Bait for the Two-Legged Rat

Bait for the Two-Legged Rat

By David Galland, Managing Editor,

The Casey Report, Casey Research

I have often said that humans are like rats in that they are extremely ingenious when it comes to looking after their personal interests. Lock a rat in a metal box and it will almost be able to figure a way out. Almost. A human would actually have a shot at it.

In the debate about what went wrong with the economy and how to fix things, the topic of loose credit standards usually arises early in the discussion. And correctly so. Due to loose credit standards, people without the financial resources to own a home were practically carried across the threshold by predatory lenders.

Well, at least that’s how the outraged political class and their adoring punditry see things.

According to that section of the jeering crowd, these lenders were so avaricious, greedy, and downright dastardly that they would actually hand the keys to a $500,000 house to an individual with not just poor but pitiful credit and with little or no money down. Bastards!

Of course, as a former banker (shudder), I have a somewhat different perspective.

Because no matter how devious or dastardly a lending institution might be, it wouldn’t even contemplate making such loans if it didn’t have a fairly well-reasoned plan in mind to actually get paid back… with interest.

Enter the government in the form of the Federal Housing Administration (FHA) and the quasi-state-owned (and now absolutely state-owned) Fannie Mae and Freddie Mac. Absent their guarantees, the private sector would never, but never, have made the loans just described. That’s because…

(a) loan officers actually take professional pride and go to great lengths in assuring that the money they loan out comes back. In fact, failing to get loans paid back with even a sniff of regularity is quick cause for a pink slip followed by a solemn escort to the front door for the approving loan officer. And…

(b) foreclosing and all the attendant activities are difficult, time consuming, and costly. To wit, trying to get juice out of a rock gets you little more than dust.
As a result, within the acceptable tolerance range for any human endeavor, banks are historically careful in setting lending standards.

But add into the equation a rate-slashing Fed looking to stimulate things a bit, side by side with a bloated Uncle Sam looking to engage in some social engineering by putting people without the credit or means into a house, and the picture quickly changes. The FHA, the world’s largest government insurer of mortgages, whose “loans require small down payments” and provide “more flexibility . . . than conventional loans,” as its website states, has currently 4.8 million insured single-family mortgages.

For the record, there are about 55 million single-family mortgages in the U.S., so the FHA has about 10% covered.

But the FHA is just one of Uncle Sam’s kissing cousins. Others, including the aforementioned Fannie and Freddie, guarantee another 31 million mortgages between them. So, in total, U.S. taxpayers now stand behind about 65% of all home mortgages in the U.S. But it is worse than that, because ever since the credit crisis began, over 80% of all new mortgages generated have been “conforming” in order to go onto the books of a government agency.

Thanks to Uncle Sam’s largess and no-risk lending guarantees – warmly applauded by the nation’s banks and sundry money shoppes, to be sure – since 1992 there has been about a 50% increase in U.S. homeownership.

Is it any wonder, therefore, that until recently you could spot a loan officer by the wide smiles on their faces, as well as their ink-stained fingers, the result of producing prodigious quantities of freshly printed loan contracts?

The way it all worked was very simple. Uncle Sam shouts for all lenders to hear, “Bring me your poor, your unqualified, your liars, and your wannabe speculators, and I will buy up their loans, allowing you to make a quick profit for generating them, and then passing them like a hot potato into my portfolio.”

Given the opportunity to make money by giving money away – not a real hard sale – the lenders rose to the occasion. A rat, sniffing out a crust of bread down an unguarded alleyway, would do much the same.

Likewise the masses, equally quick to discern the opportunity, can hardly be faulted for scrabbling to take the house, oftentimes along with a loan that put extra money in their pockets in the process.

No one was much concerned about paying for the homes; the lender’s risk was assumed by the government and the unqualified buyer didn’t have much of any money in the game, and besides, everyone was certain that house prices could only go in one direction, up. As for the government, well, the government doesn’t really pay much if any attention to the money it spends, because it’s not their money. It’s yours – if you are a U.S. taxpayer, that is.

Of course, as the smell of free cheese and wealth without end spread throughout the ether, more and more two-legged rats acted on what they perceived to be their self-interest, causing a steady influx of new buyers to stream into the alley of homeownership. And the next thing you know, you have a housing bubble of historic proportions.

But you know all this, so why am I repeating history? Well, because this week, I stopped in at a local sandwich shop and, to occupy myself with something other than looking out the window, took hold of a regional real estate guide that, as part of its editorial features, includes a table showing all of the lenders who do business in the area – 16 in all.

Among other information, the lenders’ table displayed whether or not the various lending institutions offer “Mortgages to Buyers with Less Than 20% Down?”… and whether they “Offer Mortgages with Credit Scores Under 600?”

Even today, after all the news and global angst, 9 out of 16 still advertise that they offer loans to individuals with credit scores below 600, and four of them actively promote the fact that they’ll go down to 580 – which is roughly the credit rating of an escaped felon on the run for credit card fraud. But such a loan, each of the listing institutions further qualifies, is available “Only w/FHA.”

And 12 out of 16 will still give you a loan with less than 20% down… in fact, “w/FHA,” the solid majority will still provide a loan with less than 5% down, and one touted the availability of a 103% loan.

Alas, despite the understandable desire of lenders to earn yet more cheese by generating poor-quality mortgages for Uncle Sam, borrowers now believe real estate can only go down. Given the oversupply, they are largely right for the foreseeable future. On that basis, they whiff the downside, spot the trap that waits behind the front door of Home Sweet Home, and scamper away.

The lesson in all of this, other than that once I get pounding away on the keyboard, I seem to have no off-switch, is that the real cause of the housing-led crisis was a failure to appreciate the similarities between humans and rats. Every government interference in the market, no matter how well intentioned, carries the seeds of dangerous unintended consequences. Just ask the twenty-something welfare mothers of the 1980s who, when offered monthly pay for each new offspring, quickly converted their wombs into baby factories.

I wish I could say that this lesson – that humans, like rats, will always figure out a way to pursue their self-interest, even if it requires chewing through a real or proverbial wall – has been understood, thanks to the crash. Chances are it hasn’t.

Fortunately, there is consolation to be had from the current trend towards more and bigger government. Namely, if you can fully understand what’s going on and what’s coming next, you have a rare opportunity to – in the words of a stock promoter who used to speak at conferences some years ago – get “stinky, filthy, sloppy rich.”


Even in a deep crisis like the one we’re seeing right now, windows of opportunity open up all the time – if you only know where to look. Recognizing, analyzing, and profiting from emerging trends in the economy is the objective of The Casey Report. Learn how to get handsome rewards by making the trend your friend – click here now.

Direction of Gold

This is a “golden” time of year according to history. The price of gold typically is moving up this time of year through April or so, before (typically) getting slammed again in the summer.

Recently, gold bulls have been encouraged by the strength in gold in spite of the strength in the U.S. Dollar, indicating what we call “decoupling”. Gold’s price normally has an inverse relationship to the value of the dollar. And since they are both competing currencies, why not?

What most Americans (those who care – the few) don’t realize is that gold has been hitting all time highs in a vast array of currencies, just not the U.S. Dollar.

Gold is again being seen as a safe haven and currency of no one else’s liability.

Even Dennis Gartman is bullish on gold, despite having sold some calls against his ETF position. Gartman feels we might be a bit overbought currrently and suspects golds price will either drop some from here or at least remain where it is.

