Too Much of a Good Thing

David Galland, Managing Director

Dear Reader,

I am beginning to feel a bit like one of the French unfortunates stumbling through the fog in Ardennes, circa 1914. Except that, instead of Germans full of deadly intent coming at me in the gloomy forest, it is a flock of black swans.

As it was for the French in the Ardennes, the number of problems – then Germans, now black swans – is becoming overwhelming.

Consider just a little of what we as investors, and as individuals looking forward to retirement in accommodations more commodious than a shipping box, must contend with:

  • The Euro-Stone. Despite all the bailouts and bluster flying about Europe, the yields in the wounded “piiglets” of Greece, Portugal, etc. have failed to soften to more tolerable levels. Worse, yields in the fatter PIIGS of Spain and Italy are hardening. This is of no small import to the German and French banks, which together are owed something like US$2 trillion by the porkers. At this point it is becoming clear that the eurozone’s systematic flaws doom the euro to continue trending down until it ultimately takes its place in the pantheon of failed monies.
  • The Yen Has Lost its Zen. This week the Japanese government again began intervening in currency markets because, remarkably, the yen has been pushed to highs against the dollar. This in a nation with a government debt-to-GDP ratio that is better than twice the also horrible ratio sported by these United States.

    That ratio assures that Japan’s long struggles will continue, burdened as it also is with the aftermath of the deadly tsunamis and the ongoing drama at Fukushima. Adding to its woes are the commercial challenges it faces from aggressive neighbors, and maybe worst of all, the demographic glue trap it is stuck in, with fewer and fewer young to pick up the social costs of the old. Toss in the waterfall plunge in Japan’s much-vaunted savings rate – formerly a big prop keeping Japanese interest rates down – and the picture for Japan is anything but tranquil.
  • China’s Crucible. There are many reasons for being optimistic about the outlook for China, including a large and hard working populace. But there is one overriding reason to expect a big bump in the path to China’s emergence as the world’s reigning economic powerhouse.

    Simply, it’s a capitalistic country with a communist problem.

    Now in the same way that some people believe in leprechauns or any of dozens of other magical beings, some people believe that an economy can be successfully commanded just as a captain commands the crew of a Chinese junk cruising along the coast. It’s a fantasy.

    While the comrades in charge have done quite well – largely by getting out of the way of natural human actions – they are fast reaching the limits of their ability to navigate the shoals. As I don’t need to tell you, China is a massive country, with hundreds of millions of people capable of every manner of human strengths and frailties. But if they share one interest, it is in a job that allows them to keep their rice bowls full and a roof over their heads. Said jobs don’t come from government dictate – at least not on a sustainable basis – but rather by the messy process of free-wheeling commerce… and the more free-wheeling, the better.

    In the upcoming edition of The Casey Report (due out Thursday August 11), guest contributor James Quinn discusses the very real challenges facing China, not the least of which is that in the latest reporting period official Chinese inflation popped up to 6.4%. Even more concerning was a 14% rise in price of food.

    Scrambling to keep employment high while also keeping inflation low, the Chinese government is throwing all sorts of ingredients into the mix – building ghost cities, raising interest rates, stockpiling commodities, clamping down on dissent, hacking everyone – but in the end, the irrefutable laws of economics must prevail. And so the Chinese government will have to atone for the massive inflation it unleashed in 2008, and for the equally disruptive misallocations of capital that are the hallmark of command economies.

    While the blowup in China will wreak havoc in world markets, including many commodities, a bright side for gold investors is that the country’s rising inflation should help keep the wind in the sails of monetary metal. It’s no coincidence that the World Gold Council’s latest data show investment demand for gold in China more than doubling in the first quarter of this year.
  • Uncle Scam. Then there is the United States. Casey Research readers of any duration know the fundamental setup… The political avarice that dominates both parties… The fear and greed of John Q. Public and his steady demands that the government do more… The scam being run by the Treasury and the Fed to provide the funny money to keep the government running… The cynical attempts by certain politicians to stoke a class war… The cellars full of toxic paper at the nation’s financial institutions… The outright corruption and deceit of the various government agencies as they twist and torture the data to fool the people into supporting them in their scams.

    But there’s a growing problem: An increasing number of people and institutions are coming to understand just how intractable the problems are. This has resulted in a steady move into tangible assets – gold, especially – that are not the obligation of any government. And it’s not just individuals and money managers moving into gold, but central banks. That is an absolute sea change from the situation even a few years ago.

