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Daily Dispatch: Machiavelli on Prince Obama�s Political Fortunes

GoldSpeculator — Wed, 08 Sep 2010 00:21:51 GMT

September 07, 2010 | www.CaseyResearch.com

Machiavelli on Prince Obama’s Political Fortunes

Dear Reader,

Niccolo Machiavelli (1469 – 1527) was many things, but first and foremost a keen observer of politicians and their machinations.

In actual fact, the man’s life in public service, and his influence at the time, was rather limited. And both came to a screeching halt when the republic he served collapsed and was replaced by the dictatorship of a principality ruled over by the Medicis.
Detached from the bosom of political favor, he dedicated himself to trying to get back into the good graces of the new team, going so far as writing his still famous tome -- The Prince. Despite its lofty reputation, the book was essentially the world’s longest job application, in which Machiavelli openly attempts to impress the Medicis with the depth of his knowledge about how to run a government.

Unfortunately, the Medicis weren’t buying what Machiavelli was selling, and so his political aspirations remained largely unfulfilled (though there was a brief but limited return to the corridors of power when the Medici government fell shortly before his death).

Machiavelli’s name and deeds would have been completely obscured by history’s dust, except for The Prince, which was widely published only posthumously. Even at the time the book was, in a word, controversial. For not only did Machiavelli’s musings roam to the acquisition of power, but he went into some detail about the more forceful methods a prince might deploy should the opposition become too successful and require quashing. It was the enthusiasm with which he dealt with the latter, much of it learned through his first-hand observations of the Pope, Cesare Borgia, that helped carry Machiavelli’s name down through the ages to us today and make it synonymous with manipulation, ruthlessness, and even cruelty.

Given the actual example of his life, this unflattering view of Machiavelli is largely unfair: there is no sign that he ever actively encouraged any of the then ruling elite to put on the gloves and pull out the truncheons. And to focus only on the darker side of his writings is to miss the commonsense observations with which he approaches his subject matter – observations that hold up even to this day.

In support of this contention, I’ll share a quote from his book – with the comment that you might need to read it twice in order to see its relevance to the dire straits the current Prince of the U.S.A., Prince Barack Obama, now finds himself.

BUT the difficulties occur in a new principality. And firstly, if it be not entirely new, but is, as it were, a member of a state which, taken collectively, may be called composite, the changes arise chiefly from an inherent difficulty which there is in all new principalities; for men change their rulers willingly, hoping to better themselves, and this hope induces them to take up arms against him who rules: wherein they are deceived, because they afterwards find by experience they have gone from bad to worse. This follows also on another natural and common necessity, which always causes a new prince to burden those who have submitted to him with his soldiery and with infinite other hardships which he must put upon his new acquisition.
In this way you have enemies in all those whom you have injured in seizing that principality, and you are not able to keep those friends who put you there because of your not being able to satisfy them in the way they expected, and you cannot take strong measures against them, feeling bound to them. For, although one may be very strong in armed forces, yet in entering a province one has always need of the goodwill of the natives.
(Niccolo Machiavelli, The Prince)

In the modern context, the principality of the U.S.A. is very much a composite state – with the nation almost bitterly divided by philosophy. No matter which label you choose to apply – red states and blue states; right and left; conservative and liberal – the hard reality is that the U.S.A. (and many of the world’s other nation-states) is comprised of warring camps. You can see these camps in the latest Presidential Approval Index, the one here from Rasmussen, which focuses only on likely voters.

As you hopefully noticed, Machiavelli’s observations are not limited to the natural opposition of any new prince – but also address the problems that the new prince has with members of his own constituency. In that regard, the masses that brought Prince O to power included large numbers of luddite-level environmental fanatics, dogmatic advocates of wealth redistribution, pro-trade war labor unionists, and anti-war activists.

Having tried to appease his election-year friends by ramping up the size, scope, and cost of government – and even still failing to make a dent in unemployment – there’s no way he can now attempt to fulfill their aspirations by raising taxes even further on the capitalists, push through insane carbon legislation, pick a trade war with anyone, or even afford to push for a significant standdown in the U.S. military; the country couldn’t handle hundreds of thousands of newly unemployed and fight-ready soldiers returning to a jobless America.

In short, the people who brought Prince O to power are increasingly dissatisfied with his reign – you can see that in the chart above, as well – and so can no longer be counted on to do his bidding come election time.

Coupled with the fact that there is no appeasing the Republicans, not when they have the scent of Democrat blood up their nostrils ahead of the November elections, the political prospects of the reigning prince are beginning to look positively Carter-like at this point.
There are, of course, other measures a desperate prince might take. Encouraging another war, for instance. But that will take the equivalent of a Pearl Harbor to pull off. Being against war on principle, I can only hope that that option is never taken seriously – but it would be foolish to write it off.

Which leaves us with the very real possibility that the Democrats, like Bernanke, have pretty much run out of any conceivable policy response to the economic crisis. That, in turn, leads to the conclusion that, following the November elections, the U.S. government will be once again deadlocked in an antagonistic and unproductive power sharing arrangement that assures nothing happens ahead of the 2012 presidential elections, except a lot of shouting across the aisle.

Now, in most cases, I’m a big fan of political stalemates. For the reason, you need look no further than the relatively strong performance of the economy during the latter years of the Clinton presidency when the issue most passionately discussed in Washington came down to Monica Lewinsky’s blue dress and the definition of ”is.”

In the current situation, however, a political stalemate is dangerous in the extreme, because as bad as things have been so far in this crisis, to have the government freeze up all but assures we’ll live through a systematic breakdown… of the U.S. economy and of the U.S. dollar, leading us into a sea of dark and even dangerous possibilities.

But wait, I can hear my dear partner Doug Casey growling, am I advocating for an active government? Actually, no. What I’m advocating for – what I think is essential in order for the nation to emerge from this crisis – is that the government as we know it be remade into a far smaller, less meddlesome, and far less costly version of its current iteration.
Unfortunately, in order to get to that point – other than at the barrel of a gun, which is not out of the question at this point – will be for the Republicans and Democrats to agree that the way forward is to undo much of the damage that the swelling size of government has caused over the last 75 years or so.

Realistically, it’s a long shot that even a Republican, or Tea Party, controlled government would voluntarily slash the size of government and its endless programs by, say, half. But the odds of it happening under a government dominated by Democrats, or deadlocked with Republicans, are slim and none, and slim just fell off a cliff.
While there may be some miracle waiting around the next bend in time that will kiss the economy and make it all better, the odds are far more likely that what’s waiting around the next bend is unpleasant and will make things even worse. If the worst comes to pass, there won’t be anyone to answer with a democratically weighed and measured solution – leaving the way open for martial law and worse.

The prince is powerless, and the government that he lords over is segmented and increasingly desperate, lest they lose their power and their pensions. It is a conundrum that Machiavelli himself couldn’t scheme his way out of. With the consequences so uncertain, the prudent thing for us as investors to do at this point is to remain cautious in all things.

Before moving on, I would like to mention that if you haven’t yet read The Prince, it’s worth your time. It’s available free of charge as a download on the Kindle or just straight off the Internet.

The Latest “Crisis”

I had to laugh this morning after glancing at a couple of articles, then hearing that the lead story on BBC News was about a preacher in Florida who had said he was going to burn a copy of the Koran on September 11.

The story, which now has been expanded to include comments by heads of states and even General David Petraeus, revolves around concerns that this preacher’s incendiary act is going to ignite the flames of righteous indignation among the world’s Muslim population, causing yet more threats to American lives.

What’s wrong with this story? And, by extension, the world?

First and foremost, it’s important to note that the preacher’s congregation is of such an inconsequential size that they’d have a hard time filling both sides of a Saturday afternoon softball game.

By definition, therefore, what the preacher says, or does, is of exactly zero consequence on any but the most local of media. Maybe the local coupon gazette? Maybe.

That this story has grown legs and now stalks the world, no doubt soon evoking a comment from President Obama, and maybe kicking off an inquiry by a congressional committee, can only be attributed to the mass media. If someone gets killed over this non-story, pointing the finger anywhere else but at CNN, BBC, or any of the other mass media outlets would be to point it in the wrong direction.

Secondly, any members of the Muslim faith who can’t see this media manipulation for what it is – a deliberate attempt at creating news to raise circulations and sell more advertisements, damn the consequences – then they are not just intolerant, they are thick as mud bricks.

And finally, if the ideas bound up in the religion of Islam can be threatened by some hick preacher tossing a Koran onto a fire, then the ideas would seem to be pretty weak.
But most of all, this is a cautionary tale about just how far the mainstream media will go for a buck, and how naive the consumers of those media are to keep on listening to them. A pox on all their houses.

Personal Tech

Readers of any duration know that I was early on in spotting Amazon’s Kindle as the beginning of the end for most printed books. And for obvious reasons, starting with the fact that the publishers can sell their books for much cheaper and make just as much, or even more, money due to the elimination of about nine-tenths of the supply chain. No more print costs, shipping books to and fro booksellers, dealing with overruns, etc., etc.

Then there’s the convenience of being able to carry the equivalent of a small library with you, buy a book pretty much anywhere, have dozens of popular newspapers and periodicals automatically downloaded each day, and the fact that the e-reader eliminates the inherent clumsiness and weight of books.

While Amazon doesn’t publish data on Kindle sales, I am seeing more and more of the devices show up – and they are now joined by any number of other hardware sellers, notably Apple with its iPad, which support the downloading of books in an electronic format.

Having worn out one of the earliest versions of the Kindle, I recently replaced it with the Kindle DX – the larger-format version. After having used it now for a couple of weeks, my firm recommendation is to not buy one but to stick with the regular-sized one.

While there are some small advantages to the DX, notably the ability to read PDFs in their native format, the trade-off is size and a lot of weight – which brings back into play much of the clumsiness the e-readers eliminated in the first place.

Likewise, the iPad, which I have spent a fair amount of time playing with, seems more of an expensive – and heavy – toy than the streamlined smaller (and now much cheaper) version of the Kindle.

Summing up the situation for a friend the other day, I commented that the iPhone – with its amazing suite of useful everyday applications (and some diverting games) – the Mac Air, an ultra-light and very functional laptop, and the Kindle, to satisfy my every reading need, were all I would ever want to lug around. There is, therefore, no room in the bag for the iPad.

To which my friend made a very astute observation, especially in that, in hindsight, it was so obvious.

Namely, that it’s just a matter of time before Apple builds a light-weight lap top with an empty compartment where the screen normally fits in. In lieu of the screen, and serving the same function (and much more), you would simply snap in an iPad. Then, when your work is done, you’d push a button and the iPad, already fully synched, would eject. Put away your laptop and you then can use the iPad as book reader, game machine, whatever.
Now you’re down from three must-carries to just two – your iPhone and ApplePad Air or whatever they’ll call it.

Brilliant and, I concur, inevitable. In the meantime, however, when it comes to book readers, it’s the smaller and lighter version of the Kindle hands down.

Until Tomorrow…

And that, dear readers, is that for today. Thank you for spending some time with us today, and for passing these daily musings on to others you think will benefit from them.
(If you are one of those who have been forwarded this by someone else, you can click here to sign up – it’s free.)

David Galland
Managing Director
Casey Research

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The Long Road to Recovery

GoldInvestor — Sun, 05 Sep 2010 19:52:46 GMT

Dear Reader,

Today the government released the latest unemployment data. Bloomberg, always ready to roll up the sleeves to help its friends in government (get reelected), is running a headline that �Companies in U.S. Added 67,000 Jobs in August.�

While I haven�t had time to go through the minutiae of the report, I find myself scratching my head at Mr. Market�s rather positive reaction to the report, given the bullet points:

Manufacturing payrolls declined by 27,000.
Employment at service-providers fell by 54,000.
Retailers cut 4,900 workers.
State and local governments gave walking papers to 10,000 people.
The federal government cut 111,000 jobs (mostly temporary census workers).
The number of �underemployed� � people who want full-time work, but have given up and are now working part-time, increased again, from 16.5% to 16.7%.

The fine folks at Chart of the Day just published their take on the numbers. You may see something cheerful in this snapshot, but if so, it eludes me�

Interestingly, two days ago ADP, a company that does real-time payroll processing for about one in every six U.S. workers, and whose data � because it is based on hard data and not surveying � has tended to be accurate, released its report for August employment. Based on ADP�s data, they had forecasted that the construction industry had actually cut 33,000 jobs in August.

Their data pointed to an overall decline in the work force of 105,000 jobs, worse than the government�s numbers that showed overall unemployment rose by 54,000 � moving the unemployment rate from 9.5% back up to 9.6%.

At all times, but especially ahead of an election as important as November�s, you can count me skeptical in the extreme when it comes to government data. Especially when it flies in the face of the clear trends in motion. Even with the government�s stimulus funds still coursing through the economy, in the second quarter U.S. gross domestic product fell by more than half, to an annualized rate of just 1.6%. Without the government�s supercharged spending, it�s been calculated that actual GDP would have been halved again.

So, where are all these new private-sector jobs coming from?

The construction industry was reported to have hired 19,000 people � a good number of whom, I suspect, are working on government-subsidized projects. At least in this neighborhood � and everywhere else I�ve traveled over the summer � there are almost no new houses being built. But there are a lot of roads being paved, whether they need it or not.

It also was reported that 17,000 new temps were hired in August. Historically, the number of temporary workers rises throughout the duration of a recession. In fact, only when the number of temps decisively turns down, in conjunction with full-time employment turning up, can we begin to expect that the economy is on the road to recovery.

Health care also added a fair number of jobs, over 20,000. As we�ve reported in past editions of this missive, the nation�s hospitals and medical facilities are dangerously understaffed � especially ahead of the pending nationalization of the industry and the added demand that will trigger � so this is a bright spot, of sorts.

And the mining industry added 8,000 jobs, as you would expect it to. All to the good, until the next round of legislation sends this and other �dirty� businesses back into retreat. (A major overhaul of the U.S. mining regulations was temporarily shelved because the Democrats were concerned it would hamper Nevada senator Harry Reid�s reelection chances. After the elections, expect it to resurface.)

However, even if you take the government�s latest unemployment report at face value and accept that the private sector added 67,000 jobs, with overall employment falling again by �just� 54,000, the country still hasn�t even begun the process of clawing back the more than 8.4 million jobs lost since this crisis hit.

And, given that the economy is being helped along through overt stimulus and the Fed�s not-so-overt policy of maintaining abnormally low interest rates, conditions for a recovery are about as favorable as they�re going to get.

As Bud Conrad explains in detail in this month�s edition of The Casey Report, published about an hour ago, these low interest rates simply can�t continue. And when they start to go up, along with taxes as the Bush tax cuts expire, the faltering economy will be dealt another body blow. (Click here to read Bud�s analysis.)

I might quip that the road to recovery will be long indeed, but that would be inappropriate, because so far the road to recovery is nowhere in sight.

Since I�m being skeptical about this latest bit of ginned-up good economic news, I thought it appropriate to share a note I received this morning from George S., a dear reader and new correspondent based in Greece. I�ve been reaching out to our subscribers in that bedraggled country to get their on-the-ground perspective. Here�s George�s latest note�

Dear David,

A snippet that might be fun for you to hear about.

In Greece the �system� has 2 price tiers for diesel fuel. One that users of diesel for cars, trucks, etc. use, which, for sake of clarity, say, costs 1 euro per liter, and that used for heating, which, say, costs 0.70 euro per liter. The distributor collected the 0.70 from the customer and then submitted paperwork to the state and collected 0.30 euro within 5 days straight into his bank account from the state, EXCEPT at the end of the period, when heating fuel is not any longer needed (mid-April), they did not get the difference paid back. They now (4 months later) have been told they will get the refund in the form of government 2-year bonds.

I wonder how many more tricks of this sort have been used by the �little Hitlers� of this country to cook the books and show to all that they have managed to reduce the deficit by 40%.

Just for the record, I hear that the same is happening with the return of VAT, which is of course much larger in size.

Seems that lying is an inherent vice of the politicians worldwide � any ideas how we can get rid of them?

All the best,

George

I really do hate to be a pessimist, but until I see even a glimmer of a turnaround in the anti-business, pro-big government attitudes of the nation�s power elite, I�m keeping my head down. And for good reason � these days any little thing can bring Uncle Sam�s fine-wielding thugs down on your head.

Your Money or Your Business

This week it was announced that the company that makes Botox will pay the U.S. government $600 million to settle misdemeanor claims that it �misbranded� its product for unauthorized uses, such as treating eye spasms, even though those unauthorized uses have been proven to be safe and effective. According to the government, over the five-year period in question, the company made somewhere between $20 million and $50 million a year off those unapproved uses. So, taking the highest number, $50 million a year, the company might have made $250 million from doctors using the product for something other than wrinkle smoothing.

Yet after years of fighting the feds, including suing the FDA for standing in the way of the company�s efforts to be approved for wider applications (including the treatment of children with cerebral palsy, which even the American Academy of Neurology has endorsed Botox for, saying it was an "effective and generally safe treatment"), the company finally caved in and agreed to pay the government $600 million to go away.

The steady assault of federal and state governments on U.S. business, using lawsuits to harvest oversized fines, is just one reason so many American companies have moved large parts of their operations overseas � another is the rising cost of complying with a growing body of nanny state regulations.

A case in point arrived in our mailbox last week. It was from cataloguer Smith + Noble, a company we had purchased some shades from several years ago. The president of the company, Ken Noble, wrote us to let us know that�

�In cooperation with the U.S. Consumer Product Safety Commission, Smith + Noble is voluntarily recalling about 1.16 million Roman shades and 115,000 rollers shades, sold to consumers from 1998 through April 2010� This recall involves all custom made-to-order Roman shades, and roller shades that do not have a tension device attached to the continuous loop cord.�

Through what seemed like gritted teeth, Mr. Noble went on to explain the recall�

�Smith + Noble is aware of one report of a 5-year-old boy becoming entangled in an unsecured continuous loop on a roller shade in May 2009. No medical treatment was required. Smith + Noble is aware of no reported incidents involving Roman shades.�

Now, I�m sure that somewhere out there is a bureaucrat who is all swelled up with the pride of a job well done. I suspect Mr. Noble has a different view, being forced, as he clearly was, to spend millions on what is, by any statistical calculation, an unnecessary recall.

Starting and operating a business is a challenging proposition in the best of times. That businesses have to soldier forth with a parasitical bureaucracy on their backs � sucking out the entrepreneurial life blood with taxes, forced insurance, minimum wages, more taxes, regulations, and fines � is very much not helpful.

I hope when the time comes to throw the bums out of Washington, people remember to clean out the cellars full of the entrenched bureaucrats and the nonsense regulations they enforce that are poisonous to businesses and to a robust economy.

Report from the (Gold) Field

In yesterday�s edition of this service, I discussed a bit of the process our International Speculator team follows to separate the big potential junior exploration companies from the paper-tigers that dominate the industry. Heading the team is hard-working, always-on-the-go Louis James. Overnight, Louis sent me the following note from the field. For the second time in as many months, he�s kicking rocks in the Yukon. Here�s his brief report�

I'm at the SKKY Hotel in Whitehorse, Yukon, after having spent two hours flying through storms in a plane so small, the three passengers had to carry their bags on their knees. My trip was delayed and compressed, due to the weather, but it was worth it. The project I came to see has genuine merit � and it sits on crown lands in a vast stretch almost devoid of people, except for those working on other mineral exploration in the area. More on that soon.

What I want to say now is that the province is bustling with mineral exploration, development, and exploitation activity. Sherwood Copper (now Capstone Mining) was the first company to get a new project (called Minto) permitted and into profitable production in the province this cycle, and Alexco is now close to being the second, having received the final permit necessary for its very high-grade Bellekeno silver mine. Kinross bought out Underworld Resources in the Yukon's White Gold district, and several other juniors are making headlines with significant discoveries here as well.

The province has other advantages, including relatively decent roads and power (for being so far north), a cooperative government that clearly favors responsible mining, and none of the land disputes with First Nations that can make British Columbia a tricky place to work. Best of all, the territory is still greatly underexplored, and land is still available for staking, even in some of the hot districts where recent discoveries have been made.

Some of those discoveries have spiked the relevant stocks to very high prices, so newcomers to the field should be cautious, but the field is wide open and I think the odds are very good that we'll see more big discoveries ahead. The Yukon is a place that bears watching, and that's exactly what the International Speculator team will be doing.

To stay in the loop on the next big plays in the Yukon and around the world, kick the tires with a three-month, no-risk subscription to the International Speculator. For all the reasons I detailed yesterday, you�ll be very glad you did. Details here.

Friday Funnies

The following came from a quite brilliant beer company advertising campaign. This is titled, �What goes through your mind when someone says, let�s go out for a drink?�

There are two other iterations of the campaign, also very funny, that you can view here.

The Stranded Irishman

Last week, I got in trouble with one dear Catholic reader over the joke about the Preacher�s Ass, though for the life of me, I can�t imagine how anyone could have taken offense to the joke on religious grounds. That is, unless they have a seriously retarded sense of humor. In any event, likewise I can�t see how anyone, even someone Irish, could take offense at this next joke, what do you think?

One day an Irishman, who had been stranded on a deserted island for over 10 years, saw a speck on the horizon.

He thought to himself, "It's certainly not a ship."

As the speck got closer and closer, he began to rule out even the possibilities of a small boat or a raft.

Suddenly there strode from the surf a figure clad in a black wet suit. Putting aside the scuba tanks and mask, and zipping down the top of the wet suit, there stood a drop-dead gorgeous blonde!

She walked up to the stunned Irishman and said to him,

"Tell me, how long has it been since you've had a good cigar?"

"Ten years!" replied the amazed Irishman.

With that, she reached over and unzipped a waterproof pocket on the left sleeve of her wet suit and pulled out a fresh package of cigars and a lighter.

He took a cigar, slowly lit it, and took a long drag.

"Faith and begorrah!" said the castaway. "Ah, that is so good! I'd forgotten how great a smoke can be!"

"And how long has it been since you've had a drop of good Bushmill's Irish Whiskey?" asked the blonde.

Trembling, the castaway replied, "Ten years!"

Hearing that, the blonde reached over to her right sleeve, unzipped a pocket there and removed a flask and handed it to him.

He opened the flask and took a long drink.

"'Tis nectar of the gods!" shouted the Irishman. "'Tis truly fantastic!!!"

At this point, the gorgeous blonde started to slowly unzip the long front of her wet suit, right down the middle. She looked at the trembling man and asked,

"And how long has it been since you've played around?"

With tears in his eyes, the Irishman fell to his knees and sobbed,

"Jesus, Mary, and Joseph! Don't tell me that you've got golf clubs in there too!"

(Get it, �played a round�?)

When Insults Had Class

For those of you did take umbrage at that last joke and are going to send me a nasty note at david@CaseyResearch.com, the following insults from a more literate age might come in as a handy reference as you craft your note.

In an exchange between Winston Churchill and Lady Astor, she said, "If you were my husband I'd give you poison." He said, "If you were my wife, I'd drink it."

****

A member of Parliament to British Prime Minister Disraeli: "Sir, you will either die on the gallows or of some unspeakable disease."

