The Room : The Fed

The Room – 06/19/2009

David Galland — Fri, 19 Jun 2009 19:57:00 GMT

Dear Reader,

David is taking a well-deserved week off, so this week you’re hearing from Olivier.

While David may be off duty, it didn’t prevent him from submitting an interesting article sent by one of our subscribers, along with a couple of comments.

Telegraph: U.S. cities may have to be bulldozed in order to survive

Dozens of U.S. cities may have entire neighborhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

Olivier again. Definitely a creative plan that may prove to be a better use of federal dollars than most of the other infrastructure development projects contemplated by the administration. The problem with most new infrastructure projects is that they end up adding operating and maintenance costs to municipalities and states that can’t really afford them. At least the “wrecking ball programs” should result in decreased long-term overhead for the cities that implement them.

The First 150 Days

Yesterday marked the end of Obama’s first 150 days at the helm of the U.S. of A. None of us doubted that Obama was a savvy and ambitious politician, but even we are impressed by the sheer number of new initiatives the president has undertaken. In less than five months, there are very few campaign promises he has failed to tackle.

One has to wonder, however, whether Obama may be failing to deliver on the biggest of his campaign promises – that of bringing change to Washington. Weren’t we supposed to see the end of politics as usual and of government waste and pork? Instead, we’ve gotten more of the same, with Ben Bernanke, Larry Summers, and their ilk still in charge and Geithner replacing Paulson. The doors continue to revolve between Wall Street and K Street, with the same cabal influencing policy.

Given my inclination to look at facts rather than listen to pronouncements, here is my assessment of the State of the Union after 150 days. Let’s look at a balance sheet of achievements with assets and liabilities as of June 18.

Starting with the assets:

While we have not returned to a healthy credit environment, it is undeniable that the massive injection of liquidity into the financial system by the Fed and the Treasury has managed to thaw the credit freeze we experienced last fall.
After declining by 24% from January 1 through March 9, the S&P 500 has managed to recover and closed at $918 yesterday, up 3.4% for the year in spite of a sharp contraction of real GDP (-5.7%). This may be explained by a reported increase in corporate profits for Q1 (+$42.6 billion, although non-financials declined by $64.2 billion).

One may wonder, however, if the $116.1 billion Q1 increase in profits from the financial sector (following a $178.7 billion decrease in Q4 2008) had anything to do with the changes in the FASB mark-to-market rules that were conveniently adopted by this regulatory board on April 2. (This change did not allow financial institutions to restate 2008 results but, interestingly enough, allowed them to apply the new rules retroactively to Q1 results.)
A better-than-expected unemployment report for May 2009. Non-farm employment figures fell by “only” 345,000 compared to a decline of 504,000 in April. Yet the unemployment rate has continued to grow to an all-time high of 9.8% (for the record, it was 5.3% in May 2008).
Total housing starts increased to 532,000 in May from 454,000 in April. The lowest since the Census Bureau began tracking housing starts in 1959.
Foreclosure filings dipped 6% in May compared to April. Yet they increased 18% from May 2008, marking the third highest month on record. "There were almost one million foreclosure filings in a three-month period, and that's simply unprecedented," reported Rick Sharga, senior vice president at RealtyTrac.
The University of Michigan Consumer Sentiment Index for May hit its highest level since last September, indicating that while consumers are still relatively glum, they are increasingly hopeful the economy will experience a turnaround in the next few months. The final index at 68.7 was higher than April’s 65.1 and November’s 28-year low of 55.3.

So maybe there is some light at the end of the tunnel, and the markets are anticipating the 2009 fourth-quarter recovery Ben Bernanke promised us last March in his 60 Minutes interview. Given Chairman Ben’s track record, though, I wouldn’t bet on a recovery just yet, so let’s turn to the liabilities:

