The Room : TARP

The Room – 06/05/2009

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

Dear Reader,

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

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

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

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

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

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

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

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

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

Unemployment Falls!

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

(Bloomberg headline, June 4)

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

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

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

Housing Market Bottoms!

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

(BusinessWeek, June 4)

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

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

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

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

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

So, Why the Stock Market Rally?

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

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

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

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

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

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

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

Ed. Note:

Casey Trend Trader

click here

Gold Can’t Be Beaten

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

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

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

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

Over to you, Bud…

Debt Collapse and Inflation

By Bud Conrad, Chief Economist, Casey Research

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

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

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

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

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

U.S. Treasuries

Agency Bonds

Agency Residential Mortgage-Backed Securities

Non-agency Residential Mortgage-Backed Securities

Commercial Mortgage Backed Securities

Investment Grade Corporate Bonds

High-Yield Corporate Bonds

Asset-Backed Securities

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

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

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

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

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

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

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

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

Worth a Read

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

blurted out an obvious truth

And…

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

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

Adult Supervision

By Don Grove, Casey Research's Washington correspondent

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

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

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

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

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

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

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

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

Mom!

Also from Don…

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

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

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

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

Saving Private Brown

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

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

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

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

Miscellany

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

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

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

There’s much truth in those words. Regrettably.

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

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

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

David Galland
Managing Director
Casey Research, LLC.

The Room – 04/10/2009

David Galland — Fri, 10 Apr 2009 16:18:00 GMT

Dear Reader,

A quick comment is in order on the recent stock rally. While I could provide that comment, few people do the "dose of reality" thing better than my globetrotting partner and friend of many years, Doug Casey.

Begging the forgiveness of our paying subscribers to The Casey Report, I would like to quote Doug from the current edition, just published...

David again. Given that Doug and, to a somewhat lesser degree, our own Chief Economist Bud Conrad, are deeply negative about the current economic set-up, I make it my personal mission to try and look at the brighter side of things -- though readers of this weekly missive might find that assertion laughable. It has been, I admit, a challenge to find the sunny spots in the economy over the last year or so, a challenge I have often failed at.

Even so, I had been expecting this latest rally for a couple of months, based in part on the large amount of cash sitting on the sidelines and looking to get "active." People don't enjoy being constantly bearish, and investment managers, whose livelihood – not to mention the payments on their Maseratis – depends on deploying the money entrusted to them, are always looking for excuses to be bullish.

If you look at the history of these sorts of crises – the domestic paradigm of which is the Great Depression of the 1930s – you will see that even in an event as dire as that, there were any number of fairly significant bear market rallies. In fact, it may surprise you to learn that of the 20 largest stock market rallies in the history of the DJIA, 17 occurred during the Great Depression.

While I agree to the level of my DNA with Doug's assessment of the dark outlook for the U.S. and global economy, I am of an equally firm opinion that the stock market will bottom well before the economy recovers anything close to the effervescent days of recent past.

The chart here helps make the point. Specifically, even though the Great Depression lasted well into the 1940s, the stock market bottom was put in all the way back in 1932. It is important, Doug and I agree, not to conflate the stock market with the economy. While they are certainly linked, they are not the same.

That is not to say that you could have invested in the stock market at any point following 1932 and made a profit. Far from it.

But rather, as the chart confirms, there was a significant opportunity for those who got positioned following the DJIA’s wipeout and capitulation in 1932, by which point it had fallen a full 90% from its pre-crash peak.

With the market now off "only" about 50% from its pre-crisis highs, we believe that there is still a steep cliff waiting for unwary equity investors on the other side of the current stretch of Happy Highway.

Even so, the rally now underway could last for a while, maybe even a month or so – and therefore offer traders a quick speculative opportunity.

iShares Dow Jones US Financial Sector (IYF)

But the real opportunities will come on the other side of this rally, when investors learn the full wrath of a very angry Mr. Market... and again following that dose of hard reality, when the investment masses are huddled in a fetal ball, sucking their thumbs and whimpering pathetically.

