Casey Files:
This week in 'The Room'
Doug Casey
International
Speculator
written Feb 29, 2008
posted Mar 3, 2008
Welcome to "The Room"
The subscribers-only home page of Casey Research.
February 29, 2008
Dear Readers,
It's getting to the point where
even the most determined optimist is having a hard time finding
a good reason to roll out of bed.
Among just the smattering of
news that crossed the lens this week...
- Producer prices rose 7.4 percent
in January from a year ago, coming on the heels of the news last
week that the Comedic Politicized Inflation (CPI) index has risen
over the last 12 months at the highest year-over-year rate in
decades.
X
- The National Association of
Purchasing Management's business barometer has fallen to the
lowest level since 2001, beginning to reflect a knock-on slowdown
in consumer spending.
X
- And, according to the U.S.
Commerce Department today, what modest growth in spending there
is, is now coming from inflation and not from confident consumers
mobbing local electronics shops to load up on the latest and
greatest.
X
- On that latter point, consumer
confidence in the U.S. is reliably reported to have grabbed its
chest and slumped to the ground, or at least to levels last seen
only in 1992.
And no wonder, given that housing
prices, the single most important component of the net worth
of so many people, are crashing; in December they fell by the
most on record, off 9.1% from the year before.
(During a cross-country ski
slog over the weekend, a friend who is a housing contractor by
trade told me he has not seen a slowdown like this in his 20
years in the business. He knows of only one new house on the
flight path to be built in these parts. The property holder has
six different contractors scraping it out in a bidding war to
get the job, assuring that the victor ultimately receives as
a reward a dry and meatless bone at best.)
If the housing sector slowdown
with its rising foreclosures and defaults isn't enough to keep
our optimist abed, he would have to do no more than flick on
the morning news to learn of soaring food prices, a crashing
dollar and a tumbling stock market.
No sooner had a trembling hand
secured a double dose of Advil, topped off with a cold compress,
when he would hear a report of hundreds of millions and maybe
even billions of dollars worth of new and unexpected losses being
suffered by municipalities, banks, and sundry financial institutions
on purportedly "safe" instruments concocted in earlier,
more positive times. This week, for instance, we hear that the
supposedly invincible Goldman Sachs may take it in the chops
for as much as $11 billion due to "variable interest entities,"
a form of conduit, our faltering optimist learns as he falls
back on his pillow in a fatalistic swoon, that holds close to
$800 billion in assets, some significant percentage of which
are now considered suspect.
At this point, the only folks
able to view the unfolding carnage with any casualness are the
super-rich for whom almost any conceivable loss would still leave
them the requisite funds to live like the royalty of old... and
the relatively small handful who've been smart enough to have
moved assets out of harm's way and into gold and other commodities
early on (a group that I continue to hope includes you, with
the help of our various services).
Interestingly, this week it
was revealed that the California Public Employees' Retirement
System can be counted among the few that have been seeing the
nature of the unfolding crisis in the right light, and has at
least begun to act appropriately. Calpers, according to Bloomberg...
...the largest U.S. pension
fund, may increase its commodities investments 16-fold to $7.2
billion through 2010 as raw materials prices surge to records.
Calpers, which has about $240
billion in assets, agreed at a Feb. 19 board meeting to hold
between 0.5 percent and 3 percent of its assets in commodities,
spokesman Clark McKinley said. The Sacramento, California-based
fund last year put $450 million into commodities, its first such
investment.
The agreement is the fruit
of Chief Investment Officer Russell Read's efforts since joining
in 2006 to boost returns by shifting funds into raw materials
and markets such as China and India. Oil has soared above $100
a barrel, wheat breached $13 a bushel for the first time, and
gold and platinum climbed to the highest ever since Calpers began
investing in commodities.
"We plan on ramping up
the program by hiring additional staff," McKinley said by
phone yesterday. "We are excited about commodities, which
have performed exceptionally well for us."
To which we say, welcome aboard!
Better late than never, so hats off to the obviously competent
Mr. Read.
Of course, as the pension funds, like the hedge funds, mutual
funds and institutional funds in general tend to run in packs,
this news can only help solidify the base under our current favorite
investments.
Listen and you can almost hear
the chat around the polished-wood-encased water coolers strategically
positioned around finely appointed office pension managers' offices
worldwide.
"Did you hear, Calpers
got into commodities last year?"
"Yeah, smart buggers.
