The Room : Subprime Loans

The Room - 01/30/2009

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

January 30, 2009

Dear Reader,

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

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

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

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

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

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

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

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

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

Turnaround in Interest Rates?

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

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

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

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

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

Bait for the Two-Legged Rat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Among other information, the lenders' table displayed whether or not the various lending institutions offer "Mortgages to Buyers with Less Than 20% Down?"... and whether they "Offer Mortgages with Credit Scores Under 600?"

Even today, after all the news and global angst, 9 out of 16 still advertise that they offer loans to individuals with credit scores below 600, and four of them actively promote the fact that they'll go down to 580 – which is roughly the credit rating of an escaped felon on the run for credit card fraud. But such a loan, each of the listing institutions further qualifies, is available "Only w/FHA."

And 12 out of 16 will still give you a loan with less than 20% down... in fact, "w/FHA," the solid majority will still provide a loan with less than 5% down, and one touted the availability of a 103% loan.

Alas, despite the understandable desire of lenders to earn yet more cheese by generating poor-quality mortgages for Uncle Sam, borrowers now believe real estate can only go down. Given the oversupply, they are largely right for the foreseeable future. On that basis, they whiff the downside, spot the trap that waits behind the front door of Home Sweet Home, and scamper away.

The lesson in all of this, other than that once I get pounding away on the keyboard, I seem to have no off-switch, is that the real cause of the housing-led crisis was a failure to appreciate the similarities between humans and rats. Every government interference in the market, no matter how well intentioned, carries the seeds of dangerous unintended consequences. Just ask the twenty-something welfare mothers of the 1980s who, when offered monthly pay for each new offspring, quickly converted their wombs into baby factories.

I wish I could say that this lesson – that humans, like rats, will always figure out a way to pursue their self-interest, even if it requires chewing through a real or proverbial wall – has been understood, thanks to the crash.

But as evidenced by the following item, also just in from Bloomberg, it's clear that the lesson is far from learned... at least by certain rats...

Dolts!

Fortunately, there is consolation to be had from the current trend towards more and bigger government. Namely, if you can fully understand what's going on and what's coming next, you have a rare opportunity to – in the words of a stock promoter who used to speak at conferences some years ago – get "stinky, filthy, sloppy rich."

We'll do our part to help you achieve that elevated position, in our various publications and at the upcoming Casey Research Crisis & Opportunity Summit in Las Vegas, March 20 – 22.

Speaking of that event, even though we still haven't gotten around to widely marketing it, the Las Vegas Summit is now more than 2/3 sold out... with less than 100 seats remaining. You should make the effort to get there if you can... there isn't a better time to step away from your computer and everyday life and spend a couple of days in the active contemplation of what's coming next and how to profit. You will get your most pressing questions answered. An updated schedule and registration information is available by clicking here.

Obama Watch

Looking past the rhetoric to the actions of those with their hands on the tiller of power this week, we find some items of interest.

Higher-mileage, lower-emission standards on the way. It increasingly looks as though the enviro-alarmists within the Obama administration are willing to pursue a scorched-earth policy in order to advance their agenda. This week, they set the ball in motion to accelerate the date when car manufacturers have to dramatically reduce emissions and raise fuel mileage... and looked to set a precedent whereby individual states can set their own, even more rigorous, standards. In the best of times, these sort of dictates are often stupid and counterproductive. In the worst of times, they are also dangerous.

In my view, left alone, people and industries will fluidly adapt to changing conditions... even if that adaptation means some businesses will fail and others rise. Unfortunately, the government and far too many members of the voting public just don't see it that way. And so, as with the housing crisis, expect unintended consequences.

Not having to look very far for examples of this principle in action, it was reported this week that State Farm Insurance will be dropping 1.2 million customers and withdrawing from Florida's residential home insurance market after state regulators refused the company's request for a rate hike. According to Bloomberg...
Stimulus or another brick in the wall? This just in from Washington Correspondent Donald Grove...
(Don isn't the only one encouraging a "no" vote on the stimulus bill. Check out this ad from the folks at CATO... http://cato.org/special/stimulus09/cato_stimulus.pdf
Things that go bump. Recently I shared comments by Fitzroy McLean, former intelligence operative and co-editor of Without Borders, on the topic of the daily intelligence briefings that every U.S. president since Bill Clinton has received. To recap, this briefing contains info on a wide range of real and potential threats. The president is then asked to make a decision on how to act. Failure to do so carries with it the potential for a political blowback, should the threat assessment turn out to have been accurate. Thus, even though he was only in office a few days, President Obama approved a drone attack into Pakistan's sovereign territory, killing 20 or more locals, including a number of women and children.

Now, I can't say, because I don't know, whether the intelligence leading to the attack was sound, or whether the "collateral damage" was worth it. But it is important, in my view, to note that the new president has shown himself willing, like his predecessor, to ignore international law and risk further destabilizing an already unstable ally. Was the drone attack warranted? Or was President Obama simply continuing the new presidential tradition of covering his hindquarters by acting reflexively to things that go bump in the night?
Speaking of Afghanistan. This week, we also heard Defense Secretary Robert Gates confirm that (a) there will be a build-up of more U.S. troops in that country, and (b) the whole notion about helping stabilize the country through development activities will likely be back-burnered in favor of just killing unfriendlies. In his own words, the DefSec testified...
As is made clear in Counterinsurgency Warfare by David Galula (available at http://www.praeger.com), probably the best book ever written on the topic, you simply can't win a war against insurgents with blunt military force alone. Gates, who I am almost positive has read the book, knows this, so I find a certain tired resignation in his words. We send more troops to Afghanistan not because we expect to win, but because Obama said we would in his campaign.

