Welcome to “The Room”

The June editions of International Speculator and The Casey Report are now available.

June 5, 2009

Dear Reader,

Before getting down to the business of trying to make some sense out of the Bizarro World we’ve stumbled into, I want to thank all of you who wrote in response to last week’s edition of these musings.

And I want to apologize for the e-mail flub-up that resulted in many of you receiving a rather odd response that had next to nothing to do with the e-mail you sent. Further, I’m sorry to say that this e-mail issue was only discovered yesterday, which means I haven’t had a chance to respond to your many good thoughts.

Quickly scanning the pile of e-mails, however, I was happy to see a lot of them contained high praise for the guest editorial Decline and Fall of the American Empire by James Quinn. I have passed those e-mails on to Jim and let him know we’d love to hear more from him in the future.

Also, since we’re chatting, I’d like to mention that we are considering making The Room a daily, versus a weekly, publication. That would allow us to be more timely and to deliver the content in more bite-size segments, rather than the weekly magnum opus as is currently the case.

What do you think? Drop me a line at [email protected] .

While you’re at it, maybe you’d like to suggest a new name for this column/blog/musings thing that better reflects its nature and the fact that it is delivered daily, should we decide to go ahead with that change. (And your input will definitely factor into our decision.)

Finally, before we move on to what’s important for the week’s news, I’d like to mention our new weekly e-letter, “Conversations with Casey.” By now, as a Casey subscriber, you should have received the first edition of this new publication. The genesis of it is simply that, since partnering up with Doug Casey in 2004, one of the great benefits of our association has been that it gives us the opportunity to chat on a regular basis. I can assure you that Doug is as interesting and colorful in casual conversation as he is in the written word or his platform speeches.

And so, thanks to all sorts of wonderful modern technology, we figured it would be a pretty simple matter to record quick discussions with Doug and get them out the door to provide Doug’s latest thoughts on the passing parade and to introduce Doug and Casey Research to a wider audience. If you did not receive your copy of the inaugural issue, check your spam filter, or click here to sign up.

Now, on to the week’s big news, and more… starting with the unemployment data that are getting so much attention as I write.

Unemployment Falls!

“Job Losses in the U.S. Slow, Signaling Recession Is Abating”

                                                    (Bloomberg headline, June 4) 

For the week ending May 30, it was widely reported, initial jobless claims eased to 621,000 unfortunates, a reduction of 4,000 over the previous week. Let’s ignore for a moment that that is an awful lot of people freshly added to the line for unemployment benefits. Let’s focus instead on the fact that the 4,000 improvement was on the revised data put out by the Labor Department.

Originally, for the week ending May 16, the numbers released stated that 623,000 people were newly unemployed – but that number was subsequently revised upwards to 625,000. Should a similar adjustment be made a week or so down the road, and 2,000 people are added to the 621,000 number, the May 30th numbers would bump back up to 623,000 – for an actual improvement of just 2,000, or just 0.32% of the total. Anyone who sees a bottom in those numbers is either delusional or deceitful.

Elsewhere, the Bureau of Labor Statistics released the employment stats for the month of May, stats that generated the following comments from our own Bud Conrad…

    Nonfarm payroll employment fell by 345,000, about half the average monthly decline for the prior six months. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent.  The change in total nonfarm employment for March was revised from -699,000 to -652,000, and the change for April was revised from -539,000 to -504,000. These revisions combined with the drop in the headline number confirm that things are still going very much in the wrong direction, albeit at a slowing pace.

    The less reliable and less quoted source is the household survey, which showed that the ranks of the unemployed increased by 787,000 to 14.5 million in May. The average workweek for production and nonsupervisory workers on private nonfarm payrolls edged down by 0.1 hour to 33.1 hours, showing continued weakness.

    Also less talked about is that there are many who are not officially included in unemployment data but are discouraged or only working part time. The more comprehensive measure of unemployed is the total unemployed, plus all “marginally attached “workers, plus total “employed part time for economic reasons.” That number rings in at 16.4% — a much more concerning number, and one that is up from 15.8% last month.

    So, what’s important?

    The official unemployment report headline number of job losses is not as bad as previous months, but it’s still reporting losses. Because the population is still growing, we need employment to grow by about 150,000 jobs for the unemployment rate to stay steady. So while the losses are not as bad as previous months, this is still not a comfortable report. Net: we are still in decline, even if not as rapidly as before.

    The biggest impact this morning is that interest rates hit 3.8% on the 10-year treasury, which is quite a jump and a preclude of more to come.

Housing Market Bottoms!