And here we are with our bonuses slashed -- slashed, I say! --
to only $2 million, just because we invested in AAA bonds!"
"Well, if commodities
are good enough for Calpers, who are we to argue, eh?"
"Race you to the trading
desk!"
Pile on in, we shout enthusiastically,
daydreaming about selling our appreciated resource stocks to
the stampeding herd a ways down the road.
But that, fellow travelers,
is about the only golden lining to be found in the chaos now
gripping the world. And while a good investment brings a warmth
not unlike a crackling fire and a hot toddy on a cold day, the
toddy loses much of its flavor when one considers the impact
that the unfolding crisis will have on our less well-prepared
friends, family and fellow countrymen (and women, as the case
may be).
Commenting on the news in an
email exchange from New Zealand this morning, Doug Casey had
this to say...
"My own feeling is that
by the time this cycle is over, people are going to be shocked
by how high gold goes. But it will be a sideshow compared to
the circus the Greater Depression will put on."
Unfortunately, however, the
news for the unprepared gets much, much worse. There are two
areas that I would like to comment on in a bit more depth, starting
with Bernanke's testimony.
Bernanke Pushes the Button
Yesterday, while engaged in
my periodic physical exertions, or more specifically, while I
was clinging to the handles of a medieval masochistic device
sternly labeled the "Stair Master" down at the local
facility for such things, I managed to snake out a finger to
the television monitor to tune into Chairman Ben's testimony
in front the House Financial Services Committee.
It was, I noticed when the
camera pulled back from Bernanke's oddly detached countenance,
a sparsely attended affair. In fact, it seemed to my sweat-filled
eyes as if there were no more than five or so members of elected
officialdom in the gilded chamber.
(But, hey, why should members
of Congress be interested in anything to do with the economy?
It's not like there's anything going on these days. Whether or
not Roger Clemens is doping - now THAT is worth packing the chambers
for!)
In all seriousness, however,
Bernanke's testimony yesterday was far more important than most
people understand, least of all those now doing "service"
in government. Far be it from me to be critical of the pandering
class, but I was appalled at how unbelievably, well, stupid the
questions were that were pushed toward Bernanke by the handful
of Congressmorons who bothered skipping the brunch put on by
the American Lawyers Association down the hall in order to question
Bernanke.
Bernanke's testimony was important
because in it he made it abundantly clear that the Fed - and
by extension the U.S. government - was coming down firmly on
the side of inflation.
Those of you who have been
with us for any length of time know that we have been calling
for things to arrive at a location loosely identified as "between
a rock and a hard place." It has been our consistent belief
that the Fed would inevitably be forced to make a decision between
letting the economy collapse under the weight of its many debts
and obligations, or letting the dollar collapse by shifting into
default mode trying to inflate the country out of trouble.
The specific quote from Bernanke's
testimony you want to pay attention to was this...
"The Federal Open Market
Committee will be carefully evaluating incoming information bearing
on the economic outlook and will act in a timely manner as needed
to support growth and to provide adequate insurance against downside
risks."
Note the lack of reference
to run-away-inflation that is already making itself known here,
there and everywhere.
The news that the Fed is again
opting for inflation, while coming as no surprise to us, caught
the gold bears flat-footed by sending gold sharply higher, to
over $970 as I write.
Speaking from an entirely personal
basis, I am, of course, cheered by the rise in gold, thanks to
a long-held position in a gold ETF and a portfolio stuffed to
the gills with the higher-quality gold exploration and energy
stocks of the sort followed in our International
Speculator and Casey
Energy Speculator services. But there is a real risk arising...
a true tipping point... that I am not so sure I'll be happy to
see.
While there are many factors
that might push the economy over the edge, the one to watch closely
now are the foreign holders of the U.S. dollar. As we have mentioned
more than once, the amount of U.S. dollars in the hands of foreign
holders is at historic levels. In fact, the level of holdings,
estimated at as much as $16 trillion, is unprecedented by an
order of magnitude.
At this point in the game,
we would expect to see wealthy foreign individuals cashing in
their dollars for all manner of alternatives, including other
currencies, tangible property and, of course, gold and other
tangible assets. Given the price of tangibles at this point,
that trend is likely well underway.
Diversification out of the
dollar by institutional holders is likely also underway. But
after that, if pushed to it, will come the big kahunas: the foreign
governments and their many trillions.
Up until this point, that they
have been reluctant sellers can be understood in much the same
way you can understand the concept of Mutually Assured Destruction
when discussing the pros and cons of launching nuclear strikes
against your similarly armed adversaries. At what point, however,
do the foreign governments come to the conclusion that the other
side has already "pushed the button"?