Supporting my contention of the futility of the conflict is the fact that the Soviets were incredibly brutal in their attempt to pacify the country, going so far as to drop toys that would explode when handled, the idea being to blow the hands off the next generation of Mujahedeen. So, let me ask you – if we aren't willing to go to that sort of extreme, and beyond... and we have given up on the idea of winning Afghan hearts and minds through on-the-ground politicking and development... then what, exactly, is the endgame?

To get a better sense of the situation, watch this video, it details an eye-opening trip to the largest arms bazaar in the Khyber Pass. (Thanks to Dave M. for sending it along.)

The link is here: http://www.vbs.tv/full_screen.php?s=DGFE2305DC&sc=1363196

But if we pull out, won't a new gang of terrorists reestablish themselves and begin to train for the next 9/11? Could happen, but there are better ways of dealing with those threats than getting deeper and deeper into a country that history has correctly awarded the moniker as "graveyard of empires."

(While its lyrics refer to a different sort of road, this week I've been listening to Chris Rea's The Road to Hell, which seems fitting to a discussion of the Khyber Pass. You can listen to it here)

The above list of actions of the Obama administration is not in any way meant to be a complete tally of what's been going on. For example, according to the news, later today President Obama is expected to "issue executive orders to reinforce the rights of organized labor." And he has added to his new administration Harvard Professor David Cutler. According to Harvard's web site...

"Cutler, who specializes in health care and public economics, is a vocal proponent of increasing America's health care spending, arguing in his most recent book, "Your Money or Your Life: Strong Medicine for America's Health Care System," that such spending has been worthwhile despite its high costs."
To all of which I can only repeat, "stinky, filthy, sloppy rich."

Go Gold!

For obvious reasons, there has been a lot of news on the gold front this week, with an increasing number of articles showing up in the mainstream financial media on the shift towards gold as a safe-harbor investment. Even famous hedge fund managers and other institutions are beginning to buy into the case for gold. And not just bullion, but gold stocks. This from Bloomberg this week...

Meanwhile, GLD, the largest gold bullion ETF, reported that its holdings reached an all-time high of 832.57 tonnes last week.

Miscellany

Bye, Bye, Bobby. The freshly minted Zimbabwean $100 trillion note didn't last long. This week, that nation's befuddled kleptocracy finally threw in the towel on its own currency and is allowing the citizenry to use pretty much any form of currency they can get their hands on to trade among themselves. Without the power to print and no reserves of anything of value left, the end of the Mugabe administration can't be far off. In fact, I'll go on record saying that he'll be out of power within three months. Want to bet $100 trillion Zimbabwean dollars on it?
Scapegoat Bank, MEMBER FDIC. Recently I discussed the idea of the government implementing a "bad bank," an idea that has come to life this week, with the FDIC raising its hand to manage same. Subscriber and correspondent Ian M. of Toronto sent in the following this week, which I thought was both interesting and relevant.

And that, dear readers, is that for this week.

Juggling my responsibilities as managing editor of The Casey Report, the next edition of which is due out on or about February 6, I started this week's edition of The Room yesterday afternoon... and so I am finishing up earlier than usual, at about 11:15 am. While I can't say where the markets will end today, I can report that, at this moment, the DJIA is off about 84 points, oil is up modestly to $46.05, and gold is up to $920.

Given the sheer volume of bad news this week, with unemployment continuing to reach new highs, home sales continuing to collapse, and consumer confidence – and spending – in a steep slide, the stock market should have been crushed... but it wasn't. That it wasn't, I can only view as being due to base building in anticipation of Super Obama's magical plan... you know, the big New Deal "get it done" plan to end all plans.

It's coming...

And I am going...

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/10/2008

David Galland — Fri, 10 Oct 2008 19:27:07 GMT

October 10, 2008

Dear, Dear Reader,

In last week's edition of this meandering missive, I mused as follows...

"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."

According to the number crunchers, the U.S. stock market is on track to have its worst week since 1937. Which, as you can see from the DJIA chart here, is an acceleration of the broader trend that has held sway for some time now.

While we can't yet say what action the U.S. Government will take next, glancing over the horizon, we see a growing number of countries implementing a euphemistically named "market holiday." In Iceland, all banks and markets are now enjoying a day off. And Kevin Brekke, our Switzerland-based researcher, just wrote that there is a rising call to halt trading in Germany. It would not surprise me in the slightest if the same were to occur in the U.S.

As has previously been noted, we are wandering through deep woods, with little in the way of a map to guide us. And so we must rely on what few signs we can discern. And one of those signs is that, literally, all of the "solutions" to the problem now being pushed forward by governments around the globe have to do with trying to re-generate an expansion of credit through the liberal application of a thick layer of monetary grease. In other words, trying to solve the problem with more of the same.

It's like trying to sober up a prostrate drunk by pouring Vodka down his throat as a restorative.

To the extent that these exertions fail, government is forced to fall back on the coercive powers they have taken unto themselves over the decades... slap down the short traders, clamp shut the markets, or... or... we just can't say. But in our mind's eyes, we can hear the motto of our century, "Whatever it takes," bubbling from the blubbery lips of officialdom around the world.

Playing their part, the MMM (Mass Media for the Mindless) intone that the smart move for investors to make now is to play for the big bounce, a drumbeat that was heard especially loud as the week of October 5 opened for business.

This notion that sunny skies are surely just ahead was being championed, of course, by all of the king's men and most of the punditry. It is as if the words "The worst is now behind us" are etched on the inside of their lungs.

And so they urged the investing public to jump back onboard the Rebound Express... maybe even with the use of leverage, just to be sure to squeeze all of the juice possible out the rally that surely cometh.

