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.

Raising the Shield

By Doug Hornig

Julian, Julian, what hast thou wrought?

If you've been following the WikiLeaks story, and are also a regular reader of this daily missive, then you may find yourself in a somewhat similar frame of mind to ours. We think anything that exposes the world's "leaders" for the corrupt, power-mad, sex-craven, warmongering mental cases that they are has done us all a great service.

Never mind where the leaks came from or what motivates the leakers. Are the documents genuine? They seem to be. Have they put anyone in physical harm's way? No, according to no less a source than Defense Secretary Gates. That's really all we need to know.

Despite Washington's admission that no actual damage has been done to "national security," you'd think from all the kneejerk WikiHoohah that a madman was planting bombs at our marble shrines, or at least that Joe McCarthy had risen from the dead in all his paranoid, alcoholic splendor.

Assange is under house arrest, faced with sexual assault charges in Sweden that may well be trumped-up. At the same time, various embarrassed persons in DC are working furiously to get him extradited here. Where, presumably, he could be put on trial for treason. Maybe even hanged. Who knows?

Government officials don't seem to have grasped that WikiLeaks is already decentralized, and that the free flow of information on the Internet won't be stopped by jailing or executing one person. But then, an understanding of modern tech is not a prerequisite for holding public office.

You may also have noticed that, in addition to the legal maneuvering, there's a very vociferous, bilateral smear campaign underway in certain segments of the press.

From one side comes speculation that a plaintiff in the Swedish rape case is a CIA plant. From the other side comes a retort that the person responsible for spreading story #1 - and a WikiLeaks employee - is a well-documented Holocaust denier.

Charges and countercharges fly, and the flimsier the better. For example, one investigator noted that WikiLeaks' Swedish server also hosts Pirate Bay, the bit torrent file-sharing site. A controlling interest in Pirate Bay is owned by "a prominent Swedish Nazi and financier of that country's leading fascist political party." Ipso facto, the two must be working together.

Perhaps most peculiar of all is the tale that Julian Assange has links to an intelligence-connected mind control cult in his native Australia. It's alleged that this cult, the Santiniketan Park Association, conditions children with drugs, sensory deprivation, sleep deprivation, torture and ritual sexual abuse in order to produce subjects who bend easily to the will of the group's leader.

Assange is sometimes quoted - we don't know if correctly - as having said he's "on the run" from the cult. Oh yeah, and that platinum-colored hair? That's a dead giveaway, distinctive of children raised in the cult. Mmm-hmmm...

All of this stuff would be an amusing enough sideshow, irrelevant to the damning cables released, and destined to be filed away in the Much ado about nothing drawer. Except that the anti-Assange furor has turned Washington's demagogues loose to craft legislation that is not amusing in the slightest.

A quick bit of history on the curtailment of the freedoms of speech and press: the Espionage Act of 1917, highly controversial even at the time, was passed as the U.S. was preparing to go to war with Germany. Purportedly in support of the war effort, the bill made it illegal to divulge "information respecting the national defence" if such information "is to be used to the injury of the United States, or to the advantage of any foreign nation." The Act also conferred upon the Postmaster General the right to refuse to mail or to impound publications that he determined to be in violation of its prohibitions.

Early enforcement was vigorous and wide-reaching. Sentences were not trivial. Poet e. e. Cummings spent over three months in a military lockup for openly speaking of mutinies in the French Army; Socialist Eugene Debs was put behind bars for five years for a speech that "obstructed recruiting"; and the government seized a film called The Spirit of '76 and jailed its producer, because the depiction of British cruelties during the American Revolution was deemed dangerous bad publicity about the country's WWI ally.

The Act got a quick check at the Supreme Court, which in 1919 upheld the conviction of a guy who sent anti-draft pamphlets to men eligible for the draft, while offering the opinion that enforcement should be limited to political expression that constitutes a "clear and present danger" to the government action at issue. That principle endured for less than a year. It was substantially diluted when SCOTUS upheld the conviction of a man who had distributed circulars in opposition to American intervention in Russia following the Russian Revolution - Justices Holmes and Brandeis dissenting, arguing that "a silly leaflet by an unknown man" could hardly be construed as a consequential threat to American foreign policy.

In 1918, the Sedition Act - actually a set of amendments to the Espionage Act - lowered the bar quite a bit. It prohibited such things as "any disloyal, profane, scurrilous, or abusive language about the form of government of the United States... or the flag of the United States, or the uniform of the Army or Navy."

Big umbrella. Too big, as it turns out, because the Sedition Act was repealed in 1921. But the Espionage Act endured, and it did not sit unused. Perhaps most prominently, Nixon Administration Attorney General John Mitchell invoked the act in the attempt to prosecute Daniel Ellsberg for having leaked the Pentagon Papers to the New York Times. The government also filed a restraining order that barred the Times from publishing any further articles based upon the Pentagon Papers, an order with which the Times complied.

The latter was the key development from the perspective of WikiLeaks, because it sought to impose strict limits on freedom of the press when formerly classified documents are published. The test, according to wording upheld in a 1951 decision, was whether the release of the material would likely cause "grave and irreparable" danger to the country. The administration held that publication of the papers met that test. But the Supreme Court, 6-3, disagreed and found for the Times instead.

Justice Stewart, writing for the majority, held that in areas of national defense and international affairs, the president has an independence that is virtually unchecked by the legislative and judicial branches. In the absence of such checks, he wrote, "the only effective restraint upon executive policy and power ... may lie in an enlightened citizenry - in an informed and critical public opinion which alone can here protect the values of democratic government."

All that dissenting Chief Justice Burger could muster against that argument was that when "the imperative of a free and unfettered press comes into collision with another imperative, the effective functioning of a complex modern government," we should take some time to study the possible consequences before allowing publication.

Fast forward now to 2011. In the wake of Julian Assange's "treasonous" behavior, bills have been introduced to further amend the Espionage Act. Specifically, Joe Lieberman (I-CT), John Ensign (R-NV) and Scott Brown (R-MA) have collectively puked up S.315. On the House side, Pete King (R-NY), Mike Rogers (R-AL), and Tom Latham (R-IA) are co-sponsors of HR.6506.

The proposed legislation does not deal with those who leak classified information. It's aimed squarely at publishers. It would throw out the 1971 Times decision and make it a federal crime to transmit information "concerning the identity of a classified source or informant of an element of the intelligence community of the United States," or "concerning the human intelligence activities of the United States or any foreign government" if such publication is "prejudicial to the safety or interest of the United States."

Violate it and you can spend up to a decade at Club Fed.

But to appreciate the real jollity of this, remember what a "shield law" is. While there is no such thing in the federal code, most states have them: statutes affording a privilege to journalists not to disclose in legal proceedings confidential information or sources of information obtained in their professional capacities.

Now be aware that Joe Lieberman's bouncing baby boy is named the Securing Human Intelligence and Enforcing Lawful Dissemination Act. SHIELD, get it? Hey, who says those numbnuts in Washington have no sense of humor?

All hilarity aside, though, this bit of legislative yucks seems fairly restricted in how it can be applied. But we've had too much experience with the bottles and genies of "national security" to believe the applications won't be subject to mission creep. Just consider if someone had, in the run-up to the Iraq invasion, published a secret cable from some high military official to Defense Secretary Rumsfeld, emphatically stating that the weapons of mass destruction didn't exist. Imagine what a Justice Department in an administration hell bent on war would've done to the perp. There'd be no dungeon deep enough.

And what does it mean to "transmit" in the Internet era, anyway? The definition of publication is way blurry now. We're obviously publishing this article at Casey Research. But suppose you share it with a friend. Now you've transmitted it too. And if it should be found to contain material prejudicial to the government (not that we'd ever do that), you could be on the legal hook, as well. And your friends. And your friends' friends. No real terminus to the information highway has yet been delineated.

It's a godawful law, and hopefully it won't survive its first court test. But it will be passed, you can count on that. The most vocal calls for Assange's scalp have come from the right, and Republicans can be expected to push this through a Congress they largely control, especially with defections by some of the more "conservative" Democrats like Lieberman. Obama will likely not even oppose it, and he certainly won't veto it.

After that, who can say, maybe I or another staff writer here at CR will be among those first hauled into court over our words.

The Economics of eBooks for Authors

By Alex Daley, Casey's Extraordinary Technology

Remember this face. It won't be long before you see more of it. A lot more. She's already appeared on numerous online shows and in the pages of national newspapers. But with her recent rise into the spotlight, don't be surprised to find her slated for a spot on The Today Show or even CNBC in the near future.

Her name is Amanda Hocking. She is a 26-year-old Minnesota native with a predilection for vampires and an incredible talent for writing. Her series of books, originally available only on the Amazon Kindle, have become a relatively large hit and rank her among the bestselling independent authors of the moment.

And it's her independence that has been the subject of much media speculation of late. Numerous blogs are now reporting that her sales surpassed the 100,000-eBooks-per-month threshold in December, making her arguably the most successful self-published fiction author today. And, with royalties for Kindle books at 70% in some cases, and no publisher involved to take a slice of the pie, these bloggers are quickly jumping to the conclusion that this self-made author is raking in the dough, espousing headlines like "This 26-Year-Old Is Making Millions Cutting Out Traditional Publishers With Amazon Kindle."

Unfortunately for Hocking's bank account, and the readers of all those blogs now decrying her the first eBook millionaire, the math is a little misleading.

The Business Insider article referenced above includes some (admittedly) back-of-the-envelope math to come to the conclusion that she's a potential millionaire. 100,000 books per month, times 12 months, times $1+ average royalties per book, equals more than $1M per year in income. Impressive. Though the million-dollar conclusion is a little premature. Here's why.

To begin with, it's worth explaining where they arrive at that $1+ per book in royalties. At the beginning of last year, Amazon.com made a change to the royalties they offered authors of eBooks, in an attempt to encourage more, cheaper eBooks and larger numbers of independent authors. Under the original royalty agreement, authors received 30% of the price of their eBooks and were free to set whatever price they wished for them. That's comparable to the 30% offered on average by traditional pulp-centric publishers.

Under the new arrangement, if an author agrees to a host of conditions, including making the eBook cheaper than paper copies and keeping the price between USD$2.99 and $9.99, they can keep 70% of the title's price instead. That's a lot of incentive to an independent author considering whether to go it alone or keep looking for that book deal.

Ms. Hocking's books, however, fall partially out of that price range. She is most famous for her "My Blood Approves" vampire series, the first and most popular of which retails for just $0.99 in eBook format. At that level, she would only receive about $0.30 per copy sold. If readers buy the follow-ups, each published for a still bargain bin-level $2.99, she makes a much more substantial $2.09 per copy.

Her newer trilogy also has the same structure as the prior series, with the first book at a "why not" level of $0.99 and the follow-on books priced at $2.99 as well. But to figure out how much money she may have made from her books thus far, we need to know not just how many she sold in December, but altogether.

Thankfully, two weeks prior to her sudden blog fame, this article appeared in USA Today, which highlighted Ms. Hocking as having sold a total of 146,000 books in all of 2010. Her December sales numbers are the result of a very fast-growing ramp that has accelerated from only a few hundred books a month in early 2010. If you assume the majority of her sales were for the best seller on her list and distribute the rest of the sales in a typical 30% fall-off model, 145,000 sales might be distributed amongst the 9 books she had published before the end of the year as such:

If so, then her probable take-home pay would have been in the range of $189,000 for the year (if the sales are more heavily skewed to the two $0.99 books, which is very likely, then it could be considerably less). Not a millionaire yet, but certainly a lot more than your average 26-year-old makes each year, and definitely at the high side for an author of any kind, let alone one without a publisher.

While it may have been a bit premature to anoint this young literary up-and-comer as the first millionaire of the eBook world based on her December sales, there are two really important numbers buried in her sales data that should interest readers and scare publishers.

First, all of the books she has published are available in paperback as well as in digital form. These paperback books are made possible not by her signing a contract with a traditional publisher, but through a "print on demand" service that makes a copy of the book for each order on a website like Amazon.com or the online extension of Barnes & Noble. They are priced at par with traditional store-bought paperbacks, with most of her books priced at $8.99 or $9.99 each.

The eBook versions account for 99% of all unit sales. That's an astounding disparity. Sure, her books were originally available only in the eBook format, are targeted to a young demographic that is largely digital to begin with, and promoted almost exclusive via the web. All of that skews the number a bit. But, while her experience is extreme, it is not unique.

In a very public analysis of sales of the massive bestseller The Room a few weeks ago, two things became abundantly clear. 1) Amazon is the 800 lb gorilla of the book industry, as between Kindle and print sales, the company accounted for 50% of all sales of the bestselling book. 2) Amazon's customers prefer digital to paper, as Kindle sales accounted for 80% of Amazon's total, or about 40% of all sales across all channels. And price was not the sole driver of the preference, as the hardcover on Amazon was only $14.41, or 20% more than the digital version.

In January, USA Today announced that 19 of the 50 bestselling books in the nation each had more than half of their sales from eBooks. By February, that number had risen to 23 of 50.

Which brings us back to the second most interesting tidbit from Ms. Hocking's sales data - what has happened to her sales since the end of 2010. According to USA Today, her sales in January alone approached 450,000 units! It's amazing what a little mainstream attention and an expanded base of potential consumers can do.

With an estimated 3 to 5 million new eReaders activated this holiday season, the market for eBooks just got a whole lot bigger. Add in all the people reading Kindle books on PCs, smartphones, iPads and the like, and the audience is growing at a rapid pace.

While Ms. Hocking may not yet be a self-published millionaire, she is certainly on her way there quickly. Plus, you know what they say about fiction writing: the real money is in the movie rights.

In the meantime, her success should serve as an inspiration for authors. And as a warning for traditional publishers: Let the music industry be your warning. Technology is changing the world beneath your feet. You can't fight it. Start adapting now.

[Of all the technology sectors to invest in, biotech is one of the most promising for the near future. But Alex and his team don't fall for the hype that attracts many investors to tech startups like flies. Instead they're doing meticulous due diligence on every one of their picks - as a result handing subscribers of Casey's Extraordinary Technology annualized gains of 84% in 2010. Read more here.]

B-Schools and C-Students

By Vedran Vuk

In my daily missives, I've often demeaned students of political science, philosophy, and other less career-oriented majors, but to be fair, today I want to turn the tables on my own academic background, business.

In my opinion, business degrees aren't necessarily a good choice. It really depends on what one does with them. Careers can range from CEO to assistant manager at the local McDonald's. Business degrees don't guarantee results like medicine or nursing; however, they should be applauded for their versatility. Many of my former classmates entered into companies that they never could have imagined.

But there are certainly negative aspects to both the standard business curriculum and the students who study it. So I've created a list of several common problems:

1. Lack of Entrepreneurship - A business school education does little to prepare students for entrepreneurial activities, and very few students go on to become entrepreneurs. The dream job of most business students appears to be a comfortable position inside a major corporation with a salary of $100K. For a field that's based on risk, creativity and entrepreneurship, there are surprisingly few willing to make the entrepreneurial leap.

2. A Focus on Corporations - Not only are business students not particularly entrepreneurial, but they are also pushed toward large corporations during the whole education process. For example, accounting and financial valuation are always taught with gigantic corporations in mind. But in a way, this is pointless. Unless a student becomes a professional equity analyst, they will likely never find an undervalued company in their lifetimes.

However, the chances of discovering an undervalued apartment building in your hometown are fairly good. Or the chance of finding an undervalued small business in need of venture capital is much more likely. Unfortunately, the curriculum is almost always geared toward evaluating ExxonMobil rather than evaluating Joe's Bakery down the street. The latter would be much more useful for most students interested in profit opportunities.

3. Lazy and Mediocre Students - You know the saying about companies being run by C students. Well, it really is true; one reason being that the best and brightest don't end up in business schools. Essentially, most business students are interested in making money. So they clearly didn't choose philosophy, art history or political science. But they also didn't choose engineering, profitable science sectors, technology or the medical field. Hence, many want money, but don't want to study anything difficult. Of course, some just really enjoy the business world. Nonetheless, business classrooms aren't the place to find the brightest students on a college campus.

Because of this factor, there is even a vast difference within a business school. The finance, economics and accounting majors are often noticeably different from the others. Many business students are scared to death of any intensive coursework. There's always extra space in the accounting, econometrics and financial modeling electives.

4. A Lack of Passion and the Hustle - As noted above, the vast majority of students aren't interested in becoming experts in their field. Most focus their efforts on hustling and networking to find a corporate job. When a presentation from a prospective employer comes to campus, the same students who never ask a single question in class are suddenly the most curious students in the Q&A sessions. Furthermore, almost everyone wants the hot stock tip; few want to learn statistics to find market distortions.

Of course book smarts aren't everything. But if you aren't entrepreneurial, don't know statistics, don't know accounting, and don't understand valuations, what business skills have you really acquired after four years of college? Other important business skills such as relationship building, good management and sales are more often than not learned on the job rather than in school.

5. Bad Fits and Ethical Problems - I don't mean ethical problems here in the regular meaning of the word. Instead, it's an issue of career choices. There are many individuals out there who feel that the business world is full of greed and that the free market is evil. And strangely enough, many of these individuals are business students.

Personally, I've never understood this. If you believe the business world is inherently evil, then what are you doing majoring in business? Perhaps it would be acceptable if you envisioned creating a better company. But most of these students plan to work for the same corporations that they despise. In my opinion, these are the most unethical students in business schools. They're already engaging in activities that they feel are morally wrong.

When I was on the job hunt almost two years ago, I ran across an interesting opening at a major institutional player. The position was for a research associate who would spend two years training in different groups before settling for the ideal position. The groups included fixed income markets, equities and interest rate swaps. It was one of the best job openings that I'd seen during the recession.

But the opening didn't ask for any business majors - not even finance and economics backgrounds. Rather, the position asked for biology, chemistry, engineering and math majors for the position. And given the quality of many business students, I'm not surprised by this choice.

Well, I hope that we're even now on the degree-bashing. And don't think that some of those criticisms don't apply to me. I'm certainly not perfect. If I had to evaluate myself, I'd say that numbers 1 and 2 may point to my own flaws. As you can tell by now, I'm not exactly running my own business either, and my focus happens to be on large-scale corporate valuations.

Here and Now: The Short Term

By David Galland

For the upcoming edition of The Casey Report, I interviewed Rick Maybury, an exceptional thinker when it comes to geopolitics. In his view, in the not-too-distant future, people will find themselves thinking about the world "pre-Tunisia" and "post-Tunisia."

In the short term, the uprisings in the Middle East and North Africa (a topic Bud Conrad also weighs in on at length in The Casey Report) have the potential to change the world, and profoundly so.

For starters, the price of oil has a very direct effect on economic activity. At the least, the turmoil in the oil states is going to result in a near-term crimp in supplies that will keep oil prices high into the immediate future, and maybe for years.

At worst, if the unrest spreads to any (or all) of the big three of Iraq, Iran and Saudi Arabia - as it almost certainly will if Gaddafi follows Mubarak out the door - then speculative fervor alone could send the price of oil upwards toward $200 a bbl. That would be a crushing blow to the fragile global economy and maybe even send the U.S. military into action once again, this time in an attempt to regain American influence in the region and to ensure that oil continues to flow west.

The other near-term factor to watch very carefully is the Fed's decision regarding continuing its quantitative easing. Friends in high places I have talked to expect, come June 2011, a hard stop to the easing, and based on the trial balloons now being sent up by the Fed, I have to agree. This, today, out of Bloomberg.

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

"I don't see a lot of gain to reverting to a tapering approach," Atlanta Fed President Dennis Lockhart told reporters yesterday. "I don't think that is necessary," Philadelphia Fed President Charles Plosser said last month.

Central bankers, who next meet March 15, are about half way through their second round of bond purchases. To bring the program to a full stop in June, they must be confident that the economy is strong enough to endure higher long-term interest rates and rising expectations of an exit from the most expansive monetary policy in Fed history, said Dan Greenhaus at Miller Tabak & Co. LLC in New York.

"If this is a self-sustaining recovery that can withstand higher interest rates, then why not get the hell out?" said Greenhaus, Miller Tabak's chief economic strategist. "Still, I am nervous about their ability to withdraw from this policy without broader disruptions."

Full article here.

The Fed's decision on further monetization is important on a couple of levels. The first is the potential impact a hard stop would have on the U.S. (and likely, global) stock markets.

Though I have previously shared this chart from the February 2009 edition of The Casey Report, I include it here again as it speaks volumes about the pending Fed decision. It is a snapshot of the interrelationship between Japan's quantitative easing and that country's stock market. The mechanics are easily discerned - pump up the money supply, and stocks rise. Pull the plug on the money supply, and the stock market goes down the drain.

Here's a quick response back to me from our own Bud Conrad about the Bloomberg story quoted above.

You saw the possibility early that they might stop QE 2. They are floating balloons of policy change, and Geithner's sales pitch to the banks suggests that they are trying. But I just don't think they will get away with it, for all the consequences you articulated: rising rates would hurt stocks, the economy would tank, and the weak economy would get weaker. It might help the dollar, but the dollar has not collapsed at a level requiring the Fed to protect it.

Let's see if the discussion by the Fed affects the markets as badly as the QE 2 discussion affected markets positively before the actual purchases. The 10-year Treasury bond dropped to 2.4% or so in August on just talk, and is a full % above that on the actual big purchases. If the talk scares the market (rates rise and stocks fall), I bet they extend QE 2 or diminish it slowly. They must be looking at the calendar for election year and will want to turn on the fire hose of new money printing at least 6 months or maybe a year before the election.

I wrote about all this over a year ago, explaining that the federal government deficit is too big to be absorbed by anybody but the Fed, and that they would do what came to be QE 2. The deficit hasn't changed, so my prediction is that even if the Fed stops buying Treasuries for a few months, the bad reaction of markets will force them right back to the money printing press.

Absent that, the obligations to pay interest on the debt at higher and higher rates will make the deficit so bad that the dollar really crashes. There is no way for the Fed to stay out of the business of bailing out the federal deficits for more than a quarter, in my opinion, and I'm still not expecting they can really pull that off.

I think Bud has it right, though I expect that the Fed will actually pull the trigger and announce the end of quantitative easing, albeit with a strongly worded caveat that they will reinitiate buying Treasury bonds if the situation changes for the worse - and may even use higher oil prices as cover for doing so.

At least initially, I suspect the market reaction to ending quantitative easing will be very negative for stocks, even those of the gold and silver variety that we so favor. Conversely, when the Fed ultimately reverses itself and restarts its purchases of Treasuries, it will be very good for stocks... and especially those associated with precious metals.

While this service is not really intended to provide specific investment recommendations - that's where our paid services come in, as they track the recommendations carefully - I will close this segment with some general thoughts on portfolio allocation at this point.

• The risks associated with an overvalued stock market, higher oil prices and the Fed's fumbling about for some sort of rational monetary policy are very high and will increase acutely in the months just ahead.
  
  
• Stepping out of the way of that risk by selling highly appreciated stocks in favor of a higher allocation to cash or bullion is worth consideration. Yes, you might miss some upside, but I personally fear the downside more than any missed upside.
  
  
• If the Fed does announce a full stop to its monetization and the market gets crushed, give it some time, then buy the best precious metals stocks with both hands, and even pick some up with your toes if you are able.
  
  How long should you wait to buy if there is a crash? Generally, I don't think there will be any great rush to get repositioned, but that will depend on a couple of variables, including how steep the crash is, if one occurs. The worse the crash, the greater the anticipation that the Fed will again reverse course and the quicker the precious metals stocks will come roaring back. So, we'll have to cross that bridge when we get there.
  
  
• If you still have a variable-rate mortgage, or one you are paying more than 5.5% fixed on, consider refinancing in a hurry - like yesterday. At this point, the 30-year rate is on the order of 4.88% - that's like free money. Rates are going higher, and soon. And once that trend is in motion, it's likely to stay in motion for a good long time.

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

Vedran Vuk
Casey's Daily Dispatch Editor

David here, back from a week in Costa Rica. More on that trip later.

First, however, I want to spend a few moments talking about the world we live in, starting with the big-picture, longer-term perspective, then working down to the here and now.

Hopefully, the exercise will provide useful footing for plotting your investments as the world turns.

The Long View

When last I wrote, February 18, I wrote about the hypothesis that the world is speeding toward "singularity."

As I have since realized that many dear readers may be unfamiliar with or unsure about the concept, I wanted to share some quotes from Ray Kurzweil, perhaps the most prominent of the "singulartarians."

"What, then, is the Singularity? It's a future period during which the pace of technological change will be so rapid, its impact so deep, that human life will be irreversibly transformed."

***

"The Singularity will represent the culmination of the merger of our biological thinking and existence with our technology, resulting in a world that is still human but that transcends our biological roots. There will be no distinction, post-Singularity, between human and machine or between physical and virtual reality."

***

"Can the pace of technological progress continue to speed up indefinitely? Is there not a point where humans are unable to think fast enough to keep up with it? With regard to unenhanced humans, clearly so. But what would a thousand scientists, each a thousand times more intelligent than human scientists today, and each operating a thousand times faster than contemporary humans (because the information processing in their primarily nonbiological brains is faster) accomplish? One year would be like a millennium. What would they come up with?

"Well, for one thing, they would come up with technology to become even more intelligent (because their intelligence is no longer of fixed capacity). They would change their own thought processes to think even faster. When the scientists evolve to be a million times more intelligent and operate a million times faster, then an hour would result in a century of progress (in today's terms)."

The Singularity Is Near - When Humans Transcend Biology by Ray Kurzweil (buy it on Amazon).

The key concept is that we have arrived at the point where we humans are able to use technology to transcend the physical limitations of our biological minds. Within the blink of the proverbial eye, our new nonbiological minds, unleashed and with no limitations on how powerful and how fast they can become (very much not the case with biological brains), will begin tackling the big problems that have plagued humanity since the dawn of civilization.

Call me a hopeless optimist if you will, but the historical facts and exponential nature of technological advances where more powerful computers beget more powerful computers - working simultaneously across all areas of human activity - support the concept of Singularity. Which is to say that if humanity can avoid blowing itself up for another few decades, a radical improvement in the quality (and duration) of life is almost a certainty.

That's not to say that Kurzweil and others who study the topic have perfect clarity on how the future will work out - no one does. But I do believe that they are directionally correct as to what's coming down the road, longer-term. It should bring you considerable comfort, because if Kurzweil et al. are more right than wrong, and the technological trends now in motion stay in motion, literally everything will change - and almost certainly for the better.

In the Meantime: the Medium View

The current version of the world in which we live operates under the "Nation-State" model. Doug Casey did an excellent job discussing the nation-states, and why they are doomed, in his article, End of the Nation-State, which subscribers to The Casey Report can read in its entirety in the May 2009 edition, found in the archives.

The CliffsNotes version is that, unlike the previously dominant organizing structures of tribes and kingdoms, most humans today are organized within proscribed geographical borders within which there are commonly shared language, genetics and ideologies.

For any number of reasons I won't rehash here, the nation-states are in decline, with almost all of them financially and intellectually bankrupt. I would support that by pointing to the nation-state that has long been held up as a shining example of the model at its best and most virtuous - the United States.

Unfortunately, though it is certainly better than some, a closer look readily reveals the flaws in the model.

Not only have the leaders of the United States run up the world's largest debt - by a large margin, more than any other government in history - but over the past 60 years, it has interjected its military into more shooting conflicts, in more countries, than any other. The peoples of Vietnam, the Dominican Republic, Cambodia, Laos, Grenada, Panama, Somalia, Iraq, Afghanistan and a dozen or so others have all experienced American military boots on the ground and dodged American bullets. If bankrupt and aggressively militarized is the best of breed, the model of the nation-state has clearly failed and should be discarded.

You can also sense the degradation of the nation-states in the high esteem China is held in by so many. Life in a totalitarian bird cage, however gilded, may appeal to some - but if that's the new operating model for nation-states, the world is headed for real trouble.

Which brings us to the medium-term outlook: great turmoil as the nation-states struggle to maintain the status quo in the face of their insurmountable challenges. Failing to maintain that status quo; in fact, expect the powers-that-be to redouble their efforts at maintaining, for as long as possible, the illusion of the status quo. For example, by jiggering economic data and otherwise prevaricating so that the populace retains hope and, more importantly, confidence in the ability of the government to keep the ship of state afloat. It can't.

In a rare bout of candor, earlier this week the governor of the Bank of England actually told it as he saw it... and I quote from the Telegraph of London.

The Governor of the Bank of England warned yesterday that living standards may never recover from the financial crisis and that households were only just starting to feel the full impact of bankers' mistakes.

Mervyn King told MPs that ordinary people were not to blame for the pain ahead and that he was surprised there had not been more public fury.

"It is not like an ordinary recession where you lose output and get it back quickly," the Governor said when asked if the country would ever recover from a squeeze on living standards on a scale not seen since the 1920s.

"You may not get it back for many years, if ever, and that is a big long-run loss of living standards for all people in this country."

The reference to the "ordinary people" not being to blame for the pain is mostly true - "mostly," because it is ordinary people who keep electing the dolts that run the asylum, and it was ordinary people who took loans they couldn't afford to buy stuff they didn't need. But I suspect the real reason for King's publicly absolving the masses of blame is as spade work precedent to going after the "real culprits" - namely anyone who still has a net worth of a size that makes them attractive as a target for an asset stripping in order to keep the doors of the nation-states open.

On that point, flipping through the television channels on my JetBlue flight back from Costa Rica, I came across two different financial talk shows where the topic was how soft the current tax burden is on high-income earners in the U.S. One host, on MSNBC, was especially vivid in describing the situation, referring to past periods of economic growth during which nominal income taxes on the highest earners were in excess of 70%, and even pointing favorably to the days when it was over 90%.

Even David Stockman, an individual I have a great deal of respect for, is calling for canceling the Bush tax cuts - which is to say, implementing a huge new tax increase.

Viewed strictly in terms of deficit reduction (forget about debt reduction, that's simply unpayable), Stockman may be technically correct - that it will take both tax increases and spending cuts to line up outflows with inflows. But, realistically, raising taxes won't be how the deficits get fixed.

According to the latest census, there are 110,000,000 households in the U.S. The top 10%, or 11,000,000 households, earn on average $118,200 a year.

That amounts to about $1.3 trillion in annual revenue. So, even if you stuck it hard to the fat bastards who are oppressing the masses by running businesses - so hard, in fact, that you taxed 100% of every penny they earned - the country would still be in deficit.

As I have written in the past, as much as I hate the idea of anything more than a modest flat tax of, say, 10 to 15% to pay for essential services, you might be able to convince me to pay a bit more during a time of trouble. But not when the historical example shows that no matter how much government revenues increase, government spending soon adjusts upwards to the point that the nation-state is back in deficit. Viewed in that in context, advocating higher taxes is downright unpatriotic as it only serves to drain ever more capital from the economy and flush it down the toilet as government waste.

The medium term, therefore, will be all about higher taxes - and not just on the high-income earners but everyone, most likely through the implementation of a value-added tax and a myriad of new fees, fines, sin taxes and more. And it will be about currency debasements and stricter financial controls that use available technologies to ensure that no coin slips unnoticed through the government's increasingly fine net.

As individuals, the threats to your wealth will be persistent. Likewise, your financial - and even personal - freedom will only be steadily degraded going forward.

Medium term, not so optimistic.

Here and Now: The Short Term

For the upcoming edition of The Casey Report, I interviewed Rick Maybury, an exceptional thinker when it comes to geopolitics. In his view, in the not-too-distant future, people will find themselves thinking about the world "pre-Tunisia" and "post-Tunisia."

In the short term, the uprisings in the Middle East and North Africa (a topic Bud Conrad also weighs in on at length in The Casey Report) have the potential to change the world, and profoundly so.

For starters, the price of oil has a very direct effect on economic activity. At the least, the turmoil in the oil states is going to result in a near-term crimp in supplies that will keep oil prices high into the immediate future, and maybe for years.

At worst, if the unrest spreads to any (or all) of the big three of Iraq, Iran and Saudi Arabia - as it almost certainly will if Gaddafi follows Mubarak out the door - then speculative fervor alone could send the price of oil upwards toward $200 a bbl. That would be a crushing blow to the fragile global economy and maybe even send the U.S. military into action once again, this time in an attempt to regain American influence in the region and to ensure that oil continues to flow west.

The other near-term factor to watch very carefully is the Fed's decision regarding continuing its quantitative easing. Friends in high places I have talked to expect, come June 2011, a hard stop to the easing, and based on the trial balloons now being sent up by the Fed, I have to agree. This, today, out of Bloomberg.

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

"I don't see a lot of gain to reverting to a tapering approach," Atlanta Fed President Dennis Lockhart told reporters yesterday. "I don't think that is necessary," Philadelphia Fed President Charles Plosser said last month.

Central bankers, who next meet March 15, are about half way through their second round of bond purchases. To bring the program to a full stop in June, they must be confident that the economy is strong enough to endure higher long-term interest rates and rising expectations of an exit from the most expansive monetary policy in Fed history, said Dan Greenhaus at Miller Tabak & Co. LLC in New York.

"If this is a self-sustaining recovery that can withstand higher interest rates, then why not get the hell out?" said Greenhaus, Miller Tabak's chief economic strategist. "Still, I am nervous about their ability to withdraw from this policy without broader disruptions."

Full article here.

The Fed's decision on further monetization is important on a couple of levels. The first is the potential impact a hard stop would have on the U.S. (and likely, global) stock markets.

Though I have previously shared this chart from the February 2009 edition of The Casey Report, I include it here again as it speaks volumes about the pending Fed decision. It is a snapshot of the interrelationship between Japan's quantitative easing and that country's stock market. The mechanics are easily discerned - pump up the money supply, and stocks rise. Pull the plug on the money supply, and the stock market goes down the drain.

Here's a quick response back to me from our own Bud Conrad about the Bloomberg story quoted above.

You saw the possibility early that they might stop QE 2. They are floating balloons of policy change, and Geithner's sales pitch to the banks suggests that they are trying. But I just don't think they will get away with it, for all the consequences you articulated: rising rates would hurt stocks, the economy would tank, and the weak economy would get weaker. It might help the dollar, but the dollar has not collapsed at a level requiring the Fed to protect it.

Let's see if the discussion by the Fed affects the markets as badly as the QE 2 discussion affected markets positively before the actual purchases. The 10-year Treasury bond dropped to 2.4% or so in August on just talk, and is a full % above that on the actual big purchases. If the talk scares the market (rates rise and stocks fall), I bet they extend QE 2 or diminish it slowly. They must be looking at the calendar for election year and will want to turn on the fire hose of new money printing  at least 6 months or maybe a year before the election.

I wrote about all this over a year ago, explaining that the federal government deficit is too big to be absorbed by anybody but the Fed, and that they would do what came to be QE 2. The deficit hasn't changed, so my prediction is that even if the Fed stops buying Treasuries for a few months, the bad reaction of markets will force them right back to the money printing press.

Absent that, the obligations to pay interest on the debt at higher and higher rates will make the deficit so bad that the dollar really crashes. There is no way for the Fed to stay out of the business of bailing out the federal deficits for more than a quarter, in my opinion, and I'm still not expecting they can really pull that off.

I think Bud has it right, though I expect that the Fed will actually pull the trigger and announce the end of quantitative easing, albeit with a strongly worded caveat that they will reinitiate buying Treasury bonds if the situation changes for the worse - and may even use higher oil prices as cover for doing so.

At least initially, I suspect the market reaction to ending quantitative easing will be very negative for stocks, even those of the gold and silver variety that we so favor. Conversely, when the Fed ultimately reverses itself and restarts its purchases of Treasuries, it will be very good for stocks... and especially those associated with precious metals.

While this service is not really intended to provide specific investment recommendations - that's where our paid services come in, as they track the recommendations carefully - I will close this segment with some general thoughts on portfolio allocation at this point.

• The risks associated with an overvalued stock market, higher oil prices and the Fed's fumbling about for some sort of rational monetary policy are very high and will increase acutely in the months just ahead.
  
  
• Stepping out of the way of that risk by selling highly appreciated stocks in favor of a higher allocation to cash or bullion is worth consideration. Yes, you might miss some upside, but I personally fear the downside more than any missed upside.
  
  
• If the Fed does announce a full stop to its monetization and the market gets crushed, give it some time, then buy the best precious metals stocks with both hands, and even pick some up with your toes if you are able.
  
  How long should you wait to buy if there is a crash? Generally, I don't think there will be any great rush to get repositioned, but that will depend on a couple of variables, including how steep the crash is, if one occurs. The worse the crash, the greater the anticipation that the Fed will again reverse course and the quicker the precious metals stocks will come roaring back. So, we'll have to cross that bridge when we get there.
  
  
• If you still have a variable-rate mortgage, or one you are paying more than 5.5% fixed on, consider refinancing in a hurry - like yesterday. At this point, the 30-year rate is on the order of 4.88% - that's like free money. Rates are going higher, and soon. And once that trend is in motion, it's likely to stay in motion for a good long time.

In Conclusion

In the short and medium term, things are going to become very challenging for pretty much everyone, but especially for those without a nest egg and steady income. Once the Fed steps aside and the warping effects of its money printing are mitigated, people will quickly discover just how much worse off they are than they thought.

And it will only get worse when their governments then show up at their door demanding more, in exchange for less.

Expect the turmoil now so evident in the Middle East and North Africa to continue and to spread - here, there and everywhere.  

Those are the risks. The opportunity will come following the next big shock to the stock and even commodity markets, which I would expect before June, as that will plant the seeds for spectacular gains for those with the dry powder to buy following the carnage.

What if I'm wrong? Well, you may pass up some profits between now and then by being in cash and bullion, but I'm betting you'll sleep better - so there's that.

Now, this is not to say that you should dump all your investments, wholesale. Rather, just be extra sure your portfolio is reasonably well balanced, and that the prices of your stocks are undervalued based on their underlying assets. The time will come for the Mania phase in the resource sector, and probably sooner than later. If your portfolio is in fighting trim, riding through to the other side of any big correction should work out just fine. But if your portfolio is made up of a hodge-podge of stocks that you have forgotten why you own them, then the sooner you clean things up, the better.

In the medium term, as the power elite in charge of nation-states take increasingly desperate measures to retain credibility, and therefore power, things will only get uglier. If you can afford to do so, this will be a good time to be observing things from a distance, in some comfortable corner of the world where your own government cannot readily lay hands on you or your money.

In the long term (maybe 20 years?), the payoff from technological advances should become the dominant controlling force in the global economy. And after that, it's all good.

On that last, more optimistic point - do yourself a favor and pick up Kurzweil's book. It's a fascinating read and I suspect, like myself, you will find your perspective on the world substantially improved by the time you are done with it.

Ed. Note: The upcoming Casey Research Summit, being held in beautiful Boca Raton, Florida, April 29 - May 1, will address in detail the most likely scenarios to unfold over the next few years, and how to invest.

Even though we are still assembling the blue-ribbon faculty - the latest additions being 35-year mining veteran Robert Quartermain, Nevada exploration legend Andy Wallace, and renowned market analysts Pam and Mary Anne Aden - I was just informed that there are only 25 seats remaining for the event.

If you are planning on attending, please register right away - as it will be sold out by this time next week. Details on the Summit and a secure online registration form are available by clicking here. 

The Opposite of Smart and Honest

In the interest of further revealing the level of intelligence and integrity of those now running the show in these United States, I would like to share this item, which I picked off the always worthwhile Wattsupwiththat.com.

EPA's Clean Air Act: Saving millions and making trillions? By Steve Milloy JunkScience.com

The U.S. Environmental Protection Agency claimed today that it is saving millions of lives and making the U.S. trillions of dollars through the Clean Air Act.

JunkScience.com has prepared a response to the agency's fanciful claims. Though it is still in draft form, we are posting "EPA's Clean Air Act: Pretending air pollution is worse than it is" early in response to the EPA's wild assertions.

The full story with links is at JunkScience.com.

Be afraid.

Costa Rica and Harry Potter

While my just-concluded trip is still fresh in mind, I wanted to share my now updated view on Costa Rica and touch on our drive-by visit to the new Harry Potter attraction at the Universal Studios theme park in Orlando, Florida.

First, Costa Rica.

It had been some years since I last visited my dear friends and long-term residents of Costa Rica, Pam and Mary Anne Aden, editors of the excellent Aden Analysis service, so I was particularly looking forward to the visit.

All in all, the place had not changed much over the last 12 years or so since I was there the last time. What changes have taken place I would have to scribble onto the negative side of the ledger. 

Especially at the beach community around Manuel Antonio National Park, where we stayed. I used to tell people it was like Hawaii 100 years ago - quiet, pristine, unpopulated.

Unfortunately, in the years since my last visit, the "law of relative unpleasantness" has come into play - with locals and foreigners from less desirable areas flooding in and mostly ruining the place. Sure, you can still find a quiet corner of a beach to flop down on - but the roads leading up to that corner are now cluttered with tourist operations selling group tours and vendors hawking cheesy souvenirs. And if you leave your car unattended, the odds are good it will be broken into and robbed.

The contrast between Costa Rica and the quiet corner of Cafayate, Argentina, where I now spend most of the time when I am not in the U.S., is stark. Whereas Cafayate is clean, quaint and far from the maddening crowds, and Argentina as a whole is quite sophisticated, the Costa Rican tourist haunts resemble a broken-down corner of some Floridian tourist town whose best days are well behind it.

In fairness, I have never been a fan of Central America, and even though Costa Rica is the best of breed and fine for a quick holiday, it feels seedy and cheap, though the prices very much are not. For one thing, the country has become something of a center for sex tourism - with a deluge of Old Gringos, as the locals call them, accompanied by beautiful Costa Rican women who are, by all appearances, less than half their age.

The weather in Central America has also always been a non-starter for me. While it was pleasant enough while we were there, the area experiences a long rainy season and periods of extreme heat and humidity. Then there is the flora and fauna. While much of it is quite unique - for instance, a tree sloth that (literally) hung outside of our hotel room during our entire stay - some of it is the sort that I'd prefer not to worry about. For instance, the deadly fer-de-lance snake that we saw during a horseback ride. The guide told us that they lose, on average, five horses a year to the fer-de-lance.

Another distinct negative is the petty, and not-so-petty, crime. Virtually every house you see has put into place aggressive measures to keep intruders out - most by deploying liberal quantities of razor wire on the tops of surrounding walls. Another friend whom I ran into during our visit told me that the crime, especially in San Jose, was very bad.

On the positive side, when they aren't breaking into your homes or your cars, the people of Costa Rica are uniformly nice. The service is friendly and, unlike some places, sincerely so. We also ate at some excellent restaurants and stayed in a nice resort hotel near the beach, the Hotel Parador.

Would I ever consider living in Costa Rica, or anywhere in Central America? No chance. Would I visit again? Sure, but only as a quick escape from the snow and to visit my friends there. That said, I understand that there are "different strokes for different folks" and the Adens have a great life in Costa Rica, and there are large expat communities there - so it obviously appeals to some. Just not to me, at least for anything other than a quick holiday.

From Costa Rica, we returned home via Orlando, in order to spend half a day at the Universal Studios theme park and, in particular, the Wizarding World of Harry Potter attraction. As the family unit has been Harry Potter fans from day one, and because the kids are still young enough to appreciate such things, we were happy for the opportunity to visit. Unfortunately, the Harry Potter attraction is, on the whole, not really worth the price of admission. Which, for the record, is very expensive - all in, with tickets and some refreshments, a family of four will easily spend over $400 for the pleasure. And yet, thanks to the draw of the Potter franchise, the place was packed - even though it was raining when we arrived. One of the park workers told me that if it wasn't raining, it would be much, much busier.

The basic layout of the Wizarding World is in a small corner of a much larger and somewhat gone-to-seed theme park. There are three rides - two of which are very average, and maybe sub-average, roller coasters, and one a state-of-the-art experience that uses a combination of video imagery, holograms and centrifugal force to create the experience of flying, following Harry and friends as they zip around Hogwarts on their Quidditch brooms. The family loved it, but I almost lost my breakfast. If you are prone to motion sickness, you might want to give it a pass.

Other than that, the rest of the attraction is made up of shops selling cheaply made souvenirs at over-the-top prices. So, while the visuals were good - the castle and the street are competently rendered - the entire attraction boils down to a single ride that lasts about a minute. On any given day, you'll wait in line for an hour or two to get on the ride.

I wish I could be more positive about Costa Rica or the Harry Potter attraction, but that's my honest take. Hopefully, it will be of some use.

Friday Funnies

Not much to share on the funny side this week, as I am flying fast and low trying to get caught up before taking off again next week, to Argentina for the sold-out Harvest Celebration at La Estancia de Cafayate.

There was, however, a funny outtake from a game show that I think many of you will enjoy.  View it here.

And this joke from one of our English correspondents...

Proposed cuts to the National Health Service

The British Medical Association has weighed in on Prime Minister David Cameron's new health care proposals.

The allergists voted to scratch it, but the dermatologists advised not to make any rash moves.

The gastroenterologists had a sort of a gut feeling about it, but the neurologists thought the administration had a lot of nerve.

The obstetricians felt they were all labouring under a misconception.

Ophthalmologists considered the idea short-sighted.

Pathologists yelled, "Over my dead body!" while the pediatricians said, "Oh, grow up!"

The psychiatrists thought the whole idea was madness, while the radiologists could see right through it.

The surgeons were fed up with the cuts and decided to wash their hands of the whole thing.

The ear, nose and throat specialists wouldn't hear of it.

The internists thought it was a bitter pill to swallow, and the plastic surgeons said, "This puts a whole new face on the matter."

The podiatrists thought it was a step forward, but the urologists were pissed off at the whole idea.

The anaesthetists thought the whole idea was a gas, whilst the cardiologists didn't have the heart to say no.

In the end, the proctologists won out, leaving the entire decision up to the arses in London.

That's (Almost) It for This Week!

