Paradigm Collapse

Dear Reader,

Following a week on the road – in Dallas and at our Navigating the Politicized Economy Summit in Carlsbad – your correspondent finds himself at full trot in an attempt to placate the steady demands of our electronic overlords.

As you don't need me to tell you, the merciless bastards have no heart, firing email after email at us as they do, each demanding our immediate attention. And if that isn't enough, they taunt us with tantalizing "news" headlines and real-time market quotes, all designed to scatter our thoughts and reduce our ability to focus to a mere shadow of prior generations.

Even as I was writing that paragraph, I ducked out three times to respond to emails.

The diabolical goal of these e-lords? To rewire the human brain to the point we can no longer string together the minimum number of cogent thoughts required to derive a rational conclusion. Evidence that they are meeting success in this dumbing-down of the populace is abundant.

Just yesterday the Fed Chairman, Obi-Wan Ben Bigspenda, announced the Fed will keystroke tens of billions of dollars into existence each month and continue doing so pretty much for "as long as it takes."

Is this monetary miracle actually possible? Can a government really run trillion-dollar deficits year after year? Why didn't anyone think about serving up this free lunch before now? But what if Ben is wrong? What if there are serious consequences that threaten our financial well-being? Are the topless pictures of Kate Middleton published by that French magazine on the Internet? Should I buy the sweet-looking new iPhone 5? Why can't some Muslims take a joke, and a bad one at that?

But I drift (and now you know why!).

Before getting further lost in the e-ther, let me try to muster the focus to my key topic for today… observations from our just-concluded Summit that I think you'll find of interest.

Paradigm Collapse

After three full days of fairly intense Summiteering, I have reams of notes I could share with you, given sufficient time. As I don't have that time, I'll try to summarize just a few of the key points.

In no particular order…

• The Data Confirms that the Global Economy Remains in Deep Trouble.  Not just a ‘little’ trouble, or ‘some’ trouble – but trouble of the sort that comes along only every few generations.  You know, WWII level trouble --the sort you’ll someday regale your great-grandchildren with stories about.
  
  Of course, this rather dire view comes as no surprise to most dear readers. It should come as no surprise to anyone, at least anyone paying even the slightest attention to the steady flow of bad economic news.
  
  In Carlsbad, we heard any number of perspectives on just how long this crisis might last (another ten years is well within the range of possibilities) or how bad things might get (Doug-Casey bad).
  
  The few relative optimists on the faculty, represented by friend John Mauldin, summed up their views as "We'll get through this in one piece," but always with a caveat. As in, "We'll get through this in one piece… because the politicians will have to act or face a catastrophe."
  
  Now, feel free to bet your own bottom dollars on the Republicrats and Democans coming up with a reality-based plan to reduce the deficits and debts, but that's not a bet I would personally make.
  
  Our own Bud Conrad did his usual fine job providing the audience with a data-rich overview of how the table is currently set. In his slide deck, he included a derivation of the following from the Bipartisan Policy Center that vaporizes the "contingent" argument.
  
  Ignoring the fact that the various assumptions that go into these long-term projects are make-believe, it is worth noting that even the purportedly hard-nosed budget plan put forth by VP wannabe Paul Ryan expects today's gargantuan deficits to be ongoing a decade from now, in 2022.
  
  It is no news that Ryan's plan has Democrats in a state of mouth-foaming apoplexy over its draconian impact on the social-program spending they so favor. As such, they (and "they" includes the vast majority of the nation's media) will fight it tooth and nail every step of the way. The "worth noting" part is that a majority of Republican political candidates share a similarly dim view of Ryan's plan and, in fact, are currently scrambling to distance themselves from it as they might from a radioactive ingot dropped on their toes.
  
  The point is that the government of this degraded democracy – and of most of the world – is careening out of control. Worse, not only are the brakes of fiscal restraint broken, the government and its minions at the Fed are trying to fix the situation by pressing hard on the monetary gas pedal.
  
