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David Galland is Managing Director of Casey Research, LLC. (http://www.caseyresearch.com/), and the Executive Director of the Explorers' League. His career in the resource and financial services industry dates back to a stint working underground at the Climax mine in Colorado, following college.... More
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  • Bypassing Government Roadblocks To Your Personal Prosperity

    Recently I helped out with some delivery chores. As I drove about, I discovered that one of the roads I would normally use was closed by roadblocks. It was, I imagine, due to road repair work. I had to reverse course and take a substantial detour.

    I wondered why the road crew hadn't put up a sign indicating the road was closed back at the main intersection, but I shrugged and muttered something like "Typical government operation."

    Driving back home, this idea of roadblocks took root in my mind. The thing is, only governmental entities can set up roadblocks - at least, legally.

    Obviously, there are times when such roadblocks are entirely appropriate... for example, when a bridge is found to be dangerous.

    In that case, putting up a roadblock to let drivers know that the road is a no-go makes perfect sense.

    For example, a temporary warning sign to let people know that there is a road crew fixing potholes ahead makes sense and that sort of thing.

    Otherwise, unless a road is damaged to the point where driving is either impossible or ill advised, there should be no roadblocks set up. Makes sense, right?

    The decision to set up a roadblock should be taken only by people who are close to the problem, who understand the issues, and can deal with the problem on the road, fix it, and open it up again as quickly as possible.

    Imagine then a world where government officials, as often as not operating hundreds or even thousands of miles away, are in control of the roadblock rules.

    Despite having no real knowledge of the problem at a local level, they dictate that those roadblocks be set up and made permanent based not upon the specific condition that a road is out, but rather based on political expediency, cronyism, imaginary threats, and donations by influential lobbyists.

    In a world like that, where roadblocks are set up all over the place and without any real thought to the consequences to road users, imagine how difficult it could be to get from Point A to Point B.

    In fact, it would not be out of the question that the single road leading to your house could be blocked, leaving you no way out.

    While that seems rather extreme, I would contend that it is a valid metaphor for the world we now live in.

    To make the point, a couple of weeks ago, I discussed my recent travels to Ireland and Portugal and the devastating consequences the actions of the European central planners have had on those economies.

    Before the European Commission bulldozed their way of life, the Portuguese fishermen made a nice living. They made money and supported their families the same way they had for generations. Life was good.

    But not long after Portugal's admission into the Eurozone, however, they woke up one morning to discover their own regulatory roadblock.

    It was cooked up by bureaucrats thousands of miles away who have no idea of the local challenges or hazards it would bring to the local economy and the families that rely on it.

    This roadblock required them under law to destroy their fishing boats, thereby preventing them from earning their livelihoods.

    Another example of roadblock insanity can be seen in energy policy here in the US.

    Hollow Sound Bytes and Pointless Platitudes

    Politicians bray about the need for energy independence.

    Behind the scenes, however, they kowtow to the environoids and special interests by littering the landscape with roadblocks that prevent energy companies from achieving and innovating our way to exactly the independence they tell us we must have at all costs!

    Here's where it affects you:

    Government has set up another sizable roadblock. This time it is in the path of savers.

    By meddling in the market in order to allow the debt-bloated government to continue its out-of-control spending, the Fed has suppressed interest rates to the lowest levels in US history.

    Almost overnight, retirees and others who counted on the yields earned on savings to cover living costs have come to a dead stop in front of a roadblock placed in the way of their most pressing needs.

    Their finances now in tatters, even people in their 70s who have worked hard and saved all their lives are being reduced to serving up French fries at fast-food joints.

    For another roadblock, look no further than Obamacare.

    In a recent Reason magazine article, it also expressed the same sort of convoluted logic that has gone into creating a series of related roadblocks. As one wit put it:

    "If you think health care is expensive today, wait until it's free."

    One of those roadblocks has to do with the considerably higher taxes tucked away in reams of unreadable legalese that will shift yet more funding from the private sector to the public. Here's the text from an email sent to Doug Casey by a financial professional friend of his this week:

    You may have had only a casual interest in the debate over the Obama Health Care bill, and even if you followed it closely, the headline discussion seemed to be more on the inclusion of millions of uninsured citizens, the penalties for not being insured, etc., vs. the fact that this is a noticeable income tax increase on investment income.

