Welcome to the weekend edition of Casey 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.
By Jeff Kopocis
In its recently released Annual Report 2010/11, the Bank for International Settlements (BIS) indicated that interest rates worldwide must rise. To those unfamiliar with it, the BIS is essentially a central bank for central banks and does not report to any one government. Its reports are worth paying attention to and can help investors as they analyze the global economic landscape.
Here at Casey Research, we’ve been calling for higher interest rates for some time now. And higher rates are, in fact, inevitable.
According to the BIS report:
The persistence of very low interest rates in major advanced economies delays the necessary balance sheet adjustments of households and financial institutions. And it is magnifying the risk that the distortions that arose ahead of the crisis will return. If we are to build a stable future, our attempts to cushion the blow from the last crisis must not sow the seeds of the next one.
The report goes on to state that prolonged periods of low interest rates are partly responsible for fueling the tremendous, unsustainable property bubbles seen in many emerging nations. It also asserts, “all financial crises, especially those generated by a credit-fueled property price boom, leave long-lasting wreckage.”
An Internet search for China’s ghost towns provides a startling example of how far a country will go when enticed by cheap credit and a drive to boost GDP numbers.
We agree with the BIS’s outlook and contend that – unfortunately – we are still early in that long-lasting wreckage scenario.
The loose monetary policies at central banks throughout the world that have resulted in persistent, artificially low interest rates have simply facilitated the misallocation of capital that led to the most recent crisis. What’s more, in their attempts to ensure a soft landing for the economy, world governments have actually prolonged the crisis and probably sowed the seeds for the next one.
Of course, there will be important economic implications when interest rates do start to rise. For starters, the U.S. and other countries simply won’t be able to afford the interest payments on their massive debts. Defaults and devaluations are inevitable. It won’t be pretty.
As our chairman Doug Casey says, “Just because something is inevitable does not mean it is imminent.” The evidence is mounting that a turning point is near, however, and governments around the world will soon have to start increasing their interest rates to reflect reality. Empirically, there is some confirmation of that fact as China and India have hiked rates recently to combat inflation. And the BIS report is another sign of things to come.
[With interest rates still near record lows, but poised to pop soon, now is the time to take the appropriate steps to benefit from higher rates. Check out a three-month, risk free trial of The Casey Report to learn how. Details here.]
By Kevin Brekke
I found myself sitting at an intersection in a well-known southwestern desert city recently. The traffic signal had turned red, and I clutched the transmission into neutral and glided to a comfortable stop. Other than the air conditioning in the car there was not another sound to be heard, as mine was the only car at the crossing of two six-lane boulevards. Nary a vehicle passed by in any of the lanes while I waited.
We can all relate to this annoying waiting game. Just as often, the opposite situation arises: A bunch of cars stand idling on both sides of an intersection, yielding passage to a nonexistent string of motorists. The likelihood of encountering this is directly proportional to how late one is for one’s next appointment.
During the middle decades of the 20th century, the installation of a new traffic signal in town was looked upon with pride by the citizens – a sure sign of growth and progress. The automobiles of the period were designed with tail fins, slanted front grills, windswept-looking chrome, and other visual trickery to evoke forward motion even when standing still. Indeed, a town with only one red light would become the stuff of jokes: The one-light town had replaced the one-horse town slur of the previous century.
Another factor weighing on drivers’ nerves as they sit at a traffic light is the cost of all that pricey fuel being wasted. As the nation was transitioning from train and trolley travel to the automobile, gasoline was relatively cheap. The interstate highway system and paved suburban roadway grids were planned with little thought given to fuel consumption – the emphasis was on speed and convenience. Today’s motorists are focused on the gas tank.
A possible solution is to simply turn off the engine at the light. Although with already anxious drivers and rising incidents of road rage, drivers at the front of the pack will likely hesitate to adopt this practice, as it takes a few seconds to restart a car and get it rolling, much to the annoyance of those waiting behind. A solution – one that is standard in many European countries – is the use of the yellow light before the green light. Rather than the light changing from red to green, the light switches from red to yellow, and then to green. With fuel prices considerably higher outside the U.S., European drivers routinely shut off their car engines at a light. The use of the intermediate yellow light allows time to restart the car.
