Fiscal Cliff Solution Is Nothing But Folly

Synopsis:
Observations on a sound retirement and kicking the can.

Dear Reader,

Vedran Vuk here, filling in for David Galland. I had an article ready for today, but at the last moment, our own Bud Conrad sent me his recap of the fiscal-cliff fiasco. To make sure this issue doesn’t set a record in length, I’m making way for Bud’s wisdom and always-excellent analysis. To hear more from Bud, also make sure to check out his recent interview with Jim Puplava on our growing debt and the end result of it, which is baked in the cake at this point.

Then we have an article from Dennis Miller on getting serious about your retirement goals. For those readers who aren’t familiar with Dennis yet, he’s the editor of our newest letter, Miller’s Money Forever. Unlike just about any other newsletter writer, Dennis is already in his retirement years. To take a jab at myself, I’d rather hear retirement advice from Dennis than some writer with thirty years till retirement.

Speaking of Dennis’ new letter, the latest issue of Miller’s Money Forever is coming out soon, in about ten days. Every monthly issue tackles another subject facing those in retirement or planning for it. We recently discussed the costs and benefits of annuities and reverse mortgages. In the upcoming issue we examine the pros and cons of owning real estate while in retirement. Furthermore, we’ve got a new pick in the portfolio with a great yield. Last month, we added a stable pharmaceutical with a 3.9% yield and have a few other good ones paying 5.4% and 4.8% yields. If you haven’t had a chance to do it yet, check out an issue for yourself. Now let’s get to Bud’s take on the fiscal cliff – perhaps it was a bullet dodged in the short run, but an opportunity was missed to hit the real target: runaway spending.

The Fiscal Cliff: An Opportunity Avoided

By Bud Conrad

The label “the fiscal cliff” evoked the fear that something terrible was about to happen if the previously legislated spending cuts and tax increases came into effect. From my point of view, our nation’s deficits and debt are growing at an alarming rate and need to be cut back. The reason these laws were enacted was to offer markets some hope that we would eventually work toward eliminating our serious deficits. But the prevailing opinion that such drastic decreases in our deficit would slow our economy and bring recession created the impression that this “cliff” must be avoided.

The chart below indicates the size of our federal government’s budget deficit. The blue bars reflect what would have happened if there were no legislative changes, and the harsh measures of tax increases and spending cuts occurred. The red bars reflects potential tax increases, the green spending cuts, and the purple is additional interest paid on the expanded debt as a result of bigger deficits. The cliff is seen in the rapid drop of the deficit in the first few years of the blue bars.

(Click on image to enlarge)
The result so far is that tax cuts have been extended for families making less than $450,000 per year (for individuals, it’s $400,000). Spending cuts have been delayed for two months, and the debt ceiling will have to be raised at that time. Compared to last year’s structure, the main result is a relatively modest increase of $650 billion in taxes on the rich. Spreading this over 10 years means that the budget is roughly $65 billion less per year because of the higher taxes. In essence, after all the political discussion and finger-pointing, the politicians did what I expected: they kicked the can down the road and made very little change compared to last year.

The next chart shows the same baseline blue bars with the rather large extension of Bush-era tax cuts to the lower-income households, plus some small additional spending items. Since the blue baseline includes the expectation of sequestering of spending, it is my expectation that the actual deficits could be higher when no cuts are made with some future exercise of government can-kicking. While this chart appears to have lower deficits than shown in the previous range of possible outcomes, the more accurate conclusion is that we are still facing huge deficits, and the politicians really achieved very little in managing our long-term deficit problem. When they get back to meddling, the final deficits could be a lot worse than this analysis.

After the markets closed on Friday, January 3 (when we were less likely to be watching), the Congressional Budget Office released an updated calculation on the size of the cost of the new legislation: it is now $600 billion worse than discussed. They left out the accounting for paying interest on the increased debt for the period of the calculation. I’ve included the interest-rate cost in the chart below where I estimated it as being larger in the later years of the chart. $600 billion turns out to be only a modest addition. It will turn out to be higher when rates rise.

(Click on image to enlarge)
Here are a few more details on what was decided:

• Employees will have up to $2,000 more taken out of their paychecks annually due to the expiration of the temporary payroll tax cut

• The estate tax will increase from 35% to 40%, with the first $5 million worth of property exempt from being taxed

• Capital gains and dividend tax rates will increase from 15% to 20% for higher-income earners

• Alternative Minimum Tax will be raised to affect only higher-income households

• Doctors will not see big cuts for treating Medicare patients

• Unemployed workers will receive extended benefits

It is also sad to report that Washington has been operating as business as usual, including extending many strange programs like support for NASCAR racetracks, rum import duties, and even special support for buildings in New York City near the World Trade Center. While deplorable, these items are small in the macro picture. One new emergency-spending measure that was not included is $60 billion for hurricane Sandy relief, which will surely be added to the deficit soon. The beat goes on, with the inevitable result that the deficit continues. Fiat currency systems have no built-in limit.

World markets applauded this relatively modest package, because it confirms the short-term positive results of government deficit spending. The Dow Jones Industrial Average was up 300 points the day after the crisis was “eliminated.” That means that the Federal Reserve will back up the federal government with more QE to keep the government rolling for the time being. Another result should be further downgrading of the US government debt by the rating agencies. Can you see a progression over another cliff? Downgrading raises the interest rate required by investors on US Treasuries; that increases the cost and the deficit. See the purple in the above chart? It will get worse than the CBO is letting on when rates rise.

I had been trying to ignore the massive, blanketed coverage by our media of this political circus. I knew ahead of time what the result would be from this deficit-cliff exercise. When it comes to holding the line against more government deficits, spending, and taxing, our government is dysfunctional. This event is more seminal than the results indicate: we can expect the politicians to repeat this process in a couple of months, and so on until there is a major loss of confidence in the dollar. There will be no return to fiscal responsibility. My point is simply this: we are already beyond the point of ever returning to a sensible, balanced-budget system. We may be distracted by wars, some crazy or false-flag terrorist event, or by even a natural disaster, but the conclusion is already inevitable: The US dollar will be toast; Treasuries are a dangerous investment; interest rates will start rising; and even the massive Federal Reserve manipulation supported by the banking cartels will be unable to overcome that. We will likely start in a slow fashion his year and will escalate out of control in the decade ahead.

We need to understand the implications of this recent event, and – as this small step confirms – that promises of future fixes will be complete shams. Remember when President Johnson said that there would be no repercussions from removing silver coins from our currency? A silver quarter alone is now worth around $5.50. And that’s not because silver is different; it’s because dollars are heading into the toilet. Protect yourself!

In the long run, the fiscal-cliff deal should not be celebrated as if it were a positive event. It is far from balanced, considering the much bigger government-debt problems that we face as a nation. In essence, this action was an opportunity to take real measures to curb our deficits, but the action taken has drifted us further along the path of fiscal irresponsibility.

How Can Baby Boomers Reach Their Retirement Goals?

By Dennis Miller, Editor of Money Forever

In May 2012, the Transamerica Center for Retirement Studies released its 13th annual Retirement Survey. A survey of over 3,600 workers showed that 56% plan to work after age 65, and 54% indicated they would continue working after they retire. The lead paragraph of the press release states, “American workers, shaken by the realities of the Great Recession, have adjusted their visions of retirement…”

In the detailed research report, the authors offered a new definition of “retirement readiness”:

A state in which an individual is well-prepared for retirement, should it happen as planned or unexpectedly, and can continue generating adequate income to cover living expenses throughout his/her lifetime through retirement savings and investments, employer pension benefits, government benefits, and/or continuing to work in some manner while allowing for leisure time to enjoy life.

Over the Christmas holidays I had several discussions with my baby-boomer-age children on this subject. My youngest son commented, “If I had been called for the survey, I would have responded like the majority.” He feels that his peer group is very much aware of the fact Social Security is a big question mark when they get to retirement age. He pointed out that the baby-boomer generation is different from their parents’ generation before them. Many married much later in life and did not have children until they were in their thirties.

He saw his parents accumulate the bulk of their retirement savings after the nest was empty – the time I refer to as the “sprint to the finish line.” By the time boomers’ nests are empty, they will only have a few years left to accumulate their retirement savings.

In effect, he understands that saving for retirement is a huge problem. At the same time, starting in the 50s one may be moving into peak earning years, but they are also faced with their peak family-expense years simultaneously.

His response was, “Understanding the problem is one thing. Many feel they are unable to do something about it.” Much like the generation before him, the here and now takes priority over something down the road 20 years from now. “Dad, it is really tough to try to save money with children who will soon be driving and then off to college. That costs a lot of money.” On that issue we agree.

So where do you start?

I struggled with that question for quite some time. They were looking at Dad for answers.

The first thing that came to my mind was to define saving. For many of us, we were brought up with the phrase “save up,” meaning we were saving our money so we could purchase something we wanted. One of my children’s friends was proud of the fact that both husband and wife both stopped stopping at Starbucks twice a day for coffee – they now make coffee at home and carry it in a thermos. They went on to say that the money they save equals their current boat payment. We agreed that may be one type of saving; however, it really was nothing more than a reallocation of capital.

Saving for retirement is much different. We define it as “accumulating capital for the sole purpose of creating wealth, to accomplish the goal of being able to achieve what the survey called ‘retirement readiness.'” This was capital earmarked for 20 years down the road and would be used for no other purpose. This is capital that must be accumulated above and beyond your normal living expenses.

How do we accumulate this retirement capital?

Being particularly bored on a long-distance international flight many years ago, I decided to make a list of all the material things I wanted out of life. I had just departed the United Arab Emirates and had seen some of the ostentatious wealth enjoyed by the sheiks and was thinking that it would be cool to have that kind of money. It turned out to be a two-page list. Then I figured out the cost of acquiring all the items on the list, plus the cost of maintenance. I came to one conclusion: I needed to win the big lottery annually! It was time for a dose of reality.
Understand the difference between needs versus wants. One does not have to be a miser to keep things in perspective. Baby boomers were taught to buy the biggest, most expensive homes they could afford because it was guaranteed to increase in value. For a few decades that was true, but not anymore. By the time you can really afford the McMansion, do you really need it? How many folks have we seen buy a McMansion as their children are becoming teens? A decade later, the nest is empty and maintenance, taxes, and just keeping it clean becomes a real challenge.

Do you really need all the latest computer technology, particularly when your current computer is working just fine? Do you have to have a new car the minute you pay your old one off? When your closet is so full of clothes that you have to start hanging some in the guest bedroom, it might be a clue.

My children agreed that much of what we discussed was a different way of thinking. Many in my generation realized that living within – and below – your means is a good thing when we retired; better the baby boomers get a 20-year head start.
Pay yourself first and learn to live on the rest. As I look back, the single greatest words of advice from a mentor about how to save would be that simple sentence. My wife and I would be living from month to month, but doing OK, and then a nice promotion or raise would come along. Two years later we would ask ourselves, “Where did the money go?” Once again we were living month to month, hoping for the next raise or promotion.

We finally ‘fessed up to ourselves and determined that the piano which is seldom used and the pool table that was now primarily used for folding clothes were perfect examples of our theory: “The more you make, the more you spend.” I will also readily admit that I was probably the worst culprit; if money was available, there was always something cool I could find to spend it on.

When my friend discussed the sentence with me, he really emphasized that you have to pay yourself first. By that he meant save the money where it is not easily accessible, or you will not accumulate any wealth – just more stuff. He was right.

The first step was to look for ways to save money as he suggested. For baby boomers, there are two obvious places to start. First is this: if you have a mortgage, can you make extra or larger payments? At the time, I was paid a monthly draw and then got a commission check each quarter. One thing my friend taught me was to write an extra house-payment check the minute the commission check was deposited; then we could figure out what we would do with the rest.

The second area is some sort of IRA or company retirement plan. The goal is to maximize your contribution to that plan as quickly as possible. Doing it all at once may not seem possible, but you can incrementally increase your deductions. My son told me of a friend’s wife who went back into the job market after being a stay-at-home mom. They immediately upped his contribution to his company’s 401(k) plan by 10% of her salary. They knew they could live on his salary; they had for years. In addition, she’s setting up her own IRA.
Commit yourself to being committed. I borrowed that line from a book written by Dennis Connor called The Art of Winning, in which he talked about winning the America’s Cup yacht race. It was a book I particularly enjoyed and profited from. There were times in my life where my wife and I would have to both discuss an issue and jointly make a commitment to do something different. Then it became our job to encourage and reinforce each other as we embarked on our new challenge.

Saving money for retirement is a process, not an event. Baby boomers don’t have the means to do it all at once, but they have to start somewhere. Start small, but make the commitment. As you watch your savings grow, the natural process is to find ways to make it grow faster. Many savers have told me it becomes a self-fulfilling prophecy: the more it grows, the more excited they become and the more it accelerates. One advantage of saving is the compounding effect. Many folks look forward to the day that their savings earns 10%, then 20% above and beyond what they are contributing.
Invest prudently. As you see your wealth begin to accumulate, you need to continually educate yourself about how to invest wisely. This too is a process, not an event.

A mentor once told me that I would accumulate wealth a lot quicker if I would quit trying to hit a five-run home run… there is no such thing. During the Internet boom, many of us wondered if we were the only ones not getting rich overnight. He used the baseball analogy to say that people who accumulate wealth are hitting singles and doubles regularly and consistently moving toward their goals. He was right.
In summary, for baby boomers the challenge is in front of you. You can control your attitude, your efforts, and your behavior. You have seen both boom and bust times and have learned how to survive in both environments. Savers will always find a way to save; the key is to get started now.

I hope you’ll consider following some or all of my tips above on savings. We all know that setting up a solid, reliable income stream is just as important to a comfortable retirement – and increasingly difficult in a world with 0% interest rates at the local bank. That’s why Vedran and I developed a simple 12-month investment income plan you can follow regardless of how much – or how little – you have to invest. And the best part is, if you follow the plan, you’re guaranteed investment income every month.

Friday Funnies

I’m not sure if this article will make you laugh or cry, but I’m sticking it into the Friday Funnies. The Washington Times chronicles the shock felt by many Democrats – and shared on several social-media sites – after seeing their higher payroll taxes after the fiscal-cliff deal was reached. I’ve copied a few of the choice reactions:

“What happened that my Social Security withholding’s [sic] in my paycheck just went up?” a poster wrote on the liberal site DemocraticUnderground.com. “My paycheck just went down by an amount that I don’t feel comfortable with. I guarantee this decrease is gonna’ [sic] hurt me more than the increase in income taxes will hurt those making over 400 grand. What happened?”

“My boyfriend has had a lot of expenses and is feeling squeezed right now, and having his paycheck shrink really didn’t help,” wrote “DemocratToTheEnd.”

“_Alex™” sounded bummed: “Obama I did not vote for you so you can take away a lot of money from my checks.” “Christian Dixon” seemed crestfallen: “I’m starting to regret voting for Obama.” But “Dave” got his dander up over the tax hike: “Obama is the biggest f***ing liar in the world. Why the f*** did I vote for him?”

Drive Thru Invisible Driver Prank

Correctly Forecasting Europe

What economic model correctly forecasts the outlook for the European economy: A double-dip recession, a V-shaped recovery, or something else?

The bathtub. A steep decline, then a period of stagnation, then it goes down the drain.

On Greece’s Tourism Economy

The economy of Greece is in ruins… but hasn’t it always been?

The Life of a Stock Trader

The pessimist sees the glass as half empty. The optimist sees the glass half full. The stock-market day trader just adds whiskey.

Bank Robbers and Robbers at the Bank

The good news is that, last year, the FBI reported a 20% decrease in the number of people robbing banks. The bad news is that there was a 100% increase in the number of banks robbing people.

The Banker and the Frog

A banker was walking in the park one day when she noticed a large frog sitting along the side of the pond.

As she was walking by, the frog suddenly piped up and said, ““Excuse me… but… ummm… would you happen to be a banker?”

The banker responded, “Why yes, I am a banker. Why do you ask?”

“Well,” says the frog, “I was a forecasting economist, and my forecasts didn’t turn out so well. The CEO I worked for put a spell on me and turned me into a frog. The spell can be broken if a banker will kiss me. Then I can return to being a forecasting economist.”

The banker paused for a moment, then reached out, picked up the frog, put him in her purse, and began walking along.

After a few minutes the frog piped up, “Hey, what are you doing? If you will just give me a kiss I can walk along on my own and you won’t have to carry me.”

The banker stopped, looked down at the frog, and said, “True… but you’re worth a lot more to me as a talking frog than as a forecasting economist.”

That’s it for today. David Galland should be back next week. But before I go, I have one more thing to share with you today. Upon occasion, David likes to share a cool song with our readers. Well, here’s a singer-songwriter who recently caught my ear – Slaid Cleaves. He might not be famous yet, but when you’ve got 68,000 hits on YouTube, you’re doing something right. Here’s his song Broke Down. Let me know what you think. Thank you for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Senior Analyst

Technology and Your Fourth-Amendment Rights

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Synopsis:
Michigan State Police have launched a pilot program, having traffic cops search mobile phone data from speeders; Alex Daley comments on the new intrusion on our privacy. Also in this edition: Physical delivery of gold seems to become more and more popular… and Vedran Vuk explains why, like a fine wine, propaganda gets better with age.

Dear Reader,

Today, I wanted to touch on a few housekeeping points. Most importantly, Doug Casey will make a speaking appearance on May 14 at the Global Currency Expo in La Jolla, CA. Olivier Garret and Jeff Clark will also be in attendance. Of course, Doug’s fundamental analysis on the dollar is something you don’t want to miss. So, if you’re in the area, grab a reservation. The organizers have said that there are few seats left.

While forex isn’t our primary concern at Casey Research, we’re always keeping a close eye on the dollar and other currencies around the world. Well, actually, I take that back. We are currency investors – except unlike most, we see gold and silver as money. I’ll have to use that line the next time someone asks what our newsletters invests in. “We’re currency investors. We invest in gold and silver.”

In our opinion, all fiat currencies are in a race to the bottom. However, even with this view, a few currencies differentiate themselves. Some will cross the finish line much more quickly than others. As a result, our portfolio in The Casey Report holds two currencies other than the dollar for diversification purposes.

Before we get into the issue, I wanted to mention our new additional links and reads section. I hope that you’re enjoying it thus far. Let me know what you think, and please send in links other readers might enjoy. I can’t read every website myself. Any help would be much appreciated.

First, Alena Mikhan and Andrey Dashkov take a different view on UTIMCO’s recent gold delivery than yesterday’s article by Kevin Brekke. Then, Alex Daley informs us of technology’s new threat for your rights. Finally, I’ll share some more philosophical thoughts on propaganda.

Physical Delivery Gets Popular

by Alena Mikhan and Andrey Dashkov

Last Friday, the University of Texas Investment Management Co (UTIMCO) took delivery of 6,643 gold bars, worth slightly under one billion U.S. dollars, sending shockwaves across the gold community. We don’t disagree with Casey editor Kevin Brekke’s cautionary note yesterday, but we have to point out that this action is particularly significant because UTIMCO is the nation’s second largest university fund behind Harvard’s.

