Dear Reader,
In last week's edition of these musings, I expressed my frustration that most Americans are paying next to no attention to the government's plowing under of the individual liberties that made this country the economic and political bastion it once was.
In response, a number of dear readers wrote in expressing that they shared my concerns and encouraging me to continue writing about the ongoing outrages of governments gone rogue.
While I appreciate your nice words and encouragements, per my comments last week, I don't intend to dwell on such subjects today, but I do want to share a few follow-up remarks that I think are relevant to the state of the state, which I do a bit later on in this edition.
First, however, with all the volatility in precious metals and broader markets this week, some quick comments and, I fear, somewhat scattered observations on current markets.
It has often been observed that being a successful investor is not easy. And how could it be, given that much of what drives investment returns can be tracked to the economies that serve as the foundation for those investments. That, in turn, brings into play the study of economics, which is where things begin to get very wiggly.
That's because, other than in the most primitive societies, the modern economy is a complex system containing so many moving yet interlocking parts as to make predicting outcomes impossible.
Even so, there have been periods in history when the largest of the moving parts were relatively stable, in which case, in the absence of a black swan, a certain predictability was possible.
This is not one of those periods.
Which brings me to a quick review of just a couple of the larger moving parts in today's economy. While my perspective is largely derived from the fact that my derriere is presently parked in the USA, globalization has served to link up these same moving markets across any number of economies.
So, what are these moving parts? In no particular order…
Trade. The amount a country exports vs. imports can be netted out to give you some sense of the vibrancy of an economy. Simplistically, a trade surplus typically means that there is external demand for the products and services produced by a country. Because trading partners usually need to first buy your currency before buying your output, a trade surplus is supportive of a country's currency.
The importance of a trade surplus can be seen in the case of Japan where – despite the weight of many worries on the back of that country's economy – the demand for its cars, electronics and so forth has, until recently, kept it in surplus and therefore helped to support the yen. With that country's trade now in deficit, things could get very dicey, very quickly.
(As an aside, the switch over from trade surplus to deficit in Japan is due to a number of factors, not the least of which was the overreaction to the Fukushima fiasco that caused the politicians to close down all but one of the nation's nuclear power plants, requiring the resource-weak country to spend billions importing oil.)
A trade deficit of a sufficient size and duration can have the opposite effect of a surplus, effectively requiring a nation to export its wealth to trading partners in exchange for products people want – flat-screen televisions and cars and such – as well as resources the country needs, such as oil.
The net effect of the trade deficit, in the case of the US, is that much of what we import ultimately adds nothing to the country's capital stock or productive capacity, but rather is burned up or ends up in landfills. Concurrently, our trading partners end up with lots of American cash – credible estimates put the number at roughly $7 trillion – which they can then use to buy up assets with tangible value, from real estate and US businesses, to gold and other useful commodities.
This is, of course, a simplistic view of the situation – because, for instance, many of those expatriated dollars have been reinvested in Treasury bills or otherwise parked and are at risk of suffering from the same devaluation as all dollar-based investments. Thus, the country's primary trading partners, if caught unawares, could end up watching their dollar holdings go down with the sinking ship… or, growing concerned, could start unloading those dollars by dumping Treasuries and using the proceeds to buy "stuff," helping to greatly exacerbate the coming inflation.
So, how has the whole trade thing been going in these United States over the last little while?
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The reality is much worse than even that dismal chart reflects, because the last time the US ran a trade surplus was in 1975, almost four decades ago.
Government Spending. A government that spends a lot more than it takes in will eventually be forced to engage in all manner of machinations and manipulations in order to cover its bills – bills that include the cost of paying interest on all the debt it has racked up.
Saving myself some time in raking together all the data points on how things have been going with this particularly important moving part, following are a couple of data points from a recent article by periodic Casey Report collaborator James Quinn, writing on his BurningPlatform.com blog.
