The Room : Politics

The Room – 03/20/2009

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

Dear Reader,

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

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

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

And now, everything is going to hell.

Bernanke's Gamble

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

This week we saw two developments related to this story.

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

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

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

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

Here are some of the highlights:

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

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

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

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

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

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

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

David again.

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

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

Which brings us to our second story.

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

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

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

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

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

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

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

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

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

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

And the government isn't done yet.

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

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

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

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

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

Sharp Words

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

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

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

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

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

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

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

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

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

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

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

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

Or you can call it "change."

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

Protectionism

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

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

Those trading partners are starting to slap back.

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

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

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

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

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

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

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

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

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

Evil Capitalist Polluters!

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

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

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

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

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

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

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

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

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

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

The Coming Credit Crisis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"AIG Scum Out of Town!"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It Just Doesn't End

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

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

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

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

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

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/27/2009

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

February 27, 2009

Dear Readers,

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

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

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

The Bad News

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

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

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

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

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

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

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

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

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

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

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

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

The Good News

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

Casey Trend Trader

not

Casey Trend Trader

learn more about our Trend Trader trial offer here

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

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

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

Now, take them.

A Musical Interlude

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

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

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

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

A Golden Opportunity

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

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

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

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

Watch it by clicking here.

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

Rand Refinery Ltd.

Johan Botha

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

Damn Foreigners

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

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

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

This is a dangerous game.

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

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

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

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

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

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

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

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

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

Look for the Union Label

By Donald Grove, Casey Research Washington Correspondent

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

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

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

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

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

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

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

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

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

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

Here are the orders for those who wish to scrutinize.

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

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

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

Thank God it’s Friday!

Regards, Don

State Sovereignty – Saying “No” to the Feds

By Shannara Johnson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Revolt – Part I

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

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

Dear IRS,

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

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

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

Ed Barnett
Wichita Falls

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

Tax Revolt – Part II

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

Tax the table at which he's fed.

Tax his tractor, tax his mule,

Teach him taxes are the rule.

Tax his work, tax his pay,

He works for peanuts anyway.

Tax his cow, tax his goat,

Tax his pants, tax his coat.

Tax his ties, tax his shirt,

Tax his work, tax his dirt.

Tax his tobacco, tax his drink,

Tax him if he tries to think.

Tax his cigars, tax his beers,

If he cries, tax his tears.

Tax his car, tax his gas,

Find other ways to tax his ass.

Tax all he has, then let him know,

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

When he screams, then tax him some more.

Tax him till he's good and sore.

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

Put these words upon his tomb,

“Taxes drove me to my doom...”

When he's gone, do not relax,

It’s time to apply the inheritance tax.

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

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

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

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

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

Miscellany

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

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

Stay the course.

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/20/2009

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

Dear Reader,

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

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

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

Making It Up on the Fly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Credit Capitulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About That Whole Deflation Thing…

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

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

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

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

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

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

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

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

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

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

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

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

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

I wonder if the foreign dollar holders are buying it?

China Dumping Dollars?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s Talk Gold

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

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

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

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

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

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

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

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

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

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

Shattered Hope

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

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

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

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

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

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

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

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

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

Just for Fun

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

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

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

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

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

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

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

"Done!" replies the government official.

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

A Really Good Read

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

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

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

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

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

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

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

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

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

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

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

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

Miscellany

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The thumps being my head repeatedly hitting the desk.

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

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

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

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

We live in interesting times.

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/24/2008

David Galland — Mon, 27 Oct 2008 15:47:33 GMT

Dear Readers,

I have woken in the pre-dawn to find our direst predictions coming true, with global stock markets taking yet another pounding and U.S. stock futures limit down.

Serving as a proxy for the mindset now gripping governments around the world, French President Sarkozy has announced that the French government will, henceforth, buy shares in important French companies in an attempt to prop them up.

"We will intervene massively whenever a strategic enterprise needs our money," said Sarkozy, a supposed economic conservative, as he pounded the table on behalf of nationalizing industry.

The New Age of big government is upon us. Armed with Harry Potter-like magical monetary wands, they are wildly conjuring a deluge of money from thin air to bind the free market and keep it from facilitating the resolution of economic and investment dislocations created over decades.

Bud Conrad tells me he is having a hard time adding up all the fiat money that has been committed to the battle for economic – and, by extension, political – survival over the past couple of months. The numbers rolling off the lips of officialdumb have progressed well past the hundreds of millions, or even hundreds of billions, and have now reached the trillions.

In that theme, the Fed announced this week that it would drop over half a trillion – $540 billion, to be exact – on the purchase of suspect commercial paper now clogging the portfolios of "safe harbor" money market funds. Given that there is a total of $3.4 trillion of your money resting in those very same funds, the commitment of $540 billion – about 16% of the total – should be taken as an indicator of just how bad the problem really is.

A friend of mine, employed as an executive in the money fund business, worried aloud to me over a cup of coffee a couple of months back that if even 5% of the total holdings were found lacking, the huge money market complex that provides his paycheck would be in deep trouble. That the Fed is opening the bid with 16%, therefore, says much.

Now my friend doesn't need to worry... his hefty paycheck is secured, compliments of Uncle Sam or, more accurately, the suckers whose pockets he so smoothly picks. Similarly, the stock portfolios of French shareholders are also now secure, compliments of Sarkozy.

On the topic of suckers, there is an old poker saw that goes, "If you are playing poker and within 30 minutes you can't figure out who the sucker is, it's you."

Well, the game has now been going on for about 50 years, and the average taxpayer is still glancing around, bug-eyed, trying to figure out who the sucker is.

They are about to find out.

The Trial of Gold

They filed into the docket, faces bright and smiley despite the shackles around their arms. The leader of the gang, Mr. Gold, was pushed forward into the defendant's chair. The rest, including Ms. Silver as well as the members of the resource share clan, Biggie Goldshares, Junior Goldshares and Ms. Silvershares, were manhandled onto the hard bench just behind. Rather than looking discomforted at the treatment or the ugly smells and sounds of the crowded courtroom, they just looked around pleasantly, as if on a church-sponsored outing to the local zoo.

Calling the court to order, the bailiff announced that all should rise for the judge. Shortly thereafter, Judge Market entered from stage left, a stern look in his eye. Approaching the dais, he arranged his robes around him and took his seat before gaveling the court to session.

The trial of Gold had begun.

"Mr. Gold, you and your cohorts have been accused of misleading investors into thinking that you would help them preserve their wealth, when exactly the opposite has been true of late. How do you plead?"

"Not guilty, Your Honor," Mr. Gold answered brightly, receiving a dour look in return.

"Mr. Cuomo, you may question the witness," Judge Market announced impatiently.

As Mr. Gold made himself comfortable in the witness stand, Andrew "Son of" Cuomo, taking a break from his well-oiled political career, I mean, job as New York attorney general, to serve as the public prosecutor in this high-profile case, rose smoothly to his feet, patted an imaginary loose hair into place, shot his cuffs, and approached the defendant.

"Mr. Gold, behind me in this court are good folks, hard-working folks, who believed in you. Yet you have failed to perform as advertised. How can you sit there, all shiny, and claim that you have not deceived the public in this regard?"

A pleasant and, some might say, radiant smile fixed on his face, Mr. Gold responded in an even voice. "I'm just a simple metal. I've never made any claims one way or another, so I don't know where people got it into their heads that I'm anything special. But for thousands of years now, people have been chasing after me, all over the world. Beats me why."

"Your Honor, if I may." The defense attorney, Mr. Reason, rose to his feet.

"Yes?" asked Judge Market, looking grumpy.

"I know it's a bit unusual, but Mr. Gold is not exaggerating when he says he's, well, kind of simple. If it pleases the court, it might speed things along if I could ask some expert witnesses to assist in answering the prosecutor's questions. Can do?"

"Highly irregular," said the Judge, glancing over at Mr. Gold where he sat, his smile and countenance oddly reassuring in the dark, smelly courtroom. "Mr. Cuomo, any objection?"

Seeing the fond looks in the eyes of many in the courtroom as they stared, fixated, at Mr. Gold... and after a quick consultation with his internal popularity meter and coming to the conclusion that he didn't want to appear mean-spirited, Cuomo nodded in agreement.

"Thank you," Mr. Reason said reasonably. "Then I would like to ask the Ghost of Murray Rothbard to join Mr. Gold on the witness stand."

As the court watched, their collective mouths somewhat agape, Rothbard's ghost floated softly to the witness stand and landed on the rail next to Mr. Gold, who winked at him amicably.

"Ahh, okay, well..." Mr. Cuomo, stammered, looking a little discomforted by the sight of Rothbard's ghost, his transparent bow tie ruffled slightly by some unfelt celestial wind. "How do you answer the charge against Mr. Gold that he has lured people to him under false pretenses?"

"I'd like to answer by quoting from an excellent book on the topic, the very best, in my opinion," said Rothbard's ghost with a wry smile. "It's called The Mystery of Banking and it is written by... me!"