A moment ago, I mentioned that the Harvest Celebration in Cafayate, March 15 - 20, is sold out, but there is a smaller gathering, Escape to Cafayate, being held March 23 - 27. For details at this late date, the best thing to do is visit www.LaEst.com and then drop an email to Dave Norden who is helping coordinate the event, at dnorden@lec.com.ar.

For those of you who will be at the Harvest event, I look forward to sharing some good times and a glass or two of fine Argentine wine with you soon.

Until next time, thanks for reading and for being a subscriber to a Casey Research service.

Best,

David Galland
Managing Director
Casey Research

In my daily missives, I've often demeaned students of political science, philosophy, and other less career-oriented majors, but to be fair, today I want to turn the tables on my own academic background, business.

In my opinion, business degrees aren't necessarily a good choice. It really depends on what one does with them. Careers can range from CEO to assistant manager at the local McDonald's. Business degrees don't guarantee results like medicine or nursing; however, they should be applauded for their versatility. Many of my former classmates entered into companies that they never could have imagined.

But there are certainly negative aspects to both the standard business curriculum and the students who study it. So I've created a list of several common problems:

1. Lack of Entrepreneurship - A business school education does little to prepare students for entrepreneurial activities, and very few students go on to become entrepreneurs. The dream job of most business students appears to be a comfortable position inside a major corporation with a salary of $100K. For a field that's based on risk, creativity and entrepreneurship, there are surprisingly few willing to make the entrepreneurial leap.

2. A Focus on Corporations - Not only are business students not particularly entrepreneurial, but they are also pushed toward large corporations during the whole education process. For example, accounting and financial valuation are always taught with gigantic corporations in mind. But in a way, this is pointless. Unless a student becomes a professional equity analyst, they will likely never find an undervalued company in their lifetimes.

However, the chances of discovering an undervalued apartment building in your hometown are fairly good. Or the chance of finding an undervalued small business in need of venture capital is much more likely. Unfortunately, the curriculum is almost always geared toward evaluating ExxonMobil rather than evaluating Joe's Bakery down the street. The latter would be much more useful for most students interested in profit opportunities.

3. Lazy and Mediocre Students - You know the saying about companies being run by C students. Well, it really is true; one reason being that the best and brightest don't end up in business schools. Essentially, most business students are interested in making money. So they clearly didn't choose philosophy, art history or political science. But they also didn't choose engineering, profitable science sectors, technology or the medical field. Hence, many want money, but don't want to study anything difficult. Of course, some just really enjoy the business world. Nonetheless, business classrooms aren't the place to find the brightest students on a college campus.

Because of this factor, there is even a vast difference within a business school. The finance, economics and accounting majors are often noticeably different from the others. Many business students are scared to death of any intensive coursework. There's always extra space in the accounting, econometrics and financial modeling electives.

4. A Lack of Passion and the Hustle - As noted above, the vast majority of students aren't interested in becoming experts in their field. Most focus their efforts on hustling and networking to find a corporate job. When a presentation from a prospective employer comes to campus, the same students who never ask a single question in class are suddenly the most curious students in the Q&A sessions. Furthermore, almost everyone wants the hot stock tip; few want to learn statistics to find market distortions. 

Of course book smarts aren't everything. But if you aren't entrepreneurial, don't know statistics, don't know accounting, and don't understand valuations, what business skills have you really acquired after four years of college? Other important business skills such as relationship building, good management and sales are more often than not learned on the job rather than in school.

5. Bad Fits and Ethical Problems - I don't mean ethical problems here in the regular meaning of the word. Instead, it's an issue of career choices. There are many individuals out there who feel that the business world is full of greed and that the free market is evil. And strangely enough, many of these individuals are business students.

Personally, I've never understood this. If you believe the business world is inherently evil, then what are you doing majoring in business? Perhaps it would be acceptable if you envisioned creating a better company. But most of these students plan to work for the same corporations that they despise. In my opinion, these are the most unethical students in business schools. They're already engaging in activities that they feel are morally wrong.

When I was on the job hunt almost two years ago, I ran across an interesting opening at a major institutional player. The position was for a research associate who would spend two years training in different groups before settling for the ideal position. The groups included fixed income markets, equities and interest rate swaps. It was one of the best job openings that I'd seen during the recession.

But the opening didn't ask for any business majors - not even finance and economics backgrounds. Rather, the position asked for biology, chemistry, engineering and math majors for the position. And given the quality of many business students, I'm not surprised by this choice.

Well, I hope that we're even now on the degree-bashing. And don't think that some of those criticisms don't apply to me. I'm certainly not perfect. If I had to evaluate myself, I'd say that numbers 1 and 2 may point to my own flaws. As you can tell by now, I'm not exactly running my own business either, and my focus happens to be on large-scale corporate valuations. 

Now, let's get on with the issue. First, Chris Wood will inform us about growth in the smartphone market. He'll also examine a key player in the industry. Smartphones are really taking over wave by wave. At first, the most important people in a company had smartphones. Then a second wave seemed to come about where many regular office workers bought one. But smartphones like the Blackberry were still considered work phones. Only recently are they showing their full potential. What's next? Junior high kids with smartphones? Probably, if it's not happening already. Then, we'll have a short addendum from Doug Hornig on Alex Daley's ebook article from yesterday. Last, I'll have some commentary on the Mongolian mining sector and a ridiculous new law suggested in New Jersey.

Not All Semiconductor Stocks Are Created Equal

By Chris Wood, Casey's Extraordinary Technology

It's official. Smartphone shipments have overtaken PCs. Over the past couple of years, smartphone shipments have grown at an annual rate of about 150%, while PC shipments grew at a comparatively paltry annual rate of just over 20%. Now, a new study from IDC reports that in the fourth quarter of 2010, manufacturers shipped 100.9 million smartphones to stores throughout the world - compared to 92.1 million personal computers, officially marking the first quarter in which smartphone shipments surpassed PC shipments.

This milestone probably comes as no surprise to you. Declining growth in PC sales has been widely publicized for some time as has a saturated U.S. PC market compared to a relatively untapped smartphone market. Approximately 80% of Americans own a PC, compared to just 17% who own smartphones, according to Forrester Research. So there's room for smartphone growth in the U.S. market. And that growth is coming fast. Frost & Sullivan forecasts that smartphone penetration in the U.S. is expected to match that of PCs by 2015.

When we look at the situation from a global perspective, we see that thanks to the cost and functional benefits offered by smartphones over PCs, the developing world has actually become the main engine for growth in smartphones. And research firm Gartner forecasts that in just two years, more people in the world will access the Internet on a mobile device than on a PC.

All this paints a bullish picture for smartphone sales growth in years to come, and a not-so-bullish or even bearish picture for PC sales growth. And while that's all well and good, what's more interesting are the potential implications for two semiconductor stocks.

On the one side, we have Intel Corp. (INTC), the largest semiconductor company in the world with a market capitalization approaching $125 billion and annual revenue in the neighborhood of $44 billion. Intel has long been the dominant force in chips, but more than 70% of its revenue comes from its PC Client Group, which sells microprocessors and related chipsets designed for desktop and laptop PCs. If PC sales take a dive, Intel's revenue takes a big hit.

On the other side, we have a stock (actually an ADR because the company is based in England) that you may have never heard of, but that is poised to perform quite well in this market environment defined by slowing growth in PC sales and robust growth in smartphone sales. The company is ARM Holdings and is traded on the Nasdaq in the U.S. under the ticker ARMH.

Although it's only about one-tenth the size of Intel, ARM's reach, so to speak, is astounding. Processors based on ARM's IP power most of the mobile devices (including an estimated 90% to 95% of smartphones) on the market today. For example, both the iPhone and the iPad are powered by ARM-based processors. This success is due to the company's expertise in low-power, high-performance chip architectures. Simply put, ARM's IP is the go-to solution for chips used in the mobile world, because low power consumption and longer battery lives are critical factors for success. If smartphone sales are poised for continued robust growth, then so is ARM's revenue.

In the end, as we at Casey's Extraordinary Technology have said before, it's all about growth. And as things stand, as long as this shift to mobile devices (particularly smartphones) continues, ARM looks like it's going to have that growth and Intel looks like it won't.

That's not to say Intel is necessarily out of the mobile game just yet. It's pumping plenty of money into reducing the energy usage of its high-power x86 chips, but has been unable to match ARM designs thus far.

What's more, even though ARM is definitely the better growth story here, it doesn't exactly look cheap at current prices. Mr. Market has also apparently considered our simple logic for ARM's growth in the near future and has bid the shares up about 200% over the past year.

Nevertheless, given ARM's growth prospects, I'll be surprised if the stock (read: ADR) doesn't outperform Intel over the coming years. And while I wouldn't recommend buying ARMH at today's prices necessarily, I think it's definitely something that's worth another look.

[In today's stock market, fortunes can be made with tech stocks... but due diligence and intimate knowledge of the sector is necessary to separate the wheat from the chaff. That goes especially for biotech stocks, the hottest sector right now. Read more about biotech - including three geared-for-profit stock picks - in our free report.]

Addendum to The Economics of eBooks

By Doug Hornig

You always have to be careful when you want to point out a misstep on the part of your boss. Luckily, mine is Alex Daley, and he’s very good natured about these things in general. So he wasn’t offended when I wrote him that I had a good laugh about one of his statements in yesterday’s story, “The Economics of eBooks for Authors.”

Although the article was well done and very insightful, his characterization of the economics of the book biz for print authors was a bit off the mark when he wrote: “Under the [eBook] royalty agreement, authors received 30% of the price of their eBooks and were free to set whatever price they wished for them. That’s comparable to the 30% offered on average by traditional pulp-centric publishers.”

Well, those of us who labored in this area for many years - and I’m one of them - got royalties like that only in our dreams. Maybe mega-million selling writers get them, I don’t know, since I wasn’t one. But that’s certainly not the average. Standard author’s cut for a hardcover starts at 10% of cover price and goes to 12.5 and then 15, depending on volume of sales. Paperback royalties are even worse, generally 8.5%.

That’s one of the reasons why, after publishing nine books with mainstream companies, I tried self- and e-publishing my 10th, The Old Adelphi Rolling Grist Mill. Haven’t quite reached the level of success of Amanda Hocking yet, but maybe in time. The nice thing about eBooks is that they never go out of print, as opposed to print versions, which may have a six-month shelf life. If you’re lucky.

In any case, the business is changing, that’s for sure. Last year, Amazon sold a larger volume of eBooks than bound ones, for the first time. I’m a holdout. I love the feel of a “real” book. But I suspect that someday I’ll have no choice but to learn to love the Kindle.

New Jersey Lawmaker Proposes Bike License Plates

By Vedran Vuk

Folks, I'm really not kidding.  Here's the link to the article. The proposed bill would require everyone in New Jersey to register their bikes for $10 with the Division of Motor Vehicles. Fines of $100 would be applied to unregistered bikes. I simply don't understand how this sounds like a good idea in anyone's mind.

Supposedly, the bill is necessary because seniors who have been knocked down by bike riders can't report the suspect. With a license plate, they could identify the culprit. But isn't this problem the same for any crime? When a burglar is running out the door, he won't have a license plate on his back either. What is this world coming to?

Mongolia to Raise $500 Million in First Sovereign Bond Issue

By Vedran Vuk

Most of our readers aren't heavy investors in the risky bonds of dodgy countries; so why discuss this Mongolian debt issue? Because it could be very important news for the mining industry. In December, Doug Hornig wrote an article about Mongolia's poor decision to suspend hundreds of mining licenses. However, the future may hold much less government regulation.

Now the Mongolian government will have to worry about rising spreads on its debt. With its economy linked to mining, any negative regulation on the mining sector will increase interest rates for its debt. And that means less money for wealth transfers to keep the politicians in power. With the new debt issued, there's a much higher price to pay for messing with the mining sector.

The local politicians may not know it yet, but in some ways, they've signed a deal with the devil here. They've embarked on a path of reduced sovereignty as the investment bankers of the world will be watching them closely. But less sovereignty might be a good thing for Mongolia and the mining sector, especially with folks like the Vice Minister of Finance, Ganhuyag Chuluun Hutagt, running the show. Here's a choice quote from him,

Output from the projects could push the Mongolian tugrik to appreciate as much as 10-fold, a factor the country must mitigate with a sovereign wealth fund sterilizing foreign currency denominated commodity revenue, Hutagt said.

"It's not a 'we'd like to,' we need to" create the sovereign wealth fund, Hutagt said. "To manage the economy, we need to steer the economy, we need to be in control."

He has a valid concern about rapid currency appreciation, but the final sentence of the quote should send chills down your spine.

Well, that's it for today. David Galland will be running the show tomorrow. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

In retrospect, the market was a bit slow in reaction to the troubles in the Middle East. As the Egyptian protests were becoming widespread, gold began to climb, but carefully. Similarly, oil had a momentary spike, but nothing like now.

Of course, the violence in Libya is worse than in Egypt. However, in a way, the violence might calm tensions in other parts of the Middle East. Perhaps the biggest warning sign from Egypt was the ease of overthrowing Mubarak. The markets could have foreseen more turmoil ahead.  Naturally, the Egyptian revolt encouraged others. "If they can do it, so can we" probably ran through the minds of many.

But with the violence in Libya, I would now think twice before attending the local protest in Yemen or Bahrain. My hypothesis runs somewhat counter to the conventional wisdom: the relatively peaceful protests in Egypt were a sign of trouble for other countries. The violent civil war breaking out in Libya is actually a sign of tranquility for the rest of the Middle East. 

I'm not ready to put this down into stone. After all, I'm not an expert on the geopolitical situation of every single Middle Eastern country. Some fires may burn deep enough to be unquenched by the violence. But certainly Libya will make the less passionate think twice about rising up.

Today, I'm finalizing some research for The Casey Report. We should have an excellent issue this month. If you're not already signed up, try it risk-free for 3 months today.  So in the meantime, I'll leave you with two long articles by Doug Hornig and Alex Daley. First Doug will share his thoughts on Ben Bernanke's testimony yesterday. Then Alex Daley will report on a new author circumventing traditional publishers thanks to technologies such as the Kindle.

Big Ben Tolls

By Doug Hornig

Is it just me, or do other people wonder what it takes to get a Ph.D.? Do they give them out to just anyone?

Me, I only have a B.A. In Anthropology, no less, which is one of the fields kids of my era gravitated to when they didn't want to get shipped to Southeast Asia to kill rice farmers. Of course, I got mine back when a B.A. was actually worth something. Or at least that's what I tell myself.

Ben Bernanke, on the other hand, has a Ph.D. from MIT. Which is a pretty decent school, I hear tell. Although I don't know about their economics department. It must be tucked away in a semi-private corner, what with the space required by all those prizewinning physicists and engineers running about the place. Maybe it's weak. Because there do appear to be times when I know as much about the subject as their most prominent Ph.D. And I never even took Econ 101. All I know is from studying trade patterns amongst the Trobriand Islanders.

But Ben, along with his MIT Ph.D. and a beard that is, I admit, nicer than mine, also carries the distinction of being the second most powerful man in Washington. (Or first most, by some reckonings.) What he says matters.

He doesn't say it all that often. Usually only in print, through the release of minutes of the meetings of the Federal Open Market Committee, which he chairs. Hmmm... Federal? Nope. Open? Anything but. Market - well, they do deal with markets, but hardly open ones. Committee. Check. At least they got one right.

Twice a year, though, Big Ben comes out of his hidey hole, as he did this Tuesday, and drives his Ford Focus to Capitol Hill to share with Congress his economic insights. Strike that. Not the insights part, but I'm sure he gets a chauffeured limo ride to the Hill. Although, so they say, a modest Focus is indeed the Bernanke family car.

Ben then plunks himself down in front of a panel of congresspersons who try (except for Ron Paul) to pretend they aren't as obsequious as they appear. He makes pronouncements as to the state of the American economy, takes questions and avoids the answers to them. There is this fog that slowly settles in. Perceptions get distorted. Hearing becomes impaired. By the end of his appearance, it's often difficult to find someone who remembers what he actually said.

Don't believe me? Take the reportage on Tuesday's testimony to the Senate Banking Committee, as reflected in these two headlines I plucked from the Internet. (I could go off here on the present condition of the journalistic profession, but you'll forgive me if I save that for another time.) Please feel free to draw a conclusion:

From FOXBusiness.com:  Bernanke Sees Little Effect on U.S. from Pricey Oil

From the Associated Press:  Bernanke: Rising Oil Prices Pose Threat to Economy

You see the problem.

Let's take the first one first. Even I, in my lowly anthropologic ignorance, know that rising oil prices have a ripple effect, and a big one, across the entirety of the American economy. The stuff is used not only to get our Focuses from Point A to Point B, but it goes into fertilizer, plastics, medicines, you name it. We are the oily civilization, and the cost of this über-resource has an impact on, well, pretty much everything.

Yet the chairman contends that, "The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation."
Perhaps Ben has been sharing some blue Kool-Aid with his pal, the secretary of the Treasury. Last week, commenting on the possibility of an oil shock because of turmoil in the Middle East, Tim Geithner (who only has an econ M.A., but got an important job anyway) said that the world economy is strong enough to "handle" the oil shock, and insisted that central banks "have a lot of experience in managing these things." How well they managed them was not addressed.

Barclays Capital takes a more sober view, noting that the civil war raging in Libya means 1 million barrels of that country's daily output is "shut in," with the other 600,000 barrels at risk. If the strife spreads to Algeria, another 1.3 million b/d could be taken off the market. While it's assumed that Saudi Arabia can step in and raise output, at best this takes time, and its oil is an imperfect substitute for Libya's sweet crude. Moreover, many experts question whether the Saudis actually have the spare capacity they claim.

This is a dicey situation, as you already know if you've filled your gas tank in the past month and bitched about the 3.75% price increase. Maybe Bernanke doesn't notice because of the good mileage his Focus gets. And maybe he also didn't notice when food prices in January rose at the fastest clip in three years, on top of the already-monster hikes of  '10.

But back to our headlines. Perhaps FOX just got it wrong. After all, the AP said something much different. Didn't Big Ben actually toll the alarm? Yes, if this is an alarm: As the AP reported, he admitted "that a prolonged rise in oil prices would pose a danger to the economy." No duh.

I decided, not for the first time, that the press was useless. I wasn't going to be able to see through the fog if I didn't go right to the source.

The takeaway, if you read his statement, is that he truly seems to believe (unless he's just lying through his teeth) that inflation is tame. "Over the 12 months ending in January," he says, "prices for all of the goods and services consumed by households (as measured by the price index for personal consumption expenditures (PCE)) increased by only 1.2 percent, down from 2.5 percent in the year-earlier period."

Anyone out there spend just 1.2% more in 2010 than 2009? Didn't think so. Problem is, the government loves to look at flat-screen TVs, computers, cell phones and other electronic gizmos, all of which have become steadily cheaper as the tech improves. It ignores food, fuel, healthcare, insurance, tuition and anything else that might dampen its stats. Soaring stock market and commodities prices are also not counted.

As for the future, here's the "modest increase" he projected earlier because of pricey oil: "FOMC participants see inflation remaining low; most project that overall inflation will be about 1-1/4 to 1-3/4 percent this year and in the range of 1 to 2 percent next year and in 2013." Wow. That is modest. Three solid years of ultra-low inflation. I can hardly wait.

Big Ben went into some detail concerning a monetary policy that has been "unusually accommodative" and employed some "less conventional means." Referring to the Fed's "large-scale purchases of longer-term securities." But he neglected to mention that those purchases were made with dollars newly created from thin air. And that such monetary inflation has throughout history always led to serious price inflation.

Luckily, though, "We have all the tools we need to achieve a smooth and effective exit at the appropriate time ... our ability to pay interest on reserve balances will allow us to put upward pressure on short-term market interest rates and thus to tighten monetary policy when required."

Whew. Who knew it was that simple? But I guess that's where the Ph.D. comes in. I'll apply to Phoenix University in the morning.

The Economics of eBooks for Authors

By Alex Daley, Casey's Extraordinary Technology

Remember this face. It won't be long before you see more of it. A lot more. She's already appeared on numerous online shows and in the pages of national newspapers. But with her recent rise into the spotlight, don't be surprised to find her slated for a spot on The Today Show or even CNBC in the near future.

Her name is Amanda Hocking. She is a 26-year-old Minnesota native with a predilection for vampires and an incredible talent for writing. Her series of books, originally available only on the Amazon Kindle, have become a relatively large hit and rank her among the bestselling independent authors of the moment.

And it's her independence that has been the subject of much media speculation of late. Numerous blogs are now reporting that her sales surpassed the 100,000-eBooks-per-month threshold in December, making her arguably the most successful self-published fiction author today. And, with royalties for Kindle books at 70% in some cases, and no publisher involved to take a slice of the pie, these bloggers are quickly jumping to the conclusion that this self-made author is raking in the dough, espousing headlines like "This 26-Year-Old Is Making Millions Cutting Out Traditional Publishers With Amazon Kindle."

Unfortunately for Hocking's bank account, and the readers of all those blogs now decrying her the first eBook millionaire, the math is a little misleading.

The Business Insider article referenced above includes some (admittedly) back-of-the-envelope math to come to the conclusion that she's a potential millionaire. 100,000 books per month, times 12 months, times $1+ average royalties per book, equals more than $1M per year in income. Impressive. Though the million-dollar conclusion is a little premature. Here's why.

To begin with, it's worth explaining where they arrive at that $1+ per book in royalties. At the beginning of last year, Amazon.com made a change to the royalties they offered authors of eBooks, in an attempt to encourage more, cheaper eBooks and larger numbers of independent authors. Under the original royalty agreement, authors received 30% of the price of their eBooks and were free to set whatever price they wished for them. That's comparable to the 30% offered on average by traditional pulp-centric publishers.

Under the new arrangement, if an author agrees to a host of conditions, including making the eBook cheaper than paper copies and keeping the price between USD$2.99 and $9.99, they can keep 70% of the title's price instead. That's a lot of incentive to an independent author considering whether to go it alone or keep looking for that book deal. 

Ms. Hocking's books, however, fall partially out of that price range. She is most famous for her "My Blood Approves" vampire series, the first and most popular of which retails for just $0.99 in eBook format. At that level, she would only receive about $0.30 per copy sold. If readers buy the follow-ups, each published for a still bargain bin-level $2.99, she makes a much more substantial $2.09 per copy.

Her newer trilogy also has the same structure as the prior series, with the first book at a "why not" level of $0.99 and the follow-on books priced at $2.99 as well. But to figure out how much money she may have made from her books thus far, we need to know not just how many she sold in December, but altogether.

Thankfully, two weeks prior to her sudden blog fame, this article appeared in USA Today, which highlighted Ms. Hocking as having sold a total of 146,000 books in all of 2010. Her December sales numbers are the result of a very fast-growing ramp that has accelerated from only a few hundred books a month in early 2010. If you assume the majority of her sales were for the best seller on her list and distribute the rest of the sales in a typical 30% fall-off model, 145,000 sales might be distributed amongst the 9 books she had published before the end of the year as such:

If so, then her probable take-home pay would have been in the range of $189,000 for the year (if the sales are more heavily skewed to the two $0.99 books, which is very likely, then it could be considerably less). Not a millionaire yet, but certainly a lot more than your average 26-year-old makes each year, and definitely at the high side for an author of any kind, let alone one without a publisher.

While it may have been a bit premature to anoint this young literary up-and-comer as the first millionaire of the eBook world based on her December sales, there are two really important numbers buried in her sales data that should interest readers and scare publishers. 

First, all of the books she has published are available in paperback as well as in digital form. These paperback books are made possible not by her signing a contract with a traditional publisher, but through a "print on demand" service that makes a copy of the book for each order on a website like Amazon.com or the online extension of Barnes & Noble. They are priced at par with traditional store-bought paperbacks, with most of her books priced at $8.99 or $9.99 each. 

The eBook versions account for 99% of all unit sales. That's an astounding disparity. Sure, her books were originally available only in the eBook format, are targeted to a young demographic that is largely digital to begin with, and promoted almost exclusive via the web. All of that skews the number a bit. But, while her experience is extreme, it is not unique. 

In a very public analysis of sales of the massive bestseller The Room a few weeks ago, two things became abundantly clear. 1) Amazon is the 800 lb gorilla of the book industry, as between Kindle and print sales, the company accounted for 50% of all sales of the bestselling book. 2) Amazon's customers prefer digital to paper, as Kindle sales accounted for 80% of Amazon's total, or about 40% of all sales across all channels. And price was not the sole driver of the preference, as the hardcover on Amazon was only $14.41, or 20% more than the digital version. 

In January, USA Today announced that 19 of the 50 bestselling books in the nation each had more than half of their sales from eBooks. By February, that number had risen to 23 of 50. 

Which brings us back to the second most interesting tidbit from Ms. Hocking's sales data - what has happened to her sales since the end of 2010. According to USA Today, her sales in January alone approached 450,000 units! It's amazing what a little mainstream attention and an expanded base of potential consumers can do.

With an estimated 3 to 5 million new eReaders activated this holiday season, the market for eBooks just got a whole lot bigger. Add in all the people reading Kindle books on PCs, smartphones, iPads and the like, and the audience is growing at a rapid pace.

While Ms. Hocking may not yet be a self-published millionaire, she is certainly on her way there quickly. Plus, you know what they say about fiction writing: the real money is in the movie rights.

In the meantime, her success should serve as an inspiration for authors. And as a warning for traditional publishers: Let the music industry be your warning. Technology is changing the world beneath your feet. You can't fight it. Start adapting now.

[Of all the technology sectors to invest in, biotech is one of the most promising for the near future. But Alex and his team don't fall for the hype that attracts many investors to tech startups like flies. Instead they're doing meticulous due diligence on every one of their picks - as a result handing subscribers of Casey's Extraordinary Technology annualized gains of 84% in 2010. Read more here.]

Vedran here again. At the moment, gold is up to $1,438.80. It's hard to believe that only weeks ago, I received a couple frantic emails from subscribers deeply concerned about a 6% percent drop in the price. That's it for today. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

The Canadian central bank's decision to keep the overnight rate at 1 percent is a little troubling. My speculation from a month ago seems to be playing out. I noted in reference to Norway, Australia and Canada:

"Though I'm confident that these countries will continue their upward rate path, they may wait for Trichet's and Bernanke's next move. These nations have slowly moved away from rock-bottom rates. They're ahead of the game and have the luxury to take a "wait and see" approach. Also, they don't want their rates too far ahead of other countries'. This could cause a drastic currency appreciation that would hurt exporters."

I still feel that rates are on an upward path, but it seems that Canada is taking a break for the moment. The Canadian central bank's press release fits my earlier prediction well:

The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand. While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes. Business investment continues to expand rapidly as companies take advantage of stimulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance.

Essentially, in the view of the central bank, things are improving and the recovery is strengthening, but it still doesn't want to raise rates. The primary concern seems to be exports and the negative impact from an overly strong Canadian dollar. So far, the central bank is following my script perfectly; hopefully they will follow the part about raising rates further. The market apparently believes that's still the case, as the Canadian dollar remains strong despite this decision. Currently, one Canadian dollar equals $1.0240. 

First, Doug Hornig will recount a pleasant surprise in his change. Then, I'll comment on a poor unemployment poll from Gallup. Last, I have some short thoughts on the new Atlas Shrugged film.

Payable on Demand

By Doug Hornig

A strange thing fell into my hand today.

Now, once upon a time, it wouldn't have been a noteworthy event. It's something that no American would even have bothered commenting on, because it was an everyday occurrence for us all. Yet now it is virtually unheard of.

An odd coincidence, too, that it would happen to a Casey Research staffer, someone who knew what he was holding, and how rare and historic it was.

I was having some new tires put on my car and, while I waited, I slipped next door to a fast food place to a have breakfast wrap and a drink. Paid with a twenty and got some coins and three fives in return.

Normally, I'd just stuff the bills in my wallet, and surely I'd have done so here too, and perhaps used them to pay for something down the line without a second glance. Except that the one on top caught my eye. Really caught my eye.

Wait a minute, Lincoln's too small. And it's a little too thick. And there's that old, deep blue seal. I looked more closely and could barely believe it.

Yep, in a Waynesboro, Virginia, fast food joint, indistinguishable from any other nationwide, I'd just been handed something that I'd be willing to bet no other customer of that chain got today. Or any other day, for that matter. For years back.

It was a silver certificate. 1953. Series A. Bearing the signatures of George Humphrey, Eisenhower's secretary of the Treasury, and the Treasurer of the U.S., the delightfully named Ivy Baker Priest.

Most of our readers of a certain age will remember them fondly and may have a few stashed away as keepsakes in a drawer somewhere. But anyone from Gen X onward has probably never seen one. And it's literally been decades since a cashier pulled one from the register and gave it to me.

I read the legend: This certifies that there is on deposit in the treasury of THE UNITED STATES OF AMERICA FIVE DOLLARS in silver payable to the bearer on demand. That triggered more than a trace of nostalgia. I couldn't help but remember myself as a precocious 12-year-old in the '50s, asking my dad to go to his bank and demand my silver dollars because I was losing my faith in paper (as you can see, I was destined for Casey Research from an early age). And my dad, chuckling at his peculiar child, but taking my life savings - maybe a hundred bucks from my paper route - and returning with some pleasingly heavy rolls of silver.

Back home, I began to wonder how long it had been since I could exchange this paper rectangle for the shiny stuff, so I looked it up. 1964. That's when Washington decreed that henceforth all remaining silver certificates could be exchanged only for Federal Reserve notes, as if anyone would have a reason to do so. So the government began officially pulling silver certs from circulation 47 years ago. (And in actuality, they'd been shredding them for at least ten years before that, as the 1:1 backing eroded.) Yet this relic I received in Virginia today has somehow endured in the marketplace all that time. Remarkable.

I read on, absorbing a little currency history. Silver certs were first created in 1878, as a reaction to 1873 legislation moving the U.S. to a gold standard from the bimetallic gold/silver standard that had previously prevailed. That hadn't gone down well with silver miners out west, and they pressured Washington into throwing them a bone.

After that, gold and silver certificates - 100% metal backed - circulated together. Until 1933, when Roosevelt effectively ended the gold standard by issuing his infamous executive order that recalled all gold coins, bullion and certificates; prohibited the private ownership of gold; revalued gold upward (and the dollar downward); and sealed the safety deposit boxes of private citizens.

As noted, however, redeemable silver certs hung on for another 31 years, thereby allowing, among other things, for a certain 12-year-old to acquire some Morgan dollars that he wishes he still had. But 1964 was the end of the line. We went off the silver standard, and all American money became fiat currency (setting the stage for the massive printing of today's ruinous, air-backed "money").

In truth, though, the force of rising inflation had left the government with little choice. By 1960, the price of silver was up to $1.29/ounce, which meant people could exchange their certificates for coins, melt them down into bullion, and sell that for a paper profit.

And speaking of profit, I took one last look at my treasure, and I wondered: what would I have today if I'd gotten that $5 bill when it was first issued, converted it to silver coin back in 1953, and held on to my loot? Well, in '53, the average price of silver for the year was 85 cents an ounce. That means I could've received 5.88 ounces for my five dollars. Which I could sell today for around 200 bucks (even though, believe me, I'm not swapping any of my silver for paper right now).

Y'know, that's so depressing I'm not even going to try to figure what rate of inflation it works out to.

I'm just going to put my $5 certificate into a drawer somewhere and let my kids, years from now, try to puzzle out why I felt it was worth saving.

Useless Gallup Poll on Unemployment

By Vedran Vuk

It's amazing that even major polling companies can sometimes put out the most useless information. For example, Gallup must have hired Captain Obvious to make the poll below.

And what amazing conclusion was drawn from the polls? The longer individuals are unemployed, the more hopeless they feel. Also, more applications, job interviews and weeks of unemployment lead to fewer respondents self-identifying themselves as "thriving." Wow! Thank you, Gallup, for this valuable information.

If the group breakdowns were more detailed, the poll could have been useful. Instead, one group captures the jobless who made 0 to 10 applications, and the second group captures everyone with over 10 applications. Folks, if you're unemployed in this recession and have only applied to 10 positions, you're delusional. Of course, "thriving" will be the response of this group; reality has not sunk in for them. They're either very recently unemployed or live on their own personal fantasy island. In my own job search during the recession, I applied to about 500 jobs in six months. I had probably completed 10 applications on day two of being unemployed.

The other categories are equivalently bad. The length of unemployment is broken down into two groups: over 11 weeks of unemployment and under 11 weeks. Let's compare this to the median and average unemployment, according to the Bureau of Labor Statistics. In January, the BLS began recording the duration of unemployment for the jobless over two years. This has pushed the average length of unemployment from 34.2 weeks to 36.9 weeks in January. The median unemployment is about the same at 21.8 weeks. Considering the average and median, the 11-week cutoff point isn't relevant.

If the poll tracked the progression of sentiment across many groups, this information could have been useful. But I guess that would make too much sense. It goes to show that even a respected organization like Gallup can put out a ridiculous poll.

Atlas Shrugged Part I

By Vedran Vuk

As some readers already know, Ayn Rand's book Atlas Shrugged is finally coming out as a movie. Here is the trailer. In my opinion, it doesn't look incredibly good, and many libertarian free-market types are already grumbling on the blogs. But then again, this movie wasn't made to necessarily satisfy this crowd. Hollywood already knows that it has them in its palm. Ayn Rand fans are fairly hardcore, and they'll go see the movie regardless of the quality. 

Furthermore, there's another large group of people who have heard about the book forever, but couldn't quite find the time to read the 1,200 pages. They'll likely line up for tickets as well. Frankly, no matter the quality, I'm still going to see the film. I just hope that the movie will be good enough to introduce Rand's idea to a new generation unfamiliar with her books.

That's it for today. I just needed to make a correction on the Energy Team's article from Friday.

The article said that Libya produced 1.2 million bopd and was the third largest oil producer in Africa. The 1.2 million number suggested that Libya should be the fourth producer, not the third, but this was a typographical error. Here is the production of the four countries mentioned:

Nigeria - 1.94 million bopd
Angola - 1.89 million bopd
Libya - 1.7 million bopd
Algeria - 1.42 million bopd

Thank you for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

This Monday, I'm looking at the bright side of things. While the economy still has many obstacles ahead, believe it or not, things could be worse. In response to the 2008 crash, the U.S. government and Federal Reserve poured trillions into the economy. The $700 billion bailout and trillion-dollar stimulus are distressing, to say the least. The bright side is what didn't happen. 

The U.S. ended up with a mountain of spending but not a mountain of regulation. While the fiscal situation pushes us closer to the brink of a debt crisis, in the short run, regulation can be more detrimental to economic growth. During the Great Depression, FDR's administration made the mistake of both enormous spending and overreaching regulation. And as a result, the labor market had extreme difficulty readjusting.

FDR's administration went far beyond make-work projects and infrastructure. The government determined hundreds of wages in almost every industry. Companies were pushed to keep wages high -which in turn increased unemployment. At lower wages, the companies could have hired more people, but this backwards policy only exacerbated the unemployment situation. Other FDR measures included burning crops to increase prices for farmers. While thousands were standing in soup kitchen lines, the government was burning food. These are just a few examples of the pervasive role government played during the Great Depression.

But in the current recession, we've seen few broad-sweeping regulatory moves. The financial sector and auto industry have been greatly affected, but everywhere else, it's still business as usual. For example, the tech sector essentially operates much as it did prior to the crash. During the Great Depression, every industry became much more regulated.

However, the problems in the financial sector are troubling. Government is intervening in everything from credit cards to salaries, to derivatives. In the auto industry, the government also plays a heavy hand. These are the sorts of interventions reminiscent of the Great Depression. Thankfully, they are isolated to only two industries; however, with the financial sector tied to so many others, it's still a problem.

But it could be worse. Imagine that every industry received the auto/banking treatment. If that were the case, I wouldn't have any hope for an economic recovery. Thankfully that hasn't happened. Obama has matched or exceeded FDR's spending, but on regulation, he's way behind. Of course there were attempts to force more regulation. Let's not forget cap and trade. 

In my opinion, the lack of new regulations for most industries is the last ray of hope shining through the clouds of the crisis. Though the financial sector has been extremely regulated, the rest of the economy has escaped the worst of it.

First, I'll share a quick chart comparing a few oil companies. Then, Doug Hornig will have an extended piece on WikiLeaks. Today's issue is a bit economy-lite, but tomorrow we should be back to the old routine.

The Statoil and Petrobras Bump

By Vedran Vuk

Last week, I mentioned the extra stock price bump among oil companies with less geographic diversification. So I've put together this chart to show the comparison to two prominent diversified companies, ExxonMobil and ConocoPhillips. While their stock prices received a boost from high oil prices, the risk from Middle East exposure curtailed their gains in comparison to Statoil and Petrobras. 

Raising the Shield

By Doug Hornig

Julian, Julian, what hast thou wrought?

If you've been following the WikiLeaks story, and are also a regular reader of this daily missive, then you may find yourself in a somewhat similar frame of mind to ours. We think anything that exposes the world's "leaders" for the corrupt, power-mad, sex-craven, warmongering mental cases that they are has done us all a great service.

Never mind where the leaks came from or what motivates the leakers. Are the documents genuine? They seem to be. Have they put anyone in physical harm's way? No, according to no less a source than Defense Secretary Gates. That's really all we need to know.

Despite Washington's admission that no actual damage has been done to "national security," you'd think from all the kneejerk WikiHoohah that a madman was planting bombs at our marble shrines, or at least that Joe McCarthy had risen from the dead in all his paranoid, alcoholic splendor.

Assange is under house arrest, faced with sexual assault charges in Sweden that may well be trumped-up. At the same time, various embarrassed persons in DC are working furiously to get him extradited here. Where, presumably, he could be put on trial for treason. Maybe even hanged. Who knows?

Government officials don't seem to have grasped that WikiLeaks is already decentralized, and that the free flow of information on the Internet won't be stopped by jailing or executing one person. But then, an understanding of modern tech is not a prerequisite for holding public office.

You may also have noticed that, in addition to the legal maneuvering, there's a very vociferous, bilateral smear campaign underway in certain segments of the press.

From one side comes speculation that a plaintiff in the Swedish rape case is a CIA plant. From the other side comes a retort that the person responsible for spreading story #1 - and a WikiLeaks employee - is a well-documented Holocaust denier.

Charges and countercharges fly, and the flimsier the better. For example, one investigator  noted that WikiLeaks' Swedish server also hosts Pirate Bay, the bit torrent file-sharing site. A controlling interest in Pirate Bay is owned by "a prominent Swedish Nazi and financier of that country's leading fascist political party." Ipso facto, the two must be working together.

Perhaps most peculiar of all is the tale that Julian Assange has links to an intelligence-connected mind control cult in his native Australia. It's alleged that this cult, the Santiniketan Park Association, conditions children with drugs, sensory deprivation, sleep deprivation, torture and ritual sexual abuse in order to produce subjects who bend easily to the will of the group's leader.

Assange is sometimes quoted - we don't know if correctly - as having said he's "on the run" from the cult. Oh yeah, and that platinum-colored hair? That's a dead giveaway, distinctive of children raised in the cult. Mmm-hmmm...

All of this stuff would be an amusing enough sideshow, irrelevant to the damning cables released, and destined to be filed away in the Much ado about nothing drawer. Except that the anti-Assange furor has turned Washington's demagogues loose to craft legislation that is not amusing in the slightest.

A quick bit of history on the curtailment of the freedoms of speech and press: the Espionage Act of 1917, highly controversial even at the time, was passed as the U.S. was preparing to go to war with Germany. Purportedly in support of the war effort, the bill made it illegal to divulge "information respecting the national defence" if such information "is to be used to the injury of the United States, or to the advantage of any foreign nation." The Act also conferred upon the Postmaster General the right to refuse to mail or to impound publications that he determined to be in violation of its prohibitions.

Early enforcement was vigorous and wide-reaching. Sentences were not trivial. Poet e. e. Cummings spent over three months in a military lockup for openly speaking of mutinies in the French Army; Socialist Eugene Debs was put behind bars for five years for a speech that "obstructed recruiting"; and the government seized a film called The Spirit of '76 and jailed its producer, because the depiction of British cruelties during the American Revolution was deemed dangerous bad publicity about the country's WWI ally.

The Act got a quick check at the Supreme Court, which in 1919 upheld the conviction of a guy who sent anti-draft pamphlets to men eligible for the draft, while offering the opinion that enforcement should be limited to political expression that constitutes a "clear and present danger" to the government action at issue. That principle endured for less than a year. It was substantially diluted when SCOTUS upheld the conviction of a man who had distributed circulars in opposition to American intervention in Russia following the Russian Revolution - Justices Holmes and Brandeis dissenting, arguing that "a silly leaflet by an unknown man" could hardly be construed as a consequential threat to American foreign policy.

In 1918, the Sedition Act - actually a set of amendments to the Espionage Act - lowered the bar quite a bit. It prohibited such things as "any disloyal, profane, scurrilous, or abusive language about the form of government of the United States... or the flag of the United States, or the uniform of the Army or Navy."

Big umbrella. Too big, as it turns out, because the Sedition Act was repealed in 1921. But the Espionage Act endured, and it did not sit unused. Perhaps most prominently, Nixon Administration Attorney General John Mitchell invoked the act in the attempt to prosecute Daniel Ellsberg for having leaked the Pentagon Papers to the New York Times. The government also filed a restraining order that barred the Times from publishing any further articles based upon the Pentagon Papers, an order with which the Times complied.

The latter was the key development from the perspective of WikiLeaks, because it sought to impose strict limits on freedom of the press when formerly classified documents are published. The test, according to wording upheld in a 1951 decision, was whether the release of the material would likely cause "grave and irreparable" danger to the country. The administration held that publication of the papers met that test. But the Supreme Court, 6-3, disagreed and found for the Times instead.

Justice Stewart, writing for the majority, held that in areas of national defense and international affairs, the president has an independence that is virtually unchecked by the legislative and judicial branches. In the absence of such checks, he wrote, "the only effective restraint upon executive policy and power ... may lie in an enlightened citizenry - in an informed and critical public opinion which alone can here protect the values of democratic government."

All that dissenting Chief Justice Burger could muster against that argument was that when "the imperative of a free and unfettered press comes into collision with another imperative, the effective functioning of a complex modern government," we should take some time to study the possible consequences before allowing publication.

Fast forward now to 2011. In the wake of Julian Assange's "treasonous" behavior, bills have been introduced to further amend the Espionage Act. Specifically, Joe Lieberman (I-CT), John Ensign (R-NV) and Scott Brown (R-MA) have collectively puked up S.315. On the House side, Pete King (R-NY), Mike Rogers (R-AL), and Tom Latham (R-IA) are co-sponsors of HR.6506.

The proposed legislation does not deal with those who leak classified information. It's aimed squarely at publishers. It would throw out the 1971 Times decision and make it a federal crime to transmit information "concerning the identity of a classified source or informant of an element of the intelligence community of the United States," or "concerning the human intelligence activities of the United States or any foreign government" if such publication is "prejudicial to the safety or interest of the United States."

Violate it and you can spend up to a decade at Club Fed.

But to appreciate the real jollity of this, remember what a "shield law" is. While there is no such thing in the federal code, most states have them: statutes affording a privilege to journalists not to disclose in legal proceedings confidential information or sources of information obtained in their professional capacities.

Now be aware that Joe Lieberman's bouncing baby boy is named the Securing Human Intelligence and Enforcing Lawful Dissemination Act. SHIELD, get it? Hey, who says those numbnuts in Washington have no sense of humor?

All hilarity aside, though, this bit of legislative yucks seems fairly restricted in how it can be applied. But we've had too much experience with the bottles and genies of "national security" to believe the applications won't be subject to mission creep. Just consider if someone had, in the run-up to the Iraq invasion, published a secret cable from some high military official to Defense Secretary Rumsfeld, emphatically stating that the weapons of mass destruction didn't exist. Imagine what a Justice Department in an administration hell bent on war would've done to the perp. There'd be no dungeon deep enough.

And what does it mean to "transmit" in the Internet era, anyway? The definition of publication is way blurry now. We're obviously publishing this article at Casey Research. But suppose you share it with a friend. Now you've transmitted it too. And if it should be found to contain material prejudicial to the government (not that we'd ever do that), you could be on the legal hook, as well. And your friends. And your friends' friends. No real terminus to the information highway has yet been delineated.

It's a godawful law, and hopefully it won't survive its first court test. But it will be passed, you can count on that. The most vocal calls for Assange's scalp have come from the right, and Republicans can be expected to push this through a Congress they largely control, especially with defections by some of the more "conservative" Democrats like Lieberman. Obama will likely not even oppose it, and he certainly won't veto it.

After that, who can say, maybe I or another staff writer here at CR will be among those first hauled into court over our words.

That's it for today. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

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.

The Great Short That Could Have Been

By Chris Wood

On Wednesday (February 16), Borders Group Inc. (BGP) finally succumbed to the beating it's been taking from the likes of Amazon.com and announced its decision to throw in the towel and reorganize under Chapter 11.

Reports about the imminence of a Borders bankruptcy surfaced on February 1, and the stock plunged 35% that day from an opening price of $0.73 to a closing price of $0.47. Since then the stock has fallen 51% from its close on the first of the month, all the way down to $0.23 per share when the bankruptcy announcement was made.

If you somehow managed to short BGP stock on February 1 at $0.73, you'd be sitting on a 68% gain on the trade at the moment. But let's get real; the odds you could have pulled this off would have been infinitesimally small. You would have had to be one of the first people to get the reports of the impending bankruptcy (not likely, since the story was leaked to the press by insiders), and you would have had to act faster than Wall Street in making the trade (also probably not likely, unless you, too, are a full-time stock jockey).

But you don't have to be a day trader to capitalize on a weak company like Borders for a short opportunity. What if you could have predicted Borders' bankruptcy back in, say, early June 2009, when the stock was trading north of $4 per share? Had you shorted the stock back then, you'd be sitting on a gain of more than 94%. Timing is not of the immediate essence for a great short. You just have to be right eventually and be willing to wait it out.