In the first part of that two-part profit equation, we’ll be shorting the zombie institutions who are only briefly being reanimated by the current bear market trap… and in the second part, we’ll be buying deeply undervalued stocks with both hands.

As an investor, you can choose to speculate on the rally lasting a bit longer, but do so only with the understanding that things could turn on a dime – and when that happens, your dime can quickly turn into a couple of pennies. Alternatively, one can make a good case for simply remaining patient, with heavy allocations to both cash and gold. In either case, as we explained in the current Casey Report, now's a good time to begin getting positioned for the inevitable turnaround in interest rates.

[It would be remiss of me not to mention that The Casey Report offers a generous no-risk trial period, for those of you who are interested in staying closely in touch with the evolving economic and investment situation, and the various ways to profit. Click here to learn more.]

Speaking of Zombies

(For the more musically adventurous, while you read this next bit, you might want to listen to a song in a genre I normally don't gravitate to – and I almost guarantee you that most of you will hate -- the "Goth” classic Bela Lugosi's Dead by Bauhaus. But really, unless you're a bit of a freak, you probably want to give this one a pass.)

Casey Research CEO Olivier Garret and I traveled to the Washington DC area earlier this week for several meetings, including a cup of coffee with Washington correspondent Donald Grove.

The thing that struck me most on this visit to our nation's capital was the large number of homeless people wandering its streets. There was not a single city block, it seemed to me, where one could walk without having to weave in and out of the slowly moving, numb-countenanced, living testaments to failed lives.

Please do not think I’m insensitive, I’m not (or at least I like to think I’m not… a friend once told me I was the most insensitive sensitive person he knew). Rather, I provide this observation to make the point that even at the very epicenter of our coddling government, some significant percentage of the citizenry appears to have veered onto a very bumpy stretch of life’s road, leaving them with addled brains, the clothes on their backs, and not much more.

Also commonly seen on the streets of Washington D.C. are the well-coiffed, Armani-suited creatures of government that are, in my opinion, zombies of another and more dangerous sort. Rather than simply trying to shuffle in your way long enough to solicit a voluntary donation, this elevated breed of zombie gravitates to the power that resides in Washington DC, with the clear intent to use it to forcibly shake you down and then, if in the mood, proceed to suck the blood out of your very existence.

While the first form of zombie should, and does, evoke a certain amount of sympathy, the latter deserves nothing but scorn.

Shifting gears, but still in Washington, as is often the case, because of my prior experience in the trade, I took the opportunity to chat with the taxi driver who delivered us from the train station to our first meeting.

He was a very engaging, middle-aged man from the nation of Eritrea who had been residing in these United States for about 16 years. After discussing the geography, politics, and the language of his country of birth -- a discussion that included a demonstration of his native language, a fascinating collection of sounds and words that would not have been out of place in the Star Wars bar scene – the conversation turned to life in the big city.

"So," I inquired, "how's business?"

"Pretty good," he replied. Adding, rather perceptively, I thought, "I figure this place will probably do all right. It should be one of the last places to experience a bad economy."

"Good point," I concurred. "After all, it seems like the business of government is a growth business these days."

"Yes," he added, "the business seems very good."

"What about crime?" I asked, my countryside sensibilities always attuned to the dangers of big-city life.

"It's better than it was ten years ago, but it seems like it's getting worse lately."

"How many times have you been robbed?" I asked, never thinking to ask if he had been robbed -- if you’ve driven a taxi in Washington DC for any time at all, that you’ve been robbed is a given.

"Yes, recently," the cabbie volunteered, "but they didn't take my money."

“Why not?"

“The two guys told me that I was such a nice person, they decided not to rob me. They also told me to tell my fellow cabdrivers that they should not assume that all young black men are robbers, and should pick them up. They were quite angry, you see, because they had to wait for a long time before any cab would pick them up, which was me."

"But, in fact, they were robbers, right?" I asked.

"Yes," he said with a wry smile.

(Not only am I not insensitive, I’m also not prejudiced… and I apologize if that story might be misconstrued as such… I just thought the robbers’ admonition to their intended victim to be something approaching a classic in the annals of irony.

