Casey's Daily Dispatch

Weekend Edition - September 04, 2010

Sat, 04 Sep 2010 13:00:00 -0500

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.

RIMMing Out?

By Alex Daley, Senior Editor, Casey's Extraordinary Technology

It's been over three years since the release of Apple's iPhone, the shiny touchscreen megahit that marked the launch of the "smartphone" market in most people's eyes. In recent months, though, the iPhone - whose 3G, second-generation model remains the world's best-selling single handset - has seen an increased amount of competition from a major new presence in the game: Google.

The Internet giant is now activating more than 200,000 new phones, based on its open source Android operating system, per day. That's up from 160,000 in June and is twice May's 100,000. The new guy is stalking the field - and the hunting is good.

Daily activation numbers aren't everything. But they're an accurate snapshot of how popular a given phone or platform is at the moment and, if gains can be sustained, of what the market share picture might look like a few months down the road.

Does this mean the iPhone is doomed and Apple's profitability with it? Probably not. The iPhone continues to ride a formidable wave of popularity, selling over 2.5M units per month. Its app marketplace is a stone killer, a vital force that both attracts initial users to the platform and keeps them there once they've bought in.

Just ask any iPhone user if they'd go back to whatever they were using before it. Chances are they'll chuckle.

Best of all from Apple's viewpoint, the company makes a boatload of money off each device, starting with a few hundred dollars of margin on each phone:

Now, take the royalties on the contract value from AT&T; shares of the sales of every app from the store; music downloaded from iTunes; and the vibrant accessories business with direct and "Made for iPhone" license fees - add them to base sales, and you have a very healthy business on your hands.

No, Apple doesn't have to fret much about Google. Who does, then? It's that other fruit-flavored device, the Blackberry, from Canada's Research in Motion (RIMM).

Once the most popular executive must-have gadget, the Blackberry clings to its status as king of the hill in the smartphone game, with its line of email-savvy handsets for business users. It still commands a hefty 35% of the global market:

But as you can see, over the past year only the iPhone has been holding steady. Everyone else, including RIMM, has been losing share as Android gulps an ever-larger piece of the pie.

It's Palm, Microsoft, Nokia (makers of the majority of Symbian OS phones, as cited above), and now Blackberry that are equally sharing the brunt of the Android attack, with unit shipments of all falling while Android rises.

Without a full-featured web browser, and with a surprisingly limited selection of applications for their platform, Blackberry devices have for some time looked clunky and rather antiquated next to the iPhone and Android.

It isn't as if RIMM hasn't noticed. Recently, it tried to step up to the plate and produce a truly competitive high-end smartphone, the Torch. A combination of touch screen and hardware keyboard, the Torch was intended to be all things to all people: a quick and easy touch device like the iPhone that was nevertheless acceptable to those who prefer clickable keys for fast thumbing. It may prove to be too much of a reach. Reviews have ranged from lukewarm to downright awful, and sales have been disappointing thus far. Three years on, it may be too little too late.

RIMM's primary salvation in past years has been its popularity with big enterprises and government. IT managers have long insisted that companies standardize equipment and choose only the most secure and easily maintained devices. So, RIMM focused efforts on cementing its place in the enterprise and growing with add-on offerings.

However, in today's economic climate, cost-cutting efforts - coupled with the intense popularity of the iPhone for home users - have seen a lot of businesses taking a much more relaxed, bring-your-own-phone approach to accessing email on the road. It's a corporate win-win, as employees get to choose the device they like best and the company gets to shift that cost burden onto the individual.

In the process, the big loser has been RIMM. Its hold on the enterprise is strong but slipping. The more users get accustomed to the superior experience offered by Android and iPhone devices, the more they are demanding the convenience of using them for work, instead of their Blackberries. That will inevitably shrink RIMM's cash cow market and hurt its brand with device buyers.

RIMM's competitors have also begun to attack the company's other major revenue stream besides devices, the license fees it charges for its email server, the Blackberry Enterprise Server - which organizations put between their email systems and devices, to push out messages quickly to remote users and to encrypt messages for security. Makers of popular email systems, especially Microsoft with its Exchange product line, have begun building those same features into recent versions of their products, obviating the need for the Blackberry server to deliver them. Both iPhone and Android devices support the new Exchange features.

On top of the competitive assault, RIMM also finds itself under close scrutiny by governments around the world, who are demanding that the company allow them to monitor encrypted communications. Saudi Arabia and India both have demanded that the keys to all these scrambled communications be handed over to government officials, or the services will be shut down in their countries.

Add to these items the major service outages for Blackberry phones, which have shut down email access for millions of users for hours or days at a time, on multiple occasions over the past two years, and a storm is brewing for a major decline in enterprise and government reliance on Blackberry devices.

In fact, Morgan Stanley analyst Ehud Gelblum estimates that Blackberry's market share will contract by as much as 30% by 2013, accompanied by a drop in absolute volume for the first time ever.

Until recently, the main victim of the smartphone onslaught hasn't been other smartphones, but rather those far simpler devices that the industry dubs "feature phones." Motorola was once atop the heap in feature phones, with its global mega-hit, the super-slim RAZR cell phone, and other popular models. But for the second quarter in a row, Apple's high-margin, full-featured smartphone has outsold all of Motorola's feature phones combined:

Figure 1 - Graph From BusinessInsider.com

That shift in sentiment is reflected in the stock price history of companies like Motorola and Nokia, which took the first iPhone assault head on. They've plummeted over the past few years as their sales dwindle and margins slide:

So that war is about over. With feature phones fading, the competition is shifting directly to the smartphone arena, which is heating to cherry red.

Once it was a two-horse race. But the injection of Android into the fray, and its overnight success, have completely scrambled the odds. Despite a rapidly growing overall market -- market researcher NPD says that total smartphone sales in the U.S. are up 50.1% over last year, and web statistics firm comScore says Android usage is up some 400% over the same period - the field is being thinned as many formerly established players suffer severe market erosion.

Bottom line: The losers are falling away, Android is coming on like a gangbuster, and the iPhone continues to evolve. Thus, Research in Motion now finds itself with a huge target on its back, in the crosshairs of both Google and Apple at the same time. That's an unenviable position for any company, least of all one with so many recent slip-ups.

RIMM's stock has already fallen from a 2008 high of well over $130 per share down to $47 in recent trading. Yet, despite the 64% loss, its troubles may just be beginning. If it fails to act aggressively, to bring relevant devices to market, and to maintain some semblance of present market share - then it is likely to see its stock price further extend the swan dive, right along with its device sales.

[Ed. Note: Technology is the number one growth sector in the United States... at a time when economic growth is stalling across the board. And no one knows more about cutting-edge technology than Alex Daley, senior editor of Casey's Extraordinary Technology. Getting into the right tech stocks now can pay off big - whether it's biotech firms with promising new technologies for disease diagnosis and treatment, or cyber-security companies with innovative solutions for network protection. If you want to learn more about which tech stocks to buy now, please click here.]

China and India: Still Hungry for Coal

By Marin Katusa, Chief Energy Strategist, Casey Research

One can only hope that the "Don't shoot the messenger" adage is still popular in the international community.

UK-based consultants M&C Energy Group have become the latest to join the chorus of voices asking the international community to increase the pressure on China and India to switch to cleaner energy sources.

As far as energy analyst David Hunter is concerned, it is the Western businesses that are carrying the financial burden of reducing carbon emissions. China and India, on the other hand, are benefitting from much cheaper energy, and their companies don't have to bear the costs of reversing the effects of global warming.

Mr Hunter, however, should steel himself for disappointing news. Industry experts are expecting anything but a cut in coal demand for the foreseeable future.

By their analysis, global coal demand - already at a record high - will remain strong even as the recession cuts down on oil and gas use. And the numbers are certainly matching up to these expectations.

India's coal demand is expected to reach 653 million tonnes this fiscal year, with only 572 million tonnes expected to be produced in the country. The China National Coal Association expects demand to grow by 4-6% in 2010 and the coal consumption to expand to roughly 3.4 billion tonnes.

And with power-starved economies to feed and millions of people to lift out of poverty, neither country is going to take kindly to any interference with its energy agenda.

There are two different types of coal - in fact two different types of demand - when it comes to the coal market. Though they can't be considered to be totally separate, the criticism levied against these two Asian tigers becomes somewhat blunted when we take this angle.

The first is for thermal coal, the cheapest and most popular way for emerging economies to produce electricity. Almost 75% of China's electricity comes from coal-fired plants, but this picture is rapidly changing.

Irritated by the "world's biggest energy consumer" sticker, Beijing is investing heavily - US$736 billion - into clean energy investment plans. The aim: increase the non-fossil fuel supply component to 15% of the total primary energy demand by 2020. So really, Mr Hunter's desire for a less coal-intensive China might just come true. As for India, it never likes to be too far behind its Asian rival.

The second demand is for metallurgical, or coking, coal. This is what China and India really need - good-quality metallurgical coal, something that North America has in plenty. And this demand is not going away anytime soon.

For a strong economy, one needs strong infrastructure. For strong infrastructure, one needs steel. Steel is the backbone of an economy, and it is metallurgical coal that is used to produce the heat in 90% of the world's steel production process. And for as long as the economy continues to blaze, it is metallurgical coal imports that will be stoking the furnace.

The heyday of the coal market is far from over. We've called coal the invisible bull market before; today it's very much at the forefront of the market, and it isn't going away. Coal suppliers know as well which side their bread is buttered. While traditional markets in Europe continue to struggle with their debt crises, China and India will be only too happy to race on ahead and pick up the slack.

[Ed. Note: No one knows energy better than Marin Katusa, Casey's chief energy strategist and senior editor of Casey's Energy Report. One of his previous coal picks jumped by 80%, handing subscribers handsome profits. Who will be the coal winner in 2011? Find out with a risk-free, 3-month trial with 100% money-back guarantee.]

Tech Still Churning Along

By Chris Wood, Senior Analyst, Casey's Extraordinary Technology

You may have heard that semiconductor chip maker Intel just agreed to buy Infineon's Wireless Solutions Business (WLS) for approximately $1.4 billion in cash. WLS is a leading provider of cellular platforms to top-tier global phone makers. And with this purchase, Intel is looking to move beyond chips that serve as the calculating engines of PCs and into the smartphone market.

To this news, you might respond, so what? But I think the deal embodies what could be seen as a fundamental shift in the market from PCs to smartphones. And that's profound.

Microsoft started business with the vision of a computer on every desk and in every home. It pretty much accomplished that in the Western world. But the relatively new smartphone seems poised to overtake the PC in no time at all, particularly in emerging markets.

Although research firm IDC projects PC market growth in 2010 to ring in at 19.8% (well above the 3.0% growth seen in 2009), it forecasts annual growth to slow to 11.1% by 2014 and into single digits beyond.

Meanwhile, the smartphone market is growing at an annual clip of 50%, according to IDC, and is expected to continue robust growth for many years to come. A whopping 118.3 million smartphones shipped in the first six months of 2010, reflecting a 54% increase from the 76.8 million units that were sold in the first half of last year. And analysts at ABI Research project smartphone sales to double from about 200 million units this year to more than 400 million units in 2014, which indicates forecasted compound annual growth of 20% for the next four years.

Quite frankly, ABI's forecast of growth in the smartphone market is probably on the low side. Consider that industry specialists at Frost & Sullivan expect that close to 500 million smartphones will be sold in Asia-Pacific alone in the year 2015. That would easily put worldwide annual sales in the ballpark of 700 - 800 million.

The point is that as smartphones get smarter and more affordable, and 4G service expands, we expect to see smartphones taking the place of PCs for a growing number of consumers. And this trend may already be emerging (especially in emerging markets) as evidenced by the relative expected growth rates in the years ahead and by deals like the Intel/Infineon one cited above.

So it's possible that a few years down the road, many consumers will forgo even owning a PC and will rely on a smartphone as their primary computer instead. I can't say I'll be one of those people, but it's a paradigm shift worth considering.

With all this talk of smartphone growth, I figure we should continue a bit with this (for once) positive tone and talk briefly about perhaps the one wealth creation engine in the U.S. that is still churning along, despite the state of the overall economy and all the bearish news you hear from us. That wealth engine is technology.

Over the past decade, while the overall market was weakly limping along, these companies have been steadily growing revenues, adding jobs, and spewing profits. At the same time brash startups were reinventing news, entertainment, communication, medicine, and virtually every other aspect of our work and home lives, promising to deliver still more growth even in this weak economy.

Technological development is like a force of nature. It's impersonal and implacable. It doesn't care who controls Congress or chairs the Fed. It has been the stuff of American life for a century - from the assembly line to the smartphone. Most importantly, it's done what a successful sector of the economy is supposed to do, profitably create things of value to society, and thereby creating tangible wealth.

Consider that only 30 years ago, five of the largest 24 companies in the U.S. in terms of market cap - Apple (#2), Microsoft (#3), Cisco (#15), Google (#19), and Oracle (#23), tech companies all - either hadn't gone public or didn't even exist.

From the 1980s to today, General Motors slid steadily downward, racking up billions in losses that culminated in a painful bankruptcy/bailout. Over the same period, a handful of geeks from Seattle grew their dorm-room startup, Microsoft, into a global software empire with over $60 billion per year in revenue. Along the way, the company turned four employees into billionaires and an estimated 12,000 into millionaires, while amassing some $205 billion in equity for shareholders.

In 1990, Countrywide Credit emerged as the nation's leading mortgage banker. That same year, networking company Cisco Systems went public at a split-adjusted $0.08 per share and helped to usher in the Internet age with its routers and switches. Countrywide disappeared into Bank of America in 2008, after its credit rating was slashed to "junk" by Standard & Poor's; Cisco now employs over 65,000 people and has created over $120 billion in market value.

Over the past 10 years, the airlines posted loss after loss, received numerous government bailouts, and saw the XAL airline stock index fall from 175 to 35, erasing billions in shareholder value. Meanwhile, a little Silicon Valley firm with a rather silly name, Google, built a $25 billion a year advertising behemoth and rocketed its market cap to over $140 billion.

And the list goes on.

Yes, we had the tech bubble burst in 2000. But that just put a well-deserved end to indiscriminate "tech" investing. To be successful in the sector today, you have to put in the time to separate the good companies from the bad; just like it should be. Even so, there are more opportunities than ever to use this sector to build personal wealth.

Readers of Casey's Extraordinary Technology have already realized five separate gains in 2010 that were each at least 40%, the most recent of which was generated over a mere one-week time frame. And we still have plenty of other stocks in our CET portfolio with just as much or more potential upside, with at least one new pick coming each month down the road. If you're interested in learning more about tech and tech investing, and want to know which tech stocks to buy now, sign up for a risk-free trial of Casey's Extraordinary Technology. Details here.

How to Make, or Lose, a Fortune in Junior Exploration Stocks

The first thing to know about junior resource exploration stocks is that they are volatile. You can make 50% in a day, and you can lose 50% in a day.

This is due largely to the fact that they tend to be thinly traded. Thus, a whiff of good news, or bad, can overwhelm opposing trades. In the absence of a countervailing bid, the stock can move sharply until it reaches the point that someone is willing to step up and take the other side of the trade. If the news is bad, and there's no bid, things get ugly really quick. Conversely, if the news is good - for example, the recent case of the AuEx buy-out - the volume of buyers rushing to get a hold of stock can blow the proverbial doors off. The chart from AuEx, just below, makes the point in a way that words just can't.

Is volatility bad? Not hardly. If you play these stocks intelligently, that volatility can act like a portfolio rocket booster. The alternative: a widely-followed stock has little chance of surprising the market on the upside, and so can tie up your capital for a long period of time - plodding along while you remain exposed to general market risk with almost no hope of serious appreciation.

By contrast, a junior exploration company punching holes into interesting geology is all about the potential for surprise. If the surprise is good, your stock is headed for the moon. But a poor drill hole is not necessarily a ticket to the basement - not if the company has not overinflated expectations by aggressive promotion, and is following a methodical process in its exploration program.

The topic of aggressive promotion brings me to the second thing to know about junior resource stocks - namely, that most of them are borderline frauds. That's right - the vast majority of the companies involved in the junior resource sector are headed up by management teams that have no special expertise in finding or developing economic deposits. Rather, what they're good at is telling a really good story based on the loosest of "facts" in order to get investors to pay their overhead and, hopefully, allow them to trade out of their free or low cost shares at a big profit.

While there are a number of signs you can look for that will give you some sense of the management's abilities and ethics, one is that the bad apples will tend to shift their stated focus between breakfast and dinner, depending on the flavor of the day. One minute, they are a junior gold company, the next they are on to the world's hottest lithium find - then sometime after lunch, they morph into being a uranium explorer.

That's not to say that there aren't times when competent management teams are faced with the reality that their primary resource target is going to draw a blank, and move on - it happens all the time. The trick is to be able to discern the difference between a strategic retreat, and an opportunistic bunny hop into another area where the management has no real expertise or value to bring to the game.

To help our subscribers understand the difference between a competent explorer and a paper tiger, years ago we started the Explorers' League. In order to be inducted into league, you have to have been responsible for a minimum of three economic mineral discoveries - but most of our honorees have a lot more than that. This is no small feat when you consider that probably 98% of the folks in the mining business will retire without a single economic discovery to their name.

Ron Parratt was among the first of our Explorers' League Honorees - the subsequent success he had with AuEx has only once again confirmed the importance of backing winners.

The next thing to focus on is the size, and the general set-up, of the targeted resource. I saw an exploration company advertising on a major financial web site that was breathlessly talking about the 30,000 ounces of gold it had discovered.

While I suspect a borderline or even overt fraud, in the best case scenario building expensive advertising campaigns around 30,000 ounces of gold - a truly inconsequential amount - would indicate that management is hopelessly ignorant of the realities of the business. And the reality today is that, depending on a number of variables - location, geology, local politics, metallurgy, infrastructure, etc. - the minimum resource required for a company to have any chance at success is in excess of 1 million ounces of gold. But, really, you should only be focusing on companies with the very real potential to prove up 2 million or more ounces.

In exploration plays, size counts.

And don't confuse gross metal value with anything remotely resembling reality. In fact, any company that would even mention the gross metal value of their resource is sending you a very strong signal that something fishy is afoot. For those of you new to the game, gross metal value is derived by doing the simple math of multiplying the companies' ounces (or pounds, depending on the metal) in the ground by the current price of the commodity. Thus, a company with a market cap of, say, $50 million and a resource in the ground of one million ounces of gold might tout a gross metal value, based on today's price of $1,250 per ounce, of $1.25 billion. The implication being that the market cap of the company will soon rocket in the direction of the gross metal value... wink, wink, get it while it's hot and all that.

Now, I don't have time to list all the ways that the gross metal value gets hammered down to a net that is a fraction of the total... and, more likely than not, even to the point where the deposit is uneconomic. But I'll give it a quick try anyway.

For starters, there's the cost of the infrastructure required to actually extract the mineral. While even the cost of building an open pit mine is huge, if the deposit is too deep for that, then you're talking about going underground, which can be much, much more expensive. Depending on where the resource is located - and most new discoveries are very remote (Congo, anyone?) - and the depth and structure of the mineral resource, building out the mine infrastructure can cost in the hundreds of millions of dollars, and even billions. Then there are local politics. For instance, how much of the mine will the government want to keep for itself? How high will the taxes and royalties be? Is the area secure? There are projects I'm aware of that, in order to be built, will require essentially maintaining a private army to keep local revolutionaries and thugs at bay. How's the metallurgy? Extracting metal from close to surface, oxidized, deposits can be relatively easy and effective, with recoveries in the 90% area. But if the target mineral is bound up with all sorts of detrimental minerals, the processing costs will soar, and recoveries plummet... often to the point where the overall costs, and the challenges of disposing of the toxic waste, can torpedo even a very large project. Mining requires a huge amount of power... where's it going to come from? Can you imagine the cost and hassle of having to build, say, 60 miles of power lines? How about if the deposit is located in a remote corner of the Yukon?

I could go on... and on... but you get the idea. There's a reason that well over 90% of even legitimate resource discoveries never become economic mines. That doesn't mean you can't make money off of a discovery play - but if it has little chance of becoming a mine, then you need to be clear on why you own it, and when it's time to sell.

So, how do you sort out the difference between the good guys, and the bad? And the good projects and the doomed? First and foremost, you have to live and breathe the industry. Then you have to have a deep network to use as a sounding board for your analysis. Our network includes the Explorer's League Honorees, and, now, the Casey NexTen - up and coming young professionals under 40 years old who have already proven their ability to find mines. And it also includes leading brokers, financiers, mining executives, field geologists and numerous others... around the world. In addition to putting boots on the ground in the typically far-away places that new discoveries are found - so we can fully understand the geology, the local infrastructure, relations with the local community and the political environment, etc. - our due diligence process invariably requires in-depth discussions with individuals in our network who know the people and the geology involved in the new play.

That allows us to quickly identify the good guys who are known to use good process (and virtually all real discoveries emanate from good process) and are working on targets with the right geological address. That allows us to do a quick knock-out of something like 90 out of a 100 plays that are brought to our attention... leaving us free to focus on the 10% with a real chance of success.

Now, this may be sounding like a big push for you to subscribe to our more expensive services - and obviously I wouldn't be unhappy if you did (and neither would you). But to make a lot of money in junior resource exploration, you don't need to subscribe to one of our services - though we can certainly make things easier. Even so, I know a number of individuals who have made fortunes in the sector by taking the time to do the homework necessary to build a solid understanding of the industry and the key players.

The bottom line on how to make serious money as a speculator in anything - the junior resource exploration business merely provides a convenient example - is to identify a volatile, high risk, high return investment sector, and then get to know the sector intimately. By doing so, you can eliminate much of the risk... leaving you mostly with the huge upside. And, what risk is left, is very manageable.

And don't forget - I'm talking about investing only a relatively small part of your portfolio... 10%, 20%? You can tuck the balance of your portfolio into assets with a much lower risk profile. These days, that might include gold, and, for the time being, cash.

I didn't intend to do a dissertation on junior resource stocks, or speculations, today - it just popped out. Driven, I suspect, by the discussion with my friend - and by reading a lot of emails from a number of happy subscribers who owned AuEx... or Bayfield... or one of the other recent big winners uncovered by our team in this cycle.

There is, of course, much more to understand about the junior resource sector, but if you're interested in the sector - and you should be - then the best way to proceed is take us up on a risk-free trial to the International Speculator. Click here for the simple details.

As you'll see when you click on that link, at $199 per quarter, we're not giving the International Speculator service away. That said, given the upside potential of the companies it follows, and the fact that you can try it for three full months and still get 100% of your money back if it doesn't provide far more value than it costs - you have nothing to lose by giving it a try.

(The Casey Investment Alert, unfortunately, is currently closed to new subscribers. That's because it focuses on the earliest stage nano-cap plays and special situations that simply can't handle the volume that would be generated by a larger subscription base. Even so, for most investors, the International Speculator should be all you need. )

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

David Galland
Managing Director
Casey Research

The Long Road to Recovery - September 03, 2010

Fri, 03 Sep 2010 13:00:00 -0500

Dear Reader,

Today the government released the latest unemployment data. Bloomberg, always ready to roll up the sleeves to help its friends in government (get reelected), is running a headline that "Companies in U.S. Added 67,000 Jobs in August."

While I haven't had time to go through the minutiae of the report, I find myself scratching my head at Mr. Market's rather positive reaction to the report, given the bullet points:

Manufacturing payrolls declined by 27,000.
Employment at service-providers fell by 54,000.
Retailers cut 4,900 workers.
State and local governments gave walking papers to 10,000 people.
The federal government cut 111,000 jobs (mostly temporary census workers).
The number of "underemployed" - people who want full-time work, but have given up and are now working part-time, increased again, from 16.5% to 16.7%.

The fine folks at Chart of the Day just published their take on the numbers. You may see something cheerful in this snapshot, but if so, it eludes me...

Interestingly, two days ago ADP, a company that does real-time payroll processing for about one in every six U.S. workers, and whose data - because it is based on hard data and not surveying - has tended to be accurate, released its report for August employment. Based on ADP's data, they had forecasted that the construction industry had actually cut 33,000 jobs in August.

Their data pointed to an overall decline in the work force of 105,000 jobs, worse than the government's numbers that showed overall unemployment rose by 54,000 - moving the unemployment rate from 9.5% back up to 9.6%.

At all times, but especially ahead of an election as important as November's, you can count me skeptical in the extreme when it comes to government data. Especially when it flies in the face of the clear trends in motion. Even with the government's stimulus funds still coursing through the economy, in the second quarter U.S. gross domestic product fell by more than half, to an annualized rate of just 1.6%. Without the government's supercharged spending, it's been calculated that actual GDP would have been halved again.

So, where are all these new private-sector jobs coming from?

The construction industry was reported to have hired 19,000 people - a good number of whom, I suspect, are working on government-subsidized projects. At least in this neighborhood - and everywhere else I've traveled over the summer - there are almost no new houses being built. But there are a lot of roads being paved, whether they need it or not.

It also was reported that 17,000 new temps were hired in August. Historically, the number of temporary workers rises throughout the duration of a recession. In fact, only when the number of temps decisively turns down, in conjunction with full-time employment turning up, can we begin to expect that the economy is on the road to recovery.

Health care also added a fair number of jobs, over 20,000. As we've reported in past editions of this missive, the nation's hospitals and medical facilities are dangerously understaffed - especially ahead of the pending nationalization of the industry and the added demand that will trigger - so this is a bright spot, of sorts.

And the mining industry added 8,000 jobs, as you would expect it to. All to the good, until the next round of legislation sends this and other "dirty" businesses back into retreat. (A major overhaul of the U.S. mining regulations was temporarily shelved because the Democrats were concerned it would hamper Nevada senator Harry Reid's reelection chances. After the elections, expect it to resurface.)

However, even if you take the government's latest unemployment report at face value and accept that the private sector added 67,000 jobs, with overall employment falling again by "just" 54,000, the country still hasn't even begun the process of clawing back the more than 8.4 million jobs lost since this crisis hit.

And, given that the economy is being helped along through overt stimulus and the Fed's not-so-overt policy of maintaining abnormally low interest rates, conditions for a recovery are about as favorable as they're going to get.

As Bud Conrad explains in detail in this month's edition of The Casey Report, published about an hour ago, these low interest rates simply can't continue. And when they start to go up, along with taxes as the Bush tax cuts expire, the faltering economy will be dealt another body blow. (Click here to read Bud's analysis.)

I might quip that the road to recovery will be long indeed, but that would be inappropriate, because so far the road to recovery is nowhere in sight.

Since I'm being skeptical about this latest bit of ginned-up good economic news, I thought it appropriate to share a note I received this morning from George S., a dear reader and new correspondent based in Greece. I've been reaching out to our subscribers in that bedraggled country to get their on-the-ground perspective. Here's George's latest note...

Dear David,

A snippet that might be fun for you to hear about.

In Greece the "system" has 2 price tiers for diesel fuel. One that users of diesel for cars, trucks, etc. use, which, for sake of clarity, say, costs 1 euro per liter, and that used for heating, which, say, costs 0.70 euro per liter. The distributor collected the 0.70 from the customer and then submitted paperwork to the state and collected 0.30 euro within 5 days straight into his bank account from the state, EXCEPT at the end of the period, when heating fuel is not any longer needed (mid-April), they did not get the difference paid back. They now (4 months later) have been told they will get the refund in the form of government 2-year bonds.

I wonder how many more tricks of this sort have been used by the "little Hitlers" of this country to cook the books and show to all that they have managed to reduce the deficit by 40%.

Just for the record, I hear that the same is happening with the return of VAT, which is of course much larger in size.

Seems that lying is an inherent vice of the politicians worldwide - any ideas how we can get rid of them?

All the best,

George

I really do hate to be a pessimist, but until I see even a glimmer of a turnaround in the anti-business, pro-big government attitudes of the nation's power elite, I'm keeping my head down. And for good reason - these days any little thing can bring Uncle Sam's fine-wielding thugs down on your head.

Your Money or Your Business

This week it was announced that the company that makes Botox will pay the U.S. government $600 million to settle misdemeanor claims that it "misbranded" its product for unauthorized uses, such as treating eye spasms, even though those unauthorized uses have been proven to be safe and effective. According to the government, over the five-year period in question, the company made somewhere between $20 million and $50 million a year off those unapproved uses. So, taking the highest number, $50 million a year, the company might have made $250 million from doctors using the product for something other than wrinkle smoothing.

Yet after years of fighting the feds, including suing the FDA for standing in the way of the company's efforts to be approved for wider applications (including the treatment of children with cerebral palsy, which even the American Academy of Neurology has endorsed Botox for, saying it was an "effective and generally safe treatment"), the company finally caved in and agreed to pay the government $600 million to go away.

The steady assault of federal and state governments on U.S. business, using lawsuits to harvest oversized fines, is just one reason so many American companies have moved large parts of their operations overseas - another is the rising cost of complying with a growing body of nanny state regulations.

A case in point arrived in our mailbox last week. It was from cataloguer Smith + Noble, a company we had purchased some shades from several years ago. The president of the company, Ken Noble, wrote us to let us know that...

"In cooperation with the U.S. Consumer Product Safety Commission, Smith + Noble is voluntarily recalling about 1.16 million Roman shades and 115,000 rollers shades, sold to consumers from 1998 through April 2010... This recall involves all custom made-to-order Roman shades, and roller shades that do not have a tension device attached to the continuous loop cord."

Through what seemed like gritted teeth, Mr. Noble went on to explain the recall...

"Smith + Noble is aware of one report of a 5-year-old boy becoming entangled in an unsecured continuous loop on a roller shade in May 2009. No medical treatment was required. Smith + Noble is aware of no reported incidents involving Roman shades."

Now, I'm sure that somewhere out there is a bureaucrat who is all swelled up with the pride of a job well done. I suspect Mr. Noble has a different view, being forced, as he clearly was, to spend millions on what is, by any statistical calculation, an unnecessary recall. �

Starting and operating a business is a challenging proposition in the best of times. That businesses have to soldier forth with a parasitical bureaucracy on their backs - sucking out the entrepreneurial life blood with taxes, forced insurance, minimum wages, more taxes, regulations, and fines - is very much not helpful.

I hope when the time comes to throw the bums out of Washington, people remember to clean out the cellars full of the entrenched bureaucrats and the nonsense regulations they enforce that are poisonous to businesses and to a robust economy.

Report from the (Gold) Field

In yesterday's edition of this service, I discussed a bit of the process our International Speculator team follows to separate the big potential junior exploration companies from the paper-tigers that dominate the industry. Heading the team is hard-working, always-on-the-go Louis James. Overnight, Louis sent me the following note from the field. For the second time in as many months, he's kicking rocks in the Yukon. Here's his brief report...

I'm at the SKKY Hotel in Whitehorse, Yukon, after having spent two hours flying through storms in a plane so small, the three passengers had to carry their bags on their knees. My trip was delayed and compressed, due to the weather, but it was worth it. The project I came to see has genuine merit - and it sits on crown lands in a vast stretch almost devoid of people, except for those working on other mineral exploration in the area.�More on that soon.

What I want to say now is that the province is bustling with mineral exploration, development, and exploitation activity. Sherwood Copper (now Capstone Mining) was the first company to get a new project (called Minto) permitted and into profitable production in the province this cycle, and Alexco is now close to being the second, having received the final permit necessary for its very high-grade Bellekeno silver mine. Kinross bought out Underworld Resources in the Yukon's White Gold district, and several other juniors are making headlines with significant discoveries here as well.

The province has other advantages, including relatively decent roads and power (for being so far north), a cooperative government that clearly favors responsible mining, and none of the land disputes with First Nations that can make British Columbia a tricky place to work. Best of all, the territory is still greatly underexplored, and land is still available for staking, even in some of the hot districts where recent discoveries have been made.

Some of those discoveries have spiked the relevant stocks to very high prices, so newcomers to the field should be cautious, but the field is wide open and I think the odds are very good that we'll see more big discoveries ahead. The Yukon is a place that bears watching, and that's exactly what the International Speculator team will be doing.

To stay in the loop on the next big plays in the Yukon and around the world, kick the tires with a three-month, no-risk subscription to the International Speculator. For all the reasons I detailed yesterday, you'll be very glad you did. Details here.

Friday Funnies

The following came from a quite brilliant beer company advertising campaign. This is titled, "What goes through your mind when someone says, let's go out for a drink?"

