The Downside of Information

David Galland, Managing Director

March in Northwest Argentina finds the grapes ripening to that special moment when wine makers sense that just the right balance of sugars, tannins, polyphenols and so forth has been attained.

It is then, with the knowing nod of the resident oenologists, that the harvest begins. An army of workers aided by tractors and harvesting machines flood into the sea of vineyards hereabouts and work pretty much around the clock until the harvest is complete.

It is also the time of year when the community here at La Estancia de Cafayate comes alive with almost 200 owners and guests from around the world attending back-to-back harvest celebrations.

It's a proper home-coming weekend with old and soon-to-be friends gathering for a full slate of social events, including al fresco luncheons in the vineyard, Argentine asados, glittery cocktail parties, bodega tours, leisurely meals at the clubhouse or at restaurants on the plaza and so much more.

For those of us in residence, it amounts to almost three weeks of non-stop socializing – leaving your correspondent feeling akin to what a Roman patron might feel after a round of marathon feasting and orgies. Over the past few weeks, I haven't even managed to muster the forward momentum needed to set a foot into the Athletic Club and Spa that's a five-minute walk from our house for a health-promoting workout or massage.

All of which compels me to apologize in advance should you find today's musings to be less than sparkly. I might have even given in to the temptation to roll over this morning, pull a pillow over my head and let my stalwart co-writer Vedran Vuk once again cover for me... but in the end decided against it because in the midst of all the partying, golf and general gluttony, there were some important ideas tossed around that I very much want to share.

And so, having fortified the mind with more than a few bowls of mate and Put Your Lights On by Carlo Santana and Everlast, it's time to get back to business.


The Downside of Information

It has become tradition at La Estancia de Cafayate for Casey Research to host an intimate conference in conjunction with the Harvest Celebration. In the most recent of the series, Bill Bonner, editor of the Diary of a Rogue Economist and a friend of long standing, kicked the program off with a thought-provoking discussion about the nature of information.

With a nod to Nietzsche, Bill dissected the nature of information into two categories.

The first sort is that which is derived from direct observation. For an example, Bill pointed to the tangible information that comes from living in a tribal village. As a member of the tribe, you knew your neighbors, you knew what sort of crops would grow in the different seasons, where and when to hunt, etc.

Paraphrasing Bill, "If a member of the tribe came running into the village yelling that an enemy tribe was about to attack, you would have direct knowledge that there was an enemy tribe residing in the area and that the fellow doing the yelling wasn't the sort to just make it up. So you could be certain an attack was likely."

Given this high quality of information, Bill continued, you would be able to make an informed judgment about what action to take. You could, for instance, prepare to defend your village against the intruders, take flight, or remain and hope for the best. Regardless of how you acted, at least you knew you were acting on good information.

By contrast, there is the second type of information, that which Bill calls "public information." This is the sort of information that people believe is "true," but only tangentially and without having personally observed it. In other words, it is extremely poor-quality information, the sort of thing regularly ginned up in modern times by the media to attract eyeballs on advertisements, or promoted by politicians or businesses to further their own interests.

It's Bill's hypothesis that because the evolution of the human mind occurred against a backdrop of life-and-death decision-making based on hard information, our modern minds are genetically ill-equipped to deal with public information. In other words, we evolved trusting that the information we were receiving was reliable, leaving us susceptible to believing that substantially all the information we receive today is reliable.

Making the point, Bill referred back to the case of the villagers being alerted by a fellow villager to a pending attack. So alerted, the villagers knew all they needed to know in order to decide which of the aforementioned actions to take.

But what happens when, in today's world, someone comes running into the virtual village shouting "The globe is warming, the globe is warming"? Or, "The economy needs quantitative easing!"

Because of the entirely understandable evolutionary prerequisite that we pay attention to hard information or risk being erased from the genetic pool, the human mind is essentially wired to accept that the threat from global warming is real… or that quantitative easing is needed. Or that Iraq somehow posed a threat requiring the spending of trillions of dollars and wasting untold lives to blow it to pieces.

How can we really know that any of this public information is true? We can't. Yet with a sufficient amount of arm waving in the global media, large swaths of the populace accept the information as true, setting in motion a giant snowball of political policy and the attendant massive misallocation of resources.

Into the Wild

As a related aside, during the two-day break between the events, Doug and Ancha Casey, John Mauldin and I made the trip to Bill Bonner's estancia – a fairly grueling four-and-a-half-hour drive on bad roads (and in some parts, no roads at all) into the mountains above Cafayate.