"That depends, Sir," said Disraeli, "whether I embrace your policies or your mistress."

****

"He had delusions of adequacy." - Walter Kerr

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"He has all the virtues I dislike and none of the vices I admire." - Winston Churchill

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"I have never killed a man, but I have read many obituaries with great pleasure." - Clarence Darrow

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"He has never been known to use a word that might send a reader to the dictionary." - William Faulkner (about Ernest Hemingway).

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"Thank you for sending me a copy of your book; I'll waste no time reading it." - Moses Hadas

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"I didn't attend the funeral, but I sent a nice letter saying I approved of it." - Mark Twain

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"I am enclosing two tickets to the first night of my new play; bring a friend... if you have one." - George Bernard Shaw to Winston Churchill

"Cannot possibly attend first night, will attend second... if there is one." - Winston Churchill, in response.

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"I feel so miserable without you; it's almost like having you here." - Stephen Bishop

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"I've just learned about his illness. Let's hope it's nothing trivial." - Irvin S. Cobb

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"In order to avoid being called a flirt, she always yielded easily." - Charles, Count Talleyrand

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"Some cause happiness wherever they go; others, whenever they go." - Oscar Wilde

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"I've had a perfectly wonderful evening. But this wasn't it." - Groucho Marx

Video of the Week � Dancing Dog

My friend Brian Hunt sent along a link to a video of a dog that dances the Merengue. It�s really incredible.

.

That�s It for This Week

In something of an irony, we�ll be joining in with our fellow citizens celebrating the long Labor Day weekend here in the U.S. � by not laboring at all.

As such, the next edition of Casey�s Daily Dispatch will be published on Tuesday, September 7.

Until then, thanks for reading and for being a subscriber to a Casey Research service!

David Galland

Managing Director
Casey Research

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RIMMing Out?

GoldInvestor — Sun, 05 Sep 2010 04:01:43 GMT

Dear Reader,

Welcome to the weekend edition of Casey's Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.

Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.

RIMMing Out?

By Alex Daley, Senior Editor, Casey�s Extraordinary Technology

It�s been over three years since the release of Apple�s iPhone, the shiny touchscreen megahit that marked the launch of the �smartphone� market in most people�s eyes. In recent months, though, the iPhone � whose 3G, second-generation model remains the world�s best-selling single handset � has seen an increased amount of competition from a major new presence in the game: Google.

The Internet giant is now activating more than 200,000 new phones, based on its open source Android operating system, per day. That�s up from 160,000 in June and is twice May�s 100,000. The new guy is stalking the field � and the hunting is good.

Daily activation numbers aren�t everything. But they�re an accurate snapshot of how popular a given phone or platform is at the moment and, if gains can be sustained, of what the market share picture might look like a few months down the road.

Does this mean the iPhone is doomed and Apple�s profitability with it? Probably not. The iPhone continues to ride a formidable wave of popularity, selling over 2.5M units per month. Its app marketplace is a stone killer, a vital force that both attracts initial users to the platform and keeps them there once they�ve bought in.

Just ask any iPhone user if they�d go back to whatever they were using before it. Chances are they�ll chuckle.

Best of all from Apple�s viewpoint, the company makes a boatload of money off each device, starting with a few hundred dollars of margin on each phone:

Now, take the royalties on the contract value from AT&T; shares of the sales of every app from the store; music downloaded from iTunes; and the vibrant accessories business with direct and �Made for iPhone� license fees � add them to base sales, and you have a very healthy business on your hands.

No, Apple doesn�t have to fret much about Google. Who does, then? It�s that other fruit-flavored device, the Blackberry, from Canada�s Research in Motion (RIMM).

Once the most popular executive must-have gadget, the Blackberry clings to its status as king of the hill in the smartphone game, with its line of email-savvy handsets for business users. It still commands a hefty 35% of the global market:

But as you can see, over the past year only the iPhone has been holding steady. Everyone else, including RIMM, has been losing share as Android gulps an ever-larger piece of the pie.

It�s Palm, Microsoft, Nokia (makers of the majority of Symbian OS phones, as cited above), and now Blackberry that are equally sharing the brunt of the Android attack, with unit shipments of all falling while Android rises.

Without a full-featured web browser, and with a surprisingly limited selection of applications for their platform, Blackberry devices have for some time looked clunky and rather antiquated next to the iPhone and Android.

It isn�t as if RIMM hasn�t noticed. Recently, it tried to step up to the plate and produce a truly competitive high-end smartphone, the Torch. A combination of touch screen and hardware keyboard, the Torch was intended to be all things to all people: a quick and easy touch device like the iPhone that was nevertheless acceptable to those who prefer clickable keys for fast thumbing. It may prove to be too much of a reach. Reviews have ranged from lukewarm to downright awful, and sales have been disappointing thus far. Three years on, it may be too little too late.

RIMM�s primary salvation in past years has been its popularity with big enterprises and government. IT managers have long insisted that companies standardize equipment and choose only the most secure and easily maintained devices. So, RIMM focused efforts on cementing its place in the enterprise and growing with add-on offerings.

However, in today�s economic climate, cost-cutting efforts � coupled with the intense popularity of the iPhone for home users � have seen a lot of businesses taking a much more relaxed, bring-your-own-phone approach to accessing email on the road. It�s a corporate win-win, as employees get to choose the device they like best and the company gets to shift that cost burden onto the individual.

In the process, the big loser has been RIMM. Its hold on the enterprise is strong but slipping. The more users get accustomed to the superior experience offered by Android and iPhone devices, the more they are demanding the convenience of using them for work, instead of their Blackberries. That will inevitably shrink RIMM�s cash cow market and hurt its brand with device buyers.

RIMM�s competitors have also begun to attack the company�s other major revenue stream besides devices, the license fees it charges for its email server, the Blackberry Enterprise Server � which organizations put between their email systems and devices, to push out messages quickly to remote users and to encrypt messages for security. Makers of popular email systems, especially Microsoft with its Exchange product line, have begun building those same features into recent versions of their products, obviating the need for the Blackberry server to deliver them. Both iPhone and Android devices support the new Exchange features.

On top of the competitive assault, RIMM also finds itself under close scrutiny by governments around the world, who are demanding that the company allow them to monitor encrypted communications. Saudi Arabia and India both have demanded that the keys to all these scrambled communications be handed over to government officials, or the services will be shut down in their countries.

Add to these items the major service outages for Blackberry phones, which have shut down email access for millions of users for hours or days at a time, on multiple occasions over the past two years, and a storm is brewing for a major decline in enterprise and government reliance on Blackberry devices.

In fact, Morgan Stanley analyst Ehud Gelblum estimates that Blackberry�s market share will contract by as much as 30% by 2013, accompanied by a drop in absolute volume for the first time ever.

Until recently, the main victim of the smartphone onslaught hasn�t been other smartphones, but rather those far simpler devices that the industry dubs �feature phones.� Motorola was once atop the heap in feature phones, with its global mega-hit, the super-slim RAZR cell phone, and other popular models. But for the second quarter in a row, Apple�s high-margin, full-featured smartphone has outsold all of Motorola�s feature phones combined:

Figure 1 - Graph From BusinessInsider.com

That shift in sentiment is reflected in the stock price history of companies like Motorola and Nokia, which took the first iPhone assault head on. They�ve plummeted over the past few years as their sales dwindle and margins slide:

So that war is about over. With feature phones fading, the competition is shifting directly to the smartphone arena, which is heating to cherry red.

Once it was a two-horse race. But the injection of Android into the fray, and its overnight success, have completely scrambled the odds. Despite a rapidly growing overall market -- market researcher NPD says that total smartphone sales in the U.S. are up 50.1% over last year, and web statistics firm comScore says Android usage is up some 400% over the same period � the field is being thinned as many formerly established players suffer severe market erosion.

Bottom line: The losers are falling away, Android is coming on like a gangbuster, and the iPhone continues to evolve. Thus, Research in Motion now finds itself with a huge target on its back, in the crosshairs of both Google and Apple at the same time. That�s an unenviable position for any company, least of all one with so many recent slip-ups.

RIMM�s stock has already fallen from a 2008 high of well over $130 per share down to $47 in recent trading. Yet, despite the 64% loss, its troubles may just be beginning. If it fails to act aggressively, to bring relevant devices to market, and to maintain some semblance of present market share � then it is likely to see its stock price further extend the swan dive, right along with its device sales.

[Ed. Note: Technology is the number one growth sector in the United States� at a time when economic growth is stalling across the board. And no one knows more about cutting-edge technology than Alex Daley, senior editor of Casey�s Extraordinary Technology. Getting into the right tech stocks now can pay off big � whether it�s biotech firms with promising new technologies for disease diagnosis and treatment, or cyber-security companies with innovative solutions for network protection. If you want to learn more about which tech stocks to buy now, please click here.]

China and India: Still Hungry for Coal

By Marin Katusa, Chief Energy Strategist, Casey Research

One can only hope that the �Don�t shoot the messenger� adage is still popular in the international community.

UK-based consultants M&C Energy Group have become the latest to join the chorus of voices asking the international community to increase the pressure on China and India to switch to cleaner energy sources.

As far as energy analyst David Hunter is concerned, it is the Western businesses that are carrying the financial burden of reducing carbon emissions. China and India, on the other hand, are benefitting from much cheaper energy, and their companies don�t have to bear the costs of reversing the effects of global warming.

Mr Hunter, however, should steel himself for disappointing news. Industry experts are expecting anything but a cut in coal demand for the foreseeable future.

By their analysis, global coal demand � already at a record high � will remain strong even as the recession cuts down on oil and gas use. And the numbers are certainly matching up to these expectations.

India�s coal demand is expected to reach 653 million tonnes this fiscal year, with only 572 million tonnes expected to be produced in the country. The China National Coal Association expects demand to grow by 4-6% in 2010 and the coal consumption to expand to roughly 3.4 billion tonnes.

And with power-starved economies to feed and millions of people to lift out of poverty, neither country is going to take kindly to any interference with its energy agenda.

There are two different types of coal � in fact two different types of demand � when it comes to the coal market. Though they can�t be considered to be totally separate, the criticism levied against these two Asian tigers becomes somewhat blunted when we take this angle.

The first is for thermal coal, the cheapest and most popular way for emerging economies to produce electricity. Almost 75% of China�s electricity comes from coal-fired plants, but this picture is rapidly changing.

Irritated by the �world�s biggest energy consumer� sticker, Beijing is investing heavily � US$736 billion � into clean energy investment plans. The aim: increase the non-fossil fuel supply component to 15% of the total primary energy demand by 2020. So really, Mr Hunter�s desire for a less coal-intensive China might just come true. As for India, it never likes to be too far behind its Asian rival.

The second demand is for metallurgical, or coking, coal. This is what China and India really need � good-quality metallurgical coal, something that North America has in plenty. And this demand is not going away anytime soon.

For a strong economy, one needs strong infrastructure. For strong infrastructure, one needs steel. Steel is the backbone of an economy, and it is metallurgical coal that is used to produce the heat in 90% of the world�s steel production process. And for as long as the economy continues to blaze, it is metallurgical coal imports that will be stoking the furnace.

The heyday of the coal market is far from over. We�ve called coal the invisible bull market before; today it�s very much at the forefront of the market, and it isn�t going away. Coal suppliers know as well which side their bread is buttered. While traditional markets in Europe continue to struggle with their debt crises, China and India will be only too happy to race on ahead and pick up the slack.

[Ed. Note: No one knows energy better than Marin Katusa, Casey�s chief energy strategist and senior editor of Casey�s Energy Report. One of his previous coal picks jumped by 80%, handing subscribers handsome profits. Who will be the coal winner in 2011? Find out with a risk-free, 3-month trial with 100% money-back guarantee.]

Tech Still Churning Along

By Chris Wood, Senior Analyst, Casey's Extraordinary Technology

You may have heard that semiconductor chip maker Intel just agreed to buy Infineon�s Wireless Solutions Business (WLS) for approximately $1.4 billion in cash. WLS is a leading provider of cellular platforms to top-tier global phone makers. And with this purchase, Intel is looking to move beyond chips that serve as the calculating engines of PCs and into the smartphone market.

To this news, you might respond, so what? But I think the deal embodies what could be seen as a fundamental shift in the market from PCs to smartphones. And that�s profound.

Microsoft started business with the vision of a computer on every desk and in every home. It pretty much accomplished that in the Western world. But the relatively new smartphone seems poised to overtake the PC in no time at all, particularly in emerging markets.

Although research firm IDC projects PC market growth in 2010 to ring in at 19.8% (well above the 3.0% growth seen in 2009), it forecasts annual growth to slow to 11.1% by 2014 and into single digits beyond.

Meanwhile, the smartphone market is growing at an annual clip of 50%, according to IDC, and is expected to continue robust growth for many years to come. A whopping 118.3 million smartphones shipped in the first six months of 2010, reflecting a 54% increase from the 76.8 million units that were sold in the first half of last year. And analysts at ABI Research project smartphone sales to double from about 200 million units this year to more than 400 million units in 2014, which indicates forecasted compound annual growth of 20% for the next four years.

Quite frankly, ABI�s forecast of growth in the smartphone market is probably on the low side. Consider that industry specialists at Frost & Sullivan expect that close to 500 million smartphones will be sold in Asia-Pacific alone in the year 2015. That would easily put worldwide annual sales in the ballpark of 700 � 800 million.

The point is that as smartphones get smarter and more affordable, and 4G service expands, we expect to see smartphones taking the place of PCs for a growing number of consumers. And this trend may already be emerging (especially in emerging markets) as evidenced by the relative expected growth rates in the years ahead and by deals like the Intel/Infineon one cited above.

So it�s possible that a few years down the road, many consumers will forgo even owning a PC and will rely on a smartphone as their primary computer instead. I can�t say I�ll be one of those people, but it�s a paradigm shift worth considering.

With all this talk of smartphone growth, I figure we should continue a bit with this (for once) positive tone and talk briefly about perhaps the one wealth creation engine in the U.S. that is still churning along, despite the state of the overall economy and all the bearish news you hear from us. That wealth engine is technology.

Over the past decade, while the overall market was weakly limping along, these companies have been steadily growing revenues, adding jobs, and spewing profits. At the same time brash startups were reinventing news, entertainment, communication, medicine, and virtually every other aspect of our work and home lives, promising to deliver still more growth even in this weak economy.

Technological development is like a force of nature. It�s impersonal and implacable. It doesn�t care who controls Congress or chairs the Fed. It has been the stuff of American life for a century � from the assembly line to the smartphone. Most importantly, it�s done what a successful sector of the economy is supposed to do, profitably create things of value to society, and thereby creating tangible wealth.

Consider that only 30 years ago, five of the largest 24 companies in the U.S. in terms of market cap � Apple (#2), Microsoft (#3), Cisco (#15), Google (#19), and Oracle (#23), tech companies all � either hadn�t gone public or didn�t even exist.

From the 1980s to today, General Motors slid steadily downward, racking up billions in losses that culminated in a painful bankruptcy/bailout. Over the same period, a handful of geeks from Seattle grew their dorm-room startup, Microsoft, into a global software empire with over $60 billion per year in revenue. Along the way, the company turned four employees into billionaires and an estimated 12,000 into millionaires, while amassing some $205 billion in equity for shareholders.

In 1990, Countrywide Credit emerged as the nation�s leading mortgage banker. That same year, networking company Cisco Systems went public at a split-adjusted $0.08 per share and helped to usher in the Internet age with its routers and switches. Countrywide disappeared into Bank of America in 2008, after its credit rating was slashed to �junk� by Standard & Poor�s; Cisco now employs over 65,000 people and has created over $120 billion in market value.

Over the past 10 years, the airlines posted loss after loss, received numerous government bailouts, and saw the XAL airline stock index fall from 175 to 35, erasing billions in shareholder value. Meanwhile, a little Silicon Valley firm with a rather silly name, Google, built a $25 billion a year advertising behemoth and rocketed its market cap to over $140 billion.

And the list goes on.

Yes, we had the tech bubble burst in 2000. But that just put a well-deserved end to indiscriminate �tech� investing. To be successful in the sector today, you have to put in the time to separate the good companies from the bad; just like it should be. Even so, there are more opportunities than ever to use this sector to build personal wealth.

Readers of Casey�s Extraordinary Technology have already realized five separate gains in 2010 that were each at least 40%, the most recent of which was generated over a mere one-week time frame. And we still have plenty of other stocks in our CET portfolio with just as much or more potential upside, with at least one new pick coming each month down the road. If you�re interested in learning more about tech and tech investing, and want to know which tech stocks to buy now, sign up for a risk-free trial of Casey�s Extraordinary Technology. Details here.

How to Make, or Lose, a Fortune in Junior Exploration Stocks

The first thing to know about junior resource exploration stocks is that they are volatile. You can make 50% in a day, and you can lose 50% in a day.

This is due largely to the fact that they tend to be thinly traded. Thus, a whiff of good news, or bad, can overwhelm opposing trades. In the absence of a countervailing bid, the stock can move sharply until it reaches the point that someone is willing to step up and take the other side of the trade. If the news is bad, and there�s no bid, things get ugly really quick. Conversely, if the news is good � for example, the recent case of the AuEx buy-out � the volume of buyers rushing to get a hold of stock can blow the proverbial doors off. The chart from AuEx, just below, makes the point in a way that words just can�t.

Is volatility bad? Not hardly. If you play these stocks intelligently, that volatility can act like a portfolio rocket booster. The alternative: a widely-followed stock has little chance of surprising the market on the upside, and so can tie up your capital for a long period of time � plodding along while you remain exposed to general market risk with almost no hope of serious appreciation.

By contrast, a junior exploration company punching holes into interesting geology is all about the potential for surprise. If the surprise is good, your stock is headed for the moon. But a poor drill hole is not necessarily a ticket to the basement � not if the company has not overinflated expectations by aggressive promotion, and is following a methodical process in its exploration program.

The topic of aggressive promotion brings me to the second thing to know about junior resource stocks � namely, that most of them are borderline frauds. That�s right � the vast majority of the companies involved in the junior resource sector are headed up by management teams that have no special expertise in finding or developing economic deposits. Rather, what they�re good at is telling a really good story based on the loosest of �facts� in order to get investors to pay their overhead and, hopefully, allow them to trade out of their free or low cost shares at a big profit.

While there are a number of signs you can look for that will give you some sense of the management�s abilities and ethics, one is that the bad apples will tend to shift their stated focus between breakfast and dinner, depending on the flavor of the day. One minute, they are a junior gold company, the next they are on to the world�s hottest lithium find � then sometime after lunch, they morph into being a uranium explorer.

That�s not to say that there aren�t times when competent management teams are faced with the reality that their primary resource target is going to draw a blank, and move on � it happens all the time. The trick is to be able to discern the difference between a strategic retreat, and an opportunistic bunny hop into another area where the management has no real expertise or value to bring to the game.

To help our subscribers understand the difference between a competent explorer and a paper tiger, years ago we started the Explorers� League. In order to be inducted into league, you have to have been responsible for a minimum of three economic mineral discoveries � but most of our honorees have a lot more than that. This is no small feat when you consider that probably 98% of the folks in the mining business will retire without a single economic discovery to their name.

Ron Parratt was among the first of our Explorers� League Honorees � the subsequent success he had with AuEx has only once again confirmed the importance of backing winners.

The next thing to focus on is the size, and the general set-up, of the targeted resource. I saw an exploration company advertising on a major financial web site that was breathlessly talking about the 30,000 ounces of gold it had discovered.

While I suspect a borderline or even overt fraud, in the best case scenario building expensive advertising campaigns around 30,000 ounces of gold � a truly inconsequential amount � would indicate that management is hopelessly ignorant of the realities of the business. And the reality today is that, depending on a number of variables � location, geology, local politics, metallurgy, infrastructure, etc. � the minimum resource required for a company to have any chance at success is in excess of 1 million ounces of gold. But, really, you should only be focusing on companies with the very real potential to prove up 2 million or more ounces.

In exploration plays, size counts.

And don�t confuse gross metal value with anything remotely resembling reality. In fact, any company that would even mention the gross metal value of their resource is sending you a very strong signal that something fishy is afoot. For those of you new to the game, gross metal value is derived by doing the simple math of multiplying the companies� ounces (or pounds, depending on the metal) in the ground by the current price of the commodity. Thus, a company with a market cap of, say, $50 million and a resource in the ground of one million ounces of gold might tout a gross metal value, based on today�s price of $1,250 per ounce, of $1.25 billion. The implication being that the market cap of the company will soon rocket in the direction of the gross metal value� wink, wink, get it while it�s hot and all that.

Now, I don�t have time to list all the ways that the gross metal value gets hammered down to a net that is a fraction of the total� and, more likely than not, even to the point where the deposit is uneconomic. But I�ll give it a quick try anyway.

For starters, there�s the cost of the infrastructure required to actually extract the mineral. While even the cost of building an open pit mine is huge, if the deposit is too deep for that, then you�re talking about going underground, which can be much, much more expensive. Depending on where the resource is located � and most new discoveries are very remote (Congo, anyone?) � and the depth and structure of the mineral resource, building out the mine infrastructure can cost in the hundreds of millions of dollars, and even billions. Then there are local politics. For instance, how much of the mine will the government want to keep for itself? How high will the taxes and royalties be? Is the area secure? There are projects I�m aware of that, in order to be built, will require essentially maintaining a private army to keep local revolutionaries and thugs at bay. How�s the metallurgy? Extracting metal from close to surface, oxidized, deposits can be relatively easy and effective, with recoveries in the 90% area. But if the target mineral is bound up with all sorts of detrimental minerals, the processing costs will soar, and recoveries plummet� often to the point where the overall costs, and the challenges of disposing of the toxic waste, can torpedo even a very large project. Mining requires a huge amount of power� where�s it going to come from? Can you imagine the cost and hassle of having to build, say, 60 miles of power lines? How about if the deposit is located in a remote corner of the Yukon?

I could go on� and on� but you get the idea. There�s a reason that well over 90% of even legitimate resource discoveries never become economic mines. That doesn�t mean you can�t make money off of a discovery play � but if it has little chance of becoming a mine, then you need to be clear on why you own it, and when it�s time to sell.

So, how do you sort out the difference between the good guys, and the bad? And the good projects and the doomed? First and foremost, you have to live and breathe the industry. Then you have to have a deep network to use as a sounding board for your analysis. Our network includes the Explorer�s League Honorees, and, now, the Casey NexTen � up and coming young professionals under 40 years old who have already proven their ability to find mines. And it also includes leading brokers, financiers, mining executives, field geologists and numerous others� around the world. In addition to putting boots on the ground in the typically far-away places that new discoveries are found � so we can fully understand the geology, the local infrastructure, relations with the local community and the political environment, etc. � our due diligence process invariably requires in-depth discussions with individuals in our network who know the people and the geology involved in the new play.

That allows us to quickly identify the good guys who are known to use good process (and virtually all real discoveries emanate from good process) and are working on targets with the right geological address. That allows us to do a quick knock-out of something like 90 out of a 100 plays that are brought to our attention� leaving us free to focus on the 10% with a real chance of success.

