure America's banking system and eliminate the possibility of future economic panics.

The 1910 "duck hunt" on Jekyll Island included Senator Nelson Aldrich, his personal secretary Arthur Shelton, former Harvard University professor of economics Dr. A. Piatt Andrew, J.P. Morgan & Co. partner Henry P. Davison, National City Bank president Frank A. Vanderlip and Kuhn, Loeb, and Co. partner Paul M. Warburg. From the start the group proceeded covertly. They began by shunning the use of their last names and met quietly at Aldrich's private railway car in New Jersey. In 1916, B. C. Forbes discussed the Jekyll conference in his book Men Who Are Making America and illuminates, "To this day these financiers are Frank and Harry and Paul [and Piatt] to one another and the late Senator remained 'Nelson' to them until his death. Later [following the Jekyll conference], Benjamin Strong, Jr., was called into frequent consultation and he joined the 'First-Name Club' as 'Ben.'"

And so it was that the Fed, that blight upon the U.S. dollar and instrument of unlimited government power, was born. Some of you, learning in last week's missive that Doug and I were heading to this place, wrote strong words condemning the place as if it had a life of its own. Like, perhaps, the set piece of one of those classic horror films.

But writing from the perspective of an instant expert (as I have only been here three days now), the hotel is grandiose and very pleasant in a Southern manor sort of way. The food is excellent, the amenities are plentiful and the weather far more agreeable than that gripping my hometown in the Northeast. I would, however, caution you to avoid the place in summer; in addition to high heat, the bugs are reputed to be both fierce and relentless. Even now, in early spring, the truth of that reputation is confirmed by the occasional no-see-um enjoying a snack at my personal expense.

Apparently, the old club had fallen into disrepair after World War II, when the money men that founded the place, including J.P. Morgan himself, stopped coming here in favor of the more refined holiday resorts of Europe. Such disrepair, in fact, that it was closed for four decades before eventually limping back into existence as a 4H camp and, some have said, even a flop house. Thanks to a substantial infusion of cash from the state of Georgia, or, more correctly, the taxpayers of Georgia, the club and its grounds have been restored to their former state of glory and are now very much up to code.

But why are Doug and I here? As much as I wish it was pure holidaying, or even plotting to replace the Fed system and returning to one that is actually based on something more tangible than political whim, we are here at the invitation from a friendly competitor, Porter Stansberry, to attend his annual editors conference.

It has been an interesting experience because Stansberry tends to focus on investment areas we tend to avoid. That said, there is a solid contrarian streak that flows through the organization, such as the one that has some editors talking about homebuilders being a good buy just now.

Homebuilders? Surely you jest, I thought to myself as I listened to the presentation. But then, Steve Sjuggerud, editor of the highly popular and widely read Daily Wealth, discussed how, in a typical housing collapse, the shares in the homebuilders will go down by as much as 75% to 90%, a level that would make it seem hard to get hurt. But the more important thing is that when they rebound from those depressed levels, they can go up by as much as 300% to 500%.

Consulting the ever-reliable stock research tool on the CaseyResearch.com website, I find that Steve has a point. Centrix (CTX), which is shown in the chart below and will be mentioned later, is off by about 68%.

And the following chart is from another of the nation's largest builders, Toll Brothers (TOL), which is off from about $57 to $24... a loss of about 58%.

While I personally am of the belief that the real estate that underlies these companies has a long way to go before touching bottom... a topic we'll return to momentarily, it is hard to argue with Steve's basic premise that, at some point, the home builders sell at such a steep discount that there is pretty much only one way they can move: up.

It is a classic contrarian play and one to watch for. When the blood-letting has these stocks down by 80% or more, which I think we'll see, you can assume that pretty much anyone who is going to sell will have sold... which, for the speculative minded, is the time to buy. Then sit back and wait for the next upswing. It may take quite awhile for the payoff, but provided the companies have the financial ability to avoid bankruptcy - a matter for further and serious investigation - in time the upswing will come and provide a big payday.

The Trillion-Dollar Sure Thing

After falling as low as $887 earlier in the week, gold has come quickly back to $907 as I write in the wee hours of Friday morning. Why the fall? Sometimes it is hard to divine the minds of humankind, so I'm not really sure. Misplaced optimism? Profit taking?

Even so, gold showed its spine, returning quickly to the $900 level, a level which, as we have recently discussed in this missive, may be the new base for the yellow metal... a level below which people intuit that gold is "cheap." Which it is.

Why? Because it is the U.S. dollar that most people use when assessing the value of gold. And the U.S. dollar is being increasingly put at risk by the growing list of bailouts that are hastily engineered by the government and all its various apparatchiks. During a phone call the other day, our own Bud Conrad started tallying up all the money that the government has applied or committed to the unfolding crisis so far. The sum is now closing in on one trillion dollars.

Does that number concern you? Does it surprise you? Does it make you, mouth agape, stumble toward the nearest barkeep, your hand waving in a frantic attempt to capture his attention so that he might provide a restorative?

I suspect not.

Thanks to our being inoculated with a steady dose of large numbers, a number as huge as a trillion probably only softly touches your individual consciousness. The way, perhaps, that an acquaintance in this gentle clime might helpfully brush a fallen magnolia blossom from the shoulder of your white linen suit.

The impact should, however, register more like a solid slap across your ruddy jowls delivered by a southern belle after an imprudent remark encouraged by one too many mint juleps.

But a trillion-dollar bailout, just like a three-trillion-dollar war - or more correctly, in addition to a three-trillion-dollar war -- carries with it consequences. As an old and wise friend of mine now in his twilight repose in Portugal likes to ungrammatically say, "There ain't no such thing as a free lunch." And he's right, mostly.

A basic tenet of economics has it correctly that if you flood the market with a large supply of anything, the value of each successive unit must fall. Money is no different, and monetary inflation will, as sure as day precedes night, result in price inflation. And you don't need me to tell you that the cost of pretty much everything at this point is going up.

While the sort of price inflation that eventually stirs the masses to action is still ahead of us, there is little question at this point that it is inevitable. Therefore, betting that interest rates will rise as lenders demand compensation for the anticipated erosion in the value of their money between the time it is lent and the time it is returned to them, is as close to a sure thing - even a free lunch -- as you can imagine.

In the past I have mentioned those fairly rare occasions where Doug Casey, our illustrious chairman and resident guru here at Casey Research, gets a certain look in his eye and speaks with a certain tone in his voice that indicates that he is issuing forth, oracle-like, a forecast that invariably comes true. His view on the inevitability of interest rates rising strongly over the next few years is delivered with that same force of conviction. In fact, he is on the record, as recently as yesterday morning, saying it is the single most powerful trend he sees just now.

Personally, I have placed my bets on that particular outcome and you might want to consider doing so as well.

One of the best ways to do so is with properly organized EuroDollar puts. If you are a subscriber of the International Speculator and want to re-read our write-up on that investment strategy, simply access the March 2008 issue from the archives, or by clicking here.

If you are not yet a subscriber to the International Speculator, sign up today with our 3-month, 100% satisfaction money-back guarantee. Click here to learn more and sign up now.

(There is a reason that this publication is now in its 28th year, but me telling you and seeing for yourself - without risk - are two different things.)

China on the Brink?

At our recent Scottsdale Crisis & Opportunity Summit, I had an exchange with one of our many interesting subscribers. In the interest of his privacy, and because of where he calls home, I will call him only CG. He is an international entrepreneur whose latest venture has led him to take up residence in China for some time now.

In Scottsdale he told me that he had translated some recent observations I had made in this weekly column on the topic of China for his Chinese wife. His wife, as he relayed it, said something to the effect of, "He is exactly right. How does he know this?"

While it is always flattering to have one's opinion thought worthy by those in the know, what I found most interesting, and why I share this story here, is that my comments were about the potential for civil unrest in China. Not to be repetitious, but I think the topic important enough to repeat the paragraphs which CG's wife found so revealing... here they are:

After all, while many of the world's economic observers fawn over China's remarkable progress, the facts are simple. (a) The U.S. already has the infrastructure in place that China is now trying to build; (b) China is run by a cadre of corrupt communist comrades, not exactly a model ripe for emulation by a thinking person; (c) they have over a billion mouths to feed. Which is to say, any setbacks that cause the aspirations of its large public to be disappointed could result in social unrest and worse. (The rocketing cost of rice, up almost 100% over the last year, may be a catalyst for such unrest.)

Adding to the discomfort about the potential consequences of social unrest, one only needs to glance casually into the cupboard to find tightly packed examples of the culture's apparent disdain for steadily beating hearts.

Reaching into said cupboard, we pick up Barbara Tuchman's excellent Stillwell and the American Experience in China to read her accounts of General "Vinegar Joe" Stillwell's arrival in that country in the support of Chiang Kai-Shek, as despicable a two-legged creature ever to have wandered onto the human stage. In between other duties, Joe had to restrain himself, and his men, from opening fire on officers of Mr. Kai-Shek's nationalist army that would routinely punish the loss of even so much as a single lice-ridden blanket by a foot soldier with summary execution.

But as degraded as Chiang and his fellows were, they were nothing compared to the big guy himself. Based on readings on the topic, confirmed with an airplane seat consultation with an academic who had made the study of such things his life's work, Chairman Mao was reliably responsible for the unnatural deaths of over 50,000,000 of his fellow countrymen.

To disabuse you of the notion that China has reached a level of permanent stability, I would like to share with you a YouTube video that our own Louis James brought to my attention. While I have only watched part 1 of the 8 parts available (I plan on ordering the full documentary), it's enough to give you a better sense of the place than you'll get from the mainstream media.

The documentary is called The Tank Man and it is quite moving. View it here...

One of the consequences of a sense of unsettledness in that populous nation will almost certainly be a move to stash away more gold, something they can do more easily these days, thanks to a liberalization of gold ownership that began in 2005.

How You Trade: The Casey Broker Survey...

Recently we conducted a fairly comprehensive survey of how you, our highly valued and much appreciated subscribers, traded the resource stocks. Do you favor online brokers or the full-service variety? Do those of you domiciled in the U.S. buy on Canadian markets or over-the-counter? Who are your favorite brokers? What are the best ways to save on commissions? All these questions and more were addressed in the survey, the results of which you can read by clicking here.

We would also like to thank those of you who took the time to take the survey... it offers a valuable look at an important topic.

