The Horror

Dear Reader,

As a result of being involved in the financial markets for almost 30 years now, I’ve learned that things rarely turn out as bad as the bears think they will.

Likewise, neither will they usually come to the cheery conclusion championed by the government and Wall Street’s herd of biased perma-bulls.

More often than not, the economy proceeds – like an airplane – in a fairly predictable and unexciting fashion, and is only periodically disturbed by turbulence and knuckle-whitening suspense that soon passes.

That’s how things typically go.

In the current situation, however, the plane, beset by hurricane-like conditions, is showing signs of coming apart. Already here in the US, asset values, home sales, and retail sales have fallen out of the overhead bins and have rendered some 17.5% of the passengers unemployed or underemployed. And though the captain and co-pilot speak soothing words over the PA system and stewardesses do their best to project a calm presence, the passengers are increasingly looking out the windows to note with shock that the plane is descending steeply toward the mountains of the real economy.

Given my generally optimistic nature, and because it is always concerning to a contrarian when large numbers of the public begin to share the same view – I feel a duty to step back in order to search for the patches of blue sky that surely must exist, though all our research says they don’t.

Unfortunately, dear reader, there are none to be seen. And so I am going on record here and now to say that until further notice, I intend on being – unapologetically and unabashedly – a pessimist.

How can I not? Consider just two of the strong headwinds now facing the economy...

As I have discussed often in these musings, the U.S. economy is increasingly being taken over by government. And while the Democrats, led by loathsome populists such as Nancy Pelosi and Barney Frank, are worthy of being held in especially low regard, the track record of modern-day Republicans offers no hope either.

And so, the “solutions” being proposed almost entirely focus on more government, more regulation, more spending, and more taxes. In other words, pretty much the exact opposite of what the economy now needs.

The debt levels of this country are still at record levels, but yet the government’s grand scheme is to ratchet those debt levels even higher. It is doing so by offering cheap money, incentives to take mortgages that people can't afford, and by running trillion-dollar-plus deficits of its own.

So we have a morally, philosophically, and financially bankrupt government, encouraging a morally, philosophically, and financially bankrupt public to place even more faith in the ability of said government to lead the nation on to greener pastures.

And to do so largely by borrowing trillions of dollars to dump back into failing institutions and make-work projects, and by levying yet more taxes on businesses and high-income earners – who, it should be noted, are already paying a record percentage of total federal tax receipts (the top 5% now pay over 60% of all taxes).

People have lost all sense of perspective, or what made this nation the economic power it once was. Soon, these same people will watch gap-jawed as what's left of the economy crumbles around them.

Is that pessimistic enough?

I am serious when I say that henceforth, I will expect only the worst. While I've already taken steps to protect myself and my family from what’s coming – as I hope you have – I will now redouble those efforts and urge you to do so, as well.

Now, lest you picture me hunched down over my computer, pounding out angry words while muttering expletives through spittle-flecked lips, let me say that my new-found pessimism about the economy has no effect on my generally optimistic view of life.

Far from it. An economic catastrophe, if properly prepared for, will be inconvenient, but it need not be devastating. And under almost any circumstance, not matter how dire, one can and should aspire to a healthful and enjoyable existence. In other words, living through an economic crisis and living a happy life don’t have to be mutually exclusive.

Now, you might be wondering what has set me off this morning. To which I would answer, quoting Capt. Kurtz’s final words from Apocalypse Now, “The horror! The horror!”

The Horror

 The following is an excerpt from the New York Times today.

In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.

A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”

And this from the same article…

Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750.

His bill would make the new limits permanent.

(Full article here: http://www.nytimes.com/2009/11/20/business/20limits.html)

Per the high-slapper mentioned above, the FHA specializes in making loans to income- and credit-challenged individuals. Madness.

Then there’s this from Nouriel Roubini. While Roubini was correct in spotting the coming crisis – though, I might add, well after Casey Research did so – and while he also sees the crisis worsening, check out his prescription for what ails, from an opinion piece he wrote for the NY Daily News this week…

There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation.

If a tax credit to the private sector to hire more workers is good on a temporary basis, why, I can’t help wonder as I’m hitting my head against the keyboard, isn’t it a good idea on a permanent basis?

And why would the esteemed economist think that having the government go further into debt in order to recycle the money back into the economy is better than permanently reducing the burden of government on workers and businesses and letting the free market sort the situation out?

The scary part is that Roubini’s opinion could be considered “best of class” compared to the inane proposals being bandied around by the intelligentsia now dominating the political and economic debate in this country.

In sum, the problems facing the United States are not passing turbulence but symptomatic of a systematic breakdown. The engines are shot and the plane is going down, I am now convinced.

And the problem is not just domestic.

A Global Problem

One of the great advantages, and pleasures, of this job is our global network of correspondents. This morning, the estimable Mr. Watson dropped me the following report from Portugal, a report that underscores in a fairly eye-opening way that as bad as it is in the U.S., it may actually be worse “over there.” Here’s his report.

