The Room : Wealth

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 – 03/27/2009

David Galland — Fri, 27 Mar 2009 15:31:00 GMT

Dear Reader,

The Las Vegas taxi driver was an old fifty-something, with a mullet hanging out of the back of his battered baseball cap and a potato sack gut hanging over his belt. Having driven a cab myself, long ago and far away, I habitually engage in cabbie chat, as I did now.

“So, how’s biz?”

“Horrible. Thanks to Obama, my family’s going to starve!”

“Really?” I asked incredulously, surprised by both the topic and the heat of his response. “How come?”

“Thanks to him trash talkin’ Vegas, we’ve had 110,000 room cancellations. Once the March Madness basketball tournament is over, this place is going to go back to being a ghost town, just like it was last week, and the week before that. My family’s going to starve thanks to Obama!”

“But they’re not actually going to starve, are they?”

“Yeah they are, I’m telling you. Starve, plain and simple. I ain’t making any money as it is, and once town empties out again, I’m going to go broke and my family is going to starve!”

“Wow,” I said, “so, what are you going to do? Move away?”

“Nah,” he said with no hesitation, explaining, “I like it here too much.”

With a quick and puzzled glance at the neon-illuminated cement wasteland through which the cab was speeding, I had a hard time imagining what attraction the place might have.

“What is it about this place you like so much?” So much, apparently, that he was willing to let his family starve in order to stay.

“Well,” he said in an almost professorial tone, “first, I get to see a lot of naked women. Second, I get a lot of ‘freebies’,” he said lustfully, sending a shudder down my spine. Call it rural naivety, but while I can understand that a working girl has to work, I had a hard time getting around the idea that she had to “work” with him. And for what, a free cab ride?

“Finally,” he concluded, “I like the weather. That’s about it.”

As I couldn’t think of anything else to say – at least not without risking offense -- to a man who was apparently comfortable with the idea of letting his family starve so he could continue to ogle, and apparently fondle, the women of this fair-weathered Sodom & Gomorrah, I turned my attention back to the surroundings.

And what surroundings they are. Lavish. Spectacular. Ridiculous. Some day in the future, perhaps 500 years from now, the gilded ruins of this testimony to humankind’s penchant for excess will be picked over and cataloged by archeologists for the benefit of primary school education.

Then again, with the way things are going, it could be just 50 years. I say that because City Centre, the world’s largest construction project, continues to be built on autopilot, even though it’s only about half finished. And this is just one of a number of other hotels and condo towers in a similar circumstance; started in a more optimistic time, but now merely adding to the unsold inventories that have made Las Vegas the epicenter of the real estate meltdown.

The place is in real trouble. Maybe the degenerated taxi driver will hang on, family be damned, but I suspect that an exodus from the place is inevitable. And can a cluster of mysterious large-construction project fires be far behind? (As an aside, if you own any insurance company stocks… run, don’t walk, to the selling window. It’s not just that certain doomed construction projects are likely to become fire hazards, but that insurance companies notoriously invest their capital in real estate and bonds, both of which are dead ducks, or soon will be.)

I am glad I saw Las Vegas when it was still at its prime. Soon, I suspect, it will be something akin to an urban war zone. As for Obama, the next time he gets an urge to take in a show, he might want to give the place a pass.

A Quick Musical Interlude, Then Something Different

I am going to try something different for the rest of this week’s missive, but before I get to that, I want to share a bit of music many of you may recall. But first, a little backgrounder.

A subscriber and new friend, the talented musical producer and film maker, Sadia Sadia, attended our Las Vegas summit and gave me as a gift a copy of Rick Wakeman’s autobiography, “Grumpy Old Rock Star.”

Those who recognize the name will remember Wakeman as the talented organist for the mega-band “Yes”… as well as the composer/performer for a huge body of solo work, including his much-acclaimed Journey to the Centre of the Earth.

While I wouldn’t count myself as a rock groupie and so Wakeman’s name evoked little in the way of recollection, I began to casually peruse his book, which is really just a collection of stories from his wild career, and got sucked right in. It was a big surprise… interesting, well written, and very, very funny.

As is the way with these things, reading the book reignited my interest in his music, and so I quickly stumbled back upon Roundabout by Yes, a forgotten favorite and one of the band’s best-known tunes. You can listen to it here.

(In the video, the guy dressed up in the glittery cape is Wakeman -- as gifted and as hard-living a rock star as has ever graced the stage -- so hard living, in fact, that he had two heart attacks at the age of 25.)

Now, as for the rest of this edition, I’m going to try to tell a story, but using snippets from other sources with, perhaps, a side comment thrown in now and again.