In all countries and all civilizations, two commodities have been dominant whenever they were available to compete as moneys with other commodities: gold and silver.

At first, gold and silver were highly prized only for their luster and ornamental value. They were always in great demand. Second, they were always relatively scarce, and hence valuable per unit of weight. And for that reason they were portable as well. They were also divisible, and could be sliced into thin segments without losing their pro rata value. Finally, silver or gold were blended with small amounts of alloy to harden them, and since they did not corrode, they would last almost forever.

Thus, because gold and silver are supremely "moneylike" commodities, they are selected by markets as money if they are available. Proponents of the gold standard do not suffer from a mysterious "gold fetish." They simply recognize that gold has always been selected by the market as money throughout history.

Generally, gold and silver have both been moneys, side-by-side. Since gold has always been far scarcer and also in greater demand than silver, it has always commanded a higher price, and tends to be money in larger transactions, while silver has been used in smaller exchanges. Because of its higher price, gold has often been selected as the unit of account, although this has not always been true. The difficulties of mining gold, which makes its production limited, make its long-term value relatively more stable than silver.

Concluding with a large smile and a wave of the hand, Rothbard's ghost graciously accepted Mr. Reason's words of gratitude for taking time out of his schedule to make an appearance, then stood on the rail of the witness box and, with a flourish, took a deep bow before flying out the door to return to his ethereal seat in the heavenly branch of the Austrian School of Economics.

Mr. Cuomo played for a moment with a well-manicured cuticle before whipping around, his finger jabbing in the direction of Mr. Gold. His voice rose dramatically.

"And what, Mr. Gold, do you have to say on the topic of inflation? Can you deny that you and your friends claim to be inflation hedges? If so, then how do you answer to the fact that you are now selling for a lower nominal price than back in 1980! And, in inflation-adjusted terms, you are well behind! You, sir, are a fraud!"

Mr. Gold's smile remained unchanged, his countenance pleasant as always. "I'm sorry, but I really don't understand what you are talking about."

Mr. Reason again took to his feet. "Mr. Cuomo, if I may?"

"Oh, alright. Have at it."

"The defense calls Terry Coxon of The Casey Report. Mr. Coxon, would you be so kind to answer Mr. Cuomo's question."

Coxon made his way from a seat at the back of the courtroom where he had been enjoying the show and walked over to stand next to the witness box. Unable to help himself, he reached out and gave Mr. Gold a pat on the arm.

"So, Mr. Coxon," Son-of-Cuomo barked, "How do you explain that in 1980, gold touched $850. And here, 28 years later, it is trading for less than that – even though inflation has been persistent throughout the period. The claim that gold is an inflation hedge is simply false!"

Speaking slowly, to be sure that Mr. Cuomo understood, Coxon replied...

What moves gold isn't the rate of inflation but the change in the rate of inflation.

When people expect higher inflation, they bid up gold. When people expect lower inflation, demand for gold drops, even though "lower" may still be very high. That's why gold trended down in the 1980s, even though the inflation rate was high. The inflation rate was high, but it was declining.

There is a simple reason for this relationship. Gold and the dollar are both a store of value. Gold is more reliable in the long run, and the dollar is more reliable over shorter periods. Because they do somewhat the same thing for their owners, they are competing products, but with different attributes.

For example, the cost of holding dollars for their usefulness as a store of value is the gradual erosion of purchasing power -- price inflation. In a period of rising inflation, using dollars for storing value becomes relatively more expensive than using gold. So the demand for gold increases. And since the supply of gold – in ounces – is nearly fixed, the price per ounce goes up.

To sum it up, the price of gold is lower today than in 1980 because the rate of inflation now is lower -- much lower -- than in 1980.

Judge Market looked thoughtfully at Mr. Gold. "Mr. Cuomo, any more questions for this witness?"

"Not at this time, Your Honor," Cuomo said, flicking an imaginary piece of dust off the sleeve of his silk suit as Coxon returned to his seat and the bag of popcorn he had left there.

"But I do have a question for you!" he said, with a glare at Mr. Gold. "You sit there so calm, nonchalant, even. The public looks to you to remain a bastion of stability in challenging times. But as the financial crisis has swept over the land, you have been gyrating wildly. I accuse you of luring in investors by pretending to be calm, but in actual fact being dangerously volatile!"

Mr. Gold smiled and shrugged. Again, Mr. Reason took to his pins.

"I'd like to call Jeff Clark, editor of Big Gold. I believe he has some charts that might help in answering that charge. Mr. Clark."

His step enthusiastic, Clark walked briskly up to the bailiff and handed him two charts, which were, in turn, dutifully walked up to Judge Market.

"We'll call these exhibits A and B," said Judge Market, pulling on a pair of tortoise shell specs for a closer look.

From the wings, an overhead projector was presented and Clark walked over to it, flipped it on, and laid flat a transparency. Helpfully, the bailiff lowered the lights a touch.

"I think gold has gotten a bum rap," Clark began, his face aglow from the light of the projector and, perhaps, his passion for the subject at hand.

"In fact, despite recent weakness, between January 1, 2007 and October 10, 2008, when I prepared this chart, gold is up 42.6% while the bellwether S&P 500 is down 36.9%.

"For my second chart, I'd like to address the notion that gold is more volatile than stocks," Clark said, sliding exhibit A from the projector and replacing it with exhibit B.

Mr. Cuomo, thinking about the whupping his own portfolio of Wall Street darlings had taken of late, turned to Jeff Clark and almost spat out, "Since we're on the topic of stocks, let's talk about the big gold stocks. They were supposed to do better than the physical metals, but they have been hammered just as hard or even harder than many other stock sectors!"

In the back of the room, Biggie Goldshares examined his shoes, while Clark cleared his throat and said...

No stock has escaped undamaged in the global carnage, including gold stocks. The down-drafts have been breathtaking, and it's easy to imagine that gold stocks will just keep falling. Here's what happened...

For starters, hedge funds continued deleveraging, which can cause significant moves in market prices due to their use of margin. Withdrawals in U.S. hedge funds hit $43 billion in September alone. Meanwhile, mutual funds and "basket of commodities" ETFs continued selling off due to disappointed, or frightened, investors. This means the good was sold along with the bad. Add in the intensifying fear in the marketplace and few buyers were to be found.

Second, as the sea of red numbers continued splashing across headline news, investors fled in droves. Many simply didn't want to be the last one out of what they believed was a burning building, so "Dump everything!" was the mantra. Many stocks, in a perverse use of logic, were sold because they had value. Lots of investors simply fled to cash, which is where investors reflexively go when they see a market rout.

Lastly, right or wrong, gold stocks are perceived by some as riskier than your average IBM or GE. Further, few gold stocks pay dividends, and the ones that do only yield 1-2%. Some sellers might have stuck around if they were getting 8-10%.

So, is that it for gold stocks? Look at the reasons outlined above: where does it say investors sold because inflation is dead? Where does it say the public left because the government has promised not to print money to solve their problems? Where does it indicate gold is no longer viewed as a safe haven? Has mankind lost interest in war? Does the dollar's recent rise mean its ills have been cured? Banks are fine? The economy has a bright future?

The bottom line: the base case for gold stocks remains intact, because at some point the public will see them as the place to go for profit. Gold will rise, and regardless of what the general market is doing at the time, gold stocks will separate and follow gold up. The best days for gold stocks still lie ahead, because a much higher gold price is assured by all the recent efforts to stave off a recession. Since gold stocks were pulled down by a general market panic and for reasons unrelated to fundamentals, our advice is to hold on. We're confident their day will come. And we'll sell when the problems that have yet to push gold to new inflation-adjusted highs have all played out. In the meantime, we need to be steady while others are fearful.

From the back of the room, a hand shot up. Judge Market, already resolved that this was to be no ordinary proceedings, looked over his glasses at the owner of the hand.

"Yes? And who are you? And why are you interrupting?"

"Louis James, senior editor of the International Speculator," the mysterious stranger spoke up loudly for the courtroom to hear. "I would like to add a historical fact related to gold stocks in a crisis."

"Mr. Cuomo, any objection?"

In reply, Son-of-Cuomo simply shrugged and dropped into his seat.

"Go ahead, Mr. James," Judge Market said, rocking back in his chair, his eyes attentive.

Approaching the witness stand, James turned to the assemblage and proceeded.

Homestake Mining Company (now part of mining giant Barrick Gold, NYSE.ABX) offers a worthwhile illustration of the potential of gold stocks even during depressions. As a bit of a background, for more than 100 years, the company operated the Homestake mine in South Dakota. For you television fans, you may recognize the Homestake as being a centerpiece in the recent HBO series Deadwood.

In any event, in 1935, right in the middle of the Great Depression, Homestake recovered enough gold to make $11.39 million in net income, a record that stood for nearly 40 years – and that was at a time when the U.S. government had set the price of gold at $35 per ounce. Homestake shares showed some volatility but weathered the great stock market crash of 1929, ending the year slightly up. From 1926 to the end of 1935, they went ten-to-one, soaring from $50 to $500.