Like many of Bill's friends, I was never quite sure why anyone would want a home on a property that is a seven-hour drive from the nearest commercial airport, and most of the drive on washboard roads. But when you get there, you understand. The Estancia encompasses a massive and surprisingly verdant valley – I think on the order of 200,000 hectares – a veritable Shangri-La stretching as far as the eye can see.

Now, Bill is a pretty well-off guy, but unlike many people who have amassed considerable wealth, Bill generally shuns the superficial trappings in favor of simple pleasures and in undertaking hands-on projects that are anything but simple. For instance, along with his sons and a couple of gauchos, he designed and built a small villa with three vaulted ceilings using methods perfected by the Romans (he got the basic idea from a book on Roman architecture).

Very impressive, but more to the point, over the course of his life and his many studies, Bill has become a skeptic about much and maybe most of what he hears in the media, or that spews forth from the mouths of the politicians. Instead, he has developed a Missouri-like attitude of needing to observe something himself before believing it.

The important idea that Bill shared, and that I am trying to share, is that if you take the time to step back and analyze the information you receive and parse it into that which you know to be true based on your own observations, as opposed to what is popularly accepted as true simply because it was printed in a news journal or said in a broadcast, your attitude about many things may change.

It may take some time and practice to hone your skills in separating discernible facts from public information that may actually be utter fiction… but the pay-off in adopting this attitude can be significant.

For example, rather than getting all worked up over something like global warming, you might reflect on the observable fact that virtually every generation has been plagued by prophets of doom – overpopulation, the coming ice age, Ebola, HIV, bird flu, swine flu, global warming, etc., etc. – and so simply don't concern yourself with it.

(The doomsters seem to be tuning their Hype-O-Matics into the idea that the world is about to be wiped clean by a super-meteorite. In fact, the threat is so severe that the US Senate is now holding hearings, with one legislator actually asking that Bruce Willis make an appearance… you know, because he starred in a sci-fi movie dealing with the topic.)

In prehistoric times, anyone running into the village shouting that the enemy was about to attack when they weren't would quickly find themselves hanging upside down over a fire. By contrast, in modern times, with the warnings cloaked in pseudo-science or religiosity and rebroadcast globally by the complacent and complicit media, the purveyors of such bad information tend to end up being feted at rubber chicken dinners and padding their pockets with grant money from universities and governments.

Last night over yet another dinner, I got into a discussion on this general topic with a fellow Estanciero, and we both concurred that living here in a remote wine-growing town far from the "noise" of the modern world has had a tremendously beneficial effect on our stress levels. The "news" – or public information, as Bill would term most of it – has almost zero presence in our daily lives.

(I wanted to make a quick mention of Bill Bonner's newest publication. As many of you know, for years he was the lead writer for the hugely successful free e-letter, The Daily Reckoning. Recently, he has turned his considerable writing skills to a new letter, Diary of a Rogue Economistlearn more here.)

Why Bifurcating Your Information Matters

In addition to saving yourself time and worries by mostly ignoring public information, learning to discern the difference between the two can lead to better decision making, in your everyday life and in your investments.

As a case in point, during the conference here, someone in the audience asked a question about quantitative easing. Doug Casey took hold of the microphone and replied along the lines of, "People need to stop using constructs such as 'quantitative easing.' Those are just terms that politicians have come up with to obfuscate the truth. The proper term for quantitative easing is currency debasement, plain and simple."

Going back to the observable, we know from history what happens when a king or officialdom adopts a policy of energetic currency debasement: the currency units being debased invariably become worth less and less. There is no example in history where debasing a currency doesn't drive the purchasing power down over time. And certainly none where debasing a currency causes it to appreciate over time.

Jumping back to public information, "everyone" knows that the dollar is king. The best car in the junkyard, the two-ply toilet paper in a world where all other currencies are mere single ply. But is that accepted truth actually true?

Take a look at the following two charts, taken from the presentation that Frank Trotter, president of EverBank Direct, gave in Cafayate. The first shows the US dollar against 19 major currencies. It's hard not to note that the mighty dollar has been in a long-term downtrend.

(Click on image to enlarge)

The second of Frank's charts shows the one- and ten-year performance – through 2012 – of some of the EverBank World Currency team's favorite currencies against the dollar.

(Click on image to enlarge)

(For the record, EverBank World Markets offers what may be the only FDIC-insured world currency accounts and certificates of deposit, allowing you to diversify your currency holdings extremely efficiently. For more information, click here.)