Covered call writing, which is essentially what the Gartman Letter is doing, is popular investment strategy when one is generally positive on the underlying security – in this case gold ETF – but feels that the price of the asset could come under pressure in the near term or at least not move up dramatically.

Gartman’s actions are a breath of fresh air to this writer as in the past year or so Dennis has seemed to have a tendency to buy just before gold corrects and bail out just before it takes off.

This time, Gartman doesn’t want to get left totally behind.

Writing calls, while limiting ones downside, absolutely caps ones upside, however. A potentially dangerous strategy in my humble opinion.

If one is positive on gold’s prospects, wants a bit of leverage but not so much as to hit the futures market, then a conservative mix of gold stocks might be in order.

Tread carefully here, however, as danger lurks about in these markets. Rely on the advice of experts such as those found in Big Gold.

Our Financial System is in Uncharted Waters

Uncharted Waters

By Editors Doug Hornig and Bud Conrad, The Casey Report

These are uncharted waters, indeed. The shenanigans being foisted upon us by Washington are unprecedented at least since World War II, and probably ever. There is so much complexity, if not sheer trickery, going on that it becomes increasingly difficult to make any sense of what’s happening, much less what the net effect is going to be.

Nevertheless, we must try.

As always, the first line of inquiry should be directed at the data, for the raw numbers tell us things that our politicians will reveal only reluctantly, if at all.

Let’s first take a look at what didn’t happen: Casey Research Chief Economist Bud Conrad has been scrunching the numbers to distill the bigger picture. Over the past four months, American banks have received massive amounts of bailout money, ostensibly to unfreeze the credit market and enable the banks to lend money again. That it didn’t work is obvious from a couple of charts. Here’s Bud’s first chart.

Banks Cash
Banks Cash

Note that banks’ cash assets rose by over a half-trillion dollars in just two and a half months. That’s primarily the money (ours) that was handed over to them via the Federal Reserve. Did it go to a socially useful purpose? Mmmm… no. In actuality, we got scammed.

Here’s how the scam operated: the Treasury borrowed our dollars via the sale of Treasury notes and deposited the cash at the Fed. The Fed used the money to relieve banks of their most toxic liabilities. But instead of lending it, the banks simply bought more Treasuries, thereby polishing up their balance sheets. This is made starkly evident by Bud’s second chart, where you can see that cash was being hoarded even as lending declined.

Banks Increased Cash
Banks Increased Cash

The net result of this asset shuffling is that the Treasury (that’s us) incurred more debt, the Fed absorbed all manner of toxic waste for which it may not get 10 cents on the dollar, and the banks wound up with many more bucks and much less junk, leaving them sitting pretty and chuckling all the way to… well, to the bank.

These were not small-potatoes moves, either. Check out Chart 3 below.

Trillion Dollar debt added in 3 months
Trillion Dollar debt added in 3 months

That bears repeating. The Treasury Department, on our behalf, nicked us for a cool trillion in three months. Never been done before.

And remember, over the same period, the Fed was bloating its balance sheet with financial garbage to the same trillion-dollar tune. Chart 4 shows the path of the reverse meteor.

Reserve Bank Credit
Reserve Bank Credit

As badly as it’s behaved at times, the Fed hasn’t done anything remotely like this in all its checkered 95-year history.

What’s our point? Simply this: delicate financial balances are quickly falling into imbalance. Responses of gargantuan size have merely served to keep the system from collapsing and have barely begun to improve it. Thus, the situation is not yet stabilized. There will be new surprise problems, and bigger responses, for the foreseeable future. Of that we can be certain. And collectively, all the government’s responses will inevitably have a negative effect on the value of the U.S. dollar.

With all these momentous forces at play, it’s understandable that you would feel small and powerless. Obviously, you can’t fight City Hall. But are there ways to play along with it? Is it possible to survive, and even prosper, while the economy heads for hell in a handbasket?

Yes… but you must look behind the headlines, learn to follow locked-in trends, and develop the foresight to invest counter to what the herd may be doing. The Casey Report brings you opportunities to accomplish just that.

In these times of crisis and extremely volatile markets, the trend can truly be your friend… if you recognize it in time to profit while the investing masses are still oblivious. Month after month, The Casey Report scrutinizes and analyzes emerging trends – a strategy that has been providing our subscribers with double- and triple-digit returns. Learn more here.

Wonder Why You Can’t Buy The Gold Coins You Want?

You just can’t talk about government manipulation of gold and silver without an army of know-it-alls calling you a crank.

Much as I hate the problems related to personal gold coin ownership, I certainly feel that folks ought to be able to buy from our own mint the gold and silver coins that they want at a reasonable price.

For the last six months, however, good luck finding the coins at all, let alone for a reasonable price.

The U.S. Mint originally complained about supply problems, with the manufactured blanks that is, with all the pundits telling us that there is and never was a shortage of the precious metals themselves.

Isn’t “bullocks” what our friends across the pond say?

Well, someone finally tallied up all of the rot spewing from the mouthpiece of the U.S. Mint and put it into one cohesive article.

Check it out:

U.S. Mint discourages gold ownership.

I wish I had the money to buy and a place to store it if I did. But the times I considered buying a little GLD or SLV when prices where down I would sometimes fall into a trap of either:

  • wanting it cheaper yet
  • listening to someone like Jon Nadler or Dennis Gartman saying it’s finished and going MUCH lower

Thankfully I have a little in my portfolio.

Well yesterday even the Swiss National Bank admitted that Richard Russell has it right. When choosing between “inflate or die” the Swiss government has chosen to inflate.

If gold is money, and it is, what currency do you really want to be in when everyone is inflating?

Gold. You got it. Well, metaphorically you’ve got it, because good luck finding it to buy.

I thank my friends at the Casey Report and Ed Steer of Casey Daily Resource for keeping this info in my face on a daily basis.

Obama, Keynes, and Pragmatism

Guest Editorial

By David Galland

Managing Editor, The Casey Report
On several occasions of late, I have read or heard the phrase, “We are all Keynesians now,” an erudite way of expressing the idea that the free market is dead. And that the fate of the global economy now relies almost entirely on pragmatic measures yet to be taken by governments, most notably that of the United States.

Given that the word “pragmatic” is often used to describe President Obama, it appears that the man of the hour has arrived just in the nick of time.

Not to be a spoilsport, but there is much wrong with this latest entry in the thick and well-worn journal labeled “Popular Delusions.”

First and foremost, the idea that the world’s largest debtor nation should be stood up as role model is laughable. That is like hiring the town’s serial bankrupt to run the bank. Putting aside the irony, the inherent conflict of interest destroys any U.S. credibility as an honest broker in the current scenario.

Secondly, while the incoming team has done a superior job of spinning pragmatism into the Obama brand, it is another thing altogether to actually demonstrate the quality when the shoe leather hits the fast-moving pavement.

And, if you think about it, even the word defies definition. I have heard Obama supporters comment lately that “if the private sector won’t spend money, then the government has to.” Like beauty, pragmatism, it seems, is in the eye of the beholder. In the current context, what Team Obama might consider pragmatic – soaking the successful, slapping on an energy tax, revving up the money engines ever higher – might be considered by others to be very un-pragmatic.

Even so, adopting the optimistic spirit of America’s new era, we’ll credit the incoming president and all those who surround him as pragmatics, in the sense that they are the best sort of men and women who can be counted on to make intelligent and, well, pragmatic choices in the face of a rapidly eroding global economy.