I am taking this approach because, frankly, since hopping on the plane to Las Vegas last week, the sheer volume of proposed new regulations, legislation, and plain idiocy have outstripped my processing abilities. It seems that every hour or two over the past week, there has been a breaking story that has me saying out loud, “What, are you kidding?” Or, “Wow… we’re really in trouble now!”

It came to me as I started writing to you this morning, that these many stories – rather than just random spatters of inanity – together form a distinct pattern. And the pattern seems to point to a new paradigm now materializing here in the U.S. and, by extension, the world.

As I think the following stories demonstrate, the new paradigm is not one any thinking person will embrace.

Eat the Rich

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead. There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few." (A New Era of Responsibility: Renewing America's Promise. The President's Budget and Fiscal Preview)

One finds many charts in a federal budget, most attributed to such deep mines of data as the Census Bureau or the Bureau of Labor Statistics. The one on page 11 is attributed to "Piketty and Saez."

. . . Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration."

Messrs. Piketty and Saez have produced the most politically potent squiggle along an axis since Arthur Laffer drew his famous curve on a napkin in the mid-1970s. Laffer's was an economic argument for lowering tax rates for everyone. Piketty-Saez is a moral argument for raising taxes on the rich.

. . . Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum: "While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected."

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . It's a legacy of irresponsibility, and it is our duty to change it."

(The Obama Rosetta Stone, by Daniel Henninger, from the Wall Street Journal’s Opinion Journal.Com)

Supporters of Capitalism Are Crazy, Says Harvard

everyone knows

that

(

From

Mises Daily

by Thomas E. Woods, Jr. )

Obama's Latest No-Banker-Left-Behind Scheme

(From CounterCurrents.Org)

What’s Not to Support?

David again. With a deal that has the taxpayer lending the boys club 85.7 cents on the dollar, and assuming all risk should the loans failed to be paid back, who wouldn’t provide “support” to Mr. Obama? But at what cost? Well, at better than one trillion more dollars, if things go off the rails – as they almost certainly will. How do you spell dollar? D-O-O-M-E-D.

By the by, click the following link for an exceptionally well done graphic representation of just how much money a trillion dollars is. Call the family around and give it a click (then pass it on)… http://www.pagetutor.com/trillion/index.html

New York Tax Rise on Higher Earners Hinted as Budget Gap Rises

Not So Fast

Remember Wen?

March 23 (Washington Post)

***

March 25 (Bloomberg)

***

March 25 (Bloomberg)

Timothy Geithner

Zhou Xiaochuan

Barack Obama

David again. If these people are the smartest folks in the room, I wonder who’s cooling their heels in the hallway.

We’re from the Government and We’re Here to Help

9:02 p.m.

(Alec MacGillis on the Washington Blogging site commenting on Obama’s online Town Hall meeting)

***

Barack Obama

Paul Volcker

Peter Orszag

David here. But surely Volcker, that old cohort of President Reagan and champion of fiscal conservatism, won’t recommend punishing overseas investment or raising taxes by another $300 billion?

Sadly, you are laboring under a misconception (you’re not alone).

(Real Clear Markets, The Paul Volcker Myth, Feb 2008)

***

(“Paul Volcker Blasts Idea of Permanently Repealing Estate Tax,” Wall Street Journal, January 2003)

***

EPA Greenhouse Gas Declaration May Pressure Congress

General Motors Corp.

American Electric Power Co

David Bookbinder

…

David again. Don’t you love the “Congress can do it all in one shot” comment. And, yes they can. Even mentioning this sort of legislation in the face of all that now challenges the economy is near criminal. Especially in that it is almost certain to chase away the remaining companies that still endeavor to engage in manufacturing in the U.S..

Radio Worth Listening To. Do yourself a favor and find a comfortable seat and click here to listen to this audio interview of Lord Monckton from the G. Gordon Liddy Show. Monckton is one of the most well-informed – and entertaining – commentators on the topic of anthropogenic global warming on the planet.

“Hold the fort,” I can hear some of you saying. Liddy is a hard-core dogmatic. Hardly a balanced perspective. And you are right. While I have met Liddy on several occasions and enjoyed his company, a reading of his book Will indicates that he is far more than dogmatic. Insane is more like it.

But he does a competent job as an interviewer, and Monckton does a brilliant job as an interviewee. You have to sit through some oddish music in the beginning, but it’s worth taking a listen – no matter where you come down on the issue of man’s contribution to global warming.

Worth Watching… Closely

David, still here. In the following article from the Wall Street Journal, I have boldfaced the relevant words. Words have consequences, and the consequences of these words indicate we may be on the path to another ginned-up “conflict” of the “pay no attention to the man behind the curtain” sort. It could also be an early step toward gun control, a topic that many Americans pay close attention to (and, based on history, for good reason).

