Dear Reader,
Many market participants dream of a robust bull market that will make them piles of cash. Of course, I’d be a liar to deny the appeal here. But more often than not, today’s bull markets are crashes waiting to happen. So, what’s my dream market?
Well, I could see it now. First of all, at our weekly conference call, our chief economist Bud Conrad would be completely silent. Don’t get me wrong, Bud’s views are extremely insightful, and he has a firm grip on the data, as our subscribers to The Casey Report already know. But he’s always going on and on about interest rates, inflation, the Japanese debt situation, and the eurozone crisis. Unfortunately, Bud has to discuss these issues. But in my ideal world, he’d have absolutely nothing to say.
Next, David Galland or Olivier Garret wouldn’t start the meeting by saying “What are your opinions on the global economy?” or “How far away is Portugal from a crisis?” Instead, the meeting would start by them asking, “What’s the latest technology on the horizon, what’s the cutting edge in biotech, and what business strategies are showing the most promise?”
Of course, we ask these questions regularly – especially in newsletters such as Casey’s Extraordinary Technology. But the problems in the general economy are often so big that they overshadow good company fundamentals. If a crash is around the corner, the new marketing plan at company XYZ simply isn’t that relevant – despite the plan’s merits.
Even when the market is doing well, there are enough black swans overhead to block out the sun. But this caution doesn’t only affect our investment decisions. Investors everywhere have so many uncertainties: Is the recovery in the stock market the result of monetary policy or real strength? When will rates rise, and how will that hurt the market? Is America sitting on an inflation time bomb? Are there additional regulations coming? And those are just questions for the U.S. market. Let’s not even get into the rest of the world from the eurozone to China, to Japan.
With all these concerns on the horizon, it’s no wonder that job growth is weak. The market is plagued with uncertainty. It’s difficult to plan for the future when the next several months could either lead to the expansion of QEII or contraction of the program. It’s basically a coin flip. Furthermore, the government can’t seem to decide where it stands on fiscal issues. Is it tightening its belt in name only, or will this be a serious new direction? And what’s going to happen to the state budgets? Will there be a bailout or not?
For businesses to make large long-term investments, they need predictable policy courses from the government. Then business can get back to what it does best: earn profits and make jobs. I’m not asking for an investment utopia. Simply an environment where there are few enough black swans overhead to see the light shining through. The government can’t do anything about some black swans, but a few could certainly be shot down if the Fed and the government got their act together.
First, Andrey and Alena will give their thoughts on the increasing number of laws that acknowledge gold. Could this be the beginning of a bigger trend? Then, the Energy Team will debate the costs and benefits of hiring expats and the locals on a foreign project. This is a very insightful piece and highly relevant as companies are dashing out of Libya. Last, I’ll comment on some ideas brewing in my mind from the recent news events.
By Alena Mikhan, Andrey Dashkov
Several legislative initiatives caught our attention recently. All of them are related to the monetary role of gold and range from proposals to return to the gold standard, to minting gold and silver as an alternative currency, to having all state transactions carried out in gold and silver coins, to permitting citizens to run their own mints.
Do these proposals signal a significant attitude change among politicians and mainstream economic institutions toward gold? No. They are largely regarded as fringe ideas and dismissed out of hand. The third link above is written in a condescending tone that implies everyone knows that the gold standard is bad for an economy and it caused the Great Depression. Still, it’s quite telling that opinions that gold can be incorporated into modern economy are becoming numerous, and actually making it onto the legislative agenda in various jurisdictions.
Last November, clearing house ICE Europe began accepting gold bullion as initial margin for crude oil and natural gas futures. This year, JPMorgan Chase announced that it would accept physical gold as collateral for a number of transactions. According to the WSJ, stock exchanges in New York, Chicago and Europe recently agreed to accept gold as collateral for certain trades, too. The World Gold Council is gaining traction in its push to have the Basel Committee on Banking Supervision accept the precious metals as a Tier-1 asset for banks, along with government bonds and currencies. Private and public institutions alike are clearly rethinking their attitude toward gold.
Perhaps most telling of all, the world’s central banks were net buyers of gold in 2010 and in 2009, after being net sellers for the previous 20 years. As World Bank President Robert Zoellick said last November, gold has become the "yellow elephant in the room" that needs to be acknowledged by policymakers of major economies.
No one can predict exactly how this will all shake out, but Doug Casey has long said that a return to a gold standard, or some modern equivalent, is almost inevitable. That’s because, for the reasons Aristotle outlined 2,000 years ago (it’s durable, divisible, consistent, convenient, and has intrinsic value), gold is hands-down the world’s best money.