    For those who have an adjusted gross income of $200k ($250k for joint returns) or more, the number on the bottom of the first page of your 1040, which comes before itemized deductions, charitable gifts, or personal exemptions, there is a +3.8% uncapped tax applied on all investment income (capital gains, interest, dividends, etc.), plus an obscure provision of the code known as the Pease, which reduces the value of itemized deductions, adding another +1.2% to the tax rate.

    Be aware that if the current "Bush tax cuts" are not extended, the current long-term capital gains tax rate of 15% will go up by two-thirds to 25% beginning 1/1/2013. The top rate on dividends will nearly triple from 15% to 44.6%!! Ouch.

    Unlike Social Security taxes, which are capped, the Health Care tax is uncapped. The mouthy Warren Buffett is finally getting his wish - paying more than a 15% tax rate. Instead of just writing a check for more, which he is certainly welcome to do, as an advisor to the administration, he probably had some influence on getting it applied to all higher-income Americans.

    As you know, I am not a tax attorney nor an accountant, so am sending this as a heads-up, and if it is relevant to you, you should confirm the details with your tax advisors.

    On the topic of throwing up more tax roadblocks, here's one from overseas… sent along in an email from our own Vedran Vuk. In Vedran's own words…

    "Most of the time when we think about raising taxes, it's the threat of millionaires leaving. We don't usually think about them not coming to a country. Here's an interesting case of Zlatan Ibrahimovic signing a soccer contract for 14 million euros per year. If the new tax goes through in France, he will be taxed for 75% over the first million euros. If the tax does go through, good luck attracting multimillion-earning players to France. A lot of people in the 99% will be pretty unhappy when all of their sports teams become horrible as a result of the tax."

    My favorite quote from the article is:

    "Ibrahimovic will earn 14 million euros annually, sports daily L'Equipe reported. Sports Minister Valerie Fourneyron said that indicates that European football needs more regulation."

    Yes, just what the world needs - more roadblocks.

    Of course, this time it's to block decisions that the football team's management believes it needs to make in order to win (and therefore attract fans, sell tickets, and raise rates to sponsors).

    Insane.

    I recently ran into a public-high-school English teacher and asked how the education business was going.

    His response was, "Do you have four days for me to tell you all that's wrong?"

    "It seems like every month some team or another shows up from the government in order to introduce a new teaching program. And the really frustrating thing, is that none of these people has ever taught school."

    He went on to say that it becomes clear very quickly that they have no idea what they're talking about and that each new protocol was conceived by some bureaucrat with no teaching experience either.

    It was eye-opening to hear such emotive language from a public-high-school teacher - in my experience, most of the people who choose that profession are largely on board with the whole big-government thing.

    Yet, it seems that more and more people are beginning to catch on to the idea that central planning is not such a great idea.

    It's how you end up with roadblocks where roadblocks don't belong.

    It's how you end up on a road you never intended to travel along, forced there by roadblocks that don't make sense and clearly don't help.

    Ultimately you risk getting hopelessly lost, or you turn around go back the way you came and start again.

    So yet another school program gets introduced, another law, another rule. And it all starts again.

    Happily, it is almost a certainty that, in time, the bureaucrats and their many roadblocks will be shoved aside.

    I say that because there really is a limit to how long people will put up with being denied access to their fundamental rights of life, liberty, and the pursuit of happiness.

    There is only so long that entrepreneurs will put up with having to navigate around more and more roadblocks in order to provide a product or service to consumers, when such roadblocks serve absolutely no useful purpose.

    Unfortunately, while there are a number of things you can do to get started and plenty of sound advice along the way, it will take time.

    That's because there is still a considerable swath of the voting public who actually buys into the idea that government is a force for good and that without it, equality and justice would go by the wayside.

    And so it is that the US and virtually all of the large economies around the world are still firmly in the grip of the notion that central planning is the only way to get to the green pastures that surely must be just over the next hill.

    Or, more specifically, the next round of legislation and policy machinations (read "roadblocks").

    There has never been a starker example of the mindset of the current administration and its many followers than a comment made by President Obama this week. Here it is:

    "If you've got a business, you didn't build that.
    Somebody else made that happen."

    His point is that essentially, all human progress is due to the good work of governments.