In other words, the moving part of government spending is moving quickly… in the opposite direction of where it should be moving. So much so that yesterday the Egan-Jones rating service downgraded the credit rating of the US to AA from AA+ yesterday, stating:
"When debt-to-GDP exceeds 100 percent, a country's financial flexibility becomes increasingly strained," Managing Director Sean Egan wrote in his report on the downgrade. "For the first time since World War II, U.S. debt exceeds 100 percent."
As far as machinations are concerned, the list is far too long and too complex to recap here, but because of the size of the debt at this point, no machination is of greater importance to the government than keeping interest rates capped at or near today's historic lows. That's because, as James Quinn points out, the consequences of interest rates rising even to the 5% level last seen in 2007 would be as devastating as a tornado on the nation's already fragile finances.
Given the size and unpayable nature of the government's many obligations, the odds are very good that once rates start to rise, they will not only hit 5% but blow past that level… perhaps to 10% or higher. Which means that, if it were possible for it to happen (which it isn't, things will melt down well before that point), virtually all US government revenues would have to go to paying interest.
At that point, everything changes, and none of it for the good (at least in the short run).
And that brings me to an analysis prepared in the wee hours this morning for today's edition by Casey Research Chief Economist Bud Conrad. (When I say wee hours, I'm not exaggerating – I received the first email from Bud at 3:00 am his time. Thanks, Bud!)
In addition to interest rates, he touches on the closely related matter of credit, another of the big moving parts in an economy.
The Recovery in Lending May Pressure Rates Higher
By Bud Conrad
When the economy is growing, there is a demand for credit. We have just gone through the biggest collapse in credit since the Great Depression. But credit is now rising again, as banks are making loans.
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The chart below indicates what loan recovery may mean for interest rates. When credit demand is low, as it was in the crisis of 2008, banks are not making new loans and total bank credit collapses.
The blue line shows the annual growth in credit, which was actually in decline for the first time in the data available. The red line of the fed funds rate was forced to zero by the Fed, and that matched the low growth in credit. But bank credit is now rising, indicating the potential of pressure on rates to rise as well. The correlation is not precise, and there are other forces, but there is a relationship. We are seeing recovery in the economy, so it is logical to expect that the Fed could let the fed funds rate rise from the record-low and record-long zero-interest-rate level.
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In support of the potential that the Fed may be forced to raise rates, Fed governors are now openly discussing the possibility: on April 4, speaking on Bloomberg television, Fed Governor Jeffrey Lacker suggested that the economic recovery might bring a rise in rates in 2013. The Fed would have to institute further massive Quantitative Easing to continue to keep rates so low, and the Fed minutes show no indication that they are currently preparing another round.
A Note on the Data from the Fed on Total Bank Credit
The closer picture of total bank credit is presented below, with two versions of the data. The Fed's data on total bank credit shows two big jumps in 2008 and in 2010, of $400 billion in one week. Banks did not suddenly adjust their balance sheet by such a huge sum in one week.
I removed the spikes to smooth the data. The data of the red line was used in the analysis above. Without the decreases from what I claim is distorted data, the picture of increased credit would be even more supportive of rates rising. Here is a close-up of the data from the Fed, and my correction.
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Understanding credit markets, which have been distorted greatly by the government in recent years, will be essential in projecting the future of the US economy. Interest rates are driven by the supply and demand for credit.
My upcoming article to be published in The Casey Report next week analyzes the forces of demand for credit from the federal government compared to the supply from the Fed to explain these pressures. I am also analyzing what effect higher rates might have on government deficits.
(Ed. Note: There's never been a more important time to understand the most powerful economic trends in motion and how to invest to take advantage of those trends – the mandate of The Casey Report. But don't take our word for it – instead click here to take us up on our no-risk trial subscription offer.)
David again. As this stuff is quite complex, it's easy to lose the thread (something I am prone to under the best of circumstances). But the point is that the government has to finance its historic levels of spending somehow. Once investors are able to deploy their funds into more attractive income-producing investments, or get scared that the money they are lending to the government via Treasury bill purchases isn't safe, the government will have almost no good options left when it comes to preventing interest rates from rising.
