Seeking Alpha

David Galland's  Instablog

David Galland
Send Message
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
My company:
Casey Research
View David Galland's Instablogs on:
  • Is An Economic Deluge Nigh?

    If history has taught one certain lesson, it is that the less fettered an economy, the better humankind is able to do what it does best: run from trouble and run toward opportunity. In this way mistakes are quickly resolved and progress assured.

    Conversely, the deeper the muck of regulation, mandates, taxes, subsidies and other bureaucratic meddling, the slower we humans are in following our natural instincts until the point that progress is slowed or even stopped.

    It is said that history doesn't repeat itself, but it often rhymes. In the current circumstances, it appears that enough time has passed that current generations have completely forgotten the critical connection between the ability of humans to freely pursue their aspirations and economic progress.

    You can see this ignorance in the popular demand for even more, not less, meddling in the affairs of humankind. Should this trend continue - and for reasons I will touch on momentarily, I firmly believe it will - then the aspirations of the productive minority will soon be dampened by ever higher taxes and other attempts to "level the playing field" and the global economy, already in tatters, will fall off the edge.

    There is no more timely nor acute example of this growing trend than what is currently going on in France. I refer, of course, to the first round of the presidential election process, scheduled for this weekend.

    In France, if no candidate attracts no better than 50% of the vote, then the two leading candidates go to a decisive runoff vote, this time around to be held on May 6.

    The current president, Nicolas Sarkozy, a conservative in name only, was running at a fairly steady gait toward re-election (thanks to the head start awarded all incumbents), when leading socialist candidate Francois Hollande came out with a proposal to tax anyone with an annual income of over one million euros at a rate of 75%. He also promised to add a tax on all financial transactions and increase taxes on France's biggest companies to 35% - securing bragging rights as levying the world's third-highest corporate taxes, the US being #1. This all on top of a 25% VAT, one of the world's highest. By some calculations, the result of Hollande's new taxes is that effectively 100% of all incomes over one million euros will now be stripped away by the state.

    For good measure, Hollande also promised to reverse the recent modest increase in retirement age from 60 to 62 pushed through by Sarkozy. While I am sure it is mere coincidence, I found it noteworthy that Mssr. Hollande's campaign slogan is "Change - Now!"

    Remarkably, at least for those with some small understanding of economics, as a result of leaning into the microphone with these proposals Hollande has galloped ahead of all other potential contenders and is now projected to finish nose by nose with Sarkozy.

    After which the also-rans will be removed from the race, freeing their supporters to share their affections elsewhere. Given that the leading contender for third place with an estimated 14% of the vote is one Jean-Luc Mélenchon - charitably categorized as "far left", a label that can be applied to most of the other candidates - it is projected that the "conservative" Mssr. Sarkozy will go down in double-digit flames come May 6.

    Bringing to mind the prophetic utterance of Louis XV: "Après moi, le déluge."

    The deluge in Louis' case manifested as the murderous affair commonly known as the French Revolution. In the case of Mssr. Hollande taking up residence in the Palais de l'Élysée, the deluge is likely to manifest in the form of rising interest rates as investors look to protect against an acceleration in the country's debt to GDP ratio, already projected to hit almost 90% this year, exacerbated by a flight of capital, investors, entrepreneurs and large businesses.

    As is the nature of such things, because of the aforementioned predilection of humans to run from trouble, we likely won't have to wait for Mssr. Hollande to be formally enshrined in the gilded halls for the trouble to start - it will begin within days and maybe even minutes of the handicappers concluding that his ascendency is a sure thing.

    Given that France is the third-largest economy in the already-troubled Eurozone, one can expect the deluge to spread, with potentially devastating consequences. That the guillotines may soon be rolled out across Europe can be better understood by taking into account that the Eurozone sovereign deadbeats are on the hook for roughly nine trillion euros in debt, some significant percentage of which has to be rolled over to ready buyers over the next couple of years. Adding weight to the problem is that, according to the latest figures out of the IMF, Europe's banks may have to sell off up to 3.8 trillion euros in assets, many of them questionable, between now and the end of next year. At least, if they want to remain solvent.

    Across the pond, the United States also has aggressive funding needs, given that the "change" we experienced ourselves in the last presidential election has left the government gasping for about $1.4 trillion in additional funding each year. Then there is Japan, officially the world's largest debtor in terms of debt to GDP, where the easy availability of local funding has dried up, requiring that nation to go to the international markets for funding as well.