My Mother's House - Continued

Jim Turk of GoldMoney.com likes to view the economy and markets, using as his lens grams of gold, as opposed to the U.S. dollar, a fiction at this point. Apparently a regular reader of these weekly ramblings, he weighed in on the recent discussion of the current value of my mother's childhood home, a photo of which she sent along since my first posting on the topic. Here are Jim's comments...

Here's another way of looking at the price of your mother's childhood home in Mont Clair, New Jersey, which you note was purchased in 1929 for $45,000, sold below that price almost 20 years later, and now valued by Zillow.com at $1.24 million. Your comment that "the actual current value of the property is likely closer to twice that value" because it was subdivided into a number of lots is a pretty good estimate when viewed in terms of real money.

The dollar in 1929 was defined as 23.222 grains of gold, which meant that one ounce could be exchanged for $20.67. So that 1929 price was really 2,177.1 ounces. Gold today is trading around $930, which means the adjusted purchase price of your mother's house, allowing for inflation and other debasement of the dollar, is $2,024,703. It's not quite double the Zillow.com estimate, but that could be because gold is still relatively undervalued notwithstanding its rise in price the past several years.

In any case, this example explains why gold is money -- gold communicates value very effectively over long periods of time, making it the ideal money for economic calculation.

Regards
Jim Turk
(www.goldmoney.com)

While on the topic of real estate, I'd like to share another email from one of our subscribers, Frank, on a topic that I think you'll find of interest. As you'll see, he touches on some recent transactions made by Centrix, the homebuilder mentioned earlier.

I am a subscriber to Big Gold and International Speculator.

I am a real estate developer based in Sacramento, CA and doing business throughout Northern California. If you use this information, please do not use my last name.

In the Sacramento and surrounding area MLS, 51% of all listings are REO or short sale. 61% of all actual transactions are REO or short sale. With a bulge of ARM resets through July, the existing resale market should be soft for the next fifteen months anyway.

The real blood bath is bulk residential lots, both paper lots and finished lots. The privately held builders are mostly headed to bankruptcy. Of the big residential, privately held developers in my area, literally perhaps two survive and all the rest go down. When I meet with a residential developer who wants to "fire-sale" lots, there is no possibility for a transaction because in most cases the debt exceeds the land value. Which brings up the lenders. The lenders are not foreclosing yet. Why? Are they not being leaned on by the regulators yet? The attitude from the lenders so far is denial that they have problems. Other banks have problems but not them.

Some of the public builders are starting to dump lots. 30 days ago, Centex sold approximately 880 paper lots that they had paid $60,000,000 for three years ago and had spent an additional $10,000,000 in entitlements for a total of $70,000,000. They sold these for $8,000,000. $70,000,000 to $8,000,000 in three years! Centex sold 97 finished lots on Friday, March 28, for $27,000 per lot. The cost to finish these lots was approximately $40.000 per lot, therefore the residual land value is less than zero. 12 months ago, Centex had over $900,000,000 in unrestricted cash. Today they have just over $65,000,000. Do you see a trend? I think the residential market starts to come back in California in 2-3 years. The public builders run out of lots over the next 18-24 months and California keeps growing and there is continual if diminished housing formation.

Additional bad news is that the retail and office markets are starting to roll over now. These foreclosures have not started but will soon and will lag residential by 12 months or so. Office vacancies are rising and the big box retailers and grocers have all pulled out of the market.

In a follow-up email, I asked the author of that email, "How are you going to manage?" To which Frank responded...

Thanks for asking about me. I have no bad projects, one that is underperforming has NO DEBT! That is how you survive as a developer. Plus, having turned $250,000 into $1,500,000 over the last eight years, thanks to your investment publications plus Richard Russell's Dow Theory Letters, I know I will survive just fine.

I would keep one thing in mind, just about everybody is bearish on the real estate market and that is when it will eventually turn. I say the bottom is in 2009, not 5-10 years out, and then we will start a slow process of recovery but from a much lower base.

I've said it before, and I'll say it again. We have the best subscribers in the world. If you have comments you'd like to share, drop me a note at david@caseyresearch.com.

Energy Chart of the Week

Natural gas markets used to be regional and disconnected. Not so long ago, the gas price in Europe bore little relation to the gas price in the United States and vice versa.

Pipelines, even just fifteen years ago, were the only way that natural gas, on a mass scale, was transported. But not anymore...

The rapid growth of the liquefied natural gas (LNG) business has transformed natural gas into a global commodity. Nations like Japan now rely on LNG supertankers for the fuel to meet a significant chunk of their energy needs.

LNG is linking together natural gas markets from around the world. It's allowed the tiny Middle Eastern nation of Qatar, which has the world's third largest natural gas reserves (after Russia and Iran), to become an energy superpower.

Generally, the higher associated costs of LNG (liquefaction, transportation, regasification) have meant that the LNG price has been higher than the U.S. domestic price. This trend flipped between 2003 and 2006 due to a sudden uptick in LNG supply followed by Hurricanes Rita and Katrina, which wiped out production in the Gulf of Mexico and drove up domestic prices.

[click to enlarge]

In the last two years, we've seen LNG prices rise higher than Henry Hub prices once again. Indonesia's state-owned Pertamina just negotiated a deal with Japanese gas companies to sell LNG at over US$10/MMBtu until 2011. The Japanese are competing with Taiwan, South Korea, and a fast-growing Chinese market, all of which are clamoring for more LNG. When a minor earthquake took a Japanese nuclear power plant offline, Japan had to scramble to pick LNG for its natural gas-generated electricity, paying over US$20/MMBtu for some cargos, proof that its deal with Pertamina is no stretch and might actually look like a steal in a few years.

Another factor that few investors realize is that LNG prices in Asia are tied to the Japan Crude Cocktail, a benchmark for crude oil markets in the region. As the dynamics of Peak Oil make themselves felt, LNG prices will rise in tandem with oil prices.

Combine this with a growing need for cleaner fuels, like natural gas, and it's clear that the LNG market, and consequently LNG prices, are headed higher for a long time to come.

[Ed. Note: Jeffrey Brown, one of the faculty members at our Scottsdale Summit, is a petroleum geologist. He gave a very compelling presentation on the concept of the Export Land Model, which shows how declining production combined with rising consumption can result in oil & gas export countries rapidly reaching the point where they can no longer export.

Among many interesting points he made during his presentation, the most interesting was that, based on current trends, Mexico will ship its last barrel of oil to the U.S. in or around 2014... just 6 years from now.

This has, in my opinion, huge implications. For one, Mexico is currently the second largest source of oil for the U.S., so we will have to fight it out with our international competitors to replace that oil. Secondly, Mexico gets something like 65% of its GDP from its oil exports... which means we could see some real trouble south of the border.

You can read some articles by Jeffrey on the Export Land Model on EnergyBulletin.net, but for ways to invest in this trend, there is no better source than the Casey Energy Speculator or, for the more active traders among you, the Casey Energy Confidential. The trend of higher oil prices is a trend in motion that will stay in motion for years to come... so getting positioned in the right plays now should pay off in spades going forward.]

Miscellany

LAX Phyle. We have yet another brave individual willing to help coordinate a get-together with other members of the Casey "phyle" (yet-to-be-named)... this time in Los Angeles. If you live in that area and would like to meet up for a cup of coffee down at the corner store (or whatever passes for same in a city of 3.8 million), drop Kristen a note at phyle@caseyresearch.com and she'll help get you organized.
Just for laughs. Back in the day, I periodically used to have to suit up in coat and tie and wander through the canyons of Wall Street and other haunts of Corporate America where I would sit in endless meetings listening to oh-so smart people wax forth on things like strategic planning and "best practices." It did not take me long, even though I am a college drop-out, to ascertain that underneath the suits were just human beings. Conversant in the latest nomenclature and buzz words, yes, but human beings nonetheless. Someone kindly forwarded me the following video, which is funny - especially to those of you in the Southwest... but on one level, it is a bit close to the truth. Click here to view.
Favorite headline of the week: "Some homes worth less than their copper pipes"

And That, Dear Readers, Is That for This Week

I am now going to take advantage of the weather and the good company to wander the local golf links. I am fairly new to the sport, but enjoy learning it.

I usually close with a quick check of the markets, but I started so early this morning in order to rendezvous for the just mentioned game of golf, that the stock markets won't be open for another hour and a half.

Speaking of the stock market, you may have wondered why I made no mention of the new "Paulson Plan," but when you think of it, why bother? The final form of same will only really arrive after many months and endless political re-jiggering. In the end, the odds are good that the plan, if there even is one, will bear little resemblance to the current version being floated. Pay attention to the big trend, and the rest of this stuff is just noise.

And with that, I take my leave for a rare day of doing not much of anything at all.

Thank you for reading.

David Galland
Managing Director
Casey Research, LLC.

The Room 3/31/08

David Galland — Mon, 31 Mar 2008 20:08:36 GMT

Dear Reader,

I am writing to you in the pre-dawn from a soft chair in a Starbucks in Scottsdale, a vast improvement over the small desk in the cluttered toy room that I usually write you from on Fridays. 16 inches from my left hand is a "vente" (in the Starbucks' nomenclature, that means super sized) Americano (four shots of espresso with a dash of water to hold them all together) that I will be consulting with throughout this correspondence. I do so in an attempt to sterilize the effects of a glass of wine or two too many following the close of what I felt was another excellent Crisis & Opportunity Summit.

For those of you unfamiliar with the concept of sterilization, at least as the word is used in the discussion of modern economics, a topic that occasionally slips into these paragraphs, I will elaborate. Sterilization refers to the notion that a central bank can, upon spotting a storm cloud gathering on the horizon, unleash a flood of loose money - the amount is almost irrelevant, as long as it is enough, in their studied opinion, to re-juice the economy and keep the consumers consuming. Then, once the danger is passed, the same central bankers simply cut the supply of money, thereby "sterilizing" the prior injection of cash before the ill and otherwise inevitable effect of price inflation kicks in.

It all seems so logical, this fundamental underpinning of fiat economics. Sense a threat - unleash money. Threat passed - tighten up.

Yet, as you may have noticed, it apparently doesn't work. At least if you use the value of the dollar as the metrics of success, the staunch defense of which is supposed to be job #1 of the Fed. If you are looking for further proof of that contention, your contemplations need extend only far enough to notice that the greenback has lost some 80% of its purchasing power since its link to gold was broken in 1971. There is another side effect of the flawed foundation of the fiat system, at least as it is pursued in the U.S., namely that American consumers, encouraged by the loose money to make a hefty dose of spending a part of their daily activities, are now up to their nostrils in debt and many are underwater.

