Lessons Not Learned

Dear Reader,

This morning, Steve Hanke, professor of Applied Economics at John Hopkins University and a senior fellow at the Cato Institute, sent me his latest article for GlobeAsia, titled “Hu vs. Sarkozy.” In it, he contrasts the socialist president of France with the rather more capitalist attitude of China’s leader.

His theme – that the more a government meddles, the more it retards economic recovery – will strike no new chords with you, dear reader. Yet his concise language and clarity of thought in setting the historical context for where we are in the current crisis is well worth a quick read. And I quote:

Just reflect for a moment on the most frequently repeated lessons drawn from the Great Depression (1929-33). According to most accounts, the stock market crash of October 1929 was the spark that sent the economy spiraling downward. How could this be? After all, by November 1929, the stock market had started to recover, and by mid-April 1930, it had reached its pre-crash level. Contrary to the received wisdom, massive government failure – not the stock market crash – pushed the United States into the Great Depression. It was the Federal Reserve that ushered in that terrible nightmare. During the course of the Great Depression, the money supply contracted by 25%. This sent the economy into a deflationary death spiral, with the price level falling 25%.

The Federal Reserve was not the only culprit. In the name of saving jobs, the Smoot-Hawley trade bill became law in June 1930. That intervention increased U.S. tariffs by over 50%. It was quickly followed by the imposition of retaliatory tariffs in 60 other countries. In consequence, world trade collapsed and the unemployment rate in the U.S. surged from 7.8% in June 1930 to 24.7% in 1933.

In addition to the Smoot-Hawley tariff wedge, the Hoover administration and the Democratic Congress imposed the largest tax increase in U.S. history, with the top tax rate on income jumping from 25% to 63% in 1932. If these government policies weren’t destructive enough, the Roosevelt administration’s New Deal created regime uncertainty because major policies were being changed so rapidly. As a result, investors were afraid to commit funds to new projects and private investment collapsed.

Far from saving the patient, government intervention came close to killing it. But you wouldn’t know it from listening to the current discourse about the Panic of 2008-09. Indeed, politicians and pundits throughout the world have unfortunately dialed back to the Great Depression and drawn on the false lessons of history for policy guidance and justifications for their mega-interventions.

David again. With that history lesson in mind, let’s do a quick tally of how things now stand, shall we?  

The Fed. Once again, the Fed is right in the middle of things – but this time around energetically expanding the monetary base in the hope that it will fix all that ails.  

As you look at the chart of the monetary base just below, you’ll see that after an initial round of explosive growth, the Fed slowed things down a bit. Interestingly, however, the latest data show the resumption of a steep upwards trajectory. This can be attributed to the Fed attempting to keep mortgage rates down -- and therefore the housing market from a final smack-down -- through accelerated purchasing of massive quantities of mortgage-backed securities. Regardless, whichever way you look at it, this is intervention writ large.

Taxes. Even without the slate of new and proposed taxes already in the works, simply allowing the Bush tax cuts to expire next year represents one of the largest tax increases in U.S. history. According to the Heritage Foundation, the resulting increase in tax bills will ring in at $2.4 trillion. Have a nice day, because next year the taxes on all your nice days are going up.

Trade Wars. To date, the administration has poured cement into the free-trade bucket through the “Buy American” provisions of the stimulus package and, more recently, tariffs on Chinese products. And, by doing so, it has set an easy-to-understand example for the world to emulate. 

Far more potentially damaging, however, has been the deliberate decision to sacrifice the dollar in an effort to avoid the crash-bang-value discovery that would have occurred had the market been allowed its hard crash. As things now stand, we have the Chinese matching our dollar decline step by step, causing other export-reliant countries to follow suit or to begin making angry noises about fair play and the need to level the playing field.

In short, the U.S. government’s competitive currency devaluation is moving the world briskly down the road toward the same raising of trade barricades engendered by Mssrs. Smoot and Hawley.

Legislative Limbo. From trying to kick-start a dying, union-dominated, heavy manufacturing industry… to padding the nests of some Wall Street brights while stripping those of others… to micro-adjusting bank fees… to playing doctor… to trying to legislate global climate… to… to… it becomes near impossible for even the most attentive investor to know where things stand and therefore, how to invest. 

Sell my coal stocks? Buy nuclear? Or sell nuclear and buy ethanol? Invest in car companies, or steer clear because without Uncle Sam they’ll fail anyway? But what if the good uncle continues giving? Then again, how long can Uncle Sam keep giving? And where’s he going to get the money from? Buy real estate? But what if interest rates rise due to all the money being thrown about willy-nilly? Short commercial real estate? Or buy because the feds will step in, wallets open? Arrgh… ugh… gads!

I have, on occasion, been accused of being overly negative on the near-term outlook of the U.S. economy. I confess to that attitude, but only because unless and until the government stops pushing forward its latest round of economic “assistance,” topped off with a large dollop of regulatory “relief,” the way forward for the U.S. economy seems destined to first taking several steps back -- back to a point where the lessons of the Great Depression are once again learned.

