Casey Files:
The Room
Doug Casey
International Speculator
written Feb 8 2008
posted Feb 11, 2008
[Editor's note:
This 'freebie' edition of The Room (the subscribers-only home
page of Casey Research) is a GINORMOUS page, so below I have
provided 'an index' for readers in a hurry]
What Futures Markets Are Saying
About Interest Rates and the Economy read
Making Money in a Crisis read
People Say the Funniest Things... read
Quick Takes on Politics read
The Housing Market - Watch Out Below read
Neutron Loans read
The Honorable Richard L. Armitage read
Get Well Soon read
1984 read
The Quiet Revolution in Natural Gas read
Affordable Health Care for All read
Miscellany read
Good morning! And welcome to
this edition of The Room!
If that salutation suggests
a certain snap in my step, well, you'd be right.
After all, one can't let one's
attitude be overly colored by the gloom and pessimism now stalking
the land.
No, this is America... or,
at least that is the turf upon which my own chair is currently
parked. And no matter how bad things may be, they are, on the
whole, no better or worse than those of most other places.
In fact, America has some significant
commercial advantages over many countries, especially those which
aspire to provide their citizenry a nest of perfect comfort in
all the important ways, including semi-permanent employment.
"You hire them, you retire them" is a phrase you might
hear down at town hall in much of the world.
Not in the ol' U.S. of A. No
siree. In those cases where management makes a major flub or
reaches too far for the annual bonus and, in so doing, accidentally
flips on the Equity Value Death Laser Model 2000-X, you
need hardly wait for the minute hand to travel a single rotation
before the guillotines are dragged out of storage.
Since July 2007, for instance,
Countrywide has held going-away parties (however muted) for 11,000
employees. Morgan Stanley and JP Morgan have both bid farewell
to 1,000 of their former stalwarts, with announcements that more
will follow once they can afford to buy the requisite pink paper
on which to print the traditional "so long and thanks for
all the memories" notes.
Meanwhile, Lehman Brothers
escorted 3,750 of its less close family members to the door,
and Citigroup has begun trimming its rolls, a process by which
its alumni will, it is reported, increase by 20,000.
The list goes on and on. In
fact, according to the bean counters down at the Department of
Labor Statistics, at least 1,408,852 people lost their jobs in
2007 (through November), due to mass layoffs... a 6% increase
from 2006. Of that total, many were formerly involved with the
building trades which, alone, have lost 284,000 workers since
employment in that feast-or-famine sector peaked in September
of 2006.
And, I need not remind you
that the neck-chopping is just getting started.
While it is, of course, unpleasant
to be one of those looking down into the basket while the hooded
man finishes his preparations, it is this ability - and willingness
- to view the common laborer as something of a disposable item
that allows America to bounce back so quickly after periods of
economic adversity.
Friend of long standing, Bill
Bonner, wrote an excellent piece in his always worthwhile Daily
Reckoning (dailyreckoning.com) earlier this week in which he
commented:
"Americans misunderstood
the nature of capitalism itself. It is not an "economic
system" that makes people automatically richer. It is a
moral system... a system that rewards virtue and punishes error.
You don't get richer because of Free Enterprise. Indeed, as the
economic history of the last quarter-century shows, you can get
poorer. The market system merely provides the setting in which
you get what you deserve. You could get rich - if you were to
do the right thing: work hard, save your money, innovate, take
chances, forgo consumption. But do the wrong thing... and you
will pay for it."
 Bill is, in
my view, right on the money.
Now, please, make no mistake.
I would race even a humanitarian on the scale of Al Gore to be
the first to pull the lever on any magic machine that reliably
delivered on the promise of effortless wealth, health and happiness
to all humankind. Sadly, such a machine does not exist.
(And, yes, that is a photo
of Al Gore, taken at the recent Davos gala... if you ask me,
he has been personally sequestering too many carbon units of
late.)
And so we are left with only
one economic model that has been proven to actually provide the
most benefit to the most people over any period of time: capitalism.