Over the last day and a half here at the Summit we have heard much about these and other consequences of the government's failed jiggering of the economy and, in particular, the depth and breath of the current crisis. Regrettably, I don't have time to go into great detail in this week's edition, as attempting to do so would result in my missing the plane back home.

To move things right along, I'm going to take the short cut of inviting others to join me on the page. Starting with John, a subscriber who earns his daily soup by serving as a professional real estate appraiser in Northern California. John kindly agreed to candidly answer a series of questions we sent him in our attempt to get a clearer picture of what's going on behind the scenes and under the hood in the all important real estate market.

Real Estate, the Insider's Perspective

Before we get to John's interview, I'd like to share some observations on just one of the many great presentations held at this Summit, that delivered by Andy Miller, one of the most substantial real estate investors in these 50 states (for Andy, a typical day's labor might involve the buying or selling a hundred million dollars worth of real estate or loans connected with same). Andy accepted our invitation to Scottsdale to share his perspective on the outlook for real estate going forward. While Andy used far more sophisticated language than I, I will summarize his outlook as thus:

RUN FOR COVER!

To be more specific, his view on real estate - and remember, Andy is as "inside" as inside gets - is that we are nowhere near the bottom and that some segments, commercial and condos especially, are going to fall off a cliff.

While there is little in the way of specific actions you can take to invest for a short-term profit from this unfolding situation - mainly because the stocks of almost all the publicly-traded real estate firms have already been crushed - Andy does believe that as this crash occurs it will create the opportunity of a lifetime. If nothing else, in six months or a year down the road you should be able to pick up that dream condo on your favorite beach for an off-key song. As to when the market might bottom, Andy's take is that it all depends on the actions of the government. If it stands aside and lets the market take its righteous toll on the overextended mortgagees and those who hold those mortgages, then the worst of the damage could be over in a couple of years (at least that was my sense of the timing Andy suggested). However, if the government, as it is prone to do, rolls up its sleeves and sets about fixing the many dislocations in the real estate market, then, like the Japanese before us, the real estate fiasco and attendant damage could stretch out for a decade or more. Hot tip: watch the politicians carefully (always good advice, in my opinion, especially if you find yourself in a tightly packed elevator with one).

Another of Andy's many insightful comments was that you should not trust appraisals. That's because, as the bubble inflated, loan officers, looking to make as many loans as possible, and the bigger the better, naturally gravitated toward the most liberal appraisers. By contrast, the more cautious appraisers soon found themselves in an un-enviable position portrayed so convincingly by the MayTag Repairman: sitting at an uncluttered desk, staring forlornly at the silent phone.

As is human nature, a great many, if not most, of the appraisers swallowed their ethics, put away the textbooks they studied when learning their trade, and as a basis of their appraisals began to use the amount of money they felt would evoke a smile on the thin lips of the loan officers.

The task of over-inflating the values became increasingly easier as the "comparables" available to appraisers began to reflect the new reality. To wit, if the shack down the street actually sold for $650,000, then who could dispute that the lovely fixer-up, lacking only in a little TLC (read: "new plumbing") was worth $1,000,000?

Which brings us, finally, to our guest interview with John, a residential real estate appraiser in California. As he described himself in the correspondence leading up to our interview... "I've been appraising in California for 18 years, and deal with the gamut of lenders, borrowers and developers, and see every story, scheme, and scenario possible. I have lots of anecdotal stories and evidence, as well as research and conclusions, from the extremely overbuilt new tracts, where builders are still building—because they're committed—and competing against first generation foreclosures in their earlier phases, and losing money on every sale, to small projects dead in the water or upside down, to the very rural, to the very upscale still paying cash."

With that introduction, here is our interview...

1. Have you ever seen things in the real estate market this bad?

In terms of the all-around uncertainty and worry being felt by borrowers, lenders, buyers and sellers, nothing this bad.

I was in southern California in the mid-1990s downcycle. Things had gotten overheated there especially, but the decline was much more orderly, over maybe 3-5 years, than this one has been in just two or so. In retrospect it was a fairly normal and not surprising correction. People and borrowers got hurt and became wary, but there wasn't the pervasive worry about the bottom falling out. And it wasn't as widespread. That is, while most everyone lost value in their homes in the mid-1990's downturn, fewer people were as directly impacted or in such a critical situation. There wasn't nearly the breadth and depth of indebtedness then. Today there is a much higher percentage of borrowers with a much higher level of debt because, in this run up, so many people continually ran up debt and sucked out their equity.

The frenzy of borrowing and lending up until a year or so ago was far greater than that which led to the escalating prices, and subsequent correction, in the early to mid-1990s. I see instance after instance of someone with say a $300,000 loan taking out a second mortgage or an equity line for $50,000 a year later, followed by an all new mortgage that consolidates the previous two plus tacks on another $50,000. So now they've got a $400,000 loan. Ten months later they get another $60,000. And, in 2004 through 2006 especially, there was a lot of 100% financing, usually a first and a second mortgage, often with the same lender.

The downtrend is not as steady as the mid-90s. It goes in real fits and starts. In cases of some very overbuilt communities I've seen the bar lowered by $30,000 in a single month in a $300,000 to $400,000 neighborhood. It's usually caused by sellers -- often banks -- unloading after a period of waiting or stagnating sales. All of a sudden what was thought of as a competitive asking price is now overpriced by $30,000 or more.

[Ed Note: Andy Miller said the best time to buy properties, when the time is right, of course, is at the end of quarters when the institutional holders dump properties in an attempt to clean up their books.]

2. Are appraisers under any pressure to give rosy valuations?

Not as much at this time, because the lenders are more deeply affected and truly reigning in. Mortgage brokers, who don't fund their own loans, will still try to put some pressure on, but the lenders—the ones actually putting out the money—are saying "tell us what's really happening in the market." They want to know because they've got lots of exposure and want to know the real story. In fact, where before, in the 1990s downturn, FNMA and most lenders encouraged appraisers to call the market "stable" versus "declining" even if everyone knew they weren't stable, this time around they expect to see the declining box checked, unless you make a very convincing case that values are in fact stable (not too common here in California). So, at this point lenders are really tightening. So even the magic cure of lowering interest rates won't help much when lenders are increasingly risk averse.

3. When a property doesn't sell in two or three times the normal time span, why doesn't the seller face facts and slash the price?

I've seen some slashing, and some sellers chasing the price down, but always a step behind. What they'd settle for now, but can't quite get, they could've gotten last year when they were asking $60,000 more. Reductions are more frequent and often sizeable. It used to be that you'd see a token $5,000 reduction, more just to get your listing visible again. Now large reductions are common. This is especially true in the high-end and custom spec homes. Every contractor and contractor's brother was building a spec home, getting bolder in how big and fancy they'd build them. After all if you can make $60,000 on a 2,000 square foot $400,000-value home, why not build a 4,000 square foot home with all the bells and whistles...it'll cost more and take a little longer but the market's just going up anyway. I watched one 6500 sq ft very high quality spec home go from a $2.5M asking price a few months prior to completion in 2005, slowly down to $1.9M, then $1.6M and so on, eventually to $1,200,000. In the end it sold for around $1,150,000. The guy must have lost money because I'm sure that quality cost him close to $200/sf just to build, not to mention the land (probably $200,000+) and the enormous holding costs for 2-3 years.

The other sellers are, of course, banks, whose motivations vary greatly. I've seen a few put money and effort into a home and try to hold out for reasonably close to market value, but most often they want to get them off their books as quickly as possible. Sometimes they're competitive and sometimes they blow them out. I had one agent who handles REOs (Real Estate Owned) for several lenders tell me sometimes they'll get word to get two sold in the next two weeks. He said that a decision was made, for example, to clear 100 properties nationally off their books in the next 30 days, so that meant orders were going to Region A to unload 12, Region B to unload 15, etc.

He said it was sometimes the case of regulators requiring them to reduce their REO units. In one case, the agent reduced a small home on 5 acres with a 3600 sq ft barn with additional 2BR apartment from $569,000 to $400,000, overnight. It was contracted in three days, and closed a few weeks later for $392,000. Someone had paid $710,000 for it in 2005 with 90% or maybe 100% financing. In another case a lender was asking $325,000 and accepted a cash offer of $175,000. The house was dumpy but sound and livable, and reportedly not a major fixer. It was just not worth $325,000 and the bank was tired of looking at it, and took the offer. Until then nothing in a 3BR/2BA in that neighborhood went below $275,000 or $250,000. Of course these are exceptional cases, but the downward pressure is very real, and very intense still. There are many properties for sale, and buyers are wary, or waiting. Some sellers, those fortunate enough not to have to sell, pull out of the market. Those that have to sell usually have to reduce their expectations.

4. Are there sellers who have been in denial for months about what their property is worth but who are about to come out of denial and make a big cut in the price? Are there many of them?

See #3 above. Again, there are always those that must sell. And, there's another category that falls in between the regular homeowner and the bank. It's the owner/borrower who's in trouble and must sell, or lose the house. This is the "short sale" situation, where the borrower owes more than the property is worth, and is engaging the bank in the selling process to have them accept less than the outstanding loan balance. The bank is involved in negotiations and must approve the final sales price. They're fairly agreeable, because the alternative is going through the entire default process, sinking more time and money into it, and likely losing more. And here we're just speaking about the first mortgage (trust deed in California) holder. Often a second mortgage holder will lose their entire loan amount; after all why would they step in and pay off a first mortgage that alone is more than the value of the collateral?

5. How is the market for buildable lots? More depressed than for houses? How much more difficult has it become to get financing for a buildable lot?

The market for lots has completely dried up. In this area (semi-rural northern California) land was on fire for several years, as contractors bought up nice lots and not so nice lots to build homes on. For a while everything turned to gold. People were selling land held in the family for a long time (just like silverware in the late 70s!). Developers, many inexperienced, were getting in to subdivide land to make 4 parcels, 12 parcels, or whatever zoning allowed. But it is a long and expensive process.