Watching Ben Bernanke, there
is a reasonable chance, were I a foreign holder, that I might
come to the conclusion that he has done the equivalent of just
that.
Regardless, the pressure is
growing daily on the economies of the Middle East and Asia, which
have to date helpfully reinvested the money they have received
in exchange for their goods into U.S. Treasury securities. And,
by doing so, effectively imported our inflation back home. Even
if they wish to continue avoiding the nuclear option, they will
at some point be forced to it by the U.S. pursuing a monetary
policy one could correctly term "Everyone for themselves!"
Make no mistake that once the
tipping point is reached -- and if the Fed makes yet another
steep cut at its next meeting on March 18, that could do it --
then things have the potential to shift from crisis to catastrophe
almost overnight.
What impact would a true collapse
in the dollar have on the global economy? It is a topic we'll
continue to poke at here and in our various publications. But
for now, keep your eyes wide open and your head down.
I'll touch on the second serious
development this week, but the lunch bell has just rung, so I'm
going to pass the baton over to Bud Conrad, who has sent over
a couple of items he thought you'd find of interest...
Bud on Bernanke
In alarming testimony to the
House Financial Services Committee, this week Fed Chairman Ben
Bernanke declared: "We have a problem ... the spreads between
the Treasury rates and lending rates are widening, and our policy
is essentially, in some cases, just offsetting the widening of
the spreads, which are associated with signs of illiquidity."
I said at the Denver Summit,
and since in articles, to watch out when the Fed cuts and long-term
rates don't drop.
It means that the rate-cutting
process of printing money to buy Treasuries in an attempt to
provide liquidity to lower rates is failing. The confidence in
the ability of Bernanke, or anyone else, to stop the collapse
is lost when people become aware that printing money makes it
worth less. The Fed action becomes the fear, rather than the
solution. At this point further cuts won't help the economy,
because long-term and riskier rates will reflect that loss of
confidence.
(Ed. Note: Bud Conrad recently
gave a wide-ranging interview
for the Gold Report on where the economy, gold, energy, food
and interest rates may be headed.)
A Trip Down Memory Lane
Our own Terry Coxon sent along
a link to a video of Richard Nixon announcing
the end of gold convertibility, pointing out that I would especially
enjoy the reference to "international speculators."
The canceling of convertibility
was, of course, a seminal event as it left the world with a pure
fiat monetary system, an experiment which has subsequently resulted
in the steady deterioration of all paper currencies, among other
ill effects (including unchecked growth in government, thanks
to the removal of any real obstacles to spending).
Will the whole house of cards
implodes some day, forcing a return to a gold standard or some
other system that forces fiscal restraint? If I was a betting
man, I would place large sums that the answer is "yes"...
it is inevitable.
In fact, the collapse may have
already begun.
Energy Chart of the Week
By Chris Gilpin, Contributing
Editor, Casey
Energy Speculator
Gasoline prices are comprised
of several costs: transportation of oil (usual from some distant
corner of the globe), refining costs and profits, more transportation
of gasoline (to get it from the refinery to the gas station),
taxes from every level of government, and the cost of buying
the crude it all started from. This last cost has mounted, and
now oil prices hold a greater and greater influence over gasoline
prices.
In 2004, oil prices rose 50%
from $30 to $45 roughly, and this created a corresponding 26%
rise in gasoline prices. In other words, gasoline prices increased
half as fast as oil prices did.
As oil prices have risen, the
oil cost of gasoline has begun to dwarf all other components.
Now when oil prices go up, it will cause a much steeper rise
in gas prices. If oil were to make another 50% jump from $100
to $150 - which we think is quite possible in the next year or
two - gasoline prices would rise at a rate closer to 35%. The
U.S. average for regular-grade gasoline hovers around 310 cents
per gallon right now with oil near $100; a 35% increase would
lift it to 419 cents per gallon.
The rogue factor in all these
calculations is refining capacity. Last spring, a spree of unplanned
refinery outages pushed gasoline prices higher when oil had retreated
to $60. By the time refining capacity came back online, oil was
marching to $100. By having one major cost replace the other,
gasoline prices have stayed between 280 and 310 cents per gallon
since April 2007.