  And so it is that just yesterday, The Bearded One announced that despite all common sense, basic economics and basic math, they are going to continue with Quantitative Easing to the tune of about $50 billion a month (by our calculations, the number is likely to be closer to $80 billion a month). Furthermore, as advertised, for the first time ever they are going to keep the taps open until, in their estimation, the economy has improved.
  
  It's going to take a while. During a wrap-up Q&A panel at our Summit – pictured here, albeit in a poor quality from my iPhone 3G (I so need an iPhone 5, I think) – I asked the assemblage to raise their hands if they thought the crisis would be over within the next year. No takers. Expanding the time horizon to two years triggered only a couple of hands, then kept moving out all the way to 20 years. If I had to estimate a median date range, I would probably put it at between 5 and 10 years.
  

  

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  Faculty member Bob Hoye, who has done intensive studies of past sovereign debt crises, believes it will be close to 20 years before the economy recovers. Let's see, if the Fed keeps printing "just" $50 billion a month for the next twenty years, that adds up to… gazooks – that's a $12 trillion increase over the Fed's current balance sheet of $2.8 trillion!
  
  While we can't know how this all ends, or when, stepping back into the realm of reality, it's clear that if even Ryan's much-derided plan leads to a financial train wreck, then a financial train wreck we will have. For the simple reason that on the one hand you have a government unwilling to cut pretty much anything… and the Fed willing to print pretty much everything (it takes).
  
  I've never been a big fan of disaster movies, but I strongly suspect we're going to sit through one, whether we want to or not.

• Everything is inherently risky at this point. David Webb, a little-known hedge fund manager with an almost unrivaled track record in profiting during periods of acute crisis, flew in from Sweden to share his analysis of why we are headed for what he called a Paradigm Collapse. By that, he means that the standard operating premises of the last century are in a state of collapse. Like Bob Hoye, he sees an end of pretty much anything we now view as "business as usual."
  
  Though Webb's analysis was excellent, it was near the end of his presentation, when he got into his reasons for moving his trading business to Sweden, that the audience visibly sat up in their seats. So much so that when he ran over his allotted time and the moderator tried to gently urge him from the stage, members of the audience began shouting out to let Webb continue.
  
  The reason for his move to Sweden, you see, is that Webb has carefully studied recent court cases and regulatory rulings. Taken together, it is clear that we as individual investors have lost pretty much all the important protections against brokers and bankers making off with our funds á la Corzine at MF Global. Thus, even though no one disputes that MF Global shifted funds from segregated accounts to cover losses elsewhere in the business – the new regulatory and legal regime makes that perfectly okay. So, no, Corzine isn't going to jail. And yes, it means your money is not safe in any US financial institution.
  
  Making matters worse, Webb pointed out, the pyramid of derivatives hanging over the world's financial institutions is now greater than $600 trillion (I think that was the number, but maybe it was $600 quadrillion – at this point, does it really matter?). As a consequence, these institutions are at risk of getting wiped out in the literal blink of an eye.
  
  What's an investor to do to protect themselves? While I am only skimming the surface in this piece, solutions suggested by various faculty members typically revolved around diversification. If you do nothing else, spread your assets among various accounts, including placing funds outside of the US (Canadian banks were mentioned) and diversifying into real estate, metals, etc. In Webb's case, he picked up his business and moved to Sweden where the game is not rigged as it now is in the US.

• Gold and "stuff" is still the right answer… or at least an important part of the right answer. The question, of course, is "How am I going to keep my assets safe during the global collapse of fiat currencies?" Even top-ranked bond manager and former Fed economist Lacy Hunt, after making a compelling argument that interest rates are likely to stay low for a protracted period, commented that making regular purchases of precious metals for your personal portfolio is common sense at this point.
  
  In fact, even though the overarching purpose of the Summit was to provide a thorough exploration of the economic challenges and how to get safely through to the other side – and was not a "gold" conference per se – it's safe to say that none of the faculty, no matter their specialty or investment focus, made a case that was anything but supportive of gold and other tangibles. That gold and silver (the latter of which was tapped by several speakers as having the most potential of the two) reacted as positively as they did to the Fed's announcement yesterday shows that the market for precious metals is far from saturated. In fact, even this far into the decline of the fiat currencies, gold still makes up something like only 0.3% of institutional portfolios. By the time this is over, it is likely to be a large multiple of that number.

