by Doug Casey
.."And I feel fine."
That's not just the title of an R.E.M. song. It's how today's gold and
silver investors feel every time they get a reminder from a newspaper or
news program.
They see what you see, and anyone paying even a little attention can't help
but notice the stunning array of problems that are menacing the global
economy and threatening traditional investments. In fact, I can't say I've
experienced the like of it before. And that's saying something, considering
I've made crisis (and how to profit from it) the focus of my life's work.
This time around, the unfolding crisis carries several especially dangerous
features - and a locked-in profit
opportunity available to anyone even moderately fleet
of foot.
First, the intractability of the situation. That's the word Paul Volcker,
former Chairman of the Fed, used to describe things, and it's a perfectly
good word meaning, simply, that the underlying problems can't be fixed.
In the Middle East, for example, even if we pull all our troops out today,
the situation won't settle down for years... or maybe even decades. And each
day of turmoil will cost the U.S. more tens of millions in direct and
indirect costs - and keep the global economy in a state of chronic worry
over energy supplies. Then there's the collapsing housing bubble. For years
a galloping real estate market was the primary driver of our economy. Now
real estate is hobbling on three legs and has become the primary driver of
personal and corporate bankruptcies.
Even more serious is the 6 trillion or so U.S. dollars in increasingly
twitchy foreign hands. Hardly a day goes by without some government or
another announcing plans to diversify out of the dollar. And no wonder,
given the record levels of personal and government debt in the U.S.
And even more debt is baked in the cake. We have a freshly-elected slate of
Democrat law makers looking to "do something"... from universal health care,
to global warming, to confronting the "unfair" trade practices of China and
Japan (the very people who own much of the above mentioned $6 trillion).
Those projects are just for starters, of course. Congress's "must-do" list
goes on and on, and for politicians, "do something" never means "do
something cheaply."
So far, so bad.
But it gets worse. Much worse. Over 20% of the U.S.
population - the baby boomers - are now beginning to retire, and most of
them have nowhere near enough savings to enjoy their senior years. So
they'll be absolutely dependent on the Social Security and Medicare promises
they've been hearing all their lives. Politically, those promises are
impossible to renege on. Financially, they're impossible to pay. And along
with the government's other unfunded entitlement programs, they add up to
$50 trillion of off-the-books debt.
Mr.Volker spoke well. Intractable is the word.
There's more, but that's enough. We're in a box canyon with a floor of
quicksand, and the only exit is blocked by a landslide. Investors who take a
business-as-usual attitude are not going to have a nice day.
In case that litany of problems isn't enough to get the sweat beading on
your forehead, ponder derivatives. While these hybrids have been around for
decades, the rocket- shot rise of hedge funds and the advances in financial
modeling techniques have spawned something of a competition among the
so-called best and brightest to find ever-more-complex ways of skimming
pennies from very large piles of money.
The collective result is that our financial system has been wired up to $370
trillion dollars of privately negotiated investment contracts. They're
usually written to shift risk from one bank, pension fund, insurance company
or brokerage firm to another. And many are linked together in long chains,
with each contract providing collateral for the next.
It's all very clever, but layering the enormous size- $370 trillion dollars,
far more than the net worth of all the financial institutions in the world -
on top of all that complexity is downright scary. In simpler times, a home
loan going bad would affect only the particular lender. Enough defaults
would put the lender out of business. And that would be the end of it. But
today a wave of defaults can send a shock through the portfolios of
financial institutions around the globe, including hedge funds, banks and
pension funds far removed from the troubled borrowers.
Imagine an electrical circuit with thousands of connections. No one designed
it. No one tested it. No one has a diagram for it. It just grew. Now,
because of its size and power and pervasiveness, everything depends upon it.
So what happens when one of those thousands of connections burns out? No one
really knows, but I say it's a circuit you should disconnect from before the
world learns the answer.
If you are relying on traditional investments to pad your nest for the
future, the problems stalking the world economy should be a matter of
serious concern.
Especially given that as bad as we think things are about to get, there
remains the potential for things to spin entirely and un-recoverably out of
control. That's because so many wildcards are now in play. A war in Iran?
New York hit by a freelance nuke? A worldwide panic exodus out of the
dollar? Traditional investments would be the first casualty.
The $2 trillion or so loss in stock market valuations during the recent
correction is a precursor of what's to
come... in a best case. The worse case is... much,
much worse.
Working apart from the investment multitudes, a very small minority of
investors over the past few years have been building portfolios of precious
metals and Canadian precious metals stocks. It's a minority I'm happy to be
a part of, as it allows me peace of mind and the
considerable advantage of viewing these crises
somewhat dispassionately.
That doesn't mean I'll enjoy standing on the sidelines and watching the
impact of a monetary crisis on the lives of the unprepared. Of course not.