With fluctuations as you'd expect, they held on to those gains until taking off again during the 1970s bull market for gold. When you get home, you can learn more about it with some rather ugly but eye-opening charts available at this website: http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/HomestakeHist.gif.

Cuomo rose to his Gucci-shod feet with a wicked look on his face. "Mr. James, since you are here, maybe you could tell the jury why it is that Mr. Gold's known associate, Junior Goldshares, has done even worse, almost consistently losing money for investors over the past year. Lots and lots of money! What can you possibly say in Junior's defense?"

"Sure, happy to oblige," said the ever-obliging Mr. James, then launched into the answer.

In hindsight, it would have been nice if we'd taken even more profits than we did in August of 2007 and gone to cash – and now had that capital available to back up the truck for today's screaming buys. But the economic house of cards, which appears to finally be coming apart, could have done so last fall. At the time, cashing in on base metal plays, which can be expected to suffer with a slowing economy, and holding on to precious metals plays, for which the opposite is true, made perfect sense.

We would certainly go to cash rather than hold on to any conventional investment that has exposure to "toxic paper" or that can be expected to do poorly in a slowing economy.

But gold's day in the sun is coming soon, and we still believe the stocks give us leverage on that rising star. So, as stated in the most recent edition of the International Speculator, we're not selling anything unless we think the company doesn't have what it takes to make it through to the other side.

Of course, some investors might want to do some strategic tax loss selling, then look to buy back in the new year. The problem is that often times once you are out of the market, you can miss the big moves while waiting for the right moment to jump back in.

"Not much consolation for investors who have already lost money to Junior Goldshares while waiting for the big returns to materialize," sniffed Cuomo, looking meaningfully at the jury.

"No, it's not," James agreed. "No one likes to take an investment loss. But I have to say something here in Junior's defense. Namely, I have to remind folks of the speculator's credo, because no one's ever made a secret out of the fact that Goldshares are speculative in nature.

And that credo goes like this: "Speculators invest 10% in the hope of receiving a 100% return, while investors invest 100% in the hope of a 10% return."

In the International Speculator, a very apt name for the topic we cover, it has been our constant warning that investors should invest in Goldshares with no more than 20% of their portfolio. That's for the simple reason that while these stocks can offer big rewards – life-changing rewards, in fact – investors in the sector must be willing to accept big risks. Well, today, because of panic dumping, we are seeing the worse side of Goldshares.

Even so, for illustrative purposes, let's do the math on the losses that an investor who limited their investments to just 20% of their portfolio would have suffered with Goldshares. Assume, for example, that you lost 75% on the 20% of your portfolio that you allocated to the sector. In that case, your net loss on your overall portfolio would have been just 15%. Not fun, but not particularly bad, all things considered.

Conversely, take an investor who was 100% invested in the S&P 500 over the period mentioned by Jeff Clark earlier. In that case, they'd now be down almost 40%. Actually, looking at the market action today on my iPhone, the losses would be even worse than that.

"Now, hold on!" Mr. Cuomo sputtered. "All of this is good and well, but you can't all honestly be saying that you still think gold and even gold shares are still a good investment!"

Mr. Reason, stood again. "One more witness?"

"Oh, all right, but I want an answer to my question!" Cuomo barked, adding with a dramatic flourish, "The world wants an answer, nay, demands it!"

"Call your witness," Judge Market said, unimpressed.

"The defense calls David Galland, managing director of Casey Research.

A handsome, well-dressed man, his sublime intelligence palpable even from across the room, rose from the galley and approached the witness stand where Mr. Gold smiled happily at him.

"Okay, whoever you are, start talking," Cuomo said sharply. "You tell the jury how it is you could possibly be bullish about anything related to precious metals at this time. I mean, for gawd's sake, man, the global economy itself is collapsing. It is deflation that investors must be worried about. And yet, and yet... are you going to stand there and actually tell me you think investors should hold on to their precious metals investments? You are, I contend, either mad or deluded, or both at the same time!"

Unflustered by the bluster, Galland began to speak.

Economies and investment markets are complex systems, which is to say that predicting them with any certainty is an impossibility. Thus, my comments should not be taken to reflect certainty, but rather the best interpretation I can make of the situation as we see it.

For some years now, we have been warning that the house of cards, which has been built on a fiat monetary system, would come tumbling down.

It was because of the excess and the distortions that this system make inevitable that Doug Casey and others in the organization looked at the tea leaves and saw a Greater Depression, but one of an inflationary nature.

So, here we are, with the crisis upon us. There is no question that there is a massive deleveraging going on as individuals and corporations look to rebuild their stocks of ready money by dumping assets of all description. Real estate and equity markets are crashing as a result at the same time that U.S. Treasury instruments rise in value even though their yields are negative and falling. While buying into an instrument with a negative yield, at this point in time, many feel it is better to lose some money at a measured pace than take the sort of beatings being doled out in competing financial instruments.

Of course, as U.S. Treasuries are denominated in dollars, the inflow into those instruments has helped strengthen the dollar, putting pressure on gold and silver, which are, per Terry Coxon above, viewed as a competitive form of money. You can see that correlation in the chart here that Bud Conrad, who couldn't make it today because he is preparing for a trip to New Zealand, sent over.

The panicked reaction of investors in all sectors is understandable. The crisis we are now witnessing is not just of a once-in-a-generation scale, but once in a century. And so the scramble for safe harbors and cash is perfectly understandable. It's why Treasuries are so popular, and it's why gold has largely held its own in the broader scheme of things.

"Do you have a point to make?" Cuomo sneered from his seat.

Galland nonchalantly replied:

I was merely setting the stage for where we are at this point in history. And by that I mean, here and now, October 24, 2008. You see, when panic and confusion are the watchwords of the day, as they now are, there are two attributes of the successful investor that become especially important. The first is to stay calm. The second is to try to look beyond the immediate.

Many investors have, like the participants in the Charge of the Light Brigade – the anniversary of which, by the way, is tomorrow, October 25 -- have misread the signals and rushed straight into the cannons of the bear market, being wiped out in the process. Or, in their rush for the rear, they have dumped everything indiscriminately, suffering unnecessarily big losses on great investments.

Will the market continue to rig for deflation for the immediate future? Absolutely. And for the next little while, we can expect nothing other than bad economic news. Therefore, caution in all things financial is called for. Of course, if you have a good reserve of cash, then you could take positions in the inverse stock market ETFs and short positions on banks, financials, and real estate plays recommended in The Casey Report. But in a market as uncertain as this, such positions should be approached carefully, because of the increasing presence of governments in the markets.

Specifically, with each passing day, the risk increases of market-distorting government interventions, including short-sale bans, trading halts, direct interventions in individual stocks, increased margins on targeted commodities, etc. That greatly increases the risk for short-sellers.

"Are we going to get back to the topic of Mr. Gold et al. at some point? I have a hair appointment at 2:00 pm," Cuomo said, looking down for his reflection on the highly polished top of the table in front of him.

"Yes. Right away," said Galland.

You see, most of our recommended investments are not short-term in nature, but rather look for big trends that you can invest in when they are deeply out of favor. Our base case about the nature of the crisis, and especially the government's reaction to it, has not changed. In fact, if a year ago, you had asked us to estimate the amount of money the governments of the world would unleash in an attempt to head off an economic downturn, none of us, not even Doug Casey, our resident guru now wandering the highlands of Argentina, would have come remotely close to estimating the actual numbers being deployed.

To put some meat on that point, over the last month and a little bit, the monetary base of the United States has increased by a previously unimaginable and unprecedented 20%.

And our own Bud Conrad now estimates next year's U.S. government deficit at better than 10% of GNP, an also unprecedented number. And that doesn't even factor in the impact on the deficit from the fall-off in tax revenues that is inevitable given the likely depth of the downturn.

And it gets worse than that, because if you step back just a bit, you'll realize that, while financial markets have been devastated, the damage to the real economy is just now getting started.

Which is to say that the scope of the government's monetary exertions to "fix" everything are only beginning to ramp up. The Democrats, who look likely to control the whole shebang in Washington, are already calling for yet more stimulus and expensive intervention, including, this week, a call for the government to guarantee the nation's defaulting mortgages. Given that 265,968 mortgages went into foreclosure in September alone, this potential bit of largess is unlikely to come cheap.

"Has anyone ever told you that you're long winded," Cuomo asked.

"Yes, they have. It is a personal problem I struggle with every day.

Be that as it may, investors today have several choices, or some combination thereof, they need to make in face of the economic crisis.

They can choose to try and time this market over the short term, but if they do, they better use some very tight controls and pay a lot of attention, because literally anything can happen.

They could also choose to sell everything, take the tax losses, and sit in cash until that point when the inflation we see as inevitable makes the cost of holding that cash too expensive.

