When an Image Is Worth One Word

Dear Reader,

Today I want to discuss risk and return – with an emphasis on the risk part. Let’s jump straight into it with an example. If I said that stock XYZ in our portfolio earned 20% last year, would this sound like a good return to you? At first blush, it seems pretty good – the stock definitely beat the market. But we really can’t say much with the return alone. The real question is, “How much did we risk for that 20%?”

If the 20% was earned on Johnson & Johnson, then it’s a pretty good deal. If it was earned on a junior mining stock, then it’s not so impressive. Bigger risks demand higher payoffs. That’s one reason that we cash out of some mining stocks a couple hundred percentage points up. If you’re taking a speculative risk, a 20% return simply doesn’t compensate for the potential downside.

Lately, a few congressmen have tried to bamboozle the public by ignoring the risk/return tradeoff, particularly when it comes to TARP. Since the Treasury received $255 billion of the $245 billion invested, the program has been called a “good investment” by its supporters. In reality, it’s far from that.

First of all, why were the bailouts necessary? The banks couldn’t raise enough money in the private market to save themselves. Even up to the last minute, Lehman Brothers was trying to broker a private deal, but no fish were biting. Professional investors saw too much risk and too little return in the banks. Hence, the government stepped in to bail them out.

With the dust settled and TARP showing a profit, did the government outsmart professional investors? No, not at all. Private investors were correct to avoid the banks. The government has earned $10 billion while risking $245 billion – that’s a horrible investment, a 4.1% return over three years. At a rate of 1.86%, a three-year Treasury purchased in October 2008 would have resulted in a higher rate of return. Over three years, the Treasuries would have yielded 5.7%.

Think about the huge difference between the two risks. The United States government wasn’t going to fall apart in the next three years. Obama has tried his best to spend like crazy, but even he hasn’t toppled the whole system. Treasuries were still a relatively risk-free safe haven. However, the banks were in serious trouble. Well-known names such as Lehman Brothers, Washington Mutual, Wachovia, and Bear Stearns were collapsing all around us. The risk of an investment in the financial sector falling to zero was very real.

In light of the extreme risk, a 4.1% return is pitiful. Personally, I wouldn’t take such large risks without the promise of potential returns in the 70-100% range.

Don’t get me wrong: I’m happy to get the money back. But let’s not forget that things could have turned out much differently. The U.S. government put billions of our dollars on the roulette table, spun the wheel, and broke even. The ball could have just as easily landed on the wrong number. At the end of the day, TARP was not a “good investment”; it was gambling billions on poor odds that no private investor on the Street would wager. TARP’s positive return is a good thing, but the risk undertaken doesn’t justify this paltry profit as a “good investment.”

For the rest of the issue, Jeff Clark will travel down memory lane – or more like inflationary lane – with a quick look at collapsed currencies. Then Louis James will recount his experience of giving back to the world, but maybe in not the immediate sense that comes to mind. What could be more beneficial to society than teaching the next generation about entrepreneurship?


A Thousand Pictures Is Worth One Word

By Jeff Clark, BIG GOLD

In spite of constant headlines about debts and deficits, most Americans don’t really believe the U.S. dollar will collapse. From knowledgeable investors who study the markets to those seemingly too busy to worry about such things, most dismiss the idea of the dollar actually going to zero.

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.

BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!

You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price.

As you scroll through the currencies below, you’ll see some long-ago casualties. What’s shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you’ve been born.

So what’s the one word for the “thousand pictures” below? Worthless.

Yugoslavia – 10 billion dinar, 1993

Zaire – 5 million zaires, 1992

Venezuela – 10,000 bolívares, 2002

Ukraine – 10,000 karbovantsiv, 1995

Turkey – 5 million lira, 1997

Russia – 10,000 rubles, 1992

Romania – 50,000 lei, 2001

Central Bank of China – 10,000 CGU, 1947

Peru – 100,000 intis, 1989

Nicaragua – 10 million córdobas, 1990

Hungary – 10 million pengo, 1945

Greece – 25,000 drachmas, 1943

Germany – 1 billion mark, 1923

Georgia – 1 million laris, 1994

France – 5 livres, 1793

Chile – 10,000 pesos, 1975

Brazil – 500 cruzeiros reais, 1993

Bosnia – 100 million dinar, 1993

Bolivia – 5 million pesos bolivianos, 1985

Belarus – 100,000 rubles, 1996

Argentina – 10,000 pesos argentinos, 1985

Angola – 500,000 kwanzas reajustados, 1995

Zimbabwe – 100 trillion dollars, 2006

So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was the two big Ds: Debts and Deficits.