In fact, for the record, the cab driver from Eritrea was well dressed, fit, thrilled to be in America, and happy in his work… all of which was in stark contrast to the lecherous Las Vegas cab driver I mentioned a couple of weeks ago, who was fat, sloppy, and an all-around malcontent. Given the choice of neighbors, the good-natured and hard-working Eritrean or the "all-American" cab driver from Las Vegas, the Eritrean immigrant would get my vote, hands down.)

Since I seem to have fallen into a slipstream here, I’ll go with it a bit further.

Have you seen the idea bandied about that the U.S. government could provide substantial support to the free fall in housing prices simply by offering immigrants the ability to gain citizenship, perhaps after some modest waiting period, by purchasing a house with a value in excess of some reasonable number – say $300,000?

This is not a new concept but was used very successfully by the Canadian government, on the verge of the Chinese takeover of the former British colony of Hong Kong, to encourage immigration from the well-heeled community of Hong Kong Chinese. Likewise, countries like Switzerland have for years offered economic citizenships, albeit with a higher price tag.

I gather from John Mauldin, who spoke at our Las Vegas seminar, and who had run this idea by his subscriber list, that it had generated a lot of negative feedback. I have a hard time seeing what the problem is, given the destruction of the net worth of so many American homeowners… and given this nation’s long and altogether positive experience with immigration.

What am I missing? Drop me a line at David@CaseyResearch.com.

The Cloudy Crystal Ball

For no particular reason other than curiosity, I spent some time this week looking at a couple of charts that conventional knowledge says should provide something of a look into the future.

The first chart, shown below, tests the idea that the stock market is a sensitive precursor indicator for the economy in general.

But if you look at the chart, you’ll see that the DJIA peaked about two years after the peak in the housing market, the key economic driver of the recent boom times.

Is there something to be learned from the chart? Besides the fact that the old adage about the stock market as a leading indicator doesn’t hold much water, it suggests that you should be paying far closer attention to what's going on in the real economy, rather than the stock market.

While the headlines of the financial press of late have carried story after story discussing whether the recent stock market rally is signaling the bottom in the economic downtrend, if you focus only on the tangible data emanating from the real economy – data that confirm continuing negative trends in unemployment, house prices, and defaults in virtually all credit instruments – you're likely to get a much better fix on where we are in the economic cycle.

The second chart has to do with the old saw that “Dr. Copper” is particularly adroit at predicting turns in the economy. While you might look at the chart below and see something I don’t, what I see is a very poor correlation between copper and the beginning – or end – of recessions.

In hindsight, the idea that a single indicator, however logical it might be, can tell you anything important about the future seems silly. If for no other reason than if it could, everybody would pay close attention to it and act accordingly, and so it would quickly lose its potency.

Feed the Pigs, Own the Pigs

Speaking of old saws, I’m sure you've heard the oft-repeated story about how a smart guy once captured a heard of especially wild pigs, a story that is usually set in some remote corner of the state of Georgia.

For the few of you who haven't heard the story, all the smart fellow does is to begin putting feed on the ground in a certain spot where the pigs are known to pass… and to repeat this activity daily for several weeks. At that point, with the wild pigs accustomed to the apparent manna from nowhere, the man builds a pen surrounding the feeding spot and waits until the next time the pigs are snout-deep in their victuals – at which point he simply closes the door of the pen.

That story came to mind on reading this week that the new HUD secretary, Shaun Donovan, has gone on record as saying that banks that receive TARP funds will soon be required to modify the terms of their mortgage loans to ease the burden on those struggling to pay.

Need I say more?

Probably not, but I will add a footnote in the way of the photo below, which I swiped from my favorite blog, www.planetmoron.com. The photo is of the prototype for a new vehicle to be produced by a partnership between GM and Segway… in other words, this rolling coffin will be funded in no small part with the taxpayer funds you were so kind to provide.

No, seriously, I’m not joking… they actually think they are going to sell these things, simply because they can label them green. Really, who are these people? Where do they come from? How did they make it through the gene pool intact?

Then again, anyone insane enough to strap themselves into one of these devices and pull into an active roadway likely will be removed from the gene pool in a hurry.