Or they can set aside enough cash to assure that their quality of life is not at risk in a collapsing economy and cautiously begin searching out the extraordinary values to be had in gold and other inflation hedges. There is no rush, but one would want to be positioned ahead of the big demand for these inflation hedges we see coming when the wall of government money begins to hit the economy next year.

As Doug Casey recently put it, and as the ghost of Rothbard seconded above, gold's highest and best use is as money, and sometimes it can also be a terrific investment. With the caveat that the near-term deflationary pressures will continue to periodically whip up headwinds for gold and other inflation hedges, we think that Mr. Gold, Ms. Silver, and the resource share clan are screamingly good investments. Personally, I am content with my resource holdings and am holding tight.

"Mr. Cuomo, do you have any further questions or comments before I pass judgment?" Judge Market asked.

"Only that I think these gold bugs are lunatics because everyone, but everyone now thinks that we are going into a deep deflation," Mr. Cuomo said dismissively. "I rest my case."

"Yes, that is so," Galland responded. "But, sooner than most people expect, we think that everyone, but everyone will begin to believe that it is a historic level of inflation they need to most worry about. At that point, Mr. Gold and all his friends will be waiting for them."

"Mr. Reason, do you have any closing comments?"

"No, sir."

"Then would the defendants rise," the judge intoned.

"In light of the evidence presented here today, and because a sound judgment in this case involves the passage of time, I'm going to postpone judgment on this case, and release the defendants with the stipulation that they report back here in six months. At that time, we will update our arguments and Mr. Gold, you and your friends had better have made amends by that time, or else. Do you understand?"

"Not really," Mr. Gold said brightly, "but I'll be back."

Funeral for an Economy

Years ago, I was asked to be one of six pallbearers for an elderly in-law in Montreal, the first time I had ever been asked to perform that somber service.

On the appointed day and hour, the pallbearers -- which included, I addition to myself, four elderly contemporaries of the departed as well as the deceased's younger son, who was of a similar age to my own -- assembled at the foot of the fifty or so stairs leading up into the imposing church to wait for the hearse. As befitted the occasion, we were all dressed in our best suits and spoke quietly among ourselves.

With the crowd assembled inside, the transport arrived and two burly attendants opened the door of the long, black vehicle and slid the large casket out on a purpose-built gurney. I can recall one of the attendants looking at the many steps leading to the church, and then back at the six of us pallbearers, and making a concerned face. He then instructed us on the technique involved in carrying a casket, watched as we positioned ourselves, and said a helpful "One, two, three, lift," which we did.

As the attendant slipped the gurney back into the hearse, leaving the six of us holding the large box carrying our dear friend and relative in mid-air, a shock went first through my body, and then my mind. The casket was too heavy!

It literally felt like someone had asked me to carry a pallet of bricks. But there I was, dressed in my finest, struggling to hold on to the front left rail of the elegant casket, looking with a silent whimper at the fifty steps.

In any other circumstance, I would have let go of the weight with a loud yowl, followed by a stream of obscenities at whomever it was that had played such a bad joke on me. That, as you can imagine, was not possible given the circumstances.

And so, surprising even myself at the inner strength I was able to muster, I lifted my foot onto the first step and hauled my burden unsteadily up the narrow stairs, not evoking in my mind's eye the toils suffered by the everyday Egyptian pyramid slave.

The process was repeated, painfully, step after step, sweat now pouring out of every one of my pores. In my cranium, red claxon horns blaring, simultaneously warning me that I was either going to split a gut or drop the remains of my dear friend and in-law onto the steep steps... after which, as sure as night follows day, the conveyance would begin a quick and dangerous backwards slide down the steps to an unhappy conclusion.

It was then that my straining brain remembered my fellow pallbearers, the dear departed's old friends. If I, a young man in the prime years of life, was almost done for, how could the poor old gentlemen possibly be bearing up? Oh, the tragedy, the human emotion that poured forth from me as I thought of how they must be suffering, and so I risked a concerned backward glance.

Only to see to my everlasting shock, that each was as unshaken as they had been thirty steps below, their elegant suits unruffled, their brows as dry as a freshly powdered infant. Except one, the young son of the deceased, who had been assigned the position on the rails at the far right rear of the troupe. His face was red as a beet, his face as wet as if in a shower, his eyes bulging and the veins on his temples writhing like snakes. In short, his countenance mirrored my own.

At first my brain could make no sense of the scene, but then I noticed that the four elder gentlemen, their faces somber but relaxed, were not in any definition of the word actually "lifting" anything, but rather had their hands resting lightly, daintily even, on the same rails that the two youngest members of the party were clutching as if for life itself.

Somehow, and to this day I still can't imagine how, we made it to the top of the stairs and into the church and then back down again an hour later, but I distinctly remember laughing out loud at the memory that evening when stretched out on a couch, exhausted to my core. And I laugh at it now, the memory of those elegant gentlemen going through the pretense of labor while the able-bodied carried all the weight.

So, why do I relate that scene today?

It is because it strikes me as a good metaphor to the potential of what may come to pass in the years just ahead as the government looks to pay for its many programs by raising taxes on the most productive of society.

While the Obamites, for instance, talk about modest tax increases on the rich, they fail to add into their calculations the impact of letting the Bush tax reductions expire. That one act alone will, over time, add the weight of hundreds of billions, trillions even, in taxes to the backs of the successful. And it will see a return of the estate tax, a tax that I find personally repugnant, given that the money it takes will have made it through the many tax harvestings I will have put up with throughout my career, making it to the finishing line only to have the state confiscate some large percentage of it rather than having it go to my far more deserving heirs.

And I suspect, politicking concluded, once the extent of next year's deficits is apparent, all promises about keeping taxes down will be swept aside for the hot air they are.

But with each new tax passed, the government increases the risk that the casket will be dropped.

How Long Will the Foreigners Support the Dollar?

With a U.S. government deficit in excess of $1 trillion next year, how long will foreigners be willing to invest in government T-bills and the like? Not overly long, we suspect. A suspicion heightened by the following item off the wires this week...

BEIJING (Dow Jones)--China should be very cautious in using its massive foreign exchange reserves to purchase foreign financial institutions, a senior Chinese official said Sunday.

Zheng Xinli, vice director of the China Communist Party's Central Policy Research Office, said at a forum that China should instead use its foreign exchange reserves to buy foreign resource companies, oil fields, and iron ore, copper and aluminum mines in foreign countries to meet China's demand for the resources.

China's foreign exchange reserves are the world's largest and last stood at $1.9 trillion at the end of September.

Zheng said the global financial crisis gives China a chance to internationalize the yuan.

He urged China to accelerate the pace of the yuan's convertibility reform, in an attempt to allow the Chinese currency to play a key role in the region.

On the topic of China, there was also this, this week... another of many signs that the Chinese remained focused on their future economic needs and are not afraid to act to take advantage of the current financial chaos to buy what they need on the cheap...

(Dow Jones)--China Development Bank may raise the small stake it holds in global mining giant Anglo American PLC (AAL.LN) as the value of the miner's shares has been falling on a worsening economic outlook, the South China Morning Post reported Monday, citing unnamed sources.

"CDB has a stake in Anglo American and it is actively looking at options for that stake," said one source.

"Alternatively, since it sees itself as a bridge between Anglo American and China, it could bring in other parties to take a stake," the source said.

The report didn't say how much China Development Bank owns in Anglo American, but said the bank "evidently" lent US$805 million to Chinese tycoon Larry Yung to fund his purchase of a 1.13% stake in Anglo American in 2006.

Anglo American spokesman James Wyatt-Tilby said in the report the terms of the financing placed ultimate ownership of the stake with CDB.

Credit Sucks and Don't Forget It

Friend and correspondent Sunni forwarded this in, this week.

On average, Americans have eight credit cards apiece and 20 percent of those cards are maxed out, reports CardWeb.com, which tracks the lending industry.

Americans now hold more than $850 billion in credit card debt, four times as much as in 1990. About 58 percent of cardholders do not pay down the entire balance each month. That group carries an average card debt of more than $17,000, according to the Consumer Federation of America."

This week, American Express announced that in the third quarter, they had suffered a 59 percent year-over-year decrease in net income from their credit card division.

This is yet another area in the economy we see getting much worse before it gets better.

Laughing Out Loud (When No One Else Is Looking)

Having received a nice response from you all after last week's humor installment, and having received an influx of new entries, I thought I'd repeat the exercise this week again.

This week's entry comes from friend Beth G... a revised definition of financial terms.

CEO - Chief Embezzlement Officer

CFO - Corporate Fraud Officer

BULL MARKET - A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET - A 6- to 18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING - The art of buying low and selling lower.

P/E RATIO - The percentage of investors wetting their pants as the market keeps crashing.

BROKER - What my broker has made me.

STANDARD AND POOR – Your life in a nutshell

STOCK ANALYST - The idiot that just downgraded your stock.