With that in mind, consider the following:

Morgan Stanley reported in 2009 that there’s “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%.

Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” On our current path, analyst Michael Murphy projects we’ll hit that figure by October.

Peter Bernholz, the leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” This year’s U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.

Since the Federal Reserve’s creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don’t know how – or don’t wish – to keep the currency strong.

Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the possibility of the greenback being added to the above list grows every day. And this will lead to serious and painful consequences in our standard of living. While money is only one of many problems we’ll have to deal with, you can protect your assets with the one currency that can’t be debased, devalued, or destroyed by irresponsible leaders.

Don’t be the investor who dismisses this message from history. Use gold (and silver) as your savings vehicle. Any excuse you have now will be meaningless and irrelevant when we enter that fateful period. Make sure you own enough precious metals to make a difference in your portfolio.

Because when it comes to money, worthless is not a fun word.

[Owning physical gold is good protection from the sinking value of the U.S. dollar; investing in the right gold miners can yield even higher returns. BIG GOLD focuses on the larger miners that have strong profit potential, and will help you build your wealth. Give it a ninety-day risk-free trial. Details here.]


Notes from the Field: Lithuania

By Louis James

I'm checking in from Trakai, Lithuania this week, where – for once – I'm not kicking rocks. Lithuania does produce amber, actually, and I suspect there may be other resources here, but this is not a place known for mineral wealth, nor is there any serious mineral exploration going on here that I know of.

I'm here to teach entrepreneurship. This is my yearly sabbatical, my semi-vacation, the thing I do that recharges my batteries for another year: the Casey Youth Conference on Liberty and Entrepreneurship (CYCLE). That's because I'm teaching some of the best and brightest young people in the world – mostly Belarusians, but also Lithuanians, Ukrainians, Romanians, one Latvian, one Australian, and an American. (Unfortunately the three Azeris and several more Americans couldn't make it.) What I get for the knowledge and encouragement I give is a deluge of such positive energy that I almost can't stand it. I think I laugh more during this week than I do at any other time of the year. My cheeks ache from smiling so much.

An example:

A young man from Germany just gave a talk. He was one of my students last year, and after hearing what I and the other teachers – including Doug Casey and Rick Rule – had to say, he went back to Germany, turned down the job offer he had, and launched several businesses. He wrote a business plan and raised $2 million for one idea alone. Unfortunately, his idea got regulated out of viability before he could roll it out; but fortunately, that happened before he spent any money, so he was able to return the capital he raised to his investors. Now he has several businesses going, including a consultancy that pays him four times what the job he turned down would have paid him, and at which he works about 25 hours a week (the job would have been 50-70 hours a week). He's gone even further and lives a “permanent tourist” lifestyle, with his banking mostly in Lithuania, his business based in Estonia, and since he has no residence in Germany where he came from, no tax liability there. And no residence anywhere else, either.

He tells his story, then looks at me and the group, and says, "CYCLE changed my life!"

I'm so proud, I could burst!

“Well,” some readers might think, “that’s very nice, but what does it have to do with making us money?” Shouldn't I be out somewhere kicking rocks, looking for gold? Perhaps; but there are different kinds of gold. One gold nugget I turned up in running these conferences is Andrey, my assistant, who makes it possible for me to travel constantly, looking for good speculations without losing track of all the companies we are covering.

Plus, you've got to stop cutting wood and sharpen the saw sometimes, or the saw gets dull and your efficiency drops and drops, eventually to zero. Brainstorming with these brilliant young people sharpens my mind like nothing else imaginable.

And of course, in the 21st century work is wherever you are, as long as you are online. Deals continue flowing through my inbox, and I am lining up my next batch of due diligence trips.

But more important to me is the reminder that all that we do at Casey Research to help our readers increase their wealth is about more than money. Don't get me wrong: We are focused entirely on maximizing your returns in our various fields. That, however, is a means, not an end. Life is more than money; the goal is the good life – however each of us defines that. Making money is a powerful means to that end, but it is not the end itself.

Teaching young people how to invest, start businesses, and so forth reminds me of this very simple and obvious – but often forgotten – truth.

I hope you too, dear readers, will take the time to stop and smell the roses sometime soon, and remember why you are here, working on whatever goals you are working on, and enjoy the fact that you are an entity in purposeful motion – and what a glory that is!