    Meanwhile, with the Treasury unable to borrow since May, a backlog in government financing needs has built up. Which begs the question: With the Fed standing aside (for the moment), where is the government going to find all the buyers for the many billions of dollars worth of Treasuries it needs to flog in order to keep the scam going?

    If I were a conspiracy theorist, I might look at the sell-off in equities this week, triggered as it was by nothing specific, and see a gloved hand operating behind the curtain. After all, nothing like a good old-fashioned stampede out of equities to send billions chasing after “safe” Treasuries… which has been exactly the case this week.

Regardless, with the crossroads for hard choices now behind us, the global economy finds itself at the top of a long hill… with no brakes.

From here on, it will increasingly be every nation for itself – meaning a return to competitive currency devaluations and, in time, exchange and even trade controls.

And we will see a return of the Fed to the markets. On that topic, I will once again trot out a chart from an article by Bud Conrad that ran in The Casey Report a couple of years back.

I do so because it shows what I think is a very strong corollary between what occurred in Japan after its financial bubble burst – and what is now going on here in the U.S. (and elsewhere). As you can see, as a direct result of the Japanese Central Bank engaging in quantitative easing, the Japanese stock market bounced back strongly. But then, when the quantitative easing stopped, the market quickly gave back all its gains.

(Click on image to enlarge)

If I had the time and the resources to whip up a chart overlaying the quantitative easing here in the U.S. of late versus the equity markets, I would. But I don’t, and so will delve into that fount of all information – the Internet – and grab a chart constructed by someone else (in this case, Doug Oest, managing partner of Marquette Associates – thanks, Doug!)

As one can readily see, the Japanese experience is indeed a corollary to what’s happened here, with QE pushing the stock market higher. Conversely, until the Fed comes back in, equities could be in for a rough ride. Likewise, when the Fed returns with the next round of QE, stocks could put in a very nice rally.

(Click on image to enlarge)


Some conclusions:

  1. The Fed will have to roll out another round of quantitative easing. And they will likely have to once again provide swap lines to the European central banks as they did in 2008 – though this time around a belligerent Congress is watching the Fed’s every move, so it may not be able to move as quickly as it would have otherwise. In the end, however, given there is less than nothing being done on the front of fiscal policy, it will fall to the Fed to once again ride to the rescue. But it will do so on a lame horse.
     
  2. A delay by the Fed to act could help the Treasury, at least temporarily. Per above, the U.S. government has to move a boatload of paper by the end of this year. If it wants to avoid the dire consequences of having to pay out higher yields in order to attract sufficient buying, it will have to find a lot of demand in a hurry. Should the Fed sit on its hands a bit longer, especially in the face of the escalating euro crisis, the resulting turmoil in global equity markets could provide the necessary demand to clean up the backlog and keep the U.S. government operating.

    (In the upcoming Casey Report, Bud Conrad dissects the situation and comes to some startling conclusions… and an emerging profit opportunity. You can sign up today for a no-risk trial subscription.)
     
  3. The return of the Fed may signal the beginning of the end. In the face of broad weakness in the global economy and in most commodities, the fact that gold has held up so well is a clear indication that there has been an intrinsic change in the gold market. Barbarous relic no more, it has clearly been returned to its longstanding role as sound money – unique and increasingly valued when compared to the fiat competition.

    This role will only become more crucial as the world’s desperate nation-states fire their currency cannons in the war to remain viable. The Fed’s return to Treasury markets will be, in the rear-view-mirror of future history, seen to be a seminal event – the beginning of the end of the current fiat monetary system.

Simply put, too much of a good thing is too much of a good thing. And make no mistake, the decades of operating under a fiat monetary system have been a very good thing for the political classes and their pandering cronies.

Those good times are coming to an end.


Today’s Unemployment Stats

This just in from our own Kevin Brekke, writing from the safety of his office in the strong currency bastion of Switzerland…

Well, the highly anticipated Employment Situation report for July from the BLS held few surprises. But then, the absence of any surprise is a surprise. In light of all the spending from the feds, we should expect to see some improvement. Yet the numbers look essentially unchanged when compared to July 2010.

In July 2010 there were 15,137,000 unemployed; in July 2011 there were 14,428,000.