In the meantime, we have to grab for what straws we can – prominently including precious metals, which will benefit as the dollar weakens, as it must, and which, held close to hand, have no counterparty liability. That and focusing on deep values in well-run companies, which, should you be unable to identify at any given moment, should leave you happy to remain liquid until such values again make themselves apparent.

Countdown to Copenhagen

Some additional examples of the pre-game warm-up before this December’s UN Climate Change Conference. 

British Prime Minister Gordon Brown goes apocalyptic. If you didn’t know the guy was the prime minister of a developed nation, you’d be excused for thinking the words emanating from his beer trap had been uttered by a man dressed in a tattered white sheet and holding a “We’re Doomed! Repent!” poster tacked to a stick. Quoting BBC from this past Monday…

PM warns of climate ‘catastrophe’

Brown: “50 days to save world”

The UK faces a "catastrophe" of floods, droughts and killer heatwaves if world leaders fail to agree a deal on climate change, the prime minister has warned.

Gordon Brown said negotiators had 50 days to save the world from global warming and break the "impasse".

“…Mr Brown said: "If we do not reach a deal at this time, let us be in no doubt: once the damage from unchecked emissions growth is done, no retrospective global agreement, in some future period, can undo that choice.

"So we should never allow ourselves to lose sight of the catastrophe we face if present warming trends continue."

50 days, that’s it? Wow, maybe it’s time to consider building colossal spaceships so we can send the best and brightest to far galaxies to find new hope for humanity? Might I recommend we send an advance party made up of all the world’s politicians?

The new face of aquaculture. Proving that being daffy isn’t limited to British politicians, Mohamed Nasheed, president of the Maldives, held a meeting underwater to dramatize his view of the future accommodations his successors will be forced to tolerate.

(Nice touch, the table card – making sure everyone was able to distinguish him from other aquatic creatures who are not presidents of the Maldives.)

The photo op caught the attention of a Swedish scientist who specializes in sea level research, compelling him to write an open letter that Canada’s Financial Post actually published. Here’s the opening…

October 20, 2009

To: President Mohamed Nasheed of the Maldives

From: Nils-Axel Mörner, Stockholm, Sweden

Mr. President,

You have recently held an undersea Cabinet meeting to raise awareness of the idea that global sea level is rising and hence threatens to drown the Maldives. This proposition is not founded in observational facts and true scientific judgments. 

Therefore, I am most surprised at your action and must protest its intended message.

In 2001, when our research group found overwhelming evidence that sea level was by no means in a rising mode in the Maldives, but had remained quite stable for the last 30 years, I thought it would not be respectful to the fine people of the Maldives if I were to return home and present our results in international fora. Therefore, I announced this happy news during an interview for your local TV station. However, your predecessor as president censored and stopped the broadcast.

When you became president, I was hoping both for democracy and for dialogue. However, I have written to you twice without reply. Your people ought not to have to suffer a constant claim that there is no future for them on their own islands. This terrible message is deeply inappropriate, since it is founded not upon reality but upon an imported concept, which lacks scientific justification and is thus untenable. There is simply no rational basis for it.

You can read the entire article, along with specific scientific reasons why Mr. Nasheed is all wet, by following the link here.

Of course, what the Swedish scientist failed to recognize in Mr. Nasheed’s grandstanding is that it really wasn’t about future humidity levels in the Maldives. Instead, the president’s aquatic stunt was designed to generate large cash transfers from the climate-offending yet deep-pocketed developed countries that will be saying their mea culpas in Copenhagen.

To put it simply, filleting the gullible Gordon Browns of the world is a far more lucrative and easy way to bring home the cash than, say, other forms of aquaculture such as raising prawns in sea-bound cages. All it takes is a little imagination, some scuba gear, a desk with table card, and a quick press release to the willing media.

Friday Funnies

Other than Survivor, for which I have a deep affection, I don’t watch any television. But based on what little I do watch, I can say with some conviction that, due to our lingering Puritan heritage – and the FCC -- U.S. commercials can hold no candles to the more adventurous fare offered on certain foreign networks.

In support of that contention, I present the following evidence.

Yes, Yes, Yes… view it here.

That hurts… view it here.

World’s Funniest Jokes?

Richard Wiseman of the University of Hertfordshire did research to identify the world’s funniest jokes… here are his top two. What do you think?

Two hunters are out in the woods when one of them collapses. He doesn't seem to be breathing and his eyes are glazed. The other guy whips out his phone and calls the emergency services. He gasps, "My friend is dead! What can I do?" The operator says "Calm down. I can help. First, let's make sure he's dead." There is a silence, then a shot is heard. Back on the phone, the guy says "Okay, now what?

The second funniest, according to the Wikipedia reference, follows here…

Sherlock Holmes and Dr. Watson were going camping. They pitched their tent under the stars and went to sleep. Sometime in the middle of the night Holmes woke Watson up and said: "Watson, look up at the stars and tell me, what do you see?"

Watson replied: "I see millions and millions of stars."

Holmes said: "And what do you deduce from that?"

Watson replied: "Well, if there are millions of stars, and if even a few of those have planets, it's quite likely there are some planets like Earth out there. And if there are a few planets like Earth out there, there might also be life."