Amidst the current uncertainty surrounding U.S. sovereign debt and inflation fears, this decision looks like a good solution to lock the institution’s ownership of gold under management. But the major risk UTIMCO was trying to do away with was the possibility of surging demand for physical gold at the COMEX.

As per the Bloomberg article mentioned above, “Right now few investors take physical delivery of bullion. As of April 14, 2,860 contracts this month, about 0.5 percent of total open interest, had been converted to metal, exchange data show.”

According to hedge-fund manager J. Kyle Bass, who advised UTIMCO to take physical possession of the gold: “Open interest in gold futures and options traded on the COMEX typically exceeds supplies held in its warehouses. If the holders of just 5 percent of those contracts opted to take delivery of the metal, there wouldn’t be enough to cover the demand.”

The situation, as quoted, looks quite shaky. The five percent of deliverable metal Bass mentions could disappear rather quickly if debt and inflation-induced fears manage to build enough demand momentum and subsequent physical delivery requests. Or, more specifically, if perception of counterparty risk among once-venerable institutions (no one is going to forget Lehman Brothers anytime soon) shifts the thinking towards taking delivery.

UTIMCO’s choice may not be a shift in the cosmic firmament, but increases in demand for physical gold would definitely be a significant bullish factor for gold, which has been on a steady rise and this week surpassed US$1,500 per ounce.

But is this really happening? Let’s have a look at Asia. World Gold Council figures show that among the generally robust investment demand in 2010, there were growing volumes of physical delivery in that part of the world.

Investment activity in China remained high. Physical delivery at the Shanghai Gold Exchange totaled 836.7 tonnes in 2010, with 236.6 tonnes delivered during Q4. Moreover, physical delivery as a percentage of trading volume had increased to 33% by the fourth quarter, as Chinese investors sought to get hold of gold bullion.

Source: Gold Investment Digest Fourth quarter and full year 2010

The reasoning behind the behavior of UTIMCO and some of the Asian gold traders is rather obvious: to secure ownership of a safe-haven investment tool (physical gold) in times of uncertainty while it is still possible.

As the pace of global economic growth remains a major concern and the risk of another collapse possible, the inclination to take physical delivery should gain popularity in other parts of the world, with significant consequences to the price of gold. In the U.S., UTIMCO set a precedent; the question now may be, “Who’s next?”

Technology and Your Fourth-Amendment Rights

By Alex Daley

Officer: “Do you know why I pulled you over?”

Driver: “I think I was going a little fast coming down that hill. I was just slowing down. Sorry, but…”

Officer: “License, registration and cell phone, please.”

Next time you are pulled over, don’t be surprised if a police officer asks for your cell phone. That’s apparently what’s started in Michigan, where police are employing a new piece of technology in their war against lead-footed menaces.

According to a complaint aired by the ACLU, Michigan State Police have launched a pilot program, having traffic cops search mobile phone data from speeders using this fancy gadget:

Sold by a company called Cellebrite, the “UFED” can download pretty much anything and everything from most models of phones: texts, photos, videos, even GPS data. The devices are equipped with adapters for connecting to most major brands of phones, and can even uncover information like the physical keypad lock code and internal diagnostics that track past SIM cards in use.

The device takes a dump of any phone memory it can access (on some phones, that’s a complete dump of everything) and stores it for offline analysis using the company’s desktop software back at the police station. There, police can read your call history, play your videos, or even recover previously deleted files in some cases.

There are certainly some uses for such a device, say, in analyzing the cell phone of a suspected drug dealer after his lawful arrest. But in Michigan the police have allegedly been using the device to download information from the cell phones of drivers pulled over for speeding, even when not suspected of any other crime.

The ACLU contends (and your author for one agrees completely) that downloading the contents of a person’s cell phone without probable cause or a search warrant is a clear violation of 4th Amendment rights. The organization has requested access to the logs from devices in use by the MSP, so they can determine what if anything has been downloaded, and what rights may have been trampled on, through the Freedom of Information Act.

And Michigan police are happy to comply. For a small administrative fee, of course. Just $544,680. For five devices.

The ACLU, understandably perturbed “that Michigan State Police would rather play this stalling game than respect the public’s right to know,” have tried to narrow their requests to reduce the costs of fulfilling it, only to be given the runaround on when and where the devices have been used. After years of haggling back and forth behind the scenes, the ACLU is now bringing its case to the court of public opinion in an attempt to clear these roadblocks and continue its investigation.

We can only hope that they have some success curbing any abuses that might be occurring before these devices start winding up in the patrol cars of police around the nation.

Like a Fine Wine – Propaganda Gets Better with Age

By Vedran Vuk

Today, I wanted to step way back in time to the Civil War. In April, depending on your geographic location, this time of year brings the American Civil War back into the press with some article recounting the events. In this spirit, CNN had a very interesting poll on current perceptions of the Civil War. The original intent of this poll was rather easy to see through. Hmm… I wonder why the poll asked Tea Party supporters whether their sympathies lie more with the Confederacy or the Northern states?

Unfortunately for CNN, they didn’t get their juicy story labeling the Tea Party as a bunch of pro-Confederacy racists. In fact, the poll shows the greatest numbers of Confederate sympathizers are found among political moderates with 29%. You know those moderates and their crazy pro-Confederate ways. Nonetheless, CNN found something really interesting: 42% of the polled do not believe slavery was the main reason for the war, while 54% believe that slavery was the primary reason.

Now, I’m not here to change your mind on the subject. That’s the role of a history publication and certainly not Casey’s Daily Dispatch. But I did want to discuss these numbers. In my opinion, they do not measure sentiments toward the Civil War. Instead, this poll gauges the power of propaganda. Regardless of your opinion, the poll shows that about half the country disagrees. We’re not talking about a debate on the merits of Obama’s new healthcare. In that debate, one would expect various opinions. We’re talking about an event where 600,000 were killed, entire cities were leveled, and the country was temporarily torn apart. Yet, 146 years later, Americans can’t agree on the primary reason for the war.

I find this frightening. With enough time and propaganda, a large portion of the population can be led astray. And not only will they believe the bending of the truth, they will fiercely and angrily defend it. Where do the untruths come from? Well, largely from governments. But you can see possible propaganda angles from both sides in the Civil War. After the war, the North needed to put its actions including war crimes in a better light. Hence, ending slavery suddenly became the primary reason for the war.

But you could look at the non-slavery reasons in the same light. How many Confederate veterans do you think told their kids and grandkids that they fought for slavery? Probably not many. Furthermore, on a personal level, most clearly didn’t fight the war for this reason. And that seems self-evident. Simply put, poor white Southern farmers didn’t charge a mile of open field at Gettysburg so that rich plantation owners could outcompete them with slaves. But then again, what the individual soldier thinks rarely has much to do with the cause of a war.

In wars today, the same sort of business goes on. Is the U.S. fighting in the Middle East for security, freedom and democracy? Or is the fight a part of a long-held foreign policy mentality designed to enrich the military-industrial complex? The truth is somewhere in the middle. And just like the average Confederate soldier during the war likely didn’t see his struggle as one for the slave plantations, most average guys in Iraq don’t see themselves as pawns for Halliburton’s net income.

Propaganda goes far beyond just wars. If our country can’t agree on the reason why 600,000 were killed in the Civil War, then what other common wisdom has been propagandized? Did FDR really save us from the Great Depression? Is the Federal Reserve an agent of price stability or value destruction? Is democracy the path to prosperity? Many of these issues are simply taken for granted. However, once one starts to look at the details, the clear and unquestionable “facts” become highly debatable.

Propaganda is an extremely powerful tool. With enough effort and time, the public can be convinced of practically anything. And should we be surprised? The Democratic Party has been praising FDR for 80 years, the administrations in power always back the Fed, and democracy has been the justification for numerous U.S. conflicts. These ideas have been around so long that a large part of the population sees them as undisputed facts. The same will be true with our times today. I wouldn’t be surprised one bit to find my grandkids coming back from school one day in the distant future telling me how Obama’s Recovery Act saved the country from the Great Recession and Bush fought for freedom in Iraq.

Additional Links and Reads

Student Loan Debt Likely to Top One Trillion Dollars (InsideArm.com)

Irish Housing Market Report (Bloomberg video)

Ron Paul’s House for Sale (AOL Real Estate)

That’s it for today. Thanks for reading and subscribing to Casey’s Daily Dispatch.

Vedran Vuk
Casey’s Daily Dispatch Editor

What You Need to Know About Buying Silver Today

It’s hard to believe that less than three years ago, silver was $8.80 an ounce. Since then it has nearly quadrupled in value (up 385%) and more than doubled in the last 12 months alone.

That’s great for those who already own the metal – but is it too late for the rest of us to get in?

To answer that question, BIG GOLD Editor Jeff Clark sat down with our friends of The Daily Crux. Read what he had to say about the silver rally, and why you should view any correction as good news.

Crux: Jeff, silver has had an incredible run over the past year or so… Where do you think it’s headed next?

Jeff Clark: Well, that’s probably the most common question we get these days. Silver has definitely been very exciting. The price has basically doubled in a year, and many of the stocks have done much better than that… So you could be forgiven for asking how long that can continue.

I think the bullish case for silver going forward comes down to three main factors.

The first is industrial demand. Everyone knows industrial use is much greater for silver than gold, and that does make it more susceptible to an economic slowdown. But what’s interesting is these industrial uses are growing rapidly.

For example, all of the following uses for silver are increasing: medical, electronics, food processing, water treatment, paper, building materials, wood preservation, textiles, consumer products… the list goes on and on. Every bandage-maker, for example, now offers a silver-based product. You can buy silver-laced toothbrushes, hairbrushes, combs, and make-up applicators. In England, you can buy silver-based soap.

The takeaway is that all these uses are on the rise, so even in an economic slowdown, there is a higher level of base demand. The demand for any individual application could decline, but the total number of applications for silver is increasing. Over time, I think we’ll see increasing levels of demand.

The second major factor is investment demand. Investment demand is soaring and can’t be ignored. The U.S. Mint sold more one-ounce Silver Eagles in January than in any other month since they began creating them in 1986. China’s net imports of silver quadrupled in 2010. Against all this you have the fact that most Americans don’t own any gold or especially silver. So even though there’s already incredible investment demand, the potential for it to increase is still tremendous.

The third factor is supply. Ask yourself what’s wrong with this picture: Total global demand for silver is about 890 million ounces a year. Worldwide mine production is about 720 million ounces a year. Scrap currently makes up the difference, but I think the crucial point to recognize is that producers can’t dig up enough silver to meet current demand.

So what happens if industrial uses continue to rise? What happens if investment demand continues growing? What happens if we do get some type of currency collapse? What happens if Doug Casey is right and we get a true mania in gold and silver?

We had bottleneck issues with physical supply in 2008, where mints across the world couldn’t keep up with orders. A lot of it was due to them being unprepared for the rush, and they’ve since improved some of their operations. That’s great.

But even with all the improvements, even after adding equipment, even after adding staff, even after adding work shifts… they’re still having issues. Over the past three or four months, we’ve been hearing about mints having delays, temporarily running out of stock, etc. So it’s still a problem.

And if all the factors I just mentioned come into play, then I think you could say “Bottleneck, meet desperation.” Regardless of how well prepared a manufacturer might be, demand at some point could legitimately overwhelm the system, and I think that’s a very real possibility. Anything could happen. But the scary thing is, we may not have enough supply to meet demand if we get a mania.

So based on these factors, my view is that silver can continue rising for quite some time. I don’t think it stops until SLV, the silver ETF, is a favorite of the fund managers… until Silver Wheaton is a market darling of the masses… until Pan American Silver is Wall Street’s top pick for the year… That’s when I’ll be looking for the end of this silver bull market.

Crux: Speaking of a mania, just how high do you think silver could go?

Clark: Many people don’t realize this, but silver rose 3,646% in the 1970s, from its November ’71 low to its January 1980 high. If you were to apply the same percentage rise to our current bull market, silver would climb another 500% from here, and the price would hit $160 an ounce.

Those are just numbers, but it shows that we have an established precedent for the price to go much higher.

It’s the fundamentals, of course, that will determine how high the price ultimately goes. Show me a healthy dollar, show me no threat of inflation, show me a responsible government that stops printing money… Show me a repentant Iran and North Korea… Show me that the sovereign debt issues in Europe are resolved… Show me positive real interest rates… Show me that unemployment is plummeting, that bank closures have stopped, that real estate is recovering…

Show me all that and we’ll talk about the gold and silver run being over… But until those things start changing in a big way, I’m buying.

Crux: Silver bears often suggest that a large part of the rally in the last bull market was due to the Hunt brothers, who were accused of trying to corner the market. What do you say to that? How much do you think they attributed to the price rise in the ’70s?

Clark: Well, I’m skeptical that the reason silver went as high as it did was primarily due to the Hunt brothers’ activity in the market. It’s interesting to note that they bought silver primarily because they mistrusted the government, and because they thought silver was going to be confiscated. Remember… gold ownership was illegal when they first started buying silver in the early ’70s.

Yes, they bought a lot of silver… But if you look at the correlation, you’ll notice the price didn’t necessarily move up when they bought. In fact, when the rumors that they were trying to “corner” the silver market really started going mainstream, which was in the spring of 1974, the silver price dropped solidly for the next two years. One would think that the price would’ve risen, not fallen, if silver was being “cornered.”

Secondly, if you look at price charts, silver moved in lockstep with gold back then. They rose and fell pretty much together. They both peaked on the very same day, January 21, 1980. So unless the gold market was equally spooked by what the Hunt brothers were doing with silver, it seems a stretch to assume they were the primary cause of the rise.

Last, as my editor pointed out, you have to consider that it was the mainstream media that largely promoted this idea the Hunts were “cornering” the market. With that in mind, one has to be suspicious that was, in fact, the case.

To be clear, I’m sure they had some effect, but to suggest they were the main impetus behind silver’s tremendous rise doesn’t seem wholly accurate. And look at the price today… It’s outperforming gold in our current bull market, just as it did in the ’70s, and there’s no Nelson Bunker Hunt around.

Besides… who’s to say that we won’t see other “Hunts” come along today and try to buy up large quantities of the metal? I wouldn’t rule it out.

So again, I think it’s more important to look at silver’s fundamentals for any kind of price projection than a one-off event. And those fundamentals are very bullish.

Crux: What are the bearish arguments for silver?

Clark: Well, I touched on it earlier… but if the economy crashes, silver is likely to suffer more than gold due to its large industrial use component. Another factor is that silver is not bought by central banks, so one source of demand for gold is not present with silver. But I think the bigger trend of a currency crisis is going to dwarf those concerns… And I think that silver will do very well in that environment.

Silver is more volatile than gold, but that just means you get better opportunities to buy it cheaper, and probably make more money on it if you sell near the top.

So yes, there are bearish arguments for silver, and one has to be prudent in buying it – you don’t want it to be the only asset you own, for example. But it would be equally a mistake to not own a meaningful amount.

Crux: So… is today a good time to buy?

Clark: Well, how many ounces do you own? And what percentage of your assets do those ounces represent?

There’s your answer. If you have minimal or no exposure, I suggest buying. Don’t rush out and spend all your available cash, because there will always be corrections, but the less you own, the more you want to make a plan to add a meaningful amount to your portfolio.

Remember… silver is a currency replacement just like gold. It’s money… and therefore you want to make sure you own enough for both protection and profit. If you don’t own enough, I suggest going into “accumulation” mode… buying some on a regular basis, like dollar-cost averaging.

Our recommendation in Casey’s BIG GOLD– which is a conservative letter, by the way – is that approximately one-third of your investable assets be devoted to the precious metals market. That includes gold, silver, and precious metal stocks. That may sound extreme to some, but we think the risk to currencies right now is extreme. Therefore, being overweight precious metals is justified. Obviously, each individual investor has to be comfortable with what they do.

Crux: Do you a recommend a certain percentage of ounces in silver versus gold?

Clark: We generally recommend you hold more gold than silver. We suggest approximately 70%-80% in gold versus 20%-30% in silver. Depending on your situation and risk tolerance, you may wish to have more or less in silver, but again the point is to have meaningful exposure.

Crux: For individuals who are new to buying precious metals, what are your preferred ways to purchase silver?

Clark: The options are becoming more and more mainstream, so it’s getting easier to buy both metals. The alternatives are growing, and they’re also improving. You basically have two choices: You can either buy and store it yourself, or you can buy and have someone else store it for you. Ideally, you want to do both… you want to diversify.

There are risks to storing metals yourself, such as theft, loss, or fire. You can put it in a safe deposit box, but then it’s in the financial system and it’s subject to banking hours and could even be susceptible to confiscation, though I’m skeptical that will actually happen. But I do think everyone should have some physical silver handy, at least a couple months worth of expenses.

So the short answer is to diversify what you buy and how you store it. For physical silver, I would stick to buying the popular one-ounce bullion coins – Eagles, Maple Leafs, etc.

You can also buy silver funds and ETFs in your brokerage account or online, and there are definitely some advantages to doing that. They’re easy to buy, sell, and trade. There’s no need to mess with the storage yourself, and it’s especially beneficial for those who have larger holdings. You can put $50,000 worth of gold in the palm of your hand – but $50,000 worth of silver would require a small suitcase, so space is an issue. A lot of online options now have delivery alternatives available, and some even have free storage. Options here include the various ETFs, closed-end funds, online options like GoldMoney or BullionVault, and certificate programs like the Perth Mint Certificate.

So find a couple options you’re comfortable with, diversify your holdings, and just continue to buy on the dips, with the intention to hold until the bull market is over.

Crux: How about silver stocks. Can you give us a favorite?

Clark: Well, it’s pretty clear the go-to stock in the silver industry – in my opinion at least – is Silver Wheaton. It’s definitely been a sweetheart the past two years. It’s given us everything we could want in a silver stock.

The stock suffered badly in the meltdown of ’08, and things did get a little dicey at the time, but I remember thinking that unless the world comes to an end and the silver price never recovers, this company is going to survive and bounce back – in part because of management and in part because of the business model. They have no exposure to mining costs, for example.

Shares back then were around $3… If you bought at the time, they’re now a ten-bagger. So it’s been an incredible run.

The question, of course, is going forward: Since the stock is already at $35, can it be another ten-bagger from here?

Well, the company expects to increase “production” by 70% by 2013. And their costs will basically stay stagnant. Meanwhile, imagine where the silver price could be in the next two to three years, and you can see this company can make enormous amounts of cash. Some of that is probably priced into the stock already, but you can’t deny where this company is headed over the next few years.