For instance, one way that the Fed has suppressed interest rates in recent years is by directly or indirectly buying up Treasuries at the regular auctions – but as it is already buying the stuff by the boatload (61% of all Treasuries issued in 2011), any more aggressive buying is likely to set off the alarm bells about the ill effects of monetizing government debt, causing investors to demand even higher rates.
As we have discussed at some length in past editions of The Casey Report, the problem is already exacerbated by the exodus of foreign investors from Treasury auctions. Quoting a recent article from Newsmax, further quoting the Wall Street Journal quoting former Treasury official Lawrence Goodman…
Goodman notes that foreign investors like Japan and China that once scooped up U.S. debt are shunning it. In 2009, such foreign purchases of U.S. debt amounted to 6 percent of GDP and have since fallen by over eighty percent to a paltry 0.9 percent.
The bottom line is that US interest rates cannot be maintained at historic lows in the face of historic levels of debt and deficits. And so rise they must. Getting back to the point of this exercise, the challenge for investors is deciding where and when to deploy their money to take advantage of rising rates or, more importantly, ducking the falling piano increasing rates will cut loose.
While avoiding anything but short-term bonds (and with rates as low as they are, why bother investing in them at all?) is one obvious conclusion you might come to, what about the US stock market? Commodities? After all, if the government is forced to cut back its excesses, then the barely recovering economy is likely to get crushed and, along with it, the stock market that represents that economy.
There is, of course, the other alternative – the one governments throughout the ages have fallen back on in times of trouble: monetizing the debt and debasing the currency as a form of hidden taxation and wealth transfer. More on this momentarily.
For now, it's back to the larger moving parts.
Employment (or Lack Thereof). Again setting the tone, I lean on James Quinn, whose writing on the topic of employment seems to indicate a certain skepticism, and even a dose of sarcasm.
Just to keep even with population growth, the job market has to add on the order of 250,000 jobs a month. In the latest data, out today, a recent upwards blip in employment was again reversed, with just 120,000 jobs added last month.
So, what's the government to do (because, of course, it always feels compelled to do "something")?
Cut the egregious spending? Hardly. Not when the prevailing wisdom is that the government needs to be doing more, not less, to stimulate the economy. Otherwise there is very real (and justifiable) concern that government will find itself confronted with the sort of social unrest now breaking out in places like Greece and elsewhere that austerity is even hinted at.
Leaving the only politically acceptable alternative of more spending, more debt and more currency debasement.
Energy Prices. There's no two ways around it, energy makes the world go 'round. The correlation between energy use and GDP growth is well established, and for obvious reasons. If a nation can't effectively access the energy it needs to make stuff, or grow crops, or get from point A to B, then forward progress will slow, stop or even go into reverse.
The bad news is that even though the Western economies remain stagnant, the price of oil has risen by over 340% over the last ten years and has remained at over $100 a barrel going on a year now. Meanwhile the Luddites are continuing to turn new supplies back at the gate – most notably oil from the Canadian oil sands.
If today's high oil prices truly are the "new normal," then the economy is in for a rough ride, as the price of everything that relies on energy – which is most things – will have to continually adjust upwards.
Government. While there are a multitude of moving parts that one needs to pay attention to when setting a course for an investment portfolio, I will begin to wrap up with the moving part that should be obvious to all as the most important of the lot: government.
The US government – and of all the governments of the major deadbeat economies – are jumping around like a cat on a hot griddle (what a horrible metaphor, I wonder what sick twist came up with that one?) to avoid getting burned.
The resulting machinations, manipulations and changeable regulatory environment makes predicting the future near impossible for individuals, business owners and investors alike. To name just one example, we think the Bush tax moratorium will come to an end, so we convert our retirement accounts to Roth IRAs and look to sell stocks before the capital gains rates go up. Could that help send the stock market into a tailspin? But if the Republicans win, could those trillions in new taxes be postponed?