    The phrase "an awful lot of hogs at the trough" comes to mind.

    My point is not just that these governments are broke and are about to get a lot more broke as interest rates rise on their many debts and financings, but rather that the global trend toward a resurgence in public demand for socialism in response to a worsening crisis is a certainty.

    How could it be otherwise when for decades now the schooling of children has been delegated to functionaries of the state?

    For evidence, look no further than the screen swipe here. It is a quote from an essay by a college student in the United States on role the government should play:

    The writer of those words was a member of a Valencia University economics class. The professor, Jack Chandliss, asked the class to write an essay on what the American dream means to them, and what they want the federal government to do to help them achieve that dream. Out of 180 students participating, only about 10% wanted the government to leave them alone and not tax them too much, but a whopping 80% wanted the government to provide pretty much the whole dream thing wrapped in a tidy bow - including free college tuition and health care, jobs, even the down payment on their future homes, money for retirement and hard cash, taken in the form of taxes from rich people. Please take a moment to watch a worthwhile interview with the professor.

    Pretty eye-opening, eh?

    The point here is not complex, but it is important.

    With the apparatus of state education over many years serving to bamboozle the populace into the hardened belief that government has a positive role to play in virtually all aspects of modern life, it should come to no surprise to anyone that, when push comes to shove, people are now trained to look to government to solve the problems - even when it was the government that created the problems in the first place.

    Thus, confronted with the intractable mess they have made, these governments have to keep alive the mythology they have created about their omnipotence. Which is easier said than done, because with things now swirling fairly quickly around the drain, the mob is beginning to lose faith - and even patience.

    Which puts these governments in a very tight spot, because the only way they can actually fix things is by doing exactly the opposite of what people have come to expect from their governments, which is always to do more. Put simply, the only hope now is that these governments begin to reduce their roles in their respective economies, and dramatically so. Concurrently, they have to encourage people in their aspirations to greater wealth, by lowering their taxes and unwinding the tangle of regulations they have created over the last half-century.

    But if the governments actually tried to take these actions, the brainwashed masses would be positively befuddled then outraged, as it goes against everything they have been taught. Why, it would be like the Pope shuffling his way to the balcony of St. Peter's Basilica and informing the doting faithful that there isn't a god and never has been.

    Riots would follow.

    So it is that we find ourselves at a particularly interesting juncture in the historical record.

    On the one hand you have a majority of the world's population who have been carefully schooled into believing that the institution of government holds the solution to all problems and is the source of succor to all who need it. (Even that subset of the populace who has lost confidence in their current government invariably believes as doctrine that the next and better government can change things for the better and lead the way to the shining castle on the hill.)

    In this mix are the politicians and their functionaries, 99.99% of whom believe that, if for no other reason than their re-election prospects, they have to do something to meet the demands of the public.

    Of course, under normal circumstances the "something" usually consists of making grand-sounding speeches and otherwise blowing smoke. Today that's just not going to cut it, for the simple reason that the crisis is real, it is spinning out of control, and it's not going to go away unless and until the markets are allowed to breathe again.

    Which brings us full circle to the simple truth that the brainwashed public won't stand idly by while the politicians lower taxes and regulations on the profit makers or cut back state pensions and guarantees or otherwise reduce any of the many services the state has taken on itself to provide.

    "Between a rock and a hard place" is an inadequate phrase to describe the situation.

    Meanwhile, the mob has started to gather, their dark mutterings heard by the politicos who quickly don the red caps themselves, the better to be viewed as one with the people and join in expressing outrage against the capitalists who have been selected as fall guys in this unfolding drama.

    When confronted by reporters about the fact that his 75% tax on high-income owners would raise nowhere enough revenue to offset France's towering debt and social obligations, Mssr. Hollande was heard to respond:

    "It's not a question of return. It's a question of morality."

    When coercion and theft are considered moral, anything is possible, and none of it good.

    While I certainly can't say how this is all going to end, I'm pretty sure it's not going to end well.

    [Was David's pessimistic view of the future shared by most of the experts who spoke at the just-concluded Casey Research Recovery Reality Check Summit? If you weren't there, you can still learn the answer to that question - an audio collection of every presentation is in progress. You'll hear every speaker… see every graph and chart… learn what the experts are recommending for your investment portfolio to help you survive and thrive during the coming deluge. The Summit Audio Collection will be available on CDs or in instantly available MP3 format - order your copy now.]