    • That without governments, there would be no roads to set up roadblocks on.
    • There would be no Internet.
    • There would be no body of case law nor a judicial system to enforce that law.
    • There would be no telephones.

    I disagree, and so do many others - including many from past governments who see the direction Washington, DC is taking and don't like it.

    I contend that this view of the world is essentially the opposite of the tenets of the capitalist/free-market model.

    In the view of Mr. Obama and his ilk, We the Sheeple are all but helpless without the government to lead us forward.

    That the US government's activities as a share of GDP have gone from well under 10% at the beginning of the last century to over 40% today - and will go over 50% by the time Obamacare is fully implemented - makes it clear that this country is now operating on principles that run completely contrary to those that promote success and economic well-being.

    The consequence of continuing to operate on this model will be a steady decline in the quality of life for most Americans, while favoring a ruling elite that produces nothing… except more roadblocks.

    Ayn Rand will someday be celebrated as a futurist.

    But how does one fight back? Grab a gun? Don't even think about it: the Second Amendment may have been intended to protect against a tyrannical government, but the actual truth is that the weaponry of the US government is so incredibly advanced at this point that even the most well-armed militia wouldn't last a minute.

    No, the best way to "fight back" is to get wise to the whole thing.

    Understanding what's happening and knowing where the roadblocks are likely to be just makes sense.

    And having clearly set out strategies that both sidestep the roadblocks and preserve your wealth is not just a good idea - it's critical.

    The upcoming Casey Research conference, Navigating the Politicized Economy, will give its attendees a real sense of both knowledge and preparation.

    The speaker lineup is a "who's who" of investment success, and each brings a world of experience to the event.

    Among the confirmed faculty are former US Comptroller General David Walker; The Creature from Jekyll Island author G. Edward Griffin; Karl Denninger, author of The Market Ticker; and Mauldin Economics Chairman John Mauldin. The early-bird registration discount ends on July 31, so grab your seat now.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 25 4:14 PM | Link | Comment!
  • Gold’s “Contrarian Moment”

    Glancing at the news most days, it's hard not to feel like Bill Murray's character in Groundhog Day. In the event you are unfamiliar with the movie, in it Murray's character becomes trapped in the same day… day after day.

    In the current circular condition, we have the powers-that-be assuring us that the next high-level meeting will finally produce a permanent fix to the broken economy, essentially solving the sovereign debt crisis. Then, in no more than a few days, or at most a couple of weeks, the fix is revealed to be flawed and the crisis again sparks into flames... followed shortly thereafter by yet another high-level meeting - and the cycle begins anew.

    While the characters may change - one week it is Greece, the next it is Spain, the next it is France, the next it is the US, the next it is Greece again, etc., etc. ad nauseam - the detached observer can only come to the conclusion that we are now well outside of the bounds of the normal business cycle.

    As we at Casey Research have written on this topic at great length, I don't intend to dwell on this topic, but I did want to loop back in just long enough to comment on the recent price action in commodities, especially gold, in the face of the continuing crisis.

    Today, a glance at the screen reveals that gold is trading for $1,565. For comparative purposes, as revelers warmed up their vocal cords to sing in the New Year on the last trading day of 2011, gold exchanged hands at $1,531. And exactly one year ago to the day, gold traded at $1,526 for a one-year gain of a modest 2.6%.

    A year ago, the S&P 500 traded at 1,325, while today it trades at 1,318, a small loss. Yet, have you noticed we don't hear much about the imminent collapse of the US stock market, as we do about gold? This perma-bear sentiment about gold on the part of what some people lump together under the label "Wall Street" is especially apparent in the gold stocks.

    Using the GDX ETF as a proxy for the sector, we see that the shares of the more substantial gold producers are off by an unpleasant 24% over the last year.With that "baseline" in place, let's turn to the current outlook for gold, and touch on some of the other commodities as well.

    • Gold. In the context of its secular bull market, and given that absolutely nothing has gotten better about the sovereign debt crisis - only worse - gold's correction is nothing to be concerned about.

      I know the technical types will point to levels such as $1,500 as important resistance points - and there's no question that if gold was to break decisively below that level that a lot of autopilot trades would kick in and put further pressure on gold.