Finding a great short, like finding a great company for a long position, starts with the fundamentals instead. We've made some big short calls in The Casey Report these past few years, including MBIA during the banking crisis. The Casey Report isn't a short-focused publication, though; it focuses on large market trends, so a stock like Borders makes a great example from the pile of things off our collective radar. Had we been looking at bookstore chains, one of the first places we would have turned to is an analysis tool called a Z"-score.

Here's how it works:

Originally developed in 1968 by Edward Altman, a financial economist and professor at NYU's Stern School of Business, the Z-score is the best-known multiple discriminant analysis (MDA) bankruptcy prediction model. This multivariate formula is used to predict the likelihood that a firm will go bankrupt within the next two years.

In its initial test in 1968, the Altman Z-score was found to be 72% accurate in predicting bankruptcy two years prior to the event. Later tests covering three different time periods over the next 31 years found the model to be approximately 80% to 90% accurate in predicting bankruptcy one year prior to the event.

The original Z-score combined five common financial ratios using a weighting system calculated by Altman to determine the likelihood of bankruptcy in publicly held manufacturing firms. Altman later derived a Z"-score formula consisting of four of the original financial ratios (it excluded total asset turnover to account for the variability from industry to industry) with a different weighting system to predict bankruptcy in non-manufacturing firms with the same accuracy as the original formula. This newer Z"-score would have been the appropriate model to use back in June 2009 to help you decide whether to short Borders' stock.

All you would have had to do is solve for Z" in the following equation using inputs from Borders' financial statements:

Z" = 6.56X1 + 3.26X2 +6.72X3 + 1.05X4

Where:

X1 = (Working Capital/Total Assets)

X2 = (Retained Earnings/Total Assets)

X3 = (Earnings Before Interest and Taxes/Total Assets)

X4 = (Market Value of Equity/Total Liabilities)

If Z" is greater than 2.60, the firm is considered financially healthy and in no risk of bankruptcy. If Z" is between 1.10 and 2.60, the company is in the grey zone, and you can't say one way or the other if the firm is at risk for bankruptcy. If Z" is below 1.10, the firm is considered unhealthy and will likely go bankrupt within the next two years.

So imagine it's June 8, 2009. You've been wondering for some time about the viability of traditional bookstores in today's marketplace. You see the success of Amazon.com and other online retailers, and this thing called the Kindle, with its downloadable e-books, is all the rage. You think to yourself, "There's no way a big brick-and-mortar bookstore company like Borders can compete in this new environment. Is there a good shorting opportunity here?"

Had you known about the Z"-score at the time, you could have answered your own question with a resounding, "Yes!" Using data obtained from Borders' 10-K filed on April 1, 2009 for the fiscal year ended January 31, 2009, below is a table showing the calculation of the company's Z"-score at the time.

As you can see in the table above, you would have calculated Borders' Z"-score to be 0.02 at the time you were pondering the short sale. Remember, below 1.10 is considered at substantial risk for bankruptcy in the next two years, so the numbers said Borders was screaming to be shorted. Had you done just that, you would have been able to short BGP stock at above $4, and you'd be sitting on almost a 95% gain less than two years later. All from using this one simple formula.

At Casey Research, Z"-scores are just one of the tools we use when evaluating potential shorting opportunities. But it's important to note Z-scores should not be looked at in a vacuum.

Altman's original Z-score for manufacturing firms and his newer Z"-score for non-manufacturing firms are good indicators of financial stress, but you shouldn't rely solely upon them when deciding whether to short a particular stock. Instead, use it as a starting point to flesh out your list of potential short candidates and see which ones deserve more digging.

For instance, in the case of Borders back in June 2009, after you calculated the Z"-score and saw that the firm was apparently in trouble, you could have gone back to the financial statements to confirm the results. At first blush, you would have found four straight years of stagnant or declining revenue and increasing net losses for the past three years amounting to $8.22 per share. A little more digging, and you could have found short-term liquidity problems and a real liquidation value for the company that was probably already negative. All of these further supporting the results of the Z"-score.

A Z"-score is by no means a silver bullet, but it is a good start to evaluating a short opportunity.

Good investing shorting.

Concentrated Benefits and Dispersed Costs

By Vedran Vuk

A friend of mine once asked, "How come you free-market guys always use the Department of Motor Vehicles as an example of government inefficiency? Can't you find other examples?" Admittedly, I've used the example many times.

And sure enough, the DMV has exemplified government inefficiency for decades, but why? Besides inefficiency, it reveals one of the major problems with our form of government: there is almost no incentive to fix smaller problems. On big issues, the government might actually try to do something. Furthermore, citizens will organize. For better or worse, the government has taken action on healthcare. Also, promises to reduce the deficit, to make national security stronger or to build better infrastructure are commonplace. In a democracy, politicians can run campaigns on these agendas.

However, no one can run a campaign on DMV reform. When I moved to Maryland, it took me a full six hours of waiting to acquire my driver's license and registration. The inefficiency was astounding.

But if a politician proposed reforming the DMV, I probably wouldn't vote for him. My decision to vote would depend much more on his or her other stands on big issues. DMV efficiency simply isn't an important issue. Sometimes one issue, such as abortion, can swing votes. However, no one is passionate about the DMV. As a result, the system does not change year after year. Only a budget crisis may eventually force change.

I've always heard the saying, "Well, if you don't like something about the government, then vote the person out of office." But there's no way to vote on minor issues. Plenty of things simply fall through the cracks because the issues aren't big enough to warrant campaign stands, organizations and paid lobbyists.

Who's going to get angry if the government spends a million or two to improve a public park? What about a couple of million for a new tourism office? Or perhaps we could add ten million to the prison guard pensions? As these bills are being passed, they're so small that no one has an incentive to complain - much like the DMV problem. In economics, this is often known as the problem of concentrated benefits and dispersed costs. Someone who has a million or two to gain lobbies for the issue, but the cost is so dispersed that no one complains. Only years down the road, when there's a budget crisis, do citizens finally pay attention.

Robbed!

By Jeff Clark, BIG GOLD

One of my best friends recently discovered, to his shock and dismay, that five one-ounce gold coins had been stolen from his home. I feel especially bad because I had encouraged him to buy some physical metal, giving him some tips and pointing him to the better dealers.

What's especially disconcerting about the theft is that my friend had the coins stored in a safe, hidden from view, securely locked, with the key hidden. He thought his gold was safe, a reasonable assumption given the precautions he'd taken.

But all those measures weren't enough. Based on what he knows, he strongly suspects it was a relative, partly because of this person's background and partly because they were one of few familiar enough with the house to know where the key might be. The police unfortunately don't have enough evidence to make an arrest - fingerprints, for one, couldn't be successfully lifted from the safe.

My friend was in shock for several days. While it didn't represent all the gold he owned, it's not insignificant; with gold at $1,400/ounce, that's seven grand the thief made off with. He's further consternated by how it went down; the robber only took part of his stash, evidently to make it look like his gold hadn't been disturbed. The key had also been put back in its place, and for this reason he can't pinpoint a specific time period the coins were stolen.

The cost to him has been more than monetary; he loved his bullion coins and had collected at least one from almost every country that produces them. He told me he occasionally took them out of the safe because they were, in his words, "beautiful... and I just loved the weight of them in my hand." His stash was starting to build up to a point where he had enough "savings" for almost any emergency. The pain deepened further when he learned that thanks to current IRS rules, he can't even write off the loss. (He's forgoing a homeowner's claim, given the industry's reputation for dropping customers for "small" claims.)

Needless to say, my friend is no longer storing his gold (and silver) in that safe. He's the kind that would normally shy away from using a bank safe deposit box, but not anymore. Even with that, though, he knew this method wasn't perfect and so explored all his options. He's decided to follow the suggestion I outline at the end.

After the dust settled, he told me that yes, he felt violated; yes, he's still angry; and yes, it's made him suspicious of others around him, a feeling he hates. "But what I suddenly realized," he said, "was how valuable gold is becoming again. It's not a 'barbarous relic' anymore... it's not a pretty coin or a hunk of metal or a commodity or even an investment. It really is money, and it's scary to think how dicey things might get when everyone sees gold as money again."

My friend is not poor; there were other valuables the thief could've snatched. He took the gold.

So what about you? How safe is your safe? Are your clever hiding spots clever enough?

Here's a quick checklist of the three most common places to store your gold. My friend overlooked one of the basic rules of home storage, so I hope you'll review where and how you store your precious metals so that you can avoid the same pain and loss he experienced...

Safe deposit box

The easiest and simplest way to store gold is in a safe deposit box at your local bank. If you go this route, use a local bank. You want to be able to get to your gold in an emergency, which is one of the reasons you own it in the first place. So don't keep it in a different state or a distant city. Keep it close.

However, as my friend acknowledges, a safe deposit box isn't perfect. First, your access is restricted; you can only get to the gold during regular banking hours. Second, safe deposit boxes are not insured against robbery. And last, a bank box compromises your privacy. It provides a generous clue for the government, in case it ever decides to repeat FDR's 1933 confiscation of gold.

Bury it

This is where the term "midnight gardening" comes from; people bury their gold at night so others won't notice the digging. The alternative is to find a separate reason for the excavation, such as fixing a pipe or removing a stump, and work in the daylight.

Either way, before those of you who are used to clean fingernails pass on this method, consider its advantages: it won't be damaged in a fire, and a burglar would need to know where to dig. A lot can happen in the world that won't disturb buried gold.

A few practicalities, if you decide to go the shovel route. First, use the right container, something airtight and waterproof. This is especially important if you are storing numismatics or are burying silver in any form. We've been told those water bottles that hikers use work pretty well, but choose one heavy enough to stand up to years of erosion and persistent insects. Another choice is a small section of PVC pipe from your local hardware store; cap the ends and then bury it in a shallow puddle of cement. Don't use a coffee can, since the color on the metal can bleed. To protect from scratching, put each coin in a plastic baggie or something similar.

Where do you bury it? Your location should be neither too easy nor too difficult to find. Not too easy, so that the gold won't be found by a thief. But not so difficult that years later, you or your heirs have trouble locating it. Complicated instructions (including treasure maps) can get muddled with time and create the risk your gold will never be dug up.

Find a place, on property you own, that you'll always remember but that isn't obvious if someone learns you've buried something valuable.

Keep in mind that most modern metal detectors can operate to a depth of about 4 feet for objects as large as a stash of coins or bars. There's also ground-penetrating radar, used primarily by forensic investigators, that can detect where digging has occurred, as well as satellites that can pinpoint where ground has been disturbed.

Hide it in your house and/or use a home safe

Indoor storage is practical for smaller quantities. You can probably think of dozens of places in your home where no one would think to look. Avoid any place obvious, such as a jewelry box or cookie jar. The disadvantage of this method is exposure to, as my friend can tell you, theft, along with fire, flood, and other natural disasters.

Consider using a safe, ideally one secured to the floor. As one dealer said, "A safe can be brought in on a two-wheeler and taken out on a two-wheeler if it hasn't been attached to a building or at least hidden." For obvious reasons, my friend is now gun-shy about using a safe with a key lock.

If you use a floor safe, locations for it include the garage, under a refrigerator, or anywhere you can place something over it. We recommend installing it yourself, and some of the kits make it easier than you it might expect. We wouldn't hire a contractor.

Before you buy a safe, however, I recommend reading this article from a veteran bullion collector: How Safe Are Safes? (If you can't log in because you're not a BIG GOLD subscriber, why not try it today risk-free for only $79 per year? Details here.)

Leave the right trail

However you store your gold, let exactly one person know the details. It needs to be someone in whose honesty and discretion you have complete confidence. It will be that person's job to access the gold if you are incapacitated or die. If you are using a safe deposit box, his or her name should be included in the box registration, and they should know where to go to get the key.

Tell one person, but only one. No one else should know. This is especially important if you're using home storage. You don't want to come home someday to find your house turned upside down because someone heard you're living in a treasure chest. Even worse would be to come home and find a looter waiting to have a chat with you. My friend kept quiet about his gold, but admitted some family knew about it. That's all it took.

There's just no other way to say it: Keep quiet about your gold.

Unless you've reached a point in life where you are depending on your children for help with your affairs, a child is not a good choice as your gold storage confidant. Kids talk, and you don't know whom they might tell or how far the story might travel.

But you do need to tell someone, regardless of your storage method. I heard of an old miner who - no kidding - left a treasure map for his kids, to help them figure out where he'd hidden his gold. But someone else found the map - and his kids never got their inheritance. And what if the kids had received the map but weren't very good treasure hunters? I've read similar stories about descendants who knew that gold had been left for them but had no idea where it was.

What if more than one person already knows you have gold? Review your home storage methods to be absolutely sure they are adequate, or use one of the other methods such as a bank safe deposit box.

So what's the best place to store your physical gold? Well, your choices boil down to three: store your gold in a safe deposit box, bury it, or hide it indoors. Each method has pluses and minuses, but probably the best method is a combination of them all. In other words, diversify your storage locations. My friend could've been wiped out if the robber hadn't been trying to be sneaky.

Last, don't let this scare you off from buying bullion. It's still the asset that offers the best monetary protection for the foreseeable future. Not owning it may leave you feeling robbed when you go to use your paper dollars and find they won't buy you as much as you thought. That's not a theft you can prevent - unless you own gold.

[If this is the kind of in-depth information you'd like to utilize for your investments, I encourage you to check out BIG GOLD, an inexpensive monthly newsletter that provides well-researched advice for using precious metals and large-cap mining stocks for both protection and profit. Our February issue has a brand-new stock pick, one of the safest gold companies you can buy. We have a special offer right now for new readers... click here for more or go directly to the order form.]

Gold-Backed Money Being Revived?

By Alena Mikhan, Andrey Dashkov

Several legislative initiatives caught our attention recently. All of them are related to the monetary role of gold and range from proposals to return to the gold standard, to minting gold and silver as an alternative currency, to having all state transactions carried out in gold and silver coins, to permitting citizens to run their own mints.

Do these proposals signal a significant attitude change among politicians and mainstream economic institutions toward gold? No. They are largely regarded as fringe ideas and dismissed out of hand. The third link above is written in a condescending tone that implies everyone knows that the gold standard is bad for an economy and it caused the Great Depression. Still, it's quite telling that opinions that gold can be incorporated into modern economy are becoming numerous, and actually making it onto the legislative agenda in various jurisdictions.

Last November, clearing house ICE Europe began accepting gold bullion as initial margin for crude oil and natural gas futures. This year, JPMorgan Chase announced that it would accept physical gold as collateral for a number of transactions. According to the WSJ, stock exchanges in New York, Chicago and Europe recently agreed to accept gold as collateral for certain trades, too. The World Gold Council is gaining traction in its push to have the Basel Committee on Banking Supervision accept the precious metals as a Tier-1 asset for banks, along with government bonds and currencies. Private and public institutions alike are clearly rethinking their attitude toward gold.

Perhaps most telling of all, the world's central banks were net buyers of gold in 2010 and in 2009, after being net sellers for the previous 20 years. As World Bank President Robert Zoellick said last November, gold has become the "yellow elephant in the room" that needs to be acknowledged by policymakers of major economies.

No one can predict exactly how this will all shake out, but Doug Casey has long said that a return to a gold standard, or some modern equivalent, is almost inevitable. That's because, for the reasons Aristotle outlined 2,000 years ago (it's durable, divisible, consistent, convenient, and has intrinsic value), gold is hands-down the world's best money.

Now, Gresham's Law tells us that bad money drives out good, but that's only true when legal tender laws hold sway (incentivizing people to hoard what's perceived to be "good" money and spend the "bad" money as fast as they can). When people give up on the local legal tender, Gresham's Law goes into reverse, and good money chases out bad. The dollarization of third-world economies is an example of this, the dollar being perceived as being good when compared to many shakier currencies.

So, what happens if fiat currencies as a class start to be perceived as bad money? Gresham, and history, tells us that they'll eventually be abandoned, unless made good (put back on some acceptable standard of value, like gold). The key point here is that it can't happen just a little bit, just as you can't get a little bit pregnant. Once it starts, the good money will drive out the bad, and in today's wired global economy, the phenomenon will be worldwide, fast and devastatingly thorough.

The investment implications, broadly, are obvious; you want to own gold for safety and speculate on gold stocks for profit. The details on how best to do this are the current raison d'être of our metals publications.

[In light of the information above, it seems that the Mania Phase of the gold bull market is getting closer every day. You'll want to stock up on gold, silver and sound large-cap mining stocks before the investing crowd catches on. There's still time, but it may be running short. To learn everything about prudent precious metals investments, give BIG GOLD a try today. Read our report on how Jeff Clark managed to boost his mom's IRA - and his subscribers portfolios - by 73%... and how, for only $79 per year, you can do the same...]

Analyzing the Libyan Crisis

By Casey Research Energy Team

Tensions in the Middle East plus transportation constraints: Where art thou going, oil prices?

The oil picture is always complex, but right now things are about as complicated as they can get. The unrest in Egypt has settled for the moment, but the future there is not yet clear as the military takes control on promises of free elections. Tensions are rising in Algeria, where the unofficial unemployment rate is along the lines of 40% and protesters are demanding change. Yemen and Bahrain are unsettled, to say the least. And now Libya is embroiled in the most violent protests to rock the Middle East during the current wave of uprisings, with 40-year ruler Colonel Muammar Gaddafi sending snipers and helicopters to shoot down protestors in the capital city Tripoli.

Unrest in Egypt mattered because of the Suez Canal and the Suez-Mediterranean Pipeline, which together transport almost 2 million barrels of oil per day. Protests in Libya and Algeria - with Libya inching closer and closer to full revolution status - matter because both are important oil producers and key suppliers to Europe. Algeria produces some 1.4 million barrels of crude each day, while Libya spits out 1.2 million barrels a day. Libya is Africa's third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent, concentrated in the massive Sirte Basin.

The Egyptian revolution has not yet disrupted oil supply. In Libya, however, things are very different. Global oil companies are pulling employees out of the country, leaving exploration projects and producing wells sitting idle.

Al Jazeera reported that oil has stopped flowing at the Nafoora oilfield, which is part of the Sirte Basin. The largest and most established foreign energy producer in Libya, Eni of Italy, is repatriating its nonessential personnel. German firm Wintershall is winding down its wells, which produce 100,000 barrels daily, and flying 130 foreign staff members out of the country. Norwegian Statoil is closing its Tripoli offices and pulling foreign workers out. OMV of Austria, which produces 34,000 barrels of oil a day in Libya, is evacuating most of its workers. And BP is flying its staff home as well, leaving its exploration operations unattended.

With foreign journalists banned from the country, phone lines cut and Internet access mostly severed, it is almost impossible to know just how much of Libya's oil supply has been disrupted (one report pegged it at 6%). But Libya's second largest city, Benghazi, has fallen to protestors, and it is in the country's east, where the oil fields lie. With politicians defecting and government buildings literally burning in Tripoli, it is clear that, whether Gaddafi stays or goes, disruptions will continue and uncertainty is the new normal in Libya. If Gaddafi does go, it is not at all clear who can lead the country's next phase, as Libya is a country bereft of institutions, with a non-cohesive army and old tribal structures that are both divisive and weakened.

The price of oil responded to Libya's instability immediately. Europe-traded Brent oil prices hit above US$108 per barrel on Feb. 21, a high not seen since just before the recession, in September 2008. The West Texas Intermediate (WTI) oil price, which reflects the American market, also gained notably, adding US$3 to reach almost US$92 per barrel.

The head of oil research at Barclays Capital, Paul Horsnell, described the current situation as potentially worse for oil than the Iran crisis of 1979. "That was a revolution in one country, but here there are so many countries at once. The world has only 4.5 million barrels per day of spare capacity, which is not comfortable."

There are several comments to make about all of this.

First, oil prices might run out of control again. High oil prices reduce the amount of money people have to spend on other things, shrinking demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given the recent global recession, you might expect OPEC to act quickly to prevent that cycle, but the wave of protests across the Middle East and North Africa has OPEC leaders just a tad bit distracted. Many are now wondering aloud if Saudi Arabia will be the next nation to see protests. In that context, what happens to the world economy is not exactly a priority for OPEC leaders right now - they are focused on survival. This is not an environment conducive to the kind of quick decision-making necessary to control oil prices.

Second, remember that benchmark prices for oil do not have a strong relationship to supply and demand. That is why prices could shoot up - speculation and manipulation by hedge funds and hoarders have as much impact as an actual change in supply. And a final benchmark price stems from a complex summation of interlinked spot, physical forwards, futures, options, and derivatives markets, which means the paper market is almost as important as the physical one.

The current spread between the two main benchmarks - Brent and WTI - is one example of how the benchmark pricing system fails to properly represent the oil market and all its complexity. WTI has historically been slightly cheaper than Brent, but over the last year the discount has spread to a record of as much as US$19 per barrel. The difference reflects ample supply in the U.S. Midwest (WTI is an American benchmark) compared to a squeeze on supplies from Europe's North Sea.

While that part makes sense, why is the Brent price used to determine three-quarters of the world's oil contracts, including those in Asia? A market with very low production volumes is used to price markets with very high production elsewhere in the world.

The system has led to many other nonsensical situations, like the fact that many U.S. oil refiners and consumers pay prices that track Brent, not WTI, so right now American gas station prices reflect greater-than-US$100-a-barrel oil even though the North American benchmark hasn't yet passed US$92. When you add in the fact that no one really knows what's going on in the world's fastest-growing oil market, China, you have all of the ingredients for serious mispricing.

Third, transportation infrastructure plays a key role in oil pricing. North African oil and gas are especially important to Europe because the only other place with pipelines running into Europe is Russia, and no one likes relying on Russia for energy. Russia already exports 7 million barrels of oil each day, which constitutes roughly 10% of global production.

To get around reliance on Russia for both oil and gas, European countries have been working to build more pipelines from North Africa, including a new, US$1.4 billion Algeria-Spain gas pipeline set to open in March. The desire to avoid increased reliance on Russia is another factor driving the Brent benchmark upwards; European prices for natural gas and liquefied natural gas are also on the rise, for the same reason.

Right now in the all-important oil world of the Middle East and North Africa, short-term supply, future prices, ownership and preferred trading partners are all up in the air. Libya's potential revolution poses a real threat to oil supplies - as mentioned, we only have 4.5 million barrels a day to spare, and Libya produces 1.2 million. On top of that, the fact is that oil prices are not decided in the most rational ways, and speculation plays a major role.

Can we profit from all of this? If you believe oil is on the rise, there are ways to get direct exposure to the price of oil, as well as many oil companies worth considering.

[Of course, with skyrocketing oil prices, alternative energies, becoming more attractive, will also see their day in the sun. In the upcoming issue of Casey's Energy Report, Marin and his team introduce a new standard to - for the first time ever - compare apples and oranges, i.e., the energy output of oil/gas and geothermal energy. The result would amaze you. Learn more about the future of geothermal and how to profit in this free report.]

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

Vedran Vuk
Casey's Daily Dispatch Editor

David is out, so you're stuck with me for another day. But don't worry; he should be back next week refreshed with new ideas. As you may have noticed, his Friday contributions seem to get longer and longer. And no doubt, after nearly two weeks away, his contribution next Friday will more than make up for his absence.  

Before getting started, there's one more issue to address. Yesterday, due to an error in our email system, the Daily Dispatch didn't reach your inboxes. However, the edition was posted on the website. Here is the link to yesterday's edition. The glitch in the email system has been fixed, but for future reference, our articles can always be found on www.caseyresearch.com. Just click the "My Casey Research" tab, and the Daily Dispatch link will appear. As a side note, if the Dispatch seems to be taking longer than usual to arrive, you can always access it earlier on the webpage. Now, let's get into the rest of the issue.

As I've written in the past, I don't watch television. Occasionally, I'll watch a show on YouTube or Hulu, but I haven't paid for cable or satellite for the past eight years. So during a recent visit to my parents' house, I tuned in for news. And in many ways, it was disturbing.

The majority of my information comes from reading articles and newspapers online along with my own data collection. With print, the reader has the advantage of applying his or her own tone to the material. If the market is crashing, one can gather the facts without the emotional tone of a speaker getting in the way. Or if the writer has a strong tone, it's much easier to filter out. In my opinion, this difference alone makes reading the preferable route for investment news. In the market, keeping a level head is extremely important.

With the recent Libyan revolution, I had read plenty of articles on the unrest. Of course the situation is unsettling, but it could be worse. But then I turned on FOX News. The channel's presentation of events was filled with emotional appeals and tones of emergency; I immediately felt more worried. The facts were completely the same, but the tone made all the difference. As human beings, we naturally respond to urgency and emotion. As a result, these factors can sway us from more logical decisions.

After the news on Libya, I continued to watch FOX News and other news channels. Practically every story is presented as an urgent crisis. According to the tone of the TV news, the world is falling apart at every second. It's crisis 24/7, and apocalypse is always just around the corner. Now, I'm not here to complain that the news programs are too biased - that's the usual commentary. My problem is the emotional hysteria of the whole circus. In my opinion, it's not healthy for level-headed investors; if everyone on TV is worried, one naturally becomes worried too. I'd rather keep a cool head on investment decisions and simply read the facts and numbers.

First, the Energy team will provide us with an overlook of the Libyan turmoil and the possible shortfalls in production. Then Kevin Brekke will discuss China's new role as an emerging R&D producer. 

Analyzing the Libyan Crisis

By Casey Research Energy Team

Tensions in the Middle East plus transportation constraints: Where art thou going, oil prices?

The oil picture is always complex, but right now things are about as complicated as they can get. The unrest in Egypt has settled for the moment, but the future there is not yet clear as the military takes control on promises of free elections. Tensions are rising in Algeria, where the unofficial unemployment rate is along the lines of 40% and protesters are demanding change. Yemen and Bahrain are unsettled, to say the least. And now Libya is embroiled in the most violent protests to rock the Middle East during the current wave of uprisings, with 40-year ruler Colonel Muammar Gaddafi sending snipers and helicopters to shoot down protestors in the capital city Tripoli.

Unrest in Egypt mattered because of the Suez Canal and the Suez-Mediterranean Pipeline, which together transport almost 2 million barrels of oil per day. Protests in Libya and Algeria - with Libya inching closer and closer to full revolution status - matter because both are important oil producers and key suppliers to Europe. Algeria produces some 1.4 million barrels of crude each day, while Libya spits out 1.2 million barrels a day. Libya is Africa's third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent, concentrated in the massive Sirte Basin.

The Egyptian revolution has not yet disrupted oil supply. In Libya, however, things are very different. Global oil companies are pulling employees out of the country, leaving exploration projects and producing wells sitting idle.

Al Jazeera reported that oil has stopped flowing at the Nafoora oilfield, which is part of the Sirte Basin. The largest and most established foreign energy producer in Libya, Eni of Italy, is repatriating its nonessential personnel. German firm Wintershall is winding down its wells, which produce 100,000 barrels daily, and flying 130 foreign staff members out of the country. Norwegian Statoil is closing its Tripoli offices and pulling foreign workers out. OMV of Austria, which produces 34,000 barrels of oil a day in Libya, is evacuating most of its workers. And BP is flying its staff home as well, leaving its exploration operations unattended.

With foreign journalists banned from the country, phone lines cut and Internet access mostly severed, it is almost impossible to know just how much of Libya's oil supply has been disrupted (one report pegged it at 6%). But Libya's second largest city, Benghazi, has fallen to protestors, and it is in the country's east, where the oil fields lie. With politicians defecting and government buildings literally burning in Tripoli, it is clear that, whether Gaddafi stays or goes, disruptions will continue and uncertainty is the new normal in Libya. If Gaddafi does go, it is not at all clear who can lead the country's next phase, as Libya is a country bereft of institutions, with a non-cohesive army and old tribal structures that are both divisive and weakened.

The price of oil responded to Libya's instability immediately. Europe-traded Brent oil prices hit above US$108 per barrel on Feb. 21, a high not seen since just before the recession, in September 2008. The West Texas Intermediate (WTI) oil price, which reflects the American market, also gained notably, adding US$3 to reach almost US$92 per barrel.

The head of oil research at Barclays Capital, Paul Horsnell, described the current situation as potentially worse for oil than the Iran crisis of 1979. "That was a revolution in one country, but here there are so many countries at once. The world has only 4.5 million barrels per day of spare capacity, which is not comfortable."

There are several comments to make about all of this.

First, oil prices might run out of control again. High oil prices reduce the amount of money people have to spend on other things, shrinking demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given the recent global recession, you might expect OPEC to act quickly to prevent that cycle, but the wave of protests across the Middle East and North Africa has OPEC leaders just a tad bit distracted. Many are now wondering aloud if Saudi Arabia will be the next nation to see protests. In that context, what happens to the world economy is not exactly a priority for OPEC leaders right now - they are focused on survival. This is not an environment conducive to the kind of quick decision-making necessary to control oil prices.

Second, remember that benchmark prices for oil do not have a strong relationship to supply and demand. That is why prices could shoot up - speculation and manipulation by hedge funds and hoarders have as much impact as an actual change in supply. And a final benchmark price stems from a complex summation of interlinked spot, physical forwards, futures, options, and derivatives markets, which means the paper market is almost as important as the physical one.

The current spread between the two main benchmarks - Brent and WTI - is one example of how the benchmark pricing system fails to properly represent the oil market and all its complexity. WTI has historically been slightly cheaper than Brent, but over the last year the discount has spread to a record of as much as US$19 per barrel. The difference reflects ample supply in the U.S. Midwest (WTI is an American benchmark) compared to a squeeze on supplies from Europe's North Sea.

While that part makes sense, why is the Brent price used to determine three-quarters of the world's oil contracts, including those in Asia? A market with very low production volumes is used to price markets with very high production elsewhere in the world.

The system has led to many other nonsensical situations, like the fact that many U.S. oil refiners and consumers pay prices that track Brent, not WTI, so right now American gas station prices reflect greater-than-US$100-a-barrel oil even though the North American benchmark hasn't yet passed US$92. When you add in the fact that no one really knows what's going on in the world's fastest-growing oil market, China, you have all of the ingredients for serious mispricing.

Third, transportation infrastructure plays a key role in oil pricing. North African oil and gas are especially important to Europe because the only other place with pipelines running into Europe is Russia, and no one likes relying on Russia for energy. Russia already exports 7 million barrels of oil each day, which constitutes roughly 10% of global production.

To get around reliance on Russia for both oil and gas, European countries have been working to build more pipelines from North Africa, including a new, US$1.4 billion Algeria-Spain gas pipeline set to open in March. The desire to avoid increased reliance on Russia is another factor driving the Brent benchmark upwards; European prices for natural gas and liquefied natural gas are also on the rise, for the same reason.

Right now in the all-important oil world of the Middle East and North Africa, short-term supply, future prices, ownership and preferred trading partners are all up in the air. Libya's potential revolution poses a real threat to oil supplies - as mentioned, we only have 4.5 million barrels a day to spare, and Libya produces 1.2 million. On top of that, the fact is that oil prices are not decided in the most rational ways, and speculation plays a major role.

Can we profit from all of this? If you believe oil is on the rise, there are ways to get direct exposure to the price of oil, as well as many oil companies worth considering.

[Of course, with skyrocketing oil prices, alternative energies, becoming more attractive, will also see their day in the sun. In the upcoming issue of Casey's Energy Report, Marin and his team introduce a new standard to - for the first time ever - compare apples and oranges, i.e., the energy output of oil/gas and geothermal energy. The result would amaze you. Learn more about the future of geothermal and how to profit in this free report.]

Another Surprise Trade Reversal for China

By Kevin Brekke

When multi-nation, free-trade agreements began to emerge in the 1980s, they were accompanied by ample criticism that warned of detrimental consequences for the labor forces of the industrialized Western markets. Manufacturing in higher-wage countries, it was speculated, would systematically be relocated to lower-wage jurisdictions, and good-paying jobs would be lost in the process.

Probably the most widely known trade agreement is NAFTA, the North American Free Trade Agreement, which was signed in 1992 and came into force in 1994, creating a trilateral trade bloc between Canada, Mexico and the U.S. The number of nations and regions entering into similar trade agreements has since exploded, and today a dizzying array of acronyms exists for these multilateral trade blocs. You can see a list of them here.

Following on the heels of NAFTA's implementation came the arrival of Maquiladoras, Mexican factories close to the U.S. border to which raw materials and parts were shipped and subsequently assembled into a finished product ready for export. Many of these factories were owned by American manufacturers that moved their plants from the U.S. to Mexico, and the speculation about the loss of American jobs became a reality.

The Maquiladora model of wage arbitrage in manufacturing grew rapidly. However, it was a trade structure between neighboring states that has since been overtaken by trade between non-border states. And nowhere is this growth more evident than with China.

The 2001 entrance of China into the World Trade Organization (WTO) was a very important event for the economic development of the country and followed the establishment of permanent, normal trade relations with the United States in 2000. These two events recognized China as an equal partner in the world economic community and added momentum to the pace of the economic globalization process already underway.

Over the decade following China's WTO membership, the country has emerged as a global trade powerhouse, expanding its export sector by leaps and bounds as hundreds of foreign companies rushed to exploit wage and cost differentials by shifting domestic production to the Chinese mainland.

Much of the criticism directed at the loss of jobs during this time had been countered with the so-called "They sweat, we think" argument, the gist of which goes something like this: with the growing importance of the FIRE (finance, insurance, real estate) economy and technology in the developed world, jobs with low barriers to entry and lower wages had become less desirable. As such, the manufacturing jobs (sweat) sent abroad would be replaced with jobs that required highly skilled or educated (think) employees. The specialized skills needed to fulfill these positions created a higher barrier of entry, called for higher wages, and would secure these jobs within an economy. The mundane task of product assembly, itself an artifact of the industrial age, was no longer needed in the information age.

A component in this argument is the vital role of research and development (R&D). After all, many of the goods that are eventually manufactured in China and brought to market, or the processes that are used in product development, are the consequence of an idea that ends with a new gadget, drug or killer app, or the improved version of an existing one.

And this is the spot in the sweat vs. think fairytale where we meet up with the big bad wolf; China is emerging as an R&D hub.

A report published this month by Deutsche Bank Research reveals that China is now a net exporter of R&D services. China is about ready to huff and puff and blow down the house of cards erected around the developed world's R&D export model.

Space constraints do not allow for an in-depth look at the report's findings, but here is a brief outline of some of its facts and figures:

• Over 90% of the world's leading technology companies not only manufacture worldwide, they also carry out research and development worldwide.
  
  
• Emerging market economies have more than doubled their R&D spending in the last 10 years, to 1.2% of GDP, almost half the 2.5% spent by Western economies.
  
  
• The traditional R&D centers of Japan, the EU, and the U.S. are assigning a significantly higher share of R&D contracts to external sources.
  
  
• Indications of a fast-growing transfer of knowledge and innovations from emerging markets back to industrial nations are surfacing.

The last item above includes an interesting twist on the way in which this transfer is taking shape, known as "knowledge-augmenting." This is a strategy where emerging markets are developing technologies that are planned specifically for use in industrial nations. Assisting countries such as Germany and the U.S. to enhance their technologies will, in turn, result in further reliance on the manufacturing capabilities of countries such as China. A nifty little trick.

The report, titled "International division of labor in R&D: Research follows production," discusses many other nuances and aspects to the story (India is an up-and-comer) and is definitely worth a read. It paints a picture of emerging markets in general, and China in particular, that will likely challenge the generally held view that the primary role of these markets is to supply the world with cheap, unskilled labor.

The U.S. and other technology leaders will likely be sweating as they wonder what the emerging world economies are thinking next.

Vedran again. Well, that's it for today. I just wanted to make two quick notes, the first being on Statoil. In yesterday's article, I mentioned potential plays on oil companies with low geographic diversification toward the Middle East. However, the Energy Team has reported that Statoil is pulling out of the Middle East in both of their recent pieces. Just to clarify that this isn't a contradiction: Statoil only has 44 employees in Libya, and the oil production amounts to 7,000 boe per day. In comparison, the Norwegian production equals 784,000 boe per day and involves 18,094 employees. 

Also, I wanted to remind everyone that today is the cut-off for our early-bird conference registration. You can still save $200 off the regular fee if you sign up before midnight today. Still undecided? For a glimpse of what Casey Summits have to offer, watch a snippet of the keynote speech by Eric Sprott from last fall's event. And it's not just the great faculty we always manage to gather - this year, for example, John Williams, economic whistleblower of Shadow Stats fame, will join us - it's the limited number of attendees that makes a true meeting of the minds possible. You can expect this caliber of information, as well as specific stock picks by the grand-masters of investment, when you sign up for the Summit in Boca Raton, FL, April 29 - May 1.

Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

Many market participants dream of a robust bull market that will make them piles of cash. Of course, I'd be a liar to deny the appeal here. But more often than not, today's bull markets are crashes waiting to happen. So, what's my dream market?

Well, I could see it now. First of all, at our weekly conference call, our chief economist Bud Conrad would be completely silent. Don't get me wrong, Bud's views are extremely insightful, and he has a firm grip on the data, as our subscribers to The Casey Report already know. But he's always going on and on about interest rates, inflation, the Japanese debt situation, and the eurozone crisis. Unfortunately, Bud has to discuss these issues. But in my ideal world, he'd have absolutely nothing to say.

Next, David Galland or Olivier Garret wouldn't start the meeting by saying "What are your opinions on the global economy?" or "How far away is Portugal from a crisis?" Instead, the meeting would start by them asking, "What's the latest technology on the horizon, what's the cutting edge in biotech, and what business strategies are showing the most promise?" 

Of course, we ask these questions regularly - especially in newsletters such as Casey’s Extraordinary Technology. But the problems in the general economy are often so big that they overshadow good company fundamentals. If a crash is around the corner, the new marketing plan at company XYZ simply isn’t that relevant - despite the plan’s merits.

Even when the market is doing well, there are enough black swans overhead to block out the sun. But this caution doesn't only affect our investment decisions. Investors everywhere have so many uncertainties: Is the recovery in the stock market the result of monetary policy or real strength? When will rates rise, and how will that hurt the market? Is America sitting on an inflation time bomb? Are there additional regulations coming? And those are just questions for the U.S. market. Let's not even get into the rest of the world from the eurozone to China, to Japan.

With all these concerns on the horizon, it's no wonder that job growth is weak. The market is plagued with uncertainty. It's difficult to plan for the future when the next several months could either lead to the expansion of QEII or contraction of the program. It's basically a coin flip. Furthermore, the government can't seem to decide where it stands on fiscal issues. Is it tightening its belt in name only, or will this be a serious new direction? And what's going to happen to the state budgets? Will there be a bailout or not?

For businesses to make large long-term investments, they need predictable policy courses from the government. Then business can get back to what it does best: earn profits and make jobs. I'm not asking for an investment utopia. Simply an environment where there are few enough black swans overhead to see the light shining through. The government can't do anything about some black swans, but a few could certainly be shot down if the Fed and the government got their act together.   

First, Andrey and Alena will give their thoughts on the increasing number of laws that acknowledge gold. Could this be the beginning of a bigger trend? Then, the Energy Team will debate the costs and benefits of hiring expats and the locals on a foreign project. This is a very insightful piece and highly relevant as companies are dashing out of Libya. Last, I'll comment on some ideas brewing in my mind from the recent news events.

Gold-Backed Money Being Revived?

By Alena Mikhan, Andrey Dashkov

Several legislative initiatives caught our attention recently. All of them are related to the monetary role of gold and range from proposals to return to the gold standard, to minting gold and silver as an alternative currency, to having all state transactions carried out in gold and silver coins, to permitting citizens to run their own mints.

Do these proposals signal a significant attitude change among politicians and mainstream economic institutions toward gold? No. They are largely regarded as fringe ideas and dismissed out of hand. The third link above is written in a condescending tone that implies everyone knows that the gold standard is bad for an economy and it caused the Great Depression. Still, it's quite telling that opinions that gold can be incorporated into modern economy are becoming numerous, and actually making it onto the legislative agenda in various jurisdictions.

Last November, clearing house ICE Europe began accepting gold bullion as initial margin for crude oil and natural gas futures. This year, JPMorgan Chase announced that it would accept physical gold as collateral for a number of transactions. According to the WSJ, stock exchanges in New York, Chicago and Europe recently agreed to accept gold as collateral for certain trades, too. The World Gold Council is gaining traction in its push to have the Basel Committee on Banking Supervision accept the precious metals as a Tier-1 asset for banks, along with government bonds and currencies. Private and public institutions alike are clearly rethinking their attitude toward gold.

Perhaps most telling of all, the world's central banks were net buyers of gold in 2010 and in 2009, after being net sellers for the previous 20 years. As World Bank President Robert Zoellick said last November, gold has become the "yellow elephant in the room" that needs to be acknowledged by policymakers of major economies.

No one can predict exactly how this will all shake out, but Doug Casey has long said that a return to a gold standard, or some modern equivalent, is almost inevitable. That's because, for the reasons Aristotle outlined 2,000 years ago (it's durable, divisible, consistent, convenient, and has intrinsic value), gold is hands-down the world's best money.

Now, Gresham's Law tells us that bad money drives out good, but that's only true when legal tender laws hold sway (incentivizing people to hoard what's perceived to be "good" money and spend the "bad" money as fast as they can). When people give up on the local legal tender, Gresham's Law goes into reverse, and good money chases out bad. The dollarization of third-world economies is an example of this, the dollar being perceived as being good when compared to many shakier currencies.

So, what happens if fiat currencies as a class start to be perceived as bad money? Gresham, and history, tells us that they'll eventually be abandoned, unless made good (put back on some acceptable standard of value, like gold). The key point here is that it can't happen just a little bit, just as you can't get a little bit pregnant. Once it starts, the good money will drive out the bad, and in today's wired global economy, the phenomenon will be worldwide, fast and devastatingly thorough.

The investment implications, broadly, are obvious; you want to own gold for safety and speculate on gold stocks for profit. The details on how best to do this are the current raison d'être of our metals publications.

[In light of the information above, it seems that the Mania Phase of the gold bull market is getting closer every day. You'll want to stock up on gold, silver and sound large-cap mining stocks before the investing crowd catches on. There's still time, but it may be running short. To learn everything about prudent precious metals investments, give BIG GOLD a try today. Read our report on how Jeff Clark managed to boost his mom's IRA - and his subscribers portfolios - by 73%... and how, for only $79 per year, you can do the same...]

Should Foreign Companies Hire Expats?

By the Casey Research Energy Team

The violence in Libya is impacting the entire world - oil prices are hitting 2.5-year highs as production from the OPEC nation starts to fail, gold prices are settling in above US$1,400 as the revolutions sweeping the Middle East and North Africa send wary investors towards safe havens, and natural gas prices in Europe are surging in the face of production disruptions and at least one pipeline closure.

Oil, gas, and gold prices are getting a lot of attention, but there's another aspect of the Libyan revolt that bears mention. The evacuation of foreign workers from oil rigs across Libya is a prime reminder of how tenuous it is for a company working in a challenging country to rely on expatriate workers.

For a company like England's BP or Italy's Eni, places like Libya provide the kind of returns that only come with considerable risk. In setting up shop in these risky places, companies have to decide whether to populate their operations with their own people, whom they know and trust, or with locals, who come with many unknowns. The answer seems obvious - employees are the backbone of any operation, so it seems you should use people on whom you know you can rely. But as major oil and gas firms BP, Eni, Repsol, Royal Dutch Shell, Total, Winterstall, Statoil and OMV all scramble to shutter their Libyan operations and extract employees, the seemingly obvious answer becomes questionable.

In fact, we at Casey have never thought that taking that easy road - relying primarily on expat workers - was the way to go. The most important aspect of operating in risky countries is knowing how to navigate the tricky waters of permitting, politics and partnerships. Only locals have this knowledge. Even if a foreigner gains knowledge of the system, there is no guarantee that he or she will have access to it - to use a tried-but-true cliche, success in business is as much about whom you know as what you know.

Hiring locals for positions from drill hand to project manager may slow a company down initially, but the effort will reap rewards in the longer term. Comparing an expat with a local is like comparing a child and an adult - regardless of his experience, the expat cannot possibly know as much about the situation as the local, simply because it is a world to which he is still new. And in many of these countries, a permit that officially takes three months to issue can appear the next day, if it turns out that your permitting coordinator's cousin went to school with the energy minister's assistant.

More generally, a project stands much better odds of garnering social support if it employs locals, and not only in labor roles but in positions of some authority. Another option is to partner with a local company. Either way, employment gives people living near the project a source of income, a good level of understanding in the operation, and a sense of ownership. The support thus created isn't just good from a touchy-feely perspective - today social support is an absolute requirement for project development. In contrast, an expat-run operation all too often leads locals to believe (often rightly) that their natural resources are being pillaged and their environment polluted without any real gain for them.

East West Petroleum, Africa Oil and ShaMaran Petroleum are all good examples of a company reaping the rewards of working with locals. ShaMaran is in Iraq, and both Doug Casey and Marin Katusa visited their projects last year. East West is a new, Canada-based company focused on applying modern or unconventional exploration, drilling and production techniques to oil and gas plays in both established and emerging areas, where the new technologies could significantly impact exploration and production success. The company has active projects in Egypt and Romania, and hold prospects in Tunisia, Syria, Iraq, Yemen, Russia and India.  

Given the current situations in several of those countries - Egypt, Yemen and Tunisia - you might expect the company to be running for cover. But because it has local partners in every country where it works, its operations are actually unaffected. Its biggest project is in Egypt, and East West's partner there, Kuwait Energy, says everything is continuing as usual. ShaMaran is up significantly (our subscribers were in the play early), and we have sold the company for a total position gain of +320%.

The take-home message for investors is that, if you are considering investing in a company that operates in unstable or unpredictable areas, your due diligence should include investigating the company's modus operandi abroad. Without real local partners or a commitment to local staffing, a foreign company's odds of survival in high-risk locales are slim to none. And the failure may come after millions have been spent, and lost. This is another reason why the Casey Energy team spend most of their time on the road not just researching the projects, but the management's ability to execute their business plan in politically unstable parts of the world.