In the bigger picture, you have to look at our currency issues – they’re very real. They’re deep. They’re intractable. So when I look at what is likely to happen to the dollar and thus what level of inflation is probable, I think silver will go substantially higher, which means Silver Wheaton is going to go much, much higher. Only if you believe deflation ultimately wins the war and that inflation doesn’t occur do you think silver or Silver Wheaton won’t do well.

Could it have a big correction? Well, it recently dropped as much as 28%, but sure… it could easily fall more than that in a major correction. But if that happened, I’d consider it a big buying opportunity.

In my opinion, the bigger the correction, the bigger the buying opportunity, because I really believe the future is very bright for that company.

Crux: Sounds good. Any parting thoughts?

Clark: If you’re bullish on gold, I think you need to be bullish on silver, unless you think inflation will never come to pass. Regardless of the short-term fluctuations in the market, it’s only a matter of time before the currency issues punch us in the gut and inflation really takes off.

Second, remember that silver will be volatile, but focus on the fundamentals and use selloffs as buying opportunities. Until the fundamentals driving the bull market change, buy.

Bottom line, the bull market is far from over. I think it’s going to go much longer and much stronger… So buying on dips is the best advice I could give anyone.

Crux: Thanks for talking with us, Jeff.

Clark: You’re welcome. Thanks for having me.

Editor’s Note: Readers of Casey’s BIG GOLD can access Jeff’s full list of the world’s best gold and silver stocks, along with Casey Research’s preferred and trusted precious metals dealers. Get your three-month trial with a full money-back guarantee today.

Weekend Edition – February 19, 2011

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February 19, 2011 | www.CaseyResearch.com 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.

Elementary, My Dear Watson

By Doug Hornig

I think, therefore I am.

That bedrock concept has been at the center of Western thought since Rene Descartes first set it down in 1637. It attempts, in one all-encompassing line, to establish the existence of individual consciousness, and by extension the physical being of the thinker.

What is less often considered is that the human element was implicit. In the 17th century, no one would have or could have conceived that anything other than a person might engage in such philosophical musings. Animals didn’t “think.” And machines? Forget about it.

Today, Descartes would be in a bit of a quandary. Animals exhibit tool-using and problem-solving behavior that strongly suggests logical thinking, one of the hallmarks formerly believed to distinguish our species from the rest of nature. And if machines don’t think, they do something awfully similar.

Of course, it depends on how you define the term.

The famous Turing Test – as proposed in 1950 by legendary British mathematician, cryptanalyst, and computer pioneer Alan Turing – is still cited when we attempt to delineate just when a machine achieves intelligence.

Let a person have a text chat, Turing said, with both a machine and another person, both of whom are hidden and trying to act human. Then see if the interrogator can tell which respondent is the machine. If the interrogator cannot reliably make the distinction, then the machine may be said to possess intelligence as best we can define it.

So far, machines have always flunked the Turing Test. At first, they couldn’t fool anyone. However, Turing was writing at the very dawn of the computer age, when a huge room full of vacuum tubes couldn’t do what a cell phone can do today.

To check the current state of the art, there’s the annual Loebner Competition, in which the best machines from around the world attempt to convince a panel of interrogators of their humanity. They still can’t do it consistently, but they’re getting better. Here’s an example from a recent competition, wherein an interrogator submitted questions to three respondents, a male, a female, and a machine. All three entities knew that it was fall in England, and the interrogator asked of all three what they thought of the weather that morning. The responses:
“I do tend to like a nice foggy morning, as it adds a certain mystery.”
“Not the best, expecting pirates to come out of the fog.”
“The weather is not nice at the moment, unless you like fog.”
See if you can figure out who’s who. Not exactly a slam-dunk cinch, is it?

(Did you correctly identify: a. machine; b. male human; c. female human?)

Reliably fooling humans is proving beyond a machine’s present capabilities. But how about competing against people? Could a computer, say, play Jeopardy!?

This would seem highly improbable. Not only does success at Jeopardy! depend on an extremely broad knowledge base, but contestants have to deal with puns, allusions, irony, riddles, and other non-logical word plays, as well as make sense of categories that can be a bit abstruse.

Think that’s beyond the reach of a machine? Then you need to meet Watson, who was not only Sherlock Holmes’s devoted sidekick but is a functioning computer personality from IBM. Watson, actually named for the company’s founder, Thomas Watson, plays Jeopardy!. And plays the hell out of it.

Heading up the Watson project is David Ferrucci, IBM’s senior manager for its Semantic Analysis and Integration department. Ferrucci’s team scanned into the machine’s memory vast numbers of databases, along with millions of documents. Reference books, news articles, scholarly papers, tabloid blurbs, whatever. The hard part was recreating what the human goes through in order to get from answer to question. Google is the model for that kind of search, but does it merely by hunting down words or strings of words, and returning every single hit. That won’t work with Jeopardy!, where you have to distill the intended meaning of an answer (with all of its nuances) into the one correct question.

Once the data were in place, Ferrucci gave Watson more than a hundred algorithms to use at the same time, to analyze a question in many different ways, generating hundreds of possible solutions. Another set of algorithms ranks these answers according to plausibility. And then the computer selects the one at the top of the list and hits the buzzer.

Oh, and no Internet connection allowed. That’d be cheating.

Since last summer, Watson has been practicing, taking on humans on a mock-up of the Jeopardy! set and doing well. So well that the producers of the show decided it was time to let “him” go up against some proven competition, right in the evening spotlight.

They chose Monday, February 14. Valentine’s Day. And the following two nights, as well. For competitors they picked the two greatest all-time Jeopardy! champs, Ken Jennings and Brad Rutter. Let the games begin.

(As an added attraction, the practice rounds featured a graphic that shows the three answers Watson has rated as most likely to be correct, and how certain he is of the answer he selects. That’d be a plus in the final showdown, since it would provide something of a window into Watson’s “brain.” But we don’t yet know whether it made it to the show.)

Granted, a perfect simulation of Jeopardy! with a machine playing is impossible. Computers don’t care about winning or losing money; people do. Computers are emotionless; human contestants can freeze up or be driven to greater accomplishment under pressure. And so on.

Still, there’s no question that the coming week’s event is a milestone, comparable to the 1997 chess match that saw IBM’s Big Blue computer defeat Garry Kasparov, the reigning world champion.

Ferrucci and IBM are thinking way beyond Alex Trebek. The potential applications of something like Watson are myriad. Considering the primitive state of present question-answering machines, like the one you get when you call your airline, this is a huge leap forward. It’s not too early to envision the day when a doctor, a lawyer, an engineer – any specialist – will be able to have a conversation in English with a Watson-like machine that has speed-of-light access to all the present and historical knowledge in the field.

But for now, the tapes are made and the results guarded like the Oscars. There’ve been no leaks. To see what happened with Ken, Brad and the machine, you’ll just have to tune in. And to get you in the mood, you can have a quick go at Watson yourself, here.

Whatever the outcome of the match, robotics is exploding in real time. Yet the science is still elementary, dear Watson. Robots are about where the personal computer was thirty years ago, and they are destined to change our lives, probably as much as the PC has, in the next thirty. Casey’s Extraordinary Technology watches robotics carefully and has tucked two of the leading companies in the field into our portfolio. Both have performed admirably since we added them, and there will surely be many more to come.

Canadian Natural Gas Sees a Trade Partner in China

By the Casey Research Energy Team

A $5.4 billion investment by a Chinese company in one of Encana’s massive shale gas properties in northern British Columbia and Alberta is another sign that Canada wants Asia to become a major importer of its natural gas.

Encana is a leader in one of the things the Casey Energy team loves: unconventional natural gas production. Natural gas is a cleaner energy source than oil or coal because it releases less carbon dioxide and fewer pollutants when burned, so it is becoming an important component in global clean-energy plans. And unconventional technologies have already played a major role in the gas scene of late, a trend that we expect to continue with both gas and oil.

The $5.4 billion will buy half of Encana’s Cutbank Ridge shale gas properties, which cover 635,000 acres. The properties currently produce 255 million cubic feet of natural gas per day and contain proven reserves of more than 1 trillion cubic feet. The joint venture also covers about 700 million cubic feet per day of processing capacity, some 2,100 miles of pipelines, and a gas storage facility.

The deal is the largest foreign gas deal to date by a Chinese company. China is hunting around the world for gas reserves to support its plan to triple natural gas usage over the next decade. Chinese firms have pumped about $14 billion into Canadian oil and gas companies over the last two years. On its website, PetroChina says it has been trying for years to work with major Canadian energy companies and expects the Encana deal “to provide a platform for entering the major market in North America.”

For Encana, the deal will let the company accelerate production while keeping a lid on costs. Encana has been struggling with low North American gas prices because, unlike oil, North American gas is not a globally priced commodity. Instead it trades largely only within the continent because transportation limitations keep it here. Natural gas can only be moved via pipelines because of its huge volume; when condensed into liquefied natural gas (LNG), it can be sent via ship, but there are no LNG facilities in North America.

Canada sends the majority of its oil and gas exports to the United States, which means Canadian energy producers depend on U.S. demand for the bulk of their revenues. Relying on one customer is never a good business model, especially when that customer has concerns about one of Canada’s most important energy sources (the oil sands) and about a proposed pipeline expansion.

To diversify its customer base, Canada has been eyeing increasing trade with Asia. Two proposed oil pipelines and one proposed liquefied natural gas facility would all enable Canada to export energy from the west coast straight to Asia. None are permitted yet, and all face significant opposition from environmental groups.

This PetroChina deal, though, adds some fuel to the developers’ fires. It is only sensible to assume that PetroChina’s decision to make such a major investment in Canadian gas, at a time when North American gas prices are low because of a supply glut, was based on a strategic premise: to secure gas supplies for China in the future. In particular the proposal to build a LNG facility in Kitimat likely encouraged the Chinese to move ahead with the deal, which has apparently been in the works for nine months.

Encana’s investors were very happy with the deal, lifting the company’s share price 4.5% in a day to reach $32.02. The lift came despite the company reporting a US$42 million net loss for the fourth quarter.

In the bigger picture, the news is nothing but positive for Canadian natural gas. The advent of fracking has led to major oversupplies of natural gas in the United States. Investment like this can only encourage Canada to develop the infrastructure needed to export gas to Asia, where demand and prices are higher.

The Encana news lifted other companies producing natural gas in B.C. and Alberta, including Encana’s sister company Cenovus. Cenovus was born when Encana spun its conventional oil and gas assets out into a new company. The Casey Energy team recommended buying Cenovus in mid-2010, when the company was trading at $27.40. Including the 98 it gained on the Encana news, Cenovus’ share price now stands at $34.80, which means a 27% gain for our subscribers. Learn more about the gains you can get from top-quality energy stocks here.

The Coming Food Envy

By Kevin Brekke

In 1996, a book titled The Clash of Civilizations and the Remaking of World Order by Samuel P. Huntington was published. In it, the author argues that the age of ideology had concluded, and that the primary axis of future conflicts in a post-Cold War world will be along cultural and religious lines. The uprisings, skirmishes and wars to come would not be fought over resources such as rice or oil but over differences of ethnicity and faith.

Huntington’s theory, as you would expect, mustered ample critics. Among them was Edward Said who, in his 2001 response The Clash of Ignorance, indicts Huntington for his use of oversimplification and static depictions of whole cultures. Reality, counters Said, is far more complex and dynamic.

A darkly comical sidebar to the debate was the response from the United Nations, its so-called theory of Dialogue Among Civilizations. The “theory” was the basis for a UN resolution naming the year 2001 as the Year of Dialogue Among Civilizations. When all you have is talk, every problem looks like faulty communication. Presumably, the solution to all strife in the world would come about from endless talking by its delegates while bravely enduring long hours in premium-class airline cabins, soldiering through endless caviar-topped buffet luncheons, and suffering unknown numbers of nights at five-star hotels.

The machinations of clueless NGO personnel notwithstanding, it is said that time heals all wounds. It also exposes false assumptions, like Huntington’s speculation, as we were again reminded by yesterday’s news.

“World Bank: Food Prices at Dangerous Levels,” read the Associated Press headline.

I doubt that anyone reading this gives much thought to the possibility of hunger or malnutrition paying them a visit. To Western cultures, the idea is as foreign as a homegrown political revolution or life without air conditioning. Even for a well-seasoned traveler in possession of a dog-eared passport, the plight of the world’s hungry is largely out of sight. As a tourist, you are not likely to encounter the dark underbelly of extreme poverty while taking in the popular attractions.

But leaving home is not mandatory to witness food insecurity among the most unfortunate. As of last month, the number of Americans receiving food stamps reached 43.2 million, 14% of the population, or nearly 1 in 7 people.

The phenomenal rise in the number of people seeking food assistance has so far been the direct result of protracted economic hardship that has befallen many individuals and families. The culprit has been mainly unemployment.

But if the worldwide rise in commodity prices continues, opening the door to food price inflation, the financial and economic crises plaguing the U.S. will soon devolve into a social crisis. It is one thing to be struggling to pay your bills; it is a whole different thing to be struggling while you and your family are hungry or feel deserving of a better diet.

Your neighbor may not like forgoing his cell phone for a landline, or battling with an antenna after canceling cable, all in the name of belt-tightening and a shrinking family budget. But when the smell of your steaks on the backyard grill wafts across his nostrils while he pretends to enjoy another plate of spaghetti and meatless sauce, a new kind of resentment will seep into the collective conscience of a growing slice of anxious Americans…

Food envy. At some point, and it is not far off, the complexity and urgency of food security will become a reality, and a battle in the land of plenty will ensue.

In many ways the battle has already begun. Shoplifting of food, or “shrinkage” as it is known in the retail industry, is on the rise. This is a fact that the food industry avoids talking about and works hard to keep out of the press. Not surprising when you consider that few food items carry a security tag, making them an easy mark.

Profit margins at grocery chains have compressed as retailers attempt to absorb price increases as rising commodity prices pass through to the wholesale level. Inventory shrinkage at grocery stores further pressures margins, and retailers will be forced to pass along their rising costs to the consumer. There is little to no room left for retailers to eat price increases.

Recalling Huntington’s outlook for clashes among civilizations, it looks like his theory is hit and miss on several issues. Conflict between differing groups has occurred since the human population exceeded one – it seems part of the human condition, and no change looks to be imminent. And disagreements over resources and ideology will continue; the idea that one would supplant the other seems nave. So, maybe a more appropriate title for his book would have been to suggest intra- rather than inter-civilization clashes.

The coming rise in food prices will be no less dramatic than for all commodities as the downfall of paper money accelerates. A man can survive without many things, but food is not one of them. And long before his supper table is empty, his envy of those with a diet more aligned with his desires will predictably spur a great cry for “food justice.” Any attempt by government to control, subsidize, or ration the food supply will end in disaster, and if history is a guide, shortages and higher prices. When preparing for future surprises, don’t forget to include higher food bills.

Commodity Prices Begin to Filter Through

By Vedran Vuk

As most readers have probably heard by now, January inflation increased by more than expected at 0.4% from the previous month. Rather than focus on the big number, I investigated a few of the smaller categories in the BLS data, particularly in foods affected by commodity prices. One item immediately jumped out – the fats and oils category. Since last month, seasonally adjusted prices in this category increased by 2.1% – that’s enormous. Since soybeans are a crucial ingredient to vegetable oil, this spike is fairly easy to explain.

Let’s take a look at a few more categories in the data. Remember, the charts below are consumer prices. Coffee is a good start. Since last year, the price has increased by 15.9% from $3.81 per lb of ground coffee to $4.42 per lb. (For some reason, the coffee data had a large gap in 2009; as a result the chart begins in 2010.)

Next, let’s take a look at sugar prices per lb. Since 2007, sugar has risen 25.6% from $0.52 per lb to $0.65 per lb.

The last chart shows soft margarine prices. Again, since vegetable oil is a part of margarine, the price will necessarily be affected by spikes in the soybean market. Since 2007, the price has increased by 50% from $1.15 per lb to $1.72 per lb.

Hedgers are a big reason why consumer prices lag the commodity market. Major companies have already locked in their purchases and prices months ahead in the futures market, so they can delay price increases.

The second factor is the elasticity of the products. That’s a fancy economics term for the change in demand in response to a change in price. When a product is inelastic, demand changes little with a change in price. A good example is coffee. Most coffee drinkers do not alter their consumption based on price fluctuations. Of course, companies have calculated the elasticity of their products. Since inelastic products are less responsive to price, hedging departments pay less attention to covering these costs. For example, coffee prices can be easily passed down to consumers (as a rule of thumb, the more elastic a product, the bigger the hedges). Hence, elasticity can be a good predictor of how quickly consumers will feel the impact of spikes in the commodity markets.

Dirty Jobs

By David Galland

Friend and occasional contributor to our publications, Neil Howe, has done seminal work on cycles of societal change related to the ebb and flow of generations. If you haven’t read his and William Strauss’ book The Fourth Turning, do yourself a favor and get a copy. (I just checked, and it’s available on Kindle).

Or, for the CliffsNotes version, you can download and read an interview I did with Neil last year.

The long and short of things is that Neil believes we are headed in to what he calls a “fourth turning,” a period that is invariably marked by great turmoil and crisis (World Wars I and II, as well as the Great Depression are prototypical fourth turning periods).

One of my favorite examples of the sort of societal shifts Neil talks about is the difference between the 1950s and the 1960s, which you can see in the photos here.

Literally no one saw it coming.

The jury is still out on what exactly will tip the U.S. and global economy over the edge and into another fourth turning – though I suspect the disastrous financial condition of the sovereigns and the implications that has right across the societal spectrum will play a major role.

Another candidate has to do with the outlook for employment in the Western nations – and increasingly, across much of the developing world.

As with any complex system, this topic is multi-faceted.

For instance, think for a minute about the expectations of today’s youth as they look ahead to their futures. Whereas the young used to, almost as a matter of course, follow their parents into a trade – be it farming, or working in the automobile plant – today not many would picture themselves spending a lifetime laboring in what might be termed a “dirty job.”

You know, jobs such as working in an industrial plant, or pulling night shifts cleaning bed pans at hospitals… Illegal immigrants are no longer welcome, and enforcement actions against those who hire them are far more stringent than ever – so we can’t count on them filling the gap.

But the gap is there, and as the baby boomers move past their productive years, it will only get bigger.

And it’s not just the dirty jobs: the young of today will find the idea of working to support the boomers and their predecessors who are on the dole in their dotage reprehensible.

As on many fronts, Japan provides a stark portrait of what’s coming. In 1950 there were ten Japanese workers for every ten Japanese pensioners. Today, the ratio has dropped from 10:10 to just 3:1.

Guess what? As you can see in the chart here, even though the retirement of the baby boomers in the U.S. is only just now getting under way, the worker-to-retiree ratio in the U.S. is right in line with Japan’s.

If you are in your fifties and think you are going to collect on Social Security, you might want to think again.

Staying on the topic of dirty jobs, a meme these days is that the Chinese have hollowed out the manufacturing sector of the United States and other countries of the West.