In the USA taxpayers basically support two layers of government, state and federal, with a president elected to the top position of the latter.

In Europe the set-up is similar, but with differences between various countries. For instance, the UK has parliamentary elections and a prime minister. Others, like Italy, have proportional representation and a president. However, in Europe we share an additional layer of government – the European Parliament based in Brussels. Representatives from the 27 country member nations are elected in Europe-wide elections to serve in that parliament. Of course, this results in a substantial extra tax burden for all Europeans: in addition to the added regulatory burden, all the members of the European Parliament (MEPs) get hefty salaries and generous expense allowances.

Now along comes the Treaty of Lisbon. This creates a basic European Union constitution of sorts and provides for the appointment for the first time ever of a president of the EU. It also creates a new post for a foreign-affairs chief. The original concept was that each country would hold a referendum to approve this treaty. When some countries started to say no to the treaty, Brussels and the national governments changed tactics and they all eventually simply ratified it.

So last night they chose a president of Europe. Was there any sort of election? No. Was there any campaigning or debates? No. Did we even know who the candidates were? No.

Instead, the president was selected behind closed doors over a dinner held in Brussels, for the heads of government of the 27 countries who were to make the appointment. We knew what the dinner menu was, but we did not know who the candidates were. There’s not even a job description for the new president. His duties, authorities, and responsibilities are not defined. Altogether a very undemocratic, secretive process, not unlike that which occurs in selecting a new pope.

And so, late last night a puff of white smoke was seen over Brussels, followed by the announcement that Herman van Rompuy, the Belgian prime minister, was selected as the president of Europe. As the foreign-affairs chief they selected Britain's Baroness Cathy Ashton. She has never held an elected office or even been a diplomat.

For your readers outside Europe, you may not have heard of either of these persons. Don't worry, folks. I live in Portugal and hold a British passport and keep my ears close to the ground, and I had never heard of Rompuy or Baroness Ashton. Britain's Sun has already dubbed them "Rumpy and Frumpy"! The Daily Express talked to Rompuy's sister who also is in politics. She described her brother as "a clown".

So at the end of this totally outrageous and undemocratic Orwellian process, what can the long-suffering European taxpayers look forward to? It’s too early to say, but I’m not sure I want to find out.

David again. The problem, which should be obvious to everyone, but which seems not to be, is that most of the world’s citizenry seems to have given in to the notion that big government is desirable. Or, if not desirable, at least not something to give much thought to. And so government grows bigger and more endemic with each passing day.

Now, there’s nothing that you and I can actually do to change this situation. But we sure as heck can use our investment capital to play the big trend for all it’s worth… just as we have been doing, and just as we will continue to do.

(If you’re not yet a subscriber to The Casey Report, now is the right time to take us up on our no-risk, three-month trial subscription.

The next issue, in the works now, will include Bud Conrad’s evaluation of today’s gold price, and an update by Doug Casey with his views on where we are in the current crisis. Again, you have less than nothing to lose by taking a trial subscription today. Learn more and get started right away by clicking here.)

Oh, the Hypocrisy

“I was pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time,” President Obama pontificated following his meeting with Chinese leader Hu Jintao during his recent trip.

To which the Chinese leader replied, “You are trying to kid Hu, right?”

 “Kid who?” Obama said, confused.

“No, Hu!” said Mr. Jintao.

“Who? Hu?” said Mr. Obama, looking to his aides for help.

“This Hu, that’s who!” said an obviously exasperated Hu.

“Who? Who?” said Mr. Obama before being led bewildered to lunch.

Of course, I made that up – all except the opening bit, which is what President Obama actually said. Which, when you think about it, is a bad joke. How, I have to wonder, could the president admonish Jintao about China’s exchange policies when the U.S. is engaged in much the same sort of screwing around?

How else would you term having the U.S. central bank and Treasury collude to keep interest rates down – and therefore the dollar cheap – in an attempt to boost the economy and give our exporters a leg up?

In the case of China, they are simply going along for the ride – refusing to allow the U.S. to use its own currency manipulation to get a leg up on its global competitors.

And the Chinese aren’t the only ones looking at the U.S. manipulation with a sharp eye. It was reported by Bloomberg that India, South Korea, and Indonesia are seriously thinking about limiting in-bound capital flows in an attempt to keep a lid on the appreciation of their currencies against the dollar.

As long as the U.S. government maintains its loose monetary policies, the more it risks setting off competitive devaluations and, in time, outright trade wars. 

So, “who” should Obama really be pointing the finger at?

Friday Funnies

Steven V. sent over the following quote this week that is both funny and true…

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.” -- Groucho Marx

Along those lines, check out this actual note from a senior-level person at Chrysler, dated Sunday, July 19, 2009.

Monday morning, I attended a breakfast meeting where the speaker/guest was David E. Cole, Chairman Center for Automotive Research (CAR and Professor at the University of Michigan). You have all likely heard CAR quoted or referred to in the auto industry news lately.