Friday Funnies

Hello, Operator”: Actual call-center conversations…
Customer: I've been calling 700-1000 for two days and can't get through; can you help?
Operator: Where did you get that number, sir?
Customer: It's on the door of your business.
Operator: Sir, those are the hours that we are open.

Samsung Electronics:
Caller: Can you give me the telephone number for Jack?
Operator: I'm sorry, sir, I don't understand who you are talking about.
Caller: On page 1, section 5, of the user guide it clearly states that I need to unplug the fax machine from the AC wall socket and telephone jack before cleaning. Now, can you give me the number for Jack?
Operator: I think it means the telephone plug on the wall.

RAC Motoring Services:
Caller: Does your European Breakdown Policy cover me when I am traveling in Australia?
Operator: Does the policy name give you a clue?

Directory Inquiries:
Caller: I'd like the number of the Argo Fish Bar, please.
Operator: I'm sorry, there's no listing. Are you sure that the spelling is correct?
Caller: Well, it used to be called the Bargo Fish Bar but the “B” fell off.

Then there was the caller who asked for a knitwear company in Woven.
Operator: Woven? Are you sure?
Caller: Yes. That's what it says on the label: Woven in Scotland.

Tech Support: I need you to right-click on the Open Desktop.
Customer: OK.
Tech Support: Did you get a pop-up menu?
Customer: No.
Tech Support: OK. Right-click again. Do you see a pop-up menu?
Customer: No.
Tech Support: OK, sir. Can you tell me what you have done up until this point?
Customer: Sure. You told me to write “click” and I wrote “click.”

Operator: Computer assistance; may I help you?
Caller: Yes, well, I'm having trouble with WordPerfect.
Operator: What sort of trouble?
Caller: Well, I was just typing along, and all of a sudden the words went away.
Operator: Went away?
Caller: They disappeared.
Operator: Hmm. So what does your screen look like now?
Caller: Nothing.
Operator: Nothing?
Caller: It's blank; it won't accept anything when I type.
Operator: Are you still in WordPerfect, or did you get out?
Caller: How do I tell?
Operator: Can you see the “c:” prompt on the screen?
Caller: What's a sea prompt?
Operator: Never mind; can you move your cursor around the screen?
Caller: There isn't any cursor; I told you, it won't accept anything I type.
Operator: Does your monitor have a power indicator?
Caller: What's a monitor?
Operator: It's the thing with the screen on it that looks like a TV. Does it have a little light that tells you when it's on?
Caller: I don't know.
Operator: Well, then look on the back of the monitor and find where the power cord goes into it. Can you see that?
Caller: Yes, I think so.
Opera tor: Great. Follow the cord to the plug, and tell me if it's plugged into the wall.
Caller: Yes, it is.
Operator: When you were behind the monitor, did you notice that there were two cables plugged into the back of it, not just one?
Caller: No.
Operator: Well, there are. I need you to look back there again and find the other cable.
Caller: Okay, here it is.
Operator: Follow it for me, and tell me if it's plugged securely into the back of your computer.
Caller: I can't reach.
Operator: OK. Well, can you see if it is?
Caller: No.
Operator: Even if you maybe put your knee on something and lean way over?
Caller: Well, it's not because I don't have the right angle – it's because it's dark.
Operator: Dark?
Caller: Yes– the office light is off, and the only light I have is coming in from the window.
Operator: Well, turn on the office light then.
Caller: I can't.
Operator: Why not?
Caller: Because there's a power failure.
Operator: A power.... A power failure? Aha. Okay, we've got it licked now. Do you still have the boxes and manuals and packing stuff that your computer came in?
Caller: Well, yes, I keep them in the closet.
Operator: Good. Go get them, and unplug your system and pack it up just like it was when you got it. Then take it back to the store you bought it from.
Caller: Really? Is it that bad?
Operator: Yes, I'm afraid it is.
Caller: Well, all right then, I suppose. What do I tell them?
Operator: Tell them you're too damned stupid to own a computer!

That’s it for today. I’ll be taking a few days off next week, but don’t worry – you’ll be in great hands with Chris Wood at helm. Unless something goes horribly wrong, I should be back on the Daily Dispatch by Thursday. As usual, thank you for reading and subscribing.

Vedran Vuk
Casey Daily Dispatch Editor

Jul 15, 2011