There are two other iterations of the campaign, also very funny, that you can view here.

The Stranded Irishman

Last week, I got in trouble with one dear Catholic reader over the joke about the Preacher's Ass, though for the life of me, I can't imagine how anyone could have taken offense to the joke on religious grounds. That is, unless they have a seriously retarded sense of humor. In any event, likewise I can't see how anyone, even someone Irish, could take offense at this next joke, what do you think?

One day an Irishman, who�had been�stranded on a deserted island for�over 10 years, saw a�speck on the� horizon.

He thought to himself, "It's certainly not a ship."

As the speck got closer and closer, he began to rule out even the possibilities of a small boat or a raft.

Suddenly there strode from the surf a figure clad in a black wet suit. Putting aside the scuba tanks and mask, and�zipping down the top of the wet suit, there stood a drop-dead gorgeous blonde!

She walked up to the�stunned Irishman and said to him,

"Tell me, how long has it been since you've had a good�cigar?"

"Ten years!" replied the amazed Irishman.

With that, she reached over and unzipped a�waterproof pocket on the left sleeve of her wet suit and pulled out a fresh package of cigars and a lighter.�

He took a cigar, slowly lit it, and took a long drag.

"Faith and begorrah!" said the castaway. "Ah, that is so good!�I'd�forgotten how great a smoke can be!"

"And how long has it been since you've had a drop of good Bushmill's Irish Whiskey?" asked the blonde.

Trembling, the castaway replied, "Ten years!"

Hearing that, the blonde reached over to her right sleeve, unzipped a pocket there and removed a flask and handed it to him.

He opened the flask and took a long drink.

"'Tis nectar of the gods!" shouted the Irishman. "'Tis truly fantastic!!!"

At this point, the gorgeous blonde started to slowly unzip the long front of her wet suit, right down the middle. She�looked at the trembling man and asked,

"And how long has it been since you've played around?"

With tears in his eyes, the Irishman fell to his knees and sobbed,

�"Jesus, Mary, and Joseph!�Don't tell me that you've got golf clubs in there too!"

(Get it, "played a round"?)

When Insults Had Class

For those of you did take umbrage at that last joke and are going to send me a nasty note at david@CaseyResearch.com, the following insults from a more literate age might come in as a handy reference as you craft your note.

In an exchange between Winston Churchill and Lady Astor, she said, "If you were my husband I'd give you poison."�He said, "If you were my wife, I'd drink it."

****

A member of Parliament to British Prime Minister Disraeli: "Sir, you will either die on the gallows or of some unspeakable disease."�

"That depends, Sir," said Disraeli, "whether I embrace your policies or your mistress."

****

"He had delusions of adequacy." - Walter Kerr

****

"He has all the virtues I dislike and none of the vices I admire." - Winston Churchill

****

"I have never killed a man, but I have read many obituaries with great pleasure."� - Clarence Darrow

****

"He has never been known to use a word that might send a reader to the dictionary." - William Faulkner (about Ernest Hemingway).

****

"Thank you for sending me a copy of your book; I'll waste no time reading it." - Moses Hadas

****

"I didn't attend the funeral, but I sent a nice letter saying I approved of it." - Mark Twain

****

"I am enclosing two tickets to the first night of my new play; bring a friend... if you have one." - George Bernard Shaw to Winston Churchill

"Cannot possibly attend first night, will attend second... if there is one." - Winston Churchill, in response.

****

"I feel so miserable without you; it's almost like having you here." - Stephen Bishop

****

"I've just learned about his illness. Let's hope it's nothing trivial." - Irvin S. Cobb

****

"In order to avoid being called a flirt, she always yielded easily." - Charles, Count Talleyrand

****

"Some cause happiness wherever they go; others, whenever they go." - Oscar Wilde

****

"I've had a perfectly wonderful evening.�But this wasn't it." - Groucho Marx

Video of the Week - Dancing Dog

My friend Brian Hunt sent along a link to a video of a dog that dances the Merengue. It's really incredible. Here's the link.

That's It for This Week

In something of an irony, we'll be joining in with our fellow citizens celebrating the long Labor Day weekend here in the U.S. - by not laboring at all.

As such, the next edition of Casey's Daily Dispatch will be published on Tuesday, September 7.

Until then, thanks for reading and for being a subscriber to a Casey Research service!

David Galland
Managing Director
Casey Research

How to Make, or Lose, a Fortune in Resource Stocks - September 02, 2010

Thu, 02 Sep 2010 13:00:00 -0500

Dear Readers,

I have just finished writing today's missive, and am circling back for a final edit.

As is often the case, when I sat down to write today's musings, I had no idea what I was going to write about.

It came as a bit of surprise, therefore, that I ended up getting well stuck into two fairly long essays - one on some of the fundamentals of making the big money in small resource stocks. The second essay is observations on whether or not this is a good time to start buying real estate.

The first essay popped out when I tried, in the first draft, to explain the difference between this letter and the full-contact, bottom-up analysis that is found in our paid services. Then it took on a life of its own.

With apologies for the length of today's edition, and some of the overt promotional pitches, I'll pick up the story from there. You should be able to see for yourself how I ended up going off on such a tangent...

To illustrate the difference between the Daily Dispatch and our paid advisories, in this service we might provide updated research that makes the case for including gold in your portfolio. But that's not the same thing as doing in-depth research on which of the gold ETFs do the best job of correlating with bullion, or which of the mid-cap and large gold producers offer the most compelling value based on their financial metrics, their reserve profiles and management. For that, you need our Casey's Gold & Resource Report.

(Ed. Note:� At just $39 a year, with a 100% money-back guarantee, if you're not already a subscriber, then you are either not paying attention to what's going on around you, or you're hopelessly cheap. Either way, you are likely to miss out on one of the most powerful bull markets of your lifetime. More here. )

On the general topic of resource investing, I had a pleasant conversation with a financial advisor friend earlier this week. About five years ago, after a casual conversation about the sort of analysis Casey Research does, he subscribed to our International Speculator and Casey Investment Alert. Out of the blue this week he told me that, as a result of that conversation, he had opened an account to trade our recommendations - starting with a decent amount of money, in the six-figures. Today, five years later, his portfolio is, net, up over 400%. To say the least, he's a happy camper.

For those of you new to Casey Research - and I'm pleased to report that there are a lot of you - a few words are in order as to how that sort of return is available.�

It starts with what we have called in the past, the Speculator's Credo. Simply, while most investors invest 100% of their money in the hopes of getting a 10% return - if they are very, very lucky these days - the intelligent speculator allocates just 10% of their portfolio to investments with the potential to return 100% or more.

The net result in terms of overall portfolio returns can be roughly the same, but, paradoxically, with a much lower risk profile... if you get positioned in the right speculative investments.

But where do you find such investments, you might ask.

For starters, you can look to the junior resource exploration companies of the sort followed in our International Speculator and Casey Investment Alert services. In essence, these companies look to leverage the knowledge of their management and geological teams, along with a relatively little amount of money, into making a large discovery.�

A recent good example is provided by Ron Parratt and the team at AuEx Ventures. As the former head of Nevada exploration for a number of the major gold producers, Ron was responsible for finding over 20 million ounces of gold in that well-endowed state. Growing tired of dealing with large company politics, Ron decided to strike out on his own, and in 2005 he founded AuEx, with a mandate to build shareholder value by finding a large deposit of gold in his favorite stomping grounds of Nevada.

Now, let me ask you - if you headed up well-financed exploration teams in Nevada for close to two decades, do you think you'd develop a pretty good understanding about the geology of the state? Of course.

With his new company, Ron was able to put that knowledge to work for the shareholders in his micro-cap start-up company, as opposed to the suits at corporate headquarters. Right out of the box, Ron and his team drilled into a major new gold discovery. Fortunately, subscribers to the International Speculator were among Ron's earliest shareholders, getting positioned back in October of 2005 at just 55 cents a share. Last week, AuEx agreed to be purchased, sending its shares to $5.77 - for a five year gain of over 949%.

Of course, while the returns early shareholders earned on AuEx were extraordinary, they are not all that unusual for this sector. Sure, spotting the winners early on takes a good deal of due diligence and hard work, and around every corner is a new mine field waiting to blow your investment up. But if you understand how this sector works, you can mitigate a surprising amount of the risk - leaving mostly the exceptional upside opportunity.

As I can't leave you hanging with such a bold statement, I'll continue.

How to Make, or Lose, a Fortune in Junior Exploration Stocks

The first thing to know about junior resource exploration stocks is that they are volatile. You can make 50% in a day, and you can lose 50% in a day.

The topic of aggressive promotion brings me to the second thing to know about junior resource stocks - �namely, that most of them are borderline frauds. That's right - the vast majority of the companies involved in the junior resource sector are headed up by management teams that have no special expertise in finding or developing economic deposits. Rather, what they're good at is telling a really good story based on the loosest of "facts" in order to get investors to pay their overhead and, hopefully, allow them to trade out of their free or low cost shares at a big profit.�

Ron Parratt was among the first of our Explorers' League Honorees - the subsequent success he had with AuEx has only once again confirmed the importance of backing winners.

In exploration plays, size counts.�

Observations about Real Estate

Recently, we have had a number of queries about real estate. And no wonder. For starters, real estate prices have come down. Plus, in an environment with next to zero interest rates, the idea of possibly picking up some income-producing property on the cheap holds a certain appeal to some. Then there's the fact that real estate is very much a "tangible" - and so should hold up reasonably well, should the fiat currency system come undone, as we expect it will before this crisis is over.

The following, from reader and correspondent Ross P., considers the issue of home buying from an interesting angle.

My wife and I have been considering buying/building a house for a while now. After long months of searching,�we have had to ask ourselves about the "value" of a home. I say this because my parents in 1972 purchased a 2000sq/ft home for $20,000. That was almost exactly what my father made per year at his job at the time of purchase. Is this ratio one to consider as a prudent homebuyer not trying to live beyond his means? I make about $150,000 a year and can't imagine purchasing a house here in Pittsburgh for that price and being happy with that purchase.

My parents sold their home in 2001 for $180,000, which is obviously 9 times what they paid for it. We are looking at homes in the low 300s to purchase and I can't imagine the sales price in 30 years being 9 times that price, which would be $2.7 million! So do you see my line of thinking?

Could hyperinflation cause the price to "appreciate" that same way over time? Is inflation what caused my parents home to return 9 times what they paid for it? The reason I wrote to you regarding this topic is that I thought maybe there was a future missive buried in this line of thinking. Maybe not, but if you have time I would love to hear your thoughts on home purchasing at this time.

In response, I have to point out the obvious that all real estate markets are local. Simply, unless it's a mobile home, you can't pick your home up and move. So, for example, you could offer me a house in downtown Detroit for free, and I wouldn't take it. But a house up the road from me just traded hands at over a million dollars (for the record, a 25% discount off of the offering price.) So where, and when, to buy, will largely depend on local market conditions... and the value proposition of the real estate on offer.

That said, given the dismal outlook for the U.S. economy, and housing in particular, if you're going to buy today - you should only do it on your terms. Don't let a real estate agent push you into a quick decision, or into raising your bid. Someone might beat your offer, but with the large housing inventory, the odds are good another dream house is available just down the block.

Now, as to the inflation question. If you do the inflation calculation, then based strictly on the government's debasement of the currency over the last 30 years, the $20,000 that Ross's parents spent in 1972 is the equivalent of $107,000 today. Given that they sold the property in 2001 for $180,000, confirms that there was more than inflation going on.

As you can see in the chart just below, while they sold it early on in the housing bubble, by 2001 housing prices - encouraged by the Fed's loose money policies, and a collapse in lending standards - were already on their way to the stratosphere.

While much of the appreciation in Ross's parents' home can be attributed to currency debasement, it is reasonable to attribute the additional appreciation to the general housing bubble and, finally, positive local market conditions.

But that was then, and this is now. Is now a good time to buy? Again, with the caveat that all markets are local, my general sense is that it's too early, but maybe not by much.

Weighing in on the "wait a bit longer" side of the argument is the large inventory of homes. And while that inventory is high, it is likely understated due to the shadow inventory of houses owned by fed-up sellers who have pulled their homes off the market in order to rent them and off-set some of their carrying costs while waiting for better days. In addition, there are millions of houses either in foreclosure, or which will be before too long, adding to the inventory.

On the demand side, high unemployment, a sluggish economy and the end of government home purchase incentives, home sales are falling again - indicating no significant decrease in house inventories any time soon.

On the flip side of the argument, today's mortgage rates are unnaturally low - and so, unlikely to last. When they begin to rise again, they are likely to rise a lot, and in relatively short-order. First and foremost, there is no way the government's benchmark rates can continue to bump along next to zero, especially not with the amount of debt and deficits we're running. And even a return to a rate close to the long-term norm will have a devastating effect... starting with mortgage rates (and, as a knock on consequence, house sales and prices.)

Secondly, something like 95% of all new mortgages are currently being purchased, or otherwise guaranteed, by Fannie Mae and Freddie Mac. As you don't need me to tell you, those two organizations have essentially been nationalized and are broke and doomed to fail. Simply, outside of a full-on communistic system where all property is the property of the state, the government can't be the mortgage lender of first, second, and last resort. In time, as Fannie and Freddie are revealed for the scams they are - followed by another trillion dollar bail out - the government is going to have to extricate itself from the mortgage business, which will result in rates being set by the market and not by government dictate.

Thus, buying a piece of property today with a fixed rate mortgage of just over 4%, would be about as cheap a mortgage as you'll ever get... now, and for the balance of your lifetime.

What about inflation? Though one is tempted to add the likelihood of a big inflation to the "buy now" side of the balance sheet - because property is tangible - my sense is that it's mostly a moot point. While Ross P. can't foresee a house that sells for $300 thousand today being worth $2.7 million in 30 years, not only can we foresee that happening - we'd be surprised if that was all it sold for. Of course, my reference point is today's currency units; in 30 years, much fewer "new dollars" will likely be necessary.

That's because the past 30 years represent the salad days of the current fiat monetary experiment. The fun part, if you will, with everyone feeling wealthier because they had so many more dollars in their bank and brokerage accounts, and because the things they owned that were priced in dollars - Ross's parents' house, for example - had appreciated in nominal terms. The next 30 years, however, will include the dark years where the fiat monetary system comes unglued.

When that happens, some analysts expect that the dollar price of sound money - gold - will rise to $5,000 an ounce. Other analysts think it could go much, much higher than that. I don't know, and to some extent, as long as I have a sufficient position in gold, I don't care. That's because the dollar is just a piece of paper with some numbers on it. As long as my gold, and other tangible assets I own, continue to hold their purchasing power, even as the number of zeros on the dollar expands - I'm good to go.

As a tangible, the price of your real estate is likely to rise in dollars' terms, but only because the dollar is falling. However, the premium that Ross's parents received as a result of the housing bubble will not rematerialize in our lifetimes. The overbuilding of the recent bubble years, coupled with fairly straightforward demographics related to the baby boom and bust - along with the inevitable return to sane, versus insane, lending standards - will conspire to keep the value of homes, regardless of their price in dollars, at or well below current levels for years and even decades to come.

So, no easy answer to the question of whether now is the time to buy. As with most things, it comes down to a personal calculation, based on how much you can comfortably afford to pay. By extension, that requires further contemplation as to how confident you are that your income and net worth will continue to allow you to afford the payments well into the future. Of course, in addition to your mortgage payments, that calculation has to take into account property taxes, which are going up, as well as maintenance, association dues, and more.

And, because all real estate markets are local, you also need to do some serious due diligence on the outlook for local markets. In Ross's general neighborhood, Harrisburg, Pennsylvania just defaulted on a $3.3 million municipal-bond payment, and Philadelphia's finances are also in poor shape - so, before buying, he should do enough research to be confident that the neighborhood isn't going to deteriorate.

Finally, one more reason why we may not have to wait overly long before real estate becomes at least a rational investment. And that reason is that there is a lot of money on the sidelines just now, both in the U.S. and abroad. Much of that money is in cash, and much is in bonds - a disaster in the making. As interest rates start moving up, and the fiat currencies start to come down, investors will become fairly desperate to get out of bonds and into pretty much anything with a discernable heartbeat. To the extent that housing prices have fallen by another, 20%?, 30%, will be the extent to which it is again considered a safe asset to own and some percentage of money will certainly begin to flow back into real estate.

So, personally, I would hold off buying real estate for the time being. At least in the post-bubble markets where the debt still really hasn't been addressed (much of it now sits on the books of the Fed, and Fannie and Freddie), and where desperate governments will take advantage of the fact that you can't pick up and move your house to raise your property taxes.

That said, I'm in the process of building a house in Argentina, a cash market where mortgages are almost non-existent. But that's a story for another day.

That's it for Today!

I didn't intend on going on so long, but there you are, and there you go... I hope the discussion was of interest and value to you.

Tomorrow, I'll almost certainly be shorter - as the kids have the day off, as well as Monday, for the Labor Day weekend. While I'll show up here again tomorrow, Monday we'll be taking a day off from publishing this missive.

Hopefully, if you haven't done so already, you'll actually take the time to sign up for the International Speculator today (more here).

Or, as the least, to the massively underpriced Casey's Gold & Resource Report (more here).

While I know that I'm being a bit strident on the need to sign-up for one of our paid services, and you know that I have a vested interest in you doing so - I also know that because we offer a 100% money-back guarantee on both of those publications, we'll only do well if you do well.

Otherwise you get a free look at our paid publications, and we get nothing. �Seems a more than fair proposition to me, and our paid subscriptions really will help you get the most out of the current market environment.

Until tomorrow, then, thanks for reading and for being a subscriber to a Casey Research service.

David Galland
Managing Director
Casey Research

Tech Still Churning Along - September 01, 2010

Wed, 01 Sep 2010 13:00:00 -0500

Dear Reader,

Chris here. I know I said that David would be back today, but he's still adding the finishing touches to our next edition of The Casey Report (due out Friday), so I'll be filling in along with a couple of my esteemed colleagues.

Let's get started...

To this news, you might respond, so what? But I think the deal embodies what could be seen as a fundamental shift in the market from PCs to smartphones. And that's profound.

From the 1980s to today, General Motors slid steadily downward, racking up billions in losses that culminated in a painful bankruptcy/bailout. Over the same period, a handful of geeks from Seattle grew their dorm-room startup, Microsoft, into a global software empire with over $60 billion per year in revenue. Along the way, the company turned four employees into billionaires and an estimated�12,000�into millionaires, while amassing some $205 billion in equity for shareholders.

And the list goes on.

With that shameless but sincere plug, let's move on...

Another House Call

By Kevin Brekke

We last scrutinized the Case-Shiller numbers in an April Dispatch in reaction to media headlines making rosy claims based on a rather narrow event horizon and tortured syntax. At the time, an uptick in a minority of constituent housing markets had the 20-city index sporting a year-over-year gain. Yet, looking at the underlying markets individually revealed that multi-month declines had simply been interrupted by a price hiccup, and we noted:

"Both indexes might be higher than they were a year ago, but both have been in a downtrend for the last 5 consecutive months. In fact, 15 of the 20 cities tracked have seen their index fall for between 3 and 7 consecutive months."

The Case-Shiller index is back in the news following the release of its latest measure of home prices for June 2010. Both indexes showed small gains for the third consecutive month, with the 20-city and 10-city indexes back to their Dec '08 and Nov '09 levels, respectively. And on the surface, when stated thusly, it gives the impression that housing has bottomed and is on the mend. But let us take another look, this time stepping back a few paces to gain some perspective.

A single chart showing all 20 index cities would resemble something begging for sauce and meatballs, so we broke it down into groups for clarity. The next five charts plot each index city, plus the indexes themselves, starting at their price peaks through June 2010.

Group One: Los Angeles, San Diego, New York City, Washington DC, Boston.

Group Two: San Francisco, Portland (OR), Miami, Tampa, Seattle.

Group Three: Denver, Minneapolis, Charlotte, Chicago, Dallas.

Group Four: Detroit, Atlanta, Phoenix, Las Vegas, Cleveland.

And lastly the 10-city and 20-city indexes:

At best, the charts depict a housing market that lacks direction, modulating in a narrow channel with the latest blip tracing higher. We would not wager the deed to the farm that a housing bottom is in and recovery has taken hold. To the contrary.

In our view, and as we forecast, the homebuyer tax credit lent temporary buoyancy to a sinking market. It is not a coincidence that the government-subsidized program to boost home sales that ended in April spawned a moderate rise in prices that began the same month.

Less well known is that the deadline for closing a sale was extended from June 30 to September 30, 2010, with the stipulation that a binding contract be in force by April 30. With credit tight, demands for higher down payments, and borrowers struggling with low credit scores, the up-for-reelection Congress is doing all it can to strong-arm these sales through to closing.

In fact, the free fall in house prices was only stabilized with successive government intervention schemes and billions of dollars in stimulus. First came the American Recovery and Reinvestment Act in early 2009, followed by the First Time Home Buyer Tax Credit later that year. The tax credit proved so successful, it was modified and extended into 2010. Whether or not housing can sustain this momentum without continued CPR administered from Washington will be revealed soon.

The missing ingredient to a recovery in housing, and the general economy, is of course jobs - it's kind of hard to buy a house without one. The last chart above hints at this, with the recent dip in the unemployment rate coinciding with a rise in house prices. However, the recent rash of bad news regarding the sales of new and existing homes portends a resumption of weak house prices in coming months. We will continue to monitor housing and send along our observations in this daily letter.

Regulation to Nowhere

By Vedran Vuk

China has some serious economic issues, but many are pointing to the wrong problems. A common culprit is the vast government spending that has created empty cities such as Ordos on the Mongolian border.

At first, the reckless spending on the empty city seems like the apex of government waste. But in a way, this isn't so bad. In fact, it is a lesser evil as far as government expenditure goes. The United States has had similar projects on a smaller scale, such as the Alaskan bridge to nowhere.�

Though many were outraged by the bridge, the spending could have been worse. Think about it this way. The bridge to nowhere would have cost nearly $250 million. The result would have been a redistribution of funds to a select few Alaskans and a useless bridge. Sure, it's a waste. But suppose that instead, the government gave an additional $250 million to the Environmental Protection Agency or to the Internal Revenue Service to hire more employees.

With a bunch of new environmental busy-bodies to concoct and enforce regulations, we'd certainly be worse off. They would spend their time harassing and intimidating mines, power companies, and other productive industries. As a result, it would become more difficult to operate these important businesses. With more restrictions and obstacles, jobs are lost and costs increase.�

The same goes for the IRS. What's worse for the economy - a bridge to nowhere or a thousand new tax agents?

While the bridge to nowhere received loads of attention, few camera crews are present for the most wasteful funding marked for regulatory bureaucracies. Government intervention and regulation are the real problems in the economy. If everyone in D.C. was paid $150K a year to dig a ditch the size of North Dakota, we'd be all better off. Their giant ditch would be a complete waste. But they would be away from their usual schemes and regulations. In a sense, the bridges to nowhere and the empty Chinese cities keep the stupids occupied.

Even today, our primary problem isn't necessarily the stimulus spending. In fact, one could argue that the stimulus has had little to no effect. It's the Federal Reserve's intervention in the economy that caused the crisis and has acted to prolong it as well. Also, the new financial regulations threaten the competitiveness of America's financial sector. Despite our problems, people around the world still entrust their savings and finances to New York City. Any threats to this status quo destabilize the whole economy. Furthermore, stricter derivatives regulations could negatively affect businesses from Coca Cola to Morgan Stanley. Excessive expenditure is waste. But regulation is economic destruction.

The same goes for China. The main problems are not the empty cities. The extreme monetary manipulation by the central bank is the biggest threat of all. With a vast increase in loans and the money supply, China has spawned another real estate bubble sure to pop at some point.�

The main problems during the Great Depression were also intervention and regulation. Yes, our spending today could match FDR's, but the regulations still don't. During the New Deal, nearly every profession had wage controls. Price controls covered many industries. During the war, rationing further hampered the economy. Crops and animals were burned and slaughtered to manipulate agricultural prices. Tariffs stifled world trade. Anti-trust laws bullied the most productive companies. A businessman could not start almost any project without first gaining the approval of bureaucrats. The damage caused by spending on make-work projects was nothing compared to the economic devastation caused by these policies.

Are there better places to put money than a bridge to nowhere? Of course, but there are far worse places as well. If money has to be spent, I'd rather it go toward a bridge to nowhere or an empty city than straight into a regulatory agency.�

That's It for Today

Chris again. And that, dear reader, is that for today. A glance at the screens before I go, and I see that stocks surged upward today on seemingly upbeat economic reports from China and Australia and an unexpected rise in the U.S. manufacturing index. The major stock indexes are up about 2.5% as I write. Meanwhile, gold is holding strong above $1,246/oz, and crude is up a bit at just under $74/bbl.

Also, in case you missed it, auto sales figures are back in the news. And they're not pretty. According to this article from Bloomberg, U.S. auto sales in August were the slowest for the month in 28 years as model-year closeout deals failed to entice consumers concerned the economy is worsening and they may lose their jobs. No kidding, huh?

Now I must run. David will be back with you tomorrow. Until then, thank you for reading and for subscribing to a Casey Research service!

Chris Wood
Casey Research, LLC

Japan Revisited - August 31, 2010

Tue, 31 Aug 2010 13:00:00 -0500

Dear Reader,

Chris here. David is still finishing up our new edition of The Casey Report due out this week, so I'll be covering today's Dispatch with ample assistance from a couple of my esteemed colleagues.

I read an article in The New York Times yesterday indicating that the prime minister of Japan, Naoto Kan, has recently proposed new stimulus steps to jumpstart the economy, while the Bank of Japan, under pressure from the government, further eased its already easy monetary policy.

Curious, I thought. Hasn't Japan been engaged in government stimulus for the past couple decades? Why is this news?

The answers to those questions are: (i) yes, Japan has been involved in stimulus for quite some time; and (ii) it's only news in the sense that it has yet to work.

As you can see in the chart below, the Nikkei has basically been in free fall for the past 20 years, from a peak of 40,000 at the beginning of 1990 down to about 9,000 today, with a couple drops below 8,000 along the way.

Not long after the Japanese stock bubble burst in 1990, the government began enacting stimulus measures to get the economy back on track. These measures amounted to dropping central bank interest rates to basically zero and flooding the system with debt in an effort to prop it up. Sound familiar? The result today is gross government debt equal to 250% of GDP.

So even though these Japanese "stimulus" measures have failed to work for the past 15 years, and the Japanese economy has floundered along accumulating more and more debt along the way, the wizards in Washington and at the Fed have chosen this very pattern to repeat. Maybe it will work this time...

I don't have a crystal ball, of course, but I'd expect things in Japan and the U.S. to play out in a similar fashion in the near future. In addition to huge debt levels and virtual certainty of climbing interest rates not far down the road, both countries have the demographic problem of an aging population that must be subsidized by fewer workers per retiree each year. In Japan, the demographic situation is probably worse because their population is actually declining, while we're still seeing modest growth in the U.S.

Another important difference to note is the fact that Japan's bubbles have, for the most part, already burst. We've seen this to some extent in the U.S. obviously, but not to the extent you'd expect given all the malinvestment that occurred in recent boom times. In the end, I don't know how much these differences will matter. It will be extremely difficult, if not impossible, for both Japan and the U.S. to handle their debt loads once interest rates start to rise, further shattering confidence in their respective currencies and pushing rates even higher.

Good Math Slices Bad Bologna

David sent me this article yesterday by Tom Naughton. It's a good read because it addresses the importance of understanding math to know when you're being lied to. Naughton's warning: if you can't do the math, researchers with an agenda will use lies and statistics to bamboozle you. Here are a couple of examples that Naughton provides about how "they" do it.

(Please note there is a common math error committed by Naughton in one of the examples, which I'll address below. Also note that I'm not trying to imply anything about the examples provided except that they show how math can be used to mislead you.)

Scare people with percentages.�When you see a percentage, you're looking at the results of multiplication or division. But when you see the word "difference," you are - if the researcher is honest - looking at simple subtraction. If a value goes from 20 to 22, it's an increase of 10%, but the difference is 2. (Still with me? Good; you have a functioning brain.)

Multiplication and division can produce big, impressive-sounding percentages that are in fact nearly meaningless. Here's an example that helped enshrine the "cholesterol kills" theory:

After a major study with the acronym MRFIT was concluded, the researchers announced that people with high cholesterol were over 400% more likely to die of heart disease.�Ohmigosh!! Get me into an Ornish program, now! I must reduce my cholesterol!

That's a big, scary number. Let's see how they came up with it.

Over the course of the study, 0.3% of the men whose cholesterol was below 170 died from heart disease. Meanwhile, 1.3% of the men whose cholesterol was over 265 died of heart disease.�Over 265?! Dead man walking! Buy your casket now and save!

And in fact, since 1.3/0.3 = 4.33, you could say that 1.3 is over 400% higher.

Now flip the numbers and look at the actual difference. In the low-cholesterol group, 99.7%�did not�die from a heart attack. Among the very-high-cholesterol group, 98.7%�did not�die from a heart attack. That's a difference of 1.0%. In other words, if you go up the scale from low cholesterol to very high cholesterol (nearly 100 points higher), the real difference is that an extra 1 in 100 men died of heart disease. Not quite such a scary number, is it?

Wow people with percentages.�Percentages work in the other direction, too. You've probably seen the Lipitor ads where Pfizer announces that this wonder drug reduces heart attacks by 36%. That sure sounds impressive ... until you look at the actual difference.

In the study cited by Pfizer, men with known risk factors for heart disease took either Lipitor or a placebo. In the placebo group, barely more than 3% had a heart attack. In the Lipitor group, 2% had a heart attack. Use division, and you get that impressive 36% reduction. But the difference, once again, is 1 in 100, or 1%. Boy, that's worth giving your liver a major smack-down.

There are other examples from Naughton's article, but the two above seem the most prominent. And yes, there is a math error in the first example. The line "And in fact, since 1.3/0.3 = 4.33, you could say that 1.3 is over 400% higher" is not accurate. This is a common mistake people make to say how much bigger one number is than another, they forget to subtract out the initial number. Even though 1.3 is 433% of 0.3, it's only 333% higher than 0.3. That is, increasing 0.3 by 333% gets you to 1.3; if you increase 0.3 by 433% you get 1.6. (My apologies if you're well aware of this fact. But I see the mistake so often, I figured I'd mention it.)

Investors often make this mistake when calculating returns. They'll buy a stock at $15, sell it for $45 (if they're extremely lucky) and since $45/$15 = 3, they'll claim a 300% return, while the actual return is only 200%. The easiest way to keep this straight is an easy-to-remember formula you can think of as: (Ending Investment - Beginning Investment) / Beginning Investment x 100 = Return Percentage.

Plugging the example above into the formula we see that (45-15) / 15 x 100 = 200%, the correct answer. Now, obviously there are more complicated formulas for calculating returns under different scenarios, but the one I've provided here is the answer to the most common problem.

Going back to Naughton's article, his analysis is valid even though he made a math error while explaining it. By understanding the math and digging into the real data of whatever study is being reported on, you will be able to tell if you are being lied to. And that's pretty important, in my book.

China and India: Still Hungry for Coal

By Marin Katusa, Chief Energy Strategist, Casey Research

One can only hope that the "Don't shoot the messenger" adage is still popular in the international community.

Mr Hunter, however, should steel himself for disappointing news. Industry experts are expecting anything but a cut in coal demand for the foreseeable future.

And with power-starved economies to feed and millions of people to lift out of poverty, neither country is going to take kindly to any interference with its energy agenda.

The King May Throw You a Bone, But He Won't Give Up His Seat

By Vedran Vuk

It's hard not to get hopeful about a possible overthrow of the Democrats. But will things change as a result? In my opinion, yes and no. As an analyst for The Casey Report, I constantly analyze the past to discern future trends. In the last century, government has grown bigger and bigger, decade after decade. There's no reason to expect an alternative outcome for the next decade. In this case, the trend is not your friend.

If an ETF or derivative tracked market freedom over the last century, it would probably be a penny stock by now. No one would get excited over an investment with a hundred-year track record of failure. And hence, we shouldn't get too excited about political change.

Perhaps I'm wrong and this is the turning point. But just as picking the bottom of a stock is next to impossible, predicting the turning point for a two-century trend is even more improbable. For this reason, I will not be celebrating when the Democrats are booted out.