Now, this may be sounding like a big push for you to subscribe to our more expensive services � and obviously I wouldn�t be unhappy if you did (and neither would you). But to make a lot of money in junior resource exploration, you don�t need to subscribe to one of our services � though we can certainly make things easier. Even so, I know a number of individuals who have made fortunes in the sector by taking the time to do the homework necessary to build a solid understanding of the industry and the key players.

The bottom line on how to make serious money as a speculator in anything � the junior resource exploration business merely provides a convenient example � is to identify a volatile, high risk, high return investment sector, and then get to know the sector intimately. By doing so, you can eliminate much of the risk� leaving you mostly with the huge upside. And, what risk is left, is very manageable.

And don�t forget � I�m talking about investing only a relatively small part of your portfolio� 10%, 20%? You can tuck the balance of your portfolio into assets with a much lower risk profile. These days, that might include gold, and, for the time being, cash.

I didn�t intend to do a dissertation on junior resource stocks, or speculations, today � it just popped out. Driven, I suspect, by the discussion with my friend � and by reading a lot of emails from a number of happy subscribers who owned AuEx� or Bayfield� or one of the other recent big winners uncovered by our team in this cycle.

There is, of course, much more to understand about the junior resource sector, but if you�re interested in the sector � and you should be � then the best way to proceed is take us up on a risk-free trial to the International Speculator. Click here for the simple details.

As you�ll see when you click on that link, at $199 per quarter, we�re not giving the International Speculator service away. That said, given the upside potential of the companies it follows, and the fact that you can try it for three full months and still get 100% of your money back if it doesn�t provide far more value than it costs � you have nothing to lose by giving it a try.

(The Casey Investment Alert, unfortunately, is currently closed to new subscribers. That�s because it focuses on the earliest stage nano-cap plays and special situations that simply can�t handle the volume that would be generated by a larger subscription base. Even so, for most investors, the International Speculator should be all you need. )

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

David Galland

Managing Director
Casey Research

Attached Thumbnails

Kenya � New World Building Block... Psychic Regulation

GoldSpeculator — Fri, 03 Sep 2010 14:58:53 GMT

Kenya – New World Building Block

Friday, September 03, 2010 – by Staff Report

Mwai Kibaki

Kenya's President Mwai Kibaki (left) said Friday the country's new constitution would create better economic opportunities for younger Kenyans. "There would be more opportunities and better business, a new Kenya where all citizens will live a dignified life. This is the promise of the new constitution," the President said after signing into law the new constitution at a ceremony attended by regional leaders in Nairobi. "It is also a promise that every Kenyan will unleash their full potential. We are a people with a diverse culture and languages," Kibaki said. The Kenyan leader said the constitution would help propel Kenya into a new era of faster social, political and economic growth, and would also give Kenyans an opportunity to choose better leaders. – New Africa

Dominant Social Theme: The state knows best.

Free-Market Analysis: It would be nice to think that the new Kenyan constitution is going to be helpful to the country and to Africa generally. But when we read the constitution we find as usual these days that the power of the people is vested in the state. The dominant social theme here seems to be, "A new constitution has been drawn up that gives people hope for the future. The government hasn't been much good in the past, but now with this piece of paper things will be better."

But of course the Kenyan constitution is a piece of paper. And the Keynan state is a patchwork of some 40 different tribes. At the very largest level, the Kenyan constitution is about celebrating government. The constitutional reconfiguration has been reported (and celebrated) in major media worldwide. The idea is always that the government can reinvent and change people's lives.
In these reports, the Kenyan constitution is mentioned as having been triggered by unrest and riots. The Economist Magazine reported on the constitutional referendum back in July and noted the following, "The last time the country went to the polls, in a general election at the end of 2007, the ensuing violence left 1,500 people dead and 300,000-plus homeless. Never again, said most Kenyans."

The Economist, in a celebratory article about the constitution, goes on to explain how the vote for the referendum was held peaceably. The emphasis once again is on state action to ensure a civil society: "This time around, the government has been assertive and astute in trying to keep the peace. Ten thousand police have been sent to the Rift Valley, the most combustible bit of the country, with youth gangs from the rival Kalenjin and Kikuyu ethnic groups facing off against each other. Militias are said to be rearming, this time with automatic rifles as well as bows and arrows. If they are not kept apart, they may fight."

Finally, the Economist explains the constitution's ins and outs: "The proposed constitution provides for an overhaul of the executive, legislature and judiciary, together with a measure of devolution to the regions. The country will still be ruled by an executive president, but he (there is no prospect yet of a she) will be constrained by checks and balances, and parliament will vet key appointments that had previously been made by presidential fiat. President and parliament will have fixed terms, with elections every five years. To win the top job, a candidate will have to win support from across Kenya's 40-plus recognised ethnic groups by winning at least half of all votes cast and at least a quarter of them in more than half of the 47 newly demarcated counties."

What the Economist neglects to state is that all power is vested directly in the state not the people. This is the single most important point of any constitution. The Economist skips right over it. Undeniably, however, the Kenyan Constitution is slickly written. Its preamble, in our view, has been deliberately written to sound like the US Constitution with a reference to God right in the first sentence, as follows:

We, the people of Kenya – ACKNOWLEDGING the supremacy of the Almighty God of all creation:

HONOURING those who heroically struggled to bring freedom and justice to our land:

PROUD of our ethnic, cultural and religious diversity, and determined to live in peace and unity as one indivisible sovereign nation:

RESPECTFUL of the environment, which is our heritage, and determined to sustain it for the benefit of future generations:

COMMITTED to nurturing and protecting the well-being of the individual, the family, communities and the nation:

RECOGNISING the aspirations of all Kenyans for a government based on the essential values of human rights, equality, freedom, democracy, social justice and the rule of law:

EXERCISING our sovereign and inalienable right to determine the form of governance of our country and having participated fully in the making of this Constitution:

ADOPT, ENACT and give this Constitution to ourselves and to our future generations.

One can read the above sentences and come away inspired. But when one reads them more closely they begin to provide a message that some might find confusing. There usage of the vocabulary is deliberate and is in fact the idiom of the modern regulatory state with its obsessive reliance on protecting the rights of minorities and on the use of state-force to do so. Here is the meat of the treaty:

Sovereignty of the people:

(1) All sovereign power belongs to the people of Kenya and shall be exercised only in accordance with this Constitution.

(2) The people may exercise their sovereign power either directly or through their democratically elected representatives. ...

Supremacy of this Constitution:

(1) This Constitution is the supreme law of the Republic and binds all persons and all State organs at both levels of government.

(2) No person may claim or exercise State authority except as authorised under this Constitution.

(3) The validity or legality of this Constitution is not subject to challenge by or before any court or other State organ.

(4) Any law, including customary law, that is inconsistent with this Constitution is void to the extent of the inconsistency, and any act or omission in contravention of this Constitution is invalid.

(5) The general rules of international law shall form part of the law of Kenya.

(6) Any treaty or convention ratified by Kenya shall form part of the law of Kenya under this Constitution.

The constitution begins by referring to God; but sovereign power may be exercised ONLY in accordance with the constitution. And the constitution itself is to be implemented via the state. "No person may claim or exercise state authority except as authorised under this constitution." This constitution also overrides Kenyan common or "customary" law, as follows: "Any law, including customary law, that is inconsistent with this constitution is void to the extent of the inconsistency, and any act or omission in contravention of this constitution is invalid."

The constitution paves the way for a coming international order, as follows: "The general rules of international law shall form part of the law of Kenya ..." and ... "Any treaty or convention ratified by Kenya shall form part of the law of Kenya under this Constitution."

The constitutional language was developed by a Kenyan "Committee of Experts" and voted on by the Kenyan legislature, which apparently didn't change much. What is surprising is how deliberately the constitution has been configured to ensure that the body of Kenyan law is amenable to "international law" and how it has been left open-ended to insure that further treaties or conventions can be seamlessly integrated.

In our view, in fact, this Kenyan Constitution has been tailored for the next step in the Kenyan constitutional journey, which shall be no doubt to join an African super-state that is currently being prepared. It is an African Union that will include its own currency currently called the Afro of all things. We have written about it here: Africa Union Plans Spaceflight.

The way this constitution has ended up is no coincidence. It is part of a larger, world-government promotion that is being urged on by nation-states around the world. This is the reason in fact, in our view, for the attack on the Muslim world. Yes, the West's citizens are under the impression that Islam has attacked the West, but we would argue it is the other way round. And the attacks have nothing much to do with immediate wealth or raw materials and everything to do with Anglo-American control of the levers of world government. Islam is one stumbling block and China, perhaps, is another. Russia we are not so sure about.

Seen this way, the Afghan and Iraq wars are about building, or rebuilding malleable nation states that are amenable to a larger international order. This is not a new initiative. Even the "Colonial Era" – which saw the emergence of third-world nation-states out of a hodge-podge of tribal rivalries – may be considered a concerted step toward such global governance.

Conclusion: The route to world government, if there is one, is full of twists and turns that can only be navigated by an intergenerational familial conspiracy of tremendous wealth and strategic vision. It is a kind of business and it is meant to use the power of the state itself to achieve its private ends. There is a pattern in our view. It is not a random one.

Psychic Regulation

Friday, September 03, 2010 – by Staff Report

Starting this week, fortune tellers in Warren, Mich., must be fingerprinted and pay an annual fee of $150 — plus $10 for a police background check — to practice their craft. The new rules are among America's strictest on palmists, fortune readers, and other psychics — and part of a growing push to regulate a business that has never been taken, or overseen, very seriously. But officials in Warren, a town of 138,000 near Detroit, say it's time to weed out tricksters. "We had no mechanism of enforcement to protect people against unsavory characters," Warren City Council member Keith Sadowski says. "We want to be sure there is some recourse in case we do get somebody who is not legitimate." Regulating an industry that deems itself clairvoyant, has no standard education requirements and yet rakes in cash for revealing spiritual truths may itself be an act of faith. It also might make good economic sense: just over one in seven Americans consulted a psychic or fortune-teller in 2009, according to the Pew Forum for Religion and Public Life. That could be 30 million or more of us. – Time Magazine

Dominant Social Theme: Time to regulate the mystics.

Free-Market Analysis: We have been writing about regulation lately because the regulatory state is one of the very biggest of all power-elite themes. The financial crisis has actively fanned the flames of regulation. But at some point, regulatory society must surely crosses the divide between democracy and authoritarianism (a democracy being bad enough but an authoritarian one being worse). Eventually, inexorably you end up with a kind of totalitarianism. And what then? Dominant social theme (nonetheless): the marketplace needs to be tweaked and good government stands ready to do it.

The whole idea of a regulatory democracy is based on market failure. But since markets usually do not – cannot – fail, the necessary corollary to regulatory democracy is the central bank. It is the private/public central bank with its incessant monetary surges leading to booms and then terrible busts that both consolidates entrepreneurial business and gives rise (during the bust phase) to calls for government regulation to fix what the marketplace has ruined. Of course it is not the marketplace that has ruined anything but a legislatively-granted monopoly that gives a handful of men the power to determine the volume and price of money.

Once the process of regulatory democracy is underway, it will inevitably spread to the most unlikely places. One can make a case (not a viable one) that the financial industry ought to be regulated since it is closely involved with the central bank boom-and-bust cycle. One can make a case that certain industries ought to be regulated as well. But psychics? This is the direct result of a dominant social theme at work. People have become so inured to the steady production of useless regulatory legislation that they don't even notice the absurdity anymore. Here's some more from the article:

Warren's beefed-up regs came about this spring when Matt Nichols, a Warren police officer, told the city council that the town appeared vulnerable to fortune-telling crime. Once a year since at least 2005, Nichols says he has had to try to convince a psychic to return jewelry or cash taken from a client in exchange for performing spells or to free them from curses. But since no regulations barred such acts, criminal charges weren't an option.

"We are not looking to do anything to oppress people's beliefs," argues Nichols, also a member of the National Association of Bunco Investigators, a non-profit group dedicated to combating scams and cons. "We are looking to specifically identify crime and people who prey on the vulnerable."

Notice the definition of a new crime: fortune-telling crime. It has to do with being a predator. If someone requests your services, you must not provide them too aggressively and charge too much money. In fact, seen in its largest perspective, capitalist predation in the 21st century is the direct result of the business cycle. When times are good, people spend freely and are apt to purchase numerous services. When times turn tough, people regret purchasing some of those services. Now mix in one of the true predatory classes of Western society – the legal profession – and the noxious brew is ready to serve.

It gets still worse of course. People who make their living telling fortunes are not simply going to give up their profession and go away. They will struggle to adapt. Time tells us, "Some psychics, sensing which way the wind is blowing, are developing codes of ethics to ensure honest clairvoyance. Southern California medium Linda Mackenzie, for example, promises to not use her powers for personal gain or revenge. Allie Theiss, a psychic in Wooster, Ohio, posts a confidentiality agreement on her website and assures potential customers that readings are done without regard for a client's race, gender, creed, color or sexual orientation."

We can see from the above how the misbegotten progress of regulatory democracy poisons civil society. It is not enough to regulate the biggest industrial players. Eventually, the smaller company is going to be regulated (badly) and finally society's most helpless and hapless are going to be exposed to bureaucracy's bludgeon.

Not only that, but in fighting back, these poor individuals are bound to adopt the worst, or at least most politically correct, solutions that the West hast to offer. Thus the regulatory state seeps downwards like a powerful acid through all the strata of society until every part is equally poisoned. There is little entrepreneurship left unaffected. All are to be equally fearful. Every anodyne is equally absurd. And yet still it will not stop.

Conclusion: We asked a parenthetical question at the beginning of this analysis: What then? What happens when a democracy is so saturated with regulation that it virtually ceases to function? And when does that point come? When psychics are regulated? Or is there more to go? Actually, we don't think American (or Western) society has exhausted its regulatory enthusiasm yet. But surely that day must come.

Daily Dispatch: How to Make, or Lose, a Fortune in Resource Stocks

GoldSpeculator — Fri, 03 Sep 2010 14:22:52 GMT

September 02, 2010 | www.CaseyResearch.com

How to Make, or Lose, a Fortune in Resource Stocks

Dear Readers,

I have just finished writing today’s missive, and am circling back for a final edit.
As is often the case, when I sat down to write today’s musings, I had no idea what I was going to write about.

It came as a bit of surprise, therefore, that I ended up getting well stuck into two fairly long essays – one on some of the fundamentals of making the big money in small resource stocks. The second essay is observations on whether or not this is a good time to start buying real estate.

The first essay popped out when I tried, in the first draft, to explain the difference between this letter and the full-contact, bottom-up analysis that is found in our paid services. Then it took on a life of its own.

With apologies for the length of today’s edition, and some of the overt promotional pitches, I’ll pick up the story from there. You should be able to see for yourself how I ended up going off on such a tangent…

To illustrate the difference between the Daily Dispatch and our paid advisories, in this service we might provide updated research that makes the case for including gold in your portfolio. But that’s not the same thing as doing in-depth research on which of the gold ETFs do the best job of correlating with bullion, or which of the mid-cap and large gold producers offer the most compelling value based on their financial metrics, their reserve profiles and management. For that, you need our Casey’s Gold & Resource Report.

(Ed. Note: At just $39 a year, with a 100% money-back guarantee, if you’re not already a subscriber, then you are either not paying attention to what’s going on around you, or you’re hopelessly cheap. Either way, you are likely to miss out on one of the most powerful bull markets of your lifetime. More here. )

On the general topic of resource investing, I had a pleasant conversation with a financial advisor friend earlier this week. About five years ago, after a casual conversation about the sort of analysis Casey Research does, he subscribed to our International Speculator and Casey Investment Alert. Out of the blue this week he told me that, as a result of that conversation, he had opened an account to trade our recommendations – starting with a decent amount of money, in the six-figures. Today, five years later, his portfolio is, net, up over 400%. To say the least, he’s a happy camper.

For those of you new to Casey Research – and I’m pleased to report that there are a lot of you – a few words are in order as to how that sort of return is available.

It starts with what we have called in the past, the Speculator’s Credo. Simply, while most investors invest 100% of their money in the hopes of getting a 10% return – if they are very, very lucky these days – the intelligent speculator allocates just 10% of their portfolio to investments with the potential to return 100% or more.

The net result in terms of overall portfolio returns can be roughly the same, but, paradoxically, with a much lower risk profile… if you get positioned in the right speculative investments.

But where do you find such investments, you might ask.

For starters, you can look to the junior resource exploration companies of the sort followed in our International Speculator and Casey Investment Alert services. In essence, these companies look to leverage the knowledge of their management and geological teams, along with a relatively little amount of money, into making a large discovery.

A recent good example is provided by Ron Parratt and the team at AuEx Ventures. As the former head of Nevada exploration for a number of the major gold producers, Ron was responsible for finding over 20 million ounces of gold in that well-endowed state. Growing tired of dealing with large company politics, Ron decided to strike out on his own, and in 2005 he founded AuEx, with a mandate to build shareholder value by finding a large deposit of gold in his favorite stomping grounds of Nevada.

Now, let me ask you – if you headed up well-financed exploration teams in Nevada for close to two decades, do you think you’d develop a pretty good understanding about the geology of the state? Of course.

With his new company, Ron was able to put that knowledge to work for the shareholders in his micro-cap start-up company, as opposed to the suits at corporate headquarters. Right out of the box, Ron and his team drilled into a major new gold discovery. Fortunately, subscribers to the International Speculator were among Ron’s earliest shareholders, getting positioned back in October of 2005 at just 55 cents a share. Last week, AuEx agreed to be purchased, sending its shares to $5.77 – for a five year gain of over 949%.

Of course, while the returns early shareholders earned on AuEx were extraordinary, they are not all that unusual for this sector. Sure, spotting the winners early on takes a good deal of due diligence and hard work, and around every corner is a new mine field waiting to blow your investment up. But if you understand how this sector works, you can mitigate a surprising amount of the risk – leaving mostly the exceptional upside opportunity.

As I can’t leave you hanging with such a bold statement, I’ll continue.

How to Make, or Lose, a Fortune in Junior Exploration Stocks

The first thing to know about junior resource exploration stocks is that they are volatile. You can make 50% in a day, and you can lose 50% in a day.
This is due largely to the fact that they tend to be thinly traded. Thus, a whiff of good news, or bad, can overwhelm opposing trades. In the absence of a countervailing bid, the stock can move sharply until it reaches the point that someone is willing to step up and take the other side of the trade. If the news is bad, and there’s no bid, things get ugly really quick. Conversely, if the news is good – for example, the recent case of the AuEx buy-out – the volume of buyers rushing to get a hold of stock can blow the proverbial doors off. The chart from AuEx, just below, makes the point in a way that words just can’t.

Is volatility bad? Not hardly. If you play these stocks intelligently, that volatility can act like a portfolio rocket booster. The alternative: a widely-followed stock has little chance of surprising the market on the upside, and so can tie up your capital for a long period of time – plodding along while you remain exposed to general market risk with almost no hope of serious appreciation.

By contrast, a junior exploration company punching holes into interesting geology is all about the potential for surprise. If the surprise is good, your stock is headed for the moon. But a poor drill hole is not necessarily a ticket to the basement – not if the company has not overinflated expectations by aggressive promotion, and is following a methodical process in its exploration program.

The topic of aggressive promotion brings me to the second thing to know about junior resource stocks – namely, that most of them are borderline frauds. That’s right – the vast majority of the companies involved in the junior resource sector are headed up by management teams that have no special expertise in finding or developing economic deposits. Rather, what they’re good at is telling a really good story based on the loosest of “facts” in order to get investors to pay their overhead and, hopefully, allow them to trade out of their free or low cost shares at a big profit.

While there are a number of signs you can look for that will give you some sense of the management’s abilities and ethics, one is that the bad apples will tend to shift their stated focus between breakfast and dinner, depending on the flavor of the day. One minute, they are a junior gold company, the next they are on to the world’s hottest lithium find – then sometime after lunch, they morph into being a uranium explorer.

That’s not to say that there aren’t times when competent management teams are faced with the reality that their primary resource target is going to draw a blank, and move on – it happens all the time. The trick is to be able to discern the difference between a strategic retreat, and an opportunistic bunny hop into another area where the management has no real expertise or value to bring to the game.

To help our subscribers understand the difference between a competent explorer and a paper tiger, years ago we started the Explorers’ League. In order to be inducted into league, you have to have been responsible for a minimum of three economic mineral discoveries – but most of our honorees have a lot more than that. This is no small feat when you consider that probably 98% of the folks in the mining business will retire without a single economic discovery to their name.

Ron Parratt was among the first of our Explorers’ League Honorees – the subsequent success he had with AuEx has only once again confirmed the importance of backing winners.

The next thing to focus on is the size, and the general set-up, of the targeted resource. I saw an exploration company advertising on a major financial web site that was breathlessly talking about the 30,000 ounces of gold it had discovered.

While I suspect a borderline or even overt fraud, in the best case scenario building expensive advertising campaigns around 30,000 ounces of gold – a truly inconsequential amount – would indicate that management is hopelessly ignorant of the realities of the business. And the reality today is that, depending on a number of variables – location, geology, local politics, metallurgy, infrastructure, etc. – the minimum resource required for a company to have any chance at success is in excess of 1 million ounces of gold. But, really, you should only be focusing on companies with the very real potential to prove up 2 million or more ounces.

In exploration plays, size counts.

And don’t confuse gross metal value with anything remotely resembling reality. In fact, any company that would even mention the gross metal value of their resource is sending you a very strong signal that something fishy is afoot. For those of you new to the game, gross metal value is derived by doing the simple math of multiplying the companies’ ounces (or pounds, depending on the metal) in the ground by the current price of the commodity. Thus, a company with a market cap of, say, $50 million and a resource in the ground of one million ounces of gold might tout a gross metal value, based on today’s price of $1,250 per ounce, of $1.25 billion. The implication being that the market cap of the company will soon rocket in the direction of the gross metal value… wink, wink, get it while it’s hot and all that.

Now, I don’t have time to list all the ways that the gross metal value gets hammered down to a net that is a fraction of the total… and, more likely than not, even to the point where the deposit is uneconomic. But I’ll give it a quick try anyway.

For starters, there’s the cost of the infrastructure required to actually extract the mineral. While even the cost of building an open pit mine is huge, if the deposit is too deep for that, then you’re talking about going underground, which can be much, much more expensive. Depending on where the resource is located – and most new discoveries are very remote (Congo, anyone?) – and the depth and structure of the mineral resource, building out the mine infrastructure can cost in the hundreds of millions of dollars, and even billions. Then there are local politics. For instance, how much of the mine will the government want to keep for itself? How high will the taxes and royalties be? Is the area secure? There are projects I’m aware of that, in order to be built, will require essentially maintaining a private army to keep local revolutionaries and thugs at bay. How’s the metallurgy? Extracting metal from close to surface, oxidized, deposits can be relatively easy and effective, with recoveries in the 90% area. But if the target mineral is bound up with all sorts of detrimental minerals, the processing costs will soar, and recoveries plummet… often to the point where the overall costs, and the challenges of disposing of the toxic waste, can torpedo even a very large project. Mining requires a huge amount of power… where’s it going to come from? Can you imagine the cost and hassle of having to build, say, 60 miles of power lines? How about if the deposit is located in a remote corner of the Yukon?