Back in early March, the Obama administration released its forecast for the federal budget for the remainder of 2009 (ending 9/30/09). While the 2009 deficit announced was a staggering $1.8 trillion – four times that of 2008 – the plan is that we will start to see a progressive return to reasonable levels after a few years. Unfortunately, it is already certain that once again actual deficits and unfunded liabilities will rise far beyond current plans. So far, tax receipts are $100 billion lower than forecasted in Obama’s budget, and I doubt that actual spending will come in below.
The Public-Private Investment Partnership (PPIP), announced with great fanfare by Tim Geithner in March, has yet to attract investors. While banks appear to have returned to health, they are still undercapitalized and loaded with toxic assets ready to explode with the next round of bad news.
Over the first five months of 2009, unemployment rose by 3.4 million to 14.5 million.
Foreclosures have declined slightly, but the number of foreclosures from prime borrowers (as opposed to subprime and Alt-A “problem” loans) is rising quickly as job losses increase. We can expect more defaults as a result of the recent layoffs, and we have yet to hit the next wave of Alt-A loan resets that is forecasted to hit later this year and to continue through 2011. The number of new homebuyers may be dwindling soon, too – while 30-year mortgage rates are still low, they are definitely rising. More stringent lending standards and higher rates do not bode well for a recovery in the residential markets.
Commercial real estate is only beginning to see the full impact of the recession. A tight lending environment, stricter loan-to-value ratios, declines in property values, lower occupancy rates, and the lower overall profitability of most properties mean that we will continue to see an increase in defaults in the commercial sector for quite some time.
The Obama administration’s big push for alternative, “green” energies and for a cap on carbon emission is sure to cost American taxpayers and businesses hundreds of billions of dollars while providing no guarantees that it will have any real impact on reducing our dependency on imported hydrocarbons. The administration shows very little support for the only real short- to medium-term alternatives: clean coal, domestic oil and natural gas, and nuclear. In fact, many projects are being curtailed due to lower energy prices and regulatory hurdles and threats.
Not only are we staying in the nightmare of the Iraqi war, we are expanding our involvement in Afghanistan and are drawing closer to involvement in Pakistan --

leading to yesterday’s Senate approval of the war supplemental. Who knows, we may soon be liberating North Korea too.
While universal health care may be a popular concept, it will come at a hefty price, and according to the Congressional Budget Office, it will definitely add to the already staggering, unfunded liabilities of Medicare and Social Security. Who will pay the bill?
Why, the “rich,” of course! By rich, I mean those earning over $250,000 a year. Of course, since raising taxes on the rich and carbon-emitting businesses won’t suffice, new forms of taxation – such as a federal VAT – are being seriously considered in DC. In fact, if you want to get a deeper understanding of the impact of the first 150 days of the Obama administration on future taxation, you should check this link to the Americans for Tax Reform website:. While probably not totally unbiased, it provides a sobering look at what may be upon us.
Inflation is still relatively tame. As we have explained time after time in our publications, we expect the deflationary impact of the recent burst in the asset bubble to soon be overcome by monetary expansion and runaway inflation. As the deficit widens and foreigners lose confidence in the dollar, we can expect the Fed to fill the gap by running its printing presses overtime.
The bailout of the financial, insurance, and auto industries has not only cost taxpayers an enormous amount of money, it is also a clear step towards government control of the private sector.
It is becoming clear that the federal government is challenging contractual rights in the name of the War on Crisis. In the past few months, the protection of stakeholders under bankruptcy has been trampled, contractual bonus obligations have been voided, mortgage lenders have seen foreclosure rights eliminated, and corporations have seen management and capital structure overhauled by bureaucrats without shareholders’ approval. Yet the administration states that private enterprise is the principal element of any economic recovery. Unless coerced, what private investor will want to invest in a challenging economic environment without contractual protections?

One of our subscribers, Tommy K, forwarded a cartoon that appeared in 1934 in the Chicago Tribune. It wouldn’t be too hard to make it current and relevant to our times.

Enough ranting on the state of the union, though. Let me turn to Bud Conrad, who will enlighten us on whether the current stock market rally is the beginning of a recovery or one of those bear market rallies common in serious recessions. I will let you draw your own conclusions.

Where Did the Wealth Go?

Bud Conrad, June 2009

The drop in housing and the stock market decreased consumers’ desire to spend. To understand how big the impact is, I have taken the Federal Reserve’s latest data that was published on June 11 to see what the effect is on the assets of households and nonprofit organizations. The chart below shows all the assets added together are generally growing through the end of 2007. It then shows the levels of decline through the end of the first quarter of 2009. The drop in all assets combined was $12 trillion in just over a year's time. The biggest downturn is in stock market valuation ($7 trillion), and the second-biggest drop in housing ($3 trillion).

Household liabilities decreased a very small amount by comparison. That makes sense, because housing prices can move much more rapidly than the debt on those houses. This very big decline in asset value is both the result of a slowing economy and the cause of future slow growth. As consumers feel less wealthy, they are less likely to spend. The conclusion to be drawn from this loss of wealth is that the slow economy will be with us for quite a while.