• There are ways you can survive and even thrive as things unfold. And there are ways you can anticipate big trend shifts in order to avoid the worst and participate in the best – in any number of sectors. In the case of the former, I have pages of notes on specific investments that are pretty much bulletproof in all but the most extreme circumstances. For example, in the Alternative Investments Panel, our own Alex Daley and other specialists discussed the ins and outs of investing in agricultural land, and generating considerably higher levels of income via "hard money lending" (e.g., providing short-term financing to rehab commercial properties), or by participating in alternative lending facilities – buying a share of large portfolios of unsecured debt provided to high-credit-quality borrowers. Again, I'm just scratching the surface here – the point being that while it is difficult to stay ahead, and stay out of the path of the coming train wreck, with just a bit of effort, both can be accomplished.
  
  As to the latter, anticipating the big shifts, faculty member Dominick Graziano gave a compelling presentation on how to use a simple "trick" from the playbook of technical analysts as an early warning for exiting or entering an important position. While overly simplifying, the technique involves watching both the price of a stock or commodity (or pretty much anything) and the 50- and 200-day moving averages. When they turn down, or turn up, at the same time, you would either step aside or step in, depending on the direction. If you run long-term charts showing price and moving averages (one good site is StockCharts.com), you can clearly see that if you followed this method, you would be right about big trend shifts more often than not.

There was so much more covered at the Summit, but that's what pops to mind this fine morning.

As usual, for me personally – and I suspect for a lot of the Summit participants – the highlight of the event was the opportunity to share time and ideas with other attendees. A quick but I think telling anecdote: Among a random group of participants at my lunch table one day was a remarkable 18-year-old girl – a genius actually – who, if I have it right, graduated from MIT at the age of 16 and is now an important member of a team exploring potential investments in life-extending technologies. Her primary backer is perhaps the most famous tech investor on the planet.

Over the course of lunch, I asked her about her work, and she started enthusiastically explaining her current research… until she was gently interrupted by a gentlemen on my right, a doctor, who expressed his view that she might be missing something important in her research and quickly explained why. After conceding that his point had some technical merit, she began answering his challenge but was again gently interrupted, this time when the gentleman to my left chimed in with his observation that, as an early investor in Genentech, he had been exposed to similar lines of research some years before and began elaborating on his alternative view. No sooner had the young scientist started to respond to this new challenge, a somewhat older woman who had been sitting quietly across the table looked up and began quoting from a completely different body of research on the triggers of aging and how to mitigate them, based on her involvement with another company on the leading edge of anti-aging research.

Sitting there as a passive yet highly bemused spectator, I thought to myself, "Who ARE these people?"

Well, I'll tell you who they are – which, I guess means who you are: chronically curious polymaths who remain intellectually engaged in the world we live in and constantly alert to the possibilities of discovering an interesting path less taken… a path to a better tomorrow for themselves and their families.

If you want to know how the over-governed nations of this world can actually exit this mess, it is for the zombie government and blood-sucking bureaucrats to step aside and let We the Living get things moving again. I believe this to the core of my being.

Now, having discussed the Summit, I would be remiss if I didn't urge you to purchase the complete set of CDs (or MP3s, your choice) while the material is still fresh. At this Summit, we took special pains to not only shed real light on how this crisis is likely to unfold… but the specific investments and strategies you can use to come through it in better than good shape.

By the time you finish listening to the hours of fascinating presentations, you, too, will have pages of notes as well as specific action plans on ways you can position yourself in any number of areas – precious metals, trend-friendly stocks, peer-to-peer and "hard money" lending, agriculture, foreign currencies and (selectively) bonds, and much more. It's not just money well spent, it's critical to your financial survival.

For details on how to pick up your complete set of the audio recordings from the Navigating the Politicized Economy Summit, click here. It really is a game changer.

What Money Isn't

Earlier this week, my brother forwarded me the obituary he had come upon for a guy we attended boarding school with on the Big Island of Hawaii.