[Marin and his team are the best in digging up overlooked energy opportunities across the world, and the gains their best-of-the-best stock picks make are nothing to scoff at. The next Casey's Energy Report, which will be published in a couple days, contains a brand-new pick - a company poised to gain big from skyrocketing metallurgical coal prices. Sign up now and get in on the ground floor - you have 3 months to decide whether Casey's Energy Report is right for you.]

Is Developing-Market Debt Mispriced Across the Board?

By Vedran Vuk

As protests spread throughout the Middle East, Facebook and Twitter have been regularly in the headlines. There seems to be a divide amongst the commentators - one group wants to proclaim a social media revolution while the other remains highly skeptical. I'm not here to judge the winner. However, one thing is certain: an argument that these websites had no effect at all would be hard to make.

I don't see social media as the main catalyst, but it certainly had an effect on the margins. And that's important enough. What do I mean by this? Twitter and Facebook may not ignite the fires of revolution, but they definitely make the process easier. And when something is easier, it usually becomes more probable as well. 

One way to understand this point is through probabilities. I'll use some fictional numbers to make my case. Let's say that prior to the Internet, every decade had a 10% chance of a revolution per country in a bond portfolio of 40 unstable countries. As a result, every decade an investor could expect 4 revolutions. Of course, these revolutions could lead to possible defaults on the bond. 

Now, let's say that Twitter and Facebook make rebellion and revolutions just a little bit easier. I'm not talking about a social media revolution, but change on the margin. Instead of a 10% chance of revolution per decade, the social media increases it to 12.5%. Now, from a portfolio of 40 unstable countries, 5 should have revolutions instead of 4.

To a small-time investor, this might not matter much. Few of us are investing in the sovereign debt of unstable nations. But for the institutional players, it could be important. In my opinion, the threat of revolution has increased across the board thanks to the Internet. While the media wants a direct connection between Twitter and a certain protest, the reality is more likely a marginal effect.

Now, the big question is whether the markets have priced in higher probabilities of revolution. There's a good chance that they haven't. The market did a fairly poor job of pricing default rates on mortgages in the recent crash. The default rates were backward looking, not forward looking. Hence, there's a chance that the market has overlooked this possible change in probabilities as well. 

Who Is in Play with Higher Oil Prices?

By Vedran Vuk

The reports on higher oil prices have been mostly covering the downside. But who will see the upside? Of course oil producers, but specifically those outside the Middle East. Many U.S. oil companies with operations in the Middle East are experiencing choppy trading despite the higher oil prices.

But this isn't the case with every oil company out there. Consider the partially government-owned companies in Brazil, Norway and Russia, such as Petrobras and Statoil. Due to government influence, these companies have poor geographic diversification. Government influence in a company is never a welcome sign. But this lack of diversification is circumstantially beneficial in the current environment.

Beyond oil, the governments behind these companies will feel a boost in revenue. This could place them in a sounder fiscal position or provide additional ammunition for temporary stimulus. Russia is already issuing 7-year Euro bonds this week with the timely world events.

For places like Brazil, this is extremely good timing as well. Norway also wouldn't mind an extra boost, and neither will our investment there in The Casey Report. While I'm not sure if I'd be ready to jump into Russia yet, Petrobras in Brazil is tempting. However, I'll have to do more due diligence before making a move. When a company is largely government-owned, an investor has to be extra careful.

Well, that's it for today. But before I go, I should mention that tomorrow is the last day you can get your Early-Bird pricing for the Casey Summit in sunny Boca Raton, FL, from April 29 - May 1. Sign up before midnight Friday and save $200.

Still undecided? For a glimpse of what Casey Summits have to offer, watch this keynote speech by Eric Sprott from last fall's event. And it's not just the great faculty we always manage to gather - this year, for example, John Williams, economic whistleblower of Shadow Stats fame, will join us - it's the limited number of attendees that makes a true meeting of the minds possible.

We want you to have a chance to rub elbows with our speakers, ask them questions, have a friendly chat and a cocktail... because that's what this is really all about, and it's something you'll find at few, if any, other investment conferences. So don't hesitate and sign up today.

Our summit coordinator just sent me a note that we have a subscriber who would like to know if there are people in the Dallas/Ft. Worth area that would be interested in sharing a private plane to and from Boca Raton for the summit. If you live in the Dallas/Ft. Worth area and plan to attend the summit and have interest, please send a note to Sal at saljam@verizon.net.

Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

On Monday, I wrote an article expressing the view that derivatives and OTC markets weren't responsible for the 2008 crash. In my opinion, heavy regulation in this market will do nothing to prevent the next crisis. Rather, the same old culprit known as the business cycle was responsible for the present financial disaster. Since many readers wrote in on this topic, I wanted to clarify my point.

Let's start with mortgage-backed securities (MBS) and credit default swaps. Clearly, these instruments were center stage during the crash. But did they actually cause the crisis?

First, one has to ask, "What is a derivative?" It's a financial instrument that derives its value from the value of another asset. In this case, the derivatives derived value from packaged mortgages.

Mortgage-backed securities became worthless due to higher-than-expected defaults on home mortgages, the underlying assets. There wasn't anything intrinsically wrong with these securities. The real problem came from the underlying assets and false assumptions about future default rates. This takes us one layer deeper to the housing market.

Why was there a bubble in the housing market? After all, it was the housing bubble's pop that ultimately crashed the prices of MBS. Furthermore, it was the bubble that led Wall Street to assume unrealistic default rates. But we can't blame houses for the crisis either. Well, at least not directly - there's nothing intrinsically wrong with homeownership. Yet in an environment of extremely low rates, almost anyone was given credit to purchase a home. With the expectation of permanently rising home prices and a boom-time economy, everything seemed all right. 

However, the large amounts of credit pumped into the system only produced the illusion of real wealth. When entrepreneurs and businesses see a surge in demand, they naturally respond with new businesses, projects and expansions. In this case, the demand was driven toward real estate and new home construction. But reality catches up with every monetary stimulus. The earnings and demand stall and become unsustainable as they aren't backed by a real increase in the wealth of the economy. As a result, the businesses and investments based on boom-time assumptions contract or outright fail.

Let's dig to one step beyond the housing market. Who is responsible for inserting credit into the system and artificially lowering rates? Of course, the Federal Reserve. With years of low interest rates, it facilitated an enormous bubble in the housing market. When the Fed began raising rates, the subprime market immediately felt tremors. The low-interest bubble became impossible to deflate without a serious crash.

So, I hope this clarifies my point. Derivatives gain their value from underlying assets. During the crisis, the key assets were home mortgages. Why was there a bubble in home mortgages? Because the Federal Reserve inflated their values with artificially low interest rates.

Certainly, derivatives were part of the current crisis - just like housing was a part of it. But neither factor was the root cause of the problem. One could argue that both factors helped grease the wheels of the crisis, but it's difficult to make the case that they actually caused it once we retrace our steps.

In every bubble, cheap credit is funneled into some industry. This time, it went into the housing market and, as a result, mortgage-backed securities. Last time, it went into tech. Who knows where the next credit boom will go? Maybe a bubble will form in commodities, agriculture, or even mining stocks - or so we hope. In my opinion, it doesn't make sense to regulate the flavor of the day or something way down the chain of events in a crisis. The more important part is to get down to the root cause. 

Just ask yourself, "Would the 2000 crash have been prevented if tech stocks were more regulated?"  One could think of all sorts of "sound" regulations. Perhaps companies could have their business plans and technologies passed through regulatory approval. Maybe companies would need to meet basic levels of liquidity and burn ratios. However, these steps would have done nothing to evade the next crisis.

And the same thing will happen this time with derivatives. New regulations will force companies to record every transaction. Some regulator will check equity and capital levels, but it won't matter. Because boom and bust cycles aren't the result of poor regulations - rather, they are the result of poor monetary policy.

And now on to the rest of the issue. Jeff Clark will consider strategies for storing physical gold and silver. We've always recommended to have a part of your holdings in physical metal; so this is an important article for anyone with a serious amount of bullion. Then, I'll make some short commentary on Rahm Emanuel's recent election.

Robbed!

By Jeff Clark, BIG GOLD

One of my best friends recently discovered, to his shock and dismay, that five one-ounce gold coins had been stolen from his home. I feel especially bad because I had encouraged him to buy some physical metal, giving him some tips and pointing him to the better dealers.

What's especially disconcerting about the theft is that my friend had the coins stored in a safe, hidden from view, securely locked, with the key hidden. He thought his gold was safe, a reasonable assumption given the precautions he'd taken.

But all those measures weren't enough. Based on what he knows, he strongly suspects it was a relative, partly because of this person's background and partly because they were one of few familiar enough with the house to know where the key might be. The police unfortunately don't have enough evidence to make an arrest - fingerprints, for one, couldn't be successfully lifted from the safe.

My friend was in shock for several days. While it didn't represent all the gold he owned, it's not insignificant; with gold at $1,400/ounce, that's seven grand the thief made off with. He's further consternated by how it went down; the robber only took part of his stash, evidently to make it look like his gold hadn't been disturbed. The key had also been put back in its place, and for this reason he can't pinpoint a specific time period the coins were stolen.

The cost to him has been more than monetary; he loved his bullion coins and had collected at least one from almost every country that produces them. He told me he occasionally took them out of the safe because they were, in his words, "beautiful... and I just loved the weight of them in my hand." His stash was starting to build up to a point where he had enough "savings" for almost any emergency. The pain deepened further when he learned that thanks to current IRS rules, he can't even write off the loss. (He's forgoing a homeowner's claim, given the industry's reputation for dropping customers for "small" claims.)

Needless to say, my friend is no longer storing his gold (and silver) in that safe. He's the kind that would normally shy away from using a bank safe deposit box, but not anymore. Even with that, though, he knew this method wasn't perfect and so explored all his options. He's decided to follow the suggestion I outline at the end.

After the dust settled, he told me that yes, he felt violated; yes, he's still angry; and yes, it's made him suspicious of others around him, a feeling he hates. "But what I suddenly realized," he said, "was how valuable gold is becoming again. It's not a 'barbarous relic' anymore... it's not a pretty coin or a hunk of metal or a commodity or even an investment. It really is money, and it's scary to think how dicey things might get when everyone sees gold as money again."

My friend is not poor; there were other valuables the thief could've snatched. He took the gold.

So what about you? How safe is your safe? Are your clever hiding spots clever enough?

Here's a quick checklist of the three most common places to store your gold. My friend overlooked one of the basic rules of home storage, so I hope you'll review where and how you store your precious metals so that you can avoid the same pain and loss he experienced...

Safe deposit box

The easiest and simplest way to store gold is in a safe deposit box at your local bank. If you go this route, use a local bank. You want to be able to get to your gold in an emergency, which is one of the reasons you own it in the first place. So don't keep it in a different state or a distant city. Keep it close.

However, as my friend acknowledges, a safe deposit box isn't perfect. First, your access is restricted; you can only get to the gold during regular banking hours. Second, safe deposit boxes are not insured against robbery. And last, a bank box compromises your privacy. It provides a generous clue for the government, in case it ever decides to repeat FDR's 1933 confiscation of gold.

Bury it

This is where the term "midnight gardening" comes from; people bury their gold at night so others won't notice the digging. The alternative is to find a separate reason for the excavation, such as fixing a pipe or removing a stump, and work in the daylight.

Either way, before those of you who are used to clean fingernails pass on this method, consider its advantages: it won't be damaged in a fire, and a burglar would need to know where to dig. A lot can happen in the world that won't disturb buried gold.

A few practicalities, if you decide to go the shovel route. First, use the right container, something airtight and waterproof. This is especially important if you are storing numismatics or are burying silver in any form. We've been told those water bottles that hikers use work pretty well, but choose one heavy enough to stand up to years of erosion and persistent insects. Another choice is a small section of PVC pipe from your local hardware store; cap the ends and then bury it in a shallow puddle of cement. Don't use a coffee can, since the color on the metal can bleed. To protect from scratching, put each coin in a plastic baggie or something similar.

Where do you bury it? Your location should be neither too easy nor too difficult to find. Not too easy, so that the gold won't be found by a thief. But not so difficult that years later, you or your heirs have trouble locating it. Complicated instructions (including treasure maps) can get muddled with time and create the risk your gold will never be dug up.

Find a place, on property you own, that you'll always remember but that isn't obvious if someone learns you've buried something valuable.

Keep in mind that most modern metal detectors can operate to a depth of about 4 feet for objects as large as a stash of coins or bars. There's also ground-penetrating radar, used primarily by forensic investigators, that can detect where digging has occurred, as well as satellites that can pinpoint where ground has been disturbed.

Hide it in your house and/or use a home safe

Indoor storage is practical for smaller quantities. You can probably think of dozens of places in your home where no one would think to look. Avoid any place obvious, such as a jewelry box or cookie jar. The disadvantage of this method is exposure to, as my friend can tell you, theft, along with fire, flood, and other natural disasters.

Consider using a safe, ideally one secured to the floor. As one dealer said, "A safe can be brought in on a two-wheeler and taken out on a two-wheeler if it hasn't been attached to a building or at least hidden." For obvious reasons, my friend is now gun-shy about using a safe with a key lock.

If you use a floor safe, locations for it include the garage, under a refrigerator, or anywhere you can place something over it. We recommend installing it yourself, and some of the kits make it easier than you it might expect. We wouldn't hire a contractor.

Before you buy a safe, however, I recommend reading this article from a veteran bullion collector: How Safe Are Safes? (If you can't log in because you're not a BIG GOLD subscriber, why not try it today risk-free for only $79 per year? Details here.)

Leave the right trail

However you store your gold, let exactly one person know the details. It needs to be someone in whose honesty and discretion you have complete confidence. It will be that person's job to access the gold if you are incapacitated or die. If you are using a safe deposit box, his or her name should be included in the box registration, and they should know where to go to get the key.

Tell one person, but only one. No one else should know. This is especially important if you're using home storage. You don't want to come home someday to find your house turned upside down because someone heard you're living in a treasure chest. Even worse would be to come home and find a looter waiting to have a chat with you. My friend kept quiet about his gold, but admitted some family knew about it. That's all it took.

There's just no other way to say it: Keep quiet about your gold.

Unless you've reached a point in life where you are depending on your children for help with your affairs, a child is not a good choice as your gold storage confidant. Kids talk, and you don't know whom they might tell or how far the story might travel.

But you do need to tell someone, regardless of your storage method. I heard of an old miner who - no kidding - left a treasure map for his kids, to help them figure out where he'd hidden his gold. But someone else found the map - and his kids never got their inheritance. And what if the kids had received the map but weren't very good treasure hunters? I've read similar stories about descendants who knew that gold had been left for them but had no idea where it was.

What if more than one person already knows you have gold? Review your home storage methods to be absolutely sure they are adequate, or use one of the other methods such as a bank safe deposit box.

So what's the best place to store your physical gold? Well, your choices boil down to three: store your gold in a safe deposit box, bury it, or hide it indoors. Each method has pluses and minuses, but probably the best method is a combination of them all. In other words, diversify your storage locations. My friend could've been wiped out if the robber hadn't been trying to be sneaky.

Last, don't let this scare you off from buying bullion. It's still the asset that offers the best monetary protection for the foreseeable future. Not owning it may leave you feeling robbed when you go to use your paper dollars and find they won't buy you as much as you thought. That's not a theft you can prevent - unless you own gold.

[If this is the kind of in-depth information you'd like to utilize for your investments, I encourage you to check out BIG GOLD, an inexpensive monthly newsletter that provides well-researched advice for using precious metals and large-cap mining stocks for both protection and profit. Our February issue has a brand-new stock pick, one of the safest gold companies you can buy. We have a special offer right now for new readers... click here for more or go directly to the order form.]

Rahm Emanuel Wins Chicago

By Vedran Vuk

In some ways, Rahm Emanuel's Chicago victory will make our lives more interesting. The guy known for his quote "Never let a good crisis go to waste" will soon eat his word as Chicago and Illinois face a serious fiscal crisis. This won't be the same pony show as D.C. where trillions were spent with little thought. It'll be interesting to see how Emanuel wiggles out of this predicament. 

The WSJ notes, "He faces a city reeling from the recession and years of overspending. Chicago's projected budget shortfall is approaching $1 billion and public-employee pensions are underfunded by about $20 billion."

Furthermore, Emanuel's reputation will surely provide some memorable moments in the next few years. In case some have forgotten, here's an article recounting some of his more infamous actions: 

Emanuel is known for his panache for treating donors right. He sends them cheesecakes from Eli's, the famous Chicago bakery. But the one pollster who notoriously ticked off Rahmbo received a 2 1/2 foot decomposing fish in the mail - ripe, stinky, and to the point.

...

The most infamous Rahmbo story of them all is the one that begins with the dinner the night after Bill Clinton was elected in 1992. Among those present at the dinner table was ABC News anchor George Stephanopoulos, who watched while an overwrought and clearly exhausted Emanuel began ranting at a long list of Clinton "enemies." As he shouted each name, he stabbed the table with his steak knife: "Nat Landow! Dead! Cliff Jackson! Dead!" Apparently, others joined in.

Of course, these aren't the only stories about Emanuel. We could go and on and on. And let me make clear that I don't dislike the guy simply because of his politics. Politically, there are worse people. And for the record, I'm disgusted by both Republican and Democrats. However, I find him to be an utterly frightening and disturbed human being. Often voters ask themselves, "Would I have a beer with this guy?" To put it lightly, I would rather have a beer with a death row convict than Rahm Emanuel.

Well, that's it for today. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

A friend of mine once asked, “How come you free-market guys always use the Department of Motor Vehicles as an example of government inefficiency? Can’t you find other examples?” Admittedly, I’ve used the example many times.

And sure enough, the DMV has exemplified government inefficiency for decades, but why? Besides inefficiency, it reveals one of the major problems with our form of government: there is almost no incentive to fix smaller problems. On big issues, the government might actually try to do something. Furthermore, citizens will organize. For better or worse, the government has taken action on healthcare. Also, promises to reduce the deficit, to make national security stronger or to build better infrastructure are commonplace. In a democracy, politicians can run campaigns on these agendas.

However, no one can run a campaign on DMV reform.  When I moved to Maryland, it took me a full six hours of waiting to acquire my driver’s license and registration. The inefficiency was astounding. 

But if a politician proposed reforming the DMV, I probably wouldn’t vote for him. My decision to vote would depend much more on his or her other stands on big issues. DMV efficiency simply isn’t an important issue. Sometimes one issue, such as abortion, can swing votes. However, no one is passionate about the DMV. As a result, the system does not change year after year. Only a budget crisis may eventually force change.

I’ve always heard the saying, “Well, if you don’t like something about the government, then vote the person out of office.” But there’s no way to vote on minor issues. Plenty of things simply fall through the cracks because the issues aren’t big enough to warrant campaign stands, organizations and paid lobbyists.

Who’s going to get angry if the government spends a million or two to improve a public park? What about a couple of million for a new tourism office? Or perhaps we could add ten million to the prison guard pensions? As these bills are being passed, they’re so small that no one has an incentive to complain - much like the DMV problem. In economics, this is often known as the problem of concentrated benefits and dispersed costs. Someone who has a million or two to gain lobbies for the issue, but the cost is so dispersed that no one complains. Only years down the road, when there’s a budget crisis, do citizens finally pay attention.

First, we’ll have a reader question for Alex Daley. The reader dared us to publish it; well, so we did. This is an exchange really worth reading. Then Doug Hornig will let out his frustration about a double standard for Clarence Thomas’s tax problems. Last, I’ll briefly cover some news.

A Reader Question for Alex Daley

Reader Question: “Has InterDigital rubbed some egg on your face, having closed last Friday at $58 and change? More seriously, my criticism is not the wisdom of your sell advice at $35 in November past since it had reached your target. What bothers me is that you didn't reverse your decision when you realized that it was a bad call. Still, it is not too late. I dare you to publish this!”

Alex Daley: The note you sent didn’t contain a name or salutation, so I am not sure how to greet you. But I want to thank you for taking the time to write in with your concerns over the timing of the sell recommendation for InterDigital (IDCC). You are absolutely correct that the stock has blown past our price targets and posted an incredible gain the past few months. While we did post a great gain for our subscribers, we also managed to leave a lot on the table. While I do tend to dismiss “seller’s remorse” as a bit of contradictory emotion - no gain is a gain until realized - it is worth considering how this happened.   

When we reevaluated IDCC, what we saw was a company flush with cash (and not returning enough of it to shareholders), but with a potentially difficult transition to make from 3G to 4G. In retrospect, we were overly conservative on the effect new licensing streams would have on Q4 revenues. In the end the company both blew out our own and Wall Street’s Q4 estimates, with huge increases in earnings (especially cash earnings, which the company trades at a low multiple of to this day, near $60/share), and the stock has risen sharply to trade in line with those new numbers. 

I’d like to compare this to a stock like OpenTable (OPEN), where a similar trend continued to lift the stock well after our sale. But in the case of OpenTable, the fundamentals underlying our price target never shifted. When we reran our analysis, the price target didn’t move enough to justify a continued hold. What happened instead was that the market began to value the company at a much higher multiple to earnings and revenues than we ever expected or than we are comfortable holding (153x earnings, 22x sales, recently). OPEN is ludicrously expensive. IDCC is not at all, based on the Q4 numbers that posted weeks after our sale.

In our IDCC sell note, we said (emphasis added now):  “We can always buy back in if the cycle we mentioned knocks IDCC back to a level we see as ‘cheap’ or if something fundamental changes that makes the current price look like a good value.”

That very change happened with Q4, and we moved too slowly to catch it. Simple as that. Missing that boat is painful, as we even said in our sell note how bullish we were on traffic management for wireless networks, one of IDCC’s strongest areas. Instead, we were focused on evaluating a host of new opportunities and let the IDCC post-earnings look back fall to the bottom of the priority list. We’re adjusting our timeline for reevaluations post earnings as a result. 

I am certainly much happier to be defending a 45% four-month gain than to be facing a loss of similar proportions. Still, it is not just our job to help subscribers find great stocks, but to get the most out of them as well. And that is something we continue to strive for. I’ll point to companies like iRobot, NxStage Medical, Mako Surgical and the many other large gains we continue to hold in our portfolio as proof of our disciplined approach to picking stocks and when to buy/sell.

I will submit your letter (anonymously) and this response to the Casey Daily Dispatch editors today. It is my hope they will publish it, as you raise an important point.

Thank you,

Alex

[A disciplined approach is what you really need in the volatile technology sector... and thanks to that discipline Alex and his editorial team have made several quick 40%+ gains for their subscribers... within a few months or even weeks. Read more here.]

Martha, Clarence, the Big Misunderstanding and Me

By Doug Hornig

Regular readers of the Daily Dispatch will know that I’m the political junkie around here. Not only do I follow what goes on in that vile, corrupt sphere, I actually care. I get angry at betrayals of the public trust. Most of my colleagues, I suspect, regard me with the sense of amusement aroused by a child who proclaims that he wants to become president when he grows up, because he wants to serve his country rather than simply be the most powerful person in it.

I don’t know this for a fact, but I think it’s probably safe to say that I’m the only one at Casey Research who ever seriously considered a run for elected office. It happened a number of years ago, when my local representative to the House of Delegates here in Virginia decided to switch parties.

This guy was a hack. He’d been a Dixiecrat-type Democrat all his life, but, sensing a shift in the political winds, suddenly decided he was a born-again Republican. Only problem, the Republicans didn’t want him. But after he tried to switch, the Democrats didn’t want him either. So he became an Independent and, since he was now voting Republican when he went to Richmond, the GOP tacitly agreed not to run anyone against him in perpetuity.

It was the perfect scenario for a political junkie to get elected to office. Normally, no major party would nominate me, and even if one of them were foolish enough to, I’m basically unelectable. But this was not a normal situation. Under Virginia law, if I filed to run as a Republican, that’s how I would appear on the ballot and the GOP would be powerless to stop me. Assuming the Democrats ran someone, as they always do, then it would be a three-way race. And in a three-way race, as Jesse Ventura so delightfully proved, anything can happen.

A lot of people encouraged me to do it. I had a seasoned political vet who volunteered to be my campaign manager, and an experienced pollster ready to find the right issues to run on. I even had a treasurer lined up. But here’s the thing. When you decide to run for office, you have to fill out paperwork that weighs in a good pound or more. You have to make public the most intimate details of your life, especially the financial ones. I decided it was all more than I cared to share with strangers, and thus ended my embryonic political career.

However, it never seemed inappropriate that these disclosures should be required of me. Let’s say that my state legislator had to vote on the awarding of some governmental largesse to the XYZ Corporation. And let’s say that he was a paid consultant for XYZ. I’d want that relationship to be public knowledge, not something hidden from his constituents.

Disclosure laws are, in my opinion, a good thing. They’re designed to prevent the big money-fueled corruption that results from blatant conflicts of interest. If you’re a public official and you lie on your disclosure forms, you’ve broken the law.

In this season of political madness, where taxpayers are being asked to bail out gigantic financial institutions that made bad bets to the tune of billions upon billions of dollars, a falsified financial disclosure statement may seem like small potatoes indeed. But it isn’t when the perp sits on the highest court in the land.

Supreme Court Justice Clarence Thomas filed a false financial statement. Not once. Repeatedly. For decades. It’s a crime for which an average citizen would at the least be fined and, considering its frequency and duration, would probably have to do some jail time. Calling it just a “misunderstanding” would not likely help.

Here’s what the big misunderstanding looks like:

The Ethics in Government Act of 1978 requires federal officials like Thomas to file a yearly form in which he notes not only his own sources of income but any non-investment income earned by his wife. Wives are included, reasonably enough, in order to prevent public officials from hiding bribes by funneling them to spouses.

Thomas’s wife, Virginia, makes non-investment money, and a lot of it. For example, from 2003 to 2007 she worked for the Heritage Foundation and was paid more than $120,000 per year, according to the organization’s own IRS reporting. These years were apparently not atypical, as Thomas has now filed “amended” disclosures going all the way back to 1989, but how much she made is really beside the point. Because Thomas failed to report any of it. Every year. Not only that, on the annual disclosure form, under “Spouse’s Non-Investment Income,” there is a little box marked “None.” That’s the one the Justice checked. Year in and year out.

Suppose for a moment that for seven years your spouse has been pulling down $120K per year, yet on your own personal disclosure forms, the ones you filed every April 15, that income somehow slipped through the cracks and you forgot to report it. Think you’d get away with an “Oops”? Maybe, if you were lucky, you’d escape with a fine and a suspended sentence.

Everyone on the Supreme Court reports to work in a building over whose entrance Equal Justice Under Law is chiseled in stone. If Clarence Thomas is allowed to walk, then perhaps it’s time to unchisel it.

Walk he probably will, and it won’t be the jumpsuited perp walk either. D.C. just doesn’t want anything to do with this story. Conservatives are understandably terrified at the thought of losing one of “their” seats on the Court, and all those who couldn’t wait to impeach a president for, um, lying are not-so-strangely mum here; while liberals, still licking their wounds from their butt-whipping in the last election, have shown little inclination to stir the pot. Both seem willing to say the guy made an honest mistake, he fessed up, end of story, move on.

In addition, press coverage of this crime has been lackluster at best. Although it is entirely a legal and not a political issue, it’s treated as if it were. Left-wing talking heads pursue it, right-wing heads ignore it. And the evening news only found it of interest for a day or so.

Perhaps the lack of outcry is because it isn’t perceived as much of a crime. It’s just a simple misdemeanor, right? Actually, it’s that for sure, and maybe more. The for sure part is that Thomas violated statute 5 USC appendix 104, under which an official who “knowingly and willfully” falsifies a required report is subject to a fine of up to $50,000 and up to a year in jail. On each count. Do it some twenty-odd times and it starts to add up. (Thomas could of course claim his conduct was neither willful nor knowing, perhaps insisting that “the dog ate the six hundred grand” or something, but it’d be fun to see him try that in court.) Such violations are supposed to be referred to the Attorney General, and he is supposed to investigate.

However, if you don’t think a misdemeanor of that magnitude warrants impeachment, not to mention a little sojourn in the Graybar Hotel, well, what if it were a felony?

Which brings us to Martha. Martha Stewart did jail time, as everyone knows. But most people, if asked why, would say she was convicted of insider trading on a stock deal. Nope. She was convicted of lying about it, under statute 18 USC 1001.

That’s the one the feds use when they’re looking for something to hang you with and don’t have much. It’s a mighty big umbrella. Whoever, “in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully ... makes any materially false, fictitious, or fraudulent statement or representation” is guilty of a felony punishable by up to five years in the slammer. Basically, you can’t lie to the feds under any circumstances.

It’s how they nailed Martha. And Marion Jones, who also did time. And it’s the sword over Barry Bonds’s head.

So why did Clarence do it? Assuming the obvious, that he didn’t have a series of 20 senior moments or was unclear on the meaning of the word None, we’re left to speculate.

His enemies were quick to claim he did it to ward off calls for his recusal in cases that would have a direct financial impact on his wife’s lobbying activities, pointing to such decisions as 2010’s landmark, Citizens United v. Federal Election Commission. It seems unlikely in that particular instance. If lawyers for the FEC were unaware of Mrs. Thomas’s activities, they weren’t reading the newspapers. She was at the time CEO of the lobbying group, Liberty Central, which she founded in 2009. Hardly a secret, and litigants would not have needed a financial disclosure statement before they asked Thomas to recuse himself from a case that was clearly going to have some very nice financial consequences for the Thomas family. But they didn’t. 

At the same time, there are many years’ worth of other decisions against which to weigh Ginni Thomas’s interests. Because of the falsified documents, the appearance of impropriety is in the air. It should be dealt with. If Clarence Thomas’s vote is for sale, then let some more serious charges to be brought against him. But even if no one is willing to pursue that one, the fact remains that he admittedly broke the law. He should be held accountable for what he’s done, and impeached, at a minimum.

I’m giving good odds that that won’t happen. We live on Animal Farm, where the pigs declared after the equality revolution that while all animals are equal, some are more equal than others. Our judges are among the most equal.

Doug Casey likes to say that America was originally an idea, and a fine one, but that it devolved into the United States, which is just another country. (Although, we would like to think, not a two-bit country with an openly corrupt judiciary.)

One of the basic tenets of that original, fine idea was that no one should be above the law. Especially someone entrusted with the care of the law. Justice Thomas violated that trust. He did it brazenly, and repeatedly, and he dismissed all his misdeeds in the most cavalier manner imaginable.

So where’s the outrage?

Missing the 800-Pound Gorilla in the Room

By Vedran Vuk

Bloomberg today had perhaps the worst analysis of interest rates that I’ve seen in some time. Essentially, here’s the view: interest rates were rising, but now they’re holding steady. Hence, all is well. Furthermore, economic recovery may be weaker than expected; so inflation should be tame.

First of all, there’s an 800-pound gorilla in the room known as QEII. As I mentioned in an article last week, without the current Fed intervention, rates could possibly be much higher. In the current environment, it’s very difficult to make conclusive statements on rates. Only after QEII ends will there be a clearer picture.

Second, as far as inflation goes, we’ve got bigger things to worry about than economic growth picking up faster than expected. Inflation is necessarily a monetary problem. It is not an economic-growth problem. In post-WWI hyperinflation Germany, people weren’t lugging wheelbarrows of cash because the economy was growing too fast. Instead, it was due to overheated printing presses. The Fed’s actions over the last few years should be the first consideration for anyone thinking about inflation - not economic growth.

Real Estate Slump Continues

By Vedran Vuk

The latest Case-Shiller index shows that real estate prices are down 2.4% in 20 major U.S. cities since last December. The best-performing city was... you guessed it... Washington D.C. with a 4.1% increase over the year. Of the 20 major cities, San Diego was the only other one to make a positive gain with a meager 1.7% increase. 

If housing prices continue to slump, this could be a counteracting force to stock market gains. When 401Ks increase, consumers feel wealthier, and consumer confidence becomes stronger. But housing prices have a similar effect on consumer confidence. As a result, a continued housing slump could partially counteract the stock market’s positive impacts on consumer confidence.

Well, that’s it for today. Thanks for reading and subscribing to Casey’s Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

Since it is Presidents' Day, I wanted to discuss a controversial topic, free-market anarchism. Generally, the theory holds that society can regulate itself through the incentives of the market place. If society creates demand, its needs will be supplied by the invisible hand. Personally, I'm not interested in debating a utopian anarchist society. Since this won't happen in our lifetimes, I don't want to waste your time or mine on the subject. However, this doesn't make the study of anarchism useless. In fact, it lends a unique view on financial markets misunderstood by many.

For example, regulators have been recently obsessed with the over-the-counter (OTC) markets. Their argument often goes something like this: "There are tens of trillions of derivatives traded on the OTC markets, and no one knows who is trading with whom. Furthermore, the transactions often take place by phone and are never formally recorded." After this statement, the speaker usually expects the listener to be shocked. Perhaps they'll mumble something about transparency. But credible reasons to fear the market elude most arguments.

First of all, OTC markets did not cause the financial crisis. As I've mentioned previously in the Daily Dispatch, business cycles have been reoccurring for the past two centuries. OTC markets, Glass-Steagall and derivatives are simply the favorite boogie-men of Washington regulators. But these factors aren't the root causes of the crash. 

If regulators believe that business cycles can be stopped through a few new rules and reinstalling the Glass-Steagall Act, then they're even dumber than their reputation already suggests. Hardly any attention is being paid to the real causes of the crisis, such as too much cheap credit in the system. While regulators are figuring out pointless new rules, the Federal Reserve is sowing the seeds of the next crisis with near-zero interest rates and QEII. 

So, where's the danger in OTC markets? In my opinion, they're not dangerous but instead beautiful. Millions of individuals around the globe who don't know each other exchange trillions of dollars in contracts. The deals are international with no borders and no oversight. And with reputational incentives aligned, it all works. Contracts require nothing more than making a deal on the phone. Despite a lack of regulation, trillions are entrusted to this system.

To a D.C. regulator, this seems like anarchy - and they're right. However, they don't understand that society can function without a government bean-counter recording every transaction and overseeing every participant. The regulators can't understand a world that doesn't involve their heavy hand in everything. But the billions swapped globally every day disprove their point.

In my opinion, anarchy shouldn't be the study of some fanciful society. It's a way to better understand the market place. Anarchism is much more a theory of how our world already works than an ideal theory of how it should work.

First, Chris Wood will see whether the Borders Group bankruptcy could have been predicted by a technique known as Altman's z-score. Chris's analysis is truly remarkable on this one. It's practically a textbook example of the technique. Then, I'll make some short comments on the shipping industry and the public labor unions.

The Great Short That Could Have Been

By Chris Wood

On Wednesday (February 16), Borders Group Inc. (BGP) finally succumbed to the beating it's been taking from the likes of Amazon.com and announced its decision to throw in the towel and reorganize under Chapter 11.

Reports about the imminence of a Borders bankruptcy surfaced on February 1, and the stock plunged 35% that day from an opening price of $0.73 to a closing price of $0.47. Since then the stock has fallen 51% from its close on the first of the month, all the way down to $0.23 per share when the bankruptcy announcement was made.

If you somehow managed to short BGP stock on February 1 at $0.73, you'd be sitting on a 68% gain on the trade at the moment. But let's get real; the odds you could have pulled this off would have been infinitesimally small. You would have had to be one of the first people to get the reports of the impending bankruptcy (not likely, since the story was leaked to the press by insiders), and you would have had to act faster than Wall Street in making the trade (also probably not likely, unless you, too, are a full-time stock jockey).

But you don't have to be a day trader to capitalize on a weak company like Borders for a short opportunity. What if you could have predicted Borders' bankruptcy back in, say, early June 2009, when the stock was trading north of $4 per share? Had you shorted the stock back then, you'd be sitting on a gain of more than 94%. Timing is not of the immediate essence for a great short. You just have to be right eventually and be willing to wait it out.

Finding a great short, like finding a great company for a long position, starts with the fundamentals instead. We've made some big short calls in The Casey Report these past few years, including MBIA during the banking crisis. The Casey Report isn't a short-focused publication, though; it focuses on large market trends, so a stock like Borders makes a great example from the pile of things off our collective radar. Had we been looking at bookstore chains, one of the first places we would have turned to is an analysis tool called a Z"-score.

Here's how it works:

Originally developed in 1968 by Edward Altman, a financial economist and professor at NYU's Stern School of Business, the Z-score is the best-known multiple discriminant analysis (MDA) bankruptcy prediction model. This multivariate formula is used to predict the likelihood that a firm will go bankrupt within the next two years.

In its initial test in 1968, the Altman Z-score was found to be 72% accurate in predicting bankruptcy two years prior to the event. Later tests covering three different time periods over the next 31 years found the model to be approximately 80% to 90% accurate in predicting bankruptcy one year prior to the event.

The original Z-score combined five common financial ratios using a weighting system calculated by Altman to determine the likelihood of bankruptcy in publicly held manufacturing firms. Altman later derived a Z"-score formula consisting of four of the original financial ratios (it excluded total asset turnover to account for the variability from industry to industry) with a different weighting system to predict bankruptcy in non-manufacturing firms with the same accuracy as the original formula. This newer Z"-score would have been the appropriate model to use back in June 2009 to help you decide whether to short Borders' stock.

All you would have had to do is solve for Z" in the following equation using inputs from Borders' financial statements:

Z" = 6.56X1 + 3.26X2 +6.72X3 + 1.05X4

Where:

X1 = (Working Capital/Total Assets)

X2 = (Retained Earnings/Total Assets)

X3 = (Earnings Before Interest and Taxes/Total Assets)

X4 = (Market Value of Equity/Total Liabilities)

If Z" is greater than 2.60, the firm is considered financially healthy and in no risk of bankruptcy. If Z" is between 1.10 and 2.60, the company is in the grey zone, and you can't say one way or the other if the firm is at risk for bankruptcy. If Z" is below 1.10, the firm is considered unhealthy and will likely go bankrupt within the next two years.

So imagine it's June 8, 2009. You've been wondering for some time about the viability of traditional bookstores in today's marketplace. You see the success of Amazon.com and other online retailers, and this thing called the Kindle, with its downloadable e-books, is all the rage. You think to yourself, "There's no way a big brick-and-mortar bookstore company like Borders can compete in this new environment. Is there a good shorting opportunity here?"

Had you known about the Z"-score at the time, you could have answered your own question with a resounding, "Yes!" Using data obtained from Borders' 10-K filed on April 1, 2009 for the fiscal year ended January 31, 2009, below is a table showing the calculation of the company's Z"-score at the time.

As you can see in the table above, you would have calculated Borders' Z"-score to be 0.02 at the time you were pondering the short sale. Remember, below 1.10 is considered at substantial risk for bankruptcy in the next two years, so the numbers said Borders was screaming to be shorted. Had you done just that, you would have been able to short BGP stock at above $4, and you'd be sitting on almost a 95% gain less than two years later. All from using this one simple formula.

At Casey Research, Z"-scores are just one of the tools we use when evaluating potential shorting opportunities. But it's important to note Z-scores should not be looked at in a vacuum.

Altman's original Z-score for manufacturing firms and his newer Z"-score for non-manufacturing firms are good indicators of financial stress, but you shouldn't rely solely upon them when deciding whether to short a particular stock. Instead, use it as a starting point to flesh out your list of potential short candidates and see which ones deserve more digging.

For instance, in the case of Borders back in June 2009, after you calculated the Z"-score and saw that the firm was apparently in trouble, you could have gone back to the financial statements to confirm the results. At first blush, you would have found four straight years of stagnant or declining revenue and increasing net losses for the past three years amounting to $8.22 per share. A little more digging, and you could have found short-term liquidity problems and a real liquidation value for the company that was probably already negative. All of these further supporting the results of the Z"-score.

A Z"-score is by no means a silver bullet, but it is a good start to evaluating a short opportunity.

Good investing shorting.

An Important Sign from the Shipping Industry

By Vedran Vuk

Shipping giant A.P. Moller-Maersk agreed to purchase an order of 30 enormous ships for $5.4 billion. These new gigantic vessels will hold 30% greater capacity than the largest ships currently afloat. Maersk estimates that the new ships will reduce costs by 26% compared to current ships in the fleet. The savings will come from fuel prices and port and canal fees.

This move seems to point to a stronger global economy. But there are other, perhaps more important, factors at play here. First, the shipping industry has been heavily beaten down during the crisis. All around the world, one can find shipping companies with extremely low P/E ratios and price/book ratios. Hence, Maersk's order is a bad sign for these struggling companies. Maersk could have purchased any number of smaller companies to expand its fleet, but it didn't. 

The fact that the company decided to follow a completely different route shows the shifting tides in the shipping industry - no pun intended. This new direction focuses on cost reduction and wariness of future oil prices. In a way, the purchase is a bullish sign for the industry, but it can be seen as a bearish sign too. If the biggest company expects tighter margins and higher oil prices in the future, the situation for smaller competitors could go from bad to worse.

A Short Comment on Public Unions

By Vedran Vuk

With the protests in Wisconsin, I'm again reminded of the inherent logical problems with public-employee unions. Labor unions were originally created to protect the worker from the evil capitalist employer. But in the case of public unions, there is no evil capitalist employer. In fact, the employer is the government. And government employees are usually the first to defend the government as a public servant of the common good. Well, if the government is such a caring and nice entity, why is a union necessary?

This all seems very problematic, but let's take this further. If the public employees need unions to protect themselves from the "cruel" government employer, then what protection does the rest of society need? If the government won't treat its own employees well, how can we rely on the EPA, OSHA and the SEC to do anything for the public good? So in a way, this becomes a circular argument that indicts the public employees themselves.

Well, that's it for today. Gold is over $1,400 again, and silver has crossed the $33 mark. Jeff Clark's recent advice to buy silver at $30 would have paid off quickly for any subscribers that followed the advice last week. The case for buying $30 silver is even easier to make when it's at $33. It's also easy to make the case for subscribing to BIG GOLD - it's only $79 a year - where you will learn about everything there is to know on the gold and silver bull market... including where to get the least expensive bullion, which large-cap mining stocks are buyers and keepers, and the best precious metals funds to have in your portfolio. If you (or people you know) are still not convinced that you need to own gold, check out this BIG GOLD video report on how China and others are hoarding gold and getting ready to dump the dollar.

Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

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.

Elementary, My Dear Watson

By Doug Hornig

I think, therefore I am.

That bedrock concept has been at the center of Western thought since Rene Descartes first set it down in 1637. It attempts, in one all-encompassing line, to establish the existence of individual consciousness, and by extension the physical being of the thinker.

What is less often considered is that the human element was implicit. In the 17th century, no one would have or could have conceived that anything other than a person might engage in such philosophical musings. Animals didn't "think." And machines? Forget about it.

Today, Descartes would be in a bit of a quandary. Animals exhibit tool-using and problem-solving behavior that strongly suggests logical thinking, one of the hallmarks formerly believed to distinguish our species from the rest of nature. And if machines don't think, they do something awfully similar.

Of course, it depends on how you define the term.

The famous Turing Test - as proposed in 1950 by legendary British mathematician, cryptanalyst, and computer pioneer Alan Turing - is still cited when we attempt to delineate just when a machine achieves intelligence.

Let a person have a text chat, Turing said, with both a machine and another person, both of whom are hidden and trying to act human. Then see if the interrogator can tell which respondent is the machine. If the interrogator cannot reliably make the distinction, then the machine may be said to possess intelligence as best we can define it.

So far, machines have always flunked the Turing Test. At first, they couldn't fool anyone. However, Turing was writing at the very dawn of the computer age, when a huge room full of vacuum tubes couldn't do what a cell phone can do today.

To check the current state of the art, there's the annual Loebner Competition, in which the best machines from around the world attempt to convince a panel of interrogators of their humanity. They still can't do it consistently, but they're getting better. Here's an example from a recent competition, wherein an interrogator submitted questions to three respondents, a male, a female, and a machine. All three entities knew that it was fall in England, and the interrogator asked of all three what they thought of the weather that morning. The responses:

1. "I do tend to like a nice foggy morning, as it adds a certain mystery."
   
   
2. "Not the best, expecting pirates to come out of the fog."
   
   
3. "The weather is not nice at the moment, unless you like fog."

See if you can figure out who's who. Not exactly a slam-dunk cinch, is it?

(Did you correctly identify: a. machine; b. male human; c. female human?)

Reliably fooling humans is proving beyond a machine's present capabilities. But how about competing against people? Could a computer, say, play Jeopardy!?

This would seem highly improbable. Not only does success at Jeopardy! depend on an extremely broad knowledge base, but contestants have to deal with puns, allusions, irony, riddles, and other non-logical word plays, as well as make sense of categories that can be a bit abstruse.

Think that's beyond the reach of a machine? Then you need to meet Watson, who was not only Sherlock Holmes's devoted sidekick but is a functioning computer personality from IBM. Watson, actually named for the company's founder, Thomas Watson, plays Jeopardy!. And plays the hell out of it.

Heading up the Watson project is David Ferrucci, IBM's senior manager for its Semantic Analysis and Integration department. Ferrucci's team scanned into the machine's memory vast numbers of databases, along with millions of documents. Reference books, news articles, scholarly papers, tabloid blurbs, whatever. The hard part was recreating what the human goes through in order to get from answer to question. Google is the model for that kind of search, but does it merely by hunting down words or strings of words, and returning every single hit. That won't work with Jeopardy!, where you have to distill the intended meaning of an answer (with all of its nuances) into the one correct question.

Once the data were in place, Ferrucci gave Watson more than a hundred algorithms to use at the same time, to analyze a question in many different ways, generating hundreds of possible solutions. Another set of algorithms ranks these answers according to plausibility. And then the computer selects the one at the top of the list and hits the buzzer.

Oh, and no Internet connection allowed. That'd be cheating.

Since last summer, Watson has been practicing, taking on humans on a mock-up of the Jeopardy! set and doing well. So well that the producers of the show decided it was time to let "him" go up against some proven competition, right in the evening spotlight.