Unfortunately, no sooner do we hand Team Obama a laurel than we have to point out a rather large and ugly fly in the otherwise nicely scented ointment. It is this: if the word pragmatic isn’t used as an adjective in direct association with the word “dictator,” then it becomes all but meaningless.

That’s because even if Mr. Obama is a pragmatic, the same can hardly be said of the American public, which, according to the law of the land, are the purported owners and – through the ballot – operators of the economy.

To use one easily understood example, a pragmatic president might look at the insurmountable obligations hanging over the Social Security program and decide that, at the least, some form of means testing might be applied to recipients. But the voting bloc of American elderly, readily ginned up into an elevated emotional state by the AARP and other special-interest groups, assures that anyone proposing even modest modifications to the program will be loudly shouted down and find themselves in heavy waters come the next election.

And I’m not referring just to the next presidential election cycle, which won’t kick off for another two years… but to the next congressional election of November 2010, less than two years hence. In that election, 1/3 of the Senate and 100% of the House of Representatives will be up for grabs.

With only history as my guide, I’m going to hypothesize that few of Mr. Obama’s supporters in Congress, avid though they may be, will be willing to make their reelection campaigns more difficult by supporting unpopular legislation… no matter how pragmatic.

Sure, maybe they’ll inch a little way out on the limb during a brief honeymoon period, but once the 24-hour-news-as-entertainment channels start in with a vengeance, cracks in the coalition of collectivists will begin to appear and Team Obama will turn from making “hard choices” to the “easy giveaways” the American public requires in exchange for continuing to support his party come November 2010.

After that, we move seamlessly into the next presidential election cycle, and things will go downhill from there.

Of course, this situation is not unique to the Democrats – rather, it is an intractable and, in time, terminal disease of our late-stage democracy itself.

The Keynesian Fallacy

Even ignoring the near impossibility of organizing consistent and sensible government policies in a rapidly degrading democracy, the whole idea that a government can effectively manage an economy – Keynes’ central theme – just doesn’t hold water. Despite hundreds and maybe thousands of experiments along those lines, none has shown any real durability.

There have been some examples, however, of long-term free market successes, the most powerful being the early, laissez-faire days of the United States. There are lesser examples such as Dubai in recent decades, or Hong Kong under the British – economies where the operating manual was thin and almost entirely supportive of wealth creation and free markets. Were they perfect? No, because there is no such thing as a perfect world. But in terms of creating the wealth needed for a society to advance to a more refined stage, they performed exceptionally well.

In sharp contrast, today’s freshly minted Keynesians call for increased penalties on success and a steep ramping up of regulation, the very opposite of the prescription needed.

There is another problem with the utopian aura now surrounding Team Obama, and it’s simply that government doesn’t produce anything tangible. So when it comes time to “manage” the economy, government is left with only a couple of tools. One is to force you and me to use our time and capital for purposes they view as important. Bush, for example, felt invading Iraq was a priority. Naturally, Team Obama has a slate of fresh ideas on the best use of your money, and say they want even more of it. I take umbrage at the notion that I should open my wallet even further for “the public good,” especially when the perceived public good so often runs contrary to my own beliefs. For instance, on principle, I am against war – it is always the innocents that suffer the most. And I am against the creation of new and expensive regulatory structures, a government specialty.

The other tool available to Team Obama is, of course, the creation of money. And we are now hearing a steady drumbeat that we the people should pay no attention to the deficits for the next few years.

To which I can only wonder, “Isn’t that exactly what’s been going on for the last eight years?”

It sure seems that way, considering the unprecedented levels of debt already overhanging the economy.


There has rarely, if ever, been a period of time where the economy of the U.S. has been more politicized. Today it is not enough for an investor to paw through the fundamentals and correctly identify the best – or worst – sectors or even individual companies to be invested in or to avoid. Success depends equally, and maybe even more so, on correctly anticipating what actions the government is likely to take (or not) in regards to any particular enterprise. Take GM, for example, whose rise or demise depends to a large part on the question whether the government will prop it up.

The FREE special report Obama’s Newer Deal by Casey Research analyzes the economic and political climate of the incoming Obama administration, providing a “weather forecast” that can help you prepare your assets for a rainy day. Get it now – no cost, no obligation – by simply clicking here.

Foundations of Crisis

Guest Article

By Doug Casey, Chairman,
The Casey Report, Casey Research, LLC.

Everybody wants predictions. The following article does a little better than that, in that I wrote it back in November of 1997, outlining several theories of history, and pointing to a logical way of anticipating what will likely happen to the world at large over the next generation.

As you will read, the methodology I relied upon for anticipating the events that are now unfolding – 11 years later – were actually quite accurate, confirming, in my mind at least, that now is a time to be very cautious in your personal and financial affairs.

The article is unaltered in its text from the original, though I have added some current commentary in bold italics

Doug Casey
December 26, 2008

“Don’t know much about the Middle Ages, look at the pictures an’ I turn the pages. Don’ know much about no rise and fall, don’ know much ‘bout nothin’ at all” “Wonderful World,” Sam Cooke.

The lyrics quoted above probably describe the average American’s knowledge of history about as well as any academic study. Not only don’t they know anything about it, and think it’s irrelevant, but what they do know is inaccurate and slanted. And they must not think very much about the future either if the amount of consumer debt out there, mostly accumulating at 18% interest, is any indication.

One point of studying history is that it gives you an indication of what’s likely to happen now, if you can find an appropriate analog in the past. This is a tricky business because as you look at factors contributing to a trend, it’s not easy to determine which ones are really important. Making that determination is a judgment call, and everyone’s judgment is colored by his worldview, or Weltanschauung as the Germans would have it.

Let me briefly spell out my Weltanschauung so you can more accurately determine how it compares with your own, and how it may be influencing my interpretation of the future.

I’m intensely optimistic about the long-term future. It seems to me a lock cinch that the advance of technology alone – and nanotechnology in particular – will result in a future of incredible abundance and prosperity, and that alone will solve most of the problems that plague us. Space migration, intelligence increase, and life extension will be commonplace realities. These things, plus the growth of both knowledge and its accessibility and the concomitant rise of the individual from the group, will constantly diminish politics as an element of life. The future will be much better than anything visualized on Star Trek, and will arrive much sooner. That’s the good news.

The bad news is that within the longest trend in history, the ascent of man, there is plenty of room for setbacks, and much of history is a case of two steps forward and one back. My gloomy short-term outlook, and my reasons for maintaining it, is recounted here monthly. Whether it’s right or wrong, from an investor’s point of view, the short term is more relevant than the long term. Notwithstanding Warren Buffett’s great success in going for the long term, Keynes was right when he said that in the long run we’re all dead. History shows that goes for civilizations as well as people. The problem is that our civilization is probably just now on the cusp of the long term.

Hari Seldon: Where Are You When We Need You?

Isaac Asimov’s classic Foundation trilogy centers around a scientist, Hari Seldon, who invents a science called psychohistory, which allows the fairly accurate prediction of broad trends in society going for centuries into the future. Seldon lives on Trantor, the planetary capital of a galactic empire; the entire planet is covered with a high-tech version of Washington, D.C., devoted to nothing but taxing and regulating the rest of the galaxy. Seldon forecasts that the empire will collapse and Trantor turn into a gigantic ghost town. And of course that’s what happens, because it’s a novel, and that makes for a good story. It’s a good story because it’s credible, and it’s credible because people know nothing lasts forever, and there is a cyclicality to everything; birth, youth, maturity, senescence, and death. These stages are shared by everything in the material world, whether it’s a person, a city, a civilization, or a galaxy. It’s just a question of time and scale.