      Yet, when you view the market through the lens of hard realities, which is to say, by focusing on the intractable mess the sovereigns have gotten the world into… in Europe, in Japan, in China and here in the US… then viewing gold at these levels as anything other than an opportunity is a mistake.

    • Gold Stocks. As far as the gold stocks are concerned, I consider today's levels to be extraordinarily compelling for anyone looking to build up a portfolio or to average down an existing portfolio.

      I say this for a number of reasons, starting with the contrarian perspective that this may now be the most unloved sector of the stock market. No one wants anything to do with gold stocks, and hasn't for some time now. As a consequence, the sellers will soon dry up, leaving almost nothing but buyers to push the sector back to the upside.

      This contrarian perspective is important because finding an honest-to-goodness opportunity to bet against the crowd is no easy thing in a world where literally thousands of competent equities analysts plop down at the desk each trading day with the sole purpose of searching for prospective investments. Many of these analysts are backed by huge firms with billions of dollars at risk in the markets, and so are armed with high-powered computational tools of the sort that was unimaginable even a few years ago. All of these analysts, armed with all their computational power, habitually scan a universe that totals about 4,000 publicly traded companies. Realistically, however, even a thin analytical screen will weed out all but perhaps 400 of those companies as being potentially suitable for investment.

      Thus, you have thousands of high-priced and well-armed securities analysts crunching pretty much the same data on a very small universe of possible investments. Given this reality, is it any surprise that securities are so tightly correlated? Which is to say, is it any surprise that these securities all trade right in line with the valuations that the analytical screens ultimately derive that they should? Which means there are really only two possible circumstances under which any of these stocks move up, or move down, by any significant degree

    1. Broad market movements. The saturated levels of analysis mean that, within a fairly tight range, all the stocks now move more or less together. Thus, with few exceptions, a big upswing or downswing in the broader market will send almost all stocks up or down together. To help make the point, I randomly pulled a chart of IBM and compared it against SPY (the S&P 500 tracking ETF) for the last year. Note the lockstep price movements:


      OK, IBM is a big company, so it will have a lower beta than many companies, but the point remains that saturated coverage of the stocks greatly reduces the odds of any one issue breaking free from the larger herd, unless there is…

    2. A surprise. All of these analysts, and all of their computerized analysis, help form a certain future price expectation for each security based on past financial metrics (earnings growth, return on equity, and so forth). Other than the broad market movement just referenced, or moves in line with a sub-sector of the larger market (e.g., if oil rises or falls, oil-sector stocks will tend to move up or down in sync), for a company to deviate in any substantial way from analyst expectations, by definition requires a "surprise" to occur.

      Of course, such a surprise can be positive, but because these companies are so closely watched, it is more likely to be negative. In the former category, a positive surprise might come in the form of an unexpectedly strong new product launch á la the iPad. In the latter, less happy category of surprise, it can be the blow-out of a big well in the Gulf of Mexico… or any one of a million other unanticipated vagaries of fate.

    As investors, recognizing these fundamental realities is important because it points to where above-average market opportunities are most likely to be found (or not). And that brings us back to the whole idea of being a contrarian.

    As mentioned a moment ago, "Wall Street" has never much liked the precious metals, and by extension the gold stocks. Given the length of the gold bull market - which, in our view, reflects systematic risk in all the fiat currencies, but which Wall Street views as an indication of a fatiguing trend confirmed by the underperformance of the gold stocks - traditional portfolio managers are unhesitant in giving the boot to the few gold shares that somehow made it into their portfolios against their better judgment.

    If our thinking is not clouded by our own bias, then it would behoove us as good contrarians to buy these shares from the eager sellers at such unexpectedly favorable prices. By doing so, we are able to position ourselves to make a killing once the broader financial community realizes that the problems associated with fiat money, dramatically underscored by the intractable sovereign debt crisis, are only going to get worse. At that point gold is going to head for new highs and gold stocks to the moon.