Yet I would be a fool, having recognised a crisis shaping up, not to take
the fairly obvious steps to profit.
Which brings me to the opportunity that the crisis is carrying on its back.
For any number of reasons, but first and foremost its use as money in all
the world's cultures, throughout all recorded history, gold has begun to
find renewed favour with in-the-know investors as the currency of last
resort.
Make no mistake, despite gold's rise from its $255 low in April of 2001 to
over $650 as I write, so far, only the thinnest of trickles, a minor
fraction of global capital, has made it into gold. When the flight to safety
really heats up, the real fun will begin, and the price of gold won't just
add dollars, it will add digits.
If that sounds like hyperbole, remember that, unlike the U.S. dollar, which
can be created at the speed of light, the available supply of gold is finite
and is painfully slow to change.
You can't print gold the way you print paper money. And you can't just build
a gold mine the same way you might build a Starbucks almost anywhere and on
short notice.
Instead, you first have to find a promising ore body - which is, without
exaggeration, like finding a needle in a haystack... a haystack buried
"somewhere" in the earth's crust.
Then you need to go through the immensely complex and expensive exercise of
confirming that the ore body is economically viable. Then, years after you
started exploring, you can start the even more time consuming and expensive
process of actually building your mine. That entails finding a labour force,
bringing in power, roads, mills, etc., etc... with every step hindered by
environmentalists waving court injunctions.
The long and short is that there are hardly any gold mines of size scheduled
to come on stream... and we are not talking about just over the next year or
two, but ever. Most people in the know see annual gold production falling
from here on.
For proof, there was news recently out of South Africa,
the most world's prolific gold producer. Despite the
loud incentive of higher gold prices, South African
gold production in 2006 dropped to the lowest level
since 1922.
And, above ground, there just isn't much gold to go around either. The U.S.
government, for example, possesses the world's largest gold reserves...and
those reserves amount to only about $170 billion at today's prices...not
even a rounding error on the trillions of dollars in debt the government has
guaranteed.
Put simply, the amount of gold available to investors and central banks is
like the number of beachfront home sites at Malibu - it's not going to
change much. As a result, when the rush for the lifeboats begins in earnest,
the upward pressure on gold will be unimaginable. As will be the profits for
anyone who acts now, ahead of the crowd.
If you haven't yet started accumulating precious metals, you still have
time. Start by picking up some bullion coins from a reputable dealer (silver
should do as well as gold).
Then build a portfolio of the better small companies exploring for new
deposits - the ones with the best management teams, working on the best
projects, in the best geology. These stocks are the true profit gems - in
part because of an accident of recent history.
During the long bear market that ended in 2001, the large mining companies
all but eliminated their exploration departments. Now they urgently need new
deposits to restock their declining ore reserves. But rather then scouring
the world themselves, the majors let the more agile and entrepreneurial
junior explorers - often Canadian firms, due to the resource orientation of
that country's economy - invest the capital and sweat needed to find a new
deposit. Then, when a junior company's project seems ripe, the majors
compete to buy the deposit or to acquire the junior explorer itself - and
they pay up in a most serious way.
Pick your companies right, and you can pay pennies today for shares in a
junior exploration company that history has shown again and again will sell,
with a little success, for $10, $20 or more when the market gets rocking and
investors at large rush into all things gold.
While there's no such thing as a sure thing, there are times - like now -
when the deck is heavily, massively, stacked in your favour.
You are, therefore, left with a relatively simple choice.
Do nothing and hope that all the world's troubles just drift away-and risk
personal financial disaster if they don't. Or take action, if even with a
modest share of your portfolio, and position yourself for extreme profits.
Regards,
Doug Casey
Prime slips...and slides into sub-prime.
Problems in sub-prime mortgage loans could be spreading into sub-prime
auto-loans...and sub-prime commercial loans...
As to the sub-prime auto and truck loans alone, there are some $34 billion
outstanding. As to the rest of the loans that were made to shaky borrowers,
without proper credit standards, the total may reach into the hundreds of
billions...
And what about politics? Isn't the US government operating at sub-prime
levels? And aren't the candidates for next year's presidential election also
less than prime?
Oh where...oh where...dear reader...shall we begin?
No big breaks in the financial markets yesterday. But the millwheels keep
grinding...turning the pretensions of the smart...the conceits of the
powerful...the assets of the rich – all to dust.
When standards go out the window, they just don't go out of windows in
trailer parks and ghettos. They go out of windows in gated communities in
Florida...and in Washington...and they would go out of windows of
skyscrapers in Manhattan and London, if you could only open the windows.
Even in education and art...standards slip...
We were looking at Henry's report card last night. Ai yi yi...