They chose Monday, February 14. Valentine's Day. And the following two nights, as well. For competitors they picked the two greatest all-time Jeopardy! champs, Ken Jennings and Brad Rutter. Let the games begin.

(As an added attraction, the practice rounds featured a graphic that shows the three answers Watson has rated as most likely to be correct, and how certain he is of the answer he selects. That'd be a plus in the final showdown, since it would provide something of a window into Watson's "brain." But we don't yet know whether it made it to the show.)

Granted, a perfect simulation of Jeopardy! with a machine playing is impossible. Computers don't care about winning or losing money; people do. Computers are emotionless; human contestants can freeze up or be driven to greater accomplishment under pressure. And so on.

Still, there's no question that the coming week's event is a milestone, comparable to the 1997 chess match that saw IBM's Big Blue computer defeat Garry Kasparov, the reigning world champion.

Ferrucci and IBM are thinking way beyond Alex Trebek. The potential applications of something like Watson are myriad. Considering the primitive state of present question-answering machines, like the one you get when you call your airline, this is a huge leap forward. It's not too early to envision the day when a doctor, a lawyer, an engineer - any specialist - will be able to have a conversation in English with a Watson-like machine that has speed-of-light access to all the present and historical knowledge in the field.

But for now, the tapes are made and the results guarded like the Oscars. There've been no leaks. To see what happened with Ken, Brad and the machine, you'll just have to tune in. And to get you in the mood, you can have a quick go at Watson yourself, here.

Whatever the outcome of the match, robotics is exploding in real time. Yet the science is still elementary, dear Watson. Robots are about where the personal computer was thirty years ago, and they are destined to change our lives, probably as much as the PC has, in the next thirty. Casey's Extraordinary Technology watches robotics carefully and has tucked two of the leading companies in the field into our portfolio. Both have performed admirably since we added them, and there will surely be many more to come.

Canadian Natural Gas Sees a Trade Partner in China

By the Casey Research Energy Team

A $5.4 billion investment by a Chinese company in one of Encana's massive shale gas properties in northern British Columbia and Alberta is another sign that Canada wants Asia to become a major importer of its natural gas.

Encana is a leader in one of the things the Casey Energy team loves: unconventional natural gas production. Natural gas is a cleaner energy source than oil or coal because it releases less carbon dioxide and fewer pollutants when burned, so it is becoming an important component in global clean-energy plans. And unconventional technologies have already played a major role in the gas scene of late, a trend that we expect to continue with both gas and oil.

The $5.4 billion will buy half of Encana's Cutbank Ridge shale gas properties, which cover 635,000 acres. The properties currently produce 255 million cubic feet of natural gas per day and contain proven reserves of more than 1 trillion cubic feet. The joint venture also covers about 700 million cubic feet per day of processing capacity, some 2,100 miles of pipelines, and a gas storage facility.

The deal is the largest foreign gas deal to date by a Chinese company. China is hunting around the world for gas reserves to support its plan to triple natural gas usage over the next decade. Chinese firms have pumped about $14 billion into Canadian oil and gas companies over the last two years. On its website, PetroChina says it has been trying for years to work with major Canadian energy companies and expects the Encana deal "to provide a platform for entering the major market in North America."

For Encana, the deal will let the company accelerate production while keeping a lid on costs. Encana has been struggling with low North American gas prices because, unlike oil, North American gas is not a globally priced commodity. Instead it trades largely only within the continent because transportation limitations keep it here. Natural gas can only be moved via pipelines because of its huge volume; when condensed into liquefied natural gas (LNG), it can be sent via ship, but there are no LNG facilities in North America.

Canada sends the majority of its oil and gas exports to the United States, which means Canadian energy producers depend on U.S. demand for the bulk of their revenues. Relying on one customer is never a good business model, especially when that customer has concerns about one of Canada's most important energy sources (the oil sands) and about a proposed pipeline expansion.

To diversify its customer base, Canada has been eyeing increasing trade with Asia. Two proposed oil pipelines and one proposed liquefied natural gas facility would all enable Canada to export energy from the west coast straight to Asia. None are permitted yet, and all face significant opposition from environmental groups.

This PetroChina deal, though, adds some fuel to the developers' fires. It is only sensible to assume that PetroChina's decision to make such a major investment in Canadian gas, at a time when North American gas prices are low because of a supply glut, was based on a strategic premise: to secure gas supplies for China in the future. In particular the proposal to build a LNG facility in Kitimat likely encouraged the Chinese to move ahead with the deal, which has apparently been in the works for nine months.

Encana's investors were very happy with the deal, lifting the company's share price 4.5% in a day to reach $32.02. The lift came despite the company reporting a US$42 million net loss for the fourth quarter.

In the bigger picture, the news is nothing but positive for Canadian natural gas. The advent of fracking has led to major oversupplies of natural gas in the United States. Investment like this can only encourage Canada to develop the infrastructure needed to export gas to Asia, where demand and prices are higher.

The Encana news lifted other companies producing natural gas in B.C. and Alberta, including Encana's sister company Cenovus. Cenovus was born when Encana spun its conventional oil and gas assets out into a new company. The Casey Energy team recommended buying Cenovus in mid-2010, when the company was trading at $27.40. Including the 98¢ it gained on the Encana news, Cenovus' share price now stands at $34.80, which means a 27% gain for our subscribers. Learn more about the gains you can get from top-quality energy stocks here.

The Coming Food Envy

By Kevin Brekke

In 1996, a book titled The Clash of Civilizations and the Remaking of World Order by Samuel P. Huntington was published. In it, the author argues that the age of ideology had concluded, and that the primary axis of future conflicts in a post-Cold War world will be along cultural and religious lines. The uprisings, skirmishes and wars to come would not be fought over resources such as rice or oil but over differences of ethnicity and faith.

Huntington's theory, as you would expect, mustered ample critics. Among them was Edward Said who, in his 2001 response The Clash of Ignorance, indicts Huntington for his use of oversimplification and static depictions of whole cultures. Reality, counters Said, is far more complex and dynamic.

A darkly comical sidebar to the debate was the response from the United Nations, its so-called theory of Dialogue Among Civilizations. The "theory" was the basis for a UN resolution naming the year 2001 as the Year of Dialogue Among Civilizations. When all you have is talk, every problem looks like faulty communication. Presumably, the solution to all strife in the world would come about from endless talking by its delegates while bravely enduring long hours in premium-class airline cabins, soldiering through endless caviar-topped buffet luncheons, and suffering unknown numbers of nights at five-star hotels.

The machinations of clueless NGO personnel notwithstanding, it is said that time heals all wounds. It also exposes false assumptions, like Huntington's speculation, as we were again reminded by yesterday's news.

"World Bank: Food Prices at Dangerous Levels," read the Associated Press headline.

I doubt that anyone reading this gives much thought to the possibility of hunger or malnutrition paying them a visit. To Western cultures, the idea is as foreign as a homegrown political revolution or life without air conditioning. Even for a well-seasoned traveler in possession of a dog-eared passport, the plight of the world's hungry is largely out of sight. As a tourist, you are not likely to encounter the dark underbelly of extreme poverty while taking in the popular attractions.

But leaving home is not mandatory to witness food insecurity among the most unfortunate. As of last month, the number of Americans receiving food stamps reached 43.2 million, 14% of the population, or nearly 1 in 7 people.

The phenomenal rise in the number of people seeking food assistance has so far been the direct result of protracted economic hardship that has befallen many individuals and families. The culprit has been mainly unemployment.

But if the worldwide rise in commodity prices continues, opening the door to food price inflation, the financial and economic crises plaguing the U.S. will soon devolve into a social crisis. It is one thing to be struggling to pay your bills; it is a whole different thing to be struggling while you and your family are hungry or feel deserving of a better diet.

Your neighbor may not like forgoing his cell phone for a landline, or battling with an antenna after canceling cable, all in the name of belt-tightening and a shrinking family budget. But when the smell of your steaks on the backyard grill wafts across his nostrils while he pretends to enjoy another plate of spaghetti and meatless sauce, a new kind of resentment will seep into the collective conscience of a growing slice of anxious Americans...

Food envy. At some point, and it is not far off, the complexity and urgency of food security will become a reality, and a battle in the land of plenty will ensue.

In many ways the battle has already begun. Shoplifting of food, or "shrinkage" as it is known in the retail industry, is on the rise. This is a fact that the food industry avoids talking about and works hard to keep out of the press. Not surprising when you consider that few food items carry a security tag, making them an easy mark.

Profit margins at grocery chains have compressed as retailers attempt to absorb price increases as rising commodity prices pass through to the wholesale level. Inventory shrinkage at grocery stores further pressures margins, and retailers will be forced to pass along their rising costs to the consumer. There is little to no room left for retailers to eat price increases.

Recalling Huntington's outlook for clashes among civilizations, it looks like his theory is hit and miss on several issues. Conflict between differing groups has occurred since the human population exceeded one - it seems part of the human condition, and no change looks to be imminent. And disagreements over resources and ideology will continue; the idea that one would supplant the other seems naïve. So, maybe a more appropriate title for his book would have been to suggest intra- rather than inter-civilization clashes.

The coming rise in food prices will be no less dramatic than for all commodities as the downfall of paper money accelerates. A man can survive without many things, but food is not one of them. And long before his supper table is empty, his envy of those with a diet more aligned with his desires will predictably spur a great cry for "food justice." Any attempt by government to control, subsidize, or ration the food supply will end in disaster, and if history is a guide, shortages and higher prices. When preparing for future surprises, don't forget to include higher food bills.

Commodity Prices Begin to Filter Through

By Vedran Vuk

As most readers have probably heard by now, January inflation increased by more than expected at 0.4% from the previous month. Rather than focus on the big number, I investigated a few of the smaller categories in the BLS data, particularly in foods affected by commodity prices. One item immediately jumped out - the fats and oils category. Since last month, seasonally adjusted prices in this category increased by 2.1% - that's enormous. Since soybeans are a crucial ingredient to vegetable oil, this spike is fairly easy to explain.

Let's take a look at a few more categories in the data. Remember, the charts below are consumer prices. Coffee is a good start. Since last year, the price has increased by 15.9% from $3.81 per lb of ground coffee to $4.42 per lb. (For some reason, the coffee data had a large gap in 2009; as a result the chart begins in 2010.)

Next, let's take a look at sugar prices per lb. Since 2007, sugar has risen 25.6% from $0.52 per lb to $0.65 per lb.

The last chart shows soft margarine prices. Again, since vegetable oil is a part of margarine, the price will necessarily be affected by spikes in the soybean market. Since 2007, the price has increased by 50% from $1.15 per lb to $1.72 per lb.

Hedgers are a big reason why consumer prices lag the commodity market. Major companies have already locked in their purchases and prices months ahead in the futures market, so they can delay price increases.

The second factor is the elasticity of the products. That's a fancy economics term for the change in demand in response to a change in price. When a product is inelastic, demand changes little with a change in price. A good example is coffee. Most coffee drinkers do not alter their consumption based on price fluctuations. Of course, companies have calculated the elasticity of their products. Since inelastic products are less responsive to price, hedging departments pay less attention to covering these costs. For example, coffee prices can be easily passed down to consumers (as a rule of thumb, the more elastic a product, the bigger the hedges). Hence, elasticity can be a good predictor of how quickly consumers will feel the impact of spikes in the commodity markets.

Dirty Jobs

By David Galland

Friend and occasional contributor to our publications, Neil Howe, has done seminal work on cycles of societal change related to the ebb and flow of generations. If you haven't read his and William Strauss' book The Fourth Turning, do yourself a favor and get a copy. (I just checked, and it's available on Kindle).

Or, for the CliffsNotes version, you can download and read an interview I did with Neil last year.

The long and short of things is that Neil believes we are headed in to what he calls a "fourth turning," a period that is invariably marked by great turmoil and crisis (World Wars I and II, as well as the Great Depression are prototypical fourth turning periods).

One of my favorite examples of the sort of societal shifts Neil talks about is the difference between the 1950s and the 1960s, which you can see in the photos here.

Literally no one saw it coming.

The jury is still out on what exactly will tip the U.S. and global economy over the edge and into another fourth turning - though I suspect the disastrous financial condition of the sovereigns and the implications that has right across the societal spectrum will play a major role.

Another candidate has to do with the outlook for employment in the Western nations - and increasingly, across much of the developing world.

As with any complex system, this topic is multi-faceted.

For instance, think for a minute about the expectations of today's youth as they look ahead to their futures. Whereas the young used to, almost as a matter of course, follow their parents into a trade - be it farming, or working in the automobile plant - today not many would picture themselves spending a lifetime laboring in what might be termed a "dirty job."

You know, jobs such as working in an industrial plant, or pulling night shifts cleaning bed pans at hospitals... Illegal immigrants are no longer welcome, and enforcement actions against those who hire them are far more stringent than ever - so we can't count on them filling the gap.

But the gap is there, and as the baby boomers move past their productive years, it will only get bigger.

And it's not just the dirty jobs: the young of today will find the idea of working to support the boomers and their predecessors who are on the dole in their dotage reprehensible.

As on many fronts, Japan provides a stark portrait of what's coming. In 1950 there were ten Japanese workers for every Japanese pensioner. Today, the ratio has dropped from 10:1 to just 3:1.

Guess what? As you can see in the chart here, even though the retirement of the baby boomers in the U.S. is only just now getting under way, the worker-to-retiree ratio in the U.S. is right in line with Japan's.

If you are in your fifties and think you are going to collect on Social Security, you might want to think again.

Staying on the topic of dirty jobs, a meme these days is that the Chinese have hollowed out the manufacturing sector of the United States and other countries of the West.

Yet, as the next chart so clearly shows, while the number of people going in to manufacturing in the U.S. is indeed falling, manufacturing output has remained strong.

In fact, arm waving to the contrary, U.S. manufacturing as a percentage of GDP rang in at 39.4% over the past decade, versus 37.2% in the 1990s, and 34.9% in the 1980s. So, sure, a lot of jobs shipped out overseas, but that's in no small part because U.S. businesses have gotten so much more efficient at making things with higher margins than, say, flammable sleepwear for children.

If you think about that for a moment, you may find some hope for the future - because while China has made achieved big competitive gains by manipulating its currency, that has to end badly. It always does. And when it does, the streamlined U.S. manufacturing sector will be ready to compete. Alas, it may not employ any more workers (something I'll address momentarily), but anything that helps to reduce the trade deficit is to be welcomed.

To put the situation in manufacturing in proper context, look at the long-term chart for agricultural production versus employment in the U.S. Again, one can see just how efficient the U.S. has gotten at producing stuff... without employees. There's no reason to wonder about the future of U.S. manufacturing: the chart for agriculture says it all.

What's behind these massive structural shifts in employment? Obviously, one factor has to be the exponential advances in technology.

Another could be attributed to the increased availability and ease of accessing media. The media have long been used to convince people to dress and act a certain way, but it has only been in the last 50 years or so that their presence in our lives reached endemic levels. And none of those media today makes a virtue out of long hours toiling under the hot sun, or fixing widgets to gadgets on production lines.

Another reason for the shift away from hands-on work has been the steady encroachment of government into the workplace. All with the best of intentions, naturally - but each new rule, regulation, tax, reporting requirement, workplace safety inspection, and wage mandate makes the hiring of employees something to be avoided at all costs.

I'm reminded of my visit to a huge zinc mine in Sweden, a country that is even further ahead in its workplace mothering. In Sweden, hiring a new employee is almost on a par with proposing marriage - a lifetime commitment, 'til death do you part.

In my young and foolish days I spent six months working in a mine in the United States - and it was a big, messy, crowded place, with large elevators full of dozens of dirty miners being lowered into the depths of the earth to do a very dirty and dangerous job.

Not so the mine in Sweden. Even though it was a regular work day, there were almost no employees in evidence, even in the huge milling facility - a place the size of a decent-sized sports stadium, complete with gigantic machines noisily crushing and grinding rocks. In all the time we spent in the mill, we saw only one employee - a young 30-something who briefly appeared to check a computer screen before disappearing to where she'd come from. This, too, is the future for American manufacturing.

In contrast to the West, where avoiding employees is Job #1, China's problem is exactly the reverse - they desperately need jobs for the masses. At this point in time, that means the manufacturing jobs that we in the West no longer want or can perform profitably.

Unfortunately, thanks to a brisk and accelerating inflation in China, Chinese labor costs are on the rise - up over 20% in Beijing his year alone. That makes it increasingly difficult to remain competitive. Quoting a recent report out of Nomura Securities:

"For some labor-intensive manufacturers, China's wage level is no longer attractive. The manufacturing factories will likely be moved to China's inland provinces or to countries such as Vietnam, Thailand, and Indonesia where labor costs are much lower."

This is, of course, quite threatening to the myth of China's economic invincibility, if for no other reason that Chinese manufacturing margins are already noodle-thin at somewhere between 1% and 10%. Case in point: Foxconn, Apple's "go-to" manufacturing company in China, works on a margin of just 2.5%. Not a lot of wiggle room.

Logically, in order to avoid a wholesale shutdown of its industry, or to require massive government subsidies on a long-term basis, China will have to adopt the same modern, labor-saving manufacturing tools that we in the U.S. are using so effectively. But, trapped between a rock and a hard place, implementing those efficiencies will cost jobs - causing the sort of civil unrest now catching fire in the Middle East.

All fine and well, and good riddance to the political heirs of the murderous Mao, I say. But, here's the point - none of this tossing the bums out actually creates new jobs.

Not in China and not in the U.S. And while the sprouting flowers of freedom in the Middle East and elsewhere will bring forth more work than is now available, the global trend is solidly on the side of steady adoption of the latest and greatest manufacturing tools.

Conservative projections for the robot industry through 2035 are shown in the following snippet from the November 2010 edition of Casey's Extraordinary Technology:

The global leader in robotics remains Japan, with America and Germany coming up close behind it. That country's Ministry of Economy, Trade and Industry estimates that the global robotics market will expand about 10x over the next 25 years, and nearly 60% in just the next five...

Aarkstore Enterprise, a market research firm, estimates that by 2020 the total robotics market, by its definition, will expand to match the automotive industry in gross revenues.

(If you're interested in diversifying into money-making trends in technology, Casey's Extraordinary Technology has you covered. We've just put the finishing touches on an Investor Update titled, "3 Biotech Stocks to Own in 2011." The first stock is profiled within the update, including the stock name and buy price, free and at no obligation. Simply click here to get the Investor Update now.)

Which brings us to an interesting paradox: The world needs jobs, but the steady progress in technology is slashing the need for human workers to fill what jobs remain... and is slashing that need at an almost exponential pace.

The International Federation of Robotics reported a 27% increase in robotic sales in 2010, despite - and probably in no small part because of - ongoing pressure on the global economy.

And who do you think is going to be doing the work of assembling the robots? Humans? Hardly. Like the promised future of nanotechnology, but on a macro scale, it will be machines making machines that make machines.

Soon people won't be shaking their fists at the Chinese for stealing our jobs, but at the machines. And the machines won't take notice.

And then what? Does the government in all of its wisdom begin limiting the use of machines in the workplace? Or will the shift be back towards command economies, where companies are forced to hire and produce based on the dictates of some ruling council?

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

Vedran Vuk
Casey's Daily Dispatch Editor

My stepfather, with his pilot's predilection for precision, used to admonish us - usually after we had taken something out of his tool chest and failed to return it to its assigned spot - "Take care of your tools, and your tools will take care of you."

That admonition came to mind earlier this week when struggling through a long set of push-ups. After all, do we possess any tools more important than our bodies and our minds? And yet a quick glance around reveals a hard truth: most humans treat both with something bordering on disdain and, in the case of the former, a suicidal level of neglect.

Letting these two tools fall into a state of disrepair has consequences - typically a steady degradation of personal energy. That in turn can lead to a general unhappiness because, in my mind, the connection between energy and happiness is irrefutable. Viewing that proposition in the negative, consider that the most dominant aspect of the depressed mind is a lack of energy.

There are many ways a person can become energized, but in my view the best way to do so is to engage in activities you love - or at least like a lot. Especially if you can approach these activities with some sort of goal in mind, a goal that is just outside of your abilities - and then accomplish it. If you love music, learning to play the piano can be energizing, and can continue to be so as you work your way up through increasingly difficult compositions.

There are literally an infinite number of things you can do to tap in to your native energy, provided, of course, your core tools of mind and body are in good working order. Staying up night after night drinking hooch, or chain smoking, or overeating, and doing no exercise will, in time, greatly limit your options.

People also get energy from crowds - for example, by attending music concerts. In that regard, check out this high-energy video of the Goo Goo Dolls performing their hit song Iris live in front of their hometown crowd in Buffalo - in a driving rain storm. The photo of the concert here gives you some sense of the energy, but you should watch the video; it's a classic in the genre of dramatic music that I personally find so energizing.(If you'd like to support the arts, you can also buy the song on iTunes.)

The energy from crowds is also clearly in evidence in the uprisings now sweeping the Middle East. Having, in my youth, been involved up to my eyebrows in the anti-Vietnam Oakland Induction Center Riots, I can attest to the fact that the power that builds within a mob can be almost nuclear. So powerful, in fact, it causes the individual rioter to forget, or stop caring, that the people facing them down are pointing real guns with real bullets.

I'll continue on this theme for much of the rest of this missive but, as is my nature, circuitously.

Speeding Toward Singularity

Singularity is the theory - most publicly championed by Ray Kurzweil - that at some point in the not-so-distant future humans will create a superintelligence, after which things will get wildly unpredictable for the human race as the new big brain in town sets about making a few changes.

The Terminator portrayss a dystopian version of one way things might break. One of my favorite book series of all time, Daemon and its sequel Freedom, is another.

I mention this because, looking around, I am beginning to wonder if we aren't speeding toward singularity after all.

And I'm not saying that because IBM's Watson machine beat out the human competition in a game of Jeopardy - frankly, it would have surprised me greatly if it hadn't. The human ape eagerly gave over the storing and regurgitating of facts to machines years ago.

My pondering singularity is actually triggered by spending much of this week thinking about the avalanche of challenges now rumbling down the mountain - just as we have been forecasting they would.

I'm not going to restate the litany of these challenges, other than point to the big picture that:

• The Middle East, and the energy resources trapped there, is up for grabs at the same time that...
  
  
• The developed nations of the West are straining under the crushing pressure of past policy. The U.S., for example, had an amazing tool to keep its economy in fine fettle - reserve currency status - but abused the tool so badly that it is now hopelessly broken.
  
  
• Meanwhile, China is starting to look positively wobbly thanks to its own even more extreme experiment with quantitative easing. Combine a mounting inflation with the need to keep a huge and generally unsettled population in the yokes - I mean, on the job - and things begin to get "interesting" - much as they did for Mubarak.
  
  
• You can read much in to China's attempt to exorcise much of the news coming out of Egypt from its own media.

Meanwhile, as discussed in this service yesterday, the signs of global inflation are everywhere, even though Bernanke (among others) is trying to pretend the problem doesn't exist.

And this comes against a backdrop of a population raised on a steady diet of government lies and unrepayable debt. As the lies are revealed as empty promises, and as interest payments on the debt soar, things will break. In fact, they are already breaking down... and fast.

Record deficits, record debt, intractable unemployment, unrealistic expectations for future government transfer payments, high taxes, busted pensions, and the growing expansion and militarization of police functions are just some of the many crops sowed by a century of government deceit, mismanagement, and malfeasance.

The situation has now reached the point that pretty much everybody's ox will be gored - and badly. Popular discontent will be the result, with the labor demonstrations in Wisconsin the first but certainly not the last - nor the worst - of what's to come. And it's worse than that, because even draconian measures - measures that would go well beyond anything even the most ardent fan of tea parties would consider tenable - can't put Humpty Dumpty back together again.

Something new, something that almost no one is thinking about right now, is ultimately going to be required.

And that's what brought the singularity to mind.

You see, while we humans certainly have our flaws, we also have our strengths - one of the most prevalent being our instinct for survival. Time and again we have demonstrated the intellectual capability to deal with challenges - no matter how big.

Given the computational tools now at our disposal - tools that didn't fall out of the sky, but rather were painstakingly created by the scientific community - we have more than a fighting chance at progressing past this period of crisis and challenge. To state the obvious, the ultimate consequences of what humanity conceives to break through to the other side of the singularity are impossible to gauge at this early point - if that's the path we now are on.

Confused? Let me try to approach the topic from a slightly different angle, then try to bring it all together for what I hope is a smooth landing.

Dirty Jobs

Friend and occasional contributor to our publications, Neil Howe, has done seminal work on cycles of societal change related to the ebb and flow of generations. If you haven't read his and William Strauss' book The Fourth Turning, do yourself a favor and get a copy. (I just checked, and it's available on Kindle).

Or, for the CliffsNotes version, you can download and read an interview I did with Neil last year.

The long and short of things is that Neil believes we are headed in to what he calls a "fourth turning," a period that is invariably marked by great turmoil and crisis (World Wars I and II, as well as the Great Depression are prototypical fourth turning periods).

One of my favorite examples of the sort of societal shifts Neil talks about is the difference between the 1950s and the 1960s, which you can see in the photos here.

Literally no one saw it coming.

The jury is still out on what exactly will tip the U.S. and global economy over the edge and into another fourth turning - though I suspect the disastrous financial condition of the sovereigns and the implications that has right across the societal spectrum will play a major role.

Another candidate has to do with the outlook for employment in the Western nations - and increasingly, across much of the developing world.

As with any complex system, this topic is multi-faceted.

For instance, think for a minute about the expectations of today's youth as they look ahead to their futures. Whereas the young used to, almost as a matter of course, follow their parents into a trade - be it farming, or working in the automobile plant - today not many would picture themselves spending a lifetime laboring in what might be termed a "dirty job."

You know, jobs such as working in an industrial plant, or pulling night shifts cleaning bed pans at hospitals... Illegal immigrants are no longer welcome, and enforcement actions against those who hire them are far more stringent than ever - so we can't count on them filling the gap.

But the gap is there, and as the baby boomers move past their productive years, it will only get bigger.

And it's not just the dirty jobs: the young of today will find the idea of working to support the boomers and their predecessors who are on the dole in their dotage  reprehensible.

As on many fronts, Japan provides a stark portrait of what's coming. In 1950 there were ten Japanese workers for every Japanese pensioner. Today, the ratio has dropped from 10:1 to just 3:1.

Guess what? As you can see in the chart here, even though the retirement of the baby boomers in the U.S. is only just now getting under way, the worker-to-retiree ratio in the U.S. is right in line with Japan's.

If you are in your fifties and think you are going to collect on Social Security, you might want to think again.

Staying on the topic of dirty jobs, a meme these days is that the Chinese have hollowed out the manufacturing sector of the United States and other countries of the West.

Yet, as the next chart so clearly shows, while the number of people going in to manufacturing in the U.S. is indeed falling, manufacturing output has remained strong.

In fact, arm waving to the contrary, U.S. manufacturing as a percentage of GDP rang in at 39.4% over the past decade, versus 37.2% in the 1990s, and 34.9% in the 1980s. So, sure, a lot of jobs shipped out overseas, but that's in no small part because U.S. businesses have gotten so much more efficient at making things with higher margins than, say, flammable  sleepwear for children.

If you think about that for a moment, you may find some hope for the future - because while China has made achieved big competitive gains by manipulating its currency, that has to end badly. It always does. And when it does, the streamlined U.S. manufacturing sector will be ready to compete. Alas, it may not employ any more workers (something I'll address momentarily), but anything that helps to reduce the trade deficit is to be welcomed.

To put the situation in manufacturing in proper context, look at the long-term chart for agricultural production versus employment in the U.S. Again, one can see just how efficient the U.S. has gotten at producing stuff... without employees. There's no reason to wonder about the future of U.S. manufacturing: the chart for agriculture says it all.

What's behind these massive structural shifts in employment? Obviously, one factor has to be the exponential advances in technology.

Another could be attributed to the increased availability and ease of accessing media. The media have long been used to convince people to dress and act a certain way, but it has only been in the last 50 years or so that their presence in our lives reached endemic levels. And none of those media today make a virtue out of long hours toiling under the hot sun, or fixing widgets to gadgets on production lines.

Another reason for the shift away from hands-on work has been the steady encroachment of government into the workplace. All with the best of intentions, naturally - but each new rule, regulation, tax, reporting requirement, workplace safety inspection, and wage mandate makes the hiring of employees something to be avoided at all costs.

I'm reminded of my visit to a huge zinc mine in Sweden, a country that is even further ahead in its workplace mothering. In Sweden, hiring a new employee is almost on a par with proposing marriage - a lifetime commitment, 'til death do you part.

In my young and foolish days I spent six months working in a mine in the United States - and it was a big, messy, crowded place, with large elevators full of dozens of dirty miners being lowered into the depths of the earth to do a very dirty and dangerous job.

Not so the mine in Sweden. Even though it was a regular work day, there were almost no employees in evidence, even in the huge milling facility - a place the size of a decent-sized sports stadium, complete with gigantic machines noisily crushing and grinding rocks. In all the time we spent in the mill, we saw only one employee - a young 30-something who briefly appeared to check a computer screen before disappearing to where she'd come from. This, too, is the future for American manufacturing.

In contrast to the West, where avoiding employees is Job #1, China's problem is exactly the reverse - they desperately need jobs for the masses. At this point in time, that means the manufacturing jobs that we in the West no longer want or can perform profitably.

Unfortunately, thanks to a brisk and accelerating inflation in China, Chinese labor costs are on the rise - up over 20% in Beijing his year alone. That makes it increasingly difficult to remain competitive. Quoting a recent report out of Nomura Securities:

"For some labor-intensive manufacturers, China's wage level is no longer attractive. The manufacturing factories will likely be moved to China's inland provinces or to countries such as Vietnam, Thailand, and Indonesia where labor costs are much lower."

This is, of course, quite threatening to the myth of China's economic invincibility, if for no other reason that Chinese manufacturing margins are already noodle-thin at somewhere between 1% and 10%. Case in point: Foxconn, Apple's "go-to" manufacturing company in China, works on a margin of just 2.5%. Not a lot of wiggle room.

Logically, in order to avoid a wholesale shutdown of its industry, or to require massive government subsidies on a long-term basis, China will have to adopt the same modern, labor-saving manufacturing tools that we in the U.S. are using so effectively. But, trapped between a rock and a hard place, implementing those efficiencies will cost jobs - causing the sort of civil unrest now catching fire in the Middle East.

All fine and well, and good riddance to the political heirs of the murderous Mao, I say. But,  here's the point - none of this tossing the bums out actually creates new jobs.

Not in China and not in the U.S. And while the sprouting flowers of freedom in the Middle East and elsewhere will bring forth more work than is now available, the global trend is solidly on the side of steady adoption of the latest and greatest manufacturing tools.

Conservative projections for the robot industry through 2035 are shown in the following snippet from the November 2010 edition of Casey's Extraordinary Technology:

The global leader in robotics remains Japan, with America and Germany coming up close behind it. That country's Ministry of Economy, Trade and Industry estimates that the global robotics market will expand about 10x over the next 25 years, and nearly 60% in just the next five...

Aarkstore Enterprise, a market research firm, estimates that by 2020 the total robotics market, by its definition, will expand to match the automotive industry in gross revenues.

(If you're interested in diversifying into money-making trends in technology, Casey's Extraordinary Technology has you covered. We've just put the finishing touches on an Investor Update titled, "3 Biotech Stocks to Own in 2011." The first stock is profiled within the update, including the stock name and buy price, free and at no obligation. Simply click here to get the Investor Update now.)

Which brings us to an interesting paradox: The world need jobs, but the steady progress in technology is slashing the need for human workers to fill what jobs remain... and is slashing that need at an almost exponential pace.

The International Federation of Robotics reported a 27% increase in robotic sales in 2010, despite - and probably in no small part because of - ongoing pressure on the global economy.

And who do you think is going to be doing the work of assembling the robots? Humans? Hardly. Like the promised future of nanotechnology, but on a macro scale, it will be machines making machines that make machines.

Soon people won't be shaking their fists at the Chinese for stealing our jobs, but at the machines. And the machines won't take notice.

And then what? Does the government in all of its wisdom begin limiting the use of machines in the workplace? Or will the shift be back towards command economies, where companies are forced to hire and produce based on the dictates of some ruling council?

Happiness - Part Two

In order to be happy, you need energy. But you also need to have a job and a reliable source of income - otherwise finding the leisure time to pursue dreams and passions becomes very limited. And of course, without money it becomes more challenging to secure the basic foodstuffs and shelter needed to keep the tool of your body in reasonably good shape.

Viewing the collision between jobs and machines that now seems inevitable, much of the other nonsense now going on seems almost trivial. Just today, Bernanke blamed the world's economic ills on the failure of emerging market economies (cough, cough, China) to let their currencies rise.

But this is just so much rearranging the deck chairs on a sinking ship. As the truth of persistently high levels of unemployment, here, there, and everywhere becomes apparent - and the realization that government's many promises were nothing but debt disguised in a fog of hot air - the public will come to the correct conclusion: no magic solution is in the works. At that point the unemployed will begin to look for happiness in mobs demanding change.

(Notice how similar the energy seen in the Egyptian crowd pictured here is to the crowd at the Goo Goo Dolls concert, above?)

Unfortunately, the energy from that change will be short-lived - as it has been in places such as the Ukraine following that country's "Orange Revolution." After experiencing a pickup in GDP in the years immediately following the successful revolution there, the economy has fallen back into a deep slump - with the latest data showing unemployment near 10%, GDP falling 15% year over year, and inflation over 16%.

And whereas the world's problems have until recently been largely compartmentalized - a spot of trouble here, a spot of trouble there - the tight interconnectivity of the world's economies today, personified by the presence of a failing global reserve currency, magnifies our problems to the level of a world war.

In other words, Neil Howe's fourth turning followed by Ray Kurzweil's singularity.

I have no idea how things will unfold from here, but I'm pretty sure that between now and then, things are not going to be easy for many people. And I am very sure that governments the world over will fall back on all the various ways that governments have historically dealt with crisis, and with popular unrest.

As investors, we need to take measures to protect ourselves - but it is urgent to understand that there is no one path that will take you all the way through this transition. Sure, gold will play an important role - but if China comes unglued, the commodities complex writ large is taking a hit, and likely a big hit. And if push comes to shove - as it will - governments will take measures to shore up their finances by any measure one can conceive. Defaults, confiscations, exchange controls, wars - you name it, and it can come to pass.

We will do what we can here at Casey Research to help you navigate the future, and muster what resources we can to keep you out of the worst of the troubles.

However, as mere mortals, and not infallible machines, rest assured that, from time to time, we'll stumble.

As individuals, there is much that each of us can do to enjoy life and stay happy, almost no matter what the future holds. It takes a surprisingly little amount of time to stay in reasonably good physical shape, and that alone is a big energy booster. And, per above, there are an almost infinite number of interests one can pursue.

Personally, I am very optimistic about the future - and am increasingly convinced that before I'm eventually folded back into the mantle, I'll witness the next big step forward in human progress... a step that will almost certainly be powered by machines.

So that's what I'm thinking about. My apologies if the writing flow was somewhat tortured. One of the biggest challenges of writing something from beginning to end in a single morning is that it doesn't allow for the sort of editing that would normally be deployed to polish things up.

Even so, I hope these musings were helpful in sparking some reflections of your own. As always, feel free to shoot me your thoughts at David@caseyresearch.com. Now that I am only writing this missive weekly, I'll definitely have time to read your ideas and, hopefully, to respond - privately, or publicly here in the Daily Dispatch.

Friday Funnies

Italian Job

With Italian Prime Minister Silvio Berlusconi under serious pressure due to a dalliance with a young woman, the British comedy team of Harry and Paul put together a really funny video.  

(Thanks, Andrew, for sending that along!)

Speaking of funny, this AP photo of our illustrious vice president, Joe Biden, says a lot about the state of the state these days. I thought smoking pot was illegal...

Buying the Farm

An Irish farmer named Seamus had a car accident. In court, the lorry company's hot-shot solicitor was questioning Seamus.

"Didn't you say to the police at the scene of the accident, 'I'm fine?'" asked the solicitor.

Seamus responded, "Well, I'll tell you what happened. I had just loaded my favorite cow, Bessie, into the..." "I didn't ask for any details," the solicitor interrupted. "Just answer the question. Did you not say, at the scene of the accident, 'I'm fine!'?"

Seamus said, "Well, I had just got Bessie into the trailer and I was driving down the road..."

Photos from Egypt

Listen, when the rocks start flying, it only makes sense to protect yourself. In the event that it is helpful in the future, we turn to some examples from the recent Egyptian unrest, starting with the tin pot and life jacket:

If pressed for time and nothing better is handy, this could work.

Or, for something a bit lighter, you could try this.

But the grand prize for creativity under pressure is this fellow. And, yes, that is a sandwich roll and two baguettes strapped to his head!

That's It for This Week!

Well, it's been a busy week, but that's okay because I'll be off next week, visiting Costa Rica and my dear friends Pam and Mary Anne Aden, authors of the always excellent Aden Analysis.

When I get back, we'll finish the programming for The Next Few Years, our next Casey Research Summit. It's to be held at the beautiful Waldorf Astoria in Boca Raton, Florida, April 29 - May 1.

The timing couldn't be more important, and the faculty is shaping up to be a real winner - including Christopher Whalen, the co-founder of Institutional Risk Analytics and author of Inflated: How Money and Debt Built the American Dream ". We are especially pleased to have also confirmed John Williams of ShadowStats, who will do a seminal presentation on the true state of the American economy.

Also confirmed this week was John Robb, intelligence analyst and author of Brave New War: The Next Stage of Terrorism and the End of Globalization . He'll bring us up to date on the underlying causes of the current unrest sweeping the Middle East, and provide his very credible scenario as to where things are headed. And, of course, there will be extensive coverage of our favorite investments, with a special emphasis on looking forward over the next few years for the "next big thing" - in micro-cap resource companies... in technology... energy, and much more.

As always, because we strictly limit attendance, the event will be a quick sellout. In fact, even though we are just beginning to get the word out, over a third of the seats are already spoken for. If you're planning on participating, please do not overly delay registering, which you can do securely by clicking here.

With that, I will say goodbye for this week and next. Thank you very much for reading, and for being a Casey Research subscriber.

Until next time!

David Galland
Managing Director
Casey Research

A few weeks ago, I was listening to an earnings call where both management and the analysts were concerned with higher commodity prices. The analysts' wording revealed their projections. No one asked about the company's reaction "if" commodity prices went higher, but rather "with" higher prices, what will management do.

But the conference call isn't unique; it seems that everyone expects higher prices. In my JHU finance night classes, the professors have been warning of rising inflation, and most of the students are convinced too. Furthermore, editorial after editorial warns of the same problem. Though our inflation rate is still low, the level of concern out there is very high.

We're not in the same place as last year. Back then, many warned of oncoming inflation, but the deflation side had plenty of supporters too - today it's rare to find differing opinions. Disagreement instead focuses on how much inflation will there be when it surfaces.  

Given the growing consensus on inflation, why aren't Treasury yields higher? Well, maybe they would be without QEII. While QEII seems to be rather ineffective at pushing rates downward with the 30-year yield at 4.71% and the 10-year yield at 3.58%, there could be a lot of counterfactual information missing from this analysis.

It's hard to explain how so many people have accepted the idea of future inflation, yet these expectations should not be reflected in today's Treasury prices. Only an outside force such as the Fed can temporarily suppress rates from the market's desired direction. Without QEII, 30-year Treasuries might have already been near 6% and 10-year around 4.50%. On the surface, QEII seems to have failed in its goals, but considering what rates might have been reveals a different angle.

In a way, this is a chicken-and-egg question. Did rates and inflation expectations slowly begin to rise due to QEII, or was QEII started due to fears of rising rates anyway? We can't know for sure whether the first signs of inflation are the result of QEII or the past actions filtering through the system.

If the above scenario is correct, the Fed might have a tough time unwinding QEII. In June, we could see a large spike in rates as the Fed pressure lets up. For those interested in betting on rising rates, check out The Casey Report.

First, Jeff Clark will outline the reasons to buy silver even at $30. And with a high price tag, it's definitely helpful to read his article. I began purchasing silver around the $10-$12 range, and $30 gives me sticker shock. I can only imagine how readers who bought in the low single digits feel. After Jeff's article, I'll have a few charts on price increases.

Why I'm Buying Silver at $30

Jeff Clark, BIG GOLD

The silver price has bounced 15.3% since January 28, a strong advance for a measly 13 trading days. It's already inched past its 2010 high and was selling for less than $16 this time last year, a near double in 12 months. So, is it pricy? Or should we ignore the run-up and keep buying?

I've read a few articles that say we should expect silver to drop to the $25 level, and one pinpointed $22. Others, of course, see bullish tea leaves for the near term and believe it's headed higher. Of those that assert silver will decline, most believe it will be temporary, though one writer claims the bull market in precious metals is over (I think he's a holdout from the gold-is-a-bubble camp).

These authors could be right about a near-term decline, but I'm less concerned with what the price does this month or even the next few months, and more focused on where it's likely headed over the next few years. Caution: the chart ahead may cause excitement.

While there are lots of reasons to be bullish on silver, what everyone really wants to know is how high the price can go. Here's one hint, based strictly on historical price performance.

Silver rose an incredible 3,646% from the November 1971 low of $1.32 to its January 21, 1980 high of $49.45 (London PM fix prices). Our current advance, through February 4, is 596%. At $30, silver would have to climb over five times to match the last great bull market. If it did, the price would hit $160.89 per ounce (from its bottom of $4.295 on March 30, 2001).

You'll also notice silver has a record of outperforming gold in these two bull markets. In spite of the price dropping 26.9% in 2008 (while gold gained 5%), the metal has outrun its yellow cousin by 38.6% since their respective lows in 2001.

Gold advanced 2,333% in the 1970s; it's currently up 430%. If it matched the last run, the price would hit $6,227.26 per ounce, a return of four-and-a-half times the gold you buy today.

From solely a historical price perspective, the chart certainly suggests we've got a long way to go with both metals. The question is if the fundamentals support such price advances (show me a healthy dollar and no threat of inflation, and we'll talk), but my point for the moment is that there is an established precedence for the price of these metals to climb much higher. And just as important, to keep one's eye on the big picture.

So, yes, I'm buying silver at $30, in part because I think the potential for enormous gains is high.

However, I'll add that I'm not draining my cash account to do so. I think it's important for the precious metals investor to always be in the game, but given silver's volatility and the precarious nature of most markets right now, prudence suggests we keep some powder dry as well.

Let's say one of the soothsayers noted above is correct and silver temporarily falls to $25. If you snag it at that level, your endgame return would be 543%, vs. the 436% gain from $30 (excluding premiums and storage costs). That's more than another 100% gain on your original investment.

But how does one buy silver not knowing if the price will plummet or soar? For example, silver could take off from these levels, never to see $30 again, leaving those of you waiting for a sell-off out of the market. Or it could sink to $25, making investors who went all in now regret they didn't wait for a better price. Or it could trade sideways until, say, next fall, leaving both parties uncertain and on the sidelines.

In my opinion, there's a one-word answer to the question. It solves all dilemmas - it keeps you in the market, while simultaneously letting you buy at lower prices if that occurs. It lets you build your position bigger and bigger without the worry of whether you're getting a good price.

That one-word verb is, accumulate. Or in the vernacular made popular in the '80s by the financial planning community, dollar cost average. In other words, buy a little now, buy a little next month, etc., until you have a position sufficient in size to fight off inflation and any other economic woe we're likely to encounter over the next few years.

So my advice is, buy, hold, repeat. Because if our silver market ends up looking anything like that left bar in the chart, you may regret not having bought at $30, too.

[By the way, we updated the numbers on the market cap for Pan American Silver from our article last week... check out how tiny one of the largest silver producers is compared to other popular stocks here.]

[Where do we buy silver and gold? Get our recommended list of dealers, who have some of the cheapest prices in the industry, along with the silver stocks we think will outperform the metal, with a risk-free trial to BIG GOLD for only $79 per year. To learn more about why you need gold and silver to preserve your wealth, and receive a FREE special report, click here.]

Commodity Prices Begin to Filter Through

By Vedran Vuk

As most readers have probably heard by now, January inflation increased by more than expected at 0.4% from the previous month. Rather than focus on the big number, I investigated a few of the smaller categories in the BLS data, particularly in foods affected by commodity prices. One item immediately jumped out - the fats and oils category. Since last month, seasonally adjusted prices in this category increased by 2.1% - that's enormous. Since soybeans are a crucial ingredient to vegetable oil, this spike is fairly easy to explain.

Let's take a look at a few more categories in the data. Remember, the charts below are consumer prices. Coffee is a good start. Since last year, the price has increased by 15.9% from $3.81 per lb of ground coffee to $4.42 per lb. (For some reason, the coffee data had a large gap in 2009; as a result the chart begins in 2010.)

Next, let's take a look at sugar prices per lb. Since 2007, sugar has risen 25.6% from $0.52 per lb to $0.65 per lb.

The last chart shows soft margarine prices. Again, since vegetable oil is a part of margarine, the price will necessarily be affected by spikes in the soybean market. Since 2007, the price has increased by 50% from $1.15 per lb to $1.72 per lb.

Hedgers are a big reason why consumer prices lag the commodity market. Major companies have already locked in their purchases and prices months ahead in the futures market, so they can delay price increases.

The second factor is the elasticity of the products. That's a fancy economics term for the change in demand in response to a change in price. When a product is inelastic, demand changes little with a change in price. A good example is coffee. Most coffee drinkers do not alter their consumption based on price fluctuations. Of course, companies have calculated the elasticity of their products. Since inelastic products are less responsive to price, hedging departments pay less attention to covering these costs. For example, coffee prices can be easily passed down to consumers (as a rule of thumb, the more elastic a product, the bigger the hedges). Hence, elasticity can be a good predictor of how quickly consumers will feel the impact of spikes in the commodity markets.

A Correction

There's one more thing left before we wrap up today. Jeff Clark's article from last week has been updated due to an error in the market cap for Pan American Silver. With the error fixed, his point is actually stronger than before the update. We'd like to thank our vigilant readers for catching the mistake. Here is the link to the piece.