From that point of view everyone knows the future, i.e., we all know that everything eventually dies. But we’d like a bit more precision on the timing of their lifecycles. Some gurus believe, or appear to believe, they can actually predict the details of the future; I consider them knaves. People who actually do believe them should be considered fools. That said – Nostradamus, astrology, channeling, tea leaf reading, and the like aside – I do think the best indicator of what will likely happen in the future is what has happened in the past. That may seem like an obvious statement, but it’s not. There have traditionally been three ways of looking at the problem; call them theories of history.

Oldest is what might be termed a chaotic view, which presumes mankind doesn’t have any ultimate destination but is wafted on the wings of Fortune or hangs by the thread of Fate. Subject to the arbitrary will of the gods, whether it’s the Old Testament’s Yahweh, or Homer’s Zeus, the future is unpredictable, and prophecy or an oracle gives you as good a read as anything else. I discount this theory heavily.

A second ancient view is that everything is cyclical, and therefore somewhat predictable. History may be viewed like a giant sine wave that’s possibly headed somewhere, but the direction is unknown. Or history is really a circle, constantly repeating itself, much like the four seasons of the year. There’s a lot of wisdom to the cyclical view.

The third view sees history as a linear sequence, one that’s actually headed somewhere. That view holds a special appeal for followers of evangelically oriented religions, particularly Christians (many of whose beliefs have an apocalyptic tinge) and Marxists (who were, until lately, given heart by the “scientific” inevitability their views would prevail). The linear view ties in with the idea of Progress, that (more or less) every day and in every way, things are getting better and better – although there’s also a subculture populated mostly by deep ecology, animal rights, and anti-technology types who believe things are headed to hell in a hand-basket. But they all believe we’re headed somewhere in a more-or-less straight line. There can be a lot of truth to the linear view, certainly if you look at the technological progress of mankind over the past 10,000 years, and this view prevails today.

My own view is a synthesis of the cyclical and linear theories. I see history evolving towards an incredibly bright future, but cyclically suffering setbacks, cyclically repeating the same patterns along the way. To me history looks like a spiral, heading off in a specific direction, but always covering the same ground in a different way with each revolution.

That’s one reason The Fourth Turning, (Broadway Books, NY, 1997) by William Strauss and Neil Howe got my attention; we’re all drawn to those who see at least part of reality the way we do. The book is an extrapolation of their last work, Generations, and notwithstanding its literary faults, is simply brilliant. I’ve never met Howe, but did have lunch with Strauss once about five years ago. The way I see it, although they’re both conservatives, neither of them has any particular economic, political, or social philosophy, and they’re not trying to grind an ax. Their books are a value-free look at U.S. history, and their conclusions are more credible as a result.

Their basic hypothesis is one I suspect Hari Seldon would recognize, and my thoughts are built on the research Strauss and Howe have done over the years. I suggest you get a copy of The Fourth Turning while it’s still in the stores. That’s also true for my own Crisis Investing for the Rest of the ‘90s, which has several chapters on related subject matter, and Arthur Herman’s just-released The Idea of Decline in the West, which also bears on the subject. With 50,000 new books published every year, very few stay available for more than a few months. If something has appeal, you should buy it now, because it may be hard to come by when you have the chance to get into it. (Of course, I was wrong on that point — websites such as Amazon and now make it easy to pick up many older books.)


Generational conflict has been recognized since ancient times. The twist here is the discovery of several things that have previously eluded observers. One is that the well- known conflict between fathers and sons is only half the story; there aren’t just two generational types that alternate (e.g., liberal and conservative), but four. The reason for looking at it this way is that a human life can be conveniently divided into four stages: Childhood, Young Adulthood, Midlife, and Elderhood. Throughout all of history, a long life might be considered to be 80 to 100 years, with each of the four stages equaling a quarter of it.

Just as each person’s life holds four stages of about 20 years each, each generation comprehends a group of people born over about 20 years. Members of a particular generation tend to share values and ways of looking at the world not only because their parents also shared a set of views (which the kids are reacting to), but because every new generation experiences a new set of events in a way unique to them. They hear the same music, see the same events, are exposed to the same books. Members of a generation share a collective persona. There appear to be four distinct archetypal personae that recur throughout American history. And throughout world history as well, although that’s a bit beyond what I hope to explore here.

It also seems, throughout history, that there are periodic crises. About once every century, or about when each of the four generational types has run its course, a cataclysmic event occurs. It generally takes the form of a major war, and it generally catalyzes a whole new epoch for society.

The four mature generations alive today each represent an archetype. Let’s review them from the oldest now living, to the youngest.

Hero Archetype

The “GI” generation, born between 1901 and 1924, includes basically all living people in their mid-70s and older. They grew up and came of age in the midst of the most traumatic years in human history: the 1930s and ‘40s. This was a time of catastrophic financial and economic collapse, world war, political dictatorship, genocide, and virulent ideology, among other unpleasant things; a period of intense turmoil. The times required them to be civic minded, optimistic, regular guys who could be counted on to do the right thing, fit in, and see that everybody got a square deal. As a consequence of what they’ve been through, they tend to be indulgent parents. As kids they’re “good”; as adults they’re selfless, constructive, and communitarian. Hero archetypes encounter a Crisis environment in Young Adulthood; assuming they survive it, the odds are the rest of their lives will be lived in growing economic prosperity, leading to a leisurely retirement.

Artist Archetype

Meanwhile, another generation was being born at the height of the Crisis – something that seems to occur roughly every 80-100 years – from 1925-42. This generation, the “Silent,” watched these titanic events happen but were too young to take part in them. They were relegated to being protected, while trying to be helpful in the limited ways available to them. They’re overprotected as children, when they might be characterized as “placid”; they tend to underprotect their own children as a reaction. As adults they’re sensitive, well-liked, sentimental, and caring.

Prophet Archetype

Next came the group we call the “Boomers,” born from 1943 to 1960. This was the first generation born after the Crisis was over, and they grew up in an environment where their parents (mostly GIs and early cohort Silents) felt obligated to protect them from all the trauma of the preceding years and were desirous of giving them all the things they never had. As kids they’re seen as “spirited.” Later in life, they tend to be narcissistic, presumptuous, self-righteous, and ruthless. Born after a Crisis, their Childhood years coincide with a rebirth of society, and their Elderhood coincides with another Crisis. More on them below.

Nomad Archetype

The fourth generational type is represented by today’s “Generation X,” born 1961-81, during what might be called an Awakening period when the Boomers were in the limelight. As a consequence, they were overlooked and a bit abandoned. Their reputation as kids can be summed up as “bad.” They’re oriented toward survival, which is partially a result of their being underprotected as children. When they become parents, they react and become overprotective. They tend to be savvy, practical, tough, and amoral.