I could go on… and on… but you get the idea. There’s a reason that well over 90% of even legitimate resource discoveries never become economic mines. That doesn’t mean you can’t make money off of a discovery play – but if it has little chance of becoming a mine, then you need to be clear on why you own it, and when it’s time to sell.

So, how do you sort out the difference between the good guys, and the bad? And the good projects and the doomed? First and foremost, you have to live and breathe the industry. Then you have to have a deep network to use as a sounding board for your analysis. Our network includes the Explorer’s League Honorees, and, now, the Casey NexTen – up and coming young professionals under 40 years old who have already proven their ability to find mines. And it also includes leading brokers, financiers, mining executives, field geologists and numerous others… around the world. In addition to putting boots on the ground in the typically far-away places that new discoveries are found – so we can fully understand the geology, the local infrastructure, relations with the local community and the political environment, etc. – our due diligence process invariably requires in-depth discussions with individuals in our network who know the people and the geology involved in the new play.

That allows us to quickly identify the good guys who are known to use good process (and virtually all real discoveries emanate from good process) and are working on targets with the right geological address. That allows us to do a quick knock-out of something like 90 out of a 100 plays that are brought to our attention… leaving us free to focus on the 10% with a real chance of success.

Now, this may be sounding like a big push for you to subscribe to our more expensive services – and obviously I wouldn’t be unhappy if you did (and neither would you). But to make a lot of money in junior resource exploration, you don’t need to subscribe to one of our services – though we can certainly make things easier. Even so, I know a number of individuals who have made fortunes in the sector by taking the time to do the homework necessary to build a solid understanding of the industry and the key players.

The bottom line on how to make serious money as a speculator in anything – the junior resource exploration business merely provides a convenient example – is to identify a volatile, high risk, high return investment sector, and then get to know the sector intimately. By doing so, you can eliminate much of the risk… leaving you mostly with the huge upside. And, what risk is left, is very manageable.

And don’t forget – I’m talking about investing only a relatively small part of your portfolio… 10%, 20%? You can tuck the balance of your portfolio into assets with a much lower risk profile. These days, that might include gold, and, for the time being, cash.
I didn’t intend to do a dissertation on junior resource stocks, or speculations, today – it just popped out. Driven, I suspect, by the discussion with my friend – and by reading a lot of emails from a number of happy subscribers who owned AuEx… or Bayfield… or one of the other recent big winners uncovered by our team in this cycle.

There is, of course, much more to understand about the junior resource sector, but if you’re interested in the sector – and you should be – then the best way to proceed is take us up on a risk-free trial to the International Speculator. Click here for the simple details.

As you’ll see when you click on that link, at $199 per quarter, we’re not giving the International Speculator service away. That said, given the upside potential of the companies it follows, and the fact that you can try it for three full months and still get 100% of your money back if it doesn’t provide far more value than it costs – you have nothing to lose by giving it a try.

(The Casey Investment Alert, unfortunately, is currently closed to new subscribers. That’s because it focuses on the earliest stage nano-cap plays and special situations that simply can’t handle the volume that would be generated by a larger subscription base. Even so, for most investors, the International Speculator should be all you need. )

Observations about Real Estate

Recently, we have had a number of queries about real estate. And no wonder. For starters, real estate prices have come down. Plus, in an environment with next to zero interest rates, the idea of possibly picking up some income-producing property on the cheap holds a certain appeal to some. Then there’s the fact that real estate is very much a “tangible” – and so should hold up reasonably well, should the fiat currency system come undone, as we expect it will before this crisis is over.

The following, from reader and correspondent Ross P., considers the issue of home buying from an interesting angle.

My wife and I have been considering buying/building a house for a while now. After long months of searching, we have had to ask ourselves about the "value" of a home. I say this because my parents in 1972 purchased a 2000sq/ft home for $20,000. That was almost exactly what my father made per year at his job at the time of purchase. Is this ratio one to consider as a prudent homebuyer not trying to live beyond his means? I make about $150,000 a year and can't imagine purchasing a house here in Pittsburgh for that price and being happy with that purchase.
My parents sold their home in 2001 for $180,000, which is obviously 9 times what they paid for it. We are looking at homes in the low 300s to purchase and I can't imagine the sales price in 30 years being 9 times that price, which would be $2.7 million! So do you see my line of thinking?
Could hyperinflation cause the price to "appreciate" that same way over time? Is inflation what caused my parents home to return 9 times what they paid for it? The reason I wrote to you regarding this topic is that I thought maybe there was a future missive buried in this line of thinking. Maybe not, but if you have time I would love to hear your thoughts on home purchasing at this time.

In response, I have to point out the obvious that all real estate markets are local. Simply, unless it’s a mobile home, you can’t pick your home up and move. So, for example, you could offer me a house in downtown Detroit for free, and I wouldn’t take it. But a house up the road from me just traded hands at over a million dollars (for the record, a 25% discount off of the offering price.) So where, and when, to buy, will largely depend on local market conditions… and the value proposition of the real estate on offer.
That said, given the dismal outlook for the U.S. economy, and housing in particular, if you’re going to buy today – you should only do it on your terms. Don’t let a real estate agent push you into a quick decision, or into raising your bid. Someone might beat your offer, but with the large housing inventory, the odds are good another dream house is available just down the block.

Now, as to the inflation question. If you do the inflation calculation, then based strictly on the government’s debasement of the currency over the last 30 years, the $20,000 that Ross’s parents spent in 1972 is the equivalent of $107,000 today. Given that they sold the property in 2001 for $180,000, confirms that there was more than inflation going on.
As you can see in the chart just below, while they sold it early on in the housing bubble, by 2001 housing prices – encouraged by the Fed’s loose money policies, and a collapse in lending standards – were already on their way to the stratosphere.

While much of the appreciation in Ross’s parents’ home can be attributed to currency debasement, it is reasonable to attribute the additional appreciation to the general housing bubble and, finally, positive local market conditions.

But that was then, and this is now. Is now a good time to buy? Again, with the caveat that all markets are local, my general sense is that it’s too early, but maybe not by much.
Weighing in on the “wait a bit longer” side of the argument is the large inventory of homes. And while that inventory is high, it is likely understated due to the shadow inventory of houses owned by fed-up sellers who have pulled their homes off the market in order to rent them and off-set some of their carrying costs while waiting for better days. In addition, there are millions of houses either in foreclosure, or which will be before too long, adding to the inventory.

On the demand side, high unemployment, a sluggish economy and the end of government home purchase incentives, home sales are falling again – indicating no significant decrease in house inventories any time soon.

On the flip side of the argument, today’s mortgage rates are unnaturally low – and so, unlikely to last. When they begin to rise again, they are likely to rise a lot, and in relatively short-order. First and foremost, there is no way the government’s benchmark rates can continue to bump along next to zero, especially not with the amount of debt and deficits we’re running. And even a return to a rate close to the long-term norm will have a devastating effect… starting with mortgage rates (and, as a knock on consequence, house sales and prices.)

Secondly, something like 95% of all new mortgages are currently being purchased, or otherwise guaranteed, by Fannie Mae and Freddie Mac. As you don’t need me to tell you, those two organizations have essentially been nationalized and are broke and doomed to fail. Simply, outside of a full-on communistic system where all property is the property of the state, the government can’t be the mortgage lender of first, second, and last resort.
In time, as Fannie and Freddie are revealed for the scams they are – followed by another trillion dollar bail out – the government is going to have to extricate itself from the mortgage business, which will result in rates being set by the market and not by government dictate.

Thus, buying a piece of property today with a fixed rate mortgage of just over 4%, would be about as cheap a mortgage as you’ll ever get… now, and for the balance of your lifetime.

What about inflation? Though one is tempted to add the likelihood of a big inflation to the “buy now” side of the balance sheet – because property is tangible – my sense is that it’s mostly a moot point. While Ross P. can’t foresee a house that sells for $300 thousand today being worth $2.7 million in 30 years, not only can we foresee that happening – we’d be surprised if that was all it sold for. Of course, my reference point is today’s currency units; in 30 years, much fewer “new dollars” will likely be necessary.

That’s because the past 30 years represent the salad days of the current fiat monetary experiment. The fun part, if you will, with everyone feeling wealthier because they had so many more dollars in their bank and brokerage accounts, and because the things they owned that were priced in dollars – Ross’s parents’ house, for example – had appreciated in nominal terms. The next 30 years, however, will include the dark years where the fiat monetary system comes unglued.

When that happens, some analysts expect that the dollar price of sound money – gold – will rise to $5,000 an ounce. Other analysts think it could go much, much higher than that. I don’t know, and to some extent, as long as I have a sufficient position in gold, I don’t care. That’s because the dollar is just a piece of paper with some numbers on it. As long as my gold, and other tangible assets I own, continue to hold their purchasing power, even as the number of zeros on the dollar expands – I’m good to go.

As a tangible, the price of your real estate is likely to rise in dollars’ terms, but only because the dollar is falling. However, the premium that Ross’s parents received as a result of the housing bubble will not rematerialize in our lifetimes. The overbuilding of the recent bubble years, coupled with fairly straightforward demographics related to the baby boom and bust – along with the inevitable return to sane, versus insane, lending standards – will conspire to keep the value of homes, regardless of their price in dollars, at or well below current levels for years and even decades to come.

So, no easy answer to the question of whether now is the time to buy. As with most things, it comes down to a personal calculation, based on how much you can comfortably afford to pay. By extension, that requires further contemplation as to how confident you are that your income and net worth will continue to allow you to afford the payments well into the future. Of course, in addition to your mortgage payments, that calculation has to take into account property taxes, which are going up, as well as maintenance, association dues, and more.

And, because all real estate markets are local, you also need to do some serious due diligence on the outlook for local markets. In Ross’s general neighborhood, Harrisburg, Pennsylvania just defaulted on a $3.3 million municipal-bond payment, and Philadelphia’s finances are also in poor shape – so, before buying, he should do enough research to be confident that the neighborhood isn’t going to deteriorate.

Finally, one more reason why we may not have to wait overly long before real estate becomes at least a rational investment. And that reason is that there is a lot of money on the sidelines just now, both in the U.S. and abroad. Much of that money is in cash, and much is in bonds – a disaster in the making. As interest rates start moving up, and the fiat currencies start to come down, investors will become fairly desperate to get out of bonds and into pretty much anything with a discernable heartbeat. To the extent that housing prices have fallen by another, 20%?, 30%, will be the extent to which it is again considered a safe asset to own and some percentage of money will certainly begin to flow back into real estate.

So, personally, I would hold off buying real estate for the time being. At least in the post-bubble markets where the debt still really hasn’t been addressed (much of it now sits on the books of the Fed, and Fannie and Freddie), and where desperate governments will take advantage of the fact that you can’t pick up and move your house to raise your property taxes.

That said, I’m in the process of building a house in Argentina, a cash market where mortgages are almost non-existent. But that’s a story for another day.

That’s it for Today!

I didn’t intend on going on so long, but there you are, and there you go… I hope the discussion was of interest and value to you.

Tomorrow, I’ll almost certainly be shorter – as the kids have the day off, as well as Monday, for the Labor Day weekend. While I’ll show up here again tomorrow, Monday we’ll be taking a day off from publishing this missive.

Hopefully, if you haven’t done so already, you’ll actually take the time to sign up for the International Speculator today (more here).

Or, as the least, to the massively underpriced Casey’s Gold & Resource Report (more here).

While I know that I’m being a bit strident on the need to sign-up for one of our paid services, and you know that I have a vested interest in you doing so – I also know that because we offer a 100% money-back guarantee on both of those publications, we’ll only do well if you do well.

Otherwise you get a free look at our paid publications, and we get nothing. Seems a more than fair proposition to me, and our paid subscriptions really will help you get the most out of the current market environment.

Until tomorrow, then, thanks for reading and for being a subscriber to a Casey Research service.

David Galland
Managing Director
Casey Research

Attached Thumbnails

Tech Still Churning Along

GoldInvestor — Thu, 02 Sep 2010 03:16:39 GMT

Dear Reader,

Chris here. I know I said that David would be back today, but he�s still adding the finishing touches to our next edition of The Casey Report (due out Friday), so I�ll be filling in along with a couple of my esteemed colleagues.

Let�s get started�

You may have heard that semiconductor chip maker Intel just agreed to buy Infineon�s Wireless Solutions Business (WLS) for approximately $1.4 billion in cash. WLS is a leading provider of cellular platforms to top-tier global phone makers. And with this purchase, Intel is looking to move beyond chips that serve as the calculating engines of PCs and into the smartphone market.

To this news, you might respond, so what? But I think the deal embodies what could be seen as a fundamental shift in the market from PCs to smartphones. And that�s profound.

Microsoft started business with the vision of a computer on every desk and in every home. It pretty much accomplished that in the Western world. But the relatively new smartphone seems poised to overtake the PC in no time at all, particularly in emerging markets.

Although research firm IDC projects PC market growth in 2010 to ring in at 19.8% (well above the 3.0% growth seen in 2009), it forecasts annual growth to slow to 11.1% by 2014 and into single digits beyond.

Meanwhile, the smartphone market is growing at an annual clip of 50%, according to IDC, and is expected to continue robust growth for many years to come. A whopping 118.3 million smartphones shipped in the first six months of 2010, reflecting a 54% increase from the 76.8 million units that were sold in the first half of last year. And analysts at ABI Research project smartphone sales to double from about 200 million units this year to more than 400 million units in 2014, which indicates forecasted compound annual growth of 20% for the next four years.

Quite frankly, ABI�s forecast of growth in the smartphone market is probably on the low side. Consider that industry specialists at Frost & Sullivan expect that close to 500 million smartphones will be sold in Asia-Pacific alone in the year 2015. That would easily put worldwide annual sales in the ballpark of 700 � 800 million.

The point is that as smartphones get smarter and more affordable, and 4G service expands, we expect to see smartphones taking the place of PCs for a growing number of consumers. And this trend may already be emerging (especially in emerging markets) as evidenced by the relative expected growth rates in the years ahead and by deals like the Intel/Infineon one cited above.

So it�s possible that a few years down the road, many consumers will forgo even owning a PC and will rely on a smartphone as their primary computer instead. I can�t say I�ll be one of those people, but it�s a paradigm shift worth considering.

With all this talk of smartphone growth, I figure we should continue a bit with this (for once) positive tone and talk briefly about perhaps the one wealth creation engine in the U.S. that is still churning along, despite the state of the overall economy and all the bearish news you hear from us. That wealth engine is technology.

Over the past decade, while the overall market was weakly limping along, these companies have been steadily growing revenues, adding jobs, and spewing profits. At the same time brash startups were reinventing news, entertainment, communication, medicine, and virtually every other aspect of our work and home lives, promising to deliver still more growth even in this weak economy.

Technological development is like a force of nature. It�s impersonal and implacable. It doesn�t care who controls Congress or chairs the Fed. It has been the stuff of American life for a century � from the assembly line to the smartphone. Most importantly, it�s done what a successful sector of the economy is supposed to do, profitably create things of value to society, and thereby creating tangible wealth.

Consider that only 30 years ago, five of the largest 24 companies in the U.S. in terms of market cap � Apple (#2), Microsoft (#3), Cisco (#15), Google (#19), and Oracle (#23), tech companies all � either hadn�t gone public or didn�t even exist.

From the 1980s to today, General Motors slid steadily downward, racking up billions in losses that culminated in a painful bankruptcy/bailout. Over the same period, a handful of geeks from Seattle grew their dorm-room startup, Microsoft, into a global software empire with over $60 billion per year in revenue. Along the way, the company turned four employees into billionaires and an estimated 12,000 into millionaires, while amassing some $205 billion in equity for shareholders.

In 1990, Countrywide Credit emerged as the nation�s leading mortgage banker. That same year, networking company Cisco Systems went public at a split-adjusted $0.08 per share and helped to usher in the Internet age with its routers and switches. Countrywide disappeared into Bank of America in 2008, after its credit rating was slashed to �junk� by Standard & Poor�s; Cisco now employs over 65,000 people and has created over $120 billion in market value.

Over the past 10 years, the airlines posted loss after loss, received numerous government bailouts, and saw the XAL airline stock index fall from 175 to 35, erasing billions in shareholder value. Meanwhile, a little Silicon Valley firm with a rather silly name, Google, built a $25 billion a year advertising behemoth and rocketed its market cap to over $140 billion.

And the list goes on.

Yes, we had the tech bubble burst in 2000. But that just put a well-deserved end to indiscriminate �tech� investing. To be successful in the sector today, you have to put in the time to separate the good companies from the bad; just like it should be. Even so, there are more opportunities than ever to use this sector to build personal wealth.

Readers of Casey�s Extraordinary Technology have already realized five separate gains in 2010 that were each at least 40%, the most recent of which was generated over a mere one-week time frame. And we still have plenty of other stocks in our CET portfolio with just as much or more potential upside, with at least one new pick coming each month down the road. If you�re interested in learning more about tech and tech investing, and want to know which tech stocks to buy now, sign up for a risk-free trial of Casey�s Extraordinary Technology. Details here.

With that shameless but sincere plug, let�s move on�

Another House Call

By Kevin Brekke

We last scrutinized the Case-Shiller numbers in an April Dispatch in reaction to media headlines making rosy claims based on a rather narrow event horizon and tortured syntax. At the time, an uptick in a minority of constituent housing markets had the 20-city index sporting a year-over-year gain. Yet, looking at the underlying markets individually revealed that multi-month declines had simply been interrupted by a price hiccup, and we noted:

�Both indexes might be higher than they were a year ago, but both have been in a downtrend for the last 5 consecutive months. In fact, 15 of the 20 cities tracked have seen their index fall for between 3 and 7 consecutive months.�

The Case-Shiller index is back in the news following the release of its latest measure of home prices for June 2010. Both indexes showed small gains for the third consecutive month, with the 20-city and 10-city indexes back to their Dec �08 and Nov �09 levels, respectively. And on the surface, when stated thusly, it gives the impression that housing has bottomed and is on the mend. But let us take another look, this time stepping back a few paces to gain some perspective.

A single chart showing all 20 index cities would resemble something begging for sauce and meatballs, so we broke it down into groups for clarity. The next five charts plot each index city, plus the indexes themselves, starting at their price peaks through June 2010.

Group One: Los Angeles, San Diego, New York City, Washington DC, Boston.

Group Two: San Francisco, Portland (OR), Miami, Tampa, Seattle.

Group Three: Denver, Minneapolis, Charlotte, Chicago, Dallas.

Group Four: Detroit, Atlanta, Phoenix, Las Vegas, Cleveland.

And lastly the 10-city and 20-city indexes:

At best, the charts depict a housing market that lacks direction, modulating in a narrow channel with the latest blip tracing higher. We would not wager the deed to the farm that a housing bottom is in and recovery has taken hold. To the contrary.

In our view, and as we forecast, the homebuyer tax credit lent temporary buoyancy to a sinking market. It is not a coincidence that the government-subsidized program to boost home sales that ended in April spawned a moderate rise in prices that began the same month.

Less well known is that the deadline for closing a sale was extended from June 30 to September 30, 2010, with the stipulation that a binding contract be in force by April 30. With credit tight, demands for higher down payments, and borrowers struggling with low credit scores, the up-for-reelection Congress is doing all it can to strong-arm these sales through to closing.

In fact, the free fall in house prices was only stabilized with successive government intervention schemes and billions of dollars in stimulus. First came the American Recovery and Reinvestment Act in early 2009, followed by the First Time Home Buyer Tax Credit later that year. The tax credit proved so successful, it was modified and extended into 2010. Whether or not housing can sustain this momentum without continued CPR administered from Washington will be revealed soon.

The missing ingredient to a recovery in housing, and the general economy, is of course jobs � it�s kind of hard to buy a house without one. The last chart above hints at this, with the recent dip in the unemployment rate coinciding with a rise in house prices. However, the recent rash of bad news regarding the sales of new and existing homes portends a resumption of weak house prices in coming months. We will continue to monitor housing and send along our observations in this daily letter.

Regulation to Nowhere

By Vedran Vuk

China has some serious economic issues, but many are pointing to the wrong problems. A common culprit is the vast government spending that has created empty cities such as Ordos on the Mongolian border.

At first, the reckless spending on the empty city seems like the apex of government waste. But in a way, this isn�t so bad. In fact, it is a lesser evil as far as government expenditure goes. The United States has had similar projects on a smaller scale, such as the Alaskan bridge to nowhere.

Though many were outraged by the bridge, the spending could have been worse. Think about it this way. The bridge to nowhere would have cost nearly $250 million. The result would have been a redistribution of funds to a select few Alaskans and a useless bridge. Sure, it�s a waste. But suppose that instead, the government gave an additional $250 million to the Environmental Protection Agency or to the Internal Revenue Service to hire more employees.

With a bunch of new environmental busy-bodies to concoct and enforce regulations, we�d certainly be worse off. They would spend their time harassing and intimidating mines, power companies, and other productive industries. As a result, it would become more difficult to operate these important businesses. With more restrictions and obstacles, jobs are lost and costs increase.

The same goes for the IRS. What�s worse for the economy � a bridge to nowhere or a thousand new tax agents?

While the bridge to nowhere received loads of attention, few camera crews are present for the most wasteful funding marked for regulatory bureaucracies. Government intervention and regulation are the real problems in the economy. If everyone in D.C. was paid $150K a year to dig a ditch the size of North Dakota, we�d be all better off. Their giant ditch would be a complete waste. But they would be away from their usual schemes and regulations. In a sense, the bridges to nowhere and the empty Chinese cities keep the stupids occupied.

Even today, our primary problem isn�t necessarily the stimulus spending. In fact, one could argue that the stimulus has had little to no effect. It�s the Federal Reserve�s intervention in the economy that caused the crisis and has acted to prolong it as well. Also, the new financial regulations threaten the competitiveness of America�s financial sector. Despite our problems, people around the world still entrust their savings and finances to New York City. Any threats to this status quo destabilize the whole economy. Furthermore, stricter derivatives regulations could negatively affect businesses from Coca Cola to Morgan Stanley. Excessive expenditure is waste. But regulation is economic destruction.

The same goes for China. The main problems are not the empty cities. The extreme monetary manipulation by the central bank is the biggest threat of all. With a vast increase in loans and the money supply, China has spawned another real estate bubble sure to pop at some point.

The main problems during the Great Depression were also intervention and regulation. Yes, our spending today could match FDR�s, but the regulations still don�t. During the New Deal, nearly every profession had wage controls. Price controls covered many industries. During the war, rationing further hampered the economy. Crops and animals were burned and slaughtered to manipulate agricultural prices. Tariffs stifled world trade. Anti-trust laws bullied the most productive companies. A businessman could not start almost any project without first gaining the approval of bureaucrats. The damage caused by spending on make-work projects was nothing compared to the economic devastation caused by these policies.

Are there better places to put money than a bridge to nowhere? Of course, but there are far worse places as well. If money has to be spent, I�d rather it go toward a bridge to nowhere or an empty city than straight into a regulatory agency.