And Holmes said: "Watson, you idiot, it means that somebody stole our tent."

But, at least in my warped opinion, the funniest was this one, selected as the top joke in England…

A woman gets on a bus with her baby. The bus driver says: "That's the ugliest baby that I've ever seen. Ugh!" The woman goes to the rear of the bus and sits down, fuming. She says to a man next to her: "The driver just insulted me!" The man says: "You go right up there and tell him off – go ahead, I'll hold your monkey for you."

Profiting from the Natural Gas Cycle

During our recently concluded Denver Summit, which, for the first time ever, we recorded (you’ll be sent info on those recordings soon), our own Dr. Marc Bustin explained in some detail the scale of North American gas discoveries over the past decade, much of it due to improved production techniques. So much gas is now available in North America, in fact, that we are self-sufficient for the next 100 and probably even 200 years.

This, of course, changes the entire dynamic for gas – for one thing, blowing up the traditional oil-gas ratio that has historically been used to gauge relative valuations. Oil, as a global market,  is now driven by an entirely different set of factors, including those that are geopolitical in nature.

In the new world of virtually unlimited North American gas, few inputs now matter more than price alone. To use the old adage in commodities circles, “The cure for low prices is low prices, and the cure for high prices is high prices.”

Translated, when natural gas prices fall to a level at or below production costs, producers will begin shutting in capacity until the point where prices begin to rise again. And once prices reach a certain price, the producers will open the pipes to the point where excess supply pushes prices back down again. This simple reality means that we can expect North American gas prices to trade in a fairly predictable range from this point forward, bouncing off the cost of production and the price at which producers overproduce.

With natural gas prices having risen from last month’s low of $2.92 per Mcf, to over $5.00 recently, I polled our energy team on how much higher prices might go before bouncing off the new ceiling.

Marin Katusa and Dr. Bustin, who head up our Energy Research team, share the same view that the upside of the range is in the area of $5.50, the level at which many North American gas producers are hedging their production. Those companies, points out Dr. Bustin, do a lot of research on predicting gas prices, and so if they hedge at $5.50, it’s because they think gas prices will remain below that level.

The bottom of the range? Marin puts it near last month’s low, which I’ll round off at $3.00. Dr. Bustin and Dave Hightower, editor of Casey’s Trend Trader, put the lower end of the range higher, from $3.22 to $4.50, but don’t see that range as fixed in stone.

Hightower is more optimistic on the upside, seeing the potential for natural gas topping $6.50, a price at which producers will be willing to expand production, but feels it could go considerably higher than that, should oil prices break over $90 and the Obama administration react by offering incentives to boost domestic consumption of natural gas over oil.

Regardless of the exact limits of the natural gas price range, simply being aware of the changed fundamentals of these markets opens the potential for some serious profit making. Whether it is by buying the shares of natural gas companies when they align with prices at the low end of the range, and selling when they approach highs… or utilizing carefully structured futures and options to play the market -- natural gas has the potential to offer attentive investors a gift that keeps on giving.

Of course, as with everything in life, the more time and effort you put into studying the sector, the better your overall results will be.

[Additional Resources: At just $39 a year, Casey’s Energy Opportunities is a great way to begin building your knowledge of natural gas and the entire energy sector. More here.

For more experienced investors, check out a no-risk trial subscription to Casey’s Energy Report or our premium Casey’s Energy Confidential alert service, which includes a subscription to all our energy newsletters, as well as special alerts to tip you to fast-moving and very early-stage opportunities, including private placements. More here.

If you are an active trader, looking for hands-on guidance to all the commodities markets, Dave Hightower and the team at Casey’s Trend Trader have you covered… more here.

However you decide to approach the energy markets, the key point is to make them a part of your overall portfolio planning. That’s because, regardless of everything else that’s going on in the world, people and businesses need energy… and therein lies the opportunity. ]

Miscellany

A Brave New World – Coming Soon. Subscriber and correspondent Rudi G., who is based in the Netherlands, sent over an article on a EU initiative to put the citizenry under a very focused microscope. Specifically, your emails, phone calls, bank records, purchasing histories – virtually every single way you can be identified and analyzed  – will be combined and automatically monitored for suspicious behaviors. You can read the article here. 

Music Makes the World Go Round. Looking to assist in my constant quest for dramatic music, friend and correspondent Sadia sent across a link to Rolling Stone magazine’s list of the 500 Greatest Songs of All Times. I will begin working through them, but thought you might like to, as well. Their number one song? “Like a Rolling Stone” by Bob Dylan. I agree it’s a great song, but not sure it’s number one. In any event, here’s a link to the list.
http://en.wikipedia.org/wiki/Rolling_Stone%27s_500_Greatest_Songs_of_All_Time

And, with that, dear readers, I will sign off for the week… and, most likely, for most of next week as well, as I am traveling to the Grand Opening of La Estancia de Cafayate in Argentina.

If you’ll be among the 200 or so people who will also be there, I’ll see you shortly. If not, then until next time, thank you for reading and for being a subscriber to a Casey Research service.

David Galland
Managing Director
Casey Research