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

    May 04 12:10 PM | Link | Comment!
  • Ben Graham’S Curse On Gold

    It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold's most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object "incapable of producing anything," so any investor holding it instead of stocks is acting out of irrational fear.

    How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?

    Perhaps it has something to do with his mentor, Benjamin Graham.

    Graham, author of Security Analysis (1934) and The Intelligent Investor (1949), is correctly respected as one of history's most knowledgeable investors. Over a career spanning 1915 to 1956, he refined his investment theories, in time becoming known as the father of value investing. Much of modern portfolio theory is based upon Graham's work.

    According to Graham, while no one can tell the future, there are periods when the valuations of stocks and bonds would deviate from fair value by becoming excessively over- or undervalued. To enhance returns and reduce risk, investors should alter their portfolio allocations accordingly. A quick look at a long-term chart supports Graham's theory clearly shows periods when one asset class offered a better value than the other:

    (Click on image to enlarge)

    But what of the periods when both stocks and bonds stagnated or fell together? For much of the 1970s and again from 2001 through today, any portfolio allocated solely between stocks and bonds would have at best treaded water and at worst drowned in a sea of stagflation. To earn any real return, an investor would have needed to seek alternatives.

    It's clear from this next chart that gold was exactly that alternative, a powerful counter-trend investment for periods when both stocks and bonds were overvalued. Yet gold is conspicuously absent from Graham's allocation model.

    (Click on image to enlarge)

    But this missing asset class is entirely understandable: for most of Graham's adult life and the most important years of his career, ownership of more than a small amount of gold was outlawed. Banned for private ownership by FDR in 1933, it wasn't re-legalized until late 1974. Graham passed away in 1976; he thus never lived through a period in which gold was unmistakably a better investment than either stocks or bonds.

    All of which makes us wonder: if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?

    We can never know.

    We can know, however, that given Graham's outsized influence on investment theory, there is little question that his lack of experience with gold, and therefore its absence from his observations, has had a profound effect on how most investment professionals view the yellow metal. This, in our opinion, goes a long way toward explaining the persistently low esteem in which gold is held by the mainstream investment community. And, as a consequence, its widespread failure to even be considered as an asset class.

    A couple of takeaways: first, perhaps now you can stop wondering why your broker, the talking heads in the financial media, and Warren Buffett continue to misunderstand gold as a portfolio holding. More importantly, however, is that in order to have sustained, long-term investment success, one must accept that an intelligent portfolio allocation needs to include not two but three broad categories of investment - stocks, bonds and gold, with the amounts allocated to each guided by relative valuation.

    Investors who understand this tenet have an almost unfair advantage over other investors as it allows them to get positioned in gold ahead of the crowd and enjoy the bulk of the ride, while others sit on their hands.

    So when you hear commentators ridiculing gold as a barbarous relic, lamenting that they cannot eat it or smugly asserting that it produces nothing, rest contently in knowing that they're operating with a severe handicap in their own portfolio. Meanwhile, we'll prosper, armed with the understanding that gold fulfills a very important and specific purpose in a portfolio, namely as real money that protects net worth during periods marked by excessive government debt and currency debasement such as we are currently experiencing.

    Given the powerful influence of Ben Graham and his disciples, his curse on gold will not go quietly into the night. But it should.

    David Galland is managing director of Casey Research, which provides independent investment analysis on a subscription basis to a global network of over 180,000 self-directed investors and money managers. Recognizing the emerging bull market in gold early on, in the late 1990s, Casey Research formed a metals and mining division that has grown into a leading provider of actionable gold and resource intelligence. For investors looking to become familiar with the asset category, Casey Research offers a monthly newsletter, BIG GOLD (try it risk free for 90 days), focusing on undervalued opportunities in mid- to large-cap producers, as well as best practices in buying, holding and selling precious metals. Learn now why it's more important than ever to invest in gold and gold-related equities.

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

    Feb 22 11:14 AM | Link | 2 Comments
  • Obama: A One-and-Done President?

    By the Editors of The Casey Report, Casey Research

    President Obama promised to turn around the floundering economy that he inherited from his predecessor. He promised jobs. He promised transparency. Not only did he not deliver on those campaign promises, he has led the nation further into the abyss on all counts. Today we are less prosperous, deeper in debt, and enjoy fewer liberties than when Obama first stepped into the Oval Office. His own party is losing faith in the messiah.