“US Housing Market: Pending Home Resales Rocket 6.7%” 

    (BusinessWeek, June 4)

There was also much made this week of the notion that the housing market was bottoming. The most pointed-to statistic was an improvement in the pending sales of existing homes in April. To wit, signed contracts… not actual sales.

Not to be a grouch, but as you can see in the chart here, there is a natural uptrend in housing sales in the March to June period. So the latest numbers are not out of left field but reflect to some extent seasonal patterns.

Even so, the bump in sales of 6.7% was still quick good news and, by historic terms, the logical outcome of low interest rates and sharply falling prices. Even so, it is waaaaayyyy too early to spot a turn in the bend as far as housing is concerned.

In fact, the only real trend in motion at this point, you can see in the chart here. It’s from the National Association of Realtors and shows home sales bouncing along in the basement. As you don’t need us to tell you, rising interest rates will merely increase the pressure on home sales going forward. The odds are good that sales will not fall off a cliff quite as steep as witnessed in 2007. But to expect the opposite – that at any time soon, we’ll see a surge of buying sufficient to chew through close to a year’s worth of housing inventory, and therefore begin to drive prices back to the upside – is to expect the highly improbable.

Another trend in motion can be seen in this chart, showing how the subprime foreclosures are starting to ease, but the larger market of prime mortgages is now heading for even bigger trouble.

So, Why the Stock Market Rally?

Over the last month or so, the stress-tested banks have raised over $84 billion in new capital. Of course, much of this is in response to the fact that now the government is insisting on compensation caps for banks that have received TARP funds. And it is now set to enforce those caps with the help of a soon-to-be-appointed “Special Master for Compensation,” who will report directly to Treasury Secretary Geithner.

(Note: the term “Special Master” is not my creation but that of the White House – we truly have moved into a strange new world.)

Not wanting to have to answer to the Special Master, the recipient banks are scrambling to raise the capital needed to pay off their loans and get out from under TARP’s big, fat thumb.

But I also strongly suspect that a key reason these firms are pumping out paper as fast as they can is because they realize that to wait will mean to raise more capital at a lower share price, not a higher one. In addition to a very top-heavy rally, there is the still unresolved fact that the foundations of the nation’s largest financial institutions rest on piles of suspicious paper that, absent the recent rejiggering of the accounting rules, would have them on their knees. If the captains of these enterprises really thought the green shoots were going to grow into golden fields of wheat, they would wait as long as they could in order to get a better price for their shares – rather than shoveling the stuff out the door as fast as they can at these reduced prices.

Likewise, insider selling continues apace. According to Eric Roseman, writing for our friends at The Sovereign Society (sovereignsociety.com)…

    “According to InsiderScore.com, officers and directors of publicly traded American companies have increased their selling of company stock since early May to its highest levels since 2006.”

There is a popular saying in poker circles that goes something like, “If after the first half hour, you don’t know who the sucker is, then it’s you.”

In the current scenario, a large percentage of American investors still don’t know they’re the suckers, or even that there’s a game being played. Unfortunately, the facts of the matter will be revealed to them shortly.

    [Ed. Note: I stepped away from the desk for a while and have returned to see that the initial rally triggered by the supposedly better unemployment numbers has now faded away.

    As Dave Hightower, the brain behind our Casey Trend Trader alert service, pointed out in our weekly editor’s call, in each of the last five months, there has been a brief time lag between the release of the unemployment numbers and the market’s reaction to same. If that trend holds up, then Monday, June 8, should be a bad day for equities. As always, Dave and his team are hard at structuring intelligent trades that allow the use of leverage to a variety of trading opportunities — of which there are an abundance right now. To intelligently use leveraged vehicles, which means capping much of the risk, click here.]

Gold Can’t Be Beaten

The war spending authorization bill that is now working its way through the U.S. Congress originally included a provision to hand the IMF $100 billion to pass along to other countries struggling with the financial crisis. (Hey, what’s $100 billion here and there?) And it also authorized that same institution to sell about 13 million ounces of gold. While those provisions were included in both Obama’s IMF plan and the Senate bill, it was removed from the House bill. The odds are, however, that by the time the legislation passes, they will be put back in, despite considerable Republican opposition.

Perhaps anticipating passage, gold has come under a fair amount of pressure in recent weeks, but each time, it has managed to stage an impressive comeback. The chart here shows gold’s action so far in 2009.

While there’s no question that gold could test the $900 level again, particularly if the IMF sale is approved, there has been a palpable lessening of the voices stridently calling for deflation as the inevitable result of the current financial crisis. Yes, they’ll return, but next time around, as the government unleashes its next wave of monetary inflation in response to the continued downturn in the markets we are anticipating, they’ll quickly be overwhelmed by the circumstances on the ground.