STOCK SPLIT - When your ex and their lawyer split your assets equally between themselves.

FINANCIAL PLANNER - A guy whose phone has been disconnected.

MARKET CORRECTION - The day after you buy stocks.

CASH FLOW - The movement your money makes as it disappears down the toilet.

YAHOO - What you yell after selling it to some poor sucker for $240.00 a share.

WINDOWS - What you jump out of when you're the sucker who bought Yahoo at $240.00 a share.

INSTITUTIONAL INVESTOR – Past-year investor who's now locked up in a nuthouse.

PROFIT – An archaic word no longer in use.

Miscellany

I am running really, really late today... so I will sign off right after mentioning that Alex in Calgary, who technically sponsored the first phyle in his coffee shop, would like to organize an ongoing group. If you are interested, contact phyle@caseyresearch.com.

As I sign off, accompanied by Tchaikovsky's 1812 Overture (the song aficionados of the movie "V" will recall this from the pivotal scene), I see the DJIA is off over 400 points, and gold has pulled back from the abyss and is now trading at $730.

Frantic, exciting, challenging, and sometimes tiring times we live in.

Hang in there... until next week, thank you for reading and for subscribing...

Best Regards,

David Galland
Managing Director

The Room - 10/03/2008

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

Dear Readers,

We're no longer in Kansas, Dorothy.

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

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

But, what?

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

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

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

Guns?

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

The "etc." must mean guns.

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

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

But that was then, and this is now.

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

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

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

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

Do You Know How the Fed Is Managing Your Money?

By Bud Conrad

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

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

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

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

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

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

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

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

Call Us Utopians... or Free Marketers

Ed. Note

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

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

Oink! Oink! For Shame!

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

The Big Debate

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

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

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

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

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

World on the Edge

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

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

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

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

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

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

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

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

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

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

More on the Global Situation

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

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

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

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

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

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

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

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

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

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

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

So, things could always be worse.

Ed. Note

An Interesting Perspective on European Energy

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

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

Slovakia, Finland and Macedonia 100%

Bulgaria 96%

Serbia 87%

Greece 82%

Czech Republic 79%

Austria 74%

Turkey and Slovenia 64%

Hungary 54%

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

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

Putin is a genius.

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

Ed. Note

Casey Energy Opportunities

Learn more here

Blarney Barney

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

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

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

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

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

Economics 101 for Politicians

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

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

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

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

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

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

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

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

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

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

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

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

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

Miscellany

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

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

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

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

Sincerely,

David Galland

Managing Director

Casey Research, LLC.

The Room - 09/26/2008

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

September 26, 2008

Dear Readers,

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

Everything has changed.

Everything is changing.

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

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

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

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

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

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

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

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

We don't care.

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

From a correspondent in Switzerland...

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

The Casey Report

Try our 3-month no-risk trial now.

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

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

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

The Bailout: Behind the Scenes

By Donald Grove

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

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

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

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

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

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

From Ron Paul...

Dear Friends,

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

The events of the past week are no exception.

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

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

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

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

There goes your country.

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

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

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

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

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

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

In liberty,

Ron Paul

Quotes from the Quislings

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

Here's my Rogues List...

Laurence Fink

BlackRock Inc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About Those Foreigners...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Musical Interlude

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

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

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

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

Explosions in the Sky

The Birth and Death of the Day

It's Natural to Be Afraid

All of a Sudden I Miss Everyone

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

KRS1 - Sound of Da Police ...

NWA - F*** Da Police

Pink Floyd - Another Brick in the Wall Pt. 2

Public Enemy - Fight the Power.

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

JS Bach's Toccata and Fugue

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

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

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

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

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

www.generalfuzz.net

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

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

Gypsy Soul

Obsession Confession

Slash

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

How about Classical Gas for a movin' song?

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

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

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

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

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

McPalin Is Toast

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

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

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

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

Huh? What?

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

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

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

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

Miscellaney

Phyling On

phyle

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

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

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

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

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

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

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

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

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

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

I'll leave it at that...

Until next week,

David Galland
Managing Director
Casey Research, LLC.

The Room 4/29/08

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

Written: April 25, 2008

Dear Reader,

What an interesting week!

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

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

The Battle for $900 Gold

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

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

So let's get to the nub of it.

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

In a word, no.

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

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

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

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

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

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

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

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

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

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

So, What's Going On?

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

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

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

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

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

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

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

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

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

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

Technical, Shmechnical

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

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

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

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

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

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

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

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

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

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

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

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

Other Views

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

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

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

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

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

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

A Word About Political Risk and Gold Stocks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Food & Politics

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

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

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

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

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

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

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

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

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

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

Junk By Any Other Name

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

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

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

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

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

Moody's Bond Ratings

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

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

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

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

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

B -- Generally lack characteristics of a desirable investment.

Caa -- Bonds of poor standing.

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

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

I Am Womyn!

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

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

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

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

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

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

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

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

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

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

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

Marilyn Monroe vocalized:

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

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

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

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

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

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

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

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

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

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

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

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

Miscellany

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

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

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

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

Also in the Miscellany category this week....

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

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

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

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

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

And That, Dear Readers, Is That for This Week

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

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

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

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

See you next week!

David Galland
Managing Director
Casey Research, LLC.

The Room 4/22/08

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

Written: April 18 2008

Dear Readers,

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

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

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

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

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

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

The Energy Picture

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

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

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

Where does he see the price going from here?

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

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

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

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

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

Coal's Comeback

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

* Values for 2008 are preliminary reported numbers subject to revision

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

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

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

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

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

So, How Are Things Going?

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

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

Here's a Trading Idea...

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

The obvious is to buy food commodities.

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

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

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

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

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

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

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

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

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

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

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

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

On the Topic of Interest Rates

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

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

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

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

President Obama?

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

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

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

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

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

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

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

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

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

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

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

Another Casey First

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

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

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

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

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

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

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

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

Q&A

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

Hi David,

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

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

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

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

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

Yours truly,

Linda

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

Linda:

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

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

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

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

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

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

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

Terry

In Defense of Marx

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

David

Based on your following statement:

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

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

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

Ross

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

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

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

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

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

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

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

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

It's Official: I'm Out of Touch

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

According to Bloomberg:

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

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

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

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

Inflation Watch

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

Here's the story.

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

Political Pandering

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

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

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

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

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

The Price of Gold

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

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

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

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

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

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

Miscellany

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

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

As always, I greatly appreciate you taking the time to read this weekly missive. As I sign off, the DJIA is up 234 points and gold is trading at $916. Time to worry? Hardly. But it is time to pick up the kids and so I will sign off for this week.

Until next week...

David Galland
Managing Director
Casey Research, LLC

The Room 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.

The Room 2/11/08

David Galland — Mon, 11 Feb 2008 21:00:00 GMT

Dear Readers,

Good morning! And welcome to this edition of The Room!

If that salutation suggests a certain snap in my step, well, you'd be right.

After all, one can't let one's attitude be overly colored by the gloom and pessimism now stalking the land.

No, this is America... or, at least that is the turf upon which my own chair is currently parked. And no matter how bad things may be, they are, on the whole, no better or worse than those of most other places.

In fact, America has some significant commercial advantages over many countries, especially those which aspire to provide their citizenry a nest of perfect comfort in all the important ways, including semi-permanent employment. "You hire them, you retire them" is a phrase you might hear down at town hall in much of the world.

Not in the ol' U.S. of A. No siree. In those cases where management makes a major flub or reaches too far for the annual bonus and, in so doing, accidentally flips on the Equity Value Death Laser Model 2000-X, you need hardly wait for the minute hand to travel a single rotation before the guillotines are dragged out of storage.

Since July 2007, for instance, Countrywide has held going-away parties (however muted) for 11,000 employees. Morgan Stanley and JP Morgan have both bid farewell to 1,000 of their former stalwarts, with announcements that more will follow once they can afford to buy the requisite pink paper on which to print the traditional "so long and thanks for all the memories" notes.

Meanwhile, Lehman Brothers escorted 3,750 of its less close family members to the door, and Citigroup has begun trimming its rolls, a process by which its alumni will, it is reported, increase by 20,000.

The list goes on and on. In fact, according to the bean counters down at the Department of Labor Statistics, at least 1,408,852 people lost their jobs in 2007 (through November), due to mass layoffs... a 6% increase from 2006. Of that total, many were formerly involved with the building trades which, alone, have lost 284,000 workers since employment in that feast-or-famine sector peaked in September of 2006.

And, I need not remind you that the neck-chopping is just getting started.

While it is, of course, unpleasant to be one of those looking down into the basket while the hooded man finishes his preparations, it is this ability - and willingness - to view the common laborer as something of a disposable item that allows America to bounce back so quickly after periods of economic adversity.

