 Casey Files:
This week in 'The Room'
Doug Casey
International Speculator
written Feb 15, 2008
posted Feb 19, 2008
"Unless you are new
to our services, you should, by now, be getting pretty chummy
with the right side of this trend through investments in precious
metals, energy commodities and other "stuff." Played
right, these investments will assure you won't be one of those
who, like our barely breathing canary, are caught by surprise
by the unfolding monetary crisis. And you might even get rich...
or richer than you already are."
Welcome to "The Room"
The subscribers-only home page of Casey Research.
February 15, 2008
Dear Reader...
Foolishly, I now realize, I
closed last week's column by announcing that I would endeavor
to write today's entire missive without a single mention of...
okay, well, just this once... government.
Some readers have suggested
that I could meet the test simply by replacing that specific
word with another, for instance, "Turnip." While the
idea has merit, as does even that word (looks a lot tastier than
it is), I believe that self-created rules are rules nonetheless
and no cheating allowed.
But, given the deep influence
of that particular form of human activity, the task of producing
this edition of The Room is made all the more daunting by my
admittedly childish challenge.
I suppose we could talk about
the weather.
(Actually, we can! My wife,
the chief science officer of our household, gives a dismissive
sniff any time I mention the latest forecast from local news
sources, then logs on to consult with http://www.ssec.wisc.edu/data/geo/,
a geostationary satellite with a number of filters that, once
you master it, provides all the intel you'll ever need about
what's really coming next.)
Okay, well, that about covers
the small talk.
But before we move on, I must
make one small edit to the rules surrounding today's challenge...
namely that, should I decide to quote someone else, that person
will not be subject to the same constraint, because, well, they
weren't aware of the rules in the first place.
Okay, now that we have the
rules straight, I'm going to wander into the kitchen for a further
consultation with my dear friend, Ms. Rancilio Espresso-Maker,
and let our own Bud Conrad take over the reins for a few moments.
As you may recall, last week
Bud commented on the obvious play to be had in lumber. In a similar
vein, this week he looks at commodities as a sector play...
Commodities: Looking Beyond the News
By Bud Conrad
We have read Jim Rogers' comment
on commodities in his new book and seen the price of gasoline
when we fill up, but most of us get too distracted by some enticing
traditional investment, like a stock in some extractive resource,
to think beyond the obvious.
For a year and a half, I have
been watching grains scream higher. With oil, gold and odd items
like milk and butter rising, I start to ask what might be beyond
the horizon.
First, to report the bedrock
under the commodities, see how commodities have jumped. There's
no deflation there.
Here is a chart on Minneapolis
wheat, from $5 to $18 since last summer:
It has been said that the guys
that made the most money in the gold rush were the suppliers
that provided the tools to the miners. So, who are the guys that
are making money providing tools to the commodity traders? Here
is one measure of the jump in this vein: the price of a seat
on the commodity exchange. It jumped from under $10,000 in 1971
to $725,000 at the end of 2007 in Kansas City. These seats are
traded on the exchange, and can earn profits along the way by
being leased out to institutions or rich individuals who want
to place trades directly.
And a seat on the Minneapolis
Grain Exchange tells the same explosive commodity story, jumping
from $16,000 as recently as 2004 to $280,000 now:
All this is obvious once someone
points it out. What else should we be looking at?
(A possibly profitable trend
pops into my own mind... I'll share it a bit later on. But first,
this... )
The First Annual Casey Research Inflation
Google
One of our core theses is that
global price inflation is on an unstoppable upswing at this point.
Supporting that contention are nearly daily reports from around
the globe of rapidly escalating inflation emerging everywhere
from Russia to Saudi Arabia... from Australia to China... and
almost literally everywhere in between.
In fact, I have a rather eye-opening
way to prove the point.
Simply enter the following
search query into your favorite search engine, formatted as follows...
except replace the "name of country" with the
name of any country that pops to mind. Be sure to include
the parentheses.(name of country inflation 2008)What you'll
find, without exception, is a recent news story about local price
inflation ratcheting up far more than previous expectations.