    You can see that loss of faith in the steady downward trajectory of Obama's approval ratings. While Democrats can take heart from the fact that no truly viable candidate has emerged from the GOP, it's clear that "Hope and Change" will not be sufficient to rally the electoral troops for Obama again in 2012. Voters are hurting, and Obama's claims that the blame lies with George W. Bush no longer provide any solace.

    Not only is the president's own reelection in jeopardy, his sagging polls are dragging down other Democrat candidates as well. Republican Bob Turner handily took Anthony Weiner's seat in New York's 9th Congressional District, a district that had been a Democrat stronghold since 1923. New York's 9th District has previously been represented by such Democrat stalwarts as Chuck Schumer and Geraldine Ferraro. During the special election for Weiner's seat, Obama had only 31 percent approval in that district, although he won there with 55 percent of the vote in the 2008 presidential election.

    A Democrat pollster attributed Turner's win to "the incredible unpopularity of Barack Obama dragging his party down in the district." Similarly, Republican Scott Brown took the Massachusetts seat that had been held by Ted Kennedy for almost 46 years. Brown's win was attributed in large part to widespread discontent over Obama's policies, particularly Obamacare.

    A Democrat strategist is warning his clients not to run in 2012. He said, "I don't want to see good candidates lose by 12 to 15 points because of the president." Pete Sessions (R-TX), National Republican Congressional Campaign chairman, said, "This clear rebuke of President Obama's policies delivers a blow to Democrats' goal of making Nancy Pelosi the speaker again. An unpopular President Obama is now a liability for Democrats nationwide in a 2012 election that is a referendum on his economic policies."

    The New York Times has observed that no incumbent president since FDR has won reelection with unemployment over 7.2%. Keep in mind that unemployment is actually much higher than the officially reported 9.2%. Other presidents have recovered from low approval ratings and high unemployment and still won reelection, but that will not happen here.

    The steps necessary to turn the economy around are antithetical to Obama and his collectivist, big-government philosophy. He will not make a 180-degree change in direction, so there is virtually no way unemployment will fall at all, not to mention substantially, before the election. Nor does he have any plans on the drawing board by which his popularity will rise. Instead, Obama berates a "do-nothing" Congress, including a Democrat majority in the Senate, for not passing his jobs bill - another dose of the same toxic medicine that has brought us to the economic doldrums where we languish today.

    Even if Obama turns out to be his party's standard bearer in 2012 and wins the election, he is likely to enter his second term having to deal with Republican majorities in both the House and Senate. Lacking the political skills of Bill Clinton, who similarly faced a Republican Congress, Obama would spend four years in a standoff with an intractable legislature - truly a do-nothing president.

    Many of those who so enthusiastically supported Obama in 2008 now have buyer's remorse. They could have had Hillary. Obama himself may be having second thoughts. He told NBC's Ann Curry that "there are days where I say that one term is enough."

    Obama told ABC News' Diane Sawyer that "I'd rather be a really good one-term president than a mediocre two-term president." It's fair to say that neither of those are realistic options. Neither really good nor mediocre remain within Obama's reach.

    Early in his presidency, he told NBC's Matt Lauer that "if I don't have this done in three years, then this is going to be a one-term proposition." Clearly, he has not and cannot "have this done" in three years or four years. Looks like one term it is.

    Stepping Down

    Obama has been compared to Harry Truman, who came from behind in 1948 to defeat Thomas Dewey for a second term in the White House. Truman ran successfully against a "do-nothing" Republican Congress. Obama is busy blaming this "do-nothing" Congress for not passing his jobs bill. Unlike Truman, who faced a GOP majority in both the House and Senate, Obama so far only has to deal with a Republican House. He still faces gridlock.

    Obama has also been compared to Truman in 1952. Truman believed that he could have the nomination simply for the asking, but he was challenged and defeated in a New Hampshire primary by Estes Kefauver, a first-term senator from Tennessee. Shortly after that defeat, Truman withdrew from the race. Ostensibly, he withdrew in the best interest of the country and because he was concerned that he could not govern effectively for four more years because of his advanced age. In fact, Truman was deeply disliked. He had been unable to bring the Korean War to an end or tame the federal deficit, and faced charges of corruption and cronyism in his administration. Sound familiar?

    Another parallel can be drawn to President Lyndon Johnson. Johnson was too much associated with the costly and unpopular Viet Nam war, and his Great Society was said to be a failure. He faced challenges from within his own party from Senators Eugene McCarthy and Bobby Kennedy, the brother of the assassinated president Johnson had replaced. On March 31, 1968, Johnson announced that "I shall not seek and will not accept the nomination of my party for another term as your president."