"Needs to work harder..." said his science teacher.
"Performing below his capacity..." said his math teacher.
"Work okay...but could be much better..." said his Latin teacher.
The half-empty part of that glass was obvious. But there was a half full
part too.
Henry does his homework until midnight every night...and works on it at
least 8 hours each weekend. And still, his teachers aren't satisfied.
We checked his grades and class ranking (in France, every student knows
exactly where he stands) and found that Henry is above the average in what
must be one of the toughest schools in France. Ah ha! A school with
STANDARDS...
From what we've heard, in most of the schools in France – and America -
students get passing grades, even without really knowing anything.
Meanwhile, yesterday, Elizabeth came back from an exhibit of Greek
statues...attributed to Praxiteles or his imitators.
"It was unbelievable," she remarked. "The sculptures had such dignity. It
is incredible that they were done more than 2,000 years ago..."
A thought crossed our mind. How many of today's artists could create a
beautiful statue out of a block of marble?
But blocks of marble are not our beat, here at the Daily Reckoning, so let
us get back to money.
What is endangering America's money is the same thing that is undermining
its position in the world – slipping standards.
And slipping standards is what had brought about the fifth of our Big E's.
We began to review our Five Big E trends yesterday:
Energy, Experimental Money (the faith-backed dollar), and the Exodus of
power and wealth from West to East. Today, we look at our fifth – the
Empire.
When we say that America is an Empire, it is neither a matter of desire or
reproach. It is simply an observation.
Some readers think it is unpatriotic or un-American to notice. But while a
good husband doesn't notice when his wife gets fat, perhaps, a citizen with
his wits about him might do well to keep a close eye on his government. And
if he looks carefully at America circa 2007 he will see it resembles an
empire more than a modest republic. Its troops...its culture...its
commerce... impose themselves over almost the entire planet.
Empires must be empires and follow the imperial path...from humbug, to
farce, to disaster. They must believe what isn't true (that they have some
intrinsic, inalienable advantage)...and they must relax their standards...as
they stretch...and then overstretch...until they have stretched too far.
Nine trillion in federal debt...a 'fiscal gap' 50 trillion dollars wide...
an $800 billion trade deficit...an everlasting War on Terror...
And in today's news comes word that the US is "no longer technology king."
The BBC reports:
"The US has lost its position as the world's primary engine of technology
innovation, according to a report by the World Economic Forum.
"The US is now ranked seventh in the body's league table measuring the
impact of technology on the development of nations.
"A deterioration of the political and regulatory environment in the US
prompted the fall, the report said.
NETWORKED READINESS
INDEX RANKINGS 2006
(2005)
1: Denmark (3)
2: Sweden (8)
3: Singapore (2)
4: Finland (5)
5: Switzerland (9)
6: Netherlands (12)
7: US (1)
8: Iceland (4)
9: UK (10)
10: Norway (13)
Source: WEF
And more bad news. Alan Blinder writes in the Wall Street Journal that
globalised competition could cost the US as many as 40 million jobs over the
next two decades. Fifty years ago, America was the world's most competitive
economy. Now, Asians have an edge when it comes to low cost production. And
Europeans have an edge when it comes to innovation and high quality
production. The Empire is peaking out...
What will it do when it can't pay its bills? We're going to find out...
More news...
*** "What did the economic boom ever do for us?"
The world is booming...the economy's growing...and yet.
And yet somehow we feel poorer. Somehow we are poorer too, according to a
report in today's FT. Disposable household income fell by 1.7% in the last
quarter of 2006 and managed a miserable 1.3% for the year as a whole.
With inflation nearer 3% than 2%, this for happy campers does not make.
And that doesn't help Britain's Chancellor Gordon Brown either regardless of
the quality of his recent dental work. In the run up to the push (or is it a
shoo-in?) for No 10 a disgruntled swathe of Middle England totters a step
nearer the financial edge as higher taxes, rising interest rates and rising
inflation put a squeeze on take home pay.
And what happens when standards of living are under siege? Pull in our belts
and save a little harder in case things get worse? Sounds a sensible idea
but that's not the way it works in practice explains Jonathan Loynes of
Capital Economics.
People do what they want rather than what they need.
Given the choice between foregoing the annual cash ISA allowance and the
holiday in Florida, it's the ISA that gets the bullet. To keep up the
spending, something's got to give and what's giving is the rate of saving.
At 3.7%, the UK household savings rate is at its lowest level since 2004.
So as the queen bee of globalisation coins it in the average drone is
getting squeezed...and these are the good times.
And as money gets tighter the risks considered to get more of it become
wilder and hopes more delusional. A gambler's mentality can develop...