Now, Gresham’s Law tells us that bad money drives out good, but that’s only true when legal tender laws hold sway (incentivizing people to hoard what’s perceived to be “good” money and spend the “bad” money as fast as they can). When people give up on the local legal tender, Gresham’s Law goes into reverse, and good money chases out bad. The dollarization of third-world economies is an example of this, the dollar being perceived as being good when compared to many shakier currencies.
So, what happens if fiat currencies as a class start to be perceived as bad money? Gresham, and history, tells us that they’ll eventually be abandoned, unless made good (put back on some acceptable standard of value, like gold). The key point here is that it can’t happen just a little bit, just as you can’t get a little bit pregnant. Once it starts, the good money will drive out the bad, and in today’s wired global economy, the phenomenon will be worldwide, fast and devastatingly thorough.
The investment implications, broadly, are obvious; you want to own gold for safety and speculate on gold stocks for profit. The details on how best to do this are the current raison d’être of our metals publications.
[In light of the information above, it seems that the Mania Phase of the gold bull market is getting closer every day. You’ll want to stock up on gold, silver and sound large-cap mining stocks before the investing crowd catches on. There’s still time, but it may be running short. To learn everything about prudent precious metals investments, give BIG GOLD a try today. Read our report on how Jeff Clark managed to boost his mom’s IRA – and his subscribers portfolios – by 73%... and how, for only $79 per year, you can do the same…]
By the Casey Research Energy Team
The violence in Libya is impacting the entire world – oil prices are hitting 2.5-year highs as production from the OPEC nation starts to fail, gold prices are settling in above US$1,400 as the revolutions sweeping the Middle East and North Africa send wary investors towards safe havens, and natural gas prices in Europe are surging in the face of production disruptions and at least one pipeline closure.
Oil, gas, and gold prices are getting a lot of attention, but there’s another aspect of the Libyan revolt that bears mention. The evacuation of foreign workers from oil rigs across Libya is a prime reminder of how tenuous it is for a company working in a challenging country to rely on expatriate workers.
For a company like England’s BP or Italy’s Eni, places like Libya provide the kind of returns that only come with considerable risk. In setting up shop in these risky places, companies have to decide whether to populate their operations with their own people, whom they know and trust, or with locals, who come with many unknowns. The answer seems obvious – employees are the backbone of any operation, so it seems you should use people on whom you know you can rely. But as major oil and gas firms BP, Eni, Repsol, Royal Dutch Shell, Total, Winterstall, Statoil and OMV all scramble to shutter their Libyan operations and extract employees, the seemingly obvious answer becomes questionable.
In fact, we at Casey have never thought that taking that easy road – relying primarily on expat workers – was the way to go. The most important aspect of operating in risky countries is knowing how to navigate the tricky waters of permitting, politics and partnerships. Only locals have this knowledge. Even if a foreigner gains knowledge of the system, there is no guarantee that he or she will have access to it – to use a tried-but-true cliché, success in business is as much about whom you know as what you know.
Hiring locals for positions from drill hand to project manager may slow a company down initially, but the effort will reap rewards in the longer term. Comparing an expat with a local is like comparing a child and an adult – regardless of his experience, the expat cannot possibly know as much about the situation as the local, simply because it is a world to which he is still new. And in many of these countries, a permit that officially takes three months to issue can appear the next day, if it turns out that your permitting coordinator’s cousin went to school with the energy minister’s assistant.
More generally, a project stands much better odds of garnering social support if it employs locals, and not only in labor roles but in positions of some authority. Another option is to partner with a local company. Either way, employment gives people living near the project a source of income, a good level of understanding in the operation, and a sense of ownership. The support thus created isn’t just good from a touchy-feely perspective – today social support is an absolute requirement for project development. In contrast, an expat-run operation all too often leads locals to believe (often rightly) that their natural resources are being pillaged and their environment polluted without any real gain for them.
East West Petroleum, Africa Oil and ShaMaran Petroleum are all good examples of a company reaping the rewards of working with locals. ShaMaran is in Iraq, and both Doug Casey and Marin Katusa visited their projects last year. East West is a new, Canada-based company focused on applying modern or unconventional exploration, drilling and production techniques to oil and gas plays in both established and emerging areas, where the new technologies could significantly impact exploration and production success. The company has active projects in Egypt and Romania, and hold prospects in Tunisia, Syria, Iraq, Yemen, Russia and India.
Given the current situations in several of those countries – Egypt, Yemen and Tunisia – you might expect the company to be running for cover. But because it has local partners in every country where it works, its operations are actually unaffected. Its biggest project is in Egypt, and East West’s partner there, Kuwait Energy, says everything is continuing as usual. ShaMaran is up significantly (our subscribers were in the play early), and we have sold the company for a total position gain of +320%.