Foreigners Are Slowing Investment in the U.S.

Bud Conrad, June 2009

Foreign investment in the U.S. has been one of the supports for our government deficits and for our dollar. With foreigners questioning how large their holdings should grow, a closer look at the total cross-border flows gives some indication of what is going on.

Breaking down foreign purchases of securities into long-term and short-term gives an indication that while foreigners are not yet running away from the dollar, they are reluctant to hold long-term instruments. A logical interpretation is that by holding short-term paper, they retain more flexibility to shift their money towards new investments.

The conclusion from the data is that foreigners are starting to look for alternatives to U.S. investments. Their pronouncements confirm what they are doing. Important meetings are occurring, such as that of the Shanghai Cooperation Organization, where the U.S. was excluded this week and where they discussed looking for alternatives to the dollar.

Olivier again. There are still a few bears around on Wall Street. Goldman Sachs Chief Economist Jim O’Neill said financial markets could weaken in coming weeks amid concern over the government’s intentions to roll back stimulus packages.

See this link.

In fact, it does not take a seasoned economist or a PhD to figure out that there is more downside than upside in the stock market these days.

During the month of May, the S&P 500 traded at an average P/E ratio of 127.48, shattering the previous average monthly high of 58.66 in April. For historical reference, the average P/E for publicly traded U.S. stocks has been around 15.

You may ask, if we see clear signs of a correction and weakness in the dollar, and if inflation is around the corner, why hasn’t gold gone through the roof yet? I can give at least three reasons for its relative lack of strength ($934 this morning):

Seasonality. The gold price typically shows signs of weakness in the summer and picks up in the fall and winter months because of increased jewelry demand.
IMF gold sales. It is expected that the IMF will sell one eighth of its gold reserves (12.97 million ounces) to finance aid programs to developing economies hit by the current crisis.
Deflation. While we are forecasting inflation, there are still some strong deflationary forces at play. We do not anticipate the gold mania to start until deflation fully subsides.

So am I long on gold? More than ever. I see the current softness in prices of precious metal as an opportunity to continue to load up on bullion and stocks of major gold producers, as advised in our BIG GOLD newsletter. If you are not yet a BIG GOLD subscriber, you may want to check it out and follow our recommendations.

Speaking of gold, you may have seen the following article on our site or others: Mint moves to halt possible “run” on gold.

On the same subject, one of our subscribers reports:

Notes from the Field

Although he was just back from a trip to Colombia, Louis James hopped on a plane again this week to go down to Mexico and check out Mexican silver properties there. Louis just sent along preliminary notes from his visit.

International Speculator

A Centrally Controlled Economy?

This week has seen another flurry of activity in Washington. It started with an announcement by Obama on the Financial Regulatory Reform granting the Fed broad authority as a super regulator. After studying the White Paper issued by the White House, our Bud Conrad had the following comments:

We are quickly moving to a centrally controlled economy, private ownership be damned. The source of my opinion is the already 80 pages of general description of the thousands of bureaucrats that will be assigned to direct the economy and not just limit the excesses.
One of the most problematic parts of the proposal, in my opinion, is that the Federal Reserve would be given yet more power and responsibilities in the face of its abject failure to understand and deal with the ongoing economic situation.
The Federal Reserve has stepped beyond its original charter to manage the monetary system and has been taking on loans and responsibilities for specific financial institutions. Look at Mr. Bernanke’s reaction to the simple inquiry by Congress to reveal the names of the institutions to which the Fed handed out almost $1 trillion: he flatly refused to comply.
We don't need more bureaucracy. We need more accountability and prosecution of the crooks that brought us here in the first place. What we will get is an expensive bureaucracy, many reporting requirements, and overhead. This system will add a great burden to the efficient operations of our financial systems.
If exporting manufacturing jobs offshore has hurt our economy, think of what a constipated regulatory system will do to our financial institutions: they will go somewhere else, taking jobs and wealth with them.

I have to say, having the Fed as an unregulated super-regulator is a scary thought.

But there are reports on more activities on Capitol Hill…

Audit the Fed

Don Grove, Casey Research Washington correspondent

The Federal Reserve Transparency Act would require the first audit ever of the Federal Reserve. The bill has 234 sponsors, a comfortable majority of the members of the House, and is gaining momentum.

The Obama administration should be delighted, given its commitment to transparency in government.

Drill, Baby, Drill!