Will the Fed actually cut back its spending, or unleash QE3? It says it won't do the latter, but only the most naïve believe that the Fed will step aside should the nascent recovery begin to falter as it almost certainly will. If the Fed doesn't unleash more QE, won't interest rates have to rise? If they do, won't interest rates have to eventually rise even higher (either way, interest rates are going to have to rise)?
The list of moving parts directly linked to the government makes it a fulcrum whose actions are amplified throughout the economy – and most investment markets.
Speaking frankly, unless and until these governments become so thoroughly discredited that the politicians are forced to take lessons on the finer points of dodging shoes, the magnitude of their meddling will continue to make every investment sector unpredictable and therefore an active risk to your wealth.
Over the past decade, we have advocated the hard assets of gold and silver as a core portfolio component – and that has generally been the right call. But even the safety of the monetary metals can't be guaranteed – at least not over the short to medium term – for the simple reason that the government and its minions can literally change the rules overnight.
So, what's an investor to do? Some thoughts:
There are more things you can do – for instance, either pay off your debt or refinance it for 30 years at today's ridiculously low rates. And you can shore up your personal value through a daily course of study on something you are interested in – investments, for instance.
A Closing Thought
As I said at the beginning, realistically there is no way to predict where things will stand a year from now – though the totality of the inputs suggests that the economy, and by extension most investment markets, will remain in a state of uncertainty and heightened risk for quite some time to come. By the time it's over, it wouldn't surprise me in the slightest to see some serious social unrest. That's because, as should be obvious to everyone, the template the world operated on until a few years ago is broken and can't be fixed.
The transition to whatever's next is unlikely to be smooth. There's no need to panic; just be extra thoughtful as you go about arranging your affairs. If there's good news, it's that being aware of the way things stand puts you well ahead of the crowd.
The Casey Research metals team just sent something across that many of you might find of interest.
Next week we're doing something quite unique.
We know there's a lot of questions about the gold market right now. As should be expected when a bull market is neck-deep in the "Wall of Worry" phase. Gold's been struggling since September. The shares have taken it even harder.
It's even led the mainstream pundits to simply drop their claims that "the gold bull is dead," on the pure assumption that it is.
Yet all the fundamental signs that gold should continue higher – much higher – remain.
The money supply has ballooned enormously, yet inflationary expectations still loom largely unfulfilled. And central banks have shown through their behavior – and often against their words – that they'll continue to feed this fire until the economy is "normal" again.
Sovereign debts are only rising, digging a deeper hole for the United States and everyone else. And frankly, the world economy is still rife with systemic problems. Problems that will be almost impossible to work out in any way that doesn't result in a world of financial hurt for, well, everybody.
Yet the NASDAQ was up 18% in the first quarter, and market darling Apple was up 48% while gold stocks – measured by HUI – were down 5% on top of bigger losses in late 2011.
It's enough to have even the most optimistic gold bulls second-guessing their convictions. I think our own Louis James hit it on the head in quoting Thomas Paine:
THESE are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph…
They don't call this the "Wall of Worry" for nothing. This is certainly reflected in the messages we've been getting from readers. There's plenty of doubt and plenty of questions about what comes next for gold and precious metals – and what to do now.
Which brings me to this unique event we're hosting next week.
We're doing a free conference call with the express purpose of answering your gold-investing questions, called Gold Investing in 2012 and Beyond: Your Questions Answered.
The call will feature Jeff Clark, editor of BIG GOLD, and Louis James, Casey Research Chief Metals & Mining Investment Strategist and editor of Casey International Speculator.
Together Jeff and Louis will answer your questions about today's gold market – plus, share what they see as the best course to take with your gold investments right now. I don't think you'll want to miss it.
All you have to do to attend the call free – and submit a question to be answered – is to agree to a 90-day, risk-free trial of our monthly BIG GOLD newsletter. BIG GOLD focuses on the best investments across gold and gold funds, medium- to large-cap mining stocks, and other lower-risk, high-upside gold investments.