In fact, if you think about
it, pure capitalism is really just a continuum of the world's
first discernable economic model; "survival of the fittest."
While previously success was
gained through skill with the club or at throwing rocks accurately,
in the modern-day iteration, the successful are those who understand
how to effectively run a business, or know how to make themselves
particularly valuable to their employer.
(There is another class of
individuals which one has to begrudgingly credit as successful
these days; the bureaucrats and other parasitic professions.
They understand how to tap into the communal lifeblood and, once
entrenched, sink barbs into the body politic to assure they cannot
be ejected until they leave of their own free will, a lifelong
pension in hand. Their long-term survival, however, is questionable...
because they propagate so quickly that, over time, they risk
killing the host, or being chased out of their jobs by workers
brandishing torches and pitchforks.)
The data continues to confirm
that we are headed into a deepening crisis here, which means
that unemployment, the first whiffs of which we have now smelled,
will only grow worse. In some countries, the economic pain will
be deep and dragged out by well-meaning but misguided policies.
In the U.S., however, the odds
are relatively good that after the brush fire burns through,
the businesses will remain standing, albeit with much lighter
attendance at the Friday morning pep talk, ready to pick up the
pieces and get smartly back to work.
But it is time to prepare for
the brush fire.
How bad could it get? In my
view, and the view of most of us here at Casey Research, while
the risk is certainly there, the odds remain long against widespread
soup lines. If for no other reason than that if you overlay the
economic happenings of the last 300 years with the number of
months where soup line-level economic havoc has been the order
of the day, it quickly becomes clear that massive meltdowns are
statistically very rare in the more established economies.
Yet, though rare, the historical
record is equally clear that they do happen.
Given the degree of uncertainty
just now, it is not unreasonable to take a little time to examine
your current circumstances. Do you own some gold bullion to provide
protection against a serious crisis? Have you taken steps to
offset losses in other areas - and hopefully pull down nest-padding
profits - by building a portfolio of quality gold stocks? Are
you able to raise a bit more cash "just in case"?
As importantly, are you trying
a bit harder to look after your health? Cutting back on the snacks,
a little more exercise? Having a health crisis in the middle
of a financial crisis would be the very definition of unfortunate.
As well, if you are still in
the work force, it is worth taking steps to improve your personal
value as an entrepreneur or an employee. On that topic, longer-term
readers know that while in my late teens I discovered, with full
credit to Earl Nightingale for the revelation, the fountain of
wealth: studying a topic you care about one hour a day, just
like a college student studies their books.
If you work for a company,
how much do you think you could learn about your company and
its competition by studying just one hour a day, even after only
a few months? Think your new-found knowledge would impress the
boss? Darn right it would.
Or, if you are in a dead-end
job, or suspect you may be one of those soon to be led to the
guillotines, now is a good time to begin studying something that
might help you in your next career. The secret is that it must
be a subject you are passionate about. Follow your heart, and
the money and your life satisfaction will follow.
As a personal aside, in recent
weeks, I have turned my daily studies to electronic marketing
media - an area that has the advantage of being helpful to almost
any business, or anyone with entrepreneurial aspirations. (If
you think you might benefit from that same course of studies,
there are many good websites where useful, and free, information
on the topic is available. One of the best I have come across
is marketingexperiments.com.)
But, back on topic, while it
is my style and temperament to comment on the world with a lighter
tone, make no mistake that I feel very strongly for those whose
life's travails have left them unsatisfied, financially or emotionally.
You can let it get you down, or you can set your jaw against
the challenge and get down to work.
There are, per Bill's comments
above, no guarantees built into a capitalist system... other
than, one would hope, a guarantee that you get to play on a more
or less level playing field. Regretfully, in modern-day America,
the system has been substantially degraded by a legislative system
that is willing and able to meddle in literally any aspect of
life, or bestow almost any grant, opening the door for businesses
and their lobbying organizations to influence legislation in
much the same way I can get my old dog General to beg by holding
up a piece of ham.