The nature of the beast will not change - no matter which party is in power. Economist Murray Rothbard put it best: "...the State is nothing more nor less than a bandit gang writ large."

Many of my free-market friends say, "What a great line!" And then they quickly return to promising hope and change with a free-market flavor. However, I take the line quite literally. It's not a funny jab at the government but instead a definition. The government is not some association where we hold hands and decide how to best run the country. The entire apparatus exists as an engine for wresting hard-earned goods from productive members of society. Millions depend on this gang writ large, whether through government contracts, agency jobs, or personal benefits.

Why, it's not even difficult to find conservatives and libertarians living off the government dole. The richest counties of this country surrounding D.C. won't relinquish their plush lifestyles for any ideology. Government employees, welfare recipients, and the government-made millionaires will fight tooth and nail for their money. The Tea Party soccer mom doesn't stand a chance.

But some argue that this time, it can be done. Our positions make sense, the Tea Party has momentum, and things can improve. To an extent, this view holds some merit. After all, gangs of thieves can improve sometimes.

Could a decent person join the Bloods or Crips gangs in L.A and improve them? Sure he could. Occasionally, gangs do make peace treaties with each other. There are careless gangs that murder innocent bystanders in drive-by shootings, and there are those who assassinate their opponents with precision. A decent person could negotiate peace treaties and curb the violence. But what our reformist gang member can't change is the nature of the gang.�

Many larger criminal organizations perform good deeds for the public. Whether it's giving out turkeys at Christmas or even building houses and soccer fields for the poor, as Pablo Escobar did in Columbia. The occasional kickback is the norm with large gangs and the governments. When the Republicans take over, they will likely throw out a turkey or two to the free-market mobs - most likely through a populist tax cut.

Of course, the D.C. free-market intellectuals will rejoice at these "victories." However, these gains only work to disguise the enterprise's true nature. The small respites from government growth build false hope in the government process. In reality, the government can change no more than can the Bloods or Crips. The king will throw a bone from his table to placate the masses, but don't expect him to give up his seat.

Government has been and always will be crime and theft on a large scale. So, enjoy your Republican turkey when it comes, but don't expect a revolution along with it. The road to serfdom continues. At best, our masters will allow a momentary pit stop on our march for yet bigger government.

That's It for Today

Chris again. And that, dear reader, is that for today. You can see from the chart below that gold is off on a tear today, approaching $1,250/oz as I write.

Meanwhile, stocks are mostly flat, and oil is down a bit from yesterday at $73/bbl. But we'll see what tomorrow brings. Speaking of tomorrow, David should be back at the helm of this Daily Dispatch by then, so you can look forward to that. Until then, thank you for reading and for subscribing to a Casey Research service!

Chris Wood
Casey Research, LLC

The Unintended Benefits of Regulation? - August 30, 2010

Mon, 30 Aug 2010 13:00:00 -0500

Dear Reader,

Chris here. David's hard at work on the next edition of The Casey Report, so he's relying on other members of our team to do the heavy lifting on this missive today. Thankfully, we have a couple of excellent articles from two senior team members to share with you. So without further ado, I'll turn it over to Alex Daley and Jake Weber.

RIMMing Out?

By Alex Daley, Senior Editor, Casey's Extraordinary Technology

Just ask any iPhone user if they'd go back to whatever they were using before it. Chances are they'll chuckle.

Best of all from Apple's viewpoint, the company makes a boatload of money off each device, starting with a few hundred dollars of margin on each phone:

No, Apple doesn't have to fret much about Google. Who does, then? It's that other fruit-flavored device, the Blackberry, from Canada's Research in Motion (RIMM).

But as you can see, over the past year only the iPhone has been holding steady. Everyone else, including RIMM, has been losing share as Android gulps an ever-larger piece of the pie.

In fact, Morgan Stanley analyst Ehud Gelblum estimates that Blackberry's market share will contract by as much as 30% by 2013, accompanied by a drop in absolute volume for the first time ever.

Figure 1 - Graph From BusinessInsider.com

So that war is about over. With feature phones fading, the competition is shifting directly to the smartphone arena, which is heating to cherry red.�

The Unintended Benefits of Regulation?

By Jake Weber

When the government meddles in the marketplace, it's no secret that the regulation often creates unforeseen and unintended consequences. On rare occasions the unintended consequence can actually be beneficial to the targeted market participant. This ultimately was the case when the United States Natural Gas Fund (UNG) was subjected to new CFTC regulation last year.

After energy prices soared to record highs in 2008, government watchdogs scoured the investment world for a source of blame. Naturally, the fingers were quickly pointed at the evil speculators and exchange-traded funds identified as their partner in crime. In the summer of 2009, the CFTC took actions that, although not specifically targeted at UNG, caused the fund to suspend operations for nearly two months.��

The U.S. Natural Gas Fund is an ETF designed to track, in percentage terms, the movement of the front-month natural gas futures contracts traded on the NYMEX. To meet this objective, the fund had invested primarily in NYMEX futures contracts and natural gas swap contracts traded on the London-based Intercontinental Exchange (ICE).

However, in July 2009 the CFTC moved to regulate the foreign-based swap contracts traded on ICE closing the so-called "Enron Loophole." Previously, UNG was able to use ICE swap contracts to side-step CFTC-imposed limits on natural gas positions designed to keep any single player from controlling too much of the market. With the CFTC's new oversight and the (at the time) pending financial regulatory reform bill, UNG opted to temporarily suspend creation of new units in the fund on August 12, 2009.

With UNG no longer creating baskets of shares, there was no arbitrage mechanism to keep the share price in line with its net asset value. As a result, shares of UNG were trading at a significant premium to its net asset value - at times over 20%. Finally, after 26 trading days management announced that share creation would resume on September 28 and that they would start utilizing unregulated, over-the-counter bilateral swap agreements to meet the investment objective.

To examine how this regulation affected the U.S. Natural Gas Fund, I broke down the fund's history into four different periods and ran a correlation analysis between the share price and the front-month natural gas contract on the NYMEX:

Pre-Regulation: From the fund's inception on April 18, 2007, to when UNG announced the suspension of operations on August 11, 2009.
Suspended Operations: From August 12, 2009, to September 27, 2009.
Transition: From September 28, 2009, to December 31, 2009.
Post-Transition: From January 4, 2010, to August 10, 2010

Prior to suspending operations, UNG had a fairly strong correlation of .919 with its benchmark front-month NYMEX gas contract. Remember, the closer the correlation is to 1, the closer are the movements of the two variables. As one would expect, the correlation dropped down to .597 while UNG suspended its operations.

After share creation reopened, the correlation initially went negative for a few days. A negative correlation indicating that as natural gas prices increased, UNG's price actually declined. With the resumption of share creation, the markets quickly eliminated the excessive premiums that had built up while in suspension. The correlation remained weak at .268 during what I call the "transition phase" from September 28 to the end of the year. The transition into the more opaque OTC markets probably contributed to the fund's poor correlations during this period.

Since moving into the OTC swap market, UNG has had its strongest correlation, .972 year-to-date in 2010. I think it's safe to assume that the aim of the CFTC regulation was not to enhance the performance of UNG by forcing it into the OTC swap markets, but that is ultimately what happened.

The story, of course, isn't over as the recently passed financial regulatory bill gives the CFTC authority to regulate all swap transactions, including in the over-the-counter market. It will likely take years for regulators to implement all of the new laws created by the 1,400-page bill, though. When it does come into effect, it could potentially send UNG into another fit of disarray. However, only time will tell how this new legislation plays out. In the meantime UNG continues to have considerably better performance as an unintended consequence of CFTC regulation.

Chris again. Thanks, Alex and Jake. And thank you, dear reader, for spending some of your valuable time with us today. We hope it was well worth it. I have a mountain of other work to get to, so I must run, but before I go, I would like to thank you for reading and for subscribing to a Casey Research service. Until tomorrow...

Chris Wood
Casey Research, LLC

Get Well, Pete - August 27, 2010

Fri, 27 Aug 2010 13:00:00 -0500

Dear Reader,

I spent a fair part of yesterday at the hospital, for a periodic check-up and to visit an old friend who has been laid up as the consequence of a serious accident that borders just on the edge of a statistical impossibility.�

My friend Pete lives in a rural area with less than ideal cell phone reception. In order to get better reception, he walked out on his back porch just at the very millisecond that an errant bullet from a 45-caliber pistol, recklessly fired at a free-standing target half a mile away, was hurtling through the sky. It connected with his hand and jaw, with devastating results.

Fortunately, Pete's remarkable bad luck was followed by a stroke of amazing good luck: at the time he was hit, a neighbor who has a full-time job as an emergency medical technician was haying Pete's field. Being an EMT, he knew just what to do, and was on the spot to do it just in the nick of time to save Pete's life.

As one doctor put it, my friend was the luckiest unlucky guy he'd ever met.

In any event, my buddy is a tough guy and, despite a lot of hardware attached to his jaw, looked surprisingly well. Recovery won't be easy or short, but he'll make it and come out just fine.

Since we're on the topic of hospitals, I'd like to make a couple of other observations from my visit, the first of which you may find laughable in that it is so obvious.

Hospitals are full of old people. �

Now, I know that many of you dear readers are, like myself, no longer in the spring of youth. But I'm here to tell you, if you want some hard perspective on what the final innings of life hold, just swing by your local hospital. Why, it's like stepping into a remake of George Romero's Night of the Living Dead, complete with hollow-eyed old folks staggering about in hospital gowns, clinging to walkers, or rolling around in wheelchairs looking for a nurse.

Of course, there's a smattering of unfortunates from younger generations present - but they are very much the exception to the rule.

Besides yet another reminder to live life to the fullest while one still can - never a wasted lesson - there is a financial aspect to all of this that can best be seen in the following charts.

The first shows the steep demographic trend toward an aging population in the U.S.�

The second chart shows the amount of health care spending relative to age. Which, as you can see, confirms my obvious observation that the clientele of hospitals skews to the elderly.� �

As bad as these demographic trends are for the outlook for health care costs, not to mention the already underwater Social Security system, they are about to get a lot worse.

In the way of explanation, I will loosely recap the conversation I had with my doctor during my check-up, a conversation that went something like this.

"So, how's the whole health care overhaul thing going?"

"You mean all the new computer systems?" she asked from where she sat filling in a computerized form related to my examination - a process that, by the time she was finished, took at least twice as long as my examination.

"No, I mean the new health care legislation."

"Oh, that! Well, in that it provides health care coverage to the people who can't afford it, I think it's a good thing, and long overdue," she said in the unhesitant tone of a true believer.

"What do you think will happen to the whole supply and demand thing?" I asked. "You know, when health care is free and more readily accessible? The hospital already seems pretty crowded, and it took me over a month to get an appointment. Are you going to be able to handle the extra volume?"

"Are you kidding? We can't even begin to handle what we have now. It's a disaster, and it's only going to get a lot worse!"

So, I thought to myself, her sensitive side is in favor of universal health care - as is anyone with a sensitive side. But, in almost her very next breath, she confirmed that the health care system is already sideways to high surf and dangerously listing. Once millions of new and financially unencumbered health service consumers start climbing into the boat, it can only roll over and sink.

But, hey, why worry about reality? Encouraged by the pandering politicos, we Americans have decided we want universal health care, and there's no turning back.

What I find ironic is that the government took this step even though it is coming late to the game vs. other developed nations, and so was able to avail itself of any number of real-life examples of the pitfalls of nationalized health service.

No matter, say the advocates, it's the right thing to do. Damn the details and, I fear, the consequences.

To my way of thinking, it's reminiscent of the U.S. decision to follow the French into Vietnam after their disastrous loss at Dien Bien Phu in 1954 and subsequent retreat. Despite the clear and unequivocal lessons provided by the French experience, we still marched right into the breach.

We all know how that ended.

In the case of health care, we have just taken what was already a really bad situation, caused by past meddling by the government in health care delivery, and increasingly by the hard-coded demographics mentioned above, and have made it much worse by inviting everyone else to the equivalent of a hosted party, drinks on the house.

The consequences are as obvious as my observations about the aging clientele of hospitals. In addition to an unavoidable collapse in the already suffering quality of care in American hospitals, the federal budget, already in critical condition by every measure, has no chance of recovery. And so the government will be forced to take on ever more extraordinary levels of debt to cover its soaring expenses.�

Then, in much the same way the government drafted the young to fight in Vietnam, it will expect the young to ultimately pay off its debts. I wouldn't count on it.

Get well, Pete, and stay well; the outlook for health care in America is not encouraging.

Recovery, What Recovery?

As predicted two days ago by the chief economist of this circus, Bud Conrad, the latest GDP numbers confirmed a reversal in GDP, with annualized growth in the second quarter ringing in at a feeble 1.6%. If the recovery were real, it should have stayed a trend in motion - upwards - and not losing traction.

Some analysts are finally coming to the conclusion that this, and other recent indicators, point to a double-dip recession. We disagree.

In order to have a double-dip recession, you first have to have exited the recession - which we haven't. What the government and its shills have been calling a recovery is nothing more than the predictable, but short-lived, effect of pumping the proceeds from issuing a lot of government debt into the chosen sectors of the economy.�

Kevin Brekke, our Switzerland-based editor, sent over the following that I think helps keep the situation in proper perspective...

Following today's announced downward revision of second-quarter GDP - from 2.4% to 1.6% - the economy officially joins employment on the stage of underperforming actors. A lot has been said about how the economy needs to create so-and-so many new jobs monthly to keep up with new entrants into the workforce. But what about GDP, is there a "minimum" needed with it as well? With that question in mind, let's take a look at GDP and unemployment and see if there is something to see.

A quick study of the chart and, to my eye, it seems like 5% GDP growth is an important level; periods above 5% seem to be accompanied with lower unemployment, and vice versa. There are certainly exceptions, in particular the inflationary 1970-1982 period (something to keep in mind for future reference). This is not trading advice nor high-level analysis. Just an observation. With a current sub-2% GDP, we have a long way to go before the jobless number begins a meaningful decline.

David again. Meanwhile, Uncle Ben, speaking at the Fed's annual symposium in Jackson Hole, confirmed that the Fed will do "all that it can" to ensure a continuation of the imaginary economic recovery. According to Bloomberg...

"The Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," said Mr. Bernanke.

In other words, Bernanke has the helicopters on the launch pad, loaded up with freshly minted dollars, fueled and ready to go. Given his dismal track record as a prognosticator, I think it's safe to dismiss his further comments that the risk of an "undesirable rise in inflation or of significant further disinflation seems low."�

But it would be a mistake to dismiss his clear intention to use loose money policy as a primary driver of future economic growth.

Mr. Market seems to have liked the idea of more funny money - despite a week that has seen a procession of unfalteringly bad economic news, the broader U.S. stock market is up strongly as I write. Then again, so are gold and many gold shares - so we are beginning to see gold and gold shares moving up in conjunction with broader markets, and move up even when broad markets stumble. Just my kind of investment.

Speaking of gold shares, a number of subscribers have written in about the strong performance of the junior exploration companies of late. No question, volume is picking up, and the high-quality juniors are posting some remarkable returns.

This is a topic I want to spend more time on in this service, but not until next week. While I think the broader markets are in for a setback in September - the chart below shows it is statistically the worst month for stocks - the action in the juniors points to a sustained bull market (with the inevitable corrections, of course).

If you're serious about making serious money in the junior resource sector, and have the money and the temperament to accept the higher risks required to hunt the higher returns these stocks can provide, then check out our Casey's International Speculator, the next edition of which will be published next week.

In the meantime, when you subscribe today, you can get fully up to date by reviewing all of our current best bet recommendations, updated analysis, and more in the paid-subscribers-only area of the Casey Research website. Our money-back guarantee means you can take the next three pivotal months to see just how valuable this service is - if it doesn't do way more than pay for itself, then just cancel for a full refund. Details and secure sign-up form here.

Real Life Minority Report: Crime Prediction Software In Use Today

By Chris Wood, Senior Analyst, Casey's Extraordinary Technology

Remember the sci-fi, neo-noir thriller Minority Report from about eight years ago? In case you're a little fuzzy, Tom Cruise plays a pre-crime police officer who arrests would-be criminals before they actually commit a crime. Three psychics (called precogs) float in a pool connected to a large holographic computer and send images to the computer about how the future offense will take place. Cruise and his team then interpret the images and attempt to arrest the culprit before the crime takes place.

Here's one of the precogs:

While Cruise and his team won't be knocking down your door anytime soon to arrest you for something you may or may not do, new crime prediction software is being rolled out in cities across the country in an effort to reduce not only the murder rate, but the rate of other crimes as well.

It's true.

Based on a proprietary algorithm (basically just a list of well-defined instructions for completing a task), Dr. Richard Berk, Professor of Criminology and Statistics at the University of Pennsylvania, has developed software that can supposedly predict which ex-cons will reoffend by committing murder or other various crimes when they're released.

"When a person goes on probation or parole, they are supervised by an officer. The question that officer has to answer is, 'What level of supervision do you provide?'" said Berk.

Historically, parole officers used the person's criminal record and their gut feeling to determine that level.

"This research replaces those seat-of-the-pants calculations," Berk added.

Baltimore and Philadelphia are already using older versions of Berk's software to help determine how much supervision parolees should have by predicting which individuals are most likely to commit murder or get themselves murdered. Berk's latest version of the software (which will be implemented in Washington D.C. pretty soon) expands the scope to include identifying the individuals most likely to commit lesser crimes other than murder as well. If those tests go well, Berk says the program could help set bail amounts and suggest sentencing recommendations.

To develop the software, Berk and his team analyzed over 66,000 cases, then created an algorithm capable of identifying a subset of people more likely to commit homicide or other crimes when paroled or probated by examining variables like prior record and violent acts.

So far, according to the scientific community, Berk's results are "very impressive." And be that as it may, I'm a bit uneasy about the whole idea because of the natural extension from simply using the software to predict if a paroled murderer will kill again, to using newer, more "advanced" iterations on non-violent criminals and eventually people who have committed no crimes at all (like in Minority Report). I'm sure we're a long way from this and you may consider me totally paranoid, but we're already seeing the first glimmer of this transition. As I noted above, the version of the software being rolled out in D.C. is meant to forecast lesser crimes in addition to murder.

What's more, even if the software appears to have real predictive powers (as would be evidenced by a significant reduction in the violent crime rate among parolees where the software is deployed), it will never be able to provide direct evidence that a crime would or will take place.

At the end of the day, in my humble opinion, this technology seems like an over-elaborate fix that steps onto a slippery slope toward greater state control over the individual and less personal freedom. But I can appreciate that it's kinda cool at the moment.

(Ed. Note: For in-depth analysis and stock picks in the lucrative technology sector, check out Casey's Extraordinary Technology. Technology may be America's only hope to compete globally in the months and years ahead - CET will put you solidly in the know and get you positioned in the industry's most profitable players. Just today, the CET editors issued a sell alert on ArcSight Inc. to subscribers, who saw a quick 40% return on this stock within one week of recommendation. Get your slice of the tech pie right now... details and a no-risk offer to try the service here.)

Friday Funnies

While I'm not sure how they cover their high-quality production costs, I'm thankful for whatever keeps The Onion going. Readers who take offense at strong language will want to give their offerings a pass, but anyone else with a sense of humor will enjoy their faux news coverage - it's almost uniformly well done.

The piece here is their news story on Time magazine to begin publishing content for adults, as opposed to the childish fare they currently produce. It's not the funniest thing they've ever done, but it's good and will lead you to a lot of other funny videos.

More Funny Videos

Speaking of funny videos, here's a couple more, not from The Onion.

Everyone Out of the Pool. Click here to watch. I had to wonder whether anyone went back into the pool...

What Old People Do For Fun. Well, at least insane, homicidal old people! Watch it here.

And there's this...

Photo of the Day

The Pastor's Ass�

The pastor entered his donkey in a race and�it won.

The pastor was so pleased with the donkey that he entered it in the�race�again, and it won again.

The local paper read:�

PASTOR'S�ASS OUT FRONT�

The bishop was so upset with this kind of publicity that he ordered the pastor not to enter the donkey in another race.�

The next day the local paper headline�read:�

BISHOP�SCRATCHES�PASTOR'S�ASS�

This was too much for the bishop, so he ordered the pastor to get rid�of the donkey.�

The Pastor decided to give it to a nun in a nearby convent.�

The local paper, hearing of the news, posted the following headline the�next�day:�

NUN HAS BEST ASS IN TOWN

The bishop fainted.

He informed the nun that she would have to get rid of the donkey, so she�sold�it to a farmer for $10.

The next day the paper read:

NUN�SELLS ASS FOR $10

This was too much for the bishop, so he ordered the Nun to buy back the donkey and lead it to the plains where it could run�wild.�

The next day the headlines read:

NUN ANNOUNCES HER ASS IS WILD AND FREE�

The bishop was buried the next day.

The moral of the story is: being�concerned about public opinion can�bring you much grief and misery�- even shorten your�life.�

So be yourself and enjoy life.

Stop worrying about everyone else's ass and you'll be a lot happier and�live�longer!�

Miscellany

New Faculty Announced for Casey's Gold & Resource Summit, Oct 1 - 3. We are pleased to announce that the stellar faculty for our upcoming Gold & Resource Summit in Carlsbad, California, will be shining even brighter with the addition of Ross Beaty, the resource marvel who has earned the nickname "Broken slot machine" by making a lot of people a lot of money over the years... as well as Robert Quartermain, the talented founder of Silver Standard Resources... and rare-coin professional and old friend Van Simmons, who will be co-hosting a workshop on investing in physical metals.

That's the good news. The bad news is that the summit is all but sold out at this point, and new registrations will soon be on a waiting-list-only basis. If you haven't yet registered, you need to act ASAP to secure a seat. Details and a registration form can be found here.
And Don't Miss Out on the Sights & Sounds Event at La Estancia de Cafayate, Oct 20 - 24. The registration is now open for the next gala event at Doug Casey's "Galt's Gulch" in Cafayate, Argentina. In addition to fine wine, classic Argentine asados, music, and much more - Casey Research will again be hosting a half-day seminar. This time around, the program will include Doug Casey, Bud Conrad (with a leisurely amount of time to fully discuss his analysis on the economy and markets), as well as special guest and retirement specialist Dr. David Eifrig, and more.

As usual, Casey Research will also be hosting a VIP dinner for all of our subscribers at the event.

You can learn more about La Estancia and the event by going to www.LaEst.com. As with our summits, these events invariably sell out - and the best hotel rooms in the town go quickly - so you'll want to make your plans to attend right away. To make things simple and easy, La Estancia de Cafayate has an in-house concierge staff that will help you with all your domestic arrangements. All you have to do is to arrange to get to Buenos Aires, and they can pretty much take it from there.

These events are great fun and a terrific way to experience life at its fullest in the beautiful up-and-coming wine district of Cafayate (think Napa Valley 100 years ago), located in Argentina's stunning Salta Province - rated among just a handful of Must-See Destinations 2010 by the professional staff of Frommer's travel guides.

Now, as is the case with many people, I rarely come across a photo of myself that I like. That is certainly the case with the photo that accompanies an interview I recently did with El Estanciero, the official newsletter of La Estancia. Even so, while I hate the photo, I think the interview itself is pretty good and will be helpful for anyone wondering why it is that, out of all the countries and places in the world, Doug Casey picked Cafayate as the place to be... an assessment that I fully concur with.

You can read the newsletter and the interview by clicking on the Download Latest Newsletter link in the upper right-hand corner of the La Estancia de Cafayate website. (But please ignore the picture - while no fashion model, I swear I don't look that bad!)

And that's it for this week. As always, we appreciate you being a subscriber, and you passing along the Daily Dispatch to others you think will appreciate it. Over the next few years, we are all going to share an extraordinary experience - some bad, much good - but as long as we keep our wits about us, and a sense of humor, we'll be fine.

Finally, stay well. While they are necessary, hospitals are truly dismal places. Sometimes, as was the case with my friend Pete, a hospital stay is unavoidable - but your odds of being forced into one are greatly reduced by taking care of your baseline health. Is there anything more important than that? I don't think so.

Until next week, thanks for reading.

David Galland
Managing Director
Casey Research

Weekend Edition - August 27, 2010

Fri, 27 Aug 2010 13:00:00 -0500

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.

A New War Is Being Waged

By Chris Wood, Senior Analyst, Casey's Extraordinary Technology

No, I'm not talking about a new war in the Middle East or any other kind of physical war fought with guns, missiles, and soldiers. This is a war being waged by governments against other governments, governments against corporations, and organized crime and insiders against both. And it's all happening in cyberspace.

Consider for a moment that by December of 2009, computers were being turned into zombies - the slang term for machines that can be controlled by someone other than their real owner, otherwise known as "pwned" (pronounced owned) - at a rate of 148,000 machines per day.

There was a time when viruses were a thing of nuisance alone - they wiped out systems or even just taunted owners, just because the author could. Akin to a teenage prank, they served to destroy value, but rarely to enrich their owners. That is no longer the case.

About two years ago, Heartland Payment Systems discovered that hackers had penetrated their systems for an unknown length of time and were eavesdropping on the majority of transactions the company processed. In all, some 130 million credit cards were compromised, resulting in the largest known case of credit card fraud in history. So far, the company has had to pay out about $140 million in settlements with banks and Visa, along with about $30 million in legal fees.

More recently we've had the China/Google fiasco, a situation that culminated in Google all but accusing the Chinese government of at least abetting a coordinated and sophisticated attack aimed at cracking the email accounts of known political dissidents within the country. Google was forced to admit that the attackers were successful to an extent, in that they managed to steal the source code for the company's password system that protects all accounts. But apparently no accounts were compromised in the attack, according to Google.

The point is that cyberwar is being declared on all fronts and cybercrime is on the rise. Indeed, your organization could be under attack as we speak. The typical organization today faces external threats from bots, worms, and hackers, and internal threats from data breaches, theft, and fraud. The most costly cybercrimes come from three specific sources, in order of costliness: web attacks, malicious code, and company insiders. Together these three threats account for more than 90% of the millions of dollars in cybercrime-related costs the average established company faces.

In order to get a handle on just how much cyber-attacks cost the typical organization today, the Ponemon Institute, a research firm, recently concluded a study appropriately called "First Annual Cost of Cyber Crime Study - Benchmark Study of U.S. Companies." The purpose of the study was to quantify the economic impact of a cyber-attack and help organizations determine the appropriate amount of investment and resources needed to prevent or mitigate the devastating consequences of an attack. Key takeaways from the study include:

Cybercrimes can do serious harm to an organization's bottom line. The Ponemon Institute found that the median annualized cost of cybercrime to the 45 organizations in the study is $3.8 million per company per year (mean of $6.5 million), but can range from $1 million to $52 million per year per company.
Cyber-attacks have become common occurrences. The 45 companies in the study experienced 50 successful attacks per week and more than one successful attack per company per week.
The most costly cybercrimes are those caused by web attacks, malicious code, and malicious insiders, which account for more than 90 percent of all cybercrime costs per organization on an annual basis.
All industries fall victim to cybercrime. While the average annualized cost of cybercrime appears to vary by industry segment, where defense, energy, and financial service companies experience higher costs than organizations in retail, services, and education, all industries are affected.

Now, even though hacking has become a major growth industry, we're not exactly going to plunk down our investment dollars on an organized crime ring. We will, however, back the other side. Defending against these threats has also become big business. Though estimates of its size vary broadly because of differing definitions, even the most conservative valuations peg pure security hardware and software expenditures at well above $16.5 billion annually. And steady, double-digit growth is projected for years to come.

A recent example of the growth in the network and data security space can be seen in Intel's seemingly bizarre $7.7 billion cash offer to purchase McAfee (reflecting a 60% premium at the time of the offer). Upon consideration, however, the deal doesn't appear as weird. Intel's vision involves integrating McAfee's security software with the semiconductors that it produces to eventually take this unified hardware and software into new Internet-connected devices like smartphones in order to secure them.

Intel is getting positioned early in what it sees as a security revolution. According to CEO Paul Otellini, "We have concluded that security has now become the third pillar of computing, joining energy-efficient performance and Internet connectivity in importance."

We agree with Mr. Otellini's thoughts regarding how important security has become. And we think this will be a booming business with huge growth and ample investment opportunities over the coming years.

We're so bullish on the network and data security industry as a whole, in fact, that we recently dedicated a total of one and a half issues of Casey's Extraordinary Technology to the subject and recommended what we think are the two best companies in the space. If you're interested in learning more about the industry and want to check out our picks, sign up for a risk-free trial to Casey's Extraordinary Technology today. Details here.

Thinking About Bonds

By Kevin Brekke, Editor
Casey Research, Switzerland

With the great bond stampede that began in 2009 continuing, giving rise to the very real possibility of a bond bubble, we decided to check the relationship between bond returns and bond fund inflows to see if there might be a correlation. Take a look at this chart:

(1) Measured as the year-over-year change in the Citigroup Broad Investment Grade Bond Index.

(2) Plotted as the three-month moving average of net new cash flow as a percentage of previous month-end assets. The data exclude flows to high-yield bond funds.

As suspected, the rise and fall in total return from bond funds is accompanied by an influx or exodus of bond investors. Data to construct the chart were taken from the Investment Company Institute's (ICI) 2010 Fact Book where they state,

"In 2009, investors added a record $376 billion to their bond fund holdings, up substantially from the $28 billion pace of net investment in the previous year. Traditionally, cash flow into bond funds is highly correlated with the performance of bonds. The U.S. interest rate environment typically has played a prominent role in the demand for bond funds. Movements in short- and long-term interest rates can significantly impact the returns offered by these types of funds and, in turn, influence retail and institutional investor demand for bond funds."

ICI continues by noting that secular and demographic trends have tempered the appetite for equities. An aging population tends to become risk averse, and the Baby Boomers are entering retirement and seeking a safer alternative to the stock market. This occurrence is clearly shown on the right side of the chart. Following the stock market crash in 2008, investors exited stocks and bonds as general panic prevailed. As investor calm returned, a tidal wave of new money flowed into bond funds, turning 2009 into a record year.

And the popularity of bond funds continues. So far this year, investors have funneled $200 billion in new money into bond funds. 2009 was also a record year for total assets and net new capital in bond funds from retirement accounts.

That is the view through the macro lens. Switching to a wide-angle lens gives one pause.

We can't help but draw similarities to the housing bubble that began inflating at the start of the new century. As home prices started escalating they drew the attention of a growing pool of investors. And soon this becomes a self-reinforcing phenomenon; higher prices attract greater numbers of investors that drive prices higher. Likewise for bonds. Bond returns are rising because bond returns are rising. Got it?

We have entered the terminal phase of a bond bull market ushered in thirty year ago by Paul Volker, who drove interest rates over 20%. With 30-year U.S. government paper now under 4%, the easy profits have been made and the low-hanging fruit consumed. Investors today are shimmying out on a very tall and thin branch in search of higher "total return." The snapping of the branch - sending investors big losses - may not be imminent, but it is inevitable.

As David has discussed and warned about often in this daily letter, the fiscal misadventures of the U.S. government will have their consequences. And one of the first victims will be bond investors as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the total return on bond funds will be smashed.

The sad and pathetic irony: to escape the beatings endured in the stock markets millions have sought safety in bonds. The punishment is not over.

We are afraid an awful lot of investors will be left asking, "What was I thinking?"

Uncle Scam

The latest data on global gold trends, Q2 2010, just popped into my email box from the World Gold Council.

The bad news is that the higher nominal price of gold has caused a 5% decrease in jewelry sales over the prior year.

If you're thinking "Hey, that's not that bad!", you'd be right. On this date last year, gold closed at $950... which is $286 below where it trades as I write. In other words, a 30% rise in price has resulted in a decrease of just 5% in jewelry sales.

And even that number is skewed, because the currency value of the gold purchased is up - way up. For example, India - the 800-pound gorilla in the global gold jewelry market - saw total gold jewelry sales fall only by 2%, but in local currency terms, there was a 20% increase in the nominal value of the gold trading hands. China, which only relatively recently reauthorized private gold purchases, saw a 5% increase in jewelry demand, but that translated into a 35% increase in local currency terms.

So, that's the bad news.

The good news - at least for fiat money skeptics - is that total physical gold demand in Q2 rose by a whopping 36%. More tellingly, the increase was 77% when you take into account the dollar value of the ounces purchased.