    Democrat pollsters Patrick Caddell and Douglas Schoen, in a November 21, 2011 opinion piece in the Wall Street Journal, note that Truman and Johnson both "took the moral high ground and decided against running for a new term as president." They conclude that "President Obama is facing a similar reality - and he must reach the same conclusion."

    Caddell and Schoen concede that…

    Mr. Obama could still win re-election in 2012. Even with his all-time low job approval ratings (and even worse ratings on handling the economy), the president could eke out a victory in November. But the kind of campaign required for the president's political survival would make it almost impossible for him to govern - not only during the campaign, but throughout a second term. Put simply, it seems that the White House has concluded that if the president cannot run on his record, he will need to wage the most negative campaign in history to stand any chance. With his job approval ratings below 45% overall and below 40% on the economy, the president cannot affirmatively make the case that voters are better off now than they were four years ago. He - like everyone else - knows that they are worse off.

    They urge the president to "abandon his candidacy for re-election in favor of a clear alternative, one capable not only of saving the Democratic Party, but more important, of governing effectively and in a way that preserves the most important of the president's accomplishments. He should step aside for the one candidate who would become, by acclamation, the nominee of the Democratic Party: Secretary of State Hillary Clinton."

    They note, "Having unique experience in government as first lady, senator and now as Secretary of State, Mrs. Clinton is more qualified than any presidential candidate in recent memory, including her husband. Her election would arguably be as historic an event as the election of President Obama in 2008."

    That Schoen and Caddell are Democrat pollsters who worked, respectively, for Bill Clinton and Jimmy Carter is all the more telling of the mood in the party. They claim to "write as patriots and Democrats - concerned about the fate of our party and, most of all, our country. We do not write as people who have been in contact with Mrs. Clinton or her political operation. Nor would we expect to be directly involved in any Clinton campaign." They conclude that "not only is Mrs. Clinton better positioned to win in 2012 than Mr. Obama, but she is better positioned to govern if she does."

    Hillary, however, will supposedly have none of it. She told CBS' White House correspondent Norah O'Donnell she would not consider running for president. She said, "I had a great run, I was very grateful that I could do that. I felt just really good about the experience, but that was then and this is now, and I'm looking forward."

    Caddell and Schoen will not be swayed, however. "If President Obama is not willing to seize the moral high ground and step aside, then the two Democratic leaders in Congress, Sen. Harry Reid and Rep. Nancy Pelosi, must urge the president not to seek re-election - for the good of the party and most of all for the good of the country. And they must present the only clear alternative - Hillary Clinton."

    Will Obama seize the high moral ground and step aside? Not likely. He is probably incapable of blaming himself for his predicament. He could be forced aside, perhaps by the threat of a scandal (Solyndra, MF Global, and illegal actions by his attorney general and Department of Justice). He seems even now to have trouble understanding what went wrong. He has apparently not yet considered the possibility that the luminaries with whom he has surrounded himself, including Fed Chairman Ben Bernanke, could simply be mistaken about how the world works.

    Laissez Faire

    Oddly, a do-nothing president is just what we need, but of a different sort than Obama. The answer to most of the difficult questions about government is that government has no business doing whatever it is in the first place. Of the crop of Republican contenders, only Congressman Ron Paul and New Mexico Governor Gary Johnson acknowledge that reining in the lumbering, overreaching behemoth that our government has become is the real challenge facing the next president. Other Republican hopefuls pay lip service to whittling government down to size but not by the drastic steps that are now not only necessary but overdue.

    Indeed, our government has now become so hostile and damaging to its citizens that one could fairly argue that we would be better off with almost no government at all. As Grover Norquist famously stated: "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

    Both Ron Paul and Gary Johnson are seen as not being presidential material because they are unwilling to perpetuate longstanding scams. They are thought not to be presidential material because they don't understand how the game is played or, if they do, because they are unwilling to play it. Admittedly, presidential politics has been such an extremely complex and convoluted affair that it seems only sophisticated players can handle it, but that is exactly what is wrong here.

    [Obama's policies are clear on one point: he seeks to continue slyly draining investors' assets through inflation. There are ways to circumvent it - if you're willing to learn how to make friends with shifting trends.]

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

    Feb 16 4:26 PM | Link | 1 Comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.