On that front, our own Bud Conrad has just sent over an important piece of work that looks to answer the question, “When will the price inflation reemerge?”

Over to you, Bud…

Debt Collapse and Inflation

By Bud Conrad, Chief Economist, Casey Research

Most of us understand the general idea that if the money supply increases, prices will rise.

Attempting to prove that notion, economists develop elaborate theories and definitions around the various measures of money and try to make comparisons of growth rates of money to increases in prices. Unfortunately, the correlations do not give reliable results. One of the biggest problems is that we don’t have a universally accepted definition of money supply.

To give you my perspective, I provide this analysis that goes beyond traditional bank deposits to look at a broader measure of money supply including debt. I then examine what has happened during the credit collapse, to see what the short-term effect has been on inflationary pressure.

The Federal Reserve publishes a narrow measure of money supply called M1, and a broader measure called M2. They used to publish M3 and “L” as even more comprehensive measures of money, but they were both eliminated.

M2 includes most deposits at banks plus the base money supply of M1, which includes all the currency and deposits held by banks at the Federal Reserve. This is obviously an inadequate measure of the debt instruments that can be used to purchase items and grow the economy. For example, mortgage debt is used to buy houses, and corporate bonds are issued for corporations to expand their factories and operations. So the following discussion is an attempt to look at the combined traditional measures of money as provided by the Federal Reserve, as well as other measures of debt, to see what is happening to what may be thought of as a broader measure of money by adding by the following items:

    U.S. Treasuries  

    Agency Bonds

    Agency Residential Mortgage-Backed Securities

    Non-agency Residential Mortgage-Backed Securities

    Commercial Mortgage Backed Securities

    Investment Grade Corporate Bonds

    High-Yield Corporate Bonds

    Asset-Backed Securities

All of the above forms of debt add to the ability of the economy to expand. So, the following analysis demonstrates what has been going on in the quantities of this form of debt outstanding to see whether there are inflationary pressures or deflationary pressures from the expansion or contraction of the quantity of debt.

The starting point is to look at the quantity of face value of debt outstanding. That number is then discounted by price actions and expected loss of value in defaults. Credit Suisse performed an analysis of each class of debt at four points of time, starting from early 2007 through spring 2009. Adding up all this outstanding debt shows that, in total, the amount of debt has been in modest decline, most rapidly in the latter half of 2008.

Drilling down a bit further, though, you can see that whereas forms of private debt have taken a serious drop recently, government-backed debt has been continuing its steady growth. Real estate debt that was not backed by government – for example, jumbo loans – showed the biggest drops in amount outstanding. Corporate bonds also slipped.

Three layers of government-guaranteed debt are the U.S. Treasuries, the agency bonds and Agency Residential Mortgage-Backed Securities. The reason the agency debt is considered strong and not collapsing is that it is guaranteed by the federal government, now that Fannie Mae and Freddie Mac have been taken over. The other forms of debt are privately held, and they contain the deflationary seeds from the credit collapse. This debt, when marked to market for the value it could be sold for today, has lost as much as 30% of its face value. Total debt of this set of classifications has dropped from $21 trillion to $18.4 trillion as of the fall of 2008. It recovered to $20 trillion by the spring of ’09, partly by the expansion of government debt.

The chart shows the deflationary collapse of private debt, which occurred into the early part of 2009, as being bigger than the expansion of government-supported debt. Thus we have experienced deflationary pressure.

But look what is already beginning to occur, as the government’s debt expansion gains pace. We already know, because it has told us, that it will issue $2.5 trillion of additional Treasuries to fund its big deficit and bailout programs.

By averaging the growth rate of the sectors from 2007 to 2009 with the growth of the latest quarter, we can extrapolate to a scenario of what the debt might look like in spring of 2010. Government spending will keep the debt expanding. Looking forward, we know that government debt, especially in the form of Treasuries, is likely to expand greatly. It is likely to grow more than the private debt will be collapsing. Therefore inflationary pressures are likely to return.

The value of debt outstanding helps us analyze the pressure toward higher inflation. The size of bad debt collapse being smaller than the expansion of government-supported debt suggests the return of inflationary forces in a year or less.

Worth a Read

David again. Last week, a top Democrat suffered a mental breakdown of sorts when he actually told the truth about who is really running the show down in the smelly swamp of Washington.

    A couple of choice quotes from an article that appeared on Huffington Post…
    Sen. Dick Durbin, on a local Chicago radio station this week, blurted out an obvious truth about Congress that, despite being blindingly obvious, is rarely spoken: “And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.” 


