November 14, 2009 | www.CaseyResearch.com Weekend Edition
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.
Reign of Error
As you can see in the chart below, the employment situation in these United States is unlike anything seen in many decades. In fact, were you to calculate things as they did, â€œback in the day,â€ you’d have to look to the Great Depression to find a proper comparison.
Back then, unemployment reached approximately 25%. Today, when you include those who have given up looking for work, or who have been forced to work part-time, the total comes to 17.5%. The chart clearly shows the trajectory of the trend is not going in the right direction.
In response, El Presidente told us last Friday that he and his minions are pulling out all the stops to assure that â€œAmericans who want to find work can find work and all Americans can earn enough to raise their families and keep their businesses open.â€
Under consideration, we are further told, is a tax break for companies to hire new employees.
While I certainly am in favor of tax breaks of any and all description, I have to wonder just how much of a tax incentive the government would have to offer before businesses would want to run out and hire new employees?
Especially given that virtually every business survey indicates that corporate executives remain concerned about the economic outlook. As such, human nature beckons the executive team to cut all non-essential expenses, shrink inventories, raise cash, and otherwise hunker down. Survival of the fittest pretty well sums it up.
Hiring new employees runs contrary to that mindset. Especially given that, in these United States, hiring an employee requires not just paying the wages but entails a multitude of costs, from those associated with training to a myriad of employment-related payroll taxes, including unemployment taxes, Social Security taxes, Medicare, to sundry benefits, furniture, hand soap and tissue in the corporate facilities, periodic outbreaks of employee litigation, and ongoing compliance training for anyone involved in any work involving regulated activities. Also to be paid, of course, are the HR personnel necessary to keep track of the whole tangled ball. And that’s just for starters.
Soon, costs associated with mandatory health care will be demanded and, most likely, a levy to offset your new worker’s â€œcarbon footprint.â€
Speaking broadly, the cost of the average employee in the U.S. private sector comes to $29.31 per hour. Whipping out the calculator, we soon discover that the annual tab for having the next desk occupied comes in at $60,964.80.
(The wages and benefits of federal employees tally in at about 50% higher, but in honor of their tireless service to the public, we’ll leave them out of the discussion. They are worth every darn penny in lifetime pension benefits, paid holidays, and free insurance they earn! Right?)
At the moment, using the government’s own, somewhat optimistic calculations, there are on the order of 15.7 million Americans unemployed. Of course, no economy enjoys full employment, so we’ll turn the dial only back to December of 2007, the month that the recession officially began. At the time, the unemployment rate was 4.9%, versus 10.2% today. Since that momentous month, 7.3 million jobs have been lost.
Replacing the calculator with a spreadsheet and plugging in the numbers tells us that giving all those folks a job at average wage levels, either through private employers or government work projects, would amount to $445 billion a year.
Which, when considering the planned trillion dollars plus annual deficits contemplated by the administration, seems almost reasonable.
Of course, this overlooks the reality that the money used to pay all those workers would ultimately have to come from taxpayers, including the companies themselves, making it essentially a zero-sum game. Worse, it would be a game played against a backdrop of ballooning government debts.
There is, of course, a much simpler and more sustainable approach. Namely, stop the madness and get out of the way of wealth creation. Or, put another way, it is time to stop asking what the government can do for the people, but rather what the government can do to stop tripping up the people.
Make no mistake, the U.S. is in a bare-knuckle competition with the rest of the world, starting with China where, according to Bureau of Labor Statistics estimates, the average worker earns on the order of $0.67 an hour, or $1,393 per annum. Which is to say, the average Chinese worker earns less in a week than the average Yankee earns in an hour.