His name was Walker Inman. He was 58 years old at the time of his death in 2010. Walker's death made the national news because, through personal tragedy (he was orphaned young), he inherited the bulk of the billion-dollar estate of Doris Duke of the American Tobacco Company while still a child.

Unsurprising to me, he died of a methadone overdose.

For reasons you may soon understand, even though he was a couple of classes ahead of me at school, my memories of Walker Inman are fairly vivid.

Though the boarding school we attended has become quite well known, and well endowed, most of its students were decidedly not from ultra-wealthy families. To the extent that the parents of the students had something in common, I can only surmise it was that they had enough money for the tuition and preferred their kids living elsewhere than at home.

And so it was that at what seems the rather tender young age of 12, I was packed off to live in a world not unlike that portrayed in Lord of the Flies, except with some semblance of adult supervision. In most instances, however, said supervision was provided by an upper classman – on the whole, testosterone-fueled teenagers who took some apparent satisfaction in meting out punishments to the younger kids for any real or imagined infringements of the rules via an assortment of soft tortures. You know, titty twisters (shudder), whippings with towels made into "rat tails," bludgeoning with socks stuffed with Band-Aid boxes wrapped in other socks and, on one memorable instance, tying a boy to a shower post and making him eat a bar of Ivory soap.

Spending the better part of nine months each year in such circumstances was not all bad, of course. For one, it tends to help one learn and perfect survival skills. To name just one example, a few of us tunneled deep into an embankment just over the hill from the dorms to create a rather large and cozy cave, masked by a hanging slab of turf. It was far enough into the hill that, after crawling down the tunnel to enter the main chamber, we could talk (and later smoke) without fear of being disturbed. Fortunately, given our lack of any engineering skills, the cave didn't collapse. (In fact, upon graduating, we passed it on to the next class who continued the tradition for many years, I later learned.)

It was into this environment – in my eighth grade, his tenth – that Walker Inman appeared. Having been in the school since 7^th grade, I was a veteran of dealing with aspiring sadists. But nothing prepared any of us for Walker. Obese with large, round glasses, actually quite jovial looking, it soon became apparent that Walker arrived with past experience in the Dark Arts. Earlier I mentioned that my memories of Walker were vivid. How could they be otherwise given his predilection for doing things like inviting you into his room to watch while he and his roommate used homemade blow guns to shoot needle-tipped darts into their own bare feet. The idea of the "game" was to try and hit a large vein, thereby setting off a spurting of blood. Big laughs, back slapping and congratulations all around.

In that instance, I stayed only long enough to make sure my eyes weren't deceiving me before edging out the door.

Another day, stupidly in retrospect, I let one of Walker's minions wave me excitedly into the room where Walker and his roommate told me they had successfully figured out how to broadcast radio through their own teeth and asked if I would like to try. With several of their flunkies assuring me that they had tried it and it was fantastic, and being naturally curious (with a dose of naïveté), I accepted from Walker two metal bars, one for each hand, connected to wires connected to a radio. Standing thus expectantly, I watched while Walker flipped the power switch on the radio to the "On" position.

It's an interesting experience, being electrocuted. For starters, you can't actually drop the source of your pain – in this case the two metal bars, which were effectively plugged more or less directly into the wall socket. Secondly, your body spasms uncontrollably, and your jaw clenches hard enough to chip teeth.

Perhaps because even Walker didn't want murder on his record at such a young age, he mercifully turned the radio off, and while I stood there shaking and in shock, the Walker crew celebrated with big laughs, back slapping and congratulations all around.

Reflecting on myself at that age, about 13, I recall a somewhat sensitive young man. But in reality, I could be rather tough if pushed to it. In the case of Walker, however, as I lurched out of the room on barely functioning legs, I planned no revenge: anyone who would shoot darts into his own feet or electrocute people for a laugh was to be henceforth avoided.