On Monday and again on Tuesday, I received several emails from readers inquiring for my opinion on that very same theme, often accompanied by articles from this sage or that about the pending rally.

My response to one such inquiry is as follows...

It is this.

Everyone operates from within the framework of their experience. The author's experience is that when his phone begins ringing, it's a bottom. Or when the candlestick chart shows that X level is below Y, then a bounce is due.

He is likely right in one sense... that no market goes in one direction consistently, without pullbacks and bounces.

But what if this time things are, in actual fact, different?

Oh no! Not that old saying.

Well, consider that America has historic (as in, never happened before) levels of trade deficits, government deficits, record levels of personal indebtedness, the largest housing bubble ever – a housing bubble that qualifies as the largest financial bubble in history (by a wide margin), record number of dollars in the hands of foreigners, etc.

So, before we broke through all those negative records, one could have said, yeah, but for those things to happen, things would have to be different... and they were.

Both Doug Casey and Bud Conrad are on record saying that the entire global financial system – a system built on the house of cards of a fiat currency – may be about to fall. That the holders of trillions of dollars in misallocated capital and derivatives anchored to that capital may be about to learn just what the underlying value of a fiat currency actually is, and demand something else.

Look at the stock chart of the Great Depression and you won't see it moving in a straight line... there are bounces along the way... but if you had bought ahead of most of those bounces, it would have been a financial disaster.

All of which is a long way of saying, the author you quote may be right... but I would play the bounce only with money I could afford to lose.

Gold at these prices should be a good monetary medium to transfer wealth to calmer waters... that, and not as a speculative investment, is its best and highest purpose just now. And it is a hell of a lot safer than pretty much any mainstream security (by virtue of the fact that credit markets are frozen... which makes it kinda hard to buy raw materials, meet payrolls, build inventories, buy capital equipment, etc.)

Unless and until the credit markets are working again, caution is the word.

Prior to this week, perhaps, the concept that the world we live in might not be quite so predictable and well organized – you know, that stocks fall, then quickly recover, allowing you to close shop and head down to your preferred martini bar for a $15 libation -- had not made it through the well-coifed craniums of the young and the restless that now dominate the world of finance.

An email from our Jake Weber, the Chicago-based editor of our very useful (and free!) new e-letter, Casey's Charts, shed a passing glimpse on the cost associated with misunderstanding the nature of what's going on just now...

My friend, who's a day trader here in Chicago, said that he lost $100k for the company in 10 seconds, and had he waited 10 more seconds, it would have been $300k. It's a different game...

Now, multiply that experience by the tens of thousands, handling tens of millions, and you can begin to get a sense about the hard dose of reality that has been meted out to the optimistic this week.

It is said that a picture can tell a thousand words (or, these days, given inflation, is it a hundred thousand?), and so I would share the accompanying photo from the Financial Times. One can't say with certainty, but I suspect the look on the young gentleman's face is not enthusiasm but panic.

No $15 martini today, though a bottle of cheap gin in a darkened room might be called for.

Go Gold

As I don't need to tell you -- or at least those of you who have been with us for any length of time – the core fixative in our prescription for the immunization of portfolios large and small from the dark age now descending on global financial markets is a healthy dose of bright and shiny gold.

I hope you didn't drag your feet in laying in supplies, because it is now all but impossible to find physical gold... pretty much in any form (other than expensive rarities), anywhere.

Personally, I've never seen anything like it. Even in the gold bull market scramble of the late 1970s, you still could still walk into pretty much any gold shop and pick up an ounce or two (with a short wait in line, at worst).

Likewise, I couldn't have imagined we'd see such a disconnect between the paper price of gold – which, while comforting, seems restrained to us – in light of the physical shortages and all that those shortages imply.

Shedding some light on that topic, Sally Limantour, the editor of our soon-to-be-launched trading service, forwarded the following excerpt from recent writings by Bill Fleckenstein, one of the few money managers with the foresight to see what was about to unfold...

Lust for Gold Dust

If that's the case, it could cause a mad scramble at the COMEX, because there's not enough gold to meet the open interest. It looks like physical gold, as compared to paper gold, is rapidly becoming the flavor of the day -- meaning that a huge price move may lie just in front of us.

And, if that thesis is correct, when more folks start understanding it, there might not be enough gold around to satisfy demand at anywhere near current prices -- and their attention will turn to the place where they can find gold, namely the gold miners, whose job it is to "make" more. (With the price of energy dropping as world GDP slows, the profit potential for the gold miners is liable to be the best it has been in many years.) So, I think the stage may be set for a dramatic move in gold stocks.

This, of course, is a thesis we subscribe to in our BIG GOLD letter, which is dedicated to following the fortunes of the large market capitalization producers – as well as the various ways you can buy and hold the monetary metal (in the next edition, the BIG GOLD team looks for – and finds – physical gold available for purchase. Learn more.)

The bottom line is that if you are in gold and -- we continue to believe, gold stocks and other assets connected to gold – hold on tight because as interesting as things have been so far, the next three or four acts promise to bring down the curtain.

A Quick Conrad Commentary

Our Casey Research chief economist, the always-working Bud Conrad, shot me the following note and chart in an email yesterday. While his words are succinct, they do a good job of summarizing the situation as it now stands.

Taken together, the dollar is overvalued and stocks are still not reflecting the multi-year recession that, I expect, will bring much lower earnings than the current estimates that keep the CNBC rubes saying stocks are undervalued.

Until I hear something different from the government, other than pouring more gasoline on the fire, I don't expect this crisis to even begin to be solved. At this point, I don't think they have even determined what the problem is, namely too much debt and its deleveraging.