In the final analysis, each
of us has to look after ourselves and our loved ones. If you
look to the government, which is bankrupt beyond all possible
repair at this point, to provide you with your retirement, or
to assure that the safety net remains intact, you will be setting
yourself up for steady disappointment and a life that fails to
provide anything more than the barest of necessities, if that.
What Futures
Markets Are Saying About Interest Rates and the Economy
By Bud Conrad
The combined effect of a slowing
economy and the Fed cutting its rate to stimulate has caused
the expectation for 3-month dollar-denominated investments called
Eurodollars to drop in 2008 to below 2.5%, but then to rise into
the future. (Despite the name, this has nothing to do with the
euro currency).
I interpret this to reflect
a slowing in the economy through 2008, but that then the inflation
will pick up, and investors will require higher rates to cover
that inflation. It is part of recognizing that the Fed cuts rates
by providing more liquidity. The result is that in the short
run rates drop, but in the longer run inflation returns and rates
have to rise to cover that inflation.
Making Money
in a Crisis
In the current edition of the
International
Speculator, we provide a list of ETFs you can use to play
the current financial crisis.
But, as Bud Conrad points out,
it is really not that hard to find successful investments if
you open your eyes and use logic. And, I would add, if you understand
the various instruments available to you to act on these opportunities.
For example, it's no secret
to anyone that the housing construction industry is in a slump.
So, what material is widely
used in the building of most houses? The answer, lumber, is obvious.
As you might expect, therefore,
and as is demonstrated in the chart just below, lumber prices
have fallen along with the activity in the building sector.
According to Bud, who is well
versed in the futures markets
"If you were to play
the futures markets, you could have bought a contract for 110,000
board feet of 2"x4" priced at $217/1,000 ft. The contract
is worth $23,000. The $90 price drop shown in the chart represents
a profit of 900 points, which you multiply by $11 per board feet
= almost $10,000. As the initial margin is $1,650, your returns
could have been roughly 700% over a six-month period."
Of course, futures markets
can swing both ways, and steeply so, and so should only be approached
after a great deal of hard research and paper trading. Options
trading, while also risky, offers the advantage of high leverage,
but with identifiable and limited risk. Taking the time to learn
more about options can also pay off, but again, be careful only
to invest with money you can afford to lose.
Note: At the risk of being perceived as cementing
a reputation for being crassly commercial, I am compelled to
mention that, in addition to giving other profit-making ideas,
options specialist Robert Meier of the RMB Group will be presenting
a workshop on the right - and wrong - ways to use options at
our upcoming Crisis & Opportunity Summit in beautiful
Scottsdale, AZ on March 25, 26 & 27. If you are planning
to attend, you'll need to register within the next seven days
because there are only about 20 seats remaining. The secure link
to learn more and register is just below:
http://www.caseyresearch.com/crpmkt/crpSolo.php?id=111
People Say
the Funniest Things...
 For some reason,
the memory comes to me of the time when, putting in service as
the best man at a wedding, I greeted Eleanor Mondale, the ex-vice
president's beautiful daughter, in the receiving line. I was
single at the time, and so the sight of Ms. Mondale, a model
back then, was particularly well received. For some reason, however,
the words that tumbled out of my mouth on making her acquaintance
- and I still don't know where they came from - didn't appear
to make exactly the right impression.
"Nice shoes," I said,
looking at her feet. "I bet they must hurt." (In my
weak defense, her shoes had very high heels and with very narrow
tips.)
A quizzical expression passed
over her attractive countenance (shown in the photo) before she
replied, "Ah, no. They are just fine, thank you," before
she hurried away, glancing back as she moved, I suspect, to be
sure I wasn't following her.
John McCain had such a moment
when, in a randy mood last year, he burst into song (poorly,
it must be added) with the theme that the U.S. government, ideally
under his leadership, should engage in the mass annihilation
of the unfortunates who, by accident of birth, live under the
Iranian theocracy.