    That said, as we always should do, let's quickly assess whether our own bias is leading us astray in believing in gold and gold stocks when virtually the entire army of analysts won't even consider them. Some inputs:

    • Gold prices remain near historic highs - and that has a significant impact on the bottom line of the gold producers. Barrick Gold Corp. (NYSE:ABX), for example, currently boasts a profit margin of over 30%, better than twice that of IBM and almost ten times that of Walmart. While ABX sells for just 1.6 times its book value, IBM sells for 10X.
    • Interest rates remain at historic lows, producing a negative real return for bond holders. Unless and until investors are able to capture a positive yield - a potential stake through the heart of gold - there is no lost-opportunity cost for holding gold. And bonds are increasingly at risk of loss should interest rates be pressured upwards, as they inevitably will be.
    • Sovereign money printing continues - because it must. In today's iteration of Groundhog Day, the Europeans are once again meeting in an attempt to fix the unfixable, but the growing consensus - because there is no other realistic option left to them - is that they will have to accelerate, not decelerate the money printing. Ditto here in the US, where a fiscal cliff is fast approaching due to the trifecta of the expiring Bush tax cuts, mandated cuts in government spending from the last debt-ceiling debacle and the new debacle soon to begin as the latest debt ceiling is approached. The problems in important economies such as China and Japan are as bad, and maybe even worse.
    • Debt at all levels remains high. With historic levels of debt, rising interest rates are a no-fly zone for governments, because should these rates go up even a little bit, the impact on the economy and on the ability of these governments to meet their obligations would be dramatic and devastating. This fundamental reality ensures a continuation of policies aimed at keeping real yields in negative territory, meaning that the monetization/currency debasement in the world's largest economies will continue apace.

      To get a sense of just how bad things are and how soon the wheels might come off, sending gold and gold stocks to the moon as governments throw all restraint in money printing to the wind to save themselves and their over-indebted economies - here's a telling excerpt and a chart from a recent article by Standard & Poor's titled The Credit Overhang: Is a $46 Trillion Perfect Storm Brewing?

    Our study of corporate and bank balance sheets indicates that the bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate borrowings between 2012 and 2016 in the U.S., the eurozone, the U.K., China, and Japan (including both rated and unrated debt, and excluding securitized loans). This amount comprises outstanding debt of $30 trillion that will require refinancing (of which Standard & Poor's rates about $4 trillion), plus $13 trillion to $16 trillion in incremental commercial debt financing over the next five years that we estimate companies will need to spur growth (see table 1).

    (Click on image to enlarge)

    You can read the full article here. While the authors of the S&P report try to find some glimmer of hope that roughly $45 trillion in debt will be able to be sold off over the next four years - even their base case casts doubt on the availability of the "new money" shown in the chart above. Note that this is the funding they indicate is required to fund growth. Which is to say that should the money not be found, the outlook is for low to no growth for the foreseeable future.

    It is also worth noting that the analysis assumes that something akin to the status quo will persist - which is very unlikely given the pressure building up behind the thin dykes keeping the world's largest economies intact. The landing of even a small black swan at this point could trigger a devastating cascade.

    We have said it before, and we'll say it again: there is no way out of this mess without acute pain to a wide swath of the citizenry in the world's most developed nations. While this pain will certainly be felt by sovereign bond holders (and already has been felt by those who owned Greek issues), it will quickly spread across the board to banks, businesses and pensioners - in time wiping out the lifetime savings of anyone who is "all in" on fiat currency units.

    In this environment, gold isn't just a good idea - it's a life saver. And gold stocks are not just a golden contrarian opportunity, they are one of the few intelligent speculations available in an uncertain investment landscape. By speculation, I mean that, at these prices, they offer an understandable and reasonable risk/reward ratio. Every investment - even cash - has risk these days. With gold stocks, you at least have the opportunity to earn a serious upside for taking the risk… and the risk is much reduced by the correction over the last year or so.

    Now, that said, there are some important caveats for gold stock buyers.

    • With access to capital likely to dry up, any gold-related company you own must be well cashed up. In the case of the producers, this means a lot of cash in the bank, strong positive cash flow and a manageable level of debt. (Our Casey BIG GOLD service - try it risk-free here - constantly screens the universe of larger gold stocks for just this sort of criteria, then brings the best of the best to your attention.)

      In the case of the junior explorers that we follow in our International Speculator service (you can try that service risk-free as well), the companies we like the most have to have all the cash they need to clear the next couple of major hurdles in their march towards proving value. That's because a company can have a great asset but still get crushed if it is forced to raise cash these days… and the situation will only get more pronounced when credit markets once again tighten as the global debt crisis deepens.