That's it for today. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

With a passion for research and some extra time on my hands last weekend, I explored the history of my street. With access to the Johns Hopkins University library, I searched through old editions of the Baltimore Sun. The older editions have been scanned, and search software can now locate specific words in the text. Since my street is only three blocks long and has a rather unique name, I didn't have any trouble finding hundreds of mentions in the newspaper over the years.

The first thing that struck me was the great extent to which our lives have improved. The earlier editions detailed numerous industrial deaths. With the block's former residents working mostly on the docks or the Baltimore & Ohio railroad during the 19th century, many suffered a horrific end. And the rest of the family wasn't much better off: I read account after account of young children being run over by wagons or drowning in the harbor (swimming wasn't a common skill back then). Little children causing house fires was also a serious concern. On net, the world is far safer now than back then.

And there were other stories of note. For example, several men from my block were arrested during a labor union riot. Apparently, they were responsible for knocking out a police officer's teeth with a baseball bat. And then there were more comical instances, such as the story of two female neighbors who got into a brawl at the turn of the century. The fight was so intense that both were reportedly bed-ridden for a week afterward. And why the fight? One had called the other "a thing." The neighbor screamed back, "I'm going to teach you how to be a lady" as she threw a fist at her opponent.

One article was particularly amusing. Back in the day, cities weren't nearly as large, so smaller stories could make it into the paper. The 1885 article referred to a sunken part of the road at the corner of my street where every rainfall would form an enormous puddle. Since the puddle would fill with waste, this was a public-health issue. The article demanded the local government make the small effort necessary to fix the problem.

But as I read the piece, a sudden realization came to me. No action was ever taken. That same enormous puddle on a sunken part of the road still plagues my walk to the car on any rainy day. The whole area is practically flooded even with modern drainage systems. After 125 years and certainly many road projects since, no one has bothered to fix the problem. 

And as I walked down the street last night and observed the dark street lights whose bulbs haven't been replaced in months and the ignored pot holes in the road, I remembered a basic fact of life. While many things have changed over time, some things never do.

First, Kevin Brekke will share his views on the possible social upheaval ahead from rising food prices. Then, Craig Spencer, a longtime reader and experienced investor who lives in Peru, will report from Peru's ProExplo conference. As many of our readers know, we're always keeping a close eye on South America. Hence, this correspondence is very useful.

The Coming Food Envy

By Kevin Brekke

In 1996, a book titled The Clash of Civilizations and the Remaking of World Order by Samuel P. Huntington was published. In it, the author argues that the age of ideology had concluded, and that the primary axis of future conflicts in a post-Cold War world will be along cultural and religious lines. The uprisings, skirmishes and wars to come would not be fought over resources such as rice or oil but over differences of ethnicity and faith.

Huntington's theory, as you would expect, mustered ample critics. Among them was Edward Said who, in his 2001 response The Clash of Ignorance, indicts Huntington for his use of oversimplification and static depictions of whole cultures. Reality, counters Said, is far more complex and dynamic.

A darkly comical sidebar to the debate was the response from the United Nations, its so-called theory of Dialogue Among Civilizations. The "theory" was the basis for a UN resolution naming the year 2001 as the Year of Dialogue Among Civilizations. When all you have is talk, every problem looks like faulty communication. Presumably, the solution to all strife in the world would come about from endless talking by its delegates while bravely enduring long hours in premium-class airline cabins, soldiering through endless caviar-topped buffet luncheons, and suffering unknown numbers of nights at five-star hotels.

The machinations of clueless NGO personnel notwithstanding, it is said that time heals all wounds. It also exposes false assumptions, like Huntington's speculation, as we were again reminded by yesterday's news.

"World Bank: Food Prices at Dangerous Levels," read the Associated Press headline.

I doubt that anyone reading this gives much thought to the possibility of hunger or malnutrition paying them a visit. To Western cultures, the idea is as foreign as a homegrown political revolution or life without air conditioning. Even for a well-seasoned traveler in possession of a dog-eared passport, the plight of the world's hungry is largely out of sight. As a tourist, you are not likely to encounter the dark underbelly of extreme poverty while taking in the popular attractions.

But leaving home is not mandatory to witness food insecurity among the most unfortunate. As of last month, the number of Americans receiving food stamps reached 43.2 million, 14% of the population, or nearly 1 in 7 people.

The phenomenal rise in the number of people seeking food assistance has so far been the direct result of protracted economic hardship that has befallen many individuals and families. The culprit has been mainly unemployment. 

But if the worldwide rise in commodity prices continues, opening the door to food price inflation, the financial and economic crises plaguing the U.S. will soon devolve into a social crisis. It is one thing to be struggling to pay your bills; it is a whole different thing to be struggling while you and your family are hungry or feel deserving of a better diet.

Your neighbor may not like forgoing his cell phone for a landline, or battling with an antenna after canceling cable, all in the name of belt-tightening and a shrinking family budget. But when the smell of your steaks on the backyard grill wafts across his nostrils while he pretends to enjoy another plate of spaghetti and meatless sauce, a new kind of resentment will seep into the collective conscience of a growing slice of anxious Americans...

Food envy. At some point, and it is not far off, the complexity and urgency of food security will become a reality, and a battle in the land of plenty will ensue.

In many ways the battle has already begun. Shoplifting of food, or "shrinkage" as it is known in the retail industry, is on the rise. This is a fact that the food industry avoids talking about and works hard to keep out of the press. Not surprising when you consider that few food items carry a security tag, making them an easy mark.

Profit margins at grocery chains have compressed as retailers attempt to absorb price increases as rising commodity prices pass through to the wholesale level. Inventory shrinkage at grocery stores further pressures margins, and retailers will be forced to pass along their rising costs to the consumer. There is little to no room left for retailers to eat price increases.

Recalling Huntington's outlook for clashes among civilizations, it looks like his theory is hit and miss on several issues. Conflict between differing groups has occurred since the human population exceeded one - it seems part of the human condition, and no change looks to be imminent. And disagreements over resources and ideology will continue; the idea that one would supplant the other seems naïve. So, maybe a more appropriate title for his book would have been to suggest intra- rather than inter-civilization clashes.

The coming rise in food prices will be no less dramatic than for all commodities as the downfall of paper money accelerates. A man can survive without many things, but food is not one of them. And long before his supper table is empty, his envy of those with a diet more aligned with his desires will predictably spur a great cry for "food justice." Any attempt by government to control, subsidize, or ration the food supply will end in disaster, and if history is a guide, shortages and higher prices. When preparing for future surprises, don't forget to include higher food bills.

A Report from Peru's ProExplo Conference

By Craig Spencer

Well, the ProExplo conference finished last week. It was a bit smaller than the gold conference last year, but just as superbly organized and executed. Peruvians seem particularly good at doing this sort of thing well.

There were not only a lot of juniors present but a host of booths for exploration service providers, professional groups, mining journalists and even one Panamanian brokerage house (which does not accept U.S. customers, of course) specializing in Canadian mining stocks.

I also noted that there were a lot of young Peruvians (of both sexes) present, apparently aspiring to careers in the mining industry. Inasmuch as the rather pricey cost of the conference was probably out of their price range, I expect they must have attended on a discounted basis with help from local professional organizations. It was good to see. A major theme of one of the sessions was the allegedly poor quality of mining education in Peru.

Monday night there was an amazing reception held at the Museo Andres del Castillo. This is a museum recently founded by the del Castillo family (in honor of a son who died in a sky-diving accident). It is in a beautifully restored 300-year-old home a block from Plaza San Martin in downtown Lima (only one of the numerous restoration projects bringing the old city center back to life and elegance). I was surprised  to see that its main display is an enormous and astounding  collection of mineral samples from Peru. You would not believe such surprising and beautiful things grow naturally within the Earth!
Tuesday night, there was a final banquet at the luxurious new headquarters of the Institute of Mining Engineers of Peru out in La Molina, a place I would never have been able  to see otherwise. It featured a rather kitschy exhibition of Peruvian dances along with a good meal. At my table were a couple of Canadians and their Peruvian associates (one of whom was a CSM graduate) who are in the process of starting up a mine (they hope).

At an otherwise unremarkable presentation by a guy from Credit Suisse on mine financing, an item was mentioned that I found interesting: they made a $13 million loan to Kingsrose Mining that was to be repaid in silver metal. For a bank, that is really innovative.

The most noteworthy presentation I saw was by John Black and Kevin Heather of Minera Antares. They chronicled the history of the successful development of the property (an enormous copper deposit), which they recently sold to First Quantum Minerals. Minera Antares itself may no longer be an investment opportunity. However, I was so impressed by these two guys that if I had any money, I'd put it in whatever they do next!

Vedran here again. Thanks for the report, Craig. I just wanted to quickly mention that Minera Antares was one of our big wins in the International Speculator with a 285.3% return. Our portfolio still holds shares in the company's spinoff. Try it risk-free for 3 months and find out more.

Confidence in Equities Rises

By Vedran Vuk

BofA Merrill Lynch Global Research's survey of money managers finds growing bullishness in equities. Bloomberg BusinessWeek notes,

A net 67 percent of respondents, who together manage $569 billion, had an "overweight" position on global equities, the highest level since the survey first asked the question in April 2001. That compares with 55 percent in January and 40 percent in December. Meanwhile, a net 9 percent is "underweight" cash, the lowest allocation since January 2002.

The February survey "is one of the most bullish in years," Gary Baker and Michael Hartnett, equity strategists at BofA Merrill Lynch, wrote in a report today. "Surging inflation expectations show we are no longer in a Goldilocks environment and a meaningful tactical correction in risk assets could be caused by a jump in interest rates or weaker U.S. growth."

The article goes on to mention that money managers have even become more confident about Europe. Bullishness about certain markets is one thing, but being so bullish that now Europe is looking good seems a bit much. For the full article, click here. 

A Note on Buffett's Sale of BofA

By Vedran Vuk

Yesterday, I mentioned the possibility that Berkshire Hathaway's sale of BofA might be a sign of weakness for the financial industry. But upon closer examination, this might not be the case. Along with dumping Bank of America, Berkshire Hathaway slightly added to its position in Wells Fargo.

That doesn't mean that there's nothing relevant here. Bank of America's balance sheet is certainly in worse shape than many of the other major banks. In the current environment, one would likely want to hold a more secure bank. But if an investor really thought that we were on the edge of the next big rally, riskier banks would likely make bigger returns.

One can see this difference in the betas of the two companies. BAC has a beta of 2.21 while Wells Fargo (WFC) has a beta of 1.37. In theory, this means that with every 1% increase in the market, BAC should go up 2.21% while Wells Fargo would only change 1.37%. If you were bullish on financials and the market in general, based only on this rough estimate of beta, Bank of America would seem like a better choice. So a retreat from a leveraged bank could tell us something about the outlook for the financials - even though Wells Fargo's position has been increased.

However, there are other opinions on the move. Morgan Housel from the Motley Fool points out that this position was likely the work of Lou Simpson who recently retired, and there's nothing to worry about. He makes a good point. 

However, stock picks are rarely a one-man decision. At Casey Research, our investment approach is very collaborative - it necessarily must be. There's no way that one person can know everything about a stock or see every single angle. It requires a team. And we're constantly arguing back and forth on investments until we're satisfied with a decision. If one of our key team members retired, we certainly wouldn't dump his favorite stocks. The picks are made as part of a group effort with leaders guiding the process.

So while Lou Simpson's retirement might have something to do with it, most financial companies are not dictatorships. Many analysts, researchers and managers are involved in the decision process. While managers might have the ultimate decision, a lot of other people play a strong role as well.

That's it for today. Thank you for reading and subscribing.

Vedran Vuk
Casey's Daily Dispatch Editor

I hope that everyone had an enjoyable Valentine's Day. Yesterday reminded me of a wise lecture from a few years ago. A team from Morgan Stanley came to my college to give a presentation on the company. Accompanying the younger team members was the senior manager of their entire department. He gave an enlightening lecture about the future of the financial industry... but one answer in the Q&A segment stood out, and I didn't see it coming.

A student from the audience asked the senior manager, "What was the most important factor to your success at the company?" I expected a long-winded answer about the financial industry and important lessons learned from the trenches. Or perhaps he would extol the virtues of hard work and reliability. But instead, he replied, "My wife." 

And then he went on to explain, "If you think that any woman will stay with you year after year of 80-hour work weeks, you're just wrong. And if you think that you'll be able to excel at the most important and stressful projects of your career while having a screaming match with your spouse every night, you're just wrong. And if you think anyone will follow you to Singapore for a promotion, you're just wrong."

He then went on not only to bestow praises on his wife, but to share cautionary tales of careers gone downhill as a result of divorces and sour marriages. A bad relationship can easily derail a career, and even a simple mismatch between a world traveler and someone mentally confined to a 10-mile radius can have a serious impact on lifetime wealth. 

It's easy to think that success is all your own doing, but more often than not a husband or wife has a lot to do with it. What if your spouse couldn't stand your long work hours? What if she had spending habits that didn't align with your investment goals? Most young people don't understand the huge role finding the right person plays into career success and wealth-planning. (The common warning of possible divorce is only the most obvious factor in a marriage that will leave one poorer.)

This may sound crude, but marriage is the biggest investment and career decision in life. Whether one should invest in the S&P 500 for the next two years is small potatoes in comparison.

Many of our readers learned this lesson long ago, but I thought the manager's approach was worth sharing with some younger subscribers. Next, the Casey Research Energy Team will report on new opportunities for Canadian natural gas in Asia. Currently, Canada is restricted to the North American market where prices have been depressed for an extended period of time. If trade with China began, this would change the dynamics of the entire Canadian natural gas industry. Then, Alex Daley will briefly discuss two charts showing inflows and outflows in gold funds. Last, I'll touch on the news.

Canadian Natural Gas Sees a Trade Partner in China

By the Casey Research Energy Team

A $5.4 billion investment by a Chinese company in one of Encana's massive shale gas properties in northern British Columbia and Alberta is another sign that Canada wants Asia to become a major importer of its natural gas.

Encana is a leader in one of the things the Casey Energy team loves: unconventional natural gas production. Natural gas is a cleaner energy source than oil or coal because it releases less carbon dioxide and fewer pollutants when burned, so it is becoming an important component in global clean-energy plans. And unconventional technologies have already played a major role in the gas scene of late, a trend that we expect to continue with both gas and oil.

The $5.4 billion will buy half of Encana's Cutbank Ridge shale gas properties, which cover 635,000 acres. The properties currently produce 255 million cubic feet of natural gas per day and contain proven reserves of more than 1 trillion cubic feet. The joint venture also covers about 700 million cubic feet per day of processing capacity, some 2,100 miles of pipelines, and a gas storage facility.

The deal is the largest foreign gas deal to date by a Chinese company. China is hunting around the world for gas reserves to support its plan to triple natural gas usage over the next decade. Chinese firms have pumped about $14 billion into Canadian oil and gas companies over the last two years. On its website, PetroChina says it has been trying for years to work with major Canadian energy companies and expects the Encana deal "to provide a platform for entering the major market in North America."

For Encana, the deal will let the company accelerate production while keeping a lid on costs. Encana has been struggling with low North American gas prices because, unlike oil, North American gas is not a globally priced commodity. Instead it trades largely only within the continent because transportation limitations keep it here. Natural gas can only be moved via pipelines because of its huge volume; when condensed into liquefied natural gas (LNG), it can be sent via ship, but there are no LNG facilities in North America. 

Canada sends the majority of its oil and gas exports to the United States, which means Canadian energy producers depend on U.S. demand for the bulk of their revenues. Relying on one customer is never a good business model, especially when that customer has concerns about one of Canada's most important energy sources (the oil sands) and about a proposed pipeline expansion.

To diversify its customer base, Canada has been eyeing increasing trade with Asia. Two proposed oil pipelines and one proposed liquefied natural gas facility would all enable Canada to export energy from the west coast straight to Asia. None are permitted yet, and all face significant opposition from environmental groups.

This PetroChina deal, though, adds some fuel to the developers' fires. It is only sensible to assume that PetroChina's decision to make such a major investment in Canadian gas, at a time when North American gas prices are low because of a supply glut, was based on a strategic premise: to secure gas supplies for China in the future. In particular the proposal to build a LNG facility in Kitimat likely encouraged the Chinese to move ahead with the deal, which has apparently been in the works for nine months.

Encana's investors were very happy with the deal, lifting the company's share price 4.5% in a day to reach $32.02. The lift came despite the company reporting a US$42 million net loss for the fourth quarter.

In the bigger picture, the news is nothing but positive for Canadian natural gas. The advent of fracking has led to major oversupplies of natural gas in the United States. Investment like this can only encourage Canada to develop the infrastructure needed to export gas to Asia, where demand and prices are higher.

The Encana news lifted other companies producing natural gas in B.C. and Alberta, including Encana's sister company Cenovus. Cenovus was born when Encana spun its conventional oil and gas assets out into a new company. The Casey Energy team recommended buying Cenovus in mid-2010, when the company was trading at $27.40. Including the 98¢ it gained on the Encana news, Cenovus' share price now stands at $34.80, which means a 27% gain for our subscribers. Learn more about the gains you can get from top-quality energy stocks here.

Gold Sees First Major Outflow in Over a Year

By Alex Daley

In an interesting bit of news in the gold markets, the most recent week's reporting saw a drop-off of fund investments of the yellow metal. For the first time in over a year, gold ETFs saw a substantial net outflow (greater than 1%). Totaling 53 tonnes, or 2.8% of total ETF gold holdings, the drop in investment may simply be a sign of profit taking as gold flirts with $1,400/ounce. Or it might mean something more. Only time will tell. 

Until then, see the change for yourself in this graph, which Citi analyst Johan Steyn flagged in a recent research report.

Steyn draws attention to the difference between gold and platinum in his notes, showing that the more industrial metal is still growing. One week is hardly a trend. But for anyone heavily invested in gold, it is a data point worth watching closely.

Buffett Exits BofA

By Vedran Vuk

With Warren Buffett being a champion of the bank bailouts, Berkshire Hathaway's exit from Bank of America seems noteworthy. Furthermore, this is a troubling sign from a long-term investment perspective. The financial industry always has its pulse on the economy. If Buffett isn't happy with BofA, what does that say for the rest of the financials - and more importantly, what does that say for the economy as a whole?

In the current market rally, we might be witnessing the first signs of confidence cracking. If markets are expected to go through the roof, BofA would seem like a fairly good investment. The company is wired to the entire U.S. economy. We'll have to keep a close ear to the ground in the next couple of weeks. Perhaps, Buffett is just dissatisfied with firm-specific problems, and I might be overanalyzing the decision. Then again, this isn't the same as his exit from Nestle. 

Deutsche Boerse Buys the NYSE

By Vedran Vuk

When speculating on market movements, timing is the most difficult part. Even with a correct prediction, an analyst can be off my months, if not years. Predicting the future is a difficult business. But I couldn't believe that my musings on February 9 came true before the issue of the Daily Dispatch even reached your inbox. In the issue, I reported on the London Stock Exchange's offer for the Toronto Stock Exchange. From there, I noted:

"It makes me wonder whether there's an opportunity here to purchase stock exchanges in hopes of further consolidation and mergers. Perhaps a diversified portfolio of various stock exchanges might be worth holding. I'll have to take a closer look at that possibility."

While the issue was still in the final editing process, rumors emerged over a possible Deutsche Boerse (German Stock Exchange) and NYSE merger. Stock exchange prices across the globe immediately jumped. And now, less than a week later, the Deutsche Boerse has purchased the NYSE Euronext for an all-share deal of $9.53 billion. (Read about the details here.)

I never imagined that these events would occur so soon and leave my correct speculation in the dust. There's nothing worse than being right and not getting the chance to make a buck on the idea. I'll simply have to plan ahead next time. I'm sure that this won't be the last major consolidation of stock exchanges in the next few years.

That's it for today. I just need to make a quick note on personal portfolio changes of the Casey Research team. Per our disclosure policy, a member of the Casey Research team will be doing some portfolio reallocation, most likely selling some percentage of shares held in Almaden Minerals and Alexco Resources later this week or next. This is no reflection on the companies, just a periodic portfolio rebalancing. 

Also, our next Casey Research Summit titled "The Next Few Years" is coming up fast. If you're thinking about joining the Casey Research team in sunny Boca Raton, Florida, on April 29 - May 1, act fast. Right now you can save $200 off the regular price with our early-bird discount, but only until February 25.

You won't regret signing up - our faculty and topics so far include: John Williams of Shadow Stats fame on "The True State of the U.S. Economy"; resource pro Rick Rule on "A Portfolio Approach to Crisis Investing"; James G. Rickards, senior managing director of Tangent Capital Partners on "Gold, Geopolitics and the Gold Standard"; and many more.

If you want to see the whole list - and we'll still add to it - as well as more details about the Summit, click here.

Thank you for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

Over the weekend, I watched the History Channel's documentary, Ripped Off: Madoff and the Scamming of America. If you've been following the case, this documentary didn't add anything new. The more interesting part was the extra feature documentary on the DVD, Crash: The Next Great Depression?

The documentary wasn't good because it made sense. Rather, it was an ideal example of the regular upside-down thinking on the Great Depression. The film praised FDR's New Deal and its "wonderful" policies. Of course, Hoover was blamed as usual. FDR's praises must have encompassed a full 15 minutes without a single blemish to his record. And then the documentary admits that the New Deal didn't get the country out of the Great Depression. Furthermore, there was a second slump in 1937. According to the film, only the war managed to save the U.S. economy.

This Great Depression narrative is almost comical as the arguments defeat themselves. The New Deal was supposedly a miraculous plan, but it didn't get us out of the Great Depression - the war did. But wait, if the New Deal failed, then what's so great about it? 

Apparently, it just didn't work. So, before a free-market side even needs to make their own case, the big-government crowd should really get their story straight first. Which event got us out of the Great Depression - the war or the New Deal? It can't be both. As the documentary pointed out, there was a second slump during FDR's administration. Even if one saved America, it doesn't make sense to believe that the other did too. It's all very confusing to me.   

Essentially, here's my explanation of the phenomenon: both stories are the remnants of depression-era and wartime propaganda. On the one hand, there is the New Deal propaganda. Though the program was an abysmal failure, the FDR administration kept pushing it. Second, the war came with its own propaganda (as is always the case with wars). After the war, FDR was crowned a hero beyond criticism. Hence, the failures of the New Deal were given a new gloss years later. And though the economic recovery started after the war, our history books were left with two separate stories that inherently don't make sense together, if at all. Unless you believe that America was "saved" twice from the Great Depression.

In case you're interested in Doug Casey's take on the Great Depression, we've recently released an article on the topic from a previous issue of The Casey Report. Let's just say that your high school history teacher might not approve of Doug Casey's angle on the Great Depression.

Now that I've touched on historical inconsistencies, let's get to more recent events. And there's no quicker jump into the future than to start discussing robots with Doug Hornig. As some of you may already know, the computer Watson will be competing on Jeopardy! this week. Doug Hornig will fill us in on the background. Then, I'll have some comments on gold and oil news.

Elementary, My Dear Watson

By Doug Hornig

I think, therefore I am.

That bedrock concept has been at the center of Western thought since Rene Descartes first set it down in 1637. It attempts, in one all-encompassing line, to establish the existence of individual consciousness, and by extension the physical being of the thinker.

What is less often considered is that the human element was implicit. In the 17th century, no one would have or could have conceived that anything other than a person might engage in such philosophical musings. Animals didn't "think." And machines? Forget about it.

Today, Descartes would be in a bit of a quandary. Animals exhibit tool-using and problem-solving behavior that strongly suggests logical thinking, one of the hallmarks formerly believed to distinguish our species from the rest of nature. And if machines don't think, they do something awfully similar.

Of course, it depends on how you define the term.

The famous Turing Test - as proposed in 1950 by legendary British mathematician, cryptanalyst, and computer pioneer Alan Turing - is still cited when we attempt to delineate just when a machine achieves intelligence.

Let a person have a text chat, Turing said, with both a machine and another person, both of whom are hidden and trying to act human. Then see if the interrogator can tell which respondent is the machine. If the interrogator cannot reliably make the distinction, then the machine may be said to possess intelligence as best we can define it. 

So far, machines have always flunked the Turing Test. At first, they couldn't fool anyone. However, Turing was writing at the very dawn of the computer age, when a huge room full of vacuum tubes couldn't do what a cell phone can do today.

To check the current state of the art, there's the annual Loebner Competition, in which the best machines from around the world attempt to convince a panel of interrogators of their humanity. They still can't do it consistently, but they're getting better. Here's an example from a recent competition, wherein an interrogator submitted questions to three respondents, a male, a female, and a machine. All three entities knew that it was fall in England, and the interrogator asked of all three what they thought of the weather that morning. The responses:

1. "I do tend to like a nice foggy morning, as it adds a certain mystery."
   
   
2. "Not the best, expecting pirates to come out of the fog."
   
   
3. "The weather is not nice at the moment, unless you like fog."

See if you can figure out who's who. Not exactly a slam-dunk cinch, is it?

(Did you correctly identify: a. machine; b. male human; c. female human?)

Reliably fooling humans is proving beyond a machine's present capabilities. But how about competing against people? Could a computer, say, play Jeopardy!?

This would seem highly improbable. Not only does success at Jeopardy! depend on an extremely broad knowledge base, but contestants have to deal with puns, allusions, irony, riddles, and other non-logical word plays, as well as make sense of categories that can be a bit abstruse.

Think that's beyond the reach of a machine? Then you need to meet Watson, who was not only Sherlock Holmes's devoted sidekick but is a functioning computer personality from IBM. Watson, actually named for the company's founder, Thomas Watson, plays Jeopardy!. And plays the hell out of it.

Heading up the Watson project is David Ferrucci, IBM's senior manager for its Semantic Analysis and Integration department. Ferrucci's team scanned into the machine's memory vast numbers of databases, along with millions of documents. Reference books, news articles, scholarly papers, tabloid blurbs, whatever. The hard part was recreating what the human goes through in order to get from answer to question. Google is the model for that kind of search, but does it merely by hunting down words or strings of words, and returning every single hit. That won't work with Jeopardy!, where you have to distill the intended meaning of an answer (with all of its nuances) into the one correct question.

Once the data were in place, Ferrucci gave Watson more than a hundred algorithms to use at the same time, to analyze a question in many different ways, generating hundreds of possible solutions. Another set of algorithms ranks these answers according to plausibility. And then the computer selects the one at the top of the list and hits the buzzer.

Oh, and no Internet connection allowed. That'd be cheating.

Since last summer, Watson has been practicing, taking on humans on a mock-up of the Jeopardy! set and doing well. So well that the producers of the show decided it was time to let "him" go up against some proven competition, right in the evening spotlight.

They chose Monday, February 14. Valentine's Day. And the following two nights, as well. For competitors they picked the two greatest all-time Jeopardy! champs, Ken Jennings and Brad Rutter. Let the games begin.

(As an added attraction, the practice rounds featured a graphic that shows the three answers Watson has rated as most likely to be correct, and how certain he is of the answer he selects. That'd be a plus in the final showdown, since it would provide something of a window into Watson's "brain." But we don't yet know whether it made it to the show.)

Granted, a perfect simulation of Jeopardy! with a machine playing is impossible. Computers don't care about winning or losing money; people do. Computers are emotionless; human contestants can freeze up or be driven to greater accomplishment under pressure. And so on.

Still, there's no question that the coming week's event is a milestone, comparable to the 1997 chess match that saw IBM's Big Blue computer defeat Garry Kasparov, the reigning world champion.

Ferrucci and IBM are thinking way beyond Alex Trebek. The potential applications of something like Watson are myriad. Considering the primitive state of present question-answering machines, like the one you get when you call your airline, this is a huge leap forward. It's not too early to envision the day when a doctor, a lawyer, an engineer - any specialist - will be able to have a conversation in English with a Watson-like machine that has speed-of-light access to all the present and historical knowledge in the field.

But for now, the tapes are made and the results guarded like the Oscars. There've been no leaks. To see what happened with Ken, Brad and the machine, you'll just have to tune in. And to get you in the mood, you can have a quick go at Watson yourself, here.

Whatever the outcome of the match, robotics is exploding in real time. Yet the science is still elementary, dear Watson. Robots are about where the personal computer was thirty years ago, and they are destined to change our lives, probably as much as the PC has, in the next thirty. Casey's Extraordinary Technology watches robotics carefully and has tucked two of the leading companies in the field into our portfolio. Both have performed admirably since we added them, and there will surely be many more to come.

WikiLeaks Continues to Threaten Our National Security

By Vedran Vuk

Of course, I'm only kidding with the above title. Instead, WikiLeaks continues to inform us about important world events without the negative consequences that we were all warned about. And now leaked WikiLeaks cables from the embassy in Riyadh have revealed concerns about the world's oil supply.  Here's the most significant line from the article detailing the exchanges:

"Al-Husseini disagrees with this analysis, believing Aramco's [Saudi Arabia's main oil company] reserves are overstated by as much as 300bn barrels. In his view once 50% of original proven reserves has been reached ... a steady output in decline [sic] will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years followed by decreasing output."

This sounds like pretty serious stuff. But I'm curious about Al-Husseini's projections. Many Middle Eastern countries are behind on their extraction and exploration methods. Necessarily, state-owned companies are less competitive than private companies. With monopoly powers, their protected status gives them a competitive edge, not innovation. As a result, these companies are often behind in terms of technological advancements.

Hence, I'd like to know whether Al-Husseini's forecasts assume better technologies in the future. If oil prices skyrocket due to natural supply-and-demand relationships, Saudi Arabia may adapt its oil industry model. With more advanced technologies, surely the output could increase.

Though this cable isn't definitive proof of dwindling oil supplies, it's definitely worth thinking about.

Institutional Money Flows Back Toward Gold

By Vedran Vuk

With gold and mining stocks, fickle hedge funds and institutional players have always been a concern. But currently, they're rushing back to gold.

At the first sign of trouble, short-term-oriented hedge funds will quickly pull their money from an investment. As a result, they can exacerbate price declines. But of course, on the way up, they can be equally helpful. At the moment, they appear to be back in our corner. It's important to remember that different players in the market have different time horizons.

When the price of gold retreats heavily on a particular day, one should always ask, "Who is selling gold?" The answer can give you a better grip on the situation. The concerns of the short-term trader are not the same as those of the long-term investor. Alex Daley should have some more thoughts on these fund flows tomorrow. 

That's it for today. Gold is slightly up to $1,365.30, and oil seems to be searching for a new floor at $85.85. Despite the lower oil prices, our oil industry plays in The Casey Report are doing well for the day.

Vedran Vuk
Casey's Daily Dispatch Editor

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.

Tech's Biggest Winners of the Past Year

By Chris Wood, Casey's Extraordinary Technology

As investors, we should always be forward looking. The value of a stock today derives from its future cash flows, not historical performance. Nevertheless, it can be a useful exercise to periodically take a look back and see what kinds of stocks (in terms of sector, industry and market capitalization) generated the highest returns over a given timeframe, because it gives you both a sense of where other investors are parking their money and a starting point to decide if you should do the same.

With this in mind, I ran a screen on Morningstar to search for the highest-returning stocks over the past twelve months (from the NYSE, AMEX, and NASDAQ). The results yielded 24 companies that posted more than a 300% return over the past year. Not bad. But that's not the interesting part.

What was interesting was that of all the companies on the list, only two had a market capitalization above $1 billion (one at $1.1 billion and one at $3.5 billion). In other words, the vast majority of the highest-returning stocks over the past year traded on the major exchanges in the U.S. are small-cap (or micro-cap) stocks.

When you think about this for half a second, it makes sense. After all, small-cap stocks are the ones with room to grow, they tend to have more entrepreneurial drive, and they're not bogged down by a big bureaucracy, making them more able to adapt quickly to a changing market environment.

And this propensity for small-caps to outpace large-caps when it comes to returns is well established historically. According to data crunched by MoneyChimp.com, over the 78 years to the end of 2008, small-cap stocks outperformed large-cap stocks by a wide margin. During this period, small-cap value stocks returned an annual average of 15.4%, while large-cap value stocks returned just 12.4%.

What was also interesting about the results of the screen was that eleven of the 24 companies on the list were tech companies. That's right, almost 50% of the highest-returning stocks over the past 12 months (that trade on the NYSE, AMEX and NASDAQ, and according to the Morningstar stock screener) are tech stocks.

Here's a summary of the stocks and their performance:

As you can see, these eleven tech stocks returned an average of 451% during the past 12 months. If you invested just $1,000 in each of these companies one year ago, you'd be sitting on more than $60,000 today. Impressive. But not really the point and not really likely.

The point is that tech stocks (particularly small-caps, for reasons outlined above) are outperforming alternative investments for good reason. Technology tends to advance no matter what is going on in the world. It's an engine of growth and wealth creation that doesn't really care about which party controls Congress, who is in the White House, or whatever else the talking heads are touting as the hot issue du jour. As other sectors flounder or fall, tech chugs along, spewing profits and creating wealth.

That's not to say you should just blindly throw money at the sector like investors did during the tech bubble of the late '90s. But with the right research and due diligence, we see an excellent opportunity for investors to get positioned in great tech companies that offer the potential for extraordinary returns.

At Casey's Extraordinary Technology, we focus on small-cap tech stocks poised for strong growth and market beating returns. And while we didn't achieve the 450% average gain of the eleven best-performing tech stocks of the past year, our average annualized return of more than 80% during 2010 is nothing to turn up one's nose at.

Whether you're a seasoned tech investor or a newcomer to the scene, Casey's Extraordinary Technology is a great place to profit, learn, and be entertained. Sign up now for a no-risk three-month trial. Details here.

What was QEII's Goal?

By Vedran Vuk

Yesterday, we had our regular conference call at Casey Research, and discussed our views on the economy and where things were heading. Of course, one topic was QEII. Everyone debated what might happen next. I said something like, "Well, even in his own eyes, Bernanke has failed with QEII. Unemployment hasn't been reduced enough, and 30-year Treasury rates have risen -not fallen." But thanks to the Casey team, I realized an overlooked fact: the stock market trend.

The stock market is up, but this wasn't Bernanke's original goal. Or was it? Usually, lower rates and large amounts of credit allow companies to expand their operations. As a result, monetary policy can temporarily lower the unemployment rate. But maybe Bernanke sees QEII through a different angle.

Companies already have plenty of cash, and rates have been low for a long time. If they wanted to expand, many could have done so by now. Perhaps Bernanke is attempting a roundabout method of lowering unemployment. Essentially, he could try to boost the stock market to regain consumer confidence. When consumers see their 401ks doing better, they feel wealthier and spend more. (Kevin Brekke's article touched on this.) This spending translates into earnings. And higher earnings will prompt the companies to expand. As a result, unemployment is reduced.

If this is Bernanke's plan, I'm really frightened. This strategy would mean the purposeful creation of a bubble in the stock market, in an attempt to fool the economy into increased production before the bubble pops. The Fed has stayed the course with QEII despite failing its own performance metrics. The stock-market goal would explain why the Fed is happy with QEII despite the poor performance and warnings from numerous economists.

So, is Bernanke really trying to pump up the stock market to regain consumer confidence? I can't say for sure, but it's possible. Let's hope not, because this would be a particularly bad scenario.

How Much More Demand Can Silver Handle?

By Jeff Clark, BIG GOLD

The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin's introduction in 1986. China's net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can't meet worldwide demand; the only way demand gets fulfilled is from scrap supply.

That is some very hungry demand. Which raises the question, how long can this pace continue?

This is important for various reasons, starting with how demand contributes to price. If demand falls off, our investments could, too.

While I've discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let's focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records?

There are a number of ways to measure this - the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. - but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle.

So how do the world's largest silver ETF and one of the biggest silver producers compare to the more fashionable equities?

The largest silver ETF, iShares Silver Trust, has net assets of $9.6 billion (as of February 4). This pales in comparison to the more popular stocks trading in the U.S. In fact, SLV has roughly 12% the market cap of McDonald's. It would have to grow over 20 times to match Walmart.

Pan American Silver, the largest pure silver producer trading on a major U.S. exchange, has a market cap of $16.3 billion. This is about 7% the size of Microsoft. The market cap would have to increase more than 19 times to match Apple. It is over 25 times smaller than Exxon Mobil.

This isn't to say SLV and PAAS will match the market cap of these other companies, but clearly the masses are still demanding much more of them than the biggest of silver's investment vehicles.

So how much more demand can silver handle? As much as it takes to make it the household name I'm convinced it will be before this is all over. When SLV is a favorite of fund managers. When Silver Wheaton is a market darling of the masses. When Pan American is Wall Street's top pick for the year.

Imagine what those bars on the right will look like when most everyone you know is talking about poor man's gold. The rise could be breathtaking.

Remember that silver rose over 3,646% from trough to peak in the last precious metals bull market; it's up about 630% in our current run. A return matching the 1970s advance would push the price to $152. This price level is further supported by the fact that this is about where it would be when inflation-adjusted for its 1980 peak.

When you look at the potential growth in market cap of the world's biggest silver investments, it becomes easy to view any downdraft in price as nothing but a buying opportunity. I know I do.

[BIG GOLD comes out tomorrow, which includes naming the cheapest one-ounce bullion coin on the market right now, plus a new gold stock pick that has incredible growth potential. Get all this and more for only $79 per year, including a 3-month trial with full money-back guarantee. Details here.]

Asian Tigers Leading Global Demand for More Gold

By Alena Mikhan and Andrey Dashkov

A growing number of analysts are coming to agree with our long-held view here at Casey Research that gold is in an unprecedented bull market. We've said this would be one for the record books, and so it has been. Perhaps the most significant record so far in this cycle is that gold has been appreciating for nine consecutive years. That hasn't happened in living memory. Gold closed at $276.50 in 2001, ending every year up, including last year's close at $1,405.50 - a 408.3% increase, not adjusted for inflation.

On January 27, gold hit $1,314.90, down 7.6% from the record $1,423.70 it reached last November. Some analysts see this price decline as a sign of the end of this bull market for gold. Opinions vary, and we disagree with them all, but there's one in particular we want to draw your attention to now: the notion that there is not enough demand to further increases in the price of gold.

This is simply contrary to abundant evidence that gold demand is growing rapidly. Asian countries, especially the world's gold top two consumers, India and China, have demonstrated that they are set to consume a lot more gold.

Based on Q310 statistics compiled by the World Gold Council, increased demand from China and India is primarily responsible for higher consumption in 2010 over 2009. In China, gold imports in the first 10 months of 2010 increased fivefold over the whole of 2009. One of the reasons given is fear of increasing inflation. Coupled with interest rates that are still artificially low, keeping money in the bank is falling out of favor with the Chinese, and many of them are looking for alternative methods of wealth preservation - especially gold. According to Bloomberg, 70 to 80 percent of total imports to China were made into mini-gold bars, a popular retail investment.

Eric Sprott believes increased Chinese demand coupled with loosened central bank policies toward gold transactions is causing a tsunami of investment demand for gold in China. As of September 2010, investment demand in China had increased 70% over October 2009. Jewelry demand increased just 8% over the same period. Sprott projects that the scope of Chinese and Indian combined investment demand for gold in 2010 will constitute more than half of 2010 total world mine supply. This is a significant shift in market fundamentals, with long-lasting consequences.

India, the world's largest bullion consumer, follows the same investment demand trend at a comparable pace: for the nine months ending September 2010, bullion demand in India surged by 73%, according to the World Gold Council. It outpaced jewelry demand growth by 11%, which also rose by a whopping 62% in 2010. This is very telling as jewelry demand in India also has an investment nature. No surprise, then, that increased gold demand led to a record level of gold imports last year.

We believe we are observing an enormous shift in the gold market today. Demand in Asia is surging against sluggish economic recovery and uncertainty, much as it has been doing on a smaller scale elsewhere around the world, since the crash of 2008.

Investment demand - which is to say, fear - is becoming the most important factor in today's gold market. GFMS Ltd., a London-based research company, reported that in 2010, for the first time in three decades, global investment demand for gold was higher than jewelry consumption. And it is our view at Casey Research that this trend will continue for several years to come.

[Not only has China started to hoard gold, it's also gearing up - together with several other countries - to dump the U.S. dollar. Learn all about the devastating consequences for the U.S. economy and how you can protect yourself by clicking here.]

Evil Stepchildren

By David Galland

The administration is making a lot of noise today about reforming its evil stepchildren, Fannie and Freddie, the "government sponsored enterprises" (GSE) that back virtually all of the conforming mortgages in America these days.

The intention, according to the spinmeisters, is for these entities to scale back their involvement in the nation's mortgage market and by doing so encourage a return of private lenders.

As part of the process the Treasury is recommending an increase in the size of mortgages considered to be "conforming," and therefore qualified for coverage by Fannie and Freddie.

Wait a second!

That's not going to lessen their involvement in mortgage lending - just the opposite!

Is it April 1 already?

Nope, checked the calendar - still February.

Could it be that the government is insulting the intelligence of the American public with all this talk of reforming Fannie and Freddie?

Business activities related to the U.S. real-estate industry make up about 17% of GDP. As you don't need me to tell you, the busted housing bubble has caused havoc in this large corner of the economy. I won't restate all the gory stats here, but will mention that the annual value of private construction begun in 2010 rang in 44% below the pre-bust level, in 2006.

And, according to the Bureau of Labor Statistics, employment in the construction industry was 7.6 million in January of 2006. As of January 2011, the BLS reported only 5.5 million people employed in construction - a decline of nearly 30%. And it's worse than that, because a sizable percentage of those workers still in construction are now on government jobs.

In addition, the amount of knock-on business from homeowners using their bubbly-priced houses as collateral for loans was a huge factor in the go-go days of the recent past. Today, at least 35% of U.S. mortgages are technically underwater, with the house worth less than what remains on the mortgage. And, if you add in the considerable costs associated with a real estate transaction - costs such as the typical 6% brokerage fee that reduces the net received by the seller, then the actual number of mortgages underwater soars. One credible estimate puts the actual number, when factoring in those costs, at well over 60% of all the homes in the nation.

Put simply, the housing sector is a huge and important component of the U.S. economy; and it is already in deep trouble. If mortgage rates were to increase by any appreciable amount, it would be devastating to both housing and the feeble economy. And make no mistake, absent government stooge companies guaranteeing loans for anyone with a pulse, interest rates will soar.

Always interested in his opinion on this topic, I asked Andy Miller, real estate entrepreneur and confirmed faculty member for our Casey Research Boca Raton Summit (April 29 - May 1) to comment on the noise on Fannie and Freddie coming out of Washington. His response follows.

David,

I have to laugh at it. The only other reaction a person could have is to cry.

In 2010, something over 90% of all home mortgages were sponsored by a GSA or FHA. Is it realistic to think that there will be some non-government sponsored program that could do what is now being done by government entities? I don't think so.

I won't encumber you with a long, dull email, but consider this: Fannie and Freddie routinely write mortgages over 90% LTVs (loan to value). They do so at extremely low rates. As a result, they are having huge problems with defaults and with the massive foreclosure and securitization structures. There is no outfit in the private sector that would write paper like that. It would be suicide. Therefore, how will you fill the void left by dismantling Fannie or Freddie?

I can illustrate this easily for you by directing you to the jumbo residential mortgage market. There is no Fannie or Freddie in that market since their lending stops at $417,000, depending on what part of the country you are in. At any rate, when you see what paper is being written in the jumbo market, it becomes easy to contrast. For example, there are very few private, jumbo loans written over 80% loan to value, and most are less than 80% LTV.

Can you imagine what would happen in the conforming market if, all of a sudden, Fannie and Freddie stopped writing loans, and a borrower had to turn to the private sector to get a loan? How many borrowers in America would be able and willing to write checks for 20%-25% down? We have become heroin addicts for high LTV/ low interest loans.

I don't doubt that the federal government will engage in some optical illusions, assuring us that they have stanched the losses on homes by terminating Fannie or Freddie. However, to think that the government can just turn this over to the private sector, and expect the private sector to write stupid loans with no federal guarantee is simply ludicrous.

As an aside, the Treasury, the administration, and Congress have spent the better part of the last two years railing about how bad and dishonest the private sector was while writing home mortgages. What happened? Why are they now advocating having mortgages written by the same people that wrote the paper in 2004, 2005, and 2006? I hope you are laughing too, because this should be on the Jay Leno show. Andy

On sharing Andy's remarks with our own Terry Coxon, also on the faculty in Boca Raton, he emailed back the following quip.

Every word Andy wrote is true. But why does any politician talk about the government getting out of the mortgage business? The only reason I can think of for saying "government out of the mortgage business" is to dodge blame for an expected train wreck.

As hard as the government has tried to keep the train from leaving the rails, the chart here points to the coming wreck. Rates are already beginning to move up: take away government guarantees and the 30-year rate will pop way above where it was just ahead of the crash. Remember, back when instead of taking your wallet, muggers would pin you against the alley wall until you agreed to take a loan?

The government can jawbone all it wants about unwinding Fannie and Freddie as part of its new initiative to appear more "Republican," but that doesn't begin to address the trillions in loans those entities are now standing behind, many of which, per above, are underwater. And it completely ignores the consequences of what would actually happen if the government stopped competing with the private sector and stopped guaranteeing new loans.

To wit, private sector lenders would:

• Require realistic house appraisals. A friend of mine recently took out a mortgage, and the lender didn't even ask for an appraisal - Why bother? The loan was conforming and would be shipped off to Fannie Mae before the ink was dry on the paperwork.
  
  
• Demand large down payments. Per Andy, 20% or even more - depending on a person's credit history.
  
  
• Proof of things like an ability to repay. You know, steady job and all that sort of thing.
  
  
• A much higher interest rate. Knowing what you know about the government's printing operations, would you lend money for 30 years for a yield fixed at 4.5%?

In other words, if the government steps away from the mortgage lending business, as it is now threatening to do, it would trigger an absolute rout in the housing market.

