Dear Reader,
Welcome to the weekend edition of Casey's Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.
Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.
As I sat down to write yesterday morning, the news came across that instead of ringing in at under 10%, as was widely expected, the nation's unemployment rang the bell at 10.2%.
While no surprise to our readers, we have steadily worsening unemployment against the backdrop of soaring deficits. It’s called “a rock and a hard place.”
The government answer to unemployment can only be more stimulus. That's really all they know. But spending like there’s no tomorrow is already raising political chop for the Democrats, evidence of which are the high-profile losses in the just concluded fill-in gubernatorial elections.
At this point, instead of slamming on the brakes, the Democrats appear to have decided on going for broke (a very apt term, if I may say so myself), in the hopes that by the mid-term elections, they will have bribed so many voting blocs that they can retain power. In the short period I was in Argentina, the number of initiatives foisted by the administration and its allies to mollify the plebs and buttress its political fortunes continued to pile up. The following is a hastily assembled, and no doubt incomplete, list…
Unfortunately, I could go on, but won’t. I will, however, comment that when you match up the already insane levels of deficit spending with the added costs of the new initiatives – and the less obvious costs of continuing to bail out institutions that should be allowed to fail – something has to give.
(On that last point, just today, Fannie Mae has stuck her withered hand out for another $12 billion. And the FHA, which delayed releasing its annual audit this week – not a good sign – is experiencing loan losses of upwards of 24% on the hundreds of billions of dollars worth of mortgages it provided backing for in 2007 and 2008.)
The administration knows that it can’t keep running a massive deficit without taking a big political hit come the mid-term elections next November, but likewise, they won’t cut the spending out of fear that it will result in a smoking-ruin economy ahead of those same elections.
Keeping spending, but don’t run up a deficit? Well, there’s only one way to do that – and that’s where you, dear reader, come in.
You see, the only way to pull it off is to boost revenues. As sales and real estate-related tax revenues won’t return to pre-crash levels in our lifetimes and it would be political suicide to raise taxes on the masses, who don’t really pay taxes anyway, all that’s left is to mug the “wealthy.”
It is already understood that in 2011, all sorts of bad things are scheduled to occur for income earners. For instance, the federal tax rate will bump up from 35% to 39.6%, with an additional 5.4% surtax on gross income for high-income individuals now included in the health care bill. In addition, long-term capital gains, now at 15%, will be boosted to as much as 28%.
That latter tax is especially important right now, because investors can always be counted on to act out of self-interest. If it came to be widely believed that the capital gains tax increases would kick in prior to 2011 – say, in 2010, there would be a mad rush to sell appreciated stocks in 2009. Which is to say, between now and midnight on December 31.
One of the advantages of a little gray hair is that one can dip into the memory bank and recall certain useful snippets. For example, that back in August of 1993, President Clinton passed the largest tax increase in history – the Omnibus Budget Reconciliation Act of 1993 (OBRA) – and made it retroactive to January of that year.
Challenged in court, the court held that retroactive tax increases were legal. And this was not the first time this sort of chicanery had been pulled. I well recall how the father of a very dear friend was literally ruined after the government retroactively did away with a tax shelter and demanded he pay up, and big. He fought against the patent unfairness of the situation for a decade, wrecking his health and happiness and losing most of his money.
(You can read more on the topic of retroactive taxes by clicking here.)
So, here’s a prediction for you. Starting early in the new year, the administration is going to begin the process of repealing the Bush tax cuts a year earlier, in 2010 and, when passed, they'll be retroactive to January 1, 2010.
While you should of course consult your own tax attorney, I personally plan on selling most of the investments I own that are now showing long-term capital gains. I suspect that many big investors in the know will be doing the same.
Of course, if you happen to be a serf in a kingdom other than the U.S., this doesn’t affect you – unless you own U.S. stocks, which continue to be skating on very thin ice. Should investors start suspecting that 2009 may be the last time to get out while the getting is good, the ice could break.
As our own Bud Conrad discusses in his lead article “How Low Can the Greenback Go?” in this month’s edition of The Casey Report, the fate of the global economy is very much tied in with the fate of the dollar. As shown in the chart below, the dollar has taken a horrible thwacking (to use the technical term) this year.