    • Beware of political risk. Despite the critical importance of the extractive industries to the modern economy, the industry is universally hated by politicians and regular folks everywhere. If your company - production or exploration - has significant assets in unstable or politically meddlesome jurisdictions, tread carefully. And it's important to recognize that few jurisdictions are more politically risky than the US. This doesn't mean you need to avoid all US-centric resource stocks - but rather that you need a geopolitically diversified portfolio that you keep a close eye on at all times (something we do on behalf of our paid subscribers every day).
    • Know your companies. Some large gold miners are also large base-metals miners. And at this juncture in time, personally I'm avoiding base-metals companies like a bad cold. While most base-metals companies have already been beaten down - and hard - over the last year and a half, the fundamentals remain poor. Specifically, they not only have the risk of rising production costs and political meddling, but unlike gold - where the driving fundamental is its monetary role in a world awash with fiat currency units - the base-metals miners depend on economic growth to sustain demand for their products. In a world slipping back into recession - or perhaps, in the case of Japan and China, tripping off a cliff - betting on a recovery in growth is not a bet I'd want to make just now.

    While it is hard to accurately predict the timing of major developments in any one economy, let alone the global economy, there are a number of tangible clues we can follow to the conclusion that the next year will be a seminal one in terms of this crisis.

    For starters, there is the next round of Greek elections on June 17, the result of which could very well be the anointment of one Alexis Tsipras as the head of state. An unrepentant über-leftist whose primary campaign plank is to tell the rest of the EU to put their austerity where the sun doesn't shine, the election of Tsipras would almost certainly trigger a run on the Greek banks, followed by a cutoff of further EU funding and Greece's exit from the EU. And once that rock starts to slide down the hill, it is very likely that Spain and Portugal will follow… after that, who knows? As I don't need to point out (but will anyway), June 17 is right around the corner, so you might want to tighten your seat belt.

    A bit further out, but not very, here in the US we can look forward to the aforementioned fiscal cliff. Or, more accurately, the political theatrics around the three colliding co-factors in that cliff (the approach once more of the debt ceiling, the expiring tax cuts and mandated government spending cuts). While the outcome of the theatrics has yet to be determined, it's a safe bet that the government will extend in order to pretend while continuing to spend - and by doing so, signal in no uncertain terms that the dollar will follow all of the sovereign currency units in a competitive rush down the drain.

    Bottom line: Be very cautious about industrial commodities as a whole, at least until we see signs of inflation showing up in earnest, but don't miss this opportunity to use the recent correction to fill out that corner of your portfolio dedicated to gold and gold stocks.

    To get more perspectives like this, plus sector-specific commentary in energy, technology, and precious metals, sign up for the free Casey Research daily newsletter, the Casey Daily Dispatch. It's a great way to be introduced to the world of contrarian investing.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 29 5:28 PM | Link | Comment!
  • The All-Important Question

    For pretty much everyone, no matter where they are located in the economic strata, few if any questions are more germane to making plans for the future than whether the US and other major global economies are in recovery.

    Getting the answer to that question right is of special importance to investors and businesses.

    Stating the obvious, if the broader economy really is in recovery, then investors would be well served by investing in the equities of solid companies positioned to take advantage. Similarly, those very same solid companies would be rewarded by increasing their productive capacity through investments in the plants and people necessary to meeting growing demand.

    On the same side of the ledger, bond investors would want to begin shorting up their durations or leaving the bubbly bond market altogether, in anticipation that the flood of funds into fixed income would reverse, sending rates higher (and bond prices lower).

    Conversely, if the recovery is a head fake, then an entirely different course of action is called for. For instance, one would want to adopt a cautious attitude about common stocks. And because of the nature of the crisis - crushing levels of sovereign debt - one would want to take advantage of pullbacks in precious metals to buy more, along with other so-called "tangibles." That way they would have some measure of protection against the inflation that fiat-currency powers make all but a certainty.

    In addition, reducing personal and business spending in order to conserve rainy-day cash would be advised.

    And what about US bonds in the no-recovery scenario? A sound case can be made for including them in a portfolio as that puts you in lockstep with the government's desperate need to keep interest rates down - or, better yet, have them fall further still. Given the highly politicized nature of our economy, that seems reasonable - and anyone who has been long bonds over the last few years has done very well, indeed.