Is there a solution? Well, the country could begin offering citizenships to any foreigner who plops cash money down for a house in the U.S. worth more than, say, $300,000. The Chinese, among others, would be lined up at the door. Who knows, maybe that house down the street might catch the eye of Hosni Mubarak. I suspect he'll be looking for new digs outside of Egypt pretty soon - throw in a passport, and it would be a pretty sweet deal.

(Whoops, just heard that the Swiss have frozen Mubarak's accounts... no passport for you!)

In all seriousness, absent something that dramatic, the problems with housing will be with us for a long time to come.

Since we're on the topic of coming train wrecks, steady correspondent Nitin from Nepal shot me a snippet from Matt McAbby from Oakshire Financial on the current enthusiasm about the U.S. stock market. Some quotes worth reflecting on:

First on everyone's radar should be the dwindling volumes that are driving the current rally in equities. NYSE volumes have shrunk significantly of late, running as low as 30% below average - which could mean a few things:

1. Perhaps the rally is running out of buyers.

2. Perhaps the greater part of the trade is taking place off-exchange, in the institutionally murkiest of dark pools.

3. Perhaps sellers are holding out for a liquidity-induced jump to Dow 16,000.

4. Perhaps brokerages (which make big margins off commissions) are bored of profits and are discouraging "overtrading" among sales staff.

Whatever the reason, higher highs on low volume is generally not a positive sign.

And another thing

Two more indicators we keep an eye on are flashing danger at the moment. You should be aware of them, too.

The first is the insider sell/buy ratio, which last week saw wild numbers on the sell side at 434:1. For the week, $1.7 million worth of stock was bought in sixteen separate purchases, while 126 sales totaled just under $750 million.

Why were insiders cashing out in such manic fashion? Everyone going to the Super Bowl? Needed some spending cash for the trip?

Hmm.

The second indicator is overall margin debt, which last month hit levels higher than anything seen since Lehman Bros. got a toe tag.

Total NYSE margin debt printed at $276.6 billion, its highest reading since September 2008, though not yet the ultimate highs reached in June 2007 ("Alas, Sabrina, are we headed there again?!").

At that point, overall margin debt read $381 billion, a truly staggering number.

The simple truth is that we are in truly unchartered waters here. If there was ever a time to be cautious, and to keep your ear close to the ground, it is now. This view, of course, runs contrary to the herd which, as another dear correspondent wrote recently, is getting "crisis fatigue."

I think she's right. It's hard to stay on high alert for a protracted period of time. That Americans just want to have fun can be seen in the increased margin debt just referenced, as well as in the 2.5% leap in credit card debt in December 2010 alone.

Unfortunately, if we're right about where things are headed, then the shock of the next blow to the economy is going to have an especially devastating impact on those who - believing the steady talk about recovery - have again inched out on the credit limb.

Combine a dark turn in the mass psychology with an overheated stock market, and next thing you know my wonderful partner Doug Casey's Greater Depression will be upon us. Actually, based on the fundamentals, it already is. People just don't know it yet.

The good news is that you don't have to be glum, if you are prepared, and if you are careful. That brings me to what you might view as a public service announcement, aimed at all of you who have done so well with our resource picks.

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

Vedran Vuk
Casey's Daily Dispatch Editor

David Galland here, listening to the strange but lively song Rock me Amadeus by Faldo in order to get the engine revved.

Like many of you, I watched a live feed of Mubarak's speech last night. The BBC showed his speech live online, juxtaposed in a split screen with the crowd in Tahrir Square.

Thanks to my always handy "SnagIt" program - a must-have for anyone who writes for the Internet - I was able to do a quick screen grab of what I was watching:

It was an incredible moment, watching the faltering strong man announcing that, popular delusions to the contrary, hell no, he won't go.

As the news began to sink in, you could hear the noise from the crowd start to rise - it was like watching Mubarak lean on an electronic trigger leading to a very large pile of explosives. Fortunately for him, at least at that moment, no one with any influence on the crowd shouted out, "LET'S GET HIM!" thereby setting the crowd on a surge for the presidential fortress.

Even so, it was viscerally obvious that the Mubarak dictatorship was doomed - and sure enough, as I wrote today, it came to a screeching halt with his resignation.

And with his resignation, the entire power structure of the Middle East is now up for grabs.

Already, the opposition in Iran is calling for a mass gathering "in support of Egypt," which is a not so cleverly disguised attempt to stir the masses up for their own overthrow of government. Trying to stay ahead of the curve, the Iranian president is speaking optimistically of what's going on in Egypt as heralding a new era for an Islamist Middle-East (while putting the leader of the opposition under house arrest just to be safe).

Elsewhere, Saudi Arabia's King Abdullah, who had spoken out publicly in support of Mubarak - going so far as to say they'll support him even if the U.S. turns its back on its (expensive) puppet - began softening its pro-Mubarak rhetoric ahead of his resignation. It clearly dawned on the dictators in charge there that they might not want to be viewed as keeping company with Mubarak, should he be forced to hit the road, as he now has.

Unfortunately for all these dictators, there is such a thing as karma. Maybe not in the metaphysical sense, but certainly in the sense that years spend abusing the citizenry creates no sturdy friends, but quite the opposite - it makes for abundant quantities of steadfast enemies. As long as one can keep a really tight grip on the reins of power, cracking down hard and fast on any little threat to the regime, one can keep a lid on things. It's not for nothing that the Egyptian government operated under an official declaration of emergency for 30 years.

But weaken even a little, as Mubarak clearly had, and crowds will rise and dictators fall.

As such, Mubarak's now concluded attempt to cling to power transcends Egypt because of his status - until recently - as the icon for the Middle-Eastern dictator, the long ruling "iron man" of the largest and most powerful country in the region.

Make no mistake, the world may be watching the events as they unfold, but the downtrodden youth across the Middle East are watching very, very carefully. Now that "iron man" has fallen, dangerous dreams of freedom will almost certainly sweep through the region.

To quote one young protester I just heard on BBC, "The dictator is gone! And no one, but no one can ever do this to us again!"

Things are about to get very interesting. I think if I were a Saudi prince, I'd start fueling the plane.

Investment opportunity? While watching the drama, I also kept one eye on the price action of EGPT, the ETF made up of Egyptian stocks I mentioned in my January 28 article "On Egypt" in this service. In that article, I suggested that readers with a speculative bent might want to place a stink bid below the ETF's then-price of $16.24. On the same day that I wrote that article, the ETF bottomed at $15.90 (not enough to trigger my stink bid, unfortunately). It then rallied above $18 before falling back to $17.71 following Mubarak's speech. Now that he's resigned, it's trading up to $19.23. I wouldn't chase it, but if it looks like the country might actually become a more open society, the Egyptian market could have a good long run ahead of it.

As an aside, this sort of thing can be fun to trade. For instance, in 1996 Clinton sent war ships into Taiwanese waters to counter threatening rhetoric by mainland China. As the Taiwan stock market tanked in response, I thought to myself that the people panicking out of Taiwanese stocks were essentially betting on something akin to WWIII... the odds of which were extremely slim. I coulda-shoulda bought the Taiwan market at the time - but just like Egypt, I was too slow off the mark.

Even so, I think the point is valid - academic theories aside, investors often act irrationally, especially during times of crisis. If you can keep your cool, there's a quick profit to be made.

Evil Stepchildren

The administration is making a lot of noise today about reforming its evil stepchildren, Fannie and Freddie, the "government sponsored enterprises" (GSE) that back virtually all of the conforming mortgages in America these days.

The intention, according to the spinmeisters, is for these entities to scale back their involvement in the nation's mortgage market and by doing so encourage a return of private lenders.

As part of the process the Treasury is recommending an increase in the size of mortgages considered to be "conforming," and therefore qualified for coverage by Fannie and Freddie.

Wait a second!

That's not going to lessen their involvement in mortgage lending - just the opposite!

Is it April 1 already?

Nope, checked the calendar - still February.

Could it be that the government is insulting the intelligence of the American public with all this talk of reforming Fannie and Freddie?

Business activities related to the U.S. real-estate industry make up about 17% of GDP. As you don't need me to tell you, the busted housing bubble has caused havoc in this large corner of the economy. I won't restate all the gory stats here, but will mention that the annual value of private construction begun in 2010 rang in 44% below the pre-bust level, in 2006.

And, according to the Bureau of Labor Statistics, employment in the construction industry was 7.6 million in January of 2006. As of January 2011, the BLS reported only 5.5 million people employed in construction - a decline of nearly 30%. And it's worse than that, because a sizable percentage of those workers still in construction are now on government jobs.

In addition, the amount of knock-on business from homeowners using their bubbly-priced houses as collateral for loans was a huge factor in the go-go days of the recent past. Today, at least 35% of U.S. mortgages are technically underwater, with the house worth less than what remains on the mortgage. And, if you add in the considerable costs associated with a real estate transaction - costs such as the typical 6% brokerage fee that reduces the net received by the seller, then the actual number of mortgages underwater soars. One credible estimate puts the actual number, when factoring in those costs, at well over 60% of all the homes in the nation.

Put simply, the housing sector is a huge and important component of the U.S. economy; and it is already in deep trouble. If mortgage rates were to increase by any appreciable amount, it would be devastating to both housing and the feeble economy. And make no mistake, absent government stooge companies guaranteeing loans for anyone with a pulse, interest rates will soar.

Always interested in his opinion on this topic, I asked Andy Miller, real estate entrepreneur and confirmed faculty member for our Casey Research Boca Raton Summit (April 29 - May 1) to comment on the noise on Fannie and Freddie coming out of Washington. His response follows.

David,

I have to laugh at it. The only other reaction a person could have is to cry.

In 2010, something over 90% of all home mortgages were sponsored by a GSA or FHA. Is it realistic to think that there will be some non-government sponsored program that could do what is now being done by government entities? I don't think so.

I won't encumber you with a long, dull email, but consider this: Fannie and Freddie routinely write mortgages over 90% LTVs (loan to value). They do so at extremely low rates. As a result, they are having huge problems with defaults and with the massive foreclosure and securitization structures. There is no outfit in the private sector that would write paper like that. It would be suicide. Therefore, how will you fill the void left by dismantling Fannie or Freddie?

I can illustrate this easily for you by directing you to the jumbo residential mortgage market. There is no Fannie or Freddie in that market since their lending stops at $417,000, depending on what part of the country you are in. At any rate, when you see what paper is being written in the jumbo market, it becomes easy to contrast. For example, there are very few private, jumbo loans written over 80% loan to value, and most are less than 80% LTV.

Can you imagine what would happen in the conforming market if, all of a sudden, Fannie and Freddie stopped writing loans, and a borrower had to turn to the private sector to get a loan? How many borrowers in America would be able and willing to write checks for 20%-25% down? We have become heroin addicts for high LTV/ low interest loans.

I don't doubt that the federal government will engage in some optical illusions, assuring us that they have stanched the losses on homes by terminating Fannie or Freddie. However, to think that the government can just turn this over to the private sector, and expect the private sector to write stupid loans with no federal guarantee is simply ludicrous.

As an aside, the Treasury, the administration, and Congress have spent the better part of the last two years railing about how bad and dishonest the private sector was while writing home mortgages. What happened? Why are they now advocating having mortgages written by the same people that wrote the paper in 2004, 2005, and 2006? I hope you are laughing too, because this should be on the Jay Leno show. Andy

On sharing Andy's remarks with our own Terry Coxon, also on the faculty in Boca Raton, he emailed back the following quip.

Every word Andy wrote is true. But why does any politician talk about the government getting out of the mortgage business? The only reason I can think of for saying "government out of the mortgage business" is to dodge blame for an expected train wreck.

As hard as the government has tried to keep the train from leaving the rails, the chart here points to the coming wreck. Rates are already beginning to move up: take away government guarantees and the 30-year rate will pop way above where it was just ahead of the crash. Remember, back when instead of taking your wallet, muggers would pin you against the alley wall until you agreed to take a loan?

The government can jawbone all it wants about unwinding Fannie and Freddie as part of its new initiative to appear more "Republican," but that doesn't begin to address the trillions in loans those entities are now standing behind, many of which, per above, are underwater. And it completely ignores the consequences of what would actually happen if the government stopped competing with the private sector and stopped guaranteeing new loans.

To wit, private sector lenders would:

• Require realistic house appraisals. A friend of mine recently took out a mortgage, and the lender didn't even ask for an appraisal - Why bother? The loan was conforming and would be shipped off to Fannie Mae before the ink was dry on the paperwork.
  
  
• Demand large down payments. Per Andy, 20% or even more - depending on a person's credit history.
  
  
• Proof of things like an ability to repay. You know, steady job and all that sort of thing.
  
  
• A much higher interest rate. Knowing what you know about the government's printing operations, would you lend money for 30 years for a yield fixed at 4.5%?

In other words, if the government steps away from the mortgage lending business, as it is now threatening to do, it would trigger an absolute rout in the housing market.

Is there a solution? Well, the country could begin offering citizenships to any foreigner who plops cash money down for a house in the U.S. worth more than, say, $300,000. The Chinese, among others, would be lined up at the door. Who knows, maybe that house down the street might catch the eye of Hosni Mubarak. I suspect he'll be looking for new digs outside of Egypt pretty soon - throw in a passport, and it would be a pretty sweet deal.

(Whoops, just heard that the Swiss have frozen Mubarak's accounts... no passport for you!)

In all seriousness, absent something that dramatic, the problems with housing will be with us for a long time to come.

Since we're on the topic of coming train wrecks, steady correspondent Nitin from Nepal shot me a snippet from Matt McAbby from Oakshire Financial on the current enthusiasm about the U.S. stock market. Some quotes worth reflecting on:

First on everyone's radar should be the dwindling volumes that are driving the current rally in equities. NYSE volumes have shrunk significantly of late, running as low as 30% below average - which could mean a few things:

1. Perhaps the rally is running out of buyers.

2. Perhaps the greater part of the trade is taking place off-exchange, in the institutionally murkiest of dark pools.

3. Perhaps sellers are holding out for a liquidity-induced jump to Dow 16,000.

4. Perhaps brokerages (which make big margins off commissions) are bored of profits and are discouraging "overtrading" among sales staff.

Whatever the reason, higher highs on low volume is generally not a positive sign.

And another thing

Two more indicators we keep an eye on are flashing danger at the moment. You should be aware of them, too.

The first is the insider sell/buy ratio, which last week saw wild numbers on the sell side at 434:1. For the week, $1.7 million worth of stock was bought in sixteen separate purchases, while 126 sales totaled just under $750 million.

Why were insiders cashing out in such manic fashion? Everyone going to the Super Bowl? Needed some spending cash for the trip?

Hmm.

The second indicator is overall margin debt, which last month hit levels higher than anything seen since Lehman Bros. got a toe tag.

Total NYSE margin debt printed at $276.6 billion, its highest reading since September 2008, though not yet the ultimate highs reached in June 2007 ("Alas, Sabrina, are we headed there again?!").

At that point, overall margin debt read $381 billion, a truly staggering number.

The simple truth is that we are in truly unchartered waters here. If there was ever a time to be cautious, and to keep your ear close to the ground, it is now. This view, of course, runs contrary to the herd which, as another dear correspondent wrote recently, is getting "crisis fatigue."

I think she's right. It's hard to stay on high alert for a protracted period of time. That Americans just want to have fun can be seen in the increased margin debt just referenced, as well as in the 2.5% leap in credit card debt in December 2010 alone.

Unfortunately, if we're right about where things are headed, then the shock of the next blow to the economy is going to have an especially devastating impact on those who - believing the steady talk about recovery - have again inched out on the credit limb.

Combine a dark turn in the mass psychology with an overheated stock market, and next thing you know my wonderful partner Doug Casey's Greater Depression will be upon us. Actually, based on the fundamentals, it already is. People just don't know it yet.

The good news is that you don't have to be glum, if you are prepared, and if you are careful. That brings me to what you might view as a public service announcement, aimed at all of you who have done so well with our resource picks.

It's Not A Profit Until You Realize It

(Or: You Can 't Lose What You Never Had)

By Louis James, International Speculator

Some investors in this bull market bemoan "lost profits" resulting from taking profits on stocks that continue to rise - sometimes to much higher prices. This idea of "lost profits" is a very dangerous one, borne of pure wishful thinking, that can lead to realizing huge losses instead of profits. The idea is based on applying what you know after the fact to a time before the fact. It is the precise intellectual equivalent of wishing you could go back in time to buy gold at its 2001 bottom, or sell all stocks at their pre-2008 crash top. This is simply not possible - and the same applies to knowing in advance when a stock will peak, for profit-taking purposes.

At the moment you make a speculative investment decision, you do not know what will happen. You have an educated guess about a trend that you think will stack the odds in your favor, and you have your due diligence on the best bets to make to take advantage of that trend. That's all. THAT IS ALL.

It is critical for speculators to understand this, not to imagine that they have some special foresight just because they've made money in a raging bull market. Nor should they imagine, in spite of our track record, that we mighty titans at Casey Research have any special ability to predict what will happen in the future either. What we do have is a very keen sense of the trends and a lot of experience picking the best bets to place on those trends. But we never forget that the market can buck the trends we see, and even when the trend holds true as the future becomes the present, individual speculations can fail for any of a host of reasons, ranging form a bear attack on a key individual to a surprise coup d'etat.

At any given point in time, you can have the best possible research on a bet on the most solid trend imaginable, but you never have knowledge of the future. Anything can happen - and it often does.

Over the last year, more than a half-dozen companies we recommended surged within a few months of our recommending them, or were taken over as we speculated they might be. Sometimes that happened within days, sometimes it took a few months. Those were good bets, but I did not know what would happen, only what could happen. They have all corrected after surging, in some cases to well below the price at which we took profits, and yes, in some cases to prices well above where we took profits.

But again, at the given point in time when you are considering whether or not to take profits (which we recommend doing when you get your first double on the stock), you do not know which way the market, and the stock, will go next. You do not know that you will be missing out on profits. But you do know that you will eliminate all risk in the play by recovering your initial investment. This asymmetry between not knowing a stock's future price and knowing that you can benefit from whatever that might be free of risk makes the decision very clear: friend or foe, take the dough.

The only exception I can think of to this rule is when you honestly cannot think of a single thing you'd rather do with that money. If, at that point in time, I feel a near-certainty that the very best thing I can do with any cash I may happen to have available to speculate with is to put it into the same stock I am considering taking profits on, I may just let it ride.

But if I do that, I don't get to whine about losing the whole bundle if my "double or nothing" bet comes up "nothing." I'm a big boy, and I take my lumps with grace, knowing that no one but me decided to take the extra risk.

What else could I do with the recovered investment (which is what you get when you take profits on a 100% gain)?

I can stuff it back under the mattress and continue speculating with money I will now not be anywhere near as upset if I lose. Or I could use it to buy a different speculation. That would expose me to some new risk - but a different risk than the first one, vulnerable to a broad market correction, but impervious to company-specific bad news that might afflict the stock I took profits on. Or I could invest in something more solid, like real estate in a place where I want to live. Or park it in gold to reduce my financial risk even further. Or I could hold it, keeping some powder dry until the next super-speculation with out-of-the-ballpark potential comes along. Or... well, you get the idea.

Getting your money back out of a risky game is never a bad idea, no matter what happens next. Don't get greedy, play the odds smart, and build your fortune carefully, emphasizing risk reduction as much as maximizing gains. Recklessness will just get you slaughtered along with all the sheep in the next market crash.

Remember the cold, hard truth: There is no way to distinguish in advance lost profits from missed losses.

Friday Funnies

Dear (former) Congressman Lee,

I realize that you may be new to the world of "social networking," so a quick lesson may be in order.

When you take a photo and post it on a publicly accessible site- you know, like Craigslist - pretty much everyone in the world can view it.

And if you are, you know, a public figure - kind of like a congressman or something - someone might actually recognize you.

So, in case you were ever thinking of using a social network for, I don't know, something like taking a picture of yourself without a shirt on and posting it online - you know, to show people how ripped you are - it could like, you know, ruin your career?

And, besides, it would show you were really, really clueless.

Just thought you might want to know.

Signed,

Everyone else in the world

No Enemies

Toward the end of the Sunday service, the minister asked, "How many of you have forgiven your enemies?"

80% held up their hands.

The minister then repeated his question. All responded this time, except one man, an avid golfer named Walter Barnes, who attended church only when the weather was bad.

"Mr. Barnes, it's obviously not a good morning for golf. It's good to see you here today. Are you not willing to forgive your enemies?"

"I don't have any," he replied gruffly.

"Mr. Barnes, that is very unusual. How old are you?"

"Ninety-eight," he replied. The congregation stood up and clapped their hands.

"Oh, Mr. Barnes, would you please come down in front and tell us all how a person can live ninety-eight years and not have an enemy in the world?"

The old golfer tottered down the aisle, stopped in front of the pulpit, turned around, faced the  congregation, and said simply:

"I outlived all the sons of bitches."

Never Argue with a Woman

One morning, the husband returns the boat to their lakeside cottage after several hours of fishing and decides to take a nap.

Although not familiar with the lake, the wife decides to take the boat out. She motors out a short distance, anchors, puts her feet up, and begins to read her book. The peace and solitude are magnificent.

Along comes a Fish and Game warden in his boat.He pulls up alongside the woman and says, "Good morning, ma'am. What are you doing?"

"Reading a book," she replies, thinking, Isn't that obvious?

"You're in a restricted fishing area"' he informs her.

"I'm sorry, officer, but I'm not fishing. I'm reading."

"Yes, but I see you have all the equipment. For all I know you could start at any moment. I'll have to take you in and write you up."

"If you do that, I'll have to charge you with sexual assault," says the woman.

"But I haven't even touched you," says the game warden.

"That's true, but you have all the equipment. For all I know you could start at any moment."

"Have a nice day ma'am," and he left.

MORAL:

Never argue with a woman who reads.

It's likely she can also think.

The Government Gets Tough on Spending!

Steady correspondent Dennis Miller forwarded me an article with the following graphic showing the size of the 2011 federal budget (the 2012 budget is yet to be revealed) in blue, the expected budget deficit of $1.5 trillion in red, and the cuts proposed by the administration, in green. Can't see the green? Look to the next graphic.

Read the original article here.

Of course, the Tea Party types are still talking about winding the size of government back to 2008 levels - you know, when the deficit was only about $500 billion. A good start, for sure, even though it's just not going to happen. Even if the Republicans' newly stated goal of slashing $100 billion out of the federal budget deficit this year was to actually make it through the Senate and make it past the President and into the end zone - it would still leave a budget deficit of $1.4 trillion.

(The thought "we are doomed" just came to mind, but I quickly brushed it away.)

There's a reason for elections every couple of years. It's so that the American public can publicly express their displeasure with the government. In the last election, people were angry because the economy was bad - if it was ticking along nicely, you can bet the outcome would have been significantly different. Now, pull the plug on the government's spending - at least enough to actually make a difference (see the red wedge above) - and this country will look like a smoking hole in the ground in two years. Guess who will get voted out then?

I've said it before, and I'll say it again - we are experiencing the classic end phase of a degrading democracy. From this point on, it's just rearranging the deck chairs on the Titanic.

But there's no reason for you to go down with the ship.

In that regard, we have some resources you may find useful.

Seminar in Cafayate, Argentina. Starting with the upcoming Casey Research seminar being held in conjunction with the Harvest Celebration at La Estancia de Cafayate, March 15 - 20. At the event, Terry Coxon will be talking about the single most effective way he has discovered to legally internationalize your assets, which is saying something in that he has been consulting people on that topic (as the head of Passport Financial) for over 30 years. Plus, the event is a lot of fun.

Unfortunately, it is very close to being sold out, so if you are planning to attend, you need to let Dave Norden - who's helping to organize it - know right away by emailing him at dnorden@lec.com.ar. As a bonus, when you register before February 15, there is a discount off the already low fee charged to offset the costs of the rather elaborate festivities. But I don't think there'll be any space left after that date, regardless.

Special offer on The Casey Report ends tonight. Veronica in the office asked me to remind people that the special offer of one year of The Casey Report for just $98 - a 72% discount - ends at midnight tonight. The Casey Report is co-authored by Doug Casey, Bud Conrad, Terry Coxon, and yours truly; it focuses on the big-picture trends in motion for the U.S. and global economy, and how to profit from those trends. If you've ever thought about subscribing, now's the time to do so. In the current edition, we have a very interesting and comprehensive feature on potential problems with ETFs. Here's a link to the special offer, but again, it ends at midnight tonight.

Casey Youth Conference for Liberty and Entrepreneurship (CYCLE), San Diego March 31 - April 3. For some time we have been supporting these events for students in Eastern Europe, but a couple of the alumni thought it was time to do one in the U.S., and we agreed. Since initially announcing the event, we have received dozens of emails expressing interest in taking one of the 50 available slots. The registration is now open for anyone between 18 and 29 years old. Here's a quick description and a link, from the organizers:

My name is Natalie Adomait. I work with Casey Research and am an alum of the Casey Youth Conference on Liberty and Entrepreneurship. My fellow alumna, Katya, and I will be organizing the upcoming Casey Youth Conference on Liberty and Entrepreneurship (CYCLE) USA event in San Diego, CA on March 31 - April 3.

We are so excited to announce CYCLE USA 2011 is now open for registration!

The Casey Youth Conference on Liberty and Entrepreneurship (CYCLE) is an educational conference organized by CYCLE alumni and hosted by Casey Research specifically for students and young professionals. The goal of these events is to help transform young lives by providing the tools and knowledge to achieve greater success as investors, entrepreneurs, and human beings.

The San Diego event features incredible speakers - Doug Casey, Louis James, David Galland, Rick Rule, and more from the Casey team. This will be an unforgettable event that you will not want to miss.

Program information has been attached, which includes a full schedule for the conference, and more about the speakers. To register, please visit https://www.regonline.com/caseyyouthsummit.

We look forward to seeing you in San Diego!

Best,

Natalie Adomait, CYCLE USA 2011 Coordinator

CYCLE Alumna 2009, 2010

&

Katya Akudovich, CYCLE USA 2011 Coordinator

CYCLE Alumna 2010

That's it for this week!

As always, it's been a pleasure spending time with you today. Thank you for reading, and for being a subscriber to a Casey Research publication. And now, having gone on for far too long I will make like Mubarak, and say "Adios" until next time.

David Galland
Managing Director
Casey Research

The Federal Reserve always portrays itself as a distinguished institution. The Fed's supporters are always so "scientific" and disinterested. But yesterday, in Ron Paul's subcommittee on monetary policy, we found out exactly how supporters of the Federal Reserve react when challenged. 

Dr. DiLorenzo, an Austrian economist, testified before the subcommittee. (For the video of the whole two-hour-long committee hearing, click here.) But did the media report on his statement? No. They instead focused on his other economic works and attacked his credentials.

For those readers unfamiliar with Tom DiLorenzo's research, he takes a critical view of often glorified political leaders from the past and reexamines their actions with the help of economics. His books include Hamilton's Curse, which takes a look at Alexander Hamilton's huge role in pushing for a national bank. Essentially, today's Federal Reserve is a fulfillment of Hamilton's vision. Dr. DiLorenzo is best known for his notable book on Abraham Lincoln, The Real Lincoln. 

I've read both books and found them extremely interesting. And though Lincoln has many admirers, his administration did close opposition newspapers and did deport an unfriendly congressman, among other wrong-doings. Those actions aren't very democratic, to say the least. Furthermore, the book questions Lincoln's views toward slavery and African-Americans. Lincoln supported the colonization of freed slaves back to Africa and even defended a slave owner in court over the issue of an escaped slave. In his book, DiLorenzo also questions the necessity of the bloodshed in the Civil War that resulted in the loss of 600,000 lives.

We can all have different opinions on Lincoln, but we can probably agree that no one deserves a public witch trial for academically criticizing a past presidency. After all, scholarly work is best when it challenges commonly held beliefs.

Now, what does this have to do with monetary policy? Absolutely nothing. But this is what the supporters of the Fed would rather discuss than the Austrian arguments against the Fed. Hmm... I wonder why?

On the New York Times blog, Paul Krugman mentions DiLorenzo's testimony. He notes, "Mike Konczal has a post about Ron Paul's first hearing on monetary policy, in which he points out that the lead witness is a big Lincoln-hater and defender of the Southern secession. And it's true!"

Thank you for this highly educated response, Dr. Krugman. DiLorenzo testifies with an Austrian economics argument, and Krugman, an economics Nobel Laureate, responds with a character smear and no mention of anything said at the hearing. Bravo. 

Liberal blogger Matt Yglesias went after DiLorenzo for his criticisms of Abraham Lincoln as well, but at least he actually made some short commentary on economics. Since backgrounds seem to be important to Yglesias, let's point out his highly qualified credentials on the topic, a degree in philosophy and no financial industry experience. 

In the committee, Congressman Lacy Clay accused Tom DiLorenzo of working for a neo-confederate group. He attacked his character but ultimately had no monetary-policy questions for him. Once again, while on the topic of character assassination, let me quote Mr. Clay, a holder of a political science degree, in his opening statement:

"The Republican assertion that the Fed's actions to diffuse the money supply in order to hold down interest rates and lower unemployment will somehow harm our currency is absolutely wrong."

His comment doesn't place him in the Austrian school of thought or the Keynesian school. It places him in the school of dimwits and jackasses. There is no PhD economist alive that would agree with his incredibly ignorant statement. It is absolutely frightening that a man who lacks an understanding of even the most basic macroeconomic principles sits on the subcommittee for monetary policy.

Congressman Al Green also had a choice quote, but it wasn't as bad as Mr. Clay's:

"I believe that the chairman [Bernanke] has embarked upon a path that is going to help us have a soft, softer landing than we would have but for the QEI and the QEII. Without them, it's counterfactual, but there are economists that tell us that we would have a landing that may have been a crash and it may have been devastating for the economy much more so than where we are now. "

Strange, fall 2008 sure felt like a crash, but it's a good thing that the economy wasn't devastated. The recession has only been the second longest recession in U.S. history. On a side note, remember yesterday's intro on "soft landings"? They are often promised but rarely seen.   

When the Fed really gets threatened, the veil of a distinguished institution falls apart and the creature from Jekyll Island shows its ugly face. It's not about theory, logic or facts. The Fed will do anything to keep itself in power.

I have many more thoughts on this subcommittee hearing, but I'll have to turn it over to Alena Mikhan and Andrey Dashkov who will report on the growing demand for gold from China and India. Then, Alex Daley's article will touch on Nokia's future and the CEO's recently leaked company memo. This CEO isn't a bad writer - I wish that I had used the burning oil platform analogy for an article. I could think of a few instances where that would work well in a Daily Dispatch piece. Anyway, let's get started...

Asian Tigers Leading Global Demand for More Gold

By Alena Mikhan and Andrey Dashkov

A growing number of analysts are coming to agree with our long-held view here at Casey Research that gold is in an unprecedented bull market. We've said this would be one for the record books, and so it has been. Perhaps the most significant record so far in this cycle is that gold has been appreciating for nine consecutive years. That hasn't happened in living memory. Gold closed at $276.50 in 2001, ending every year up, including last year's close at $1,405.50 - a 408.3% increase, not adjusted for inflation.

On January 27, gold hit $1,314.90, down 7.6% from the record $1,423.70 it reached last November. Some analysts see this price decline as a sign of the end of this bull market for gold. Opinions vary, and we disagree with them all, but there's one in particular we want to draw your attention to now: the notion that there is not enough demand to further increases in the price of gold.

This is simply contrary to abundant evidence that gold demand is growing rapidly. Asian countries, especially the world's gold top two consumers, India and China, have demonstrated that they are set to consume a lot more gold.

Based on Q310 statistics compiled by the World Gold Council, increased demand from China and India is primarily responsible for higher consumption in 2010 over 2009. In China, gold imports in the first 10 months of 2010 increased fivefold over the whole of 2009. One of the reasons given is fear of increasing inflation. Coupled with interest rates that are still artificially low, keeping money in the bank is falling out of favor with the Chinese, and many of them are looking for alternative methods of wealth preservation - especially gold. According to Bloomberg, 70 to 80 percent of total imports to China were made into mini-gold bars, a popular retail investment.

Eric Sprott believes increased Chinese demand coupled with loosened central bank policies toward gold transactions is causing a tsunami of investment demand for gold in China. As of September 2010, investment demand in China had increased 70% over October 2009. Jewelry demand increased just 8% over the same period. Sprott projects that the scope of Chinese and Indian combined investment demand for gold in 2010 will constitute more than half of 2010 total world mine supply. This is a significant shift in market fundamentals, with long-lasting consequences.

India, the world's largest bullion consumer, follows the same investment demand trend at a comparable pace: for the nine months ending September 2010, bullion demand in India surged by 73%, according to the World Gold Council. It outpaced jewelry demand growth by 11%, which also rose by a whopping 62% in 2010. This is very telling as jewelry demand in India also has an investment nature. No surprise, then, that increased gold demand led to a record level of gold imports last year.

We believe we are observing an enormous shift in the gold market today. Demand in Asia is surging against sluggish economic recovery and uncertainty, much as it has been doing on a smaller scale elsewhere around the world, since the crash of 2008.

Investment demand - which is to say, fear - is becoming the most important factor in today's gold market. GFMS Ltd., a London-based research company, reported that in 2010, for the first time in three decades, global investment demand for gold was higher than jewelry consumption. And it is our view at Casey Research that this trend will continue for several years to come.

[Not only has China started to hoard gold, it's also gearing up - together with several other countries - to dump the U.S. dollar. Learn all about the devastating consequences for the U.S. economy and how you can protect yourself by clicking here.]

How Nokia Plans to Get Its Groove Back

By Alex Daley

There is no question about it: mobile is huge. By many measures, it is the biggest technology business in the world. According to the latest data from 2010, there are an estimated 5 billion mobile phone users around the world, covering 72% of the global population. The industry has created countless billion-dollar behemoths, from the resurgent Apple built on top of billions of dollars of yearly iPhone sales, to Research in Motion with its phenomenally successful Blackberry line of devices, to massive mobile carriers like France's Orange, the UK's Vodafone, and the world's largest carrier by subscribers, China Mobile.

But one of the mobile world's most celebrated early stars is fading, and fast - Nokia. The Finnish mega-company traces its roots all the way back to the rubber industry in 1865. But it evolved over nearly a century and a half into the largest mobile phone supplier in the world. At its peak, the company accounted for the majority of all phones in the world. However, lately things have begun to unwind. Market share for the company has slipped from 39% in 2008 to 35% in 2009, and again to 30% in 2010. 

Not only is their global market share decreasing, they're being assaulted from every side and find themselves with shrinking influence, shrinking margins and shrinking options. Apple, RIM, and the contingent of Android phone manufacturers around the world have gulped up the overwhelming majority of the high-end smartphone market, where profit margins are high. On the other end of the spectrum, Chinese technology outfits have begun to lock up the massive lower end of the market, turning out designs and equipment at a breakneck pace. 

Desperate to find relevance in a market moving on without the company, last year they appointed former Microsoft executive Stephen Elop to the position of CEO. He has been pretty quiet since he joined the company, taking his time to learn the business and get to the root of the issues that cause the market to value this technology giant at less than the $43 billion in revenue it generated last year. Quiet until now. 

Yesterday a memo from the new CEO to the employees of the struggling firm leaked onto the Internet. In it, Elop compares the company to a man who must choose between dying on a burning oil platform and risking his life in the dark, cold sea many meters below. The memo, which is included in full below, doesn't mince words by comparison to most CEO-speak. 

And the use of the term "platform," while symbolic, seems like a calculated choice for a company that staked its future on a failing developer platform known as Symbian, and a long delayed smartphone platform called MeeGo yet to even launch nearly four years after the iPhone was originally released.

For anyone who follows this industry, the memo is required reading, as it outlines the problems Nokia faces. And between the lines, it appears to spell out the strategy the company must take, and is largely rumored to be announcing tomorrow: abandoning its platform and starting fresh in unknown waters.

The question of the hour is not just whether or not that will happen, but whose platform it will be. Apple doesn't license. HP has locked up WebOS with its Palm buy. That really only leaves Google, whom Elop cites as a competitor, and Microsoft, his Alma Mater, which goes completely unmentioned in the damning note below. Go ahead and read it. And when you do, think about what would be going through your head if you were a longtime executive or middle manager at the company:

There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform's edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.

As the fire approached him, the man had mere seconds to react. He could stand on the platform and inevitably be consumed by the burning flames. Or he could plunge 30 meters into the freezing waters. The man was standing upon a "burning platform," and he needed to make a choice.

He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times - his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a "burning platform" caused a radical change in his behaviour.

We too, are standing on a "burning platform," and we must decide how we are going to change our behaviour.

Over the past few months, I've shared with you what I've heard from our shareholders, operators, developers, suppliers and from you. Today, I'm going to share what I've learned and what I have come to believe.

I have learned that we are standing on a burning platform.

And we have more than one explosion - we have multiple points of scorching heat that are fuelling a blazing fire around us.

For example, there is intense heat coming from our competitors, more rapidly than we ever expected. Apple disrupted the market by redefining the smartphone and attracting developers to a closed but very powerful ecosystem.

In 2008, Apple's market share in the $300+ price range was 25 percent; by 2010 it escalated to 61 percent. They are enjoying a tremendous growth trajectory with a 78 percent earnings growth year over year in Q4 2010. Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience and developers would build applications. They changed the game, and today, Apple owns the high-end range.

And then there is Android. In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers. Android came in at the high end, they are now winning the midrange, and quickly they are going downstream to phones under €100. Google has become a gravitational force, drawing much of the industry's innovation to its core.

Let's not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in the Shenzhen region of China to produce phones at an unbelievable pace. By some accounts, this ecosystem now produces more than one-third of the phones sold globally - taking share from us in emerging markets.

While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind.

The first iPhone shipped in 2007, and we still don't have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.

We have some brilliant sources of innovation inside Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphones. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market.

At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.

At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, "the time that it takes us to polish a PowerPoint presentation." They are fast, they are cheap, and they are challenging us.

And the truly perplexing aspect is that we're not even fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis.

The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren't taking our market share with devices; they are taking our market share with an entire ecosystem. This means we're going to have to decide how we either build, catalyse or join an ecosystem.

This is one of the decisions we need to make. In the meantime, we've lost market share, we've lost mind share and we've lost time.

On Tuesday, Standard & Poor's informed that they will put our A long term and A-1 short term ratings on negative credit watch. This is a similar rating action to the one that Moody's took last week. Basically it means that during the next few weeks they will make an analysis of Nokia, and decide on a possible credit rating downgrade. Why are these credit agencies contemplating these changes? Because they are concerned about our competitiveness.

Consumer preference for Nokia declined worldwide. In the UK, our brand preference has slipped to 20 percent, which is 8 percent lower than last year. That means only 1 out of 5 people in the UK prefer Nokia to other brands. It's also down in the other markets, which are traditionally our strongholds: Russia, Germany, Indonesia, UAE, and on and on and on.

How did we get to this point? Why did we fall behind when the world around us evolved?

This is what I have been trying to understand. I believe at least some of it has been due to our attitude inside Nokia. We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven't been delivering innovation fast enough. We're not collaborating internally.

Nokia, our platform is burning.

We are working on a path forward - a path to rebuild our market leadership. When we share the new strategy on February 11, it will be a huge effort to transform our company. But I believe that together, we can face the challenges ahead of us. Together, we can choose to define our future.

The burning platform, upon which the man found himself, caused the man to shift his behaviour and take a bold and brave step into an uncertain future. He was able to tell his story. Now we have a great opportunity to do the same.

Stephen.

Vedran here again. David will be writing tomorrow. I'll see you again on Monday. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

Everyone is familiar with the myth that booms can last forever. But another, less noticeable myth takes hold right when the boom begins to weaken. It's the idea that the central bank can slowly unwind apparent problems on the horizon.

The U.S. experienced this during the 2006-2008 period. Bernanke tried to raise rates to avert inflation. As soon as the rates rose, there were problems with adjustable-rate mortgages. It's hard to argue that the MBS crisis was a complete surprise. But investors thought that this was no big deal - just a speed bump in the road. If anything, the MBS problem would keep the market flat. Or we might be eased downward into a mild slump. But a crash? Of course not.

China and Europe today somewhat remind me of this period. China's balancing act with higher rates appears to be working. And in Europe, everything is fine at the moment; the PIIGS aren't in the headlines lately. Most imagine that the worst is over - and Europe can slowly ease out of trouble. But I think both areas will be extremely lucky to pull off their plans without rocking the boat.

We've seen this mood before - it usually precedes a crisis by a year or two. A problem in the market is recognized, but for some reason, everyone closes their eyes and hopes for the best. Looking back through history, there are few episodes where the economy gently unwinds major problems. The more common reaction is a giant and sudden correction. While China and Europe may be holding up for now, they'll have a reckoning day somewhere down the road.

First, Jeff Clark will gauge the investor demand for silver by comparing the largest silver ETF to large-cap companies. Then, Chris will lay out the Technology Team's process for valuing biotech stocks. With no cash, it can be tricky, but there's a way around that obstacle. And last, I'll comment on a news event as well as provide a link to an interesting lecture on the Federal Reserve.

How Much More Demand Can Silver Handle?

By Jeff Clark, BIG GOLD

The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin's introduction in 1986. China's net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can't meet worldwide demand; the only way demand gets fulfilled is from scrap supply.

That is some very hungry demand. Which raises the question, how long can this pace continue?

This is important for various reasons, starting with how demand contributes to price. If demand falls off, our investments could, too.

While I've discussed the concern regarding the lack of supply before, which has its own implications for the silver market, let's focus on investment demand. Frankly, is there room for it to continue to grow? After all, how long can investors continue to set records?

There are a number of ways to measure this - the amount of money available to invest, its percent of total financial assets, its contrast to demand in the last bull market, etc. - but I think the bottom line to answering the question is to compare the biggest silver investments to some popular equities. If they rival that of the stocks we always see on the news and analysts constantly talk about and every fund manager wants to own, then it might be reasonable to assume demand could be nearing its pinnacle.

So how do the world's largest silver ETF and one of the biggest silver producers compare to the more fashionable equities?

Pan American Silver, the largest pure silver producer trading on a major U.S. exchange, has a market cap of $3.72 billion. This is 4.7% the size of McDonald's. The market cap would have to increase more than 53 times to match Walmart. It is over 62 times smaller than Microsoft.

This isn't to say SLV and PAAS will match the market cap of these other companies, but clearly the masses are still demanding much more of them than the biggest of silver's investment vehicles.

So how much more demand can silver handle? As much as it takes to make it the household name I'm convinced it will be before this is all over. When SLV is a favorite of fund managers. When Silver Wheaton is a market darling of the masses. When Pan American is Wall Street's top pick for the year.

Imagine what those bars on the right will look like when most everyone you know is talking about poor man's gold. The rise could be breathtaking. 

Remember that silver rose over 3,646% from trough to peak in the last precious metals bull market; it's up about 630% in our current run. A return matching the 1970s advance would push the price to $152. This price level is further supported by the fact that this is about where it would be when inflation-adjusted for its 1980 peak.

When you look at the potential growth in market cap of the world's biggest silver investments, it becomes easy to view any downdraft in price as nothing but a buying opportunity. I know I do.

[BIG GOLD comes out tomorrow, which includes naming the cheapest one-ounce bullion coin on the market right now, plus a new gold stock pick that has incredible growth potential. Get all this and more for only $79 per year, including a 3-month trial with full money-back guarantee. Details here.]

Biotech Valuation 101

By Chris Wood, Casey's Extraordinary Technology

It's no secret that we here at Casey's Extraordinary Technology are avid followers of the biotech world and frequent investors in biotech companies. For good reason - the biotech industry is an exciting opportunity for investors with the right risk tolerance. It strives to meld the cutting edge of science and technology with the world of finance to create the medicines of tomorrow. And it can provide investors with mammoth returns in short order, if you know what you're doing. You can also lose your shirt investing in biotech, even if you know what you're doing. The trick is to put the odds of success in your favor and position yourself for your winners to outnumber your losers. And you will have losers.

The good news is that you don't need an MD or PhD to start investing in biotech stocks. And while I don't recommend you rush out and buy a bunch (or any) of them after you read this article, I would like to provide you with a basic idea of how professional investors approach these stocks from a valuation perspective.

Before going on, I must stress that there is no "accepted" way of valuing biotech stocks and I've simplified things here for the sake of brevity.

Now let's get started...

Many biotech companies with promising drug candidates are not only pre-earnings companies, but they're basically pre-revenue companies with their only revenue derived from milestone payments from larger partners associated with advancing their pipeline. Substantial revenues will only come once the firm has commercialized a drug and it receives a percentage of sales in the form of royalty payments.

Valuing a company like this might seem like a daunting task, but the trick is at first not to think of it as one company with a pipeline of drugs. Rather, think of each drug in the pipeline as its own market opportunity, or company if you will. Now all you have to do is value all these little companies and add them together to get a rough estimate of what the whole firm is worth. This can be accomplished using simple discounted cash flow analysis to calculate a probability weighted net present value of the pipeline, and hence, the company itself.

First, we start with a forecast of sales revenue from the lead pipeline candidate; i.e., the drug that is the furthest along in clinical trials. We'll call it "Candidate 1."

(Now is probably a good time to mention that when valuing the pipeline, we only consider candidates that have made it to clinical trials. We consider all the candidates in the discovery or pre-clinical stage worthless because the probability of these drugs actually making it to market is so small.)

The sales forecast horizon typically spans ten years, and we assume a ramp-up to peak sales.

Start the forecast by determining what the patient population is for the disease Candidate 1 is supposed to treat; i.e., the potential addressable market of the drug. This potential market size will range from a few thousand patients for rare conditions like metastatic basal cell carcinoma to many millions of patients for something like type-2 diabetes. Also, be sure to only include patient populations in areas where the drug is being considered for sale at market prices.