Given its precipitous decline, it would not be a surprise for the greenback to stage a rebound. In the recent past, the dollar has strengthened on bad economic news, as investors ran back into the “safe harbor” of U.S. Treasuries.
Today, however, when the very bad news on unemployment broke, the dollar initially fell (though it is mostly flat as I write). While this may just be a fluke, it’s a fluke worth watching. The dollar index (DXY) is currently at 75.62. Should it look like it will break below the psychologically important 70 level, it may be time to accelerate your preparations for the worst.
(In addition to Bud Conrad’s important article on the dollar, The Casey Report includes the specific investments you can use today to get through what’s coming tomorrow. Fortunately for those of you who are not yet subscribers, our 3-month, 100% money-back guarantee allows you to give The Casey Report a test drive with no risk. Don’t miss this edition, it’s important. And you don’t have to. Click here for more now.)
By Chris Wood
I’m sure you heard that the Obama administration announced last Friday that the government’s fiscal stimulus program has helped create or save almost 650,000 jobs so far.
On the subject, Vice President Joe Biden said:
We’re moving in the right direction. We’re starting to make real progress on the road to recovery. Quite simply, the Recovery Act is performing as advertised.
Are the administration’s claims accurate?
The short answer is, no, but it really doesn’t matter.
Government projects may create jobs that did not exist before, but the net effect on the economy will always be negative. Because jobs don’t matter, production does.
To quote my former professor, friend, and famous economist, Walter Block:
If the media tell us that "the opening of XYZ mill has created 1,000 new Jobs," we give a cheer. When the ABC company closes and 500 jobs are lost, we're sad. The politician who can provide a subsidy to save ABC is almost assured of wide-spread public-support for his work in preserving jobs.
But jobs in and of themselves do not guarantee well-being. Suppose that the employment is to dig huge holes and fill them up again? What if the workers manufacture goods and services that no one wants to purchase? In the Soviet Union, which boasted of giving every worker a job, many jobs were just this unproductive. Production is everything, and jobs are nothing but a means toward that end.
Imagine the Swiss Family Robinson marooned on a deserted South Sea island. Do they need jobs? No, they need food, clothing, shelter, and protection from wild animals. Every job created is a deduction from the limited, precious labor available. Work must be rationed, not created, so that the market can create the most product possible out of the limited supply of labor, capital goods, and natural resources.
The same is true for our society. The supply of labor is limited. We must not allow government to create jobs or we lose the goods and services which otherwise would have come into being. We must reserve precious labor for the important tasks still left undone.
Alternatively, imagine a world where radios, pizzas, jogging shoes, and everything else we might want continuously rained down like manna from heaven. Would we want jobs in such a Utopia? No, we could devote ourselves to other tasks—studying, basking in the sun, etc.—that we would undertake for their intrinsic pleasure.
Instead of praising jobs for their own sake, we should ask why employment is so important. The answer is, because we exist amidst economic scarcity and must work to live and prosper. That's why we should be of good cheer only when we learn that this employment will produce things people actually value, i.e., are willing to buy with their own hard-earned money. And this is something that can only be done in the free market, not by bureaucrats and politicians.
Block alludes to the Broken Window Fallacy above in the sentence, “We must not allow government to create jobs, or we lose the goods and services which otherwise would have come into being.” This fallacy explains why the claim “Government job creation boosts the economy” is patently false and requires some further explanation.
To quote Henry Hazlitt’s Economics in One Lesson:
Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.
A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
So it is with government “job creation”… we lose the goods and services that would have otherwise come into being.
Consider the Obama administration’s claim that the 640,000 jobs were created from $159 billion of stimulus spending (a cost of almost $250,000 per job, most of which are temporary, and many last for just weeks). But where did that $159 billion come from?
It came from you and me… the taxpayers. What would we have used that $159 billion for had it not been taken from us?
Some of us would have spent it on food, some shelter, some luxury goods, and some may have saved and invested the money. Indeed, if that $159 billion had not been taken from us, then every business we would have purchased from or invested in would be better off. They would have received more revenue and produced more goods, and potentially would have hired more people to make and sell those goods.