Of course, not shown in this mix is the performance of gold, the über-currency, over the same time periods. In 2012 gold rose by only about 3.5%, but for the ten-year period, it rose from $278 to $1,657, a gain of about 500%.

I'll have a bit more to say about gold, and particularly gold stocks, momentarily… but before that, I want to toss out one more item of observable information as it relates to today's economy, political environment and the outlook for the dollar.

The chart here is of federal spending in trillions of inflation-adjusted dollars. That means that the increase in spending shown accurately reflects the growth in government in real terms (as opposed to reflecting the decline in purchasing power from the currency debasement).

It also shows the scale of the purportedly draconian cuts in federal spending to be made as part of proposed austerity measures… revealing all the hand waving about the severe consequences of said cuts as just so much public information… or, if you prefer, misinformation.

What you can also observe from this chart is that the federal government has grown into a behemoth, a huge prop under the economy… the world's largest economy, for the record. The idea that the politicians will find the backbone to cut this level of spending back to the point where it balances the budget is ludicrous. Even if enough of them wanted to make such cuts, the ensuing depression would trigger a public backlash that would see them voted out of power in the proverbial blink of an eye.

Which is to say that the current trend of currency debasement is almost certainly going to continue until it simply can't anymore.

And that brings me back to gold and particularly gold stocks.

Downturn Millionaire

Even though the first of the two events here in Cafayate was beginning, the partners of Casey Research got together and decided that the state of the gold share market had reached such a dismal state that we had to take action on behalf of those of our subscribers with investments in these markets.

And so we hit the phones and email and arranged for Jonathan Roth, a highly respected journalist and film maker, to fly down to Argentina, picking up a crew in Buenos Aires on the way. Our purpose was to tap into the minds of some of the conference speakers, as well as mining share experts back in North America who were invited to join by live video feed.

The program, which some wit back in the office named "Downturn Millionaires," has as its primary mission to put today's junior mining share markets into clear perspective.

And that perspective, I am convinced after moderating the impromptu webinar, is that the meltdown in the junior resource stocks over the last year has created a once-in-a-generation opportunity for life-changing profits. That's because while gold bullion has been largely flat over the last 12 months, the junior gold and silver shares have been positively bombed out.

And by bombed out, I refer to the observable fact that even great companies – with great management teams, money in the bank and large proven resources of gold and silver in supportive political jurisdictions – have seen their share prices lose over 50% of their market value over the past 12 months.

That this has occurred against the backdrop of only a modest consolidation in gold bullion prices, and a massive global commitment by central bankers to currency debasement, represents a huge disconnect.

So, what's it to be? Is the long bull market in precious metals and precious-metals shares over? Or does the disconnect point to just the sort of once-in-a-generation profit opportunity for those bold enough to act (selectively, of course)?

The program features Doug Casey, Bill Bonner, Rick Rule, John Mauldin and Louis James, the globe-trotting senior editor of our International Speculator service who talks about the specific stocks to add to your portfolio today.

I understand that the program will go live on the Casey Research site on April 8. At this point, I don't have much more in the way of details, but do know that because of the importance of the topic, we are going to make it available to everyone to watch for free.

Watch your mailbox for more on Downturn Millionaires, filmed on location here at La Estancia de Cafayate. I promise you, it will be worth your time.

And with that, I want to move on to an article I received yesterday from Dennis Miller, editor of Miller's Money Forever on another bit of public information: that banks are safe.


Just Whose Money Is It Anyway?

By Dennis Miller

At some point in our life, I am sure most of us have had the experience where we start to accumulate our own personal small pile of money. Whether our money was a birthday gift, came from paper routes or baby-sitting, our little cash pile was burning a hole in our pocket. Our elders decided it was time for us to march down to the bank and open up our very own savings account. They told us it was for safe keeping. After all, if we kept our money at home, we could get robbed. In a bank, it is safe and insured by the government.

Part of those early life experiences was the concept of putting away our money, in a safe place, and accumulating wealth that we would need down the road. The contract was implied. It was our money and safely protected in the bank.

Our confidence was shaken when the first TARP bill was passed to bail out several banks deemed "too big to fail." Indeed, the government kept its promise; our money is safe.

Recently many of us have read articles about Cyprus, where the European Union has decided to confiscate money in people's bank accounts in the form of a tax. Here is what our own Marin Katusa said about it in the Casey Daily Dispatch, on Tuesday, March 19.

For those with bank accounts in the Mediterranean island of Cyprus, this past weekend was a disastrous one. In what is an unprecedented move in the Eurozone, Cyprus is planning to impose a tax on bank accounts as part of an agreement to be bailed out by the European Union.