The take-home message for investors is that, if you are considering investing in a company that operates in unstable or unpredictable areas, your due diligence should include investigating the company’s modus operandi abroad. Without real local partners or a commitment to local staffing, a foreign company’s odds of survival in high-risk locales are slim to none. And the failure may come after millions have been spent, and lost. This is another reason why the Casey Energy team spend most of their time on the road not just researching the projects, but the management’s ability to execute their business plan in politically unstable parts of the world.
[Marin and his team are the best in digging up overlooked energy opportunities across the world, and the gains their best-of-the-best stock picks make are nothing to scoff at. The next Casey’s Energy Report, which will be published in a couple days, contains a brand-new pick – a company poised to gain big from skyrocketing metallurgical coal prices. Sign up now and get in on the ground floor – you have 3 months to decide whether Casey’s Energy Report is right for you.]
By Vedran Vuk
As protests spread throughout the Middle East, Facebook and Twitter have been regularly in the headlines. There seems to be a divide amongst the commentators – one group wants to proclaim a social media revolution while the other remains highly skeptical. I’m not here to judge the winner. However, one thing is certain: an argument that these websites had no effect at all would be hard to make.
I don’t see social media as the main catalyst, but it certainly had an effect on the margins. And that’s important enough. What do I mean by this? Twitter and Facebook may not ignite the fires of revolution, but they definitely make the process easier. And when something is easier, it usually becomes more probable as well.
One way to understand this point is through probabilities. I’ll use some fictional numbers to make my case. Let’s say that prior to the Internet, every decade had a 10% chance of a revolution per country in a bond portfolio of 40 unstable countries. As a result, every decade an investor could expect 4 revolutions. Of course, these revolutions could lead to possible defaults on the bond.
Now, let’s say that Twitter and Facebook make rebellion and revolutions just a little bit easier. I’m not talking about a social media revolution, but change on the margin. Instead of a 10% chance of revolution per decade, the social media increases it to 12.5%. Now, from a portfolio of 40 unstable countries, 5 should have revolutions instead of 4.
To a small-time investor, this might not matter much. Few of us are investing in the sovereign debt of unstable nations. But for the institutional players, it could be important. In my opinion, the threat of revolution has increased across the board thanks to the Internet. While the media wants a direct connection between Twitter and a certain protest, the reality is more likely a marginal effect.
Now, the big question is whether the markets have priced in higher probabilities of revolution. There’s a good chance that they haven’t. The market did a fairly poor job of pricing default rates on mortgages in the recent crash. The default rates were backward looking, not forward looking. Hence, there’s a chance that the market has overlooked this possible change in probabilities as well.
By Vedran Vuk
The reports on higher oil prices have been mostly covering the downside. But who will see the upside? Of course oil producers, but specifically those outside the Middle East. Many U.S. oil companies with operations in the Middle East are experiencing choppy trading despite the higher oil prices.
But this isn’t the case with every oil company out there. Consider the partially government-owned companies in Brazil, Norway and Russia, such as Petrobras and Statoil. Due to government influence, these companies have poor geographic diversification. Government influence in a company is never a welcome sign. But this lack of diversification is circumstantially beneficial in the current environment.
Beyond oil, the governments behind these companies will feel a boost in revenue. This could place them in a sounder fiscal position or provide additional ammunition for temporary stimulus. Russia is already issuing 7-year Euro bonds this week with the timely world events.
For places like Brazil, this is extremely good timing as well. Norway also wouldn’t mind an extra boost, and neither will our investment there in The Casey Report. While I’m not sure if I’d be ready to jump into Russia yet, Petrobras in Brazil is tempting. However, I’ll have to do more due diligence before making a move. When a company is largely government-owned, an investor has to be extra careful.
Well, that’s it for today. But before I go, I should mention that tomorrow is the last day you can get your Early-Bird pricing for the Casey Summit in sunny Boca Raton, FL, from April 29 – May 1. Sign up before midnight Friday and save $200.
Still undecided? For a glimpse of what Casey Summits have to offer, watch this keynote speech by Eric Sprott from last fall’s event. And it’s not just the great faculty we always manage to gather – this year, for example, John Williams, economic whistleblower of Shadow Stats fame, will join us – it’s the limited number of attendees that makes a true meeting of the minds possible.
We want you to have a chance to rub elbows with our speakers, ask them questions, have a friendly chat and a cocktail… because that’s what this is really all about, and it’s something you’ll find at few, if any, other investment conferences. So don’t hesitate and sign up today.
Our summit coordinator just sent me a note that we have a subscriber who would like to know if there are people in the Dallas/Ft. Worth area that would be interested in sharing a private plane to and from Boca Raton for the summit. If you live in the Dallas/Ft. Worth area and plan to attend the summit and have interest, please send a note to Sal at saljam@verizon.net.
Thanks for reading and subscribing to Casey’s Daily Dispatch.
Vedran Vuk
Casey's Daily Dispatch Editor