They are working on the wrong problem with the wrong solutions.

Meanwhile, the chart here provides a glimpse at where those solutions are taking the U.S. economy. Not a pretty picture. Gold remains the only safe harbor.

Snippets

The following items arrived this week from Mr. Watson, my longtime friend and correspondent in Portugal.

Running Out of Digits

To which I reply by sharing the message off a bumper sticker I saw earlier this week, "If you aren't angry, you aren't paying attention!"

Iceland on Ice. British local governments, it is now revealed, may have as much as 1 billion pounds parked in Iceland banks, banks with an AA rating. They all parked funds there on the recommendation of John Prescott, Tony Blair's deputy prime minister! The Iceland government wanted to seize control of the three bankrupt banks but discovered that there was no law on the books allowing them to do this. So they used the anti-terrorism laws to seize the banks' assets. Look out, America. Meanwhile, the Iceland president just had a heart attack and was rushed to hospital for heart surgery. I wonder if there is a cause-and-effect relationship at work?

David again, on the topic of Iceland, the following excerpt came out of an article that just came across the wires from an English news source...

Financial crisis: Gordon Brown to sue Iceland over near £1bn of frozen bank deposits

Gordon Brown has described the behaviour of the Icelandic government following the bank collapses as "totally unacceptable", adding that the Government was considering legal action.

The Prime Minister is furious that 300,000 bank customers are blocked from accessing deposits in online bank Icesave.

There are also concerns that councils and police authorities might not be able to retrieve nearly £900m of taxpayers' money which is stranded in Icelandic bank accounts.

Mr. Brown told a press conference: "We are taking legal action against the Icelandic authorities. We are showing by our action that we stand by people who save."

Alistair Darling, Chancellor of the Exchequer, added: "The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here."

In sandbox lingo, those comments would be equivalent to, "If you don't give me back my ball, I'm going to tell my mother!" Regardless, one government giving raspberries to another is not exactly the sort of big love international cooperation everyone is cooing about lately.

The Really BIG Bubble

As I wrote in the September 1 edition of The Casey Report, which focused on housing and how much longer the meltdown in that important sector might last, the global housing bubble at $30 trillion ranks as the biggest financial bubble in history.

It is, in fact, an amount roughly equivalent to the GNP of the entire world.

But my contention that it was the biggest bubble ever was an error. The Really BIG Bubble is in global derivatives, as shown here in this snapshot from the International Swaps and Derivatives Association. As you can see on the lower right-hand side of the really big bubble, the Credit Default Swaps alone come to over $54 trillion... and they are now coming unglued.

While we cannot know how the game will end, the simple fact that the pieces involved are this big is a lot more than a little concerning. I sincerely hope the best case will appear in a fresh suit and pressed tie and announce that all is well. For the time being, however, preparing for the worst case seems appropriate.

What to Watch Now

We expect this crisis to unfold in stages. So far, we have seen the real estate bubble beginning to deflate (and it has a long ways to go, increasingly involving commercial real estate, a play we are already profiting from in The Casey Report), a freeze-up in credit, the emergence of violent market volatility... and now a global stock market meltdown (dare we say "crash"?).

Next up will be widespread bank failures, corporate bankruptcies, soaring unemployment, increasingly draconian government interventions, all of which will end in a massive inflation. How's that for a string of happy thoughts?

Unfortunately, we'll have a lot of time to discuss those various developments in the weeks, months, and even years ahead.

For now, however, the key measure to watch is the London Interbank Lending Rate, or LIBOR, as it is referred to in the trades.

As you may already be aware -- being a whole lot more astute than most people in such matters -- LIBOR is the rate at which banks are willing to lend money between themselves. In addition to being viewed as a measure of trust and normalcy in the global financial system – and on that measure, an upward-spiking LIBOR is the equivalent of a flashing red light these days – it is also used as a feature in financial contracts worldwide.

For example, if you have secured a loan to build your factory or a line of credit to finance the stream of materials you need to manufacture your goods, the underlying terms of your agreement almost invariably use LIBOR, plus some percentage, to express the interest rate you'll pay on the loan.

LIBOR is so widely used in this manner that it is estimated to be linked to over $370 trillion worth of financial contracts. Thus, when LIBOR spikes by 1.44% to 5.38%, as it did earlier this week (it has since settled in around 4.82%... for the moment), the financial consequences to already struggling businesses are huge.

To get the full picture, you have to understand that, pre-crisis, LIBOR was ticking along at about one-half of a percent. So, in raw numbers, multiply a 4.3% increase in LIBOR across $370 trillion worth of contracts and you come up with a financial punch in the gut of almost $16 trillion.

Businesses will fail. Industries will grind to a halt.

Watch LIBOR. Unless and until those rates come down, you can forget about that whole "Happy days are here again" thing. (And, when LIBOR does eventually come down, we'll still be in the deep, dark woods... just in another quadrant of the woods.)

Vive Le Difference!

The McCain/Palin team, correctly in my view, hurls bricks at Obama/Biden for looking to the government to fix all that ails.

Set the free market free, I cheered, pumping my arm enthusiastically in the air with a loud whoop or two thrown in for effect.

But then I came across the following, and my arm dropped across my forehead in an swoon of bitter despair.

"And it's my proposal, it's not Senator Obama's proposal, it's not President Bush's proposal," McCain said. His campaign estimates it would cost about $300 billion, some of which could be diverted from an existing $700 billion rescue package.

Democrat, Republican... two sides of a statist coin if you ask me.

But wait, just when my despair was about to turn to cynicism, I came across this other item from Bloomberg... they caught the culprit behind the financial crisis!