Friend of long standing, Bill Bonner, wrote an excellent piece in his always worthwhile Daily Reckoning (dailyreckoning.com) earlier this week in which he commented:

Americans misunderstood the nature of capitalism itself. It is not an "economic system" that makes people automatically richer. It is a moral system... a system that rewards virtue and punishes error. You don't get richer because of Free Enterprise. Indeed, as the economic history of the last quarter-century shows, you can get poorer. The market system merely provides the setting in which you get what you deserve. You could get rich - if you were to do the right thing: work hard, save your money, innovate, take chances, forgo consumption. But do the wrong thing... and you will pay for it.

Bill is, in my view, right on the money.

Now, please, make no mistake. I would race even a humanitarian on the scale of Al Gore to be the first to pull the lever on any magic machine that reliably delivered on the promise of effortless wealth, health and happiness to all humankind. Sadly, such a machine does not exist.

(And, yes, that is a photo of Al Gore, taken at the recent Davos gala... if you ask me, he has been personally sequestering too many carbon units of late.)

And so we are left with only one economic model that has been proven to actually provide the most benefit to the most people over any period of time: capitalism.

In fact, if you think about it, pure capitalism is really just a continuum of the world's first discernable economic model; "survival of the fittest."

While previously success was gained through skill with the club or at throwing rocks accurately, in the modern-day iteration, the successful are those who understand how to effectively run a business, or know how to make themselves particularly valuable to their employer.

(There is another class of individuals which one has to begrudgingly credit as successful these days; the bureaucrats and other parasitic professions. They understand how to tap into the communal lifeblood and, once entrenched, sink barbs into the body politic to assure they cannot be ejected until they leave of their own free will, a lifelong pension in hand. Their long-term survival, however, is questionable... because they propagate so quickly that, over time, they risk killing the host, or being chased out of their jobs by workers brandishing torches and pitchforks.)

The data continues to confirm that we are headed into a deepening crisis here, which means that unemployment, the first whiffs of which we have now smelled, will only grow worse. In some countries, the economic pain will be deep and dragged out by well-meaning but misguided policies.

In the U.S., however, the odds are relatively good that after the brush fire burns through, the businesses will remain standing, albeit with much lighter attendance at the Friday morning pep talk, ready to pick up the pieces and get smartly back to work.

But it is time to prepare for the brush fire.

How bad could it get? In my view, and the view of most of us here at Casey Research, while the risk is certainly there, the odds remain long against widespread soup lines. If for no other reason than that if you overlay the economic happenings of the last 300 years with the number of months where soup line-level economic havoc has been the order of the day, it quickly becomes clear that massive meltdowns are statistically very rare in the more established economies.

Yet, though rare, the historical record is equally clear that they do happen.

Given the degree of uncertainty just now, it is not unreasonable to take a little time to examine your current circumstances. Do you own some gold bullion to provide protection against a serious crisis? Have you taken steps to offset losses in other areas - and hopefully pull down nest-padding profits - by building a portfolio of quality gold stocks? Are you able to raise a bit more cash "just in case"?

As importantly, are you trying a bit harder to look after your health? Cutting back on the snacks, a little more exercise? Having a health crisis in the middle of a financial crisis would be the very definition of unfortunate.

As well, if you are still in the work force, it is worth taking steps to improve your personal value as an entrepreneur or an employee. On that topic, longer-term readers know that while in my late teens I discovered, with full credit to Earl Nightingale for the revelation, the fountain of wealth: studying a topic you care about one hour a day, just like a college student studies their books.

If you work for a company, how much do you think you could learn about your company and its competition by studying just one hour a day, even after only a few months? Think your new-found knowledge would impress the boss? Darn right it would.

Or, if you are in a dead-end job, or suspect you may be one of those soon to be led to the guillotines, now is a good time to begin studying something that might help you in your next career. The secret is that it must be a subject you are passionate about. Follow your heart, and the money and your life satisfaction will follow.

As a personal aside, in recent weeks, I have turned my daily studies to electronic marketing media - an area that has the advantage of being helpful to almost any business, or anyone with entrepreneurial aspirations. (If you think you might benefit from that same course of studies, there are many good websites where useful, and free, information on the topic is available. One of the best I have come across is marketingexperiments.com.)

Oh, and since we're on that topic, I'd like to mention that we are looking for an experienced marketing director to help us spread the word about Casey Research... just drop me a résumé at David@caseyresearch.com.

But, back on topic, while it is my style and temperament to comment on the world with a lighter tone, make no mistake that I feel very strongly for those whose life's travails have left them unsatisfied, financially or emotionally. You can let it get you down, or you can set your jaw against the challenge and get down to work.

There are, per Bill's comments above, no guarantees built into a capitalist system... other than, one would hope, a guarantee that you get to play on a more or less level playing field. Regretfully, in modern-day America, the system has been substantially degraded by a legislative system that is willing and able to meddle in literally any aspect of life, or bestow almost any grant, opening the door for businesses and their lobbying organizations to influence legislation in much the same way I can get my old dog General to beg by holding up a piece of ham.

In the final analysis, each of us has to look after ourselves and our loved ones. If you look to the government, which is bankrupt beyond all possible repair at this point, to provide you with your retirement, or to assure that the safety net remains intact, you will be setting yourself up for steady disappointment and a life that fails to provide anything more than the barest of necessities, if that.

What Futures Markets Are Saying About Interest Rates and the Economy

By Bud Conrad

The combined effect of a slowing economy and the Fed cutting its rate to stimulate has caused the expectation for 3-month dollar-denominated investments called Eurodollars to drop in 2008 to below 2.5%, but then to rise into the future. (Despite the name, this has nothing to do with the euro currency).

[click to enlarge]

I interpret this to reflect a slowing in the economy through 2008, but that then the inflation will pick up, and investors will require higher rates to cover that inflation. It is part of recognizing that the Fed cuts rates by providing more liquidity. The result is that in the short run rates drop, but in the longer run inflation returns and rates have to rise to cover that inflation.

Making Money in a Crisis

In the current edition of the International Speculator, we provide a list of ETFs you can use to play the current financial crisis.

But, as Bud Conrad points out, it is really not that hard to find successful investments if you open your eyes and use logic. And, I would add, if you understand the various instruments available to you to act on these opportunities.

For example, it's no secret to anyone that the housing construction industry is in a slump.

So, what material is widely used in the building of most houses? The answer, lumber, is obvious.

As you might expect, therefore, and as is demonstrated in the chart just below, lumber prices have fallen along with the activity in the building sector.

[click to enlarge]

According to Bud, who is well versed in the futures markets...

"If you were to play the futures markets, you could have bought a contract for 110,000 board feet of 2"x4" priced at $217/1,000 ft. The contract is worth $23,000. The $90 price drop shown in the chart represents a profit of 900 points, which you multiply by $11 per board feet = almost $10,000. As the initial margin is $1,650, your returns could have been roughly 700% over a six-month period."

Of course, futures markets can swing both ways, and steeply so, and so should only be approached after a great deal of hard research and paper trading. Options trading, while also risky, offers the advantage of high leverage, but with identifiable and limited risk. Taking the time to learn more about options can also pay off, but again, be careful only to invest with money you can afford to lose.

Ed. Note: At the risk of being perceived as cementing a reputation for being crassly commercial, I am compelled to mention that, in addition to giving other profit-making ideas, options specialist Robert Meier of the RMB Group will be presenting a workshop on the right - and wrong - ways to use options at our upcoming Crisis & Opportunity Summit in beautiful Scottsdale, AZ on March 25, 26 & 27. If you are planning to attend, you'll need to register within the next seven days because there are only about 20 seats remaining. The secure link to learn more and register is just below:

http://www.caseyresearch.com/crpmkt/crpSolo.php?id=106

People Say the Funniest Things...

For some reason, the memory comes to me of the time when, putting in service as the best man at a wedding, I greeted Eleanor Mondale, the ex-vice president's beautiful daughter, in the receiving line. I was single at the time, and so the sight of Ms. Mondale, a model back then, was particularly well received. For some reason, however, the words that tumbled out of my mouth on making her acquaintance - and I still don't know where they came from - didn't appear to make exactly the right impression.

"Nice shoes," I said, looking at her feet. "I bet they must hurt." (In my weak defense, her shoes had very high heels and with very narrow tips.)

A quizzical expression passed over her attractive countenance (shown in the photo) before she replied, "Ah, no. They are just fine, thank you," before she hurried away, glancing back as she moved, I suspect, to be sure I wasn't following her.

John McCain had such a moment when, in a randy mood last year, he burst into song (poorly, it must be added) with the theme that the U.S. government, ideally under his leadership, should engage in the mass annihilation of the unfortunates who, by accident of birth, live under the Iranian theocracy.

(I refer, of course, to his rendition of "Bomb, Bomb, Bomb Iran"... posted for all posterity here... http://www.youtube.com/watch?v=hAzBxFaio1I)

Now, because we serve a broad audience, I suspect that there are any number of you who might agree with Senator McCain's musical sentiment, responding to any critics of same with a roll of the eyes and a comment along the lines of, "C'mon, really! Has everyone lost their sense of humor? Jeez!"