Next, assess the potential competition of Candidate 1 to determine a market penetration rate. If Candidate 1 is a new cure for a rare condition, it could receive orphan drug status and be granted exclusive rights to the cure for a period of seven years post-approval. On the other hand, if Candidate 1 is meant to treat a common disease in a market with lots of competition, you might assume a market penetration rate of only a few percent.

Now that you have a potential market size and a market penetration rate, you can calculate Candidate 1's estimated market size in terms of patient number. Then you just multiply this number of patients by your estimated sales price per patient per year and you've got an annual peak sales figure for Candidate 1.

The best way to estimate a sales price for Candidate 1 is to use a comparables approach by ascertaining what competing products sell for in the marketplace. If Candidate 1 is a new cure to treat a rare condition, however, estimating the sale price could involve a great deal more uncertainty. One option in this case is to call the company's investor relations department and inquire about any guidance it may provide.

Once a peak sales figure for Candidate 1 is derived, you must figure out how much of that revenue is flowing to the company you are trying to value. You see, even after very early-stage IPOs, most biotech companies don't have the resources and capital necessary to take a drug from discovery and development, through clinical trials, all the way to commercialization. So, many of these companies partner up with bigger players, which take on varying levels of the risk and costs associated with bringing the drug to market. The actual revenue that flows to the small biotech is often in the form of a royalty payment set at a percentage of the drug's sales. (You can usually find a description of the agreements outlining specific percentages in the subject company's 10-k reports.)

After multiplying Candidate 1's peak sales by the royalty rate (or other rate depending on the specific agreement in place), you have your estimate of annual peak sales revenue.

An example of this calculation is shown below:

As I noted before, we usually forecast the first ten years of the drug's sales because that's generally an adequate approximation of how long the drug has left before its patent expires. Also, we assume a ramp-up to peak sales, which generally falls in the range of about five years.

Now that you have your sales forecast for Candidate 1 for the next ten years, you have to forecast operating expenses and capital costs to derive a forecast of future cash flows, then discount those cash flows to the present at an appropriate rate to account for risk, then apply a probability of approval factor to those discounted cash flows to arrive at a probability weighted net present value for Candidate 1. Just repeat this process for all the drug candidates undergoing clinical trials and sum together for an estimate of firm value for the subject company.

Obviously, much more could be written about this process, particularly about estimating costs and accounting for risk. But the goal here was just to give you a basic understanding of how we biotech investors approach these stocks. We start with a rough calculation just like we performed above, and if the numbers look promising, we dig in for more detail.

A Century of Failure: Why It's Time to Consider Replacing the Fed

By Vedran Vuk

This Wednesday, I had the pleasure of attending a lecture at Loyola University Maryland by Professor George Selgin from the University of Georgia. The lecture focused on the failures of the Fed to achieve its goals since inception. He shows that the Fed's performance is at the very least no better than the period prior to its existence. Dr. Selgin gave almost an identical speech at the Mises Institute late last year. Here is the video.

I particularly enjoyed his approach to the topic. He uses research and quotes from the mainstream to back his points - though his own views are influenced by Austrian economics. It's important to defeat the Fed on its own terms. And that's just what Selgin does.

Once the data is laid out, it's hard to argue against his case, no matter your economic school of thought. Often, arguments against the Fed are packaged in repetitious and limited ways. OK, we know that the dollar is worth about 95% less since 1913. Selgin repaints the picture with a different brush and a much more sophisticated approach.

On a side note, Dr. Selgin does research on the history of private minting. Though I haven't read it, some readers may enjoy his most recent book, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821.

The World Continues to Get Smaller

There's big news today from England. The London Stock Exchange has offered to purchase the Toronto Stock Exchange for C$3.2 billion in stock. This is the biggest deal since the Singapore Exchange made an offer on Australia's exchange, and it's a trend sure to continue for some time. The stock exchanges of the world simply won't be getting less integrated.

It makes me wonder whether there's an opportunity here to purchase stock exchanges in hopes of further consolidation and mergers. Perhaps a diversified portfolio of various stock exchanges might be worth holding. I'll have to take a closer look at that possibility.

On a side note, I find the opening line of the linked article a bit sad (for the dollar), "London Stock Exchange Group Plc, the 210-year-old bourse operator, agreed to buy Toronto Stock Exchange owner TMX Group Inc. for about C$3.2 billion ($3.2 billion) in stock as the companies cut costs to counter lost market share."

Yes, 3.2 billion Canadian dollars worth parenthesis 3.2 billion U.S. dollars.

That's it for today. Thank you for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

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Many of our subscribers are quite knowledgeable on economics. They really keep up with world events and have read numerous books on the subject. However, one can reach a ceiling without more formal education. I faced that problem during my undergraduate studies. I had read mountains of short articles and books on the topic, but I still didn't have an in-depth appreciation of the subject.

Not until entering my PhD program did I learn the ins and outs of the field. But I could have done so beforehand. Consider this advice for curious readers who desire highly advanced knowledge of economics without attending a PhD or other program.

In many ways, PhD programs are simply certification mechanisms. They actually teach the students very little. Essentially, the professor hands out a syllabus with an enormous reading list. Each week, a course requires about 20 hours of intense reading - but each class is only three hours long, resulting in a conundrum. The professor cannot cover 20 hours of reading in three hours of class. Hence, 80% of a PhD education comes from your own willingness to read endless academic articles.

As a result, a committed person could essentially acquire the knowledge on their own. The only classes that might be helpful are math and statistics courses. Many academic articles require familiarity with these subjects. However, one can get the general idea even with limited mathematical knowledge.

For readers who really want to push their boundaries, I would recommend finding a favorite professor or school with graduate-level classes. Then, locate the professor's syllabus online or e-mail him to get one. And then work through the articles slowly in your spare time.

The only problem might be access to the academic articles. Some university libraries will charge non-students an annual fee to access library resources and online journals. Another way to get access might be to sign up for the cheapest one-credit class one can find at a local university - just to get access to the school's online academic publications. Purchasing each academic article would probably be more costly in the long-run.

Now, I don't recommend this process for just anyone. But if you're really crazy about economics and feel that your knowledge has reached a plateau, then I would consider this route. A PhD degree in economics is arduous to acquire - the actual knowledge behind it is quite accessible to the determined reader.

Now to the rest of today's issue. First, I'll make some comments on China's interest rate increase, then Kevin Brekke will relay observations from his trip to the U.S. Kevin is an ex-pat living in Switzerland, hence, he brings the fresh perspective of an outside view. Last, I'll take my best guess at what hobgoblins might be running around Bernanke's brain.

China Raises Rates Again

By Vedran Vuk

China has raised its benchmark one-year lending rate by 25 basis points, from 5.81% to 6.06%. The market accepted the hike without much trouble. The Hang Seng Index only fell 0.294% on the news. In the January 3rd edition of Casey's Daily Dispatch, I laid out this scenario:

"The December interest rate increase was only the second of 2010. However, two rate increases in such a short period of time usually signal more to come. And China may be able to raise rates with little fanfare... If the market has already priced in the interest rate movements, the Chinese shouldn't expect a harsh reaction from higher rates. The market barely reacted to the December rate hike, lending credence to this point of view."

So, what's next for China? In the near term, additional 25 basis-point hikes wouldn't surprise me.  However, if the inflation numbers don't respond positively, China will likely have to resort to 50 basis-point hikes. That could shake the market. Currently, the market expects an incremental approach to higher rates. Hence, higher inflation would suggest bigger jumps in the benchmark rate - that might mean trouble for the Chinese economy.

On The Adaptation of our Species

By Kevin Brekke

Human behavior, or more accurately its understanding, is certainly one of the last great mysteries. As Charles Darwin and others have observed, animals are adaptive to their environment, and that ability most certainly applies to the species Homo sapiens. For most animals, the process of adjusting to their surroundings is one of positive integration that over time benefits the whole. Adapt or perish is one way of characterizing the challenge.

But for those at the top of the taxonomic scale, adaption can often be negative integration, or disintegration, when it is based on false information. And that looks to be the case today regarding how investors and consumers are changing their thinking and their behavior in a rising stock market environment.

As many of you know, I am an expat American currently residing in Switzerland, and have been living in central Europe for many years. I live a rather self-imposed isolated life in the Alps, happily unmolested by western media. Returning to the U.S. is always an eye-opener. I have been in America for the last four weeks, spending my time in Texas and California seeing family and friends, and have observed how Americans seem to be adapting their views and behavior within the context of a rebounding stock market and perceived economic recovery, albeit an anemic one.

And so far during my time here, I have seen few clues of concern from the people in general about the state of the economy, the country's fiscal health, or the future of the American Dream. It's all anecdotal, mind you, but I find it nonetheless instructive and thought I would relay my observations:

- When at Macy's, I overheard a conversation between a floor salesperson and a shopper who knew each other by name, both about 60 years of age. The saleswoman said she was forced to return to work because she lost so much of her retirement money in the crash and how hard it was to get her job back with Macy's. The nicely put together shopper said she had to sell her home because she, too, lost a lot of money in the stock market crash and got $300,000 less than it was "worth." Both agreed that at least things were getting better with the stock market up.

- A stylist who cut my wife's hair talked about the slowing economy, especially in construction, in the Coachella Valley (Palm Springs). But she thought things were getting better in construction, and, you know, the stock market is up.

- One morning at the hotel's "complimentary hot breakfast buffet" a table of three men in business-casual attire seated next to me were upbeat about prospects for their company's sales, and debated the merits of pharmaceutical stocks (I got the impression they were pharma sales reps). With the stock market at 12,000 things were looking good.

Other family and friends, as well as the strangers above, sounded to me like a USA Today headline - "The DOW Is Up!" And, sure, things might not be perfect, but things are getting better and slowly improving. We are almost back to business as usual.

It looks like "mission accomplished" by the Fed - QE the U.S. markets and confidence will return to the people. DOW 12,000 has spread pixie dust over anxious Americans.

My friends and family know what I do, and about the company that I do it for. And last year when I was in the country they asked how we (Casey Research) were doing and about our thinking on gold and related subjects. This year, no one has asked me anything. But some have pointed out that, well, you know - the stock market is up, right?

Returning to my breakfast buffet, there are not one, but two flat screens in the dining area - one is tuned to CNN, the other to an "all sports, all the time" channel. One was showing video clips of the chaos in Egypt; the other was broadcasting a college basketball game. Observing the behavior of my fellow diners, I could not help but notice that the facial expressions of those focused on either screen were identical; it was all just entertainment, a distraction, the hypnotic side-show du jour that captured their attention. The turmoil in the Middle East/Saharan Africa means little to the masses. Until there is rioting in their neighborhood, or in the stands of the home team, it's all too remote to mean anything.

My musings today were triggered by the thoughts of some of my peers here at Casey Research as we are trying to make sense of our environment. Notably, we are puzzled at the lack of response by gold to the chaos in Egypt, and wonder if this might point to continued price weakness ahead. Personally, I have no clue as to how big a gold correction might be coming, if at all. But my sense is that this may be the year of "gold malaise." I just do not see the urgency that was apparent when I was in the country last year. If 2011 turns out to be the year that breaks gold's phenomenal ten-year run, we will be giddy buyers and thankful for the chance to stock up at bargain prices. Nothing has changed for gold's fundamentals. Don't let yourself adapt to the wrong signals in a false environment. Stay the course - buy gold.

[If you, too, don't believe the hype about the Dow and the revived economy, consider Jeff Clark's conservative approach to asset protection: Buy gold, buy silver, buy large-cap precious metals stocks. All these are proven winners and good inflation hedges for stormy times. Try Jeff's BIG GOLD advisory today for only $79 a year - and 3 months to decide, with money-back guarantee. More here.]

What was QEII's Goal?

By Vedran Vuk

Yesterday, we had our regular conference call at Casey Research, and discussed our views on the economy and where things were heading. Of course, one topic was QEII. Everyone debated what might happen next. I said something like, "Well, even in his own eyes, Bernanke has failed with QEII.  Unemployment hasn't been reduced enough, and 30-year Treasury rates have risen -not fallen." But thanks to the Casey team, I realized an overlooked fact: the stock market trend.

The stock market is up, but this wasn't Bernanke's original goal. Or was it? Usually, lower rates and large amounts of credit allow companies to expand their operations. As a result, monetary policy can temporarily lower the unemployment rate. But maybe Bernanke sees QEII through a different angle.

Companies already have plenty of cash, and rates have been low for a long time. If they wanted to expand, many could have done so by now. Perhaps Bernanke is attempting a roundabout method of lowering unemployment. Essentially, he could try to boost the stock market to regain consumer confidence. When consumers see their 401ks doing better, they feel wealthier and spend more. (Kevin Brekke's article touched on this.) This spending translates into earnings. And higher earnings will prompt the companies to expand. As a result, unemployment is reduced.

If this is Bernanke's plan, I'm really frightened. This strategy would mean the purposeful creation of a bubble in the stock market, in an attempt to fool the economy into increased production before the bubble pops. The Fed has stayed the course with QEII despite failing its own performance metrics. The stock-market goal would explain why the Fed is happy with QEII despite the poor performance and warnings from numerous economists.

So, is Bernanke really trying to pump up the stock market to regain consumer confidence? I can't say for sure, but it's possible. Let's hope not, because this would be a particularly bad scenario.

That's it for today, but I had just one more thought. Recently, I had a moment similar to Kevin Brekke's examples. I was at gym doing my usual routine, riding an exercise bike and reading the financial news.  In front of me were four large TVs blaring images of the Egyptian riots for a full hour. Behind me, two ladies were on elliptical machines discussing every other topic than the news right in front of them: some cute guy at the bar, arguments with another friend, and shopping.

I'm not saying that everyone should be a political junkie. But when running on a rat-wheel at gym, one would expect sheer boredom to make the riots topical. Despite four enormous screens displaying the chaos in Egypt, there wasn't a single word about it. As Kevin just said, "The turmoil in the Middle East/Saharan Africa means little to the masses. Until there is rioting in their neighborhood, or in the stands of the home team, it's all too remote to mean anything."

Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

At the onset of the financial crisis, many commentators predicted the end of capitalism. With free markets still around in a weakened form, the predictions were a little too bold. Sure, things are a lot worse, but the expected swing toward socialism didn't go all the way. However, some intellectual ideas did die in the crash.  Most importantly, any structure of a macroeconomic worldview has fallen apart -primarily in the media.

What do I mean? Previously, booms and busts were understood to be the phenomenon of business cycles. Despite conflicting theories from various schools of thought, economists recognized the presence of repeated business cycles. But today the business cycle seems all but forgotten in the press. Anything and everything is blamed for the crash other than business cycles. The accusations range from risk-taking on Wall Street to excessive bonuses, to regulations. Some of the favorite ones include the Community Reinvestment Act and the repeal of the Glass-Steagall Act.

And of course, these regulations had a role to play, but the Federal Reserve played the leading part. With a short look back at history, the other explanations fail to account for previous booms and busts. Did the Community Reinvestment Act and Financial Services Modernization Act cause the dot-com bubble? What about the recession in 1991? And there are many more recessions throughout history; new regulations cannot possibly explain everything.

Well, what about the subprime mortgages? Certainly those caused the crash. Yes and no. This time it was subprime mortgages, last time it was tech, and next time it'll be something else. Ultimately, an extended period of low interest rates led to the crisis. Too much credit in the market gave entrepreneurs and companies the illusion of real prosperity. Businesses engaged in projects expecting sustained prosperity. In the case of housing, the demand seemed strong and endless. But unfortunately, it was only driven by the low cost of borrowing - not real wealth in society. When interest rates began to rise, the artificial wealth contracted. Projects that were built on the expectation of ever-increasing wealth suddenly went bust, and the entire economy experienced a massive contraction.

The same scenario has happened time and time again. Regulations, mortgages, and excessive risk-taking are just minor details in the big picture of the business cycle. Every crash has its own set of characters and problems, but they're not the real causes of the bust. 

First, we'll have Chris Wood discuss some top-performing tech small-caps and micro-caps. Then, Doug Hornig will discuss a controversial doctor's thoughts on prescription drugs and their effectiveness. Casey's Extraordinary Technology is always keeping its eye on biotech advancements. Hence, it's good to keep up with various controversies in the field. Last, I'll have some thoughts on interest rates for the next year.

Tech's Biggest Winners of the Past Year

By Chris Wood, Casey's Extraordinary Technology

As investors, we should always be forward looking. The value of a stock today derives from its future cash flows, not historical performance. Nevertheless, it can be a useful exercise to periodically take a look back and see what kinds of stocks (in terms of sector, industry and market capitalization) generated the highest returns over a given timeframe, because it gives you both a sense of where other investors are parking their money and a starting point to decide if you should do the same.

With this in mind, I ran a screen on Morningstar to search for the highest-returning stocks over the past twelve months (from the NYSE, AMEX, and NASDAQ). The results yielded 24 companies that posted more than a 300% return over the past year. Not bad. But that's not the interesting part.

What was interesting was that of all the companies on the list, only two had a market capitalization above $1 billion (one at $1.1 billion and one at $3.5 billion). In other words, the vast majority of the highest-returning stocks over the past year traded on the major exchanges in the U.S. are small-cap (or micro-cap) stocks.

When you think about this for half a second, it makes sense. After all, small-cap stocks are the ones with room to grow, they tend to have more entrepreneurial drive, and they're not bogged down by a big bureaucracy, making them more able to adapt quickly to a changing market environment.

And this propensity for small-caps to outpace large-caps when it comes to returns is well established historically. According to data crunched by MoneyChimp.com, over the 78 years to the end of 2008, small-cap stocks outperformed large-cap stocks by a wide margin. During this period, small-cap value stocks returned an annual average of 15.4%, while large-cap value stocks returned just 12.4%.

What was also interesting about the results of the screen was that eleven of the 24 companies on the list were tech companies. That's right, almost 50% of the highest-returning stocks over the past 12 months (that trade on the NYSE, AMEX and NASDAQ, and according to the Morningstar stock screener) are tech stocks.

Here's a summary of the stocks and their performance:

As you can see, these eleven tech stocks returned an average of 451% during the past 12 months. If you invested just $1,000 in each of these companies one year ago, you'd be sitting on more than $60,000 today. Impressive. But not really the point and not really likely.

The point is that tech stocks (particularly small-caps, for reasons outlined above) are outperforming alternative investments for good reason. Technology tends to advance no matter what is going on in the world. It's an engine of growth and wealth creation that doesn't really care about which party controls Congress, who is in the White House, or whatever else the talking heads are touting as the hot issue du jour. As other sectors flounder or fall, tech chugs along, spewing profits and creating wealth.

That's not to say you should just blindly throw money at the sector like investors did during the tech bubble of the late '90s. But with the right research and due diligence, we see an excellent opportunity for investors to get positioned in great tech companies that offer the potential for extraordinary returns.

At Casey's Extraordinary Technology, we focus on small-cap tech stocks poised for strong growth and market beating returns. And while we didn't achieve the 450% average gain of the eleven best-performing tech stocks of the past year, our average annualized return of more than 80% during 2010 is nothing to turn up one's nose at.

Whether you're a seasoned tech investor or a newcomer to the scene, Casey's Extraordinary Technology is a great place to profit, learn, and be entertained. Sign up now for a no-risk three-month trial. Details here.

Calling Medicine onto the Carpet

By Doug Hornig

In one of Lewis Black's standup routines, the acerbic comic makes a point about the constantly changing nature of much health information by saying to the audience, "I just have one question. Is milk good for you?" And when no one responds, he says, "I rest my case."

Poking holes in the fabric of modern medicine, especially regarding its miracle drugs, is something few people want to do. First because it's big business, important to the economy. And second because we like to assure ourselves that "advances" in this field are uniformly effective, and that what our doctors are prescribing has been tested and found relatively free of ugly side effects.

That's the party line. But it's bunk. So says Dr. John Ioannidis, a longtime critic of iffy medical claims, and the newly appointed head of Stanford University's Prevention Research Center.

Profiled in a January 24 Newsweek (or, as Doug Casey likes to call it, NewSpeak) article, Ioannidis pulls no punches. "People are being hurt and even dying," he maintains, because of claims based on faulty medical research. At the least, some very expensive drugs provide little or no benefit to those taking them.

Case in point: statins. These drugs - like Pfizer's mega-blockbuster Lipitor - are among the most commonly prescribed in America. Used for cholesterol control, they have been touted as lifesavers for those at risk of heart attack. We spend more than $20 billion a year on them. Yet a major study of more than 30,000 patients, released in mid-January by a non-profit research organization, the Cochrane Collaboration, concluded that the drugs are probably overprescribed.

While statins have been shown to reduce heart attacks, strokes and deaths in higher-risk patients such as those with diabetes or established heart disease, the researchers only found "limited evidence" that the drugs provide significant benefits to those at lower risk. In addition, "the potential adverse effects of statins among people at low risk of cardiovascular disease [i.e., those with no risk factors other than high cholesterol] are poorly reported and unclear," the authors wrote.

Other orthodoxies contradicted by further research during the past decade include: that vitamin E helps prevent cardiovascular disease; that estrogen therapy reduces older women's risk of Alzheimer's; that antidepressants alter brain chemistry (it was found that they work, when they do at all, primarily via placebo effect); and that adequate Vitamin D blood levels can't be maintained without supplementation.

Ioannidis had his aha! moment in the mid-1990s, while at NIH, when he realized that positive drug trials, which find that a treatment is effective, and negative ones, in which a drug fails, take the same amount of time to conduct. "But negative trials took an extra two to four years to be published," he noticed. "Negative results sit in a file drawer, or the trial keeps going in hopes the results turn positive."

With billions of dollars sometimes hanging in the balance, pharma companies have an obvious disincentive to declare a new drug useless or, worse, dangerous. And that can mean years of patients receiving a treatment that is ineffective or even harmful.

Additionally, Ioannidis points out that, "When you do thousands of tests, statistics says you'll have some false winners." If they're testing an approved drug for other uses and get hits for some off-label indications, doctors tend to "use that as the basis to prescribe the drug for this new use. I think that's wrong," because the seeming benefit may have been due entirely to chance. And even when a claim is later disproved, it can take a long time for that information to filter down to the level of the prescriber. It's quite common for doctors to make decisions based on earlier studies that have been disproven by subsequent research, simply because it's so difficult to stay up to date on everything in this crowded field.

Now, the myth-busting doc does have his critics. In order to challenge some clinical findings, Ioannidis has developed his own method of mathematical modeling, which some others have questioned. But with so much "conventional wisdom" flying out the window with regularity, there are many who believe he should be taken very seriously. Among them, George Lundberg, former editor of The Journal of the American Medical Association, who estimates that doing a better job with drug development and prescription could save $700 billion to $1 trillion a year in U.S. healthcare spending.

Of course, we surely don't want to develop an overly skeptical, anti-science mentality in a large segment of the population. Many modern drugs save or extend lives, and give the gift of health back to previously untreatable patients. That's why, at Casey's Extraordinary Technology, we've spent so much time investigating the most promising medical research we can find, and stocking our portfolio with the best of the best biotech companies out there.

Will the Fed Raise Rates in the Next 12 Months?

By Vedran Vuk

According to Pimco's Bill Gross, the Fed won't raise rates for the next 12 months. His primary reason is the lack of job growth. Like many other market analysts, he estimates that the economy needs over 200,000 jobs per month for sustainable economic growth.

Aside from the jobs picture, a few other factors point to extended low rates. First, QEII is scheduled to continue through June. If Bernanke thinks the economy will pick up, he would likely end QEII sooner rather than raise rates. Or he'll make the purchases smaller for the last few months. QEII and higher rates together seem counterproductive. So this means no rate changes at least until June. But then the Federal Reserve will want to wait a month or two to evaluate the market's reaction to the end of quantitative easing. They likely won't make a quick decision afterward.

Now that puts us into September, and this is where the picture gets murky. The Fed will have processed QEII by then and will be ready to make a rate decision. But who knows the future jobs outlook? Hence, I wouldn't expect a rate hike until September, and even then the outlook will be fuzzy.

However, inflation could throw this prediction way off target. If inflation really starts to show between now and September, Bernanke may raise rates slightly to ease market concerns. If the job picture improves by September, there will likely be higher rates. So there's a possibility of no rate change for 12 months, but only if unemployment and inflation remain the same.

Some Additional Thoughts on the 2008 Crash

By Vedran Vuk

At the beginning of the Obama administration's term in office, the Left often blamed the crisis on "the policies of the last eight years." This always makes me think, "Well, what policies specifically?" Even the items mentioned in the intro didn't start in the last administration and weren't only Bush's fault. The Financial Services Modernization Act that got rid of Glass-Steagall was passed in 1999. The CRA wasn't exactly a Republican agenda either. Also, don't forget that Fannie and Freddie were busy and empowered throughout the '90s.

Then there are the low interest rates. But this was a policy of the Federal Reserve and not the Bush administration. Also, the Democrats can't possibly mean low rates since today's rates are even lower. The "last eight years of policy" quote shows how ignorant the Democrats really are about business cycles. It's essentially like saying "Some stuff from the past eight years caused this, but we're really not sure what the actual problem is." As a result, they blame bonuses, proprietary trading, a sudden burst of greed, or some other mumbo-jumbo that has nothing to do with the business cycle.

That's it for today. Thanks for reading and subscribing to Casey's Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor

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.

Everything You've Read about the SOTU is Wrong

By Doug Hornig

Here at Casey Research, few of us bothered to watch the State of the Union address. The expectation, as always, is of long-winded self-congratulation, interspersed with applause-generating sound bites - long on rhetoric, short on substance. It was all that but, surprisingly, much, much more. In actuality, it was one of the most brilliant pieces of political theater you'll ever see... if that sort of thing appeals to you.

I'm more of a political junkie than many of my colleagues here, so I watch all these things. If you missed it, you can catch the instant replay on YouTube. It's worth it. Yawn your way through all the obligatory bits: the nod to the fallen comrade (this year it is, of course, Gabbrielle Giffords); the praise for those serving in foreign wars; the proclamation that the country is still the best in the world and headed down the right track; the promise of cooperation with the other party, etc. This is boilerplate. Every president says these things.

But what both mainstream and partisan commentators seem to have missed is the subtext - and that was a stunner.

Consider the back story: here's a guy whose policies have just been repudiated big time. The opposition is flying high, sharpening its knives. What do you do? You could play defense and argue that everything you've done is going to work out in the long run. But savvy politicians know that while defense may prevail in football or basketball, it never wins an election. So Obama went on the attack, and he did it so stealthily and with such a velvet glove that the GOP may not yet know what hit them... no, scratch that; they know.

Sure, Obama proposed new spending on things we can't pay for, but he confined that to safe areas like education, infrastructure, and clean energy - things everyone's for, even if we don't want the government paying for them. But global warming? Zero, zip, nada. Cap and trade is as dead as ninety-nine cent gasoline.

Well and good. But that was kind of expected. What wasn't expected is that in one short hour this paragon of liberalism suddenly, unexpectedly, got reborn as a conservative. Just have a look at this laundry list of the things he's belatedly discovered he's all for: repealing the bad parts of the health care bill; removing unnecessary regulation from business; cutting corporate taxes; simplifying the general tax code while closing loopholes; eliminating superfluous government agencies; tort reform; and even, yes, tinkering with Social Security, the formerly untouchable third rail of Democratic politics. He actually said all that. If you don't believe me, check it out.

Does this sound familiar? It should: Obama just stole nearly the entire Republican playbook. What're they gonna do now? They just got this big electoral swing their way, and everything they pledged to do, he's gonna preempt them and take credit for it all himself. In fact, now if the GOP doesn't get what it wants, he can blame that on them, too. Forget the pretty talk about cooperation and conciliation. This was a full-bore neutering, done in front of the world, using the other guys' own knives.

And the thing is, it doesn't matter if he was lying through his teeth. He's seized the high ground that the opposition thought it had just won, and told them that they only way they can get it back is to rebuke their own selves. That is hardball. It essentially marginalized Paul Ryan's 'rebuttal,' which was brief, thoughtful and on target, but was obviously written in response to a projected big government speech that didn't really materialize. (And please, don't even mention Michele Bachmann to me.)

I once believed there was no way in hell this guy could ever get reelected, but now I'm rethinking that. He may not know jack about economics but he sure understands politics way better than his arrogant conduct of the past two years would suggest.

I sent an abbreviated version of this text to our own Bud Conrad this morning, and he replied, "Now can we guess what legislation might actually get done and what effect this will have? My net: Nothing important. We will see deficits forever."

True enough, the SOTU address was all about posturing, and little of substance may result. However, Obama has taken the risk of putting all this on the public record and now, if Republicans hold his feet to the fire on their favorite issues, he'll have a lot of trouble backing away from his words.

I think there will be some deficit reduction - not enough, but some. Obama has to deal with Paul Ryan, the new chair of the House Budget Committee and personally my second favorite choice for president in 2012 after Gary Johnson. Ryan is a real deficit hawk, and the only politician to propose an actual roadmap designed to balance the budget. Workable or not, it's out there, and there's no competitive plan. So you can count on Ryan pushing it, or at least parts of it.

In addition, Obama publicly admitted what everyone already knows - the budget cannot be balanced by cutting discretionary spending alone. Social Security must be repaired as well. Apart from being emphatic that he wouldn't allow SS to depend on the vagaries of the stock market, Obama didn't offer anything concrete. The shocker is that he mentioned it at all. Democrats don't do that. It could be phony baloney, since it would mean bucking a big segment of his own party (although, come to think of it, that might not be a bad reelection strategy). But no matter who likes it or doesn't, changes to SS must be made and we've now been signaled that they're on the way. The parties will fight over what to do and when, but we're going to get something.

Bud's vision of deficits forever is right on, but they will start to shrink. There will be cuts to the military budget, and some money will be saved as we stand down in Iraq and, hopefully, Afghanistan, although that's far from a done deal. Any reduction in business regulation that he proposes will cruise on through, and have a positive effect. Consolidation and cuts in bureaucracy will be cheered by everyone, and will help. The health care bill will be dissected from A to Z, and reformed, saving some money.

The key, though, is tax reform. Neither party has wanted to face this since forever. But the president is finally admitting that spending cuts alone aren't enough, no matter how drastic. You also have to raise revenues. So how do you that without raising taxes? Actually, it's not that hard. If he's not lying about reducing the corporate tax rate, that one'll sail through Congress and it'll have an immediate and very positive effect, not only bolstering the economy, but increasing tax revenues as private sector confidence improves and new ventures are launched. The other way is by closing tax loopholes, which he also promised. Efforts to further soak the rich with higher rates have gained little traction, so Obama has shifted focus. Now he apparently favors merely making everyone pay their "fair share" - no deductions, no accounting legerdemain - and if he follows through that would increase revenues dramatically. That one, of course, would face very tough sledding, as every lobbyist in D.C. cranks up the heat. But it'd be hugely popular with the public, so we shall see. It could happen.

Finally, what if anything does all this mean to investors? Well, if Obama does back the larger part of the Republican agenda, that's very business-friendly. Which in turn means that the stock market should do very well.

And there's one other thing that directly affects us hard money folk, something of a throwaway line during Obama's backpedaling on the health care bill. The president said he's realized that there are a lot of things in there that should come out, including one section that is unduly burdensome on businesses. This, I think, can only refer to the onerous requirement that 1099s be submitted for all transactions over $600. That's gotten huge negative press and it looks like he got the message. I wouldn't call it a sure thing, but it's close. The GOP hates this so much that I think they'll push through a repeal of that section, even if they get nothing else. That is very good news for all of us who like to keep our precious metals buying private.

In the end, will there be any substantive change? History suggests we'd best not hold our breath. Meanwhile, the mountain of debt continues to grow, and nothing anyone envisions can prevent it from hitting the wall some day soon. Still, the real problems will start to be addressed and some first, fumbling attempts will be made to deal with them. The executive branch and Congress will cooperate, not because they want to but because they kind of have to. Obama will need to grit his teeth and abandon his dreams of a government that fixes all things if he wants a second term; the GOP will have to grit theirs and accept that they may have to concede the White House in order to get what they want. For a political junkie, it's gonna be an interesting two years.

Microsoft Reports $2.5B Loss

By Alex Daley, Casey's Extraordinary Technology

We're awash in earnings reports yet again. This time around it's the all-important calendar year Q4 results pouring in, which include holiday sales and provide a good perspective for year-over-year performance.

Dominating the headlines today is the "surprise" announcement by Microsoft that the company pulled in record revenue and earnings for the quarter. The company raked in an impressive $19.95 billion gross in the fourth quarter. Last year's results for the same quarter included about $1.7 billion in deferred revenue. Take that out, and on an apples-to-apples (no pun intended) comparison that's a 15% year-over-year growth rate. It's not quite catching up with Apple's 30% growth levels, but an impressive take for a company already raking in well over $60 billion per year gross.

This impressive revenue found its way to the bottom line as well. Net income was $6.63 billion for the quarter, or $0.77 in diluted earnings per share. By the same measure, that's a 28% year-over-year jump. Keep in the deferral and it's down only a fraction of a percent.

I refer to the earnings as a surprise, because they handily beat official estimates, which averaged $0.68/share. But analysts and investors around the world paying any attention to Microsoft in Q4 could clearly see the writing on the wall. Its new gaming system add-on, the Kinect, racked up an impressive eight million units in sales, representing about $1.5 billion in sales by most accounts (it's hard to count pure Kinect revenues because of the mix of bundled console sales with the add-on alone).

Big news this earnings season has been that Apple, which posted its results over a week ago, would have passed Microsoft in gross revenues if things panned out as predicted. And, despite the significant jump in gross revenues, that proved true. The Redmond, WA based software behemoth still bested Apple on one measure though: profits.

Microsoft, while struggling in a few strategic areas like mobility, appears to be doing strongly in many areas. Gaming growth has been strong. Office posted 24% growth year over year, keeping its business division going strong. And Windows 7 has now sold over 300 million units, firmly establishing it as the fastest selling operating system in history (thanks in large part to both a recovery in PC demand, and the desire for customers to get away from Windows Vista as fast as they possibly can). Revenues for that division are down from the Windows 7 launch high last year, as expected, and are showing some signs of struggle against tablets like the iPad as it grew slower than unit sales, losing some market share. But it is still highly profitable.

So, what's this $2.5 billion loss? It's the cumulative loss the company has posted in its online operations over 2009.

Microsoft's online division, which includes the revenues and costs associated with running two of its three major web properties, MSN.com and search engine Bing.com, posted $691 million dollars in gross revenues for the quarter. That's a solid jump from the $527 million dollars it posted the previous quarter, or the $516 million in the quarter over last year.

However this smallest division at Microsoft has managed to lose money for 20 of the last 20 quarters - a perfect five-year record. It's beginning to irk many investors, who have seen their shares in Microsoft stay basically flat for a decade, rarely skirting over the $30/share price mark 2001 opened with.

Since 1998, the online division has racked up a net loss over $11 billion dollars in total, so it's easy to see where irked investors are coming from. After all, headlines are filled with stories of companies in similar positions to Microsoft on the web making money hand over fist.

On one hand you have Facebook, which has the third most trafficked domain in the world according to Compete.com. Despite a relatively benign number and type of ads, it's bringing in nearly $1 billion in annual revenue on a 35% margin according to data leaked from its private fund-raising round.

Or consider Amazon, the fifth most visited domain, which just yesterday reported $12.95 billion in revenue in its holiday quarter, netting $416 million in profit for the quarter.

Or Google, the number one site on the web, which posted $2.54 billion in earnings on revenue of $6.37 billion last quarter.

On the other hand there's Microsoft. With MSN.com, the default home page for millions of computers sold every year, they hold the ninth spot overall in traffic rankings. With Live.com, the domain host to all the add-on services for Windows like file sharing, photo sharing, messaging and more, Microsoft holds the eighth spot. Bing, Microsoft's web search engine meant to compete with Google, holds the sixth overall traffic ranking in the world.

Microsoft owns three of the top ten sites on the Internet, yet the company lost $543 million online in just one quarter (likely plus additional losses for Windows Live - their results are now masked inside the Windows division overall, but it was losing money handily when that accounting change was made).

More and more investors are starting to ask the company why it keeps investing online. The answer is quite simple, if you look at it from the perspective of management.

Microsoft needs to find approximately $800 million in new revenue - nearly an entire Facebook - just to add 1% to its topline revenue these days. If the company is to post a steady 10% growth rate, you're now talking $8 billion in new revenue per year. With 95% market share with Windows and similar penetration with Office, growth there is going to be cyclical at best, relying on upgrade cycles to drive new sales. PC shipments just aren't growing fast enough to drive new revenues.

And where units are growing, in mobile phones and tablets, Microsoft has little to no presence. Even if it can crack the market for tablets, cheap alternatives like Android have squeezed most of the profit margin out of operating system software, and the device makers like Apple and RIM are the ones who see most of the margins. But Microsoft risks angering its biggest customers - equipment makers like HP and Samsung and Dell - if it chases Apple down the hardware rabbit hole.

During last quarter (their fiscal Q2), the company bought back $5 billion in shares and issued $1.3 billion in dividends. Had they shuttered the online division, they would have added less than $0.07 in EPS and less than 10% to the total they could return to shareholders. If they can turn it around and bring the division to the type of profit margins its closest competitors see online, they could potentially add as much to the bottom line as they are now subtracting.

So, it's a minimal loss for the company relative to all its other problems - less than 1% of gross revenue, barely adding any negative margin. It's also one of the few areas left for growth of the magnitude Microsoft needs to boost its top line, if it can find success.

From management's perspective, just one Kinect-size win can change the division's prospects overnight, as it did with Microsoft's former perpetual loser, the games division. And, if the company can find a hit the size of the iPad in another division, then no one will even notice what's being lost online again.

The question for Microsoft isn't whether or not it should be online still. It's whether the company can really find the big hits it needs. The Kinect shows that maybe this giant still has some mojo left. But, even with 8 million units sold, it still just barely makes a dent in those colossal numbers from Windows and Office. And online losses make even less of an impact overall.

How to Buy a Vacation Home

Jeff Clark, BIG GOLD

For most people, there are some surefire luxuries that signify wealth, a few pearls of conspicuous consumption that say you've made it. For me, it's always been a second home. My grandparents owned a vacation home in Arizona and then Florida when I was a kid, and it was an annual highlight to travel there every year.

But something happened on the way to my generation's version of the American dream. Of all the people I knew that had second homes, only one acquired it through their own hard work and success. The rest inherited them.

With high unemployment, shaky business conditions, desperate governments, weak real estate demand, and a suspect stock market, owning a vacation home is not even on the radar these days for most Americans. Paying their existing mortgage is the primary concern, something millions of homeowners still aren't able to do. So, how is it that I can suggest a way to buy a vacation home in these conditions?

Because there are two trends in motion that I believe will continue working in our favor. And it likely won't take long for them to reach a culmination point, allowing those of us with such a goal to see it realized. The chart below will give you an eye-opening visual of my claim.

First, real estate. For those of you who have a glass-half-full prognosis for the near future of real estate, I'd like to challenge an assumption you may be making; namely, that real estate prices rise in an inflationary environment. While the massive amount of quantitative easing and buying of mortgage-backed securities will likely put a floor under prices, it's the black swan of rising interest rates that could derail any significant recovery.

Once rates start climbing, home-buying will become more unaffordable, keeping demand low, especially when the starting point is a million-plus hangover of vacant houses. And if mortgage rates return to the 12-14% levels we saw in the last big inflationary period of the early '80s (they peaked at 18% in 1982), real estate prices aren't going anywhere but down in real terms. They may rise in nominal dollars, but after accounting for inflation, they'll still lose ground. Your half-full glass might not get filled for a long time.

Second, hard assets. The amount of money being created from nothing and thrown at our problems right now is unprecedented in history, so inflation is a when question, not an if one. This process can and will result in a devalued currency unit, and a direct beneficiary of that is rising precious metal prices.

In real terms, real estate will go down, precious metals will go up.

It's interesting to look at this trend with gold, but it's absolutely fascinating when you plug in the numbers for silver. Not only may silver outperform gold before this is all over, but silver is more "affordable" to the masses.

Take a look at how many ounces of silver have been needed to buy a median-priced home in the U.S.

In 1970, it took 14,067 ounces of silver to buy a median-priced U.S. home ($23,000). By January 1980, it had dropped all the way to 1,603 ounces, based on silver's average price that month of $38.80. The ratio bottomed at 1,258 at silver's record high of $49.45 (London PM Fix) on January 21. (We can argue later in another article about how much of that spike was due to the Hunt Brothers' hoarding of the metal, but I will point out that gold and silver peaked on the very same day, implying the same forces were influencing both).

The ratio peaked in 1990 at 22,616 due to silver's average price that year of only $4.06, and was still at 18,365 in July 2006, the pinnacle of the real estate boom. However, look what happened to the ratio in the four years and three months since: it's dropped 66.1%, to 6,213.

You may think the ratio won't fall further since it's already declined 69.2% in the last ten years. But I would point out that it collapsed 88.6% during the 1970s - and that was amid a 170% rise in home values! Only economists on government-laced Kool-Aid could fathom home prices rising that much over the next decade.

All this adds up to one thing: the number of ounces of silver to buy a median-priced home at some point in the near future will likely fall below 2,000. And given the unrelenting abuse to fiat currencies, it's very possible it could hit a measly 1,000 ounces. Now that's affordable.

The fine print, of course, is that you actually sell when the silver price is high, and that you pay the tax on the gain from another source. But I would argue that even a modest budget could come up with a few extra ounces to offset the tax bill.

Think silver is too volatile to use as a savings vehicle? The price fluctuates, no doubt, but ask yourself this: if you were to put ten grand into a savings account and another ten into silver, which asset will have more purchasing power five years from now? Even with the savings account earning interest, you'd be able to purchase much more with the stash of silver when you go to spend the proceeds.

Doug Casey is insistent real estate hasn't bottomed because we're on the cusp of a depression. I'm convinced the silver price won't be stopping when it hits $50. If we're right about these trends, that million-dollar vacation home you spotted on Nag's Head a few years back could be had for less than 2,000 ounces of silver.

Vacation home, here I come.

[Jeff Clark is the senior editor of BIG GOLD, Casey Research's monthly newsletter on gold, silver, and large-cap precious metals stocks. For a risk-free trial with 3-month money-back guarantee, click here.]

Low Interest Rates Forever?

By Vedran Vuk

Lately, fund managers have been exiting some emerging markets in fear of higher interest rates. With the stock market up, they're ready to plunge back into Europe and the U.S. To me, this seems to be a short-sighted move. Yes, many emerging markets are increasing rates to combat inflation. But how long before inflation creeps up in the developed world? Even if inflation remains tame, a strong recovery would lead to central bank rate hikes.

A Bloomberg article provides some commentary:

Brazil's central bank lifted its benchmark overnight rate by 50 basis points, or 0.5 percentage point, to 11.25 percent on Jan. 19. India raised rates to the highest in two years on Jan. 25 and signaled more increases. China has ordered lenders to set aside more money as reserves four times since October and raised interest rates twice in the fourth quarter. Russia increased banks' reserve requirements for the first time since 2009 on Jan. 31 to stem the fastest inflation in a year.

"The global environment has really changed," said Maarten-Jan Bakkum, an emerging-markets strategist at ING Investment Management in The Hauge, which oversees about $511 billion. "After years of disappointment on growth in the U.S and Europe, expectations have improved. We are in an environment where emerging markets will probably struggle relative to developed markets."

Where exactly are these wise guys going to put their money when rates and inflation start to rise in the U.S. and Europe? This strategy might yield some opportunity in the short term, but the low interest rate environment won't last much longer.

A Classic Casey Speculation

By Louis James

These words are admittedly self-serving, but they are also, I hope, instructive, and worth considering.

International Speculator subscribers just locked in a huge win in a company called Fronteer Gold, subject of a takeover offer from mining gold giant Newmont, announced today. This takeover comes a little sooner than we expected, but is exactly the endgame we speculated on, given the large and growing high-grade, low-production-cost gold resource Fronteer has been advancing at its Long Canyon project in Nevada. Nevada is not only a prime mining jurisdiction, it's also Newmont's bread basket.

There's a lot more to the story, including other gold projects of interest to Newmont, and a JV with Newmont rival Agnico-Eagle. The main point now, however, is that though still in early stages, it was very clear to anyone knowledgeable about the business that Fronteer had a prime project, getting better all the time, that made it an attractive takeover target.

And this is the second time we've won big on this same company. Earlier, we bet on it based on successful exploration of an attractive portfolio of gold projects and the probability of positive results from its uranium exploration program, before that last run-up in uranium prices. That was April of 2006, and we bought at C$4.96. The uranium exploration was as successful as we speculated, and the stock more than tripled - we took profits at C$14.81 just a year later. That gave us the comfort to hold on, free of risk, through the crash of 2008, and then to put out a strong Buy recommendation in December of 2008 at C$2.38.

The logic then was that Fronteer was getting nothing for its uranium again and had a very large treasury (for a junior company) with which to make high-quality acquisitions. Both seemed about to change, and both did. First, Fronteer bought out its JV partner at Long Canyon, consolidating 100% ownership of one of the most exciting gold projects in the U.S. This move also set the stage for a takeover of FRG, which became much more attractive as 100% owner of the project. Then, Fronteer sold its uranium projects for C$261 million, enabling more prime acquisitions - or perhaps a transition to production, given the low cost estimated to build the Long Canyon gold mine.

The point, again, is that if you understand what makes for a good gold project and how these deals work, all of the above was reasonably predictable.

The stock hit C$14.44 this morning, a 506.7% gain over our December 2008 recommendation, and a 211.9% gain over a more recent Best Buy recommendation made just a year ago at C$4.63.

Spotting takeover candidates is one of the things we shoot for in the International Speculator, given both the boost in share price and trading liquidity such events bring. You can do it too, if you learn what to look for.

[Even though a big return, that Fronteer win is merely a blip on Louis' radar. After all, in 2010 his stock recommendations in Casey's International Speculator beat the S&P 500 by 8.4 times. Don't miss the next huge winner - sign up today for a 3-month, 100% money-back trial. More 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!

Vedran Vuk
Casey's Daily Dispatch Editor