The kids born between 1982 and perhaps 2002 should be another Hero archetype. My own experience with them is that they’re shaping up that way. Represented by clean-cut, straight-arrow Power Rangers. Quite a reaction to the sewer-dwelling Mutant Ninja Turtles that were analogs for the previous generation. They’re “‘can do” kids, programmed to do the right thing in a smoke-free, drug-free, eco-sensitive, politically correct world. Like all Hero types, they respect their elders, do what they’re told without much questioning authority. That’s just the type of person you want to have fighting a war for you, and that’s probably just what they’ll wind up doing. Just like the last Hero types, the GIs. (Iraq was first. Iran next? Or will it be Saudi Arabia?)

It’s risky to characterize everyone born in a certain time frame as sharing a persona; after all, people are individuals, not ants or atoms, each like the other. But it’s really no different than characterizing people by the country they’re from. There’s no question in my mind that people share characteristics by virtue of the milieu in which they live, and that’s true of time as well as geography. Take a look at the people you know by age groups, and see if they don’t roughly fit the brief descriptions.

The interesting thing is that through about 400 years of American history, it’s possible to see these generational types repeating themselves. It’s not an accident. The characteristics of each type shape the next generation, as well as current events. And events leave a further imprint on all of them.

Making an Example of the Boomers

Just as every generation has its own persona, the character of each generation evolves as it moves through life. The Boomers are perhaps the most relevant example of this. First they were Mouseketeers and Beaver Cleaver clones. Who could have guessed they would mutate into Hippies and even Yippies as they reached Young Adulthood, reacting against everything they’d grown up with, everything their parents worked so hard to give them.

They came of age during a period that might be called an Awakening, and it’s recurred on schedule five times so far in American history. Awakenings are times of religious and moral ferment, when the youth tend to challenge prevailing cultural values pretty much across the board. Young adults were into New Age things this time around, in the 1960s and ‘70s. At the time it seemed utterly shocking and completely new, but that was only because nobody then alive had seen the previous Utopian Awakening in the 1830s and ‘40s, the Pietist Awakening of the 1740s and ‘50s, the Puritan Awakening of the 1630s and ‘40s, or the Protestant Reformation of the 1530s and ‘40s.

Like all the generations before them that grew up in similar times, they eventually put away the things of their youth. But who guessed that their next mutation would be into Yuppies, whose motto was not “Peace and Love” or “Revolution for the Hell of It,” but “Shop Till You Drop” and “He Who Dies with the Most Toys Wins” as they moved into midlife.

But even now the acquisitive mania that characterized the ‘80s is ebbing, now that the first cohorts of Boomers are crossing over 50. You can already see the signs of their next stage of evolution, in the judgmental behavior of people like William Bennett (George Bush) and Dan Quayle (Ann Coulter) on the “right,” and Al Gore and Hillary Clinton on the “left.” They did sex, drugs, and rock ‘n’ roll in the ‘60s. They believe they’ve fought the war of good against evil in both Vietnam and the segregated lunch counters of the South. They know they were the first generation to have traveled widely thanks to the jet, to have been brought up by television, and had the telephone as a given. They’ve been there, done that, and now that they’re getting older, they’re going to make sure that everyone else benefits from their wisdom – like it or not.

The Boomers are an archetypal Prophet generation, a type born after a secular crisis, just in time to create another one. Get the image of a grim elder, with a well-defined vision of what’s right and wrong, calling down wrath, and laying down the law for a troubled nation in chaotic times. That’s the type of person who tends to lead countries into wars, as well as through them. Interestingly, the Boomers in America have their counterparts abroad today, especially in China, where they grew up during the Cultural Revolution. Two ideologically driven, righteous groups running two such powerful and alien cultures is almost a guaranteed formula for a millennial-sized crisis. Which should appear, coincidentally, sometime shortly after the millennium. (We’re right on schedule.)

So What’s Next?

The real watersheds in history, crises that make or break a civilization, occur roughly every 100 years. The most recent ones in American history that will resonate without looking up the facts in a reference book are the Revolution, circa 1782; the Civil War, circa 1863; and WW II, circa 1943. We’ve had other wars, and they were traumatic enough; that’s the nature of war. But the War of 1812, Mexican, Spanish, World War I, Korean, and Vietnam wars had nothing to do with the country’s survival as an entity, as a civilization. They were optional wars, sport fighting, if you will, by comparison. Wars that occur at a secular Crisis, a “Fourth Turning” to Strauss and Howe, when a Prophet generation is acting as elder statesmen, with Nomads as operational commanders, and Heroes as front line soldiers tend to be total wars that have an ideological underpinning. They’re life-and-death struggles not just for the individual participants, but for the civilization as a whole.

That major wars occur at such long remove from each other probably isn’t an accident. Really catastrophic wars, from at least the days of Troy on down, have usually been the Great Events that resound through living memory. The Great Event of a century forms the thought and character of everyone alive when it happens, influencing them relative to the stage of life they’re in at the time. Perhaps that’s why a people will collectively do its best to avoid a repeat, at least while there’s anyone still alive who saw the last crisis.

(It’s been said that war is a force that gives life meaning. And I think that’s true, although it’s perverse that the most destructive and idiotic activity that it’s possible to engage in would just have to be the most important. Maybe, after the orgy of self-indulgence and conspicuous consumption that has characterized the past couple decades, Americans collectively feel they need to prove something. There has to be some rationale for the current war hysteria other than pure stupidity…)

In any event, the way the current generations line up relative to historical analogs, an excellent case can be made the U.S. is approaching another time of secular crisis, a Fourth Turning, with an expected due date of 2005 – seven years from now – plus or minus a few years in either direction. The Stamp Acts catalyzed the American Revolution, the election of Lincoln catalyzed the Civil War, the Crash of ‘29 catalyzed the Depression/WW II era. What might precipitate the elements now floating in solution? The answer is, practically any random event that’s sufficiently traumatic. Any of the theses of current disaster/action novels and movies will do nicely. Perhaps the accidental or intentional release of a super plague vector. The crashing of an airliner into the Capitol during a joint session. (Close, but not quite.) An all-out assault on the IRS computers by an armed group – or perhaps the computers just melting down due to the Year 2000 Problem. Perhaps a financial disaster that cascades into the Greater Depression. In any of these, or a hundred other scenarios, the federal government would almost certainly act precipitously and with a heavy hand, which would bring on a whole other set of consequences.

(In the historical context, 9/11 will be viewed as the opening kick-off for the coming Crisis… and the messianic overreaction of Bush and his cronies as the catalyst for turning things from bad to worse. It may be that Hurricane Katrina, for instance, a completely accidental event, may be blamed for providing a pin to burst the financial bubble – which would be a pity, since the neocons could then blame it, not themselves.)

There’s no way of telling where the Crisis will lead, or how it will end. That’s going to depend not only on exactly who’s in control, but what they do, whom they’re up against, and a hundred other variables we can’t even anticipate. One thing that seems certain is that real crisis brings out strong (although not necessarily wise) leadership. Because of its age and size, it will come from the Boomer generation, and it will be in the mold of Roosevelt or Lincoln – both very dangerous precedents. The Boomers in Elderhood will be dogmatic, harsh, puritanical, and quite willing to burn down the barn in order to destroy whatever rats they see. Admix that attitude to a time resembling the Revolution, the Civil War, or WW II, overlain with today’s ethnic strife, urbanization, financial overextension, and powerful, compact new weaponry in the hands of foreign fanatics out to teach the Great Satan a lesson, and it’s a real witch’s brew.

If things evolve over the next decade as they did in past analogs, it will be a very un-mellow time indeed. That’s assuming things end well, and there’s no guarantee they will, as many foreign countries have discovered throughout history. We’ve been uniquely blessed.