(I refer, of course, to his
rendition of "Bomb, Bomb, Bomb Iran..." posted for
all posterity here:
http://www.youtube.com/watch?v=hAzBxFaio1I)
Now, because we serve a broad
audience, I suspect that there are any number of you who might
agree with Senator McCain's musical sentiment, responding to
any critics of same with a roll of the eyes and a comment along
the lines of, "C'mon, really! Has everyone lost their sense
of humor? Jeez!"
While I admit that the idea
of unleashing waves of missiles against another country and the
thought of "collateral damage" is a knee-slapper, I
do wonder if a majority of the U.S. electorate will share the
joke come election time.
I suspect not.
As a result, I strongly suspect
that Sen. McCain's long-held aspirations to the highest office
may likewise be scuttled.
Especially because, in addition
to the somewhat concerning psychology revealed by his impromptu
outburst of nihilistic verse, the perma-Senator is firmly on
record as being in concert with the idea that America should
occupy Iraq for 100 years, a sentiment that is not in step, if
you believe the polls, with the majority.
And as a result, Obama or Hillary
will be elected. (Sorry, Ron Paul fans, he may have raised a
lot of money, but he's been effectively marginalized by the media
and his fellow Republicans.)
And this points to the sticky
wicket in democratic politics. You see, I am personally quite
sure that I would prefer the economic policies of Sen. McCain
over those of Sen. Clinton or Sen. Obama... but I'm equally certain
that I would prefer either of those candidates' less martial
backgrounds and leanings over those of Sen. McCain.
It is a classic no-win proposition.
And so I prepare instead to cope the best I can with the damage
that I see coming. Given that it is likely the Democrats will
soon be ruling the roost, that means preparing for an acceleration
of the feel-good policies that have laid such a solid foundation
for escalating inflation - and higher gold prices.
My old associate from EverBank
(Everbank.com), Chuck Butler, recently shared a Warren Buffett
quote with the readers of his Daily Pfennig e-letter. Longer-term
readers know that there are issues on which Mr. Buffett and I
fail to see eye to eye, but in these remarks, I am in agreement.
And I quote...
"If something is unsustainable,
it's going to have consequences; so far the consequences have
been a general decline in the dollar against major currencies.
If we continue the same policies, we're going to get the same
results in the next five or 10 years."
He also had this to say about
inflation... "Inflation has been in remission and is
likely to be more prevalent in the next 10 years."
There are many things that
cause dislocations in the marketplace, but few are as predictably
disruptive - and, if you know how to play things, profitable
- as government. The writing is on the wall. Now you just need
to take the steps to prepare yourself to profit.
Quick Takes
on Politics
At this point in the election
cycle, it is probably appropriate for us to share, once again,
the world's shortest political quiz, a reliable tool to tell
you where you really belong on the political scale.
You can take it here: http://www.theadvocates.org/quiz.html
And, to assist you in contemplating
the human frailties that argue so convincingly in favor of restricting
the power afforded to any government, there is the following
video featuring the antics of one of the anointed of America's
political class. While you may have seen one of these videos
in the past, this one is particularly well executed. Follow the
link just below
http://www.youtube.com/watch?v=BqLvBUSJucg
The Housing
Market - Watch Out Below
One of the more interesting
aspects of the current soaring default rate on home mortgages
-- the very same defaults that are now bedeviling financial institutions
around the globe -- is that the sophisticated models that were
created to predict the behavior of the borrowers failed so badly.
This week, in an article in
the Financial Times (ft.com), they discussed these failures at
some length.
Following are some excerpts
I thought you would find of interest:
"There has been a failure
in some of the key assumptions which supported our analysis and
modelling," Mr McDaniel admits. "The information quality
deteriorated in a way that was not appreciated by Moody's or
others." Mortgage borrowers, in other words, did not behave
as expected.
"The issue at stake
revolves around so-called delinquency rates, the proportion of
people who fall behind on their debt repayments. When American
households have faced hard times in previous decades, they tended
to default on unsecured loans such as credit cards and car loans
first -- and stopped paying their mortgage only as a last resort.