However, driving around Desert Town, USA I encountered an unexpected surprise and the antidote to the time and fuel wasting traffic light: the roundabout. It was such a pleasure to slip through the intersection in a smooth, uninterrupted arc. The other drivers I observed seemed to navigate through the traffic anomaly with no trouble as well.
I have started to notice roundabouts being substituted for traffic lights in many areas of new construction in the U.S. From the perspective of the city or county that must build and maintain a traffic light-controlled intersection, it makes economic sense at every stage. Roundabouts cost less to build, require little maintenance, and do not use electricity. A traffic signal requires utilities, regular replacement of lamps, and is far costlier to install. For two of these reasons – the cost of utilities and maintenance – existing traffic lights are being replaced with roundabouts in many European countries, a trend I hope will take hold in America.
But the decision to simplify America’s controlled intersections goes beyond these basic practicalities. In reality, a traffic light is a government program.
Think about it.
The use of the traffic light requires construction and perpetual maintenance by unionized, public-sector employees.
A department must be formed to draft and standardize the rules of use, construction, installation, and lane markings at the various configurations of intersections. The department is also staffed with unionized, public-sector employees.
Traffic citations will be issued for infractions of the rules and are issued by law enforcement officers from various state, city, and county public safety divisions. They, too, are all unionized, public-sector employees.
Public safety issues at intersections prone to red-light running or speeding will garner cries for cameras to monitor driver behavior. The traffic signal now becomes a source of revenue overseen by unionized, public-sector employees.
I’m sure I missed other issues, but you get the idea. Although replacing many of today’s traffic lights with roundabouts would result in long-term cost savings, the money needed now to pay for the conversion is not available in these times of governmental budget crises.
Like so many of the decisions facing governments at all levels, opting for the best course of action is often compromised or impossible due to entrenched special interests, and the outcome is usually to the detriment of the taxpayer. The obligations placed upon the government entity regarding public-sector employees becomes self-limiting: Making smart, long-term budgetary course corrections requires funding that is not available due to non-discretionary spending for salaries and benefits.
The old adage that it takes money to save money is in play here. At some point the idea of investing for our civic future must be understood to mean far more than paying the salaries and benefits of public employees.
By Doug Hornig
Sometimes it seems that the more we write about the rise of the surveillance state, the more examples of its long-armed reach pile up. Recently, a couple of new (to me, anyway) developments caught my eye.
The first came in the form of an email from a loyal reader who wrote: “In a convenience store in Pennsylvania, a young man was buying a pack of cigarettes and was told to swipe his driver's license through the credit-card reader. I asked the clerk what that was about. I was told that anyone under 27 years of age has to swipe their driver ID to purchase tobacco products.”
Our reader was puzzled by this, wondering what law (local, state, federal?) it came under. Well, none, as it turns out – just store policy to verify the purchaser’s age, management says. But isn’t the person’s DOB clearly printed on the front of the license? Of course, management explains, but it’s “quicker to swipe the card and read it on the screen than have to do the math on the date to figure out if someone is of legal age.”
Yeah… As Barbie once reminded us, “Math class is tough.”
I checked to see if this was an isolated incident. Nope. It’s a trend among retailers – not only of cigarettes but alcohol, too. And more. According to a news story out of KGO-TV in San Francisco, “A growing number of retailers, night clubs, rental companies, and banks now are requiring you to swipe your driver's license to make all kinds of transactions.”
That leads us to ponder some disturbing possibilities… not just that the store is probably filing your personal info away in its database in order to hit you with some targeted advertising later on. You may already have set yourself up for that when you accepted the supermarket’s offer of a discount card in return for it tracking your buying habits. But there’s a rather significant difference between information given voluntarily and involuntarily. Consider the case of a 64-year-old California woman forced to swipe her license in order to buy liquor.
She complied, but later realized that, “It's out there. The cat's out of the bag now that I consume alcohol. I thought, 'Great, now what have I done?' I thought, 'I bet my health insurance is going to go up,' or 'Is my car insurance going to go up?'"
Good questions. And obviously ones that smokers would have even more cause to ask.