What to Do

Strauss and Howe aren’t financial types, and their advice is nebulous along those lines. To sum it up, their suggestion is to learn to swim with the tide by not hoping the current good times last forever; the chances of the good times are coming to an end now. They’d also advise not sticking your head up above the crowd, something that is always very risky when times are in turmoil; remember what happened to Japanese-Americans during the last crisis. They suggest that there will likely be a resurgence of nationalism, much as was the case during past crises. It won’t be a good time to be a maverick in the U.S., a thought that makes places like Argentina and New Zealand look even more appealing.

(I bought property in both places shortly after this was written, and have been rewarded with a quadruple in both instances – considerably better than would have been the case in the U.S.).

Strauss and Howe suggest you look to diversify in all things, so everything won’t go bad at once. Brace for the collapse of public support mechanisms. Set your roots with your family, because people you can rely on will be at a premium. Heed emerging community norms, bond with like-minded people, and return to basic, classic virtues. This is sound advice any time, but critical if you’re rigging for heavy weather.

Assuming you wanted to stay in the U.S., you’d rather be on some land near a small town, and far away from a major city. You’d want to be self-sufficient in as many ways as possible – freeze-dried food. etc. Perhaps Howard Ruff will make a comeback with advice like that, which seems quaint today. But then I’m nothing if not a contrarian.

(In hindsight, the original article could have been a bit more specific – other than the suggestions about Argentina and New Zealand. Personally, I believe that unassailable wealth is the best protection against global crisis. For it to be unassailable, your wealth must be at once substantial, free from threat of confiscation, divorced from the whims of the masses, and located in a country or currency that has a good risk/reward profile. Unfortunately, the U.S. doesn’t make the cut.

In the first instance, the single best way to build wealth now, while there is still time to do so, is in carefully selected gold and other resource stocks. In order for it to be free from the threat of confiscation, at least some part of your wealth needs to reside in a country where you don’t. To state the obvious, I would be very cautious about traditional stocks and bonds until we see how things shake out. Rather, get positioned in gold and silver stocks now, ahead of the curve, then sell out for a big profit to the panicking masses and move an increasing percentage of your wealth into tangibles such as gold, silver, and maybe, as part of a diversified portfolio, real estate in especially attractive areas – but only after the bubble has decisively burst.)

A Parting Parable

In case you have any doubts, I buy the theory outlined above and its many ramifications that there isn’t room to explore here. It really is scary to think that we could again experience a real Crisis with a capital C; I’m not talking about just a bear market in stocks. If it happens, I promise you stocks and mutual funds will be about the farthest things from most people’s minds.

At the same time, there’s no point in feeling terrorized. This stuff has been going on since the dawn of history. So let me leave you with a parable. I could appropriately quote Ecclesiastes (To every thing there is a season, and a time to every purpose under heaven: a time to be born, and a time to die, a time to plant, and a time to pluck up that which is planted, etc., etc.). But everyone knows that reference. Let me rather give you John O’Hara. At the beginning of O’Hara’s novel Appointment in Samara, he tells a brief parable, which I’ll summarize:

There was a merchant in Baghdad who went to the market with his servant. There they saw Death, who stared at the servant in what seemed a threatening way. Later the servant said “Master, lend me a horse. I shall ride to Samara, and there Death will not find me.” The merchant did so, then returned to the market, where he again saw Death, whom he approached and asked why he had stared at his servant in such a threatening way. Death responded, “I wasn’t threatening him. I was just very surprised to see him here in Baghdad, since I have an appointment with him in Samara later this afternoon.”

(Strange, the location for the proverb, in that this was well before the current war).


There is no doubt that we are now in the Crisis stage… which, according to Strauss and Howe’s “Turnings” theory, may last another decade or more. Is there any way to escape this economic tsunami unscathed?

In fact, there is: market “riptides,” big economic trends that have always made money for those bold and farsighted enough to seize them. Those trends are what The Casey Report focuses on. Where others will be pulled under by the current, with the help of the Casey experts, you will be able to catch the big waves emerging on the horizon and ride them like a pro. If you try a risk-free, 3-month trial subscription with 100% money-back guarantee today, you will also receive our bonus report “The Greater Depression” – completely free of charge. Click here to learn more.

Where Was Your Money in 2008?

Where Was Your Money in 2008?

By Doug Hornig, co-editor of

BIG GOLD, from Casey Research

2008 is now in the rear-view mirror, with virtually every investor shouting “Good riddance!” and praying for a better year to come. Forget about making money, just keeping your head above water was an accomplishment over the past twelve months.

Consider the statistics (12/31/07 vs. 12/31/08):

Housing – down 18% nationally, by the Case Shiller index, and 30% or more in most major metropolitan areas.

Domestic stocks? Nope. The Dow Jones Industrial Average – down 33%; Dow Utilities – down 30%; Dow Transports – down 21%. S&P 500 – down 38%. NASDAQ – down 40%. And if you were unfortunate enough to have invested in a financial-sector ETF, you lost at least 55%.

Foreign stocks? The Vanguard Emerging Markets Fund, a typical example, came in at minus 55%.

Bonds didn’t fare well, either, with the yield on 10-year Treasuries dropping 42%, and 30-year T-Bonds off 38%.

Energy. Uh-oh. Crude oil – down 59%. Natural gas – down 37%.

Industrial metals took a whacking, with copper down 55%, nickel 56%, and aluminum 37%.

Food did a little better than most, which isn’t saying a whole lot. Corn – down 17%; wheat – down 24%; live cattle – down 15%.

Enough. You get the idea. Every asset was mired firmly in the red in 2008, right?

Actually, no. The single exception was gold, which was up 5.6%. A modest gain in most times, but a phenomenal performance for a year where everything else tanked.

And if you managed to invest something other than U.S. dollars in the metal, you did even better. Gold rose 12% in euros, 32% in Canadian or Australian dollars, and a whopping 44% in British pounds.

Nor is this an isolated phenomenon. In 2008, gold posted its eighth straight yearly advance. Since the beginning of 2001, it has averaged a better than 16% annual gain vs. the U.S. dollar, 11% vs. the euro, and 17% vs. sterling.

Your financial advisor likely tells you to invest in the stock market and be patient, because over the long haul stocks will yield an average yearly return of 9-10%. Well, maybe so. But it sure depends on how generous your time frame is.

Over the past eight years, gold has added 215% (in U.S. dollars). During the same period, the S&P 500 lost 22%. The DJIA? Down 11%. In order to show a profit with a simple buy-and-hold strategy (ignoring all rallies and dips), you’d have to go back to early 1999 for the Dow, and 1997 for the S&P!

Where was your money in 2008? Or ’07? Or … ?

If you’re a BIG GOLD subscriber, a significant portion of your portfolio was in physical gold and paper proxies tied to the gold price.

Yes, the gold-producing companies that we follow in BIG GOLD did poorly in 2008, as the frenzied stock sell-off spared neither market nor sector, across the globe. But we held on through the storm, and the miners have rebounded sharply in the past month. We expect that they will be stellar performers in 2009, as the coming inflation that’s baked into the American economic cake begins to break out.