Mr. Cole, who is an engineer by training, told many stories of the difficulty of working with the folks that the Obama administration has sent to save the auto industry. There have been many meetings where a 30+ year experienced automotive expert has to listen to a newcomer to the industry, someone with zero manufacturing experience, zero auto industry experience, zero finance experience and zero engineering experience, tell them how to run their business.

Mr. Cole's favorite story is as follows:

There was a team of Obama people speaking to Mr. Cole (engineer, automotive experience of 40+ years, and Chairman of CAR). They were explaining to Mr. Cole that the auto companies needed to make a car that was electric and liquid natural gas (LNG) with enough combined fuel to go 500 miles so we wouldn't "need" so many gas stations (a whole other topic). They were quoting BTUs of LNG and battery life that they had looked up on some website.

Mr. Cole explained that to do this you would need a TRUNK FULL of batteries and a LNG tank as big as the car to make that happen, and that there were problems related to the laws of physics that prevented them from...

The Obama person interrupted and said (and I am quoting here): "These laws of physics? Whose rules are those? We need to change that." (Some of the others wrote down the law name so they could look it up.) "We have the Congress and administration. We can repeal that law, amend it, or use an executive order to get rid of that problem. That's why we are here, to fix these sorts of issues."

..... And these are the same people who are going to fix healthcare?!

David again. For some reason husband/wife jokes seem particularly popular. I don’t know why, but that won’t stop me from sharing that came across my desk this week…

Husband Down

A husband and wife are shopping in their local Walmart. The husband picks up a case of Budweiser and puts it in their cart.

“What do you think you're doing?” asks the wife.

“They're on sale, only $10 for 24 cans,” he replies.

“Put them back, we can't afford them,” demands the wife, and so they carry on shopping.

A few aisles further on along, the woman picks up a $20 jar of face cream and puts it in the basket…

“What do you think you're doing?” asks the husband.

“It’s my face cream. It makes me look beautiful,” replies the wife.

Her husband retorts: “So do 24 cans of Budweiser and they’re half the price.”

On the PA system: “Cleanup on aisle 25, we have a husband down.”

Miscellany

• Good News on the Fed Audit. Despite a concentrated lobbying effort to try and head it off, and Barney Frank showing his true colors by flip-flopping at the last minute in an attempt to defeat it, Ron Paul’s bill amendment to audit the Fed was approved by a 43-26 vote in the House Finance Committee, with Democrats joining with Republicans in a rare case of bipartisanship. The scrap is far from over, but it’s a good start. You can read the story here. http://globaleconomicanalysis.blogspot.com/2009/11/ron-paul-alan-grayson-audit-fed-bill.html
  
  
• Book Review Dominick, a trusted correspondent, sent along the following book recommendation that I thought the readers among you might appreciate.

David -- I hope all is well. I am reading a new book on my Kindle that you might enjoy: Atomic Awakening by James Mahaffey. ((http://www.amazon.com/s/ref=nb_ss?url=search-alias%3Daps&field-keywords=atomic+awakening&x=18&y=18)) The book begins with the best short history of modern physics I have ever read, then presents a balanced and enlightening  history of nuclear power and its future. A really great read.

And that, dear readers, is that for the week.

Before I go, I want to remind you that, per my recent essay “Retro Taxes,” I’m more convinced than ever that the government plans on moving the expiration of the Bush tax cuts up by a year – and making it retroactive to January 1, 2010. Which means that if you have appreciated investments that qualify for long-term capital gains treatment, you’ll want to sell them before year-end to avoid paying a 28% capital gains tax, versus the current 15%.

Speaking of stocks, as I sign off I see that the U.S. stock market is again coming under pressure – with the DJIA off by about 50 points. Meanwhile, gold is strong at $1,144. The gold stocks, meanwhile, are down a bit – but nothing too extreme.

One big question among many big questions is just how much gold stocks will be affected by a sudden sharp selloff in broader markets – which we still expect before, or soon after, the top of the year. The answer, unfortunately, is unknowable – made even more so due to some really big money moving into the sector. Will that money prove to be more resilient than in the last big sell-off? Or will it, too, rush for the exits? Or will the launch of even more gold stock funds – such as the one being organized now by mega-investor John Paulson, due to launch in January – provide a counterweight to selling pressures?

Really, there’s no way to know. Therefore, while it is very important just now to be bullish on gold and, by extension, gold shares – don’t go overboard on the latter. Don’t chase stocks that have just had a big run up, and only buy the shares of companies that you have taken the time to really understand. Ideally, these companies will have the potential to do well under almost any circumstance. (We can help you with the best of the best gold stocks (check out Casey’s International Speculator for more.)

Or, put another way, the key is to be moderate in all things, including your excesses.

And with that, I thank you for reading and for being a subscriber to a Casey Research service!

David "Bear" Galland
Managing Director
Casey Research