Beyond that, our reader wondered what other information that black strip on the back of his license contains. Answer: At a minimum, everything that’s on the front of the card – name, address, DOB, height, weight, license number. Hmmm. Suppose an overweight person buys a six-pack of beer. Where does that info go?
Not to his insurance company, or so they say. But after a lifetime of watching mission creep make its stealthy way into so many different aspects of surveillance, I have my doubts.
And speaking of creepy, there’s no other way to describe the sinisterly named VIPR, one of the Transportation Security Agency’s brilliant brainchildren, and a major notch on agency chief John Pistole’s belt as he seeks to “take the TSA to the next level.”
There are at least 25 Visible Intermodal Prevention and Response (VIPR) task forces – comprised of federal air marshals, surface transportation security inspectors, transportation security officers, behavior detection officers, and explosives detection canine teams – fanned out across the country. VIPRs began modestly. As of 2009, the annual bill was a mere $30 million. But Pistole, a former FBI agent, has asked for a much more aggressive $110M for fiscal 2012. It’s a key part of his stated goal to turn the TSA into a “national-security, counterterrorism organization, fully integrated into U.S. government efforts.”
What are we getting for the money? In their word, security. To my mind, Big Brother.
VIPR teams have been deployed to perform random security sweeps of transportation facilities such as ports, railway and bus stations, airports, ferries, and subways. But it’s no secret that the government would like to expand coverage in order to “secure” so-called soft targets such as malls, stadiums, bridges, tunnels, and the like – and VIPR is the first step down that path. They’ve already blocked traffic in order to search trucks and cars on the busy Chesapeake Bay Bridge, near Washington.
What’s next? Walmarts, restaurants, schools? The list is essentially endless. So, will pat-downs and full-body imaging become just another routine part of everyday life in the United States? Well, as Jim Harper of the Cato Institute aptly wrote, “The natural illogic of VIPR stings is that terrorism can strike anywhere, so VIPR teams should search anywhere.”
There has been some pushback, notably in February, after VIPR took over the Amtrak station in Savannah, GA, and thoroughly searched every person who entered. When Amtrak Police Chief John O’Connor first heard of a blog posting about the incident, he thought it was a joke. It wasn’t, and O’Connor went ballistic, ordering VIPR teams off of Amtrak property… at least until a firm agreement could be drawn up to prevent the TSA from taking actions that the chief says are illegal and clearly contrary to Amtrak policy.
Why the big search happened at all is unclear, but the most logical conclusion is that the agency was either practicing or perhaps simply justifying its payroll. You’d have to suspend a lot of belief to think that it came about because of an actual terrorism tip, because agents posted a sign at the station’s entrance proclaiming that anyone who entered would be “subject to mandatory screening.” And if that weren’t sufficient warning to cause a would-be bomber to abort, chances are he’d just alter his plans slightly. The pathetic truth is that it’s not even necessary for anyone departing Savannah by train to go into the station: If one already has a ticket, all one needs is to be dropped off near the platform. So the action wound up targeting such suspicious citizens as the elderly and infirm who had to sit down inside as they waited, mothers of infants who needed a diaper change, and the like.
The Savannah incident was a fiasco to be sure, but no more of one than when VIPR units were first rolled out on Dec. 12, 2005, then promptly pulled back two days later after it turned out that no one had bothered to inform local law enforcement. Upon hearing of these new semi-SWAT teams, a number of facilities, including the D.C. Metro system, subsequently said they had no interest and opted out.
It’d all be quite comical if these people weren’t armed and taking their job deadly seriously.
Kate Hanni, spokesperson for the Coalition for an Airline Passengers’ Bill of Rights, sums it up neatly:
They’re trying to scare the pants off the American people that we need these things... Fear is a commodity and they’re selling it. The more they can sell it, the more we buy into it. When American people are afraid, they will accept anything.
[The trend of increased surveillance may be clear, but how an investor might profit maximally from it is anything but. A three-month trial subscription to The Casey Report will bring you insights from Doug Casey himself, as well as others who’ve learned to spot trends in the making as well as how to profit from that information.]