Sure, we could look to Uncle Sam to do our competing for us. Say, by starting a trade war and slapping tariffs of up to 99% on Chinese goods, but that’s a sure-fire way to create an entry in future editions of the history texts titled â€œSmoot-Hawley Redux, 2010-2011.â€
Instead, given the remaining good, albeit somewhat ragged, reputation of these United States as a reasonable place to do business, the government could simply step back out of the limelight it has so eagerly sought these many decades and especially in the recent months and strip away most if not all of the disincentives to starting operating businesses. One-off tax incentives are fine and all that, but what is desperately needed is a 180-degree change in the bureaucratic mindset.
Were such a change of thinking to materialize, the list of options available to encourage the economy to get out of its slump would expand exponentially.
Put another way, the alternatives being contemplated under the current regime are, loosely speaking, to (a) destroy the dollar, (b) start a trade war, (c) tax the productive into penury, and (d) beggar the next ten generations.
Adopting a fresh new mindset that reduces the government’s role in the economy to that of an extra — instead of it being the director, producer, and all leading actors, as is the situation today — would vastly expand the options available to stimulate the economy.
Here they are:
(a) cut personal and corporate taxes to a level that would have entrepreneurs the world over clamoring to open up shop and do business here,
(b) slash government spending to the bone, further requiring,
(c) a sharp reduction in the expensive and time-draining bureaucratic meddling that hinders virtually every economic activity, and
(d) the end of funding for foreign adventures, subsidies, and overseas bases, therefore kicking off a new Pax Americana, all of which would quickly
(e) reestablish the country’s fading status as the bastion of free enterprise in an increasingly statist world.
Truly, setting the right example today could have as much of an impact on the world as did the group of visionaries that launched America, Version 1776.
Call me Pollyanna, but I cannot help but think as I look down the path we are on, versus the path just described, that the latter is clearly the better of the two. Because the first, this Reign of Error, can only lead to an economic guillotine.
Unfortunately, I can’t see how we are going to get off the current path, not without first letting it run its insane course.
Speaking of whichâ€¦â€œPresident Obama has increased funding for staffing at the U.S. Equal Employment Opportunity Commission, and is adding labor economists who will be looking for [trends that indicate] systemic discrimination patterns,â€ said Judy Keenan, a trial attorney with the New York District office of the EEOC who served as a panelist at the LeClairRyan conference. â€œSo companies that use credit checks or even criminal background searches as part of the employment process may be reviewed to see if their investigative actions have a disparate negative racial or gender-based impact.â€
The EEOC is also looking into alleged cases of wage discrimination, where employees who engage in similar work are paid differently according to their nationality, Keenan said.
The EEOC is also looking carefully at severance or separation agreements â€” where a company provides an involuntarily terminated employee with cash or other benefits in return for the employee’s agreement not to sue over the layoff, Keenan said.
(NJBiz, â€œEmployers will face increased workplace scrutinyâ€, Nov 9 2009)
And people wonder why so many American companies have outsourced overseas? It’s a trend that will continue until, of course, the government passes new tax legislation to penalize it. That cannot be far away.
While hoping for the best, it is imperative to prepare for what’s coming. That people are doing just that can be seen in the gold price, which hit a new record level as I wrote this.
The 138th Reason We Like Gold
Jeff Clark, Casey’s Gold & Resource Report
There are so many reasons every investor should hold gold that it’s a chore just to track them all. Here’s one you don’t see much press about, and yet it begs for higher gold prices in and of itself.
The list of mega gold deposits waiting in the wings for production is getting shorter. And of the 15 largest developments in the world, most are in politically risky countries, and in that list we now have to include the U.S.
Gold Reserves (million ounces) Location
45 British Columbia
31 Dominican Republic
As with oil, much of the easy gold has already been found and dug up. And, per above, of what remains in the earth’s crust, an increasing number of those ounces are in countries with substantial levels of political risk. A couple more on this list have development challenges so extreme that they may never pour a dorÃ© bar or could at least see extensive delays.
World gold production is already in decline, falling from 81 million ounces in 2005 to 75.7 million last year, despite the clear financial incentive to produce more. And the dearth of remaining big deposits doesn’t provide much hope that the production decline will turn around anytime soon.