Those who have under 100,000 euros in their accounts will be taxed 6.75%, while those above that figure will be taxed almost 10%.

Technically, the depositors do not lose the money, but would gain shares in banks guaranteed by future natural-gas revenues – not a very good guarantee at all, given how incompetent the Cyprus government has been to date.

People are outraged: wouldn't you be, if you were to lose 10% of all your bank savings because your government had to be bailed out by foreigners?

The banks were closed, and at the time this is being written, nothing has been finalized. In the meantime, citizens have hit the ATM machines and emptied them out in an effort to get as much money out of the banks as possible. Regardless of the outcome, this should send up yet another red flag for all Americans, even if this is happening on the other side of the world.

The underlying problem is worldwide. For decades, politicians have been spending more money than their governments have taken in, and the bills are piling up at an ever-increasing rate. These bills are now coming due, and basically they have reached their credit limit. As a result, central banks are simply printing money to pay the bills. Governments are desperate to generate revenue because they know the citizens will riot and throw them out of office if they try to cut social spending. The riots we are seeing in Europe are certainly a preview of things to come. They would rather rob from the working class than face the real spending issues that need to be addressed.

Why Should I Be Worried?

A friend recently used an interesting analogy to try to explain the Cyprus situation. He said, suppose the state of North Dakota could not pay its bills and the federal government got tired of bailing them out. Finally they said, "Enough is enough," and simply decided to impose a tax on all money in North Dakota bank accounts. If you don't live in North Dakota, what's the big deal?

Regular Casey readers have enjoyed articles from Doug Casey, David Galland and others about their adventures in Argentina and how they are setting up a new homestead in the beautiful wine country. At the same time, we also read International Man and other publications that encourage us to look at other places in the world. While that is nice, one thing some folks don't realize is this: While you may want to exit the country, you are still a US citizen and all your income is taxable, no matter where in the world you live. Should you decide to give up your citizenship, you may do so; however, you must pay an exit tax.

There are many websites that explain the exit tax – here's one of them. Here is a general summary:

The exit tax was modified significantly in 2008 and now presents a serious problem for potential expatriates whose net worth exceeds $2 million (or whose annual tax liability exceeds prescribed thresholds) as the tax liability is triggered by a mark-to-market artificial tax event.

You are deemed to have sold all your property, yes even personal property, and liquidated in full all retirement plans – all on the day before the legal expatriating event.

My concern is not the fine-print details of the law, but rather the concept behind it. Just whose money is it anyway? Is it our money that we earned through our hard work and efforts, or are we just temporary custodians of the government's money?

It Couldn't Happen Here in the US, Could It?

I'm sure most of us recall the discussions taking place in 2010 where the government was investigating the possibility of requiring IRAs to hold a certain amount of US Treasury debt. Here is one excerpt:

Bloomberg reported Friday that Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Mark Iwry are planning to stage a public comment period before implementing regulations that would require private investors to structure IRA and 401(k) accounts into what could amount to a U.S. Treasury debt-backed government annuity.

CNBC's Rick Santelli broadcast the rumor the same day from the trading floor during CNBC's "Power Lunch" show.

Spokesmen from both the U.S. Treasury and Department of Labor confirmed to WND that the federal agencies are about to enter a pre-regulation public comment phase on the proposed rule change.

So tell me again. The government of Cyprus wants to take money out of people's bank accounts without their consent to pay their bills. The money will be replaced with risky shares in banks guaranteed by future natural-gas revenues. Our Marin Katusa says it is a very poor guarantee given how incompetent the government has been to date.

Our government, also in debt, has already discussed tapping into everyone's retirement accounts, taking out our (risky) investments in some of the finest, best-run businesses in the world and replacing a portion of them with government-backed IOUs. Perhaps we could also add the same comment, "… it is a very poor guarantee given how incompetent the government has been to date."

At the time this is written, this is purely in the discussion stage and nothing has been decided. There has also been no meaningful discussion about reducing spending. That means we will soon be faced with another crisis down the road. Should the politicians get away with this theft, it will continue. I'm sure we have all heard that once you start stealing, it gets easier each successive time. I recall one hardened criminal on a TV show go so far as to say, "You steal often enough, the guilt goes away." I doubt that politicians have much of a problem with guilt.

It is no wonder that on Monday, March 18 in the Casey Daily Dispatch, the metals team reported:

"…..while ETF holdings are declining, the physical market is seeing robust support. In fact, the US Mint – the bellwether for measuring demand of physical gold in the Western world – reports that sales of gold and silver coins are soaring.