Here’s the article – as you read it, see if your mind begins to evoke, as mine did, visions of the author running around waving his or her arms at the new and impending “crisis!”…

address the crisis

the full Senate Committee on Homeland Security and Governmental Affairs, also will offer the highest level of attention from Congress on the issue thus far

extra $100 million

targeting the guns and money from inside the U.S

The government is girding for a possible Katrina-style disaster along the 2,000-mile-long Mexican border

Obama Announces Plans for More Funding for Afghan War

(Washington Post)

***

The End of Summer(s)?

The Innovator's Dilemma

(Adrianna Huffington writing in The Huffington Post)

David here. Don’t you love the “our remarkable president” bit of sycophancy? It reminds me of a conversation I had at the Las Vegas summit with a friend of some duration – an interesting and intelligent individual. It started when she told me she had been a big supporter of Obama’s, but now she wasn’t so sure. The conversation went something like this…

“Why were you such a big supporter?” I asked.

“You know, because he was for change,” she replied.

“Sure, but what does that actually mean? What change?”

“Oh, you know, change from the way Bush was handling things,” she said with a certain uncertainty in her voice.

“So, your vote for Obama was really just a vote against Bush’s policies?” I asked, thinking that wasn’t altogether a bad reason.

“Well, no, I don’t think so,” she answered. “There is something else. You see my father was black and my mother was white, like Obama, so I felt a connection.”

“Fair enough,” I commented, “But was that it? I mean, wasn’t there some particular philosophical point that rallied you behind Obama?”

“Well, er, I’m not sure. But I sure am worried about him now.”

I have always found it remarkable how many otherwise reflective people have a hard time expressing why they support one candidate and dislike another… often viscerally. It is, I believe, strong testament to the ability of the campaign team, and the media, to paint a picture that resonates with the target audience… a picture that, while attractive, more often than not completely lacks a tangible foundation.

Americans may not be very good at manufacturing “stuff” these days, but we are whizzes at selling stuff through multi-channel media campaigns, including fine-talking politicians.

As for Summers, I have previously mentioned that Olivier Garret and I heard Summers at a White House conference last year. When it came time for him to speak, he gave a very lucid and even passionate argument for making Bush’s tax rollbacks permanent (for the not irrational reason that to let them expire will amount to one of the largest tax increases in history, an increase that the economy can ill afford at any time, but especially now).

While I don’t have a full grip on Summer’s broader philosophical and academic views of the economy, I took it as encouraging that he was brought onto Team Obama, though from what I have heard since, it seems like he has grooved right in with the statist views now dominating in Washington. But maybe not, and so, per Huffington, expect him to be an early casualty.

“Fusion Centers” Expand Criteria to Identify Militia Members

(FOX News, 3/23/09)

David again. Be afraid… be very, very afraid.

Glimmers of Hope

Gordon Gets a Thrashing

(“General Watson,” friend and occasional Casey Research European correspondent).

David again. Here’s the video… and it is definitely a “must see” -- if you haven’t yet done so, and most of you probably will have, given the amount it is being emailed around. Click here to watch.

Given the amount of play this video has received, there is hope that the media will look to boost their ratings by finding other champions of fiscal sanity and providing them a soap box. Could happen. Probably won’t.

AIG, I Quit!

David again. Another item that has made the rounds this week is the letter of resignation from an AIG employee.

There is so much to the “evil bonus takers” story that the media, falling back on Ye Olde Witche Hunt as a circulation booster, has ignored, either deliberately or just because they are stupid.

The now famous AIG resignation letter sheds some much needed light, so read it if you haven’t.

Meanwhile, the net result of all of this grandstanding and outright thuggery (for a definition of the word, look up Andrew Cuomo in the dictionary) is that the top executives from AIG and other leading financial institutions are handing in their bonuses with one hand while signing new employment agreements with firms overseas that, as part of those new agreements, are agreeing to replace those bonuses as recruitment incentives.

Even without the enticement, who would possibly want to work for AIG these days?

And so, the American taxpayer, who is already into AIG for $200 billion, has just assured that the asset “we” have paid so dearly for is little other than a gutted shell run by second-rate people. Oh, and those second-raters will be forced to deal with trillions in remaining derivative contracts. It will be akin to asking monkeys to repair jet engines.

Of course, as the next wave of planes begin to fall from the sky, the government will again rush in… with your money.

In any event, the “Glimmers of Hope” part is that the soon-to-be-former AIG employee’s letter may, just may, help cool down the mob psychology that bordered on violence last week.