The craze and demand peaked probably in 2005-2006, and I still see some of these projects just coming to market. People have spent two years, and more money than they expected, to get their golden little subdivision, all finalized and ready to go to market...and the market is not there. The demand is so low for unimproved land now, but I haven't yet seen the capitulation I expect. I've seen small and medium sized subdivision projects, which are completely upside down. A friend of mine owns a commercial appraisal firm and specializes in large subdivisions. He's been the bearer of bad news too. In the frenzy, national builders were buying farm land in the middle of nowhere, some two plus hours from metro areas, to create new subdivisions and planned communities. Many of the tracts and phases that never got built now have a residual value of less than zero! That is, taking the estimated value of a proposed completed house (times 20 or 200 or 2,000 depending on how big your plans were!) and backing out the cost to build the house and all your infrastructure, bond obligations, etc., the land is worth less than zero. Of course, it is worth something, but only to speculators willing to sit on it for a long time. There's a reason it was farm land in the middle of nowhere to begin with. Some can't even go back to farming because of zoning and general plan changes and new houses now adjacent. [A whole other topic is farmers selling water rights to new developments and municipalities, resulting in what is an increasing amount of fallow land that's apparently not farmable now. Lots of unintended consequences, and unfolding opportunities?] It's going to be very interesting to watch the market unfold.

6. Based on what you are observing, how much further do you think prices are going down?

My answer would have to be anywhere from "some" more, say 15-20%, should well grounded optimism magically set in before year-end, to a lot more, possibly 30-40%, should news and conditions (and perceptions) worsen and snowball, or there be some unexpected large macro event that shakes things up on top of the underlying situation.

This, of course, is the unknown and unexpected, but these things happen. It could be a natural disaster, a military showdown, somebody doing something big and stupid in the Middle East, political correctness of "Olympic" proportions (what if the Tibet situation goes south, Richard Gere and fans get half the world to boycott China this summer and cause them to lose face in an epic way, and they decide in turn to boycott our dollar...), or simply some confluence of events, in the US or elsewhere, that ratchets up fears and concerns here.

In other words, if the stars line up, and lots of things go well, or appear to go well, throughout 2008, things may stabilize with maybe only a 15% haircut, from here, in general real estate values in the US. To predict less than this just calls for too much precision with all the variables and uncertainty, unless you really believe the downturn is about over, which I don't see. Under current conditions 5-10% can potentially whiz by in a month or a quarter, and is really just noise, between commissions, negotiating skills, fear and uncertainty, and the varied motivations of both buyers and sellers.

On the other hand, if things continue along with the same pressures as I see now, we'll likely see drops of 15% to 20%. If conditions fail to improve in the next 6-18 months, or are exacerbated in some way, then I think we could see larger drops in value, and a more prolonged decline.

Of course, there are many markets and sub-markets throughout the country, and some are more volatile and some more insulated than others. There will be some exceptions and some extremes. In general, though, I believe we're in for some more decline.

7. How long do you think it will be before we see prices come back to the levels they were before the crash? Are we talking months, years or decades at this point? We know this is pure conjecture, but what is your gut feeling based on many year's experience?

That's a long way to go back up, especially since we're still going down at this point. I'd have to estimate as much as a generation, at least for the areas that are being most impacted. It got so overheated with lenders, buyers and borrowers making mutually terrible decisions. Everyone is going to be wary for a long time, especially because this became such a speculation-driven run up.

Besides lots of average homeowners forgetting common sense (and forgetting that even attractive loans still require repayment) and assuming (speculating) that values would keep going up, there sprang up a whole class of everyday people that became speculators, and actually went out and bought second and third homes to turn over. These were people who otherwise don't do real estate deals, because the market doesn't normally afford that kind of opportunity. There was a huge disconnect from what typically drives a real estate market. Most people probably won't go near real estate speculation again, will be careful in their future borrowing, and will be wary of buying more houses than they need and can afford. So, until they're no longer the primary buyers and owners of real estate, and their kids and grandkids stop taking their advice, we probably won't again have conditions that will lead to a rapid increase in values.

Of course, natural growth and demand do cause values to rise, but it could take 10-20 years of typical appreciation (1-3% per year in traditionally less volatile areas, to maybe 3-6% in more active markets like California, the East Coast and Florida) to cover the ground of 4-8 years of frenzy. And that will be after the current downturn stabilizes, meaning oversupplies are absorbed, foreclosure and defaults have run their course, indebtedness is at normal levels, and healthy market conditions are back in place. That in itself will probably be another year or two at best. It doesn't seem likely that the down cycle will last only 2-3 years, considering the last one lasted 3-6 years when the underlying problems were not as bad. To summarize, to get back to where we were at the peak, at least in the areas hit the hardest, we'll need the time it takes to stabilize, at least a year or two, and then, depending on where things do stabilize, likely a decade or two of healthy and typical appreciation.

David again... my sincere appreciation to John for taking the time to work with us on this interview. Correlating his remarks with those of Andy Miller, and taking into account the sheer magnitude and importance of the real estate markets to the U.S. economy, I think the picture painted is fairly bleak.

That said, per Andy, when this wildfire eventually runs its course, it will create the opportunity of a lifetime for investors who have avoided the worst of the losses and have their capital intact.

As an aside, if you are, like John, an insider in a business with experiences that you think other subscribers would like to hear about, drop me a line at david@caseyresearch.com.

Democracy Versus Republic

As you may have noticed, I am no big fan of the idea of democracy because, in time, democracy inevitably devolves into a fight - with votes - at the public trough. Today, over 51% of the populace of the U.S. are net recipients of money from the U.S. government (read: their fellow citizens).

But if not democracy, what? In my view, it is a republic... a form of government whereby the government is limited to specific functions and no more, and where rights are inviolate and not subject to tampering by whichever gang of powerseekers have captured the flag.

On this topic, one of the participants at the Summit wandered over to me to share the following illustration of the difference between the two forms of government:

In a democracy, two wolves and a sheep get together to decide who they are going to eat for lunch.

In a republic, eating the sheep would be outlawed.

Universal Health Care Anyone?

At this point, given the high cost of health care, the high levels of indebtness which makes those costs unbearable to so many Americans, and because changing the system is as easy as voting in the Democrats, it is my opinion that universal healthcare is a sure thing for the U.S.

Given my time constraints, a more detailed discussion of the wisdom of adopting this large-scale giveaway will have to wait. But I would like to share a couple of anecdotes that will give you a hint as to my general views on the topic.

The first came out of a newspaper I picked up on a recent trip to Canada. The first paragraph, about patients in Ontario, pulls back the peel on the rest of the story, and reads as follows:

"More than 400 Canadians in the full throes of a heart attack or other cardiac emergency have been sent to the United States because no hospital can provide the lifesaving care they require here."

In the same newspaper (the Globe & Mail if I recollect correctly), I also noticed large ads paid for by the Canadian government, couched in a pleading language, for doctors. Given the sheer volume of red tape and effective income restrictions doctors in that country are saddled with, it is no wonder so many of their best and brightest now practice their professions here in the U.S., and there are shortages up north.

My second anecdote comes from a fun service I subscribe to called "This is True" (thisistrue.net). Here it is...

"PLEASE HOLD: More than 43,000 patients had to wait outside in ambulances for at least an hour last year before they could be seen in Britain's National Health Service emergency rooms. Standards require that patients must been seen within four hours when they arrive at an emergency room, so when busy, patients must wait outside so the clock doesn't start ticking."

Who knows, maybe the government in the U.S. will learn its lessons from the various universal health care systems being employed around the world, and won't let politics or demands from constituents drive the creation of a system that destroys the few remaining positive aspects of the U.S. medical system... or beggars the country any more than it already is... but that is a long-shot hope at best.

Inflation? What Inflation?

Last week I shared the story of my mother's childhood residence, in Mont Clair, New Jersey, purchased in 1929 for $45,000, and sold below that price almost 20 years later.

My friend of long standing, Ian McAvity, the editor of Deliberations, an excellent service for those of you who lean toward technical analysis, dropped me an email with the following message.

David,

You might be amused that Zillow.com estimates the value of 10 Sutherland Road, Mont Clair, NJ at $1.24 million currently.

Ian

So, $45,000 to $1.24 million in about 63 years. But it is worse than that, because the former family homestead was, according to my mother, subdivided into a number of lots, so the actual current value of the property is likely closer to twice that value.

I said to my wife the other day, following an expensive meal, that I need to recalibrate how I think about money. Simply, $20 is no longer the $20 I remember from my youth, but is actually more like $2.00, or even $1.00.

Thus, a dinner bill of $200 for a family of four at a decent restaurant should not evoke a reaction such as "$200! This is ridiculous! How does anyone manage to survive these days, let alone save any money!".

Rather, recalibrating my sense of value to the brave new world whose air we now breathe, my reaction should, going forward, be nothing more than, "Nice dinner, and look, it was only $20."

A self-delusion, or the new reality? You decide.

Bearish Questions

Ed Steer, the hardworking contributing editor to our Daily Resource Plus, sent along an article from Reuters on the Bear Stearns buyout, which I thought you would find of interest. I certainly did. Here's an excerpt...

NEW YORK -- Stunned Bear Stearns shareholders who saw investments virtually wiped out overnight when a takeover deal with JPMorgan Chase was unveiled are demanding to know how it was put together in the first place.

For instance, they -- and Washington lawmakers -- want answers on how the deal was arranged, and gained government approval and financing, all in a few hours, and seemingly without alternative bidders being canvassed.

They also have a host of questions about the role of the Federal Reserve and the Treasury Department in engineering the emergency deal.

So far some crucial details remain murky.

"Under the circumstances, shareholders should be entitled to know just about everything," said James Melican, chairman of shareholder advisory firm Proxy Governance Inc., which is expected to make a recommendation to investors on whether the deal should be approved.

"There needs to be full disclosure of exactly what happened over the weekend," he said. Investors have "an absolute right to know whether there is any other alternative mechanism that could either keep Bear Stearns in business or at least have them get a more appropriate price for their shares."

Billions of dollars in shareholder value have been wiped away in the last week. Based on current market prices, the takeover is valued at $2.41 a share, a shockingly low offer compared with Bear's $159 stock price last April.

Another highly unusual aspect of the deal is the way JPMorgan Chase & Co. has been allowed into the Bear Stearns Cos. Inc. to provide "management oversight of its operations."

If shareholders were to reject the JPMorgan offer, JPMorgan still would have been in a position to understand everything about Bear's trading strategies, staff quality and assets.

JPMorgan even has an option to buy the Bear Stearns' building if the deal collapses.

Congress also wants answers, particularly on the involvement of the Federal Reserve in pushing the deal, which came as Bear Stearns faced a sudden cash crunch and possible collapse. In an unusual move, the Fed agreed to lend $30 billion to fund illiquid Bear Stearns assets to help seal the takeover.

Among the unanswered questions are:

-- Were other parties asked to bid on Bear Stearns, or did the government solely approach JPMorgan about the takeover?