    Goldman Sachs’ new top lobbyist was recently the top staffer to Rep. Barney Frank, D-Mass., on the House Financial Services Committee chaired by Frank. Michael Paese, a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank’s committee in September, will join Goldman as director of government affairs, a role held last year by former Tom Daschle intimate, Mark Patterson, now the chief of staff at the Treasury Department. This is not Paese’s first swing through the Wall Street-Congress revolving door: he previously worked at JP Morgan and Mercantile Bankshares, and in between served as senior minority counsel at the Financial Services Committee.

You can read the full article here, though I suspect it won’t tell you anything you don’t already know.

Since we’re on the topic of the smelly swamp, here’s a quick update from the place from Don Grove…

Adult Supervision

By Don Grove, Casey Research’s Washington correspondent

I have heard that those who have had the dubious honor of being in the immediate presence of the president say there is no doubt that he is the smartest person in the room. Even our own Doug Casey has acknowledged that Obama “is no moron. Far from it.” High intelligence is no substitute for maturity and common sense, however. The guys who ran Long Term Capital Management were geniuses, including two Nobel Prize-winning economists, yet they screwed up royally and it took a Fed-sponsored bailout to stop the hemorrhaging.

The gullible electorate saw Obama as a savior. He’s not. He may be smart, but he lacks maturity and common sense. Only we ourselves can offer the salvation we seek. What we need from the president and Congress is just enough common sense to get out of the way. 

Our nation and the world suffer from a popular misconception that smart people in government will solve our problems – and, of course, that they need more money to do it. Not! Revenue measures from speed cameras to requiring licenses for tax preparers and bullying low-tax jurisdictions to catch tax evaders all share a fundamentally flawed underlying assumption: that the government has a legitimate need for more money. That’s ass-backwards. We may choose to squander our scarce resources on government meddling in good times, but when money is tight, such profligacy has to go. 

People do amazing things when left to their own resources. For example, our national savings rate has been going up since economic disaster hit. The average person need not be brilliant to know to hunker down in hard times, cut expenses, reduce debt, and set something aside for an even rainier day, conveniently providing capital for new productive enterprise in the process. But our government is still busy giving these sensible people bad advice in hopes of reanimating the lifeless corpse for one more miraculous cycle of spending-driven opulence. Paddles! Clear! 

The Fed’s efforts to jump-start a recovery by throwing money at our problems have floundered. Chairman Bernanke testified this week before the House Budget Committee. He acknowledged that interest rates are going up in response to raging deficits, despite the Fed’s efforts to nurture those promising green shoots of recovery. For example, the Fed’s purchase of Fannie Mae bonds briefly prompted a housing refinance boom, but that has now fizzled as rates creep inexorably upward as if they had a mind of their own and owe no fealty to the Fed.

Congressman Paul Ryan (R-Wisc.) told Bernanke “that there is no free lunch.” Ryan noted that “Treasury is issuing debt and the central bank is buying it. It gives the alarming impression that the U.S. one day might begin to meet its financial obligations by simply printing money.” [Aren’t we already there?] Not to worry. Bernanke assured Ryan that: “The Federal Reserve will not monetize the debt. Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation.” Hopefully the former, undoubtedly the latter.

Should we take comfort from Bernanke’s assurances? No. Bernanke seems to live in a fairytale world immune from the harsh realities real people grapple with every day. According to the Fed chairman:

    In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.

See? It’s all about inflation “expectations,” which, being “stable,” will “limit further declines in inflation.” Now, is that a good thing? Wasn’t that a bad thing a little while ago? Oh, well. Obviously smart people like Bernanke and the president have this figured out, and we all just have to have the right expectations. Still, I have this foreboding sense that the parents have stepped out and unruly children are wasting hot water, leaving doors open, bullying, and may be about to burn down the house. 


Also from Don…

Don mentioned that he participated in the last Washington DC phyle meeting… so I asked him to do a quick write-up as a way of providing some insight into the value one of these informal meet up groups might offer. (Personally, I’ve never been to one — although our Summits seem to me to be larger versions of these smaller events.) Here are Don’s notes…

    There were seven of us at the DC Phyle meeting. We met for dinner at a quiet, off-the-beaten-track Italian restaurant in Arlington, where we were treated very well and given a private room. A very interesting, diverse, and savvy group, age range probably 25-50s – stimulating discussion with lots of thoughtful, well-reasoned, well-informed ideas. 

    I found it absolutely refreshing to compare notes with folks who were not shy about intelligently projecting the likely outcome of events that are unthinkable or inconceivable to the rank and file. Loss of reserve currency status for the USD, global currency crisis, insurrection, barter, adopting a gold or other standard and how it evolves from chaos – the interaction of inflation, deflation, interest rates, supply and demand, demographics, and the government-provoked anomalies that make these things hard to track and predict. I had to hustle to keep up. It’s discussions like these that hold Alzheimer’s at bay. 