His name, in case you hadn't heard, is Kenneth Rickel. And better yet, he's from Beverly Hills! Rich and greedy, just as we suspected. Bring out the duct tape and truncheons, I say!

From Bloomberg's report on the miscreant behind the crime of the century...

Just what kind of short seller is our man Rickel? Not a naked short seller, like the kind Cox normally vilifies. And while the SEC may have called his civil violations "illegal," it didn't accuse him of fraud.

According to the SEC's complaint, Rickel covered short sales on 14 companies with shares he bought through their public stock offerings. If he'd covered his bets with stock he bought on the open market, he would've been OK under the rules. In a short sale, an investor sells borrowed shares, hoping to buy them back at a lower price and pocket the difference as profit. (Naked shorts sell shares without borrowing them first.)

And what was the totality of Rickel's ill-gotten gains? $207,291. For shame, Mr. Rickel, for shame! (You can read the whole story here:)

Kind of reminds me of Barney Frank's blaming the housing collapse on the free market (see last week's edition). On that topic, someone -- and I am sorry to say I don't recollect, but thanks to whomever you are -- sent along the following.

Which brings me to my song of the week, a classic and very appropriate to today's situation. It's Ship of Fools by World Party. You can listen to it here.

And, Now for Something Entirely Different...

I'm tired of writing about doom and gloom. So, let's take a quick breather by spending a few minutes on one of my favorite topics... the more optimistic topic of technology. This week, a couple of items came to my attention.

Cars for Teens. The first is that Ford announced they are coming out with a new car that allows parents control over maximum speed, music volume, and required seat belt usage. As the father of two pre-teens and remembering my own experience as a teenager behind the wheel (final tally four accidents, one serious), I am solidly in Ford's customer demographic for this innovation.

Kindle 2 Coming. Subscriber and regular correspondent Marv A. tipped me off to the fact that the much anticipated Kindle V.2 is on the way. In fact, here's a peek at it. As readers of any duration know, I am in love with this technology... and even more so with each passing day. If you don't have a Kindle yet, you just don't know what you're missing. In any event, here's a link to an article on the new version. I'll be a buyer (that will make three for a family of four... but I suspect it will be four for four in the not-too-distant future.)

Correspondence

I have received many wonderful and thoughtful emails over the last couple of weeks (along with a few not so wonderful, but hey, it is what it is). While I read all email addressed to me, the problem comes in responding, which takes longer. The problem is that the incoming mail – perfectly understandable given the temper tantrum being thrown by global markets – has reached the point where I am falling hopelessly behind.

Next week, I will try to be a better correspondent.

Sleep Walking into a Brave New World

"It's unreal," said Dean Price, 24, a graphic designer in London. "We've been sleep-walking into this. Everyone talks about Orwell and 1984, but no one ever does anything about it."

I'm running out of time, but I don't want to end this week without hoisting a warning flag about the rising tide of fascism, which typically occurs during economic crisis.

You don't need me to point out the signs that are there for everyone to see, if they weren't too sheepish or just too busy trying to survive to do so. Gitmo, wiretapping of civilians (and, according to breaking news, soldiers in Iraq and their loved ones), U.S. spy satellites being redirected to within U.S. borders for law enforcement purposes, even the deployment of a U.S. Army brigade within the U.S. with a specific mandate to be available to "help" in the event of a domestic emergency of an unspecified nature. A democratic congressman, during the floor debate on the big bailout, said that he and a number of his colleagues were told that if they didn't vote in favor of the bill, "the stock market would crash, and within two weeks martial law would be declared." (You can look all those references up for yourself. I would have done it for you, but I am already out of time.)

The quote at the top of this segment comes from an article I came across on Bloomberg this week on the very slippery slope that Britain is now on. It started with surveillance cameras here and there and has expanded to the point where even local councils have been given permission to deploy spy cameras and wire tapping.

It is worth reading, which you can do here.

As an aside, I am re-reading Orwell's 1984... on my Kindle, of course. It is a true classic and well worth a re-read, especially now.

My point is simple: if there was ever a time to be vigilant, this is it.

Miscellany

You Think Times Are Tough in the U.S.? Last week, I discussed the fact that, as bad as things are in the U.S. financial system, it is as bad, or worse, in Europe. How bad? Well, I can't say for sure if this photo out of England is real or not, but if things keep going the way they are, it could be... (thanks to Bill W. for sending that along!)
Stock Sale Notice. As is our policy, please be advised that a member of our team intends to sell his shares in Allied Nevada, a company we are currently have as a buy. The decision to sell is entirely due to the need to raise some of the money needed to pay a tax bill and has nothing to do with the company or its prospects. Also per our policy, he will not sell until you have had a head start of two business days.
Phyle Announcements. Glenn in Auckland, NZ, is looking to start a get-together group for subscribers, as is Hans in Tampa, FL. The inaugural gathering in Los Angeles is Oct. 18 at 7:00 pm at The Church and State located at 1850 Industrial Ave (east downtown LA). The next phyle meeting in Seattle is scheduled for Oct. 21 at 7:00 pm at the Starbucks in downtown Mercer Island, WA. For more on these events, drop a line to Kristen at phyle@caseyresearch.com.

That's it for this week. As I sign off, just after midday, I see the DJIA is off by 368 points, the S&P is off another 39 points to 865, and gold, after a morning surge, has backed off to around $880 per ounce, as traders close out positions ahead of the weekend. This weekend, the G-7 finance ministers, the IMF and Worldbank all meet in Washington, DC. Understandably, there is a lot of uncertainty in the markets about what's going to happen on Monday.