That�s It for Today

Chris again. And that, dear reader, is that for today. A glance at the screens before I go, and I see that stocks surged upward today on seemingly upbeat economic reports from China and Australia and an unexpected rise in the U.S. manufacturing index. The major stock indexes are up about 2.5% as I write. Meanwhile, gold is holding strong above $1,246/oz, and crude is up a bit at just under $74/bbl.

Also, in case you missed it, auto sales figures are back in the news. And they�re not pretty. According to this article from Bloomberg, U.S. auto sales in August were the slowest for the month in 28 years as model-year closeout deals failed to entice consumers concerned the economy is worsening and they may lose their jobs. No kidding, huh?

Now I must run. David will be back with you tomorrow. Until then, thank you for reading and for subscribing to a Casey Research service!

Chris Wood

Casey Research, LLC

An Exception in Equities

GoldInvestor — Thu, 02 Sep 2010 03:06:25 GMT

(Doug Casey, interviewed by The Gold Report)

Editor's Note: Just recently, our friends at The Gold Report interviewed Doug on his thoughts about the precious metals bull market, how high gold will go, his views on gold stocks, and much more. Some of what he says below is not new to longtime readers, but we think his comments on gold investments being a potential exception to the rule for what's coming are well worth bringing to your attention.

* * *

The Gold Report: Doug, at a recent conference you said that the U.S. ought to default on its national debt now. Why that rather than letting it play out?

Doug Casey: Several other things almost equally radical should be done besides defaulting on the debt. I recognize that an outright default is most unlikely, but the national debt should be defaulted on for several reasons.

To start with, once the U.S. government defaults on its debt, people will think twice before lending it any more money; giving politicians the ability to borrow is like giving a teenager a bottle of whiskey and the keys to a Corvette. A second reason is that the debt is an albatross around the necks of the next several generations; it's criminal to make indentured servants out of people who aren't even born yet. A third reason would be to overtly punish those who have been lending money to the government, enabling it to do all the stupid and destructive things that the government does with that money.

The debt will be defaulted on one way or another. The trouble is they're almost certainly going to default on it through inflation, by destroying the currency, which is much worse than defaulting on it overtly. That's because inflation will wipe out the relatively few people who are prudent in this country, those who are actually saving money. Because they generally save in the form of dollars, they're going to wipe them out financially.

It's just horrible. Runaway inflation will reward the profligates who are in debt – people who've been living above their means. And punish the producers who've been saving and trying to build capital. That's in addition to the fact it will destroy millions of productive enterprises. A runaway inflation is the worst thing that can happen to a society, short of a major war. They just should default on it honestly, as it were.

TGR: But your belief is we'll try to inflate our way out of it to pay for it.

DC: Don't say "we." Say the U.S. government. I don't consider myself part of the problem. Americans have to learn that the government isn't "us." It's an entity that has its own interests, its own life, its own agenda. It views citizens as milk cows – or perhaps even beef cows – strictly as a means to its ends.

TGR:Whether it's overt or by default, doesn't that end up in the same place down the line?

DC: There are two ways they can default – one by saying, "We don't have the money and we're not going to pay you," and the other by continuing to print up money and giving people the number of dollars that they're owed, except the dollars are worthless. The first alternative is by far better, for many reasons we can't fully explore now. But it's going to be traumatic either way.

TGR: But the assumption that we could actually just print more dollars and pay off the debt implies that somewhere the debt will stabilize.

DC: Oh no. It doesn't have to stabilize. To pay interest on the national debt, and to pay for additional spending, all the Federal Reserve has to do is buy bonds from the U.S. government. It doesn't have to stabilize at all. The government is most unlikely to cut back on its spending, most of which has become part of the social fabric – Medicare, Social Security, unemployment benefits, food stamps, corporate bailouts, continuing foreign wars, domestic "security"…These people are crazy enough that it could get like Germany in the ‘20s or Zimbabwe a few years ago.

TGR: At what point do we tip over and turn into a situation such as Zimbabwe or the Weimar Republic?

DC: At the moment we're in an economic twilight zone or, if you wish, the eye of a hurricane. There is apparent stability in the economy. The stock market's high. The bond market's high. Only the real estate market is in visible trouble. Retail prices are level; they're not going up and maybe they're even going down in some cases. This is a temporary situation. We will inevitably – and soon – hit the other side of the storm. At some point those trillions of dollars created by the U.S. government – and many other governments around the world have created trillions of currency units – are going to have an effect. When will that be? The timing is uncertain. But I think it's going to be soon.

TGR: Will it be rapid?

DC: If these things were perfectly predictable, it would be easier to dodge the bullet. This is an almost unique time in world economic history, and I think we're not only going to have economic consequences, but social and political consequences, and very likely military consequences. So hold on to your hat.

TGR: To protect what individual wealth we may have, you've recommended selling real estate and renting, holding assets outside the United States, owning gold, etc. When we're out of the eye and in the thick of this economic hurricane, what types of equity investments should people be holding?

DC: Now is a very bad time to have most kinds of equities; stocks in general are very overpriced, by almost every parameter. I'm not looking to sell my gold until I can buy solid blue chip stocks for dividend yields in the 8% to 10% area. That's after they cut their current dividends. Although it's certainly not the bargain it was 10 years ago. Nonetheless gold will go higher. Stocks will go lower. I don't know exactly when I'll sell my gold and buy stocks, but it will be when there's a panic into gold and when stocks are bargains. I'm sure I'll be afraid to make the trade when the time comes – but good trades almost always run counter to your emotions. Perhaps the tipoff will be when Newsweek or Time – if either still exists then – run a front cover with a golden bear tearing apart the New York Stock Exchange.

I think it will be a generation before American real estate is a solid buy again. And the world at large will likely have quite a different character then.

TGR: I take your point about equities in general, but are you also staying away from gold equities? Or do you maybe see an opportunity there?

DC: They're a special situation; on the one hand they are a play on gold, but on the other hand they're stocks. There's an excellent chance that with the trillions of currency units being created, the government inevitably will wind up inflating other bubbles. There's a very good chance for a bubble in gold and a very big bubble in gold stocks. So I would say that they are an exception to other equities. We could see these juniors go up by an order of magnitude or more, even while most other stocks are going down.

Historically, junior resource stocks are the most volatile class of securities in existence.

TGR: Might other sectors also be in that situation?

DC: My crystal ball is hazy, but it seems to me that junior resource stocks are the best speculative place in the equities market. There'll probably be others, but I don't see them very clearly at this time. I'm waiting to see what materializes. You have to look at all markets of all types, everywhere in the world, to find things that are overpriced, as well as things that are underpriced.

Most of the time the trend in any given market is uncertain. I prefer to act only when, in my subjective opinion, the odds are greatly in my favor, and when the potential return is a multiple of my investment. In other words, most people invest 100% of their capital in hope of a 10% return. I prefer to wait until I can invest 10% of my capital for a 100% return.

As to what's going to happen over the next few years, I feel confident that we've entered into the Greater Depression in earnest. It will be an extended period of time when most people's standard of living drops significantly. But as I said, I think there's an excellent chance of a bubble igniting in resource stocks. That will build on the bubble that's going to come in gold.

High levels of inflation make "investing," in the Graham-Dodd sense of the word, very hard. And inflation makes speculation almost necessary. Just don't confuse speculation with gambling – they're very different. Speculation is the art of capitalizing on politically created distortions in the market.

TGR: What's your definition of resource stocks? For some, it's very broad and includes metals, agricultural commodities, and such. Are you referring specifically to gold?

DC: I'm most friendly toward gold; it's the only financial asset that's not simultaneously someone else's liability. I'm friendly toward silver, too, because silver is kind of poor man's gold. I'm very friendly toward oil because I do believe a good, solid argument can be made for what was first defined by M. King Hubbert as "peak oil." Also, oil is likely to be a major player in the next major Mideast conflict. I like uranium; nuclear is certainly the safest, cheapest, and cleanest form of mass power generation.

There's an excellent case to be made for agricultural commodities in general, and live cattle in particular. I'm not very friendly toward base metals such as lead, zinc, copper, aluminum, iron, and so forth. Usage of industrial metals could drop considerably in the ongoing depression.

TGR: You mentioned earlier that you thought it would be a generation before real estate represents a good investment again. Many economic theories, though, tell us that real estate is a good thing to have in an inflationary environment. How do you reconcile those two schools of thought?

DC: The problem is that we've just finished a decade-long real estate boom. Actually, there's been a property boom, largely driven by debt, since the end of World War II. There's been immense overbuilding and it's got to be absorbed. A lot of the overbuilding will have to be bulldozed, quite frankly, because it's completely uneconomic. I think the economic contraction we're going in to is so serious that in this country you'll be able to buy real estate for back taxes, much like in the last depression.

But it's much more serious than what happened in the 1930s when real estate taxes were de minimis. Now many people have to pay $10,000, $20,000, even $30,000 a year in taxes on their houses before they even start paying the mortgage and the utilities and maintenance. And municipalities are likely to try raising the mill rate, because they're largely bankrupt, and assessed values are way down.

There's a great deal more I could say about what's yet to come in the real estate sector. But let me just say the real estate bubble has a long way to deflate yet.

TGR: Is it both residential and commercial or is it worse in one sector?

DC: That's tough. Is emphysema worse than Parkinson's? I suspect, however, that commercial is going to be worse than residential.

People's shopping habits are one of the things that the Internet has changed and will continue to change. It makes more sense to buy things online and have them delivered to you, than to take the time and expense of going shopping, and the merchant having to deal with retail space, inventory, a geographically limited clientele and so forth. I wouldn't be surprised to see prices on a lot of commercial property come down 80% or 90%. You'll see a lot of properties permanently shuttered. That's a disaster for owners, who will still have to pay taxes. There will be no money for maintenance.

TGR: We spoke earlier about inflation and the likelihood of the U.S. government printing its way out of debt. Do you see a point in time where the United States or even other governments will go back to the gold standard?

DC: It's both essential and inevitable. That's because they have no reason to trust one another. They need a medium of exchange and a store of value that's not faith-based.

All the other governments of the world know that the U.S. is bankrupt and the dollar is nothing but a floating abstraction. Why should they hold billions or in some cases trillions of these things on their balance sheets? They're going to go back to gold because it's the only financial asset that's not simultaneously somebody else's liability.

It's not because gold is magic in any way. It's just because it has characteristics that among the 92 naturally occurring elements make it uniquely well suited for use as money. It's durable. It's divisible. It's convenient. It's consistent. It has use value in and of itself. And it can't be created out of thin air by some government. It's a better combination of those things than any of the 92 elements. It's infinitely better than paper. So yes, I think they'll go back to gold within this generation.

TGR: You were speaking of buying things online. Most people today don't even use paper bills. We do everything electronically in terms of banking. Aren't those properties of gold that you described irrelevant in the electronic era?

DC: To the contrary. Gold is an asset. You can put it in your bank account and transfer it. You can buy and sell it electronically. The fact that it can be transferred electronically today makes it a better money than ever before. So no, not at all, gold is quite relevant. It's not in any way an anachronism. I pity fools like Bernanke and Geithner who don't understand that. If they totally destroy the dollar, they may end up hung by their heels from a lamp post.

TGR: You said you're very partial to oil and uranium. Are you attracted to any other energy resources?

DC: Yes. My friend Rick Rule has justifiably and very intelligently been a big promoter of geothermal energy, because it's actually superior to even nuclear in some ways. It should have a huge future. There's very little geothermal being generated right now, and a great deal could be generated in the future. Many other forms of power generation are possible – tides, ocean currents, heat differentials in the ocean, solar microwaved down from collectors in high orbit – there are many, many innovative technologies out there.

Of course as technology keeps advancing, conventional solar will become cheaper and more efficient. Energy shortages, and high energy costs, are totally caused by political issues. In a true free market world they wouldn't even be worth talking about.

TGR: But will technology-reliant sources such as solar and wind power be able to sustain through this downturn that you're expecting?

DC: Well, most of the power we have is now generated via coal. Coal is very problematical as an energy source – it's dirty, bulky, and could be used for better things than burning. Stupidly, most new plants will be running on coal, not nuclear.

That said, you can expect that the average guy will be cutting his standard of living, driving less, turning down his heat in the winter, turning down his air conditioning in the summer, and turning off the lights when he leaves the room. So I'm not sure that electricity consumption will be going up for years to come, especially with a lot of stores being shuttered and so forth.

Wind and solar are trivial sources of power. Good for certain applications in certain locations, but not suitable for mass power in an industrial civilization with anything like our present technology.

TGR: So if electricity consumption goes down... wind and solar are barely economically viable now.

DC: That's right. It's just a question of the alternatives. You weigh what you pay for a kilowatt hour on the grid versus what it costs an individual to put up private wind or solar, or for utility to put up commercial wind or solar. I see no reason to invest in these alternatives other than economics.

The way I see it, arguments made about saving the planet and so forth are basically ridiculous, even if naively well intended. All the blather about "carbon footprints" is scientifically nonsensical. It's not a matter of tree hugging. If you're paying more for something than necessary, you're misallocating capital. You're destroying capital. That's a real crime against humanity.

To me, it's strictly a matter of economics. If at some point technology makes a great breakthrough, maybe solar will become the best and cheapest power source; that would be wonderful. That's not the case right now. As I said before, maybe they'll be able to put solar collectors into geostationary earth orbit and beam down solar to earth by microwave. There are lots of possibilities for solar to become economic. It's just that right now, it costs several times what other forms of power do. It doesn't make sense, except in certain places, in certain applications.

TGR: Given that, would we expect to see any solar in your portfolio?

DC: If somebody makes a cosmic breakthrough, I'm happy to buy the stock. I'm certainly not inclined against solar on any philosophical grounds.

TGR: The Chinese recently announced that they will start selling gold coins through their banking system. What do you make of that? Is it really big news?

DC: I think it is. The Chinese know that one of the reasons Mao took over is because the government of Chiang Kai-shek destroyed the national currency. The Chinese can see the problems with the U.S. dollar. That it could blow up in their hands. They also see the problems they're creating for themselves by creating trillions of new renminbi. So I think that they're encouraging the average guy in the street to do some saving with gold so that if things go sideways with these paper currencies, the average guy isn't left too destitute and too angry. At least he'll have some gold coins. I think they're being quite intelligent about encouraging their people to buy gold.

TGR: What do you make of the fact that a country with a communist orientation encourages its citizens to buy gold, while the world's supposedly premier democracy does not?

DC: First of all, let's recognize that communism was a very short-term aberration in the 5,000-year grand scheme of Chinese history. Mao only ruled the country for about 30 years. Since the late ‘70s, China's been returning to its old ways. Everybody knows that the Communist Party in China is nothing but a scam for its members to cream something off the top of everything. It's ludicrous to say China is a communist country. It's easier to do business in China than it is in the U.S. – lower taxes, less regulation, fewer legal hassles.

In point of fact, the Chinese are reverting to the mean. For many centuries, up until the Industrial Revolution, China was much wealthier than the West. Now it's rising again.

As far as the United States is concerned, unfortunately it's going the other way. The issue has nothing to do with democracy. Democracy is just mob rule dressed up in a sports coat. It's much overrated. The U.S. government is becoming more powerful, and the U.S. is radically departing from the economic philosophy of free markets that made it great. It's simultaneously becoming more politically repressive. The Chinese are just reverting to their traditional economic philosophy, which is not communism, it's capitalist trade and production.

TGR: Presumably, participants will get a lot more of what we've been talking about at the Casey Summit that you have scheduled for October 1–3 in Carlsbad, California.

DC: For sure. We're going to be talking about specific ways to take advantage of the problems that we have today. It's important to remember that as the Greater Depression deepens, most of the real wealth in the world still will be here. It's just going to change ownership. The key for this conference is we're going to examine why things are the way they are. But perhaps even more important is how to capitalize on them, how to take advantage of them.

TGR: Of course you'll be at the conference too. And your lineup includes Bob Bishop, Eric Sprott, Richard Russell, Bob Prechter, and obviously Rick Rule.

DC: And Neil Howe, who with William Strauss wrote The Fourth Turning and Generations: the History of America's Future, 1584 to 2069. It's among the most brilliant, and original, analyses of long-term trends of history I've ever seen.

TGR: And I understand you'll be introducing the Casey NexTen. How does that complement your Casey Explorers' League?

DC: When Ross Beaty, Bob Quartermain, Simon Ridgway, and the other members of our Explorers' League come out with a new deal, it automatically carries a huge premium because they're proven commodities – highly technically competent, honest guys with good work habits, who have found and made economic more than three mines.

With the Casey NexTen, we've done a lot of work on finding the next generation, guys who have all the makings of these veterans, the young editions of our Explorers' League. With this group, you can still buy in cheap and get them as they're just moving into the most productive stages of their lives as opposed to moving toward retirement.

Getting to know them personally, which is possible for people who attend the conference, would be one of the most financially productive things that you'll be able to do if you have any interest at all in resource stocks.

-----

As Doug says, to weather the economic storm we're already in the midst of, gold and sound gold-related investments are the best ways to protect yourself. As the dollar and other fiat currencies decline further, and global economies are raking up mountains of debt, these precious metals instruments may well become the saving grace for any smart investor. Learn more here.

Oil�s Out - Find Out What�s In

GoldInvestor — Thu, 02 Sep 2010 03:04:05 GMT

Oil’s Out - Find Out What’s In

By Marin Katusa, Chief Energy Strategist, Casey’s Energy Opportunities

The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution.

June saw the 2010 launch of IEA’s biannual report, Energy Technology Perspectives. Speaking at the launch was Nobuo Tanaka, executive director for IEA. The Gulf oil spill, he said, could prove to be a tipping point in the world’s energy consumption habits. He added that the disaster serves as a tragic reminder that our current path is not sustainable.

As far as the IEA is concerned, this is probably a very important moment to start looking at alternative energy sources. If we, as a collective group of consumers, continue on the business-as-usual path, the scenario for 2050 is looking grim.

This baseline scenario sees carbon emissions rising by 130%, with power generation accounting for 44% of total global emissions in 2050. Oil demand will be up by 70% – that’s five times the oil production in Saudi Arabia today. I’ll leave you to imagine what this means from an energy security perspective.

The other scenario offered by the publication, known as BLUE Map, is the “target” scenario. It assumes that all carbon emissions will be reduced by 50% by 2050 and suggests the least costly way to get there. This 50% reduction, the IEA insists, is the absolute minimum, should we want to keep climate change within the more acceptable 2-3 degree change.

The main focus of this scenario is, of course, weaning the world off fossil fuels. Carbon intensity of energy use would have fallen by 64% by 2050. Demand for coal would drop by 36%, gas by 12%, and oil demand by 4%. Renewable energy would be providing a hefty 40% of primary energy supply and 48% of the electricity generated. As for cars, 80% will be electric, hybrid, or hydrogen-fueled.

And while the world is expected to reduce emissions by 50% by 2050 in the BLUE scenario, it is the OECD that will bear the real burden. Non-OECD countries can get away with just a 50% reduction; OECD countries are looking at cutting 70-80% of their 2007 emissions. This would mean that the electricity sector for these 32 countries would have be “almost completely decarbonized” by 2050.

A portfolio of technologies needed to achieve the carbon emissions under the BLUE Map scenario

So what needs to be done to make this work? Well, gird your loins – the “top priority” will be to increase energy efficiency, reduce energy consumption, and lower energy intensity.

But there’s also some exciting news. The revolution is already under way.

On a global scale, total investment into technology and its deployment between now and 2050 would be about US$45 trillion – 1.1% of average annual global GDP over the period. The good news is, that investment has already begun all around the world.

Even as China grudgingly accepts the mantle of the biggest energy consumer, investment dollars are being poured into renewable energy research. China has already surpassed the United States as the largest producer of clean energy, whether it be hydro, wind, solar, or nuclear.

Germany, Europe’s powerhouse, is lining up renewable energy to compete with nuclear. Currently getting 10% of its energy from renewable energy, Germany’s renewable numbers for 2020 are projected at 38.6% electricity, 15.5% heating and cooling, and 13.2% of the transport sector.

And in the United States, the Obama Administration has been pushing for, and encouraging, clean energy research and development since it came into power. On display are a variety of subsidies and loans guaranteed to tempt even the most conservative producer.

Whether it’s the 30% cash up-front that the government is willing to give renewable energy projects or the vast amounts of cash injections into various energy technologies programs, renewable energy is set to take off in America.

For those investment portfolios that have taken a hit from the BP and Enbridge oil disasters, the IEA report is only going to spur up greater interest in the renewables game. Knowing which companies are enjoying political favor from Washington to Berlin and are at the receiving end of substantial grants is a sure-fire way to repair the damage.

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Find out which renewable energy company – poised to take a moon shot – is Marin’s personal favorite right now. Read more here.

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New BIG Picture ED - Time to Go Global

GoldInvestor — Wed, 01 Sep 2010 03:23:27 GMT

Time to Go Global

By Chris Wood, Editor, Casey Research

Here at Casey Research, we really don’t enjoy being a buzz-kill. It’s just that we think it’s more important for investors to be well informed about the reality in which we find ourselves today than it is to be happy-go-lucky all the time.

The good news is that when the stuff hits the fan, as it has for going on two years now, it opens up a number of unexpected opportunities for profit. Even in the hairiest situations, there are ways to protect yourself.

Having said that, let’s start with the bad news…

If you live in the U.S., your taxes are about to get much, much, higher. And I’m not talking about the Bush tax cuts set to expire at the end of this year. I’m talking about a structural deficiency in the tax base that will force the spendthrift federal government to demand much more from the productive members of society, no matter who’s in charge of Congress and the White House.

Here are the facts.

Summary of Federal Government Receipts and Outlays
Fiscal Years 2009 and 2010 by Month ($ Millions)
	Receipts	Outlays	Surplus/(Deficit)
Fiscal Year 2009
October	$164,827	$320,360	($155,533)
November	$144,769	$269,970	($125,201)
December	$237,785	$289,540	($51,755)
January	$226,090	$289,547	($63,457)
February	$87,312	$281,171	($193,859)
March	$128,924	$320,513	($191,589)
April	$266,205	$287,112	($20,907)
May	$117,217	$306,868	($189,651)
June	$215,339	$309,671	($94,332)
July	$151,480	$332,160	($180,680)
August	$145,529	$249,083	($103,554)
September	$218,880	$264,087	($45,207)
Total Fiscal Year 2009	$2,104,357	$3,520,082	($1,415,725)
Fiscal Year 2010
October	$135,294	$311,657	($176,363)
November	$133,564	$253,851	($120,287)
December	$218,918	$310,328	($91,410)
January	$205,239	$247,873	($42,634)
February	$107,520	$328,429	($220,909)
March	$153,358	$218,745	($65,387)
April	$245,260	$327,950	($82,690)
May	$146,794	$282,721	($135,927)
June	$251,048	$319,470	($68,422)
Fiscal Year-to-Date 2010	$1,596,995	$2,601,024	($1,004,029)
Source: Department of the Treasury Financial Management Service

For a bit of a refresher and to update where we are, in the table above I broke down federal government receipts and outlays (revenue and expense) by month for fiscal year 2009 and year-to-date 2010.