A Shift in Tide for the Trade Deficit

Our own Bud Conrad threw together the following chart showing the recent deep reversal in the trade deficit.

Some people might view this chart with optimism – because we all know trade deficits are bad, especially those of historic portions. And so, a reversal in the trade deficit can only be good, right?

Maybe not.

Seeing this sharp reversal, a couple of thoughts come to mind.

For instance, the foreigners on the receiving end of the deficit have been redeploying the massive quantities of dollars they received by selling us flat-screen televisions, etc., to buy up equally massive amounts of U.S. government debt. In fact, they have been the largest buyers of U.S. Treasuries, by a wide majority, in recent years. Thus, a reversal of the trade deficit means that these same foreigners will now have far less cash with which to purchase U.S. Treasuries… at the very same time that the U.S. government has obscene amounts of Treasury bills to sell.

Our own Doug Casey has often said that while one should be concerned about the trade deficit, it is when the trade deficit goes into reverse that you should get most concerned. Doug’s point is simply that the reversing trade deficit is likely an advance indicator that the flow of dollars is beginning to reverse and head back toward our shores. Put another way, over the last decade Americans have essentially exported their inflation, but the reversal in the flow strongly suggests that we are now heading toward the opposite scenario.

The More Things Change...

Tim Diering from the office sent over a cartoon, cut from the pages of the Chicago Tribune circa 1934.

While the cartoonist clearly demonstrates a flair for the dramatic in his etchings, I found the general talking points eerily similar to those you might come across these days in the public discourse about the Obama administration's liberal application of stimulus, combined with equally generous implementations of new and larger government programs.

You can view a full-sized version of it here.

Miscellany

What’s a Trillion, Part II. A week or so ago in this column/blog thingy, I included a link to a very competently done graphic demonstrating just how much money $1 trillion really is. I thought that would be the last word on the topic, but then John from the office sent over a link to a video that does an even better job of communicating just how much $1 trillion is. Give it a watch by clicking the link here …

… and then use the tool on this page to forward this missive to a friend or relative in the hopes of illuminating more and more people as to both the magnitude and the insanity of the government's plans to spend trillions -- and as much as $12 trillion has been committed so far -- in trying to return to the halcyon days of the bubble years now gone by.

What’s a Ton(ne)? As we have also touched upon lately, often times you will find that the media uses “tons” or “tonnes” when discussing the sale bulk quantities of gold. Yet, because gold is most commonly priced and sold in troy ounces, using any other measure serves mainly to obfuscate the situation and confuse the average reader.

In an attempt to resolve this question once and for all – and I am encouraged in this effort by both Doug Casey and reader Steve D. -- there are 32,150 troy ounces to the metric ton or tone, which is the measure usually used in discussing large gold sales, but shouldn’t be. [Note: Whenever here in the U.S., you read the word “ton” without a qualifier, it almost always means short ton. There are 2,000 lbs. to the short ton and 2,205 lbs. to the metric ton. To confuse you even more, likewise, a troy ounce differs from a standard, or avoirdupoiss, ounce – the former equals 31.1 grams, the latter only 28.4 grams.]

A “tonne” of gold seems a lot… a lot more than 32,150 ounces. So, maybe the use of tonnes is a deliberate attempt to spook the market? I’m not conspiracy-minded, but just maybe…

Panama Errata. In a recent article titled "Move Your Money Out of the Country, and Soon," the editors of Without Borders provided the names of several firms in Panama that might be able to assist readers with the international component of their portfolios. One of the firms involved, Verdmont Capital, S.A. contacted us to let us know in no uncertain terms that they will not accept American clients. Apparently, other companies named also no longer accept U.S. clients.

We are sorry if any of you wasted time by reaching out to those firms. At least you can take consolation in the knowledge that Uncle Sam is keeping a close eye on your money.

And that, dear readers, is it for this week’s edition. With the markets closed for the Easter holidays, I won’t be offering a final comment on the market action, as I so often do.

I will, however, wish you all a very happy holiday. May all the golden eggs be yours!

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

David Galland
Managing Director
Casey Research, LLC.