However, in the last couple of years households have become delinquent
on their mortgages much faster than trends in the wider economy
might suggest. That is particularly true of the less creditworthy
subprime borrowers. More-over, consumers have stopped paying
mortgages <i>before</i> they halt payments on their
credit cards or automotive loans -- turning the traditional delinquency
pattern on its head. As a result, mortgage lenders have started
to face losses at a much earlier stage than in the past.
"In the past, if a
household in America experienced financial problems it tended
to go delinquent on its credit cards, but kept on paying its
mortgage," says Malcolm Knight, head of the Bank for International
Settlements, the central banks' bank. "Now what seems to
be happening is that people who have outstanding mortgages that
are greater than the value of their home, or have negative amortisation
mortgages, keep paying off their credit card balances but hand
in the keys to their house . . . these reactions to financial
stress are not taken into account in the credit scoring models
that are used to value residential mortgage-backed securities."
And this...
"In recent months,
Washington politicians have devoted a great deal of attention
to the problem of "resets". This refers to the fact
that many subprime borrowers took out loans in recent years at
initial, ultra-low "teaser" rates, which typically
rise (or "reset") after a couple of years. Around 1m
of these subprime loans are due to reset this year, which means
that many households could suddenly face sharply higher repayments.
That in turn has sparked fears of a looming further rise in delinquencies
by increasingly cash-strapped households.
"To offset this risk,
the administration of President George W. Bush recently brokered
a plan to freeze the resets. Yet in private, Treasury officials
admit that while the scheme might help at the margins, it is
unlikely to be a "silver bullet". This is because one
dirty secret of recent mortgage data is that, thus far, there
has been a surprisingly weak correlation between rate resets
and delinquencies. That suggests that the reset freeze may have
only a limited effect on foreclosures this year."
And...
"Some economists suspect
that if house price declines continue but the US jobs market
holds up, the pattern of high mortgage defaults relative to other
forms of consumer credit could continue. However, if the US slips
into recession or even a protracted period of rising unemployment,
delinquencies might rise on a wide range of consumer credits,
implying a return to a more traditional pattern. Indeed, some
banks are starting to brace themselves for this latter shift.
"The problems in the credit markets are spreading to the
consumer sector - the next area of concern is auto loans and
credit cards," says John Thain, chief executive of Merrill
Lynch."
I am reminded of a website
that Doug Casey (who was first among others) brought to my attention
this week. It is www.youwalkaway.com.
Should you click that link,
you will find an enterprising e-biz that makes its money by providing
homeowners, tired of the burden of paying their mortgages, with
a kit that shows them the ins and outs of walking away with no
further liabilities. And, even better, it explains how said mortgagees
can live payment-free for the typical 8-month period it takes
before the lenders are able to escort you from the premises.
Unfortunately for the economy
and for those holding the "AAA" rated paper built out
of these corrosive loans, www.youwalkaway.com is likely to become
an increasingly popular site. Which brings me to...
Neutron Loans
Yesterday I had a pleasant
lunch with a financial planner friend of mine. As he tends to
deal with a more upscale clientele, he was unfamiliar with a
category of mortgages sometimes called "payment optional."
If you thought "Ninja"
mortgages were about as bad as it got -- you know, No income,
No job, No Assets - then that is only because you haven't
come across the payment optional feature offered to many of those
same mortgagees.
In a nutshell, payment optional
allows borrowers to elect to pay only a portion of their mortgage
payment in any given month, rolling the balance-due but unpaid
amount back into the original loan. This option was offered under
the guise of allowing borrowers to deal with an emergency cash
need. You know, the car breaks down and so, for a month, you
pay less on your mortgage in order to have available the funds
required to repair the car.
The problem, of course, is
that many consumers, swept up in the giddy housing boom and romanced
by the mortgage originators, borrowed more than they should have.
And, when finding themselves unable to make the required payments,
they began to fall back on the payment optional feature in order
to get them through to the next payday.
With the magic of compounding
interest now working against them, the situation was, and is,
clearly untenable, assuring a steady supply of fresh customers
for youwalkaway.com.
Bloomberg had a good article
on the topic. For those of you short of time, here's a quick
excerpt..