The average duration of unemployment went from 32.6 weeks in July 2010 to 39 weeks in July 2011. The number of chronically unemployed continues to rise.

The percent distribution of the unemployed (less than 5 weeks; 5-14 weeks; 15-26 weeks; 27 weeks and over) also remained about unchanged year over year.

The “27 weeks and over” category represents 43.1% of the unemployed, or just over 6.2 million jobless. This segment of the unemployed has exhausted its 26 weeks of state benefits and is now in the federal emergency unemployment systems. That federal system is scheduled to stop accepting new entrants in early 2012, meaning that once state benefits are used that’s it: No more weekly checks. And absent an extension to the current 99-week limit on receiving unemployment benefits, hundreds of thousands will systematically see their $300/wk (national average) checks stop arriving over the next few months.

All told, nothing good to report about here. Other than a token drop in the official unemployment rate to 9.1%, joblessness will continue as a drag on the economy.


A Doctor’s Visit

Earlier this week I showed up at a follow-up appointment with a doctor. As part of the checking-in process, the receptionist reviewed my files and asked, fingers poised expectantly over her keyboard, “And what was the highest educational level you have achieved?”

“What?”

“I asked, what was the highest educational level you achieved?”

“That’s absolutely none of your business,” I responded. “Why would you ask such a question?”

“The government requires us to ask it; I don’t know why.”

“Well, it’s none of the government’s business either.”

“I’m sorry, sir; it’s just something we are told to ask.”

Now, I like to think of myself as a reasonably mellow person. But I don’t think I am alone in beginning to seriously resent the government’s intrusions in my personal business.

Hopefully an increasing number of people will begin to “just say no” when it comes to going along with this sort of nonsense.


The Debt Debate Made Simple

During the budget debate NPR featured an op-ed from a recently retired TV reporter – a guy who gets paid for essentially the same reason Polly gets a cracker – commenting on those members of Congress who attempted to stop the government from raising the debt ceiling. In the view of this august personage, the Tea Party congressmen and others of their ilk were directly equivalent to the white racists who tried to block the repeal of Jim Crow laws back in the 1960s. He even went so far to mention them in the context of bus burnings and lynchings.

While his views might have been a tad on the extreme side – as in extremely ignorant and extremely leftist – I suspect that the majority of Americans agreed with him that the debt ceiling must be raised.

In the event that you know someone who is similarly ignorant of the basics of the debate just ended, here’s a very useful analogy from friend Jeff Berwick of the Dollar Vigilante blog:

Doctor: Uncle Sam, you’ve been drinking larger and larger amounts of alcohol every day since 1960. 1960 was the last year where you didn't drink. You are going to die if you keep this up.

Uncle Sam: I don’t want to die, Doc. Tell me what I need to do.

Doctor: Well, from 1960-1975 you weren’t too bad. You drank 3 or 4 beers per day but it was under control. You could have stopped if you wanted... you just didn’t. However, throughout the 80s it increased to about 5 or 6 per day and then by the 90s you were up to drinking 10 beers a day.

Uncle Sam: Yes, Doc, but remember 1999 and 2000? I slowed to only 5 or 6 beers per day again.

Doctor: Yes, but that was just for 2 years. Since then you’ve gotten completely out of control. You’ve increased every year since and then, since 2008 to now you’ve gone from 30 to 40 beers per day.

Uncle Sam: Ok Doc. It’s time to get serious. Here is what I’m going to do. I am now drinking 40 beers per day but in 2013 I will only drink 39.6. And in 2014 I will only drink 39.4 beers per day. By 2021 I will be down to 38 beers per day. Will that work?

Doctor: You’re in denial. And, you'll be lucky to make it to 2013 much less 2021.

Jeff’s right – the monetary system is coming unglued, and when it does there won’t be anything funny about it.

Which seems an appropriate time to drop in a plug for When Money Dies, our upcoming Casey Research Summit, being held in Phoenix, AZ Oct 1-3.

✓✓✓ Even though we have only mentioned it in passing so far, and we have been keeping the faculty under wraps, about half of the registrations are sold. There are some big developments in the works for this event (to be announced next week), and what looks to be one of our best faculties ever, so if you are interested in joining in I would sincerely suggest you sign up right away.