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Follow the Gold
Louis James, another of the always moving senior members of the Casey Research team, is currently in Chile, chasing up a major new deposit being developed by a highly prospective and very well-run Canadian-listed junior exploration company. Here’s a flash reportâ€¦I’m in Copiapo, northern Chile, on the edge of the Atacama desert. But I’m not here to taste Atacama wines, I’m here for the Maricunga Gold Belt. That’s because this is one of the few places in the world where companies are making new elephant-size gold discoveries (up to 10 million ounces of gold, some larger) in a politically stable, pro-mining jurisdiction, and I wanted to gather local intel on a couple of particularly promising plays.
I’m very encouraged. This place is really booming. Global economic crisis? Not here. I’m writing from a brand-new hotel that wasn’t even a hole in the ground last time I was here. From my window, I can see mine dumps on the mountainsides outside of town. Are people upset about the environment? Not any I can find. And because I am fluent in Spanish, I can and do ask just about everyone I come into contact with. They’ve got jobs and are building new homes. On the way into town, I saw that one enterprising local entrepreneur had converted what had been a vacant lot into a sales lot for haul trucks and other mining equipment, ready for the highest bidder.
Barrick and Kinross are reported to have completed a final feasibility study on their nearby 25.4-million-ounce Cerro Casale gold project, but have not yet published the results. As you might imagine, lot of people here are waiting eagerly to see if the partners will go ahead with the project, as the initial capex for the mine’s construction in the pre-feasibility study weighed in at $3.65 billion. There are literally thousands of jobs in the balance.
For us, a green light on Cerro Casale will mean even more and better infrastructure in this already active mining area. And it will mean a lot of attention drawn towards the juniors operating in this area, especially the best of the best we are now completing our due diligence on for Casey’s International Speculator.
It’s as close to a certainty as you can have in this business that early investors make big money any time a micro-cap junior explorer can develop a serious new deposit in a mining-friendly jurisdiction with existing infrastructure. That’s what we’re looking for, and finding, here in the Atacama.
(Don’t miss Louis’ final findings on the latest chapter in his quest to find triple-digit profits from well-positioned junior exploration companies including a brand-new company recommendation, a gold producer operating in Mexico whose shares look ready to take a moonshot. Getting started with a fully guaranteed 3-month trial to Casey’s International Speculator is as easy as clicking here.)
The Complex Energy Complex
Dave Hightower, November 2009
In the energy complex, a combination of surging, inelastic global demand, an ineffective global refining industry, and periodic supply setbacks are setting the table for a move to $140 per barrel crude oil prices.
While the groundwork for the historic 2008 price spike could be attributed to the double hurricane strike on the U.S. Gulf Coast’s refinery industry in 2005, the real seed of the rally probably started in 1995, when Chinese petroleum demand first began to exceed domestic supply. Now in 2010, Chinese crude oil demand is expected to be almost twice their domestic supply.
This growth in Chinese demand alone has required another 4 million barrels per day of world oil production. While this increase in world demand grew gradually over the course of a decade, and did so against a background of oil prices not really showing a significant premium until well into 2004, it was not surprising that global supply was outstripped by consumption. In other words, low prices did nothing to encourage exploration or to restrict demand.
Those who think speculation was responsible for the 2008 spike in oil prices need to realize that the best-case forecast for the daily world oil surplus fell below 1 million barrels per day in the months ahead of the peak. Just meeting world demand required almost flawless oil production, unhindered transportation, and, perhaps the hardest element of all, a fully functioning refining effort.
While no one expects U.S. refiners to operate at a loss to ensure the U.S. maintains an adequate supply of fuel products, the refinery industry can to a certain degree influence its own profit margins. Simply, the processing of too much crude oil into end products usually results in a product glut, while processing too little crude oil into end products results in a shortage.