The Senate Energy and Natural Resources Committee adopted an amendment to its energy bill that would allow oil and gas drilling within 45 miles of the Florida coast. If the Senate climate bill becomes law with the Florida drilling amendment intact, it could be sufficient to derail the whole climate bill. "We're simply not going to let this happen," said Bill Nelson (D-Fla).

Yes! That's what I like to hear! As long as they are bickering among themselves, there is less chance they will do any real mischief.

Back to Olivier .

On the subject of hydrocarbons, you may be interested in this article about the recently released 2009 International Energy Outlook. This year’s report released by the Energy Information Administration (EIA) includes the first acknowledgement of Peak Oil by this agency.

At Casey Research, we are so bullish on energy that it will be the central theme of our next conference on September 18-20 in Denver, Colorado. Marin Katusa, Senior Editor of Casey Energy Opportunities, has been working on an extraordinary line-up of experts to cover both conventional and alternative energies in depth. If you have not done so, mark your calendar – registration will open soon.

As we all know, Europe has been struggling with the recession just as much as we have. For a while it appeared as though Italy might have just found the solution ($40 billion more or less) to its financial problems, thanks to the diligence of its border patrol officers, who detained two supposedly Japanese men with $134 billion worth of U.S Treasury bonds in a suitcase.

Check out this story from Asia News: U.S. government securities seized from Japanese nationals not clear whether real or fake.

Unfortunately for Italy, Bloomberg reported yesterday that according to the U.S. government, the notes are fake..

Building Without the Proper Permits

Jacques T. sent us this very funny email I would like to share. Purportedly, this is an actual letter sent to a man named Ryan DeVries regarding a pond on his property. It was sent by the Pennsylvania Department of Environmental Quality, State of Pennsylvania.

While we haven’t verified if this is real or a hoax, it’s quite amusing nonetheless.

SUBJECT: DEQ File No.97-59-0023; T11N; R10W, Sec. 20; Lycoming County

Dear Mr. DeVries:

It has come to the attention of the Department of Environmental Quality that there has been recent unauthorized activity on the above referenced parcel of property. You have been certified as the legal landowner and/or contractor who did the following unauthorized activity:

Construction and maintenance of two wood debris dams across the outlet stream of Spring Pond.

A permit must be issued prior to the start of this type of activity. A review of the Department's files shows that no permits have been issued. Therefore, the Department has determined that this activity is in violation of Part 301, Inland Lakes and Streams, of the Natural Resource and Environmental Protection Act, Act 451 of the Public Acts of 1994, being sections 324.30101 to 324.30113 of the Pennsylvania Compiled Laws, annotated.

The Department has been informed that one or both of the dams partially failed during a recent rain event, causing debris and flooding at downstream locations. We find that dams of this nature are inherently hazardous and cannot be permitted. The Department therefore orders you to cease and desist all activities at this location, and to restore the stream to a free-flow condition by removing all wood and brush forming the dams from the stream channel. All restoration work shall be completed no later than January 31, 2009.

Please notify this office when the restoration has been completed so that a follow-up site inspection may be scheduled by our staff. Failure to comply with this request or any further unauthorized activity on the site may result in this case being referred for elevated enforcement action. We anticipate and would appreciate your full cooperation in this matter. Please feel free to contact me at this office if you have any questions.

Sincerely,

David L. Price

District Representative and Water Management Division.

Here is the response sent back by Mr. DeVries:

Re: DEQ File No. 97-59-0023; T11N; R10W, Sec. 20; Lycoming County

Dear Mr. Price,

Your certified letter dated 12/17/07 has been handed to me to respond to. I am the legal landowner but not the Contractor at 2088 Dagget Lane, Trout Run, Pennsylvania.

A couple of beavers are in the (State-unauthorized) process of constructing and maintaining two wood “debris” dams across the outlet stream of my spring pond. While I did not pay for, authorize, nor supervise their dam project, I think they would be highly offended that you call their skillful use of nature’s building materials “debris.”

I would like to challenge your department to attempt to emulate their dam project any time and/or any place you choose. I believe I can safely state there is no way you could ever match their dam skills, their dam resourcefulness, their dam ingenuity, their dam persistence, their dam determination and/or their dam work ethic.

These are the beavers/contractors you are seeking. As to your request, I do not think the beavers are aware that they must first fill out a dam permit prior to the start of this type of dam activity.

My first dam question to you is:

(1) Are you trying to discriminate against my spring pond beavers, or

(2) do you require all beavers throughout this state to conform to said dam request?