As you can see in the table, we’re through three-fourths of fiscal year 2010 and the deficit is already over $1 trillion. At this point last year, the deficit was also just above $1 trillion. So you can bet we’re on track for a total deficit of between $1.4 and $1.5 trillion this year.

Just like last year, the huge deficit figure will be widely reported, even in the mainstream media. But a related piece of vital information will be glossed over (if reported at all).

This piece of information is the most crucial to why your taxes are set to skyrocket – and nobody is even bothering to mention it.

You see, the “outlays” column above comprises two types of spending: discretionary and mandatory. Mandatory spending, expenditures that must go into the U.S. budget, includes things like Social Security, Medicare, Medicaid, income security programs, and some others. And according to the Congressional Budget Office, mandatory spending reached $2.1 trillion in fiscal year 2009. What’s more, it increased more than 30% from the year before.

Now look back up at the table above. Notice anything?

Total receipts for 2009 were also $2.1 trillion. In 2009, for the first time ever, mandatory spending just about equaled total tax receipts.

That means that basically every single penny the federal government received in taxes last year (including individual income taxes, corporate income taxes, social insurance and retirement receipts, excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts) was already spent on something mandatory before it came in.

It’s also worth mentioning that while mandatory spending grew by 30% last year, tax receipts fell by 16%. So under the current tax structure, a gap will begin to grow where mandatory spending pulls away from total tax receipts.

What this all means is that your tax burden is sure to rise, significantly, over the coming years. That’s the government’s only choice at this point. You think it will cut discretionary expenses by any meaningful amount? Not hardly, it’s too politically damaging. And forget about legislation to cut mandatory spending until the system goes completely bust. In the meantime, both parties will try to kick the can further down the road by extracting as much as possible from you in taxes.

Now, here’s the good news…

Unlike the government, you do have a choice. You can “go global” and protect yourself by internationalizing your wealth through all the legal means available, making yourself a target that’s not easy to hit.

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For the past several months, we’ve had some of our best people working on a special report with the purpose of providing you everything you need to know to internationalize your assets and yourself. And it’s finally finished. You can read all the details here, incl. the 5 best ways of going global… at this point, this is not “Whenever you get around to it” advice anymore – the time to act is now, before new laws and regulations kick in that prevent you from getting your money out of the country.

Japan Revisited

GoldInvestor — Wed, 01 Sep 2010 03:18:28 GMT

August 31, 2010 | www.CaseyResearch.com

Japan Revisited

Dear Reader,

Chris here. David is still finishing up our new edition of The Casey Report due out this week, so I’ll be covering today’s Dispatch with ample assistance from a couple of my esteemed colleagues.

I read an article in The New York Times yesterday indicating that the prime minister of Japan, Naoto Kan, has recently proposed new stimulus steps to jumpstart the economy, while the Bank of Japan, under pressure from the government, further eased its already easy monetary policy.

Curious, I thought. Hasn’t Japan been engaged in government stimulus for the past couple decades? Why is this news?

The answers to those questions are: (i) yes, Japan has been involved in stimulus for quite some time; and (ii) it’s only news in the sense that it has yet to work.

As you can see in the chart below, the Nikkei has basically been in free fall for the past 20 years, from a peak of 40,000 at the beginning of 1990 down to about 9,000 today, with a couple drops below 8,000 along the way.

Not long after the Japanese stock bubble burst in 1990, the government began enacting stimulus measures to get the economy back on track. These measures amounted to dropping central bank interest rates to basically zero and flooding the system with debt in an effort to prop it up. Sound familiar? The result today is gross government debt equal to 250% of GDP.

So even though these Japanese “stimulus” measures have failed to work for the past 15 years, and the Japanese economy has floundered along accumulating more and more debt along the way, the wizards in Washington and at the Fed have chosen this very pattern to repeat. Maybe it will work this time…

I don’t have a crystal ball, of course, but I’d expect things in Japan and the U.S. to play out in a similar fashion in the near future. In addition to huge debt levels and virtual certainty of climbing interest rates not far down the road, both countries have the demographic problem of an aging population that must be subsidized by fewer workers per retiree each year. In Japan, the demographic situation is probably worse because their population is actually declining, while we’re still seeing modest growth in the U.S.

Another important difference to note is the fact that Japan’s bubbles have, for the most part, already burst. We’ve seen this to some extent in the U.S. obviously, but not to the extent you’d expect given all the malinvestment that occurred in recent boom times. In the end, I don’t know how much these differences will matter. It will be extremely difficult, if not impossible, for both Japan and the U.S. to handle their debt loads once interest rates start to rise, further shattering confidence in their respective currencies and pushing rates even higher.

Good Math Slices Bad Bologna

David sent me this article yesterday by Tom Naughton. It’s a good read because it addresses the importance of understanding math to know when you’re being lied to. Naughton’s warning: if you can’t do the math, researchers with an agenda will use lies and statistics to bamboozle you. Here are a couple of examples that Naughton provides about how “they” do it.

(Please note there is a common math error committed by Naughton in one of the examples, which I’ll address below. Also note that I’m not trying to imply anything about the examples provided except that they show how math can be used to mislead you.)

Scare people with percentages. When you see a percentage, you’re looking at the results of multiplication or division. But when you see the word “difference,” you are – if the researcher is honest – looking at simple subtraction. If a value goes from 20 to 22, it’s an increase of 10%, but the difference is 2. (Still with me? Good; you have a functioning brain.)

Multiplication and division can produce big, impressive-sounding percentages that are in fact nearly meaningless. Here’s an example that helped enshrine the “cholesterol kills” theory:

After a major study with the acronym MRFIT was concluded, the researchers announced that people with high cholesterol were over 400% more likely to die of heart disease. Ohmigosh!! Get me into an Ornish program, now! I must reduce my cholesterol!

That’s a big, scary number. Let’s see how they came up with it.

Over the course of the study, 0.3% of the men whose cholesterol was below 170 died from heart disease. Meanwhile, 1.3% of the men whose cholesterol was over 265 died of heart disease. Over 265?! Dead man walking! Buy your casket now and save!

And in fact, since 1.3/0.3 = 4.33, you could say that 1.3 is over 400% higher.

Now flip the numbers and look at the actual difference. In the low-cholesterol group, 99.7% did not die from a heart attack. Among the very-high-cholesterol group, 98.7% did not die from a heart attack. That’s a difference of 1.0%. In other words, if you go up the scale from low cholesterol to very high cholesterol (nearly 100 points higher), the real difference is that an extra 1 in 100 men died of heart disease. Not quite such a scary number, is it?

Wow people with percentages. Percentages work in the other direction, too. You’ve probably seen the Lipitor ads where Pfizer announces that this wonder drug reduces heart attacks by 36%. That sure sounds impressive … until you look at the actual difference.

In the study cited by Pfizer, men with known risk factors for heart disease took either Lipitor or a placebo. In the placebo group, barely more than 3% had a heart attack. In the Lipitor group, 2% had a heart attack. Use division, and you get that impressive 36% reduction. But the difference, once again, is 1 in 100, or 1%. Boy, that’s worth giving your liver a major smack-down.

There are other examples from Naughton’s article, but the two above seem the most prominent. And yes, there is a math error in the first example. The line “And in fact, since 1.3/0.3 = 4.33, you could say that 1.3 is over 400% higher” is not accurate. This is a common mistake people make to say how much bigger one number is than another, they forget to subtract out the initial number. Even though 1.3 is 433% of 0.3, it’s only 333% higher than 0.3. That is, increasing 0.3 by 333% gets you to 1.3; if you increase 0.3 by 433% you get 1.6. (My apologies if you’re well aware of this fact. But I see the mistake so often, I figured I’d mention it.)

Investors often make this mistake when calculating returns. They’ll buy a stock at $15, sell it for $45 (if they’re extremely lucky) and since $45/$15 = 3, they’ll claim a 300% return, while the actual return is only 200%. The easiest way to keep this straight is an easy-to-remember formula you can think of as: (Ending Investment – Beginning Investment) / Beginning Investment x 100 = Return Percentage.

Plugging the example above into the formula we see that (45-15) / 15 x 100 = 200%, the correct answer. Now, obviously there are more complicated formulas for calculating returns under different scenarios, but the one I’ve provided here is the answer to the most common problem.

Going back to Naughton’s article, his analysis is valid even though he made a math error while explaining it. By understanding the math and digging into the real data of whatever study is being reported on, you will be able to tell if you are being lied to. And that’s pretty important, in my book.

China and India: Still Hungry for Coal

By Marin Katusa, Chief Energy Strategist, Casey Research

One can only hope that the “Don’t shoot the messenger” adage is still popular in the international community.

UK-based consultants M&C Energy Group have become the latest to join the chorus of voices asking the international community to increase the pressure on China and India to switch to cleaner energy sources.

As far as energy analyst David Hunter is concerned, it is the Western businesses that are carrying the financial burden of reducing carbon emissions. China and India, on the other hand, are benefitting from much cheaper energy, and their companies don’t have to bear the costs of reversing the effects of global warming.

Mr Hunter, however, should steel himself for disappointing news. Industry experts are expecting anything but a cut in coal demand for the foreseeable future.

By their analysis, global coal demand – already at a record high – will remain strong even as the recession cuts down on oil and gas use. And the numbers are certainly matching up to these expectations.

India’s coal demand is expected to reach 653 million tonnes this fiscal year, with only 572 million tonnes expected to be produced in the country. The China National Coal Association expects demand to grow by 4-6% in 2010 and the coal consumption to expand to roughly 3.4 billion tonnes.

And with power-starved economies to feed and millions of people to lift out of poverty, neither country is going to take kindly to any interference with its energy agenda.

There are two different types of coal – in fact two different types of demand – when it comes to the coal market. Though they can’t be considered to be totally separate, the criticism levied against these two Asian tigers becomes somewhat blunted when we take this angle.

The first is for thermal coal, the cheapest and most popular way for emerging economies to produce electricity. Almost 75% of China’s electricity comes from coal-fired plants, but this picture is rapidly changing.

Irritated by the “world’s biggest energy consumer” sticker, Beijing is investing heavily – US$736 billion – into clean energy investment plans. The aim: increase the non-fossil fuel supply component to 15% of the total primary energy demand by 2020. So really, Mr Hunter’s desire for a less coal-intensive China might just come true. As for India, it never likes to be too far behind its Asian rival.

The second demand is for metallurgical, or coking, coal. This is what China and India really need – good-quality metallurgical coal, something that North America has in plenty. And this demand is not going away anytime soon.

For a strong economy, one needs strong infrastructure. For strong infrastructure, one needs steel. Steel is the backbone of an economy, and it is metallurgical coal that is used to produce the heat in 90% of the world’s steel production process. And for as long as the economy continues to blaze, it is metallurgical coal imports that will be stoking the furnace.

The heyday of the coal market is far from over. We’ve called coal the invisible bull market before; today it’s very much at the forefront of the market, and it isn’t going away. Coal suppliers know as well which side their bread is buttered. While traditional markets in Europe continue to struggle with their debt crises, China and India will be only too happy to race on ahead and pick up the slack.

[Ed. Note: No one knows energy better than Marin Katusa, Casey’s chief energy strategist and senior editor of Casey’s Energy Report. One of his previous coal picks jumped by 80%, handing subscribers handsome profits. Who will be the coal winner in 2011? Find out with a risk-free, 3-month trial with 100% money-back guarantee.]

The King May Throw You a Bone, But He Won’t Give Up His Seat

By Vedran Vuk

It’s hard not to get hopeful about a possible overthrow of the Democrats. But will things change as a result? In my opinion, yes and no. As an analyst for The Casey Report, I constantly analyze the past to discern future trends. In the last century, government has grown bigger and bigger, decade after decade. There’s no reason to expect an alternative outcome for the next decade. In this case, the trend is not your friend.

If an ETF or derivative tracked market freedom over the last century, it would probably be a penny stock by now. No one would get excited over an investment with a hundred-year track record of failure. And hence, we shouldn’t get too excited about political change.

Perhaps I’m wrong and this is the turning point. But just as picking the bottom of a stock is next to impossible, predicting the turning point for a two-century trend is even more improbable. For this reason, I will not be celebrating when the Democrats are booted out.

The nature of the beast will not change – no matter which party is in power. Economist Murray Rothbard put it best: “…the State is nothing more nor less than a bandit gang writ large.”

Many of my free-market friends say, “What a great line!” And then they quickly return to promising hope and change with a free-market flavor. However, I take the line quite literally. It’s not a funny jab at the government but instead a definition. The government is not some association where we hold hands and decide how to best run the country. The entire apparatus exists as an engine for wresting hard-earned goods from productive members of society. Millions depend on this gang writ large, whether through government contracts, agency jobs, or personal benefits.

Why, it’s not even difficult to find conservatives and libertarians living off the government dole. The richest counties of this country surrounding D.C. won’t relinquish their plush lifestyles for any ideology. Government employees, welfare recipients, and the government-made millionaires will fight tooth and nail for their money. The Tea Party soccer mom doesn’t stand a chance.

But some argue that this time, it can be done. Our positions make sense, the Tea Party has momentum, and things can improve. To an extent, this view holds some merit. After all, gangs of thieves can improve sometimes.

Could a decent person join the Bloods or Crips gangs in L.A and improve them? Sure he could. Occasionally, gangs do make peace treaties with each other. There are careless gangs that murder innocent bystanders in drive-by shootings, and there are those who assassinate their opponents with precision. A decent person could negotiate peace treaties and curb the violence. But what our reformist gang member can’t change is the nature of the gang.

Many larger criminal organizations perform good deeds for the public. Whether it’s giving out turkeys at Christmas or even building houses and soccer fields for the poor, as Pablo Escobar did in Columbia. The occasional kickback is the norm with large gangs and the governments. When the Republicans take over, they will likely throw out a turkey or two to the free-market mobs – most likely through a populist tax cut.

Of course, the D.C. free-market intellectuals will rejoice at these “victories.” However, these gains only work to disguise the enterprise’s true nature. The small respites from government growth build false hope in the government process. In reality, the government can change no more than can the Bloods or Crips. The king will throw a bone from his table to placate the masses, but don’t expect him to give up his seat.

Government has been and always will be crime and theft on a large scale. So, enjoy your Republican turkey when it comes, but don’t expect a revolution along with it. The road to serfdom continues. At best, our masters will allow a momentary pit stop on our march for yet bigger government.

That’s It for Today

Chris again. And that, dear reader, is that for today. You can see from the chart below that gold is off on a tear today, approaching $1,250/oz as I write.

Meanwhile, stocks are mostly flat, and oil is down a bit from yesterday at $73/bbl. But we’ll see what tomorrow brings. Speaking of tomorrow, David should be back at the helm of this Daily Dispatch by then, so you can look forward to that. Until then, thank you for reading and for subscribing to a Casey Research service!

Chris Wood

Casey Research, LLC

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Daily Dispatch: Get Well, Pete

GoldSpeculator — Fri, 27 Aug 2010 23:59:46 GMT

August 27, 2010 | www.CaseyResearch.com

Get Well, Pete

Dear Reader,

I spent a fair part of yesterday at the hospital, for a periodic check-up and to visit an old friend who has been laid up as the consequence of a serious accident that borders just on the edge of a statistical impossibility.

My friend Pete lives in a rural area with less than ideal cell phone reception. In order to get better reception, he walked out on his back porch just at the very millisecond that an errant bullet from a 45-caliber pistol, recklessly fired at a free-standing target half a mile away, was hurtling through the sky. It connected with his hand and jaw, with devastating results.

Fortunately, Pete’s remarkable bad luck was followed by a stroke of amazing good luck: at the time he was hit, a neighbor who has a full-time job as an emergency medical technician was haying Pete’s field. Being an EMT, he knew just what to do, and was on the spot to do it just in the nick of time to save Pete’s life.

As one doctor put it, my friend was the luckiest unlucky guy he’d ever met.
In any event, my buddy is a tough guy and, despite a lot of hardware attached to his jaw, looked surprisingly well. Recovery won’t be easy or short, but he’ll make it and come out just fine.

Since we’re on the topic of hospitals, I’d like to make a couple of other observations from my visit, the first of which you may find laughable in that it is so obvious.
Hospitals are full of old people.

Now, I know that many of you dear readers are, like myself, no longer in the spring of youth. But I’m here to tell you, if you want some hard perspective on what the final innings of life hold, just swing by your local hospital. Why, it’s like stepping into a remake of George Romero’s Night of the Living Dead, complete with hollow-eyed old folks staggering about in hospital gowns, clinging to walkers, or rolling around in wheelchairs looking for a nurse.

Of course, there’s a smattering of unfortunates from younger generations present – but they are very much the exception to the rule.

Besides yet another reminder to live life to the fullest while one still can – never a wasted lesson – there is a financial aspect to all of this that can best be seen in the following charts.

The first shows the steep demographic trend toward an aging population in the U.S.

The second chart shows the amount of health care spending relative to age. Which, as you can see, confirms my obvious observation that the clientele of hospitals skews to the elderly.

As bad as these demographic trends are for the outlook for health care costs, not to mention the already underwater Social Security system, they are about to get a lot worse.
In the way of explanation, I will loosely recap the conversation I had with my doctor during my check-up, a conversation that went something like this.

“So, how’s the whole health care overhaul thing going?”
“You mean all the new computer systems?” she asked from where she sat filling in a computerized form related to my examination – a process that, by the time she was finished, took at least twice as long as my examination.
“No, I mean the new health care legislation.”
“Oh, that! Well, in that it provides health care coverage to the people who can’t afford it, I think it’s a good thing, and long overdue,” she said in the unhesitant tone of a true believer.
“What do you think will happen to the whole supply and demand thing?” I asked. “You know, when health care is free and more readily accessible? The hospital already seems pretty crowded, and it took me over a month to get an appointment. Are you going to be able to handle the extra volume?”
“Are you kidding? We can’t even begin to handle what we have now. It’s a disaster, and it’s only going to get a lot worse!”

So, I thought to myself, her sensitive side is in favor of universal health care – as is anyone with a sensitive side. But, in almost her very next breath, she confirmed that the health care system is already sideways to high surf and dangerously listing. Once millions of new and financially unencumbered health service consumers start climbing into the boat, it can only roll over and sink.

But, hey, why worry about reality? Encouraged by the pandering politicos, we Americans have decided we want universal health care, and there’s no turning back.
What I find ironic is that the government took this step even though it is coming late to the game vs. other developed nations, and so was able to avail itself of any number of real-life examples of the pitfalls of nationalized health service.
No matter, say the advocates, it’s the right thing to do. Damn the details and, I fear, the consequences.

To my way of thinking, it’s reminiscent of the U.S. decision to follow the French into Vietnam after their disastrous loss at Dien Bien Phu in 1954 and subsequent retreat. Despite the clear and unequivocal lessons provided by the French experience, we still marched right into the breach.

We all know how that ended.

In the case of health care, we have just taken what was already a really bad situation, caused by past meddling by the government in health care delivery, and increasingly by the hard-coded demographics mentioned above, and have made it much worse by inviting everyone else to the equivalent of a hosted party, drinks on the house.
The consequences are as obvious as my observations about the aging clientele of hospitals. In addition to an unavoidable collapse in the already suffering quality of care in American hospitals, the federal budget, already in critical condition by every measure, has no chance of recovery. And so the government will be forced to take on ever more extraordinary levels of debt to cover its soaring expenses.

Then, in much the same way the government drafted the young to fight in Vietnam, it will expect the young to ultimately pay off its debts. I wouldn’t count on it.
Get well, Pete, and stay well; the outlook for health care in America is not encouraging.

Recovery, What Recovery?

As predicted two days ago by the chief economist of this circus, Bud Conrad, the latest GDP numbers confirmed a reversal in GDP, with annualized growth in the second quarter ringing in at a feeble 1.6%. If the recovery were real, it should have stayed a trend in motion – upwards – and not losing traction.

Some analysts are finally coming to the conclusion that this, and other recent indicators, point to a double-dip recession. We disagree.

In order to have a double-dip recession, you first have to have exited the recession – which we haven’t. What the government and its shills have been calling a recovery is nothing more than the predictable, but short-lived, effect of pumping the proceeds from issuing a lot of government debt into the chosen sectors of the economy.
Kevin Brekke, our Switzerland-based editor, sent over the following that I think helps keep the situation in proper perspective…

Following today’s announced downward revision of second-quarter GDP – from 2.4% to 1.6% – the economy officially joins employment on the stage of underperforming actors. A lot has been said about how the economy needs to create so-and-so many new jobs monthly to keep up with new entrants into the workforce. But what about GDP, is there a “minimum” needed with it as well? With that question in mind, let’s take a look at GDP and unemployment and see if there is something to see.
A quick study of the chart and, to my eye, it seems like 5% GDP growth is an important level; periods above 5% seem to be accompanied with lower unemployment, and vice versa. There are certainly exceptions, in particular the inflationary 1970-1982 period (something to keep in mind for future reference). This is not trading advice nor high-level analysis. Just an observation. With a current sub-2% GDP, we have a long way to go before the jobless number begins a meaningful decline.

David again. Meanwhile, Uncle Ben, speaking at the Fed’s annual symposium in Jackson Hole, confirmed that the Fed will do “all that it can” to ensure a continuation of the imaginary economic recovery. According to Bloomberg…

“The Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” said Mr. Bernanke.

In other words, Bernanke has the helicopters on the launch pad, loaded up with freshly minted dollars, fueled and ready to go. Given his dismal track record as a prognosticator, I think it’s safe to dismiss his further comments that the risk of an “undesirable rise in inflation or of significant further disinflation seems low.”

But it would be a mistake to dismiss his clear intention to use loose money policy as a primary driver of future economic growth.

Mr. Market seems to have liked the idea of more funny money – despite a week that has seen a procession of unfalteringly bad economic news, the broader U.S. stock market is up strongly as I write. Then again, so are gold and many gold shares – so we are beginning to see gold and gold shares moving up in conjunction with broader markets, and move up even when broad markets stumble. Just my kind of investment.

Speaking of gold shares, a number of subscribers have written in about the strong performance of the junior exploration companies of late. No question, volume is picking up, and the high-quality juniors are posting some remarkable returns.

This is a topic I want to spend more time on in this service, but not until next week. While I think the broader markets are in for a setback in September – the chart below shows it is statistically the worst month for stocks – the action in the juniors points to a sustained bull market (with the inevitable corrections, of course).

If you’re serious about making serious money in the junior resource sector, and have the money and the temperament to accept the higher risks required to hunt the higher returns these stocks can provide, then check out our Casey’s International Speculator, the next edition of which will be published next week.

In the meantime, when you subscribe today, you can get fully up to date by reviewing all of our current best bet recommendations, updated analysis, and more in the paid-subscribers-only area of the Casey Research website. Our money-back guarantee means you can take the next three pivotal months to see just how valuable this service is – if it doesn’t do way more than pay for itself, then just cancel for a full refund. Details and secure sign-up form here.