As you've already figured out, the bulk of the physical demand is coming from investment - with the amount of gold held by ETFs growing 414% over the previous year.

Too far, too fast? I don't think so.

In my opinion, as the fiat money monsters are brought to bay, the price of gold can really only go higher. Overly confident? I don't think so.

That's because when people lose faith in a currency, as they will before this crisis is over, they unfailingly rush to exchange the unbacked paper money for something more tangible. While pretty much anything with an intrinsic value will do - real estate, antique cars, old masters - for all the reasons that Aristotle enunciated, gold is viewed in a class of its own, and so has an unblemished history as a universally accepted store of value.* And, thanks to its portability, divisibility, durability, and consistency, it has also always been looked upon as a convenient form of money.

The most pressing macro-observation I'd like to make - an observation that's critical for investors to understand (though most don't or won't) - is that the tectonic monetary shift now underway is truly global in nature. And it's not going to be over until a new and markedly different monetary regime has been implemented.

It's like this: Throughout history governments have experimented with fiat money. They have done so because the benefits to the government and the insiders that invariably latch on to power are just so damn attractive. The Romans did it by debasing their coinage, but the modern version goes one better by completely disconnecting a currency from any value whatsoever, and then wantonly printing as politically motivated needs or wants arise.

The latest fiat system kicked off in earnest in 1944 when Uncle Scam, in Bretton Woods, NH, got the leaders of the world's war-weary countries to agree to accept the U.S. dollar as their reserve currency. In return, the U.S. agreed that the currency notes it would subsequently issue would be convertible into a corresponding amount of gold. Then Tricky Nixon came along in 1971 and canceled the right of the bearer to swap the notes for gold. Overnight, the link between the currency and anything tangible was lost.

That, of course, opened the door to all subsequent politicians to engage in the whole print, print, print thing. The keystone asset of the former system - gold - soon became a distant memory for the new crop of central bankers and, remarkably, to the bearers of the notes.

For any number of reasons, most of which related to the illusion of increasing prosperity, people simply stopped paying attention to what Uncle Scam was up to. Of course, that illusion was largely based on the increase in nominal wealth: if one year you're worth $100,000 and three years later you are worth $150,000, the tendency is to feel richer even if your actual purchasing power has gone up by far less or even has declined due to a debasement of the currency.

Today's dollar is worth just 18 cents in 1971 terms.

But all scams must, in time, come to an end. And that's what's going on now. It ends here. Before this is over, the current iteration of the U.S. dollar - the vaporous construct with no actual value - will lose its value as money.

Which brings me to an important nuance in this discussion.

Most failed fiat money experiments involve a single currency. The most convenient recent example is provided by Mugabe's Zimbabwe. Rather than actually supporting the creation of marketable goods and services in what he sees as his private fiefdom, he took the low road of energetically abusing his fiat currency to the vanishing point.

In a situation such as that, the local citizenry suffers - as well as anyone foolish enough to be holding bonds denominated in the debased currency. But that's about it.

In the current scenario, the keystone of the entire global monetary system is the U.S. dollar. Which means that the primary reserve holdings of virtually all the world's significant central banks are at risk of going up in smoke.

And it's even worse that, because the dollar is also the number one trade currency - which means corporations around the world are sitting on huge holdings or are dependent on commercial contracts denominated in dollars.

And even that's not the end of it. Because Uncle Scam has long served as a role model to other world leaders, those leaders have enthusiastically followed suit and universally launched fiat monetary systems of their own. It's bad enough that the world's reserve currency is a fiction - but the situation becomes really dire when you accept as fact that all the world's currencies are a fiction.

Man, we're in a lot of trouble.

If you have so far resisted our constant urgings to make gold - which is to say, real money - a core portfolio holding, it's not too late. Just start buying on the inevitable dips. I can assure you that as the fiat monetary structures continue to crumble - and they will - more and more people will be turning to gold. The latest World Gold Council data is just a straw in the wind.

In fact, thanks to the convenience of the gold ETFs (which you should make an effort to understand before blindly investing in them - there are important differences between them), once the show really gets underway, the relative trickle of investment funds moving into gold today will quickly become a torrent, completely outrunning available gold supplies and sending prices much, much higher - and in a hurry.

While no one can say when the big spike in gold will occur, one can say accurately that, given the systematic frailty, it could literally happen on any given day. That's what happens when scams are unveiled. Remember Bernie Madoff? How many people do you think tried to give him money the day after he was arrested, versus desperately scrambled to get their money out of his sticky web? The answers are "No one" and "Everyone" - that's what happens when people lose faith in a currency.

Of course, gold bullion, and gold bullion proxies, aren't the only asset classes that will do well in the coming currency collapse. The chart below shows what looks to be a trend change in the gold stocks. In previous recent stock market corrections, people thought of gold stocks more in terms of being stocks and overlooked their direct connection to gold. That appears to be changing, with a divergence between gold stocks and the broader markets. The leverage in gold stocks to gold bullion could make them especially attractive.

There is much more to this discussion than I can go into here, but rest assured that, among many others, these are all topics we'll be discussing in depth at the upcoming Casey's Gold & Resource Summit in Carlsbad, California on Oct 1 - 3. (More info and a last chance to save with the early-bird registration here - but you have to register by midnight tonight.)

And, of course, we'll continue to provide steady coverage in our paid services, including the ridiculously low-priced Casey's Gold & Resource Report. If you're new to the sector, that's where you'll want to start. (Details here.)

Regardless of what you do, do something - because to stumble on as if this crisis will end with a whimper would be a dire mistake.

* Quoting my dear friend and partner Doug Casey on the intrinsic value of money... "Aristotle correctly observed, in the 4th century BCE, that a good money must have five characteristics. It must be durable (which is why we don't use, say, wheat, as money), divisible (which is why artwork isn't practical), convenient (which is why lead isn't very good), consistent (which rules out real estate), and must have value in itself (which is why paper doesn't work). Gold, of the 92 naturally occurring elements, is particularly well suited for use as money. There's no magic involved, no mysticism, no need for all kinds of laws; it's really just common sense."

Recovery, What Recovery?

Some analysts are finally coming to the conclusion that this, and other recent indicators, point to a double-dip recession. We disagree.

Kevin Brekke, our Switzerland-based editor, sent over the following that I think helps keep the situation in proper perspective...

But it would be a mistake to dismiss his clear intention to use loose money policy as a primary driver of future economic growth.

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

David Galland
Managing Director
Casey Research

Regulation Run Amok - August 26, 2010

Thu, 26 Aug 2010 13:00:00 -0500

Dear Reader,

Chris here, filling in for David today. In the wake of some 1,500 or so salmonella cases from tainted eggs, more than 500 million eggs have been recalled and the FDA is calling for - you guessed it - more money, more power, and more regulation.

Raise your hand if you think piling on even more regulations will prevent such events from happening again.

If your hand is up, you should give me a call, I've got a bridge to sell you.

Think of all the regulation that was in place to keep the financial markets in check and prevent a collapse of the system prior to 2008. Just a few of the agencies charged with regulation and protection were the Federal Reserve, the Treasury (including the Office of Thrift Supervision), the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation. The federal government had multiple (would-be redundant) layers of regulators and regulations in place concerning mortgages, financial institutions, and stock markets. And still all of this regulation could not stop the crisis from coming or keep it at bay once it got going.

Now we have a new financial reform bill that's been passed to "prevent anything like this from happening again." Hmmm, I'm pretty sure I've heard that before. This new legislation and the regulation that comes out of it will not make things any better. Because it's government regulation (read: intervention) itself that is the problem.

Most people think government regulation is generally good because they erroneously believe that there are no self-regulatory aspects of individual behavior in the marketplace. Thus, as William L. Anderson points out in his article, "A Primer on Regulation":

This does not only mean a belief that there are no self-policing mechanisms, but also that markets operate on the edge of chaos. This is patently untrue. Because private enterprise works on a voluntary basis, a business owner cannot coerce someone to do business with him. Things like loss of reputation, shoddy products, poor service and the like serve as real boundaries for business owners, who in a free market survive only by offering goods that people are willing to purchase.

Moreover, there are numerous private (read that, voluntary) organizations that police businesses, settle disputes, independently test products, and provide needed information for consumers and producers alike. Yes, these organizations do have a regulating effect upon the behavior of individuals who participate in private production and exchange. Thus, the statist claim that without government, markets would be a chaotic mess is simply untrue.

Once you take the mental leap to recognize markets are self-regulating and the economy itself would not erupt into chaos absent government regulation, it's easy to see other huge problems with today's regulatory system that are so often overlooked. Glossing over the fact that the system is clearly unconstitutional, two biggies are that heavy regulation favors big business at the expense of small business and the moral hazard created by the blind trust people put in regulations and regulators. On these matters I'd like to quote Dr. Ron Paul:

It is important to understand that regulators are not omniscient. It is not feasible for them to anticipate every possible thing that could go wrong with whatever industry or activity they are regulating. They are making their best guesses when formulating rules. It is often difficult for those being regulated to understand the many complex rules they are expected to follow. Very wealthy corporations hire attorneys who may discover a myriad of loopholes to exploit and render the spirit of the regulations null and void. For this reason, heavy regulation favors big business against those small businesses who cannot afford high-priced attorneys.

The other problem is the trust that people blindly put in regulations, and the moral hazard this creates. Too many people trust government regulators so completely that they abdicate their own common sense to these government bureaucrats. They trust that if something violates no law, it must be safe. How many scams have "It's perfectly legal" as a hypnotic selling point, luring in the gullible? Many people did not understand the financial house of cards that are derivatives, but since they were legal and promised a great return, people invested. It is much the same in any area rife with government involvement. Many feel that just because their children are getting good grades at a government school, they are getting a good education. After all, they are passing the government-mandated litmus test. But, this does not guarantee educational excellence. Neither is it always the case that a child who does NOT achieve good marks in school is going to be unsuccessful in life. Is your drinking water safe, just because the government says it is? Is the internet going to magically become safer for your children if the government approves regulations on it? I would caution any parent against believing this would be the case. Nothing should take the place of your own common sense and due diligence.

Whether you buy into these arguments and the notion that government regulation should be seen as the problem rather than the solution is, of course, up to you. You're free to think that more regulation is exactly what's needed in the case of the egg fiasco, the financial markets, and everything else. But I would urge you at the very least to think seriously about these matters rather than blindly calling on the nanny state to do more every time something goes wrong. I'd also urge you to consider all the regulation currently in place and ponder, how much is enough?

A Fractious Fed?

By Doug Hornig

This coming Friday and Saturday, the Federal Reserve Bank of Kansas City will sponsor its annual retreat in Jackson Hole, Wyoming. It's a chance for Fed officials, foreign counterparts, and academic experts to meet to discuss economic policy. This one could be contentious.

According to Jon Hilsenrath's lengthy article in Tuesday's Wall Street Journal, the last regularly scheduled meeting of the FOMC, on August 10, was the stormiest of Ben Bernanke's four-and-a-half-year tenure as chairman.

At issue: what to do about the Fed's huge portfolio of mortgage-backed securities that it accepted from ailing banks back in the formal bailout days. That portfolio is about to begin shrinking much more rapidly than anticipated, as low mortgage rates cause Americans to refinance their mortgages. Which means that securities held by the Fed are being paid off.

What's the extent of the shrinkage? A group led by the New York Fed's markets chief, Brian Sack, projected that the portfolio would contract by up to $340 billion by the end of 2011. In addition, it was estimated that about $55 billion in debt issued by Fannie Mae and Freddie Mac, and held by the Fed, would likely be paid off. Taken together, that represented a potential 20% drop in the Fed's $2.05 trillion in holdings in 18 months' time.

The options: allow the Fed's balance sheet to shrink, which would amount to a passive tightening of financial conditions; or act aggressively to maintain holdings at the current level, i.e., continue down the easy-money path.

Most investors know that Ben Bernanke favored the latter. He got his way, as expressed in the FOMC's formal decision to use the mortgage proceeds to buy Treasuries. The vote was 9-1, with only perpetual gadfly Thomas Hoenig of Kansas City dissenting.

But Hilsenrath notes that the seemingly substantial agreement disguises the lack of true consensus. Of the 17 attending - the FOMC consists of 5 Washington-based governors and the heads of the 12 regional banks, but only 10 have voting rights at any given time - he says that seven "spoke against the proposal or expressed reservations."

Bernanke will have the opportunity to further define his position when he speaks at Jackson Hole, and he may introduce some fine tuning. Most likely, he will try to paint a big, agreeable smiley face on the Fed.�

But there is trouble, and Big Ben is cracking the whip in no uncertain terms. Using the proceeds from the MBS to buy Treasuries may only be the beginning. If the economy doesn't pick up more than it has, the Fed could begin printing money in earnest again. Bernanke has made it clear that he will do whatever it takes to prevent deflation, and he will risk rising inflation even if it means riding close herd on the increasingly shaky majority that agrees with him.

For the complete Hilsenrath article, click here.�

Delay and Pray, and Then?

By Jake Weber

While it may be hard to believe, the housing market hasn't been the worst-performing real estate sector in terms of price. The index for the Case-Shiller Composite-20 index for residential real estate peaked in July 2006, and as of May 2010, the index had dropped by 29.1%.

Considering how dismal the recent housing data has been, we can certainly expect for the Case-Shiller index to continue its downward trajectory. However, it still has some catching up to do with its counterpart that tracks national commercial real estate prices. The Moody's Commercial Property Price Index peaked in October of 2007, and as of June it had already lost 41.4% of its value.

Making the situation potentially much worse, the price declines in commercial properties have occurred absent a major wave of default in the commercial sector - at least one comparable to what we saw in housing. Rather than accept losses, lenders have been carrying commercial loans on their books at pre-crash values, pushing the problem down the road in a strategy dubbed "delay and pray."

Rearranging the deck chairs on the Titanic has worked for many lenders so far, but as this article from Crain's Chicago Business demonstrates, procrastination can't prevent the inevitable:

A Georgia firm that holds two junior mortgages on the 46-story tower at 500 W. Monroe St. says the building's loans went unpaid when they came due this month and that the company may foreclose and take control of the property.

It would be the first foreclosure of a major office tower in the Loop in 11 years and a sign that the market remains mired in the hangover of the debt-stoked valuation bubble that peaked in mid-2007. That's when Broadway Partners Fund Manager LLC, a once high-flying New York firm, bought 500 W. Monroe for $336.7 million, with a package of loans that made up more than 95% of the purchase price.

Mr. Fasulo reckons that 500 W. Monroe could be worth about $240 million today, based on an estimate of the building's net operating income and the return investors would expect since the tower is just 70% leased. That would put its current value at roughly 30% below the 2007 purchase price, a decline in line with national trends. A report last week by New York-based Moody's Investors Service showed property values in the top 10 U.S. office markets have plummeted 31% since the 2007 peak.

The building's current value is also $84 million less than the $324 million Broadway borrowed to buy it. The sunken value, debt load and uncertainty about 500 W. Monroe's future ownership weigh on leasing efforts, sources say.

Piedmont, which bought a slice of the tower's debt in March 2008, said in a Securities and Exchange Commission filing that the borrower missed an Aug. 9 maturity date and that Piedmont exercised its right to extend the maturities of two senior loans, including a $140-million mortgage held by commercial mortgage-backed securities investors.

The filing says Piedmont is "considering its options for enforcement of its collateral, one of which is a potential foreclosure."

Lenders have delayed and prayed, but as prices continue to decline, borrowers are finding it much easier just to walk away, or to send "jingle mail," as this article from the Wall Street Journal put it:

Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense...

More landlords are expected to follow suit. Of the $1.4 trillion of commercial-real-estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC. And as the economic recovery sputters, owners of struggling properties are realizing a big property-value rebound isn't imminent.

Owners of commercial property have an easier time walking away than homeowners because commercial mortgages are typically nonrecourse. That means the biggest penalty for walking away is the forfeiture of assets and cash flow they may generate.

Read the full article here.

The obvious conclusions are that we can expect rents and lease rates to decline further, more defaults and foreclosed properties in the commercial real estate sector. Taking it a step further, this will probably lead to many more bank failures, as much of the commercial mortgages and CMBS are concentrated in the local and regional banks.�

Chris again. Thanks, Doug and Jake. And thank you, dear reader, for spending some time with us today. David will be back at the helm tomorrow. Until then, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC

Uncle Scam - August 25, 2010

Wed, 25 Aug 2010 13:00:00 -0500

Dear Reader,

The latest data on global gold trends, Q2 2010, just popped into my email box from the World Gold Council.�

The bad news is that the higher nominal price of gold has caused a 5% decrease in jewelry sales over the prior year.

So, that's the bad news.

As you've already figured out, the bulk of the physical demand is coming from investment - with the amount of gold held by ETFs growing 414% over the previous year.

Too far, too fast? I don't think so.

In my opinion, as the fiat money monsters are brought to bay, the price of gold can really only go higher. Overly confident? I don't think so.

Today's dollar is worth just 18 cents in 1971 terms.

Which brings me to an important nuance in this discussion.

In a situation such as that, the local citizenry suffers - as well as anyone foolish enough to be holding bonds denominated in the debased currency. But that's about it.

Man, we're in a lot of trouble.

Regardless of what you do, do something - because to stumble on as if this crisis will end with a whimper would be a dire mistake.

GDP to Be Revised Lower

By Bud Conrad, The Casey Report

The GDP (Gross Domestic Product) is the largest measure of all output of our country, so it is watched closely as an indicator of whether a country's economy is growing or in recession. After GDP data for any particular period are initially reported, they are subsequently updated and re-released as additional data are collected. The most watched number is the quarterly real (after inflation) seasonally adjusted annual growth rate. The second-quarter advance estimate was 2.4% real and 4.3% in current dollars (nominal). In the United States, the consumer constitutes approximately 70% of GDP activity, so we can get a good idea of what the updated numbers might look like, versus the initial estimates, by looking at the growth in the Personal Consumption Estimate (PCE).

To do so, I have taken the latest PCE data and compared it to the GDP (nominal) in the chart below. As you can see, the PCE is lower than the last GDP advance estimate. So when we get the revised GDP report the day after tomorrow, on August 27, it is likely to be one to two percentage points lower than the previous level.

While slowing is somewhat expected, I think the markets haven't factored this amount of decline into the numbers, so it could be a negative for stocks. Be careful.

David again. As dire as the situation we are facing may be, in time it will get sorted out. After the wave of coming sovereign defaults, the public, fed up with the politicians and their functionaries, will reach a breaking point and a real change will occur.

And I'm not talking about a "change you can believe in," which is nothing more than a platitude to provide weak cover for an escalation in the same policies that brought us to this point in the first place, but "real change" - starting with reining in the bureaucrats and their insane spending and crippling regulatory regimes.

On that topic, my friend Porter Stansberry recently republished an essay he wrote some time ago that I loved when he first wrote it, and I love just as much the second time around. With his kind permission to reprint it, here it is...

This Is Why There Are No Jobs in America

By Porter Stansberry
Saturday, August 21, 2010

I'd like to make you a business offer.

Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...

Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in - as long as it's legal.

But I can't give you any capital - you have to come up with that on your own. I won't give you any labor - that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.

Now in return for my rules, I'm going to take roughly half of whatever you make in the business each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits.

You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."

Now... after you've put your hard-earned savings at risk to start this business, and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out - to finally live the good life.

Whether or not this is "fair" - some people never can afford to retire - is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business.

Oh... and one more thing...

Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth.

After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children.

All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.

I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me - or cheat me on any of my fees or rules - I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail.

That's how civil society is supposed to work, right? This is Amerika, isn't it?

That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs...

David again. Moving right along, as you have probably heard, New Housing Sales have just been reported. Following on yesterday's dismal existing housing data, new housing sales have fallen to the lowest level since records began to be kept in 1963. Let that sink in a moment. At this pace, fewer homes will be sold over the next year than at any time since 1963... just 276,000 units. Here's a quick look at the state of housing that just arrived from Bud Conrad...

Housing Is Still in Depression

By Bud Conrad

Today, August 25, we got the latest New Housing Sales for July, and they were a disaster. At a 276,000 annual rate, they are below any time since the data started in 1963 (except for 267,000 in May). June was revised down from 330,000 to 315,000. The chart shows the peak at 1,400,000.

Even if sales had risen, as watchers had expected, to 339,000, it would have been bad - but further declines with mortgage interest rates at new lows make this report even more confirming that we are not out of recession. All the government actions just haven't worked. This debt unwinding is going to be with us for a long time.

That's It for Today...

Well, almost. A couple of closing notes.

Ireland's Credit Rating Cut by S&P. While Ireland's fiscal troubles have been well documented, so have the country's proactive efforts to try and deal with those troubles. Not enough, says the newly responsible S&P. The reality is that all of the PIIGS, and the U.S. and Japan (among many others), are so far underwater that there is no way out - other than default through inflation or by canceling debt.

On this general topic, the good folks at ZeroHedge recently posted an excellent article on just how dire the situation is in Greece. Europe's sovereign debt crisis may be off most people's radar at the moment, but not for long. Here's a link to the article.��

Congratulations to John Hathaway. The latest edition of Pensions & Investments magazine named John Hathaway's Tocqueville Gold Fund the top-performing U.S. stock fund for both the latest one-year and five-year periods. While I haven't personally met John, I'm very much looking forward to doing so at our Carlsbad summit where he'll be among the faculty. You can too, but you'll have to act promptly as the event is headed for a quick sell-out. Details on the complete faculty and registration information here.

And with that, I will actually sign off - with a glancing note that gold is powering higher still... and the gold stocks are moving up as well, despite the broader stock markets again coming under pressure.

The trends remain our friends...

Thanks for reading.

David Galland
Managing Director
Casey Research

Return to Babel - August 24, 2010

Tue, 24 Aug 2010 13:00:00 -0500

Dear Reader,

David Galland here - back at the desk and refreshed following an end-of-summer holiday through France, with a three-day dip into Switzerland.

My holiday rest was supplemented with three days of bed rest, thanks to a high fever picked up just at the end of the trip.� While it may sound odd, I actually don't mind a rare bout of fever. For starters, it seems to me the closest I'll come to a Native American sweat lodge experience, involving as it does long spells of deep sleep, vibrant dreams, and the cleansing effects of sweating copiously. Secondly, there's no question of rushing to and fro, the norm of my unsettled nature; it's straight to bed for mostly uninterrupted lounging.

Hey, maybe there's a business idea in there - a stay in bed spa? Forget all that calisthenics and diet stuff.� Instead, check in with your favorite person, slip into some nice pajamas, then kick back for a couple of days of meals in bed, movie watching, reading, the occasional massage - that sort of thing. I'd be a customer!

In any event, I'm happy to be back, and raring to go.

Before moving on to something actually useful, at least from an investment perspective, I'd like to share some cursory observations from Europe.

Return to Babel

Having lived in Europe as a student for most of a year, and traveled there many times since, I have some small basis for identifying the changes that have occurred in recent decades.

Back in the day, the Switzerland, France, and Germany where I spent my time as a youth were generally homogenous and possessed of a distinct native charm. In the case of Switzerland and Germany, there was also an almost sterile tidiness.

Today, it seems to me that Europe's tolerance for multiculturalism - a tolerance fostered by political correctness, proximity and the contagion of operating foreign empires - has allowed those cultures to blossom in the European garden. The politically correct might say that the new and more diverse garden possesses a beauty of its own. From my unedited perspective, however, the garden looks a mess.

Allow me to try and explain that perspective.

When visiting the Middle East, Asia, Africa, or other far-away places - most of which are notable for their homogeneity - the cultures encountered naturally appear exotic and often beautiful to the Western eye, largely because they are so distinctly foreign to our own native environs.

However, when transplanted in large patches into Europe, as these cultures have been, the effect can be far less pleasing. In some parts we passed through, it even seems that the long-standing European cultures were in full retreat, with the natives unsure of even where they fit in any more - but too polite to mention it.

In my old stomping grounds of Montreux, you can still find restaurants serving raclette, fondue, and other national dishes - but those are very much the exception to the new normal of pizza joints, kabob shops, and Chinese take-out. And the boulevards we strolled down were not dominated by Swiss, but rather by what might be termed "other" - Arabs and Africans especially. In our hotel, a landmark, virtually all of the help was Chinese or Filipino, their common language being English, not the traditional Swiss languages of French and German.

Of course, in the hinterland, the situation is obviously not so pronounced, as immigrants invariably head first to the cities - but all the same, to say that Montreux had changed since my days there would be a gross understatement.

And the situation in Paris was even more pronounced. Sure, there were throngs of tourists - of all nationalities - but what I'm referring to are what might be termed the man on the street; the taxi drivers, waiters, shop keepers, restaurant managers, etc., etc.

While my sampling was limited by the geography covered on my travels, based on what I saw and have heard and read, this tableau is being repeated across Europe.

In my view, this shift to multiculturalism in Europe is not only endemic, but inevitable.� Like the kudzu, multiculturalism once well-rooted spreads and, in time, will overtake much of that which preceded it, no matter how old or sacrosanct.� When I was in Switzerland lo those many years ago, the natives were as uptight and even xenophobic a culture as existed on the planet. Immigration rules were tough, and if you were not Swiss and made even a small misstep, you were on the next plane, train, or bus home. Clearly, something changed along the way.

And it's not just the influence of swarthy foreigners that's apparent in Europe. On a long walk down a country lane outside of a mid-sized French town, I was surprised to find that the smattering of litter I came across almost all originated from American sources. (In one stretch, it was something like five McDonald's cups and food wrappers, three Coke bottles, and two Marlboro packages.) In fact, ironically for the land of fine cuisine, McDonald's has a huge presence in France... almost 1,000 restaurants according to one source I looked up.

Is this cultural transmutation bad?

Over the next few decades, I don't see how strife will be avoided. The strife will come from existing national cultures trying to fight to retain those cultures - and from the encroaching cultures trying to hang on and spread, bumping into other competing cultures as they do. This spreading won't be due to any any evil scheme, but rather will flow from the entirely human desire to surround oneself with friends, family, and the customs associated with respective cultures.

At no point in my travels did I see a Middle-Easterner mingling socially with anyone outside of their culture. Ditto, the North Africans traveled in groups, with no French or Swiss friends in evidence.

In the long-term, of course, this cultural mash-up will be of no more consequence than those derived from the pious Cathars having been wiped from the map, or the Incan empire crumbling into little pieces. �Ultimately these changing societies will likely morph into new cultural identities, in much the same process that occurred in the creation of the current iteration of the United States - with the indigenous people being squeezed out by the English settlers, who in time were themselves overrun by immigrants from the rest of the world.

Alternatively, rather than meld, today's culturally diverse nation states might continue to develop in such a way that they become the equivalent of a flat-lying tower of Babel - geographic containers for an assortment of smaller, distinct� and even hostile collectives - each with their own language, religious dictates, fashions, and DNA. Or, the nation states themselves will simply disappear, to be replaced with whatever's coming next.

While sitting here, I can't pretend to know how things will work out over the long run, but I'm pretty sure that whatever happens, it will happen first in Europe. Thanks to a lack of any real geographical defense, the continent has always been a crossroads - a fluid place with new cultures regularly arriving at the gate, more often than not in the form of armies who don't bother asking permission to enter.

In the current context, the next wave has already arrived... it's not clear that they are enemies... and they have arrived not in a horde, but in a steady train of modern conveyances and, increasingly, in the hospital birthing ward.

Regardless as to how you feel about this issue, in the case of much of Europe, I think the die is cast and what is done cannot be undone - at least not without some real upheaval.

As a closing remark, the other thing that really stood out from my trip was that the European waistband has noticeably expanded since last I spent any real time there. McDonald's big push into European markets is symptomatic of a much larger shift to fast foods, a shift that is especially apparent in a proliferation of pizza parlors that has made them ubiquitous.

House on Fire

For some months now, in The Casey Report, in this free service, and at our Casey Research summits, we have warned that the structural issues bedeviling the US housing market are far from resolved.

Furthermore, thanks to the insights provided by friend and "go to" real estate investment pro �Andy Miller of Miller-Frishman, we've been warning that the upward momentum in housing sales from the first part of this year would falter this summer. The following excerpt from the May 5, 2010 edition of these musings points to just one of a number of Andy's prescient warnings...

Andy Miller, our favorite major league real estate professional, warned in no uncertain terms that housing sales will "fall off a cliff" in July and continue to tumble through the end of the year - and beyond.

... Andy's comments are worth paying�very�close attention to. For the simple reason that the government and its legion of shills have been playing soft music about a measured recovery.

If Andy is right - and he has been consistently right in his analysis in the period leading up to, and through, this crisis - the shock of plummeting housing sales this summer has the potential to be massively disruptive to the economy and the markets. Especially in that it will reveal to increasingly complacent consumers the sour truth as to how things really stand, which is in sharp contrast to the fiction they've been fed by the administration and its Wall Street cronies.�

While things have taken just a bit longer than expected, today's news that sales of existing homes have fallen 27% over the last month - to a 15-year low - even though we're still in the traditionally strong summer months, confirms the need for extreme caution in housing and, by extension, the broader economy to which the housing sector is so important. If Andy's right, and we believe he is, the housing data are going to remain weak through the end of this year, and beyond.

Of course, the last thing the U.S. administration and its allies want ahead of the November election is another stock market crash - so I can only expect they'll keep trying to pull rabbits out of the hat, maybe even to the extent of leaning on friends in high places on Wall Street to help support the markets on bad days.� That's become easier in recent years; as has been widely noted, small investors are increasingly exiting the stock markets - leaving the field open to the institutional traders who can move quickly with large amounts of capital.

In time, however, the government is going to run out of bunnies... be careful.

Speaking of being careful, while catching up on my reading while in bed, I came across an article that said, while individuals may be moving their money out of equities, they have been moving into bond funds - and in a big way.

It's called jumping from the frying fan into the fire.

Based on my experience as a co-founder of a mutual fund group, I can tell you that if there is one sure thing in this world, it's that when investors rush en masse into an investment category, it is invariably at almost exactly the wrong time to do so. Is that the case with today's rush into bonds?

To shed some light on that point, Casey Research Swiss-based editor Kevin Brekke volunteered to look into the correlation between bond flows and performance. Here's his report...

Thinking About Bonds

By Kevin Brekke, Editor
Casey Research, Switzerland

(1) Measured as the year-over-year change in the Citigroup Broad Investment Grade Bond Index.

(2) Plotted as the three-month moving average of net new cash flow as a percentage of previous month-end assets. The data exclude flows to high-yield bond funds.

That is the view through the macro lens. Switching to a wide-angle lens gives one pause.

The sad and pathetic irony: to escape the beatings endured in the stock markets millions have sought safety in bonds. The punishment is not over.

We are afraid an awful lot of investors will be left asking, "What was I thinking?"

That's it for today...

Well, almost. �Before signing off I want to mention that the Early Bird registration price for our upcoming Casey Research Gold & Resource Summit, to be held in sunny Carlsbad, California Oct 1 - 3, will come to a hard stop tomorrow, Wednesday August 24 at midnight.

If you have any interest in precious metals - make that any interest in surviving the next leg down in this crisis - then check out the updated speaker roster, and save by registering before the Early Bird price expires.� More importantly, these events are always quick sell-outs, and that is looking very much the case for the Carlsbad Summit... don't miss it.� Here's the link.

Finally, if you have written to me at anytime in the last few weeks, I'm sorry for the delay in responding - I'm still working through the overstuffed email box.

Until tomorrow, thanks for reading!

David Galland
Managing Director
Casey Research

A New War Is Being Waged - August 23, 2010

Mon, 23 Aug 2010 13:00:00 -0500

Dear Reader,

Cybercrimes can do serious harm to an organization's bottom line. The Ponemon Institute found that the median annualized cost of cybercrime to the 45 organizations in the study is $3.8 million per company per year (mean of $6.5 million), but can range from $1 million to $52 million per year per company.
Cyber-attacks have become common occurrences. The 45 companies in the study experienced 50 successful attacks per week and more than one successful attack per company per week.
The most costly cybercrimes are those caused by web attacks, malicious code, and malicious insiders, which account for more than 90 percent of all cybercrime costs per organization on an annual basis.
All industries fall victim to cybercrime. While the average annualized cost of cybercrime appears to vary by industry segment, where defense, energy, and financial service companies experience higher costs than organizations in retail, services, and education, all industries are affected.