And despite the turmoil of ’08, our readers always had something to cushion the blow. Gold. We advised buying it and taking it into their physical possession. When a severe shortage of coins and small bullion bars developed in the second half of the year and premiums skyrocketed, we showed subscribers where to buy at the lowest possible markup. For those with sufficient means, we provided detailed instructions for purchasing 100-oz. gold bars on the New York Comex.

2008 was a rough year, for everyone. But it’s gone, and if you held gold and its proxies, you did better than most.

The important question now is: where should your money be in 2009? That’s the question we address every month in BIG GOLD. Try a risk-free 3-month trial subscription with 100% money-back guarantee… learn more here.

Broken Down Banks and Brokerages Offering Advice to You and Me

Not that I needed it, but in support of my comment about most financial advisors being morons in my year-end missive posted (and emailed) yesterday, this cartoon says it all.

A similar cartoon I’m sure has been done illustrating how stupid it is for Detroit auto makers to receive condemnation and advice from the U.S. Congress on fiscal responsibility.

But that’s the way the world is and voters have long ago figured out how to vote themselves the largess of the Treasury.

It’s now up to us to determine how we can best protect ourselves and even profit from it.

I recommend you take a risk free look at the Casey Report.

Should the Big Three Be Allowed to Fail?

This editorial about the Big Three bailout comes from Casey Research. I would only like to make a small addendum to the title and ask: “Should the Big Three Be Allowed or Forced to Fail?”

Should the Big Three Be Allowed to Fail?

By Olivier Garret

CEO, Casey Research

The Casey Report

The fact that after over 30 years of consistent mismanagement and decline, there is still any discussion on whether or not we should allow the now significantly smaller “Big Three” automakers to fail is clear evidence that Washington has lost all common sense.

Why, when after more than three decades of continuous restructuring, GM, Ford, and Chrysler have not been able to change their culture, high-cost basis and ill-conceived strategies, does anyone believe yet another break would change anything? Are they going to be better off next year, or the year after that, or even five years from now? Just because their situation has become even more precarious, it doesn’t mean that they will be more successful going forward… more likely the opposite.

“The definition of stupidity is doing the same thing over and over again and expecting different results,” said Albert Einstein.

The best thing that could happen to the auto industry is the Big Three filing for bankruptcy protection. As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities. Management would be overhauled, pensions renegotiated, union agreements tabled and made more flexible. Everything that these three companies have attempted to do for years, and could never achieve, would now be possible.

So, why in the world is management siding with the unions in their appeal to Congress?

Because under bankruptcy protection, management becomes accountable to the court, many of their perks and benefits would be curtailed, and they could, heaven forbid, even lose their jobs.

The auto industry, its unions and allies are therefore quick to point out that they, too, are “too big to fail” (have we heard that before?), that the American economy would not recover from the job losses and the economic impact of failures that would have far-reaching implications.

The Center for Automotive Research (CAR) has just released a comprehensive study on the impact of a 100% failure of the Big Three in the U.S.:

  • In the first year, the U.S. economy would lose 3 million jobs (about nine additional jobs for each auto worker that is laid off). It would lose another 2.5 million in year two and 1.8 million in year three.
  • U.S. personal income would decline by over $150 billion in the first year and another $250 billion in the next two years.
  • Our government would also lose $60 billion in 2009 and almost another $100 billion in the next two years.

I agree – it poses a very grim scenario.

In fact, Senate Bill Sec. 402 seeks to “(C) preserve and promote the jobs of 355,000 workers in the United States directly employed by the auto industry and an additional 4,500,000 workers in the United States employed in related industries; and (D) safeguards the ability of the domestic automobile industry to provide retirement health care benefits for 1,000,000 retirees and their spouses and dependents.”

Obviously, the $25 billion approved by Congress on September 24, 2008 is already falling short. It is clearly not enough to deal with a problem of that scale and, the car makers lament, needs to be doubled immediately. But in case you wonder, the industry and its unions do reserve the right to come back for more…

So let’s review some of CAR’s assertions in light of what we know:

Auto sales are forecast to decline from 16.1 million in 2007 to 14.9 million in 2008. 2009 can be expected to be much worse. Spending on capital goods such as cars and trucks will be affected long-term as a result of excessive consumer debt, tighter credit terms, higher unemployment, and a serious recession (or depression).

If car sales decline dramatically, manufacturing capacity has to be reduced to match demand. This means that the less productive plants would be shut down, employees laid off, and that the supply chain would have to adjust accordingly. This is basic economics so far.

Now comes our choice: On the one hand, we have some highly productive global manufacturers that produce fuel-efficient vehicles the U.S. consumer wants and can afford to buy. On the other hand, we have three inefficient companies that produce unattractive gas guzzlers and are plagued with high legacy costs and liabilities (Big Three workers make $73/hr, Toyota’s $48, the average manufacturing worker makes $32). Why should U.S. taxpayers subsidize these losers? Is it so that they can continue to compete unsuccessfully with productive manufacturers and avoid any dramatic (and much-needed) changes in their way of doing business?

In light of the fact that throwing good money after bad almost never works out, I think the U.S. taxpayers should not bail out GM, Ford, and Chrysler. A common-sense alternative would be to save our tax dollars and allow the most efficient manufacturers to gain market share and hire more workers. Ultimately the U.S. market will post sales of 12 to 15 million cars annually. If it takes one, two, or three million fewer workers to produce the cars U.S. consumers can afford to buy, so be it.

A farmer with one modern wheat combine can do the job of a thousand 18th century farm hands. That is a lot of unemployed farm workers, yet nobody demands to return to those good old days. Productivity and efficiency do result in job losses and dislocation, but eventually progress creates new jobs and additional wealth.

Whether a Honda, GM, Toyota, Ford, Hyundai, or VW, currently each and every car still requires one engine and four wheels. Each manufacturer uses basically the same domestic and overseas suppliers, and each has dealers selling its cars (most dealers represent a broad spectrum of brands and will sell whatever car the market wants). The argument that GM closing its doors would result in the loss of 2 million jobs or more is ludicrous as the competitors that pick up the slack will hire workers and buy more from their suppliers. While that may not be good for Detroit, it may be good for the Carolinas or Tennessee.

Simply, business shifting from certain players in the industry to others is called competition. Capitalism and competition are the forces that have made the U.S. the most successful economy for many decades. Granted, it is a harsh reality, but it works, and so far no other system has come even close to creating as much wealth for most of its agents.

Anyone who follows our flagship newsletter, The Casey Report, knows our stance: we hope, most likely in vain, that the new administration will finally come to the realization that no entity is too big to fail. Besides, bankruptcy reorganizations have a much greater chance of success with larger corporations, as they usually have lots of assets to dispose of — assets that can be sold cheaply to new enterprises, which are then able to build businesses on a much sounder basis. In the process, there is innovation and progress.

The choice is clear: Either the Obama administration can continue on the path of nationalizing entire segments of our economy (so far banking, insurance, auto – next, health, airlines…) and run them into the ground. Or it can let poorly managed companies fail, thereby making it easy for successful businesses and new entrepreneurs to buy the assets of these organizations. Step back and let the markets work their magic instead of blaming the market for ills that were created by special interests and poorly designed regulations.


Throughout history, the markets have shown “riptides” – powerful trends that can make or break a market sector and, in their wake, the people invested in that sector. It’s quite obvious that the U.S. auto industry’s day in the sun is over… maybe for good. But just like the tide going out to sea and coming back to shore, for every dying industry, another one emerges.