Speaking of which, Sally Limantour, in the current edition of The Casey Report, provided the technical break-up/break-down levels for a number of markets... i.e., the levels at which a breakthrough signals a bigger move up or down. I asked her to update the levels for stocks and gold. The current break-up level for the S&P 500 is 1005, the break-down is 825. For gold, the break-up is $942, the break-down is $866.

Now, obviously, those numbers move with time... but at least now you know what the traders are watching.

We live in interesting times. Stay in touch...

David Galland

Managing Director

Casey Research, LLC.

The Room 09/19/2008

David Galland — Mon, 22 Sep 2008 20:43:31 GMT

September 19, 2008

Dear Readers,

Hi, I am Olivier Garret, this week’s editor of The Room.

What a rough week out there. My mind wanders as I drive at a crawl (I am not known to be a patient driver) behind a car full of “leaf peepers,” as Vermonters affectionately call the tourists who invade our state every autumn. I wonder how my friend David Galland is doing in Portugal, sipping the local wines with no access to his emails? It may be the worst week to be without market news -- or perhaps not…

Hopefully David is enjoying himself while celebrating an old friend’s birthday with a group of other newsletter editors and industry peers.

Meanwhile, Treasury Secretary Paulson and Fed Chairman Bernanke are not exactly having a day at the beach as they try to solve our nation’s problems. By the way, this past week, it seemed to me that Lehman drew the wrong lottery number while AIG appears to have hit the jackpot. I wonder how many other “private enterprises” will be lucky enough to get bailed out at taxpayers’ expense in the next few months: WaMu, Wachovia, and hundreds of other financial institutions, GM, Ford, Delta, United?

Where Is the Bottom of the Markets?

For several years, we have been warning about the emerging crisis in our publications, and during the past few months, The Casey Report has been emphasizing that what started as a subprime mortgage issue is now quickly evolving into a full-scale depression. I actually wish that our analysis had been flawed and that the government officials who had claimed that the subprime crisis was contained and the markets would rebound in the second half of the year had been right.

Unfortunately, the Fed’s quick fixes did not stick and current events are reinforcing our conviction that this is much more than a normal cyclical correction. It seems as though no securities are being spared these days. Of course, the financials are taking a beating as expected, but we are feeling the ripple effect in all sectors of the economy, including commodities and the junior sector.

Recession fears usually negatively affect the commodities market, as investors expect industrial activity and consumption to decline. This time, however, the very sharp correction of recent months in commodities has been amplified by the need for liquidity on the part of many hedge funds and institutional investors.

Is this the end of the commodity bull market? I am convinced that we are actually feeling the effect of a relatively short-lived, albeit very painful correction. As the Fed and the Treasury continue to intervene in the market, they continue to lose ground and credibility, caught between a sharp recession and strong inflationary pressures. In an effort to bail out the financial sector (soon to be followed by the broader insurance, auto, and airline industries), they have no choice but to start injecting hundreds of billions in liquidity into a contracting market place. This, in turn, will contribute to the makeover of a stagflation period of historical proportion that will make the ‘70s look like a tea party.

Is it time to run for the exit? My answer is a definite “No,” but don’t take my word alone for it. I would like to quote a short excerpt from a fascinating interview of one of the most respected players in the resource markets, Rick Rule. You can read the full interview in this month’s edition of BIG GOLD. Here it is:

David Galland

Rick Rule

So Why Are We Still Bullish on Commodities?

In spite of a sharp recession, the rest of the world will not stop (although it may experience downturns for a while). The aspirations of hundreds of millions of emerging middle-class Chinese and Indian citizens will eventually be attained -- they will continue to work hard to see their standard of living climb and will increase their consumption of food, energy and durable goods. This, coupled with the inflation and debasement of the dollar, will inevitably start a new run for tangible commodities long before this crisis is over.

It is hard not to panic in the current environment and not to run for cover. Instead, we believe it is time to adjust our strategy, taking new input into consideration, of course, but generally speaking, stay the course: continue to invest in precious metals, energy, and other commodities, and buy stocks of discounted top-quality producers and juniors. Some reallocations could also be used to minimize tax liabilities for the year.

In the meantime, make sure that if some of your stink bids get filled, you take money off the table as soon as you can on short-term news. Over the last few weeks, we have seen some great stocks get hit hard by redemptions, then rebound somewhat (20%, 30%, or 50% in a few days). The trend could continue downward for a few months before we see a real turnaround in the resource markets; in the meantime one needs to use the current volatility to acquire great stocks cheaply and take some quick profits. Last week, our Casey Energy Confidential alert provided an opportunity for double-digit gains within a couple of days on several stocks. Subscribers were able to recover their initial investment and retain free positions on some great stocks.

More than ever, we believe in gold and quality gold stocks. I would like to share with you an article recently sent by Nicholas Pingitore, one of our readers:

SHUIT Happens!

HUI Index Components
Company Name	Symbol	% Weighting	Market Cap (9/11/08)
Barrick Gold	ABX	15.83%	23.35 billion
Goldcorp Inc	GG	14.98%	17.72
Newmont Mining	NEM	11.91%	16.3
Randgold Resources Ads	GOLD	6.57%	2.45
Iamgold Corp	IAG	6.43%	1.32
Eldorado Gold Corp	EGO	5.80%	2.02
Agnico-Eagle Mines	AEM	5.49%	6.31
Gold Fields Ltd Adr	GFI	5.21%	4.64
Kinross Gold	KGC	4.96%	7.29
Harmony Gold Mining Adr	HMY	4.80%	2.67
Yamana Gold	AUY	4.12%	5.27
Hecla Mining	HL	3.91%	0.54
Coeur d'Alene Mines	CDE	3.54%	0.77
Northgate Minerals	NXG	3.47%	0.32
Golden Star Resources	GSS	2.99%	0.28
TOTAL MARKET CAP			91.25 Billion

The total market cap of the HUI is less than $92 billion. Now compare that figure with the below chart of diversified companies.