    While you'll have to make your own call on bonds, my own enthusiasm is curbed by looking at the charts of the upwards-spiking interest rates on the bonds of Spain, Greece, Italy, and so forth. When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath.

    Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that.

    For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise?

    Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.

    So, what's it going to be? Recovery… no recovery… or worse, maybe even a crash?

    We all have a lot riding on getting the answer right.

    The Quest for Confidence

    Ultimately, the purpose of searching for the truth about the recovery isn't about either fear or greed. It's about confidence.

    If you really knew what's coming, then the right moves to make become obvious. You could then make those moves with the calmness of spirit that comes from certain knowledge and get on with your life. While others struggle or miss an opportunity by betting on the wrong future, you'd have set up your affairs to survive and prosper.

    Of course, given that we are talking about a complex system - the economy - total certainty is never completely possible. But for reasons I'll share, the nature of the current crisis paradoxically allows for more certainty than would normally be the case.

    And so I want to share my conclusion about how I believe things will unfold from here, followed with some support for that conclusion.

    While, as readers of any duration are well aware, we at Casey Research foresaw the current crisis years in advance and have remained firm in our conviction that the recovery is a charade… based on my own readings, and after spending the last two weeks in the company of a couple dozen very plugged-in economists, top-performing money managers, and top financial analysts, my conclusion is thus:

    The world's largest economies, including the US, Europe, Japan, and China are speeding for the equivalent of a brick wall. In short, I believe that before this crisis is over, we will experience the Greater Depression my dear friend and business partner Doug Casey has long anticipated.

    In case that conclusion fails to communicate my current view sufficiently clearly, I will condense it as follows:

    The world's largest economies are screwed.

    And I will even set my conclusion to music, in the form of the song Somebody That I Used to Know by Gotye, which seems appropriate because the economy that we used to know won't be back again for many years to come.

    Trust me, stating an opinion on the direction of the economy in such unequivocal terms troubles me. For starters, I wish my conclusion could be otherwise because no one likes to be a harbinger of doom. Mostly, however, I have long resisted adopting a set-in-cement position on something as wiggly as the future. In my experience, anyone who absolutely, totally buys into a particular future is almost always proven wrong by time.

    Yet, as my quest for certainty unfolded, I could come to no other conclusion than that the world as we know it is headed for an economic catastrophe.

    Allow me to explain.

    The quest started with our Casey Research Recovery Reality Check Summit, April 27-29, in Weston, Florida. We took our mandate of getting to the bottom of this matter of recovery seriously, including faculty members with a variety of perspectives to see if an overarching conclusion about the recovery could be ascertained.

    In addition to our own team of Doug Casey, Bud Conrad, Terry Coxon, Louis James, Marin Katusa and Jeff Clark, included in the faculty were: Lacy Hunt, former economist with the Dallas Fed and the world's most successful bond manager; Jim Rickards, money manager and author of Currency Crisis; John Mauldin, best-selling author of Endgame and the just-released The Little Book of Bull's Eye Investing; John Williams of ShadowStats fame; Porter Stansberry, founder of Stansberry Research; Michael Lewitt, editor of The Credit Strategist; Gordon Chang, China analyst; Harry Dent, author of The Great Crash Ahead (who also debated James Rickards on the question of inflation or deflation); Andy Miller on real estate; Greg Weldon of the Weldon Report; John Hathaway of the Tocqueville Funds; resource market guru Rick Rule of Sprott Asset Management; Caesar Bryan, a senior portfolio manager for the Gabelli Fund group; and David Stockman, the head of the Office of Management and Budget during the Reagan administration.

    (Plus, on the taking-action front, there was a special panel on international diversification as well as panels where a dozen or so experts on everything from gold stocks to uranium, to rare earths, to graphite, to technology, to energy gave their best picks.)

    In other words, a full program.

    Then, immediately following the conclusion of our summit, Olivier Garret, Casey Research CEO and partner, and I climbed on a plane for California and John Mauldin's Strategic Investment Conference.

    John's event was geared more for hedge fund and very-high-net-worth investors and, as such, included a more mainstream slate of speakers, but what a slate it was.