While I admit that the idea of unleashing waves of missiles against another country and the thought of "collateral damage" is a knee-slapper, I do wonder if a majority of the U.S. electorate will share the joke come election time.

I suspect not.

As a result, I strongly suspect that Sen. McCain's long-held aspirations to the highest office may likewise be scuttled.

Especially because, in addition to the somewhat concerning psychology revealed by his impromptu outburst of nihilistic verse, the perma-Senator is firmly on record as being in concert with the idea that America should occupy Iraq for 100 years, a sentiment that is not in step, if you believe the polls, with the majority.

And as a result, Obama or Hillary will be elected. (Sorry, Ron Paul fans, he may have raised a lot of money, but he's been effectively marginalized by the media and his fellow Republicans.)

And this points to the sticky wicket in democratic politics. You see, I am personally quite sure that I would prefer the economic policies of Sen. McCain over those of Sen. Clinton or Sen. Obama... but I'm equally certain that I would prefer either of those candidates' less martial backgrounds and leanings over those of Sen. McCain.

It is a classic no-win proposition. And so I prepare instead to cope the best I can with the damage that I see coming. Given that it is likely the Democrats will soon be ruling the roost, that means preparing for an acceleration of the feel-good policies that have laid such a solid foundation for escalating inflation - and higher gold prices.

My old associate from EverBank (Everbank.com), Chuck Butler, recently shared a Warren Buffett quote with the readers of his Daily Pfennig e-letter. Longer-term readers know that there are issues on which Mr. Buffett and I fail to see eye to eye, but in these remarks, I am in agreement. And I quote....

If something is unsustainable, it's going to have consequences; so far the consequences have been a general decline in the dollar against major currencies. If we continue the same policies, we're going to get the same results in the next five or 10 years.

He also had this to say about inflation... "Inflation has been in remission and is likely to be more prevalent in the next 10 years."

There are many things that cause dislocations in the marketplace, but few are as predictably disruptive - and, if you know how to play things, profitable - as government. The writing is on the wall. Now you just need to take the steps to prepare yourself to profit.

Quick Takes on Politics

At this point in the election cycle, it is probably appropriate for us to share, once again, the world's shortest political quiz, a reliable tool to tell you where you really belong on the political scale.

You can take it here: http://www.theadvocates.org/quiz.html

And, to assist you in contemplating the human frailties that argue so convincingly in favor of restricting the power afforded to any government, there is the following video featuring the antics of one of the anointed of America's political class. While you may have seen one of these videos in the past, this one is particularly well executed. Follow the link just below...

http://www.youtube.com/watch?v=BqLvBUSJucg

The Housing Market - Watch Out Below

One of the more interesting aspects of the current soaring default rate on home mortgages -- the very same defaults that are now bedeviling financial institutions around the globe -- is that the sophisticated models that were created to predict the behavior of the borrowers failed so badly.

This week, in an article in the Financial Times (ft.com), they discussed these failures at some length. Following are some excerpts I thought you would find of interest...

"There has been a failure in some of the key assumptions which supported our analysis and modeling," Mr. McDaniel admits. "The information quality deteriorated in a way that was not appreciated by Moody's or others." Mortgage borrowers, in other words, did not behave as expected.

The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first -- and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. More-over, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans -- turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.

"In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage," says Malcolm Knight, head of the Bank for International Settlements, the central banks' bank. "Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortization mortgages, keep paying off their credit card balances but hand in the keys to their house . . . these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities."

And this...

In recent months, Washington politicians have devoted a great deal of attention to the problem of "resets". This refers to the fact that many subprime borrowers took out loans in recent years at initial, ultra-low "teaser" rates, which typically rise (or "reset") after a couple of years. Around 1m of these subprime loans are due to reset this year, which means that many households could suddenly face sharply higher repayments. That in turn has sparked fears of a looming further rise in delinquencies by increasingly cash-strapped households.

To offset this risk, the administration of President George W. Bush recently brokered a plan to freeze the resets. Yet in private, Treasury officials admit that while the scheme might help at the margins, it is unlikely to be a "silver bullet". This is because one dirty secret of recent mortgage data is that, thus far, there has been a surprisingly weak correlation between rate resets and delinquencies. That suggests that the reset freeze may have only a limited effect on foreclosures this year.

And....

Some economists suspect that if house price declines continue but the US jobs market holds up, the pattern of high mortgage defaults relative to other forms of consumer credit could continue. However, if the US slips into recession or even a protracted period of rising unemployment, delinquencies might rise on a wide range of consumer credits, implying a return to a more traditional pattern. Indeed, some banks are starting to brace themselves for this latter shift. "The problems in the credit markets are spreading to the consumer sector - the next area of concern is auto loans and credit cards," says John Thain, chief executive of Merrill Lynch.

I am reminded of a website that Doug Casey (who was first among others) brought to my attention this week. It is www.youwalkaway.com.

Should you click that link, you will find an enterprising e-biz that makes its money by providing homeowners, tired of the burden of paying their mortgages, with a kit that shows them the ins and outs of walking away with no further liabilities. And, even better, it explains how said mortgagees can live payment-free for the typical 8-month period it takes before the lenders are able to escort you from the premises.

Unfortunately for the economy and for those holding the "AAA" rated paper built out of these corrosive loans, www.youwalkaway.com is likely to become an increasingly popular site. Which brings me to...

Neutron Loans

Yesterday I had a pleasant lunch with a financial planner friend of mine. As he tends to deal with a more upscale clientele, he was unfamiliar with a category of mortgages sometimes called "payment optional."

If you thought "Ninja" mortgages were about as bad as it got -- you know, No income, No job, No Assets - then that is only because you haven't come across the payment optional feature offered to many of those same mortgagees.

In a nutshell, payment optional allows borrowers to elect to pay only a portion of their mortgage payment in any given month, rolling the balance-due but unpaid amount back into the original loan. This option was offered under the guise of allowing borrowers to deal with an emergency cash need. You know, the car breaks down and so, for a month, you pay less on your mortgage in order to have available the funds required to repair the car.

The problem, of course, is that many consumers, swept up in the giddy housing boom and romanced by the mortgage originators, borrowed more than they should have. And, when finding themselves unable to make the required payments, they began to fall back on the payment optional feature in order to get them through to the next payday.

With the magic of compounding interest now working against them, the situation was, and is, clearly untenable, assuring a steady supply of fresh customers for youwalkaway.com.

Bloomberg had a good article on the topic. For those of you short of time, here's a quick excerpt...

Feb. 7 (Bloomberg) -- Joe Ripplinger took out a $184,000 mortgage in 2006 and makes his payments every month.

Now he owes $192,000.

The 66-year-old Minneapolis house painter has a payment-option adjustable-rate mortgage. It allows him to write a check for $565 a month even though he owes $1,300. The difference is added to the mortgage, and when his total debt reaches $212,000, or after five years have passed, his monthly minimum will jump to about $2,800, which he can't afford.

"We're barely making it right now," Ripplinger said.

The estimated 1 million homeowners with $500 billion of option ARMs are beyond the help of interest-rate cuts by Federal Reserve Chairman Ben S. Bernanke. While subprime borrowers face an average increase of 8 percent or less when their adjustable- rate mortgages reset, option ARM homeowners may see their monthly payments double after their adjustments kick in.

"We call them neutron loans because they're like a neutron bomb," said Brock Davis, a broker with U.S. Express Mortgage Corp. in Las Vegas. "Three years later the house is still there and the people are gone."

You can read the article in its entirety by following the link here.

http://www.bloomberg.com/apps/news?pid=20601109&sid=akYNTEygRJH8&refer=exclusive

The Honorable Richard L. Armitage

Our own Bud Conrad attended a talk at Stanford last night by Richard Armitage, called Diplomacy: Humanitarianism in Action. Here's Bud's report:

Armitage was the second-in-command at the State Department, serving from 2001 to 2005 during Colin Powell's tenure. He had a front-row seat of the decision to go to war on Iraq. He served in Vietnam, was implicated in the outing of Valerie Plame, is on the board of directors of Conoco Phillips and is now working for John McCain's presidential campaign.

He strode on the stage and spoke without notes, evoking the image of a weak impersonation of General Patton. He wore a rumpled suit and was the only person with a tie. The speech was lightly attended, with an audience of only 60 or so. I guess students are more interested in basketball than a conservative who is now slipping off the political stage.

While the speech was of no particulate import, befitting the empty suit he has become, at the reception afterward I gained this most important insight: I asked him what the reason was for going to war in Iraq, and specifically if it was about oil.

He demurred, saying that he was part of the decision and the focus was on WMD (Weapons of Mass Destruction) and on bringing the light of democracy to the region. I pursued to ask how long we would be in Iraq. His answer was "a decade," although with decreasing forces. We didn't discuss the costs, as he still supports the original decision, but from the view of an economist, I have my interpretation. Namely, that we will be spending $100 to $200 billion per year we are there, so, if his assessment is correct, we can expect to add another $1+ trillion to the tab of what we've spent so far.