By Vedran Vuk
Yesterday I read about a new company called Alta Bicycle Share in Forbes magazine. The service is pretty simple: At docking stations users can rent bikes with the swipe of a credit card.
Immediate problems with the service come to mind. Personally, I don’t commute with a bike and neither do most people. The Zipcar service is one thing, but a rentable bike doesn’t make much sense outside a vacation resort setting.
There’s a second problem with the business model. Suppose I want to get around on a bike. Buying a bicycle isn’t exactly going to break the bank. Zipcar works because owning a car is expensive and in many places highly inconvenient. There’s the purchase price plus maintenance, insurance, parking fees, etc. With bikes, none of these issues exist. What’s the point of renting a bike? It isn’t exactly unaffordable or inconvenient to own one.
These seem like problems for this business model. But don’t worry, Alison Cohen (founder of Alta Bicycle Share) has conquered them. Her goal is not to sell the service to consumers, but rather to the government. The article notes, “Cities buy the bikes and install docking stations where users can rent them with the swipe of a credit card. Alta looks after the bikes and collects payment, earning either a cut of the revenue or a flat annual management fee.”
Why exactly does the government need to subsidize her bike business? If Alison’s company wants to offer consumers an attractive service, I’m more than happy for her efforts. But rather than appeal to consumers, she’s taking money from their back pockets through taxes.
In the print edition, above the article in big letters is the word “entrepreneurs.” But is this what an entrepreneur really is? When folks say, “We need more entrepreneurship in this country,” do they mean more businesses fighting for government contracts? I’ve mentioned this downward spiral in a previous article. When young businesspeople would rather find ways to sell their ideas to the government than to consumers, we’re in real trouble. It reveals a change of mentality.
When a good government connection is more valuable than a good business idea, the end is near. This sort of business environment is a defining characteristic of every backward country in the world.
Often folks complain that our country doesn’t produce anything tangible, and as a result, we’re headed down the wrong path. But the route of courting government business is even worse. Consider this example: I visit my regular burger joint and order some food. The business pays its employees and earns a slight profit. I’m willing to pay more than the cost of the burger. The owner is better off, the employees get a wage, and I’m satisfied with the convenience.
Here’s the problem with the government-contract bikes: The company apparently can’t make it in the marketplace alone. Consumers aren’t willing to pay for the service because they don’t value it enough. When the government forces them to pay anyway, consumers are worse off, and the bike company is better off.
Maybe the service industry isn’t the path to prosperity, but this form of government “entrepreneurship” is a straight shot for disaster. What makes free markets work is the voluntary exchange between parties. Each is better off in some form or another.
Yes, some are much better off than others. At the burger joint, I’m better off than having to go home and cook the burger myself. The business owner clearly benefits from the transaction. And the employee’s wage is better than no wage at all. Everyone gets something.
In the case of Alta Bicycle Share, my life would be better without its existence. It’s just another tax leech lobbying for my money to provide a service that I don’t want. This isn’t the way to prosperity, and it shouldn’t be celebrated in the “entrepreneurs” section.
By Jeff Clark, BIG GOLD
Monitoring the gold industry requires a lot of reading, scanning websites, some more reading, calling, emailing, and still more reading. And all that perusing has alerted me to a theme emanating from the analysts in our industry about gold stocks – one that may not be well-known to outside investors.
That theme is this: Gold stocks are seriously undervalued. That may seem obvious to some; but it’s the widespread consensus I’ve picked up on that’s quite remarkable. And if word of this were to spread outside our sector, we could start to see a groundswell in the precious metals equities.
The following statements have been made within the past couple of weeks. Keep in mind that this is what these institutional, hedge, and mutual fund managers are telling their clients. Take a look:
Tocqueville Gold Fund Portfolio Manager John Hathaway: “I’m looking for gold stocks in general to be re-priced over the next several months. Gold stocks have tremendous catch-up potential. I don’t know whether that’s 30% or 25% or 40%, but it’s something like that because of what kind of earnings they’ll report… Mining stocks will be producing great earnings, while the rest of the economy is stalling out. Just by exception, people will have to look at them. That to me will be very positive for mining stocks I think for the next 6 to 12 months.”