The Tea Party Supports Higher Taxes

By Vedran Vuk

The Tea Party movement supports higher taxes... no, not really. I'm just kidding. But this might as well be a recent headline, as article after article attempts to connect unrelated causes to the Tea Party.

In an article from two weeks ago, I mentioned the grouping of Tea Party activists regardless of the underlying issue. This never happens with left-wing groups. Anti-war protesters, environmentalists, and gay-rights activists are hardly ever thrown under the same umbrella. Each group is treated individually -as it should be. Environmentalism doesn't guarantee support for the other causes. Similarly, the Tea Party is filled with all sorts of people and perspectives. It's a highly decentralized movement.�

Nonetheless, the media wants to dumb it down and group everything. This way, it's easier to attack and demonize the whole.

To prove my point, I searched for news stories that piggy-back unrelated issues onto the Tea Party. My results are only a brief collection of stories from last week. A list of several months would surely be much larger. Let's take a look at some headlines:

�"Mosque debate strains tea party, GOP"

There's really no reason to discuss this problem in terms of the Tea Party. Everyone is looking at the issue the same way. On the one hand, no one wants to trample the religious freedom of others. But on the other hand, many are offended. I'm sure that the average universal healthcare supporter is just as split on this issue as the average Tea Party protester.

"The Tea Party, Civil Rights, and Glenn Beck's Rally on MLK Anniversary"

This next article connects the Tea Party to anti-civil rights sentiments, continuing the trend of linking policy topics to racism. Could the Tea Party have some racists in its ranks? Sure, just as there are racists among Obama supporters. But this doesn't make racism the unifying principle of either group.

"Tea party activists rally on Arizona-Mexico border"

According to the piece, Tea Party activists now stand fervently against immigration. Hmm, strange, I thought the main issue was taxation. Also, let's not forget the Tea Party's libertarian roots. An anti-immigration position only reflects the opinion of some Tea Party protesters.�

Furthermore, the article clearly points out that only 400 people attended the rally. This isn't a gargantuan crowd. It's certainly smaller than many other Tea Party gatherings. Nonetheless, these 400 are deemed representatives of the entire movement, and their small gathering made headlines across dozens of reputable news sites.

"This is liberty? Tea Party takes on net neutrality"

This could be the most ridiculous article yet. When I think of the Tea Party, do you know what comes to mind first? Net neutrality, of course. Honestly, the average tax protestor probably doesn't even know the specifics of the issue. Nonetheless, the article staples net neutrality onto the movement and tries to reveal some sort of grand contradiction.

Slowly, the media is deconstructing the attractiveness of the Tea Party. Any small right-wing gathering is immediately assumed to be a Tea Party event. But the group isn't a distinctive organization with a specific party line. That's what made it so attractive in the first place. Many independents with varying views could jump on board. By stapling other Republican Party issues to the group, the whole loses strength and appeal as an outside DC grassroots organization. Will the public fall for the idea that decentralized tax protestors are equivalent to the Republican Party platform? That remains to be seen. In the end, the result may be a self-fulfilling prophecy as more independents and libertarians are turned off from the Tea Party, thanks to the media's rebranding of the movement.

That's It for Today

Chris again. And that, dear reader, is that for today. I know I said David would probably be back today, but he's battling a fever after returning from his trip and was in no condition to write this missive. Hopefully, he'll be better tomorrow, but we'll see.

Before signing off, a quick glance at the screens shows the recent sell-off in stocks has subsided for the time being as indexes across the globe are little changed from Friday's close. Meanwhile, crude is down a bit at around $73/bbl, and gold is holding strong above $1,226/oz. But we'll see what tomorrow brings. Until then, thank you for reading and for subscribing to a Casey Research service!

I must mention one last thing before I run. For personal reasons having nothing to do with the companies themselves, a member of the Casey team plans to lighten his load of ITH and XG.

Thanks again. Until tomorrow...

Chris Wood
Casey Research, LLC

Weekend Edition - August 21, 2010

Sat, 21 Aug 2010 13:00:00 -0500

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.

After the Brick and Mortar Funeral, What's Next?

By Vedran Vuk

The brick-and-mortar video stores such as Blockbuster, Hollywood Video, and Movie Gallery are on their way out. Blockbuster has been beaten down to penny stock status at 14 cents per share. On the other hand, Netflix has a roaring share price of $139.

Though Netflix appears to be a very attractive business, I see cracks in its future. No, I'm not recommending Blockbuster's stock. The company has serious problems and will be gone soon enough. Though I wouldn't be surprised to see it emerge out of bankruptcy as an online-only business. But Netflix's model isn't perfect either. Would I short them? No, not yet, but maybe down the road.

For now, the company should still perform well as it aims the kill-shot at the brick-and-mortar stores. But once the competition is dead, what's next?

In my opinion, too many investors are watching Netflix's success. After the brick-and-mortar stores exit the picture, new competitors will arise. And that's where the problem comes in. Though Netflix has an innovative business model, it is also an extremely replicable model.

Traditional brick-and-mortar stores can always differentiate through location. A restaurant downtown will make more money than the same chain in the middle of nowhere. With prime locations, business can overcharge to gain an edge. But with the Internet, there's no location. Everyone stands on a level playing field. Hence, price becomes the primary competitive tool. When competition occurs through price, margins are naturally squeezed. No one can overcharge based on location or convenience when another competitor is only a click away.

To avoid this, websites create reasons for the customer to remain loyal. Amazon and especially eBay have done this particularly well. On the websites, one receives ratings based on transactions with other customers. The more smooth transactions you perform, the more other buyers and sellers trust you. Hence, the longer one uses the site, the better the interaction. If the customer left for another website, reputational benefit would be lost.

Further, networking effects are important too - and I don't mean the social kind. A networking effect is an economic term for value that increases with the number of users. For example, suppose someone constructed a website identical to Facebook. Would it be worth as much as Facebook? Of course not. Facebook's value comes from the millions of users utilizing the site rather than from the actual software behind it. Similarly, Amazon and eBay wouldn't be particularly useful with only a handful of sellers. Replicating the networking effect presents a greater challenge than actually copying the business model.

Netflix lacks this key component. There's no advantage to more subscribers. Sure, the company will have more movies with increased revenues, but this is a matter of inventory. If Walmart increases its customer base, it, too, has more inventory. This is not a networking effect but rather an economy-of-scale issue. Second, Netflix subscribers have no reason to stay on the site. If someone offered a better price or service, the customer would be gone. These missing foundations will be a problem in the long run.

As Netflix continues to succeed, the sharks will begin to circle. A few companies have made lackluster efforts to emulate Netflix. So far, they've failed to put a significant dent in Netflix. However, eventually a bigger competitor will emerge and take a chunk of the company's market share. This could take a while, but it's coming. In the next ten years, I wouldn't be at all surprised to see several major competitors. The company will face lower margins and less market share. Perhaps, when the first serious contender arrives on the scene, I'll be ready to short Netflix.

Foreign Buyers of Our Government Debt Are Changing

By Bud Conrad

The U.S. continues its delicate balance of buying foreign goods that supply the money to foreigners to buy our government debt. They now own $4 trillion of Treasuries, having purchased a half-trillion in the last year. That supplies our federal government to fund our $1.5 trillion budget deficit. Without these big purchases by foreigners, our interest rates would have to rise to attract buyers and the dollar would be weaker.

The chart below shows foreigners' holdings of our government debt (Treasuries) over the last year. While the upward slope seems modest in this big-picture view, that is because they started the year with $3.5 trillion Treasuries. The 16% growth is large.

The breakout between Foreign Private and Foreign Official shows that the private sector is the source of growth. Remember that across this time frame, many had been losing confidence in the eurozone after Greece became close to insolvent. That caused a flight toward the dollar, and the safest dollar investment is Treasuries.

A further breakdown to the largest holders reveals one important shift: China actually sold off holdings. This is a surprise, as their trade surplus with us continued in positive territory. Hong Kong bought $45 B in this period, so the total sell-off would be less if this was added to mainland China's $72 B sell-off.

The other surprise is the size of the purchases from the U.K. Some of this could be from Britain-based people and enterprises fearing problems with their pound, but more likely it comes from other countries that use the money center of London to make their investments, so we see it as Britain-based. The most likely would be Middle Eastern oil interests, as oil prices are higher and the investments are shielded from the direct linkage back to the source. It could also be other Europeans using London to transact on their behalf, fleeing the euro for the perceived safety of the dollar.

Japan has returned to buying U.S. Treasuries, perhaps because their own interest rates are so low.

While the overall picture shows foreigners continuing to invest in Treasuries, there is some weakness in the components here. The one to watch is China as they hold $843 B, and if they sold in quantity, we could face serious problems in the U.S. with funding our budget deficits.

The other question is what is behind the big purchases from the U.K. and whether they are potentially fickle if, say, U.S. policy in the Middle East were to bring caution to investors in dollars. There isn't enough data here to predict the future, but the sheer size of the foreign holding adds danger to those that think we can run deficits forever without consequences.

So I watch this data closely as a way to read foreigners' confidence. The relatively modest Chinese sell-off should be watched closely, because if it grew, other countries could lose confidence too.

You'll Buy Gold Now and Like It!

By Jeff Clark, Casey's Gold & Resource Report

I get this question a lot: "Should I buy gold now, or wait for a pullback?"

It's a valid question. For nearly two years, gold hasn't had a serious decline. There have been pullbacks, of course, but nothing assumption-challenging. In fact, since October 2008, gold's largest price drop is 10.6% (based on London PM fix prices), and yet the average of all declines since 2001 is 13% (of those greater than 5%). The biggest pullback we've seen this summer is 8.2%. Technically the summer's not over, but I'll admit I'm surprised we haven't had a better buying opportunity.

So, is now the time to buy? It depends on your honest answer to another question: "Do you own enough gold?" By "enough" I mean an amount that lends meaningful protection on your assets. By "meaningful" I mean that no matter what happens next - another financial blow-up, accelerating inflation, crushing deflation, war, a plummeting dollar, more reckless government spending - you won't worry about your investments.

Whether you should buy now is almost irrelevant if you don't already own a meaningful amount of gold. If you earn $50,000 a year, how is one gold Eagle coin going to protect you if the dollar plummets and sends inflation soaring? If your investable assets total $100,000, is your nest egg sufficiently protected owning two gold Maple Leafs? This is all akin to buying a $50,000 insurance policy for a $500,000 home.

Today we face the prospect of prolonged economic stagnation, and most governments are administering grossly abusive monetary policy as a remedy. While some of the consequences are already being felt, the full ramifications have not hit your wallet yet. But they will.

If you don't have at least 10% of your investable assets in physical gold, or at least two months of living expenses, you have your answer: Buy. Don't use leverage, don't borrow money, and don't buy with reckless abandon, but yes, get your asset insurance policy and tuck it away. And then start working toward 20% (we recommend a third of assets be in various forms of gold in Casey's Gold & Resource Report).

Back to the original question: should we buy now, or wait for a pullback?

The answer comes when you look at the big picture. If you pull up a 9-year chart of gold, what sticks out is that the price is near its all-time nominal high. One could be forgiven for thinking it looks toppy or at least ripe for a pullback. But I assert that the highs for gold have yet to be charted.

What will a gold chart look like after adding five years to it?

When projecting gold's potential price peak, there are many ways to measure it. Conservatively, gold reaching its inflation-adjusted 1980 high would have it topping around $2,400 an ounce. More radically, if the U.S. tried to cover its cumulative foreign trade deficit with its current gold holdings, gold would need to hit about $32,000/oz.

Let's take something more middle of the road, and apply the same trough-to-peak percentage advance gold underwent in the 1970s. (I think there's a greater than 50/50 chance it does more than that, given the precarious nature of the U.S. dollar.) Gold rose from $35 in 1970 to $850 in 1980, a factor of 24.28. Our price bottomed in 2001 at $255.95; multiply that by 24.28 and you get a gold price of $6,214 per ounce.

Sound too high? Well, would it feel high if you had to pay $12.50 for a Big Mac? At $3.39 today at my local McDonald's, that's about what it would cost ten years from now if we get the same rate of inflation we had in the late 1970s.

So if gold hits $6,214, what might it look like on a chart if you bought today around $1,200?

$1,200 doesn't seem so pricey, does it?

I'm not saying there won't be pullbacks or that you shouldn't try to buy at lower prices. Just keep a big-picture perspective. Let's say gold falls to $1,100 and you're kicking yourself for having bought at $1,200... if gold reaches $6,200 an ounce, the profit difference between buying at $1,200 and buying at $1,100 is only 1.6%. If gold gets whacked to $1,000 (at which point I'll be buying with both hands) the difference is still only 3.2%.

Heck, even if gold peaks at $2,400, you still get a double from current levels. (But unless government monetary policies immediately reverse course, gold isn't stopping at $2,400.)

So there's my answer. Yes, you have to accept my projection of gold's ultimate price plateau. And you have to sell at some point to realize the profit. But if the final chapter of this bull market looks anything like the chart above, I don't think you'll be too upset having bought at $1,200.

Carpe gold.

As high as we think gold could go, it's gold producers that will gain three and four times more, bringing us potentially life-changing profits. Check out the new issue of Casey's Gold & Resource Report, where we've identified the easiest and cheapest way to buy gold stocks, even for smaller wallets. It's only $39 per year - try it risk-free here.

The (Dis)Service Economy

By Kevin Brekke, Editor
Casey Research, Switzerland

Employment is back in the news. Actually, the news remains all about employment or the lack thereof. The number of those newly jobless and filing for unemployment benefits scooted higher for the third consecutive week, reaching the half-million mark once again.

Not only is the level of new claims alarming, an unwelcome trend looks to be developing and gathering a head of steam, as shown in the following chart. For all of 2010, new weekly claims have been stuck in a range, where for the first half of the year they were in a zig-zag down trend that has since reversed course. Stated another way, and pandering to our readers that use technical analysis (we are TA skeptics), you might say that the initial claims number is set to break through the upper boundary of a trend channel.

Curiously, note the grayed area of the chart indicting a period of recession. This data is taken from the St. Louis Federal Reserve website, and they have apparently declared that the recession that commenced in 4Q 2007 ended 2Q 2010. The NBER, the official recession-dating arbiter, has yet to declare the recession's demise. We declare that one of them is right.

Recession or not, a recovery we can believe in will require job growth. Sustained, long-term job growth. Other indicators, however, show that businesses are decidedly agnostic about the stamina of any claimed "recovery."

From yesterday's BLS release:

"Over the year (July 2009 to July 2010), real average hourly earnings rose 0.4 percent, seasonally adjusted. An increase in average weekly hours of 1.2 percent combined with the increase in real average hourly earnings resulted in a 1.6-percent increase in real average weekly earnings during this period."

Translation: fewer employees are working longer hours.

And therein lies the rub. A paltry 1.6% increase in the earnings of the employed will not offset the total loss of earnings by the nation's unemployed. The service-based economy and its reliance on consumption has always been a dual-blade razor. We are now suffering the nicks and cuts from the other side of the blade as falling consumption reinforces itself in a negative feedback loop. Only when imbalances are purged from the system will equilibrium attain and the free market be allowed to dictate investment and demand.

Leading up to our current state of disrepair were decades of misallocated capital directed into the budding-turned-Kudzu service economy to cater to all those shoppers. We again face the dull blade of consequence.

Returning again to the BLS:

"In May 2009, the 10 occupations with the highest employment levels represented more than 20 percent of total employment, and the number of workers in these occupations ranged from 1.9 million workers to 4.2 million workers.

"Most of these occupations were relatively low paying: 9 of the 10 largest occupations had median wages between $8.28 per hour and $14.56 per hour. Median wages for all occupations in the United States were $15.95 per hour in May 2009. The one exception among the 10 largest occupations was registered nurses, whose median wages were $30.65 per hour. Employment among registered nurses was 2.6 million in May 2009."

The much-touted service economy has taken us to the point where nearly 1 in 5 employed Americans work in low-skilled, low-wage jobs. The singular exception being registered nurses, and we suspect that the new Obama health care bill will remedy that in no time.

Here are America's 10 largest occupations by numbers employed. This report was recently released by the BLS, yet is current only through May '09. However, there is little doubt that not much has changed.

So, the question should not be "Are we in a recovery?"

We need to be asking "What are we recovering to?"

Welcome to the dis-service economy.

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

Chris Wood
Casey Research, LLC

Welcome to the Dis-Service Economy - August 20, 2010

Fri, 20 Aug 2010 13:00:00 -0500

Dear Reader,

I was going to discuss cyber-crime and data security (which is becoming a booming business) with you today, but I received a few surprise entries from other members of the team that I'd like to run instead. So we'll save the data security stuff for another day.

Now, without further ado I'll turn it over to Jeff Clark, Kevin Brekke, and Vedran Vuk.

You'll Buy Gold Now and Like It!

By Jeff Clark, Casey's Gold & Resource Report

I get this question a lot: "Should I buy gold now, or wait for a pullback?"�

Back to the original question: should we buy now, or wait for a pullback?

What will a gold chart look like after adding five years to it?

So if gold hits $6,214, what might it look like on a chart if you bought today around $1,200?

$1,200 doesn't seem so pricey, does it?

Heck, even if gold peaks at $2,400, you still get a double from current levels. (But unless government monetary policies immediately reverse course, gold isn't stopping at $2,400.)

Carpe gold.

The (Dis)Service Economy

By Kevin Brekke, Editor
Casey Research, Switzerland

From yesterday's BLS release:

Translation: fewer employees are working longer hours.

Returning again to the BLS:

So, the question should not be "Are we in a recovery?"

We need to be asking "What are we recovering to?"

Welcome to the dis-service economy.

How Do You Say Global Competition?

By Vedran Vuk

While researching yesterday's article on college degrees, I ran across some interesting data on foreign-language graduates. Since global competition is very real, the languages are becoming increasingly important fields of study.

I don't think that every American needs to learn multiple languages. In fact, I'm extremely irritated when someone compares Americans and Europeans on the languages. Europeans have much stronger incentives to learn foreign languages. If the average U.S. citizen were surrounded by a dozen languages, I wouldn't be surprised to see equal mastery of several. Individuals follow incentives, and different incentives lead to alternative outcomes. Our lack of languages is simply the result of our geographic and economic environment. It is no great fault or folly.

That said, there are some extremely useful ones such as Arabic, Mandarin, and Cantonese. Yes, English is the business language of the world, but only minimal information is translated. Though shareholder reports and stock exchanges are often translated, other information is not. Try finding data about agriculture in China, real estate in Vietnam, or the financial sector in Saudi Arabia. Most details and in-depth studies will not offer translations. With English alone, you're only getting a partial picture.

Unfortunately, the U.S. isn't keeping up, as evidenced by the chart below:

Spanish degrees have always confused me. Unless one plans on working with low-skilled labor, Spanish isn't particularly helpful. The majority of Hispanics do speak English. Further, the U.S. has too many people fluent in both languages. Acquiring a degree that allows you to speak a language that many already know from birth doesn't seem particularly helpful. And while one acquires the Spanish degree, the fluent speaker will acquire a more useful degree instead. Again, you're a step behind.

While Spanish graduates are plentiful, practically no one graduates in Arabic and Chinese. There's so much opportunity with fluency there. I've even seen job advertisements such as this:

"Applicant must possess 5 years of international business experience or speak Mandarin."

It's amazing that simply speaking the right foreign language can equal five years of experience!

Further, the job opportunities within the government for Arabic are obvious. One would think that students desiring a guaranteed $100K/year for the rest of their lives would be lining up. Things were different during the Cold War. In the late '60s, over 700 students a year were finishing Russian degrees.

The other languages on the chart are even more confounding - 2,432 graduates in French! Do these students realize that the 19th century is over? And though French is spoken in a few other countries, German is even more limited. Further, Italian should not outnumber Arabic and Chinese. At least German and French are dominant in the European Union.

Some of these lows are likely due to few programs being offered in Chinese and Arabic. But nonetheless, it's still pitiful. We're in a global world. China isn't going away, and neither are the problems in the Middle East. It's time for us to wake up to those facts.�

Friday Funnies

What Are You Sinking About?

Link here.

Afternoon at Home

New Microsoft Phone

Weather Station

Get Shade Where You Can

Science Translations

The following list of phrases and their definitions might help you understand the mysterious language of science and medicine. These special phrases are also applicable to anyone working on a Ph.D. dissertation or academic paper anywhere!

"It has long been known" = I didn't look up the original reference.

"A definite trend is evident" = These data are practically meaningless.

"While it has not been possible to provide definite answers to the questions" = An unsuccessful experiment, but I still hope to get it published.

"Three of the samples were chosen for detailed study" = The other results didn't make any sense.

"Typical results are shown" = This is the prettiest graph.

"These results will be in a subsequent report" = I might get around to this sometime, if pushed/funded.

"In my experience" = once.

"In case after case" = twice.

"In a series of cases" = thrice.

"It is believed that" = I think.

"It is generally believed that" = A couple of others think so, too.

"Correct within an order of magnitude" = Wrong.

"According to statistical analysis" = Rumor has it.

"A statistically oriented projection of the significance of these findings" = A wild guess.

"A careful analysis of obtainable data" = Three pages of notes were obliterated when I knocked over a glass of pop.

"It is clear that much additional work will be required before a complete understanding of this phenomenon occurs" = I don't understand it.

"After additional study by my colleagues" = They don't understand it either.

"Thanks are due to Joe Blotz for assistance with the experiment and to Cindy Adams for valuable discussions" = Mr. Blotz did the work, and Ms. Adams explained to me what it meant.

"A highly significant area for exploratory study" = A totally useless topic selected by my committee.

"It is hoped that this study will stimulate further investigation in this field" = I quit.

And that, dear reader, is that for this week. David should be back with you next week, so you can look forward to that. In the meantime, thank you for reading and for subscribing to a Casey Research service. Until we meet again...

Chris Wood
Casey Research, LLC

Filling the Void - August 19, 2010

Thu, 19 Aug 2010 13:00:00 -0500

Dear Readers,

Before getting started today, I'd like to welcome all the new readers who have joined this service over the past couple weeks.

What we try to do in this Daily Dispatch (some times more successfully than others) is give you an informative and entertaining overview of the markets, the economy, national and geopolitics. It's generally a big-picture view of what's going on in the world, all tinted with Managing Editor David Galland's masterful prose and personal (always on-point and interesting) anecdotes.

Unfortunately for the new readers out there, David has been on a well-deserved vacation in Europe the past few weeks, so you have yet to fully experience what this service has to offer.

Here's a picture of David from his trip (looking quite French, I might add) as he reads a book and takes in the scenery of the French countryside.

Other members of the Casey team have stepped up in his absence and attempted to fill the void, but nobody does it like David. Thankfully, he returns from Europe tomorrow and should take back the reins of this missive next week.

Now on to what's in the news.

Initial jobless claims rose for a third straight week to a nine-month high of 500,000 last week as businesses continue to show they're not convinced of any so-called recovery. Two other reports released today also pointed to a gloomier economic outlook. The Federal Reserve Bank of Philadelphia's regional business survey plummeted, and the index of leading U.S. economic indicators rose less than expected in July, a mere 0.1%, the Conference Board said.

On a positive note, after seven and a half years, the final U.S. combat troops have pulled out of Iraq. But around 50,000 U.S. service personnel remain in the country in an "advise and assist" role, primarily responsible for training Iraqi security forces.

So do we finally see a light at the end of the tunnel? Is the U.S. really on its way to vacating Iraq?

Not really. Even if the U.S. military is able to leave Iraq by the end of 2011 (which is starting to look more unlikely by the day), the State Department and a small army of private contractors are planning to fill the void.

According to this article out of The New York Times:

By October 2011, the State Department will assume responsibility for training the Iraqi police, a task that will largely be carried out by contractors. With no American soldiers to defuse sectarian tensions in northern Iraq, it will be up to American diplomats in two new $100 million outposts to head off potential confrontations between the Iraqi Army and Kurdish pesh merga forces.

To protect the civilians in a country that is still home to insurgents with Al Qaeda and Iranian-backed militias, the State Department is planning to more than double its private security guards, up to as many as 7,000, according to administration officials who disclosed new details of the plan. Defending five fortified compounds across the country, the security contractors would operate radars to warn of enemy rocket attacks, search for roadside bombs, fly reconnaissance drones and even staff quick reaction forces to aid civilians in distress, the officials said.

"I don't think State has ever operated on its own, independent of the U.S. military, in an environment that is quite as threatening on such a large scale," said James Dobbins, a former ambassador who has seen his share of trouble spots as a special envoy for Afghanistan, Bosnia, Haiti, Kosovo and Somalia. "It is unprecedented in scale."

It's that last paragraph that I find the most interesting. I'm all for bringing U.S. soldiers home but wonder if this new plan is going to be a complete disaster that just gets a bunch more people killed.

Now I'm going to kick it over to my colleague Vedran Vuk to finish today's missive as I'm not feeling well and am suffering from a complete lack of ideas to write about. Hey, it happens.

Worthless Degrees, Now and Then

By Vedran Vuk

Whether discussing the slow economy or recent graduate unemployment, readers seem to always find a culprit in worthless degrees. Hence due to popular demand, I embarked on a short study of the issue. Before crunching the data from the Department of Education, I agreed with our readers. But one fact always bothered me. I've heard the same complaint about college degrees as long as I can remember. Surely, a trend would reveal itself in the data. The results were mixed.�

To begin, let's look at some often-considered useless majors:

The common view holds that useless degrees as a proportion of graduates are on the rise, but this chart indicates the reverse. Since 1970, there is a clear decline. In the early '90s, things did become worse again - but only shortly.

The highs of the early '70s make sense. I might not have been born in the era, but I've seen the Woodstock footage. The film does not lie, and neither do the education statistics. Higher proportions of English, Sociology, and History majors naturally came with the hippie movement.�

Another anomaly is the second hump between 1991 and 1994. Notice that it appears across the majors. While the '70s are easily explainable, the second hump hides a bigger mystery. Remember that these are graduates. The peaks graduating in 1994 began college in 1990 or 1989.

Now on to more respected and challenging majors. Though these degrees don't necessarily lead to an amazing career, they are impressive. Finding a job in physics isn't easy, but a physics graduate is still far more remarkable than a political science grad.

Few students entered these fields beforehand. But now there are even fewer. Notice the lack of a particular pattern compared to the above chart. The humps in the early '70s and early '90s are missing -the decline is slow but steady.�

Since mathematics is always set as an educational benchmark, I wanted a closer look:

Math degrees conform to the common view. There's clearly a strong downward trend from 3 percent to just below 1 percent. This major is telling as it combines difficulty with application. With a math degree, one can enter almost any field. Further on the higher levels, the complexity surpasses most other degrees. Unfortunately, few are taking the challenge.

Another celebrated major is always engineering:

The early 1980s appeared to be the golden age of engineering. This relates to the first chart. Suddenly, fewer students were focusing on sociology and history. Instead, engineering became all the rage. Evaluating the current state of engineering depends on the starting point. Compared to 1971, we're about even. But from the mid-1980s, the trend is clearly downhill.

So, where are the upward trends? For one, business majors have reached a plateau:

This partially goes along with the hippie explanation. What do hippies hate? Business, of course. And clearly 1970 is a low point for the major. However, increasing business degrees aren't necessarily a good thing. A business degree isn't a golden ticket. In my opinion, it's a neutral diploma. The degree gives one the tools to succeed extraordinarily, but it does not guarantee success. On the other hand, a good statistics major has a job in the bag. A talented business major isn't guaranteed anything. The sky is the limit, but the counter at Starbucks is a possibility as well - especially in this environment.

Overall, the future doesn't seem to be getting definitively worse. If anything, we're converging away from the hardest and easiest degrees to those somewhere in between. 1970 had plenty of useless majors, but also more students interested in mathematics and science. This makes sense. Not everyone was a hippie back then. There were still plenty of hard-working students around.

The far more interesting aspect of these charts is the graduates between 1980 and 1986. They are almost a forgotten great American generation. They had the lowest proportions of worthless majors. Business degrees exploded from abysmal lows. And engineering reached a peak. In a recent article, I discovered that this era also had the highest rate of labor force participation for recent grads in four decades. No one talks much about this group, but I think that they're worth admiring.

That's It for Today

Chris again. Thanks, Vedran. And thank you, dear readers, for reading and subscribing to a Casey Research service. Before I go, a quick glance at the screens shows that the sour economic news released today has sent stocks tumbling about an average of 1.75% across the major indexes. Meanwhile crude is down to $74.22/bbl, and gold is up a few bucks from yesterday's close at $1,234.60/oz.

One last thing. Tomorrow is the early-bird registration deadline for our Casey's Gold & Resource Summit. If you're planning to attend and wish to save $200 off the registration price, sign up now. Details here.

Now I must run. Until tomorrow...

Chris Wood
Casey Research, LLC

$202 Trillion? - August 18, 2010

Wed, 18 Aug 2010 13:00:00 -0500

Dear Reader,

According to Reuters and other sources, General Motors is supposed to file paperwork this week for an IPO that's expected to raise between $15 billion and $20 billion and is an important step in shedding its government backing. The U.S. government (read, U.S. taxpayers) stepped in last year with a $50 billion bailout for the company and currently owns a 61% stake in it.

So, after the bailout and billions of dollars of debt wiped off the books, GM's definitely a leaner machine these days. But are you going to buy shares of the company when they hit the market sometime between late October and Thanksgiving?

GM reported earnings of $1.3 billion in the second quarter (its best showing since Q2 2004), but how impressive is it really? And have things really turned around?

My answer to those questions would be: not very and probably not.

For one thing, profits weren't driven by much-improved vehicle sales but a $3 billion reduction in interest expense relative to the same quarter a year ago, thanks to the debt that was wiped out. Worldwide vehicle sales were up a mere 11% from Q2 2009 (a quarter that showed a loss of nearly $13 billion) and have only gotten back up to the level generated in Q3 2008.

What's more, the failure to acknowledge the Opel situation hints to a write-down coming in future quarters. Despite some $5 billion in restructuring costs at Opel remaining as yet unfunded, GM has chosen to not deal with the situation in the quarters leading up to the IPO. Add to that huge pension liabilities that simply can't be funded with cash generated from operations and accounting that appears "hinky," to say the least, and I would say that even with all the debt that's been wiped away, GM is still a sick company.

�Give me five or six straight quarters without a single "one-time" write-down in the $20 billion region, and I might be able concede that things have started to turn around at GM.

Dollar-Sniffing Dogs

A colleague of mine attended a talk this morning given by the new director of one of two U.S. facilities to train border patrol and customs dogs and their handlers. She said it was some eye-opening stuff. Here's her dispatch:

We've mentioned several times in these pages what we expect will be increasing controls in the United States on moving currency out of the country. Well, the feds have just taken another step in that direction. Most of the attention on the $600 million (bipartisan) border bill that Obama signed last Friday has been on immigration. Here's something else it's likely to be spent on: currency-sniffing dogs at our borders. Border patrol and customs dogs up to now have been trained to detect drugs, explosives, hidden humans, and other "bad" stuff. But sniffing those stacks of paper the feds call money is on track to join the list, we've learned.

Ostensibly the goal is to make laundering drug money harder. Anyone the dogs signal who's simply looking to diversify their assets out of the country would be just coincidence, naturally. Whether it's the perfectly (for now) legal US$9,000 or damned-if-you-do-or-don't-declare US$19,000 isn't likely to make much difference to a dog, who's just happy he found his toy.

The Brits have been good at this for awhile, and have been willing to share: link here.

Kind of makes you feel like converting some more paper into something hard, round, and shiny.

Foreign Buyers of Our Government Debt Are Changing

By Bud Conrad

Japan has returned to buying U.S. Treasuries, perhaps because their own interest rates are so low.

So I watch this data closely as a way to read foreigners' confidence. The relatively modest Chinese sell-off should be watched closely, because if it grew, other countries could lose confidence too.

Uh... How Much Was That?

By Doug Hornig

As regular readers know, our chief economist, Bud Conrad, has been predicting (rather correctly) the dire economic consequences that will result from our mushrooming national debt. Of particular concern is the debacle yet to come, from the future's unfunded liabilities.

Now, however, he is going to have to pass his Mr. Gloom hat to another contender. Namely, Boston University economics professor Laurence Kotlikoff.