Feb. 7 (Bloomberg) -- Joe Ripplinger
took out a $184,000 mortgage in 2006 and makes his payments every
month.
Now he owes $192,000.
The 66-year-old Minneapolis
house painter has a payment-option adjustable-rate mortgage.
It allows him to write a check for $565 a month even though he
owes $1,300. The difference is added to the mortgage, and when
his total debt reaches $212,000, or after five years have passed,
his monthly minimum will jump to about $2,800, which he can't
afford.
"We're barely making it
right now," Ripplinger said.
The estimated 1 million homeowners
with $500 billion of option ARMs are beyond the help of interest-rate
cuts by Federal Reserve Chairman Ben S. Bernanke. While subprime
borrowers face an average increase of 8 percent or less when
their adjustable- rate mortgages reset, option ARM homeowners
may see their monthly payments double after their adjustments
kick in.
"We call them neutron
loans because they're like a neutron bomb," said Brock Davis,
a broker with U.S. Express Mortgage Corp. in Las Vegas. "Three
years later the house is still there and the people are gone."
You can read the article in
its entirety by following the link here.
http://www.bloomberg.com/apps/news?pid=20601109&sid=akYNTEygRJH8&refer=exclusive
The Honorable
Richard L. Armitage
Our own Bud Conrad attended
a talk at Stanford last night by Richard Armitage, called Diplomacy:
Humanitarianism in Action. Here's Bud's report:
Armitage was the second-in-command
at the State Department, serving from 2001 to 2005 during Colin
Powell's tenure. He had a front-row seat of the decision to go
to war on Iraq. He served in Vietnam, was implicated in the outing
of Valerie Plame, is on the board of directors of Conoco Phillips
and is now working for John McCain's presidential campaign.
He strode on the stage and
spoke without notes, evoking the image of a weak impersonation
of General Patton. He wore a rumpled suit and was the only person
with a tie. The speech was lightly attended, with an audience
of only 60 or so. I guess students are more interested in basketball
than a conservative who is now slipping off the political stage.
While the speech was of no
particulate import, befitting the empty suit he has become, at
the reception afterward I gained this most important insight:
I asked him what the reason was for going to war in Iraq, and
specifically if it was about oil.
He demurred, saying that he
was part of the decision and the focus was on WMD (Weapons of
Mass Destruction) and on bringing the light of democracy to the
region. I pursued to ask how long we would be in Iraq. His answer
was "a decade," although with decreasing forces. We
didn't discuss the costs, as he still supports the original decision,
but from the view of an economist, I have my interpretation.
Namely, that we will be spending $100 to $200 billion per year
we are there, so, if his assessment is correct, we can expect
to add another $1+ trillion to the tab of what we've spent so
far.
This ensures continued U.S.
deficits and lower productivity, which confirms my basic thesis
that the dollar will continue to come under pressure.
(On the topic of wars with
Iraq, Doug Hornig, editor of our Daily Resource Plus, sent along
the following YouTube video, featuring a rather interesting 1994
interview with Dick Cheney.
http://www.youtube.com/watch?v=S9YuD9kYK9I)
Get Well Soon
Living in a ski resort as I
do, it is not unusual to hear a debate around the dining table
on the topic of what is more dangerous, skiing or snowboarding.
Each side of the debate has
their opinion, but our own Dave Johnsen, the programmer who assures
our websites work each day, decided to wade in decisively on
the topic, crashing his snowboard into a tree and breaking his
fibula, as well as tearing his ACL, MCL, LCL, and meniscus.
Confined to bed after eight
hours of surgery yesterday, he will have abundant time to jot
down his further thoughts on the skiing vs. snowboarding debate.
In the meantime, all of the Casey team would like to wish him
a speedy recovery. (Oh, and if the website starts to get all
wiggly, you can now appropriately assign the blame... to snowboarding.)
1984
It is, at this point, a tired
literary device to reference George Orwell's seminal work, 1984,
when commenting on the recent erosion of personal liberties.