For example, I randomly googled
Egypt... and here's what I found.
On February 8, the bank initiated
a hike of 25 basis points, bringing its deposit rate to 9% and
its lending rate to 11%. The decision came in the wake of news
that inflation hit 11.5% in the year to January, reversing Egypt's
disinflationary trend from the last quarter of 2007...
Okay, let's try another one.
Throwing a mental dart at an invisible board, it lands on...
Mauritania? Here's that story...
NOUAKCHOTT, Nov 15, 2007 (AFP)
Mauritanian President Sidi Ould Cheikh Abdallahi ordered villages
to stockpile food to help cushion the effect of rising inflation,
his economic adviser said Thursday. The announcement came just
days after the latest unrest over the crisis. Some six thousand
tonnes of wheat had already been put aside for the stocks as
part of a bid to stabilise prices, said Sidi Mohamed Ould Biye.
The announcement [came] after a series of violent protests since
last week over spiralling prices have left one person dead and
17 injured."
There are a number of reasons
for this powerful upswing, but none more important than the fiat
monetary regime that allows for a steady, unfettered flow of
freshly minted paper and its electronic doppelgangers to enter
the market. The most widely used and traded commodities, energy
and food, are, like canaries in an old-fashioned coal mine, early
warnings of what's coming.
This week, for instance, we
have the news out of England that families there are now spending
an extra £1,300 pounds a year (US$ 2,550) on household
items, most notably food and fuel, which, according to an article
in the Daily Telegraph, are rising at the briskest pace in 17
years.
As you can see by letting your
eyes float back up the page to Bud's first chart, which shows
the commodities index curve moving up more or less steadily since
the U.S. dollar's link to gold was broken, the canary is now
lying on its back, its cute little feet stretched upwards, a
convulsive twitch the only indication of a weak spark of life.
Is there any force on earth
that can stand in the way of commodities continuing to rise over
the next thirty years and beyond? (With the inevitable short-term
corrections along the way, of course.)
Absent a wholesale abandonment
of the fiat monetary system, the answer is no. That many of these
same commodities are concurrently getting harder and more expensive
to find in any useful quantities only exacerbates the problem.
And, of course, as the cost
of living goes up, so must wages and benefits, some of which
are already pegged to automatic adjustments.
By now almost everyone is familiar
with the concept of "tipping" points -- that point
beyond which the inevitable also becomes the imminent. My favorite
partner of all times, Doug Casey, is of the opinion that we are
at that point.
I am finding it harder and
harder to disagree.
Unless you are new to our services,
you should, by now, be getting pretty chummy with the right side
of this trend through investments in precious metals, energy
commodities and other "stuff." Played right, these
investments will assure you won't be one of those who, like our
barely breathing canary, are caught by surprise by the unfolding
monetary crisis. And you might even get rich... or richer than
you already are.
These are topics we will, of
course, continue to cover at greater length, and with far more
specificity, in our various subscription services.
[NOTE: If you're new
to Casey Research and are looking for a good place to get started,
take an inexpensive subscription to our BIG GOLD as that monthly
newsletter offers simple and lower-risk ways to play the inflation
trend. For more on BIG GOLD and its 3-month, 100% money-back
satisfaction guarantee, click
here.]
Dispatches from the Front Lines of
the Credit Crisis
Remember back when... when
certain individuals associated with certain unnamed institutions
were pontificating that the subprime losses would amount to no
more than $100 billion to $150 billion? It turns out that said
individuals were somewhat ill informed, a point made clear by
the steady stream of blood-soaked dispatches coming back from
the front of the credit crisis. Just this week...
✓ Mortgage
insurer MGIC announced yesterday it had a net loss of $1.47 billion,
or $18 per share, mainly attributable to a $1.2 billion loss
reserve. The company is now said be to urgently seeking new capital
in order to avoid further rating downgrades.