-- Were any overseas banks or private equity firms asked to consider a bid, or did the buyer have to be a large U.S. bank?

-- How did the Federal Reserve arrive at the $30 billion figure and did it discuss with Bear whether it was preferable to arrive at a quick sale or explore a bankruptcy filing?

-- How could due diligence be done and the deal approved in the space of a few frantic hours on Sunday?

-- And how can a party taking over another be allowed to run the target before the deal has gone through?

With so many unknowns, the Senate Finance Committee is reviewing the sale and particularly what implications it may have for taxpayers. On Thursday afternoon the committee's top Republican, Iowa Sen. Chuck Grassley, said he wanted details of the Fed's financial support of the deal, as well as how Bear insiders were being treated under the buyout.

In the House of Representatives, the chairman of the House Oversight and Government Reform Committee also wants to know more. The committee is conducting a "preliminary review" of the deal, an aide to Democratic Rep. Henry Waxman of California, who chairs the panel, said on Thursday.

A decision on whether to launch a more formal investigation or to hold committee hearings could take several weeks, said the aide, who declined to be identified. The aide added that the Bear Stearns developments dovetailed with separate hearings that Waxman's committee has conducted on compensation packages for top executives at troubled firms.

Here's a link to the full article.

And That Is It For This Week...

As usual, I have so much more I would like to discuss. But unusually, I have almost no time to dive in further.

I will leave off, however, by saying that I was pleasantly surprised while idly looking through a discarded copy of USA Today, while waiting for yet another jolt of caffeine to be delivered, to find the front page article of the Life Section of that publication dedicated to a glowing discussion of the town of Cafayate and the surrounding wine country, where my own favorite partner of all times is building out his own version of Galt's Gulch. (You can view more at www.cafayateliving.com).

Doug has always had a spectacular eye for moving into the right real estate markets at the right time, and it looks like he's done it again.

In any event, it is time to wrap these weekly musings and rush madly for the airport. Next week I will be writing from the forebodingly named Jekyll Island, Georgia, where Doug and I will be spending a few days in good company further pondering the world as we know it.

Until then, thank you for reading and for subscribing. And a special tip of the hat to all of you who attended our Summit. I have said it before, and I'll say it again, our subscribers are a remarkably philosophically sound and interesting lot. It is always a pleasure to spend time with you, and the Scottsdale Summit was no exception.

Very sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room 3/24/08

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

Dear Reader,

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

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

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

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

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

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

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

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

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

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

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

Problem Solved?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Blame it on Smokey the Bear

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

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

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

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

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

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

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

Which Brings Up an Interesting Question

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

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

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

I will, however, comment just a bit further.

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

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

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

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

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

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

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

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

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

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

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

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

What's Coming

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

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

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

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

Show Me the Money!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Energy Chart of the Week

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

[click to enlarge]

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

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

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

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

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

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

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

China Still Is Selling Us More and More

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

[click to enlarge]

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

Real Estate, Real Trouble

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

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

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

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

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

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

We live in interesting times, indeed.

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

Warm regards,

David Galland
Managing Director
Casey Research, LLC.

The Room 3/17/08

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

Dear Reader,

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

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

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

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

A bit more detail...

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

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

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

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

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

The Best-Laid Plans

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

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

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

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

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

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

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

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

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

Geologists Rule!

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

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

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

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

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

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

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

Click to Learn More About the 3-Month
International Speculator Trial Subscription]

Expert Reveals Wolves Pose No Danger to Sheep

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

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

Well, then, how about this:

Economists See US Avoiding Recession
or this,

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

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

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

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

Sluggish job growth for balance of '08

Housing doldrums to persist "for a very long time"

GDP growth for the year of 1.5%

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

But a recession? No.

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

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

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

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

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

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

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

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

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

How You Know When the Economy Is in Trouble

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

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

Among the listed members, I found...

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

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

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

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

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

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

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

Watch out below...

Are You a Skeptic?

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

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

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

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

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

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

So, as always with the Net, caveat emptor.

David again.

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

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

New Trend: The End of Printed Books

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

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

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

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

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

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

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

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

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

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

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

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

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

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

End Notes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And That's It for This Week...

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

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

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

And they say gold is risky.

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

David Galland
Managing Director
Casey Research, LLC.

The Room 3/10/08

David Galland — Mon, 10 Mar 2008 16:16:14 GMT

Dear Fellow Global Adventurers,

This past week I came across worthy comments from Dr. Marc Faber of the Gloom, Boom & Doom Report in which he comments that, by continuing to cut interest rates, Bernanke will eventually "destroy the U.S. dollar."

If Bloomberg is reporting accurately, and I see no immediate reason in this case to doubt them, Dr. Faber also said...

In the U.S., they pursue essentially economic policies that target consumption, which in my opinion is misguided. They should pursue economic policies that stimulate capital investment and capital formation.

We share Dr. Faber's sentiments on the outlook for the dollar. And his thoughts on how to solve the many challenges facing the U.S. economy resonate with us here at Casey Research, as well.

The fly in this otherwise pleasant and lightly scented ointment, however, is that -- thanks to the nature of democracy and even humanity's shared psychology -- Bernanke is powerless to take Marc up on his common-sense recommendation. In my opinion, the Fed is left with no course of action but to destroy the dollar.

I say that due to the mechanical aspects of Marc's suggestion. You see, in order for the government to stimulate capital investment and capital formation, it would have to greatly reduce the weight of its own dead hand on businesses and individuals.

There is a saying that capital flows to where it is best treated, the veracity of which can be proven by considering that on the order of 25% of the world's construction cranes are currently deployed in Dubai. And that city has no real resources of its own; it's located in the most geopolitically unstable corner of the globe, and has a physical climate that is measured only in terms of hot, really hot, and even hotter.

Properly restructured, the U.S. could, at the risk of sounding nationalistic, kick Dubai's butt. And China's as well.

After all, while many of the world's economic observers fawn over China's remarkable progress, the facts are simple. (a) The U.S. already has the infrastructure in place that China is now trying to build; (b) China is run by a cadre of corrupt communist comrades, not exactly a model ripe for emulation by a thinking person; (c) they have over a billion mouths to feed. Which is to say, any setbacks that cause the aspirations of its large public to be disappointed could result in social unrest and worse. (The rocketing cost of rice, up almost 100% over the last year, may be a catalyst for such unrest.)

Adding to the discomfort about the potential consequences of social unrest, one only needs to glance casually into the cupboard to find tightly packed examples of the culture's apparent disdain for steadily beating hearts.

Reaching into said cupboard, we pick up Barbara Tuchman's excellent Stillwell and the American Experience in China to read her accounts of General "Vinegar Joe" Stillwell's arrival in that country in the support of Chiang Kai-Shek, as despicable a two-legged creature ever to have wandered onto the human stage. In between other duties, Joe had to restrain himself, and his men, from opening fire on officers of Mr. Kai-Shek's nationalist army that would routinely punish the loss of even so much as a single lice-ridden blanket by a foot soldier with summary execution.

But as degraded as Chiang and his fellows were, they were nothing compared to the big guy himself. Based on readings on the topic, confirmed with an airplane seat consultation with an academic who had made the study of such things his life's work, Chairman Mao was reliably responsible for the unnatural deaths of over 50,000,000 of his fellow countrymen.

I digress.

Returning to my theme, the U.S. has everything it needs to be more than competitive on the global stage. All that needs fixing, really, is to eliminate the single largest obstacle to capital formation, the heavy weight of government. To be metaphoric, it is hard enough to successfully climb the mountain of capitalist endeavor -- having to do it with a large sack of rocks weighing on your spine greatly reduces the odds of success.

There are many ways that this reduction in the weight of government could be accomplished. A well-timed nuclear backpack going off in the nation's capital pops to mind. But such a solution would only be temporary and would lead, unquestionably, to a Hydra-like regeneration of even more and bigger government in its place.

No, the far better approach would be to put the institution on a strict regime. To treat the government the way a heartless physical fitness coach might, whose lunch money is entirely dependent on his client losing all but the essential ratio of body fat.

Personally, I can see no better way of getting right down to it than by anchoring spending by reinstituting a gold standard, then tossing out the entire tax code in favor of a level tax of 10%. (With the amount of wealth that would be created, forgiving even that burden for the true unfortunates would be of no fiscal consequence.)

In addition to providing a welcoming home for capital, among the many other advantages of making these moves, would be; (a) the elimination of the Fed. With no need to "manage" the currency, their disastrous reign over the world's money supply would come to a quick end; (b) the elimination of the horrible waste and costs associated with tax preparation, estimated to be a minimum of $150 billion a year, before taking into account all the personal time and worries that go into the current process; and (c) the government would be forced to be far more selective in its pursuits and to curb its unceasing expansion plans.

Making a necessarily loose calculation and using the current economy for same, a gold standard and flat tax together would require the government to live with a budget of about $1.38 trillion per year, requiring a substantial reduction in the $3.1 trillion it is projected to burn up in 2008.

But the reality would be not quite so stark, as the tax receipts would soar in the new economy as the world beat a path to set up to do business in the U.S.

There's just one problem with that practical, though utopian, view.

Which brings us back to the nature of democracy and the psychology of humankind. While the votetariat may talk a good game, when it comes right down to it, the majority is interested in seeing its favorite uncle not spend less but more.

More on health care. More on fighting global warming (or cooling, whichever idea has the most traction at the moment). More on bailing out subprime borrowers and lenders alike. More on the social security net. More on FDA inspections, more on financial regulation, more on building bridges and more on commissions to study the drug habits of professional athletes. Some want more money for Homeland Security and war, others want more money for foreign aid to this or that country or to protect pygmy elephants as they meander through dark jungles on the other side of the world.

Not very long ago, my own dear mother provided illumination on the topic when she told me that she, who had been a big Ron Paul supporter, had retracted her support after hearing him comment to the effect that he would, as she put it, "eliminate my Social Security."

And there's something else. The Germans have a word, Schadenfreude, which loosely translated means taking pleasure at seeing others fail. The tightly linked obverse of that sentiment is that we take umbrage when someone succeeds a bit too much.

Consider the indignation in some circles at Bush's "tax cuts for the rich"... tax cuts that will almost certainly fade away into the darkening horizon as the next administration comes to power.

But tax cuts for the rich... or, more accurately, those who aspire to wealth and succeed in gaining same, is exactly what the country needs to power through the looming crisis.