    For the better part of three days, Olivier and I hunkered down to hear presentations and meet with the likes of: David Rosenberg, the star analyst of Gluskin Sheff; H. "Woody" Brock, an economist with some of the deepest credentials in the business (you can Google any of these guys for bio info); economic historian and best-selling author Niall Ferguson; Marc Faber of the Gloom, Doom and Boom Report; David McWilliams, the popular and very erudite Irish economist; David Harding of Winton Capital Management; Jeffrey Gundlach of DoubleLine Capital; Lacy Hunt again… and my favorite for this conference, Mohamed El-Erian of PIMCO fame.

    In other words, for the better part of two weeks, I was immersed in presentations and one-on-one discussions with truly some of the smartest, best-studied people in the world today on economics and investment markets - with the primary topic being whether the so-called recovery is real, and the consequences if it falters.

    While the speakers used a variety of methodologies to approach the topic, when all was said, the only conclusion that could be reached was that the world is headed for a very challenging period.

    That conclusion was for the most part derived from three aspects of the many presentations:

    1. Hard data. Tallying up all the charts and tables I viewed and heard discussed over the last couple of weeks, if such a thing were possible, would produce a number well in excess of 1,000. While there were some that dealt in forward-looking projections, the vast majority dealt with the here and now, as well as the historical context of how we got here.
    2. What wasn't said. For business reasons, many of the big-name money managers couldn't come right out and say that we were heading for a crash, but they all took pains to communicate in not so subtle ways that this was a likely outcome. Tellingly, not a single speaker over the entire two-week period - at either event - came out and said that we could expect a normal business-cycle recovery to continue.
    3. The complete lack of practical discussion about how the world can avoid hitting the wall. While the pessimism was palpable, even among the usually perma-bull Wall Street types, at no point did anyone espouse a politically feasible solution to avoid the coming crash. The few who even attempted to point to a solution, at best, mumbled platitudes about the politicians finding the spine to adopt fiscal-austerity measures. One of the speakers - something of a gas bag, it must be admitted - pronounced in all seriousness that the only solution to the economic malaise was for everyone in America to rush out and read his book.

      As an aside, over the course of lunch with that same gas bag, we had a discussion that went something like this:

    [Me] "All of the speakers, you included, point to the current trend of higher debts and deficits and say they are untenable, and so the big economies will hit a wall in the not-too-distant future. Yet hardly anyone actually then defines what hitting the wall will look like."

    [Him] "Yes, well, things will likely get a bit messy if the politicians can't pull together to address the structural problems in the economy."

    "But wouldn't you agree that, given the nature of our democracy, the odds of the politicians taking action before we hit the wall are almost nil?"

    "Not at all. If everyone in this country would read my new book, they would understand the situation and rise up to force their elected representatives to take the right action."

    "Seriously? The only way to avoid the next leg down is if everyone in the US reads your book? That's it?"

    At which point - I kid you not - he picked up his plate and changed tables. (There's a reason I am only rarely allowed out in public.)

    But the fact remains that other than perhaps Doug Casey and a small handful of other presenters at our conference, almost no one even attempted to anticipate just what happens when the crisis swells up to its full height and then comes crashing down.

    Or, specifically, what the consequences are likely to be when the world's largest economies all hit the wall at more or less the same time. For the record, I have compiled a list of the ten largest economies in the world, and a reasonable assessment of their current situation follows in descending order by size of GDP:

    United States - screwed

    China - really screwed

    Japan - massively screwed

    Germany - pretty screwed, especially in that export economies take a big hit in a crisis

    France - le screwed!

    Brazil - somewhat screwed

    United Kingdom - blimey, screwed too

    Italy - properly screwed

    Russia - hardly screwed at all (lots of resources and next to no government debt)

    Canada - pretty screwed, eh?

    As concerning as it is to see how many of the world's largest economies are in trouble, the biggest problem of all is that the central bank reserves of virtually every country in the world are stuffed with US government IOUs masquerading as tangible assets.

    So, what happens when the world's reserve currency enters collapse and the dollar turns into a hot potato? Don't know, but I'm pretty sure we'll find out in the not-so-distant future.

    [If you want your portfolio to be prepared for what's ahead in the not-so-distant future, you'll want to have the insights -including specific stock recommendations - the 31 speakers at the Casey Research Recovery Reality Check Summit gave. And you can have them: the Summit Audio Collection is available in either instantly downloadable MP3 format or CDs.]

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 15 3:07 PM | Link | Comment!
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