The call is next Thursday at 2 p.m. Eastern time (a recording will be available for those who can't attend live).
But in order to attend – and submit a question to be answered on the call – you must respond by 11:59 p.m. Eastern time tonight – Friday, April 6.
To learn more about the call – plus accept your no-risk trial of BIG GOLD, submit a question, and attend the call free – click here.
Speaking of gold, looking at a five-year snapshot of the metal, the recent "correction" doesn't seem very much to worry about.
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How Can You Tell When a Politician Is Lying?
Not sure if this video is technically funny, or just mind boggling in that it reveals an administration so bereft of creativity and intellectual honesty that it is unhesitant in rolling out canned comments when meeting with visiting dignitaries. Or is it a sign of arrogance? You decide. You'll want to watch this and pass this along.
Just Visiting
Angela Merkel arrives at Passport Control at Athens airport.
"Nationality?" asks the immigration officer.
"German," she replies.
"Occupation?"
"No, just here for a few days."
Keeping the News in Perspective
The following was sent along from Bob D. from Denver – thanks!
An easy guide to keeping political news in perspective...
1. The Wall Street Journal is read by the people who run the country.
2. The Washington Post is read by people who think they run the country.
3. The New York Times is read by people who think they should run the country, and who are very good at crossword puzzles.
4. USA Today is read by people who think they ought to run the country but don't really understand The New York Times. They do, however, like their statistics shown in pie charts.
5. The Los Angeles Times is read by people who wouldn't mind running the country, if they could find the time – and if they didn't have to leave Southern California to do it.
6. The Boston Globe is read by people whose parents used to run the country.
7. The New York Daily News is read by people who aren't too sure who's running the country and don't really care as long as they can get a seat on the train.
8. The New York Post is read by people who don't care who is running the country as long as they do something really scandalous, preferably while intoxicated.
9. The Miami Herald is read by people who are running another country but need the baseball scores.
10. The San Francisco Chronicle is read by people who aren't sure if there is a country or that anyone is running it; but if so, they oppose all that they stand for. There are occasional exceptions if the leaders are handicapped, minority, feminist, atheist dwarfs who also happen to be illegal aliens from any other country or galaxy, provided, of course, that they are not Republicans.
11. The National Enquirer is read by people trapped in line at the grocery store.
12. The Key West Citizen is read by people who have recently caught a fish and need something to wrap it in.
And now we know…
Picking up from my comments last week on concerns over the growing reach of the state, while no one can see the future, at least not with any great deal of clarity, we can look at the present and draw certain conclusions.
My concern, which I have expressed at some length in recent missives, is that the American public appears to be asleep at the switch during one of the most crucial times in American history. Specifically, during a time when a number of technologies, spurred on by the exponential increase in computational power, are experiencing truly transformative growth.
To provide just one example, it is increasingly clear that in the very foreseeable future – perhaps five years from now – driverless cars will be a common sight on American highways. Five years ago, the things weren't even being discussed other than in small pods in the scientific community.
You can also see the transformation in the emergence of tablet computers with the successful launch of the iPad. Introduced in April of 2010, just two years ago, it is now absolutely endemic, with almost 16 million units sold in the last quarter of 2011 alone.
But more to the point, these same technological advances are taking place in many areas that shape the very nature of society for decades to come. The problem is that the government and its rent-seeking allies in the military-industrial complex are increasingly focusing on getting a leg up on the public at this history-making point in time.
Returning once again to Pete Kofod's excellent article on The Race Condition, which appeared in these pages, the government is racing ahead – with the technology, legislation and judicial action that, if unchecked, all but ensure it will get through the gate with this stuff before the majority of the public are aware there is even a race going on. And once through the gate, the new technologies will then be used to make certain that the public gains admission and access only with the proper credentials and state-issued permissions.
At that point, the transition from "government of the people for the people" to government as a fully independent entity will be complete. Given that all that really separates government from other institutions is that it has license to use force to ensure compliance to its dictates, we the people should be very concerned, but aren't.