If you are not discriminating against these particular beavers, through the Freedom of Information Act, I request completed copies of all those other applicable beaver dam permits that have been issued.

(Perhaps we will see if there really is a dam violation of Part 301, Inland Lakes and Streams, of the Natural Resource and Environmental Protection Act, Act 451 of the Public Acts of 1994, being sections 324.30101 to 324.30113 of the Pennsylvania Compiled Laws, annotated.)

I have several concerns. My first concern is, aren't the beavers entitled to legal representation? The spring pond beavers are financially destitute and are unable to pay for said representation -- so the state will have to provide them with a dam lawyer. The Department's dam concern that either one or both of the dams failed during a recent rain event, causing flooding, is proof that this is a natural occurrence, which the Department is required to protect. In other words, we should leave the spring pond beavers alone rather than harassing them and calling them dam names…

Being unable to comply with your dam request, and being unable to contact you on your dam answering machine, I am sending this response to your dam office.

Thank you,

Ryan Devries & the Dam Beavers

Miscellaneous

We have received requests for new phyles. Several subscribers want to know if there are existing phyles in either Chicago, Manhattan, or in Massachusetts. No formal group have formed in these areas yet, but if you are interested in organizing or participating in such a group, let Megan know by sending an email to phyle@caseyresearch.com. She will be happy to facilitate contacts in these cities.

Tom in Melbourne, Australia, is interested in starting a new phyle there. Contact Megan if you live in the area, and she will coordinate with him.

Finally, Tommy K. is wondering if the Denver area phyle members would be interested in a summer meeting in Vail he would host with his wife.

12:50 pm… I’m afraid it is time for me to sign out. The Dow is slightly down, the S&P and TSX are up again, and commodities markets are quiet.

Thank you for reading and being a Casey subscriber.

Olivier Garret
CEO, Casey Research

The Room – 05/15/2009

David Galland — Fri, 15 May 2009 16:48:00 GMT

Dear Reader,

Last time I wrote, I labored under the after-effects of a mild case of “immoderation.” In response to which the ever-moving Doug Casey (writing from Washington D.C.) sent along the following witticisms, which I thought you might enjoy...

After a week of engaging in all manner of healthful activity, I am ready once again to tilt my lance against the armies of absurdity that assault the senses more or less constantly these days.

This week, for instance, Alan Greenspan opined that the economy has bottomed, and the stock market actually rallied in response! It’s akin to Bernard Madoff announcing he is opening a new money management service from the secure facility where he now resides, and having investors rush all over themselves to hand him their money.

Or how about these headlines...

US Retail Sales Unexpectedly Fall for Second Month (Bloomberg)… and, Foreclosures: “April was a shocker"(CNN)… or Unemployment Claims in U.S. Jump More Than Forecast on Idled Auto Plants (Bloomberg).

Now, despite my ready access to a large and very capable team of researchers who are intensely curious and focused on facts, I won’t claim anything close to perfect knowledge about anything. But I will claim that any economic observer who is “shocked” by any piece of bad news these days has either been misreading their doctor’s instructions on their daily doses of Valium, or is just plain stupid.

But the absurdity doesn’t stop there. Not by a long shot.

For proof of that contention, look no further than the crime of omission the mainstream media are now committing by failing to report, emphasized with banner headlines, the train wreck now occurring with the government’s finances.

Starting with the trouble the U.S. Treasury had on May 7 when it tried to auction off $14 billion in long-term bonds. Skeptical buyers demanded higher yields, forcing the rate to rise from 4.19% to 4.29% over the course of the auction.

But even that is just the tip of the iceberg. The latest developments have to do with the sharp shortfall in tax revenues we have been anticipating.

Here’s the story…

Tax Revenues Tanking

While everyone else has been focused on the banks’ stress tests and how much government is spending to bail out troubled “too big to fails,” a disturbing trend on the other side of the equation is now emerging: how much (or rather, how little) the U.S. government is receiving in tax revenues.

After combing through the past 25 editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, we created the following chart.

Here’s what’s going on:

In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.
Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!
When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus -- on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper.

Using the government’s own expense projections, the revenue shortfall, even if it doesn’t worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. For reasons we’ve discussed at some length in The Casey Report, those expense projections are likely to be significantly understated.

Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009… in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion “adjustment” alone totaled more than any full-year budget deficit in the nation’s history.