Company Name	Symbol	Market Cap (9/11/08)
Johnson & Johnson	JNJ	197.12 billion
Microsoft	MSFT	244.42
Exxon Mobil	XOM	386.07
Intel	INTC	111.49
General Electric	GE	270.98
Proctor & Gamble	PG	219.23

Editor’s note: Fannie Mae, Freddie Mac and AIG used to be in the above list but we had to write their market cap down to almost $0 and take them out...

the largest un-hedged miners in the world!

http://www.commodity-trading-solutions.com/

Back to Olivier – as I am not a regular columnist for Casey Research, I would like to share a little bit of my personal experience.

Can Our Government Save Us from All Evil?

All of the rhetoric from our politicians on what our government should do to protect its citizens reminds me of a period 18 years ago when I traveled frequently on business throughout what was then Eastern Europe.

I remember arriving in Warsaw about twelve months after the fall of the Berlin Wall in East Germany; the city was grim, dark, and polluted. The best hotel in the city was in a state of disrepair with broken fixtures. Service was poor and the food was horrendous (the hotel was still state-run).

http://www.poloniatoday.com/history13.htm

I traveled around the country to the famous city of Gdansk, seat of the Solidarity revolution and one of the largest ship building ports on the Baltic Sea. On the road, I met a few smoky Trabants, some local versions of Fiats (1960s design), and many horse-drawn carriages (trucks were rare then). Everywhere I went, life was grim. Most enterprises were state-run with large bureaucracies and very low productivity.

Throughout this trip, as well as many prior trips to Yugoslavia, Hungary, Czechoslovakia, and Romania, I remember being horrified by the state of disrepair, sadness, and darkness of the communist bloc societies.

My trip to Poland in 1990 was in the aftermath of the fall of the Berlin Wall; in Warsaw, there was suddenly a glimmer of hope in the midst of the darkness. Many locals immediately started to set up “shops” on the sidewalks, trying to sell whatever miserable belongings they could spare in order to trade them for something else they needed.

Over the next 3 years, I returned to Poland several times, and each time I discovered progress in this country’s steady march away from the yoke of 50 years of state dictatorship. With each trip, I saw gigantic state enterprises shutting down with all of the disruption and pain it caused in people’s lives. These inefficient monsters were soon replaced by smaller, more nimble entrepreneurial firms. Streets began to look cleaner and brighter, with new paint on many buildings and new cars parked along the roads. For many people, standards of living were visibly improving; others were still the victims of the harsh transition to capitalism.

In 2006, I returned to Poland after 13 years of absence. I found in Warsaw a modern and vibrant city that could rival many other Western European cities of similar size. It was clean, modern, with signs of new wealth throughout its middle class. Although I am sure there are still some people left on the margins of society, they have become a small minority.

In all, it took 15-plus years of hard work and entrepreneurship to rebuild a modern society out of the destruction brought by 50 years of socialism. The Poles rejected overwhelmingly their central government and adopted many of the free-market ideas that made for the early success of America. Their journey was often painful, but they transformed their country into a better, more prosperous land. They quickly became more successful than their East German neighbors, who were led to believe that their salvation was to come from their fellow West Germans rather than through their own enterprise and hard work.

It is interesting to me that after having “won” the Cold War and having freed Europe, the United States is gradually becoming a centralized state where we abandon capitalism and individual liberties in the name of fear of failure or terrorism. Not all is perfect in Poland, but they have moved in the right direction (at least until their integration into the EU), while capitalism and entrepreneurship are being trampled in the U.S.

Recessions are painful and difficult to deal with, but it is better to poke the bubble early than to prolong the pain. I do not know any other alternative than to let the market correction take its course. Delaying the burst of a bubble only makes the pain worse when it finally explodes.

I spent several years of my working life restructuring businesses. Many people have asked me: How difficult is it to lay off half of the employees of a distressed business? How can you do it? Invariably, my answer is: very easily. I look at the remaining half and know that if I do not make a difficult choice today, the business will close and the other half will lose their jobs as well.

After failures and bankruptcies, people and nations have the opportunity for a fresh start; with innovation and hard work, generations of Americans have managed to better their lives and those of their children. I can’t say I feel we have achieved the same in the last 10-20 years.

Back to what comes next. I have asked our Chief Economist Bud Conrad to share a few comments and a chart that illustrates the dilemma faced by Paulson and Bernanke:

Bud correctly points out that as our domestic consumption slows, China and other exporters to the U.S. will see a decline in their activity that will be accompanied by a corresponding reduction in the financing of our debt. Continued injection in liquidity by the Fed will contribute to further devaluation of the dollar.

Foreign lenders see their U.S. investments being hit by the combination of currency devaluation and write-offs of stocks and bonds. The only possible way for our government to retain and attract foreign funds will be to increase interest rates. This will be a very challenging decision as long as our economy is in a recession. In spite of calls to ease interest rates in the short run, it will be difficult for the Fed to continue to support a policy of negative real rates if it needs to encourage foreign investment.

At the risk of being redundant, I have also asked Louis James to give us his thoughts on current events. Here is what he has to say:

International Speculator

It’s currently the third image down

www.youtube.com/watch?v=XwzYtdA6y_U

Boobus Americanus

Casey Investment Alert

International Speculator

Options & Futures

Last month, several attendees to our Chicago Options & Futures Intensive asked me if Casey Research would ever consider launching an Options Alert to complement The Casey Report. At the time, I responded that Doug, David, and I had discussed the possibility of launching such a service within six months but that we would only do so if we found a very experienced editor for this service.