What the country doesn't need, really, is to keep depreciating the currency. What will it take for the average voter to wake up to the reality that the U.S. dollar has lost 81% of its value since its link to gold was cut in 1971?

If things continue on the current flight path, which is pretty much headed straight at the ground, we may soon find out.

The Right Way to Look at the U.S. Economy Today

[click to enlarge]

In the lead article of our December 2006 International Speculator ("Users Guide to Fiscal Calamity", view archives) we pointed out that the 20-year bubble in financial assets was only temporarily and lightly deflated in 2000, as the Fed's money pumping shifted the asset bubble to the housing market.

As a consequence, going into the current crisis, the long bubble was not only intact but larger than ever.

In the wee hours this morning, in between arranging his shirts and socks for a 6:30 am departure for a look-around of China, our own Bud Conrad somehow found the time to throw together the chart above, updating the data on the asset bubble.

If you step back from the chart, squint at it slightly, and use the power of your mind to add the two lines together, one representing equities, and the other housing... then mentally assign a net asset value to both... what you come up with is a clear road sign that the bubble still has a long way to go in a collapse, and that the collapse has begun.

Confirming that point, as I was writing this, the news came across the screen that U.S. payrolls contracted again in February, the second month in a row, and the most in five years. Understandably, the stock market is again in a free fall.

This is all but a continuum at this point. Yesterday, for instance, we learned that, collectively, the equity in American homes is now less than the debt owed on those homes. This is the first time this has ever occurred, or at least since the Fed started tracking that data in 1945. It is no wonder, therefore, that foreclosures and "walk-aways" are also breaking all the wrong records.

Rushing about trying to keep the wall from collapsing on top of the economy, the Fed announced today that it will further ramp up the largely indiscriminate, cut-rate lending it is making available to the banks, indicating that any hopes for a more intelligent approach to sorting things out will go unfulfilled.

Desperate Acts - Continued

On the topic of desperate acts, in recent editions of these musings, I have pointed to attempts by the bureaucrats to maintain the status quo by paying off bank employees in tax havens for client lists, selling off state lotteries and closing parks, etc.

On that general theme, this week provided additional examples:

The first entry is from Jubak's Journal, which appears regularly, it seems, on MSNMoney.com...

The Pension Benefit Guaranty Corp., the government agency that protects the pensions of 44 million workers in case their employers can't (or won't) pay promised benefits, has announced that to avoid going bust it will double the percentage of its portfolio -- to 45% -- that it puts into stocks. An additional 10% will go into alternative investments, including hedge funds.

In other words, facing a $14 billion deficit and even larger projected shortfalls, the Pension Benefit Guaranty Corp., or PBGC, decided not to save (by raising premiums) or to live within its means (by cutting benefits) but to gamble in the financial markets by taking on more risk. The PBGC was so proud of its new strategy that it announced it on Presidents Day, when the U.S. financial markets were closed and almost no one was paying attention.

While Mr. Jubak is to be thanked for bringing a little levity into the day, his indignation misses a key point. It's not as if they are actually betting with their own money. Even a complete wipe-out of the organization's remaining capital would be papered over with a quick press release that the government has had to step in and bail it out. People will shrug off the news, if they even notice it, as just another billion here, a billion there.

Unlike them, I view these billions as just more bricks in an increasingly rotted and dangerously tipping wall.

The second item comes from Bloomberg...

Jefferson County, Alabama, in a move that may cost it $184 million, said it wouldn't pledge reserves against $5.4 billion of interest-rate swaps tied to sewer debt that its bankers may demand.

...The county, which includes Birmingham, confronted a March 7 deadline to put up the $184 million in collateral or buy insurance to meet its obligations to JPMorgan Chase & Co. and three other banks on 13 swaps after S&P and Moody's Investors Service began downgrading the sewer debt last week.

"The county commission faces difficult decisions on the sewer system debt. However, these decisions will not be made at the expense of the county's employees," Jefferson County Commission President Bettye Fine Collins wrote in a memo to the workers.

I love Bettye's unusual candor... no question where her loyalty rests. Destroy the county's credit rating? Blow off $184 million? No sweat. But cause any expense or discomfort to the county's employees, no way.

Energy Chart of the Week

Last year showed both the promise, and the problem, with liquefied natural gas (LNG) imports to the United States.

[click to enlarge]

The promise is that rising LNG imports will offset dwindling natural gas imports coming down the pipe from Canada. Alberta, especially, will consume a much greater proportion of its own natural gas production to extract and upgrade their massive tar sands resources. With an emerging global market in LNG, a drop-off in regional supply shouldn't matter, or so the conventional thinking goes.

The problem is that the rest of the world is clambering for LNG as well - and they're willing to pay higher prices for it. In the first half of 2007, the U.S. was able to track down a number of cargos and imported a record amount of LNG. Then, a minor earthquake forced the Japanese to shut down a nuclear plant, and they had to rely on natural gas-fired power plants to make up the shortfall. In their desperation, Japan outbid nearly everyone for LNG cargos, and U.S. LNG imports plummeted. There was no sense in paying $12/MMBTU for LNG, when natural gas in North America cost nearly half that.

There are five regasification terminals for LNG in the Lower 48 and lately two of them have been sitting idle. LNG imports are still very low in the beginning of 2008. Last year, LNG imports averaged 45 Bcf per month, but in the first two months of 2008, that's down to 21 Bcf per month. Discouraging news for consortiums working to build more of these very expensive and very controversial regasification LNG terminals.

The wild fluctuations in LNG imports to the U.S. in 2007 demonstrated that until prices within North America go much higher, the U.S. will not participate in the global LNG market. The idea that LNG will flood the U.S. natural gas market with new supply and keep down prices is ludicrous.

North American natural gas prices will rise - as they have been for the entire decade - until it makes economic sense to go out and compete with the likes of Japan, Spain and others for expensive LNG cargos. By keeping an eye on LNG prices, we can gauge where domestic prices are headed. LNG prices are, in that sense, a leading indicator of domestic natural gas prices ¬- and, with the inevitable corrections along the way, they point to a future with natural gas prices of well over $10.

[Ed. Note: On behalf of subscribers, the team at the Casey Energy Speculator, which includes Dr. Marc Bustin, by well-deserved reputation one of the world's top unconventional oil & gas specialists, have been very closely watching the natural gas sector, including developments with LNG. If you want to know what they know, and their latest recommendations to profit, simply take the monthly service (complete with weekly online updates) for a test drive today. An unquestioning 3-month, 100% money-back guarantee assures your satisfaction. Check it out now.]

Bootstrapping It

Were you to place the America of today on a scale with the America of yesteryear, there are a number of measures by which the current model would fall short. At least if I was the one doing the weighing.

Consider, for instance, that in his time, which was the early 20th century, H.L. Mencken was, by a wide margin, the most popular newspaper columnist in the land.

For those of you who haven't yet had the pleasure of reading his writings, I would suggest you run, not walk to the nearest book store to pick up a collection. My personal favorite is the Vintage Mencken as assembled by Alistair Cooke.

Meanwhile, to tide you over, here are a couple of a multitude of his many quotable quotes...

"In the United States, doing good has come to be, like patriotism, a favorite device of persons with something to sell."

"It is inaccurate to say that I hate everything. I am strongly in favor of common sense, common honesty, and common decency. This makes me forever ineligible for public office."

There was another author from earlier times, one Horatio Alger, Jr., who was wildly popular in the 19th century based on his many dime story novels, mainly about scrappy lads who managed through honesty and hard work to fight their way out of poverty and into the proverbial mansion on a well-sited hill. (That he had a base predilection for the same scrappy lads failed to dent his popularity, it seems.)

This comes to mind because of an article Doug Casey thought you might enjoy. It is the story of a young man with everything, who decides to test the American dream by dropping out of his usual society, ignoring his material advantages, and with just $25, to try and attain some modest level of financial stability.

While some of you may be tempted, after reading the article, to catalogue the various reasons why the young man was a success, while others less fortunate at birth would be doomed to fail, I think the mere act of making that catalogue is wrong-headed. What the world needs these days, in my view, is a lot more of the "can do" attitude, and a whole lot less of the helpless victim mentality that so unprofitably grips the minds of such large swaths of current society.

In any event, here's the story...

Eye on Liechtenstein

Kevin Brekke, our Switzerland-based editor, has been helping us keep an eye on the developments in Liechtenstein, a canary in the coal mine, as far as we are concerned, for the outlook for financial privacy. Here's his latest report...

Hey David,

Well, as the news cycle exerts its influence on the Liechtenstein Event, like gravity it has pulled the story from the front page, to the back page, to off the page. But here's what we know (or what the media would have us think we know) as of Thursday, 6 Feb:

In true fascist government style, German politicians were clamoring for microphones and face time in front of the cameras to pound their collective chests with, as one newspaper caption put it, "true pride in their actions." I guess in Germany under the Merkel & Co. regime, coercion, bribery, and buying stolen property is considered praiseworthy. In any case, it was announced that close to 200 Germans had come forward and were cooperating with the tax authorities.

The scope of interest has also been revealed to encompass not just bank accounts in Liechtenstein, but also family and company trusts, and safe deposit boxes. The tax authorities were quite clear in their charge that anyone with cash in a foreign bank safety deposit box must be doing something illegal. Apparently being in possession of your own money outside your home country confers upon the citizen a verdict of guilty - guilty of what we don't know, but guilty nonetheless. And besides, it's so much more profitable and expedient to exercise habeus grabus than to ask questions and uncover the facts.

Not surprising was the piling-on of other socialist countries drooling to get their hands on a piece of this action. Greece, Italy, Spain, Portugal, Sweden, Great Britain, Ireland, and of course France, all expressed keen interest and deep concern to expose their own tax miscreants in the pursuit of "social justice." So pathetically desperate is Britain that their tax minister has announced that they will pay 100,000 pounds for a similar DVD with the names of British account holders.

In all fairness, there was a bright spot in this otherwise dark episode. A few clearer heads managed to elbow their way to the mic and interject some legal and ethical ponderings upon the shouting mob, er, the media. Sweden and Great Britain said that although they will pursue individuals to recoup tax revenue, they would likely not be able to bring criminal charges to bear, as the information was obtained via a crime - theft. Oh, those pesky details. The standouts so far have been Finland and Denmark. They took the argument further by saying that the theft of goods should not be rewarded - it's neither ethical nor legal.

More as it develops...

And That's It for This Edition...