In an article published on Bloomberg.com, Kotlikoff writes, "Let's get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills."

This is not a news flash. Former U.S. Comptroller General David Walker has been barnstorming the country for the past several years: appearing on every television show that will have him, delivering the same message, trying to educate the American people about the seriousness of our plight.

If Walker's warnings have largely fallen on deaf ears, then Kotlikoff's are likely to receive an immediate ride on the prevailing winds to places far away. Because his conclusions make Walker's seem like chump change.

Kotlikoff took a hard look at the Congressional Budget Office's Long Term Budget Outlook, released in June. "Based on the CBO's data," he writes, "I calculate a fiscal gap of $202 trillion."

202 what????

No, that's not a misprint. Kotlikoff says that, taking into account all supposedly funded liabilities, we're in hock to the tune of $202 trillion, or nearly a quarter of a quadrillion dollars. Normal minds cannot deal with a number like that. He can't possibly be serious.

But he is. He's a serious economist whose ideas are taken seriously. And he's no stranger to controversy. For years, he's been talking and writing about the coming generational storm, i.e., the consequences of a worldwide aging population. At some point, the young will no longer be able to support the old. When that happens, well, who knows what will follow?

He also waded into the current economic crisis, proposing a totally revamped banking system in his 2010 book, Jimmy Stewart Is Dead. The proposal, Limited Purpose Banking, "takes the multifaceted fraud out of our financial system by turning all banks, insurance companies, hedge funds, etc. into fully transparent mutual fund companies. Limited Purpose Banking also abolishes over 115 federal and state regulatory authorities and replaces them with the Federal Financial Authority, which verifies, fully and immediately discloses, and independently rates and appraises all securities held by the mutual funds."

Interesting. But of course banking reform won't help with the federal debt, which Kotlikoff describes as "a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck."

All Ponzi schemes collapse. They must. That includes Uncle Sam's, which Kotlikoff says "will stop in a very nasty manner," the inevitable endgame when you've been living beyond your means for sixty years." As we all have.

What's the way out of this unmanageable debt overhang? Kotlikoff doesn't know, but he suggests three actions the government will probably be forced to take:

"The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills."

In his view, "Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it's the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece."��

And there's another possibility Kotlikoff doesn't mention. Default. It seems likely that at some point we'll essentially have to declare bankruptcy, and some measure of default on the debt will be necessary. That would trigger a worldwide fiscal crisis, with unforeseeable results.

Not a pretty picture, all around. But one we're stuck with, once Washington's con game comes to an end.

Read the complete Kotlikoff article here.

Chris again. Don't despair, dear reader. Just because we often talk about how scary the situation on the horizon appears, it doesn't mean all is lost. Even in times of great crisis, there are opportunities to profit. And there are always ways to protect yourself. The editors of The Casey Report, including Chief Economist Bud Conrad, see things unfolding much the way Kotlikoff does and have selected investments and a portfolio strategy that will provide protection and profit in the turmoil to come. Now is a great time to sign up for a risk-free 3-month trial of The Casey Report. Details here.

And that, dear reader, is that for today. Thank you for spending some time with us today. We hope it was worth your while. Until tomorrow, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC

Is the U.S. Becoming a Third-World Country? - August 17, 2010

Tue, 17 Aug 2010 13:00:00 -0500

Dear Reader,

We mentioned the other day that we really don't enjoy being a buzz-kill. But it's our job to bring you the truth. In any event, I wanted keep this notion of not being a buzz-kill at the forefront of my thoughts this morning, so I set off to find some positive news about the economy.

I was not so lucky, to say the least. Even what was touted as good news by the mainstream media reflected an underlying negative situation.

Here's what I found:

Starting off with a real doozy, I stumbled upon a great article titled "10 Signs the U.S. Is Becoming a Third World Country" over at the Activist Post. I must admit I've never heard of the Activist Post before, but this article does make a compelling case. Below I'll provide the signs mentioned in the article, but I urge you to read the linked article for an explanation of each. Once again, the link to the story is here.

Rising unemployment and poverty
Economic dependence (debt above 90% of GDP)
Declining civil rights
Increasing political corruption
Military patrolling the streets
Failing infrastructure
Disappearing middle class
Devalued currency
Controlling the media
Capital controls

Next I came across an eye-opening story from The New York Times titled "Back to School? Bring Your Own Toilet Paper." Yes, apparently cash-strapped school systems across the country are requiring students to bring a lot more than pencils and pens with them the first day of school. Here are a few examples:

An elementary school in Moody, Alabama, now requires its first-grade students to bring two double rolls of paper towels, three packages of Clorox wipes, three boxes of baby wipes, two boxes of garbage bags, liquid soap, Kleenex, and Ziplocs.
On the list for pre-K students at an elementary school in Texas: a package of cotton balls, two containers of facial tissue, rolls of paper towels, sheaves of manila and construction paper, and a package of paper sandwich bags.
Wet Swiffer refills and plastic cutlery are among the requests from a school in Seattle.

Compared to books and other expenses associated with school, these new requirements don't really add too much to each parent's total bill. But they do speak volumes about the state of affairs in public, i.e., government, schools. More evidence: schools in Hawaii have already moved to a four-day week due to a lack of funds.

Then there's this story out of Oakland, which reports that due to severe budget cuts and layoffs, police in the city will no longer be able to respond to a number of crimes. And these aren't crimes like jaywalking either. Chief Anthony Batts listed more than 40 situations his officers will no longer respond to, including burglary, grand theft, and vandalism. At the time the story was released, the cut in services was contingent upon the layoff of 80 officers, which had yet to be determined as negotiations between City Hall and the police union were ongoing. Since then, however, negotiations broke down and the layoffs did occur.

Situations like those above are popping up all over the country, and there's really nothing that can be done about it. We've discussed before that the states are flat broke, and the federal government's de facto solution for everything (spend and kick the can) has already made the situation so untenable that we're teetering on the cusp of a total collapse.

Oh well, maybe there's some good news coming out of the private sector that will help lift our spirits.

I see reports that stocks are up today, thanks to stronger-than-expected profits from mega-retailers Walmart and Home Depot. Could this be it... just the news necessary to wake us bears from hibernation? Not so much.

Earnings were higher than expected at the two giants, but it was mostly thanks to cost cutting rather than improved sales.

At Walmart, total revenue for the quarter was up about 2.8%, thanks to a currency exchange rate benefit of nearly $1 billion, but same-store sales in the U.S. were down for the fifth consecutive quarter. The bottom line was helped by the company's ability to cut operating expenses down to 94.0% of total revenue, compared to the 94.2% level experienced in the previous quarter and the same quarter the year before. Now, 0.2% doesn't sound like a lot, but when you're dealing with somebody the size of Walmart, it amounts to a couple hundred million dollars.

The situation was similar over at Home Depot. Total revenue was up 1.8% compared to the same quarter a year ago, but what really helped the company was a full one-percent drop in the ratio of operating expenses to total revenue. Home Depot was able to shrink its operating expense burden to 89.4% of total revenue, from 90.4% in the same quarter the year before.

This begs the question: how much longer can giants like Walmart and Home Depot rely on cost cutting to beat the Street's earnings expectations in the face of stubbornly slow sales?

Not much longer, it turns out. According to the New York Post, a recent JPMorgan Chase study of a Walmart Supercenter in Virginia has revealed that "the worlds' largest retailer has raised prices by nearly 6% on average over the past six weeks." Prices on certain items increased by more than half - such as a 50% price hike on Windex household cleaner, 65% on Quaker Oats instant grits, and 50% on Tide laundry soap. So much for everyday low prices. Granted, Walmart is still at the lower end of the retail spectrum, but, says the New York Post, "its lead is narrowing - to 10.4 percent last month from 16 percent in June." [Read the full article here.]

It's pretty obvious that the retail giants are resorting to desperate measures. And if their plan is to run on a skeleton labor crew generating gains through higher productivity, their time may be up.

The Bureau of Labor Statistics recently reported that after nearly a year and a half of strong productivity gains, workers may have finally reached their limits. According to the BLS, worker productivity fell 0.9% in the second quarter. This marked an end to five straight quarters of productivity gains and may indicate that employees are now stretched too thin.

"What's happened is a lot of U.S. companies have reached the limit of how much they can slash their workforce and work existing employees to the bone," said Nariman Behravesh, chief economist with IHS Global Insight in Lexington, MA.�

This could be good news for the millions of unemployed workers out there, but we still have to see a turnaround in sales for it to become worthwhile for companies to start to add workers. Unfortunately, I don't see that coming anytime soon.

After the Brick and Mortar Funeral, What's Next?

By Vedran Vuk

For now, the company should still perform well as it aims the kill-shot at the brick-and-mortar stores. But once the competition is dead, what's next?�

Time Is Running Out!

If you're planning on attending our Casey's Gold & Resource Summit on October 1-3 at the beautiful Park Hyatt Aviara Resort in Carlsbad, California, you only have until Friday (three days from today) to save $200 with our special early-bird registration price. Click here to register now.

In case you're not yet familiar with the event, this latest in our series of exclusive summits will be to thoroughly examine the outlook for precious metals, energy, and related stocks - and how to best invest for what's coming next. We've assembled an all-star cast for what is sure to be a profitable experience for you. But these events always sell out quickly, so sign up now. Details and registration here.

And that, dear reader, is that for today. A quick look at the screens, and I see a good bit of investor optimism in the stock market as indexes across the world are up about 2%. Must be due to all that "good news" we talked about earlier. Meanwhile, crude is holding steady just above $76/bbl, and gold is up around $1,228/oz. Now I must run. Until tomorrow, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC

WWII Events - August 16, 2010

Mon, 16 Aug 2010 13:00:00 -0500

Dear Reader,

Vedran Vuk here filling in for Chris Wood. Today, the history buffs will get a treat. We'll be taking a look at some significant WWII events and the resulting stock market reactions.

Why is this important today? Stock markets always react to important events in one way or another. If the event was predicted, the impact on the actual event date will be minor. Market predictions adjust prices long before the event actually occurs. If the event is a surprise, the market will react sharply.

This important insight has many applications today. For example, yes, there are still sovereign debt problems out there. But how well is the market prepared? Everyone recognizes the PIIGS problem. This could mean that the danger is partially factored into current prices. Further, double-dip debates are constant in the media. A sudden downturn wouldn't catch everyone by surprise.

In 2008, many triggers were far less predictable - such as the collapse of AIG, Lehman Brothers, and Bear Stearns. The first rejection of TARP also threw Wall Street a curve ball. So, while there are certainly black swans on the horizon now, I have a feeling that the impact of another downturn won't be as large as 2008. The really dangerous black swans are overlooked possibilities, such as a major economy facing a debt downgrade or an expanded war in the Middle East. These events would certainly catch Wall Street off guard and lead to big trouble.

But for more predictable events, too many people are playing it safe and are watching for a double-dip. This expectation could cushion an abrupt correction.

WWII and the Dow Jones Industrial Average

A while back, a free-market professor told me that FDR did in fact help the economy - with his death. I thought that this was just a joke, but I finally took the time to check it out. The results were startling.

FDR passed away on April 12, 1945. On the first trading day after his death, a strong upward trend began to form.

Even more startling is the Dow's volume for the three days following his death:

Studying markets around major events is always an interesting exercise. For one thing, markets give us more honest interpretations of history without the propaganda. Markets measure the sentiments of investors with large sums of money on the line.

These investors don't have the same comforts as political ideologues, historians, and armchair philosophers in interpreting events. They trade shares in the heat of the moment, and their fortunes critically depend on accurately predicting the significance of the news.�

With this in mind, I examined other important WWII events in relation to the Dow. Some of the results run counter to the lessons most of us learned about WWII in school. The first one really threw me off, the invasion of Poland:

I wish that there were an easy way to explain this one, but it's simply confounding. Poland was not so important to the U.S. But why would the invasion warrant a jump? On the other hand, the invasion of France was a dramatically negative event for the U.S. stock market:

Though the invasion of Poland resulted in a rally, the invasion of France led to a nearly 40-point drop. The Dow retreated almost 31% - the sharpest drop of the war. One would think that surely other events would be more dramatic, such as the attack on Pearl Harbor. However, the data tells a different story:

The Dow barely fell 7 points after the bombing. By the end of the month, the index almost rebounded to the pre-attack price. Strangely, the market wasn't very surprised. Yet, most history books portray Pearl Harbor as the surprise attack of the century. Perhaps investors already accounted for the U.S.'s entrance into war after the invasion of France. To them, war was already a sure thing. Pearl Harbor was simply the final trigger point.

The victories have interesting reactions as well. For example, here's D-Day:

The market doesn't exactly jump on the landing day as one would expect. But this reaction is historically accurate.

D-Day gets a lot of the glory because of the logistical challenge. But the week following D-Day was probably more important. The Germans still had an opportunity to push the Allies off the beach. Thankfully, Hitler was convinced that D-Day was simply a diversion and left a large force of panzers idle. These panzers, as well as other dangers, were huge concerns post landing. Only a week after the event was the new front finally secure. Hence, the market reaction appears gradual as the troops pushed further away from the beach.�

The most shocking chart is the reactions to the atomic bombs. What could be more surprising than dropping an atomic bomb? But the market didn't even flinch.

Once again, the market movement doesn't follow the official story: the bomb was a super-secret weapon, and it ended the war years earlier. The Dow didn't seem to react that way. Perhaps victory had already been factored into the Dow. Maybe it was simply a delayed reaction, or maybe the official story isn't true. Either way, it's a head scratcher.

(Side note: the lowest-volume day of 1945 was on August 6, the date of the Hiroshima bomb.)

Not only do these charts suggest variant interpretations of these events, they also challenge the idea of war rescuing the economy.�

If war boosts the economy, then explain the market dropping on the French invasion and Pearl Harbor. Further, shortly after the Japanese and German surrenders, the market rose. As victory appeared more certain after D-Day, the market also increased. The hope of peace creates prosperity, not war.

Some Concluding Thoughts

The charts share one interesting characteristic - a post-event drag. Notice that the event dates are followed by upward and downward trends. Today, a major event triggers a major sell-off or rally in the market immediately. Back then, the process appeared to be much slower.

I've read accounts from older traders who complain about the difficulty of profiting in modern markets. With these charts, maybe I can understand why. Looking back, one could easily make a profit on publicly available news. Today, the prices adjust in less than a minute to a news event.

Before we close up, I wanted to remind readers of the upcoming Casey's Gold & Resource Summit in Carlsbad, CA, October 1-3. If you register by August 20 (in 4 days), you'll receive $200 off with our early-bird special.

The summit's focus on gold comes at a crucial point. The more gold rises, the more naysayers come out of the woodwork. Just two weeks ago, gold dipped near $1,160, and the critics quickly assembled an impromptu funeral for gold, only to be disappointed by its renewed strength. It didn't take long for the market to prove them wrong - again. Gold is now at $1,223 and doing well.

Where's it going from here? The gold summit should be the best place to find out from a highly knowledgeable faculty spanning the industry. Space is limited. So, sign up while you can.

Well, that's it for today. I hope that you enjoyed our short time together. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey Research

Weekend Edition - August 14, 2010

Sat, 14 Aug 2010 13:00:00 -0500

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.

New York Senate: No More Fracking Around

By Marin Katusa, Chief Energy Strategist

The New York Senate has had a busy week. Not only have they finally passed the New York State Budget, they've also voted to enact a one-year moratorium on hydrofracking for natural gas.

Hydraulic fracturing, or hydrofracking, is a drilling technique used to extract gas from shale. Large quantities of highly pressurized water, sand, and chemicals - called frac water - are injected deep underground to break up rock and release gas to the surface.

This technique has sparked a drilling boom throughout the United States that has allowed companies to tap into enormous reserves of natural gas locked into big rock formations such as the Marcellus Shale.

It's also stirred up a storm of controversy and anger. Critics and environmentalists are raging that the millions of gallons of used frac water left in the earth are contaminating fresh drinking water supplies.

Liberally helping this along has been the sensationalist TV documentary Gasland by amateur documentarian Josh Fox. Mr. Fox explores communities from Pennsylvania to Wyoming where hydrofracking has left people sick, animals without fur, and tap water so polluted that it can be lit on fire. All to a plaintive tune picked out on Mr. Fox's banjo.

And after a series of disasters that has left the U.S. energy industry reeling and government officials running around like headless chickens, New York officials are taking no chances.

Both the State Assembly and the governor are expected to sign off on the bill, which would see a halt to any drilling licenses being issued for the Marcellus Shale until May 15, 2011. In the meantime, the Department of Environmental Conservation will be examining the safety issues and environmental concerns.

We're not terribly surprised about this moratorium. New York has always been the state with the toughest stance on hydrofracking. But while protecting one's water supply is, after all, a top priority, we feel that this moratorium may be based more on the idea of pleasing voters than on hard facts.

BP's Past Is Not Shale's Future

The aftermath of the BP disaster has left the American public acutely aware of environmental issues. It hasn't helped that a couple of gas explosions and another oil spill followed almost immediately on the heels of the BP spill. Angry rumblings could be heard from all over the country, and for New York, Gasland could well have been the straw that broke the camel's back.

What both Mr. Fox and the New York Senate have failed to acknowledge, however, is that the risk of contamination of ground water by frac water is almost negligible when the drilling is done properly.

When a gas shale well is drilled, part of the well is, out of necessity, isolated from the rock. A large-diameter steel pipe (the casing) is cemented into place, through which subsequent drilling and fracturing operations take place. Here's a diagram of a cross-section of a well:

If the casing is done right, there's no chance that any frac water could infiltrate drinking water supplies. The rocks of interest are buried deep, deep in the ground - over 4,000 ft down. So unless there's some truly bizarre geology going around, neither the frac water nor any fractures created can mix with well water.

The industry isn't blind to the fact that poisoning well water will only shake investor confidence and lead to their ruin. They're well aware of the environmental and economic impact, and are investing heavily into recycling and disposal techniques.

While there is a chance that frac water could contaminate drinking water at the surface, or during transport due to accidents, chances are still quite slim. And to give credit where it's due, the industry, with a drilling history spanning over 50 years, has quite an outstanding safety record. So why the sudden fuss?

It's also ironic that the people shouting for clean energy alternatives to oil are the ones who are turning their noses up at shale gas. A much cleaner-burning fuel than oil, there is also enough shale gas in North America to last 100 years of demand.

Not to mention the projected revenues and jobs that shale gas could bring to debt-crippled states in the next five years.

So while New York may be throwing away a major opportunity, opting instead for paperwork and debt, America continues to be dependent on other countries for its energy. As for shale gas companies, they will simply move their money and expertise elsewhere. But with 3,000 trillion cubic feet of shale gas underneath American feet, don't worry... they won't be moving too far away.

[Ed. Note: Other than death and taxes, one thing is certain; the human race needs energy to survive and thrive, and there will always be profitable opportunities available in this sector. Marin and his team have put an enormous amount of effort into getting positioned in these profitable opportunities - and things are getting exciting. If you're an investor, this is the perfect time to boost your portfolio with some carefully chosen stocks that will make the trend your friend. Try Casey's Energy Opportunities for only $39 a year - and with our 3-month money-back guarantee. Details here.]

Invest in a New Education Trend

By Chris Wood

The subject of today's issue is education and an important trend in education that's been taking root over the past few years.

Traditional university degrees have become prohibitively expensive today. Even if students get a loan to pay for school, they find themselves up to their eyeballs in debt when they graduate - with no chance of paying off the loan for decades, in some cases (if at all). So students yearning to learn valuable skills for the marketplace have turned to the for-profit private sector in droves to help solve their problem.

Recognizing that this trend toward online and for-profit education will likely accelerate in years to come, I decided to take a look at the companies operating in the space to help you figure out if this might be a good place to invest.

I only had time to look at U.S.-based companies (apologies), but what I've come up with is a group of 17 publicly traded companies that comprise what I'm calling the U.S. Education Services Sub-Industry. Some of these companies only operate online, but most provide online services as well as on-ground campuses.

Here's a breakdown of the "industry."

Education Services Sub-Industry (U.S. Publicly Traded Companies)
Company	Ticker	Stock Price	Market Capitalization	Sales (TTM)	Earnings (TTM)	Basic EPS	P/E Ratio	Earnings Yield	Current Ratio
Apollo Group	APOL	$42.29	$6,218,913,660	$4,742,162,000	$612,394,000	$3.98	10.6	9.4%	1.3
Career Education	CECO	$20.48	$1,664,298,803	$2,023,653,000	$209,042,000	$2.54	8.1	12.4%	1.3
DeVry	DV	$47.40	$3,376,615,409	$1,804,746,000	$245,365,000	$3.45	13.7	7.3%	1.2
Corinthian Colleges	COCO	$7.82	$689,149,152	$1,634,566,000	$136,783,000	$1.56	5.0	19.9%	0.8
Education Management	EDMC	$12.57	$1,795,622,401	$2,377,338,000	$141,885,000	$1.04	12.1	8.3%	1.4
ITT Educational Services	ESI	$71.28	$2,394,301,330	$1,499,827,000	$351,740,000	$9.76	7.3	13.7%	1.3
Strayer Education	STRA	$214.48	$2,978,627,033	$578,736,000	$120,561,000	$8.87	24.2	4.1%	1.6
Lincoln Educational	LINC	$14.15	$369,128,404	$611,088,000	$63,645,000	$2.43	5.8	17.2%	0.9
Universal Technical Institute	UTI	$16.51	$399,913,244	$416,215,000	$29,198,000	$1.22	13.5	7.4%	0.9
K12	LRN	$25.64	$780,641,388	$368,315,000	$22,184,000	$0.75	34.2	2.9%	3.7
Capella Education	CPLA	$79.42	$1,330,018,149	$384,502,000	$54,529,000	$3.26	24.4	4.1%	4.9
Nobel Learning Communities	NLCI	$7.11	$75,015,484	$225,814,000	$2,354,000	$0.23	30.9	3.2%	0.3
Bridgepoint Education	BPI	$14.62	$799,533,004	$589,048,000	$107,051,000	$1.98	7.4	13.5%	1.9
Learning Tree International	LTRE	$10.82	$148,820,704	$124,865,000	$1,874,000	$0.14	77.3	1.3%	1.7
Grand Canyon Education	LOPE	$18.40	$842,259,356	$295,769,000	$33,709,000	$0.74	24.9	4.0%	1.3
Princeton Review	REVU	$2.38	$122,327,578	$161,881,000	($27,792,000)	($0.82)	NA	NA	0.9
American Public Education	APEI	$26.82	$495,574,328	$173,689,000	$28,064,000	$1.54	17.4	5.7%	3.5
Total			$24,480,759,426	$18,012,214,000	$2,132,586,000

[Note: In the table above, earnings reflects the net income available to common shareholders before extraordinary items. Basic EPS was calculated using the basic weighted average shares over the previous four quarters.]

As you can see in the table, these 17 companies reflect a combined market capitalization of $24.5 billion and generate $18 billion in annual sales and $2.1 billion in earnings. The three most attractively priced companies in the space, based on a multiple-of-earnings approach, are Corinthian Colleges (COCO), ITT Educational Services (ESI), and Lincoln Educational (LINC).

Even though COCO and LINC have higher earnings yields than ESI and have shown stronger growth in the recent past (and have much smaller market caps and the capacity to grow faster in percentage terms in the near future), their balance sheets indicate some short-term liquidity problems and greater risk than ESI.

If I were to invest in the education services sub-industry at this point (which I haven't yet but may in the near future), my pick would be ITT Educational Services (ESI). The company's TTM sales of $1.5 billion reflect an increase of 47.7% from 2008 results. And TTM basic EPS of $9.76 is an 88.4% jump from 2008's figure of $5.18.

What's more, the company generates close to $9 per share in free cash flow and has a pretty good-looking balance sheet with no short-term liquidity issues. The capital structure appears a little risky for my taste, but I could probably get over that, given the 54.4% return on assets and 229% return on equity. Add all that to the fact that ESI is trading just about at its 52-week low, and the company definitely has potential as an investment, in my view.

Remember, I'm not saying you should load up on shares of ESI, but I would recommend taking a closer look at it if you are thinking about getting positioned in a solid company that should benefit from the larger trend of a growing market in for-profit education.

Time to Bid Farewell to Oil - But What Will Take Its Place?

By Marin Katusa, Chief Energy Strategist, Casey Research

The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution.

June saw the 2010 launch of IEA's biannual report, Energy Technology Perspectives. Speaking at the launch was Nobuo Tanaka, executive director for IEA. The Gulf oil spill, he said, could prove to be a tipping point in the world's energy consumption habits. He added that the disaster serves as a tragic reminder that our current path is not sustainable.

As far as the IEA is concerned, this is probably a very important moment to start looking at alternative energy sources. If we, as a collective group of consumers, continue on the business-as-usual path, the scenario for 2050 is looking grim.

This baseline scenario sees carbon emissions rising by 130%, with power generation accounting for 44% of total global emissions in 2050. Oil demand will be up by 70% - that's five times the oil production in Saudi Arabia today. I'll leave you to imagine what this means from an energy security perspective.

The other scenario offered by the publication, known as BLUE Map, is the "target" scenario. It assumes that all carbon emissions will be reduced by 50% by 2050 and suggests the least costly way to get there. This 50% reduction, the IEA insists, is the absolute minimum, should we want to keep climate change within the more acceptable 2-3 degree change.

The main focus of this scenario is, of course, weaning the world off fossil fuels. Carbon intensity of energy use would have fallen by 64% by 2050. Demand for coal would drop by 36%, gas by 12%, and oil demand by 4%. Renewable energy would be providing a hefty 40% of primary energy supply and 48% of the electricity generated. As for cars, 80% will be electric, hybrid, or hydrogen-fueled.

And while the world is expected to reduce emissions by 50% by 2050 in the BLUE scenario, it is the OECD that will bear the real burden. Non-OECD countries can get away with just a 50% reduction; OECD countries are looking at cutting 70-80% of their 2007 emissions. This would mean that the electricity sector for these 32 countries would have be "almost completely decarbonized" by 2050.

A portfolio of technologies needed to achieve the carbon emissions under the BLUE Map scenario

So what needs to be done to make this work? Well, gird your loins - the "top priority" will be to increase energy efficiency, reduce energy consumption, and lower energy intensity.

But there's also some exciting news. The revolution is already under way.

On a global scale, total investment into technology and its deployment between now and 2050 would be about US$45 trillion - 1.1% of average annual global GDP over the period. The good news is that investment has already begun all around the world.

Even as China grudgingly accepts the mantle of the biggest energy consumer, investment dollars are being poured into renewable energy research. China has already surpassed the United States as the largest producer of clean energy, whether it be hydro, wind, solar, or nuclear.

Germany, Europe's powerhouse, is lining up renewable energy to compete with nuclear. Currently getting 10% of its energy from renewable energy, Germany's renewable numbers for 2020 are projected at 38.6% electricity, 15.5% heating and cooling, and 13.2% of the transport sector.

And in the United States, the Obama Administration has been pushing for, and encouraging, clean energy research and development since it came into power. On display are a variety of subsidies and loans guaranteed to tempt even the most conservative producer.

Whether it's the 30% cash up-front that the government is willing to give renewable energy projects or the vast amounts of cash injections into various energy technologies programs, renewable energy is set to take off in America.

For those investment portfolios that have taken a hit from the BP and Enbridge oil disasters, the IEA report is only going to spur up greater interest in the renewables game. Knowing which companies are enjoying political favor from Washington to Berlin and are at the receiving end of substantial grants is a sure-fire way to repair the damage.

Find out which renewable energy company - poised to take a moon shot - is Marin's personal favorite right now. Read more here.

Finding the Next Oil Spill

By Joe Hung, Energy Division

More than four months later, the damaged pipe in the Gulf has finally been sealed. Almost three-quarters of the oil has been cleaned up, burned off, or evaporated, and everyone - from Obama to the coffee guy at BP - is breathing a huge sigh of relief.

It is, unfortunately, only a matter of time before the next oil disaster happens.

This isn't a sensationalist statement. Take a good look around the world, and you'll see what we mean.

While BP has been throwing everything it's got at the Gulf, China has been battling its own oil spill. Since it is China we're dealing with here, no one is actually sure how big the oil spill is or even what caused it: theories are ranging from an exploding pipeline to accusations of a government cover-up. And depending on whether you believe the Chinese officials or Greenpeace, anywhere between 10,833 barrels to 650,000 barrels of crude oil may have poured into the Yellow Sea.

Looking closer to home, drilling for oil in the United States is moving offshore, into deeper waters and more dangerous reservoirs. As we've learnt from the BP disaster, while we've cracked the code on how to drill that deep, we haven't quite figured out what to do if something goes wrong.

Now imagine that sort of disaster up in the Arctic, maybe even an oil leak under the thick winter ice. By the time cleanup operations could begin in the springtime, the oil could reach as far away as Russia, even Norway.

Even onshore production for North America seems to be doomed lately. On July 26, Enbridge's 293-mile-long old and corroded pipeline that carries most of the oil imported by the U.S. from Canada began leaking oil into the Kalamazoo River, a major waterway to Lake Michigan. Only 13,000 barrels of the 19,500 barrels leaked has been recovered so far, with the oil 80 miles away from Lake Michigan.

In Nigeria, it's not just the threat of accidents on offshore oilrigs. The biggest threats to oil production for Africa's biggest energy producer are militant attacks on its pipelines and saboteurs siphoning off oil. However, in light of the Gulf disaster, Nigerian authorities are giving foreign companies a light warning about any oil spills in the Niger Delta.

And to put the final tarnish on this dismal picture, let's not forget that oil-carrying tankers are crisscrossing the ocean every day. Tanker spills might not be as common now as they were in the 1970s, but the ships are sitting targets for pirates, who aren't exactly known for passing health and safety tests.

But before giving up completely and returning to the good old cave-living days, consider this fact. Many of these accidents have happened not because something is fundamentally wrong with producing oil, but due to gross negligence by the oil companies.

It's no secret now that BP did not adhere to all the safety codes before the Deepwater Horizon rig exploded and sank. Enbridge, the company that owns the pipeline leaking oil into the Kalamazoo River, had been warned repeatedly about the condition of the pipeline weeks before the rupture. In China, the "biggest oil spill in history" was cleaned up in only nine days.

Of course, it could just be that the number of oil spills hasn't gone up and it is only that the media is playing on the hype of the BP oil disaster. A hype that is being fueled by oil companies setting up shop in more environmentally fragile areas.

But the truth is that oil spills today are far less frequent than back in the day. Oil companies don't want to lose oil to spills or to have to shell out billions to pay for cleanup and fines. Not to forget that oil spills mean higher insurance premiums and tougher regulatory hurdles for everyone in the industry. So, if anything, it makes sense for oil companies to invest in better safety procedures.

That said, not every oil company thinks that way. To save a few pennies now, cutting corners to cut costs, especially in these troubled times, seems like a smart option. That it is these cost-saving measures that ultimately leave them on the rocks financially is quite ironic.

So what's next? No matter which way you look at it, the world needs oil. Demand is rising, with China and India leading the developing countries. For America, oil is still a lifeline, and this won't change overnight. The real crux of the matter then is not just where our oil should come from, but from whom.

There are many oil companies operating across the world who do conduct themselves with integrity. While accidents may still befall them, it is less likely that it would be due to bad business behavior.

And whether it's for the sake of your portfolio or just for your conscience, knowing who is up-to-date with all the safety codes and procedures could make a world of a difference.

[Ed. Note: The new edition of Casey's Energy Opportunities was just released, and it's truly a must-read. Chief Investment Strategist Marin Katusa puts boots on the ground in northern Iraq to search for potential oil investments. Spoiler alert: he found one. You can read all about Marin's trip and the investment recommendation by signing up for a 3-month risk-free trial of Casey's Energy Opportunities, complete with our 100% money-back guarantee. Subscribe today for only $39, and save 50% off the regular price. Details here.]

The Best Gold Interview of 2010

Jeff Clark, Casey's Gold & Resource Report

Much of what passes for "insider" information these days is often conspiracy-edged or largely conjecture. True inside information is actually hard to come by. So what follows is the refreshingly candid and uncut version of my talk with a first-hand participant in the murky and little-understood world of gold bullion, mints, and bullion dealers.