But it doesn’t stop there. If that $159 billion had been left in our hands, we would have spent and allocated it on things that are the highest priority for us. This action would have sent a series of signals through the market of what to produce more of and what to invest more in. It would have encouraged competition among suppliers of the various items being purchased, driving them to find more efficient and effective ways to create superior, more innovative products for less. This is how the market creates wealth. Competition spurs innovation and creative destruction, which increases productivity.
So, instead of the $159 billion, higher employment, more goods and services, and more innovative businesses producing what society values more, we have 640,000 (mostly temporary) jobs producing what society values less… and that’s assuming the administration’s claim is accurate (it's not, but that story is for another day).
Which scenario do you prefer?
By Joe Hung
President Obama, as a staunch proponent of green energies, has been pushing for their implementation since Day One of his presidency. Whether you agree with him or not that renewable energy is America’s future and that the U.S. will be the global center of green technology, fact is that there is a lot of money to be made here.
We of Casey’s Energy Division feel the best opportunities lie in the sector that people talk the least about. Wind farms and solar farms shoot up all over the United States like mushrooms after a summer rain, and largely uneconomical biofuels are having their day in the sun… but one type of energy sticks out as vastly underappreciated, even though it has all the characteristics of profitable energy production:
1. Base-load power, 365 days a year, 24 hours a day
Solar and wind power depend on the weather to work efficiently. Solar panels don’t produce electricity during the night, and even in the day, the angle of the sun to the solar panel can alter the electricity output. Wind is even trickier: if it’s too weak, it doesn’t turn the turbines enough to generate power; if it’s too strong, it will damage the turbines. Any number of factors will affect the rate of power production. For the profitable green energy I’m talking about, however, the plant is running at more than 90% capacity regardless of the weather (compared to less than 40% for wind and 20% for solar). The utilities know exactly how much power is being produced and are able to sign long-term Purchasing Power Agreements (PPA) with the companies that produce it.
2. Obama is footing the bill for 30% of the capital costs
In the American Recovery and Reinvestment Act of 2009, President Obama has extended the production tax credit (PTC) – up to 2.1 cents per kilowatt-hour of produced renewable energy – for eligible “green technology” companies to 2013. New projects coming online can instead opt for an investment tax credit (ITC) worth 10-30% of the project’s value if construction is started before the end of 2010 and completed before 2013. The ITC then qualifies to be converted to a grant from the Department of Treasury.
3. Squeaky clean
This type of green energy produces no carbon emissions, and its land use is much smaller than that of wind and solar. In fact, its footprint is so small that it can be installed inside a national park with virtually no repercussions.
4. Vast unexplored resources right here in the United States
There is enough energy locked within this type of resource to provide the United States with 30,000 years of power… though it currently supplies less than 1% of America’s energy. This means the growth potential in this sector is outstanding, and the United States could become a world leader in both energy generation and technology of this resource.
So, what is this technology?
The answer: geothermal energy, a time-tested technology that has heated homes, baths, and spas since Roman times. “Geothermal” literally means “Earth’s heat,” which is about 9,900 degrees Fahrenheit at the Earth’s core – about as hot as the surface of the sun. Geothermal energy can be harnessed from underground reservoirs, containing hot rocks saturated with water and/or steam. Drilling down 1.2 miles or more into the reservoirs, producers can draw up the hot water and steam to a geothermal power plant, where they are used to drive electric generators. The water, once used and cooled, is then piped back to the reservoir.
Though geothermal energy has all the advantages listed above, it is still largely ignored in the mainstream media, which has chosen to focus on solar and wind. The truth is that geothermal’s efficiency is competitive with that of fossil fuels like coal and natural gas, even without government incentives, which are really just icing on the cake.
That’s why many of the top resource players in Vancouver are putting their chips on this renewable energy… and you would be wise to do the same. You can find a much more in-depth analysis in Casey’s Energy Opportunities as well as Casey’s Energy Report -- how exactly geothermal works, how it compares to other forms of energy, and the best ways to profit from it.
Our subscribers have already made handsome returns on several of our geothermal picks (one stock, recommended in our premium alert service, Casey’s Energy Confidential, gained 27% in less than a month; another that we just our closed position on nearly doubled). But we believe the best is still to come – so don’t miss out on this opportunity of a lifetime.
And that, dear reader, is that for this week. See you on Monday!
David Galland
Managing Director
Casey Research