Real Life Minority Report: Crime Prediction Software In Use Today
By Chris Wood, Senior Analyst, Casey’s Extraordinary Technology

Remember the sci-fi, neo-noir thriller Minority Report from about eight years ago? In case you’re a little fuzzy, Tom Cruise plays a pre-crime police officer who arrests would-be criminals before they actually commit a crime. Three psychics (called precogs) float in a pool connected to a large holographic computer and send images to the computer about how the future offense will take place. Cruise and his team then interpret the images and attempt to arrest the culprit before the crime takes place.

Here’s one of the precogs:

While Cruise and his team won’t be knocking down your door anytime soon to arrest you for something you may or may not do, new crime prediction software is being rolled out in cities across the country in an effort to reduce not only the murder rate, but the rate of other crimes as well.

It’s true.

Based on a proprietary algorithm (basically just a list of well-defined instructions for completing a task), Dr. Richard Berk, Professor of Criminology and Statistics at the University of Pennsylvania, has developed software that can supposedly predict which ex-cons will reoffend by committing murder or other various crimes when they’re released.

"When a person goes on probation or parole, they are supervised by an officer. The question that officer has to answer is, 'What level of supervision do you provide?'" said Berk.

Historically, parole officers used the person’s criminal record and their gut feeling to determine that level.

"This research replaces those seat-of-the-pants calculations," Berk added.

Baltimore and Philadelphia are already using older versions of Berk’s software to help determine how much supervision parolees should have by predicting which individuals are most likely to commit murder or get themselves murdered. Berk’s latest version of the software (which will be implemented in Washington D.C. pretty soon) expands the scope to include identifying the individuals most likely to commit lesser crimes other than murder as well. If those tests go well, Berk says the program could help set bail amounts and suggest sentencing recommendations.

To develop the software, Berk and his team analyzed over 66,000 cases, then created an algorithm capable of identifying a subset of people more likely to commit homicide or other crimes when paroled or probated by examining variables like prior record and violent acts.

So far, according to the scientific community, Berk’s results are “very impressive.” And be that as it may, I’m a bit uneasy about the whole idea because of the natural extension from simply using the software to predict if a paroled murderer will kill again, to using newer, more “advanced” iterations on non-violent criminals and eventually people who have committed no crimes at all (like in Minority Report). I’m sure we’re a long way from this and you may consider me totally paranoid, but we’re already seeing the first glimmer of this transition. As I noted above, the version of the software being rolled out in D.C. is meant to forecast lesser crimes in addition to murder.

What’s more, even if the software appears to have real predictive powers (as would be evidenced by a significant reduction in the violent crime rate among parolees where the software is deployed), it will never be able to provide direct evidence that a crime would or will take place.

At the end of the day, in my humble opinion, this technology seems like an over-elaborate fix that steps onto a slippery slope toward greater state control over the individual and less personal freedom. But I can appreciate that it’s kinda cool at the moment.

(Ed. Note: For in-depth analysis and stock picks in the lucrative technology sector, check out Casey’s Extraordinary Technology. Technology may be America’s only hope to compete globally in the months and years ahead – CET will put you solidly in the know and get you positioned in the industry’s most profitable players. Just today, the CET editors issued a sell alert on ArcSight Inc. to subscribers, who saw a quick 40% return on this stock within one week of recommendation. Get your slice of the tech pie right now… details and a no-risk offer to try the service here.)

Friday Funnies

While I’m not sure how they cover their high-quality production costs, I’m thankful for whatever keeps The Onion going. Readers who take offense at strong language will want to give their offerings a pass, but anyone else with a sense of humor will enjoy their faux news coverage – it’s almost uniformly well done.

The piece here is their news story on Time magazine to begin publishing content for adults, as opposed to the childish fare they currently produce. It’s not the funniest thing they’ve ever done, but it’s good and will lead you to a lot of other funny videos.

More Funny Videos
Speaking of funny videos, here’s a couple more, not from The Onion.

Everyone Out of the Pool.

. I had to wonder whether anyone went back into the pool…

What Old People Do For Fun. Well, at least insane, homicidal old people!

.
And there’s this…

Photo of the Day

The Pastor's Ass

The pastor entered his donkey in a race and it won.

The pastor was so pleased with the donkey that he entered it in the race again, and it won again.

The local paper read:

PASTOR'S ASS OUT FRONT

The bishop was so upset with this kind of publicity that he ordered the pastor not to enter the donkey in another race.

The next day the local paper headline read:

BISHOP SCRATCHES PASTOR'S ASS

This was too much for the bishop, so he ordered the pastor to get rid of the donkey.

The Pastor decided to give it to a nun in a nearby convent.

The local paper, hearing of the news, posted the following headline the next day:

NUN HAS BEST ASS IN TOWN

The bishop fainted.

He informed the nun that she would have to get rid of the donkey, so she sold it to a farmer for $10.

The next day the paper read:

NUN SELLS ASS FOR $10

This was too much for the bishop, so he ordered the Nun to buy back the donkey and lead it to the plains where it could run wild.

The next day the headlines read:

NUN ANNOUNCES HER ASS IS WILD AND FREE

The bishop was buried the next day.

The moral of the story is: being concerned about public opinion can bring you much grief and misery – even shorten your life.

So be yourself and enjoy life.

Stop worrying about everyone else's ass and you'll be a lot happier and live longer!

Miscellany

New Faculty Announced for Casey’s Gold & Resource Summit, Oct 1 - 3. We are pleased to announce that the stellar faculty for our upcoming Gold & Resource Summit in Carlsbad, California, will be shining even brighter with the addition of Ross Beaty, the resource marvel who has earned the nickname “Broken slot machine” by making a lot of people a lot of money over the years… as well as Robert Quartermain, the talented founder of Silver Standard Resources… and rare-coin professional and old friend Van Simmons, who will be co-hosting a workshop on investing in physical metals.
That’s the good news. The bad news is that the summit is all but sold out at this point, and new registrations will soon be on a waiting-list-only basis. If you haven’t yet registered, you need to act ASAP to secure a seat. Details and a registration form can be found here.
And Don’t Miss Out on the Sights & Sounds Event at La Estancia de Cafayate, Oct 20 – 24. The registration is now open for the next gala event at Doug Casey’s “Galt’s Gulch” in Cafayate, Argentina. In addition to fine wine, classic Argentine asados, music, and much more – Casey Research will again be hosting a half-day seminar. This time around, the program will include Doug Casey, Bud Conrad (with a leisurely amount of time to fully discuss his analysis on the economy and markets), as well as special guest and retirement specialist Dr. David Eifrig, and more.
As usual, Casey Research will also be hosting a VIP dinner for all of our subscribers at the event.
You can learn more about La Estancia and the event by going to www.LaEst.com. As with our summits, these events invariably sell out – and the best hotel rooms in the town go quickly – so you’ll want to make your plans to attend right away. To make things simple and easy, La Estancia de Cafayate has an in-house concierge staff that will help you with all your domestic arrangements. All you have to do is to arrange to get to Buenos Aires, and they can pretty much take it from there.
These events are great fun and a terrific way to experience life at its fullest in the beautiful up-and-coming wine district of Cafayate (think Napa Valley 100 years ago), located in Argentina’s stunning Salta Province – rated among just a handful of Must-See Destinations 2010by the professional staff of Frommer’s travel guides.
Now, as is the case with many people, I rarely come across a photo of myself that I like. That is certainly the case with the photo that accompanies an interview I recently did with El Estanciero, the official newsletter of La Estancia. Even so, while I hate the photo, I think the interview itself is pretty good and will be helpful for anyone wondering why it is that, out of all the countries and places in the world, Doug Casey picked Cafayate as the place to be… an assessment that I fully concur with.
You can read the newsletter and the interview by clicking on the Download Latest Newsletter link in the upper right-hand corner of the La Estancia de Cafayate website. (But please ignore the picture – while no fashion model, I swear I don’t look that bad!)

And that’s it for this week. As always, we appreciate you being a subscriber, and you passing along the Daily Dispatch to others you think will appreciate it. Over the next few years, we are all going to share an extraordinary experience – some bad, much good – but as long as we keep our wits about us, and a sense of humor, we’ll be fine.
Finally, stay well. While they are necessary, hospitals are truly dismal places. Sometimes, as was the case with my friend Pete, a hospital stay is unavoidable – but your odds of being forced into one are greatly reduced by taking care of your baseline health. Is there anything more important than that? I don’t think so.
Until next week, thanks for reading.

David Galland
Managing Director
Casey Research

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Daily Dispatch: Regulation Run Amok

GoldSpeculator — Thu, 26 Aug 2010 23:57:55 GMT

August 26, 2010 | www.CaseyResearch.com

Regulation Run Amok

Dear Reader,

Chris here, filling in for David today. In the wake of some 1,500 or so salmonella cases from tainted eggs, more than 500 million eggs have been recalled and the FDA is calling for – you guessed it – more money, more power, and more regulation.
Raise your hand if you think piling on even more regulations will prevent such events from happening again.

If your hand is up, you should give me a call, I’ve got a bridge to sell you.

Think of all the regulation that was in place to keep the financial markets in check and prevent a collapse of the system prior to 2008. Just a few of the agencies charged with regulation and protection were the Federal Reserve, the Treasury (including the Office of Thrift Supervision), the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation. The federal government had multiple (would-be redundant) layers of regulators and regulations in place concerning mortgages, financial institutions, and stock markets. And still all of this regulation could not stop the crisis from coming or keep it at bay once it got going.

Now we have a new financial reform bill that’s been passed to “prevent anything like this from happening again.” Hmmm, I’m pretty sure I’ve heard that before. This new legislation and the regulation that comes out of it will not make things any better. Because it’s government regulation (read: intervention) itself that is the problem.
Most people think government regulation is generally good because they erroneously believe that there are no self-regulatory aspects of individual behavior in the marketplace. Thus, as William L. Anderson points out in his article, “A Primer on Regulation”:

This does not only mean a belief that there are no self-policing mechanisms, but also that markets operate on the edge of chaos. This is patently untrue. Because private enterprise works on a voluntary basis, a business owner cannot coerce someone to do business with him. Things like loss of reputation, shoddy products, poor service and the like serve as real boundaries for business owners, who in a free market survive only by offering goods that people are willing to purchase.

Moreover, there are numerous private (read that, voluntary) organizations that police businesses, settle disputes, independently test products, and provide needed information for consumers and producers alike. Yes, these organizations do have a regulating effect upon the behavior of individuals who participate in private production and exchange. Thus, the statist claim that without government, markets would be a chaotic mess is simply untrue.

Once you take the mental leap to recognize markets are self-regulating and the economy itself would not erupt into chaos absent government regulation, it’s easy to see other huge problems with today’s regulatory system that are so often overlooked. Glossing over the fact that the system is clearly unconstitutional, two biggies are that heavy regulation favors big business at the expense of small business and the moral hazard created by the blind trust people put in regulations and regulators. On these matters I’d like to quote Dr. Ron Paul:

It is important to understand that regulators are not omniscient. It is not feasible for them to anticipate every possible thing that could go wrong with whatever industry or activity they are regulating. They are making their best guesses when formulating rules. It is often difficult for those being regulated to understand the many complex rules they are expected to follow. Very wealthy corporations hire attorneys who may discover a myriad of loopholes to exploit and render the spirit of the regulations null and void. For this reason, heavy regulation favors big business against those small businesses who cannot afford high-priced attorneys.
The other problem is the trust that people blindly put in regulations, and the moral hazard this creates. Too many people trust government regulators so completely that they abdicate their own common sense to these government bureaucrats. They trust that if something violates no law, it must be safe. How many scams have “It’s perfectly legal” as a hypnotic selling point, luring in the gullible? Many people did not understand the financial house of cards that are derivatives, but since they were legal and promised a great return, people invested. It is much the same in any area rife with government involvement. Many feel that just because their children are getting good grades at a government school, they are getting a good education. After all, they are passing the government-mandated litmus test. But, this does not guarantee educational excellence. Neither is it always the case that a child who does NOT achieve good marks in school is going to be unsuccessful in life. Is your drinking water safe, just because the government says it is? Is the internet going to magically become safer for your children if the government approves regulations on it? I would caution any parent against believing this would be the case. Nothing should take the place of your own common sense and due diligence.

Whether you buy into these arguments and the notion that government regulation should be seen as the problem rather than the solution is, of course, up to you. You’re free to think that more regulation is exactly what’s needed in the case of the egg fiasco, the financial markets, and everything else. But I would urge you at the very least to think seriously about these matters rather than blindly calling on the nanny state to do more every time something goes wrong. I’d also urge you to consider all the regulation currently in place and ponder, how much is enough?

A Fractious Fed?
By Doug Hornig

This coming Friday and Saturday, the Federal Reserve Bank of Kansas City will sponsor its annual retreat in Jackson Hole, Wyoming. It’s a chance for Fed officials, foreign counterparts, and academic experts to meet to discuss economic policy. This one could be contentious.

According to Jon Hilsenrath’s lengthy article in Tuesday’s Wall Street Journal, the last regularly scheduled meeting of the FOMC, on August 10, was the stormiest of Ben Bernanke's four-and-a-half-year tenure as chairman.

At issue: what to do about the Fed’s huge portfolio of mortgage-backed securities that it accepted from ailing banks back in the formal bailout days. That portfolio is about to begin shrinking much more rapidly than anticipated, as low mortgage rates cause Americans to refinance their mortgages. Which means that securities held by the Fed are being paid off.

What’s the extent of the shrinkage? A group led by the New York Fed's markets chief, Brian Sack, projected that the portfolio would contract by up to $340 billion by the end of 2011. In addition, it was estimated that about $55 billion in debt issued by Fannie Mae and Freddie Mac, and held by the Fed, would likely be paid off. Taken together, that represented a potential 20% drop in the Fed's $2.05 trillion in holdings in 18 months' time.

The options: allow the Fed’s balance sheet to shrink, which would amount to a passive tightening of financial conditions; or act aggressively to maintain holdings at the current level, i.e., continue down the easy-money path.

Most investors know that Ben Bernanke favored the latter. He got his way, as expressed in the FOMC’s formal decision to use the mortgage proceeds to buy Treasuries. The vote was 9-1, with only perpetual gadfly Thomas Hoenig of Kansas City dissenting.

But Hilsenrath notes that the seemingly substantial agreement disguises the lack of true consensus. Of the 17 attending – the FOMC consists of 5 Washington-based governors and the heads of the 12 regional banks, but only 10 have voting rights at any given time – he says that seven “spoke against the proposal or expressed reservations.”

Bernanke will have the opportunity to further define his position when he speaks at Jackson Hole, and he may introduce some fine tuning. Most likely, he will try to paint a big, agreeable smiley face on the Fed.

But there is trouble, and Big Ben is cracking the whip in no uncertain terms. Using the proceeds from the MBS to buy Treasuries may only be the beginning. If the economy doesn’t pick up more than it has, the Fed could begin printing money in earnest again. Bernanke has made it clear that he will do whatever it takes to prevent deflation, and he will risk rising inflation even if it means riding close herd on the increasingly shaky majority that agrees with him.

For the complete Hilsenrath article, click here.

Delay and Pray, and Then?
By Jake Weber

While it may be hard to believe, the housing market hasn’t been the worst-performing real estate sector in terms of price. The index for the Case-Shiller Composite-20 index for residential real estate peaked in July 2006, and as of May 2010, the index had dropped by 29.1%.

Considering how dismal the recent housing data has been, we can certainly expect for the Case-Shiller index to continue its downward trajectory. However, it still has some catching up to do with its counterpart that tracks national commercial real estate prices. The Moody’s Commercial Property Price Index peaked in October of 2007, and as of June it had already lost 41.4% of its value.

Making the situation potentially much worse, the price declines in commercial properties have occurred absent a major wave of default in the commercial sector – at least one comparable to what we saw in housing. Rather than accept losses, lenders have been carrying commercial loans on their books at pre-crash values, pushing the problem down the road in a strategy dubbed “delay and pray.”

Rearranging the deck chairs on the Titanic has worked for many lenders so far, but as this article from Crain’s Chicago Business demonstrates, procrastination can’t prevent the inevitable:

A Georgia firm that holds two junior mortgages on the 46-story tower at 500 W. Monroe St. says the building's loans went unpaid when they came due this month and that the company may foreclose and take control of the property.
It would be the first foreclosure of a major office tower in the Loop in 11 years and a sign that the market remains mired in the hangover of the debt-stoked valuation bubble that peaked in mid-2007. That's when Broadway Partners Fund Manager LLC, a once high-flying New York firm, bought 500 W. Monroe for $336.7 million, with a package of loans that made up more than 95% of the purchase price.
Mr. Fasulo reckons that 500 W. Monroe could be worth about $240 million today, based on an estimate of the building's net operating income and the return investors would expect since the tower is just 70% leased. That would put its current value at roughly 30% below the 2007 purchase price, a decline in line with national trends. A report last week by New York-based Moody's Investors Service showed property values in the top 10 U.S. office markets have plummeted 31% since the 2007 peak.
The building's current value is also $84 million less than the $324 million Broadway borrowed to buy it. The sunken value, debt load and uncertainty about 500 W. Monroe's future ownership weigh on leasing efforts, sources say.
Piedmont, which bought a slice of the tower's debt in March 2008, said in a Securities and Exchange Commission filing that the borrower missed an Aug. 9 maturity date and that Piedmont exercised its right to extend the maturities of two senior loans, including a $140-million mortgage held by commercial mortgage-backed securities investors.
The filing says Piedmont is “considering its options for enforcement of its collateral, one of which is a potential foreclosure.”

Lenders have delayed and prayed, but as prices continue to decline, borrowers are finding it much easier just to walk away, or to send “jingle mail,” as this article from the Wall Street Journal put it:

Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense...
More landlords are expected to follow suit. Of the $1.4 trillion of commercial-real-estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC. And as the economic recovery sputters, owners of struggling properties are realizing a big property-value rebound isn't imminent.
Owners of commercial property have an easier time walking away than homeowners because commercial mortgages are typically nonrecourse. That means the biggest penalty for walking away is the forfeiture of assets and cash flow they may generate.
Read the full article here.

The obvious conclusions are that we can expect rents and lease rates to decline further, more defaults and foreclosed properties in the commercial real estate sector. Taking it a step further, this will probably lead to many more bank failures, as much of the commercial mortgages and CMBS are concentrated in the local and regional banks.
Chris again. Thanks, Doug and Jake. And thank you, dear reader, for spending some time with us today. David will be back at the helm tomorrow. Until then, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC

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Daily Dispatch: Uncle Scam

GoldSpeculator — Thu, 26 Aug 2010 02:59:50 GMT

August 25, 2010 | www.CaseyResearch.com

Uncle Scam

Dear Reader,

The latest data on global gold trends, Q2 2010, just popped into my email box from the World Gold Council.

The bad news is that the higher nominal price of gold has caused a 5% decrease in jewelry sales over the prior year.

If you’re thinking “Hey, that’s not that bad!”, you’d be right. On this date last year, gold closed at $950… which is $286 below where it trades as I write. In other words, a 30% rise in price has resulted in a decrease of just 5% in jewelry sales.

And even that number is skewed, because the currency value of the gold purchased is up – way up. For example, India – the 800-pound gorilla in the global gold jewelry market – saw total gold jewelry sales fall only by 2%, but in local currency terms, there was a 20% increase in the nominal value of the gold trading hands. China, which only relatively recently reauthorized private gold purchases, saw a 5% increase in jewelry demand, but that translated into a 35% increase in local currency terms.

So, that’s the bad news.

The good news – at least for fiat money skeptics – is that total physical gold demand in Q2 rose by a whopping 36%. More tellingly, the increase was 77% when you take into account the dollar value of the ounces purchased.

As you’ve already figured out, the bulk of the physical demand is coming from investment – with the amount of gold held by ETFs growing 414% over the previous year.

Too far, too fast? I don’t think so.

In my opinion, as the fiat money monsters are brought to bay, the price of gold can really only go higher. Overly confident? I don’t think so.

That’s because when people lose faith in a currency, as they will before this crisis is over, they unfailingly rush to exchange the unbacked paper money for something more tangible. While pretty much anything with an intrinsic value will do – real estate, antique cars, old masters – for all the reasons that Aristotle enunciated, gold is viewed in a class of its own, and so has an unblemished history as a universally accepted store of value.* And, thanks to its portability, divisibility, durability, and consistency, it has also always been looked upon as a convenient form of money.

The most pressing macro-observation I’d like to make – an observation that’s critical for investors to understand (though most don’t or won’t) – is that the tectonic monetary shift now underway is truly global in nature. And it’s not going to be over until a new and markedly different monetary regime has been implemented.

It’s like this: Throughout history governments have experimented with fiat money. They have done so because the benefits to the government and the insiders that invariably latch on to power are just so damn attractive. The Romans did it by debasing their coinage, but the modern version goes one better by completely disconnecting a currency from any value whatsoever, and then wantonly printing as politically motivated needs or wants arise.

The latest fiat system kicked off in earnest in 1944 when Uncle Scam, in Bretton Woods, NH, got the leaders of the world’s war-weary countries to agree to accept the U.S. dollar as their reserve currency. In return, the U.S. agreed that the currency notes it would subsequently issue would be convertible into a corresponding amount of gold. Then Tricky Nixon came along in 1971 and canceled the right of the bearer to swap the notes for gold. Overnight, the link between the currency and anything tangible was lost.

That, of course, opened the door to all subsequent politicians to engage in the whole print, print, print thing. The keystone asset of the former system – gold – soon became a distant memory for the new crop of central bankers and, remarkably, to the bearers of the notes.

For any number of reasons, most of which related to the illusion of increasing prosperity, people simply stopped paying attention to what Uncle Scam was up to. Of course, that illusion was largely based on the increase in nominal wealth: if one year you’re worth $100,000 and three years later you are worth $150,000, the tendency is to feel richer even if your actual purchasing power has gone up by far less or even has declined due to a debasement of the currency.

Today’s dollar is worth just 18 cents in 1971 terms.

But all scams must, in time, come to an end. And that’s what’s going on now. It ends here. Before this is over, the current iteration of the U.S. dollar – the vaporous construct with no actual value – will lose its value as money.

Which brings me to an important nuance in this discussion.

Most failed fiat money experiments involve a single currency. The most convenient recent example is provided by Mugabe’s Zimbabwe. Rather than actually supporting the creation of marketable goods and services in what he sees as his private fiefdom, he took the low road of energetically abusing his fiat currency to the vanishing point.

In a situation such as that, the local citizenry suffers – as well as anyone foolish enough to be holding bonds denominated in the debased currency. But that’s about it.

In the current scenario, the keystone of the entire global monetary system is the U.S. dollar. Which means that the primary reserve holdings of virtually all the world’s significant central banks are at risk of going up in smoke.

And it’s even worse that, because the dollar is also the number one trade currency – which means corporations around the world are sitting on huge holdings or are dependent on commercial contracts denominated in dollars.

And even that’s not the end of it. Because Uncle Scam has long served as a role model to other world leaders, those leaders have enthusiastically followed suit and universally launched fiat monetary systems of their own. It’s bad enough that the world’s reserve currency is a fiction – but the situation becomes really dire when you accept as fact that all the world’s currencies are a fiction.

Man, we’re in a lot of trouble.