Investors with the knack to recognize those potent trends have made fortunes in the past, simply by getting in while the investing masses were still clueless. One of them is Doug Casey, famous contrarian investor, speaker and book author. Time and time again, Doug and his team at Casey Research have correctly predicted the next riptide… if you want to know what’s coming next, learn more here.

Lost Principles in Economically Uncertain Times

Lost Principles

By Olivier Garret

CEO, Casey Research

As the economic crisis continues to unfold, recently a sense of uncertainty has begun to pervade the market. Even dyed-in-the-wool risk takers admit that they don’t know what to think anymore. Inflation, deflation, recession or depression – there are so many vagaries that it appears to be anyone’s guess what will happen next.

Despite the current, volatile environment, though, our expert team at Casey Research maintain their core prediction: that a highly inflationary cycle is not far off. While we, along with several external experts, continuously review our assumptions and conclusions and encourage dissenting opinions and analysis to avoid biased conclusions, so far we keep returning to our views about what’s coming. That said, the hardest thing to predict is not what will happen, but when.

The way I see it, the swift, far-reaching and mostly ill-conceived reactions from most of the world’s governments under the leadership of two apprentice sorcerers (Bernanke and Paulson) have until now resulted in a widespread run for an exit to nowhere, a deep credit freeze, and total and indiscriminate mistrust in the market and all of its players.

The fact remains that in the last year, many principles that have long been rooted in the success of capitalism have been thrown out of the window.

  • First, market players discovered that the longest-lasting asset bubble in recent history was made possible by poor regulations (as opposed to lack thereof), greed, and the misunderstood and misrepresented risks of credit derivatives.
  • Second, we found out the real meaning of “too big to fail.” If a business is large enough and has enough clout, it doesn’t matter how poorly managed it has been, it will be bailed out at the expense of taxpayers (us) and investors (us again).
  • Third, we found that the rating systems the financial markets had been relying on have been misleading investors and failing to identify some of the riskiest asset classes. As a result, investors and all other economic agents are left with no means of evaluating risk as they conduct business, hence the credit freeze and rush to cash.
  • Fourth, to add to the confusion, the U.S. Fed and Treasury, followed by many other central banks, have been altering the rules of the game by the minute (buying toxic waste at face value, bailing out certain financial institutions but not others, becoming shareholders of several behemoths in the banking and insurance industry, and trumping all accepted rules of creditors’ and stakeholders’ priority, prohibiting the shorting of certain classes of assets on a moment’s notice).
  • Last but not least, the U.S. presidency, weakened by almost eight years of mismanagement, has continued to show total lack of leadership. It has empowered a couple of technocrats to run the country’s finances without leadership until a new administration gets in and, hopefully quickly, figures out what to do. To make matters worse, the EU has shown its ugliest face and demonstrated a fact we all truly knew but didn’t want to recognize until recently — that economic unity and coordination is easy in good times but almost impossible when the going gets tough.

No wonder economic actors are wreaking havoc as they race for shelter.

Add to this the fact that all natural resources have been hammered by the combination of a credit freeze and lower real and anticipated demand from most industrial nations.

Finally, junior exploration stocks – being very thinly traded and rightfully considered to be in a higher risk class — have been hammered twice as hard as the rest of the markets (hence the performance of the TSX-V, which has lost 76% in the last year and 30% in the past 30 days alone). The fact that many hedge funds had to unwind large positions in such a small market certainly did not help values.

What does this mean for investors in this market?

We all have suffered significant losses in our portfolios, and although our choices may have reduced some of the downside, quality companies have been hit almost as hard as fly-by-night juniors with no future.

Several of our companies are trading at or below cash value and get no goodwill for the significant assets and outstanding management teams they have assembled.

Although there is no way to tell when we will hit a bottom in these markets, we believe that once tax-loss selling season is over and reality settles in, we will see the beginning of a slow recovery process for the best of the juniors. Investors who have the ability to stay the course and are invested in the highest-quality juniors will recover from their losses and benefit from what will eventually be another bull market in commodities.

Precious metals and agriculture, followed by certain segments of the energy sector, will lead the way to widespread price increases across the range of commodities. While we can’t predict the exact timing of this run, the fundamentals are in place once the world economies take a turn for the better or at least stabilize somewhat.

Here is why:

  • The current crisis is taking tremendous amounts of needed capacity off the supply pipeline. Whether it be energy, base metals, or agricultural goods, projects to bring online expensive oilfields and alternative fuel sources are being shelved and will take years to get back on track. Mines are closing and projects are being canceled, thereby removing much of the supply; the credit squeeze is cutting down on agricultural investment, and working capital constraints will dramatically limit supply.
  • The world’s demographics are not changing, nor are the aspirations of a hard-working, fast-growing middle class in emerging economies. The changes that drove commodity markets up for the last few years are long lasting and real.
  • Peak Oil and peak-everything. There is limited supply for many commodities, and although there are alternatives (curbing consumption and finding alternative sources of energy), it takes large investments to do so. In current markets, many of these investments are going to be put aside until the next crisis/shortage hits – at which point we will have years of a commodities bull run before an equilibrium is reached.
  • We anticipate that China, Russia, and India will take advantage of low commodity prices to secure very large, long-term supply commitments while the Western world licks its wounds and tries to recover. By the time we do, an even larger portion of the world’s available resources may no longer be available on the markets, for example oil and gas.

In the last edition of Casey Energy Opportunities, Marin Katusa pondered how the U.S. is going to replace the supply of uranium when the HEU program with Russia is set to expire in 2013. The answer is that the U.S. will struggle to replace 40% of its needs, and this will benefit a handful of U.S. suppliers with proven reserves. Currently shares of these companies, which have the cash to develop resources or are already producing with positive cash flows, are incredibly cheap – a win-win situation. Eventually similar opportunities will come from copper and strategic metals.

  • We can expect the world to continue to be a very unstable place, where regional conflicts can quickly spread and spin out of control, with obvious impact on the smooth supply of key commodities (Gulf region, Nigeria, former Soviet republics, to name a few). In fact, a widespread financial crisis could precipitate those events as conflicts are often linked to economic hardship.
  • The unprecedented deficits, a wave of bailouts, and growth in the money creation by central banks in the Western world will eventually lead to massive inflation. In the U.S. alone, the monetary supply has increased by 50% since early September. This will unequivocally reverse the current short-term deflationary pressures and lead to a steep devaluation of the dollar and other major currencies. At that point, precious metals and all tangible assets are poised for a strong recovery.

So, if you ask me if I am still bullish on the resource sector, my answer yes, now more than ever. Juniors are juniors, and when things go wrong, they get beaten down. The strong ones with great teams and lots of cash will survive and prosper, the others will disappear. When commodities come back with a vengeance, there will be fewer companies, almost all with good projects… and those who are invested in these few companies will see a very sizeable appreciation of their capital as the broader public returns.

It’s very hard to be a contrarian investor, especially when all forces seem to be against you, but one thing the markets have taught me is that memory on the Street is unbelievably short, and they will come back.


Not only is the economy presently going haywire, there’s also still the boogeyman of Peak Oil looming on the horizon. While oil prices are at a low not seen for a while, it is all but certain that this sweet relief for motorists won’t last very long.

When oil prices come roaring back, the energy market will virtually explode… and,  if you are safely positioned in the right stocks by then, your bank account will too. Learn more about how being a contrarian investor can earn you a fortune – click here.