Last week I discussed the technologies now being quickly developed to allow governments to record your every communication and every move. But the technologies now under development extend to a far more granular level. Hell, within a relatively short period of time, the Dogs of War will be replaced with the robotic Cheetah of War… just as manned aircraft are rapidly being replaced with death-dealing drones.
And for the record, when I say Americans are asleep at the switch, I am not just talking about the uninformed masses – folks whose daily struggles to keep their heads above water preclude any time for idle reflections.
Earlier this week I had a surprising chat with a very intelligent businessman friend of mine. I mentioned my article on the government's recording everything, and the conversation subsequently rolled out something as follows:
"Well, it's no big deal. After all, it's to protect us. And only criminals need to worry about that stuff."
"Sure, but then you have to give some thought to the definition of crime. After all, it wasn't a crime to be a Jew in Germany in the early 1930s, but then it was, and it was punishable by death."
"That's a bit extreme, isn't it?"
"Maybe, but the point I'm trying to make is that laws change. What about smoking pot? Should that be a crime?"
"I think so. After all, we as a country have a tradition of looking out for people. You know, to protect them from themselves. You can't have people running around smoking pot and doing cocaine and stuff."
"Why not? They used to, before there were laws against it. Who did it hurt, except maybe the user?"
"C'mon now. You can't just let people do heroin and stuff. That's just not the way America works. We look after our citizens. Plus, we give them certain privileges and benefits as Americans, and in exchange there are certain requirements they have to follow."
"Really? Did you ever do drugs when you were younger?"
"Sure, we all did."
"So, who was the victim? Do you think you should have been put in jail?"
"But you can't have people driving cars all messed up and stuff like that."
"That's a different issue. Driving while intoxicated on anything makes you an active threat to others – that's not what I'm talking about. And all I'm talking about is that the definition of what a crime is can change. Not that long ago, there were few if any laws against smoking pot or doing cocaine or any of it. Today, there are millions of Americans in jail for just that. In fact, there are more people in jail in America – the land of the free – than in any other country in the world, both in total numbers and as a percentage of the population, and by a large percentage."
"Really? Are you sure? I have never heard that."
The conversation was quite a revelation to me, though to his credit, he then added:
"You know, I just don't think about this stuff. It just doesn't come up in my life, so when you asked me about it, I just told you my opinion – but it's off the top of my head, without any real thought."
Now, let me make it clear – I like this guy. In fact, he's one of my few good friends hereabouts. But he's just not paying attention, because he doesn't have to – because nothing and no one has heretofore slapped him upside the head and told him to pay attention.
Which is my point. By the time the slap comes, it will be too late to do anything about it… because the government will be holding all the cards, or at least all the important cards.
One dear reader wrote in rather angrily that there will be no place to hide, not even in remote corners of South American countries – because the average person has lost everything and every opportunity due to the cozy crimes of the financial and political elites and so will be looking to anyone with money to pay up, in both money and blood if I read his tone correctly.
And so it may come to that, but if anyone is thinking about rising up against authority, they better get off the couch because even a few years down the road, the powers-that-be will have all the power-that-be.
Hey, here's another bale of hay in the wind now…
It's a recently signed Executive Order that sure looks like preparing the ground for the Executive Branch to take over the government – based on nothing more tangible than it stating the need to act in the interest of national security.
And the slope grows more slippery still.
But enough of that. I am running way late, and so must move promptly toward the exit on this week's rather scattered musings.
Before doing so, however, I return briefly to the topic of faraway retreats in South American countries – specifically, a job opportunity being offered by members of the fast-growing community at La Estancia de Cafayate…
The International School of Cafayate, a new organization which will provide educational support and encouragement to the children of residents of La Estancia de Cafayate, is looking for a full-time teaching professional to help start and lead a dynamic educational program for multi-age students. Here's a link to the details of the job and how to respond.
And with that, I bid you a wonderful weekend and, for those of you who like bunnies, a Happy Easter.
David Galland
Managing Director
Casey Research