Yet, the notion of an all-powerful
entity snooping into your everyday affairs, ala Mr. Orwell's
Big Brother, is sufficiently disturbing that observers of these
things can't help but to drag it out, much in the same way others
commenting on another genre might recall Frankenstein, or Dracula.
Unfortunately, while monsters
made from reconstructed men or eternally living blood suckers
are pure fiction, Orwell's monster is increasingly real.
Earlier this week, one of our
researchers related a conversation between himself and his tax
accountant. While requiring him to fill out a rash of new government
forms, she commented that, in her role as a professional tax
preparer, she no longer worked for him but for the government.
But it gets much worse. You
see, our elected officials are now fast-tracking legislation
to institutionalize warrantless eavesdropping on your every communication.
Don't believe me? Click the
link below
http://blog.wired.com/27bstroke6/2008/02/sen-rockefeller.html
The
Quiet Revolution in Natural Gas
By Chris Gilpin, contributing
editor, Casey
Energy Speculator.
While natural gas production
has hummed along, slowly increasing in the U.S. over the past
ten years, it would be a big mistake to think that everything
is business as usual. There is a major shift underway in the
natural gas industry. Conventional gas production is going the
way of the dodo bird, while unconventional production - from
sources like coal bed methane, tight gas and gas shales - has
stepped up and made itself known as the future of natural gas.
The Lower 48 has been pumping
more natural gas from unconventional sources than conventional
ones since 2000 - the trend is accelerating. Conventional gas
could soon account for less than a third of overall production.
The transition from conventional
gas to unconventional has been remarkably smooth. It turned out
to be much less of a challenge to exploit unconventional sources
of natural gas than to exploit unconventional sources of oil,
such as oil shale and tar sands (both of which have been nightmares
from an engineering perspective).
A conventional gas operation
is rather discreet, with a single well working every 640 acres
or so, while a Coal Bed Methane (CBM) project dots the landscape
with wells everywhere, as many as one per 80 acres. There's a
lot of needless hand wringing over the aesthetics of such operations,
but what interests us is how this infrastructure build has affected
the landscape of supply and demand. For instance, the average
production per well has been dropping precipitously.
Despite its growing popularity,
unconventional gas is no one's first choice. CBM projects require
a huge amount of infrastructure to duplicate the same amount
of production as one conventional well. Your average conventional
gas well in the U.S. produces about 600 Mcf/d, while your average
CBM gas well often pumps out less than 100 Mcf/d.
To make up the difference,
the industry has been forced to drill, fracture, dewater, and
maintain a lot more wells - all of which costs money. Gas producers
have no choice but to pass these expenses along to the broader
market, which has been a major factor in the rise of natural
gas prices from $2/Mcf in 1998 to over $6/Mcf today.
The same story holds true in
western Canada where CBM has just begun catching on in the last
few years. The average initial productivity of a gas well drilled
in the Western Canadian Sedimentary Basin has dropped from 1,000
to 300 thousand cubic feet per day over the last five years,
a combination of ailing conventional gas resources and the rise
of unconventional ones.
Without unconventional gas,
the U.S. would be left trying to outbid the rest of the world
for cargoes of LNG (liquefied natural gas), an unappealing scenario.
Many of the most intriguing
investment possibilities now lie in parts of the world outside
of the U.S. where unconventional technology is breaking virgin
ground. Alberta is just starting to ramp up CBM production. Southeast
Asia has huge reserves of unconventional gas that have never
been properly explored. Using the American experience as a template,
natural gas-producing regions all over the world are learning
that it pays to think unconventional.
[Note: Mark Bustin,
a senior researcher for the Casey energy division, is one of
the leading unconventional gas experts in the world. The team
is watching for opportunities in gas to open up in the spring
and summer, after prices ease up due to seasonal considerations.
In the meantime, the energy division just updated a Special Report,
North America's Top 5 Uranium Explorers... featuring the
5 best junior uranium stocks.
This is of particular interest
now, because the uranium juniors as a sector have swung from
massively overbought to deeply oversold. As determined contrarians,
the time is fast approaching to begin reloading in the sector,
and these are the companies you'll want to own.