Raymond James/Canada: “With many of the equities trading at historically lower multiples, we would view this as an attractive buying opportunity… We recommend investors take advantage of the strengthening precious metal prices by accumulating gold and silver equities ahead of the typical fall rally.”
BofA/Merrill Lynch analysts said precious metal stocks are “substantially undervalued… Based on the higher gold and silver price forecasts (offset somewhat by the lower copper prices) we have increased our price objectives on most of our stocks under coverage. Our analysis indicates that gold stocks are reflecting a gold price in the $1,200-$1,300/oz range.”
Dundee Capital Markets updated a study of the historical price-to-net-asset-value multiples on a number of gold equities and described the situation as one of “bargain basement prices.” Their conclusion: “Our analysis suggests that most of the gold producing companies appear undervalued and therefore offer excellent investment opportunities at this time. In fact, we recommend an overweight position in gold equities as the summer wanes and we head into the fall season, traditionally a great time to own gold companies.”
RBC Capital Markets noted the relative underperformance of the gold stocks, stating the stage was set for a “potential surge in gold equities.”
BlackRock’s Catherine Raw of the Gold & General Fund said regarding gold miners, “I, as an investor, would say that in the end, given that belief the world isn’t going to collapse, if you’re prepared to be patient, then I would see now as a very good buying opportunity.”
HSBC Global Asset Management, putting its money where its mouth is, reportedly sold most of its physical gold holdings and bought gold shares. “Gold equities will remain under pressure while investors remain fearful, but once investors feel that the risk of another leg down in general markets passes, or after a downswing in the markets, we feel the gold equities will do some catching up.”
Blue Phoenix CEO John Licata: “Gold companies… are not factoring in $1,500 gold prices. Many of them are still building models based on $1,000 gold. So to me there’s a lot of value still within the gold sector that has not been realized.”
Sprott Asset Management’s Chief Investment Strategist John Embry: “They [gold and silver equities] haven’t moved up a lot with gold and silver… they’ve been sort of wallowing a bit… If money decides it has to come into this space, it’s going to be like Internet stocks in the ‘90s, except the mining stocks are going to have real fundamentals.”
CIBC’s Barry Cooper said the proliferation of bullion ETFs is a “market-sentiment driven event that will pass, as fundamental financial drivers kick in to support share prices and drive them higher.”
U.S. Global Investors Chief Investment Strategist Frank Holmes: “There is a substantial opportunity to buy healthy gold mining companies at historically low prices compared to gold… With gold companies currently undervalued and offering strong cash flows and attractive yields, we think gold equities will be rewarded by the market and rise with strong gold prices.”
BMO financial analyst Don Coxe: “Gold and gold stocks offer protection that is going to become more valuable in the months ahead. It’s possible that the long-awaited period, when gold stocks outperform bullion, is coming soon.”
You might be tempted to take the contrarian view, since they’re all leaning to one side of the boat. I think that would be the wrong move. While gold stocks have moved up nicely over the past 30 days, and a short-term correction may be due, these comments are all from within the gold industry. The general public, in spite of some new bullion buyers this year, don’t have gold stocks on their radar at this point. When they are all invested, maybe then it will be time to be contrarian.
Of course, just because a stock represents good value doesn’t mean it must rise – or if it does, that it will do so soon. The point with many of these comments is that buying now – this summer – will fetch you very good value. And for the big-picture investor, that’s exactly what we’re looking for.
Remember, gold stocks have already demonstrated some serious leverage to gold in this bull market. From the 2001 bottom through the end of 2007, gold producers as a group rose about 1,200% (as measured by the Amex Gold Bugs Index), while gold was up about 230% in the same time frame. They outperformed the metal by five to one. Historically for the producers, the ratio is closer to three to one. Either way, my bet is that at some point, those days will return.
And maybe we’re nearing that time now.
[Not all gold and silver stocks have good value. Some will perform much better than others, so you want your money invested in the best of the best. We just recommended one of the hottest silver producers in the industry – a name most institutional investors are just now picking up on. Get its name and all our recommendations with a no-risk trial subscription to BIG GOLD.]
And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!
Casey Daily Dispatch Editor