If you have so far resisted our constant urgings to make gold – which is to say, real money – a core portfolio holding, it’s not too late. Just start buying on the inevitable dips.
I can assure you that as the fiat monetary structures continue to crumble – and they will – more and more people will be turning to gold. The latest World Gold Council data is just a straw in the wind.

In fact, thanks to the convenience of the gold ETFs (which you should make an effort to understand before blindly investing in them – there are important differences between them), once the show really gets underway, the relative trickle of investment funds moving into gold today will quickly become a torrent, completely outrunning available gold supplies and sending prices much, much higher – and in a hurry.

While no one can say when the big spike in gold will occur, one can say accurately that, given the systematic frailty, it could literally happen on any given day. That’s what happens when scams are unveiled. Remember Bernie Madoff? How many people do you think tried to give him money the day after he was arrested, versus desperately scrambled to get their money out of his sticky web? The answers are “No one” and “Everyone” – that’s what happens when people lose faith in a currency.

Of course, gold bullion, and gold bullion proxies, aren’t the only asset classes that will do well in the coming currency collapse. The chart below shows what looks to be a trend change in the gold stocks. In previous recent stock market corrections, people thought of gold stocks more in terms of being stocks and overlooked their direct connection to gold. That appears to be changing, with a divergence between gold stocks and the broader markets. The leverage in gold stocks to gold bullion could make them especially attractive.

There is much more to this discussion than I can go into here, but rest assured that, among many others, these are all topics we’ll be discussing in depth at the upcoming Casey’s Gold & Resource Summit in Carlsbad, California on Oct 1 – 3. (More info and a last chance to save with the early-bird registration here – but you have to register by midnight tonight.)

And, of course, we’ll continue to provide steady coverage in our paid services, including the ridiculously low-priced Casey’s Gold & Resource Report. If you’re new to the sector, that’s where you’ll want to start. (Details here.)

Regardless of what you do, do something – because to stumble on as if this crisis will end with a whimper would be a dire mistake.

* Quoting my dear friend and partner Doug Casey on the intrinsic value of money...
“Aristotle correctly observed, in the 4th century BCE, that a good money must have five characteristics. It must be durable (which is why we don’t use, say, wheat, as money), divisible (which is why artwork isn’t practical), convenient (which is why lead isn’t very good), consistent (which rules out real estate), and must have value in itself (which is why paper doesn’t work). Gold, of the 92 naturally occurring elements, is particularly well suited for use as money. There’s no magic involved, no mysticism, no need for all kinds of laws; it’s really just common sense.”

GDP to Be Revised Lower
By Bud Conrad, The Casey Report

The GDP (Gross Domestic Product) is the largest measure of all output of our country, so it is watched closely as an indicator of whether a country’s economy is growing or in recession. After GDP data for any particular period are initially reported, they are subsequently updated and re-released as additional data are collected. The most watched number is the quarterly real (after inflation) seasonally adjusted annual growth rate. The second-quarter advance estimate was 2.4% real and 4.3% in current dollars (nominal). In the United States, the consumer constitutes approximately 70% of GDP activity, so we can get a good idea of what the updated numbers might look like, versus the initial estimates, by looking at the growth in the Personal Consumption Estimate (PCE).

To do so, I have taken the latest PCE data and compared it to the GDP (nominal) in the chart below. As you can see, the PCE is lower than the last GDP advance estimate. So when we get the revised GDP report the day after tomorrow, on August 27, it is likely to be one to two percentage points lower than the previous level.

While slowing is somewhat expected, I think the markets haven’t factored this amount of decline into the numbers, so it could be a negative for stocks. Be careful.

David again. As dire as the situation we are facing may be, in time it will get sorted out. After the wave of coming sovereign defaults, the public, fed up with the politicians and their functionaries, will reach a breaking point and a real change will occur.

And I’m not talking about a “change you can believe in,” which is nothing more than a platitude to provide weak cover for an escalation in the same policies that brought us to this point in the first place, but “real change” – starting with reining in the bureaucrats and their insane spending and crippling regulatory regimes.

On that topic, my friend Porter Stansberry recently republished an essay he wrote some time ago that I loved when he first wrote it, and I love just as much the second time around. With his kind permission to reprint it, here it is…

This Is Why There Are No Jobs in America
By Porter Stansberry
Saturday, August 21, 2010

I'd like to make you a business offer.

Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...

Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in – as long as it's legal.

But I can't give you any capital – you have to come up with that on your own. I won't give you any labor – that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.

Now in return for my rules, I'm going to take roughly half of whatever you make in the business each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits.

You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."

Now... after you've put your hard-earned savings at risk to start this business, and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out – to finally live the good life.

Whether or not this is "fair" – some people never can afford to retire – is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business.

Oh... and one more thing...

Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth.

After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children.
All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.

I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail.
That's how civil society is supposed to work, right? This is Amerika, isn't it?
That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs...

David again. Moving right along, as you have probably heard, New Housing Sales have just been reported. Following on yesterday’s dismal existing housing data, new housing sales have fallen to the lowest level since records began to be kept in 1963. Let that sink in a moment. At this pace, fewer homes will be sold over the next year than at any time since 1963... just 276,000 units. Here’s a quick look at the state of housing that just arrived from Bud Conrad…

Housing Is Still in Depression
By Bud Conrad

Today, August 25, we got the latest New Housing Sales for July, and they were a disaster. At a 276,000 annual rate, they are below any time since the data started in 1963 (except for 267,000 in May). June was revised down from 330,000 to 315,000. The chart shows the peak at 1,400,000.

Even if sales had risen, as watchers had expected, to 339,000, it would have been bad – but further declines with mortgage interest rates at new lows make this report even more confirming that we are not out of recession. All the government actions just haven’t worked. This debt unwinding is going to be with us for a long time.

That’s It for Today…

Well, almost. A couple of closing notes.

Ireland’s Credit Rating Cut by S&P. While Ireland’s fiscal troubles have been well documented, so have the country’s proactive efforts to try and deal with those troubles. Not enough, says the newly responsible S&P. The reality is that all of the PIIGS, and the U.S. and Japan (among many others), are so far underwater that there is no way out – other than default through inflation or by canceling debt.

On this general topic, the good folks at ZeroHedge recently posted an excellent article on just how dire the situation is in Greece. Europe’s sovereign debt crisis may be off most people’s radar at the moment, but not for long. Here’s a link to the article.

Congratulations to John Hathaway. The latest edition of Pensions & Investments magazine named John Hathaway’s Tocqueville Gold Fund the top-performing U.S. stock fund for both the latest one-year and five-year periods. While I haven’t personally met John, I’m very much looking forward to doing so at our Carlsbad summit where he’ll be among the faculty. You can too, but you’ll have to act promptly as the event is headed for a quick sell-out. Details on the complete faculty and registration information here.

And with that, I will actually sign off – with a glancing note that gold is powering higher still… and the gold stocks are moving up as well, despite the broader stock markets again coming under pressure.

The trends remain our friends…
Thanks for reading.

David Galland
Managing Director
Casey Research

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You'll Buy Gold Now and Like It!

GoldSpeculator — Wed, 25 Aug 2010 20:55:10 GMT

By Jeff Clark, Casey's Gold & Resource Report

I get this question a lot: "Should I buy gold now, or wait for a pullback?"

It’s a valid question. For nearly two years, gold hasn't had a serious decline. There have been pullbacks, of course, but nothing assumption-challenging. In fact, since October 2008, gold’s largest price drop is 10.6% (based on London PM fix prices), and yet the average of all declines since 2001 is 13% (of those greater than 5%). The biggest pullback we've seen this summer is 8.2%. Technically the summer's not over, but I'll admit I'm surprised we haven't had a better buying opportunity.

So, is now the time to buy? It depends on your honest answer to another question: “Do you own enough gold?” By “enough” I mean an amount that lends meaningful protection on your assets. By ”meaningful” I mean that no matter what happens next – another financial blow-up, accelerating inflation, crushing deflation, war, a plummeting dollar, more reckless government spending – you won't worry about your investments.

Whether you should buy now is almost irrelevant if you don't already own a meaningful amount of gold. If you earn $50,000 a year, how is one gold Eagle coin going to protect you if the dollar plummets and sends inflation soaring? If your investable assets total $100,000, is your nest egg sufficiently protected owning two gold Maple Leafs? This is all akin to buying a $50,000 insurance policy for a $500,000 home.

Today we face the prospect of prolonged economic stagnation, and most governments are administering grossly abusive monetary policy as a remedy. While some of the consequences are already being felt, the full ramifications have not hit your wallet yet. But they will.

If you don't have at least 10% of your investable assets in physical gold, or at least two months of living expenses, you have your answer: Buy. Don't use leverage, don't borrow money, and don't buy with reckless abandon, but yes, get your asset insurance policy and tuck it away. And then start working toward 20% (we recommend a third of assets be in various forms of gold in Casey's Gold & Resource Report).

Back to the original question: should we buy now, or wait for a pullback?

The answer comes when you look at the big picture. If you pull up a 9-year chart of gold, what sticks out is that the price is near its all-time nominal high. One could be forgiven for thinking it looks toppy or at least ripe for a pullback. But I assert that the highs for gold have yet to be charted.

What will a gold chart look like after adding five years to it?

When projecting gold's potential price peak, there are many ways to measure it. Conservatively, gold reaching its inflation-adjusted 1980 high would have it topping around $2,400 an ounce. More radically, if the U.S. tried to cover its cumulative foreign trade deficit with its current gold holdings, gold would need to hit about $32,000/oz.

Let's take something more middle of the road, and apply the same trough-to-peak percentage advance gold underwent in the 1970s. (I think there's a greater than 50/50 chance it does more than that, given the precarious nature of the U.S. dollar.) Gold rose from $35 in 1970 to $850 in 1980, a factor of 24.28. Our price bottomed in 2001 at $255.95; multiply that by 24.28 and you get a gold price of $6,214 per ounce.

Sound too high? Well, would it feel high if you had to pay $12.50 for a Big Mac? At $3.39 today at my local McDonald's, that's about what it would cost ten years from now if we get the same rate of inflation we had in the late 1970s.

So if gold hits $6,214, what might it look like on a chart if you bought today around $1,200?

$1,200 doesn't seem so pricey, does it?

I'm not saying there won't be pullbacks or that you shouldn't try to buy at lower prices. Just keep a big-picture perspective. Let's say gold falls to $1,100 and you're kicking yourself for having bought at $1,200… if gold reaches $6,200 an ounce, the profit difference between buying at $1,200 and buying at $1,100 is only 1.6%. If gold gets whacked to $1,000 (at which point I’ll be buying with both hands) the difference is still only 3.2%.

Heck, even if gold peaks at $2,400, you still get a double from current levels. (But unless government monetary policies immediately reverse course, gold isn't stopping at $2,400.)

So there's my answer. Yes, you have to accept my projection of gold's ultimate price plateau. And you have to sell at some point to realize the profit. But if the final chapter of this bull market looks anything like the chart above, I don't think you'll be too upset having bought at $1,200.

Carpe gold.

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Daily Dispatch: Return to Babel

GoldSpeculator — Wed, 25 Aug 2010 16:54:11 GMT

August 24, 2010 | www.CaseyResearch.com

Return to Babel

Dear Reader,

David Galland here – back at the desk and refreshed following an end-of-summer holiday through France, with a three-day dip into Switzerland.

My holiday rest was supplemented with three days of bed rest, thanks to a high fever picked up just at the end of the trip. While it may sound odd, I actually don’t mind a rare bout of fever. For starters, it seems to me the closest I’ll come to a Native American sweat lodge experience, involving as it does long spells of deep sleep, vibrant dreams, and the cleansing effects of sweating copiously. Secondly, there’s no question of rushing to and fro, the norm of my unsettled nature; it’s straight to bed for mostly uninterrupted lounging.

Hey, maybe there’s a business idea in there – a stay in bed spa? Forget all that calisthenics and diet stuff. Instead, check in with your favorite person, slip into some nice pajamas, then kick back for a couple of days of meals in bed, movie watching, reading, the occasional massage – that sort of thing. I’d be a customer!

In any event, I’m happy to be back, and raring to go.

Before moving on to something actually useful, at least from an investment perspective, I’d like to share some cursory observations from Europe.

Return to Babel

Having lived in Europe as a student for most of a year, and traveled there many times since, I have some small basis for identifying the changes that have occurred in recent decades.

Back in the day, the Switzerland, France, and Germany where I spent my time as a youth were generally homogenous and possessed of a distinct native charm. In the case of Switzerland and Germany, there was also an almost sterile tidiness.

Today, it seems to me that Europe’s tolerance for multiculturalism – a tolerance fostered by political correctness, proximity and the contagion of operating foreign empires – has allowed those cultures to blossom in the European garden. The politically correct might say that the new and more diverse garden possesses a beauty of its own. From my unedited perspective, however, the garden looks a mess.

Allow me to try and explain that perspective.

When visiting the Middle East, Asia, Africa, or other far-away places – most of which are notable for their homogeneity – the cultures encountered naturally appear exotic and often beautiful to the Western eye, largely because they are so distinctly foreign to our own native environs.

However, when transplanted in large patches into Europe, as these cultures have been, the effect can be far less pleasing. In some parts we passed through, it even seems that the long-standing European cultures were in full retreat, with the natives unsure of even where they fit in any more – but too polite to mention it.

In my old stomping grounds of Montreux, you can still find restaurants serving raclette, fondue, and other national dishes – but those are very much the exception to the new normal of pizza joints, kabob shops, and Chinese take-out. And the boulevards we strolled down were not dominated by Swiss, but rather by what might be termed “other” – Arabs and Africans especially. In our hotel, a landmark, virtually all of the help was Chinese or Filipino, their common language being English, not the traditional Swiss languages of French and German.

Of course, in the hinterland, the situation is obviously not so pronounced, as immigrants invariably head first to the cities – but all the same, to say that Montreux had changed since my days there would be a gross understatement.

And the situation in Paris was even more pronounced. Sure, there were throngs of tourists – of all nationalities – but what I’m referring to are what might be termed the man on the street; the taxi drivers, waiters, shop keepers, restaurant managers, etc., etc.

While my sampling was limited by the geography covered on my travels, based on what I saw and have heard and read, this tableau is being repeated across Europe.

In my view, this shift to multiculturalism in Europe is not only endemic, but inevitable.
Like the kudzu, multiculturalism once well-rooted spreads and, in time, will overtake much of that which preceded it, no matter how old or sacrosanct. When I was in Switzerland lo those many years ago, the natives were as uptight and even xenophobic a culture as existed on the planet. Immigration rules were tough, and if you were not Swiss and made even a small misstep, you were on the next plane, train, or bus home. Clearly, something changed along the way.

And it’s not just the influence of swarthy foreigners that’s apparent in Europe. On a long walk down a country lane outside of a mid-sized French town, I was surprised to find that the smattering of litter I came across almost all originated from American sources. (In one stretch, it was something like five McDonald’s cups and food wrappers, three Coke bottles, and two Marlboro packages.) In fact, ironically for the land of fine cuisine, McDonald’s has a huge presence in France… almost 1,000 restaurants according to one source I looked up.

Is this cultural transmutation bad?

Over the next few decades, I don’t see how strife will be avoided. The strife will come from existing national cultures trying to fight to retain those cultures – and from the encroaching cultures trying to hang on and spread, bumping into other competing cultures as they do. This spreading won’t be due to any any evil scheme, but rather will flow from the entirely human desire to surround oneself with friends, family, and the customs associated with respective cultures.

At no point in my travels did I see a Middle-Easterner mingling socially with anyone outside of their culture. Ditto, the North Africans traveled in groups, with no French or Swiss friends in evidence.

In the long-term, of course, this cultural mash-up will be of no more consequence than those derived from the pious Cathars having been wiped from the map, or the Incan empire crumbling into little pieces. Ultimately these changing societies will likely morph into new cultural identities, in much the same process that occurred in the creation of the current iteration of the United States – with the indigenous people being squeezed out by the English settlers, who in time were themselves overrun by immigrants from the rest of the world.

Alternatively, rather than meld, today’s culturally diverse nation states might continue to develop in such a way that they become the equivalent of a flat-lying tower of Babel – geographic containers for an assortment of smaller, distinct and even hostile collectives – each with their own language, religious dictates, fashions, and DNA. Or, the nation states themselves will simply disappear, to be replaced with whatever’s coming next.

While sitting here, I can’t pretend to know how things will work out over the long run, but I’m pretty sure that whatever happens, it will happen first in Europe. Thanks to a lack of any real geographical defense, the continent has always been a crossroads – a fluid place with new cultures regularly arriving at the gate, more often than not in the form of armies who don’t bother asking permission to enter.

In the current context, the next wave has already arrived… it’s not clear that they are enemies… and they have arrived not in a horde, but in a steady train of modern conveyances and, increasingly, in the hospital birthing ward.

Regardless as to how you feel about this issue, in the case of much of Europe, I think the die is cast and what is done cannot be undone – at least not without some real upheaval.
As a closing remark, the other thing that really stood out from my trip was that the European waistband has noticeably expanded since last I spent any real time there.
McDonald’s big push into European markets is symptomatic of a much larger shift to fast foods, a shift that is especially apparent in a proliferation of pizza parlors that has made them ubiquitous.

House on Fire

For some months now, in The Casey Report, in this free service, and at our Casey Research summits, we have warned that the structural issues bedeviling the US housing market are far from resolved.

Furthermore, thanks to the insights provided by friend and “go to” real estate investment pro Andy Miller of Miller-Frishman, we’ve been warning that the upward momentum in housing sales from the first part of this year would falter this summer. The following excerpt from the May 5, 2010 edition of these musings points to just one of a number of Andy’s prescient warnings…

Andy Miller, our favorite major league real estate professional, warned in no uncertain terms that housing sales will “fall off a cliff” in July and continue to tumble through the end of the year – and beyond.
… Andy’s comments are worth paying very close attention to. For the simple reason that the government and its legion of shills have been playing soft music about a measured recovery.
If Andy is right – and he has been consistently right in his analysis in the period leading up to, and through, this crisis – the shock of plummeting housing sales this summer has the potential to be massively disruptive to the economy and the markets. Especially in that it will reveal to increasingly complacent consumers the sour truth as to how things really stand, which is in sharp contrast to the fiction they’ve been fed by the administration and its Wall Street cronies.

While things have taken just a bit longer than expected, today’s news that sales of existing homes have fallen 27% over the last month – to a 15-year low – even though we’re still in the traditionally strong summer months, confirms the need for extreme caution in housing and, by extension, the broader economy to which the housing sector is so important. If Andy’s right, and we believe he is, the housing data are going to remain weak through the end of this year, and beyond.

Of course, the last thing the U.S. administration and its allies want ahead of the November election is another stock market crash – so I can only expect they’ll keep trying to pull rabbits out of the hat, maybe even to the extent of leaning on friends in high places on Wall Street to help support the markets on bad days. That’s become easier in recent years; as has been widely noted, small investors are increasingly exiting the stock markets – leaving the field open to the institutional traders who can move quickly with large amounts of capital.

In time, however, the government is going to run out of bunnies… be careful.
Speaking of being careful, while catching up on my reading while in bed, I came across an article that said, while individuals may be moving their money out of equities, they have been moving into bond funds – and in a big way.

It’s called jumping from the frying fan into the fire.

Based on my experience as a co-founder of a mutual fund group, I can tell you that if there is one sure thing in this world, it’s that when investors rush en masse into an investment category, it is invariably at almost exactly the wrong time to do so. Is that the case with today’s rush into bonds?

To shed some light on that point, Casey Research Swiss-based editor Kevin Brekke volunteered to look into the correlation between bond flows and performance. Here’s his report…

Thinking About Bonds
By Kevin Brekke, Editor
Casey Research, Switzerland

With the great bond stampede that began in 2009 continuing, giving rise to the very real possibility of a bond bubble, we decided to check the relationship between bond returns and bond fund inflows to see if there might be a correlation. Take a look at this chart:

(1) Measured as the year-over-year change in the Citigroup Broad Investment Grade Bond Index.
(2) Plotted as the three-month moving average of net new cash flow as a percentage of previous month-end assets. The data exclude flows to high-yield bond funds.

As suspected, the rise and fall in total return from bond funds is accompanied by an influx or exodus of bond investors. Data to construct the chart were taken from the Investment Company Institute’s (ICI) 2010 Fact Book where they state,

“In 2009, investors added a record $376 billion to their bond fund holdings, up substantially from the $28 billion pace of net investment in the previous year. Traditionally, cash flow into bond funds is highly correlated with the performance of bonds. The U.S. interest rate environment typically has played a prominent role in the demand for bond funds. Movements in short- and long-term interest rates can significantly impact the returns offered by these types of funds and, in turn, influence retail and institutional investor demand for bond funds.”

ICI continues by noting that secular and demographic trends have tempered the appetite for equities. An aging population tends to become risk averse, and the Baby Boomers are entering retirement and seeking a safer alternative to the stock market. This occurrence is clearly shown on the right side of the chart. Following the stock market crash in 2008, investors exited stocks and bonds as general panic prevailed. As investor calm returned, a tidal wave of new money flowed into bond funds, turning 2009 into a record year.

And the popularity of bond funds continues. So far this year, investors have funneled $200 billion in new money into bond funds. 2009 was also a record year for total assets and net new capital in bond funds from retirement accounts.

That is the view through the macro lens. Switching to a wide-angle lens gives one pause.
We can’t help but draw similarities to the housing bubble that began inflating at the start of the new century. As home prices started escalating they drew the attention of a growing pool of investors. And soon this becomes a self-reinforcing phenomenon; higher prices attract greater numbers of investors that drive prices higher. Likewise for bonds. Bond returns are rising because bond returns are rising. Got it?

We have entered the terminal phase of a bond bull market ushered in thirty year ago by Paul Volker, who drove interest rates over 20%. With 30-year U.S. government paper now under 4%, the easy profits have been made and the low-hanging fruit consumed. Investors today are shimmying out on a very tall and thin branch in search of higher “total return.” The snapping of the branch – sending investors big losses – may not be imminent, but it is inevitable.

As David has discussed and warned about often in this daily letter, the fiscal misadventures of the U.S. government will have their consequences. And one of the first victims will be bond investors as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the total return on bond funds will be smashed.

The sad and pathetic irony: to escape the beatings endured in the stock markets millions have sought safety in bonds. The punishment is not over.

We are afraid an awful lot of investors will be left asking, “What was I thinking?”

That’s it for today…

Well, almost. Before signing off I want to mention that the Early Bird registration price for our upcoming Casey Research Gold & Resource Summit, to be held in sunny Carlsbad, California Oct 1 – 3, will come to a hard stop tomorrow, Wednesday August 24 at midnight.

If you have any interest in precious metals – make that any interest in surviving the next leg down in this crisis – then check out the updated speaker roster, and save by registering before the Early Bird price expires. More importantly, these events are always quick sell-outs, and that is looking very much the case for the Carlsbad Summit… don’t miss it. Here’s the link.

Finally, if you have written to me at anytime in the last few weeks, I’m sorry for the delay in responding – I’m still working through the overstuffed email box.
Until tomorrow, thanks for reading!

David Galland
Managing Director
Casey Research

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