As a subscriber to the Casey Energy Speculator, you'll
find the report in the Special Reports section of this
website... for everyone else, you can receive the report free
of charge if you subscribe today.
Remember, your subscription
comes with a no-questions-asked, 3-month money-back guarantee.
Click here to get "North America's
Top 5 Uranium Explorers" today.]
Affordable Health Care for All
Not so long ago, I was chatting
with a cab driver while riding from JFK into Manhattan, when
the conversation turned to what constituted a living wage. "I
can't even afford health care," he said grumpily, weaving
his cab with the grace of a ballet dancer between gaps in rumbling
semi-trucks. With a snort he commented, "I'm not much of
a Hillary fan, but the time has come for universal health care."
"That may be so,"
I chimed in from the back seat, "but I once lived in Canada
and while there, watched someone I cared for deeply enter the
nationalized health care system. After many months of bureaucracy
and red tape, he ended up dead because they didn't run the tests
that would have discovered his cancer, until it was too late."
"Yeah, but..." he
started, his thoughts cut off by the need to concentrate on cutting
off the competitor's cab trying to squeeze onto the expressway
beside him.
"Here's a question,"
I continued. "If you didn't have to pay so much of your
money in taxes... income taxes, property taxes, taxes on gasoline
and all the things you buy... how much money do you think you'd
save every year?"
"A lot!" he replied,
a happier note in his voice as his mind contemplated the idea.
"So, if you didn't have
to pay all those taxes, but instead maybe just a 10% flat tax,
do you think you might be able to afford health insurance then?"
I asked, rhetorically.
"Hadn't thought of that,"
he said, shaking his head with some confidence. "But, yes,
I could. No problem."
So, what do you think? Could my "Unified Theory on Solving
the U.S. Health Care Dilemma" qualify me for a Nobel prize?
Who knows, I might actually have a chance, given that the bar
on that prize seems to have been precipitously lowered in recent
years.
Miscellany
- A number of you have sent
in the article from the <i>NY Times</i> discussing
how merchants there are starting to post signs announcing "Euros
Accepted." A sign of the times, to be sure, but I'm watching
for the day that they start posting signs "Gold Accepted."
- Ernst & Young made headlines
this week by saying that most metals analysts' predictions of
metal prices "have consistently and significantly lagged
behind the actual spot market," and that mining and metals
equities have been undervalued. To which I reply, "Welcome
to our world."
Here's just one of a number
of memorable points they made in their report:
"It is our view that
current metal prices are actually a return to sustainable price
levels following an extended period of artificially depressed
prices, rather than the conventional wisdom that the industry
is near the top of a cycle."
- I asked one of our researchers
to do an analysis of what price level gold needs to reach before
we would, based on historical precedence, start seeing serious
movement in the gold stocks. For data points, we looked back
at two prior gold bull markets, then adjusted the price of gold
back then to reflect the current purchasing price of the dollar.
While we are still working on the data, a quick look suggests
that, if history is a guide, gold has to break over $1,000 decisively
to get the masses involved in the stocks. But when they do come,
the returns are spectacular. We'll have more on the topic here,
and in our other publications, in the near future.
A quick glance at the screen
before signing off shows me that Wall Street is again painted
red... and that gold, silver, many of the base metals, oil &
gas are all higher.
It is especially gratifying
to see gold come back so strongly from the whupping it took earlier
this week, especially considering all the trash talk about our
favorite metal of late. Including, most notably, Dennis Gartman
who is calling for it to correct down to $810, though he nuances
his comments by stating that even at that level, it would still
be in a bull market and poised to surge again.
While we cannot predict the
future, nor pretend to, neither can we yet see a scenario that
does not favor gold reaching Bud Conrad's forecast of gold over
$1,200 this year.
And that, fellow planetary
travelers, is that for this week. As always, thank you for spending
time with me today.
Next week I am going to endeavor
to write an entire edition without mentioning the word "government"
once. Until then...
Sincerely,
David Galland
###
Doug Casey
Casey Archives
321gold Ltd
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