Yet, as the next chart so clearly shows, while the number of people going in to manufacturing in the U.S. is indeed falling, manufacturing output has remained strong.

In fact, arm waving to the contrary, U.S. manufacturing as a percentage of GDP rang in at 39.4% over the past decade, versus 37.2% in the 1990s, and 34.9% in the 1980s. So, sure, a lot of jobs shipped out overseas, but that’s in no small part because U.S. businesses have gotten so much more efficient at making things with higher margins than, say, flammable sleepwear for children.

If you think about that for a moment, you may find some hope for the future – because while China has made achieved big competitive gains by manipulating its currency, that has to end badly. It always does. And when it does, the streamlined U.S. manufacturing sector will be ready to compete. Alas, it may not employ any more workers (something I’ll address momentarily), but anything that helps to reduce the trade deficit is to be welcomed.

To put the situation in manufacturing in proper context, look at the long-term chart for agricultural production versus employment in the U.S. Again, one can see just how efficient the U.S. has gotten at producing stuff… without employees. There’s no reason to wonder about the future of U.S. manufacturing: the chart for agriculture says it all.

What’s behind these massive structural shifts in employment? Obviously, one factor has to be the exponential advances in technology.

Another could be attributed to the increased availability and ease of accessing media. Media has long been used to convince people to dress and act a certain way, but it has only been in the last 50 years or so that its presence in our lives reached endemic levels. And none of that media today makes a virtue out of long hours toiling under the hot sun, or fixing widgets to gadgets on production lines.

Another reason for the shift away from hands-on work has been the steady encroachment of government into the workplace. All with the best of intentions, naturally – but each new rule, regulation, tax, reporting requirement, workplace safety inspection, and wage mandate makes the hiring of employees something to be avoided at all costs.

I’m reminded of my visit to a huge zinc mine in Sweden, a country that is even further ahead in its workplace mothering. In Sweden, hiring a new employee is almost on a par with proposing marriage – a lifetime commitment, ’til death do you part.

In my young and foolish days I spent six months working in a mine in the United States – and it was a big, messy, crowded place, with large elevators full of dozens of dirty miners being lowered into the depths of the earth to do a very dirty and dangerous job.

Not so the mine in Sweden. Even though it was a regular work day, there were almost no employees in evidence, even in the huge milling facility – a place the size of a decent-sized sports stadium, complete with gigantic machines noisily crushing and grinding rocks. In all the time we spent in the mill, we saw only one employee – a young 30-something who briefly appeared to check a computer screen before disappearing from whence she came. This, too, is the future for American manufacturing.

In contrast to the West, where avoiding employees is Job #1, China’s problem is exactly the reverse – they desperately need jobs for the masses. At this point in time, that means the manufacturing jobs that we in the West no longer want or can perform profitably.

Unfortunately, thanks to a brisk and accelerating inflation in China, Chinese labor costs are on the rise – up over 20% in Beijing his year alone. That makes it increasingly difficult to remain competitive. Quoting a recent report out of Nomura securities:
“For some labor-intensive manufacturers, China’s wage level is no longer attractive. The manufacturing factories will likely be moved to China’s inland provinces or to countries such as Vietnam, Thailand, and Indonesia where labor costs are much lower.”

This is, of course, quite threatening to the myth of China’s economic invincibility, if for no other reason than Chinese manufacturing margins are already noodle-thin at somewhere between 1% and 10%. Case in point: FoxConn, Apple’s “go-to” manufacturing company in China, works on a margin of just 2.5%. Not a lot of wiggle room.

Logically, in order to avoid a wholesale shutdown of its industry, or to require massive government subsidies on a long-term basis, China will have to adopt the same modern, labor-saving manufacturing tools that we in the U.S. are using so effectively. But, trapped between a rock and a hard place, implementing those efficiencies will cost jobs – causing the sort of civil unrest now catching fire in the Middle East.

All fine and well, and good riddance to the political heirs of the murderous Mao, I say. But, here’s the point – none of this tossing the bums out actually creates new jobs.

Not in China and not in the U.S. And while the sprouting flowers of freedom in the Middle East and elsewhere will bring forth more work than is now available, the global trend is solidly on the side of steady adoption of the latest and greatest manufacturing tools.

Conservative projections for the robot industry through 2035 are shown in the following snippet from the November 2010 edition of Casey’s Extraordinary Technology:
The global leader in robotics remains Japan, with America and Germany coming up close behind it. That country’s Ministry of Economy, Trade and Industry estimates that the global robotics market will expand about 10x over the next 25 years, and nearly 60% in just the next five…

Aarkstore Enterprise, a market research firm, estimates that by 2020 the total robotics market, by its definition, will expand to match the automotive industry in gross revenues.

(If you’re interested in diversifying into money-making trends in technology, Casey’s Extraordinary Technology has you covered. We’ve just put the finishing touches on an Investor Update titled, “3 Biotech Stocks to Own in 2011.” The first stock is profiled within the update, including the stock name and buy price, free and at no obligation. Simply click here to get the Investor Update now.)

Which brings us to an interesting paradox: The world need jobs, but the steady progress in technology is slashing the need for human workers to do what jobs remain… and is slashing that need at an almost exponential pace.

The International Federation of Robotics reported a 27% increase in robotic sales in 2010, despite – and probably in no small part because of – ongoing pressure on the global economy.

And who do you think is going to be doing the work of assembling the robots? Humans? Not hardly. Like the promised future of nanotechnology, but on a macro scale, it will be machines making machines that make machines.

Soon people won’t be shaking their fists at the Chinese for stealing our jobs, but at the machines. And the machines won’t take notice.

And then what? Does the government in all of its wisdom begin limiting the use of machines in the workplace? Or will the shift be back towards command economies, where companies are forced to hire and produce based on the dictates of some ruling council?

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

Vedran Vuk
Casey’s Daily Dispatch Editor

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Daily Dispatch: The Cure for High Prices

September 24, 2010 | www.CaseyResearch.com The Cure for High Prices

Dear Reader,

With gold poking its fair-haired head over the top of $1,300 today, a new record, many dear readers are wondering if this rally is sustainable. Reader and correspondent Mike B. sent along the following chart, which offers a useful road map to any secular bull market.
Of course, those of you who have been subscribers to our services for any period of time will happily note yourselves as belonging to the “smart money” crowd.

As to where we are on this map today, it’s our contention that the public is still almost completely uninvolved in gold at this point. Increasingly, however, the institutions are. David Rosenberg, who has a large following among the institutions, wrote today that he thinks the Mania stage is still well off, and that gold won’t really gain steam until it hits $3,000. This, despite his being a staunch deflationist.

Of course, we can’t know what the purchasing power of a debased U.S. dollar will be a few years down the road and it could be worth nothing which means the price of gold could be literally anything, maybe even one million dollars per ounce.

But Rosenberg is directionally correct that the Mania phase is still ahead of us. Sure we are starting to see increasing media attention to gold, a benchmark on the chart above, but it’s still nowhere the level of coverage the yellow metal used to receive during the latter stage of the 1970s bull market. Back then, the CBS Evening News in fact, all the major news broadcasts would, as a matter of policy, display the price of gold right next to that of the stock indices.

At this point, using any corrections to build positions ahead of the Mania phase still makes a world of sense to us.

Quick Comment on the Stock Market

As I write, a modest (and passing) pick-up in consumer durables has sent the S&P 500 to 1,147, blasting through the 1,130 top of the range we discussed last week. Given that such a high percentage of trades are now computer driven, this could be the move needed to trigger short covering, in which case the market could move higher still.

I have no doubt that this is a bear market trap, but timing when the trap will close is a near impossibility. One bit of useful input came today in the form of a chart in David Rosenberg’s letter showing the tight correlation (75%) between the two-year Treasury note and the S&P 500. His take is that either yields have to rise or the S&P has to fall.
In my view, the two-year rate will rise, causing the S&P to fall. It’s just a question of time.

While we risk being stripped of our speculator credentials, we hold to our contention that in the face of such uncertainty you shouldn’t be afraid to take a profit when a profit is to be taken, and to favor larger allocations to cash and to gold during this transitory period. In other words, be careful.

Still on the bigger picture, I ran an interview yesterday featuring the co-founder of Home Depot speaking with great eloquence on just how challenged American businesses are in this environment. Continuing that theme, the good folks at ZeroHedge tipped us to a Bloomberg story in which William Simon, the CEO of Walmart, is quoted as saying the company is trying “to figure out how to deal with what is an ever-increasing amount of transactions being paid for with government assistance.”

He then goes on to say…
You need not go farther than one of our stores on midnight at the end of the month. And it’s real interesting to watch, about 11 p.m. customers start to come in and shop, fill their grocery basket with basic items baby formula, milk, bread, eggs and continue to shop and mill about the store until midnight when government electronic benefits cards get activated, and then the checkout starts and occurs.
Full story here.

Congressional Hearings on Gold

Congressional hearings have begun on matters related to gold. Reading MineWeb’s story on the hearings, it’s hard not to conclude that the government is looking for an excuse to drop a heavy new layer of regulation onto the gold sellers, a prerequisite to ultimately limiting public access to the soundest form of money.

I have no illusions about the shady nature of many coin dealers, but remain firm in my opinion that more regulation fixes nothing. In fact, it makes things worse because it lulls buyers into a false sense of security. Thanks to the Internet, there are a near endless number of resources now readily available to potential buyers trying to understand the dos and don’ts of coin buying, and to sort the honest dealers from the bad.

In any event, because it’s important to keep an eye on Congress, much in the same way you might watch a drunk boxer sitting next to you at the bar, here are a few relevant quotes and a link to the full story.
Charles Bell, programs director for the Consumers Union, the publisher of Consumer Reports, told the subcommittee, “Many of the problems that have come to public light are related to high-pressure sales tactics that entice consumers to purchase coins that have high mark-ups, that turn out to have much less resale value than the customer initially expected.”
Bell said consumers are also at risk because sellers of gold coins and bullion may not be licensed or regulated either by the SEC or the Commodities Futures Trading Commission. “And sales representatives may not be licensed as investment advisors, even though they present their products as an ‘investment.'”
“Coin and bullion sellers are subject to relatively limited public oversight, and state consumer protection authorities may only be able to offer limited help for consumers who feel they have been defrauded,” Bell explained.
… ” Lois Greisman, associate director in the Bureau of Consumer Protection at the FTC, said, “Scam artists also are putting a new twist on an old scamfalsely touting coins and precious metals as low-risk, high-yield investments to hedge against the economic downturn and fears of a declining U.S. dollar.”
“Often these marketers also fail to disclose hidden fees, mark-ups, and premiums added onto the purchase place of the coin or precious metal investment,” she explained. “By failing to disclose this key information to consumers, the marketers divert consumers from purchasing investment opportunities from legitimate dealers, and leave the consumers drowning in underwater investment.”
…The FTC supports the Coin and Precious Metals Disclose Act, which would require coin and precious metals dealers to fully disclose not only the purchase price, but also all other fees associated with the sale of coins and precious metals, and the melt value and reasonable resale value for coin and precious metals. The legislation would require dealers to make disclosures clearly and conspicuously prior to completing the sale.
That last part sounds reasonable, doesn’t it? Based on the history of these things, though, it’s likely a Trojan Horse. Once they get through the gates, amending and expanding the regulations becomes a snap.

The good news is that there is no overt discussion, yet, of confiscating gold, but retaining the freedom to buy and own gold will require constant vigilance.

The Cure for High Prices

Commodity traders have a saying that goes, “The cure for high prices is high prices… and the cure for low prices is low prices.”

The wisdom of that homily can be best understood by considering the impact of price movements on a commodity such as wheat.

Should the price of wheat rise well above the norm, the natural response of farmers will be to plant more. At a high enough price, farmers who traditionally plant other crops will also shift to wheat to take advantage of the profit opportunity. And, in the absence of trade restrictions, producers in other parts of the world will increase their wheat shipments to markets where they can get a better rate for their crops. In almost no time at all, a glut of wheat will assure that the price of wheat will fall. Ergo, “The cure for high prices is high prices.”

Of course, the situation works in reverse as well. Should prices fall to the point where there’s no money to be made in wheat, producers will plant something else or go out of business. Either way, in a relatively short period of time, wheat supplies will come under pressure, and the price will rise.
Despite the obvious truth of the scenarios just described, it’s remarkable how often governments feel compelled to meddle in the market mechanism. Which is why it was so refreshing to recently read the following out of Russia…
Russia Won’t Intervene To Curb Soaring Food Prices Minister
MOSCOW (AFP)–The Russian government won’t intervene to curb prices for basic food stuffs as inflation soars after the country’s worst ever drought, Economic Development Minister Elvira Nabiullina said Tuesday.
“I think it does not make sense to impose [price] limits,” Nabiullina was quoted by Russian news agencies as saying.
“We are of course monitoring what is happening to prices. In August, the average weekly rate of inflation sped up. This is primarily due to the drought.”
Under Russian law, the government can impose caps on the prices of flour, millet, buckwheat and salt if they jump by more than 30% over a 30-day period.
Forty-five Russian regions saw prices for certain foods grow by more than 30% in the 30-day period up to Aug. 23, Vedomosti business daily reported Tuesday, citing a report by the economic development ministry.
While Russia still has many imperfections, it is refreshing to see that after its long communist experiment, Russians have developed an understanding of the importance of letting markets sort themselves out. We can only hope the trend continues to gain momentum.

Since we’re on this general topic, I might as well quickly comment on some other commodities and how high or low prices affect them. Oil and gas, for instance.
Periods of higher prices for oil and gas will typically cause an escalation in exploration, and in the development and production of known reservoirs that have been left undeveloped due to the poor economics. Going after a deepwater target, or investing in a new heavy oil deposit, won’t happen at $40/bbl oil, but if the producers think oil is going to stay over $70, it may. And in relatively short order, escalating production will begin to weigh on the price.

But as the price begins to go down, the production may not fall off nearly so rapidly as might be the case for wheat or other crops. That’s because shutting in a well and eventually restarting production is costly. Further, as long as you are making money, the temptation will be to produce. Thus, if, taking into account all lifting costs, you are producing oil at, say, $25 per bbl and oil is selling for $70 per barrel, you will produce all you can. But what happens if oil drops to $40 a barrel? As long as you are making money, you’ll keep right on producing.

Thus, the time lag between overproduction and lower prices and a reduction in the supply to the point where prices start moving upwards can be protracted. Case in point, at $3.90 natural gas is now selling at close to the cost of production, yet the price has remained stubbornly low.

As per above, lower prices will curtail further exploration and development, and so in time supply and demand will swing in the opposite direction, and you can make a lot of money by positioning yourself ahead of those swings.

Another commodity for which the general rule of thumb doesn’t hold up is gold. As you can see in the chart just below, which we have published previously, despite a stunning rise in price over the past decade, mine production has fallen from previous highs, though the amount of scrap coming to market has certainly increased. This is a clear picture of a commodity with structural limitations to new supply.

Should demand continue to escalate as we believe it must then the mostly static supply profile has to result in higher prices. It would be the equivalent of the world’s dirt becoming so depleted that only so much wheat could be grown and no more. At that point, if you wanted a nice loaf of bread, you’d pay a lot more for it just as you will for an ounce of gold.

Viewed in this context, by the time Jill Q. Public decides to jump on the gold bandwagon, she’ll almost certainly find available supplies limited or at least not available at anything close to today’s prices.

On that point, a straw in the wind flew by yesterday when the following announcement arrived out of the blue on the fax machines of coin dealers across the nation.

Gold get it while you can.

Friday Funnies

I’m running late, and I haven’t come across anything really worthy, so I’m light on the Friday Funnies this week. If you come across a great joke or have any comments on this service, please send them my way at David@CaseyResearch.com.

PSYCHIATRIC HOSPITAL PHONE MENU

Hello, and thank you for calling the State Psychiatric Hospital. Please select from the following options menu:

If you are obsessive-compulsive, press 1 repeatedly.

If you are co-dependent, please ask someone to press 2 for you.

If you have multiple personalities, press 3, 4, 5 and 6.

If you are paranoid, we know who you are and what you want; stay on the line so we can trace your call.

If you are delusional, press 7 and your call will be forwarded to the Mother Ship.

If you are schizophrenic, listen carefully and a little voice will tell you which number to press.

If you are manic-depressive, it doesn’t matter which number you press, nothing will make you happy anyway.

If you are dyslexic, press 9696969696969696.

If you are bipolar, please leave a message after the beep or before the beep or after the beep. Please wait for the beep.

If you have short-term memory loss, press 9. If you have short-term memory loss, press 9. If you have short-term memory loss, press 9.

If you have low self-esteem, please hang up; our operators are too busy to talk with you.

If you are menopausal, put the gun down, hang up, turn on the fan, lie down, and cry.
You won’t be crazy forever.

For the Record

As President Obama paves the way for the newest round of peace talks between the Israelis and Palestinians, he has been speaking optimistically about the outlook for the talks. A smattering of quotes…
“The Israelis and Palestinians have waited a long time for this vision to be realized, and I call upon all those gathering to redouble their efforts to turn dreams of peace into reality.”
“I remain personally committed to implementing my vision of two democratic states, Israel and Palestine, living side by side in peace and security.” (1)
*** “The hardest issues now at last are on the table.” He added: “I hope the parties will seize this opportunity and not retreat from the clear moment to capture the momentum of peace.” (2)
*** “We want to be an honest broker, and I think the parties see us in that role, and that’s the role we will continue to play at this point.” (3)
*** “We’ve made significant progress toward peace. We have initiated a dialogue from which we should not consider turning back.”
“Much work remains to be done and the road ahead is tough, but it’s the right road and I remain optimistic that direct negotiations for a just resolution of the Palestinian problem in the context of a real and enduring peace is within our reach.” (4)
*** “We are going to settle things on the West Bank. We are friends. There will be peace in the Middle East.”
“I think there will be peace in the Middle East thanks to these brave men who have had the courage to face difficult problems.” (5)
No, wait it wasn’t Obama who said all that!
It was, in order… (1) George W. Bush; (2) Bill Clinton; (3) George H. W. Bush; (4) Ronald Reagan; (5) Jimmy Carter.
What Obama said was
“We have to summon the will to break the deadlock that has trapped generations of Israelis and Palestinians in an endless cycle of conflict and suffering.”
“This moment of opportunity may not soon come again,” Obama said in the Rose Garden Wednesday afternoon. “The [two sides] cannot afford to let it slip away.”
As regular correspondent Dennis Miller recently wrote, the only way for there ever to be peace in this sort of conflict is if one side or the other loses the will to fight. As they’ve now been at it for half a century and neither side shows signs of throwing in the towel, maybe it’s time that the U.S. stop wasting its time and resources trying to get the two parties together and instead encourage them to drop the gloves and engage in a winner-takes-all Battle Royale?
Or we could let some other country take over the charade of brokering peace. Maybe the leaders of Denmark have some spare time on their hands?