✓ It
was announced Wednesday that between April and December 2007
alone, Japanese financial institutions have incurred losses of
600 billion yen (US$5.5 billion) from investments related to
U.S. subprime mortgages. I have recently come across credible
analysis that says the Japanese banks are scrambling behind the
scenes to avoid fully disclosing the size of their subprime losses,
but that it could run into many multiples of the number reported
this week.
✓ Bond
insurer MBIA this week begged for relief from short-sellers and
further, asked that the rules be changed about how bond insurers
are assessed. Otherwise, they were at risk of going out of business
by virtue of having done a spectacularly poor job and being punished
for it with a ratings downgrade. Predictably, their argument
revolves around the time-honored contention that they are too
large to fail. Which is another way of saying that the burden
of their losses should ultimately be shifted to taxpayers.
✓ Warren
Buffett seems to disagree, in effect, encouraging their collapse
by offering to off-load the company's municipal bond liabilities
(as well as those of the other bond insurers) at fire sale prices.
Grasping at straws, the equity markets did a dead-cat bounce
on the news based on the observation that, "Ah, Buffett
is doing what JPMorgan did in 1907 to bail out the stock markets!"
Not so fast, say us...
Bud Conrad's take...
"Buffett is no dummy. He isn't in this for the good of the
U.S. economy: he's in it to make money. So I doubt he is paying
more than the Muni insurance is worth. The sellers are up against
the wall, having fire sales to stay afloat.
"They would be selling off their only assets that are worth
anything, leaving behind the toxic waste. This is not the bailout
that will fix the overleveraged guarantees on $2.4T of bonds
by these insurers; rather, it confirms that they are desperate,
and even closer to worthless, in my opinion. If such a deal goes
through, it shortens the life of the insurers unless a big government
bailout emerges."
✓ UBS,
Europe's largest bank, announced this week a fourth-quarter subprime-related
loss of almost $12 billion. And it's not over yet. According
to Bloomberg, the bank's CEO said that 2008 would be another
"difficult year."
✓ Perhaps,
like a child caught with its hand in the cookie jar and then
tries to deflect attention by pointing to the chocolate-smeared
face of a nearby sibling, UBS analyst Philip Finch issued a report
today stating that, in his view, the world's banking sector as
a whole could suffer another $203 billion in losses due to the
credit meltdown.
A billion here, $200 billion
there, this is beginning to add up to real money. Or is it? It's
hard to say any more, thanks to the steady drumbeat of these
large numbers. It is positively numbing.
Which begs the question...
What, Really, Is a Billion?
Some time ago, I did an article
in which I tried to remind people just how much a billion dollars
is.
As I can't find that article
to republish here, I trolled into the internet, that source of
all knowledge, to find a reference I recalled from speeches Ronald
Reagan used to make on the topic.
Here it is, from a 1977 speech.
Does anyone realize how much
a single billion is? A billion minutes ago Christ was walking
on this earth. A billion hours ago our ancestors lived in caves,
and it's questionable as to whether they'd discovered the use
of fire.
A billion dollars ago was 19 hours in Washington, D.C. And it'll
be another billion in the next 19 hours, and every 19 hours until
they adopt a new budget at which time it'll be almost a billion
and a half.
But let me really paint the picture for you. If you gentlemen
sent your wives out on a shopping spree, and gave them each a
billion dollars, and told them not to spend more than a thousand
dollars a day, they won't be home for 3,000 years.
Of course, that was then, and
this is now. Based on the 2008 budget, it no longer takes 19
hours for $1 billion of your tax dollars to go out the door,
but just three.
Or, viewed another way, your
tax dollars are being spent at a rate of $331 million each and
every hour of each and every day... 365 days of the year.
And even at that frenetic pace,
it still takes 125 days to spend a trillion. Using $100 bills
as our unit of measure, we find that it would require a stack
670 miles high to add up to $1 trillion.
Gee, I'm not sure that helped.
The Solution to All That Ails the
World
(But Don't Tell Anyone!)