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

In other words, events are rolling out almost exactly as we have been anticipating. Below, for example, are some useful excerpts from an April 3 article titled “Widening Deficits” by Casey Research CEO Olivier Garret. To quote…

In the midst of the Great Depression, the 1931 federal tax revenues had fallen by 52% from their 1929 highs. While we do not expect anything that dramatic in 2009, it would not be unrealistic to see a 20% to 25% reduction in cash flow from tax collections this tax season. Such a drop would pose significant challenges given that spending commitments are off the charts and climbing.
Later in that same article, Olivier continued,

Olivier’s forecast of failed auctions and rising interest rates on Treasuries proved more prophetic as a May 7th story from Bloomberg reported:

So, what does all this mean?

As per above, the rock-and-the-hard-place scenario we have been predicting is unfolding before our eyes. At this point, other than sharply changing course and letting the free market cope with the crisis through a brutal “survival of the fittest” scenario, the government is left with no other option than to accelerate its buying up of its own debt.

Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for the stunning rise in interest rates we are now positioning ourselves for in The Casey Report (and, you can too… learn more).

Super Fed, Super Cop?

Did you see that the Obama administration wants to turn the Fed into a “super cop” to regulate any company considered by the government to be “too big to fail”? If not, you can read the story here…

That notion caught the attention of Bud Conrad, no big fan of the Fed. In his own words…

video of testimony by the Inspector General

anything

David again. Speaking of banking, there is a short but very informative video that explains in simple terms what a sham the recently concluded bank stress test really was. Watch it here…

Sharks Eat Sharks

Dear friend and regular UK correspondent Sadia sent me a collection of links to the unfolding media scandal now underway in England over the egregious abuses of expense accounts by members of parliament in that country. Here’s her email…

Times: Parliament's darkest day: MPs suspended and Michael Martin at risk

Linked here

Times: Shahid Malik stands down as Justice Minister after PM orders inquiry into his expenses
Linked here.

Daily Mail: Bring them to justice! The Mail helps to launch campaign to prosecute sleaze MPs
Linked here.

Independent: The married couple who took taxpayers for £282,731
Linked here.

FT: MP claimed for non-existent mortgage
Linked here.

Guardian: MPs' expenses
Linked here.

Telegraph: MPs' expenses
Linked here.

David again. My purpose for including all those links was not to invite you to spend the rest of your day in idle reading, but rather to make the point that there is an honest-to-goodness, blood-in-the-water media frenzy now underway in England. Members of both the ruling party and its loyal opposition are (correctly) under assault – which is to say, the very institution of government in the UK is running for cover.

The good news, for this side of the Atlantic, is that you can bet your last dollar that the desk editors of various U.S. media factories, having taken note of the satisfactory increase in eyeballs-on-pages being generated in England over the expense scandal, are now urging their reporters to look for – and find – a similar scandal in Washington D.C.

I suspect they won’t have to look too hard.

While no fan of the whole genre of news-as-entertainment, I expect to be highly entertained by the revelations of expense abuses by U.S. congressmen and sundry bureaucrats that should be coming to a media outlet near you soon.

Eat Dirt

Given the general outlook and views of those here at Casey Research, it is something of an oddity that we are headquartered in Vermont. It is, in fact, something of an accident -- the outcome of the usual twists and turns of life that brought me to this place roughly 25 years ago. Subsequently, Casey Research followed along.

The "oddity" part has to do with the fact that this is one of the highest-taxed states in the union, and the overarching political temperament could be accurately described as "socialist." In fact, Vermont's Senator Bernie Sanders is the nation's only elected (openly declared) socialist.

Yet, the place has much to recommend it, including a general lack of population due to the aforementioned high taxes and a well-earned reputation for cold winter weather. But it also has an abundance of beautiful scenery, scenery that includes any number of ski hills and even the shores of the six largest lake in the country. When the weather is good here, Vermont is very nice indeed.

I mention all of this because I came across a story this week from one of our fellow residents, an amateur environmentalist by the name of Annie Leonard who has created a popular YouTube video about America's "stuff"... the general theme being that to own "stuff" is bad. Very bad.

To give you a sense of her views, here is an excerpt from an article on her film.

“We’ll start with extraction, which is a fancy word for natural resource exploitation, which is a fancy word for trashing the planet,” she says at one point. “What this looks like is we chop down the trees, we blow up mountains to get the metals inside, we use up all the water and we wipe out the animals.”

There is an old saying, "Beware what you wish for because you may get it.” While I cannot find it in my heart to hope that Ms. Leonard gets her wish, because then we would all be living in caves and subsisting on roots and berries, I can certainly hope that the populace come to their senses before her Luddite notions gain any real traction.