Customarily, when considering a company for a potential recommendation, I hold a series of discussions with management. It was during one of these vetting procedures that I spoke with Andy Schectman of Miles Franklin - and heard some disturbing reports about supply that every investor should know. Andy is a bullion seller, so you're welcome to take his comments with a grain of salt. On the other hand, what he sees week after week and what he hears from his high-level industry contacts might just make you pull back on that salt shaker and re-inventory the number of ounces you own...

Jeff Clark: Andy, tell us about the kinds of contacts you have in the industry and where you get your information.

Andy: I'm associated with two of the six primary mint distributors in the United States. There are only six primary precious metal distributors here because the qualifications are very difficult to meet. Aside from having $100 million in annual sales, you have to extend a $50 million line of credit to the U.S. Mint, and very few companies can do that. So in working with these companies, I'm privy to information that many others aren't.

Jeff: So, what have you been hearing from them about supply for physical gold and silver?

Andy: I think in order to properly characterize what's happening in the industry, it's important to start from a big-picture perspective, which is that by and large the masses in this country are not involved in precious metals. In my experience, the move we've seen in gold over the last decade has primarily been from international investment - sovereign wealth funds in the Orient, petrodollars in the Middle East, India buying from the IMF, Russia and Japan accumulating, etc.

Most U.S. investors have lived through nothing but prosperity and good times, where they perhaps didn't think they needed to own gold - but I think the rest of the world isn't as optimistic about the future. So when you talk about supply, it's important to acknowledge that most people in this country don't own any gold and silver. To me, that's what should really alarm people.

Jeff: Tell us how you would characterize supply right now.

Andy: Fragile. Availability of product changes almost weekly.

But it's worse than that. When the market plunged 1,000 points in one day last month, two German banks bought about 35,000 or 40,000 one-ounce coins and cleaned out the Royal Canadian Mint overnight. Think about that: two banks cleaned out one of the world's preeminent mints in one day.

Then you have the Austrian Mint recently announcing they were running into supply issues. And the U.S. Mint has been the model of inefficiency for the last several years. They have been either reluctant or unable to meet demand when it comes to Gold Buffalos, Platinum Eagles, and fractional Gold Eagles. They issue dribs and drabs of them, but certainly not enough to meet demand.

Jeff: And they frequently run out.

Andy: They frequently run out, they frequently have delivery delays, and it's a situation where very quickly we could see major disruption in the supply chain.

Jeff: We saw supply constraint in 2008, where dealers were running out of product. Do you think we're headed there again?

Andy: I do. In 2008, when gold dropped from $1,000 to $700 very quickly, all product worldwide disappeared. Within weeks the U.S. Mint was shut down. The Canadian, Austrian, and Australian Mints were all eight to 12 weeks back-ordered or shut down. The Australian Mint stopped taking any new orders in July or August for the rest of the year. The Rand Mint, for the first time ever, sold out of all its product. One wealthy Swiss businessman flew his own 747 there and cleaned them out.

So product was impossible to get, but not just from the primary mints; even the refiners that made 100-ounce silver bars couldn't get them. No one could get anything, and it was a very scary time if you owned a gold company. There were many days I sat at my desk wondering how I was going to get product tomorrow, and there were times we couldn't take orders whatsoever. And that comes from a company that's done over $100 million in sales, is a member of the certified exchange, and that has contacts that run very deep in the industry - and I couldn't get anything.

A friend of mine who owns a very prominent gold and silver company in Colorado has a store front, and back then he told me, "I want to put a sign on my window that says, 'All we do is buy, we don't sell,' because one person will come in there and clean me out and there's nothing to be had."

So what I think is ahead comes from that experience. If you factor in that very, very few people in this country have even held a gold coin - let alone own any gold, or understand the reasons to own it, or will even accept the arguments for owning it - I think the primary distinguishing characteristic of this market will be that people won't be able to get product when they want it. The rising price in and of itself will not be the main hurdle. For the most part, people will overcome price, because they'll want to own it. The real issue will be getting product in a timely fashion, and that will become difficult for the average American.

Jeff: What about supply from those selling coins and bars who bought at lower levels? Doesn't that increase the available supply?

Andy: This is what I believe is a distinguishing feature of this market: there is a total absence of a secondary market. There isn't one. Period. In years past, we used to do a lot of business with people wanting to sell. Today, virtually no one is selling their coins back to us. In fact, for every 100 transactions we have, maybe one is a seller - the other 99 are buyers. Our largest supplier, who provides over 60% of all bullion to the U.S. market, told me earlier this month they have days without one single buy back. And this is from the largest supplier in the U.S.

Jeff: Why do you think no one's selling?

Andy: People are afraid. They're afraid of what's happening geopolitically, economically, fiscally, and want to hold on to their gold. As they should, because this is exactly the kind of circumstance gold is for.

So I would argue that as gold and silver creep higher, there will be more and more buying and less and less selling. And less selling means less product for buyers.

When you look at the fact that there is no secondary market, and then you throw into the mix that the mints are already running into production problems, and then add the troubles in Europe, which could easily spread, I think it's easy to see how demand could outstrip supply. I assure you, there's an awful lot of gold acquisition going on in other countries - the Swiss and Germans, for example, see the handwriting on the wall. They were buying everything up when the European crisis broke. It was bedlam for awhile.

And if all of a sudden people here wake up and feel they really need to own gold but can't get it, we'll be right back where we were in 2008.

But to your point, yes, nobody is selling anything right now and almost anything you buy will be dated 2010. That's because there are no backdatedcoins to be had virtually anywhere. Maybe 20 here or 50 there, but nothing on a meaningful basis.

Jeff: It sounds like regardless of what's going on in America, global supply could be in jeopardy if this trend continues.

Andy: Absolutely, especially with the fact that there is no secondary market. Really, the people who enter the game late are going to be at the mercy of the mints. And if the mints run out of supply, or just stopped selling for whatever reason, it's "game over" for those who want to accumulate. Right now there's as good a supply as I've seen in a couple years, and that's at a time when we've already witnessed the Royal Canadian Mint running out of gold for a week or so, the Austrian Mint also running out of product, and the U.S. Mint rationing Silver Eagles for a short time.

Jeff: And you're calling this a good supply market?

Andy: Yes. It's as good as we've seen in a couple years.

Jeff: That's scary.

Andy: I don't think you're exaggerating by saying that. And the message is, "Buy now while it's still available." I know it may sound like I'm trying to sensationalize it, but I'm really not. Based on what I know, it's my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning. Supply is that small compared to the tremendous amount of money that's out there.

Here's another example. I had a meeting with a money management company here in Minneapolis that manages some of the oldest money in the entire country, literally billions of dollars. And when I spoke with them, I discovered the principals of the firm had never held a gold coin. They asked me questions that were as rudimentary as what I would get from a complete novice. By the end of the conversation, they said they would start with a $5 million order. I later learned this was a small order for just one of their clients. It was just dipping a toe in the water for these people.

Well, it won't take too many of these kinds of people waking up to gold to drain the supply chain. Most of the wealth in this country is driven through money managers, and at some point these people will tell their managers, "I don't care what the price or premium is, get me gold." When they come knocking in large numbers like that, the supply chain will dry up overnight. I know this to be true. If we see an event that drives money managers to buy physical gold, the supply will be gone.

Jeff: Some of that money is already going into the ETFs.

Andy: Yes, but not when you consider the total capital that's available. And keep in mind that the prospectus for GLD and SLV state that, more or less, you can't take possession of the metal. So, do you "own" gold if you have shares in GLD or SLV, or any ETF, for that matter? If you can't put the coin or bar in the palm of your hand, the answer is no.

Jeff: Are you seeing any difference between gold and silver? Is one more difficult to come by than the other?

Andy: We've seen a lot of demand for silver, probably more so than gold, and the U.S. Mint has already rationed Silver Eagles once this year. Junk silver bags are becoming much harder to get. And I think the higher gold goes, the faster silver will disappear. At some point the American public will realize they should have some gold and silver, and we could see a situation where the gold price could get out of reach for some investors. Those people will turn to silver and, as a result, it will probably be tougher to get than gold.

Jeff: If supply gets scarce, do you expect premiums to shoot up?

Andy: Absolutely. In 2008 the premiums were astronomical. Silver Eagles were $5.50 to $6 over spot. Gold Eagles were $100 to $150 over spot. The premiums went parabolic. That could easily happen again.

Jeff: And that was due to constrained supply.

Andy: Yes. When the price fell off the table, everything disappeared quickly. That's counterintuitive, I know, because logic would dictate that as the price of something falls, demand is waning. But as the price fell, I think it became more attractive to large interests around the world, and everything got gobbled up fast.

Looking ahead, I can tell you that the only way you'll see premiums stay where they are is if the mints are able to keep up with demand, and based on what I see I would argue there is no way they can. They can't even keep up now. On top of that, as I stated, people aren't going to sell their gold this time unless they absolutely have to, so there won't be any supply coming from sales.

Jeff: So your message to someone who owns little or no physical metal now is what?

Andy: Acquire as many gold and silver ounces as you can. In the end it's not about price paid, it's about number of ounces. View the supply issue as critically as you would the price, because I believe that more than anything else, the lack of available supply will mark this industry.

Jeff: Excellent advice, Andy. Thanks for your input.

Do you own enough gold and silver? We made special arrangements with our new recommended dealer for some seriously discounted bullion, enough that the savings will cover your first year's subscription to Casey's Gold & Resource Report. The discounted price, available only to our readers, will remain open for only a short time. Check it out risk-free here.

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

Chris Wood
Casey Research, LLC

The Best Gold Interview of 2010 - August 13, 2010

Fri, 13 Aug 2010 13:00:00 -0500

Dear Reader,

We have something a little different but very special for you today. Jeff Clark, senior editor of our Casey's Gold & Resource Report, recently sat down with an industry insider to talk about the gold and silver supply. The insight gleaned is something every investor should know - even if you're not currently positioned in precious metals.

Here's the interview in its entirety.

The Best Gold Interview of 2010

Jeff Clark, Casey's Gold & Resource Report

Jeff Clark: Andy, tell us about the kinds of contacts you have in the industry and where you get your information.

Jeff: So, what have you been hearing from them about supply for physical gold and silver?

Jeff:� Tell us how you would characterize supply right now.

Andy: Fragile. Availability of product changes almost weekly.

Jeff:� And they frequently run out.

Andy:� They frequently run out, they frequently have delivery delays, and it's a situation where very quickly we could see major disruption in the supply chain.

Jeff: We saw supply constraint in 2008, where dealers were running out of product. Do you think we're headed there again?

Jeff: What about supply from those selling coins and bars who bought at lower levels? Doesn't that increase the available supply?

Jeff: Why do you think no one's selling?

So I would argue that as gold and silver creep higher, there will be more and more buying and less and less selling. And less selling means less product for buyers.

And if all of a sudden people here wake up and feel they really need to own gold but can't get it, we'll be right back where we were in 2008.

Jeff:� It sounds like regardless of what's going on in America, global supply could be in jeopardy if this trend continues.

Jeff: And you're calling this a good supply market?

Andy: Yes. It's as good as we've seen in a couple years.�

Jeff: That's scary.

Jeff: Some of that money is already going into the ETFs.

Jeff: Are you seeing any difference between gold and silver? Is one more difficult to come by than the other?

Jeff: If supply gets scarce, do you expect premiums to shoot up?

Jeff: And that was due to constrained supply.

Jeff: So your message to someone who owns little or no physical metal now is what?

Jeff: Excellent advice, Andy. Thanks for your input.

Friday Funnies

DUI check. The foolproof way to check if someone's been drinking and driving.

Link here.

Drive an Aries. Great spoof of a luxury car commercial.

Link here.

No Swimming

Hot Dog

Tiger Shark is Lurking

Offensively Lazy

Be Careful

Job Descriptions

1. A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.

2. An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.

3. A statistician is someone who is good with numbers but lacks the personality to be an accountant.

4. An actuary is someone who brings a fake bomb on a plane, because that decreases the chances that there will be another bomb on the plane.

5. A programmer is someone who solves a problem you didn't know you had in a way you don't understand.

6. A mathematician is like a blind man in a dark room looking for a black cat that isn't there.

7. A topologist is someone who doesn't know the difference between a coffee cup and doughnut.

8. A lawyer is a person who writes a 10,000-word document and calls it a "brief."

9. A psychologist is someone who watches everyone else when a beautiful girl enters the room.

10. A professor is one who talks in someone else's sleep.

11. A consultant is someone who takes the watch off your wrist and tells you the time.

12. A committee is a body that keeps minutes and wastes hours.

And that, dear reader, is that for this week. As always, thank you for reading and for subscribing to a Casey Research service. See you on Monday!

Chris Wood
Casey Research, LLC

The Genetics of Investing: Kill the Messenger - August 12, 2010

Thu, 12 Aug 2010 13:00:00 -0500

Dear Reader,

I have two excellent but rather longish articles to share with you today, so I’ll waste no time in getting the show started.

And off we go...

The Genetics of Investing: Kill the Messenger

By Doug Hornig, Editor, Casey’s Extraordinary Technology

If you had a previously incurable genetic condition and scientists came up with a treatment for it, you’d jump at the chance to take advantage. That’s a no-brainer. But what if you had the opportunity to invest in a company deeply involved in just such cutting-edge research?

In classical drama, as well as real life, the bearer of bad news is often executed, simply for having brought it; in modern medicine, though, messenger killing is not only acceptable, it represents a major breakthrough in our approach to genetic disorders.

And major may be a vast understatement. We’re talking about a development that could not only revolutionize an entire field and save countless lives, but one that will make fortunes for savvy investors.

It boils down to this: Scientists now have a technique for selectively, and reversibly, turning off the behavior of certain pieces of the genetic code in humans. The key word being reversibly.

Ever since the mapping of the human genome in recent years, researchers have been digging ever deeper into the genetic causes of many diseases. The idea was simple: find the gene responsible for a malady, then alter or remove it from a person’s body and cure the disease. A severe course of action, but one many patients were willing to risk for the chance to cure a dreadful condition. In the 1990s, using a number of techniques collectively known as gene therapy, doctors started putting these new treatments into practice.�

But the gene therapy route involves genetic mutation, a risky proposition at best... After you’ve deconstructed the gene, you can’t put it back together if problems develop, which they often did. The genetic manipulations that were performed unleashed all kinds of side effects - many of them lethal. Too many people were dying, so scientists began looking beyond full-bore genetic assaults.

There had to be a better way, and there is...

The current preferred alternative - as yet still in its infancy - is about as close to the polar opposite of the old approach as possible. It doesn’t touch the gene at all. It’s not only temporary and easily reversible, and thus good for the patient’s peace of mind, it’s also well suited for experimentation on outside threats such as cancer, or possibly even bacterial and viral infections.

It’s called RNA interference (RNAi), and as the name implies, the technique involves interrupting the function of RNA (ribonucleic acid), one of the key components of all living cells. In order to understand exactly how it works, you first have to know just a little about an extraordinarily complicated subject, human cell dynamics. Here’s the short version.

At the center of the cellular action is the familiar, twisted-ladder-shaped double helix structure known as DNA (deoxyribonucleic acid). It consists of two very long chains of molecules (polynucleotides), paired together. One chain is called the sense strand; its complement on the other side is called the anti-sense strand.

DNA is further subdivided into 23 chromosomes, and they in turn are sliced into about 25,000 smaller bits called genes.

Genes are the source of all top-level commands in the body. They direct the production of proteins that make everything run smoothly or, in the case of a genetic malfunction, run amok. And they do it through a two-part process, transcription and translation.

First, transcription: Crawling all over the DNA are enzymes, little ladder-climbing robots that dock at the boundaries between genes. Once an enzyme locks on, it transcribes the code of a gene into a particular form of single-stranded RNA (or one half of a tiny piece of DNA). This RNA is always derived from the DNA’s sense strand. It mimics the gene that encoded it, except for a small chemical marker that designates it as a “messenger” RNA (mRNA), a sort of carrier pigeon used to send genetic instructions from the command center of a cell to its parts.

Then, translation: The enzyme releases the mRNA, and it travels to another part of the cell, the ribosome, a kind of all-purpose life-maintenance factory. It’s the ribosome that translates the instructions carried by the RNA and starts building proteins - the essential chemicals that support a healthy body - in accordance with the underlying DNA command.�

Message sent; message received.

However, when the ribosome’s protein production is not working correctly or is genetically faulty to begin with, the body essentially turns on itself. The mRNA is carrying the wrong message. This results in diseases that have been very difficult to treat compared with their virus- or bacteria-based counterparts.

Historically, fighting those diseases has been a matter of isolating the offending protein and neutralizing it. No small feat. There are about a hundred thousand different proteins in the body, interacting with each other in billions of ways. And once you find the one you’re looking for, you have to test compound after compound against it, trying to identify the haystack needle that actually affects it (if there is one). Modern high-speed computers have simplified this random task, but it’s still incredibly time consuming.

Now all that’s changing - and the change is producing one of the most exciting developments in medicine today: anti-sense technology.

Once genetic mapping became a reality, researchers quickly discovered that it was possible to sabotage wayward mRNA before it ever gets to the ribosome. All you had to do was synthesize the anti-sense form of the undesirable mRNA and inject it into the cell, where it would bond with the sense sequence automatically, effectively “switching off” the message. If the ribosome can’t read it, you’ve achieved RNA interference, and the offending proteins will never be produced at all.

You’ve killed the messenger.

That’s excellent in itself. But the added bonus is reversibility. The effect lasts only as long as the anti-sense agent is present. If counterproductive complications arise, you simply stop treatment and the mRNA is returned to its previous state, once the supply of reacting chemicals is exhausted.

It works. But establishing the theoretical basis, then proving it out, those were the easy parts. Next came the difficulties, which divide into two broad areas.

Of these, the toughest is that you need a pinpoint delivery system. It’s obviously impossible to inject the anti-sense compound into individual cells, one by one. Maybe in a Petri dish. But not in a human being.

Then, once you do get it inside, you have to protect it from the body’s natural defenses against invaders. After that, it must encounter its target. Finally, it must align itself properly with the elaborately folded RNA and generate the enzymes that will deactivate it.

Thus there’s a furious arms race underway, with plenty of companies vying to develop the gold standard in delivery systems. So far, there’s no clear winner - though it looks like multiple options for delivery will eventually be available to therapy manufacturers, as recent successes using lipids and polymers to deliver anti-sense molecules in humans have demonstrated.

The other half of the equation is the need for the proper anti-sense sequences. But before you can synthesize them, you have to identify proteins associated with different diseases. That can be tricky. Protein signatures differ among diseases, and can even differ among patients with the same disease.

Zeroing in on the right target protein is not enough, either. You have to then backtrack to the mRNA that causes its production. Only then can you design your anti-sense messenger.

It’s not high school lab work, but still... Lock down on the right mRNA and you don’t need to bombard it with randomly chosen compounds. You only have to design one that features a complementary structure - properly combining the four simple molecules that are the building blocks of all DNA - and you’re done. Comparatively, it’s a walk on the beach. Not to mention that you don’t have to tinker with the underlying gene, either.

Hand-crafted cures for nearly every genetic malady, possibly extending even to non-genetic ones - that’s the promise. If only we didn’t have to wait for a reliable delivery system to make its way through the scientific process and the regulatory gauntlet. But we do. In the meantime, however, researchers are taking great strides forward with mRNA identification and the development of specific anti-sense molecules. There’s no reason not to stockpile them against the day when they can easily be applied.

And one innovative biotech company - the leader in the field of anti-sense therapy - is doing just that. Though it’s only at the beginning of this exciting road, the company is already being courted by major pharmaceutical companies and bringing in tens of millions in revenue per year. As RNAi takes off, they stand to make billions, not only for themselves, but for investors as well. Try a no-risk subscription to Casey’s Extraordinary Technology today - with 3-month money-back guarantee.

Finding the Next Oil Spill

By Joe Hung, Energy Division

It is, unfortunately, only a matter of time before the next oil disaster happens.

This isn’t a sensationalist statement. Take a good look around the world, and you’ll see what we mean.

While BP has been throwing everything it’s got at the Gulf, China has been battling its own oil spill. Since it is China we’re dealing with here, no one is actually sure how big the oil spill is or even what caused it: theories are ranging from an exploding pipeline to accusations of a government cover-up. And depending on whether you believe the Chinese officials or Greenpeace, anywhere between 10,833 barrels to 650,000 barrels of crude oil may have poured into the Yellow Sea.

Looking closer to home, drilling for oil in the United States is moving offshore, into deeper waters and more dangerous reservoirs. As we’ve learnt from the BP disaster, while we’ve cracked the code on how to drill that deep, we haven’t quite figured out what to do if something goes wrong.

Even onshore production for North America seems to be doomed lately. On July 26, Enbridge’s 293-mile-long old and corroded pipeline that carries most of the oil imported by the U.S. from Canada began leaking oil into the Kalamazoo River, a major waterway to Lake Michigan. Only 13,000 barrels of the 19,500 barrels leaked has been recovered so far, with the oil 80 miles away from Lake Michigan.

In Nigeria, it’s not just the threat of accidents on offshore oilrigs. The biggest threats to oil production for Africa’s biggest energy producer are militant attacks on its pipelines and saboteurs siphoning off oil. However, in light of the Gulf disaster, Nigerian authorities are giving foreign companies a light warning about any oil spills in the Niger Delta.

And to put the final tarnish on this dismal picture, let’s not forget that oil-carrying tankers are crisscrossing the ocean every day. Tanker spills might not be as common now as they were in the 1970s, but the ships are sitting targets for pirates, who aren’t exactly known for passing health and safety tests.

It’s no secret now that BP did not adhere to all the safety codes before the Deepwater Horizon rig exploded and sank. Enbridge, the company that owns the pipeline leaking oil into the Kalamazoo River, had been warned repeatedly about the condition of the pipeline weeks before the rupture. In China, the “biggest oil spill in history” was cleaned up in only nine days.

Of course, it could just be that the number of oil spills hasn’t gone up and it is only that the media is playing on the hype of the BP oil disaster. A hype that is being fueled by oil companies setting up shop in more environmentally fragile areas.

But the truth is that oil spills today are far less frequent than back in the day. Oil companies don’t want to lose oil to spills or to have to shell out billions to pay for cleanup and fines. Not to forget that oil spills mean higher insurance premiums and tougher regulatory hurdles for everyone in the industry. So, if anything, it makes sense for oil companies to invest in better safety procedures.

So what’s next? No matter which way you look at it, the world needs oil. Demand is rising, with China and India leading the developing countries. For America, oil is still a lifeline, and this won’t change overnight. The real crux of the matter then is not just where our oil should come from, but from whom.

And whether it’s for the sake of your portfolio or just for your conscience, knowing who is up-to-date with all the safety codes and procedures could make a world of a difference.

[Ed. Note: The new edition of Casey’s Energy Opportunities was just released, and it’s truly a must-read. Chief Investment Strategist Marin Katusa puts boots on the ground in northern Iraq to search for potential oil investments. Spoiler alert: he found one. You can read all about Marin’s trip and the investment recommendation by signing up for a 3-month risk-free trial of Casey’s Energy Opportunities, complete with our 100% money-back guarantee. Subscribe today for only $39, and save 50% off the regular price. Details here.]

And that, dear reader, is that for today. Until tomorrow, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC

The Fed Continues the Stimulus - August 11, 2010

Wed, 11 Aug 2010 13:00:00 -0500

Dear Reader,

We've got some great stuff from other members of the team, so I'll be playing more the role of moderator today.

Now, without further ado, I'll turn it over to Casey Research Chief Economist Bud Conrad for his comments on the latest round of stimulus.

The Fed Continues the Stimulus

By Bud Conrad, Chief Economist

The Fed's announcement yesterday to maintain the target range for the federal funds rate at 0 to 1/4 percent was pretty much expected. But buried in the words was a point that affected the markets.

Here's the text.

And this is the market-moving point:

... the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

Translation: The Fed is continuing to keep the stimulus going, by buying Treasuries when their mortgage-backed�securities�mature.

The immediate result of this announcement was for the dollar to fall.

Here is the short-term dollar fall:

That is in the context of a big drop in the dollar index since June from close to 90 to now close to 80.

While the action by the Fed is modest, it confirms that they are staying with a low interest rate and high buying and holding of Treasuries. That can be seen in the rise in bonds (meaning, drop in rate) on the announcement.

Similarly, the lowering of rates can be seen in the longer-term view.

Gold rose on the announcement, confirming a loss of confidence in the dollar.

And stocks recovered from losses earlier in the day.

While I think the knee-jerk reactions from the Fed words are often over done, the message that the markets took is that the Fed is continuing to support the economy rather than the dollar. This general pattern has been our expectation for years, and it's why we have been recommending gold as opposed to dollar holdings for years.

The Fed, in its modest statements yesterday, is really just following true to form. It could have done more, like cutting the interest it pays on deposits, but what it did was enough to get a short-term reaction. There are plenty of other forces affecting the market, not the least of which is the huge government deficit, something the Fed does not control.

Bud Conrad on Asia

Chief economist Bud Conrad has been digging through the world financial situation, focusing on Asia and the Chinese real estate bubble. What follows is his brief take (4 minutes) recently featured on Fox Business News.

Link here.

You can read much more about this in the current edition of The Casey Report. Bud's fascinating lead article is titled "Asia's Place in the World." Here's a brief summary of the bigger discussion in the article from Mr. Conrad himself:

I have been focused on the U.S. mortgage debt crisis and then the European Greek Sovereign Debt Crisis, so until now I have ignored the situation in Asia. Their great success started in Japan's big economic "Miracle" of the 1980s and was followed by the other Asian "Tigers" taking on the leadership of world�manufacturing. I had been assuming growth in Asia would overtake the West.

But Asia has feet of clay too. Looking at two charts, first of their stock markets and second their real estate, we can see patterns of big-picture cycles. I use Japan and China to reflect Asia in contrast to the U.S.�

Looking more closely, each country has a serious problem.

Japan has a serious aging problem. The percentage of the population over 65 years old will grow from 20% to 40% by 2050, as population drops from 127 million to 95 million.

China has what looks to me like a real estate bubble. It is made worse by interlocking government, banks, and developers supplying speculating consumers who hold property that is empty. Stories of whole buildings not occupied and new industrial cities that are not filling up are evidence of overbuilding. It is said 65 million apartments are vacant.

The add-on is that Japan has worse debt and China has more money growth than we have.

Money creation and debasement is worldwide, so invest in tangibles like oil, gold, and agriculture.

To read Bud's eye-opening article and everything else The Casey Report has to offer, sign up for a risk-free 3-month trial with money-back guarantee. Details here.

Time to Bid Farewell to Oil - But What Will Take Its Place?

By Marin Katusa, Chief Energy Strategist, Casey Research

The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution.

A portfolio of technologies needed to achieve the carbon emissions under the BLUE Map scenario

So what needs to be done to make this work? Well, gird your loins - the "top priority" will be to increase energy efficiency, reduce energy consumption, and lower energy intensity.

But there's also some exciting news. The revolution is already under way.

Find out which renewable energy company - poised to take a moon shot - is Marin's personal favorite right now. Read more here.

There's Nothing Unusual About Uncertainty

By Vedran Vuk

On July 21, Ben Bernanke testified before the Committee on Banking, Housing, and Urban Affairs. From the testimony, one line stood out: "...we also recognize that the economic outlook remains unusually uncertain." Since then, everyone on Wall Street has been interpreting the words, "unusually uncertain."� Well, it's about time that I gave my two cents.

In my opinion, these words don't actually make much sense. If the market is unusually uncertain, then this implies that there are other degrees of certainty known to the Fed. The Federal Reserve is implying some degree of predictive powers beyond the market.

But markets are always uncertain as prices reflect the probabilities of certain outcomes. If participants believe a positive event will occur, prices will be bid upward almost instantly. If probability favors a turn for the worse, investors will sell. And when the markets are in-between, investors will adapt accordingly as well. Even now, investors are neither positioned for a boom nor a bust but instead are dealing with stagnation.

To imply certainty is a bit ridiculous. This would mean that anyone could easily profit on the market. Let's say that "unusually uncertain" means a 50/50 chance of the economy going up or down. Now, suppose a 60% chance of a market rally exists with a 40% chance of a slide. Investors would bid up prices to reflect the higher probability of economic recovery.

How far will the prices go? Participants will push prices to point where the advantage disappears and there is again a 50/50 chance in either direction. If this were not true, investors could consistently make extraordinary profits by placing bets on more probable and predictable events.

Hence, Bernanke's statement that the market is "unusually uncertain" is preposterous. It's always highly uncertain.

In our publications such as The Casey Report, we work year-round to find only several excellent opportunities where the odds of high returns exceed 50%. Major financial firms and banks do the same. They comb over hundreds of financial statements looking for the smallest advantages. It's extremely difficult to find a diamond in the rough. Yet Bernanke implies a god-like ability to predict the market's direction and the future - though at the moment, his powers are dulled by the "unusually uncertain" economy.�

Further, exactly where are these periods of lower uncertainty? Even booming years weren't certain. One could claim that the late '90s markets were relatively certain. But even in this case, the boom wasn't based on certainty but rather false values of dotcom companies and loose monetary policy. Incorrect valuations are perhaps the opposite of certainty. The same goes for the subprime bubble.

Also, remember that bubbles pop suddenly. Hence, an upward trend that suddenly falls of a cliff isn't a model of predictability. In fact, many people lost their shirts for the very reason that they began to believe in a for-certain continuously increasing market.

Today (Aug. 11) is a microcosm of the same issue. Finally, the Dow seemed to be reaching near 11,000. In fact, it appeared to be a clear trajectory to many, and then suddenly it nosedived nearly 250 points. Certainty in markets is a mirage.

Within our own predictions, we admit uncertainty. Economic theory tells us that central banks will be unable to manipulate fiat currencies forever. Eventually, paper money will fall to its intrinsic value, zero. But this doesn't mean that we can pick the exact date of the event. Even if your investment strategy is sound, uncertainty remains a dominant force in the market.

If the market doesn't seem highly uncertain to you all the time, you're either a billionaire or a very confused narcissist. Last time that I checked, there weren't too many billionaires working down at the Federal Reserve - just a bunch of bureaucratic narcissists.

Chris again. Thanks, guys. And thank you, dear reader, for spending some time with us today. Before I sign off, a quick glance at the screens shows that stocks worldwide are off between 2% and 3%. Meanwhile, crude is down to $78/bbl, and the dollar index is below 81. But our favorite yellow metal is holding strong right about at the $1,200/oz mark.

Until tomorrow, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC

Invest in a New Education Trend - August 10, 2010

Tue, 10 Aug 2010 13:00:00 -0500

Dear Reader,

Today's dispatch will probably be shorter than usual, since I spent most of the morning doing the research and calculations for the table below.

The subject of today's issue is education and an important trend in education that's been taking root over the past few years.

Here's a breakdown of the "industry."

Education Services Sub-Industry (U.S. Publicly Traded Companies)
Company	Ticker	Stock Price	Market Capitalization	Sales (TTM)	Earnings (TTM)	Basic EPS	P/E Ratio	Earnings Yield	Current Ratio
Apollo Group	APOL	$42.29	$6,218,913,660	$4,742,162,000	$612,394,000	$3.98	10.6	9.4%	1.3
Career Education	CECO	$20.48	$1,664,298,803	$2,023,653,000	$209,042,000	$2.54	8.1	12.4%	1.3
DeVry	DV	$47.40	$3,376,615,409	$1,804,746,000	$245,365,000	$3.45	13.7	7.3%	1.2
Corinthian Colleges	COCO	$7.82	$689,149,152	$1,634,566,000	$136,783,000	$1.56	5.0	19.9%	0.8
Education Management	EDMC	$12.57	$1,795,622,401	$2,377,338,000	$141,885,000	$1.04	12.1	8.3%	1.4
ITT Educational Services	ESI	$71.28	$2,394,301,330	$1,499,827,000	$351,740,000	$9.76	7.3	13.7%	1.3
Strayer Education	STRA	$214.48	$2,978,627,033	$578,736,000	$120,561,000	$8.87	24.2	4.1%	1.6
Lincoln Educational	LINC	$14.15	$369,128,404	$611,088,000	$63,645,000	$2.43	5.8	17.2%	0.9
Universal Technical Institute	UTI	$16.51	$399,913,244	$416,215,000	$29,198,000	$1.22	13.5	7.4%	0.9
K12	LRN	$25.64	$780,641,388	$368,315,000	$22,184,000	$0.75	34.2	2.9%	3.7
Capella Education	CPLA	$79.42	$1,330,018,149	$384,502,000	$54,529,000	$3.26	24.4	4.1%	4.9
Nobel Learning Communities	NLCI	$7.11	$75,015,484	$225,814,000	$2,354,000	$0.23	30.9	3.2%	0.3
Bridgepoint Education	BPI	$14.62	$799,533,004	$589,048,000	$107,051,000	$1.98	7.4	13.5%	1.9
Learning Tree International	LTRE	$10.82	$148,820,704	$124,865,000	$1,874,000	$0.14	77.3	1.3%	1.7
Grand Canyon Education	LOPE	$18.40	$842,259,356	$295,769,000	$33,709,000	$0.74	24.9	4.0%	1.3
Princeton Review	REVU	$2.38	$122,327,578	$161,881,000	($27,792,000)	($0.82)	NA	NA	0.9
American Public Education	APEI	$26.82	$495,574,328	$173,689,000	$28,064,000	$1.54	17.4	5.7%	3.5
Total			$24,480,759,426	$18,012,214,000	$2,132,586,000

Keeping with the education theme of today, I'll now turn it over to Vedran Vuk for his take on "How to Combat Watered-Down Degrees."