By Doug Hornig
Last weekend's meeting of the
G-7 finance ministers in Tokyo came and went without much publicity.
Concern about the state of the world economy was expressed, but
no momentous actions were taken. Yawn. Yet for those who were
paying attention, some very revealing dialogue slipped out.
Now let it be said that honesty
and transparency are uncharacteristic of government in general.
If they were more common, the people might actually know what
was going on behind the curtain. And that's the last thing governments
want because, were the public not so dumbed down, it might respond
appropriately, with torches and pitchforks.
Thus our surprise at the following:
One of the things G-7 officials
discussed was the need for collective action to calm markets
if price moves become irrational,
Jean-Claude Juncker, who chairs
the Eurogroup -- the monthly meetings of Eurozone finance ministers
and the European Central Bank -- said in an interview he's concerned
about ongoing turbulence in the financial markets.
"We are not yet at the
end of the crisis," Juncker said. "The corrections
will drag on for a few weeks, months. We have agreed in Tokyo
that if there are irrational price movements in the markets,
we will collectively take suitable measures to calm the financial
markets."
No big news there. Although
we devoutly believe in free markets, we're not so naïve
as to believe that's their actual state. Governments intervene,
all the time. Always, of course, "for our own good."
But here's the kicker. When
asked what form such collective calming action might take, Juncker
said: "Whoever has a strategy, should not set it out. Otherwise
it will lose its effect if it is explained."
Well, that exposes the man
behind the curtain, doesn't it? What Juncker is admitting is
that not only should governments intervene, but it's important
that they do so in secret. A strategy explained might become
ineffective. Or, in other words, if people knew what these guys
were up to, they might not want to go along!
A remarkably candid moment
that Juncker probably wishes he could take back.
[NOTE: Doug Hornig is
the editor of the Daily Resource Plus, our free daily
e-letter on all the latest news related to resource markets.
If you are not yet receiving this valuable, yet complimentary
service, you can sign up by
clicking here now. ]
An Unfolding Trend
Earlier in this edition, Bud
challenged readers to come up with other trends and ways to play
them profitably.
I have an early entrant. It
is that over the next ten years, we are going to see a growing
number of nations to ban the export of critical resources.
As I have commented on in the
past, given that it has now been established that Mexico's massive
Cantarell oil field is past its peak and at risk of becoming
uneconomic within the next 10 years, how long do you think it
will be before that country starts restricting oil exports to
its northern neighbor?
In fact, oil imports from Mexico
are already off by 21% just since December 2006. And they are
expected, based on current trends, to drop by as much as another
1 million barrels a day over the next decade (from about 1.3
million bbl per day currently).
For the record, in addition
to Mexico, the other largest oil exporters to the U.S. include
Canada at the #1 spot, followed by Saudi Arabia and then Venezuela,
at #3. Thus, when Hugo Chavez threatens to cut oil shipments,
as he has done again recently, it is a threat actually worth
paying attention to.
So, one entrant on a trend
to profit from would be to buy the oil sands companies that have
gotten beaten up. It is just a matter of time before Canadians
see the wisdom of dropping a nuclear power plant over the oil
sands, providing the energy required to extract the oil economically.
This play could take awhile to unfold, but given how beat up
many of the oil sands companies were, it's a play to keep an
eye on.
But my big idea here is that,
as the world's resources come under increasing pressure, you
can expect to hear more and more calls for countries to limit
exports -- the equivalent of hoarding on a national scale --
leading to massive economic dislocations and, one would assume,
opportunities for the fleet of foot.
Lending support to this idea,
Vietnam announced this week that it would immediately begin cutting
back the amount of coal it will allow exported, and is thinking
of stopping all exports by 2015. According to Bloomberg, Nguyen
Khac Tho, vice director of the Ministry of Industry and Trade's
energy and petroleum department, made the following comments
in a phone interview:
Coal is a resource that
can't be renewed. Our most important task is to meet domestic
demand to ensure national energy security.