This may have created a false
sense of security among motorists, who saw oil move up twenty
or thirty dollars without much of a corresponding rise in gasoline
prices. This spring refineries have scheduled their normal outages
to switch from winter to summer-grade gasoline, but how many
unplanned outages will occur? The U.S. oil-refining infrastructure
is outdated and badly in need of replacement, but permitting
a new refinery in the Lower 48 has proven to be a near impossible
task. It's reasonable to expect a growing number of unplanned
outages at refineries in the years ahead, and if any of these
correspond with another jump in oil prices, then prices at the
pump would roar to new heights.
As a motorist, it's all very
annoying. The best tactic is to hedge your rising fuel costs
with energy stocks that will benefit from higher oil prices -
or trade in your car for one of those Flintstone vehicles. But
I hear they can be rather hard on the feet.
[Ed. Note: If you are looking
to profit from energy, you owe it to yourself to check out the
Casey Energy Speculator. And it couldn't be easier, given that
subscriptions come with a 3-month, no-questions-asked, 100% money-back
guarantee. Check out the current profit-packed edition by clicking
here now.)
The Other Important News of the Week
Last week I pointed to the
breaking news Fitzroy MacLean of our Without
Borders publication tipped me to, about German intelligence
officers paying a Liechtenstein bank employee US$5.9 million
to steal a disk containing the names of all the German account
holders.
In writing this news up, I
posited that the Germans likely also got the account names of
non-Germans, "...giving the German government a very nice
trading card."
It didn't take long for my
intuition to be proved right, as it was announced this week that
the Germans were now cooperating with friendly governments around
the world so they, too, could corner tax miscreants.
Confirming the point, one of
our subscribers sent along a news item from New Zealand about
how that country's Internal Revenue Department is offering anyone
with an offshore account, especially of the Liechtenstein variety
to, in essence, come out with your hands up or else. If you are
a New Zealander with assets in the pilfered bank, I have no doubt
you are sweating bullets.
Here in the U.S. of A., the
Internal Revenue Service is also working hand in glove with the
Germans to hunt down the tax cheats.
This is a trend firmly in motion,
with serious implications.
First, now that executives
and even lower-level employees of banks in tax havens with the
right levels of access have seen the going market price for client
names, and that rather than being brought up on criminal charges
for breaking confidentiality agreements, they will be saluted
by officialdom around the world, there will be a rush to capitalize.
All that the person needs to do is to grab the list, download
the file, or whatever, and make it past the front door to collect
on the waiting riches.
In addition to the considerable
personal problems this will cause the account holders, it effectively
spells an end to the idea of financial privacy.
And that is an important battle
to be lost by anyone who values individual freedom. Look at it
this way, until recently countries knew that if they squeezed
too hard, money would begin slipping across the borders to undeclared
safety. With that escape route closed, they can now squeeze ever
harder.
Even so, human nature being
what it is, you can expect the same people - at least those not
in jail following the global witch hunt that will soon extend
to the Caymans, Andorra, or any other jurisdictions where the
bankers have been accommodative to privacy seekers - to look
for other ways of hiding wealth.
Of course, gold, diamonds and
other readily portable and fungible assets will find favor. Setting
the stage for the battle in the war of the state against the
individual: a new round of government confiscations of gold and
other such assets, "in the public interest."
I can't see this happening
imminently, and we should be able to see it coming, but the threat
that it could happen in the next decade, along with foreign exchange
controls and similar acts of desperation by the tax farmers,
is real.
Now let me be clear. I am not
in favor of tax cheating. Per the fresh example from Liechtenstein,
the risks are too high and, in my view, always have been. But
that doesn't mean that I can't lament the fact that the system
is moving closer and closer to the point where you won't be able
to enjoy any level of privacy in relation to your financial affairs.
Visa's $19 Billion IPO a Scam?
During the course of dinner
with a highly positioned financial services executive the other
night, he told me that Visa and MasterCard had lost a major lawsuit
related to hidden charges, and that it will cost them a lot of
money and force them to change their business in a number of
detrimental ways.
Almost immediately thereafter
I read that Visa was planning a $19 billion IPO. Coincidence,
I wondered?
Curious, I decided to dig a
bit. I hadn't gotten very far when I came across a very coherent
analysis
on the situation by Mish Shedlock.
Could the broader investment
community catch on to the true intent of the IPO, dooming it
and by doing so, maybe, lead to yet another giant stumbling?
While that remains an outside possibility, it is by no means
out of the question given the impact of the lost lawsuit, and
that the credit card companies are almost certain to be next
to feel the pain of consumer belt tightening.