How to Combat Watered-Down Degrees

By Vedran Vuk

Yes, higher education continues to get worse. But I don't buy the hysteria that this will mark the decline of Western civilization. The business world in particular has worked around watered-down degrees for a long time. Today's college grads are filtered through internship programs. A college degree no longer guarantees a job. Instead, a diploma leads to an internship, which hopefully leads to a job.

Another adaptation has been the value placed on non-college educational certification titles, such as the CPA (Certified Public Accountant) and the CFA (Chartered Financial Analyst). These designations are far more important than an undergraduate or even graduate degree.�

As some readers already know, I'm pursuing a MS in finance at Johns Hopkins University. At the beginning of one class, the professor asked the students to introduce themselves and explain their reasons for acquiring either an MBA or MS finance. One equity analyst from a big financial firm in town gave the most educated answer. She said, "I'm getting a MS finance degree so that I can pass the CFA exams." The degree was simply a means to gaining enough knowledge to pass the more important accreditation exams. And her goal is well thought-out. A non-CFA graduate will be incomparable to one with the CFA title.

The business world isn't dumb. It realizes that college degrees alone are worthless - even on the graduate level. Further, it realizes that GPAs are meaningless standards. A 2.5 in some schools can be more difficult to earn than a 4.0 in others. Hence, CPA and CFA certifications have surpassed even graduate degrees as a way of demonstrating superior proficiency.

And while anyone can get a graduate degree slowly, one has to actually learn something to conquer the CPA and CFA exams. Take, for example, the CFA's pass rates. The certification requires passing three separate tests. Since the tests began in 1963, the average pass rate for the Level I test has been at 44%, Level II at 49%, and Level III at 63%. Each test must be taken sequentially after passing the previous exam.

If 100 people took the tests together, only 14 would pass all three tests on the first time. I can't recall any college class or test where 86% of the students failed. Also, remember that only the best consider the CFA exams. The guy who barely graduated college between keg stands and bong rips is not exactly lining up to take them. He doesn't stand a chance. In 2010, many unemployed, less qualified candidates entered into the test pools attempting to cheaply boost their resumes. Naturally, the pass rate for the Level I exam dropped to 34%. At this rate, assuming the other pass rates remained the same, only 10 out of 100 passed all three on the first try.�

As prerequisites, the CFA only requires a bachelor's degree and the CPA requires 150 hours of college courses, about 5 years. On top of that, real-world experience is also a requirement. The process is a great way for excellent grads to stand out without wasting thousands on further tuition. The studying can be done on your own, with perhaps only a class or two to fill in the gaps.

Further, the certifications level the college degree playing field. Many talented people simply didn't have the money to attend Harvard or Princeton and had to choose local state schools instead. While a state school diploma may not be impressive on a resume, the CPA and CFA exams are equivalently respected by everyone. They allow people to prove their merit instead of proving the size of their parents' pocketbooks.

The point is to prove what you know. As degrees get worse and worse, I wouldn't be surprised to see similar certifications becoming dominant in other fields as well.�

Chris again. Thanks, Vedran. Now, dear reader, it's getting late and I must run. As is our customary farewell, before I go I would like to thank you for reading and for subscribing to a Casey Research service. Until tomorrow...

Chris Wood
Casey Research, LLC

No More Fracking Around - August 09, 2010

Mon, 09 Aug 2010 13:00:00 -0500

Dear Reader,

Despite what Treasury Secretary Geithner wrote in his op-ed in The New York Times, titled "Welcome to the Recovery," even the mainstream economists and media have recently acknowledged that a double dip recession is possible. We've been saying since the beginning of the so-called "recovery" that it was nothing of the sort, and now others have set up base in our camp.

The reason we've remained so steadfast in our claim that things really aren't getting better is that rather than listening to talking heads in the news media or to politicians, we listen to the data.

Here are three pieces of data worth listening to that seem to proclaim the economy is still not on the mend.

Consumer Bankruptcies on the Rise

In 2006, the year after the Bankruptcy Abuse Prevention Act of 2005 went into effect (a change to the federal law that made it harder for individuals to seek protection from creditors), 598,000 consumer bankruptcy cases were filed, according to the American Bankruptcy Institute. By 2008 that figure had jumped 77% to about 1.06 million filings. In 2009 it jumped another 32% to 1.4 million consumer bankruptcy filings.

Now, according to Samuel J. Gerdano, the American Bankruptcy Institute's executive director, "The pace of consumer filings this year remains on track to top 1.6 million filings." Predictably, Gerdano attributes the continued rise in consumer bankruptcies to "debt burdens, unemployment, and an uncertain economic climate."

Private Sector Still Not Hiring

According to the latest Census report, private employers added 71,000 jobs in July. But this small increase was only enough to bring total private employment back to the level it was in July of 2009. Furthermore, compared to December of 2007, total private employment is still off by nearly 8 million jobs. It's also worth remembering that the private sector needs to add about 125,000 jobs per month just to keep up with population growth. So the small increase in July can at most be considered a drop in the bucket.

On another note, the Labor Department said that initial requests for jobless benefits unexpectedly rose to a seasonally adjusted 479,000 last week, the highest level since April, a sign that hiring remains weak and companies are still cutting workers.

Food Stamp Use at Record Highs

According to the USDA's most recently reported data (May 2010), the number of Americans who are receiving food stamps rose to a record 40.8 million. This is up a staggering 44% from the May 2008 figure of 28.4 million. To put the most recent figure into perspective, it equates to more than one-eighth of the population. Yes, more than one in every eight people in the U.S. is on food stamps. Participation has set records for 18 straight months, and the figure is projected to rise to 43.3 million in 2011.

And the issues discussed above are just three of the many things that must turn around before we can say that we're firmly on the road to recovery. So keep your wits about you and remember to listen to the data.

Now I'll vacate the stage and turn the rest of the show over to my esteemed colleagues. Please enjoy.

New York Senate: No More Fracking Around

By Marin Katusa, Chief Energy Strategist

The New York Senate has had a busy week. Not only have they finally passed the New York State Budget, they've also voted to enact a one-year moratorium on hydrofracking for natural gas.

And after a series of disasters that has left the U.S. energy industry reeling and government officials running around like headless chickens, New York officials are taking no chances.

BP's Past Is Not Shale's Future

What both Mr. Fox and the New York Senate have failed to acknowledge, however, is that the risk of contamination of ground water by frac water is almost negligible when the drilling is done properly.

Not to mention the projected revenues and jobs that shale gas could bring to debt-crippled states in the next five years.

Is It Really That Complex?

By Vedran Vuk

Recently, I've read a few articles on the dangers of commodity ETFs. Of course, they're largely correct. These funds aren't as simple as they may seem. The funds suffer from an effect known as contango. When the price of future delivery contracts is higher than the contracts near the spot price, the market enters into contango. As future delivery contracts approach maturity, they will decrease in value down to the spot price. Hence, commodity prices can remain the same while these funds lose money.

But that doesn't indict all funds. Neither does it mean that these are ultra-complex, unintelligible investments, as many articles purport. In fact, we recommended an oil ETF in The Casey Report two months ago. By understanding the pitfalls, we located a fund that attempts to counteract contango. As should be the norm, our recommendation came with an upfront explanation of contango's downside.

So how was this particular ETF chosen from the rest? First, we compared the correlations of leading oil ETFs to WTI crude oil prices over several years. Then we dissected and analyzed time frames with large contango tracking errors. After evaluating the overall performance and the worst contango effects, one fund stood out. During the worst contango periods, where some funds were moving in the opposite direction of oil, this fund maintained a 0.6 correlation to spot oil prices. This is far from perfect correlation, but considering that some funds had correlations in the teens and negatives, this result considerably beats the competition.

Did we immediately jump to a conclusion and recommend the ETF to our subscribers? Of course not! Even with our correlation test, we needed more information before moving forward. A high correlation doesn't make other risks disappear. To proceed, the fund's superior performance had to be explained. After carefully reading the prospectus and analyzing the competitors' prospectuses, we arrived at a rational explanation for the performance. The analysis was circulated around the office, and the green light was given.

Besides the correlations, the process is pretty straightforward. You don't need a Ph.D. in mathematics to read a prospectus. It shocks me that many financial professionals hastily recommended commodity ETFs without even understanding contango basics or taking a peek at the prospectus. Further, the media inadvertently supports these poor advisors by calling these ETFs "complex financial instruments that even the financial experts didn't fully understand." Wall Street has used the same excuse throughout the crisis. I call BS. This isn't complexity; it's incompetence. Reading the prospectus isn't too much to ask of a financial professional.

The main financial firms love reiterating the "complexity" line. They don't want the blame to fall on pure stupidity instead. Brokers who recommended these instruments for their clients should have known better.

Could you imagine the same explanations coming from other fields or professions? Imagine a doctor accidentally killing a patient and then saying, "But it's so complex!" Yes, things are complex. But that's not an excuse. Engineers, doctors, architects, all have very complex jobs - that's one reason for their high compensation. In fact, their challenges and complexities surpass those faced by the financial world. As a financial professional, I'm not paid to twiddle my thumbs. My job is to figure out those complexities in order to protect subscribers and provide them with the best opportunities available. If you can't figure out the complexities, get in another line of work.

But what about the cases where something might be truly out of your grasp? Well, maybe, then, not choosing an investment is the best decision. There are always safer, well-understood choices out there. Engineers don't build a bridge when they can't understand how it will stand up. Doctors don't prescribe a random drug without understanding its effects. Why should financial professionals be treated any differently? If you can't understand it, don't recommend it. There's nothing complex about common sense.

Chris again. Thanks, Marin and Vedran. And thank you, dear reader, for spending some of your valuable time with us today. As always, it is greatly appreciated. Until tomorrow, thank you for reading and for subscribing to a Casey Research service.

A quick glance at the screens before I sign off, and I see that stocks are up about half a percent, crude is up above $81.50/bbl, and gold is hanging tough at about $1,204/oz. Now I must shift gears to many other matters requiring my attention. Thanks again for reading. See you tomorrow!

Chris Wood
Casey Research, LLC

Weekend Edition - August 07, 2010

Sat, 07 Aug 2010 13:00:00 -0500

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.

Does the Government Reduce Discrimination?

By Vedran Vuk

In the new financial reform bill, a section was added that demands increased gender and minority inclusion within financial firms working with the federal government. Also, the section would increase the number of minorities and women in certain federal agencies. There's not much to say about this section as it is written so vaguely that no one fully understands its application yet. What I find more interesting is the general concept.

Can governments reduce discrimination? Can people truly be judged by "the content of their character" with the help of government? I certainly don't think so. In fact, governments fuel hatred and engage in discrimination all the time.

Think about immigration laws. A person born in San Diego has the right to work in a prosperous country. Another born in Tijuana only miles south must sneak across the border, constantly evade authorities, and be generally hated by the American public. This illegal alien gets treated like garbage for no other reason than being born in the wrong place. His personal qualities and work ethics are meaningless. If he were a member of the lucky sperm club born in the United States, his life opportunities would be entirely different.

Judging individuals based on their skin color is pretty dumb. Judging them based on their birthplace's distance from an imaginary border could perhaps be even dumber.

The arguments against more open immigration laws always depend on discrimination. There's the obvious, the claim that "they're taking our jobs." Well, I don't see why one human being deserves a job over another.

But there are other, more rational cases against immigration. For example, immigrants will demand healthcare, welfare, and social services. Hence, we must close the borders and deport illegal aliens. Sure, these reasons are very real fiscal problems. But why apply them only to illegal immigrants? We have plenty of homegrown welfare queens here. Yet I haven't heard many calls for deporting native citizens.

What makes an American-born welfare drug addict more worthy than a hard-working illegal immigrant trying to feed his family?

Another case is that immigrants will overwhelmingly vote for the Democrats. Hence, they must be stopped. But that doesn't add up with the polls. George W. Bush received about 44% of the Hispanic vote. That's an amazing outcome considering the Republicans' anti-immigration rhetoric. Arizona, the center of the current immigration debate, had a 44% Hispanic turnout for McCain in 2008. If Republicans actually tried to court Hispanic voters, I have no doubt that they'd have the majority within a few elections. Hispanic immigrants are largely pro-family, pro-life, and just want the opportunity to work. This should be a no-brainer for Republicans.

Further, why blame immigrants for any of this mess? America has been going down the drain for a long time. Last time I checked, most politicians in D.C. were elected by native citizens. If any immigration wave should be blamed, it would be the immigrants from nearly a century ago. Simply, Obama wasn't elected by illegal aliens.

But let's not stop with immigration. Don't forget nationalism and patriotism. These irrational beliefs of superiority promoted by the government aren't exactly banners of social equality. Nationalism more often than not leads to other horrid policies, particularly in trade and foreign policy. We must protect Detroit and ruin those Chinese and Indian workers. They don't deserve jobs, for some reason.

And the biggest hypocrisy is war. Let's face it. Many Americans do not care about the innumerable Iraqi and Afghani civilian casualties caused by the occupation. Only U.S. casualties matter. You can't honestly look me straight in the face and tell me that our government sees the life of a U.S. soldier as equivalent to the life of an Afghani civilian.

This isn't just the fault of our government. Most governments around the world behave the same way. It is in the nature of government to discriminate and prefer some groups over others.

Whether Wall Street has the "correct" proportion of races and genders or not seems a small concern compared to bigger questions of equality and fairness. Instead of promoting these values, the U.S. government creates more harm to individuals based on discrimination than could any hate group within its borders. If the government actually wants human beings to be treated equally, it should start with looser immigration laws, free trade, and a more peaceful foreign policy - not arbitrary quotas on Wall Street.

If Deflation Wins, What Will Gold Stocks Do?

By Jeff Clark, Senior Editor, Casey's Gold & Resource Report

The talk of a possible double dip is now common banter on TV investment programs. And indeed, deflationary forces seem to have the stronger grip right now than inflationary ones. So if deflation is the next reality we have to face, what happens to our favorite stock investments?

There's lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don't see a true deflation all that often. But of course we've got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment.

First, we know what happened to the stock market in 1929, and in that initial shock, gold stocks crashed too. A rally ensued in most equities until the following April, including gold stocks. Then the Dow took a one-way elevator ride down for the next two and a half years.

What did gold stocks do?

From 1929 until January 1933, the stock of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, the largest Canadian producer, advanced 558%. In spite of the gold price being fixed at the time, gold stocks rose dramatically.

At the same time, the DJIA lost 73% of its value.

And the chart doesn't show that you could have bought both stocks at half their 1929 price five years earlier, which would have led to gains of around 1,000%. That's not all: both companies paid healthy and rising dividends as the depression wore on; Homestake's dividend went from $7 to $15 per share, and Dome's from $1 to $1.80.

Yes, volatility was high in the gold stocks throughout the depression, with occasional wild price swings. But after the 1929 crash, much of the volatility was to the upside.

The bottom line is that the two largest gold producers - during a time of soup lines and falling standards of living - handed investors five and six times their money in four years.

What about gold itself? On April 5, 1933, President Roosevelt issued an executive order forcing delivery (i.e., confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz (you can read the original order here). And less than nine months later, he raised the gold price to $35, effectively diluting every dollar 41% overnight and swindling everyone who had turned in his gold.

We don't know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, we believe it would retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

But with all this said, the overriding concern isn't deflation. Yes, economic growth will likely be flat for years, and many Americans will see some hard times ahead. But deflation won't win; in a fiat money system, any deflation will be met with an inflationary overreaction (as we've seen). And the worse the deflation, the more extreme the overreaction will be.

In fact, I think there's another round of money printing before this year is over. And sooner or later, that extra money is going to dilute every dollar you own, giving us an inflationary hit as bad as the deflationary one we got during the Great Depression.

It's for this reason that I continue to urge you to own physical gold, in your possession and under your control, given its reliability as a store of value in both inflationary and deflationary environments. If you don't have a meaningful portion of your investments in physical gold, I think you're playing with fire. And those who play with fire eventually get burnt.

Want an easy way to start buying physical gold? I arranged for some seriously discounted bullion in the current issue of Casey's Gold & Resource Report, which you can check out risk-free here...

Talk vs. Action on Rare Earths

By Louis James

A number of subscribers have written to ask why we haven't taken the plunge on the rare earth element (REE) plays that have been making so much news lately.

Actually, we did, in our Casey's Investment Alert service, well before the REE bubble inflated last year, and having made a bunch of money and taken profits, we still have some risk-free chips placed on our favorite REE play. This was a very high-risk move, made because the company in question also had a strong gold story. If the market hadn't gone gaga over REEs when it did - for no reasons anyone could have predicted with any high degree of confidence - we'd have likely taken a loss on that bet.

The critical point here is that the market for REE juniors took off because a writer made a big splash publicizing the REE market, not because of some sudden and real change in the underlying supply and demand in that market. Many companies in the sector shot up two, three, even five times, without anything changing in their fundamentals.

That worked out great for those of us already invested, but once a "flavor of the day" inflates a bubble, it's time to take profits, not buy.

That said, there has now been a seismic shift in the REE market, in the form of the Chinese, source of over 90% of the world's REEs, cutting their exports by 72% recently. Here's a link to a story on this.

So, with the REE plays having sold off since the bubble peaked last year, is now finally time to buy?

Maybe. Or maybe not.

First, note that in spite of the major shift in the market the Chinese have created, popular REE stocks, like RES, AVL, and CCE, have not gone through the roof.

Second, the highest-profile REE play out there at the moment is the new IPO of Molycorp (NYSE.MCP), which has the past-producing Mountain Pass project in California. And yet, the company had to reprice the IPO at a lower level, and the shares have not taken off, as of this writing.

These are clear signs that REE plays really were in a flavor-of-the-day bubble, but more importantly regarding the junior explorers, as far as I can tell, none of them can say yet how much it will actually cost them to produce a pound or kilo of the metals they propose to produce. If this were off-the-shelf technology we were talking about, we might go with reasonable estimates from similar projects, but it's not. Ranging from technical factors such as crystal size to the specific mix of metals in each deposit, these minerals are each unique, meaning there is no simple, economic production process. Until these guys can say what it will cost them to produce what they have, we cannot say that what they have has any value at all.

That doesn't mean that they will all fail to figure out their processes, just that until they do, we're likely to remain on the sidelines.

Further, who can really say why the Chinese did what they did? There could be several reasons, with actual depletion of reserves being only one, and perhaps not the most likely. They could just be testing the market, to see how elastic demand is. It could be even more Machiavellian, with the Chinese holding the ability to flood the market as an ace up their sleeve, for purposes of their own.

In the final analysis, the markets for these high-tech metals are tiny, opaque, and highly subject to manipulation - not to mention vulnerable to the next leg down for the global economy, which we here at Casey Research do still expect to begin in the quarters ahead.

That's not to say we'd never buy another REE play, but the deal would have to be so cheap, it'd almost have to amount to a "can't lose" type proposition.

We are looking.

Meanwhile, be cautious. Remember that when "everyone" is talking about something, it's usually time to sell, not buy - which is what the market seems to be doing in response to the most recent round of talk.

[Casey's International Speculator subscribers can confirm that Louis knows what he's talking about: after all, every single stock he recommended in 2009 was a winner. Read more details here...]

China Is Winning the Energy Race

By Marin Katusa

Stop the presses. The United States is no longer the world's biggest consumer of energy.

After topping the energy consumption charts for more than a century, the U.S. has been left behind as China leapfrogged past. According to the International Energy Association's (IEA) latest report, China burned its way through 2,252 million tonnes of oil equivalent last year - about 4% more than the U.S.

(The oil-equivalent measure is a bundle of all forms of energy consumed, including crude, coal, nuclear, natural gas, and renewable resources.)

That's an astonishing turnaround, according to IEA chief economist Fatih Birol, who noted that as recently as 2000, the U.S. consumed twice as much energy as China.

Energy Consumption Trends of China and the United States 1965 - 2009

Source: BP Statistical Review of World Energy, 2010

It's no longer 1973, when President Nixon could declare that our status as top energy consumer was "good. That means we are the richest, strongest people in the world." Today, bragging about winning the energy-eating competition doesn't gain you any brownie points. Which is probably why Chinese authorities were quick to reject the IEA data as "unreliable," choosing instead to focus on their intention to sink about 5 trillion RMB (about US$750 billion) into renewable energy projects.

Despite the denials, a new age in the history of energy has begun, and the implications are enormous. China may not want to accept the honors, but the reality is that it's now the most important player on energy's demand side.

According to the IEA report, China will be investing more than $4 trillion over the next 20 years to ensure there are no power or fuel shortages, and that there is enough energy to keep feeding its economy. Thus the ever-increasing number of ships steaming out from Canadian and Australian ports: all are bound for Beijing, all loaded with precious energy supplies.

Whether it's coal, gas, uranium, or oil, China's import numbers are only heading one way - up. Here's a brief overview.

Coal:

The wealth of Western nations was built on the back of coal, and China plans to be no different.

King Coal, cheap and plentiful in China, accounts for 70% of all energy consumed. Most of that goes to meet the burgeoning demand for power, and with US$30 billion just invested into improving the national electrical grid, we're not going to see coal taking a backseat anytime soon.

China also needs metallurgical (coking) coal for producing steel - the backbone of an economy. As the construction boom continues, corporations will be crying out for it. But with no higher-grade reserves of its own, China is buying up whatever is in the market, sending coal prices skywards.

Oil:

Beijing continues its relentless courting of oil-rich countries across the globe. Its national oil companies (NOCs) offer debt forgiveness, development packages, infrastructure improvements, and, yes, bribes, in exchange for secure oil contracts, especially in Africa. The net overseas production from the three Chinese NOCs for 2010 will be a record-breaking 1 million barrels a day... that's enough to fuel all of Australia!

Not content with just acquiring oil assets outright, Chinese NOCs are also tying up partnerships with other oil companies. In fact, the three Chinese NOCs accounted for nearly 20% of all global deal values in the first quarter of 2010.

Nor has China ignored North America. It's heavily invested in the oil sands of northern Canada. This huge reserve is likely to become the most important source of U.S. oil, and China is making sure its finger is very firmly in the pie.

The U.S. still remains the number one consumer of crude. But over the past three years, China has accounted for at least a third of world demand growth in crude. And with a projected 45% increase in demand in the next five years, Chinese NOCs won't be hitting the brakes anytime soon.

Gas:

China is throwing itself onto the clean and green bandwagon as well. And the cleaner-burning alternative to oil is its cousin, liquefied natural gas (LNG).

Expectations are for a hike of almost 50% in Chinese demand for LNG by 2020. This year alone, China is expected to boost its LNG imports by about 65%, from 5.5 million tonnes in 2009.

No surprise that China is wedging its foot very firmly into the vast gas reserves of Kazakhstan, Uzbekistan, and Tajikistan. A 1,100-mile-long pipeline has just been completed to link Chinese factories and power plants to Central Asia.

Unconventional gas deposits - like shale gas - will also have a role to play. The country's shale gas reserves are estimated to be about 26 trillion cubic meters.

As China wakes up to the potential of this energy source, it's also waking up to the fact that the technology to unlock it is in North America. So planes full of well-heeled Chinese investors are heading on over to woo North American producers.

If you're a small-capitalization firm, with the potential to lower costs and risks, improve project returns and tap opportunities that are otherwise beyond reach, you're in demand.

Uranium:

Nuclear power is coming to China in a big way. The country is set to purchase up to 5,000 metric tonnes of uranium this year - more than twice what it needs.

But consider that by the year 2020, China will have at least 60 nuclear reactors up and humming across the country, throwing off 85 gigawatts of output and demanding 20,000 tonnes of fuel per year. That's nearly 40% of the 50,572 tonnes mined globally in 2009.

Now the hoarding makes more sense.

The result: After a three-year lull, uranium prices are spiking up. Analysts at RBC Capital Markets have predicted a 32% spike in prices for next year - for a uranium company, this is Christmas come early. And while the bull market of 2006 saw at least 27 new uranium mines opening up across the world, it's not going to be enough. Yellowcake is back, and it'll be glowing red this time around.

China might not wish to be called the world's biggest energy consumer, but it's a fact, and its edge will continue to grow. The process of explosive economic development is like feeding teenagers - they're never full. And while China continues on this tear to eat up the world's coal, oil, uranium, and gas, there are some great opportunities unfolding.

Which producers are favorites to supply China?

Which companies are most attractive to Chinese investors, and to the NOCs?

When will uranium prices jump by 200% again?

We've put a lot of effort into charting China's moves on the energy game board, and things are getting exciting. If you're an investor, this is the perfect time to boost your portfolio with some carefully chosen stocks that will make the trend your friend. Try Casey's Energy Opportunities for only $39 a year - and with our 3-month money-back guarantee. Read more here.

Time to Go Global

By Chris Wood

We really don't enjoy being a buzz-kill. It's just that we think it's more important for you to be well informed about the reality in which we find ourselves today than it is to be happy-go-lucky all the time. The good news is that when the stuff hits the fan, as it has for going on two years now, it opens up a number of unexpected opportunities for profit. Even in the hairiest situations, there are ways to protect yourself. And that's where Casey Research comes in.

More on that in a moment, now for the bad news...

If you live in the U.S., your taxes are about to get much, much, higher. And I'm not talking about the Bush tax cuts set to expire at the end of this year. I'm talking about a structural deficiency in the tax base that will force the spendthrift federal government to demand much more from the productive members of society, no matter who's in charge of Congress and the White House.

Here are the facts.

Summary of Federal Government Receipts and Outlays
Fiscal Years 2009 and 2010 by Month ($ Millions)
	Receipts	Outlays	Surplus/(Deficit)
Fiscal Year 2009
October	$164,827	$320,360	($155,533)
November	$144,769	$269,970	($125,201)
December	$237,785	$289,540	($51,755)
January	$226,090	$289,547	($63,457)
February	$87,312	$281,171	($193,859)
March	$128,924	$320,513	($191,589)
April	$266,205	$287,112	($20,907)
May	$117,217	$306,868	($189,651)
June	$215,339	$309,671	($94,332)
July	$151,480	$332,160	($180,680)
August	$145,529	$249,083	($103,554)
September	$218,880	$264,087	($45,207)
Total Fiscal Year 2009	$2,104,357	$3,520,082	($1,415,725)
Fiscal Year 2010
October	$135,294	$311,657	($176,363)
November	$133,564	$253,851	($120,287)
December	$218,918	$310,328	($91,410)
January	$205,239	$247,873	($42,634)
February	$107,520	$328,429	($220,909)
March	$153,358	$218,745	($65,387)
April	$245,260	$327,950	($82,690)
May	$146,794	$282,721	($135,927)
June	$251,048	$319,470	($68,422)
Fiscal Year-to-Date 2010	$1,596,995	$2,601,024	($1,004,029)
Source: Department of the Treasury Financial Management Service

For a bit of a refresher and to update where we are, in the table above I broke down federal government receipts and outlays (revenue and expense) by month for fiscal year 2009 and year-to-date 2010.

As you can see in the table, we're through three-fourths of fiscal year 2010 and the deficit is already over $1 trillion. At this point last year, the deficit was also just above $1 trillion. So you can bet we're on track for a total deficit of between $1.4 and $1.5 trillion this year. Just like last year, the huge deficit figure will be widely reported, even in the mainstream media. But a related piece of vital information will be glossed over (if reported at all). This piece of information is the most crucial to why your taxes are set to skyrocket - and nobody is even bothering to mention it.

You see, the "outlays" column above comprises two types of spending: discretionary and mandatory. Mandatory spending, expenditures that must go into the U.S. budget, includes things like Social Security, Medicare, Medicaid, income security programs, and some others. And according to the Congressional Budget Office, mandatory spending reached $2.1 trillion in fiscal year 2009. What's more, it increased more than 30% from the year before.

Now look back up at the table above. Notice anything? Total receipts for 2009 were also $2.1 trillion. In 2009, for the first time ever, mandatory spending just about equaled total tax receipts.

That means that basically every single penny the federal government received in taxes last year (including individual income taxes, corporate income taxes, social insurance and retirement receipts, excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts) was already spent on something mandatory before it came in.

It's also worth mentioning that while mandatory spending grew by 30% last year, tax receipts fell by 16%. So under the current tax structure, a gap will begin to grow where mandatory spending pulls away from total tax receipts.

What this all means is that your tax burden is sure to rise, significantly, over the coming years. That's the government's only choice at this point. You think it will cut discretionary expenses by any meaningful amount? Not hardly, it's too politically damaging. And forget about legislation to cut mandatory spending until the system goes completely bust. In the meantime, both parties will try to kick the can further down the road by extracting as much as possible from you in taxes.

Now, here's the good news...

Unlike the government, however, you do have a choice. You can "go global" and protect yourself by internationalizing your wealth through all the legal means available, making yourself a target that's not easy to hit.

For the past several months, we've had some of our best people working on a special report with the purpose of providing you everything you need to know to internationalize your assets and yourself. And it's finally finished. You can read all the details here, incl. the 5 best ways of going global... at this point, this is not "Whenever you get around to it" advice anymore - the time to act is now, before new laws and regulations kick in that prevent you from getting your money out of the country.

Casey's Gold & Resource Summit

The dates and location have been set for the next Casey Research Summit: October 1 - 3 at the beautiful Park Hyatt Aviara Resort in Carlsbad, California - a short hop from the San Diego airport.

The primary purpose of this latest in our series of exclusive Casey Research Summits will be to thoroughly examine the outlook for gold, and how to best invest for what's coming next.

With the gold bull market already having lasted over a decade, how much further can it run? How high can gold go? And how will you know when the gold bull market is coming to an end? Taking value, volatility, risk, and liquidity into consideration, what are the best ways to invest in gold at this point in time? Which of the junior resource companies are now your best bets for the big speculative upside?

Those topics and much, much more, including where the economy is headed next and the outlook for other investment classes, will be covered at this special Casey's Gold & Resource Summit.

Though we're still in the early stages of assembling the blue-ribbon faculty, in addition to Casey Research's senior team of Doug Casey, Bud Conrad, Louis James, Marin Katusa, Terry Coxon, Jeff Clark, and David Galland... other faculty members now confirmed include Richard Russell, Dow Theory Letters; Jim Puplava, Financial Sense Online; Eric Sprott, Sprott Asset Management; Robert Prechter, Elliott Wave International; Rick Rule, Global Resource Investments; Brent Cook, Exploration Insights; Bob Bishop, independent mining share investor; Vitaliy Katsenelson, Director of Research/Portfolio Manager at Investment Management Associates, Inc; Andrew Schectman, Miles Franklin; Ben Johnson, First Securities Northwest.

And in what should turn out to be one of the most profitable programs of the summit, we'll introduce you to Casey's NexTen - the brilliant young resource pros with the talent and energy to become serially successful; their early track records already demonstrate that they are well on the way. At the summit you'll meet them in person, hear about their latest projects, and just perhaps get in early on what should be an exciting, long, and profitable series of corporate successes.

That's just a small sampling of what we'll be exploring at the summit. Register today and you'll save $200. But we recommend you act fast. Space is limited and these summits tend to sell out quickly. Details here.

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

David Galland
Managing Director
Casey Research