Walker's reign of terror didn't last long… maybe three months, before he finally crossed a line that even a billion dollars couldn't erase. As I wasn't in the room, the details are secondhand, but they seemed credible because he was summarily kicked out. The story was that he and his roommate (also from a very wealthy family, and also kicked out) hogtied one of their minions and hung him like a trussed pig from the beam over the door. They were in the process of testing the effects of randomly concocted chemical mixtures, poured on a rag and held over the boy's mouth and nose. Fortunately for said minion, a dorm monitor walked in and disturbed the experiment, which, according to the story, would have caused the poor minion's imminent demise if not interrupted.

And so it was that Walker Inman exited my life until I was reminded of him this week via a story about the lingering legal battles following his death (quite an interesting story, which you can read here).

As you'll read, should you choose to do so, it appeared that Walker continued his wayward ways… marrying five times, extending his love of needles into a heroin addiction (ergo the methadone overdose) and generally continuing to be a complete waste of air.

The moral of this story is fairly straightforward, though far too many people just don't get it. Money is a useful tool for ensuring you have access to the goods and services that make life comfortable. But if Walker's life provides any useful lessons, money – even a billion dollars – can't help you live a fulfilled and happy life.

Friday Funnies

Living Life Backwards

A dear reader sent in the following quote from Woody Allen this week that I thought quite clever. Here it is…

"In my next life, I want to live my life backwards. You start out dead and get that out of the way. Then you wake up in an old people's home feeling better every day. You get kicked out for being too healthy, go collect your pension, and then when you start work, you get a gold watch and a party on your first day. You work for 40 years until you're young enough to enjoy your retirement. You party, drink alcohol, and are generally promiscuous, then you are ready for high school. You then go to primary school, you become a kid, you play. You have no responsibilities, you become a baby until you are born. And then you spend your last 9 months floating in luxurious spa-like conditions with central heating and room service on tap, larger quarters every day and then Voila! you finish off as an orgasm!"

–Woody Allen

Tax Returns

The following was sent in by my friend Ron from Hawaii.

I just received my tax return for 2011 back from the IRS. It puzzles me!!!

They are questioning how many dependents I claimed. I guess it was because of my response to the question: "List all dependents."

I had replied, "12 million illegal immigrants; 3 million crackheads; 42 million unemployed people on food stamps, 2 million people in over 243 prisons; half of Mexico; 535 persons in the US House and Senate and 1 useless president."

Evidently, this was NOT an acceptable answer. I keep asking myself, "Who did I miss?"

Finally…

Master Your Mind, Master Your Money. The week before last, I ran an article by fellow La Estancia de Cafayate owner and friend Susan "Kung Fu Girl" Fuji on the true size of a trillion dollars. For those of you interested in her work, here's a link to a video of her recent interview on Russia Today, an increasingly popular alternative broadcasting group. While nothing profound, I do think that Kung Fu Girl's story is an important one for millions of Americans who feel completely out to sea when it comes to personal finances. Whether it is a result of following the government's lead by spending more than they have taken in, or not having taken the time to learn the basics of economics and investing, I think it's safe to say that the majority of people stumble along with their finances in varying states of disrepair. Susan's mantra is "Master your mind, master your money" – a good and useful approach.

The Coolest Presidential Election Party Ever? Speaking of La Estancia de Cafayate, as previously announced, the big season-opening event for the thriving community of chronically curious polymaths from around the world who own property in this little corner of paradise in northwest Argentina is being held November 5-10. As the US presidential election will be held November 6, at the urging of John Mauldin who will be attending, the event coordinators have arranged for a café on the scenic plaza to pipe in the election results via cable programming from the States. So, after a private reception at a local winery, we'll gather and share the excitement as the nation determines who will be pillager-in-chief for the next four years.

If you haven't yet made plans to join Doug Casey, me and a great group of like-minded individuals at this always great event, drop Dave Norden a note at dnorden@LaEst.com and he'll send you the schedule and further details. These events, which include a Casey Research conference, always sell out, so let Dave know you're interested at your earliest convenience.

And with that, I must sign off for the day as my e-lords are growing angry for having mostly neglected them these last couple of hours!

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

David Galland
Managing Director
Casey Research