We Have Come a Long Way, Baby

How many more clues do we need? When we signed up for Social Security, receiving a check was no longer an option, it had to be direct deposited. What the government puts in, they can just as easily take out.

It sure looks to me like the lessons of our youth have now become totally reversed. You put your money in the bank because it was safe, you didn't want to get robbed. Additionally, it was protected by the federal government. Now the banks are no longer safe, and we are concerned about being robbed by the federal government.

I suspect sales of PVC pipe are also soaring. If you buy the right size, you can store a whole lot of gold and silver coins in them. Are we as a nation reverting to the days of old Europe where we must hide our wealth from the taxman?

We better be very concerned about the events in Cyprus, regardless of how they turn out. If our politicians think they can continue to rob the working class in new and creative ways, they certainly will.


Friday Funnies

This first entry is technically not funny, in fact, it is quite unfunny. But I sure found it interesting that a poster commissioned by the European Union, designed as a politically correct call for unity, dropped the old hammer and sickle at the top of the star. And, yes, the poster is real and not some Internet hoax.

Sequestration on Saturday Night Live

A really funny skit – here’s the link.

Funny Commercial on the Value of Paper

Thanks to fellow Estanciero Pete K for sending this along. Here's the link.


Book Review

Sticking with our theme for today, I want to highly recommend a book to you. It's titled Kill Anything That Moves: The Real American War in Vietnam by Nick Turse.

This book is one of those rare pieces of work with the power to completely alter your perception of a historical event… in this case, the Vietnam War. And, in doing so, alter your perception of the much heralded US military machine.

The author, a real reporter who left no stone unturned in writing his book – a rare commodity these days – dug through a mountain of previously classified investigative reports from US military and various government archives, then traveled extensively in Vietnam to confirm his findings: that the My Lai massacre in which between 350 and 500 unarmed civilians were slaughtered by a company of US soldiers wasn't the exception but the norm.

I have to warn you; the book is extremely hard-hitting and even painful for an American to read. You simply don't want to believe that our government would actively support the scorched-earth, "kill anything that moves" actions detailed in the book – but the depth of the research leaves little doubt at the truth of the matter. And the truth is that, encouraged by the US military command at the time, the US soldiers regularly acted like the savages you'll read about in hell holes like the Congo, or the Japanese in the rape of Nanking.

A friend of mine who served in Vietnam rationalized the behavior by saying that it was not unusual for US patrols to spend a couple of weeks crawling through the jungle without seeing a single armed combatant, but still suffering 10% casualties… leading to the sort of anger and frustration that resulted in entire villages being wiped out, even though the villagers were all old men, women and children.

While some patriots will be offended by the book, or the contention that the US military command condoned the barbarism, it is hard to square up that only one person, Second Lt. William Calley, a platoon leader during the murder spree in My Lai, was convicted. And even though he was given a life sentence, he served only three and a half years under house arrest. I think the proper term for that sort of sentence is "slap on the wrist."

Tough as it is, the book is very much worth a read as it puts the Fourth Generation Warfare (4G) now dominating global conflicts in clear perspective… unable to pin down and kill the elusive enemy, the brunt of the pain will always fall on the civilians. It will also disabuse you of any delusions you may have about the valor of war, an entirely healthy exercise, in my view.

For those of you who reflexively support US military adventures, please don't waste your time or mine sending me angry emails about this posting. Instead, do yourself a favor and read the book.


And Finally…

Attend the World MoneyShow Vancouver FREE as a Guest of Casey Research

Join Casey Research Senior Market Strategist Marin Katusa at The World MoneyShow in Vancouver, April 18-19. This is Western Canada's most popular gathering of resource companies and investors, and a great place to meet the senior executives of our recommended resource companies. Marin Katusa will be sharing his Energy 2013 Forecast and updating his favorite energy investments today. The conference is free, but advance registration is required. Here's a link to do just that.

Marin will also be appearing at the Las Vegas MoneyShow, May 13-16, 2013, at Caesars Palace. You can access the details by clicking here.

And with that, I will sign off for the week, in all probability now stumbling upstairs for a siesta before dragging my bedraggled self down to the Athletic Club for a massage (here in the Argentine outback, an excellent hour-long massage only costs between $30 and $40).

Until next time, thanks for reading and for being a subscriber to a Casey Research publication.

David Galland
Managing Director
Casey Research

Mar 22, 2013
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