Looking at a chart published in The Times this has already happened in the
virtual world of the internet. It publishes a chart plotting the growth in
UK online gambling revenues since 2000. Were this a stock chart and had I
bet the house on it, I would not be straining away at my keyboard today. UK
revenues have ballooned from around £300m in 2000 to £2,750m in 2005. And
that was 2005! Then there's other temptations for a 'flutter'...spread
betting, the National Lottery, gaming machines, super casinos... Oh there
are many ways for the financially squeezed to throw the dice one last time.
And while Middle England struggles to keep up appearances we hear a
confession from a senior civil servant:
'I'm an alcoholic and do very little for my £737,000 a year'.
Bob Kiley, formerly London mayor Ken Livingstone's transport czar charged
amongst other things with making the London Underground less of a hell hole,
has gone public with his personal problems. We can admire the candour but
despair at the waste. More taxes, more wasted spending - twas ever thus.
Finally, good news. Bao Xishun, at 7ft 9 inches the world's tallest man has,
after a global search for a partner, found a wife says The Times. He's
managed to stumble on a bride living in his home town of Chifeng, 5ft 6 inch
Xia Shujuan. Given the lousy demographic odds of finding a wife in China,
achievement indeed.
--------------------------
And more views:
*** Et tu, Dear Reader?
The Daily Reckoning is too long. That's what readers tell us. We're sorry.
But we don't have time to write something short.
*** And we promised to explain our Theory of Modern Politics...
The question before is how come all governments – including the supposedly
freedom-loving U.S. of A – have edged towards collectivism?
We begin with a conversation we had with our bus driver.
The last two days were spent at the Chateau de Courtomer, where we were
attending a conference with Addison and Eric and many others on the Daily
Reckoning team. The days were bright and sunny. The conversation quick and
agreeable. The wine soft and smooth.
Coming back, we sat up next to the bus driver, where we could get a good
view of the rolling Normandy hills.
"I worry about what will happen to our kids and grandchildren...about what
kind of world they're going to live in," he said.
He was a very-French looking man of about 50, with a full head of dark hair
with gray streaks in it, and an ironic smile. He wore a tie and might have
passed for a waiter in a good restaurant.
"I started my career as a chauffeur 30 years ago," he went on. "Back then,
you had no trouble getting a job.
And they didn't ask you a million questions or tell you what to do. You just
had to drive the bus.
"But now, everything is regulated. Everything. I can't drive more than 4
hours without stopping for a 45 minute break. That's why I couldn't move the
bus out of the parking lot when we got to the chateau. I had to stay there
and do nothing for 45 minutes. The 45-minute break is supposed to be a
safety measure. But, the effect of it was that I was driving at night...and
I was tired.
"Back when I started, I could decide for myself But now everything is
decided for us."
He is onto something. Just look at the current issue of Fortune Magazine for
proof. It is supposedly the voice of conservative, capitalistic freedom
lovers – people who treasure the liberty of the individual to decide for
himself when to drive his bus...or how organize his work...or how to spend
his money.
"Fix the health care system: Raise taxes," says the headline. "Sometimes
raising taxes makes sense, even to conservatives."
The writer, Matt Miller, goes on to explain that there is an "opening of the
capitalist mind," going on, allowing the old robber barons to appreciate the
benefits of taxation.
We almost fell out of our chair when we realised what he was proposing; we
were laughing so hard.
The story is this: employers are finding it hard to keep up with the cost of
health care benefits. For example, another article explains that a
65-year-old couple, not covered by a private health care plan, should plan
on spending $215,000 on health care through the end of their lives – an
amount up 7% from the year before.
But far as we have observed, there is no direct relationship between
spending money and enjoying good health. Many of the most expensive health
problems are simply a result of bad habits. We suspect that 90% of
heath-care expenditures is unnecessary or inefficient, or both. But if
people want to spend their money on health care, well...it's their money.
Already, company-sponsored health care is collectivised.
But it is collectivised privately...and honestly. For the most part,
employers and employees can decide for themselves what they want to do about
their health and how much they want to spend on it. But employees want
health care benefits...and many employers have health care plans with
crushing legacy costs. So what do they want to do? Own up to the fact that
they their costs are out of control? Raise the standards...and cut the
costs?
Figure out how to fix their own health care system problems? No, they want
to shove the costs of their health care obligations onto the general
taxpayer!
They want a program of forced collectivisation – where their employees spend
someone else's money on their health...and where the government will be
ultimately responsible for the health care of everyone in the country.
Most likely, the pseudo-conservatives at FORTUNE will get their wish.
George W. Bush went a long way towards forced collectivisation of health
care costs with his big drug bill. The next president is likely to go even
further.
And so...the whole world goes in Marx's direction...in Bismarck's
direction...away from Liberte and towards Egalite...away from the Theory of
the Individual and towards the Theory of the Collective.
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