This ensures continued U.S. deficits and lower productivity, which confirms my basic thesis that the dollar will continue to come under pressure.

(On the topic of wars with Iraq, Doug Hornig, editor of our Daily Resource Plus, sent along the following YouTube video, featuring a rather interesting 1994 interview with *** Cheney. http://www.youtube.com/watch?v=S9YuD9kYK9I)

Get Well Soon

Living in a ski resort as I do, it is not unusual to hear a debate around the dining table on the topic of what is more dangerous, skiing or snowboarding.

Each side of the debate has their opinion, but our own Dave Johnsen, the programmer who assures our websites work each day, decided to wade in decisively on the topic, crashing his snowboard into a tree and breaking his fibula, as well as tearing his ACL, MCL, LCL, and meniscus.

Confined to bed after eight hours of surgery yesterday, he will have abundant time to jot down his further thoughts on the skiing vs. snowboarding debate. In the meantime, all of the Casey team would like to wish him a speedy recovery. (Oh, and if the website starts to get all wiggly, you can now appropriately assign the blame... to snowboarding.)

1984

It is, at this point, a tired literary device to reference George Orwell's seminal work, 1984, when commenting on the recent erosion of personal liberties.

Yet, the notion of an all-powerful entity snooping into your everyday affairs, ala Mr. Orwell's Big Brother, is sufficiently disturbing that observers of these things can't help but to drag it out, much in the same way others commenting on another genre might recall Frankenstein, or Dracula.

Unfortunately, while monsters made from reconstructed men or eternally living blood suckers are pure fiction, Orwell's monster is increasingly real.

Earlier this week, one of our researchers related a conversation between himself and his tax accountant. While requiring him to fill out a rash of new government forms, she commented that, in her role as a professional tax preparer, she no longer worked for him but for the government.

But it gets much worse. You see, our elected officials are now fast-tracking legislation to institutionalize warrantless eavesdropping on your every communication.

Don't believe me? Click the link below...

http://blog.wired.com/27bstroke6/2008/02/sen-rockefeller.html

The Quiet Revolution in Natural Gas

By Chris Gilpin, contributing editor, Casey Energy Speculator

While natural gas production has hummed along, slowly increasing in the U.S. over the past ten years, it would be a big mistake to think that everything is business as usual. There is a major shift underway in the natural gas industry. Conventional gas production is going the way of the dodo bird, while unconventional production - from sources like coal bed methane, tight gas and gas shales - has stepped up and made itself known as the future of natural gas.

The Lower 48 has been pumping more natural gas from unconventional sources than conventional ones since 2000 - the trend is accelerating. Conventional gas could soon account for less than a third of overall production.

The transition from conventional gas to unconventional has been remarkably smooth. It turned out to be much less of a challenge to exploit unconventional sources of natural gas than to exploit unconventional sources of oil, such as oil shale and tar sands (both of which have been nightmares from an engineering perspective).

A conventional gas operation is rather discreet, with a single well working every 640 acres or so, while a Coal Bed Methane (CBM) project dots the landscape with wells everywhere, as many as one per 80 acres. There's a lot of needless hand wringing over the aesthetics of such operations, but what interests us is how this infrastructure build has affected the landscape of supply and demand. For instance, the average production per well has been dropping precipitously.

[click to enlarge]

Despite its growing popularity, unconventional gas is no one's first choice. CBM projects require a huge amount of infrastructure to duplicate the same amount of production as one conventional well. Your average conventional gas well in the U.S. produces about 600 Mcf/d, while your average CBM gas well often pumps out less than 100 Mcf/d.

To make up the difference, the industry has been forced to drill, fracture, dewater, and maintain a lot more wells - all of which costs money. Gas producers have no choice but to pass these expenses along to the broader market, which has been a major factor in the rise of natural gas prices from $2/Mcf in 1998 to over $6/Mcf today.

The same story holds true in western Canada where CBM has just begun catching on in the last few years. The average initial productivity of a gas well drilled in the Western Canadian Sedimentary Basin has dropped from 1,000 to 300 thousand cubic feet per day over the last five years, a combination of ailing conventional gas resources and the rise of unconventional ones.

Without unconventional gas, the U.S. would be left trying to outbid the rest of the world for cargoes of LNG (liquefied natural gas), an unappealing scenario.

Many of the most intriguing investment possibilities now lie in parts of the world outside of the U.S. where unconventional technology is breaking virgin ground. Alberta is just starting to ramp up CBM production. Southeast Asia has huge reserves of unconventional gas that have never been properly explored. Using the American experience as a template, natural gas-producing regions all over the world are learning that it pays to think unconventional.

[Ed. Note: Dr. Marc Bustin, a senior researcher for the Casey energy division, is one of the leading unconventional gas experts in the world. The team is watching for opportunities in gas to open up in the spring and summer, after prices ease up due to seasonal considerations.

In the meantime, the energy division just updated a Special Report, North America's Top 5 Uranium Explorers... featuring the 5 best junior uranium stocks.

This is of particular interest now, because the uranium juniors as a sector have swung from massively overbought to deeply oversold. As determined contrarians, the time is fast approaching to begin reloading in the sector, and these are the companies you'll want to own.

As a subscriber to the Casey Energy Speculator, you'll find the report in the Special Reports section of this website... for everyone else, you can receive the report free of charge if you subscribe today.

Remember, your subscription comes with a no-questions-asked, 3-month money-back guarantee. Click here to get "North America's Top 5 Uranium Explorers" today.]

Affordable Health Care for All

Not so long ago, I was chatting with a cab driver while riding from JFK into Manhattan, when the conversation turned to what constituted a living wage. "I can't even afford health care," he said grumpily, weaving his cab with the grace of a ballet dancer between gaps in rumbling semi-trucks. With a snort he commented, "I'm not much of a Hillary fan, but the time has come for universal health care."

"That may be so," I chimed in from the back seat, "but I once lived in Canada and while there, watched someone I cared for deeply enter the nationalized health care system. After many months of bureaucracy and red tape, he ended up dead because they didn't run the tests that would have discovered his cancer, until it was too late."

"Yeah, but..." he started, his thoughts cut off by the need to concentrate on cutting off the competitor's cab trying to squeeze onto the expressway beside him.

"Here's a question," I continued. "If you didn't have to pay so much of your money in taxes... income taxes, property taxes, taxes on gasoline and all the things you buy... how much money do you think you'd save every year?"

"A lot!" he replied, a happier note in his voice as his mind contemplated the idea.

"So, if you didn't have to pay all those taxes, but instead maybe just a 10% flat tax, do you think you might be able to afford health insurance then?" I asked, rhetorically.

"Hadn't thought of that," he said, shaking his head with some confidence. "But, yes, I could. No problem."

So, what do you think? Could my "Unified Theory on Solving the U.S. Health Care Dilemma" qualify me for a Nobel prize? Who knows, I might actually have a chance, given that the bar on that prize seems to have been precipitously lowered in recent years.

Miscellany

A number of you have sent in the article from the NY Times discussing how merchants there are starting to post signs announcing "Euros Accepted." A sign of the times, to be sure, but I'm watching for the day that they start posting signs "Gold Accepted."
Ernst & Young made headlines this week by saying that most metals analysts' predictions of metal prices "have consistently and significantly lagged behind the actual spot market," and that mining and metals equities have been undervalued. To which I reply, "Welcome to our world."

Here's just one of a number of memorable points they made in their report:

"It is our view that current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices, rather than the conventional wisdom that the industry is near the top of a cycle."
I asked one of our researchers to do an analysis of what price level gold needs to reach before we would, based on historical precedence, start seeing serious movement in the gold stocks. For data points, we looked back at two prior gold bull markets, then adjusted the price of gold back then to reflect the current purchasing price of the dollar. While we are still working on the data, a quick look suggests that, if history is a guide, gold has to break over $1,000 decisively to get the masses involved in the stocks. But when they do come, the returns are spectacular. We'll have more on the topic here, and in our other publications, in the near future.

A quick glance at the screen before signing off shows me that Wall Street is again painted red... and that gold, silver, many of the base metals, oil & gas are all higher.

It is especially gratifying to see gold come back so strongly from the whupping it took earlier this week, especially considering all the trash talk about our favorite metal of late. Including, most notably, Dennis Gartman who is calling for it to correct down to $810, though he nuances his comments by stating that even at that level, it would still be in a bull market and poised to surge again.

While we cannot predict the future, nor pretend to, neither can we yet see a scenario that does not favor gold reaching Bud Conrad's forecast of gold over $1,200 this year.

And that, fellow planetary travelers, is that for this week. As always, thank you for spending time with me today.

Next week I am going to endeavor to write an entire edition without mentioning the word "government" once. Until then...

Sincerely,

David Galland
Managing Director
Casey Research, LLC.