Miscellany

Scottsdale, Arizona, Phyle Meeting. If you live in the Scottsdale area and would like to connect with other Casey readers, the next Casey Phyle meeting is being held at 6pm on Monday, September 27, at the Paradise Bakery on Raintree. The agenda for discussion now includes:
The apparent aversion of a stock market crash, at least for now
The strange dichotomy of a falling dollar with rising bonds
Are agricultural commodities for real?
Why does oil languish while most commodities, including Dr. Copper, are doing well?

If you’re interested in attending, drop us a note at Phyles@CaseyResearch.com, or just show up.

Errata Right Bubble, Wrong Year. In yesterday’s missive, I noted in passing the top of the Japanese real estate bubble as having occurred in 1981. That, of course, was a typo as the actual top occurred in 1989.

New Orleans Investment Conference. As usual, the annual New Orleans Conference is pulling out all the stops to present a star-studded cast of speakers, with headliners that should appeal to those of you dear readers who skew toward the more conservative side of the political spectrum, specifically Newt Gingrich and Con. Dick Armey. While Doug Casey won’t be able to make it this year to balance things out with his more libertarian perspective, our own Marin Katusa will be there to talk about some of his favorite resource plays. More on the event here.

And with that, dear reader, I wish you a nice weekend thank you for reading and for being a Casey Research subscriber!

David Galland
Managing Director
Casey Research

Daily Dispatch: Weekend Edition – August 14, 2010

August 14, 2010 | www.CaseyResearch.com Weekend Edition

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.

New York Senate: No More Fracking Around
By Marin Katusa, Chief Energy Strategist

The New York Senate has had a busy week. Not only have they finally passed the New York State Budget, they’ve also voted to enact a one-year moratorium on hydrofracking for natural gas.

Hydraulic fracturing, or hydrofracking, is a drilling technique used to extract gas from shale. Large quantities of highly pressurized water, sand, and chemicals called frac water are injected deep underground to break up rock and release gas to the surface.
This technique has sparked a drilling boom throughout the United States that has allowed companies to tap into enormous reserves of natural gas locked into big rock formations such as the
Marcellus Shale

Marcellus_Formation
.

It’s also stirred up a storm of controversy and anger. Critics and environmentalists are raging that the millions of gallons of used frac water left in the earth are contaminating fresh drinking water supplies.

Liberally helping this along has been the sensationalist TV documentary Gasland by amateur documentarian Josh Fox. Mr. Fox explores communities from Pennsylvania to Wyoming where hydrofracking has left people sick, animals without fur, and tap water so polluted that it can be lit on fire. All to a plaintive tune picked out on Mr. Fox’s banjo.
And after a series of disasters that has left the U.S. energy industry reeling and government officials running around like headless chickens, New York officials are taking no chances.

Both the State Assembly and the governor are expected to sign off on the bill, which would see a halt to any drilling licenses being issued for the Marcellus Shale until May 15, 2011. In the meantime, the Department of Environmental Conservation will be examining the safety issues and environmental concerns.

We’re not terribly surprised about this moratorium. New York has always been the state with the toughest stance on hydrofracking. But while protecting one’s water supply is, after all, a top priority, we feel that this moratorium may be based more on the idea of pleasing voters than on hard facts.

BP’s Past Is Not Shale’s Future

The aftermath of the BP disaster has left the American public acutely aware of environmental issues. It hasn’t helped that a couple of gas explosions and another oil spill followed almost immediately on the heels of the BP spill. Angry rumblings could be heard from all over the country, and for New York, Gasland could well have been the straw that broke the camel’s back.

What both Mr. Fox and the New York Senate have failed to acknowledge, however, is that the risk of contamination of ground water by frac water is almost negligible when the drilling is done properly.

When a gas shale well is drilled, part of the well is, out of necessity, isolated from the rock. A large-diameter steel pipe (the casing) is cemented into place, through which subsequent drilling and fracturing operations take place. Here’s a diagram of a cross-section of a well:

If the casing is done right, there’s no chance that any frac water could infiltrate drinking water supplies. The rocks of interest are buried deep, deep in the ground over 4,000 ft down. So unless there’s some truly bizarre geology going around, neither the frac water nor any fractures created can mix with well water.

The industry isn’t blind to the fact that poisoning well water will only shake investor confidence and lead to their ruin. They’re well aware of the environmental and economic impact, and are investing heavily into recycling and disposal techniques.
While there is a chance that frac water could contaminate drinking water at the surface, or during transport due to accidents, chances are still quite slim. And to give credit where it’s due, the industry, with a drilling history spanning over 50 years, has quite an outstanding safety record. So why the sudden fuss?

It’s also ironic that the people shouting for clean energy alternatives to oil are the ones who are turning their noses up at shale gas. A much cleaner-burning fuel than oil, there is also enough shale gas in North America to last 100 years of demand.
Not to mention the projected revenues and jobs that shale gas could bring to debt-crippled states in the next five years.

So while New York may be throwing away a major opportunity, opting instead for paperwork and debt, America continues to be dependent on other countries for its energy. As for shale gas companies, they will simply move their money and expertise elsewhere. But with 3,000 trillion cubic feet of shale gas underneath American feet, don’t worry… they won’t be moving too far away.

[Ed. Note: Other than death and taxes, one thing is certain; the human race needs energy to survive and thrive, and there will always be profitable opportunities available in this sector. Marin and his team have put an enormous amount of effort into getting positioned in these profitable opportunities and things are getting exciting. If you’re an investor, this is the perfect time to boost your portfolio with some carefully chosen stocks that will make the trend your friend. Try Casey’s Energy Opportunities for only $39 a year and with our 3-month money-back guarantee. Details here.]

Invest in a New Education Trend
By Chris Wood

The subject of today’s issue is education and an important trend in education that’s been taking root over the past few years.

Traditional university degrees have become prohibitively expensive today. Even if students get a loan to pay for school, they find themselves up to their eyeballs in debt when they graduate with no chance of paying off the loan for decades, in some cases (if at all). So students yearning to learn valuable skills for the marketplace have turned to the for-profit private sector in droves to help solve their problem.
Recognizing that this trend toward online and for-profit education will likely accelerate in years to come, I decided to take a look at the companies operating in the space to help you figure out if this might be a good place to invest.

I only had time to look at U.S.-based companies (apologies), but what I’ve come up with is a group of 17 publicly traded companies that comprise what I’m calling the U.S. Education Services Sub-Industry. Some of these companies only operate online, but most provide online services as well as on-ground campuses.

Here’s a breakdown of the “industry.”

Education Services Sub-Industry (U.S. Publicly Traded Companies) Company Ticker Stock
Price Market
Capitalization Sales (TTM) Earnings
(TTM) Basic
EPS P/E
Ratio Earnings
Yield Current
Ratio Apollo Group APOL $42.29 $6,218,913,660 $4,742,162,000 $612,394,000 $3.98 10.6 9.4% 1.3 Career Education CECO $20.48 $1,664,298,803 $2,023,653,000 $209,042,000 $2.54 8.1 12.4% 1.3 DeVry DV $47.40 $3,376,615,409 $1,804,746,000 $245,365,000 $3.45 13.7 7.3% 1.2 Corinthian Colleges COCO $7.82 $689,149,152 $1,634,566,000 $136,783,000 $1.56 5.0 19.9% 0.8 Education Management EDMC $12.57 $1,795,622,401 $2,377,338,000 $141,885,000 $1.04 12.1 8.3% 1.4 ITT Educational Services ESI $71.28 $2,394,301,330 $1,499,827,000 $351,740,000 $9.76 7.3 13.7% 1.3 Strayer Education STRA $214.48 $2,978,627,033 $578,736,000 $120,561,000 $8.87 24.2 4.1% 1.6 Lincoln Educational LINC $14.15 $369,128,404 $611,088,000 $63,645,000 $2.43 5.8 17.2% 0.9 Universal Technical Institute UTI $16.51 $399,913,244 $416,215,000 $29,198,000 $1.22 13.5 7.4% 0.9 K12 LRN $25.64 $780,641,388 $368,315,000 $22,184,000 $0.75 34.2 2.9% 3.7 Capella Education CPLA $79.42 $1,330,018,149 $384,502,000 $54,529,000 $3.26 24.4 4.1% 4.9 Nobel Learning Communities NLCI $7.11 $75,015,484 $225,814,000 $2,354,000 $0.23 30.9 3.2% 0.3 Bridgepoint Education BPI $14.62 $799,533,004 $589,048,000 $107,051,000 $1.98 7.4 13.5% 1.9 Learning Tree International LTRE $10.82 $148,820,704 $124,865,000 $1,874,000 $0.14 77.3 1.3% 1.7 Grand Canyon Education LOPE $18.40 $842,259,356 $295,769,000 $33,709,000 $0.74 24.9 4.0% 1.3 Princeton Review REVU $2.38 $122,327,578 $161,881,000 ($27,792,000) ($0.82) NA NA 0.9 American Public Education APEI $26.82 $495,574,328 $173,689,000 $28,064,000 $1.54 17.4 5.7% 3.5 Total

$24,480,759,426 $18,012,214,000 $2,132,586,000

[Note: In the table above, earnings reflects the net income available to common shareholders before extraordinary items. Basic EPS was calculated using the basic weighted average shares over the previous four quarters.]

As you can see in the table, these 17 companies reflect a combined market capitalization of $24.5 billion and generate $18 billion in annual sales and $2.1 billion in earnings. The three most attractively priced companies in the space, based on a multiple-of-earnings approach, are Corinthian Colleges (COCO), ITT Educational Services (ESI), and Lincoln Educational (LINC).

Even though COCO and LINC have higher earnings yields than ESI and have shown stronger growth in the recent past (and have much smaller market caps and the capacity to grow faster in percentage terms in the near future), their balance sheets indicate some short-term liquidity problems and greater risk than ESI.

If I were to invest in the education services sub-industry at this point (which I haven’t yet but may in the near future), my pick would be ITT Educational Services (ESI). The company’s TTM sales of $1.5 billion reflect an increase of 47.7% from 2008 results. And TTM basic EPS of $9.76 is an 88.4% jump from 2008’s figure of $5.18.
What’s more, the company generates close to $9 per share in free cash flow and has a pretty good-looking balance sheet with no short-term liquidity issues. The capital structure appears a little risky for my taste, but I could probably get over that, given the 54.4% return on assets and 229% return on equity. Add all that to the fact that ESI is trading just about at its 52-week low, and the company definitely has potential as an investment, in my view.

Remember, I’m not saying you should load up on shares of ESI, but I would recommend taking a closer look at it if you are thinking about getting positioned in a solid company that should benefit from the larger trend of a growing market in for-profit education.

Time to Bid Farewell to Oil But What Will Take Its Place?
By Marin Katusa, Chief Energy Strategist, Casey Research

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

Finding the Next Oil Spill
By Joe Hung, Energy Division

More than four months later, the damaged pipe in the Gulf has finally been sealed. Almost three-quarters of the oil has been cleaned up, burned off, or evaporated, and everyone from Obama to the coffee guy at BP is breathing a huge sigh of relief.
It is, unfortunately, only a matter of time before the next oil disaster happens.
This isn’t a sensationalist statement. Take a good look around the world, and you’ll see what we mean.

While BP has been throwing everything it’s got at the Gulf, China has been battling its own oil spill. Since it is China we’re dealing with here, no one is actually sure how big the oil spill is or even what caused it: theories are ranging from an exploding pipeline to accusations of a government cover-up. And depending on whether you believe the Chinese officials or Greenpeace, anywhere between 10,833 barrels to 650,000 barrels of crude oil may have poured into the Yellow Sea.

Looking closer to home, drilling for oil in the United States is moving offshore, into deeper waters and more dangerous reservoirs. As we’ve learnt from the BP disaster, while we’ve cracked the code on how to drill that deep, we haven’t quite figured out what to do if something goes wrong.

Now imagine that sort of disaster up in the Arctic, maybe even an oil leak under the thick winter ice. By the time cleanup operations could begin in the springtime, the oil could reach as far away as Russia, even Norway.

Even onshore production for North America seems to be doomed lately. On July 26, Enbridge’s 293-mile-long old and corroded pipeline that carries most of the oil imported by the U.S. from Canada began leaking oil into the Kalamazoo River, a major waterway to Lake Michigan. Only 13,000 barrels of the 19,500 barrels leaked has been recovered so far, with the oil 80 miles away from Lake Michigan.

In Nigeria, it’s not just the threat of accidents on offshore oilrigs. The biggest threats to oil production for Africa’s biggest energy producer are militant attacks on its pipelines and saboteurs siphoning off oil. However, in light of the Gulf disaster, Nigerian authorities are giving foreign companies a light warning about any oil spills in the Niger Delta.
And to put the final tarnish on this dismal picture, let’s not forget that oil-carrying tankers are crisscrossing the ocean every day. Tanker spills might not be as common now as they were in the 1970s, but the ships are sitting targets for pirates, who aren’t exactly known for passing health and safety tests.

But before giving up completely and returning to the good old cave-living days, consider this fact. Many of these accidents have happened not because something is fundamentally wrong with producing oil, but due to gross negligence by the oil companies.
It’s no secret now that BP did not adhere to all the safety codes before the Deepwater Horizon rig exploded and sank. Enbridge, the company that owns the pipeline leaking oil into the Kalamazoo River, had been warned repeatedly about the condition of the pipeline weeks before the rupture. In China, the “biggest oil spill in history” was cleaned up in only nine days.

Of course, it could just be that the number of oil spills hasn’t gone up and it is only that the media is playing on the hype of the BP oil disaster. A hype that is being fueled by oil companies setting up shop in more environmentally fragile areas.
But the truth is that oil spills today are far less frequent than back in the day. Oil companies don’t want to lose oil to spills or to have to shell out billions to pay for cleanup and fines. Not to forget that oil spills mean higher insurance premiums and tougher regulatory hurdles for everyone in the industry. So, if anything, it makes sense for oil companies to invest in better safety procedures.

That said, not every oil company thinks that way. To save a few pennies now, cutting corners to cut costs, especially in these troubled times, seems like a smart option. That it is these cost-saving measures that ultimately leave them on the rocks financially is quite ironic.

So what’s next? No matter which way you look at it, the world needs oil. Demand is rising, with China and India leading the developing countries. For America, oil is still a lifeline, and this won’t change overnight. The real crux of the matter then is not just where our oil should come from, but from whom.
There are many oil companies operating across the world who do conduct themselves with integrity. While accidents may still befall them, it is less likely that it would be due to bad business behavior.
And whether it’s for the sake of your portfolio or just for your conscience, knowing who is up-to-date with all the safety codes and procedures could make a world of a difference.
[Ed. Note: The new edition of Casey’s Energy Opportunities was just released, and it’s truly a must-read. Chief Investment Strategist Marin Katusa puts boots on the ground in northern Iraq to search for potential oil investments. Spoiler alert: he found one. You can read all about Marin’s trip and the investment recommendation by signing up for a 3-month risk-free trial of Casey’s Energy Opportunities, complete with our 100% money-back guarantee. Subscribe today for only $39, and save 50% off the regular price. Details here.]

The Best Gold Interview of 2010
Jeff Clark, Casey’s Gold & Resource Report

Much of what passes for “insider” information these days is often conspiracy-edged or largely conjecture. True inside information is actually hard to come by. So what follows is the refreshingly candid and uncut version of my talk with a first-hand participant in the murky and little-understood world of gold bullion, mints, and bullion dealers.

Customarily, when considering a company for a potential recommendation, I hold a series of discussions with management. It was during one of these vetting procedures that I spoke with Andy Schectman of Miles Franklin and heard some disturbing reports about supply that every investor should know. Andy is a bullion seller, so you’re welcome to take his comments with a grain of salt. On the other hand, what he sees week after week and what he hears from his high-level industry contacts might just make you pull back on that salt shaker and re-inventory the number of ounces you own…

Jeff Clark: Andy, tell us about the kinds of contacts you have in the industry and where you get your information.

Andy: I’m associated with two of the six primary mint distributors in the United States. There are only six primary precious metal distributors here because the qualifications are very difficult to meet. Aside from having $100 million in annual sales, you have to extend a $50 million line of credit to the U.S. Mint, and very few companies can do that. So in working with these companies, I’m privy to information that many others aren’t.

Jeff: So, what have you been hearing from them about supply for physical gold and silver?

Andy: I think in order to properly characterize what’s happening in the industry, it’s important to start from a big-picture perspective, which is that by and large the masses in this country are not involved in precious metals. In my experience, the move we’ve seen in gold over the last decade has primarily been from international investment sovereign wealth funds in the Orient, petrodollars in the Middle East, India buying from the IMF, Russia and Japan accumulating, etc.

Most U.S. investors have lived through nothing but prosperity and good times, where they perhaps didn’t think they needed to own gold but I think the rest of the world isn’t as optimistic about the future. So when you talk about supply, it’s important to acknowledge that most people in this country don’t own any gold and silver. To me, that’s what should really alarm people.

Jeff: Tell us how you would characterize supply right now.

Andy: Fragile. Availability of product changes almost weekly.
But it’s worse than that. When the market plunged 1,000 points in one day last month, two German banks bought about 35,000 or 40,000 one-ounce coins and cleaned out the Royal Canadian Mint overnight. Think about that: two banks cleaned out one of the world’s preeminent mints in one day.

Then you have the Austrian Mint recently announcing they were running into supply issues. And the U.S. Mint has been the model of inefficiency for the last several years. They have been either reluctant or unable to meet demand when it comes to Gold Buffalos, Platinum Eagles, and fractional Gold Eagles. They issue dribs and drabs of them, but certainly not enough to meet demand.

Jeff: And they frequently run out.

Andy: They frequently run out, they frequently have delivery delays, and it’s a situation where very quickly we could see major disruption in the supply chain.

Jeff: We saw supply constraint in 2008, where dealers were running out of product. Do you think we’re headed there again?

Andy: I do. In 2008, when gold dropped from $1,000 to $700 very quickly, all product worldwide disappeared. Within weeks the U.S. Mint was shut down. The Canadian, Austrian, and Australian Mints were all eight to 12 weeks back-ordered or shut down. The Australian Mint stopped taking any new orders in July or August for the rest of the year. The Rand Mint, for the first time ever, sold out of all its product. One wealthy Swiss businessman flew his own 747 there and cleaned them out.

So product was impossible to get, but not just from the primary mints; even the refiners that made 100-ounce silver bars couldn’t get them. No one could get anything, and it was a very scary time if you owned a gold company. There were many days I sat at my desk wondering how I was going to get product tomorrow, and there were times we couldn’t take orders whatsoever. And that comes from a company that’s done over $100 million in sales, is a member of the certified exchange, and that has contacts that run very deep in the industry and I couldn’t get anything.

A friend of mine who owns a very prominent gold and silver company in Colorado has a store front, and back then he told me, “I want to put a sign on my window that says, ‘All we do is buy, we don’t sell,’ because one person will come in there and clean me out and there’s nothing to be had.”