Alas, I think it is a false hope because she has just signed a contract with Simon & Schuster to publish a book on the same theme. Further, her video is now being widely distributed to the nation's schools to be used in their normal curriculum of brainwashing.

You, too, can glimpse the future we should aspire to, according to Ms. Leonard, by emulating the world of the past – by taking 20 minutes now to view the same video, “The Story of Stuff,” that millions of schoolchildren will be viewing in the months and years ahead.

This seems to be an appropriate time to mention that we are now homeschooling one of our children... and none too soon. More on that topic on another day.

(But since we are on the topic, however briefly, if you have any good recommendations for online courses for middle- and high-school students, I would greatly appreciate it if you'd shoot them my way, at David@CaseyResearch.com.)

Word from the (Mexican) Street

Earlier this week, as part of an effort to further calibrate our investment advice to the needs of our readers, I reviewed a count of Casey Research subscribers by geographic location. As usual, I was pleasantly surprised at the large number of countries in which our subscribers reside – including Burkina Faso, Lebanon, Brunei, Nepal, and well over 100 more.

Once again tapping into this widespread network, I was able to solicit a first-hand report “from the ground” as to the state of things in Mexico. Jeff B., a longtime correspondent, filed this dispatch on how the swine flu hysteria had affected life in his current home town of Acapulco…

Star Trek – “Stayed Wide Awake”

Last weekend, I took the kids to see the new Star Trek movie. While most movie reviewers tend to use some number of stars or perhaps thumbs pointing upwards or downwards in order to communicate their opinions on the movies they watch, I have a simpler system that emanates from the hours I keep.

Using my rating system, uninteresting movies warrant a "long nap" -- literally.

Mediocre fare will garner "periods of napping," or perhaps "occasional nodding off.” It is only the very best movies that rate "stayed wide awake throughout" -- the rating I enthusiastically award to the latest entry in the Star Trek movie franchise.

As a youth, I enjoyed Star Trek but would not categorize myself as a "Trekkie" (generally speaking, a self-imposed moniker that always struck me as categorizing oneself as "delusional" and maybe in need of "getting a life"). Even so, it was fun to see how the director managed to seamlessly introduce the Star Trek characters as they came together in their early careers, the background against which the movie unfolds.

But even if I had never seen a Star Trek episode, I have to believe that the overall plot and production values of the film would have sucked me in and kept me glued to my seat, as they did. The only disappointment came in mild doses, mostly associated with brief appearances by one of the original cast members whose age is sufficiently advanced at this point that you can detect a slight but distracting whistling of his dentures as he delivers his lines. But that’s a petty critique of what is otherwise a very tight movie.

So, at least by my rating system, if you're looking for an entertaining, interesting, and action-packed film for a rainy weekend, Star Trek may be just the thing.

Miscellany

Lecture on the Great Depression. While there is as much or even more misinformation on the Internet, and a great deal of mindless -- make that mind-numbing -- stupidity on services such as YouTube, there is no debate that there is also much excellent content available. For instance, if you have 49 minutes available, you can listen into an excellent lecture on the Great Depression sponsored by the Von Mises Institute. All that’s required is that you click the link here.
Charlotte Phyle… Grant in Charlotte is looking to get a phyle started. If you are in the area, drop us a note at phyle@CaseyResearch.com and we’ll get you hooked up.
Trade War… with Canada? As I was getting ready to go to press, someone sent me an article from today's Washington Post on the topic of a burgeoning trade war between the U.S. and Canada, the unintended – or maybe intended – consequence of the "Buy American" provisions inserted by Congress into the recent stimulus package. Here's an excerpt to give you a flavor of the thing...

Once again reminding one of the reason to run in the opposite direction whenever one hears the phrase "Hi, I'm from the government and I'm here to help." (Read the full article here)

And with that, I must sign off for the week, noting as I do that the U.S. stock market is jumping around like a yo-yo, with the DJIA down 36 points as I sign off. Gold continues to defy its naysayers by holding firm at $930, and oil is changing hands at $58 a barrel, no small feat given the surpluses now filling storage tanks, and even oil tankers, around the world. There is big money moving into inflation hedges just now… but merely a trickle compared to what’s to come.

Until next week, thanks for reading and for being a Casey Research subscriber…

David Galland
Managing Director
Casey Research, LLC.