    As an interesting aside, I was starting to think about how we would handle the bill when one of our group grabbed the check and said “That’s alright, guys. I’ve got this.” There was a brief pause before he found himself facing an unruly pile of cash that I believe included a substantial tip for our deserving waiter. I think it all goes to show that the Casey organization attracts good people.

Up to this point, we have done little more than provide communications assistance for the various Casey phyles that have cropped up around the country and in the world. We were discussing getting more involved, maybe by providing some special content for the meetings or helping define the guest speakers — that sort of thing. If you are currently running one of these groups and would be interested in receiving more help from us, drop us a note at [email protected]

If you’re interested in attending one of these groups, drop us a note as well, and we’ll hook you up with the closest organizer.

David again… this just in from the “General,” a British friend now observing his homeland from the comfortable distance of Portugal…

Saving Private Brown

Following the well-publicised expenses scandal, Gordon Brown, the Labour P.M., now has a mutiny in the ranks. In the last few days, eight of his ministers have resigned, of which six are inner-cabinet ministers. This has precipitated a huge cabinet reshuffle, which is still going on as I type this on Friday afternoon. That is not Brown’s only problem. Yesterday British voters went to the polls for local government elections. Full results will not be known until this evening; however, early results indicate that the Conservative Party led by David Cameron is already thrashing the Labour Party. On Sunday evening, we will also get the results from the 27 countries that are participating in an election for the European Parliament. Again Labour is expected to be easily beaten by the Conservatives.

On top of all this, British Members of Parliament have put down a motion of No Confidence in the PM for debate this Wednesday. Informed pundits and the media only give Brown a 50/50 chance of surviving next week. Already a number of MPs are circulating a petition forcing Brown to resign. Alternatively, he may be forced to call a general election, which the Conservatives are almost certain to win.

So what is Brown doing tomorrow? Well, he is off to Normandy for the 65th anniversary of D-Day. He will also be meeting there with President Obama and other world leaders. With his troops already mutinying and with so many walking wounded in his regiment, he might be well advised to “hang out” at the Normandy beaches and not return to the UK, where there is an awful lot of shrapnel flying about. 

Quote of a lifetime from actor David Carradine, who yesterday was sadly found dead in a Bangkok Hotel, under mystifying circumstances. David was 72. His best-known films were Kung Fu and Kill Bill. He was well known for his sense of humour. My favourite quote of his was: “Never buy anything from someone who is out of breath.”


Remember Hill-Bill? This week, someone forwarded me what I thought was a very insightful analysis of how Obama has effectively shifted his former competitors, the Clintons, to the trash heap of history. Well worth a read… linked here.

More Tech You Like:  Sorry, but I can’t find out which of you sent along this tip… but thanks, whoever you are.

    “I have been using the free Grand Central (now Google.com/voice) for over a year and it’s great. A free phone number, transferred to any or all of your “real” phone numbers, call screening, time-of-day routing, incoming number blacklist, conference calling, voice to text messaging, google 411 integration, call return and more. Worth a look.”

The Kettle Is Now Calling the Pot Black. A couple of subscribers forwarded a commentary that ran on the website of Russia’s Pravda news service. It offered a fairly sharp critique of the path America now finds itself on. Considering the source, the comments are pretty eye-opening… Here’s an excerpt:

    It must be said, that like the breaking of a great dam, the American descent into Marxism is happening with breathtaking speed, against the backdrop of a passive, hapless sheeple, excuse me dear reader, I meant people.

    … First, the population was dumbed down through a politicized and substandard education system based on pop culture, rather than the classics. Americans know more about their favorite TV dramas then the drama in DC that directly affects their lives. They care more for their “right” to choke down a McDonalds burger or a Burger King burger than for their constitutional rights. Then they turn around and lecture us about our rights and about our “democracy.” Pride blind the foolish.

There’s much truth in those words. Regrettably.

Well, that’s it for this week. Sorry that I can’t share any music with you this week. It’s just that none really jumped out at me.

As I put away the tools for the day, and the week, I see that the DJIA has managed to rally by a meager 37 points, while gold has had a bad day, down $25 on the day… and oil is holding strong at $68. Sure, gold could go down a bit… but it’s hardly worth thinking about. The trend for much higher inflation is cemented in at this point.

As always, thanks for reading, and for being a subscriber to a Casey Research publication.

David Galland
Managing Director
Casey Research, LLC.