A Politician I Can Support

(Press TV, March 25)

Some Concluding Thoughts

David again. Remarkably, I could go on, but I fear I have tried your patience enough for one day. So, what are we to make of all these stories?

First, the Obama administration is clearly statist. And they apparently have set their sights on taxing the productive elements of society to the fullest possible measure. As I have noted in the past, however, businesses don’t pay taxes – rather, they just pass the taxes on to their consumers (or they go out of business). And so every time you see a new business tax, cover your wallet.

While the higher net worth individuals will, for a time, accept higher and higher tax burdens, unlike the proverbial frog in a pot of water that is slowly approaching boil, those with the assets to move will – when the temperature reaches uncomfortable – hop out of the pot and head to friendlier grounds.

Recognizing this truth, the Obama administration is already working on exchange controls. That is clear in the Obama campaign promise to use tax policy to punish companies that ship jobs overseas, a promise he is now putting into effect ala Volcker. Once those particular bricks are laid, adding on a few more layers in order to also wall in the individual is a snap.

Now, some of you – many perhaps – arrive at this point in time as supporters of Obama, and so bristle at my remarks. Just as do those of you who favor the views of the strident opposition from the “right,” unhappy at my quick jibe at Bush’s policies.

It behooves me, as the managing director of a company that makes its payroll by offering solace and substance to its subscriber base, to caper and scrape to our clientele. You, to be specific.

To the extent that I offend, I apologize. But only because that is not my intent, no matter the tone of voice I might use in these weekly musings. Rather, I sit here, like you, an observer of the world around us, and I try to make sense of things. Last week, I expressed outrage at the scramble to foist our current problems onto the backs of our progeny. Today, the pattern that is visible in the collection of articles here tells me things are moving quickly beyond the matters related only to the economy. And so, looking over the landscape, I am touched by an entirely different emotion… one of deep concern for the very nature of our society.

What does all this have to do with investing, some of you will angrily write?

That, of everything, has a simple answer: with a clear, albeit disturbing pattern now emerging, so, too, are the personal opportunities to protect yourself and to profit. Gold, silver, foreign investments, contrarian stock market opportunities, strategically structured futures and options strategies to take advantage of volatility – all those and more.

These are, of course, topics we cover in great detail in The Casey Report and our other publications. And to a lesser degree, these weekly ramblings.

Regrettably, because of my duties related to getting the next edition of The Casey Report out by this time next week, I need to leave it at that, despite my promise last week to share some of the highlights from our just concluded Crisis & Opportunity Summit in Las Vegas.

I will endeavor to do so next week. I just felt the material I covered here was more important, and hope you concur.

Miscellany…

Tokyo Phyle. One of our subscribers in Tokyo is looking to start a phyle. If you’d like to meet up with other Casey subscribers in that city, drop Kristen a note at phyle@caseyresearch.com.

You Are the Best! A quick note to say, as I have before, how wonderful it was to spend time with so many of you at the Las Vegas summit. After the event ended, virtually every speaker I talked to told me that the audience was the finest, most intelligent, and impressive they had ever come across. I couldn’t agree more.

Finally, because it’s sort of funny, I wanted to close by updating the story of my quick short on the S&P, using Scottrade. As you may recall, I used words to the effect that one of the advantages of an online trading account is how quickly you can short the market (in that case, using RSW, a 2X inverse S&P ETF). At one point during the day that I was writing that issue of The Room, I was up about $800 and was going to close my position with the quick profit, but got distracted by my son asking me to check out something he was doing on a video game. By the time I remembered my short, the market was closed. Long story short (excuse the pun), that gap in attention has, so far, cost me about $15,000.

I am, however, unconcerned. There is so much bad egg now baked into the cake that the rally of late simply can’t be sustained, and today appears to be wobbling. And so I will hold my inverse ETF shares and even add to them on any further rallies. I’ll let you know how it worked out when I finally close out the position.

In the meantime, I hope you gain some benefit from my experience. Namely, because something is easy – i.e., popping into an online trading account to make a quick trade – it also makes it more likely you will take the action, based on little more than impulse and a quick flush of emotion.

On that note, I will share with you Terry Coxon’s dictate. Which goes something like this, “The next time you spot a really, really exciting investment opportunity, one that you absolutely have to act on immediately, the first thing you should do is to look around for a comfortable chair, sit down in it, and take a few deep and relaxing breaths.”

Always good advice.

And with that, I sign off, thanking you for reading and for being a subscriber to a Casey Research publication. We work only for you, and it is a pleasure to do so.

David Galland
Managing Director
Casey Research, LLC.