Friday Funnies

World Wow Web

As far along as the Internet has come, I suspect it will evolve and get more interesting with each passing day. SelfControlFreak is a pretty cool website. Click on any of the photos, and it will pull up another page with the same photo – then see what happens when you move your mouse over the photo, or click in it.

David Letterman’s Top Ten Reasons Why Golf Is Better Than Sex

#10... A below-par performance is considered damn good.

#9... You can stop in the middle and have a cheeseburger and a couple of beers.

#8... It’s much easier to find the sweet spot.

#7... Foursomes are encouraged.

#6... You can still make money doing it as a senior.

#5... Three times a day is possible.

#4... Your partner doesn’t hire a lawyer if you play with someone else.

#3... If you live in Florida, you can do it almost every day.

#2... You don’t have to cuddle with your partner when you’re finished.

And the NUMBER ONE reason  why golf is better than sex:

When your equipment gets old you can replace it!

True Love

An old woman was sipping on a glass of wine while sitting on the patio with her husband when she said, “I love you so much, I don’t know how I could ever live without you.”

Somewhat taken aback, her husband asked, “Is that you or the wine talking?”

“It’s me, talking to the wine,” she replied.

An Idea for Debt Reduction!

Though I am including this in the Friday Funnies, I can assure you this is an actual story. Now, if the Demopublicans and Republicrats can’t (quickly) agree on this one-budget cutting initiative, then you know we are truly doomed.

Senators urge end to U.S. development aid to China

On Thursday August 4, 2011, 3:01 pm

WASHINGTON (AP) – A bipartisan group of senators is calling for an end to tens of millions of annual U.S. development aid to China, saying there are more needy countries than the world’s second-largest economy, which has trillions in foreign reserves.

The eight Democrats and four Republicans made their appeal Thursday to a Senate appropriations committee that must approve foreign aid funding for the fiscal year starting in October.

…They say since 2001, the U.S. has provided more than $275 million in direct assistance to China, such as for expanding Internet access and improving public transportation.

Full story.

Moving right along…


National Defense…

The first of two items on the general topic of national defense, out of Bloomberg, is just another item for the evidence locker when the U.S. government goes on trial for squandering 200 years of accumulated wealth.

$35B Missile Defense Misses Bullet with Bullet

In tunnels under Fort Greely, Alaska, workers wearing hazmat suits and respirators are fighting to keep America safe from missile attack.

They are battling mold in corridors leading to six underground silos that house rockets for shooting down enemy warheads. The mold and leaking pipes mean the installation must be replaced this year as part of a $1.16 billion fix for the national missile defense shield, senior defense officials told Congress.

No one knows whether the $35 billion program would work. It has never been tested under conditions simulating a real attack by an intercontinental ballistic missile deploying sophisticated decoys and countermeasures. The system has flunked 7 of 15 more limited trials, yet remains exempted from normal Pentagon oversight and so far has been spared the cuts Congress is demanding in other areas of federal spending.

Full story.

Okay, maybe I’m just getting overly cynical as I get older, but on reading this next headline I immediately decided I was going to stay at home on 9/11.

U.S. sees no credible threats before 9/11 anniversary

(Reuters) – There have been no credible or specific threats against the United States yet ahead of the tenth anniversary of the September 11 attacks, Homeland Security Secretary Janet Napolitano said Wednesday.

U.S. officials have been on high alert for possible plots to reprise in some form of the September 11, 2001 attacks in which al Qaeda operatives hijacked commercial airliners and crashed them into the World Trade Center and the Pentagon.

“We have no specific or credible threats involving the 9/11 anniversary to date,” she told reporters during a news conference on an unrelated subject.

Full story.


And Finally…

Upcoming International Society for Individual Liberty (ISIL) Conference in Sicily

As many of you are aware, Casey Research has been involved with ISIL for some time – with Louis James on the ISIL board since 2002, and our organization sponsoring the CYCLE event (Casey Youth Conference for Liberty and Entrepreneurship) in Lithuania – the most recent of which had a record-breaking 200 students.

A number of dear readers have expressed interest in sending their own kids or grandkids to one of the ISIL events. You may be interested in ISIL’s next World Conference in Sicily, August 29-September 2. Check it out.

And with that, I will bid you farewell for the day, and the week by thanking you for reading, and for being a Casey Research subscriber.

David Galland
Managing Director
Casey Research

Aug 05, 2011