So what I think is ahead comes from that experience. If you factor in that very, very few people in this country have even held a gold coin let alone own any gold, or understand the reasons to own it, or will even accept the arguments for owning it I think the primary distinguishing characteristic of this market will be that people won’t be able to get product when they want it. The rising price in and of itself will not be the main hurdle. For the most part, people will overcome price, because they’ll want to own it. The real issue will be getting product in a timely fashion, and that will become difficult for the average American.

Jeff: What about supply from those selling coins and bars who bought at lower levels? Doesn’t that increase the available supply?

Andy: This is what I believe is a distinguishing feature of this market: there is a total absence of a secondary market. There isn’t one. Period. In years past, we used to do a lot of business with people wanting to sell. Today, virtually no one is selling their coins back to us. In fact, for every 100 transactions we have, maybe one is a seller the other 99 are buyers. Our largest supplier, who provides over 60% of all bullion to the U.S. market, told me earlier this month they have days without one single buy back. And this is from the largest supplier in the U.S.

Jeff: Why do you think no one’s selling?

Andy: People are afraid. They’re afraid of what’s happening geopolitically, economically, fiscally, and want to hold on to their gold. As they should, because this is exactly the kind of circumstance gold is for.

So I would argue that as gold and silver creep higher, there will be more and more buying and less and less selling. And less selling means less product for buyers.
When you look at the fact that there is no secondary market, and then you throw into the mix that the mints are already running into production problems, and then add the troubles in Europe, which could easily spread, I think it’s easy to see how demand could outstrip supply. I assure you, there’s an awful lot of gold acquisition going on in other countries the Swiss and Germans, for example, see the handwriting on the wall. They were buying everything up when the European crisis broke. It was bedlam for awhile.
And if all of a sudden people here wake up and feel they really need to own gold but can’t get it, we’ll be right back where we were in 2008.

But to your point, yes, nobody is selling anything right now and almost anything you buy will be dated 2010. That’s because there are no backdatedcoins to be had virtually anywhere. Maybe 20 here or 50 there, but nothing on a meaningful basis.

Jeff: It sounds like regardless of what’s going on in America, global supply could be in jeopardy if this trend continues.

Andy: Absolutely, especially with the fact that there is no secondary market. Really, the people who enter the game late are going to be at the mercy of the mints. And if the mints run out of supply, or just stopped selling for whatever reason, it’s “game over” for those who want to accumulate. Right now there’s as good a supply as I’ve seen in a couple years, and that’s at a time when we’ve already witnessed the Royal Canadian Mint running out of gold for a week or so, the Austrian Mint also running out of product, and the U.S. Mint rationing Silver Eagles for a short time.

Jeff: And you’re calling this a good supply market?

Andy: Yes. It’s as good as we’ve seen in a couple years.

Jeff: That’s scary.

Andy: I don’t think you’re exaggerating by saying that. And the message is, “Buy now while it’s still available.” I know it may sound like I’m trying to sensationalize it, but I’m really not. Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning. Supply is that small compared to the tremendous amount of money that’s out there.

Here’s another example. I had a meeting with a money management company here in Minneapolis that manages some of the oldest money in the entire country, literally billions of dollars. And when I spoke with them, I discovered the principals of the firm had never held a gold coin. They asked me questions that were as rudimentary as what I would get from a complete novice. By the end of the conversation, they said they would start with a $5 million order. I later learned this was a small order for just one of their clients. It was just dipping a toe in the water for these people.

Well, it won’t take too many of these kinds of people waking up to gold to drain the supply chain. Most of the wealth in this country is driven through money managers, and at some point these people will tell their managers, “I don’t care what the price or premium is, get me gold.” When they come knocking in large numbers like that, the supply chain will dry up overnight. I know this to be true. If we see an event that drives money managers to buy physical gold, the supply will be gone.

Jeff: Some of that money is already going into the ETFs.

Andy: Yes, but not when you consider the total capital that’s available. And keep in mind that the prospectus for GLD and SLV state that, more or less, you can’t take possession of the metal. So, do you “own” gold if you have shares in GLD or SLV, or any ETF, for that matter? If you can’t put the coin or bar in the palm of your hand, the answer is no.

Jeff: Are you seeing any difference between gold and silver? Is one more difficult to come by than the other?

Andy: We’ve seen a lot of demand for silver, probably more so than gold, and the U.S. Mint has already rationed Silver Eagles once this year. Junk silver bags are becoming much harder to get. And I think the higher gold goes, the faster silver will disappear. At some point the American public will realize they should have some gold and silver, and we could see a situation where the gold price could get out of reach for some investors. Those people will turn to silver and, as a result, it will probably be tougher to get than gold.

Jeff: If supply gets scarce, do you expect premiums to shoot up?

Andy: Absolutely. In 2008 the premiums were astronomical. Silver Eagles were $5.50 to $6 over spot. Gold Eagles were $100 to $150 over spot. The premiums went parabolic. That could easily happen again.

Jeff: And that was due to constrained supply.

Andy: Yes. When the price fell off the table, everything disappeared quickly. That’s counterintuitive, I know, because logic would dictate that as the price of something falls, demand is waning. But as the price fell, I think it became more attractive to large interests around the world, and everything got gobbled up fast.
Looking ahead, I can tell you that the only way you’ll see premiums stay where they are is if the mints are able to keep up with demand, and based on what I see I would argue there is no way they can. They can’t even keep up now. On top of that, as I stated, people aren’t going to sell their gold this time unless they absolutely have to, so there won’t be any supply coming from sales.

Jeff: So your message to someone who owns little or no physical metal now is what?

Andy: Acquire as many gold and silver ounces as you can. In the end it’s not about price paid, it’s about number of ounces. View the supply issue as critically as you would the price, because I believe that more than anything else, the lack of available supply will mark this industry.

Jeff: Excellent advice, Andy. Thanks for your input.

Do you own enough gold and silver? We made special arrangements with our new recommended dealer for some seriously discounted bullion, enough that the savings will cover your first year’s subscription to Casey’s Gold & Resource Report. The discounted price, available only to our readers, will remain open for only a short time. Check it out risk-free here.

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

Chris Wood
Casey Research, LLC

Daily Dispatch: A Dictatorship of the Majority

July 07, 2010 | www.CaseyResearch.com A Dictatorship of the Majority

Dear Reader,

Over the long weekend we watched Harold and Maude, the 1970s cult classic. While the years haven’t been kind to many movies of that vintage, Harold and Maude struck us as not having lost anything to the cultural transition.

Therefore, if you are looking for something a little different but altogether life affirming, I’d highly recommend it. An added bonus is the soundtrack by Cat Stevens. In fact, as I write, I’m listening to a live version of one of his songs,
Miles from Nowhere

.

In his time, Cat Stevens was one of the most talented lyricists and musicians on the scene. Then, at the apex of his career, he suffered what was likely an artistic crash. While his tidied-up
Wikipedia page

Cat_Stevens
attributes his subsequent conversion to Islam to a near-fatal drowning incident after which he changed his name to Yusuf Islam and turned his back on music (until recently) my quirky memory recalled him having legal trouble related to stalking a stripper, a sure sign of a tormented soul.

It is a tragic flip side of human nature that, rather than celebrating and enjoying exceptional success, so many people instead suffer a meltdown. One day they are at the top of their profession, and the next they are slinking around strip clubs or lurking in public restrooms, or slipping behind the wheels of their cars while sloppy drunk, then compounding a bad situation by unleashing racist tirades when nabbed.

This tendency to go moth-like to the flames of self-immolation doesn’t stop with individual humans but can suck in an entire culture. As I have previously shared, perhaps the single best example of that is provided by the ancient Hawaiians who, finding themselves in absolute paradise, set about inventing over 2,000 “kapus” or laws, transgressions of most of which were punishable by death. One minute, paradise, the next a hell where the shadow of a prince falling on you was a quick ticket to summary execution.

The U.S. of A. provides yet another useful example of this phenomenon. Blessed by broad ocean-bound borders on two sides, and no real threats from the top or bottom, the country has been free from the constant invasions that have tormented the European principalities and their successor nation-states for time immemorial. Coupled with a legal birthright founded on the idea of “Live and let live,” the extreme success the country enjoyed in its youth should surprise no one.

Unfortunately, rather than remaining true to its founding principles, successive leaderships have led the country deeper and deeper into foreign entanglements, and further and further down the road of populism of the sort that has left Europe gasping for breath.

The situation has now reached a crossroads. In one direction, the direction we here at Casey Research steadily advocate, there is real hope. That hope is based on remembering the principles of self-reliance that made America so economically powerful in its early career a haven with a relatively short list of reasonable laws and regulations, administered by a minimal bureaucracy supported by a modest and simplified tax code.

Economic historian Niall Ferguson recently commented on the surprising lack of dialogue about this path in America. You can, and should,
watch this video here

. (Thanks to steady correspondent Nitin for bringing this to my attention).

Unfortunately, not only are the politicians, of both stripes, not talking about a return to policies based on sound principles of economics to wit those that support the creation of wealth but they are continuing to float all manner of new and damaging ideas for “governing” the nation out of the crisis. Starting with hefty increases in taxes and regulations, actions certain to have exactly the opposite effect.

And it could get a lot worse than that.

Case in point, there was a discussion on BBC radio yesterday about a growing number of voices from the environmental community who are now calling the very principle of democracy into question. The basic thesis is that by encouraging short-term thinking, a democracy is unable to deal with long-term problems in this case, the climate change these true believers see coming 50 or 100 years down the road.

Of course, while they are misguided to the extreme on the environmental concerns, they are technically correct about the whole short-term/long-term thing. That’s because the only thing most politicians are interested in is getting reelected two or four years down the road. Anything outside of that time horizon is of no real import, other than as script elements for political theater.

I also find much to dislike about democracy, preferring instead the simpler system of a republic based on certain inviolable rights. For example, private property is sacrosanct and can’t be taken away for failing to pay a tax or because town managers come to believe your land would be well suited for a convention hotel.

Even so, it concerns me greatly to find my steady disappointment with our degraded democracy which is little more than a rush to the slopes at this point to be shared by members of the environmental movement. I don’t know much, but I know for a certainty that their version of what the country should transition to, and mine, differ dramatically. This is not just idle speculation, as I increasingly think we’ll see a serious transition in the nation and in much of the world resulting from this crisis. Much in the same way that the cascading crisis of the 1930s led to FDR, war, and a fundamental rearrangement of global power.

So, what’s the world going to look like a decade from now? Less government, and what there is strictly collared by hard rules that protect the rights of the individual?
Or more government, where the rights of the individual are all but overrun in the interest of the greater good?

Unfortunately, based on the signs now popping up, I have to believe the odds strongly favor the latter scenario. In the last Great Depression, many of the tools for what might be termed a dictatorship of the majority simply didn’t exist in the body of prevailing law until FDR began pulling the levers.

Since that time, things have gotten steadily worse until the point that Americans now sit on their hands while the government rounds people up and holds them without trial, or invades other countries on false pretenses, then continues the farce at the cost of trillions of dollars. Then there is the federal takeover of one large swath of the economy after the next.

Put another way, at this point the slope has been well greased for government to do pretty much anything it wants… all in the name of the greater good. With that being the case, all that’s needed now for things to get really ugly is the right impetus.

I suspect that won’t be long in coming. Whether it’s war with Iran, now made all but inevitable by the U.S.-led sanctions preventing key commodities from reaching the citizenry… or the next leg down in the eurozone, followed by a loss in faith by bond traders about the similarly dismal outlook for Japanese and U.S. finances, we are approaching a tipping point.

Which brings us back to the lack of debate about rational approaches out of this crisis referenced by Ferguson. Unless and until that debate is well joined, you must take it as a given that things are only going to get worse from here. And then they are going to get really bad.

Maybe so bad that the push by some in the environmental community to toss over key concepts of democracy could come to pass. Of course, for them to promote this idea is naïve to the extreme, because in the dictatorship that follows, the environmentalists would likely be the first up against the wall.

On this general topic, this week we continue with short video clips of my dear partner Doug Casey excerpted from The Fall of America video series. In today’s installment, Doug discusses some of the worst of what he believes is to come.
Watch it here

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Then, if you so desire, you can learn more about the entire high-quality, 9-disc video series by clicking here.

End Notes

I’d like to close for the day by stressing our view that we’re on the edge of an economic precipice.

As explained in this month’s edition of The Casey Report, published last night, this next leg down will likely take pretty much everything down with it, including most commodities and even the precious metals. That said, we see any downdraft in the precious metals, and especially gold, to be short lived and nothing to worry about. Which is to say, if you are looking to add positions, you can view any continued setback as good news. Gold stocks are also likely to come under pressure, but, again, as people remember those securities are attached to gold, they’ll do just fine.

Continuing for a moment on this topic, over the weekend I spent time with a friend who is a very highly placed Wall Street exec and over the course of our discussion learned that he and his colleagues concur with our view that things are about to get ugly. You could call him a reluctant bear because, as he correctly points out, it’s a lot harder making money in a bad market. The idea at this point is more about not losing, so don’t be afraid to hold some extra cash in here.

Finally, for today, we received a number of emails from dear readers complaining about our man in Washington, Don Grove, using the phrase “right-wing nuts” in conjunction with a mention of Rush Limbaugh and Glenn Beck. This was a misunderstanding, a case of Don trying to be sarcastic, which is why he used quotation marks around the phrase. Don is on the record as a fan of Limbaugh and Beck.

Speaking personally, while I think Limbaugh has shown himself to be fully human and a hypocrite by calling for the death penalty for drug users while being an addict himself and Beck tends to go a bit overboard, they bring a lot of value to the policy debate in this country. That they are so vilified by the socialist/populists is a direct result of the fact that their views resonate so strongly with people who stand in opposition to the current leadership.

While I consider myself more of a libertarian with anarchist leanings than a conservative, economically I’m on the same page as Limbaugh and Beck. In the final analysis, however like all their peers in the talk show community these guys are mostly just media personalities pulling a paycheck, so one shouldn’t take them overly seriously.
And with that, and with my apologies if I have further offended anyone, I will sign off for the day.

Until tomorrow, thank you for reading and for being a subscriber to a Casey Research service. On that topic of subscribing, I’ll leave off by mentioning we are still offering three-month, no-risk trials to The Casey Report, in case you’d like to view the current edition for yourself. Love it, or get your money back. Details here.

David Galland
Managing Director
Casey Research

Daily Dispatch: Why Have the Jobs Gone Away?

July 06, 2010 | www.CaseyResearch.com Why Have the Jobs Gone Away?

Dear Reader,

Chris here. If you’re from the U.S., I hope you had a wonderful 4th of July weekend. If you’re from a foreign land, I hope your weekend was equally pleasant. For me, I spent my weekend at home cleaning. As a thirty-something bachelor, I sometimes overlook things like vacuuming, mopping, dusting, and doing dishes. But my parents are arriving tomorrow, and I didn’t want them to see their son living like a pig (even though I’m quite certain my father would if my mom weren’t around). Truth be told, thanks to how hot it was this weekend where I live, I didn’t accomplish close to what I set out to do, and I’m nowhere near finished making my home presentable. But hopefully I can knock it out tonight.

Okay, enough chit chat, now down to business.

Why Have the Jobs Gone Away?

It’s no secret that the private sector in the U.S. has been shedding jobs at an alarming rate, while the public sector has grown fat milking the production of the private sector. Just look at the chart below showing the most recent data from the Bureau of Labor Statistics on private employment (from January 2008 through June 2010) compared to the chart on federal government employment for the same period.

Since January of 2008, the private sector has shed 7.9 million jobs, reflecting a decline of 6.8% in total private employment over the past 30 months, while the federal government has added 469,000 jobs, indicating an increase of 17.1% over the same period.
But this stark contrast says nothing about why the jobs have disappeared. On this subject, I just came across a write-up by the blog The Economic Collapse that I largely agree with, so I’ll provide some excerpts below.… Yes, the large global corporations have been sending millions of jobs overseas where labor is far, far cheaper. And yes, the U.S. government has accumulated so much debt that it is absolutely suffocating the U.S. economy.
But there is another very important factor that has been largely overlooked. Traditionally, about 75 percent of all new jobs are created by small businesses. But today, hundreds of thousands of small businesses are being strangled out of existence by all of the oppressive taxes, fees, rules, regulations, paperwork and demands that government keeps imposing on them. In such a repressive environment, it is getting close to impossible for small businesses to thrive, and if our small businesses can’t succeed, then we simply are not going to see a lot of jobs being created.

You see, the truth is that over the past several decades the game has become dramatically stacked in favor of large businesses. Big corporations have the money to lobby Congress and other governmental institutions, they get almost all the tax breaks and they are the only ones who get bailouts. They even “help” write legislation on the federal level.

Many times large corporations will even lobby for more regulations for their own industry because they know that they can handle all of the rules and paperwork far easier than their smaller competitors can. After all, a large corporation with an accounting department can easily handle filling out a few thousand more forms, but for a small business with only a handful of employees that kind of paperwork is a major logistical nightmare.

When it comes to hiring new employees, the federal government has made the process so complicated and so expensive for small businesses that it is hardly worth it anymore. Things have gotten so bad that more small businesses than ever are only hiring part-time workers or independent contractors.
So what we actually have now is a situation where small businesses have lots of incentives not to hire more workers, and if they really do need some extra help the rules make it much more profitable to do whatever you can to keep from bringing people on as full-time employees.
Yes, all big corporations today started out small. But, in general, they got their start in a much friendlier regulatory environment than exists today. And the point is that as long as the deck is stacked so strongly against small businesses competing and expanding, the U.S. economy cannot thrive and jobs won’t be created, they’ll continue to be lost.

Signs of the Times…

Here are some random stories that speak volumes about the times we live in.
The U.S. government is spending 2.6 million tax dollars to study the drinking habits of Chinese prostitutes and another $400,000 to study gay sexual behavior in Argentine bars (yes, bars in Argentina). Link here.
U.S. officials say that more than $3 billion in cash (much of it aid money paid for by U.S. taxpayers) has been stolen by corrupt officials in Afghanistan and flown out of Kabul International Airport in recent years. Link here.
Researchers at the State University of New York at Buffalo received $389,000 from the U.S. government to pay 100 residents of Buffalo $45 each to record how much malt liquor they drink and how much pot they smoke each day. Link here.
It’s reported that a 6-year-old girl from Ohio is on the “no fly” list maintained by U.S. Homeland Security. Link here.
Oh yeah, and the average federal worker now earns about twice as much as the average worker in the private sector.

If stories like these are becoming too commonplace in your view and expatriation is looking like a better and better option each day, you might want to check out this article that deals with the 7 most common excuses against expatriation.
Also, we just released a new special report titled American Expatriation Guide: How to Divorce the U.S. Government. While each individual’s situation is unique and you should always consult a legal professional concerning the specifics of your choice to part ways with the U.S., this report will answer many of your questions on the topic. Download the free report here.