(NOTE: I would be remiss
on many levels if I didn't mention that we have been following
the coal story closely in the Casey Energy Speculator... to learn
more and take a trial subscription is as easy
as clicking here.)
The Letter Bag
I received the following note
from a subscriber, Daniel T. I thought you'd find the following
excerpt of interest.
Dear David,
I want to convey something that may be of interest to you, with
regard to what's happening in the ongoing saga of the big banks.
About six weeks ago, a close friend told me that she had just
gotten a letter from her mortgage lender informing her that her
HELOC (Home Equity Line of Credit) is now frozen due to the "current
financial climate" or some vague reason like that.
I immediately thought about my own HELOC and said to myself "They
won't ever do that to me - I'm an accredited investor, never
ever a late payment on anything, no credit card debt, no car
loans, lots of equity in a higher-end home in a neighborhood
that actually appreciated in the last year, great FICO score,
etc."
My HELOC was for about $250,000, which I never touched and only
thought of it as perhaps useful one day for some quick cash to
bridge some investment opportunity, or whatever.
But because I believe Bud Conrad and all his brilliant analyses
(not to mention you and the rest of the Casey crew), I decided
to take all of my equity money out of the HELOC except for a
few thousand, and put it into something that will return, at
the very least, the cost of the interest payment and exceed even
that for some profit. (That's not hard to do being a Casey Research
subscriber).
Guess what? In less than a week, I got the same letter as my
friend. It was from IndyMac Bank, one of the bigger banks, telling
me that my HELOC was now frozen. From the contents of the letter,
I could tell that it came from another department of IndyMac
which had no idea I had just cleaned them out.
You better believe that I was very happy I got those $$$ out
and put them to good use.
I tell you this so as to possibly warn others, especially those
that are absolutely depending on their HELOC to carry them through
rough times. We are going to see a lot more of this. If they
would do this to someone with my financial profile, then, well...
look out.
Just Google "banks freeze helocs" and have a look.
One can only imagine what will happen when this becomes widespread
and what will happen to people who utterly depend on their HELOC
for survival. Scary. This could be the last straw for many.
I'm very much looking forward to seeing you again at the Crisis
and Opportunity Summit in Scottsdale. The last one was great.
Best,
Daniel T
Make no mistake, the credit
crisis is far from over. In fact, it is spreading.
Miscellany
Foreigners Go Home... Many in the U.S. wish the illegal immigrants
would get the hell out. Well, if you fall into that camp, you
will be cheered to hear that you may be getting your wish. An
unintended consequence, however, is that they may be taking some
segments of the economy with them. Follow the link below for
the story from the New York Times. [here]
Except Sovereign Wealth Funds... Here's a cool tool to
look at the size and distribution of sovereign funds. Note that
there are two tabs in the upper right-hand corner of the page
the link leads to...
http://tinyurl.com/yokar9
The Nature of Complexity... I have often commented on the fact
that we live in a complex world. Which is why, no doubt, so many
people are willing to let the mass media do their thinking for
them. It is far easier to accept as truth the latest news burbling
out of CNN, rather than puzzle things out for yourself. On that
topic, earlier this week, Doug Casey forwarded me a link to an
exceptional speech on that topic by author Michael Crichton.
If you are comfortably seated and have a bit of time, do yourself
a big favor and give this a read. You might even want to pass
it along to your family, friends and associates. Given the general
dearth of critical thinking these days, the world can use all
the help it can get.
Here's the link...
http://www.michaelcrichton.com/speech-complexity.html
And that, dear readers, is it for this week's edition.
In review, I found that I sort of, but not quite, avoided references
to the "Turnip" today. It is, I can assure you, no
simple task given the deep roots that the Turnip has in all things,
financial and otherwise.
A quick glance at the numbers shows that gold is holding, yet
again, over $900 on the week, and the U.S. stock market is, once
again, losing ground.
As always, I greatly appreciate you taking time out of your day
to read.
Sincerely,
David Galland
Managing Director
Casey Research, LLC.
###
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