By our calculations, processing too little was the source of four major energy bull market moves from 2000 to 2009. At the end of 2009, the U.S. refinery operating rate dipped down to just 80% of capacity, leaving 20% idled. Poor refinery margins certainly encouraged and possibly justified the slowdown, but if these facilities are left idle for too long, the oversupply of gasoline and distillates will quickly turn into another shortage.
The â€œOil Market Manipulationâ€ Argument Is Flawed
The argument that speculators caused the 2008 rally in oil prices is highly suspect, considering that the peak of speculative interest in crude oil futures took place four months ahead of the peak in prices.
Specifically, the Commitments of Traders (COT ) reports show that the net long positions in crude held by speculators fell from 149,000 net long in March 2008 to 83,945 by July 15th, four days after the August 2008 contract peaked at 147.27.
Furthermore, the spec long position peak in 2008 was not even as high as the previous spec long record of 152,000, posted July 31, 2007. If the specs caused the spike in oil prices, why didn’t oil hit the $140 per barrel level in 2007? Apparently it is an â€œinconvenient truthâ€ that the world petroleum rally was the result of massive annual deficit readings in 2006 and 2007.
Another inconvenient truth is that U.S. EIA weekly motor gasoline stocks were falling to a modern-day record low in the lead-up to the peak in prices. And that U.S. heating oil stocks in early 2008 fell to a modern-day low of just above 20 million barrels!
The subsequent decline in prices, while welcomed in the short term, is likely only temporary. At the 2009 summer lows, nearby crude oil futures fell to within $4 of cost of production for Canadian tar sands oil. This further suggests that it is unrealistic to pine away for a return to $35 per barrel crude oil. Clearly, the world now depends on more expensive sources of oil. Cheaper oil prices will mean less oil supply.
An Important Time for Market Signals
The world is facing an extremely critical junction. We can attempt to regulate commodity trading, as the government is now contemplating, and limit the necessary â€œinvestmentâ€ required to feed, power, and clothe the world and in turn suffer the ravages of starvation, conflict, and commodity inflation or we can facilitate â€œinvestmentâ€ and allow the world the ability to cope with the massive changes wrought by globalization.(David again. Who’s talking about oil these days? Answer: Almost no one even though prices have doubled from the recent bottom. And it is going far, far higher. If you do nothing else, do yourself a favor and sign up for a year of
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Don’t Do It
Looking up Afghanistan in the CIA Fact Book reveals the nation’s official population tally at some 28 million.
But that number is totally, dangerously wrong.
Dangerous because the erroneous population count sets the stage for a certain failure of the United States military’s efforts in Afghanistan, and even raises the possibility of a nuclear conflagration.
I will attempt to quickly explain.
The story begins with an Englishman by the name of Mortimer Durand who, in 1893, was tasked with drawing a border separating Afghanistan from British conquests in India. Other than dictates from the Raj to assure the Brits kept the strategic parts, Durand’s line was arbitrary.
In this way was divided the population of Afghani Pashtuns, the region’s dominant ethnic group.
On one side of the invisible line, in modern-day Afghanistan, live about 12 million Pashtuns (out of a total population of 28 million). Tucked up against the other side of the line, in what now constitutes Pakistan, live another 25 million Pashtuns.
Simply, they are members of the same large family a family with a long and colorful history of putting aside their internecine shoot-ups in order to come together to wear down and ultimately defeat far stronger and better equipped invaders.
Now, look at the map here.
As you can’t miss, there is very long and uninterrupted border between the countries of Afghanistan and Pakistan. A border no more substantial than the ink Durand used to draw it over a century ago.
Across that border, in a region of incredibly hard terrain, flows an almost uninterrupted exchange of relatives, food, guns, refugees, and warriors in need of rest and sustenance, donkeys, RPGs, and any other thing the Pashtuns and other Afghani insurgent groups want to move in one direction or the other.
In the past, I have referenced (and recommended) David Galula’s excellent manual Counter Terrorist Warfare: Theory and Practice, the very same manual that General Petraeus, on taking the reins in Iraq, purchased in bulk for his officers. In his book, Galula lays out the required conditions for success in fighting a guerilla war. At the top of the list is that the insurgents can have no safe sanctuary to which they can retreat to for rest and resupply.