Time to Board the Gold Stocks Train?
By Jeff Clark, Casey’s Gold & Resource Report

One of the big hints that gold stocks will be ready for take-off is when they stop following the broader markets and strictly track gold, particularly if the market falls and gold stocks don’t. We now have data showing this has just occurred.

From April 2009 to April 2010, gold stocks mirrored the S&P. The two markets held hands as often as high school sweethearts; there was very little separation between them. While it wasn’t always a daily connection, any weekly and especially monthly chart showed them moving in tandem.

Until now.

For the quarterly period of April through June, gold stocks advanced 11%, tracking gold’s gain of 10.7%. The S&P, however, lost 14.1%.

We haven’t seen this level of separation between gold stocks and the general stock market since the first quarter of 2010. This demonstrates obvious strength in our sector, and is precisely the kind of action that can signal we’re getting closer to our precious metals investments starting a major leg up.

In the big picture, this data should be considered a short-term indicator. However, it’s a refreshing reminder that at some point, it won’t matter what the broader markets are doing. In the precious metals bull market of the 1970s, the Barron’s Gold Mining Index soared 652%, while the S&P gained only 22% for the entire decade. This means that if you’re bearish on the economy, you don’t have to be bearish on gold stocks.

Whether this is the beginning of permanent separation or not, the following chart tells us the stock market, in relation to gold, is going one direction.

At gold’s bottom in April 2001, the Dow/Gold ratio (DJIA divided by gold price) was 41.2. It now stands at 7.9 (as of July 2).

When gold peaked in January 1980, the Dow/Gold ratio reached “one,” meaning they were both selling for about the same price. To hit that same ratio today, gold will have to go higher and the Dow simultaneously lower. The fundamental reasons gold will rise are far from over, and a second leg down in the broader markets seems almost locked in at this point.

In this context, Doug Casey’s call for a $5,000 gold price doesn’t seem so farfetched. It also coincides with his call for a Greater Depression, an environment not exactly suited for higher stock prices. $5,000 gold = 5,000 Dow.

Where do you think they’ll meet three? Eight?

This has obvious implications for your investments. If you’re investing for the big picture, you first want to think twice about any conventional stock investment. You might even consider a short position on one of the indices, something without a time limit, such as an inverse ETF.

Second, you should plan on higher gold prices. While pullbacks are inevitable, it does mean that even if you don’t own gold yet, it’s not too late. In fact, any excuse you have now for not buying gold will seem shallow and meaningless when the dollar begins cratering and so does your standard of living.

Third, don’t shy away from gold stocks. Yes, they’re still stocks and thus vulnerable, and we’re not sure the separation is here to stay, but selling your core holdings would be, in my opinion, a mistake. One of these days gold stocks won’t wait around for you to jump back in. And you could find yourself chasing them, a tactical error for the investor looking to maximize profit from what we believe will be a once-in-a-generation bull market.

In fact, if you had followed only this strategy since the precious metals bull market began in April 2001, you’d be up 375% in your gold holdings and up 707% in your gold stocks. An investment in the S&P, meanwhile, would’ve returned you exactly zero.

It’s our opinion this trend will continue. Gold stocks could very well get cheaper in the short term, handing us an excellent buying opportunity. But in the big picture, they’re destined for much higher levels.

My advice is to make sure you’re on the right side of this trend.

What’s a good price on gold, silver, and precious metals stocks? We’ve charted every summer pullback in prices since the bull market began in 2001, giving us target zones for every asset in our portfolio. Our Summer Buying Guide is an invaluable resource for identifying a good bargain in our industry. And you can access it right now, for $39 per year, with a risk-free 3-month trial. Click here for more.

Why Green?
By Vedran Vuk

What do the War on Terror, green energy, and the high-speed rail project have in common? They all lack clear objectives and success measurements. These three initiatives are perfect for politicians. When there is a clear benchmark, government gets into trouble. For this reason, politicians more and more avoid quantifiable projects such as unemployment, poverty, income, etc. Or they set arbitrary benchmarks. For example, universal healthcare aims to insure the entire population. I have no doubt that the government can insure everyone. However, I have very strong reservations about long-term affordability and quality. Of course, the Democrats realize this too. That’s why they focused on the number of uninsured rather than price and quality. They know that they will fail on price and quality.

The wars in the Middle East are also unquantifiable goals. Are we winning or losing in Iraq and Afghanistan? It’s impossible to say. At best, one can have an educated opinion, but an objective statement eludes both sides of the issue. Occasionally, the government attempts to quantify success by demonstrating lower casualty rates. But even these statistics are worthless and deceptive. Victory more often than not comes with higher casualties not fewer. Further, it’s impossible to say with certainty whether there would be more or less terrorist attacks without the wars.

Sooner or later, we’ll have to exit the Middle East. However, the unquantifiable century-long goal will be green energy and the green movement. Will green energy ever be more profitable than oil, coal, and gas? Let me put it this way: Green energy is little more than modern-day alchemy. Today, oil is the gold, and the wind farm is the lead. There are plenty of good uses for lead, but ultimately it will never become gold.

Because environmental goals cannot be quantified, the government will keep pushing them for eternity. There’s no way to account for cleaner air in a cost/benefit analysis that’s why the government loves green. Just ask yourself, what should society pay for 10% cleaner air? You could pick any number. No matter the outcome, the government can always claim success. Those pesky cost/benefit approaches won’t bother them here.
Emissions are already following this model. Goals are set to reduce emissions by arbitrary percentages, but the quantifiable benefits are never revealed. Further, the percentages themselves appear to be arbitrarily picked out of thin air. Though the benefits are unaccountable, the government can keep claiming that it’s “saving the planet.” What does it actually mean to cut emissions by, say, 30%? Where’s the benefit outside the catch phrases of a “cleaner and greener world”? The benefits are always left vague, generalized, and idealized with a touch of apocalyptic overtone.

The new high-speed rail project campaigns focus on the environmental benefits and the improved livability of communities. $8 billion is being spent on these projects around the country, with $2.25 billion for California alone. How does one calculate success in creating a “livable community”? Ultimately, “livable” is a subjective term. And that’s exactly why the government has adopted this as a goal. Even if the project is a complete money pit, they can always claim to have created more “livable” neighborhoods.

Then there’s the green angle that promises to reduce pollution. Sure, maybe the air will be a bit cleaner. But is this worth $8 billion? Once again, it’s impossible to say and that’s the whole point.

If society actually valued high-speed rail, a system would have been constructed long ago. When consumers demand a product, entrepreneurs will be more than happy to provide it. If the costs are greater than the consumers’ willingness to pay, then the project will fail or will never even start. The very fact that a private high-speed rail does not exist says everything that you need to know about the cost/benefit analysis here. Only unquantifiable goals can justify the project. Hence, these are the goals centerstage.
But don’t worry. The high-speed rail will be a success just like the Iraq war, just like green energy, and just like universal healthcare. When there are no quantifiable goals and only arbitrary benchmarks, every government project is a winner.

And That’s It for Today

Chris again. Before signing off, I would like to point to a recent article in The New York Times that lays out Robert Prechter’s (founder and president of Elliott Wave International) market forecast. Prechter is convinced that we have entered a market decline of staggering proportions. He says the Dow is likely to fall well below 1,000 (no typo, that’s one thousand) over perhaps five or six years as a grand market cycle comes to an end. Link here.

Although I’m skeptical about many technical approaches to market analysis, Prechter’s version of the Elliott Wave theory has brought him and his company much success over the years, so it might not be wise to discount his approach completely off hand. Still, as bad as I think things are going to be over the next few years, I have a really hard time believing the Dow could fall below 1,000 simply because of all the money that has been and will continue to be pumped into the system. Furthermore, once the inflation expectation catches hold, the velocity of money will ramp up as people eagerly trade their dollars for something more tangible. Insofar as pieces of blue chip companies that actually produce things and are capable of creating wealth represent something “more tangible” than fiat currencies, the rush could actually push the Dow up in nominal terms.

Even so, in real terms, the money pumping we’re seeing today and will continue to see will (due to the malinvestment it has caused and will cause) destroy much wealth in the years to come, and people’s average standard of living will decline significantly.
And that, dear reader, is that for today. As always, thank you for reading and for subscribing to a Casey Research service.

Chris Wood
Casey Research, LLC

Daily Dispatch: The End of the Gold Bull Market

May 13, 2010 | www.CaseyResearch.com The End of the Gold Bull Market

Dear Reader,

In communicating with a financial advisor friend of mine this morning, the topic of cash and gold stocks came up. Which got me thinking about a few things I’d like to share with you.

To change things up a bit, I’ll interview… myself.

Q. With gold and gold stocks on a tear, does Casey Research still recommend holding 1/3rd of a portfolio in cash?

A. The answer depends, of course, on what country you are currently sitting in. Were I sitting in the eurozone, I would have already moved much of my safe harbor cash into the “resource” currencies such as Canada and Norway… i.e. countries that are rich in the natural resources that the world needs and will always need.

If my derrière was resting in a seat planted on U.S. soil, as it is, and I didn’t plan on doing any significant overseas spending, then I would feel relatively comfortable for the time being, with a larger than usual allocation to the dollar. But I would have been diversifying into the resource currencies as well.

(One convenient way to do so is with the FDIC-insured EverBank® World currency accounts and CDs details here.)

Q. Hold the fort, dude how can you write frequently about the demise of the dollar and yet be “relatively comfortable” holding the stuff?

A. In a nutshell, the monetary inflation, quantitative easing, and insane spending of the U.S. government, emulated by countries around the globe, have set the table for a large serving of currency depreciation down the road.

Once that depreciation begins to appear in the form of price appreciation, we’ll look to trade our greenbacks for more in the way of tangibles probably more gold… maybe real estate in a good location, location, location… maybe more silver… maybe deep value energy stocks… maybe antiques… maybe some of all of the above.
For the time being because price inflation is not out of control and yields are so low there is little real carrying cost to holding a larger allocation to cash and the flexibility and security of having cash is a big plus.

Q. What about gold and gold stocks today?

A. Gold is sound money. Always has been, probably always will be. In the sort of crisis now underway a crisis that to no small extent is now focused on sovereign fiscal and monetary excesses gold has a particularly important role in protecting wealth.

If you don’t own it, start accumulating it, preferably on the inevitable dips. If you do own it, hold it and consider accumulating it up to somewhere between 20% and 30% of your portfolio, though the exact amount will depend on factors such as your cash flow needs, personal debt obligations, your age and work status, etc. that we can have no way of knowing.

One of the nuances in answering this question has to do with deciding what form of gold to own. While we like physical gold held in a safe place, you don’t want to go overboard because things can happen. For instance, robbery, or even a house fire that melts your wealth back into the dirt. In addition, at some point the gold bull market will end and when it does, the scramble to sell will likely overwhelm the coin dealers to the point where they literally take their phones off the hook. That creates the potential for big gaps down in the price between the time you decide to sell, and are actually able to sell. Mind you, I don’t see that being a concern any time soon but it’s always worth keeping in the back of your mind.

There are a number of other bullion alternatives a big positive being that many are easy to buy, hold, and sell including allocated and unallocated gold accounts, electronic gold, gold ETFs, and so forth. Some are better than others and all are worth understanding before making investments. Our Casey’s Gold & Resource Report is a good source for this sort of info. At just $39 a year, it’s also a real bargain details here.

Generally our recommendation is to hold your gold in a variety of investment vehicles as that will mitigate the risks of having too many eggs in one basket.

Turning to gold stocks, subscribers of some duration will already be well positioned in the best of the best. And will own many positions risk-free, having already recaptured their original investment. If that is the situation you are in, and you really understand the companies you are invested in, then at this point either hanging in for the big upside, or trading the surges and dips, makes sense. If you are new to the sector, I wouldn’t chase the stocks just now but rather put in stink bids i.e. 10% to 20% below the current market, and look to get filled on a correction.

If you are new to the gold stocks, or risk-averse, then look to build a portfolio of large cap gold stocks such as we cover in our Casey’s Gold & Resource Report (more). Those will attract a lot of attention from the public at large, and from institutions, as the bull market gathers steam.

If you have experience with gold stocks, and a higher tolerance for risk, then a subscription to our International Speculator, which focuses on the small-cap Canadian explorers and developers, is right for you. Those juniors have amazing volatility and, when the news is good, the upside can be breathtaking. (more here.)

Regardless of the approach you take, don’t chase stocks as they move higher but look to build your portfolio on dips over the next few months.

The idea is to get positioned before the underlying price of gold reaches a level where the public starts to come into the sector in a big way at which point, if history is any guide, the early investors will make stunning returns.

Q. At what price do the gold stocks catch fire?

A. Some years ago, we had someone spend the better part of a week in a musty storeroom full of old Canadian newspapers, paging through past issues and recording the price and volumes of the gold stocks during the last big run-up, in the 1970s. We then compared that data to the gold price in inflation-adjusted dollars in order to determine the price that the broader investment public began piling into the gold. The number worked out to about $1,250 per ounce in today’s dollars. In other words, when gold decisively takes out $1,250 an ounce and holds above that level, if history is a guide, we may start seeing the average guy on the street and the institutions start to pile into the stocks.

Of course, while interesting from an historical perspective, that analysis has no scientific basis. The key point, therefore, is that during the last big gold bull market the public wasn’t involved in the gold stocks when they should have been in the run-up phase but rather only piled in after the price of gold bullion soared, relatively late in the bull market. So far, the average Joe and Jill are just not in this market. But, they will be.

Q. How high do you think gold will rise?

A. At our recent Crisis & Opportunities Summit (more on CDs), an attendee asked how high we thought the dollar price of gold would reach in this bull market.

My response was that there really is no way of actually forecasting that number, for the simple reason that, in a fiat currency regime, the underlying unit of valuation is so intangible. Let’s say you lived in Zimbabwe some years ago, and owned an ounce of gold. One day your ounce might be worth 1,000 of the local currency units. A year later, it might be 1,000,000. Or, even 10,000,000,000.

While the U.S. is no Zimbabwe at least not yet its currency is just as intangible, for the simple reason that the government can print the stuff pretty much at will. To say that gold will go to $5,000 in the current crisis is really just another way of saying that the dollar currency unit will fall by some significant degree. But, given the uncertainty in the economy, and unknown of what actions the government and the Fed might take next, we really can’t know how much purchasing power the currency unit will lose in the months and years just ahead.

To date, the government has been extraordinarily breathtakingly willing to abuse the dollar. They have largely gotten away with it so far, but that certainly doesn’t mean they have gotten away with it. When the time comes for the piper to be paid, we suspect he’ll be paid pennies on the dollar… which could easily result in gold trading for $3,000, $5,000, $10,000 per ounce but, who knows, maybe even $10,000,000,000.

The point is, given the choice between dollars and gold, you are far more likely to preserve your wealth over the duration of this crisis better with gold.

Q. Is the gold bull market getting old? How much longer can it last?

A. Having been around and actively involved in hard assets as the editor of “Gold Newsletter” and the conference director of the New Orleans Conference during the last big gold bull, I hope I can provide some useful perspective.

For instance, I can well recall in late 1979 when all of the many gurus of the day were predicting gold would keep going higher and higher still. Well, as we all know, it didn’t.
What’s interesting about this time around is that there is almost no scenario we can envisage that is going to kick the legs out from under the gold market at least any time soon. In contrast, in the late 1970s, the gold bulls coulda/shoulda seen that the Fed had a lot of room to act i.e. by pushing up interest rates in order to tackle the price inflation that was the key driving force in the soaring gold prices of the time.

Today, the situation is profoundly different. Starting with the fact that this is, at the core, a debt crisis. And the one thing you can’t do in a debt crisis is to encourage interest rates to rise. Look no further than Greece for that lesson.

So, we have an unprecedented monetary inflation, truly out-of-control sovereign spending and debt, unprecedented levels of private debt, unprecedented trade deficits, a massively overbuilt and overpriced post-bubble real estate market and, importantly, near historically low interest rates.

So, we have to ask ourselves other than continuing to exercise its powers of fiat money creation what ammunition does the government have at its disposal to address the structural problems of today’s economy? And, of course, actually creating more money and more debt isn’t addressing the structural problems, it is compounding them.

Of course, the government can default on their sovereign obligations an option I think we’ll see Greece and others of the PIIGS take, and probably fairly soon.

They can also continue to inflate, which we expect them all to do.
And they can… no, actually, I think that about sums it up: default or inflate. In either scenario, gold is going to be seen as the ultimate safe harbor.

Q. Won’t the government see gold as a threat to its fiat currency and try to do something about it?

A. Of course, governments might try any number of stunts that could affect gold. For example, raising margin requirements to curb playing the markets with leverage, or even attempting outright confiscation.

All we can do is to monitor the situation closely and try to anticipate their next moves in order to get out of the way. A number of people I know have opened safety-deposit accounts in other countries as one way to hedge their bets against confiscation. Others have bought numismatics but be careful on that front, because that can increase illiquidity.

It is not out of the question, in my view, that before this is over we could see a revaluation of gold in order to relink the U.S. dollar to it because sooner or later, as the crisis reaches its climax, something is going to replace the fiat currencies but at this stage it’s impossible to guess what that will look like. If we did see a return to a gold standard, then the government could actually be responsible for sending gold up by many multiples.

Back to the present, at this point I can’t see anything that is going to derail this bull market but I do see a whole lot of things with the potential to send it into the stratosphere.

Q. Thank you for your time.

A. My pleasure. Always happy to be of help.

Q. You’re kind of strange, talking to yourself and everything. You know that, right?

A. Sometimes I wonder.

Speaking of Gold

While we don’t use technical indicators in our analysis, a lot of active traders do. As such, the tripping of key technical supports can serve as something of a self-fulfilling prophecy. Which is why we do like to keep at least one eye on it.

The chart here shows one of the technical views of gold’s breakout, and an analysis that expects gold stocks to move strongly higher from here. As the chart is too small for most to read, you can hit the link here to view a larger version.

A Hung Parliament
By General Watson from the Algarve

While a long-term expat from his native Britain, friend and correspondent General Watson makes it a point to keep up with the happenings in the land of his birth. In this installment, he sheds some light on the turnabout in British politics thanks to the recent election.

There are 650 constituency seats in the British Parliament. This means that to form a new government, one party has to win a majority of 326 seats. Last week’s general election result was that the Tory (conservative) party won 306, Labour (socialist) won 258, the Liberal/Democrats (centrist) party won 57 seats, and Others won 28. This means that no one scored an overall majority. This is referred to as a ‘hung parliament.’

The British system is ‘first past the post’ in each constituency. As a result, the names of the leaders standing for election do not even appear on the ballot paper, except in their own constituency. For the first time ever there were three live, 90-minute TV debates featuring the three party leaders: David Cameron of the Conservatives, Gordon Brown from Labour, and Nick Clegg from the Liberal/Democrats. The big surprise was that Nick Clegg, who was not well known to voters, performed very well.