It is an absolutely stunning day outside, and I swore to our production team that I would get this missive to them early, so I am going to line up both of those objectives and sign off now.

But first, a couple of quick housekeeping announcements.

Our Casey Research Crisis & Opportunity Summit is completely sold out. If you happen to come across a link to the event, please ignore it because we simply won't take any more registrations.
Based on subscriber feedback, we are going to re-double our efforts to tighten up the length of our monthly publications to no more than 24 pages. That said, knowing how prolific our team is, I suspect you'll be receiving additional special reports in between editions on topics that catch their collective eyes and that benefit from more in-depth exposition.

As is my custom, a quick check of the screen reveals that gold is hovering around $975, which is almost $200 higher than the average realized price of gold sold by Kinross Gold and other producers in producing their highly profitable Q407 financial results (to wit, the next quarterlies will only be better).

I also see that the DJIA has broken fairly decisively below the 12,000 benchmark. It's going lower.

Until next week... thank you very much for reading.

David Galland
Managing Director
Casey Research, LLC.

The Room 3/3/08

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

Dear Readers,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Race you to the trading desk!"

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

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

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

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

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

Bernanke Pushes the Button

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bud on Bernanke

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

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

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

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

A Trip Down Memory Lane

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

You can see Nixon make the announcement by clicking here.

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

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

In fact, the collapse may have already begun.

Energy Chart of the Week

By Chris Gilpin, Contributing Editor, Casey Energy Speculator

[click to enlarge]

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

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

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

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

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

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

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

The Other Important News of the Week

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

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

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

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

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

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

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

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

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

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

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

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

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

Visa's $19 Billion IPO a Scam?

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

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

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

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

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

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

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

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

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

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

"Probably," he said with a dismissive shrug.

He didn't get the job.

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

Miscellany

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

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

That's It for This Week

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

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

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

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

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

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

David Galland
Managing Director
Casey Research, LLC

The Room 2/18/08

David Galland — Mon, 18 Feb 2008 14:00:21 GMT

Dear Reader,

Foolishly, I now realize, I closed last week's column by announcing that I would endeavor to write today's entire missive without a single mention of... okay, well, just this once... government.

Some readers have suggested that I could meet the test simply by replacing that specific word with another, for instance, "Turnip." While the idea has merit, as does even that word (looks a lot tastier than it is), I believe that self-created rules are rules nonetheless and no cheating allowed.

But, given the deep influence of that particular form of human activity, the task of producing this edition of The Room is made all the more daunting by my admittedly childish challenge.

I suppose we could talk about the weather.

(Actually, we can! My wife, the chief science officer of our household, gives a dismissive sniff any time I mention the latest forecast from local news sources, then logs on to consult with http://www.ssec.wisc.edu/data/geo/, a geostationary satellite with a number of filters that, once you master it, provides all the intel you'll ever need about what's really coming next.)

Okay, well, that about covers the small talk.

But before we move on, I must make one small edit to the rules surrounding today's challenge... namely that, should I decide to quote someone else, that person will not be subject to the same constraint, because, well, they weren't aware of the rules in the first place.

Okay, now that we have the rules straight, I'm going to wander into the kitchen for a further consultation with my dear friend, Ms. Rancilio Espresso-Maker, and let our own Bud Conrad take over the reins for a few moments.

As you may recall, last week Bud commented on the obvious play to be had in lumber. In a similar vein, this week he looks at commodities as a sector play...

Commodities: Looking Beyond the News

By Bud Conrad

We have read Jim Rogers' comment on commodities in his new book and seen the price of gasoline when we fill up, but most of us get too distracted by some enticing traditional investment, like a stock in some extractive resource, to think beyond the obvious.

For a year and a half, I have been watching grains scream higher. With oil, gold and odd items like milk and butter rising, I start to ask what might be beyond the horizon.

First, to report the bedrock under the commodities, see how commodities have jumped. There's no deflation there.

[click to enlarge]

Here is a chart on Minneapolis wheat, from $5 to $18 since last summer:

[click to enlarge]

It has been said that the guys that made the most money in the gold rush were the suppliers that provided the tools to the miners. So, who are the guys that are making money providing tools to the commodity traders? Here is one measure of the jump in this vein: the price of a seat on the commodity exchange. It jumped from under $10,000 in 1971 to $725,000 at the end of 2007 in Kansas City. These seats are traded on the exchange, and can earn profits along the way by being leased out to institutions or rich individuals who want to place trades directly.

[click to enlarge]

And a seat on the Minneapolis Grain Exchange tells the same explosive commodity story, jumping from $16,000 as recently as 2004 to $280,000 now:

All this is obvious once someone points it out. What else should we be looking at?

David again. Care to take up Bud's challenge? Drop me your ideas via email: david@caseyresearch.com.

(A possibly profitable trend pops into my own mind... I'll share it a bit later on. But first, this...)

The First Annual Casey Research Inflation Google

One of our core theses is that global price inflation is on an unstoppable upswing at this point. Supporting that contention are nearly daily reports from around the globe of rapidly escalating inflation emerging everywhere from Russia to Saudi Arabia... from Australia to China... and almost literally everywhere in between.

In fact, I have a rather eye-opening way to prove the point.

Simply enter the following search query into your favorite search engine, formatted as follows... except replace the "name of country" with the name of any country that pops to mind. Be sure to include the parentheses.

(name of country inflation 2008)
What you'll find, without exception, is a recent news story about local price inflation ratcheting up far more than previous expectations.

For example, I randomly googled Egypt... and here's what I found.

On February 8, the bank initiated a hike of 25 basis points, bringing its deposit rate to 9% and its lending rate to 11%. The decision came in the wake of news that inflation hit 11.5% in the year to January, reversing Egypt's disinflationary trend from the last quarter of 2007...

Okay, let's try another one. Throwing a mental dart at an invisible board, it lands on... Mauritania? Here's that story...

NOUAKCHOTT, Nov 15, 2007 (AFP) Mauritanian President Sidi Ould Cheikh Abdallahi ordered villages to stockpile food to help cushion the effect of rising inflation, his economic adviser said Thursday. The announcement came just days after the latest unrest over the crisis. Some six thousand tonnes of wheat had already been put aside for the stocks as part of a bid to stabilise prices, said Sidi Mohamed Ould Biye. The announcement [came] after a series of violent protests since last week over spiralling prices have left one person dead and 17 injured."

There are a number of reasons for this powerful upswing, but none more important than the fiat monetary regime that allows for a steady, unfettered flow of freshly minted paper and its electronic doppelgangers to enter the market. The most widely used and traded commodities, energy and food, are, like canaries in an old-fashioned coal mine, early warnings of what's coming.

This week, for instance, we have the news out of England that families there are now spending an extra £1,300 pounds a year (US$ 2,550) on household items, most notably food and fuel, which, according to an article in the Daily Telegraph, are rising at the briskest pace in 17 years.

As you can see by letting your eyes float back up the page to Bud's first chart, which shows the commodities index curve moving up more or less steadily since the U.S. dollar's link to gold was broken, the canary is now lying on its back, its cute little feet stretched upwards, a convulsive twitch the only indication of a weak spark of life.

Is there any force on earth that can stand in the way of commodities continuing to rise over the next thirty years and beyond? (With the inevitable short-term corrections along the way, of course.)

Absent a wholesale abandonment of the fiat monetary system, the answer is no. That many of these same commodities are concurrently getting harder and more expensive to find in any useful quantities only exacerbates the problem.

And, of course, as the cost of living goes up, so must wages and benefits, some of which are already pegged to automatic adjustments.

By now almost everyone is familiar with the concept of "tipping" points -- that point beyond which the inevitable also becomes the imminent. My favorite partner of all times, Doug Casey, is of the opinion that we are at that point.

I am finding it harder and harder to disagree.

Unless you are new to our services, you should, by now, be getting pretty chummy with the right side of this trend through investments in precious metals, energy commodities and other "stuff." Played right, these investments will assure you won't be one of those who, like our barely breathing canary, are caught by surprise by the unfolding monetary crisis. And you might even get rich... or richer than you already are.

These are topics we will, of course, continue to cover at greater length, and with far more specificity, in our various subscription services.

[ED. NOTE: If you're new to Casey Research and are looking for a good place to get started, take an inexpensive subscription to our BIG GOLD as that monthly newsletter offers simple and lower-risk ways to play the inflation trend. For more on BIG GOLD and its 3-month, 100% money-back satisfaction guarantee, click here.]

New Zealand Get-Together

At this time of year, Casey Research chairman and namesake Doug Casey likes to hang his spurs either in Salta, Argentina, or just outside of Auckland, New Zealand, where he is at this writing.

Given that I already correspond with a number of subscribers from New Zealand, I asked Doug if he might enjoy hosting an informal get-together for anyone in the area. You know, a couple of beers, a few laughs, that sort of thing. He said it would be his pleasure.

While we don't have anything yet in the way of a specific time or place, Auckland is the nearest big town to him, so it will be at a suitably equipped establishment (i.e., the presence of beer pulls and a decent wine list) there at some point in the next week or so.

If you are in the area and would like to meet up, just drop me a note at david@caseyresearch.com and I'll make sure you get the details.

Dispatches from the Front Lines of the Credit Crisis

Remember back when... when certain individuals associated with certain unnamed institutions were pontificating that the subprime losses would amount to no more than $100 billion to $150 billion? It turns out that said individuals were somewhat ill informed, a point made clear by the steady stream of blood-soaked dispatches coming back from the front of the credit crisis. Just this week...

Mortgage insurer MGIC announced yesterday it had a net loss of $1.47 billion, or $18 per share, mainly attributable to a $1.2 billion loss reserve. The company is now said be to urgently seeking new capital in order to avoid further rating downgrades.
It was announced Wednesday that between April and December 2007 alone, Japanese financial institutions have incurred losses of 600 billion yen (US$5.5 billion) from investments related to U.S. subprime mortgages. I have recently come across credible analysis that says the Japanese banks are scrambling behind the scenes to avoid fully disclosing the size of their subprime losses, but that it could run into many multiples of the number reported this week.
Bond insurer MBIA this week begged for relief from short-sellers and further, asked that the rules be changed about how bond insurers are assessed. Otherwise, they were at risk of going out of business by virtue of having done a spectacularly poor job and being punished for it with a ratings downgrade. Predictably, their argument revolves around the time-honored contention that they are too large to fail. Which is another way of saying that the burden of their losses should ultimately be shifted to taxpayers.
Warren Buffett seems to disagree, in effect, encouraging their collapse by offering to off-load the company's municipal bond liabilities (as well as those of the other bond insurers) at fire sale prices. Grasping at straws, the equity markets did a dead-cat bounce on the news based on the observation that, "Ah, Buffett is doing what JPMorgan did in 1907 to bail out the stock markets!" Not so fast, say us...