Simply, the Pakistani Pashtun problem alone makes sending more troops into Afghanistan a non-starter. The border separating the Pashtun populations is too long and too rough to control. And so the insurgency will never want for supplies, sanctuary, or fresh soldiers for its struggle. That gives it a staying power well beyond that the latest crop of invaders will be able to manage as the months and years string out and the casualties rise.
Of course, the U.S. could decide to take the war to the Pakistani Pashtuns, using more than just drone strikes. But such an invasion would necessitate pacifying a large, well-armed, and hostile population. It would also likely result in the toppling of our allies in the fragile Pakistani regime. That could then require an even broader action or risk Pakistan’s nukes falling under the radicals’ control. And that would quickly bring India into the picture.
In other words, should the U.S. decide to invade nuclear-armed Pakistan, the whole situation would quickly get so wiggly that there’s no telling where it could lead, but it’s doubtful it would lead anywhere good.
Which leaves the U.S. and its allies with only two alternatives. Get out or continue trying to pacify the Pashtuns (among others) in Afghanistan, while a huge number of their brethren are actively are cheering them on and providing material support from just across Durand’s line. While I am no expert, I have read enough history and Galula’s manual to form the strong opinion that such an effort will end poorly.
Maybe we can get tougher? Really take off the gloves and all that stuff?
Well, it’s hard to imagine how we could get tougher than the Soviets, or Genghis Khan, or Alexander the Great, or all the other invaders that didn’t just capture the region but actively tried to exterminate the population. The Soviets, much to their discredit, actually went so far as to drop bombs designed to look like toys, in order to blow off the arms of the next generation of mujahedeen.
The Afghans are still standing.
Then there’s the all-important question, what exactly is it we are fighting for? On that topic, I’ll have to defer to someone who purportedly knows — or should know: Ambassador Richard Holbrooke, the U.S. special envoy to Afghanistan and Pakistan. Two months ago, he was asked which benchmark the U.S. was using to measure its success and progress in Afghanistan. His response, â€œWe’ll know it when we see it.â€
So, why am I writing this article, knowing that it will offend pro-war readers?
First and foremost, because of my distain for foreign adventures and my hope that a pushback from an increasing number of Americans will keep Obama from going deeper into Afghanistan. Secondly, there is a moral issue here. We can’t very well call ourselves the land of the free if we are fighting wars here, there, and everywhere for objectives that even our senior diplomat in the area is unable to enunciate.
And then there is the less important, but still important, question of finances.
Namely, the U.S. is already broke. Thus, the idea of spending trillions of dollars on a war with no clear objective and no clear enemy is not just stupid, it is madness. I read recently that the U.S. spends $350 million a day on fuel alone in Afghanistan and Iraq. Money that is ultimately being spent to support a fraudulent regime that condones the sort of religious intolerance you’d expect to be championed by a mullah from the Middle Ages.
Finally, there is the truth inherent in the old saying, â€œWar is the health of the state.â€ This war, like so many others, opens the door for the government not only to rationalize the sort of fiscal irresponsibility just discussed, but also to exert more and more control over the populace, all in the name of â€œnational security.â€ Over the last 100 years, the U.S., despite its high-road self-image, has engaged in more wars, in more countries, than all of the other Western powers combined. Of course, some have made more sense than others. But this one makes no sense at all.
In my opinion, having fired off some shots that cost far too many lives, it’s time for the U.S. to end this madness and head home. Sticking our face ever deeper into the dark hole that is Afghanistan is not just futile, it’s crazy.
Don’t do it.
(And, should Obama opt for an escalation in Afghanistan, run, don’t walk, to the nearest gold window. Because there’s only one way to pay for the massive ongoing operational costs and that’s inflation.)
And that, dear reader, is that for this week. See you on Monday!