The election result was that someone had to put together a coalition of two parties. This gave Clegg an opportunity to horse-trade his seats between the Conservative and Labour parties. They also must agree on their potential common policies. This took five days of negotiations. Even though Brown had obviously lost, tradition has it that Brown should remain as prime minister until a new one is appointed by the Queen. So Führer Brown hunched down in his 10 Downing Street bunker, until the war was over.

The end result was that, eventually, the Conservatives did a deal with the Lib/Dems to form a coalition government with David Cameron as prime minister and Nick Clegg as deputy prime minister. This meant that Gordon Brown had to go down to Buckingham Palace to see the ‘Head Mistress’ and resign his premiership. The ‘Boss’ then appointed David Cameron as the new prime minister.

This is the first coalition government in the UK since World War Two. And Cameron, at 43, is the youngest prime minister in 200 years. As the price for coalition, the Lib/Dems also get five members of their team appointed to cabinet posts. The key Conservative appointments are that 38-year old George Osborne will become chancellor of the exchequer (treasury secretary) and William Hague will be the new foreign secretary. In the meantime, Gordon Brown has also resigned as the leader of the Labour party and the deputy leader Harriet Harman will take over on a temporary basis, until Labour has a new leadership election in the next few weeks. The most likely winner of that is David Miliband, the previous foreign secretary, who is reported as being a great favorite of Hillary Clinton’s.

The new government is facing an annual deficit of 163 billion pounds, which represents about 12% of GDP and is nearly as bad as Greece. They have promised that they will tackle the deficit with a new emergency budget within 50 days, which will cut government expenditures and no doubt increase some taxes. Sounds familiar, but seeing is believing.
David, again. The initial word out of the new government is that they will soon propose a cut in spending of 8 billion pounds. Not much of a dent, though it wouldn’t surprise if the public reacted negatively to even that amount. Speaking of the public acting badly, click here for a just-released video of protestors trying to storm a bank in Greece… I mean, Ireland.

Plain Insane

Since we’re in video watching mode, check out this video from the state of Pennsylvania in which they overtly use the latest in Big Brother technology along with the added threat one would associate with drone warfare to threaten delinquent taxpayers.
When I first watched it, I thought it was a joke… a spoof. It’s not. And the worst part is they don’t even know how wrong this is.

Watch it here

.

(Thanks Jeff, for sending that along.)
MiscellanyBye Bye BP? In NYC, I had a beer with an old college chum who is now a partner in a law firm that has been retained by one of the litigants in the Deeper Horizon rig accident. He figures that the case will provide a good ten-year annuity for his firm. And he also thought, as have others I’ve spoken to, that this could ultimately take BP down.

This whole litigation thing is just getting started. The trend for looking to harvest cash with more and bigger litigation in the U.S. won’t stop with a deep-pocketed, oil-spilling, foreign conglomerate (translation: BIG target), but will expand to Wall Street banks and the rating agencies whose primary function during the mortgage crisis was to put lipsticks on the portfolios of pigs.
The lawsuits will come from governments, from the pension plans that thought they were buying safe bonds, from folks in the fishing industry… hell, from everyone, about everything. In the end, the biggest winner will be the U.S. government that will have its hand out at every turn, and the biggest loser the American public, who will find itself scratching its collective head in the dark and wondering why no foreigners want to do business over here.

Report from the Sacramento Phyle. If you want to know what other readers are thinking, check out this recap of the recent Casey Phyle meeting in Sacramento. For those of you new to Casey Research, these “phyles” a term from sci-fi writer Neal Stephenson meaning a group of individuals who affiliate with each other based on shared views are informal meet-up groups of Casey readers. To find out if there is a Phyle near you, drop us a note at phyles@CaseyResearch.com.

Coming Monday a Return of the Deutsche Mark? Okay, this is way out there but one of our researchers came across an online posting from a person who purports to work at Deutsche Bank who claims to have been working for months on a surprise reintroduction of the Deutsche Mark… this coming Monday. While I have to take this information with a large bag of salt it sure would shake things up in the eurozone if it were true.
And that, dear reader, is that for the day. Until tomorrow, thanks for reading, and for subscribing to a Casey Research service.

For those of you new to our services, don’t miss this opportunity to “dip your toe” into gold and gold stocks with our Casey’s Gold & Resource Report. At just $39 a year with a 3-month unconditional money-back guarantee, you literally can’t go wrong. Here’s the link.

David Galland
Managing Director
Casey Research

Daily Dispatch: Going Nuclear

April 09, 2010 | www.CaseyResearch.com Going Nuclear

Dear Reader,

Glancing at the calendar this morning, a nagging sense of something left undone crept into the back of my cranium.

Something that one should remember to do this time of year. Let’s see…

Send annual extortion money to “Uncle” Sam down at mob headquarters. Check.

Begin a rigorous regime of stomach and back exercises to prepare for the pending golf season. Check.

Clean up the dog droppings revealed by the melting of snow in the front yard of Chez Galland. Check.

Sell in May and go away. That’s it!

But does that time-worn adage, familiar to all experienced investors, hold water? Or is it just another myth of the sort that arrives in the email box with painful regularity these days?

While I am no Bud Conrad, maestro of charting skills and detailed data analysis, I managed to hobble together some charts that may be of use in coming to an answer.

The first chart below shows the S&P 500 over the last five years. As you can see, in three of the five years, selling in May and going away until September would have been the right move. In one of the five years you might have missed modest profits, but in only one 2009 during the extreme bounce back from the chasm of 2008 would you have missed substantial gains.

Treating 2009 as the anomaly it was, one would have to say at least when it comes to the broader stock market that the notion of selling in May holds up.

What about gold stocks?

This next chart shows the XAU index of large-cap gold and silver miners. For the same five-year period, we see that, had you held on to your stocks in May, you would have been a big winner in two years, up marginally in one (but only thanks to a last-minute rally) and down in two one sharply in the 2008 crash. While you would have done better, on the whole, in the gold stocks, it seems pretty clear that, in a typical year, you wouldn’t have missed much by selling in May and going away.

With a few caveats the most important being that once you exit the market, inertia could set in and cause you to stay out of the next big leg up. Given where we think gold stocks in particular are headed over the next five years, that would be most unfortunate. In addition, buying and selling involve tax considerations and transaction fees. (Though, don’t forget that capital gains taxes are going up at the end of 2010.)

Gold Bullion

With my charting engine all revved up, I decided to take a look at physical gold. The chart below is of the London Gold Fix. Interestingly, despite the clear big-picture bull trend that has seen the price of gold more than doubling over the period, you can also see that selling in May and going away would have been a good move for gold bullion over the last five years… provided, of course, you took advantage of the summer doldrums to buy back in.

So, what to make of all this?

Nothing particularly profound. If you know what you own and why you own it, then, generally speaking, the odds are decent that even if there is some weakness over the summer, you’ll regain lost territory and move up in the fall. In all the charts, with the exception of the anomaly of the 2008 crash, September to January tends to be a pretty good period for most asset classes.

But there are clearly some years where selling in May makes sense, and this could very well be one of those years. With a veritable flock of black swans swirling overhead, and the U.S. equity markets overvalued by almost every measure, if you are overweight in any single investment or sector, consider lightening up, and sooner rather than later.
Personally, I am unconcerned about the price of gold, and the resource stocks I own, I own for a very specific reason and so would look to buy more on any correction. But taking a moment to step back and reflect on one’s portfolio is never a bad idea.
And, based on the limited data I’ve shown here, doing so in April just about now, in fact seems a pretty good time to do so.

Going Nuclear: Obama’s Green Machine Is Ready to Go
By Marin Katusa , Senior Market Strategist, Casey’s Energy Opportunities

Over the Easter weekend, seven nuclear reactors throughout the United States stopped operations, and natural gas prices skyrocketed by over 20%. And this was when most of the country was enjoying mild weather and businesses were shut for the long weekend.

Now, with the new workweek starting, traders are out in force looking for the cheapest possible power ahead of rising demand, and the power markets are heading one way: up.

No Homer Simpsons Allowed Here!

It is unfortunate that nuclear power plants are still linked in our minds to the Three Mile Island and Chernobyl disasters. While these were some truly horrific events, we’re failing to realize one very important fact: we’ve learnt from our mistakes. The next generation of nuclear plants are better designed and more safety measures have been put into place than what was there in the plants from the 1960s and 1970s. There is always some operational risk, but that is present in every power plant, be it coal, natural gas, geothermal, or nuclear.

Currently, the United States houses roughly 24% of the world’s nuclear reactors, and they account for about 20% of the power generated in the country. That’s one in every five homes being powered by nuclear energy. This number is a lot higher for some states, with New Jersey getting almost more than 50% of its power from nuclear energy. With renewed interest in nuclear power in the U.S. and President Obama guaranteeing loans for two new reactors this February, it’s pretty clear that the nuclear share in the energy pie is set to increase.

It’s Clean, It’s Green, It’s the New Obama Nuclear Machine

Though they vary in design, nuclear reactors operate on the same basic principle: the energy released by nuclear fission heats water to produce steam, which turns the turbines that generate electricity. The silver lining: no fossil fuels are burnt at any stage, so almost no greenhouse gases are produced. They are, however, expensive to build and it can take years. But once in operation, fuel costs are very low, which translates to low maintenance costs, and each plant can easily operate for up to 60 years. Running at around 90% capacity, nuclear power plants are workhorses that shut down only once every 18 months for refueling and maintenance.

The fact that they emit almost no greenhouse gases also makes nuclear power plants safe from the threat of potential emissions caps. Once these are introduced, and they are certainly going to be introduced, the costs of producing electricity at coal and natural gas-fired plants will noticeably escalate. In fact, the high energy yield of nuclear fuels, the carbon dioxide emitted during the mining, enriching, fabrication, and transportation of uranium is very small compared to the carbon dioxide emitted by fossil fuels.

Do You Like a 1,500% Return on Your Stocks? Our Subscribers Do.

The push to restart the uranium mining industry started up in 2001 and by 2006, America’s yellowcake production had increased by 70%. The Casey Research team was out scouting the market, and we knew which junior uranium mining company was going to explode. On our recommendation, our subscribers saw their stocks that they bought at under US$0.25 shoot up to over US$4 per share in less than a year.

Today, America’s nuclear industry is ready to expand again and has all the political and economic support necessary to do so. Consuming almost 30% of the world’s uranium, America’s uranium mining industry is looking to jumpstart itself again and at Casey Research, we know all the inside details. Click here for your free trial today and find out who will win the prize and who will miss out.

Liberal Arts and the iPad
By Bud Conrad

Steve Jobs said that the new iPad was developed by merging liberal arts with technology. Through my engineering eyes, I think of these technical breakthroughs as the result of combining hardware and software.

I saw an hour-long interview by Charlie Rose of Walt Mossberg and David Carr showing the function and features of this new device and became so enamored, I decided to go buy one the next day. Unfortunately all three nearby stores had sold out, but I prevailed a day later, like mothers buying scarce Cabbage Patch dolls in the 1980s.

Boy, does Apple know how to market! That one-hour TV slot was an infomercial that Apple could never have paid to get. There has been hype in the community for three months, and they know how to capture attention. It’s been five days, and hundreds of thousands of $500 machines are flowing to the masses.

I remember the to-be-shown-only-once 1984 commercial for the Mac: zombies, red running shorts, and smashing the Big Brother screen! No product features. Only anticipation that something to shake up the world was coming to bring information to the dull masses. How prophetic.

Here I am less than a day since I bought one, trembling from the outsized purchase that may be too new to work or not interface with my PC properly, and finding limitations on availability of WiFi.

But I hark back to that time in 1984 when I bought the second version of the Mac (which got beyond being just a toy) and grew into a Mac bigot, creating a developer’s relationship between then Fortune 500 “Big Iron” Amdahl and Apple. (What a culture clash as we drove to Apple in our Mercedes and suits, and they were late to the meeting, with beards, yellow Ethernet cables hanging from the ceiling, giving a sense of a Montessori school.)

It took a month for me to learn that mouse and visual interface, and there were plenty of people that said they would never need a mouse back then. The mouse, as developed by Doug Engelbart and demonstrated at the 1968 Fall Joint Computer conference had come alive. And computing became more accessible to the masses.

I have a similar feeling about the new interface demonstrated by the iPad. I loved my iPhone the last two years, (my contract expired a few months ago, so I know), and I have fond feelings toward how many new things I learned with that device. I hear small children love to play with smartphones.

That isn’t a fluke: one of the original human interface developers from Xerox PARC was Alan Kay, who at an early MacWord gave us bit-fiddler engineers a lesson in human development, discussing Piaget’s observation that the primitive child brain can recognize parents’ faces, and that communication by pointing and clicking on icons was from a more basic part of our brain.

The iPad develops a new paradigm in how we will interface with our information. It is enchanting. It is a mouse killer. We will see more. This is the wave of the new things to watch, along with services like iTunes that will replace traditional information sources.
The cost of delivering a new paradigm is high, which is why most Asian producers merely copy. For example, I sat through a class for an hour and a half, with six of us in the store that must have cost $200 to put on, and I badgered several floor people when the WiFi crashed twice. But “There’s an app for that” can make more money than the box.

In the early days of the Internet, I gave a talk at Harvard Business School where I gave my sense of where the Internet was going, saying things like “Remember when we had milk delivered to our door? That is what is going to happen to the newspaper.”

I pushed a bit further saying “Think of the future when we will be saying ‘Remember when we had newspapers? Remember when we had books? Do you remember movie theaters? Those libraries were kind of quaint. Perhaps, when we meet again in the future, we won’t have to travel because we can meet in virtual Internet space.’”

We are close to that vision. The features for book reading with this device are revolutionary, and I can say with confidence that Amazon and the iPad will bring the demise of the biggest Barnes and Noble.

Bricks and mortar are going the way of the milk man. Clicks are replacing bricks just as the human genome has superseded our competition. This is a new wave. (Ed. Note: The single best way to stay on top of big changes happening in tech is with a subscription to Casey’s Extraordinary Technology service. Through a comprehensive monthly letter and special alerts, the CET keeps you up-to-date and in the groove on everything you need to know about profiting from new technologies. A three month, 100% guaranteed, trial subscription is yours for the asking. Details here.)
The persistently elevated unemployment level continues to drain the federal and states’ unemployment insurance systems. The number of states forced to borrow from the Federal Unemployment Trust Account (FUTA) to continue sending out weekly unemployment checks has grown 50% from 22 to 33 over the last six months. And the total amount borrowed has surged 100% from $19.2 to $38.5 billion. Not exactly the “stabilizing” in employment that the government officials like to claim is underway.

FUTA was intended as a self-funded system via a yearly, per-employee tax paid by employers. However, the federal budget for fiscal year 2010 allocated “advances” to the fund specifically earmarked for “loans to states.” So, it appears that the bankrupted state programs are using FUTA as another backdoor bailout, with Uncle Sam’s loyal taxpayers footing the bill.

Relying on Big Brother for your economic analysis is a dicey proposition at best. At Casey Research, we monitor all the trends that impact your life and your money. Start getting the objective and independent analysis needed to position your portfolio to profit from the unfolding trends by accepting a no-risk, no-hassle, 100% satisfaction-guaranteed subscription to The Casey Report. Get started now by clicking here.

Friday Funnies

A man is walking down the streets of Washington DC one night. All of a sudden a mugger sticks a gun in his ribs and says, “Give me all your money!” He replies, “Do you realize I am an important member of Congress?”

The robber says, “In that case, give me all my money!”

Light Bulb Jokes

How many Californians does it take to change a light bulb? Six. One to turn the bulb, one for support, and four to relate to the experience.

How many LA cops does it take to change a light bulb? Five: One to screw in a new bulb, and four to beat the crap out of the old one.

How many mystery writers does it take to screw in a light bulb? Two, one to screw it almost all the way in and the other to give it a surprising twist at the end.

How many statisticians does it take to change a light bulb? One — plus or minus three

How many doctors does it take to screw in a light bulb? That depends on whether it has health insurance.

How many accountants does it take to change a light bulb? What sort of answer did you have in mind?

How many rock drummers does it take to change a light bulb? Ten. One to hold the bulb, and nine to drink until the room spins.

Mahatma Gandhi, as you may know, walked barefoot most of the time, which produced an impressive set of calluses on his feet. He also ate very little, which made him rather frail, and with his odd diet, he suffered from bad breath. This made him… a super callused fragile mystic hexed by halitosis.

Husband and wife go to the doctor’s

A woman accompanied her husband to the doctor’s office.

After his checkup, the doctor called the wife into his office alone. He said, “Your husband is suffering from a very severe stress disorder. If you don’t follow my instructions carefully, your husband will surely die.”

“Each morning, fix him a healthy breakfast. Be pleasant at all times. For lunch make him a nutritious meal. For dinner prepare an especially nice meal for him.”

“Don’t burden him with chores. Don’t discuss your problems with him; it will only make his stress worse. Do not nag him. Most importantly, make love to him regularly.”

“If you can do this for the next 10 months to a year, I think your husband will regain his health completely.”

On the way home, the husband asked his wife, “What did the doctor say?”
“He said you’re going to die,” she replied.

MiscellanyA Case for Expatriation. Following is the opening bit from an article titled “America the Grim Truth” I received this week by one of our researchers.Americans, I have some bad news for you: You have the worst quality of life in the developed world by a wide margin.

If you had any idea of how people really lived in Western Europe, Australia, New Zealand, Canada and many parts of Asia, you’d be rioting in the streets calling for a better life. In fact, the average Australian or Singaporean taxi driver has a much better standard of living than the typical American white-collar worker.

I know this because I am an American, and I escaped from the prison you call home.

I have lived all around the world, in wealthy countries and poor ones, and there is only one country I would never consider living in again: The United States of America. The mere thought of it fills me with dread.
While the author comes across as a something of a socialist, his overall message has a lot of truth to it. My personal experience and my interactions with dozens of expats over the years confirm it’s a big, beautiful world out there, with abundant rewards available and not just of the monetary sort for those willing to break free of the confines of their national identity. You can read the full article here.Ohio Phyle. Matthew D. will be taking over the reins on the Ohio phyle. If you are in Ohio and would like to join the group or even if you have previously joined drop us a note at phyle@CaseyResearch.com and we’ll get you set up for the next meet-up.
And with that, I will sign off, thanking you as I do for spending time with us this week, and for being a subscriber to a Casey Research service. Glancing at the screens, I see that gold is breaking to the upside and is now up over $1,160. While it is impossible to say whether the gold price will take out its former (nominal) high, a lot of support for the metal is coming from the increased media coverage on the insolvency of sovereign debtors.

In the end, as the fiat currencies head for their intrinsic value (correctly calculated in calories i.e., the heat they produce when burned), only the precious metals, or currencies directly linked to precious metals, will remain viable.
We live in interesting times, and they are going to get a lot more interesting before this is over.

David Galland
Managing Director
Casey Research