The Room – 02/27/2009

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

February 27, 2009

Dear Readers,

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

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

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

The Bad News

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

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

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

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

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

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

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

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

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

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

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

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

The Good News

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

Casey Trend Trader

not

Casey Trend Trader

learn more about our Trend Trader trial offer here

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

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

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

Now, take them.

A Musical Interlude

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

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

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

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

A Golden Opportunity

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

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

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

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

Watch it by clicking here.

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

Rand Refinery Ltd.

Johan Botha

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

Damn Foreigners

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

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

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

This is a dangerous game.

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

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

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

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

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

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

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

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

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

Look for the Union Label

By Donald Grove, Casey Research Washington Correspondent

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

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

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

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

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

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

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

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

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

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

Here are the orders for those who wish to scrutinize.

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

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

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

Thank God it’s Friday!

Regards, Don

State Sovereignty – Saying “No” to the Feds

By Shannara Johnson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Revolt – Part I

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

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

Dear IRS,

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

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

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

Ed Barnett
Wichita Falls

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

Tax Revolt – Part II

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

Tax the table at which he's fed.

Tax his tractor, tax his mule,

Teach him taxes are the rule.

Tax his work, tax his pay,

He works for peanuts anyway.

Tax his cow, tax his goat,

Tax his pants, tax his coat.

Tax his ties, tax his shirt,

Tax his work, tax his dirt.

Tax his tobacco, tax his drink,

Tax him if he tries to think.

Tax his cigars, tax his beers,

If he cries, tax his tears.

Tax his car, tax his gas,

Find other ways to tax his ass.

Tax all he has, then let him know,

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

When he screams, then tax him some more.

Tax him till he's good and sore.

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

Put these words upon his tomb,

“Taxes drove me to my doom...”

When he's gone, do not relax,

It’s time to apply the inheritance tax.

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

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

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

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

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

Miscellany

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

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

Stay the course.

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

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

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

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

Sincerely,

David Galland
Managing Director
Casey Research, LLC.

The Room - 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 - 09/26/2008

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

September 26, 2008

Dear Readers,

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

Everything has changed.

Everything is changing.

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

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

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

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

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

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

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

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

We don't care.

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

From a correspondent in Switzerland...

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

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

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

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

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

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

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

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

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

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

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

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

Ed. Note

The Casey Report

Try our 3-month no-risk trial now.

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

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

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

The Bailout: Behind the Scenes

By Donald Grove

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Always the optimist.

Regards, Don

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

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

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

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

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

From Ron Paul...

Dear Friends,

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

The events of the past week are no exception.

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

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

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

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

There goes your country.

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

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

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

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

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

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

In liberty,

Ron Paul

Quotes from the Quislings

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

Here's my Rogues List...

Laurence Fink

BlackRock Inc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About Those Foreigners...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Musical Interlude

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

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

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

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

Explosions in the Sky

The Birth and Death of the Day

It's Natural to Be Afraid

All of a Sudden I Miss Everyone

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

KRS1 - Sound of Da Police ...

NWA - F*** Da Police

Pink Floyd - Another Brick in the Wall Pt. 2

Public Enemy - Fight the Power.

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

JS Bach's Toccata and Fugue

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

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

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

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

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

www.generalfuzz.net

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

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

Gypsy Soul

Obsession Confession

Slash

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

How about Classical Gas for a movin' song?

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

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

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

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

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

McPalin Is Toast

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

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

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

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

Huh? What?

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

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

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

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

Miscellaney

Phyling On

phyle

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

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

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

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

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

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

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

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

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

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

I'll leave it at that...

Until next week,

David Galland
Managing Director
Casey Research, LLC.

The Room 4/7/08

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

Dear Readers,

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

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

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

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

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

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

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

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

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

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

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

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

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

The Trillion-Dollar Sure Thing

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

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

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

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

I suspect not.

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

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

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

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

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

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

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

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

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

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

China on the Brink?

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

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

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

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

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

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

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

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

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

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

How You Trade: The Casey Broker Survey...

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

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

My Mother's House - Continued

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

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

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

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

Regards
Jim Turk
(www.goldmoney.com)

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

I am a subscriber to Big Gold and International Speculator.

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

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

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

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

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

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

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

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

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

Energy Chart of the Week

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

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

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

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

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

[click to enlarge]

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

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

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

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

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

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

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

Miscellany

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

And That, Dear Readers, Is That for This Week

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

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

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

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

Thank you for reading.

David Galland
Managing Director
Casey Research, LLC.