Bud Conrad's take...

"Buffett is no dummy. He isn't in this for the good of the U.S. economy: he's in it to make money. So I doubt he is paying more than the Muni insurance is worth. The sellers are up against the wall, having fire sales to stay afloat.

"They would be selling off their only assets that are worth anything, leaving behind the toxic waste. This is not the bailout that will fix the overleveraged guarantees on $2.4T of bonds by these insurers; rather, it confirms that they are desperate, and even closer to worthless, in my opinion. If such a deal goes through, it shortens the life of the insurers unless a big government bailout emerges."
UBS, Europe's largest bank, announced this week a fourth-quarter subprime-related loss of almost $12 billion. And it's not over yet. According to Bloomberg, the bank's CEO said that 2008 would be another "difficult year."
Perhaps, like a child caught with its hand in the cookie jar and then tries to deflect attention by pointing to the chocolate-smeared face of a nearby sibling, UBS analyst Philip Finch issued a report today stating that, in his view, the world's banking sector as a whole could suffer another $203 billion in losses due to the credit meltdown.

A billion here, $200 billion there, this is beginning to add up to real money. Or is it? It's hard to say any more, thanks to the steady drumbeat of these large numbers. It is positively numbing.

Which begs the question...

What, Really, Is a Billion?

Some time ago, I did an article in which I tried to remind people just how much a billion dollars is.

As I can't find that article to republish here, I trolled into the internet, that source of all knowledge, to find a reference I recalled from speeches Ronald Reagan used to make on the topic.

Here it is, from a 1977 speech.

Does anyone realize how much a single billion is? A billion minutes ago Christ was walking on this earth. A billion hours ago our ancestors lived in caves, and it's questionable as to whether they'd discovered the use of fire.

A billion dollars ago was 19 hours in Washington, D.C. And it'll be another billion in the next 19 hours, and every 19 hours until they adopt a new budget at which time it'll be almost a billion and a half.

But let me really paint the picture for you. If you gentlemen sent your wives out on a shopping spree, and gave them each a billion dollars, and told them not to spend more than a thousand dollars a day, they won't be home for 3,000 years.

Of course, that was then, and this is now. Based on the 2008 budget, it no longer takes 19 hours for $1 billion of your tax dollars to go out the door, but just three.

Or, viewed another way, your tax dollars are being spent at a rate of $331 million each and every hour of each and every day... 365 days of the year.

And even at that frenetic pace, it still takes 125 days to spend a trillion. Using $100 bills as our unit of measure, we find that it would require a stack 670 miles high to add up to $1 trillion.

Gee, I'm not sure that helped.

The Solution to All That Ails the World
(But Don't Tell Anyone)!

By Doug Hornig

Last weekend's meeting of the G-7 finance ministers in Tokyo came and went without much publicity. Concern about the state of the world economy was expressed, but no momentous actions were taken. Yawn. Yet for those who were paying attention, some very revealing dialogue slipped out.

Now let it be said that honesty and transparency are uncharacteristic of government in general. If they were more common, the people might actually know what was going on behind the curtain. And that's the last thing governments want because, were the public not so dumbed down, it might respond appropriately, with torches and pitchforks.

Thus our surprise at the following:

One of the things G-7 officials discussed was the need for collective action to calm markets if price moves become irrational, Jean-Claude Juncker was quoted as saying.

Juncker, who chairs the Eurogroup -- the monthly meetings of Eurozone finance ministers and the European Central Bank -- said in an interview he's concerned about ongoing turbulence in the financial markets.

"We are not yet at the end of the crisis," Juncker said. "The corrections will drag on for a few weeks, months. We have agreed in Tokyo that if there are irrational price movements in the markets, we will collectively take suitable measures to calm the financial markets."

No big news there. Although we devoutly believe in free markets, we're not so naïve as to believe that's their actual state. Governments intervene, all the time. Always, of course, "for our own good."

But here's the kicker. When asked what form such collective calming action might take, Juncker said: "Whoever has a strategy, should not set it out. Otherwise it will lose its effect if it is explained."

Well, that exposes the man behind the curtain, doesn't it? What Juncker is admitting is that not only should governments intervene, but it's important that they do so in secret. A strategy explained might become ineffective. Or, in other words, if people knew what these guys were up to, they might not want to go along!

A remarkably candid moment that Juncker probably wishes he could take back.

[ED. NOTE:Doug Hornig is the editor of the Daily Resource Plus, our free daily e-letter on all the latest news related to resource markets. If you are not yet receiving this valuable, yet complimentary service, you can sign up by clicking here now. ]

An Unfolding Trend

Earlier in this edition, Bud challenged readers to come up with other trends and ways to play them profitably.

I have an early entrant. It is that over the next ten years, we are going to see a growing number of nations to ban the export of critical resources.

As I have commented on in the past, given that it has now been established that Mexico's massive Cantarell oil field is past its peak and at risk of becoming uneconomic within the next 10 years, how long do you think it will be before that country starts restricting oil exports to its northern neighbor?

In fact, oil imports from Mexico are already off by 21% just since December 2006. And they are expected, based on current trends, to drop by as much as another 1 million barrels a day over the next decade (from about 1.3 million bbl per day currently).

For the record, in addition to Mexico, the other largest oil exporters to the U.S. include Canada at the #1 spot, followed by Saudi Arabia and then Venezuela, at #3. Thus, when Hugo Chavez threatens to cut oil shipments, as he has done again recently, it is a threat actually worth paying attention to.

So, one entrant on a trend to profit from would be to buy the oil sands companies that have gotten beaten up. It is just a matter of time before Canadians see the wisdom of dropping a nuclear power plant over the oil sands, providing the energy required to extract the oil economically. This play could take awhile to unfold, but given how beat up many of the oil sands companies were, it's a play to keep an eye on.

But my big idea here is that, as the world's resources come under increasing pressure, you can expect to hear more and more calls for countries to limit exports -- the equivalent of hoarding on a national scale -- leading to massive economic dislocations and, one would assume, opportunities for the fleet of foot.

Lending support to this idea, Vietnam announced this week that it would immediately begin cutting back the amount of coal it will allow exported, and is thinking of stopping all exports by 2015. According to Bloomberg, Nguyen Khac Tho, vice director of the Ministry of Industry and Trade's energy and petroleum department, made the following comments in a phone interview:

Coal is a resource that can't be renewed. Our most important task is to meet domestic demand to ensure national energy security.

([ED. NOTE: I would be remiss on many levels if I didn't mention that we have been following the coal story closely in the Casey Energy Speculator... to learn more and take a trial subscription is as easy as clicking here.)

The Letter Bag

I received the following note from a subscriber, Daniel T. I thought you'd find the following excerpt of interest.

Dear David,

I want to convey something that may be of interest to you, with regard to what's happening in the ongoing saga of the big banks. About six weeks ago, a close friend told me that she had just gotten a letter from her mortgage lender informing her that her HELOC (Home Equity Line of Credit) is now frozen due to the "current financial climate" or some vague reason like that.

I immediately thought about my own HELOC and said to myself "They won't ever do that to me – I'm an accredited investor, never ever a late payment on anything, no credit card debt, no car loans, lots of equity in a higher-end home in a neighborhood that actually appreciated in the last year, great FICO score, etc."

My HELOC was for about $250,000, which I never touched and only thought of it as perhaps useful one day for some quick cash to bridge some investment opportunity, or whatever.

But because I believe Bud Conrad and all his brilliant analyses (not to mention you and the rest of the Casey crew), I decided to take all of my equity money out of the HELOC except for a few thousand, and put it into something that will return, at the very least, the cost of the interest payment and exceed even that for some profit. (That's not hard to do being a Casey Research subscriber).

Guess what? In less than a week, I got the same letter as my friend. It was from IndyMac Bank, one of the bigger banks, telling me that my HELOC was now frozen. From the contents of the letter, I could tell that it came from another department of IndyMac which had no idea I had just cleaned them out.

You better believe that I was very happy I got those $$$ out and put them to good use.

I tell you this so as to possibly warn others, especially those that are absolutely depending on their HELOC to carry them through rough times. We are going to see a lot more of this. If they would do this to someone with my financial profile, then, well... look out.

Just Google "banks freeze helocs" and have a look. One can only imagine what will happen when this becomes widespread and what will happen to people who utterly depend on their HELOC for survival. Scary. This could be the last straw for many.

I'm very much looking forward to seeing you again at the Crisis and Opportunity Summit in Scottsdale. The last one was great.

Best,

Daniel Trevor

Make no mistake, the credit crisis is far from over. In fact, it is spreading.

Miscellany

Foreigners Go Home... Many in the U.S. wish the illegal immigrants would get the hell out. Well, if you fall into that camp, you will be cheered to hear that you may be getting your wish. An unintended consequence, however, is that they may be taking some segments of the economy with them. Follow the link below for the story from the New York Times.

Click here to view.

Except Sovereign Wealth Funds... Here's a cool tool to look at the size and distribution of sovereign funds. Note that there are two tabs in the upper right-hand corner of the page the link leads to... http://tinyurl.com/yokar9

The Nature of Complexity... I have often commented on the fact that we live in a complex world. Which is why, no doubt, so many people are willing to let the mass media do their thinking for them. It is far easier to accept as truth the latest news burbling out of CNN, rather than puzzle things out for yourself. On that topic, earlier this week, Doug Casey forwarded me a link to an exceptional speech on that topic by author Michael Crichton.

If you are comfortably seated and have a bit of time, do yourself a big favor and give this a read. You might even want to pass it along to your family, friends and associates. Given the general dearth of critical thinking these days, the world can use all the help it can get.

Here's the link...

http://www.michaelcrichton.com/speech-complexity.html

And that, dear readers, is it for this week's edition.

In review, I found that I sort of, but not quite, avoided references to the "Turnip" today. It is, I can assure you, no simple task given the deep roots that the Turnip has in all things, financial and otherwise.

A quick glance at the numbers shows that gold is holding, yet again, over $900 on the week, and the U.S. stock market is, once again, losing ground.

As always, I greatly appreciate you taking time out of your day to read, and for subscribing.

Sincerely,

David Galland
Managing Director
Casey Research, LLC.