I suspect most people wouldn't
be unhappy if the credit card companies took it in the neck.
On that theme, years ago I
interviewed a senior credit card company executive and over the
course of our meeting, I mentioned to him that I had recently
caught a charge for "lost credit card insurance" on
my bill. It was for something like $46 a year - for nothing,
as far as I could tell. Indignant, because I hadn't approved
the charge, I called the service center and no sooner were the
words of complaint out of my mouth than the representative said,
"No problem, sir. That charge will be removed." In
other words, no questions or pushback at all.
"Oh, that!" my new
acquaintance, the credit card executive, commented, a smirk on
his face. "That was the idea of the guy in the office next
to me. We were running behind on the quarterly numbers and he
came up with the idea to bump the revenue."
"You mean," I asked,
a somewhat stunned look on my face, "that you simply hit
all the credit cards with a $46 charge?" (And we're talking
about hundreds of thousands of accounts.)
"Yep. It was a big winner,
because most people don't look very hard at their bills."
"But that must be illegal,"
I said dismayed.
"Probably," he said
with a dismissive shrug.
He didn't get the job.
Of course, the flip side of
Visa running into trouble will be yet another form of credit
that gets tighter... and more costly.
Miscellany
- Lines of Lawyers. As predicted, lawyers armed with thick
briefcases and high-digit display calculators are increasingly
jostling each other in the long lines that are starting to form
at the doorsteps of the wounded financial service industry behemoths.
This week, HSH Nordbank, a German sector public bank (translation,
they have clout), announced it was going after UBS bank for "hundreds
of millions" in subprime losses. As the piling on grows,
we'll start to see the major bank failures that our own Bud Conrad
has been forecasting these past months. Followed, natch, by the
helicopters' worth of bailouts, courtesy of taxpayers.
X
- High-Stakes Shell Game. In a classic shell game, the banks
are trying to prop up the AAA ratings of the insurers standing
behind the hundreds of billions of dollars of toxic waste now
eating away at their portfolios. While cost effective -- $3 to
$5 billion is a lot cheaper than the carnage that will follow
a downgrade -- the odds are high that they'll invest the money,
the insurers will get downgraded anyway, costing them their investments
and the value of their portfolios. Unless, of course, the same
helicopters show up with yet more taxpayer largess to keep the
insurers intact. It would not surprise me in the slightest to
see, even, the de facto nationalization of a failing rating agency.
X
- In the "Remember,
We're All Only Human" Department ... I came across another anecdote about another
of the esteemed members of the judiciary, one Robert Somma, a
federal bankruptcy judge appointed by President Bush in 2004.
It appears he has stepped down from the bench after police found
that he had crashed his Mercedes into another car while drunk
and wearing a dress, fishnet stockings and heels, and carrying
a purse. "He's a highly respected member of the bar,"
said a fellow judge, "and remains so." I don't care
about his dress code, live and let live, I say... but next time,
take a cab.
X
- Look Before You Leap. There was news out this week that
Norilsk, the Russian mining giant, was ordering a fleet of super
icebreakers to take advantage of the melting of Arctic ice, opening
up new routes across the top of the world. Someone might want
to tell them not to place their deposit yet, because the Arctic
ice hasn't just re-formed, it's thicker than ever. Here's
the reference.
That's It for This Week
Major developments are afoot,
with the term "We live in interesting times" barely
covering it.
While we expect things to continue
in a similar vein, and to likely grow steadily worse for some
months and maybe even years to come, the best approach at this
point is to assure that you and your family come out okay.
It's like the warnings that
the flight attendants give during their briefings on the topic
of what one should do should yellow oxygen masks start falling
on your head while in flight. If you don't first take care of
yourself, before turning your attention to the less well positioned,
you could find yourself wiped out and of no use to anyone.
As I close my weekly musings,
I see that gold is solidly planted at $971, oil is parked over
$101 and the long-suffering DJIA is off yet another 295 points.
Wall Street types like to look
down their nose at people who invest in gold, silver and other
commodities... but they may have to revisit their prejudice,
given that the broader U.S. stock markets have been essentially
flat over the last 5 years... which means, adjusted for inflation,
their favorite sector has been a loser for half a decade now.
Decidedly not the case for the precious metals, energy and other
commodities.
Until next week, thanks for
reading...
David Galland
Managing Director
Casey Research, LLC.
###
Doug Casey
Casey Archives
321gold Ltd
|