I now have the pleasure of announcing that Sally Limantour, a 30-year veteran floor trader on the Chicago Commodities Exchange, has decided to join our team and launch this new alert service for us. In addition to being a professional options and futures trader, Sally is teaching online intensive training classes for traders and is a talented newsletter writer. I have asked Sally to write a short note to introduce you to her world.

A Ride to the Rescue

Multiple Personalities

Buck Broke Mountain

Especially in these tumultuous times, options and futures provide unique investment opportunities to profit from almost any major trend and to tailor investments to literally any risk/reward strategy. The Casey option alert will be a unique service that will combine both educational and trading advice. We anticipate launching this service during the second half of October and will keep you informed as soon as details are finalized.

And from the Desk of Doug Hornig…

chutzpah

sturm und drang

that’s

Olivier again for the closing remarks.

Panama

At Casey Research, we do not usually announce conferences until we have picked a destination, a topic, and a date. Last month in Chicago, we announced to attendees that we were planning a conference in Panama in November and that details would come in September. Unfortunately, it turned out that we could not finalize all of the arrangements to our satisfaction in order to make it happen for this date, and we will have to delay this event until after the turn of the year. We thank you for your patience and will let you know as soon as we have secured a venue and planned the program. Stay tuned…

TV?

Many of you have had the opportunity to hear Bud Conrad at our conferences, but have you ever seen him on TV? As one might expect, with the developing crisis, the mainstream media are beginning to pay attention to what the Casey Research contrarians have to say. In the past several weeks, it seems that the opinions of Doug Casey, David Galland, Terry Coxon, and Bud Conrad have been heavily sought by Fox Business, CNBC, the Boston Globe, and Dow Jones Newswire (WSJ), to name a few. In case you have missed Bud’s latest appearance on CNBC, I have included the link below.

http://www.cnbc.com/id/15840232?video=852271347&play=1

Before I leave you to take my second son, a high school senior, for a seven-hour drive to New Jersey to visit Princeton University, I wanted to continue David’s tradition and let you enjoy a very appropriate song for these trying times.

http://www.youtube.com/watch?v=zeo0_3gN190

While it has been a tall order to fill in for David, he will fortunately be back at the helm next week.

Thank you for being our subscribers. It truly is a pleasure to work for such a fine group of sophisticated investors. I look forward to the opportunity to meet many more of you during future conferences or travels to cities where Casey Phyles get together.

Olivier Garret
CEO
Casey Research

The Room 3/31/08

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

Dear Reader,

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

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

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

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

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

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

Real Estate, the Insider's Perspective

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

RUN FOR COVER!

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

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

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

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

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

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

With that introduction, here is our interview...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Democracy Versus Republic

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

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

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

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

In a republic, eating the sheep would be outlawed.

Universal Health Care Anyone?

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

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

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

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

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

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

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

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

Inflation? What Inflation?

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

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

David,

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

Ian

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

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

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

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

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

Bearish Questions

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

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

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

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

So far some crucial details remain murky.

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

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

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

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

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

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

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

Among the unanswered questions are:

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

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

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

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

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

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

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

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

Here's a link to the full article.

And That Is It For This Week...

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

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

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

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

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

Very sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room 3/24/08

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

Dear Reader,

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

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

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

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

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

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

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

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

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

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

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

Problem Solved?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Blame it on Smokey the Bear

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

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

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

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

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

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

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

Which Brings Up an Interesting Question

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

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

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

I will, however, comment just a bit further.

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

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

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

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

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

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

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

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

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

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

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

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

What's Coming

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

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

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

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

Show Me the Money!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Energy Chart of the Week

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

[click to enlarge]

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

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

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

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

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

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

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

China Still Is Selling Us More and More

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

[click to enlarge]

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

Real Estate, Real Trouble

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

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

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

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

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

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

We live in interesting times, indeed.

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

Warm regards,

David Galland
Managing Director
Casey Research, LLC.

The Room 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.

The Room : Subprime Loans

The Room - 01/30/2009

Turnaround in Interest Rates?

Bait for the Two-Legged Rat

Obama Watch

Go Gold!

Miscellany

The Room - 10/10/2008

Go Gold

A Quick Conrad Commentary

Snippets

The Really BIG Bubble

What to Watch Now

Vive Le Difference!

And, Now for Something Entirely Different...

Correspondence

Sleep Walking into a Brave New World

Miscellany

The Room 09/19/2008

Where Is the Bottom of the Markets?

So Why Are We Still Bullish on Commodities?

S*HUI*T Happens!

Can Our Government Save Us from All Evil?

Options & Futures

And from the Desk of Doug Hornig…

Panama

TV?

The Room 3/31/08

Real Estate, the Insider's Perspective

Democracy Versus Republic

Universal Health Care Anyone?

Inflation? What Inflation?

Bearish Questions

And That Is It For This Week...

The Room 3/24/08

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

What's Coming

Show Me the Money!

Energy Chart of the Week

China Still Is Selling Us More and More

Real Estate, Real Trouble

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

The Room 2/11/08

What Futures Markets Are Saying About Interest Rates and the Economy

Making Money in a Crisis

People Say the Funniest Things...

Quick Takes on Politics

The Housing Market - Watch Out Below

Neutron Loans

The Honorable Richard L. Armitage

Get Well Soon

1984

The Quiet Revolution in Natural Gas

Affordable Health Care for All

Miscellany

SHUIT Happens!